Insurance Pre-Study Books

Question 1

Needs APproach vs. Human Life Value Approach

Answer 1

Needs approach - evaluates the income replacement and lump sum needs of survivors in the event of an income producer’s untimely death.

Human Life Value Approach - uses projected earnings less self-maintenance costs as the basis for measuring the life insurance needs. Important items: individual’s current earnings, future growth rate of earnings, number of working years remaining, cost of self-maintenance, and the capitalization rate (discount rate)

Question 2

Term Life Insurance

Answer 2

inexpensive at young age
no cash value, savings or investment component
pure insurance protection
exponentialy increasing premiums for older age entry or renewal
ART (annual renewal term) - premiums increase annually.
Level term - premiums are level for a period of time
decreasing term - oremiums are level for a decreasing term policy. Death benefit decreases over the term of the policy. Can be used for mortgage payoff

Term policy can be used for educaiton funding, paying off debts, or to cover expenses during grieving process.

Question 3

Whole Life or Permanent Life Insurance

Answer 3

Whole Life - provide lifetime protection if premiums are paid as agreed.

Advantages - tax deferred growth of cash value, permanent protection until age 120.

Disadvantages - premiums are expensive, cash value grows gradually

Question 4

Ordinary Life (Type of Whole Life)

Answer 4

• insured pays premiums until age 120 or death
• cash value increases to face value at age 120
• DB is level throughout term

Question 5

Limited Pay Life (type of whole life)

Answer 5

premiums are higher than ordinary life becuaes the insured only pays premiums until a certain age

Question 6

Variable Life (type of whole life)

Answer 6

cash value is invested in stock, bond, and MMF.
opportunity for higher returns exists for Var. life.
DB and cash value fluctuate based on investment performance

Question 7

Current Assumption Whole Life (CAWL)

Answer 7

• insurer uses new money rates and new mortality rates to establish premiums
• can adjust premiums every five years if needed (higher/lower int rates)
• can have lo CAWL or hi cawl

Question 8

First to Die vs second t odie.

Answer 8

first to die - AKA single life policy. Ends with first death.

second to die -policy continues on after first death to the bene as new owner. Provides death benefits when second person dies. Good for estate planning.

Question 9

Whole Life - Particpating vs. Non Participating

Answer 9

Participating - will pay out dividends
Non- participating - will not pay out dividends .

Options “CRAP - O”
cash - client receives the dividends as cash,
reduce premiums-
accumulate at interest - company invests divs.
paid up additions - purchases addiitonal LI for insured
one-year term - AKA fifth dividend option. ADDS TERM INSURANCE.

Question 10

Settlement Options for LI

Answer 10

• Lump SUm
• Interest Only - Dividends Paid Out
• Annuity Payments

Question 11

List Insurance Non-Forfeiture Options

Answer 11

• Cash Surrender Value - insured receives accumulated cash value when terminating the LI policy. Cash value less surrender charges
• Reduced Paid-Up Insurance - receives cash value in form of a paid up policy with smaller face amount
• Extended Term Insurance - insured receive cash value in form of a paid up policy for a specified duration

Question 12

accelerated death benefits

Answer 12

• can take out an accelerated DB if terminally ill ( 24 months to liv eor less)
• income from an accelerated DB is NOT taxable to the insured
• no restriction son what the DB can be used for

Question 13

Universal LIfe

Answer 13

insured may adjust: premiums paid, face value and cash value
-insured does not direct the investment portion of the cash value
cash value can be used to pay the policy premiums

Question 14

Life Insurance grace period

Answer 14

Typically 31 to 61 days after the premium due date in which policy remains in foce.

Question 15

Misstatement of Age and Gender

Answer 15

Policy will not be cancelled if insured lies about their age or misstatemnts their gender (younger and women get chearper insurance).

The DB will be adjusted by what the premiums “should have” been. THe policy will not be cancelled.

Question 16

Group Term Life

Answer 16

Most common employer provided insurance.
First $50K in coverage is income tax free to the employee
premiums are tax deductible- to the employer
premiums paid by EE are after tax dollars

Question 17

Group Whole Life

Answer 17

allows employees to accumulate savings through cash value
if premiums are paid by the employer they are taxed to the employee

Question 18

Taxation of LI

Answer 18

• LI proceeds are not subject to income tax (exception transfer for value rule)
• dividends earned on cash value are not taxed until withdrawn
• cash value not taxable if withdrawn at death
• loan against policy are tax free unless its a MEC (modified endowment policy). Then it uses LIFO.
• exchanging a LI policy for another one does not create a tax. even. (exchangin annuity contract for LI policy DOES create a TE).

Question 19

Taxation of Benefits Rec’d During Life

Answer 19

• dividends are not taxable and are considered a return of basis (premium)
• if dividends exceed premiums, then they are taxable
• withdrawals of principal are not taxed until you exceed premiums

Question 20

Looks at MECS Pg. 162

Question 21

Transfer for Value

Answer 21

• extent that proceeds exceeds basis.
  Exceptions: transfer to insured ,business partner, partnershup of insured, corp where insured is a shareholder/officer, transfer that results in carryover basis

Question 22

Surrender Policy Prior to Death

Answer 22

Lump Sum - amount above premiums paid is ordinary income
Interest Only - int taxed as ordinary income
installment payments - return of principal and int. over time. Only int is taxed as ordin. income.

Question 23

Annuities Taxation - Pre and Post 1982

Answer 23

Post 1982 and pre-mature withdrawals = LIFO (withdrawals are taxed to the extent of earnings FIRSt, and principal last)

Question 24

Does out of pocket max include deductibles?

Answer 24

Yes. The out-of-pocket maximum is the most you could pay for covered medical services and/or prescriptions each year. The out-of-pocket maximum does not include your monthly premiums. It typically includes your deductible, coinsurance and copays,

Question 25

Health Insurance

Answer 25

traditional medical expense insurance is dividend into 4 categories:
- hospital expense - room & board
-surgical expense - covers surgeon fees inside and outside of hospital
-physician’s expense - covers all nonsurgical physician expenses
-major medical - covers hospitalization, physician and surgeon fees, physical therapy, prescirption drugs.
Eye exams and dental are excluded from coverage.
80/20 consiruance rule (after meeting deductible). Each family member must statisfy a deductible with a maximum of 3 deductibles per family. Coinsurance portion also applies to each family member

Question 26

Patient Protection and Affordable Care Ace (PPACA)

Answer 26

requires most u.s. citizens and legal residents to have health insurance.
No tax penalty for non-compliance (now)
creates exchanges for health insurance for individuals and small biz.
- Employer Requirements: Employers with 50+ uninsured FT employees = $2K/FT employee up to first 30 from assessment. More than 200 employees? Must automatically enroll employee in health insur. plan offered by compannt

Creates four benefit categories - bronze (min. coverage), silver (covers 70% of benefit costs), gold (covers 80% of benefit costs), platinum(covers 90% of benefit costs),

Prohibits lifetime limits and annual limits on dollar value of coverage

Dependet coverage for children up to Age 26.

