Module 5 - Quiz

Question 1

T / F - The elimination period of disability and long-term care policies determines how long coverage lasts.

Answer 1

False - The elimination period is like a deductible, it is the amount of time that the insured must wait before receiving a benefit.

Question 2

T / F - All else being equal, the longer the elimination period, for disability and long-term care policies, the lower the premium for the insured.

Answer 2

True - The elimination period is like a deductible. All else being equal, the longer the insured has to wait before receiving a benefit, the lower the
premium will be.

Question 3

T / F - The elimination period (for disability and long-term care policies) has no impact on premiums, it is the dollar amount of the benefit that solely determines the insured’s premium

Answer 3

False - The elimination period is like a deductible. All else being equal, the longer the insured has to wait before receiving a benefit, the lower the
premium will be.

Question 4

Under the Affordable Care Act, health care exchanges have been created with basic tiers of coverage available. Which of the following is not one of the basic tiers?

1) Platinum
2) Silver
3) Bronze
4) Tin

Answer 4

4) Tin

• Health care exchanges have been created and the plan types are based on the actuarial value of coverage, with bronze plans providing 60% of coverage,
  silver 70%, gold 80%, and platinum 90%. There is also a Catastrophic tier available to those under 30, which provides less than 60% of coverage.

Question 5

Which one of the following situations would be best suited for a decreasing term insurance policy (a policy that provides a lower death benefit each passing
year)?

1) a single parent with a home mortgage and a special needs child
2) a single homeowner with no dependents
3) a young couple just starting out and living in a rented apartment
4) a retired couple in excellent health living in a house with no mortgage

Answer 5

2) a single homeowner with no dependents

• A single homeowner is the ideal candidate for decreasing term insurance because they would likely not need life insurance for anything besides final
  expenses and paying off the mortgage.

> A single parent with a special needs child will most likely need at least level protection for life insurance, so decreasing term insurance would not be
appropriate.

> If anything, a young couple just starting out would most likely want an annually renewable term policy.

> A retired couple in excellent health would probably be better candidates for permanent life insurance.

Question 6

Which one of the following elements is not considered in the process of determining the cost of a life insurance premium?

1) Morbidity charges
2) Expense charges
3) Mortality charges
4) Credited interest

Answer 6

1) Morbidity charges

• Three main elements combine to determine the amount of an insurance premium: mortality charges, expense charges, and credited interest, if any.
  Morbidity is the occurrence of illness and relates primarily to disability insurance. Morbidity refers primarily to disability insurance, and mortality refers to life insurance.

Question 7

T / F - After cumulative insurance dividends received exceed cumulative premiums paid, they are income-tax-free.

Answer 7

False - Until cumulative dividends paid exceed the cumulative premiums paid, the dividends are income-tax-free. After this point, dividends will be taxable. It
would be unusual for the dividend total to exceed the amount of premiums paid.

Question 8

T / F - Dividends are a result of higher than expected expenses or lower than expected investment results.

Answer 8

False - Dividends are a result of lower than expected mortality expenses, lower administrative or other expenses, better than expected investment results, or a
combination of these factors.

Question 9

T / F - Dividends may not be used to increase the death benefit and cash value of a contract.

Answer 9

False - Dividends can be used to increase the death benefit and cash value of an insurance contract.

Question 10

T / F - Dividends may be used to reduce premium payments, thus maintaining insurance coverage and reducing out-of-pocket expenses.

Answer 10

True - Dividends may be used to reduce the owner’s out-of-pocket expense.

Question 11

What occurs if an irrevocable beneficiary passes away before the insured?

1) Policy rights usually revert to the owner
2) Policy rights would be included in the irrevocable beneficiary’s estate
3) Policy rights would go to the closes relative of the account owner

Answer 11

1) Policy rights usually revert to the owner

- If an irrevocable beneficiary passes away before the insured, policy rights usually revert to the owner.

