Insurance Flashcards by Kaylee U

Which of the following correctly reflect how insurance operates?
I. Probability affects pricing
II. Loss exposure is reduced by having a large pool of insured people share in the financial losses suffered
by members of the pool
Ill. Risk is transferred from a group to an individual
IV. Loss probability is speculative
A. All of the above
B. 1, II
C. II, III, IV
D. II

B. I, II
The underwriter uses a morbility or mortality table or similar tables in the process of selecting in classifying exposures (probabilities) answer to applies the principle of large numbers

How well did you know this?

Not at all

Perfectly

Question 8
Which of the following statements concerning the various methods of handling risk is incorrect?
A. Avoidance: A parent refuses to give permission for a child to participate in a field trip.
B. Retention: A parent raises the deductibles on his automobile insurance when his teenager begins to
drive the car.
C. Reduction: A homeowner increases the height of the fence surrounding his swimming pool.
D.Diversification: A condominium association installs floodlights in the building’s adjacent parking lot.
E. Transfer: A homeowner requires a surety bond from his/her contractor to guarantee the completion
date of a remodeling project.

D.
Installing floodlights in the parking lot is an example of risk reduction. It is incorrect. The other statements are accurate.

How well did you know this?

Not at all

Perfectly

question 13
A company can purchase and own life insurance and all of the following circumstances, except which of the following ?
A. Key person
B. Buy-sell
C. Deferred Compensation arrangement for a key person.
D. Dependent of a key person.

D. dependent of a key person
An employer has no insurable interest exists on the dependent of an employee

How well did you know this?

Not at all

Perfectly

Question 4
Using a capital retention calculation, what amount of life insurance face value should the client purchase to
meet his survivor’s yearly income needs ($65,000) so that it will increase with inflation of 6%?
meet nis survivor’s yearly income needs ($65,000) so that it will increase with inflation of 6%?
A. $1,083,333
B. $1,148,333
C. $650, 000
D. $715,000

B. $1,148,333

65,000/6%=1,083,333.333 + 65,000 = $1,148,333

How well did you know this?

Not at all

Perfectly

How well did you know this?

Not at all

Perfectly

Question 7
Which of the following is true about participating policies written by a participating insurance company?
A. They always pay dividends to their policyholders.
B. They overcharge premiums.
C. They are owned by stockholders.
D. They participate with stockholders.

B. they overcharge premiums..

Premiums for participating policies, intentionally overcharge. The premium answer is wrong because of the word always if the company loses money and is not required to pay a dividend.

How well did you know this?

Not at all

Perfectly

Question 5
Which of the following vehicles are covered under Dad’s PAP?
I. A new car purchased last week Il. A car rented while on vacation
III. A pickup truck used in business
IV. A car owned by his son on a separate insurance policy
A. All of the above
B. I, II, IV
C. I, Il
D III

C. The new car would be covered as would the temporary rental vehicle. The van would have to be covered under a commercial policy not on a personal auto policy (PAP).

How well did you know this?

Not at all

Perfectly

Which of the following exclusions are generally found in homeowner policies?
1. Earthquake
Il. Sinkhole home damaged
III. Flood
V. Carelessness by an insured
A. All of the above
B. 1,1I, IV
C. 1I, III
D. 1,II

D
Coverage for earthquake and flood are excluded. Sinkhole is covered because the home is damaged. Intentional losses committed by an insured are specifically excluded. Carelessness is not an intentional loss. EXAMPLE: A driver didn’t notice the car in front of him or her. As a result, the person hit the car in front of him or her. The carrier will pay the claim.

How well did you know this?

Not at all

Perfectly

Question 9
explained?
Which of the following statements about the difference between HO-2 policies versus HO-3 policies is accurately
A. Damage to an attached garage is covered under Coverage A in an HO-2 policy, but damage to a detached garage is protected under Coverage B in an HO-3 policy.
B. An HO-2 policy covers damages to the insured’s residence against “broad form perils” including intentional loss while an HO-3 policy covers “basic form perils.”
C.
In an HO-2 policy, personal property of the insured is covered against “broad form perils”, but in an HO-3 policy personal property of the insured is covered against “open form perils.”
D. The principal difference between the HO-2 and the HO-3 is that coverage on the dwelling and other structures is more comprehensive under the HO-2 policy.

