Life, Health & Disability Insurance Flashcards
What are the five life insurance policy dividend options?
*Remember CRAP-O
Cash option
Reduce premiums
Accumulate at Interest
Paid-up additions
One-year term (the 5th dividend option for the exam), adds term insurance each year to the policy face amount equal to cash value of the policy
What are the life insurance non-forfeiture options?
Cash surrender value
Reduced paid-up insurance = insured receives the cash value in the form of a paid-up policy with a smaller face amount
Extended term insurance = insured receives the cash value in the form of a paid-up term policy for a specified duration w/ the same face amount as the original policy
What is the difference between Universal Life A (Universal Life Option 1) vs. Universal Life B (Universal Life Option 2)?
A - death benefit will increase if cash value gets high enough
B - death benefits vary directly w/ cash values, B more expensive than A
How is disability of waiver premium treated with whole life and universal / variable life insurance?
Whole = insurer will waive all premiums after disability
Universal and Variable Universal = insurer will waive charges related to mortality and administration OR waive the entire premium
How are life insurance dividends treated for tax purposes?
Dividends are not taxable and treated as a return of basis (or premiums).
If dividends exceed premiums, then dividend is taxable.
How are life insurance withdrawals treated for tax purposes?
Considered a return of principal until accumulated premiums have been distributed, then taxed as ordinary income.
What makes a policy a MEC?
Fails the 7-Pay Test. This is when the cumulative premiums paid exceed the premiums due for the time period being considered.
Withdrawals or loans are taxed on a LIFO basis.
MEC status only affects loans, not the taxation of proceeds at death.
What is the difference in Traditional Life Insurance vs. MEC treatment of loans?
When an insured surrenders a life insurance policy prior to death, what are the surrender options and how are they treated for tax purposes?
Lump sum - amount above premiums paid is ordinary income
Interest Only - interest is taxable as ordinary income
Installment Payments - portion is a return of principal and interest; interest portion is taxed as ordinary income
How is the tax deductibility of life insurance premiums treated for employer (ER) and employee (EE)?
Premiums paid by insured are not tax deductible
Group life insurance premiums paid by an ER are deductible by the ER
Premiums paid by the ER are taxable income to the EE
1st $50,000 of coverage is not taxable to an EE
An EE must impute taxable income for benefits > $50,000
Imputed income is a function of age and amount of benefits per $1,000 in excess coverage.
What is the taxation installment option for life insurance proceeds or annuity payments?
Monthly payment X 12 months X life expectancy = Total Payments
Basis / Total Payments = Exclusion Ratio
Exclusion Ratio X Total Payments = Amount Excluded from Monthly Income
** Payments received beyond life expectancy are 100% taxable income.
** Any basis not recovered before death is deductible on decedents final return as a miscellaneous itemized deduction not subject to 2%
What is the premature withdrawal tax treatment of annuities?
LIFO which means withdrawals are taxed to the extent of earnings before capital (basis) is returned
What are the four major classes of traditional medical expenses?
- Hospital expense (does not cover physician fees)
- Surgical expense (covers surgeon fees whether in or outside of a hospital)
- Physician’s expense
- Major medical
- covers hospitalization, physician and surgeon fees, physical therapy, and Rx
- no lifetime cap
- eye exams and dental care are excluded from coverage
- usually an 80/20 coinsurance clause where insurer pays 80% of expenses above the deductible and insurer pays 20% above the deductible
- each family member must satisfy a deductible (typically 3 deductible max per family)
- coinsurance portion applies to each family member
What are the four benefit categories per the Affordable Care Act?
- Bronze = minimum allowable coverage and covers 60% of plan benefit costs, out-of-pocket limit equal to the HSA limit
- Silver = covers 70% of plan benefit costs w/ HSA out-of-pocket limits
- Gold = covers 80% of plan benefit costs w/ HSA out-of-pocket limits
- Platinum = covers 90% of plan benefit costs w/ HSA out-of-pocket limits
** all plans must provide essential benefits plus a separate catastrophic plan
Describe a Health Maintenance Organization (HMO).
