Risk Management and Insurance Planning

Question 1

Pure Risk

Answer 1

There is a chance or loss or no loss (ex. death, auto accident, house fire).
Insurable risks.

Question 2

Speculative Risk

Answer 2

A chance of profit, loss, or no loss.
Generally undertaken by entrepreneurs.
Generally voluntary risk and not insurable.

Question 3

Subjective Risk

Answer 3

Differs based on an individual’s perception of risk.

Question 4

Objective Risk

Answer 4

Measurable and quantifiable.
Measures the variation of an actual loss from expected loss.

Question 5

Law of Large Numbers

Answer 5

When more units are exposed to a similar loss the predictability of such a loss to the entire pool increases.
The more exposures, the more likely that the risks will be equal true results and thus will be predictive of future results.
Helps to reduce objective risk.

Question 6

Perils

Answer 6

The actual cause of a loss (ex. fire, wind, tornado, earthquake, burglary, collision)

Question 7

Types of Hazards

Answer 7

Hazard: condition that increases the likelihood that a peril will occur.
Moral
Morale
Physical

Question 8

Moral Hazard

Answer 8

A character flaw that could lead to a person filing a false claim.

Question 9

Morale Hazard

Answer 9

The indifference created because a person is insured.

Question 10

Physical Hazard

Answer 10

A tangible condition that increases the probability of a peril occurring.

Question 11

Adverse Selection

Answer 11

The tendency of persons with higher-than-average risks to purchase or renew insurance policies.
Premiums are dependent upon a balance between favorable and unfavorable risks in the pool.
It is managed through underwriting, denying insurance on the front end, and raising premiums on the back end.
The underwriter is responsible for managing adverse selection.

Question 12

Requisites for an insurable risk

Answer 12

Large number of similar exposure units (homogeneous).
Losses must be accidental.
Cannot insure moral hazards because premiums would sky rocket.
Losses must be measurable and determinable so that the insurer can accurately forecast actual losses.
An insurer cannot provide coverage that would cause it to become financially insolvent.
Premiums must be affordable.
*Insurable risks are CHAD - not Catastrophic, Homogeneous, Accidental, and measurable and Determinable

Question 13

Elements of a valid contract

Answer 13

One party must make an offer and the other party must accept that offer (ex. signing and paying the first premium).
Must be legal competency of all parties involved.
Bother parties must be 18 or older, otherwise contract is voidable by the minor.
Must be legal consideration.
Contract must pertain to a lawful purpose.
*A legal contract requires COALL - Competent parties, Offer and Acceptance, Legal consideration, and Lawful purpose

Question 14

Legal Principles of Insurance Contracts

Answer 14

The Principle of Indemnity
Subrogation Clause
The Principle of Insurable Interest

Question 15

The Principle of Indemnity

Answer 15

An insured is only entitled to compensation to the extent of the insured’s financial loss.
An insured cannot make a profit from an insurance contract.

Question 16

Subrogation Clause

Answer 16

The insured cannot receive compensation from both the insurer and a third party for the same claim.
If the insured collects compensation from their insurance company, they lose the right to collect compensation from the third party.

Question 17

The Principle of Insurable Interest

Answer 17

An insured must have an emotional or financial hardship resulting from damage, loss, or destruction.
Property and liability insurance - the insured must have insurable interest at the time of policy inception and at the time of loss.
Life insurance - the insured only needs insurable interest at the time of the policy inception.

Question 18

Warranty

Answer 18

A promise made by the insured to the insurer.
A breach of warranty is grounds for avoidance by the insurance company.

Question 19

Representation

Answer 19

Statements made by the insured to the insurer during the application process.
There must be a material misrepresentation to void an insurance contract.
Misrepresenting age on a life insurance application is not material misrepresentation.

Question 20

Concealment

Answer 20

When the insured is silent about a fact that is material to the risk.A

Question 21

Adhesion

Answer 21

An insurance policy is basically “take it or leave it”. There are no negotiations over terms and conditions.
As a result, any ambiguities in an insurance contract are found in favor of the insured.

