CFP Exam Prep Cards - Section 2 - Insurance Planning Flash Cards

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Title: CFP Exam Prep Cards - Section 2 - Insurance Planning
Description: CFP Exam Prep Cards for Section 2 of the Exam - Insurance Planning
Number of Cards: 159
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Author: andychief6
Created: 2010-03-04
Tags: cfp
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    • Question
    • Answer
    • Side 3
    • Hazard
    • condition that increases the probability of loss
    • Peril
    • the cause or reason for loss
    • Risk
    • the potential for loss
    • Crime
    • wrongs against public
    • Tort
    • private misdeeds violating the rights of another person
    • Examples of intentional Torts
    • assault, libel, trepass, invasion of privacy
    • Examples of unintentional Torts
    • negligence and carelessness
    • Negotiable instrument
    • contract used as a substitute for money
    • Examples of Perils
    • fire
      windstorm
      theft
    • 3 types of hazards
    • 1) physical hazards
      2) Moral hazards
      3) Morale hazards
    • Physical hazard
    • physical properties (like volatility) that increase hazard
    • Moral Hazard (not Morale)
    • qualities in individuals (like dishonesty) that increase the risk of loss
    • Morale Hazard (not Moral)
    • knowing the risk and taking it anyway
    • The law of large numbers
    • when something occurs a large number of times it is easier to predict aspects of it
    • Adverse selection
    • people who are aware opf the vulnerability to a certain peril are more likely to acquire insurance against it
    • CLASSIFICATION OF RISK
      Financial Risk
    • financial loss
    • CLASSIFICATION OF RISK
      Static Risk
    • more easily covered by insurance, common economic risks
    • CLASSIFICATION OF RISK
      Dynamic Risk
    • associated with changes in the economy (price level or consumer tastes)
    • CLASSIFICATION OF RISK
      Fundamental Risk
    • not particular to any individual - responsibility of society
    • CLASSIFICATION OF RISK
      Particular Risk
    • felt by individuals, more commonly coevered by insurance
    • CLASSIFICATION OF RISK
      Pure Risk
    • chance of loss or no loss (Pure risk is insurable)
    • CLASSIFICATION OF RISK
      Speculative Risk
    • there can be both a risk of loss or a chance of gain (gambling) - THIS IS NOT INSURABLE
    • MANAGING RISK
      Risk can be (5):
    • 1) avoided
      2) retained
      3) transferred
      4) shared
      5) reduced
    • MANAGING RISK
      Risk Retained
    • Voluntary or involuntary submission to risk (common when potential risk is small)
    • MANAGING RISK
      Risk Transferred
    • shift of risk from one individual to another who is more equipped to handle it (insurance company)
    • MANAGING RISK
      Risk Shared
    • risk may be shared (through corporation, LP, LLC)

      Health insurance with deductible and coinsurance
    • MANAGING RISK
      Risk Reduced
    • taking active steps to minimize the damage caused by risk with high frequency but low loss
    • MANAGING RISK
      Risk Avoidance
    • is the total refusal to perform a risky bahavior
    • Mortality
    • the rate at which a population dies
    • Morbidity
    • the likelihood of disability
    • Elements of a Contract (8)
    • 1. Insurable Interest
      2. Offer and acceptance
      3. Consideration (money)
      4. Legal object
      5. Competent Parties
      6. Legal Form
      7. Misrepresentation?
      8. Warranties
    • Charateristics of Insurance Contracts (7)
    • 1. Contracts of indemnity (cant make a profit)
      2. Personal Contract (not transferable)
      3. Contract of adhesion (take it or leave it)
      4. Contract of utmost good faith
      5. Unilateral contract (only one promise)
      6. Conditional (premium must be paid)
      7. Aleatory contract (outcome affected by chance, $'s collected cannot equal)
    • Defenses to Negligence (3)
    • 1. Contributory negligence (cannot be found liable if injured person was negligent in any way)
      2. Comparative negligence (client gets hit by a car when drunk - but other driver was speeding)
      3. Assumption of risk - (injured party fully understood the risk and took it anyway)
      GROSS NEGLIGENCE DOES NOT GET YOU OFF THE HOOK
    • Insurance sold by agents can be binding as a result of? (3)
    • 1. Expressed authority (comes directly from the company)
      2. Implied authority (if you walk into a State Farm office)
      3. Apparent authority (fraud by an agent)
    • Superannuation
    • the risk of outliving income and accumulated assets
    • General Provisions of Life Insurance contracts (3)
    • 1) final draft must be approved by State Commish of Insurance
      2) policy along with attached application represent the entire contract
      3) Age missrepresentation?
    • What if age is missrepresented on life insurance contract?
    • The insurance company has the right to adjust the amount of insurance that the premium paid would have purchased at the insured age
    • LIFE INSURANCE-OTHER PROVISIONS
      Grace Period Provision
    • 31 days - designed to prevent unitentional lapse in policy
    • LIFE INSURANCE-OTHER PROVISIONS
      Reinstatement provision
    • lapse period cannot exceed 3-5 years as defined in the contract / all premium that should have been paid are due
    • LIFE INSURANCE-OTHER PROVISIONS
      Suicide Provision
    • within 2 years, return of premium without interest
    • LIFE INSURANCE-OTHER PROVISIONS
      War Provision
    • return of premium and interest
    • LIFE INSURANCE-OTHER PROVISIONS
      Automatic Premium Loan
    • may obtain loan equal to the cash surrender value
    • Settlement Options Life Insurance proceeds (5)
    • 1. lump sum
      2. interest
      3. fixed-period installment
      4. fixed-amount installment
      5. life income (annuity option)
    • How is beneficiary of life insurance proceeds taxed when paid in installments
    • interest portion is taxable as interest income
    • What is the situation if an irrevocable beneficiary is named?
    • beneficiary retains a legal interest in the contract and the owner will be unable to change the owner or beneficiary without the sxpress consent of the current beneficiary
    • Life Insurance Premium Computation (3)
    • 1. Mortality
      2. Interest
      3. Loading
    • Are life insurance contracts contracts of indeminty?
    • NO - they make no attempt to restore the individual to his previous position
    • UL - UNIVERSAL LIFE
      Death Benefit?
    • may increase or deacrease death benefit as long as they maintain insurability
    • UL - UNIVERSAL LIFE
      Why is it reffered to as unbundled insurance?
    • because operating expenses, mortality charges, and cash buildup can all be viewed in the annual statement
    • UL - UNIVERSAL LIFE
      Similar to what other kind of Life policy
    • similar to Whole Life policy - except that the premium payment is flexible, death benefit adjustable, and investment and mortality risk are transferred to policy holder
    • WL - WHOLE LIFE
      Description
    • (a) insurance costs are spread out over life of insured
      (b) policies offer a level premium
      (c) provide gauranteed and fixed death benefit
      (d) balance between cash accumulation and insurance
    • WL - WHOLE LIFE
      Four basic types of Whole Life Insurance
    • 1) Ordinary WL
      2) Limited-Pay WL
      3) Single-Premium WL
      4) Graded-Premium
    • WL - WHOLE LIFE
      Ordinary WL
    • lowest premium rate / lowest cash value

