CFP Module 1 (FINAL)

3-pronged Test (ABC Test)

- Advice or analyses concerning securities (NOT general economic discussions) - Business standard (being in the business) - Compensation

What is the 7-pay test?

- Compares amount deposited into a policy in first seven years with seven annual net level premiums. - If a policy fails the seven-pay test it is classified as a modified endowment contract (MEC). - Loans or withdrawals are taxable on a last in, first out (LIFO) basis. - Death benefits maintain normal life insurance tax status (generally tax free to beneficiaries).

Activities of Daily Living (ADLs)

- Dressing - Transferring - Toileting - Eating - Bathing - Maintaining continence - Cognitive impairment*/dementia (e.g., Alzheimer's) * Should cognitive impairment occur, it supersedes policy requirements for inability to perform two ADLs.

Annuity Investment Options

- Fixed - Variable - Market-Value Adjusted: withdrawals prior to end of contract period may be adjusted based on current market rates - Equity-Indexed: fixed value (safety net), tied to an index for potential increased value, participation rate (and other factors) determines actual growth - Retirement Income :becoming more common because of desired flexibility, may allow withdrawals rather than requiring annuitization

LTC benefits from Medicaid

- LTC benefits for the impoverished - Rules vary by state General Requirements: a) Must be medically certified as needing care b) Must "spend down" assets (be impoverished) c) Specific asset/income requirements also vary by state Considerations: 1) Quality of care 2) Impoverishment issues 3) Potential penalties for improper asset transfer 4) Availability of Medicaid patient beds

What is the Planner's role in Homeowners Insurance?

- Learn your state laws - Identify potential uncovered or under-covered risks - Make appropriate referrals - Monitor

Withdrawals from an MEC

- MEC withdrawals prior to 59½ are subject to 10% penalty on taxable gains. - Once a policy becomes a MEC, it remains a MEC forever. - In the case of a 1035 exchange, MEC is still a MEC. - Policies that avoid MEC status in their first seven years may still be subject to MEC rules in the event of material change, such as a change of age or increase of coverage amount. - A new seven-year premium limit is instituted. - All single-premium life policies are MECs.

Annuity Income Taxation

- Nonperiodic (lump-sum) distribution Pre-August 1982: FIFO Post-August 1982: LIFO - Annuitized distributions Fixed annuity—exclusion ratio: investment divided by total expected return Variable annuity—exclusion amount: investment divided by number of payments Annuitization pre-1987: all payments use exclusion ratio Annuitization post-1986: exclusion ratio applies until initial investment (annuitant's basis) is recovered

HIPAA Qualification

- Only 2 ADLs or cognitive impairment required as benefit triggers - Nonforfeiture benefits (examples) Reduced paid-up benefit Specified pool of money Shortened benefit period May not include cash refund - Guaranteed renewable - Conforms with NAIC LTCI model regulation

Title Insurance

- Protects against defective title to land and improvements - Defects discovered by title insurance company are listed and excluded—suits from undiscovered defects will be defended - Policy term indefinite—terminates when property is sold by insured - Attorney's abstract (opinion) not a good substitute The Torrens System: an alternative to title insurance, only used in a few states

Medicaid Partnership Plans

- State approved plans - Allows the pool of money purchased to be excluded from Medicaid spend down requirements. Example: Lisa purchases a policy with a pool of $300,000. If her state requires a spend-down to $2,000 beyond the house and the car, she would qualify for Medicaid while retaining $302,000 in assets. If married, this would be in addition to the spouse's available assets, thus, protecting the spouse to a higher level.

What is covered under "Coverage A -- Dwelling" of the HO 02, HO 03, HO 05, HO 08 forms besides the form itself?

- Structures attached to the dwelling - materials and supplies located on or adjacent to premises that are intended for use in construction, alteration or repair of the dwelling

What are all the LTC insurance options?

1) Self insurance 2) Reverse mortgage 3) Spend down to Medicaid 4) Traditional LTC policy/joint policy 5) Life insurance with LTC rider 6) Annuity with LTC rider

Levels of Health Care for Long Term Care

1) Skilled Care (SNC): 24-hour registered nurse available; supervision of a doctor 2) Intermediate Care: Less intensive nursing or rehabilitative care 3) Custodial Care: Assistance necessary for health and maintenance of individual 4) Home Care: Care in patient's home; first level of care that is not institutional 5) Respite Care: Allows the primary caregiver a break from caregiving duties

What are the 9 classes of property excluded under Coverage C of all forms?

1) things separately described and specifically insured under HO or other insurance 2) animals, birds, fish 3) motorized land vehicles (with exceptions) 4) property of roomers, boarders, or other tenants not related 5) property in an apartment that is regularly rented 6) property rented to others away from premises 7) aircraft and their parts (except models) 8) books/software containing business data or drawings 9) credit cards or debit cards, except as provided under additional coverages

Role of the Adjuster

Adjuster is someone who investigates insurance claims and determines the amount to be paid. Different categories of adjusters are staff, bureau and independent. Agents may also serve as adjusters. Most represent the insurance company A public adjuster is hired by the insured to help navigate the claims process and is paid a contingency fee based on the amount of the settlement

Joint and Survivor Annuity

Amount determined on 2 lives is paid out to the beneficiary prior to either death. At the death of one of the annuitants, the contract can continue either in full or for a reduced amount to the beneficiary (survivor)

Open peril (all risks)

Any peril not specifically excluded is covered (Flood and earth movement excluded)

COBRA (Consolidated Omnibus Budget Reconciliation Act)

Available in 3 time lengths 18 Months 20 employees or more (up to 102% of full premium) Laid off (downsized, right-sized, structural re-engineering) Fired (except for gross insubordination) Moved from full-time to part-time 29 Months Extension available 11 months (in addition to the original 18 months) Available in the event of employee disability 36 Months Loss of dependent status Divorce Employee dies Employee qualifies for Medicare

An individual has $2,500 to invest and wants to accumulate $4,000 at the end of five years. What annual rate of return is required to meet this goal if earnings on the investment are compounded monthly?(LO 3-5) A. 9.4% B. 9.6% C. 9.7% D. 9.8%

A is correct. a. This answer correctly solved for I/YR, by entering 12 (P/YR), 2,500 +/- (PV), $4,000 (FV), 5 (×P/YR; or 60 P/YR). b. This answer incorrectly used semiannual compounding. c. This answer incorrectly used annual compounding. d. This answer incorrectly entered 5 (N) instead of 5 (×P/YR).

