Risk Management & Insurance Planning 11%

Question 1

Peril

Answer 1

is the cause of a financial loss (e.g., flood or illness)

Question 2

Hazard

Answer 2

Is a condition that INCREASES the probability that a loss will occur

Physical Hazard: Physical characteristics of the person or property that increase the chance of loss (e.g., oily rags left near a furnace or high blood pressure)

Moral Hazard: The chance of loss from dishonesty (e.g., a person intentionally causes a loss or overstates the amount of the loss when a peril occurs)

Morale Hazard: Indifference to loss (due to existence of insurance), which creates carelessness and increases the chance of loss (e.g., failure to lock car doors)

Question 3

Loss

Answer 3

A disappearance or reduction in value (partially or completely)

Question 3

Risk Management Process (7 Steps)

Answer 3

1. Identify and establish risk management goals
2. Gather pertinent data to determine risk exposures
3. Analyze and evaluate the information to identify risk exposures
4. Develop a risk management plan
5. Communicate the recommendations
6. Implement the recommendations
7. Monitor the recommendations for needed changes

Question 4

Risk Avoidance

Risk Management Strategies

Answer 4

Risk may be avoided if the person refuses to engage in an action that creates a risk (e.g., refusal to fly or drive)

Question 5

Risk Reduction

Risk Management Strategies

Answer 5

Risk may be reduced through loss prevention methods and/or safety improvements

1) Examples include: installing hand rails, fire sprinklers, and security system

Question 6

Risk Retention

Risk Management Strategies

Answer 6

Risk may be retained; therefore, no action is taken to avoid, transfer, or reduce risk.

Risk may be voluntarily or involuntarily retained

1.) Self-insurance, coinsurance, and deductibles are examples of risk retention
2.) Risk retention can be coupled with other methods of managing risk

Question 7

Risk Transfer

Risk Management Strategies

Answer 7

Risk may be transferred, either through an individual or an insurance contract

Question 8

Which of the following statements regarding disability insurance policies is CORRECT?

Answer 8

OWN OCCUPATION definition of disability may allow the insured to receive benefits, even if the insured can work in another occupation.

Question 9

Liability due to negligence

Answer 9

Has unlimited potential losses.

Question 10

Exclusion Ratio

Answer 10

If Karen took an annuity settlement option for a $100,000 face policy that would pay her $644.30 per month for the rest of her life (life expectancy 25 years), how much of each monthly payment would be taxable?

Step 1: Calculate the total to be received from the annuity: $644.30 × 300 months (12 x 25) = $193,290

Step 2: Determine her tax basis: $100,000 (face amount)

Step 3: Calculate the exclusion ratio (tax basis ÷ total benefit): $100,000 ÷ $193,290 = 0.5174

Step 4: Multiply the monthly payment by the exclusion ratio: $644.30 × 0.5174 = $333.36 nontaxable (monthly)

Step 5: Subtract $333.36 from $644.30 to arrive at the taxable amount of $310.94

Question 11

Endorsement method split-dollar life insurance is an insurance arrangement in which:

Answer 11

the employer is the owner of the policy and is also the beneficiary to the extent of the premiums paid by the employer.

Question 12

Which of the following benefits are provided by workers’ compensation?

Answer 12

Medical expense reimbursement

Question 13

Mary and Robert are approaching retirement age and are concerned about long-term care insurance. What would not be considered as a funding source for their long-term care needs?

Answer 13

The balance in their flexible spending account (FSA) can be used to reimburse long-term care expenses tax-free.

Question 14

Which of the following statements concerning disability income policies is CORRECT?

A) Noncancelable policies do not provide a continuation provision.
B) *Noncancelable policies guarantee the insured the right to renew the policy for a stated number of years or until a specified age for a premium guaranteed upon renewal.
C) A guaranteed renewable policy guarantees a level premium for the lifetime of the insured.
D) Noncancelable polices permit the company to adjust premiums for individual insureds.

Answer 14

B) Noncancelable policies guarantee the insured the right to renew the policy for a stated number of years or until a specified age for a premium guaranteed upon renewal

Noncancelable disability income policies DO NOT allow the insurer to adjust premiums for individuals.

Noncancelable policies provide the most liberal continuation provision.

Question 15

(Vacation Home Dwelling Problem)

Justin has an HO-5 homeowners policy.
The dwelling is insured for $150,000.
He keeps personal property valued at $20,000 in a lake cottage, where he spends his summer weekends.
What amount of coverage does Justin have on the personal property he keeps at the lake cottage?

