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145 Cards in this Set

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Pell Grants
Available to full or part time under graduate students.

Must have financial need, and complete a FAFSA
Elements of an insurable risk
The loss must be measurable
The loss must be accidental or Fortuitous
Dis-Advantages of Self Insurance
You must duplicate Services offered by the insurer.
No impartial claims service
Advantages of Self Insurance
No selling cost
Roles of an Adjuster
Determine if there was a loss covered by the policy
Handle settlement of certain losses
Duties of the courts in regulating Insurers
To render decisions on the meaning of policy terms.
To rule on the constitutionality of Insurance laws.
Characteristics of an un-endorsed
HO 00 03
Open peril coverage on the dwelling
Broad form coverage on personal property
What are the steps of the Financial Planning Process
E.G.A.D.I.M
Establish and Define relationship, Gather Info,
Analyze and evaluate,
Develop, and present plan
Implement
Monitor
Step one of E.G.A.D.I.M.
Establish and Define Relationship:

*Explain the planning process
*Explain services provided
*Inform of docs required
*Clarify planner and client responsabilities
Step two of E.G.A.D.I.M.
Gather Info

*Use interview questions
*Determine goals, needs, priorities
*Get Docs
*Risk tolerance and time frame
*Determine Values and Expectations
Step three of E.G.A.D.I.M.
Analyze and Evaluate

*Current financial status
*Special needs
*Risk/Insurance status
*Investments/retirement
*Taxation
*Real estate
*Employee benefits
Step four of E.G.A.D.I.M.
Develop and present Plan

*Prepare plan specific to client
*Plan must address and prioritize: cash flow, estate tax, capital needs, income tax, benefits, investments, and liability risk.
*
Step five of E.G.A.D.I.M.
Implement the Plan

*Assist the client with Implementation
*Coordinate with other professionals
Step six of E.G.A.D.I.M.
Monitor the Plan

*Monitor progress
*Review changes in law
*Update client info
Statement of Financial Position
*Statement of assets, liabilities, and net worth on a specific date
*i.e. as of December 31 20XX
*Assets - Liabilities = Net Worth
Assets = Liabilities + Net Worth
Cash Flow Statement
*Statement of inflows and out flows over a period of time
*i.e. For the year ending December 31 20XX
Emergency Funds
3-6 months of expenses, preferably 3 months for dual income, 6 months for one earner.
Save X% of your gross income
5-10%
What is the Current Ratio?
The current ratio measures a firms ability to pay off current debts with current assets (cash and equivalents, receivables, inventory)

Current assets / Current liabilities
What is the acid test ratio?
Similar to Current ratio, but take away inventory from the calculation.

Cash and equivalents, receivables /Current liabilities

Use to determine how easy it would be to pay off current liabilities with most liquid current assets
Consumer Debt should not exceed:
20% of net income
Important things to remember about budgets:
They can be mis-leading

Do not attempt 100% accuracy

Use budget to measure accomplishment
Housing cost (PITI) should not exceed:
28% of Gross Income
Your total monthly payments should not exceed:
36% of Gross Income
What is the kiddie tax?
Applies to Investment income greater than $1,700 (indexed)

* For children under 19 Y.O. or under 24 if a full time student
*First $850 is untaxed(standard deduction)
*Second $850 is taxed at childs marginal tax rate
*Anything over $1,700 is taxed at parents marginal rate.
Closed Vs. Open Ended Leases
Closed end: Lessee walks away at the end of the lease, only money that may still be due is from damages or excess mileage.

