Risk Management and Employee Benefit Quiz 5

Question 1

Bill is covered by a homeowners tenants Form HO-4 policy, which has a $500 deductible. While he is at work, burglars steal his television, stereo, $150 cash, and $6,500 designer watch. Which of the following statements is CORRECT?

A)
The cash is not covered.
 B)
None of the losses will be covered.
 C)
Only the television and stereo are covered.
 D)
All items are subject to the deductible, but the watch is subject to a specific coverage limit.

Answer 1

D

Question 2

Madison is covered by her husband’s employer-sponsored group health plan. Her husband dies in an accident on July 15, and she elects COBRA coverage on September 12. Which of the following statements regarding Madison’s coverage under COBRA is (are) CORRECT?

1. Madison has missed the deadline for electing COBRA coverage.
2. Madison has until October 27 to pay the premium for the period of COBRA coverage prior to September 12.
3. Madison is eligible for up to 36 months of coverage.
4. Madison must pay the entire cost of her COBRA coverage.

Answer 2

2, 3, 4

Question 3

ABC Company purchased a key employee life insurance policy with a face amount of $500,000 on one of its top executives, Roberta. ABC paid premiums of $50,000 on the policy during Roberta’s employment with the company. When Roberta retired, she bought the policy from ABC for $60,000 and named her daughter, Teresa, as beneficiary. Roberta paid additional premiums of $20,000 on the policy before she died. Which of the following statements are CORRECT with regards to this key employee life insurance policy?

1. Teresa must claim $50,000 of the $500,000 death benefit as ordinary income upon Roberta’s death.
2. ABC Company was not able to take a tax deduction for the premiums paid on the life insurance policy.
3. Key employee life insurance policies cover employees who are considered critical to the success of a business and whose death might cause a significant financial loss to the company.
4. Teresa will receive the $500,000 death benefit tax-free upon Roberta’s death.

Answer 3

2, 3, and 4

Question 4

Scott has an HO-3 homeowners policy on his house. The dwelling is insured for $200,000. One evening, two friends are visiting Scott’s house. As they are walking up Scott’s sidewalk, one of the friends trips while clowning around, causing him to break his ankle and incur emergency room expenses of $5,000. The injured friend acknowledges that the accident occurred through no fault of Scott’s. Which of the following statements regarding coverage for this accident under Scott’s HO-3 policy is CORRECT?
A)
Scott’s HO-3 policy covers the entire $5,000 of the friend’s medical expenses.
B)
Scott’s HO-3 policy provides no coverage because the accident was not Scott’s fault.
C)
Scott’s HO-3 policy covers up to $2,500 of the friend’s medical expenses.
D)
Scott’s HO-3 policy covers up to $1,000 of the friend’s medical expenses.

Answer 4

D

Question 5

John Smith has a major medical policy with a $500 deductible and an 80/20 coinsurance provision. What amount will the insurer pay if John incurs $30,500 of covered medical expenses?
A)
$6,500.
 B)
$30,500.
 C)
$30,000.
 D)
$24,000.

Answer 5

D

Question 6

A client is buying a home near a hillside. The client is concerned that during heavy rains the neighborhood may be prone to flooding or landslides as a result of runoff from the hill. Which of the following perils would be covered under the client’s standard homeowners insurance policy?

1. Landslides or mudflow.
2. Flood, surface water, waves, tidal waves, and overflow of a body of water.
3. Water that backs up through sewers or drains or overflows from a sump.
4. Water damage in the form of burst pipes.

Answer 6

4 only

Question 7

Phillip is involved in a serious automobile accident and incurs medical expenses and other damages totaling $300,000. Philip sues the other driver for negligence. At trial, the court finds both drivers were negligent and rules that the other driver was 90% responsible for the accident and Phillip was 10% responsible. Assuming that the contributory negligence rule applies, which of the following statements regarding the outcome of this case is CORRECT?
A)
Phillip can recover $30,000 from the other driver.
B)
Phillip can recover $300,000 from the other driver.
C)
Phillip can recover $150,000 from the other driver.
D)
Phillip can recover nothing from the other driver.

