Fundamentals & Insurance

Question 1

CODE OF ETHICS:

A CFP® professional must:

Answer 1

1. Act with honesty, integrity, competence, and diligence.
2. Act in the client’s best interests.
3. Exercise due care.
4. Avoid or disclose and manage conflicts of interest.
5. Maintain the confidentiality and protect the privacy of client information.
6. Act in a manner that reflects positively on the financial planning profession and CFP® certification.

Question 2

CODE OF ETHICS AND PROFESSIONAL RESPONSIBILITY PRINCIPLES

Answer 2

Principle 1 – Integrity: Provide professional services with integrity.

Principle 2 – Objectivity: Provide professional services objectively.

Principle 3 – Competence: Maintain the knowledge and skill necessary to provide professional services competently.

Principle 4 – Fairness: Be fair and reasonable in all professional relationships. Disclose conflicts of interest.

Principle 5 – Confidentiality: Protect the confidentiality of all client information.

Principle 6 – Professionalism: Act in a manner that demonstrates exemplary professional conduct.

Principle 7 – Diligence: Provide professional services diligently.

Question 3

Rule 1.3 If the services include financial planning or material elements of financial planning, the certificant or the certificant’s employer shall enter into a written agreement governing the financial planning services (“Agreement”). The Agreement shall specify:

Answer 3

a. The parties to the Agreement
b. The date of the Agreement and its duration
c. How and on what terms each party can terminate the Agreement
d. The services to be provided as part of the Agreement.

Question 4

Practice Standard 100-1: Defining the Scope of the Engagement.

Answer 4

The financial planning practitioner and the client shall mutually define the scope of the engagement before any financial planning service is provided

Question 5

the financial planning practitioner and the client shall mutually define the scope of the engagement. The process of “mutually-defining” is essential in determining what activities may be necessary to proceed with the engagement. This prcess is accomplished in financial planning engagements by:

Answer 5

1. Identifying the service(s) to be provided
2. Disclosing the practitioner’s material conflict(s) of interest
3. Disclosing the practitioner’s compensation arrangement(s)
4. Determining the client’s and the practitioner’s responsibilities
5. Establishing the duration of the engagement

Question 6

Terminology: “Fee-only.”

Answer 6

A certificant may describe his or her practice as “fee-only” if, and only if, all of the certificant’s compensation from all of his or her client work comes exclusively from the clients in the form of fixed, flat, hourly, percentage or performancebased fees.

Question 7

Terminology: “Commission”

Answer 7

denotes the compensation generated from a transaction involving a product or service and received by an agent or broker, usually calculated as a percentage on the amount of his or her sales or purchase transactions. This includes 12(b)1 fees, trailing commissions, surrender charges and contingent deferred sales charges.

Question 8

Terminology: “Compensation”

Answer 8

any non-trivial economic benefit, whether monetary or nonmonetary, that a certificant or related party receives or is entitled to receive for providing professional activities.

Question 9

Integration Factors. Among the factors that CFP Board will weigh in determining whether a CFP® professional has agreed to provide or provided Financial Advice that Requires Financial Planning are:

Answer 9

a. The number of relevant elements of the Client’s personal and financial circumstances that the Financial Advice may affect
b. The portion and amount of the Client’s Financial Assets that the Financial Advice may affect
c. The length of time the Client’s personal and financial circumstances may be affected by the Financial Advice
d. The effect on the Client’s overall exposure to risk if the Client implements the Financial Advice
e. The barriers to modifying the actions taken to implement the Financial Advice.

Question 10

Terminology: “Personal financial planning” or “financial planning” …In determining whether the certificant is providing financial planning or material elements of financial planning, factors that may be considered include, but are not limited to:

Answer 10

• The client’s understanding and intent in engaging the certificant.
• The degree to which multiple financial planning subject areas are involved.
• The comprehensiveness of data gathering.
• The breadth and depth of recommendations.

Question 11

No Client Agreement to Engage for Financial Planning.

If a CFP® professional otherwise must comply with the Practice Standards, but the Client does not agree to engage the CFP® professional to provide Financial Planning, the CFP® professional must either:

Answer 11

a. Not enter into the Engagement
b. Limit the Scope of Engagement to services that do not require application of the Practice Standards, and describe to the Client the services the Client requests that the CFP® professional will not be performing
c. Provide the requested services after informing the Client how Financial Planning would benefit the Client and how the decision not to engage the CFP® professional to provide Financial Planning may limit the CFP® professional’s Financial Advice, in which case the CFP® professional is not required to comply with the Practice Standards
d. Terminate the Engagement.

Question 12

Felony

Answer 12

A felony offense, or for jurisdictions that do not differentiate between a felony and a misdemeanor, an offense punishable by a sentence of at least one-year imprisonment or a fine of at least $1,000.

Question 13

Relevant Misdemeanor

Answer 13

A criminal offense, that is not a Felony, for conduct involving fraud, theft, misrepresentation, other dishonest conduct, crimes of moral turpitude, violence, or a second (or more) alcohol and/or drug-related offense.

Question 14

Regulatory Action

Answer 14

An action initiated by a federal, state, local, or foreign governmental agency, self-regulatory organization, or other regulatory authority

Question 15

Civil Action

Answer 15

A lawsuit or arbitration.

Question 16

Finding

Answer 16

A finding includes an adverse final action and a consent decree in which the finding is neither admitted nor denied, but does not include a deficiency letter, examination report, memorandum of understanding, or similar informal resolution of a matter.

Question 17

Minor Rule Violation

Answer 17

A violation of a selfregulatory organization rule designated as a minor rule violation under a plan approved by the U.S. Securities and Exchange Commission. A rule violation may be designated as “minor” under a plan if the sanction imposed consists of a fine of $2,500 or less, and if the sanctioned person does not contest the fine.

Question 18

Financial Planning

Answer 18

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.

Question 19

When is a client first engaged with a CFP® professional?
a) When a written contract is signed.
b) When the client pays the practitioner.
c) When the client first relies on the practitioner’s advice.
d) When the client transfers their assets to the practitioner for
management.

Answer 19

c) When the client first relies on the practitioner’s advice.

Question 20

Code of Ethics

Answer 20

1. Act with honesty, integrity, competence, and diligence.
2. Act in the client’s best interests.
3. Exercise due care.
4. Avoid or disclose and manage conflicts of interest.
5. Maintain the confidentiality and protect the privacy of client
   information.
6. Act in a manner that reflects positively on the financial
   planning profession and CFP® certification.

Question 21

Financial Planning: Terms of the

Engagement

Answer 21

• Provided prior to or at the time of the engagement (first or second
meeting)
• Include:
• The Scope of Engagement and any limitations;
• The period(s) during which the services will be provided; and
• The Client’s responsibilities.
A CFP® professional is responsible for implementing, monitoring, and
updating the Financial Planning recommendation(s) unless specifically
excluded from the Scope of Engagement.

Question 22

Compensation Models

Answer 22

• Fee-Only
   • Advisor and/or Firm cannot change, or have the 
   ability to charge, sales related compensation
• Fee-Based
   • Fee and Commission
• Sales Related Compensation
   • 12b-1 fees
   • Transaction fees
   • Revenue sharing
   • Referral fees

Question 23

Under what circumstances may Alan, a CFP® professional, commingle
assets with his clients?

Answer 23

a) It is never allowed.
b) Only if assets are properly tracked and available to the clients on
demand.
c) Only if given explicit written authorization, properly tracked and
permitted by law.
d) Only if given explicit written authorization and available to the
clients on demand.

Question 24

When does the CFP Board allow you to use “Fee Only” to describe a CFP®
professional’s compensation?

a) Insurance sales and commissions
b) Hourly rate only
c) Salary and bonus from employer
d) 12b-1 Fees

Answer 24

b) Hourly rate only

Question 25

Integration Factors

Answer 25

• The number of relevant elements of the Client’s personal and
financial circumstances that the Financial Advice may affect;
• Most changes do not happen in a silo
• The portion and amount of the Client’s Financial Assets
• The larger the amount of assets, the more areas of FP will be effected
• The length of time the Client’s personal and financial circumstances
may be affected
• The effect on the Client’s overall exposure to risk if the Client
implements; and
• The barriers to modifying the actions taken to implement
• Surrender charges

Question 26

Practice Standards for the Financial
Planning Process:

Uber Is A Drunk Person’s Immediate Motor vehicle.

Answer 26

1. Understanding the Client’s Personal and Financial Circumstances.
2. Identifying and Selecting Goals
3. Analyze the client’s current course of action and potential alternative
   courses of action
4. Developing and Presenting Financial Plan Recommendations
5. Presenting the Financial Planning Recommendations
6. Implementing Financial Plan Recommendations
7. Monitoring the Plan

Question 27

A CFP® professional is responsible for all steps of the financial
planning process unless specifically excluded from the scope of engagement.

True / False

Answer 27

True

Question 28

• Names and Numbers
• Children’s names and spouses age
• Income / Expenses / Budget
• Assets, liabilities, current Investments
• Insurance Policies (Life, Health, DI, HO, LTC, etc.)
• Estate Plan

Are examples of?

Answer 28

• Quantitative Information

Question 29

• Conditions, Aspirations, Hopes and Dreams
• Client’s health
• How client FEELS about things
• What do they Love about their Life and Money
• Lifestyle changes
• Education (children / grandchildren)
• Retirement Life
• Risk Tolerance
• Behavioral Finance

Are examples of?

Answer 29

• Qualitative Information

Question 30

What to do when:

Understanding the Client’s Personal
and Financial Circumstances

Answer 30

• Obtain qualitative and quantitative information
• Analyze information
• Assess the Client’s personal and financial
circumstances
• Address incomplete information

In Practice…
• May be obtained directly from the client or other sources such as
interview(s), questionnaire(s), client records and documents.
• Communicate to the client a reliance on the completeness and accuracy of
the information provided and the impact on recommendations.
• The planner should be an active and engaged listener during the data
gathering step.
• The four categories of information gathered by the planner include: lists
of assets and liabilities, dollar values, ownership information and
contractual agreements.

Question 31

What to do when:

Identifying and Selecting Goals

Answer 31

• Identify potential goals
• Discuss your assessment of client’s financial and
personal circumstances
• Develop reasonable assumptions and estimates
• Select and prioritize goals
• Note impact that particular goals have on other goals
• Discuss any goals that may be unrealistic

In Practice…
• Goals should be consistent with the client’s values, attitudes,
expectations and time horizon.
• Goals should also provide focus, purpose, vision and direction
for the financial planning process.
• Goals and objectives must be consistent with the client’s values
and attitude.
• Determine clear, relevant and measurable objectives.

Question 32

What to do when:

Analyze the client’s current course of action and potential alternative courses of
action

Answer 32

Analyze the current course of action
• Analyze material advantages and disadvantages of the current course
of action
• Analyze potential alternative courses of action
• Note: potential alternative course of action does not become a
recommendation until the CFP® professional selects it as a
recommendation in Step 4 of the process.

In Practice…
• Analyze the information to gain an understanding of the client’s financial
situation and determine if the client’s goals, needs and priorities can be
met by the client’s current course of action.
• Use client-specified, mutually agreed upon, and/or other reasonable
assumptions such as:
• Personal: retirement age(s), life expectancy(ies), income needs, risk
factors, time horizon and special needs; and
• Economic : inflation rates, tax rates and investment returns
• Determine strengths and weaknesses of the client’s financial situation and
current course of action (may be appropriate to amend the scope of the
engagement and/or obtain additional information)

Question 33

What to do when:

Developing and Presenting Financial Plan Recommendations

Answer 33

• From the current and potential alternative courses of action, select one or
more recommendations designed to maximize the potential for meeting
the Client’s goals
• Consider the assumptions and estimates used.
• The basis for making the recommendation, including:
• How it is designed to maximize the potential to meet the Client’s goals,
• The anticipated material effects of the recommendation on the Client’s financial and personal
circumstances, and
• How the recommendation integrates relevant elements of the Client’s personal and financial
circumstances;
• The timing and priority of the recommendation; and
• Whether the recommendation is independent or must be implemented with another
recommendation.

In Practice…
• Consider sufficient and relevant alternatives to the client’s current course
of action in an effort to reasonably meet the client’s goals, needs and
priorities
• Take into account legal and/or regulatory limitations and level of
competency in properly addressing each of the client’s financial planning
issues
• More than one alternative may reasonably meet the client’s goals, needs
and priorities, illustrating the subjective nature of exercising professional
judgment
Recommendation(s) shall be consistent with the following:
• Mutually defined scope of the engagement;
• Mutually defined client goals, needs and priorities;
• Quantitative data provided by the client;
• Personal and economic assumptions;
• Practitioner’s analysis and evaluation of client’s current situation; and
• Alternative(s) selected by the practitioner.
• A recommendation may be to continue the current course of action
• May be necessary for the practitioner to recommend that the client modify
a goal

Question 34

What to do when:

Presenting the Financial Planning Recommendations

Answer 34

Present to the Client the selected recommendation(s) and the
information that was required to be considered in developing
the recommendation(s).
• Provide advantages and disadvantages of continuing the current plan
and of any alternative plans.
• Recommendations may be presented orally, in writing, in person, over
the phone, or in another format that fits the client’s needs.
• Consider the complexity of your recommendations when determining the
presentation.
• Keep in mind client’s that have visual or hearing impairments

In Practice…
• There are 5 elements that should be communicated to the
client during this step:
1. Client goal review
2. Assumptions used
3. Observations and findings
4. Recommendations
5. Alternatives
• Communication effectiveness increases client trust and cooperation and creates a low propensity for the client to leave their planner.
• When communicating with the client, a combination of words,
numbers and graphics should be employed.
• Communication techniques that are effective include pacing,
rephrasing and reflecting.
–Pacing – matching the speed of listening with the speed of
the person talking.
– Rephrasing – restating or repeating back what has been stated.
– Reflecting – a paraphrasing technique where the planner restates the
client’s words, in the planner’s words.

