Life, Health & Disability Insurance

Question 1

What are the five life insurance policy dividend options?

*Remember CRAP-O

Answer 1

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

Question 2

What are the life insurance non-forfeiture options?

Answer 2

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

Question 3

What is the difference between Universal Life A (Universal Life Option 1) vs. Universal Life B (Universal Life Option 2)?

Answer 3

A - death benefit will increase if cash value gets high enough

B - death benefits vary directly w/ cash values, B more expensive than A

Question 4

How is disability of waiver premium treated with whole life and universal / variable life insurance?

Answer 4

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

Question 5

How are life insurance dividends treated for tax purposes?

Answer 5

Dividends are not taxable and treated as a return of basis (or premiums).

If dividends exceed premiums, then dividend is taxable.

Question 6

How are life insurance withdrawals treated for tax purposes?

Answer 6

Considered a return of principal until accumulated premiums have been distributed, then taxed as ordinary income.

Question 7

What makes a policy a MEC?

Answer 7

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.

Question 8

What is the difference in Traditional Life Insurance vs. MEC treatment of loans?

Answer 8

Question 9

When an insured surrenders a life insurance policy prior to death, what are the surrender options and how are they treated for tax purposes?

Answer 9

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

Question 10

How is the tax deductibility of life insurance premiums treated for employer (ER) and employee (EE)?

Answer 10

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.

Question 11

What is the taxation installment option for life insurance proceeds or annuity payments?

Answer 11

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%

Question 12

What is the premature withdrawal tax treatment of annuities?

Answer 12

LIFO which means withdrawals are taxed to the extent of earnings before capital (basis) is returned

Question 13

What are the four major classes of traditional medical expenses?

Answer 13

1. Hospital expense (does not cover physician fees)
2. Surgical expense (covers surgeon fees whether in or outside of a hospital)
3. Physician’s expense
4. 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

Question 14

What are the four benefit categories per the Affordable Care Act?

Answer 14

1. Bronze = minimum allowable coverage and covers 60% of plan benefit costs, out-of-pocket limit equal to the HSA limit
2. Silver = covers 70% of plan benefit costs w/ HSA out-of-pocket limits
3. Gold = covers 80% of plan benefit costs w/ HSA out-of-pocket limits
4. Platinum = covers 90% of plan benefit costs w/ HSA out-of-pocket limits

** all plans must provide essential benefits plus a separate catastrophic plan

Question 15

Describe a Health Maintenance Organization (HMO).

Answer 15

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.

Question 16

Describe a Preferred Provider Organization (PPO).

Answer 16

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.

Question 17

Describe Managed Care (Primary Care Physician - PCP).

Answer 17

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.

Question 18

What are disqualifying reasons for HSA eligibility?

Answer 18

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.

Question 19

What is the HSA catch-up contribution age?

Answer 19

55 (not 50 like for IRAs and employer plans)

Question 20

What health insurance premiums are permitted as HSA qualified medical expenses?

Answer 20

• 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

Question 21

What is the COBRA eligibility?

Answer 21

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)

Question 22

What length of time must an employer offer coverage based on the qualifying event?

Answer 22

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

Question 23

How do you determine the Medicaid penalty?

Answer 23

Penalty assessed on assets gifted in the 5 years (60 months) prior to Medicaid.

Assets Gifted Within Last 60 Months / Monthly care cost

Question 24

Disability Income Insurance types of disabilities

Answer 24

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

Question 25

How are disability insurance premium benefits taxed?

Answer 25

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

Question 26

Summary of Taxation of Insurance Products

Answer 26

Question 27

How do you determine the amount of cost a person pays when they use coinsurance and deductible?

Answer 27

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.