Open ended: at lease termination, the appraised value of the asset will determine any further monies due from or owed to the Lessee.
Section 529 Plan
*Vary by state
*May Allow out of state contributions
* Custodian controls distributions
*Withdrawals tax free as long as used to pay for qualified college expenses (Tuition, books, Supplies room and board)
*Can be transferred to nuclear relatives, in laws and first cousins. Also can be rolled over to just about anyone
Coverdell Education Savings Account
*Originally called "Education IRA"
*Put in up to $2,000 per year
*Can pay for elementry, secondary, and college expenses.
*Must be distributed within 30 days of when individual reaches 30 years of age
Agent
*insurer is legally bound to actions of the agent!
*Does not represent the insured
*Rep of the insurance company
Broker
*Can not bind risk to the insurance com.
*Represents the insured
*Not an agent of the insurance com.
Principles (insurers) are liable for the actions of an agent if:
There is:
Express authority (contractual)
Implied (not stated but assumed duties)
Apparent (Ostensible, if the insurance company doesn't block it or clearly dispute the actions of the agent)
Principles may not be liable for actions if:
*Must notify the insured their not ratifying the acts of the agent
*No policy issued
*Premiums returned
Steps of the Claims Process:
1. Notice: Notify insurer of loss ASAP
2. Investigation: Insurer determines if there was a loss covered by the policy.
3. Proof of loss: Sworn statement by Insured
4. Payment or denial
Options of the Insurer for settling claims
1. Replacement (repair or replace rather than pay ACV)
2. Abandonment or Salvage
(property is taken over by insurer)
3. Pair or set (repair, replace or pay ACV)
General Agent
Independent business people empowered by an insurance company to to sell and appoint agents in a specified territory.
Independent Agent
Generally represent several Property and liability companies. Do business under the American Agency System.
Captive Agent
Represent one or one group of companies. Can only use other insurers if their company doesn't offer the product the customer needs.
Career agent
Usually work with a General agent or a or an agency manager, associate with one company but maintain relationships with other companies to fill client needs.
Producing General Agents
Same as a General Agent, except:
*Usually actually sell themselves (dont hire or train other agents)
*Don't have designated territories
*May represent more than one life company
Surplus Line or Excess Line Brokers or Agents
Handle insurance that cannot be purchased in he state for any reason.
3 reasons to regulate the insurance Industry:
To avoid market Failure
(too much or too little ins. at too high or too low of prices i.e. monopoly)

Public Choice
Keep the companies smaller and more efficient if they want to compete

Capture:
Regulators tend to come from the industry they regulate
How does the Legislative branch regulate insurance?
*Enacts law to govern insurance companies within its own state boundary
*Standards of solvency
*Regulates rates of investment
*Licensing of Agents
Who is the State Commissioner?
*Is the central regulation figure in each state
*Makes rulings that are binding into law
*Exercises judicial power in implementing and enforcing the states insurance code.
NAIC
National Association of Insurance Commissioners

*No legal Power
*Shares Ideas
*Seeks to Standardize state regulation
Twisting
Convincing customer to cancel a policy just to replace it with another for a profit
Rebating
Returning Premium to induce a customer to purchase insurance.
Investment Advisors Act of 1940
(IAA)
*Meant to protect the public and investors from malpractice by those that advise about securities
*requires disclosure, stops illegal profit sharing, makes it unlawful for advisor to engage in fradulant conduct.
SEC Release IA-770
*Indicates how the SEC will enforce the IAA
What are the three (IAA) test to determine if one is an Investment Adviser or not
1. Are you Providing Advice?
2.Are you in the business of Giving advice?
3.Do you receive compensation for advice?
What are the six categories of exceptions under the definition of Financial Advisor
1.Bank or bank holding co.

2.Lawyer, Engineer, Teacher etc. whose advise is incidental to their profession.

3.Broker or Dealer whose advise is incidental and non-compensated

4.Bona-fide News paper or Fin. Publication

5.only advise about securities issued and garunteed by the U.S. Gov.

6.Any others the SEC deems (none now)
What are the three Investment Advisors that are exempt from registering
1. Intrastate advisers who have clients in one state only and doesnt offer securities available on national exchanges

2.An Advisor whose only clients are insurance companies

3.A private Advisor who:
during the past 12 months had
less than 15 clients

doesnt hold themselves out to the
public as an adviser

Doesnt act as such for a registerd
investment company
Form ADV (I&II)
and
U-4
ADV (I) General Info, name, location year of business, background, types of clients.

