Exam Tips - Ethics, Fundamentals, & Insurance

Question 1

ALWAYS bar list for becoming CFP certified

Answer 1

• Felony conviction for theft, embezzlement, or other financially based crimes
• Felony conviction for tax fraud or other tax-related crimes
• Revocation of a financial professional license, unless the revocation is administrative in nature
• Felony conviction for any degree of murder or rape
• Felony conviction for any other violent crime within the last five years

Question 2

PRESUMED bar list for becoming CFP certified

Answer 2

• Two or more personal or business bankruptcies
• Revocation or suspension of a non-financial professional license, unless the revocation is administrative in nature
• Suspension of a financial professional license, unless the suspension is administrative in nature
• Felony conviction for nonviolent crimes (including perjury) within the last five years
• Felony conviction for violent crimes other than murder or rape that occurred more than five years ago

Question 3

Which of the following is not an element of the CFP Board requirement of Fiduciary Duty?

a) Duty of Diligence
b) Duty of Loyalty
c) Duty of Care
d) Duty to Follow Client Instructions

Answer 3

A. Duty of Diligence
- The Duty of Diligence requires a CFP professional to provide services to their clients in a timely and thorough manner. Diligence is not a required element of Fiduciary Duty.

Question 4

Amber applied for CFP® certification and was denied. Her prior conduct falls under the “presumed list” and she wants
to appeal. Which of the following is true regarding the review process?
a) She must call the Professional Review staff within 15 days and tell them that she plans to submit to the review
process.
b) A fee will be charged.
c) A final decision whether to deny or grant the petition will be made within 120 days of application.
d) The Disciplinary and Ethics Commission’s decision regarding a petition for consideration is final and may never
be appealed.

Answer 4

B. A fee will be charged
There is nor requirement to call, nor is there any set day in which a decision must be made, a written petition for reconsideration must be submitted. A decision may be appealed if relevant professional revocation or suspension is vacated or the relevant felony conviction is overturned

Question 5

15. Ralph, a CFP® professional, was the financial advisor for Sue and her husband Bob, who had recently passed away.
    Bob’s assets included an IRA with Sue as the named beneficiary. Ralph advised Sue that she could disclaim her interest
    as beneficiary of the IRA, which would allow its value to pass to her two children. However, Ralph did not notify the
    custodian issuer of the IRA that Sue had disclaimed her interest in the IRA. Ralph acknowledged during his hearing with
    the Disciplinary and Ethics Commission that he could have annuitized the existing annuity in the IRA, which would have
    been less costly for Sue than purchasing a new annuity for each of her children. The Commission determined that
    annuitizing the existing annuity would have avoided early withdrawal penalties and the effects on taxable income on Sue’s
    children, and issued a Public Letter of Admonition to Ralph. The Commission ordered Ralph to complete, in addition to
    the 30 hours of continuing education for renewal, 12 hours of continuing education, including four hours
    each in estate planning, investments and estate distributions. Ralph violated all of the following provisions
    of the Code of Ethics EXCEPT?
    a) Failed to exercise reasonable and prudent professional judgment in providing professional services
    b) Failed to act in the best interest of the Client
    c) Failed to modify the scope of the agreement and to bring in an estate planning attorney
    d) Failed to make and/or implement only recommendations that were suitable for the Client

Answer 5

C. Failed to modify the scope of the agreement and to bring in an estate planning attorney
- Ralph failed to apply knowledge and skill in Bob’s passing. Ralph did not act as a fiduciary nor recommend options to maximize the potential of meeting client goals. The fact pattern does not indicate Ralph failed to identify and select goals.

Question 6

For many years, Samuel has been employed as a financial advisor at a leading brokerage firm where he conducts
suitability reviews and makes investment recommendations for his clients. He recently obtained his CFP® certification and
has just signed an agreement with Thomas, a new client, for a comprehensive financial plan. According to the Code of
Ethics, all of the following represent additional requirements for Samuel in his engagement with Thomas compared with
his other clients EXCEPT:
a) Samuel must understand the new client’s personal and financial circumstances by gathering qualitative and
quantitative information.
b) Samuel must Identify and prioritize goals through the financial planning process.
c) Thomas must receive an oral disclaimer identifying Samuel’s sources of compensation.
d) Thomas must receive a written notice of confidentiality policies at the time of engagement

Answer 6

C. Thomas must receive an oral disclaimer identifying Samuel’s source of compensation.
- A CFP professional engaged for Financial Planning must clearly describe and provide clients with their methods of compensation in writing.

Question 7

John is a CFP® professional and is engaged in the financial planning process with his client Frank. John is in the data
gathering process and has collected bank statements, insurance policies, estate documents, and all other relevant
information with the exception of tax returns. Frank refuses to supply the tax returns or any documents that support his
income claims. John’s best course of action is to?
a) The CFP Board’s Code of Ethics and Standards of Conduct require John to disengage from the client until such
time Frank is willing to supply tax returns or other documents to support his income.
b) If John suspects that Frank is evading taxes or underreporting his income, John is required by the Code of Ethics
and Standards of Conduct to report his suspicions to the appropriate regulatory authorities.
c) John should contact the IRS and request a copy of tax returns for the past three years, with or without the consent
of the client.
d) John may limit the scope of the engagement to recommendations for which he has sufficient and relevant
information or disengage from the client.

Answer 7

D. John may limit the scope of the engagement to recommendations for which he has sufficient and relevant information or disengage from the client.
- According to Practice Standard 1.ii: Obtaining Quantitative Information and Documents, if the practitioner is unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, the
practitioner shall either: restrict the scope of the engagement to those matters for which sufficient and relevant information is available or terminate the engagement. Answer A is incorrect because the Practice Standard permits the practitioner to either limit the scope of the engagement or disengage. Answer B is incorrect because the Standards of Professional Conduct do not require a CFP® professional to report suspicions to the appropriate regulatory authority. Answer C is incorrect because John must receive the information from his client. He cannot request copies of the tax returns without the consent of his client

Question 8

Mary is a CFP® professional and is in the analyzing and evaluating step of the financial planning process. Mary is
developing a capital needs analysis for her client and has established assumptions for tax rates, investment returns and inflation rates. Her client disagrees with Mary’s assumptions regarding inflation and other economic variables used in the retirement needs analysis calculation. What should Mary do next?
a) If Mary and her client are unable to agree on the assumptions used for the retirement capital needs analysis,
Mary should limit the scope of the engagement and exclude retirement capital needs analysis from her
recommendations.
b) Mary should use the assumptions that result in the most conservative recommendations for retirement funding.
c) The CFP Board’s Code of Ethics and Standards of Conduct require Mary to disengage from the client.
d) Mary should provide her client with multiple projections, consistent with all varying assumptions.

Answer 8

A. If Mary and her client are unable to agree on the assumptions used for the retirement capital needs analysis, Mary should limit the scope of engagement and exclude retirement capital needs analysis from her recommendations.
- According to Practice Standard 2.a. Identifying Potential Goals. A CFP® professional must discuss with the Client the CFP® professional’s assessment of the Client’s financial and personal circumstances, and help the Client identify goals, noting the effect that selecting a particular goal may have on other goals. In helping the Client identify goals, the CFP® professional must discuss with the Client, and apply, reasonable assumptions and estimates. These may include life expectancy, inflation rates, tax rates, investment returns, and other Material assumptions and estimates.”

Question 9

RIA Exceptions “to Registration” with the SEC

Answer 9

The exception is that TABLEs are incidental:

• Teachers
• Accountants
• Brokers
• Lawyers
• Engineers

Question 10

RIA Exemptions “From Registration”

Answer 10

VIPS are SaFE from exemptions:

• Venture Capital
• Insurance
• Private funds less than $150M
• home State
• Foreign advisors
• securities not on a national Exchange

Question 11

Accredited Investor

Answer 11

1, 2 , 3, 4 Test:

• $1 million net worth (exclusive of a personal residence) reviewed at least every 4 years
• Make a minimum of $200,000 per year on average if single
• Make a minimum of $300,000 per year on average if married

Question 12

Brad, just out of college, has finished studying for his series exams. Brad passed both the Series 6 & 7 secu-rities licensing exams. Brad can now sell all of the following except:

a) Mutual Funds.
b) Options.
c) Variable Life Insurance.
d) UIT.

Answer 12

C. Variable Life Insurance
- Based on the question, we can infer that Brad has not passed a state insurance licensing exam. We know that he can now sell mutual funds, options, and UITs.

Question 13

The Financial Planning Process

Answer 13

Even God Admits Dat It’s Mesmerizing!

• Establish client - planner relationships
• Gathering client data - determining goals and expectations
• Analyze and evaluate client’s financial status
• Developing and presenting the financial plan
• Implementing the financial plan
• Monitoring the financial plan

Question 14

Three-Panel Approach (Risk): Life Insurance & Health Insurance Coverage

Answer 14

Life Insurance - 10-16 x gross pay

Health Insurance - >= $1M lifetime benefit

Question 15

Three-Panel Approach(Risk): Disability Coverage

Answer 15

60-70% of gross pay

Question 16

Three-Panel Approach (Risk): Property - Home and Auto Coverage

Answer 16

<= FMV

Question 17

Three-Panel Approach (Risk): LTC Coverage

Answer 17

Inflation-protection 36-60 months

Question 18

Three-Panel Approach (Risk): PLUP

Answer 18

$1-3M

Question 19

Three-Panel Approach (Short-Term Savings & Investments): Emergency Fund

Answer 19

3-6 months

= current assets / monthly non-discretionary cash flows

Question 20

Three-Panel Approach (Short-Term Savings & Investments): Housing Ratio 1

Answer 20

28% of GROSS INCOME
= PITI / Monthly Gross Income
Principal Interest Taxes (homeowner’s) Insurance

Question 21

Three-Panel Approach (Short-Term Savings & Investments): Housing Ratio 2

Answer 21

36% of GROSS INCOME

= (PITI + Recurring Debt Payments) / Monthly Gross Income

Question 22

Three-Panel Approach (Short-Term Savings & Investments): Debt Analysis

Answer 22

Good - anytime the useful life of the asset far exceeds the term of debt; Ex) 15-year mortgage or 3-year car loan
Bad - Ex) includes carrying credit card debt each month
Reasonable - Ex) 30-year mortgage or 5-year car loan

Question 23

Three-Panel Approach (Long-Term Savings & Investments): Education Funding

Answer 23

$3000/$6000/$9000 per child per year for 18 years

Question 24

Three-Panel Approach (Long-Term Savings & Investments): Retirement Amount, Savings Rate, Return, & Risk

Answer 24

Amount = 16 x Pre-Retirement Income
Savings Rate = 10-12%
Retirement Return = 8-10% (expected)
Risk/STD = 8-14%

Question 25

Three-Panel Approach (Long-Term Savings & Investments): Legacy Documents

Answer 25

Will, Durable Power of Attorney for Healthcare, and Advanced Medical Directive

Question 26

Business Life Cycle: Peak - Inflation, Interest Rates, Unemployment, & GDP

Answer 26

Inflation - Highest
Interest Rates - Highest
Unemployment - Lowest
GDP - Highest

Question 27

Business Life Cycle: Recession - Inflation, Interest Rates, Unemployment, & GDP

Answer 27

Inflation- Decreasing
Interest Rates - Decreasing
Unemployment - Increasing
GDP - Decreasing

Question 28

Business Life Cycle: Trough - Inflation, Interest Rates, Unemployment, & GDP

Answer 28

Inflation - Lowest
Interest Rates - Lowest
Unemployment - Highest
GDP - Lowest

Question 29

Business Life Cycle: Expansion - Inflation, Interest Rates, Unemployment, & GDP

Answer 29

Inflation - Increasing
Interest Rates - Increasing
Unemployment - Decreasing
GDP - Increasing

Question 30

Time Associated with a Recession

Answer 30

6 months / 2 quarters

Question 31

Time Associated with a Depression

Answer 31

18 months / 6 quarters

Question 32

Leading Economic Indicators

Answer 32

• Initial unemployment claims
• Stock prices
• Money supply (M2)
• New manufacturing orders
• New private housing units
• Consumer sentiment

Question 33

Coincident Economic Indicators

Answer 33

• Employees on payroll
• Personal Income
• Industrial protection
• Manufacturing sales

Question 34

Lagging Economic Indicators

Answer 34

• Average duration of unemployment
• Change in the CPI
• Change in labor cost per unit
• Consumer credit to income
• Value of outstanding loans
• Average prime rate charged by banks

Question 35

Discount Rate

Answer 35

Overnight interest rate at which member banks can borrow from the Federal Reserve to meet their reserve requirements

Question 36

Fed Funds Rate

Answer 36

Overnight borrowing rate between banks

Question 37

An INCREASE in the Reserve Requirement (Money Supply, Interest Rates, Policy)

Answer 37

Money Supply - DECREASE
Interest Rates - INCREASE
Policy - CONTRACTIONARY

Question 38

An INCREASE in the Discount Rate (Money Supply, Interest Rates, Policy)

Answer 38

Money Supply - NO CHANGE
Interest Rates - INCREASE
Policy - CONTRACTIONARY

Question 39

SALES of Treasuries in Open Market (Money Supply, Interest Rates, Policy)

Answer 39

Money Supply - DECREASE
Interest Rates - INCREASE
Policy - CONTRACTIONARY

Question 40

An INCREASE in the Excess Reserve Rate (Money Supply, Interest Rates, Policy)

Answer 40

Money Supply - DECREASE
Interest Rates - INCREASE
Policy - CONTRACTIONARY

Question 41

A DECREASE in the Reserve Requirement (Money Supply, Interest Rates, Policy)

Answer 41

Money Supply - INCREASE
Interest Rates - DECREASE
Policy - EXPANSIONARY

Question 42

A DECREASE in the Discount Rate (Money Supply, Interest Rates, Policy)

Answer 42

Money Supply - NO CHANGE
Interest Rates - DECREASE
Policy - EXPANSIONARY

Question 43

BUYING Treasuries in Open Market (Money Supply, Interest Rates, Policy)

Answer 43

Money Supply - INCREASE
Interest Rates - DECREASE
Policy - EXPANSIONARY

Question 44

A DECREASE in the Excess Reserve Rate (Money Supply, Interest Rates, Policy)

Answer 44

Money Supply - INCREASE
Interest Rates - DECREASE
Policy - EXPANSIONARY

Question 45

Debts not discharged through Chapter 7 Bankruptcy

Answer 45

• Student loans
• 3 years of back taxes
• Alimony
• Child support
• Debts related to fraud are not discharged but debts associated with negligence are discharged

Question 46

Assets that are exempt from creditors through Chapter 7 Bankruptcy

Answer 46

• Contributory traditional and Roth IRAs up to $1M
• Qualified plans along with converted IRAs have an unlimited exemption (Converted IRAs, aka rollover, must be clearly marked rollover and have no other contributions commingled

Question 47

Chapter 7 Bankruptcy

Answer 47

Provide relief through liquidation

Question 48

Chapter 11 Bankruptcy

Answer 48

Provides relief through reorganization for businesses or the self-employed

Question 49

Chapter 13 Bankruptcy

Answer 49

Provides relief through adjusting debts

Question 50

Low interest rates and high unemployment would be characteristic of?

Answer 50

Trough

Question 51

All of the following are examples of monetary policy except?

a) Open market operations.
b) Discount rate.
c) Reserve Requirement.
d) Prime Lending Rate

Answer 51

D. Prime Lending Rate

- The Fed does NOT control the prime lending rate, only the overnight or discount rate

Question 52

What skills are necessary to effectively communicate with a client?
I. Frequent eye contact.
II. Monitoring voice pitch and tone
III. Mirroring

Answer 52

I, II, and III

Question 53

Monetary Policy

Answer 53

• Federal Reserve
• 1) Reserve Requirement
• 2) Discount Rate
• 3) Open Market Operations
• 4) Excess Reserves

Question 54

Fiscal Policy

Answer 54

• Congress
• 1) Taxation
• 2) Spending
• 3) Debt Management

Question 55

As a planner, it’s critical to determine a client’s life cycle position because:

a) Must know how many dependents the client has.
b) Life cycle position impacts a client’s goals and behavior.
c) Net worth is critical to the planning process.
d) Life cycle position impacts risk tolerance and time horizon

Answer 55

b) Life cycle position impacts a client’s goals and behavior

- Definition of life cycle position.

Question 56

Cash & Cash-Equivalents

Answer 56

Ex) Cash, checking accounts, money market, CD (12 months or less maturity

• Laddered CDs set to mature every 6 months
• Anything client expects to convert to cash within one year
• Does NOT include EE savings bonds

Question 57

Invested Assets

Answer 57

Ex) stocks, bonds, mutual funds, retirement accounts, business ownership and any assets maturing in greater than 12 months

Question 58

Personal Use Assets

Answer 58

Ex) personal residence, car, furniture, boat and clothing

- Include assets used to maintain the client’s lifestyle

Question 59

Current Liabilities

Answer 59

Obligations that are due within the next 12 months
It excludes interest unless already incurred
ex) credit cards, taxes payable and any unpaid bills such as utilities, cable cell phone bills, etc

Question 60

Long-Term Liabilities

Answer 60

The remaining balance on any outstanding debt beyond 12 months
Ex) Includes the balance on a loan for a client’s house, car, boat or any other outstanding loan

Question 61

Consumer debt payments should not exceed __ of ___ income

Answer 61

20% ; NET

Question 62

Savings Ratio

Answer 62

Performance Ratio
10-12%
Annual Savings (EE + ER Contributions) / Annual Gross Income

Question 63

Return on Investments (ROI)

Answer 63

Performance Ratio
(Ending Investments - Beginning Investments - Savings - Gifts Received) / (Average Invested Assets)
Avg Invested Assets = (Beg Inv + End Inv) / 2

Question 64

John currently pays $3,000 per month on his revolving credit card debt that has an outstanding balance of $45,000. John’s home has a fair market value of $500,000, with an outstanding mortgage of $280,000. John has the following investments:
• Life insurance with a cash value of $10,000.
• $35,000 in a money market mutual fund earning 1% per year.
• $20,000 in a certificate of deposit earning 1.25% per year. ·
Which of the following would you recommend John doing to eliminate the credit card debit and maximize his overall cash flow?
a) Pay off the credit card debt by liquidating the certificate of deposit first, then payoff the balance of the credit card using the money market mutual fund.
b) Pay off the credit card debt by borrowing $45,000 against his home equity.
c) Pay off the credit card debt using money market mutual fund and borrowing the remainder from the cash value of his life insurance.
d) Pay off the credit card debt by liquidating the money market mutual fund first, then payoff the balance of the credit card debt using the certificate of deposit

Answer 64

d) Pay off the credit card debt by liquidating the money market mutual fund first, then payoff the balance of the credit card debt using the certificate of deposit
- Use the money market mutual fund, as it has the lower rate of return, followed by the certificate of deposit, as it pays a higher rate of return. The question asks about “maximizing” overall cash flow, so taking a home equity loan is not the “best” answer, and after 12/15/2017 the interest would not be deductible.

