Risk Management/ Insurance Planning Flashcards
HSA annual contribution limit - self only
$3650
HSA annual contribution limit - Family
$7,300
HSA contribution catch up age and $ amount
55+ $1000
Risk Management: High Frequency & High Severity
Avoid
Reduce
Risk Management: High Frequency & Low Severity
Retention or reduction
Risk Management: Low Frequency & High Severity
Transfer (insure)
Risk Management: Low Frequency & Low Severity
Retention
HSA Last month rule
If eligible under HDHP on the fist day of the last month of the tax year, they may fund HSA as if eligible for entire year
HSA minimum deductible: Self only
$1,400 (2022)
HSA minimum deduction: Family
$2,800 (2022)
HSA maximum out of pocket: self only
$7,050 including deductible, co-pays, and other amounts,
Not including premiums
HSA maximum out of pocket limits: Family
$14,100
Including deductible, copays, and other amounts.
NOT including premiums
Can you contribute to an HSA if you enroll in Medicare?
No
Rules for IRA transfer into an HSA
May make one (lifetime) direct transfer from IRA to fund HSA up the annual a limit for that year (minus contributions for that year)
LTC Insurance Locations
Facility: (highest to lowest level of support)
Nursing Home Care (Private/Semi-Private)
Assisted Living Facility (ALF)
Community:
Adult Day Health Care (ADC)
Home:
Home Health Aide Services
Homemaker Services
Features of LTC services: Nursing Home Care and Assisted Living Facility
Nursing Home Care:
residential, higher level than ALF
personal care, health support, rehabilitation, medication, 24-hour
Assisted Living Facility:
Residential
Personal care
Health support
Features of LTC services: Adult Day Health Care (ADC)
Residential
Socialization, structure, supervision
May include medical management
Features of LTC services: Home Health Aide Services and Homemaker Services
Home Health Aide Services:
Personal care, non-medical
Hands-on approach
Homemaker Services:
Household tasks & errands
hands-off approach
LTC Insurance and Medicare
Medicare does NOT pay for long-term custodial care.
LTC Insurance Features & Benefits
Benefit period: time that LTC benefits will be received (e.g., 2, 5 years, lifetime) or pool of money options
Elimination period: The waiting period before benefits become available, ranges from 0-365 days.
Daily Benefit: Maximum amount that a policy will reimburse for daily LTC services. Set at policy inception according to a benefit schedule.
Riders: Add-on features. Inflation protection is most important.
Waiver of premium: Insured does not have to pay premiums while receiving benefits.
Renewability: Most individual LTC policies are guaranteed renewable
Exam tip: Benefits are “dials” that can be turned to increase benefits or decrease premiums, e.g., the insured may elect a longer elimination period to be able to afford higher daily benefits.
Qualified LTC Insurance - Required features
- Benefits payable only for qualified LTC 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 to as a reduction in future premiums or increase future benefits
- Limitations and exclusions are prohibited (except pre-existing within 6 months of application)
- Contract cannot provide for skilled nursing care only or require prior hospitalization
- Contract must have 2-year incontestable clause for misrepresentation
Qualified LTC insurance Tax benefits
- Benefits are received tax-free up to an annual limit (‘22 - $390/d or $142,350)
- Premiums paid are a qualified medical expense for the itemized deduction for medical expenses - 7.5% AGI
- Premiums can be paid from HSA
- Premiums paid by employers are tax-free to employees and benefits remain TAX-FREE
Qualified LTC Benefits triggers
- Unable to perform 2 of 6 ADLs for 90+ days
- Substantial cognitive impairment
- Dr. certification needed for both
LTC ADLs
(BEDCOT:)
Bathing
Eating
Dressing
Continence
On ← → off toilet
Transferring
OR:
Substantial Cognitive Impairment
A doctor’s certification of condition(s) is required for qualification
LTC Asset Protection Benefit is provided through____?
Partnership Long-Term Insurance:
= Partnership between states and insurance companies for qualified LTC insurance
- provides additional asset protection if LTC insurance is exhausted and insured files for Medicaid
- total amount paid under LTC insurance is added to Medicaid spend-down limit and protected
Taxation of Disability Income Insurance Benefits
Employer Paid Premiums: benefits TAXABLE to insured
Employee Paid Premiums:
if paid with AFTER-TAX dollars, benefits are TAX FREE
if ER pays premium but includes premiums as compensation to the EE, benefits are TAX FREE
if paid with PRE-TAX dollars, benefits are TAXABLE
What are qualifying expenses for an HSA?
