Risk Management and Employee Benefit Quiz 4

Question 1

When purchasing a PAP, which of the following coverages is (are) required?

1. Liability coverage.
2. Comprehensive and collision.
3. Uninsured motorists.
4. Medical payments.

Answer 1

1 only

Question 2

Which of the following are among the characteristics of a major medical insurance policy?

1. Broad coverage.
2. Deductibles.
3. Low coverage limits on essential health services.
4. Coinsurance requirements.

Answer 2

1, 2, and 4

Question 3

Which of the following definitions best describes voidable?
A)
The right, in some life insurance policies, to take the part of the cash value representing basis in a way that avoids the transaction being treated as a loan.
B)
A characteristic of a contract such that it can be affirmed or rejected at the option of one party but is binding on the other.
C)
That part of an insurance contract that spells out the basic promise of the insurance company to pay benefits according to the terms of the policy.
D)
A characteristic of a contract such that only one of the parties makes a binding promise that, if broken, gives rise to an action for breach of contract.

Answer 3

B

Question 4

Which of the following is a plan in which employees may select from a menu of employer-provided benefits or choose to receive cash in lieu of benefits of equal value?
A)
Cafeteria plan.
 B)
VEBA.
 C)
SARSEP.
 D)
Section 401(k) plan.

Answer 4

A

Question 5

The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA):

1. Provides former employees with continuation of group health insurance for a maximum of 12 months.
2. Allows the premium for continuation of group health insurance coverage to be as high as 102% of the existing group rate.
3. Applies to covered employees, their spouses, and dependents.
4. Requires employers with 20 or more employees to provide for the continuation of group health insurance, in the event of termination or other ‘qualifying events’.

Answer 5

2, 3, and 4

Question 6

Which of the following statements regarding agency relationships is NOT correct?
A)
The principal may be legally liable for the agent’s acts if the agent is acting within the scope of his authority.
B)
A common type of agency/principal relationship is that of an employee and an employer.
C)
The agent owes a fiduciary duty of loyalty to the principal.
D)
The principal is not charged with knowledge of the agent’s activities if the agent did not inform the principal of those activities beforehand.

Answer 6

D

Question 7

When evaluating life insurance needs, which of the following factors should be considered by a married person with children?

1. How long before Social Security or other benefits will be available to the surviving spouse.
2. How long will the surviving spouse need financial support.
3. Are there sufficient financial resources available to avoid causing financial hardship to the surviving spouse and children.
4. Are there sufficient financial resources available to pay higher education costs for the children.

Answer 7

all should be considered

Question 8

Which of the following can create a current tax liability upon exercise?

1. Incentive stock options (ISOs).
2. Nonqualified stock options (NQSOs).

Answer 8

both can create a current tax liability

Both ISOs and NQSOs may create a current income tax liability upon exercise. The exercise of NQSOs creates additional W-2 compensation income, which is a type of ordinary income, and, thus, FICA withholding is required. Although the exercise of ISOs does not create a regular tax liability, it does create a positive AMT adjustment. This positive AMT adjustment, if large enough, may create AMT liability. Also, the eventual sale of the stock will create a negative AMT adjustment equal in amount to the positive AMT adjustment.

Question 9

Which of the following perils is (are) ordinarily covered in an open-perils HO-3 policy?

1. Ice damage.
2. Lightning.
3. Flood.
4. Earthquake.

Answer 9

1 and 2

HO-3 is an open-perils policy, but the general exclusions in all HO policies include earthquake and flood.

Question 10

Under which of the following provisions are overdue premiums on a life insurance policy automatically borrowed from the cash value after the grace period expires?
A)
Waiver of premium.
 B)
Surrender provision.
 C)
Double indemnity.
 D)
Automatic premium loan.

Answer 10

D

Question 11

Which of the following events will qualify for COBRA continuation coverage?

1. Divorce.
2. Termination of employment.
3. Death of the worker.
4. Resigning from a job.

Answer 11

all events will qualify for COBRA coverage

Question 12

Which of the following statements regarding the roles of the National Association of Insurance Commissioners (NAIC) in regulating insurance is (are) CORRECT?

1. The NAIC makes recommendations for legislation and policy.
2. The NAIC has the legal authority to force states to adopt its regulations.

Answer 12

1 only

Question 13

The term uninsured motorist, under the uninsured motorist coverage of a PAP, includes:

1. A car insured by a company that becomes insolvent.
2. A hit-and-run driver.
3. A car operated without liability insurance.

Answer 13

all would be considered uninsured motorist

Question 14

Which of the following statements concerning the personal auto policy (PAP) Part B Medical Payments coverage is (are) CORRECT?

1. Part B of the PAP provides payment for the reasonable and necessary medical expenses of an insured as a result of an automobile accident.
2. The insureds under Part B include the named insured, spouse, and any family members while occupying a motor vehicle or when struck as a pedestrian by such a vehicle.