Question 22

Aleatory

Answer 22

The money exchanged may be unequal. In other words, there’s a small premium, but the insured may receive a large benefit.

Question 23

Unilateral

Answer 23

Only one promise made by the insurer which is to pay in the event of a loss.
The insured is not obligated to pay the premiums. If the premiums are not paid, then there’s no promise by the insurer.

Question 24

Express Authority

Answer 24

Given through an agency or written agreement.
The insurer is responsible for acts of an agent based on express authority.

Question 25

Implied Authority

Answer 25

The authority that the public perceives.
The actual delivering of an insurance contract and accepting a premium is an example of implied authority.
The insurer is still responsible even if a client is misled.

Question 26

Apparent Authority

Answer 26

When the insured believes the agent has authority to act on behalf of the insurer when in fact, no authority actually exists.
Could be inferred based on business cards or a sign on the wall, but the agency agreement actually expired.
If an agent represents that insured can purchase a policy from an insurance company that has not renewed that agent’s agreement, they may still be held responsible.

Question 27

Insurance Rating Agencies

Answer 27

A.M. Best’s
- Highest: A++ to A/A-
- Lowest: C/C- to D

Moody’s
- Highest: Aaa to Aa1/Aa2
- Lowest: B1/B2/B3 to Caa

Standard and Poor’s
- Highest: AAA to BBB
- Lowest: BB and lower CC

Question 28

National Association of Insurance Commissioners

Answer 28

Provides a watch list of insurance companies based upon financial ratio analysis. Ratios measure the financial health of insurance companies.
NAIC has no regulatory power over the insurance industry, but is involved in accrediting state insurance regulatory offices. Regulation occurs at the state level.

Question 29

6 Steps of Risk Management

Answer 29

1. Determine the objectives of the risk management program.
2. Identify the risks to which the client is exposed.
3. Evaluate the identified risks as to probability of occurrence and potential loss.
4. Determine alternatives for managing risks, and select the most appropriate alternative for each.
5. Implement the program.
6. Evaluate, monitor, and review (control).
   *DIEDIE - Don’t Insure Everything (Squared)

Question 30

Term Life Insurance

Answer 30

Pure insurance protection which pays a predetermined sum if the insured dies during a specified period of time.
Protection ceases at the end of the term unless renewed.
Premium pattern may be level or increasing on an annual or set period basis.
Face amount may be level or decreasing.
No cash value, savings component, or investment component.
Very inexpensive at young ages.
Most policies are renewable without evidence of insurability.
Most are convertible without evidence of insurability for a specified period.
There is a waiver of premium if the payer becomes totally disabled.
Appropriate for education funding, expenses during the grieving process, or paying off a mortgage (decreasing term).

Question 31

Types of Term Insurance

Answer 31

Annual Renewable Term (ART)
Level Term (LT)
Decreasing Term (DT)

Question 32

Annual Renewable Term (ART)

Answer 32

Premium increases annually, but the death benefit stays fixed.
Can be converted to permanent life insurance without evidence of insurability.

Question 33

Level Term (LT)

Answer 33

Larger premiums than an ART policy as you are prepaying the higher mortality costs.

Question 34

Decreasing Term (DT)

Answer 34

Premiums are level, but the death benefit decreases.
Ex. if the goal is to payoff a mortgage.

Question 35

Whole Life/Permanent Life Insurance

Answer 35

Provides lifetime protection if premiums are paid as agreed.
Pre-fund future higher mortality costs using present value analysis.
Premium patterns vary widely from single premium to increasing premiums.
Have a savings or investment component with earnings accruing on the residual of the premium less the cost for the year plus any previous savings balance.
Cash values may be used for loans or may be received if the policy is surrendered.
Cash values usually have a minimum guaranteed rate of interest.
Participating policy: receives dividends.
Non-participating policy: does not receive dividends.

Question 36

Whole Life/Permanent Life Insurance Advantages

Answer 36

Provide tax deferred growth of cash value.
Permanent protection until age 100-120.

Question 37

Whole Life/Permanent Life Insurance Disadvantages

Answer 37

Premiums are expensive and their is no flexibility with the premium payments.
Cash value grows gradually.
The insured may not be able to purchase as much protection.

