Insurance & Social Security Flashcards
Risk, for insurance purposes, is defined as:
loss or no loss
Pure Risk
insurable
Speculation
gain or loss (investment)
Fundamental Risk
impersonal group risk (recession)
Particular Risk
personal (your disability)
Static Risk
caused by other than changes in the economy (earthquake)
Dynamic Risk
caused by changes in the economy
Peril
cause of a financial loss (fire, theft, collision, hurricane)
Hazard
a condition that increases the likelihood that a peril will occur
Physical Hazard
storing gasoline too close to an open flame (may cause a fire)
Moral Hazard
dishonesty
an insured files a fraudulent claim
Morale Hazard
carelessness
insured does NOT take proper precautions to protect an asset because they have insurance
Risk Management
Low Frequency Low Severity = retain
Low Frequency High Severity = Insure transfer
High Frequency Low Severity = reduce
High Frequency High Severity = avoid
Underwriter’s Challenge
manage adverse selection
underwriter manages adverse selection of the insurance portfolio by using techniques on the front end (physicals for life insurance, history of claims for property insurance, etc.) & on the back end (raising premiums, canceling insured w/ excessive claims, etc.)
Insurable Risk (CHAD)
for a risk to be insurable, the following must be true: CHAD
- Not Catastrophic to insurer
- Homogeneous exposure units (large # of similar units)
- Accidental as to insured
- Determinable & Measurable risks
Social Insurance
mandatory in nature
examples = Social Security & worker’s compensation
Public Insurance
mandatory in nature
examples include FDIC, SIPC, & PBGC
Private Insurance
voluntary in nature
examples include insurance on the person, property, or liability
Legal Nature of Insurance
Areas of law = torts, contracts, agency
insurance is a contract & therefor can say anything
there is NO substitute for reading the contract, especially regarding coverage, limits, & exclusions
Contract Law
offer, acceptance, consideration, legal object, competent parties, & legal form
Principle of Indemnity
cannot make a profit
to make whole
Insurable interest
life insurance = only at inception
property = at inception & at time of loss
Contract is personal
cannot be transferred or assigned w/out the consent of the insurer w/ the exception of life insurance
Contract of Adhesion
ambiguities are charged to the writer/insurer
take it or leave it contract, no negotiating
approved as is for sale in state by state insurance commissioner
statements by the insured are representations NOT warranties & must be material to void contract
Contract is Aleatory
parties may not give & receive equal dollar amounts
insured pays premiums & has no claims or DB paid out greater than premiums paid
the outcome is affected by chance
Contract is Unilateral
one promise only & made by the insurer & conditional
conditioned on the insured paying premiums
Tort Law
typically insurance covers for negligent & not intentional acts caused by the insured
children/minors may be held liable/parents may be vicariously liable for acts of children
damages may be compensatory; if the injury is a bodily injury it is NOT taxable
punitive & compensatory damages w/out bodily injury are subject to income taxation
Defenses include - assumption of the risk, contributory negligence, comparative negligence, & last clear chance
statute of limitations for tort decisions may be up to 2 years (up to 3 years for property damage
recommended to have a PLUP which covers the risk & also provides legal defense
Comparative Negligence
if both the plaintiff (injured party) & the defendant contribute to the circumstances that result in injury, then the damages are adjusted to reflect their respective percentage of fault
Contributory Negligence
if the injured party contributes in any way to the circumstances that result in injury, then the injured party cannot collect any damages
Agency Law
an agency & agent binds the principal if in course & scope of agency
may result from express, implied, or apparent authority
Insurance Regulations & Ratings
regulation by the State Insurance Commissioner
NAIC (National Association of Insurance Commissioners) policy group
A.M. best (A++-S
Moody’s (Aaa-B3)
S&P (AAA-B)
Life Insurance
