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CFP Study > Risk management/ insurance planning > Flashcards

Risk management/ insurance planning Flashcards

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1
Q

What is the method to completely transfer business interests among partners/owners using life insurance policies?

A

Buy-Sell: Cross Purchase Agreement

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2
Q

What are the 3 advantages and 2 disadvantage of a buy-sell: cross purchase plan?

A

Advantages:
1. Simple solution for business w/ few owners
2. Death benefit tax free to owners
3. Increase in basis to surviving owners

Disadvantages
1. Younger owners pay more with age gap
2. Difficult to implement with a higher number of owners

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3
Q

What is the formula to find number of polices needed in a cross purchase plan?

A

N*N(-1)

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4
Q

What is a method to completely transfer business interest back to the business using life insurance policies? (buys back ownership shares)

A

Buy-Sell: Entity purchase plan

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5
Q

What are 3 Advantages and 2 disadvantages of an entity purchase plan?

A

Advantages
1. Preferred solution for business with multiple partners
2. Death benefit tax free to business
3. Business pays policy premiums

Disadvantages
1. No increase in cost basis to surviving owners
2. Surviving owners more gains upon sale of business

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6
Q

How do you determine number of policies needed with entity purchase plans?

A

Equal to number of partners

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7
Q

What method to transfer business interests offers flexibility to both the partners and business?

A

Buy-Sell: Wait and see plan

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8
Q

What are the 3 types of buy-sell ageements?

A
  1. Cross purchase plan
  2. Entity purchase plan
  3. Wait and see
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9
Q

What is the 3 step process for a buy-sell wait and see agreement following the death of a business partner?

A

BOB
Step 1. Business has 1st option to purchase deceased partners stock
Step 2. Surviving partners/owners have option to purchase deceased stock. applies if business waives option or business purchases less than 1/2 shares
Step 3. Business required to purchased deceased partners stock

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10
Q

What is the tax consequence to the viatical settlement company on a viatical settlement?

A

Any amount received in excess of basis is taxable to the company

Basis= amount paid to insured + premiums paid by the company

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11
Q

Is the cash value allocated to sub-accounts in variable life subject to creditors of insurance company?

A

No

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12
Q

What is the extended term payout option for life insurance?

A

Cash value is used for extended term insurance. Cash value is gone.

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13
Q

What is the cash surrender payout option on life insurance?

A

Cash value to be paid in lump sum, contact ends

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14
Q

What are the 3 options for non-forfeiture (termination) on permanent life insurance with a cash value?

A
  1. Cash surrender value
  2. Extended term options
  3. Reduced paid- up insurance - reduced death benefit/ retain cash value
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15
Q

What are the 2 options for universal life?

A

Option A: Death benefit remains level
Option B: Death benefit is face amount plus cash values

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16
Q

What are the 3 types of universal life?

A
  1. Fixed
  2. Indexed
  3. Variable
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17
Q

What 2 things does whole life guarantee?

A

Death benefit and premiums

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18
Q

What are the 2 types of permanent life insurance?

A

Universal and whole

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19
Q

What are the 5 annual renewable terms for term insurance?

A

10,20,30, First to die, second to die

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20
Q

What are the 2 attributes associated with decreasing term?

A
  1. Typically associated with loans
  2. Level premium over term/ decreasing death benefit
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21
Q

What are the attributes of the death benefit and premiums for level term life insurance?

A

Death benefit remains level
Premiums increases after expiration of initial guaranteed term

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22
Q

What are the 2 types of term insurance?

A

Level and decreasing

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23
Q

What are the 3 types of life insurance?

A

Term, Universal, and Whole life

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24
Q

What is reduced paid up insurance life insurance?

A

Use cash value to purchase new policy same type as old, with reduced death benefit and keep new cash value to grow at reduced rate.

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25
Q

What allows the insurer to automatically make a loan against policy cash value for paying overdue premiums?

A

Automatic premium loan

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26
Q

What happens with the unpaid amount on an automatic premium loan?

A

Unpaid + accrued interest is subtracted from death benefit

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27
Q

Can you contribute to an HA once on Medicare?

A

No, but you can continue to use it for qualified expenses

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28
Q

What is the triple tax advantage of an HSA?

A
  1. Pre tax contributions
  2. tax deferred earnings
  3. Tax free distributions
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29
Q

How many direct transfers, up to the annual dollar limit, can you do from an IRA to HSA per year?

