Risk Management and Employee Benefit Quiz

Question 1

Which of the following statements regarding a flexible spending account (FSA) provided to an employee are CORRECT?

1. Employee contributions to the account will not be subject to federal income taxes.
2. Employee contributions to the account will not be subject to Social Security taxes.
3. A flexible spending account is a cafeteria plan funded through employee salary reductions.
4. Amounts in an employee’s account can be used to make contributions to a health savings account for the employee.

Answer 1

1 , 2, and 2

Question 2

Rank the order of premiums payable from low to high for the following permanent types of life insurance for the first-year premium:

1. Ordinary whole life.
2. Single premium life.
3. 10-year pay.
4. 20-year pay.

Answer 2

1, 4, 3, 2

Question 3

Which of the following eligibility requirements must be met for a disabled worker to receive workers’ compensation benefits?

A)
The disabled person need only work in a covered occupation.
B)
The disabled person must work in a covered occupation and must have a job-related accident or disease.
C)
The disabled person must either work in a covered occupation or must have a job-related accident or disease.
D)
The disabled person need only have a job-related accident or disease.

Answer 3

B

Question 4

Adam, age 75, has been blind for 2 years. He has trouble walking and is unable to cook for himself. His family has told him that he needs to consider entering an assisted living facility. Would he be considered chronically ill under a qualified long-term care policy?
A)
Yes, as long as he can prove to the insurance company he is unable to perform these tasks.
B)
No, sight is not considered an activity of daily living, although cooking is.
C)
Yes, he has been unable to perform 2 activities of daily living for over 90 days.
D)
No, neither sight nor cooking is considered an activity of daily living.

Answer 4

D

Question 5

Doug is a full-time employee of the XYZ Company. XYZ provides a group health plan for its employees, their spouses, and dependents. Doug and his wife, Alberta, are covered by the plan. This year, Doug and Alberta finalized their divorce, and Alberta is no longer eligible for coverage under the group plan as Doug’s spouse. Which of the following statements regarding Alberta’s eligibility for continuation of coverage under COBRA is (are) CORRECT?

1. Alberta is eligible for up to 36 months of continuation coverage.
2. To receive continuation of coverage, Alberta must elect coverage within 60 days of the divorce.
3. To receive continuation of coverage, Alberta must pay a premium within 45 days after electing to receive coverage.

Answer 5

1, 2, and 3

Question 6

Luke has a PAP insuring his personal automobile. His policy limits under Part A are 250/500/50, and his coverage under Part B is $5,000 per person. He does not carry coverage under Part C or Part D. One afternoon, he is driving with 3 of his friends as passengers when the car is struck by a hit-and-run vehicle. Luke and his friends all suffer bodily injuries resulting in medical expenses of $7,000 each, for a total of $28,000. Luke’s car also sustains damage of $5,000. The accident is determined not to have been Luke’s fault. Which of the following statements regarding Luke’s coverage under his PAP for this accident is (are) CORRECT?

1. Luke’s PAP does not cover any of the medical expenses resulting from this accident because the accident was not his fault.
2. Luke’s PAP covers $20,000 of the $28,000 in medical expenses.
3. Luke’s PAP fully covers the damage to his car.

Answer 6

2 only

Question 7

Ed is a full-time employee of the General Company. General has 18 full-time employees and 6 part-time employees. The company provides a group health for full-time employees, and the normal group rate for the plan is $1,000 per month per employee. Ed and his wife are both covered by the plan. If Ed dies, which of the following statements regarding continuation of coverage under COBRA is (are) CORRECT?

1. Ed’s wife is eligible for continuation coverage for a maximum of 18 months.
2. To receive coverage, Ed’s wife must elect coverage within 30 days of Ed’s death.
3. General Company may charge Ed’s wife up to $1,020 per month for the coverage.

Answer 7

3 only

Statement 1 is incorrect; the term of coverage is 36 months if the qualifying event is the death of the covered employee. Statement 2 is incorrect; to receive coverage, Ed’s wife must elect coverage within 60 days of Ed’s death. Statement 3 is correct; the employer may charge up to 102% of normal group rates for coverage.