Question 27

HMO vs. PPO vs. PCP

Answer 27

• HMO - care is managed by a PCP who determines what care is received. Primary disadvantage is that there is no coverage “outside” of the HMO.
  
  • Staff model - HMO is a corporation and medical staff members are employees of the HMO
  • Group model - AKA network model. HMO contracts with groups of medical providers to care for insured plan subscribers
  • Individual Practice Associaion - Physicians who have their own office locations by contract out the HMO on a fee-for-service basis. Most flexible
• Preferred Provide Organization -network of health care providers with whom an employer or insurance company contracts. Provides a discount on services. Insured receives a high rate of reimbursement when using providers within org. Seek care OON? Increased deductibles and coinsurance. PPO preservers employees option to choose a provider outside of network.PPO, or Preferred Provider Organizationhealth plans, offer a popular combination of cost savings and flexibility.
• Managed Care (PCP) - insured accesses care via a PCP who provides services or refers to specialist. Consumer pays a small copayment or other deductible. Physicians need approval to perform certain procedures and it may reduce a patient’s options for care if not approved.

Question 28

Health Savings Accounts

Answer 28

• provide employees and individuals seeking health care a tax dedction for amounts contributed to their accounts and tax free and earning free growth (distributions tax free and penalty free if used for qualifying medical expenses
• EE and ER contributions okay
• Eligibility: must have HDHP
• Disqualifiers: -covered in anyway by a non-HDHP. Particiaption in medicare. anyone who MAY or IS claimed as Dependent on another’s return.
• The maximum HSA contribution includes both employer + employee contributions.
• Catch up contribution of $1K if 55 and older (not 50 and older like IRAs)
• Contributions tax deductible for EE, ER, family members who receive ccontributions on their behalf

Qualified expenses (no premiums EXCEPT) - COBRA, medicare premiums, LTC premiums, premiums while receiving unemployment, dental/vision care

Distributions for NQ withdrawals are subject to income tax and 20% penalty before age 65

After 65 - just income tax applies

Question 29

True/False: Employer provided group health insurance is not taxable to EE?

Answer 29

True.

Question 30

HIPAA

Answer 30

• pre-existing conditions won’t restrict you from switching from one group plan to another (HIPAA does not apply if switching from group to indiv or indiv to indiv)
• Coverage of a preexisting medical condition may be limited or excluded for up to 12 months for those who enroll in a group health plan when first eligible to enroll. In the case of late enrollment, the maximum permitted limitation is 18 months.

Question 31

COBRA

Answer 31

• extension of group health insurance with the same coverage
• employer may charge 2% for admin expenses (total expense to employee is 102% of actual insurance cost)
• applies to loss of coverage for employee, employee’s spouse and/or dependent children
• To be eligible for COBRA:
• employed individual dies

employee is voluntarily or involuntarily terminated

hours are reduced from FT to PT

covered employee separates from spouse

employee becomes eligible for Medicare

dependent child is not longer eligible for coverage (married, age, left school)

• EE have 60 days to make election
• COBRA applies to employers who offer group health care plan NAD have at least 20 employees.
• ER must offer COBRA for a specific period of time based on the following events:

-18 months for reduction in hours of normal termination

36 months for death

36 months divorce

36 months for Medicare eligibility

36 months for loss of dependency status by children of employee

29 months if employee meet ss definition of disabled

Memorize the 18 months for reduction in hours or involuntary/voluntary term. All others are 36 months.

Eligible COBRA continuation coverage: - bankruptcy of company, EE doesn’t make premium payments, EE becomes covered under another plan

Question 32

LTC Options - Medicaid

Answer 32

• Medicaid - poor people. Paid at state and or federal level. Determined based on person’s assets (In order to be eligible for Medicaid, applicants must have no more than $2,000 in “countable” assets).
• ACA expanded Medicaid coverage
• Individuals going to nursing home can apply for medicaid and are eligible once assets are spent down (subject to state limits)
• may be a penalty period based on the amount of assets gifted in last five years prior to entering a nursing home
• any gifted assets will be assessed in formula Ex: if nursing home costs $5K/mo,. and they gifted $15K first 3 months would not be covered by Medicaid

Question 33

LTC - Medicare vs. LTCI

Answer 33

Medicare benefits are availble to those eligible for SS

LTC benefits under Medicare are extremely restrictive

What Types of Care Does Medicare Cover?

• Skilled nursing care. Medicare helps to pay for your recovery in a skilled nursing care facility after a three-day hospital stay. Medicare will cover the total cost of skilled nursing care for the first 20 days, after which you’ll pay $185.50 coinsurance per day (in 2021). After 100 days, Medicare will stop paying.
• Home health care. If you are homebound by an illness or injury, and your doctor says you need short-term skilled care, Medicare will pay for nurses and therapists to provide services in your home. This is not round-the-clock care. Generally, it’s for no more than 28 hours per week. With your doctor’s recommendation, you may qualify for more.
• Hospice. Medicare covers hospice care. Hospice is care you get to make you more comfortable when you are in the last stage of life with a terminal illness. You’re eligible if you are being treated for your terminal illness, and your doctor certifies that you probably will live no longer than six months. You can get care for longer than that, as long as your doctor says you are still terminally ill.

