CFP - Insurance Planning

Identify the three stages in the life-cycle model

1. Asset accumulation phase 2. Conservation/Risk Management Phase 3. Distribution/Gifting Phase

List some of the services not covered by LTC Insurance

1. Services during the elimination period (up to six months) 2. Pre-existing conditions (up to six months) 3. Mental and nervous disorders However, they must cover serious biological disorders such as Alzheimer's, schizophrenia. 4. Care provided by family members or loved ones. 5. Some states allow exclusion of: Alcohol and drug addition or Suicide (attempted)

What are the two ways that long-term care insurance policies will provide coverage for long-term care costs?

1.) Benefits are provided for a fixed period of time 2.) Fixed dollar amount is available for the payment of long-term care benefits.

Differentiate between actual cash value, replacement cost and appraised value.

Actual cash value: Represents the replacement cost less the depreciated value of the property. Replacement Cost: Represents the amount to repair or replace property, without any deduction for depreciation. Appraised (or agreed upon) value: When items are hard to value or when the insured owns property that exceeds standard limits (typically jewelry, art, furs, etc.)

Explain Adverse Selection

Adverse Selection is the tendency of those that most need insurance to seek it while those with the least perceived risk avoid paying the premiums by not buying insurance.

What are the characteristics of an Flexible Premium Deferred Annuity (FPDA)?

Allows insured to vary the premiums paid. Retirement income is a function of total premiums paid.

Highlight the two reasons that explain why group health insurance is the most popular type of health insurance.

Because most working adults get their coverage by participating in their employers group health plan.

Identify the purpose of Coinsurance

Coinsurance exists primarily in property insurance and encourages insureds to cover their property to at least a stated percentage of the property's value, or else suffer a financial penalty.

What happens if insured commits suicide and has a life insurance policy.

Coverage is excluded if suicide committed within one or two years of purchasing the policy. If suicide within exclusion period, premiums are returned.

Identify the typical sections of an insurance contract and give examples of each section

Definitions of terms used in the contract (Ex. You, Your: Refers to the owner of the policy) Declarations: Describes which property or person is being covered. Description of what is insured Perils covered: Exclusions: Excludes certain perils (War, Flood, etc.) Conditions: Requires the insured to perform certain duties (notify in the event of a loss).

Determine how Disability befits are taxed

If the insured paid the premiums with after-tax dollars the benefits received under the policy will not be subject to income tax. Benefits provided under a policy paid for with pre-tax dollars or by the employer are subject to income tax. If premium cost is shared, benefit is taxable on a pro-rata basis. Partnerships and S corps generally cannot deduct premiums on partners/owners. Benefits to partners/owners are tax free since they effectively pay the premium.

Identify the three levels of state regulation of the insurance industry.

Legislative Judicial Executive or State Insurance Commissioners

What are the characteristics of a Single Premium Deferred Annuity (SPDA)?

Lump sum payment of premium. Can use proceeds from a life insurance policy to purchase a single premium annuity.

Identify the different payment options for life insurance benefits.

Lump-Sum Payment Interest Only Fixed Amount Annuity Life Income Annuity - annuity payment based on benefit amounts and beneficiaries age. Fixed Period Annuity Life Income W/ Period Certain Annuity Joint & Last Survivor Annuity

Differentiate between moral, morale and physical hazards.

Moral: based on a character flaw, such as: Filing a false claim. Morale: the indifference created because the person is insured, such as leaving car unlocked Physical Hazard: a tangible condition that increases the probability of a peril occurring, such as icy roads, poor lighting, defective equipment

Explain the two types of renewability with Disability Insurance Policies

Non-cancelable: policy cannot be cancelled and insured has the option to renew for the period (or age) stated. Premium cannot be increased. Guaranteed Renewable: Insured is guaranteed the option to renew, but premium may increase on a class basis.

Distinguish between pure risk and speculative risk

Pure Risk: The chance of a loss or no loss occurring. With pure risk, there is no chance of experiencing a gain. Pure risk is insurable. Ex.) Either your car is in an accident and damaged or it is not. Speculative Risk: Chance of loss, no loss or a profit. Speculative risk is the risk that an investor takes when buying a stock or an entrepreneur when starting a business. Insurance is not available for speculative risk.

Difference between a Rider and an Endorsement

Rider: Change to an existing PROPERTY insurance policy Endorsement: Change to a LIFE OR HEALTH insurance policy.

Define Incontestability in insurance

States that once the policy has been in force for a period of time (typically two years), the insurer may not cancel the policy if they later discover a material misrepresentation, omission, or concealment.

Determine if the NAIC has regulatory power

The National Association of Insurance Commissiorners (NAIC) assist state insurance regulators in serving the public and therefore DOES NOT have regulatory power.

Identify what is insurable interest and the difference between insurable interest in property insurance vs. life insurance.

The Principle of Insurable Interest asserts that an insured must suffer a financial loss is a covered peril occurs, otherwise no insurance can be offered. Insurable interest for property must exist both at the inception of the policy and at the time of loss. Insurable interest for life insurance need only exist at the inception of the policy.

Identify the goals of the NAIC (National Association of Insurance Commissioners)

The goals are to: Protect the public Promote competition Promote fair treatment of insurance consumers Promote the solvency of insurance companies Support and improve state regulation of insurance.

When is there a taxable event triggered when exchanging between life insurance contracts and annuities?

The only time a taxable event is created is when an annuity is exchanged for a life insurance policy. An annuity is taxable when annuitized and Uncle Sam doesn't want a taxable product (annuity) being converted to a tax free product (life insurance). Any exchange in life to life, life to annuity or annuity to annuity are all tax free.

Define the Parol Evidence Rule

The rule states that "what is written prevails." Oral agreements that are not reflected in the written contract are not valid.

Define Out-of-Pocket Maximum

The sum of the deductible and the insured's portion of the coinsurance.

Identify the difference between agents and brokers.

Agents are legal representatives of an insurer and act on behalf of an insurer. Agents are only permitted to sell policies written by their company. Brokers are legal representatives of the insured and act in the best interest of the insured. A broker may sell insurance policies from any one of a number of different insurance companies.

When can long-term care benefits be triggered?

Benefits can be triggered when unable to performance 2 of 6 activities for daily living (ADL) for at least 90 days. ADLs include: Eating Bathing Dressing Transferring Toileting Continence "Wake Up and get out of bed (transferring), put on clothes (dressing), go to the restroom (toileting) and urinate (continence) then take a shower (bathing) and eat breakfast (eating)."

Explain the different coverage periods for different individuals under the COBRA plan.

COBRA only applies to employers who offer a group health plan and have at least 20 employees. 18 Months of Coverage: Termination of employment or moving from full-time to part-time status. 29 Months of Coverage: The employee meets the Social Security definition of disability. 36 Months of Coverage: Death of the covered employee, Divorce of a covered employee, Loss of dependent status, Eligibility for Medicare.