mitigates against risk of loss of income for those w/ dependents
parties are owner, insured, & beneficiary
incontestability clause - 2 years
suicide clause - 2 years
grace period - 31 days
war clause
Life Premiums
based on in-house mortality tables plus interest & loading
Term Insurance
pure insurance for specified period covered
premiums level or increase
no cash value
inexpensive, usually renewable, can be converted to permanent insurance
good choice for most families & those w/ temporary insurance needs; large need limited resources
Whole or Ordinary Life Insurance
fixed premium
fixed DB
no owner control over investments
fixed ROR
want guarantees
Variable Life Insurance
fixed premium
guaranteed minimum DB but can increase if investment experience on CV is good
policyowner control over investments
no minimum CV guarantee
flexibility w/ investment responsibility, fixed premiums
Universal Life Insurance
variable premiums subject to required minimum
DB may increase above initial face amount depending on CV accumulation
no policyowner control over investments
may have minimum guaranteed CV rate but can be higher depending on interest rates
premium flexibility w/out investment responsibility
Variable Universal Life Insurance
variable premium subject to required minimum
guaranteed minimum DB but can increase if investment experience on CV is good
policyowner complete control over investments
no minimum guarantee CV ROR
flexibility w/ investment responsibility, variable premiums
agent needs both insurance & securities license to sell
High/Low CAWL (Current Assumption Whole Life)
interest sensitive crediting
Low CAWL = low premiums
High CAWL = higher premiums
insurer right to adjust premium at 5 year mark
cash value invested in insurer’s bond portfolio
agent only needs insurance license to sell
Second to Die
typically used for estate planning
DB paid after second death (survivorship)
First to Die
typically usually used to pay off mortgages
DB paid after first death (joint life insurance?)
Credit Life
protects the lender, usually very expensive (better off w/ term insurance)
Needs Approach
amount of life insurance needed
PV of dependent needs, including last medical, funeral, adjustment period, mortgage payment fund, dependency cost of living, education fund, & retirement fund
Human Life Approach
amount of life insurance needed
PV of income expected less taxes & decedent consumption
Capitalized Income Approach
amount of life insurance needed
decedent’s income (less taxes & consumption) divided by the inflation-adjusted investment rate
Death Benefit Taxation
generally not taxable to recipient EXCEPT for transfer-for-value rule or a cash value policy held by a QP
Transfer-for-Value Rule
when policy transferred for valuable consideration DB may not be fully excluded from income taxation
EXCEPTIONS: (i.e. DB NOT taxed)
1. transfer to the insured
2. transfer to business partner of the insured (or to the partnership)
3. transfer to a corporation in which the insured is an officer or shareholder
4. transfer to a transferee whose basis is determined by the transferor’s basis (or tax-free exchange or gift)
Surrender of Policy Taxation
taxable to extent surrender value exceeds premiums paid
EXCEPTION: viatical settlement or accelerated benefits provision/nontaxable if insured expected to die w/in 2 years or chronically ill
Life Insurance Dividend Taxation
not taxable unless received as cash & exceed premiums paid
Life Insurance Loans Taxation
taxable if MEC & then only to extent earnings are withdrawn as loans (LIFO)
MEC Taxation
all single premium insurance policies are MEC’s
does not affect taxation of DB
cash withdrawals (including loans) treated on LIFO basis (return on investment) & are taxable (taxable portion also subject to 10% penalty if insured is under 59.5
once a MEC always a MEC
a policy exchanged for a MEC is also a MEC
Life Insurance Premiums Taxation
NOT tax deductible for personal or business insurance
EXCEPT group-term insurance
Cash
dividend option
clients receive money & can use it or invest it as they wish
Accumulate at Interest
dividend option
company invests the dividends & tax-free up to the client’s basis in the policy
interest paid on the dividends is taxable
Reduce Premiums
dividend option