Question 38

Types of Whole Life Insurance

Answer 38

Ordinary Whole Life Insurance
Limited Pay Whole Life Insurance
Variable Whole Life Insurance

Question 39

Ordinary Whole Life Insurance

Answer 39

The insured pays premiums until age 100-120 or death.
The cash value increases to face value at age 100-120.
The death benefit is level throughout the term of the policy.

Question 40

Limited Pay Whole Life Insurance

Answer 40

Premiums are higher than ordinary life because the insured only pays premiums until a certain age.

Question 41

Variable Whole Life Insurance

Answer 41

The cash value is invested by the insured in stock, bond, and money market mutual funds. An opportunity for higher returns on cash value exists with variable life.
The death benefit and cash value fluctuate based on investment performance.

Question 42

Life Insurance Dividend Options

Answer 42

Available on participating policies. These dividends do not need to be reported.

Cash: client’s receive the money and can use it or invest it as they wish.

Accumulate at interest: the company invests the dividends and they are tax-free up to the client’s basis in the policy. Interest paid on the dividends is taxable.

Reduce premiums: decreases the out of pocket expense for premiums.

Paid-up additions: purchases additional insurance each year for insured regardless of health or occupation.

One-year term: adds term insurance each year to the policy face amount equal to the cash value of the policy. Also known as the 5th dividend option.

*Dividends are a CRAP-O: Cash option, Reduce premiums, Accumulate at interest, Paid-up additions, and Term (one-year)

Question 43

Life Insurance Nonforfeiture Options

Answer 43

Available on cash value policies when the policy has lapsed.

Cash surrender value: insured receives the accumulated cash value when terminating the life insurance policy. The cash surrender value is the cash value less surrender charges.

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: the insured receives the cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy.

Question 44

Universal Life Insurance

Answer 44

Flexible - the insured may adjust the premiums paid, the face value of the policy, and cash value.
The insured does not direct the investment portion of the cash value.
Cash value can be used to actually pay the policy premiums.

Question 45

Universal Life Insurance - A

Answer 45

A flexible premium, adjustable death benefit, unbundled life insurance contract.
If the cash value gets high enough, the death benefit will increase.
Unbundled - beneficiary receives cash value OR death benefit.

Question 46

Universal Life Insurance - B

Answer 46

Same as Universal A except that death benefits vary directly with the cash values.
More expensive than A because the death benefit is equal to a specified amount of insurance PLUS the cash value - bundled.

Question 47

Variable Universal Life Insurance

Answer 47

Has investment options such as stock, bond, and money market mutual funds and is directed by the insured.
There is no minimum guaranteed rate of return or interest.
The cash value is invested in a separate account, not the insurer’s general account.
The cash value is not guaranteed but in the event of an insurance company failure, the separate account will not be treated as an asset of the insurance company.

Question 48

Absolute Assignment

Answer 48

The other transfers all policy ownership rights.

Question 49

Collateral Assignment

Answer 49

Used for collateral on debt, which only assigns limited ownership rights.
The assignment automatically terminates when the debt is satisfied.

Question 50

Taxation of Life Insurance

Answer 50

Death benefits are generally excludable from taxable income.
Dividends earned on cash value are not taxable until withdrawn.
Cash value is not taxable if received at death.
Loans against life insurance are tax free unless the contract is a MEC.
Exchanges for one life insurance policy to another or to an annuity does not create a taxable event.
Exchanging an annuity for life insurance creates a taxable event.

Question 51

MEC

Answer 51

Subject to 10% penalty and LIFO taxation if withdrawals before age 59.5.
Policy becomes a MEC if it fails the 7 pay test: cumulative premiums paid exceed the premiums due for the time period being considered.
MEC status only effects withdrawals and the ability to take loans, not the taxation of proceeds at death.

Question 52

Life Insurance Transfer for Value

Answer 52

Taxable to the transferee to the extent that proceeds except basis.
Exceptions:
- Transferred to the insured.
- Transferred to a business partner of the insured.
- Transferred to a corporation in which insured is a shareholder or officer.
- Transfer that results in carryover basis from transferor to transferee.

