Insurance Planning Flashcards by Michael cherry

Which of the following is a hazard, rather than a peril?
-Ice on the road
-An apartment fire
-A car accident
-All three are hazards

Ice on the road

Ice on the road would give rise to a loss, such as a car accident.

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Identify the difference between moral hazard and morale hazard from the following list.
-Moral hazard is a condition that increases the chance of loss, such as a slippery floor, while morale hazard decreases the chance of loss, such as a floor mat.
-Moral hazard refers to the indifference of individuals because of the presence of insurance, while morale hazard refers to dishonesty in individuals that increases the frequency or severity of a loss.
-Moral hazard is a condition that decreases the chance of loss, such as a floor mat, while morale hazard increases the chance of loss, such as a slippery floor.
-Morale hazard refers to the indifference of individuals because of the presence of insurance, while moral hazard refers to dishonesty in individuals that increases the frequency or severity of a loss.

Morale hazard refers to the indifference of individuals because of the presence of insurance, while moral hazard refers to dishonesty in individuals that increases the frequency or severity of a loss.

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Which of the following statements is NOT correct?
-A pure risk is the possibility of a loss or the possibility of no loss.
-A speculative risk has the potential for gain, no loss or gain, or a loss.
-Risks and losses vary by frequency, or likelihood of occurrence, and severity.
-A residence or an art collection may be subject to damage (a pure risk), but they may also have the potential for appreciation or depreciation (a speculative risk).
-All of the above are correct statements.

All of the above are correct statements.

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The three primary classifications of risk exposure include all of the following EXCEPT?
-Personal
-Liability
-Personal injury
-Property

Personal injury

Personal injury is a type of liability risk exposure.

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Mike is going to dinner with his wife. He knows that the rate of car theft in Town A is 20%, so instead goes to dinner in Town B, which has a car theft rate of 1%. This is an example of what method of handling risk?
-Risk Reduction
-Risk Retention
-Risk Avoidance
-Risk Transfer

Risk Reduction

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Assume the same fact pattern as in the previous question with one change - assume that Mike orders pizza for delivery instead of going to a restaurant. This is an example of what method of handling risk?
-Risk Reduction
-Risk Retention
-Risk Avoidance
-Risk Transfer

Risk Avoidance

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Which of the following is NOT one of the six steps in the Risk Management Process?
-Determine client risk management objectives.
-Evaluate risk exposures.
-Implementation of the plan
-Payment of insurance claims.

Payment of insurance claims.

This is not a Risk Management process step, especially since insurance may or may not be a factor.

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Which of the following is not an uninsured transfer of risk financing?
-Subcontracting
-A deductible
-Hedging
-Contractual conditions, exclusions, or limitations

A deductible

This is an example of risk retention.

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Social insurance usually insures risks that are too substantial or undesirable for commercial insurance companies or deemed to be sociologically and economically important to society as a whole.
-True
-False

True

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Commercial insurance provides a substantial and broad range of coverage to indemnify individuals and entities within the capabilities of commercial companies to do so.
-True
-False

True

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If an individual were to roll a die (with six possible outcomes) 3,000 times, based on the ___________________, we would expect any one of six numbers to be rolled approximately 500 times.
-Law of large numbers
-Principle of adverse selection
-Law of exposure units
-Principle of large risk groups

Law of large numbers

The Law of Large Numbers states that as the number of units increase, the more closely the actual result will approach the expected result.

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Which of the following statements is correct?
-Insurers will generally insure risks where the only possibilities are for loss or no loss.
-Death is an example of speculative risk.
-A fundamental risk is a risk to a small but very similar group of persons.
-A hurricane is an example of a speculative risk.

Insurers will generally insure risks where the only possibilities are for loss or no loss.

Insurers will generally only insure pure risks, not speculative risks.

