CFP Insurance Review Exam Questions & Answers Graded A+
Subrogation Clause- - ANSWER-The insured cannot claim money from both the insurer
and a 3rd party. If the insured receives compensation for loss from the insurer, and sues
the 3rd party (or 3rd party's insurer) for additional funds, the insurer has the right to all
funds in order to recoup their costs.
Characteristics of Insurance Contracts- - ANSWER-"Adhesion: insurance policy is take
it or leave it. No negotiations over terms an conditions. This means ambiguities in
contract are found in favor of the insured.
Aleatory: money exchanged may be unequal. Small premium, huge payout.
Unilateral: One way promise of the insurer to pay in the event of loss.
Conditional: Insured must abide by terms/conditions of contract. I.e. person with leak
roof leaves it unreported for 3 weeks, house caves in.
"
Types of Authority- - ANSWER-"Express: written authority.
Implied: authority perceived by public. I.e. contract delivered, and premium excepted.
Insurer is still responsible even if client is misled
Apparent Authority: pretty much the same as implied authority.
"
Coinsurance- - ANSWER-Insurer has the pay the greater of: (Face Value divided by
coinsurance) x loss) - deductible. Or ACV = loss - depreciation.
6 Steps of Risk Management- - ANSWER-"DIE DIE!
Determine objectives
Identify risks client is exposed to
Evaluate identified risks for probability and potential loss
Determinealternatives for risk management & select appropriate ones.
Implement the program
,Evaluate, monitor, & review.
"
Risk Management Guidelines- - ANSWER-"Risk Avoidance: use this for the most
serious types of risk. Avoid altogether
Risk Transfer: use insurance to transfer risk for severe risk of low frequency
Retention: retain the risk when financial risk is low and frequency is high, because
insurance is too expensives (i.e. dings in your car).
"
Term Life Insurance Provisions- - ANSWER-"1. Renewable: usually without evidence of
insurability
2. Convertible: can be converted to whole life policy without evidence of insurability.
3. Waiver of Premium: if insured becomes totally disabled, preimums are waived during
period of disability.
"
Life Ins. Dividend Options- - ANSWER-"1. Nonparticipating: whole life policy that
doesn't pay dividends
2. Participating: whole life Policy that does pay dividends. CRAP-O
Cash
Reduce Premiums
Accumulate at Interest (tax free up until client's basis in policy)
Paid-up Additions (purchases additional insurance covereage)
One-year Term: Adds term insurance each year. the 5th option.
"
Life Ins. Nonforfeiture Options- - ANSWER-"REC.
Reduced paid-up insurance: receives cash value in the form of a small whole life policy
with lesser face value.
, Extended Term: cash value turns into a paid up term polciy for specified duration with
same face as original policy.
Cash Surrender: client receives accumulated cash value minus surrender charges
"
Universal Life Insurance- - ANSWER-Similar to whole life policy, except the insured
cannot direct the investment portion themselves. The Preimus paid, face value, and
cash value can all be adjusted by the insured. Two types, A & B. A has a level death
benefit until cash value becomes almost as large as the death benefit, then they rise in
tandem. B is more expensive because you pay for a guaranteed level of insurace aboe
your cash value at all times.
MECs- - ANSWER-Modified Endowment Contract. 10% penalty applies if withdrawn
before age 59.5. A policy is a MEC if it fails the 7 pay test: premiums paid exceed
premiums due for time period considered. At death, the poicy benefit will be income tax
free, but taxable in the estate JUST LIKE a normal life insurance policy.
Transfer for Value ins. Exceptions- - ANSWER-"Transferred to:
1. Insured
2. Businesss partner or partnership of insured
3. Corporation which insured is shareholder or officer
4. Transfer that results in carryover basis from transferor to transferee.
"
Premium Tax treatment- - ANSWER-"1. Deductible by employer
2. Not deductible to employee
3. Premiums considered taxable income to employee.
4. First $50,000 of coverage is not taxable to an employee, benefits in excess of this
amount must be imputed to the employee.
