Insurance

Question 1

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

I. Dies.
II. Retires.
III. Divorces.
IV. Terminates employment (prior to retirement.)

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

Answer 1

Solution: The correct answer is D.

One of the few exceptions to continued COBRA coverage is termination due to gross misconduct.

Question 2

An employer subject to COBRA must provide a covered employee with the option of continuing health insurance coverage in which of the following circumstances?

I. The employer has terminated its health plan.
II. The employee has been terminated for incompetence.
III. The employer has gone out of business.
IV. The employee has been terminated for gross misconduct.

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

Answer 2

Solution: The correct answer is A.

COBRA is extended to those that separate from services with the exception of dismissal for gross misconduct

Question 3

Which of the following statements accurately describes a fully insured group health insurance plan?

a. Dismemberment benefits from accidental death and dismemberment coverage (AD&D) are taxable to the employee.
b. Benefits from a comprehensive medical expense plan are always tax free to the employee.
c. Death benefits from AD&D coverage are taxable to the employee’s beneficiary if the contract does not meet the definition of a life insurance contract.
d. Employer-paid premiums are deductible by the employer if the benefits are payable to the employer and are considered additional reasonable compensation.

Answer 3

Solution: The correct answer is B.

Option “A” - AD&D benefits are not taxable to the employee’s beneficiaries. Option “C” is false. Option “D” - Premiums are always deductible to the employer. In a self-funded plan which is discriminatory, some or all of the benefits may be taxable to key employees.

Question 4

All of the following are settlement options except:

Fixed period payments.
Fixed amount installments.
Reduced paid-up insurance.
Interest Only

Answer 4

Solution: The correct answer is C.

All of the following are settlement options except reduced paid-up insurance, which is a non-forfeiture provision

Question 5

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

$10.80
$115.20
$126.00
$132.40

Answer 5

Solution: The correct answer is A.

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

Question 6

Direct recognition programs used with life insurance policies are best described in the following statement:

a. Any amount of cash that is removed from the policy is reflected in a decrease in the amount of dividends and interest paid on that policy.
b. Mutual companies that are owned by their policy holders directly pay profits to the policy owners.
c. Very large policies indicate a recognized tendency of the company to write primarily term insurance.
d. If the agent has received many awards from his company, he would be a good one to select.

Answer 6

Solution: The correct answer is A.

Direct recognition programs are best described as follows: Any amount of cash that is removed from the policy is reflected in a decrease in the amount of dividends and interest paid on that policy.

Question 7

Your client, John Hotas, owns a whole-life insurance policy with a death benefit of $100,000 on the life of his wife Mary. The policy has a cash value of $6,500. The dividends are used to purchase additional paid-up life insurance. Their daughter, Ester, is the named beneficiary. If Mary were to die today, which of the following is true?

a. John continues to own the policy for the benefit of the daughter.
b. A taxable gift of the life insurance proceeds has been made from John to his daughter.
c. John receives an amount equal to the cash value, and the daughter receives the remainder of the life insurance proceeds tax-free.
d. The daughter must be at least 14-years old in order to collect the proceeds.

Answer 7

Solution: The correct answer is B.

Because John owns the policy on Mary’s life, when Mary dies and the proceeds go to Ester, their daughter, as beneficiary, they are considered a gift from the policy owner (John) to his daughter. Had Mary owned the policy on her life, the proceeds would have passed to her daughter tax-free.

Question 8

Which one of the following accurately describes the characteristics of group term life insurance?

a. The minimum size group is 10, unless specific requirements are met.
b. A medical exam is generally required to secure coverage.
c. Coverage amounts may be based only on job classification and length of service.
d. The payout at death is always in the form of a lump sum payment.

Answer 8

Solution: The correct answer is A.

Option “B” - Medical exams may not be required for group term. Option “C” - Coverage amounts may be (and many times are) based upon salary level, not job classification and length of service. Option “D” - Payouts are almost always made in lump sum payment, unless otherwise specifically requested by the beneficiary.

Question 9

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

Reduced paid-up insurance.
Paid-up additions.
Accumulate at interest.
Extended term.

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

Answer 9

Solution: The correct answer is D.

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

Question 10

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

Reduced paid-up insurance.
Extended term insurance.
Installments for a fixed period.
One-year term.

Answer 10

Solution: The correct answer is B.

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

Question 11

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

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

Answer 11

Solution: The correct answer is D.

