C.26 Insurance policy and company selection

Question 1

When selecting a life insurance policy, which factor should be considered first?

A. The policy’s premium cost
B. The policy’s death benefit
C. The policy’s cash value accumulation
D. The insurer’s financial strength rating

Answer 1

D. The insurer’s financial strength rating.

When selecting a life insurance policy, it is important to consider the financial strength of the insurer to ensure they will be able to pay claims in the future.

C.26 Insurance policy and company selection

Question 2

Which of the following factors should be considered when selecting a health insurance policy?

A. The policy’s premium cost
B. The policy’s deductible and copay amounts
C. The policy’s network of healthcare providers
D. All of the above

Answer 2

D. All of the above

When selecting a health insurance policy, it is important to consider factors such as premium cost, deductible and copay amounts, and the network of healthcare providers.

C.26 Insurance policy and company selection

Question 3

A client is looking for a disability insurance policy that will provide coverage until age 65. Which type of disability insurance policy should be recommended?

A. Short-term disability insurance
B. Long-term disability insurance
C. Individual disability insurance
D. Group disability insurance

Answer 3

B. Long-term disability insurance

C.26 Insurance policy and company selection

Question 4

Which of the following is an advantage of purchasing an umbrella insurance policy?

A. It provides additional liability coverage
B. It is less expensive than other types of insurance
C. It provides coverage for damages to personal property
D. It is not necessary if you have other types of insurance

Answer 4

A. It provides additional liability coverage

C.26 Insurance policy and company selection

Question 5

A client is concerned about the financial impact of a serious illness. Which type of insurance policy should be recommended?

A. Long-term care insurance
B. Disability insurance
C. Critical illness insurance
D. Life insurance

Answer 5

C. Critical illness insurance

C.26 Insurance policy and company selection

Question 6

A client is looking for a policy that provides coverage for both death and savings. Which type of policy should be recommended?

A. Term life insurance
B. Whole life insurance
C. Universal life insurance
D. Variable life insurance

Answer 6

B. Whole life insurance

C.26 Insurance policy and company selection

Question 7

A client is interested in purchasing a policy that will provide coverage for a specific period of time. Which type of life insurance policy should be recommended?

A. Term life insurance
B. Whole life insurance
C. Universal life insurance
D. Variable life insurance

Answer 7

A. Term life insurance

C.26 Insurance policy and company selection

Question 8

A client is concerned about the financial impact of a disability that could prevent them from working. Which type of disability insurance policy should be recommended?

A. Short-term disability insurance
B. Long-term disability insurance
C. Individual disability insurance
D. Group disability insurance

Answer 8

C. Individual disability insurance

C.26 Insurance policy and company selection

Question 9

A client is looking for a policy that will provide coverage for their business in the event of a lawsuit. Which type of insurance policy should be recommended?

A. Liability insurance
B. Property insurance
C. Business interruption insurance
D. Workers’ compensation insurance

Answer 9

A. Liability insurance.

Liability insurance provides coverage in the event that a business is sued for damages caused by its products, services or operations.

C.26 Insurance policy and company selection

Question 10

A client is concerned about the financial impact of a fire that could damage their business property. Which type of insurance policy should be recommended?

A. Liability insurance
B. Property insurance
C. Business interruption insurance
D. Workers’ compensation insurance

Answer 10

B. Property insurance

Property insurance provides coverage for damage to a business’s property caused by a fire.

C.26 Insurance policy and company selection

Question 11

A client is interested in purchasing a policy that will provide coverage for loss of income due to a disaster. Which type of insurance policy should be recommended?

A. Liability insurance
B. Property insurance
C. Business interruption insurance
D. Workers’ compensation insurance

Answer 11

C. Business interruption insurance

Business interruption insurance provides coverage for loss of income due to a disaster, such as a natural disaster or fire.

C.26 Insurance policy and company selection

Question 12

A client is interested in purchasing a policy that will provide coverage for damage to their business property caused by theft. Which type of insurance policy should be recommended?

A. Liability insurance
B. Property insurance
C. Business interruption insurance
D. Workers’ compensation insurance

Answer 12

B. Property insurance

Property insurance provides coverage for damage to a business’s property caused by theft.

C.26 Insurance policy and company selection

Question 13

A client is concerned about the financial impact of a product liability claim. Which type of insurance policy should be recommended?

A. Liability insurance
B. Property insurance
C. Business interruption insurance
D. Workers’ compensation insurance

Answer 13

A. Liability insurance

Liability insurance provides coverage in the event that a business is sued for damages caused by its products, services, or operations

C.26 Insurance policy and company selection

Question 14

A client has a life insurance policy classified as a Modified Endowment Contract (MEC). If the client surrenders the policy, what is the tax treatment of the gain?

A. Taxed as capital gains
B. Taxed as ordinary income
C. Taxed as a qualified dividend
D. Not taxable

Answer 14

B. Taxed as ordinary income

Any gain from the surrender of a MEC is taxed as ordinary income. The gain is calculated as the cash value of the policy minus the basis (amount paid into the policy).

C.26 Insurance policy and company selection

Question 15

Which of the following statements is true regarding distributions from a Modified Endowment Contract (MEC)?

A. Distributions are always tax-free
B. Distributions are taxed on a “first in, first out” (FIFO) basis
C. Distributions are taxed on a “last in, first out” (LIFO) basis
D. Distributions are taxed as long-term capital gains

Answer 15

C. Distributions are taxed on a “last in, first out” (LIFO) basis

Distributions from a MEC are subject to the LIFO rule, meaning earnings (gains) are distributed first and are taxable as ordinary income.

C.26 Insurance policy and company selection

Question 16

If a client, age 58, takes a loan of $100,000 from a Modified Endowment Contract (MEC) and the gain in the policy is $80,000, what is the taxable amount and is there a penalty?

A. $0 taxable, no penalty
B. $80,000 taxable, 10% penalty on $80,000
C. $100,000 taxable, no penalty
D. $80,000 taxable, 10% penalty on $100,000

Answer 16

B. $80,000 taxable, 10% penalty on $80,000

The $80,000 gain is taxable as ordinary income. Because the client is under age 59½, there is a 10% early withdrawal penalty on the taxable amount ($80,000).

C.26 Insurance policy and company selection

Question 16

A client, age 55, withdraws $50,000 from a Modified Endowment Contract (MEC) with a cash value of $200,000 and a basis of $150,000. What are the tax implications of this withdrawal?

A. $0 taxable, $50,000 tax-free
B. $50,000 taxable as ordinary income
C. $25,000 taxable as ordinary income
D. $50,000 taxable as long-term capital gains

Answer 16

B. $50,000 taxable as ordinary income

Under the LIFO rule for MECs, the first $50,000 of the withdrawal is considered a gain and is taxable as ordinary income.

C.26 Insurance policy and company selection

Question 16

How does a life insurance policy become classified as a Modified Endowment Contract (MEC)?

A. When premiums exceed the guideline premium limit
B. When the policy fails the 7-pay test
C. When the policy owner changes beneficiaries
D. When the policy is over 20 years old

Answer 16

B. When the policy fails the 7-pay test

A life insurance policy becomes classified as a MEC if it fails the 7-pay test, which limits the amount of premiums that can be paid into the policy in the first seven years to prevent it from becoming primarily an investment vehicle.

C.26 Insurance policy and company selection