Question 65

Which of the following statements is most accurate regarding a variable rate mortgage?

a) The most appropriate time to use a variable rate mortgage is when interest rates are expected to increase.
b) The most appropriate time to use a variable rate mortgage is when future interest rate movements are uncertain.
c) The most appropriate time to use a variable rate mortgage is when income is expected to significantly increase in the future or you anticipate staying in the house for a short period of time.
d) The most appropriate time to use a variable rate mortgage is when income is expected to increase in the future or you anticipate staying in the house for a long period of time.

Answer 65

c) The most appropriate time to use a variable rate mortgage is when income is expected to significantly increase in the future or you anticipate staying in the house for a short period of time.

Question 66

When preparing a client’s statement of financial position, which of the following is true?

a) A reserve liability account for taxes owed on the sale of assets should be listed.
b) Assets with more volatility should be listed first in the investment assets section.
c) All expenditures should be categorized as fixed or variable.
d) Anticipated liabilities, such as a potential car purchase in 10 years should be reported and recorded at its net present value.

Answer 66

a) A reserve liability account for taxes owed on the sale of assets should be listed

Question 67

Federal Pell Grant

Answer 67

• Strictly NEED based and dependent on the EFC (Expected Family Contribution) amount
• The EFC determines a student’s eligibility and how much is awarded
• Only students that have not earned a bachelors or professional degree qualify

Question 68

Stafford Loan

Answer 68

• Primary type of financial aid provided by the US Department of Education
• Stafford loans are student loans
• Repayment begins after a 6-month grace period of leaving school or falling below part-time status (6 semester hours)
• Not appropriate if the parents intend to repay them loans

Question 69

Subsidized Stafford Loan

Answer 69

• The interest is paid for by the federal government while the student is in school
• NEED based

Question 70

Unsubsidized Stafford Loan

Answer 70

• Interest begins to accrue when the funds are disbursed

- NOT need based

Question 71

Parent Loans for undergraduate Students (PLUS)

Answer 71

• Loan for parents to pay for their children’s undergrad studies
• NOT need based, but depends on the parent’s credit score
• Are not subsidized
• Appropriate for parents who can afford to make a loan payment, but may not have saved anything for education

Question 72

Grad PLUS loan for Graduate Students (PLUS Direct)

Answer 72

• A graduate or professional student enrolled at least half-time at an eligible school in a program leading to a professional or graduate degree or certificate
• Depend on student credit score
• Maximum PLUS loan amount you can borrow is the cost of attendance minus any other financial assistance you receive
• Begin making payments six months after you graduate, leave school, or drop below half-time enrollment
• Interest accrues as you go, you can pay it as you go or let it be added to your balance

Question 73

Federal Perkins Loan Program

Answer 73

• Is for students with exceptionally low EFC
• Is NEED based
• Program expired on 9/30/17

Question 74

American Opportunity Tax Credit & Lifetime Learning Credit - Important Considerations

Answer 74

• An individual MAY claim an AOTC or LLC in the same year as a distribution from a 529 plan, just NOT for the same expenses
• An individual may NOT claim both an AOTC and LLC for the same child, in the same year
• An individual may NOT use an AOTC or LLC for the SAME expense paid by a qualified tuition program
• An individual MAY use the AOTC or LLC in the same year a distribution from a qualified tuition plan, just NOT the same expenses

Question 75

Prepaid Tuition (Benefit, Limits Per Year, Appropriate Expenses)

Answer 75

• B: Pay for college credit in today’s dollars
• LPY: None
• AE: Tuition & fees

Question 76

529 Plan (Benefit, Limits Per Year, Appropriate Expenses)

Answer 76

• B: Tax free if used for qualified education expenses
• LPY: State dependent
• AE: tuition & fees, books & supplies, equipment, room & board (if >= 1/2 time)

Question 77

Coverdell ESA (Benefit, Limits Per Year, Appropriate Expenses)

Answer 77

• B: tax-free growth if used for qualified education expenses
• LPY: $2,000
• AE: tuition & fees, books & supplies, equipment, room & board

Question 78

Roth IRA (Benefit, Limits Per Year, Appropriate Expenses)

Answer 78

• B: no 10% penalty if used for qualified education expenses
• LPY: $6,000
• AE: tuition & fees, books & supplies, equipment, room & board (if >= 1/2 time)

Question 79

EE Bond (Benefit, Limits Per Year, Appropriate Expenses)

Answer 79

• B: Interest excluded from income if used for qualified educational expenses
• LPY: None
• AE: tuition & fees

Question 80

Student Loan Interest Deduction (Benefit, Limits Per Year)

Answer 80

• B: Deduct student loan interest before AGI

- LPY: $2,500

Question 81

Lifetime Learning Credit (Benefit, Limits Per Year, Appropriate Expenses)

Answer 81

• B: 20% tax credit on $10,000 worth of education expenses
• LPY: $2,000
• AE: tuition & fees, books & supplies, equipment*
• (paid directly to the University)

Question 82

American Opportunity Tax Credit (Benefit, Limits Per Year, Appropriate Expenses)

Answer 82

• B: 100% of first $2,000 and 25% of second $2,000 in expense - applies to first four years
• LPY: $2,500
• AE: tuition & fees*, books & supplies, equipment
• (paid directly to the university)

Question 83

Harry and Sally are contemplating making a contribution to their grandchildren’s education fund. Harry and Sally are both retired, have a significant amount of discretionary income and are concerned about estate transfer taxes. Which of the following education planning techniques would you recommend?

Answer 83

529 Savings Plan

Question 84

All of the following statements are true, except?

a) The American Opportunity Tax Credit is available for the first four years of post-secondary education.
b) The Lifetime Learning Credit is only available for the first two years of post-secondary education.
c) The American Opportunity Tax Credit is awarded on a per student basis.
d) The Lifetime Learning Credit is awarded on a per family basis

Answer 84

b) The Lifetime Learning Credit is only available for the first two years of post-secondary education.
- AOTC is good for first 4 years
- LLC is available throughout your life-time
- AOTC is per student
- LLC is per family

Question 85

What is one of the primary differences between a Coverdell ESA and a 529 Savings Plan?

a) Coverdell can be used for private elementary, middle or high school.
b) A Coverdell does not have a phase-out limit for participation.
c) A 529 Plan has a phaseout limit for participation.
d) A 529 Saving Plan allows 5-year proration of contributions

Answer 85

d) A 529 Saving Plan allows 5-year proration of contributions
- Both the Coverdell and the 529 Savings Plan can be used for private elementary, middle, or high school
- A 529 Savings Plan does not have a phase-out
- A 529 Savings Plan allows a 5-year proration of contributions; a Coverdell does not.

Question 86

Severity

Answer 86

Actual dollar amount of a loss

Question 87

Law of Large Numbers

Answer 87

Specifies that when more units are exposed to a similar loss the predictability of such a loss to the entire pool increases

Question 88

Perils

Answer 88

The actual cause of a loss

- Ex) fire, wind, tornado, earthquake, burglary, and collision

Question 89

Hazard

Answer 89

Condition that increases the likelihood of a loss occurring

Question 90

Moral Hazard

Answer 90

• A character flaw
• A character flaw would lead to a filing a false claim
• Ex) A famous Ohio State running back claimed his car was broken into and $10,000 worth of CDs were stolen. There certainly wasn’t $10,000 worth of CDs in his car and thus is an example of a moral hazard

Question 91

Morale Hazard

Answer 91

• The indifference created because a person is insured
• Ex) Beth goes to the convenience store to get milk for her baby. Beth leaves the keys in her car and the car running while she goes into the store, not concerned that her car may get stolen because she has car insurance

Question 92

Physical Hazard

Answer 92

• Tangible condition that increases the probability of a peril occurring
• Ex) Icy or wet roads, poor lighting, or defective equipment

Question 93

Insurable Risks

Answer 93

CHAD

• not Catastrophic for the insurer
• Homogeneous exposure
• Accidental from the insured’s POV
• measurable and Determinable

Question 94

Elements of a Valid Contract

Answer 94

COALL

• Competent parties
• Offer and
• Acceptance
• Legal consideration
• Lawful purpose

Question 95

Insurable Interest

Answer 95

• An insured must have an emotional or financial hardship resulting from damage, loss, or destruction
• Property and Liability Insurance - the insured must have insurable interest at the time of policy inception and at time of loss
• Life Insurance - the insured only needs an insurable interest at the time of policy inception
• Life insurance policies are considered long-term investments

Question 96

Characteristics of Insurance Contracts

Answer 96

Adhesion
Aleatory
Unilateral
Conditional

Question 97

Characteristics of Insurance Contracts - Adhesion

Answer 97

• An insurance policy is basically “take it or leave it.” There are no negotiations over terms and conditions
• As a result, any ambiguities in an insurance contract are found in favor of the insured

Question 98

Characteristics of Insurance Contracts - Aleatory

Answer 98

• The money exchanged may be unequal

- In other words, there’s a small premium, but the insured may receive a large benefit

Question 99

Characteristics of Insurance Contracts - Unilateral

Answer 99

• Only one promise is made by the insurer which is to pay in the event of a loss
• The insured is not obligated to pay premiums. If the premiums are not paid, then there’s no promise by the insurer.

Question 100

Characteristics of Insurance Contracts - Conditional

Answer 100

• The insured must abide by the terms and conditions of the insurance contract. If terms and conditions are not followed, the insurer may not pay a claim

Question 101

Express Authority

Answer 101

• Given through an agency or written agreement

- Insurer is responsible for acts of an agent based on express authority

Question 102

Implied Authority

Answer 102

• Authority that the public perceives, and a valid agency agreement exists
• The actual delivering of an insurance contract and accepting a premium is an example of implied authority
• Insurer is still responsible even if a client is misled

Question 103

Apparent Authority

Answer 103

• When the insured believes that the agent has authority to act on behalf of the insurer when in fact, no authority actually exists
• Could be inferred based on business cards or a sign on the wall, but the agency agreement actually expired
• If an agent represents that insured can pay the premium late, but is wrong, then the insurer is still responsible

Question 104

National Association of insurance Commissioners (NAIC)

Answer 104

• Provides a watch list of insurance companies based on financial ratio analysis
• Ratios measure the financial health of insurance companies
• NAIC has NO regulatory power over the insurance industry, but is involved in accrediting state insurance regulatory offices
• NAIC issues “model legislation” that state legislatures may or may not adopt
• Regulation occurs at the state level

Question 105

Six Steps of Risk Management

Answer 105

DIE DIE

1. ) Determine the objectives of the risk management program
2. ) Identify the risks to which the client is exposed
3. ) Evaluate the identified risks as to probability of occurrence and potential loss
4. ) Determine alternatives for managing risks, and select the most appropriate alternative for each
5. ) Implement the program
6. ) Evaluate, monitor, and review (control)

Question 106

Risk Avoidance

Answer 106

Use for the most serious types of risk

Question 107

Risk Transfer

Answer 107

Using insurance where the financial risk is severe but the frequency is low

Question 108

Risk Retention (Reduction)

Answer 108

Appropriate where the financial risk is low and frequency is high because it would be too expensive to insure
Ex) Dings in your car, minor injuries/illnesses and deductibles

Question 109

What type of hazard results from the indifference a person has to the potential loss because of the existence of insurance?

a) Peril.
b) Physical Hazard.
c) Moral Hazard.
d) Morale Hazard.

Answer 109

d) Morale Hazard
- Moral hazard is a character flaw or dishonesty (ex: burning your house down)
- Morale hazard is the indifference a person has towards loss because of insurance (ex: leaving the keys in the car and the car running)

Question 110

Chris walks into his insurance agent’s office and notices his agent’s name on a business card and the insurer’s name on letterhead. If the agent has a valid agency agreement, what type of authority does Chris believe his agent has to enter into an insurance contract?

a) Express Authority.
b) Implied Authority.
c) Apparent Authority.
d) None of the Above.

Answer 110

b) Implied Authority
- Implied Authority is based upon the agents business card, letterhead, and insurance company sign on the door
- Express Authority is the agency agreement between the insurance agent and insurance company
- Apparent Authority is when no authority actually exists

Question 111

If coverage is less than the coinsurance requirement, then insurer pays the greater of actual cash value or the following formula:

Answer 111

(Face Value / Coinsurance) x Loss - Deductible

Coinsurance = 80% x Replacement Cost

Question 112

Which of the following life insurance policies has a fixed premium, a cash value, and death benefit that can fluctuate based on investment performance?

a) Annually renewable term.
b) Variable renewable term.
c) Variable whole life.
d) Variable lifetime annuity.

Answer 112

c) Variable whole life
- Variable whole life has fixed premium, death benefit can fluctuate based on investment performance. No such thing as variable renewable term.

Question 113

Jennifer is receiving annuity payments of $1,500 per month. Her life expectancy is 20 years. She purchased the annuity for $200,000. What is her taxable income each year from the annuity payment?

a) $833.
b) $667.
c) $8,000.
d) $10,000.

Answer 113

c) $8,000
$1,500 x 12 x 20 = $360,000
$200,000 / $360,000 = 0.555 exclusion and 0.444 inclusion
Inclusion: 0.444 x $18,000 = $8,000

Question 114

Jennifer is receiving annuity payments of $1,500 per month. Her life expectancy is 20 years. She purchased the annuity for $200,000. What is her return of basis each year from the annuity payment?

a) $833.
b) $667.
c) $8,000.
d) $10,000.

Answer 114

d) $10,000
$1,500 x 12 x 20 = $360,000
$200,000 / $360,000 = 0.555 exclusion and 0.444 inclusion
Exclusion: 0.555 x $18,000 = $10,000

Question 115

Jennifer is receiving annuity payments of $1,500 per month. Her life expectancy is 20 years. She purchased the annuity for $200,000. Jennifer lived beyond the 20-year life expectancy. What is the taxable amount from the annuity each year beyond the 20-year life expectancy?

a) $833.
b) $18,000.
c) $8,000.
d) $9,996.

Answer 115

b) $18,000
- Once basis has been recovered, 100% of annuity payments are taxable
- Note: If a life insurance annuity, then the proration would continue. Different law regarding life insurance annuity.

Question 116

All of the following statements regarding disability insurance are correct except?

a) The longer the elimination period, the less expensive the policy.
b) An own occupation policy will provide disability benefits if the insured is unable to perform the duties of their own occupation.
c) An any occupation policy is less expensive than an own occupation policy.
d) A residual benefit clause provides the insured with benefits that extend beyond the disability period.

Answer 116

d) A residual benefit clause provides the insured with benefits that extend beyond the disability period.
- Residual benefit makes up the difference between wages before disability and wages after disability

Question 117

All of the following are true regarding COBRA except?

a) The employer is allowed to charge up to 102% of the health insurance premium.
b) COBRA must be offered because of voluntary or involuntary termination of the employee or reduction in hours from full-time to part-time.
c) Termination of employment requires 36 months of coverage.
d) Divorce or legal separation requires 36 months of coverage

Answer 117

c) Termination of employment requires 36 months of coverage

- Termination of employment only requires 18 months of coverage

Question 118

Under a HO-3 Policy, all perils are covered, with some exceptions. All of the following are perils that are excluded from a HO-3 policy, except:

a) Termite Damage.
b) Flood.
c) Earthquake.
d) Tornado.

Answer 118

d) Tornado
- Termite damage results due to negligence so it is excluded
- Flood and earthquake are definitely excluded

Question 119

Which of the following offers identical coverage for all forms of a homeowners insurance policy?

a) Section I.
b) Section II.

Answer 119

b) Section II

- Liability and Medical Payments are identical

Question 120

All of the following statements are correct regarding a Personal Auto Policy Part C (Uninsured Motorists) coverage except?

a) Payment for property damage.
b) Payment for lost wages.
c) Payment for pain and suffering.
d) Payment for punitive damages.

Answer 120

d) Payment for punitive damages
- Does not pay for punitive damages
- Cannot sue yourself for liability

Question 121

All of the following statements are correct regarding a Personal Auto Policy Part D (Coverage for Damage to Your Auto) coverage except?

a) Collision with other vehicles.
b) Comprehensive, which is fire, theft or vandalism.
c) Collision damages to a borrowed or rented vehicle.
d) Collision, which includes contact with an animal or bird.

Answer 121

d) Collision, which includes contact with an animal or bird

- D is coverage under comprehensive

Question 122

All of the following statements regarding the Social Security system are correct except?

a) Individuals over age 62 who receive Social Security benefits, automatically qualify for Medicare.
b) For workers entitled to retirement or disability benefits, an ex-spouse may be eligible for benefits under the former spouse’s work record.
c) Medicare Part A is paid for by a portion of Social Security taxes collected, while premiums are charged for Part B.
d) Disability benefits are paid to any age worker who meets the definition of disability and has earned enough credits, given their age.

Answer 122

a) Individuals over age 62 who receive SS benefits automatically qualify for Medicare
- Automatically qualify for Medicare at age 65

Question 123

All of the following statements regarding Social Security are correct except:

a) Many private insurance companies sell Medicare supplemental insurance policies.
b) Medicare supplemental insurance policies help pay Medicare’s coinsurance amounts and deductibles, as well as other out-of-pocket expenses for health care.
c) If a worker applies for retirement or survivors benefits before his or her 65th birthday, he or she must file a separate application for Medicare.
d) Even if an individual continues to work after turning 65, he or she should sign up for Part A of Medi-care.

Answer 123

c) If a worker applies for retirement or survivors benefits before his or her 65th birthday, he or she must file a separate application for Medicare
- If this is the case, there is no need to file a separate application for Medicare.

Question 124

Kevin is age 62 and collecting Social Security benefits. In order to begin receiving Medicare Part A benefits, he must:

a) Do nothing, coverage starts immediately at age 65.
b) File a separate application for Medicare upon his 65th birthday.
c) Do nothing, coverage starts immediately upon receiving retirement benefits, regardless of age.
d) File a separate application for Medicare upon his 67th birthday

Answer 124

a) Do nothing, coverage starts immediately at age 65
- Coverage starts automatically
- If you receive retirement benefits early, there is no need to file a separate application

Question 125

All of the following statements concerning Social Security beneficiaries are correct except:

a) Monthly benefits can be paid to a disabled insured worker under age 65.
b) Benefits can be paid to the divorced spouse of a retired or disabled worker entitled to benefits if age 62 or over and married to the worker for at least 10 years.
c) Benefits can be paid to the surviving spouse (including a surviving divorced spouse) of a deceased insured worker if the widow(er) is age 60 or over.
d) Benefits can be paid to the dependent parents of a deceased insured worker at age 59 or over

Answer 125

d) Benefits can be paid to the dependent parents of a deceased insured worker at age 59 or over
- Benefits can be paid to dependent parents of a deceased worker at age 62 or older

Question 126

Insofar as employment and production are concerned, which two of the following industries are typically more affected by recession?

