Course 102: Insurance
unilateral contract
- only insurance company legally promises to perform and there is no legally enforceable promise to pay premiums by policyowner - if policyowner does not pay required premiums, insurance company does not have to perform
deferred nonqualified annuity
- purchased with after-tax dollars - usually used to provide retirement income
agent
- represent specific company and act on behalf of insurance company (principal) - can bind insurance company to risk prior to submitting application to company and able to provide coverage immediately as long as acting on explicit or implied authority for principal - employee of insurance firm or work independently
2 interest-adjusted methods
- surrender cost method and net payment method - used for comparing cost of life insurance policies - accounts for TVM
5 risk management methods
1. avoiding 2. retaining 3. reducing 4. transferring 5. diversification
apparent authority
occurs when agent oversteps actual authority and insurer takes no action to counter impression that such authority exists
when to use which risk management method
retain: low risk frequency, low risk severity reduce: high risk frequency, low risk severity transfer: low risk frequency, high risk severity avoid: high risk frequency, high risk severity
Medicare Part C (medicare advantage plan)
- health care offered by private insurance companies approved by and under contract with Medicare - includes Part A, Part B, and prescription drug coverage - include HMOs, PPOs, private fee-for-service plans, special needs plans, and Medicare MSA plans
convertible term insurance
- may be converted to cash value policy without evidence of insurability - most group term life insurance policies provided to employees by employer may be converted to cash value policy without providing insurability when employee terminates employment
types of health insurers
- private health insurance: provided by commercial insurance companies, independent plans, and Blue Cross and Blue Shield organizations - self-insurance: company pays for claims directly and handles administration personally or outsources to third-party administrator (TPA)
annuitization
- process of converting amounts held in accumulation account into periodic payments
own occupation disability coverage
- provides benefits when insured unable to perform regular and customary duties of their own occupation because of covered illness or injury - premium can be 3% to 5% annual income
6 factors to consider when determining if life insurance is needed and what type
1. amount of life insurance needed 2. duration of need: short-term or long-term 3. risk tolerance level: investment risk and risk tolerance 4. amount disposable income available 5. financial self-discipline 6. attitude or predisposition regarding life insurance protection for heirs
5 types of term life insurance
1. annual renewable term 2. level term 3. decreasing term 4. reentry term 5. convertible term
business uses of insurance
1. buy-sell agreement 2. cross-purchase agreement 3. entity-purchase buy-sell agreement 4. wait-and-see buy-sell plan
5 strategies to reduce automobile insurance costs
1. elect highest deductible can afford 2. consolidate insurance needs 3. maintain good driving record 4. choose vehicle carefully 5. maintain good credit history
2 methods of determining disability benefit amount
1. income benefit: equals pre-disability income x % benefits, including or excluding SS or workers' comp benefits 2. flat amount: predetermined benefit determined when policy purchased, paid regardless of if insured receives SS or worker's comp
LTC insurance need calculation
1. inflate current annual LTC cost (PV) to date of LTC need using LTC inflation rate (I/YR) for length of LTC need (N), where N = age LTC needed - current age 2. calculate FV of #1 (PMT) for length LTC needed (N) at LTC inflation rate (I/YR) 3. calculate FV of assets to be used in case of LTC need (PV) using investment asset rate of return (I/YR) for length of LTC need (N), where N = age LTC needed - current age 4. LTC insurance needed = #2 - #3
3 ways to determine amount of homeowner's coverage needed
1. market value 2. actual cash value 3. replacement cost value
8 homeowner's insurance policy discounts
1. paid-in-full 2. older homeowner 3. claim-free 4. nonsmoker 5. new-home 6. credit-score insurance 7. multipolicy 8. protective devices
attractive nuisance
something owned that may attract children to person's property and requires special care to protect trespassers from harm caused by property (ex: pools, yard gyms, trampolines)
vicarious liability
personal liable for torts committed by someone else (such as employer liable for tort committed by employees)
actual cash value (ACV)
equal to replacement cost minus functional depreciation
variable annuity taxable amount of each payment
= payment amount - tax-free amount
peril
cause of financial loss and, in insurance world, is actual event for which individual purchases insurance
hazard
condition increasing probability that peril will occur
compensatory damages
current and future financial losses resulting from injury
replacement cost
current cost of replacing property with new materials of like kind and quality
traditional net cost method formula
net cost per $1,000 of insurance per year calculated by dividing net cost per year by face amount of policy in thousands
waiver-of-premium rider
provides way for insured to keep coverage in force without having to make premium payments when disabled for specified amount of time
morbidity rate
ratio of occurrence of sickness to number of healthy persons among group of people over given period of time (sick or disabled individuals)
concealment
occurs when applicant is silent about facts material to issuance of policy
mutual insurance companies
owned by policyholders and offer participating policies (share in profits of company through policy dividends)
4 advantages and 2 disadvantages of term life insurance
advantages: 1. affordability 2. maximum life insurance coverage per total premium dollars expended 3. satisfaction of temporary need for life insurance coverage 4. possibility of ensuring continued insurability disadvantages: 1. prohibitive cost at older ages of insured 2. no savings (cash value) feature
investment in contract formula
= premiums paid - dividends received - outstanding loans or withdrawals
basis in contract formula
= premiums paid - dividends received - outstanding loans or withdrawals - cost of insurance
gain at sale formula
= sales price - basis
effective tax rate formula
= total tax liability / total economic income
value of individual owner's subaccount
= value of accumulation unit x # accumulation units held
investment income
- interest - dividends - capital gains - rental income - royalty income - nonqualified annuities - income from businesses involved in trading of financial instruments or commodities - income from businesses that are passive activities to taxpayer - gains from sale of stocks, bonds, and mutual funds - capital gain distributions from mutual funds - gain from sale of investment real estate - gains from sale of partnership or S corp interests - excess of sale proceeds over section 121 exclusion
interest rate cap before participate rate formula
= [% cap x % participation rate] x 100* *%'s as decimals
participation rate formula
= [% increase in index x % participation rate] x 100* *%'s as decimals
Section 1035 exchange basis in new contract formula
= basis in old contract + premiums paid into new contract - dividends received from new policy - LTC rider premium paid from life policy or annuity
net amount at risk (NAR) formula
= cash value - death benefit
frequency
- how often a peril occurs - measured in terms of likelihood
implied authority
authority consumers may reasonably believe agent possesses
moral vs. morale
moral = dishonest morale = carelessness
mortality rate
number of deaths among a group of people, most often expressed as deaths per 1,000
guaranteed values
those for which insurer bears risk
nonguaranteed values
those for which risk borne by policyowner
variable annuity exclusion ratio formula
= investment in contract/annuitant's life
agreed-upon value
- amount paid for loss is agreed upon by insurer and insured at time policy is issued - used when valuing certain losses is too difficult - no violation of indemnity principle can occur
commutation provision
allows owner to withdraw funds in exchange for reduction or elimination of future periodic payments
premium
amount insurance company requires insured to pay in order to complete transfer of risk to insurance company
settlement option
available to named beneficiary at death of insured
malpractice insurance
protects physicians and other licensed professionals from liability associated with bodily injury, medical expenses, and property damage, including cost of defending lawsuits related to these claims
declarations
provide details about type and amount of insurance and names of those insured
longevity insurance
- type of paid-up deferred annuity - individual (sometimes employer) purchases policy that will not pay until past normal retirement age (85 years)
6 risk factors affecting auto insurance premiums (auto risk exposures)
1. gender 2. age 3. marital status 4. credit history 5. car's make and model 6. city and neighborhood where housed
types of homeowner's coverage
A: dwelling B: appurtenant structures C: personal property/contents D: additional living expenses/loss of use E: liability F: medical payments for legally obligated payments for bodily injury or property damage of another person(s) occurring on property G: damage by client to property of others
fundamental risk
affect large group of people (recessions, earthquakes, etc.)
warranty
promise made by insured to insurer that is part of insurance contract and must be adhered to by the insured
4 types of inflation riders for LTC plans
1. simple inflation: adds stated dollar amount to dollar limit each year 2. compound inflation: adds percentage increase in dollar limit each year based on TVM principles 3. waiver of premium rider: eliminates need to pay premiums during elimination period and while receiving benefits 4. nonforfeiture rider: allows client to stop making premium payments in return for reduced benefits and may allow return of some premiums if policy canceled
12 considerations before purchasing pet insurance
1. waiting periods 2. dollar limits 3. multipet discounts - coverage for: 4. routine wellness exams 5. neutering or spaying 6. prescription drug expenses 7. by incident or accident 8. preexisting conditions 9. chronic or recurring conditions 10. vaccinations and required shots 11. lost or stolen pet 12. death of pet during treatment
9 most common homeowner risks
1. water damage 2. fire damage 3. wind and storm damage 4. visitor accidents 5. animal bites 6. home accidents 7. falling trees 8. intoxicated guests 9. injured domestic workers
guaranteed insurability option rider
insured may purchase additional insurance, regardless of insurability, at specified intervals up to specified maximum age
partial disability rider
pays amount specified in policy (usually 50% of full disability benefit) when insured can return to work on limited or PT basis
tenants' and cooperative policies (HO-4)
insures against damage to client's property when renting and for personal liability of client when others are injured or sustain property damage arising from insured rental
uninsured motorist coverage
pays for damages to client's car and medical expenses if uninsured driver damages car
maximum possible loss and probability of loss: premature death
max. possible loss: PV of future earnings probability of loss: low, but depends on current health and lifestyle of individual, as well as age
maximum possible loss and probability of loss: long-term care costs
max. possible loss: approximately $30,000 to $100,000 annually depending on level of care and geographic location probability of loss: high once 60 years and above
general exclusion ratio calculation
monthly annuity benefit = total payments received in year/12 total expected payments = monthly annuity benefit x life expectancy table factor exclusion ratio = (cost of plan at annuity start date + death benefit exclusion)/total expected payments
paid-up whole life policy
no future premiums due, but policy remains in effect
additional Medicare tax
additional 0.9% applied to excess income if taxpayer's wages, other compensation, or self-employment income (combined with spouse if MFJ) exceeds thresholds
shared benefits provision
allows each partner to use portion of other partner's benefit
flexible premium annuity
allows insured option to vary premium deposits over designated period of time
underinsured motorist coverage
pays for damages to client's car if damaged by someone without enough insurance to cover medical expenses and/or car damages
3 nonforfeiture options
1. cash surrender value 2. reduced paid-up insurance 3. extended term insurance
preexisting condition (HIPAA defined)
any medical condition treated or diagnosed within 6 months before enrolling in new group plan
settlement options
at time of distribution, owner must decide how annuity payments will be made and over what period
cash settlement option
beneficiary elects to receive promised benefit in lump sum
McCarran-Ferguson Act of 1945
continued regulation and taxation of the insurance industry to be done primarily by states
liability split-limit coverage (25/50/10)
- $25,000 maximum bodily injury liability payment or uninsured motorist payment for injury/deaths to one person involved in single accident - $50,000 maximum bodily injury liability payment or uninsured motorist payment made for injuries/death to all persons involved in single accident - $10,000 maximum property damage liability payment made for damages to other person's property from single accident
preferred provider organization (PPO)
- HMO, except allowed to receive care outside network for additional fee - health care providers paid on fee-for-service basis
Part B deductible and coinsurance
- Medicare recipients first pay $144.60 per year as deductible - after deductible met, pay 20% of Medicare-approve amount for inpatient doctor services, outpatient therapy, and durable medical equipment
cafeteria plan qualified benefits
- accident and health benefits (not Archer MSAs or long-term care insurance) - adoption assistance - dependent care assistance - group term life insurance coverage - HSAs, including distributions to pay long-term care services
express authority
- actual authority - specifically granted by insurer in agency contract or agreement - written or oral
initial bonus percentage or initial bonus amount
- actual bonus paid by insurer at inception of annuity contract - expressed as percentage of initial premium or specific dollar amount - must be stated in annuity contract
split definition disability coverage
- base benefits on own-occupation during first 1-2 years of initial disability period, then base continuation eligibility on any-occupation - annual premium 1% to 3% annual income
RMD calculation
- based on IRS single life table - first RMD = account balance/life expectancy from IRS table - subsequent RMDs have denominator reduced by 1 for each year after first RMD year
taxation of LTC policy benefits
- benefits received not taxable up to IRS per diem limit ($370 per day) - excess of IRS per diem limit or if benefits received exceed actual money spent on LTC expenses, taxed as ordinary income
key person life insurance
