RMI 270 Final Exam
RMI 270 Final Exam RMI 270
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This 9 page Study Guide was uploaded by Danielle Notetaker on Monday May 2, 2016. The Study Guide belongs to RMI 270 at Ball State University taught by Dr. Fitzgerald in Spring 2016. Since its upload, it has received 20 views. For similar materials see in Risk Management And Insurance at Ball State University.
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Date Created: 05/02/16
Class Lecture Notes for RMI 270 Final Exam Ch.6 Operations • Ratemaking-‐ the pricing of insurance and calculations in premiums • Underwriting-‐ process of selecting, classifying, and pricing applicants for insurance o Underwriting Principles: § Attain profit § Select insureds according to standards § Provide equity • When making decisions you can:: o Accept it o Accept it with changes o Reject it • Production = Sales • Producers = Agents Different Types: • Agent – represents the company, they have a contract with the company • Broker – represents the insured, NOT restricted to one company • Solicitor – hired by agent to solicit for them, go door to door to sell future business • Consultant – independent, does not work for a company Investments: • General account – all investments for all insureds • Separate account – variable Ch.11 Life Insurance • Death – is a certainty • Premature death – if you die prior to your life expectancy Why you need life insurance • Paying for final expenses such as…. o Nursing home o Funeral/burial o Personal bills o Paying mortgage debt o Legal fees How much life insurance do you need? • Multiple of earnings method: multiple annual earnings by an arbitrary number • Capital Retention: determine how much capital/money you need, you RETAIN the capital investment and NEVER spend it, you just live off the earnings from returns Term Insurance • Straight term – coverage remains the same while premiums increase • Decreasing term-‐ premiums remain the same while coverage decreases • Renewability – renew policy without evidence of insurability • Convertibility – covert to whole life policy without evidence of insurability • If you want maximum coverage and the maximum amount of protection, you should buy term life insurance • Term insurance: least expensive policy, but gives you the most protection per dollar o Only pays if death during the term o No savings component (not used for retirement savings) Disadvantages: • Does NOT build cash value • Premiums increase as you get older • Low interest rates raise premium prices Whole Life Insurance • More expensive, but it has cash value • Has limited payment (only pay for a fixed number of years) • Promises to pay the face amount of the policy at death or age 100 • Permanent protection • Non-‐forfeiture protection o Options include: guaranteed cash value, reduced paid up insurance, extended term • Reasonable cost • Flexibility 4/27 NOTES Retirement Planning: • Set your goals o At what age do you want to retire? o How much money will you need? • Estimating future retirement needs/income is difficult • Mistakes in Retirement planning o Start saving too late o Save too little money o Invest your money too conservatively (need to take more risks) o People only plan to save for only 10-‐15 years after retirement, but in reality people live longer o People believe that living expenses will be lower when they retire, which is NOT true o Never take money out of your retirement savings plan • Reasons people do not save: o Too young o Ill start saving next year o Spend bonus o My pension will work o My kids will take care of me o Too old o Expensive car Pension Plans o Defined Contribution: company guarantees contribution, but not a return on it or a retirement benefit Advantages: • Tax-‐deferred • Funded through payroll deduction • Employer usually matches what the employee contributes o Defined Benefit: company guarantees benefit but not contribution % of benefit x avg. salary x yrs of service • Guaranteed income • No investment risk • Not dependent on your ability to save • Tax deferred o Cash Balance Plan – bad for defined benefit plans o Money Purchase Plan – bad for defined contribution plan Retirement Products Available: o Annuities o Qualified plans – the IRS has approved it o Non-‐qualified plan o Defined contribution o Defined benefit • Profit-‐ Sharing Plan: based on the company’s profits, so if the company is not making a profit, then you will not have anything going into your retirement savings plan. If you leave your job (terminate), you will not get to take this money with you Tax Advantages for Qualified Plans • Tax deduction to