Exam 2

Question 1

Corinne purchased a single-premium deferred annuity ten years ago at age 45. She used $40,000 of after-tax funds she had accumulated over fifteen years. She decides to surrender the annuity for a lump-sum distribution of its $90,000 value. Which of the following statements is correct?

A. Corinne will owe income taxes on $50,000
B. Corinne will owe income taxes on $90,000
C. Corinne will owe income taxes and a 10% penalty on $90,000.
D. Corinne will owe income taxes and a 10% penalty on $50,000.

Answer 1

D. Corinne will owe income taxes and a 10% penalty on $50,000

Question 2

Frank asked his company’s employee benefits director if his group health coverage could be converted to individual coverage. The benefits director said, “Yes, you can convert to an individual policy, and the coverage is identical to your group coverage.” Frank quit his job and converted to an individual policy. Six months later, he filed a claim. He was dismayed to learn the conversion policy was more limited compared to the group coverage, and his claim was denied. What legal doctrine will allow Frank to bring a successful legal action against his former employer because he was financially harmed due to his reasonable reliance upon a representation of fact?

A. adhesion
B. waiver
C. estoppel
D. subrogation

Answer 2

C. estoppel

Question 3

Long-term care needs are important for those who are age 65 and older. Which of the following statements is correct regarding those who are age 65 or older?
A. Men are more likely to be ADL disabled than women
B. Women are more likely to be subject to a home fire than men are to be involved in a car accident.
C. Men are more likely to have a car accident than women
D. It is more likely that a woman will be ADL disabled than have an auto accident.

Answer 3

D. It is more likely that a woman will be ADL disabled than have an auto accident.

Question 4

All of the following statements concerning variable life insurance are correct EXCEPT:

Answer 4

the death benefit is fixed and guaranteed for the insured’s entire life

payments are guaranteed just not death benefit

Question 5

A contract in which the values exchanged are not equal because chance is involved is called a(n)

Answer 5

aleatory contract

Question 6

Lisa does not want her life insurance policy included in her gross estate when she dies. Lisa can remove the life insurance policy from her estate if she does which of the following more than 3 years before she dies?

Answer 6

make an absolute assignment of the policy to someone else

Question 7

Marcus is concerned that inflation will erode the purchasing power of the face value of his life insurance policy. His agent suggested that Marcus add a provision that allows him to purchase one-year term insurance equal to the percentage change in the consumer price index without having to demonstrate insurability. This provision is called a(n)

Answer 7

cost-of-living rider

Question 8

What is the practical effect of an insurance policy being a conditional contract?

Answer 8

The insurer can refuse to a pay claim if the insured has not complied with all policy provisions

Question 9

A false material statement made by an applicant for insurance is an example of

Answer 9

Misrepresentation

Question 10

When must an insurable interest legally exist in life insurance?

Answer 10

At the time the life insurance policy is purchased.

Question 11

Agnes and Mary Clare, two elderly sisters, own an annuity covering both of their lives. The annuity pays benefits to them until the first sister dies, then the annuity terminates. Agnes and Mary Clare own a(n)

Answer 11

joint life annuity

Question 12

With regard to employer-paid group term life insurance, the employee is free from income tax liability for the first ________ of term life insurance protection.

Answer 12

$50,000

Question 13

A contingent beneficiary in a life insurance policy has the right to

Answer 13

the assets if the primary dies

Question 14

Which of the following statements concerning the nature of term insurance is correct?

Answer 14

It provides protection for only a limited period of time

Question 15

Which of the following is a characteristic of a longevity annuity?

Answer 15

forfeiture of the purchase price if the annuitant dies during the deferral period

Question 16

All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT

A. close family relationship
B. potential legal liability
C. secured creditors
D. a contract right

Answer 16

close family relationship

Question 17

Julian, who is now 75 years old, accumulated $60,000 at age 60. He used his savings to purchase a single premium annuity, which pays him $500 per month. If his life expectancy was 25 years at the time he purchased the annuity, how much of each payment is subject to tax?

Answer 17

300

50030months=60000
60000/150000 = 40%
500.6=300

Question 18

Laura’s medical insurance policy includes a $500 deductible. Laura is required to pay 20 percent of covered expenses in excess of the deductible, and her insurer will pay 80 percent of covered expenses in excess of the deductible. Laura was hospitalized and her covered medical expenses were $10,500. How much of the $10,500 will be paid by the insurer?

Answer 18

8000
10500-500=10000
10000*.8=8000

Question 19

Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). Assume that Juanita receives 12 monthly payments of $500 the first year. How much taxable income must she report?

Answer 19

50%

90000/45000

Question 20

Annuities are used for a variety of reasons. Which of the following statements is correct regarding annuities?

A. most annuities are annuitized
B. annuities are the most cost-efficient way to access tax-deferred growth for most people
C. Withdrawals from an annuity before age 59.5 result in an early withdrawal penalty on the entire amount of the withdrawal.
D. Withdrawals from a non-qualified annuity consist of a portion of earnings and a return on a basis.

Answer 20

C. Withdrawals from an annuity before age 59.5 result in an early withdrawal penalty on the entire amount of the withdrawal.