A

Only 1 per LIFETIME

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30
Q

What is the last month rule for HDHP’s and HSA’s

A

If eligible under HDHP on 1st day of the last month of the year, may fund HSA as if eligible for full year

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31
Q

For what reason would COBRA not be available to someone?

A

Gross misconduct

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32
Q

What does COBRA stand for?

A

Consolidated Omnibus budget reconciliation Act

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33
Q

What is the max cost of continued coverage to a qualified beneficiary under COBRA?

A

102% of cost paid by employee and employer

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34
Q

What are the 6 qualifying events under COBRA and the qualified beneficiaries of each?

A

E= Employee, S= Spouse, D= Dependent child
1. Termination or hours reduced - E/S/D
2. SS disability ( Employee or QB) - E/S/D
3. Enrollment in Medicare - S/D
4. Divorce or legal separation - S/D
5. Death of employee - S/D
6. Loss of “dependent child” Status - D

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35
Q

What are the 6 qualifying events under COBRA and their max period of continuation coverage?

A
  1. Termination or hours reduced - 18 months
  2. SS disability ( Employee or QB) - 29 months
  3. Enrollment in Medicare - 36 months
  4. Divorce or legal separation - 36 months
  5. Death of employee - 36 months
  6. Loss of “dependent child” Status - 36 months
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36
Q

What are the 4 risk management choices and use in regards to frequency and severity of a risk?

A
  1. Risk avoidance - HF and HS
  2. Risk reduction - HF + HS, HF + LS
  3. Risk transfer- LF + HS
  4. Risk retention - HF + LS, LF + LS
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37
Q

What are 4 tax benefits of LTCi

A
  1. Benefits received tax free
  2. Premiums paid are qualified medical expenses for itemized deductions
  3. Premiums can be paid from an HSA
  4. Premiums paid by employers are tax free to employees
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38
Q

What are the 6 LTCi Features and benefits?

A
  1. Benefit period - 2,5, lifetime
  2. Elimination period - 0 to 365 days
  3. Daily benefit
  4. Riders
  5. Waiver of Premium
  6. Renewability
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39
Q

Why would someone choose option A over B universal life insurance?

A

As option A cash value grows, you pay a small premium, and lesser pure insurance

Option B CV gets stacked, so premiums are always paid on face amount. Higher premiums

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40
Q

What are the 6 types of whole life insurance polices?

A
  1. Variable
  2. Second to die
  3. Graded premium
  4. Modified
  5. Limited pay
  6. Guaranteed issue
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41
Q

What 2 items may result in cash surrender being taxable income?

A
  1. Dividends reduce basis in policy, considered return of premium
  2. outstanding loan included in surrender value when calculating a gain
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42
Q

What are the 5 ways participating life insurance policy dividends are paid/used?

A

CRAPO
1. Cash
2. Reduce premium
3. Accumulate at interest
4. Paid up additions
5. One year term

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43
Q

What are the 2 LTC facilities and what do they provide?

A
  1. Nursing home care
    Residential, personal care, health support
    Rehab, medication, 24 hour care
  2. Assisted living facility
    residential, personal care, health support
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44
Q

What is the taxation of disability income insurance benefits?

A
  1. If employer paid premiums, taxable
  2. If employee paid premiums with AT dollars, tax free
  3. If employer paid premiums but counts as compensations, benefit is tax free
  4. If employee paid pre-tax - benefits are taxable
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45
Q

What is the 1 community LTC location and what does it provide?

A

Adult day health care
1. Residential
2. Socialization, structure, supervision
3. May include medical management

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46
Q

What is the structure of a LTC policy where cost of care is less then the max daily benefit, making the policy last longer?

A

Pool of money

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47
Q

Does an ADL and SCI require 90 days certified by a doctor?

A

ADLs yes, SCI no just the Certification of a doctor

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48
Q

What are the 8 required features of LTCi?

A
  1. Benefits only for Qualified LTC services
  2. Guaranteed renewable
  3. Does not pay or reimburse expenses reimbursed by Medicare
  4. No cash surrender value
  5. Policy dividends reduction in premium or increase benefit
  6. Limitations and exclusions prohibited - no prior hospitalization required
  7. Cannot provide for skilled nursing care only
  8. Have 2-year incontestable clause for misrepresentation
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49
Q

What amount of LTCi is added to Medicaid spend down limit and is protected?