Question 53

Taxation of Life Insurance Premiums

Answer 53

Premiums paid by the insured are not tax deductible by the insured.

Question 54

Taxation of Group Life Insurance Premiums

Answer 54

Premiums paid by the employer are deductible to the employer.
Premiums paid by the employer are taxable income to the employee, to the extent that they exceed $50k of coverage.
An employee must impute taxable income for benefits in excess of $50k.
The imputed income is a function of age and amount of benefits per $1,000 in excess coverage.

Question 55

Chronically Ill

Answer 55

A person who is not terminally ill but has been certified by a licensed health care provider as being unable to perform, without assistance, at least 2 activities of daily living for at least 90 days, or a person with a similar level of disability.

Question 56

Activities of Daily Living (ADLs)

Answer 56

Eating
Toileting
Transferring
Bathing
Dressing
Continence
*Must be unable to perform at least 2 of the above to be chronically ill.

Question 57

Taxation of Annuities

Answer 57

Post 1982 - premature withdrawals receive LIFO tax treatment.
Pre 1982 - premature withdrawals received FIFO tax treatment.

Question 58

Tax Treatment for Annuity and Life Insurance Exchanges

Answer 58

LL
AA
LA
NOT AL
Can never un-MEC a policy, even through exchange.

Question 59

Solving Stop Loss Limit

Answer 59

Insured always pays the deductible.
Insured then pays coinsurance percentage of stop loss amount.
After paying coinsurance percentage of the maximum stop loss amount, insurer pays 100%.
Insured pays the deductible plus the stop loss limit.

Question 60

Non-cancellable Policies

Answer 60

Continuous and guarantee an insured the right to renew until a specific age or stated number of years.
The insurer cannot raise premiums and cannot cancel the policy.

Question 61

Guaranteed Renewable Policies

Answer 61

The right to renew is guaranteed until a specific age or stated number of years.
The insurance company cannot cancel the policy but they can raise the premiums, as long as the premiums are raise for an entire group or class of policyholders.

Question 62

Medicare Part A (Hospital Insurance)

Answer 62

Paid for by a portion of the social security tax.
Services covered include: hospital, skilled nursing, home health care, and hospice.
Benefit period begins on the first day a patient receives services and ends after 60 consecutive days of no further hospital stays, skilled nursing care, or rehabilitation services. There is no limit to number of benefit periods per individual.
Deductible of $1,600 (2023) per benefit period.
Coinsurance (insured pays):
-$400 per day for 61-90 per benefit period
- $800 per day for days 91-150 (lifetime reserve days)
Skilled nursing facility coinsurance:
- $200 per day for days 21-100 per benefit period
Medical equipment coinsurance of 20%.
Services not covered: custodial care (include nursing care facility that provides assistance with ADLs).

Question 63

Medicare Part B (Medical Insurance)

Answer 63

Persons with Part A coverage can elect Part B coverage as well - optional
Premiums are paid by the insured ($164.90 per month or more depending on income).
Services include: doctor’s services, ambulance transportation, diagnostic tests, outpatient therapy, home health care, clinical research, durable medical equipment, mental health (inpatient, outpatient, partial hospitalization).
The deductible is $226 per year with a coinsurance of 20%.

Question 64

What is NOT covered by Medicare Part B

Answer 64

Dental care, dentures
Cosmetic surgery
Hearing aids
Eye exams

Question 65

Medicare Part D (Drug Coverage)

Answer 65

Intended to save participants money on prescription drug costs and help protect against higher drug costs in the future.
Insurance companies and other private companies work with Medicare to offer these drug plans by negotiating discounts on drug prices.
Optional.

Question 66

COBRA (Consolidated Omnibus Reconciliation Act)

Answer 66

An extension of group health insurance with the same coverage.
Applies to any employer who has a health plan and 20 or more employees.
An employer may charge 2% for administrative expenses (total expenses to the employee is 102% of the actual insurance cost).
Applies to loss of coverage for the covered employee, employee’s spouse and/or dependent child.

