Case Study Quiz Flashcards
Devin has $70,000 of protection under his employer’s group term life insurance plan, for which he makes a monthly contribution of $1.50. Lana is the named beneficiary. The actual cost to the employer for his protection is $0.20 per month per $1,000 of insurance, and the uniform premium for group term insurance under the Internal Revenue Code is $0.09 per month per $1,000 of insurance. Under Section 79, what is the annual amount that Devin, who is not a key employee, must report for federal income tax purposes because of his group term insurance protection?
A)
$30.00
B)
$3.60
C)
$57.60
D)
$21.60
The answer is $3.60. The amount is calculated by multiplying $0.09 per month by 20 ($20,000 of coverage in excess of $50,000) and then multiplying by 12 to arrive at the annual amount (0.09 × 20 × 12 = $21.60). Then, subtract the amount paid by the employee ($1.50 per month × 12 months = $18.00 per year); $21.60 − $18.00 = $3.60.
LO 6.1.1
The Kennedys had a kitchen fire causing extensive damage to their dwelling. The cost of repairing the damage is $40,000. At the time of the loss, the limit on the dwelling under the Kennedys’ policy was $200,000, but the adjuster estimates the replacement cost to be $250,000. What is the amount of loss the Kennedys will recover from their insurance company?
A)
The Kennedys will collect $40,000 if the policy includes the replacement cost endorsement.
B)
The cost of the repairs is covered in full, minus the deductible.
C)
The Kennedys will collect $32,000, minus the deductible.
D)
The Kennedys violated the replacement cost provision, and only the actual cash value of the loss will be paid, minus the deductible.
b
Because the Kennedys complied with the 80% coinsurance requirement for partial losses, they will collect the full cost of the repairs, less the deductible.
LO 6.1.1
In the current year, Magnum Corporation began offering Devin and other employees access to a high deductible health savings plan and an accompanying health savings account (HSA) through a Section 125 Cafeteria Plan. Which of the following statements regarding the income tax treatment is CORRECT?
Contributions to the health savings account avoid federal and state taxes, but not FICA taxes, in the current year.
Contributions into the health savings account must be used before December 31st of the plan year.
Starting at age 65, funds from the health savings account can be withdrawn penalty free for non-medical related uses.
A)
III only
B)
I and II only
C)
I only
D)
II and III
a
Contributions to a health savings account through a Section 125 Cafeteria plan save on federal, state, and FICA taxes and funds may rollover to the next plan year. At age 65, funds can be withdrawn penalty-free for non-medical related uses.
LO 6.1.1
As part of a life insurance needs analysis, the Kennedys should be concerned about a fund for which of the following?
A)
Income for the surviving spouse
B)
Education of any dependents
C)
Dependency care income
D)
All of these
d
The answer is all of these. The financial needs analysis method, also known as the life insurance needs method, analyzes all recurring expenses of the dependent survivors and any unusual expenses that may result from the death of the insured.
LO 6.1.1
Devin and Lana are meeting with you next week and will bring information regarding Devin’s group disability income insurance plan. What definition of disability would provide the most favorable protection for Devin?
A)
The inability of the insured to engage in any occupation
B)
The inability of the insured to engage in his own occupation and not working in any gainful employment
C)
The inability of the insured to engage in his own occupation
D)
The inability of the insured to engage in any reasonable occupation for which he is or might easily become qualified
c
The most favorable protection for Devin would be his inability to engage in his own occupation. The own occupation definition of disability provides the broadest protection for insureds, in that they must not be able to perform the major duties of their own occupations.
LO 6.1.1
Devin and Lana are thinking about selecting a settlement option for their variable annuity. Their objective is to have the annuity provide income until both of them are deceased. Which of the following settlement options will best meet their needs?
A)
Joint and survivor annuity
B)
Single (straight) life annuity
C)
Life annuity with period certain
D)
Installment refund annuity
a
The joint and survivor annuity will provide the couple with annuity income until both of them are deceased. For a given purchase price, a single (straight) life annuity generally provides the highest monthly payment amount because the annuity provides no payments beyond the annuitant’s life.
What is the amount of coverage the Kennedys have on their personal property under their homeowners insurance policy?
A)
$100,000
B)
$200,000
C)
$20,000
D)
$50,000
a
The answer is $100,000. The Kennedys have $200,000 of coverage on their home. Under a homeowners policy, the limit on personal property (Coverage C) is typically 50% (50% × $200,000 = $100,000) of the amount of coverage on the dwelling.
LO 6.1.1
If Devin’s nonqualified deferred compensation plan is informally funded, which of the following statements regarding his plan is CORRECT?
I. The assets funding the plan are owned by Magnum Corporation and are subject to the claims of its general creditors.
II. Any earnings generated on the assets funding the plan are taxed to Magnum Corporation.
A)
I only
B)
Neither I nor II
C)
II only
D)
Both I and II
d
Regarding the Kennedys’ deferred variable annuity,
A)
the contract fees will be less than if they owned a mutual fund.
B)
the insurer directs the cash value investment allocation.
C)
the return credited to the contract is fixed.
D)
the amount of growth during the accumulation stage is uncertain.
d
Because the annuity is variable, the Kennedys have the ability to invest in one or more subaccounts with varying investment styles. Because the final outcome of the investment is uncertain, the future amount of growth during the accumulation stage is uncertain as well.
LO 6.1.1
This year, Devin and Lana withdraw $25,000 from their variable annuity to pay some unexpected bills. Assuming the annuity was issued in 2010, and the $125,000 balance in the annuity includes $50,000 in earnings, what is the amount of the $25,000 withdrawal that is subject to income tax?
A)
$25,000
B)
$0
C)
$12,500
D)
$5,000
a
The answer is $25,000. Because the annuity was issued after August 13, 1982, any withdrawals are taxable, to the extent there are earnings in the contract (LIFO rule). Therefore, the entire $25,000 withdrawal is subject to income tax.
LO 6.1.1