the employer for employer contributions • Employee contributions are taxed free also Vested – you take the money from your retirement savings account even if your job is terminated or you leave your job • Vesting Schedules: as year of service increase, you will get a higher percentage of your money that you can take with you • Cliff Vesting-‐ you can only take all of your money after a certain number of years o Ex: In year 5, you can take 100% of your benefits 401(k) Plan – refers to the section 401(k) in the tax revenue code • Money is tax free until the money is withdrawn Factors that influence retirement planning: • Longevity • Inflation • Health • Pensions o Defined benefit o Defined contribution • IRA o Traditional IRA o Non-‐deductible IRA o Roth IRA-‐ no age 70 ½ you can contribute for as long you want, pay taxes now o Maximum limit = $5,500 tax free, income tax deductible o 59 ½ -‐ you cannot take the money out of your IRA before this age, if you do you will pay a 10% penalty tax o 70 ½ o minimum required distribution o money accumulates tax free o distributions are taxable o cannot invest in life insurance Things to know for Final Exam Ch. 11, 12, 14, 15, 16, 17, & 18 • Medical-‐ o Surgical expense, what does it cover? § Surgical expense pays the cost of surgery in or out of the hospital § NOT all procedures are covered, cosmetics NOT covered o Major medical policy: § High maximum -‐ $1,000,000 limit or more § Coinsurance – usually 80/20 § High deductible § Stop loss limit o Stop loss limit-‐ when you reach that number, copayments stop, 100% is covered/pay for § Deductible counts toward reaching the stop loss limit • Renewable features of contract o Conditionally renewable o Guaranteed renewable – the company guarantees renewable, but keep the right to increase premium • Pre existing conditions • Annuities o Life annuity with no refund-‐ largest income o Pure life annuity – MAXIMUM amount of income o Refund annuity – cash or installment, beneficiary will collect the refund if you die early o Annuity certain – no income for life, gives annuity for certain # of years, NOT suggested to buy o What is the risk of annuities for insurance companies? • Medical expense coverage – what is provided o Hospitalization – pays a portion of per-‐day room & board charges o Surgical expenses -‐ pays the cost of surgery in or out of the hospital o Physician expenses – pays for non-‐surgical hospital care, includes consultation with specialists and lab tests o Dental services – covers necessary dental care & some dental injuries, mostly offered through group insurance • Gatekeeper – managed care, HMOs • HIPAA o Key word is Portability-‐ know what this means • Coordination of benefits – o Jim & Pat each work and each company has group insurance. On Jim’s plan, pat is the dependent. If Jim goes to the hospital, his plan pays first & if money is still needed Pat’s plan will pay the rest. You do NOT get double benefits • COBRA – key provision – COBRA is good for 36 months!!! You can continue coverage for 3 years • Dental insurance • Cafeteria plans • Life insurance o Non-‐forfeiture options: § Guaranteed cash value § Reduced paid up insurance § Extended term • Settlement options specifically life income – cash, fixed amount, fixed period, life income o Life income-‐ more than one person § Joint & survivor • Variable annuities – surrender charge = money you do not get back o You can have a variable annuity, where when you go to cash in, you will NOT get all of your money back b/c there is a surrender charge, say 4%, which you will not get back OR upfront load that you will NOT get back • Minimum required distribution from an IRA • Hospital policy – what is covered? • Roth IRA – taxed on contributions, but not when the benefits are withdrawn from the account • Disability income insurance o Elimination period – 0 days for accidents, 7 days for sickness • Non cancellable and guaranteed renewable – best policy • Residual disability • Social security retirement • Yearly renewable term insurance – premiums o Premiums get more and more expensive as you get older • Characteristics of term insurance – term insurance has no cash value o Benefit paid if insured dies during the policy period o When time period is over, no more protection unless you renew it o No savings component • Ordinary life insurance • Limited payment life insurance • Entire contract clause – o Consists of this policy, any attached riders, & the attached copy of this application • Suicide clause – o Suicide of the insured, while sane or insane, within two years of the date of issue, is NOT covered by this policy. In that event, this