Answer 7

D

Question 8

Which of the following types of property is(are) excluded from personal property coverage under Coverage C of a homeowners policy?

1. Pets.
2. Property belonging to tenants who are not related to the insured.
3. Credit cards.
4. Cash.

Answer 8

1, 2, and 3

Question 9

You have a 35-year-old client with an extremely conservative risk tolerance. He is an attorney who specializes in entertainment law, and his income for the next ten years will probably be the highest of his career. He wants a life insurance policy that has stability and is guaranteed to be in force until age 95. He is also concerned with regards to the negligence liability he may encounter within his business practice. Which of the following statements would be CORRECT?

1. A whole life insurance policy may be appropriate for this particular client.
2. This client may be a good candidate for malpractice insurance.
3. Modified whole life insurance may be appropriate for this client.
4. Errors and omissions insurance may be appropriate for this client.

Answer 9

1 and 4

Question 10

The Tops Corporation purchased a variable annuity in 2016 as part of a nonqualified deferred compensation plan for one of its key employees. In 2016 the annuity loses $20,000 in value, and in 2017 the annuity gains $25,000 in value. Which of the following statements regarding the income tax treatment of this annuity in 2016 and 2017 is CORRECT?

A)
The $20,000 loss is deductible as a short-term capital loss, and the $25,000 gain is taxable as a long-term capital gain.
B)
The $20,000 loss is not deductible, and the $25,000 gain is not taxable.
C)
The $20,000 loss is not deductible, and the $25,000 gain is taxable as ordinary income.
D)
The $20,000 loss is deductible as an ordinary loss, and the $25,000 gain is taxable as ordinary income.

Answer 10

D

Question 11

Michelle purchased a $100,000 whole life insurance policy 25 years ago. To date, she has paid $50,000 in total premiums and received $10,000 in dividends. The policy has a cash surrender value (CSV) of $15,000 and is subject to a $30,000 outstanding loan. Michelle was recently referred to Elvis, a CFP® professional, to help her figure out what she should do with this policy. One financial planner attempted to convince her to surrender the policy and buy an annuity with the proceeds, while an insurance agent was sure he had a great deal on a variable universal life insurance product which had a selection of investments to choose from for the cash value. Which of the following statements could Elvis correctly make to Michelle with regards to the factors involving her potential transaction?

1. Elvis could explain to Michelle that her investment in the contract is equal to $40,000.
2. Elvis could mention to Michelle that she cannot transact a Section 1035 exchange from her current life insurance contract into a new life insurance or annuity contract.
3. Elvis could state that although Michelle would receive $15,000, she would only be taxed on $5,000 if she decided to surrender the policy.
4. Elvis could state that one reason she may consider moving the funds from a whole life insurance policy into a variable universal life insurance policy is the flexibility when it comes to adjusting the premiums and the death benefit.

Answer 11

3 and 4

Question 12

Leona owns a whole life insurance policy with a face amount of $100,000. The policy is not a modified endowment contract (MEC). Leona has paid total premiums of $20,000. This year, the cash value of the policy increases by $7,000 and Leona takes out a policy loan of $25,000. Which of the following statements regarding Leona’s situation is (are) CORRECT?

1. Leona must report $5,000 as ordinary income.
2. Leona must report $7,000 as long-term capital gain.
3. If Leona dies, the beneficiary will have to pay federal income taxes on the $100,000 death benefit.
4. Generally, withdrawals from the cash value of a life insurance policy are subject to first in, first out (FIFO) basis treatment.

Answer 12

4 only

Question 13

Martine is covered by Medicare Part A. During 2017, he is hospitalized for 75 consecutive days and incurs hospital expenses of $100,000. What will be his out-of-pocket cost for this hospital stay, assuming all of his expenses are covered expenses under Medicare Part A?