What are the characteristics of an Immediate Annuity?

Payments to annuitant begin immediately. Purchased with one single lump sum. Annuitant - Insured who receives income payment under an annuity contract.

Identify the difference between stock insurers and mutual company insurers.

A stock insurer is an insurance company that issues stock and is owned by shareholders with the intent of earning a profit. A mutual company insurer is an insurance company that is owned by the policyholders, not shareholders.

Understand the "Unholy Trinity"

An unholy trinity is when the insured, policy owner and beneficiary are different people. Example would be a father is the insured, mother is the owner and child is the beneficiary.

Explain how life insurance benefits could be taxable if transferred.

Death benefits become taxable to transferee to the extent proceeds exceed basis. Example: Joe owes Mike $100,000. Joe gives Mike a policy for $1,000,000 with a cash value of $40,000. Mike could cash it in and take a $60,000 loss. Mike could collect if Joe dies and he would have a taxable gain of $900,000.

Identify typical perils covered under a personal homeowner's policy.

Fire, Lightening, Windstorm, Hail, Riot, Falling Objects, Weight of Ice or snow, Smoke, Explosion, Theft

What are some of the Required Features that Must be Offered in a long-term care policy?

Inflation protection Non-forfeiture Benefit: Will be the greater of premiums paid or 30x daily skilled nursing home benefit at the time the policy lapsed. Rejection of these features must be in writing:

If the insured surrenders the policy prior to death, the insured may take the cash value as?

Lump Sum: The amount above premiums paid is ordinary income. Interest Only: Interest is taxable as ordinary income. Installment Payments: Portion is a return of principal and interest. The interest portion is taxed as ordinary income.

Differentiate between various methods to regulate insurance rates

Prior Approval Law: Insurance company must file the rate increase request with the State's Insurance commissioner's office. File & Use Law: Permit an insurance company to file the rate increase and immediately implement the rate insurance. The commissioner may later deny the increase and the insurance company would have to rebate the premiums. Use & File Law: Insurer can increase rates, but they must file the rate increase within a specific time period. Open Competition: Allows insurers to set their own rate, presuming that supply and demand will determine the appropriate rates for various insurance products.

Explain the pros & cons of a Entity Purchase Buy/Sell Agreement using life insurance.

Pros: Company pays and there are fewer policies needed. Cons: No increase in surviving partners basis.

Describe the difference between straight whole life, limited pay whole life, modified whole life and variable whole life insurance.

Straight Whole Life: Owner pays a specified level premium every year until death (or age 100 or 120). Limited Pay Whole Life: Policies are paid over a payment period (10, 20, 30 years). After the payment period the policy is considered paid-up and no additional premium payments are due. Modified Whole Life: Policies have lower premiums initially (often 3-5 years) and increase after the initial period. Policies give a person the opportunity to purchase a whole life policy with initial lower premiums that increase as the insured's income increases. Variable Whole Life: Have fixed premiums and allow the cash value to be professionally managed by the insurance company or outside investment manager.

Identify the difference between subjective and objective risks.

Subjective Risk: Differs based upon an individual's perception of risk. An example would be: two guys go out drinking, five drinks each, one gets pulled over for DUI. Next time out, the guy that got pulled over has 1 drink and calls a cab. The other guy has 5 drinks again and drives home. Subjective risk is how you perceive the actual risk. Objective Risk: Does not depend on an individual's perception. Objective risk measures the difference between an actual loss from expected loss. Example: Before you can start your car, you blow into a breathalyzer. If you are below the legal limit, your car will start. If you are over the legal limit, your car will not start. Objective risk is measurable.

Explain how FSAs can assist employees with health care cost.

The FSA, is commonly used by employers as an employee benefit that permits employees to defer income to the FSA to pay for health care expenses with pre-tax dollars. Employers may offer either a grace period of 2 months and 15 days to spend unused funds from the prior year OR allow up to a $500 rollover to the subsequent year. They may not offer both.

What is the time frame of a "grace period" with life insurance and what happens if the insured passes during the "grace period"

The grace period is typically 31-61 days after the premium due date in which policy remains in force. If insured dies during grace period, insurer assumes insured would have renewed. The insurer pays the benefit and deducts the premium.

Describe the income tax benefits that can be arranged with life insurance planning

The growth of the cash value and the death benefit are exempt from federal taxes. Policy owners can also withdrawal the basis in the policy without triggering federal taxes. The policy owner can also take loans against the cash value of the policy tax-free, as long as the policy is in force at the date of the death. The death benefit on the policy will be reduced by the amount of the outstanding loan.

Identify the purposes of a deductible.

The purpose of a deductible is to reduce the filing of small claims, reduce premiums, and eliminate moral and morale hazards.

List some of the optional benefits that could be included in LTC policies but are not required.

Waiver of premium while collecting benefits Refund of unearned premium if canceled and that the beneficiary receives upon insured's death Restoration of benefits: The maximum policy benefit is restored if no claims for a specified period of time following a claim Bed reservation: When leaving a nursing home to go into a hospital, some policies will pay to reserve the nursing room for a specified number of days. Shared benefits: Some policies allow access to spouse's benefit upon exhaustion of insured's benefit.

What is the maximum stay in a skilled nursing care facility for those covered by Medicare?

100 days

Explain Actual Cash Value & Replacement Cost with Coinsurance of a Homeowners policy.

Actual Cash Value - Represents depreciated value of the property. Replacement Cost - Amount necessary to purchase, repair or replace with similar quality at current prices. The insured must carry 80% of the replacement cost at the time of the loss. The coinsurance formula is: (Insurance Purchased/CoInsurance) X Amount Loss Ex) John owns a house valued at $500,000. The replacement cost of the house is $400,000 and the value of the land is $100,000. He purchased $250,000 of insurance with a coinsurance requirement of 80%. A tornado caused $100,000 in damage to his house. If John has a $500 deductible, how much will the insurance company pay? ($250,000/(80%X$400,000)) X $100,000 $78,125 - $500 (deductible) $77,625 - Amount insurance would pay

Identify the distinguishing characteristics of insurance contracts

Adhesion: Take it or leave it - no negotiation of premiums. Aleatory: The dollar amount exchanged between the insured and the insurer are unequal. Unilateral: Only one promise made, by the insurer to pay the beneficiary in the event of a covered loss. Conditional: The insured must abide by all the terms and conditions of the contract if the insured intends to collect under the policy.

List the 4 parties in an annuity contract.

Annuitant - Individual upon whose life the contract is dependent. It is generally the life expectancy of the annuitant that affects the timing and amount of payout under the contract. Beneficiary - Entitled to a death benefit if provided under terms of the annuity contract. Owner - Annuitant, beneficiary, trust or company Insurance Company - Issues the contract and is responsible for paying benefits.

What happens to a widows social security benefits when they remarry?

Benefits cease at remarriage unless 60 or older

What HO Form is designed for Historical Buildings?

