1
Q
What is Risk?
A
A condition where there is a POSSIBLITY of LOSS (a situation where exposure to loss exists).
- Starting a business
- Buying real estate
- Exposure to germs or viruses
- Activity that could lead to injury
2
Q
What is Peril?
A
The CAUSE of LOSS, the event insured against:
- Fire
- Windstorm
- Theft
- Collision
- liability
- Sickness or injury
3
Q
What is a Hazard?
A
A condition that may create or increase the CHANCE OF LOSS arising from a PERIL.
- Owning a home on an earthquake fault
- Owning a home by a river
- Poor maintenance of property (cars breaks, old christmas trees)
- Working in a contagious lab
4
Q
What are the Elements of Insurance?
A
- Large number of homogeneous exposure units (safety in #s)
- Loss must be definite and measurable
- Must be fortuitous or accidental
- Must not be catastrophic (for the insurance company)
5
Q
What are the Methods to Avoid/Reduce Loss?
A
- Avoidance: Do not drive, Do not purchase a home but rent
- Diversification: Duplication of assets or activities at different locations
- Transference: INSURANCE
- Risk Retention: Voluntary - Recognizes that the risks exist and assume losses (deductible, coinsurance)
- Risk Reduction: Sprinkler system, safety programs
6
Q
What is Insurable Interest?
A
- Property and Casualty: At inception and at time of claim
- Life: At inception, but need not be at time of claim
7
Q
What are the Parts of the Insurance Contract?
A
- Declarations Page: Factual Statements that identify the specific person, property or activity being insured.
- Definitions: Explanation of key policy terms
- Insuring Agreements: Spells out the basic promise of the insurance company
- Conditions: Spells out in detail the duties and rights of both parties.
- Exclusions: Circumstances when the insurer will NOT pay.
- DICE
8
Q
What are Negligences?
A
- Attractive Nuisances: Swimming pool, vacant lot
- Negligence per se: Violation of a statute
- Strict Liability
- Product Liability
- Absolute Liability: Workers Comp
- Vicarious Liability: Respondeat superior (principal’s liability for their agents).
9
Q
What are Defenses?
A
- Assumption of Risk (skiiing, car racing)
- Contributory (jay walking, being drunk)
- Comparative (A is 20% negligent, B is 80%)
- Last Clear Chance (Rear end someone when you could have avoided it by swerving, braking in time)
10
Q
What are two methods of Calculating Life Insurance needs?
A
- Capital Utilization Approach: Uses annuitization to provide needed income but leaves no money at the end of the planned period.
- Capital Needs Approach: Uses interest only, so the original capital is still left at the end of the period (also called Capital Retention or Interest Only).
11
Q
What are the most comprehensive Insurance Rating Service/Category services?
A
- A.M. Best: A++ to F
- Standard & Poor: AAA to CCC
12
Q
What are Sections of a Homeowner’s Policy and
what do they cover?
A
Section I (Coverage: A B C D)
- A - Dwelling and Attached Structures
- B - Other structures, separate from dwelling (detached garage, fences, sheds)
- C - Contents and Personal Property
- D - Loss of Use Section II (Coverage: E F)
- E - Liaiblity
- F - Medical Payments
13
Q
What property is excluded under Personal Property Coverage?
A
- Animals, Birds, or Fish
- Motorized Land Vehicles and Aircraft
- Property of roomers, boarders or other tenants
- Property contained in an apartment regularly rented or held of rental to others by the insured (unless specifically endorsed)
14
Q
What are the Basic Form Perils Covered?
A
The policy lists perils covered:
- Windstorm
- Hail
- Aircraft
- Riot
- Vandalism
- Vehicles
- Explosion
- Smoke
- Fire
- Lightning
- Theft
Study Hint: Remember: WHARVVES/FLT
15
Q
What are the Broad Form Perils Covered?
A
- Rupture of a System
- Artificially Generated Electricity
- Falling Objects
- Freezing of Plumbing
Study Hint: Remember Basic plus RAFF
16
Q
Homeowner’s Policy Exclusions include:
A
- Earthquake
- Flood
- Neglect
- Intentional Loss
- Ordinance/Law
- Power Failure
- War
- Nuclear Hazard
Note: Sinkhole is a covered peril for the exam
17
Q
What is the formula for Replacement Cost Coverage?
