Contains the notes on the Insurance study book material for the CFP Board Exam. Topics include life, disability, health, auto, P&L, annuities, and Social Security.
The Notes
- Starred (*) topics are more likely to be on the exam (2021).
- Insurance
- Protects against financial loss.
- Protects against pure risks.
- Used for risk management within a financial plan.
- Risk
- Pure Risk: either the chance of financial loss or no loss (i.e. house fire, auto accident, illness). Only insurable risk.
- Speculative Risk: chance of profit, loss, or no loss.
- Subjective Risk: differs based on a person’s perspective.
- Objective Risk: is measurable and quantifiable.
- measures variation of actual loss from expected loss.
- Probability of Loss
- Measures frequency of an event occurring over the long run.
- Measures the expected claim cost for insurance cos.
- Severity
- The actual dollar amount of loss.
- Severity of loss is more important than probability of loss.
- Law of Large Numbers
- The predictability of an event occurring increases with more exposure. The higher the exposure, the more likely the results equal true results and are predictive of future results.
- reduces objective risk.
- Causes of Insured Losses
- Peril
- actual causes of loss.
- Ex: fire, tornado, burglary, collision, etc.
- Hazard
- A condition that increases the odds of loss occurring.
- Moral Hazard
- Character flaws like filing a false claim.
- Morale Hazard
- Indifference due to being insured.
- Ex: Leaving keys in running car because its insured.
- Physical Hazard
- Tangible condition that increases probability of peril occuring.
- Ex: icy roads, defective equipment, poor lighting, banana peel, etc.
- Moral Hazard
- A condition that increases the odds of loss occurring.
- Adverse Selection
- The tendency that person with higher-than-average risk buys/renews insurance policy.
- Managed via underwriting, raising premiums, or denying coverage.
- Premiums depend on balancing favorable and unfavorable risks in the pool.
- Peril
- Insurable Risks are:*
- Homogenous exposure units: a large number of similar occurrences.
- Accidental:
- Determinable and Measurable: so insurers can forecast actual losses.
- Not Catastrophic: won’t lead the insurer to financial insolvency.
- Premiums must be affordable.
- Can not insure moral hazard.
- Principles of All Contracts*
- Competent Parties
- 18 or older,
- Offer and Acceptance
- one party makes the offer, the other party accepts.
- Legal Consideration
- Consideration: the thing being exchanged — money, services, property. Incudes promise to pay.
- Lawful Purpose
- Invalid if action is illegal.
- Competent Parties
- Principles of Insurance Contracts
- Indemnity
- Insured can not make a profit.
- Compensation is only based on the extent of financial loss.
- Subrogation Clause
- Insured can not be compensated by the insurer and a third party for the same claim.
- Insurable Interest
- Insured must have emotional/financial hardship from damage, loss, or destruction
- Property & Liability Insurance – must have an insurable interest at policy inception and at time of loss.
- Life Insurance = must have insurable interest only at policy inception.
- Void Contract
- Never valid. Not enforceable.
- Voidable Contract
- A valid contract that allows cancelation.
- Indemnity
- Principle of Good Faith
- Warranty
- Promise made by insurer to insured.
- Breach of warranty grounds for avoidance.
- Representation
- Statements made by insured to insurer during application process.
- Material misrepresentations (lying) will void an insurance contract.
- Note: Lying about Age on a life insurance application is not material. The insurer will adjust the death benefit to the correct age.
- Concealment
- Insured leaves out a fact that is material to risk.
- Warranty
- Characteristics of Insurance Contracts
- Adhesion
- The policy is “take it or leave it.” No negotiating terms and conditions.
- Ambiguities in contract found in favor of insured.
- Aleatory
- Money exchanged can be unequal i.e. small premium but large benefit.
- Unilateral
- Insurer promises to pay the benefit, insured is not obligated to pay premiums.
- No premiums paid, no promise to pay.
- Conditional
- Insured must follow terms and conditions of insurance contract.
- Insurer may not pay a claim if not followed.
- Adhesion
- Contract Rights and Provisions
- Waiver
- When party relinquishes a right
- Estoppel
- Party is denied an assertion of a right they are entitled to.
- Ex: insurer can’t raise premiums after an accident because the agent said (informal agreement) that it wouldn’t happen.
- Wavier Provisions
- Insurer avoids liability of loss due to agents making unauthorized policy changes.
- Waiver
- Law of Agency
- Agent: legal representative of the insurer.
- enters into agreements on behalf of insurer.
- General Agent
- Represents one insurer.
- Independent Agent
- Represents multiple insurers.
- Broker
- Represents policy owner, not the insurer.
- Agent: legal representative of the insurer.
- An Agents Authority Arises From:
- Express Authority
- Through an agency or written agreement.
- Insurer is responsible for the acts of the agent.
- Implied Authority
- Based on what the public perceives, and a valid agency agreement exists.
- Ex: delivering an insurance contract and accepting a premium is implied authority.
- Insurer is responsible even if the client is misled.
- Apparent Authority
- Insured believes the agent has authority to act on behalf of an insurer when they don’t.
- Ex: agency agreement expired but the agent still uses businesses cards, signage, etc. as if it still existed.
- Insurer is responsible if agent misrepresents info to insured i.e. like paying premiums late.
- Express Authority
- Features of Insurance Contracts
- Conditions
- The duties and rights of insurer and insured.