A)
$6,251.
 B)
$22,800.
 C)
$1,316.
 D)
$20,000.

Answer 13

A

Question 14

Megan, a CFP® professional, is meeting with George this afternoon. George has many questions for Megan regarding his existing variable universal life insurance B policy, which has a cash value of $175,000 and a death benefit of $500,000. He wants to make sure the beneficiary on this policy is never changed; even if he becomes incapacitated. He does not trust anyone in his family and wants to make sure his grandson, Joey, age 23, remains his beneficiary. He also wants to know what happens to the cash value when he dies because he would like Joey to inherit that amount as well. George has been single since his wife passed away several years ago and Megan can sense that he really wants to get clarity with the eventual transfer of his assets. Which of the following statements regarding George’s issues is(are) CORRECT?

1. George can make Joey a primary beneficiary which will not allow the policyowner or any power of attorney, agent, or family member to change the beneficiary designation in the future.
2. Because George’s policy is a variable universal life B policy, the policy’s beneficiary will receive both the cash value and the death benefit.
3. George can make Joey a contingent beneficiary which will not allow the policyowner or any power of attorney, agent, or family member to change the beneficiary designation in the future.
4. George can make Joey a revocable beneficiary which will make it impossible for an agent, power of attorney, or family member to change the beneficiary designation in the future.

Answer 14

2 only

Question 15

Julie earns $40,000 per year and her employer provides a flexible spending account (FSA). Julie and her husband incur $5,000 in annual child-care expenses for their 2 children. Which of the following statements regarding Julie’s choices within her FSA is (are) CORRECT?

1. Julie’s maximum salary reduction for a dependent care FSA is $5,000.
2. Julie’s maximum salary reduction for dependent care FSA is $2,600.
3. Even if Julie was self-employed, she could still have an FSA.
4. Julie’s contributions to her FSA are not subject to payroll taxes.

Answer 15

1 and 4

Question 16

Sandy, age 50, has a single-coverage health plan with a deductible of $1,700 and a maximum out-of-pocket of $10,000 for 2017. Today is June 1, 2017 and Sandy wants to establish a health savings account (HSA). Her employer does not offer an HSA. Which of the following statements regarding Sandy’s situation is CORRECT?

A)
Sandy is not eligible to establish an HSA because her health plan’s maximum out-of-pocket is over the $6,550 limit for 2017.
B)
Sandy is eligible for an HSA because her health plan is a high-deductible health plan.
C)
Sandy can establish an HSA on June 1, but her maximum contribution will be limited to a prorated amount.
D)
Sandy is not eligible for an HSA because HSAs must be employer-sponsored.

Answer 16

A

Question 17

Julian is a partner in the XYZ Partnership. He owns a life insurance policy with a face amount of $300,000 on his own life. The XYZ partners adopt a cross-purchase buy-sell agreement, and as part of that agreement William, another partner, buys Julian’s life insurance policy for $50,000 and names himself as beneficiary. William pays $10,000 in premiums on the policy before Julian dies. When Julian dies, what amount of the $300,000 death benefit must William include in his gross income?

A)
$240,000.
 B)
$60,000.
 C)
$0.
 D)
$300,000.

Answer 17

C

Question 18

Carol, age 47, is a graphics designer with aspirations to be an entrepreneur. She currently lives in an old Victorian 3,000 square foot lakefront home in which the replacement cost is much greater than the current market value. Her income is largely dependent on bonuses which create inconsistent cash flows. Her main concern is to make sure that her disabled grandchild will be provided financial support and care in the event of her death. She currently has custody of him because her daughter is financially irresponsible and currently dealing with a substance abuse issue. She is hoping George, the CFP® professional at her local bank, can help guide her to an informed decision. Which of the following statements is (are) CORRECT with regards to George’s advice for Carol?