Question 67

Qualifying events in which an employer must offer COBRA coverage for a specific period of time

Answer 67

Reduction in hours or normal termination - 18 months
Death - 36 months
Divorce - 36 months
Medicare eligibility - 36 months
Loss of dependency status by child of employee - 36 months
Employee meets social security definition of disabled - up to 29 months

Question 68

Long Term Disability

Answer 68

Covers periods when the insured is unable to work due to an accident or sickness.
Needs to be 60-70% of gross pay.
Needs to be to retirement or for life.
Social security definition is disabled for 5 months, expected to continue for 12 months or result in death and cannot perform duties of any occupation.
Benefits are taxable if premiums are paid by other than the insured.
Usually has 30-180 day elimination periods which essentially serves as a deductible.
May have a residual clause which provides some benefits for returning to work in a lower paid position.
Must be either non-cancellable (insurer cannot cancel and can’t raise premiums) or guaranteed renewable (insurer cannot cancel but can raise premiums, but only if raise on entire group).

Question 69

Types of Disability

Answer 69

Any occupation
Own occupation
Split definition

Question 70

Any Occupation Disability

Answer 70

Considered disabled if insured cannot perform the duties of “any occupation”.
Provides for the least expensive premium.
Considered disabled if unable to perform duties of gainful occupation they’re reasonably fitted by education, experience, training, and prior economic status.

Question 71

Own Occupation Disability

Answer 71

Considered disabled if insured cannot perform the duties of his “own occupation”.
More expensive, ideal for specialized, high paying fields.

Question 72

Split Definition of Disability

Answer 72

Begins with own occupation, and moves into any occupation after a year or two under the own occupation definition.

Question 73

Taxation of Disability Benefits

Answer 73

If EMPLOYEE pays the premium:
- Premiums are NOT deductible
- Benefits are tax-free

If EMPLOYER pays the premium:
- Premiums ARE deductible to employer
- Benefits to employees ARE taxed

If EMPLOYEE pays premium with PRE-TAX dollars (cafeteria plan):
- Benefits to employee ARE taxed

Question 74

Residual Benefits Clause

Answer 74

If insured goes back to work at less pay then the policy will pay the difference between current income and income prior to disability.

Question 75

Homeowners Insurance Section I

Answer 75

Coverage A: Dwelling
Coverage B: Other structures
Coverage C: Personal property
Coverage D: Loss of use

Question 76

Homeowners Insurance Section II

Answer 76

Coverage E: Personal liability
Coverage F: Medical payments to others

Question 77

Basic Named Perils

Answer 77

Fire
Vehicles
Lightening
Smoke
Windstorm
Vandalism
Hail
Explosion
Riot
Theft
Aircraft
Volcano
*A named peril policy

Question 78

Broad Perils

Answer 78

Basic named perils plus:
Falling objects
Weight of ice, snow, sleet
Accidental overflow of water
Sudden bursting of appliances
Freezing of system or appliance
Damage from electrical current
*A named perils policy

Question 79

General exclusions for homeowners policies

Answer 79

Movement of ground (earthquake, landslide)
Ordinance or law (loss resulting from regulations regarding construction or demolition)
Damage from water (floods, water from underground sewer backup)
War or nuclear hazard (including nuclear powerplant)
Power failure
Intentional act (burning down your own house)
Neglect (must take reasonable means to save property and mitigate loss)

Question 80

HO I - Coverage A: Dwelling

Answer 80

Covers repair or replacement of the house, attached structures and building materials on premises.
The insured must purchase an amount equal to replacement cost (cost to rebuild) of the building.
Insured must carry at least 80% of replacement cost of the building (coinsurance).
Actual cash value: represents the depreciated value of the property.
Replacement cost: amount necessary to purchase, repair or replace with similar quality at current prices. Insured must carry 80% of the replacement cost at the time of loss.
(Insurance Purchased / Coinsurance) X Loss or Replacement Cost

Question 81

HO I - Coverage B: Other Structures

Answer 81

Includes detached garages, storage buildings, etc.
Limit is usually 10% of the amount of coverage A.
Other structures will not be covered if used for business purposes.

