Insurance

Coinsurance formula

( Face Value / Coinsurance ) x Loss - Deductible Coinsurance = 80% x Replacement Cost

What are the goals of state insurance regulation?

1. Protect the insured 2. Maintain and promote competition 3. Maintain solvency of insurers

How much coverage must an employer offer through COBRA based on a reduction in hours or normal termination? Death? Divorce?

18 months for reduction in hours or normal termination 36 months for everything else

how much can a retiree's benefit increase each year they delay retirement?

8% (simple interest)

The principle of indemnity is: A) a person is entitled to compensation only to the extent that financial loss has been suffered B) insured cannot indemnify himself from both the insurance company and a negligent third party for the same claim C) the insured must be subject to emotional or financial hardship resulting from the loss D) the insured and insurer must both be forthcoming with all relevant facts about the insured risk and coverage provided for that risk

A B describes subrogation C describes an insurable interest D describes concealment

The two insurance ratings agencies are...?

A.M. Best's and Moody's A.M. Best's: A++ to A/A- down to C/C- to D Moody's: Aaa to Aa1/Aa2 down to B1/B2/B3 to Caa

Is an ER required to extend medical coverage under COBRA to eligible members of the EE's family if the EE: 1. Die 2. Retires 3. Divorces 4. Terminates employment (prior to retirement)

All four require the ER to extend coverage under COBRA

What do conversion privileges on term insurance do?

Allows them to be changed over to cash value without proof of insurability

What are the variables in the Human Life Value approach to life insurance?

Amount of income earned Less amount consumed by the insured (HLV is a quick subtraction equation)

Your client owns a small firm that manufactures building supplies for commercial and industrial construction. In the last four years the firm has grown from three to eighteen employees. Last year your client began offering subsidized health insurance to the employees and their families. All of the employees elected to participate in the health plan. Assume that an event occurs and an employee is no longer eligible to be covered on the company health plan. Which of the following statements is true regarding COBRA requirements for continuation of health benefits? A) Regardless of the reason (for benefits loss) the employees are eligible for at least 12 months of COBRA coverage. B) The employer can charge a 2.5% premium to cover administrative costs associated with providing continued coverage C) If an employee becomes Social Security disabled, they are allowed 24 months of COBRA coverage. D) Your client is not required to offer COBRA coverage Rationale

Answer is d. - COBRA applies to employers with 20 or more employees. Statement a. is false for two reasons. If an employee is fired for gross misconduct, COBRA does not apply. In all other cases, employees are allowed a minimum of 18 months. Statement b. is incorrect. Employers can charge a 2% premium. Statement c. is incorrect. 29 months is the correct number of months

When a property claim has been submitted, the adjusted is called in to do what?

Assist the insured in preparing a proof-of-loss statement Determine whether there was a loss covered by the policy

Where does insurance regulation take place?

At the state level. The National Association of Insurance Commissioners (NAIC) has no regulatory power over the insurance industry

Which of the following is an insurable risk? A objective risk B pure risk C subjective risk D speculative risk

B pure risk involves the risk of loss or no loss and is the only insurable risk

When the insured is silent toa fact hat is material to the risk being insured, what has occurred? A breach of warranty B misrepresentation C concealment D breach of indemnity

C Breach of warranty - you don't do something you agree to do (e.g. install a home alarm security system) misrepresentation - you say you don't smoke when you do breach of indemnity - you can't make a profit

Requisites for an insurable risk

CHAD Losses must NOT pose a Catastrophic risk for the insurER a large number of Homogenous exposure units losses must be Accidental from insured's viewpoint losses must be measurable and Determinable so that the insurer can accurately forecast actual losses

a legal contract requires what?

COALL there must be Competency of all parties involved in a contract one party must make an Offer and the other party must Accept that offer there must be Legal consideration. consideration is whatever is being exhcnaged, whether money, services, or property the contract must pertain to a Lawful purpose

What are the life insurance nonforfeiture options?