Question 35

What to do when:

Implementing Financial Plan Recommendations

Answer 35

• Must be completed unless specifically excluded
• Establish responsibilities of the client, CFP® professional and
any third parties.
• CPA, Attorney, Insurance Agent, etc.
• Set timeline and priority
• Select implementation actions product and services.

In Practice…
• Mutually agree on the implementation responsibilities consistent with the scope of the engagement
• Client is responsible for accepting or rejecting recommendations
• Conflicts of interest, sources of compensation or material relationships with other professionals not been previously disclosed shall be disclosed at this time
• Referrals to other professionals or advisers shall indicate the basis on which the practitioner believes the other professional or adviser may be
qualified
• Select appropriate products and services that are consistent with the client’s goals, needs and priorities
• Investigate products or services that reasonably address the client’s needs
• Products or services selected must be suitable to the client’s financial situation and consistent with the client’s goals, needs and priorities
• Use professional judgment incorporating both qualitative and quantitative information in selecting the products and services that are in the client’s interest
• The client and planner mutually agree on the implementation responsibilities.
• Any additional conflicts of interest should be discussed as well.
• The planner should discuss any reservations the client may have regarding the recommendations.
• The planner should use an implementation timeline for all parties

Question 36

What to do when:

Monitoring the Plan

Answer 36

• Must be completed unless specifically excluded
• Establish monitoring and updating responsibility
• How and when
• Be realistic and clear in setting expectations
• Client’s responsibilities to update
• Ensure you have proper access or authority to
communicate with third-parties
• Monitor the client’s progress
• Analyze at appropriate intervals
• Obtain current qualitative and quantitative information
• Update goals, recommendations, or implementation
decisions
• Determine if the terms of engagement are up to date

In Practice…
• Clarify the responsibility of the practitioner - the client’s
expectations should be in alignment with the level of
monitoring services which the practitioner intends to provide
• Explain what is to be monitored, the frequency of monitoring and the communication method
• Monitoring process may reveal the need to re-initiate steps of the financial planning process
• The current scope of the engagement may need to be modified

Question 37

Duties Owed to Firms and Subordinates

Answer 37

1. Use Reasonable Care When Supervising
2. Comply with Lawful Objectives of CFP® Professional’s Firm
3. Provide Notice of Public Discipline

In Practice…
• Must properly supervise subordinates
• Assistants, Paraplanners, other CFP® Professionals
• Follow Firm lawful objectives
• Note: if you violate a firm policy, but not a CFP Board Code or Standard, you will not be subject to regulatory action from CFP Board

Question 38

Duties Owed to CFP Board

Answer 38

1. Definitions
2. Refrain from Adverse Conduct
3. Reporting
4. Provide Narrative Statement
5. Cooperation
6. Compliance with Terms and Conditions of Certification and License

Question 39

Behavior that “Always Bars” Certification

Answer 39

• Felony conviction of:
• Theft, embezzlement, tax fraud or other financial/tax crimes.
• Murder and rape.
• Violent crime within past five years.
• Revocation of a financial professional license.
• Exception: Not renewing a license by not paying the fee.

Question 40

Behavior that is “Presumed” Unacceptable and will Bar

Certification

Answer 40

• Two or more personal or business bankruptcies
• Felony conviction of:
• Violent crimes other than murder or rape that occurred more than five years ago.
• Non violent crimes, including perjury, within the last five years.
• Revocation or Suspension of a non-financial professional license.
• Exception: Not renewing a license by not paying the fee.

Question 41

• According to the CFP Board, the CFP® professional is responsible for everything related to a client’s personal finances. The only time a CFP® professional is NOT
responsible is when a special license is required to effect a transaction, such as a
real estate license.

True / False

Answer 41

True

Question 42

Eric filed for personal bankruptcy four years ago and is now applying to become a CERTIFIED FINANCIAL PLANNER™ practitioner. Based on the Candidates Fitness Standards, which of the following statements is true?

a) Disclosed publicly by CFP Board for 10 years.
b) The bankruptcy is classified as conduct that is “Presumed” unacceptable and may bar certification.
c) Personal bankruptcy is not part of the Candidate’s Fitness Standard.
d) Personal bankruptcy is limited to a three year “look back” when applying the Candidate’s Fitness Standard.

Answer 42

b) The bankruptcy is classified as conduct that is “Presumed” unacceptable and may bar certification.

Question 43

A husband and wife, who are both clients of a CFP® professional, are having marital problems and they recently separated. The wife needs $5,000 to pay a divorce attorney. They have a joint account with $150,000, the wife has her own IRA, and the husband has an investment portfolio. What should the CFP® professional do next?

a) Don’t give the wife money
b) Give the wife money for the attorney from their joint account
c) Split the joint account into two separate individually owned accounts
d) Bring them both in to revise the planning agreements

Answer 43

d) Bring them both in to revise the planning agreements

• As a CFP® professional, you owe a duty to your client. Identify your client and disclose everything.
• Examples
− Husband and wife are clients, the wife wants a divorce. She either wants money for an attorney or wants you to be her CFP® professional.
You must disclose to the husband. Giving her the money is not the right answer.

Question 44

There are four elements that determine if a certificant is in a financial planning engagement:

Answer 44

1. The client’s understanding and intent in engaging the certificant.
2. The degree to which multiple financial planning subject areas are involved (generally, two or more).
3. The comprehensiveness of data gathering.
4. The breadth and depth of recommendations.

Question 45

Which of the following is not a principle of the CFP Board’s Code of Ethics and Professional Responsibility?

a) Integrity.
b) Objectivity.
c) Professionalism.
d) Prudence.

Answer 45

Answer: D ICOCFPD

Question 46

Which of the following is not a principle of the CFP Board’s Code of Ethics and Professional Responsibility?

a) Competence.
b) Continuing Education.
c) Fairness.
d) Professionalism.

Answer 46

Answer: B Continuing education is part of the Principle of Competence.

Question 47

The Principle of Fairness addresses which of the following?

a) Fair competition among planners.
b) Reasonable fees and compensation.
c) Fair treatment of all clients.
d) Pro Bono work for low income clients.

Answer 47

Answer: B The Principle of Fairness requires that fees and compensation be reasonably based upon what other planners would charge with similar experience for a similar engagement.

Question 48

The Principle of Integrity addresses which of the following?

a) Precludes false and misleading advertising.
b) Reasonable fees and compensation.
c) 30 hours of continuing education every two years.
d) Bring credit to the profession.

Answer 48

Answer: A Integrity focuses on the actions of the planner. A planner cannot create unjustified expectations for create false and misleading advertising.

Question 49

The Principle of Objectivity addresses which of the following?

a) Focus is on actions of the planner.
b) Put the client’s interest ahead of your own.
c) 30 hours of continuing education every two years.
d) Practice what you know and refer what you don’t know.

Answer 49

Answer: B Objectivity requires that the planner put the client’s interest ahead of your own. The planner cannot let the enticement of profit sway your recommendations.

Question 50

The Principle of Competence addresses which of the following?

a) Do not disclose confidential client information.
b) Put the clients interest ahead of your own.
c) 30 hours of continuing education every two years.
d) Prevents false or misleading advertising.

Answer 50

Answer: C Competence requires 30 hours of continuing education every two years. In addition, two of the hours must be in ethics.

Question 51

The Principle requiring a CFP® certificant to reasonably investigate financial products recommended to cli-ents is?

a) Professionalism.
b) Diligence.
c) Confidentiality.
d) Integrity.

Answer 51

Answer: B Diligence requires the planner to reasonably investigate investments before recommending them. A planner may reasonably rely on the research of others in the form of a stock analyst’s report.

Question 52

In which of the following circumstances would a CFP® certificant not be able to disclose confidential client information?

a) Civil dispute between planner and client.
b) Court order to satisfy a legal proceeding.
c) A written request by the IRS.
d) Normal course of business while opening an account on behalf of a client.

Answer 52

Answer: C The IRS is not a court order. All the other options are exceptions to the principle of confidentiality.

Question 53

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 53

Answer: B There is no requirement to call, nor is there any set day in which a decision must be made. A decision may be appealed if relevant professional revocation or suspension is vacated or the relevant felony conviction is overturned.

Question 54

Jim has done many “bad” things over the span of his life; however, several years ago he decided to become an upstanding citizen. He is now concerned that his prior bad acts will prevent him from becoming a CFP® certificant. Which of the following is “presumed” to bar him from certification?

a) A personal bankruptcy 10 years ago.
b) Suspension of a law license for failing to pay the required fees.
c) Suspension of a securities license.
d) Felony conviction for perjury seven years ago.

Answer 54

Answer: C A suspension of a law license for administrative reasons and a single bankruptcy are not on the presumption list. A felony conviction of a non violent crime is only on the presumed list if it occurred within the last 5 years.

Question 55

Which of the following is true regarding the candidate fitness standards?

a) A felony conviction for theft, embezzlement or other financially-based crimes 8 years ago will “pre-sumably” bar a person from certification.
b) They only identify issues that will bar a person from certification.
c) A felony conviction of 2nd degree murder will always bar a person from being certified.
d) A significant number of employment terminations will “presumably” bar a person from certification.

Answer 55

Answer: C A felony conviction of any degree for murder or rape will always bar certification. A financial crime will Always bar certification, regardless of the time elapsed. The Standards identify issues that will bar or delay a person from being certified. A significant number of employment terminations will very rarely bar a person from certification.

Question 56

Which of the following may rarely result in the delay or denial of certification? 1. Customer complaints 2. Misdemeanor convictions 3. Employer reviews and terminations

a) 1 only
b) 2 only
c) 1 and 3
d) 1, 2 and 3

Answer 56

Answer: D All of the these may rarely result in the delay or denial of certification.

Question 57

For many years, Samuel has been employed as a financial advisor at a leading brokerage firm where he con-ducts 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 finan-cial 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) Thomas and Samuel should discuss and mutually agree on the services to be provided by Thomas.
b) As Thomas researches the options available to satisfy Samuel’s investment needs, he should recom-mend only the best available product options.
c) Thomas must supply an accurate and understandable written disclosure of his compensation arrange-ments.
d) Thomas must supply a general summary of likely conflicts of interest, in writing.

Answer 57

Answer: A Item A is not an additional requirement; it is required for ALL engagements, whatever the scope (Rule 1.1). The duty of care for financial planning is that of a “fiduciary” one who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client, as exemplified by Item B. Items C & D are required to be in writing only for financial planning engagements by Rule 2.2 (e).

Question 58

Bob is a CFP® professional and has entered into a signed engagement letter to provide the first four steps of the financial planning process. Once Bob has made the recommendations, the engagement letter clearly identifies that the scope of the relationship ends and the client is solely responsible for implementation. Six months after Bob provided a client with his recommendations, the client approached Bob about purchasing life insurance through Bob, which was one of the recommendations in his plan. Is Bob still engaged with the client?

a) No, the engagement letter limited the scope of the services to be provided. Bob is no longer engaged in the financial planning process with the client. Bob is now selling product beyond the scope of the engagement.
b) Yes, Bob is still engaged with the client because Bob previously established a professional relationship and is now providing implementation services to the client by selling life insurance.
c) No, a planner is not engaged with a client when only selling a single product. The planner would be engaged if applying multiple steps in the financial planning process
d) Yes, because even by providing one step in the financial planning process, a planner is considered engaged with a client.

Answer 58

Answer: B According to the CFP Board’s Standard of Professional Conduct FAQs, in general, once a financial planning relationship with a CFP® professional has been established, all future services provided by the CFP® pro-fessional to the client are likely to be considered by CFP Board to be part of the financial planning process. Answer A is incorrect because CFP Board generally considers a CFP® professional to be engaged with the client for all future services provided by the CFP® professional.
Answer C is incorrect because the planner is still engaged because a relationship was previously established and future services are considered to be part of the financial planning process.
Answer D is incorrect because if the planner did not previously provide financial planning services and was solely selling life insurance, the planner would not be engaged with the client.

Question 59

Will has the following transactions. What is the impact on his net worth? - Purchased furniture for $5,000 on credit. - Investments appreciated by $10,000. - Bought a car for $20,000, put $5,000 down out of his money market and financed the remainder.

a) Increased by $25,000.
b) Decreased by $15,000.
c) Increased by $10,000.
d) No impact.

Answer 59

Answer: C
Furniture:

PUA + $5,000 & Liabilities + $5,0000 -> No impact to Net Worth Investments:
Invested Assets +$10,000 -> Increase Net Worth by $10,000
Bought a Car: Cash & Cash Equivalents - $5,000 & PUA increase by $20,000 & Liabilities +$15,000 ->No impact to Net Worth

PUA is a Personal Use Asset on the balance sheet.

Question 60

Assume the following information and answer the questions below: Jennifer has the following balances:

Current Assets - $21,000
Current Liabilities - $7,000
Monthly Nondiscretionary Expenses - $3,000
Annual Income - $120,000
Mortgage, Interest and Taxes
- $2,000 per month
Total Monthly Debt including Mortgage - $3,000 per month

What is her emergency fund?
What is her current ratio?
What is her housing ratio?
What is her housing ratio and all other debt ratio?

Answer 60

Answers:

Emergency Fund = $21,000 ÷ $3,000 = 7 months

Current Ratio = $21,000 ÷ $7,000 = 3.0

Housing = $2,000 ÷ ($120,000 ÷ 12) = 20%

Housing and All Other Debt = ($3,000) ÷ ($120,000 ÷ 12) = 30%

Question 61

Which of the following is NOT a personal use asset?

a) Automobile.
b) Primary Residence.
c) Furniture.
d) Pension Plan.