Question 82

HO I - Coverage C: Personal Property

Answer 82

Includes furniture, electronics, paintings, etc.
Limit is usually 50% of coverage A amount.
Coverage is still effective, regardless of where property is located at the time of loss.
Standard coverage is for actual cash value, need an endorsement for replacement cost.
Limits are placed on personal property losses, e.g. cash, coin collections ($250), jewelry ($1,500).
Exclusions: property of roomers/renters or property in an apartment rented to others.

Question 83

HO I - Coverage D: Loss of Use

Answer 83

Combination of additional living expenses and loss of rental income.
Limit is usually 20-20% of coverage A amount for insurance forms HO-2, HO-3, HO-4, and HO-5.
50% of coverage C for HO-6, and 10% of coverage A for HO-8.
Loss resulting from living in a hotel because residence is damaged or being repaired.
Alternatively, if rental income is lost due to a property being damaged, the insured may collect.

Question 84

HO II - Coverage E: Personal Liability

Answer 84

Protects the insured against claims arising out of both bodily injury and property damage.
The insurer will cover both the damages and the costs of any defense of the claim or suit.
The minimum amount of coverage is $100k per occurrence.
Liability insurance is based on a legal liability to pay.
The insurer will only pay to the lesser of the damage or the coverage.

Question 85

HO II - Coverage F: Medical Payments to Others

Answer 85

Includes coverage for the medical payments to others for injuries that arise even where the insured is not liable for the injury.
Medical expenses include reasonable charges for medical procedures, surgical procedures, hospital stays, ambulances, dental care, x-rays, professional nursing, prosthetic devices, and funeral services.
Does not apply to the insured or members of the insured’s household.
Not liability coverage and not based on fault.

Question 86

Required conditions to collect under Coverage F: Medical Payments to Others

Answer 86

One of the following conditions must be met for an individual to receive medical payments coverage from the insured:
- The injury occurs while the person has permission to be at the insured location.
- The injury occurs while the person is away from the insured location and is caused by a condition at the insured location or on property immediately adjoining the insured location.
- The insured injures another person while away from the insured location.
- An animal owned by or in the care of the insured injures an individual off the insured premises.

Question 87

HO-4: Contents Broad Form (Renters)

Answer 87

Designed for tenants, and provides protection for furniture, clothes, and other personal property against the same perils as HO2 broad form.
Loss of use coverage is limited to 20% of the amount of coverage C (personal property).
Tenant’s improvements and betterments coverage protects the insured for the value for any additions, installations, or improvements made by the insured to the rented dwelling.

Question 88

HO-6: Unit Owners Form (Condo Owners)

Answer 88

Covers basic and broad named perils, but not building coverage.
The insurance responsibility in a condo arrangement is divided between the condo unit owner and the condo association. Loss assessments typically need an endorsement.
Provides coverage for the personal property of the condo owner for the same named perils as HO2.
Provides for loss of use coverage equal to a max of 50% of the amount of coverage C (personal property).
Provides coverage for building alterations and additions, which include appliances, fixtures, real property that pertains exclusively to the insured’s premises, property that is the insured’s responsibility under the condo association agreement and structures owned by the insured other than the condo unit.
Endorsements can be added to provide open peril coverage on the unit owner’s building items, personal property, loss of unit rental and assessment coverage.

Question 89

Parts of a Personal Auto Policy

Answer 89

Part A: Liability Coverage
Part B: Medical Payments
Part C: Uninsured Motorist
Part D: Coverage for Damage to Your Auto
Part E: Duties After an Accident or Loss
Part F: General Provisions

Question 90

Personal Auto Policy Limits

Answer 90

Expressed at $X/$Y/$Z
X - $ of coverage for bodily injury per person
Y - $ of coverage per accident
Z - $ of coverage for property damage

Question 91

Personal Auto Policy Part A: Liability Coverage

Answer 91

Covered persons include you, any family member, any person using your car with your permission, any organization responsible for the conduct of someone driving your covered auto, any organization responsible for your conduct while driving a non-owned auto.
Coverage amounts are limited as follows:
- Bodily damage per person
- Bodily damage per occurrence
- Property damage per occurrence
Split limits: 50/100/25
Stated in thousands of dollars
State law minimum limits (on bodily damage and property coverage) automatically increase when driving from state to state.
Insurance on the auto is primary insurance to recover any loss. Driver’s insurance is secondary.

