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Victor's Personal CFP > Standards and Insurance > Flashcards

Standards and Insurance Flashcards

For trouble areas in my weekly review

1
Q

What is a PER

A

Professional Eligible for Reinstatement

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2
Q

Elements of Section 1 of Rules of Conduct

A

“Defining the Relationship”

  1. 1 - Mutual agree upon the services
  2. 2 - Discuss obligations (goals, needs and objectives), Compensation, Proprietary products, other entities to meet product needs.
  3. 3 Written agreement (Parties, date, terminates, services to be provided)
  4. 4 FIDUCIARY!
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3
Q

Elements of Section 2

A

“Information Disclosed to P. Clients or Clients”

  1. 1 - Certificant shall not lie and stuff, leave things out, etc.
  2. 2 - Client shall disclose… Comp, conflicts, areas of expertise, must put services in writing (if planning). . . ADV works here.
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4
Q

2 Factors for Buying vs. Renting

FHA maximum mortgage limits

A

Time and Taxes.
Higher the tax bracket, more advantageous for buying.
Shorter time frames good for renting

FHA Loan max mortgages between 270 and 730K

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5
Q

Mortgage Interest Deduction Rules

A

750 JNT, 375 Single interest deductible.

Old mortgages are grandfathered UNLESS you refinance. (so if you have a jumbo, don’t refinance)

Old mortgage loans 1MM limit still deductible

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6
Q

Shortcut for Mortgage Interest / After Tax Problems

A

Calculate interest as if it were 100% mortgage interest in the first year and do the calculation (no principle, e.g. interest rate X mortgage balance).

Then pick the next highest number!

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7
Q

EE Education Bonds

A

Parents own them
Phaseouts on tax sheet

Can’t be in a UTMA or UGMA for tax free interest.

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8
Q

Kiddie tax goes how long?

A

Until 24, if a full-time student etc.

Until 19 if not

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9
Q

The Fed sets which interest rate?

A

DISCOUNT rate (not fed funds… that’s bank to bank overnight)

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10
Q

Types of Bankruptcy

A

Chapter 11: Those who don’t qualify for 13, reorg, because too much debt, or not enough income… ugly

Chapter 13: Reorganization. Creditors can’t harass. Debtor can keep assets

Chapter 7 (HIGHLY TESTED) - Permits debtor to claim either Federal or State exemptions (33 states have opted out)

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11
Q

Chapter 7 and Education Savings Accounts

A

Must have been in accounts for 2 years to be protected for Chapter 7. Basically a 2 year look back.

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12
Q

Bankruptcy and Fitness Standards

A

One bankruptcy generally doesn’t deem an individual to fail to satisfy board requirements.

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13
Q

Suspension Rules

A
  • Time not to exceed 5 years
  • Must publish and identify in press release
  • Certificant may qualify for reinstatement
  • The suspended person must notify clients and their employer of the board suspension
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14
Q

Appeal Window for Suspension

A

You have to file an appeal within 30 days, or the ruling is permanent

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15
Q

When NPV is 0, what is IRR?

A

SAME AS REQUIRED RATE

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16
Q

Parts of the Insurance Contract

A

DDICE

Declarations
Definitions
Insuring Agreements
Conditions (duties and rights of both parties)
Exclusions
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17
Q

Homeowners Shortcut

A

A (Abode)
B (Buildings)
C (Contents)
D (Demnity, aDditional) “Loss of use”

E (Enemies)
F (First Aid) - for others

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18
Q

Replacement Cost vs. ACV

A

ACV is Replacement - Depreciation

Replacement cost is preferred, only for buildings though.

Personal property is covered under ACV

Scheduled personal property is on an “Appraised” value basis (jewlers, etc.)

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19
Q

HO 3 Percentages

A

A Open
B Open 10% of A
C Broad 50% A
D Open 30% of A

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20
Q

Amount of Coverage for Partial Property Loss

A

Greater! of ACV ( or Replacement Cost Formula (Insurance Carried / Insurance Required (using RC) * loss, less deductible

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21
Q

PAP Which parts for who?

A

A - Liability (others)
B - Medical (ME)
C - Uninsured (others)
D - Damage to auto (ME)

B and D are for MEEEEEEE

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22
Q

COBRA, which companies pay, and who gets benefits?

A

Companies: If total employees (NOT covered) including PT exceeds 20

Who gets?: You have to be covered by health insurance to get them

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23
Q

Disability Benefits Taxation - S Corp

A

2% owners, tax free benefits. Same as a 162 bonus plan basically.

(even though they deduct it, but then have to pay it later)

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24
Q

What’s it mean to be “Qualified” LTC

A

Premiums Deductible:

  • after 1996, premiums deductible as itemized medical (subject to 7.5% floor). 51-60, 1560/year, 61-70 $4,160/year (older you get, more you can deduct
  • Self employed health insurance/LTC, same “Portion” deductible on front of 1040 (no floor)

OLDER YOU GET, MORE YOU CAN WRITE OFF)

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25
Q

PQs and NTQ

A

NTQ LTC policies have a “Medical Necessity” trigger. Not deductible premiums.

