Insurance Final

CASE STUDY

Former New York City Police Department Officer Sentenced in Manhattan Federal Court to 28 Months in Prison for Fraud and Identity Theft (source: FBI) JOHN L. MONTANEZ, a former police officer with the New York City Police Department ("NYPD"), was sentenced February 18, 2015 in Manhattan federal court to 28 months in prison for credit card fraud and identity theft. The sentence was imposed by U.S. District Judge Katherine Polk Failla. Law enforcement executed a search of his apartment and of his locker at his precinct. The search of the apartment yielded, among other things, identification documents in other names and a device allowing for the swiping of a credit/ debit card. The search of the locker yielded 16 identification documents in other names, including driver's licenses, benefits cards, and Social Security cards. The identification documents obtained from the search of the locker appeared to come from arrests that MONTANEZ affected or participated in throughout the course of his career as a police officer.

Participation Rate

determines how much of the increase in the index will be used to calculate the index-linked interest. For example, if the calculated change in the index is 10 percent, and the participation rate is 70 percent, the index-linked interest will be seven percent

Coinsurance Formula

(Insurance Purchase / Coinsurance) x Amount of Loss

Coverage D: Loss of Use

-A combination of additional living expenses and loss of rental income. -The limit is usually 30% of the Coverage A amount. -The loss resulting from living in a hotel because residence is damaged or being repaired. •This section only applies to additional living expenses. -Alternatively, if rental income is lost due to a property being damaged, the insured may collect loss of use.

Replacement Cost (RC)

-Amount necessary to purchase, repair or replace with similar quality at current prices -Insured must carry 80% of the replacement cost at the time of the loss

The following personal property items are specifically excluded from coverage in package policies:

-Animals, birds, and fish -Articles separately described and specifically insured -Motorized land vehicles used off premises -Property of roomers or boarders not related to the insured -Aircraft and parts -Furnishings on property rented out to others -Property held as samples, held for sale, or sold but not delivered -Business data, credit cards, and funds transfer cards -Business property held away from the residence premises

Torts cover intentional acts and accidents, such as:

-Civil wrongs •Intentional Tort: Libel, slander, assault and battery •Strict and Absolute Liability oStrict - allows for defense oAbsolute - no defense •Negligent (Unintentional Tort) oPrudent Man standard-Did the defendant act in the same manner as a prudent man would act

Negligence on the part of the injured party

-Contributory •Insured persons negligent actions contributed to loss, cannot recover -Comparative •Insured persons negligent actions contributed to loss, can recover portion of loss from other negligent party -Last Clear Chance Rule •The plaintiff can collect even if there was contributory negligence on the plaintiff's part if the plaintiff can prove the defendant had a last clear chance to avoid the accident

Coverage A: Dwelling

-Covers repair or replacement of the house, attached structures and building materials on premises. -Purchase an amount equal to replacement cost (cost to rebuild) of the building. -Insured must carry at least 80% of replacement cost of the building (coinsurance).

No Fault Insurance Definition

-Each party involved in an accident files a claim and collects from their own insurance company for any injuries sustained.

•Traditionally, individuals receive fixed annuities from:

-Employer defined benefit plans -Government retirement plans -Insurance companies

Duties After a Loss (the insured)

-Give notice to the insurer immediately. -Protect the property from further damage. -Prepare an inventory of the loss. •Building damage •Personal property damage or loss -File a written proof of the loss.

Coverage F: Medical Payments to Others

-Includes coverage for the medical payments to others for injuries that arise even where the insured is not liable for the injury. -Medical expenses include reasonable charges for medical procedures, surgical procedures, hospital stays, ambulances, dental care, X-rays, professional nursing, prosthetic devices, and funeral services. -It does not apply to the insured or members of the insured's household. -This coverage is not liability insurance coverage and is not based on fault.

Coverage B: Other Structures

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

Coverage C: Personal Property

-Includes furniture, electronics, clothing, paintings, etc. -Standard coverage is for actual cash value. -Limits are placed on certain personal property losses, e.g. cash, coin collections ($200), jewelry ($1,500). -Limit is usually 50% of Coverage A, but be sure to read the policy. -Coverage is effective regardless where you property is located. -Need an endorsement for personal property to have replacement cost rather than actual cash value. If you have a loss you want a new TV, not the depreciated value of your TV. -Need a rider for high value jewelry because of low policy limits.

Medicaid Type Services

-Inpatient hospital services -Home health care for persons eligible for skilled-nursing services -Outpatient hospital services -Pregnancy-related services, including prenatal care and 60 days postpartum pregnancy-related services -Laboratory and x-ray services -Vaccines for children -Pediatric and family nurse practitioner services -Physician Services -Nursing facility services for persons aged 21 or older -Federally qualified health-center (FQHC) services, and ambulatory services of an FQHC that would be available in other settings -Family planning services and supplies -Nurse-midwife services -Early and periodic screening, diagnostic, and treatment (EPSDT) services for children under age 21 -Rural health clinic services

•Annuities can be characterized based on several factors:

-Length of payout (fixed or variable) -Frequency and flexibility or premium (single premium or flexible premium) -The timing of when income is payable (immediate or deferred) -Tax considerations and funding vehicle

Coverage F: Medical Payments to Others

-One of the following conditions must be met for an individual to receive medical payments coverage from the insured: •The injury occurs while the person has permission to be at the insured location. •The injury occurs while the person is away from the insured location and is caused by a condition at the insured location or on property immediately adjoining the insured location. •For example, ice on the sidewalk or driveway and someone slips and falls •The insured injures another person while away from the insured location. •An animal owned by or in the care of the insured injures an individual off the insured premises.