Question 92

Personal Auto Policy Part B: Medical Payments

Answer 92

Covered persons include you or any family member while occupying the auto, you or any family member as a pedestrian struck by an auto, any other person while occupying your covered auto.
Coverage amounts are limited as follows:
- Per person, per occurrence basis
Exclusions: public livery, racing and an auto used without permission.

Question 93

Personal Auto Policy Part C: Uninsured Motorist

Answer 93

Pay what an “under-insured” or uninsured driver should have paid.
Under-insured or uninsured must have been at fault.
Covered persons include you or any family member while occupying the auto, any other person while occupying your covered auto, any person who might have been entitled to damages, you or your family member as a pedestrian.
Exclusions: public livery, regular use of a non-owned vehicle, auto used without permission, and auto used in insured’s business.

Question 94

Personal Auto Policy Part D: Coverage for Damage to Your Auto

Answer 94

Provides direct damage coverage on your covered auto and any non-owned auto (rental or borrowed car).
Collision: protects against an accident involving another car, running off the road, into a lake, tree or wall.
Comprehensive or other than collision: covers falling objects, fire, theft, explosion, earthquake, windstorm, hail, water, flood, mischief, vandalism, riot, contact with a bird or animal and breakage of glass.
Insurance company has the option of paying for repairs or actual cash value of auto.
Exclusions: public livery, radar detectors, most electronic equipment, nuclear damages, auto used without permission, and auto used in insured’s business.

Question 95

Personal Auto Policy Part E: Duties After and Accident or Loss

Answer 95

Notify the insurer.
File proof of the loss.
Cooperate with the insurer during the investigation.
The insured must file a police report if there is a theft or accident with an uninsured motorist.

Question 96

Personal Auto Policy Part F: General Provisions

Answer 96

Only provides coverage in the US, Puerto Rico, and Canada.
A personal auto policy is not effective in Mexico.
An insured must notify their insurer about a new car purchase within 30 days of purchase.

Question 97

Assumption of Risk

Answer 97

A person cannot sue a ski resort if injured while skiing because the skier assumed the risk associated with skiing.

Question 98

Negligence on the part of the injured party

Answer 98

The negligent act of the injured party caused the injury.

Question 99

Contributory negligence

Answer 99

A person’s negligent actions contributed to the loss.
This is a very severe defense and the injured party cannot recover.

Question 100

Comparative negligence

Answer 100

A person’s negligent actions contributed to the loss but they can recover a portion of the loss from the other negligent party.

Question 101

Last clear chance rule

Answer 101

The plaintiff can collect even if there was contributory negligence on the plaintiff’s part if the plaintiff can prove the defendant had a last clear chance to avoid the accident.

Question 102

PLUP (Personal Liability Umbrella Policy)

Answer 102

Provides protection against legal obligations that arise from negligent acts.
Pays the cost, up to the face of the policy, that result in liability.
Usually provides defense for the insured in the event of a lawsuit.
Requires higher liability limits on underlying auto and homeowner policies.
Does not pay until the liability limits on the underlying policies are exhausted.
Coverage is for liability of the insured, the family members, or both.
Coverage includes exposure at the premises of the residence or away from the residence.
Provides coverage for the insured’s legal obligation because of bodily injury or property damage.
*Coverage should be for $1 million at minimum, otherwise it is considered a deficiency in the plan.

Question 103

PLUP Exclusions

Answer 103

Coverage for bodily injury or property damage if the act that created that injury or damage was intentional.
Liability that is a result of a business owned or conducted by the insured.
Liability that arises from rental operation conducted by the insured.
Liability that occurs on an uninsured location that is owned by the insured.

Question 104

Errors and Omissions Insurance

Answer 104

Covers negligent acts, errors, and omissions.
Many professionals carry E&O, such as: accountants, lawyers, engineers, financial planners.