PQs are partnership policies with the state. Mass Lien law basically.

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26
Q

When is 1035 Exchange Not ALlowed?

A

Annuity to Life Insurance NO

If Insured changes NO

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27
Q

Insurance Cash Value Restrictions

A

If “General Account” policy, this can happen.

If Variable or “Separate Account” policy, you’re safe.

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28
Q

Incontestible Period and Suicide Clause Period

A

2 Years

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29
Q

Reinstatement of Policy Requirements

A

Must be within stated time period

PROOF OF INSURABILITY

30
Q

2 Waiver of premium Options

A

With UL / VUL policies specifically. Disability benefit can pay either

(1) Mortality & Administrative only (Cash Value stagnates)
(2) Full premium!

Whole life pays whole premium.

31
Q

Dividend Options

A

CRAPO

Cash
Reduced Premium
Accumulate w/ Interest
Paid-up Additions
One year term (5th Dividend)
32
Q

NAIC Model Regulation Highlights

A

Non-variable policies only

  • Copies of illustration must be signed by applicant ang agent, and sent with policy application.
  • Can’t be represented as anything but Life Insurance
  • “Vanish” is prohibited as a word in the policies

Illustrations:
- Must be labeled “Life Insurance Illustration”

33
Q

NAIC does not do what?

A

No legal power over insurance regs. Makes recommendations, or suggestions (to state comissioners)

34
Q

Accelerated Benefits vs. Viatical

A

Both tax free benefits to ill insured.

Accelerated Benefits better, because unused face goes to beneficiaries tax free. (you still get full face ultimately)

35
Q

Viatical basis

A

Viatical sales price + Add’l premiums paid is tax free.

Everything else is ordinary income to Viatical company. (logical)

36
Q

Life Settlement (Not Terminally Ill, Over 65 usually)

A

LTCG is the right answer. (generally)

Between Prem paid and CV = OI, CV to settlement is Cap Gains

37
Q

Policy Lapse Taxation

A

Basis = Premiums Billed - Dividend prem reductions

Amount over basis (CV) is taxable as Ordinary Income.

38
Q

Death Benefits Taxation

A

Tax Free EXCEPT for Transfer for Value rules.

39
Q

MEC Taxation

A
  • LIFO for Distributions (like Annuity) - then tax free return of premium
  • 10% penalty for earnings taken < 59.5
  • Dividends taxable as income if received in cash, used to reduce premiume, or retained to pay policy loan.

(only post-1988)
Once, always a MEC
For grandfathered, if you increase face >150K, or need to prove insurability, you lose grandfathered status.

40
Q

Non-Funded Buy/Sell Options

A

Could be:

  • Naked promise to pay (stroke a check)
  • Installment Sale
41
Q

Formula for Cross-Purchase number of policies

A

N * (N-1)

42
Q

Disability Buy/Sell Differences

A

Entity Purchase: For Life, his family gets 500K income tax free (because of step-up in business basis). For disability, he has to pay capital gains tax (no step-up in business interest)

Cross-purchase: Both disability and Life get basis step-up for the surviving / non-disabled person.

43
Q

Key Employee life insurance. Estate consequences?

A

Employee has no incidents of ownership. Not included in Estate

44
Q

Transfer for Value Consequences

A

Policy is taxed like a Viatical for someone non-terminal (proceeds in excess of consideration paid, and premiums paid, are Ordinary Income)

Exceptions are transfers to the insured, partner / partnership, Corporation with insured as officer, divorce.

Insured should buy the policy, then gift to kids (gifts don’t trigger it)

45
Q

Spendthrift Annuity Payout Options

A

Specified Period (term certain)

Specified Income (dollar certain)

46
Q

How are Annuities Taxed?

A
  • Withdrawals are taxed at LIFO, with any earnings B4 59.5 10% penalty
  • Basis comes out tax and penalty free (after all earnings)
  • Exceptions:
    (1) Distribution over the life of the annuitant
    (2) Contributions before 1982 are still FIFO
47
Q

Annuity Taxation for Non-Natural Citizens

A

Non-natural persons (trusts, corporations, etc.) do NOT get tax deferral. Accumulation is treated as earned in that year (ordinary income)

As such losses are ORDINARY

48
Q

When do companies lose the 50K life insurance exemption?

A

When plans are discriminatory or “Carve Outs”.

Taxed per “Table 1” rate, as COMPENSATION (FICA / FUTA on top)

49
Q

How is “Table 1 Rate” given for above 50K taxation?

A

.29 cents / 1000 of face coverage over 50K PER MONTH

Anything above is W2 income (FICA / FUTA included)

50
Q

Do FSAs pay taxes?