- Declarations
- Insured’s name, property description, coverage amount, premium, policy term, inception/termination dates.
- Exclusions
- Outlines what will NOT be covered.
- May excludes perils i.e. war, flood, or earthquake.
- May excludes items i.e. cash or collectibles.
- Riders/Endorsements
- Written additions to the contract.
- Deductibles
- Amount insured pays before insurer makes payment.
- Reduces premiums, eliminates small claims, and retains risk.
- Found in property, health, auto policies.
- Copayments
- Insured pays a portion of the losses incurred.
- In addition to deductibles.
- Ex: health insurance 80/20 copay. Insured pays 20% of expenses above the deductible.
- Coinsurance
- Requires insured to cover a percentage of property value (usually 80%) re: homeowners insurance.
- Coinsurance = 80% x Replacement Cost
- Coinsurance Formula = (Face Value/Coinsurance) x Loss – Deductible
- Conditions
- Insurance Regulation is at the state level, NOT federal.
- Protects the insured.
- Maintains/promotes competition.
- Maintains solvency of insurers.
- Insurance Commissioner: administers/interprets/enforces insurance laws.
- Insured Loss Valuation
- Replacement Cost
- Cost of replacing property with like-kind.
- Actual Cash Value
- Replacement cost less depreciation.
- May cause a financial burden on insured.
- Example:
- Home theater goes up in flames.
- Replace Cost = $9,000
- Depreciation = 40%
- Actual Cash Value = $9,000 – ($9,000 x 0.40) = $5,400
- Does Not include deductible. Insured receives actual cash value less the deductible.
- Home theater goes up in flames.
- Agreed-Upon Value
- Value is determined in advance by the insured and insurer.
- Ex: art and antiques.
- Replacement Cost
- National Association of Insurance Commissioners (NAIC)
- Has NO regulatory power over the insurance industry.
- Issues model legislation that states may or may not adopt.
- Steps to Risk Management
- Determine objectives of risk management
- Identify risk exposed to.
- Evaluate identified risk’s odds of occurring/loss.
- Determine alternatives to manage risk and select the most appropriate.
- Implement the program.
- Evaluate, monitor, review.
- Risk Management Guidelines
- Retain = low severity/low frequency
- Reduce = low severity/high frequency
- Insure = high severity/low frequency
- Avoid = high severity/high frequency
- Life Insurance
- Why Life Insurance?
- Income for the readjustment period or income replacement in case of death of primary wage earner.
- Financial support for dependents.
- Fund child’s education at parent’s death.
- Pay off debts of surviving family.
- Needs Approach
- Considers income replacement and lump-sum needs of survivors at earners death for life insurance needs.
- Common Needs:
- Cash needs
- Final expenses
- Debt repayment
- Education expenses
- Emergency expenses
- Income needs
- Readjustment period needs
- Dependency period needs
- Spousal life income — including “blackout period” between when Social Security survivor benefits ends (last child hits age 16) and the spouse receives Social Security retirement benefits (age 60).
- Human Life Value Approach
- Projects future earnings less survivors ability to earn for life insurance needs.
- Current earnings
- Earnings growth rate
- Working years left
- Amount survivors can earn
- Discount rate
- Projects future earnings less survivors ability to earn for life insurance needs.
- Term Life Insurance
- Only for temporary needs.
- Pays a predetermined benefit if death occurs during a specified time period i.e. term.
- Benefit amount is level or decreasing.
- No cash value, savings, or investment component.
- Inexpensive at younger ages.
- Provisions
- Renewable – can be renewed without evidence of insurability.
- Convertible – can be converted to a whole life policy without evidence of insurability over a specific time period.
- Waiver of Premium – premiums are waived if disabled.
- Limitations
- Premiums increase exponentially with age.
- May not meet permanent insurance needs.
- Types
- Annual Renewable Term
- Annual term limit
- Premiums increase annually.
- Level Term
- Premiums and death benefit stay level for a period of time.
- A portion of premiums in early years prepay for later years.
- Decreasing Term
- Premiums stay level but death benefit decreases over the policy’s term.
- Use case: pay off a mortgage
- Annual Renewable Term
- Whole/Permanent Life Insurance
- Best for lifetime/permanent needs like estate planning.
- Provides coverage until age 120 if premiums are paid.
- Has a savings or investment component.
- Tax-deferred growth of cash value.
- Cash value can be used as a loan or paid out at policy surrender.
- Premiums are expensive.
- Types
- Ordinary Life
- Premiums paid until age 120 or death.
- Limited Pay Life
- Premiums paid to a certain age.
- Variable Life
- Cash value invested in stock, bond, money market mutual funds.
- Possibility of a higher return on cash value.
- Death benefit and cash value fluctuate with investment performance.
- Current Assumption Whole Life
- Interest sensitive — insurer uses current interest rates to set premiums
- Insurers can recalculate premiums once on a predetermined date…if rates are too high and premiums too low.
- Ordinary Life
- Policies
- First to Die
- Benefits paid when first insured dies.
- Second to Die or Last to Die
- Benefit paid when second or last insured dies.
- Higher life expectancy than individual life expectancy.
- Use case: liquidity for estate taxes.
- First to Die
- Dividend Options
- Nonparticipating – no dividends.
- Participating – pays dividends.
- Options*
- Cash – paid out to the clients.