A
- Replacement Cost x Coinsurance Percentage = Insurance Required
- Insurance Carried ÷ Insurance Required x Loss - Deductible = Amount Paid by Insurance
18
Q
What are the requirements for a vehicle to be eligible for:
- Insurance Services Office (ISO)
- Personal Auto Policy (PAP)
A
- Be owned by an individual or by a husband and wife living in the same household
- Be private passenger auto
- Not be used as public or livery conveyance
- Not be rented to others
19
Q
What are the Parts of an Auto Insurance Policy?
What do they cover?
A
- Part A - Liability to third parties
- Part B - Medical payments
- Part C - Uninsured/Underinsured motorists
- Part D - Damage to the covered auto
20
Q
What is classified as a “Covered Auto” under an
Auto Insurance policy?
A
- Any vehicle shown on the declarations page
- Any of the following which you acquire during the policy period:
- Private Passenger Auto
- Pickup Truck
- Panel Truck or Van
NO coverage for any of these used in a business (need a commercial policy for that)
- Any trailer you own listed on the declarations page
- Any auto or trailer you do not own while used as a temporary substitute for any vehicle decribed herein which is out of normal use because of a breakdown, repair, servicing, loss or destruction
21
Q
Who are the Persons Insured under medical payments coverage of the PAP?
A
- The named insured and any family member who suffers bodily injury caused by accident while occupying covered vehicle
- The named insured and family members who if, while a pedestrian, are struck by any motor vehicle designed for use on public roads or by a trailer
- Other persons while an occupant of the insured’s auto (passengers)
22
Q
What is Uninsured Motorist Coverage (UM)?
A
This agreement promises to pay the amount an injured insured could have collected from the uninsured dirver if such driver had carried auto liability insurance. The term “covered person” as used under the uninsured motorist coverage of the PAP includes the following:
- The named insured and any family member
- Any other person occupying the insured’s covered auto
- Any person, for damages that person is entitled to recover because of injury to a person described above
Note: UM is liability protection, NOT medical payments
23
Q
What are the perils covered under the “Other Than Collision” Provision of an Auto Policy?
A
- Glass Breakage
Loss caused by:
- Falling Objects
- Fire
- Theft
- Explosion
- Earthquake
- Windstorm
- Hail
- Water
- Flood
- Riot or Civil Commotion
- Contact with Birds or Animals
24
Q
What are the benefits of an Umbrella Liability Insurance?
A
- Nearly always a correct answer since it is smart coverage
- Provides liability coverage (BI/PD) for catasptrophic claims
- Requires policy owner to carry certain underlying coverage of specified amounts
- Professional acts are specficially EXCLUDED!
25
What are the two types Professional Liaiblity Insurance and who/what does it cover?
* **Malpractice** - Bodily Injury (doctors, dentists)
* **Errors and Omissions (E&O)** - Monetary damages (financial advisors, lawyers, accountants, insurance agents)
26
What does Worker's Compensation cover?
* Unlimited Medical Expenses
* Diasbility Income (TAX FREE)
* Death Benefits
* Rehabilitation (Medical and Vocational)
* Absolute Liability
27
Medicare does NOT cover...
* Routine foot care, glasses, hearing aids, and dental
* Emergency Care outside the US (some exceptions for Canada, Mexico and Caribbean)
28
Explain the limitations of Medicare's Long Term Care coverage.
**Benefits are Limited**: Pays all of the first 20 days of SKILLED care and everything over a specified amount per day for the next 80 days of SKILLED care (100 day max)
**The Limited Benefit is Subject to Substantial Restrictions**: Pays for SKILLED care only:
* Admission to a nursing home must follow within 20 days of the hospital stay of three days or more
* The patient's condition must be expected to improve
29
Compare HMO vs PPO
**HMO:**
* Provider paid monthly fee regardless of services rendered (Capitation)
* Out of Network care not covered at all
**PPO:**
* Provider paid for actual services rendered
* Out of network partially covered, usually 70%
30
What are the COBRA coverage requirements and
Qualifying Events?
* Must have 20 Full/Part-Time Employees.
* The option to buy Continuation.
**Coverage must be offered to**: (Qualifying Event?)
* Terminated employees/dependents up to 18 mo.
* Voluntary or involuntary termination, change from FT to PT
* Spouses and other dependents up to 36 mo.