1. Capital goods.
2. Consumer durable goods.
3. Consumer nondurable goods.
4. Services.

Answer 126

b) 1 and 2

- Capital goods and consumer durables are cyclical and fluctuate directly with the economy and GDP

Question 127

Which of the following statements concerning supply and/or demand is/are true?

1. If demand increases and supply simultaneously decreases, equilibrium price will rise.
2. There is an inverse relationship between price and quantity demanded.
3. If demand decreases and supply simultaneously increases, equilibrium price will fall.
4. If demand decreases and supply remains constant, equilibrium price will rise.

Answer 127

a) 1, 2 and 3

- Statement 4 is false because equilibrium price will fall if demand decreases and supply remains constant

Question 128

Your client is designing an educational investment program for her eight-year-old son. She expects to need the funds in about ten years when her AGI will be approximately $45,000. She wants to invest at least part of the funds in tax-exempt securities. Identify which investment(s) would yield tax-exempt interest on her federal return if the proceeds were used to finance her son’s education.

1. Treasury bills.
2. EE bonds.
3. GNMA funds.
4. Zero coupon Treasury bonds.

Answer 128

e) 2 only
- T-bills, zero coupons and GNMA funds are all taxable. EE bonds are tax exempt if used for qualified education expenses.

Question 129

Which combination of the following statements concerning federal law is correct?

1. The Securities Act of 1933 provides for protection from misrepresentation, deceit, and other fraud in the sale of new securities.
2. The Securities Investor Protection Act of 1970 is designed to protect individual investors from losses as a result of brokerage house failures.
3. The Investment Advisers Act of 1940 requires that persons or firms advising others about securities investment must register with the Securities and Exchange Commission.
4. The Investment Advisers Act of 1940 assures the investor safety of investment in companies engaged primarily in investing, reinvesting, and trading in securities.

Answer 129

a) 1, 2 and 3
- Statements 1, 2 and 3 are true. Statement 4 is false because the Investment Advisors Act of 1940 requires an investment advisor to register with the SEC.
- It does not address investor safety with regards to trading in securities.

Question 130

Which one of the following factors would be the strongest indication that interest rates might rise?

a) Selling of dollar-denominated assets by foreign investors.
b) Decreasing United States government deficits.
c) Decreasing rates of inflation.
d) Weak credit demand by the private sector of the United States economy

Answer 130

a) Selling of dollar-denominated assets by foreign investors
- Interest rates will rise anytime the money supply decreases.
- If dollar denominated assets are being sold, US dollars are being sent overseas as the assets are being sold. This results in the money supply decreasing and interest rates increasing.
- Decreasing deficits means the US government is demanding less dollars.
- Decreasing inflation will result in lower interest rates
- Weak credit demand means that businesses are requiring less dollars, therefore, the demand for dollars is low. If demand for dollars is low, then interest rates will decrease.

Question 131

Johanna Olsen, CFP®, is duly registered under the Investment Advisers Act of 1940. For which one of the following activities would this planner be in violation of the act?

a) She received, with the client’s knowledge, both a fee for advice given to the client and a commission from client transactions.
b) She included the cost of preparing the client’s income tax returns as part of the annual fee charged the client.
c) She gave clients planning advice that was not achievable, given the current economic conditions.
d) She distributed to clients the written disclosure brochure 2 weeks after an investment advising con-tract was duly signed.

Answer 131

d) She distributed to clients the written disclosure brochure 2 weeks after an investment advising contract was duly signed
- Submitting the disclosure brochure must be done no more than 48 hours before entering into the contract or at the time of entering the contract with a 5-day “look-see”

Question 132

Bob, age 47, has worked for XYZ Company the past 12 years. XYZ Company has lost a major contract and must begin downsizing immediately. Bob was laid off yesterday. What should Bob do first?

a) File for unemployment benefits.
b) Rollover his company 401(k) plan.
c) Convert disability coverage under COBRA provisions.
d) Notify the bank holding the mortgage on his house

Answer 132

a) File for unemployment benefits
- The question asks what the client should do first. Filing for unemployment benefits will provide the client with some income replacement, which is the highest priority.

Question 133

Jill and Brandon are married with one child named Cole. Jill’s parents contribute $2,000 to a Coverdell ESA this year for Cole. Brandon’s parent’s also want to contribute to Cole’s education fund. Which of the fol-lowing contributions can they make?

1. 529 Savings Plan
2. Coverdell ESA
3. UGMA Account
4. UTMA Account

Answer 133

c) 1, 3 and 4
- The maximum contribution to a Coverdell ESA is $2,000 per year, per beneficiary. All other accounts are eligible for a contribution.

Question 134

One of your clients runs a lawn-care and gardening business. She has just told you there has been a misunderstanding between herself and one of her clients on a contract they wrote and signed. They are both aware of the error and are willing to work together to rectify the situation. The remedy that will best suit this situation is:
A. Reformation.
B. Rescission.
C. Res ipsa loquitor.
D. Revitalization

Answer 134

A. Reformation

• The ideal result here, because both parties agree, would be reformation.
• Recission occurs when no agreement can be reached and is usually carried out by a court of law.

Question 135

In a situation where someone has undertaken activities or actions that bring about extraordinarily hazardous circumstances, the term that would best describe this situation is:
A. Vicarious liability.
B. Attractive nuisance.
C. Res ipsa loquitor.
D. Absolute liability.

Answer 135

D. Absolute liability
- In a situation where someone has undertaken activities or actions that bring about extraordinary hazardous circumstances, the term that would best describe this situation is absolute liability.

Question 136

Once the contract is placed in written form, all previous and prior understandings of a verbal contract (or any other nature) will not be allowed to contradict the written contract. This will be known as:
A. Res ipsa loquitor.
B. Parol evidence rule.
C. Estoppel.
D. Waiver provision.

Answer 136

B. Parol evidence rule

• Option “a” - the thing speaks for itself - no need to prove negligence
• Option “C” - If a right has been waived, the company will be stopped from denying a claim
• Option “D” - The company representatives cannot change the contract

Question 137

Suppose you have structured a budget with monthly periods as your budget intervals. Since certain expenditures such as auto insurance or a Thanksgiving charity donation do not occur every budget interval, they may be best incorporated by:
A. Estimating them into every budget interval.
B. Estimating them in the budget only when incurred.
C. Counting on increases in income.
D. Using tax refund.

Answer 137

A. Estimating them into every budget interval
- These types of varied or periodic expenses should be accounted each recording period. An annual expense may be too large to account for at the time it is paid, better to save a little towards that goal as you go.

Question 138

As a rule of thumb, it is best if consumer debt does not exceed:
A. 20% of net income.
B. 20% of gross income.
C. 3 to 6 months of expenses.
D. 36% of gross monthly income

Answer 138

A. 20% of net income
- This is a rule of thumb, along with the others that recommend housing debt be limited to 28% of gross income, and total debt not to exceed 36% of gross income.

Question 139

Your client wants to receive payments of $2,500 from her investments at the beginning of each month during her retirement to supplement her pension plan benefits. Your client estimates she will need to receive this monthly payment for 35 years. If an 8.5% annual return is earned on investments, compounded monthly, what amount does your client need to have at the time of her retirement to fund her needs?

Answer 139

B. $337,106
BEGIN
N = 35 x 12 = 420
I = 8.5/12
PV = ?
PMT = 2,500
FV = 0

Question 140

Billy Smith, age 55, has been a member of the union for 30 years, and as a result, has been excluded from his employer's retirement plan. Billy has been offered a management position with his firm, which will make him eligible to participate in the company's 401(k) plan. Billy's objective is to retire at age 65 with $2,000 in monthly retirement income, exclusive of Social Security benefits. He assumes a life expectancy of age 95. The union retirement plan will provide him with $1,000 monthly. (There are NO matching contributions from Billy's employer to the 401(k) plan and his income is adequate to have the required level of contributions fall within the deferral limits of the 401(k) plan. Contributions and payments, as appropriate, are made at the beginning of each month.) If the return in the company's 401(k) plan is 10%, what monthly amount will Billy have to contribute to that plan for 10 years to meet his objective?
A. $556
B. $566
C. $576
D. $747

Answer 140

A. $556
- This question is intended to test several time-value-of-money calculations, and is NOT intended to imply a level of retirement income or savings approach.
BEGIN
N = 12 x 30 = 360
I = 10/12 = .833
PV = ? => $114,900
PMT = 1000
FV = 0

BEGIN
N = 10 x 12 = 120
I = 10/12 = .833
PMT = ? => $556
FV = 114900

Question 141

David has won the Illinois state lottery. He must decide whether to receive annual payments of $250,000 at the beginning of each year for the next 20 years, or a lump sum payout. What lump sum amount does David need to receive to equal the $250,000 payments for the next 20 years, if he can earn an 8% return on his investments, assuming inflation is 3%?
A. $2,454,537
B. $2,650,900
C. $2,875,900
D. $3,307,511

Answer 141

B. $2,2650,900
- This is a present value of an annuity due problem. 
BEGIN
N = 20
I = 8
PV = ? => 
PMT = 250,000
FV = 0
- Inflation is not necessary in this calculation, lotto winnings income streams will not increase with inflation, they are equivalent to a fixed annuity

Question 142

Sam Peterson wants an additional $24,000 per year income after his retirement. Sam can earn 8% interest. How much will he need to invest to reach his goal?
A. $192,800
B. $240,000
C. $277,835
D. $300,000

Answer 142

D. $300,000

• Sam does not mention how he wants the money. He may want it either in terms of “capital utilization” (like an annuity) or “capital conservation” where the principle is never touched, only interest is used. Since Sam does not know how long he will live.
• With the information provided you could back into a number by figuring 24,000 income based on 8% of your answer set. This would be the capital preservation model. Or an easy step would be 24,000 / .08 = 300,000
• $300,000 x 8% = 24,000
• He has decided to put aside $300,000 which at 8% interest will generate $24,000 per year indefinitely without toughing the principle

Question 143

The First Practice Standard - Understanding The Client’s Personal and Financial Circumstances is a good place to:
A. Construct and send the client an information organizer.
B. Establish which services will be provided during the engagement.
C. Undertake teambuilding and networking with other professionals who are already working with the client.
D. Modify goals if need be during this step

Answer 143

A. Construct and send the client an information organizer

• Option “B” is prior to step one
• Options “C” and “D” are step three - trend analysis and information evaluation.

Question 144

Which of the following can the Federal Reserve do to increase the money supply?
I. Decrease the reserve requirements for banks from 8% to 6%.
II. Increase expenditures of the federal government, thereby increasing the money supply in the economy.
III.Conduct open-market transactions.

A. I only.
B. I and III only.
C. II only.
D. I and II only.

Answer 144

B. I and III only
- All of the above have the potential to increase the money supply, however, the Federal Reserve does not control the expenditures of the federal government. Increasing expenditures of the federal government would be fiscal policy, not monetary policy.

Question 145

Which of the following are included among the tools available to the Federal Reserve (the Fed) to accomplish its responsibilities?
I. Open market operations.
II. Deficit spending.
III. Discount rate change.
IV. Treasury bill issuance.

Answer 145

A. I and III only

• Choice IV - Issuing Treasury bills is the domain of the Treasury Department, not the Federal Reserve.
• Choice II - Deficit spending falls under fiscal policy which is governed by the executive and legislative branches of government, not the Federal Reserve.

Question 146

The economy has had high unemployment, manufacturing capacity utilization has been low, and consumer and investor confidence is low. The Federal Reserve can be expected to:
A. Decrease the money supply and lower interest rates to decrease capital spending and encourage consumer spending.
B. Decrease the money supply and raise interest rates to encourage capital investment.
C. Increase the money supply and lower interest rates to encourage capital investment and consumer spending.
D. Increase the money supply and raise interest rates to reduce inflation and increase spending.

Answer 146

C. Increase the money supply and lower interest rates to encourage capital investment and consumer spending

• These are actions that the Federal Reserve will take in order to try to stimulate the economy by encouraging business growth and spending activities
• Decreasing money supply would slow the economy

Question 147

As a direct result of a prolonged bull market and rising economy, the Chair of the Federal Reserve sees the possibility of problems looming on the horizon. Which of the following are among the issues the Chair may be anticipating, and what are the related actions might the Chair take to alleviate these circumstances?
I. Stagnation; raise the Federal Reserve rate.
II. Inflation; raise the Federal Reserve rate.
III. Deflation; raise the required reserve.
IV. Recession; raise the opening bid at T-bill auctions.
V. Irrational exuberance; print less money

Answer 147

B. II only

• The situation described presents a strong possibility of inflation. One way to control inflation is by raising interest rates.
• Raising required reserve is another, but it is incorrectly paired with deflation
• The other choices make no sense

Question 148

Which one of the following actions might the Federal Reserve take when using open market operations to regulate the supply of money and the availability of credit?
A. Raise or lower the discount rate that influences market purchases and sales of fixed-income securities.
B. Call high-coupon Treasury bonds and allow investors to purchase newly issued Treasury bonds with lower coupons.
C. “Put” corporate bonds owned by the Fed to the issuing corporation to reduce the quantity of money in the hands of businesses.
D. Purchase Treasury bonds from bank investment departments.

Answer 148

D. Purchase Treasury bonds from bank investment departments
- The tools of the Federal Reserve include changing the discount rate, changing reserve requirements, and open market operations (which consist of either buying or selling Treasury securities depending on the Federal Reserve’s desired objective.)

Question 149

Federal authorities govern the insurance industry in the following instances and manner:
I. The federal government NEVER influences insurance regulations. That is left to the individual states.
II. Through the Internal Revenue Codes.
III. Through the Securities Exchange Commission.
IV. Through the Employees Retirement Income Securities Act.

Answer 149

B. II, III, and IV only
- Federal authorities govern the insurance industry in the following instances and manner, through the Internal Revenue Codes, through the SEC, and through ERISA

Question 150

Which of the following comes under an exemption from registration status of the Investment Advisers Act of 1940?
A. Banks and bank holding companies that are not investment companies.
B. Lawyers, accountants and teachers whose advice is solely incidental to the practice of their profession.
C. Advisers whose advice and services is related to strictly to securities which are obligations of the U.S. government.
D. Advisors whose only clients are insurance companies

Answer 150

D. Advisors whose only clients are insurance companies
- The parties in Option “D” are exemptions, but must abide by Section 206 of the Act (the anti-fraud provision.) All of the other answers are exceptions; that is, they need not register at all, and are not governed by the Act.

Question 151

Which of the following are exceptions under the definition of “investment advisor”?
I. Banks that are NOT investment companies.
II. Accountants or lawyers whose investment advice is “solely incidental” to the practice of their profession.
III. Persons whose advice relates only to securities issued or guaranteed by the U.S. government.
IV. Publishers of financial publications that have regular and general circulation.

A. I and III only.
B. II and IV only.
C. I, II and IV only.
D. I, II, III and IV.

Answer 151

D. I, II, III and IV
- Exceptions do not come under the jurisdiction of the Investment Advisor’s Act and need not register as investment advisors

Question 152

Which of the following statements about the selected industry relative to its regulatory body and the relationship between the two are true?

I. The insurance industry is primarily regulated by each of the 50 states.
II. The majority of banks are subject to federal regulation by the Federal Reserve System and the Federal Deposit Insurance Corporation.
III. Pension plan funds are primarily subject to federal regulation.
IV. The organized stock exchanges, such as the New York Stock Exchange, are primarily regulated by the federal government.

Answer 152

D. I, II, III and IV

• Option “III” - Pension funds are governed by PBGC (also known as the Pension Benefit Guarantee Corporation) and ERISA (also known as the Employees Retirement Income Security Act) rules as to reporting and requirements on the federal level.
• Option “IV” - Organized stock exchanges are regulated by the U.S. Government agency, the SEC.

Question 153

You have approved a prospect and completed your presentation. It is incumbent upon you (based on the brochure rule) to:
A. Provide the client with all of the information as required within 48 hours after the meeting.
B. Provide the client with all of the information as required five days before the meeting.
C. Provide the client with all of the information as required at the meeting if they are given a 48 hour time period to change their mind.
D. Provide the client with all of the information at or before the time you enter into a contract.

Answer 153

D. Provide the client with all of the information at or before the time you enter into a contract
- The brochure rule requires that a planner or advisor provide the client with all of the information as required at the meeting, or before the meeting, you enter into contract with them

Question 154

In a situation where an employee has accepted workers compensation benefits, an employer is protected from the following:
A. A suit by the employee's family.
B. A third party suit.
C. A suit by the employee.
D. A suit by the employee's spouse.

Answer 154

C. A suit by the employee
- Options “A”, “B”, and “D” are exposures for an employer even when the employee has already accepted Workers Compensation

Question 155

Mrs. Hoffman is an 80-year old widow whose liquid assets are on deposit at a small FDIC-insured bank. She has the following on deposit: - $75,000 in various Certificates of Deposit - $50,000 in a Money Market Mutual Fund - $200,000 in an IRA Rollover - $25,000 Passbook Savings (Joint with son) - $25,000 Checking Account (Joint with daughter) How much is currently insured by the FDIC?
A. $100,000
B. $125,000
C. $250,000
D. $375,000

Answer 155

B. $125,000

• The $75,000 CDs are insured under Mrs. Hoffman (Single). The $50,000 Money Market Mutual Fund is not insured by the FDIC. It may be insured under the SIPC but that is not what the question is asking. The $200,000 could be insured but we do not know what the IRA is invested in as it must be cash to receive FDIC coverage. The Passbook Savings is FDIC insured jointly with her son ($12,500 for each Mrs. Hoffmann and her son) for a total of $25,000 coverage. The Checking account is FDIC insured jointly with her daughter ($12,500 for each Mrs. Hoffmann and her daughter) for a total of $25,000 coverage.
• The question asked “How much is currently insured by FDIC”, NOT what Mrs. Hoffman was covered for. IF the question had asked “How much is Mrs. Hoffman insured for under the FDIC?” the answer would be: $75,000 + $12,500 + $12,500 = $100,000, due to the joint accounts with her children.

Question 156

Regulation Z, issued by the Federal Reserve Board, is a part of the Consumer Credit Protection Act. Regulation Z requires that:
A. Lenders must disclose the items purchased.
B. Lenders must be given a “cooling off” period.
C. The dollar amount of finance charges and the annual percentage rate be disclosed.
D. The length of time to pay the debt be disclosed

Answer 156

C. The dollar amount of finance charges and the annual percentage rate be disclosed
- With the advent of Regulation Z, consumers were able to see the actual cost (including finance changes) that they were paying in any transaction they were making

Question 157

A young couple, John and Mary Bartlett, are thinking about purchasing a new home using one of the following mortgages: Mortgage #1 - 8.5% interest with 4 discount points to be paid at the time of closing. Mortgage #2 - 9.5% interest with 2 discount points to be paid at the time of closing Assuming the couple could qualify for both mortgages, which of the following aspects should be considered in deciding between these two mortgages?
I. Gross income of the couple.
II.Estimated length of ownership.
III. Real estate tax liability.
IV. Cash currently available

Answer 157

C. II and IV only

• The question tries to eliminate the need to include gross income as part of the answer by stating that the couple could qualify for both mortgages.
• Real estate taxes will be the same regardless of their financing.

