FP512- Risk Mgt, Insurance & EE benefits Flashcards

Question

Which of the following statements regarding Coverage E and Coverage F within a standard homeowners insurance policy is CORRECT? I. Medical payments coverage (Coverage F: Medical Payments to Others) will automatically pay for bodily injuries, regardless of fault, typically up to $1,000 per occurrence on or off the premises. II. Personal liability coverage (Coverage E: Personal Liability) protects the insured homeowner and all resident family members against personal liability for bodily injury and property damage that may occur on or off the premises due to negligence, up to $300,000 per occurrence. III. Coverage E may cover the insured for injuries or property damage caused while playing golf. A) II only B) I and III C) I only D) I, II, and III

Answer 1

The answer is I and III. Coverage F is protection that will automatically pay for bodily injuries regardless of fault. In contrast, Coverage E only pays for bodily injury and property damage for which the insured is legally liable. If the insured causes damage to property or others while golfing, Coverage E will cover the insured up to the policy limit of $100,000. Also, Coverage E may cover the insured for injuries or property damage resulting from negligence while on the golf course. LO 2.2.2

Answer 2

A) I,III & IV The answer is I, III, and IV. All of these sections are included in both homeowners and auto policies, except comprehensive coverage, which is only a part of a personal auto policy.

Answer 3

Explanation | The answer is farm-use vehicles generally have higher premiums. Farm-use vehicles generally have reduced premiums.

Answer 4

The answer is I, II, III, and IV. All of these are types of insurance coverage under a PAP.

Answer 5

Explanation The answer is IV only. A CPP is a standard package of what used to be monoline forms offered at a discount. The standard CPP includes coverage for buildings, contents, and liability coverage. Additional coverage is available for things like commercial autos, glass, and specific, unique-to-the-business causes of loss. Thus, a CPP is customizable so it can accommodate many different businesses. The CPP is designed for larger businesses, while the business owner policy is designed for smaller businesses. LO 2.4.1

Answer 6

C) II only The answer is II only. The increase in cash value of a life insurance policy is not taxable to the owner of the policy as long as it remains in the policy. Premiums on individual life insurance policies are not tax deductible. Dividends are generally considered to be a return of premium and are not taxable. Withdrawals from non-MEC contracts are not taxable unless they exceed the owner's basis.

Answer 7

The answer is I, III, and IV. The value of the life lost is not considered in the needs approach. Rather, the focus is on the financial needs and remaining resources of the surviving dependents.

Answer 8

D). The answer is whole life policies. Only participating whole life policies pay dividends that are essentially a return of premium when a mutual life insurance company has better-than-expected operating results. While universal life policies pay interest, neither universal nor term life policies pay dividends. LO 3.3.2

Answer 9

The answer is I, II, and III. There are three common nonforfeiture options available when surrendering or discontinuing premium payments on a whole life insurance policy. Under the cash surrender value option, a policy owner can surrender the policy and receive the net cash value. By electing the reduced paid-up insurance option, a policy owner leaves the net cash value of the original life insurance policy with the company and receives a smaller amount of fully paid-up insurance of the same type. If the policy owner chooses the extended term insurance option, the net cash value is used as a net single premium to purchase a paid-up term insurance policy.

Answer 10

The answer is $1,722.15. The total amount Carolyn will receive from the settlement option is $1,620,000 ($4,500 × 360). Her tax basis is $1,000,000, so her exclusion ratio is 0.6173 ($1,000,000 ÷ $1,620,000). Therefore, $2,777.85 of each payment is excluded from gross income ($4,500 × 0.6173), and the remainder ($1,722.15) is taxable. In addition, the taxable income may be subject to the 3.8% Medicare contribution tax. LO 3.2.5

Answer 11

The answer is both I and II. When contributions are left to accumulate, the earnings credited to the contract are not taxable until withdrawn by the annuitant.

Answer 12

The answer is reentry term. Reentry term is a policy under which the insurance company may renew coverage at a lower premium rate than the guaranteed renewal rate, provided that, at the time of renewal, the insured furnishes satisfactory evidence of continued insurability. A reentry term policy, therefore, rewards individuals who remain in good health as they continue to age while maintaining insurance coverage for other insureds who no longer qualify for lower rates. LO 3.2.1

Answer 13

The answer is modified premium whole life. With a modified premium whole life insurance policy, premiums are lower for the initial three to five years after issue and then increase once thereafter. As such, modified whole life is simply an ordinary life policy with a unique premium payment structure that accommodates a policy owner who expects to experience an increasing salary in the near future.

Answer 14

The answer is $0. When Greg dies, Jackie receives a $50,000 death benefit under his 20-year level term policy and a $150,000 death benefit (two times his salary of $75,000) under his group life policy. Because she receives the benefits in one lump sum, they are not included in her gross income. LO 3.2.5

Answer 15

The answer is to allow the business to purchase a deceased owner's share of the business from the estate. The primary purpose of a buy-sell agreement funded with life insurance is to provide the cash required by the agreement to allow the surviving partner(s) to buy the deceased partner's share from his heirs or estate in the event he dies before retiring.

Answer 16

C) The answer is both I and II. By understating their age, insureds could reduce life insurance premiums. The misstatement of age clause provides that if a misstatement of the insured's age is discovered after the policy is issued, the insurance company can adjust the face amount of the policy to an amount that the premium would have purchased had the insured's age been stated correctly.

Answer 17

The answer is decreasing term life insurance. A decreasing term life insurance policy is the best choice for this client because it provides a level premium and a death benefit that decreases over time. Historically, this type of policy has been used as mortgage protection insurance because the decrease in death benefit approximates the declining principal as mortgage payments are made by the homeowner. Level term life insurance provides fixed premiums, but the face amount remains constant. Decreasing whole life insurance is not a type of policy. Whole life insurance is not appropriate because, although the premiums are fixed, the face amount remains constant, and the policy provides a cash value.

Answer 18

The answer is I, II, and III. All of these factors should be analyzed when assessing the cost of a universal life insurance policy.

Answer 19

D) The answer is fixed amount. 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.

Answer 20

C) The answer is both I and II. Withdrawals will consist of taxable earnings until all the earnings have been withdrawn (LIFO rule), and withdrawals may be subject to a 10% penalty tax if taken before age 59½.

Answer 21

D) The answer is the insurance company would return all premiums without interest to the beneficiary. The suicide clause stipulates that, if the insured commits suicide within a specified period (usually two years), the insurance company is only liable for a return of the insured's premium payments, not the policy's death benefit.

Answer 22

The answer is I and III. In this situation, the risks Donald should address are paying off debt and replacing lost income. Given these facts, there is no concern for estate taxes, and personal goals are not something that can be insured against. LO 3.1.1

Answer 23

B) I only??

Answer 24

The answer is III and IV. Because Diego 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 Diego'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 MEC, loans or distributions from the policy are taxed on a last in, first out basis, meaning that any earnings in the policy are taxed first. LO 3.2.4

Answer 25

The answer is I, II, and III. All of these are income tax characteristics of a life insurance policy. Generally, such a policy is accorded favorable tax treatment under law. LO 3.2.5

Answer 26

The answer is I, II, and III. Variable universal life insurance policies are suited for individuals with higher, not lower, risk tolerances and investment experience. LO 3.2.5

Answer 27

D). The answer is no insurance coverage will have been in place from the date of the lapse to the date all reinstatement requirements are submitted. Assuming reinstatement is granted, no coverage is available during the lapsed period.

