HS 311 Quizzes Flashcards
All of the following statements regarding risk are correct EXCEPT:
A) Objective risk is the difference between the expected and actual losses.
B) Particular risk is a risk that will impact a large group of individuals simultaneously.
C) Subjective risk is the risk that an individual perceives based on that person’s prior experiences.
D) Speculative risk is the chance of loss, no loss, or a profit.
B) Particular risk is a risk that will impact a large group of individuals simultaneously.
Which of the following is a risk reduction technique?
A) Purchasing life insurance
B) Parking your car at the end of the parking lot, away from other cars
C) Choosing not to go skydiving
D) Buying a warranty on your new TV
B) Parking your car at the end of the parking lot, away from other cars
The immediate cause and reason for a loss occurring, such as a hurricane, is referred to as a(n)
A) hazard.
B) insurable risk.
C) peril.
D) risk.
C) peril.
Icy roads and wet floors that increase the likelihood of a loss occurring are known as which type of hazard?
A) Physical hazard
B) Character hazard
C) Moral hazard
D) Morale hazard
A) Physical hazard
Which of the following statements is (are) correct regarding insurance contracts?
I. The principle of insurable interest is closely aligned with the principle of indemnity, in that both limit the insured from experiencing a gain using insurance.
II. A subrogation clause in an insurance policy requires that the insured relinquish a claim against a negligent third party if the insurer has already indemnified the insured.
Both I and II
Insurance coverage relies on the law of large numbers, meaning
A) events that are statistically difficult to predict for a specific individual are more predictable for a large number of individuals.
B) events that are statistically difficult to predict for a large number of individuals are more predictable for an individual.
C) insurers can statistically predict whether an individual will suffer a loss more accurately than they can statistically predict whether a large number of individuals will suffer losses.
D) insurers can adequately predict the losses expected for an individual but are unable to predict the losses expected for large numbers of individuals.
A) events that are statistically difficult to predict for a specific individual are more predictable for a large number of individuals.
Antonio’s television was stolen. The television cost $1,500 when it was first bought, but it now has a fair market value of $750. If Antonio has a homeowners policy that covers losses for personal property at actual cash value (ACV), what amount is Antonio entitled to recover?
A) $600
B) $750
C) $1,500
D) The current retail price for a new replacement television
B) $750
All of the following statements regarding insurance policies are correct EXCEPT:
A) Adverse selection is the tendency of those who most need insurance to purchase insurance policies while those with the least perceived risk are less likely to pay the necessary premiums for insurance.
B) An endorsement is a modification or change to a life or health insurance policy.
C) Co-payments are loss-sharing arrangements whereby the insured pays a flat dollar amount or percentage of the loss in excess of the deductible.
D) Deductibles serve as motivation for an insured to take precautions to avoid losses or to prevent the filing of false claims.
B) An endorsement is a modification or change to a life or health insurance policy.
The correct answer is (B).
An endorsement is a modification or change to an existing property insurance policy, whereas a change to a health or life insurance policy is a rider.
Premium rates set by insurance companies are regulated at which level of government?
A) Federal
B) State
C) Local
D) None of the above
The correct answer is (B).
Insurance premiums are regulated at the state level.
Ashley owns a home with a $400,000 replacement value. This February, a blizzard causes $75,000 in damages to the home. Ashley has an insurance policy with 80 percent coinsurance and a $1,000 deductible. How much will the insurer pay if Ashley carries $300,000 of coverage?
A) $60,000.00
B) $69,312.50
C) $70,312.50
D) $75,000.00
The correct answer is (B).
[$300,000 ÷ (0.80 × $400,000)) )] × $75,000 = $70,312.50 − $1,000 deductible = $69,312.50
Which of the following must be paid if the 66-year-old owner of a Health Savings Account (HSA) makes a distribution for a non-medical expense?
I. Income taxes
II. A 20% penalty
A) I only
If a distribution from an HSA is made for non-medical expenses after the owner reaches age 65, the 20% penalty is waived but income taxes must be paid.
Belinda is a participant in her employer’s group comprehensive major medical insurance plan. The plan has a $500 deductible, a $2,500 out-of-pocket maximum, and 80 percent coinsurance. If Belinda is injured in an accident resulting in $2,000 in medical costs, how much will Belinda need to pay for the medical bills?
A) $0
B) $400
C) $800
D) $2,000
The correct answer is (C).
Belinda will need to pay the first $500 to cover the deductible, then 20% of the remaining $1,500 (that is, $300) for a total of $800.
Which of the following correctly describes the tax treatment of reimbursements received from healthcare insurance?
A) They are generally not taxed.
B) They are generally taxed at ordinary income rates.
C) They are generally taxed at ordinary income rates, net of basis (premiums paid into the policy).
D) They are generally taxed at long term capital gains rates.
The correct answer is (A).
The benefits of healthcare insurance policies are generally received tax-free.
Indemnity health insurance plans are one of the ________ flexible types of insurance policies in terms of having the freedom to pick one’s own providers, but participants pay some of the ________ premiums.
A) Most; highest
B) Most; lowest
C) Least; highest
D) Least; lowest
The correct answer is (A).
Indemnity health insurance plans give participants the freedom to choose their own health care providers, but they pay some of the highest premiums.
Which of the following policies provides the greatest degree of protection to the insured?
