| A | B |
|---|
| insurance is only used to protect against | pure risks |
| pure risk | there is a chance of loss or no loss; ex. death, auto accident, and house fire |
| speculative risk | chance of profit, loss, or no loss; undertaken by entrepreneurs; generally voluntary risk and not insurable |
| subjective risk | differs based upon an individuals perception of risk |
| objective risk | does not depend on an individuals perception, but is measurable and quantifiable; measures the variation of an actual loss from expected loss |
| severity of loss | actual dollar amount of the loss; more important than the probability of a los |
| law of large numbers | when more units are exposed to a similar loss the predictability of such a loss to the entire pool increases |
| perils | the actual cause of a loss; fire wind tornado |
| hazard | condition that increases the likelihood of a loss occurring |
| moral hazard | character flawthat would lead to a filing a false claim |
| morale hazard | indifference created because a person is insured |
| physical hazard | tangible condition that increases the probablilty of a peril occurring |
| adverse selection | tendency of persons with higher than average risks to purchase or renew insurance policies; managed through underwriting, denying insurance on the front end, and raising premiums on the back end |
| requisites for an insurable risk | homogenous; accidental; determinable; not catastrophic |
| elements of a valid contract | competent parties, offer and acceptance, legal consideration, and lawful purpose |
| the princicple of indemnity | an insured is only entitled to compensation to the extent of the insured's financial loss; cannot make profit from an insurance contract |
| subrogation clause | can't receive compensation from both the insurer and a third party forthe sameclaim |
| principle of insurable interest | an insured must have an emotional or financial hardship resulting from damage, loss, or destruction |
| property and liability insurance insurable interest | the insured must have insurable interest at time of policy inception and at time of loss |
| life insurance insurable interest | the insured only needs an insurable interest at the time of policy inception |
| warranty | a promise made by the insured to the insurer to avoid certain risks |
| representation | statements made by the insured to the insurer during the application process; must be material to void an insurance contract |
| concealment | when the insured is silent about a fact that is material to the risk |
| adhesion | take it or leave it; no negotiations over terms or conditions; as a result many ambiguities are foudn in favor of the insured |
| aleatory | money exchanged may be unequal; small premium but te insured may get a big benefit |
| unilateral | only one promise is made by the insurer which is to pay in the event of a los; the insured is not obligated to pay premiums, but then there's no promise by the insurer |
| conditional | the insured must abide by the therms and conditions of the insurance contract or else the insurer may not pay a claim |
| waiver | occurs when a party relinquishes a knwon right |
| estoppel | takes place when a party is denied assertion of a right to which they are otherwise entitled |
| waiver provisions | an insurer may seek to avoid liability associated with a loss due to their agents offering policy changes not authorized by the company |
| parol evidence rule | once the contract is placed in written form all previous and prior understandings may not contradict the written contract; reflects the complete understanding of both parties |
| reformation | contractual remedy in which the contract is revised to express the original intent of all parties |
| recission | deems a contract void from inception |
| general agent | represents one insurer such as a state farm or allstate agent |
| independent agent | represents multiple unrelated insurers |
| broker | actually represents the policy owner, not the insurance company |
| express authority | given through an agency or written agreement; responsible for acts of an agent based on express authority |
| implied authority | authority that the public perceives; the actual delivering of an insurance contract and accepting a premium is an example of implied authority |
| apparent authority | the insured believes that agent has authority to act on behalf of the insurer when in fact no authroity actually exists; could be inferred based on business cards or a sign on the wall |
| conditions | details the duties and rights of the insured and insurer |
| declarations | includes name of the insured, description of the property, amount of coverage, amount of premium, term of the policy, and inception/termination dates |
| riders and endorsements | written additions to an insurance contract; make it possible to customize an insurance contract for items that may be limited in coverage under the normal terms and conditions of a contract; take precendence over conflicting terms in policy |
| insurance regulation is done at what level | state |
| legislative branch insurance | provides for licensing of agents and enacts laws and requirements for doing business in a particular state |
| goals of state insurance regulation | protect the insured, maintain and promote competition, maintain solvency of insurers |
| replacement cost | current cost of replacing property with new materials of like kind |
| actual cash value | essentially replacement cost, less depreciation; can impose serious financial burden on the insured; almost all auto policies are acv |
| agreed upon value is typically used for | art and antiques |
| deductibles | a stated amount the isnured must pay before the insurer will make payments; help eliminate small claims and reduce premiums |
| deductibles are a form of | retaining risk |
| deductibles are used mainly for | property health and auto policies |
| copayments | in addition to deductibles and are common with health insurance; pays a portion of the losses incurred |
| coinsurance formula | 80% X replacement cost; face value / coinsurace X loss - deductible |
| if coverage is less than the coinsurance requirement then insurer pays | greater of actual cash value or the following formula |
| what can mitigate dying too soon | life insurancew |
| what can mitigate living too long | annuities |
| what can mitigate disability | disability insurance |
