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CFP Exam Prep (July 2023) > Risk Managment and Insurance Planning > Flashcards

Risk Managment and Insurance Planning Flashcards

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1
Q

Risk Avoidance

A

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

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2
Q

Risk Reduction

A

Techniques used to reduce the likelihood of loss

ie. security systems, smoke detectors and seatbelts

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3
Q

Risk Transfer

A

Shifting financial consequences associated with a risk to a third party

ie. buying insurance

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4
Q

Risk Retention

A

Intentionally or unintentionally retaining the risk of loss, some or all, from exposure

ie. self insuring or insurance deductibles

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5
Q

HSA (who, when and tax advantages)

A

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

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6
Q

HSA Contribution Limits

A

Self- $3,850
Family - $7,750
Catch up (55 or older)- $1,000 additional

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7
Q

HSA Uses

A

Medical and superscription expenses

Includes OTC drugs, Dental, Vision, and qualified LTCi premiums

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8
Q

HDHP- Deductibles and out of pocket maximums

A

Minimum deductible- self- $1,500
Family - $3,000

Maximum out of pocket -
self - $7,500
Family- $15,000

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9
Q

Cobra

A

Group plans of 20 or more employees required to extend temporary extension of health coverage in certain circumstances

AKA continuation coverage

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10
Q

Cobra qualifying event

A

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)

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11
Q

Cobra Costs

A

Costs can be passed on to the beneficiary at a max of 102% of the plan cost

Due monthly

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12
Q

Long-term Care locations (least intensive to most)

A

Home Maker Services
Home Health Aid
Adult Day Health Care
Assisted living facilities
Nursing home care

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13
Q

Medicare and Long term care

A

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

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14
Q

LTCi - Benefit period

A

Specific time frame (2 years) or pool of money

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15
Q

LTCi- Elimination Period

A

Waiting period before benefits kick in

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16
Q

LTCi- Daily Benefit

A

Maximum insurance will pay per care for care. Set at inception of policy

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17
Q

LTCi- Rider

A

add on features to the policy. An important one to consider is inflation protection

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18
Q

LTCi- Waiver of Premium

A

The policy holder does not pay premiums while receiving benefits

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19
Q

LTCi- Renew-ability

A

Most LTCi policies are guaranteed renewable

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20
Q

Qualified LTCi Requirements

A

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

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21
Q

Qualified LTCi Benefits

A

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

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22
Q

LTC Benefits triggers

A

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

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23
Q

Activities of Daily Living (ADLs)

A

Bathing
Continence
Dressing
Eating
Transferring on and off toilet

Blindness and unable to walk are not ADLs

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24
Q

Partnership Long-term Care insurance

A

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

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25
Q

Disability insurance
(Any, Own, Modified, SS)

A

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

26
Q

Taxation of Disability Benefits

A

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

27
Q

Term Life Insurance

A

Lowest premium at issue
No Cash Value
May be renewable
May be convertible to permanent
May be participating (dividends)

28
Q

Types of Term Life insurance

A

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

29
Q

Permanent Life Insurance

A

Higher Premiums than term at issue
Builds Cash Value
Cash value accessible by loans of with drawls
May be participating

30
Q

Universal Life

A

Option A- Death benefit remains level
Option B- Death benefit is face amount plus cash value

31
Q

Whole Life

A

Guaranteed death benefit
Guaranteed premiums

32
Q

Variable life insurance policies

A

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

33
Q

Life Insurance: Termination Options

A

Cash Surrender value

Extended term

Reduced Paid-up policy

34
Q

Cash Surrender Value

A

The insurance company pays the cash value to the policy owner as a lump sum and the contract ends

35
Q

Extended Term

A

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

36
Q

Reduced Paid-up insurance

A

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

37
Q

Modified Endowment Contracts (MECs)

A

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

38
Q

7-Pay test

A

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

39
Q

Non-MEC vs. MEC Policies

A

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

40
Q

Viatical Settlements

A

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

41
Q

Terminally ill vs. Chronically ill

A

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

42
Q

Viatical Settlment Tax Treatment

A

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

43
Q

Buy-Sell: Cross purchase agreement

A

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

44
Q

Buy-Sell: Entity Purchase agreement

A

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

45
Q

Buy-sell: wait and see agreement

A

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

46
Q

Annuities Tax Treatment

A

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

47
Q

Annuity exclusion for life (Dates)

A

December 31 1986
before this date exclusions from annuities continues even after full basis was recovered

48
Q

Annuity FIFO/LIFO switch dates

A

August 14, 1982
Annuity contract dates before this withdrawals are FIFO
Annuity contracts signed after this date are LIFO

49
Q

Types of Home Owners Insurance

A

Property- Type 1

Liability- Type 2

50
Q

Home Owners Insurance Property

A

A- Address
B- Backyard
C- Crate and Crap
D Damaged/Destroyed Digs

51
Q

Home Owners Insurance: Liability

A

E- Exposure to legal Action
F- Funds for others Fractured Femurs

52
Q

Home Owners Insurance: Named Peril

A

Covers specific perils or “causes of loss” that are covered. Everything else is not covered

IF not named…Not covered

53
Q

Home Owners Insurance: Open Peril

A

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

54
Q

Home Owners Insurance Form

A

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

55
Q

Home Owners Co-Insurance Requirements

A

Minimum 80% of replacement cost

56
Q

Home Owners Co-Insurance Formula

A

[(Did Have/ Should Have) * Loss amount] - deductible

57
Q

Automobile Insurance Types

A

PAP (personal automotive policy)- part A- Liability
Part D- Damage to your auto

58
Q

Automobile Coverage Part A

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

59
Q

Automobile Part D

A

Collision- Damage to vehicle caused by an accident

Comprehensive - All other physical damage to the auto

*Hitting a deer is comprehensive not Collision

60
Q

Personal Liability Umbrella Policy (PLUP)

A

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

61
Q

PULP requirements

A

Typically minimum Coverage above the state/federal legal minimums
Auto- 300k/300k/100k or
250k/500k/100k

Homeowners - $300k section E liability coverage

62
Q

PULP- Does/ Does not Cover

A

Typically does cover cost of defense

Does not cover insured’s business interests

Does Not cover anything until underlying policy is exhausted

CFP Exam Prep (July 2023) (6 decks)

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