Covers repair rather than replacement cost, basic perils covered Designed to cover losses to structures where the replacement cost for the home exceeds the market price for the home.

Explain an Equity Index Annuity

Equity-indexed annuities credit interest using a formula based on changes in the index to which the annuity is linked. The formula determines how the additional interest is calculated and credited to the contract. An equity indexed annuity is a compromise between a variable annuity and a straight fixed annuity having little downside risk and modest upside potential. An equity indexed annuity, like other fixed annuities also promises to pay a minimum (guaranteed but low) interest rate. This minimum rate guarantee is paid regardless of whether the index-linked interest rate is lower than the guaranteed rate. The two features of an equity indexed annuity contract that have the greatest effect on the amount of additional interest that may be credited to the contract are: The indexing methods specified in the contract. The participation rate. Index Term: Typically ranges from 1-10 years Interest is credited at the end of the term

Identify the three major credit reporting agencies

Experian Equifax TransUnion

What HO Form is the typical Renters Insurance?

Form HO 4 Designed for tenants, and provides protection for furniture, clothes, and other personal property against the same perils as HO2 Broad Form.

Define the two primary types of group health insurance.

Group Basic Medical Insurance: Insurance covers hospital, physician and surgical bills, but typically has low policy limits. Group major medical insurance: Supplements basic medical coverage by paying for a wider array of services and increasing policy maximums.

What happens when there is a misstatement of gender or age on a life insurance policy.

Misstatement of age on application will not void the contract. The benefit is paid, but adjusted up or down by what premiums would have been if age was accurately stated. Younger persons and women pay less for life insurance.

Describe the characteristics of the investments in a Fixed Annuity.

Most conservative type of annuity-guaranteed minimum rate of return. Actual return may be greater than minimum guaranteed rate of return, but never less. Initial rate is guaranteed for a specified period of time. Renewal rate-takes effect after initial rate

What is the Social Security Death Benefit?

One-time $255 death benefit payment Paid to deceased worker's surviving spouse, or minor child (if no spouse).

What does Homeowners insurance Coverage C cover?

Personal Property Includes furniture, electronics, clothing, paintings, etc. Limits are placed on certain personal property losses, e.g. cash, coin collections ($250), jewelry ($1,500). Use a scheduled personal property rider to obtain additional coverage at appraised value. Coverage for small boats is available, but better to purchase separate policy. Limit is usually 50% of Coverage A, but be sure to read the policy. Coverage is effective regardless where your property is located. Need an endorsement for personal property to have replacement cost rather than actual cash value. If you have a loss you want a new t.v., not the depreciated value of your TV. Need a rider for high value jewelry because of low policy limits. The following personal property items are specifically excluded from coverage in package policies: -Animals, birds, and fish Articles separately described and specifically insured -Motorized land vehicles used off premises -Property of roomers or boarders not related to the insured -Aircraft and parts -Furnishings on property rented out to others -Property held as samples, held for sale, or sold but not delivered -Business data, credit cards, and funds transfer cards -Business property held away from the residence premises

How to calculate a clients Primary Insurance Amount (PIA)

Sum of three separate percentages of the AIME 90% of the first $960 32% of the AIME over $960 and less than $5,785 15% of the AIME that exceeds $5,785 Maximum PIA = $3,011 at Normal Retirement Age Calculated at age 62 PIA has a COLA adjustment

Who qualifies for survivor benefits from Social Security

Widow or Widower (60 and older, Over 50 and disabled, Caring for a child under age 16, Caring for a child who was disabled before age 22) Unmarried Child (Under 18, Under age 19 and in high school, Age 18 or older and disabled before age 22) Dependent parents of the deceased worker (These are income tax dependent parents)

What are General Exclusions for all Homeowners Policies?

*Students must know* 1. Movement of ground - earthquake or landslide 2. Damage from rising water - Floods, water from underground and sewer backup 3. Intentional acts - Burning down your own house 4. Neglect - Must take reasonable means to save property and mitigate loss 5. War or nuclear hazard -Including nuclear power plant 6. Ordinance or law - Loss resulting from regulations regarding construction or demolition 7. Power failure - Such as a power plant failure that causes a loss

Identify the requisites for an insurable risk

1. A large number of homogenous exposure units - Homeowners insurance for FL residents should be separate from other states because of their unique risks (hurricane). 2. Losses must be accidental from insured's view - Cannot insure moral hazards, premiums would skyrocket. 3. Losses must be measurable and determinable - It is easy to determine the value of a house or auto, it is difficult to determine the amount of cash in a wallet, therefore coverage is limited in terms of both money and time. 4. Losses must not pose a catastrophic risk for the insurer - An insurer cannot provide coverage that would cause it to become financially insolvent. 5. Premiums must be reasonable and affordable.

Explain the Risk Management Process.

1. Determining the objectives of the risk management program. 2. Identifying the risk to which the individual is exposed. 3. Evaluating the identified risks for the probability and severity of the loss. 4. Determining the alternative for managing risk: Retaining, reducing, avoiding, transferring 5. Implementing the risk management plan selected 6. Periodically evaluating and reviewing the risk management program.

Identify the three methods used to determine life insurance needs

1. Human-Life Value: The death benefits of a client's life insurance equal the economic value of their future earnings stream discounted to it's present value while considering their tax and consumption patterns. 2. Needs Approach: Method to determine life insurance needs that suggests the death benefits of a client's life insurance should equal the cash needs that the family will require at death plus income replacement needs. 3. Capitalized-earnings approach: Method to determine life insurance needs that suggests the death benefits of a client's life insurance should equal an income stream sufficient to meet the family's needs without depleting the capital base.

Identify the two categories of legal competence

1. Minors: In most states, a minor is under the age of 18. 2. Lacking Sounds Mind: A person lacking sound mind does not have the capacity to understand the purpose and terms of the contract.

List the 5 primary factors of your credit score

1.) Payment history 2.) Amount of credit and credit utilization (1-30% best) 3.) Length of credit history 4.) Mix of credit types 5.) New credit and new accounts

To be fully insured by Social Security requires how many quarters of continuous coverage?

40

Explain a Modified Endowment Contract (MEC).

A MEC is a policy that has been funded with more money than allowed under federal tax laws. Essentially you cannot contribute more to a policy than you would on a 7 year pay whole life policy with the same death benefit (otherwise the policy fails the 7-pay test). A contract fails to meet the 7-pay test if the cumulative premiums paid at any time during the first 7 policy years exceeds the cumulative 7-pay premiums on or before such time being considered. Failure to meet the 7-pay test results in the contract being classified as a "modified endowment contract" for tax purposes. If the policy is a Modified Endowment Contract (MEC), then withdrawals are taxed on a LIFO basis. Taxed as ordinary income until cash value equals accumulated premiums. MECs subject to a 10% penalty if withdrawals before the age of 59 ½. If not a MEC then taxed on a FIFO basis.