- business owns policy and is beneficiary and key employee insured - businesses usually use term insurance to fund key person life insurance
risk
- chance of loss or uncertainty of outcomes associated with engaging in activity - not subjective, but condition of everyday life - amount of risk undertaken is generally measurable by evaluating likelihood of occurrence in large and similar (homogenous) group
Medicare Part B covers
- clinical research - ambulance services - durable medical equipment or any medical equipment needed - mental health expenses - preventive services - second opinion prior to surgery - limited outpatient prescription drugs - physician's services - home health services not requiring hospital stay - diagnostic tests - drugs that cannot be self-administered - all hospital outpatient services
dividend one-year term insurance option (fifth dividend option)
- dividends used to purchase one-year term insurance equal to policy's current cash value - face amount of term policy is death benefit amount that annual premium equal to dividend amount will purchase as annually renewable term
permanent life insurance
- does not terminate at any given time as long as adequate premiums paid - more expensive than term life insurance - provide death benefit and have cash value - policyowners can borrow against cash value or withdraw cash value to help meet future goals (education funding or retirement planning)
paid-up deferred annuity
- each premium payment purchases fixed-dollar benefit that will begin on specified date in future - no account value
any occupation disability coverage
- eligible benefits only if disabled to extent are unable to perform duties of any occupation for which they are qualified based on education, training, and prior experience - least expensive with premium of 1% annual income
small business health insurance tax credit
- eligible employers receive credit up to 50% (35% for tax-exempt employers) of employer contributions to health care premiums - available for two consecutive taxable years - to be eligible, small business must: (a) have fewer than 25 FTE employees (b) have average employee salary must be less than $50,000 per year, adjusted for inflation (c) pay at least 50% plan cost
employees not required to be included in ESPPs
- employees with less than 2 years of employment - HCEs - PT employees or seasonal workers
insurance favoring key employees
- occurs when more than 25% of total nontaxable benefits provided for all employees under plan goes to key employees - if insurance plan favors key employees, firm must include value of taxable benefits employee could have selected in employee's wages - plan under collective bargaining agreement does not favor key employees
offer and acceptance
- occurs when offer is unqualified and accepted in exact terms (contract of adhesion) - acceptance decision made through underwriting process
consideration
- occurs when there is exchange of value - usually promise to pay premium is sufficient consideration - for life insurance, premium must be paid before insurance contract is binding for insurer - submission of completed insurance application (offer) and payment of first premium (consideration) will usually create binding contract if application would pass standard underwriting requirements
basic homeowner's policy (HO-1) VVVC WEATHRS PIPPL FAM G
Vehicle Vandalism and malicious mischief Volcano Civil judgments Windstorm Explosion Aircraft Theft and burglary Hail Riot and civil commotion Smoke Property of others damaged Injuries to body Personal property (at home) Personal property (away) Lightning Fire Additional living expense if forced to live away from home temporarily Medical payments Glass breakage
particular risk
affect individuals or small groups of people
financial needs or insurance needs analysis method
analyzes all recurring expenses of dependent survivors and any unusual expenses that may result from death of insured then compares these needs with existing assets that would be available for death of insured and funds difference
representation
statement made on insurance application that applicant represents as correct to best of their knowledge and belief
suicide clause
stipulates if insured commits suicide within specified period (usually two years), company only liable for return of insured's premium payments
IRR on yield method
used to determine IRR on cash value of permanent policy held for particular term
6 basic parts of personal automobile policy
A: liability limits B: medical payments and exclusions C: uninsured motorist coverage D: collision coverage (damage to inanimate object) and comprehensive coverage (damage to insured's vehicle) E: duties after accident or loss F: general provisions and exclusions
disability insurance needs steps
1. evaluate currently monthly income, existing disability coverage, other income (spouse and investment), and emergency fund 2. sum client's expenses: mortgage payments, car payments, utilities, food, medical expenses, children's education and other needs, etc. 3. evaluate disability insurance options
3 types of fixed deferred accumulation annuities
1. excess interest annuity 2. modified guaranteed annuity (MGA) 3. fixed indexed annuity (FIA)
6 factors to consider when evaluating for replacement
1. existing policy's relative value 2. issuing company's A.M. Best and other ratings 3. appropriateness of policy for client's needs 4. any possible or intervening changes in client's insurability 5. client's risk tolerance level 6. financial cost of starting over with new policy
6 activities of daily living
1. bathing 2. dressing 3. eating 4. transferring from bed to chair 5. using toilet 6. maintaining continence
3 methods for determining amount of life insurance needed to cover key employee
1. replacement cost method: incorporates costs associated with replacing person 2. contribution to earnings method: based on estimate of employee's contribution to gross earnings 3. multiples of income method: based on multiplying employee's salary by fact of 5 to 10
3 settlement options
1. replacement cost: cost to replace, repair, or rebuild home to original condition with materials of same kind and quality if damaged or destroyed less deductible and up to policy's dollar limit (no deductible for E and F coverages) 2. repair cost: cost to replace, repair, or rebuild damaged dwellings to similar condition, using contemporary materials 3. actual cash value: replacement cost at time of loss minus depreciation
variable annuity tax-free amount adjustment for payment of different amount than first year
given first year's tax-free amount and second and third year's payment amounts third year's annual taxable amount = third year's payment amount - [((first year's tax-free amount - second year's payment amount)/multiple at current age in third year based on IRS Table V)) + previous payment's tax-free amount)]
residual disability rider
provides benefit, based on formula specified in policy, if insured returns to work on FT basis, but at income less than pre-disability earnings
formula to determine reimbursement and coinsurance amount if fall below 80% rule
reimbursement = (amount of coverage/(replacement value x 80%)) x (loss or claim amount - deductible) coinsurance amount = (amount of coverage/(replacement cost x 80%)) x loss or claim amount
churning
the practice by which policy values in existing life insurance policy or annuity contract are used to purchase another policy or contract with same insurer for purpose of earning additional premiums or commissions without an objectively reasonable basis for believing new policy will result in actual and demonstrable benefit
4 times to consider annuity in retirement planning process
when client wants: 1. tax-deferred growth 2. retirement income or income stream that cannot be outlived 3. freedom from investing and managing retirement assets 4. replacement or alternative to IRA
promissory warranty
promise that insured will or will not do something during life of policy
condominium policies (HO-6)
provides content and property coverage for any alterations, appliances, fixtures, improvements, and interest walls within condominium (building and common areas covered by separate policy owned by association)
home insurance monoline policy
provides one type of coverage
simplified exclusion ratio calculation
tax-free monthly amount = (cost of plan at annuity start date + death benefit exclusion)/life expectancy table factor taxable amount for year = total pension or annuity payments received in year - (tax-free monthly amount x # months payments made in year) balance of cost to be recovered = (cost in plan at annuity starting date + death benefit exclusion) - (tax-free monthly amount x # months payments made in year)* *if zero, payments received next year fully taxable
terminally ill vs. chronically ill
terminally ill: certified by physician as having illness or condition causing expected death within 24 months of date of certification chronically ill: (a) unable to perform at least 2 daily living activities for at least 90 days, and (b) benefits only excluded from income to extent used for long-term care services
simplified exclusion ratio method must be used by:
those with annuity starting date after November 18, 1996 with the following conditions: (a) client receives pension or annuity payments from qualified employee plan, qualified employee annuity, tax-sheltered annuity plan (403(b)) (b) on annuity starting date, client is either under age 75 or entitled to less than 5 years of guaranteed payments
5 transferees that do not result in loss of exclusion treatment
transfers to: 1. insured 2. partner of insured 3. partnership in which insured is partner 4. corporation in which insured is officer or shareholder 5. transferee whose basis in policy determined by reference to transferor's basis (tax-free exchange or gift eligible for gift tax annual exclusion)
nonviatical sale of life insurance policy
when sold to unrelated person who will not suffer economic loss at death of insured (purchases as investment): (a) ordinary income component = CSV less investment in contract (b) capital gain component = gain at sale less ordinary income component
stock options
- give employee right to purchase fixed number of shares of employer stock at predetermined price over stated period - award of stock option not taxable
insurable loss is a CHAD
1. can't be catastrophic 2. homogenous group 3. accidental 4. determinable *fifth risk sometimes specified as need to avoid adverse selection or attempting to effectively manage risk of loss by combining higher risk exposure units with lower risk exposure units
3 methods to determine life insurance amount to manage premature death risk
1. capital retention method 2. human life value method 3. financial needs or insurance needs analysis method
5 dividend options
1. cash option 2. dividends to reduce premium 3. dividends to accumulate at interest option 4. paid-up additions 5. one-year term insurance option (fifth dividend option)
5 whole life insurance settlement options
1. cash option 2. interest only option 3. fixed-period installments 4. fixed-amount installments 5. life income option
5 step risk management process
1. clarify objectives: goals of individual or business relating to risk 2. identify risk: risk prohibiting individual or business from meeting objectives (risks to person, property, and of personal liability or business liability due to negligence) 3. measure risk: magnitude of risk identified 4. manage risk: how will risk be controlled or financed? 5. monitor risk: reviewed on regular basis based on level of risk and probability of occurrence
long-term month disability need (monthly shortfall) calculation
1. after-tax continuing income while disabled = other income x (federal + state tax rate) 2. yearly shortfall while disabled = yearly expenses needed while disabled - after-tax continuing income while disabled 3. monthly LT income needed while disabled = yearly shortfall/12 4. monthly taxable LT disability benefits = (insured's annual income x % payable benefits)/12 5. monthly benefit after taxes = monthly taxable benefits x (federal + state income tax rate) 6. monthly LT disability need = monthly LT income needed - monthly benefit after taxes
accidental death benefit rider (double indemnity clause)
pays additional death benefit if insured dies accidentally, usually equal to twice face amount
comprehensive coverage
pays for damages to client's car due to theft, fire, or falling objects
non-annuitized distributions
- after age 59.5, amount of payout considered gain is subject to ordinary income taxes - gain equal to difference between current value of annuity less investment in annuity - determination of non-taxable and taxable amounts based on LIFO (withdrawal taxable first up to gain, then remainder non-taxable return of principal)
indemnity plan
- all benefits paid regardless of daily expenses - example: client purchases 2 year plan with $200 daily limit, so client has resources equal to $146,000 ($200 x 365 x 2) that can be used any time during 2 year period
period certain annuity
- periodic payments made for specific period of time (10 or 20 years) - payments payable to named beneficiary if annuitant dies prior to end of specified period - payments cease at end of period, regardless of if annuitant still alive
legal capacity
- requires individuals, groups, or businesses entering into insurance contract be capable of entering into contract per law - minors and mentally incompetent people do not have legal capacity - if one party is incompetent, contract voided
crisis waiver
- surrender charge waivers in event of specified occurrence (ex: nursing home, terminal illness, unemployment, disability) - if specified occurrence arises, deferred annuity contract owner may withdraw some or all of contract value without incurring surrender charge - still subject to income tax - 10% penalty on pre-59 1/2 withdrawals may be waived in certain circumstances (death or disability of annuitant)
adverse selection
- tendency for those at substantial risk to purchase insurance - managed by premium pricing and denying/canceling coverage
4 major private insurance rating agencies
1. A.M. Best: issues in-depth reports and financial-strength ratings ( A++ through D) 2. Fitch Investors Service, Inc.: credit opinions (AAA through D) 3. Moody's Investors Service: credit ratings, research, and risk analysis through analyzing financial conditions (Aaa through C) 4. Standard & Poor's Corporation: two types of ratings; claims-paying ability issued by request and qualified solvency ratings issued using public information only (AAA through D) 5. Demotech, Inc. 6. TheStreet.com
13 sources of LTC support
1. LTC insurance 2. personal savings 3. family support 4. continuing care retirement community 5. insurance with LTC or chronic illness living benefits rider 6. viatical settlement 7. accelerated death benefits 8. reverse mortgage 9. Medicare 10. Medicaid 11. veterans benefits 12. PACE 13. immediate annuities and deferred LTC annuities
10 optional automobile coverages for additional premium
1. accidental death benefit 2. auto replacement coverage 3. comprehensive coverage 4. custom/nonfactory equipment 5. gap coverage for leased or financed vehicles 6. medical payments 7. physical damage/repair/replace coverage 8. rental reimbursement 9. towing 10. uninsured motorist property damage
2 stages of annuity
1. accumulation stage 2. distribution stage
4 health care provisions by PPA and HCERA of 2017 and 2018