Answer 61

Answer: D

Pension plan is an invested asset.

Question 62

The value of a clients house will be listed at what price in the personal use asset section of the balance sheet?

a) Cost.
b) Insured Price.
c) Outstanding Mortgage Balance.
d) Fair Market Value.

Answer 62

Answer: D

Assets are always valued at fair market value on the balance sheet.

Question 63

Jennifer has a salary of $50,000 per year. She contributes $2,500 to 401(k) and her employer contributes $2,500. Which of the following statements is true?

a) Her savings rate is 5%, which is well below the industry benchmark.
b) Her savings rate is 10%, which is on target with the industry benchmark.

Answer 63

Answer: B

Savings Rate = (2,500 + 2,500)  50,000 = 10% Benchmark is 10-12%

Question 64

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 64

Answer: C

A – Could be priced out of the mortgage if rates increase.
B – Would rather interest rates are declining or stable.
D – Would prefer to stay in the house for a short period of time because rates are most likely to increase.

Question 65

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 65

Answer: A

A reserve liability account for taxes owed on the sales of assets should be listed.
B - assets should be listed liquid to least liquid.
C - expenditures would be on the cash flow statement.
D - statement of financial position is a snap shot in time, a pro-forma statement would account for future assets/debt.

Question 66

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 66

Answer: D

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 67

Which of the following statements concerning educational tax credits and savings opportunities is correct? (CFP® Certification Examination, released 8/2004)

a) The Lifetime Learning Credit is equal to 100% of qualified educational expenses up to a certain limit.
b) The American Opportunity Tax Credit is available for the first 4 years of postsecondary education.
c) A parent who claims a child as a dependent is entitled to take the American Opportu-nity Tax Credit for the educational expenses of the child.
d) The contribution limit for Coverdell Education Savings Accounts is applied per year per donor.

Answer 67

Answer: Both B and C

a) The Lifetime Learning Credit is equal to 20% of qualified educational expenses up to a certain limit – 20% up to $10,000 in expenses.
b) The American Opportunity Tax Credit available for the first 4 years of postsecondary education.
c) A parent who claims a child as a dependent is entitled to take the American Opportu-nity Tax Credit for the educational expenses of the child.
d) The contribution limit for Coverdell Education Savings Accounts is applied per year per donor – per student, not per donor.

Question 68

John and Mary have AGI of $125,000 and have not planned for their children’s education. Their children are ages 18 and 17 and the parents anticipate paying $20,000 per year, per child for edu-cation expenses. Which of the following is the most appropriate recommendation to pay for the children’s education?

a) 529 Savings Plan.
b) PLUS Loan.
c) Pell Grant.
d) Coverdell ESA.

Answer 68

Answer: B

It’s too late for the parent’s to begin savings for their children’s education so that eliminates the 529 Savings Plan and Coverdell ESA. Their AGI is too high for a Pell Grant.

Question 69

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?

a) Prepaid Tuition.
b) Coverdell ESA.
c) UGMA or UTMA.
d) 529 Savings Plan.

Answer 69

Answer: D

529 Savings Plans are a good planning technique for grandparents that want to pay for their grandchildren’s education. It also allows the grandparents to lower their gross estate.

Question 70

What is the maximum contribution to a 529 Plan in the current year, if grandparents elect gift splitting?

a) $15,000.
b) $30,000.
c) $75,000.
d) $150,000.

Answer 70

Answer: D

$150,000 ($15,000 x 2 x 5) Annual exclusion x 2 for gift splitting x 5-year proration.

Question 71

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 71

Answer: B

American Opportunity Tax Credit is good for the first four years. Lifetime is available throughout your life-time. American Opportunity Tax Credit is per student, lifetime is per family.

Question 72

Which of the following types of aid are not need based?

a) Pell Grant.
b) Plus Loan.
c) Perkins Loan.
d) Subsidized Stafford Loan.

Answer 72

Answer: B

Plus loans are based on a parent’s credit score.

Question 73

The following type of financial aid is awarded to students with a low EFC, and funds are guaranteed to be available if a student qualifies:

a) Pell Grant.
b) Plus Loan.
c) Work Study.
d) Stafford Loan.

Answer 73

Answer: A

Pell Grants are always available if a student qualifies.

Question 74

Will is a freshman at Florida State University where his tuition is $4,000. Sydney, his older sister, is a junior at Expensive University, where tuition is $25,000. What is the maximum tax credit Will and Sydney’s par-ents can take?

a) $2,000.
b) $3,800.
c) $3,650.
d) None of the Above.

Answer 74

Answer: D

The total tax credit is $5,000.
Will: $2,500 and Sydney: $2,500
Will: American Opportunity Tax Credit = $2,500 $2,000 x 100% = $2,000 $2,000 x 25% = $500
Sydney: American Opportunity Tax Credit = $2,500 $2,000 x 100% = $2,000 $2,000 x 25% = $500

Question 75

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 75

Answer: D

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 76

Donna has a son, Colin (age 18), a freshman at Tulane University with tuition of $30,000 per year. Donna’s AGI is $45,000 and takes a withdrawal of $20,000 from her 529 Plan. She pays the remaining $10,000 in tuition out of her checking account. Which of the following would you recommend?

a) Take a Lifetime Learning Credit of $2,000.
b) Take an American Opportunity Tax Credit of $2,500.
c) Cannot take American Opportunity Tax Credits or Lifetime Learning Credits because she took a 529 distribution.
d) Take American Opportunity Tax Credits and Lifetime Learning Credits totaling $4,500 ($2,000 + $2,500).

Answer 76

Answer: B

Donna should take the American Opportunity Tax Credit because it offers a larger tax credit than the Lifetime Learning Credit.

Question 77

Mr. and Mrs. Smith come to you for advice on the financing of their son’s college education at their state university. Even though their annual family income exceeds $70,000, they have not saved enough for his college expenses. You advise that their best opportunity to acquire education funds would be through:

a) Pell Grants.
b) Subsidized Stafford Student Loans.
c) Supplemental Education Opportunity Grants.
d) Parent Loans for Undergraduate Students (PLUS).

Answer 77

Answer: D

Their AGI is too high to qualify for a Pell Grant, subsidized Stafford Loans or FSEOG. For parents that have a high income, PLUS loans are most appropriate.

Question 78

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.

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

Answer 78

Answer: B

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

Question 79

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.

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

Answer 79

Answer: A

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

Question 80

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.

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

Answer 80

Answer: E

T-bills, zero coupons and GNMA funds are all taxable. EE bonds are tax exempt if used for qualified educa-tion expenses.

Question 81

Arrange the following financial planning functions into the logical order in which these functions are per-formed by a professional financial planner.

1. Interview clients, identify preliminary goals.
2. Monitor financial plans.
3. Prepare financial plan.
4. Implement financial strategies, plans, and products.
5. Collect, analyze, and evaluate client data.

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

Answer 81

Answer: D

Establish Client – Planner Relationships
Gathering Client Data - Determining Goals and Expectations
Analyze and Evaluate Client’s Financial Status
Developing (prepare) and Presenting the Financial Plan
Implementing the Financial Plan
Monitoring the Financial Plan

E-G-A-D-I-M

Question 82

The estimated value of a real estate asset in a financial statement prepared by a CFP® certificant should be based upon the:

a) Basis of the asset, after taking into account all straight-line and accelerated depreciation.
b) Client’s estimate of current value.
c) Current replacement value of the asset.
d) Value that a well-informed buyer is willing to accept from a well-informed seller where neither is com-pelled to buy or sell.
e) Current insured value.

Answer 82

Answer: D

Assets should be stated at fair market value, which is the price a well-informed buyer and seller would accept.

Question 83

Movement through the phases of the business cycle is initiated by shifts in aggregate demand which create fluctuations in Gross Domestic Product (GDP). Which combination of the following statements would be the most significant contributor to the upward shift in aggregate demand shown in the graph?

1. Increase in demand for capital goods.
2. Increase in interest rates.
3. Increase in disposable income.
4. Increase in savings.

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

Answer 83

Answer: A

The demand curve will shift up and to the right anytime consumer income increases. If disposable income increases and there is an overall increase in demand the demand curve will shift up and to the right. An increase in interest rates or savings rate will shift the demand curve down and to the left.

Question 84

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.

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

Answer 84

Answer: A

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 85

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 85

Answer: A

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. Decreas-ing 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 86

Robert Smith asks for your help in preparing his cash flow statement. He tells you that his salary before taxes is $250,000 and that he has no mortgage on his home. Which of the following statements is true about Robert’s cash flow statement?

a) The value of the home would be an income source since there is no mortgage.
b) The value of the home would be an asset.
c) The taxes on his salary would be a liability.
d) The taxes on his salary would be an expense.

Answer 86

Answer: D

Although statement B is true, it doesn’t answer the question. If the question asked about the statement of financial position, B would be a correct answer. On the cash flow statement or statement of income and expenses consists of income less savings, fixed expenses, variable expenses and taxes.

Question 87

Judy Green, a CFP® certificant, has proof that Mary Clark, another CFP® certificant in her office, has uti-lized clients’ funds under management to cover gambling debts. Mary returned the funds to the clients’ accounts and made them whole, including the earnings that would have accrued during the time that the funds were withdrawn. Under the Code of Ethics and Professional Responsibility and Disciplinary Rules and Procedures, Judy is obligated to:

a) Report Mary’s action to the local CFP® organization for proper processing.
b) Report Mary’s action to CFP® Board of Examiners (Now Council on Examinations) because Mary has violated the Professionalism Principle.
c) Report Mary’s action to CFP Board because Judy is bound by the Code of Ethics and Professional Responsibility to do so.
d) Not report Mary’s action to CFP Board because Judy would violate the Confidentiality Principle.
e) Not report Mary’s action to CFP Board because Mary made full restitution and the clients involved were not harmed by Mary’s action.

Answer 87

Answer: C

Even though the client was made whole, this is still a violation of the Code of Ethics. Judy is obligated under the Code and professional responsibility to report the violation to CFP Board. CFP Board’s of Examiners (Now Council on Examinations) is responsible for the CFP® Exam, not enforcing the code of ethics.

Question 88

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 88

Answer: D

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 89

A client provides a current personal balance sheet to the financial planner during the initial data gathering phase of the financial planning process. This financial statement will enable the financial planner to gain an understanding of all of the following except the:

a) Diversification of the client’s assets.
b) Size of the client’s net cash flow.
c) Client’s liquidity position.
d) Client’s use of debt.

Answer 89

Answer: B

Net cash flow will be on the statement of income and expenses or statement of cash flow. Assets, liabilities and net worth will all be included on the balance sheet.

Question 90

A CFP® certificant obtains a new client. During the fact-finding process, he discovers that the client’s previ-ous advisor, also a CFP® certificant, had filed several tax forms incorrectly with computational errors. The CFP® certificant’s initial duty to the client should be which of the following?

a) Contacting the other financial planner.
b) Contacting CFP Board.
c) Contacting the IRS.
d) Informing the client of the situation.

Answer 90

Answer: D

The planner’s obligation is to let the client know about the error. The client can then take the return to a CPA to file an amended return. Only practice what you know.

Question 91

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 91

Answer: A

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 92

Which of the following investment vehicles are most appropriate for an emergency fund for a family with $12,000-a-year discretionary income?

1. Balanced mutual fund.
2. Line of credit.
3. Money market mutual funds.
4. Laddered CDs set to mature every 6 months.

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

Answer 92

Answer: C

An emergency fund should be invested in current assets. Money market mutual funds and laddered CDs are both considered current assets.

Question 93

You receive a phone call from an individual you have not spoken with previously. The caller is excited, just having heard that a new mutual fund is positioned to deliver large gains in the coming year. The caller wishes to purchase shares of the fund through you. Keeping in mind stages of the overall personal financial planning process, which of the following questions that address the first two stages of the financial planning process should you ask the caller?

1. What are your goals for this investment?
2. What other investments do you have?
3. What is your date of birth?
4. Do you want your dividends reinvested?

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

Answer 93

Answer: C

Items 1, 2 and 3 all pertain to the second step of the financial planning process, “gather client data and deter-mine goals.” Statement 4 does not pertain to the first two steps of the financial planning process.

Question 94

Which of the following are exceptions under the definition of “investment advisor”?

1. Banks that are not investment companies.
2. Accountants or lawyers whose investment advice is “solely incidental” to the practice of their profes-sion.
3. Persons whose advice relates only to securities issued or guaranteed by the US government.
4. Publishers of financial publications that have regular and general circulation.

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

Answer 94

Answer: D

All of the statements are examples of exceptions to whom is an investment advisor.

Question 95

A local businessperson approaches a CFP® certificant for assistance with an investment-related tax problem. The client’s previous tax preparer had suggested the purchase of a variety of tax-advantaged investments to reduce the client’s current and future tax burden. Time passed, the client’s income dropped, and the tax laws changed. The client does not feel the tax preparer misrepresented the situation on the initial sale, but would still like to know what recourse is available with respect to the tax preparer. The CFP® certificant should:

1. Explain to the client that this issue is beyond the scope of the CFP® certificant’s professional expertise.
2. Advise the client that no recourse is available.
3. Advise the client to contact an attorney.
4. Contact the tax preparer.

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

Answer 95

Answer: B

The CFP® certificant should not contact the tax preparer. Any issue between the client and previous tax pre-parer should be handled by the client. In addition, this issue is beyond the scope of a CFP® certificant’s area of expertise. The certificant should refer the client to contact an attorney and explain that the issue is beyond the CFP® certificant’s expertise.

