Chartered Financial Consultant (ChFC) Insurance and Risk Management Syllabus

What is the difference between Universal Life Option A and Option B death benefits?

Option A (Level): the death benefit stays level; as cash value grows, the net amount at risk decreases. Option B (Increasing): the death benefit equals the face amount PLUS the accumulated cash value, so the total payout increases as cash value grows (higher cost).

What are the standard life insurance dividend options for participating policies?

1) Cash payment; 2) Reduce premiums; 3) Accumulate at interest; 4) Paid-up additions (buy small amounts of additional paid-up insurance); 5) One-year term (fifth dividend option). Dividends are treated as a nontaxable return of premium.

What are the nonforfeiture options when a permanent policy is surrendered or lapses?

1) Cash surrender value (take the cash); 2) Reduced paid-up insurance (a smaller fully paid-up policy); 3) Extended term insurance (same face amount as term for as long as the cash value will buy). Extended term is usually the automatic default on lapse.

What are the standard life insurance settlement options for paying the death benefit?

1) Lump sum (cash); 2) Interest only (proceeds held, interest paid); 3) Fixed period (proceeds + interest paid over a set time); 4) Fixed amount (set payments until proceeds exhausted); 5) Life income/annuity options (paid over the beneficiary's life, with or without period certain or refund).

Describe these common life insurance riders: waiver of premium, guaranteed insurability, accelerated death benefit, accidental death benefit.

Waiver of premium: insurer pays premiums if the insured becomes totally disabled. Guaranteed insurability: lets the insured buy more coverage at specified dates without evidence of insurability. Accelerated death benefit: pays part of the face amount early if terminally/chronically ill. Accidental death benefit (double indemnity): pays an extra amount if death results from an accident.

What policy provisions protect the insured: incontestable clause, grace period, suicide clause, misstatement of age?

Incontestable clause: after the policy is in force ~2 years, the insurer cannot contest it for misstatements (except nonpayment). Grace period: ~31 days to pay an overdue premium without lapse. Suicide clause: no death benefit (premiums refunded) if suicide occurs within the first ~2 years. Misstatement of age/sex: the death benefit is adjusted to what the premium would have purchased at the correct age.

How are life insurance death benefits and cash-value growth taxed?

Death benefits paid to a beneficiary are generally received income-tax-free. Cash value grows tax-deferred. There is no income tax on policy loans or on withdrawals up to basis (premiums paid), unless the policy is a MEC; gains above basis on surrender are taxed as ordinary income.

What is a Modified Endowment Contract (MEC), and how does the 7-pay test affect taxation?

A MEC is a life policy funded too quickly — it fails the 7-pay test (premiums in the first 7 years exceed those needed to pay it up). MEC distributions (loans/withdrawals) are taxed LIFO (gain first, taxable as ordinary income) and a 10% penalty applies before age 59½. The death benefit remains income-tax-free.

What is the transfer-for-value rule in life insurance taxation?

If a life insurance policy is transferred/sold for valuable consideration, the death benefit becomes income-taxable (to the extent it exceeds the buyer's basis). Exceptions where it stays tax-free: transfers 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.

Distinguish the major managed-care/health plan types: HMO, PPO, POS, and indemnity/fee-for-service.

HMO: must use in-network providers and a primary-care gatekeeper for referrals; lowest cost, least flexibility. PPO: network with discounted rates but allows out-of-network at higher cost, no gatekeeper. POS: hybrid using a gatekeeper but allowing out-of-network referrals. Indemnity (fee-for-service): any provider, insurer reimburses a percentage after deductible — most flexible, highest cost.

Define and contrast an HDHP/HSA, an FSA, and an HRA.

HDHP/HSA: a high-deductible plan paired with a Health Savings Account — an employee-owned, portable, triple-tax-advantaged account. FSA: an employer flexible spending account funded by employee pre-tax salary deferrals, generally use-it-or-lose-it, not portable. HRA: a Health Reimbursement Arrangement funded solely by the employer to reimburse medical expenses.

What is the "triple tax advantage" of a Health Savings Account (HSA)?

1) Contributions are tax-deductible (or pre-tax through payroll); 2) Earnings grow tax-free; 3) Withdrawals for qualified medical expenses are tax-free. (Non-qualified withdrawals before age 65 are taxed and incur a 20% penalty.)

What key features define a disability income insurance policy: definition of disability, elimination period, benefit period?

Definition of disability: "own occupation" (cannot do your own job — most favorable), "any occupation" (cannot do any reasonable job — stricter), or split/modified. Elimination period: the waiting time before benefits begin (e.g., 30–90 days; longer = lower premium). Benefit period: how long benefits are paid (e.g., 2 years, 5 years, or to age 65).

How is disability income insurance taxed depending on who pays the premium?

If the individual pays premiums with after-tax dollars, benefits are received income-tax-free. If the employer pays the premiums (and does not include them in income), the disability benefits are taxable to the employee. Premiums split create proportionate taxation.

What are the residual benefit and cost-of-living adjustment (COLA) riders on disability policies?

Residual (partial) disability benefit: pays a proportionate benefit when the insured returns to work but suffers an income loss (e.g., ≥20% loss of earnings). COLA rider: increases benefits during a long-term claim to keep pace with inflation, protecting purchasing power.

