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J’s CFP Review > Risk Management & Insurance > Flashcards

Risk Management & Insurance Flashcards

1
Q

If eligible under a _______ on the first day of the last month of the tax year, tax payer may fund an HSA for the max allowed for the full year.

A

High deductible health plan (HDHP)

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2
Q

Advantages of an HSA

A

1) Pre-tax contributions
2) Tax-deferred earnings
3) Tax-free distro
4) Balance not subject to use-it-or-lose-it
5) May use for OTC drugs, dental, vision, LTC insurance
6) Most employers also contribute
7) Cannot fund once enrolled in Medicare
8) Upon death, HSA will be includes in gross estate, but avoid probate with named beneficiaries

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3
Q

Medicare and Long Term Care

A

Medicare does not pay for long-term custodial care

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4
Q

Long Term Care - rank order of locations

A

“FCH”

Facility: Nursing home care & Assisted Living Facility (Residential, higher care, personal care, rehab, meds, 24-hour support)

Community: Adult Day Health Care (Residential or day, may include med mgmt,

Home: Home Health Aide Services & Homemaker Services. (Personal care, non-medical)

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5
Q

Long Term Care - Features & Benefites

A

“Dials to influence premiums”

1) Benefit Period
2) Elimination Period
3) Daily Benefit
4) Riders
5) Waiver of Preimum
6) Renewability

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6
Q

Medicare pay schedule of skilled nursing care

A

Day 1 - 20: Zero $ co-pay
Day 21 - 100: Patient pays $194.50 co-insurance per day
Day 101+: Patient pays all costs

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7
Q

Employee count requirement for COBRA

A

20

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8
Q

COBRA, what does it cost?

A

Cost cannot exceed 102% of the costs paid by the employee and employer originally

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9
Q

COBRA - max period of continuation coverage

A

Termination other than gross misconduct or reduction of hours; 18 months (includes employee)
Employee/qual’d bene meets SS definition of disability; 29 months (includes employee)
Employee enrollment in Medicare; 36 months
Divorce or legal separation; 36 months
Death of employee; 36 months
Loss of dependent child status; 36 months (dependent child only)

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10
Q

Qual’ed Long-Term Care Insurance requirements and features

A

Benefits payable only for qual’ed l/t care services
Contract must be guaranteed renewable
Contract does not pay or reimburse expenses reimbursable under Medicare
Contract does not provide for a cash surrender value
Policy dividends must be applied as a reduction in future premiums or increase future bene’s
Limitations and exclusions are prohibited (except pre-existing w/in 6 months of application)
Contract cannot provide for skilled nursing care only or require prior hospitalization
Contract must have 2-yr incontestable clause for misrepresentation

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11
Q

LTCI tax benefits

A

Bene’s are tax-free
Premiums paid are qual’d medical expense for itemized deduction (Skd A - itemized deductions; greater than 7.5% of AGI)
Premiums can be paid from HSA
Premiums paid by employers are tax-free to employees and benefits remain tax-free

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12
Q

LTCI benefit triggers

A

2 of 6 ADLs, or
Substantial cognitive impairment (e.g. dementia)

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13
Q

What are the ADLs?

A

“BED COT”

Bathing
Eating
Dressing

Contintence (ability to control bowels)
On - off toilet
Transferring (ability to move to-from bed or wheelchair)

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14
Q

Disability Income Insurance - Policy Types

A

Any-occ
Own-occ
Modified own-occ
Social Security Disability

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15
Q

Presumptive Disability Clause

A

An insured is always considered totally disabled, even if he is at work, if sickness or injury;
(1) results in the loss of sight of both eyes
(2) hearing in both ears
(3) ability to speak, or
(4) use of any two limbs

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16
Q

If employer paid premiums for disability insurance, benefits are ________.

A

Taxable

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17
Q

If employee paid disability insurance premiums with after-tax dollars, benefits are _____________.

A

Tax-free

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18
Q

If employee paid disability insurance premiums with pre-tax dollars, benefits are __________.