A) Conditionally renewable
B) Noncancelable
C) Guaranteed renewable
D) Optionally renewable
The correct answer is (B).
A noncancelable policy offers the greatest amount of protection for the insured since the insured can force the insurance company to provide continued coverage, at the same premium, simply by paying the premium on the policy.
Amanda, an employee at Computer Solutions, recently divorced her husband, Carlos. Computer Solutions has provided group health insurance coverage to Amanda and her family since she began working for the company. Carlos is unemployed but is entitled to COBRA continuation coverage for
A) 12 months.
B) 18 months.
C) 29 months.
D) 36 months.
The correct answer is (D).
Carlos may obtain group health insurance coverage under Amanda’s plan for 36 months after the divorce.
All of the following are true regarding health savings accounts (HSAs) EXCEPT:
A) HSA funds can be invested.
B) Contributions made to the HSA by the plan participant are tax-deductible as an adjustment to gross income (above-the-line).
C) If an employer makes contributions to an HSA on behalf of an employee, the employer contributions are included in the taxable income of the employee.
D) To be eligible to make HSA contributions, an individual must be covered by a high-deductible health insurance plan.
The correct answer is (C).
If an employer makes contributions to an HSA on behalf of an employee, and the contribution limits are not exceeded, the employer contribution is not included in the taxable income of the employee.
A health savings account (HSA) and a flexible spending account (FSA) have several similarities including
A) that all funds carry over from year to year.
B) their use of pretax contributions.
C) that funds are invested.
D) all of the above.
The correct answer is (B).
Both FSAs and HSAs use pre-tax contributions. Funds only carry over from year to year in an HSA, not in an FSA. Only funds in an HSA are invested; FSA funds are not invested.
Which of the following is true of medical expense insurance?
A) It meets the requirements for minimal essential coverage under the Affordable Care Act (ACA).
B) The policy limits are likely to be very low, compared with major medical policies.
C) Planners usually recommend medical expense insurance because it offers the same coverage as group major medical insurance for a similar price.
D) All of the above are true.
The correct answer is (B).
The policy limits for medical expense insurance are likely to be much lower compared to major medical policies. Medical expense insurance, on its own, will not qualify for minimal essential coverage under the Affordable Care Act (ACA).
Which of the following is true of group health insurance?
A) Employer group health insurance plans that require all employees be eligible for the plan pose the greatest adverse selection risk.
B) Group policies are underwritten by assessing specific health risks of the individuals in the group.
C) One of the downfalls of group health insurance is the high administrative costs for each of the participants.
D) None of the above are true.
The correct answer is (D).
All of the above are incorrect. Group insurance plans that require all employees to enroll in the program pose little adverse selection risk because healthy individuals do not have the ability to opt- out. To do so would leave only those with greater expected health care needs covered in the plan. Group policies are underwritten based on the characteristics of the entire group, not on individual health assessments. One of the benefits of a group insurance policy is that the administrative costs are spread out among all the individuals, leaving less administrative costs per person, compared to individual policies.
Isaiah, a financial planner, is working with his clients to determine their life insurance needs. Isaiah is determining each person’s life insurance need by estimating the cash needs of the family during and after the insured’s death. Some of the financial needs that Isaiah is considering are the payment of final expenses, medical care, and eliminating debts. Which of the following models is Isaiah using to determine the life insurance needs?
A) The human life-value approach
B) The capitalized earnings approach
C) The needs approach
D) The discretionary cash flow approach
The correct answer is (C).
Isaiah is using the needs approach to determine the life insurance needs of his clients.
All of the following statements concerning term life insurance are correct EXCEPT:
A) An individual’s mortality risk affects the price of the term insurance premiums.
B) Term insurance policies tend to be used by older individuals more frequently than by younger individuals.
C) Unlike other forms of life insurance, term life insurance policies do not have cash accumulation features.
D) An annual renewable term policy (ART) permits the policyholder to purchase term insurance in subsequent years without evidence of insurability.
B) Term insurance policies tend to be used by older individuals more frequently than by younger individuals.
The premiums for term life insurance increase as the mortality risk increases. Therefore, premiums for term life insurance are often unaffordable for older individuals, making this type of life insurance much more common among younger individuals.
A key disadvantage of annual renewable term, compared to level term, is that:
A) It only covers a fixed term, after which the insured receives no coverage.
B) It becomes increasingly expensive to maintain coverage as the insured ages.
C) It is generally associated with lower death benefits.
D) It is difficult to purchase in most states.
The correct answer is (B).
Annual renewable term policies become increasingly expensive as the insured ages. In contrast, level term policies have a fixed, level premium.
Violetta sells commercial real estate and works on a commission. She wants a substantial amount of permanent life insurance protection, but because of her irregular income, she is not sure she will be able to pay a fixed premium every year. Which of the following should Violetta consider?
A) A guaranteed renewable term insurance policy
B) A modified whole life insurance policy
C) A single-premium immediate annuity
D) A universal life insurance policy
D) A universal life insurance policy
Option (A) is incorrect because a guaranteed renewable term policy has a fixed premium. Option (B) is incorrect because, although a lower premium is charged for the first few years, a modified whole life insurance policy still has a fixed premium. Option (C) is incorrect because Violetta is currently interested in permanent life insurance protection, not an annuity.
Which of the following statements concerning the uncertainty of investment gains or losses in a variable life insurance policy is correct?