ADV (II) Detailed info specific types of products and services, fee structure, business associates and balance sheet

Form U-4: Must be submitted on behalf of every IAR seeking employment at an IA
SEC or State registration?
Under $25 million in AUM register with the state

Over $30 million register with the SEC
What is the brochure rule?
Registered Investment Advisers must provide all clients (current and prospective) with a copy of the ADV(II) or something that is equivalent

Must be delivered at least 48 hours prior to entering into a contract, and every year there after (or at least an offer to deliver it)
Who is FINRA?
*Not a government agency
*Self regulatory agency
*Registered with the SEC
*If you want to sell certain products you will need to pass correlating FINRA exams
Types of FINRA Exams
Series 6: Mutual Funds, UIT's, variable life insurance and annuities

Series 22: Direct participation programs: Oil and Gas, Real Estate Syndications.

Series 62: smaler version of the series 7, no options
Steps of the Risk Management Process
1. Identify Risk Management Goals
2. Gather important data
3. Analyze
4. Construct a plan
5.Implement
6. Monitor
What are some tools that will help gather risk info from a client?
1. Insurance policy checklist
2. Risk analysis questioner
3. Financial checklist
4. A review of the clients personal and
private activities
The 3 Rules of Risk Management
1. Don't risk more than you can afford to lose
2. Consider the Odds
3. Don't risk a lot for a little
What is the large loss principle?
Losses that can have catastrophic results must be the first to be insured!
What are the four elements of an Insurable Risk?
A. There must be enough similarity between the risk to create some predictability

B. The Loss produced by the risk must be definite and measurable

C.The loss must be fortuitous or accidental

D. The loss must not be
catastrophic to the insurer
What is the purpose of underwriting?
Is the process of selecting and classifying risk.
Post Selection Underwriting
Reviewing and possibly canceling policies before it expires (becoming illegal in some states)
Five sources of information used for underwriting
The application

Info from the Agent or Broker

Investigations

Information Bureaus

Examinations or inspections
Risk Avoidance
Staying Away from the risk activity all together. Use when risk is high in severity and frequency
Risk Retention
Just dealing with the risk by paying for any losses that may occur. Use when risk is low in severity and frequency
Risk transference
AKA insurance, use when risk is high in severity, but low in frequency.
Risk reduction and sharing
reduction lowers chances a risk will occur, and sharing spreads the responsibility for handling a loss to others (incorporation).
What is adverse selection and why is it a problem?
The tendency for worse than average risk policy holders to purchase or continue coverage, this negatively affects insurers ability to make predictions about future losses.
Three risk exposures that may necessitate Life Insurance
1. Death before Debt repayment

2. Spouse outliving pension

4. Death befor reaching life goals
Family risk exposures when a primary income earner dies
1. Final expenses

2. Contingent Liabilities

3. Dependant Income

4. Education

5. Family Goals

6. Support of parents
Closely held business risk exposures that may merit life insurance
1. Death of a partner
2. Death of a key employee
3. Losing key employee to competition
4. Illiquidity of business in the event of an owners death
What is a Buy-Sell agreement and how can life insurance be helpful in exercising it?
Buy-sells often occur when it is necessary to transfer the ownership of a dead partner to the remaining owners.