Coverage that is usually included on the Homeowners policy as a scheduled endorsement (scheduled floater) are:

-Personal furs -Jewelry -Silverware floater coverage is the same as jewelry -Golf equipment floater covers golf equipment kept in a locker in a clubhouse -Camera, fine art and antiques, stamp and coin collection, musical instrument, wedding presents, and personal property floaters

•A credit report generally includes the following information:

-Personal information -Credit account information -Any inquiries -Delinquency information -Any information from collection agencies -Any public information from state and other courts

Coverage E: Personal Liability

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

Annuities are used to:

-Provide income streams for retirees -Accumulate assets on a tax-deferred basis

Common Features of Long-Term Care Insurance Policies

-Renewability - guaranteed renewability -Nonforfeitures Benefits - Return of Premium or Shortened Benefit Period -Waiver of premium while receiving benefits

Actual Cash Value (ACV)

-Represents depreciated value of the property.

Coverage F will not provide coverage for bodily injuries:

-Sustained by the insured or any family member. -Sustained by a regular resident of an insured location. -Sustained by a residence employee of the insured that occur outside of the scope of employment. -Sustained by anyone eligible to receive benefits for their injuries under a workers compensation or similar disability law. -Resulting from nuclear reaction radiation, etc., regardless of how cause.

Res Ipsa Locquitur

-The act speaks for itself -If an accident occurred, then there was negligence •If there is an airplane crash, the act speaks for itself and negligence occurred. •Vicarious Liability -Responsible for the acts of others •Bartender serving alcohol to a customer who later causes an accident. The bartender and bar owner may be responsible. •Parents are responsible for the acts of their children.

Loss to a Pair or Set

-The insurer may •Repair or replace damaged item OR •Pay the difference between the value before and after the loss.

Common Special Needs Trusts

-Third Party Special Needs Trust -The self settled type trust that is established and exempt under 42 U.S.C. Sec.1396p(d)(4)(A) -A pooled trust which is exempt under 42 U.S.C. Sec.1396p(d)(4)(C)

Long-Term Care

A range of personal care and supportive services that a person might need if they were unable to care for themselves because of illness, disability, or cognitive impairment.

Structured Settlements and the Secondary Market Example 1

Alice is injured by Barb in an automobile accident. The claim is not settled and ultimately goes to court. Alice wins the case and settlement money is offered to pay Alice either a lump-sum payment or a structured settlement making payments over Alice's lifetime. Alice, who is now unable to work, accepts the structured settlement annuity. The court order specifies that Alice shall receive $2,000 per month for life, with a 20- year guaranteed payment period. Neither Alice nor the court want Barb or Barb's auto insurance company to pay the annuity. Therefore, Barb's insurance company purchases an annuity from a major life insurance carrier to pay the annuity of $2,000 per month with a 20-year guarantee. Barb's auto insurance company is the owner of the policy, the life insurance company is the issuer, and Alice is the payee. If, by chance, the life insurance company goes out of business and the state-guarantee funds that guarantees insurance also go out of business (not likely), then Alice can go back to the original automobile insurance company and demand that they make the required payments as specified in the court settlement. Five years into the annuity, Alice needs money, and because she does not work, she decides to sell some or all of her annuity payments in return for a lump-sum payment. Alice sells the annuity at an 8.5% discount rate and receives $203,000 from the structured settlement company. The structured settlement company then re-offers the annuity for $253,000 (equating to a yield of approximately 5%) over the term of the annuity. The yield is substantially higher than the yield on CDs or treasuries. A similar 15-year guaranteed annuity of $2,000 per month might cost $300,000 and yield 2.5%.

Variable Annuity Fees Example

Eddie purchases a variable annuity contract with a $100,000 purchase payment. The contract has a schedule of surrender charges, beginning with a 7% charge in the first year, and declining by 1% each year. In addition, he is allowed towithdraw 10% of the contract value each year free of surrender charges. In the first year, Eddie decides to withdraw $50,000, or one-half of your contract value of $100,000 assuming the contract value has not increased or decreased because of investment performance). In this case, Eddie could withdraw $10,000 (10% of contract value) free of surrender charges, but he would pay a surrender charge of 7%, or $2,800, on the other $40,000 withdrawn.

Variable Annuity

Features: •Tax deferred earnings •Avoid income tax when one investment in the annuity contract is sold and replaced with another investment (transfer among subaccounts) •Death benefit protection options •Living benefit protection options •Lifetime income options Since control of the underlying investments in the variable annuity contract rests with the contract holder, variable annuities offer potentially higher returns than fixed annuities but also involve investment risk.

Fixed Annuity:

Fixed Annuity: •Most conservative •Provides full principal protection combined with a guaranteed rate of return •Typically, the premiums paid for the annuity contract will begin earning an interest rate, which is dependent on current fixed income interest rates and known as the initial rate. •Once the initial interest rate guarantee period expires, a renewal rate will go into effect.

ESTABLISHING CREDIT

If a person has no credit, the easiest way to establish credit is with: •a secured credit card, •a co-signer, •a single purpose card (e.g. gas card), or •an automobile loan with a substantial down payment.

Estate Taxation Example 2

Ira has always been a planner and very methodical about his finances. Twenty years ago, he purchased a deferred variable annuity that is now worth $1 million. Unfortunately for Ira, he stepped on a piece of glass and the wound got infected. The infection went untreated, and he died. The value of the annuity, which was not annuitized, is included in his estate.

Coinsurance Example 1

John owns his home valued at $500,000. The replacement cost of the house is $400,000 and the value of the land is $100,000. He purchased $250,000 of insurance with an 80% coinsurance requirement. A tornado caused $100,000 in damage to his house. If John has a $500 deductible, how much will the insurance company pay?

Taxation of Annuities Example

Kevin invested $100,000 in an annuity contract. Many years later, he annuitized the contract. The insurance company agreed to pay him $1,388.89 per month for 15 years. His expected return, therefore, is $250,000.02 (15 years x 12 months x $1,388.89 per month). The exclusion ratio is 40%, calculated by taking Kevin's investment in the contract of $100,000 and dividing it by his expected return of $250,000.20. The amount of each payment excluded from tax is $555.56 (calculated by multiplying the exclusion ratio of 40% by the payment of $1,388.89). The difference between the payment of $1,388.89 and the portion excluded from income ($555.56) is $833.34 (60%), which is subject to income tax.