Irrevocable beneficiaries have all of the rights of the policy owner. In this case, the insured must secure permission from the irrevocable beneficiary with regard to any activity or dispositive change in the policy.

Question 12

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

Guaranteed purchase option.
Disability waiver of premium.
Accidental death benefit.
Non-forfeiture provisions

Answer 12

Solution: The correct answer is A.

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

Question 13

Eunice is 84 years old and was diagnosed with Alzheimer’s disease 4 years ago. Her daughter Janice has been caring for her. Eunice has been relatively easy to care for, but Janice is worried about progressing issues and looking to find additional care for her mom. Janice found a Long Term Care policy that her parents took out before her father’s death. When will Eunice be eligible for care under the policy provisions?

Eunice is not currently eligible for benefits.
Eunice is eligible for care once she is unable to do 2 of the 6 Activities of Daily Living.
Eunice is not eligible for Long Term Care due to her Alzheimer’s diseases.
Eunice is eligible for benefits now due to a cognitive impairment.

Answer 13

Solution: The correct answer is D.

The triggers for LTC benefits are the inability to preform 2 of the 6 ADLs; dressing, eating, bathing, transferring, toileting and continence. Benefits may also be triggered by severe cognitive impairments that require care to protect the individuals health and safety such as Senile Dementia, Alzheimer’s disease or Parkinson’s disease

Question 14

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

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

Answer 14

Solution: The correct answer is C.

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

Question 15

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

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

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

Answer 15

Solution: The correct answer is D.

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

Question 16

Which of the following is a mandatory provision for health insurance policies?

Grace period and reinstatement.
Occupation.
Misstatement of age.
Suicide.

Answer 16

Solution: The correct answer is A.

All of the others are optional provisions for health insurance policies.

Question 17

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

The staffing model.
The IPA model.
The group model.
The network model.

Answer 17

Solution: The correct answer is B.

The IPA (Individual Practice Association) allows the greatest flexibility among HMO coverages.

Question 18

The group model of the HMO:

Is a corporation and medical staff members including doctors, nurses and clerical staff are employees of the HMO.

Is a type of HMO organization that is made up of physicians who have their own office locations.

Is an arrangement that is sometimes known as the network model.

Has no gatekeeper within the structure of this model.

Answer 18

Solution: The correct answer is C.

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

Question 19

Rodney is being admitted to the hospital with a preapproved covered expense for procedures that will cost $12,225. Rodney’s policy has a $300 deductible per person. This deductible must be met by two family members. This requirement has been satisfied already this year. The policy also has a $5,000 coinsurance feature with an 80/20 split. What is the amount the insurer will pay for the procedure that Rodney is about to receive?

$11,225
$10,925
$10,625
$11,925

Answer 19

Solution: The correct answer is A.

If the deductible has been satisfied, then Rodney has only the 20% of the $5,000 coinsurance amount to satisfy (5,000 x 20% = 1,000). This means that the insurer will cover $11,225 ($12,225 - $1,000).

Question 20

While John is working on his garage roof, he slips, falls off the roof, and lands on the driveway next to the car. John broke his arm in the fall. He should seek to collect and will be successful in doing so from which of his insurance policies?

Coverage F, medical payment insurance on his homeowners.
Medical pay on his auto insurance.
His personal health insurance policy.
His extended coverage on his life insurance policy.

Answer 20

Solution: The correct answer is C.

Option “A” - Homeowners does not pay for injury to the insured. Option “B” - Medical pay auto pays for the insured if he or she is injured “in, on, or about the covered auto.” Here he was close, but not close enough. His personal health insurance (Option “C”) will pay.

Question 21

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

I. A collateral assignment is a temporary transfer of some or all of the ownership rights on condition such rights revert to the assignee.

II. 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.

III. 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.

IV. An absolute assignment is an irrevocable transfer of all ownership rights which can be accomplished through a sale or gift.

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

Answer 21

Solution: The correct answer is C.

The correct answer is “C.” Option “I” incorrectly describes a collateral assignment, reversion right should go back to the assignor. Option “III” almost describes a collateral assignment, but reversion of rights return to the insured, not the insurance company.

Question 22

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

What the insurer agrees to do.
The perils against which the insurer will provide coverage.
The exclusions to coverage.
The insured’s name.

Answer 22

Solution: The correct answer is D.