Question 96

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

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

Answer 96

Answer: C
The maximum contribution to a Coverdell ESA is $2,000 per year, per beneficiary. All other accounts are eligible for a contribution.

Question 97

Which of the following is an insurable risk?

a) Objective Risk.
b) Pure Risk.
c) Subjective Risk.
d) Speculative Risk.

Answer 97

Answer: B

Pure risk involves the risk of loss or no loss and is the only insurable risk.

Question 98

The underwriter of an insurance company is charged with the responsibility of achieving a profit within the risk parameters of the company. Which of the following is the underwriter’s greatest challenge?

a) Setting premiums.
b) Motivating salespeople.
c) Making sure that profit margins are correct.
d) Managing adverse selection.

Answer 98

Answer: D

Managing adverse selection may be accomplished before the contract is issued by using credit scores, physicals, claims history, etc., or on the back-end of property, automobile, health, and dental insurance by raising annual premiums.

Question 99

Exam Tip

Insurable Risks are CHAD

Answer 99

Not Catastrophic, Homogeneous exposure units, Accidental, and measurable and Determinable.

Question 100

Which of the following is not a requisite for an insurable risk from an insurer’s perspective?

a) Law of Large Numbers.
b) Losses must be accidental, measurable, and determinable.
c) Losses must not pose a catastrophic risk for the insured.
d) The premiums must be affordable.

Answer 100

Answer: C

The losses must not pose a catastrophic risk for the insurer. The insured wants to transfer cata-strophic risks.

Question 101

Exam Tip

A legal contract requires COALL!

Answer 101

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

Question 102

Eric walks into his insurance agent’s office, signs a life insurance application, and gives his agent the first month’s premium. As Eric is leaving his insurance agent’s office, he is hit by a bus. Will Eric’s wife be able to collect under the life insurance policy?

a) Yes, as long as Eric was insurable (no terminal illnesses or life threatening pre-existing conditions).
b) No, the policy was not delivered.
c) Yes, regardless of whether Eric was insurable.
d) No, because signing the application and paying the first month’s premium is not con-sidered offer and acceptance.

Answer 102

Answer: A

By signing the application and making the first month’s premium payment, Eric is insured as long as he is insurable. This is an example of a conditional acceptance by the insurer.

Question 103

Mike is injured in an auto accident caused by Tim. Mike collects bodily injury payments from his insurance company and sues Tim to recover as well. Tim’s insurance company also pays Mike for the same injuries. Which of the following principles has been violated?

a) Subrogation.
b) Subjective Risk.
c) Adverse Selection.
d) Adhesion.

Answer 103

Answer: A

The Subrogation clause in an insurance contract prevents Mike collecting from both his insur-ance company and a third party for the same claim.

Question 104

Dave is 42 years old and applying for a life insurance policy. In order to receive a lower pre-mium, Dave indicates that he is 34 on the insurance application. Which of the following is the insurance company most likely to do when they determine Dave’s right age?

a) Avoid the contract.
b) Void the contract.
c) Refund the premiums and deny any claim by Dave’s beneficiary.
d) Pay Dave’s beneficiary a lesser face value that is based upon the premiums paid and Dave’s correct age.

Answer 104

Answer: D

Misstating age is a misrepresentation, but not a material misrepresentation and the insurance company will still pay the beneficiary. The amount will just be reduced based upon the actual premiums paid by the insured and the insured’s correct age.

Question 105

Randy’s house slid down a hill in California after a heavy rain storm and is a total loss. The rel-evant part of the insurance contract states, “earthquake is a general exclusion.” Which party is likely to win in court and why?

a) The insurance company because of the stated exclusion.
b) The insurance company because homeowner’s policies do not cover mudslides.
c) Randy because of the aleatory principle.
d) Randy because the contract is adhesive.

Answer 105

Answer: D

Randy will most likely win because ambiguities are decided in favor of the insured under the principle of adhesion.

Question 106

Scott is 22 and just started his first job with Rest in Peace Life Insurance Company. Scott is scheduled to take the State insurance exam at 9:00 a.m. on Saturday. The exam is computerized and if passed, automatically issues the State License. Scott has an important appointment with his Uncle Carlos at 1:00 p.m. on Saturday to sell Carlos $10M of universal variable life insur-ance. On Friday, just before 5:00 p.m. Scott’s boss gives him a wrapped gift and tells him not to open it until after he passes the exam, which she is confident he will do. Scott goes ahead and opens the present on Friday night and calls his friends to celebrate getting his “Rest in Peace” business cards. Scott goes out with his friends Friday night, gets drunk, and misses the Saturday exam. However, he goes to Carlos’ house, takes his application, and gets a check from Carlos for the first year premium. Unfortunately, Carlos is hit by lightening while playing golf Saturday afternoon and dies. Which of the following is correct?

a) Carlos’ beneficiary will collect $10M because of explicit authority and that the check was given to the agent.
b) The policy is not issued because Scott is not licensed to sell life insurance.
c) Carlos’ beneficiary will not receive anything because the check, while issued, was given to an unlicensed agent.
d) Presuming Carlos meets normal underwriting standards, his beneficiary will collect $10M under apparent authority.

Answer 106

Answer: D

Even though not licensed, Scott can still bind “Rest in Peace” because he should not have appli-cations and business cards.

Question 107

Exam Question
Actual Cash Value

Brandon purchased a home theater system for $10,000 two years ago. The replacement cost is $8,000. The home theater system was destroyed in a fire. Brandon’s insurance company esti-mates that the home theater system was 40% depreciated. How much will Brandon receive if the home theater system is covered under actual cash value?

a) $2,000.
b) $2,700.
c) $3,200.
d) $4,800.

Answer 107

Answer: D

$8,000 - (.40 x $8,000) = 8,000 - 3,200 = $4,800 If Brandon owed a $500 deductible, he would actually receive $4,800 - $500, or $4,300.

Question 108

Todd owns a house with a replacement value of $300,000 . He purchased $200,000 of homeowners insurance with a coinsurance requirement of 80% and a $500 deductible. Todd experiences a $40,000 loss. What will the insurance company pay?

Answer 108

Coinsurance Formula: [$200,000 ÷ (0.80 x $300,000)] x $40,000

200,000 ÷ 240,000 x 40,000 - 500 = $32,833

Question 109

SIX STEPS OF RISK MANAGEMENT

Answer 109

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).

Exam Tip
D-I-E-D-I-E: Don’t Insure Everything (Squared)

Question 110

Which of the following methods of dealing with risk does not match its action?

a) Risk Avoidance: Wearing a hard hat on a construction site.
b) Risk Reduction: Installing a sprinkler system in a building.
c) Risk Transfer: Carrying automobile insurance.
d) Risk Retention: Health insurance policy deductibles.

Answer 110

Answer: A

Avoidance would mean not going anywhere near a construction site.

Question 111

The tendency for individuals of higher-than-average risk to seek out or purchase insurance policies is?

a) Peril.
b) Hazard.
c) Law of Large Numbers.
d) Adverse Selection.

Answer 111

Answer: D

The underwriter attempts to manage adverse selection and weed out or manage those that need insurance.

Question 112

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 112

Answer: D

Moral hazard is a character flaw or dishonesty, e.g., burning your own house down. Morale hazard is the indifference a person has towards loss because of insurance (e.g., leaving the keys in your car and the car running).

Question 113

Which of the following is correct regarding a peril and hazard?

a) A hazard is the proximate or actual cause of a loss.
b) A peril is the proximate or actual cause of a loss.
c) A peril is the condition that creates or increases the likelihood of a loss occurring.
d) None of the above.

Answer 113

Answer: B

Peril is proximate cause of a loss. Hazard is a condition that creates or increases the likelihood of a loss occurring.

Question 114

Which of the following is not a requisite for an insurable risk?

a) A large number of homogeneous exposure units must exist.
b) Insured losses must be accidental from the insured’s standpoint.
c) Insured losses must be measurable and determinable.
d) Loss must not pose a catastrophic risk for the insured.

Answer 114

Answer: D

Loss must not pose a catastrophic risk for the insurer. All others are a requisite for an insurable risk.

Question 115

The principle of indemnity is:

a) A person is entitled to compensation only to the extent that financial loss has been suffered.
b) Insured cannot indemnify himself from both the insurance company and a negligent third party for the same claim.
c) The insured must be subject to emotional or financial hardship resulting from the loss.
d) The insured and insurer must both be forthcoming with all relevant facts about the insured risk and cov-erage provided for that risk.

Answer 115

Answer: A

B describes subrogation. C describes an insurable interest. D describes concealment.

Question 116

The subrogation clause is:

a) A person is entitled to compensation only to the extent that financial loss has been suffered.
b) Insured cannot indemnify himself from both the insurance company and a negligent third party for the same claim.
c) The insured must be subject to emotional or financial hardship resulting from the loss.
d) The insured and insurer must both be forthcoming with all relevant facts about the insured risk and cov-erage provided for that risk.

Answer 116

Answer: B

Insurance company can collect against a negligent third party.

Question 117

When must an insurable interest exist for a property insurance claim?

a) At the policy inception and time of loss.
b) At the policy inception only.
c) At the time of the loss.
d) Either at the policy inception or at the time of the loss.

Answer 117

Answer: A

An insurable interest for property must exist at inception and at loss.

Question 118

When must an insurable interest exist for a life insurance claim?

a) At the policy inception and time of loss.
b) At the policy inception only.
c) At the time of the loss.
d) Either at the policy inception or at the time of the loss

Answer 118

Answer: B

An insurable interest for life insurance must exist at the policy inception only.

Question 119

When the insured is silent to a fact that is material to the risk being insured, what has occurred?

a) Breach of Warranty.
b) Misrepresentation.
c) Concealment.
d) Breach of Indemnity.

Answer 119

Answer: C

Breach of Warranty – you don’t do something you agree to do (e.g., install a home alarm security system). Misrepresentation – you say you don’t smoke when you do. Breach of Indemnity - you can’t make a profit.

Question 120

Jennifer is applying for life insurance, with her two children as beneficiaries. Jennifer has always been told she looks young for her age and although she is 58, she stated that she is 28 on her life insurance application. What would the insurer be most likely to do if Jennifer’s beneficiaries attempt to collect on the life insurance policy?

a) Void the policy.
b) Require payment on premiums for a 58-year-old insured.
c) Recalculate the face value of the policy based on actual premiums paid.
d) Bring a lawsuit against the estate.

Answer 120

Answer: C

The insurance company will simply calculate how much coverage she could have bought based upon her real age and actual premiums paid.

Question 121

Which of the following statements regarding the characteristics of an insurance contract is false?

a) They are a contract of adhesion, which means the insured must take it or leave it.
b) They are aleatory contracts, which means amounts exchanged may be unequal.
c) They are unilateral, meaning there is only one promise, which is a promise by the insured to pay the pre-mium.
d) The contracts are conditional, which means the terms are under the condition that premiums are paid.

Answer 121

Answer: C The promise is by the insurer to pay if a loss occurs.

Question 122

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 122

Answer: B

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 123

Donna owns a house with a fair market value of $500,000 . She purchases $300,000 of insurance with a coinsurance requirement of 80%. If Donna’s house is hit by a tornado and suffers a $150,000 loss, what will the insurer pay?

a) $75,000.
b) $112,500.
c) $150,000.
d) $250,000.

Answer 123

Answer: B

(Amt Purchased ÷ (Coinsurance)) × Loss
($300,000 ÷ ($500,000 x 0.80)) x $150,000 = $112,500

Question 124

Insurance regulation is primarily conducted at what level?

a) Securities and Exchange Commission.
b) State Insurance Commissioner.
c) Federal Insurance Commission.
d) NAIC

Answer 124

Answer: B

NAIC – The National Association of Insurance Commissioners tries to have similar laws across states, but the end result is that each State Insurance Commissioner regulates insurance products and companies.

Question 125

Which of the following statements regarding loss frequency is true?

a) Loss frequency is the expected number of losses that will occur within a given period.
b) Loss frequency is the potential size or amount of a loss.
c) Loss frequency is a measure of the total amount of losses incurred by an insurer.
d) Loss frequency is a measure of variability between actual and expected losses.

Answer 125

Answer: A

Frequency measures the number of losses expected to occur. Severity measures the potential size in dollars.

Question 126

Which of the following statements regarding loss severity is true?

a) Loss severity is the expected number of losses that will occur within a given period.
b) Loss severity is the potential size or amount of a loss.
c) Both A and B.
d) Neither A nor B.

Answer 126

Answer: B

Frequency measures the number of losses expected to occur. Severity measures the potential size in dollars.

Question 127

Dave earns $45,000 after tax this year and his personal expenditures are $8,000 per year. He believes that his salary will grow at 4% per year, his heirs can earn 6% on any investments, and he will work for another 26 years. What is his human life value insurance need?

N = 26 
I = [(1 + 0.06) ÷ (1 + 0.04)] – 1 x 100 = 1.923% 
PMT = $45,000 - 8,000 = $37,000 
FV = 0 
PV = ?

Answer 127

Answer:

PV = $751,482.34. Dave’s personal expenditures will not need income replacement.

Question 128

Sally is 30 years old, a single mother of one child (age 9), making $25,000 per year as a secre-tary. Her net worth is zero.

Sally has two identified objectives:

1. Provide for her child in the event of her death.
2. Invest for retirement.
   Which of the following insurance policies should Sally purchase?

a) Whole life.
b) Universal variable.
c) Variable whole life.
d) Term life.

Answer 128

Answer: D

Sally can only afford term life insurance and her primary goal is likely to provide for her child.

Question 129

DIVIDEND OPTIONS

Nonparticipating • Whole life policy does not pay dividends.
Participating • Whole life participating policy will pay dividends.

