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CFP Prep - Nipa > Risk Management > Flashcards

Risk Management Flashcards

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1
Q

Buy-Sell : Cross Purchase

A

business owners buying insurance on each other for death, disability

of policies = N x (N-1) ; N is number of owners

Each owner pays premium to the insurance company for the death benefit for the other owners.

Death benefits are provided to the surviving owners.

Decednet’s company stock goes to his/her family or Estate.

Surviving owners will use the death benefits to buy the stock from family or estate.

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2
Q

Buy-Sell: Cross Pros and Cons

A

Advantages:
- Increase in basis for the surviving owner
- works best if you have fewer owners
- death benefits pass tax-free to surviving owners

Disadvantages:
- younger owners will pay considerably more in premiums if there are big age differences
- hard to implement with growing number of owners

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3
Q

Buy-Sell: Entity Purchase Agrt - Advantages

A

Preferred solution for businesses with multiple partners.

Death benefit passes tax-free to business.
Business pays policy premiums.

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4
Q

Buy-Sell: Entity Purchase Agrt - Disadvantages

A

No increase in cost basis to surviving owner(s).

Surviving owner(s) will have substantially more gains upon sale of business (due to lack of step-up).

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5
Q

What is a stock redemption buy-sell plan

A

Buy-Sell: Entity Purchase Agreements

If the business entity is a corporation, the plan may be referred to as stock redemption buy-sell plan

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6
Q

Buy-Sell: Entity Purchase Agreements

A

a method to completely transfer business interests back to the business (i.e., the entity) using life insurance policies.

The business purchases policies (pays premiums) on the owners and uses death benefit proceeds to buy back ownership shares from the decedent’s family or estate upon death of a partner.

Owners agree to establish a binding agreement with the business to buy and sell their respective business interests upon either:

Death,
Disability, or
Retirement

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7
Q

Buy-Sell: Entity Purchase Agreements - # of Policies Needed

A

The number of policies needed is equal to the number of partners and/or shareholders.

When setting up a buy-sell agreement with a larger number of partners, entity purchase plan is the more efficient method.

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8
Q

What’s more efficient method when setting up buy-sell agreements with large # of owners?

A

Entity purchase plan

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9
Q

Buy-Sell: Wait & See Agreements - 3 step process (BOB)

A

Following the death of a business partner, the following sequence of steps is set in motion:

Step 1: Business has 1st option to purchase the deceased partner’s stock.

Step 2: Surviving partner(s) have the option to purchase the deceased partner’s stock.
Applies if the business waives the option to purchase in Step 1, or The business purchases less than half of the deceased partner’s stock.

Step 3: Business is required to purchase the deceased partner’s stock.

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10
Q

Buy-Sell: Wait & See - who pays the premium

A

Owners take on life insurance policies on each other.

the agreement is to wait and see what to do about purchase of the decedent’s stock - Whether the business should buy it or owners should buy it

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11
Q

What are Living Distributions from Life Insurance Policy

A

Withdrawals and Loans

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12
Q

How are Living Distributions from MEC Policy treated?

A

LIFO (gains first)

Distributions are taxed as ordinary income + 10% penaliy for early withdrawals

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13
Q

How are living distro from non-MEC policy treated?

A

FIFO (Basis First = Premium’s First)

Distributions are considered ordinary income and taxed as such
No penalty for distributions

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14
Q

Taxation of death benefits for life insurance policies

A

Tax-free

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15
Q

7-Pay Test

A

Applies for Case Value Life Insurance Policies

policies that take in too much premium during the first 7 policy years, or in 7 years after a material change.

For each policy, a net level premium is calculated. If the total premium actually paid into the policy at any time during the 7-year testing period exceeds the sum of the net level premiums needed to result in a paid-up policy after 7 years, then the policy is a MEC.

