Risk Management & Insurance Planning (12%)

Question 1

What is Risk?

Answer 1

A condition where there is a possibility of loss (a situation where exposure to loss exists).

• Starting a business
• Buying real estate

Question 2

What is Peril?

Answer 2

The cause of a loss, the event insured against:

• Fire
• Windstorm
• Theft
• etc.

Question 3

What is a Hazard?

Answer 3

A condition that may create or increase the chance of loss arising from a peril.

• Owning a home on an earthquake fault
• Owning a home by a river

Question 4

What are the Elements of Insurance or insurable risk?

Answer 4

1. Large number of homogeneous exposure units
2. Loss must be definite and measurable
3. Must be fortuitous or accidental
4. Must not be catastrophic (for the insurance company)

Question 5

What are the Methods to Avoid/Reduce Loss?

Answer 5

Memory Aid: S T A R R D

1. Sharing: often implemented by ER based benefits that allow for the company to pay a portion of the premiums along with the EE.
2. Transference: INSURANCE (Risk Transfer)
3. Avoidance: Do not drive, Do not purchase a home but rent
4. Retention: Voluntary - recognizes that the risks exist and assume losses (deductible, coinsurance). Think of selecting a lower premium health care plan with high deductibles.
5. Reduction: risk avoidance, risk reduction and risk transfer.
6. Diversification: Duplication of assets or activities at different locations.

Further thoughts:

Client has major medical insurance is (Risk Transfer)

Client has kids wear helmets on bikes and elbow pads and wrist guards on rollerblades is (Risk Reduction)

Client having a deductible is (Risk Retention)

Avoiding risky activities is (Risk Avoidance)

Question 6

What is Insurable Interest?

Answer 6

Property and Casualty: At inception and at time of claim

Life: At inception, but need not be at time of claim

Question 7

What are the Parts of the Insurance Contract?

Answer 7

Memory Aid: D DICE

Declarations Page: Factual Statements that identify the specific person, property or activity being insured.

Definitions: Explanation of key policy terms

Insuring Agreements: Spells out the basic promise of the insurance company

Conditions: Spells out in detail the duties and rights of both parties.

Exclusions: Circumstances when the insurer will NOT pay.

Question 8

What is subrogation?

Answer 8

Subrogation is a provision that is designed to prevent the insured from making a profit on a claim. Subrogation is the act of one party claiming the legal rights of another that it has reimbursed for losses. Subrogation occurs in property/casualty insurance when a company pays one of its insured’s for damages, then makes its own claim against others who may have caused the loss, insured the loss, or contributed to it.

For Example: Suppose another driver runs a red light and your car is totaled. You have insurance on your car, so you call your insurance carrier and they pay you for all of your expenses related to the accident. Your insurance company, realizing that the other driver had an insurance policy, then seeks reimbursement from the at-fault party’s insurance carrier. Your insurer is “subrogated” to the rights of your policy and can “step in your shoes” to recover any amount paid out on your behalf. This is the definition of subrogation.

Question 9

What are Negligences?

Answer 9

Study tip: NAVA Snt

• Negligence per se: Violation of a statute like traffic laws and building codes.
• Attractive Nuisances: Landowner may be held liable for injuries to children trespassing on the land if an injury is cuased by swimming pool, trampoline, vacant lot
• Vicarious Liability: Respondeat superior (Responsibility of superior for the acts of their subordinate such as a principal’s liability for their agents or an FA for their CA)
• Absolute Liability: Liability without fault or liability for which their is no excuse. Workers Comp
• Strict Liability: Imposition of liability without fault for damages of defendant or Product Liability.

Question 10

What are Defenses Against Legal Liability?

Answer 10

Study Tip: DAL CC - Defense Against Liability CC

• Due Diligence:
• Assumption of Risk (skiiing, car racing)
• Last Clear Chance (Rear end someone when you could have avoided it by swerving, braking in time)
• • Contributory Negligence (jay walking, being drunk)
• Comparative Negligence (A is 20% negligent, B is 80%)

Question 11

What are two methods of Calculating Life

Insurance needs?

Answer 11

1. Capital Utilization Approach: Uses annuitization to provide needed income but leaves no money at the end of the planned period.
2. Capital Needs Approach: Uses interest only, so the original capital is still left at the end of the period (also called Capital Retention or Interest Only).

Question 12

What are the most comprehensive Insurance Rating Service/Category services?

Answer 12

• A.M. Best: A++ to F
• Standard &Poor: AAA to CCC

Question 13

What are Sections of a Homeowner’s Policy and what do they cover?

Answer 13

Section I (Coverage: A B C D)

• A - Dwelling and Attached Structures
• B - Other structures, separate from dwelling (detached garage, fences, sheds)
• C - Contents and Personal Property
• D - Loss of Use

Section II (Coverage: E F)

• E - Liaiblity
• F - Medical Payments

Question 14

What property is excluded under

Personal Property Coverage?

Answer 14

1. Animals Birds or Fish
2. Motorized land vehicles and aircraft
3. Property of roomers, boarders or other tenants
4. Property contained in an apartment regularly rented or held of rental to others by the insured (unless specifically endorsed)

Question 15

What are the Basic Form Perils Covered?

Answer 15

The policy lists perils covered:

• Windstorm
• Hail
• Aircraft
• Riot
• Vandalism
• Vehicles
• Volcanic
• Explosion
• Smoke
• Fire
• Lightning
• Theft

Study Hint:

Remember: WHARVVVES/FLT

Question 16

What are the Broad Form Perils Covered?