Answer 14

both are correct

Question 15

Several years ago, Stan purchased a $400,000 whole life insurance policy on his life. He has paid cumulative premiums over the years of $20,000, and has accumulated a cash value of $25,000. This year, he was diagnosed with a rare liver disease, and as a result his life expectancy is only 6 months. Because of his large medical costs, he is considering selling his policy to a viatical settlement company. They have offered him $250,000 for the policy. He would also like to explore other ways to generate cash from the policy. Which of the following statements regarding Stan’s situation are CORRECT?

1. If Stan sells his policy to the viatical settlement company, he will be taxed on any gain from the sale if he dies more than 2 years later.
2. If the viatical company collects the death benefit as a result of Stan’s death, the proceeds will be tax free to the company.
3. If Stan sold the policy to his cousin for $250,000, his cousin would be subject to ordinary income tax on a portion of the life insurance benefit when Stan dies.
4. If Stan takes a loan from the policy, some or all of the loan will be subject to ordinary income tax if the policy is classified as a modified endowment contract.

Answer 15

3 and 4

Question 16

Which of the following are exclusions under the Coverage E (Personal Liability) portion of Section II of homeowners policies?

1. Personal liability.
2. Business activities.
3. Intentional injury.
4. Uninsured locations.

Answer 16

2, 3, and 4

Question 17

A drunk driver killed Jerry and severely injured his girlfriend. The court awarded his girlfriend $50 million in damages. These damages most likely represent
A)
general damages
 B)
special damages
 C)
punitive damages
 D)
loss of property damages

Answer 17

C

Question 18

In which of the following circumstances is a cafeteria plan appropriate?

1. When the employee mix is comprised mostly of older employees with families who need maximum medical and life insurance benefits.
2. When employers want to choose the benefit package most suited to their individual needs.
3. When an employer seeks to maximize employee satisfaction with the benefit package, thereby maximizing the employer’s benefit from its compensation expenditures.
4. When a small employer does not have much money to spend on benefits.

Answer 18

3 only

Question 19

Noncancelable disability income insurance contracts are different from guaranteed renewable disability income insurance contracts because:
A)
noncancelable disability income insurance policies cannot be canceled mid-term.
B)
noncancelable disability income insurance policies have more liberal benefits.
C)
noncancelable disability income insurance policies are not guaranteed renewable.
D)
noncancelable disability income insurance policies cannot have a change in premium.

Answer 19

D

Question 20

true or false?

noncancelable disability policies are also guaranteed renewable

Answer 20

true

Question 21

can guaranteed renewable disability policies have a change in premium?

Answer 21

yes, on a class basis

Question 22

Which of the following is included in the definition of a dwelling under Coverage A of homeowners insurance?

A)
Building materials used in the alteration of the dwelling.
 B)
Land on which the house is situated.
 C)
Furniture inside the house.
 D)
A garage detached from the house.

Answer 22

A

Question 23

Which of the following is (are) covered under ‘Coverage A-Dwelling’ of the HO-2, HO-3, and HO-8 homeowners forms?

1. The land on which the home is built.
2. Any structures attached to the dwelling.
3. Structures separated from the dwelling by a clear space, including detached garages, fences, patios, and swimming pools.
4. Materials and supplies that are intended for use in construction.

Answer 23

2 and 4

Question 24

A nonqualified retirement plan permits the:
A)
employee to avoid taxes on compensation until the dollars are actually received.
B)
employee to receive current income, yet defer taxes on that income.
C)
employer to avoid taxes on investment income earned.
D)
employer to deduct the annual plan contribution from taxable income.

Answer 24

A

Question 25

Which of the following is (are) advantages of a straight life, immediate fixed annuity?

1. A straight life, immediate fixed annuity accelerates savings growth for long-term investment because of its tax-deferred accumulation.
2. An annuitant cannot outlive the payments.
3. A straight life immediate fixed annuity provides a guaranteed stream of income for life.
4. A straight life immediate fixed annuity has no residual value at death that would be subject to estate taxes.

Answer 25

2, 3, and 4

Question 26

All of the following are characteristics of a principal-agent relationship EXCEPT:
A)
the agent has a duty of loyalty to the principal.
B)
the agent may bind the principal in a contract with a third person.
C)
the agent typically has little or no independent discretion.
D)
the agent acts on behalf of the principal in engaging in business transactions.

Answer 26

C

Question 27

Endorsement method split-dollar life insurance is an insurance arrangement in which:
A)
the employer is the owner of the policy and is also the beneficiary to the extent of the premiums paid by the employer.
B)
the employee is the owner of the policy and is also the beneficiary to the extent of the cash value of the policy.
C)
the employer and the employee share the cost of the life insurance on the employee and the portion of the premium paid by the employer is the value of the term life portion of the policy.
D)
the employer pays the cost of the premium and the employee must name the employer as the beneficiary.

Answer 27

A