Pure Risk
change of loss or no loss
Speculative Risk
chance of profit, loss or no loss
Subjective Risk
based upon an individual's perception of risk
Objective Risk
measurable and quantifiable risk
Probability of Loss
chance" of a loss occuring
Severity
dollar amount of the loss
Perils
actual cause of loss
Hazard
condition that increases the likelihood of a loss occuring
Moral Hazard
character flaw ie: false claim
Morale Hazard
indifference created because a person is insured ex) not concerned if loss happens bc you are insured
Physical Hazard
tangible condition that increases the probability of a peril occuring ex) icy or wet roads
Insurable Risks
- accidental
- measurable and determinable
- catastrophic risk
- have homogenous exposure
Principle of Indemnity
insured is only entitled to compensation to th extent of the insured's financial loss
Subrogation Clause
insured cannot receive comp from both insurer and third party for same claim
Principle of Insurable Interest
The insured must be in a position to lose financially if a covered loss occurs
Void Contracts
were never valid and thus never came into existence
Voidable Contracts
a valid contract that allows cancelation by one of the parties however the other party is bound by agreement
Warranty
a promise made by the insured to the insurer
Representation
statements made by the insured to the insurer during the application process. Misrepresentation must be material in order to avoid an insurance contract.
Adhesion
any ambiguities in an insurance contract are in favor or the insured bc they are "take it or leave it" and there are no negotiations over terms and conditions
Aleatory
money exchanged in insurance contracts may not be the same; small premium, large benefit
Unilateral
only one promise is made to the insurer which is to pay in the event of a loss
Conditional
insured must abide by the terms and conditions of the insurance contract or else the insurer may not pay a claim
Express Authority
given through agency or written agreement
Implied Authority
authority that the public perceives and a valid agency agreement exists
Apparent Authority
when the insured believes that agent has authority to act on behalf of the insurer when no authority actually exists. Can be inferred based on businesses cards or signs, the insurer is still responsible
Conditions
details the duties and rights of the insured and insurer
Declarations
includes names of the insured, description of property, amount of coverage, amount of premium, term of policy and inception/termination dates
Exclusions
outlines specifically what will not be covered, includes perils, costs of certain things or specific items
Riders and Endorsements
written additions to an insurance contracts
Regulations of Insurance Contracts
Done on the state level, not federal level
Actual Cash Value (ACV)
replacement cost (FMV), less depreciation = cash received
Deductible
amount that must be paid before insurer will make payments, form of retaining risk
Copayments
are in addition to deductibles and are common with health insurance, insured must pay a portion of the losses incurred
Coinsurance
a provision under which both the insured and the insurer share the covered losses
Step 1) Calc co-insurance requirement:
replacement cost x coinsurance %
Step 2) Calc % of loss that will be covered
Policy Amount / Co-Insurance requirement
Step 3) Calc Tot
National Association of Insurance Commissioners (NAIC)
has no regulatory power over insurance industry, but is involved in accrediting state insurance regulatory offices
Six Steps of Risk Management
1. Determine objectives of risk management program
2. identify risks to which the client is exposed
3. evaluate the identified risks as to probability of occurrence and potential loss
4. determine alternatives for managing risks, and select the most appro
Risk Avoidance
avoiding an act that would create a risk; use for most serious types of risks
Risk Transfer
using insurance where the financial risk is severe but the frequency is low
Risk Retention/Reduction
appropriate when financial risk is low and frequency is high because it would be too expensive to insure
ex) dings on car, minor illnesses and deductibles
Skilled Nursing
traditional nursing home, physician ordered
Intermediate nursing
occasional nursing care, physician ordered
Custodial Care
assistance with eating, dressing, bathing, ect.
Home Health Care
in home nursing or necessary assistance
Assisted Living
apartment style living with healthcare services
Adult Day Care
daily assistance while a spouse or family member works
Hospice Care
for terminally ill, at home, hospital or nursing facility
Modified Endowment Contract (MEC)
A life insurance policy under which the amount a policy owner pays in during the first years exceeds the sum of net level premiums that would have been payable to provide paid-up future benefits in seven years. Loans from policy are taxable and penalized,
Life Insurance Policy Rider
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Disability Income Policy Rider
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Association Arrangements
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Tax Implications of Disability Insurance:
Employee pays premium with after tax dollars
Premiums are not deductible
Benefits are tax free for EE
Tax Implications of Disability Insurance:
Employer pays the premium
Premiums are deductible for ER
benefits are taxed for EE
Tax Implications of Disability Insurance:
Employee pays premium with pre-tax dollars
benefits are taxed to EE
Business overhead expense policy
pays the insured's business overhead expenses if the insured becomes disabled. The policy is designed for small businesses that rely on one or two persons.