Cash surrender value - insured receives the accumulated cash value when terminating the life insurance policy. The cash surrender value is the cash value less surrender charges Reduced paid-up insurance - insured 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 fo a paid-up term policy for a specified duration, with the same face amount as the original policy

Randy's house slid down a hill in California after a heavy rain storm and is a total loss. The relevant part of the insurnace contract states, "earthquake is a general exclusion." Which party is likely to win in court and why? A the insurance company because of the stated exclusion B the insurance company because HO policies do not cover mudslides C Randy because of the aleatory principle D Randy because the contract is adhesive

D Randy will most likely win because ambiguities are decided in favor of the insured under the principle of adhesion

The underwriter of an insurance company is charged with the responsibility of achieving a profit within the risk parameters of the company. Which of the following is the underwriter's greatest challenge? A setting premiums B motivating salespeople C making sure that profit margins are correct D managing adverse selection

D managing adverse selection may be accomplished before the contract is issued by using credit scores, physicals, claims history, etc., or on the back-end of property, auto, health, and dental insurance by raising annual premiums

Six steps of risk management

DIEDIE 1. Determine the objectives of the risk management program 2. Identify the risks to which the client is exposed 3. Evaluate the identified risks as to probability of occurence and potential loss 4. Determine alternatives for managing risks, and select the most approporiate alternative for each 5. Implement the program 6. Evaluate, monitor, and review (control)

what is NOT covered under Medicare Part B?

Dental care, dentures Cosmetic surgery Hearing aids Eye exams

What is the SS definition of disability?

Disability is expected to last for 12 mos. and will result in your death AND cannot perform the duties of any occ

what is the difference between E&O and malpractice insurances?

E&O covers negligent acts, errors, and omissions. It is carried by many professionals such as accountants, lawyers, engineers, and financial planners Malpractice provides coverage where bodily injury may occur. Many doctors carry this

what are the tax implications for EEs and ERs on group term insurance?

ERs can deduct premiums and benefits are not taxable EEs premiums are taxable if greater than 50K, and benefits are not taxable

what are the tax implications for EEs and ERs on group disability insurance

ERs can deduct premiums and benefits are not taxable Premium is not taxable to EE if premiums paid by ER Also not taxable if EE pays via pre-tax dollars Premium IS taxable to EE if paid by EE via after-tax dollars Benefits are taxable unless paid by after-tax dollars by EE

what are the tax implications for EEs and ERs on group LTC insurance

ERs can deduct premiums and benefits are not taxable Premiums are not taxable to EE, but benefits are taxable if they are "qualified expenses" (IRS Pub 502)

what are the tax implications for EE and ERs on medical insurance?

ERs can deduct premiums and benefits are not taxable to ER EEs premiums are not taxable and benefits are not taxable

Why is 1982 significant in terms of annuities

For annuities after 1982 and premature withdrawals, the withdrawal receives LIFO tax treatment. Any annuity prior to 1982 receives FIFO tax treatment

How are disability benefits taxed?

If EMPLOYEE pays the premium with AFTER-TAX dollars: -premiums are not deductible -benefits are TAX FREE If EMPLOYER pays the premium: -premiums ARE deductible to employer -benefits to employee ARE TAXED If EMPLOYEE pays premium with PRE-TAX dollars (cafe plan): -benefits to employee ARE TAXED

What are the variables in the Needs Approach to life insurance?

Income needed during the readjustment period Life income to spouse Education and retirement funding

Are life insurance premiums deductible to the insured?

No, but group life insurance premiums paid by an employer are deductible by the employer and are taxable income to the employee

Your client has a personal auto policy with the following characteristics: $250 deductible: comprehensive $500 deductible: collision 300/500/300 split liability limits Which of the following statements is true? A) Your client drives off the road and into a pond. The deductible will be $500 B) Your client causes a multi-car accident. The policy will pay up to $500,000 for damage to all automobiles damaged in the accident C) Your client's car is broken into and $3,000 of personal property is stolen. The deductible will be $250. D) Your client hits a dead deer on the side of the road. The deductible will be $250.

Rationale Answer is a. - In a multi-car accident the policy will pay up to $300,000 for property damage. Personal property stolen from an auto is covered under a homeowner policy, not the auto policy. Hitting an inanimate object (like a dead deer) is collision. The deductible is $500

Three partners in a business have decided to dissolve the company. As part of a buy/sell agreement created years before, the company had purchased single premium life insurance on each partner, each with a $1 million death benefit. Each partner decides to purchase the policy that is written on their own life. The fair market value of each policy is $300,000. As this is a transfer of a policy for value, what will be the income tax consequences when the death benefits are ultimately paid out? A) There will be no taxes on the death benefit as this is an exception to the transfer-for-value rule B) Upon death of the partner taxes will be owed on $700,000 C) Taxes will be owed on $1,000,000 D) Taxes are due on $700,000 this year because the policy is classified as a MEC