A) It is jointly borne by both policyowner and insurer.
B) It is nonexistent.
C) It is borne by the policyowner.
D) It is borne by the insurer.
The correct answer is (C).
Options (A), (B), and (D) are incorrect because the policyowner bears the risk of investment gains or losses in a variable life insurance policy.
Which of the following statements concerning universal life insurance is (are) correct?
Policyowners must pay a target premium each year.
A withdrawal of cash value is treated as a loan.
Neither I nor II
Statement I is incorrect because the target premium is only a suggested premium Statement II is incorrect because withdrawals from a universal life policy resemble withdrawals from a savings account and incur no indebtedness.
Which of the following statements concerning insurable interest is (are) correct?
I. Life insurance requires that insurable interest exists at the time of a claim.
II. Without an insurable interest, insurance would be a wager or gambling contract.
II only
Statement I is incorrect because life insurance requires an insurable interest only when an insurance contract is purchased.
In conducting a needs analysis to determine the amount of life insurance an individual with dependents requires, all the following types of needs must be considered EXCEPT:
A) income to meet the individual’s retirement needs.
B) ongoing income needs of the surviving dependent family members.
C) the need to fund the children’s education.
D) lump-sum cash needs at the individual’s death.
The correct answer is (A).
A needs analysis presumes that the individual dies. Retirement needs of the individual’s survivors, however, are considered.
Which of the following statements describes factors that should be considered when deciding whether it is better to buy term life insurance or to buy permanent insurance and invest the premium difference?
A) The cash value of a permanent life insurance policy can readily be liquidated.
B) For clients in higher marginal tax brackets, the cost of permanent policy premiums is somewhat offset by their tax deductibility.
C) Only the death benefit from a term policy is received income-tax-free.
D) Increases in life insurance cash values are subject to federal income taxes as they accrue.
The correct answer is (A).
(B) is incorrect because life insurance premiums are not tax deductible. (C) is incorrect because death benefits from both term and permanent policies are received income-tax-free. (D) is incorrect because increases in cash values are not subject to federal income taxes as they accrue, in contrast to the earnings in a separate investment program, which are often taxed as ordinary income.
Which of the following statements concerning life insurance contracts are correct?
A) The assignment clause combats abuse by the insurance company, stating that once a policy has been in effect for a period of time, the insurer may not cancel the policy due to a material misrepresentation or omission.
B) The suicide clause is designed to hedge against the risk that individuals with suicidal thoughts will purchase life insurance and, shortly thereafter, commit suicide.
C) Most life insurance policies provide a grace period, typically spanning one year after the premium due date for the policy owner to pay an overdue premium.
D) All of the above are correct.
The correct answer is (B).
Option (A) is incorrect because it describes the incontestability clause. Assignment is the process of transferring all or part of the policy’s ownership rights. Option (C) is incorrect because the grace period typically spans one month.
Which of the following test(s) can be used to determine whether or not a life insurance contract meets the definition of a modified endowment contract (MEC)?
I. The corridor test
II. The seven-pay test
Both I and II
Both the corridor test and the seven-pay test are used to determine whether or not a life insurance contract is a MEC
An owner-insured of a viatical settlement is not subject to income tax on the capital gains of the policy if
A) the death benefit is less than $1 million.
B) the individual is less than 65 years of age.
C) the individual is terminally ill.
D) the owner-insured’s basis in the policy is greater than $1 million dollars.
The correct answer is (C).
If the owner-insured of a life insurance policy is terminally ill at the time the policy is sold, the gain in the policy is not subject to income tax. Terminal illness is defined as having a life expectancy of less than 24 months.
How are withdrawals from the cash value of a permanent life insurance policy typically taxed?
A) Using the “first in, first out” (FIFO) method in which withdrawals up to the policyowner’s basis are withdrawn tax-free and any additional withdrawals are taxed at ordinary income rates.
B) Using the “last in, first out” (LIFO) method in which gains above the policyowner’s basis are withdrawn first and taxed at ordinary income rates.
C) Such withdrawals are generally not subject to taxation unless the policy is a Modified Endowment Contract (MEC).
D) Withdrawals of cash value are not permitted; to access the cash value, policyowners may take tax-free policy loans or surrender the policy.
The correct answer is (A).
The policyowner’s basis in the policy may be withdrawn without triggering tax consequences.
Which of the following statements concerning a properly designed buy-sell agreement is (are) correct?
I. It ensures that a business owner’s estate can sell the business for a reasonable price.
II. It should specify how the purchase price will be established.
Both I and II are correct.
With regard to employer-paid group term life insurance, the employee is free from income tax liability for the first __________ of term life insurance protection.
A) $25,000
B) $50,000
C) $75,000
D) $100,000
The correct answer is (B).
The first $50,000 of death benefit protection received by the employee is tax-free
Members of a four-person partnership want to enter into a buy-sell arrangement. How many life insurance policies would need to be purchased to properly fund coverage of the partnership using a cross-purchase agreement?
One policy
Four policies
Eight policies
Twelve policies
The correct answer is (D). 12
Each owner would need to purchase a life insurance policy on each of the other owners. Therefore a total of 12 policies would need to be purchased.
4 × (4 − 1) = 4 × 3 = 12
Members of a three-person partnership want to enter into a buy-sell arrangement. How many life insurance policies would need to be purchased to properly fund coverage of the partnership using an entity-purchase agreement?