1. allow states to implement own plans that meet standards 2. allow states flexibility to provide businesses with more than 100 employees ability to purchase coverage in SHOP exchange 3. allow no pre-existing conditions for anyone, including high-risk customers 4. all healthcare plans required to offer preventive care coverage
capital retention method formula
1. annual income needed = annual salary - annual benefits 2. life insurance needed = (annual income needed/investment rate) + annual income needed
6 key factors affecting health care costs in retirement
1. estimated health insurance premiums 2. estimated out-of-pocket costs 3. age chose to retire 4. life expectancy 5. quality of health of individual 6. inflation
5 ways to reduce premiums for LT disability policy
1. extend elimination period 2. purchase split-definition policy over own-occupation policy 3. reduce income replacement ratio in policy 4. integrate with SS 5. purchase through group plan rather than individual marketplace
4 EIA features affecting actual return
1. participation rate: determines how much of increase in value of underlying index will be used to compute interest rate credited to owner 2. interest rate caps: maximum interest rate annuity can earn 3. spread or administrative fee: index-linked interest determined by subtracting percentage from any gain in index; up to 3% 4. high water mark: indexing method credits index-linked interest on basis of any increase in index value from index level at beginning of annuity's term to highest index value at various points during annuity's term, usually annual anniversary from purchase date
6 categories of family needs
1. payment of final expenses of insured (funeral) 2. readjustment (covers immediate period following death, typically two years) 3. dependency period income (household and child care) 4. payment of outstanding mortgage liability 5. education of dependents 6. lifetime income of surviving spouse (includes SS blackout period)
5 duties insurance agent owes to principal
1. performance using reasonable skill and diligence 2. notification of any material information concerning agency relationship 3. loyalty 4. obedience of instructions 5. accounting of any money rightfully belonging to insurance company that comes into agent's possession
3 types of hazard
1. physical: something that increases likelihood of loss should peril occur (ex: leaving oily rags near furnace) 2. moral: when use of insurance increases likelihood that insured will be dishonest when reporting loss (ex: dishonesty of embezzling employee) 3. morale: when presence of insurance cause insured to become complacent or indifferent to loss (ex: leaving car unlocked because insured)
3 ways to value losses for property insurance
1. replacement cost 2. actual cash value 3. agreed-upon value
multiple of income approach
= client's annual gross income x number between 5 to 15 depending on dependents, expenses, and debts
universal life insurance period 1 cash value formula
= flexible premium paid - mortality charges - admin expenses + interest at current interest rates
variable annuity tax-free amount of each payment
= investment in contract (adjusted for any refund feature)/multiple for age per IRS Table V
fixed annuity exclusion ratio formula
= investment in contract/expected return* *expected return = # expected payments x expected payment amount
accumulation unit formula
= value of separate account/# accumulation units owned by all annuity owners
contracts of utmost good faith (warranty)
full disclosure on part of proposed insured is required
number of policies needed with cross-purchase agreement
N x (N-1) N = number of owners
income retention approach
PVA = (PMT/i) x [1-(1/((1+i)^n))] PMT = income shortfall = insured's income - survivor's income
human life valuation approach formula
PVA = (PMT/i) x [1-(1/((1+i)^n))] PVA = PV of annuity due PMT = only insured's current income i = discount rate n = estimated number of years needed or years until survivor turns 67
capital retention approach formula
PVP = PMT/i
SS blackout period
SS benefits cease for spouse because youngest child is at least 16 years and surviving spouse is not yet 60 years
3 advantages and 4 disadvantages of whole life insurance polices
advantages: 1. fixed premium payments 2. income tax-deferred cash value accumulation 3. lifetime or long-term insurance protection disadvantages: 1. fixed premium payments and amounts 2. possible inadequate coverage given high cost 3. gradual cash value growth and return compared to other investments 4. possible surrender charges
bad reservation benefit
allows client to transfer out of a facility for short period (usually limited to no more than 30 days) without losing place in institution
unfunded deferred compensation plan
business established deferred compensation plan funding contributions on pay-as-you-go basis
voidable contract
for reasons deemed satisfactory by court, contract can be set aside by one of the parties
eligibility group
category of people who have certain characteristics impacting their health needs, such as age or disabled, and meet certain common requirements, such as income and asset levels
comprehensive form policy (HO-5)
covers all perils associated with HO-3 policy, plus additional coverage for personal possessions
single-limit liability coverage
covers bodily injury and/or property damage liabilities for any one accident with single dollar limit without regard to how much of limit for bodily injury and/or property damage
collateral source rule
damages assessed against negligent party should not be reduced simply because injured party has insurance protecting against specific peril
data and assumptions needed to determine LTC need
data: - current annual LTC cost - current age - assets to be used in case of LTC need assumptions: - LTC inflation - length of LTC need - age of LTC need - investment asset rate of return
return-of-premium rider
encourages insureds to limit claims made by requiring insurance company to return some or all of premiums paid if claims less than expected during specified period stated in policy
fixed annuity amount excluded annually from owner/annuitant's income
exclusion ratio x pension or annuity payments received in current year
substantial risk of forfeiture
exists if arrangement provides employee will forfeit stock in any of following circumstances: - employee does not remain with employer for specified period - employee does not meet certain sales or performance goals - employee goes to work for competitor - employee works for corporation not controlled by immediate family members
80% rule
homeowner's must maintain coverage equal to 80% of home's replacement value
misstatement of age or gender clause
if misstatement of insured's age or gender discovered after policy issued, company can adjust face amount of policy to amount premium would have been had age or gender been stated correctly
home insurance package policy
incorporates several types of coverages
estimated probable loss (EPL)
insurance company's estimate of realistic loss, assuming insured has and will continue to take steps to avoid losses
conditional contract
insured must perform or prove certain conditions before insurance company honors elements of contract
nursing home
licensed facility providing nursing care to individuals who are chronically ill or unable to perform daily living activities
life income settlement option
life annuity with period certain: - beneficiary paid specified amount periodically for life - payments guaranteed for certain number of periods - if beneficiary dies before specified period ends, payments continue to beneficiary's estate or contingent beneficiary until period ends life annuity with refund: - beneficiary paid income periodically for life - if death benefit not recovered at time of beneficiary's death, total amount of payments received does not equal or exceed basis of annuity - remainder up to basis is paid to contingent beneficiary in installments or lump sum
maximum possible loss and probability of loss: disability
max. possible loss: PV of future earnings probability of loss: higher than premature death, but relatively low in general
maximum possible loss and probability of loss: damages or losses to personal property
max. possible loss: limited to property's value probability of loss: generally low for total loss, but depends on type of personal property and geographic location
maximum possible loss and probability of loss: health care costs
max. possible loss: unlimited probability of loss: high for small claims, generally low for catastrophic claims
general damages
nonmonetary losses, such as pain and suffering
stock insurance companies
owned by stockholders and offer nonparticipating policies
dividend cash option
owner receives check on policy's anniversary date equal to amount of dividend declared by company
auto collision coverage
pays to repair client's vehicle and, if client at fault, collision damage costs
cost-of-living adjustment (COLA) rider
periodically increases disability benefit amount based on either percentage stated in policy or changes in inflation (CPI)
indemnity
policyowner will be reimbursed by insurer only up to actual loss and cannot profit
twisting
practice of inducing policyowner with one company to lapse, forfeit, or surrender life insurance or annuity policy for purpose of taking out policy through another company
benefit amount
predefined benefit insured will receive in situations disability claim paid
incontestability clause
prevents insurance company from contesting validity of policy after it has been in force for two years
fundamental aspect of insurance within financial planning process
provide protection against events causing economic loss
human life valuation approach
relies on: (a) current income (possibly adjusted my replacement ratio, which is reduction in income from reduced expenses and taxes at death) (b) estimate of years survivor will need income (c) discount rate to calculate PV of client's lifetime income
legal form
requires insurance contracts be filed and approved by state regulatory agency before sales can proceed for particular contract
deferred variable annuity
- most popular - payments made to account invested in underlying subaccounts to provide variable payment at owner's retirement - potentially provides inflation protection during relatively long investment period
executive bonus plan
- allows firm to deduct all ordinary and necessary business expenses for personal services rendered by key employee (including reasonable allowance for salaries and other compensation) - arrangement where: (a) business pays premiums on permanent life insurance policy (b) key employee owns policy (c) key employee is beneficiary or has selected beneficiaries - key employee may use accumulated cash value as needed
future purchase option rider (guaranteed insurability rider)
- allows insured persons to increase benefits on future specified dates with increases in their income - not available once insured becomes disabled
cash surrender value option
- allows owner who discontinues premium payments to surrender policy and receive net cash value (cash value less applicable surrender charges and/or outstanding policy loans) - may incur tax liability on part of cash value accumulation - owner loses income tax-free death benefit
special form/open policy (HO-3)
- also called all-risk form covering dwelling against all risks of physical loss except for the following specifically excluded: (a) termites (b) flood (c) earthquakes and landslides (d) ordinances of law (e) water damage (f) war (g) power failure (h) intentional damage or neglect
taxation of individual life insurance benefits
- annual cash value increase not subject to current income taxation and investment gains in variable contracts tax-deferred - if insured dies and policy never surrendered, cash value accumulation not taxed - premium payments not tax deductible, but premiums for group term life insurance provided to employees deductible by employer - dividends distributed from participating life insurance policy not taxable, but considered return of premium and reduces policyowner's basis - if dividends distributed exceed premiums paid to date, excess taxable as ordinary income - if regular policy, withdrawals receive FIFO income tax treatment (tax-free up to owner's investment or accumulated premiums) - partial withdrawals of cash value up to basis or loans taken on from policy are tax-free if not classified as MEC
general purpose health care flexible spending account (HCFSA)
- arrangement client sets up through employer to pay for many out-of-pocket expenses with tax-free dollars, including copayments and deductibles, quali
pure risk
- situation in which there is only the possibility of loss or no loss
negligence
- unintentional tort - when someone fails to act in reasonable prudent manner and causes harm to someone
8 homeowner's insurance underwriting factors
1. amount and type of coverage 2. home's age and condition 3. client's claim history 4. construction material 5. availability of local fire protection 6. availability of law enforcement or crime prevention services 7. location/rating territories based on crime rates, storm activity, and claims history of area 8. cost to rebuild client's home
5 LTC triggers
1. living alone 2. being older 3. being female 4. family health history 5. personal health characteristics (obesity, diet, exercise, substance use)
4 types of whole life insurance policies
1. ordinary or straight life 2. limited-pay whole life 3. modified premium whole life 4. single premium whole life
gain at surrender formula
= cash surrender value - investment in contract *investment in contract = premiums paid - dividends received - outstanding loans or withdrawals
universal life insurance period 2 cash value formula
= cash value period 1 + flexible premium paid - mortality charges - admin expenses + interest at current interest rates
severity
- extent of possible losses associated with an event
legal object
- requires subject of insurance contract be for legal business or legal purpose - if illegal, contract voided
2 FINRA rules required when recommending variable annuity
1. FINRA Rule 2330: Members' Responsibilities Regarding Deferred Variable Annuities 2. FINRA Rule 2111: Suitability
4 disability policy exclusions
1. preexisting conditions: company may deny coverage for claims considered to be health condition for which client received medical treatment or exhibited symptoms usually requiring medical care within time period prior to disability claim 2. act of war: disability or illness resulting from war 3. self-inflicted injuries 4. work-related injuries: exclude coverage for disabilities covered through workers' comp
3 ways to reduce shortfall while disabled
1. reduce disability household expense need 2. increase savings and investments to generate income in case of disability 3. purchase supplemental disability insurance in private market
3 strategies when assessing and evaluating need for homeowner's insurance
1. seek insurance providing replacement cost coverage 2. clients with collections and/or highly valued personal property should purchase special coverage for those items 3. if live in flood and/or earthquake prone area, should consider purchasing supplemental policies (damage not usually covered under standard policies)
maximum possible loss and probability of loss: liability due to negligence
max. possible loss: depends on settlement, but can be in millions probability of loss: low
methods to lower premium: disability insurance
- increase length of elimination period - choose safe(r) occupation - improve health through diet and exercise - avoid tobacco