Answer 28

D). The answer is life income option. Life income is a settlement option. LO 3.3.2

Answer 29

B) The answer is both I and II. Both statements are true of the ADB rider. LO 3.3.3

Answer 30

B) The answer is human life value. Human life value is the family's share of the earnings of the breadwinner. The projected value of the decedent breadwinner's future earnings is discounted to its present value to determine the human life value. LO 3.4.1

Answer 31

B) The answer is Antonio could convert his policy to an extended term policy. According to the insurance company, his policy would last past a normal life expectancy, and the full death benefit would go to his heirs without additional out-of-pocket expenses, as long as he passes away within the extended term period. Because of his shortened life expectancy, taking a cash surrender would provide the least amount of money for his heirs. Utilizing an extended term policy would create the most resources for his heirs. The AD&D rider would do nothing to benefit Antonio. LO 3.5.1

Answer 32

A) The answer is I, II, and III. Statement IV is not an eligible tax-free exchange under Section 1035. A taxable event occurs if an annuity is exchanged for a life insurance policy or endowment contract. LO 3.5.2

Answer 33

D) The answer is a deferred annuity is one in which the first benefit payment is made one payment interval after the date of purchase. A single premium immediate annuity is one in which the first benefit payment is made one payment interval after the date of purchase. LO 3.6.1

Answer 34

D) The answer is these plans allow for generous limits on the amount payable for any event. Plans that provide indemnity coverage impose rigid limits on the amount payable for each event.

Answer 35

Explanation The answer is II, III, and IV. 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. This assumes the employee pays the premium, which can be as high as 102% of the current group rate.

Answer 36

A) The answer is I and III. Medicare Part B does not cover routine exams for eyeglasses or foot care. LO 4.4.1

Answer 37

Explanation C) The answer is Arthur is eligible for up to 18 months of continuation coverage. Termination of employment, including voluntary resignation and retirement, is a qualifying event for purposes of COBRA, as is becoming eligible for Medicare. Each of ABC's eight part-time employees counts as half an employee for purposes of the 20-employee rule, so ABC is subject to the COBRA requirements. LO 4.1.1

Answer 38

c) The answer is I and III. Medigap policies must have a 30-day free-look period. Pre-existing condition limitations may not last longer than six months from the date of issue. LO 4.4.2

Answer 39

Explanation The answer is the residual disability rider. The residual disability rider provides a benefit to an insured who has returned to work at lesser pay. In order to qualify, the insured must have at least a 20% reduction in pay.

Answer 40

The answer is both I and II. There are seven basic types of services covered by the standard LTC policy, including skilled nursing care, intermediate nursing care, custodial care, home health care, assisted living, adult day care, and hospice care. To qualify for favorable tax treatment, LTC policies must have certain consumer protection features (e.g., contracts cannot exclude any specific illness, including Alzheimer's disease).

Answer 41

The answer is life insurance with a face amount of less than $1,500. In addition, one motor vehicle, personal property and household belongings, and one's primary residence, with some limitations, generally do not count when calculating eligibility for Medicaid. LO 4.1.2

Answer 42

The answer is I, II, and IV. Medicare Part B does not provide routine foot care exams. LO 4.4.1

Answer 43

B) The answer is cannot have a premium change. A noncancelable disability income insurance policy is a continuous term contract guaranteeing the right to renew for a specified period with a guaranteed premium. Therefore, all noncancelable disability income policies are also guaranteed renewable. Guaranteed renewable disability income contracts allow for automatic renewal but permit the insurance company to raise the premium for an entire class of insureds. Noncancelable policies are more expensive than guaranteed renewable policies. LO 4.5.1

Answer 44

Explanation | A) The answer is II only. Self-employed persons may deduct premiums paid for qualified LTC insurance policies.

Answer 45

Explanation The answer is employers with 20 or more employees must offer continuing health care coverage to former employees and/or their dependents upon the occurrence of a qualifying event. In most cases, employees may maintain group health insurance benefits for up to 18 months after leaving work. Employers with 20 or more employees normally have to offer this extended health insurance coverage to terminated employees. The Department of Labor identifies several events that may allow for COBRA coverage, including voluntary or involuntary termination of the covered employee's employment for reasons other than gross misconduct and reduced hours of work for the covered employee. LO 4.1.1

Answer 46

Explanation The answer is both I and II. Participating providers are paid on a fee-for-service basis as their services are used, and covered individuals have financial incentives to receive treatment within the PPO. LO 4.2.1

Answer 47

The answer is II and III. For 2019, a high-deductible single-coverage health plan must have a deductible of at least $1,350 and a maximum out of pocket of $6,750. Both Plan B and Plan C meet this test. LO 4.2.1

Answer 48

Explanation B) The answer is 2, 90. Under a qualified long-term care policy, a chronically ill person is expected to be unable to perform, without substantial assistance from another person, two ADLs for 90 days. LO 4.1.1

Answer 49

Explanation The answer is noncancelable. A disability income insurance policy that is noncancelable provides the greatest amount of security for the insured (at the greatest premium outlay). With this provision, the insurance company guarantees the renewal of the policy for a stated period without any increase in future premiums. LO 4.5.1

Answer 50

Explanation The answer is the premiums are not deductible and the benefits are tax free. The premium for an individual disability income insurance policy is a nondeductible personal expense, and the benefits are tax free. LO 4.5.1

Answer 51

B) The answer is both I and II. Both of these factors should be considered. LO 4.3.1

Answer 52

Explanation The answer is $200. Her first bill of the year is $1,200. She pays her $200 deductible and will still owe 20% of the $1,000 left over after the deductible is subtracted ($1,200 – $200 (deductible) = $1,000 × 20% coinsurance = $200).

Answer 53

Explanation C) The answer is no, Judson is not considered chronically ill. Neither sight nor cooking is considered an activity of daily living. Therefore, Judson is not considered chronically ill, and his benefits will not be triggered. LO 4.6.1

Answer 54

B) The answer is both I and II. Both of these factors should be considered. LO 4.3.1

Answer 55

D) The answer is I, II, and III. All of these statements describe situations in which an employer might choose to use a nonqualified retirement plan. LO 5.1.1

Answer 56

Explanation The answer is II and III. An executive/employee covered under an NQDC plan can defer taxation if the assets used to fund the plan are subject to a substantial risk of forfeiture or are in a rabbi trust. A secular trust does not afford income tax deferral to the executive/employee. LO 5.2.1

Answer 57

D) The answer is a significant restriction is imposed on the use of offshore rabbi trusts designed to avoid U.S. income tax. The American Jobs Creation Act of 2004 imposed a significant restriction on the use of rabbi trusts designed to avoid U.S. income tax. The act also provides that executives who leave the company cannot take a distribution from a nonqualified plan for at least six months after the date of separation. The period over which the distribution will be paid may not be determined by the participant, but must be specified in the plan document. Plan distributions are generally payable upon separation of service, death, disability, change in ownership of the company, or unforeseeable emergency (as defined by the IRS). LO 5.1.2

Answer 58

Explanation D) The answer is it is a trust in which the assets remain available to the claims of the employer's general creditors, thereby constituting informal funding on the arrangement. A rabbi trust is an irrevocable trust in which the assets remain available to the claims of the employer's general creditors and is a common method of informally funding an NQDC plan. LO 5.2.1

Answer 59

Explanation C) The answer is an unsecured promise to pay qualifies as a substantial risk of forfeiture because there is no guarantee that the executive will receive the deferred compensation. If there is a substantial risk of forfeiture, the deferred compensation will not be treated as constructively received, and the executive is not considered to have current taxable income. A rabbi trust qualifies as a substantial risk of forfeiture because the funds set aside for the executive may be used to satisfy the employer's creditors. LO 5.1.2

Answer 60

Explanation The answer is neither I nor II. Excess benefit plans are not subject to ERISA requirements because they are unfunded plans. LO 5.1.1

Answer 61

Explanation B) The answer is III and IV. The employee receives the net amount of the stock (the stock remaining after the sale of shares) or all cash. When an option is exercised, the employee has to pay to buy the shares. If the employee does not have enough cash to exercise the options, then a cashless option becomes a viable choice. The option is exercised, after which sufficient stock is immediately sold for the fair market value to realize the cash needed to pay for the exercise and any costs and taxes associated with the sale. The employee receives the net amount of the stock in either stock or cash. LO 5.4.1

Answer 62

Explanation D) The answer is neither I nor II. The pure deferred compensation arrangement uses some portion of the executive's current compensation to fund the promised compensation benefit. With a salary continuation approach, the plan is funded with money the employer has set aside from current earnings to benefit the executive in the future. LO 5.2.1