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

Question 23

Which of the following provisions allow a life insurance company to refuse to make payment on a policy claim based on the amount of time the policy has been in force.

I. Incontestable Clause.

II. Suicide Clause.

III. Entire Contract Clause.

IV. Ownership Clause.

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

Answer 23

Solution: The correct answer is C.

In most states, it is a one or two-year period during which incontestable clauses and suicide clauses are in effect. Entire contract and ownership are not based on the passage of time.

Question 24

The tendency of the “poorer than average” risk to seek to purchase insurance best describes:

Risk transfer.
Moral hazard.
Adverse selection.
Law of large numbers.

Answer 24

Solution: The correct answer is C.

An example of adverse selection occurs when a smaller company changes health insurers frequently. Those who have a condition that is covered by the previous insurer would be turned down by the new insurance company due to adverse selection.

Question 25

According to common law, if both parties are to blame in a given accident, each is guilty and may not collect against the other even if the defendant was 90% to blame and the plaintiff only 10% to blame. This is known as:

Comparative negligence.
Assumed risk.
Last chance clear.
Contributory negligence.

Answer 25

Solution: The correct answer is D.

Contributory negligence was a defense that prevented many frivolous law suits, but also resulted in some very justifiable cases being thrown out of court. This doctrine has been supplanted for the most part by comparative negligence, but as a result law suits have become far more frequent and frivolous.

Question 26

A client has asked you, as her planner, to review her life policies. The variable life insurance contract that she owns may be characterized as a/an:

Unilateral contract.
Aleatory contract.
Conditional contract.
Personal contract of adhesion.

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

Answer 26

Solution: The correct answer is D.

All choices accurately describe the variable life contract.

Question 27

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

Judicial.
Executive.
Legislative.
Public Safety.

Answer 27

Solution: The correct answer is B.

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

Question 28

Which of the following is a FALSE statement?

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 the contract is sold to a qualified plan.

An individual licensed to sell life insurance and fixed annuities in his or her own state can sell those same products in all states except New York without additional licensing.

In the majority of states, it is illegal to rebate commissions.

The minimum licensing requirements (in most states) to sell variable annuity contracts is proper state life and annuity licenses, and a Series 6 securities license.

Answer 28

Solution: The correct answer is B.

All of the choices are true with the exception of Option “B.” Unless a state has reciprocity with another state, licensing is required in each state in which business is conducted.

Question 29

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

Insurance costs are unknown at the time the premium is established and unregulated insurers might charge too little or too much.

Beneficiaries are usually entirely different from the insured. They are not present to protect their self-interest when the contract is made.

Upon death of an insured under a life insurance policy, federal regulators are able to secure income tax proceeds prior to lump sum payments.

Insurance is a service that is paid for in advance, but its benefits are reaped in the future.

Answer 29

Solution: The correct answer is C.

Generally, there is no income tax on life insurance proceeds except in the case of transfer for value sales of a policy.

Question 30

Over the years, Sam Andrews has made $40,000 in after-tax contributions into his employer’s qualified thrift plan. He has been told that his monthly income will be $1,000 per month and his expected total annuity payments are $260,000 (based on life expectancy.) Under current law, how much of the monthly payment will be includible in Sam’s gross income for federal income tax?

$272
$424
$538
$846

Answer 30

Solution: The correct answer is D.

The basis of $40,000 would be allocated as a percentage of the projected total benefit (annuity rules in effect since August 20, 1996.) Therefore, the return of basis would be ($40,000÷$260,000) × 1,000=$153.85 as a return of capital, and $846.15 is taxable as ordinary income.

Question 31

Which of the following is NOT a factor that affects (and in some cases limits) the liability of the insurer?

Insurable interest.
Policy face value.
Rate structure.
Deductibles

Answer 31

Solution: The correct answer is C.

Without an insurable interest, the insurance will not be sold. This affects liability of an insurer. Face value is the most (limit) an insurer will pay. Deductibles are paid by the insured, and other insurance is taken into account in all policies but life insurance, where face value limits the amount paid. The rate structure is directly related to establishing premiums, not a liability of the insurance company.

Question 32

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

A.M. Best Reports
Standard and Poor’s
Moody’s Investors Services
Dun and Bradstreet

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

Answer 32

Solution: The correct answer is C.

Options “I,” “II” and “III” all provide rating services within the insurance industry. Dun & Bradstreet concerns itself more with credit standings of a firm not with insurance.