What is a "Wait and See" decision in a Buy/Sell agreement

A Wait and See gives first right of purchase to business with secondary rights to owners. Greater flexibility and tax advantages for C corps. Would also need to be funded (probably with life insurance).

What are the characteristics of a Fixed Annuity?

A fixed interest rate is applied over a period of time. It provides more security than a variable annuity contract.

What is a Guaranteed Minimum Accumulation Benefit (GMAB) Rider for an Annuity contract?

A guaranteed minimum accumulation benefit (GMAB) rider guarantees that for a specified period of times (typically 7-10 years), an investor's contract value will be at least equal to a certain minimum percentage (usually 100%) of the amount invested regardless of investment performance. The rider combines principal protection with potential upside potential. Many GMABs require the funds to be invested in a specified set of sub accounts or in a specified asset allocation.

What is a Guaranteed Minimum Income Benefit (GMIB) Rider for an Annuity contract?

A guaranteed minimum income benefit (GMIB) rider is designed to provide the investor with a minimum amount of lifetime income during retirement, regardless of investment performance. The contract guarantees an income stream based on a minimum benefit base. The benefit base initially equals the initial investment, but will increase over time. Generally, investors must wait for a period of time (often ten years) before annuitizing. The rider guarantees the income even if the benefit base goes to zero.

What is a Guaranteed Minimum Withdrawal Benefit (GMWB) Rider for an Annuity contract?

A guaranteed minimum withdrawal benefit (GMWB) rider guarantees that a certain percentage (usually 5-7%) of the amount invested can be withdrawn annually until the entire amount is completely recovered, regardless of investment performance of the underlying asset base.

How much can Social Security Retirement Benefits be reduced by if drawn at 62?

A reduced retirement benefit is available for early retirement at age 62. If full retirement is 65, then at age 62 the retirement benefit is 80% of the normal full retirement benefit. If 66 then 75%. If 67 then 70%. The benefit is reduced by 5/9 for each month, for first three years that a worker retires early. The benefit is reduced by 5/12 for each month beyond three years. Example: Joe's full retirement age is 65, but decides to take retirement benefits at age 62. How much will be his benefit? Reduction calculated as follows: 65 - 62 = 3 years or 36 months 36 x 5/9 = Percentage benefits will be reduced 36 x 5/9 = 20% Therefore he receives 80% of PIA at age 62 Example 2: Joe's full retirement age is 67, but decides to take retirement benefits at age 62. How much will his benefit be? Reduction of benefit: 67 - 62 = 5 years or 60 months First three years: 36 x 5/9 = 20%, plus Next two years: 24 x 5/12 = 10% Total reduction is 20% + 10% = 30% Therefore he will receive 70% of his PIA at age 62

Identify how a waiver may impact the insurer's ability to deny a claim

A waiver is relinquishing a known legal right. If an insurer waives a legal right, it may not deny paying a claim based on the insured violating or breaching that right.

Explain the difference between Absolute and Collateral Assignment

Absolute Assignment: Owner transfers all policy ownership rights to someone else, typically the result of divorce. Collateral Assignment: Used for collateral on debt, only assigns limited ownership rights. Automatically terminates when debt is satisfied. For example, assignment is to payoff debt with remainder to beneficiaries.

List and describe the two phases of an annuity.

Accumulation Phase - Period during which funds are accumulated. Payments are made overtime or a single lump sum. Please see Exhibit 7.5 in the Insurance textbook for a detailed overview of the accumulation phase. Annuitization Phase - Starts once payments to annuitant begin. Several options available. The payment amount is calculated over the remaining life expectancy (RLE). Pooling of risk: some die prior to RLE, others outlive RLE

Identify the difference between a representation, warranty and concealment.

All are part of the the principal of utmost good faith and both the insured and insurer follow these three legal doctrines during the application and throughout the life of the policy. Representation: A statement made by the applicant during the insurance application process. Warranty: A promise made by the insured that is part of the insurance contract. Concealment: When the insured in intentionally silent regarding a material fact during the application process.

What are some "Broad" names Perils in a homeowners policy?

All of Basic names perils, plus falling objects, weight of snow, accidental overflow of water, sudden bursting of appliances, Freezing of system or appliance, Damage from electrical current

How can annuities be used to protect against longevity risk.

Also known as Longevity Insurance - An annuity that will not begin payments until an advanced age (often 85). Protects against superannuation. Allows individual higher consumption of retirement assets. Cost is reasonable because: Allows a 20+ year accumulation if purchased at retirement. Retirement life expectancy at annuitization is low. IRS has ruled that longevity policies within a qualified retirement plan or IRA will not affect required minimum distribution.

Do you want named perils or open perils?

Always want open perils policy.

Do we want actual cash value or replacement value?

Always want replacement value.

Explain Structured Settlements of annuities

An annuity sold by an annuitant in exchange for a lump sum payment and then re-sold in the secondary market. It may provide higher yield than other investments of comparable terms. Risks to seller: Legality, costs, reputation of factoring company, life insurance requirements, tax consequences, superannuation Risks to buyer: Not registered with SEC, reliability of information, legal disputes and illiquidity

Describe the different between annual renewable, level-term, and decreasing term life insurance.

Annual Renewable Term: Renew term policy every year (without underwriting) but premiums increase annually as you age. Level-Term: Fixed premium over the term of the policy. Decreasing Term: Premiums stay the same but death benefit on policy decreases over time.

What are the three valuation methods for an Equity Indexed Annuity?

Annual Reset (Ratcheting) Method: Compares the change in the index from the beginning of the year to the end of the year. Gains are locked, declines in the index are ignored. High Watermark Method: Uses the highest value of the index (usually at annual anniversaries) and compares it to the value at the beginning of the term. Protects against declines in the index during the term. Point-to-Point Method: Compares the value of the index at two points in time, such as the start and end of the contract term. The value of the annuity can be negatively affected due to significant declines in the index toward the end of the contract term.

What restrictions are there is a Social Security beneficiary lives in another country?

Beneficiaries may travel and live in other countries, but checks will not be mailed to the following countries: Cuba or North Korea

What happens if an individual is receiving Social Security benefits based on spouse's earnings and they go through a divorce?

Benefits cease at divorce, unless Individual is 62 or older AND was married longer than 10 years

How does someone qualify for Social Security Disability

Benefits payable to workers with: Severe physical or mental impairments which prevents them from performing "substantial work." (earning > $1,260 per month) (2020) The disability is expected to last for at least 12 months or result in death. The worker must be fully insured with 20 quarters of coverage in the last 40 quarters

Describe some of the Disadvantages of an Annuity.