Answer 63

D) The answer is restricted stock to be included as employee income if there is no longer a substantial risk of forfeiture. Section 83 requires the employee to include as income any property that the employee has the right to enjoy, or the employee's right to the property is no longer subject to a substantial risk of forfeiture. Consulting services after retirement are subject to risk of forfeiture. LO 5.3.2

Answer 64

Explanation The answer is I, II, and III. There are two broad ways to structure a nonqualified plan. The first is as a salary reduction or pure deferred compensation arrangement. With this approach, the plan uses some portion of the executive's current compensation to fund the promised compensation benefit, usually payable at the executive's retirement date. Alternatively, the plan may be structured with a salary continuation approach. To implement this arrangement, the plan is funded with money that the employer has set aside from current earnings to benefit the executive. The salary continuation approach is preferred by most executives because they are not sacrificing any of their own compensation to fund the benefit. LO 5.3.1

Answer 65

Explanation The answer is II and IV. Statements I and III do not describe situations that are appropriate for implementing a nonqualified plan. An employer will use a nonqualified plan to provide a deferred compensation benefit to an executive or group of executives, or when the employer wants to provide certain key employees with tax-deferred compensation benefits. LO 5.3.1

Answer 66

Explanation The answer is I and II. ISOs must be part of a written plan approved by the stockholders. The expiration date cannot exceed 10 years from the date of grant. The exercise price of the option cannot be less than the market price of the stock at the date of the grant. The shares received as a result of exercising the ISOs cannot be sold within two years from the date of grant and one year from the date of exercise, otherwise the favorable tax treatment will be lost. LO 5.4.1

Answer 67

The answer is I, II, III, and IV. All of these statements are correct. The primary purpose of this plan is to reward executives for achieving specific performance goals. LO 5.5.2

Answer 68

The answer is I, II, and III. Excess benefit plans provide excess retirement income to executives, provide the executive with the difference between the amounts payable under his qualified plan and the amount that he would have received if the Section 415 plan limitation did not exist, and can discriminate in favor of highly compensated employees. LO 5.5.1

Answer 69

C) $40,000 Explanation The answer is $40,000. Malone is entitled to receive an award of $4 per share, or $40,000 (10,000 shares × $4 difference between value at grant and value at exercise). LO 5.5.2

Answer 70

Difference between market value of stock at a particular time and option's exercise price.

Answer 71

The answer is III and IV. Jonathan will have a $750,000 capital gain when he sells the stock at $100 per share. His adjusted tax basis is $25 per share, LO 5.4.1

Answer 72

The answer is phantom stock. Closely held corporations wishing to reward their highly valued employees without adding more shareholders may use phantom (or shadow) stock arrangements. Such arrangements are structured as fictional deferred compensation accounting entries, where the base value is equal to the current value of the corporation's common stock. LO 5.5.2

Answer 73

The answer is II only. Only statement II is correct. If the funds within a nonqualified plan are subject to a substantial risk of forfeiture, the executive will not have received taxable income. LO 5.1.2

Answer 74

Explanation The answer is both a nonqualified stock option (NQSO) and an incentive stock option (ISO). Both ISOs and NQSOs may create a current income tax liability. The exercise of an NQSO creates additional W-2 compensation or ordinary taxable income that is subject to FICA or payroll taxes. The exercise of an ISO creates an individual alternative minimum tax (AMT) adjustment item. This item, if large enough, may result in current AMT liability. LO 5.1.2

Answer 75

The answer is I, II, and IV. Statement III is incorrect because disability or premature death does not create a substantial risk of forfeiture. LO 5.3.2

Answer 76

The answer is II, III, and IV. There are no AMT consequences at the time of exercise. There are no tax ramifications at the date of grant or date of exercise. Upon disposition of the shares, the employee will recognize ordinary income based on the lesser of the fair market value (FMV) of the stock at the grant date, less the option price, or the FMV of the stock on the disposition date (or date of death, if sooner), less the option price. The balance of any gain is treated as capital gain. If the option is equal to the FMV of the stock at the date of grant, all gain upon disposition will be a capital gain as long as the shares are held by the employee for at least two years from grant of the option and one year after the exercise.

Answer 77

The answer is I, II, III, and IV. All of these statements are correct regarding phantom stock plans. The primary purpose of this plan is to reward executives for achieving specific performance goals.

Answer 78

Explanation B) The answer is the entire benefit will be taxable. Because the employer paid the premiums, the entire amount of disability benefits received will be taxable. Social Security disability benefits will not be reduced by other disability benefits. However, if Andrea is eligible to receive Social Security benefits, the disability benefits from her employer disability policy may be reduced. LO 6.3.1

Answer 79

A) The answer is group term life insurance. Group term life insurance premiums are deductible by the employer and excludable from income by the employee if the face value does not exceed $50,000. LO 6.1.1

Answer 80

D) 18 months Explanation The answer is 18 months. Terminated employees qualify under COBRA, and the required coverage period is 18 months. If an employee meets the definition of Social Security disability, the required period of coverage under COBRA is 29 months. LO 6.2.3

Answer 81

Explanation The answer is a flat amount that is paid per service, such as for doctor visits or emergency room visits. Copayments are a flat amount that is paid per service, such as for doctor visits or emergency room visits. Copayments are not premiums. Coinsurance is a percentage of the expenses that are paid by the insurance company once the deductible has been met for covered services. LO 6.2.1

Answer 82

C) The answer is I, II, and III. In 2019 an employee can elect to participate in both FSAs for a total of $7,700 in annual elected salary reductions. LO 6.2.2

Answer 83

Explanation D) The answer is a flat amount that is paid per service, such as for doctor visits or emergency room visits. Copayments are a flat amount that is paid per service, such as for doctor visits or emergency room visits. Copayments are not premiums. Coinsurance is a percentage of the expenses that are paid by the insurance company once the deductible has been met for covered services. LO 6.2.1

Answer 84

Explanation The answer is $4,025. Subtract the $250 deductible from the $6,000 of covered expenses, then multiply the remaining $5,750 by 70%, which represents the insurer's share because Jolene's share is 30%. ($6,000 – $250) × 70% = $3,850. LO 6.2.1

Answer 85

Explanation The answer is $0. Nothing is included in Lisa's gross income as a result of her group term life insurance coverage. The $50,000 group term life insurance exclusion applies to both current and former employees, including retirees. LO 6.1.1

Answer 86

Explanation The answer is $534. Rudolph's excess coverage is $150,000 ($200,000 − $50,000 = $150,000). The monthly cost of his excess coverage is $64.50 (150 × $0.43 = $64.50), and the annual cost is $774 ($64.50 × 12 = $774). The annual cost of the excess coverage, less Rudolph's contribution, is $534 ($774 − $240 = $534). LO 6.1.1

Answer 87

Explanation A) The answer is they would be subject to income tax. If disability premiums are paid with pretax dollars, any benefits received would be subject to income tax, and the employer would be required to match the FICA portion of payroll taxes. LO 6.3.1

Answer 88

Explanation The answer is $120. Robert must include the cost of his excess group term life insurance in his gross income. His excess coverage is $100,000 ($150,000 − $50,000). The monthly cost of his excess coverage is $10.00 (100 × $0.10), and the annual cost is $120 ($10 × 12 = $120). He must include the entire $120 in gross income because he does not contribute toward the cost of the coverage. Employer-paid premiums for health insurance are excluded from the employee's gross income. LO 6.1.1

Answer 89

Explanation The answer is I, II, III, and IV. All of these benefits are not included in a Section 125 plan. LO 6.4.1

Answer 90

The answer is both I and II. Premiums paid toward a group disability contract for an employee are deductible as an ordinary and necessary business expense by the employer. Any disability benefit received by the employee under this arrangement is fully taxable. Employee contributions on split premium disability income insurance policies are not tax deductible to the employee, and benefits received are not taxable. LO 6.3.