Eligibility & Benefits for LTCI POLICY

• LTCI Benefits Triggered by ADLs
  
  • Chronically Ill - Unable to perform 2 of 6 ADLs for at least 90 days
    
    • Bathing. The ability to clean oneself and perform grooming activities like shaving and brushing teeth.
    • Dressing. The ability to get dressed by oneself without struggling with buttons and zippers.
    • Eating. The ability to feed oneself.
    • Transferring. Being able to either walk or move oneself from a bed to a wheelchair and back again.
    • Toileting. The ability to get on and off the toilet.
    • Continence. The ability to control one’s bladder and bowel functions.
  • Substantial cognitive impairment - behavior threatens own/others health and safety
• Services Provided Include ADL & IADL

Question 34

LTCI partnership program

Answer 34

Individuals use a LTC policy to pay the first portion of LTC and then qualify for Medicaid without the spend down requirement

Ex: if the LTC policy provides for $200K of lifetime benefits, the individual will be able to shelter the $200K from the Medicaid spend down requirement

Question 35

LTCI - Tax benefits

Answer 35

premiums are tax deductible and deductibility is limited based on age of the insured

benefits are tax free as long as policy is qualified. (peson needs care for 90 days, unable to perform 2 or more ADLs or substantial cognitive impairment)

LTC does not contain a surrender valued

Question 36

Disability Income

Answer 36

• unable to work because of illness or injury
• Policy issues:
• coverage (sickness/accident)
• Term
• elimination period (0 to 180 days)
• taxability of benefits (depends on payor)
• amount of benefits (60-70%)
• definition of disability
• residual benefit
• pronation period

The Elimination Period is defined as the period starting from the day you first become disabled and continuing for the period noted in the policy. This may be 90 days or 180 days or whatever the policy calls for. No Benefits Paid: During the EP, no benefits are paid.

Question 37

**Disability Insurance - Benefit Period, Elimination Period, Taxation

Answer 37

Benefit Period - ST: 2-6 yrs. LT: retirement age, death or specific period of time

Elimination period - premiums are waived. Elimination period serves as a deductible.

Taxation of Benefits

• EE pays premium with after tax dollars - premiums are not tax deductiblem, benefts are tax free
• ER pays premium - ER deducts premium, beenfits to EE are taxed
• EE pays with pre tax dollars: benefits to EE are taxed (cafeteria plan)

Question 38

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 38

Answer: B. Conditional Receipt.

A conditional receipt gives an insurance company a window of time in which they can ultimately issue or refuse to approve the policy. If during this time, the applicant for a life insurance contract dies, the company will pay a death benefit if the policy would have been issued.

A conditional receipt is a document given to someone who applies for an insurance contract and has provided the initial premium payment.

Condiitonal rceipt will not be issued until application is complete and initial premium is rec’d.

Question 39

Typically when group long term disability income insurance premiums are paid by a C corp, all disability benefit amounts rec’d by an employee are:

Answer 39

Includible in the income for federal tax purposes without regard to any other source of income

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

Question 40

Which of the following statements is false?

A. Federal law does not require those selling a group annuity contract with multiple investment choices, including equity funds to have a securities license or to provide a prospectus if it is sold to a qualified plan.

B. If you are licensed to sell life insurance and fixed annuities in your own state, you can sell those same products in all states except NY without additional licensing

C. In almost all states it is illegal to rebate commissions

D. The minimum licensing requirements for most states for selling variable annuity contracts are proper state life and annuity licenses and a Series 6 securities license.

E. Currently, there is no federal legislation covering licensing or regulation of capital requirements for insurance companies

Answer 40

Answer. B.

Remember that individual states regulate the insurance industry. Must have license in that state to sell products

Question 41

Jasmine’s mother, Betty, moved in with her 4 years ago after the loss of Jasmine’s dad. 6 months ago, Betty was diagnozed with dementia and requires more care than Jasmine can provide. They have chosen to place Betty in a nursing home nearby. THe home is $7K/mo. Betty currently has $21K in assets. Betty has also ben gifting Jasmine $600/mo. for last four years to help with the home and kids activities. When will Betty be eligible for Medicaid coverage for her care?

Answer 41

Answer: 7 months. $21K will cover first three moths of care. She gifted a total of $28K in prior 5 years. Penalty period is four months ($28,800/7000 = 4.1143) plus the three months she covered out of pocket.

In order to be eligible for Medicaid, applicants must have no more than $2,000 in “countable” assets (the dollar figure may be slightly more, depending on the state).

Question 42

How long is the look back period for gifts for Medicaid coverage (nursing home )

Answer 42

5 years

Question 43

Your client owns a whole life insurance policy with a death benefit of $200K on the life of his spouse. The policy has a cash value of $13.5K of which the dividends are used to purchase additional paid-up life insurance. Their son is the named beneficiary. If the spouse were to die today, which of the following is true?

A. The client continues to own the policy for the benefit of the son

B. A taxable gift on the LI proceeds has been made from the client to the son.

C. Client receives an amount equal to the cash value, and the son receives the reaminder of the LI proceeds tax free

D. The son must be at least 14 years old in order to collect the proceeds

E. The client receives the proceeds of the LI policy but must hold them in a LI trust for the benefit of the son.

Answer 43

Answer B. This is an example of the “unholy trinity” where the owner, insured and been are all different. If insured dies, owner has made a gift to the bene.

A major plus with life insurance is that the death benefit is usually tax-free. Your beneficiaries receive the money and don’t have to worry about a cut going to Uncle Sam.

But there’s an exception you should know about if you’re planning to buy life insurance and want to protect yourself from a gift tax.

The tax trap is known as the “unholy trinity” or “the Goodman Triangle” after a 1946 court case, Goodman v. Commissioner of the Internal Revenue Service. It happens when three different people play the roles of policy owner, insured and beneficiary.

Think of a life insurance policy as a triangle, says Amy Rose Herrick, a Chartered Financial Consultant and founder of the Money With Amy website. The three points of the triangle are as follows:

• The policy owner — the person who bought the policy and pays the premiums.
• The insured — the person whose life the policy covers.
• The beneficiary — the person designated to receive the death benefit when the insured dies.

“You always want two points of the triangle to be the same person, company or charity,” Herrick says.

If there are three different people at the three points, then the death benefit could count as a taxable gift to the beneficiary.

Question 44

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

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

Answer 44

Answer. 1 and 4.

A group term LI can be converted to an individual permanent LI policy, however a group permanent policy cannot be converted to a term policy. The insured does NOT have to prove insurability

A term-to-permanent life insurance conversion, or “term-to-perm” conversion, allows you to extend your life insurance coverage. You may have a 10-,15-, 20- or 30-year term life insurance contract now. Instead of letting it expire, you may be able to exchange it for a permanent policy without needing a new medical exam.

Question 45

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

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

Answer 45

Answer. 1,2 and 3.

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

Question 46

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

1. Direct involvement through tht development of specific regulations for all states to follow.
2. The regulation of the insurance commissioners of all states.
3. (indirectly) the exchange of info and prep of recommendations
4. Assuming that all states insurance regulation is somewhat uniform
5. Acceding state insurance regulation offices

Answer 46

Answer: 3 and 5

The NAIC only provides guidance and recommendation to the state insurance commissions. While they only provide recommendations, the NAIC has no actual control over the state insurance regulation

Question 47

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

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

Answer 47

All the above. All of the benes are eligible for COBRA benefits

Question 48

Bruce, age 55, is the bene of his mother’s $20K LI policy. Insured has requested him to select a settlement option for payment of the proceeds. What factors would be consdiered before making the election?

