Risk Management & Insurance Flashcards
What does Medicare Part A cover?
“HHH SNaCk”
- hospital fees
- hospice care
- home health care
- skilled nursing care
Who is eligible for Medicare Part A?
- generally anyone age 65+
- anyone with end stage renal failure
- anyone age 65+ who’s also receiving social security/railroad retirement benefits
- anyone receiving social security disability payments for at least 24+ months
Generally anyone eligible for part A is automatically signed up for Part B (they can opt out)
If insured is still employed they must be given an option to participate in their ER’s group insurance
- Medicare would be secondary to ER’s insurance
What are the two death benefit options for Universal & Variable Universal Life?
Option A
- level death benefit
- pays out the face value only
Option B
- increasing death benefit
- pays out face value and cash value
How long, and for what, does Medicare Part A cover hospital stays? What’s the cost?
For people w/
- 40+ quarters coverage -> no premium
- 30-39 Q coverage -> premium is $259/m
- < 30 Q coverage -> premium is $471/m
Hospital stays
- 0-60d; paid in full, insured pays dedt
- 61-90d; insured pays co-insurance
- 91+; lifetime reserve days (60)
• benefit period (90d) restarts after 60 days out of hospital, higher coinsurance
How long does Part A cover skilled nursing care?
- 0-20d; paid in full
- 21-100d; insured pays co-insurance
- 101; insured pays in full
• must be ordered by doctor, insured was hospitalized for at least 3 days within the last 30 days
How long does Part A cover Home Health Care?
Part A pays for first 100 home health visits for an illness that requires home health care
A hospital stay don’t need to precede the claim
Must be ordered by a doctor
What does Part A cover for hospice benefits?
Available for the terminally ill
Life expectancy must be 6 months or less
Limited to 210 days unless individual is recertified as terminally ill
What are the eligibility requirements for LTC?
Must be “chronically ill”
- chronically ill -> can’t do 2/6 ADL’s for more than 90 days
- cognitive impairment (Alzheimer’s, etc)
ADL’s -> “BED To Chair”
- bedding
- eating
- dressing
- toileting
- continence
- transferring (going from bed to chair)
What are some mandatory provisions of LTC?
- must be guaranteed renewable or noncancelable
- 60 day look back period
- 2yr incontestability clause for misrepresentation
- words must be defined
- contract cannot require a prior hospital stay or for only skilled nursing care
- limitation and exclusions are prohibited except for pre-existing conditions (6m)
What are marketing requirements for LTC?
- provide applicants for an outline of coverage & a shoppers guide
- 30 day free look period
- policy comparisons are fair and accurate
- expected loss ratio thats at least 60%
- IF A REPLACEMENT POLICY -> insurer must waive period regarding pre-existing conditions
What are the tax implications for the individual regarding LTC?
- deductible as a medical expense (itemized deductions, Ltd by persons age)
- premiums paid by self employed are deduction for AGI (above the line, Ltd by age)
- ER payments for group premiums -> TAX DEDT FOR ER; NOT TAXABLE to EE
- LTC benefits CANNOT be included in cafeteria plan or FSA in tax advantage basis
- benefits paid are generally excludable from GI up to $400/day max
What are tax advantages for LTC?
Must meet all federal standards outlined in HIPAA to be a qualified policy
- contract must be limited to LTC only
- can’t pay for expenses reimbursable under Medicare
- must be guaranteed renewable
- may not provide for any surrender value or other dollars that can be borrowed, paid, assigned, or pledged
- all refunds of premium/dividends MUST either
• reduce future premiums; or
• increase future benefits
What’s a 1035 exchange?
A tax free exchange of one life insurance policy, endowment contact, or annuity for another policy/LTC policy
LI can be exchanged for
- another LI policy
- endowment contract
- annuity
- LTC
endowment contract can be exchanged for
- another endowment contract
- annuity
- LTC
an annuity can be exchanged for
- another annuity
- LTC
What is the treatment of premiums to ER/EE for group health & LI plans as an EE benefit?
