Missed Exam Questions Flashcards
Which of the following statements concerning Medicare part B is correct?
1. Benefits are subject to a calendar year deductible, and only 80% of the medicare approved charges are paid.
2. The cost of self administer drugs is generally covered
3. The cost of doctor visits is covered both in and out of a hospital
4. Part B is a voluntary program of health insurance
5. Outpatient services by a participating hospital are a covered expenses
1, 3, 4, 5
1. Benefits are subject to a calendar year deductible, and only 80% of the medicare approved charges are paid.
3. The cost of doctor visits is covered both in and out of a hospital
4. Part B is a voluntary program of health insurance
5. Outpatient services by a participating hospital are a covered expenses
When Andy purchased a whole life insurance contract, he wanted the death benefit to increase each 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-pays a death benefit equal to the cash value, which is increasing. Since the dab is based on cash value, it increases yearly. This is true, even if the policy owner borrows against the policy. Accumulated with interest isn’t a death benefit. ( Dividends. Are paid in addition to the face amount of the policy)
Tilly Tightbudget wants to stop paying the premiums on her whole life policy. What are her options?
1. Cash it in
2. Take a reduced amount of paid up whole life
3. Take a paid up term (extended term ) insurance policy
4. Use APL to cover the premium (if elected by the policy holder in the application)
5. Annuitize the cash value
All of the above
Hollis has the following needs relating to life insurance:
- possible policy loans
-cash to pay federal estate taxes
- guaranteed level premiums
Which type of policy listed below would be most suitable?
A. First to die
B. Joint life
C. Whole life
D. Universal
E Variable universal
C- whole life insurance is the only policy that fulfills all 3 objectives. The joint life doesn’t spell out the type of policy
Which of the following statement is true about a specific difference between universal life and variable universal life?
A cash value of the variable universal life policy is in a separate account; cash value in the universal life policy is in a general account
B The variable universal life cash value is in a general account; universal life cash value is in a separate account
C Both have flex premiums
D Variable universal life has a cash value based on current interest rates
A- variable policies invest the cash value in an account that is separate from the general account.
Lilly is comparing the policy provisions, features and options of 2 whole life insurance policies. She plans to buy one. What feature listed below should be least important to her?
1. The guaranteed cash values of the policy
B. Whether the carrier pays dividends or not
C. The non forfeiture options
D the settle options
E the insurance company rating
E- a company rating is not a provision, feature or option.
From the list below, what are the reasons why an insurance company would issue a Form 1099 to a policy owner?
1. The dividends were behind held to accumulate interest
2. The dividends were used to purchase paid up additions
3. The owner cashed in the policy which had a basis greater than its cash value
4. The policy was a MEC and the owner had made a withdrawal
5. The whole life policy was a MEC and dividends were used to reduce premiums
1, 4, 5
In answer 1, the interest is taxable (but not the dividends themselves). In answer 2, the dividends were not taxable. In answer 3, part of the surrender value would have been taxable if the cash value exceeded the basis. Answer 4 and 5 are both MEC situations that trigger tax consequences.
Homer, age 68, owns a life policy with a $50k db. He took at 30k loan against the policy. Over 10 years, $10k in dividends was used to reduce premiums (billed at 4k/year). The current cash value of the policy is 15k (net of loan). If Home surrenders the policy, which of the following statements is true regarding what Homer must show on Form 1040?
A Homer will incur taxable gain or ordinary loss
B Homer must report 15k in ordinary income
C Homer may claim an ordinary loss of 5k
D Homer must report 15k in LTCG
E Homer must report 5k of ordinary income
B
Net cash value 15k (net of loan)
Loan +30k (add loan back)
= 45k total cash value
Less premiums 30k (40k billed-10k div’s used to pay premium)
= ordinary income of 15k
Don and Bill own a business valued at 1 mill. Some years ago, they signed a cross purchase buy sell agreement funded with life insurance. Don is leaving to start a business. Don wants to purchase his life insurance policy (250k) from Bill. Which of the following situations triggers a transfer for value problem?
