1: Self-Study Examination

Question 1

1. Determining the client’s financial status by analyzing and evaluating client information is one of the stages of the personal financial planning process. Which of the following tasks typically are completed in this stage?

I. identifying auto insurance needs and current coverage

II. identifying current financial status

III. recommending specific tax strategies

IV. preparing financial statements

a. I and II only
b. I and III only
c. III and IV only
d. I, II, and III only
e. II, III, and IV only

Answer 1

1. a. This is the correct answer. Recommending specific tax strategies follows this step, and preparing financial statements precedes this step.

(LO 1–1)

Question 2

2. Which of the following characteristics apply to Pell grants?

I. available to half-time students
II. available to full-time students
III. available to graduate students
IV. available to undergraduate students

a. II and IV only
b. I, II, and III only
c. I, II, and IV only
d. II, III, and IV only
e. I, II, III, and IV

Answer 2

2. c. This is the correct answer because Pell grants are not available to graduate students.

(LO 1–8)

Question 3

3. Financial planners typically recommend that clients have monies set aside for emergencies. Which of the following generally are considered appropriate
   sources of emergency funds?

I. credit cards
II. money market mutual funds
III. savings accounts
IV. entire amount in checking account

a. I and II only
b. II and III only
c. III and IV only
d. II, III, and IV only
e. I, II, III, and IV

Answer 3

3. b. This is the correct answer. Credit cards create debt and thus are not appropriate for emergency fund use. Checking accounts may be used, but not the entire amount. An amount equal to one month’s expenses should be reserved. Additionally, any type of mutual fund, other than a money market fund, should not be used for emergency funds because the value of a mutual fund fluctuates so much, and there may be a loss upon liquidation.

(LO 1–4)

Question 4

4. Which of the following are elements of an insurable risk for an insurance company?

I. The loss must be catastrophic.
II. The loss must be measurable.
III. The loss must be accidental or fortuitous.
IV. The loss must be inevitable.

a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
e. II, III, and IV only

Answer 4

4. c. This is the correct answer. A loss may be catastrophic for the insured, but cannot be catastrophic from the perspective of the insurer. Also, premiums to
   cover inevitable losses would approach or be greater than the cost of the loss itself. Insurance covers losses that may or may not happen.

(LO 4–4)

Question 5

5. The second stage of the financial planning process involves gathering data. Which of the following are functions of this stage?

I. constructing personal financial statements
II. obtaining qualitative information about the client
III. establishing goals and objectives
IV. evaluating potential barriers to achieve goals

a. I and II only
b. I and III only
c. II and III only
d. I,II, and III only
e. I, II, III, and IV

Answer 5

5. d. This is the correct answer. During the second stage of planning, information is gathered from the client and organized. Evaluation and analysis occur in the third stage.

(LO 1–1)

Question 6

6. Phil Moore, age 66, is interested in obtaining long-term care insurance. He is single, is in good health, and wants to make sure he receives proper care if he
   is incapacitated. He also wants his estate of a few hundred thousand dollars left to his children.

Which one of the following is a primary consideration Phil should use in making his decision?

a. An inflation benefit is probably a good idea.
b. A policy where benefits last for a year or so would give him time to qualify for Medicaid.
c. A policy with a hospitalization requirement is a sound way to reduce the premium.
d. He should definitely not have a plan that provides home care.

Answer 6

6. a. This question requires evaluation of the facts and application of long-term care coverage. Phil is relatively young, so an inflation benefit is most likely a very good idea. He may or may not need a home care benefit—the question doesn’t really provide any information on this for you. However, to say that Phil definitely should not get a home health care benefit is incorrect. Purchase of a policy primarily to buy time in order to qualify for Medicaid is not the best decision in this case. Requiring a hospitalization before benefits are paid is a needless requirement, and when it is included in a policy, it most
   definitely does not reduce the premium.

(LO 8–6)

Question 7

7. Which of the following are roles of the adjuster in adjusting losses?

I. to determine whether there was a loss covered by the policy

II. to choose the arbitrator who will determine the amount of loss

III. to handle settlement of certain losses

IV. to classify the loss as standard or substandard

a. I and II only
b. I and III only
c. I and IV only
d. II and III only
e. II and IV only

Answer 7

7. b. This is the correct answer. The insurer, not the arbitrator nor the adjuster, determines the amount of loss and determines the status of any loss. Losses are not classified as standard or substandard.

(LO 9–1)

Question 8

8. Which of the following are duties of the courts in regulating insurers?

I. to render decisions on the meaning of policy terms

II. to enact laws that govern the conduct of insurers

III. to rule on the constitutionality of insurance laws

IV. to determine requirements an insurer must meet to obtain a license

a. I and II only
b. I and III only
c. I and IV only
d. II and IV only
e. III and IV only

Answer 8

8. b. This is the correct answer. The courts render decisions on the meaning of policy terms and rule on the constitutionality of insurance laws. The state legislature completes the remaining two duties: enacts laws and may establish requirements that an insurer must meet to obtain a license to do business in that state.

(LO 4–14)

Question 9

9. Which of the following statements are accurate concerning budgets?

I. Crafting and comparing budgets year to year will lead to better retirement need projections.

II. If expenses exceed income, the only solution is to cut expenses.

III. Put the most focus on tracking and monitoring the monthly routine bills because they create the most problems.

IV. If there is excess income, a plan to automatically invest the money into investments should be created.

a. I only
b. IV only
c. I, II and IV only
d. I, II, III and IV

Answer 9

9. a. It is true that comparing budgets over several years will lead to better estimates of needed retirement income.

Option II is incorrect because there are many options besides cutting expenses that will bring the budget back in line (e.g., selling an asset, taking in a boarder, or doing some part-time work to pay off a credit card).

Option III is incorrect because most problems arise
because people have not budgeted for the non-routine expenses that end up occurring consistently.

Finally, option IV is incorrect because paying off debt, taking a family vacation, or renovating the house to sell may take
precedence.

