Insurance Practice Exam Flashcards
Temporary insurance coverage, contingent on an applicant’s ability to present evidence of insurability, can be provided by:
a) Evidence of consideration.
b) Conditional receipt.
c) Delivery of contract.
d) Initial premium payment.
Answer: B
Below is the CFP Board Council on Examinations’ response to a candidate’s question regarding this exam item: “Note that while the conditional receipt sets forth certain terms of temporary life insurance coverage, it will not be issued without a completed application and payment of an initial premium.”
Typically when a C corporation pays group long-term disability income insurance premiums, all disability benefit amounts received by an employee are:
a) Not includible in the income of the employee for federal tax purposes without regard to any other
sources of income.
b) Includible in the employee’s income for federal tax purposes without regard to any other sources of income.
c) Not includible in the employee’s income for federal tax purposes if any portion of the benefit is reduced/offset by other income.
d) Includible in the employee’s income for federal tax purposes if any portion of the benefit is reduced/offset by other income.
e) Includible in the employee’s income for federal tax purposes unless they are over age 65.
Answer: B
If the employer pays disability insurance premiums, any benefits will be included in taxable income. Any disability premiums paid by the insured with after-tax dollars, then any benefits received will be tax-free.
Jasmine’s mother, Betty, moved in with her four years ago after the loss of Jasmine’s dad. 6 months ago, Betty was diagnosed with dementia and required more care than Jasmine could provide. They have chosen to place Betty in a nursing home nearby. The home is $7,000 a month. Betty currently has $21,000 in assets. Betty has also been gifting Jasmine $600 a month for the last four years to help with the home and kids’ activities. When will Betty be eligible for Medicaid coverage of her care?
a) Immediately.
b) 3 months.
c) 4 months.
d) 7 months.
Answer: D
Betty currently has $21,000 in assets to cover the first three months of care (21,000/7,000 = 3). She gifted $28,800 to Jasmine in the prior five years (600 x 12 = 7,200 x 4 years = $28,800). The penalty period would be four months ($28,800 / $7,000 = 4.1143) plus the three months she covered out of pocket; it tells us Medicaid will pick up the costs after seven months.
Your client owns a whole life insurance policy with a death benefit of $200,000 on the life of his spouse. The policy has a cash value of $13,500, of which the dividends are used to purchase additional paid-up life insurance. Their son is the named beneficiary. If the spouse were to die today, which of the following is true?
a) The client continues to own the policy for the son’s benefit.
b) A taxable gift of the life insurance proceeds has been made from the client to the son.
c) The client receives an amount equal to the cash value, and the son gets the remainder of the life insurance proceeds tax-free.
d) The son must be at least 14 years old to collect the proceeds.
e) The client receives the proceeds of the life insurance policy but must hold them in a life insurance trust for the son’s benefit.
Answer: B
This is an example of the so-called “unholy trinity” where the owner, insured and beneficiary are different. If the insured dies, the owner has made a gift to the beneficiary.
The National Association of Insurance Commissioners is involved in the regulation of insurance by
- Direct involvement through developing specific regulations for all states to follow.
- The regulation of the insurance commissioners of all states.
- (Indirectly) the exchange of information and preparation of recommendations.
- Assuring that all states’ insurance regulation is somewhat uniform.
- Accrediting state insurance regulatory offices.
a) 1, 2, and 5.
b) 1 and 4.
c) 3 and 5.
d) 4 only.
e) 2, 3, and 4.
Answer: C
The NAIC only provides guidance and recommendations to the state insurance commissioners. While they only offer advice, the NAIC has no actual control over the state insurance regulations.
Bill Jones, age 35, comes to see you because he has just been diagnosed with a terminal illness. His doctor told him he would not be able to work more than another six months and that his life expectancy is only 12-18 months. Bill also tells you that he has always been self-employed, and with the exception of the last two years, has never paid into Social Security.
What benefits will be available to Bill and his family from Social Security due to his death? Assume his wife is also 35 years old, and they have two children, ages 10 and 8.
- Monthly survivor’s benefit for the worker’s child under age 18 (or age 18 if the child is a full-time high school or elementary school student).
- Monthly survivor’s benefit for the worker’s spouse, or former spouse, caring for a dependent child under age 16 who is eligible for benefits.
- Monthly survivor’s benefit for the worker’s spouse until age 65.
- Lump-sum death benefit of $255 for the worker’s spouse or child.
a) 1, 2, and 3.
b) 1, 2, and 4.
c) 3 and 4.
d) 1 and 2.
Answer: B
At death, Bill will be currently insured. In other words, he will have earned at least six quarters of coverage in the last 13 quarters. Therefore, Bill’s beneficiaries will be entitled to benefits. So, statements 1, 2, and 4 are factual. If there were no children, Bill’s wife would not be eligible for benefits.
Which of the following is not needed to calculate the client’s human life value?
a) Average annual earnings to the age of retirement.
b) Estimated annual Social Security benefits after retirement.
c) Costs of self-maintenance.
d) Number of years from the client’s present age to the contemplated retirement age.
e) Selection of an appropriate capitalization rate.