Question 158

Hannah currently has $915,000 saved. She will retire in 10 years and wants to take $80,000 income for 25 years at the beginning of each year. She also wishes to have $1,000,000 35 years from now to leave to her heirs. What is the internal rate of return needed to accomplish this?
A. 5.99%
B. 4.96%
C. 3.13%
D. 4.75%

Answer 158

B. 4.96%
- The correct answer is B. Income needs to begin at the beginning of year 10, make end of year 9 the last year of inactivity. The 1,000,000 is entered separately as it is not part of the retirement income stream

915 +/- Cfj
0 CFj
9Nj
80 CFj
25 Nj
1000 Cfj
IRR/YR = 4.9649%

Question 159

If the maximum loan-to-value ratio on a $100,000 home is 85%, this means that the lender would accept:
A. A minimum down payment of $15,000 plus closing costs.
B. A minimum down payment including closing costs of $15,000.
C. Closing costs plus points of $15,000.
D. A maximum down payment of $15,000.

Answer 159

A. A minimum down payment of $15,000 plus closing costs
- Closing costs are not included in the loan-to-value ratio calculations of the lender. Closing costs are in additional to the minimum down payment.

Question 160

All of the following are Rules of the Code of Ethics except:
A. A certificant shall refrain from borrowing or lending money and commingling financial assets.
B. A certificant shall at all times act in the client’s best interest.
C. A certificant shall not engage in conduct, which reflects adversely on his integrity or fitness as a certificant.
D. A certificant shall exercise due care.

Answer 160

A. A certificant shall refrain from borrowing or lending money and commingling financial assets
- A certificant shall not borrow or commingle funds as stated under the Standards of Conduct.
B, C and D are all in the Code of Ethics

Question 161

A client complained about a CFP® professional because he took too long to do something and the client lost 10% of his investment in a stock. Who does the CFP® professional have to report this complaint to?
A. CFP Board
B. FINRA
C. His manager
D. The Securities and Exchange Commission

Answer 161

C. His manager

• The manager should be notified and the firm will take appropriate steps to resolve the issue with the client, typically either through arbitration or negotiations.
• A is incorrect because the CFP Board must be notified when a CFP® Professional is charged, convicted or named in criminal, civil or regulatory action including the suspension of a professional license.
• B is incorrect because FINRA must be notified if there is a violation of securities law.
• D is incorrect because the SEC must be notified if there is a violation of securities law

Question 162

An anonymous informant filed a complaint against Jerry and another CFP® professional regarding Jerry’s involvement in a Securities and Exchange Commission (“SEC”) and state regulatory authority investigation. Jerry entered into a Letter of Acceptance, Waiver and Consent agreement (“AWC”) with Financial Industry Regulatory Authority, Inc. (“FINRA,” f/k/a National Association of Securities Dealers or “NASD”) regarding violations of NASD Rules 2110 and 3010. The AWC arose out of FINRA’s investigation of Jerry’s sale of shares in a private placement offering (“Offering”) conducted in 20XX pursuant to a private placement memorandum (“PPM”) that offered shares of Jerry’s company (“Company”). Jerry discovered inaccuracies in the financial projections set forth in the PPM but did not disclose the inaccuracies to the purchaser because he determined that the inaccuracies were not material. In the AWC, Jerry consented to paying a $20,000 fine and to a 15-day suspension by FINRA. According to the Code of Ethics and Standards of Conduct, which of the following statements are true:
A. Jerry is required to notify the CFP Board of the FINRA investigation within 30 days and outcome of the event within 30 days.
B. Jerry is not required to notify the CFP Board of the FINRA investigation or outcome.
C. Jerry is required to notify the CFP Board of the outcome of the FINRA investigation within 30 days , but not the initial investigation.
D. Jerry is not required to notify the CFP Board of the investigation or outcome, as the fine is under $50,000.

Answer 162

A. Jerry is required to notify the CFP Board of the FINRA investigation within 30 days and outcome of the event within 30 days.
- Duties to CFP Board require CFP® professionals to disclose FINRA investigations and outcomes other than an uncontested minor rule violation (under $2,500 award)

Question 163

What would likely rise to the standard of a material conflict of interest, and need to be disclosed by a CFP® professional?
A. That the CFP® professional recommended his personal accountant who gives the CFP® professional discounted accounting services.
B. The CFP® professional received an undisclosed fee for a referral to a municipal bond broker.
C. A client who is an attorney brought him a $50 fruit basket as a thank you for the referral.
D. The CFP® professional gave the name of his lawyer to one of his clients who was wishing to divorce his wife, whom was also a high revenue client of the CFP® professional.

Answer 163

D. The CFP® professional gave the name of his lawyer to one of his clients who was wishing to divorce his wife, whom was also a high revenue client of the CFP® professional
- Referring one client to another is rife with potential conflicts of interest. Especially if both clients provide active revenue for the CFP® professional. A is not the best answer, a discounted accounting service is a conflict of interest but not likely material. B is incorrect a fee paid by a broker is a conflict of interest, but not immediately material as the CFP® professional is a fiduciary. C is not material

Question 164

Which of the following statements is true regarding a Coverdell Education Savings Account?
A. An individual can be the beneficiary of only one Coverdell ESA, and the total contribution to the account in any year can’t exceed $2,000.
B. There’s no limit to the number of accounts that can be established for a particular beneficiary; however, the total contribution to all accounts on behalf of a beneficiary in any year can’t exceed $2,000.
C. The Coverdell ESA must be established in the names of the parents, who must be at least 24 years old at the time the account is created.
D. There may be multiple contributors to a Coverdell ESA, however the total contribution per contributor cannot exceed $2,000 in any year.

Answer 164

B. There’s no limit to the number of accounts that can be established for a particular beneficiary; however, the total contribution to all accounts on behalf of a beneficiary in any year can’t exceed $2,000
- Answer A is incorrect because an individual can be the beneficiary of multiple accounts. Answer C is incorrect because it describes the education requirements for Series EE bonds, not Coverdell. Answer D is incorrect because the $2,000 limit is per beneficiary, not per contributor or per account

Question 165

Which of the following are available to full-time graduate students?
I. Pell Grants.
II. Subsidized Stafford Loans.
III. Supplemental Education Opportunity Grants (SEOG).
IV. Perkins Loans.

Answer 165

None of the above

- Perkins loan program ended September 2017

Question 166

Your client has asked you to assist her in examining possible funding methods for her daughter who is planning on attending graduate school for her MBA. Which of the following can you advise your client is/are available to assist in covering expenses?
I. Perkins Loan
II. Supplemental Education Opportunity Grant
III. Supplemental Loan for Students (Stafford Unsubsidized)
IV. Parent PLUS Loan
V. Lifetime Learning Credit

Answer 166

III only
- No grants are available to graduate students, only loans. Lifetime Learning Credit is a credit for tax purposes, not financial assistance direct for education. Parent PLUS Loans are loans for parents to pay for undergraduate course work. Graduate parent loans are available for graduate school, but is not an answer choice. Perkins loan program ended September 2017.

Question 167

Which of the following statements is correct concerning the effect of prepaid tuition plans on federal financial aid?
A. The amount of prepaid tuition is not treated as an asset of the parent or child when determining financial aid.
B. The current value of the prepaid account is included in the student’s assets.
C. The current value of the prepaid account is included in the parents’ assets when calculating expected family contributions.
D. The amount of prepaid tuition has no impact on the expected family contribution formula

Answer 167

C. The current value of the prepaid account is included in the parents’ assets when calculating expected family contributions
- Prepaid tuition is not a student asset for federal financial aid purposes. Prepaid tuition is treated as an asset of the parents’ and is included in the expected family contribution formula.

Question 168

If you have product with inelastic demand, which of the following is TRUE?
A. As the price increases, revenue decreases.
B. As the price increases, revenue increases.
C. As the price increases, revenue is unchanged.
D. None of the above

Answer 168

B. As the price increases, revenue increases.

- If the demand is inelastic, price increases raise revenues

Question 169

A shift “up and to the left” of the supply curve occurs when:
A. Some firms leave the industry.
B. Government reduces regulations on production.
C. The cost of inputs goes down.
D. Taxes go down.
E. Competition increases

Answer 169

A. Some firms leave the industry
- The supply curve shifts up and to the left, resulting in a decrease of a good or service being supplied, when firms leave an industry or market. When firms leave an industry, less of a good or service is produced at all price levels.

Question 170

Sally recently had her tax return prepared by her CPA. The CPA recommended that Sally increase her employer sponsored 401(k) retirement savings to 10%. Around the same time, Sally was working with Bob, a CFP® professional, who recommended specific asset allocation percentages and amounts allocated to various asset classes for her retirement and investment assets. Sally has come to you, a CFP® professional, for assistance implementing the recommendations from both her CPA and financial planner. Under which circumstances are you considered engaged in financial planning?
A. You recommend a new asset allocation for Sally.
B. You engage in a collaborative process that helps maximize a Sally’s potential for meeting life goals through financial advice that integrates relevant elements of the Sally’s personal and financial circumstances.
C. Since Sally is working with a CFP® professional, by implementing recommendations, you are also engaging in financial planning.
D. You recommend that Sally contribute any federal income tax refunds to a Roth IRA and any state income tax refunds to a traditional IRA.

Answer 170

B. You engage in a collaborative process that helps maximize a Sally’s potential for meeting life goals through financial advice that integrates relevant elements of the Sally’s personal and financial circumstances.

• b is the best answer and the CFP Board definition of financial planning
• A and D are financial recommendations but not necessarily integrative or requiring communicating and prioritizing with Sally. C is not correct, a client can have multiple advisers, some financial planners and some not.

Question 171

A young, single client approaches a CFP® professional with $5,000 stating that he would like to develop a financial plan and invest in the market. This is his first experience investing and he would like help choosing an appropriate account. What is the CFP® professional’s most appropriate course of action (CFP® Certification Examination, released 8/2012)?
A. Open a brokerage account with margin.
B. Open and fund a Roth IRA for the current year.
C. Determine whether the client has any consumer debt.
D. Determine whether the client has adequate life insurance.

Answer 171

C. Determine whether the client has any consumer debt.
- Of the answer options provided, reviewing debt (answer C) is the best fit. The CFP® professional needs additional information from the client before taking an action involving increasing client risk, such as opening a margin account. Reviewing life insurance may be appropriate for the client, but does not appear to be a goal of the client. The CFP® professional does not have enough information to determine if a Roth IRA is appropriate. A is incorrect because a brokerage account with margin increases the client’s risk, which the planner needs to gather more information on the client’s ability and willingness to accept more risk. B is incorrect because the planner needs additional information to determine if a Roth IRA is appropriate or not. D is incorrect because the client did not indicate that life insurance is a goal of the client’s.

Question 172

Ron and his wife Susan, both 61 years of age, ask a CFP® professional to provide a recommendation on whether or not Susan should start to draw Social Security benefits when she first becomes eligible at age 62. Which of the following would be the least important to obtain in order to provide a recommendation (CFP® Certification Examination, released 8/2012)

A. Family longevity and health history.
B. Social Security earning statement for each.
C. Other retirement assets or financial needs.
D. Long-term disability coverage.

Answer 172

D. Long-term disability coverage.
- When to begin drawing social security requires consideration of multiple issues such as financial needs, health/life expectancy, survivor benefits and higher wage earner analysis. Disability coverage is not a factor. A is incorrect because family longevity and health history is a consideration. B is incorrect because wage earner analysis is an important consideration. C is incorrect because available assets and financial needs is an important consideration.

Question 173

A CFP® professional meets with two new clients who would like advice about their mortgage. In the review, the CFP® professional finds that their essential expenses exceed their income. Mortgage rates have come down significantly and they intend to refinance their current 30-year mortgage to a 15-year mortgage. Their payments will be higher than their current payment. However, they will pay off the mortgage 5 years earlier than the current amortization schedule allows. What should the CFP® professional do (CFP® Certification Examination, released 8/2012)?
A. Suggest they stay with their current mortgage, as the higher interest is tax deductible.
B. Suggest they refinance to a 30-year fixed mortgage and begin funding savings.
C. Suggest they refinance to the 15-year mortgage, which would reduce the amount of interest paid over the life of the loan.
D.Suggest they meet with their mortgage broker

Answer 173

B. Suggest they refinance to a 30-year fixed mortgage and begin funding savings
- The clients have a negative cash flow, and should reduce their payments as much as possible and establish a cash reserve. A is incorrect because they need to reduce their expenses below their current income. C is incorrect because a 15-year mortgage will increases their cash outflows, which already exceed their current income. D is incorrect because meeting with their mortgage broker may or may not result in a lower mortgage payment, thereby lowering their overall expenses.

Question 174

Which of the following statements is false?

a) Federal law does not require those selling a group annuity contract with multiple investment choices including equity funds to have a securities license or to provide a prospectus if it is sold to a qualified plan.
b) If you are licensed to sell life insurance and fixed annuities in your own state, you can sell those same products in all states except New York without additional licensing.
c) In almost all states it is illegal to rebate commissions.
d) The minimum licensing requirements in most states for selling variable annuity contracts are proper state life and annuity licenses and a Series 6 securities license.
e) Currently, there is no federal legislation covering licensing or regulation of capital requirements for insurance companies

Answer 174

b) If you are licensed to sell life insurance and fixed annuities in your own state, you can sell those same products in all states except New York without additional licensing
- Individual states regulate the insurance industry. An insurance agent must be licensed by that state to sell insurance in that state

Question 175

Jasmine’s mother, Betty, moved in with her 4 years ago after the loss of Jasmine’s dad. 6 months ago Betty was diagnosed with dementia and requires more care than Jasmine can provide. They have chosen to place Betty in a nursing home near by. The home is $7,000 a month. Betty currently has $21,000 in assets. Betty has also been gifting Jasmine $600 a month for the last 4 years to help with the home and kids activities. When will Betty be eligable for Medicaid coverage of her care?

a) Immediately.
b) 3 months.
c) 4 months.
d) 7 months.

Answer 175

c) 4 months
- Betty currently has $21,000 in assets that will cover the first 3 months of care (21,000/7,000 = 4). She gifted a total of 28,000 to Jasmine in the prior 5 years (600 x 12 = 7,200 x 4 years = $28,800). The penalty period would 4 months ($28,800 / $7,000 = 4.1143) plus the 3 months she covered out of pocket, tells us Medicaid will pick up the costs after 7 months.

Question 176

Your client owns a whole life insurance policy with a death benefit of $200,000 on the life of his spouse. The policy has a cash value of $13,500 of which the dividends are used to purchase additional paid-up life insur-ance. Their son is the named beneficiary. If the spouse were to die today, which of the following is true? a) The client continues to own the policy for the benefit of the son.

b) A taxable gift of the life insurance proceeds has been made from the client to the son.
c) The client receives an amount equal to the cash value, and the son receives the remainder of the life insurance proceeds tax free.
d) The son must be at least 14 years old in order to collect the proceeds.
e) The client receives the proceeds of the life insurance policy but must hold them in a life insurance trust for the benefit of the son.

Answer 176

b) A taxable gift of the life insurance proceeds has been made from the client to the son
- This is an example of the so-called “unholy trinity” where the owner, insured and beneficiary are all different. If insured dies, owner has made a gift to the beneficiary.

Question 177

The National Association of Insurance Commissioners is involved in the regulation of insurance by

1. Direct involvement through the development of specific regulations for all states to follow.
2. The regulation of the insurance commissioners of all states.
3. (Indirectly) the exchange of information and preparation of recommendations.
4. Assuring that all states insurance regulation is somewhat uniform.
5. Accrediting state insurance regulatory offices.

a) 1, 2, and 5.
b) 1 and 4.
c) 3 and 5.
d) 4 only.
e) 2, 3, and 4

Answer 177

c) 3 and 5.
- The NAIC only provides guidance and recommendations to the state insurance commissioners. While they only provide recommendations, the NAIC has no actual control over the state insurance regulations

Question 178

Under the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985, an employer is required to extend medical plan coverage to eligible members of the employee’s family if the employee:

1. Dies.
2. Retires.
3. Divorces.
4. Terminates employment (prior to retirement).

a) 1, 2, and 3.
b) 1 and 3.
c) 2 and 4.
d) 4 only.
e) 1, 2, 3, and 4.

Answer 178

e) 1, 2, 3, and 4.

- All of the beneficiaries are eligible for COBRA benefits.

Question 179

Bruce, age 55, is the beneficiary of his mother’s $200,000 life insurance policy. The insurer has requested him to select a settlement option for payment of the proceeds. What factors should he consider before making the election?

1. His current income needs.
2. His asset management ability.
3. His net worth.
4. His estate planning goals.
5. His tax liability on the $200,000.

a) 1, 2, 3 and 5.
b) 2 and 4.
c) 1 only.
d) 3, 4 and 5.
e) 1, 2, 3 and 4

Answer 179

e) 1, 2, 3 and 4

- The proceeds from a life insurance policy are tax free, so the tax liability on the proceeds are not an issue.

Question 180

Bill Jones, age 35, comes to see you because he has just been diagnosed with a terminal illness. His doctor told him he will not be able to work more than another 6 months and that his life expectancy is only 12-18 months. Bill also tells you that he has always been self-employed, and with the exception of the last two years, has never paid into Social Security.

What benefits will be available to Bill and his family from Social Security as a result of his disability?

1. Medicare Part A.
2. Medicare Part B.
3. Monthly disability benefit.
4. Lump-sum disability benefit.
5. Monthly benefit to spouse.

a) 1, 2 and 3.
b) 3 and 5.
c) 1, 2 and 4.
d) 3 only.
e) None of the above

Answer 180

e) None of the above
- Since Bill is not 65 and has not been disabled for two years, he will not be eligible for Medicare. Bill is not fully insured (40 quarters of coverage); therefore, he is not entitled to any disability benefits. A spouse is not entitled to any disability benefit either, because he is not fully insured and there’s no information regarding minor children.

Question 181

Ginny is a sole proprietor. She wants to provide 60% of salary disability coverage to JoAnna, her employee who is in a 35% combined tax bracket. JoAnna’s W-2 wages are $40,000 and Ginny’s annual contribution to her qualified profit-sharing account on JoAnna’s behalf is $4,000.

