Dalton CFP, November 2021

How do you become eligible for Social Security survivorship benefits?

"Fully-insured" = earned 40 quarters "Currently insured" = earned at least 6 quarters of coverage out of previous 13 quarters for SS.

You currently have a $450/month health insurance premium where your employer pays $350/month and you pay the other $100/month. You lose your job, but want to continue coverage through COBRA. How much do you need to pay out of pocket per month?

$450/month plus 2% to cover administrative costs under COBRA

Assume Bob has a policy that provides $200,000 of insurance on his dwelling with an 80/20 coinsurance clause and a $1,000 deductible. The current replacement cost is $300,000. How much will Bob collect if he suffers a covered loss with a replacement value of $50,000, but an actual cash value of $30,000?

(Amount of Insurance Carried / Coinsurance) x Loss - Deductible = [200,000 / (300,000 x .80)] x 50,000 - 1000 = 40,667 Insurance company will pay the greater of the coinsurance amount and the actual cash value. 40,667 or 30,000

What is required for a risk to be considered "insurable"?

- Large number of homogeneous exposures - Losses must be accidental, measurable, and determinable - Losses can't be catastrophic for the insurer - Premiums must be affordable

What are the five general legal requirements for an insurance contract to be considered valid and enforceable?

- Must be an offer & acceptance (mutual consent) - Must be an exchange of consideration (both parties must give up something of value and it doesn't need to be money) - Must be legal competency of both parties (age 18+ and of sound mind) - Must be performance (your offer & acceptance had to do with something being done, whether it was a sale, an act, etc.) - Must be for a legal purpose

What are the characteristics of whole life insurance?

1) Fixed premiums 2) Fixed face value / death benefit 3) There is a savings component, this is a cash value policy 4) Insurance company makes investment decisions of cash value

What are the characteristics of a variable life insurance policy?

1) Fixed premiums 2) Fixed face value / death benefit 3) There is a savings component, this is a cash value policy 4) The insured makes the investment decision of the cash values

What are the characteristics of annual renewable term life insurance?

1) The premiums increase due to mortality 2) The face value / death benefit is fixed 3) No savings component or cash value 4) No investment options

What are the characteristics of a major medical policy?

1) They contain coinsurance provision 2) They provide coverage for hospital, physician's and surgeon's fees 3) They have an annual deductible, coinsurance to stop-loss, then insurance company pays

How does a policy become a Modified Endowment Contract (MEC)?

1) This happens when you fail the "7 Pay Test" 2) Essentially you pay in the premiums too quickly 3) Your premium payment rate is so high, the policy becomes "paid-up" by 7 years (paid-up means you don't have to pay anything else)

What are the characteristics of variable universal life insurance?

1) Variable premiums, subject to required minimum 2) Has a guaranteed minimum death benefit, but can increase if investment experience on cash value is good 3) There is a savings component 4) Insured directs investments of cash values

What are the characteristics of universal life insurance?

1) Variable premiums, subject to required minimum (flexible) 2) Face value / death benefit may increase above initial face amount depending on cash value accumulation 3) There is a savings component 4) Insurance company directs investments of cash values

What are the tax benefits of an HSA?

1) Your contributions are tax deductible 2) Distributions for qualified medical expenses are excluded from income 3) Non qualified withdrawals prior to age 65 incur a 20% penalty 4) Employer contributions are not taxed 5) Not annual use or lose (like flexible spending accounts)

What are 1035 Exchanges? And what qualifies as a 1035 exchange?

1035 Exchanges are Tax Free Exchanges = (LEA) Life Insurance to Endowment; Life Insurance to Annuity; Endowment to Annuity Taxable Exchanges = Annuity to Endowment; Annuity to Life Insurance; Endowment to Life Insurance

What COBRA term does an employee qualify for if their employment is terminated or they move from full-time to part-time status?

18 month COBRA Term (no coverage for termination for "gross misconduct")

What COBRA term do you qualify for if the employee meets the Social Security definition of disability?

