Risk Managment and Insurance Planning Flashcards
Risk Avoidance
Used when risk cannot be reduced or transferred
ie. deciding not to go bungee jumping or choosing not to drive due to fear of being in an accident
Risk Reduction
Techniques used to reduce the likelihood of loss
ie. security systems, smoke detectors and seatbelts
Risk Transfer
Shifting financial consequences associated with a risk to a third party
ie. buying insurance
Risk Retention
Intentionally or unintentionally retaining the risk of loss, some or all, from exposure
ie. self insuring or insurance deductibles
HSA (who, when and tax advantages)
Individuals and employers can contribute (typically individuals)
If you are insured on the first day of the last month of the tax year you can make full HSA contributions for the Tax year
Pre-tax contributions, tax free growth, and tax free distributions (if used to pay for medical). Triple tax advantage
HSA Contribution Limits
Self- $3,850
Family - $7,750
Catch up (55 or older)- $1,000 additional
HSA Uses
Medical and superscription expenses
Includes OTC drugs, Dental, Vision, and qualified LTCi premiums
HDHP- Deductibles and out of pocket maximums
Minimum deductible- self- $1,500
Family - $3,000
Maximum out of pocket -
self - $7,500
Family- $15,000
Cobra
Group plans of 20 or more employees required to extend temporary extension of health coverage in certain circumstances
AKA continuation coverage
Cobra qualifying event
Termination (or reduction in hours)- 18 months (E,S,DC)
Disability through SS- 29 months (E,S,DC)
Employee enrolled in medicare, Divorce or death - 36 months (S,DC)
Loss of dependent status under the plan - 36 months (DC)
Cobra Costs
Costs can be passed on to the beneficiary at a max of 102% of the plan cost
Due monthly
Long-term Care locations (least intensive to most)
Home Maker Services
Home Health Aid
Adult Day Health Care
Assisted living facilities
Nursing home care
Medicare and Long term care
Medicare does not cover LTC
Will pay for a limited time after hospitalization
Days 1-20 - zero co pay
Days 21-100 - Patient pays $200 coinsurance per day
Days 101+ = Patient pays all costs
LTCi - Benefit period
Specific time frame (2 years) or pool of money
LTCi- Elimination Period
Waiting period before benefits kick in
LTCi- Daily Benefit
Maximum insurance will pay per care for care. Set at inception of policy
LTCi- Rider
add on features to the policy. An important one to consider is inflation protection
LTCi- Waiver of Premium
The policy holder does not pay premiums while receiving benefits
LTCi- Renew-ability
Most LTCi policies are guaranteed renewable
Qualified LTCi Requirements
Payable for LTC services only
Must be guaranteed renewable
Does not reimburse for medicare reimbursable expenses
No cash surrender value
Dividends must reduce premiums or increase benefits
Limitations and exclusions are prohibited, except preexisting conditions within 6 months of application
Qualified LTCi Benefits
Benefits are tax free
Premiums are qualified medical expenses for tax purposes
Premiums can be paid from HSA
If premiums are paid by the employer the payments and the benefit are tax free
LTC Benefits triggers
Option 1- Unable to preform 2 of the 6 activities of daily living for 90+ days
Option 2- substantial cognitive impairment
Either must be certified by a doctor
Activities of Daily Living (ADLs)
Bathing
Continence
Dressing
Eating
Transferring on and off toilet
Blindness and unable to walk are not ADLs
Partnership Long-term Care insurance
Partnership between states and insurance companies
Provides asset protection if LTCi benefits are exhausted and insured files for medicaid
Total amount paid under LTCi is added to Medicaid spend down limits and protections
Disability insurance
(Any, Own, Modified, SS)
Any Occ- payable if individual is disabled and can not engage in any occupation
Own Occ- Payable if policy holder can not preform their own occupation
Modified - Own occ to start then changes to Any Occ after a set amount of time
Social Security- Unable to preform any occupation and the condition is expected to last no less then 12 months or result in death
Taxation of Disability Benefits
Employer pay premiums- benefits are taxable to the insured
Employee pays premium with tax free dollars- benefits are taxable
Employer pays but includes the premiums are compensation to the employee - Benefits are tax free
Employee paid with after tax dollars- Benefits are tax free
Term Life Insurance
Lowest premium at issue
No Cash Value
May be renewable
May be convertible to permanent
May be participating (dividends)
Types of Term Life insurance
Level Term- death benefit remains level over the guaranteed term; premiums increase upon expiration of initial guaranteed term
Decreasing term- Level premiums over term, benefits reduce over time (usually connected with debt such as a mortgage)
Annual Renewable- 10, 20, or 30 year term These can also have first to die or second to die riders
Permanent Life Insurance
Higher Premiums than term at issue
Builds Cash Value
Cash value accessible by loans of with drawls
May be participating
Universal Life
Option A- Death benefit remains level
Option B- Death benefit is face amount plus cash value
Whole Life
Guaranteed death benefit
Guaranteed premiums
Variable life insurance policies
All Variable policies:
Cash Value sub-accounts give policy owners investment choices
Variable universal life:
Cash Value not subject to insurance companies creditors
Not held in general account
Life Insurance: Termination Options