Answer 91

Explanation The answer is Greg owes tax of $1,200 and a penalty of $1,000. A distribution from an HSA that is not used for qualified medical expenses is taxable and, if made before age 65, is subject to an additional 20% penalty. LO 6.2.3

Answer 92

Explanation The answer is I only. COBRA applies only to employers with 20 or more employees. A part-time employee counts as half an employee for purposes of the 20-employee rule. LO 6.2.3

Answer 93

Explanation The answer is typically, unemployment benefits are paid out for 52 weeks. Typically, unemployment benefits are paid out for 26 weeks. LO 6.4.1

Answer 94

Explanation The answer is Sergei could make a one-time trustee-to-trustee transfer from his traditional IRA to his HSA for the maximum allowable HSA annual contribution limit, provided he has not already made his contribution for the year. An individual can make a one-time trustee-to-trustee transfer from a traditional IRA to an HSA. This transfer is not subject to income tax but is limited to the maximum annual HSA contribution limit. LO 6.2.2

Answer 95

Explanation B) The answer is Rollie is eligible for continuation coverage for up to 18 months. Termination of employment is a qualifying event under COBRA, regardless of whether it is voluntary or involuntary. The maximum period of continuation coverage following a termination of employment is 18 months for the employee and covered dependents. LO 6.2.3

Answer 96

Explanation The answer is I, II, III, and IV. Under a cafeteria plan, employees may, within limits, choose the form of employee benefits from options provided by their employer. Such a plan must include a cash option that is taxable as ordinary income. Qualified benefits, which exclude the cash option, are an exception to the constructive receipt rules of income taxation. A cafeteria plan that is funded entirely through employee salary reductions (with no employer contribution) is known as an FSA. LO 6.2.2

Answer 97

C) The answer is employer payments for group premiums are tax deductible to the employer but are not taxable income to the employee. LO LO 6.2.3

Answer 98

The answer is 0%. If the employee pays her own premiums, the benefit is tax-free, and the premiums are not deductible by the employer. LO LO 6.3.1

Answer 99

Explanation The answer is a time deductible. The elimination period is the time period before the benefits will pay after a disability occurs. LO LO 6.3.1

Answer 100

A) The answer is I, III, and IV. Statement II is incorrect. Workers' compensation is funded through premiums paid solely by the employer. LO LO 6.4.1

Answer 101

The answer is I, II, III, and IV. Legal services for divorces, bankruptcy, adoption assistance, and estate planning document preparation are commonly included within prepaid legal coverage. LO LO 6.4.1

Answer 102

C) all of them

Answer 103

Explanation The answer is 100%. Group disability benefits received via a plan funded with pretax dollars are fully taxable to the employee.

Answer 104

A) The answer is HMOs provide both the health care service and the health care financing, but traditional health care insurance companies provide only the financing. LO LO 6.2.1

Answer 105

Explanation The answer is life and long-term disability insurance are less common in self-funded plans. It is uncommon for life or long-term disability plans to be self-funded plans. An insurance company assumes the risk and administrative burden in a traditional plan. Employers pay the premium in a traditional plan. Self-funded plans are normally medical or short-term disability coverage because of their relative predictability.

Answer 106

A) The answer is an individual can only be liable for torts he personally committed. A person may be liable for torts committed by someone else. For example, parents may be liable for torts committed by their children, and employers may be liable for the torts committed by their employees. This type of liability is known as vicarious liability. LO 1.6.1

Answer 107

Explanation The answer is the McCarran Ferguson Act of 1945. The McCarran Ferguson Act of 1945 left direct regulation of the insurance industry to the states. LO 1.4.1

Answer 108

The answer is low probability, high severity. Insurance (or the transference of risk) is most suited to those losses that have a low probability or frequency of occurring and potentially high severity.

Answer 109

Explanation The answer is both I and II. Part B: Medical Payments coverage provides payment for the reasonable and necessary medical expenses of the insured as a result of an automobile accident. Expenses must be incurred within three years of the incident, and limits are provided on a per-person, per-occurrence basis. Individuals covered by Part B include the named insured, spouse, and any family member while they are occupying a motor vehicle, or when, as a pedestrian, they are struck by a vehicle. LO 2.3.1

Answer 110

The answer is both I and II. Professional liability insurance covers a wide variety of insurance policies for many occupations and protects against liability for failing to use the degree of skill expected of a person in a particular occupation. Professional liability insurance includes both medical malpractice insurance and errors and omissions insurance.

Answer 111

Explanation The answer is II only. Self-employed persons may deduct premiums paid for qualified LTC insurance policies. LO 4.6.2

Answer 112

Explanation The answer is II and III. For 2019, a high-deductible single-coverage health plan must have a deductible of at least $1,350 and a maximum out of pocket of $6,750. Both Plan B and Plan C meet this test. LO 4.2.1

Answer 113

Explanation The answer is residual disability benefits. The architect is concerned about total disability and the risk of reduction in income due to partial disability. A residual disability benefit is usually payable in proportion to the insured's reduced earnings as a result of a less-than-total disability—within a certain range, such as 20%–80%.

Answer 114

The answer is the policy must pay for expenses reimbursable under Medicare. The contract cannot pay for expenses reimbursed under Medicare. LO 4.6.1

Answer 115

Explanation The answer is both I and II. 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 in either case, and Medicare is inadequate because it does not provide coverage for custodial care. LO 4.6.2

Answer 116

Explanation The answer is a Medicare supplement policy. Medicare supplement policies are specifically designed to help manage the out-of-pocket costs not covered by original Medicare. LO 4.4.2

Answer 117

Explanation The answer is employers with 20 or more employees must offer continuing health care coverage to former employees and/or their dependents upon the occurrence of a qualifying event. In most cases, employees may maintain group health insurance benefits for up to 18 months after leaving work. Employers with 20 or more employees normally have to offer this extended health insurance coverage to terminated employees. The Department of Labor identifies several events that may allow for COBRA coverage, including voluntary or involuntary termination of the covered employee's employment for reasons other than gross misconduct and reduced hours of work for the covered employee. LO 4.1.1

Answer 118

Explanation The answer is $2,000. The maximum out of pocket Maria will pay is $2,000, consisting of the deductible amount of $500 and 20% of the amount up to the stop-loss limit, or $1,500 ($7,500 × 0.20). After that amount is paid, her insurance company will pay 100% of the expense. LO 4.3.1

Answer 119

Explanation The answer is I, III, and IV. Only statement II is incorrect. Skilled nursing care essentially means that a registered nurse is available and supervises the care 24 hours a day, and the care is required by a physician. If this is the case, the first 20 days in the facility are fully paid by Medicare. The next 80 days are also covered, but with a daily coinsurance. LO 4.6.2

Answer 120

The answer is I and III. Medicare Part B does not cover routine exams for eyeglasses or foot care. LO 4.4.1

Answer 121

Explanation The answer is $8,000. Medicare will pay 80% of the covered expenses after Harry has satisfied the Part B deductible. LO 4.4.1

Answer 122

The answer is the residual disability rider. The residual disability rider provides a benefit to an insured who has returned to work at lesser pay. In order to qualify, the insured must have at least a 20% reduction in pay. LO 4.5.2

Answer 123

Explanation The answer is I and III. Medigap policies must have a 30-day free-look period. Pre-existing condition limitations may not last longer than six months from the date of issue.

Answer 124

The answer is III only. For 2019, a high-deductible family-coverage health plan must have a deductible of at least $2,700 and a maximum out of pocket of $13,500. Plan C is the only plan that meets this test. LO 4.2.1

Answer 125

The answer is I, III, and IV. Medicare will cover individuals who have been receiving Social Security disability benefits for at least 24 months. LO 4.4.1

Answer 126

The answer that it is administered solely by the federal government. The Medicaid program is administered by each individual state. The states remit payments to eligible participants and are partially reimbursed by the federal government. LO 4.1.2

Answer 127

The answer is I, II, and III. In addition to these factors, planners should ensure that the policy covers both sickness and accidents, that the client has emergency funds sufficient to cover the elimination period plus 30 days (because benefits will be paid in arrears), that the policy is noncancelable or guaranteed renewable, and that the premium is competitive.

Answer 128

The answer is both I and II. There are seven basic types of services covered by the standard LTC policy, including skilled nursing care, intermediate nursing care, custodial care, home health care, assisted living, adult day care, and hospice care. To qualify for favorable tax treatment, LTC policies must have certain consumer protection features (e.g., contracts cannot exclude any specific illness, including Alzheimer's disease). LO 4.6.1

Answer 129

The answer is II only. Under the single life annuity settlement option, the annuity payments stop when the beneficiary dies. Each payment includes a taxable interest component and a nontaxable principal component. A beneficiary of an annuity from a life insurance settlement option who dies before his life expectancy cannot deduct any unrecovered basis.