A
An attached garage is part of the covered dwelling and is thus protected under Coverage A. This applies to both the HO-2 and HO-3 forms. Answer B is wrong because intentional loss is excluded. Answer C is wrong because both the HO-2 and HO-3 policies provide broad form perils for personal property. Answer D is wrong because the HO-3 policy offers better protection with open perils coverage.

How well did you know this?

Not at all

Perfectly

Question 11
Bill Yates was involved in a not-at-fault auto accident. He was hurt, and his car was damaged. A hit-and-run vehicle left the scene of the accident before Bill could get the driver’s name or license number. Under which parts of his auto policy (he has A, B, C, and D coverage) can he collect?
1. Bodily injury/property damage
Il. Medical payments
Ill. Uninsured motorist
IV. Collision
V. Other than collision
A. 1, II, III
B. 1I, III, IV
C. II, V
D. III, IV
E. IV

B
Medical payments and collision coverages apply. Answer Ill protects him when he gets sued, but Bill was not at fault. Bill must file a claim against his own insurer to collect under the uninsured motorist provision. Basically, he sues himself. This presumes the hit-and-run driver cannot be identified. Item I is incorrect because Coverage A would apply if Bill were at fault and if the other party were injured or his/her property were damaged.

How well did you know this?

Not at all

Perfectly

Question 12
Jane carries a $1 million personal umbrella liability insurance policy with a requirement that the underlying automobile liability policy has liability limits of $250,000 per person. However, Jane only has coverage for $50,000. If a legal judgment of $700,000 is obtained against Jane, what amount will the umbrella policy pay?
A.
$50,000
B.
$250,000
C.
$450,000
D.
$500,000
E. $650,000

C
The umbrella liability insurance policy would pay a benefit of $450,000. $700,000 - $250,000 (required limit) = $450,000. Her auto policy would pay $50,000 then she would pay $200,000 out-of-pocket then the umbrella would pay the difference.

How well did you know this?

Not at all

Perfectly

Question 13
Which of the following statements about umbrella liability insurance policy coverage are true?
I. It provides excess coverage when the limits of the insured’s basic liability coverage are adequate.
Il. It provides excess coverage when the limits of the insured’s basic liability coverage are inadequate.
Ill. It provides broader coverage than basic underlying policies.
A. I, II, III
B. 1, Ill
C. II, III
D. I, Il

A
The material shows that the umbrella even provides benefits when the client has inadequate coverage. The insured is responsible for gaps in coverage. For the CFP Board Certification Examination, the client should have umbrella liability coverage.

How well did you know this?

Not at all

Perfectly

Question 15
Mr. Harris serves on the Board of Directors of his condominium association. He is not paid for his services.
During the year, the management company of the condo was sued for and lost $1 million due to negligent acts.
Can Mr. Harris be sued?
A. No, the management company is solely responsible.
B. Yes, Mr. Harris can be sued
C. No, Mr. Harris is not an officer of the condo association.
D. No, Mr. Harris is only responsible in case of mismanagement.

B
Mr. Harris can be sued by an association member. This is why he should require the condo association to purchase Directors and Officers coverage.

How well did you know this?

Not at all

Perfectly

Question 16
Which of the following employer paid insurance premiums or costs are tax-deductible?
1. Business owner’s insurance
Il. Key employee life insurance
III. Workers’ compensation insurance
IV. Federal unemployment tax
V. Directors and officer’s liability insurance
A. I, III, IV, V
B. I, II, III
c. II, Iv
D. III, IV, V
E. III, V

A
Premiums for I, Ill, IV, and V are business deductions. Unemployment benefits are taxable income. Answer ll is not tax-deductible. Federal unemployment tax is FUTA and is deductible.

How well did you know this?

Not at all

Perfectly

Question 1
In conjunction with a major medical insurance policy, what does the term break point mean?
A.
The maximum benefit amount is paid out.
B.
The participation (coinsurance) provision begins.
C.
The insurer begins to pay 100% of all medical expenses.
D.
The insured must incur a specified amount of expense personally before the major medical plan becomes applicable.

C.
In major med, the breakpoint is the dollar amount of the claim at which the insurer pays 100% of the eligible expenses.

How well did you know this?