(LO 1–5)

Question 10

10. Lisa, age 30, has come to you for help in determining which type of life insurance policy will best meet her needs. She wants the coverage to last for the rest of her life. Also, she is not currently saving for retirement and feels she wants to include some savings element in her life insurance program. Lisa is conservative in the areas of risk management and investments. She wants at least a minimum guaranteed cash value built into the policy and wants a guaranteed death benefit. Which one of the following is the best choice to meet Lisa’s needs?

a. term life insurance
b. universal life insurance
c. whole life insurance
d. variable universal life insurance

Answer 10

10. c. This is the correct answer. Term insurance normally provides the highest amount of death protection per premium dollar, and it is most useful in covering temporary needs, but Lisa wants the policy to last throughout her lifetime, and she wants a savings element built into the policy. The universal life policy would be the second best choice, as it meets all the criteria except
    that it does not provide the desired cash value and death benefit guarantees. The variable universal policy does not satisfy Lisa’s risk tolerance level. Only the whole life insurance will meet all of her requirements.

(LO 5–7)

Question 11

11. Which of the following are dividend options available to the policyholder of a participating whole life insurance policy?

I. paid-up additions
II. accumulate at interest
III. extended term
IV. premium reduction

a. I and II only
b. III and IV only
c. I, II, and III only
d. I, II, and IV only
e. II, III, and IV only

Answer 11

11. d. This is the correct answer. Extended term is a nonforfeiture option, not a dividend option (one-year term is the dividend option).

(LO 5–4)

Question 12

12. Which of the following are criteria that should be considered when selecting an insurer?

I. the types of coverage available
II. analysts’ stock forecast
III. the finances of the insurer
IV. NAIC watch list status

a. I and II only
b. III and IV only
c. I, III, and IV only
d. II, III, and IV only
e. I, II, III, and IV

Answer 12

12. c. Option II may be interesting, but the stock analyst’s report on the company has no bearing. All of these other areas should be considered when selecting an insurer.

(LO 4–13)

Question 13

13. Which of the following are not ages or transition events that indicate it is appropriate to complete a review of potential health insurance options?

I. A couple’s child will be one month old in three days.

II. A client is 65 years old and COBRA will end in four months.

III. A 25-year-old adult child was recently laid off and, as a result, will lose his health insurance. He has moved back in with his parents until employment is found.

IV. A client just received a promotion to management that offers special non-qualified deferred compensation, stock options, and other executive perks, including a physical at MAYO clinic.

a. I and II only
b. II and III only
c. I, II and IV only
d. I,II and III only
e. I, II, III and IV

Answer 13

13. d. The newborn has one month to be placed on parents’ policy, so this is urgent. The 65-year-old coming off of COBRA will need to sign up for Medicare within the time frame or pay a penalty for the rest of his or her life.
    An unemployed 25-year-old can be on the parents’ coverage because losing his job is considered a qualifying event. While the promotion and employee
    benefit changes should trigger a review, it is not because of the health insurance.

(LO 7–1)

Question 14

14. Health maintenance organization plans typically provide which of the following?

I. medical services on a coinsurance basis
II. medical services for a patient copayment
III. coverage for treatment by specified physicians
IV. coverage only for specified accidents and illnesses

a. I and II only
b. I and III only
c. I and IV only
d. II and III only
e. II and IV only

Answer 14

14. d. This is the correct answer. HMOs normally do not use coinsurance provisions. Coverage is general and comprehensive in nature rather than limited to certain accidents or illnesses.

(LO 7–3)

Question 15

15. Margaret is in the market for a new automobile. An automobile dealer has suggested that she lease a vehicle. The proposed lease terms include making
    36 monthly payments of $325 and returning the vehicle to the dealer at the end of the lease period. Margaret may owe the lease company additional money if the car’s actual value is less than the projected value. What type of lease agreement is the dealer proposing to Margaret?

a. closed-end lease
b. fixed-cost lease
c. finance/open-end lease
d. operating lease

Answer 15

15. c. This is the correct answer. Finance and open-end leases are the same. Closed-end and fixed-cost leases are also the same, except for unusual use or damage, there are no additional costs. Operating leases don’t exist.

(LO 1–7)

Question 16

16. Under the Personal Auto Policy (PAP), the insured or any other person seeking a claim payment under the policy has a duty to do which of the following?

I. give prompt notice to the insurer

II. gather evidence for the insurer to use in settling the claim

III. provide pertinent medical records to the insurer upon request

IV. submit to reasonable medical examinations requested by the insurer

a. I and III only
b. II and IV only
c. I, III, and IV only
d. I, II, III, and IV

Answer 16

16. c. This is the correct answer. The insured is not required to gather evidence for the insurer; that is the job of the insurer and law enforcement agencies. However, prompt notice is required, as is cooperation with the insurer.

(LO 9–9)

Question 17

17. Which of the following match the issues with a couple’s second marriage with the appropriate planner action?

a. Clients are concerned about protecting their previously accumulated assets and personal incomes. Their planner recommends they work with
an attorney to draft prenuptial agreements.

b. Clients are concerned about ensuring that their group and personal life insurance policies still go to their own children. Their planner recommends drafting new wills.

c. Clients wish to ensure they provide for each other first and the remaining money be split between children. Their planner recommends changing
ownership of residence to joint with rights of survivorship.

d. Clients are unsure how much life insurance they need and how to structure it. Their planner suggests 5-10 times annual income with each other as beneficiaries, plus a letter of understanding explaining how to determine distributions to children.

Answer 17

17. a. This is the correct answer. The discussion with the attorney and prenuptial agreement will address their concern, and the attorney will convey what other changes need to be made.

Option b. is incorrect because life insurance has beneficiary designations and a new will does not change those.

Option c. is incorrect because joint with rights of survivorship will not address the issue of sharing money between children.

Option d. is incorrect because the planner would need to examine divorce decrees and complete a risk analysis. Additionally, the new spouses should not be the beneficiaries. Most likely, the attorney may provide the appropriate beneficiary designation language.