Question 33

An insured, age 25, with full coverage and all provisions possible on his policy is found to be disabled and uninsurable currently and in the future, due to a gradually incapacitating terminal condition. Life expectancy is 12 to 15 years as the illness runs its course. Which of the following would be applicable and also which should our insured be advised to exercise in this case? (Assume all of these benefits that follow are provided on the policy.)

Waiver of premium.
Accidental Death Benefit.
Guaranteed purchase option.
Living Benefits Rider.

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

Answer 33

Solution: The correct answer is D.

The client will be in need of all but the accidental death benefit given the description provided above.

Question 34

The particular type of disability insurance that is renewable is:

Non-cancelable.
Guaranteed Renewable.
Cancelable.

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

Answer 34

Solution: The correct answer is C.

Cancelable policies are not renewable. These are one-time temporary policies, not seen very often anymore and best avoided.

Question 35

Disability income insurance benefits terminate for the following reasons:

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

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

Answer 35

Solution: The correct answer is B.

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

Question 36

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

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

Answer 36

Solution: The correct answer is C.

The probation period, when included in a Disability Income policy, is the time the insured must wait after the issue of the policy before specified conditions will be covered.

Question 37

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

Any Occupation.
Modified Any Occupation.
Split Definition.
Loss of Income.

Answer 37

Solution: The correct answer is B.

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

Question 38

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 disability income coverage?

Residual disability benefits.
A change-of-occupation provision.
Dismemberment benefits.
A relation of earnings-to-insurance provision.

Answer 38

Solution: The correct answer is A.

Residual benefits cover partial disability and directly address the concern that the client has expressed. Options “B,” “C” and “D” are valid provisions, but do not in any way address the client’s area of concern.

Question 39

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

Extended first party coverage.
Modified no-fault coverage.
Pure no-fault coverage.
Unsatisfied judgment no-fault coverage.

Answer 39

Solution: The correct answer is B.

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

Question 40

On homeowner policy forms where other structures are covered, the coverage is usually what percent of the dwelling?

10%
20%
30%
40%

Answer 40

Solution: The correct answer is A.

On homeowner policy forms where other structures are covered, the coverage is usually 10% of the dwelling.

Question 41

Your client, George Wu, owns a great deal of fine art and antiques. He wishes to know, in such an instance when fine arts or antiques are insured under a homeowners policy by an endorsement, how is the coverage written?

Coverage is usually on a replacement cost basis.
Coverage is usually on an actual cash value basis.
Coverage is usually provided on an appraised value.
The perils are the same as the homeowners policy to which the endorsement is attached.

Answer 41

Solution: The correct answer is C.

Fine arts and antiques are generally insured on a homeowners policy with an endorsement known as a “personal articles floater” which is a form of Inland Marine insurance. This coverage is provided on an appraised value.

Question 42

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

$88,000
$110,000
$120,000
$150,000

Answer 42

Solution: The correct answer is B.

This is the value of the entire package minus the value of the land (e.g., $150,000 - $40,000 = $110,000).

Question 43

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

$4,250
$5,750
$6,250
$9,500

Answer 43

Solution: The correct answer is B.

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

Question 44

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

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

Answer 44

Solution: The correct answer is B.

There is no “pure no-fault” in existence in any state in the U.S. Modified no-fault allows suits when verbal and dollar thresholds have been crossed. Dollar threshold is damage occurring above a certain amount, not a limit to actionable compensatory amounts.

Question 45

Six years ago, Sonny Gates purchased a building for $400,000. Its current replacement cost is $800,000. The building is covered for fire-related perils by Commercial Carriers Insurance Company to $400,000, with an 80% coinsurance provision and a $2,000 straight deductible. Last week, a fire broke out in the building, causing $600,000 of covered damage. What amount will Commercial Carriers Insurance Company pay for this loss?

$298,000
$373,000
$598,000
$600,000

Answer 45

Solution: The correct answer is B.

(Face value ÷ coinsurance) × Loss - Deductible

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

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

(.6250 × 600,000) - 2,000

375,000 - 2,000

373,000

Question 46

Under the definition of long term care, the highest level of care provision which calls for services where residents are seen regularly by physicians is known as:

Intensive nursing care.
Skilled nursing care.
Intermediate care.
Custodial care.

Answer 46

Solution: The correct answer is B.