Rationale Answer is a. - When a stock redemption agreement is terminated, the corporation may wish to distribute the policies to the respective insureds if the policies are no longer needed for a business purpose. A distribution of a policy to the insured qualifies as an exception to the transfer-for-value rule

You just bought your teenage son a 10-year old used convertible. Which insurance is necessary? A) Liability B) Collision C) Uninsured motorists D) All of the above are required

Rationale Answer is a. - only liability insurance is necessary

Your client has a long-term disability policy that is provided through work, paid for by the client's employer. The policy has a 90-day elimination period and will pay 60% of wages lost due to disability. Your client's salary is $90,000 per year. Her marginal tax rate is 25%. If your client becomes disabled, what is the after-tax disability benefit that she will receive monthly (following the elimination period)? A) $4,500 B) $3,375 C) $2,700 D) $2,250

Rationale Answer is b. - Since the employer paid the premium, all of the benefit will be taxable. ($90,000/12) x .60 x .75= $3,375

Your client has just become disabled for the long term. She works for a major corporation and makes $12,000 per month. Several years ago she purchased an own occupation policy that will pay 60% of monthly wages. The policy has a 90-day elimination period. The policy also has a has a residual disability benefit that will compensate her, should she return to work at reduced earnings. Your client has paid he premiums for this policy with after-tax dollars. After being totally disabled for 12 months, she is able to return to work. However, she continues to be "residually disabled" and returns to work in a different capacity and at a lower salary. In her present position she earns $5,000 per month. Which of the following statements is correct? A) For months 4-12, the policy paid $7,200 per month, all of which was taxable. B) Now that the client has returned to work, the policy pays $4,200 per month. No taxes are due. C) The residual benefit paid by the policy is $7,000 per month, non-taxable. D) The loss of wages must be at least 50% before the residual benefit provision is enforceable

Rationale Answer is b. - The residual benefit is the lost income as a percentage of the pre-loss income times the monthly disability benefit: ($12,000-$5,000 = $7,000 lost income. $7,000/$12,000 = .583. The monthly disability benefit is 60% of $12,000 = $7,200. Therefore, the monthly residual benefit is .583 x $7,200 = $4,200. None of the benefits will be taxable as the premiums were paid by your client with after tax dollars. Statement a. is incorrect because the benefit is not taxable. Statement d. is incorrect because most policies with residual benefits require lost income to be 20-25 percent of prior monthly income

Which of the following statements regarding whole life insurance and universal life insurance is correct? A) Whole life: investment selections are directed by the insurance company; universal life: the insured directs the investments B) Whole life: the death benefit is guaranteed as long as the insured pays the premium (set at policy inception); universal life: the death benefit is not guaranteed, even if the insured pays the premium (set at policy inception) C) Whole life: withdrawals from the accumulated cash value is tax free up to the amount of premiums paid in; universal life: withdrawals from the accumulated cash value is treated on a LIFO basis. Withdrawals are initially treated as earnings. D) Whole life: the insured can adjust the death benefit, and while the policy is in force, the insured has flexibility regarding the premium payment amount; universal life: not very flexible. The insured must make the premium payment to insure that the cash value growth will match the increase in mortality costs.

Rationale Answer is b. - universal life death benefit is not guaranteed because the cash value in the policy must grow to cover increasing mortality costs. If the earnings rate on the cash value is too low, the policy may collapse. Statement a. is incorrect because the insurance company directs the investments for both policies. Statement c. is incorrect because withdrawals from both policies are treated on a FIFO basis (unless a MEC). Statement d. is incorrect because the insured in a whole life policy cannot adjust the death benefit or change the premium payment amount

Your client travels often for business. She often finds it necessary to rent a car when out of state on a business trip. She always declines the optional collision coverage offered by the car rental agency. Assume that she is at fault in an automobile accident while on one of these trips. Which of the following statements is correct? A) The rented car is a covered auto on her policy. B) The rented car is not a covered auto on her policy because she is out of state. C) The rented car is not a covered auto on her policy because she is on a business trip. D) Damage to the rented car will be covered by the rental car company with on recourse to your client.