Purpose of Long-Term Care

Long-term care services meet the needs of frail, older people and other adults who lack the capacity for self care.

Estate Taxation Example 1

Pursuant to a retirement plan, ABC Company (ABC) was paying Fred an annuity for life, and was to provide Helen, Fred's wife, upon his death after retirement, with a similar annuity for life. Assume that Fred died at age 67, after the annuity began, when he fell of a treadmill while working out. The value of the wife's annuity is includible in the Fred's gross estate.

STEPS THAT VICTIMS OF IDENTITY THEFT SHOULD TAKE

STEPS THAT VICTIMS OF IDENTITY THEFT SHOULD TAKE 1. File a report with law enforcement. 2. File a complaint with the Federal Trade Commission at www.identitytheft.gov or the FTC Identity Theft Hotline at 1-877-438- 4338 or TTY 1-866-653-4261. 3. Place a 'fraud alert' on the all credit records by contacting one of the three major credit bureaus: •Equifax, www.Equifax.com, 1-800-525-6285 •Experian, www.Experian.com, 1-888-397-3742 •TransUnion, www.TransUnion.com, 1-800-680-7289 4. Contact the victim's financial institutions and close any accounts opened without permission or that have been tampered with. 5. Check the Social Security Administration earnings statement annually. Accounts can be accessed online at www.ssa.gov.

Types of Care

Skilled Nursing Care •Refers to a level of care that includes services that can only be performed safely and correctly by a licensed nurse (either a registered nurse or a licensed practical nurse), doctor or therapist. Custodial Care •Refers to non-skilled, personal care, such as help with activities of daily living (eating, bathing, transferring, dressing, toileting, and continence). Home Health Care •Care provided at home Hospice Care •Typically utilizes a team-oriented approach to address medical, physical, social, emotional, and spiritual needs of the terminally ill. Adult Day Care Services •Provide supervision during the day at a community basedcenter while caretaker family members are at work. Programs address the individual needs of functionally or cognitively impaired adults. Assisted Living Facility •Residential living arrangements that provides individualized personal care, assistance with activities of daily living, help with medications, and services such as laundry and housekeeping. Long-Term Care Services •Include medical and non-medical care for people with chronic illnesses or disabilities.

Conditions that Trigger Long-Term Care Benefits

Terminal illness - defined as having a life expectancy of less than 6 months, certified by a qualified health professional. Chronic illness - defined as having a physical or cognitive impairment that: ①prevents the insured individual from performing at least two of the six activities of daily living for at least a 90 day period, or ②requiring substantial supervision to prevent the insured from posing a danger to himself, herself, or others. ③To be considered chronically ill, the insured individual must be certified as such by a qualified health professional within the previous 12 months.

Inflation

The increase in the general price level of goods and services

Activities of Daily Living

The six activities of daily living are: ①eating ②bathing ③dressing ④transferring ⑤toileting ⑥continence

Factors in the Selection of Long-Term Care Policy

When deciding on a policy, one should consider the following: •the premium •the period of coverage or total benefits •any inflation adjustment •the elimination (deductible) period •services covered •services excluded •who is the gatekeeper to determine qualification for benefits •how are benefits paid •what triggers benefits

Floor Crediting Rate

minimum index-linked interest rate that will be credited to the contract in a given period

Index Term

period over which index-linked interest is calculated, ranging from 1 to 10 years, with 6 to 7 being the most common

Cap Rate

some indexed annuities impose an upper limit on the index-linked rate

IMPORTANT PAP POLICY DEFINITIONS

•"Your covered auto" is defined as any of the following: -Any vehicle shown in the policy declarations. -Any new vehicle in addition to those shown in the declarations, but only for 30 days or until the new vehicle is reported to the insurer. The insurer will charge a premium from the date the vehicle was acquired. The new vehicle will have the broadest coverage provided on any declared vehicle for the 30-day perod. -Any new vehicle that replaces a vehicle shown in the declarations. The new vehicle will have the same coverage as the vehicle it replaced. The insured must report the new vehicle within 30 days only if coverage for damage to your auto is desired. -Any trailer the insured owns. -Any auto or trailer that the insured does not own, but that is used as a temporary substitute while a covered vehicle is unavailable due to loss, breakdown, repair, service, or destruction.

Medicare

•A federal program that pays for healthcare for persons over age 65 and for people under age 65 with disabilities •Generally does not cover long-term care services •Will help pay for a short stay in a skilled nursing facility, for hospice care, or for home health care if the recipient meets the following conditions: -Has had a recent prior hospital stay of at least three days -Is admitted to a Medicare-certified nursing facility within 30 days of the prior hospital stay -Needs skilled care, such as skilled nursing services, physical therapy, or other types of therapy, as a result of some medical condition that caused the hospital stay •If all of these conditions are met, Medicare will pay for some of the costs up to 100 days.

Long-Term Care Coverage

•A long-term care policy may pay different dollar amounts for different types of long-term care services. Policies usually pay benefits by the day, week, or month. •Most long-term care policies limit the total amount of benefits that can be paid over the life of the policy. Some policies state the maximum benefit limit in terms of years. Other policies state the maximum benefit limit in terms of dollars. The maximum benefit limit is referred to as themaximum lifetime benefit or the total plan benefit.

CREDIT SCORES

•A number that summarizes a person's credit risk based on an evaluation of his or her credit report at a particular point in time. •Credit scores are calculated using a formula with four or more variables with various weightings. •Often referred to as FICO scores (Fair Isaac Corporation). However, there are various credit scoring companies and many different credit scores. •The two most well-known credit scores are FICO and Vantage.

Special Needs Trust

•A specific type of trust that is used to provide benefits to persons or beneficiaries with special needs. •Typically, these trusts are established to ensure that benefits available from federal and state agencies are preserved and maintained.