A

Taxable

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19
Q

Section 162 arrangement; Disability insurance

A

If the employer pays the premium but reports the payments as compensation to the insured, benefits are tax-free to the insured. It’s as if the employee paid the premiums with after-tax dollars.

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20
Q

Types of Life Insurance

A

Term Life
Universal Life
Option A
Option B
Whole Life

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21
Q

Universal Life Insurance Option A

A

Death benefit remains level

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22
Q

Universal Life Option B

A

Death benefit is face amount PLUS cash value

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23
Q

Universal Life Policies

A

Fixed Universal Life: Premiums stay the same; fixed interest rate; least riskiest of UL;
Variable Universal Life: Variable interest rate, cash value is invested in mutual funds that can increase or decrease
Indexed Universal Life: Cash value account has a min & max guaranteed interest rate based on an index

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24
Q

Life Insurance Non-Forfeiture Options

A

(1) Cash Surrender Value
(2) Extended-Term Option
(3) Reduced Paid-Up Insurance

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25
LI | Cash Surrender Value
Insurance co pays the cash value to the policy owner as a lump sum and contract ends
26
LI | Extended-Term Option
Policy owner uses the cash value from their policy to place the policy on extended term insurance. The cash value serves as a single premium to pay for term life insurance for as long as the cash value will support the stated death benefit at the insured’s current age. The option has no residual cash value. The insurance co may allow reinstatement of the permanent policy if the extended term has not expired. Maintains the original death benefit but may not last to life expectancy.
27
LI | Reduced Paid-Up Insurance
The policy’s cash value is used to buy a paid-up policy of the same type as the policy that lapsed. The new policy will have a reduced death benefit but will retain a cash value that will grow throughout the life of the policy at a reduced rate.
28
MEC
Cash value LI policy assuming it fails the 7-pay test and changes the tax treatment cash distro’s while the insured is alive.
29
What is the Seven-Pay test for LI?
Helps the IRS determine whether your LI policy will be converted into a MEC. It compares the total premiums paid in the first 7 years of the policy with what you’d need to pay it in full. If your payments exceed what’s needed, your policy becomes recognized as a MEC. Policies purchased before 6/20/88 not subject to premium limits. Test applied at start of policy and if the policy experiences a material change.
30
What did the 7-Pay test work to deter?
Curtail the use of single premium LI payments as a tax-free income investment vehicle.
31
Two conditions of a Vatical Settlement
(1) Terminally ill: certified by a physician as having an illness or condition that can reasonably be expected to result in death within 24 months of the date of certification. (2) Chronically ill: Refers to a person who is unable to perform at least two activities of daily living for a period of at least 90 days.
32
Viatical Settlement: tax consequences to the insured
Amounts rcvd under a LI contract on the life of a terminally ill or chronically ill person are EXCLUDED FROM GROSS INCOME. However if the person is only chronically ill, the benefits will only be excluded from income to the extent they are used for long term care services only.
33
Viatical Settlement: tax consequence to the viatical settlement company
Purchase Price of policy +Ongoing Premiums =Basis Death Benefit -Basis =Taxable Gain
34
Buy-Sell: Cross-Purchase Agreements
Advantages: -Good for biz with few owners -Death benefit passes tax-free to surviving owner -Increase in basis to the surviving owner (primary advantage over entity purchase) Disadvantages: -Significant age difference between owners, younger ones will pay considerably more in premiums -Difficult to implement with a higher number of owners Formula: = n * (n-1)
35
Buy-Sell: Entity Purchase Agreement
