Liability insurance

Question 1

Negligence liability

Answer 1

if negligence is show to be proximate cause of injury, negligent party is liable

Question 2

Intentional Tort

Answer 2

assault and battery, libel and slander, false arrest, trespass, invasion of privacy

Question 3

Strict Liability

Answer 3

“accidents happen” - regardless of if anyone is at fault. If you maintain dangerous property, high risk activities - handling hazardous materials

Question 4

John auto coverage is 50k/500k/25k
Umbrella policy of 1mil requires 150k of coverage. John has an accident and 1.2mil judgement against him by injured party, how much does he pay?

Answer 4

Umbrella needs 150k coverage to kick in. John has to pay 100k for umbrella to kick in, that brings him to 1,150,000. He needs to pay an additional 50k to cover the whole judgement

150k total

Question 5

Which would be covered in “other than collision” under PAP
1.hail
2. flood
3. windstorm
4. hitting an animal

Answer 5

All of them are covered

Question 6

Your car is parked in the garage and the garage is destroyed by an earthquake - would homeowner’s or PAP cover the loss?

Answer 6

ONLY The PAP covers - it doesn’t matter if the car was in the garage or in the driveway - auto policy covers

Question 7

In order for your home to be covered for a flood or earthquake what do you need to have?

Answer 7

Earth movement or earthquake and flood have to be added - the question might ask about either

Question 8

John has a comprehensive major medical insurance policy with a $500 deductible, a 70% coinsurance clause and a $10,500 stop-loss. If John has an accident with $33,500 of medical bills, what will he pay in coinsurance?

1. 500
2. 9,900
   3 10000
3. 10,400

Answer 8

$33,500 Medical Expenses - $500 Deductible = $33,000 x 30% Coinsurance Clause = $9,900.

Make sure you subtract the deductible

Question 9

If you have a comprehensive major medical policy with a 70% coinsurance clause, how much of the bills will you have to pay?

Answer 9

30% plus the deductible

Question 10

John has a comprehensive major medical insurance policy with a $500 deductible, a 70% coinsurance clause and a $10,500 stop-loss. If John has an accident with $35,000 of medical bills, what will he pay in coinsurance?

Answer 10

He will pay $10,000. The stop loss is $10,500 and he paid a $500 deductible

(35000-500) * .3 = 10350 plus deductible would go over 10,500

Question 11

John has a major medical policy with a $300 yearly deductible and 80% coinsurance to a $2,500 stop-loss. He suffered an illness with covered bills of $4,750 and a $175 deductible. Earlier in the year, he spent $175 on his deductible for a doctor’s visit. What will the insurer pay?

Answer 11

Because he paid a $175 deductible before this medical expense of $4,750, the deductible is $125 as the yearly maximum, is $300. The $4,750 Medical Expense – $125 Deductible = $4,625 x 20% or $925. His out-of -pocket amount is $925+$125=$1,050. Total Medical of $4,750 - $1,050 = $3,700 the the insurer will pay.

Question 12

John has a house with a fair market value of $225,000 (the land amount is $75,000). The house is insured for $100,000. John incurred a $30,000 loss due to a fire in the home. Assuming there is a $1,500 deductible, how much will John receive from the insurance company?

Answer 12

$225,000 FMV of Home - $75,000 for Land = $150,000. [($100,000 Policy / ($150,000 Home x 80%) x $30,000 Loss] - $1,500 Deductible = $23,500 Insurance Reimbursement.

Question 13

If you’re given a problem with a home value and land value what do you do?

Answer 13

You take the land value out

Question 14

In a question “replacement cost” of a home is equal to what

Answer 14

Fair market value

Question 15

In a question, fair market value is equal to what

Answer 15

replacement cost

Question 16

How do you find homeowners insurance coverage?

Answer 16

(Insurance amount) / (home value * .8) * damage

Question 17

John has a house with a fair market value of $750,000 (the land amount is $250,000). The house is insured for $435,000. John incurred a $100,000 loss due to a fire in the home. Assuming there is a $10,000 deductible, how much will John receive from the insurance company?

Answer 17

$750,000 FMV of Home - $250,000 for Land = $500,000. [($435,000 Policy / $500,000 Home x 80%) = 1.0875 and cannot exceed 1 or 100%.

Therefore, the $100,000 Loss - $10,000 Deductible = $90,000 Insurance Reimbursement.

Question 18

When you’re calculating the covereage in an insurance problem what do you multiply first?