"
Subrogation Clause- - ANSWER-The insured cannot claim money from both the insurer
and a 3rd party. If the insured receives compensation for loss from the insurer, and sues
the 3rd party (or 3rd party's insurer) for additional funds, the insurer has the right to all
funds in order to recoup their costs.
Characteristics of Insurance Contracts- - ANSWER-"Adhesion: insurance policy is take
it or leave it. No negotiations over terms an conditions. This means ambiguities in
contract are found in favor of the insured.
Aleatory: money exchanged may be unequal. Small premium, huge payout.
Unilateral: One way promise of the insurer to pay in the event of loss.
Conditional: Insured must abide by terms/conditions of contract. I.e. person with leak
roof leaves it unreported for 3 weeks, house caves in.
"
Types of Authority- - ANSWER-"Express: written authority.
Implied: authority perceived by public. I.e. contract delivered, and premium excepted.
Insurer is still responsible even if client is misled
Apparent Authority: pretty much the same as implied authority.
"
Coinsurance- - ANSWER-Insurer has the pay the greater of: (Face Value divided by
coinsurance) x loss) - deductible. Or ACV = loss - depreciation.
6 Steps of Risk Management- - ANSWER-"DIE DIE!
Determine objectives
Identify risks client is exposed to
Evaluate identified risks for probability and potential loss
Determinealternatives for risk management & select appropriate ones.
Implement the program
,Evaluate, monitor, & review.
"
Risk Management Guidelines- - ANSWER-"Risk Avoidance: use this for the most
serious types of risk. Avoid altogether
Risk Transfer: use insurance to transfer risk for severe risk of low frequency
Retention: retain the risk when financial risk is low and frequency is high, because
insurance is too expensives (i.e. dings in your car).
"
Term Life Insurance Provisions- - ANSWER-"1. Renewable: usually without evidence of
insurability
2. Convertible: can be converted to whole life policy without evidence of insurability.
3. Waiver of Premium: if insured becomes totally disabled, preimums are waived during
period of disability.
"
Life Ins. Dividend Options- - ANSWER-"1. Nonparticipating: whole life policy that
doesn't pay dividends
2. Participating: whole life Policy that does pay dividends. CRAP-O
Cash
Reduce Premiums
Accumulate at Interest (tax free up until client's basis in policy)
Paid-up Additions (purchases additional insurance covereage)
One-year Term: Adds term insurance each year. the 5th option.
"
Life Ins. Nonforfeiture Options- - ANSWER-"REC.
Reduced paid-up insurance: receives cash value in the form of a small whole life policy
with lesser face value.
, Extended Term: cash value turns into a paid up term polciy for specified duration with
same face as original policy.
Cash Surrender: client receives accumulated cash value minus surrender charges
"
Universal Life Insurance- - ANSWER-Similar to whole life policy, except the insured
cannot direct the investment portion themselves. The Preimus paid, face value, and
cash value can all be adjusted by the insured. Two types, A & B. A has a level death
benefit until cash value becomes almost as large as the death benefit, then they rise in
tandem. B is more expensive because you pay for a guaranteed level of insurace aboe
your cash value at all times.
MECs- - ANSWER-Modified Endowment Contract. 10% penalty applies if withdrawn
before age 59.5. A policy is a MEC if it fails the 7 pay test: premiums paid exceed
premiums due for time period considered. At death, the poicy benefit will be income tax
free, but taxable in the estate JUST LIKE a normal life insurance policy.
Transfer for Value ins. Exceptions- - ANSWER-"Transferred to:
1. Insured
2. Businesss partner or partnership of insured
3. Corporation which insured is shareholder or officer
4. Transfer that results in carryover basis from transferor to transferee.
"
Premium Tax treatment- - ANSWER-"1. Deductible by employer
2. Not deductible to employee
3. Premiums considered taxable income to employee.
4. First $50,000 of coverage is not taxable to an employee, benefits in excess of this
amount must be imputed to the employee.
"