decreases the out of pocket expense for premiums
Paid-up Additions
dividend option
purchases additional insurance each year for insured regardless of health or occupation
One-year Term
dividend option
adds term insurance each year to the policy face amount equal to cash value of the policy
also known as the 5th dividend option on the CFP certification examination
Cash Surrender Value
nonforfeiture option
insured receives the accumulated cash value
cash surrender value = CV minus surrender charges
Reduced Paid-up Insurance
nonforfeiture option
insured receives the cash value in the form of a paid-up policy w/ a smaller face amount
Extended Term Insurance
nonforfeiture option
insured receives the CV in the form of a paid-up term policy for a specified duration, w/ the same face amount as the original policy
Long Term Disability
covers the loss of income d/t disability
DI Coverage
typically cover periods when the insured is unable to work d/t suffering an accident or sickness
DI Amount of Benefits
60-70% of gross pay
DI Period of Benefits
needs to be to retirement or life
DI Types of Policies
own occupation, any occupation, split definition (own occ to any occ)
NOTE: Social Security definition disabled for 5 months, expected to continue for 12 months or result in death & cannot perform duties of any occupation
may be integrated w/ Social Security to reduce premiums in group plans
benefits taxable if premiums paid by other than insured
usually 30-180 day elimination period (longer EP = lower premiums)
may have residual clause = provides some benefits for returning to work in a lower paid position
needs to be either non-cancellable (insurer cannot cancel nor raise premiums) or guaranteed renewable (insurer cannot cancel but CAN raise premiums but only if raised on entire group)
Short Term Disability
covers up to 2 years of benefits (usually group)
Long-Term Care LTC - Private Policies
Medicare does NOT provide for LTC
LTC policies must be either non-cancellable or guaranteed renewable
Eligibility = cannot perform 2 of 6 ADLs (eating, bathing, dressing, transferring, toileting, or continence) for at least 90 days OR substantial cognitive impairment
small federal income tax deduction for premiums paid
Business Property & Liability Insurance (5)
- BAP - Business auto policy similar to PAP
- CPP (commercial package policy) - property & liability similar to homeowners insurance
- Workman’s Comp - mandatory for employers
- CLUP - Commercial liability umbrella policy (similar to PLUP)
- Professional Liability Insurance - malpractice insurance (covers negligent acts that can result in bodily injury) & errors & omissions (E & O) insurance (covers negligent acts, errors & omissions)
Homeowners Package Policy
HO2, 3, 4, 5, 6, 8
HO4 = rental
HO6 = condo
HO8 = modified
Named Perils Policies
Basic = 12 named perils
Broad = 12 basic perils + 6 perils, 18 total
Basic Perils (12)
fire
vehicles (damage caused by vehicles)
lightning
smoke
windstorm
vandalism or malicious mischief
hail
explosions
riots or civil commotion
theft
aircraft
volcanic eruptions
S-L-W & F-V-V-V-H-E-A-R-T (pronounced Slow Favorite)
Broad Perils (18)
12 basic perils +
falling objects
weight of ice/snow/sleet
accidental discharge/overflow of water or steam
sudden & accidental cracking, burning, bulging of appliances
freezing of plumbing, heating, air conditioning, fire sprinkler system, or appliance
sudden & accidental damage from artificially generated electrical currents
Basic + FAS-FWD (pronounced Fast Forward)
Open Perils Policies
all perils covered (unless excluded)
protection from losses associated w/ all perils except those specifically excluded
provides more comprehensive coverage than the basic & broad policies
exclusions include neglect (termite damage), flood & earthquakes
General Exclusions
flood, intentional loss, earth movement, neglect
E - Personal Liability
bodily injury/property damage - NOT personal injury
F- Medical Payments Coverage
not based on fault
does NOT cover the insured’s family
Exclusions (apply to Coverages E & F)
watercraft w/ more than 25hp, business activities, motor vehicle liability, uninsured locations
Dwelling/Other Structures
covered on replacement cost basis; personal property covered on ACV basis