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

Answer 48

Answer: all the above except the tax liability.

The benefits are tax free so he doesn’t need to consider it.

Question 49

If you are currently insured through SS (will have earned at least 6 quarters of coverage in the last 13 quarters) and you die, your beneficiares will be entitled to spouse or childrens benefits.

If your spouse has no children, they will not be entiteled to benefits

Answer 49

Review the insurance practice exam

Question 50

A participating policy enables you, as a policyholder, to share the profits of the insurance company. These profits are shared in the form of bonuses or dividends. It is also known as a with-profit policy. In non-participating policies, the profits are not shared and no dividends are paid to the policyholders.

Answer 50

If policy is participating, then the dividends paid out are treated as a return of capital/return of premiusm paid and are NOT TAXABLE to the insured.

Question 51

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

A. Average annual earnings to age of retirement

B. Estimated annual SS benefits after retirement

C. Costs of self-maintenance

D. Number of years from the client’s present age to the contemplated age of retirement

E. Selection of an appropriate capitalizlation rate

Answer 51

Answer. B

Question 52

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

Answer 52

Hazards.

Hazards increase the frequency of a loss.

Perils are the proximate cause of a loss

Question 53

subgroation

Answer 53

Subrogation allows your insurer to recoup costs (medical payments, repairs, etc.), including your deductible, from the at-fault driver’s insurance company, if the accident wasn’t your fault. A successful subrogation means a refund for you and your insurer.

One example of subrogation is when an insured driver’s car is totaled through the fault of another driver. The insurance carrier reimburses the covered driver under the terms of the policy and then pursues legal action against the driver at fault.

Subrogation is a term describing a right held by most insurance carriers to legally pursue a third party that caused an insurance loss to the insured.

Question 54

An HO3 policy (special form: “All risks of physical loss” except those specifically excluded) with no endoresemtns excludes which one of the foloowing perils?

A. Flood

B. Fire

C. Collapse

D. Weight of ice

E. Volcanic eruption

Answer 54

ANswer A. Flood

Flood is alwayus excluded and needs a separate policy

Question 55

When fine arts or antiques are insured under a HO policy by an endorsement, coverage is usually on a _____ basis

Answer 55

Answer: valued basis

Fine arts and antiques need an appraisal or agreed upon value. THe closest choice is “valued basis”

Question 56

MECs

The seven-pay test helps the IRS determine whether your life insurance policy will be converted into an MEC. It compares the total premiums you paid in the first seven years of the policy with what you’d need to pay it in full. If your payments exceed what’s needed, your policy becomes recognized as an MEC

Answer 56

Cash-value life insurance has always provided consumers with a tax-free avenue of growth within the policy that could be accessed at any time, for any reason. But Congress has placed limits on the amount of money that can be put into these instruments, and all cash-value policies are now subject to what is the seven-pay test (also written as the “7 pay test”), which limits the tax benefits of cash-value withdrawals. Policies that fail this test are now classified as modified endowment contracts (MEC).¹

This act created the MEC. Before this law was passed, all withdrawals from any cash-value insurance policy were taxed on a first-in-first-out (FIFO) basis. This meant the original contributions that constituted a tax-free return of principal were withdrawn before any of the earnings. But TAMRA placed limits on the amount of premium that a policy owner could pay into the policy and still receive FIFO tax treatment. Any policy that receives premiums in excess of these limits automatically becomes a MEC.

What Are the Likely Tax Consequences of an Early Withdrawal Under a MEC? Withdrawals are taxed similarly to those of a non-qualified annuity. For withdrawals before the age of 59½, a penalty of 10% may apply. As with traditional life insurance policies, MEC death benefits aren’t subject to taxation

Taxation of MECs

Any loans or withdrawals from an MEC are taxed on a last-in-first-out basis (LIFO) instead of FIFO. Therefore, any taxable gain that comes out of the contract is reported before the nontaxable return of principal. Furthermore, policy owners under the age of 59.5 must pay a 10% penalty for early withdrawal.⁵ It should also be noted that the IRS has its own set of guideline premiums that must be met in order for cash value policies to retain their FIFO status.

Question 57

What is an absolute assignment?

Answer 57

What is Absolute Assignment in Life Insurance? In life insurance, the term absolute assignment refers to the transfer of all interest, rights, and ownership of an asset — in this case, the life insurance policy. This decision is irrevocable, which means it cannot be changed once it is in place.

Question 58

What is a collateral assignment?

Answer 58

Only a portion of the rights of the contract are assigned, until an obligation is fulfilled, such as collateral on a loan. The rights under the contract then revert back to the owner.

Question 59

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

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

Answer 59

4 only.

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

Question 60

insurable interest

Answer 60

What is insurable interest in life insurance? “Insurable interest” means, in simple terms, that someone would experience financial hardship upon your death. This is a basic requirement for a life insurance contract: The person who is purchasing the policy needs to have an insurable interest in the insured person

In order to purchase a life insurance policy on another person, a beneficiary-owner (a person, trust, or business) has to prove an insurable interest or financial dependency in the insured person.

In any case, a beneficiary must have an insurable interest in the person who is being insured if they are purchasing insurance on that person’s life

Question 61

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

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

Answer 61

Answer: 2 and 4

Question 62

A contract for variable life insurance may be categorized as an

Answer 62

unilateral contract, aletaory contract, condiitonal contract, or personal contract of adhesion

Question 63

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

Answer 63

Protect against adverse selection

Question 64

Is hospice care covered by Medicare Part A or B?

Answer 64

Yes hospice benefits are available for terminally ill persons

You qualify for hospice care if you have Medicare Part A (Hospital Insurance) and meet all of these conditions

Question 65

Residual disability benefits

Answer 65

protects against reduction in income if less- than total disability. Will provide difference in new salary vs old salary.

Question 66

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

Answer 66

Answer. $88K.

($150- 40k) = $110K x 80%

Question 67

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

A) it allows employees to borrow or withdraw cash

B) it provides an opportunity to continue coverage after retirement

C) The entire premium cost is paid by the employer

D) IT provides flexibility in designing coverage to best meet individual needs

Answer 67

Answer C.

