1
Q
Method to Control Losses: Avoidance
A
- rent instead of purchasing property
- avoid buying home with a swimming pool
2
Q
Method to Control Losses: Diversification
A
- store assets at different locations
3
Q
Method to Control Losses: Reduction
A
- install sprinklers, smoke detectors, burglar alarm for home
- create safety programs for businesses
4
Q
Method to Control Losses: Retention
A
- deductibles in insurance policies
- coinsurance in insurance policies
- self-insurance
5
Q
Method to Control Losses: Transfer
A
- insurance
- hold harmless agreements/hedging contracts
- incorporation of business
6
Q
High loss Severity, Low loss Frequency
A
- risk transfer (purchase insurance)
7
Q
High loss Severity, High loss Frequency
A
- avoidance (insurance premiums would be prohibitive)
8
Q
Low loss Severity, High loss Frequency
A
- retention or reduction (high frequency implies transfer will be costly)
9
Q
Low loss Severity, Low loss Frequency
A
- retention (seldomly occurs, when they do, financial impact is minimal)
10
Q
Negligence: Attractive Nuisance
A
- swimming pool, vacant lot
11
Q
Negligence: Negligence per se
A
- violation of statute
- examples: school zone, crosswalk, etc
12
Q
Negligence: Strict Liability
A
- product liability
- think firestone tires
13
Q
Negligence: Absolute Liability
A
- worker’s compensation
- keeping wild animals
- extra hazardous
14
Q
Negligence: Vicarious liability/Repondeat Superior
A
- principal responsible for agents
- one person is held liable for the behaviors of another
15
Q
Defenses: Assumption of Risk
A
- skiing, stock car races
- cannot hold someone else liable for taking on
16
Q
Defenses: Contributory
A
- jaywalking
- drunk driving
- any negligence on part of the injured party
17
Q
Defenses: Comparative
A
- A is 20% negligent
- B is 80% negligent
18
Q
Defenses: Last Clear Chance
A
- road rage
- had a last clear chance to avoid
19
Q
Property Loss Calculation
A
- replacement cost x coinsurance percentage = insurance required
- [insurance carried / insurance required x loss] - deductible = amount paid by insurer
greater of that calculated and ACV is paid unless greater than 80%, then only formula is paid
*ignore land
20
Q
Insurance Requirements for Homeowners and Commercial
A
- homeowners requires 80%
- commercial requires 90%
21
Q
Actual Cash Value
A
- ACV = replacement cost - depreciation
22
Q
Definition of Non-cancelable (noncan)
A
- can never raise the premium
23
Q
When to recommend Term Insurance
A
- limited time for protection
- dollars available for coverage are limited
24
Q
When to use Limited Pay Whole Life Insurance
A
- when client has a long-life expectancy
25
Capital Retention Calculation
- life insurance need = [yearly income/inflation] + first years’ income
26
Actual Cash Value (ACV)
- replacement cost - depreciation
27
When to use Replacement cost vs Actual Cash Value
- replacement cost = dwelling/structure
- actual cash value = personal property
28
HSA Penalty (under 65)
- 20%
29
Owner or S Corp
- tax free benefits
30
Taxation of LTC Premiums (51-60)
- $1,790/yr
31
Taxation of LTC Premiums (61-70)
- $4,770/yr.
32
When to Use Limited Pay Whole-Life
- long-life expectancy while insured
33
Non-Forfeiture Options (Giving up Policy)
- cash
- reduced paid up (face value is reduced)
- paid up term/extended term (policy lasts as long as cash value allows
34
Taxation of Whole Life
policy face value
(+) paid up additions
(-) loans
= Policy Death Benefit
(+) one year term
= entire death benefit
35
Simultaneous Death Act
- pre decease each other
36
Transfer for Value (Not a gift, sold)
- transferred to the insured
- transferred to a partner of the insured (partnership)
- transfer to corporation which insured is share holder
- transfer due to divorce agreement
- wanting to give to child, better in ILIT
37
Pure Life Annuity
- periodic payment for life
- advantages:
- guaranteed income stream
- no value remains at death
- highest payout
- disadvantages:
- receives fixed payment
- cannot ask for principal back
- annuitant may day before entire principal is realized
38
Exclusion Ratio Calculation (Annuities)
- monthly payment x life expectancy (in months) = expected return
- (investment/expected return) = exclusion ratio
39
Principle of Indemnity
- insurer seeks to reimburse the insured for approximately the amount lost, no more and no less
40
Insurable Risk
- right or relationship with regard to the insured person or property such that the insured will suffer financial loss from damage, loss, or destruction to what is insured
41
Subrogation
- insurer takes over the legal rights of the insured that existed at time of loss
42
Unilateral
- only one party is bounded; insured makes no promise
43
Adhesion
- contract is accepted as is. Not negotiated
44
Waiver of provisions
- only president, vp, secretary may alter contract. Must be accepted as is
45
Aleatory
- number of dollars given up are unequal. Outcome is uncertain
46
Capital Needs Approach Formula
- annual income / (rate of return - inflation)
- not real rate of return like TVM
47
When is Life Insurance Policy in Force?
- when policy is delivered and premium have been collected
48
Property Coverage
- is on valued basis
49
Auto Insurance (Most Important for Wealthy)
- Part A and Part C
50
Auto Insurance (Most important for poor and unemployed)
- part B and part D
- likely can’t afford medical payments or car repairs
51
Insured Changes
- cannot complete 1035 exchange
52
Nonforfeiture Options
- surrender for cash value
- reduce death benefit via paid up reduce amount
- create term policy which terminates if out lived via extended term
53
If loan is mentioned along with dividend options
- choose one year/5th dividend option
54
Life Settlements
- typically over age 65
- not made to terminally or chronically ill
- look for LTCG answer
55
MEC Characteristics
- once a mec always a mec
- all single premiums are mecs
- distributed LIFO
- if under 59.5 also a 10% penalty
- if seven pay test is unmet and too much is paid in first 7 years
- dividends are taxed as income if received in cash, reduced premiums due, or retained to pay policy loan
56
Capital Retention Formula
- yearly income/inflation + first years income
- be sure to include first years income
57
Medicare Eligibility commingled with COBRA
- medicare is a 36 month event
58
Increase Death Benefits Yearly
- one year term
59
Calculate Economic Benefit
- take higher of actual cost and table 1
- take different between step 1 and amount paid
- multiply by 12 for annual
- multiply by life insurance amount / $1,000
60
Can group health be converted to individual health
Yes
CFP July 2023
flashcards
Decks in class (8)
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