Question 21

Janice purchased a living room set for $1,000 and insured this furniture on an actual cash value basis. Two years later the living room set was destroyed by a covered peril. At the time of loss, the property had depreciated in value by 25 percent. The replacement cost of the furniture at the time of loss was $1,200. Assuming no deductible, how much will Janice receive from her insurer?

Answer 21

$1200

Question 22

In 2001, Britney bought a single-premium variable life policy with a face value of $100,000. Her premium payment was $32,000. Britney is now 42 years of age, and the cash value of the policy is $65,000. What are the consequences of Britney taking a loan for $25,000 this year?

Answer 22

The consequence is that the loan is taxable income, but there is no penalty if it is a hardship withdrawal.

Question 23

An elimination (waiting) period is an example of a(n)

Answer 23

straight deductible

Question 24

Helen and John both own automobiles on which they carry liability insurance. If Helen is negligent and has an accident while driving John’s car with his permission, how will each insurer respond to any liability judgment against Helen?

Answer 24

Helen’s insurance will pay on an excess basis if John’s insurance is insufficient to cover the judgement.

Question 25

Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of

Answer 25

subrogation

Question 26

Scott purchased a life insurance policy to ensure that his kids were taken care of in the event of his untimely death. Since they are now grown, he feels he no longer needs the life insurance. He would like to exchange it for an annuity that can provide him additional income for his golden years. Which of the following is correct? 1. He can make the exchange, but it will be taxable to the extent of the cash value. 2. He can make the exchange, but it will be taxable to the extent of the cash value less the additional money he puts into the annuity. 3. This transaction is prohibited by the IRS 4. He can make the exchange, which will not be taxable.

Answer 26

4. He can make the exchange, which will not be taxable.

Question 27

Lionel purchased a $200,000 ordinary life insurance policy when he was 25 years old and had significant life insurance needs. Now Lionel is 50. His mortgage is almost paid-off and his children have left home and are financially independent. Lionel no longer wants to pay premiums, but he would like to have some permanent life insurance in force. Which nonforfeiture option could Lionel employ to meet these objectives? A. cash value B. reduced paid-up insurance C. paid-up additions D. extended term insurance

Answer 27

Reduced paid-up insurance

Question 28

Which of the following statements concerning the grace period provision in a life insurance policy is correct? 1. A straight life annuity provides the lowest amount of periodic income of all the life income options. 2. Fixed-period and fixed-amount are life income options.

Answer 28

Neither

Question 29

Brad owns a cash value life insurance policy. Last year, the cash value increased by $300. Brad received $100 in policyowner dividends on the policy last year. Brad was the beneficiary named in his grandmother's $50,000 life insurance policy. When she died this past year, Brad received $50,000. How much taxable income relating to life insurance must Brad report for federal income tax purposes?

Answer 29

$0

Question 30

Avery does not want to miss out on the expected growth of the stock market. However, he wants to have protection against the loss of his principal. He expects to contribute to an annuity over the next twelve years. What annuity is best suited for Avery?

Answer 30

An equity-indexed annuity

Question 31

Which of the following statements about variable annuities is true?

Answer 31

Variable annuities typically provide a guaranteed death benefit payable to a beneficiary if the annuitant dies prior to retirement

Question 32

Which of the following statements concerning the rights of a beneficiary in a life insurance policy is not correct?

Answer 32

The maximum percentage gain is usually capped.

Question 33

Beth purchased a participating life insurance policy 6 years ago. Her life insurance needs have increased, but she has developed a medical condition that makes it impossible for her to purchase more life insurance at affordable premiums. Which dividend option make sense for Beth to use given her medical condition?

Answer 33

paid-up additions

Question 34

Deductibles are not used in which of the following type of insurance?

Answer 34

life insurance

Question 35

Some insurers offer a single-premium deferred annuity that does not begin paying benefits until an advanced age, such as 85. This product is called a(n)

Answer 35

longevity insurance

Question 36

All of the following statements concerning annuities are correct EXCEPT: A. generally, annuity contracts issued today require fixed, level funding payments. B. annuities are sold by life insurance agents C. an annuity is a periodic payment D. annuitants can pay the annuity premiums in lump sums

Answer 36

A. generally, annuity contracts issued today require fixed, level funding payments.

Question 37

ABC Company insured its building on a replacement cost basis for $700,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $1 million when it sustained a $40,000 loss. How much will ABC Company receive from its insurer, assuming no deductible applies?

Answer 37

35000 700000/(.8*1000000)=.875 .875*40000

Question 38

Mark reviewed his homeowners policy. He learned that his personal property was insured on an actual cash value basis. He would like replacement cost coverage on his personal property. He contacted his agent who said, "I'll simply add an amendment to your contract that changes the basis of recovery to replacement cost." The written provision the agent was referring to is called a(n)

Answer 38

endorsement

Question 39

Which of the following is not one of the six ADLs (Activities of Daily Living)?

Answer 39

six activities of daily living are bathing, dressing, toileting, transferring, continence, and eating

Question 40

What is the legal significance of a material concealment by an insurance applicant?

Answer 40

the contract is voidable at the insurer's option