Question 12

Which one of the following is a characteristic of the Affordable Care Act (ACA)?

1) The ACA created government health insurance.
2) There are market exchanges for comparison and choice of plans.
3) Plans are organized by price.
4) Children must purchase their own health insurance coverage at age 21.

Answer 12

There are market exchanges for comparison and choice of plans.

• Market exchanges offering health plans are part of the Affordable Care Act.

> Insurance and care are provided by the private sector, not the government. There is no government health insurance plan offered under the Affordable
Care Act.

> Plans are organized by health care features under the Affordable Care Act.

> Children stay on a parent’s plan until age 26 under the Affordable Care Act.

Question 13

Which one of the following is the most important factor to focus on when obtaining life insurance?

1) Type of insurance
2) Insurance need
3) Insurance company product line

Answer 13

2) Insurance need

• The most important factor is to make sure the life insurance need is covered, or covered as much as possible. The type of insurance that is being used is
  secondary. If someone needs $500,000 worth of insurance and term is all that they can afford, then they should purchase term. Purchasing a $75,000
  whole life policy is not a viable alternative—if something were to happen to the insured then there would be a substantial shortfall for the survivors.

Question 14

When purchasing disability insurance, which one of the following is the least restrictive definition of disability from the perspective of the insured?

1) unable to perform two out of six ADLs
2) at any occupation
3) his or her own occupation

Answer 14

3) his or her own occupation

• The “own occupation” definition is the most liberal and least restrictive for the insured because it says that a person will be considered disabled if they are
  unable to work at their own prior occupation.

> # 1 - This is a definition that applies to long-term care insurance and when it will start to provide a benefit.

> “At any occupation” means that, in order to be considered disabled, you must not be able to work at any occupation. This is the most restrictive definition
from the viewpoint of the insured since the ability to perform any job would mean that you are not considered disabled as far as the insurance company is
concerned

Question 15

T / F - Variable annuities may offer no guarantee as to the account value, except at death.

Answer 15

True - Variable annuities offer no guarantee as to the account value, except at death.

Question 16

T / F - Since variable annuities lack liquidity, they do not offer a hedge against inflation.

Answer 16

False - Variable annuities, over time, are like stocks, which have been an effective hedge against inflation. Fixed annuities, which are invested in the insurer’s
general account, might be subject to the claims of the insurer’s creditors in the event of financial difficulties.

Question 17

T / F - Variable annuity assets are subject to the claims of creditors in the event that the insurance company has financial difficulties.

Answer 17

False - Variable annuity assets are held in separate accounts and are not subject to creditors’ claims in the event that the insurance company has financial
difficulties.

Question 18

T / F - Variable annuities offer investment flexibility, but likely lower returns.

Answer 18

False - Variable annuities offer investment flexibility, and potential for higher returns.

Question 19

What is the maximum amount of group term life insurance coverage an employer can provide on the life of an employee without income tax consequences to
the employee?

1) $30,000
2) $50,000
3) $70,000
4) $100,000

Answer 19

2) $50,000

• An employer can provide up to $50,000 of group term-life insurance coverage on the life of an employee without income-tax consequences to the
  employee.

> Any amount of group term-life insurance offered by an employer in excess of $50,000 per employee will increase the employee’s taxable income in an amount equivalent to the premiums for the excess insurance coverage.

Question 20

T / F - Comparing whole life to term insurance - Whole life has an element of savings whereas term insurance does not.

Answer 20

True - Whole life insurance has a savings element (cash value) built into the policy resulting in higher initial premiums. Term life insurance does not have any
cash value.

Question 21

T / F - Comparing whole life to term insurance - Term charges higher initial premiums than whole life insurance.

Answer 21

False - At any given age the initial premiums for whole life are higher because of the savings element (cash value) built into the policy.

Question 22

T / F - Comparing whole life to term insurance - Term is considered permanent coverage and whole life is considered temporary.

Answer 22

False - Whole life is considered permanent coverage, and term life is considered temporary.