Not at all

Perfectly

Question 8
Saul, a sole proprietor (35% tax bracket), established an HSA. The account has a $3,100 deductible. Recently, Saul had an illness which cost $2,000 in medical expenses. He took a $2,000 distribution from the HSA to pay these expenses. Which of the following statements best describes the tax outcome associated with the distribution?
A. Distributions from an HSA are tax-free.
B. The $2,000 is taxable at 35%.
C. Distributions that are used to pay qualified medical expenses are excludable from gross income.
D. The distribution is tax-free only after $3,100 of expenses are incurred.

C. HSA distributions or qualified expenses are tax-free. Distributions can be taxable if they are not qualified. The word “qualified” is missing in answer A.

How well did you know this?

Not at all

Perfectly

Question 5
The period of time after the disability occurs but before benefits payments begin is the:
A. Waiting period
B. Any occupation definition
Presumptive disability
D. Residual disability
E. Probation period

A. The waiting (elimination) period is the number of days between the onset of the disability and the eligibility for benefits.

How well did you know this?

Not at all

Perfectly

Question 8
From the insured’s standpoint, which is the most beneficial definition of total disability?
A.Loss of income
B. Non-cancellable
C. Any occupation
D. Own occupation
E. Presumptive disability

D. The own occupation definition of total disability is most likely to pay the benefit to the insured.

How well did you know this?

Not at all

Perfectly

Question 2
Mrs. Heartpatient was in the hospital for 6 days to repair an arterial aneurysm. Under Medicare Plan A, her daily nursing facility co-payment is $209.50 (2025). Upon discharge from the hospital and as part of her prescribed rehabilitation plan, she has entered a skilled nursing facility. The skilled nursing facility charges $359.50 per day.
If she stays 30 days, what amount must she pay out of pocket?
A.
$1,500
$2,095
C.
$8,690
D.
$10,785

B
Medicare will pay the cost for the first 20 days in full. Medicare will then pay the amount above $209.50 for the remaining 10 days of the patient’s stay. Mrs. Heartpatient will pay $209.50 per day for 10 days, or $2,095.

How well did you know this?

Not at all

Perfectly

Question 3
Upon returning to work, the insured is unable to earn as much as he did before the disability began. Benefits are proportional to the amount of income lost and are payable for the same duration as total disability benefits would be covered. Which feature of disability income insurance is accurately described?
A. Waiting period
B. Any occupation definition
C. Presumptive disability
D. Residual disability
E. Probation period

D.
Medicare will pay the cost for the first 20 days in full. Medicare will then pay the amount above $209.50 for the remaining 10 days of the patient’s stay. Mrs. Heartpatient will pay $209.50 per day for 10 days, or $2,095.

How well did you know this?

Not at all

Perfectly

Question 9
Dr. Samuels purchased a disability policy with a base benefit of $10,000/mo. and a SIS benefit of $1,200/mo. Dr.
Samuels became totally disabled and ultimately received $800 in Social Security disability benefits. What amount of benefit will the carrier pay him each month from the policy once he receives the Social Security benefit?
A.
B.
D.
E.
$400
$9,200
$10,400
$10,800

C
The base plan of plus $1,200 - 800
$10,000
+ $400
$10,400

How well did you know this?

Not at all

Perfectly

Question 10
Otis would like to purchase a disability insurance policy, but premium cost is a problem. What can he do to reduce the premium costs?
1. Increase the elimination period
Il. Delete the presumptive disability coverage
Ill. Delete the continuance provision
IV. Not buy the COLA rider
V. Purchase a guaranteed renewable policy
A. I, IV, V
B. II, III
C. I, III, IV
D. II, III,

A. Otis can reduce the premium by electing a longer elimination period and/or choosing a policy with a guaranteed renewable rather than non-cancellable provision. The presumptive disability clause and the continuance provision clause are included in the policy. COLA is a rider (extra cost).

How well did you know this?

Not at all

Perfectly

Question 4
Charles Changer is thinking about buying a new life insurance policy from a new carrier and canceling his old policy. As a CFp® practitioner, what would you most likely suggest?
1. Charles should get updated proposals on his existing policies. Then compare proposals for both companies.
Il. Charles should research the financial position of both companies.
Ill. Charles should check with the NAIC to find out if the new company is on the watch list.
IV. Charles should determine if the new carrier uses agents rather than brokers to sell policies.
V. Charles should ask if the new policy will have incontestable and suicide clauses.
A. All of the above
B. I, II, III, IV
C. I, II, III
D. II, IV, V

Question 4: C
The method of sale (agent versus broker) should have little impact on the policy in the long run. All life insurance policies include uncontestable and suicide clauses.