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Which of the following risks would likely be the most insurable risk?
-High severity, high frequency
-Low frequency, high severity
-Low severity, low frequency
-High frequency, low severity

Low frequency, high severity

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Which of the following is NOT a requirement of an insurable risk?
-Affordable premium
-Determinable and measurable loss
-Calculable chance of loss
-Loss should not be catastrophic
-All of the above are requirements of an insurable risk

All of the above are requirements of an insurable risk

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Life insurance is subject to the principle of indemnity.
-True
-False

False

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ABC Corporation takes out a life insurance policy on their VP of Operations, Bill. Bill leaves the company two years later for another job. Two years later, Bill dies. Can ABC Corporation still collect on Bill’s life insurance policy?
-Yes, because they had an insurable interest at the time of Bill’s death
-Yes, because they had an insurable interest when the policy was purchased
-No, because they did not have an insurable interest at the time of Bill’s death
-No, because they did not have an insurable interest when the policy was purchased.

Yes, because they had an insurable interest when the policy was purchased

With life insurance policies, the insurable interest is only required when the contract is purchased.

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Bonnie’s pickup is damaged in an accident caused by Sylvia. Bonnie’s insurance company pays to have her truck repaired at a cost of $4,500. Bonnie paid a deductible of $1,000, so the insurer was out-of-pocket $3,500. Bonnie’s insurer sues Sylvia/Sylvia’s insurance company for the damages since the accident was clearly Sylvia’s fault. Bonnie’s insurer collects $4,500 from Sylvia’s insurer. Bonnie’s insurer sends Bonnie a check for $1,000 to cover her deductible. Both Bonnie’s insurer and Bonnie are made whole by the process but neither party made a profit. What doctrine makes this process feasible?
-Doctrine of Actual Cash Value
-Doctrine of Rightful Compensation
-Rights of Subrogation
-Rights of Just Compensation
-Rights of Full Indemnity

Rights of Subrogation

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Which of the following statements regarding subrogation is NOT true?
-If the insured (victim) waives his or her right to sue a negligent party, the insurer’s right has not been waived.
-Subrogation refers to the fact that only the insurer has legal rights to sue a negligent party, the actual insured person has no rights to sue.
-Subrogation does not apply to life insurance.
-Subrogation only pertains to contracts of indemnity.

Subrogation refers to the fact that only the insurer has legal rights to sue a negligent party, the actual insured person has no rights to sue.

The insured does have rights to sue. Subrogation is when the insured gives those rights to the insurer.

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Which of the following statements is correct?
-In most states, when dealing with life insurance, the offer and acceptance can be either oral or written.
-Offer and acceptance, consideration, and deductibles were all identified as basic requirements of an insurance contract.
-One of the basic requirements of an insurance contract is that its purpose must be legal in nature.
-None of the above is correct.
-All of the above are correct.

One of the basic requirements of an insurance contract is that its purpose must be legal in nature.

Insurance contracts may not promote illegal or immoral activities.

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Which of the following statements is correct?
-Technically, a property and casualty policy actually covers a person versus a property.
-A policyowner can typically negotiate provisions with the insurer prior to accepting the policy provisions.
-An insurer must assume that the insured has misrepresented or concealed substantive information from the insurer either at the time of application or when filing a claim.
-Only the insured has committed to a legally enforceable promise when issuing an insurance policy.

Technically, a property and casualty policy actually covers a person versus a property.

Insurance contracts are personal.

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A life insurance policy has which type of insuring agreement?
-A named-perils agreement
-An open-perils agreement

An open-perils agreement

An open-perils agreement (or all-risks policy) covers all perils except those specifically excluded.

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Which one of the following would NOT be found on the declarations page of an insurance policy?
-The name of the insurer
-A list of named perils covered by the policy
-The effective date of the policy
-Amount of coverage provided
-The person, property, or activity being insured

A list of named perils covered by the policy

This would be found in the insuring agreement, not the declarations page.