policy will end & the only amount payable will be the premiums paid to us, less any loans • Grace period – o allow 31 days from the due date for payment of a premium. All insurance continues during this grace period. Once the grace period ends & you still haven’t paid, the policy lapses • Assignment – absolute & collateral o While the insured is living, you can assign the policy or any interest in it. As owner, you still have the rights of ownership that have not been assigned. • Characteristics of an annuity o Contributions into an annuity are NOT tax-‐deductible, you will pay taxes on contributions o Guaranteed income for life, you cannot outlive an annuity • Deferred annuity • Disability payments – difference between partial disability and total disability • Social security issues • Group insurance – o begins with one contract (the master contract), low cost since there is only one policy and employees get certificate, no proof on insurability is need which means you could have a pre-‐existing condition & still be covered, paid by payroll deduction • Qualified plans – eligibility o You could manipulate eligibility with years of service o IRS rules – age 21 and 1 year of service needed to be eligible • Dual definition of disability o Own occupation – if you cannot perform the duties of your current job, but you may be able to do duties of a different job o Any occupation-‐ cannot perform any job duties that you are qualified to do by education or experience o Dual definition only applies for one year o In year 2, reasonable fitted • Keo plan – must be self-‐employee • 403(b) plan – tax deferred retirement plan for government organizations or public universities • Cliff vesting – you have to be with the company for so many years before your money is vested (belonging to you) Yrs of Service Vested 1 0% 2 0% 3 0% 4 0% 5 100% • Qualified retirement plans – tax characteristics • How long is an annuity paid for? o Annuities are guaranteed for life Social Security Reasons for Social Insurance: o To help solve a social problem o To provide coverage for perils that are difficult to insurance o To provide a base of economic security Basic Characteristics of Social Insurance: o Compulsory – you must participate, no choice o Floor of income o Benefits loosely related to earnings – the higher your earnings, the higher the benefits are, but you do NOT get back exactly what you contributed o Benefits are prescribed by law o Social adequacy stressed over individual equity o No needs test – no proof of insurability o Full funding is not necessary – the assets are not sufficient to cover all of the liabilities o Financially self-‐supporting • Earmark tax • Paid by employer and employee Things you need: • SSAN – social security number • Earnings • Quarter of coverage – 3 month period where you have earned money that is above the minimum requirement • Insured status o Fully insured – need 40 quarters of coverage, the earliest you can get it is within 10 years of working § Need this to qualify for retirement benefits o Currently insured – begin at age 21, you have to only have 1 ½ years of working & paying SS taxes § Need this to qualify for survivor benefits • AIME – Average Index Monthly Earnings • PIA – your retirement benefit SS Retirement Benefits • Normal Retirement age = 67 • Must have 40 quarters of coverage • Early retirement results in lower benefits (if you retire prior to age 67) o Subject to earnings test: if you continue to work and earn too much, you SS check will be reduced • Late retirement results in greater benefits (after age 67) Issues with Social Security • Third rail – no political party wants to try and reform the SS system • Death – forget to figure in the people who die before they receive SS benefits o All the money you’ve paid into social security is gone, if you die before you start receiving payments • Fertility – the fertility rate is lower than 2.1, if each women has 2 children then that would replace the wife & husband. Fewer children born means fewer people paying into SS • Women – women work fewer years because of child bearing, women are paid less, live longer than men • COLA – cost of living adjustment (needs to be greater) • Longevity – people are living longer • Workers • Funding • Entitlement • Raided • Welfare • Private accounts – if you put in 1.5 million into SS and you both die before retirement, none of this money is paid out How to solve problems today? • Increase taxes each year • Gradually increase full retirement age from 67 to 68 • Change the adjustment of cost of living to account for health care
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