When does a life insurance policy become an MEC?

A life insurance policy becomes an MEC if: - it fails seven-pay test - loans or withdrawals taxed as ordinary income (LIFO) - 10% penalty on withdrawals taken before age 59½ - death benefits retain normal tax status

Teresa's residence was insured four years ago for $430,000 with a replacement value policy. Today the market value is $450,000 and replacement costs are $470,000. If her home burned entirely down, what would she receive? A) $430,000 B) $450,000 C) $470,000 D) $376,000

A) $430,000 because that is the maximum she has it insured for. The fact that she has replacement value is negated because it is not insured at the replacement value. The market value is irrelevant when it comes to homeowners coverage. The key numbers are replacement cost and insured amount. The formula in d only applies to partial losses and is incorrect anyway.

Wayne Johnson wants to accumulate enough funds to send his son, Mark, to college. Mark is 4 years old, and it is expected that he will begin a four-year college program at age 18. The annual tuition today is $12,500. Wayne estimates that the annual inflation for college tuition will be 5% and he can get an 8% return on his money. How much does Wayne need to put aside today in order to meet this goal? A. $36,738 B. $37,432 C. $38,487 D. $109,432

B is correct a. This answer was incorrectly calculated in the end mode. b. This answer was correctly solved using the following three-step calculation. First, inflate $12,500 at 6% for 14 years = $28,261. Second, calculate the PVAD for four years using the inflated cost ($28,261) and the inflation-adjusted interest rate (1.8868) = $109,944. Finally, calculate the PV of $109,944, discounted at the after-tax rate of return for 14 years = $37,432. c. This answer incorrectly multiplied $12,500 by 4, then inflated that amount for 14 years at 6%, and discounted the result at 8% for 14 years. d. This answer correctly followed the process, but it did not discount the answer back 14 years at 8%.

Which person or entities must register as an investment adviser?

The activities of the Planner determine if registration or licensing is required. Whenever a planner includes investment advice in a plan, he may be required to register as an investment adviser. -- SEC registration is required if you advise. -- FINRA registration is required if you sell. These statements will help you remember: 1) An individual may perform activities requiring registration as an investment adviser that may not require FINRA registration 2) An individual may be required to register with FINRA but not with his or her state or the SEC. 3) An individual may be required to register with both FINRA and the SEC (or his or her state). Dodd-Frank Act Everyone who gives advice about securities should register as an adviser and ANY investment can be considered a security. Confirmed IA-770 and established the 3-pronged test to determine if a planner needs to register. Antifraud provisions of the IA apply to any adviser, regardless of whether they have to register

Which of the following are primary criteria that should be considered when selecting an insurer? I. a favorable rating from several rating companies II. the number of agents employed III. favorable risk-based capital ratios IV. the fact it is not on the NAIC's Watchlist a. I and II only b. III and IV only c. I, III, and IV only d. II, III, and IV only e. I, II, III, and IV

C is the correct answer because the number of agents employed has little to do with the strength and viability of the insurance company. They may be solely supported by brokers.

Life Insurance Policy Nonforfeiture Options

Cash surrender value:The insured receives the accumulated cash value when terminating the policy. Reduced paid-up insurance: An insured terminating a policy receives the cash value in the form of a paid-up policy with a smaller face amount. Extended term insurance: The insured receives the cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy.

Healthcare Case question

Deductible is Individual/Family ($1500/$3000) If embedded deductible, when a family member meets the individual deductible, medical expenses transition to coinsurance BUT the most the family will pay for deductibles is the 2nd number listed. Gets the insurer to pay more quickly. Non-embedded deductible, you just ignore the 1st number Copays not included to deductible or MOOP Once coinsurance kicks in, apply insured's % of the APPROVED medical expenses above the deductible until the MOOP is met (MOOP is deductibles + coinsurance) If you go out of network, and insurer pays a lower %, that amount is not added to MOOP

Immediate Annuity

Income pmts to beneficiary start within a year after a single payment is made

LTC benefits from Medicare

Limited (if any) LTC benefits from Medicare Requirements: 1) Must spend at least three days in a hospital as an admitted patient (not for observation) 2) Must enter a Medicare-approved skilled nursing facility within 30 days of hospital release Benefits: a) First 20 days paid in full b) Days 21-100 paid with a daily deductible ($148 in 2013) c) Days 100+ no benefit d) Limited home health care

HIPAA: Health Insurance Portability & Accountability Act of 1996

Major health insurance-related provisions (to reduce job lock) •Pre-existing conditions: cannot apply coverage exclusion for more than 12 months •When moving to a new job: cannot apply coverage exclusion if there is no break in previous coverage of 63 days or less •Pregnancy not a pre-existing condition •No pre-existing conditions when enrolling on exchanges during open enrollment or triggering event Only applies to comprehensive health care •i.e., not ancillary benefits such as disability, LTC, dental, etc. •Not to managed care plans (governed by other provisions)

What is covered under loss-of-use coverage (Coverage D)?

Necessary increases in living expenses incurred to continue the normal standard of living when the premises are rendered uninhabitable by an insured peril

What is the difference between notice of loss and proof of loss (HO Insurance)?