Answer 18

The home value * .8

THEN

Coverage amount / result of above

Question 19

Which of the following exchanges are not protected under IRC Section 1035?

a)	Exchange annuity for annuity.					
b)	Exchange an annuity for life insurance policy.					
c)	Exchange life insurance policy for a qualified long-term care insurance contract.

Answer 19

Annuity for insurance policy is not covered

Question 20

What is the progression for exchanging life insurance?

Answer 20

Life insurance - > annuity -> long term care

can only go upstream

Question 21

John purchased an annuity for $100,000 on June 1, 2005. He has chosen to annuitize the annuity on March 1, 2023, and will receive $750 a month for the rest of his life. The actuarial number of payments is 14 years for John, age 74. Which of the following statements is true?
a) FIFO basis is used to calculate any ordinary income and return of basis.
b) LIFO basis is used to calculate any ordinary income and return of basis.
c) All payments received after the 168th payment are tax-free.
d) All payments received after the 168th payment are taxable.

Answer 21

ll payments received after the 168th payment are taxable

Question 22

John, at age 20, purchased a $25,000 annuity on October 10, 1995. Every October for the first 25 years, John has as contributed $1,000 to this annuity. The annuity on July 12, 2023 is now worth $250,000.

Which is true if John takes a $50,000 distribution on July 12, 2023?

	Amount of	Does a 10%					
	Taxable	Penalty					
	Distribution	Apply?					
a)	$25,000 	No					
b)	$25,000 	Yes 				
c)	$50,000 	No					
d)	$50,000 	Yes

Answer 22

d) $50,000 Yes (Answer)

The 10% rule applies because hes not disabled or death

Question 23

John, at age 20, purchased a $25,000 annuity on October 10, 1995. Every October for the first 25 years, John has as contributed $1,000 to this annuity. The annuity on July 12, 2023 is now worth $250,000.

If John takes a $50,000 distribution on July 12, 2023 and annuitizes the contract for a 40 year annual straight life payment of $8,000 after becoming disabled, what is subject to tax?

a) $0
b) $1,250
c) $6,750
d) $8,000

Answer 23

6750

[$50,000 adjusted basis / ($8,000 Payment x 40 Years)] x $8,000 Payment = $1,250 Return of Basis. Therefore, the taxable amount is $8,000 - $1,250 or $6,750.

6750 is the growth

Question 24

If an annuity is in the accumulation period and you take a withdrawal - how is it taxed?

Answer 24

LIFO - interest is taxed

Question 25

Fixed Period annuity taxation

Answer 25

total payments = amount to be received

Question 26

Life income annuity taxation

Answer 26

expected amount to be received is based on life expectancy tables from the US treasury

Question 27

When was FIFO method used on annuity distributions

Answer 27

before August 14th 1982 for distributions

Question 28

When was LIFO method used on annuity distributions

Answer 28

after August 14th 1982 for distributions

Question 29

If an annuity is not annuitized and you make a withdrawal - what is taxed?

Answer 29

The growth - once all the growth is taxed the remainder is considered principal and isn’t taxed

Question 30

What happens if the annuitant dies before the cost basis is recovered?

Answer 30

a deduction for the unrecovered amount is considered an itemized deduction not subject to 2% of AGI on the annuitant’s final tax return

Question 31

When do you use the exclusion ratio?

Answer 31

when annuitizing a contract, each payment is a return of capital and ordinary income calculated using the exclusion ratio

Question 32

Exclusion ratio

Answer 32

(Basis in Contract /Total Payments Received) * Payment received = Return of basis

Question 33

If the contract is a deferred annuity with no post tax basis - what is the exclusion ratio?

Answer 33

The exclusion ratio is zero - all distributions are taxed as ordinary income

Question 34

John purchases an annuity on 1/1/09 for 60k. He annuitizes and will receive monthly $600 for 15 years. What is his taxable income if the first payment is on 9/1/22?

Answer 34

Exclusion ratio: 60k/($600 x 12 month x 15 years) = .556
Total payments received in 2022 = $600 x 4 months = $2,400
Tax free return of basis = $2,400 x .5556 = $1,333.33
Taxable income = $2,400 - $1,333.33 = $1,066.67
Adjusted basis of annuity as of 12/1/22 = $60,000 - $1,333.33 = $58,666.67

Question 35

When would payments on an annuitization be fully taxable?

Answer 35

payments received beyond the projected life expectancy - except if issued before December 31 1986, then the exclusion applies to all distribs

Question 36

When would the exclusion ratio apply to all distributions?

Answer 36

for annuities issued before August 14 1982

Question 37

Is there a step up for annuities?