Options “A” - There is no coverage known a “intensive nursing care.” Options “C” - Intermediate care is identical to skilled nursing care defined above, but not seen with as much regularity by a physician (not daily). Both Options “B” & “C” are institutional care, whereas Option “D” is not.

Question 47

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

Continuing Care Retirement Communities.
Disability Income Policy Rider.
Association Arrangements.
Life Insurance Policy Rider.

Answer 47

Solution: The correct answer is D.

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

Question 48

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

A stock redemption plan must have a corporation as a party to the contractual arrangement.

A stock redemption plan increases the cost basis of surviving shareholders.

Under a cross-purchase plan funded with life insurance, premiums paid are tax deductible to the payor.

Proceeds of a life insurance policy owned by a surviving shareholder must be included in the gross estate of the decedent.

Answer 48

Solution: The correct answer is A.

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

Question 49

Which of the following accurately reflects the use of split-dollar life insurance in a business setting?

It can be a fringe benefit to an employee.

Insurance premiums are usually split between the employer and the employee (insured).

It may be used to fund a buy-sell stock redemption agreement.

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

Answer 49

Solution: The correct answer is D.

All these statements are correct. Split dollar life insurance is an arrangement where an employee and employer generally share the premium cost and cash value for death benefit of a life insurance policy covering the life of the employee.

Question 50

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

Stock redemptions (entity agreements) increase the cost basis of the surviving shareholders.

Insured cross-purchase plans involve shareholders buying life insurance on each other.

Parties to a cross-purchase agreement can agree to the purchase of remaining life insurance policies from the decedent’s estate.

Under a stock redemption (entity agreements) plan, life insurance owned by the corporation on the shareholder’s life is not included in the decedent’s estate.

Answer 50

Solution: The correct answer is A.

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

Question 51

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

It provides liquidity to the deceased’s estate for paying death taxes and other debts.

It provides for continuation of the business by the surviving owners.

It can establish the estate tax value of the business interest in the deceased’s estate.

It provides the surviving owners with the option to buy the deceased’s business interest

Answer 51

Solution: The correct answer is D.

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

Question 52

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

Contingent business interruption.
Extra expense insurance.
Business interruption.
Lease hold interest coverage.

Answer 52

A. Contingent business interruption

Question 53

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

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

Life insurance owned by Denise will not be included in Dennis’ probate estate.

Life insurance and/or disability insurance premiums to fund the agreement are tax deductible as an ordinary business expense.

Denise would receive an increased cost basis in Dennis’ stock equal to the amount paid to redeem the shares from Dennis’ estate.

The transaction side-steps the entity and thus avoids constructive dividend concerns.

Answer 53

Solution: The correct answer is B.

Insurance premiums to fund buy-sell agreements in a cross-purchase plan are not tax deductible. In the case of an entity agreement, where the firm owns the policies, the premium would also NOT be tax deductible.

Question 54

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

A 63-year old federal government employee hired in 1972.

A corporate director, age 55, whose only income is from being a corporate director.

A 68-year old proprietor filing Schedule F.

A 65-year old business owner who, over his lifetime, has received only dividend income from the S-corp business.

Answer 54

Solution: The correct answer is C.

Persons “A” and “B” are too young. Person “D” did not receive any income which was ever subject to self-employment or social security taxes, therefore, did not ever become qualified.

Question 55

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

Lump sum death benefit of $255.

Mother or father’s spousal benefit for caring for a qualifying child under age 16.

Income benefits to a child under age 18.

Survivor benefit to spouse (assume not remarried) at their full retirement age.

I and III only.
II, III and IV only.
I, II and III only.
All of the above.

Answer 55

Solution: The correct answer is C.

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

Question 56

Kathleen recently died. She was fully insured and left behind her husband Robert (age 60), their two children, Nora (age 18 and in college) and David (age 13), and her dependent single mother Joy (age 70). All of the following are true, except?

Robert is entitled to a maximum survivorship benefit of 71.5% of Kathleen’s PIA subject to the family maximum.

Joy is entitled to a survivorship benefit of 82.5% of Kathleen’s PIA subject to the family maximum.

Nora is not eligible for survivorship benefits.

David is entitled to a survivorship benefit of 75% of Kathleen’s PIA subject to the family maximum.

Answer 56

Solution: The correct answer is A.

