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CPWA Test Prep > Risk Management and Asset Protection > Flashcards

Risk Management and Asset Protection Flashcards

1
Q

What are the main types of insurance coverage for high-net-worth (HNW) clients?

A

The primary types include life, health, disability, property, casualty, umbrella liability, and specialty insurance (e.g., kidnap and ransom).

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2
Q

Describe umbrella liability insurance and its role for HNW clients.

A

Umbrella liability insurance provides coverage above standard liability limits, typically $1–10 million, covering bodily injury, property, and personal injury claims beyond primary policies.

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3
Q

What is Private Placement Life Insurance (PPLI)?

A

PPLI offers customizable life insurance with favorable tax treatment and asset protection, often used for wealthy clients to hold alternative investments.

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4
Q

Define the homestead exemption in asset protection.

A

Homestead exemption protects a primary residence from creditors up to a certain value, varying by state, but does not cover IRS claims.

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5
Q

What asset classes are at greater risk from creditors?

A

Assets in individual names, TIC or JTWROS accounts, second homes, non-qualified retirement accounts, and certain real estate holdings are more vulnerable.

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6
Q

Explain the role of trusts in asset protection.

A

Trusts, especially those with spendthrift provisions, shield assets from creditors by legally separating ownership from beneficiaries.

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7
Q

Describe self-settled trusts and their asset protection benefits.

A

Self-settled trusts allow the creator to be a beneficiary while keeping assets protected, particularly in states like Alaska and Delaware or offshore jurisdictions.

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8
Q

What are fraudulent conveyance laws?

A

These laws prevent asset transfers intended to defraud creditors, invalidating such transfers if made without fair consideration or to avoid liabilities.

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9
Q

What is a charging order in asset protection?

A

A charging order allows creditors to claim distributions owed to a debtor from LLC or partnership interests, without seizing control of the entity.

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10
Q

What are Domestic Asset Protection Trusts (DAPTs)?

A

DAPTs are trusts established in certain U.S. states with strong creditor protection laws, like Alaska and Delaware, allowing self-settled protection.

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11
Q

How do offshore asset protection trusts (FAPTs) work?

A

FAPTs, in jurisdictions like the Cook Islands, offer strong protection by requiring creditors to re-litigate claims under local laws, often with higher standards of proof.

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12
Q

What is the difference between revocable and irrevocable trusts in asset protection?

A

Revocable trusts do not protect assets from creditors since they can be altered by the settlor, while irrevocable trusts provide stronger protection by removing settlor control.

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13
Q

Define spendthrift provisions in trusts.

A

Spendthrift provisions prevent beneficiaries from transferring their interest, shielding assets from creditors until distributed.

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14
Q

Explain the role of life insurance in estate planning and asset protection.

A

Life insurance provides liquidity for estates, often with creditor protections, allowing families to inherit assets without debt burden.

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15
Q

What are irrevocable life insurance trusts (ILITs)?

A

ILITs hold life insurance policies outside the estate, providing tax benefits and protecting the policy’s proceeds from creditors.

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16
Q

How does the Uniform Voidable Transactions Act (UVTA) impact asset transfers?

A

UVTA standardizes fraudulent conveyance rules, allowing creditors to reverse asset transfers intended to hinder, delay, or defraud.

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17
Q

Describe asset protection in qualified retirement accounts.

A

Qualified accounts under ERISA, like 401(k)s, are generally protected from creditors, unlike IRAs, which have limited protection.

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18
Q

What are the advantages of asset protection through limited partnerships (LPs)?

A

LPs protect personal assets from claims against business debts, and charging orders limit creditors to distributions without ownership rights.

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19
Q

How can family limited partnerships (FLPs) be used in asset protection?

A

FLPs offer tax efficiency and asset protection by limiting creditor access through charging orders and separating control from ownership.

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20
Q

Explain the role of a trustee in asset protection trusts.

A

Trustees manage assets on behalf of beneficiaries, shielding assets from creditors if structured with proper legal protection.

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21
Q

What factors influence the choice between self-insurance and commercial insurance?

A

Key factors include risk assessment, loss frequency and severity, cost-benefit analysis, and client peace of mind.

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22
Q

Describe the importance of umbrella insurance for high-net-worth clients.

A

Umbrella insurance extends liability coverage beyond primary policies, offering protection from large personal claims.

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23
Q

What is second-to-die life insurance?

A

Second-to-die policies pay out after the last insured’s death, ideal for estate planning to cover tax liabilities for heirs.

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24
Q

Define income protection strategies in cases of divorce.

A

Income protection strategies include prenuptial agreements, trusts, and segregated accounts to secure assets from division.

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25
Q

Explain property and casualty insurance’s role in asset protection.

A

This insurance covers risks related to real and personal property, protecting clients from financial loss due to damage or liability.

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26
Q

How does risk assessment impact asset protection planning?

A

Risk assessment evaluates potential threats to assets, guiding insurance and legal strategies to mitigate financial exposure.

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27
Q

What are annuities, and how do they provide protection?

A

Annuities offer lifetime income, with some states protecting them from creditors, making them suitable for asset protection.