Complexity with so many choices is often difficult for investors to understand Costs and fees reduce returns within the annuity Once funds are exchanged for the annuity, they are no longer available for bequests or other needs Taxable benefits consist entirely of ordinary income, as opposed to capital gains and/or qualifying dividends

Define Conditional acceptance

Conditional acceptance applies if the insured pays the 1st premium along with the application, typically with auto insurance, but before the policy is issued. A good example involves life insurance. Referred to as conditional receipt, if the insured is deemed to be "insurable" by the insurance company, then coverage begins on the date the insured receives the conditional binding receipt. Typically, the insured must submit a premium payment and a completed acceptable application in order for the insured to obtain the receipt. As long as the insured is "insurable" then the insurer is obliged to cover a claim should one occur between the time the application is received and the time the policy is officially issued. However, if the insured is ultimately denied coverage (due to underwriting), then the insurer could nullify the coverage, even if a premium was collected.

How do you calculate a worker's Average Indexed Monthly Earnings (AIME) for Social Security

Convert earnings after age 21 to current dollars using an indexing factor Sum the highest 35 years Divide sum by 420 months (35 * 12) This calculation yields the Average Indexed Monthly Earnings. Useful for understanding benefit calculation.

Describe Part D of a auto insurance policy.

Coverage for Damage to your auto Covers your car and occupants if you are at fault. Two parts: Comprehensive - Damage to your car that are out of your control (something hits you, flood, hail, etc) Collision - Damage to your care that are in your control (you run into another car, run off the road and hit tree, etc.)

When reviewing Disability insurance, what are the 5 main policy characteristics of the policy that should be considered?

Coverage: Coverage should be for sickness and accident. Approximately 1/3 of disabilities occur because of accident. Amount of Coverage: As a general rule: 60-70% of pre-tax income. Typical employer group plan is 60%. Private coverage can be added to raise percentage. Consider effects of Social Security - integrated benefit? Taxability - if taxable, need higher coverage Term of Coverage: Short Term -Two years or less Elimination period: 5-30 days Helpful but can be costly. Long Term: Until retirement or death Elimination period: 30-180 days Critical, more important than short term If both - ensure coverage periods are coordinated Definition of Disability: Own occupation, any occupation, split definition. Elimination Period: Time from disability until policy benefits will commence. Typically 1 to 6 months if only LTD. Premiums decline as elimination period rises. If the insured has both short term and long term policies the elimination period for LTD should coordinate with end of STD.

Describe the differences and similarities between an HMO and PPO.

Differences: An HMO is a group of physicians who provide comprehensive care for their patients. Physicians are employed by the HMO directly or choose to participate in the HMO. With an HMO you have to go through your primary doctor for specialist visits. A PPO in an arrangement between the insurance companies and the health care providers. With a PPO, you can go directly to a specialist without needing to see your primary. PPOs also typically have a larger provider pool.

Describe Part E of a auto insurance policy.

Duties After an Accident or Loss Notify the insurer. File a proof of loss. Cooperate with the insurer in the investigation. Must file a police report if theft or uninsured motorist.

What does Homeowners insurance Coverage A cover?

Dwelling Covers repair or replacement of the house, attached structures and building materials on premises. The insured should purchase an amount equal to replacement cost (cost to rebuild) of the building. The insured must carry at least 80% of replacement cost of the building (coinsurance).

Who is eligible for Medicare benefits and what are the 4 parts of Medicare?

Eligibility: People 65 and older or Disabled individuals Consists of: Hospital Insurance - Medicare Part A Medical Insurance - Medicare Part B Medicare Advantage - Medicare Part C (HMO/PPO) Prescription Drug - Medicare Part D

How to fix an error on your credit report?

Errors should be addressed to the agency in writing (100 words or less). The agency has 30 days to investigate & respond. If an agency chooses not to correct, the 100 word statement will be appended to their credit report upon request. If the agency agrees to correct the error, the consumer should also follow up with the creditor.

Difference between express, implied and apparent authority.

Express Authority: Is to the agent through a formal written document which outlines the duties, responsibilities, and scope of authority that the agent can act upon. Implied Authority: The authority an agent relies on to do their job when the express authority is insufficiently precise. Think all the company logos in an insurance agents office. Apparent Authority: When a third party believes implies of express authority exists, but no authority actually exist.

What are some "Basic" named Perils in a homeowners policy?

Fire, Lightening, windstorm, hail, riot, air craft, vehicles, smoke, vandalism, theft & volcano.

Identify typical perils covered under a personal auto policy.

Fire, Storm, Theft, Collision, Hail, Flood, Falling object, Contact w/ bird, Earthquake, Windstorm.

How are withdrawals taxes in an annuity prior to annuitization?

For annuities purchased prior to 1982, a FIFO method is used for withdrawals such that withdrawals up to the owners basis are not taxable but rather are a return of capital. For annuity contracts purchased after 1982, the withdrawal rule is LIFO which means that withdrawals are taxed to the extent of earnings. Withdrawals prior to age 59 ½ are subject to a 10% penalty.

What HO Form is the typical Homes Owners Insurance?

Form HO 3 Coverage on Dwelling (A) and Other Structures (B) on an Open Peril Basis. Coverage on Personal Property (C) and Loss of Use on a Broad basis (perils 1-18) Additionally, Form HO 1 covers perils 1-12 and HO2 covers perils 1-18.

What HO Form is designed for Condo Insurance?

Form HO6 Covers basic and broad named perils, but not building coverage. I.E. Covers Dwelling, Personal Property and Loss of Use but does not cover "Other Stuctures".

What are the investment characteristics and fees associated with a Variable Annuity?

Fund are invested by the insured in a set of sub accounts (mutual funds). Provides potentially higher returns with greater levels of risk. Generally has higher fees than fixed annuities. Fees include: Mortality and Expense Risk Charges - Covers risk of annuitant living too long. Fees for any guaranteed death benefits. Typically range from 1.15 - 1.85% annually Administrative and Distribution Fees - Covers cost of servicing and distributing the annuity. 0 - 0.35% annually Sub Account Fees - Investment management and transaction fees. 0.7 - 2.5% annually Surrender Charges (Contingent Deferred Sales Charge-CDSC) - Initially 5 - 9%, declining over time. Also applies to fixed annuities.

Describe Part F of a auto insurance policy.

General Provisions Only provides coverage in the United States, Puerto Rico and Canada. A personal auto policy is not effective in Mexico.

Explain when a hard vs soft inquiry on your credit occurs and how it affects your credit.

Hard inquiries occur when a consumer is applying for an auto loan, mortgage, student loan, personal line of credit or credit card. Hard inquiries may occur when renting an apartment or opening a checking or brokerage account. Hard inquiries have only a small negative effect for 12 months unless there are several in a short time. Soft inquiries occur when a consumer is checking his or her own credit score or when a potential employer is conducting a background check. Soft inquiries may occur when renting an apartment or opening a checking or brokerage account. Soft inquiries have no effect of credit score.

Describe how an HSA works.

Health Savings Accounts (HSA) may be set up by individuals or employers and allow eligible individuals to save for health care costs on a tax-advantaged basis. Contributions made to the HSA by the plan participant are tax-deductible as an adjustment to gross income (above the line), and distributions from the HSA to pay for medical expenses are excluded from income.