(LO 1–9)

Question 18

19. Which of the following correctly matches the appropriate method of addressing a risk?

I. Mary installs a fence with a locked gate around the pool and increases her umbrella policy (risk reduction and risk transfer).

II. Marcus stops driving and has his daughter drive him everywhere (risk avoidance and risk sharing).

III. Marie sets up an LLC for her business, purchases property and liability insurance with a $1,000 deductible (risk sharing, risk transfer, and risk
retention).

IV. Morty pays the premium on his accidental death policy (risk retention).

V. Mindy purchases warranties on all her business equipment (risk transfer).

a. I, and III only
b. I, III, and V only
c. II, III,IV, and V
d. I, II,III, IV, and V

Answer 18

19. b. This is the correct answer. Marcus is not sharing the risk with his daughter. She is the only one liable. In option IV, Morty is transferring the risk by paying the premium. The other statements are true.

(LO 4–3)

Question 19

20. Joe owns a universal life insurance policy on his life. Joe’s wife, Tina, is listed as the primary revocable beneficiary, and his estate is listed as the contingent beneficiary. Which of the following are characteristics of this policy arrangement?

I. It permits flexibility of both premium and death benefits.

II. It provides the wife with the security that her husband can’t change the beneficiary or assign the policy without her consent.

III. His adult children will automatically qualify for a share of the policy proceeds.

IV. It provides a cash value fund that accumulates on a tax-deferred basis.

a. IV only
b. I and III only
c. I and IV only
d. I, II, and III only
e. II, III, and IV only

Answer 19

20. c. This is the correct answer. Option II would be true only if the wife were designated as an irrevocable beneficiary. The children would get a share of the proceeds only if they were listed as contingent beneficiaries and the wife predeceased her husband, or if the husband’s will made such a bequest.

(LO 5–2)

Question 20

21. Which of the following statements correctly describe provisions of the liability insuring agreement of a comprehensive personal liability (CPL) policy?

I. It promises to pay covered liability claims the insured becomes legally obligated to pay.

II. It promises to provide legal defense for the insured.

III. It gives the insured the right to approve any out-of-court settlement the insurer proposes to accept.

IV. It covers any professional liability the insured incurs.

a. I and II only
b. III and IV only
c. I, II, and III only
d. II, III, and IV only
e. I, II, III, and IV

Answer 20

21. a. This is the correct answer. The insured does not have the option to approve or disapprove an out-of-court settlement, and personal liability policies do not cover liabilities resulting from professional activities.

(LO 9–6)

Question 21

22. Which of the following are accurate statements regarding professional liability insurance?

I. Physicians and dentists use malpractice insurance to protect themselves from suits alleging assault and battery (i.e., bodily harm) as well as invasion of privacy (among other things).

II. Errors and omissions insurance is generally used where there is a risk of financial or property (including intangible property) damage.

III. Physicians generally retain the right to prevent the insurance company from settling a lawsuit rather than going to court.

IV. The trend in errors and omissions insurance is to provide the coverage on a claims-made basis and not to require consent of the insured to settle claims out of court.

a. I and II only
b. II and III only
c. III and IV only
d. I, II, and IV only
e. II, III, and IV only

Answer 21

22. d. This is the correct answer. Protection from suits alleging assault and battery, along with invasion of privacy, are specific coverages of malpractice insurance. Physicians generally cannot prevent the insurance company from settling out of court.

(LO 9–5)

Question 22

25. Rhonda Lennon is a stuntwoman. She currently is filming a movie where she has to run through a burning building. The film company has taken out a disability policy on her and makes her wear a special fire suit during the scene. Which one of the following answers gives two methods of handling risk being used by the film company?

a. risk transfer and risk reduction
b. risk retention and risk reduction
c. risk avoidance and risk sharing
d. risk sharing and risk transfer
e. risk avoidance and risk retention

Answer 22

25. a. This is the correct answer. The disability policy represents risk transfer and the special fire suit reduces risk.

(LO 4–6)

Question 23

26. Which one of the following is a rule of risk management?
    a. insure low-risk, low-cost potential losses first
    b. cover all possible losses
    c. consider the probable chance of each individual loss instead of the possible dollar amount of losses
    d. substitute reasonable insurance premiums for large, uncertain cost

Answer 23

26. d. This is the correct answer. Large, uncertain losses, where the potential for financial disaster is high, should be insured.

Options a. and b. are the opposite of good risk management. It is nearly impossible to determine the probable chance of each individual loss. Rather, you should consider the dollar amount of potential losses and the effect those losses may have on your finances.

(LO 4–1)

Question 24

27. Daryl Jackson is an agent for the Accountable Insurance Company (AIC). During the most recent year, the company has been informing its agents not
    to write fire insurance policies on day care centers. But, when the Day Care Center of America applied for a policy, Daryl bound the coverage. Day Care
    Center of America was destroyed by a fire shortly thereafter. What is the obligation of the Accountable Insurance Company in this situation? Consider carefully the supporting rationale in selecting your answer.

a. AIC is required to pay because Daryl had express authority to bind the company.
b. AIC is required to pay because Daryl had the apparent (ostensible) authority to do what the public reasonably believes he can do.
c. AIC is required to pay because they should have been faster in getting back to Day Care Centers of America with their disposition of the case.
d. AIC is not required to pay because Daryl is the agent of the insured.
e. AIC is not required to pay because Daryl failed to disclose full knowledge of the situation.

Answer 24

27. b. This is the correct answer. Day Care Center of America would have no way of knowing that AIC had not authorized Daryl to write coverage on day care centers. Therefore, because Daryl bound the coverage as an agent of AIC and because the company did not reject the coverage when the application was presented, the company is obligated to honor that coverage. Given that AIC did not specifically reject the coverage, it could also be said that Daryl had implied authority as a result (however, the more correct answer is apparent authority).