The entire premium is paid for by the employee for a group universal life policy. Due to the cost , an employer rarely covers the full cost of this type of policy. An employee may be allowed to borrow against the plan. IT does provide permanent coverage

Question 68

WHich comapnies offer credit ratings on companies

Answer 68

A..M. Best, S&P and Moodys

Question 69

In a situation where someone has undertaken activities or actions that bring about extraordinarily hazardous circumstances, the term that would best describe this situation is:

1. Vicarious liability.
2. Attractive nuisance.
3. Res ipsa loquitor.
4. Absolute liability.

Answer 69

Solution: The correct answer is D. absolute liability

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

Question 70

Once the contract is placed in written form, all previous and prior understandings of a verbal contract (or any other nature) will not be allowed to contradict the written contract. This will be known as:

1. A.Res ipsa loquitor.
2. B.Parol evidence rule.
3. C.Estoppel.
4. D.Waiver provision.

Answer 70

Solution: The correct answer is B.

Option “A” - The thing speaks for itself - no need to prove negligence. Option “C” - If a right has been waived, the company will be stopped from denying a claim. Estoppel is a legal principle that prevents someone from arguing something or asserting a right that contradicts what they previously said or agreed to by law. It is meant to prevent people from being unjustly wronged by the inconsistencies of another person’s words or actions. Option “D” - The company representatives cannot change the contract.

Question 71

Grayson Marks is a referral from one of your long-term clients. Grayson has recently left his job and needs to roll over his former company 401(k). He has all his paperwork and needs to complete the transfer information. What is your first step?

1. Review and complete the paperwork for Grayson.
2. Help Grayson select investment choices for his new IRA.
3. Complete the account paperwork for the new IRA account.
4. Speak with Grayson to establish the responsibilities and parameters in the financial planning engagement.

Answer 71

Solution: The correct answer is D.

The answer is “D”. It may be tempting to initiate the rollover to meet the client’s request, but you need to start at step 1 in the financial planning process. Establish who the client is, we don’t know if Grayson is married and his spouse should be included. You will also want address if you will be doing comprehensive financial planning including monitoring the plan.

Question 72

Comparative negligence statutes:

1. A.Equalize negligence and loss.
2. B.Eliminate negligence.
3. C.Allocate negligence and loss proportionately.
4. D.Assume no-fault.

Answer 72

Solution: The correct answer is C.

Question 73

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

1. Reformation.
2. Rescission.
3. Res ipsa loquitor.
4. Revitalization.

Answer 73

Solution: The correct answer is A. Reformation

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

Question 74

Two fairly common defenses used against charges of negligence have been contributory negligence and:

1. Lack of injury.
2. Combined negligence.
3. Assumption of risk.
4. Lack of negligence.

Answer 74

Solution: The correct answer is C.

Today, more and more we are seeing cases presented on a comparative negligence basis. This allows one to collect even if one party did in some way contribute to the accident.

Question 75

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

1. Dismemberment benefits from accidental death and dismemberment coverage (AD&D) are taxable to the employee.
2. Benefits from a comprehensive medical expense plan are always tax free to the employee.
3. 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.
4. Employer-paid premiums are deductible by the employer if the benefits are payable to the employer and are considered additional reasonable compensation.

Answer 75

Solution: The correct answer is B.

Option “A” - AD&D benefits are not taxable to the employee or employee’s beneficiaries. Option “C” is false. Benefits would only be taxable if paid as an income stream. Then only the interest would be taxable. Option “D” - Premiums are always deductible to the employer, even if it is part of a key-person policy or pays to the employee. In a self-funded plan which is discriminatory, some or all of the benefits may be taxable to key employees.

Employer-paid premiums for health insurance are exempt from federal income and payroll taxes. Additionally, the portion of premiums employees pay is typically excluded from taxable income. The exclusion of premiums lowers most workers’ tax bills and thus reduces their after-tax cost of coverage

Question 76

Karen’s employer has a non-contributory indemnity health plan. The plan has a $250 deductible with 90/10 coinsurance and out-of-pocket limit is $10,000. Karen has the following medical expenses: - $75 for a visit to her family physician - $350 for ultrasound - $3,800 surgeon’s fees How much will Karen have to pay this year?

1. $647.50
2. B.$250
3. C.$3,975
4. D.$422.50

Answer 76

Noncontributory Insurance — a plan of insurance for which the employer pays the entire premium and the employee does not contribute to premium payment.

Solution: The correct answer is A.

Karen’s total medical expenses are $4,225 ($75 + $350 + $3,800).

She must pay the deductible of $250 plus

$4,225 - $250 = 3,975 x 10% = 397.50

For a total of $647.50

Question 77

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

1. The employer has terminated its health plan.
2. The employee has been terminated for incompetence.
3. The employer has gone out of business.
4. The employee has been terminated for gross misconduct.

Answer 77

Solution: The correct answer is A. (2 only)

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

Question 78

Employers with _____ or more full-time-equivalent employees are usually mandated to offer COBRA coverage

Answer 78

20

Question 79

If for any reason other than gross misconduct, your employment is terminated, COBRA provisions allow:

1. Cancellation of all group insurance benefits.
2. Continuation of group insurance benefits until you are re-employed.
3. Elimination of all group insurance waiting periods.
4. Temporary continuation of group insurance benefits with premiums paid by you.

Answer 79

Solution: The correct answer is D.

COBRA is designed to allow an individual to continue coverage for 18 months (29 months if they are disabled) while continuing premium payments themselves.

Question 80

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?

Answer 80

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 81

Bob Bradley has a typical major medical policy with a $250 deductible per occurrence and a $1,000,000 benefit maximum per occurrence. The policy has the usual 80%-20% coinsurance or percentage participation clause, with an out-of-pocket limit of $5,000 per occurrence applicable to the insured’s coinsurance obligation. During a recent hospital confinement, Bob ran up the following bills:

Hospital room-and-board charges $4,500

Long-distance phone charges $ 150

Hospital charges for tests and medication $3,360

Physician’s visits in hospital $1,100

Replacement cost of broken eyeglasses $ 250

TOTAL $9,360

How much of this total will be paid by Bob’s insurer?

Answer 81

Solution: The correct answer is B. $6,968

The only costs not includible as covered expenses are the phone calls and the glasses for $400. This amount subtracted from the total of $9,360 means that of the remaining $8,960: $8,960 - $250 = $8,710 × 20% coinsurance = $1,742 + $250 = $1,992 insured, which is below the out-of-pocket maximum of $5,000. $8,710 - $1,742 = $6,968 insurer.

Question 82

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

1. A.Grace period and reinstatement.
2. B.Occupation.
3. C.Misstatement of age.
4. D.Suicide.

Answer 82

Solution: The correct answer is A.