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The Smiths have their home covered by three insurers. Insurer A provides 25% of the coverage, insurer B 40%, and insurer C 35%. After a $30,000 loss, insurer B wrote a check for $12,000. Which provision is being used by the Smiths for multiple insurance providers?
-Contribution by equal shares
-Pro-rata liability
-Primary and excess

Pro-rata liability

The pro rata liability provision states that each provider will pay up to an amount equal to his or her proportional share of the total coverage on the house.

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Three companies insure Josh’s $250,000 house. Insurer A has it insured for 10%, insurer B for 35%, and insurer C for 55% of the replacement value. Using the contribution by equal shares provision for multiple insurance providers, how much will each insurer pay for a loss of $120,000?
-All three pay $40,000
-A pays $25,000 ; B pays $47,500 ; C pays $47,500
-A pays $12,000 ; B pays $42,000 ; C pays $66,000
-A pays $25,000 ; B pays $42,000 ; C pays $53,000

A pays $25,000 ; B pays $47,500 ; C pays $47,500

Provider A will pay their full amount of coverage, and B and C will split the remaining amount.

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All of the following are methods that insurers utilize to reduce the cost of claims and premiums EXCEPT: -Coinsurance -Deductibles -Benefit Limits -Insurance to value provisions -All of the above are used to reduce claim costs and premiums.

All of the above are used to reduce claim costs and premiums.

After the front window of Mom and Pop's Candy store was broken the third time, they did not have to pay a deductible. What is the most likely reason for this? -They have a straight deductible. -They have an aggregate deductible. -The third broken window occurred during their elimination period. -This could not happen. There is always a deductible payment.

They have an aggregate deductible. Because this was the third time the window was broken, Mom and Pop have most likely already paid up to the aggregate amount and insurance will pay the full amount of any losses the rest of the year.

_________________ is generally defined as the replacement cost (not the insured's cost) less depreciation. -Actual Cash Value -Replacement Cost -Stated Amount -Agreed Value

Actual Cash Value

Insurance companies use which of the following methods to determine covered perils in property policies: A. Open-Perils B. Selected Perils C. Named-Perils D. Named Hazards

A and C

All of the following statements regarding coinsurance when insuring property are true EXCEPT? -The coinsurance calculation is determined by values and costs at the time of a loss. -The market value of the property is not a factor in determining replacement cost of actual cash value. -It is the insured's responsibility to maintain the proper amount of coverage. -A coinsurance clause in a commercial property policy will state that if a property is insured for at least 60% of the insurable value of the property, then the policy will settle a claim for the fully insured amount up to the maximum limit of the policy.

A coinsurance clause in a commercial property policy will state that if a property is insured for at least 60% of the insurable value of the property, then the policy will settle a claim for the fully insured amount up to the maximum limit of the policy. The required percentage of coverage of insurable value (replacement value) is up to the insurer and will be stated in the policy. It is usually between 70% and 90%.

Jane purchased an office building for $3.5 million three years ago. He had the building appraised six months ago for $3.8 million (market value). The replacement cost is currently estimated at $3.75 million. Jane has the building insured for $2.8 million on a replacement cost basis. The insurer requires 80% coverage for full replacement cost coverage. Recently, a fire caused significant damage to the lower two floors of the building. It will cost $1.2 million to restore the building to its former condition. Approximately how much of the $1.2 million replacement cost will the insurer pay? $900,000 $960,000 $1,105,263 $1,120,000 $1,200,000

$1,120,000 The required insured value is 80% of the replacement cost ($3.75 million), which equals $3.0 million. The actual insured amount is $2.8 million, which is 93.33% of the required amount. Hence, .9333 X $1.2 million = $1,119,960 (rounded to $1,120,000).

Which of the following is not considered a tort? -Intentional injury or property damage -Unintentional injury or property damage -Criminal acts -Injury or property damage caused by an individual’s wild animal

Criminal acts

Personal liability policies always cover comprehensive and punitive damages. True False

False Liability policies rarely cover punitive damages.

