Certified Financial Planner (CFP) Risk Management and Insurance Planning Syllabus

Describe the needs (capital needs) approach to life insurance, including the capital retention vs. capital liquidation distinction.

The needs approach sums the family's cash needs (final expenses, debts, income replacement, education, emergency fund) minus existing resources. Capital liquidation spends down both principal and earnings; capital retention preserves principal and lives only on earnings, requiring a larger amount.

Using capital retention, what life insurance principal provides $40{,}000 of annual income at a 5% net return?

$$\text{Principal}=\frac{40{,}000}{0.05}=\$800{,}000$$

Compare term life insurance with permanent (cash value) life insurance.

Term provides pure death protection for a set period, has no cash value, and low initial premiums. Permanent (whole/universal) provides lifelong coverage, builds tax-deferred cash value, and has higher, level premiums.

Contrast whole life and universal life insurance.

Whole life has fixed premiums, a guaranteed death benefit, and a guaranteed cash value with fixed crediting. Universal life is flexible-premium and adjustable-death-benefit, with cash value credited at current interest rates and transparent mortality/expense charges.

Distinguish variable life and variable universal life from traditional whole life.

Variable and variable universal life let the policyholder direct cash value into separate-account subaccounts (stocks/bonds), so cash value and (partly) death benefit fluctuate with investment performance. They are securities requiring a prospectus, unlike traditional whole life with guaranteed values.

In universal life, distinguish Option A (Option 1) from Option B (Option 2) death benefits.

Option A pays a level death benefit (cash value grows inside a fixed face amount, reducing net amount at risk). Option B pays the face amount plus the accumulated cash value, so the total death benefit increases over time.

What is the formula for an insured's net amount at risk in a cash-value policy?

$$\text{Net amount at risk}=\text{Death benefit}-\text{Cash value}$$

Describe the three nonforfeiture options available when a whole life policyholder stops paying premiums.

Cash surrender value (take the cash), reduced paid-up insurance (a smaller fully paid-up policy), and extended term insurance (full face amount as term for as long as the cash value can fund it).

List the common dividend options in a participating whole life policy.

Take dividends in cash; reduce premiums; accumulate at interest; purchase paid-up additions; and purchase one-year term insurance (the 'fifth dividend option').

Name the standard policy provisions and beneficiary settlement options found in life policies.

Provisions include grace period, incontestability clause, suicide clause, reinstatement, and the entire-contract clause. Settlement options include lump sum, interest only, fixed period, fixed amount, and life income (annuitization).

What does the incontestability clause provide, and what is the typical suicide exclusion period?

After the policy has been in force for two years, the insurer cannot contest the policy or deny a claim for material misrepresentation. The suicide clause typically excludes death by suicide within the first two years, refunding premiums paid.

How are life insurance death benefits generally taxed for income and estate tax purposes?

Death proceeds paid by reason of death are generally income-tax-free to the beneficiary. However, the proceeds are included in the insured's gross estate if the insured held any incidents of ownership at death.

How is the cash value buildup and a withdrawal/surrender of a non-MEC life policy taxed?

Cash value grows tax-deferred. On surrender, gain (cash value minus basis/premiums paid) is taxed as ordinary income. Withdrawals are taxed on a FIFO basis (basis first, tax-free) up to basis; policy loans are generally not taxable while the policy stays in force.

What is a Modified Endowment Contract (MEC), how is it created, and how are its distributions taxed?

A MEC is a life policy that fails the 7-pay test (premiums paid too quickly in the first seven years). Distributions (loans/withdrawals) are taxed LIFO (gain first, ordinary income) and may incur a 10% penalty before age 59½, though the death benefit remains income-tax-free.

What is the transfer-for-value rule and its main exceptions?

If a life policy is transferred for valuable consideration, the death benefit becomes income-taxable to the extent it exceeds the buyer's basis. Exceptions: transfer to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is an officer/shareholder.

What are the metallic tiers of ACA marketplace plans and their approximate actuarial values?

