Insurance Review Questions Flashcards
1
Q
What are conditions that increase either the frequency of severity of loss called? A. Risks B. Perils C. Hazards D. Retention
A
C By definition
2
Q
Which of the following is an element of an insurable risk?
A. The loss must not be fortuitous.
B. The loss must be catastrophic.
C. There must be a sufficiently large number of heterogeneous exposure units to make losses reasonably predictable.
D. The loss produced by the risk must be definite and measurable.
A
D - Answer C uses heterogeneous rather than homogeneous.
3
Q
What do methods to control losses include? I. To diversify the losses II. To retain the losses III. To transfer the losses IV. To avoid the losses V. To reduce the losses A. All of the above B. II, IV, V C. II, III D. III, IV, V
A
A
4
Q
Which of the following correctly reflect insurance contract characteristics?
I. Probability affecting pricing
II. Reducing the loss by having a large pool of people share in the financial losses suffered by members of the pool
III. Transferring of risk from a group to an individual
IV. Speculating as to Joss probability
A. All of the above
B. I, II
C. II, III, IV
D. II
E. I
A
B - The underwriter uses a morbidity of a mortality table (or similar tables) in the process of selecting and classifying exposures (probabilities). Answer II uses the principle of large numbers.
5
Q
Why would a very large company use a self-insurance program?
A. To reduce insurance risks
B. To reduce cost associated with commercial insurance
C. To reduce income taxes
D. To increase profits
A
B - Self-insurance does not reduce insurance risks. It could reduce income taxes or increase profits (depending on the claims). Although Answer D is arguable in certain circumstances as it may increase profits, Answer B is the better answer.
6
Q
Stop-loss coverage is most likely to be used by what type of company to partially self-insure its employee medical Insurance program?
A. Only large companies
B. Medium-to-large companies
C. Companies with as little as 100 employees
A
C - A small company could self-insure employee claims to $250,000. Claims above $250,000 in aggregate would be paid by an insurance company. Claims under $250,000 in aggregate would be financed by the employee, employer contributions, and potentially reduced health insurance premium costs. The dollar amount ($250,000) is just used to justify the answer. It could be $100,000 to $1,000,000. The word partially is bolded.
7
Q
Which of the following is an example of a hazard?
A. One cars hits another car
B. A home burns to the ground after being struck by lightning
C. Ownership of a home
D. Owning a home on the Gulf of Mexico
A
D - Answers A and B are perils, and Answer C is a risk. Other examples of a hazard are the type of construction or the occupancy of a building.
8
Q
Which of the following statements concerning the various methods of handling risk is incorrect?
A. Avoidance: A parent refuses to give permission for a child to participate in a field trip.
B. Retention: A parent raises the deductibles on his automobile insurance when his teenager begins to drive the car.
C. Reduction: A homeowner increases the height of a fence surrounding his swimming pool.
D. Diversification: A condo association installs floodlights in its parking lot.
E. Transfer: A homeowner requires a surety bond from his/her contractor to guarantee the completion date of his/her remodeling project.
A
D - Installing floodlights in the parking lot is an example of risk reduction. It is incorrect. The others are correct.
9
Q
Which of the following are elements of an insurable risk? I. The loss must be inevitable. II. The loss must be catastrophic. III. The loss must be fortuitous. IV. The loss must be accidental. A. All of the above B. I, III, IV C. I, IV D. III, IV
A
D - Although death is inevitable, this element of risk is insurable. However, if the loss were inevitable, the element of risk would not be present.
10
Q
Jane's car is damaged due to an accident in which she was not at fault. Jane forces her carrier to provide her with a new car. Her carrier then takes over Jane's rights to file a claim under which of the following? A. Negligence per se B. Collateral source rule C. Absolute liability D. Subrogation
A
D - When her carrier provides her with a new car, she is indemnified (made whole). The carrier would take over her legal rights.
11
Q
In an insurance contract, which term refers to the legally binding arrangement that explains the basic promise of the insurance company? A. The declarations B. The definitions C. The insuring agreement D. The exclusions E. The conditions
A
C - In this section, the insurance company promises to pay for the loss if the loss should result from the perils covered.
12
Q
In an insurance contract, where do you find the factual statements identifying the specific person, property, or activity being insured? A. The declarations B. The application C. The conditions D. The amendments E. The definitions
A
A - The declarations also give descriptive information about the insurance being provided.
13
Q
A company can purchase and own a life insurance policy in all the following circumstances except which of the following?
A. Key person
B. Buy-sell
C. Deferred compensation arrangement for a key person
D. Dependent of a key person
A
D - No insurable interest exists on the dependent of an employee.
14
Q
Which of the following are the most important criteria for selecting an insurer? I. Carrier represented by brokers, not agents II. Policy types offered III. A.M. Best rating IV. History of the company A. All of the above B. I, II, III C. II, III D. III E. I, IV
A
C - Answers I and V are not factors in deciding whether to select an insurer.
15
Q
Which answer best matches a legal term to an example of that term?
A. Intentional tort: negligence
B. Attractive nuisance: dangerous pets
C. Absolute liability: babysitting
D. Negligence: backing into another car while parking
A
D
16
Q
A life insurance policy that pays dividends is which of the following? A. Guaranteed renewable policy B. Participating policy C. Flexible premium policy D. Non-participating policy
A
B - Participating life policies pay dividends.
17
Q
Using a capital retention calculation, how much life insurance should the client purchase to meet his survivor's yearly income needs ($65,000) so that it will increase with inflation of 6%? HINT: There are only two numbers given. A. $1,083,333 B. $1,148,333 C. $650, 000 D. $715,000
A
B - $65,000 Ö 6% = $1,083,333 Begin \+ 65,000 $1,148,333 NOTE: If there is no time variable it is not a HP type question. Method shown in Insurance Lesson 2. However, inflation is used in lieu of return.
18
Q
An alligator cage was knocked over by a hurricane. The alligator escaped and injured one neighbor, frightened several others, and did considerable damage to a neighbor’s dogs. Under these circumstances, which of the following statements concerning the responsibility of the alligator owner is (are) correct?
I. The court would recognize the events as an act of God and not hold the owner of the alligator responsible for the ensuing escape of the alligator or the resulting damage.
II. The court would recognize the owner of the alligator as having absolute liability.
III. Since the owner of the alligator did not have a ‘last clear chance’ to avoid the accident, that owner is not responsible.
A. I
B. II
C. III
D. I, III
E. None of the statements are correct.
A
B - Answers A and C do not avoid absolute liability.
19
Q
Jan is comparing two life insurance contracts. One agent said that after ten years the cash value will exceed the premiums paid. The other agent gave her a Best Report. What information should Jan obtain to make a better decision?
A. Whether the policy is participating or non-participating
B. A cost-benefit analysis
C. A Standard & Poor’s Report
D. A third proposal
A
B - Although Answers A, B, and C are important, Answer B will allow Jan to compare the contacts.
20
Q
Which of the following is true about policies written by a participating insurance company?
A. They always pay dividends to their policyholders.
B. They overcharge for premiums due.
C. They are owned by stockholders.
D. They participate with stockholders.
A
B - This is the best answer. Answer A is wrong because of the word ‘always.’ If the company loses money, it is not required to pay a dividend.
21
Q
Ken, a financial planner, is away on vacation. His para planner, Sue, gives advice to one of Ken’s clients. Sue’s information causes the client to lose money. Can Ken be held responsible?
A. No, he was on vacation.
B. No, he did not give the advice.
C. Yes, Ken can be held responsible under strict liability.
D. Yes, Ken can be held responsible under respondeat superior.
A
D - He has vicarious liability.
22
Q
Which of the following is not a negligent situation?
A. Babysitting for a family member
B. Keeping of wild animals
C. Backing into another car while parking
D. Not screening or fencing around a swimming pool
A
A - Babysitting by itself is not a negligent situation. Answer B is absolute liability. Answer C is a collision. Answer D is attractive nuisance.
23
Q
Which of the following is not one of the sources of information used during the underwriting process? A. Information from the broker B. Cost-benefit analysis C. Physical examinations D. Investigations Insurance Planning Quiz - Lesson 2
A
B - The other answers are correct.
Insurance Planning Quiz - Lesson 3
24
Q
Lloyd purchased a small house that he uses as an office building for $200,000. Its replacement cost is
$150,000. Because of the location, the carrier required 90% coinsurance. Lloyd insured the building for
$120,000. Recently, he had a small electrical fire that caused $5,000 of smoke and other damage. Using the formula method, how much of the claim did the carrier pay if his deductible was $500?
A. $500,000
B. $3,250.00
C. $3,500.00
D. $3,944.44
E. $4,000.00
A
D - [$120,000 Ö $135,000* x $5,000] - $500 = $3,944.44
*The replacement cost is $150,000, but the coinsurance is 90%. Therefore, the insurance coverage should be $135,000. The insurance carrier will pay $4,445.44 less the deductible.
25
```
John and Helen insured their home under an HO-2 policy. John and Helen upgraded their coverage to an HO- 3. The HO-3 (special form - all risk of physical loss except those specifically excluded) with no endorsements includes which of the following perils?
I. Hazards
II. Intentional loss
III. Flood
IV. Earthquake
V. Vandalism
A. None of the above
B. I
C. I, II
D. III, IV
E. V
```
E - Intentional loss, floods, and earthquakes are normal exclusions. Explosions would be covered. (Remember WHARVES Vandalism). A peril is a cause of loss. A hazard is a condition that may create or increase the chance of a loss arising from a given peril.
26
Which of the following is a characteristic of an HO-4 policy?
A. It provides basic coverage on personal property.
B. It excludes medical payments to others.
C. It is a policy for condo owners.
D. It excludes coverage on structures.
D - It has broad form coverage on personal property. The policy includes medical payments. The policy is for renters, not condo owners.
27
```
Homeowners Section II coverage includes which of the following?
I. Dwelling
II. Liability
III. Personal property
IV. Medical payments
V. Loss of use
A. I, III, V
B. II, III
C. II, IV
D. III, IV
```
C - The question is asking about Section II coverage.
28
```
Which of the following vehicles are covered under a father's PAP?
I. A new car purchased last week
II. A car rented while on vacation
III. A pickup truck used in business
IV. A car owned by a son on a separate insurance policy
A. All of the above
B. I, II, IV
C. I, II
D. III
```
C - The van would have to be covered under a commercial policy not on a personal auto policy (PAP).
29
```
A workers' compensation claim falls under which kind of liability?
A. Strict
B. Absolute
C. General
D. Contributory negligence
E. Assumption of risk
```
B - Common law defenses for employers against injured workers include Answers D and E. Absolute liability holds the employer liable for most work-related injuries and diseases.
30
```
Which of the following is/are homeowner policy exclusions?
I. Earthquake
II. Sinkhole/home damaged
III. Flood
IV. Carelessness by an insured
A. All of the above
B. I, II, IV
C. II, III
D. I, III
```
D - Sinkhole is covered because the home is damaged. Intentional losses committed by an insured are specifically excluded. Carelessness is not an intentional loss. EXAMPLE: The person, while driving a car, didn't watch the car in front of him or her. As a result the person hit the car in front of him or her. The carrier will pay the claim.
31
```
Which of the following is excluded under an auto policy?
A. Earthquake
B. Flood
C. Falling objects
D. Wear and tear
```
D - Under the auto policy, earthquakes, floods, and falling objects are covered. Normal wear and tear is not covered.
32
Which of the following is true?
A. Damage to an attached garage is covered under Coverage A in an HO-2 policy, but damage to a detached garage is protected under Coverage B in an HO-3 policy.
B. An HO-2 policy covers damages to the insured 1's residence against 'broad form perils' including intentional loss.
C. In an HO-2 policy, personal property of the insured is covered against 'broad form perils', but in an HO-3 policy personal property of the insured is covered against 'open form perils.'
D. The principal difference between the HO-2 and the HO-3 is that coverage of the dwelling and other structures is more comprehensive in the HO-2 policy.
A - Answer A must be read carefully. Answer B is wrong because intentional loss is excluded. Answer C is wrong because both the HO-2 and HO-3 policies provide 'broad form perils' for personal property. Answer D is wrong because the HO-3 policy offers better coverage with 'open perils' coverage.
33
John and Helen are considering buying a 'rental' condo on the beach in Florida. They are concerned about condo assessments due to building storm damage. Which type of homeowners policy should they buy?
A. HO-5 with loss assessment coverage
B. HO-3 with HO-15 rider with Section II loss assessment
C. HO-4 with loss assessment coverage
D. HO-6 with loss assessment coverage
D - The proper policy is an HO-6. Loss assessment is additional coverage.
34
```
Bill Yates was involved in a not-at-fault auto accident. He was hurt, and his car was damaged. A hit-and- run vehicle left the accident before Bill could get the driver's name, number, or license. Under which parts of his auto policy (he has A, B, C, and D coverage) can he collect?
