Book 2 Pages 1 - 101 Flashcards
(366 cards)
1
Q
a device used to manage risk by having a large pool of people share in the financial losses suffered by members of the pool
A
Insurance
2
Q
a condition where there is a possibility of an adverse deviation from the desired outcome
A
risk
3
Q
The larger the number of members in the group, the ____ the probability that actual losses will equal expected losses
A
greater
4
Q
the cause of a financial loss
A
Peril
5
Q
examples of perils
A
flood or illness
6
Q
a condition that increases the probability that a loss will occur
A
hazard
7
Q
physical characteristics of the person or property that increase the probability of a loss occurring
A
Physical hazards
8
Q
examples of physical hazards
A
blood pressure or a location of a house in a flood zone
9
Q
the chance of loss from dishonesty or when a person intentionally causes a loss or overstates a loss
A
Moral Hazard
10
Q
the chance of a loss occurring due to ones indifference or a person lack of caring if a loss occurs because they know they have insurance
A
Morale Hazard
11
Q
a stated amount of money the insured is required to pay on a loss before the insurer will make any payments
A
Deductible
12
Q
an outline of the perils that are not covered under the policy
A
Exclusions
13
Q
Examples of exclusions
A
earthquake, war, floods
14
Q
describe written additions to an insurance policy
A
riders/endorsements
15
Q
exposure to a risk that may cause financial loss
A
Financial risk
16
Q
exposure to a risk that does not cause financial loss
A
Non-financial risk
17
Q
losses that are caused by factors other than a change in the economy, i.e. risks that are always present
A
Static risks
18
Q
Examples of static risks
A
natural disasters, death, flood, earthquake
19
Q
True or False?
Static risks are not insurable
A
False, they are insurable
20
Q
losses that are a result of the economy changing
A
Dynamic risks
21
Q
Examples of Dynamic risks
A
Inflation, changes in business cycle
22
Q
True or False?
Dynamic Risks are insurable
A
False, they are not
23
Q
a risk that affects a large group of people
A
Fundamental risk
24
Q
examples of fundamental risks
A
recession, earthquake
25
a risk that is individual in nature or affects a small number of people
Particular risk
26
a risk that involves only the chance of a loss or no chance of a loss
Pure risk
27
Are pure risks insurable?
Yes
28
loss of income or asset resulting from the loss of ability to earn income caused by disability, death, or sickness
Personal risk
29
direct or indirect loss to property itself from theft or destruction
Property risk
30
intentional or unintentional injury to property or others
Liability risk
31
failure to meet or follow through on an obligation
Risk from failure of others
32
risk that involves both the chance of loss or gain
Speculative risk
33
examples of speculative risk
gambling
34
Is speculative risk insurable?
No
35
True or False?
| Risk management involves managing both insurable and non insurable risks?
True
36
In risk management, insurance should be justified on the basis of what kind of an analysis?
cost-benefit analysis
37
What are the 6 steps to risk management?
1. Determine the objectives
2. Identify the risks that the subject is exposed to
3. Evaluate the risks as to the probability of occurrence and potential loss
4. Determine alternatives for managing risk and select most appropriate for each risk
5. Implement the most appropriate alternative
6. Evaluate and review periodically
38
happens when a person refuses to accept risk by not engaging in an action that creates risk
risk avoidance
39
examples of risk avoidance
not driving a car or going on a plane
40
happens when a person chooses to retain the risk and takes no action to avoid the risk
Risk retention
41
examples of risk retention
self insurance, coinsurance, deductibles
42
happens when a person transfers the risk through an individual or insurance contract
risk transfer
43
happens when a person shares the risk with a group of others
Risk sharing
44
happens when risk is reduced through loss prevention methods or safety improvements
Risk reduction
45
What are some methods that can be used to decrease the insurance premiums?
```
increase the deductible
increase the elimination period
install an alarm system
improve health and diet
avoid tobacco
choose a safer job
reduce coverage term (years)
```
46
What characteristics must be present for a loss to occur?
1. Large homogeneous exposure
2. must be measurable and definite
3. must be accidental
4. can't be catastrophic to society
47
the likelihood that parties with the greatest probability of loss are the ones most likely to purchase insurance
Adverse selection
48
mandatory insurance that seeks to protect individuals against large fundamental risks
Social insurance
49
What are some examples of social insurance?
Social security
Medicare
Workers comp
Medicaid
50
insurance that seeks to enhance public trust and is usually mandatory
Public insurance
51
What are some examples of public insurance?
federal deposit insurance corp (FDIC)
Pension benefit guarantee corp (PBGC)
securities investor protection corp (SIPC)
52
What insurance coverage should a client have during the asset accumulation phase?
health, disability, life, property and casualty
53
What insurance coverage should a client have during the conservation phase?
health, disability, life, property and casualty
| may consider long term care
54
What insurance coverage should a client have during the gifting/distribution phase?
health, property and casualty, long term care, and life to lesser extent
55
an organization made up of the states' insurance commissioners, whose purpose is to discuss industry problems that may require legislation or regulation
National Association of Insurance Commissioners (NAIC)
56
What are the 5 elements of an insurance contract?