| national association of insurance commissioners (NAIC) | provides a watch list of insurance companies based upon financial ratio analysis; ratios measure the financial health of insurance companies; has no regulatory power over the insurance industry, but is involved in accrediting state insurance regulatory offices |
| six steps of risk management | determine the objectives of the risk managment program; identify the risks to which the client is exposed; evaluate the identified risks as to probability of occurrence and potential loss; determine alternatives for managing risks, and select the most approrpiate alternative for each; implement the program; evaluate, monitor, and review (control) |
| what type of risk management is this? health insurance policy deductibles | risk retention |
| carrying automobile insurance | risk transfer |
| installing a sprinkler system in a building | risk reduction |
| why purchase life insurance | income replacement; financial support; education; paying off debts; income for spouse |
| human life value approach formula | projected future earnings - self-maintenance costs as basis for measuring life insurance needs |
| important items in calculating human life value | current earnings, future growth rate of earnings, number of working years reamining, cost of self-maintenance, and the discount rate |
| term life insurance | pays a predetermined sum if the insured dies during a specified period of time; protection ceases at the end of the term unless renewed |
| term life premium pattern may be | level or increasing on an annual or set period basis |
| face amount for term life may be | level or decreasing |
| is there a cash value to term insurance? savings component? investment comp? | no |
| waiver of premium | if the insured becomes totally disabled, the premiums are waived during the period of disability |
| term life insurance limitations | exponentially increasing premiums for older age entry or renewal; may not meet permanent insurance needs |
| annual renewable term | premiums increase annually; no cash value; death benefit fixed at face amount |
| advantages of annual renewable term | pure death benefit protection that is cheap; insured receives a max death bene for each dollar in premiums; can be converted to a perm policy without proving insurability |
| level term | insured prepays some of the later more expensive premiums earlier in the policy; no cash value; death bene is fixed |
| advantages of level term | premiums stay level; provides pure cheap death bene; receives max death bene for each dollar in premiums; can be converted to a perm policy without proving insurability |
| disadvantages of level term | insured overpays premiums initially; no savings component |
| decreasing term | premiums are level for a decreasing term policy; no cash value; death bene decreases over term of policy |
| most appropriate use for deacreasing term is | to payoff a mortgage |
| advantages of whole life | provide tax deferred growth of cash value; provide perm protection until 100 |
| disadvantages of whole life | premiums are expensive and no flexibility with premium payments; cash value grows gradually; insured may not be able to buy as much of it |
| ordinary life | pay premiums until age 100 or death; cash value increases to face value at age 100; death bene is level throughout the term of the policy |
| limited pay life | premiums are higher than ordinary life because the insured only pays premiums until a certain age |
| variable life | cash value is invested in stock, bond, and money market mutual funds; death bene and cash value fluctuate based on investment performance |
| nonparticipating | whole life policy doesn't pay dividends |
| participating | pays dividends in cash, accumulate at interest, reduce premiums, paid up additions, or one year term |
| cash dividends whole life | clients get money and can use it how they wish |
| accumulate at interest | company invests the dividends and they are tax free up to the client's basis in the policy. interest paid on dividends is taxable |
| reduce premiums | decreases the out of pocket expense for premiums |
| 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. |
| 5th dividend option = | one year term |
| cash surrender value | cash less surrender charges |
| reduced paid up insurance | receive the cash value in the form of a paid-up policy with a smaller face amount |
| extended term insurance | receives the cash value in the form of a paid up term policy for a specified duration with the same face amount s the original policy |
| accelerated death benefits | life expectancy must be 24 months or less to take a lump sum or monthly income distribution |
| universal life insurance | insured may adjust premiums paid, face value, and cash value; does not direct the investment portion of the cash value; cash value can be used to actually pay the policy premiums |
| universal life A | flexible premium, adjustable death bene, unbundled life insurance contract; if the cash value gets high enough the death bene will increase; insured can either receive the cash value or the face value of the policy |
| universal life b | same as uni a but death benes vary directly with cash values; uni b is more expensive than a because the death bene is equal to a specified amount of insurance plus cash value |
| variable universal life | investment options such as stock, bond and money markets, no min guaranteed rate of return or interest, cash value invested in a separate acct not the insurer's general account; cash value not guaranteed |
| grace period | typically 31-61 days after the premium due date in which policy remains in force; if insured dies during, insurer assumes insured woul have renewed; insurer will pay death bene and deduct the premium |
| misstatement of gender or age | misstatement of age will not void the contract; death bene will be paid, but reduced by what premiums would have been if age was accurately stated |
| suicide | coverage is excluded if suicide is committed within one or two years of purchasing the policy; if committed within the exclusion period, premiums are returned |
| disability waiver of premium whole life | insurer will waive all premiums after disability |
| universal and variable universal disability waiver of premium: | insurer will waive the charges related to mortality and administration OR waive the entire premium |
| assignment | policy owner assigns rights to life insurance contract to someone else |