Answer 130

The answer I, II, and III. All of these items have dollar limits under the standard homeowners policy. To increase this limit to an agreed-upon value, items need to be scheduled or endorsed. LO 3.3.1

Answer 131

The answer is I, II, and III. There are three common nonforfeiture options available when surrendering or discontinuing premium payments on a whole life insurance policy. Under the cash surrender value option, a policyowner can surrender the policy and receive the net cash value. By electing the reduced paid-up insurance option, a policyowner leaves the net cash value of the original life insurance policy with the company and receives a smaller amount of fully paid-up insurance of the same type. If the policyowner chooses the extended term insurance option, the net cash value is used as a net single premium to purchase a paid-up term insurance policy. LO 3.2.2

Answer 132

The answer is whole life policies. Only participating whole life policies pay dividends that are essentially a return of premium when a mutual life insurance company has better-than-expected operating results. While universal life policies pay interest, neither universal nor term life policies pay dividends. LO 3.3.2

Answer 133

The answer is I, II, and III. Universal life insurance policies allow policyowners to adjust the premiums, death benefit, and cash values. They do not allow policyowners to change the policy expenses. LO 3.2.3

Answer 134

The answer is accelerated death benefits rider. The accelerated death benefits rider was developed in response to increased demand for viatical settlements (where policyowners sell their life insurance policy for a portion of the value of the death benefit). Once an insured meets the definition of terminally ill per the policy, a portion of the death benefits as defined by the policy (ranging between 25% and 98%) may be accessed. LO 3.3.3

Answer 135

The answer is $1,722.15. The total amount Carolyn will receive from the settlement option is $1,620,000 ($4,500 × 360). Her tax basis is $1,000,000, so her exclusion ratio is 0.6173 ($1,000,000 ÷ $1,620,000). Therefore, $2,777.85 of each payment is excluded from gross income ($4,500 × 0.6173), and the remainder ($1,722.15) is taxable. In addition, the taxable income may be subject to the 3.8% Medicare contribution tax. LO 3.2.5

Answer 136

The answer is both I and II. Withdrawals will consist of taxable earnings until all the earnings have been withdrawn (LIFO rule), and withdrawals may be subject to a 10% penalty tax if taken before age 59½. LO 3.6.2

Answer 137

The answer is both first-to-die and second-to-die policies. These are joint life policies.

Answer 138

The answer is the present value of the family's share of the breadwinner's future earnings. A human life value is a present value amount and represents the family's share of the present value of a breadwinner's future earnings that would be lost due to death. LO 3.4.1

Answer 139

The answer is I and IV. The outstanding policy loan of $25,000 reduces the death benefit payable under the policy to $475,000. Because the settlement option was interest only, the entire payment of $14,250 consists of interest, and the $475,000 principal amount remains on deposit with the insurance company. The principal amount of a life insurance death benefit is income tax free. Charles must include $14,250 in this year's gross income because the payment consists entirely of interest. In addition, the $14,250 of taxable income may be subject to the 3.8% Medicare contribution tax. LO 3.2.5

Answer 140

Explanation The answer is if Azumi collects more than 100 payment, all amounts received after the 100th payment must be fully included in her gross income. Payments beyond projected life expectancy are fully taxable unless the annuity payments began on or before December 31, 1986. If the annuitant dies before life expectancy and has not completely recovered her basis, the unrecovered basis is deductible on the annuitant's final income tax return as a miscellaneous itemized deduction not subject to the 2% of adjusted gross income floor. For contracts where annuity payments began after December 31, 1986, the exclusion ratio is only used to the extent of recovering the basis; therefore, the taxpayer will not use the exclusion ratio for payments made after life expectancy and will be taxed on the entire amount. LO 3.6.2

Answer 141

The answer is annuitants may start distributions from an annuity before age 59½ without incurring tax penalties. Withdrawals from an annuity contract made before the owner is age 59½ are subject to income tax and a 10% penalty unless an exception applies. The most notable exception is IRC Section 72, which permits the annuity distribution to be paid out as a series of substantially equal periodic payments over the lifetime of the owner. LO 3.6.2

Answer 142

The answer is $0. Lump-sum death benefits received from a life insurance policy as a result of the insured's death are generally excludable from gross income. LO 3.2.2

Answer 143

Explanation The answer is I, II, III, and IV. In a variable annuity, the owner of the contract directs the investment of the contract's cash value among subaccounts and bears the investment risk. Any financial planner who solicits or presents a variable annuity to a client should read and understand the variable annuity prospectus. The prospectus contains, but is not limited to, all of the variable annuity's investment choices as well as the fees, expenses, investment objectives, investment strategies, risks, performance, and pricing for each investment choice. Any type of annuity that offers a credit based on a percentage of the premium paid is considered a bonus annuity. EIAs combine the features of traditional insurance products (e.g., guaranteed minimum return) with those of a security (e.g., returns linked to equity markets). LO 3.6.1

Answer 144

Explanation D) The answer is if used for key employees, a qualified plan will not be subject to ERISA nondiscrimination rules requirements. Qualified plans are subject to ERISA nondiscrimination rules requirements, regardless of who is covered under the plan. LO 5.1.1

Answer 145

Explanation The answer is I, II, III, and IV. All of these statements are correct. The primary purpose of this plan is to reward executives for achieving specific performance goals. LO 5.5.2

Answer 146

The answer is 127. Latarsha will receive a net amount of 127 shares of stock calculated as follows: The exercise cost of the NQSO is $10,000 (500 shares × $20 per share). She will have to pay ordinary income taxes of $1,200 on the bargain element [($30 FMV − $20 exercise price) × 500 shares × 0.24]. Therefore, Latarsha's total cost of exercising the option is $11,200. In order to cover the cost of the option, 373 shares of the stock must be sold ($11,200 ÷ $30 FMV). This leaves a net amount of 127 shares (500 − 373) that Latarsha will receive. LO 5.4.1

Answer 147

Explanation The answer is the underlying assets funding the plan are not subject to the claims of the employer's general creditors. The underlying assets funding a nonqualified plan are subject to the claims of the employer's general creditors. LO 5.3.1

Answer 148

Explanation The answer is I and IV. Statement II is incorrect because the election must be made within 30 days of receiving the restricted stock. Statement III is incorrect because the employee will recognize ordinary income, not capital gain, when the election is made. In the event of forfeiture, the employee may have a capital loss if she paid any amount toward the purchase of the restricted stock. LO 5.3.2

Answer 149

Explanation The answer is II and III. A secular trust causes immediate or accelerated taxation to the employee for employer contributions to a nonqualified plan. Funds in a secular trust cannot be reached by the employer's creditors and, as such, provides security for executives. A secular trust is irrevocable. LO 5.2.1

Answer 150

Explanation The answer is both I and II. Premiums paid toward a group disability contract for an employee are deductible as an ordinary and necessary business expense by the employer. Any disability benefit received by the employee under this arrangement is fully taxable. Employee contributions on split premium disability income insurance policies are not tax deductible to the employee, and benefits received are not taxable. LO 6.3.1

Answer 151

Explanation The answer is Greg owes tax of $1,200 and a penalty of $1,000. A distribution from an HSA that is not used for qualified medical expenses is taxable and, if made before age 65, is subject to an additional 20% penalty. LO 6.2.3

Answer 152

Explanation The answer is the entire benefit will be taxable. Because the employer paid the premiums, the entire amount of disability benefits received will be taxable. Social Security disability benefits will not be reduced by other disability benefits. However, if Andrea is eligible to receive Social Security benefits, the disability benefits from her employer disability policy may be reduced. LO 6.3.1

Answer 153

C) The answer is they would be subject to income tax. If disability premiums are paid with pretax dollars, any benefits received would be subject to income tax, and the employer would be required to match the FICA portion of payroll taxes. LO 6.3.1

Answer 154

Explanation The answer is I, II, III, and IV. Under a cafeteria plan, employees may, within limits, choose the form of employee benefits from options provided by their employer. Such a plan must include a cash option that is taxable as ordinary income. Qualified benefits, which exclude the cash option, are an exception to the constructive receipt rules of income taxation. A cafeteria plan that is funded entirely through employee salary reductions (with no employer contribution) is known as an FSA. LO 6.2.2

Answer 155

A) The answer is I, III, and IV. The number of agents employed is not relevant. An insurer should have a favorable rating from several rating companies, have a high persistency rate (low lapse rate), and not be on the NAIC's Watchlist.