One policy
Three policies
Six policies
Nine policies
The correct answer is (B). 3
With an entity-purchase buy-sell arrangement, the business would purchase life insurance policies on each owner. Therefore, a total of 3 policies, one for each owner, would need to be purchased.
An insured’s life insurance policy has been classified as a modified endowment contract (MEC). When the insured passes away, the policy’s death benefit is subject to which of the following tax treatments?
The beneficiary receives the death benefit tax-free.
The death benefit is subject to ordinary income taxation.
The death benefit is subject to capital gains taxation.
The sum of all premiums paid are received as a tax-free return of basis while the remainder of the death benefit is subject to capital gains taxation.
The correct answer is (A).
Whether a policy is classified as a MEC does not affect the tax treatment of that policy’s death benefit: the death benefit is still received tax-free by the beneficiary.
Which of the following is a taxable event?
A beneficiary receives the death benefit from a modified endowment contract (MEC).
An insured takes a policy loan from the cash value of a universal life insurance policy.
An insured receives an interest payment after electing the interest-only surrender option.
A beneficiary receives a $100,000 death benefit from a group term life insurance policy.
The correct answer is (C).
When the interest-only surrender option is selected, the death benefit is left with the insurance company. Gains on that balance are received as taxable interest income. Answer (A) is incorrect because death benefits from a MEC are received tax-free by the beneficiary. Answer (B) is incorrect because policy loans, like all loans, are not considered taxable income. Answer (D) is incorrect because death benefits from group term life insurance policies are received tax-free by the beneficiary.
A Section 1035 exchange would allow which of the following tax-free exchanges?
A modified endowment contract (MEC) to typical life insurance policy.
A deferred annuity to a life insurance policy.
A modified endowment contract (MEC) to an annuity.
All of the above.
The correct answer is (C).
A life insurance policy, whether a typical policy or a MEC, may be exchanged tax-free for an annuity. Answer (A) is incorrect because a MEC cannot be converted to a typical policy; “once a MEC, always a MEC”. Answer (B) is incorrect because annuities may not be exchanged for life insurance policies tax-free under Section 1035.
Which of the following is true as it relates to disability insurance?
A) From a risk perspective, short-term disability coverage is far more important than long-term coverage.
B) As a general rule, an individual’s mortality risk is usually much higher than the individual’s morbidity risk.
C) Most working professionals should have a minimum 60 to 70 percent of their gross income protected with a disability insurance policy.
D) All of the above are correct
The correct answer is (C).
At minimum, working professionals should usually have 60 percent to 70 percent of their gross income covered with a disability policy. From a risk perspective, long-term coverage is more important than short-term coverage because short-term coverage usually only lasts for 1 to 2 years. Morbidity risk is significantly higher than mortality risk.
What is the purpose of disability income insurance?
A) To provide a one-time payment for the insured while he or she is injured or ill
B) To provide regular income for the insured while that person is working and when he or she is unable to work due to injury on the job
C) To provide a regular income while the insured is unable to work due to illness or injury
D) To provide a one-time payment for the insured while that person is working and when he or she is unable to work due to illness or injury
The correct answer is (C).
Disability insurance is income replacement insurance for covering sickness and accidents.
For a short-term disability policy, what is the typical elimination period?
A) 5 to 30 days
B) 30 to 45 days
C) 45 to 660 days
D) 1 to 2 years
The correct answer is (A).
Short-term disability policies typically have a shorter elimination period (5 to 30 days) than the elimination period of long-term policies (30– to 180 days).
Chen has a disability income policy that pays a monthly benefit of $3,000. Chen has been disabled for 60 days, but he only received $1,500 from his disability insurance. Which of the following is the probable reason that he only received $1,500?
A) The policy has a deductible of $1,500.
B) The elimination period is 45 days.
C) The policy has a 50 percent coinsurance clause.
D) Chen is considered to be only 50 percent disabled
The correct answer is (B).
If the elimination period is 45 days, Chen will only have received half (15/30) of the monthly benefit for month two
Short-term disability insurance policies provides coverage for up to
A) 1 year.
B) 2 years.
C) 5 years.
D) 10 years.
The correct answer is (B).
Short-term disability insurance policies usually provide coverage for up to 2 years
Seamus has a disability policy and had an accident sliding into third while participating in his local softball league. As a result of Seamus’s accident, he is no longer able to perform all of the requirements of his prior job. His new job pays 30 percent less than his salary before the accident. Which of the following provisions in his disability policy would provide continuing benefits to Seamus to offset his loss in income?
A) A residual benefit provision
B) An elimination period provision
C) A partial disability provision
D) A COLA rider
The correct answer is (A).
The residual benefit provision will provide continuing benefits for an insured who returns to work but suffers a loss of income due to the disability.
Compared to the likelihood of dying before age 65, the likelihood of an American becoming disabled before age 65 is:
A) About 1/3rd as likely.
B) About as likely.
C) About 3 times as likely.
D) About 30 times as likely.
The correct answer is (C).
The likelihood of becoming disabled before age 65 is about 3 times the likelihood of dying.
All of the following are correct regarding group disability coverage EXCEPT:
A) Premiums for group disability coverage are typically lower than premiums for individual policies.
B) Employer-sponsored group disability coverage is usually coordinated so that there is continuous income coverage between short-term and long-term policies.