Answer 15

D) $7,500

When personal property is located at another residence of the insured (e.g., a vacation home), the coverage on that property is limited to the greater of $1,000 or 10% of the Coverage C insurance.

Because Justin’s dwelling is insured for $150,000, his coverage under Coverage C is $75,000 and the personal property at the cottage is insured for $7,500 ($75,000 × 10%).

$150K / 2 = $75K Vacay Home Dwell Cover

$75K * 10% = $7500 ANSWER

Question 16

Joe was involved in an accident at the plant where he works and, as a result, lost his arm. Under the workers’ compensation system, this type of injury is considered an example of:

A) *partial permanent disability.

B) partial temporary disability.

C) total permanent disability.

D) total temporary disability.

Answer 16

A) partial permanent disability.

Losing an arm is an example of a partial permanent disability.

Question 17

Term Life Insurance Convertible feature.

Answer 17

The convertible feature of a term life insurance policy permits the policyowner to exchange the term contract for a contract of permanent life insurance within a specified time without evidence of insurability.

Question 18

COBRA

1. COBRA provides for the continuation of group health insurance coverage for employees in the event of termination or other ‘qualifying events’ for 18–36 months, assuming the employee pays the premium, which can be as high as 102% of the current group rate.
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 18

Answer: ALL CORRECT

Question 19

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 life insurance policy does Grant own?

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

Answer 19

C) Participating limited pay whole life

The policy is NOT a term life insurance policy because it has a cash value.

Grant’s policy is a participating limited pay whole life policy. The fact that George received a policy dividend indicates he has a participating policy. The fact that no further premiums are due once he reaches age 65 indicates he has a limited pay whole life policy.

Question 20

Which of the following statements regarding workers’ compensation is CORRECT?

A) Workers’ compensation provides benefits only if the employer was negligent.

B) *Workers’ compensation benefits are excluded from the employee’s gross income for tax purposes.

C) Workers’ compensation is funded by contributions deducted from employees’ paychecks.

D) Workers’ compensation applies to all occupations.

Answer 20

B) Workers’ compensation benefits are excluded from the employee’s gross income for tax purposes.

Employers are responsible for providing the coverage

Workers’ compensation imposes strict liability on the employer, and benefits do not depend on whether the employer was negligent.

Employees CANNOT be required to contribute to workers’ compensation;

Question 21

The LAW OF AGENCY implies that a financial planner:

Answer 21

Represents the firm & the firm is responsible for any promises the financial planner makes to the client.

Question 22

Larry purchased a variable annuity in 2005 and has a modified adjusted gross income (MAGI) of $325,000. The annuity is in the accumulation period. Larry’s basis is $50,000, and the contract contains $100,000 in earnings. This year, he withdraws $60,000 from the annuity. Assuming Larry is 45 years old and single, which of the following statements regarding the tax consequences of this withdrawal is CORRECT?

A) Larry must include $60,000 in gross income, pay a penalty of $6,000, and the $60,000 is subject to the 3.8% Medicare contribution tax.

B) Larry must include $10,000 in gross income and pay a penalty of $1,000.

C) The withdrawal is tax-free and penalty free.

D) Larry is not required to include the amount of the withdrawal in gross income but must pay a penalty of $1,000.

Answer 22

A) Larry must include $60,000 in gross income, pay a penalty of $6,000, and the $60,000 is subject to the 3.8% Medicare contribution tax.

Because Larry purchased the annuity on or after August 14, 1982, the withdrawal is subject to the last in, first out (LIFO) method of taxation. Under LIFO, withdrawals are treated as coming from earnings first and are taxed to the extent of earnings. Premature distributions (before age 59½) are also subject to a 10% penalty. In addition, the $60,000 taxable gain is also subject to the 3.8% Medicare contribution tax that applies to net investment income of single taxpayers with MAGI exceeding $200,000.

Question 23

Which of the following states that liability for the negligence of one person can be transferred to another under certain conditions?

A) Negligence per se

B) *Vicarious liability

C) Collateral source rule

D) Res ipsa loquitur

Answer 23

B) Vicarious liability

Vicarious liability can arise from several situations, one of which occurs when an employee is acting on behalf of the employer.

Question 24

Homeowners Section I Coverages

Answer 24

Section A: Dwelling (100% replace cost)
Section B: Other Structures (10% dwelling)
Section C: Personal Property (50% dwelling)
Section D: Loss of Use (20-10% dwelling)

Additional Coverage:
Debris removal
damage to trees
credit card loss: up to $500

Question 25

Homeowners Section I Coverages

Section A: Dwelling

(Recommend 100% of the replacement)

Answer 25

1. Structures attached to the dwelling
2. Mtrls. & supplies intended for use in construction

Land NOT INCLUDED

Partial Loss = 80% of replacement cost

Financial planners should recommend 100% of the replacement cost of the home w/ regard to homeowners insurance coverage.