1. Offer and acceptance
2. Consideration
3. Legal Object
4. Legal Capacity
5. Legal Form
57
acts that are prosecuted by the state and are punishable by fine, imprisonment, or death
Criminal acts
58
Are criminal acts insurable?
generally no
59
an infringement on the rights of another; the wrongdoer creates a right in the damaged party to bring a civil action
Tort
60
What are examples of intentional torts?
battery, assault, libel, slander, false imprisonment, trespass, etc
61
an act or failure to act in a reasonably prudent manner, and such act or failure to act causes harm to another
unintentional tort
62
happens when one person becomes legally liable for the torts of another
Vicarious liability
63
examples of vicarious liability
an employer becomes liable due to an employees actions
64
the failure to act in a way that a reasonably prudent individual would have acted in a similar situation
Negligence
65
liability that may be imposed without proof of an individual's negligence or bad intent
Strict (absolute) Liability
66
What are some examples of strict liability?
workers comp
product liability
extraordinarily dangerous activities (handling hazardous materials)
67
What are the two forms of injury that can result from a tort?
Bodily injury and property damage
68
type of injury that may lead to medical expense, loss of income, pain and suffering, mental anguish and loss of consortium
bodily injury
69
damages used to compensate for measurable losses
special damages
70
damages used to compensate for intangible losses (pain and suffering)
general damages
71
damages exceeding simple compensation and awarded to punish the defendant
punitive damages
72
True or False?
| Property damage is usually measured by the actual monetary loss
True
73
a rule that states that damages assessed to a negligent party should not be reduced simply because the injured party has other sources of recovery available, such as insurance or employee benefits
Collateral Source Rule
74
a defense of negligence stating that the injured party fully understood and recognized the dangers involved in an activity and voluntarily chose to proceed
Assumption of Risk
75
examples of assumption of risk
a fan got hit by a baseball while sitting behind first base at a game
76
a defense of negligence stating that the injured party's negligence also contributed to their injury
Contributory negligence
77
a defense of negligence where the amount of damages is adjusted to reflect the extent to which the injured party's own negligence contributed to the injury
Comparative negligence
78
the actual authority that an insurance company gives representatives
Expressed authority
79
the authority that is reasonably necessary to carry out the agent's duties
Implied authority
80
the authority that the agent is not expressly given by the principal but that an agent in a similar situation normally possesses
implied authority
81
when the insured is led to believe the agent has authority, either express or implied, where no such authority actually exists
Apparent authority
82
principle that states the insured may only recover from the insurance company the amount of financial loss they experienced
Indemnity
83
a relationship where the person applying for insurance will incur a loss from the destruction, damage, or death of the insured subject
insurable interest
84
When does an insurable interest for property have to exist? i.e. at the time of issuance or the time of the loss?
Both
85
When does an insurable interest have to exist for life insurance? i.e. at the time of issuance or the time of loss?
Time of issuance
86
Do life insurance policies follow the indemnity rule? Why or why not?
No because the recovery amount is the death benefit or face value of the policy not the actual value of the insured's life
87
the amount that can be recovered under a contract that provides for the repairs or replacement needed
replacement cost
88
contracts that set an agreed upon value of the property at issuance and at the time of the loss the insurer must pay that value to the insured
Started value contracts
89
True or False?
Insurance contracts, other than life insurance, cannot be transferred to another person without the written consent of the insurance company
True
90
an oral or written statement that is false and intended to defraud, which induces a party to enter a contract
Misrepresentation
91
type of misrepresentation where the statement is false and material
misrepresentation of fact
92
type of misrepresentation where the statement is false, material, and fraudlent
Misrepresentation of opinion
93
failure to disclose material facts relative to the application for insurance
Concealment
94
the intentional relinquishment of a known right by the insured
waiver
95
prevents denying a fact that was previously admitted
Estoppel
96
An insurance contract is a _________ contract meaning that the insurer promises to perform, but the policy owner does not promise to pay the premiums
unilateral
97
an insurance contract is a _____ contract meaning that the insurer will make pay benefits, but only if the insured is paying premiums
conditional
98
an insurance contract is an _____ contract meaning that if no loss occurs the insurer will pay nothing, but if a loss does occur the insurer will pay more than the premiums received
aleatory
99
states that if an insurer pays the insured for a loss caused by a third party, the insured is required to assign his right to recover from the third party to the insurer
subrogation
100
insurance contracts are contracts of _____ meaning you can't negotiate, it's take it or leave it
adhesion
101
Who is said to be making the offer under an insurance contract when the application includes the first premium?
The applicant/future insured
102
when the policy owner assigns all or a portion of the death benefit to a creditor as security for a loan
Collateral assignment
103
how long is the period of time before the incontestable clause for a life insurance policy kicks in?
usually 2 years
104
What is the typical grace period under a life insurance policy to pay premiums?