Answer 16

Study Hint

Remember: Basic plus C R A F F

• Collapse of a Building
• Rupture of a system - (discharge and overflow of water and steam)
• Artificially generated electricity
• Falling objects (weight of ice, snow or sleet)
• Freezing of plumbing

Question 17

What are the Open Form Perils Covered?

Answer 17

Study Hint

Remember: Basic plus Broad - Flood & Earth mvmt

• Any Peril not specifically excluded is covered
• FLOOD and EARTH MOVEMENT is NOT Covered

Open Perils are all risks or any peril not specifically excluded is covered, like…

Earthquake

Floods

Water Damage

Damage from or infestation of birds, vermin, rodents, and insects

Neglect, deterioration, and general wear-and-tear

Settling, shrinking, bulging, or expanding of your home’s foundation

Your pets and other animals

Mold, fungus, and rot

Intentional loss

War, government action, and nuclear hazard

Ordinance or law

Smog, rust, and corrosion

Any Peril not specifically excluded is covered

FLOOD and EARTH MOVEMENT is NOT Covered

Study Hint

Remember: Basic plus Broad - Flood & Earth mvmt

Question 18

What are the Homeowner’s Forms of Coverage?

Answer 18

Question 19

Homeowner’s Policy Exclusions include:

Answer 19

Hint: FEW PIN SON

• Flood
• Earthquake
• War
• • Power Failure
• Intentional Loss
• Neglect
• • Sinkhole is a covered peril for the exam
• Ordinance/Law
• Nuclear Hazard

Question 20

What is the formula for Replacement Cost Coverage?

Answer 20

Replacement Cost x Coinsurance Percentage = Insurance Required

(Insurance Carried ÷ Insurance Required) x Loss -Deductible = Amount Paid by Insurance

Question 21

What are the requirements for a vehicle to be eligible for:

• Insurance Serivces Office (ISO)
• Personal Auto Policy (PAP)

Answer 21

• Be owned by an individual or by a husband and wife living in the same househole
• Be private passenger auto
• Not be used as public or livery conveyance
• Not be rented to others

Question 22

What are the Parts of an Auto Insurance Policy?

What do they cover?

Answer 22

Hint: L M U D

​

• Part A - Liability to third parties
• Part B - Medical payments
• Part C - Uninsured/Underinsured motorists
• Part D - Damage to the covered auto

Question 23

What is classified as a “Covered Auto” under an auto insurance policy?

Answer 23

• Any vehicle shown on the declarations page
• Any of the following which you acquire during the policy period:
  
  • Private passenger auto
  • Pickup truck
  • Panel truck or van
  • NO coverage for any of these used in a business (need a commercial policy for that)
• Any trailer you own listed on the declarations page
• Any auto or trailer you do not own while used as a temporary substitute for any vehicle decribed herein which is out of normal use because of a breakdown, repair, servicing, loss or destruction

Question 24

Who are the Persons Insured under Part B. medical payments coverage of the PAP?

Answer 24

• The named insured and any family member who suffers bodily injury caused by accident while occupying covered vehicle
• The named insured and family members who if, while a pedestrian, are struck by any motor vehicle designed for use on public roads or by a trailer
• Other persons while an occupant of the insured’s auto (passengers)

Question 25

What is Uninsured Motorist Coverage (UM)?

Answer 25

This agreement promises to pay the amount an injured insured could have collected from the uninsured dirver if such driver had carried auto liability insurance. The term “covered person” as used under the uninsured motorist coverage of the PAP includes the following:

• The named insured and any family member
• Any other person occupying the insured’s covered auto
• Any person, for damages that person is entitled to recover because of injury to a person described above

Note: UM is liability protection, NOT medical payments

Question 26

What are the perils covered under the “Other Than Collision” Provision of an Auto Policy?

Answer 26

• Glass breakage
• Loss caused by:
  
  • Falling Objects
  • Fire
  • Theft
  • Explosion
  • Earthquake
  • Windstorm
  • Hail
  • Water
  • Flood
  • Riot or civil commotion
  • Contact with birds or animals

Question 27

What are the benefits of an Umbrella Liability Insurance?

Answer 27

• Nearly always a correct answer since it is smart coverage
• Provides liability coverage Bodily Injury (BI) or Property Damage (PD) for catasptrophic claims
• Requires policy owner to carry certain underlying coverage of specified amounts
• Professional acts are specficially EXCLUDED!

Question 28

What are the two types Professional Liaiblity Insurance and who/what does it cover?

Answer 28

Malpractice - Bodily Injury (doctors, dentists)

Errors and Omissions (E&O) - Monetary damages (financial advisors, lawyers, accountants, insurance agents)

Question 29

What does Worker’s Compensation cover?

Answer 29

Study Tip: UR A D D with two D’s

​

• Unlimited medical expenses
• Rehabilitation (medical and vocational)
• Absolute Liability
• Disability Income (TAX FREE)
• Death Benefits (TAX FREE)

Question 30

Compare HMO vs PPO

Answer 30

HMO:

• Provider paid monthly fee regardless of services rendered (capitation)
• Out of Network care not covered at all

PPO

• Provider paid for actual services rendered
• Out of network partially covered, usually 70%

Question 31

What is PPACA?

Answer 31

Patient Protection Affordable Care Act

PPACA = ObamaCare

Question 32

Explain the limitations of Medicare’s Long Term Care coverage.