supplemental coverages
- additional replacement cost coverage (guarantees full replacement cost of home) - debris removal coverage (additional 5% to 10% coverage limit if debris removal plus property damage more than coverage limit) - tree removal coverage (up to $500) - trees, shrubs, and other plants coverage (up to $500 per item) - fire department service charge coverage (up to $500) - credit card, funds transfer card forgery, and counterfeit money coverage (up to $500) - ordinance and law coverage (home partially damaged and cannot be rebuilt to original condition due to local building code changes up to 10% of coverage A) - personal property endorsement coverage (up to value of insured property) - water backup and sump pump overflow coverage - earthquake insurance coverage (deductible is 10% of home value or more) - flood insurance coverage - watercraft endorsement coverage (watercrafts 26' or under or without outboard engine > 25hp)
broad form policy (HO-2)
- covers only personal property against all perils in HO-1 - also covered against: (a) falling objects (b) weight of ice, snow, and sleet (c) damage from accidental discharge or overflow of water from within plumbing, heating, air conditioning, or sprinkler system (d) freezing of plumbing systems (e) electrical damage to appliances
personal umbrella liability policy (PUP)
- aka excess liability or umbrella liability policy - extend coverage above limits of liability coverage of homeowner's and automobile policies - pay after other policies' limits exhausted - provide legal defense if client found responsible for: (a) bodily injury (b) damage to others' property (c) personal injury (slander, defamation, libel) - usually within $1mil to $10mill - excludes liability from business activities, intentional acts, and illegal activities
deferred income annuity (DIA)
- aka longevity annuity - guarantee income for life or certain period of time - future income start dates chosen at contract issuance - contract owner makes payment start date decision in future, not at purchase date - elected income start date may be any time after first contract year and up to age 85; will remain same regardless when premium payments made - premium payments either single premium or flexible premium - purchase rates (annuitization rates) established at time of initial premium payment or subsequent premium payments
single premium whole life insurance
- all premiums paid in one up-front lump sum - most suitable for owner with cash windfall (lottery) and wants to give life insurance protection to heirs - provides tax-deferred buildup of cash value - death benefit payable from policy income tax-free unless subject to transfer-for-value income tax rules - classified as modified endowment contract (MEC) for tax purposes - may be subject to income tax and penalties on loans or lifetime withdrawals
intentional torts that nullify excess liability coverage
- assault and battery - slander - trespassing - conviction of fraud
law of large numbers
- asserts that the larger the number of members in a group, the greater the probability the actual loss experience will equal the expected loss experience - helps insurers predict with realistic accuracy how many of these losses will occur within a specific sample population during a given period of time and more accurately determine appropriate premium charges - if pool of insureds is large enough, loss of some can be spread out among many
insurance coverages emphasized during 3 phases of life
- asset accumulation phase: health and disability insurance needed, but emphasis on life and property and casualty insurance - conservation/protection phase: health, disability, life, and property and casualty insurance needed, but should start exploring long-term care insurance - distribution/gifting phase: disability no longer needed, life insurance not as crucial, health and long-term care insurance take priority, and property and casualty insurance maintained
3 defenses to negligence
- assumption of risk: applies when victim fully understood and recognized dangers involved in activity and voluntarily chose to proceed - contributory negligence: person cannot recover damages if own negligence contributed to injuries - comparative negligence: damages adjusted to reflect extent to which injured party's negligence contributed to injuries (adopted in place of contributory negligence)
ordinary/straight life insurance
- based on assumption that owner will pay premiums until death or endowment age (120) - provides max permanent death benefit for lowest possible premiums - premiums must be paid until death or endowment age - does not have opt-out feature - if insured alive at endowment age, policy endows (cash value now equal to death benefit and face amount paid to owner)
joint and survivor annuity
- based on lives of two or more annuitants - annuity payments made until last of two annuitants dies (in contrast to joint annuity where payments terminate at death of first annuitant) - mandatory payment form for qualified plan participant entitled to receive pension at retirement unless QJSA chosen - options include joint and 100%, 75%, or 50% survivor - annuity with reduced survivor benefit will pay more while joint annuitants alive
traditional net cost method
- bases calculations on projected premiums, dividends, and cash values over selected term - weakness is it does not consider TVM
nonforfeiture options
- benefits available in whole life insurance policy if policy discontinued during insured's lifetime - owner does not forfeit cash value accumulation, but chooses how existing cash value used
health savings account (HSA)
- combines features of high-deductible health insurance policy with tax-free savings account to be used in payment of individual qualifying expenses - contributions are tax-deductible and may be used to reimburse account owner for qualifying expenses - earnings not taxable until distributed, then not taxable unless not used for qualifying expenses - 20% penalty on distributions not used for qualifying expenses if made before age 65, unless owner disabled or has died - main disadvantage is participant must waive comprehensive health insurance coverage and enroll in plan with high insurance deductible (best for younger, healthier individuals unlikely to have large medical bills)
presumptive disability
- condition stated in policy contract that, when present, automatically presumes insured to be totally disabled and automatically renders payment - if presumption condition present, insured eligible for benefits regardless of whether person leaves workforce or not - conditions include loss of two limps or total loss of sight, hearing, or speech
variable annuity prospectus
- contains all of variable annuity's investment choices and fees, expenses, investment objectives, investment strategies, risks, performance, and pricing for each investment choice - financial planner required to provide prospectus to client at point of solicitation
exclusions
- contractual provision that denies coverage for certain perils, persons, property, or property locations - necessary part of every insurance contract and allows planner to identify gaps in risk management - examples include acts of war, terrorism in commercial policies, nuclear incidents, flooding, earthquakes, and intentional acts
qualified joint and survivor annuity (QJSA)
- couple elects higher monthly benefit amount under single life annuity and use part of benefit to purchase life insurance on plan participant's life with participant's spouse as beneficiary - known as pension maximization approach
professional liability (errors and omissions) insurance
- coverage for wrongful practices by professional service providers, including financial planners - covers faulty service (errors) or failure to provide service altogether (omission)
National Association of Insurance Commissioners (NAIC)
- created by state commissioners to coordinate all insurance regulation - promulgates model legislation, but has no formal legislative role - specifies 12 provisions that must be included in health insurance policies (entire contract provision, grace period provision, and payment of claims provisions) and several optional provisions
fixed indexed annuity (FIA)
- credits excess interest in accordance with external stock market index (usually S&P 500) - method for determining excess interest determined in advance and amount not known until end of year - credit interest annually - include monthly or annual interest rate cap on credit amount - provide only partial exposure to underlying index - deduct margin from index gains before crediting contract - withdrawal charges start at 10%, declining 1% each year
methods to lower premium: long-term care insurance
- decrease daily benefit amount - reduce number of years of coverage - improve health through diet and exercise - avoid tobacco
common exclusions from most health insurance policies
- dental care - eyeglasses - hearing aids - elective cosmetic surgery - workers' comp claims - claims for self-inflicted injury - long-term care expenses
public insurance
- designed to enhance public trust in financial institutions - usually mandatory and administered by government or quasi-governmental institutions - Federal Deposit Insurance Corporation (FDIC), Pension Benefit Guaranty Corporation (PBGC), and Securities Investor Protection Corporation (SIPC) administer public insurance
Affordable Care Act (ACA) of 2010
- designed to ensure all Americans have access to health care through purchase of health insurance - bars insurance companies from discriminating based on preexisting conditions, health status, and gender - provides better coverage and information needed to make informed decisions about health insurance - creates health insurance exchanges - offers premium tax credits and cost-sharing assistance to low and middle income families - invests substantially in Community Health Centers to expand access in communities where needed most - empowers Department of Health and Human Services and state insurance commissioners to conduct annual reviews of new plans demanding unjustified, egregious premium increases - allows children to remain on health insurance up to age 26 even if no longer tax return dependent
major medical plans
- designed to provide broad coverage for all reasonable and necessary expense associated with illness or injury wherever occurred - often underwritten as group plans - include deductible and coinsurance provisions - deductible may pay per illness, per person per year, or per family per year - deductible must be satisfied before company pays claims with exception of covered preventive care costs - after deductible met, company pays stated percentage of all remaining covered expenses that are usual and customary (coinsurance) - maximum out-of-pocket feature where there is maximum deductible and coinsurance amounts that beyond which the company pays 100% of covered medical expense
nonqualified deferred compensation plan
- designed to provide future retirement benefits for key employees - have three elements: (a) promise to pay benefit in future (b) possibility that promised benefits can be forfeited (c) predetermined funding method
capital retention method
- determines amount of life insurance needed using only interest or earnings to furnish continued support of family - original principal or capital saved remains at end of income period
annuity distributions upon death of annuitant
- distributions to anyone other than following must be distributed by end of tenth calendar year following annuitant's death: (a) surviving spouse (b) disable or chronically ill individual (c) individual no more than 10 years younger than annuitant (d) child of annuitant who yet to reach age of majority
dividends to reduce premium option
- dividends applied to reduce amount of annual premiums on policy - owner pays difference
dividends to accumulate at interest option
- dividends left with company to accumulate interest - amount accumulated added to death benefit if insured dies or cash value if policy surrendered - interest taxable as ordinary income in year earned
dividend paid-up additions option
- dividends used to purchase additional paid- up insurance coverage, hence increasing death benefit - cash value increases net cash surrender value
section 83(b) election
- employee who receives restricted stock may elect to recognize W-2 income immediately rather than wait until substantial risk of forfeiture expires - if made within 30 days of receiving restricted stock, employee includes FMV of stock at receipt less amount paid for stock as W-2 income - subsequent appreciation in stock value treated as capital gain
split-dollar life insurance
- employer and employee agree to split premiums and/or benefits of life insurance policy - used for executive compensation or gifts among family members - allows key employee to obtain high-face-value policy with low overall premium - if key employee owns policy, employer's premium payments treated as loans to executive; if executive not required to pay employer market-rate interest on loan, executive taxed on difference between market-rate interest and actual interest - if employer owner, employer's premium payments treated as providing taxable economic benefits to executive equal to key employee's interest in policy cash value and current life insurance protection
general purpose health care FSA
- employer reimburses participating employee for medical expenses specified in plan that are not covered by any type of health insurance plan, such as copayments, coinsurance, deductibles, and certain medical services - reimbursements tax-free to employees - unused amounts not carried forward, unless employer allows grace period up to 2.5 months - employees can contribute up to $2,700 from pay - employer contributions limited
restricted stock
- employer stock forfeited by employee/executive if employment performance not satisfactory or employment terminates before requisite period - stock value not taxable if stock subject to substantial risk of forfeiture - if no longer subject to substantial risk of forfeiture, stock value less amounts paid for stock taxed as W-2 income
methods to lower premium: health insurance
- increase deductible - improve health through diet and exercise - avoid tobacco
recurrent-disability rider (relapse provision)
- ensures insured will receive benefits if were to become disabled for second time because of previous disability - if relapse occurs within six months of return to work, then second disability considered continuation of initial disability (no second elimination period)
Medicare payroll tax
- equal to 2.9%, divided equally between employer and employee (1.45% each) - levied on all earnings with no income limit to provide financing of Medicare program - not deductible by employee - share paid by employer deductible as ordinary and necessary business expense - 3.8% Medicare contribution tax (NIIT) on lesser of NII or excess of MAGI over threshold
Archer Medical Savings Account (Archer MSA)
- established by HIPAA - tax-favored savings accounts for medical expenses - can no longer be established, only existing ones maintained - replaced by HSAs - tax-deferred until distribution - distributions for qualified medical expenses not taxable - taxable distributions subject to 20% penalty if made before age 65
underwriting
- evaluating risks and screening potential insureds regarding whether risk should be covered, how much coverage should be offered, and how much coverage should cost
