Insurance

Question 1

Employer cannot purchase or own an insurance policy in which of the following circumstances? - key person, stick purchase agreement, deferred comp, or cross-purchase agreement

Answer 1

Cross- purchase agreement because no insurable interest exists for company (stock holder buys other stock holders interest) where other 3 the company has an insurable interest

Question 2

What type of company is most likely to use stop-loss coverage to partially self-insure its employee medical insurance program?

Answer 2

Companies with as few as 100 employees (small companies)

Excess insurance coverage that protects self insured employer against catastrophic insurance claims that exceed a predetermined threshold (e.g. $250k)

Question 3

Capital retention life insurance questions

Answer 3

Income needed / rate of return
Plus money for year 1

$36k needed
7% rate of return
4% inflation

36k/.03 =1.2M + 36k = 1,236,000

If net investment rate of return and inflation rate provided - subtract inflation rate from investment rate (7% - 4% = 3%)
* do not use real rate of return ((1.07/1.04) - 1) * 100)

If no time element it’s not a time value of $ question

Question 4

If want to research background of insurance company, which rating service use?

Answer 4

A.M. Best - only one that provides detailed, historical data on insurance carriers

All others only provide ratings

Question 5

Property and Casualty Coverages

Answer 5

Section 1
A - Abode (dwelling)
B - Building and backyard (other structures)
C - Contents (personal property)
D - Days Inn or Demnity (loss of use)

Section 2
E - Enemies or everyone wants to sue (personal liability)
F - First aid (medical payments)z

Question 6

Basic form

Answer 6

WHARVES FLT: windstorm, hail, aircraft, riot, vandalism vehicles, explosion, smoke, fire, lightening and theft

Question 7

Broad form

Answer 7

RAF (Royal air force): rupture of a system, artificially generated electricity, freezing of plumbing and falling objects

Question 8

HO 1, 2, 3, 4, 5, 6, 7 and 8

Answer 8

HO 1 - dwelling (A-D basic coverage)
HO 2 - home (A-D broad coverage)
HO 3 - home (A, B and D open and C broad) - add HO 15 to make C open
HO 5 - home (A-D open)
HO 8 - older home (A-D basic)
HO 4 - renters (C-D broad, no A and B)
HO 6 - condo (C open, D broad, some coverage for A and B, like wall to wall carpet and cabinets and loss assessment coverage)
HO 7 - mobile homes

Question 9

Exclusions from coverage

Answer 9

OPEN WIF

Ordinance of law
Power failure
Earthquake
Neglect & Nuclear hazard

War
Intentional loss
Flood

Question 10

Property loss calculations

Answer 10

Coinsurance percentage

Homeowner’s policies - use 80% if not given

Commercial - use 90% if not given

Question 11

Personal auto policy

Answer 11

A - All my fault - LiAbility (BI/PD - bodily injury property damage)
B - hospital Bed (medical payments)
C - careless / crap (uninsured and underinsured)
D - Damage (damage to auto - collision loss and other than collision loss (comprehensive))

Question 12

Submit to insurance underwriter for disability insurance - net worth statement or cash flow statement?

Answer 12

Net worth statement

Question 13

Provision in LTC that generally most important - guaranteed renewability or inflation protection?

Answer 13

Inflation protection

HIPPA requires guaranteed renewable

Question 14

What Medicare section is skilled nursing covered under?

Answer 14

Part A not Part B

Question 15

Other than LTC what other means provides nursing home coverage - Medicaid, Medicare supplement policy or medigap ins?

Answer 15

Medicaid

Medicare supplement or medigap ins may provide for rehabilitation stay but not for nursing home coverage

Question 16

What life ins coverage will force someone to put away money if big spender and not saver?

Answer 16

Whole life and not universal life or variable universal life because whole life required to pay premiums and covers entire life. Not forced to pay premiums with universal life and variable universal life policies

Question 17

Better solution for funding buy-sell agreement - whole life or variable life?

Answer 17

Variable life because of CV component along with growth potential of variable life policy. Can use CV to fund buy-sell agreement

Question 18

Misstatement of age - when is DB adjusted upward and downward?

Answer 18

DB upward if younger than age stated because premium will buy more benefit

DB downward if older than age stated because premium will buy less benefit

Question 19

Is conversion provision (term to perm) an insurance order that requires extra premiums?

Answer 19

No, it’s a standard contract provision

Question 20

W substantially borrows from her whole life policy. She is concerned about reduced DB. Which divide T option should she select - paid up additions or 5th dividend?

Answer 20

5th dividend because it will buy an amount of 1 year term insurance equal to the outstanding loan

Paid up additions may or may not be equal to the amount of the loan

Question 21

P terminally ill and less than 2 years to live. Life insurance with DB of $500k and $40 CV. Viatical settlement co offers P $325k in cash and pays 8 more premiums of $4k each.

Is the $325k P receives taxed?
What portion of DB to viatical company is tax free?