Answer 32

• Benefits are limited - pays all of the first 20 days of SKILLED care and everything over a specified amount per day for the next 80 days of SKILLED care (100 day max)
• The limited benefit is subject to substantial restrictions:
  
  • Pays for SKILLED care only
  • Admission to a nursing home must follow within 20 days of the hospital stay of three days or more
  • The patient’s condition must be expected to improve

Question 33

Medicare does NOT cover…

Answer 33

Study Tip: D E F G H

​

• Dental
• Emergency (outside US, except Canada, Mexico and Carribean)
• routine Foot care
• Glasses
• Hearing Aids

Question 34

What are the Medicare Penalties?

Answer 34

Those who have worked 40+ quarters are automatically enrolled in Medicare Part A. You have to enroll in Part B unless you are already getting SSA or Railroad Retirement Board.

1. Individual must register within 3 months prior to, or three months after birth month when turning age 65.
2. If no registration, then NO coverage until open enrollment or preexisting conditions apply.
3. If enroll late in Part A (meaning you worked 39 or less quarters) you will pay a 10% penalty on the premiums. You have to pay late fee for twice as many years as it took you to sign up for Medicare Part A (1 year late = 2 year 10% penalty.)
4. Premiums increase for Parts B, C, and D if not covered from that time until enrollment and remain increased for life.
   
   1. Part B penalty is permanent, if you are 1 year late to sign up then you pay 10% penalty, 2 years = 20%, 3 years = 30% and you pay the late fee the entire time you have Part B.
   2. Part D late-enrollment penalty is calculated by multiplying 1% of the “national base beneficiary premium” by the number of months you were eligible, but did not apply, for a Medicare Prescription Drug Plan. This amount is rounded to the nearest 10 cents and added to your monthly prescription drug plan premium.
      1. The national base beneficiary premium may change each year, so the late-enrollment penalty may also change each year.
      2. Beneficiaries may have to pay the late-enrollment penalty the whole time they’re enrolled in a Medicare Prescription Drug Plan.
5. Common ERROR is that preexisting conditions are gone due to PPACA but PPACA does NOT apply to Medicare.

Question 35

Who has to pay Medicare Part A Premiums?

Answer 35

Most beneficiaries over age 65 don’t pay a monthly premium for Medicare Part A coverage if they or their spouse paid Medicare taxes for at least 10 years (or 40 quarters) while working.

• If worked 40 quarters contribution to OASDHI - then $0 premium paid
• If worked 30 to 39 quarters - Then owe $277/mo. premium
• If worked less than 30 quarters - Then owed $413/mo. premium

Question 36

What does Medicare Part A Cover?

Answer 36

Think of Dad’s Stroke……

A looks like an H so think of Hospital

Inpatient Hospital Expenses like bed and board, operating room costs and lab tests.

• Some home health services
• Hospice Care
• Skilled Nursing Care
• Very limited Long-Term Care

Question 37

How much is the Medicare Part A Deductible?

Answer 37

For 2017, the Medicare Part A deductible is $1,316 for each benefit period. (60 day period between hospitalization - new spell of illness)

Question 38

Medicare Part A - Hospital Coinsurance coverage?

Answer 38

Your pay per benefit period varies based on the length of your hospital stay. Medicare Part A deductible is $1,316 for each benefit period. After deductible is met then….

• 1 through 60 days: $0 coinsurance
• 61 through 90 days: $329 per day coinsurance ($9,870)
• 91 days and beyond: $658 per day coinsurance for each lifetime reserve day (you may get up to 60 lifetime reserve days in your lifetime)
• After lifetime reserve days are used up: Medicare typically doesn’t cover your inpatient hospital stay.

Question 39

Medicare Part A - Skilled Nursing Facility Coinsurance Amounts?

Answer 39

The 2017 skilled-nursing facility coinsurance you pay per benefit period also varies based on the length of your stay. Medicare Part A deductible is $1,316 for each benefit period. After deductible is met then….

• 1 through 20 days = $0 coinsurance
• 21 through 100 days = $164.50 per day coinsurance ($13,160)
• 101 days and beyond = You are responsible for all costs unless you have a separate insurance policy that covers these costs.

Question 40

Medicare Part A - In Patient Mental Health Costs?

Answer 40

The costs for inpatient mental health coverage are the same as inpatient hospital costs (see above).

If you get physician services as part of your mental health care while you’re a hospital inpatient, you’ll pay 20% of the Medicare-approved amount.

Question 41

Medicare Part A - Home Health Costs?

Answer 41

You pay 20% of the Medicare-approved amount for durable medical equipment. Medicare pays all other costs.

Question 42

Medicare Part A - Hospice Care Costs

Answer 42

You pay up to a $5 copayment for each prescription drug needed for symptom control or pain relief while you’re at home, and 5% of the Medicare-approved amount for inpatient respite care.

Question 43

What does Medicare Part B Cover?

Answer 43

B looks like a D or P so think of Doctors or Physicians

Medicare Part B Covers Physician & Outpatient Expenses such as bed and board (for outpatient), operating Room costs, and lab tests.

• Ambulance
• Blood work
• Lab Service & Screenings
• Physical Therapy
• Supplies
  
  • medical equipment
  • diabetic
  • glasses

Question 44

Medicare Part B Premiums?

Answer 44

Part B Premium is based on MAGI income as reported 2 years ago: Most people pay $109 monthly premium.