Ignoring cost-of-living adjustments or any possible Social Security benefits, calculate JoAnna’s net-of-tax monthly disability payment if Ginny pays the disability premium and JoAnna’s tax bracket during disability remains at 35%.

a) $1,300.
b) $1,430.
c) $2,000.
d) $2,200.

Answer 181

a) $1,300.
- 40,000 / 12 = $3,333 gross pay
- $3,333 x 0.60 = 2,000 disability benefit
- $2,000 x (1 - 0.35) = $1,300 net of taxes benefit

Question 182

Which of the following is not needed to calculate the client’s human life value?

a) Average annual earnings to the age of retirement.
b) Estimated annual Social Security benefits after retirement.
c) Costs of self-maintenance.
d) Number of years from the client’s present age to the contemplated age of retirement.
e) Selection of an appropriate capitalization rate.

Answer 182

b) Estimated annual Social Security benefits after retirement
- Average annual earnings prior to retirement, cost of self-maintenance, remaining work life expectancy and an appropriate capitalization rate.

Question 183

Conditions that increase either the frequency or severity of loss are called:

a) Subrogation.
b) Risks.
c) Hazards.
d) Perils.
e) Extenuating circumstances.

Answer 183

c) Hazards.

- Hazards increase the frequency of a loss. Perils are the proximate cause of a loss.

Question 184

An HO-3 policy (Special form: “All risks of physical loss” except those specifically excluded) with no endorsements excludes which one of the following perils?

a) Flood.
b) Fire.
c) Collapse.
d) Weight of ice.
e) Volcanic eruption.

Answer 184

a) Flood

- Flood is always excluded and needs a separate policy.

Question 185

When fine arts or antiques are insured under a homeowners policy by an endorsement,

a) Coverage is usually on a replacement cost basis.
b) Coverage is usually on an actual cash value basis.
c) Coverage is usually provided on a valued basis.
d) The perils are the same as the homeowners policy to which the endorsement is attached.
e) Coverage limits are the same as the homeowners policy to which the endorsement is attached.

Answer 185

c) Coverage is usually provided on a valued basis.

- Fine arts and antiques need an appraised or agreed-upon value. The closest choice is “valued basis.”

Question 186

Which one of the following statements about life insurance products and their tax attributes is correct?

a) Modified endowment contracts do not provide a tax-free death benefit if the policyholder dies prior to age 59.
b) Tax-deferred annuities owned by a corporation are eligible for tax-deferred accumulation.
c) Permanent life insurance owned by a pension plan is 100% income tax free to the beneficiary of the plan.
d) If a person purchased a life and 20-year term-certain immediate annuity at age 50, there would be no premature distribution penalty.
e) Policyholders of single payment deferred annuity contracts purchased prior to 1987 may withdraw funds tax free from their policy up to basis.

Answer 186

d) If a person purchased a life and 20-year term-certain immediate annuity at age 50, there would be no premature distribution penalty.
- The term extends beyond 591⁄2 and the immediate annuity is a substantially equal payment.
- Below is CFP Board of Examiners’ (Now Council on Examinations) response to a candidate’s question regarding this exam item. “D is indeed the correct answer because immediate annuities are not subject to a premature distribution penalty tax. This only applies to deferred annuities.”

Question 187

Which of the following are true regarding the ownership of life insurance?

1. A policy can only be issued to the insured.
2. Generally, assigning a policy requires proof that the insured is still “insurable” meaning still in good health.
3. Only a person with an insurable interest, generally a relative, a business associate, or lender, can be named as a beneficiary.
4. The owner can assign (transfer) the policy to whomever he or she chooses, even if the assignee has no insurable interest.

a) 1, 2 and 3.
b) 1 only.
c) 2 and 4.
d) 4 only.
e) 1, 2, 3 and 4.

Answer 187

d) 4 only.
- An insurable interest must only exist at the time of policy inception for life insurance. An insurable interest does not have to exist at the time of loss. A policy can be issued to anyone with an insurable interest.

Question 188

A client, age 70, a widower with no close relatives, has crippling arthritis. The client is unable to walk and is confined to a custodial nursing home. Which of the following programs is/are likely to pay benefits towards the cost of the nursing home?

1. Medicare may pay for up to 100 days of care after a 20-day deductible.
2. Long-term care insurance may pay part if coverage of the facility type is broad enough.
3. Private medical insurance may pay part if it is a comprehensive major medical policy.
4. Medicaid may pay if the client has income and assets below state thresholds.

a) 1, 2 and 3.
b) 1 and 3.
c) 2 and 4.
d) 4 only.
e) 1, 2, 3 and 4

Answer 188

c) 2 and 4
- A private medical policy will not pay for custodial care because he is unable to perform some ADLs. Medicare also does not pay for custodial care.
- Below is CFP Board of Examiners’ (Now Council on Examinations) response to a candidate’s question regarding this exam item.
- “The clarification on why (3) above is incorrect is that a comprehensive major medical policy would pay for treatments for the arthritis but not for the custodial care which is required because he cannot perform the functions of daily living; i.e., dressing, feeding, bathing, etc. “

Question 189

Which of the following is a benefit provided by Medicare Part A or B?

a) Hospice benefits for terminally ill persons.
b) A stop-loss limit for annual medical expenses in excess of $2,500.
c) Coverage for custodial care.
d) Coverage for prescription drugs that can be self-administered

Answer 189

a) Hospice benefits for terminally ill persons.
- The correct answer was hospice care. There is no stop loss with Medicare and it does not provide custodial care. Drug coverage is available in Part D or Part C.

Question 190

A client recently purchased a new home from a builder for $150,000 including the lot valued at $40,000. What is the minimum insurance amount you would recommend that your client purchase to cover full replacement of the house in the event of a loss?

a) $88,000.
b) $110,000.
c) $120,000.
d) $150,000.

Answer 190

b) $110,000.
- There is no need to insure the value of the land. The minimum amount is 80% of replacement. currently the home is worth $110,000 (150,000 - 40,000) and at an 80% coinsurance for full coverage of loss, the amount would be $88,000.

Question 191

Jill Smith is an agent acting as a buyer for Tom Jones, d/b/a TKJ Auto Repair, a sole proprietorship. Her authority is limited to purchasing supplies and equipment up to $5,000 in cost. Jill signs a promissory note borrowing $5,000 from a third party. Tom Jones uses the funds for business purposes. Which of the following statements describes Tom Jones’ responsibility for Jill Smith’s action?

a) Jones is not bound by Smith’s actions since she lacked the actual authority to sign for the loan.
b) Jones is not bound by Smith’s actions since she lacked the necessary power of attorney to sign for the loan.
c) Jones is not bound by Smith’s actions since she lacked the express authority to sign for the loan.
d) Jones is bound by Smith’s actions since he ratified her action by using the loan proceeds for his business.
e) Jones is bound by Smith’s actions since she has the authority to purchase

Answer 191

d) Jones is bound by Smith’s actions since he ratified her action by using the loan proceeds for his business.
- Tom ratified Jill’s actions by using the funds she borrowed. Actually having the authority to purchase supplies and equipment does not obligate Tom since Jill only has the authority to buy supplies and equipment. Had Tom not used the funds, he would not be obligated to payback the loan.

Question 192

Your client’s employer has recently adopted a group universal life insurance plan. The advantages of such a plan for your client typically include all of the following except:

a) It allows employees to borrow or withdraw cash.
b) It provides an opportunity to continue coverage after retirement.
c) The entire premium cost is paid by the employer.
d) It provides flexibility in designing coverage to best meet individual need

Answer 192

c) The entire premium cost is paid by the employer.
- The entire premium is paid by the employee for a group life policy. An employee may be allowed to borrow from a group universal plan. It does provide permanent coverage.

Question 193

Terry Underwood purchased a 15-year-old compact car with 100,000 miles for his teenage son who recently received his license. Which of the following auto insurance coverages should be included in the policy for this auto?

1. Part A - liability coverage
2. Part B - medical payments coverage
3. Part C - uninsured motorist coverage
4. Part D - damage to insured’s auto

a) 1, 2, and 3.
b) 1, 2, and 4.
c) 1, 3, and 4.
d) 2, 3, and 4

Answer 193

a) 1, 2, and 3
- There is no need for Part D coverage since the car probably cost less than $500. Recall that insurance is best for low frequency and high severity. The value of the property is a low severity risk whereas all others could be high severity.

Question 194

Of the following policy options and provisions, which are dividend options available to policyholders of a participating whole life insurance policy?

I. Reduced paid-up insurance.
II. Paid-up additions.
III. Accumulate at interest.
IV. Extended term.

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

Answer 194

d) II and III only.

- Only Options “II” and “III” are dividend options. The others are non-forfeiture options.

Question 195

The following type of insurance would be described as an unbundled policy where the company selects the places of investment:

a) Universal life insurance.
b) Interest sensitive life insurance.
c) Variable universal life insurance.
d) Adjustable life insurance.

Answer 195

a) Universal life insurance.
- In all of these coverages, the monies above and beyond mortality and expenses are invested by the company in its general fund. Only variable life allows the investor to select investments. A universal policy is unbundled. The way this question is asked (“unbundled and selected by the company”) points one toward the correct answer of universal life.

Question 196

If a permanent life policy provides a guaranteed option to purchase additional insurance on the original policy, that option will include all of the following features in the new policy, except:

a) Guaranteed purchase option.
b) Disability waiver of premium.
c) Accidental death benefit.
d) Non-forfeiture provisions.

Answer 196

a) Guaranteed purchase option.
- Guaranteed purchase options cannot be purchased with guaranteed purchase option provisions. It would be like making the third wish for three more wishes.

Question 197

Tracy Cardinale was named by her sister, Lisa, as irrevocable beneficiary of Lisa’s life insurance policy. After this was set up, Lisa wanted to borrow from the policy’s cash value. What right does Lisa have to the cash value? Consider carefully the supporting rationale in selecting your answer.

a) Lisa can borrow the cash value, but she may NOT surrender the policy because of Tracy’s interest in the policy.
b) Tracy must allow Lisa to borrow from the cash value because she is the owner of the policy and as such has a right to do so.
c) Lisa may borrow from the cash value because Tracy has only a contingent interest in the policy.
d) Lisa can only borrow from the cash value with Tracy’s written approval because she has a conditionally vested interest in the policy.

Answer 197

d) Lisa can only borrow from the cash value with Tracy’s written approval because she has a conditionally vested interest in the policy.
- Even though Lisa is the owner of the policy, she can be denied permission to borrow from the cash value since Tracy (the irrevocable beneficiary) has a vested interest in the policy.

Question 198

Viatication will become an important issue if:

a) The insured were suffering from a terminal illness.
b) The insured were in need of a down payment for a home purchase.
c) The insured were taking care of elderly parents.
d) The insured were in need of bail money.

Answer 198

a) The insured were suffering from a terminal illness.

- Viatication becomes an important issue if the insured were suffering from a terminal illness.

Question 199

Your client, John Kent, purchased a limited payment whole life policy 15 years ago. He would like to stop paying the premiums on his policy, but continues to need the same amount of insurance. If he did so, which one of the following is a non-forfeiture option he could use?

a) Reduced paid-up insurance.
b) Extended term insurance.
c) Installments for a fixed period.
d) One-year term.

Answer 199

b) Extended term insurance.
- An extended term insurance is correct because extended term insurance is the only choice that is a non-forfeiture option. Option “A” - Although this is a non-forfeiture provision, the amount of insurance coverage would be reduced. Option “C” is a settlement option, and Option “D” is a dividend option.

Question 200

The best life insurance policy for the payment of federal estate taxes for a 50-year old couple with illiquid assets is:

a) An individual whole-life policy on each spouse on a cross-ownership basis.
b) A joint and last-to-die life insurance policy owned by an irrevocable trust.
c) A joint last-to-die life insurance policy owned by the spouse with the larger estate.
d) A joint and last-to-die life insurance policy owned by the spouse with the smaller estate.

Answer 200

b) A joint and last-to-die life insurance policy owned by an irrevocable trust.
- The “last-to-die” will pay on the second death, and if it is held in a trust, it will not add to the insured estate tax due because it will not increase the taxable estate

Question 201

Dave is 46, married and has an annual salary of $60,000. His employer offers group term life insurance coverage equal to 2 times his annual salary. The employer’s cost for Dave is $.40 per $1,000 of which Dave pays $.08 per month per $1,000. The Table 1 (Section 79) rate for 45-49 year olds is $0.15 per $1,000. What additional income must Dave include in his taxable income this year resulting from the group term insurance?

a) $10.80
b) $115.20
c) $126.00
d) $132.40

Answer 201

a) $10.80
- Dave is paying $115.20 each year for the coverage ($120 × 0.08 × 12). The Table I cost is calculated by subtracting $50,000 (the tax-free amount allowed under Section 79) from the $120,000 actually purchased, dividing the remainder by $1,000, multiplying the Table 1 rate of 0.15 times 12. ($120,000 - $50,000 / $1,000 × 0.15 × 12). So, the Table 1 premium is $126 (rounded.) Subtract the $115.20 already paid by Dave from the $126 Table 1 premium to determine the additional taxable income ($126 - $115.20 = $10.80).

Question 202

The group model of the HMO:

a) Is a corporation and medical staff members including doctors, nurses and clerical staff are employees of the HMO.
b) Is a type of HMO organization that is made up of physicians who have their own office locations.
c) Is an arrangement that is sometimes known as the network model.
d) Has no gatekeeper within the structure of this model.

Answer 202

c) Is an arrangement that is sometimes known as the network model.
- The group model of the HMO is an arrangement that is sometimes known as the network model. Option “A” describes a staff model. Option “B” describes an IPA. Option “D” is incorrect as ALL HMOs employ gatekeepers.

Question 203

The HMO model under which the subscribers have the greatest flexibility is:

a) The staffing model.
b) The IPA model.
c) The group model.
d) The network model

Answer 203

b) The IPA model
- The IPA allows the greatest flexibility among HMO coverages
- IPA = Independent Physician Association

Question 204

Which one of the following risk management techniques is accurately paired with the appropriate activity?

a) Risk avoidance - installing sprinkler systems.
b) Risk retention - wearing protective clothing.
c) Risk reduction - establishing a general partnership.
d) Risk sharing - incorporation.

Answer 204

d) Risk sharing - incorporation.
- Incorporating is an example of risk sharing. Option “A” - Installing sprinklers is risk reduction, as is Option “B”, protective clothing. Option “C” - Establishing a general partnership is risk sharing.

Question 205

Which of the following would appear on the declaration section of a policy?

a) What the insurer agrees to do.
b) The perils against which the insurer will provide coverage.
c) The exclusions to coverage.
d) The insured’s name.

Answer 205

d) The insured’s name.
- Option “A” is the insuring agreement. Option “B” is the coverage section. Option “C” pertains to policy exclusions. The insured’s name appears on the “declaration” page.

Question 206

Which of the following pairs matches correctly?

a) Pure risk; which occurs in the event of possible loss and/or possible gain.
b) Speculative risk; which exists when there is an uncertain possibility of loss and no chance of gain.
c) Dynamic risk; in which the core of risk resides in the change in the environment caused by the changing human condition.
d) Static risk; which is dependent on the state of the individual and is measurable and observable.

Answer 206

c) Dynamic risk; in which the core of risk resides in the change in the environment caused by the changing human condition.
- Dynamic risk is the only one correctly paired with its definition

Question 207

The person who commits the tort will not benefit or be relieved of obligation and responsibility just because the victim has insurance. This best describes:

a) Negligence per se.
b) Vicarious liability.
c) Collateral source rule.
d) Absolute liability.

Answer 207

c) Collateral source rule.
- This is the collateral source rule. The survival of a tort action means that even in the event of death of the victim or the tortfeasor, the tort will remain actionable. Negligence per se regards a violation of a legal standard.

Question 208

Which of the following statements is incorrect in regard to the regulation of the insurance industry?

a) Insurance costs are unknown at the time the premium is established and unregulated insurers might charge too little or too much.
b) Beneficiaries are usually entirely different from the insured. They are not present to protect their self-interest when the contract is made.
c) Upon death of an insured under a life insurance policy, federal regulators are able to secure income tax proceeds prior to lump sum payments.
d) Insurance is a service that is paid for in advance, but its benefits are reaped in the future.

Answer 208

c) Upon death of an insured under a life insurance policy, federal regulators are able to secure income tax proceeds prior to lump sum payments.
- Generally, there is no income tax on life insurance proceeds except in the case of transfer for value sales of a policy.

Question 209

Which of the following is not an example of a form of indirect federal regulation over the insurance industry?

a) FDIC: Federal Deposit Insurance Corporation.
b) IRC: Internal Revenue Codes.
c) SEC: Securities Exchange Commission.
d) ERISA: Employees Retirement Income Security Act.

Answer 209

a) FDIC: Federal Deposit Insurance Corporation.

- FDIC is coverage for bank deposits. The rest are indirect federal government involvement.

Question 210

Which branch of government is charged with interpreting and enforcing state insurance code rulings that have the force of law?

a) Judicial.
b) Executive.
c) Legislative.
d) Public Safety.

Answer 210

b) Executive.
- The key word here is “enforcing.” That is what the executive branch does. Had the question asked about interpreting and rendering opinions, it would have been referring to the state judicial branch.

Question 211

Which of the following are duties of insurance commissioners in regulating insurers?

I) To rule on the constitutionality of insurance laws
II) To determine if an insurer meets the requirements to obtain a license
III) To render decisions on the meaning of policy terms
IV) To conduct financial investigations of insurers operating in the state
a) I and II only.
b) I and III only.
c) I and IV only.
d) II and IV only.

Answer 211

d) II and IV only.

- Options “I” and “III” are under the purview of the state courts

Question 212

A lump sum of cash is paid to an annuity with payments to the annuitant slated to begin within one payment interval from purchase and proceeds are invested in a portfolio generating rates similar to current market rates. I have purchased:

I. Immediate annuity.
II. Variable annuity.
III. Deferred annuity.
IV. Single premium annuity.
a) I and II only.
b) II and III only.
c) II, III and IV only.
d) I, II and IV only.

Answer 212

d) I, II and IV only.
- Lump sum is single premium. Annuity beginning one payment interval later is immediate (this effectively eliminates Options “III” - deferred annuity), and market rates refers to variable rather than fixed annuities.

Question 213

Inland marine insurance covers all of the following except:

a) Imports.
b) Floaters.
c) Domestics shipments.
d) The hull of the ship.

Answer 213

d) The hull of the ship.
- The hull of the ship is covered under ocean marine insurance. An inland marine insurance is a category of insurance that protects against property losses to goods in transit.

Question 214

There are a number of definitions used to determine whether an insured is disabled. The split definition of disability includes the following two:

a) ‘Own occupation’ changing to ‘modified any occupation’.
b) ‘Modified any occupation’ changing to ‘own occupation’.
c) ‘Own occupation’ changing to ‘any occupation’.
d) ‘Any occupation’ changing to ‘own occupation’.