- Accumulate at Interest – company invests the dividends, which grow tax-free, up to client’s basis in the policy.
- Reduce Premiums
- Paid-up Additions – buys added coverage each year.
- One Year Term – adds term insurance each year equal to the cash value of the policy.
- Settlement Options
- Lump Sum
- Interest Only
- Periodic interest payments on policy proceeds.
- Annuity Payments
- Fixed Amount
- Fixed payments to the beneficiary until proceeds depleted.
- Life Income
- Converts death benefit to annuity contract for the life of the beneficiary.
- Fixed Period
- Fixed payments over a fixed period of time.
- Death benefit converts to annuity certain.
- Life Income w/ Period Certain
- Annuity for the life of the beneficiary but with a minimum guaranteed number of payments.
- Joint & Last Survivor Income
- Payments made over the lives of two people.
- Survivor receives reduced payments after first annuitant dies.
- Fixed Amount
- Nonforfeiture Options*
- Cash Surrender Value
- Insured gets cash value (less surrender charges) when policy terminates.
- Reduced Paid-Up Insurance
- Cash value converted to a paid-up policy with smaller benefit amount.
- Extended Term Insurance
- Cash value converted to a term policy over a set time period with same face amount as original policy.
- Cash Surrender Value
- Accelerated Death Benefits
- Insured can take death benefit early if terminally ill.
- Life expectancy must be 24 months or less.
- Paid as lump sum or monthly income — payments deducted from policy’s face value.
- Not taxable for insured.
- Universal Life Insurance
- Premiums paid, policy’s face value, and cash value can be adjusted by insured.
- Insured does NOT direct investment of cash value.
- Variable Univeral Life
- Has investment options of stock, bonds, and money market mutual funds.
- No minimum guaranteed rate of return or interest.
- Cash value is invested in a separate account and not guaranteed.
- Policy Provisions
- Grace Period
- 31-61 days after the premium due date — policy stays in force.
- If the insured dies during the grace period, insurer pays the death benefit less the premium due.
- Misstatement of Gender or Age
- Death benefit is paid, but reduced based on amount paid and actual age/gender.
- Misstating age does not void the contract.
- Suicide
- Coverage is excluded if suicide is committed within 1 or 2 years of purchase.
- Premiums are returned if coverage is excluded.
- Disability Waiver
- Whole life: insurer waives premiums after disability.
- Universal/Variable Life: insurer waives charges to mortality/administration or entire premium.
- Grace Period
- Assignment
- Absolute Assignment
- Owner transfers all policy ownership rights.
- Collateral Assignment
- Assigns limited ownership as collateral for a debt.
- Terminates once debt is paid off.
- Most whole life uses Direct Recognition — reduces dividends/interest on the portion of cash value used as collateral.
- Absolute Assignment
- Group Life Insurance*
- Group Term
- Most common.
- Premiums for first $50,000 in coverage is tax free.
- Premiums paid by employer = tax deductible.
- Premiums paid by employee = after-tax dollars.
- Group Whole
- Premiums paid by employer = taxable income to employee.
- Group Term
- Taxation
- Death benefits are excluded from taxable income.
- Exception: transfer for value.
- Dividends
- Not taxable until withdrawn.
- Considered a return of basis.
- Taxable after it exceeds premiums paid.
- Not taxable until withdrawn.
- Withdrawals
- Cash value is not taxable if withdrawn at death.
- Considered return of principal until exceeds premiums paid, then taxed as ordinary income.
- MECs (Modified Endowment Contract)
- Policy is a MEC if premiums paid exceed premiums due (fails the 7 Pay Test).
- Subject to 10% penalty if withdrawn before 59 ½.
- Withdrawals or loans taxed on a LIFO basis (interest first, then basis).
- Loans are tax free.
- Exception: MEC.
- Exchanging one life insurance policy for another, or life insurance for annuity is not a taxable event.
- Exchanging annuity for life insurance is a taxable event.
- Surrender Policy
- Lump Sum: amount above premiums paid is ordinary income.
- Interest Only: interest taxed as ordinary income.
- Installment Payments – Return of principal and interest. The principal is not taxed. Interest is taxed as ordinary income.
- Ordinary Income = Cash Surrender Value – Premiums Paid
- Basis = Premiums Paid
- Transfer of Policy for Value
- Death benefits are taxable to the transferee on the amount that exceeds basis.
- Exceptions to Transfer-for-Value Rule:
- Transferred to insured.
- Transferred to business partner of insured.
- Transferred to partnership of insured.
- Transferred to corporation which insured is shareholder or officer.
- Transfer results in carryover basis from transferor to transferee.
- To the owner transferring the policy:
- Terminally/chronically ill — proceeds are tax free.
- Not terminally/chronically ill — basis is tax free, cash surrender value over basis is ordinary income, capital gains on the rest.
- Premiums*
- Not tax-deductible for insured.
- Are deductible for employer for group life and taxable income for employee.
- Installment Options for Life Proceeds or Annuity Payments
- Taxable income based on exclusion ratio:
- Basis = Premiums Paid
- Exclusion Ratio = Basis/Total Expected Payments
- Exclusion Ratio = percentage of each payment excluded from gross income i.e. return of basis.
- Ordinary Income = Gross Income x Exclusion Ratio.
- Life insurance paid as annuity retains the exclusion ratio indefinitely.