4 factors that increase need for disability insurance
- excess body weight - tobacco use - participation in high-risk activities - chronic conditions (diabetes, high blood pressure, back pain, depression, excessive alcohol consumption, substance abuse)
Section 1035 exchange
- exchange of existing insurance-based contract for new insurance-based contract without having to pay taxes on gain in original contract - can provide new opportunities for flexibility and tax-deferred accumulation without taxes on cash value growth - tax on contract's gain deferred, not eliminated
LTC provisions and terms
- exclude coverage for preexisting conditions - exclude coverage for drug and alcohol addictions diagnosed within 2 years of policy purchase - potential discount if both partners of married couple purchase policies with shared benefits provision - bad reservation limit provision - dollar limit on maximum benefits paid daily ($50 to $300) - reimbursement structured (pay for actual costs incurred) - indemnity plan provision - maximum time benefit will be paid ranges from 1 year to lifetime (most commonly 2-3 years, but 5 years cover most needs) - elimination period usually 30 to 180 days - inflation rider
annuitized distributions
- exclusion ration used to determine taxable amount of each distribution - if annuity starts after 1986, total amount of annuity income that can be excluded cannot exceed cost of contract (excess fully taxable) - tax on systematic or periodic withdrawals apply to earnings first
transfer-for-value
- existing life insurance policy transferred for valuable consideration - insurance proceeds from death benefit includable in gross income of transferee to extent proceeds exceed sales price plus basis (loss of exclusion of death benefit)
Medicare
- federal government health insurance plan - secondary to health insurance through employer - covers individuals: (a) age 65 and over (b) have been receiving SS disability benefits for 24 months or more (c) on kidney dialysis treatment and in end-stage renal failure
10 factors considered when selecting insurance provider
- financial ratings - underwriting practices - asset size and age of company - track record - financial operating ratios - lapse ration (% policies terminated each year) - average policy size - product lines offered - average investment returns - form of ownership
single premium immediate annuity (SPIA)
- first annuity payment made one scheduled interval from purchase date (within 12 months of contract date) - purchased with single lump-sum payment - used when retirement plan participant transfers investment risk and payment responsibility to insurance company - purchase (annuitization) rates established at contract issuance
2 types of accumulation annuities
- fixed deferred annuity: account values change based on credits issued by insurance company - variable deferred annuity: account values change based on investment experience of assets held in account
annuity distributions
- for annuity part of qualified retirement plan, held in IRA, or purchased with qualified plan money, required minimum distributions must begin at age 72, but are not mandatory for non-qualified annuities - qualified charitable distributions may begin as early as age 70.5 for any type of annuity - distributions prior to age 59.5 subject to 10% federal income tax penalty on taxable portion
Medicare contribution tax (NIIT)
- for individuals, 3.8% on lesser of: (a) net investment income (b) excess of MAGI over threshold - for estates or trusts, 3.8% on lesser of: (a) undistributed net investment income (b) excess of AGI over $12,950 - does not apply to nonresident aliens
accelerated death benefit rider
- for insureds either terminally or chronically ill - if terminally ill (life expectancy 24 months or less), company will pay out portion of death benefit (usually 50% face amount) that is fully excludable, with remaining 50% paid out as tax-free income death benefit to beneficiary - if insured chronically ill, benefits paid on basis of costs incurred for qualified long-term care services fully excludable and those paid on per diem or periodic basis excludable up to limit
Medicare Supplemental Insurance (Medigap)
- form of private insurance that helps pay for certain health care costs not covered by Medicare - does not replace Medicare Part C - sold by private companies and put toward copayments, coinsurance, and deductibles - some offer coverage for medical care obtained outside US - each insurance company decides which policies it wants to sell, but state laws may affect which offered - insurance companies selling Medigap do not have to offer every Medigap plan, but must offer Medigap Plan A and Plan C or Plan F - covers coinsurance only after insured paid deductible unless Medigap pays deductible
buy-sell agreement
- funded using permanent life insurance, business earnings, sale of business assets, and laons - small business use these to establish value of company prior to event happening
methods to lower premium: property and casualty insurance
- increase deductible - install alarm system - buy less expensive assets (cost less to insure) - improve credit score - combine several types of coverage with single insurance company to get multi-line discount
gifting NQSO
- gift of NQSO to family member or qualified charity before exercise date - employee recognizes no gain on transfer date - when exercised by giftee, employee has W-2 income subject to FICA taxes - if donee qualified charity, employee gets charitable income tax deduction on the later of transfer date or option vesting date
universal life insurance
- gives policyowners ability to adjust premium, death benefit, and cash value to meet financial goals - does not have structured premium requirement - policy will remain in force as long as cash surrender value supports monthly deductions for mortality and administrative expenses - if cash surrender value insufficient to support deductions, owner must deposit additional premium to avoid lapse - owner does not have ability to direct investment of cash value
Medicaid
- government health insurance helping low-income households pay medical bills - administered at state level - to be eligible, must be part of state's eligibility group - states required to cover some groups - planner prohibited from provided advice regarding ways to move or shelter assets to become Medicaid eligible for LT care benefits
net investment income
- gross investment income reduced by investment interest expense, investment brokerage fees, royalty-related expenses, and state and local taxes allocable to items included in NII - investment income includes interest, dividends, capital gains, rental income, royalty income, nonqualified annuities, income from businesses involved in trading of financial instruments or commodities, income from businesses that are passive activities to taxpayer
excess interest annuity
- guarantees minimum interest rate for life of contract - does not allow insurer to declare discretionary excess interest - discretionary excess interest determined and guaranteed annually in advance and based on present and anticipated earnings on current investments of insurer - minimum interest rate based on 5-year constant maturity treasury index and set at contract purchase date - surrender charge on excess interest annuities capped at 10%, reducing to 0% after 7 to 10 years
life annuity with period certain
- guarantees minimum number of payments will be paid or annuitant will have income for life, whichever is greater - common period certain options are 10-year and 20-year period certain - if annuitant dies before guaranteed period, named beneficiary(ies) receive remaining guaranteed payments - using TVM, monthly payment to annuitant is less than single life annuity settlement option - the longer period certain, the less the monthly payout
guaranteed minimum income benefit (GMIB) rider
- guarantees owner can eventually annuitize certain minimum guaranteed income base regardless of contract's subaccount performance - guarantees minimum level of annuity payments
modified guaranteed annuity (MGA)
- guarantees principal and high rate of interest on amounts deposited for specified period with unqualified right to withdraw unadjusted cash surrender benefit upon end of specified period - owners select guarantee period (3, 5, 7, or 10 years) - withdrawals made prior to ending period may be adjusted and subject to charge - interest rate in MGA guaranteed during period, but excess interest rate may change each year - provide market value adjustment (positive or negative) that changes account value if annuity surrendered or withdrawal made
level term insurance
- has level death benefit and fixed annual premium for stated period - usually five-year increments - premiums for earlier terms are higher than those for ART - overpayment during early years funds increasing mortality cost for later ages - contract may allow renewability at increased premium - may be convertible
3 major types of managed care plans
- health maintenance organization (HMO) - preferred provider organization (PPO) - point of service plans (POS)
10 leading causes of death in US (health exposures)
- heart disease - cancer - chronic lower respiratory diseases - accidents - stroke - Alzheimer's disease - diabetes - nephritis, nephrotic syndrome, and nephrosis - intentional self-harm
LTC insurance partner program
- helps individuals obtain LTC insurance coverage - about $150,000 can be sheltered from required asset use by Medicaid (asset disregard), basically protecting household assets for transfer to heirs
strict liability
- holds tortfeasors liable for damages sustained by their actions or from their products, whether or not they were deemed "at fault" - if merchandise or service causes damage and claimant can prove product/service defective and dangerous, company held strictly liable - can be insured against - employers strictly liable for unpaid wages or underreported taxes
Section 1035 exchange characteristics
- if life policy or annuity contains LTC rider, values used from life policy or annuity to pay LTC rider will not be taxable distributions, but will reduce basis - exchange of annuity contract for life insurance policy is not tax-free because life policy taxed more favorably, such as by tax-free death benefit) than annuity - if exchange involves two life insurance policies both policies must be on same owner and insured, otherwise taxable - if exchange involves two annuity contracts, contracts must have same owner and be payable to same person(s), otherwise taxable
taxation of nonqualified stock options (NQSO)
- if no readily ascertainable FMV a date of grant, employee not taxed until exercise of option - on exercise date, bargain element is income to employee on W-2 (ordinary income) and subject to FICA taxes - bargain element = FMV on exercise date - option price at grant date - employer receives deduction for bargain element - holding period begins on exercise date - taxable basis in stock equal to exercise price plus ordinary income recognized
taxation of disability benefits
- if purchased directly and premiums not deducted on 1040, benefits received will not be taxable - if purchased through group plan and pays premiums with pretax dollars, benefits received subject to income tax - partnerships and S corps may deduct cost of premiums, but usually added back to employee's income instead
surrender charge
- imposed when full value of annuity contract is surrendered (lump-sum withdrawal) or when funds exceeding free withdrawal amount are withdrawn - percentage of amount invested (principal deposits) or percentage of entire account value - reduces over time (ex: 7% in first contract year, 6% in second)
methods to lower premium: life insurance
- improve health through diet and exercise - avoid tobacco
point of service plans (POS)
- incudes network of participating providers and other policies of managed care plans - includes indemnity-type benefits for patients receiving services from nonparticipating providers (benefit level lowered)
reentry term insurance
- insurance company may renew coverage at lower premium than guaranteed renewal rate if, at time of renewal, insured gives evidence of insurability - may be convertible
installment refund annuity (life with refund feature)
- insurance company promises to continue periodic payments after annuitant dies until sum of all payments equals purchase price of annuity - period certain similar to life annuity - cash refund option: unpaid balance paid in lump sum to named beneficiary(ies) at annuitant's death
estimated maximum possible loss (EMPL)
- insurance company's estimate of maximum loss that can be sustained by company for one risk - based on worst-case scenario
limited-pay whole life insurance
- insurance is permanent and insured has lifetime protection - premiums payable for limited number of years, after which policy becomes paid up for stated face amount
qualified longevity annuity contract (QLAC)
- insurance option that ensures retirees have stream of regular income throughout advanced years - type of deferred income annuity - made accessible to 401(k) plans and other employer-sponsored individual account plans and IRAs through amendment of required minimum distribution (RMD) regulations so longevity annuity payments don't need to begin prematurely to comply with RMD regulations
life insurance with LTC rider (hybrid policy)
- insured receives LTC benefits if needed, which reduce face value of policy - if LTC benefits not needed, insured's beneficiary receives full face value upon insured's death - not qualified LTC policy for income tax deduction and exclusion purposes because accumulate cash balance
self-insurance
- insuring individuals or entities by setting aside money to cover potential future losses rather than purchasing insurance (ex: health insurance) - greatest advantage to business is cost savings - greatest disadvantage to business is exposed to potentially large or catastrophic losses (can be minimized by purchasing high deductible insurance policy featuring stop loss coverage)
annual renewable term (ART) insurance
- issued and provides protection for one year - key advantage: policyowner can renew policy for subsequent periods to stated age without evidence of insurability - key disadvantage: premiums increase each year as insured ages - may be convertible
regulation of insurance by 3 branches of government
- legislative: provides for licensing of agents - judicial: rules on constitutionality of laws passed and renders decisions regarding policy - executive: administers, interprets, and enforces insurance laws
decreasing term insurance
- level premium with decreasing death benefit - used as mortgage protection insurance because decrease death benefit approximates declining principal balance as mortgage payments made - may be convertible
modified endowment contract (MEC)
- life insurance policies in which premiums paid within first 7 years of new policy or of material change to existing policy (increase in policy death benefit beyond certain amount) exceed IRC amounts (seven-pay test) and trigger MEC treatment (ex: single premium life insurance policy) - subject to LIFO, meaning all withdrawals/loans taxed first to extent of taxable earnings as ordinary income - 10% penalty on taxable portion of withdrawals/loans (excluding basis/premiums paid) taken before age 59.5 - basis considered returned only when earnings exhausted - death benefit tax-free to beneficiary - once MEC, always MEC
guaranteed minimum accumulation benefit (GMAB) rider