How well did you know this?

Not at all

Perfectly

Question 5
When will the proceeds from a life insurance policy be subject to income tax?
A. When a client gifts his policy to his ex-spouse
B. When a client gifts her policy to her daughter
C. When a client sells his policy to a viatical company
D.
When a client buys a policy under which she is the insured from her employer’s qualified plan

Study These Flashcards

Question 5: C
The sale to the viatical company is a transfer for value that will subject the beneficiary to income tax on the proceeds. Answers A and B are gifts. Gifts are not transfers for value. In Answer D, the client is buying her own policy. When the client dies, the death benefits paid to the viatical company will be subject to income tax above basis.

Question 6 Don and Bill own a business valued at $1,000,000. Some years ago, they signed a cross-purchase buy-sell agreement funded with life insurance. Don is leaving to start a new business. Don wants to purchase his life insurance policy ($250,000) from Bill. Which of the following situations triggers a transfer for value problem? A. A sale of the policy from Bill to Don B. A direct transfer for value the policy from Bill to Don's wife to avoid the three-year estate inclusion rule C. A sale of the policy from Bill to the new business (corporation) that Don is starting D. A sale of the policy from Bill to a corporation in which Don will own

B The sale of the policy from Bill to Don's wife triggers the transfer for value consequences. The exceptions to the transfer for value rule include a sale or transfer to the insured (Don) or a sale to a corporation in which the insured is a shareholder or officer.

Question 9 Which of the following statements accurately describes a modified endowment contract? I. It meets the requirements of a life insurance contract. Il. It was entered into on or after June 21, 1988. Ill. It fails to meet the seven pay test. IV. It meets the guideline premium and corridor test or cash value accumulation test. A. I, N B. II, III C. 1, I1, III D. II, III, IV E. All of the above

C. through Ill are all elements of the IRC definition of a modified endowment contract.

Question 8 Which non-forfeiture option which could impose a delay clause A. APL B. Grace period C. Paid-up D. Extended term E. Cash surrender value

Question 8: E The cash surrender option may apply a 6-month delay clause. This is to prevent a run on the bank. This is a standard provision in life insurance policies. In insurance industry practice, there would be no delay.

Question 9 Which of the following terms identifies a policy provision which would create a loan from the cash savings account to pay a premium in default? A. APL B. Grace period C. Paid-up D. Extended term E. Cash surrender value

Question 9: A The Automatic Premium Loan (APL) provision enables the insurance company to borrow from a life insurance policy's cash value to pay premiums in default.

Which of the following is not a correct statement concerning universal life insurance? A. It provides lifetime protection as long as sufficient premium is paid. B. It features a guaranteed cash value. C. It has a flexible premium. D. It separates the protection and savings components.

Question 11: B UL provides a guaranteed minimum interest rate but not a guaranteed cash value.

Question 12 Hollis has the following needs relating to life insurance: possible policy loans • cash to pay federal estate tax • guaranteed level premiums Which type of policy listed below would be most suitable? A. First to die B. Joint life C. Whole life D. Universal E. Variable universal

C Whole life insurance is the only policy that fulfills all three objectives. The joint life contract doesn't spell out the type of policy (whole life, universal, or variable).

Which of the following statements is true about a specific difference between universal life and variable A. Cash value of the variable universal life policy is in a separate account; cash value in the universal life policy is in a general account. B. The variable universal life cash value is in a general account; universal life cash value is in a separate account. C. Both have flexible premiums. D. Variable universal life has a cash value based on current interest rates.

Question 14: A Variable policies invest the cash value in an account that is separate from the insurer's general account. Answer C is wrong because the question is asking about the differences.

Question 17 Lilly is comparing the policy provisions, features, and options of two whole life insurance policies. She plans to buy one. What feature listed below should be least important to her? A. The guaranteed cash values of the policy B. Whether the carrier pays dividends or not C. The non-forfeiture options D. The settlement options E. The insurance company rating

E A company rating is not a provision, feature, or option. The answer must relate to the question.