A

Total amount paid under LTCi

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50
Q

What are the 4 definition of disability for disability income insurance?

A
  1. Own occupation - can’t perform own occupation - more expensive
  2. Any occupation - payment if can’t perform any occupation
  3. Modified own occupation - Hybrid, own occupation first, then any after a period of time
  4. Social security disability- most difficult to qualify for - unable to perform any occupation and medical condition of 12 months or more
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51
Q

What are the 3 LTC location categories?

A
  1. Facility
  2. Community
  3. Home
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52
Q

What does partnership LTC insurance do?

A

Provides additional asset protection if LTCi benefit is exhausted and insured files for Medicaid

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53
Q

Who is partnership LTC insurance between?

A

States and insurance companies

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54
Q

Are blindness or inability to walk an ADL?

A

No

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55
Q

What are the 6 ADLs of LTC?

A

BEDCOT
1. Bathing
2. Eating
3. Dressing
4. Continence
5. On-off toilet
6. Transferring

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56
Q

What are the 2 options for LTC benefit triggers?

A
  1. Unable to perform 2 of 6 ADLs for 90+ days
  2. Have a substantial cognitive impairment

Dr. certified for both

57
Q

What type of LTC does Medicare cover and what is the cost for each period?

A

Skilled nursing care
Days After hospitalization
0-20 - fully covered
21-100 - Person pays $200
101+ Fully amount paid by person

58
Q

What are the 2 LTC Home locations and what do they provide?

A
  1. Home health Aid
    Personal care, non medical
    hands-on approach
  2. Homemaker
    Household tasks and errands
    hands-off approach
59
Q

What is the number of employees required for COBRA?

A

20 FT employees
PT employee count as half

60
Q

What are 5 things to think about when recommending risk management?

A
  1. Liability umbrella
  2. Appropriate deductible
  3. Sufficient Disability insurance
  4. Sufficient life insurance
  5. Sufficient emergency fund
61
Q

What is the penalty for using HSA funds for Non-qualified expenses prior to and after age 65?

A

prior to - 20% penalty and ordinary income taxes on amount used
after - ordinary income taxes on amount used

62
Q

What are the 4 attributes of permanent life insurance?

A
  1. Higher premiums than term at issue
  2. Builds cash value
  3. Cash value accessible by loans or WDs
  4. May be participating
63
Q

What are the 5 attributes of Term life insurance?

A
  1. Lowest premium at issue
  2. No cash value
  3. May be participating
  4. May be renewable
  5. May be convertible to permanent
64
Q

What is a cash value life insurance contract where premiums paid have exceeded the amount allowed to keep full tax treatment?

A

A modified endowment contract

65
Q

What is considered a modified endowment contract?

A

Cash value life insurance policy that fails the 7 pay test. Changes the tax treatment of cash distributions while alive.

66
Q

What 2 times does the 7-pay test apply?

A
  1. At issues
  2. If policy experiences material change
67
Q

Why was the 7 pay test law put in to place?

A

To curtail use of single premium life as a tax free investment

68
Q

What is the 7 pay test for a MEC?

A

Net premium level calculated, if total premiums paid into during 7 year test period exceed sum of net level premiums needed to result in a paid up policy after 7 years, then the policy is a MEC

69
Q

What are the taxation of death benefits for NON- MEC and MEC policies?

A

tax free for both

70
Q

What is the order of cash value distributions for NON-MEC and MEC policies?

A

Non-MEC - FIFO ( Basis first)
MEC - LIFO (Gains first)

71
Q

What are the character of taxable distributions for non-MEC and MEC?

A

Ordinary income

72
Q

What is the penalty for taxable distributions from non-MEC and MEC policies?

A

Non-MEC - none
MEC - 10% prior to 59 1/2

73
Q

What is a way for seriously ill people to get cash by transferring a life insurance policy in exchange for a cash discounted amount of the death benefit?

A

Viatical settlement

74
Q

To do a viatical settlement, what are the conditions that an insured must meet? ( one or the other)

A

1.Terminally ill
or
2. Chronically ill

75
Q

An individual who has been certified by a physician as having an illness or condition that will result in death within 24 months is know as what?