29 month COBRA Term

What is a Social Security disability benefit?

A Social Security benefit available to recipients who have a severe physical or mental impairment that is expected to prevent them from performing "substantial" work for at least a year or result in death. To qualify for these benefits, the recipient must have the sufficient amount of Social Security credits.

What is a Social Security survivorship benefit?

A Social Security benefit available to surviving family members of a deceased, eligible worker.

What is the "Cross Purchase" Buy-Sell Agreement?

A buy-sell agreement to which only the owners are party and under which surviving owners agree to purchase the business interest of a deceased, disabled, or retired owner.

What is a residual income provision?

A provision that will provide continuing benefits for an insured who returns to work but suffers a reduction of income due to a disability.

What is an installment refund annuity?

A special type of term certain annuity where by the insurer promises to continue periodic annuity payments after the annuitant has died until the sum of all annuity payments made equals the purchase price of the annuity.

What is "own occupation" disability insurance?

A type of disability insurance policy that provides benefits to a policyholder if he is unable to perform the duties of their own occupation. This type of policy is more expensive than any occupation policy. E.G. Surgeon hurts hand, so he teaches. In this case he would get his disability benefit + his teacher's salary. This has the best coverage. If you can't do your own occupation then you are considered disabled.

What is "any occupation" disability insurance?

A type of disability insurance that provides benefits to a policyowner if he or she is unable to perform the duties of any occupation for which he or she is suited by education, training, or experience. E.G. A surgeon who hurts hand could still teach so this would not be recognized at a disability under "any occupation" insurance. This is not very good coverage.

On HO coverage list the following for Section I: A) ? B) ? C) ? D) ?

A) Dwelling B) Other Structures C) Personal Property D) Loss of Use

What is COBRA?

A.K.A "Consolidated Omnibus Budget Reconciliation Act" it allows you to continue your health insurance coverage even though there's been some kind of event where you would have normally lost coverage.

You adhere to the contract as written. Because you didn't write the contract, any ambiguities are in favor of the insured or policy owner.

Adhesion

The tendency that those who most need insurance seek it out

Adverse Selection

A type of insurance contract in which the dollar amount exchanged is uneven (E.G. you pay premiums over your life & never file a claim; or you make two payments then your house is destroyed)

Aleatory

What is an open perils policy?

All risk coverage for personal property that provides for a much broader & more comprehensive protection program than named perils coverage. It covers any risk that is not specifically excluded in the policy. Exclusions include: sink hole collapse, earthquake, sewage backup, refrigerated property coverage.

What is a flexible premium annuity?

Allows the insured the option to vary premium deposits. This might be a good annuity for someone who has fluctuating income (commission-based employees).

What is a deferred annuity?

An annuity contract that does not begin payments immediately, but waits until some future time to start payments.

What is an immediate annuity?

An instrument created when the contract owner trades a sum of money in return for a stream of income that begins immediately.

When must you have insurable interest on life insurance?

At the inception of the policy

When must you have insurable interest on property?

At the inception of the policy and at the time of loss

How do you qualify for Medicare?

Attain age 65. Or receive disability benefits for two years.

What should you do with a risk that is high severity / high frequency? (E.G. living in a extreme weather area like tornado alley)

Avoid Risk

When the insured is intentionally silent regarding a material fact during the application process (E.G. you are aware of a certain health issue, but you purposely don't disclose it in your application)

Concealment

What are HO-6 Homeowner's Insurance policies forms?

Condo coverage, which covers the same perils in HO-2 & HO-4, but doesn't provide building coverage except for additions & alterations.

For a Personal Auto Policy, what is Section D for? Who's covered? What does it pay for?

Coverage for Damage to Your Auto: Collision = Stationary Objects (like a tree); or single car accident like a rollover Comprehensive = Moving (Falling Object; stolen; fire; weather related damage; animal; riots, etc.) Coverage goes with the driver.

How can you qualify for 36 months of COBRA coverage?