Question 26

Homeowners Section I Coverages

Section B: Other Structures

(Generally will be 10% of the insurance on the dwelling)

Answer 26

Garage & other structures DETACHED from the dwelling

10% of the amount of insur. on the dwelling applies as insur on detached structures.
(house 150K insur; detached garage = 15K insured)

NOT INCLUDED:
Land
Any structure for use for any biz
Rented space who is not a tenant

Question 27

Homeowners Section I Coverages

Section C: Personal Property & Contents

(Generally will be 50% of the insurance on the dwelling)

Answer 27

1. Personal prop. either owned or used by the insured.
2. Generally will be 50% of the insurance on the dwelling.

Exception:
Personal property located at another residence of the insured (i.e. vacay home), then coverage is greater of $1K or 10% of Coverage C insurance.

EX:
Bob’s dwelling coverage = $150K
Personal prop insured = $75K
Vacay Home personal prop = greater of $1k or 10% of dwelling

Because Bob’s dwelling is insured for $150,000, his coverage under Coverage C is $75,000 and the personal property at the vacay house is insured for $7,500 ($75,000 × 10%).

Question 28

Homeowners Section I Coverages

Section D: Living Expenses or Loss of Income

(20% of the amount of insurance on the dwelling for HO-2, HO-3, and HO-5 policies)

(HO-1 and HO-8 policies are limited to 10% of the amount of insurance on the dwelling).

Answer 28

Coverage D is limited to 20% of the amount of insurance on the dwelling for HO-2, HO-3, and HO-5 policies (HO-1 and HO-8 policies are limited to 10% of the amount of insurance on the dwelling). The three types of benefits that are provided under Coverage D include additional living expenses, fair rental value, and prohibited use

Additional living expense coverage pays for increased expenses incurred by the insured to continue to maintain the insured’s standard of living if the house is deemed uninhabitable because of an insured peril. This benefit is paid only for the period reasonably required to repair or replace the damage or until the insured permanently relocates (e.g., lodging costs or additional costs of meals eaten in restaurants).

If the insured does not incur additional living expenses, the insured will receive a benefit equal to the fair rental value of the property; fair rental value is also paid when a portion of the premises is rented to others but is unusable

If use of the property is prohibited because of some event other than damage to the property, the insured may receive additional living expenses or fair rental value

Lease cancellation costs are not covered

Question 29

Homeowners Section II Coverages

Coverage E: Personal Liability

Answer 29

This coverage protects the insured against claims arising against BODILY INJURY & PROPERTY DAMAGE on or off of the premises due to negligence

Minimum Coverage: $100K up to $500K

Insurer will pay only when insured is legally liable.

Question 30

Homeowners Section II Coverages

Coverage F: Medical Payments to Others

Answer 30

Will pay up to $1000 for medical payments to others.

Question 31

Homeowners Exclusions

8 Exclusions that prevent coverage for a loss associated w/ these exclusions.
O-P-E-N-N W-I-F

Answer 31

1. Ordinance of Law
2. Power Failure
3. Earth Movement
4. Neglect
5. Nuclear Hazard
6. War
7. Intentional Loss
8. Flood

Question 32

12 Basic Named Perils
W-H-A-R-V-E-S & F-L-T

Answer 32

1. Windstorm
2. Hail
   3.** A**ircraft
3. Riot
   5.** V**andalism
4. Vehicles
5. Explosion
6. Smoke
7. Fire
8. Lightning
9. Theft

Question 33

Comprehensive Coverage

(Auto Insurance)

Answer 33

Is for losses resulting from something other than collision such as:
breakage of glass
falling objects
fire
theft
storm damage
damage from collision with animals (e.g., deer and birds)

Question 34

Collision Coverage

(Auto Insurance)

Answer 34

Provides for losses that result from collisions with inanimate objects

Question 35

Personal Auto Policy (PAP)

Part A: Liability Coverage
Part B: Medical Payments
Part C: Uninsured Motorist
Part D: Damage to your Auto
Part E: Duties After accident or loss
Part F: General Provisions

Answer 35

Part A: Liability Coverage
Part B: Medical Payments
Part C: Uninsured Motorist
Part D: Damage to your Auto
Part E: Duties After accident or loss
Part F: General Provisions

Question 36

Business Insurance

Commercial Package Policy (CPP)

Answer 36

Insurance package that provides multiple coverages that provide lower premiums and fewer gaps in overall coverage.

