CFP Module 3 cheat sheet

Risk = uncertainty about outcomes; pure risk (loss or no loss) is insurable, speculative risk (gain or loss) is not.

Risk management steps: identify exposures, measure frequency and severity, select techniques (avoid, retain, reduce, transfer, insure), implement, monitor.

Insurable risk criteria: large number of homogeneous exposure units, accidental and measurable loss, definite loss in time/place/amount, no catastrophic concentration, affordable premium.

Law of large numbers: as the number of independent exposure units grows, actual loss experience converges toward expected loss, enabling predictable premiums.

Adverse selection: high-risk individuals buy more coverage; insurers counter with underwriting, exclusions, waiting periods, and experience rating.

Moral hazard = behavior change after coverage; morale hazard = carelessness/indifference; both raise expected losses.

Indemnity principle: insurance restores the insured to pre-loss financial position, never profit; supports ACV settlement and subrogation.

Utmost good faith requires disclosure of material facts; breach by insured may allow rescission, breach by insurer may waive defenses.

Reinsurance transfers insurer risk: treaty covers a class automatically, facultative is case-by-case; proportional (quota share, surplus) vs excess of loss.

Human life value = present value of future earnings net of self-maintenance and taxes; needs approach = income replacement + debts + education + final expenses - existing resources.

Term life pays only on death within the term, no cash value; level term, decreasing term, and annually renewable term differ in premium pattern.

Whole life: level premium for life, guaranteed cash value, guaranteed death benefit; limited-pay (20-pay, paid-up at 65) compresses premiums.

Universal life: flexible premium, adjustable death benefit, credited interest; Option A (level) vs Option B (increasing) death benefit; COI charges rise with age.

Variable life and variable universal life shift investment risk to the owner; they are securities requiring a prospectus and dual registration.

Policy loans accrue interest; unpaid interest is added to the loan and reduces net cash value and death benefit; lapse risk if loan exceeds cash value.

Nonforfeiture options on lapse: cash surrender, reduced paid-up, extended term; dividend options include cash, reduce premium, accumulate, paid-up additions.

Incontestability clause: insurer cannot contest misrepresentation after 2 years; suicide clause typically 2 years; grace period ~30-31 days.

Tax: death benefit generally income-tax-free; cash value grows tax-deferred; withdrawals are FIFO, loans generally not taxable unless policy lapses or is a MEC.

Cost-sharing vocabulary: deductible (insured pays first), coinsurance (fixed percentage after deductible), copayment (flat dollar), out-of-pocket maximum caps annual exposure.

Major medical features: lifetime/annual limits, preauthorization, network tiers, preventive care often covered pre-deductible.

Managed care models: HMO (gatekeeper, in-network only, capitation), PPO (in-network discounts, no referral), POS (hybrid), EPO (no out-of-network).

Indemnity/consumer-driven plans: HDHP paired with HSA; HSA contributions are pre-tax, grow tax-free, and roll over; HSA requires qualified high-deductible plan.

COBRA: continuation for 18 months (qualifying event) or 29 months (disability), 36 months for dependents; premium up to 102% of group rate.

HIPAA: portability, guaranteed renewability, limits on preexisting-condition exclusions when creditable coverage is continuous.

Individual market: guaranteed issue with no medical underwriting; subsidies based on income relative to federal poverty level; open enrollment with special enrollment triggers.

Underwriting factors for individual health: age, tobacco, geography; medical history generally excluded in guaranteed-issue markets.

Coordination of benefits: primary plan pays first, secondary pays up to the balance; birthday rule applies to dependent children under both parents' plans.

Benefit trigger: inability to perform 2 of 6 ADLs (bathing, dressing, toileting, transferring, eating, continence) for at least 90 days, or severe cognitive impairment.

Benefit amount = daily/monthly maximum x benefit period; common periods 2-5 years; shared care rider lets spouses pool benefits.

Elimination period is a deductible measured in days of service (e.g., 90 days); longer elimination period lowers premium.

Inflation protection compounds the benefit (e.g., 3% or 5% compound); without it, fixed benefits erode with care costs.

Coverage settings: home care, adult day care, assisted living, nursing home; home care may have a separate, often lower, maximum.

Tax treatment: benefits from a qualified LTC policy are income-tax-free up to per-diem limits; premiums deductible within age-based limits.

Partnership programs offer Medicaid asset protection equal to the policy benefit if the insured exhausts coverage.

Premium increases are not guaranteed; insurers may raise rates on a class basis with state approval; nonforfeiture options protect paid premiums.

Underwriting is strict; decline risk rises with age and health history; group and worksite products often use simplified underwriting.

Own-occupation: pays if unable to perform the duties of your own occupation; any-occupation: pays only if unable to work in any job for which reasonably suited.

Benefit period: short-term (13-52 weeks) vs long-term (2 years, 5 years, to age 65, lifetime); longer periods raise premium.

Elimination (waiting) period is the time before benefits start; 30/60/90/180 days; longer wait lowers premium; coordinate with emergency fund.

Residual/partial disability pays proportional benefit based on lost income; presumptive disability pays full benefit for loss of sight, speech, hearing, or limbs.

Benefit cap typically 60-70% of pre-disability gross income to preserve work incentive; benefits are taxable if premiums were employer-paid.

Definition matters most: own-occ with a reasonable period, plus residual, is the strongest design; 'any gainful occupation' is weakest.

Key riders: cost-of-living adjustment, future increase option, waiver of premium, Social Security offset, return of premium.

Group LTD is cheaper but less portable; individual DI is medically underwritten and portable; Social Security disability is strict and slow.