Death of a covered employee; divorce or legal separation of a covered employee; loss of dependent status; eligibility for Medicare (COBRA is typically available for 18 months for the covered worker & 36 months for survivors or dependents of covered worker).

For a Personal Auto Policy, what is Section E for? Who's covered? What does it pay for?

Duties After a Loss: Contact insurance company, mitigate damage, local authorities, etc.

On HO coverage list the following for Section II: E) ? F) ?

E) Personal Liability F) Medical Payments to Others

What is IRC Section 162?

Employee purchases and owns the LI plan. The company then pays the premiums, so they can take the deduction. The premiums are like compensation to the employee, so they are taxable income. The employee has to pay the income tax on the premium with no cash, so a second bonus is paid to the employee to cover the tax.

Who is required to offer COBRA?

Employers who have 20 or more full-time (equivalent) employees and offer group health insurance.

What would positively affect your credit (FICO) score?

FICO Scores have a 7 year lookback. 1) History of regular & timely payments 2) Amount of debt (low debt is a plus) 3) Credit utilization (best if < 30% of

A loss of value such as premature death of a family's primary wage earner. (Life insurance can protect you against financial risk)

Financial Risk

What are the three payment levels of health insurance?

First, the insured has to pay deductible Next, coinsurance must be paid (i.e. 80/20...insurance pays 80% of all costs in excess of deductible & insured has to pay 20% generally up to a stop loss amount (i.e. $1,500)) Finally, once the insured pays the deductible & the stop loss amount ($1,500), the insurance company pays for anything above that amount

A risk that can affect many people at once (E.G. Earthquake, Hurricane, Tornado)

Fundamental Risk

For a Personal Auto Policy, what is Section F for? Who's covered? What does it pay for?

General Provisions: Auto policy is effective in US / Canada (not Mexico), covered autos, exclusions, things specific to policy

What HO policy forms are the most comprehensive?

HO-3 and HO-5 (open-peril policies)

Conditions that increase the likelihood that a peril will occur

Hazard

Why do people need Long Term Care (LTC) insurance?

Health insurance doesn't cover long term care. Medicare is not a good alternative; Medicare will only pay for up to 100 days in a skilled nursing facility (requires hospital stay). Medicaid covers LTC, but you must have spent down your assets in order to qualify for Medicaid (low net worth)

To make one whole; to put you back in the same financial position after loss occurred (E.G. repairing car after accident)

Indemnity

Any financial interest in life or property such that, if the life or property were lost or harmed, the insured would suffer financially.

Insurable Interest

What is a Rabbi Trust?

Is informally funded and is promise-to-pay. It is composed on general assets of the company that issued it. Although assets are technically set aside, they remain general assets. They are available for creditors. It have a "springing irrevocability" clause, but that's going to be for mergers, acquisitions, and takeovers. It is not going to cover if company goes bankrupt. Grantor trust designed to segregate nonqualified deferred compensation benefits from an employer's general accounts.

Secular Trust

It is an irrevocable trust where the money is formally funded and set aside. It is not available to creditors. It does not create a substantial risk of forfeitures. It will be taxable to the employee because it is irrevocable. There is a tax consequence and there is a way to eliminate the tax consequence to the employee, and that is by putting on a graduated vesting schedule...so as they're vested that says they get taxed. Whatever they're vesting is the amount they will be taxed on in that given year. As employee is taxed, the employer gets their tax deduction. One under which trust assets are not subject to the claims of the employer's general creditors Firm makes contributions to a trust and the trust terms such that assets cannot revert back to the firm but assets are NOT available to firm's creditors.

What is "modified" disability insurance?

It may start out as a "own occupation" policy, but after a few years they may switch to a "modified" policy. If you're still unable to work in some kind of capacity relevant to your education / training then insurance will keep paying, but it you can still do something (E.G. doctors) can do then you are no longer considered disabled.

What is a joint and survivor annuity?

It pays past the death of the first person until the death of the second person.

On a homeowner's insurance policy, what is basic coverage?