Answer 214

a) ‘Own occupation’ changing to ‘modified any occupation’.
- At first, the insured is considered disabled if he or she cannot perform his or her specific occupation. After a period of time (usually 2 to 3 years), the definition is broadened to include any occupation to which the insured is fit to undertake based education or training.

Question 215

The policy which insures an individual when “the insured is unable to perform the duties pertaining to any gainful occupation for which they are suited by education, experience, or training” best describes what definition of disability?

a) Any Occupation.
b) Modified Any Occupation.
c) Split Definition.
d) Loss of Income.

Answer 215

b) Modified Any Occupation.
- Option “A” - Any occupation would say you are employable even in the severest disabilities. Option “C” - Split definition uses own occupation to begin with and moves toward modified any occupation. This allows for training in a new field. Option “D” - Loss of income avoids having to define disability.

Question 216

Disability income insurance benefits terminate for the following reasons:

I. Insured has returned to work.
II. Maximum benefit period has been reached.
III. Group coverage has been canceled.

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

Answer 216

b) I and II only.

- If one is on disability and the company cancels the policy, coverage is still continued

Question 217

If the insured under a disability income insurance policy moves to a more hazardous job and receives an increase in compensation with the job change, what will be the likely effect on the disability coverage?

a) The relation of earnings to insurance clause will require an adjustment in the benefits payable.
b) The definition of disability will automatically change from “own-occupation” to “any-occupation”.
c) The change of risk clause will require new underwriting of the risk.
d) The change of occupation provision will permit the insurer to reduce benefits payable.

Answer 217

d) The change of occupation provision will permit the insurer to reduce benefits payable.
- In the case of increased risk on a disability policy the insurer will generally reduce coverage to match what the premium will purchase at the new, riskier position.

Question 218

Which of the following statements best describes the probation period in a disability income policy?

a) The period of time that must elapse before the policy is activated.
b) The period of time available for the insurer to cancel coverage under the policy.
c) The period of time the insured must wait before specified illnesses or injuries are covered.
d) The period of time the insured must wait before benefits are payable.

Answer 218

c) The period of time the insured must wait before specified illnesses or injuries are covered.
- The probation period, when included in a Disability Income policy, is the time the insured must wait after the issue of the policy before specified conditions will be covered.

Question 219

When Pete Morin purchased his $100,000 home, he insured it at the required coinsurance amount of 80% of the value. Over the last five years, the value of his home has increased and is now $160,000, but he has not increased his coverage. Pete has a $500 deductible. He has a kitchen fire causing $10,000 in damage. What amount will his insurer pay for repairs?

a) $4,250
b) $5,750
c) $6,250
d) $9,500

Answer 219

b) $5,750
- The amount carried divided by the amount required (80% of current value) times the loss, minus the deductible equals the payment. One of the tricks on this one is that he purchased $80,000 of coverage initially (80% of the purchase price). So, the covered loss equals [$80,000 / (.80 × $160,000)] × $10,000 = $6,250. The insurer will pay $6,250 - $500 = $5,750.

Question 220

When a property claim has been submitted, the adjuster is called in to do which of the following:

I. Assist the insured in the preparing the proof-of-loss statement.
II. Determine whether there was a loss covered by the policy.
III. Classify the loss as standard, substandard, or ineligible.
IV. Choose the arbitrator who will determine the amount of loss.
a) I and II only.
b) I and III only.
c) I and IV only.
d) II and III only.

Answer 220

a) I and II only.
- Options “I” and “II” are roles of an adjuster. Option “III” is incorrect because the classification is the underwriter’s job. Option “IV” is incorrect because the adjuster determines the amount of loss. An arbiter would enter into the situation only if the two sides cannot agree

Question 221

Where no-fault auto insurance is involved, which of the following is a correct match?

a) Pure no-fault: Several states have enacted this system.
b) Verbal threshold: Law suits may be allowed when there is a fatal injury.
c) Modified no-fault: In no way impedes the right of tort action.
d) Pure no-fault: Allows for tort action under certain conditions.

Answer 221

b) Verbal threshold: Law suits may be allowed when there is a fatal injury.
- There is no “pure no-fault” in existence in any state in the U.S. Modified no-fault allows suits when verbal and dollar thresholds have been crossed. Dollar threshold is damage occurring above a certain amount, not a limit to actionable compensatory amounts.

Question 222

Under the basic approaches commonly in use in the no-fault auto insurance dilemma, which of the following best describes the plan where injured parties do not give up the right to sue, but simply refrain from such action until either a dollar threshold or a verbal threshold is reached?

a) Extended first party coverage.
b) Modified no-fault coverage.
c) Pure no-fault coverage.
d) Unsatisfied judgment no-fault coverage

Answer 222

b) Modified no-fault coverage.
- Modified no-fault coverage is the plan where injured parties do not give up the right to sue, but simply refrain from such action until either a dollar threshold or a verbal threshold is reached.

Question 223

All of the following require a special endorsement rider or a separate policy for coverage to be effective, except:

a) A house involved in flooding.
b) A house involved in an earthquake.
c) A car involved in flooding.
d) A piece of jewelry valued at $10,000.

Answer 223

c) A car involved in flooding.
- Personal auto policies are the only ones that offer coverage for flooding. On a homeowners policy, water damage is covered “from the sky coming down,” but not “from the ground coming up.”

Question 224

In the Commercial General Liability contract, which of the following parts does not belong?

a) Coverage A, bodily injury and property damage liability.
b) Coverage B, personal and advertising liability.
c) Coverage C, medical payments.
d) Coverage D, other structures.

Answer 224

d) Coverage D, other structures.

- There is no “other structures” coverage on a CGL contract.

Question 225

Six years ago, Sonny Gates purchased a building for $400,000. Its current replacement cost is $800,000. The building is covered for fire-related perils by Commercial Carriers Insurance Company to $400,000, 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 Commercial Carriers Insurance Company pay for this loss?

a) $298,000
b) $373,000
c) $598,000
d) $600,000

Answer 225

b) $373,000
- (Face value ÷ coinsurance) × Loss - Deductible

[400,000 ÷ (.80 × 800,000)] × 600,000 - 2,000

[(400,000 ÷ 640,000) × 600,000] - 2,000

(.6250 × 600,000) - 2,000

375,000 - 2,000

373,000

Question 226

Which of the following represents the LEAST favorable means of securing long-term care coverage?

a) Continuing Care Retirement Communities.
b) Disability Income Policy Rider.
c) Association Arrangements.
d) Life Insurance Policy Rider.

Answer 226

d) Life Insurance Policy Rider.
- Continuing Care Retirement communities are structured specifically for Long-Term Care (LTC) coverage, as are the individual policies. Association arrangements are also LTC specific. These three all provide excellent means to obtain LTC coverage. The disability income policy rider takes a coverage that can no longer be carried after age 65 and converts it to useful LTC coverage, another excellent plan. The least favorable is to have diminished coverage that one will most definitely need at some point - life insurance.

Question 227

Activities of daily living are standards also known as ADLs. These are activities the patient must be able to perform. Which of the following are common ADLs?

I. Eating and dressing.
II. Toileting and transferring.
III. Maintaining continence and meal preparation.
IV. Bathing and walking.

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

Answer 227

c) I and II only.

- Meal preparation and walking are not activities of daily living. Therefore, III and IV are wrong.

Question 228

One of your clients, Fred Majors, age 70, a widower with NO close relatives, has crippling rheumatoid arthritis. Fred is unable to walk and is confined to a custodial nursing home. Which of the following programs is/are most likely to pay benefits towards the cost of Fred’s nursing home stay?

I. Medicare may pay for up to 100 days of care after a 20-day deductible.
II. Long-term care insurance may pay part if coverage of the facility type is broad enough.
III. Private medical insurance may pay part if it is a comprehensive major medical policy.
IV. Medicaid may pay if the client has income and assets below state thresholds.

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

Answer 228

c) II and IV only.
- Option “I” - Medicare will not pay because the client has no possibility of recovery and this is a “must” to secure Medicare payment. Option “III” - Private medical insurance does not pay for custodial nursing home stays, except possibly in a convalescent situation. The clarification on why Option “III” above is incorrect in that a comprehensive major medical policy would pay for treatments for the arthritis, but not for the custodial care which is required because Fred cannot perform the functions of daily living (i.e., dressing, feeding, bathing, etc.)

Question 229

All the following statements describe benefits of a typical buy-sell agreement, EXCEPT:

a) It provides liquidity to the deceased’s estate for paying death taxes and other debts.
b) It provides for continuation of the business by the surviving owners.
c) It can establish the estate tax value of the business interest in the deceased’s estate.
d) It provides the surviving owners with the option to buy the deceased’s business interest.

Answer 229

d) It provides the surviving owners with the option to buy the deceased’s business interest.
- A buy-sell agreement should provide for a commitment of the surviving owners to buy the deceased’s interest, not just an option to buy. The owner wants to be assured that there will be a sale of the interest at the time of death, not just an option. The other statements are benefits of a buy-sell agreement.

Question 230

Which of the following statement(s) concerning the choice of a stock redemption (entity agreement) versus a cross-purchase corporate buy-sell agreement funded with insurance is FALSE?

a) The use of existing insurance to fund the agreement causes a transfer-for-value problem if an entity agreement is selected, but does NOT cause this problem if a cross-purchase approach is used.
b) A cross-purchase agreement should be selected if the surviving owners expect to sell their interests during their lifetimes.
c) An entity approach may solve the affordability problem if one owner is significantly older than the others.
d) An entity agreement becomes more desirable as the number of owners included in the agreement increases.

Answer 230

a) The use of existing insurance to fund the agreement causes a transfer-for-value problem if an entity agreement is selected, but does NOT cause this problem if a cross-purchase approach is used.
- Transfer-for-value problems can be created if existing policies are transferred between shareholders of a corporation in a cross-purchase agreement. An exception to transfer-for-value exists for transfers from a shareholder or officer to the corporation (to fund an entity purchase agreement), but not for transfers between shareholders.

Question 231

Insured buy-sell agreements have the following characteristics, except:

a) Stock redemptions (entity agreements) increase the cost basis of the surviving shareholders.
b) Insured cross-purchase plans involve shareholders buying life insurance on each other.
c) Parties to a cross-purchase agreement can agree to the purchase of remaining life insurance policies from the decedent’s estate.
d) Under a stock redemption (entity agreements) plan, life insurance owned by the corporation on the shareholder’s life is not included in the decedent’s estate.

Answer 231

a) Stock redemptions (entity agreements) increase the cost basis of the surviving shareholders.
- The cost basis of surviving shareholder does not increase in an “entity” or stock redemption buy-sell, but would increase, in part, in a cross-purchase.

Question 232

Your client, Dennis and Daughter, Inc. (often referred to as DAD by the owners) is a C corporation with gross receipts of $3,000,000 for the past four years. The net earnings to the firm for the most recent fiscal year were $120,000. There are two shareholders, Dennis and his daughter, Denise. They have recently had an outside consultant perform a valuation of the firm using the capitalization method and a .10 capitalization rate. Based on this information, Dennis and Denise have decided to execute a buy-sell agreement. Using the above information, answer the following question.

All the following would be true in a cross-purchase plan, if Dennis passed away first, EXCEPT:

a) Life insurance owned by Denise will not be included in Dennis’ probate estate.
b) Life insurance and/or disability insurance premiums to fund the agreement are tax deductible as an ordinary business expense.
c) Denise would receive an increased cost basis in Dennis’ stock equal to the amount paid to redeem the shares from Dennis’ estate.
d) The transaction side-steps the entity and thus avoids constructive dividend concerns.

Answer 232

b) Life insurance and/or disability insurance premiums to fund the agreement are tax deductible as an ordinary business expense.
- Insurance premiums to fund buy-sell agreements in a cross-purchase plan are not tax deductible. In the case of an entity agreement, where the firm owns the policies, the premium would also NOT be tax deductible.

Question 233

A supplier of your company experiences fire damage at their plant. They cannot provide an essential part to you for a number of weeks. This, of course, delays your operation. You are covered by a very extensive insurance. For this reason, you would go to collect from your:

a) Contingent business interruption.
b) Extra expense insurance.
c) Business interruption.
d) Lease hold interest coverage.

Answer 233

a) Contingent business interruption.
- You would go to collect from your contingent business interruption insurance because it is a business which you do not own that has a direct effect on your own business.

Question 234

Which of the following statements about split-dollar life insurance and its uses is incorrect?

a) Stock redemption plans can be funded by split-dollar life insurance.
b) All policy values and benefits of a split-dollar life insurance policy are subject to the claims of company general creditors.
c) The insurance premium of a split-dollar life insurance contract is generally divided between the employee and the employer.
d) The insurance death benefit of a split-dollar life insurance policy is generally divided between the employee and the employer.

Answer 234

b) All policy values and benefits of a split-dollar life insurance policy are subject to the claims of company general creditors.
- Only the portion of benefit in the policy that is attributable to the actual contributions of the company are subject to the claims of company creditors.

Question 235

Professional liability contracts which provide protection in cases where substandard conduct presents the possibility of bodily injury, is known as:

a) CPA liability insurance.
b) Errors and omissions insurance.
c) Malpractice insurance.
d) Lawyers professional liability insurance.

Answer 235

c) Malpractice insurance.
- CPA liability, fiduciary liability and even lawyers’ liability are specializations of Errors & Omissions coverage involving loss or damage of property or money. Malpractice covers bodily injury.

Question 236

Which of the following statements accurately reflect the nature of buy-sell agreements?

a) A stock redemption plan must have a corporation as a party to the contractual arrangement.
b) A stock redemption plan increases the cost basis of surviving shareholders.
c) Under a cross-purchase plan funded with life insurance, premiums paid are tax deductible to the payor.
d) Proceeds of a life insurance policy owned by a surviving shareholder must be included in the gross estate of the decedent.

Answer 236

a) A stock redemption plan must have a corporation as a party to the contractual arrangement.
- The corporation must be a party to the stock redemption plan. A stock redemption plan is a stock purchase by a corporation, so the cost basis of the surviving shareholders are not affected, thus they do not receive a step up in basis. Proceeds of a policy owned by a surviving shareholder are not includible in the decedent’s gross estate. Premiums are not tax deductible.

Question 237

What benefits are available to the survivors of a deceased worker who was currently insured but not fully insured at death?

I. Lump sum death benefit of $255.
II. Mother or father’s spousal benefit for caring for a qualifying child under age 16.
III. Income benefits to a child under age18.
IV. Survivor benefit to spouse (assume not remarried) at their full retirement age.

a) I and III only.
b) II, III and IV only.
c) I, II and III only.
d) All of the above.

Answer 237

c) I, II and III only.

- There are no survivor benefits to a surviving spouse with no qualifying child.

Question 238

Which of the following correctly describes benefits provided by Medicare?

a) Coverage for eye care.
b) No stop-loss limits.
c) Coverage for custodial care.
d) Coverage for dental care.

Answer 238

b) No stop-loss limits.
- Medicare is an 80/20 split without stop-loss limits. Medicare does not provide custodial care coverage, eye care or dental coverage.

Question 239

What is the total length of time a 35-year old employee must have worked to be considered fully insured in order to qualify for disability insurance under social security?

a) 10 quarters.
b) 15 quarters.
c) 20 quarters.
d) 40 quarters

Answer 239

d) 40 quarters
- The disability recipient must have worked 40 quarters (or periods) in total to be eligible for benefits, and of these, 20 quarters must have occurred in the 40 quarters immediately before becoming disabled.

Question 240

Kathleen recently died. She was currently insured for Social Security. Which of the following persons would be entitled to survivorship benefits based on her work record?

a) Her husband, Robert, who is age 65.
b) Her mother, Joy, age 70, who was a dependent of Kathleen before her death.
c) Her daughter, Nora, age 18 and in high school.
d) None of the above.

Answer 240

c) Her daughter, Nora, age 18 and in high school.
- Since she was only currently insured Robert and Joy are not entitled to survivorship benefits. Her daughter is still eligible for benefits even though she is 18 because she is in high school.

Question 241

Which of the following individuals will be eligible for Medicare coverage A and B this year?

a) A 63-year old federal government employee hired in 1972.
b) A corporate director, age 55, whose only income is from being a corporate director.
c) A 68-year old proprietor filing Schedule F.
d) A 65-year old business owner who, over his lifetime, has received only dividend income from the S-corp business.

Answer 241

c) A 68-year old proprietor filing Schedule F.
- Persons “A” and “B” are too young. Person “D” did not receive any income which was ever subject to self-employment or social security taxes, therefore, did not ever become qualified

Question 242

Which of the following statements is true regarding CFP® professionals?

A comprehensive written plan must be developed for every client of a financial planner.
Financial planning engagements must be comprehensive and cover, at a minimum, retirement planning, risk management and cash flow planning.
Financial planning engagements require the application and integration of the planner’s knowledge, skills, and decision-making in service to clients.
Financial planning requires that all a CFP® professional create a cash flow statement and statement of financial position for their clients.

Answer 242

Financial planning engagements require the application and integration of the planner’s knowledge, skills, and decision-making in service to clients.

Question 243

Morgan, a prospective client, recently approached Mike, a CFP® professional with significant estate planning needs. Mike does not feel like he can adequately fulfill all of Morgan’s needs so he refers Morgan to a colleague who specializes in estate planning. What principle did Mike most clearly demonstrate?

Objectivity
Fairness
Professionalism
Competence

Answer 243

Competence
- A competent financial planner focuses on maintaining and applying adequate skills and knowledge when providing services to clients. Competence also includes the planner’s ability to recognize his or her limitations. Answer A is incorrect because objectivity is about providing professional services objectively and Mike did not perform any services. Answer B is incorrect because although Mike is being fair to Morgan, he is better demonstrating competence, and the question asks what principle did Mike MOST clearly demonstrate. Answer C is incorrect because much like answer B, competence is most clearly demonstrated over professionalism

Question 244

Which of the following statements is true regarding compensation disclosure requirements?

Disclosures of compensation methods must remain accurate throughout each client engagement.
If the disclosure is required in writing, the certificant may refer a client to their website meets the compensation disclosure requirement.
The CFP® professional is only obligated to disclose compensation information at the initiation of a client engagement.
The CFP Board audits CFP® professionals to determine the adequacy of compensation disclosures

Answer 244

Disclosures of compensation methods must remain accurate throughout each client engagement.

Question 245

Tom is a CFP® professional and is working with a husband and wife on their financial plan. One of the recommendations is for the couple to purchase a $500,000 whole life insurance policy, for which Tom is to receive a commission. During a telephone interview with the clients, Tom completes the application based on the couple’s responses to his questions. A question asks if the husband or wife have ever been convicted of driving under the influence within the past five years. He sends it to them for their signature. A few years later, the husband died in a single car accident, and the life insurance company denied the policy. The wife sued the CFP® professional on what grounds?