(LO 4–12)

Question 25

28. In long-term care, the phrase level of care refers to
    a. whether the patient really needs long-term care or if some other way can be found to meet the patient’s needs.
    b. the degree of intervention required, including skilled, intermediate, or custodial care.
    c. whether the care must be delivered by a hospital or a nursing home.
    d. how much the long-term care plan will pay.
    e. the classification of the care that is required in the Medicare DRG table.

Answer 25

28. b. This is the correct answer. The location where care is received is essentially irrelevant when determining the level of care required.

(LO 8–8)

Question 26

29. What is one characteristic of, or legal requirement for, an enforceable insurance contract?
    a. The parties to the contract must give up goods or services of equal value.
    b. The applicant must be given the right to alter or change provisions in the contract.
    c. A contract with a minor may be valid, but it is voidable by the minor.
    d. The performance of the contract cannot be contingent on the occurrence of an event that is subject to chance.

Answer 26

29. c. This is the correct answer. A contract with a minor is voidable by the minor, but it is a legal contract. Parties to an insurance contract give up unequal goods or services, and the applicant cannot change provisions in the contract. Finally, insurance contracts specifically cover events subject to chance.

(LO 4–8)

Question 27

30. What is NOT one of the implications of the underwriting process for advisers and clients?
    a. The planner may need to assist the client in finding solutions other than insurance to solve problems if the client is uninsurable.
    b. Advisers need to help clients understand, assess, and address risks before it is apparent that they will experience a loss.
    c. Because a person submitting an application must share information he or she knows with the insurer, the client should understand the potential conflict of interest before an application is made.
    d. If an application is denied by one company, there is no reason to attempt applying with another company.

Answer 27

30. d. This is the incorrect statement because companies have different underwriting standards, and what one company rejects or highly rates, another company may accept or apply a lesser rating. All other statements are
    true.

(LO 4–5)

Question 28

31. Wilber McNearney was accidently misled by his insurance agent to believe the car he was buying was insured under his existing insurance contract when
    it was not. Relying on the agent’s assurance, he drove the car and had an accident. Which of the following would have the most direct application to
    this situation?

a. the principle of estoppel because the agent misled Wilber
b. the difference between a void and voidable contract
c. a contract of adhesion because Wilber had no choice in accepting the policy
d. the conditions section of the personal auto policy clearly stated it would not be covered

Answer 28

31. a. This is the correct answer. When the agent misled him, the principle of estoppel holds that the insurance company must cover the car. This voids the fact that the contract clearly stated it would not be covered because a reasonable person would have trusted the agent’s word.

(LO 4–8)

Question 29

32. Which one of the following is a provision contained in a homeowner’s policy that is used by an insured or insurer in settling property and casualty losses?
    a. The insurer must reimburse the insured for any voluntary payments the insured makes to injured parties.
    b. The insured may decide to relinquish ownership of lost or damaged property to the insurer and claim a total loss.
    c. The insurer must repair or replace damaged property with that of like kind and quality.

d. The insured must give the insurer notice of a loss immediately or as soon as practicable.
e. The insurer must find the insured property of like kind and quality as that which was damaged or destroyed.

Answer 29

32. d. This is the correct answer. There is no provision for the insurer to reimburse the insured for voluntary payments, and the insured cannot decide to force the insurer to declare a total loss. The insurer can repair or replace the damaged property, but it also may just issue a check. The insurer only has the responsibility to reimburse the insured according to policy provisions.
    While not too significant a factor in answering this question, be careful when evaluating statements involving conditions such as must or may (any, always,
    never, etc.). They can make the difference between an answer being correct or incorrect.

(LO 9–3)

Question 30

33. What provision does the doctrine of waiver make for settling insurance contract disputes?
    a. The insurer may not alter the contract provisions for any reason.
    b. The insurer may void the contract in cases of misrepresentation.
    c. The insurer may be held to any relinquishment of a contractual right.
    d. The insurer may be held only to those terms written into the contract.
    e. The insurer will not be allowed to contradict any prior position taken in court.

Answer 30

33. c. This is the correct answer. Related to (but not the same thing as) the doctrine of waiver, the insurer may be stopped (doctrine of estoppel) from asserting any previously waived contractual rights.

(LO 4–10)

Question 31

34. Last year, John Lewis purchased a building for $850,000. Its current replacement cost is $1,000,000. John insured the building for $700,000, with an 80% coinsurance provision and a $2,000 straight deductible. Last week, a fire broke out in the building, causing $600,000 of covered damage. What amount will the insurance company pay for this loss?

a. $513,678
b. $523,000
c. $523,214
d. $524,927

Answer 31

34. b. This is the correct answer, calculated as follows:

($700,000 / $800,000) * $600,000 - $2,000 = $523,000

Insurance carried = $700,000

Insurance required (80% of $1,000,000) = $800,000

Remember: the coinsurance requirement is based on current replacement cost, not original purchase price.

(LO 9–10)

Question 32

35. Which one of the following answers correctly matches a legal term to an example of that term?

a. criminal act: manufacturing of explosives
b. intentional tort: libel
c. negligence: battery
d. strict liability: arson
e. absolute liability: assault

Answer 32

35. b. This is the correct answer. Battery, arson, and assault are criminal acts and would also normally be considered an intentional tort. The manufacturing of
    explosives is neutral. What one does with the explosives may be deemed a criminal act or result in a tort action.

(LO 4–7)

Question 33

36. Barbara Barnett left her parked car in the drive gear on top of a hill while visiting at a friend’s house. Her car rolled down the hill and injured two
    children. Which one of the following doctrines may influence Barbara’s liability in this situation?

a. assumption of risk
b. strict liability
c. negligence per se
d. negligence

Answer 33

36. d. This is the correct answer. Assumption of risk and strict liability do not relate to this situation. Negligence per se requires that an individual violate a regulation specifically designed to protect a select group of people (e.g., children in a school zone).