Question 23

Which one of the following types of life insurance policies allows for flexibility in both the premium amount and the face coverage amount?

1) Universal life
2) Variable life
3) Limited payment life
4) Whole life

Answer 23

1) Universal life

• Universal life insurance is also known as “flexible premium adjustable life.” It allows the policyholder to increase or decrease the face amount of the policy
  according to his or her changing needs. It also allows the insured to pay a varying premium; however, if not enough is paid in premiums the policy could
  be in danger of lapsing.

> A variable life insurance policy has fixed premiums. A variable universal life policy does allow for flexible premiums.

> Limited payment life insurance adjusts the annual premiums so that while the insured has insurance coverage for life, payments are made only for a
specified number of years, typically until age 65.

> Whole life, also known as “straight life,” has a premium that remains level throughout the term of the contract. Premium payments must be made for life.

Question 24

T / F - What is true for variable life AND not true for traditional whole life insurance?

• Variable life insurance contracts shift the investment burden to the policyholder.

Answer 24

True - The buyer of a variable life insurance policy must be willing to give up the guarantee of a stated cash value in exchange for the possibility of enhanced death benefits and cash value. This puts all of the investment risk on the policyholder, which is not the case with whole life insurance.

Question 25

T / F - What is true for variable life AND not true for traditional whole life insurance?

• Premiums for a variable life insurance policy are fixed.

Answer 25

False - Both variable and whole life are types of permanent life insurance that have fixed premiums.

Question 26

T / F - What is true for variable life AND not true for traditional whole life insurance?

• A variable life insurance policy includes a guaranteed death benefit.

Answer 26

False - Both variable and whole life insurance policies have a guaranteed death benefit.

Question 27

T / F - What is true for variable life AND not true for traditional whole life insurance?

• Variable life insurance policies allow for cash buildup.

Answer 27

False - Both variable and whole life insurance policies allow for cash buildup.

Question 28

Which one of the following activities of daily living (ADLs) would not be listed in a long-term care (LTC) insurance policy?

1) Bathing
2) Eating
3) Dressing
4) Driving

Answer 28

4) Driving

• Driving is not a listed ADL. The activities of daily living listed in a long-term care insurance policy include bathing, toileting, eating, dressing, transferring,
  and/or maintaining continence, along with cognitive impairment.

Question 29

T / F - Regarding long-term disability policies

• If an employer pays the premiums for an employee, then any benefit received by the employee would be tax-free.

Answer 29

False - If the employer pays the premium they will take a deduction, meaning the premiums will be paid with pretax dollars. If premiums are paid with pretax
dollars then any benefit will be taxable.

Question 30

T / F - Regarding long-term disability policies

• If premiums for a long-term disability policy are paid for with pretax dollars, then any benefit received from the policy will be tax-free

Answer 30

False - If premiums for a long-term disability policy are paid with pretax dollars, then any benefit received will be taxable.

Question 31

T / F - Regarding long-term disability policies

• If premiums for a long-term disability policy are paid with after-tax dollars, then any benefit received from the policy would not be taxable.

Answer 31

True

Question 32

Rex has a $125,000 whole life policy with his wife Brenda as the sole beneficiary. The cash value of the policy is $35,000, and Rex has an outstanding loan
for $12,000. Rex had an unfortunate hunting accident, and Brenda has asked how much she will collect from the policy. What is the life insurance death benefit
payable to Brenda?

1) $23,000
2) $35,000
3) $113,000
4) $125,000

Answer 32

3) $113,000

• $125,000 is the death benefit; $35,000 is the cash value that could be used before death. The policy amount less the outstanding loan amount of $12,000
  means that Brenda would receive $113,000.

Question 33

The provision in a life insurance contract that allows an insurance company to postpone payment of the cash surrender or policy loan value for a period of up
to six months after a policy owner’s request is known as the

1) Grace period
2) Incontestable provision
3) Reinstatement provision
4) Delay clause

Answer 33

4) Delay clause

> The reinstatement provision allows the insured to reinstate the policy within a specified period after lapse.