A a sale of the policy from Bill to Don
B A direct transfer for value the policy from Bill to Don’s wife to avoid the 3 year inclusion rule
C A sale of the policy from Bill to the new biz (corp) that Don is starting
D A sale of the policy from Bill to a corp in which Don will own
B- The sale of the policy from Bill to Don’s wife triggers the transfer for value consequences. The exceptions to the transfer for value rule include a sale or transfer to the insured (don) or a sale to a corporation in which the insured is a shareholder or officer
Which of the follow statements is true about the difference between mutual insurance companies and stock insurance companies?
A. Stock companies typically pay residual profits to shareholders
B Stock companies do not pay dividends to their policy holders
C Only mutual companies pay dividends to their policy holders
D Only mutual companies issue guaranteed cash value policies
A Some stock companies issue participating policies (including those paying dividends to policyholders). The world “only” in c and d makes them incorrect.
Jack is age 50 and divorced. He no longer has to pay alimony or child support. His son is 28 and on his own. Jack has 2 life insurance policies: 60k of grope term (son is bene) and 250k of whole life (estate is the bene). He has been paying 3k of premium annually for 10 years on the 250k policy and can afford to continue to pay premiums. He wants to maximize his retirement benefits, and he believes he does not need as much life insurance as he now carries. Which solution is best for him concerning his 250k whole life policy?
A make a section 1035s exchange of the policy into a fixed or variable annuity
B cash in the policy and roll all the cash value into an international mutual fund
C lower the death benefit and continue the policy
D exchange the existing policy for a variable policy but maintain the db of 250k
E select 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 Jack cashes the policy in and the policy has a loss, he cannot claim the loss for income tax purposes. The mutual fund future gains and div’s will be subject to tax whereas teh variable annuity will grow tax deferred. The other options all continue the insurance in one way or another.
Continuing with Jack from the previous question: when Jack retires, should he convert his group term policy? If he converts, which kind of policy can he convert to? The quest 14 fact remains unchanged except Jack is now age 65/.
A convert to decreasing term
B Convert to a whole life
C terminate the coverage at Age 65
D convert to a variable annuity
B- Jack does not need much life insurance at age 65 . it does not indicate no need. The 60k of group term is not a large policy. Conversion to a whole life seems to fit the question best. He cannot convert a group term policy to an annuity.
Sally (age 35) and Hy (age 36) want to fund a buy sell agreement with life insurance. The insurance carrier is willing to offer life insurance on Hy but only with a rating (extra premium). Which option should Sally and Hy choose to achieve the greatest mutual benefit?
A they should use a cross purchase type buy sell. They should each purchase a level term policy even is Hy is rated. Hy may have to pay more.
B They should use a cross purchase type buy-sell. They should each purchase variable universe 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 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 in a cross purchase arrangement, Sally would purchase Hy’s policy (the higher premium). She would pay the higher premium. With good investment performance the variable policy may be less costly. Answer C is wrong. Corporate ownership of policies makes them subject to the corporations creditors. 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 to him than minimizing premiums.
Richard’s employer plans to sell the current split dollar policies to the insured. Richard asks his employer to sell his policy directly to his children. This direct transfer would remove it from his estate. Which of the following statements are correct.
1. Teh selling price will be the cash value of the policy
2. The policy death benefits will become income tax taxable to his children under transfer for value and be estate tax free ( no 3 year rule)
3. To avoid the decrease in death benefit that will result from taking a loan or withdrawal to roll out the policy, the children can buy the employers interest for cash
4. If the employer receives more in payments than it paid in premiums, it must recognize taxable income.
2, 3, 4.
Answer 1 is false. The selling price will be the greatest of cash value or the premium paid by the employer. 3 is true, but it will trigger transfer for value tax exposure. It will remove the policy from his estate.
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?
A At age 18, the children will be able to buy a Corvette if they want. The proceeds will be theirs because teh policies are not purchased under UTMA or trust.
B At age 18, John can remove the interest tax free because this policy meets the definition of life insurance (1984 act).
C. At age 18, the interest will be distributed under FIFO rules because it is a MEC policy (1988 act)..
D If the children sign as owners, the Kiddie Tax will not apply on any taxes payable.
E None of the above
E- none of the statements are accurate. Answer a is wrong because john must be the owner of the policy. John will control the policy. Answer B is wrong because John used a single premium policy ( making it a MEC) and withdrawals will be LIFO. Interest will come out first, and interest will be taxable. Answer C is wrong because a MEC makes the payout LIFO. Answer D is wrong b cause the children are minors and cannot own the policy.