LO 4–11)

Question 34

37. A comprehensive personal liability (CPL) policy provides coverage for which one of the following?
    a. legal liability stemming from claims arising away from the premises of the insured
    b. legal liability that may arise as a result of a professional mistake or error
    c. legal liability stemming from business and professional activities of the insured
    d. losses arising due to the dishonesty of employees

Answer 34

37. a. This is the correct answer. The statement would also have been true if it focused on legal liability from claims arising at the premises of the insured. Each of the other responses has to do with professional or commercial liability, which a personal liability policy will not cover.

(LO 9–4)

Question 35

38. Which of the following are accurate descriptions of insurance contracts?

I. The declarations section includes information by the applicant so there is no question of misstatement in the future.

II. Misrepresentation of facts by the insured generally allows the insurer to void the contract if the facts misrepresented were “material.”

III. Because the contract is one of adhesion, the client can choose to change the language if the company accepts it.

IV. Subrogation clauses allow the insurance company to recover money if someone else pays for the same claim.

a. I and IV only
b. I, II, and IV only
c. II, III, and IV only
d. I, II, III, and IV

Answer 35

38. b. This is the correct answer. Option III is an incorrect statement because a contract of adhesion means you “stick” to the contract—no changes. All other statements are correct.

(LO 4–9)

Question 36

39. Which one of the following actions is not accurately paired with an appropriate method of handling risk?

a. risk avoidance: ceasing a line of business
b. risk retention: subcontracting
c. risk transfer: purchasing insurance
d. risk sharing: incorporating a business
e. risk reduction: installing a sprinkler system

Answer 36

39. b. This is the correct answer. Subcontracting is not an example of risk retention.

(LO 4–2)

Question 37

40. What kind of annuity generally makes the first annuity payment one payment interval (e.g., one month) after the date of purchase?

a. deferred annuity
b. refund annuity
c. immediate annuity
d. pure life annuity
e. joint and survivor annuity

Answer 37

40. c. This is the correct answer. Payments are delayed with a deferred annuity. Refund, pure life, and joint and survivor annuities all represent types of annuitization options, rather than identifying when payments begin.

(LO 5–10)

Question 38

41. John Simpson named his cousin, Anne Lawson, as the irrevocable beneficiary of his life insurance policy. John would now like to borrow from the policy’s cash value. What right does Anne have to the cash value? Consider carefully the supporting rationale in selecting your answer.
    a. Anne must allow John to borrow from the cash value because she has only a contingent interest in the policy.
    b. Anne can deny John permission to borrow from the cash value because she has a conditionally vested interest in the policy.
    c. Anne must allow John to borrow from the cash value because she has no interest in the policy until John dies.
    d. Anne can deny John permission to borrow from the cash value, although she has no interest in the policy until John dies.
    e. Anne must allow John to borrow from the cash value because he is the owner of the policy and as such has a right to do so.

Answer 38

41. b. This is the correct answer. An irrevocable beneficiary has what amounts to a veto right on any potential policy changes. So, Anne is said to have a
    conditionally vested interest in the policy.

(LO 5–5)

Question 39

42. What is the purpose of the incontestable clause of a life insurance policy?
    a. During a specified period, the policyowner may reinstate a lapsed policy upon payment of past-due premiums and proof of insurability.
    b. After a specified period, the beneficiary may not challenge the insurance company’s choice of settlement option.
    c. During a specified period, the policyowner may pay a premium in default without causing the policy to lapse.
    d. After a specified period, except in cases of extreme fraud, the insurer is prohibited from challenging the policy on the basis of misstatements in the application.
    e. During a specified period, the policyowner may contest provisions stated in the policy.

Answer 39

42. d. This is the correct answer. The incontestable period normally is one or two years.

(LO 5–8)

Question 40

43. Which of the following does not match the goal with the correct nonforfeiture option?
    a. Joe wants to stop paying premiums on his policy, but keep face amount for specified years—installments for a fixed period.
    b. Maurice wants no additional premiums but the policy to last his lifetime— paid-up reduced.
    c. Linda wishes to use the cash value to pay off the mortgage, in which case she won’t need the coverage—surrender for cash.
    d. Suzanne wants the full amount to continue until her child finishes college without any additional premium—extended term.

Answer 40

43. a. This is the correct answer because installments for a fixed period describes annuity options or settlement options, not a nonforfeiture option. The others are all correct matching of goals and nonforfeiture options.

(LO 5–9)

Question 41

44. Which of the following statements is incorrect regarding the various roles of government in regulating the insurance industry?
    a. Insurance is regulated by the states, so states may choose to reject those created by federal legislation such as those under the Affordable Care Act or COBRA.
    b. Insurance commissioners’ duties include examination of companies for financial solvency, rates, and unfair practices, among other duties.
    c. State courts interpret and apply the laws and regulations. Additionally, they serve as recourse for a review of constitutionality and actions of regulators.
    d. States establish programs to protect policyholders from losses in the event of an insurer insolvency, which typically includes assessing remaining insurers.

Answer 41

44. a. This is the incorrect statement. States may not reject those federal laws, such as ACA. All other statements are accurate.

(LO 4–14)

Question 42

46. Donald Smith is married to Beth and has two small children. Both he and his wife are employed outside the home. They spend both incomes, have a mortgage, personal credit cards with balances, two auto loans, and minimal assets. Donald also has a child by a prior marriage that he is responsible for supporting. Beth helps take care of her aging parents, is an only child, and will be the sole beneficiary of substantial funds in a trust when her parents pass away (the trust supporting them is currently worth over $1 million). Which of the statements below is incorrect concerning financial risks at death exposures?
    a. Because of the trust fund Beth will inherit, her retirement does not need to be considered in evaluating insurance needs.
    b. Donald needs to incorporate child care requirements and the divorce decree needs to be examined to determine how much needs to be carried to meet those obligations.
    c. Debt repayment should be incorporated into the insurance analysis.
    d. Donald’s death as a wage earner would have substantial impact on the family and, thus, should be incorporated into evaluating insurance needs.

