Risk Management and Insurance Planning

Question 1

Types of losses

Answer 1

People face three basic categories of losses from risk exposures:

property losses—direct and indirect losses

liability exposures

personal losses to income and wealth

Question 2

Types of personal risk

Answer 2

Death – The expenses directly related to death will include remaining medical bills, funeral and burial costs, probate costs, taxes, executor fees, and estate administrative expenses. The indirect expenses will include:

Payment of outstanding debts for home, car, and other personal belongings.
Cost to fund children’s education expenses.
Funding income to beneficiaries for the loss of spouse’s income stream.
Cost of supporting beneficiaries due to the loss of a breadwinner’s income stream.
Any other amounts deemed important.

Disability – Insurance is used to replace lost wages and out-of-pocket medical expenses while disabled. The payment usually ranges from 60% - 80% of earned income depending on taxability. There are short-term disability plans (not to exceed two-years) and long-term plans (greater than two-years of coverage).

Poor health – Individuals may be ineligible for life insurance and subject to higher premiums for health insurance if they are not part of an employer’s group plan.

Unemployment – The period where an individual is not employed. State unemployment insurance can provide much-reduced payments for a short period of time to help with everyday living expenses. For self-employed individuals, there is no unemployment assistance.

Superannuation – out-living income and accumulated assets in retirement.

Question 3

Steps involved in risk management

Answer 3

1. Establish Objective
2. Identify Loss Exposure
3. Measure Loss Exposure
4. Develop Plan
5. Implement Plan
6. Regularly Review Plan

Question 4

Current standard of living for surviving spouse is ??

Answer 4

60%

Question 5

When can risk be retained

Answer 5

However, risk should only be retained when funds are available to cover it. Does the client have a sizable emergency fund to tap into when needed, adequate savings, cash and liquid investments, and/or deferred annuities that can be used to offset exposures to risks?

Question 6

Risk administration

Answer 6

Risk administration is the cost associated with your risk management plan. Risk administration includes costs such as the premiums you pay, as well as the time you spend analyzing your risk situation. As time goes by, the cost associated with your risk management program may prompt you to reevaluate your implementation strategy.

Question 7

Human life value

Answer 7

the formula is based on the person’s income earning ability. Human life value is the present value of income lost as a result of the person’s death. The question is, how much money is needed for investment now, in order to provide replacement income for a set number of years?

Question 8

Needs analysis approach

Answer 8

this method comes at the question of life insurance from a different direction. Rather than just replacing lost income, it looks at how that income was being used.

There are three steps to this analysis.

Identify the needs that would arise or continue following death of the individual - death expenses, mortgage payoff, readjustment period, income for dependents.
Total the resources that would be available such as life insurance, employer-provided benefits, Social Security survivor benefits, savings, retirement plans.
Measure the difference between the needs and the resources available. The resulting shortfall is the insurance need.

Question 9

When is retirement income available in case on untimely death

Answer 9

Traditional pensions, funded solely by the employer’s money, may not be accessible until retirement.

Question 10

Are death benefits taxable

Answer 10

When calculating the income need using life insurance, know that the death benefits received are normally free of income taxes. Therefore, if you are using salary replacement of $100,000 and the taxes on this amount is $32,000 you are replacing the after-tax amount of $68,000 and not the full salary of $100,000. Otherwise, you would be over insuring and paying premiums for the extra $32,000 which could be used for other goals.

Question 11

What is Probate Cost

Answer 11

Probate is the process of filing, validating and executing a will by a court. These costs vary significantly by jurisdiction and as a function of the estate’s size. Such costs commonly range from 2 to 5 percent of the gross estate and can be higher. Executor fees may also be incurred in final expenses

Question 12

Cash needs at death

Answer 12

1. Final expenses
2. Outstanding debt
3. housing
4. Education fund
5. Emergency fund for 6 months

Question 13

Capital Liquidation Approach

Answer 13

The capital liquidation approach assumes that both principal (capital) and interest are liquidated over the relevant time period to provide the desired income. This approach requires a smaller capital sum to provide a given income level than the retention approach.

Question 14

Capital Retention Approach

Answer 14

The capital retention approach assumes that the desired income is provided from investment earnings on the principal, and no part of the desired income is from the capital. In other words, the capital is retained undiminished, even after death. This approach permits a capital sum to be passed on to the family’s next generation (or to whomever is designated). It is considered more conservative, because in an emergency, the principal itself can be accessed.

Question 15

Affordable care act

Answer 15

Under the Affordable Care Act (ACA), you can be penalized for not acquiring a minimal amount of health insurance coverage.

Question 16

Medical Insurance Premiums are tax deductible or not?

Answer 16

The premiums paid as an employee are tax favorable as the amount is excluded from taxable wages. Special rules apply if you are self-employed whereby the premium payments can be deducted in arriving at adjusted gross income (AGI). Also, out-of-pocket expenses can be deducted if you itemize deductions and exceed the phase-out amount.