I. Bodily injury/property damage
II. Medical payments
III. Uninsured motorist
IV. Collision
V. Other than collision
A. I, II, III
B. II, III, IV
C. II, V
D. III, IV
E. IV
```
B - Medical payments and collision apply. Answer III protects him when he has no one to sue. Bill must file a claim against his own insurer to collect under the uninsured motorist provision. Basically, he sues himself. This presumes the hit-and-run vehicle/operator cannot be identified. Item I is incorrect; Coverage A would apply if Bill were at fault and if the other party were injured or his/her property were damaged.
35
Jane has a $1 million umbrella policy with a requirement that the underlying automobile liability policy has limits of $250,000 per person. However, Jane only has coverage of $50,000. If a legal judgment of
$700,000 is obtained against Jane, how much will the umbrella pay?
A. $50,000
B. $250,000
C. $450,000
D. $500,000
E. $650,000
C - The question only asks about the umbrella. $700,000 - $250,000 (required limit) = $450,000. Her auto policy would pay $50,000 then she would pay $200,000 and the umbrella would pay the difference.
Please review umbrella information if you are having any problems with this question.
36
Which of the following is true about umbrella liability insurance coverage?
I. It provides excess coverage when the limits of the insured's basic liability coverage are adequate.
II. It provides excess coverage when the limits of the insured's basic liability coverage are inadequate.
III. It provides broader coverage than basic underlying policies.
A. I, II, III
B. I, III
C. II, III
D. I, II
A - The material shows that the umbrella even works when the client has inadequate coverage. It makes the insured responsible for inadequate coverage. For the CFP Board Certification Examination, the client should have an umbrella.
37
```
Joe, a CFP practitioner, has various personal, business, and professional insurance policies. He is sued by a client for unsuitable investments recommendations. Which policy or policies will afford Joe coverage?
I. Malpractice
II. Errors and Omissions
III. Personal Umbrella
IV. Commercial Umbrella
V. Business Owners Policy
A. I, III, IV
B. II, IV, V
C. II, IV
D. II
E. III, IV, V
```
D - Professional liability is covered only by errors and omissions. The personal umbrellas, the commercial umbrella, and the BOP all have exclusions for professional liability.
38
Mr. Harris serves as a director of his condo association. He is not paid for his services. During the year, the management company of the condo lost $1 million due to negligent acts. Can Mr. Harris be sued?
A. No, the management company is solely responsible.
B. Yes, Mr. Harris can be sued.
C. No, Mr. Harris is not an officer of the condo association.
D. No, Mr. Harris is only responsible in case of mismanagement.
B - This is why Mr. Harris should require the condo association to purchase Directors and Officers coverage. He can be sued by an association member.
39
```
Which of the following corporate paid insurance premiums or costs are tax-deductible?
I. Business owners insurance
II. Key man life insurance
III. Workers' compensation insurance
IV. Federal unemployment tax
V. Directors and officers insurance
A. I, III, IV, V
B. II, III
C. II, IV
D. III, IV, V
E. III, V
Insurance Planning Quiz - Lesson 3
```
A - Answers II is not tax-deductible. Answers I, III, V, and V are business deductions. Unemployment benefits are taxable inco1ne, but the payment of the tax is tax-deductible. Federal unemployment tax is FUTA and is deductible.
NOTE: Although Key Man life insurance is not covered at this point, the only choice is answer A. The answer A's policies are a business deduction.
Insurance Planning Quiz - Lesson 4
40
What does the term 'break point' mean in a major medical policy?
A. The maximum benefit amount is paid out.
B. The participation (coinsurance) provision begins.
C. The insurer begins to pay 100% of all medical expenses.
D. The insured must incur a specified amount of expense personally before the major medical plan becomes applicable.
C By definition
41
Which of the following statements concerning Medicare Part B is or are correct?
I. Benefits are subject to calendar-year deductible, and only 80% of the Medicare approved charges are paid.
II. The cost of self-administered drugs is covered.
III. The cost of doctor visits is covered both in and out of hospital.
IV. Part B is a voluntary program of health insurance.
V. Outpatient services by a participating hospital are a covered expense.
A. I, II, IV
B. I, II, V
C. I, III, IV, V
D. IV, V
E. IV
C - Self-administered drugs are not covered. Medicare B is subject to a deductible.
42
Lars has a medical policy that has a $1,000 deductible and an 80%/20% coinsurance clause of the next
$5,000 of claims. If Lar's claim is $5,000, how much will he pay?
A. $800
B. $1,000
C. $1,400
D. $1,800
E. $3,200
```
D Claim $5,000
Lars Insurance
Deductible
$1,000
-----
Coinsurance
800 (20% of $4,000)
$3,200 (80% OF $4,000)
$1,800
$3,200
```
43
Which of the following is true about preferred provider organizations (PPOs)?
A. Patients must go to a PPO gatekeeper to get to the PPO specialists.
B. PPOs emphasize cost containment.
C. Employees who use PPOs may go out-of-system for needed medical treatment.
D. PPOs have a fixed prepayment fee.
C - HMOs emphasize cost containment.
44
Ken, who is age 65, has elected to drop his group health plan (family coverage) but continue to work. He elected Medicare Parts A and B. His wife is age 63. What are her options if the company has a self- funded health plan for its 50+ employees?
A. She will not be offered coverage because the employer has a self-funded health plan and no COBRA options.
B. She can get 18 months of coverage under COBRA.
C. She can be covered for 18 months only if her husband, Ken, elects COBRA.
D. She can get 36 months of coverage under COBRA.
D - The qualifying event is 'eligibility for Medicare.' He dropped his coverage because he is eligible for Medicare. His family, not him, will get COBRA coverage for 36 months.
45
Which is true about HIPAA?
A. It is only available to an employee when the company has 20 or more employees.
B. If an individual cannot elect COBRA, that individual cannot elect HIPAA.
C. It affords coverage for up to 36 months, depending on the qualifying event.
D. It allows an employee to take specific insurance from one job to another.
E. It was designed to reduce the problem of 'job lock.'
E - HIPAA's main feature is to allow an employee to move from one employer's health plan to a new employer's health plan without having to meet the pre-existing requirements of the new employer's health plan. Answers A and B are COBRA answers. HIPAA is available to all employees with prior medical coverage. Answer D Is wrong. One cannot take specific insurance from one job to another.
46
Larry (single) has an HSA plan. He elected a $2,200 deductible plan. During the year he has $1,000 of qualified miscellaneous medical expenses not covered by insurance. He withdraws $1,000 from his HSA to pay the medical expenses. What will be the tax result?
A. The $1,000 will be tax-free to Larry.
B. The $1,000 will be taxable to Larry.
C. $350 will be taxable, and $650 will be tax-free (65% rule).
D. $650 will be taxable, and $350 will be tax-free (65% rule).
A - HSA distributions are excludible from gross income if they are used to pay medical expenses. In this question it says he has $1,000 of qualified miscellaneous medical expense not covered by insurance. Answer A is the best choice.
47
Medicare supplemental policies do which of the following?
A. Cover approved expenses not paid by Medicare
B. Cover expenses not paid by Medicaid
C. Cover nursing home expenses
D. Fully reimburse all expenses not paid by Medicare
A - Medicare supplement policies do not reimburse all expenses not paid by Medicare.
48
Bob, a self-employed individual (31% tax bracket), has an HSA. He has a $3,100 deductible. Recently, Bob had a medical problem which cost $2,000 in medical expenses. He took a $2,000 distribution from the HSA to pay these expenses. Which of the following is true?
A. Distributions from an HSA are tax-free.
B. The $2,000 is taxable at 31%.
C. Distributions that are used to pay qualified medical expenses are excludable from gross income.
D. The distribution is tax-free only after $3,100 of expenses are incurred.
C - This is similar to Q7 except answer A says distributions. Distributions can be taxable if they are not
qualified. The word ÒqualifiedÓ is missing in answer A. Picky
49
Mr. Smith, age 65, and Mrs. Smith, age 62, are both working. Who could be covered by Medicare?
A. Neither
B. Mr. Smith only
C. Mrs. Smith because Mr. Smith will be covered
D. Mrs. Smith will not be covered.
B - Answer D does not answer the question (could be 'covered').
50
The major differences between HSAs and HSAs are which of the following?
I. HSAs have smaller deductibles than HSAs.
II. HSAs have smaller maximum out-of-pockets than HSAs.
III. HSAs have catch-up provisions; HSAs do not.
IV. HSAs can be written after 2004; HSAs can be written until the end of 2006.
A. All of the above
B. I, III
C. I, IV
D. II, III
E. II, IV
B - HSAs have larger maximum out-of-pockets than HSAs. After 2005, no new HSAs can be created. 2006 is wrong. Answer II is incorrect.
51
The COBRA election period is which of the following?
A. 30 days after termination
B. 30 days after the actual notice of the event to the qualified beneficiary by the plan administrator
C. 60 days after termination
D. 60 days after the actual notice of the event to the qualified beneficiary by the plan administrator
D - The 60 days starts with the notification.
52
```
Which of the following benefits are provided by Medicare Part A and Part B?
I. Acupuncture
II. Eye refractions
III. Long-term care
IV. Diagnostic tests
V. 3 pints of blood as an inpatient
A. I, II, IV
B. II, III, IV
C. II, V
D. IV, V
E. IV
```
E - Extended care (not LTC) in a skilled nursing home is limited to 100 days. Eye refractions (exams) are not covered. If the hospital has to buy blood for you, you must either pay the hospital costs for the first 3 units you get in a calendar year or have the blood donated by you or someone else. Only IV is covered.
53
Who is eligible for a HSA?
A. Any individual covered by a HDHP
B. Any individual enrolled in Medicare
C. Any individual claimed on someone else's tax form
D. Any individual covered by group health insurance
A - Answer B could be true if it said 'eligible for Medicare'. Answer D may be true. It depends on the plan deductible. HDHP is a high deductible health plan.
54
```
Fact: The penalty for late sign-up for Medicare Part D is 1% for each month late. If the base premium is
$35 per month today, how much additional monthly premium would John Thomas pay if he signs up 48 month late?
A. $16.80
B. $23.04
C. $35
D. $48.04
E. $51.80
Insurance Planning Quiz - Lesson 4
```
A - $35 x 48% = $16.80
| Insurance Planning Quiz - Lesson 5
55
```
Sam works for Z Corporation. His salary is $60,000. Sam has disability insurance provided by the corporation based on 60% of his salary. The employer adds the cost of the disability insurance coverage annually to Sam's W-2 ($3,000). Sam is in a 28% bracket. Calculate Sam's net-oHax monthly disability benefit if he remains in the 28% bracket while disabled.
A. $2,160
B. $2,268
C. $3,000
D. $3,150
```
C - Sam's salary is $60,000. The amount of insurance is based on his salary. His W-2 income is $63,000. The premium is added to his salary in the form of a bonus (not salary). He is paying the premiums; therefore, the benefits are tax-free.
If Z Corporation paid the premium for Sam under a salary continuation contract, what is the answer? Answer: A Answer C is $60,000 at 60% = $36,000 divided by 12.
56
```
Mrs. Ledbetter was in the hospital for 6 days to repair an arterial aneurysm under Medicare Plan A ($152.00 - 2014). Upon discharge from the hospital and as part of her prescribed rehabilitation plan, she has entered a skilled nursing facility. The skilled nursing facility charges $302.00 per day. If she stays 30 days, how much must she pay out of pocket?
A. $1,500
B. $1,520
C. $4,480
D. $7,460
```
```
B - Medicare will pay the first 20 days in full. Medicare will pay the amount above $152.00 for the next 10 days. She will pay $152.00 per day for 10 days, or $1,520.
Medicare pays
$302.00 for 20 days =
$6,040
$150.00* for 10 days =
+1,500
$7,540
* 302.00 - 152.00 = $150.00
```
57
```
Upon returning to work, the insured is unable to earn as much; benefits are proportional to the amount of income lost and are payable for the same duration as total disability benefits.
A. Waiting period
B. Any occupation definition
C. Presumptive disability
D. Residual disability
E. Probation period
```
D By definition
58
```
The insured is considered disabled only if 'he or she is unable to perform the duties pertaining to any gainful occupation.'
A. Waiting period
B. Any occupation definition
C. Presumptive disability
D. Residual disability
E. Probation period
```
B By definition
59
```
A period of time after the disability occurs before benefits payments begin.
A. Waiting period
B. Any occupation definition
C. Presumptive disability
D. Residual disability
E. Probation period
```
A By definition
60
Tom is age 65. He falls repeatedly due to Alzheimer's. Although unhurt, he is admitted into a nursing home because he is unable to care for himself. Which of the following is true?
A. He can be covered by Medicare for 20 days.
B. He could be covered by Medicaid if he qualifies.
C. He will be covered by either Medicare or Medicaid.
D. He will not be covered by Medicare or Medicaid.
B - The key words are 'could' and 'will.' He 'could' be qualified if his resources are insufficient. He will not be covered by Medicare because there was no hospital stay and because his condition is not expected to improve.