- living benefit rider - guarantees owner of variable annuity will receive at least return of principal, in lump sum, after specified waiting period - provides that if contract value at end of waiting period is less than guaranteed minimum value, insurer will make one-time contribution sufficient to bring contact up to guaranteed value
costs that should be planned for in terms of health events
- loss of income - PV expenses associated with paying down debts and future financial obligations - medical care
taxation of benefits at death of insured
- lump sum payment: excludible from income of recipient except for where transfer-for-value rule triggered - interest-only payment: fully taxable as ordinary income to beneficiary - installment or annuity payments: return of basis is nontaxable (ratio of face value to total amount of expected payments) and excess over basis is taxable interest - estate tax: proceeds included in decedent's gross estate if decedent had incidents of ownership at death, gifted policy within three years of death, or proceeds payable to decedent's estate
social insurance
- mandatory insurance administered by government, with benefits mandated by law - purpose is to protect people from large fundamental risks - includes Social Security, Medicare, Medicaid, and workers' compensation
private insurance
- marketed by private insurance companies - include disability, health, long-term care, property, liability, and life insurance - could be mandatory by state law
bonus annuity
- may offer bonus in form of credit added to initial premium - offered to give potential annuity clients incentive to choose particular annuity product
market value policy (HO-8)
- modified HO-1 policy - provides replacement cost coverage that cannot exceed amount necessary to repair dwelling using materials of like kind and quality - recommended when replacement value exceed market value
exclusion ratio
- money invested in nonqualified annuity (after-tax contribution) is recovered tax-free over life of annuity - simplified exclusion ratio can be used by those taking distributions from qualified plan in which client made after-tax contributions - clients with nonqualified plan or private annuity must use general exclusion ratio
first-to-die life insurance
- most commonly used in buy-sell or business continuation agreement to provide liquidity for one business owner to buy out family of second owner
possible limitations on disability benefit payments
- most have provision stating that if client's earnings decrease, benefits will be based on lower amounts and not higher initial income estimate - benefits typically reduced in one policy if client has multiple disability coverage, including SS unless policy explicitly excludes SS offsets - firms that offer disability coverage are allowed to discriminate in favor of HCEs and executives in terms of who can enroll and how much of premium paid by employer
material misrepresentation
- must be material before insurer may void policy and deny payment of claim - insurer must prove test of materiality - test of materiality: if insurer had known truth, would it have affected insurer's underwriting decision to extent that policy would not have been issued? - if insurer decides policy would still have been issued, can instead (1) increase premium and collect additional premium from inception of policy (2) decrease amount of coverage based on what premium would have purchased at increased rate
5 requirements of ISOs
- must be part of written plan approved by stockholders - exercise date of option cannot exceed 10 years from grant date - exercise price of option cannot be less than stock's market price on grant date - maximum value of stock to which ISO may first become exercisable in any one year is $100,000 (stock valued when option granted) - shares received through exercise of ISOs cannot be sold within 2 years of grant date and 1 year from exercise date, otherwise favorable tax treatment lost
broker
- must submit application to insurance company for approval before insurance is bound - represent interest of applicants and insured individuals/entities - when action taken against broker, consequences not attributed by courts to insurance company
voluntary employee's beneficiary associations (VEBA)
- mutual association of employees providing certain benefits to members or designated beneficiaries - funded by employees or employer - funds held in trust for payment of benefits - contributions and interest earned not taxable - mostly used by states and municipalities - usually established as tax-advantage payments to help employees pay life, sickness, accident, or other benefits to members/dependents/beneficiaries
reduced paid-up insurance option
- net cash value of original policy used as net single premium to purchase lesser amount of fully paid-up insurance - insurance purchased is same type of policy as policy discontinued - most appropriate for owner who wants some level of permanent death benefit with no future premium payments
long-term care (LTC) insurance
- nonmedical insurance policy paying for services and support for those needing LTC - actual trigger defined in each policy, but usually triggered when individual can no longer perform 2 of 6 daily living activities or experiencing certain level of cognitive impairment - usually excluded from individual and group health plans and Medicare - also helps pay for services related to instrumental activities of daily living - when issued, policy must be either guaranteed renewable or noncancelable - most commonly used to pay for nursing home, home health care, and hospice expenses - money in cafeteria plan cannot fund LTC insurance premiums nor can LTC insurance be offered as cafeteria-plan benefit - those using HDHP can use HSA assets to fund LTC insurance premiums
ISO taxation
- not taxable at exercise date, but bargain element is AMT adjustment - employee's taxable basis for regular income tax is ISO's exercise price - employees basis for AMT is ISO's exercise price plus bargain element - employer does not get deduction when employee exercises ISO - if stock acquired by ISO not sold until one year after exercise date and two years from grant date, gain in stock value treated as LTCG - if not held for above periods, bargain element taxed as ordinary income, but not subject to FICA taxes, and amount above FMV at exercise date taxed as capital gain with holding period equal to time from exercise date
home health care
- nursing received at home on PT basis - usually includes skilled nursing care, physical or occupational therapy, speech therapy, care from home health aides, and help from homemakers
absolute liability
- occurs due to dangerous activities causing damage to people or property - claimant does not need to prove behavior dangerous or defective
6 required elements of legally binding contract
- offer and acceptance - consideration - legal object - legal capacity - legal form - insurable interest
variable annuity
- offers variable (uncertain) amount of payment over given period based on performance of subaccounts - owner of contract directs investment of cash value among subaccounts and bears investment risk - rate of return depends on performance of assets within subaccounts - both security and insurance product, so financial planner needs securities license and state variable insurance license to sell this product - include death benefit equal to greater of: (a) premium paid (b) highest anniversary account value - offer guaranteed living benefit (guaranteed minimum account, income, or withdrawal benefit)
key employee
- officer having annual pay more than $185,000 - employee who is either of following: (a) 5% owner of business (b) 1% owner of business whose annual pay more than $150,000
right of subrogation
- on behalf of insurer - policyowner required to assign right of recovery against third party to insurance company if company pays for loss caused by third party
adjustable life insurance
- on initial application date, applicant choose death benefit and premium amount, then nonforfeiture values calculated - owner may elect to increase or decrease death benefit and/or change premium amount - changes result in new computations and new nonforfeiture values - usually has cost-of-living rider that allows owner to increase death benefit once every three years in same percentage amount as CPI without proving insurability
guaranteed lifetime withdrawal benefit (GLWB) rider
- optional - guarantees owner of variable annuity can make certain systematic withdrawals for life and be assured of receiving guaranteed amount of income regardless of annuity contract's investment performance - owner can withdraw up to specific percentage of protected value each year for life, even if contract value drops to zero and total withdrawals exceed benefit base
social security rider
- provides additional benefit depending on amount of disability benefits payable by SS - few insureds qualify for SS benefits - pays amount above policy benefit up to what SS would have paid
ESPPs taxation
- ordinary income recognized on lesser of: (a) FMV at grant date less option price, or (b) FMV on disposition date (date of death, if sooner) less option price - balance of gain treated as capital gain - if option price equal to FMV at grant date, all gain at disposition treated as capital gain if satisfies holding period requirements
aleatory contract
- outcome affected by chance and dollars collected by parties usually unequal - if no loss occurs, insurance company pays nothing - if loss occurs, insurance company may pay more than premiums collected
variable universal life (VUL) insurance
- owner directs investment of policy's cash value among variable subaccounts - increasing or decreasing death benefit - flexible premium payment schedule - cash value not guaranteed, but cash value held in subaccounts and not part of insurance company's general account - considered to be a security and life insurance product (planner must have securities license and state variable insurance license to sell this) - sold with prospectus - moderate to high risk tolerance appropriate
variable life insurance
- owner directs investment of policy's cash value among variable subaccounts - owner bears all investment risk (should have higher than average risk tolerance) - does not have guaranteed minimum cash value or interest rate - if fixed and level premiums continuously paid, policy will not lapse - considered to be a security and life insurance product (planner must have securities license and state variable insurance license to sell this) - sold with prospectus
7 property/liability exposures
- owning automobile/vehicle, home, or other personal property - being negligent (some forms can be transferred to insurance company) - acting as child care provider - renting property to others - employing household workers directly - engaging in business activities - engaging in hobbies that have potential to harm others - owning pets
social security disability insurance
- paid only to those who have substantial work history - paid only to workers with long-term impairments that preclude any gainful work by reason of medically determinable physical or mental impairment expected to last at least a year or result in death, regardless if arose on or off job - nature of impairment must be severe enough that worker cannot perform previous work nor do any other type of substantial gainful work - benefits begin after 5 month elimination period - high threshold of evidence to receive benefits - SS insured status required to satisfy eligibility for disability income benefits; status based on having paid SS taxes in 20 of 40 calendar quarters ending with quarter in which disability claim made
features of immediate annuity contracts
- payments payable in fixed dollar amounts and do not provide protection against inflation - may provide inflation protection with periodic increases based on fixed rate or index (CPI), but feature reduces initial payment amount - do not permit partial withdrawals - do not provide cash surrender benefits - some have commutation provision - include free-look period of 10 to 30 days during which purchaser can request refund of premium - income payments under life contingent immediate annuity based on client's age, gender, life expectancy, health, marital status, and premiums paid
survivorship (second-to-die) life insurance
- pays at death of second of two spouses - underlying policy, term or permanent, pays out at survivor's death and used to pay estate settlement costs, estate taxes, and transfer taxes - most common use is to provide liquidity to pay taxes upon death of second spouse - less expensive than separate insurance policies on each spouse - estate taxes of first spouse to die covered by unlimited marital deduction - usually owned by irrevocable life insurance trust with independent trustee to keep death benefit from being included in gross estate of surviving spouse
whole life insurance
- pays benefit at death of insured as long as premiums paid according to terms of contract - provides protection for entire life of insured while generating cash reserve available to owner during insured's lifetime - level premium over entire payment period
Option B death benefit
- pays increasing death benefit equal to NAR plus existing cash value - NAR remains level throughout policy term and monthly mortality cost increases with age - requires greater funding to keep policy in force than Option A
Option A death benefit
- pays level death benefit - when policy offers Option A death benefit, NAR decreases as cash value increases - monthly mortality rate increases with age, but rate applied to decreasing NAR
fixed annuity
- pays specified (fixed) interest rate over given period - provides more security of principal than variable annuity (designed for conservative investor) - does not take advantage of market conditions - funds held in insurance company's general account - insurance company bears all investment risk
grace period
- period during which owner may pay overdue premium (usually 31 days after due date) - during period, policy must remain in force and company cannot terminate coverage for any reason - if insured dies within grace period, company deducts overdue premium from death benefit payable
deferred annuity contract
- periodic income payments postposed (at least 12 months from purchase date) - periodic income payment amounts determined at purchase date - purchased with either lump-sum premium payment or periodic level premiums payments - amount of income annuitant will receive based on premiums paid and investment return or annuity accumulation on contract
no-fault automobile insurance or personal injury protection (PIP)
- permits client to recover financial losses from own insurance company regardless of who caused loss - restricts right to sue by establishing injury severity threshold that, if not met, prohibits person from suing for damages
ESPP requirements
- plan must be written and approved by shareholders - option grant price must not be less than lesser of: (a) 85% FMV on grant date (b) 85% FMV on exercise date - no employee can acquire right to buy more than $25,000 of stock per year, valued at grant date - shares acquired must be held for at least two years from grant date and one year from exercise date - if employee does not remain with company, outstanding stock options must be exercised within 3 months after leaving company - employees owning more than 5% of corporation may not participate
temporary life insurance
- provides coverage for a specified period - most common type is term life insurance