Answer 37

No

Question 38

If you have an annuity inside an IRA - what is going to be taxed?

Answer 38

The whole thing is taxed because you took the deduction on the contribution

Question 39

John, at age 20, purchased a $25,000 annuity on October 10, 1995. Every October for the first 25 years, John has as contributed $1,000 to this annuity. The annuity on July 12, 2023 is now worth $250,000.

Which is true if John takes a $50,000 distribution on July 12, 2023 and annuitizes the contract for a 40 year annual straight life payment of $8,000 after becoming disabled. What is subject to tax?

John is age 50 when he receives the first payment, is this subject to the 10% penalty?

Answer 39

The 10% won’t apply because he was disabled

Question 40

John, at age 20, purchased a $25,000 annuity on October 10, 1995. Every October for the first 25 years, John has as contributed $1,000 to this annuity. The annuity on July 12, 2023 is now worth $250,000.

Which is true if John takes a $50,000 distribution on July 12, 2023 and annuitizes the contract for a 40 year annual straight life payment of $8,000 after becoming disabled. What is subject to tax?

John is age 50 when he receives the first payment, is this subject to the 10% penalty?

Because he annuitized the contract when he became disabled and he is under age of 59-1/2, the 10% penalty will not apply.

If the 10% penalty did apply, how much of the $8,000 payment that we calculated as $6,750 as taxable and $1,250 as return of basis would he pay?

Answer 40

10% of the taxable amount of $6,750 or $675.

Question 41

John, at age 20, purchased a $25,000 annuity on October 10, 1995. Every October for the first 25 years, John has as contributed $1,000 to this annuity. The annuity on July 12, 2023 is now worth $250,000.

Which is true if John takes a $50,000 distribution on July 12, 2023 and annuitizes the contract for a 40 year annual straight life payment of $8,000 after becoming disabled. What is subject to tax?

Assume John dies after receiving $24,000 (three years of payments). What is John’s adjusted basis?

Answer 41

$50,000 Original Basis – ($1,250 Return of Basis x 3 Payments Received) = $46,250.

Question 42

John, at age 20, purchased a $25,000 annuity on October 10, 1995. Every October for the first 25 years, John has as contributed $1,000 to this annuity. The annuity on July 12, 2023 is now worth $250,000.

Which is true if John takes a $50,000 distribution on July 12, 2023 and annuitizes the contract for a 40 year annual straight life payment of $8,000 after becoming disabled. What is subject to tax?

Assume John dies after receiving $24,000 (three years of payments). What is John’s adjusted basis?

$50,000 Original Basis – ($1,250 Return of Basis x 3 Payments Received) = $46,250.

How is this $46,250 treated for tax purposes?

Answer 42

$46,250 is a miscellaneous itemized deduction and only receives a benefit if this amount and other itemized deductions exceeds the standard deduction.

For example if his standard deduction was 13k he would definitely itemize

Question 43

John, at age 50, purchased a MEC for $300,000. Which of the following statements are true if today the policy is worth $500,000, and John, at age 61, borrows $250,000 from the policy?

	Amount of	Does a					
	Taxable	Penalty					
	Distribution	10% Apply?					
a)	$200,000 	No					
b)	$200,000 	Yes					
c)	$250,000 	No					
d)	$250,000 	Yes

Answer 43

a) $200,000 No (Answer)
The time of a distribution will determine if the 10% penalty applies to a MEC.

The amount of taxable is the growth - 10% applies when he bought it at age 50 but not when he borrowed it at age 61

Question 44

John purchased a $500,000 whole life policy on April 15, 2021, with a premium of $1,000 per month. John did not pay the January 15, 2023, premium. The next day, January 16, 2023, John committed suicide. What will the insurance company pay his beneficiary if the policy has a cash value of $16,252?

a) $16,252
b) $21,000
c) $21,000 plus interest
d) $499,000
e) $500,000

Answer 44

C) $21,000 plus interest

A total of 21 monthly payments were made or $21,000.

Question 45

John purchased a $500,000 whole life policy on April 15, 2021, with a premium of $1,000 per month. John payed all 25 payments when committed suicide on June 1, 2023. What will the insurance company pay his beneficiary if the policy has a cash value of $18,200?

a) $18,200
b) $25,000
c) $25,000 plus interest
d) $500,000

Answer 45

d) $500,000 (Answer)

The suicide clause applies to the first two years of when the policy is issued.