Answer 21

Tax free to P because terminally ill (not $325k-$40k =285 K·$ $285k taxable to P if not terminally ill)

$357k of DB tax free to viatical company because that’s company’s basis ($325k + $32k =$357k)

Question 22

C divorced and met J. If married him wants pre-nup and wants whatever assets remain to go to her favorite charity. C considering life ins to benefit J should C die first. What policy suggest if in good health and nonsmoker?

10 year term l, annual renewable term or whole life

Answer 22

Answer - whole life
Whole life provides guaranteed premium and cash value. She may have 30 year life expectancy so if J does before her she can cash it in or leave to favorite charity

Annual renewable term will become increasingly expensive

Doubtful she would only need 10 years of coverage

Question 23

H & W have estate that exceeds $30M and their business makes up 80% of assets. Debt is minimal but fail to save each year. 3 kids and 6 grandkids none of whom work in business. They are worried about future of business and estate taxes after both die. What do?

Find a buyer for business
Buy 2nd to die variable universal life policy

Answer 23

Buy 2nd to die policy because need for cash to pay estate taxes and bequeaths are likely to occur at 2nd death

Premium will be based on joint life expectancy which is usually more favorable than single life policy

Sell business not fit their needs - doesn’t say they want to sell or how old they are. They could be 50.

Question 24

A purchased whole life policy and wants DB to increase each year. What dividend option should he select?

Paid up insurance or one year term

Answer 24

One year term because it pays a DB equal to the guaranteed CV (which is increasing). Since DB is based in CV, it is increasing yearly, even if insured borrows against policy

Paid up insurance is a non-forfeiture option. It does not increase, the DB is fixed.

Paid up additions would also be correct, but that wasn’t answer choice (note I read paid up insurance to be paid up additions by mistake)

Question 25

What is true about term insurance? Can provide permanent protection for 30 or more years or it is usually guaranteed renewable (for limited number of years)

Answer 25

Usually Guaranteed renewal for a period of years

Question 26

Which is not correct about universal Life insurance? It features guaranteed CV or it separates protection and savings components

Answer 26

It features guaranteed CV - it does provide a guaranteed minimum interest rate but not guaranteed CV

Question 27

Is CV for universal life and variable universal life invested in the same type of account?

Answer 27

No, universal life is in a general account and variable universal life is in a separate account (separate from insurer’s general account)

Question 28

How is appreciation when a life insurance policy is surrendered taxed?

Answer 28

Generally, it’s taxed as ordinary income

Question 29

T’s parents bought T $50k life ins policy when he was 2. Now at 25, T owns the policy and is getting married. CV is $10k. What are his options? Cash it in for $10k (maybe partially taxable Exchange for larger face value policy (tax free exchange) with proof of insurability Roll CV into annuity (tax free exchange) Select the extended term non forfeiture option

Answer 29

All of these 2&3 are permissible 1035 exchanges 1&4 are nonforfeiture options

Question 30

If need $10k in cash from whole life policy what most cost effective way to do this? Current face value $100k Dividends buying paid up ins (DB $25k & CV $15k) CV (not including dividends): $35k Take $10k loan from policy’s CV Withdraw $10k from policy’s CV Surrender paid up insurance equal to $10k of CV Surrender K and buy new moser cost effective policy

Answer 30

If surrender paid up additions only, proceeds will be mainly tax free and the only the dividend sourced DB will be reduced If does loan, it will reduce net death proceeds and interest on loan not deductible

Question 31

When thinking about buying a new life insurance policy do either of these matter? If new carrier uses agents rather than brokers to sell policies Asking if the new policy will have incontestable and suicide clauses

Answer 31

No, method of sale (agent vs broker) should have little impact on policy in long run and all policies include incontestable and suicide clauses

Question 32

D & B own business and signed cross purchase buy sell agreement funded with insurance. D is leaving to start new business and wants to purchase his policy from B. Will this create a transfer of value issue?

Answer 32

No, exception to transfer of value rule includes sale or transfer to insured, but if did a transfer for value to D’s wife this would be a problem

Question 33

In order to be a MEC, does it have to meet the requirements of a life insurance k?

Answer 33

Yes, this is one of the elements of the IRC definition of a MEC

Question 34

If someone MEC’ed a contract, what types of distributions are dividends paid by the contract taxable? Received in cash Used to reduce premiums Used to purchase paid up additions Kept with company to accumulate interest Used to pay off policy loan

Answer 34

Yes - Received in cash Used to reduce premiums Used to pay off policy loan No - Used to purchase paid up additions Kept with company to accumulate interest

Question 35

If have Series 6 and all applicable state licenses, which investment can’t you sell? Variable annuity, variable life ins, mutual funds, REITs

Answer 35

REITs are tradable securities so would need Series 7

Question 36

Joint and survivor annuity and H dies. Which is correct statement about the annuity? Amount of annuity includible in H’s estate is the amount of the original investment that has not been fully recovered at H’s death Amount of annuity includible in H’s estate is the replacement cost of a single life annuity on W at time of H’s death

Answer 36

Amount of annuity includible in H’s estate is the replacement cost of a single life annuity on W at time of H’s death

Question 37

Endorsement type split dollar owned by employer. S can purchase the policy. If policy had $1M DB, $120k CV and $100k premiums paid, what would S be required to pay?