A

Terminally ill

76
Q

What refers to a person who is unable to perform at least two activities of daily living for at least 90 days?

A

Chronically ill

77
Q

What is the individual who seeks to enter into a viatical settlement know as?

A

Viator

78
Q

What is the timeframe of a cooling off period in a viatical settlement?

A

15 days

79
Q

What is the tax consequence to the insured on a viatical settlement?

A

Amounts received are excluded from income. If chronically ill, benefits only excluded to extent they are used for LTC services

80
Q

In a buy-sell: entity purchase agreement, what is the increase in basis?

A

no increase

81
Q

For buy sell cross purchase agreements, what is the survivors basis increased by?

A

the amount of life insurance death benefit used to buy decedent’s interest at death

82
Q

Do annuities receive a step up at death?

A

no

83
Q

What are withdrawals tax treatment for annuities and the penalty prior to 59 1/2?

A

LIFO

10%

84
Q

What is the exclusion ratio for annuities funded on after-tax basis?

A

Basis/Expected payout = tax free portion of payment

exclusion ends when all basis is recovered

85
Q

What is the tax free exchange of an annuity for another called?

A

1035 exchange

86
Q

When do immediate, deferred, and deferred income annuity payments begin?

A

immediate - within 1 year
Deferred after 1 year
Deferred income - after 1 year

87
Q

What are gain distributions from a NQ annuity taxed as?

A

ordinary income

88
Q

What is the basis recovery taxation method for withdrawals and annuitizations?

A

Withdrawals -LIFO
Annuitizations - Exclusion until basis recovered

Exclusion ratio = investment /(annual payment x life expectancy )

89
Q

What are the 5 exceptions on annuity payouts that avoid 10% penalty?

A
  1. Over 59 1/2
  2. Immediate NQ annuity
  3. Substantially equal periodic payments
    4.Death
  4. Disability
90
Q

What are the allowable 1035 exchange between life insurance, endowment, annuity, and LTCi?

A

Can trade same or down, not up

Life insurance
endowment
annuity,
LTCi

91
Q

What is the withdrawal taxation of annuities prior to august 14th, 1982?

A

FIFO

92
Q

Prior to December 31st of 1986, for annuitization what is the rule for exclusion allowances?

A

applies for life, even after basis is recovered

93
Q

For homeowners insurance, what covers specific perils or causes of loss covered, but everything else is not covered?

A

Named perils

94
Q

What homeowners coverage specifies excluded perils that will not be paid, but everything else is covered?

A

open perils

95
Q

What is the main difference between H0-03 and H0-05 homeowners insurnace?

A

3 has named peril, 5 has open

96
Q

How can you make an H0-03 policy cover open perils?

A

adding H0-15 endorsement

97
Q

What are the 2 testable parts of a personal auto policy (PAP)?

A

Part A - Liability
Part D - damages to auto

98
Q

What are the 2 limits PAP part A has?

A

Single limit - one $ cap
Split limit - Example 250k/750k/100k
Max Body injury/max all bodily injury/ max property damage

99
Q

What are the 2 parts of PAP Part D?

A

Collision - damage to vehicle caused by accident
Comprehensive - all other physical damage to auto (includes hitting a dear)

100
Q

What policy is a critical addition to a client’s property and casualty and significantly enhances liability coverage for a small premium?

A

Personal liability umbrella policy (PLUP)

101
Q

What type of coverage does PLUP provide and what is the typical amount?

A

Auto and homeowners above and beyond underlying limits

$1mm plus

102
Q

To use a PLUP, do you have to exhaust underlying policy limit first?

A

Yes

103
Q

What type of coverage does PLUP extend coverage for and what does it not?

A

Personal liability ( libel or slander)
Does not extend coverage for business interest of the insured

104
Q

What is anything that causes a financial loss, such as wind, fire, and theft, known as?

A

Peril

105
Q

What is a condition that serves to increase the frequency or severity of perils known as, such as gasoline soaked cloth in garage?

A

Hazard

106
Q

What is physical characteristics of the person or property that increases the chance of loss, such as a slippery sidewalk, known as?

A

Physical hazard

107
Q

What are dishonest tendencies, often due to an insured’s weakened financial condition, that are likely to increase loss frequency and or severity?

A

Moral hazard

108
Q

What is an indifference to the loss when insurance is in place, which creates carelessness and increases the chance of loss known as?