- OTC & prescription medication
- dental
- vision
- LTC premiums
What employer must offer COBRA coverage?
20 or more FT employees in prior year
What is the maximum cost of COBRA coverage?
102% of ER and EE cost combined
P.L.U.P.
Personal Liability Umbrella Policy
COBRA Qualifying Events
- Death of the covered employee
- The termination of the employee for any reason EXCEPT gross misconduct
Qualified events quitting retiring or being fired for anything but gross misconduct - A reduction in the employee’s hours so that the employee or dependent is ineligible for coverage
- The divorce or legal separation of the covered employee and his or her spouse
- For spouses and children, the employee’s eligibility for medicare
- a child ceasing to be an eligible dependent under the plan
Who are the qualified beneficiaries for COBRA after termination (for any reason other than gross conduct) or reduction in hours of employment?
Employee
Spouse
Dependent Child
Who are the qualified beneficiaries for COBRA after an Employee or a qualified beneficiary meets the Social Security definition of disability?
Employee
Spouse
Dependent Child
Who are the qualified beneficiaries for COBRA after an Employee enrollment in Medicare?
Spouse
Dependent Child
Who are the qualified beneficiaries for COBRA after Divorce or legal separation?
Spouse
Dependent child
Who are the qualified beneficiaries for COBRA after a death of an employee
Spouse
Dependent Child
Who are the qualified beneficiaries for COBRA after loss of “dependent child” status under the plan?
Dependent child
How long are COBRA benefits provided after termination (for any reason other than gross conduct) or reduction in hours of employment?
18 months
How long are COBRA benefits provided after an Employee or a qualified beneficiary meets the Social Security definition of disability?
29 months
How long are COBRA benefits provided after a covered employee enrolls in Medicare?
36 Months
How long are COBRA benefits provided after the divorce or legal separation of the covered employee
36 Months
How long are COBRA benefits provided after a death of a covered employee
36 months
How long are COBRA benefits provided after the loss of dependent child status under a covered employee’s plan
36 Months
What is the maximum cost an employee would pay for continued COBRA coverage after a qualifying event?
102% of the costs paid by the employee and the employer
Premiums are due monthly
COBRA rules apply to businesses with ____ or more employees
20
part-time employees count as ½ an employee for this count
Medicare pays for skilled nursing care for a limited time following hospitalization
What is the coverage for days 1 -20
Zero Co-pay for each benefit period
Medicare pays for skilled nursing care for a limited time following hospitalization
What is the coverage for days 21 - 100
The patient pays $194.50 coinsurance per day
Medicare pays for skilled nursing care for a limited time following hospitalization
What is the coverage for days 101+
The patient pays all costs
What are the asset protection benefits of owning a partnership LTCi?
The dollar amount of benefits paid out by a partnership program equals the amount an insured can retain in net worth and still qualify for Medicaid.
The normal qualifying net worth is $2000 for each individual
Define Any-Occupation Disability Coverage
- Benefits are payable only if the individual is disabled severely enough that they cannot engage in any occupation.
- This is the LEAST favorable definition towards the insured
- Less Expensive option
Define Own-Occupation Disability Coverage
- Allows a disability payment if the policyholder is unable to perform his or her occupation.
- The MOST favorable definition of disability for the insured
- Much more expensive option
Define Modified Own-Occupation Disability Coverage
A very common hybrid approach. The policy maintains “own occupation” definition of disability for a stated claim period and then applies an “any occupation” definition for the balance of the claim period.