If both property and liability coverage are combined into a single policy, it is called a multiline policy.

Coverage can include 2 or more coverage parts or forms:
1. property
2. general liability
3.crime
4. boiler and machinery
5. inland marine
6. commercial auto, and farm

Question 37

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

Answer 37

B) $135,000

Special Damages = compensation for MEASURABLE losses

In this case, the special damages are $135,000 ($100,000 medical bills + $20,000 rehabilitation expenses + $15,000 damage to the car).

Question 38

Static Risk

(Mother Nature)

Answer 38

Aare the losses that are caused by factors such as natural disaster, earthquake, death or flood (risks that are always present)
1. Occur regularly
2. Are insurable

Question 39

Dynamic Risk

(Economy)

Answer 39

Are the result of the economy changing (e.g., changes in business cycle, inflation); insurance typically does not cover these risks

Question 40

Res ipsa loquitur

(“the thing speaks for itself”)

Answer 40

A doctrine of the law of negligence concerned with the circumstances and the types of accidents, which afford reasonable evidence if a specific explanation of negligence is not available

1. The presumption in such situations is that the incident would not have occurred without negligence on the part of someone; therefore, negligence is presumed
2. The plaintiff does not have to prove negligence and the burden of proof shifts to the defendant

Question 41

LIFE ANNUITY QUESTION

A client annuitized his fixed annuity and selected a life annuity with a 15-year period certain payout option. The income payments from the annuity were $2,000 per month. After 10 years of receiving income payments, the client died. Which of the following statements with respect to the client’s income payments is CORRECT?

A) If the client had chosen a straight life annuity payout option, payments would have continued upon the client’s death.

B) If the client had chosen a joint and survivor annuity, payments would have ceased upon the client’s death.

C) As long as a beneficiary has been selected, annuity payments continue beyond death regardless of the option selected.

D) Income payments of $2,000 per month will continue to the client’s designated beneficiary for five years.

Answer 41

D) Income payments of $2,000 per month will continue to the client’s designated beneficiary for five years.

In a life annuity with period certain payout option, if the annuitant dies before the end of the specified period, payments continue to the annuitant’s designee for the remaining term. In this case, payments continue for five years. The joint and survivor annuity payout option will continue to make payments until the death of the last of the two annuitants.

Question 42

Coordination of benefits provision

Answer 42

Prevents over insurance and the duplication of benefits when an insured is covered under more than one group health insurance plan?

Question 43

This year, the XYZ Corporation pays premiums of $10,000 on a $500,000 life insurance policy covering one of its executives. During the year, the cash value of the policy increases by $3,000. The beneficiary of the policy is the executive’s estate. Which of the following statements regarding the income tax consequences of this arrangement is CORRECT?

A) XYZ may deduct nothing; the executive includes nothing in gross income.

B) XYZ may deduct $7,000; the executive must include $13,000 in gross income.

C) XYZ may deduct $10,000; the executive must include $13,000 in gross income.

D) *XYZ may deduct $10,000; the executive must include $10,000 in gross income.

Answer 43

D) XYZ may deduct $10,000; the executive must include $10,000 in gross income.

If a corporation pays the premium on a policy covering an employee and the employee is the beneficiary, the premium is considered compensation to the employee and is deductible by the corporation.

Question 44

Bud is employed by Big Rig Trucking where he is covered by a preferred provider organization (PPO) plan, 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 regarding Bud’s company benefits in the current year is(are) CORRECT?

A) Bud will have to pay taxes on $1,200 of the disability income benefits for the current year.

B) Because Bud’s medical plan with Big Rig is a PPO, he is able to receive care outside of the network of providers for lower deductibles and coinsurance fees.

C) Bud may cover his adult children until they reach age 21 on Big Rig’s medical plan.

D) Bud will have to pay taxes on $1,800 of the disability income benefits for the current year.

Answer 44

D) Bud will have to pay taxes on $1,800 of the disability income benefits for the current year.

Because the employer pays 60% of the disability income insurance premiums, 60% of the disability income benefits are taxable ($3,000 × 60% = $1,800).
A preferred provider organization (PPO) allows members to receive care outside the network of providers; however, the insured will generally face higher deductibles and/or higher coinsurance. Bud may cover his adult children until they reach age 26 on Big Rig’s medical plan.

Question 45

Which of the following statements regarding a health savings account (HSA) is CORRECT?

A) Health savings accounts are not available for self-employed individuals.