They take many forms such as:
Stock redemption
Cross purchase
Wait and see
Third Party

Life Insurance can provide the funds necessary for the buy out
Term Insurance
Protects against loss due to death during a specified time period.

initial premiums are lower than whole
but premiums increase over time

does not accumulate cash value

At end of policy term policy owner may be declined for renewal
Whole life insurance
provides guaranteed protection for the entire life of the insured

provides guaranteed nonforfeiture values that can be used as forced savings

Has a guaranteed level premium for life of the insured

death benefit guaranteed for life of insured

can be borrowed against

can be used for emergencies
Limited pay whole life
Same as whole Life but premiums are higher and last for a shorter time period
Universal Life Insurance
Technical name is flexible adjustable life

has a cash value fund that grows tax deferred and has a minimum guaranteed rate of intrest

includes flexible premium payments

adjustable death benefits

unbundled in structure

level death benefit is called type 1 or A
increasing death benefit is called type 2 or B
Advantages and Disadvantages of Universal Life
Has flexible premium payments and adjustable benefits

provides full disclosure every year

Unbundled format
---------------------------------------------------

may not give best insurance protection or savings rates

future yield is uncertain

there is no guarantee that what you choose to pay in will give enough benefit
Variable Life Insurance
Combination of protection and growth potential from investments

Sub accounts hold investments

Has Guaranteed premium and Benefit but no guaranteed cash value
Variable Universal Life Insurance (VUL)
Flexible premium and death benefit like Universal

Investment choices for cash fund

no guarantees at all except to keep coverage in force
Interest sensitive whole life
Whole life plan that reacts to interest rates by fluctuating the premium or cash value depending on the plans structure
Adjustable Life Insurance
Combo of Term and Whole

-Premium and face amount are adjustable at any monthly policy anniversary

-Can change back and forth from Whole to Term
Indeterminate premium policy
Whole or Term policy with maximum guaranteed premium.

premiums fluctuate
Participating vs. Non-Participating Life insurance
Dividends of Participating plan may be paid to owner as a tax free return of premium

Non-Participating do not pay, but may increase the cash value
Irrevocable Beneficiaries
Must affirm ANY changes in a life insurance policy
Common insurance plan clauses
Entire Contract-
The Policy and Application constitute a contract between ins co. and insured.

Ownership-
Ins policy is personal property

Incontestable-
after policy has been in force for 2 years the validity of the contract can not be questioned, except for fraud

Misstatement of age-
If you lie about age the Ins Co. can adjust the ins accordingly

Grace period-
Allows a premium to be paid late, usually 30 or 31 days

Reinstatement-
If grace period is exceeded allows certain period of time where policy can be reinstated pending evidence of insurability
Viatical Agreement
Policy owner can sell their life insurance to a third party (or Viatical firm). Take estimated payout and subtract estimated premiums paid until that point and determine a value at which to sell the policy.
Cash or Loan Value
Also known as the "Surrender Value"
You want to borrow or pull the money out

($ per thousand of death benefit i.e. $100 per thousand = $1000 on a $100,000 contract)
Reduced Paid up Insurance
You want to stop paying premiums but want the policy to stay intact

($ per thousand of death benefit i.e. $100 per thousand = $1000 on a $100,000 contract)
Extended Term Insurance
You want to stop paying premiums and just buy the original face amount amount in Term Insurance instead.

(Expressed in terms of years and days)
What are the Non-Forfeiture options of a life insurance Policy?
Cash or Loan Value (Surrender value)

Reduced Paid up Insurance

Extended Term Insurance
Types of Dividend Options
Cash

Paid up Dividend Additions

Reduced Premium

Accumulate at Interest

One Year Term
Paid up Dividend Additions
Also called (PUA's)

This allows for the purchase of additional net cost insurance!

Can be added on each year regardless of health or occupation.

No further Premiums are due on it, but it pays dividends!

Defers Taxes!

Best combination of increased death benefit AND cash value
Reduced Premium (Dividend Option)
Decreases out of pocket expenses
Accumulate at Interest
Money is managed professionally and at a guaranteed minimum rate.

Dividends are tax free, but the interest THEY generate is not.

Worst tax implications
One Year Term (Fifth Dividend Option)
Usually used in conjunction with one of the other Dividend options.