- Taxable income based on exclusion ratio:
- Death benefits are excluded from taxable income.
- Why Life Insurance?
- Life Annuity Contracts
- Provides periodic payments over a fixed period or life.
- Protects against outliving assets i.e. retirement funding.
- Types
- Immediate Annuity
- Payments are immediate.
- Purchased with a single lump sum.
- Deferred Annuity
- Payments begin at some future date.
- Accumulates interest until that date.
- Flexible Premium Deferred Annuity
- Premiums paid can vary.
- Payments depend on amount of premiums paid.
- Single Premium Deferred Annuity
- Lump-sum premium.
- Fixed Annuity
- Fixed interest rate.
- Variable Annuity
- May invest in stock or bond mutual funds.
- No guarantee of return on investment.
- Equity Indexed Annuity
- Fixed annuity linked to an index — most often S&P 500.
- Limits downside risk of index — guarantees minimum interest rate.
- Index term — interest credited at end of term — typically 1-10 years.
- Participation Rate
- Percentage of index increase that affects credited interest
- Ex: 60% participation rate and 10% rise in index = 6% credited interest.
- Indexing Method
- Annual Reset
- Calculated annually, interest added annually and protected from declines.
- High Watermark
- Compares highest anniversary to initial index.
- Point to Point
- Compares index at end of term to beginning of term.
- Annual Reset
- Immediate Annuity
- Payment Timing
- Pure Life Annuity
- Made over annuitants lifetime, stop at death.
- Risk is one payment, then dying.
- Life Annuity w/ Guaranteed Minimum Payment
- Payments made over a minimum term, then annuitant lifetime.
- If annuitant dies within the term, payments continue to annuitant’s beneficiary.
- Lower payout than pure life.
- Installment Refund Annuity
- Pays out the premiums paid less what’s already paid out.
- Joint & Survivor Annuity
- Paid over the lifetime of two annuitants.
- Pure Life Annuity
- Taxation
- Post-1982: withdrawals are LIFO = taxed on earnings first before basis is returned.
- Pre-1982: withdrawals are FIFO = basis first is not taxable, before earnings are taxed.
- Exchange annuity for annuity is not taxable event.
- Exchange annuity for life insurance is taxable event.
- Health Insurance
- 4 Classes of Medical Expanse Insurance
- Hospital Expense
- i.e. room and board charges
- Surgical Expense
- i.e. surgeon fees
- Physician’s Expense
- nonsurgical physician fees.
- Major Medical
- i.e. hospitalization, physician/surgeon fees, physical therapy, prescription drugs.
- Dental and vision care not included.
- Usually a coinsurance clause (80/20 is typical).
- Hospital Expense
- Stop Loss = max amount insured must pay in coinsurance payments.
- Insured pays deductible first.
- Insured pays coinsurance percentage to stop loss limit.
- Insurer pays 100% of the rest.
- Group Hospitalization and Major Medical
- All policies should use the Out-of-Pocket approach instead of Stop Loss per the Affordable Care Act.
- Patient Protection and Affordable Care Act (PPACA)
- Requires most U.S. residents to have health insurance.
- Tax penalty eliminated beginning 12/31/2018.
- Creates exchanges to purchase insurance.
- Premiums and cost-sharing credits for those with incomes between 133-400% of the federal poverty level.
- Employer Requirements:
- Employers with > 200 employees must automatically enroll employees. Employees may opt out.
- Employers with >= 50 employees are fined $2,000 per full-time employee if they do not offer coverage (fine excludes first 30 employees).
- Exempts employees with < 50 full-time employees
- Requires no pre-existing conditions clauses = guarantee issue and renewability.
- Dependent coverage up to age 26.
- Prohibits lifetime and annual limits.
- Health Maintenance Organizations (HMOs)
- Primary care physician determines what care is recieved.
- Disadvantage: no coverage outside HMO.
- Models
- Staff Model = HMO is a corporation, medical staff are employees.
- Group Model = network model — HMO contracts with groups of providers to care for insured.
- Individual Practice Association = physicians with own office, contracted out by HMO on fee for service basis.
- Preferred Provider Organization (PPOs)
- Network of health care providers contracted by insurance cos.
- Insured gets a discount on service when using in-network providers.
- Insured may use out-of-network providers also, but at the cost of a higher deductible and coinsurance.
- Managed Care (Primary Care Physician – PCP)
- Primary care physician provides services or refers to specialists.
- Physicians need approval to perform certain procedures (reduced patient options).
- Insured pays small copayment or deductible.
- Health Savings Accounts (HSAs)
- Tax-deferred savings accounts for qualifying medical expenses.
- Must have a high-deductible health plan — at least a $1,400 deductible (single) or $2,000 (family).
- No requirement to use funds in current year — can be used for savings vehicle for medical expenses in retirement.
- Medicare participation disqualifies coverage.
- Contributions
- Limits
- $3,600 (single) and $7,200 (family) for 2021.
- $1,000 catch-up contribution for 55 and older.*
- Contributions are deductible:
- For employee who contributes.
- For employer who contributes.
- For eligible family members that receive contributions.
- Employee and employer can make contributions.
- Limits
- Distributions
- Money used toward qualifying medical expenses is tax-free.
- Non-Qualifying Medical Expenses*
- Taxed as income
- Subject to 20% penalty if taken before age 65.
