Novel Investor

Compounding investing wisdom...

Insurance Study Guide

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.
        1. Moral Hazard
          • Character flaws like filing a false claim.
        2. Morale Hazard
          • Indifference due to being insured.
          • Ex: Leaving keys in running car because its insured.
        3. Physical Hazard
          • Tangible condition that increases probability of peril occuring.
          • Ex: icy roads, defective equipment, poor lighting, banana peel, etc.
    • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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
  • 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.
    • Agreed-Upon Value
      • Value is determined in advance by the insured and insurer.
      • Ex: art and antiques.
  • 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
    1. Determine objectives of risk management
    2. Identify risk exposed to.
    3. Evaluate identified risk’s odds of occurring/loss.
    4. Determine alternatives to manage risk and select the most appropriate.
    5. Implement the program.
    6. 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
    • 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
    • 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.
      • 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.
      • 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.
      • 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.
      • 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.
    • 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.
    • 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.
    • 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.
      • 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.
  • 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.
    • 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.
    • 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).
    • 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.
      • 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.
    • 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
    • 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.
      • 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.
  • 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.
    • 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.
      • If employer pays premiums:
        • Premiums are deductible for employer.
        • Benefits to employee are taxed.
    • 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.
    • 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.
    • 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.
    • 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.
  • 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
      • 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.
    • 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
  • 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.
    • 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.
    • 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.
    • 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
      • Professional Liability
        • Malpractice
        • Errors and omissions (E&O)
  • 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.
    • 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.
      • 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).
      • 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.

Or read other book notes.

Print Friendly, PDF & Email

Learning

Return Tables

Connect