Notice of loss: 1st step in the claim process; must be given immediately (or ASAP) Proof of loss: Within a specified time after giving notice, the insured must file proof of the loss (a sworn statement stating the loss has occurred, amount of the claim, and circumstances surrounding the loss)

What are additional Beneficiary designations?

Per Stirpes (by branch): Grandchildren receive only the share of the deceased child Per Capita (by head - depends on company definition) Children of deceased child (grandchildren) share equally with surviving children Per Capita at Each Generation - Primary beneficiaries keep their status, receive full share; remainder split evenly Per Capita (2) - Secondary beneficiaries are not considered until all of the primary beneficiaries are deceased.

Inland Marine Insurance (Personal Property)

Personal Property Floater: Provides open perils-level coverage Broad coverage for: - Articles that may be moved or are in transit - Examples: jewelry, furs, silverware, art - Purpose: to cover articles excluded or limited on homeowners policies - Not used for installed property (e.g., wall-to-wall carpet) - May be purchased as a separate policy or by endorsement on homeowners policy as Scheduled Endorsement - Also known as: Personal Articles Floater

What is Personal Liability Coverage (attached as part of HO)?

Personal liability (non-business, non-automobile) Medical payments to others Additional includes: - Claim expense - First aid expense - Damage to property of others - Loss assessment coverage

What are the Beneficiary Designations/Provisions?

Primary: The person or entity first entitled to proceeds of the policy after the death of the insured. Contingent: The person entitled to proceeds of the policy if the primary beneficiary is deceased at the death of the insured or is ineligible to receive them. Revocable: The insured reserves the right to change the beneficiary designation at any time. Irrevocable: The insured cannot change beneficiary designation, acquire a policy loan, or assign the policy without consent of the primary beneficiary.

What are the 2 functions of umbrella liability policy?

Provide excess coverage broaden the perils

Qualified or Nonqualified LTC policies?

Qualified policies have tax deductible premiums (HIPAA-qualified) However, LTC expenses now qualify as medical expense for income tax (Schedule A, in 2015, 7.5% floor applies for seniors) Choose the best policy: qualified or nonqualified to meet the client's needs Tax issues should be a secondary consideration

What is the Planner's Role in Long Term Care Insurance?

Raise the issue - Calculate the gap between income stream and annual needed resources - Identify consequences to family/dependents/caretakers/portfolio ability to support and potential of returning home after LTC stay - Evaluate and provide options and costs

What is the difference between Replacement Cost and Actual Cash Value?

Replacement Cost: Cost of replacement covered up to specified preset limits. Usually coupled with an inflation guard endorsement ACV: Essentially, replacement cost minus depreciation If given a choice, replacement cost is the better option

Classifications of Annuities

Single Premium vs Fixed or Flexible premium Immediate vs Deferred Individual Life vs Joint and Last Survivor Straight/pure vs period certain or refund Fixed dollar payout vs variable payout

Why go with term insurance?

Term life insurance is for temporary needs: •mortgage costs •dependent education •consumer debts •large coverage; small premium •cost rises with age

What are the Healthcare triggering events?

Triggering Events Marriage Divorce Birth Death Disability Losing/changing jobs Reducing number of hours worked Dramatic changes in income Moving Retiring Ages 30 days old 26 years old 55 years old 65 years old

Umbrella Liability Coverages

Umbrella Liability Policy - Catastrophic coverage for potential high jury awards - Takes over after base coverage from auto or homeowners policy is used up - Must have underlying base coverage—e.g., homeowners and/or auto/boat/ etc. - Relatively low rate for large coverage amount

What is the purpose of HO 15 endorsement?

Used in conjunction with HO 03 to replace form HO 05, which is hard to get. Expands coverage on contents (personal Property) to open peril (from broad form). The HO 15 endorsement has been withdrawn as a part of the ISO HO 2000 program and functionally replaced with the new HO 05

Deferred Annuity

payments start at a later date in the future

What coverage is provided under "Coverage C -- Personal Property (Contents Coverage) of all HO forms?

personal property owned or used by insured while anywhere in the world; note that there are limits on certain high value personal property

What structures are covered under "Coverage B -- Other Structures" of the HO 02, HO 03, Ho 05, and HO 08 forms?

structures separated from dwellings by clear space, including detached garage, fences, patios, pools

Define Medicaid

•Medicaid focuses on those lacking financial wherewithal to pay for health care. •Medicaid is a federally initiated program. •Administered, and partially funded, at the state level. •Each state sets its own criteria to qualify for benefits. •Some who qualify include: recipients of Aid to Families with Dependent Children (AFDC) children under age 6 with family income at or below 133% of the federal poverty level (FPL) supplemental Security Income (SSI) recipients in most states

Anne Marie wants to accumulate a sum of money that will provide her with an additional $5,000 of income per year. How much will she need to have in the fund to provide that amount of money each year, assuming the funds earn 8% annually? (LO 3-1) A. $33,550 B. $36,234 C. $62,500 D. $78,433

The answer is c. a. This answer incorrectly solved for PV, using a 10-year time frame and an 8% interest rate. b. This answer incorrectly solved for PVAD, using a 10-year time frame and an 8% interest rate. c. This answer correctly divided the desired $5,000 by 8%. This is a capitalization calculation. d. This answer incorrectly solved for FV, using a 10-year time frame and an 8% interest rate.

Which one of the following is not an advantage of universal life (UL) insurance? a. It has flexible premium payments. b. It lends itself to a compulsory savings program. c. It has an adjustable death benefit. d. It has an unbundled structure.

The correct answer is: b) a. Universal life allows flexible premium payments. Payments can be increased, reduced, and even occasionally omitted. b. Due to flexible premiums, universal life insurance does not lend itself to compulsory savings. It is often the case that people reduce payments to the point that universal life effectively becomes expensive term insurance. c. The death benefit of universal life policies can be adjusted up or down to meet the needs of the client. d. Universal life policies are unbundled so clients can see the cost of expenses and charges.