Question 8

Rilee Corporation purchased a $50,000 whole life policy on a key employee, Susan Lee. When Mrs. Lee terminated employment with the corporation her husband, Mr. Lee purchased the policy from the corporation for $15,000. Mr. Lee designated himself sole beneficiary and had paid premiums of $8,000 by the time his wife died. What are the tax consequences to Mr. Lee upon receipt of the life insurance proceeds?

A)
Mr. Lee would receive $8,000 tax free and $42,000 as ordinary income.
B)
Mr. Lee would receive $23,000 tax free and $27,000 as ordinary income.
C)
Mr. Lee would receive $15,000 tax free and $35,000 as ordinary income.
D)
Mr. Lee would receive $50,000 tax free.

Answer 8

B

Question 9

Corinne is covered by Medicare Part B. In 2017 she incurs medical expenses of $10,000, consisting of diagnostic tests and physicians’ services. What will be her out-of-pocket cost for the expenses, assuming they are covered expenses for purposes of Part B?

A)
$2,146.40.
 B)
$2,000.00.
 C)
$183.00.
 D)
$2,183.

Answer 9

A

Corinne must first pay a deductible of $183 (2017). She must then pay 20% of the remaining expenses ($9,817 × 20% = $1,963.40) for a total of $2,146.40 ($183.00 + $1,963.40).

Question 10

Which of the following statements regarding rabbi trusts is NOT correct?
A)
A single rabbi trust can be used to fund the assets of multiple deferred compensation plans sponsored either by a single employer or by an employer and its subsidiaries.
B)
A rabbi trust can have a springing irrevocability provision, protecting an executive’s rights in the case of a management takeover.
C)
A rabbi trust is an employer funded trust that is subject to the claims of the employer’s creditors (thus escaping current taxation for the executive), but the funds in the trust cannot be used by or revert to the employer.
D)
The rabbi trust calls for an irrevocable employer contribution to finance promises under a nonqualified plan, but funds in trust held cannot be reached by the employer’s creditors.

Answer 10

D

Question 11

Which of the following scenarios is subject to current year taxation under the economic benefit or constructive receipt rules?

A)
GHI Corporation transfers assets to an irrevocable trust in which a key executive is the beneficiary. The trust is subject to the claims of the employer’s creditors.
B)
ABC Corporation buys life insurance on the lives of its key executives to fund their nonqualified plan, which contains a golden handcuffs provision. ABC owns the policies, pays the premiums, and is the beneficiary of the policies. ABC has direct control over the cash values in the policies and can divert these funds to business use, if desired.
C)
DEF Corporation makes a bonus available to its officers that can be taken as current income or deferred by leaving the funds in an irrevocable trust in which the officers are the beneficiaries.
D)
JKL Corporation awards the CEO with restricted stock options that vest in three years.

Answer 11

C

Question 12

Samantha has a homeowners policy. Her dog bites the mailman and he incurs emergency room expenses of $600. What is the consequence of this event?
A)
There is no coverage under this policy because pets are excluded.
B)
Only medical payments coverage applies, not liability coverage.
C)
Samantha needed a personal liability umbrella policy (PLUP) for coverage of this type of risk.
D)
Medical payments coverage is applicable, and liability coverage is applicable if Samantha is held legally liable.

Answer 12

D

Question 13

Ted is seriously ill, and a doctor has certified that he is expected to die within 24 months. He owns a whole life insurance policy with a face amount of $500,000 and a cash surrender value (CSV) of $150,000. Ted’s investment in the policy is $120,000. He sells the insurance policy to a qualified viatical agreement company for $200,000. Ted dies 17 months later. The viatical agreement company paid premiums of $10,000 on the policy before Ted died. Which of the following statements regarding the income tax consequences of this transaction is (are) CORRECT?

1. Ted receives the $200,000 payment from the viatical agreement company income tax free.
2. Ted must pay income tax on $80,000 of the $200,000 payment received from the viatical agreement company.
3. The viatical agreement company must include $290,000 of the $500,000 death benefit in gross income.

Answer 13

1 and 3

Question 14

Which of the following statements are CORRECT regarding homeowners insurance?