indemnity coverage (first dollar coverage)
- plans that provide this are called traditional plans - do not include deductible or coinsurance provision - reimburse insurance from first dollar of loss according to schedule list of allowed costs - offer more flexibility with health care needs, such as access to specialist without referral from primary care physician
personal contract
- policy between insurance company and named individual or entity - with exception to life insurance, policies cannot be assigned to another person with insurance company's permission
reinstatement clause
- policy may lapse if premiums not paid - specifies conditions under which lapsed policy may be reinstated - if policy has automatic premium loan provision, company automatically pays premium out of policy's cash value and continues coverage after expiration of grace period
adhesion
- policyowner can only accept or reject contract and cannot modify terms - if provision disputed in court, policyowner will get benefit of doubt regarding ambiguity in terms
superannuation risk
- possibility of running out of money during lifetime by choosing lump-sum distribution - appears when choosing settlement option between lump sum and lifetime stream of annuity payments at retirement or from life insurance death benefit
modified premium whole life insurance
- premiums lower for initial years after policy issue, usually no more than first five years, and then increase once after - simply ordinary life policy with different premium payment arrangement for owner expecting increasing income
accumulation deferred annuity
- premiums paid less expenses and fees are accrued in account - accumulated amount applied to purchase of income annuity that will be paid during payout phase of contract - maintains account value used in determining benefits - required to provide access to contract funds through partial or full withdrawals (surrenders) any time prior to or at retirement (may require cash be held for 6 months prior to distribution or have 10% limit per year without surrender charges) - distributions subject to surrender charge within specified period - provide cash payment in event of death before payout
health maintenance organization (HMO)
- prepayment organization - provides broad range of health services to group of subscribers for fixed monthly fee - medical providers receive monthly fixed payment for each enrolled patient (capitation fee) - PCP managed medical care and determines needs for specialists - major disadvantage is cost of medical care not covered, except for emergency care, if subscriber uses provider outside of HMO
disability waiver of premium rider
- prevents policy from lapsing as result of nonpayment of premiums during insured's disability - total disability usually required before rider triggered
tort
- private wrong - when person infringes on rights of another in way that gives injured person right to sue for damages - intentional or unintentional
fixed-period installments settlement option
- proceeds (principal and interest) paid over specified period or term - interest portion taxable - use exclusion ration to determine nontaxable portion of payment received
interest only settlement option
- proceeds of policy retained by insurer and reinvested - only interest paid to beneficiary - interest taxable as ordinary income in year earned
fixed-amount installments settlement option
- proceeds paid at set dollar amount per month until all principal and interest exhausted - interest portion taxable - use exclusion ratio to determine nontaxable portion of payment received
subaccount
- professional managed portfolios of debt and equity securities - each subaccount includes stocks, bonds, or combination of both depending on investment objective
affirmative warranty
- promise that is something true when coverage is applied for - statements made on application for insurance coverage are not affirmative warranties, but representations
auto liability coverage
- protects client if at fault in accident or collision - pays for medical expenses and vehicle damage for other driver and passengers
employee stock purchase plans (ESPPs)
- provide employees with options to purchase employer stock through payroll deductions - must be nondiscriminatory - limit on amount of employer stock employee can purchase
hospice services
- provide medical care designed to maintain or improve qualify of life for someone whose illness, disease, or condition unlikely to be cured medically - LTC policies also pay benefits if policy beneficiary receiving services in continuing care retirement community, board and care home, government-sponsored home for disabled and elderly, or community-based program - until LTC benefits paid, LTC provided in person's home or home of relative - hospice usually provided by family members
Medicare medical savings account (MSA) plan
- provided by insurance companies in partnership with Medicare - allow clients to acquire health coverage in same manner as an HDHP combined with MSA - do not cover Part D expenses - MSA deposits money into client's account and client can choose to use money to pay health care costs before meeting deductible - some may cover dental, vision, and LT care expenses not covered by Medicare for extra cost
free withdrawals
- provided for if annuity imposes surrender charges - allows contract owner to withdraw up to stipulated amount, usually 10% of contract's accumulated value, every year without incurring surrender charges - extends for same period of time that surrender charges apply - does not alter tax consequences; annuity withdrawals subject to income taxation and 10% penalty if taken before owner reaches 59 1/2 - never income tax or penalties on basis portion of withdrawals, but may be surrender charges
Health Insurance Portability and Accountability Act (HIPAA)
- provided there could not be enforcement of preexisting medical condition clause if: (a) employee covered by prior employer's health insurance plan for at least 12 months, and (b) fewer than 63 days elapsed since loss of coverage under prior employer's plan
consumer-driven health plan
- provides incentive for clients to control cost of health care - provide enhanced freedom to spend health care dollars using in- and out-of-network providers - clients required to pay much higher expenses initially
term life insurance
- provides insurance protection for stated period, after which no coverage afforded - "pure insurance" because does not accumulate cash value - some build up small cash reserve to cover future mortality costs and expenses (usually depleted by end of policy term)
straight (single) life annuity
- provides lifetime income to owner/annuitant regardless of how long they live - after annuitant dies, issuer makes no further payments - provides highest monthly payment amount - no residual value at death, so not includable in estate and subject to estate taxes
employer mandate
- provision created by 2010 Health Care Reform Legislation - requires certain employers to provide qualifying health care coverage to full-time employees and eligible dependents or be subject to monetary penalties - applies to firms with 50 or more full-time employees - avoid penalty by offering coverage to 95% of full-time employees and their eligible dependents
single premium annuity
- purchased with single lump sum - proceeds or benefits from qualified retirement plan often used to purchase immediate, single premium, fixed annuity
5 characteristics of insurance risk
- pure risk - accidental - not catastrophic for insurance company - potential pool of insureds must be large and homogenous - losses must be determinable and measurable
qualified LTC policies
- qualified LTC policy: (a) provides guaranteed renewability (b) does not provide cash surrender benefit (c) does not pay benefits by Medicare - premiums potentially deductible by individual or business - premiums can be combined with non-reimbursed medical expenses and used for AGI itemized medical expense deduction (limited based on age ranging from $450 to $5,200) - benefits received tax-free
accumulation unit
- quantity of measurement for purpose of determining annuity owner's interest in separate account - value of each unit depends on value of securities in which money is invested
factors of insurance company examined for rating
- recent performance - financial statements - leverage - management stability - competition - diversification - market presence
state government structure over insurance companies
- regulation under direction of state insurance commissioner or administrator - legislative authority regarding new insurance laws remains with state legislature - commissioner and staff decide whether all insurance companies operating in state meet legislative requirements - commissioner grants permission for insurance companies domiciled outside state (foreign companies) to sell products in state if meet specific financial requirements
insurable interest
- relationship in which person applying for insurance will incur loss (financial and/or emotional) from destruction, damage, or death of insured subject - for property and casualty insurance, must exist both when policy is written and when loss occurs - for life insurance, only needs to exist when policy is written
NAIC Model Replacement Regulation
- requires agent and applicant to sign statement when replacing existing policy - statement must be presented and read to applicant even if no replacement and must be submitted with new or original policy application - for each replacement policy, replacing insurance company must provide 30-day free look or preview of new policy with right to obtain full refund if subsequently canceled - company that issued original policy must be notified in writing about proposed replacement - replacing company may or may not require suicide clause in original policy to reset
Consolidated Omnibus Budget Reconciliation Act (COBRA)
- requires certain employers to provide previously covered individuals, including spouses and dependents, with same coverage received while employed after occurrence of qualifying event - benefit recipient must pay full cost of group coverage plus up to 2% premium to cover admin expenses - to continue health insurance coverage through COBRA, individual must experience qualifying event - not automatic, but must be elected by terminated employee or qualified party - election period may not end earlier than 60 days after notice of event - once elected, employee/beneficiary has 45 days to pay premium - premium retroactive to date of qualifying event - employers that offer group health insurance or self-fund insurance must provide continuation coverage under COBRA if have 20 or more employees (PT counts as half an employee) - government and church employers COBRA exempt
high-deductible health plan (HDHP)
- requires individuals to pay a higher deductible ($1,400 single) to cover medical expenses before insurance plan payments begin - chosen to save money on premiums - annual maximum out-of-pocket expenses cannot exceed ($6,900 for single coverage) - can have first-dollar coverage for preventive care and higher out-of-pocket copayments and coinsurance
static risk
- result from factors other than changes in the economy (earthquakes, floods, etc.) - tend to occur regularly and can be insured
dynamic risk
- result of changes in economy (business cycle, inflation, etc.) - not typically covered by insurance
viatical settlement
- sale of life insurance policy by terminally ill insured to another party, typically to investors or investor groups, who hope to profit by insured's early death - insured generally receives between 50%-80% face value and names buyer as beneficiary - buyer pays premiums after sale - death benefit less sales price and basis received by buyer taxable as ordinary income
guaranteed minimum withdrawal benefit (GMWB) rider
- same as GLWB, except not guaranteed for life of contract owner - owner can make certain systematic withdrawals over specified period and be assured of receiving at least return of premium or benefit base regardless of annuity contract's investment performance
secular trust
- same as rabbi trust, but not subject to claims of creditors or general expenses/obligations of business - contributions subject to income tax to key employee
cashless exercise of NQSOs and ISOs
- selling of employer stock to satisfy exercise price and other costs associated with exercise, such as income taxes - employee receives net amount of stock (stock remaining after sale of shares) or all cash
cafeteria plan
- separate written plan maintained by employer for employees that meet specific requirements and regulations of Section 125 - provides employees opportunity to receive certain benefits on pretax basis - participants must be permitted to choose from at least one taxable benefit and one qualified benefit - employer contributions made by salary reduction agreement and not considered wages to employee for taxable income purposes
Medicare Part A covers
- skilled nursing care - home health services - care in hospice for terminally ill - inpatient care in hospitals
3 types of damages
- special damages: designed to compensate injured person for measurable losses - general damages: compensate injured person for intangible losses that cannot be measured in dollars and cents - punitive damages: designed to punish wrongdoer; usually for intentional tort or acting with reckless disregard for others; usually not insurable
equity-indexed annuity (EIA)
- specialized type of annuity whereby insurance company credits contract owner with return based on changes in an equity index, such as S&P 500 - insurance company usually guarantees minimum return (floor), varying by issuing company - after accumulation period, insurance company makes periodic payments to owner/annuitant under terms of contract - combines features of traditional insurance products with securities - best for client who wants to participate in equities market without bearing investment risk of variable annuity
elimination period
- specified period of time, stated in policy contract, following beginning of disability during which expenses must be paid by insured - ranges from a few days to several years - policies with longer elimination period have lower annual premiums
Part B Medicare premium
- standard Part B premium of $144.60 payable each month if meet all of following: (a) enroll in Part B for first time in 2020 (b) do not receive SS benefits (c) directly billed for Part B premiums (d) have both Medicare and Medicaid and Medicaid pays premiums (e) have MAGI exceeding certain amount - Part B premium automatically deducted from benefit payment of SS, Railroad Retirement Board, or Office of Personnel Management and usually $110 - may pay more than standard amount if MAGI above certain amount, called Income Related Month Adjustment Amount (IRMAA), using MAGI from tax return 2 years prior
workers' compensation
- state-managed fund financed through employer contributions - premiums paid based on industry classification of employer and occupation classification of workers - premiums higher or lower based on employer's experience rating (shows if workers paid more or less benefits for workers for similar employers in same insurance classification - provides benefits to workers injured on the job or have work-related illness - include medical treatment and cash payments to replace portion of lost wages - provided benefits for both short-term and long-term and for partial and total disabilities - if condition has permanent consequences, worker's comp will pay permanent disability benefits - if death results from work activity, insured's dependents will receive survivor benefits - disability policies do not pay benefits if insured injured on job or has work-related illness