B) Contributions to a health savings account are not subject to an annual limit.

C) *Health savings accounts are used to pay unreimbursed qualified health care expenses of the account holder, the account holder’s spouse, or the account holder’s dependents.

D) Distributions from a health savings account that are not used for qualifying medical expenses are subject to income tax and a penalty, regardless of the account holder’s age.

Answer 45

C) Health savings accounts are used to pay unreimbursed qualified health care expenses of the account holder, the account holder’s spouse, or the account holder’s dependents.

HSAs are available for self-employed individuals. Distributions not used for medical expenses are taxable and subject to a 20% penalty tax, unless they are made after the account beneficiary’s death, disability, or attaining age 65.

Question 46

Employer Group Insurance Premiums

Answer 46

Employer = Deductible

Employee = NOT taxable income

Question 47

Disability Definitions

Own: $$$
Modified: $$
Any: $

Answer 47

Own Occupation: The inability to perform any or all of the duties in one’s own occupation (most expensive

Modified Own Occupation: Starts out as own –> Any occupation

Benefits are paid if the disabled person cannot perform their specific occupational duties but would not continue to pay if that individual chose to be gainfully employed in another field

Any Occupation: The inability to perform the duties of any occupation for which one is reasonably qualified by education, training, or experience

Question 48

Social Security Definition of Disability

Answer 48

A mental or physical impairment that prevents the worker from engaging in any substantial gainful employment;

For Social Security, the disability must have lasted for 5 months and be expected to last a total of at least 12 months or result in the death of the worker

Question 49

Long Term Care (LTC)

Answer 49

Requirements:

1. Carrier has to cover 5/6 ADLs
2. Insured has to experience 2/6 ADLs for at least 90 days
   ADLs:
   eating
   bathing
   dressing
   transferring from bed to chair
   using the toilet
   continence (control bowel)
3. Elimination Period (Coverage is for defined period following elimination period, 30-180 days)

Question 50

Long Term Care Insurance

NAIC Model Legislation Rules:

Answer 50

Contracts must be guaranteed renewable or noncancellable.

They must have a 30-day free look period

The expected loss ratio must be at least 60%.

If the policy is a replacement policy, the insurer must waive the time period regarding pre-existing conditions.

Question 51

Beginning last year, Ruby, a widow, elected to receive the proceeds of a $100,000 face value insurance policy on the life of her deceased husband in 10 annual installments of $11,900. This year, she received a payment of $11,900, which included $1,900 of interest. If Ruby dies in December of this year after collecting the first annual installment payment, what amount of the annuity received, if any, is subject to income tax on her final income tax return?

A) *$1,900

B) $5,000

C) $0

D) $6,900

Answer 51

A) $1,900

The amount subject to income tax is $1,900. Note: Because the payments are made with life insurance proceeds, there is no recapture of basis.

Fund were paid with after tax $

Question 51

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

A) Earthquake

B) Nuclear War

C) Flood

D) *Ice damage

Answer 51

D) Ice damage

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

Question 52

Fixed Annuity

Answer 52

1. The funds in a fixed annuity are held in the insurance company’s general account
2. The insurance company bears all of the investment risk.
3. Proceeds paid to the beneficiary at a set dollar amount per month until all the principal and interest are exhausted

Question 53

Straight Life Annuity

Answer 53

A straight life annuity provides periodic (usually monthly) income payments
END once the annuitant dies

Question 54

Immediate Annuity

Answer 54

Disburses the first benefit one payment interval after the date of purchase.

Question 55

joint-and-last-survivor annuity

Answer 55

provides income that ceases upon the death of the second spouse

Question 56

Ken owns a hardware store that fills customers’ propane tanks. You are Ken’s insurance agent and are attempting to explain insurance terms to Ken. Which of the following statements is CORRECT?

A) Fire is a peril.

B) Leaving oily rags in a hardware store’s repair shop area is a hazard.

C) A pure risk is one that involves only the chance of loss or no loss; in other words, there is no chance of gain.

D) All of these statements are correct.

Answer 56

All of these statements are correct.

Question 57

Pure Risk

Answer 57

Involves ONLY the chance of loss or no loss; in other words, there is no chance of gain.

Question 58

Which of the following statements regarding the incidental death benefit rule for qualified retirement plans is CORRECT?

A) If universal life insurance is involved, the total premiums paid for the policy must not exceed 50% of the participant’s total benefit.

B) Life insurance is not permitted in a qualified plan.

C) If term life insurance is involved, the total premiums paid for the policy must not exceed 50% of the participant’s total benefit.