A

Morale Hazard

109
Q

What is the likelihood that parties with the greatest probability of loss are the ones who most desire the insurance known as?

A

Adverse selection

110
Q

What is a contract that only one side promises to do anything?

A

Unilateral contract

111
Q

What type of contact is it when one party prepares the entire contract?

A

Contract of adhesion

112
Q

What is an agreement under which action is predicated on a specific event. The events are not controlled by either party?

A

Aleatory contract

113
Q

What involves both the chance of loss or gain

A

Speculative risk (not insurable)

114
Q

What involves only the chance of loss or no loss?

A

pure risk

115
Q

What involves losses caused by factors not related to the economy (loss of family breadwinner)?

A

static risk

116
Q

What holds that damages assessed against a negligent party should not be reduced simply because the injured party has other sources of recovery available?

A

Collaterol source rule

117
Q

What is it known as when the act itself constitutes negligence, thereby relieving the burden to prove negligence?

A

Negligence per se

118
Q

What liability without regard to negligence or fault?

A

absolute liability

119
Q

What is liability for damage resulting from some extraordinarily dangerous activity or other statutorily defined activities? (negligence does not have to be proved

A

Strict liability (most traffic violations)

120
Q

What is negligence caused by one or two or more parties?

A

Joint and several liability

121
Q

What is known as when one person may become legally liable for the torts of another?

A

Vicarious liability

122
Q

What 13 exclusions are not covered by homeowners insurance?

A
  1. Flooding
  2. Earthquakes
  3. Termites, rats/ infestations
  4. Mold
  5. Aggressive or dangerous dogs
  6. Poor maintenance or neglect
  7. Power surges or outages
  8. Home-based businesses
  9. Local building ordinance or law requiring you to bring your home up to code
  10. Intentional damage caused by you or another resident family member
  11. Nuclear hazards
  12. War
  13. Government action
123
Q

What life insurance policy rider waives future premiums if the insured becomes permanently disabled as a result of injury or illness? (premiums paid during elimination period are refunded)

A

Wavier of premium rider

124
Q

What life insurance rider allows you to purchase additional insurance coverage in the stated period without the need for further medical examination?

A

Guaranteed insurability rider

125
Q

What life insurance rider pays out an additional amount if the insured dies as the result of an accident? (sometimes referred to as the double indemnity rider)

A

Accidental death rider

126
Q

What life insurance rider pays a monthly income to a beneficiary in addition to the policy face amount for a state period of time to help with expenses in a transition period after death?

A

Family income benefit rider

127
Q

What rider provides a death benefit in case a child dies before a specified age, after child reached maturity, policy can convert to permanent insurance?

A

Child term rider

128
Q

What life insurance rider allows the souse of the base policy insured to have a term life insurance rider under a permanent policy insuring their spouse?

A

Spouse term tider

129
Q

What life insurance rider typically allows a portion of the policy death benefits to be paid while the insured is alive and is in need of long term care services?

A

Long term care rider

130
Q

What life insurance rider allows a potions of the policy death benefit to be paid while the insured is still alive if the insured has been diagnosed with terminal illness?

A

Terminal illness rider

131
Q

What life insurance rider refunds the premiums paid over a specified term if the insured is alive at the end of the period or refunds the premiums paid to the beneficiary at the death of the insured?

A

Return of premium rider

132
Q

On what basis does H0-3 cover dwelling and contents?

A

Dwelling - open perils
Contents - named peril basis

133
Q

What is the typical coinsurance clause requirement of the replacement cost value for a partial loss to be paid in full?

A

80% of the replacement cost value

134
Q

For coinsurance of a dwelling insured for 80% or more, what does the policy pay?

A

lesser of

actual cost to repair damages or replace building
or
stated limit of coverage under policy

135
Q

If dwelling is insured for less than 80% of replacement cost, what does the policy pay?

A

Greater of

actual cash value (replacement-depreciation)
or
Proportion of loss that is equal to proport of insurance as compared to 80% replacement

136
Q

What is the homeowners coinsurance formula?

A

[Did have/should have] x loss amount]-deductible

137
Q

Does a homeowners policy pay more than standard dwelling coverage?

A

no

138
Q

In a case study, where should you look on a financial statement for more information?

A

Footnotes

CFP Study (6 decks)

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