Answer 42

46. a. This is the incorrect statement. Because the funds are being used to support her parents and they are in a trust, there is no way of knowing without analysis whether the trust will entirely cover Beth’s retirement. All
    of the other statements are true concerning issues that should be evaluated through an insurance analysis.

(LO 5–1)

Question 43

47. Which of the following statements are correct about disability insurance?

I. Noncancelable means that the policy must be renewed but the premium may change for the class of insured.

II. The classification of a job has low impact on the premium and coverage.

III. An insured is restricted in the amount of coverage they can purchase to avoid moral hazard.

IV. Guaranteed insurability riders allow those who believe their income will increase significantly in future years to protect their right to purchase additional coverage even if their health changes.

V. Cost-of-living rider increasing the benefit after an insured is disabled is an important rider to protect from short-term disabilities.

a. I and III
b. II and III
c. III and IV
d. III, IV, and IV

Answer 43

47. c. This is the correct answer. Noncancelable policies cannot be canceled, and the premium cannot be increased, except as may be specified in the terms of
    the contract where age changes occur. The job classification has high impact on both coverage and premium, and a cost-of-living rider protects against
    long-term disabilities, not short-term disabilities. All other statements are correct.

(LO 8–3)

Question 44

48. Which of the following is an appropriate action concerning keeping or replacing a policy based on the fact patterns?
    a. Aaron has a whole life policy that he no longer needs because he is a widow with no children, so you recommend he utilize a 1035 exchange into an annuity to provide income.
    b. Amber has received a new quote for 20-year term that is less costly with a quality company for a new 20-year term that will extend her coverage for another three years at a lower rate. You recommend she cancel her old coverage and apply for the new policy.
    c. Ariana’s insurance agent has just changed companies and called her to explain that the new company’s products are better and he can replace the whole life policy that she bought three years ago with a better performing whole life plan. Nothing else has changed since the application. You recommend that illustrations of both plans be evaluated with serious consideration of keeping the original since the front end loads have almost been paid and both companies are equally sound.

d. Adam and his wife just had their second child and he received a substantial raise. He has been carrying $1 million in 10-year level term coverage that will expire in eight years. His health is not great. He would
also like to save additional funds in stocks and bonds. You recommend he convert part of his 10-year term policy to a variable life product.

Answer 44

48. b. This is the incorrect response. Amber should not cancel her existing coverage until the new policy is issued. All other recommendations are appropriate.

(LO 6–5)

Question 45

49. Which of the following statements concerning Medicare are accurate?

I. An individual must sign up the three months before, during, or three months after their 65th birthday in order to avoid penalties and avoid any preexisting condition clauses.

II. Parts D and B carry a penalty in the forms of a higher premium if the participant does not sign up in time unless they have credible coverage.

III. If a client has a Medicare advantage plan, they still need Parts A, B, and D.

IV. Medicare Advantage Plans, Medigap plans, and Medicare supplemental insurance are different names for the same insurance.

a. I only
b. I and II only
c. II and III only
d. I, II, and IV

Answer 45

49. b. This is the correct answer. Statement III is incorrect because Medicare Advantage plans replace the need for B and D as it is a complete package of all the parts. Statement IV is incorrect because Medicare Advantage Plans are NOT the same as Medicare Supplemental Insurance (previously referred to as Medigap).

(LO 7–4)

Question 46

50. Cathy Kiley has a comprehensive major medical policy with a $200 deductible and 80% coinsurance to a $5,000 stop-loss limit. Cathy recently became ill and had covered medical bills totaling $3,850. What amount will the insurer pay in this situation?

a. $930
b. $970
c. $2,880
d. $2,920
e. $3,650

Answer 46

50. d. This is the correct answer, calculated as follows:

$3,850 – $200 = $3,650;

$3,650 × 80% = $2,920.

(LO 7–5)

Question 47

51. Willard Smith purchased a home from Lucinda Powers 20 years ago. Now he would like to sell it. During the course of the legal work preparing for the
    sale, it was found that Willard’s claim to ownership of the property was subject to question because of irregularities in the probate proceeding from
    which Lucinda received the property. Willard’s recourse is likely to be against which of the following?

a. the professional liability insurance carrier of the real estate agent who sold Willard the property
b. Lucinda’s homeowners policy carrier, since it should have known that she had no right to transfer the property
c. Willard’s homeowners policy carrier, since it should have warned him not to purchase the property

d. the insurer who sold Willard title insurance when he purchased the
property

Answer 47

51. d. This is the correct answer. This is the type of situation title insurance was designed to cover. No other insurance coverage has any responsibility in a case like this. The realtor would not be held liable.

(LO 9–7)

Question 48

52. Melissa, age 55, makes $100,000 and has determined that before taxes, in case of a disability, she would need $65,000 increasing with inflation through retirement. Her current retirement projections show that if she continues saving at the same rate, she will achieve her goals. She currently has 60% of
    her income covered through a group disability plan at work that her employer pays. A company has offered to underwrite 70% of her income. Which of the
    following statements are accurate about Melissa’s coverage and her need and ability to acquire more?

I. Because the employer pays for the group coverage, the insurance company might increase the amount of coverage they will underwrite.

II. Because the employer pays for the group coverage, the insurance company might decrease the amount of coverage they will underwrite.

III. If Melissa purchases $5,000 of individual coverage with a cost-of-living rider, she will cover her goal.

IV. Melissa should purchase the cost-of-living rider with her policy.

a. I and IV
b. II and IV
c. I, III and IV.
d. II, III, and IV

Answer 48

52. d. This is the correct answer. Statement II is incorrect because when an employer pays for group disability coverage, the benefits are taxable. As a result, companies will sometime increase the underwritten amount. While the gap is just $5,000 in the first year, that simply brings her up to the initial goal. Because the group policy will not increase with inflation, she will start
    losing ground. Additionally, she will not be able to save any additional funds for retirement and will not be receiving her company contributions to retirement either. She should purchase the full amount possible to reach her goal.