Less than $85K then pay $109 premium

$85K Single or ($170 MFJ) then pay $134 premium

graduated AGI Limits up to $214K

$214K Single then pay $428.60

Question 45

What is Medicare Part B Deductible?

Answer 45

Annual deductible: You pay $183 per year before Medicare Part B benefits begin.

Question 46

What are Medicare Part B Cost for Physicians?

Answer 46

• Physician coinsurance: You pay 20% of the Medicare-approved amount for most doctor services after you have reached your yearly deductible. You may pay more if your doctor does not accept Medicare.
• Preventive care services: Certain preventive care is covered 100% (do not have to meet deductible first) by Medicare if your doctor or health-care professional accepts assignment (meaning they agree to accept the amount set by Medicare as full payment for providing the service). Otherwise, you generally pay 20% of the Medicare-approved amount after your deductible.
• Clinical lab tests: You pay nothing. Medicare covers all Medicare-approved clinical lab expenses.(do not have to meet deductible first)

Question 47

What does Medicare Part C Cover?

Answer 47

Medicare Part C is a Medicare Advantage Plan which combines A, B and D together.

• Provides additional benefits not included in the original Medicare program
• MAY provide better coverage at lower cost than a combination of A, B and D plus a supplement.
• Problem —- Programs not always available in a given geographic area. Also, you have to stay in network of your plan for better rates.

Question 48

What does Medicare Part D cover?

Answer 48

Medicare Part D covers Prescription Drugs and requires a deductible payment and significant co-pays.

Donut hole in Part D

Question 49

Medicare Part D Eligibility?

Answer 49

Medicare Part D covers prescription drugs and, like Medicare Part C, is available through private insurers that are approved by Medicare.

To be eligible to enroll in a Medicare prescription drug plan (PDP), you must have Medicare Part A and/or Part B and you must live in the service area for the prescription drug plan in which you want to enroll.

To be eligible to enroll in a Medicare Advantage plan with prescription drug coverage (MAPD), you must have Medicare Part A and Part B, and you must live in the service area for the MAPD plan you’re considering.

Question 50

What is the Medicare Part D Deductible?

Answer 50

The annual deductible for a standard Medicare Part D Prescription Drug Plan is a maximum of $400 in 2017.

Question 51

What are Medicare Part D Premiums?

Answer 51

Medicare Part D Prescription Drug Plans often charge a monthly premium for coverage.

Since these plans are provided by Medicare-approved private insurance companies, the actual premium you pay varies by plan.

Question 52

What are Medicare Part D Premium Penatlites?

Answer 52

The late-enrollment penalty for Medicare Prescription Drug Plans depends on how long you go without creditable coverage.

The late-enrollment penalty is calculated by multiplying 1% of the “national base beneficiary premium” by the number of months you were eligible, but did not apply, for a Medicare Prescription Drug Plan.

This amount is rounded to the nearest 10 cents and added to your monthly prescription drug plan premium.

The national base beneficiary premium may change each year, so the late-enrollment penalty may also change each year.

Beneficiaries may have to pay the late-enrollment penalty the whole time they’re enrolled in a Medicare Prescription Drug Plan.

Question 53

What are the Medicare Part D Coinsurance Costs?

Answer 53

Pay $400 deductible:

• Then 25% copayment of next $3,700 covered expenses (beneficiary - $925; Med D - $2,775)
• Donut Hole (varies by state): next $3,625 out-of-pocket (no insurance benefit)
• Then coverage resumes (insured pays 5%)
• Total out-of-pocket: $4,950 (deductible $400 + copayment $925 + donut hole $3,625)

Question 54

What are the COBRA coverage requirements (•) and

qualifying events (¤)?

Answer 54

Must have 20 full/part time employees.

The option to buy continuation:

Coverage must be offered to: (and what’s the qualifying event)

• Terminated employees/dependents up to 18 mo.
  
  • Voluntary or involuntary termination, change from FT to PT
• Spouses and other dependents up to 36 mo.
  
  • Employee’s death, divorce, legal separation, or eligibility for Medicare
• Children of Employees up to 36 mo.
  
  • Loss of dependent status (marriage)
  • Reaching dependency age limit specified by plan

Question 55

What is a Health Savings Account (HSA) and what

are its benefits?

Answer 55

• Used inconjunction with Health Deductible Health Plan (HDHP)
• Distributions are tax free if used for health care
• Contributions not spent are carried forward and portable
• Unused assets become property of named bene on death
• Distributions for non-medical are ordinary income plus 20% penalty if under 65

Question 56

What are the Definitions of Disability?

Answer 56

1. Own Occupation - best definition for the insured (Most Liberal)
2. Modified any occupation
3. Split definition - Own then modified
4. Any Occupation (Social Security definition)
5. Loss of Income

Question 57

What are the Policy Continuation Provisions for

Disability Income?

Answer 57

Noncancellable “noncan”: Continuous term policy guaranteeing the insured’s right to maintain the policy at the stated premium

Guaranteed renewable: Continuous right to maintain the policy, but the insurer may increase the premium by class of insureds

Waiver of Premium: The premium will be paid if the insured becomes disabled.

Question 58

Taxation of premiums and benefits for Disability Policies

Answer 58

Taxation of premiums and benefits:

• The individual owns the contract and pays the premium.
  
  • Premiums are not deductible
  • Benefits are tax free to the employee.
• The employee owns the contract and the employer pays the entire premium under a bonus arrangement like section 162 disability insurance.
  
  • Premiums are deductible by the employer as a bonus
  • Benefits are tax free to the employee.
• The employee owns the contract and the employer pays the entire premium under a salary continuation plan (group plan).
  