Advantages: -Preferred solutions for biz with multiple partners -Death benefit passes tax-free to biz -Biz pays all the premiums Disadvantages: -No step-up in basis -Surviving owners will have substantially more gains upon sale of biz due to lack of step-up Formula: = n
36
Buy-Sell: Wait and See Agreements
“Wait and see BOB” -> Biz / Owner / Biz LI policies can be configured in multiple ways -As a cross-purchase agreement, where partners pay premiums on the policies on each other -As an entity purchase agreement, where the company pays premiums on policies written on partners -A hybrid of both
37
Required features of Qual’ed LTCI
-Benefits payable only for qual’ed l-t care services -Contract must be guaranteed renewable -Contract does not pay or reimburse expenses reimbursable under Medicare -Contract does not provide for a cash surrender value (no cash surrender) -Policy dividends must be applied as a reduction in future premiums or increase future benefits -Limitation and exclusions are prohibited (except pre-existing w/in 6 months of app) -Contract cannot provide for skilled nursing care only or require prior hospitalization -Contract must have 2-year incontestable clause for misrepresentation
38
How annuity funds can be invested?
-Variable: Sub-accounts; allocate investments (not mutual funds); assets are not apart of general acct of insurer -Fixed -Equity-Indexed: returns matched to mkt index; worst possible return in a year = 0; more conservative option
39
Lives covered in a Life Annuity?
(1) Single Life (2) Multiple Lives -Joint Life -Joint & Survivor -Full -2/3 -1/3
40
Three types of annuities?
(1) Immediate: payments start 1 month to 1 year after initial payment (2) Deferred: payments start later that 1 year after initial payment (3) Deferred Income Annuity: payments start after age 85 (NEED TO VERIFY)
41
Tax treatment for annuity payments (regardless of type)?
Taxed as ordinary income
42
Annuity tax treatment
-Annuities with after-tax basis receive an exclusion allowance for annuity action -Basis/expected payout = tax-free o portion of annuization payment -Exclusion allowance ends when all basis has been recovered -Withdrawals have LIFO based tax treatment -Subject to 10% penalty of early withdrawals before after 59.5
43
Annuity early withdrawal penalty
10% if before age 59.5
44
Annuity tax exclusion ratio - for annuitized contracts only
Investment in Contract / (Annual Payment * Life Expectancy) = Exclusion Ratio Note: -Life expectancy given on exam
45
Exceptions to 59.5 early withdrawal penalty for annuities
-Owner over 59.5 -Owner disabled -Owner dies -Immediate NQ annuity -Substantially equal periodic payments; later of 5 yrs or owner reaches 59.5
46
Annuitization prior to which date applies the exclusion allowance for life, even after basis is recovered?
Dec 31, 1986
47
Annuity withdrawals: which date determines accounting treatment?
Prior to 8/14/1982 = FIFO After 8/14/1982 = LIFO
48
Section 1035 exchanges
“Let’s Eat All Quesadillas” Rank order…. Life Insurance Endowment Annuity Qual’d Long-Term Care Insurance
49
Primary objectives of using a Section 1035 exchange in the change of life insurance policies?
Defer recognition of gain in a policy which the surrender value exceeds the basis
50
Basic Homeowners Coverage / Broad Form
HO-02
51
Basic Homeowners Coverage / Special Form
HO-03 “3 our special number”
52
Tenants/Renters Coverage / Contents Broad Form
HO-04
53
BEST Homeowner’s Coverage / Comprehensive Form
HO-05
54
Condo/Co-op Owners / Unit Owner’s Form
HO-06
55
Older/historical homes / Modified Coverage
HO-08 “8 for day I was born”
56
What does HO-15 coverage provide?
“3 * 5 = 15” An endorsement that provides HO-03 to HO-05 like covereage
57
What is a named peril in homeowner’s insurance
Coverage specifics perils or “causes of loss”that are covered. Everything else is not covered.
58
What are open perils in homeowners insurance?
Coverage specifics excluded perils or “cause of loss” that will not be paid. Everything else is covered.
59
List of homeowners insurance coverage
A = address B = backyard C = crate of crap D = damaged/destroyed digs E = exposure to legal action F = funds for others fractured femurs
60
Homeowners insurance coinsurance clause formula
((Did Have / Should Have) * Loss Amount) - Deductible *Note: D before S… D is numerator, S denominator *Remember: policy will never pay more than stated policy limit!
61
If dwelling insured for 80% or more of replacement cost, policy pays LESSER of….