Premiums paid by ER for group health insurance plans are
- deductible for ERA
- tax exempt to EE
Group term life
- premiums up to first $50k are tax exempt to EE
Group perm life (not UL)
- if ER pays entire premium, EE taxed on non-term portion of premium & this part is deductible by ER
Group perm life (universal life)
- NO tax adv to ER; EE pays whole premium
What is the equation to determine amount of Group Term LI included in a covered EE’s W2 income?
Excess coverage (above $50k) * Section 79 premium = Monthly cost of coverage * 12 months = Annual cost of coverage - annual cost of coverage paid by EE = Taxable amount of coverage in W2 income
What is split dollar LI and what are the 2 forms of policy ownership?
Split-$ life is a LI arrangement between EE & ER where the cost/benefits
- ER provides LI to an exec w/ a low cost/cash outlay for the executive
- fringe benefit
- pre-retirement DB is a major objective for executive
Policy ownership
1) endorsement method (“the ER endorses”)
- ER owns policy and pays whole premium
• EE dies -> ER receives agg premiums; Beneficiary receives remaining DB tax free
• ER terminates plan -> ER receives cash value, EE gets nothing
2) collateral assignment method
- EE owns policy, ER makes interest free loan to EE in amount of the premium to be paid
• EE dies -> ER recovers agg loans made, EE’s Benny receives remaining DB
• ER terminates plan -> ER receives amount = to total loans made, EE receives the policy
What are the income tax treatments of split $ LI and its various ownership forms?
Endorsement method
- economic benefit receives by EE must be treated as compensation income
• “ER endorses compensation”
Collateral Assignment
- pmts by ER accounted for as a loan to under IRC S. 7872
DB loses tax free nature if transferred for value except when
- transferred to insured
- transferred to a partner of insured / partnership where insured is a partner
- transferred to a Corp where EE is a shareholder/officer
- transfer in which EE’s receives in whole/part carryover basis
What is Key Employee Life Insurance?
Covers EE’s who are critical to the biz
The Business
- has insurance interest in K-EE’s
- biz owns the policy, pays premium, and is the beneficiary
- premiums NOT tax deductible but DB IS received by biz tax free
How much LI can be included in included in a Qualified Plan?
25% test (first test)
- typically DC plans
- no more than 50% of ER’s contributions can be used to pay for whole life
- no more than 25% of ER’s C’s can be used to pay for any LI other than WL (term/UL)
• “50% is a WHOLE lot more than 25%”
100: 1 test (second test)
- typically DB plans
- the Death Benefit cannot exceed 100x the expected monthly benefit to the employee
- cost of LI in QP’s is not deductible to SE people
- NO IRA’s
What are tax issues during participation and at death for LI in QP’s?
During participation
- the pure protection cost of LI must be included in EE’s gross income
- that amount is treated as the EE’s basis for subsequent distributions
Tax issues at death
- value of life insurance is included in decedents gross estate
- cash surrender value is income taxable to beneficiary
What are the sections of PAP?
“LMU DDG”
A - Liability (mandatory) B - Med Pay C - Uninsured motorist D - Damage to your auto E - Duties after a loss F - General Provisions
What are the six standard HO policy forms and the 2 sections of those forms?
2 sections of HO forms
- Section 1: Property/loss of use
- Section 2: liability/med expenses
6 HO Forms
- HO2: Broad Form
- HO3: Special form (dwelling/other -> open peril)
- HO4: Contents broad form (Renters insurance)
- HO5: comprehensive form, open peril
- HO6: condo owners
- HO8: Mod. Coverage Form (old homes)
Which property is valued on an Actual Cash Value basis and how do you calculate it?
Personal property under all forms is valued on an ACV basis, unless covered by an HO3 policy (switches to replacement cost)
ACV = replacement cost - depreciation
What property is valued on a replacement cost method and what are the stipulations of it?
Dwellings and other business structures are covered for loss on a replacement cost basis (and personal property under an HO3)
Insured must typically insure home for at least 80% of R cost* or insurer will pay for claims on a coinsurance basis, the formula is;
[(Insured $ / 80% of R cost) * loss] - deductible = amount insurer pays
*rule is 90% of R-cost for commercial bldgs
What are the 5 subsections of Section 1 for Homeowners Insurance?