Open Perils Policy

•All perils are covered except those specifically excluded. •Typical exclusions include neglect (termite damage), flood, war, etc.

Default Risk for Annuities

•All states have guarantee funds run by the state insurance commission that act as the payor of last resort in the case of an insurance company failure. •While a few insurance companies have failed, no annuity contract holder in the United States has been deprived of promised payments to date.

Coinsurance Example 2

•Alternatively, if John had $320,000 in insurance coverage, then 100% of the loss would be covered, less the deductible.

Annuity

•An annuity is a contract that is designed to provide a specific income that is payable at stated intervals for a specified period of time.

Long-Term Care Insurance

•An option that can mitigate the risks of needing and having to pay for long-term care for an extended period of time. •Designed to cover long-term services and supports, including personal and custodial care in a variety of settings. •Pays for home health care, nursing home stays, and hospice care. •Policies have many choices, limitations, and costs that need to be considered.

General Provisions of Sections 1 & 2

•Assignment of a Homeowners policy to another is not valid without the insurance company's written consent. •The insured may be required to assign his or her right of recovery against a third party if the insurance company pays for a loss caused by the third party (subrogation). •The policy is void if the insured willfully misrepresented or concealed any material fact concerning the insurance.

COST OF AUTOMOBILE INSURANCE

•Automobile insurers determine premiums using three basis sets of factors: -Age and sex of operators -Use of the automobile -Driving record of the operators

Variable annuities are offered by share class:

•B shares typically having a 6 to 8 year period of surrender charges •L shares having a 3 to 4 year surrender charge period for each contribution •C shares having no surrender charge •B shares typically having slightly lower fees Note: There is generally a direct link between the CDSC and the commission the broker receives as part of the sale.

Medicaid Planning Example 1

•Barry worked as a plumber since he was 18 years old. He worked hard his entire life and has saved a fair amount of money by not going on vacations, eating at home, and living modestly. He just turned age 65 and has been diagnosed with Alzheimer's disease. He had hoped that he would be able to leave some of his money to his daughter for his grandson's college education. However, he is concerned that he will spend his life's savings on long-term care. He is also concerned that his wife will be without the necessary funds to care for her needs.

Point-to-Point Index-Linked Crediting Method

•Based on the difference between an index value at the end of the term compared with the index value at the start of the term •Permits a higher participation rate •Since the term is typically 6 or 7 years, the annuitant may not be able to receive the index-linked interest until the end of the term

INSURANCE ON WATERCRAFT

•Boat owner's policy covers liability, physical damage, medical payments and uninsured water craft. •Physical damage coverage is ACV coverage for the boat and permanently attached equipment. •The motor including remote controls and batteries, and boat trailer, on an open peril basis that is subject to wear and tear, gradual deterioration and mechanical breakdown.

Legal Liability

•Breach of Contract •Crimes -Public wrongs •Liability insurance will cover certain classes of torts, but not breach of contract or crimes. •Negligence -Failure to acts as a Prudent Man •Defense to negligence -Assumption of risk-the injured party assumed the risk before doing something. •Not available in all states

FICO SCORE

•Calculated using a formula that evaluates many types of information in the credit report at that credit reporting agency and ranges from 300 to 850. •The FICO scoring system dramatically lowers the cost of borrowing and the cost of capital in the United States. •Quick, easy access to credit is a major source of economic strength and stability for consumers and businesses alike. •Factors such as gender, race, religion, nationality and marital status are not included in FICO scores.

CHARGE CARDS

•Charge card issuers expect payment of the full balance within 30 days •Charge cards generally charge annual fees •American Express is the most well-known charge card issuer at this time

BUSINESS AND PROFESSIONAL INSURANCE

•Commercial Package Policy (CPP) -Property & liability coverage •The Business Owners Policy (BOP) •Business Liability Insurance -Bodily injury, property damage, legal defense •Business Liability Umbrella Policy (BLUP) -Liability, legal defense •Business Auto Policy (BAP) •Commercial Liability Umbrella Policy (CLUP) •Malpractice Insurance -Provides coverage where bodily injury may occur due to negligence •For example: Doctors, dentists, and surgeons •Errors & Omissions -Covers negligent acts, errors and omissions. -Many professionals carry E&O Policy, such as: •Accountants •Lawyers •Engineers •Financial Planners •Products Liability Insurance

Annual Reset Method

•Comparing the index value at the end of the contract year with the index value at the beginning of the contract year •The advantage of the annual reset method is that the interest earned is locked in and the index value is reset at the end of each year •Future decreases in the index will not affect the interest already earned

High Watermark Approach

•Comparing the value of the index at various points during the term (usually on anniversary dates) •The interest credited is based on the difference between the highest index values and the index value at the start of the term •This design may credit higher interest to the contract than some other interest crediting designs if the index reaches a high point early or in the middle of the term and then drops off later

Disadvantages of Annuity Contracts

•Complexity •Costs and fees •Tax consequences •Annuities are protected from creditors in some states

PLUP Exclusions

•Coverage for bodily injury or property damage if the act that created the injury or damage was intentional •Liability that is a result of business owned or conducted by the insured •Liability that arises from rental operation conducted by the insured •Professional liability •Liability that occurs on an uninsured location that is owned by the insured

Part B: Medical Payments

•Covered persons include you or any family member while occupying the auto, you or any family member as a pedestrian struck by an auto, any other person while occupying your covered auto •Coverage amounts are limited as follows: ²Per Person, Per Occurrence Basis •$5,000 limit per person, four persons in a car, then $20,000 limit •Exclusions: ²Public livery, racing, and auto used without permission.