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

Question 83

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?

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

Answer 83

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 84

Jerry Burnham has covered medical expenses of $5,750. He has a $250 deductible on his health insurance policy with a 80/20 coinsurance up to the stop-loss of $5,000. His insurance company paid the following amount:

1. $1,250
2. $1,750
3. $4,400
4. $5,500

Answer 84

Solution: The correct answer is C.

$5,750 - $250 = $5,500 × .20 = $1,100 + $250 = $1,350 for insured $5,750 - $1,350 = $4,400 for the insurer

Always take (Total Expenses - Deductible) × coinsurance %; not coinsurance × Stop Loss.

Question 85

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

1. A.The staffing model.
2. B.The IPA model.
3. C.The group model.
4. D.The network model.

Answer 85

Solution: The correct answer is B.

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

Question 86

The group model of the HMO:

1. A.Is a corporation and medical staff members including doctors, nurses and clerical staff are employees of the HMO.
2. B.Is a type of HMO organization that is made up of physicians who have their own office locations.
3. C.Is an arrangement that is sometimes known as the network model.
4. D.Has no gatekeeper within the structure of this model.

Answer 86

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 87

An insured with a $250 deductible and an 80% - 20% coinsurance with a stop-loss limit of $5,250 would be responsible for how much of covered expenses totaling $4,700?

1. $1,250.00
2. $3,560.00
3. $1,140.00
4. $1,190.00

Answer 87

Solution: The correct answer is C.

The insured pays the $250 deductible. The remaining $4,450 ($4,700 - $250) is split, 20% paid by the insured ($890) totaling $1,140 ($250 + $890). The balance is paid by the insurer.

Question 88

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

1. Risk avoidance - installing sprinkler systems.
2. Risk retention - wearing protective clothing.
3. Risk reduction - establishing a general partnership.
4. Risk sharing - incorporation.

Answer 88

Solution: The correct answer is D.

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

Question 89

The best way to handle a high severity, low frequency risk is through the utilization of the following method:

1. Risk transfer.
2. Risk avoidance.
3. Risk retention.
4. Risk reduction.

Answer 89

Solution: The correct answer is A.

Risk transfer is the use of insurance. This should be done in the event of high severity (catastrophic) and low frequency (probable, but not often) losses that would wipe out one’s financial resources.

Question 90

All of the following are to be counted among the four primary methods of treating risk, except:

1. Risk Reduction.
2. Risk Elimination.
3. Risk Avoidance.
4. Risk Transfer.

Answer 90

Solution: The correct answer is B.

Risk elimination is not a risk management technique. Risk retention and risk sharing are other techniques that may be used as risk management options.

Question 91

Disability income insurance benefits terminate for the following reasons:

1. Insured has returned to work.
2. Maximum benefit period has been reached.
3. Group coverage has been canceled.
4. I only.
5. I and II only.
6. II only.
7. I, II and III only.

Answer 91

Solution: The correct answer is B.

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

Question 92

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

1. The relation of earnings to insurance clause will require an adjustment in the benefits payable.
2. The definition of disability will automatically change from “own-occupation” to “any-occupation”.
3. The change of risk clause will require new underwriting of the risk.
4. The change of occupation provision will permit the insurer to reduce benefits payable.

Answer 92

Solution: The correct answer is D.

In the case of increased risk on a disability policy the insurer will generally reduce coverage to match what the premium will purchase at the new, riskier position.

Question 93

Which of the following statements accurately reflects the tax implications of the purchase of disability insurance?

1. Employer paid policy on key employee = benefits taxable to employer.
2. Employer paid policy on key employees = non-taxable benefits to employee.
3. Employer paid policy on employee with employer as beneficiary = not deductible to employer.
4. Business overhead expense policy = benefits are tax free to individual owner/operator who purchases policy on himself.

Answer 93

Solution: The correct answer is C.

Option “A” benefits would be taxable to the employee. Option “B” benefits would be taxable to the employee because they are employer paid and deducted premiums. Option “D” benefits are taxable but the premiums are tax deductible as a business expense. Note: A business overhead expense disability policy pays the insured’s business overhead expenses if the insured becomes disabled. The policy is designed for small businesses that rely on one or two persons.

Question 94

As a rule, when group long-term disability income insurance premiums are paid for an employee by the C corporation for which they work, all disability benefit amounts received by an employee are:

1. NOT includible in the income of the employee for federal tax purposes without regard to any other sources of income.
2. Includible in the income of the employee for federal tax purposes without regard to any other sources of income.
3. NOT includible in the income of the employee for federal tax purposes if any portion of the benefit is reduced/offset by other income.
4. Includible in the income of the employee for federal tax purposes if any portion of the benefit is reduced/offset by other income.

Answer 94

Solution: The correct answer is B.

Disability premiums paid by the individual are received tax free; disability benefits paid by the C corporation are fully taxable upon receipt. Also, those benefits where the insured has paid the premium through a tax deductible plan (such as a cafeteria plan for group premiums) are taxable upon receipt.

Question 95

Is workers compensation taxable IRS?

Answer 95

Do you claim workers comp on taxes as taxable income? Regarding your question: do you claim workers comp on taxes, the answer is no. You are not subject to claiming workers comp on taxes because you need not pay tax on income from a workers compensation act or statute for an occupational injury or sickness.

Question 96

The particular type of disability insurance that is renewable is:

1. Non-cancelable.
2. Guaranteed Renewable.
3. Cancelable.
4. I only.
5. II only.
6. I and II only.
7. II and III only.

Answer 96

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 97

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

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

Answer 97

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 98

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?

1. Any Occupation.
2. Modified Any Occupation.
3. Split Definition.
4. Loss of Income.

Answer 98

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.

An any-occupation policy stands in contrast to an own-occupation policy that considers a policyholder disabled if they are unable to perform the same job as they did before an injury. Employer-provided disability insurance may only be available as an any-occupation policy.

Modified own-occupation: According to this definition, a person receives benefits when they can’t work in their own occupation and are totally disabled. However, benefits do not continue if that person wants to work earning an income in another profession.

Under own-occupation policies, coverage is provided to the insured even if they find work in a new profession as these policies do not come with such stipulations

Question 99

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

1. ‘Own occupation’ changing to ‘modified any occupation’.
2. ‘Modified any occupation’ changing to ‘own occupation’.
3. ‘Own occupation’ changing to ‘any occupation’.
4. ‘Any occupation’ changing to ‘own occupation’.

Answer 99

Solution: The correct answer is A.

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

Question 100

Which of the following statements regarding investment risk is correct?