Tom, a key employee of Action, Inc., participates in a discriminatory group life insurance plan for key employees. Tom is age 40. The employer provides $500,000 of group term life insurance. Table 1 rate = $ .10 per $1,000 per month • Actual premium = $ .09 per $1,000 per month • He actually contributes $ .08 per $1,000 per month. How much is Tom's economic benefit per year for the group term life A.$ 60 B 108 C 120 D. $480

Question 3: C In this situation, the key employee's economic benefit (income) is the difference between the Table 1 rate ($.10) and the contribution he made toward the insurance ($08). A key employee, like Tom, in a discriminatory plan must include the higher of the actual cost or the Table 1 cost. In addition, the key employee may not exclude the cost of the first $50,000 of coverage. 0.02* x 12 × 500 = $120

Which of the following group type insurance policies do not offer a conversion feature? I. Life Il. Health Ill. Short-term disability IV. Long-term disability A. 1, 11, B. 11, III C. II, IV D. III, IV E. IV

Question 4: D Life and health group insurance coverage provides conversion features. See end of Chapter 4 Insurance for group health convertibility. Group disability is not convertible.

Which of the following statements about an entity purchase buy-sell agreement are true? 1. The premiums are not deductible as a business expense. II. The premiums are deductible as a business expense. III. The death benefits will be income tax free. IV. After the first death, the remaining stockholder's stock will receive a step-up in basis. V. The deceased shareholder's stock will get a step-up in basis. A. 1, III, V B. II, III, IV, V C. 1, III D. II, IV

A. Answers I, Ill. and V are true. Because the company cannot deduct the premium, the death benefits are received income tax free. At death, the deceased shareholder's stock (Answer V) enjoys a step-up in basis (appreciated property) but not the remaining shareholders' stock (Answer IV). Capital assets generally receive a stepped-up basis upon the death of the owner. The remaining shareholders' basis remains unchanged.

Corporation Q offers a nonqualified deferred compensation plan for Mary. To informally fund the plan, the employer purchases and owns a variable annuity ($100,000 initial deposit). The separate account had a gain for the year of $5,000. Is the capital gain tax deferred? A. If the gain is capital gain, then the gain is deferred. B. The gain is deferred until Corporation Q turns the policy over to Mary. C. The $5,000 gain is taxable as capital gain to Corporation Q this year. D. The $5,000 gain is taxable as ordinary income to Corporation Q this year. E. gain in a separate account is tax deferred

D. The income is taxable as ordinary income in the current tax year when the annuity is owned by an entity who is not a natural person. Annuities don't declare capital gains.

Question 10 Mr. Safe wants an annuity with payments he cannot outlive. However, if he dies prematurely, he wants the annuity to provide payments that will at least be equal to the purchase price of that annuity. What type of annuity should Mr. Safe buy? A. Single life with 10 years certain B. Pure life annuity C. Single life with period certain guaranteed D. Installment refund annuity

A refund annuity provides annuity payments at least equal to the purchase price of the annuity. Answers A and C may or may not provide payments at least equal to the purchase price should he die prematurely. Answer B will only last as long as he is alive.

Are annuity contract premiums deductible? A. No, because premiums are never deductible. B. Yes, because annuity contract premiums are deductible when a corporation offers them as part of a discriminatory nonqualified deferred compensation plan. C. Yes, because annuity contract premiums are deductible when the annuity premiums are paid as a bonus to the employee. (The employee owns the annuity.) D. Yes, because annuity contract premiums are deductible when the annuity is held in an IRA.

C. If, instead of paying an employee a bonus directly, the employer deposits the bonus into an annuity contract owned by the employee, the annuity payment is deductible. Answers A and B are false. A corporation can realize gains and losses from an annuity but not deduct the premiums. Answer D could be false based on phaseout limits/active participation rules. Since answer C is always correct and Answer D is correct only under certain conditions, Answer C is the only possible choice. Answer A is incorrect. Annuities issued after 1982 are taxed LIFO (last-in-first-out). Before 1982 they were taxed FIFO (first-in-first-out).