It protects the homeowner from losses associated with specifically named perils. 1) Fire 2) Smoke 3) Explosions 4) Lightning 5) Hail 6) Windstorm 7) Theft 8) Vandalism 9)Damage from aircraft 10) Damage from vehicles 11) Riots & civil commotion 12) Volcanic eruption

What is a Cost of Living Adjustment (COLA) rider?

It provides a cost of living adjustment to benefit payments based on increases in inflation. Typically these are tied to the CPI.

On a homeowner's insurance policy, what is broad coverage?

It provides protection for the perils covered in basic coverage, plus additional protection for named perils not covered under basic coverage. Falling objects; weight of ice, snow, sleet; sudden & accidental tearing, cracking, bulging of household systems / appliance; freezing of a household system; accidental discharge or overflow of water or stream; sudden & accidental damage from artificially generated electric current

What does a pure life annuity provide? (also known as a life annuity)

It provides the max periodic payout. It also provides a stream of income to annuitant for life. This may not be appropriate for someone who wants to leave month to their heirs (no bequests guaranteed).

What is the advantage / disadvantage of having a policy that is integrated with Social Security?

It will be less expensive than a policy that is not integrated. It also reduces the payout of disability income payments if the insured also qualifies for Social Security disability.

For a Personal Auto Policy, what is Section A for? Who's covered? What does it pay for?

Liability: 100/300/100 $100k bodily injury per person $300k bodily injury per accident $100k of property damage per accident This form of auto insurance goes with the drivers (not the car).

For a Personal Auto Policy, what is Section B for? Who's covered? What does it pay for?

Medical Payments: Covers you or anyone in your car, or you or a family member that is hurt as a pedestrian.

Are withdrawals from cash value policies based on LIFO or FIFO? What about Modified Endowment Contracts?

Most policies are taxed on a FIFO basis (IRS says you're withdrawing premiums) LIFO: IRS says you're withdrawing earnings and you're taxed, and get a 10% penalty before 59 1/2 Modified Endowment Contracts are taxed on a LIFO basis

What is the Social Security definition of "disability"?

Must be unable to perform duties of any occupation related to training / experience. Must be unable to perform any gainful activity. Must have a condition expected to last 12 months or longer, or end in death.

How do you become eligible for Social Security retirement benefits?

Must obtain at least 40 quarters of SS credits by working and earning a certain income.

What are HO-2 Homeowner's Insurance policies forms?

Named perils broad coverage

A risk that would result in a loss, other than a monetary loss (E.G. the emotional distress a family may experience due to death of a loved one, or an injury that might be permanent)

Non-Financial Risk

A measurable risk through variation in uncertain outcomes based on facts and data.

Objective Risk

What are HO-5 Homeowner's Insurance policies forms?

Open-perils coverage, but provides personal property protection on an open perils basis

What are HO-3 Homeowner's Insurance policies forms?

Open-perils coverage. Personal property coverage is provided on a named perils broad form basis

A risk that only affects one individual. (E.G. death, disability, health)

Particular Risk

Cause of financial loss (E.G. fire, hurricane, wind, damage, theft, etc.)

Peril

What are the three types of hazards? And how do they differ from one another?

Physical Hazard: physical condition that increases chances of a peril occurring; e.g. icy roads, living on the Gulf Coast, etc. Moral Hazard: breaks the moral standard; e.g. dishonesty - an insured files a fraudulent claim Morale Hazard: carelessness or indifference; e.g. insured doesn't take necessary precautions simply because they have insurance or an "it's not going to happen to me" attitude

A chance of loss or no loss, but no chance of gain. (E.G. on home insurance you can suffer damage or not suffer damage)

Pure Risk

What are HO-4 Homeowner's Insurance policies forms?

Renter's and tenants coverage; provides personal liability coverage plus coverage for personal contents on a broad perils basis & loss of use.

What are HO-8 Homeowner's Insurance policies forms?

Repair cost coverage. Referred to as a "modified form policy".