30 or 31 days
105
What happens when the insured dies during the grace period?
The amount of premium due will be deducted from the death benefit
106
How long does a typical suicide clause in an insurance policy last?
Two years
107
True or False?
| If suicide occurs within two years the beneficiary receives the premiums paid plus any interest accumulated
False, only premiums paid, interest does not get paid out
108
4 rules for a life insurance policy to be reinstated
1. lapse can't be longer than 3-5 years as stated in policy docs
2. policy must not have been surrendered
3. acceptable proof of insurability must be provided
4. all premiums due from the time of the lapse must be paid
109
What is the maximum loan size under a life insurance policy?
an amount equal to the cash surrender value
110
What does the automatic premium loan provision do?
It pays the premium from the cash value of the policy if the premium is not paid by the due date
111
Rules involved with an accidental death benefit rider?
death must occur within 90 days of accident
cause of death must be related to accident
age limitation is usually imposed
excludes suicide, death from disease, and acts of war
112
a rider that permits the policyowner to purchase additional life insurance at specific intervals without providing evidence of insurability
guaranteed insurability rider
113
a rider that offers additional life insurance as inflation protection
cost of living rider
114
a clause that provides protection against the beneficiary's alienation of the policy proceeds by denying the beneficiary the right to convey, alienate, or assign his interest in the policy proceeds
Spendthrift clause
115
clause that stipulates that settlement of the policy is withheld for a specified number of days (usually 30) after the death of the insured; furthermore any surviving beneficiary who dies within this period is considered to predecease the insured
Common disaster clause
116
How long can most term insurance policies be renewable without having to provide evidence of insurability?
until age 70
117
provision involved with term insurance policies that allow you to convert to a permanent insurance policy without evidence of insurability up to a specified age
Convertible
118
type of term insurance that has a level face amount and exponentially increasing annual premiums
annual renewable term
119
type of term insurance that has a level face amount and premiums that remain constant for the term then increase if the policy is renewed at the end of the term
Level term
120
type of term insurance that has exponentially increasing premiums and policy cannot be renewed beyond specified age
Term to age 65 or 70
121
type of term insurance that has level premiums and a decreasing face amount
Decreasing term
122
type of term insurance that is used to protect ones mortgage
decreasing term
123
type of term insurance used in buy-sell agreements, mortgage protection, paying off debt, and education expenses
first to die or joint term life
124
life insurance policies that pay the face value of the policy only if the insured survives the endowment period
Pure endowment policies
125
True or False?
| Pure endowment policies are available in the US
False
126
type of life insurance policy that pays the face value of the policy only if the insured dies within the endowment period or pay the face value (usually in the form of an annuity) if the insured survives the endowment period
regular endowment contract
127
type of life insurance where premiums are level and are paid for life, the face amount also remains constant for life
whole ordinary life
128
type of life insurance where premiums are paid for a specific number of years but the death benefit remains constant for life
limited pay life
129
type of insurance policy where there premium is low in the first year then increases each year for early policy years then levels off after 5-1o years
Graded premium whole life
130
type of insurance policy where premiums are lower for the first 3-5 years then increase to a premium slightly more than what a whole life policy would cost at that age but less than what a level premium whole policy would be at that age
Modified life
131
type of insurance policy where premiums are fixed but the face amount may vary with no guarantee of cash value
Variable life
132
True or False?
| A client should have higher risk tolerance if they want to use variable life
True
133
Does the death benefit of variable life have a minimum guaranteed?
Yes
134
a life insurance policy that is interest sensitive in which the insurer's current investment experience under nonparticipating policies is credited to the cash values
Current assumption whole life (CAWL)
135
under (CAWL) favorable experience relative to assumptions may make the insured have a ____ premium
lower
136
unfavorable experience under a (CAWL) relative to assumptions may make the insured have a ______ premium
higher
137
life insurance that has a flexible premium, adjustable death benefit, and is an unbundled life insurance policy
Universal Life
138
universal life policy that has a level death benefit
Universal Life A or Option 1
139
universal life policy where the death benefit equals face amount of policy plus cash value (increasing DB)
Universal Life B or Option 2
140
true or false?
| universal life B is more expensive than universal life A
True
141
an universal life policy with investment options for the cash value and no minimum guarantee rate of return or interest
Variable Universal Life
142
Are death benefits under VUL guaranteed?
