Risk Management and Insurance Planning (11%)

Question 1

4 Ways to Address Risk

Answer 1

ARRT (Pirate Art)
Avoidance - Not skydiving
Reduction - Alarm
Retention - Insurance Deductible
Transfer - Insurance

Question 2

HSA Contribution Limits

Answer 2

$4,150 Single
$8,300 Family
+$1,000 if 55+

Question 3

HDHP Limits

Answer 3

Single - $1,600+ deductible; Max $8,050;
Family - $3,200+ deductible; Max $16,100

Question 4

HSA Last-Month Rule

Answer 4

If eligible under HDHP on first day of last month of tax year, may fund HSA for entire year

Question 5

HSA Withdrawal Restrictions

Answer 5

Tax free if used for medical expenses
W/d prior to age 65 for non-medical has 20% penalty

Question 6

IRA to HSA rollover

Answer 6

1x Lifetime!
Max of annual HSA contribution
Must maintain HSA for 12-months afterwards

Question 7

ER’s required to offer COBRA

Answer 7

Group health plans with 20+ employees

Question 8

COBRA Qualifying Events

Answer 8

Death of Covered EE
Termination, Resignation, Retirement - not gross misconduct
Reduction in hours causing ineligibility
Divorce of covered EE
EE going on Medicare - spouse and children can use COBRA
a Child ceasing to be eligible dependent

Question 9

Cost and Paying for COBRA

Answer 9

Qualified Bene pays up to 102% of the costs
Premiums due monthly

Question 10

COBRA Durations

Answer 10

18-months:
Termination, Resignation, Retirement, Reduction in hours.
29-months: Disability
36-months: All other’s

Question 11

Medicare Coverage for SNF

Answer 11

Patient pays:
Days 1-20 = $zero
Days 21-100 =$204/day
Days 101+ = patient pays all costs

Question 12

ADL’s (2 of 6 for LTCi)

Answer 12

BED COT
Bathing
Eating
Dressing

Continence
On-Off Toilet
Transferring
*Not blindness or inability to walk

Or - substantial cognitive impairment

Question 13

LTCi Tax Treatments

Answer 13

-Benefits are received tax-free
-Premiums are qualified medical expenses for itemized deductions for medical expenses
-Premiums can be paid from HSA
-Premiums paid by ER are tax-free to EE’s and benefits are tax-free

Question 14

LTCi Incontestability Rule

Answer 14

2-year incontestibility period (insurers cannot cancel after 2 years for application errors)

Question 15

4 definitions of disability for disability insurance

Answer 15

Any-Occupation - less expensive, least favorable
Own-Occupation - more expensive, more favorable
Modified Own-Occupation - hybrid
Social Security Disability - toughest definition of disability

Question 16

Disability Insurance Benefits Taxation

Answer 16

ER paid premiums = Taxable Benefit to EE
ER paid and added to W-2 = benefits are tax-free
EE paid w/ after-tax = benefits are tax-free
EE paid with pre-tax = benefits are taxable

Question 17

Term Life Insurance Features

Answer 17

Lowest Premium
No cash value
May be participating (dividends)
May be renewable
May be convertible to permanent
Level Term vs. Decreasing Term (loans)
Annual Renewable, First-to-Die, Second-to-Die

Question 18

Similarities b/w Universal and Whole Life Insurance

Answer 18

Higher premiums than term
Build cash value
Cash accessible through loans or withdrawals
May be participating (dividends)

Question 19

Universal Life Insurance features

Answer 19

Fixed, Variable or Indexed.
Option A = death benefit remains level
Option B = death benefit is face plus cash value

Question 20

Whole Life Insurance
Types and Features

Answer 20

Variable, Second-to-Die, Graded Premium, Modified, Limited Pay. Guaranteed Issue
Guaranteed death benefit
Guaranteed premiums
Tax-deferred cash value growth

Question 21

Life Insurance - Extended Term Option

Answer 21

Use cash value as a single premium to pay for term life as long as possible
May allow re-instatement