Three years ago, David bought a new plasma TV for $6,000. Today, a similar plasma TV costs $4,000. Assuming the original plasma TV is 50% depreciated, what is the actual cash value of David's plasma TV?

Replacement Cost - Depreciation $4,000 - ($4,000 x 0.50) $4,000 - $2,000 = $2,000

What is the formula to calculate actual cash value?

Replacement Cost - Depreciation = Actual Cash Value

A statement made by the applicant during the insurance application process (E.G. you weren't aware of a certain health issue at the time of an application, you go to the doctor a month later and are diagnosed with something...this isn't a misrepresentation)

Representation

What should you do with a risk that is low severity / low frequency? (E.G. car gets scratched or dented)

Retain Risk

What should you do with a risk that is low severity / high frequency? (E.G. losing your reading glasses)

Retain Risk (buy new glasses) / Reduce Risk (by purchasing glasses neck chain to reduce chance of loss)

A chance of loss, no loss, or gain. (E.G. Going to the casino)

Speculative Risk

The perceived amount of risk based on an individual's prior experience or feeling. (E.G. You went rock climbing, got hurt and never did it again. Someone else went rock climbing, never got hurt, and continued doing it)

Subjective Risk

The process by which an insurer can, after it has paid a loss under the policy, recover the amount paid from any party (other than the insured) who caused the loss or is otherwise legally liable for the loss.

Subrogation

What is a guaranteed minimum annuity? (also known as term certain)

The insurance company guarantees to make payments for a minimum amount of time. This may go beyond annuitant's death.

What is a Social Security retirement benefit?

The most familiar Social Security benefit, full retirement benefits are payable at normal retirement age and reduced benefits as early as age 62 to anyone who has obtained at least a minimum (40 quarters) amount of Social Security credits.

What is a Stock Redemption Agreement?

The name of the agreement when a close corporation buys the interest or shares of a deceased partner or shareholder.

What is the Social Security elimination period?

The period of time, beginning upon injury or sickness, that an insured is disabled, but is not collecting benefits from the insurer. Social Security back pays on time elapsed during elimination period, though a disability policy will not.

What is a non-qualified deferred compensation plan?

This is an incentive plan in which an employer promises to pay highly compensated employees the full value of their voluntary salary deferral at a defined future point in time. Income taxes are deferred until the employee takes possession of the incentive funds. Not tax deductible. These are informally funded most often with life insurance, and they are administered either with Rabbi or Secular Trusts.

What is non-qualified deferred compensation?

This is for executives

What is Social Security Integration?

This is when Social Security integrates with your disability policy. Your disability policy might pay you the 1st two years and 5 months. And then Social Security disability kicks in, and the disability policy stops paying. Or SS disability can offset a disability policy that doesn't cover the desired amount of your wages.

What should you do with a risk that is high severity / low frequency? (E.G. catastrophic financial loss such as an individual's death, long-term disability)

Transfer risk using life or property insurance; or share the risk using long term disability insurance (the insurer would pay a portion of the daily long term care expenses).

For a Personal Auto Policy, what is Section C for? Who's covered? What does it pay for?

Uninsured Motorist: Covers damage caused by an uninsured or under-insured motorist.

A promise made by the insured that is part of the insurance contract (E.G. you told insurer you were going to install alarm on home...your home is broken into 3 months later and you never installed the alarm. This is a breach of warranty and can void the contract)

Warranty

What is the Social Security definition of "fully-insured"?

You have earned 40 credits of coverage.

What do you need in order to be eligible for an HSA?

You must be covered under a high deductible plan And you can't have any insurance that would disqualify from an HSA (E.G. you can't be covered on a non-high deductible plan on a spouse's policy)

How do you qualify for Long Term Care benefits?

You must be unable to perform 2 of the 6 activities of daily living (ADLs) ADLS = BEDTTC or Bathing, Eating, Dressing, Toilet, Transferring, Continence (bladder control) OR You must have substantial cognitive impairment.