Identify the most appropriate risks to insure based on loss severity and loss frequency

High severity & Low Frequency: Transfer - disability, premature death, damage to personal home. High severity & High Frequency: Avoidance - drunk driving and smoking in bed. Low severity & Low frequency: Retention - minor auto and property damage (car ding) Low severity & High Frequency: Reduction - common cold

Describe the medical expense insurance covers, and name the subcategories of it.

Hospital Expense Coverage: pays for costs of medical care while the insured (or family members, if a family policy) are in the hospital. Amounts billed directly by the hospital are covered, subject to policy limitations, but separately billed items, such as doctors and surgeon's fees, and x-ray fees for services performed outside of a hospital are not covered by a hospital expense policy. Many policies limit coverage to a specified number of days, such as 60, 90, or 180 days. Physicians Expense Insurance: Provides coverage for fees charged by physicians for office visits and tests that are not performed in the hospital (such as blood work, x-rays, and non-surgical procedures). Surgical Expense Insurance: Pays for surgeon's fees when a surgical procedure is not conducted in a hospital (if the surgical procedure was conducted in the hospital, these expenses would be covered by the hospital expense coverage policy).

Explain what "Reinstatement" is in life insurance.

If a life insurance policy lapses due to non-payment of premium and expiration of the grace period, the policy may permit reinstatement provided that the requirements specified in the policy are satisfied. The policy will specify that reinstatement without evidence of insurability is available for a short time after expiration of the grace period (usually 31 days).

When could life insurance benefits be taxed?

If an individual owns a life insurance policy on his or her own life, or if the proceeds of the policy are made available to the executor of his or her estate, the death benefit will be included in the owner/insured's gross estate, and may be subject to estate tax.

What happens if annuity payouts extend beyond annuitants life expectancy? What if an annuitant dies before life expectancy?

If payments extend beyond life expectancy, then 100% of payments are included in taxable income If annuitant dies before life expectancy, unrecovered basis may be claimed as itemized deduction (not subject to 2% AGI)

Distinguish between he principals of indemnity and subrogation

Indemnity: Asserts that an insurer will only compensate the insured to the extend the insured has suffered an actual financial loss. Subrogation: A clause in an insurance policy that requires that the insured relinquish a claim against a negligent third party, if the insurer has already indemnified the insured.

Elaborate on the taxation of premiums for both individuals and employers for life insurance.

Individuals: Premiums paid are not tax deductible. Group Life Policies: Premiums paid by the employer are tax deductible for the employer. The first $50K of coverage is not taxable to the employee; however, the employee must impute taxable income for benefits in excess of $50K. The tax is a function of age and amount of benefits per $1,000 in excess of coverage.

What are the characteristics of a Variable Annuity?

Invests in "sub-accounts." A sub-account is stock or bond mutual funds. There is no guarantee of return on investment. The owner accepts more investment risk. A variable annuity offers the opportunity for a higher payment when annuitized.

Describe Part A of a auto insurance policy.

Liability Coverage Covers others when you are at fault. Typically have "split limits" which include: injury per person/per accident/property damage. Ex.) Split limit of 100/300/100 means the policy will cover $100k per person in injuries, up to $300k per accident in total and $100k in property damage to the other vehicle or property.

What decision factors should be taken into consideration for long-term care

Life Expectancy: Longer = greater need Gender: Women live longer than men Family Situation: Family members willing and able to provide care. Custodial vs. skilled care. Family Health History: If chronic or debilitating health conditions historically run in the family, a person may have a greater need for LTC. Quality of Care: Medicaid does not provide choice of facility.

List some alternatives for paying for LTC needs aside from LTC insurance.

Life insurance with LTC rider: This policy will pay out a benefit of long-term care if needed and a death benefit to a designated beneficiary is not needed. Annuity with LTC rider: This policy permits the insured to make withdrawals from an annuity to pay for LTC expenses. Longevity annuity (deferred income annuity): Annuity begins at a later age (80-85) and can be used to pay for any expenses, including LTC expenses. Viatical or life settlement: The insured sells their life insurance policy. Reverse mortgage: This is a home equity loan that permits the borrower to receive cash against the value of their home without selling the home.

What does Homeowners insurance Coverage D cover?

Loss of Use This section provides reimbursement for expenses related to additional living expenses and loss of rental income. Limit is usually 20% of Coverage A amount. Loss resulting from living in a hotel because residence is damaged or being repaired. This section only applies to additional living expenses. Alternatively, if rental income is lost due to a property being damaged, the insured may collect. The insured must suffer a financial loss. For example, if the result of a hurricane you stay with a relative for free. You cannot collect.

Describe Part B of a auto insurance policy.

Medical Payments Covers the people in your own car.

What does Homeowners insurance Coverage F cover?

Medical Payments to Others Includes coverage for the medical payments to others for injuries that arise even where the insured is not liable for the injury. Medical expenses include reasonable charges for medical procedures, surgical procedures, hospital stays, ambulances, dental care, X-rays, professional nursing, prosthetic devices, and funeral services. It does not apply to the insured or members of the insured's household. Does cover household employees. This coverage is not liability coverage and is not based on fault. Coverage F will not provide coverage for bodily injuries: Sustained by the insured or any family member. Sustained by a regular resident of an insured location. Sustained by a residence employee of the insured that occur outside of the scope of employment. Sustained by anyone eligible to receive benefits for their injuries under a workers compensation or similar disability law. Resulting from nuclear reaction radiation, etc., regardless of how it was caused. Tip: Does not cover thieves and trespassers. Medical payments coverage will also apply if an animal owned by or in the care of the insured injures an individual off the insured premises. The animal must be OFF the insured premises.

What does medicare cover if there is a long-term care need and for how long?

Medicare provides very limited coverage following a hospital stay. Medicare only provides skilled care. Medicare does not cover custodial care. The maximum number of skilled care days Medicare pays for is 100 days.

What are Instrumental Activities of Daily Living (IADLs)

Medicine Management Shopping Preparing Meals Housekeeping Doing Laundry Using Transportation Handling Finances

Identify the elements of a valid contract

Mutual Consent Offer and Acceptance -Signing an insurance application and paying the first premium is an example. Performance or Delivery -In order for a contract to be enforceable, the party to a contract must perform a duty under the contract. Lawful Purpose -Insurance contracts that promote actions contrary to public interest are invalid Legal Competency of all Parties - Must be 18 years old, otherwise contract is voidable by the minor at any time.

What does Homeowners insurance Coverage B cover?

Other Structures Includes detached garages, storage buildings, etc. Limit is usually 10% of the amount of Coverage A. Other structures will not be covered if used for business purposes.

Define the three major "Definitions of Disability" in LTD policies.