Premiums fall between Any and Own occupation costs
Define Social Security Disability Coverage
The toughest definition of disability to qualify for benfits
The insured must be unable to perform any occupation and the medical condition is expected to last no less than 12 months or result in death
Taxation of Disability Income Insurance benefit:
Employer Paid Premiums
Benefits received are taxable to the insured
Taxation of Disability Income Insurance benefit:
Employee Paid Premiums
Premiums paid with AFTER-tax dollars
Benefits are Tax-Free
Taxation of Disability Income Insurance benefit:
Employee Paid Premiums
Premiums paid by employee with PRE-tax dollars
Benefits are Taxable
Taxation of Disability Income Insurance benefit:
Employer Paid Premiums
Premiums paid by the employer but included as compensation to the employee
Benefits are TAX-FREE to the Employee
TermLife Insurance
Lowest Premium at Issue
No cash value
May be participating (dividends)
May be renewable
May be convertible to permanent
Level Term: DB remains level over guaranteed term, premiums increase at expiration of initial guaranteed term
Decreasing Term: associated with loans, level premiums over term
Annual Renewable: 10, 20, 30-year term, First-to-Die, Second-to-Die
Whole Life / Permanent Life Insurance
higher premiums than term insurance at issue
builds cash value
CV accessible by loans or withdrawals
May be participating (dividends)
Guaranteed DB
Guaranteed premiums
Most guarantees of life insurance types
Variable WL: cash value sub-accounts give policy owners investment choices
Second-to-Die
Graded premium WL
Modified WL
Limited Pay WL
Guaranteed Issue WL
Universal Life Insurance
Type of permanent life insurance
Option A: DB remains level
Option B: DB = face amount + cash value
Most flexible of life insurance types
Fixed UL
Variable UL (sub-accounts: investment choices!) - offers flexibility to pay random amounts into the policy, sub-accounts protected from insurance company’s creditors
Indexed UL
Life Insurance Termination / Non-forfeiture Options
- Cash surrender value:
Insurance company pays CV to policy owner as lump sum and contract ends
- Extended Term Option:
CV serves as single premium to pay for term life insurance for as long as CV will support stated DB at insured’s current age (no residual CV!); original DB stays, but may not last to life expectancy
- Reduced Paid-up Insurance:
CV used to buy paid-up policy of the same type as lapsed policy, new policy will have reduced DB but will retain CV that will grow throughout life of the policy at reduced rate
Some insurance companies allow conversion to immediate single-premium annuity that pays amount for rest of policy owner’s life based on CV of lapsed/ surrendered policy and current age.
Automatic premium loan allows insurer to make loan agains policy’s CV to pay overdue premiums provided CV is greater than or equal to premium amount due. It is deducted from the DB, thus decreasing coverage.
In which type of life insurances is the cash value protected from creditors?
variable whole life insurance
variable universal life insurance
Modified Endowment Contracts (MEC)
A cash value life insurance policy is considered a MEC if it fails the 7-pay test and changes the tax treatment cash distributions while the insured is alive.
The 7-pay test is applied
- at the inception of the policy and, again,
- if the policy experiences a material change (change in death benefit under the policy or substantial addition of a flexible payment)
Law changes were enacted to curtail use of single premium life insurance as a tax-free income investment vehicle.
- LIFO tax treatment regardless of age of policy (ignore 15-year rule) for distributions and loans
- 7-pay test is designed to impose MEC status on policies that take in too much premium during first 7 policy years, or in 7 years after a material change: for each policy, a net level premium is calculated. If total premium paid into policy during 7-year testing period > sum of net level premiums needed to result in a paid-up policy after 7 years, the policy is a MEC
- 10% penalty applies for any loan or withdrawal if taxpayer < 59 ½
- Once a MEC, always a MEC
Non-MEC vs. MEC Policies
Non-MEC MEC
Taxation of DB tax free tax free
Order of CV distributions FIFO (basis first) LIFO (gains first)
Character of taxable distrib. Ordinary income Ordinary income
Penalty for taxable distrib. None 10% < 59 ½
Viatical Settlements
A seriously ill person can get cash by transferring a life insurance policy to a viatical settlement company in exchange for cash of a discounted amount of the DB. Policy owner (viator) gets cash settlement, Viatical Settlement Company makes ongoing premiums and receives future death benefits.