Answer 156

Explanation A) The answer is independent agents. The phrasing in the questions defines independent agents who, ideally, base their decision on where to place business on the needs of the client and the suitability of the insurance company.

Answer 157

Explanation The answer is I and IV. Because a DVD player and DVDs are not high-value items, they are most likely covered under the personal property section of the homeowners policy or auto coverage, not under separate floaters. The camera and artwork need to be insured. Motorized boats need their own policy, and while they float, they aren't covered under this coverage. LO 2.2.1

Answer 158

Explanation The answer is II, III, and IV. Workers' compensation insurance is not covered under a commercial package policy. Covered forms generally include property, general liability, crime, boiler and machinery, inland marine, commercial auto, and farm. LO 2.4.1

Answer 159

Explanation The answer is I, II, and IV. Universal life insurance has all of the features except for a minimum guaranteed cash value. Universal life insurance has a guaranteed minimum interest rate, but that only applies if there is a cash value. LO 3.2.3

Answer 160

The answer is variable universal life (VUL). A VUL policy is the only type of policy that will meet all the client's needs. A VUL policy combines the flexibility of universal life with the possibility of an increasing death benefit and a higher cash value than traditional fixed products. LO 3.5.1

Answer 161

Explanation The answer is I, II, and III. Proceeds held by the company with interest paid to the beneficiary are not an actual life income option. Most companies will not allow proceeds to be left at interest indefinitely, so a life income cannot be provided by this option. LO 3.6.2

Answer 162

Explanation The answer is I, III, and IV. Statement II is incorrect. The ACA employer mandate remains in effect and is currently being enforced.

Answer 163

Explanation The answer is David McCorkle is unsure if he could work in another field if his skills become obsolete. While obsolescence of skills may cause a loss of income, it is not considered a disability. Skill obsolescence may in fact cause a loss of earning ability, but no disability insurance policy will cover that possibility. LO 4.5.1

Answer 164

Explanation The answer is it may tax income that is made available but is not yet received by a taxpayer. The constructive receipt doctrine taxes income that is made available, even though the income is not actually received. The constructive receipt doctrine applies to formally funded plans, not unfunded (informally funded) plans. Unfunded plans are based on promise only. The economic benefit doctrine states that when the employee's benefit has become substantially vested or essentially equivalent to the receipt of cash, current income taxation will result. LO 5.1.2

Answer 165

Explanation The answer is it must be subject to a substantial risk of forfeiture. To avoid immediate taxation to the participant, a funded nonqualified deferred compensation plan must be nontransferable and subject to a substantial risk of forfeiture. LO 5.3.1

Answer 166

Explanation The answer is ordinary income tax. Nonqualified deferred compensation death benefits payable to a surviving beneficiary are subject to ordinary income tax as income in respect of a decedent. LO 5.3.2

Answer 167

Explanation The answer is the III only. At the date of disposition of the shares, the employee will recognize ordinary income on the basis of the lesser of (1) the fair market value (FMV) of the stock at the grant date less the option price, or (2) the FMV of the stock on the disposition date (or date of death, if sooner) less the option price. ESPP purchases are limited to a maximum value of $25,000 per calendar year.

Answer 168

``` Explanation The answer is the plan benefits a nondiscriminatory class of employees. The plan will meet the test if it benefits a nondiscriminatory class of employees. At least 70% of all employees benefit from the plan, and at least 85% of participants are not key employees. Coverage for dependents is usually equal to the limits established for employees. ``` LO 6.1.1

Answer 169

Explanation | The answer is I, III, and IV. Short-term disability provides coverage for up to two years (24 months).

Answer 170

Explanation The answer is I, III, and IV. Option II is incorrect because gender and age have nothing to do with annuity classification.

Answer 171

Explanation The answer is they require initial premiums in excess of $10,000. Initial premiums may be as low as $500–$1,000 for qualified accounts and $1,000–$5,000 for nonqualified accounts. Some annuities require higher premiums (some allow for even lower premiums). LO 3.6.1

Answer 172

Explanation The answer is I, II, and III. Proceeds held by the company with interest paid to the beneficiary are not an actual life income option. Most companies will not allow proceeds to be left at interest indefinitely, so a life income cannot be provided by this option. LO 3.6.2

Answer 173

Explanation The answer is premiums can only be linked to gender and smoking but not health issues. Under the ACA, premiums cannot be linked to gender or health issues. All of the other statements are true. LO 4.1.1

Answer 174

Explanation The answer is I, III, and IV. Statement II is incorrect. The ACA employer mandate remains in effect and is currently being enforced. LO 4.1.1

Answer 175

Explanation The answer is indigent or impoverished. Medicaid is a state/federal welfare program that provides benefits to those who are indigent or impoverished. Each state determines the level of income and assets that qualifies. An individual does not have to be eligible for Medicare to obtain Medicaid benefits, and there is no requirement for prior hospital confinement. LO 4.1.2

Answer 176

Explanation The answer is the coordination of benefits clause is designed to prevent the insured from collecting benefits from two policies that together would equal more than 100% of the expense incurred. Internal limits are used by insurance companies to limit the amount that is payable under the contract, not to guarantee full payment. The exclusions clause is generally the same for all policies issued by the same company. It lists those treatments, procedures, supplies, and providers for which no benefits will be paid. Utilization review is a process in which the insured generally must have a proposed procedure evaluated and approved by the insurance company prior to having it performed in order to have it be fully covered. LO 4.2.1

Answer 177

Explanation The answer is typical coinsurance provisions require that the plan provider pays 20% of the bills and the recipient of the care pays 80%. This would be an uncommon split between providers and recipients, though in some plans an 80/20 split can be found where the insurer pays 80% of the coinsurance split amount. Although the most common coinsurance split is 80% paid by provider and 20% paid by participant, some plans may have 70/30 or 60/40 splits. LO 4.2.1

Answer 178

Explanation The answer is $8,200. The answer is calculated as follows: Total loss: $10,750 ($7,500 + $3,250) Deductible: −500 Equals $10,250 Less 20% −2,050 Insurance $8,200 LO 4.3.1

Answer 179

Explanation The answer is individuals who have end-stage renal disease are eligible for Medicare regardless of their age. Medicare is a federal health care program for persons age 65 or older, certain disabled persons who qualify for Social Security Disability Insurance (SSDI) after 24 months, and anyone who has end-stage renal (kidney) disease. LO 4.4.1

Answer 180

Explanation The answer is Medigap Policy A is the most expensive and most comprehensive form of coverage. Medigap Policy A is the least expensive and least comprehensive form of Medigap coverage. LO 4.4.2

Answer 181

Explanation The answer is David McCorkle is unsure if he could work in another field if his skills become obsolete. While obsolescence of skills may cause a loss of income, it is not considered a disability. Skill obsolescence may in fact cause a loss of earning ability, but no disability insurance policy will cover that possibility. LO 4.5.1

Answer 182

Explanation The answer is the elimination period serves a purpose similar to that of a deductible. The elimination period is the portion of a disability for which the insured must pay all expenses without disability income insurance benefits from the insurance company. LO 4.5.1

Answer 183

Explanation The answer is I and II. The insurance company cannot raise premiums on a noncancelable disability policy. An own occupation (own occ) disability policy is the most expensive. LO 4.5.2

Answer 184

Explanation The answer is the policy has a 30-day elimination period. Disability income insurance policies do not have deductibles (or coinsurance provisions). If the elimination period is 30 days and Kathy is disabled for 60 days, she will have received only one monthly benefit check for $2,400. LO 4.5.2

Answer 185

Explanation The answer is cleaning living quarters. Cleaning living quarters is not included as one of the Health Insurance Portability and Accountability Act's (HIPAA's) six ADLs. The six ADLs are dressing, eating, bathing, transferring (getting from bed to chair), toileting, and maintaining continence. LO 4.6.1

Answer 186

Explanation The answer is the patient's condition must be expected to improve. Medicare will not cover long-term care costs if the patient's health is not expected to improve. LO 4.6.1

Answer 187

Explanation The answer is PILICO material specifies that adult day care qualifies for home care level benefits. Adult day care is an addition that enhances the flexibility of available benefits and expand the number of options for care. LO 4.6.2

Answer 188

Explanation The answer is to provide additional retirement benefits for highly compensated employees. An important reason for establishing a nonqualified plan is to provide additional retirement benefits for highly compensated employees. Contributions to a nonqualified plan are not deductible until the plan benefits are actually received by the plan participant. Funds used by the employer to provide an unfunded nonqualified deferred compensation benefit must be available to bankruptcy creditors. LO 5.1.1

Answer 189

Explanation The answer is variable life insurance. Variable life insurance permits the cash value of the policy to be invested in a number of different accounts of the insurer, such as indexed equities, blue chip growth, growth and income, international, bonds, and so forth. LO 5.2.1

Answer 190

Explanation The answer is disqualifying disposition with an ISO will result in ordinary income taxes, as well as FICA and FUTA taxes. ISOs, when there is a disqualifying disposition, are subject to ordinary taxes, but they are not subject to FICA or FUTA taxes. LO 5.3.1

Answer 191

Explanation The answer is it must be subject to a substantial risk of forfeiture. To avoid immediate taxation to the participant, a funded nonqualified deferred compensation plan must be nontransferable and subject to a substantial risk of forfeiture. LO 5.3.1

Answer 192

Explanation The answer is ordinary income tax. Nonqualified deferred compensation death benefits payable to a surviving beneficiary are subject to ordinary income tax as income in respect of a decedent. LO 5.3.2

Answer 193

Explanation The answer is the III only. At the date of disposition of the shares, the employee will recognize ordinary income on the basis of the lesser of (1) the fair market value (FMV) of the stock at the grant date less the option price, or (2) the FMV of the stock on the disposition date (or date of death, if sooner) less the option price. ESPP purchases are limited to a maximum value of $25,000 per calendar year. LO 5.4.1

Answer 194

Explanation The answer is the holding period requirement in order to receive preferential capital gains treatment is two years from the grant date and one year from the date of exercise. This is the holding period requirement in order to receive capital gains treatment. The annual limit for ESPPs is $25,000, and ESPPs, just like ISOs, do require shareholder approval. The maximum permitted discount from fair market value is 15%. LO 5.4.1

Answer 195

Explanation The answer is purchase a fixed number of shares of employer stock at a predetermined price over a stated period. Stock options give the employee (usually an executive) the right to purchase a fixed number of shares of employer stock at a predetermined price over a stated period.

Answer 196

Explanation The answer is X Corporation would like to establish an unfunded plan that will provide benefits for a vice president in excess of those provided by the company's qualified plan. A supplemental executive retirement plan is a funded or an unfunded plan providing benefits for select employees in excess of those provided by the employer's qualified retirement plan. LO 5.5.2

Answer 197

Explanation The answer is I and II. Characteristics of group term life insurance include payment of a face amount to the beneficiary named at the time of death of the insured and low cost, simple administration, and tax advantages. LO 6.1.1

Answer 198