Which one of the following is considered to be the highest level of long-term care? A. custodial care B. respite care C. skilled nursing care D. intermediate care E. home care

The correct answer is: c) A) Custodial care is generally nonmedical and encompasses assistance with bathing, eating, and so forth. It is not at as high a level as skilled nursing care. B) Respite care is the provision of a replacement caretaker so that the regular caretaker can take a break from duties. It is not considered a high level of care. C) Skilled nursing care is the highest level of long-term care. It generally refers to 24-hour-a-day availability of a registered nurse under a doctor's supervision. D) Intermediate care refers to less-intensive nursing or rehabilitative care. E) Home care is not under a physician and is the least intense level of all.

Personal property floater (inland marine) policies are available for which of the following items? I. silverware II. musical instruments III. golfing equipment IV. installed carpeting A) I and II only B) II and III only C) I, II, and III only D) I, II, III, and IV

The correct answer is: c) A) Personal property floaters are available for silverware and musical instruments, but they also are available for golfing equipment. B) Personal property floaters are available for musical instruments and golfing equipment, but they also are available for silverware. C) Personal property floaters are available for silverware, musical instruments and golfing equipment, but they are not available for installed carpeting (this is considered a "fixture" and covered under the HO policy itself, however, coverage would be available for an item such as an antique rug). D) Personal property floaters are available for silverware, musical instruments, and golfing equipment, but not for installed carpeting (however, coverage would be available for an item such as an antique rug).

Modified endowment contracts can only be created in which of the following types of life insurance policies? I. term life policies II. whole life policies III. universal life policies IV. variable universal life policies a. I and II only b. III and IV only c. II, III, and IV only d. I, II, III, and IV

The correct answer is: c) I. The only policy in which a MEC cannot be created (though technically possible with a single payment) is a term life policy because it has no investment capacity and lasts only to the end of the term. II. A whole life policy has no premium flexibility, but can be structured as a single payment policy and therefore becomes a MEC. III. UL policies have unbundled premiums and can become a MEC. IV. VUL unbundled premium structure can become a MEC.

When determining how much long-term care insurance to buy, all of the following should be considered except: a) the cost of long-term care in the client's area. b) marital status of the client. c) HIPAA qualification. d) daily benefit amount offered by the policy.

The correct answer is: c) a) The cost of long-term care in the client's area is an important consideration unless the client plans to move to a different geographical area. b) The marital status of a client is important due to the differences in household expenses once a client enters a nursing home. If the client is married, household expenses are unlikely to change as much as if the client were single. c) HIPAA qualification should be considered when comparing policies, but it is of little or no importance when determining how much coverage to purchase. d) Daily benefit amounts currently range from $50 to $300, with most falling between $50 and $150. Accordingly, these are an important consideration when determining an appropriate amount of coverage to purchase.

Which one of the following is not true regarding second to die policies? a. The policy pays when the last person dies. b. Premiums are generally lower than the cost for two separate policies. c. They are generally not a very useful tool for estate planning purposes. d. They may be generally advantageous when one of the two insureds is older and highly rated.

The correct answer is: c) a. Second-to-die policies pay when the last, not first, person dies. b. As is most often the case, the cost of buying a single policy is less than if two policies are purchased. c. Second-to-die policies are quite useful as estate planning tools. In the case of married couples, when the second spouse dies, the policy can provide liquidity for estate taxes. If structured correctly, the proceeds also can avoid estate taxes d. These are excellent policies if one of the proposed insureds is older and/or highly rated. The underwriting on these policies will concentrate on the person who is most likely the second to die.

In which of the following annuities do payments to the policy holder begin shortly after purchase? a. variable, flexible installment, immediate annuity fixed installment, deferred annuity b. single premium, immediate annuity c. single premium, variable deferred with some fixed subaccounts

The correct answer is: c) a. There is no such animal as a flexible premium, immediate annuity, and variable refers only to the underlying investments. b. All deferred annuities begin payments at some point in the future. Fixed refers only to the underlying investments. c. Immediate annuities begin paying the policyholder shortly after payment of premium. d. All deferred annuities begin payments at some point in the future. Variable and fixed refer only to the underlying investments.

What is one legal requirement for an enforceable insurance contract? A) The parties to the contract must give up goods or services of equal value. B) The applicant must be given the right to alter or change provisions in the contract. C) The applicant must be considered a competent party to make a valid contract. D) The insured must be of majority age for the contract to be valid. E) The performance of the contract cannot be contingent on the occurrence of an event that is subject to chance.

The correct answer is: c) an applicant must be mentally competent to make a valid contract. A) Insurance is an aleatory contract in that the parties give up goods or services of unequal value—the insurance premium versus promise to pay for a covered loss. B) The applicant has no such right in an insurance contract. D) If an insurance contract is entered into by an insured who is not of majority age, the contract is still valid, but it is voidable by the minor only. E) An insurance contract is by its nature contingent on the occurrence of an event that is subject to chance.

Comprehensive personal liability coverage (CPL) can be acquired in all of the following ways except as: A) an individual CPL policy. B) part of a homeowners policy. C) an endorsement to a monoline dwelling form. D) an endorsement to a personal auto policy (PAP).

The correct answer is: d) A) Most CPL coverage is available via individual policies. B) CPL coverage can be included in Section II of a homeowners policy. C) CPL coverage may be added to monoline dwelling forms through endorsement. D) CPL coverage is not available through PAPs.