1. War, earth movement, power failure, and volcanic eruptions are general exclusions.
2. An HO-6 policy is designed for condominium owners.
3. Coverage on the dwelling is on an actual cash value basis provided that the amount of insurance coverage is at least 80% of the replacement cost of the building.
4. Section D is loss of use.

Answer 14

2 and 4

Question 15

Which of the following statements regarding constructive receipt in a nonqualified retirement plan is (are) CORRECT?

1. Constructive receipt occurs if the deferred compensation is credited to an executive’s account, set apart for the executive, or made available to the executive so that he may draw upon it anytime or could draw on it if notice of intention to draw had been given.
2. Constructive receipt does not occur if the deferred compensation is subject to substantial limitations or restrictions, or if the election to defer compensation is a mere promise to pay, not represented by notes or secured in any way.

Answer 15

both are correct

Question 16

Stacy, a CFP® professional, has an appointment with Karen, one of her long-time clients, regarding life insurance planning. Karen is a single, 45-year-old professional with no dependents. She wants to borrow $25,000 with a payback period on the loan of 5 years and her goal is to insure that it will be paid off if she dies prematurely. Stacy’s next appointment is with Bob who is looking for permanent life insurance. Bob is currently making $45,000 per year but is expected a significant pay increase 5 years from today. Bob’s brother and his wife will also be joining the meeting and they are looking for some sort of life insurance policy that will pay their estate taxes. Which of the following statements is (are) CORRECT regarding these clients?

1. Karen, Bob, and Bob’s brother and spouse are all candidates for term life insurance.
2. Bob’s brother and his wife may be able to benefit from a first-to-die life insurance policy to help cover their estate taxes.
3. Stacy should consider reviewing the terms of a modified whole life insurance policy with Bob and a term life insurance policy with Karen.
4. Karen, Bob, and Bob’s brother and spouse are all candidates for a personal liability umbrella policy (PLUP).

Answer 16

3 and 4

Question 17

You have an existing investment client which you recently discovered has a need for a permanent life insurance policy. This client is not sure how much life insurance is necessary to fulfill the entire need and is very interested in the cost of the proposed policy. The client also wants to make sure that you only use rating agencies which base their ratings on public information and interviews with management when determining if the company is solvent enough to earn his business. Which of the following statements are CORRECT when determining which life insurance policy to choose for this client?

1. The capital retention method would be a good method to help determine the amount of life insurance needed because it takes inflation into account.
2. Moody’s Investors Service would meet the criteria the client is looking for as far as a rating agency because the service uses both public information and interviews with management when determining the insurance company’s rating.
3. The net cost method, when used to compare the cost of one insurance policy to another, is weak because it does not consider the time value of money.
4. Whole life insurance is appropriate for clients who have long-term life insurance needs.

Answer 17

3 and 4

The capital retention method does not take inflation into account when calculating a client’s life insurance needs. Moody’s Investors Service only uses public information when determining an insurance company’s rating. The client would need to use A.M. Best to meet the criteria of a rating agency that used both public information and interviews with management to determine the rating.

Question 18

Kevin signs a contract to act as an agent for a local businessman, Mr. Johnson. While acting as Mr. Johnson’s agent, Kevin enters into several contracts with prospective clients. However, Kevin is a minor and lacks legal capacity to enter into contracts. Which of the following statements regarding this situation is (are) CORRECT?

1. Kevin may void the contract he entered into with Mr. Johnson.
2. The prospective clients are not bound by the contracts they entered into with Kevin as Mr. Johnson’s agent.
3. Mr. Johnson may void the contract he entered into with Kevin.

Answer 18

1 only

Question 19

Aimee is the vice president and major shareholder of Peak, Inc. She owns a life insurance policy with a face amount of $1 million on her own life. Peak, Inc. adopts an entity purchase (stock redemption) buy-sell agreement, and as part of that agreement, the corporation buys Aimee's life insurance policy for $200,000 and names itself as beneficiary. The corporation pays $100,000 in premiums on the policy before Aimee dies. When Aimee dies, what amount of the $1 million death benefit is subject to income tax?
A)
$900,000.
 B)
$0.
 C)
$700,000.
 D)
$1 million.