      premiums payable throughout life
    • WL - WHOLE LIFE
      Limited-Pay WL
    • protection for life / paid up at retirement or other staage
    • WL - WHOLE LIFE
      Single-Premium
    • good tax-deffered investment / single lump sum payment
    • WL - WHOLE LIFE
      Graded Premium WL
    • low initial premium / increases for several years / ideal for starving students
    • VARIABLE WHOLE LIFE INS POLICY
      Description
    • (a) fixed premium just like WL
      (b) gauranteed DB
      (c) has flexibility of Variable policy
      (d) no guaranteed cash values
    • VARIABLE LIFE INSURANCE POLICY
      Descripton:
    • (a) owner is allowed to choose the investments
      (b) no guaranteed cash value or crediting rate
      (c) investments held in seperate accounts that RESEMBLE mutual funds
    • VARIBALE LIFE INSURANCE POLICY
      Risk in down market?
    • Policy holder will be charged a substantial amount just to keep that policy active in a down market.
    • Who is a FIRST TO DIE policy usually structured for?
    • Owners of a business, for the continuation of the business
    • How does a business structure a first to die policy?
    • (a) all the owners of the business are insured under the same policy
      (b) when the first owner dies the insurance company will make a payment that is used to purchase the deceased's share in the business
    • Who is a SECOND TO DIE policy usually structured for?
    • Usually purchased by married persons to help make estate tax payments
    • How do married individuals structure a SECOND TO DIE policy?
    • When first spouse dies the estate transfers to the living spouse, and when the second spouse dies the estate becomes taxable. This tax is paid by the insurance policy - and helps eliminate liquidity problems
    • Are ENDOWMENT policies used very much?
    • No - a tax law passed in 1984 eliminated the tax-advantaged buildup of an endowment's cash value
    • How does an ENDOWMENT policy work?
    • the death benefit will be equal to the cash value at maturity
      At age 100 cash value = death benefit
    • TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE

      Dividends exceed premium
    • Ordinary income
    • TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE

      Withdrawals within first 15 years of policy
    • LIFO
    • TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE

      Withdrawals after 15 years of policy
    • FIFO
    • TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE

      Modified Endowment Contract withdrawals and loans
    • LIFO regardless of age of contract
    • TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE

      Lump-Sum payments (beyond cost basis)
    • Ordinary Income
    • TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE

      Interest Payments
    • Oridinary Income
    • TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE

      Installment Payments (portion that is not return of principle)
    • Ordinary Income
    • TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE

      Transfer of life insurance policy (for valuable consideration to the extent proceeds exceed basis)
    • Ordinary Income
    • TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE

      Premiums (individual policies)
    • Generally not deductible
    • TAXATION OF LIFE INSURANCE ON LIVING BENEFITS DURING LIFE

      Premiums (corporation pays premium and is not beneficiary)
    • Deductible by employer and taxable as compensation to employee