A
  • No FICA / FUTA
51
Q

General Rules for FSA

A
  • Use it or Lose It (usually 12/31, but could have 2.5 month extension, or $500 rollover provision. NOT BOTH)
  • No LTC, No Concurrent HSA
52
Q

Dependent Care FSA Differences

A

5K max, for kids under 13

  • Both spouses must work to qualify (unless spouse is disabled or a student) (if one spouse earns less than 5K, then benefit is limited to earnings)
  • 12/31 you lose unspent portion. No extension or rollover
  • Education, overnight camps, field trips, clothing etc. not included / allowed payments
53
Q

Who pay to maintain a FSA

A
  • Employer mostly

- Experienced gains also help pay (forfeitures from unused)

54
Q

Dependent Care credit

A
  • 20% of the first 10K of expenses
  • Kids under age 13
  • Portion paid with FSA ineligible
55
Q

Calculator Mode for Retirement problems

A

Use beginning mode / think beginning of the year for retirement income (so it can be spent throughout the year)

56
Q

What’s a VEBA

A

Voluntary employees’ beneficiary asociations (501c9)

  • Employers can deduct benefits (except for deferred compensation) (employees can contribute too)
  • Death benefits, medical expense benefits, child care, severance, education, disability, legal expenses, unemployment)

Unclear whether or not these amount are included in employee income. I don’t think so…

57
Q

Prepaid Legal Services taxation?

A

Benefits are generally taxed as Comp tot he employees.

58
Q

Dental and Vision Taxation

LTC Taxation

A

Dental is deductible by employer and tax free to employee.

Vision is deductible, but taxable to employees per a schedule.

LTC premiums paid by employers are includible in employee income

59
Q

For a couple with no money, not married, and a baby, what is top priority between Life Insurance, Medical Insurance, Emergency Fund, Guardianship, or College Funding

A

Definitely Medical insurance, but guardianship is a close 2nd.

60
Q

What is rule 2.1 in the Code of Conduct?

A

Look it up!

61
Q

What are the basics of a HRA

A
  • Employer-funded, solely
  • Reimburses employees for substantiated medical expenses up to a maximum dollar amount per coverage period
    (Look up more, maybe?)
62
Q

If a question asks for a recommendation, what answers should you eliminate

A

Answers which aren’t actionable recommendations!

63
Q

Key Employee life insurance, Company borrowing rules?

A

Companies can borrow and deduct loan interest on cash values of key employees up to $50,000 per policy.

64
Q

In a transfer for value, is the policy included in the owner’s estate even if it was a temporary ownership.

A

Even if it’s an exception to “Transfer for Value”, and the policy is then transferred to a corporation or to kids, the 3 year rule is triggered (beyond the 3 year, they’re out of the woods)

65
Q

Most important advantage of group life insurance for an employer, over individual policies?

A

Employer is most concerned with Cost (which is less on group, generally, than individual policies)

66
Q

Tax Free Fringe Benefits

A
  • Qualifying day care services (limited)
  • Health Plan premiums for you, spouse, and dependents
  • Up to 50K Life Insurance
  • Company car for working conditions
  • 260/month cap for parking and transit passes
  • Occasional overtime meals, tickets, cab fare, etc.
  • Value of discounts on company products (if they don’t exceed gross profit percentage)
  • Services discounts, limited to 20% of price charged to normal customers.
67
Q

Are Section 125 plans deductible by employer?

A

NO, they’re funded by employee deferrals.

68
Q

Are Legal Reimbursement plans deductible by employer?

A

YES. They’re comp to the employee.

69
Q

Shelly, age 60, bought a 100K limited pay whole life with yearly Premium of 5K. She surrenders the policy after 10 years. Policy values:
Net cash value: 15K
Outstanding Loan: 30K
Dividends Reducing Prems: 10K

What is the tax consequence?

A

Net CV (is net of Loan), so you add NCV + Loan to get Cash Value of 45K

Basis is 50K - 10K for dividend reductions.

45K CV - 40K Basis = 5K of ORDINARY INCOME

70
Q

PAP 100/300/50 Meaning

A

This refers to the Liability (A) coverage

Per Person / Per Incident / Property

All for OTHER people (not your collision / other than collision).

71
Q

Taxation of Viatical Settlements

A

If Terminally Ill:

  • Death Benefit, less price paid, is Ordinary Income (for company)
  • For Terminal Person: Tax Free (<2 years to live)

If a Life Settlement (not terminal):

  • For insured, Premiums Paid - Cost of INsurance = Tax free basis
  • For insured, Basis - Cash Value = Ordinary Income
  • Anything above Cash Value to price paid is Capital Gain.
72
Q

Homeowners Policy Exclusions (pneumonic)

A

OPENN WIF

Ordinance of Law
Power Failure
Earthquake
Neglect
Nuclear hazard

War
Intentional loss
Flood

Victor's Personal CFP (7 decks)

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