Answer 19

B

Question 20

Bud is employed by Big Rig Trucking where he is covered by a PPO, a contributory disability income insurance plan, and an annuity pension plan. The disability income insurance plan provides long-term disability income coverage for which Bud is paying $40 per quarter and Big Rig is paying $60 per quarter for a monthly benefit of $1,000. During the current year, Bud was disabled for 5 months and collected disability payments of $1,000 per month for 3 months (he had a 60-day elimination period). Which of the following statements is (are) CORRECT with regards to Bud’s company benefits in the current year?

1. Bud will have to pay taxes on $1,800 of the disability income benefits for the current year.
2. Because Bud’s medical plan with Big Rig is a preferred provider plan, he is able to receive care outside of the network of PPO providers for lower deductibles and coinsurance fees.
3. Bud will have to pay taxes on $1,200 of the disability income benefits for the current year.
4. Bud may cover his adult children until they reach age 26 on Big Rig’s medical plan.

Answer 20

1 and 4

Question 21

Which of the following are reasons an employer might favor a nonqualified plan over a qualified plan?

1. A nonqualified plan has more design flexibility.
2. A nonqualified plan typically has lower administrative costs.
3. Nonqualified plans typically allow the employer an immediate income tax deduction.
4. Employers can generally exclude rank-and-file employees from a nonqualified plan.

Answer 21

1, 2, and 4

Question 22

All of the following statements regarding the legal characteristics of insurance contracts are correct EXCEPT:

A)
generally, when the terms of the policy are ambiguous, obscure, or susceptible to more than one interpretation, the construction most favorable to the insurer will prevail.
B)
insurance contracts are conditional, (i.e. the failure of one party to perform relieves the other party of his or her obligation).
C)
most property, liability, and health insurance contracts are considered contracts of indemnity.
D)
the insurance contract is personal and follows the person rather than the property.

Answer 22

A

Question 23

John dies owning a $200,000 life insurance policy. He is the insured, and his brother Tom is the beneficiary. Tom does not need all the benefits currently and elects to receive the benefits annually over a 10-year period. The benefit he will receive is $23,500 per year. How much of this payment is includable in Tom’s gross income each year?

A)
$0.
 B)
$3,500.
 C)
$1,750.
 D)
$23,500.

Answer 23

B

Any amounts received above the face amount of $200,000 will be taxable to Tom: $23,500 annual benefit × 10 years = $235,000 total amount received, and $235,000 - $200,000 death benefit = $35,000 ÷ 10 = $3,500 per year included in gross income.

Question 24

Which of the following are employer objectives that can be achieved by including a forfeiture provision in a company’s nonqualified retirement plan?

1. To discourage key executives from leaving the company prematurely, a golden handcuffs provision can be incorporated into the plan specifying that substantial benefits will be forfeited if service is voluntarily terminated prior to normal retirement age.
2. To prevent a decrease in revenue and to ensure a smooth transition in company leadership, a nonqualified deferred compensation plan can require a key executive to provide consulting services after retirement or else forfeit any benefit under the plan.
3. To discourage former employees from leaving the business and going to work for a competitor, a covenant not to compete provision can require the forfeiture of nonqualified benefits if the employee enters into competition with the employer.

Answer 24

1, 2, and 3

Question 25

Martin passed away at age 48. He owned a modified endowment contract which had a cost basis of $77,000 and a face amount of $200,000. How is the death benefit taxed to the sole primary beneficiary?

A)
The entire $200,000 is taxable as ordinary income.
 B)
$123,000 is taxed as ordinary income.
 C)
$123,000 is taxed as long-term capital gain.
 D)
The entire $200,000 is tax free.

Answer 25

D

Question 26

in regards to ISO, a clients basis for regular income tax purposes will be equal to ____

Answer 26

options exercise price

Question 27

in regards to ISO, a clients basis for AMT tax purposes is equal to ____

Answer 27

FMV of stock at exercise

Question 28

Jorge is receiving favorable tax treatment on the sale of his shares of stock which he acquired as a result of an exercise of ISOs. The favorable tax treatment is a direct result of Jorge making sure that he met the ISO holding period requirements. At the time of exercise, Jorge had an AMT adjustment to the extent the FMV of the stock exceeded the option exercise price. Which of the following statements is (are) CORRECT with regards to Jorge’s ISO transactions?