Dividend Options?

CRAP-O

Answer 129

1. Cash – Clients receive the money and can use it or invest it as they wish.
2. Reduce Premiums – Decreases the out-of-pocket expense for premiums.
3. Accumulate at Interest – Company invests the dividends and they are tax free up to the client’s basis in the policy. Interest paid on the dividends is taxable.
4. Paid-up Additions – Purchases additional insurance each year for insured regardless of health or occupation.
5. One-year Term – Adds term insurance each year to the policy face amount equal to cash value of the policy. Also known as the 5th dividend option on the CFP Exam!

Question 130

LIFE INSURANCE NONFORFEITURE OPTIONS

Answer 130

Cash Surrender Value • Insured receives the accumulated cash value when terminating the life insurance policy. The cash surrender value is the cash value less surrender charges.

Reduced Paid-up Insurance • Insured receives the cash value in the form of a paid-up policy with a smaller face amount.

Extended Term Insurance • The insured receives the cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy.

Question 131

Tiffany purchases a universal life insurance policy with a face amount of $1,000,000 and with a cash value of $100,000. The death benefit would be?

Answer 131

$1,100,000.

Question 132

John, age 35, is married with two children ages 3 and 5. John has a need for life insurance throughout his lifetime. He has a significant income, but has saved very little. He has expressed concern over stock market volatility and he is very risk averse. Which of the following life insurance policies would provide John with a savings component, permanent protection and will match his risk tolerance?

a) Level Term.
b) Variable Universal.
c) Variable Life.
d) Whole Life.

Answer 132

Answer: D

Level term is not permanent insurance and does not have a savings component. Neither variable policy will match John’s risk tolerance. Whole life insurance provides permanent protection and a savings component.

Question 133

Cindy, who is actually 45, has been lying about her age for the last 15-20 years and tells Conner, the insurance agent, that she is 30. She has a drivers license to support age 30. She buys $1M term life policy paying premiums of $1 per thousand. Age 45 premiums are $2.50 per thousand. Cindy dies in the first year. Which is correct?

a) Cindy’s beneficiaries collect $0 but get the premiums back because Cindy died.
b) Cindy’s beneficiaries collect $1M as long as her death was accidental.
c) Cindy’s beneficiaries collect $400,000, which is the policy value with premiums adjusted for actual age.
d) The policy is voidable for up to two years by the insurance company for fraud.

Answer 133

Answer: C

The face is adjusted for the correct premiums.
Cindy is paying $1,000 = ($100,000 ÷ $1,000) x $1.
She should be paying $2.50 per $1,000, so the face is adjusted to $400,000 = $1,000 ÷ 2.5 = $400 x $1,000 = $400,000.

Question 134

Pure Life Annuity
• Payments are made to the annuitant over his lifetime.
• Payments stop at death of annuitant.
• The primary risk is receiving one payment, then dying.

Life Annuity with Guaranteed Minimum Payments
• Payments continue for a minimum term and payments are payable to the annuitant’s beneficiary if death occurs prior to expiration of the minimum term or until death of annuitant if annuitant’s lifetime exceeds the minimum term. The payout is less under this method than a pure life annuity.

Answer 134

Example
Pure Life Annuity, Age 62, $250,000 basis: $1,200/month paid out. Guaranteed Minimum for 20 years, Age 62, $250,000 basis: $900/month paid out.

Question 135

Installment Refund Annuity
• If total payments to the annuitant are less than the premiums paid for the policy at the owner’s death, the policy will payout the difference between premiums paid and what has already been paid out.

Answer 135

Example:

Sam paid $250,000 for his annuity. He received $175,000 in payments prior to his death. Under an installment refund annuity, his beneficiary would receive $75,000 ($250,000 - $175,000).

Question 136

Peter, age 62 had paid $500,000 into an annuity over his lifetime. He has decided to begin receiving a lifetime annuity since he has now retired. He will receive $4,000 per month for the remainder of his life, which is expected to be 20 more years. How much of the installment pay-ments are taxable and how much is excluded from taxable income?

Answer 136

Exclusion Ratio:

$4,000 x 12 x 20 years = $960,000 total expected payments
$500,000 Peter’s basis in the policy 500,000 ÷ 960,000 = 52% exclusion ratio
52% of each payment is excluded from gross income

$4,000 x 0.52 = $2,080 return of basis or income excluded from gross income
$4,000 x 0.48 = $1,920 taxable as ordinary income

Question 137

Just prior to the payout period the amount of money that is available in the contract as principal paid in over the life of the annuity is determined at $200,000. The total annuity is currently val-ued at $360,000. The annuity payment is calculated at $24,000 per year. Our client wants to retire at age 65. The the IRS Tables multiplier from the IRS Table for age 65 is 15 (remaining life expectancy). What amount of the annuitant’s payment will be excluded from tax?

a) $1,111.11 until the principal amount has been exhausted.
b) $888.89 for the life of the annuitant.
c) $1,111.11 for the life of the annuitant.
d) $888.89 until the principal amount has been exhausted.

Answer 137

Answer: A

Divide the figure of paid-in principal ($200,000) by the figure of current cash in the annuity ($360,000).
$ 200,000 = 55.6% (this is the exclusion ratio) $ 360,000
The exclusion percentage is then applied to each monthly payment: $2,000 x 55.6% = $1,111.11 (of each payment is tax excluded)

Question 138

Walter is terminally ill and has a 20-year level term life insurance policy with a face value of $500,000. Walter has paid $15,000 in premiums over the last 10 years. Walter sells the term policy to a company that specializes in viatical settlements. Walter sells the policy for $400,000. What is the tax impact to Walter and the viatical settlement company at Walter’s death?

a) Walter has taxable income of $385,000, company has taxable income of $100,000.
b) Walter has taxable income of $400,000, company has taxable income of $100,000.
c) Walter has taxable income of $0, company has taxable income of $100,000.
d) Walter has taxable income of $0, company has taxable income of $500,000.

Answer 138

Answer: C

There is no taxable event to Walter and the viatical settlement company has taxable income to the extent the policy proceeds exceed the amount paid for the policy.

Question 139

Mary Pat, age 62, has an annuity worth $100,000 . Thirty-five years ago she purchased the annu-ity with $15,000. Today, she has a need for additional life insurance on her husband, Brad. Which of the following is the most appropriate strategy to provide Mary Pat with additional life insurance on her husband using her annuity?

a) Annuitize the annuity and purchase life insurance on Brad.
b) Surrender the annuity and purchase life insurance.
c) Exchange the annuity for a post-1987 annuity, then exchange for a life insurance pol-icy.
d) Exchange the annuity for a life insurance policy.

Answer 139

Answer: A

Annuities cannot be exchanged for a life insurance policy on a tax-free basis. The best choice is to just annuitize the annuity and use the income to purchase additional life insurance.

Question 140

Insured suffers $10,500 loss in connection with hospital and doctor bills. The insured has a $500 deductible and 80/20 coinsurance with a stop loss of $1,000. The insurer will pay the fol-lowing:

Deductible
Coinsurance (client portion) to stop loss limit $10,000 x 20% = $2,000, but limit is $1,000
Coinsurance (Insurer’s portion) 10,000 x 80%

Totals:
Insured Pays = $1,500
Insurer Pays = $9,000

Answer 140

Insured Pays
$500 - $10,500 = $10,000 × 0.20 = $2,000 - Stop loss of $1,000

Insured Pays = $1,500

Insurer Pays = $9,000
$1,500 (Deductible + Stop loss) - $10,500 = $9,000

Question 141

Laureen has a major medical policy with a $500 deductible, 80/20 coinsurance clause and a stop loss of $2,000. Laureen incurs $20,500 of medical expenses. The insurer will pay the follow-ing:

Totals:
Insured Pays = $2,500
Insurer Pays = $18,000

Answer 141

Insured Pays
$500 - $20,500 = $20,000 × 0.20 = $4,000 - Stop loss of $2,000

Insured Pays = $2,500

Insurer Pays = $18,000
$2,500 (Deductible + Stop loss) - $20,500 = $18,000

Question 142

Let’s assume that covered expense charges were $10,000 for an insured with a $250 deductible and an 80/20 coinsurance with a $5,000 stop loss limit. The payments would be divided between insurer and insured how?

a) Insured pays $5,250; Insurer pays $4,750.
b) Insured pays $8,750; Insurer pays $1,250.
c) Insured pays $2,200; Insurer pays $7,800.
d) Insured pays $4,750; Insurer pays $4,250.

Answer 142

Answer: C

Insured Pays:
$250 - $10,000 = $9,750 × 0.20 = $1,950 - Stop loss of $5,000

Insured Pays = $2,200

Insurer Pays = $7,800
$2,200 (Deductible + Stop loss) - $10,000 = $7,800

Question 143

John has a group medical policy with the following provisions: A $250 deductible, 80/20 coin-surance and an out-of-pocket limit of $1,000, after which the insurance company pays 100%. John is injured in a biking accident and incurs $6,250 in medical expenses. How much will John have to pay?

a) $1,000.
b) $1,250.
c) $1,450.
d) $8,000.

Answer 143

Answer: A

Loss - $6,250
Deductible -
Covered Loss - $6,000
Coinsurance - ($6,000 x .20) limit is $1,000 including deductible because it is a group plan with an out-of-pocket limit.

Question 144

To be eligible for COBRA, group coverage must terminate because:

Answer 144

• Covered employee dies.
• Employee is voluntarily or involuntarily terminated.
• Hours are reduced from full-time to part-time.
• Covered employee separates from spouse.
• Employee becomes eligible for Medicare.
• A dependent child is no longer eligible for coverage (age, married, left school).

• COBRA only applies to employers who offer a group health plan and have at least 20 employees. Therefore, an employer with fewer than 20 employees is not required to offer COBRA. Note: Both full-time and part-time employees count towards the 20, but part-time employees count as a fraction of employee based upon their hours worked. Most likely, you will be given only a count of full-time employees on the CFP® Exam.

Example:
Ginny’s Bait & Tackle has 15 full-time employees and 10 part-time employees. The require-ment for full-time is 40 hours per week and the part-time employees average 25 hours per week. Ginny’s B&T must provide COBRA since they have more than 20 employees (15 full-time plus (10 employees x 25 hours)  40 (full-time hours) = 6.25 additional employee equivalent

Question 145

Charlie has worked with his company for 32 years and has been a participant in the employer’s group health plan for all of those years. Charlie was laid off, along with all of his coworkers, due to the employer’s bankruptcy. Is Charlie eligible for COBRA continuation benefits?

Answer 145

Answer: If there is no longer a health plan, there is no COBRA coverage available.

• The employer must have a group health plan and continue that group health plan in order for beneficiaries to receive COBRA.
• The employer must offer coverage for a specific period of time based on the following qualifying events:
- 18 months for reduction in hours or normal termination.
- 36 months for death.
- 36 months for divorce.
- 36 months for Medicare eligibility.
- 36 months for loss of dependency status by children of employee.
- Up to 29 months if employee meets Social Security definition of disabled.

• An employee terminated due to “gross misconduct” is not eligible for COBRA.

Exam Tip:
Memorize the 18 months for a reduction in hours or normal termination and that all others are 36 months. If CFP Board tests any event other than a reduction in hours or normal termination, then it will be 36 months.

Question 146

Phil was employed by a large manufacturing company with well over 5,000 employees. Phil had family coverage under the company’s group health care plan. Phil died in the current year. Which of the following statements is correct based upon any COBRA election for Phil’s depen-dents?

a) Phil’s wife and minor children are eligible for 18 months of COBRA coverage.
b) Phil’s wife and minor children are eligible for 36 months of COBRA coverage.
c) Phil’s wife and minor children are not eligible for COBRA coverage.
d) Phil’s wife and minor children are eligible for 29 months of COBRA coverage.

Answer 146

Answer: B

All catastrophic events qualify for 36 months of COBRA coverage. Death of the insured is con-sidered a catastrophic event, along with divorce, legal separation and loss of dependent status.

Question 147

WJG Inc, has 25 full-time employees, but only 15 are covered under the group health care plan. Which of the following statements is true?

a) WJG is not required to offer COBRA because only 15 employees participate in the group health care plan.
b) WJG is required to offer COBRA because they have 20 or more employees.
c) WJG is allowed to charge 105% of actual premiums for anyone who elects COBRA coverage.
d) WJG can offer COBRA to the employees who are not participating in the group health care plan.

Answer 147

Answer: B

The requirement is that a company that has 20 or more employees must offer COBRA, regard-less of the number of employees participating in the plan. WJG can charge up to 102% of the premiums. COBRA can only be offered to employees who are participating in the group health care plan.

Question 148

Margret is 87 years of age and has been a widow for 2 years. Her daughter is unable to provide the level of care Margret needs. Margret enters a nursing home today. She currently has count-able assets of $80,000. The nursing home costs $8,000 a month. Margret gifted $20,000 to her daughter before her husband died and another $15,000 the year after he died.
Margret applies for Medicaid when she enters the nursing home. How long before Margret is eligible for Medicaid payment of the nursing home care?

a) 5 months
b) 10 months
c) 14 months
d) 24 months

Answer 148

Answer: C

Margret’s current assets of $80,000 will cover 10 months of care at $8,000 a month (80,000 / 8,000 = 10 months). The look back of 60 months reveals $35,000 in gifts. This is calculated toward the penalty period of 4 months ($35,000 / $8,000 = 4.375). After 14 months, Medicaid will begin covering Margret’s nursing home costs.