Cash Surrender value
Extended term
Reduced Paid-up policy
Cash Surrender Value
The insurance company pays the cash value to the policy owner as a lump sum and the contract ends
Extended Term
The policy owner uses the cash value from their policy to purchase a single payment (premium) term life insurance policy. Benefit stays the same but there is an end to the policy, no residual cash value
Reduced Paid-up insurance
The policies cash value is used to buy a “paid-up” policy. The policy will have reduced death benefits but will retain a cash value that will grow and be used to pay for the new policy
Modified Endowment Contracts (MECs)
Cash Value insurance policy that has failed the 7-pay test
Changes tax treatment of cash distributions while insured is alive
Death benefit is still tax free
7-Pay test
If a policy is fully paid up on or before the 7th year of payments then is fails the 7-pay test and is considered a MEC
Non-MEC vs. MEC Policies
Both- Transfer tax free at death and distributions are taxable as ordinary income
Non-MEC- distributions are FIFO and no penalty for taxable distributions
MEC- Distributions are LIFO and there is a 10% penalty tax for taxable distributions before age 59 1/2
Viatical Settlements
A way for a seriously ill person to get cash by transferring a life insurance policy to a viatical settlement company for cash of a discounted amount of the death benefit
Terminally ill vs. Chronically ill
Terminal- A condition that is expected to result in death within 24 months of doctors certification
Chronically- a person who is unable to preform at least 2 of the 6 ADL for a period of at least 90 days
Viatical Settlment Tax Treatment
Policy Holder (Viator) terminal- excluded from gross income
Chronic- excluded from gross income if used to pay for long term care services
Viatical settlement company- cash settlement plus additional payments is basis, money that is received in excess of basis will be taxable
Buy-Sell: Cross purchase agreement
Transfers business interest among partners.
Advantages- Simple if few owners
death benefit received tax free
increases basis for surviving owners
Disadvantages- If big age difference younger partner pay much more
Difficult when dealing with many owners
Buy-Sell: Entity Purchase agreement
Transfers business interest back to the business using life insurance policy
Advantages- preferred solution for business with many partners
Death benefit tax free to the business
Business pays policy premium
Disadvantages- No increase basis for surviving owners, causing more gains upon future sales
Buy-sell: wait and see agreement
Gives flexibility in transferring of business interests
step 1- business has 1st option to purchase
step 2- surviving partner(s) have the option to purchase if business waiver option or purchased less then half
Step 3- Business is required to purchase remaining stock
Annuities Tax Treatment
LIFO
10% penalties for withdrawls before 59 1/2
Tax exclusion basis formula Basis/Expected payouts=Tax free portion
Tax exclusion ends when full basis has been recovered
Annuity exclusion for life (Dates)
December 31 1986
before this date exclusions from annuities continues even after full basis was recovered
Annuity FIFO/LIFO switch dates
August 14, 1982
Annuity contract dates before this withdrawals are FIFO
Annuity contracts signed after this date are LIFO
Types of Home Owners Insurance
Property- Type 1
Liability- Type 2
Home Owners Insurance Property
A- Address
B- Backyard
C- Crate and Crap
D Damaged/Destroyed Digs
Home Owners Insurance: Liability
E- Exposure to legal Action
F- Funds for others Fractured Femurs
Home Owners Insurance: Named Peril
Covers specific perils or “causes of loss” that are covered. Everything else is not covered
IF not named…Not covered
Home Owners Insurance: Open Peril
Coverage specifically excludes perils or “causes of loss” that will not be covered. Everything else is covered
Coverage is open to everything except what is named
Home Owners Insurance Form
HO-02- Broad Form- Basic Coverage
-03 Special Form- Better Coverage
-04 Contents Broad Form- Renters insurance
-05 Comprehensive- BEST HO coverage
-06- Unit owners form- condo/co-op (studs in)
08- Modified Coverage- older/Historic Homes only- less coverage
Home Owners Co-Insurance Requirements
Minimum 80% of replacement cost
Home Owners Co-Insurance Formula
[(Did Have/ Should Have) * Loss amount] - deductible
Automobile Insurance Types
PAP (personal automotive policy)- part A- Liability
Part D- Damage to your auto
Automobile Coverage Part A
Single Limit- Amount is a single dollar cap per collision
Split Limit- Bodily Injury (max per person)/ Bodily Injury (max per collision)/ Max property damage per collision
Automobile Part D
Collision- Damage to vehicle caused by an accident
Comprehensive - All other physical damage to the auto
*Hitting a deer is comprehensive not Collision
Personal Liability Umbrella Policy (PLUP)
Critical addition to clients property and casualty insurance and significantly enhances liability coverage for a small premium
*in case study, if a client doesn’t have a PULP protection a correct answer should recommend this addition
PULP requirements
Typically minimum Coverage above the state/federal legal minimums
Auto- 300k/300k/100k or
250k/500k/100k
Homeowners - $300k section E liability coverage
PULP- Does/ Does not Cover
Typically does cover cost of defense
Does not cover insured’s business interests
Does Not cover anything until underlying policy is exhausted