Answer 37

$120k because under endorsement split dollar it’s the higher of CV or premiums paid Company generally can’t charge interest due to terms of agreement

Question 38

A and B entered into disability and life buyout agreement. A’s basis in the business is $100k and buyout is for $1M. How much income will be taxable to A if he becomes totally disabled or to his estate if he dies?

Answer 38

$900k/$0 For disability, stock will be redeemed at $1M resulting in $900k gain For death, estate gets step up in basis. Heirs can sell stock and no income tax would be due. The $1M would be included in A’s estate, but question did not ask about estate tax only income tax

Question 39

Corporation Q offers no qualified deferred comp plan for M. To informally fund the plan, Corporation Q purchases and owns a variable annuity. The separate account has a $5k gain for the year. Is the capital gain taxed deferred?

Answer 39

The $5k gain is taxed as ordinary income to corporation this year because owned by entity and not a natural person

Question 40

Which feature accurately reflects a disadvantage to the annuitant of a single life immediate fixed annuity? Annuitant receives a fixed payment or no residual value remains in the taxable estate of annuitant

Answer 40

Annuitant receives fixed payment No value at death (single life) is an advantage for federal estate tax purposes

Question 41

E earns $100k. E is eligible for 5x annual income in group life. Monkey employees only eligible for 1x. If Table 1 rate is $.15 per $1,000 per month, how much income is E charged for the benefit?

Answer 41

.15*500 =75 * 12 = $900 No $50k exemption to subtract Fri $500k of insurance Also, remember to multiply by 12 if info given is monthly and asking for annual amount charged/have to pay

Question 42

Company X purchase a group term insurance policy on each employee for $100k. It is the owner and named itself as the beneficiary of the policy. Can company deduct premium?

Answer 42

No, deduction is not allowed if employer directly or indirectly is the beneficiary in the policy

Question 43

If use FSA debit card, does employer have to require employees to provide itemized receipts for all expenses charged to the debit card?

Answer 43

Yes, but IRS allows employer to waive the receipt requirement when debit card used at pharmacy or grocery stores that accept FSA debit cards

Question 44

If L is a highly compensated and key employee and her employer offers group term life insurance benefit of 4x her salary ($80k), how is premium taxed? Table 1 coverage cost on $320k of DB as ordinary or compensation income

Answer 44

Compensation income because also subject to FICA or self employment taxes

Question 45

Which statement regarding Medicare Part A is correct? To be eligible, you must be at least 65 Benefits are subject to both a deductible and co-payments provisions for inpatient hospital care

Answer 45

Correct - Part A benefits are subject to both a deductible and co-payments Don’t have to be at least 65 because disabled workers can be covered under age 66

Question 46

A and B want to find buy-sell with life insurance. Insurance carrier willing to offer life insurance on B, but with a rating (extra premium). What option should A and B choose to achieve greatest mutual benefit? Use cross-purchase buy-sell and 1) each purchase level term policy even if B is rated and have to pay more OR 2) each purchase variable universal life on each other’s lives and some of the premium rating (out of pocket costs) could be reduced by wise investment choices.

Answer 46

#2 - with good investment choices variable policy may be less costly

Question 47

Employer plans to sell split dollar life insurance policy to insured. Employee asks employer to sell to employee’s kid. What would be the selling price?

Answer 47

Greater of CV or premium paid by employer

Question 48

If H leaving her job for another job, which can she do? Convert health plan to individual policy and pay the premium Convert group term insurance into individual term insurance and pay premium

Answer 48

Convert health insurance - not very good policy and expensive but can do it If convert group life it has to be converted into a permanent plan (term to perm)

Question 49

Corporation is concerned about how EE’s death will impact the company as EE is a key employee. Which factors should be considered when quantifying amount of life insurance corporation should have on EE? Loss of earnings caused by EE’s death Cost of finding replacement of EE Cost of funding split dollar policy on EE Whether there is someone in the corp that can easily step into EE’s position

Answer 49

1, 2, and 4 - split dollar is employee benefit type policy not a key person policy

Question 51

Corp considering salary continuation plan for J. If corp pays disability insurance premium in the form of a bonus to J, will the disability benefits be excluded from J’s income?

Answer 51

Yes, the benefits would be tax free. But, the bonus would be taxable

Question 53

Who is the owner of a split dollar life insurance policy under the collateral assignment method?

Answer 53

The employee not the company

Question 54

If an employee gets injured on the job, which benefits will not be tax free? Employer paid sick benefits Workers comp disability income benefits

Answer 54

Employer paid sick benefits - they are like salary and thus taxable All workers comp benefits are tax free even disability benefits