  • Premiums are deductible by the employer
  • Benefits are taxable to the employee

Question 59

Permanent Life Insurance

(Low Risk Tolerance)

Answer 59

• Insurance company controls the investment return
• Assets part of the general account

1. Whole Life
2. Universal Life

Question 60

Permanent Life Insurance

(High Risk Tolerance)

Answer 60

• Client controls the investment return
• Assets part of a separate account

1. Variable Life
2. Variable Universal Life

Question 61

What are the Dividend Options on Life Insurance?

Answer 61

Study Tip: C R A P O

​

• Cash paid to insured
• Reduce Premium
• Accumulate with insurer with interest (like savings a/c)
• Paid up additions (allows to pay for additional insurance like a stock having dividend reinvestment - also accelerated endowment option )
• One-year term (Treated as a net single premium of 1 year term as insured’s current age. 5th dividend option)

Question 62

What are the Nonforfeiture Options of Life Insurance?

Answer 62

Study Tip: R E C

• Reduced Paid Up Policy (An insured terminating a policy receives the cash value in the form of a paid-up policy with a smaller face amount)
• Extended Term Ins Policy (The insured receives the cash value in the form of a paid-up term policy for a specified duration, with same face amount as the original policy)
• Cash Surrender Value (Insured receives accumulated cash when terminating the policy)

Question 63

What are the Life Insurance Settlement Options?

Answer 63

Study Tip: L I Fa Fp (a = Amount, p = Period)

​

• L ife Income Options: The proceeds are paid for the remainder of one or more beneficiaries’ lives, with various provisions for remaining funds. These are annuity payout options
  
  • See annuity Payout options slide.
• I nterest only Option: Proceeds kept with insurer with guaranteed Int rate
• F ixed Period Option: The bene receives a fixed number of payments
• F ixed Amount Option: The beneficiary receives a stated amount of income each period until the proceeds are exhausted.

Question 64

Are dividends from Mutual Insurance companies taxable?

Answer 64

Dividends are paid from mutual companies where the mutual policy owners own the policy/company. These dividends are non-taxable. They are considered to be returns of premium which you have already paid taxes on.

Stock companies pay dividends to shareholders. These dividends are taxable to all shareholders.

Question 65

Explain the difference between Nonforfeiture vs. Dividend Options

Answer 65

Nonforfeiture Options:

Reduced Paid Up Policy: (An insured terminating a policy receives the cash value in the form of a paid-up policy with a smaller face amount)

Extended Term Ins Policy: (The insured receives the cash value in the form of a paid-up term policy for a specified duration, with same face amount as the original policy)

Cash Surrender Value: (Insured receives accumulated cash when terminating the policy)

Dividend Options:

Cash paid to insured

Reduce Premium

Accumulate with isurerer with interest (like savings a/c)

Paid up additions (allows to pay for additional insurance like a stock having dividend reinvestment - also accelerated endowment option )

One-year term (Treated as a net single premium of 1 year term as insured’s current age. 5th dividend option)

Question 66

What is a Modified Endowment Contract (MEC)?

Answer 66

Concerns the taxability of life insurance

​

• Entered into after June 21, 1988
• Fails to meet the “7-pay test” (for the exam, includes ALL single premium policies)
• Distributions/withdrawals are taxed LIFO (interest first)
• Distributions under 59½ are also subject to 10% federal penalty tax (if not disabled)
• Death benefit is still tax-free

The 7-pay test is assessed by calculating if the total amount of premiums paid into a life insurance policy by the holder within the first seven years exceed the amount of premiums required to have the policy be considered paid up in seven years. If the premiums paid exceed the amount required, then the life insurance policy is considered an MEC.

Question 67

What are the MEC Grandfather life insurance rules?

Answer 67

• If death benefit increases by $150k or less and the insured has guaranteed insurability (no proof of insurability), the policy will NOT lose its grandfathered (non-MEC) status.
• If the policy increases by ANY amount and the insured must prove insurability, the policy MAY lose its grandfathered (non MEC) status.

Question 68

When are the proceeds in a life insurance policy taxable due to Transfer for Value?

Answer 68

If an interest in a life insurance policy is transferred for valuable consideration (not a gift), the proceeds in the excess of the consideration paid for the policy, combined with any premiums paid by the owner, are taxable as ordinary income (like a viatical). The main exceptions to this rule are:

• A sale or transfer to the insured
• A sale or transfer to a partner or partnership in which the insured is a partner
• A corporation in which the insured is a shareholder or officer
• Divorce

Question 69

What are the 1035 Tax Free Exchange Rules?

Answer 69

• Life → Life (OK)
• Life → Annuity (OK)
• Annuity → Annuity (OK)
• Annuity → Life (NO NO NO!)

Question 70

Buy Sell

Stock Redemption

vs

Cross Purchase

Answer 70

Stock Redemption: No Step up in cost basis

Cross-Purchase: Step up in basis

Question 71

Split Dollar Insurance

EndoRsement Method

vs.