Bronze ≈ 60%, Silver ≈ 70%, Gold ≈ 80%, Platinum ≈ 90% actuarial value. Actuarial value is the share of total covered medical costs the plan pays on average.

What is the income range for ACA premium tax credit eligibility and what is a cost-sharing reduction tied to?

Premium tax credits historically apply to households roughly between 100% and 400% of the federal poverty level (income-based subsidies have been temporarily expanded). Cost-sharing reductions (lower deductibles/copays) are available to eligible enrollees who choose a Silver plan.

Define key health-plan cost-sharing terms: deductible, copay, coinsurance, and out-of-pocket maximum.

Deductible: amount the insured pays before the plan pays. Copay: fixed dollar charge per service. Coinsurance: a percentage the insured pays after the deductible. Out-of-pocket maximum: the annual ceiling after which the plan pays 100% of covered costs.

Compare an HMO, PPO, and HDHP/HSA health plan structure.

HMO: must use network providers and a primary-care gatekeeper for referrals; lowest cost, least flexibility. PPO: in- and out-of-network coverage without referrals; more flexible, higher cost. HDHP: high deductible paired with a tax-advantaged Health Savings Account.

State the key tax advantages and 2024 contribution limits of a Health Savings Account (HSA).

An HSA offers triple tax benefit: deductible contributions, tax-deferred growth, and tax-free qualified medical withdrawals. 2024 limits: $4{,}150 (self-only) and $8{,}300 (family), plus a $1{,}000 catch-up for those age 55+; the account must be paired with a qualifying HDHP.

Compare own-occupation, modified-own-occupation, and any-occupation definitions of disability.

Own-occupation: benefits paid if you cannot perform your specific occupation (most liberal). Modified/split: own-occ for an initial period then any-occ. Any-occupation: benefits paid only if you cannot work in any job suited to your training/education (most restrictive).

How are disability income insurance benefits taxed depending on who paid the premiums?

If the employer paid premiums (and didn't include them in income), benefits are taxable. If the individual paid premiums with after-tax dollars, benefits are received income-tax-free.

Define the elimination (waiting) period and benefit period in a disability income policy.

The elimination period is the time between the onset of disability and when benefits begin (e.g., 90 days); a longer one lowers premiums. The benefit period is how long benefits are paid (e.g., 2 years, to age 65, or lifetime).

What is a residual (partial) disability benefit and a cost-of-living adjustment (COLA) rider?

A residual benefit pays a proportionate benefit when a partial disability causes a loss of income (often 20%+). A COLA rider increases benefits during disability, usually tied to inflation, to preserve purchasing power.

What does long-term care (LTC) insurance cover and what triggers benefits?

LTC insurance covers custodial/skilled care (nursing home, assisted living, home care) for chronic conditions. Benefits trigger when the insured cannot perform at least 2 of 6 activities of daily living (ADLs) or has severe cognitive impairment.

List the six activities of daily living (ADLs) used to determine LTC benefit eligibility.

Bathing, dressing, eating, toileting, transferring (mobility), and continence.

What are the parts of Medicare and what does each cover?

Part A: hospital/inpatient (premium-free for most). Part B: physician/outpatient services (monthly premium). Part C: Medicare Advantage (private plans bundling A, B, often D). Part D: prescription drug coverage.

Distinguish Medicare from Medicaid in terms of eligibility.

Medicare is a federal age/disability-based program (generally age 65+ or qualifying disability) regardless of income. Medicaid is a joint federal-state, means-tested program for low-income individuals and is the largest payer of long-term custodial care.

What is a Medigap (Medicare Supplement) policy and what does it do?

Medigap is standardized private insurance that pays Medicare's cost-sharing gaps (deductibles, coinsurance, copays). It works only with Original Medicare (Parts A and B), not with Medicare Advantage.

Identify the standard homeowners forms HO-2, HO-3, HO-5, and HO-4/HO-6, and the difference between named-peril and open-peril (all-risk) coverage.