No
143
are premiums greater for first to die or second to die policies?
first to die
| second to die has cheaper premiums
144
life insurance that protects the lender or borrower from financial loss in the event the borrower dies before completing payment of debt
Credit Life
145
what does the death benefit under credit life usually equal?
the loan balance
146
True or False?
| Credit life premiums are high relative to the amount of coverage provided
True
147
life insurance that has a known maximum cost and a minimum death benefit
whole life
148
life insurance that has a know maximum costs and minimum death benefit but allows for investment options
Variable Life (Whole)
149
a method of evaluating a person's need for capital resources upon death
Programming for Life Insurance
150
a method of determining the amount of life insurance needed that uses interest only to furnish the continued support of the family
Capital Retention
151
True or False?
| Capital Retention method accounts for inflation
False, it does not
152
under this method, the original principal or capital saved by the client still remains at the end of the income period
Capital Retention
153
a method of determining the amount of life insurance needed by projecting the income of the individual through the remaining work life expectancy, including raises - then discount it back to PV
Human Life
154
a method of determining the amount of life insurance needed by examining all recurring expenses to dependent survivors and any unusual expenditures that may result from the death of the individual
Financial Needs
155
What are the factors that should be considered if using the financial needs method?
marital status, role of spouses (work or not), size of family, and dependents' willingness to work
156
in regards to life insurance this is a fund of pooled death benefit that includes last medical costs and funeral costs
fund for final expenses
157
in regards to life insurance this is a fund of pooled death benefit that covers the period following death and may include nonrecurring costs as the family adjusts to the death of a provider
fund for readjustment
158
in regards to life insurance this is a fund of pooled death benefit that covers the period with highest needs because dependents require income for living and other expenses
dependency period income fund
159
in regards to life insurance this is a fund of pooled death benefit used to pay of debts
the mortgage payment fund
160
in regards to life insurance this is a fund of pooled death benefit that establishes money for education
the education fund
161
in regards to life insurance this is a fund of pooled death benefit that establishes a way for the surviving spouse to have income for life if they do not work or does not have the skills necessary to work
life income for the spouse fund
162
True or false?
| Guaranteed values in an insurance contract mean that the insurance company holds the risk
True
163
what is the largest component of price and performance in a term life policy?
Mortality assumptions
164
what is the largest component of price and performance is a whole life policy?
Investment experience
165
how to calculate the net cost of an insurance policy
Face Value - total premiums paid - total dividends paid - cash value at end of term - cost per year = net cost per year
then take net cost per year divided by (policy face value divided by 1,000) to get cost per $1,000
166
problems associated with net cost of insurance method
does not account for TVM
assumes future cash value, premiums, dividends
assumes policy lasts until expiration
167
how to calculate the interest adjusted method
| (surrender cost) index
face value
- total premiums that have been inflated by an interest rate
- dividends that have been inflated by same interest rate
- cash value at end of term
= insurance cost
calculate pmt using annuity due with n selected terms and i interest rate
take that pmt and divide it by (Face value/1,000)
168
what is the difference between the surrender cost index method and net payment cost index method
the net payment cost index does not account for the cash value of policy
169
company that rates insurance companies based on public info and interviews with management
AM Best
170
company that rates insurance companies based on public info and management interviews, but public info alone may be enough to assign a rating
Fitch
171
company that rates insurance companies based on the basis of public info alone
Moody's or Fitch
172
company that rates insurance companies only upon request
Standard and Poor's
173
what is the risk of superannuation?
the risk of running out of money
174
type of annuity that has a lump sum premium with an annuitization period deferred until some point in the future
Single Premium Deferred Annuity (SPDA)
175
type of annuity that allows for periodic, nonfixed contributions/premiums and earnings accumulate tax free and are then distributed at somepoint in the future
Flexible premium deferred annuity (FPDA)
176
type of annuity where the annuitant pays a single premium then the payments begin
SPIA (Single premium immediate annuity)
177
true or false?
| with fixed annuities the insurer bears the investment risk?
True
178
true or false?
| fixed annuities are better for high risk tolerance clients
false, fixed annuities are better for low risk tolerance
179
an annuity contract that is credited with a return based on changes in an equity index
Equity Index Annuity (EIA)
180
Do equity index annuities usually have a guaranteed minimum rate of return?
Yes, usually
181
a type of annuity that offers a credit based on a percentage of the premium paid
Bonus annuity
182
the practice of using misrepresentations to induce a policyowner with one company to lapse/forfeit/surrender a life insurance or annuity policy for the purpose of taking out a policy with another company
Twisting
183
the practice by which policy values in an existing life insurance policy or annuity contract are used to purchase another policy or contract with that same insurer for the purpose of earning additional premiums or commissions
churning
184
formula for investment in an insurance contract
premiums paid - dividends received - outstanding loans or withdrawals
185
formula for basis in an insurance contract
premiums paid - dividends received - outstanding loans or withdrawals - cost of insurance before the sale
186
formula for gain at surrender in an insuarnce contract
cash surrender value - investment in contract
187
formula for gain at sale of an insurance contract
sale price - basis
188
True or False?
The general rule is that the annual cash value increase in a life insurance policy is not subject to current income taxation
True
189
True or FAlse?
| Invetment gains in variable life contracts are tax deferred
True
190
True or FAlse?
life insurance premiums that are considered as alimony payments resulting from a divorce or separate maintenance decree are tax deductible by the payor and taxable to the payee
True
191
True or False?
| Dividends distributed from an insurance contract are taxable
False, generally speaking
192
True or False?
| Dividends distributed from an insurance contract are considered a return of basis
True
193
True or FAlse?
| If dividends distributed under an insurance contract exceed the owner's premiums paid then they are taxable
True
194
True or FAlse?