Part A: Liability Coverage

•Covered persons include you, any family member, any person using your car with your permission, any organization responsible for the conduct of someone driving your covered auto, any organization responsible for your conduct while driving a nonowned auto. •Coverage amounts are limited as follows: -Bodily Damage Per Person -Bodily Damage Per Occurrence -Property Damage Per Occurrence •Split Limits: 50/100/25 (Bodily Damage per person/per occurrence/property damage) •Stated in thousands of dollars •State law minimum limits automatically increase to state mandated minimums when driving from state to state. •Insurance on the auto is the primary insurance to recover any loss. The driver's auto insurance is secondary.

HO-6 Unit Owners Form (designed for condo owners)

•Covers basic and broad named perils, but not building coverage •The insurance responsibility in a condo arrangement is divided between the condo unit owner and the condo association. •Provides coverage for the personal property of the condo owner for the same named perils as HO2. •Provides for loss of use coverage equal to 40% of the amount of Coverage C (personal property). •Provides coverage for building alterations and additions, which include appliances, fixtures, real property that pertains exclusively to the insured's premises, property that is the insured's responsibility under the condo association agreement and structures owned by the insured other than the condo unit. •Endorsements can be added to HO6 to provide open peril coverage on the unit owner's building items (carpet, inside walls), personal property, loss of unit rental and assessment coverage.

HO-2 Broad Form

•Covers both basic and broad named perils (1-18)

HO-8 Modified Form

•Covers repair rather than replacement cost, basic perils are covered •Designed to cover losses to structures where the replacement cost for the home exceeds the market value for the home. •Theft coverage applies to the premises only and is limited to $1,000 per occurrence. •May cover dwelling using current materials and labor rather than attempting to replace older materials and craftmanship.

HO-4 Contents Broad Form (designed for renters)

•Designed for tenants, and provides protection for furniture, clothes, and other personal property against the same perils as HO2 Broad Form. •Loss of use coverage is limited to 20% of the amount of Coverage C (personal property). •Tenant's improvements and betterments coverage protects the insured for use value for any additions, installations or improvements made by the insured to the rented dwelling. •This coverage is limited to 10% of the amount of personal property coverage.

Income Taxation

•Distributions are not made to the annuitant until the contract is annuitized •Distributions taken from an annuity before annuitizing, it must be included in the taxpayer's gross income until all of the gain in the contract has been distributed •Further distributions are treated as tax-free returns of investment dollars •Annuity contracts follow a LIFO approach to income reporting •Annuities issued prior to August 14, 1982 receive FIFO treatment •Annuities purchased with pre-tax dollars typically do not have any basis -401(k) plans -Deductible traditional IRA •Each annuity payment received from a non-qualified annuity is split into two pieces: -A tax-free return of basis -Taxable income •If annuitant takes a distribution of income from an annuity contract before age 59½, a 10% penalty tax applies •If the annuitant is a high income taxpayer and the annuity distribution is not made through an IRA or qualified plan, a 3.8% Affordable Care Act surtax will apply

HO-5 Comprehensive Form

•Dwelling and personal property covered on an open perils basis.

Medicaid

•Federal/state entitlement program that pays for medical assistance for certain individuals and families with low incomes and resources. •Each state: -Establishes its own eligibility standards: determines the type, amount, duration, and scope of services -Sets the rate of payment for services -Administers its own program •Medicaid policies for eligibility, services, and payment are complex and vary considerably, even among states of similar size or geographic proximity

Earnings

•Fixed - invest in less risky investments and will guarantee returns for a period of time •Variable - have a wider array of investment choices, including equity investments

Equity-Indexed Annuities

•Fixed annuities, either immediate or deferred, that earn interest or provide benefits that are linked to an external equity reference or an equity index. •One of the most commonly used indices for annuity products in the Standard & Poors 500 composite stock price index (S&P 500) •Credit interest using a formula based on changes in the index to which annuity is linked •A composite between a variable annuity and a straight fixed annuity having little downside risk and modest upside potential •Two Features: ①Indexing methods specified in the contract ②Participation rate

Flexible Premium vs. Single Premium

•Flexible - allows the insured the option to vary premium deposits over time •Single - annuity purchased with a single lump sum

IDENTITY THEFT AND FRAUD

•Identity theft is a big business, estimated to be 15 billionstolen from 13.1 million U.S. consumers in 2015, compared with $16 billion and 12.7 million victims a year earlier. In the past six years identity thieves have stolen $112 billion. •Consumers who suspect that they have been a victim of identity theft should take action immediately.

Immediate vs. Deferred

•Immediate annuity: created when the contract owner trades a sum of money in return for a stream of income that begins immediately. •Deferred annuity: does not begin distributions immediately, but waits until some future time to start payments.

FICO ALTERNATIVE SCORE

•In April 2015, FICO announced a piloted alternative scoring system to make millions of Americans who currently do not have a FICO score credit worthy. •FICO joined with Equifax to use data from cable, cell phone, electric and gas bills to produce a score of credit worthiness for persons who would not have scores otherwise.

Advantages of Annuity Contracts

•Individuals concerned with the possibility of outliving their retirement savings may transfer that longevity risk to an insurance company by purchasing an annuity •Opportunity to defer income taxation •The ability to rebalance the portfolio inside the annuity contract without incurring any immediate income taxation on asset sales •Annuities are protected from creditors in some states

Optional Features of Long-Term Care Insurance

•Issuers of long-term care policies must offer inflation protection and a nonforfeiture benefit, but probably will charge extra for those features. •Inflation protection - helps the insured to maintain the purchasing power of the original contract benefit. •Guaranteed Purchase Option - allows the insured to increase the benefits by a state percentage periodically. The down side to this approach is that the premium increases as the benefit is increased and the right to purchase future increases may be lost of one or more purchase options are not taken. •Non-forfeiture Benefit - the guarantee that the insurer must offer that the insured will receive some of the benefits for which the premium was paid, even upon cancellation or lapsed.

Medicaid Planning Example 2

•Larry worked as a plumber since he was 18 years old. He worked hard his entire life, but also enjoyed his life by buying expensive cars, vacationing every change he had, and always buying the latest in fashion trends. While he has earned a significant amount of money over his career, he has almost nothing saved and lives in an apartment. He just turned age 65 and has been diagnosed with Alzheimer's disease. He is very concerned about the progressiveness of the disease and the prospect of needing long-term care and not being able to afford it.