Onec a MEC Always a MEC

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16
Q

Annuity Contract

A

It’s a investment contract for right to receive stream of income in the future

Purchaser can make one or multiple payments to insurance company and in exchange insurance company “guarantees” to pay stream of income in the future

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17
Q

Annuity Payments timeline

A

Annuity Payments can begin immediately or at a future date and can last for the predetermined time.

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18
Q

Accumulation Annuity

A

AKA deferred annuity

Accumulates funds and grows wealth over time, through tax deferred growth

Has two phases - accumulation phase and income phase (optional)

Grow tax deferred, can take withdrawals (charges may apply)

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19
Q

Income Annuity

A

Provide the guarantee of a steady stream of income in retirement

Priority is guaranteed income payments, not wealth accumulation

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20
Q

How do surrender charges work for Annuities?

A

Surrender penalty applies typically over a 7-to-10-year period (or longer)

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21
Q

Fixed Annuity

A

guaranteed interest;
minimum and current

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22
Q

Equity Indexed Annuity

A

linked to an index; often S&P 500
point to point
participation rate
spread
caps

23
Q

Variable Annuity

A

provides a variety of separate subaccounts which allow assets to be invested in securities such as stocks, bonds, money market accounts, etc.

The account owner can transfer assets between subaccounts.

Usually contain a fixed account which provides a guaranteed interest rate account.

24
Q

Which annutization would have highest payout ?

A
  1. Single Life (ends at death of the annuitant)
  2. Joint Life
  3. Joint & Survivor (full, 2/3, 1/3)
25
Q

Annuity Guaranteed Minimums

A

ONLY Applicable to Life Annuity Form of Payment

Refund certain - When annuitant dies before the period, lump sum or installment of guaranteed minimums to beneficiary

Period Certain - For a specified period of time

26
Q

Immediate vs. Deffered Annuity Payments

A

Immediate payments = distributions start within 1 year

Deffered = distributions start after 1 year

27
Q

Flexible-Premium

A

more than one-time contribution in varying $ amounts

28
Q

Taxation of non-qualified (i.e. after-tax) Annuity

A

Payout = basis + gains

Gains distributed from a non-qualified annuity are taxed as ordinary income

If Annuity payout is a Withdrawals: 1. Gain taxed as ordinary income
2. Basis taxed as LIFO (10% apply to gains if before 59 1/2)

If Annuity payout is Annuitization:
1. Gain taxed as ordinary income
2. Exclusion allowance is applied from each payment until the basis is recovered.

No step-up at death, as annuities are income in the respect of a decedent (IRD).

29
Q

Withdrawals from annuity

A

Withdrawals have LIFO tax treatment (i.e. earnings first)

Subject to early withdrawal 10% penalty prior to age 59 ½.

30
Q

Sec 1035 exchange

A

A Section 1035 exchange is used primarily to defer current taxation in the exchange of life insurance and annuity contracts.

Annuity may be exchanged tax-free for other annuities (IRC Section 1035)

31
Q

Exclusion allowance of annuitization payment

A

tax free portion = exclusion allowance)

= Basis ÷ expected payout over annuity time (monthly payment x # months when payment is expected)

Exclusion allowance ends when all basis has been recovered.

32
Q

LEAQ (Loved Elizabeth As Queen)

A

Life Insurance
Endowment
Annuity
Qualified LTCi

LI can be exchanged for LEAQ
Endowment can be exchanged for EAQ
Annuity can be exchanged for AQ
Qualified LTCI can be exchanged for Q

33
Q

Named Perils coverage

A

specifies perils or “causes of loss” that are covered. Everything else is not covered

34
Q

Open Perils coverage

A

specifies excluded perils or “causes of loss” that will not be paid. Everything else is covered.

35
Q

HO-03

A

Special Form

most comprehensive Homeowners Insurance coverage

Covers CONTENT on a NAMED perils basis
DWELLING on an OPEN perils basis

A HO-03 policy can provide open perils coverage for contents by adding a HO-15 endorsement – remember this by 3 x 5 =15.