In order for legal liability to be imposed by the courts for losses due to negligence, all of the following elements must exist or have occurred EXCEPT: -A legal duty to protect others from harm must be present. -There must be a failure to perform a legal duty. -The injured person must show damage or injury as a result of the activity or non-activity of the defendant. -There must be a proven relationship between an act and the damage or injury incurred. -All of the above are required elements of negligence.

All of the above are required elements of negligence.

Examples of res ipsa loquitor include all of the following EXCEPT: -A box of nails accidentally falls off a truck on the road and damages the tires of several following cars. -A dentist accidentally pulls a healthy tooth versus the dead tooth. -The gardener accidentally runs a mower into a statue and ruins the statue. -All of the above are examples of res ipsa loquitor.

All of the above are examples of res ipsa loquitor.

Breaking a law is virtually a guarantee of negligence or "negligence per se." True False

True If a law is violated and directly relates to the damage and/or injury, the injured party is very likely relieved of the obligation to prove negligence.

Common law recognizes four categories of people that have different degrees of care due to them by a property owner and/or occupant. Which of the following is NOT one of the four categories? -A trespasser -A tort feasor -An invitee -Children -A licensee

A tort feasor A tort feasor is a person who violated another person’s rights.

Which of the following is an example of an intentional tort? -Sandy sees Jill being mugged, but does not call the police or intervene. -Mitch's snake bites Kim on her hand while she was playing with it. -Sarah loses control of her car and crashes into Jim's car. -Tom throws a rock through Nick's window because he was angry with him.

Tom throws a rock through Nick's window because he was angry with him. Tom was intentionally attempting to do harm to Nick's window.

Which of the following is not a required element of negligence? -Existence of a legal duty -Res ipsa loquitor -Damage or injury -Failure to perform legal duty

Res ipsa loquitor Res ipsa loquitor is a modification of the law of negligence, not a required element.

Only one of the elements of a negligent act must be true for negligence to be present. True False

False All required elements must be present before an act is determined negligent.

Nick is held liable for the negligent acts of his son. This is an example of: -Res ipsa loquitor -Intentional tort -Imputed negligence -Proximate cause relationship

Imputed negligence Imputed negligence is when one person is held liable for the act of another person because of their relationship, such as employer-employee, parent-sibling, or principal-agent.

Bill is suing Gene for causing an accident. It was determined that Bill was responsible for 55% of the accident. Under which of the following comparative negligence defenses can Bill collect damages? -Pure rule -49 percent rule -50 percent rule

Pure Rule Pure comparative negligence allows the plaintiff to recover damages in an amount proportional to the defendant's responsibility. In this example, if it is determined that Bill was responsible for 55% of an accident costing $100,000, Bill may still be awarded $45,000 in damages.

Coverage A would cover which of the following? A. The primary residence of the insured policyowner B. The swimming pool behind the primary residence of the insured policyowner C. The medical expenses of a friend who slips on the pavement around the pool

A only Coverage B insures the pool. The medical expenses are a Section II/liability issue. All Section I coverages insure property only.

Coverages A and B cover which of the following structures? A. Stables on the residence premises B. A tool shed on the residence premises rented to a neighbor for storage C. A detached garage on the residence premises used by the property owner for his lawnmower repair business

A only When rented to a non-tenant of the dwelling, a tool shed cannot be covered. The detached garage cannot be covered because it is a detached structure used for business purposes. Try again.

Joseph owns a house that has a current market value of $350,000. He has insured the house for $250,000 using an HO3 policy with no deductible. The actual cash value is $245,000. The replacement value is $300,000. If the house burns down, how much will his insurance company pay to rebuild the house? -$245,000 -$250,000 -$280,000 -$312,500 -$350,000

$250,000 The total replacement cost is $300,000 but Joseph only insured the house to $250,000, which is the maximum benefit that he will receive for a total loss.