``` Explanation The answer is the plan benefits a nondiscriminatory class of employees. The plan will meet the test if it benefits a nondiscriminatory class of employees. At least 70% of all employees benefit from the plan, and at least 85% of participants are not key employees. Coverage for dependents is usually equal to the limits established for employees. ``` LO 6.1.1

Answer 199

Explanation The answer is III only. The 2010 Health Care Reform Legislation provides that plans covering dependents must allow coverage for adult children until age 26. The child need not live at home or be claimed as a dependent for income tax purposes. The child may be married, but coverage does not extend to the child's spouse or children. LO 6.2.1

Answer 200

Explanation The answer is a company may allow participants to use expenses in the first 2½ months to spend the prior year's allocated amount and to roll over $500 into the next year. This is incorrect because a company may offer one of these exceptions but not both. They may allow expenses from the first 2½ months to be claimed against the prior year's balance OR allow a rollover of up to $500 of unused funds into the next year, but not both. All other statements are correct. LO 6.2.2

Answer 201

Explanation The answer is the rules require the employee or dependent to notify the employer within 60 days of a qualifying event, such as a divorce. COBRA rules apply to an employer with 20 or more total (not just covered) employees. The employer can charge up to 102% (not 120%) of the cost of an active employee to cover administrative costs. Finally, the beneficiary/participant must request coverage after a qualifying event occurs because coverage is not automatic. LO 6.2.3

Answer 202

Explanation | The answer is I, III, and IV. Short-term disability provides coverage for up to two years (24 months).

Answer 203

Explanation The answer is II, III, and IV. The payment of country club dues by the employer would create taxable income. The other benefits listed are excludible. LO 6.4.1

Answer 204

The answer is I, II, III, and IV. Workers' compensation provides all of these benefits. Medical expenses are covered in full in most states. Disability income benefits can be paid after the disabled worker satisfies a waiting period. Death benefits are paid if the worker dies as a result of a job-related accident or disease. All states provide rehabilitation services to restore workers to productive employment. LO 6.4.1

Answer 205

Explanation The answer is $76,000 ordinary income. Any payments, including death distributions, from a nonqualified annuity are taxed as ordinary income excluding the basis of the contract. The 10% penalty would not be applicable because the distribution was made as a result of a death. LO 7.1.1

Answer 206

Explanation The answer is both I and II. Coverage E protects the insured homeowner and all resident family members against liability for bodily injury and property damage that may occur on the premise. Coverage F pays necessary medical expenses of others that result from bodily injury arising out of the insured's activities, premises, or animals. Generally, Coverage F will pay up to $1,000 per person per occurrence. Coverage F will automatically pay regardless of fault. Coverage E only pays when the insured is at fault. In this case, the broken chair puts the insured at fault, and Krista may seek to be reimbursed for pain and suffering, lost wages, and medical bills. LO 7.2.1

Answer 207

Explanation The answer is no, the Brewsters are not eligible to establish a health savings account because they are in a low deductible health plan. For 2020, the minimum amount the family deductible is required to be is $2,800 in order to be eligible for a health savings account. The Brewsters' family health insurance family deductible is only $1,500. The plan does not have to be sponsored by an employer. LO 7.3.1

Answer 208

Explanation The answer is a statement of all sources of income for the CFP® certificant. As a CFP® certificant, you are expected to provide a substantial amount of information to clients; however, all sources of income are not relevant to the relationship. A planner receiving dividends or interest, alimony or child support payments, is under no obligation to disclose that information to clients. A statement of compensation related to the planning practice is appropriate and expected. LO 7.3.2

Answer 209

Explanation The answer is reduction. Installing storm shutters reduces the risk of damage to the homeowner's property. LO 1.2.1

Answer 210

Explanation The answer is II, III, and IV. They have unlimited liability exposure. A car accident could lead to an unlimited amount of liability depending on the circumstances, as well as the possibility of negligence occurring on their property. There is a higher probability of becoming disabled than of experiencing premature death, and it is much more important to have liability insurance on a vehicle than collision coverage. Liability claims may be much higher than any type of collision damage to a vehicle. Both Oscar and Judith are too young to consider long-term care insurance at this time. LO 1.2.2

Answer 211

Explanation The answer is I and III. The courts render decisions on the meaning of policy terms and rule on the constitutionality of insurance laws. The state legislature completes the remaining two duties: enacts laws and may establish requirements that an insurer must meet to obtain a license to do business in that state. LO 1.4.1

Answer 212

Explanation The answer is hazard: something that increases the likelihood of a loss occurring. Risk is the possibility of loss and perils are the causes of losses. Moral hazard is a result of the client being unethical or misrepresenting himself in order to obtain insurance or to induce the payment of a claim. LO 1.1.1