Alternatives to Long-Term Care Insurance

•Life insurance with long-term care rider •Annuity contracts with long-term care provisions •Longevity annuities (also known as deferred income annuities) •Viatical or Life Settlement Contracts •Reverse Mortgages

Factors That Influence the Need for Long-Term Care Insurance

•Long-term care insurance makes economic sense if the person as assets to protect. Otherwise, the individual would qualify for Medicaid. •To decide whether long-term care insurance is appropriate, one should consider: -Personal risk factors oLife expectancy oGender oFamily situation oFamily health history -Financial considerations -Other available alternatives

Services Not Covered by Long-Term Care

•Long-term care policies may exclude coverage for some conditions, either completely or for a limited period. •Policies typically exclude: -Pre-existing conditions -Mental and nervous disorders -Care provided by family members or loved ones

Settings of Long-Term Care

•Long-term care services are provided in a variety of settings: -home -community -residential setting -institutional setting (nursing home)

Assets included in medicaid eligibility

•Many assets are not counted at all when determining Medicaid eligibility. Assets that are counted include: -Checking and savings accounts -Stocks and bonds -Certificates of deposit -Real property other than your primary residence -Additional motor vehicles if you have more than one

Annuity Payout Period

•May provide payments for a fixed term such as 20 years (term certain) or for an indefinite term such as the lifetime of the annuitant (life annuity).

Assets not included in medicaid eligibility

•Medicaid generally does not count the following assets: -Primary residence -Personal property and household belongings -One motor vehicle -Life insurance with a face value under $1,500 -Up to $1,500 in funds set aside for burial -Certain burial arrangements such as pre-need burial agreements -Assets held in specific kinds of trusts •In 2016, the equity limit is in excess of $500,000. Medicaid must deny benefits above this limit.

Medicaid generally does not count:

•Medicaid generally does not count: -Nutritional assistance (food stamps) -Housing assistance provided by the federal government -Home energy assistance

Medicaid Planning and the Look Back Period

•Medicaid planning - arranging assets so they are preserved for the individual and/or family members, but are not countable when Medicaid eligibility is determined. •States conduct a review, or "look-back," to determine whether the individual (or his or her spouse) transferred assets (e.g., cash to children, transferring home ownership) to another person or party for less than fair market value (FMV). •The DRA lengthened the "look-back period" to 60 months (5 years) prior to the date the individual applied for Medicaid. •When individuals transfer assets at less than the FMV, they are subject to a penalty that delays the date they can qualify to receive Medicaid long-term care services.

General Exclusions for all Homeowner's Insurance

•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 a 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

Part E: The duties of the insured after an accident or loss

•Notify the insurer •File a proof of loss (affidavit) •Cooperate with the insurer in the investigation of the loss •The insured must file a police report if the cause of the loss was theft or uninsured motorist

Part F: General Provisions

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

PERSONAL AUTO INSURANCE POLICY

•Part A: Liability Coverage •Part B: Medical Payments •Part C: Uninsured Motorists •Part D: Coverage for Damage to Your Auto •Part E: Duties After an Accident or Loss •Part F: General Provisions

Qualified State Long Term Care Partnership Program

•Partnership-qualified long-term policies: •Help people purchase shorter term, more complete long-term care insurance •Include inflation protection, so the dollar amount of benefits received can be higher than the amount of insurance coverage purchased •Allow people to apply for Medicaid under modified eligibility rules if there is continued need to long-term care after the policy maximum is reached •Include a special "asset disregard" feature that allows individuals to keep assets like personal savings above the usual $2,000 Medicaid limit

WHAT'S NOT IN A CREDIT SCORE

•Pay raises: 48% of those surveyed erroneously believed that an increase in income improves their credit score. •Credit inquiries: 40% of those surveyed were unsure of the impact of checking a credit score. 20% surveyed erroneously believed checking a credit report caused it to go down. •Paying down debt: 61% surveyed erroneously believed paying off debts from late payments automatically increased their score. •Trending information: 70% of those who have checked their credit reports in the last year incorrectly assumed that they reflected recent changes or trends in their finance over time.

Personal Assets and Savings

•Paying long-term care out of personal savings can be an option for some. •Depends on how long the services are needed •May only be needed for a short period of time. •In other cases, paying for services can be financially devastating - also devastating to a person's spouse.

Part C: Uninsured Motorists

•Pays what an "under-insured" or uninsured driver should have paid. •Under-insured or uninsured must have been at fault. •Covered persons include you or any family member while occupying the auto, any other person while occupying your covered auto, any person who might have been entitled to damages, you or your family member as a pedestrian when struck by an uninsured motorist. •Exclusions: -Public livery, regular use of an nonowned vehicle, auto used without permission, auto used in insured's business

OTHER USERS OF CREDIT INFORMATION

•Potential employers •Life insurance providers •Potential landlords •Cell phone companies

The Personal Liability Umbrella Insurance Policy

•Protection against legal obligations that arise from negligent acts. •A PLUP pays the costs, up to the face of the policy, that result in liability. •Usually provides legal defense for the insured in the event of a law suit. •A PLUP requires higher liability limits on underlying auto and homeowner policies. •The coverage is for liability of the insured, the family members, or both. •The coverage includes exposure at the premises of the residence or away from the residence. •Provides coverage for the insured's legal obligation because of bodily injury or property damage. •Provides payment for reasonable medical expenses for the injured party. •Typical coverage is between $1-3M •Excludes professional pursuits.

HO-3 Special Form

•Provides coverage on dwelling and other structures on an open perilsbasis resulting in coverage against all physical loss other than those specifically excluded. •Personal property is covered on a named-peril basis •Allows loss of use on an open peril basis and the personal property coverage is 50% of the insurance on the dwelling. •Contains exclusions applicable to the open perils coverage of the dwelling and other structures. •Provides coverage on the same perils as HO2 but an endorsement can be added so that personal property is covered on an all risk basis.