Question 12 In 1996, Joseph Jeter, age 55, purchased a deferred annuity that is estimated to pay him $850 per month for the rest of his life, beginning at age 65. His investment in the contract was a one-time payment of $50,000. The assumed rate of return on the contract is 8%. At this time, Joseph is not sure whether he will need to withdraw any of his original investment prior to the starting date of the annuity. Which one of the following is an accurate income tax implication of the deferred annuity for Joseph? A. Withdrawals in a lump sum are first allocated to the tax-free investment in the annuity. B. The distribution amount consisting of interest paid on the investment is taxed as a capital gain. C. Earnings on the investment are taxable in full each year to Joseph as ordinary income. D. The distribution amount consisting of Joseph's investment in the contract is a tax-free return of capital if he surrenders the contract. E. Tax-free withdrawals are allowed for education or family illness.

Question 12: D In a distribution from an annuity, the individual's investment in the contract is treated as a tax-free return of capital. Until distributions begin, the earnings continue to grow tax-deferred.

Through her employer's FSA, Betty elects a salary reduction of $5,000 for dependent childcare. Which of the following statements is false? A. The FSA is typically funded entirely through employee salary reductions. B. The salary reduction is not subject to FICA and FUTA. C. If Betty fails to use all the salary reduction ($5,000) by year end, the remaining dollars can be used in the 2½ month grace period. D. The salary reduction is not subject to federal withholding tax.

C. The new rule allows workers an extra 2½ months to spend the money (until March 15th) for the medical expense portion only. This question is about dependent care FSA only.

Bobbie Jo owns a single premium deferred annuity. Which of the following features would be advantageous to A. The annuitant can't change the payout method. B. Accumulation is tax-deferred until distributions are paid out. C. The annuitant receives a guaranteed stream of income no matter how long he or she lives. D. The amount remaining in the annuity is not subject to estate taxes.

A. Insurance is risk transference. Self-insurance, deductibles, and coinsurance represent risk retention.

Which of the following annuity distribution methods offers the highest periodic payment? A. Single life B. Single life with 10-year period certain C. Immediate D. Single premium

A. A single life annuity distribution provides the highest periodic payment amount. Single life with 10-year certain will reduce the payout.

Trina Traveler purchased a level premium term policy under which she is the named insured. After returning from a long vacation, she notices a lapse notice on the term policy from her insurance carrier. What can she do to keep the policy in force? A. Send in the premium and see if the carrier will accept it (explain she was out of the country) B. Exercise her guaranteed renewable option C. Contest the notice D. Submit the policy reinstatement form E. Exercise her guaranteed purchase option provision

D. She can reinstate the policy. She will have to pay any premiums in arrears, but will maintain the premium of the original policy.

Continuing with Jack from the previous question: When Jack retires, should he convert his group term policy? If he converts, which kind of policy can he convert to? The Question 14 facts remain unchanged except Jack is now age 65. A. Convert to decreasing term B. Convert to a whole life policy C. Terminate the coverage at age 65 D. Convert to a variable annuity

B. Jack does not need much life insurance at age 50. Answer 14 does not indicate no need. The $60,000 of group term is not a large policy. Conversion to whole life seems to fit the question best. He cannot convert a group term policy to an annuity.

Hank, age 52, has a wife and two dependent children, ages 18 and 19. He was recently fired from his job of 10 years. He elects to be covered under COBRA (family coverage). Which of the following statements is true? I. He will be entitled to 18 months of coverage. II. His wife and two children will get 36 months of coverage. IlI. The plan of coverage will be slightly more restrictive than his current health insurance. IV. He will have to pay his employer's premium cost plus 2%. A. All of the above B. 1, 11, IV C. 1, 1I D. I, IV E. II, III

Question 16: D All family members are entitled to 18 months coverage. Answer l is true. Hank will get 18 months of plan continuation. The COBRA plan benefits must be identical to the benefits of the group health coverage. The employer may charge Hank 102% of its actual premium cost because it must handle Hank's checks and paperwork.

Which of the following statements concerning Medicare Part A benefits is correct? A. To be eligible, the insured must be at least age 65. B. Home health care visits are covered under Part D. C. Hospice care is specifically excluded. D. Benefits are subject to both a deductible and co-payments provisions for inpatient hospital care.

D. Part A benefits are subject to a deductible and copayments. Disabled workers, for example, can be covered under age 65. Hospice care is covered under Part A. Medicare Part D is for drugs.

Ida is 55 years old and approaching retirement. She participates in a fully funded defined benefit retirement program. What kind of benefits does Ida need to obtain when she retires? 1. Major medical insurance II. Disability insurance IlI. Long-term care insurance IV. Life insurance A. All of the above B. I, I C. I, V D. II, II E. II١, ١٧

B She needs medical coverage. She needs LTC so that her income stream from the defined medical benefit plan is not tapped for future LTC needs. Ida cannot keep or obtain disability insurance when she is retired. There is no indication of a life insurance need.