Question 105

Malpractice Insurance

Answer 105

Provides coverage where bodily injury may occur, such as doctors.

Question 106

Eligible persons for survivorship benefits under social security

Answer 106

Children under 18 are always covered as are caretakers of children under 16.
Spouse age 60 or older if worker is fully insured.
Dependent parents age 62 or older if worker is fully insured.

Question 107

Social Security Disability Benefits

Answer 107

Long-term benefit if the worker is unable to do any work for which they are suited.
5 month waiting period (benefits start month 6).
Disability payments stop at retirement age when the worker starts receiving retirement benefits.
Not eligible if the worker earns $1,470 or more per month.
Maximum benefit up to 80% of the worker’s average earnings.
Benefits also available to children under age 18 or disabled.

Question 108

Social security credits required for disability

Answer 108

6 credits in 3 previous years if disabled before age 24.
2 credits per year between age 21 and year of disability if disabled between ages 24-30.
20-40 credits depending on age if disabled after 30. 20 of these credits must be earned in the 10 years prior to disability.

Question 109

Social Security Benefit Eligibility

Answer 109

Question 110

Health Maintenance Organizations (HMOs)

Answer 110

Delivers comprehensive health care in return for a periodic payment (premium).
Care is managed by a PCP who determines what care is received.
Primary disadvantage is that there is no coverage “outside” of the HMO.
Three models:
- Staff model
- Group model
- Individual practice association

Question 111

Staff Model (HMO)

Answer 111

A corporation, and medical staff members are employees of the HMO.

Question 112

Group Model (HMO)

Answer 112

Sometimes known as the network model where the HMO contracts with groups of medical providers to care for insured plan subscribers.

Question 113

Individual Practice Association (HMO)

Answer 113

Made up of physicians who have their own office locations, but contract out to the HMO on a fee-for-service basis.

Question 114

Preferred Provider Organizations (PPOs)

Answer 114

Network of healthcare providers with whom an employer or insurance company contracts.
Provider offers a discount on services.
Insured receives a high rate of reimbursement when using providers within the organization.
Insured can seek care elsewhere but will suffer a penalty in the form of increased deductibles and coinsurance.

Question 115

Health Savings Account (HSAs)

Answer 115

Provide employees and individuals seeking health care a tax deduction for amounts contributed to their accounts as well as use of the money and earnings tax-free for qualifying medical expenses.
Employer, employee, or both can make contributions.
Must have medical insurance under a high deductible health plan in order to qualify.
$1,000 catch-up contribution if 55 and older.
Non-qualified distributions are subject to income tax and a 20% penalty if taken before 65. After 65, only income tax will apply.

Question 116

Flexible Spending Account (FSA)

Answer 116

Commonly used by employers as an employee benefit that permits employees to defer income to be used to pay for health care expenses with pre-tax dollars.
“Use it or lose it” - require the employee to either use the contributed amounts for medical expenses by 2.5 months after year end or forfeit the unused amount to the company.
Deferrals are limited.

Question 117

Taxation of Insurance Products

Answer 117

Question 118

Reduced Social Security Benefit for Early Retirement

Answer 118

Benefits reduced by 5/9 or 1% for each month, for the first three years that a worker retires early.
Benefits are then reduced by 5/12 of 1% for each month beyond three years.

Question 119

Increase in Social Security Benefits

Answer 119

A retiree’s benefit may increase by 8% (simple interest) each year the retiree delays their benefit.

Question 120

Reduction of Social Security Benefits

Answer 120

Early retirement: benefit is reduced $1 for every $2 above the earnings threshold for persons below full retirement age. Threshold is $24,240.
Full retirement age: in the year you reach full retirement, the benefit is reduced $1 for every $3 above the earnings threshold. Threshold is $56,520.
Earnings based reductions end at full retirement age.

Question 121

Taxation of Social Security Benefits

Answer 121

Up to 85% of benefit may be taxed.
Thresholds are based on combined income which includes:
- AGI
- Nontaxable interest
- Foreign earned income
- 1/2 of retirement benefit
Below first hurdle - 0 tax