A -> Dwelling B -> other structures (detached) C -> Personal Property D -> Loss of use \+ Additional Coverage (debris removal, damage to trees, credit card loss)
What does Coverage A of Homeowners insurance cover?
Dwellings
- any structure attached to dwelling
- materials & supplies used for construction of dwelling
Land is always excluded
What does coverage B of homeownership insurance cover?
Other structures (detached)
- structures not attached to dwelling
- covered by 10% of A’s coverage
Exclusions
- land
- business use
- rental property
What does coverage C of homeowners insurance cover?
Personal Property
- broad & worldwide coverage
- anything inside the house is covered (aka stuff you’d take out when you move)
ACV basis unless covered by HO3 policy
Covered by 50% of A’s coverage
What does coverage D of homeowners insurance cover?
Loss of Use / Loss of Income
- additional living expenses
-
-
ADL is actually the difference between what it cost you before the loss of use and how much if costs now
Covered by 20% of A’s coverage
What are the HO2, HO3, and HO5 policies?
HO2
- broad form
- 18 named perils (12 basic + 6)
HO3
- open form (dwell, other)
- broad form (pers prop)
- HO15 rider = HO5 policy
HO5
- open peril form
What are the HO4/6/8 policies?
HO4
- renters insurance
- tenants pers prop covered w/ broad form
- loss of use limited to 30% of coverage C
HO6
- condo owners insurance
- broad form coverage for personal property
- 40% of C coverage for loss of use
HO8
- modified coverage
- “old Victorian home”
- for when R-cost exceeds market price
- uses a functional r-cost provision
- theft coverage to premises only, Ltd to per $1000/occurrence
What are the basic named perils (1-12)?
“Wizards and riots”
- fire/lightning/windstorms (tornado)/hail
- riots/theft/vandalism/mischief
- explosions/volcanic eruption
What are the broad named perils?
18 broad named perils
- 12 basic (wizards and theft)
- falling objects
- weight of ice/snow/sleet
- accidental discharge of water (internal) etc
- sudden accidental damage due to electrical current
“12 basic (wizards/riots/theft) + ice, internal water, electricity”
What’s the tax treatment of annuities prior to annuitization?
Before 8/14/1982
- FIFO
On/after 8/14/1982
- LIFO
“Before 8/14 is FIRST”
Any premature distribution (before 59.5) is subject to 10% penalty + tax
How are annuities owned by non natural entities (corporations) taxed?
Earnings are taxed as ordinary income
Losses are treated as ORDINARY loss, not subject to annual $3,000 limit
How are NQSOs taxed?
At Grant
- No tax
At Exercise
- Bargain Element is taxed as W-2 Incoem (subject to FICA)
- BE = FMV - Exercise Price
At Sale
- Amount realized - Basis = capital gain
- basis is FMV @ purchase (BE + ex price)
How are ISO’s taxed?
At Grant
- no tax
At Exercise
- No income tax
- the bargain element is a positive adjustment for AMT
At Sale
- if HPR is met (held 2y from G, 1y from Ex)
- Sale - Ex Price = LTCG
- if HPR is NOT met (disqualifying disposition)
- Bargain Element = W-2 Income (no FICA)
- other gain is either short/long term cap gain
- AMT adjustments
- Regular taxable income - BE (neg adjust.)
What are some stipulations of the ISO?
HPR
- 1 year from Exercise
- 2 years from Grant
Option must be exercised within 10 years
EE’s cannot receive more than $100,000 in a given year, based on FMV @ grant
- if above 100k -> amount above 100k are NQSO
ER’s receive no deduction unless disqualifying disposition is made (violate HPR)
What’s a Rabbi Trust?
Informally funded trust (not considered funded due to tax deferral)
Set up to hold property for funding a Deferred Comp plan
Funds SUBJECT TO CLAIMS of general creditors
No current taxation to EE’s
What’s a Secular Trsut
Trust set up to hold property for funding deferred comp plans
Funds NOT SUBJECT TO CREDITOR CLAIMS
EE’s taxed IMMEDIATELY on contributions
What’s the main difference between the Rabbi & Secular Trust?
The secular trust is protected against bankruptcy/creditor claims, but the secular trust doesn’t provide for tax deferral
“The Secular person doesn’t believe in bankruptcy, but the Rabbi does”
“The secular person doesn’t believe in tax deferral, but the Rabbi does”
What are SERPs?