deductible
- stated amount of money the insured is required to pay on loss before insurer will make payments under policy - help eliminate small claims, reduce premiums, and decrease morale hazards - used mainly in property, health, and automobile insurance contracts - each member of insured's household usually has to meet individual deductible amount
term of renewal
- stated in disability policy contract - confirm rights of insured and insurance company to renew, cancel, and/or adjust/modify premiums or benefits - with employer group plan, employer is policyholder and has renewal rights
Patient Protection and Affordable Care Act of 2010 and Health Care and Education Reconciliation Act of 2010
- those not eligible for Medicare, Medicaid, or other government-provided health care must maintain certain minimum levels of essential health care coverage - penalty if fail to maintain minimum level - plans covering dependents must allow coverage of adult children until age 26 - prohibits lifetime and annual coverage limits for essential deductibles, copayments, or coinsurance - insurers cannot: (a) cancel coverage after insured gets sick unless fraud in application (b) impose preexisting conditions or exclusions or deny coverage based on preexisting conditions for children under 19 (c) impose higher deductibles, copayments, or coinsurance for emergency services provided by out-of-network provider (d) establish eligibility rules in favor of HCEs - plans required to provide women with direct access to in-network OBGYNs and children with in-network pediatricians without preauthorization or prior PCP referral)
not insured under homeowner's policies
- travel trailers - camping trailers - motor homes
rabbi trusts
- trust used to fund nonqualified retirement benefit for rabbi - deferred compensation contributions placed in trust - money can only be used for beneficiary's retirement - to avoid current taxation on plan assets, trust assets remain subject to claims of creditors, but not to general expenses or obligations of business
Section 1035 valid exchanges resulting in postponement of taxes
- two life insurance contracts - life insurance contract for endowment or annuity contract - two annuity contracts - endowment insurance contract for annuity contract - two endowment insurance contracts (only if new contract provides regular payments beginning on date no later than the date payments would have begun under old contract) - life insurance, annuity, or endowment contract for tax qualified long-term care insurance policy - two qualified long-term care insurance policies
disability insurance
- typically purchased through employer's benefit package or in private market - benefits always based on insured's actual earnings received from job or occupation - most impose maximum benefit based on percentage of insured's gross salary or wages
taxation of annuity distributions
- unless from qualified plan funded with pretax dollars, portion of every payout considered to be partial return of principal (not taxable) and account earnings (taxable) - two types: (a) non-annuitized (b) annuitized (distributions using periodic payments) - if employee did not pay any part of cost of pension/annuity and employer did not withhold part of cost from paycheck, amounts received each year fully taxable to employee
annuity unit
- used when time comes to pay out variable annuity income to annuitant - individual will receive value of certain number of annuity units at each payment - once number of annuity units is determined using life insurance annuity tables, number of units remains fixed during entire payout period, but value of units may change from payment to payment depending on underlying investments
managed care plan
- uses co-payments instead of annual deductible - requires initial consult with primary care physician regarding health issues and PCP then coordinates specialized care - developed on belief that preventive care less expensive than treating illnesses after they arose
human value life method
- uses individual's income-earning ability as basis - project income person will earn during employment career then uses discount rate to determine PV - does not consider survivor's lump-sum needs if insured dies - uses family's share of earnings concept (takes into account what insured would have earned after taxes and personal consumption)
extended term insurance option
- uses net cash value as net single premium to purchase paid-up term insurance policy - term insurance policy face amount equal to face amount of original policy for specified period - most appropriate for owner wishing to preserve original death benefit protection for limited time
suitability
- when recommending purchase or exchange of annuity to client resulting in insurance transaction or series of insurance transactions, financial planner must have reasonable grounds for believing recommendation is suitable for client - recommendations must be based on client's information - financial planner must have reasonable basis to believe client is informed of and would benefit from various features of annuity - financial planner must believe particular annuity as a whole, but also underlying subaccounts, riders, exchanges, replacements, and enhancements, are suitable
speculative risks
- when there is a possibility of a gain (ex. gambling) - cannot be properly evaluated or measured
participating policy
- whole life insurance that pays dividends (not guaranteed) - usually only issued by mutual companies, but can be issued by stock companies - dividends paid if insurance company has favorable investment, expense, or mortality experience
riders/endorsements
- written additions to insurance contract modifying original provisions - allow policyholders to customize insurance contract to needs
12 automobile insurance discounts
1. antitheft/antivandalism devices 2. auto club memberships 3. auto/home packages 4. car pool 5. college student away from home over 100 miles away 6. approved defensive driver over age 55 7. good driver 8. good student (B average or better) 9. low annual mileage 10. mature driver credit 11. multiple vehicles 12. safety devices (air bags, seat belts, antilock brakes)
9 provisions of HSAs
1. any individual below Medicare age not covered by another health plan can establish account 2. up to 100% of contributions tax-deductible with maximum yearly contributions limited to $3,550 for single coverage 3. high deductible required on policy part of account ($1,400 for single coverage) 4. annual maximum out-of-pocket expenses cannot exceed ($6,900 for single coverage) 5. individuals 55 to 65 may contribute additional catch-up amount of $1,000 6. contributions not spend on qualifying medical expenses carried forward for lifetime and transferred at death to spouse on tax-free income basis 7. OTS drugs and medicines, other than insulin, not qualified unless prescribed 8. preventive care services not subject to deductible 9. individual can make one-time, trustee-to-trustee transfer from traditional IRA to HSA not subject to income tax, but limited to maximum annual HSA contribution
3 automobile part A liability policies
1. bodily injury liability insurance: financial protects insured and family if sued by someone injured in accident insured involved in, including legal and court costs and damages awarded 2. property damage liability insurance: pays insured's legal responsibility for damage to property of others cause by collision with insured's car 3. uninsured motorist insurance: pays for client's bodily injuries and those of passengers if insured hit by uninsured motorist or hit-and-run driver responsible for accident (does not pay for damages to insured's car)
8 Medigap plan rules
1. client must have Part A and B 2. if client has Part C, must leave Part C before Medigap policy begins 3. client pays private insurance company monthly premium in addition to Part B premium 4. covers only one person (if client and spouse both want Medigap, must get separate policies) 5. may buy Medigap from any insurance company licensed to sell one in their state 6. standardized Medigap guaranteed renewable even if client has health problems and pays premiums 7. not allowed to include prescription drug coverage 8. illegal to sell to anyone with Medicare MSA plan
11 factors to consider when evaluating need for disability coverage
1. client's current health status 2. family health history 3. risks associated with current employment 4. risks of hobbies and recreational activities 5. income contribution to household's overall earnings 6. present or absence of emergency savings 7. potential sources of income in case of emergency 8. household's tax situation 9. ability of household to cut back expenses in event of emergency 10. household's ability to obtain ST funding, loans, and financing in event of emergency 11. accessibility to employer-provided disability coverage and the following, if access available: (a) policy definition of disability (b) integration with SS and WC benefits (c) length of elimination period (d) annual premium (e) ability to pay premiums with pre- or after-tax dollars (f) portability provisions and riders (g) length of benefit
4 duties principal owes to insurance agent
1. compensation 2. reimbursement and indemnification 3. cooperation 4. safe working conditions
8 claims paid for under homeowner's and renter's insurance (homeowner's and renter's risk exposures)
1. damage to client's home, garage, and other outbuildings 2. loss of furniture or other property due to damage or theft, both at home and away 3. additional living expenses if client forced to rent while house repaired 4. bodily injury and property damage caused by client through negligence 5. injuries happening in and around client's home to anyone other than family 6. accidents happening in and around client's home for which they are responsible for 7. loss of money, gold jewelry, and collections 8. personal property in storage
9 life insurance needs analysis factors
1. estimate of final expense needs (including medical and funeral costs) 2. readjustment fund to help insured's family cover unexpected costs and adjust to loss of income 3. estimate of debt, liabilities, and mortgage payoff amounts 4. PV estimate of amount needed to pay for dependent expenses while children in school 5. PV estimate of amount needed to pay for spouse's or partner's living expenses until their retirement or death 6. calculation of gross insurance need 7. summary of insurance currently in place 8. summary of other assets 9. calculation of client's net need
human life value method formula
1. family's share of earnings (FSE) = annual earnings - (annual taxes + annual consumption) *annual taxes = annual earnings x effective tax rate **annual consumption = (annual earnings - annual taxes) x consumption % 2. solve for PV of George's life: BEG mode on calculator PMT = FSE I/YR = [[(1 + annual earnings % on investments) / (1 + annual salary increase %)] - 1] x 100 N = retirement age - current age
10 steps for family needs or insurance needs analysis
1. gather information 2. estimated FMV of assets owned and classify as liquid or nonliquid 3. determine liabilities to be paid off if client died today 4. determine liquid assets remaining after liabilities and postmortem expenses 5. estimate funds needed to provide all dependents income until youngest child reaches 18 or 19 years when SS benefits cease 6. estimate amount required to provide higher education for children 7. estimate preretirement income for surviving spouse for period of SS blackout 8. estimate retirement income for surviving spouse 9. determine amount needed for emergency fund 10. determine insurance needs by adding 5-9 and subtracting total resources available
four factors required for negligence
1. have duty to act 2. engage in breach of duty to act 3. cause injury or damage due to breach of duty to act 4. injury/damage direct result of negligence
4 methods of life insurance needs calculation
1. human life valuation approach 2. multiple of income approach 3. capital retention approach 4. income retention approach
4 rules investors follow before entering viatical settlement
1. insured must have owned policy for at least 2 years to ensure contestability period expired 2. insured must be terminally ill, with remaining life expectancy no more than 2 years from agreement date 3. insured must sign release permitting investor to access medical records 4. insured must sign waiver releasing investor from liability associated with changing existing beneficiary designations
6 important health statistics
1. just over one in four 20-year-olds will become disabled before retirement 2. over 37 million Americans (12% of population) are classified as disabled 3. more than 50% of disabled are between 18-64 years 4. almost 9 million disabled wage earners (5% of US workers) receive SS Disability Insurance benefits 5. 90% or more of disabilities are caused by illnesses rather than accidents 6. women have longer life expectancy than men, meaning they have a higher need for disability insurance
5 provisions of QLACs purchased on or after July 2, 2014
1. maximum age at commencement of income: specified annuity starting date in contract must be no later than first day of month following employee's attainment of age 85 2. maximum allowed investment: 401(k) or similar plan or IRA may allow plan participants to use up to 25% of account balance or $125,000, whichever is less, to buy QLAC without worry of noncompliance with age 70 1/2 minimum distribution requirements 3. allowing return of premium (ROP) death benefit: if buying retirees die before or after age of income commencement, premiums paid and not yet received as payments will be returned to accounts and paid to beneficiaries 4. protecting persons against unintentional payment of excess longevity annuity premiums: if individual accidentally exceeds limit on premium payments, allowed to correct excess without disqualifying purchase 5. allowing more flexibility in issuance: when contract issued, contract (or rider or endorsement) must state contract is intended to be QLAC
6 common causes of disability
1. musculoskeletal/connective tissue disorders 2. cancer 3. injuries and poisoning 4. mental disorders 5. cardiovascular/circulatory disorders 6. disorders of nervous system and sense organs
4 parts of Medicare palns
1. part A - hospital insurance 2. part B - supplementary medical insurance: no cost for preventive services if health care provider accepts assignment 3. part C: Medicare advantage plans 4. part D - outpatient prescription drug coverage: provided by private companies; penalty if not enrolled when first eligible but join later
2 types of disability policies
1. short-term having maximum benefit of 2 years; usually base benefits on own-occupation 2. long-term having benefits that can last remainder of person's life, but usually until age 65 (transition to Medicare); use split-definition
RMDs for sole designated beneficiary spouses
1. treat as annuity of their own, or 2. base RMDs on own current age, or 3. base RMDs on annuitant's age at death, reducing distribution period by 1 each year, or 4. withdraw entire account balance by end of fifth year following annuitant's death if annuitant died before RMD beginning date - can wait until annuitant would have turned 72 to begin RMDs