Answer 213

Explanation The answer is I, II, and IV. All risks are covered, but groundwater damage is only covered while personal property is away from the premises. HO15 modifies the earth movement exclusion so that it only applies to coverages for the dwelling and other structures. LO 2.1.1

Answer 214

Explanation The answer is $36,500. This is the correct computation: Payment = (Amount of insurance owned/ Amount of insurance required × Loss)− Deductible Amount of insurance required = $240,000 x .8 = $192,000 ($120,000/ $192,000×$60,000) −$1,000 = $36,500 LO 2.2.1

Answer 215

Explanation The answer is I and IV. Personally owned aircrafts and watercrafts may be covered if basic liability coverage is in place for them at the time the umbrella policy is purchased. The advantage of umbrella policies is their relatively low cost. It is not uncommon to be able to bring liability protection levels up to $1 million for less than $200 per year. LO 2.2.2

Answer 216

Explanation The answer is a liability claim. While the total loss of a dwelling and all contents could be significant, the unlimited potential of the dollar size of a liability claim holds the greatest potential for financial loss for a homeowner. For example, imagine the size of the lawsuit for a child who drowns in a homeowner's pool because it wasn't properly fenced or the total of the claims of a second story deck collapsing with 20 guests on it. LO 2.2.2

Answer 217

Explanation The answer is I, II, and IV. Loss of use is a homeowners coverage, but liability, auto damage, and underinsured motorist coverages are included in the PAP. For an extra premium, a personal auto policy may provide rental reimbursement for loss of use. LO 2.3.1

Answer 218

Explanation The answer is II, III, and IV. Workers' compensation insurance is not covered under a commercial package policy. Covered forms generally include property, general liability, crime, boiler and machinery, inland marine, commercial auto, and farm. LO 2.4.1

Answer 219

Explanation The answer is I, III, and IV. Option I is a risk reduction technique while options III and IV are risk transfer techniques. Option II is also risk transfer technique, but it is for liability and the question is addressing property risks only. Remember to always look at what the question is asking for and no more.

Answer 220

Explanation The answer is government-imposed fines and penalties. Government fines and penalties are generally not covered. However, some insurance companies will cover punitive damages.

Answer 221

Explanation The answer is I only. A basic CGL policy protects against non-auto, non-employee liability claims. While it may be possible to add coverage for employee liability and business auto liability, that is not a part of a basic CGL policy. LO 2.4.2

Answer 222

Explanation The answer is one-year term life insurance (or fifth dividend option). The one-year term life insurance (or fifth dividend) option pays a death benefit equal to the guaranteed net cash value (which is typically increasing annually). Extended term life insurance is a nonforfeiture option and interest only is a settlement option. Accumulate at interest is a dividend option where dividends are left with the insurance company to accumulate with interest. The amount accumulated is then added to the death benefit if the insured dies or to the cash value if the policy is surrendered. LO 3.3.2

Answer 223

Explanation The answer is paid-up dividend additions. Additional insurance is purchased with this option. This small amount is fully paid-up with no premiums due to keep it in force. LO 3.3.2

Answer 224

Explanation The answer is waives the premiums only for a total disability in most cases. Typically, an insured needs to be totally disabled (as defined in the policy) before the rider may be used. LO 3.3.3

Answer 225

Explanation The answer is $25,490. This is calculated by inflating the $8,200 at 6% for 12 years = $16,500. Then calculate the PV∆ (BEG) for four years using the inflated cost and the inflation-adjusted interest rate = $64,189. Finally, calculate the PV of that number discounted at the after-tax rate of return for 12 years = $25,490. The formula to determine the correct interest rate to use in the second step is: 1 plus the rate of return, divided by 1 plus the rate of inflation, minus 1, times 100 (1.08/1.06 – 1 × 100 = 1.8868). Step 1: 12 [N]; 6 [I/YR]; 8,200 [PV]; [FV] = 16,500 Step 2: 4 [N], 1.8868 [I/YR]; 16,500 [PMT]; 0 [FV]; [PV] (PV∆) = 64,189 Step 3: 12 [N]; 8 [I/YR]; 0 [PMT]; 64,189 [FV]; [PV] = 25,490 LO 3.4.1

Answer 226

Explanation The answer is a simple capitalization method whereby the annual need is divided by the inflation-adjusted rate of return. The capital retention calculation is a simple capitalization calculation whereby the annual need is divided by the inflation-adjusted rate of return. LO 3.4.1

Answer 227

Explanation The answer is variable universal life (VUL). VUL policies have the features that will meet the Goldens' needs, because they allow flexible premium payments and the ability to invest the cash value in subaccounts. None of the other choices provide this combination of features. LO 3.5.1

Answer 228

Explanation The answer is replacing a term policy through the policy's conversion clause is usually the best and least expensive alternative. The use of a policy's conversion clause may not be the best alternative. As stated in the module, the term company may not have the most desirable cash value policy, and costs may be higher than with another company. LO 3.5.2

Answer 229

Explanation The answer is I, III, and IV. Option II is incorrect because gender and age have nothing to do with annuity classification. LO 3.6.1

Answer 230

Explanation The answer is they require initial premiums in excess of $10,000. Initial premiums may be as low as $500–$1,000 for qualified accounts and $1,000–$5,000 for nonqualified accounts. Some annuities require higher premiums (some allow for even lower premiums). LO 3.6.1

Answer 231

Explanation The answer is premiums can only be linked to gender and smoking but not health issues. Under the ACA, premiums cannot be linked to gender or health issues. All of the other statements are true. LO 4.1.1

Answer 232

Explanation The answer is the coordination of benefits clause is designed to prevent the insured from collecting benefits from two policies that together would equal more than 100% of the expense incurred. Internal limits are used by insurance companies to limit the amount that is payable under the contract, not to guarantee full payment. The exclusions clause is generally the same for all policies issued by the same company. It lists those treatments, procedures, supplies, and providers for which no benefits will be paid. Utilization review is a process in which the insured generally must have a proposed procedure evaluated and approved by the insurance company prior to having it performed in order to have it be fully covered. LO 4.2.1

Answer 233

Explanation The answer is $8,200. The answer is calculated as follows: Total loss: $10,750 ($7,500 + $3,250) Deductible: −500 Equals $10,250 Less 20% −2,050 Insurance $8,200 LO 4.3.1

Answer 234

Explanation The answer is individuals who have end-stage renal disease are eligible for Medicare regardless of their age. Medicare is a federal health care program for persons age 65 or older, certain disabled persons who qualify for Social Security Disability Insurance (SSDI) after 24 months, and anyone who has end-stage renal (kidney) disease. LO 4.4.1

Answer 235

Explanation The answer is I and II. The insurance company cannot raise premiums on a noncancelable disability policy. An own occupation (own occ) disability policy is the most expensive. LO 4.5.2

Answer 236

Explanation The answer is II, III, and IV. Statements II, III, and IV describe transactions that can be accomplished under Section 1035 of the Internal Revenue Code without recognizing any gain or loss. Statement I (surrendering the policy for cash and purchasing another policy) would result in taxable income of $25,000. LO 3.5.2

Answer 237

Explanation The answer is I, II, and III. There are three common nonforfeiture options available when surrendering or discontinuing premium payments on a whole life insurance policy. Under the cash surrender value option, a policyowner can surrender the policy and receive the net cash value. By electing the reduced paid-up insurance option, a policyowner leaves the net cash value of the original life insurance policy with the company and receives a smaller amount of fully paid-up insurance of the same type. If the policyowner chooses the extended term insurance option, the net cash value is used as a net single premium to purchase a paid-up term insurance policy. LO 3.2.2

Answer 238

Explanation The answer is the law of large numbers theory asserts that with more members in a group, the probability that the actual loss experience will equal the expected loss experience is greater. A peril is the cause of a financial loss. A morale hazard is the indifference to loss that creates carelessness and increases the chance of loss because of insurance. Risk is the dispersion of actual from expected results. LO 1.5.1

FP512- Risk Mgt, Insurance & EE benefits Flashcards

(264 cards)