HO-2 broad named-peril; HO-3 open-peril on dwelling and named-peril on contents (most common); HO-5 open-peril on both dwelling and contents; HO-4 renters; HO-6 condo unit-owners. Named-peril covers only listed perils; open-peril covers all perils except those excluded.

State the coinsurance requirement in homeowners insurance and the formula for a partial-loss recovery.

Homeowners policies require insuring to at least 80% of replacement cost. If underinsured, recovery on a partial loss is reduced by: $$\text{Recovery}=\left(\frac{\text{Amount carried}}{0.80\times\text{Replacement cost}}\right)\times\text{Loss}-\text{Deductible}$$

A home with $400{,}000 replacement cost is insured for $240{,}000; a $50{,}000 loss occurs with a $1{,}000 deductible. What does the HO policy pay under the 80% coinsurance rule?

Required = $0.80\times400{,}000=\$320{,}000$. $$\left(\frac{240{,}000}{320{,}000}\right)\times50{,}000-1{,}000=0.75\times50{,}000-1{,}000=\$36{,}500$$

Identify the six coverage parts (A–F) of a standard homeowners policy.

Coverage A: dwelling; B: other structures; C: personal property; D: loss of use; E: personal liability; F: medical payments to others.

What are the main coverage parts of the Personal Auto Policy (PAP)?

Part A: liability (bodily injury and property damage). Part B: medical payments. Part C: uninsured/underinsured motorist. Part D: coverage for damage to your auto (collision and other-than-collision/comprehensive).

Distinguish collision from comprehensive (other-than-collision) coverage under Part D of the PAP.

Collision covers damage to your auto from impact with another vehicle or object or rollover. Comprehensive (other-than-collision) covers losses like theft, fire, vandalism, flood, hail, and animal strikes.

What do split liability limits such as 100/300/50 mean in an auto policy?

$100{,}000 bodily injury per person, $300{,}000 bodily injury per accident (all persons), and $50{,}000 property damage per accident.

What is a personal umbrella liability policy and what must usually underlie it?

An umbrella provides excess liability coverage (typically $1 million or more) above the limits of the underlying homeowners and auto policies, and can cover some gaps (e.g., libel/slander). Insurers require minimum underlying limits (e.g., $250{,}000/$500{,}000 auto, $300{,}000 homeowners liability).

Define an annuity and distinguish the accumulation phase from the annuitization (payout) phase.

An annuity is an insurance contract that transfers the risk of outliving one's assets by exchanging a premium for a stream of payments. In the accumulation phase, funds grow tax-deferred; in the annuitization phase, the contract pays out income, possibly for life.

Compare a fixed annuity, a variable annuity, and an indexed annuity.

A fixed annuity credits a guaranteed interest rate (insurer bears investment risk). A variable annuity invests in subaccounts so returns vary (owner bears risk; it is a security). An indexed annuity credits interest linked to a market index with a guaranteed minimum floor, subject to caps/participation rates.

Contrast an immediate annuity with a deferred annuity.

An immediate (SPIA) annuity is funded with a single premium and begins payouts within about one year. A deferred annuity accumulates value tax-deferred for years before payouts begin, and may be funded by single or flexible premiums.

Compare a straight-life (life-only) annuity payout with a life-with-period-certain and a joint-and-survivor option.

Straight-life pays the highest income but stops at the annuitant's death (nothing to heirs). Life with period certain pays for life but guarantees payments for a minimum period to a beneficiary. Joint-and-survivor pays over two lives (lower payment) until the second death.

How is the taxable portion of non-qualified annuity income determined during annuitization, and how are early withdrawals treated?

During annuitization, the exclusion ratio determines the tax-free return of basis: $$\text{Exclusion ratio}=\frac{\text{Investment in contract}}{\text{Expected total return}}$$ Pre-annuitization withdrawals are taxed LIFO (gain first, ordinary income) with a 10% penalty before age 59½.