61
When Jody became ill (but not disabled) for a few weeks, John and Jody experienced a negative cash flow. Although both have disability insurance plans, they feel existing coverage will be insufficient to maintain their current lifestyle. Which do you suggest they do?
A. Both should increase their existing individual disability plans to maximum benefits permitted by law.
B. Both should take out additional life insurance and add disability waiver of premium.
C. Both should take out hospital and surgical indemnity policies.
D. Both should take out an LTC policy with home health care.
E. Both should apply for additional individual disability policies with Social Security supplements and guaranteed insurability options.
E - The best answer is Answer E because it addresses the question. Answer A looks good, but you cannot increase the benefits on an existing policy. Even with a guaranteed insurability rider, a new additional policy would be issued.
62
```
Which is the best definition of disability from the insured's standpoint?
A. Loss of income
B. Non-cancellable
C. Any
D. Own
E. Presumptive
```
D
63
Dr. Samuels purchased a disability policy with a base benefit of $10,000/mo. and a SIS benefit of
$1,200/mo. Dr. Samuels is totally disabled and ultimately receives $800 in Social Security disability benefits. How much will the carrier pay him each month fron1 the policy once he receives the Social Security benefit?
A. $400
B. $9,200
C. $10,400
D. $10,800
E. $11,200
```
C - The base plan of
$10,000
plus $1,200 - 800
+ 400
$10,400
```
64
Bob would like to purchase a disability insurance policy, but premium cost is a problem. What can he do to reduce the premium costs?
I. Increase the elimination period
II. Delete the presumptive disability coverage
III. Delete the continuance provision
IV. Not buy the COLA rider
V. Purchase a guaranteed renewable policy
A. I, IV, V
B. II, III
C. I, III, IV
D. II, III, V
E. IV, V
A - Bob can reduce the premium by using a longer elimination period and/or choosing a policy with guaranteed renewable rather than non-cancellable. The presumptive disability clause and the continuance provision clause are part of the policy. COLA is a rider (extra cost).
65
```
A client already has short-term disability (group with a 6-month benefit). The client wants long-term disability and continuous coverage. Which coverage provisions would least fulfill his/her goal on the new policy?
A. COLA coverage
B. Increased monthly benefits
C. Any occupation
D. Elimination period of 180 days
Insurance Planning Quiz - Lesson 5
```
C - The question is asking which coverage provision would least satisfy her goals. Having any occupation would not be beneficial.
Insurance Planning Quiz Lesson 6
66
```
When Andy purchased a whole life contract, he wanted the death benefit to increase from year to year. Which dividend option did he elect?
A. Paid-up insurance
B. Extended term
C. One-year term
D. Pure life
E. Accumulated with interest
```
C - The one-year term dividend option pays a death benefit equal to the guaranteed cash value (which is increasing). Since the death benefit is based on the cash value, it increases yearly. This is true even if the client borrows against the policy. Paid-up insurance is a non-forfeiture option, not a dividend option. It does not increase; the death benefit is fixed. Accumulated with interest isn't truly a death benefit. (Dividends are paid in addition to the face amount of the policy.) Paid-up additions would be a correct answer, but it isn't a choice.
67
Which of the following is true about term insurance?
A. It can provide permanent protection (30 or more years).
B. It can have a limited amount of cash value.
C. It is usually guaranteed renewable (limited number of years).
D. It is only good for an insured that has a need for a large amount of death benefit.
C - Term insurance is renewable for a period of years.
68
```
Janice (50%) and Sylvia (50%) own Jasy, Inc. They have a simple buy-sell arrangement. They feel the company is worth $500,000. Which of the following life insurance contracts would you suggest?
A. $250,000 first-to-die
B. $250,000 of whole life on each
C. $500,000 15-year level term on each
D. $1,000,000 15-year level term on each
```
A - This sounds like a first-to-die application. If the total interest is $500,000 and each owns 50%, then the insurance needs only to cover the first to die (50% of $500,000). The most simple and least costly policy is Answer A. Two $250,000 whole life policies are expensive. After one person dies, the second policy is not necessary. Remember, that is what the question is asking (buy-sell application).
69
```
Which of the following is a non-forfeiture option?
A. Paid-up additional insurance
B. One-year term insurance
C. Extended term insurance
D. 5th dividend
E. Interest only
```
C - Answers A, B, and D are dividend options. 'Interest only' is a settlement option.
70
```
Lillian, terminally ill, sells her $100,000 policy to a viatical company for $40,000. What amount of gain must she report if she paid $30,000 of premiums?
A. $0
B. $10,000
C. $40,000
D. $60,000
E. $70,000
```
A - The gain is always zero no matter what the cash value, premium paid, or the payment made by the viatical company.
71
```
Client is over 60 years old. If there is no need for life insurance, what is the best non-forfeiture option?
A. APL
B. Grace period
C. Paid-up
D. Extended term
E. Cash surrender value
```
E - If there is no need, the client should cash the policy in.
72
```
Level amount of life insurance for a fixed period of time
A. APL
B. Grace period
C. Paid-up
D. Extended term
E. Cash surrender value
```
D - Definition of extended term
73
```
Non-forfeiture option which could have a delay clause
A. APL
B. Grace period
C. Paid-up
D. Extended term
E. Cash surrender value
```
E - The cash surrender option has a 6-month delay clause. This is to prevent a 'run on the bank'. This is a standard provision in life insurance policies. In the real world, there would be no delay,
74
```
Policy provision which would create a premium loan to pay a premium in default
A. APL
B. Grace period
C. Paid-up
D. Extended term
E. Cash surrender value
```
A - Definition of Automatic Premium Loan (APL)
75
A client wants to stop paying the premiums on his whole life policy. What are his options?
I. Cash it in
II. Take a reduced amount of paid-up whole life
III. Take a paid-up term (extended term) insurance policy
IV. Use APL to cover the premium (if elected by policyholder)
V. Annuitize the cash value
A. All of the above
B. I, II, III
C. II, III, V
D. IV
A - All the options are available. The APL option is elected by the policyholder at issue or any time by the policyholder. It creates a loan to pay the premium. The loan is not a demand loan.
76
Which of the following is not a correct statement concerning Universal life insurance?
A. It provides lifetime protection as long as sufficient premium is paid.
B. It has a guaranteed cash value.
C. It has a flexible premium.
D. It separates the protection and savings components.
B - UL has a guaranteed minimum interest rate but not a guaranteed cash value.
77
```
A client(s) has the following needs:
- lifetime death benefits
- estate tax liquidity
- guaranteed premiums
Which type of policy would be most suitable?
A. First to die
B. Joint life
C. Whole life
D. Universal
E. Variable universal
```
C - The best answer is whole life. It is the only policy that fulfills all three parameters. The joint life doesn't spell out the type of policy (whole life, universal, or variable).
78
```
Jack wants to buy a life insurance policy. He is young and an aggressive investor with a high risk tolerance. He wants to buy a policy where the cash value will keep up with market conditions. Which policy is most suitable for him?
A. Variable universal
B. First-to-die
C. Limited-pay whole life
D. Re-entry term
E. ART
```
A - He is young and aggressive with a high risk tolerance.
79
Which of the following is true about one of the differences between universal life and variable universal life?
A. Variable universal life cash value is in a separate account; universal life cash value is in a general account.
B. Variable universal life cash value is in a general account; universal life cash value is in a separate account.
C. Both have flexible premiums.
D. Variable universal life has a cash value based on current interest rates.
A - Answer C is wrong because the question is asking about the differences.
80
```
Alice bought a variable universal life policy (option B) some years ago. She paid $3,000 per year ($30,000 total). The face value of the policy is $200,000. The current cash value is $40,000. If she dies, how much will her beneficiary be paid?
A. $30,000
B. $40,000
C. $200,000
D. $230,000
E. $240,000
```
E - The death benefit ($200,000) plus the cash value ($40,000)
81
```
Alex applies for a universal life policy on Mr. Judd. Alex provides Mr. Judd with an illustration under NAIC model law. What must the illustration include?
I. Alex's name
II. Mr. Judd's name
III. The death benefit
IV. The insurance carrier's rating
A. I, II, III
B. II, III, IV
C. III
D. III, IV
```
A - The insurance company name is required, but not its rating. Although it does not say Alex is an agent, he is still proposing and applying for a universal life insurance policy. Answers II and III are correct. The answer has to be Answer A.
82
Lilly is comparing the policy provisions, features, and options of two whole life insurance policies. What should be least important to her?
A. The guaranteed cash values of the policy
B. Whether the carrier pays dividends or not
C. The non-forfeiture options
D. The settlement options
E. The insurance company rating
E - This is a stem-type question asking about policy provisions, features, and options. A company rating is not a provision, feature, or option. The answer must relate to the question.
83
```
Which of the following is a dividend option?
A. Extended term
B. Fixed period
C. One-year term
D. Reduced paid-up insurance
Insurance Planning Quiz - Lesson 6
```
C - Insurance Planning Quiz - Lesson 7
84
An older man owns a life policy with a $50,000 death benefit. He took a $30,000 loan against the policy. Over 10 years, $10,000 in dividends was used to reduce premiums (billed at $4,000 per year). The cash value of the policy is $15,000 (net of loan). If he surrenders the policy, which of the following is true?
A. He will incur taxable gain or ordinary loss.
B. $15,000 ordinary income must be declared.
C. $5,000 ordinary loss may be declared.
D. $15,000 ordinary gain must be declared.
E. $5,000 ordinary income may be declared.
```
B - Net Cash Value
$15,000
(net of loan)
Loan
+ 30,000
(add loan back)
Total cash value
$45,000
Less premiums
- 30,000
Ordinary income
$15,000
* $40,000 billed less $10,000 dividends used to pay premium. The surrender will create ordinary
income, not ordinary gain.
```
85
```
Cindy purchased a whole life policy 20 years ago. The annual premium is $2,000 a year. She used the dividends to reduce the premium each year. (Dividends paid were $10,000 over 20 years.) If she surrenders the contract for $30,000, what amount of the proceeds will be taxable?
A. -0-
B. $10,000
C. $20,000
D. $30,000
```
```
A - Surrender value
$30,000
Premiums billed ($40,000 less dividends ($10,000)
30,000
$ - 0-
```
86
R.J. is tired of paying premiums on his whole life insurance policy. Besides cashing the policy in, what other non-forfeiture option is available?
A. He can exchange (1035) it into a second-to-die policy and avoid the tax on gain.
B. He can let the dividends pay the premium.
C. He can let the dividends buy paid-up insurance.
D. He can choose the extended term option.
E. He can choose the one-year term rider option.
D - A 1035 isn't a non-forfeiture option. In addition, he would be required to continue making premium payments. The only non-forfeiture option shown is extended term option.
87
Your client is thinking about buying a new life insurance policy from a new carrier and canceling his old policy. As a CFP practitioner, what do you suggest?
I. The client should get updated proposals on his existing policies. Then compare proposals for both companies.
II. The client should check out the financial position of both companies.
III. The client should check with the NAIC to find out if the new company is on the watch list.
IV. The client should determine if the new carrier uses only agents or brokers to sell policies.
V. The client should ask if the new policy will have incontestable and suicide clauses.
A. All of the above
B. I, II, III, IV
C. I, II, III
D. II, IV, V
C - The method of sale (agent or broker) should have little impact on the policy owner in the long run. All policies have uncontestable and suicide clauses.
88
When will the proceeds from a life insurance policy be subject to income tax?
A. When a client gifts his policy to his ex-spouse
B. When a client gifts her policy to her daughter
C. When a client sells his policy to a viatical company
D. When a client buys her policy from her corporation
C - Answers A and B are gifts. Gifts are not 'transfers for value.' In Answer D, the client is buying her policy. When the client dies, the death benefits paid to the viatical company will be subject to income tax above basis.
89
Don and Bill own a business valued at $1,000,000. Some years ago, they signed a cross-purchase agreement using life insurance. Don is leaving to start a new business. Don wants to purchase his life insurance policy ($250,000) from Bill. Which of the following triggers a transfer for value problem?
A. A transfer for value of the policy from Bill to Don
B. A direct transfer for value the policy from Bill to Don's wife to avoid the three-year estate inclusion rule
C. A sale of the policy from Bill to the new business (corporation) that Don is starting
D. A sale of the policy from Bill to Don
B - The exceptions are a sale or transfer to the insured (Don) or a sale to a corporation in which the insured is a shareholder or officer.
90
Question #6 continues. Which of the following does not trigger a transfer for value problem?
A. Transfer for value to another family member
B. Transfer for value to a trustee of an irrevocable trust
C. Transfer for value to Don
D. Transfer for value to Don's wife
C - The best way to avoid the transfer for value rule is to have the insured purchase the policy. Don is then free to make a gift of the policy to his wife, another family member, or a trust. Don must survive the 3- year contemplation of death rule to keep the life insurance face value out of his estate, but it is income tax-free. A transfer to Don's wife is a transfer for value.