- Subject to income tax only at 65 or older.
- Can not be used toward health insurance premiums unless:
- Long-term care insurance premiums
- COBRA premiums
- Health care coverage while receiving unemployment comp.
- Dental and Vision
- Cosmetic surgery and over-the-counter drugs are excluded.
- Health Insurance Provisions
- Noncancellable Policies
- Insurer can not raise premiums and cancel the policy.
- Guaranteed Renewable Policies
- Right to renew is guaranteed under PPACA.
- Noncancellable Policies
- Group Health Insurance*
- Employer-provided health insurance is not taxable income to employee.
- Health Insurance Portability and Accountability Act (HIPAA)
- Protects workers’ ability to get health insurance when changing jobs, laid off, or retiring.
- Can get coverage without restrictions switching from one group plan to another group plan.
- Does not apply is switching from group plan to individual plan.
- Includes a 12-month exclusion window for new employees, reduced for each month of “creditable coverage” before enrolling.
- Creditable coverage = any health coverage held immediately prior to applying to new plan.
- Strategies (Pre-ACA)
- Switch Jobs within 62 days = Use HIPAA
- Switch Jobs with unknown time frame = Use COBRA
- Retire = Use Medicare if eligible or COBRA
- Protects workers’ ability to get health insurance when changing jobs, laid off, or retiring.
- Consolidated Omnibus Budget Reconciliation Act (COBRA)
- Extension of group health insurance with same coverage.
- Applies to loss of coverage for employee, employee’s spouse, and/or dependent children.
- Employer can charge 2% for admin expenses. So total cost to employee is 102% of insurance cost.
- Only applies to employers offering group health insurance and have 20 or more employees.*
- Full and part-time employees count toward the 20.
- Employers with less than 20 employees are not required to offer COBRA.
- Eligibility requires group coverage termination for:
- Covered employee dies.
- Employee voluntarily/involuntarily terminated.
- Reduced hours from full to part time.
- Covered employee separates from spouse.
- Employee eligible for Medicare.
- Dependent child no longer eligible for coverage.
- Employer must offer coverage for:*
- 18 months for reduced hours or normal termination.
- 36 months for:
- Death
- Divorce
- Medicare eligibility
- Loss of dependency status by employers children
- Employees have 60 days to make COBRA election.
- May be terminated if:
- Employer goes out of business and terminates coverage for all employees.
- Employee/beneficiary fails to make premium payments.
- Employee covered under another plan.
- Long Term Care Options
- Medicaid
- Eligibility based on person’s assets — available to poor.
- Benefits paid by state and/or federal government.
- Nursing Home coverage:
- Gifted assets five years prior to entering the nursing home are included in formula to determine coverage once assets are spent down.
- Medicare
- Available to anyone eligible for Social Security.
- Benefits are restrictive.
- Only pays if patient will see improvement in condition.
- Continuing Care Retirement Communities (CCRC) offers:
- Independent Living.
- Assisted Living
- Memory Care
- Skilled Nurse and Rehab
- Private Long-Term Care Policy
- Coverage for nursing home and other things not covered by health insurance:
- Skilled Nursing — nursing home, physician ordered.
- Intermediate Nursing – occasional nursing care, physician ordered.
- Custodial Care – assistance eating, dressing, bathing, etc.
- Home Health Care – In home nursing or assistance.
- Assited Living – apartment style living with health services.
- Adult Day Care – Daily assistance while family members work.
- Hospice Care – terminally ill at home, hospical, or nursing facility.
- Eligibility:
- Must be chronically ill or substantial cognitive impairment.
- Chronically Ill = unable to perform 2 of 6 ADLs for at least 90 days
- ADLs (Activities of Daily Living) = eating, bathing, dressing, transferring bed to chair, toileting, continence.
- Cognitive Impairment = behavior threatens own/others health/safety.
- Chronically Ill = unable to perform 2 of 6 ADLs for at least 90 days
- Must be chronically ill or substantial cognitive impairment.
- Coverage for nursing home and other things not covered by health insurance:
- Long Term Care Insurance Partnership Program
- Partnership between individual LTC insurance and Medicaid.
- Individual uses LTC insurance to pay for the first portion of long term care and qualify for Medicaid without spend down requirement.
- The policy includes an “asset disregard” that lets individuals to shelter assets from Medicaid equal to the amount of benefits received.
- Ex: $200,000 lifetime benefits = shelter $200,000 in assets from Medicaid spend down requirement.
- Long Term Care Tax Benefits*
- Premiums are tax-deductible and limited based on age of insured.
- Benefits are tax-free if policy is qualified:
- Person is expected to need care for at least 90 days.
- Unable to perform 2 or more ADLs, or suffers substantial cognitive impairment.
- Medicaid
- 4 Classes of Medical Expanse Insurance
- Disability Income Insurance
- Provides income if insured is unable to work due to illness/injury.
- Definitions
- Any Occupation
- Considered disabled if can’t perform “any occupation.”
- Lowest premiums.
- Modified Any Occupation
- Considered disabled if can’t perform the duties of a job they’re fit for based on education, experience, and prior economic status.
- Own Occupation
- Considered disabled if can’t perform duties of own occupation.
- Split Occupation
- Starts with own occupation, then moves to modified occupation after 1-2 years.
- Any Occupation
- Benefit Period
- Short term = 2 years or less.
