Risk Management and Employee Benefit Quiz 3

Question 1

Jane is an agent for the ABC Life Insurance Company. Her agency agreement authorizes her to solicit insurance applications, collect initial premium payments, and issue conditional receipts. When Jane issues a conditional receipt, she is exercising what type of authority?
A)
Implied authority.
 B)
Apparent authority.
 C)
Express authority.
 D)
Vicarious authority.

Answer 1

C

Jane exercises express authority when she issues a conditional receipt because the authority to issue conditional receipts is expressly stated in her agency agreement.

Question 2

universal life B. Which of the following statements CORRECTLY describe the differences between these two policy types?

1. A universal life A policy is more expensive than a universal life B policy.
2. A universal life B policy has a level death benefit.
3. The net amount at risk to the insurance company remains constant over time with a universal life B policy.
4. In a universal life A policy, the death benefit is only the face amount.

Answer 2

3 and 4

Universal life B is more expensive than universal life A because the death benefit is equal to a specified amount of insurance plus the cash value. Universal life A provides a death benefit equal to only the face amount of the policy. Over time, the net amount at risk to the insurance company decreases under universal life A while it remains constant under universal life B.

Question 3

Bob and Jane are both physicians, each earning over $100,000 per year. They are 53 and 51 years old, respectively, and have accumulated over $1,500,000 in assets. Their home is paid off, and they have no children or debts. Their combined annual living expenses are $60,000 and they have planned their estate so that any estate taxes will be minimal. They are not interested in life insurance but want to learn more about long-term care insurance. Which of the following statements with regards to their long-term care insurance needs are CORRECT?

1. Premiums paid by the individual are tax deductible as a medical expense for itemized deduction purposes, subject to limitation based on the individual’s age.
2. Medicare covers only a maximum of 100 days of custodial nursing care, and only the first 20 days are covered 100%.
3. Some life insurance policies may provide an accelerated benefit or living benefit rider which can be used to pay for nursing care costs.
4. If the insured qualifies for a viatical settlement, the insured can exclude the gain from the sale of the policy if the proceeds are used for the insured’s long-term care.

Answer 3

1, 3, and 4

Question 4

Burt, age 63, purchased a commercial real estate property. An office building is located on the property and rented by a tenant who makes monthly rent payments to Burt’s real estate investment firm. He has a wife and 2 children. He personally owns 3 cars and his business has 9 employees. Which of the following statements is (are) CORRECT?

1. When Burt purchased his property insurance, he needed to have a financial interest in the property for the policy to be approved by underwriting.
2. Burt should raise his liability coverage on his personal automobiles and purchase a personal liability umbrella policy in the event one of his employees has an accident.
3. Burt should purchase at least 90% of the property’s replacement cost in the form of commercial property insurance policy.

Answer 4

1 and 3
Only statement 2 is incorrect. He personally owns the vehicles. In order to have employees covered for liability, he would need to have the vehicles placed in the name of the business and purchase a commercial insurance policy.

Question 5

Ronald, age 65, is enrolled in Medicare and has a health savings account (HSA) with single coverage. What is the maximum monthly contribution he can make to his HSA in 2017?

A)
$0.
 B)
$562.50 plus catch-up contribution of $83.33.
 C)
$283.33.
 D)
$283.33 plus catch-up contribution of $83.33.

Answer 5

A

People who have enrolled in Medicare at age (65) are no longer eligible to make HSA contributions. If Ronald chooses not to enroll in Medicare and meets all of the other requirements, such as being enrolled in a high deductible health insurance plan, he may still be able to make contributions to his health savings account.

Question 6

Derrick is involved in an automobile accident. The other driver is seriously injured and incurs medical expenses of $200,000 as a result of the accident. His employer-provided health insurance covers $180,000 of these expenses. At trial, the judge finds that Derrick’s negligence caused the accident and that he is responsible for the other driver’s injuries. Which of the following statements regarding the application of the collateral source rule to this situation is CORRECT?
A)
Derrick must pay the entire $200,000 in damages even though the other driver’s insurance covered $180,000 of his medical expenses.
B)
Derrick is not required to pay any damages because the other driver recovered against his own insurance company.
C)
Derrick must pay only $20,000 in damages because the other driver recovered $180,000 from a collateral source.
D)
Derrick must pay $10,000 in damages, representing 50% of the amount not paid by the other driver’s health insurance.

Answer 6

A

The collateral source rule provides that damages assessed against a negligent party will not be reduced simply because the injured party has other sources of recovery available. Derrick must pay the entire $200,000 in damages.