91
Which of the following life insurance policies would not be a MEC?
A. Insured purchased a single premium policy in 1998.
B. Insured purchased a level premium policy of $2,000 but by the fourth year has paid in $10,000.
C. Insured purchased a single premium policy in 1990 but then exchanged it in 1995 for a level premium policy.
D. Insured purchased a single premium policy in 1986.
D - Single premium policies purchased before 1988 are not affected by the MEC rules unless they are 'materially changed.'
92
Which of the following describes a modified endowment contract?
I. It meets the requirements of a life insurance contract.
II. It was entered into on or after June 21, 1988.
III. It fails to meet the 'seven pay test.'
IV. It meets the guideline premium and corridor test or cash value accumulation test.
A. I, IV
B. II, III
C. I, II, III
D. II, III, IV
E. I, II, III, IV
E - I through IV are all elements of the IRC definition of a modified endowment contract.
93
Mr. Frank purchases a whole life contract. Unknowingly, he 'MEC'ed the contract by paying too much premium. He is now concerned about the dividends being paid by the contract. Under what usage are dividends paid by this contract taxable?
I. They are received in cash.
II. They are used to reduce premium.
III. They are used to purchase paid-up additions.
IV. They are kept with company and accumulate with interest.
V. They are used to pay off a policy loan.
A. Dividends are never taxable.
B. All of the above
C. I, II, V
D. III, IV
E. II, V
Insurance Planning Quiz - Lesson 7
C - The dividends aren't taxable when they accumulate with interest. However, the interest paid on the dividends is taxable. The contract is a MEC. Dividends used in certain ways are taxable.
Insurance Planning Quiz Lesson 8
94
Which of the following are true about an entity purchase buy-sell agreement?
I. The premiums are not deductible as a business expense.
II. The premiums are deductible as a business expense.
III. The death benefits will be income tax free.
IV. After the first death, the remaining stockholders will get a step-up in basis.
V. The deceased shareholder's stock will get a step-up in basis.
A. I, III, V
B. II, III, IV, V
C. I, III
D. II, IV
A - Answers I, III, and V are true. Because the company cannot deduct the premium, the death benefits are received income tax free. At death, the deceased shareholder's stock (Answer V) will get a step-up in basis (appreciated property) but not the remaining shareholders' (Answer IV). This is no difference than the deceased owning Google stock and dying. The remaining shareholders' basis remains unchanged.
95
Mr. Ball worked for ABC, Inc. ABC, Inc. had no group life insurance plan but paid Mrs. Ball $40,000 upon the death of her husband. What is the tax effect to Mrs. Ball?
A. The $40,000 is taxable as ordinary income.
B. The $40,000 is tax-free.
C. $35,000 is taxable; $5,000 is a de minimus payment.
A - The $5,000 exclusion rule (de minimus payment) was eliminated several years ago. The only way the company can pay $40,000 to Mrs. Ball is to charge her with income.
96
Diane Land and Beverly Timberlake recently sold a successful business. For many years prior, they signed a cross- purchase buy-sell agreement which was funded with insurance. Diane owned a $2 million life insurance policy on Beverly. She had paid premiums of $122,000, and the cash value was $110,000.
Beverly owned a $2 million life insurance policy on Diane. She had paid premiums of $140,000, and the cash value was $150,000. Diane wants to buy her policy from Beverly. Which one of the following is true?
A. If Diane pays Beverly $150,000 for Diane's policy, this will trigger a transfer-for-value problem.
B. If Diane pays Beverly $140,000 for Diane's policy, Beverly will not have to report any gain.
C. If Diane pays Beverly $150,000 for Diane's policy, Beverly will not have to report any gain
D. If Diane pays Beverly $150,000 for Diane's policy, Beverly will have to report $10,000 as capital gain.
B - If Diane paid $150,000, the net gain ($150,000 - $140,000) is subject to ordinary income tax (Answer C). Since Diane is buying her own policy, the transaction is not subject to transfer-for-value rules. In answer B, there is no gain.
97
Mr. Landis entered into a disability and life buy-out agreement with his partner, Mr. Adams. Mr. Landis business basis is $100,000. The buy-out is for $1,000,000. How much income will be taxable to Mr.
Landis if he becomes totally disabled or to his family if he dies?
A. $100,000/$1,000,000
B. $900,000/$1,000,000
C. $900,000/$0
D. $0/$0
C - For disability, the stock will be redeemed for $1,000,000 ($900,000 gain). For death, his estate will get a step-up in basis. His heirs can sell the stock, and no income tax will be due. Yes, the $1,000,000 will be included in Landis's estate, but the question did not ask about estate tax.
98
Jamie and Terry, the owners of JT, Inc., have set up a life and disability buy-sell agreement based on an FMV for JT, Inc. of $1,000,000. Each owns 50%. Which of the following are true?
I. Neither the life nor disability insurance premiums are deductible if they do an entity purchase or a cross-purchase agreement.
II. If either one of them dies, his estate will get a step-up in basis and pay no taxes.
III. If either of them becomes disabled, the benefits paid to the corporation (entity purchase) or beneficiary (cross-purchase agreement) will be income tax free.
IV. If either of them becomes disabled, the disabled owner will be subject to capital gains taxation on the sale of his business interest.
A. I, II, III
B. I, III,
C. I, III, IV
D. II, IV
C - Situation II is wrong because of the word no. An estate can be subject to estate taxes. Yes, they will get a step-up in basis. Situation III is equally tough. The corporation or the other owner is the beneficiary, not the disabled owner. The premiums are paid with after-tax money; the insurance benefits are tax-free.
Situation III is correct.
99
Mr. A is a 50% owner with Mr. X in AX Corporation. They have done a cross-purchase agreement. How should Mr. A's policy be structured if the corporation is worth $250,000?
A. Owner Ð Mr. X; Beneficiary - Mr. X; Coverage $125,000
B. Owner Ð Mr. X; Beneficiary - Mr. X; Coverage $250,000
C. Owner Ð Mr. X; Beneficiary - Mrs. A; Coverage $125,000
D. Owner Ð Mr. A; Beneficiary - Mrs. A; Coverage $250,000
A - Mr. X should own tl1e policy (50% of $250,000) and be the beneficiary.
100
Corporation Q offers a nonqualified deferred compensation plan for Mary. The company purchases and owns a variable annuity ($100,000 initial deposit). The separate account had a gain for the year of
$5,000. Is the gain tax- deferred?
A. If the gain is capital gain, then the gain is deferred.
B. The gain is deferred until Corporation Q turns the policy over to Mary.
C. The $5,000 gain is taxable as capital gain to Corporation Q this year.
D. The $5,000 gain is taxable as ordinary income to Corporation Q this year.
E. Gain in a separate account is tax-deferred.
D - Annuities don't declare capital gains. The income is taxable as ordinary income when the annuity is owned by an entity who is not a natural person.
101
```
Which of the following annuities make payments to the annuitant shortly after purchase?
A. Single life
B. Period certain
C. Immediate
D. Single premium
```
C - All the answers could be true, but by definition, an immediate annuity makes payments shortly after purchase.
102
What is a disadvantage to the annuitant of a single life immediate fixed annuity?
A. Annuitant receives a fixed payment.
B. Taxation is deferred.
C. No residual value remains in the taxable estate of the annuitant.
D. The annuitant can outlive the stream of income.
A - This question is asking about an immediate annuity disadvantage. Answer C can be an advantage because it has no value at death (single life) in a taxable estate.
103
Mr. Safe approaches you. He wants an annuity with payments he cannot outlive. However if he dies prematurely, he wants an annuity providing payments that will at least be equal to the purchase price of that annuity. What type of annuity should Mr. Safe buy?
A. Single life with 10 years certain
B. Pure life annuity
C. Single life with period certain guaranteed
D. Installment refund annuity
D - A refund annuity provides annuity payments at least equal to the purchase price of the annuity. Answers A and C may or may not provide payments at least equal to the purchase price should he die prematurely. Answer B will only last as long as he is alive.
104
Are annuity contract premiums deductible?
A. No, premiums are never deductible.
B. Yes, annuity contract premiums are deductible when a corporation offers them as part of a discriminatory nonqualified deferred compensation plan.
C. Yes, annuity contract premiums are deductible when the annuity premiums are paid in the form of a bonus to the employee. (The employee owns the annuity.)
D. Yes, annuity contract premiums are deductible when the premium is for an IRA.
C - If, instead of paying an employee a bonus directly, the employer deposits the bonus into an annuity contract owned by the employee, the annuity payment is deductible. Answers A and B are false. A corporation can realize gains and losses but not deduct the premiums. Answer D could be false based on phaseout limits/active participation rules. Since answer C is always correct and Answer D is correct only under certain conditions, Answer C is the only possible choice. Answer A is incorrect. Annuities are taxed LIFO (last-in-first-out) not FIFO (first-in-first-out).
105
In 1996, Joseph Jeter, age 55, purchased a deferred annuity that is estimated to pay him $850 per month for the rest of his life, beginning at age 65. His investment in the contract was a one-time payment of $50,000. The assumed rate of return on the contract is 8%. At this time, Joseph is not sure whether he will need to withdraw any of his original investment prior to the starting date of the annuity. Which one of the following is an income tax implication of the deferred annuity for Joseph?
A. Withdrawals in a lump sum are first allocated to the tax-free investment in the annuity.
B. The distribution amount consisting of interest paid on the investment is taxed as a capital gain.
C. Earnings on the investment are taxable in full each year to Joseph as ordinary income.
D. The distribution amount consisting of Joseph's investment in the contract is a tax-free return of capital if he should surrender the contract.
E. Tax-free withdrawals are allowed for education or family illness.
D - In a distribution from an annuity, the individual's investment in the contract is treated as a tax-free return of capital.
106
```
Jane purchased a deferred annuity for $120,000. The annuity provides monthly payments of $1,000. Jane's life expectancy is 25 years. How much of each payment will be included (taxable) in income?
A. $400
B. $600
C. $800
D. $1,000
Insurance Planning Quiz - Lesson 8
```
B - $120,000 = 40% excluded
$300,000
$400 is excluded, and $600 is included. This is the annuity inclusion/exclusion rule.
Insurance Planning Quiz - Lesson 9
107
Alvin is employed by ABC, Inc. The company provides a group disability (salary continuation) plan that pays Alvin $5,000 per month if he is disabled. The company pays 50% of the premium, and Alvin pays the other 50% after-tax (salary deduction). If Alvin is disabled, are the benefits taxable?
A. The $5,000 benefit is tax-free.
B. $2,500 is tax-free, and $2,500 is taxable.
C. The $5,000 benefit is fully taxable.
D. Split premium plans are no longer available.
B - This is a contributory plan (50%) by the employee. Half of tl1e benefits are tax-free and the other half taxable.
108
```
How long is the waiting period for Social Security disability?
A. No waiting period
B. 5-month waiting period
C. 6-month waiting period
D. 12-month waiting period
```
B - Benefits payable at the beginning of the 6th month reflect a 5-month waiting period.
109
Tom, a key employee of Action, Inc., participates in a discriminatory plan for key employees. Tom is age
40. He gets $500,000 of group term life insurance.
- Table 1 rate = $ .10 per $1,000 per month
- Actual premium = $ .09 per $1,000 per month
- He actually contributes $ .08 per $1,000 per month.
How much is Tom's economic benefit per year for the group term life
A. $ 60
B. $108
C. $120
D. $480
C - A key employee in a discriminatory plan must include the higher of the actual cost or the Table 1 cost. In addition, the key employee may not exclude the cost of the first $50,000 of coverage.
.2 * x 12 x 500 = $120 *In this situation, the key employee's economic benefit (income) is the difference between the Table 1 rate ($.10) and the contribution he made toward the insurance ($.08).
110
```
Which of the following group type policies does not have a conversion feature?
I. Life
II. Health
III. Accidental death short-term disability
IV. Disability long-term disability
A. I, II,
B. II, III
C. II, IV
D. III, IV
E. IV
```
D - Life and health group insurance coverage provides conversion features. See end of Lesson 4 Insurance for group health convertibility. Group type disability isn't convertible.
111
```
Richard owns a corporation with 5 employees. He is considering both individual and group disability. Group disability would be an advantage for which of the following reasons?
I. Employee may deduct the premiums
II. Generally a more liberal waiting period
III. Generally lower premiums
IV. Generally more liberal underwriting
V. Benefits up to 70% of compensation
A. All of the above
B. I, II, III, IV
C. I, II, III, V
D. II, III, IV
E. I, IV, V
```
D - A corporation, not the employee, is entitled to deduct the cost of the fringe benefits. The underwriting is simpler, generally a medical questionnaire rather than a physical exam. Benefits can start on the 1 day for an accident. I consider this more liberal. Financial underwriting is based on salary. Benefits are usually limited to some cap like 50% of compensation, maximum $5,000 per month (No carrier issues benefits of 70%.). The policy cannot benefit the employer.