“Supplemental Executive Retirement Plan”
“Golden Handcuffs”
NQDC plan providing retirement income to executives
Can be funded w/ Rabbi Trusts (UNFUNDED)
Can compliment existing retirement plans to bring executive benefits up to desired level
(Exec is Ltd by ERISA covered limits)
What are ESPPs?
EE Stock Purchase Plans
Can grant options as low as 85% of FMV on grant days, or 85% of FMV of stock on exercise date
Shares have HPR (1y -> Ex, 2y -> G)
No 5+% owners, $25,000 annual limit
What are Jr Class Shares?
Separate class of common stock, usually w/ 1/10th the rights of common stock
No tax to EE @ issue
Convert to full shares of common stock eventually w/ no tax to EE
Taxable as cap gain at sale
What are some characteristics of managed care plans?
PPO plans
- similar to HMO but allows out of network coverage (it’ll cost more though)
- fee for service basis, NOT capitation
POS plans
HMO Plans
- premium & some copays
- have to stay in network
What are some characteristics of HSA’s?
favorable tax treatment account for qualified medical expenses
Must be covered by a high dedt. plan
- $1,400+ dedt. (S)
- $2,800+ dedt. (Family)
Max contributions, determined MONTHLY
- $3,600 (S) ($300/m)
- $7,200 (MFJ) ($600/m)
- +$1,000 catch up for ppl 55/65y/o
- you cannot contribute to HSA after qualifying for Medicare
ABOVE THE LINE DEDUCTION (for AGI) for CASH contributions
W/d penalty for Non-Q expenses is 20% penalty + taxes (penalty goes after 65); 6% excise tax on excess contributions
LAST MONTH RULE
- if you become eligible on 12/01, you can contribute to a HSA as if you were eligible for the entire year
Can make a one time IRA rollover to HSA to extent of max annual contribution
What are some characteristics of S. 125 Cafeteria Plans?
ERs to offer extra benefits to EEs they can pick from
ALWAYS has to take additional benefit as CASH
Any benefits offered are typically includable in W2 income; qualified benefits excluding cash are exceptions to constructive receipt (won’t be taxable)
NOT INCLUDED
- Scholarships/fellowships
- educational assistance
- employee discounts
- retirement/nonqualified plan benefits
What are key characteristics of FSAs?
Use it or lose it rule
- ER may allow EITHER $500 roll into next year, or
- expenses in first 2.5 months of next year to be paid with prior years balance
Covers eligible medical expenses but not OTC
Funded with PreTax dollars (pre fed/state/FICA)
What are the tax implications of ER provided healthcare plans?
If the ER provides benefits then they are tax deductible by
- C corps / S corps
- closely held c corps
- partnerships
- sole proprietorships
Benefits paid generally not taxed to EE, subject to some limits
What’s an 83(b) election?
When an EE elects to recognize W2 income on a distribution of company stock immediately
- W2 income reported = FMV - basis
- subsequent appreciation is a capital gain
- EE must elect this within first 30 days
When will a return of premium be paid in lieu of a death benefit for life insurance
1) insured commits suicide within 2 years of the policy’s issuance
2) insured is kill as a result of war, if war is an exclusion
What 2 exclusions are generally excluded on all HO policies?
Earthquakes and Floods
“Poseidon is generally excluded in HO policies”
What is NFIP and when is it generally in force
NFIP is the National Flood Insurance Program
it provides subsidized flood insurance for property owners
Coverage is effective immediately within the first 30 days of availability
Contents coverage available to household and personal property usual/incidental to the occupancy of the dwelling
What are the non forfeiture options for cash value life insurance?
1) surrender for cash value available
- excess CV over basis is taxable as ordinary income, taxable in year received
2) use CV to buy a reduced amount of paid up insurance
- cv buys a reduced single premium insurance
- face amount of policy is based off net single premium
3) use CV to buy paid up term insurance
- same face amount as OG policy
- term period determined by net single premium & other assumptions (mortality)
What are some benefits provided by workers compensation?