Rationale Answer is c. - If the client was on a personal trip, the damage to the rental car would be covered under her personal auto policy. Because she was on a business trip, the rental car is not a covered auto

Given the following disability insurance options, which is likely to have the least expensive monthly premium? A) Own occupation; $10,000 monthly benefit; 3-month elimination period, integrated with Social Security B) Own occupation; $10,000 monthly benefit; 3-month elimination period, not integrated with Social Security C) Any occupation; $10,000 monthly benefit; 3-month elimination period, integrated with Social Security D) Any occupation; $10,000 monthly benefit; 3-month elimination period, not integrated with Social Security

Rationale Answer is c. - Policies with an any occupation definition of disability are less expense than policies with an own occupation definition. Also, policies integrated with Social Security are less expensive than policies that are not integrated with Social Security.

Jim needs a loan for his business. He convinces Tamra, a business acquaintance, to loan him $75,000. Jim assigns his life insurance policy ($100,000 death benefit, $5,000 cash value) as collateral for the loan. Jim never makes any loan payments and dies years later. What is Tamra's gain or loss, if any? A) There is a $25,000 gain. The gain is taxed as ordinary income. B) There is a $25,000 gain. The gain will receive capital gains tax treatment C) There is a $20,000 gain. The gain is taxed as ordinary income. D) There are no income tax consequences. Tamra is entitled to an amount equal to loan repayment, with the remainder going to Jim's designated beneficiary.

Rationale Answer is d.

What is the interpolated terminal reserve and how is it determined for estate and gift valuation? A) The interpolated terminal reserve is the value of the term life insurance that has been reserved by the actuary for a person who dies prior to the term expiration. B) The interpolated terminal reserve is the reserve for permanent life insurance that is paid up. It is determined by the actuary using an exponential mortality equation. C) The interpolated terminal reserve is the difference between the death benefit of a permanent life insurance policy and the cumulative premiums paid to date. D) The interpolated terminal reserve is the actuary's reserve for an in pay status permanent life insurance policy and is simply an actuarial estimate.

Rationale The answer is d. An actuarial estimate used internally by the insurance company and provided by the actuary to be estate or donor for valuation purposes.

Rodney is being admitted to the hospital with a preapproved covered expense for procedures that will cost $12,225. Rodney's policy has a $300 deductible per person. This deductible must be met by two family members. This requirement has been satisfied already this year. The policy also has a $5,000 coinsurance feature with an 80/20 split. What is the amount the insurer will pay for the procedure that Rodney is about to receive? A) $11,225 B) $10,925 C) $10,625 D) $11,925

Rationale The correct answer is "A." If the deductible has been satisfied, then Rodney has only the 20% of the $5,000 coinsurance amount to satisfy. This means that the insurer will cover $11,225 ($12,225 - $1,000).

Karen's employer has a non-contributory indemnity health plan. The plan has a $250 deductible with 90/10 coinsurance and out-of-pocket limit is $10,000. Karen has the following medical expenses: - $75 for a visit to her family physician - $350 for ultrasound - $3,800 surgeon's fees How much will Karen have to pay this year? A) $647.50 B) $250 C) $3,975 D) $422.50

Rationale The correct answer is "A." Karen's total medical expenses are $4,225 ($75 + $350 + $3,800). She must pay the deductible of $250 plus 10% x ($4,225 - $250) = $647.50.

Which of the following statements concerning the choice of an entity versus a cross-purchase partnership buy-sell agreement funded with insurance is FALSE? A) The use of existing insurance to fund the agreement causes a transfer-for-value problem if an entity agreement is selected, but does NOT cause this problem if a cross-purchase approach is used. B) A stock redemption should be selected if the surviving partners expect to sell their interests during their lifetimes. C) An entity approach may solve the affordability problem if one partner is significantly older than the other. D) An entity agreement becomes more desirable as the number of partners included in the agreement increases.

Rationale The correct answer is "A." The use of existing insurance does not cause a transfer-for-value situation in both entity and cross-purchase situations because the entity is presumed the same as the individual in a partnership. (B) is correct because if you do the cross purchase then each owner would have to sell, surrender, or hold onto the policy on the departing owner. Also, the departing owner would have multiple policies, each covering the other owners that (s)he would need to do something with. (C) is correct because the if we have owners significantly older than other owners then the young owners will have to pay a lot more in premiums to insure the older owners' lives in a cross-purchase agreement. (D) is correct because the number of policies needed in a cross purchase is N * (N-1).

All of the following are settlement options except: A) Fixed period payments. B) Fixed amount installments. C) Reduced paid-up insurance. D) Interest Only

Rationale The correct answer is "C." All of the following are settlement options except reduced paid-up insurance, which is a non-forfeiture provision.