Her husband, Robert, who is age 60 is entitled to a survivorship benefit of 71.5% of Kathleen’s PIA based on retirement but he would be entitled to 75% since he is caring for a child under 16 (David).

Her mother, Joy, age 70, who was dependent on Kathleen before her death is entitled to a survivorship benefit of 82.5% of Kathleen’s PIA. Her daughter, Nora, age 18 and in college is not eligible for survivorship benefits because she is not less than 18 and being in college is not an exception to the rule. Her son, David, age 13 is entitled to a survivorship benefit of 75% of Kathleen’s PIA

Question 57

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

Her husband, Robert, who is age 65.

Her mother, Joy, age 70, who was a dependent of Kathleen before her death.

Her daughter, Nora, age 18 and in high school.

None of the above.

Answer 57

Solution: The correct answer is C.

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

Question 58

Becky, age 53, was married to Herman for 16 years before their divorce. Becky has not remarried, and she and Herman had no children. Herman worked for a bottling company for 33 years before retiring last month. Shortly after retiring, he died in a car accident. The earliest Becky could collect Social Security benefits is age:

A. 55.

B. 60.

C. 62.

D. 67.

Answer 58

Solution: The correct answer is B.

Social Security survivor benefits are available to a surviving spouse beginning at age 60. The benefits are available to a former spouse, if the marriage lasted at least 10 years.

Question 59

Which of the following definitions of disability used in a group disability income plan is the most restrictive to the employee?

A. The inability of the employee to perform each and every duty of his or her own occupation.

B. The inability of the employee to engage in any occupation for compensation.

C. The inability of the employee to engage in any occupation for which he or she is qualified by training, education, or experience.

D. The inability of the employee to engage in his or her own occupation for 24 months and any occupation for which he or she is qualified thereafter.

Answer 59

Solution: The correct answer is B.

The most restrictive definition of disability is “the inability of an employee to engage in any occupation for compensation.”

Question 60

Which of the following would have the least risk exposure?

A. Maintaining the HO policy liability at $100,000 without an umbrella policy.

B. Maintaining a long-term disability policy with a two-year benefit period.

C. Not having a long-term care policy.

D. Having $60,000 Part A coverage on a home with a replacement cost of $100,

Answer 60

Solution: The correct answer is D.

Having $60,000 Part A coverage on a home with a replacement cost of $100,000.

This would have the LEAST risk exposure.

A – leaves unlimited liability.

B – two years in a nursing home out of pocket could be 192,000 – 240,000

C – Average stay in a nursing home is 3 years. Average cost 8k-10k a month. Could cost 360,000 for a 3 year stay.

D is the different in what you should have, 80% of 100k and what he does have, which is a 20,000 difference.

Question 61

Gina and Jacque moved into their first new home. They threw a housewarming party and invited a few family and friends. They also invited some of their new neighbors. One of the guests tripped on a stair that was in need of repair and broke her wrist catching herself during the fall. Which coverage under their homeowner’s policy will cover the guest’s medical expenses?

A. Coverage A.

B. Coverage B.

C. Coverage E.

D. Coverage F.

Answer 61

Solution: The correct answer is D.

A is incorrect. Coverage A covers damage to the dwelling. B is incorrect. Coverage B covers unattached structures. C is incorrect. Coverage E is for personal liability, which may come in handy if their new neighbor decides to sue them for the injury.

Question 62

Charlie and Craig are brothers and business partners. They launched a successful coffee chain, Brother’s Coffee, in a non-community property state, three years ago. Brother’s Coffee comprises a majority of their assets. Charlie and Craig consulted withJovan Smyth, CFP® as they were opening their business. Jovan’s financial guidance was helpful to them, and he continues to help them with retirement planning for their employees. They wanted to meet with him to determine next steps before deciding if they should franchise their business. Which should be the CFP® professional’s course of action?

A. Create Wills leaving Brother’s Coffee to their alma mater

B. Purchase key employee policies on one another.

C. Create a buy-sell agreement funded with life insurance.

D. Gather data on the company and personal financial situations of the brothers.

Answer 62

Solution: The correct answer is C.

A buy-sell agreement is paramount to protect the business ownership.

A is incorrect. The brothers have not given any indication that they have charitable planning goals.

B is incorrect. This may offer some protection, but a buy-sell agreement would be more effective.

D is incorrect. As this is a long-standing relationship, we can conclude the data gathering has been done.