Own Occupation: Defined as not being able to perform each and every duty associated with own occupation. Any Occupation: Defined as not being able to perform the duties of any occupation for which the insured in qualified based on education, training and experience. Split Definition: Defined as Own Occupation for a time frame (typically two years) followed by an Any Occupation definition.

Explain the participation rate, cap rate and floor crediting rate in annuities.

Participation Rate: Percentage of index increase that affects credited interest. If participation rate is 70% and index rises 10%, credited interest = 7%. May vary from term to term or could be guaranteed The Cap Rate (not in all annuities) is the maximum rate of credited interest. The Floor Crediting Rate (not in all annuities) is typically 0% which means no losses are allocated to the contract.

What are the characteristics of an Deferred Annuity?

Payments to annuitant begin at some future date. Usually in the form of a retirement annuity that accumulates interest until retirement age. Purchased either in a lump sum or periodic installment premiums.

What does Homeowners insurance Coverage E cover?

Personal Liability Protects the insured against claims arising out of both bodily injury and property damage. The insurer will cover both the damages and the costs of any defense of the claim or suit. The minimum amount of coverage is $100,000 per occurrence. The Coverage E liability insurance is based on a legal liability to pay. The insurer will only pay to the lesser of the damage or the coverage. This section excludes professional exposures. This section excludes injuries to employees that fall under workers compensation or disability laws.

Determine if property and life insurance policies are assignable.

Personal insurance policies are contract between the insurer and the insured. Therefore, the policy cannot be assigned to a third party without the consent of the insurer. Life insurance contracts can be assigned without the consent of the insurer because the contact continues to cover the insured regardless of who owns the policy.

Explain the pros & cons of a Cross Purchase Buy/Sell Agreement using life insurance.

Pro: Basis of surviving partners increases Con: There can be a cost variance among partners depending on who you are insuring. There can also be a lot of policies (remember N * (N-1) - tells you how many policies). Ex. 5 partners would need to purchase 20 different policies all together (5 * (5-1) = 20)

Describe some of the benefits and negatives of universal life insurance

Pro: Insured can pay in addition to premium and have excess be invested by insurance company to cover future premiums or increase death benefit (depending on "Option" chosen. Con: The flexibility in premiums may cause the death benefit to be reduced or lapse.

Understand the process of life insurance underwriting.

Process by which insurance companies decide whether to provide insurance to a customer and under what terms. Underwriters evaluate insurance applications and determine coverage amounts and premiums.

Describe some of the advantages of an Annuity.

Provides lifetime income Structure of income can be based on a single life or multiple lives Eliminates superannuation risk May provide protection from creditors Earnings are tax-deferred Investment options allow for fixed or variable earnings

List and describe the 4 different annuity payment options.

Pure Life Annuity: Payments are made to annuitant over his/her lifetime. Payments stop at death of the annuitant. There is a risk of receiving one payment, then dying. A pure life annuity is not appropriate if the client wishes to benefit heirs. Refund Options: Payments continue for a minimum term, payable to annuitant's beneficiary if death occurs prior to a minimum term, or until death of annuitant if annuitant's lifetime exceeds the minimum term. Guaranteed Minimum can be any number of years 10 or 20, but the payout would be smaller than a pure life annuity. Example: Jerry pays $250,000 into an annuity. Prior to his death, he only collected $100,000 from the annuity. The balance of $150,000 ($250,000 - $100,000) is paid to his beneficiary. Period of Time Certain Annuity: Payments continue for a minimum term or Until death of annuitant with a cash refund option. Example: Jack is annuitant with 10 year period certain contract. He dies in year 1. Beneficiary receives 9 years of payments. If Jack dies in year 40, Jack is still getting annuity payments for 40 years. Joint & Survivor Annuity: Two annuitants, usually a husband and wife. Payments continue until death of second annuitant. Payments are lower than a Pure Life Annuity.

How much of someones Social Security Benefits can be taxable and what are the limits?

Retirees with substantial income in addition to Social Security benefits, up to 85% of the benefit may be taxable , based upon an individuals MAGI. 1st Hurdle: $32k (MFJ) & $25k (single) 2nd Hurdle: $44k (MFJ) & $34k (single)

Describe the four responses to pure risks

Risk Reduction: The process of reducing the likelihood of a pure risk that is high in frequency and low in severity. Example: Car doors dings, common cold. Risk Transfer: Involves transferring a low frequency and high severity risk to a third party. Example: disability, premature death, damage to home. Risk Avoidance: Used for any risks that are high in frequency and high in severity. Activities that will very frequently result in severe financial consequences should be avoided, such as drunk driving and smoking in bed. Risk Retention: Accepting some or all of the potential loss exposure for risks that are low in frequency and low in severity. Example: minor property damage to a personal residence or personal auto. Deductibles and co-payment are a form of risk retention where the insured is sharing in the first dollar of a financial loss. Risk retention is an appropriate risk management strategy for risks that are low in frequency and low in severity.

Explain the difference between secured and unsecured loans.

Secured Loans Collateral backs the loan (mortgages, car loans) Unsecured Loans No collateral (credit cards)

What are the 7 types of coverage provided by a long-term care policy?

Skilled Nursing: Traditional nursing home, physician ordered Intermediate Nursing: Occasional nursing care, physician ordered Custodial Care: Assistance with eating, dressing, bathing, etc (primary issue for LTC because Medicare doesn't cover) Home Health Care: In-home nursing or necessary assistance Assisted Living: Apartment style living with healthcare services Adult Day Care: Daily assistance while spouse or family member works Hospice Care: For terminally ill, at home, hospital or nursing facility

Identify the 4 sources of disability coverage

Social Security Disability: The insured must be disabled for 5 months and going to be disabled for 12 months or the disability will result in your death AND your cannot perform the duties of any occupation. Workers Compensation: Covers disability resulting from injuries on the job. Group Disability Policy: Is provided by an employer and is typically less expensive than individual disability policies. Individual Disability Policy: Disability policies purchased by individuals directly, with after tax dollars.

Explain how Social Security Benefits can be reduced

Social Security Retirement benefits are reduced for early-retirees and other beneficiaries who have earnings from continued employment. Earnings Income: Wages Self-Employment Income Earnings does not include: Pension Income Investment Income Capital Gains Before normal retirement age: $1 reduction for every $2 of earnings above $18,240 for 2020. In the year the retiree reaches normal retirement age $1 reduction for every $3 of earnings above $48,600 for 2020. Only applies to earnings in the months before attaining normal retirement age. After attaining normal retirement age, $0 reduction (the reduction goes away).

Sellers of variable annuities are required to possess?

State insurance licensing and FINRA securities licensing

What is the additional medicare tax and when is a tax payer subject to it?

The Additional Medicare Tax is required by the Affordable Care Act and is 0.9% on wages, compensation or self employment income in excess of the following thresholds: Married Filing Joint = $250k Married Filing Separate = $125k Single - $200k Head of House = $200k Widow with Child = $200k

Describe how a copay, deductible, and max out-of-pocket amount work in conjunction with each other.