Joseph owns a house that has a current market value of $350,000. He has insured the house for $250,000 using an HO3 policy with no deductible. The actual cash value is $245,000. The replacement value is $300,000. A tree falls on Joseph's house and the cost to repair the damage is $40,000. How much will his insurance pay? -$32,000 -$40,000 -None -$250,000

$40,000 Joseph has his house insured for at least 80% of the replacement value, thus he is not subject to a reduction in benefits.

Jill owns a home that has a market value of $500,000, a replacement value of $400,000, and an "actual cash value" for insurance purposes of $260,000. Her house burns down. She has insured the house for $300,000 using an HO3 policy with a $1,000 deductible. As a result of the total loss, how much will her insurance pay? -$499,000 -$399,000 -$299,000 -$259,000 -$224,000

$299,000 She has replacement cost coverage on the home yet she underinsured the home against total loss. She will receive $299,000 ($300,000 less deductible). Coinsurance penalty does not apply to total losses.

Standard HO-3 Coverage C provides insurance for personal property on a _______ perils basis. -Named -Open

Named

Standard HO-3 Coverage C provides insurance on an Actual Cash Value basis. True False

True However, the insured can add a Personal Property Replacement Cost Endorsement to the policy.

Which of the following personal property is subject to sublimits? a. Jewelry b. Currency c. Firearms

a, b, and c

Which of the following are excluded from Personal Property Coverage under Coverage C? a. Animals, birds and fish b. Most motor vehicles c. Silverware

a and b Silverware is subject to a sublimit, but not excluded.

Additional Coverages are optional and selected by the policyowner and require extra premium per coverage selected. True False

False Additional Coverages are automatically included in the policy and are included in the policy's premium.

All of the following are duties of the insured in the event of a loss EXCEPT? -Give prompt notice of the loss to the insurer -Notify police in event of theft -Prepare an inventory of damaged personal property -Make a reasonable effort to protect the property from further damage -All of the above are duties of the insured in the event of a loss

All of the above are duties of the insured in the event of a loss

All of the following are probable Section I Additional Coverages EXCEPT: -Debris removal, which provides for removal of damaged property/debris resulting from a covered peril up to 5% of the Coverage A limit. -Pays up to $500 per tree, $1,000 per loss for the cost of removing a fallen tree caused by a windstorm, hail, ice, snow, or sleet that has damaged a covered structure, a driveway, or handicap access ramp. -Cost of reasonable repairs to preserve and protect the property from further damage is covered. -Reimbursement for up to $500 charged by a fire department to respond to a call because the property is threatened by an insured peril. -All of the above are examples of Additional Coverage in Section I.

All of the above are examples of Additional Coverage in Section I.

The inflation guard endorsement will automatically increase the limit of Coverage A (dwelling), but not for other Section I coverages, by an indexed percentage each year to adjust for inflation. -True -False

False The inflation guard endorsement will automatically increase the limit of coverage for A (dwelling), B (other structures), C (personal property), and D (loss of use) by an indexed percentage each year to adjust for inflation.

Scheduled Personal Property Endorsements provide worldwide, open perils coverage for specified valuable personal property. -True -False

True Certain valuable items, such as antiques, jewelry, coin collections, artwork, etc., have policy coverage limits that provide inadequate coverage. This endorsement generally provides worldwide open perils coverage for scheduled items that typically must be appraised to establish insured value.

Earthquake endorsements are usually written with no deductibles and the additional premium is relatively modest in all locations. True False

False Adding the earthquake coverage endorsement removes this exclusion typically with a deductible ranging from 5% to 10%. The cost can be quite reasonable in some areas while quite expensive in others.

All of the following are Section I exclusions EXCEPT: -Earth movement -Floods -Neglect -Intentional loss -All of the above are exclusions in Section I of an HO-3 policy.

All of the above are exclusions in Section I of an HO-3 policy.