No gain is realized if you exchange a life insurance policy for another life insurance policy, an endowment policy, an annuity contract, or a qualified ltci policy
True
195
True or false?
no gain is realized if you exchange an endowment contract for for a life insurance policy, an endowment policy, an annuity contract, or a qualified ltci policy
false, only no gain if exchanged for last 3 listed
196
In order for no gain to be realized from an annuity exchange, the annuity must be exchanged for what kind of policy or policies?
another annuity or qualified LTC event
197
in order for no gain to be realized from a ltci policy the policy must be exchanged for what type of policy or policies?
another LTC policy
198
Withdrawals under a non Modified Endowment Contract use what taxation method?
First in First out
| basis comes out first
199
withdrawals under a modified endowment contract use what taxation method?
Last in First out
| taxed until it gets down to basis
200
what is the taxation of the cash surrender value?
ordinary income if cash surrender value exceeds the investment in the contract
201
if the beneficiary chooses to receive interest only payments instead of the lump sum death benefit, will the interest payments be taxable?
Yes
202
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 (25 years life expectancy), how much of each monthly payment would be taxable?
$310.94
203
True or false?
An annuity from life insurance proceeds retains its original exclusion ratio after the annuitant/beneficiary lives past the original life expectancy
True
204
True or false?
| Life insurance death benefit proceeds avoid probate if there is a named beneficiary
True
205
3 situations where the death benefit proceeds are included in the gross estate
1. the policy was gifted to someone else within 3 years of death
2. the proceeds are payable to the estate, executor of the estate, or creditors of estate
3. the decendent (person who died) retained incidents of ownership such as the right to assign the policy, the right to change bene, the right to change policy provisions
206
an agreement that states the insured is expected to die within 24 months and the proceeds received from the sale of the policy are not subject to income tax
viatical agreement
207
True or false?
an insured who is chronically ill can exclude the gain from a sale of life insurance policy if the proceeds are used for the insured ltc.
True
208
When did annuities change from FIFO to LIFO
August 1982
209
calculation for fixed annuity exclusion ratio
investment in the contract / expected return
210
Jimmy has a basis of $400,000 in his non qualified fixed annuity. His life expectancy at age 65 is 25 years, and his monthly payment is expected to be $2,000. What is his expected return on the contract and his exclusion ratio?
expected return = 25 x 12 x 2,000 = $600,000
| exclusion ratio = 400 / 600 = .6667
211
True or false?
| Payments beyond the projected life expectancy of an individual under a fixed annuity are fully taxable
True, unless payments began before 1986
212
calculation for variable annuity exclusion ratio
investment in contract / annuitant's life
213
William purchased a variable annuity at age 63. The total cost of the contract was $15,000. The annuity starting date was january 1 of the year he purchased the annuity. His annuity will be paid annually starting on july 1 of the year he purchased it. His life expectancy is 21.6 years. What is his exclusion ratio?
$15,000 / 21.6
| $694.44 per year is tax free
214
True or False?
if an annuity contact is held by an entity who is not a natural person (i.e. a corporation), the earnings or loss on that contract are included in taxable income for the year
True
215
Group life insurance premiums up to the first $_____ of coverage paid by the employer are tax exempt to the employee
$50,000
216
ABC company maintains a group life insurance policy for its employees. An employee age 56 is provided with $200k worth of coverage. The cost per $1,000 of protection per month is $.43 for someone in his age bracket. If the employee contributes $350 annually towards the cost of his coverage, how much will be included in his gross income
```
excess coverage
- cost per $1,000
- monthly cost of coverage
multiplied by 12
= annual cost of coverage
- employee contribution
=taxable amount
```
217
True or FAlse?
| health insurance premiums paid by the employer for health insurance are taxable to the employee
False, they are tax exempt
218
True or False?
| health insurance premiums paid by the employer are tax deductible for the employer
true
219
an arrangement between an employer and an employee, where the costs and benefits of the life insurance policy are shared
Split-dollar life insurance
220
True or false?
| under a split dollar life insurance plan, the employer receives a tax deduction for the premium payments it makes
false
221
True or false?
| A split dollar life insurance plan can be effective for employees who fear a post retirement death
false, helps protect pre retirement death more
222
what are the three ways to split a split dollar life insurance policy?
premium
cash value
policy ownership
223
split dollar plan where the employer pays a portion of the premiums equal to the increase in cash surrender value
the classic or standard split dollar plan
224
split dollar plan where the employee's premium share is level for a number of years
level premium plan split dollar
225
True or false?
| under key employee life insurance, the premiums are tax deducitble by the employer
FAsle
226
split dollar policy ownership where the the employee is the owner
collateral assignment
227
split dollar policy ownership where the employer is the owner
endorsement method
228
True or false?