Allows for the acquisition of inexpensive insurance that is equal to the guaranteed cash value.
Settlement Options for Life Insurance or Annuities
Lump Sum

Interest Option

Installments for a fixed Period

Installments for a fixed Amount

Life Income Options:
Straight Life
Life Income, period certain
Life Income with refund
Joint and survivor income
Interest Option (Settlement Option)
Proceeds of the policy stay at with Insurance company (to be paid out at a later date)

Only Interest is paid to the Beneficiary (At a minimum guaranteed amount)
Installments for a fixed Period (Settlement Option)
Policy owner (or the beneficiary) may choose to have the proceeds paid out over some specific time period.
Installments of a Fixed Amount
(Settlement Option)
Policy owner (or the beneficiary) may choose to have the proceeds paid out in some specified amount for however long they will last.
Life Income Options (4)
(Settlement Options)
Income is paid out in form of an Annuity. Payments can be given to someone other than whose life the annuity was based on. (Wierd right?)

1. Straight Life: Paid out on basis of life expectancy (most basic)

2. Life Income, Period certain: (Also called C&C) Beneficiary is paid a life income for a guaranteed minimum number of years

3. Life Income with Refund: LIfe Income, but if there is some value left at the end, it can be given to a contingent beneficiary

4. Joint and survivor Income: Gives income to two payees, which continue even if one dies.
Life Insurance Rider:
Renewability Provision
Guaranties the ability to renew a policy for a specified amount of periods.

(For Term Insurance duh!)
Life Insurance Rider:
Conversion Provision
Ability to convert a Term policy into some type of permanent Insurance with out having to prove any evidence of insurability!
Life Insurance Rider:
Common Disaster Clause
In case of a disaster, if the insured dies and then the Beneficiary some time (up to 30 days later) it will be as if the beneficiary died first.

The goal is to not dis-inherit any contingent Beneficiaries.
Life Insurance Rider:
Spendthrift Clause
Meant to stop Beneficiaries from assigning $$$ from policy proceeds. However after the $$$ is theirs they can do with it what they please
Life Insurance Rider:
Disability Waiver of Premium
If policy owner becomes totally disabled they will not have to make premium payments.
Life Insurance Rider:
Accidental Death Benefit
If the insured is killed by an accident, and death occurs within 90 days of the accident an additional sum will be paid
Life Insurance Rider:
Guarantied Insurability
Policy owner may purchase additional insurance at stated intervals with out providing proof of insurability.
Five ways Annuities can be classified
1. Method of payment/ Accumulation
Fixed or Variable

2. # of lives covered
Single or joint and Survivor

3. When payments start
Immediate or Deferred

4. Method of Premium Payment
Single or period of years

5. Nature of Insurers Obligation:
Pure life, Refund, period certain
Joint and Survivor Annuity
Covers two or more annuitants, with payments continuing until death of last survivor
Immediate Annuity
Benefits payable right away
Deferred Annuity
May be a spread of years between purchase and payments. May have a tax deferred gain.
Single premium Annuity
One Premium is paid as opposed to an installment payment plan.
Pure life/ Straight life Annuity
Payments made for annuitants entire life

Done, or "fully liquid" at time of death, i.e. nothing goes to estate

Provides maximum income per dollar of Principle
Life and Period Certain Annuity
Payments made for the life of the annuitant, but guaranteed for a certain # of years regardless if the annuitant lives for the certain amount of years.
Joint Life Annuity
RARELY used because after either annuitant dies, payments cease completely.
Refund Annuity
If there is value left at the Annuitants death, the remainder will be paid to a beneficiary (lump sum or installments)
Pure Life Immediate Fixed Annuity
Guarantied income for annuitants life (cant outlive it) starting right away, nothing left when he/she dies. No estate tax to worry about.