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28
Q

Describe key estate planning benefits of irrevocable trusts.

A

Irrevocable trusts reduce estate tax liability, protect assets from creditors, and facilitate wealth transfer to heirs.

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29
Q

How does digital asset management relate to asset protection?

A

Digital asset management secures online accounts and intellectual property, ensuring control and security over digital wealth.

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30
Q

Explain creditor protection benefits of 529 college savings plans.

A

529 plans may be protected from creditors, securing funds for education purposes under certain state laws.

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31
Q

What is the “badges of fraud” concept in fraudulent conveyance?

A

Badges of fraud indicate intent to defraud creditors, such as transferring assets without fair consideration or concealing property.

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32
Q

Describe the role of offshore trusts in prenuptial planning.

A

Offshore trusts serve as an alternative to prenuptial agreements, securing assets in case of marital dissolution.

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33
Q

What legal entity protections apply to LLCs?

A

LLCs protect personal assets from business liabilities, with member assets shielded unless there is fraud or gross negligence.

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34
Q

How does self-insurance function as a risk management strategy?

A

Self-insurance involves retaining risk internally, using reserves for predictable losses rather than paying insurance premiums.

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35
Q

Define the term “asset protection trust” (APT).

A

APTs are designed to hold and protect assets from creditors, often in foreign jurisdictions with favorable laws.

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36
Q

What is the primary benefit of using irrevocable life insurance trusts (ILITs)?

A

ILITs exclude life insurance proceeds from estates, reducing taxes and providing creditor protection.

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37
Q

Describe the concept of asset segmentation in risk management.

A

Asset segmentation separates assets by risk level, protecting high-risk assets from low-risk holdings.

38
Q

How do irrevocable trusts protect against spendthrift beneficiaries?

A

Spendthrift clauses limit beneficiaries’ control over distributions, shielding trust assets from their creditors.

39
Q

What is income protection insurance, and who benefits?

A

Income protection insurance replaces lost income due to disability, providing stability for dependents and high earners.

40
Q

Explain the “flight provision” in offshore trusts.

A

A flight provision relocates trust assets to another jurisdiction if the current jurisdiction becomes hostile to asset protection.

41
Q

What is long-term care insurance, and why is it important in risk management?

A

Long-term care insurance covers costs of care for chronic illnesses or disabilities, protecting personal assets from healthcare expenses.

42
Q

Define the concept of a captive insurance company.

A

A captive insurance company is owned by the insured parties, offering tailored coverage and potentially reducing insurance costs for businesses or wealthy individuals.

43
Q

How does life insurance contribute to liquidity in estate planning?

A

Life insurance provides immediate liquidity upon death, helping cover taxes, debts, and expenses without selling estate assets.

44
Q

Explain the role of prenuptial agreements in asset protection.

A

Prenuptial agreements set terms for asset division in case of divorce, protecting wealth and securing inheritance for children from prior marriages.

45
Q

What are tenancy by the entirety protections?

A

This ownership type between spouses protects property from individual creditors, as both must consent to transfers or claims.

46
Q

Describe joint tenancy with rights of survivorship (JTWROS).

A

JTWROS grants equal ownership and transfers to the surviving owner upon death, offering probate avoidance but limited creditor protection.

47
Q

What is the purpose of key person insurance in businesses?

A

Key person insurance protects businesses against financial loss if a vital employee, such as a founder or executive, dies or becomes disabled.

48
Q

Define professional liability insurance.

A

Professional liability insurance, also known as errors and omissions insurance, protects professionals from claims of negligence or inadequate work.

49
Q

What is malpractice insurance?

A

Malpractice insurance covers professionals like doctors and lawyers for legal costs if sued for errors or negligence in their services.

50
Q

Describe reinsurance and its function in risk management.

A

Reinsurance transfers portions of risk from one insurer to another, spreading risk and protecting insurers from catastrophic losses.

51
Q

Explain how cybersecurity insurance protects digital assets.

A

Cybersecurity insurance covers losses from data breaches, cyberattacks, and associated legal costs, protecting digital information and systems.

52
Q

What is the purpose of a life insurance buy-sell agreement in a business?

A

A buy-sell agreement funded by life insurance provides liquidity for co-owners to buy out a deceased owner’s share, ensuring business continuity.

53
Q

Define flood insurance and its necessity for property protection.

A

Flood insurance covers damages due to flooding, often required in high-risk areas as standard property insurance typically excludes flood damage.

54
Q

What is health insurance, and why is it critical in risk management?

A

Health insurance covers medical expenses, protecting individuals from high healthcare costs and ensuring access to necessary treatments.

55
Q

Describe disability insurance and its two main types.

A

Disability insurance provides income replacement for disabled individuals, with short-term covering months and long-term covering years or until retirement.

56
Q

Explain indemnity in insurance policies.

A

Indemnity is the principle of compensating policyholders for actual losses, preventing them from profiting from insurance claims.

57
Q

What is a rider in an insurance policy?

A

A rider is an add-on provision that modifies coverage, such as adding additional benefits or excluding specific risks.

58
Q

Define the term “underwriting” in insurance.