Question 7

Jamie, age 54, just inherited $500,000 and she has an appointment with her CFP® professional, Oscar, this afternoon to go over some of her insurance-based investment options with a portion of the proceeds. She currently manages the local grocery store and has a salary of $75,000 per year. She is looking for a tax-deferred investment vehicle that will help supplement her retirement income in 11 years. In addition, she wants the investment to have the opportunity to keep up with inflation. Jamie considers herself a moderate risk taker. She has a portfolio of individual stocks at her local brokerage office. Which of the following statements is (are) CORRECT and could be used within Oscar’s presentation?

1. Oscar can inform Jamie that she could achieve her goal of tax deferral with either a fixed or variable annuity.
2. Oscar should remind Jamie that if she chooses a fixed annuity for a portion of the inheritance, she will bear the investment risk.
3. Oscar should try to present annuities which are offered by insurance companies with a minimum A.M. Best rating of “E”.
4. Oscar could also mention that if Jamie chooses to invest in either a fixed or variable annuity, and decides that she would prefer a cash value life insurance policy in the future, she may utilize a Section 1035 exchange to move the funds from the annuity to the cash value life insurance policy.

Answer 7

1 only

Question 8

Bruce, a CFP® professional, wrote a life insurance policy on his client, Jenny. She is 40 years old, but her youthful looks allow her to claim her age as 35. Bruce filled out the application based on the age she claimed without verification. With Bruce’s help, she applied for a life insurance policy that had an annual premium of $25 per $1,000 for age 40 and $15 per $1,000 for age 35. On the application, Bruce stated Jenny’s age as 35 and processed the application for the purchase of a $20,000 life insurance policy, receiving a check from Jenny for the appropriate annual premium for a 35-year-old. Jenny died unexpectedly one year later at the age of 41. What are the implications assuming the insurance company discovers Jenny misstated her age on the application?

1. The insurance company will pay the full $20,000 death benefit to Jenny’s beneficiaries.
2. The insurance company will only pay a death benefit of $12,000.
3. Because Jenny’s beneficiaries received significantly less money from the life insurance policy, they may be short on their liquidity needs.
4. Bruce may be liable for damages if he is deemed to be negligent in taking the application.

Answer 8

2, 3, and 4

Question 9

Disability insurance needs analysis is used to design an insurance program that will provide protection against a loss of income resulting from a disability. Which of the following statements regarding disability insurance needs analysis are CORRECT?

1. A disability insurance needs analysis should start with the idea that the individual will receive Social Security disability benefits.
2. The elimination period chosen should always be the shortest possible.
3. If the benefits are taxable, the after-tax cash flows should be sufficient to replace the lost income.
4. The term of the benefits should match the term of work-life expectancy.

Answer 9

3 and 4

Question 10

A client recently annuitized his fixed annuity and selected a life annuity with a 15-year period certain payout option. The income payments from the annuity are $2,000 per month. The client died after receiving income payments for exactly 10 years. Which of the following statements is (are) CORRECT regarding this situation?

1. Income payments of $2,000 per month will continue to the client’s designated beneficiary for 5 years.
2. Income payments will stop.
3. If the client had chosen a straight life annuity payout option, payments would have ceased upon the client’s death.
4. If the client had chosen a joint and survivor annuity, payments would have ceased upon the client’s death.

Answer 10

1 and 3

Question 11

Which of the following statements regarding insurance terms is (are) CORRECT?

1. Adverse selection is the likelihood that parties with the greatest probability of loss are more likely to purchase insurance.
2. Death is an example of a static risk.
3. Medicaid is an example of public insurance.
4. An aleatory contract is a contract which can only be accepted or rejected.

Answer 11

1 and 2

Question 12

a contract of ____ is a contract which can only be accepted or rejected

Answer 12

adhesion

Question 13

An ____ contract is a contract which the outcome is affected by chance and the dollars exchanged by the parties are unequal

Answer 13

aleatory

Question 14

is medicaid an example of public or social insurance?

Answer 14

social

Question 15

Which of the following statements regarding long-term care insurance are CORRECT based on NAIC model legislation?

1. Contracts must be guaranteed renewable or noncancellable
2. Applicants must have a 60-day free-look period.
3. Expected loss ratio must be at least 50%.
4. If the policy is a replacement policy, the insurer must waive the time period regarding pre-existing conditions.

Answer 15

1 and 4

Question 16

According to NAIC model legislation, long-term care contracts must have a ____ day free look period and an expected loss ratio of ___%

Answer 16

30 ; 60

Question 17

Which of the following are features of whole life insurance?

1. Provides a guaranteed cash value.
2. The premiums are level for the life of the policy.
3. The death benefit is guaranteed for life.
4. The cash value may be used as collateral for loans.