(LOs 8–1, 8–2, and 8–5)

Question 49

53. Which of the following statements concerning flexible spending plans and HSAs are true?

I. Employers can offer either an employee to roll over $500 into the following year or allow expenses for the first 2½ months to be used to spend the balance in a flexible spending plan, but not both.

II. Owners of health savings accounts may not contribute past age 65.

III. Owners of health savings accounts may use funds accumulated in the HSA to pay long-term care premiums.

IV. Participants over the age of 55 may contribute an additional $1,000 in both HSAs and flexible spending plans.

a. I and II only
b. I, II, and III only
c. II, III, and IV only
d. I, II, III, and IV

Answer 49

53. b. This is the correct answer. Flexible spending plans do not allow for catchup provisions of $1,000.

(LO 7–6)

Question 50

55. After going through a costly divorce coupled with a significant downturn in her business, Mary is loaded with debt and does not have enough cash flow to meet her monthly payment obligations. As a result, she is considering personal bankruptcy as a potential option. Mary’s attorney has explained that she will be freed from most of her debts in exchange for giving creditors
    those of her assets that legally may be seized. Which type of bankruptcy is Mary considering?

a. Chapter 13 bankruptcy
b. Chapter 7 bankruptcy
c. Chapter 9 bankruptcy
d. Chapter 11 bankruptcy

Answer 50

55. b. This is the correct answer. Chapter 7 bankruptcy involves liquidation of most (but not necessarily all) assets. Chapter 13 bankruptcy involves creation
    of a repayment plan, and the debtor usually gets to keep most assets. Chapters 9 and 11 are generally used by businesses or municipalities to reorganize debt.

(LO 2–5)

Question 51

56. Lori Graham has sold life insurance to many clients over the past eight years, receiving commissions on the sales. She just earned her CFP designation. She has decided to broaden the scope of her practice to include investment and tax planning advice, but she will limit the products she sells to fixed and variable annuities and life insurance. She plans to include the phrase Tax and Investment Planning on her business cards along with her designation, and anticipates charging a separate fee for her financial planning advice. Which of the following requirements are accurately described?

I. Lori must be registered with the SEC as an investment adviser.

II. Lori must be registered/licensed with FINRA.

III. Lori must disclose that she limits her sales to those specific products in her scope of engagement.

IV. Lori will not be held by the CFP board to the fiduciary standard if she sells the client life insurance more than a month after completing the financial planning engagement.

a. I and II
b. I, II, and III
c. I, II, and IV
d. I, II, III, and IV

Answer 51

56. a. This is the correct answer. Any representative who wants to sell variable products must register with FINRA and normally obtain the Series 63 and Series 6 or Series 7 licenses. Lori must disclose her limited product selection to clients, but it does not necessarily have to be in the scope of engagement as long as it is done prior to sale. The last statement is incorrect because the
    amount of time lapsing between a contract and the sale is irrelevant.

(LOs 2–1, 2–2, and 2–3)

Question 52

57. Which one of the following arises from being classified as an investment adviser by the SEC?
    a. A client advisory contract can be transferred to another financial planner at any time.
    b. A written disclosure brochure must be delivered to FINRA.
    c. The individual can use RIA after his or her name on business cards and stationery.
    d. Client records must be retained indefinitely.
    e. The individual must update Form ADV Part 1 each year.

Answer 52

57. e. This is the correct answer. Client contracts cannot be transferred without the express consent of the client. Brochures are given to clients, not FINRA, and the information from form ADV is updated annually. The initials RIA cannot be used, and records must be kept for five years from the date of the last client contact.

(LO 2–2)

Question 53

58. Andrew Rivers, CFP®, has prepared a statement of full disclosure for potential clients. Which one of the following is information that must appear in the statement, according to the Code of Ethics and Professional Responsibility of the CERTIFIED FINANCIAL PLANNER Board of Standards
    Inc.?

a. a list of all operating expenses connected with Andrew’s financial planning practice
b. the names and addresses of the bank or banks where the planning practice keeps deposits
c. a list of clients serviced over the past 12 months
d. the names of all insurance companies with whom Andrew has an agent’s contract

Answer 53

58. d. This is the correct answer. None of the other information is required by CFP Board to be disclosed.

(LO 2–3)

Question 54

59. Bob Jordan deposited an inheritance of $20,000 in an account earning an 8% annual rate compounded quarterly. How much will be in the account at the
    end of three years? Round your answer to the nearest dollar.

a. $21,224
b. $25,194
c. $25,306
d. $25,365
e. $50,363

Answer 54

59. d. This is the correct answer, calculated as follows:

4 (gold, P/YR), 
$20,000 +/- (PV), 
8 (I/YR), 
3 (gold, ×P/YR), 
(FV) = $25,365. 

(LO 3–2)

Question 55

60. Kent Stephens wants to accumulate $15,000 in 20 years. He expects to earn an average annual compound return of 11%. How much should he invest at the end of each of the next 20 years to reach his goal? Round your answer to the nearest dollar.

a. $210
b. $234
c. $389
d. $467

Answer 55

60. b. This is the correct answer, calculated as follows:

```
1 (gold, P/YR),
$15,000 +/– (FV),
11 (I/YR),
20 (N),
PMT) = $233.64 (LO 3–6
~~~

Question 56

61. Janine Scott wants to receive an amount equal to $40,000 in today’s dollars at the beginning of each year for the next eight years. She assumes that
    inflation will average 6% over the long run and that she can earn a 9% compound annual after-tax return on investments. What lump sum does Janine need to invest today to fund her needs? Round your answer to the nearest dollar.

a. $282,810
b. $289,211
c. $290,814
d. $353,527
e. $363,564

Answer 56

61. c. This is the correct answer, calculated as follows:

(gold, BEG/END), 
1 (gold, P/YR), 
$40,000 +/– (PMT), 
8 (N), 
[(1.09 ÷ 1.06) – 1 × 100 = 2.8302] (I/YR), 
PVAD = $290,814. 