> The incontestable provision is usually the first two years that a life insurance policy is in effect, during which the insurer may deny a claim based on a misstatement or
misrepresentation of the insured.

> The grace period is a 30- or 31-day period after the life insurance premium is due, during which the contract remains in full force.

Question 34

The income-based (human life) method of calculating the necessary amount of life insurance coverage

1) puts a value on replacing economic worth—the amount of earning power that would be lost.
2) is computed using a future value, and the future value amount is the insurance need.
3) is a multiple of 10 times annual salary.
4) is the most accurate method of computing the amount of life insurance coverage necessary.

Answer 34

1) puts a value on replacing economic worth—the amount of earning power that would be lost.
- The human life (income-based) method puts a value on replacing future economic worth.

> The income-based method is computed using a present value, and it is the present value amount that is the insurance need.

> The human life method is not simply a multiple of salary. There are five basic steps to determine a person’s human life value

> The income-based method is easier to calculate than the needs-based method, but it is the least accurate of the two.

Question 35

Which of the following are possible financial considerations used to determine required life insurance through the needs-based method?

1) Burial expenses
2) Readjustment period income
3) Charitable bequests
4) Retirement needs for surviving spouse

Answer 35

1 - 2 - 3 - 4

• All of the choices are possible inclusions in determining required life insurance needs.

Question 36

Your clients are considering which health insurance policy to choose: Gold, Silver, or Bronze. They are most concerned about how much they would be
potentially liable for if a catastrophic event were to occur. You would advise them that the amount they should be taking into account the most is the

1) Deductible
2) MOOP
3) Coinsurance amount

Answer 36

2) MOOP

• The maximum out-of-pocket amount (MOOP) would be the best number to take into account and would be the maximum amount they would be
  responsible for before the insurance company pays 100%.

> The deductible is just part of what the insureds would be liable for; they would also have to pay any coinsurance amounts, and possibly copayments.

> Coinsurance is just part of what the insureds would be liable for; they would also have to pay the deductible (and possibly copayments) before coinsurance
kicks in.

Question 37

Which one of the following describes the time at which there must be an insurable interest for a life insurance policy?

1) When the policy is purchased
2) When the insured dies
3) When the insured reaches age 65

Answer 37

1) When the policy is purchased

• The concept of insurable interest is that the purchaser of a policy must have something to insure that would cause some kind of personal loss. There must
  be an insurable interest at the time a life insurance policy is purchased, and with property insurance there must be an insurable interest at the time of the
  claim.

Question 38

T / F - Medicare will only pay long-term care costs if the patient was in a hospital first and is expected to recover.

Answer 38

True - Medicare will only pay long-term care costs if the patient was in a hospital first and is expected to recover. Medicaid is designed more for long-term care
than Medicare and provides immediate benefit payments.

Question 39

T / F - Medicaid will only pay long-term care costs if the patient is diagnosed with a terminal condition.

Answer 39

False - Medicare will only pay long-term care costs if the patient was in a hospital first and is expected to recover. Medicaid is designed more for long-term care
than Medicare and provides immediate benefit payments.

Question 40

T / F - Medicare is designed more for long-term care than Medicaid and provides immediate benefit payments.

Answer 40

False - Medicare will only pay long-term care costs if the patient was in a hospital first and is expected to recover. Medicaid is designed more for long-term care
than Medicare and provides immediate benefit payments.

Question 41

Under the Affordable Care Act, all plans in the marketplace must offer the same set of essential health benefits, which includes all of the following except

1) Maternity care
2) Prescription drugs
3) Mental health care
4) Long-term care

Answer 41

4) Long-term care
- Long-term care can be covered with long-term care insurance, which is different from health insurance. Long-term care coverage is not required under the Affordable Care Act.

> Maternity care must be covered according to the Affordable Care Act.