dwelling coverage may be broad perils (HO2), open perils (HO3, HO5), or basic perils (HO8)
Personal property coverage in HO2, HO3, HO4 & HO6 are named perils & ACV - need to endorse for open perils & replacement cost
Personal property coverage in HO5 is open peril & ACV - need to endorse for replacement cost
Policies provide for loss of use: HO2 = 30%; HO3 = 30%, HO4 = 30%; HO5 = 30%; HO6 = 50%; HO8 = 10%
Policies provide small amounts of liability usually $100k - $300k, thus the need for a PLUP
Policies provide for medical payments to others w/out regards to fault
Policies have limits on certain items – cash $200, watercraft $1,500, theft of firearms $2,500, theft of silverware etc $2,500, property on premises used for business $2,500, property away from premises $500
Homeowner’s policies do NOT cover earth movement or flood – need separate policies (riders or endorsements)
Homeowners policies do NOT cover business property except de minimis, nor rental property, nor motorized vehicles used on farm, nor intentional acts by insured, nor normal wear & tear
HO2 = all broad
HO3 = all open, except broad for Part C
HO4 = broad for C & D
HO5 = all open
HO6 = broad for Parts A/C/D
HO8 = all basic
Business Life Insurance Premiums
NOT deductible EXCEPT for group term
Business Life Insurance Employer-Provided Group Term Life Insurance
NOT taxable to EE for 1st $50k of DB provided
Split Dollar
shares costs & benefits b/t key employees & entity
any payment made by ER to split dollar plan is either a loan (collateral assignment method) or as taxable compensation (endorsement method)
if loan interest is zero (or below market rates) difference b/t market rate & actual rate is treated as taxable compensation to employee
Disability for Businesses
may be group disability for EEs – fringe benefit & taxable to EEs
Business Health Insurance
group plans (Indemnity, HMOs, PPOs, EPOs, & POSs)
Business Long Term Care (LTC) Insurance
may be provided on group basis
Buy-Sell Agreements
an agreement b/t partners/co-owners to continue business upon the death, disability, or retirement of a partner/co-owner
most are funded w/ life insurance &/or disability policies
Cross Purchase
used for buy/sell agreements
protects closely-held business partners
of policies = (# partners) x (# partners - 1)
Advantage = step up in basis for remaining partners
Disadvantage = cost of policies may differ greatly d/t age differences among owners
Entity Purchase
alternative to cross purchase, used for buy/sell agreements
one policy per principal owned by entity
Disadvantage = no step up in basis for remaining partners
Buy-Sell Agreements - Tax Treatment for Deceased/Disabled Owner
when partner dies, their business interest gets step up in basis equal to FMV at time of death (no capital gain must be recognized)
Not so w/ disability buy-sell; as such the capital gain on the sale of the disabled partner’s business interest can be significant
Insurance on Property - Auto
does NOT cover Motorcycles, Boats, Airplanes
Personal auto policy (PAP) covers liability, medical payments, uninsured motorist, damage to own auto – if replacement vehicle coverage is for 30 days, if new 14 days
insured is a person & all resident family members w/ licenses
owner of the vehicle (NOT the driver) is the primary insured
limits are expressed $100/$300/$50 ($100k for bodily injury per person, $300k per accident, $50k for property damage) coverage shifts up to state while driving for minimum coverage
Exclusions = intentional acts, rental use, & business use
uninsured motorist coverage covers insured if injured by uninsured driver; will cover an insured pedestrian hit by an uninsured or underinsured vehicle
Other-Than-Collision (Comprehensive) covers animate objects
Collision covers inanimate objects while auto is moving
Personal Liability Umbrella Policy (PLUP)
need for a PLUP largely dictated by insured’s personal wealth; usually $1-$10M in excess of underlying auto & home coverage
premiums inexpensive
provides legal defense - at no cost against the policy limits
usually covers personal injury liability, plus liability of libel, slander, & defamation
provides excess liability coverage on home, cars, boats, & recreational vehicles if listed
covers all members of household & users of vehicles