Part D: Coverage for Damage to Your Auto

•Provides direct damage coverage on your covered auto and any nonowned auto (rental or borrowed car). •Collision -Protects against an accident involving another car, running off the road, into a creek or lake, tree, wall. •Comprehensive -Covers the following perils: falling objects, fire, theft, explosion, earthquake, windstorm, hail, water, flood, mischief, vandalism, riot, contact with a bird or animal and breakage of glass. •Insurance company has the option of paying for repairs or actual cash value of auto. •Exclusions: -Public livery, radar detectors, most electronic equipment, nuclear damages, auto used without permission, auto used in insured's business.

THE FAIR CREDIT REPORTING ACT OF 1971

•Provides that U.S. citizens have free access to their credit reports and credit scores from the three national credit reporting agencies. •Consumers should examine their credit report regularly because they frequently contain errors.

REPAIRING A CREDIT REPORT

•Repairing a credit report requires planning, due diligence, and persistence. •Any negative information in the report that is incorrect should be addressed immediately and in writing (limited to 100 words) to the credit reporting agency.

Homeowners (HO) insurance: basic coverages

•Section I Coverages: -Coverage A: Dwelling -Coverage B: Other structures -Coverage C: Personal property -Coverage D: Loss of use •Section II Coverages: -Coverage E: Personal Liability -Coverage F: Medical Payments to Others

SECURE VS. UNSECURE LOANS

•Secured loans are secured by collateral that may be repossessed if the loan is not repaid as agreed. Examples of secured loans are mortgages and automobile loans, where the house or car is considered collateral towards the debt. If the consumer defaults on the loan, the lender seizes the property. •An unsecured loan has no such collateral and is only backed by the borrower's promise to pay. Examples of unsecured loans are personal loans and non-secured credit cards. Secured loans are considered higher quality loans by lenders because of the collateral.

Annuity Benefit Options

•Single life annuities -Straight or pure life annuities -Installment refund annuities -Cash refund annuities -Term certain annuities •Term certain (Guaranteed Minimum Payment) •Joint and survivor life annuities -100% joint and survivor annuity -75% joint and survivor annuity -50% joint and survivor annuity

CONSUMER LENDING

•Sixty to seventy percent of GDP growth in the United States is a result of consumer spending. •Credit cards, home equity loans, home equity lines of credit, auto loans, other recreational vehicle loans, and appliance loans are all included in consumer lending.

Third Party Special Needs Trust

•Sometimes referred to as a family trust as the trust is a receptacle for funds from a parent, guardian or other family member. •The assets of these trusts, if properly structured, are not counted or considered for purposes of available benefits for the beneficiary. •The trust must be established to not provide food, shelter or any asset that could be converted into food or shelter, such as cash. •It may provide for other benefits, such as medical treatment, therapy, education, travel, computer equipment, etc. These types of benefits can improve the lifestyle of the beneficiary and not interfere with governmental benefits.

SIGNS OF IDENTITY THEFT

•Unexplainable bank withdrawals •Failure to receive bills or mail •Merchants refuse checks •Debt collectors call about unknown debt •Unknown accounts appear on credit reports •Receipt of unknown medical bills •IRS notices of multiple tax returns or unknown income reported •Notice of data breach from business with which there is a legitimate account

Structured Settlements and the Secondary Market

•Sometimes these secondary market annuities are called pre-owned annuities or in-force annuities. •These annuities can be purchased from the original owner at a discount or from a third party, and the stream of income is assigned to the purchaser. •Secondary market annuities typically offer a rate of return or yield that is well above the yield available on standard fixed annuities, immediate annuities, or even bonds of a similar credit quality. •Both sellers and buyers of annuities should conduct substantial due diligence prior to entering into this type of transaction.

Longevity Insurance

•Sophisticated name for a deferred annuity purchased by an individual at or before retirement that will not begin to make payments until that person reaches an advanced age - typically age 85. •Cost of longevity annuity contracts are very reasonable for 2 reasons. ①The contract is purchased at or before retirement, and payments do not generally begin until age 85. This allows a 20+ year accumulation period. ②Since payments on contracts do not begin until age 85, and average life expectancy is about 81 years, more than half of those purchasing longevity annuities will not receive any payments, preserving that capital for those who do live beyond average life expectancy. •If a deferred annuity contract is purchased inside a qualified plan or IRA, it can pose a problem since its value must be included when determining required minimum distributions, but the money inside of the annuity will not be available for distribution until the retiree attains age 85. •The longevity insurance regulations address this problem by specifying that if a qualified longevity insurance contract is purchased inside of a qualified retirement plan or IRA, the value of the contract will not be considered when calculating required minimum distributions. •To be considered a qualified longevity insurance contract, the premium for the deferred annuity purchased must not exceed the lesser of 25 percent of the account balance or $125,000, and upon issuance, the contract must be specified to be a longevity annuity contract at issuance.

Tax-Qualified Long-Term Care Contracts

•Tax-qualified implies that the long-term care insurance policy is treated as health insurance for federal income tax purposes and is therefore deductible on income tax returns. •If long-term care insurance premiums are paid for by an employer, the employer may deduct the premium cost as an employee benefit. The employees will not be required to report the value received in their incomes for the year. •Long-term care contracts cannot, however, be provided as a benefit under cafeteria plans.

Flood Insurance

•The National Flood Insurance Program provides subsidized flood insurance to property owners in qualified areas. •The coverage uses two forms: -Coverage on dwellings and contents. -Coverage on other types are ACV basis but replacement cost is available. •A flood policy is enforceable immediately during the first 30 days that coverage is available in a community.

Exempt Trusts

•The assets of the other two trusts are also ignored for Medicaid purposes. However, these two trusts require that assets remaining in the trust be available for state recovery to the extent that state funds were used to care for the beneficiary.