Collateral aSSignment Method

Answer 71

EndoRsement Method:

• EmployeR is the owneR
• Employee is NOT a shareholder

Collateral aSSignment method:

• Employee is owner
• Employee is a Shareholder
• Employee aSSigns the policy

Question 72

Explain Annuity Taxation

Answer 72

Periodic Payouts:

Payout ÷ Basis = Tax-free

Lump Sum Payouts:

• LIFO (interest first rule)
• Ordinary income plus 10% penalty if under 59½

Question 73

Annuity Distribution Options

Answer 73

Study Tip: F I P 3 Life’s & 3 Joints

• Fixed amount—flat dollar amount until the account is depleted.
• Interest income—only the interest earned is distributed so the account principal remains
• Period certain—payments for a specified length of time that depletes the account.
• Life income—pays for the life of the annuitant.
• Life income with period certain—pays benefits for the longer of the life of the annuitant (to the annuitant) or the stated period certain (e.g., 10, 15, 20 years) (to a beneficiary).
• Life income with refund—pays for the life of the annuitant and if any account value remains upon the annuitant’s death, pay the balance to the beneficiary.
• Joint life—seldom used as it pays until the first of two annuitants dies.
• Joint and survivor—pays until the death of the second of two annuitants.
• Joint and survivor with period certain—pays for the longer of the life of the surviving annuitant or a specified length of time.

Question 74

What are the characteristics of a

Flexible Spending Account (FSA)?

Answer 74

• Must be used by March 15th or forfeited to the company (use it or LOSE it - Medical Only. Dependent Care must be used by 12/31)
• Not subject to income tax, FICA or FUTA
• Health FSA may not be used to reimburse an employee premiums paid for other health plans (such as MSA, HSA and LTC)
  
  • Expenses for LTC services can NOT be reimbursed under a health FSA, but other medical expenses can be reimbursed.

Question 75

What are the major Tax Free Fringe Benefits?

Answer 75

• Health Care Premiums
• Insurance Premiums on non-discriminatory group life policy up to $50k
• Company car for working conditions only
• Employer-provided transit passes ($135/mo cap) or parking ($255/mo cap)
• Occasional overtime meal money, cab fare, theater or sporting event tickets
• Discounts on services limited to 20% of selling price charged to customers

Question 76

When are Fringe Benefits taxable?

Answer 76

Health insurance premiums paid for self-employed, partners, and more than 2% owners of an S-corp are Taxable income. 100% is deductible as an adjustment to income on the FRONT of the 1040. This can include all types of health insurance programs.

Question 77

Rules of Risk Management (Think of gambling)

Answer 77

1. Don’t risk more than you can afford to lose. - transfer potentially devastating losses when the severity can’t be reduced.
2. Consider the odds. - the higher the probability of loss, the less appropriate is risk transfer - cost plus administration fees.
3. Don’t risk a lot for a little. - some risks should definitely be transferred while other risks should not.
4. Evaluate the maximum possible loss and the maximum probable loss. - use this to determine which risks to retain and which risk to handle with another risk management technique.

Question 78

Other Insurance Contract Terms?

Answer 78

1. Aleatory (chance, unequal dollars) An agreement concerned with an uncertain event that provides for unequal transfer of value between the parties. Insurance policies are aleatory contracts because an insured can pay premiums for many years without sustaining a covered loss. Conversely, insureds sometimes pay relatively small premiums for a short period and then receive coverage for a substantial loss.
2. Adhesion (if you wrote it, you’re stuck with it) A contract offered intact to one party by another under circumstances requiring the second party to accept or reject the contract in total without having the opportunity to bargain over the wording. Insurance policies are contracts of adhesion and, as such, are construed strictly against the party writing them (i.e., the insurer).
3. Conditional (certain conditions must be met; physical, premium payment, etc.)
4. Personal (between insurer and insured)
5. Unilateral (only one side is under legal obligation) A contract in which only one party makes an enforceable promise. Most insurance policies are unilateral contracts in that only the insurer makes a legally enforceable promise to pay covered claims. By contrast, the insured makes few, if any, enforceable promises to the insurer. Instead, the insured must only fulfill certain conditions—such as paying premiums and reporting accidents—to keep the policy in force.
6. Utmost good faith: This principle is enforced through legal doctrines and policy provisions, which include

• warranties
• concealment
• note that fraud voids the contract

7. Contract of Indemnity (except for “valued policies” and “cash payment policies”): This principle is enforced through legal doctrines and policy provisions, which include

• insurable interest,
• actual cash value,
• subrogation, and
• “other insurance” provisions.

Question 79

Types of Agency Authority

Answer 79

• Express Authority – specifically conferred by the agent OR occasionally.
• Implied Authority – not expressly granted, but assumed to have in order to transact business
• Apparent Authority – ostensible authority; the appearance of, or assumption of authority, based on agent’s actions (it appears that agent is acting within the scope of authority). Example is if I a new life insurance agent and I just sold a life insurance policy to a client. Then the client said that want to get new home owners insurance. Since I am a new agent, I can’t sell home owners yet, but I say yes, we can get that for you and give them a quote. Then the company is liable because the client doesn’t know that I can’t do that, but I could get sued or fired for this. APPARENT AUTHORITY INVOLVES APPEARANCES

Question 80

Groundwater and Flooding

Answer 80

Groundwater and flood is generally not covered. You will have to get federal flood insurance for flooding.

Question 81

Homeowners Coverages: Sections I and II

Answer 81

Section I

A - Dwelling

B - Other Structures

C - Personal Property

D - Loss of Use: This component of a homeowners policy will pay for additional costs that you incur when it is necessary to live away from your home due to damage from a covered peril. The coverage will pay for up to 12 months of the necessary difference in living expenses required to maintain your family’s current standard of living.

For example, if you normally spend $1,000 of groceries and dining each month, but your displacement causes the grocery and dining bills to increase to $1,400, your insurance will pay the additional $400.