1. George should recommend a whole life insurance policy to provide the financial support for her grandson in the event that she dies prematurely because the flexible premiums will work well with her inconsistent cash flows.
2. George should verify that Carol has an HO-3 homeowners insurance policy.
3. George should recommend a personal liability umbrella policy (PLUP).
4. George should recommend a universal life insurance policy to provide the financial support for her grandson in the event that she dies prematurely because the flexible premiums will work well with her inconsistent cash flows.

Answer 18

3 and 4

Question 19

The Andersons own an equity-indexed annuity with a cap rate of 9%, a floor of 3%, and a participation rate of 90%. If the underlying index increases by 13% this year, what interest rate will be credited to their annuity?
A)
8.1%.
 B)
11.7%.
 C)
9%.
 D)
13%.

Answer 19

C

Question 20

Four years ago, Janet was granted a nonqualified stock option (NQSO) to purchase 500 shares of employer stock at $30 per share. Janet would like to receive as many shares of stock as she can from the option, but she does not have any cash to pay for the exercise cost of the option. She exercised the option when the fair market value of the stock was $40. Assume Janet’s marginal income tax rate is 28%. If Janet opts for a cashless exercise, how many shares of employer stock can she receive (ignoring FICA)?

A)
500.
 B)
0.
 C)
90.
 D)
410.

Answer 20

C

This is an example of the cashless exercise of an NQSO. Janet will receive 90 shares of the employer stock, calculated as follows: The exercise cost of the option is $15,000; (500 shares × $30 per share). In addition, because the option is a NQSO, Janet will have to pay ordinary income tax of $1,400 on the bargain element: [($40 FMV − $30 exercise price) × 500 shares × 28% tax rate]. Therefore, the total cost of the option is $16,400. To cover the total cost of the option, 410 shares of the stock must be sold; ($16,400 total cost ÷ $40 fair market value (FMV) per share). Thus, 500 − 410 = 90.

Question 21

Gerald, age 62, is covered by his employer’s group health insurance plan. He resigns his position to retire and begins receiving Social Security retirement benefits. He does not plan to return to work, but wants to ensure that he is never without health care coverage. Which of the following statements regarding Gerald’s situation is CORRECT?

A)
Gerald should consider purchasing an individual health policy because his COBRA coverage will expire before he becomes eligible for Medicare at age 65.
B)
Gerald has no need to purchase individual health coverage because he can purchase COBRA continuation coverage until he becomes eligible for Medicare at age 65.
C)
Gerald is not eligible for COBRA continuation because he resigned voluntarily.
D)
Gerald is not eligible for COBRA continuation coverage because he is on Social Security.

Answer 21

A

Question 22

Which of the following statements regarding the tax issues of nonqualified retirement plans is NOT correct?
A)
Because an unfunded promise to pay an executive has an element of risk, there is no current taxation to the executive.
B)
The deduction for the employer can occur at any time, regardless of when the inclusion of income occurs for the executive employee.
C)
If there is a substantial risk of forfeiture, the deferred compensation will not be treated as constructively received and there will be no current taxable income to the executive.
D)
Funds that are deemed to be constructively received are required to be reported as taxable income by the executive.

Answer 22

B

Question 23

Brian, age 63, is covered by a health savings account (HSA). This year he contributes $1,000 to the HSA and his employer contributes $2,000. Brian also takes a distribution of $3,000 to pay for qualified medical expenses. Which of the following statements regarding the income tax consequences of these transactions is (are) CORRECT?

1. Brian may take an above-the-line tax deduction of $1,000 for his own contribution.
2. Brian must include the $3,000 distribution in his gross income.
3. Brian must include the employer’s $2,000 contribution in his gross income.

Answer 23

1 only

Question 24

Meals are excludable from income if they are provided:

1. By the employer.
2. On the employer’s premises.
3. For the convenience of the employer.

Answer 24

all are correct