C) Employers may pay premiums on behalf of the employees or allow the employees to pay the premium directly through payroll deduction.
D) The definition of disability for group disability policies is almost always own-occupation.
The correct answer is (D).
Group insurance policies commonly use the any-occupation definition of disability, either throughout the entire benefit period or 2 years into the benefit period.
Dana works for Argos, Inc., which provides disability insurance for its employees but only pays 60 percent of the premium. Dana pays the remaining 40 percent of the premium with after-tax dollars. If Dana is disabled, what percentage of her benefits is taxable?
A) 0%
B) 40%
C) 60%
D) 100%
The correct answer is (C).
Sixty percent of Dana’s benefits are taxable. Only the portion paid by the employer (with pre tax dollars) is taxable.
Tom has a disability policy and was recently injured, causing him to permanently lose hearing in both of his ears. Which of the following provisions might come into play causing Tom to receive disability benefits quicker than with a normal disability claim?
A) Own occupation policy
B) Presumptive total disability
C) Residual benefit provision
D) Waiver of premium rider
The correct answer is (B).
With presumptive total disability coverage, if a condition such as losing hearing in both ears arises, the policy automatically presumes total disability and will begin payments according to the contract.
All of the following are considered activities of daily living (ADLs) EXCEPT:
A) dressing.
B) bathing.
C) cognitive ability.
D) transferring from a bed to a chair.
The correct answer is (C).
The six ADLs are eating, bathing, dressing, transferring from a bed to a chair, using the toilet, and maintaining continence. Cognitive ability is not an ADL.
Which of the following is (are) required for an insured to qualify for long-term care benefits?
I. The insured is unable to perform two of the six ADLs for at least 90 days.
II. The insured has substantial cognitive impairment requiring substantial supervision for his or her protection.
Either I or II
The insured must meet one of the two criteria (statement I or II) to be eligible for long-term care benefits.
All of the following are requirements of a qualified long-term care insurance policy EXCEPT:
A) The benefit of the policy must offer inflation protection.
B) The contract must offer to cover pre-existing conditions.
C) The contract must be guaranteed renewable.
D) The contract must offer to pay a nonforfeiture benefit.
The correct answer is (B).
For a long-term care policy to be considered a qualified plan, the plan must be guaranteed renewable and offer inflation protection and a nonforfeiture benefit. The contract does not need to offer to cover pre-existing conditions.
A chronically ill person is entitled to receive benefits under a long-term care policy and is defined as someone who is unable to perform _____ activities of daily living for a period of at _____ least days.
A) Four; 90
B) Two; 60
C) Two; 90
D) Three; 90
The correct answer is (C).
Under a qualified long-term care policy, a chronically ill person must be unable to perform without the substantial assistance of another person two ADLs for 90 days.
Janet is 83 years old and has been blind for 4 years. She is no longer able to drive or cook for herself. Assuming she has a qualified long-term care plan, is she considered chronically ill?
A) Yes, she has been unable to perform two activities of daily living for over 90 days.
B) Yes, but she must prove to the insurance company that she is unable to perform these tasks.
C) No, sight is not considered an activity of daily living, although cooking is.
D) No, cooking, and driving, and being able to see are not considered ADLs.
The correct answer is (D).
Cooking, driving, and being able to see are not considered ADLs. The Health Insurance Portability and Accountability Act defines chronically ill as being unable to perform two of the six activities of daily living (ADLs). The six ADLs are eating, bathing, dressing, transferring from a bed to a chair, using the toilet, and maintaining continence.
An individual is trying to qualify for Medicaid by gifting away their assets. Assets they gift away in the past 60 months might still be considered countable assets because they were gifted away during the:
A) Lookback period
B) Elimination period
C) Benefit period
D) Qualifying period
The correct answer is (A).
The purpose of the look-back period is to determine whether an individual only qualifies for Medicaid because they recently gave away assets. The lookback period is 60 months long
Which of the following is correct regarding how employer payments for long-term care are treated for federal income tax purposes? Employer payments for long-term care group premiums are
A) deductible to the employer and not taxable income to the employee.
B) deductible to the employer but are taxable income to the employee.
C) not deductible to the employer and not taxable income to the employee.
D) not deductible to the employer and are taxable income to the employee.
The correct answer is (A).
Employer payments for long-term care group premiums are tax deductible to the employer and not taxable income to the employee.
Leo, Declan, Anthea, and Willa all live at the South Hampton Home for Distinguished Musicians. Which of these meet(s) the criteria for being chronically ill under qualified long-term care provisions?
I. Leo, who cannot drive, hear, or dress himself
II. Declan, who cannot speak, feed himself, or dress himself
III. Anthea, who cannot hear, walk, or feed herself
IV. Willa, who cannot drive, walk, or dress herself
A) Anthea only
B) Declan only
C) Declan and Willa
D) Leo and Anthea
The correct answer is (B).
The inability to feed and dress yourself without assistance are two of the listed tasks that constitute a chronically ill person under a qualified long-term care policy. Declan is the only one who qualifies as chronically ill.
Long-term care can be extremely expensive. Which of the following statements is (are) correct regarding the cost of long-term care?