HIPAA requires qualified long-term care policies to adhere to which of the following guidelines? I. They must recognize five or six ADLs. II. They must cover cognitive impairment. III. Reinstatement must be possible if a policy lapses due to cognitive impairment. a) I only b) II only c) I and III only d) I, II, and III

The correct answer is: d) a) Qualified policies must recognize five or six ADLs. However, they must also cover dementia and allow for reinstatement due to lapses caused by cognitive impairment. b) Qualified policies must cover dementia. However, they must also recognize five or six ADLs and allow for reinstatement due to lapses caused by cognitive impairment. c) Qualified policies must recognize five or six ADLs and must allow for reinstatement due to lapses caused by cognitive impairment. However, they must also cover dementia. d) Qualified policies must adhere to all three of these guidelines. Additionally, qualified policies must provide nonforfeiture provisions and be guaranteed renewable.

Characteristics of an insurance contract

1) Aleatory: the outcome is controlled by chance AND the dollars that change hands are of unequal amounts 2) Adhesion: insurance contracts are prepared by one party and either accepted/rejected by the other 3) Conditional: Ins Co pays on the condition that a covered loss occurs. If the insured doesn't abide by the contract conditions, they may not have to pay the claim 4) Unilateral: only one party can enforce the contract (Co can't force the policy owner to pay the premium) 5) Personal 6) Utmost good faith 7) Contract of indemnity (made whole) - except "valued policies" and "cash payment policies" - This principle is enforced through legal doctrines and policy provisions, which include: insurable interest, actual cash value, subrogation, and "other insurance" provisions. When an Insurance contract must be changed, the remedies are: 1) Rescission: an equitable remedy where the original contract is deemed null from the beginning. Party seeking relief must show fraud, impossibility, misrepresentation of a material fact, concealment in the application or mutual mistake as to a material fact. Generally sought by the insurer - required only to return premiums (not the larger benefits under the contract) 2) Reformation: equitable remedy where the contract is changed to express the original intentions of the parties. Must show a MUTUAL MISTAKE, a unilateral mistake coupled with fraud, duress, or related misconduct

What are the characteristics of Life Insurance policies?

1) Amount of protection Term: Level: Remains constant during term Decreasing: Decreases over the specified period Whole: Remains constant unless loans have reduced the face amount, dividends are used to increase the face amount, or riders are purchased. Established in contract Variable: May increase or decrease during the period. Minimum benefit usually established in contract at the original face amount Universal Life: Constant unless option 2 (which increases the death benefit by the cash value amount) is chosen, loans have reduced the face amount, or riders are purchased Variable UL: Generally level (may increase due to investment results) 2) Savings element/Investment selection (cash value) Term: Level: None Decreasing: None (actually, some policies have small savings) Whole: Established in contract but may be increased by dividends or excess interest in current assumption whole life products. Early on, the annual level premium more than pays for insurance protection. Guaranteed minimum rate of return Variable: Cash value from separate accounts varies; an established ratio to amount of protection is maintained to prevent conversion to MEC or non-life insurance. Wide investment selection Universal: Varies based on premium payment, death benefit, and interest rate paid on the cash fund. Has a guaranteed minimum rate of return Based on conservative projection of company's portfolio return - follows bond rates Variable UL: Cash value from separate accounts varies based on investment results. Client selects investment options from conservative to equity 3) Duration of Protection Term: Level: Specified period; if insured dies after the period, no benefit; may be renewable Decreasing: Same as above; not renewable Whole: Whole life of the insured. (If insured is alive at age 100/120, face amount is paid) Variable: Whole life of the insured Universal Life: Can be structured for a term or for whole of insured's life. Failure to maintain cash value can terminate policy Variable UL: Can be structured for a term or for whole of insured's life. Failure to maintain cash value can terminate policy 4) Cost/ premium as compared to other forms Term: Level: Stated in contract; increases over time Decreasing: Stated in contract; usually level for life of contract Whole: Level amount; determined in advance by insurance company. Outlay higher than term initially at same age; lifetime cost is lower than term Front end loads reduce cash value in initial years Variable: Level premium. Death benefit plus contract fees plus investment expenses plus front end load and back end penalties need to be evaluated against return Universal Life: Flexible premium payments. Similar evaluation of fees need to be completed Variable UL: Flexible premiums; poor investment results will increase premiums required. Similar evaluation of fees needs to be completed 5) Appropriate Use Term: Level: Temporary need for death protection When low initial premium is a factor Decreasing: When need decreases over time; examples—home mortgage or until children are self-sufficient Whole: When lifetime (or more than 20 years) death protection is desired When forced savings is desired Can borrow against cash value When guaranteed premium amount is desired Conservative investment desired Variable: When client wants lifetime death protection Desires equity investment option Willing to invest additional funds if needed to maintain insurance if market returns not adequate Universal Life: When maximum flexibility is desired When the savings element is desired When need is for whole of life or long term (rule of thumb more than 20 years) Variable UL: When client wants the combined elements of variable life and universal life Desires flexible premiums and death benefit Desires equity investments Wants to accumulate funds on tax deferred basis and can afford to put in additional funds to maintain insurance if marker returns not adequate

What are the Life Insurance Dividend Options?

1) Dividends in cash: Dividends are paid in cash to the insured as declared and considered return of premium 2) Reduce premiums: Dividends are indicated on the premium notice and reduce the premium due 3) Accumulate at interest: Dividends are placed on deposit with the insurer with a guaranteed minimum interest rate plus any excess interest—essentially like a taxable savings account 4) Paid-up dividend additions: Dividends are treated as a net single premium, purchasing paid-up additional insurance at insured's attained age rate— Earns more dividends so highest increase 5) One-year term insurance: Dividends treated as net single premium, purchasing one-year term insurance at insured's attained age Also known as the fifth dividend option

What factors should influence amount of LTC insurance?