Question 22

Reduced Paid-Up Insurance

Answer 22

Cash value is used to buy a paid-up policy of the same type as the policy that lapsed.
Has a reduced death benefit
Will retain cash value that continues to grow

Question 23

5 Life-Insurance Non-Forfeiture Options (SERIAL)

Answer 23

(SERIAL)
1. Cash Surrender Value
2. Extended-Term Option
3. Reduced Paid-Up Insurance
4. Immediate Single-Premium Annuity
5. Automatic Premium Loan

Question 24

Automatic Premium Loan on Life Insurance

Answer 24

Use cash value to pay overdue premiums.
Loan is added to other loans
Unpaid loan and accrued interest is deducted from death benefit

Question 25

Modified Endowment Contracts (MECs) - Penalties

Answer 25

Enacted to curtail use of single premium life insurance as a tax-free income investment vehicle.
LIFO treatment for distributions and Loans
10% penalty for any loan or withdrawal if under 59-1/2
Tax Free death benefit

Question 26

Viatical Settlement Features

Answer 26

Selling a cash-value life insurance policy.
Must be Terminally ill (24-months)
Must be Chronically ill (2 of 6 ADL’s for 90-days+)
15-day cooling off period to retract sale.

Question 27

Viatical Settlement Taxation

Answer 27

If terminally ill - tax free to policy owner
If chronically ill - tax-free is used for medical
Viator = cash paid, plus subsequent premiums is the basis; excess is taxable.

Question 28

Buy-Sell Agreement Basis

Answer 28

Entity-Purchase does not give basis to any owner

Question 29

Annuity Taxation

Answer 29

-No step-up at death - considered IRD
-Withdrawals have 10% penalty before 59-1/2
-Annuitization Payments - Exclusion allowance for basis
-Withdrawals are LIFO (prior to 1982 = FIFO)
-Ordinary Income on taxable distributions

Question 30

Income in Respect of a Decedent (IRD)

Answer 30

Untaxed income that a decedent had earned or had a right to receive during their lifetime. Taxes on IRD are owed by the individual beneficiary or entity that inherits this income.

Question 31

Annuity Exclusion Ration Formula

Answer 31

Investment in Contract / Annual Payment x Life Expectancy
If payments go beyond life expectancy - all taxable income

Question 32

Permitted Sec. 1035 Exchanges

Answer 32

Life Insurance -> Endowment -> Annuity -> LTCi

Question 33

6-parts of Homeowners Insurance

Answer 33

Property:
A = Address
B = Backyard
C = Crap
D = Damaged

Liability:
E - Exposure to Legal action
F - Funds for Fractured Femurs

Question 34

Homeowner’s Insurance Policy Forms

Answer 34

HO-2 - Basic
HO-3 - Better (named perils)
HO-4 - Tenants (contents only)
HO-5 - Comprehensive (open perils)
HO-6 - Condo
HO-8 - Historical Homes
HO-15 Endorsement for open perils for contents
HO-3 + HO-15 = HO-5

Question 35

Named Perils vs Open Perils

Answer 35

Named = names causes of loss that are covered; everything else is excluded.

Open = names causes that are NOT covered; everything else is covered.

Question 36

Homeowners Coinsurance Requirements

Answer 36

Insured for 80% of Replacement Cost Value (RCV)
If above: pays actual cost up to policy limit
if below: pays replacement cost - depreciation or Proportional amount
Formula:
(“Did Have” / “Should Have Had”) x Loss Amount - Deductible

Question 37

Umbrella Insurance

Answer 37

Insured pays difference between underlying coverage requirement and actual coverage.

Question 38

Auto Insurance
Part A vs. Part D

Answer 38

Part A -
Liability ($250/$750/$100 =
Max Bodily injury $250k,
Max all bodily injuries $750,
Max Prop Damage $100k)

Part D - Damage to your Auto (Collision or Comprehensive)

Question 39

Measure of Diversifiable Risk + Market Risk

Answer 39

Standard Deviation

Question 40

Measure of Non-Diversivfiable Risk

Answer 40

Beta