Luke owns Lucky Luke's Lager, Inc. If the corporation buys a business overhead expense (BOE) policy and it pays the premium, which of the following statements is true? A. It can pay Luke's umbrella liability insurance because he is 100% owner. B. It can cover Luke's salary because salary is a normal business expense. C. Benefits payable to Luke's corporation are taxable income. D. Benefits payable by the policy are limited by the actual business expenses incurred.

D. Luke's salary is specifically excluded under the BOE policy. The BOE will not cover the premium for his personal umbrella liability policy. The benefits are income tax-free.

Sam's knee problem makes him nervous about his disability insurance. Sam is a regional sales manager for Hyper-Tech, Inc. He earns $200,000 in salary plus a $200,000 (estimated) bonus. This is a perfect job for him, and he doubts he can duplicate this job and money with any other employer. How should he cover himself for disability considering his current coverage? 1. He should opt-out of his current group disability plan and purchase the maximum amount of individual disability coverage. II. He should supplement his group disability plan with a new individual plan with own occupation coverage up to age 65. III. He should build up an emergency fund and self-insure for a reasonably long waiting period with a new individual policy. IV. He should buy a guaranteed insurability rider in the new individual policy. He can exercise the option if he loses his job for any reason. V. He should buy a partial disability rider in the new individual policy. This benefit will be paid until age 65 if he is partially disabled. A. I B. II, III, IV, V C. II, III, IV D. II, III E. Il

Question 24: D If possible, Sam should supplement his current plan. The group plan definition of disability is his own occupation for 5 years. He doesn't have much spendable income. It makes sense to keep the group plan and build up his emergency fund. Answer IV is false. To exercise a guaranteed insurable option, he must show proof of higher earnings. Answer V is false. This defines the residual disability rider. The partial disability rider is normally free.

Mr. and Mrs. Apple. New Jersey residents, have a daughter who attends Cornell University in New York State. They give her a car while she is a college student. After college, she takes a job and will live in Manhattan. Is her car still eligible for coverage under the parents' PAP policy? A. No B. Yes C. It depends on whether she can be claimed as a dependent. D. She will not be protected for out of state coverage.

A. While away at college, the daughter is still considered a resident of her parents' home (a dependent). After taking a job and residing in New York, she must license and insure the car in New York.

While at college, Billie Bob takes a job delivering pizzas for extra spending money. Distracted by looking for an address, he crashes into the side of a parked car. The whole side and the frame of the parked car (a BMW) is destroyed, resulting in a total loss of the vehicle. Billie Bob's car is owned and insured by his parents. How, if at all, will the claim be paid? A. The BMW owner's insurance will pay the BMW claim, and Billie Bob's parents' policy will pay for Billie Bob's car. B. Billie Bob's parents' insurance will pay for both cars' damage. C. There will be no coverage because Billie Bob is negligent. D. There will be no coverage afforded to Billie Bob or his parents because the car was being used for business purposes.

D. There is no coverage for either car if the vehicle is used for business purposes. Answer A is partially right, but the BMW owner's insurance company will sue the parents (subrogation).

Question 38 Sally (age 35) and Hy (age 36) want to fund a buy-sell agreement with life insurance. The insurance carrier is willing to offer life insurance on Hy but only with a rating (extra premium). Which option should Sally and Hy choose to achieve the greatest mutual benefit? A. They should use a cross-purchase type buy-sell: They should each purchase a level-term policy even if Hy is rated. Hy may have to pay more. B. They should use a cross-purchase type buy-sell. They should each purchase variable universal life on each other's lives. Some of Hy's premium rating (out-of-pocket cost) could be reduced by wise investment choices. C. They should use a redemption agreement type buy-sell. Their company should purchase 2 universal life policies. D. They should use a redemption agreement type buy-sell. Their company should purchase 2 limited-pay whole life policies. The policies would be creditor proof.