I. Medicare is a practical way to pay for long-term care.
II. Most people who need long-term care will receive at least some financial assistance from Medicaid.
Neither I nor II
Statement I is incorrect because Medicare is not a good option to pay for long-term care because it is limited and restrictive and will only pay for up to 100 days. Statement II is incorrect because only people who meet fairly strict income and asset tests qualify for Medicaid. While these tests vary somewhat by state, generally people must have nearly no income and very little assets to qualify for financial assistance from Medicaid.
Where do most people receive long-term care services?
A) In their home
B) In an assisted-living facility
C) In skilled-nursing care
D) In a hospital
The correct answer is (A).
Most people receive long-term care in their home
Which of the following accurately describes a variable annuity?
A) A variable annuity offers a fixed rate of return.
B) A variable annuity mitigates the risk of superannuation and inflation.
C) A variable annuity is always a deferred annuity.
D) A variable annuity is always for a single life expectancy.
The correct answer is (B).
Option (B) is correct as variable annuities can mitigate the risk of superannuation and mitigate the loss of purchasing power from inflation. Option (A) is incorrect because variable annuities offer a variable rate of return. Option (C) is incorrect as variable annuities can either be deferred or immediate. Option (D) is incorrect as a variable annuity can be for a single life, joint life, or for a guaranteed term
Alice, a single 38-year-old, wants to invest in the stock market on a tax-deferred basis from now until she retires. She believes that the stock market will fluctuate up and down over time but that, over the long term, it will be significantly higher than it is today. She does not want to pay for product features that she does not value. What type of annuity is most suitable for Alice?
A) A deferred fixed annuity
B) A single-premium variable annuity
C) A flexible variable annuity
D) An equity-indexed annuity
The correct answer is (C).
The equity-indexed annuity allows participation in the stock market while guaranteeing her principal against losses; however, it comes at a cost. A fixed annuity does not expose the investment to the equity market. The single-premium annuity does not accommodate funding over a career.
Annuities have a variety of features and benefits. Which one of the following types of annuities allows for investment returns that are exposed to the stock market but has a minimum rate of return?
A) An equity-indexed annuity
B) A variable annuity
C) A fixed annuity
D) A single-premium variable annuity
The correct answer is (A).
An equity-indexed annuity has the protection of a guaranteed minimum rate of return while still having the potential of earning higher equity returns. A fixed annuity will have a guaranteed rate of return but will not have any participation in the stock market.
When determining the percentage of an annuity payment that is subject to tax, the investment in the annuity is divided by the total of the expected payments to be received. Which of the following is the name of the portion that is subject to tax?
A) The inclusion ratio
B) The exclusion ratio
C) The current ratio
D) The working-capital ratio
The correct answer is (A).
The exclusion ratio equals the owner’s investment in the annuity contract divided by the expected return on the annuity. The inclusion ratio is calculated by subtracting the exclusion ratio from 100%. The resulting percentage is multiplied by the distribution, or payment, received to calculate the portion of the payment that is subject to income tax.
Equity-indexed annuities have several different indexing methods. Which of the following is one of them?
A) The oscillation neutrality method
B) The uptick method
C) The high watermark method
D) The trailing 3-year average method
The correct answer is (C).
Option (C) is the correct answer. Other methods include the point-to-point method and the annual reset (ratcheting) method. Choices (A), (B), and (D) are not real indexing methods
Annuities are financial products that solve a variety of problems. All of the following problems are intended to be mitigated by annuities EXCEPT:
A) dying prematurely.
B) running out of money.
C) subjecting earnings to current income tax.
D) maintaining the purchasing power of assets.
The correct answer is (A).
Annuities can help lessen superannuation (the risk of outliving funds) and purchasing power (if the annuity is variable). However, an annuity does not reduce the likelihood of dying (mortality).
Lila is a 55-year-old widow with no source of income. Her husband died recently, and she has received insurance proceeds from a policy on his life. She wants to invest in an annuity that will produce income starting today and continuing until she plans to collect Social Security at age 65. She wants to receive the most she can in monthly income. Which of the following is the most suitable annuity for Lila based on her objectives?
A) A longevity annuity
B) A 10-year term-certain fixed annuity
C) An immediate single-premium life annuity
D) A deferred fixed annuity
The correct answer is (B).
Lila wants the greatest amount of income for the next 10 years. She has no other source of income and must rely on the annuity until she begins collecting Social Security benefits. A term-certain annuity is the best choice for her objectives.
Paul is 70 years old. At age 65, for $50,000, he purchased a single-premium annuity that pays him $300 per month. If his life expectancy was 25 years when he purchased the annuity, about how much of each payment is subject to tax?
A) $133
B) $167
C) $192
D) $300
The correct answer is (A).
The exclusion ratio can be found by dividing the owner’s investment in the annuity contract by the expected return. The taxable portion of the payment can be found by subtracting the exclusion ratio from 1 and multiplying the resulting percentage by the payment amount.
$50,000 ÷ (25 years × 12 months × $300) = 55.56%
1 − exclusion ratio = 44.44%
$300 × 44.44% = $133.32
The taxable portion of the payment is $133.32, or about $133.
Hugo owns an annuity. He decides that he no longer has a need for it and wants to exchange it for a life insurance policy. To get the policy he wants, he will need to exchange the annuity and add additional money. Which of the following is correct?
A) He can make the exchange, but it will be taxable to the extent of the value of the annuity.
B) He can make the exchange, but it will be taxable to the extent of the annuity less the additional money he puts into the life insurance policy.