| under an executive bonus life insurance plan, the employer has an income tax deduction in the year the bonus is paid
True
229
True or false?
| under an executive bonus life insurance plan, the employee does not recognize taxable income when the bonus is received
False
230
True or false?
| the cost of life insurance is deductible for self employed individuals
FAlse
231
True or false?
| IRA's are not permitted to hold life insurance
True
232
In regards to life insurance in qualified plans, no more than ___% of the employer's contributions can be used to purchase a whole life policy
50%
233
In regards to life insurance in qualified plans, no more than ____% of the employer's contributions can be used to purchase a life policy other than whole life
25%
234
for defined benefit plans no more than ___ times the monthly benefit can be covered by the death benefit
100 times
example: Monthly benefit is $2,000....death benefit can be no more than $200k
235
The 4 R's associated with nonqualified deferred compensation plans
recruit
retain
reward
retire
236
true or false?
| non qualified deferred compensation plans do not need to meet discriminatory testing
True
237
Under nonqualified deferred compensation plans, when can an employer realize a tax deduction?
Not until the year where the income is taxable to the employee
238
True or FAsle?
| S corps and parthnerships cannot take full advantage of nonqualified deferred comp plans
True
239
occurs within nonqualified deferred comp plans if the executive has access to funds or if the funds are securely set aside for the executive
constructive receipt
240
True or False?
| Funds under construtive receipt do not have to be reported as taxable income
False
241
True or false?
| a substantial risk of forfeiture allows for the nonqualified deferred comp plan to be tax deferred
True
242
Which of the following qualifies as a substantial risk of forfeiture, resulting in no current income tax?
1. an unsecured promise to pay
2. a rabbi trust
3. a secular trust
1 and 2 only
243
a trust set up to hold property for funding a deferred comp plan
Rabbi Trust
244
a trust for the exclusive benefit of the employee
Secular trust
245
True or false?
| secular trusts are irrevocable
true
246
True or false?
| Rabbi trusts are subject to creditors
True
247
true or false?
| secular trusts are subject to creditors
FAlse
248
a nonqualified retirement plan for key company employees, such as executives, that provides benefits above and beyond those covered in other retirement plans such as IRA, 401(k) or nonqualified deferred compensation NQDC plans.
SERP Plans
| Supplemental Executive Retirement Plan
249
type of plan that has a salary continuation design that provides a specified deferred amount payable in the future without reducing current income
SERP Plans
250
true or false?
| under a SERP plan an employer receives a tax deduction only when the benefits are paid to the executive
True
251
a nonqualified deferred compensation (NQDC) plan that provides supplemental retirement income benefits to employees whose benefits under the employer's qualified retirement plan are limited by the application of Internal Revenue Code (IRC)
Excess Benefit Plan
252
When is income on a nonqualified stock option realized?
at exercise
253
when you exercise a nonqualified stock option how is your basis in the stock determined?
basis = exercise price plus the ordinary income you realize from exercising the option
254
how much income will Brewster include in his wages if he receives 10,000 NQSO at $10 per share and exercises them when the market price is $25 per share
$150,000
255
How much gain does Brewster have if he receives 10,000 in NQSO at $10 per share and exercises them when the market price is $25, he then sells them several years later for $100 per share
$750,000 in gain - long term
256
True or false?
the employee will realize ordinary income when the transferee exercises the NQSO that were transferred from the employee to the other entity
True
257
Which date is used to determine when NQSO are considered gifts?
the latter of the transfer date or vested date
258
True or FAlse?
If an employee transfers NQSO to a charity, the employee will still realize compensation income when the charity exercises them
true
259
true or false?
| the expiration date for ISOs can be greater than 10 years from the grant date
false
260
True or false?
| while living, an employee can transfer ISOs to another party
false
261
when must ISOs be be exercised by?
within 3 months from retirement/termination date
262
how long do you need to hold ISOs for favorable tax treatment?
2 years from grant date, 1 year from exercise date
263
true or false?
| when you exercise ISO you realize compensation income
false
264
is there payroll tax on ISO that are sold within 1 year of exercise
No, but it is included as compensation income
265
In regards to ISO, how do you calculate an employee's adjusted basis for regular tax
the exercise price x # of shares
266
In regards to ISO, how do calcualte the basis for AMT
it equals # shares x fmv of stock
267
If there is a non qualified disposition with an ISO, is it possible to have a capital loss?
no
268
Calculate the cost of the following cashless exercise NQSO: and how many shares would have to be sold to satisfy the cashless transfer
Three years ago, Tina was granted a nonqualified stock option to purchase 100 shares of employer stock at $20 per share. She exercised the option when the FMV of the stock was $30, assume her marginal rate is 28%
exercise cost = 20 x 100 = 2,000
tax cost = 30 - 20 x 100 x 28% = $280
total cost = $2,280
shares to be sold = $2,280 / 30 = 76
269
Under an Employee Stock Purchase Plan, what is the mimum grant price allowed?