Question 38: B In a cross-purchase arrangement, Sally would purchase Hy's policy (the higher premium.) She would pay the higher premium. With good investment performance the variable policy may be less costly. Answer C is wrong. Corporate ownership of policies makes them subject to the corporation's creditors. A cross-purchase agreement gives the survivor a tax advantage (step-up in basis). Hy has a shortened life expectancy, step-up in basis is more important to him than minimizing premiums.

Richard's employer plans to sell the current split-dollar policies to the insured. Richard asks his employer to sell his policy directly to his children. This direct transfer would remove it from his estate. Which of the following statements are correct? 1. The selling price will be the cash value of the policy. II. The policy death benefits will become income taxable to his children under transfer for value and be estate tax free (no 3-year rule). III. To avoid the decrease in death benefit that will result from taking a loan or withdrawal to roll out the policy, the children can buy the employer's interest for cash. IV. If the employer receives more in payments than it paid in premiums, it must recognize taxable income. A. 1, I1, III B. ١, ١١, ١٧ C. I١, ١١١, ١٧ D. III, IV

C. Answer l is false. The selling price will be the greater of cash value or the premium paid by the emplover. Il is true, but it will trigger transfer for value tax exposure. It will remove the policy from his estate.

Helen is considering leaving her job to take a job at a different TV station. The new station provides no benefits but more salary. Which of the following statements is true? A. She can continue her health plan for 36 months under COBRA assuming that Mirror has 20 employees and that she pays the premium. B. She can convert her health plan to an individual policy and pay the premium. C. She can convert her life insurance into an individual term plan and pay the premium. D. She can convert her disability plan and pay the premium.

Question 47: B Group health insurance allows for conversion to an individual health policy (reference Insurance Chapter 4). It is not a very good policy and relatively expensive, but it is better than nothing. COBRA for terminating employees is available for 18 months. If she converts her group life insurance, it must be converted into a permanent plan, not term. Group disability insurance is not convertible.

John is concerned about damages to his auto during the "no name" storm. Which of the following losses are covered by the other than collision (comp) coverage of his Personal Auto Policy? 1. During the Initial part of the storm, hail damages his windshield and various windows in the car. II. As the river begins to rise, he decides to move his car to higher ground and hits a prize bull which had strayed onto the roadway. The bull is killed, and the rancher is suing for $100,000 damages III. As a result of hitting the bull, the front-end of the car is caved in and the windshield shatters, opening it up to the rain. The car stalls out in a ditch alongside the road. V. Since the car cannot be moved, the rising river (flood) damages the engine. V. He has to tow the car to a repair shop. A. I, II, III, IV, V B. 1, II, V C.1, III, IV, V D.IV, V

C. Hail is covered under other than collision (comp) (Answer I). Damage to the car incurred by hitting the bull is covered, but the bull itself isn't covered by comprehensive (Answer Il). The economic loss related to the bull is covered by BI/PD (property damage). Answer Ill is covered. Flood is a covered event under comprehensive (Answer IV). Answer V is covered under comp. Towing due to an accident is covered under comp. Comp is "other than collision" covered in Chapter 3.

Who is the owner of an endorsement method split dollar variable life policy? A. The insurance company B. The insured C. The insured's employer D. The insured's beneficiary E. Ownership is split between the insured and employer

C. Under the endoRsement method of split dollar insurance, the employeR is the owneR.

Clarke, Inc. is concerned about how John's death will affect the company. John is a key employee. Which of the following factors should be considered when quantifying the amount of life insurance Clarke should have on John? 1. The loss of earnings caused by John's death II. The cost of finding a replacement for John Ill. The cost of funding a split-dollar policy on John IV. Whether there is someone in the organization who can easily step into John's position A. 1, I1, III B. ١, ١١, ١٧ C. 1, ١١١, ١٧ D. II, III, IV E. All of the above

B. Split-dollar is an employee-benefit-type policy application of life insurance, not a key person policy.

Who is the owner/beneficiary of the current split-dollar policy? I. Mark is the owner. II. Mark and Mary's company is the owner. III. Mary is the primary beneficiary. IV. Mary is functionally a contingent beneficiary. V. Mark and Mary's company operates as the primary beneficiary. A. I, III, IV B. I, IV, V C. II, III, IV D. II, IV, V E. I1, II

B. Under the collateral assignment method for split dollar insurance, Mark is the owner of the policy. Mary receives the balance of the death benefits (like a contingent beneficiary) after the company receives its return of premium.

Insurance Flashcards

(59 cards)