The DEDUCTIBLE is the amount that you must pay before the insurance company starts paying out. After the deductible is met, COINSURANCE or COPAYS kick in and the insurance company will then pay a percentage of the remaining bill (60, 70, 80 or 90%) and the insured will pay the rest. Finally, the insured will only have to pay up to their OUT-OF-POCKET max.

Calculate the exclusion/inclusion ratio for the follow problem: Peter, elects an installment payment option on a policy with a face value of $500,000. He will receive $4,000 per month for the remainder of his life, which is expected to be 20 more years. How much of each installment payment is taxable and how much is excluded from taxable income?

The exclusion/inclusion ratio: Monthly payment x 12 months x life expectancy = Total Payments Basis / Total Payments = Exclusion Ratio Exclusion Ratio x Monthly Payments = Amount Excluded from Income -------------------------------------------------- $4,000 x 12 x 20 years = $960,000 total expected payments $500,000 Peter's basis in the policy $500,000 / $960,000 = 52% exclusion ratio 52% of each payment is excluded from gross income $4,000 x .52 = $2,080 return of basis $4,000 x .48 = $1,920 taxable as ordinary income

What is a Guaranteed Lifetime Income Benefit (GLIB) Rider for an Annuity contract?

The guaranteed lifetime income benefit guarantees that a certain percentage (typically 2-8%, often based on age) of the amount invested can be withdrawn each year for as long as the contract holder lives. The percentage will be lower for younger investors and higher for older investors when withdrawals begin.

Determine why the law of large numbers is useful for insurance companies.

The law of large numbers is a principal that states that actual outcomes will approach the mean probability as the sample size grows. This is useful for insurance companies because the larger the insured pool, the more likely actual losses will approach the expected losses, thereby reducing forecasting error and objective risk. This results in insurance premiums that are more efficient and thus are less costly to the insured.

Identify how Estoppel pertains to insurance contracts

The legal process of denying a right you might otherwise be entitled to under the law. Example: If an insurance agents says the policy will pay in the case of a suicide even tho the contract says otherwise. Therefore, the insurance company may have to pay out if they are able to prove the insurance agent in fact noted it would pay out.

How are annuity contacts calculated for within an estate?

The remaining value of an annuity contract at death is included in the estate for gross estate tax purposes. This applies when death occurs prior to annuitization or if term-certain payments remain following death of annuitant. Annuities are considered IRD (income in respect of a decedent) assets for income tax purposes. The beneficiary inherits any remaining basis and pays income tax on excess distributions. The beneficiary receives a deduction for any gross estate taxes paid.

LTC premiums can be tax deductible and benefits are tax free as long as the policy is "Qualified". What makes a policy "Qualified"?

There is no surrender value It is limited to qualified long-term care services Dividends are used to reduce future premiums or increase benefits The policy meets consumer protection laws It does not pay for expenses covered under Medicare. The maximum deduction is part of the medical expense itemized deduction subject to a 7.5% hurdle of AGI (Adjusted Gross Income).

Explain the reasoning behind the criticism of managed care insurance plans.

This physician becomes the patient's "point of service." The in-network, primary care physician may make referrals outside of the network, if the patient prefers an out-of-network provider, but higher deductibles and coinsurance payments may apply if the insured is receiving services on the indemnity side.

Describe some health insurance policy provisions that are particularly relevant to financial planners.

Time Limit or Incontestability Clause: When a health insurance policy is issued on a non-cancelable or guaranteed renewable basis, the policy often includes an incontestability clause. The incontestability clause protects the insured by preventing the insurer from challenging the validity of the health insurance contract after it has been in force for a specified period of time (typically two years) unless the insured fraudulently obtained coverage. Grace Period: When the policy includes a grace period, however, the policy will remain in force and will not lapse as long as the premium is paid within a specified number of days after the due date. A one-month grace period (which usually translates to a period of 31 days), is very common in health insurance policies.

How much of your pay goes to FICA taxes and how is it distributed?

Total taxes of 7.65% 6.2% up to $137,700 of compensation (OASDI) 2020 1.45% of total compensation (HI) Old Age and Survivor Insurance (OASI) Trust Fund - 5.30% up to $137,700 (2020) Disability Insurance (DI) Trust - 0.9% up to $137,700 (2020) Medicare Insurance (HI) Trust (Part A) - 1.45% (all compensation) Supplemental Security Income (SMI) Trust (Part B) - Funded by general tax revenue

What are the two most common credit scores?

Two most common credit scores are: FICO (formerly Fair Isaac) Vantage (joint venture of 3 major agencies)

Highlight the two reasons that explain why group health insurance can be provided so cost effectively.

Underwriting a large group of individuals permits the insurer to spread the claims risk among the pool of participants, and having a large group of participants spreads the administrative costs of the plan across more people.

Determine the underwriting process.

Underwriting is the process of classifying applicants into risk pools, selecting insureds, and determining premiums.

Describe Part C of a auto insurance policy.

Uninsured Motorists Covers your car and occupants if other drivers fault and they do not have insurance OR do not have enough insurance.

What is a Viatical Settlement in Life Insurance and how is it taxed?

Viatical Settlement is an arrangement in which a policyholder sells their life insurance policy to a third party. If insured is terminally ill (expected to die within 24 months) or chronically ill (uses proceeds to pay for long-term care), then proceeds are not subject to income taxes. The purchaser incurs tax liability to the extent the proceeds of the policy exceed the purchase price and other costs. (Ex. Let's say John Doe has a year to live. He's decided that he has saved enough for retirement, his children are grown and out of the house, and he is comfortable with the assets he'll be leaving them when he dies. John doesn't need to leave his kids any more money, so he decides he wants to get rid of his life insurance policy so he can stop paying the premiums and so he can use the proceeds to pay his medical bills. Because he has a whole life policy, there is some cash value in the policy. Company XYZ is a viatical settlement provider. It purchases whole and universal life insurance policies from people who no longer need or want the coverage but want to recoup their investments in the policies. The sellers receive cash to use as they wish; the buyer begins making the premium payments on the seller's behalf. In this way, Company XYZ essentially has a policy on the life of the seller. John Doe sells his policy to Company XYZ. When he dies, Company XYZ receives the death benefits from the insurance policy.)

Explain the income tax consequences from taking a loan from a life insurance policy and how the interest is charged on the loan.

When a policy loan is issued, there are no income tax consequences for the policy-owner (provided that the life insurance policy was not classified as a modified endowment contract), and the interest rate charged on the loan is typically a low rate that is specified in the contract. Any loan outstanding at the death of the insured, plus accrued interest on the loan, is deducted from the death benefit paid to the policy beneficiary.

Describe the taxation of an individual's health care benefits.

When an individual receives benefits under a health insurance policy, and those benefit payments are used to pay for the health care of the insured, no taxable event occurs. In this instance, the benefits are received tax-free.