* Employee's death, divorce, legal separation, or eligibility for Medicare Children of Employees up to 36 mo.
* Loss of dependent status (marriage)
* Reaching dependency age limit specified by plan
31
What is a Health Savings Account (HSA) and
what are its benefits?
* Used in conjunction with High Deductible Health Plan (HDHP)
* Distributions are tax free if used for health care
* Contributions not spent are carried forward and portable
* Unused assets become property of named bene on death
* Distributions for non-medical are ordinary income plus 20% penalty if under 65
32
What are the Definitions of Disability?
**Own Occupation** - Best definition for the insured
* Modified any occupation
**Split Definition** - Own then modified
**Any Occupation** (Social Security definition)
* Loss of Income
33
What are the Policy Continuation Provisions for Disability Income?
* **Noncancellable "Noncan":** Continuous term policy guaranteeing the insured's right to maintain the policy at the stated premium
* **Guaranteed Renewable:** Continuous right to maintain the policy, but the insurer may increase the premium by class of insureds
34
Taxation of Premiums and Benefits for Disability Policies
**Taxation of Premiums and Benefits:**
**The individual owns the contract and pays the premium:**
* Premiums are not deductible
* Benefits are tax free to the employee
**The employee owns the contract and the employer pays the entire premium under a bonus arrangement like section 162 disability insurance:**
* Premiums are deductible by the employer as a bonus
* Benefits are tax free to the employee.
**The employee owns the contract and the employer pays the entire premium under a salary continuation plan (group plan).**
* Premiums are deductible by the employer
* Benefits are taxable to the employee
35
Permanent Life Insurance (Low Risk Tolerance)
* Insurance company controls the investment return
* Assets part of the general account
* Whole Life
* Universal Life
36
Permanent Life Insurance (High Risk Tolerance)
* Client controls the investment return
* Assets part of a separate account
* Variable Life
* Variable Universal Life
37
What are the Dividend Options on Life Insurance?
* Cash
* Reduce Premium
* Accumulate with Interest
* Paid up Additions
* One-year Term/5th Dividend
**Remember**: CRAPO
38
What are the Nonforfeiture Options of Life Insurance?
* Cash
* Extended Term
* Paid Up Reduced Amount
39
What are the Life Insurance Settlement Options?
* Cash
* Pure Life/Single Life
* Refund
* Period Certain
* Specified Income/Period
* Interest Only
* Joint and Survivor
40
What is a Modified Endowment Contract (MEC)?
* Entered into after June 21, 1988
* Fails to meet the "7-Pay Test" (*for the exam, includes ALL single premium policies*)
* Distributions/Withdrawals are taxed LIFO (Interest First)
* Distributions under 59½ are also subject to 10% federal penalty tax (if not disabled)
* Death Benefit is still tax-free
41
What are the MEC Grandfather Life Insurance rules?
* If death benefit increases by $150k or less and the insured has guaranteed insurability (no proof of insurability), the policy will NOT lose its grandfathered (non-MEC) status.
* If the policy increases by ANY amount and the insured must prove insurability, the policy MAY lose its grandfathered (non MEC) status.
42
When are the proceeds in a Life Insurance policy taxable due to Transfer for Value?
If an interest in a life insurance policy is transferred for valuable consideration (not a gift), the proceeds in the excess of the consideration paid for the policy, combined with any premiums paid by the owner, are taxable as ordinary income (like a viatical).
**The main exceptions to this rule are:**
* A sale or transfer to the insured (most common)
* A sale or transfer to a partner or partnership in which the insured is a partner
* A corporation in which the insured is a shareholder or officer
* Divorce
43
What are the 1035 Tax Free Exchange Rules?
* Life → Life (OK)
* Life → Annuity (OK)
* Annuity → Annuity (OK)
* Annuity → Life (NO WAY!)
44
Buy Sell Stock Redemption
vs
Cross Purchase
**Stock Redemption**:
* No Step up in Basis
**Cross-Purchase**:
* Step up in Basis
45
Split Dollar Insurance Endorsement Method
vs
Collateral Assignment Method
**Endorsement Method**:
* Employer is the owner
* Employee is not a shareowner
**Collateral Assignment Method:**
* Employee is owner
* Employee is a Shareholder
* Employee assigns the policy
46
Explain Annuity Taxation
**Periodic Payouts:**
* Basis / Payout = Tax-free
**Lump Sum Payouts:**
* LIFO (Interest First Rule)
* Ordinary income plus 10% penalty if under 59½
47
What are the characteristics of a
Flexible Spending Account (FSA)?