Benefits are taxable to EE, premiums are tax deductible to ER
Last-to-Die Policy
pays on the death of the second spouse
Good option for paying estate taxes when held by a trust
Business Interruption Insurance
Insurance that protects companies during the period necessary to restore property damaged by an insured peril. Coverage pays for lost income and other expenses related to recovery.
Misstatement of Age
-This clause protects the insurance company against an applicant who lies about his age
-The insurance company has the right to adjust your face amount up or down to coincide with the face amount or policy limit the correct premium would have purchased if
Incontestability Clause
a provision stating that the insurer cannot dispute the validity of a policy after a specified period
Group Term Insurance
Term insurance provided, usually without a medical exam, to a specific group of individuals, such as company employees, who are associated for some purpose other than to buy insurance.
Premiums for first $50k in coverage is tax free, if paid by ER they ar
Fully Insured for Social Security Benefits
must earn 40 quarters of coverage
1 quarter = $1,410 (2020)
Pure Life Annuity
Provides periodic benefit payments as long as the annuitant lives, with the payments ceasing at death.
HO-6 Policy
covers all interior walls of a condo. Does not cover roof or exterior walls
Comprehensive Personal Liability Policy
Provides broad coverage for an individual or family's liability exposure for bodily injury or property damage
Cross Purchase Plan
An agreement that provides that upon a business owner's death, surviving owners will purchase the deceased's interest, often with funds from life insurance policies owned by each principal on the lives of all other principals.
Taxation of Dividends from Life Insurance Policies
If dividends paid are greater than premiums paid are fully taxable. If dividends paid are less than premiums paid, then dividends are not taxed.
Modified No-Fault Coverage Plan
The plan where injured parties do not give up the right to sue, but simply refrain from such action until either a dollar threshold or a verbal threshold is reached
Probationary Period in Disability Insurance
the time the insured must wait after the issue of the policy before specified conditions will be covered
Non-cancelable Policy
Policies that are renewable on a guaranteed basis and the premium cannot be changed.
Guaranteed Renewable Policy
These policies guarantee renewability, not level premiums. Premium levels can be changed as long as it is done for an entire rate class.
Group Model HMO
An HMO that contract with a medical group for the provision of health care. Relationship between HMO and medical group is generally very close. A form of CLOSED-PANEL HMO, AKA an arrangement called a network model
Variable Universal Life Insurance
A form of universal life insurance that allows the policyholder to make fund choices for the investment component but that has no guaranteed cash value and no guaranteed interest rate. Guarantees minimum death benefit as long as premiums were paid. Premiu
Annual Renewable Term (ART)
- premiums increase annually
- no cash value
- death benefit is fixed at the face amount of policy
- can be converted to a permanent policy without proving insurability
Level Term Life Insurance
- premiums remain the same throughout the life of the policy
- no cash value, no savings component
- death benefit is fixed at face amount
Whole Life Insurance
life insurance that pays a benefit on the death of the insured and also accumulates a cash value. Cash values may be used for loans or may be received if the policy is surrendered. Premiums are flexible depending on the type of policy
Ordinary Whole Life Insurance
a level-premium policy that provides lifetime protection, premiums are paid till age 120 or until death, increasing cash value, death benefit is level throughout term
Limited Pay Life Insurance
higher premiums by the insured only pays premium until a certain age
Variable Life Insurance
whole life insurance that invests the cash value of the policy in stocks or other high-yielding securities
While Life Participating Policy Dividend Options
1. cash
2. accumulate at interest - dividends are invested and are tax free up to basis, interest paid on dividends is taxable
3. reduce premiums
4. Paid-up Additions
5. One-year term
Fixed Period Option
A Life insurance Settlement option under which the beneficiary receives a regular income for a specified period of time, such as 10 years, at which time the principal and interest are depleted.
Life Income with Period Certain Option
the recipient is provided with the "best of both worlds" in terms of a lifetime income and guaranteed installment period
Life Insurance Nonforfeiture Option: Cash Surrender Value
For life insurance, the quantity that the owner is able to get if the policy does not remain in force until the insured's death. For annuities, the amount of a deferred annuity's accrued value that the contract holder is able to get if the policy is relin
Life Insurance Nonforfeiture Option: Reduced Paid-Up Insurance
Nonforfeiture option where cash value is used to make a single premium payment to purchase as much of the same type of insurance as possible. Face amount of the new policy would be less than the original policy but no further premium payments would be nec
Life Insurance Nonforfeiture Option: Extended Term Insurance
Nonforfeiture option where cash value is used to make a single premium payment on a Term Insurance Policy of the same face amount as the original policy. Original policy can be reinstated. Not available on rated policies.