Question 149

Private Long-Term Care Policy
• Provides coverage for nursing home stays and other types of care not covered by health insurance
• Seven types of coverage:

Answer 149

1. Skilled Nursing – Traditional nursing home, physician ordered.
2. Intermediate Nursing – Occasional nursing care, physician ordered.
3. Custodial Care – Assistance with eating, dressing, bathing, etc.
4. Home Health Care – In-home nursing or necessary assistance.
5. Assisted Living – Apartment style living with healthcare services.
6. Adult Day Care – Daily assistance while a spouse or family member works.
7. Hospice Care – For terminally ill, at home, hospital or nursing facility.

• Eligibility for benefits under a private long-term care policy: - Must be chronically ill or suffer from substantial cognitive impairment.
• Chronically Ill - Unable to perform 2 of 6 ADLs for at least 90 days.
* Activities of Daily Living include: Eating, bathing, dressing, transferring from bed to chair, using the toilet, and continence.
• Substantial cognitive impairment - Behavior threatens own/others health and safety.

Question 150

Which of the following is/are correct?

1. LTC policies are designed to pay for skilled nursing care, intermediate care, custodial care and home care.
2. LTC polices are designed to provide coverage for major medical expenses including extended care in an intensive care unit.
3. An LTC policy must be non-cancelable to qualify for deductibility.
4. There is a cap on the amount of LTC premiums that can be deducted.

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

Answer 150

Answer: B

Deductibility limits are based upon age. LTC policies must be qualified to be deductible, not Noncancellable. Note – deductible premium amount included in medical expense deduction threshold of 10% of AGI.

Question 151

Taxation of Disability Benefits:

Answer 151

• If EMPLOYEE pays the premium with AFTER-TAX dollars:

• Premiums are Not Deductible;
• Benefits ARE Tax Free.

• If EMPLOYER pays the premium:

• Premiums ARE Deductible to Employer
• Benefits to Employee ARE TAXED

• If EMPLOYEE pays premium with PRE-TAX dollars (cafeteria plan):
- Benefits to employee ARE TAXED.

Question 152

Mike earns $18,000 a month as a physician. He becomes disabled under an own occupation definition policy with a 50% of prior wages clause because he lost his hearing in a hunting acci-dent. He returns to work as a researcher making $3,000 per month, a reduction in income of 83.33%. He has a residual benefit provision in his disability policy that calls for monthly bene-fits of $12,000. What will be his total income per month including any residual benefits?

a) $3,000 one-time payment.
b) $12,000, the greater of his salary or the disability benefits.
c) $13,000, the $3,000 plus $10,000 from the residual.
d) $15,000, the $12,000 plus the $3,000.

Answer 152

Answer: C

Mike gets (83.333 x $12,000) + $3,000 = $13,000.
$3,000 ÷ $18,000 = 0.1666 
1 - 0.1666 = 0.8333 × $12,000 = $10,000 + 3,000 = $13,000

Example:

Brian was a neurosurgeon making $30,000 per month prior to becoming disabled. As a result of his disability, he was no longer able to perform surgery, but was able to work in hospital admin-istration making $8,000 per month, resulting in a reduction in income of 73.33%. His residual benefit clause calls for a $15,000 monthly benefit. Brian’s disability insurance contract will pay 73.33% of $15,000 or $11,000. Thus, giving him income of $19,000 ($11,000 + $8,000) per month.

Question 153

Which of the following life insurance policies provides the highest benefit, with the lowest premium, and is simply a pure death benefit policy?

a) Term insurance.
b) Whole life insurance.
c) Universal life insurance.
d) All of the above.

Answer 153

Answer: A

Straightforward definition of term life insurance.

Question 154

Kyle, age 33, is married and has a newborn son. Kyle is concerned about providing for his family in the event of his premature death. He is concerned about the long-term affordability of life insurance, but is able to budget a fixed amount for a period of time. Which of the following policies would you recommend?

a) Annually renewable term.
b) Level term.
c) Whole life insurance.
d) Single premium annuity.

Answer 154

Answer: B
Based upon being able to budget a fixed amount each year. Annually renewable term will get too expensive. Other policies are too expensive because of savings component.

Question 155

Ryan and Jody are age 68 and 72, respectively. They have significant assets that will be subject to estate taxes upon the second spouse’s death. Which of the following life insurance policies would you recom-mend?

a) Annually renewable term.
b) Second-to-die whole life policy.
c) First-to-die whole life policy.
d) Ordinary whole life.

Answer 155

Answer: B

A second-to-die policy will provide the estate with the necessary liquidity at the death of the second spouse.

Question 156

Which of the following life insurance policies contain a cash value savings component that reaches the face value of the policy at age 120?

a) Term.
b) Whole life.
c) Universal life.
d) Lifetime annuity.

Answer 156

Answer: B

Whole life pay premiums until age 120 when cash value equals the face of the policy.

Question 157

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 157

Answer: C
Variable whole life has fixed premium, death benefit can fluctuate based on investment performance. No such thing as variable renewable term.

Question 158

All of the following statements concerning whole life insurance are true except?

a) Level premium whole life insurance accumulates a cash value that eventually reaches the face value of the policy at age 120.
b) Whole life insurance offers permanent protection throughout the insured’s lifetime.
c) Whole life insurance can be participating, which means the insured must participate in self-directed investments for the cash value.
d) Whole life insurance premiums paid throughout the insured’s lifetime are ordinary life policies.

Answer 158

Answer: C

Participating means the insured receives dividends. All other statements are true.

Question 159

All of the following statements concerning universal life insurance are true except?

a) The insured has the flexibility to adjust premiums, face value and cash value of the policy.
b) Insured has flexibility without the investment responsibility of the cash value.
c) Cash value of the policy can be used to pay the premiums.
d) The death benefit of a universal life insurance policy is fixed.

Answer 159

Answer: D
Universal policies have a death benefit that depends on investment performance and premiums paid. The death benefit is not fixed. All other statements are true.

Question 160

All of the following statements regarding annuities are correct except?

a) A deferred annuity provides income to the beneficiary at some date in the future.
b) A flexible premium annuity provides the insured with the flexibility to vary premium payments.
c) A joint and survivor annuity is an ideal way for parents to leave assets to their children.
d) Annuity benefits consist of both return of basis and taxable income.

Answer 160

Answer: C

Annuities do not leave anything to heirs. If goal is inheritance for children, don’t buy an annuity.

Question 161

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 161

Answer: C
$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 Be careful of rounding issue.

Question 162

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 162

Answer: D
$1,500 x 12 x 20 = $360,000
$200,000 ÷ $360,000 = 0.555 exclusion and 0.444
inclusion Inclusion: 0.5555 x 18,000 = 10,000 - Be careful of rounding issue

Question 163

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 163

Answer: B
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 164

John has a major medical policy with a $250 annual deductible and an 80/20 coinsurance provision, with a $2,000 stop loss limit. John has emergency surgery that cost $8,000. How much will he have to pay for the surgery?

a) $250.
b) $1,600.
c) $1,800.
d) $2,250.

Answer 164

Answer: C 
$8,000 – deductible = covered loss 
$8,000 – $250 = $7,750 
Insured’s portion $7,750 x 0.20 = $1,550 + $250 deductible = $1,800. 
Insurer’s portion $7,750 x 0.80 = $6,200

Question 165

John has a major medical policy with a $250 annual deductible and an 80/20 coinsurance provision, with a $2,000 stop loss limit. John has emergency surgery that cost $12,000. How much will he have to pay for the surgery?

a) $250.
b) $2,000.
c) $2,250.
d) $2,600.

Answer 165

Answer: C
$12,000 – deductible = covered loss
$12,000 – $250 = $11,750
Insured’s portion $11,750 x 0.20 = $2,350 + $250 deductible = $2,600.
Stop loss is $2,000 plus deductible of $250 for a total of $2,250. For a major medical, he pays deductible and stop loss.
For an ACA compliant group plan he only pays the max out of pocket amount of $2,000.

Question 166

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 166

Answer: D

Residual benefit makes up the difference between wages before disability and wages after disability.

Question 167

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 167

Answer: C

Termination of employment only requires 18 months of coverage.

Question 168

There are three basic forms of coverage offered by homeowners policies:

Answer 168

• Basic coverage
• Broad coverage
• Open coverage

Question 169

Basic Coverage

Protects the homeowner from losses associated with twelve (12) named perils:

Answer 169

1. Fire
2. Vehicles (damage caused by vehicles)
3. Lightning
4. Smoke
5. Windstorm
6. Vandalism or malicious mischief
7. Hail
8. Explosions
9. Riots or civil commotion
10. Theft
11. Aircraft
12. Volcanic eruptions

Question 170

Broad Coverage
Provides protection from losses associated with eighteen (18) named perils. This includes the twelve (12) perils cov-ered in basic coverage, plus coverage for losses associated with these additional six (6) named perils:

Answer 170

Basic Coverage

1. Fire
2. Vehicles (damage caused by vehicles)
3. Lightning
4. Smoke
5. Windstorm
6. Vandalism or malicious mischief
7. Hail
8. Explosions
9. Riots or civil commotion
10. Theft
11. Aircraft
12. Volcanic eruptions

Broad Coverage

13. Falling objects
14. The weight of ice, snow, sleet
15. Accidental discharge or overflow of water or steam
16. Sudden and accidental cracking, burning, bulging of appliances
17. Freezing of plumbing, heating, air conditioning, fire sprinkler system, or appliance
18. Sudden and accidental damage from artificially generated electrical currents

Question 171

Open Perils Coverage Provides protection from losses associated with all perils, except those that are specifically excluded. An open perils policy provides more comprehensive coverage than the basic and broad policies.

Answer 171

Exam Tip
Basic and broad policies are “named perils” polices. Losses resulting from perils not specifically “named” are not covered. An open perils (or “all-risks) policy covers “all perils” except those that are specifically excluded.

General Exclusions From Most Homeowners Policies
Perils that are generally excluded from most homeowners policy include:
• Movement of the ground (earthquake, ground movement from volcanic eruption, mud/landslide, and sink hole)
• Ordinance or law regulating the construction, repair or demolition of a building or structure
• Damage from rising water (including floods; surface and tidal water; waves; water below the surface that exerts pressure on buildings, structures, and improvements; and water backing up through drains and sewers)
• War
• Nuclear hazards (including radiation or radioactive contamination)
• Power failure caused by an uninsured peril (such as spoilage due to a freezer thawing out)
• Intentional acts
• Neglect

Exam Tip
A ‘rule of thumb” is that covered losses must result from something that is “sudden and accidental.” Losses associated with neglect and intentional acts of the insured are not covered.

Question 172

Endorsements
Some of the perils that are excluded from the standard homeowners insurance policy can be covered by purchase of an endorsement. An endorsement is a supplement to an existing policy that provides additional coverage. Excluded
perils that may be covered by purchase of an endorsement include:

Answer 172

• Sink hole collapse
• Earthquake
• Sewage backup
• Refrigerated property coverage

Protection from losses associated with floods may also be available by purchasing a separate insurance policy from the National Flood Insurance Program.

Question 173

Your home is covered by an open perils policy. Which of the following losses would be covered under your policy?

a) Termite damage
b) Your angry neighbor throws a brick through your glass door
c) Flood damage
d) Earthquake damage

Answer 173

Answer: B

Intentional acts of the INSURED are excluded from coverage. Intentional acts committed by some-one else are covered.

Question 174

Coverage A: Dwelling
Pays for repair and replacement for damage to the house and any attached structures. It also coverages building mate-rials on the premises. Losses are paid on a replacement cost basis. Replacement cost is the amount necessary to repair or replace the dwelling with materials of the same or similar quality at current material prices (no deduction for depreciation is taken).

• Some policies require the insured to carry homeowners insurance of at least 80% of the replacement cost of the home to be fully covered for partial losses (this is a coinsurance requirement). If less than 80 percent of the replacement cost is carried, the insured receives payment for partial losses calculated as follows:

Amount of insurance carried ÷ (0.80 × Replacement Cost) × Loss = ? (Insurance Pays)

Bill owns a home with a replacement cost of $400,000. He purchases $200,000 of property insurance with a coinsurance requirement of 80%. If Bill experiences a $50,000 loss, the insur-ance company will pay:

Answer 174

$200,000 ÷ (0.80 × $400,000) × $50,000 = $31,250 - Deductible

The insurer will pay Bill $31,250 less his deductible.

Note, he will not receive the full loss of $50,000 even though his total coverage is $200,000. If he had at least $320,000 of coverage, he would have received the entire $50,000 from the insurance company less his deductible.

Question 175

Coverage B: Other Structures

Detached structures on the property are covered by homeowners insurance. Examples include:

Answer 175

• Detached garages
• Greenhouses
• Storage buildings

Typically the limit of this coverage is 10 percent of the Coverage A (dwelling) limit. Losses to other structures are insured on a replacement cost basis.

Exam Tip:
Other structures that are used for business purposes are not covered under a homeowners policy. Separate business coverage must be obtained for these structures.

Question 176

Lisa bought a new 52” television for $2,800. Three years later the television was stolen. The television depreciated by 60% in the three years. Today, the same television costs $1,500. Lisa will receive?

Answer 176

$600 ($1,500 - $900 depreciation; $1,500 x 60% = $900) in actual cash value. How-ever, she will receive the full $1,500 if she has replacement cost coverage instead of actual cash value coverage.

Question 177

HO-2 Broad Form

Answer 177

Provides coverage on a broad perils basis (18 named perils).

Question 178

HO-3 Special Form

Answer 178

Provides coverage on an “open perils”, or “all-risks” basis.
• Special form of homeowners insurance • If a specific peril is not excluded from coverage in the policy, the policy covers losses associated with that peril.
• Personal property coverage under a HO-3 policy is still provided on a named perils broad form basis.