Question 46

John is 50 years old, but claims on his insurance application that his age was 45. The premium for a 50-year old is $25 per $1,000, whereas it is $10 per $1,000 for a 45-year-old. John purchases a $100,000 policy based on the premium of a 45-year-old. One year later he unexpectedly died, at age 51. What amount will his beneficiary receive if the insurance fails to discover his misstated age on the application?

    a)	$0 						
b)	$40,000 						
c)	$60,000 						
d)	$100,000

Answer 46

d) $100,000 (Answer)

If the error or omission is discovered before death, the correct amount is charged for all years or the policy is adjusted to what the 50 year would have obtained. Therefore, $1,000 / $25 = 40 x $1,000 or $40,000 of coverage.

Question 47

John purchases a $500,000 whole life policy with an annual premium on June 1, 2022. The premium for the year is $14,000. John dies on June 26, 2023, and his wife notifies the insurance company of his death on July 8, 2023. John, who paid all of the couple’s bills, forgot to mail in the current June 1, 2023, premium payment. What amount will the wife receive if the cash value of the whole life policy was $16,200 at the time of death?

a) $0
b) $16,200
c) $486,000
d) $493,000
e) $500,000

Answer 47

c) $486,000 (Answer)

Question 48

John purchases a $500,000 whole life policy with an annual premium on June 1, 2022. The premium for the year is $14,000. John dies on July 4, 2023, and his wife notifies the insurance company of his death on July 8, 2023. John, who paid all of the couple’s bills, forgot to mail in the current June 1, 2023, premium payment. What amount will the wife receive if the cash value of the whole life policy was $11,200 at the time of death?

a) $0
b) $11,200
c) $486,000
d) $493,000
e) $500,000

Answer 48

b) $11,200 (Answer)

Question 49

John has a $500,000 death benefit whole-life policy with a yearly $3,000 premium, which was purchased on June 1, 2017. As of July 1, 2023, the policy has a $22,000 cash value, and he sells the policy to his best friend, Sam, for $25,000.

What are the tax consequences to John?

a) He has a realized loss of $1,000.
b) He has a realized gain of $3,000.
c) He has a realized gain of $4,000.
d) He has a realized gain of $4,000 that is tax-free.

Answer 49

d) He has a realized gain of $4,000. (Answer)

There are 7 years of the $3,000 premium for a basis of $21,000. If he sells for $25,000 - $21,000 adjusted basis = $4,000 realized gain that is recognized as ordinary income.

Question 50

John has a $500,000 death benefit whole-life policy with a yearly $3,000 premium, which was purchased on June 1, 2017. As of July 1, 2023, the policy has a $22,000 cash value, and he sells the policy to his best friend, Sam, for $25,000.

Assume Sam pays 10 years of the $3,000 premium when John passes away when the cash value of the policy is $80,000, what amount is taxable to Sam?

a) $0.
b) $420,000.
c) $445,000.
d) $500,000.

Answer 50

c) $445,000. (Answer)

Sam’s cost basis is the original $25,000 acquisition plus $3,000 x 10 years or premiums for an adjusted basis of $55,000. The death benefit of $500,000 minus the $55,000 adjusted cost basis is a $445,000 realized gain that is recognized as ordinary income due to the transfer-for-value rules.

Question 51

John has a $500,000 death benefit whole-life policy with a yearly $3,000 premium, which was purchased on June 1, 2017. As of July 1, 2023, the policy has a $22,000 cash value, and he sells the policy to his best friend, Sam, for $25,000.

Assume Sam pays 10 years of the $3,000 premium when John passes away when the cash value of the policy is $80,000, what amount is taxable to Sam?

Before John dies, Sam exchanges the life insurance policy for an annuity. What statement is true?

a) The Code will not allow for this exchange to occur.
b) Sam will use an exclusion ratio for a distribution from the annuity.
c) If Sam annuitizes the annuity contract, the actuarial payments are based on Sam’s life.
d) If Sam annuitizes the annuity contract, the actuarial payments are based on John’s life.

Answer 51

c) If Sam annuitizes the annuity contract, the actuarial payments are based on Sam’s life. (Answer)

Question 52

Which of the following are settlement options from a cash value life insurance policy that has lapsed?

1) Paid-up whole life in a reduced amount.						2) Term insurance for the face value of the whole life policy.				3) Cash equal to the surrender value.						
							
a) 1 only						
b) 2 only						
c) 3 only						
d) 1 and 2 only						
e) All of the above.

Answer 52

e) All of the above. (Answer)

Question 53

Which of the following conditions must be met in order for a lapsed life insurance policy to be reinstated?