(LO 3–7)

Question 57

62. Karla wants to fund her five-year-old son’s college education. Annual tuition at a state university is currently $10,000, but is increasing at a rate of 6% each year. She believes she can earn a 7% (annual) after-tax return on her investments. How much should Karla deposit today to fund four years of college education for her son, beginning when he reaches age 18? Round answer to the nearest dollar.

a. $34,536
b. $34,584
c. $34,881
d. $34,910

Answer 57

62. d. This is the correct answer, calculated as follows:

(gold, BEG/END), 1 (gold, P/YR)

Step 1. 13 (N), 6 (I/YR), 10,000 +/- (PV), FV=21,329.28

Step 2. 4 (N), .9434* (I/YR), 21,329.28 +/- (PMT), [0 (FV)],
PVAD=84,128.53
*I/YR= [(1.07/1.06) – 1] x 100 = .9434

Step 3. 13 (N), 7 (I/YR), [0 (PMT)], 84,128.53 (FV), PV=$34,910.35

(LO 3–7)

Question 58

63. Stella Easley wants to open a boutique in six years. She will need an additional $300,000 (stated in today’s dollars) at that time. She assumes that inflation will average 7% and that she can earn an 11% compound annual after-tax return on investments. What serial payment should Stella invest at the end of the first year (i.e., one year from today) to attain this goal? Round your answer to the nearest dollar.

a. $43,884
b. $45,527
c. $48,395
d. $48,714
e. $54,697

Answer 58

63. d. This is the correct answer, calculated as follows:

set calculator to END mode, 
1 (gold, P/YR), 
6 (N), 
$300,000 +/– (FV), 
[(1.11 ÷ 1.07) – 1 × 100 = 3.7383] (I/YR), 
(PMT) = $45,527. 

You must then add a year’s worth of inflation because the first payment will be made at the end of the year. Do this additional calculation as follows:

$45,527 × 1.07 = $48,713.89.

(LO 3–8)

Question 59

64. Melissa Nolman’s house payments, including principal and interest, are $750 at the end of each month. She has a 25-year mortgage note with a 12%
    interest rate compounded monthly. What was the amount of Melissa’s original mortgage note? Round your answer to the nearest dollar.

a. $16,517
b. $34,152
c. $71,210
d. $71,922
e. $100,000

Answer 59

64. c. This is the correct answer, calculated as follows:

12 (gold, P/YR), 
(gold, BEG/END – to set calculator in END mode), 
$750 +/– (PMT), 
25 (gold, xP/YR), 
12 (I/YR), 
(PV) = $71,209.91. 

(LO 3–3)

Question 60

65. James Wicks purchased a zero-coupon bond for $420. The bond matured last week, and James received the face amount of $1,000. If the bond paid an average annual compound rate of 13% compounded semiannually, approximately how many years did James hold the bond?

a. 2 years
b. 7 years
c. 14 years
d. 15 years
e. 28 years

Answer 60

65. b. This is the correct answer, calculated as follows:

2 (gold, P/YR), 
$420 +/– (PV), 
$1,000 (FV), 
13 (I/YR), 
(N) = 13.7754 ÷ 2 = 6.8877. 

(LO 3–4)

Question 61

74. Bill and Melinda own several homes and a yacht. They rotate their artwork between homes and lend to art galleries. They travel frequently and take jewelry and collectibles with them along with their chef and personal butler, who arranges for their belongings to be transferred routinely. What combination of coverage will protect their personal property?
    a. homeowners, automobile, umbrella policy
    b. homeowners, automobile, yacht, and in-land marine
    c. homeowners, automobile, yacht, floater policy, and umbrella
    d. homeowners and inland marine

Answer 61

74. b. Inland marine or floater policy will cover the personal property wherever it is. The homeowners, yacht, and automobile coverage also has some coverage for personal property. The umbrella policy covers liability, not
    property, so would be of no use.

(LO 8–2)

Question 62

75. Brenda has started her first job, and she is purchasing a new disability income policy. She wants to ensure that she will be able to increase her coverage prior to a disability in addition to the cost-of-living rider. Which of the following riders will help Brenda accomplish her goal?

a. additional insurance rider
b. social insurance rider
c. residual benefits option
d. guaranteed insurability option

Answer 62

75. d. This is the correct answer. The additional insurance rider is a type of cost of- living rider, and neither the social insurance rider nor the residual benefits option provides the coverage Brenda desires.

(LO 8–4)

Question 63

76. Medicare will most likely provide long-term care benefits when a person
    a. is hospitalized for a week and then immediately enters a skilled nursing facility for 35 days.
    b. is only expected to live for seven months and hires a nurse on a full-time basis to provide hospice care.
    c. moves her mother to a nursing home after caring for her at home for six months.
    d. needs help getting to and from his house and hires a part-time nurse for that purpose.

Answer 63

76. a. This is the correct answer. Medicare guidelines require the patient to have had a period of hospitalization of at least 3 days and to have entered a skilled
    nursing facility within 30 days of the hospital confinement. Additionally, Medicare generally requires that the patient be capable of having his or her condition improve. (LO 8–7)

Question 64

77. Melinda has been working with a particular client for over 15 years. She has met the client’s children and has a friendly relationship with both the children and the client’s attorney. At the last meeting, the client told her to retitle her assets by putting her caretaker’s name on the account so the caretaker could pay bills. What can Melinda legally do?
    a. postpone changing the account ownership until she talks with the attorney
    b. contact one of the children and express concern
    c. change the title as the client requested and notify her compliance department and the state department of suspected elder abuse
    d. send a letter to the client and her attorney expressing concern after changing the title and notifying the state department of suspected elder abuse

Answer 64

77. c. Melinda has a duty of confidentiality to the client and cannot share any information with the attorney or the client unless she has written permission to do so. She must act on the client’s request. She also has a legal liability to report any potential elder abuse which this has the potential to be. She could certainly reach out to the client and ask to get written permission to talk with
    the attorney about setting up a system or talk to children but without permission even though it feels like the moral action, she does not have the right.

(LO 2–3)