Life Insurance Nonforfeiture Option: Accelerated Death Benefits
early receipt of life insurance proceeds that are not taxable under certain circumstances, such as the taxpayer is medically certified with an illness that is expected to cause death within 24 months.
Universal Life Insurance
permanent cash-value insurance that combines term insurance (death benefits) with a tax-sheltered savings/investment account that pays interest, usually at competitive money market rates. Insured does not direct the investment portion of the cash value.
Group Whole Life Insurance
Employer premiums taxable to employee
Taxation of Life Insurance
-Policy dividends: free of income tax. When dividends exceed premiums paid, they are included as ordinary income
-Policy loans are not taxable unless policy is a MEC (ordinary income plus 10% penalty if under age 59 �)
-Withdrawals: No tax is owed until t
Taxation of Annuities
-contributions made with AFTER-tax dollars
-interest, dividends, and capital gains taxes are deferred until distributions are made
-anything exceeding the cost basis is taxed at ordinary income
-exclusion ratio: percentage of contribution basis to total
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Penalty for non-qualified medical expense distributions from HSA ends at
age 65
Noncancellable Policies
continuous and guarantee an insured the right to renew until a specific age or stated # of yrs.
Insurer cannot raise prems or cancel policy
Guaranteed Renewable Policy
the insurer guarantees to renew the policy at each anniversary date. cannot be cancelled but premiums can be raised as long as the premiums are raised for an entire
COBRA Coverage Time
18 months for reduction in hours or normal termination
Everything else is 36 months
Medicaid
Federal program that provides medical benefits for low-income persons. Individuals entering nursing home can apply/are eligible for Medicaid once assets are spend down (there may be penalty period based on amount of assets gifted in the 5 years prior to e
Private Long Term Care Policy
provides coverage for nursing home stays and other types of care not provided by health insurance
must be chronically ill or suffer from substantial cognitive impairment (chronically ill = unable to perform 2/6 ADLs for at least 90 days)
Any Occupation
definition for being totally disabled in a disability income policy. person cannot perform any occupation he/she is qualified
Modified Any Occupation
definition of being disabled if unable to perform duties of gainful occupation they're reasonably fitted by education, experience, training or prior economic status
Split Definition
begins with own occupation and moves into modified any occupation after a year or two under the own occupation definition
Residual Benefits
disability insurance characteristic where if the insured goes back to work at less pay, the policy will pay the difference between current income and income prior to disability
Taxation of Insurance Products
- premiums paid by employer are generally tax deductible
- if premiums are tax deductible for the employer, then the benefit is taxed for the employee
Basic and Broad Coverage HO Insurance
named perils" policies, losses resulting from perils not specifically named are not covered
Open Perils Coverage
all losses are covered except those losses specifically excluded
General Exclusions in All Dwelling Policies
- Ordinance of law
- Earthquake
- Flood
- War
- Nuclear
- Intentional losses
- Government seizure
Endorsement
a supplement to an existing policy that provides additional coverage
HO Policies
HO1: Fire, smoke, lightning, windstorm
HO2: Snow, Ice, Falling objects
HO3: Dealing with glass or safety material, like 2
HO4: Renters Policy: items are limited, cover $1000/piece but only up to $5000 covered etc
HO5: Like 4 but covers dwellings
HO6: Cond
Section I Coverages
Coverage A: Dwelling (attached structures)
Coverage B: Other Structures (detached)
Coverage C: Personal Property (contents)
Coverage D: Loss of Use (damage so bad I can't live there)
Coverage E: Liability (I am in trouble)
Coverage F: Medical Payments to
Personal liability umbrella policy
Provides excess liability coverage and additional coverage for home owner's and automobile insurance.
A client without an umbrella policy or one too low to meet the underlying policy limits is considered to have a deficiency in their plan that needs to be
Social Security Beneficiaries
- a disabled insured worker under age 65
- retired
CFP PRACTICE EXAM QUESTIONS
CFP PRACTICE EXAM QUESTIONS
Impact of yield changes on mutual life insurance companies
When yields on invested assets go up, they may increase the dividends paid on whole life insurance. Policyholders are basically like stockholders and they benefit from increased earnings.
Medicare Eligibility
Anyone over 65 who is eligible for social security is eligible for Part A. Others over 65 may join and pay a premium. Certain disabled also eligible without regard to age. Everyone pays premium for Part B.
If Ee is covered by employer when they turn 65, t
Medicare Benefits for Lengthy Hospital Stay
$300/day for first 20 days
$129.50/day for next 80 days
No benefit after 100th day.
*coverage starts after 3rd day
Accumulation Value on Annuity Policy
Step 1: Calc index gain:
Value of Index B / (Value of Index A - 1)
Step 2) Multiply index gain by participation rate to get net return
Step 3) Multiply value in step two by initial investment amount