1. Beta is a measure of systematic, non-diversifiable risk.
2. Rational investors will form portfolios and eliminate systematic risk.
3. Rational investors will form portfolios and eliminate unsystematic risk.
4. Systematic risk is the relevant risk for a well-diversified portfolio.
5. Beta captures all the risk inherent in an individual security.

Answer 100

1. Answer: I, III and IV only.

Solution: The correct answer is B.

Choice “II” is untrue because systematic risk cannot be diversified away. Choice “V” is untrue because beta measures systematic risk, and not all risk inherent (in this case diversifiable risk) is measured by beta.

Question 101

Mortgage-backed securities may contain which of the following risks:

1. Purchasing power risk.
2. Interest rate risk.
3. Prepayment risk.
4. II only.
5. I and II only.
6. I and III only.
7. I, II and III.

Answer 101

Solution: The correct answer is D.

If rates on the mortgage backed securities do not keep up with inflation and rising rates, their purchasing power will be reduced, as will their value (interest rate risk). If interest rates fall, the mortgagees may seek refinancing and prepay their obligations early.

Question 102

You are faced with several fixed income investment options. Which of these bonds has the greatest reinvestment rate risk?

1. A U.S. Treasury bond with an 11.625% coupon, due in five years with a price of $1,225.39 and a yield to maturity of 6.3%.
2. A U. S. Treasury strip bond (zero-coupon) due in five years with a price of $735.12 and a yield to maturity of 6.25%.
3. A corporate B-rated bond with a 9.75% coupon, due in five years with a price of $1,038.18 and a yield to maturity of 8.79%.
4. A corporate zero coupon bond due in 5 years with a price of $750 and a yield to maturity of 5.9%.

Answer 102

Solution: The correct answer is A.

This is due to the high coupon and lack of similar rates currently.

A good visual to use in the bond chart in Lesson 6 under Yield Summary. If the YTM is currently 6.3% on an 11.625% coupon bond, the bond is trading at a premium, meaning investors are willing to pay more to purchase that bond than new ones issued at par with the current coupon rate (much lower than 11.625%).

Question 103

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.

1. Incontestable Clause.
2. Suicide Clause.
3. Entire Contract Clause.
4. Ownership Clause.
5. I only.
6. II and IV only.
7. I and II only.
8. II and III only.

Answer 103

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 104

These policies guarantee renewability, not level premiums. Premium levels can be changed as long as it is done for an entire rate class.

1. Guaranteed renewable.
2. Non-cancelable.
3. Cancelable.
4. Renewable.

Answer 104

Solution: The correct answer is A.

Non-cancelable” policies are renewable on a guaranteed basis and the premium cannot be changed. All the others allow for a premium change, but the “guaranteed renewable” is the policy where if a rate change is made, it must be for an entire rate class.

Question 105

Life insurance is an aleatory contract. This means that:

1. Life insurance is designed to make one whole.
2. Those who need this contract most will try to buy it.
3. Only one party is legally obligated to perform.
4. One party pays more than the other party.

Answer 105

Solution: The correct answer is D.

Option “A” is indemnity. Option “B” is adverse selection. Option “C” is a unilateral contract.

Question 106

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:

1. Unilateral contract.
2. Aleatory contract.
3. Conditional contract.
4. Personal contract of adhesion.
5. I, II and III only.
6. I and III only.
7. II and IV only.
8. I, II, III and IV.

Answer 106

Solution: The correct answer is D.

All choices accurately describe the variable life contract.

1. Unilateral contract; it was drafted by one party.
2. Aleatory contract; means the policy values are uneven. The insured pays a small premium for a larger death benefit from the insurance company.
3. Conditional contract; conditions must be met to establish the policy (underwriting, health screening etc) and keep the policy (pay premiums).
4. Personal contract of adhesion; It is not a business contract, it is a policy on one person, making it a personal contract.

Question 107

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

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

Answer 107

1. II and IV only.

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

Question 108

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?

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

Answer 108

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 109

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:

1. Intensive nursing care.
2. Skilled nursing care.
3. Intermediate care.
4. Custodial care.

Answer 109

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 110

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

1. Continuing Care Retirement Communities.
2. Disability Income Policy Rider.
3. Association Arrangements.
4. Life Insurance Policy Rider.

Answer 110

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 111

Haley Mills has been a client of yours for quite some time. She recently unearthed some share certificates that her grandmother had left to her a few years ago. These shares that Grandma Mills bought were from an Internet start up. The timing was perfect, because the firm was about to undertake another stock offering and Haley had preemptive rights. Of the firm’s initial 1,700,000 share offering, Grandma Mills had invested enough to buy 10,000 shares at $11 per share. The new offering was an 850,000 share offering at $87 per share. If Haley fully exercised her preemptive rights, how much total cash would she pay for the shares in this new offering?

1. $55,000
2. $217,500
3. $385,750
4. $435,000

Answer 111

Solution: The correct answer is D.

The 10,000 share purchase of the 1,700,000 share initial offering was .59% (10,000 ÷ 1,700,000). That amount relative to this new offering of 850,000 shares was equivalent to 5,000 (850,0000 × .59%) shares if all preemptive rights were exercised. This 5,000 shares times the $87 offering price means that to fully exercise this right, Haley would require $435,000.

Question 112

How many days prior to the date of record must an investor purchase a stock to receive a dividend?

1. One day.
2. Two days.
3. Three days.
4. Four days.

Answer 112

Solution: The correct answer is B.

The ex-dividend date is one day prior to the date of record. An investor must purchase the stock the day before the ex-dividend date to receive the dividend. Therefore, an investor would have to purchase the stock two days prior to the date of record to receive the dividend.

Question 113

If the market risk premium were to increase, the value of common stock (everything else being equal) would:

1. NOT change because this does NOT affect stock values.
2. Increase in order to compensate the investor for increased risk.
3. Increase due to higher risk-free rates.
4. Decrease in order to compensate the investor for increased risk

Answer 113

Solution: The correct answer is D.

Question 114

An investor in improved land (with an office building) is concerned most with which one of the following factors?

1. Net income of investment.
2. Reselling the property within three years.
3. Real estate taxes.
4. Cash flow expected to be generated by the property.

Answer 114

Solution: The correct answer is D.

An office building is purchased to rent space; therefore, cash flow is of paramount importance. Net income without the information that leads up to this final figure is not as valuable as cash flow information. Resale, commissions and taxes are secondary concerns if the property is purchased (with an office building) for cash flow.

Question 115

Which of the following is an attribute of mortgage REITs?