Assume that homeowners Section II liability coverage covers you for bodily injury and property damage liability. In which of the following circumstances does the homeowners liability coverage cover you? -a. You accidently run into your next-door neighbor's fence and gate while mowing your lawn. Your neighbor wants $3,000 for the damage. -b. You are a financial advisor and a client sues you for negligence because the value of his retirement portfolio dropped dramatically. -c. A friend of your son slips on the wet kitchen floor and hits his head on the cabinets. He requires $895 of medical care. His parents want to be reimbursed for the medical treatment.

a and c

Which of the following would be covered by Additional Coverages in Section II of a homeowners policy? -a. Court costs, attorney fees and various legal expenses incurred to defend the insured from a lawsuit for negligence. -b. The insured called an ambulance for medical assistance right after the accident. -c. Your son and a friend are throwing javelins in the backyard and accidentally break your neighbor's window and cut a hole in his dining room floor.

a, b, and c

All of the following are exclusions for Coverages E and F EXCEPT: -Expected or intentional injury -Business and professional activities -Criminal activities -Bodily injury to a residence employee that occurs off the insured location and does not occur in the course of employment -All of the above are exclusions for Coverages E and F

Bodily injury to a residence employee that occurs off the insured location and does not occur in the course of employment This exclusion applies only to Coverage F.

The insurer can choose to not renew coverage with written notice at least 30 days prior to expiration date of the policy. True False

True

Bill is worried that his homeowners policy will not cover the brand new television that was stolen from his house. In which of the following situations would you NOT expect the television to be insured? -Bill has named perils coverage and theft is listed as a named peril. -Bill has open perils coverage and theft is not listed as an exclusion. -Bill has named perils coverage and theft is not listed as a named peril. -Bill has an HO-4 policy.

Bill has named perils coverage and theft is not listed as a named peril. Unless theft was named as a covered peril, it would not be insured.

Relatives of the insured that are away at college, who were living at the dwelling before leaving for school, are NOT generally covered under the insured’s policy for the purposes of homeowners insurance. -True - because they are not currently living in the dwelling. -True - because relatives of the insured are never covered. -False - because relatives under the age of 24 can still be covered. -False - because all relatives of the insured are covered.

False - because relatives under the age of 24 can still be covered. Children away at school are still covered, provided they lived at the home before leaving for school and are under the age of 24.

Which part of the HO-3 would generally insure damaged furniture? -Coverage A: Dwelling -Coverage B: Other Structures -Coverage C: Personal Property -Coverage D: Loss of Use

Coverage C: Personal Property Coverage C would insure damaged furniture since it is personal property.

“Additional Coverages” in an HO-3 policy would not cover which of the following? -Removal of the debris of a covered loss -Expenses incurred to protect the home from further damage after a hurricane -Trees in the backyard destroyed by vandalism -Up to $500 reimbursement for loss as a result of a lost or stolen credit card -Additional Coverages covers all of the above.

Additional Coverages covers all of the above.

The insured perils are the same for “Coverage A: Dwelling” and “Coverage B: Other Structures,” but not for “Coverage C: Personal Property” of the HO-3 policy. -True -False

True A standard HO-3 policy is issued on an open perils basis for Coverage A and B, but on a named perils basis for Coverage C: Personal Property.

Which of the following is NOT listed as a general exclusion in Section I of an HO-3 policy? -Earthquake -Landslide -Intentional loss by insured -Neglect -Theft

Theft Theft is not listed as a general exclusion.

Without any endorsements to alter coverage of an HO-3 policy, which of the following losses would you expect to be paid based on actual cash value? -Kitchen Table -Roof -Backyard deck -Attached garage

Kitchen Table The kitchen table is personal property, which is generally paid based on actual cash value.

Jill has insured her $270,000 home for 85% of the value. The garage has a replacement cost of $35,000, but is 40% depreciated. If the garage is destroyed by a fire, how much will Jill receive from her insurance company? -$21,000 -85% of $35,000 -$35,000 -Jill’s garage would not be covered.

$35,000 Jill has more than the necessary 80% coverage of her home, so she would receive the full $35,000 replacement cost.