Question 179

HO-4 Renters Policy

Answer 179

Provides coverage for renters and tenants.
• Does not cover the dwelling or other structures • Provides personal liability coverage
• Provides coverage for personal contents (Coverage C) on a broad perils basis (minimum amount sold is $6,000)
• Provides for loss of use of the premises (equal to 30% of personal property coverage)

Question 180

HO-5 Comprehensive Form

Answer 180

Provides coverage on an “open perils”, or “all-risks” basis.
• comprehensive homeowners insurance.
• very similar to the special form of homeowners insurance (HO-3), with one major change. An HO-5 policy provides personal property protection on an open perils, instead of a broad perils basis.

Question 181

HO-6 Condominium Owners Form

Answer 181

Provides coverage for condominiums.
• Coverage for inside structure of their unit and all of its contents (the outside structure is owned, maintained and insured by the association)
• Covers the same perils provided in the HO-2 and HO4 forms (broad perils coverage)
• But does not provide building coverage other than for additions and alterations
• Like renters insurance (HO-4), the minimum amount of personal property coverage (Coverage C) that can be purchased is $6,000
• Loss of use (Coverage D) is limited to 50 percent of the Coverage C limit

Question 182

HO-8 Modified Coverage Form

Answer 182

Modified form policy
• Provides repair cost coverage (instead of providing replacement cost coverage) for damage to property
• Provides “functional replacement cost” coverage
• Typically insures older homes that may be quite expensive to repair if the insurance is required to use original construction materials and workmanship

Question 183

A split limit policy is one in which the liability for bodily injury per person, bodily injury per accident, and property damage are all separately stated. For example, 50/100/50 means:

Answer 183

• $50,000 of bodily injury coverage per person
• 100,000 of bodily injury coverage per accident
• $50,000 of property damage coverage

A combined single limit policy has a fixed amount of coverage that the insurance company pays, whether the loss is attributable to bodily injury or property damage. For example, a policy might be issued with a $300,000 limit, which is the max coverage for a single accident, regardless of whether the liability was due to bodily injury or property dam-age.

Question 184

LEGAL LIABILITY

Intentional interference:

Answer 184

An intentional act committed against another that causes injury.

• Intentional criminal acts are generally not covered under a liability insurance policy. Slander and libel, however, while intentional acts, are usually covered under personal liability insurance policies. Slander is defamation or harm caused by a verbal statement, and libel is defamation caused by a written statement.

Question 185

LEGAL LIABILITY

Strict and absolute liability:

Answer 185

Occurs as a result of legislation in which one party is held legally liable regardless of who is responsible for the injury.

• Workers compensation laws are examples of strict liability. Under a strict liability definition, responsible parties have few defenses. Under absolute liability, the responsible party has no defense.

Question 186

LEGAL LIABILITY

Negligence:

Answer 186

An act or failure to act with appropriate care, and bodily injury or property damage results from such action or inaction.

• In determining whether an individual has acted with appropriate care, the courts use the “prudent man” standard. The standard is met if a reasonable person confronted with the same circumstances would have performed the same acts.
• Direct negligence refers to acts or omissions directly attributable to an individual. An individual may also be liable for indirect or vicarious acts.
• Vicarious liability: an individual is held at least partially responsible for negligent acts performed by someone else.

Examples:
• Parents may be held liable for the acts of their children.
• Employers may be held liable for the acts of the employees.

Question 187

LEGAL LIABILITY

• Burden of proof

Answer 187

• Initially borne by the injured party. Standard of proof in most civil cases is the preponderance of the evidence (more than 50%).

Question 188

LEGAL LIABILITY

• Damages

Answer 188

• Damage from a tort can take two forms - bodily injury and property damage. Property damage is usually measured by the actual monetary loss caused by the act. Bodily injury may lead to medical expenses, loss of income, pain and suffering, mental anguish, and/or loss of consortium.

The damages for bodily injury can be:
• Special damages compensate for measurable losses (loss of limbs).
• General damages compensate for intangible losses (pain and suffering).
• Punitive damages are amounts assessed against the negligent party as punishment for the act.

Question 189

LEGAL LIABILITY

• Collateral source rule

Answer 189

• Holds that damages assessed against a negligent party should not be reduced simply because the injured party has other sources of recovery available such as insurance or employee benefits (health or disability insurance).

Question 190

A personal liability policy (PLP) or personal liability umbrella policy (PLUP) is used to?

Answer 190

Provide protection for these higher types of claims. The PLUP is an excess liability policy that covers liability in excess of the underlying liability coverage for auto and home policies.

• A personal liability policy (PLP) or personal liability umbrella policy (PLUP) is used to provide protection for these higher types of claims. The PLUP is an excess liability policy that covers liability in excess of the underlying liability coverage for auto and home policies.
• A PLUP will not be issued without the PLUP carrier insisting on certain levels of underlying liability coverages for both auto and home.
• The PLUP policy supplements the underlying liability coverages of auto and home (or renters) and usually provides coverage of $1 million or more.
• It should be noted that umbrella policies do not cover all liabilities. Criminal acts and intentional acts are not covered. Slander and libel are the exceptions.

Question 191

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 191

Answer: D
Termite damage happens slowly (as it is the result of negligence), so it is excluded. Flood and earthquake are definitely excluded.

Question 192

John, who has retired to Miami, decided to purchase a condominium unit on the beach. Which of the following homeowners policies would be most appropriate for John to purchase?

a) HO-3.
b) HO-4.
c) HO-5.
d) HO-6.

Answer 192

Answer: D

HO-6 is for condo owners.

Question 193

Jennifer lives by herself and rents a one-bedroom apartment in Manhattan. Which of the following home-owners policies would be most appropriate for Jennifer to purchase?

a) HO-3.
b) HO-4.
c) HO-5.
d) HO-6.

Answer 193

Answer: B

HO-4 is for renters.

Question 194

Section II of a HO-3 policy provides what type of protection for the homeowner?

a) Dwelling.
b) Damage to Others Property.
c) Loss of Use.
d) Personal Property.

Answer 194

Answer: B

A, C, and D are in Section I.

Question 195

Raymond lived in New Orleans during Hurricane Katrina. His home was destroyed by wind damage and he was forced to live in a hotel for three months. Which section of his homeowners policy would reimburse him for the increased living expenses associated with the hotel stay?

a) Dwelling.
b) Other Structures.
c) Loss of Use.
d) Personal Property.

Answer 195

Answer: C

Only for increase in living expenses.

Question 196

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

a) Section I.
b) Section II.

Answer 196

Answer: B

Section II.
Liability and Medical Payments are identical.

Question 197

Which of the following would not be considered an insured person for the purposes of Part A (Liability Cov-erage) for a Personal Auto Policy?

a) You.
b) Any family member.
c) Any person using your covered auto with permission.
d) Any person using your covered auto without permission.

Answer 197

Answer: D

By definition.

Question 198

Family members are covered for the purposes of Part A (Liability Coverage) for a Personal Auto Policy when operating all of the following except?

a) Your covered auto.
b) Rented auto.
c) Borrowed car.
d) Replacement car after 31 days.

Answer 198

Answer: D

You have a duty to notify the insurance company within first 30 days of purchasing a new car.

Question 199

Mike has the following split limits of coverage on his Personal Auto Policy of 100/300/50. Which of the following best describes Mike’s coverage?

a) $100,000 per person for bodily injury, $300,000 per occurrence for bodily injury and $50,000 for prop-erty damage.
b) $100,000 per covered auto, $300,000 per occurrence for covered auto and $50,000 for uninsured motor-ist.
c) $100,000 per person for bodily injury, $300,000 per occurrence for property damage and $50,000 for uninsured motorist.
d) $100,000 for property damage, $300,000 per person for bodily injury and $50,000 for property damage.

Answer 199

Answer: A

Splits Limits Read: Bodily Injury / Per Occurrence for Bodily Injury / Property Damage.

Question 200

All of the following statements are correct regarding a Personal Auto Policy Part B (Medical Payments) coverage except?

a) Provides payment for medical expenses of an insured due to an auto accident.
b) Provides medical payments if struck as a pedestrian.
c) Provides payments for medical expenses for household pets if struck by the covered auto.
d) Provides payment for medical expenses of anyone occupying the insured’s covered auto.

Answer 200

Answer: C
Does not cover pets.
Does cover as a pedestrian.

Question 201

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 201

Answer: D

Does not pay for punitive damages. You cannot sue yourself for liability.

Question 202

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 202

Answer: D

D is coverage under comprehensive.

Question 203

All of the following statements are correct regarding a personal umbrella liability policy except?

a) Provides protection above and beyond the liability limits of your homeowners and PAP.
b) Requires the insured to carry certain underlying minimum amounts of liability for homeowners and PAP.
c) The insurer provides legal defense to the insured.
d) Only appropriate for individuals with a high net worth.

Answer 203

Answer: D

Future earnings can be garnished. A PLUP may protect against garnished wages.

Question 204

CATEGORIES OF SOCIAL SECURITY BENEFITS

Answer 204

• Retirement Benefit.
• Disability Benefit.
• Death Benefit.
• Survivors’ Benefits.
• Medicare.

Question 205

Reduced Benefit For Early Retirement at Age 62

Answer 205

• If full retirement is age 65 then age 62 is 80% of full retirement benefits.
- If full retirement is age 66 then age 62 is 75% of full retirement benefits.
- If full retirement is age 67 then age 62 is 70% of full retirement benefits.
• Benefits are reduced by 5/9 of 1% for each month, for the first three years that a worker retires early.
• Benefits are then reduced by 5/12 of 1% for each month beyond three years.

Question 206

To qualify for retirement benefits a worker must be?

Answer 206

“Fully insured” means a worker must earn 40 quarters of coverage.
• A quarter of coverage is based on a dollar amount of earnings.
• To earn one quarter of coverage in 2019: - 1 Quarter = $1,360 in wages subject to Social Security.

Exam Tip: Just know that a retiree’s benefit may increase by 8% (simple interest) each year the retiree delays their benefit.

Question 207

DISABILITY ELIGIBILITY

A worker is covered for disability if?

Answer 207

• Age 31 and greater; the worker is fully insured (40 quarters) and earned 20 quarters in the last 40 quarters. - Between ages 24-30: a worker has earned 1⁄2 of quarters available since age 21 to disability.
• If ages 21-24; a worker has earned 6 quarters in the last 12 quarters.

Question 208

SURVIVORSHIP ELIGIBILITY (Info)
• A worker must be either fully insured (40 quarters)
OR
• Currently insured
- Currently insured is at least 6 quarters of coverage in the last 13 quarters.
• A child under age 18 is entitled to survivorship benefits whether a worker is currently or fully insured.
• A spouse with a child under age 16 is entitled to survivorship benefits whether a worker is currently or fully insured.
• There is no coverage for spouse of a currently insured worker.
• There is spousal coverage, if worker was fully insured.

Answer 208

IMPORTANT SOCIAL SECURITY BENEFICIARIES
• A disabled insured worker under age 65.
• A retired insured worker age 62 or older.
• A spouse of a retired or disabled worker who is at least 62 OR is caring for a child under age 16 or disabled child.
• A divorced spouse of a retired or disabled worker, if the ex-spouse is age 62 and was married to the worker for at least 10 years and did not remarry by age 60.

Question 209

William’s full retirement age is 65, but he decides to take retirement benefits at age 62. How much will his benefit be reduced?

Answer 209

65 - 62 = 3 years or 36 months too early
36 x 5/9 = 20% reduction in benefits

Jerry’s full retirement age is 67, but he decides to take retirement benefits at age 63. How much will his benefit be reduced?

67 - 63 = 4 years, or 48 months too early
36 x 5/9 = 20% reduction plus
12 x 5/12 = 5% reduction
Total reduction in benefits is 25%.

Question 210

Benefits Can Be Temporarily Reduced If You Earn Too Much (2019 Info)

Answer 210

Early retirement
- The benefit is reduced $1 for every $2 above the earnings threshold for persons below full retirement age.
- Threshold: $17,640 (Annual limit, monthly test).
Full Retirement Age
- In the year in which you reach the age of retirement the benefit is reduced $1 for every $3 above the earnings threshold.
- Threshold: $46,920 (Annual limit, monthly test).
- Earnings based reductions end at full retirement age. Taxation of Social Security Benefit
- Up to 85% of benefit may be taxed.
- Thresholds are based upon Combined Income.
- Combined Income includes:
• AGI.
• Nontaxable interest.
• Foreign earned income.
• 1/2 of retirement benefit

Question 211

MEDICARE BENEFITS
ELIGIBILITY

• Federal health insurance for people 65 and older.
• Spouses can qualify at 65 based on the other spouse’s work record.
• Three parts, Medicare A, B, & D.
• Eligible persons are automatically enrolled if at least receiving retirement benefits, OR any age if receiving social security disability for at least?

Answer 211

Answer

2yrs

Question 212

Medicare A, B, & D?

Answer 212

Medicare Part A (2019)
• Hospital Insurance (Covers Places):
- Places include inpatient hospital care and home health care.
- Semi-private room, meals, operating and recovery room, lab tests, x-rays.
- Hospice Coverage.
- Skilled nursing care facility following a covered hospital stay

Medicare Part B (2019)
• Part B provides coverage for doctor visits, lab tests, ambulance, outpatient therapy, clinical research, durable medical equipment (wheel chairs, hospital beds, walkers, oxygen), mental health (inpatient, outpatient, partial hospitalization), getting a second opinion before surgery, and home health care.
• Medicare covers an initial preventative visit and annual wellness visit.

• Does not cover:

• Dental care, dentures.
• Cosmetic surgery.
• Hearing aids.
• Eye exams.
• The insured is automatically enrolled in Part B, unless an individual opts out.
• The standard premium is $135.50 per month and premiums are deducted from Social Security (higher premiums for individuals with income over $85,000 (single) or $170,000 (MFJ)).
• The deductible is $185 per year.
• After satisfying the deductible then Part B covers 80%. There is no stop loss limit.