Which of the following statements best describes the probation period in a disability income policy? A) The period of time that must elapse before the policy is activated. B) The period of time available for the insurer to cancel coverage under the policy. C) The period of time the insured must wait before specified illnesses or injuries are covered. D) The period of time the insured must wait before benefits are payable.

Rationale The correct answer is "C." The probation period, when included in a Disability Income policy, is the time the insured must wait after the issue of the policy before specified conditions will be covered.

Which of the following is NOT a factor that affects (and in some cases limits) the liability of the insurer? A) Insurable interest. B) Policy face value. C) Rate structure. D) Deductibles.

Rationale The correct answer is "C." Without an insurable interest, the insurance will not be sold. This affects liability of an insurer. Face value is the most (limit) an insurer will pay. Deductibles are paid by the insured, and other insurance is taken into account in all policies but life insurance, where face value limits the amount paid.

An insured, age 25, with full coverage and all provisions possible on his policy is found to be disabled and uninsurable currently and in the future, due to a gradually incapacitating terminal condition. Life expectancy is 12 to 15 years as the illness runs its course. Which of the following would be applicable and also which should our insured be advised to exercise in this case? (Assume all of these benefits that follow are provided on the policy.) I. Waiver of premium. II. Accidental Death Benefit. III. Guaranteed purchase option. IV. Living Benefits Rider. A) I only. B) II only. C) I, II and III only. D) I, III and IV only.

Rationale The correct answer is "D." The client will be in need of all but the accidental death benefit given the description provided above.

Inland marine insurance covers all of the following except: A) Imports. B) Floaters. C) Domestics shipments. D) The hull of the ship.

Rationale The correct answer is "D." The hull of the ship is covered under ocean marine insurance.

What covers partial disability within a policy?

Residual benefits

what are the broad named perils for HO insurance?

SWADe FF sudden bursting of appliances weight of ice, snow, sleet accidental overflow of water from a man made source (i.e. not floods) damage from electrical current falling objects freezing of system or appliance

what are the basic named perils for HO insurance?

VVV WEATHR FS vehicles vandalism volcano windstorm explosion aircraft theft hail riot fire smoke

what does collision insurance on your PAP cover?

accidents involving another car, running off the road, into a lake, tree, or wall

When are catch-up contributions for HSAs allowable?

at age 55 and older, not the typical 50 and over we see for IRA catch-up contributions

what is the survivorship eligibility in SS for children?

children under 18 are always covered as are caretakes of children under 16 (whether a worker ir currently or fully insured)

Whole life participating policy will pay dividends. What are the options?

dividends are a CRAP-O Cash - clients receive the money and can use it or invest it as they wish Reduce premiums - decreases the out-of-pocket expense for premiums Accumulate at interest - company invests the dividends and they are tax-free up to the client's basis in the policy. Interest paid on the dividends is taxable Paid-up additions - purchases additional insurance each year for insured regardless of health or occupation One-year term - adds term insurance each year to the policy face amount equal to cash value of the policy. Also known as the 5th dividend option on the CFP exam!

what does comprehensive or other-than-collision PAP cover?

falling objects, fire, theft, explosion, earthquake, windstorm, hail, water, flood, mischief, vandalism, riot, contact with a bird or animal, and breakage of glass

which perils are typically exluded under all HO policies?

movement of ground (includes earthquake or landslide) ordinance or law (loss resulting from regulations regarding construction or demolition) damage from water (floods, water from underground and sewer backup) war or nuclear hazard (including nuclear power plant) power failure (such as power plant failure that causes a loss) intentional act (burning down your own house) neglect (must take reasonable means to save property and mitigate loss)

How can retirement benefits be reduced or taxed?

retire too early and benes are permanently reduced (5/9 for ea month for first 3 years, 5/12 for ea month beyond that) can be temporarily reduced if you earn too much ($1 for every $2 above threshold is before retirement age, $1 for every $3 if at full retirement age) up to 85% of SS benefit may be taxed, based upon MAGI

What strategy should you impose in the event of a medical coverage change when your client switches jobs within 62 days of leaving previous job? Or switch jobs with an unknown timeframe?

utilize HIPAA, coverage begins with no, or a limited, preexisting condition timeframe utilize COBRA to extend coverage and minimize the "break" period. Utilize HIPAA to obtain a new policy

Does Part B medical payments on your PAP cover your family members?

yes, covers any of your family members as a pedestrian