Tom, or his employer, should review government motor vehicle records to corroborate and verify the answers on the client’s policy application.
Tom was sued for fiduciary breach. He should have forwarded the completed application to the clients for the clients to sign the application and pay the first premium.
It’s a violation of Tom’s obligation to CFP Board to take a phone interview for a life insurance application, so Tom should invite the clients to his office for them to complete the application and sign it or forward a blank copy of the application for the clients to complete and sign.
Tom should provide a copy of the application to the client for signature, along with a policy illustration.

Answer 245

Tom, or his employer, should review government motor vehicle records to corroborate and verify the answers on the client’s policy application.
- According to anonymous case #17554, the planner should corroborate and verify the client’s answers regarding potential DUI convictions. If the client dies in an accident the insurance company will not pay a claim on the life insurance policy if the client was in fact, convicted of DUI in the past five years. The Disciplinary and Ethics Commission found this planner negligent in failing to review governmental motor vehicle records and violated old Rule 701 of the CFP Board’s Code of Ethics.

Under the October 2019 rule revision Tom owes a duty to his firm to comply with lawful objectives. This extends to an agent and insurer relationship.

A CFP® professional must act with a duty of care and loyalty to his client. Having false information on an application violates those duties making options B and D incorrect. Option C is incorrect because the CFP® professional is violating a duty to his employer not CFP Board.

Question 246

Your client, Helen, owns a joint account with her sister. The account was established and contributed to by their mother years ago. Helen comes into the CFP® Professional’s office requesting to withdraw her half of the money from the account. The professional feels that she is making an emotional decision at the time, what should he do?

Contact the mother and advise her to schedule a meeting with both of her daughters.
Talk to Helen and ask her why she does not want to keep her money with her sister anymore.
Tells Helen to contact her attorney.
Tells Helen to contact her sister and have her sign a document saying that she can withdraw the money.

Answer 246

Talk to Helen and ask her why she does not want to keep her money with her sister anymore.
- A discussion with Helen is the best approach. If there are no withdrawal restrictions on the account, contacting another party is not appropriate.

A is incorrect because it would be a violation of the duty of confidentiality to contact Helen’s mother regarding her request.

C is incorrect because Helen does not need authorization from the attorney to make the withdrawal.

D is incorrect because Helen does not require authorization from her sister to withdraw the money.

Question 247

Which of the following best describes “Fee-Only” compensation as defined by the CFP Board Code of Ethics and Standards of Conduct?

12b-1 fees, Flat fess, AUM fees, Direct Fees paid by a client or custodian platform.

Front-load, back-load, 12b-1 fees, insurance product commissions, sales based noncash travel incentives, salary or bonus based related to sales or production goals, direct or indirect benefits from related entity receiving sales-based compensation.

Hourly fees, flat fees, subscription fees, asset under management fees, custodial platform fees, salary or bonus not related to sales or production goals, travel to custodian or research conference.

Hourly fees, flat fees, subscription fees, asset under management fees, custodial platform fees, salary or bonus related to sales and production.

Answer 247

Hourly fees, flat fees, subscription fees, asset under management fees, custodial platform fees, salary or bonus not related to sales or production goals, travel to custodian or research conference.
- Duties Owed to a Client (12 a. 1. Fee-Only is a compensation type absent of commissions and sales charges.

a) The CFP® Professional or their firm do not receive any sales or product-based compensation.
b) Related parties (such as referring professionals or allied professionals) receive no sales-based compensation in connection with professional services.

Question 248

Which statement best fits the CFP Board Code of Ethics for CFP Board professionals and registrants?

CFP Board Code of Ethics are a means to avoid disciplinary action.

CFP Board Code of Ethics state a CFP® Professional must follow the practice standards if they are performing financial planning, but not when simply recommending or transacting financial assets.

CFP Board Code of Ethics are a guide to the personal financial planning process.

The code of ethics is not specifically defined, remains aspirational and leads to more detailed rules and obligations through the planning process.

Answer 248

The code of ethics is not specifically defined, remains aspirational and leads to more detailed rules and obligations through the planning process.
- The Code and Standards are general statements expressing the ethical and professional ideals certificants and registrants are expected to display in their professional activities. As such, they are aspirational in character and provide a source of guidance for certificants and registrants.

Question 249

Bill is a CFP® professional with an insurance license and he received a call today from John, a prospective client. John was referred to Bill by one of Bill’s current clients. John explained that he and his wife recently had their first child and he would like to purchase a twenty-year term life insurance policy from you with a face value of one million dollars from an AA or higher rated Insurer. According to the Code of Ethics, which of the following would be acceptable actions for Bill as a CFP® professional?

Gather sufficient information about the client to complete the application and execute the transaction after John signs a letter acknowledging the limited nature of the engagement.
Act as a fiduciary, complete the life insurance application and submit to underwriting after providing information about compensation, any potential conflicts of interest, contact information and any other material information about you and your firm.
The Code of Ethics require Bill to provide written information about his compensation, material conflicts of interest, contact information and any other material information about Bill and his firm to John.
Submit the client’s life insurance application to the underwriter and inform John that Bill can provide a comprehensive risk management plan that will reduce the client’s overall risk exposure for little to no increase in annual premiums.

Answer 249

Act as a fiduciary, complete the life insurance application and submit to underwriting after providing information about compensation, any potential conflicts of interest, contact information and any other material information about you and your firm.
- B is the best answer. John is able to sell a financial product as a CFP® professional without engaging in financial planning. He owes Bill the duties to a client selling a financial asset including acting as a fiduciary (1. a. b. and c) as well as providing the client with information (10). A Is not the best answer a written scope of engagement is not required in this circumstance. This transaction is not financial planning and does not require integration. C is not the best answer material conflicts of interest do not need to be in writing. D is not the best answer, the CFP® professional is required to provide information and act as a fiduciary, making (B) a better option than (D).

Question 250

George is a CFP® professional who is appointed with a large federally covered adviser that is also a mutual insurance company. George is limited to selling a suite of proprietary mutual funds whose costs are higher than other options offered by his competition. Which of the following principles of the Code of Ethics allows George to hold the CFP® designation and requires him to disclose his constraints with clients?

Act in a manner that reflects positively on the financial planning profession and CFP® certification
Maintain the confidentiality and protect the privacy of client information
Act with honesty, integrity, competence, and diligence
Avoid or disclose and manage conflicts of interest

Answer 250

Avoid or disclose and manage conflicts of interest

- George’s constraints are a material conflict of interest which must be disclosed and managed.

Question 251

When should a financial planning client immediately contact their CFP® Professional?

When the client has an additional child.
If there is a change in the client’s marital status.
If there is a change in the client’s tax rate.
If there is a change in the client’s employer.

Answer 251

If there is a change in the client’s marital status.
- This is a difficult question to choose one correct answer. The best answer is B, as a change in marital status likely results in a major impact to current and future financial planning.The engagement will need to be updated to reflect who the client is (additional client if married or removal of a client in the case of divorce)

A is incorrect because while the client should contact their CFP® professional regarding a new child, the additional child will not change the scope of the engagement.

C is incorrect because a change in tax rates is likely expected, unless it’s related to a significant change in income.

D is incorrect because simply changing jobs is immaterial, unless it accompanies a significant change in insurance benefits and/or income.

Question 252

Adherence by CFP Board professionals and registrants to the Code of Ethics and Standards of Conduct is as follows:

Duties owed to clients are voluntary for all professionals, and the Practice Standards are mandatory for all financial planning professionals.

Practice Standards are mandatory for certificants who engage in a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances.

Duties owed to clients are binding on all certificants, Practice Standards are only enforced for CFP® professionals who represent their compensation as “fee only”.

Duties owed to Clients, Duties owed to CFP Board and Practice Standards are mandatory for all CFP®certificants.

Answer 252

Practice Standards are mandatory for certificants who engage in a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances.
- Financial Planning is defined as “engaging in a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances”. CFP® certificants must adhere to practice standards when performing financial planning.

Question 253

Sorel Parks, CFP®, met with Dorian and Griffin, Dorian’s father. During the meeting, Sorel entered into an oral agreement with Dorian to manage Griffin’s financial affairs. Sorel did not complete a client profile of Griffin. Sorel offered to review and make recommendations on Griffin’s then-current living trust. Sorel prepared a Last Will, Revocable Trust and Durable Power of Attorney for management of Property and Personal Affairs, and charged Griffin $400 per hour for preparing the documents. Griffin had not requested such documents. Griffin asked Sorel to provide him with all the documents pertaining to his investments. As of the hearing date with the Disciplinary and Ethics Commission, Sorel had not provided the requested documents to Griffin. The Commission issued an Order to Revoke Permanently Sorel’s right to use the CFP®, CERTIFIED FINANCIAL PLANNER™ and certification marks. The Commission ordered Sorel to verify that he was not using the marks by submitting copies of letterhead and business cards within 30 days of the Order. To comply with the Code of Ethics, before providing any services to Griffin, Sorel was required to take which of the following steps, Except:

A. Review implementation responsibilities with Griffin.

B. Understanding The Client’s Personal and Financial Circumstances by Obtaining Qualitative and Quantitative Information

C. Provide information to a client outlined in Duties to a Client including but not limited to How the client pays for products, services and additional incurred costs including surrender charges and sales loads. How the CFP® professional and their firm are compensated for providing products and services.

D. Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action prior to making any financial planning recommendations.

E. Sorel must do all of the above.

Answer 253

A. Review implementation responsibilities with Griffin.
- Implementation responsibilities are done after the client agrees to one of the courses of action the CFP® professional has presented. Duties owed to clients (10) outlines information that must be provided to a client when a CFP® professional is providing financial advice or engaging in financial planning. This information must be provided prior to the process beginning. B is the first step of the active financial planning process and comes after item C. D is a step in the planning process that comes after Information is provided.

Question 254

Which of the following would most likely require a CFP® professional to follow practice standards for the financial planning process with their clients?

Activity related solely to the sale of a specific category of products
Investment advisory services as defined by applicable state or federal regulations
Completing an application and opening a brokerage account
Acting as an instructor in a financial planning continuing education class

Answer 254

Investment advisory services as defined by applicable state or federal regulations
- Investment advisory services are procedural and require a discussion of goals, risk and optimization.

Question 255

Sally, age 28, is a CFP® professional and is just starting her own financial planning practice. Sally is concerned about the liability associated with practicing financial planning and would like to take the appropriate steps to minimize her liability. Which action should Sally take that would help her to minimize her liability?

Sally should use a suitability standard when evaluating and recommending investment alternatives, and other financial planning advice, for clients.
Sally should partner with other CFP® professionals and offer financial planning services as part of a team of practitioners to minimize her liability.
Sally should purchase a general liability insurance policy and an errors and omissions policy.
Sally should provide services with the duty of a fiduciary.

Answer 255

Sally should provide services with the duty of a fiduciary.
- According to the CFP Board’s Standard of Professional Conduct FAQs, the CFP Board believes that compliance with the Standards, including the requirement that financial planning services be provided with the duty of a fiduciary, is a way to reduce liability.

A is incorrect Sally must provide professional services with a Fiduciary Duty (Duties owed to clients 1 a. b. and c.)

B and C are strong choices, but practicing with a duty of care, loyalty and following client instructions should lead to fewer infractions and liability than other business models.

Question 256

Which of the following are included in the first step of the financial planning process (Understanding the Client’s Personal and Financial Circumstances)

I. Identifying Potential Goals
II. Obtaining Qualitative and Quantitative Information
III. Analyzing Information
IV. Addressing Incomplete Information

II, III and IV only.
I, II and IV only.
II and IV only.
I, II, III and IV.

Answer 256

II, III and IV only.
- Elements II, III and IV are required in the first step of the financial planning process. Step 1 included analyzing information, not to be confused with Step 3, Analyzing the Client’s Current Course of Action. Element I – Identifying Potential Goals, should occur in the second step of the planning process (Identifying and Selecting Goals).

Question 257

A client is involved in a potentially litigious matter and asks to confide legally sensitive information to a CFP® professional under the protection of advisor-client privilege. This information may affect another one of the CFP® professional’s clients, who happens to be a business partner of the first client. How should the CFP® professional respond to this situation (CFP® Certification Examination, released 8/2012)?

Ensure that the client signs the required Privacy Policy before having any discussions.
Caution the client that there is no such thing as advisor-client privilege.
Document the information and, as required by CFP Board’s fiduciary standard, debrief the second client on the details that pertain to her.
Document the information and, as required by CFP Board’s Rule on Reciprocal Disclosure.

Answer 257

Caution the client that there is no such thing as advisor-client privilege.
- A CFP® Professional’s duties to clients, confidentiality and privacy (rule 9) provides examples of when a CFP® may be compelled to share information without the active consent of the client including a civil, criminal, exam, subpoena or summons. The CFP® may be pulled into a civil disclosure and should share as much at the onset of a relationship. A is incorrect because a CFP® professional will be required to disclose information that may impact another client or disengage the client. C is incorrect because debriefing the second client would not be in the best interest of the first client D is incorrect because there is no such rule as Reciprocal Disclosure

Question 258

Which of the following statement is true regarding the CFP Board’s Code of Ethics and Standards of Conduct?

The standards apply to all CFP® professionals at all times, regardless of the insurance or securities licenses or registrations held.
The standards are waived when CFP® professionals are limited to proprietary products.
The standards apply to all CFP® professionals unless they hold another license or other registration.
The standards apply only to CFP® professionals who provide financial planning or material elements of financial planning.

Answer 258

The standards apply to all CFP® professionals at all times, regardless of the insurance or securities licenses or registrations held.
- A CFP® professional must follow the code of ethics when providing professional services.

Question 259

A principal in your financial planning office, who is a CFP® professional, has been tried and convicted of securities fraud and malfeasance of funds by virtue of the fact that he commingled client funds with funds of the financial planning firm and with his own funds, as well. The CFP Board Code of Ethics prohibits a CFP® professional from doing such. As a result, which of the following is the CFP Board likely to undertake?

Private censure.
Public letter of admonition.
Revocation.
Temporary suspension of right to use the marks (up to 5 years).
The CFP Board has no jurisdiction in this case, as it is a matter for the SEC to determine

Answer 259

Revocation.
- The Board could use suspension, but since it seems to be an offense that has been ongoing, and not an error or misjudgment, it is far more likely to go with the revocation in this case. The Board does have jurisdiction over its own, and the other options are simply too light for the level of offense.

Question 260

A CFP® professional’s client, Jim, was previously married and had 2 children. He set up an irrevocable trust for those two children, naming his brother Harry as the trustee. Jim remarries a woman named Laura who has no children. Laura comes into the CFP® professional’s office saying that Jim is concerned about losing money in the trust due to the recent drop in the market, so he wants to change some things. What should the professional do?

Provide her with the trading forms that will require Jim’s signatures, allowing her to make the changes requested.
Tell her that because she is not the trustee, she is not authorized to make any charges.
Tell her that he will contact Harry, the trustee, and let him handle it.
Contact Jim to discuss the meeting with Laura.

Answer 260

Contact Jim to discuss the meeting with Laura.
- The CFP® Professional owes a duty to the client, who is Jim. The Code of Ethics require the CFP® Professional to discuss Jim’s concerns with Jim, not Laura. In addition, the conversation with Jim needs to address that Jim does not have control over the trust assets, the trustee does.

A is incorrect because Jim is the client and the planner owes the duty of a fiduciary and confidentiality to Jim since Laura is not the client.

B while true, the CFP® Professional should first tell Laura that Jim is the client and Jim should discuss his concerns, because the CFP® professional may only speak to the client about the trust.

C is incorrect because the CFP® professional must talk to the client about the trust, not Laura or Harry, unless Harry instructs the CFP® professional differently.

Question 261

Becca, age 24, applied for CFP® Certification. The Disciplinary and Ethics Commission denied her application because she had been convicted of assault and battery and served nine months in the county jail at the age of 18, while she was a member of a street gang. She has served her time, graduated from college and has decided to appeal the decision of the Disciplinary and Ethics Commission. All of the following are true regarding the review process EXCEPT:

She must submit a written petition for consideration to Professional Review staff and sign a form agreeing to CFP Board’s jurisdiction.
Staff will review the request to ensure the transgression falls within the “presumed unacceptable” list.
Her prior conduct falls under the “presumed unacceptable” category and therefore, she may appeal the denial of certification.
The Disciplinary and Ethics Commission’s decision regarding a petition for consideration is final.

Answer 261

The Disciplinary and Ethics Commission’s decision regarding a petition for consideration is final.
- Reason: The DEC’s decision regarding a petition for consideration may be appealed to the Appeals Committee of the Board of Directors, in accordance with Article 11 of the Disciplinary Rules and Procedures. All the other statements are true.

Question 262

In engagements where financial planning services are to be provided, which of the following is not required to be provided to a client?

Disclosure of reasonable and customary fees paid for custodial services.

Any arrangement by which someone who is not the Client will compensate or provide some other material economic benefit to the CFP® professional, the CFP® Professional’s Firm, or a Related Party for the recommendation or Engagement.

How the client pays for products, services and additional incurred costs including surrender charges and sales loads.

Existence of any bankruptcy, public discipline and locations of any Self Regulatory Organization (SRO) or government websites where the CFP® professional is a control person.

Answer 262

Disclosure of reasonable and customary fees paid for custodial services.
- Duties owed to clients require disclosing referral benefits, how products will be paid for and existence of any bankruptcies. Reasonable and customary fees for custodial services are not sales-based compensation (12.b.ii) and are not required to be specifically disclosed.

Question 263

A CFP® professional gathers all necessary information from a new client and then goes on vacation. While away on vacation, he asks his Paraplanner to put together the financial plan and present it to his client. What Standard of Conduct did he violate?

The Duty of Confidendiality.
A certificant shall provide reasonable and prudent professional supervision or direction to any subordinate or third party to whom the certificant assigns responsibility for any client services.
Both rules as stated above.
He did not violate any rules of conduct.

Answer 263

A certificant shall provide reasonable and prudent professional supervision or direction to any subordinate or third party to whom the certificant assigns
- The CFP® professional violated the Duty to Use Reasonable Care When Supervising.