Insured must either be
Terminally ill: certified by physician as having a condition that can reasonably be expected to lead to death with in 24 months of date of certification, OR:
Chronically ill: unable to perform at least 2 activities of daily living for a period of at least 90 days
15-day cooling-off period must be provided during which viator can rescind viatical agreement
Buy-Sell: Cross Purchase Agreements
cross-purchase plan is a method to completely transfer business interests among partners/owners using life insurance policies
Owners agree to buy and sell their respective business interests upon either:
- death
- disability
- retirement
Advantages:
- simple solution for businesses with few owners (each owner obtains life insurance on the other)
- death benefit passes tax-free to surviving owner (deceased owner’s stock passes to family or estate, other owner(s) use life insurance proceeds to buy stock from deceased owner’s family or estate)
- increase in basis to surviving owner (primary advantage of cross-purchase over entity purchase)
Disadvantages:
- if significant age difference between owners, younger owners will pay considerably more in premiums
- difficult to implement with higher number of owners
NUMBER OF POLICIES Needed:
n x (n-1)
(n = number of shareholders)
Basis for surviving owner:
50% of FMV at death of other owner plus 50% of original basis
Buy-Sell: Entity Purchase Agreements
(aka stock redemption plan), method to completely transfer business interests back to the business (entity) using life insurance policies: business purchases policies on the owners and uses death benefit proceeds to buy back ownership shares upon death of a partner
Owners agree to establish a binding agreement with the business to buy and sell their respective business interests upon either:
- death
- disability
- retirement
Advantages:
- preferred solution for businesses with multiple partners
- death benefit passes tax-free to business (business uses death benefit proceeds to purchase stock from deceased owner’s family / estate)
- business pays policy premiums
Disadvantages:
- no increase in cost basis to surviving owner(s)
- surviving owner(s) will have substantially more gains upon sale of business (due to lack of step-up)
NUMBER of policies needed = number of partners/shareholders (more efficient buy-sell agreement with larger number of partners)
Buy-Sell: Wait and See Agreements
method to transfer business interests that offers flexibility to both partners and business as they purchase business interests upon either:
- death
- disability
- retirement
Since circumstances in business, the economy, and tax legislation change over time, this allows for opportunity to select most advantageous purchasing method.
Policies can be configured in a variety of ways:
- cross-purchase
- entity purchase
- hybrid combination of the two
When a business partner dies, the following steps are set in motion:
- Business has option to purchase deceased partner’s stock
- Surviving partner(s) have option to purchase deceased partner’s stock
- if business waives option to purchase in Step 1 or
- business purchases less than ½ of deceased partner’s stock
- Business is required to purchase deceased partner’s stock
Steps upon death of a partner in a buy-sell wait & see agreement are a key differentiator compared to cross purchase and entity purchase agreements. (Memorize: “Wait & See B.O.B” - Business (1st) - Owner (2nd) - Business (3rd)
Annuities
- immediate
- deferred
- fixed
- variable
- provide lifetime income
- period certain
- refund certain
Life only annuitization: highest payout but ends at death of annuitant
can provide guaranteed death benefit to owner
many annuity companies pay premium bonus when annuities are purchased
surrender penalty usually over 7-10-year period
No step-up at death, as annuities are income in the respect of a decedent (IRD)
Taxable distributions = OI
- annuities with after-tax basis receive exclusion allowance for annuitization:
Basis / expected payout = tax-free portion of annuitization payment
Withdrawals: LIFO based tax treatment, subject to early withdrawal penalty (10%) prior to age 59 ½
May be exchanged tax free for other annuities
Annuity Taxation
- gain portion of distributions is taxed as OI
- distributed gains are subject to 10% early withdrawal penalty prior to age 59 ½ unless an exception applies
- Basis: withdrawals = LIFO-based; annuitization: exclusion allowance is applied from each payment until basis is recovered
Exclusion Ratio:
Investment in Contract / Annual payment X Life Expectancy (from IRS Table V)
If payments go beyond life expectancy, ALL TAXABLE INCOME!
Annuitization prior to 12-31-1986 applies exclusion allowance for life even after basis is recovered.
Withdrawals for Purchase Date prior to 8/14/1982: FIFO
Withdrawals for Purchase Date after 8/14/1982: LIFO
Pre-59 ½: 10% penalty on taxable earnings
Exceptions:
- owner 59 ½
- owner disabled
- owner dies
- Immediate NQ annuity
- Substantially equal periodic payments - later of: 5 years or owner turns 59 ½
Section 1035 Exchange
primary objective is to defer recognition of gain in a policy in which surrender value exceeds the basis
used primarily to defer current taxation in the exchange of life insurance for annuity contracts
Allowable exchanges:
- Life insurance for
- life insurance
- annuity
- endowment
- LTC
- Annuity for
- annuity
- endowment
- LTC
- Endowment for
- annuity
- endowment
- LTC
- Qualified LTC for
* LTC
Remember: It’s all downhill from here:
Life Insurance
Endowment
Annuity
LTC
Homeowners Insurance
6 types of policy forms, each of which has 6 parts:
Property (part 1) - coverage A, B, C, & D
Liability (part 2) - coverage E & F
HO-02 - Broad Form - Basic Homeowners Coverage
HO-03 - Special Form - Better Homeowners Coverage
HO-04 - Contents Broad Form - Renters (contents only)
HO-05 - Comprehensive Form (Best Homeowners Coverage)
HO-06 - Unit Owner’s Form (Condo/ Co-Op Owners)
HO-08 - Modified Coverage (older or historical homes only (less coverage)
HO-03 and HO-05 provide most comprehensive coverage, difference: HO-03 covers contents on named perils basis, HO-05 covers contents on an open-perils basis.