D) *In a defined benefit plan, the death benefit is limited to a maximum of 100 times the expected monthly benefit.

Answer 58

D) In a defined benefit plan, the death benefit is limited to a maximum of 100 times the expected monthly benefit.

Life insurance is permitted in a qualified plan. However, the incidental death benefit rule must be satisfied. The plan must satisfy one of the following two tests (incidental death benefit rule).

TEST #1: The 25% test. No more than 50% of the employer contributions can be used to purchase whole life insurance. No more than 25% of the employer contributions can be used to purchase life insurance other than whole life insurance (term or universal).

Test #2: The 100:1 ratio test; For defined benefit plans, a death benefit cannot exceed 100 times the expected monthly benefit for the employee.

Question 59

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) Vicarious authority

B) *Express authority

C) Apparent authority

D) Implied authority

Answer 59

B) Express authority

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 60

Most automobile insurance companies use a classification system to determine premiums. Which of the following individuals would be considered the lowest risk in a classification system?

A) Rebecca, age 16, who is single

B) Jennifer, age 28, who is married

C) Vincent, age 16, who is single

D) Christopher, age 28, who is married

Answer 60

B) Jennifer, age 28, who is married

Single drivers are considered higher risk and typically pay higher premiums than married drivers. Males are considered higher risk than females. Drivers under age 25 are typically considered higher risk than drivers over age 25. State laws vary, but all of these factors are used in classification systems.

Question 61

Which of the following statements concerning the need for long-term care (LTC) insurance is CORRECT?

A) Medicare provides adequate custodial care for qualifying Alzheimer’s patients.

B) Medicare will cover all nursing home benefits up to and including skilled nursing.

C) *A skilled nursing benefit for Alzheimer’s disease or mental dementia is not permitted under Medicare Part A because a patient’s condition would not be expected to improve.

D) All LTC facilities are Medicare approved.

Answer 61

C) A skilled nursing benefit for Alzheimer’s disease or mental dementia is not permitted under Medicare Part A because a patient’s condition would not be expected to improve.

Medicare is an inadequate LTC solution because it does NOT provide coverage for custodial care.
Not all facilities are approved for Medicare patients.
For short term stays, if the level of care falls below skilled nursing Medicare will cease to pay benefits.
A skilled nursing benefit for Alzheimer’s disease or mental dementia is not permitted under Medicare Part A, because a patient’s condition would not be expected to improve.

Question 62

The National Flood Insurance Program (NFIP) provides subsidized flood insurance for property owners in qualified areas and

Answer 62

Coverage is effective immediately if elected within the first 30 days of availability.

Although not mandatory, mortgage lenders generally require homeowners to purchase flood insurance in flood-prone areas.

Contents coverage applies to household and personal property usual or incidental to the occupancy of the dwelling. In addition, a deductible may apply to any claims.

Question 63

Ricky was in an accident this year and is now disabled. He is receiving disability benefits from a disability policy that was paid for by his employer. Which of the following statements regarding the disability benefits is CORRECT?

A) The entire benefit will be tax-free.

B) The benefits received from his employer’s policy will reduce the amount of Social Security disability benefits that he is eligible to receive.

C) *The entire benefit will be taxable.

D) Only the benefit received over $10,000 will be taxable.

Answer 63

C) The entire benefit will be taxable.

b/c the EMPLOYER paid the premiums, the entire amount of disability benefits received will be taxable to Ricky.

Social Security disability benefits will NOT be reduced by other disability benefits. However, if Ricky is eligible to receive Social Security benefits, the disability benefits from his employer disability policy may be reduced.

Question 64

Which of the following statements regarding participating and nonparticipating life insurance is CORRECT?

A) Mutual companies are owned by their stockholders and usually offer nonparticipating policies.

B) Participating life insurance is a policy in which no annual dividends are paid to the policyowners.

C) Nonparticipating life insurance is a policy in which dividends are paid only on the excess of premium.

D) *Stock companies are owned by the stockholders and usually offer nonparticipating policies.

Answer 64

D) Stock companies are owned by the stockholders and usually offer nonparticipating policies.

Dividends are not paid on nonparticipating life insurance policies. Mutual companies are owned by their policyholders and offer participating policies.

Question 65

Torts

Answer 65

Torts include all civil wrongs not based on contracts and are a broad residual classification of many private wrongs against another person or organization.

Question 66

Which of the following individuals meet the criteria for being chronically ill under qualified long-term care provisions?