- medical expense reimbursement
- disability income
- death benefits
- rehabilitation services
Who can you grant NQSO’s and ISO’s to?
NQSO’s
- “pretty much anyone”
- employees
- independent contractors
- family members
- a beneficiary of EE/Ind. Contractor
ISO’s
- employees ONLY
What are FSA’s typically used for?
- medical expenses
- dental care expenses
- dependent care expenses
NOT individual life insurance premiums
What is a VEBA and how is its income taxed?
A VEBA (volunteer EE benefit association) is an organization (trust/Corp) established by an ER through a CBA to hold funds to pay benefits under an EE benefit plan
It’s income is exempt from regular income tax if certain requirements are met
What is a spendthrift clause in a life insurance policy mean?
It prevents a beneficiary from assigning their interest in a policy to someone else
What should and shouldn’t be assumed when utilizing a disability needs analysis?
Should
- that the cash flows should be sufficient to replace lost income
- the term of benefits should match the term of work-life expectancy
Shouldn’t
- assuming the insured will receive social security disability benefits (extremely strict qualifications)
- elimination period should be the shortest (should be tailored to clients ability to cover expenses from emergency fund)
If an individual doesn’t have 40 quarters of coverage, how can they still gain Medicare coverage w/o paying a premium?
Their spouse (65y) has 40+ quarters of coverage
What’s the Social Security definition of disability?
A mental/physical impairment that prevents the individual from engaging in any substantial gainful employment
The disability must have lasted for at least 5 months, and be expected to last for at least 12 months OR result in the persons death
What are some requirements of a LTC to be qualified?
- policy must not have cash value
- policy can’t pay for expenses reimbursable by Medicare
- policy must be guaranteed renewable
It’s not required to have a policy’s elimination period exceed 60 days
What are payments based on for reverse mortgages?
Payments are based on a percentage of equity in the home along with a stated interest rate and specified payment period
What a special damages in regards to compensatory damages?
Special damages are compensation for measurable losses
- medical bills
- rehab expenses
- property damage
What’s the tax treatment on a LI policy if the insured dies and the insured, policy owner, and beneficiary(ies) are all different people?
Considered “the unholy trinity”
The DB will be considered a taxable gift to the beneficiaries from the policy owner
- the PO should give the policy to the insured to avoid this issue
What is the value of a gift if an insured makes an absolute assignment of a paid up life insurance policy?
The replacement cost of the policy
- the single premium that an IC would charge for a comparable policy issued at the insureds present age
What form of disability benefit is paid as a result of an Injury that permanently reduces someone’s ability to function but still perk it s some working or other activity?
Partial disability
*RESIDUAL disability benefits are paid on a proportional basis to an insured who’s income is reduced because of a disability
How do you attain fully insured and currently insured status?
Fully insured status
- earn at least 1 credit per year since attaining AGE 21 (for r/survivor benefits)
- 40 credits maximum
Currently insured status
- earn 6 credits out of the most recent 13 quarters
Is the probability of disability or death greater, regarding the need for disability insurance?
The probability of disability is greater
What are the coverage/benefit periods for skilled nursing care, who pays and when, and how does one qualify for SNC? Also, what ISNT covered?
- For illnesses/conditions no longer requiring continuous hospital care
- must be ordered by a physician
- insured must have been hospitalized for this within the last 30 days, for at least 3 days
- Medicare pays for the first 20 days in full
- insured pays co-insurance for days 21-100
- insured has NO coverage from days 101+
CUSTODIAL CARE IS NOT COVERED
How do you calculate the amount of employer provided group term insurance coverage includable in an employees taxable income?
Amount in excess of 50k limit * IRC cost per thousand ———————————————- = month cost of coverage * 12 ———————————————- = annual cost of coverage - employee’s annual contribution ———————————————- = amount includable in EE’s GI
How does the concept of SRF apply to NQDC plans?
- SRF is necessary to prevent constructive receipt
- SRF generally requires EE’s actual performance of services
- SRF isn’t necessary in unfunded plans that are executed prior to performance of services
LTC Policies
- what type of contact must it be
- how long is the free look period
- what’s the expected loss ratio
- what must the insurer do if a replacement policy?