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

LTC insurance covers custodial/nursing care for chronic conditions — nursing home, assisted living, and home care. Benefits are typically triggered when the insured cannot perform 2 of the 6 Activities of Daily Living (eating, bathing, dressing, toileting, transferring, continence) or has severe cognitive impairment, usually after an elimination period.

What is a "tax-qualified" LTC policy's tax treatment?

In a qualified LTC policy, benefits are generally received income-tax-free (subject to a per-diem cap that is indexed), and premiums are deductible as medical expenses subject to age-based limits and the AGI floor for itemized medical deductions.

Describe the four parts of Medicare (A, B, C, D).

Part A: hospital insurance (inpatient, skilled nursing, hospice) — premium-free for most. Part B: medical insurance (physician, outpatient) — requires a monthly premium. Part C: Medicare Advantage — private plans combining A, B, and often D. Part D: prescription drug coverage through private plans.

What is Medigap, and at what age does Medicare eligibility generally begin?

Medigap (Medicare Supplement) is private insurance that covers gaps in Original Medicare such as deductibles, copays, and coinsurance; standardized plans are labeled A–N. Medicare eligibility generally begins at age 65 (or earlier with certain disabilities or ESRD).

How does Medicaid differ from Medicare?

Medicare is a federal age/disability-based program (not income-tested) for those 65+ or disabled. Medicaid is a joint federal-state, means-tested (income and asset) program for low-income individuals; it is the primary payer of long-term custodial nursing-home care in the U.S.

Name the standard homeowners (HO) coverage forms and which perils approach each uses.

HO-2 (Broad — named perils), HO-3 (Special — open perils on dwelling/structures, named perils on contents — the most common), HO-4 (renters/tenants — contents only), HO-5 (Comprehensive — open perils on both dwelling and contents), HO-6 (condo unit-owners), HO-8 (modified, for older homes at actual cash value).

Identify the Section I property coverages (A–D) in a homeowners policy.

Coverage A: dwelling. Coverage B: other structures (detached garage, shed) — typically 10% of A. Coverage C: personal property/contents — typically 50% of A. Coverage D: loss of use / additional living expenses — typically 20–30% of A.

State the homeowners coinsurance / 80% replacement-cost rule and its formula.

To collect full replacement cost on a partial loss, the dwelling must be insured for at least 80% of its replacement cost. Otherwise the recovery is $$\text{Payment} = \left(\frac{\text{Amount of Insurance Carried}}{0.80 \times \text{Replacement Cost}}\right) \times \text{Loss} - \text{Deductible}$$ (capped at actual cash value or policy limit).

A home with a $400{,}000 replacement cost is insured for $280{,}000. A covered partial loss is $60{,}000 (deductible $1{,}000). Using the 80% coinsurance rule, what does the insurer pay?

Required amount = $0.80 \times 400{,}000 = 320{,}000$. Payment ratio = $\frac{280{,}000}{320{,}000} = 0.875$. Payment = $0.875 \times 60{,}000 = 52{,}500$, minus the $1{,}000 deductible = $\$51{,}500$.

What are Section II coverages (E and F) of a homeowners policy?

Coverage E: Personal Liability — pays for bodily injury or property damage to others for which the insured is legally liable, plus legal defense. Coverage F: Medical Payments to Others — pays small medical bills of non-residents injured on the premises regardless of fault (no-fault, low limit).

List the six coverage parts (A–F) of the Personal Auto Policy (PAP).

Part A: Liability (bodily injury and property damage to others). Part B: Medical Payments. Part C: Uninsured/Underinsured Motorists. Part D: Coverage for Damage to Your Auto (collision and "other than collision"/comprehensive). Part E: Duties After an Accident or Loss. Part F: General Provisions.

Distinguish collision coverage from "other than collision" (comprehensive) in the PAP, and explain split limits like 100/300/50.

Collision pays for damage to the insured's auto from impact/overturn. Other-than-collision (comprehensive) covers other causes (theft, fire, hail, glass, animal strike). Split liability limits 100/300/50 mean $100,000 bodily injury per person, $300,000 bodily injury per accident, and $50,000 property damage per accident.

What is the difference between a no-fault auto system and a tort/at-fault system?

In a tort/at-fault system, the negligent driver's insurer pays the other party's damages, and victims may sue. In a no-fault system, each driver's own insurer pays that driver's medical/economic losses (via PIP) regardless of fault, and the right to sue is restricted to serious-injury thresholds — reducing litigation.

What is a personal umbrella liability policy and how does it interact with underlying coverage?

An umbrella policy provides high excess liability limits (typically $1 million or more) above the underlying homeowners and auto liability limits, and can cover some perils the underlying policies exclude (subject to a self-insured retention). Insurers require specified minimum underlying limits before the umbrella attaches.

Name and contrast key business risk coverages: business owners policy (BOP), commercial general liability (CGL), business interruption, and key-person insurance.

BOP: a packaged property + liability policy for small businesses. CGL: covers the firm's liability for bodily injury, property damage, and personal/advertising injury to third parties. Business interruption (time-element): replaces lost income and continuing expenses while operations are suspended after a covered property loss. Key-person life insurance: business-owned coverage on an essential employee to offset the financial loss from that person's death.