A) An individual who cannot drive, walk, or dress without assistance

B) An individual who cannot hear, walk, or feed himself without assistance

C) *An individual who cannot speak, feed himself, or dress without assistance

D) An individual who cannot drive, hear, or dress without assistance

Answer 66

C) An individual who cannot speak, feed himself, or dress without assistance

Qualifications under the 2 out of 6 activities of daily living (ADLs) test include:
Bathing,
Eating,
Dressing,
Maintaining continence,
Use of the toilet.
Transferring from bed to chair,

Question 67

Which of the following situations would be covered under Coverage F of a homeowners policy?

A) The insured falls down the stairs within their own house.

B) *The insured’s dog gets loose and bites a child several blocks away.

C) The insured’s daughter falls off a swing set in the insured’s backyard and breaks her arm.

D) The insured’s maid falls down the stairs of the insured’s house.

Answer 67

B) The insured’s dog gets loose and bites a child several blocks away.

Coverage F (medical payments to others) would not cover the insured’s maid because Coverage F generally excludes residence employees.
The insured’s daughter would not be covered because Coverage F does not apply to the insured or members of the insured’s household.
The insured falling down in their own house would be covered under medical insurance.

Question 68

In the event that health insurance is involuntarily lost, which of the following individuals is eligible for a continuation of benefits under COBRA?

A) An employee, age 67, that has retired

B) The grandchild, age 26, of a formerly covered employee

C) An employee that resigned from service 90 days ago

D) *The ex-spouse of a covered employee

Answer 68

D) The ex-spouse of a covered employee

If the insured lost health coverage due to a divorce or legal separation, they are eligible for COBRA benefits.

Employees that have separated from service must make the election within 60 days.

Retirees over age 65 are required to enroll in Medicare.

Adult children may be covered on their parent’s policy until age 26.
Coverage will NOT extend to grandchildren of the insured.

Question 69

HSA (Health Savings Account)

For 2023, high-deductible plans for HSAs are defined in the following table:

Deductible
Single ≥$1,500
Family ≥$3,000

Maximum Out of Pocket
Single $7,500
Family $15,000

Answer 69

Individuals with high-deductible health insurance plans can make tax-deductible cash contributions (above-the-line deductions) that may be used to reimburse the individual tax free for qualifying medical expenses

Withdrawals for purposes other than qualifying medical expenses, are subject to income tax and a 20% penalty

Question 70

David is covered by a $180,000 group term life insurance policy and has named his daughter as the beneficiary. He is not a highly compensated employee. David’s employer pays the entire cost of the policy, for which the uniform annual premium is $8 per $1,000 of coverage. How much of this premium is taxable income to David?

A) $0
B) $1,040
C) $12,480
D)$640

Answer 70

B) $1,040

Group term life insurance premiums, up to the first $50,000 of face value paid for by the employer, are income tax free to the employee.

180K - 50K = 130K
Excess coverage (in thousands) 130
Cost per $1,000 of coverage × $8
Annual cost of coverage $1,040 = (130 x 8)

Question 71

Named-peril vs. Open-peril

Answer 71

Named-peril coverage covers only those specific perils that were listed in the policy

Open-peril coverage covers all perils except those specifically excluded.

Question 72

Under which life insurance settlement option are the proceeds paid to the beneficiary at a set dollar amount per month until all the principal and interest are exhausted?

A) Life income option
B) Interest only option
C) *Fixed amount option
D) Fixed period option

Answer 72

C) Fixed amount option

Under the fixed amount option, a fixed amount is paid until both the principal and interest are exhausted.

The amount paid remains unchanged, but the period in which the payments are made depends on how much is to be paid each period.

Question 73

Which of the following is a characteristic of “negligence per se”?

Answer 73

Negligence per se is a situation in which the act itself constitutes negligence.

Question 74

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

A) The disabled person must work in a covered occupation and must have a job-related accident or disease.

B) The disabled person need only have a job-related accident or disease.

C) The disabled person need only work in a covered occupation.

D) The disabled person must either work in a covered occupation or must have a job-related accident or disease.

Answer 74

A) The disabled person must work in a covered occupation and must have a job-related accident or disease.

To receive workers’ compensation benefits, 2 eligibility requirements must be met:

1. the disabled person must work in a covered occupation
2. the worker must have a job-related accident or disease.

*Most occupations are covered by workers’ compensation, but many states exclude coverage for farm workers, domestic servants, and casual employees.

Question 75

Universal Life Insurance policy Option A death benefit
vs.
Universal Life Insurance policy Option B death benefit.

Answer 75

Option A:
CV increases
DV: remains level

Option B “both):
CV increases
DB: increases

C) The net amount at risk to the insurance company remains constant over time with a universal life insurance policy with an Option B death benefit.