Answer: B
Average annual earnings before retirement, cost of self-maintenance, remaining work-life expectancy, and an appropriate capitalization rate.
Conditions that increase either the frequency or severity of loss are called:
a) Subrogation.
b) Risks.
c) Hazards.
d) Perils.
e) Extenuating circumstances.
Answer: C
Hazards increase the frequency of a loss. Perils are the proximate cause of a loss.
An HO-3 policy (Special form: “All risks of physical loss” except those expressly excluded) with no endorsements excludes one of the following perils?
a) Flood.
b) Fire.
c) Collapse.
d) Weight of ice.
e) Volcanic eruption.
Answer: A
Flood is permanently excluded and needs a separate policy.
Which one of the following statements about life insurance products and their tax attributes is correct?
a) Modified endowment contracts do not provide a tax-free death benefit if the policyholder dies before age 59.
b) Tax-deferred annuities owned by a corporation are eligible for tax-deferred accumulation.
c) Permanent life insurance owned by a pension plan is 100% income tax-free to the plan’s beneficiary.
d) If a person purchased a life and 20-year term-certain immediate annuity at age 50, there would be no premature distribution penalty.
e) Policyholders of single payment deferred annuity contracts purchased before 1987 may withdraw funds tax-free from their policy up to basis.
Answer: D
The term extends beyond 59½, and the immediate annuity is a substantially equal payment.
Below is the CFP Board of Examiners’ (Now Council on Examinations) response to a candidate’s question regarding this exam item.
“D is indeed the correct answer because immediate annuities are not subject to a premature distribution penalty tax. This only applies to deferred annuities.”
Which of the following statements about assignments is/are true?
- An absolute assignment is an irrevocable transfer of all ownership rights, which can be accomplished through a sale or gift.
- A collateral assignment is a temporary transfer of some or all ownership rights on the condition such rights revert to the assignee.
- A collateral assignment is a temporary transfer of some or all ownership rights whereby such rights revert to the assignor upon satisfaction of agreed-upon conditions.
- A collateral assignment is a temporary transfer of some or all of the ownership rights on the condition such rights revert to the insurance company upon satisfaction of agreed-upon conditions.
a) 1, 2, and 3.
b) 1 and 3.
c) 2 and 4.
d) 4 only.
e) 1, 2, 3, and 4.
Answer: B
In an absolute assignment, the policy ownership rights are permanently transferred. With a collateral assignment, only a portion of the rights of the contract is assigned until an obligation is fulfilled, such as collateral on a loan. The rights under the agreement then revert back to the owner.
Which of the following are true regarding the ownership of life insurance?
- A policy can only be issued to the insured.
- Generally, assigning a policy requires proof that the insured is still “insurable,” meaning still in good health.
- Only a person with an insurable interest, generally a relative, a business associate, or a lender, can be named beneficiary.
- The owner can assign (transfer) the policy to whomever they choose, even if the assignee has no insurable interest.
a) 1, 2, and 3.
b) 1 only.
c) 2 and 4.
d) 4 only.
e) 1, 2, 3, and 4.
Answer: D
Insurable interest must only exist at the policy inception for life insurance. An insurable interest does not have to stand at the time of loss. A policy can be issued to anyone with an insurable interest.
A client, age 70, a widower with no close relatives, has crippling arthritis. The client cannot walk and is confined to a custodial nursing home. Which of the following programs is/are likely to pay benefits towards the cost of the nursing home?
- Medicare may pay for up to 100 days of care after a 20-day deductible.
- Long-term care insurance may pay part if coverage of the facility type is broad enough.
- Private medical insurance may pay part if it is a comprehensive major medical policy.
- Medicaid may pay if the client has income and assets below state thresholds.
a) 1, 2, and 3.
b) 1 and 3.
c) 2 and 4.
d) 4 only.
e) 1, 2, 3, and 4.
Answer: C
A private medical policy will not pay for custodial care because he cannot perform some ADLs. Medicare also does not pay for custodial care.
Below is the CFP Board of Examiners’ (Now Council on Examinations) response to a candidate’s question regarding this exam item.
“The clarification on why (3) above is incorrect is that a comprehensive major medical policy would pay for treatments for the arthritis but not for the custodial care which is required because he cannot perform the functions of daily living; i.e., dressing, feeding, bathing, etc.”
A contract for variable life insurance may be characterized as a/an:
- Unilateral contract.
- Aleatory contract.
- Conditional contract.
- Personal contract of adhesion
a) 1, 2, and 3.
b) 1 and 3.
c) 2 and 4.
d) 3 and 4.
e) 1, 2, 3, and 4.
Answer: E
All are characteristics of an insurance contract.
Which of the following is a benefit provided by Medicare Part A or B?
a) Hospice benefits for terminally ill persons.
b) A stop-loss limit for annual medical expenses above $2,500.
c) Coverage for custodial care.
d) Coverage for prescription drugs that can be self-administered.
Answer: A
The correct answer was hospice care. There is no stop loss with Medicare, and it does not provide custodial care. Drug coverage is available in Part D or Part C.