| absolute assignment | the owner transfers all policy ownership rights |
| collateral assignment | used for collateral on debt, which only alligns limited ownership rights; automatically terminates when debt is satisfied |
| group term insurance | premiums for first $50k is tax free |
| premiums paid by employer are | tax deductible |
| premiums paid by employee are with | after tax dollars |
| group whole life | allows employees to accumulate savings for retirement through the cash value of a policy; premiums paid by employer are taxable income to employee |
| life annuity contracts | periodic payment to someone that continues for a fixed period or the duration of a designated life or lives; provides protection from outliving your assets; used to fund retirement |
| life annuity contracts are not appropriate if | you want to leave assets to your heirs |
| life annuity contracts are not a | hedge against inflation |
| immediate annuity | payments begin immediately and is purchased with one single lump sum |
| deferred annuity | payments begin at some future date |
| a deferred annuity is usually in the form of | a reitrement annuity that accumulates interest until retirement age |
| flexible premium deferred annuity | allows insured to vary premiums paid; reitrement income is a function of total premiums paid |
| single premium deferred annuity | lump sum payment of premium; earnings accumulate tax free until taken out; proceeds from a life insurance policy can be used to purchase a single premium annuity |
| fixed annuity | accumulates a fixed interest rate over a period of time; provides the owner with more security than a variable annuity contract |
| variable annuity | may ivnest in stock or bonds held in sub accounts; no guarantee on return; owner accepts more investment risk with variable annuity |
| a variable annuity is appropriate if a client wants to | keep pace with inflation |
| pure life annuity | payments are made to the annuitant over his lifetime; payments stop at death |
| primary risk of pure life annuity | receiving one payment, then dying |
| installment refund annuity | if total payments to the annuitant are less than the premiums paid for the policy the policy at the owner's death, the policy will payout the differenece between premiums paid and what has already been paid out |
| joint and survivor annuity | an annuity is paid out over the lifetime of two annuitants, usually a husband or wife; lower payments than pure life |
| death benefits are generally excludable from | taxable income unless the transfer for value rule is involved |
| dividends earned on cash value are | not taxable until withdrawn |
| cash value is (taxes) | not taxable until withdrawn |
| loans against life insurance are (taxes) | tax free; unless a mec |
| MEC taxation | LIFO |
| dividends earned during life are | not taxable and are considered a return of basis |
| if dividends exceed premiums then the dividend | is taxable |
| withdrawals are considered a return of principal in annuities and life insurance until | accumulated premiums have been distributed, then taxed as ordinary income |
| 7 pay test | contract fails if the cumulative premiums paid exceed the premiums due for the time period being considered |
| premiums paid by the insured are | not tax deductible by insured |
| group life insurance premiums paid by an employer are | deductible by the employer |
| premiums paid by the employer are | taxable income to the employee |
| any basis not recovered before the death of the annuitant is deductible on his final return as a | miscellaneous itemized deduction not subject to 2% |
| after recovering your entire basis, | the remainder is 100% taxable |
| exclusion/inclusion ratio | bases/total payments |
| total payments formula | monthly payment X 12 months X life expectancy = total payment |
| amount excluded from monthly income formula | exclusion ratio X monthly payments |
| for pre 1982 annuities withdrawals up to owner's basis are not taxable but rather are treated as a return of capital using | FIFO |
| for annuities after 1982, the withdrawal rule is | LIFo |
| group medical insured pays | only stop loss |
| major medical insured pays | deductible and stop loss |
| catch up contribution for HSAs starts | at 55 and older at $1k |
| contribution limit to HSAs | $3,250 for singles; $6450 for marrieds |
| the penalty for non qualified medical expense distributions from HSAs ends at | 65 not 59 1/2 |
| noncancellable policies | continuous and guarantee insured right to renew; insurer can't raise premiums and can't cancel policy |
| guaranteed renewable policy | right to renew guaranteed for a certain number o fyears; insurer can raise premiums |
| HIPAA | protects workers ability to get health insurance when changing jobs or getting laid off |
| HIPAA exclusion window | 12 months (18 months for late enrollment) after 63 or more day break in coverage |
| deductible for medicare part a | $148/day for 21-100 days |
| services not covered under medicare a | custodial care |
| deductible for medicare part b | $147/ year with 20% coinsurance |
| SErvices not included for medicare part b | routine physical exams, dental care, cosmetic surgery, hearing aids, eye exams |
| for disability insurace, if employee pays the premium | premiums arent deductible; benefits are tax free |
| if employer pays disability insurance premium | premiums are deductible to employer; benefits to employee are taxed |
| if employee pays premium to disability insurance with pre-tax dollars | benefits to employee are taxed |
| medical insurance. deductible for premium for employer? | yes |
| group term insurance deduction for premium for employer? | yes |
| group disability insurance deduction for premium for employer? | yes |
| group LTC deduction for premium for employer? | yes |
| key person life deduction for premium for employer? | no |
| entity purchase insurance deduction for premium for employer? | no |
| taxable benefit to employer for insurance | no |
| medical insurance premium taxable to employee? taxable benefit? | no, no |
| group term premium taxable to employee? taxable benefit? | no if = $50k; yes if greater than $50k; no |
| group disability premium taxable to employee? taxable benefit? | no if paid by ER, no if PT $ by EE, yes if AT $ by EE; no if paid AT by EE, yes otherwise |
| group LTC premium taxable to employee? taxable benefit? | no; yes if qualified expenses, no otherwise |