Universal life insurance Option B death benefit is more expensive b/c the death benefit is equal to a specified amount of insurance plus the cash value.

Universal life insurance Option A death benefit 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 insurance with an Option A death benefit while it remains constant under universal life insurance with an Option B death benefit.

Question 76

Workers’ Compensation Principles

Answer 76

1. Workers’ compensation is funded through premiums paid solely by the employer.
2. The injured employee is not required to prove negligence on the part of the employer.
3. In exchange for benefits, an employee gives up the right to sue the employer.
4. The benefits payable under workers’ compensation are periodic payments & NONtaxable income.

Question 77

Automatic premium loan provision

(Premium paid from policy cash value)

Answer 77

provides that the premium will automatically be charged against the policy cash value if it is not paid by the due date.

Question 78

Reinstatement provision

Answer 78

allows a policyholder to reinstate a policy after it lapses, but only if the insured can prove insurability.

Question 79

Nonforfeiture provision

Answer 79

specifies what will happen to the cash value if the policyowner discontinues premium payments

Question 80

Incontestability provision

(insurer CANT contest policy)

Answer 80

prevents the insurer from challenging the validity of a policy after it has been in force for a specific period.

Question 81

straight life, immediate fixed annuity

Answer 81

1. An annuitant cannot outlive the payments.
2. Starts paying out income immediately and is guaranteed for life.
3. Does NOT provide tax-deferred accumulation, nor is there a residual value at death.

Question 82

(Contributory Negligence Rule)

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 the ensuing trial, the court finds both drivers were negligent and rules that the other driver was 90% responsible for the accident while 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 $270,000 from the other driver.

B) Phillip can recover $30,000 from the other driver.

C) *Phillip can recover nothing from the other driver.

D) Phillip can recover $300,000 from the other driver.

Answer 82

C) Phillip can recover nothing from the other driver.

Under the contributory negligence rule the injured party CANNOT recover damages if his own negligence contributed to his injuries, even if his own negligence was slight.

Question 83

Section 1035 Exchange

Answer 83

You can exchange a life insurance policy for an annuity

You CAN NOT exchange an annuity for a life insurance policy

Question 84

Viatical Settlement

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 rare liver disease, and, as a result, his life expectancy is only six 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 is CORRECT?

A) 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 two years later.

B) If Stan takes a loan from the policy, some or all of the loan will be subject to capital gain income tax if the policy is classified as a modified endowment contract (MEC).

C) If the viatical company collects the death benefit as a result of Stan’s death, the proceeds will be tax-free to the company.

D) *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.

Answer 84

D) 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.

Because Stan is terminally ill (i.e., expected to die within two years), he will not be taxed on the proceeds received from the viatical settlement company, even if he lives longer than two years.

When the viatical settlement company receives the death benefit, part of the death benefit will be taxed at ordinary income tax rates to the company.

The sale of the policy to Stan’s cousin would be considered a transfer for value. His cousin would be taxed on the death benefit (less any amounts paid) because the transfer-for-value rules cause the death benefit to become taxable.

With a modified endowment contract (MEC), loans or distributions from the policy are taxed on a (LIFO) basis, meaning that any earnings in the policy are taxed first, at ordinary income rates (not capital gains)

Question 85

The two interest-adjusted methods of comparing life insurance policy costs

Answer 85

1. Surrender cost index
2. Net payment index

Question 86

Steve purchased a house for $750,000. The house has a replacement cost of $1 million with an 80% coinsurance provision and a $2,000 deductible. What is the minimum amount of coverage Steve should have on the house in order to be fully covered for a partial loss up to the policy limit?

A) $750,000.
B) $1,000,000.
C) *$800,000.
D) $850,000.

Answer 86

C) $800,000

Under the coinsurance provision, the amount of coverage required to fully cover a partial loss up to the policy limit would be $800,000, (80% of $1 million).

Financial planners should always recommend that homes be insured for 100% of replacement cost in order to protect against a total loss. Homeowners insurance policies only cover damages up to the policy limit.

Question 87

Which of the following statements concerning the categories of persons and vehicles that are eligible for personal automobile policies is CORRECT?

A) The vehicle cannot be a private passenger auto.

B) *The vehicle must NOT be used for commercial purposes.

C) The vehicle may be owned by a business.

D) The vehicle may also be a delivery vehicle.

Answer 87

B) The vehicle must NOT be used for commercial purposes.

To be eligible, the vehicle must be a private passenger vehicle that is owned by an individual and is not used for commercial or delivery purposes.