-Actual cost to repair damage or replace the building -Stated limit of coverage under the policy
62
If dwelling insured for less than 80% of replacement cost, policy will pay GREATER of…
-Actual cash value of the damage (replacement cost minus depreciation) -Proportion of the loss that is equal to the proportion of insurance maintained as compared to 80% of the replacement cost
63
Personal auto policy (PAP) split limits
E.g. $250k / $500k / $500k Max bodily injury / Max all bodily injuries / Max property damage
64
Personal auto policy - Part D components
(1) Collision - damage to vehicle caused by an accident (INCLUDES HITTING AN ANIMAL) (2) Comprehensive - all other physical damage to the auto (e.g. theft, destruction)
65
Personal Liability Umbrella Policy details
-Provides additional liability coverage ABOVE AND BEYOND underlying limits to one’s homeowners or PAP -Typically req’s one to maintain min coverage limits at of underlying policies -Does not pay until underlying policy limits exhausted -Typically extends coverage for personal liability (e.g. libel and slander) -Does not cover business interests
66
Collateral Source Rule
States that damage assessed against a negligent party should not be reduced simply based on the fact that the injured party has insurance protecting against the specific peril
67
Group Term Life Insurance
Such policies should not total over $50k to avoid tax consequences.
68
With Option A universal life, what outlines the net amount at risk?
Face amount of the policy minus the accumulation fund. In short, if a policy holder contributes more to a policy, the insurer pays less.
69
Private annuity contracts must be unsecured.
Private annuity is a type of asset contract in which a person, the annuitant, transfer an asset to another person, the obliged, in return for payments made to the annuitant for the rest of their life. The obliges must be independent, and the annuity cannot be secured in any way.
70
Declining surrender charge in a Variable Annuity to penalize clients withdrawing money before the end of 5 years is an example of what?
Loss aversion.
71
HO2 is known as a what?
Named Perils Policy It provides coverage on a home against sixteen listed perils. If a peril is not listed, it is excluded.
72
A contract in which only the insurance company makes legally enforceable promises is what type on contract?
Unilateral contract
73
Risk that results in an uncertain degree of gain or loss is what type of risk?
Speculative
74
Insurance rating agencies
AM Best Standard & Poor’s Moody’s Fitch
75
Perils covered by homeowner’s insurance
HARVEST WFL Hail Aircraft Vandalism Explosion Smoke Theft Windstorm Fire Lightning
76
McCarran-Ferguson Act
Reaffirmed the state level regulation of insurance
77
What passes by contract at a decedent’s death?
Life Insurance
78
Hazard
Possibility of an adverse deviation from an expected outcome
79
Permanent forms of life insurance offer which type of loan provisions?
Automatic premium - clause provides for a loan in the amount of the cash value of the policy
80
Personal Auto Policy parts
A: Liability Coverage B: Medical Payments C: Uninsured Motorist D: Coverage for Damage to your Auto E: Duties after an Accident or Loss F: General Provisions
81
Survivorship life insurance premiums are _____ than single life premiums
Lower Survivorship life covers 2 people but only pays DB upon death of second person. Policy used to fund estate taxes typically.
82
Residual disability benefits
Apply to persons who become disabled and suffer a loss of time/duties but are still actively engaged in an occupation.
83
What is a Section 412(i) plan?
Tax-qualified plan for small biz owners
84
How is a 412(i) benefit plan funded?
Cash value life insurance and annuity contracts
85
For a non-cancelable insurance policy, the premium will always stay the same unless the insured buys more or less coverage?
More
86
Common exclusions to homeowner’s policies
War, Nuclear Hazard, and Power Failure
87
Law that regulates insurance companies
McCarren-Ferguson Act of 1945
88
Patrol evidence rules, once an insurance contract is written and signed, any agreement that were discussed before the contract was signed are ______.
Irrelevant
89
HMO
Also known as network model
90
PPO
Flat fee for service

J’s CFP Review (7 decks)

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