C) He can make the exchange under Section 1035, and it will not be taxable.
D) He can make the exchange, which will not be taxable, but his basis will not reflect any of the investment into the life insurance policy.
The correct answer is (A).
An exchange from an annuity to a life insurance policy is not a tax-free exchange under Section 1035
Sue purchased a single-premium deferred annuity 10 years ago at age 35 for $50,000. Recently, she decided to surrender the annuity for a lump-sum distribution of its $95,000 value. Which of the following statements is correct?
A) She will owe income taxes on $45,000.
B) She will owe income taxes on $95,000.
C) She will owe income taxes and a 10% penalty on $45,000.
D) She will owe income taxes and a 10% penalty on $95,000
The correct answer is (C).
She will owe income tax on $45,000 of the earnings. In addition, the distribution is prior to age 59½ and is subject to the 10 percent early withdrawal penalty on the taxable portion
Which of the following individuals is most likely to be covered by malpractice insurance?
A) A lawyer
B) A financial planner
C) A physician
D) An architect
The correct answer is (C).
Medical doctors, including physicians, are typically covered by malpractice insurance. The other professionals are generally covered by errors and omissions insurance.
Homeowners policies provide coverage for losses from which of the following?
A) Fire or other listed perils
B) Loss of use
C) Personal property
D) All of the above
The correct answer is (D).
Homeowners policies cover all of the above in Section 1 of the policy.
All of the following are generally covered by comprehensive coverage on a personal automobile policy EXCEPT:
A) Fire
B) Theft
C) Vandalism
D) Collisions
The correct answer is (D).
Collisions with other vehicles are covered under liability coverage. Coverage with other objects is covered by collision coverage.
Which of the following losses is not covered by a standard homeowners policy?
A) Personal liability
B) Theft
C) Medical payments
D) Personal vehicle
The correct answer is (D).
Homeowners policies do not generally cover any vehicles
Which of the following clauses states that full payment of damages to structures under the homeowners policy will be made only if the insurance equals 80 or more percent of the replacement cost of the structure and is carried on the property at the time of the loss?
A) A coinsurance clause
B) An inflation rider clause
C) A reinsurance clause
D) A replacement clause
The correct answer is (A).
The coinsurance clause requires 80 percent coverage to avoid the insured becoming a coinsurer.
The standard form of the homeowners policy excludes which of the following?
A) Fire and other perils
B) Animals, birds, and fish
C) Personal liability
D) Theft
The correct answer is (B).
Animals, birds, and fish generally are excluded, although liability coverage may be available for pets.
Colin has a replacement-cost homeowners policy with an 80% coinsurance provision. The value of the home is $450,000, and he carries $350,000 worth of insurance. How much would the insurance company owe him in the event of a $100,000 loss due to fire (without regard to a deductible)?
A) $80,000
B) $85,000
C) $97,222
D) $100,000
The correct answer is (C).
$450,000 × 0.80 = $360,000
$350,000 ÷ $360,000 = 0.97222
0.97222 × $100,000 = $97,222
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 punitive damages.
D) Payment for when the insured is injured while walking across the street.
The correct answer is (C).
The PAP uninsured motorist does not pay for punitive damages.
Homeowners policies generally insure personal property at actual value rather than replacement value. Which of the following should an insured homeowner consider obtaining if he or she has a significant amount of older personal property such as televisions and other electronics?
A) A personal liability insurance rider
B) A professional liability insurance rider
C) An endorsement on that property
D) A separate agreed value policy
The correct answer is (C).
An endorsement on personal property allows that property to be insured for replacement rather than actual value, usually without a deductible for a premium increase.
Because it is a common exclusion from most homeowners insurance policies, homeowners must generally find supplemental coverage for which of the following perils:
A) Fire
B) Theft
C) Flood
D) Medical payments to others
The correct answer is (C).
Damage from flooding is generally excluded from HO policies.
Which of the following is an example of a secured loan?
A) A student loan
B) A home mortgage
C) A debt-consolidation loan
D) A personal loan
The correct answer is (B).
Secured loans are those secured by collateral that may be repossessed if the loan is not repaid as agreed. Mortgages are secured because the house is considered collateral toward the debt
The FICO score calculation includes all of the following EXCEPT:
A) credit card payment history.
B) credit utilization.
C) credit mix.
D) salary increases.
The correct answer is (D).
The FICO score is calculated using a formula including payment history, debt burden/credit utilization, credit history, new credit, and types of credit. Salary increases do not impact a person’s FICO score.
Which of the following is one of the major credit reporting bureaus?
A) Fair Isaac Corporation
B) Experian
C) Vantage
D) Vanguard
The correct answer is (B).
Experian, TransUnion, and Equifax are the three major credit reporting bureaus
Lisa has a credit score of 650. She wants to improve her credit score before buying a house. What can she do to improve her credit score?
A) Make consistent, timely payments.
B) Open new credit card accounts.
C) Reduce her credit mix.
D) Close credit card accounts.
The correct answer is (A).
Payment history is a key factor in a good credit score. Therefore Lisa should start making more consistent, timely payments to improve her credit score.
Which of the following individuals most likely has the highest credit score?
A) Michaela has two credit cards, credit utilization of 15 percent, an installment loan, a mortgage, and a perfect payment history for 3 years.
B) Andrew has a 30-year mortgage in the 10th year with a perfect payment history, and the mortgage is his only debt.