A is incorrect because a paraplanner working for a CFP® Professional is reasonably expected to be involved in the course of doing business

Question 264

According to her letterhead, Fella Neeus, CFP®, worked for Fleesum Investments from 200X to 202X. She specialized in highly lucrative annuity contracts which she sold to elderly, inexperienced investors. When renewing her CFP® certification during this time frame, she disclosed a series of FINRA arbitrations and civil suits brought against her by former clients. As detailed in the following summary of a civil lawsuit, George and Betty, former clients of Fella, alleged actions that were typical of all of Fella’s recommendations. George and Betty met with a Mortgage Broker to refinance their home. These clients were in their late 70s and had no income and no source of cash other than retirement benefits, social security and rental income from a small house. In June 2001, based on the Mortgage Broker’s advice, the clients borrowed $600,000 against their home instead of the $285,000 they had initially sought to borrow. In July 2001, based on Fella’s recommendation, the clients placed the excess funds of $314,000 in a variable annuity contract. All of the funds in the variable annuity were invested in equity index investments. Fella did not inform the clients that their funds would be invested in only equity index investments. The value of the variable annuity decreased and the income the clients received became insufficient to pay their mortgage. In July of this year, the clients filed a civil lawsuit against Fella alleging that the purchase of the variable annuity contract was induced by Fella, who recommended that the clients borrow more money than they needed. During Fella’s hearing with the Disciplinary and Ethics Commission of the CFP Board, Fella made the following representations and disclosures or omissions: 1. Fella testified that she did not have a relationship with the Mortgage Broker and was not involved in any transactions with the Mortgage Broker, which testimony was refuted by documents that had been submitted in the FINRA Arbitrations; 2. Fella failed to disclose fundamental characteristics of variable annuities to George and Betty; and 3. It was established that Fella informed George and Betty that the variable annuity investment would be insured for the amount invested, regardless of what happened in the stock market. Which of the following requirements of the Code of Ethics did Fella NOT violate?

Act a fiduciary with duties of care, loyalty and following client instructions.
Comply with the law by not intentionally or recklessly participating or assist in violation of standards or the laws, rules and regulations governing professional services.
Use sound and professional judgement. A CFP® professional must exercise judgment that is not subordinated in the interest of the CFP® professional or others.
Use the marks in compliance with the rules and regulations of CFP Board.

Answer 264

Use the marks in compliance with the rules and regulations of CFP Board.
- “Fella Neeus, CFP®” is correct usage when part of the letterhead, or signature. At all other times, CFP® professional (or other acceptable noun), is the correct usage. A, B and C were violated in this case.

Question 265

Jack, a new client for Robert, a CFP® professional, requests a needs analysis concerning Jack’s life insurance situation. Jack is 42, married and has two children he plans to send to college. He wants Robert to evaluate how much and what type of insurance he should purchase. Which of the following is required to be provided to Jack according to the Code of Ethics?

A written disclosure of all material conflicts of interest Robert faces prior to entering into a financial planning agreement.
A notarized statement from Robert’s compliance offer that Robert is free and clear of all material conflicts of interest.
A form ADV showing that Robert is charging hourly fees, the only accepted compensation model allowed in a financial planning relationship.
None of the above is required by the Code of Ethics.

Answer 265

None of the above is required by the Code of Ethics.
- CFP Board requires material conflicts of interest to be disclosed. They can be delivered either orally or in writing, and are not require to be provided in writing. B and C are not required of a CFP® professional.

Question 266

John is a CFP® professional and is engaged in the financial planning process with his client Frank. John is in the data gathering process and has collected bank statements, insurance policies, estate documents, and all other relevant information with the exception of tax returns. Frank refuses to supply the tax returns or any documents that support his income claims. John’s best course of action is to?

Disengage from the client until such time Frank is willing to supply tax returns or other documents to support his income.
If John suspects that Frank is evading taxes or underreporting his income, John is required by Duties to CFP Board to report his suspicions to the appropriate regulatory authorities.
John should contact the IRS and request a copy of tax returns for the past three years, with or without the consent of the client.
John may limit the scope of the engagement to recommendations for which he has sufficient and relevant information or disengage from the client.

Answer 266

John may limit the scope of the engagement to recommendations for which he has sufficient and relevant information or disengage from the client.
- John must Obtain Qualitative and Quantitative Information (practice standard 1). A CFP® professional must describe to the Client the qualitative and quantitative information concerning the Client’s personal and financial circumstances needed to fulfill the Scope of Engagement and collaborate with the Client to obtain the information. If unable to obtain information necessary to fulfill the Scope of Engagement, the CFP® professional must either limit the Scope of Engagement to those services the CFP® professional is able to provide or terminate the Engagement.

Question 267

Jonathon got divorced in 20XX and subsequently had severe financial problems. Two years later he filed a chapter seven bankruptcy. After getting back on his feet, he graduated from college and got a job selling life insurance for a large national insurer three years following his bankruptcy. During his first year on the job, he received a large number of customer complaints, his insurance license was suspended for one month and he was discharged by his employer. During his unemployment, he completed all of the requirements for the CFP® designation. In August of four years following his bankruptcy, he made his application to the CFP Board. Which of the following is correct under the Board’s revised policy regarding bankruptcy?

Jonathan’s behavior falls on the presumed unacceptable list and he will be denied the right to use the marks unless he files a successful consideration request with the CFP Board.
Jonathan’s behavior falls on the always bar list and he will be denied the right to use the marks.
Jonathan’s behavior will prevent him from applying for the CFP® designation for the five year period following his actions
Jonathan’s bankruptcy will be disclosed on the CFP® professional’s public profile displayed on the CFP Board’s website for 10 years. He will need to request a consideration from the Disciplinary and Ethics Commission for the suspension, but the bankruptcy will not be a factor in their decision.

Answer 267

Jonathan’s behavior falls on the presumed unacceptable list and he will be denied the right to use the marks unless he files a successful consideration request with the CFP Board.
- This answer was correct under the pre-October 2019 practice standards and remains correct under 2012 fitness standards. One complexity to the question rationale is that if Jonathan were to successfully petition the discipline and ethics committee, he would be required to report the bankruptcy to clients when providing professional services. An expanded rationale is below:

A is correct under the revised Candidate Fitness Standards effective July 2012. Although the bankruptcy alone would not constitute presumed unacceptable behavior, it is a consideration when accompanied by any other behavior on the list, such as the suspension of his insurance license. B is not correct because revocation of a financial professional license is required to move to the always bar list. C is incorrect because there is no five year expiration period on the suspension of the insurance license D is not correct because although the bankruptcy alone would not constitute presumed unacceptable behavior, it is a consideration when accompanied by any other behavior on the list, such as the suspension of the insurance license.

Question 268

Mary is a CFP® professional and is in the Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action step of the financial planning process. Mary is developing a capital needs analysis for her client and has established assumptions for tax rates, investment returns and inflation rates. Her client disagrees with Mary’s assumptions regarding inflation and other economic variables used in the retirement needs analysis calculation. What should Mary do next?

If Mary and her client are unable to agree on the assumptions used for the retirement capital needs analysis, Mary should limit the scope of the engagement and exclude retirement capital needs analysis from her recommendations.
Mary should use the assumptions that result in the most conservative recommendations for retirement funding.
The CFP Board’s Standards of Professional Conduct require Mary to disengage from the client.
Mary should provide her client with multiple projections, consistent with all varying assumptions.

Answer 268

If Mary and her client are unable to agree on the assumptions used for the retirement capital needs analysis, Mary should limit the scope of the engagement and exclude retirement capital needs analysis from her recommendations.
- The best answer is A. Mary can continue with the client. The principle of integrity allows for differences of opinions with client relationships. However without the client and planner agreeing to an outcome Selecting and Implementing Actions, Products, or Services (Practice standard 6.d) would be inappropriate.

Question 269

A client, Tom, informs a CFP® professional that his daughter, Susie, graduated from college last month and landed her first job. Tom wants to establish a Roth IRA for Susie. Tom wants to make a $5,000 contribution for Susie and explains that she does not know about investing and probably would not have the extra money to contribute. How could the CFP® professional best accomplish Tom’s objective (CFP® Certification Examination, released 8/2012)?

Open the account in Susie’s name and then have Tom gift the assets to Susie.
Explain to Tom that he can contribute to an IRA for Susie.
Request Tom set up a joint meeting with Susie to complete the planning process with her.
Explain to Tom that Susie must complete a risk questionnaire before Tom can open the account.

Answer 269

Request Tom set up a joint meeting with Susie to complete the planning process with her.
- Susie will be the client and account owner and will need to be involved in this process.

A is incorrect because the planner must meet with Susie to open an account for her.

B is incorrect Susie must use earned income to make a contribution to a Roth or Traditional IRA.

D is incorrect because Tom must meet with Susie before opening the Roth IRA and include her in the process.

Question 270

Sidney, a CFP® professional, has been working with his new client Rachel over the last few months. He has completed all required disclosures and provided all written documents required for a financial planning engagement. After gathering and analyzing Rachel’s financial information, Sidney developed and presented a comprehensive financial plan. Rachel agreed with most of his recommendations, but wants her uncle, a local attorney, to implement the estate planning components of the plan, rather than an attorney that Sidney normally works with and trusts to do a thorough job. Sidney does not know Rachel’s uncle and is unfamiliar with his qualifications. According to the Practice Standards of the Code of Ethics, Sidney could take all of the following actions EXCEPT:

Contact Rachel’s uncle and coordinate the delivery of any information needed to implement the estate planning component of the plan.
Inform Rachel that if she used her uncle for estate planning he would need to restrict the scope of the engagement to exclude responsibility for the estate planning implementation.
Inform Rachel that if she used her uncle for estate planning, Sidney is required to have the documents reviewed by a qualified estate planning attorney to ensure they are legal and accurate or Sidney may need to terminate the engagement.
Inform Rachel of the name, contact information and the expertise and credentials of his attorney, and ask her to consider using his services rather than her uncle because Sidney believed his expertise would be valuable to Rachel.

Answer 270

Inform Rachel that if she used her uncle for estate planning, Sidney is required to have the documents reviewed by a qualified estate planning attorney to ensure they are legal and accurate or Sidney may need to terminate the engagement.
- A CFP® professional is not required to have the documents reviewed, but it would be in the best interest of the client (Duties to Client 8 – Complying with the Law). A CFP® professional may not intentionally or recklessly participate or assist in violation of these standards or the laws, rules and regulations governing professional services. Sidney may be acting recklessly if he does not push for Rachel to have documents reviewed by a qualified estate planning attorney.

A is a correct statement as Sidney does need to follow the clients instructions and wishes. B is a correct statement, Sidney should comply with Rachel and provide the information requested, but does not need to be part of the implementation. D is a correct statement as Sidney should explain that a credentialed attorney in the area of planning she needs would be in her best interest, but will follow the client’s wishes.

Question 271

Thomas, a CFP® professional, has been Shelley’s financial advisor for over 20 years and is very familiar with her family situation, goals, objectives and needs. Thomas has just completed a meeting with Shelley and Gertrude, Shelley’s mother, who is 79. During the meeting, Thomas entered into an oral agreement with Shelley to manage Gertrude’s financial affairs. Gertrude offered no objections to this arrangement. Thomas did not complete a client profile for Gertrude since he was already fully aware of the family’s and Gertrude’s situation. Gertrude collects a small amount from social security but must supplement that with the interest from her investment portfolio of $100,000. She indicated she would like to provide for her remaining life and establish education funds to send her six grandchildren to college. The grandchildren range in age from 2 - 15. According to the provisions of the Practice Standards, Thomas should take all of the following actions before initiating any action on behalf of Gertrude, EXCEPT:

Schedule a meeting to discuss material conflicts of interest with Gertrude.
Understanding The Client’s Personal and Financial Circumstances by Obtaining Qualitative and Quantitative Information.
Provide information to a client outlined in Duties to a Client including but not limited to How the client pays for products, services and additional incurred costs including surrender charges and sales loads iii. How the CFP® professional and their firm are compensated for providing products and services.
Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action prior to making any financial planning recommendations.

Answer 271

Provide information to a client outlined in Duties to a Client including but not limited to How the client pays for products, services and additional incurred costs including surrender charges and sales loads iii. How the CFP® professional and their firm are compensated for providing products and services.
- Duties owed to clients (10) outlines information that must be provided to a client when a CFP® professional is providing financial advice or engaging in financial planning. This information must be provided prior to the process beginning. B is the first step of the planning process and comes after A. C is not sufficient before an engagement begins. D is a step in the planning process that comes after Information is provided.

Question 272

For many years, Samuel has been employed as a financial advisor at a leading brokerage firm where he conducts suitability reviews and makes investment recommendations for his clients. He recently obtained his CFP® certification and has just signed an agreement with Thomas, a new client, for a comprehensive financial plan. According to the Code of Ethics and Standards of Conduct, all of the following represent requirements for Samuel in his engagement with Thomas EXCEPT:

Samuel must address if he has implementation responsibilities.
Samuel must act as a fiduciary in his relationship with Thomas.
Samuel must provide Thomas with an existence of any bankruptcy where Samuel was a control person.
Samuel must provide Thomas with information regarding how Thomas pays for products, services and additional incurred costs including surrender charges and sales loads.

Answer 272

Samuel must address if he has implementation responsibilities.
- A is the best answer. A is found in the CFP® practice standards, step four. As a practice standard this step only needs to be applied if Samuel is subject to the Practice Standards, which would be the case if he is engaging in a comprehensive financial planning relationship. Implementation is a required step, and only needs to be addressed in the beginning if it is specifically excluded from the engagement. B, C and D are required of any CFP® professional selling a financial asset or providing professional advice.

Question 273

Sally, a CFP® professional, was discussing the prior year’s investment results with her long standing client Deidra as part of their semi-annual meeting to review the status and progress of a comprehensive financial plan Sally had developed for Deidra a number of years ago. The initial plan included a risk tolerance assessment of moderately aggressive for Deidra and over the years, her reactions to market ups and downs had supported this assessment in Sally’s opinion. As a result, well diversified equity investments comprised about 70-75% of Deidra’s portfolio, on average. It had not been a good year in the market. The S&P 500 had declined slightly more than 30%, as the economic recovery faltered and concerns about the European debt crisis mounted. Deidra’s portfolio lost 35% of its value over the last 12 months. Deidra became very concerned as she began to recognize the extent of the losses, and was bordering on becoming hysterical. As they talked, Sally discovered that Deidra had become pregnant, was getting married next month and had planned to use some of her investments to help support the family while she stayed home for the first six months of the child’s life. According to the Code of Ethics and Standards of Conduct, Sally must take the following actions EXCEPT:

Establish with Deidra whether her new husband will be added to their Financial Planning engagement.
Sally must communicate to Deidra when she (Sally) will update financial planning recommendations
Sally and Deidra must discuss the temporary change in income, and how to plan for it.
Sally must modify the scope of the engagement based on Deidra’s risk aversion.
Sally must do all of the above.

Answer 273

Sally must modify the scope of the engagement based on Deidra’s risk aversion.
- A CFP® professional would need to re-establish the financial planning engagement to add the new husband as a client. B and C are conversation that will need to be had as part of Monitoring and Updating. However a new scope of engagement is not required when a client changes their risk aversion.

Question 274

Which of the following statements are true regarding the ownership of individual life insurance?

I. A policy can only be issued to the insured.
II. Generally, assigning a policy requires proof that the insured is still “insurable” (meaning still in good health).
III. Only a person with an insurable interest, generally a relative, a business associate, or lender, can be named as a beneficiary.
IV. The owner can assign (transfer) the policy to whomever he or she chooses, even if the assignee has NO insurable interest.

I, II and III only.
I only.
II and IV only.
IV only.

Answer 274

IV only.
- Option “I” - An individual with an insurable interest in the insured can purchase a policy. Option “II” - Policy assignments can be made regardless of the insured’s health as long as the policy is in force. Option “III” - The policy owner can name anyone a beneficiary.

Question 275

Which of the following statements about the conversion privilege is/are true regarding group life insurance plan provided by employers?

I. The policy may be converted from a permanent product to a term product.
II. The policy may be converted if the insured provides evidence of insurability.
III. At conversion, the billing is switched to the insured.
IV. The policy may be converted from a term policy to an individual permanent life policy.

I and IV only.
I, II and III only.
I, II, III and IV.
III and IV only.

Answer 275

III and IV only
- Option “I” - Switching from a permanent to a term product is not a conversion available in any group life insurance. Option “II” - These group plan term-to-permanent conversions will occur without evidence of insurability.

Question 276

Non-forfeiture rights of policyholders guarantee that there will be a:

Policy face value.
Death benefits for survivors.
Cash value.
Premium refund.

Answer 276

Cash value.
- Non-forfeiture rights (or provisions) arrange an orderly legal structure to assure monies paid on an insurance policy are not simply absorbed by the company without recourse in the event that an insured decides to terminate coverage. Two other such provisions include “reduced paid-up” and “extended term.”

Question 277

Jerry Rivers owns a $250,000 level-term life policy which he purchased five years ago. He has paid premiums of $400 per year for the past five years. He also owns a $125,000 whole life policy which he purchased fifteen years ago. He has paid premiums of $2,000 per year for the past 15 years, and now the policy has a cash surrender value of $40,000. Over the years, the whole life policy has paid cash dividends to Jerry. The cumulative dividends paid to Jerry since inception totals $5,000. Assume the whole life policy is a participating policy and has paid Jerry $5,000 in dividends since inception. Which statement is true?

The cash dividends received by Jerry to date are treated as taxable.
If Jerry died today, his beneficiary would receive a death benefit of $120,000 from the whole life policy.
The cash dividends received by Jerry to date are treated as non-taxable.
The cash dividends received by Jerry should have been reported as a long-term capital gain on his personal income tax return in the year they were paid.

Answer 277

The cash dividends received by Jerry to date are treated as non-taxable.
- Dividends which are less than the amount of premiums paid are considered a return of that excess premium to the payor and are therefore non-taxable. Dividends paid to the premium payor above the amount of premium paid are fully taxable as income when earned.

Question 278

Which of the following is true of a Modified Endowment Contract (MEC)?

I. No money can be withdrawn from the contract without incurring a 10% penalty.
II. Once a contract is a MEC, it remains so even after a 1035 Exchange for a different policy.
III. Any withdrawals are made on a LIFO basis.
IV. The contract owner can borrow the money out of the policy without incurring the penalty.

I and II only.
I and IV only.
II and III only.
III and IV only.

Answer 278

II and III only.
- Option “I” is false because once all the earnings are withdrawn and tax and penalty paid on them, the basis is not taxed, nor is there a penalty. Option “IV” is false because even loans from a MEC are taxable and the penalty is applied.

Question 279

Jennifer Anton was named by her husband, John Anton, as irrevocable beneficiary of his life insurance policy based on a court order. John would now like to borrow from the policy’s cash value. What right does John have to the cash value?

John can borrow the cash value, but he may not surrender the policy because of Jennifer’s interest in the policy.
Jennifer 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.
John may borrow from the cash value because Jennifer has only a contingent interest in the policy.
John can only borrow from the cash value with Jennifer’s written approval because she has a conditionally vested interest in the policy.

Answer 279

John can only borrow from the cash value with Jennifer’s written approval because she has a conditionally vested interest in the policy.
- Irrevocable beneficiaries have all of the rights of the policy owner. In this case, the insured must secure permission from the irrevocable beneficiary with regard to any activity or dispositive change in the policy.