Question 63

Chalene just graduated from grad school, is starting her first year as a lawyer, and moved into her first apartment. Since she has never lived on her own, she will be purchasing all new furnishings along with a new TV and surround sound system. She is a little concerned about her things since she found out her neighbor downstairs likes to grill on the patio every night, and often leaves the barbeque unattended. What can Chalene do to provide some protection for her belongings?

A. Speak with the property manager about a waiver of liability.

B. Purchase an HO-4 policy.

C. Purchase an HO-6 policy.

D. Get verbal assurance from the neighbor that more care will be taken.

Answer 63

Solution: The correct answer is B.

While it may be good to speak with the manager and the neighbor, it will not provide any protection of her belongings. HO-4 policy covers renters belongings. HO-6 policy is for condo owners.

Question 64

Extreme Co, a C corporation, has implemented a tax qualified group long-term care insurance plan and a cafeteria plan for its employees. Which of the following statements is correct regarding the group long-term care plan?

A. Premiums paid by the company for the long-term care plan are included in the taxable income of the employees.

B. The long-term care insurance cannot be included in the cafeteria plan.

C. Benefits from the long-term care plan are taxable to the employees.

D. The deduction for premiums is limited to 50% of the company’s taxable income.

Answer 64

Solution: The correct answer is B. .

A is incorrect. Premiums paid by the company for the long-term care plan are excluded from the taxable income of the employees

C is incorrect. Benefits from the long-term care plan will be received tax-free by the employees.

D is incorrect. There is no such limit on the deduction for long-term care premiums for a corporation.

Question 65

All of the following statements are correct regarding Health Savings Accounts (HSAs) EXCEPT:

A. HSAs can be established by self-employed individuals who are covered under a high deductible health plan.

B. The 10% penalty associated with non-qualified distributions from an HSA will be waived once the participant attains age 59½.

C. The tax benefits of HSAs are greatest for highly compensated employees.

D. The balance in an employee’s HSA can be carried forward if unused for expenses incurred during the tax year.

Answer 65

Solution: The correct answer is B.

If a non-qualified distribution is made from an HSA, the distribution will be subject to income tax and a 20% penalty. The penalty will be waived if the individual has attained age 65 (not 59½).

Question 66

Ralph, age 62, wants security for his wife in the event of his death. He owns a variable annuity worth $105,000 (basis of $65,000 and surrender charge of $7,000). If Ralph wants to use the annuity to purchase life insurance, his best option would be to:

A. Retain the annuity for its tax-deferred growth and use other funds to purchase a life insurance policy on his life, for the benefit of his wife.

B. Begin taking annuity payments from the variable annuity and use the cash to pay premiums on a permanent life insurance policy on his life.

C. Surrender the annuity for cash and purchase a permanent life insurance policy on his life, with his wife as the named beneficiary.

D. Exchange the variable annuity under a tax-qualified Section 1035 exchange into a variable universal life insurance policy, with his wife named as beneficiary.

Answer 66

Solution: The correct answer is B.

Ralph should annuitize the annuity now and use the money for life insurance. This would be the best strategy to satisfy his specific objective, taking into account the taxation of the annuity.

A is incorrect. Ralph has a goal of USING THE ANNUITY to purchase life insurance. Therefore, retaining the annuity would not be the appropriate option to satisfy his objective. C is incorrect. If he surrendered the annuity, he would be subject to a large surrender charge of $7,000, as well as income taxes on the annuity gain. D is incorrect. The exchange of an annuity into life insurance is a taxable exchange. It is not protected from taxation under Section 1035.

Question 67

John is age 59 and unmarried, and is thinking about retiring soon from his job at a sign making company. He currently has a net worth of approximately $2,300,000, and lives in a state that imposes both a state income tax and a state death tax. Which one of the following insurance coverages would be most appropriate for John at this stage of his life?

A. Long-term care insurance.

B. Long-term disability insurance.

C. Medical insurance.

D. Life insurance.

Answer 67

Solution: The correct answer is C.

Although all of the coverages listed may potentially be important, the most pressing need is medical insurance. John will lose his company coverage and not yet be eligible for Medicare. Disability insurance is designed to replace income lost due to disability. Since John is about to retire, disability insurance is not necessary. Life insurance may not meet John’s needs as does not have immediate family to support or provide any indication he would like to leave a large sum of money to charity. Long term care is likely the next item to address with John after filling his immediate need of medical insurance.