112
Are the premiums paid for group term life insurance a deductible business expense by the company?
A. Yes
B. No
C. Only if the plan does not discriminate in favor of key employees
D. Only if the employer is indirectly a beneficiary under the policy
A - Answer C is incorrect. The plan costs are deductible even if the plan discriminates in favor of key employees. The key employees will be taxed on the first $50,000 of benefits. Answer D is incorrect. The plan is only for the employee's benefit, not the employer.
113
```
A key employee in discriminatory group term life insurance can exclude the taxable cost of the first of coverage?
A. $0
B. $50,000
C. One-time salary
D. Two-times salary
```
A - The key employees may not exclude the first $50,000 of coverage.
114
```
A non-key employee in discriminatory group term life insurance can exclude the taxable cost of the first
of coverage?
A. $0
B. $50,000
C. One-time salary
D. Two-times salary
```
B - The non-key employees may exclude the first $50,000 of coverage.
115
If all the employees get $100,000 of group term coverage, then which of the following is true?
A. Only the cost of up to $50,000 is tax-free.
B. The cost of the $100,000 is ta x-free.
C. The plan is discriminatory in favor of the lower paid employees.
D. The cost will be fully taxable.
A - The plan is not discriminatory. Everyone gets the same amount of coverage. The first $50,000 is tax-free.
116
Todd Smith works for XYZ, Inc. The company has a contributory long-term group disability plan. Todd's benefits under the policy are $5,000 per month. If he contributes 100% of the premium due each month, what happens if he becomes disabled and collects benefits?
A. The plan is discriminatory
B. The benefits are tax free
C. 100% of the benefits are taxable
D. The plan is not a group disability but an individual disability plan
Insurance Planning Quiz - Lesson 9
B - The plan is paid for with after-tax dollars (fully contributory). The benefits are tax-free.
Insurance Planning Quiz - Lesson 10
117
Rita elects a salary reduction of $7,500 to her FSA account split. Which of the following is false?
A. The FSA is typically funded through employee salary reductions.
B. The salary reduction is not subject to FICA and FUTA.
C. If Rita fails to spend all of the salary reduction by March 15th of the next year ($2,500), the remaining dollars are forfeited in the health FSA.
D. Dependent care is limited to 2 children.
D - Dependent care is not limited by the number of children but is limited by dollar amount ($5,000) and age. It is a maximum $5,000 for dependent care. The $7,500 was split between tl1e two programs. The healthcare ($2,500) on FSA money must be spent by March 15th or it is forfeited.
118
Betty elects a salary reduction of $5,000 for dependent child care. Which of the following is false?
A. The FSA is typically funded entirely through employee salary reductions.
B. The salary reduction is not subject to FICA and FUTA.
C. If Betty fails to use all the salary reduction ($5,000) by year end, the remaining dollars can be used in the 2 1/2 month grace period.
D. The salary reduction is not subject to withholding.
C - The new rule allows workers an extra 2 1/2 months to spend the money (until March 15th) for the medical expense portion only. This question is referring to dependent care FSA only.
119
Which statements regarding a health FSA are correct?
I. It may receive contributions from an eligible person.
II. Employers must contribute.
III. All the contributions are not included in gross income.
IV. Reimbursements from the health FSA used for qualified medical expenses are not taxed.
A. I, III
B. I, IV
C. I, II, III
D. II, IV
E. III, IV
B - Statement III is wrong because the employer can provide coverage (pay premium) for long-term-care services, but it is included in the employee's gross income. Answer II is wrong because of the next statement.
120
Tim is an employee of a company. What benefits can Tim pay for using FSA contributions (pretax and pre-FICA)?
I. Qualified medical insurance deductibles and medical expenses that have been claimed but not covered by the health insurance policy
II. Qualified dental insurance deductibles and dental expenses that have been claimed but not covered by the health insurance policy
III. Long-term care premiums
IV. Dependent care benefits not to exceed $5,000
A. I, II, III
B. I, II, IV
C. I, II
D. III, IV
B - No kind of health premiums, including LTC premiums, may be paid by Tim through an FSA plan. The employer can provide coverage (pay premium) for long-term-care services, but it is included in the employee's gross income. However, expense reimbursements are okay.
121
```
What benefits can be offered under a cafeteria plan?
I. Cash benefit
II. Group term life insurance
III. Nonqualified deferred compensation
IV. Accident and health benefits
A. All of the above
B. I, II, IV
C. II, III, IV
D. III, IV
```
B - Cafeteria plans cannot provide for nonqualified deferred compensation.
122
```
What is the limit on total medical expenses that can be covered under a health FSA?
A. No limit
B. $2,500 per person per year
C. $5,000 per year
D. $2,500 per year
```
D - There is a cap on both the health FSA ($2,500) and the dependent care ($5,000).
123
```
Money deducted from an employee's pay into a FSA is subject to which of the following?
I. Withholding taxes
II. No withholding taxes
III. FICA
IV. No FICA
A. I, III
B. I, IV
C. II, III
D. II, IV
```
D - An FSA allows money to be deducted from an employee's paycheck pre-tax.
124
Expenses for over-the-counter drugs cannot be deducted or counted towards the 7.5% itemized deduction, but can they be paid for by an FSA?
A. Yes
B. Over-the-counter drugs are no longer qualified expense.
B - This was changed. It is the current law.
125
```
A health FSA cannot pay for which of the following?
I. Health insurance premiums
II. Cosmetic items
III. Cosmetic surgery
IV. Items that can improve 'general health'
A. All of the above
B. I, III, IV
C. I, III
D. II, IV
```
A - All of the above including health insurance premiums are not eligible expenses. Answer IV is too broad an answer to be correct. This is a picky little question. Please refer to the textbook.
126
An FSA can be established to pay for certain expenses to care for dependents that live with you while you are at work. Expenses that qualify include which of the following?
I. Child dependent care
II. Adult day care for senior citizens that live with you (like parents)
III. Overnight camps
IV. Long-term care for parents that live elsewhere (such as in a nursing home)
A. All of the above
B. I, II, III
C. I, II
D. II, IV
E. III
Insurance Planning Quiz - Lesson 10
C - Answers III and IV are not allowed.
| Insurance Planning - Final
127
Mutual Life Insurance Company told its agents not to write life insurance policies on clients who had any form of cancer. Thomas, an agent for Mutual, takes an application on Mrs. Steel who has a mild form of cancer along with a deposit check. What is the obligation of Mutual in this situation?
A. Mutual is required to pay because Thomas had the express authority to write insurance for the company.
B. Mutual may be required to pay because Thomas had the implied authority to write insurance for the company.
C. Mutual will be required to underwrite the policy because Thomas is an agent for the company.
D. Mutual will issue a policy because Thomas never disclosed the mild form of cancer.
B - Answer A is wrong because Thomas was instructed (presumably in writing - indicating express authority) not to write policies on persons with any form of cancer. The question does not imply that Thomas or Mrs. Steel failed to disclose her mild form of cancer. Answers C and D are wrong because of will be required.In reality, the carrier would never underwrite the policy and would refund Mrs. Steel's deposit. However, if Mrs. Steel died in a car accident before the refund had been paid, arguably the insurance company may be obligated to pay the death benefit.
128
Which of the following is true about the difference between mutual insurance companies and stock insurance companies?
A. Stock companies can pay residual profits to stockholders.
B. Stock companies do not pay dividends to their policyholders.
C. Only mutual companies pay dividends to their policyholders.
D. Only mutual companies issue guaranteed cash value policies.
A - Some stock companies issue participating policies (including paying dividends to policyholders). Watch out for the word onlyin Answer C and D.
129
```
Ken, a CFP practitioner, is doing a complete financial plan for a client. As part of the plan, he is doing risk management. Which of the following methods or examples of handling risk should he use?
I. Risk avoidance
II. Risk reduction
III. Self insurance
IV. Insurance
A. All of the above
B. I, II, III
C. I, III, IV
D. IV
```
A - Insurance is risk transference. Self insurance, deductibles, and coinsurance represent risk retention.
130
Bobbie owns a single premium deferred annuity. Which of the following features would be advantageous to Bobbie?
A. The annuitant can't change the payout method.
B. Accumulation is tax-deferred until distributions are taken.
C. The annuitant has a guaranteed stream of income no matter how long the annuitant lives.
D. The amount remaining in the annuity is not subject to estate taxes.
B - Annuity contracts offer tax-deferred accumulation when they are owned by individuals. This is a single premium deferred annuity. Answer C is true, but the question does not indicate the payout method. Answers A and D are false.
131
```
Which of the following is not a dividend option?
I. Cash
II. Paid-up reduced amount
III. One-year term insurance
IV. Extended term insurance
V. Accumulated with interest
A. I, III, V
B. I, II, IV
C. II, IV
D. III, V
E. IV, V
```
C - Answers II and IV are non-forfeiture options.
132
ABC, Inc. acquires a key person (owner/beneficiary) life insurance policy on Kathy, its sales manager. Kathy decides to leave and start her own company. ABC keeps the policy in force. Kathy dies in an unfortunate accident. David, her husband, files a claim on the policy for her death benefits.
A. The policy proceeds will be paid to David because he has an insurable interest.
B. The policy proceeds will be paid to ABC because the company is the owner/beneficiary.
C. The policy proceeds will be split between David and ABC because of 'reformation.'
D. The policy will be deemed null and void, and all premiums will be returned to ABC.
B - ABC, Inc. is the owner and beneficiary. An insurable interest is not required at the insured's death.
133
Which of the following annuity methods offer the highest income distribution?
A. Single life
B. Single life with 10-year period certain
C. Immediate
D. Single premium
A - Single life with 10-year certain will reduce the payout.
134
```
Joe Benson purchased a whole life policy 10 years ago. He wants to stop paying the premiums on his policy. If he does stop paying premiums, which of the following is a non-forfeiture option he can select?
A. Installments for a fixed period
B. One-year term
C. Paid-up reduced amount
D. Installments for a fixed amount
```
C - Other answers are not non-forfeiture options.
135
Barry, who is divorced, has a son by a prior marriage. Per the divorce decree, he is required to pay for life insurance on his son (ex-wife as the beneficiary) and his ex-wife {son as the beneficiary). He wants to make sure he does the minimum insurance necessary and leaves nothing to his ex-wife except the death benefit should his son die first. What would you suggest if his ex -wife will own the policy?
A. Pay for 2 level premium term policies
B. Pay for a first-to-die policy
C. Pay for 2 whole life policies
D. Pay for 2 decreasing term policies
E. Pay for 2 annual renewable term policies
B - This is a first-to-die situation. Once either his son or ex-wife dies, Barry's requirement to provide life insurance ends. If the son dies, the ex-wife receives the benefits, and then the policy ceases. If the ex - wife dies, the son gets the benefits, and then the policy ceases. If Barry selects any form of cash value or separate policies on the son and the son dies first, his ex -wife ends up with her policy and the cash value in her policy. A first-to- die policy will cost less than two level premium policies. The first-to-die dies with the first person to die.
136
John and Jody Thomas are married. They are both in their 60s and need $1,000,000 to pay estate taxes. John has blood pressure problems, is overweight, and has just been told by his doctor that he is a borderline diabetic. Choose the best life insurance policy considering John and Jody's situation.
A. Adjustable life on Jody
B. Level term on Jody
C. First-to-die on John and Jody using variable universal
D. Survivorship life using universal life
E. Whole life on Jody
D - Because the protection is for estate tax liability, survivorship life makes the most sense. Survivorship life means second-to-die. The premium of the survivorship policy would normally be less than a premium on insurance for Jody alone. John does not appear to be totally uninsurable. His life expectancy will lower the second-to-die premium.
137
When is limited-pay whole life policy most appropriate?
A. When the insured has a lirr1ited life expectancy
B. When the need for insurance expires in a limited number of years
C. When the policy owner only wants to pay premiums for a limited number of years
D. When the policy owner only wants a limited amount of death benefit
C - Limited pay whole life is not for a person with a limited life expectancy. In fact, someone with a limited life expectancy probably overpays for the coverage by paying more than required to keep the policy in- force.
138
A first-to-die (joint life) policy makes sense in which of the following situations?
I. As mortgage protection (husband and wife)
II. As protection against family debt (husband and wife)
III. As money to fund a buy-sell arrangement
IV. As a key person's policy
A. All of the above
B. I, II, III
C. I, III
D. II, IV
B - If first-to-die can be used for mortgage protection, then it also can be used to cover other debts. It can fund a buy-sell. A first-to-die policy covers more than one person. It is not a key person policy. A key person policy covers a single life. Answer IV choice refers only to a key person (singular).
139
Lillian purchases a level premium term policy. After returning from a long vacation, she notices a lapse notice on the term policy from her insurance carrier. What can she do?