- Long term = until retirement age, death, or specific time period.
- Elimination Period
- Time until benefit begins.
- Serves as a deductible.
- Premium waived during elimination period.
- Taxation*
- If employee pays premiums:
- With after-tax dollars:
- Premiums are not deductible.
- Benefits are tax free.
- With pre-tax dollars:
- Benefits are taxed.
- With after-tax dollars:
- If employer pays premiums:
- Premiums are deductible for employer.
- Benefits to employee are taxed.
- If employee pays premiums:
- Characteristics
- Cost of Living Rider = benefits adust for inflation.
- Residual Benefits = covers difference if insured returns to work for less pay.
- Integrated with Social Security = disability benefits from Social Security reduces amount benefits paid by insurer.
- Probation Period = wait time after policy issue before covered – 15 to 30 days.
- Property & Liability Insurance
- Property = protects from loss on home, condo, auto, boat, and other property.
- Liability = protects from loss due to legal action from property damage, personal injury, income loss.
- Homeowners Insurance (HO)
- Basic Coverage
- Only covers specific perils below.
- Covers loss from 12 Named Perils:
- Fire, vehicles, lightning, smoke, windstorm, vandalism, hail, explosions, riots, theft, aircraft, volcanic eruption
- Broad Coverage
- Only covers specific perils below.
- Includes the 12 Named Perils Plus 6 Named Perils:
- Falling objects
- Weight of ice, snow, sleet
- Accidental discharge or overflow of water/steam
- Accidental cracking, burning, bulging of appliances
- Freezing of plumbing, heating, AC, sprinkler system, appliance
- Accidental damage from artificially generated electrical currents.
- Open Perils Coverage
- Covers losses from “all perils” except those specifically excluded.
- Rule of thumb:* covered losses must result from something that is “sudden and accidental.”
- Generally Excluded Perils
- Ground movement – earthquake, sink hole, landslide, etc.
- Ordinance regulating construction, repair, demolish of building.
- Damage from rising water – floods, tidal water, waves, backing up through drains/sewers.
- War
- Nuclear hazards
- Power failure from uninsured peril
- Intentional acts
- Neglect
- Endorsements
- Purchased supplement to existing policy that provides additional coverage:
- sink hole, earthquake, sewage backup, etc.
- Flood coverage can be purchased separately from National Flood Insurance Program.
- Purchased supplement to existing policy that provides additional coverage:
- Basic Coverage
- Section I Coverage
- Coverage A: Dwelling
- Covers repair/replacement for damage to house/attached structure and building materials.
- Insured on replacement cost basis = materials of like quality at current market prices ( no deductions).
- May require homeowners insurance of at least 80% coverage to be fully covered.
- If less than 80%:
- Insurance Payment = (Amount Insurance Carried/Coinsurance Requirement) x Loss Amount
- Tip: Insurance I have, divided by insurance I should have (80% of replacement cost), times the loss, minus deductible equals the insurance amount covered.
- Coverage B: Other Structures
- Covers detached structures like garage, greenhouse, storage.
- Typically limited to 10% of Coverage A limit.
- Insured on replacement cost basis.
- Tip: “other structures” used for business are not covered, business coverage is needed.
- Coverage C: Personal Property
- Tangible moveable property owned by insured — furniture, electronic equipment, books, clothing, etc.
- Typically limited to 50% of Coverage A limit.
- Insured on actual cash value basis — can upgrade with replacement-cost endorsement.
- Typical personal property item limits:
- $500 – money, bullion, coin collection, bank notes
- $1,500 – securities, bills, debt, plane tickets, manuscripts
- $1,500 – theft of jewelry, watches, gems, precious metals, furs
- $1,500 – watercraft and trailers
- $2,500 – theft of firearms
- $,2500 – theft of silver-/gold-/pewter-ware
- Endorsements can be bought to increase coverage of above.
- Typical exclusions:
- Animal, birds, fish
- Land vehicles used off-premise
- Property of boarders not related to isnured
- Aircraft and parts
- Furnishing rented to others
- Property held for sale or sold (not delivered)
- Business data, credit cards, debit cards
- Business property away from residence.
- Coverage D: Loss of Use
- Covers living expenses if insured can’t use residence due to covered damages.
- May cover lost rental income if unhabitable.
- Typically limited to 30% of Coverage A limit.
- HO-6 – limited to 50% of Coverage C limit.
- HO-8 – limited to 10% of Coverage A limit.
- Coverage A: Dwelling
- Section II Coverage
- Coverage E: Personal Liability
- Covers “others” bodily injury and property damage when insured is responsible.
- Minimum $100,000 (typically).
- Insurer covers legal defense and settlement costs.
- Coverage F: Medical Payments to Others
- Covers “others” medical expenses regardless of liability.
- Medical expenses incurred within 3 years of accident.
- Typically, limits range from $1,000 to $10,000.
- Does not cover expenses incurred by insured or household.
- Coverage E: Personal Liability
- Homeowners Insurance Policy Forms
- HO-2 Broad Form
- Covers 18 named perils.
- HO-3 Special Form
- Covers “open perils” = all risks except what’s specifically excluded.
- Personal property is on named perils broad form basis.
- HO-4 Renters Policy
- Coverage for renters/tenants.
- Personal contents (Coverage C) on broad perils basis.
- Personal liability coverage.