Medicare Part D
• Provides prescription drug coverage benefits.
• Wide variation across plans. Most require a premium and have deductibles and co-pays.

Question 213

Medicare Part C - Medicare Advantage covers?

Answer 213

Medicare Part C - Medicare Advantage

• Must own and pay for Part A and Part B.
• Coverage similar to an HMO, PPO or POS plan.
• Coverage is regional. Emergency care will be provided outside coverage area.
• Coverage includes vision, dental, hearing.

Question 214

Sam’s normal retirement age is 65. He decided to begin receiving Social Security early retirement benefits at age 64. How much will his benefit be reduced?

a) 20%.
b) 10%.
c) 7%.
d) 5%.

Answer 214

Answer: C

12 x 5/9 = 7%

Question 215

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 215

Answer: A

Automatically qualify for Medicare at age 65. All other statements are true.

Question 216

Jennifer earns $50,000 per year in salary. All of the following statements regarding Social Security taxes are correct except?

a) A total of $4,000 is withheld for Social Security taxes.
b) $725 is withheld for Medicare.
c) $3,100 is withheld for the OASDI portion of Social Security.
d) The Medicare portion is taxed on an unlimited salary while the OASDI is taxed up to the wage base.

Answer 216

Answer: A

$50,000 x 7.65% = $3,825
Medicare portion = $50,000 x 1.45% = $725
OASDI = $50,000 x 6.2% = $3,100

Question 217

Generally, for most workers, how many quarters of coverage are needed to be fully insured?

a) 4.
b) 20.
c) 40.
d) 80.

Answer 217

Answer: C

Question 218

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.h

Answer 218

Answer: C

If a worker applies for retirement or survivors benefits before his or her 65th birthday, there is no need to file a separate application for Medicare.

Question 219

Sydney works at Joe’s Stone Crabs in Miami. Because of the seasonal nature of the business, Sydney only works two months out of the year and earns $100,000 in wages subject to Social Security. How many quar-ters of coverage does Sydney earn by working at Joe’s Stone Crabs two months out of each year?

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

Answer 219

Answer: D

A worker can earn up to 4 quarters a year, and they can be earned all in one day if wages subject to Social Security are $5,440 (4 x $1,360). Total earnings required are $1,360 per quarter to earn one quarter of coverage.

Question 220

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 220

Answer: A

Coverage starts automatically. If you receive retirement benefits early, there’s no need to file a separate application.

Question 221

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

a) The worker who takes early retirement benefits will receive a reduced benefit.
b) Workers entitled to retirement benefits can currently take early retirement benefits as early as age 59 1⁄2.
c) To qualify for retirement benefits, a worker must be fully insured, which means that a worker has earned a certain number of quarters of coverage under the Social Security system.
d) Earning a designated amount of money, regardless of when it was earned during the year, will credit the worker with a quarter of coverage for that year.

Answer 221

Answer: B

As early as age 62.

Question 222

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 222

Answer: D

Benefits can be paid to the dependent parents of a deceased worker at age 62 or over.

Question 223

Temporary insurance coverage, contingent on an applicant’s ability to present evidence of insurability, can be provided by:

a) Evidence of consideration.
b) Conditional receipt.
c) Delivery of contract.
d) Initial premium payment.

Answer 223

Answer: B

Below is CFP Board of Examiners’ (Now Council on Examinations) response to a candidate’s question
regarding this exam item: “Note that while the conditional receipt sets forth certain terms of temporary life insurance coverage, it will not be issued without a completed application and payment of an initial premium.”

Question 224

Typically when group long-term disability income insurance premiums are paid by a C corporation, all disability benefit amounts received by an employee are:

a) Not includible in the income of the employee for federal tax purposes without regard to any other sources of income.
b) Includible in the income of the employee for federal tax purposes without regard to any other sources of income.
c) Not includible in the income of the employee for federal tax purposes if any portion of the benefit is reduced/offset by other income.
d) Includible in the income of the employee for federal tax purposes if any portion of the benefit is reduced/offset by other income.
e) Includible in the income of the employee for federal tax purposes unless he or she is over age 65.

Answer 224

Answer: B

If disability insurance premiums are paid by the employer, any benefits received will be included in taxable income. Any disability premiums paid by the insured with after-tax dollars, then any benefits received will be tax free.

Question 225

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 225

Answer: B

Individual states regulate the insurance industry. An insurance agent must be licensed by that state to sell insurance in that state.

Question 226

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 eligible for Medicaid coverage of her care?

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

Answer 226

Answer: C

Betty currently has $21,000 in assets that will cover the first 3 months of care (21,000/7,000 = 3). 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 227

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 insurance. 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 227

Answer: B

This is an example of the so-called “unholy trinity” where the owner, insured and beneficiary are all differ-ent. If insured dies, owner has made a gift to the beneficiary.

Question 228

In group life insurance plans provided by employers, which of the following statements about the conversion privilege is/are true?

1. The policy may be converted from a term policy to an individual permanent life policy.
2. The policy may be converted from a permanent product to a term product.
3. The policy may be converted if the insured provides evidence of insurability.
4. At conversion, the billing is switched to the insured.

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

Answer 228

Answer: A

A group term life insurance can be converted to an individual permanent life insurance policy; however, a group permanent policy cannot be converted to a term insurance policy. The insured does not have to prove insurability.

Question 229

Regarding the characteristics of insurance, which of the following is/are fundamental?

1. Probability (possibility and predictability of a loss).
2. Law of large numbers.
3. Transfer of risk from individual to group.
4. Insurance is a form of speculation.

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

Answer 229

Answer: C

All of the above are true, except insurance is not designed to cover speculative risk. Speculative risk involves loss, no loss or gain. Insurance only covers pure risk, loss or no loss.

Question 230

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 230

Answer: C

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 231

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 231

Answer: E

All of the beneficiaries are eligible for COBRA benefits.

Question 232

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 232

Answer: E

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

Question 233

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 233

Answer: E

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 234

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 death? Assume his wife is also 35 years old, and they have two children ages 10 and 8.

1. Monthly survivor’s benefit for the worker’s child, under age 18 (or age 18 if the child is a full-time high school or elementary school student).
2. Monthly survivor’s benefit for the worker’s spouse, or former spouse, who is caring for a dependent child under age 16 who is eligible for benefits.
3. Monthly survivor’s benefit for the worker’s spouse until age 65.
4. Lump-sum death benefit of $255 for the worker’s spouse or child.

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

Answer 234

Answer: B

At death, Bill will be currently insured, in other words he will have earned at least 6 quarters of coverage in the last 13 quarters. Therefore, Bill’s beneficiaries will be entitled to benefits. So, statements 1, 2 and 4 are true. If there were no children, Bill’s wife will not be eligible for benefits.

Question 235

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 235

Answer: A

(Employer pays benefit)
$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 236

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 benefit if JoAnna 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 236

Answer: C

$40,000 ÷ 12 = $3,333 gross pay
$3,333 x 0.60 = 2,000 disability benefit
If she is paying the premiums, then any benefit is tax free.

Question 237

John Rivera owns a $300,000 level-term life policy which he purchased five years ago. He has paid premiums of $500/year for the past five years. He also owns a $100,000 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 John. The cumu-lative dividends paid to John since inception totals $5,000.

John has decided to cancel his $300,000 level-term policy. Which statement is true?

a) John has a taxable gain of $2,500.
b) John has a taxable gain of $297,500.
c) John would have no taxable gain.
d) John would have a taxable gain only if he died while the insurance was in force.

Answer 237

Answer: C

A term policy has no cash value; therefore, there are no tax consequences upon canceling the policy.

Question 238

John Rivera owns a $300,000 level-term life policy which he purchased five years ago. He has paid premiums of $500/year for the past five years. He also owns a $100,000 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 John. The cumu-lative dividends paid to John since inception totals $5,000.

Assume the same facts as above, but assume that the whole life policy is a participating policy and has paid John $5,000 in dividends since inception. Which statement is true?

a) The cash dividends received by John to date are treated as taxable.
b) If John died today, his beneficiary would receive a death benefit of $95,000 from the whole life policy.
c) The cash dividends received by John to date are treated as nontaxable.
d) The cash dividends received by John should have been reported as a long-term capital gain on his per-sonal income tax return in the year they were paid.

Answer 238

Answer: C

Because the policy is PARTICIPATING, the dividends are a return of capital (or a return of premiums paid) and, therefore, are nontaxable.

Question 239

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 239

Answer: B

Average annual earnings prior to retirement, cost of self-maintenance, remaining work life expectancy and an appropriate capitalization rate.

Question 240

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

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

Answer 240

Answer: C

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

Question 241

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 241

Answer: A

Flood is always excluded and needs a separate policy.

Question 242

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 242

Answer: C

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

Question 243

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 243

Answer: D

The term extends beyond 59 1⁄2 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 244

Which of the following statements about assignments is/are true?

1. An absolute assignment is an irrevocable transfer of all ownership rights which can be accomplished through a sale or gift.
2. A collateral assignment is a temporary transfer of some or all of the ownership rights on condition such rights revert to the assignee.
3. A collateral assignment is a temporary transfer of some or all of the ownership rights whereby such rights revert to the assignor upon satisfaction of agreed-upon conditions.
4. A collateral assignment is a temporary transfer of some or all of the ownership rights on condition such rights revert to the insurance company upon satisfaction of agreed-upon conditions.

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

Answer 244

Answer: B

An absolute assignment, the policy ownership rights are permanently transferred. With a collateral assign-ment, only a portion of the rights of the contract are assigned, until an obligation is fulfilled, such as collateral on a loan. The rights under the contract then revert back to the owner.

Question 245

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 245

Answer: D

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 246

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 246

Answer: C

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 247

A contract for variable life insurance may be characterized as a/an:

1. Unilateral contract.
2. Aleatory contract.
3. Conditional contract.
4. Personal contract of adhesion.

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

Answer 247

Answer: E

All are characteristics of an insurance contract.

Question 248

What is the main responsibility of the underwriting department of a life insurance company?

a) To guard against adverse selection.
b) To set a limit on the amount of insurance issued.
c) To set adequate insurance rates.
d) To avoid exposures that could result in loss.

Answer 248

Answer: A

An underwriter wants to avoid giving insurance to those that need it. Adverse selection is the tendency of persons with higher than average risks to seek insurance.

Question 249

Which of the following is a benefit provided by Medicare Part A or B? Hospice benefits for terminally ill persons.

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

Answer 249

Answer: A

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 250

A successful architect wants to purchase disability income insurance. She is concerned about becoming totally disabled, but also about a reduction in income if she is obliged to reduce her workload because of a less-than-total disability. To satisfy these concerns, which of the following should be included in her disabil-ity income coverage?

a) Residual disability benefits.
b) A change-of-occupation provision.
c) Dismemberment benefits.
d) A relation of earnings-to-insurance provision.

Answer 250

Answer: A

A residual benefit clause will pay the difference between her new salary and the salary prior to becoming disabled.

Question 251

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 251

Answer: B

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 252

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 busi-ness.
e) Jones is bound by Smith’s actions since she has the authority to purchase

Answer 252

Answer: D

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 253

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 needs.

Answer 253

Answer: C

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 254

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 254

Answer: A

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 255

In selecting insurance coverage for a client, the prudent planner should consult which of the following inde-pendent sources for determining company strength?

1. A.M. Best.
2. Standard and Poor’s.
3. Moody’s Investors Services.
4. Dun and Broadcaster.

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

Answer 255

Answer: C

A.M Best, Standard and Poor’s and Moody’s all provide ratings for insurance companies.

Question 256

Medicare Part A (2019)

• Hospital Insurance (Covers Places):

• Places include inpatient hospital care and home health care.
• Semi-private room, meals, operating and recovery room, lab tests, x-rays.
• Hospice Coverage.
• Skilled nursing care facility FOLLOWING a covered hospital stay

DOES NOT COVER?

Answer 256

• Custodial care services are NOT provided, including nursing care facilities that provide assistance with activities of daily living.

Question 257

Nominal rate = stated or quoted rate of interest
Nominal rate incorporates expected inflation

(1 + nominal rate) = (1 + real rate)(1 + inflation)

Real rate = [(1 + nominal rate) / (1 + inflation)] – 1

Nominal = 10%
Inflation = 4%

Real = ?

Answer 257

Answer:

Real = (1.10 ÷ 1.04) - 1 = .0577 × 100 = 5.77%

Question 258

Saving Until Child Reaches College Age

Jan wants to plan for her daughter’s education. Her daughter, Rachel, was born today and will go to college at age 18 for five years. Tuition is currently $15,000 per year, in today’s dollars. Jan anticipates tuition inflation of 7% and believes she can earn an 11% return on her investment. How much must Jan save at the end of each year, if she wants to make her last payment at the beginning of her daughter’s first year of college?

Answer 258

Answer: -4,689.39

0 cfj
0 cfj
17 [] nj
15,000 cfj
5 [] nj
3.7383 (Real rate) I
[] NPV = 36,046.54

N = 18
I = 11%
PV = 36,046.54
PMT = ?
FV = 0

PMT = -4,680.39

Question 259

Sydney wants to plan for her retirement. She is currently 30 years old, plans to retire at age 60 and expects to live for another 35 years. Sydney’s current salary is $100,000, but she thinks her wage replacement ratio will be 65% during retirement and that Social Security will provide $15,000 of income (annually) during retirement. She believes she can earn a 12% return on her investments and that inflation will be 3%. How much must Sydney save at the beginning of each year, to meet her retirement goal?

Answer 259

T