A. Send the premium in and see if the carrier will accept it (explain she was out of the country)
B. Exercise her guaranteed renewable option
C. Contest the notice
D. Obtain the policy reinstatement paperwork
E. Exercise her guaranteed purchase option provision
D - She can reinstate the policy. That is the best answer. Of course, if enough time has expired, she can just obtain a new policy. That way, she will not have to pay back premiums and interest.
140
Jack is age 50 and divorced. He no longer has to pay alimony or child support. His son is 28 and on his own. He has two life insurance policies: $60,000 of group term (son as the beneficiary) and $250,000 of whole life (estate as the beneficiary). He has been paying $3,000 of premium annually (10 years) on the
$250,000 policy and can afford to continue to pay premiums. He wants to maximize his retirement benefits, and he believes he doesn't need as much life insurance. He has come to you to help him make a decision. Which solution is best for him concerning his $250,000 whole life policy?
A. 1035 the policy into a fixed or variable annuity
B. Cash in and roll all the cash value into a mutual fund
C. Lower the death benefits and continue the policy
D. Exchange the existing policy for a variable policy but continue the face at $250,000
E. Use the extended term option and pay no further premium
A - Answer A is a tax-free exchange, and the basis of the life policy (premiums paid) will be carried over into the annuity. If he cashes in the policy (Answer B) and the policy has a loss, he cannot claim the loss for income tax purposes. The mutual fund future gains and dividends will be subject to tax whereas the variable annuity will grow tax-deferred. The other options all continue the insurance in one way or another. This question is subjective.
141
```
Continuing with Jack from the previous question: When Jack retires, should he convert his group term? If he converts, which kind of policy can he convert to? The Question 14 facts remain unchanged except Jack is now age 65.
A. Convert to decreasing term
B. Convert to a whole life policy
C. Terminate the coverage at age 65
D. Convert to a variable annuity
```
C - The question says he does not need much life insurance at age 50. Answer 14 does not indicate no need. The $60,000 of group term is not a large policy. Conversion to whole life seems to fit the question best. He cannot convert to an annuity. This is a group term policy.
142
Hank, age 52, has a wife and two dependent children, ages 18 and 19. He is fired from his job of 10 years. He elects to be covered under COBRA (family coverage). Which of the following is true?
I. He will get 18 months of coverage.
II. His wife and two children will get 36 months of coverage.
III. The plan of coverage will be slightly more restrictive than his existing health insurance.
IV. He will have to pay his employer's normal premium plus 2%.
A. All of the above
B. I, II, IV
C. I, II
D. I, IV
E. II, III
D - Actually, all family members get 18 months coverage, but Answer I is true. He will get 18 months. The COBRA plan must be identical. The total cost is 2% more than the normal cost (sometimes 102% is used.)
143
Which of the following statements concerning Medicare Part A benefits is correct?
A. To be eligible, you must be at least age 65.
B. Home health care is covered under Part B.
C. Hospice care is specifically excluded.
D. Benefits are subject to both deductible and co-payments provisions for inpatient hospital care.
D - Disabled workers, for example, can be covered under age 65. Home health care and hospice care are covered under Part A. Please note that although the question is about Part A, it has a Part B answer to throw you off.
144
Which of the following person(s) is eligible for benefits under COBRA for 36 months?
A. Employee who terminates
B. Spouse of a terminated employee (employee had family coverage.)
C. Employee who changes from full-time to part-time employment
D. Widow and dependent children of an employee (Employee had family coverage.)
D - The persons in Answers A, B, and C all get 18 months of coverage not 36 months.
145
Dr. Adams, one of the doctors at Make Me Beautiful, Inc. (a corporation), becomes disabled during the current year. Until he recovers, he will be unable to perform the duties of his occupation. What can he expect in the form of disability income benefits, and if he remains on disability beyond one year, will that change?
Coverage/Insured Dr. Adams
Base $ per month $17,250
Elimination period 90 days
Sickness/ Accident term To age 65/own occupation
Options Residual/SIS benefit of $800/mo.
(Potential Social Security benefits are $1,200/mo. if he qualifies.)
Owner/Premium payor Make Me Beautiful, Inc.
A. He will get $18,050 a month (taxable) for the first year (after the 90-day wait) and then $16,850 (taxable) after Social Security benefits are paid.
B. He will get $17,250 a month (taxable) for the first year (after the 90-day wait). He will also get
$800 a month as an SIS benefit for as long as he is not eligible for any Social Security payments.
C. He will get $17,250 a month (taxable) after 90 days plus $800 as an SIS benefit. After one year, the supplement will stop, and he will get $1,200 in Social Security disability payments.
D. He will get $17,250 a month (taxable) and no SIS benefit because he will qualify for Social Security disability payments of $1,200 a month.
B - The SIS benefit disability is an offset rider. If he does not qualify for Social Security disability, he will continue to get the $800 a month. Answer D is wrong because he may be disabled, but we don't know whether he did qualify for Social Security disability. Potential benefits are not assured.
146
Dan's parents are both in their late 70s. His parents cannot afford LTC insurance premiums. Dan's earned income is mostly spent supporting his own family. However, Dan (who is successful) has
$250,000 in a money market account. Which of the following seems appropriate in this situation? (This is a client evaluation question Ð very subjective.)
I. Dan could buy LTC for his parents using personal cash flow and assets in his money market account.
II. The parents could buy LTC for themselves.
III. Da n should spend down his parents' assets and qualify them for Medicaid.
IV. Dan's parents will qualify under Medicare.
A. I, II, III, IV
B. I, III, IV
C. II, III
D. II, IV
E. I
E - It says the parents cannot afford LTC which could be expensive in the late 70s. Spending down your parents' assets to qualify for Medicaid doesn't fit with the fact that Dan has enough to buy his parents an LTC policy. Dan has $250,000 in a money market account. The question says he is successful. Dan's parents might qualify under Medicare, but it has severe limitations (100 days). I think he should try to purchase them LTC. This is my opinion.
147
```
Ida is 55 years old and approaching retirement. She participates in a good defined benefit retirement program. What kind of benefits does Ida need to obtain when she retires?
I. Major medical insurance
II. Disability insurance
III. Long-term care insurance
IV. Life insurance
A. All of the above
B. I, III
C. I, IV
D. II, III
E. III, IV
```
B - Ida cannot keep or obtain disability insurance when she is retired. There is no indication of a life insurance need. She needs medical coverage. She needs LTC so that her income stream from the defined medical benefit plan is not tapped for future LTC needs. Only two answers apply; I and III which is the best choice.
148
Ken owns his own corporation. If the corporation buys a business overhead expense (BOE) policy and the corporation pays the premium, which of the following is true?
A. It can't pay Ken's professional liability insurance because it's personal.
B. It can cover his salary because salary is a normal business expense.
C. Benefits payable to his corporation are taxable income.
D. Benefits payable by the policy are limited by the actual business expenses incurred.
Sam and Susan Case (questions 23-25)
Sam (age 32) and Susan (age 28) have 2 young children. Sam's employer provides and pays for the following employee benefits.
Comprehensive Major Medical
$250 deductible per person then the client pays 20% and insurance pays 80% of the next $10,000. Then the insurance pays 100%. Sam and his family are covered.
Group Disability
60% of salary / $5,000 per month maximum benefit
90 day wait / benefits to age 65 for sickness or accident 5 year own occupation, thereafter any occupation
Group Life
$200,000 Life / $200,000 AD&D (one times salary)
Susan primary beneficiary/children contingent beneficiaries
D - The BOE can pay Ken's professional liability policy premium (a normal business expense). Ken's salary is specifically excluded under the BOE policy. The benefits are income tax-free.
149
```
Sam has just been in day surgery with a knee problem due to playing touch football. His claim is $8,500. You visit him at home while he is convalescing. He asks you how much he will have to pay for this claim. He lives on the financial edge.
A. $1,250
B. $1,900
C. $5,000
D. $5,250
E. $6,600
```
```
B - He pays
Insurance pays
Sam's $8,500 claim
Deductible
$ 250
-0-
Coinsurance
1,650
(20%)
6,600 (80%)
TOTAL
$1,900
$6,600
```
150
Sam's knee problem makes him nervous about his disability insurance. Sam is a regional sales manager for Hyper-Tech. He makes $200,000 salary plus $200,000 (estimated) bonus. This is a perfect job for him, and he doubts he can duplicate the job and money with any other company. He asks you how he should cover himself for disability considering his current coverage.
I. He should opt-out of his existing group disability plan and purchase the maximum amount of individual disability coverage.
II. He should supplement his group disability plan with a new individual plan with own occupation coverage good to age 65.
III. He should build up an emergency fund and self-insure for a reasonably long waiting period with a new individual plan.
IV. He should buy a 'guaranteed insurability' rider in the new individual plan so that if his job is terminated, he can exercise the option if he loses his job for any reason.
V. He should buy a partial disability rider in the new individual plan. This benefit will pay until age 65 if he is partially disabled.
A. I
B. II, III, IV, V
C. II, III, IV
D. II, III
E. II
D - Answer II is true. Sam should supplement his existing plan whether he can is debatable, but he should. The group plan is his own occupation for 5 years. He doesn't have much spendable income. It makes sense to keep the group plan and build up his emergency fund. Answer IV is false. To exercise a guaranteed insurableoption, he must show proof of higher earnings. Answer V is false. This defines the residual disability rider. In addition1 the partial disability rider is normally free.
151
Sam informs you that he would like to start a retirement savings program, but you are concerned that Sam needs at least $1,500,000 of additional life insurance because he lives on the financial edge.
Considering all the facts in this case and the prior questions and answers, what type of life policy would you recommend Sam purchase?
A. 20-year level term
B. Whole life
C. Variable life
D. Universal life
E. Variable universal life
A - You must review all the case information to answer this question. Sam has never purchased any insurance with after-tax dollars. He also needs to purchase individual disability insurance and fund a retirement plan. Finding all these dollars will be difficult {financial edge.) On that basis, Answer A (term insurance) is the best choice.
152
```
A bird hits your windshield is an example of which of the following?
A. BI/PD
B. Medical payments
C. Collision
D. Other than collision
```
D
153
```
A tree falls on your car is an example of which of the following?
A. BI/PD
B. Medical payments
C. Collision
D. Other than collision
```
D - Falling object
154
```
Your car skids on ice. You and your passenger are slightly injured, requiring emergency room treatment is an example of which of the following?
A. BI/PD
B. Medical payments
C. Collision
D. Other than collision
```
B
155
```
You are speeding, and the car skids on ice. You crash into a barricade. Your passenger is hurt and sues you is an example of which of the following?
A. BI/PD
B. Medical payments
C. Collision
D. Other than collision
```
A
156
Sam and Sally own an apartment property with an FMV of $1 million. The apartment building value is
$800,000 before a fire occurs. The building is insured for $640,000 with a 90% coinsurance and $2,500 deductible. How much of the claim is paid by the insurance company if the fire damages are $102,500? NOTE: Use 4 decimal places
A. $13,887.75 +/- $5 B. $23,000.00 +/- $5 C. $88,612.25 +/- $5 D. $91,112.25 +/- $5 E. $102,500.00 +/- $5
```
C Fire damages
$102,500.00
[$640,000 x $102,500] - $2,500 =
- 88,612.25
720,000*
Sam and Sally would have to pay $13,887.75
Using 4 decimal places
*The $200,000 difference is the value of the land. 90% of $800,000 is $720,000.
$640,000 + 720,000 is .8889.
```
157
Mr. and Mrs. Apple (Florida residents) have a daughter who attends Clemson University (SC). They give her a car while she is a college student. After college, she takes a job and resides in South Carolina. Is her car still eligible for coverage under the parents' PAP policy?
A. No
B. Yes
C. It depends on whether she can be claimed as a dependent.
D. She will not be covered for 'out of state' coverage.
A - While away at college, the daughter is still considered a resident of her parents' home (a dependent). After taking a job and residing in South Carolina, she must license and insure the car in South Carolina.
158
John's home has a market value of $475,000 and a replacement cost of $375,000. The home is covered for $350,000 with coinsurance of 80% and a $1,000 straight deductible. The house burns, causing
$100,000 in damages. How much will the insurance company apportion for this loss?
A. $99,000
B. $74,000
C. $73,000
D. $100,000
A - The 80% clause is based on replacement cost. $375,000 x 80% equals $300,000. With coverage of
$350,000, he is adequately covered. The claim ($100,000) less the deductible will be paid. The difference between $475,000 and $375,000 is the value of the land.
159
While at college, Billie Bob takes a job delivering pizzas for extra spending money. Distracted by looking for an address, he runs into the side of a parked car. The whole side and the frame of the parked car (a BMW) is destroyed, resulting in a total loss. Billie Bob's car is owned and insured by his parents. How, if at all, will the claim be paid?
A. The BMW owner's insurance will pay the BMW claim, and Billie Bob's parents' policy will pay for Billie Bob's car.
B. Billie Bob's parents' insurance will pay for both cars' damage.
C. There will be no coverage because Billie Bob is negligent.
D. There will be no coverage afforded to Billie Bob or his parents because the car was being used as a livery conveyance.