> Prescription drugs must be covered according to the Affordable Care Act.

> Mental health care must be covered according to the Affordable Care Act.

Question 42

Sam and Lacey Gruff and their child, Vincent, have a Bronze health care plan that includes:

> $4,000 individual deductible
80% coinsurance percentage, after deductible is met
MOOP limit is $12,900

If Sam has a sudden illness and must be hospitalized for five days, at a total cost of $50,000, how much will Sam have to pay for this illness? Use the
information given.

1) Sam pays $46,000, Insurance pays $4,000
2) Sam pays $37,100, Insurance pays $12,900
3) Sam pays $12,900, Insurance pays $37,100
4) Sam pays $4,000, Insurance pays $56,000

Answer 42

3) Sam pays $12,900, Insurance pays $37,100

• Sam will pay $4,000 initially and then 20% of the amount accrued until an additional $8,900 is reached. After $12,900, the insurance company will pay
  100% of all costs. So Sam must pay up to the MOOP limit of $12,900.

Question 43

Which one of the following are payout options offered by fixed annuities?

1) Life income option
2) Period certain option
3) Fixed amount payments
4) Life option with refund

Answer 43

All

• Fixed annuities offer payment choices of life income, period certain, fixed amount, life option with refund certain, and installment payments with refund
  certain.

Question 44

T / F - Regarding HSAs, an individual must have a high deductible health care plan in order to fund an HSA.

Answer 44

True - A high deductible plan is required in order to fund an HSA.

Question 45

T / F - Regarding HSAs, individuals age 45 or older are eligible to make an additional contribution to an HSA.

Answer 45

False - Individuals age 55 or older are eligible to make up to an additional $1,000 “catch-up” contribution into an HSA.

Question 46

T / F - Regarding HSAs, health savings account contributions are made with after-tax dollars.

Answer 46

False - Contributions made to an HSA can be taken as an “above-the-line” deduction on an individual’s tax return, thus funding the HSA with pretax, and not after-tax dollars.

Question 47

Thomas wants to have an income stream for the rest of his life that does not vary and has a lump sum to fund an annuity. He wants the income payments to
start as soon as possible. Which annuity should he consider?

1) Fixed immediate
2) Variable immediate
3) Deferred immediate

Answer 47

1) Fixed immediate

• Thomas would want a fixed annuity if he did not want the payments to vary. He would also want the annuity to be immediate, meaning the payments
  would begin now rather than being deferred.

> A variable annuity would be invested in the market, and since the account balance would fluctuate year to year so would the payment to Thomas.

> Annuities are either immediate, meaning they start paying an income stream immediately, or deferred, meaning the balance grows tax-deferred and may
or may not be converted to an income stream in the future. There is no such thing as a deferred immediate annuity.

Question 48

T / F - Regarding life insurance, the grace period for most policies is 45 days.

Answer 48

False - The grace period for insurance policies is typically 30 or 31 days (one month).

Question 49

T / F - Regarding life insurance, policyholders can generally borrow up to 90% of the cash value of a policy.

Answer 49

True - Although not necessarily advisable, generally policyholders can borrow up to 90% of the cash value of their policy.

Question 50

T / F - Regarding life insurance, generally life insurance policies do not pay for suicide.

Answer 50

False - Life insurance policies do pay for suicide after the policy has been in place for one or two years, depending upon the state.

Question 51

Insurance companies need to guard against is the tendency of having largely only those individuals who most need a particular kind of insurance be the ones
buying that insurance. This is called

1) Adverse selection
2) Moral hazard
3) Morale hazard

Answer 51

1) Adverse selection
- Insurance companies must guard against adverse selection, or else there may not be enough money in the pool to pay claims.

> Moral hazard is the possibility that individuals will be dishonest or commit fraud in order to collect from an insurance company.

> Morale hazard is the possibility that an insured individual will behave differently because they have insurance in place (in other words, not be as careful).