- Loss of use of premises (30% of personal property coverage).
- Does not cover dwelling/structure.
- HO-5 Comprehensive Form
- Covers “open perils.”
- Personal property is open perils basis.
- HO-6 Condominium Owners Form
- Covers the inside structure of unit and contents.
- Broad perils basis.
- Loss of Use (Coverage D) limited to 50% of Coverage C limit.
- HO-8 Modified Coverage Form
- Covers repair cost to damaged property.
- Functional replacement cost coverage.
- Used for older homes.
- HO-2 Broad Form
- Automobile Insurance
- Part A: Liability Coverage
- Covers “others” bodily injury and property damage when insured is responsible.
- Limits very state to state – either split limits or combined single limits.
- Split Limits: separates bodily injury per person, bodily injury per accident, and property damage
- Example: 50/100/50
- $50,000 bodily injury coverage per person
- $100,000 bodily injury coverage per accident
- $50,000 property damage coverage
- Example: 50/100/50
- Combined Single Limits: fixed amount of coverage per accident whether it’s bodily injury or property damage.
- Part B: Medical Payments Coverage
- Covers medical expenses from accident.
- For insured and family members:
- Covers medical expense if hurt while driving, as a passenger, or pedestrian.
- For other occupants:
- Covers medical expense if hurt as a passenger.
- Part C: Uninsured Motorist Coverage
- Covers property damage or bodily injury if uninsured/under-insured motorist is at fault.
- Part D: Coverage for Damage to Insured’s Auto
- Repair/replace insured’s auto when damaged.
- Covers single-car accident, multi-car accident, theft, or not collision damage from:
- fire
- theft
- vandalism
- weather-related (tree, flood, earthquake, hail, etc.)
- animals
- riots
- falling objects
- Part E: Duties After an Accident of Loss
- After a loss, insured must:
- Immediately give notice to insurer — time, place, and circumstances of event, names, addresses of claimants and witnesses
- Protect auto from further loss.
- File written proof of loss with insurer.
- After a loss, insured must:
- Part F: General Provisions
- Covers insured driving in U.S. and Canada, not Mexico (requires separate policy for Mexico).
- Common Exclusions
- Named Driver: only covers those named in the policy.
- Excluded Driver: excludes people by name.
- Intentional Acts
- Racing
- Vehicles with less than four wheels.
- Factors Affecting Premiums
- Age for younger drivers
- Marital status
- Credit score
- Driving record/claims history
- Location
- Type of car
- Use and mileage of car
- Coverages and deductible
- Part A: Liability Coverage
- Legal Liability
- Liability Insurance
- Most policies, like home and auto, include liability coverage but may fall short of needs.
- Does not cover breach of contract or criminal offense.
- Covers certain torts (civil wrongs) that caused injury to others:
- Intentional Interference – intentional act against another to cause injury.
- Slander/Libel – usually covered.
- Intentional acts – Not Covered.
- Strict and Absolute Liability – legally liable due to legislation
- Ex: workers comp laws.
- Negligence – bodily injury or property damage from an act or failure to act with appropriate care.
- Courts use prudent man standard to determine “appropriate care.”
- Prudent man standard = if a reasonable person in same circumstances would have acted similarly.
- Vicarious Liability: held partially responsible for negligent acts.
- Ex: parents liable for child’s actions.
- Courts use prudent man standard to determine “appropriate care.”
- Intentional Interference – intentional act against another to cause injury.
- Relevant Concepts
- Res ispa loquitur – the act speaks for itself
- Ex: a plane crash implies negligence.
- Negligence per se – the act itself constitutes negligence. Relives burden of proof
- Ex: drunk driving
- Burden of Proof – borne by injured party.
- Damages
- Property Damage – measured by monetary loss.
- Bodily Injury
- Special damages for measurable losses – loss of limbs.
- General damages for intangible losses – pain and suffering.
- Punitive damages – as punishment for the act.
- Collateral Source Rule
- Damages should not be reduced because injured party has other sources of financial recovery available – like their own health or disability insurance.
- Res ispa loquitur – the act speaks for itself
- Defense to Negligence
- Assumption of the Risk – injured party fully understood/recognized danger and proceeded anyway.
- Not available in all states.
- Negligence on Part of Injured Party
- Contributory Negligence – injured party did not look out for own safety.
- Comparative Negligence – damages are adjusted based on the proportion of injured party’s contribution to own injury.
- Last Clear Chance Rule – injured party failed to avoid the accident despite a “last clear chance” to do so.
- Assumption of the Risk – injured party fully understood/recognized danger and proceeded anyway.
- Personal Liability Umbrella Policy (PLUP)
- Only provides coverage after homeowners/auto policy is exhausted.
- Insurers will insist on a minimum of underlying coverage in home and auto.
- Usually $1 million or more.
- Lack of an umbrella policy is likely a sign of deficient coverage.
- Business P&L Coverage
- Commercial Package Policy (CPP)
- Covers loss of assets in perils and some liability.
- Include basic, broad, and open perils.
- Does not cover flood or other exclusions.
- Add endorsement for business interruption – lost profits.
- Business Auto Policies (BAP)
- Covers damage to autos and liability
- Commercial Liability Umbrella Policy (CLUP)
- Excess liability coverage after underlying policies is exhausted.