A HO-03 policy can provide open perils coverage for contents by adding a HO-15 endorsement.
Named Perils vs. Open Perils
Named Perils coverage specifies perils or causes of loss that are covered, everything else is not covered
Open Perils coverage specifically excludes perils or causes of loss that will not be paid, everything else is covered
A - address (dwelling)
B - backyard (added structures)
C - contents (personal property)
D - Damaged/ Destroyed (loss of use)
E - Exposure (liability)
F - Funds for fractures
Homeowners Insurance Policy Coinsurance Requirement and Formula
Dwelling should be insured for at least 80% of the replacement cost for a partial loss to be paid in full.
If dwelling is insured for 80% or more of the replacement cost, the policy pays the LESSER of:
- the actual cost to repair damage or replace the building
- the stated limit of coverage under the policy
If a dwelling is insured for less than 80% of the replacement cost, homeowners policy will pay the GREATER of:
- actual cash value of the damage (replacement cost minus depreciation)
- proportion of loss that is equal to proportion of insurance maintained as compared to 80% of the replacement cost
Homeowners Coinsurance Formula:
[(Actual Coverage / Required Coverage ) x Loss Amount] - Deductible
Remember: the policy never covers more than the stated coverage amount!
Personal Automobile Policies
Part A - liability
Single limit (= $ cap) OR split limit ($250k bodily injury / $750k max all bodily injuries / $100k property damage)
Part D - damage to your auto
Collision - damage caused by accident
Comprehensive - all other physical damage to auto (e.g., driver hits a deer!)
Personal Liability Umbrella Policy
provides additional liability coverage above and beyond underlying limits of one’s homeowners and automobile coverage (usu. $1M)
- typically requires insured to maintain stated minimum coverage limits in the underlying homeowners and automobile insurance policies (extends to a boat owned by insured if required minimum liability insurance on the boat is maintained)
- does not pay until underlying policy limit is exhausted
covers same bodily injury and property damage exposures as the underlying policies but also typically extends coverage for personal liability (libel and slander)
- does not extend coverage for business interests of the insured
typically covers cost of defense
Life Insurance Non-Forfeiture Options
- Cash Surrender Value: accumulated CV is received when terminating life insurance policy (CV - surrender charges_
- Reduced Paid-Up Insurance: paid-up policy with smaller face amount
- Extended Term Insurance: paid-up term policy for specified duration with same face amount as original policy
Life Insurance Dividend Options
- Cash
- Reduce Premiums: decreases out-of-pocket expense for premiums
- Accumulate at Interest: company invests dividends tax free up to client’s basis; interest paid on dividends is taxable
- Paid-up additions: purchase additional insurance each year for insured regardless of health or occupation
- One-Year Term: adds term insurance each year to policy amount equal to CV of policy (= 5th dividend option)
The proximate cause of a loss is the …….
first peril in a chain of events resulting in a loss. Without proximate cause, the loss would not have occurred.
(example: earthquake)
peril
A peril is an event, like a fire or break-in, that may damage your home or belongings.
hazard
increases the likelihood of a peril happening
Hazard vs. peril
A peril is a potential event or factor that can cause a loss, such as the possibility of a fire that could engulf a house. A hazard is a factor or activity that may cause or exacerbate a loss, such as a can of gasoline left outside the house door or a failure to regularly have the brakes of a car checked.
moral vs. morale
moral: abuse of insurance, e.g., being dishonest about a loss
morale: indifference, e.g., leaving house unlocked because it is insured
What is the stop loss limit and how is it calculated?
The stop-loss limit is the amount of total expenses after payment of the deductible to which the insured’s portion of the coinsurance will result in reaching the MOOP.
The following calculation to determine the stop-loss limit:
(MOOP - Deductible) ÷ Insured’s Coinsurance Percentage
($17,500 - $1,500) ÷ 0.20 = $80,000