1. They receive income from the rental or lease of real estate properties.
2. They provide more opportunity for capital gains than equity REITs.
3. They receive monthly income from investing in real estate loans.
4. They frequently invest in commercial properties.

Answer 115

Solution: The correct answer is C.

Options “A”, “B”, and “D” all describe equity REITs. Mortgage REITs are more volatile than equity REITs.

Question 116

NOI property

Answer 116

Net operating income does not take into account all the fees and expenses that might accrue from the property as capital, including income taxes, mortgage payments, and amortization or depreciation

Operating expenses include the costs of running and maintaining the building, including insurance premiums, legal fees, utilities, property taxes, repair costs, and janitorial fees

Question 117

The Chesapeake Bay apartment complex contains 60 one-bedroom apartments renting for $650 per month. In addition, the complex generates $625 per month from laundry, parking, and vending machines. Vacancy and collection losses have averaged 8% of Potential Gross Income (PGI) and are expected to continue at about the same rate in the future.

Annual expenses totaling $117,000 include:

Property taxes = $2,000

Property management = $7,000

Interest expense = $72,000

Swimming pool = $5,000

Professional fees = $8,000

Other expenses = $23,000

There is a monthly mortgage payment of $10,000 per month. Out of the $10,000 mortgage, $6,000 is interest expense and $4,000 is repayment of principal. Assuming a capitalization rate of 9%, what is the market value of the Chesapeake Bay complex?

1. $1,941,422
2. $2,884,140
3. $3,560,667
4. $4,360,667

Answer 117

Solution: The correct answer is D.

Gross rental receipts ($650 × 60 × 12) = $468,000 plus non-rental income ($625 × 12) = $7,500 equals potential gross income (PGI) ($468,000 + $7,500) = $475,500. PGI minus vacancy and collection losses [$475,500 - (.08 × $475,500)] = $437,460 equals Effective Gross Income (EGI). EGI minus expenses equals net income $437,460 - $117,000 = $320,460. Next, determine net operating income by adding interest and depreciation expense back to net income.

NOI = $320,460 + $72,000 interest + $0 depreciation = $392,460.

Market value = $392,460 ÷ .09 = $4,360,667

Question 118

You MUST add back depreciation and interest expenses to NOI calculation

Question 119

Lisa is a condo owner and has an HO-6 policy. She purchased the condo for $400,000. Her HO-6 policy is an open peril policy and has a face value of $360,000. Her contents are covered on a named peril basis with $100,000 in coverage. She also has an 80% coinsurance requirement. A tornado hits the building and completely destroys the roof of the condo. The cost to repair the roof is $50,000. How much would her condo policy cover for the roof damage?

1. $0.
2. $32,000.
3. $45,000.
4. $50,000.

Answer 119

Solution: The correct answer is A.

An HO-6 policy does not provide coverage for the building or roof. The building and roof are covered by the condo association policy, which covers all exterior walls and roof. The HO-6 policy covers all interior walls for a condo.

Question 120

The coinsurance formula is relatively simple.

Answer 120

Begin by dividing the actual amount of coverage on the house by the amount that should have been carried (80% of the replacement value). Then, multiply this amount by the amount of the loss, and this will give you the amount of the reimbursement.

Question 121

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?

1. $4,250
2. $5,750
3. $6,250
4. $9,500

Answer 121

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 122

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?

1. Extended first party coverage.
2. Modified no-fault coverage.
3. Pure no-fault coverage.
4. Unsatisfied judgment no-fault coverage.

Answer 122

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 123

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

1. Assist the insured in the preparing the proof-of-loss statement.
2. Determine whether there was a loss covered by the policy.
3. Classify the loss as standard, substandard, or ineligible.
4. Choose the arbitrator who will determine the amount of loss.
5. I and II only.
6. I and III only.
7. I and IV only.
8. II and III only.

Answer 123

Solution: The correct answer is A.

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

Question 124

Which of the following Homeowners Forms is known as Special Form and provides open peril coverage on both dwelling and appurtenant structures?

1. HO-1
2. HO-4
3. HO-6
4. HO-3

Answer 124

Solution: The correct answer is D.

HO-1 is almost non-existent basic coverage. HO-4 is renter’s coverage. HO-6 is condominium owner coverage.

HO-3 is special form coverage with open peril on coverage A and B.

HO-5 (not listed) is comprehensive form coverage.

Question 125

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

Answer 125

Solution: The correct answer is A.

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

Question 126

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?

1. $88,000
2. $110,000
3. $120,000
4. $150,000

Answer 126

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). Full replacement cost requires the full value of the property be insured (the house burned to the ground). For partial loss coverage, 80% of the value can be used (some fire or water damage, not a full loss).

Question 127

The branch of government responsible for proposal of bills and passage of legislation that governs the conduct of insurance organizations and their business is:

1. U.S. Congress.
2. State legislature.
3. State judicial branch.
4. State insurance commissioner office.

Answer 127

Solution: The correct answer is B.

Insurance is state regulated. Legislation is from legislature.

Question 128

Question

Which of the following is an advantage when a business chooses to have self-insurance for its employees?

1. Necessity to replace impartial claims service.
2. Incurred losses are deductible to the company.
3. Contributions to the self-insurance fund are not tax deductible.
4. Investment management and consulting services are replaced by the self-insurer.

Answer 128

Solution: The correct answer is B.

All the statements are true, but Options “A,” “C” and “D” are disadvantages or at the very least, additional requirements placed on the self-insurer.

Question 129

Medicare is a government-sponsored health care plan that has two primary components, namely:

1. Basic hospital insurance and dental insurance.
2. Broad-based hospital insurance and basic supplementary medical insurance.
3. Basic supplementary medical insurance and dental insurance.
4. Basic hospital insurance and supplementary medical insurance.

Answer 129

Solution: The correct answer is D.

Medicare does not include any of the other items such as dental coverage. Nor does it contain any more than basic hospital coverage.

Question 130

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?

1. Her husband, Robert, who is age 65.
2. Her mother, Joy, age 70, who was a dependent of Kathleen before her death.
3. Her daughter, Nora, age 18 and in high school.
4. None of the above.

Answer 130

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. The rule is under age 18, under age 19 if still in secondary school (high school). Payments to a child will stop at graduation or age 19, even if still in high school. Social security allows a two month grace period when the child turns 19 if their birthday is before graduation, otherwise no payments will be made to a 19 year old child, dependent or not.

Question 131

Which of the following is a FALSE statement?

1. 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.
2. 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.
3. In the majority of states, it is illegal to rebate commissions.
4. 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 131

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.