A

Underwriting assesses risk and determines coverage terms and premiums, balancing profitability and risk for the insurer.

59
Q

What is the elimination period in disability insurance?

A

The elimination period is the waiting time between the onset of a disability and the start of benefit payments, affecting premium costs.

60
Q

Describe whole life insurance and its key feature.

A

Whole life insurance provides lifelong coverage with a cash value component, allowing policyholders to build savings over time.

61
Q

Explain term life insurance.

A

Term life insurance offers coverage for a specific period, with no cash value, and is generally more affordable than permanent policies.

62
Q

What is universal life insurance?

A

Universal life insurance offers flexible premiums and adjustable death benefits, with a cash value component that earns interest.

63
Q

Describe variable life insurance.

A

Variable life insurance allows policyholders to invest the cash value in sub-accounts, with potential for higher returns but increased risk.

64
Q

Define annuities and their types.

A

Annuities are insurance products that provide regular payments, often used for retirement income, including fixed, variable, and indexed annuities.

65
Q

Explain how umbrella policies interact with other insurance policies.

A

Umbrella policies provide additional liability coverage that activates after primary policy limits are exceeded, extending protection.

66
Q

What is a deferred annuity?

A

A deferred annuity begins payments at a future date, allowing tax-deferred growth until distributions start.

67
Q

Describe an immediate annuity.

A

Immediate annuities start payments soon after a lump-sum payment, providing a guaranteed income stream.

68
Q

Define income replacement ratio in disability insurance.

A

The income replacement ratio determines the percentage of income covered by a disability insurance policy.

69
Q

Define income replacement ratio in disability insurance.

A

The income replacement ratio determines the percentage of income covered by a disability policy, typically 60-80% of pre-disability income.

70
Q

What is the incontestability clause in life insurance?

A

After a policy has been in force for a certain period, usually two years, the insurer cannot dispute its validity except for fraud.

71
Q

Explain the suicide clause in life insurance.

A

The suicide clause denies death benefits if the insured dies by suicide within a specified period, typically within the first two years of the policy.

72
Q

Describe cost-of-living adjustments (COLA) in insurance policies.

A

COLA increases policy benefits to keep up with inflation, commonly applied to disability and long-term care insurance.

73
Q

Define portability in group insurance.

A

Portability allows employees to continue group insurance coverage independently when leaving an employer, often at a higher cost.

74
Q

What is the grace period in an insurance policy?

A

The grace period is the time after a missed premium payment during which coverage remains active, usually 30 days.

75
Q

Explain waiver of premium in insurance policies.

A

This provision waives premium payments if the policyholder becomes disabled, maintaining coverage without payments.

76
Q

What are return of premium life insurance policies?

A

These policies refund premiums if the insured outlives the term, offering a unique blend of term insurance with a return component.

77
Q

Describe the concept of risk pooling in insurance.

A

Risk pooling combines individual risks, spreading potential losses across a large group to stabilize premiums.

78
Q

Define actuarial tables in life insurance.

A

Actuarial tables use statistical data to estimate life expectancy, informing premium calculations and policy terms.

79
Q

What is cash surrender value in a life insurance policy?

A

It is the amount a policyholder receives if a whole or universal life policy is canceled before maturity.

80
Q

Explain non-forfeiture options in life insurance.

A

These options allow policyholders to retain some benefits if they stop paying premiums, such as reduced paid-up insurance or extended term insurance.

81
Q

What is the primary benefit of survivorship life insurance?

A

Survivorship life insurance covers two lives and pays out only after both insured individuals have passed, commonly used for estate planning.

82
Q

Describe health savings accounts (HSAs) and their tax benefits.

A

HSAs allow tax-free contributions, growth, and withdrawals for qualified medical expenses, available to those with high-deductible health plans.

83
Q

What is the purpose of key-person life insurance?

A

Key-person insurance protects a business against financial losses resulting from the death of a critical employee.

84
Q

Define long-term care riders in life insurance.

A

LTC riders provide funds for long-term care expenses, using part of the life insurance death benefit to cover care costs.

85
Q

Explain conversion privileges in life insurance.

A

Conversion privileges allow term policyholders to switch to a permanent policy without medical underwriting, often within a specific timeframe.

86
Q

What is guaranteed insurability in life insurance?

A

This rider allows policyholders to purchase additional coverage at certain ages or life events without medical exams.

87
Q

Describe the “split-dollar” life insurance arrangement.

A

Split-dollar insurance is an agreement between employer and employee to share premium costs and benefits of a life insurance policy.

88
Q

What is the significance of an insurance audit?

A

An insurance audit reviews existing policies to ensure they meet current needs, aligning coverage with changing circumstances.

89
Q

Define critical illness insurance.

A

This policy pays a lump sum if the insured is diagnosed with a specified illness, such as cancer or stroke, providing financial support during treatment.

90
Q

Explain business interruption insurance.

A

This insurance covers lost income and expenses if a business is unable to operate due to covered events like fire or natural disaster.

91
Q

What is umbrella insurance’s role for high-net-worth individuals?

A

It offers high-limit liability coverage beyond other policies, essential for protecting significant wealth from large claims.

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