D - There is no coverage for either car if the vehicle is used as a public or livery conveyance. Answer A is partially right, but the BMW insurance company will sue the parents (subrogation). Webster - Livery is the act of delivering legal possession of property. Tough subjective answer.
160
Which of the following exclusions applies to an HO-3 policy?
A. HO-3 has no exclusions; it is an 'all risk policy.'
B. Hazard
C. Intentional loss
D. Explosion
E. Riot
C - Intentional losses are excluded from homeowners policies.
161
A client purchases a home for $330,000. The value of the land is $50,000. The mortgage is $260,000. The property is covered for fire-related perils by XYZ Insurance Company to $225,000 with an 80% coinsurance provision and a $1,000 deductible. Does the client have sufficient coinsurance coverage for the home?
A. Yes
B. No
C. The client may suffer a penalty due to a partial loss.
D. If the property is a total loss, the mortgage will not be completely paid off.
A - The replacement value of the home is $280,000. The insurance is $225,000. The client is insured for 80%. 80% of $280,000 is $224,000. The mortgage is just fluff info.
162
```
Which of the following is covered by other than collision?
A. Contact with a deer
B. Contact with a large tree
C. Contact with another car
D. Contact with a barricade
```
A - Contact with a bird or animal is covered under other than collision.
163
```
Which benefits are payable to an incapacitated worker or his or her dependents under workers' compensation laws?
I. Total permanent disability benefits
II. Rehabilitation benefits
III. Retirement benefits
IV. Occupational disease benefits
A. All of the above
B. I, II, IV
C. II, III
D. II ,IV
E. IV
```
B - Occupational disease would be paid as a medical benefit under workers' compensation. I forced you into Answer B.
164
Sally (age 35) and Hy (age 36) want to fund a buy-sell with life insurance. The insurance carrier is willing to offer life insurance on Hy with a rating (extra premium). Which option should Sally and Hy choose to achieve the greatest benefit?
A. They should use a cross-purchase type buy-sell: They should each purchase a level-term policy even if Hy is rated. Hy may have to pay more.
B. They should use a cross-purchase type buy-sell. They should each purchase variable universal life on each other's lives. Some of Hy's premium rating (out-of-pocket cost) could be reduced by wise investment choices.
C. They should use a redemption agreement type buy-sell. Their company should purchase 2 universal life policies.
D. They should use a redemption agreement type buy-sell. Their company should purchase 2 limited-pay whole life policies. The policies would be creditor proof.
B - Answer A is wrong. In a cross-purchase arrangement, Sally would purchase Hy's policy (the higher premium.) She would pay the higher premium. But in the long run with good investment choices she may pay a lower out-of-pocket cost. Answer C is wrong. Corporate ownership of policies makes them subject to the corporation's creditors. Answer C may be a good answer for the insurance portion, but a cross-purchase agreement gives the survivor a tax advantage (step-up in basis). Hy has a shortened life expectancy, step-up in basis is more important than higher premiums. How much higher? Client evaluation question - very subjective.
165
```
Richard's employer plans to sell the current split-dollar policies to the insured. Richard decides to have his employer sell his policy directly to his children. This direct transfer would remove it from his estate. Which of the following statements are correct?
I. The selling price will be the cash value of the policy.
II. The policy death benefits will become income taxable to his children under transfer for value and estate tax free to the children (no 3-year rule).
III. To avoid the decrease in death benefit that will result from using a loan or withdrawal to roll out the policy, the children can buy the employer's interest for cash.
IV. If the employer receives more in payments than it paid in premiums, it is taxable income.
A. I, II, III
B. I, II, IV
C. II, III, IV
D. III, IV
John and Helen Smith Case (questions 40-54)
John Smith is 33 years old and married. He is the sales manager and minority shareholder of Clarke, Inc., where he has worked for 11 years. He earns $60,000 annually. John has no employee benefits through Clarke except a group life insurance program. Clarke has no medical insurance or pension plan for its employees. He has an IRA with a FMV of $18,349. Helen, his wife, is 33 years old. She is the assistant news director for Mirror Television. She earns $30,000 per year. Helen has vested retirement benefits of $28,000 in Mirror's defined contribution plan. A schedule of employee benefits that Mirror provides is attached. John and Helen have 2 children: William, age 2, and Karen, age 13. They have not planned financially for their children at this point.
Additional Information
John and Helen have a net worth of $100,000. They wish to purchase a new home for $150,000. They want to make 20% down payment on the new home. They have already earmarked $10,000 towards the down payment and are saving $500 at the end of each month. They feel they can achieve an 8% after- tax return on their personal investments.
INSURANCE INFORMATION
Automobile -Type Single Limit
Liability
$100,000
Medical payments
25,000
Uninsured
100,000
Collision
250
deductible
Other than Collision
100
deductible
Towing
50
each disablement
Homeowners - Type HO - 4
Dwelling
$0
Other structures
0
Personal Property
50,000
Loss of Use
10,000
Personal Liability
25,000
Medical Payments
5,000
Scheduled Property
Jewelry
Life Insurance - John
Type
Group
Benefit
$120,000
(2x salary)
Cash Value
None
Owner
Employer
Beneficiary/
Contingent
Helen/William and Karen
Premium
Employer paid
Life Insurance - Helen
Type
Whole life - Participating
Benefit
$40,000
Cash Value
$2,650
Dividends
Bought $10,500 of paid-up additional
insurance
Beneficiary/
Contingent
John/Estate of the insured
Premium
$570 per year
Waiver of premium
None
MIRROR TELEVISION COMPANY BENEFITS - Helen Smith: Employee
Group Term Life
Benefit
$60,000
Beneficiary
John
Contingent
William & Karen
Premium
Employer paid
Group Comprehensive Major Medical
Lifetime maximum
$1,000,000
Coinsurance
80%
Stop-loss limit
$10,000 Ð per person
Deductible
$250/year Ð individual
$500/year Ð family (After two deductibles are
paid, the deductible is waived.)
Premium
$60/month
Long-Term Disability (LTD)
Benefit period
Sickness/Accident to 65
Percentage of income
60%
Elimination period
180 days
Definition
Any occupation
Premium
Employer paid
Retirement Plan
Type
Defined Contribution 25% is contributed per year
Balance
$28,000
Vested
100%
Earning
9%
Contribution
Employer only
```
C - Answer I is false. The selling price will be the greater of cash value or the premium paid by the employer. Yes, III is true, but it will trigger transfer for value. It will remove it from his estate.
166
Considering all the facts in the case, if you are their financial planner, what do you recommend they do first?
A. Set aside sufficient money for the children's education
B. Lower their expenses to save more of their income
C. Analyze their taxable versus tax-free income
D. Provide for custodial arrangements for their children in the event of their untimely deaths
D - When there are no custodial arrangements for children, it's always the best answer. Answer A is a good but not the best answer. It appears they are financially struggling to get enough money to buy a new home. Answer A does not say what kind of account, the dollar amount, etc. It is not a complete answer. There is no information to answer B or C.
167
Considering all the facts in the case, what additional coverage should John and Helen consider
purchasing?
I. Additional life insurance on John's life
II. Additional life insurance on Helen's life
III. Disability coverage for John
IV. Increased homeowners and auto policy liability coverages to cover the requirements of the umbrella policy
V. Umbrella liability coverage
A. All of the above
B. I, II, III, V
C. I, II, V
D. III, V
A - The key word is consider.They need all these coverages. They may not be able to afford all the coverage, but they should consider them including increasing HO liability on their renter's policy.
168
John is considering purchasing life insurance policies on the lives of each of the children and making the maximum single premium deposit. He will then withdraw only the interest at the time they attend college. What will be the result?
I. At age 18, the children will be able to buy a Corvette if they want. The proceeds will be theirs because the policies are not purchased under UTMA or a trust.
II. At age 18, John can remove the interest tax-free because this policy meets the definition of life insurance (1984 act).
III. At age 18, the interest will come out under FIFO rules because it is a MEC policy (1988 act).
IV. If the children sign as owners, the Kiddie Tax will not apply on any taxes payable.
V. John should take the policy out on his life because the cash value build up will be greater in the same number of years until it is needed for college.
A. I, IV
B. II, III
C. III
D. V
E. None of the above
E - Answer I is wrong because John must be the owner of the policy. John will control the policy. Answer II is wrong because John used a single premium policy (making it an MEC), and withdrawals will be LIFO. Interest will come out first, and interest will be taxable. Answer III is wrong because an MEC makes the payout LIFO. Answer IV is wrong because the children are minors and cannot own the policy. Answer V is wrong because John's cost of life insurance will be substantially higher than the life insurance cost on the lives of the children, therefore reducing the future cash value buildup. This is a complex answer.
169
```
How many months do John and Helen have to save to fund the full down payment on the home? (HP 10B and HP 17BII round-up to next highest number)
A. 29
B. 32
C. 36
D. 38
```
B - Down payment $150,000 x 20% = $30,000 (FV), already saved $10,000 CHS PV, saving $500 CHS PMT (end), 8% Ö 12 = .6667 i, solve for n (HP 12C) If you are using a 10B or 17BII in 12P/Yr use 8% Answer: 32 months (12c)/31.8 months (10B/17Bll) Note: If you net the $30,000 (needed) and the $10,000 (saved), you get a wrong answer. This is because the $10,000 can earn a return during the saving period.
170
```
What is the total death benefit of Helen's whole life policy?
A. $29,500
B. $40,000
C. $42,650
D. $53, 150
E. $50,500
```
E - The death benefit is $40,000 plus the paid-up adds ($10,500). The cash value ceases at the insured death.
171
```
John and his family have the following medical claims {non-automotive) during the year {see policy). Claims are submitted as shown below.
1st William:
$10,250
3rd John
$500
2nd Helen:
$5,000
4th Jaren
$750
How much does the insurance pay on these four claims?
A. $12,550
B. $12,800
C. $13,050
D. $14,000
E. $15,250
```
```
B - William (10,250 Ð 250*) x 80% = $8,000 Helen (5,000 Ð 250*) x 80% = 3,800
John 500 x 80% = 400
Karen 750 x 80% = 600
TOTAL $12,800
* The maximum family deductible is 2.
```
172
Which of the following is/are true about John's group term life insurance contract?
I. He can make an absolute assignment to Helen as the beneficiary and remove the policy from his estate.
II. He owns the contract.
III. He makes no contribution to the premium.
IV. The $120,000 is included in his estate although it passes through to Helen under the marital deduction.
V. At John's death, Helen must pay income tax on the $70,000 excess death benefit.
A. I, II, III, IV
B. I, II, IV
C. I, III, IV
D. IV, V
E. IV
C - Answer I is true. Making an absolute assignment of a policy will remove the policy from his estate subject to the 3- year rule. Answer II is false. The company owns the policy. Answer III is true. He is charged with income (W2) for the excess benefits (above $50,000), but he doesn't pay the premium. Answer V is false. John will be charged with the Table Ion premiums attributable to benefits above
$50,000 ($120,000 - 50,000 = $70,000). Because he is charged with the premium, the benefits are income tax free.
NOTE: Even though the company owns the policy, he has an incident of ownership, the right to name the beneficiary.
173
Helen is considering leaving her job to take a job at a different TV station. The new station provides no benefits but more salary. Which of the following statements is true?
A. She can continue her health plan for 36 months under COBRA assuming that Mirror has 20 employees and that she pays the premium.
B. She can convert her health plan and pay the premium.
C. She can convert her life insurance into an individual term plan and pay the premium.
D. She can convert her disability plan and pay the premium.
B - Group health insurance has a provision that allows for a conversion to an individual health policy (reference Insurance Lesson 4). It is not a very good policy and reasonably expensive. The carriers know only unhealthy people will convert, but it is better than nothing. COBRA for terminating employees is available for 18 months. If she converts her group life insurance, it must be converted into a permanent plan, not term. Group disability insurance isn't convertible.
174
As a result of medical problems, Helen is disabled for 90 days (consecutive) during the year. Which of the following is true?
I. If she were disabled more than 180 days, the policy would have paid $1,500 per month.
II. Helen's disability benefits are income tax free.
III. Helen can perform a limited amount of freelance writing work at home and still receive her benefits under her policy.
IV. Helen should try to get a policy with 100% benefits since disability income is subject to income tax.
V. The elimination period is similar to the deductible in a medical insurance plan.
A. I, II, IV
B. I, IV, V
C. I, V
D. II, IV
E. III, V
C - Helen's employer paid the premium; therefore, all benefits will be taxable (Answer II). Helen's policy states she only will get benefits if she cannot perform any occupation (Answer III). Disability benefits are normally only available for 50-600/o of salary.
175
How many years will it take Helen to have $300,000 accumulated in her 25% pension plan based on current assumptions?