1. The tax basis for regular tax purposes is the exercise price plus appreciation at the exercise date (FMV of stock at time of exercise).
2. The tax basis for AMT purposes is the option exercise price.
3. If Jorge would have sold the shares received through the exercise of his ISOs within 2 years from the date of the grant and 1 year from the date of the exercise, he would have lost the favorable tax treatment.
4. The expiration date on Jorge’s ISOs could not have exceeded 2 years from the date of the grant.

Answer 28

3 only

Question 29

Sarah has an HO-5 homeowners policy on her home. Her home is insured under the policy for $300,000. She has a detached garage with a replacement cost of $25,000, which she uses for personal use. She also has a detached shed she rents to a local building contractor, who uses it for storage. The replacement cost of the shed is $10,000. How much of her $35,000 worth of detached buildings are covered have under Coverage B of her homeowners policy?
A)
$20,000.
 B)
$35,000.
 C)
$25,000.
 D)
$30,000.

Answer 29

C

Question 30

Mark’s corporate employer has provided him with a salary reduction nonqualified deferred compensation plan. The company decided to use a rabbi trust to hold the assets for the plan. The plan will provide Mark with 60% of his current salary at retirement. In addition, the plan provides for income to his spouse upon his death. Which of the following statements are CORRECT with regards to the company’s plan?

1. Mark’s benefits will be taxed as ordinary income upon distribution.
2. Mark’s benefits will be tax-free upon distribution.
3. The funds his employer deposits into the rabbi trust are subject to the claims of the company’s general creditors.
4. The risk of forfeiture is considered substantial, so there is no current taxation for Mark.

Answer 30

1, 3, and 4

Question 31

Daryl is involved in an automobile accident that seriously injures the other driver. Daryl was later determined to be intoxicated at the time of the accident. As a result of the accident, the other driver incurs medical bills of $100,000 and physical rehabilitation expenses of $20,000. In addition, the other driver’s car suffers $15,000 in damage. At trial, the judge finds that the accident was caused by Daryl’s negligence. The judge orders Daryl to pay the other driver’s medical bills, rehabilitation expenses, and car repair expenses. The judge also awards $500,000 for the other driver’s pain and suffering and imposes $10 million in damages as punishment, for a total of $10,635,000 in damages. Of the $10,635,000, what amount represents special damages?

A)
$135,000.
 B)
$10,635,000.
 C)
$120,000.
 D)
$515,000.

Answer 31

A

Question 32

true or false?

Variable life insurance has level premiums and provides a guaranteed minimum death benefit which can increase based on favorable investment performance of the subaccounts, but cannot fall below the face value.

Answer 32

true

Question 33

true or false?

Variable universal life insurance will give the owner the ability to adjust the premiums and the death benefit as needed in the future.

Answer 33

true

Question 34

Carl, a CFP® professional, is sitting at his desk processing annuity paperwork from his previous appointment. All of a sudden he looks up and there is one of his clients, David, with a look of concern on his face. Apparently, he had just learned from his neighbor that the type of life insurance he currently owns only pays a benefit if he lives to a certain age. Carl explained to David that his neighbor was incorrect. He went on to explain to David that he actually owns a life insurance policy that pays a death benefit if he dies during a certain period of time; not if he lives to a certain age. Because everything happened so fast, Carl did not have the time to put away the annuity paperwork he was processing while he was having the conversation with David. Which of the following statements are CORRECT regarding this scenario?

1. By having the annuity paperwork in David’s view, Carl may have violated the Principle of Confidentiality.
2. David’s neighbor thought he owned a term life insurance policy when he actually owned an endowment contract.
3. David’s neighbor thought he owned an endowment contract when he actually owned a term life insurance contract.
4. Because David rushed into Carl’s office and caught him off guard, Carl is not considered to have violated the CFP Board’s Code of Ethics with regards to confidentiality.

Answer 34

1 and 3