C) June has four credit cards, credit utilization of 50 percent, and a perfect payment history for 10 years.
D) Will has one credit card with a $50,000 limit.
The correct answer is (A).
Payment history, credit utilization, and mix of credit are critical to credit scores. Michaela has a lower utilization and a broader mix of credit.
All of the following are advantages of a credit card EXCEPT:
A) Credit cards are similar to a line of credit.
B) Credit cards permit the purchase of goods and services even when funds are low.
C) Credit cards generally have higher interest rates than other sources of credit.
D) Credit card fraud is relatively low and easy to contest.
The correct answer is (C).
Interest rates are generally higher for credit cards than for other sources of credit. This is not an advantage.
Which of the following is best known for creating credit scores?
A) The Fair Isaac Corporation
B) Fidelity
C) Equifax
D) TransUnion
The correct answer is (A).
The Fair Isaac Corporation (FICO) is best known for creating credit scores.
Which of the following people is most likely to be offered debt with high interest rates and high monthly minimum debt payments?
A) A person with a credit score of 10
B) A person with a credit score of 90
C) A person with a credit score of 500
D) A person with a credit score of 750
The correct answer is (C).
Credit scores range from 300 to 800. A score of 500 is relatively low and would be associated with high interest rate debt.
Cam just learned that he is a victim of identity theft. What should he do to minimize the damage?
A) Place a fraud alert with the credit-reporting agencies.
B) Request a credit report from each of the principal credit-reporting agencies.
C) Contact all of his creditors and financial institutions.
D) Complete all of the above
The correct answer is (D).
All of the listed actions should help minimize the damage of identity theft.
Generally, how long does a fraud alert last?
A) 30 days
B) 60 days
C) 90 days
D) 120 days
The correct answer is (C).
A fraud alert placed with the credit-reporting agencies remains on the credit report for 90 days but can be renewed.
Which of the following concerning the Social Security earnings test is correct?
A) It applies only to workers between age 62 and the normal age of retirement.
B) It applies to all retirees receiving Social Security benefits.
C) It taxes earned income at 25 percent.
D) All of the above are correct.
The correct answer is (A).
The Social Security earnings test applies to all Social Security beneficiaries who are younger than the normal age of retirement
Social Security retirement benefits are
A) subject to income taxes for those with certain income levels.
B) nontaxable for all beneficiaries.
C) subject to federal income taxes but not state income tax.
D) subject to capital-gains taxes.
The correct answer is (A).
Social Security retirement benefits are taxable depending on other income
To determine a specific Social Security retirement benefit, the Social Security Administration considers the amount of money the worker earned over what time frame?
A) The highest-earning 35 years
B) The most recent 25 years
C) The highest-earning 25 years
D) The most recent 35 years
The correct answer is (A).
The Social Security Administration considers the average from the highest 35 years of indexed earnings subject to Social Security.
If a worker has employment earnings after starting full Social Security retirement benefits, which of the following is correct?
A) The Social Security benefit will be reduced by a percent of the earnings.
B) There is no reduction in Social Security benefits.
C) Benefits are reduced if the earnings are in excess of the annual earnings limit.
D) The worker will be ineligible to receive future Social Security benefits.
The correct answer is (B).
Full Social Security retirement benefits means full-age or normal-age retirement. There is no earnings test or limit on the amount of earnings beyond full retirement age.
Leroy and Doris are married. Upon Leroy’s death, and assuming they have been married long enough to qualify, which of the following Social Security benefits will Doris continue to receive?
A) Both Leroy and Doris’s benefits
B) Just Doris’s benefits
C) Both benefits for up to one year after the death, then the higher of the two benefits
D) The higher of either benefit but not both
The correct answer is (D).
The higher of two benefits but not both
How are Social Security retirement benefits taxed?
A) Social Security benefits are not subject to income tax. They were already taxed.
B) Income tax is based on the individual or couple’s MAGI and half of their Social Security benefits.
C) Up to 100 percent of Social Security benefits can be subject to tax.
D) Up to 50 percent of Social Security benefits can be subject to tax.
The correct answer is (B).
Taxation depends on modified adjusted gross income and the amount of Social Security benefits
When are individuals eligible to receive full Social Security retirement benefits?
A) Age 55
B) Age 62
C) Age 65
D) It depends on when the worker was born.
The correct answer is (D).
Age 62 will permit reduced Social Security retirement benefits. Full benefits occur between age 65 and age 67.
If already receiving Social Security, approximately how much can you earn from employment at age 64 without reducing your benefit?
A) About $19,000
B) About $25,000
C) About $33,000
D) About $145,000
The correct answer is (A).
The earnings test for those under the normal age requirement is up to an exempt amount of $18,960 for 2021
The Social Security tax on payroll is a matching tax, meaning that
A) the government matches the amount that each worker pays.
B) both workers and their employers pay the Social Security tax based on the workers’ earnings.
C) the benefits workers receive are larger than the taxes paid.
D) the benefits a worker will receive are proportional to the taxes paid.
The correct answer is (B).
Both employee and employer pay Social Security payroll taxes.
The worker’s Social Security retirement benefits at full retirement age are based on all of the following EXCEPT:
A) PIA calculation.
B) AIME.
C) birth year.
D) income in retirement.
The correct answer is (D).
Income in retirement does not affect retirement benefits after full retirement age.