A. 14 years (HP12C) 13.62 years (HP10B or HP17BII)
B. 15 years (HP12C) 14.35 years (HP10B or HP17BII)
C. 17 years (HP12C) 16.8 years (HP10B or HP17BII)
D. 18 years (HP12C) 17.7 years (HP10B or HP17BII)
B - Pension contributions are normally made at year end. She currently has $28,000. Her salary is $30,000. The plan is growing at 9% per year.
28,000 ± PV, 7,500 ± PMT, 9 i, 300,000 FV (end) Solve for N 15 years (HP-12C) 14.35 years (HP-10B)
Difficult solution.
176
John is concerned about damages to his auto during the 'no name' storm. Which of the following losses is covered by the compcoverage of his Personal Auto Policy?
I. During the Initial part of the storm, hail damages his windshield and various windows in the car.
II. As the river begins to rise, he decides to move his car to higher ground and hits a prizebull which had strayed onto the roadway. The bull is killed, and the rancher is suing for $100,000 damages
III. As a result of hitting the bull, the front-end of the car is shoved in and the windshield shatters, opening it up to the rain. The car stalls out in a ditch alongside the road.
IV. Since the car cannot be moved, the rising river (flood) damages the engine.
V. He has to tow the car to a repair shop the next day.
A. I, II, III,IV, V
B. I, II, V
C. I, III, IV, V
D. IV, V
C - Hail is covered under comprehensive (Answer I). Damage to the car incurred by hitting the bull is covered, but the bull itself isn't covered by comprehensive (Answer II). The bull is covered by BI/PD (property damage). Answer III is covered. Flood is a covered event under comprehensive (Answer IV). Answer V is covered under comp. Towing due to an accident is covered under comp. Comp is other than collisioncovered in Lesson 3 (auto coverage).
177
Who is the owner of an endorsement method split dollar variable life policy?
A. The insurance company
B. The insured
C. The insured's employer
D. The insured's beneficiary
E. It is split between the insured and employer
C - Under endorRsement method, the employeR is the oweR.
178
Clarke is concerned about how John's death will affect the company (a key person). Which of the following factors should be considered when quantifying the amount of life insurance Clarke should have on John?
I. The loss of earnings caused by the key person's death
II. The cost of finding a replacement for the key person
III. The cost of funding a split-dollar policy on the key person
IV. Whether there is someone in the organization who can easily step into the position held by the key person
A. I, II, III
B. I, II, IV
C. I, III, IV
D. II, III, IV
E. All of the above
B - Split-dollar is an employee-benefit-type policy application of life insurance, not a key person policy.
179
```
Clarke is considering a split-dollar policy on John. John will own the policy, and Helen will be the beneficiary of the policy. What is this type of arrangement called?
A. SERP
B. Employer pays all
C. Executive bonus method
D. Endorsement method
E. Collateral assignment method
```
E - Since he is the owner of the split-dollar policy, collateral assignment is the best answer.
180
```
Clarke is considering a salary continuation plan. If Clarke pays the disability insurance premium, which of the following will be true?
I. If Clarke gives John the disability premium in the form of a bonus, the disability benefits will be excluded from income.
II. If Clarke pays the premium, the disability benefits will be income taxable as ordinary income.
III. If the company pays the premium, the company can deduct the premiums paid.
IV. If Clarke both owns the policy and is the beneficiary of the policy, benefits can be paid in the form of dividends to John.
V. If Clarke pays the premium, the company will not be able to deduct the premium.
A. I, II, III, IV
B. I, II, IV, V
C. I, II, III
D. II, III
E. V
Mark and Mary Hatton Case (questions 55 - 63)
Mark
- Age 56, has some minor medical problems
- Is divorced and has 4 children from his prior marriage
- Owns and operates a business with his second wife, Mary
- Has a will and various trusts for estate planning purposes
Mary
- Age 40, in good health
- Is divorced (This is her second marriage.)
- Only has a simple will (All separate assets go to her mother.)
Mark's children
- Daughter, age 32, married with 2 children
- Son, age 30, married with 1 child
- Daughter, age 27, single
- Son, age 23, single (has special needs)
Bob - 23-year old son
Bob is a paraplegic due to a sporting accident at age 18. He recently graduated from college and is trying to start his own business. Mark and Mary have provided him with a specially equipped house so that he can live on his own.
PLANNING
Mark has a will (separate property assets go to his children) and an unfunded revocable trust.
Ass
Inv
Use
1Property settlement from prior marriage IRA is a rollout from prior husband's pension plan. Beneficiary is Mary's mother.
2Property settlement from prior marriage - IRA is a rollout from a prior employer's pension plan. Beneficiaries are his children equally.
3Replacement value: $350,000
4The residence was purchased after Mark and Mary married. The replacement value of the house is
$225,000.
5Property settlement from prior marriage
Business (C Corporation)
Mark was a very successful salesman for an advertising agency. When Mark married Mary, they decided to start their own ad agency. Mark handles all the marketing activities for the company, and Mary runs the day-to-day operations. The company employs 10 people (including Mark and Mary). The business is in a unique older building which Mark purchased. Because of its uniqueness, the insurance carrier requires extra coverage (90%). None of Mark's children work in the business. None of them like Mary or want to spend time with her.
PERSONAL / BUSINESS NSURANCE
Homeowners policy
Carrier
A-1 Insurance Company
Dwelling
$200,000
Contents
$100,000
Liability
$300,000
Replacement cost
Building only, contents are
ACV $25,000 scheduled jewelry
Rider
$600 per year
Cost
Umbrella liability policy
Carrier
A-1 Insurance Company
Coverage
$1,000,000
Cost
$500 per year
Business property policy
Carrier
A-1 Insurance Company
Property
$300,000
Contents
None
Deductible
$1,000
Liability
$1,000,000
Replacement cost
Building
Rider
Loss of use
Cost
$1,200 per year
Life insurance policy on Mark
Carrier
Mutual of Ohio
Coverage
$500,000
Dividends
Buying paid-up additional insurance (current
death benefit $75,000)
Cash value
$45,000
Dividend cash value
$20,000
Loans
None (8% fixed rate)
Owner
Mark
Beneficiary
Children equally
Premium
$3,000 per year (purchased 15 years ago)
Sailboat policy
Carrier
Watercraft Insurance Company
Hull
$150,000
Liability
$1,000,000
Premium
$2,500 per year
Business owners policy (BOP)
Carrier
Commercial Insurance Company
Contents
$100,000
Liability
$1,000,000
Riders
Non-owned auto/hired auto
Premium
$1,000 per year
Workers compensation policy
Carrier
Commercial Insurance Company
Coverage
All employees except Mark and Mary
(They opted out)
Liability
$100,000
Premium
$2,000 per year
Auto Policy Carrier
Carrier
Commercial Insurance Company
BI/PD
$1,000,000
Med pay
$5,000/$15,000
UM
$1,000,000
Collision
$500 deductible
Other than collision
$500 deductible
Riders
Towing and rental car
Premium
$2,000 per year
Auto policy covers Mark and Mary's cars which are owned by the corporation.
Split-dollar policy (collateral assignment)
Covered person
Mark
Type
Variable universal life (option A)
Death benefit
$500,000
Beneficiary
The company for return of premiums paid: The remainder is paid to Mary, if
living, and if not, to Mark's children in equal shares.
Cash value
$28,000
Premium
$8,000 (Policy was purchased 5 years ago.)
Group medical insurance
Covered persons
Employees of agency (Mark and Mary)
Type of plan
Indemnity
Deductible
$500
Coinsurance
80%/20% of the next $5,000
Stop-loss
After an out-of-pocket of $1,500,
the plan pays 100%
Premium
Company pays for employees only;
family coverage is paid by employees. (Bob is covered as a dependent by Mark.)
Group life insurance
Covered persons
Employees of agency (Mark and Mary
Life
$50,000
AD&D
$50,000
Beneficiary
Children of the insured
Premium
Company pays for employees'
insurance
```
C - Under a salary continuation plan, Answers II and III are true. Answer I is an option. The bonus would be taxable; then, the benefits would be tax -free. Answer IV is wrong because companies can't own and be the beneficiaries of an individual disability policy. They can own and be the beneficiaries of a disability overhead or disability buyout policy but not an individual disability policy. If Answer I is true, then Answer II is true, and Answer V is false.
181
What are Bob's options for health insurance?
I. He can get up to 36 months of COBRA.
II. He can convert the group coverage to an individual health plan.
III. He can elect a HJPAA option.
IV. He might be able to continue under his father's plan.
V. He can apply for group insurance when he starts his own business.
A. I, III, IV
B. II, III, IV, V
C. III, IV, V
D. III, IV
E. V
B - COBRA is not an option (10 employees). He has a conversion option under his father's policy. (No evidence of insurability is required.) HIPAA is an option. As long as he is a dependent of his father, he can continue under his father's plan. The maximum age is usually 24. If Bob starts his own business, he can apply for group insurance.
182
```
During the year, Bob makes $5,100 of health claims. How much does the carrier pay?
A. $920
B. $1,420
C. $3,680
D. $4,180
E. $5,100
```
C - Insured Carrier
Deductible $500 -----
Coinsurance $920 (20% of $4,600) $3,680 (80% of $4,600)
$1,420 + $3,680 = Claim $5,100
183
```
If Mark dies, what total amount insurance death benefit will his children receive?
A. $500,000
B. $550,000
C. $575,000
D. $1,085,000
E. $625,000
```
```
E - Mutual of Ohio
$500,000
Paid-up additions
75,000
Group life
50,000
$625,000
Under split dollar, the company will get its premium back first. If the children were the primary beneficiary [$500,000 - 40,000 (premium)], they would get $460,000 more.
```
184
Mark wants to start an education funding program for his grandchildren. What type of plan is most appropriate, and how much should he contribute per grandchild?
A. UGMA ($3-5,000/Yr) B. UTMA ( $3-5,000/Yr) C. 529 ($3-5,000/Yr)
D. 529 ($70,000 lump sum)
C - Best answer. 529 plan I minimal contribution at this time considering he has 3 grandchildren and this is a second marriage. His wife may object to Answer D considering his children are unfriendly. The maximum contribution for 2014 is $70,000 x 3 or $210,000 for Answer D. 529 plans are generally superior to UGMA and UTMA because of the kiddie tax (now age 24).
185
```
In case Mark or Mary dies, what type of advanced business planning should they do?
I. Entity purchase buy-sell
II. Cross-purchase buy-sell
III. Key man on Mark
IV. Split-dollar on Mark
V. Non-qualified deferred comp on Mark
A. I, III, IV, V
B. II, III, IV, V
C. I, III
D. II, III
E. III, IV, V
```
D - The company is owned 50/50. Mark's children do not like Mary. Mark and Mary should do a cross- purchase buy-sell. The business should buy a key-man policy on Mark. The agency relies on Mark's selling ability. The question asks about business planning should either of them die. Split-dollar and non- qualified deferred compensation reflect personal planning. Mark already has an existing split-dollar policy. Cross-purchase is a better than entity purchase for Mary. She can buy Mark's stock at his death. Otherwise his children will get his stock.
186
```
During the summer, a hail storm damages the exterior of Mark's commercial building. Damages amount to $50,000. How much does the insurance company pay? HINT: Use 4 decimal places to get close to the answer.
A. $46,620
B. $47,620
C. $48,500
D. $49,000
E. $50,000
```
A - The insurance carrier required 90% (see page 17) coverage.
$300,000 x 50,000 - $1,000 = $46,620 90% of $350,000
187
Mark is concerned about becoming disabled and his company failing. If he purchases a BOE policy (business overhead expense), which of the following is true?
A. The premium is not deductible, but the benefits are tax- free.
B. The premium is deductible, but the benefits are taxable income to the business.
C. The premium is deductible, and the benefits are tax-free.
D. The premium is not deductible, and the benefits are taxable income.
E. Only self-employed persons can purchase BOE policies.
A - The corporation cannot deduct the premium, but it can exclude the benefits from its gross income.
188
Who is the owner/beneficiary of the existing split-dollar policy?
I. Mark is the owner.
II. Mark's company is the owner.
III. Mary is the primary beneficiary.
IV. Mary is more like a contingent beneficiary.
V. Mark's company operates as the primary beneficiary.
A. I, III, IV
B. I, IV, V
C. II, III, IV
D. II, IV, V
E. II, III
B - Under collateral assignment, Mark is the owner of the policy. Mary gets the balance of the death benefits (like a contingent beneficiary) after the company receives its return of premium.
189
If an employee (other than Mark or Mary) gets hurt while on the job, which benefits will not be tax-free?
A. Employer paid sick pay benefits
B. Workers' compensation medical benefits
C. Workers' compensation disability income benefits
D. Workers' compensation death benefits should he die
E. Death benefits from the group life insurance should he die
Insurance Planning - Final
A - Group life insurance and workers' compensation benefits would be tax- free. Sick pay benefits are like salary being paid while sick. They are not disability benefits but benefits paid by an employer for a certain number of days. They are taxable.
Investment Planning Quiz ? Lesson 1