Answer 17

all are correct

Question 18

Tim is a shareholder in a small corporation. His MAGI is over $300,000. He owns a life insurance policy with a face amount of $200,000 on his own life. His investment in the policy is $75,000. The corporation adopts a cross-purchase buy-sell agreement, and as part of that agreement, one of the other shareholders buys Tim’s policy for $100,000 and names himself as beneficiary. The other shareholder who has a MAGI of over $400,000 pays $20,000 in premiums on the policy before Tim dies. Which of the following statements regarding the income tax consequences of this transaction is CORRECT?

A)
Tim must include nothing in gross income; the co-shareholder must include $80,000 in gross income and is not subject to the Medicare 3.8% surtax.
B)
Tim must include $25,000 in gross income; the co-shareholder must include $80,000 in gross income and both of the gains are subject to the 3.8% Medicare surtax.
C)
Tim must include $25,000 in gross income and is subject to the 3.8% Medicare surtax; the co-shareholder must include nothing in gross income and is not subject to the Medicare 3.8% surtax.
D)
Both Tim and the co-shareholder will include nothing in gross income.

Answer 18

B

Question 19

Diana has a PAP covering her personal automobile. On August 1 of this year, she buys a new van that weighs 9,000 pounds. She uses the van as a delivery vehicle for the catering business she operates from her home. Which of the following statements regarding the PAP coverage for Diana’s new van is (are) CORRECT?

1. The new van is automatically covered under Diana’s PAP for 30 days.
2. The new van is permanently covered under Diana’s PAP if she notifies her insurance company within 30 days.
3. The new van is not covered under Diana’s PAP regardless of whether Diana notifies her insurance company.

Answer 19

3 only

Question 20

Shelley is a full-time employee of Topper, Inc. Topper has 15 full-time employees and provides a group health plan for its full-time employees. Shelley, her husband, and their three children are covered by the plan. Because of a slowdown in business, Topper reduces Shelley’s status to part-time, causing her to lose eligibility for the health plan. Which of the following statements regarding Shelley’s eligibility for continuation coverage under COBRA is CORRECT?

A)
Shelley is eligible for continuation coverage for up to 29 months.
B)
Shelley is eligible for continuation coverage for up to 36 months.
C)
Shelley is not eligible for continuation coverage.
D)
Shelley is eligible for continuation coverage for up to 18 months.

Answer 20

C

Question 21

All of the following companies provide group health plans for their employees. Which of them is (are) subject to the COBRA continuation of coverage requirements?

1. Company A, with 15 full-time employees.
2. Company B, with 13 full-time employees and 16 part-time employees.
3. Company C, with 10 full-time employees and 30 part-time employees.

Answer 21

2 and 3

Question 22

Mariel owns a house that has a replacement cost of $300,000. The house is insured under an HO-3 homeowners policy; the coverage on the dwelling is $250,000 with a $1,000 deductible. There are construction materials with a replacement cost of $20,000 on the premises which will be used in the construction of a guest room. A fire destroys the construction materials, does $25,000 in damage to the house, and completely destroys a detached garage that has a replacement cost of $30,000. How much will Mariel recover under the policy?

A)
$70,000.
 B)
$54,000.
 C)
$49,000.
 D)
$69,000.

Answer 22

D

The construction materials are covered under Coverage A of Mariel’s policy, and the detached garage is covered up to $25,000 under Coverage B (Coverage B = 10% of Coverage A). Mariel recovers $25,000 for the damage to the house, $20,000 for the damage to the construction materials, and $25,000 for the damage to the garage, minus the $1,000 deductible, for a total of $69,000.

Question 23

Mr. and Mrs. Wood have an HO-3 homeowners policy on their home. Their home is insured under the policy for $500,000. The Woods have 2 detached garages, each with a replacement cost of $30,000. Mr. Wood uses one of the garages to store an antique automobile he plans to restore someday, and Mrs. Wood uses the other garage to make pottery, which she does strictly as a hobby. How much coverage do the Woods have under Coverage B of their homeowners policy?

A)
$60,000.
 B)
$50,000.
 C)
$45,000.
 D)
$30,000.

Answer 23

B

The coverage under Coverage B of a homeowners policy is 10% of the coverage on the dwelling. Neither garage falls under an exclusion to Coverage B, so the Woods’ coverage is $50,000.

Question 24

Grant, age 50, has a life insurance policy with a $500,000 face amount and a cash value of $200,000. The face amount will remain constant for Grant’s life, but no further premiums are due once Grant reaches age 65. This year, Grant receives a policy dividend of $100. What type of policy does Grant own?

A)
Level term life insurance policy.
 B)
Term life to age 65.
 C)
Participating limited pay whole life.
 D)
Nonparticipating limited pay whole life.

Answer 24

C