- Product Liability Coverage
- Covers liabilities specific to a manufactured product including:
- Harmful products
- Defective products
- Inappropriate packaging
- Insufficient directions or warning on usage
- Covers liabilities specific to a manufactured product including:
- Professional Liability
- Malpractice
- Errors and omissions (E&O)
- Commercial Package Policy (CPP)
- Liability Insurance
- Social Security
- Old Age, Survivor, and Disability Insurance (OASDI)
- Paid in via FICA (Federal Insurance Contributions Act) and SECA (Self-employed Contributions Act)
- Paid by both employee and employer (self-employed pay both)
- Social Security Tax = 6.2% on wages up to $142,800 wage base (2021)
- Medicare Tax = 1.45% on all wages
- Medicare Surtax = 0.9% on wages over $200,000 (Single & HOH) or $250,000 (MFJ)
- Retirement Benefits
- Current Normal or Full Retirement Age
- 67 years old (if born in 1960 or later)
- 66 years old (if born between 1955-59)
- Reduced Benefits for Early Retirement at Age 62
- 70% of full retirement benefits at 62 (if full retirement age is 67)
- 75% f full retirement benefits at 62 (if full retirement age is 66)
- Benefits reduced 5/9 of 1% for each month, for first 3 years of early retirement.
- Benefits then reduced 5/12 of 1% for each month beyond 3 years.
- Increased Benefits
- Delaying up to age 70 may increase retirement benefits.
- 8% increase per year if retirees delay benefits.
- Eligibility
- Must be fully insured = 40 Quarters of Coverage.
- 1 Quarter of Coverage is based on an amount of earnings.
- Ex: 1 Quarter = $1,470 in wages in 2021.
- Important Beneficiaries
- Disabled insured worker under age 65.
- Retired insured worker age 62 or over.
- Spouse of retired/disabled insured worker age 62+
- Spouse of retired/disabled insured worker with child under age 16 or disable child.
- Divorced spouse of retired/disabled insured worker, if ex-spouse is age 62, married to worker for 10 years, and not remarried by age 60.
- Temporary Reduced Benefits*
- If earn too much.
- Early Retirement
- Reduced $1 for every $2 earned above the threshold ($18,960 annual limit) for those below full retirement age.
- Full Retirement Age
- Reduced $1 for every $3 earned above the threshold ($50,250 annual limit) in year reach full retirement age.
- Reductions end at full retirement age.
- Taxation of Benefits*
- Up to 85% may be taxed.
- Based on combined income:
- AGI
- Nontaxable income.
- Foreign earned income.
- 1/2 of retirement benefits.
- Current Normal or Full Retirement Age
- Disability Benefits
- Disability defined as severe physical/mental impairment for 5 months that prevents a worker from performing substantial work for at least 1 year or result in death.
- Benefits depend on credits earned and age.
- Eligibility
- Age 31 or older = fully insured (40 quarters), and earned 20 quarters in last 40 quarters.
- Age 24-30 = earned 1/2 of quarters available since age 21 to disability.
- Age 21-24 = earned 6 quarters in last 12 quarters.
- Survivorship Eligibility*
- Children under 18 (under 19 if in secondary school) are always covered. Same for caretakers of children under 16.
- Medicare Benefits
- Federal health insurance for age 65 or older.
- Spouse qualify at 65 based on the spouse work record.
- Applying
- Automatically enrolled if receiving retirement benefits or at any age if receiving disability benefits for 2 years.
- Must enroll at 65 if not receiving retirement benefits.
- Does not provide coverage for services outside the U.S.
- Exceptions:
- In U.S. at time of medical emergency but foreign hospital is closer.
- Traveling to Alaska, without reasonable delay, and Canadian hospital is closer.
- Live in U.S. and foreign hospital is closer to your home.
- Exceptions:
- Medicare Part A
- Hospital Insurance – Covers Places
- Inpatient hospital care
- Home health care
- Semi-private room, recovery room, meals, lab tests, x-rays
- Hospice care
- Skilled nurse care following covered hospital stay
- Benefit Periods – determines amount paid by insured.
- Benefit period = begins 1st day in hospital, ends after 60 days of no further skilled care.
- Deductible = $1,484 per benefit period.
- 1st 60 days is the deductible
- Beyond 60th day, Coinsurance is:
- $371 for days 61-90, per day.
- $742 for days 91-151 per lifetime reserve day (only 60 lifetime reserve days).
- $18.50 per day for skilled nursing care days 21-100. 1st 20 days covered 100%.
- Custodial care NOT provided (daily living assistance).
- Hospital Insurance – Covers Places
- Medicare Part B
- Covers doctor visits, lab tests, ambulance, outpatient therapy, medical equipment (wheelchair, walkers, etc.), mental health, home health care.
- Covers preventative visit and annual wellness visit.
- Does NOT cover:*
- Dental care or dentures.
- Cosmetic surgery.
- Hearing aids.
- Eye exams.
- Automatically enrolled in Part B. Must opt out.
- Premiums deducted from Social Security ($148.40/mth standard)
- Deductible = $203 per year
- Covers 80% after deductible.
- Medicare Part C
- Must own/pay for Part A and B.
- Similar to HMO, PPO plans – coverage is regional.
- Includes vision, dental, hearing.
- Medicare Part D
- Prescription drug coverage.
- Medicare Supplement Insurance
- Sold and designed to offset costs of Medicare deductible/coinsurance.