Delivers comprehensive health care in return for a periodic payment (premium).
Care is managed by a PCP who determines what care is received.
The primary disadvantage is that there is no coverage “outside” of the HMO.
Describe a Preferred Provider Organization (PPO).
Network of health care providers with whom an employer or insurance company contracts.
The provider offers a discount on services.
The insured receives a high rate of reimbursement when using providers within the organization.
Insured may seek care elsewhere, but will suffer a penalty in the form of increased deductibles and coinsurance.
Preserves employee’s option to choose a provider outside of the network.
Describe Managed Care (Primary Care Physician - PCP).
Insured accesses care via a PCP who provides services or refers to a specialist.
Physicians need approval to perform certain procedures and it may reduce a patient’s options for care if not approved.
The consumer pays a small copayment or other deductible.
Health care providers agree to accept compensation provided under the plan.
What are disqualifying reasons for HSA eligibility?
Individual not covered by a high deductible health plan (HDHP).
General purpose HRAs and health FSAs count as other health insurance coverage and can disqualify a taxpayer from using an HSA.
Medicare participation
Individuals who may be claimed as a dependent on another’s return.
What is the HSA catch-up contribution age?
55 (not 50 like for IRAs and employer plans)
What health insurance premiums are permitted as HSA qualified medical expenses?
- LTC insurance premiums
- COBRA premiums
- Health care coverage while receiving unemployment compensation
- Medicare and other health care coverage (not including Medigap policies) if you were 65 and older
- Dental (including orthodontics) and vision care
- Distributions for NQ medical expenses subject to income tax and a 20% penalty if taken before age 65
What is the COBRA eligibility?
Group coverage must terminate because:
- covered EE dies
- EE is terminated (voluntarily or involuntarily)
- Hours are reduced from full-time to part-time
- covered EE separates from spouse
- EE becomes eligible for Medicare
- a dependent child is no longer eligible for coverage (age, married, left school)
** COBRA only applies to ERs who offer a group health plan and have at least 20 EEs
** both full-time and part-time EEs count towards the 20 (part-time count as a fraction of a full-time based on their hours worked)
What length of time must an employer offer coverage based on the qualifying event?
18 months for reduction in hours or normal termination
36 months for death, divorce, Medicare eligibility, or loss of dependency status by children of the EE
Up to 29 months if EE meets social security disability definition
** EEs have 60 days to make a COBRA election
** EE terminated due to “gross misconduct” is not eligible for COBRA
How do you determine the Medicaid penalty?
Penalty assessed on assets gifted in the 5 years (60 months) prior to Medicaid.
Assets Gifted Within Last 60 Months / Monthly care cost
Disability Income Insurance types of disabilities
Any Occupation
- considered disabled if insured cannot perform the duties of “Any Occupation”
- provides for the least expensive premium
Modified Any Occupation
- considered disabled if unable to perform duties of gainful occupation they’re reasonably fitted by education, experience, training, and prior economic status
Own Occupation
- considered disabled if cannot perform the duties of his “Own Occupation”
- more expensive, ideal for specialized, high paying fields
Split Definition
- begins w/ own occupation and moves into modified any occupation after 1-2 years under the own occupation definition
How are disability insurance premium benefits taxed?
If EE pays premium with AFTER-TAX dollars:
- premiums are not deductible
- benefits ARE TAX FREE
If ER pays the premium:
- premiums are deductible to the ER
- benefits to employee are ARE TAXED
If EE pays premium with PRE-TAX dollars (cafeteria plan):
- benefits to the EE ARE TAXED
Summary of Taxation of Insurance Products
How do you determine the amount of cost a person pays when they use coinsurance and deductible?
Step 1: Subtract deductible before calculating the coinsurance amount.
Step 2: Multiple the coinsurance % by the procedure costs.
Step 3: Add the deductible amount to Step 2 amount.
Step 4: Compare Step 3 amount to the max OOP or stop limit amount.