This coverage will vary by insurer, but most policies offer 10 percent of your home coverage with additional coverage available for a price.

Section II

E - Comprehensive Liability: The liability portion of a homeowners policy protects you against lawsuits for property damage or bodily injury that you or members of your family cause to other people. Examples of this would be a guest slipping on an icy sidewalk, tripping down your stairs or being bitten by your dog.

The liability portion of your policy covers the following:

Injured party’s medical bills

Legal fees

Any damages awarded to the injured party

Most homeowners policies offer a minimum of $100,000 worth of liability coverage, but this is often not enough to cover all expenses. Industry experts recommend carrying at least $300,000 to $500,000.

F - Medical Payments & Property Damage to others, expenses and claims: mini-accident policy.

–Medical payments to others pays the reasonable medical expenses of another person who is accidentally injured while on an insured location, or by the activities of an insured, resident employee, or animal owned by or in the care of an insured

–The insured is not required to be legally liable

–Coverage does not apply to the insured or regular residents of the household, other than a residence employee

–Coverage applies even if the injury occurs away from an insured location

Question 82

Homeowners Insurance Forms - Perils insured against (Types of Coverage)

Answer 82

Basic form – Fire and lightning, windstorm and hail, explosion, riot and civil commotion, vehicles, aircraft, smoke, vandalism, volcanos and theft (ONLY these listed perils)

Broad form – adds falling objects, weight of ice, snow, sleet, collapse of buildings, accidental discharge of overflow of water or steam.

Open Perils (all risk) – Any peril not specifically excluded is covered.

Question 83

What is the most standardized homeowners policy and what is it insured against.

Answer 83

HO 3 is the most standardized homeowners policy and it is insured against….

1. Open Peril for the Dwelling
2. Open Peril for the Other Structures
3. Broad for Personal Property (if you add HO-15 to HO-3 then it becomes Open Peril for Personal Property and a HO-5 policy)
4. 20% of A (Dwelling)

Question 84

Replacement Cost vs. Actual Cash Value

Answer 84

Replacement Cost:

1. Cost of replacement covered up to specified preset limits
2. Usually coupled with an inflation guard endorsement

All other HO’s pay on replacement cost basis. Also HO only pays medical for those who DON’T live in the house because you can’t cover yourself or your family. It only covers visitors.

Payment based on the replacement cost of damaged or stolen property is usually the most favorable figure from your point of view, because it compensates you for the actual cost of replacing property. If your camera is stolen, a replacement cost policy will reimburse you the full cost of replacing it with a new camera of like kind. The insurer will not take into consideration the fact that it has a shutter count of 20,000 because you’ve used the camera every day for the last two years, causing a considerable amount of wear and tear. If it was ACV then the insurance company would reduce the amount becuase it is a used camera with 20,000 shutter count.

Actual Cash Value (ACV):

1. Essentially, replacement cost minus depreciation
2. If given a choice, replacement cost is the better option for the insured.

HO-8 is the ONLY Home Ownership policy is settled by actual cash value (ACV) or replacement cost minus depreciation, meaning old home have gorgeous crown molding and plaster walls. The insurance company says, you pay for crown molding and plaster, we will play for regular molding and dry wall

Question 85

HO-15 Rider

Answer 85

You can add HO-15 Rider and it will actually bring the HO-3 to for personal property up to open perils coverage.

You can only add the HO-15 to the HO-3. You cannot add it to any other policy.

IMPORTANT MISTAKE PEOPLE MAKE: This does not eliminate the limits that are put on personal property that are put in the standard policy. YOU WILL HAVE TO USE ANOTHER RIDER

HO-5 is the same as the HO-3 + HO-15 rider. All states aren’t on this yet.

Question 86

HO-8

Answer 86

HO-8 (Old Homes)

HO-8 is the ONLY Home Ownership policy is settled by actual cash value (ACV) or replacement cost minus depreciation, meaning old home have gorgeous crown molding and plaster walls. The insurance company says, you pay for crown molding and plaster, we will play for regular molding and dry wall

All other HO’s pay on replacement cost basis. Also HO only pays medical for those who Don’t live in the house because you can’t cover yourself or your family. It only covers visitors.

Question 87

Inland Marine Insurance (Personal Property Coverage)

Answer 87

Has nothing to do with water…..

Personal Property Floater

Provides open perils-level coverage

Broad coverage for:

Articles that may be moved or are in transit

Examples: jewelry, furs, silverware

Purpose: to cover articles excluded or limited on homeowner’s policies

Not used for installed property (e.g., wall-to-wall carpeting)

May be purchased as separate policy or by endorsement on homeowners policy as scheduled Endorsement

Also known as: Personal Articles Floater

Question 88

$400K worth of personal property in a $300K house. What should they do?

Answer 88

Increase coverage on the house to $400K is a wrong answer.

You actually have to get a different policy like for jewelry. You get an inland marine policy. Think of the insurance that floats all of the cargo/stuff along the inland or rivers/canals of the US

Question 89

Who has to pay Medicare Part A Premiums?

Answer 89

​Most beneficiaries over age 65 don’t pay a monthly premium for Medicare Part A coverage if they or their spouse paid Medicare taxes for at least 10 years (or 40 quarters) while working.

If worked 40 quarters contribution to OASDHI - then $0 premium paid

If worked 30 to 39 quarters - Then owe $277/mo. premium

If worked less than 30 quarters - Then owed $413/mo. premium

Question 90

Medicare Part A Hospital coinsurance coverage?