1) Identified income gap 2) Consequences to spouse/dependents and financial security of individual 3) Size of portfolio and other assets that could be liquidated versus Medicaid planning 4) Availability and willingness of family support 5) Availability and willingness to pay premiums 6) Desired goals of individual

Life Insurance Settlement Options

1) Interest Option: Proceeds may be left to the insurer with a guaranteed minimum interest rate 2) Fixed Period Option: The beneficiary receives a fixed number of payments. 3) Fixed Amount: The beneficiary receives a stated amount of income each period until the proceeds are exhausted. 4) Life Income: The proceeds are paid for the remainder of one or more beneficiaries' lives, with various provisions for remaining funds. These are annuity payout options. 5) Straight Life Income: The proceeds are paid out over the lifetime of the beneficiary. 6) Life income with period certain: Payments are for the annuitant's lifetime, subject to a guaranteed minimum number of total payments. In the event the annuitant dies before receiving the guaranteed minimum number of payments, the remaining payments are made to the beneficiary. 7) Life income with refund: Similar to the life income with period certain, except in this option the guaranteed minimum payment amount is equal to the original investment in the contract. 8) Joint and last survivor income option: The proceeds are paid during the lifetimes of two beneficiaries and can be either the same income or reduced payments to the survivor.

What are the 11 life transitions and the impact each might have on healthcare?

1) Marriage: Triggering event so enrollment outside of the open enrollment periods 2) Divorce: 60 days after divorce spouse must sign up for COBRA 3) Death: spouse covered under a deceased individual's group coverage has 60 days to sign up and can keep the coverage for 36 months

What are the elements of an insurable risk?

1) Must be sufficiently large number of homogenous exposure units to make losses reasonably predictable (law of large numbers) 2) the loss produced by the risk must be definite and measurable 3) the loss must be fortuitous or accidental (except for life insurance) 4) loss must NOT be catastrophic to the insurance company

Stages of the Loss Adjustment Process

1) Notice: contact insurer about loss 2) Investigation: insurer determines if there was a loss 3) Proof of loss: sworn statement that enumerates amount 4) payment or denial

What are the legal requirements for Enforceable Contracts?

1) Offer and acceptance 2) Consideration 3) Legal object 4) Competent parties - void or voidable 5) Legal form

Eight general exclusions that apply to all standard ISO homeowners policies

1) Ordinance or law: if dwelling doesn't comply with local code, insurer not liable for increased construction to bring up to code unless covered by endorsement 2) earth movement: excludes coverage for loss caused by earth movement except direct loss by fire, explosion, theft or breakage of glass 3) water damage: excludes coverage for loss caused by flood, water backing up in sewers/drains, below surface of ground seeping through basement walls, foundation, floors 4) power failure: denies coverage for losses from interruption of power if it takes place away from the residence premises 5) neglect: excludes loss resulting directly or indirectly from neglect of the insured to use reasonable means at or after a loss to save the property 6) war: excludes loss caused by way in all forms 7) nuclear hazard: excludes losses from nuclear reaction, radiation, radioactive contamination 8) intentional loss: excludes intentional damage to own property

Important Long-Term Care Policy Provisions

1) Prior hospitalization requirement (such policies are to be avoided) 2) Level of care required for initial benefit payments to begin 3) Elimination period (waiting period from eligibility until payments begin) 4) Benefit period 5) Renewability and time of underwriting 6) Pre-existing condition waiting period 7) Waiver of premium 8) Nursing facility requirements 9) Qualification for home health care benefits 10) Benefit amounts 11) Inflation rider availability

Homeowners Insurance Perils (Broad)

Basic and Adds: falling objects; weight of ice, snow, or sleet; (NOT SEEPAGE) collapse of buildings; accidental discharge or overflow of water or steam; explosion of steam or hot water system; freezing of plumbing, etc.; damage from artificially generated electrical currents

LTCI Benefits Tax Issues

Benefits - Paid either as per diem or actual expenses - Payments for qualified LTC expenses excludible from income - Taxability (if any) calculated by formula using an annually indexed per diem amount ($320 in 2013) - Reimbursement for actual expenses not normally taxable

How do you apply the Homeowner's Coinsurance clause?

Coinsurance provision require home to be insured for at least 80% of replacement cost in order for partial losses to be covered completely. If you don't maintain insurance equal to 80% of replacement cost, a partial loss will be covered at the greater of: 1) the actual cash value (replacement cost - depreciation) or 2) coinsurance penalty formula = (Amt of insurance carried/Amt of insurance required) * Loss -- Deductible In most cases, the coinsurance penalty formula provides the higher benefit. The fraction cannot exceed 1. If it does (the insured has more than 8-% of replacement cost covered, the policy won't pay more than the loss. If the loss is greater than the insurance, even if insurance is more than 80% of replacement, the insurance company won't pay more than the amount of insurance. Example: Insured's home would cost $150K to rebuild. Insurance on the home is $100K with a $500K deductible. A kitchen fire causes $20K in damage. Using the coinsurance penalty formula = Amt of insurance ($100K)/Amt of insure. required (80%*$150K) = $100k/$120k = 0.83 0.83*Loss($20k) = $16,667 $16,667 - Deductible ($500) - $16,167 to be paid by the insurance company Another example: Bought building for $850K Replacement value = $1mm Insurance $700K, 80% co-insurance Deductible = $2,000 Fire broke out and caused damage = $600K Amount of insurance required = 80%*$1mm = $800K Amt of ins = 700/800 = 0.875 (600K) = $525k-2,000 = $523,000

Comprehensive Personal Liability (CPL)

Comprehensive: - Broad coverage for nonbusiness, non automobile personal liability exposures - Covers individual or family unit - Liability from premises and personal activities States and companies vary in the coverage, so it's critical to read! For example, uninsured motorists coverage, watercraft with small motors, snowmobiles, etc. may or may NOT be covered based on the state even with the same company!

What coverages are included in Section II of all HO forms?