The importance of company credit rating

•The financial stability of the company issuing the annuity contract is of major concern to contract holders, andshould be a consideration in determining which annuity contract to purchase. •Several rating agencies assess the financial strength of insurance companies issuing annuity contracts. These include A.M. Best (with a rating scale from A++ to S), S&P (with a rating scale of AAA to R), and Moody's (with a rating scale from Aaa to C).

Retirement Life Expectancy

•The period between retirement and death - this period has increased due to: -earlier retirement and -extended life expectancy

Estate Taxation

•The remaining value of an annuity contract held by an individual at death is included in the individual's gross estate for estate tax purposes. •Annuities are considered IRD (income in respect of a decedent) assets.

VANTAGE SCORE

•The three major credit bureaus (Equifax, Experian, and TransUnion) joined together to create the VantageScore, which was launched in March of 2006. •It weighs payment history more than FICO and now ranges from 300 to 850. •VantageScore attempts to improve on the FICO score by putting more weight on the past 24 months of credit history.

CREDIT REPORTS

•There are three major credit reporting bureaus or agencies that collect credit information. ①Experian: www.Experian.com ②Equifax: www.Equifax.com ③TransUnion: www.Transunion.com •These credit agencies are for-profit companies and not government agencies. They compile and maintain credit information from credit card companies, banks, mortgage companies, and other creditors for the purpose of creating a personal in-depth credit report on individuals.

CREDIT INQUIRIES

•There are two types of inquiries: ①Hard inquiries ②Soft inquiries

General requirements of Medicaid

•To be eligible for Medicaid, a person must meet both the general requirements as well as meet the financial requirements. In most cases, a person must be one of the following to meet the general requirements: -Be age 65 or older -Have a permanent disability as that term is defined by the Social Security Administration -Be blind -Be a pregnant woman -Be a child, or the parent or caretaker of a child

Medicaid financial requirements

•To meet the financial requirements for Medicaid, a person must have limited income and limited assets. A person's income includes: -Regular benefit payments such as Social Security retirement or disability payments -Veterans benefits -Pensions -Salaries -Wages -Interest from bank accounts and certificates of deposit -Dividends from stocks and bonds

SUMMARY OF AUTOMOBILE COVERAGE

•To summarize, the owner and operator of an automobile should be concerned about the following risks: -Liability for injuries and damages to persons outside of the insured vehicle. -Liability for injuries and damages to persons inside the insured vehicle. -The cost to repair or replace a damaged or stolen insured vehicle or other property.

Traditional Medical Care vs. Long-Term Care

•Traditional medical care attempts to treat or cure illnesses. •Long-term care usually does not attempt to improve the medical condition of the recipient but rather helps to maintain lifestyle. •Long-term care services help the recipient to manage routine activities of daily living (ADLs).

Optional Benefits of Long-Term Care Insurance (May or May Not Be Offered)

•Waiver of Premium - allows the insured to stop paying premiums during the period in which they are receiving policy benefits. •Refund of Premium - the company will refund some or all of the insured's premiums minus any claims paid under the policy if the policy is canceled. •Restoration of Benefits - Often policies will restore the maximum benefit amount in the event that the insured receives benefits, but the benefits do not exceed a specific period of time, often 180 days. •Bed Reservation - some policies will pay to reserve a bed in the nursing home when the insured leaves to go into a hospital. •Shared Benefits - policies that have this benefit permit a person who has fully exhausted the benefits under his/her own policy to make use of the benefits available under his/her spouse's policy.

Partnership-Qualified Policy Example

•Walter, a single man, purchases a Partnership policy with a value of $100,000. Some years later he receives benefits under that policy up to the policy's lifetime maximum coverage (adjusted for inflation) equaling $150,000. •Walter eventually requires more long-term care services, and applies for Medicaid. If Walter's policy was not a Partnership-qualified policy, in order to qualify for Medicaid, he would be entitled to keep only $2,000 in assets. He would have to spend down any assets over and above this amount. •However, because Walter bought a Partnership-qualified policy, he can keep $152,000 in assets and the state will not recover those funds after his death. Walter would only have to spend down his assets over and above the $152,000 in order to be eligible for Medicaid.

•Annuities have two distinct phases:

①Accumulation phase ②Annuitization (not all annuities are annuitized)

There are generally four parties to an annuity contract:

①Annuitant ②Beneficiary ③Owner ④Insurance company

4 Methods to Pay for Long-Term Care Services

①Medicare ②Medicaid ③Personal assets and savings ④Long-term care insurance

Variable Annuity Fees

①Mortality and expense risk charges •Insurance risks •Cover the risks of annuitant living too long •1.15% to 1.85% annually ②Administrative and Distribution Fees •Costs associated with servicing and distributing the annuity ③Annual Fee •Record keeping and administration •$30 to $50 •Regularly waived ④Sub Account Fee and Expenses •Charged to the investment subaccounts inside the annuity (mutual funds), and include investment management fees. •$0.7% to 2.5% ⑤Surrender Charges •Known as contingent deferred sales charges (CDSC) •Typically a percentage of the amount withdrawn and declines over time •7% to 9%

Indexing Method:

①The annual reset (ratcheting) method ②The high watermark method ③The point-to-point method

Basic Types of Living Benefits:

①The guaranteed minimum accumulation benefit (GMAB) ②The guaranteed minimum income benefit (GMAIB) ③The guaranteed minimum withdrawal benefit (GMWB)

To meet the definition of a tax-qualified contract, the long-term care insurance policy:

①must provide benefits that are limited to long-term care services ②does not provide a cash surrender value or access to funds that can be paid, assigned, borrowed, or pledged as collateral for a loan ③provides that refunds may be used only to reduce future premium payments or increase future policy benefits ④must meet consumer protection standards defined in the Health Insurance Portability and Accountability Act of 1997 (HIPPA) ⑤must coordinate benefits with Medicare