Answer 90

Your pay per benefit period varies based on the length of your hospital stay: Deductible of $1,316 first, which is 10% of the $13,160 cost of Skilled Nursing Care. Divide that by the 80 days 1-20 free and 21-100 = $164.50. Times $164.50 x 2 = $329.

• 1 through 60 days: $0 coinsurance
• 61 through 90 days: $329 per day coinsurance
• 91 days and beyond: $658 per day coinsurance for each lifetime reserve day (you may get up to 60 lifetime reserve days in your lifetime)
• After lifetime reserve days are used up: Medicare typically doesn’t cover your inpatient hospital stay.

Question 91

Medicare Part A Skilled Nursing Facility Coinsurance Amounts?

Answer 91

The 2017 skilled-nursing facility coinsurance you pay per benefit period also varies based on the length of your stay: Deductible of $1,316 first, which is 10% of the $13,160 cost of Skilled Nursing Care. Divide that by the 80 days 1-20 free and 21-100 = $164.50.

• 1 through 20 days = $0 coinsurance
• 20 through 100 days = $164.50 per day coinsurance
• 101 days and beyond = You are responsible for all costs unless you have a separate insurance policy that covers these costs.

Question 92

What is Universal Life Insurance?

Answer 92

Universal Life is an unbundled life insurance product with a cash value fund that accumulates tax deferred (invested in an insurer’s money market-like investment) earning at least a minimum guaranteed rate of interest);

it includes flexible premium payments, adjustable benefits, unbundled structure, and full disclosure or transparency of costs;

it may have a level death benefit, sometimes referred to as (Option A or Option 1) or an increasing death benefit (Option B or Option 2).

Question 93

Advantages of Universal Life (UL)

Answer 93

• Flexible premium payments
• Adjustable death benefits
• Unbundled structure (‘U’ for universal and ‘U’ for unbundled)
• Full disclosure annually

Question 94

Disadvantages of Universal Life?

Answer 94

• Policyholder may receive neither the most competitive insurance coverage nor the most competitive savings vehicle.
• Future yield is uncertain.
• Compulsory nature of savings is reduced due to flexible premium payments.
• There is no assurance that a given premium will be adequate to maintain the policy.

Question 95

Variable Life vs. Universal Life?

Answer 95

Variable life is built on a whole life platform. This means that premiums are fixed and mortality charges are guaranteed (which is also true of universal life).

Additionally, variable life guarantees a minimum death benefit, even though there may be some variability of death benefit based on market returns.

Neither variable life nor universal life guarantee cash values, but universal life normally includes a guaranteed minimum interest rate. (CFP D28)

Question 96

How to calculate the insurance amount received to replace damaged building?

Answer 96

• [(Amount Carried/Amount required) × Loss] - Deductible = Amount of Loss to be Recovered [($500,000/$700,000) × $250,000] − $1,500 = $177,071.
• ** The amount required is 80% (rule) of the $875,000 or $700,000. (CFP D32)
• *** If amount of insurance exceeds 80% of replacement cost then you will get the full amount of insurance less the deductible.
• **** If you have adequate coverage to meet the 80% coinsurance requirement, the payment by the insurance company is limited to the policy face amount of coverage, unless the house is insured for its full replacement cost and a replacement cost rider (inflation adjusted) is included with the policy. (CFP D32)

Amount carried is the current amount of insurance

Amount required is 80% of the replacement cost.

Insurance company can only pay back the amount limited to the policy value. A $200K policy can’t pay $210K out.

Question 97

What does NonCancellable mean in disability insurance?

Answer 97

It means the insurance company can NOT incresae the premium for the policy term.

Question 98

What does Guaranteed Renewable mean in disability insurance?

Answer 98

Guaranteed renewable means they can NOT increase the premium for individuals but they can increase the premium rate for an entire policyholder class.

Question 99

Are Death Benefits from a life insruance funded buy-sell agreement free from income tax?

Answer 99

Yes, however if the business is a C coporation, the death proceeds may be subject to AMT.

Question 100

Can a business deduct premiums for entity purchased buy-sell agreements?

Answer 100

Yes, premiums are tax deductible.

Surviving owners do not receive a step up in basis because the company owns the policy.

Question 101

Are payments of premiums made by a business, where the shareholder or the owner is the insured, considered taxable income?

Answer 101

Yes, they are considered taxable income and they are tax deductible to the employer.

Question 102

In a cross purchase agreement, is the cash value of the policies owned by the deceased on the other shareholder’s lives is considered to be in the deceased’s estate?

Do surviving Owners’ receive a step up in basis?

Answer 102

Yes, the cash value is considered to be in the deceased’s estate but the policies owned by the other shareholder’s on the deceased life are not considered in the decedent’s estate.

Yes, surviving owners receive a step up in basis.

Question 103

What are two types of Buy-Sell Agreements?

Answer 103

Cross Purchase Agreement

(Partners own policy and are beneficiary of each other’s policy)

&

Stock Redemption Plan or Entity Purchase Agreement

(Company owns policy and is beneficiary of policy)

Question 104

What’s the formula for Cross Purchase Buy-Sell agreement?

Answer 104

N x (N-1) = # of policies

For example.

3 partners = 6 policies [3x(3-1)=6]

4 partners = 12 policies [4x(4-1)=12]

Question 105

What does waiver of premium mean in disability insurance?

Answer 105

Rider that pays for the premium if I become disabled.