85% of the FMV on the date of grant or
| 85% of FMV on the date of exercise
270
how long does an employee have to hold shares under a ESPP to receive favorable tax treatment
2 years from grant and 1 year from exercise
271
Through his company's ESPP, David receives an option to purchase 1,000 shares of XYZ stock at $20 per share, when the FMV of the stock was $22 per share. He exercises the options when the market price is $25 per share. 5 years later, Dave sells the shares for $100. What are the tax consequences?
$2,000 ordinary income
| $78,000 capital gain
272
how do you determine the income component of stocks exercised under a ESPP?
the lesser of fmv on date of grant - option price
| or the fmv on date of disposition - option price
273
how is phantom stock taxed to the employee?
at retirement or other termination event the vested value is received as cash and taxed as ordianry income
274
similar to phantom stock, except it gives the right to the monetary equivalent of the increase in the value of shares of stock over a specified time period
stock appreciation rights
275
states that an employee who receives restricted stock may elect to recognize the income immediately rather than waiting until there is no longer a substantial risk of forfeiture
Section 83b election
276
how long does an employee have to make an 83b election?
30 days after receiving the restricted stock
277
when is restricted stock taxed?
when there is no longer a substantial risk of forfeiture:
when it is vested
meeting performance goals
278
What are the tax consequences of the following transaction assuming no section 83b election:
Mark has restricted stock of 1,000 shares worth $10 at time of grant. Mark is required to work for the company for 5 years otherwise the restricted stock is forfeited. Mark works for 7 years. The stock was $40 by end of year 5. Mark then sells the restricted stock at $45
Mark realizes $30,000 in compensation income at year 5
Mark has a long term capital gain of $5,000 in year 7
If 83b was elected:
Mark has $10,000 in compensation in year 1
Mark has long term capital gain of $35,000 in year 7
279
```
True or false?
an employee is taxed when they convert junior class shares into common class shares
```
False
280
```
True or false?
an employee is not taxed on the date the junior class shares are issued
```
True
281
a plan in which employee may, within limits, choose the form of employee benefits from a selection of benefit provided by the empolyer
cafeteria plan
282
true or false?
| cafeteria plans must include a cash option
true
283
True or false?
| cafeteria plans are not complex
false
284
true or false?
| cafeteria plans are expensive to administer
true
285
are cafeteria plan subject to discriminatory testing?
Yes
286
Employers who employed on average ___ or fewer employees during the preceding two years are allowed to use SIMPLE cafeteria plan
100
287
eligible employers who start a SIMPLE cafeteria plan can maintain the plan until they exceed ____ employees during the preceding year
200
288
can scholarships or fellowships be provided under a cafeteria plan?
no
289
can dependent care services be provided under a cafeteria plan?
yes
290
can employee discounts be provided under a cafeteria plan?
no
291
can non qualified or qualified deferred comp be included in a cafeteria plan?
no
292
can group life insurance be provided under a cafeteria plan?
yes
293
can a HSA be included in a cafeteria plan?
Yes
294
can accident and health benefits be included in cafeteria plans?
yes
295
can long term care insurance be included in cafeteria plans?
no
296
how many hours are required for an employee to be eligible under a SIMPLE cafeteria plan?
1,000
297
can someone under 21 years old take part in a SIMPLE cafeteria plan?
No
298
how many years of service are required to participate in a SIMPLE cafeteria plan?
1 year
299
a cafeteria plan in which employees can be reimbursed for qualified expenses
flexible spending account
300
what are the two types of FSA's?
health FSA
| dependent care assistance fsa
301
maximum amount allowed to be reimbursed for health/medical expenses under a FSA for 2017 is ___
$2,600
302
what is the maximum annual salary reduction for dependent care expenses under a FSA for 2017?
$5,000
303
what is the maximum salary reduction if an employee uses a health FSA and dependent care FSA for 2017?
$7,600
304
are contributions to FSA's subject to payroll taxes?
no
305
are FSA's use it or lose it? or do they allow carry over?
use it or lose it
306
true or false?
| long term care insurance and over the counter drugs are eligible for reimbursement under a FSA
false, besides for insulin
307
Calculate the total tax savings from the below FSA assuming all expenses are qualified:
```
employer uses $2,000 of FSA for qualified expenses avoiding the following taxes:
15% fed
4% state
1.45% medicare
6.2% SSI
```
total savings = 26.65% x 2,000 = $533
308
are prepaid legal services included in the employees gross income?
Yes
309
are prepaid legal services tax deductible to the employer?