1) Evidence of insurability must be provided.					2) The insured must repay or reestablish any policy loan.						
							
a) 1 only						
b) 2 only						
c) Both 1 and 2						
d) Neither 1 nor 2

Answer 53

c) Both 1 and 2 (Answer)

Question 54

John is terminally ill and is only expected to live for 13 months. Since he needed cash to try a new treatment, he sold a $400,000 ($175,000 basis) life policy to a viatical company for $275,000. The $200,000 of treatments and $40,000 of long-term care expenses were a success and he lived another 7 years. What are the tax implications?

a) John has $175,000 that is tax-free.						b) John has $275,000 that is tax-free.					c) John has $35,000 that is taxable as ordinary income.				d) John has $100,000 that is taxable as ordinary income.

Answer 54

b) John has $275,000 that is tax-free. (Answer)

Question 55

Which of the following are dividend options that appear in participating policies?

1) Purchase of term insurance.				
2) Reduction of premiums.				
3) Purchase of paid-up additions.				
4) Accumulation at interest.				
 					
a) 2 and 4				
b) 3 and 4				
c) 2, 3, and 4				
d) All of the above.				
e) None of the above.

Answer 55

d) All of the above. (Answer)

Question 56

John purchased a $500,000 whole life insurance policy on his own life and designated his wife as beneficiary. Currently John can surrender his policy for the lump-sum cash value of $25,000. He has paid gross premiums of $40,000 and received dividends of $5,000 over the life of the policy.
What is John’s cost basis?

a) $20,000 						
b) $25,000 						
c) $35,000 						
d) $40,000 						
e) $45,000

Answer 56

c) $35,000 (Answer)

Total premiums paid of $40,000 - $5,000 of dividends that were not reinvested = $35,000 adjusted cost basis.

Question 57

John purchased a $500,000 whole life insurance policy on his own life and designated his wife as beneficiary. Currently John can surrender his policy for the lump-sum cash value of $25,000. He has paid gross premiums of $40,000 and received dividends of $5,000 over the life of the policy.

If John surrenders the policy, what are the tax consequences?

a) John has a loss that is a miscellaneous itemized deduction.			
b) John has a deductible personal loss.			
c) John has a non-deductible personal loss.			
d) John will have a taxable gain.

Answer 57

c) John has a non-deductible personal loss. (Answer)

Proceeds from policy are $25k
Adjusted basis is 35k

$25,000 - $35,000 adjusted basis is a realized loss. This is recognized as a non-deductible personal loss.

Question 58

John purchased a $500,000 whole life insurance policy on his own life and designated his wife as beneficiary. Currently John can surrender his policy for the lump-sum cash value of $25,000. He has paid gross premiums of $40,000 and received dividends of $5,000 over the life of the policy.

Assume additionally that there was a policy loan of $4,000 and accrued interest of $1,000. How much will John receive from the life insurance company if he surrenders the policy?

If John surrenders the policy, what are the tax consequences?
a) $20,000
b) $21,000
c) $29,000
d) $30,000

Answer 58

a) $20,000 (Answer)

The cash value $25,000 - $4,000 policy loan - $1,000 accrued interest = $20,000. Note – this is before any surrender charges that may apply.

Question 59

John is a sole proprietor. He wants to provide 80% of salary disability coverage to Jack, his only employee who has W-2 wages of $100,000. The premium is paid 100% by the company.

What is Jack’s net-of-tax monthly disability benefit if Jack remains in the 25% marginal tax bracket?

a)		$0 					
b)		$1,667 					
c)		$5,000					
d)		$6,667

Answer 59

$5,000 (Answer)

$100,000 Salary x 80% coverage = $80,000 / 12 months = $6,667 monthly benefit. Because the employer paid the premium for Jack, the $6,667 is taxable at a marginal rate of 25% or a $1,667 liability for taxes. The net amount after taxes is $6,667 - $1,667 or $5,000.

Question 60

John is self employed. What is John’s net-of-tax monthly disability benefit if John remains in the 35% marginal tax bracket when receiving the disability benefits and his earnings are $200,000 with a 80% disability payout?

a) $0 					
b) $3,033 					
c) $8,667					
d) $13,333

Answer 60

d) $13,333 (Answer)

John is self-employed so the benefit is not taxable of $200,000 salary x 80% coverage = $160,000 / 12 months = $13,333 monthly benefit. Because the premium payment is not tax deductible for John, the income received from the disability contract is tax-free.

Question 62

If the homeowners ratio is over 1, dont forget what

Answer 62

to subtract the deductible