Coverage E: comprehensive liability insurance Coverage F: medical payments to others, claim expenses, damage to property of others, first-aid expense, loss assessment coverage

Patient Protection and Affordable Care Act (PPACA 2010)

Expands Coverage •Establishes health insurance exchanges and subsidies •Created SHOP for small businesses •Extends coverage for dependent children up to age 26 •Increased qualifiers for Medicaid Impacting Affordability •Insurers must accept all applicants during open enrollment or at triggering event if prior coverage •No limit on coverage for preexisting medical conditions •No premium change due to differences in enrollees' health •Lifetime maximums prohibited •Eliminated prescription cost gap in Medicare Sets Standards •Minimum coverage defined •Bronze, Silver, Gold, Platinum, or Catastrophic •Some preventative care required •Encourages integrated health systems •Mandates percentage of premiums to be spent on care vs. administrative expenses and profits •Guarantees right to appeal denials of payments Individual Mandate •Buy insurance or pay a penalty with limited exceptions •2% of yearly income above threshold with maximum penalty the national average of bronze plan OR $325 per person ($162.50 child) max $975 •New tax forms - addressed at tax filing Employer Mandate •Schedule to be effective 2015 •May be repealed •Applies to employers of 50 or more full time equivalent employees •Must meet 2 requirements •Pay at least 60% of the total allowed costs of benefits under the plan •Must be affordable meaning employee contribution cannot exceed 9.5% of employees W2 wages( excludes dependent care) Controversial •Purported to be a "budget buster" •Continue to check legal status through this year and next; expect changes

Homeowners Insurance Perils (Basic)

Fire lightning windstorm hail explosion riot and civil commotion vehicles aircraft smoke vandalism and malicious mischief theft volcanic eruption

For what types of property are each of the 6 forms in the HO series used?

HO 02, HO 03, HO 05, HO 08: homes, owner-occupied HO 04: tenants (rented dwelling) HO 06: condos (owners) HO 08: older homes where replacement cost greatly exceeds market value

HO 02 vs HO 03

HO 02: broad form coverage on dwelling, other structures and loss of use HO 03: open peril coverage on dwelling, other structures and loss of use; offers coverage for more causes of loss

HO 03 vs HO 03 + HO 15

HO 03: broad form on personal property HO 03 + HO 15: open peril coverage on personal property

HO 04 vs HO 06

HO 04: for renters; only personal property and loss of use coverage HO 06: for condo owners; limited dwelling coverage in addition to personal property and loss of use coverage

What is the Ideal HO Policy?

HO3 + HO15 (or HO5 but hard to get) Ordinance or law (extra cost to bring dwelling up to code) Inflation Guard Replacement Cost endorsement on personal property umbrella flood insurance collectibles sump pump/algae endorsement Guaranteed replacement cost on dwelling: covers you the amount above what you paid. Gives you a % over the face of the insurance (tell insurance company to determine guaranteed RC value)

5 Key Annuity Questions

How are premiums paid? (Single premium, fixed premium, Flexible premium) When do benefits begin? (Immediate, Deferred, Longevity) Who is the annuitant? (Individual, Joint Life) How long are benefits paid? (Period Certain, Pure Life, Joint Life, Life and Period Certain (5, 10, 20 yrs), Life with refund) What is the method of benefit payment and/or accumulation? (Fixed payment, Fixed w COLA, Variable)

In the process of assisting Barney and Betty to calculate what they still owe on their home, you are provided with the following information: They purchased their home eight years ago for $239,500. They made a 20% down payment, and financed the balance using a 30-year mortgage with a 5.15% interest rate. Taxes and insurance increase the payment by $300 per month. In the process of calculation you tell them that they have an outstanding principal balance of what amount? A. $129,524 B. $164,365 C. $165,071 D. $206,338

The correct answer is c. Set the calculator for 12 payments per year or 12 p/yr. Next be sure the calculator is in End Mode. A 20% down payment of $47,900 means that Bernie and Betty financed the balance of $191,600 and this is used as the PV in the calculation. Because we must first calculate the regular monthly payment, N = 360 (or 30 years times 12 months per year). The interest or I/YR = 5.15 and all that needs to be done is to calculate the payment or PMT = $1,046.19 In calculating 8 years of payments, we are examining the results of 96 payment periods or 8 times 12 = 96; To accomplish this we must press the following keys: 1 [INPUT]; 96 [SHIFT], [AMORT] look under the FV key for AMORT. Once this has all been done the following should be on your screen 1 - 96. Then push the [=] key and the principal paid thus far in 8 years will show up; Press the [=] key again and interest paid to date shows up; Press [=] key one more time and the remaining principal balance will be displayed.

Which HO policy form, or combination of forms, provides the highest level of building and personal property coverage? I. HO 00 02 II. HO 00 03 III. HO 00 15 IV. HO 00 05 A) I only B) III only C) II and IV only D) II, III, and IV only

The correct answer is: D) A) The HO 00 02 policy form only provides broad form coverage on buildings and personal property. A combination of the HO 00 03 form and the HO 00 15 personal property endorsement, or the new HO 00 05 policy, provides open perils coverage on both buildings and personal property. B) The HO 00 15 endorsement may only be used to upgrade personal property on an HO 00 03 policy. It does not provide building-related coverage on its own. A combination of the HO 00 03 form and the HO 00 15 personal property endorsement, or the new HO 00 05 policy, provides open perils coverage on both buildings and personal property. C) The new HO 00 05 policy form does provide open perils coverage on buildings and personal property, but the HO 00 03 form only provides broad form coverage for personal property. A combination of the HO 00 03 form and the HO 00 15 personal property endorsement, or the new HO 00 05 policy, provides open perils coverage on both buildings and personal property. D) A combination of the HO 00 03 form and the HO 00 15 personal property endorsement, or the new HO 00 05 policy, provides open perils coverage on both buildings and personal property.