excludes rental property (possible exception) business liability, vehicle racing, & intentional acts
usually will NOT cover high risk activities (street racing), liabilities resulting from crimes (DUI), or from intentional acts
Medicare Benefits
federal health insurance plan for people 65 & older whether retired or still working
people who are disabled or have permanent kidney failure can get Medicare at any age
3 parts: Hospital Insurance (Part A), Medical Insurance (Part B), & Prescription Drug Coverage (Part D)
generally individuals who are 65 or older & receive Social Security benefits automatically qualify for Medicare
Medicare Part A
hospital insurance, paid for by a portion of Social Security tax
helps pay for necessary medical care furnished by Medicare-certified providers, including inpatient hospital care, skilled nursing care, home health care, hospice care, & other care
of days that Medicare covers care in hospitals & skilled nursing facilities is measured in what is termed benefit periods
benefit period begins on first day patient receives services in a hospital or skilled nursing facility & ends after 60 consecutive days w/out further skilled care
no limit to # of benefit periods a beneficiary may have
deductible of $1,632 applies per benefit period
61st through 90th day of each benefit period the insured individual must pay $408 a day in form of coinsurance
any days over 90 in a benefit period are considered lifetime reserve days
60 lifetime reserve days available w/ coinsurance of $816 per day
Medicare Part B
Medical insurance
optional & a premium is charged
financed by the monthly premiums paid by those who are enrolled & out of the general revenues from the U.S. Treasure
used to pay for doctors’ services, ambulance transportation, diagnostic tests, outpatient therapy services, outpatient hospital services (including ER visits, X-rays, & laboratory services), some preventative care, home healthcare services not covered by Part A
Medicare Standard Part B premium is $174.70; the Part B deductible is $240
Items NOT Covered by Medicare Part B
high probability of question on this!
routine physical exams
dental care
cosmetic surgery
hearing aids
eye exams
care received in a foreign country
Medicare Part D Subsidy
intended to save participants money on prescription drug costs & help protect against higher drug costs in the future
insurance companies & other private companies work w/ Medicare to offer these drug plans by negotiating discounts on drug prices
Life Annuity Contracts
periodic payment to an individual that continues for a fixed period or the duration of a designated life or lives
provides protection from outliving your assets (longevity risk)
commonly used to fund retirement
NOT appropriate if you want to leave assets to your heirs
NOT a hedge against inflation
Types of Annuities
immediate annuity
deferred annuity
flexible premium deferred annuity (FPDA)
single premium deferred annuity (SPDA)
fixed annuity
variable annuity
Taxation of Annuities
withdrawals post 1982 annuity LIFO treatment (gains first)
withdrawals pre 1982 annuity FIFO treatment
exclusion ratio (or inclusion) for annuitized annuities
Indemnity Health Insurance
pay for losses/has deductible/coinsurance on major medical & stop loss provisions/doctors are independent
HMO
uses co-pay
doctors are EEs of HMO
referral needed to see specialist
PPO
Preferred Provider Network
uses co-pay
Doctors are independent of insurer
Doctors agree to charge reduced rates in exchange for increased patient volume
POS
point of service
combines HMO/PPO/indemnity
as insured moves among providers deductibles, co-pays change accordingly
EPO
exclusive provider organization
similar to HMO but no referral needed to see a specialist
Health Insurance Coverage (Basic or Major Medical)
Basic = for doctor visits etc; usually after deductible
Major Medical = if sold alone is first dollar coverage w/ coinsurance, deductible, & stop loss provision
Basic & Major Medical frequently combined in group plans
Coinsurance for Major Medical (% Participation Clause)
80/20 = 80% covered by insurer, 20% insured
after deductible is met first
usually out of pocket maximum
ACA (Obama Care) Plans
Bronze = plan pays 60% on average; insured 40%