36
Q

HO-05

A

Comprehensive Form

BEST comprehensive Homeowners Insurance coverage

Covers contents on a open perils basis

37
Q

HO-03 Dwelling and Content Coverage

A

HO-03 homeowners insurance provides DWELLING coverage on an OPEN perils basis and CONTENTS coverage on a NAMED perils basis.

38
Q

HO-08

A

Modified Coverage for older homes

Used for older homes (150+ years old because of the value of wood work, ornamentation, etc)

39
Q

Reinstatement Provision

A

opportunity to renew a lapsed policy (under specified conditions)

40
Q

Health Insurance Continuation under COBRA

A

The termination of the employee for any reason except gross misconduct. This includes quitting, retiring, or being fired for anything but gross misconduct - 18 months
Disability (Social Security definition) 29 months

36 months
The death of the covered employee
A reduction of the employee’s hours so that the employee or dependent is ineligible for coverage.
The divorce or legal separation of the covered employee and his or her spouse.
For spouses and children, the employee’s eligibility for Medicare.
A child ceasing to be an eligible dependent under the plan.

41
Q

HO-4

A

Renter (4 rent) - Contents + liability

42
Q

HO-6

A

Condo owners = cabinetry, content, “studs-in”, not the roof or common areas

43
Q

6 parts of the HO Insurance Policy

A

A = for address
B = for backyard
C = for crate-crap
D = damaged/destroyed digs
E = exposure to legal action
F = for others (Fractured Femurs)

44
Q

Collision Insurance

A

With an inanimate object - another vehicle, light pole, building etc

45
Q

Exclusions Not Covered By Homeowners Insurance

A

Flooding
Earthquakes, landslides, and another ground movement
Termites, rats, and other infestations
Mold
Aggressive or dangerous dogs
Poor maintenance or neglect
Power surges or outages
Home-based businesses
Local building ordinance or law requiring you to bring your home up to code
Intentional damage caused by you or another resident family member
Nuclear hazards
War
Government action

46
Q

Return of Premium Rider

A

Refunds the premiums paid over a specified term if the insured is alive at the end of the period or

refunds the premiums paid to the beneficiary at the death of the insured.

The insured pays an additional premium for this rider.

47
Q

Terminal Illness Rider

A

Allows a portion of the policy death benefit to be paid while the insured is still alive if the insured has been diagnosed with a terminal illness.

48
Q

Long-Term Care (LTC) Rider

A

typically allows a portion of the policy death benefit to be paid while the insured is alive and is in need of long term care services

49
Q

Spouse Term Rider

A

allows the spouse of the base policy insured to have a term life insurance rider under a permanent policy insuring their spouse.

50
Q

Child Term Rider

A

provides a death benefit in case a child dies before a specified age.

After the child reaches maturity, the plan can be converted into permanent insurance, often up to a multiple of the rider amount, perhaps 4-5x, without the need for medical underwriting.

These riders typically insure all children of the insured parent at one premium cost.

51
Q

Family Income Benefit Rider

A

pays a monthly income to the beneficiary in addition to the policy face amount for a stated period of time to help with expenses in a transition period after the death of the insured.

52
Q

Accidental Death Rider

A

pays out an additional amount if the insured dies as the result of an accident.

Normally, the additional benefit paid out on death due to an accident is equivalent to the face amount of the original policy, which doubles the benefit, sometimes referred to as the “double indemnity rider.

A policy may offer an accidental death benefit rider in higher multiples of the policy face amount.

53
Q

Guaranteed Insurability Rider

A

This rider allows you to purchase additional insurance coverage in the stated period without the need for further medical examination.

The option often is structured in a manner such as every 3 years from age 21 to 40 or some other interval

54
Q

Waiver of Premium Rider

A

Future premiums are waived if the insured becomes permanently disabled as a result of injury or illness prior to a specified age.

The disability waiver may have an elimination period before premiums are waived, such as 90 days.

Typically, after the elimination period is satisfied, the premiums paid during the elimination period are refunded.

CFP Prep - Nipa (10 decks)

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