- must be guarantee renewable or noncancellable
- applicants have a 30 day free look period
- expected loss ratio must be at least 60%
- if a replacement policy -> IC must waive time period regarding pre-existing conditions
What would the DB be in a cross purchase LI agreement (assume biz of $2.4m and 4 equal partners)
DB would be value of each partners share in the business
- $2.4m biz w/ 4 equal partners
• DB would be $200k per policy
• each partner has $600k basis & has to buy 3 policies
• $600k basis / 3 policies per partner = $200k db
What’s the gain when surrender a cash value LI policy and what is the investment in such a contract?
Gain @ surrender = cash surrender value - investment in the contract
Investment in LI contract = premiums paid - dividends received - outstanding loans
What are the taxable events when exercising & selling ISO’s?
At Grant
- no taxable event
At exercise
- no taxable event
- positive AMT adjustment to the extent of the Bargain Element (FMV @ exercise - exercise price)
At sale (HPR met)
- LTCG to extent of (FMV @ sale - ex. Price)
- negative AMT adjustment to extent of bargain element
- ER does NOT get a deduction
At sale (HPR not met)
- W2 compensation (no FICA tax) to extent of bargain element
- LT/STCG to extent (FMV @ sale - ex price)
- ER gets a deduction
What are speculative risks?
Risks that involve the chance of loss OR gain
Aka gambling
What are fundamental risks?
Risks that affect a large group of people
What are particular risks?
Risks that affect individuals, are personal in nature
What are financial risks?
Exposure to a risk that may cause financial loss
What is a risk?
The likelihood of an adverse outcome
Aka -> damage to a house
What is a peril?
The cause of loss
Aka -> fire, hail, etc
What is a hazard?
Increase the likelihood of a loss occurring or the amount of loss increasing
Aka -> leaving a lit candle near curtains
What are static risks?
Not related to the stock market
Aka -> includes losses caused by earthquakes and floods
What are dynamic risks?
Risks related to stock/capital markets
Aka -> inflation
What is a pure risk?
A risk that has only loss or no loss, no chance of gain
What are provisions of the collateral source rule?
- a person who commits a tort will be liable for full damages even if the plaintiff has other sources of recovery (insurance)
- person who committed the tort is not entitled to a reduction of benefits because injured person has other sources of recovery (insurance)
- prevents person who commuted the tort from benefitting because of fortuitous circumstances
What does the 7-pay test mean?
The net level premiums that would have been paid up to the time in question if the policy was considered paid up after 7 level annual premium payments were received
What does comprehensive personal liability policies cover?
- Sums the insured is legally obligated to pay
- bodily injury AND property damage
- includes exposure AT OR AWAY FROM RESIDENCE
- NO COVERAGE if the act that caused injury was intentional
What is negligence per se?
“Drunk driving”
NPS is when the injured party doesn’t have to prove negligence because the act itself constitutes negligence (like drunk driving)
Are non discriminatory group disability policies tax deductible by employers?
Yes
If they don’t meet to 80% coinsurance req; how do you determine to amount paid out if pocket by insured?
1) (Amount of insurance / amount they should have had) * loss = % covered by IC
2) 100% - % loss covered by IC = % loss covered by insured
3) ($ amount of loss - deductible) * % covered by insured = current OOP + deductible = total OOP
What’s most likely the best idea for a family w/ sufficient liquid assets, a substantial net worth, and insurance policies on at least one spouse/home/car/etc?
A personal umbrella liability policy
An inexpensive way to prevent various catastrophic liabilities
Does Medicare or Medicare supplement policies offer coverage when traveling abroad?
No, Medicare doesn’t cover foreign travel and Medicare supplement tax policies only apply in case of emergencies
Are amounts received as damages on account of personal physical injuries or physical sickness includable in income?
No, payments of damages from physical injuries or physical sickness are excludable from income
If a Corp pays the premium on an employee and the Corp is NOT a Benny then how is the benefit/premium treated?
Then it’s considered compensation to the employee so it’s taxable income to the employee and deductible to the Corp
What are the coverage amounts for detached buildings (b), personal property (c), and loss of use (d) on HO-2/3/5?
B - 10% of coverage on home
C - 50% of coverage on home
D - 20% of coverage on home