Social Security disability requires inability to do any substantial gainful activity and a 5-month waiting period; benefit is modest.

HO forms: HO-2 broad, HO-3 special (open perils on dwelling, named perils on contents), HO-5 comprehensive, HO-4 renters, HO-6 condo, HO-8 older homes.

HO-3 Coverage A dwelling, B other structures, C personal property, D loss of use, E personal liability, F medical payments; typically A/B/C/D as percentages of A.

Actual cash value = replacement cost - depreciation; replacement cost pays without depreciation; extended replacement cost adds a percentage above limit.

Coinsurance clause on commercial property: required limit = coinsurance % x value; recovery = loss x (carried / required), capped at policy limit.

Deductibles apply per occurrence; hurricane/windstorm percentage deductibles are a percentage of Coverage A, not a flat dollar amount.

Auto policy parts: liability (bodily injury/property damage), medical payments/PIP, uninsured/underinsured motorist, collision, other than collision (comprehensive).

Negligence elements: duty, breach, proximate cause, damages; defenses include comparative/contributory negligence and assumption of risk.

Business income covers lost profits and continuing expenses during restoration; extra expense covers costs to resume operations quickly.

Claims process: notice, proof of loss, adjuster investigation, settlement, appraisal or arbitration for disputes; salvage and subrogation rights.

Personal umbrella sits above auto and homeowners liability; it typically requires underlying limits (e.g., $300K auto/$300K homeowners) and drops down if underlying is exhausted.

Umbrella is excess over scheduled underlying policies and may provide broader coverage not in underlying; self-insured retention applies to gaps.

Homeowners personal liability (Coverage E) covers bodily injury/property damage from non-business, non-auto activities; medical payments (F) pays regardless of fault.

Exclusions commonly tested: intentional acts, business pursuits, professional services, auto (owned/rented for business), watercraft/aircraft beyond limits, expected injury.

CGL occurrence form covers BI/PD during the policy period; claims-made covers claims reported during the period, with retroactive date and tail coverage.

Professional liability (E&O) covers negligent acts/omissions in services; D&O covers directors/officers for wrongful acts; fiduciary liability covers ERISA plan breaches.

Commercial auto, workers compensation, and employment practices liability are separate lines not covered by a personal umbrella.

Umbrella underwriting considers net worth, number of vehicles/homes, teen drivers, pools, and rental properties.

Additional insured and certificate of insurance requirements are common contractual risk transfer mechanisms.

Group underwriting uses the group, not the individual: size, industry, participation, and prior claims experience determine rates.

Group life: term coverage, often 1-2x salary; imputed income above $50,000 of employer-paid coverage is taxable to the employee.

Group health: employer-paid premiums are deductible to employer and excluded from employee income; employee-paid premiums via cafeteria plan are pre-tax.

Section 125 cafeteria plan allows pre-tax salary reduction for health, dental, vision, and dependent care; qualifying life events allow mid-year changes.

ERISA sets fiduciary, reporting, and disclosure duties; vesting rules apply to pension but not to health or group term life.

Group disability: short-term (salary continuation) and long-term; employer-paid premiums make benefits taxable, employee-paid premiums make benefits tax-free.

Retirement plans: 401(k) elective deferrals, employer match, vesting schedules, contribution limits indexed annually; 403(b) for nonprofits, 457 for government.

Defined benefit vs defined contribution: DB promises a benefit and shifts investment risk to employer; DC shifts risk to employee.

COBRA and HIPAA interact with group plans; FMLA requires continuation of group health coverage during unpaid leave.

Social Security retirement: full retirement age 67 for those born 1960 or later; reduced benefit at 62, delayed credits up to age 70 (8%/year after FRA).

Social Security disability: requires insured status, inability to do substantial gainful activity, 5-month waiting period, and 24 months for Medicare eligibility.

Survivor benefits: spouse caring for child under 16, spouse at age 60 (50 at 60 if disabled), children under 18 (19 if in school); lump-sum death payment.

Medicare Part A hospital (no premium with 40 quarters), Part B medical (premium), Part C Medicare Advantage, Part D prescription drugs.

Medicare enrollment: initial window 7 months around age 65; late enrollment penalties for Part B and D unless creditable coverage exists.

Medigap supplements Original Medicare; it cannot be used with Medicare Advantage; guaranteed-issue rights exist in limited situations.

Medicaid is income/asset-tested and jointly funded; long-term care coverage is a major function; 5-year look-back for asset transfers.

Social Security taxation: up to 85% of benefits taxable based on provisional income (AGI + tax-exempt interest + half of benefits).

Medicare does not cover custodial long-term care; it covers skilled nursing facility care for up to 100 days per benefit period after a qualifying hospital stay.

Business risk management: identify property, liability, business income, key person, and cyber exposures; use retention, transfer, and loss control.

Key person life insurance indemnifies the business for loss of a critical employee; buy-sell funding uses cross-purchase or entity-purchase arrangements.

Business continuation: buy-sell agreement sets valuation and triggers (death, disability, retirement, divorce); funded with life/disability insurance.

Commercial property: coinsurance, blanket vs specific coverage, business income with waiting period and extended period of indemnity.

Commercial general liability: premises, products-completed operations, personal and advertising injury; occurrence vs claims-made triggers.

Workers compensation: statutory no-fault benefit for work-related injury; exclusive remedy limits employee tort suits; experience modification affects premium.

Professional liability/E&O, D&O, fiduciary, and cyber liability fill gaps not covered by CGL.

Captive insurance is a form of self-insurance; risk retention groups and pools serve similar functions for homogeneous groups.

Businessowners policy (BOP) packages property and liability for small businesses with eligibility limits on size and occupancy.