Which of the following are broad economic assumptions (rather than an individual's personal situation) that must be made during the life insurance selection process? I. the rate of return a client can earn on investments II. the inflation rate for the calculation period III. current resources available to purchase insurance IV. the client's risk tolerance a. I and II only b. II and III only c. III and IV only d. I and IV only

The correct answer is: a I. The rate of return and the inflation rate are broad economic variables that must be assumed to determine the appropriate amount of life insurance coverage. II. The inflation rate is a broad economic variable that must be assumed, but current resources, though important in the insurance selection process, are not a necessary economic assumption. III. Current resources, though important in the insurance selection process, are not a necessary economic assumption, and risk tolerance is important in the insurance selection process, but it is a client attribute, not an economic assumption. IV. The rate of return is a broad economic variable that must be assumed to determine the appropriate amount of life insurance, but risk tolerance though important in the insurance selection process, is a client attribute, not an economic assumption.

Which one of the following is not one of the eight general exclusions that apply to all standard ISO homeowners policies? a.vandalism b.earth movement c.war d.neglect

The correct answer is: a) a) Vandalism is one of the ten basic coverages of standard ISO policies. It is not an exclusion. b) Earth movement is an ISO exclusion unless it is caused by theft, fire, explosion, or breakage of glass. c) War is an ISO exclusion. d) Neglect is an ISO exclusion. This encourages policyholders to use reasonable means to keep their properties safe and habitable.

Which one of the following is not one of the eight general exclusions that apply to all standard ISO homeowners policies? A) vandalism B) earth movement C) war D) neglect

The correct answer is: a) a) Vandalism is one of the ten basic coverages of standard ISO policies. It is not an exclusion. b) Earth movement is an ISO exclusion unless it is caused by theft, fire, explosion, or breakage of glass. c) War is an ISO exclusion. d) Neglect is an ISO exclusion. This encourages policyholders to use reasonable means to keep their properties safe and habitable.

Which one of the following is not generally excluded from coverage in Comprehensive Personal Liability (CPL) policies? A) the use of automobiles B) renting a room in a house to a single tenant C) liabilities incurred by physicians D) the use of boats (with some exceptions)

The correct answer is: b) A) Because every state requires that automobiles have their own liability coverage, automobiles usually are excluded from CPL policies. B) Although property rental usually is excluded from CPL policies, renting a room to fewer than three tenants does not normally trigger exclusion. C) Liabilities incurred by physicians, attorneys, financial planners, and other professionals are covered by professional liability policies. They are therefore excluded from CPL policies. D) Boats are generally excluded from CPL policies (with some exceptions).

Which of the following stipulations must be met for Medicare to cover the cost of long-term care? a) The care can be needed either full- or part-time. b) The patient's condition must be expected to improve. c) The need for care can be determined by the patient's family. d) The care can be either skilled or unskilled.

The correct answer is: b) a) Care must be needed full time. b) Medicare will not cover long-term care costs if the patient's health is not expected to improve. c) The need for care must be certified by a physician. d) Medicare will cover skilled care only.

Which HO policy form, or combination of forms, provides the highest level of building and personal property coverage? I. HO 00 02 II. HO 00 03 III. HO 00 15 IV. HO 00 05 a.I only b.III only c.II and IV only d.II, III, and IV only

The correct answer is: d) a) The HO 00 02 policy form only provides broad form coverage on buildings and personal property. A combination of the HO 00 03 form and the HO 00 15 personal property endorsement, or the new HO 00 05 policy, provides open perils coverage on both buildings and personal property. b) The HO 00 15 endorsement may only be used to upgrade personal property on an HO 00 03 policy. It does not provide building-related coverage on its own. A combination of the HO 00 03 form and the HO 00 15 personal property endorsement, or the new HO 00 05 policy, provides open perils coverage on both buildings and personal property. c) The new HO 00 05 policy form does provide open perils coverage on buildings and personal property, but the HO 00 03 form only provides broad form coverage for personal property. A combination of the HO 00 03 form and the HO 00 15 personal property endorsement, or the new HO 00 05 policy, provides open perils coverage on both buildings and personal property. d) A combination of the HO 00 03 form and the HO 00 15 personal property endorsement, or the new HO 00 05 policy, provides open perils coverage on both buildings and personal property.

All of the following are true regarding life insurance beneficiaries, except: a. primary beneficiaries are paid before secondary beneficiaries. b. there is no limit to the number of beneficiaries in any one class. c. spouses are the most commonly named primary beneficiaries. d. most beneficiary designations are irrevocable.

The correct answer is: d) a. Primary beneficiaries are paid prior to all other classes of beneficiary. b. The number of beneficiaries in any class is limitless. c. Spouses are the most common primary beneficiaries. Surviving children are the most common secondary beneficiaries. d. Most beneficiary designations are revocable. Only a small percentage are irrevocable.

What are the IAA exemptions for registration?

The following ARE investment advisers but are exempt from registration (they still have to comply with 1940 Act): 1) IA whose Clients are all state residents of the Adviser's state and who only give advice on securities that aren't listed on any exchange 2) IA whose only clients are insurance companies 3) IA who had fewer than 15 clients in last 12 months (doesn't count if part of large Co) 4) IA is a charity 5) IA to a plan maintained as employee benefit for employees of the church or related 501 org 6) IA registered with the Commodity Futures Trading Commission whose business doesn't consist primarily as acting as an investment adviser

What are the IAA exceptions for registration?

The following are NOT Investment Advisers: 1) banks that aren't investment cos 2) lawyers, accountants, engineers, teachers whose advice is incidental to their profession 3) Broker-dealers 4) publishers of newspaper, magazine or publication 5) US government securities or guaranteed by US govt 6) others that the SEC designate

HO 00 15 rider

When added to HO 00 03 form, provides open peril coverage for personal property - This rider eliminates the earth movement exclusion from personal property that is located away from the premises and involved in earth movement

Why go with whole life insurance?

Whole life insurance is for permanent needs: •lifetime needs •last expenses •estate liquidity •business needs •premiums same for life