Does not grow with inflation, its fixed so you get what you get. Cant get at the principle.
Deferred annuities
Tax deferred
choose fixed (guarantied) or
variable (moves with the Market)
Tax penalties for early withdrawal
What is the Purpose of life insurance policy reserves?
To pay all future benefits or non-forfeiture values
how to calculate the inflation adjusted interest rate
1 + After tax return
-------------------------- -1] X 100
1 + inflation rate
Deductible
Initial Amount Insured must pay before insurance coverage begins

Higher deductible, lower Premiums
Coinsurance (participation percentage)
defines what portion of covered medical expenses is paid by insured and what portion is paid for by the plan.

Its purpose is to discourage insureds from abusing coverage and seeking unnecessary medical care
Stop-loss limit
The amount of covered expenses, beyond the deductible, that is shared at the coinsurance rate.
Breakpoint
The dollar amount at which the insurer has to start paying 100% of the covered cost (up to the maximum)
Capitation
Payment of an annual or monthly fee to providers (as opposed to a fee per service)
4 types of Medicare coverage
Part A: Hospital Coverage

Part B: Physicians and out of Hospital coverage

Part C: Medicare Advantage: Alternatives to traditional medicare coverage

Part D: Prescription Drug coverage
5 major plan options available under Medicare Advantage
Medicare HMO's

Medicare PPO's

Private Fee for Service Plans

Special Needs plans

Medicare MSA
What is Medigap?
A group of special policies designed by the NAIC and developed by commercial insurers and BC/BS as supplements to cover the gap between what medical care cost and what medicare pays.

Known as Medicare supplement policies, or the 10 NAIC designed plans
Exclusions
Medical services for which the plan specifically excludes
Pre-existing conditions Clause
Excludes medical conditions for which were previously treated or which a prudent person would have sought treatment BEFORE coverage began.
Utilization Review
Procedure is reviewed and authorized by the insurance company before it occurs, or shortly after in emergency circumstances.
UCR or Surgical Schedule
Max amount an Insurer will pay for service in a given area
Internal Policy limits
Limits for specific illnesses or procedures that fall below policy overall benefits
Coordination of benefits clause
Clause that stops insured from using more than one policy to collect more than 100% of expenses
Supplemental Coverages
Modified or additional coverage available for extra premium
PPO
Utilizes a network or doctors or hospitals to lower cost (similar to HMO)

No referral is necessary to see a specialist
HMO
Provides comprehensive health care for co-payments and periodic payments. (usually no deductible or co-insurance)

Limited network of Doctors must be used

Must get a referral to see a specialist

Usually cost less

Covers preventative care (usually)
Comprehensive Major Medical Insurance
Wide choice of Providers

High premium

Very high coverage limits

Very few care exclusions

has high out of pocket expenses to meet deductible
HIPAA provision reducing "Job Lock"
HIPAA helps to limit pre-existing condition exclusions. It sets the limit at 12 months for new insureds. It also allows this exclusion to be cut down by up to the entire 12 months using any prior coverage using a day for day match system. i.e. if the insured had 11 moths of continued coverage before switching they would only have one month of pre existing condition exclusion in the new policy. Any breaks in coverage of over 63 days will constitute a reset of the system.

Alt insurance types like disability, dental or workmans comp dont count.
COBRA
Alllows an employee to keep their heath care plan when leaving an employer. Must pay the premiums plus up to a 2% fee.
Indemnity
Should mean that the insured is restored to their original financial position after a loss.

Unfortunately in the insurance world certain supplemental health coverages are called "Indemnity plans" even though the amount that they compensate is not proportionate to the loss, but rather some predetermined amount.
Medicade
Program for low income individuals. Federally created but mostly state run.
Medicare
Federal health care for people over age 65, certain handicapped persons and those with end-stage kidney disease. Yuk.
Major Medical coverage
Vs.
Comprehensive Major Medical coverage
MMC: Has high limit per loss, not many exclusions, and uses deductibles, co-insurance and the stop loss limit. Designed to take over where a base plan leaves off.

CMMC: Same as MMC, but it is a stand alone coverage that does not need a base plan underneath it.