Silver = plan pays 70% on average; insured 30%
Gold = plan pays 80% on average; insured 20%
Platinum = plan pays 90% on average; insured 10%
Catastrophic = plans pay less than 60% on average; available only to people under age 30 or those w/ a hardship exemption
NOTE: plans no longer have a lifetime limit or a pre-existing condition clause
COBRA Group Health Plan for Continuance
applies to any ER who has a health plan & 20 or more EEs
events that create COBRA benefits = death of EE, termination (except for gross misconduct), reduction of hours, children no longer dependents d/t age, divorce, EE reaches Medicare age
if the event is catastrophic = 36 months of COBRA benefits - death, divorce, child no longer a dependent d/t age, EE reaches Medicare age
if the event is non-catastrophic = 18 months of benefits - retired, fired, reduction in hours
COBRA - 18 Months
termination of employment (unless gross misconduct)
moving from full-time to part-time status
COBRA - 29 Months
employee meets the Social Security definition of disability
COBRA - 36 Months
death of a covered employee
divorce or legal separation of a covered employee
loss of dependent status
eligibility for Medicare
Health Savings Accounts (HSA)
may be set up by individuals or employers & allow eligible individuals to save for health care costs
contributions from participant are tax-deductible
distributions for qualified medical expenses excluded from income
penalty for nonqualified expenditures = ordinary income tax & 20% penalty if owner younger than 65
can carry over unused amounts to future years & invest those amounts so that over time the value inside of the HSA can grow
Flexible Spending Account (FSA)
commonly used by ERs as an EE benefit that permits EEs to defer income ($3,200 limit 2024) to be used to pay for health care expenses w/ pre-tax dollars
use it or lose it
HSA Advantages
pre-tax contributions
funds carry over from year to year
funds can be invested
permits reimbursement of OTC medication purchases
can be used to pay LTC insurance premiums
HSA Disadvantages
must have high deductible health plan to qualify
some HSAs have high annual fees
FSA Advantages
pre-tax contributions
participants have total control over how to spend the money w/in the related health care or dependent care options
can be used for “optional” medical procedures (LASIK eye surgery, braces, etc)
can be used for child care or dependent care
permits reimbursement of OTC medication purchases
FSA Disadvantages
money MUST be used by 2.5 months after end of plan year or lose it
CANNOT receive distribution amounts that are covered under another health plan
deferrals are limited
6 Major Categories of Social Security Benefits
- Retirement benefits
- Disability benefits
- Family benefits
- Survivors’ benefits
- Medicare
- Supplemental Security Income (SSI) benefits; SSI benefits are NOT funded by Social Security taxes
Social Security Benefit Reductions - Early Retirement
Before FRA (full retirement age)
reduction = 5/9 (1%) x months up to 36 months
plus 5/12 (1%) for additional months beyond 36
*benefit may be further reduced for early retirees if earnings too high (benefit reduced $1 for every $2 above a threshold)
Social Security Benefit Increases - Delayed Retirement
8% simple interest increase per year
ex = FRA 66, delaying until age 70 results in 132% of PIA at age 66
Social Security PIA Acronym
Primary Insurance Amount
Social Security Fully Insured
40 quarters of coverage or one quarter for each year after age 21 but before age 62
Social Security Currently Insured
at least 6 quarters of coverage in the last 13 quarters
Social Security Disability Insured
before age 24 = 6 quarters of coverage in last 12 quarters
age 24 through 30 = covered for half of the available quarters after age 21
age 31 or older = must be fully insured & have 20 quarters of coverage in the last 40 quarters
Social Security Income Tax Hurdle Amounts
1st Hurdle
- MFJ $32k
- All Others $25k
2nd Hurdle
- MFJ $44k
- All Others $34k
Percent of SS subject to tax: 0% up to 85%
Below first hurdle = zero tax
85% of SS benefits will be subject to tax when MAGI is above approximately 150% of the second hurdle
About 20% to 25% of SS benefits will be subject to taxation at the second hurdle