* Must be used by March 15th or forfeited to the company (use it or LOSE it - Medical Only)
* Dependent Care must be used by 12/31
* Not subject to income tax, FICA or FUTA
* Health FSA may not be used to reimburse employee premiums paid for other health plans (such as MSA, HSA and LTC)
* Expenses for LTC services can NOT be reimbursed under a health FSA, but other medical expenses can be reimbursed.
48
What are the major Tax Free Fringe Benefits?
* Health Care Premiums
* Insurance Premiums on non-discriminatory group life policy up to $50k
* Company car for working conditions only
* Employer-provided transit passes ($270/mo. cap) or parking ($270/mo. cap)
* Occasional overtime meal money, cab fare, theater or sporting event tickets
* Discounts on services limited to 20% of selling price charged to customers
49
When are Fringe Benefits taxable?
* Health Insurance Premiums paid for self-employed, partners, and more than 2% owners of an S-Corp are Taxable Income.
* 100% is deductible as an adjustment to income on the FRONT of the 1040.
* This can include all types of health insurance programs.
50
Law of Large numbers
* Homogeneous exposure (test sometimes says heterogeneous)
* Pooled Risks
* Increase # events, increase likelihood of results
51
Adverse Selection (noun)
* Reduction of risk for insurance company
* Same proportion of good/bad risks becaise pf
* Tendency of poorer risks to seek insurance
* Sellers have info buyers don't have
* Tendency of high risk to buy more insurance than low risk
52
Morbidity Table
Incidence and severity of sickness and accidnts in a well-defined class of persons
Morbidity Table is a statistical table showing the probably indicence and duration of DISABILITY
53
Mortality table
Probable rate of DEATH at each age, usually expressed as incidents / 1000
54
UMBRELLA INSURANCE
EVERYONE NEEDS UMBRELLA
High deductible saves in the long run
55
Self Insurance
* Formal Program of RISK RETENTION
* Not limited to large companies
* Business performs functions of insurance company
* requires large # of SIMILAR perils thereby able to PREDICT losses
* MUST establish formal fund for losses
* **Advantages**:
* Avoid commercial insurance costs
* Reserves can be invested in Short Term MMkts to offset program costs
* **Disadvantages**
* Catastrophic loss exposure
* Administrative overhead
* Tax on reserves
* Contributions NOT DEDUCTIBLE in tax year
56
Risk Management
Avoidance
Diversification
Reduction
57
Risk Financing
Retention
Transfer
58
Basic Rules of Risk Management
SEVERITY overrides PROBABILITY
1. High Severity, Low Frequency: Risk Transfer (Use Insurance)
2. High Severity, High Frequency: Risk Avoidance (Insurance too expensive)
3. Low Severity, High Frequency: Retention or Reduction (Insurance could be costly)
1. Low Severity, Low Frequency: Retention
59
Indemnity Principle
Insurer seeks toreinburse the insured for NO MORE or LESS than the amount of loss
**FOUR PRINCIPLES:**
1. Insurable Interest
2. ACTUAL cash value
3. Other insurance (ability to profit from a loss)
1. Subrogation (pursue 3rd party)
60
Contract Requirements
Application (offer and acceptance)
Consideration (money)
Legal Capacity (mental and of age)\*
\*underage may signe for necessisty
61
Contract Characteristics
Unilateral: One party makes a promise (the insurer)
Won't go to collections if you don't pay
Adhesion: Contract is AS IS
Waiver Provision: Agents cannot alter the contract
62
Aleatory Contract
Unequal benefit
1. small premium pays large term death benefit
63
Rescission
Contract is null from the beginning
* fraud,
* misrepresentation,
* concealment or
* mistakes regardingh material facts
64
Collateral Source Rule
Tort Liability: you can still sue the other guy even if insurance indemnifies
65
Underwriting Process
Application
Info from Agent or Broker
Investigations
Information Bureaus
Physical Exams or inspections
66
Loss Adjustment
1. Notic of Loss (insured)
2. Investigation by Adjuster
3. Proof of Loss (Insured files proff)
1. Payment or deny
CFP EXAM - SM - Danko
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