Yes
310
true or false?
an employee does not have to include child and dependent care services under $5,000 in their gross income if provided by the employer
True
311
True or False?
| dues paid to a private health club/gym by the employer are taxable to the employee as wage compensation
True
312
is qualified employer provided educational assistance at undergrad and graduate levels included in an employee's gross income?
no, maxed at $5,250 though
313
benefits that are so small that accounting for them would be impractical and therefore are excluded from an employee's gross income
de minimis fringe benefits
314
example of de minimis fringe benefits
company computer or copy machine
315
a type of welfare benefit plan into which employers make deposits that will be used to provide future employee benefits
Voluntary Employees' Beneficiary Association (VEBA)
316
in what year are VEBA contributions deductible to the employer
in the year they are made
317
can life insurance benefits be included in a VEBA?
yes
318
can commuter expense coverage be covered in a VEBA?
no
319
can vacation be included in a VEBA?
yes
320
can job training benefits be included in a VEBA?
yes
321
true or false?
| A VEBA sits inside an irrevoacble trust
True
322
can accident/homeowners insurance be included in a VEBA?
no
323
Can savings, retirement, or deferred comp be included in a VEBA?
no
324
how long do short-term disability benefits generally last?
2 years
325
how long do long-term disability benefits generally last?
more than two years or until a certain age, usually 65
326
what has greater chances of occurrence, generally speaking, death or disability?
disability
327
true or false?
| own occumpation disability is the msot expensive
true
328
what is the difference between own occupation and modified occupation?
modified states that the insured can not be working to claim benefits
329
under the social security definition of disability, how long must the disability last
at least 5 months and expected to last at least 12 months or unti ldeath
330
does disability insurance usually exclude preexisting sicknesses?
yes
331
disability policy where if the employee returns to work for lesser pay the policy will pay the difference between original pay and the lesser pay
residual policy rider
332
occurs when an insured is unable to perform one or more important duties of his own but can still perform some duties
partial disability
333
true or false?
| when disability benefits under a policy are lowered by social security disability benefits your premiums will be lower
true
334
designed to cover the expenses that are usual and necessary in the operation of a business should the owner/insured become disabled
business overhead expense insurance
335
are premiums deductible under business overhead expense insurance
yes
336
what is the maximum benefit length under business overhead expense insurance
1-2 years
337
are benefits under business overhead expense insurance taxable?
yes
338
under key employee disability insurance, are premiums deductible if the employee is the beneficiary?
yes
339
under key employee disability insurance, are premiums deductible if the employer is the beneficiary?
no
340
under key employee disability insurance, are benefits tax free if paid to the employee?
no
341
under key employee disability, are benefits tax free if paid to the employer?
yes
342
how long does a policy owner have to wait until they can receive their first disability payment with most policies?
elimination period plus 30 days
343
health or dissability policies that guarantee the insured the right to renew until a specified age or # of year with no premium increases
noncancelable policies
344
health or disability policies where a right to renew is guaranteed but the insurance company can increase premiums on a class basis
guaranteed renewable
345
health or disability polices where the insurance company may terminate the policy if certain conditions are met
conditionally renewable
346
what is the time limit for incontestability?
two years except for fraud
347
how long does the insured have to notify the insurance company of a claim they want to file?
20 days
348
how long does the insured have to provide proof of loss?
90 days from date of loss
349
disability option you can select that increases the coverage amount as your income increases
guarantied insurability option
350
disability option you can select that increases your benefit each year by inflation or some other index
cost of living adjustment benefit
351
what is the difference between hospital reimbursement contract and hospital service contracts
reimbursement contracts pay the insured for the costs they realized during hospital stay, where as service contracts allow the insured to receive actual hospital services for a stated number of days
352
amounts an insured must pay to receive certain covered services
copayments
353
what does 80/20 coinsurance mean?
the insured pays 20% of covered expenses after the deductible is reached and before the stop loss limit is reached
354
the dollar amount of covered benefits to which the coinsurance provision is applied
stop loss limit
355
the maximum amount the insured must pay including the deductible and coinsurance payment
maximum out of pocket
356
how much does does Jane's insurance company pay in the following scenario:
jane becomes ill and has a insurance policy with $250 deductible and 80% coinsurance. She incurrs medical bills of 7,000 and doctor expenses of 3,250
$8,000
357
how much would mary pay under the following scenario:
mary becomes ill and realizes 6k of medical expense. her policy has a $300 deductible with a 5,000 stop loss limit. coinsurance is 80/20
300 + 20% x 5,000 = $1300
358
an organization that provides a broad range of health services to a group of subscribers for a fixed periodic payment
Health maintenance organization
359
hospital and surgical expenses coverage that requires the insurance company to pay the first costs that are insured, without being subject to a deductible
first dollar coverage
360
can self employed personas deduct health insurance costs?
yes
361
do HMO's provide out of network service?
no
362
do PPO's provide out of network service?
yes but at higher costs
363
what are the qualifying events under extended cobra coverage?
death
termination of employment
change in employment status (full time to part time)
divorce or legal separation
child reaching an age where the child is no longer eligible
employee reaches medicare age and spouse/dependents lose coverage as a result
364
how long does the individual have to select coverage if they want to be covered by COBRA's extended coverage provision?
within 60 days of qualifying event
365
how long does the individual have to pay the premium for coverage under COBRA's extended coverage provision?
45 days
366
how much can the employer charge for COBRA coverage?
up to 102% of normal group rates