Section II of the HO-3 would not discuss which of the following? -Personal Liability -Medical payments to others -Loss of use

Loss of use

Which of the following statements is false, based on HO-3 policy Section I and II conditions? -The policyholder may cancel a policy at any time. -The insurance company may elect not to renew a policy -When selling a home, the HO-3 policy on the home is included -The insurer has the right of subrogation.

When selling a home, the HO-3 policy on the home is included The insurer must give permission to transfer an HO-3 policy.

Newly acquired replacement autos are generally insured for collision coverage for 14 days after purchase, provided the named insured previously insured at least one covered for collision coverage. -True -False

True An individual purchasing a new car is insured for 14 days.

Part A: Liability Coverage will generally NOT insure which of the following? -Damage to property (not the insured’s) as a result of an accident -Lawsuits arising as the result of an accident -Property owned by the insured -The cost of bail bonds up to $250

Property owned by the insured Part A of the PAP is intended for liability coverage. For that reason, damage to property owned by the insured is not covered here.

Out-of-state accidents are excluded from coverage under the PAP. -True -False

False Out-of-state accidents are not excluded from coverage.

Jerry causes an accident in which the person he hit, Melissa, is sent to the hospital. Melissa’s medical bill is $45,000. This would be covered under which part of Jerry’s PAP? -Part A: Liability Coverage -Part B: Medical Payments Coverage -Part C: Uninsured Motorists Coverage -Part F: General Provisions

Part A: Liability Coverage If the insured is held responsible, medical bills of persons not in the insured’s vehicle would be covered under Part A of the PAP.

Mark gets into an accident. In which of the following situations would he be covered under Part C of his PAP? -Mark caused the accident. -He was hit by a negligent person driving a rental car. -A negligent driver in a car hit Mark while walking on the sidewalk and left the scene of the accident. -Mark’s car slid off the road into a tree.

A negligent driver in a car hit Mark while walking on the sidewalk and left the scene of the accident. Hit-and-run incidents are considered uninsured and would be covered under Part C of the PAP.

An individual driving a rental car is generally NOT covered by his or her insurance provider. -True -False

False Rental vehicles are generally insured, unless local state laws dictate otherwise.

An insured vehicle damaged by lightning would most likely be covered by which part of a PAP? -Part D - Collision Coverage -Part D - Other-than-Collision Coverage -Part B – Medical Payments Coverage -Part B – Uninsured Motorist Coverage

Part D - Other-than-Collision Coverage “Other-than-collision” coverage would cover a lightning strike.

Joyce has auto insurance with Part A liability limits of $100,000/$300,000/$50,000. Joyce runs into the back of a car on the highway (she is the 100% negligent driver) that totals the other driver’s car (a $25,000 loss) and the other driver is awarded damages for bodily injury totaling $200,000. Joyce’s car is also totaled (a $30,000 loss) and she sustains injuries and subsequent medical bills totaling $8,500. How much of the liability costs will her Part A coverage pay? -$25,000 -$100,000 -$125,000 -$200,000 -$225,000

$125,000 The liability for bodily injury has a maximum of $100,000 per person, thus the $200,000 liability is only partially covered. The property damage limit is $50,000, thus the $25,000 is fully covered.

Joyce has auto insurance with Part A liability limits of $100,000/ $300,000/$50,000. Tanya has her car insured for the same limits. They both have collision coverage. Joyce's car is in the shop for maintenance and Tanya lends her car to Joyce so Joyce can run some errands. Joyce runs into the back of a car on the highway (she is the 100% negligent driver) that totals the other driver’s car (a $25,000 loss) and the other driver is awarded damages for bodily injury totaling $175,000. Tanya's car is also totaled (a $30,000 loss). Which insurer will pay how much of the liability costs and how much of the loss of Tanya's car? -Tanya's insurance will pay $75,000 of the bodily injury liability claim and none of the property damage liability. Joyce's insurance will pay $100,000 of the bodily injury liability claim and all $25,000 of the property loss. Joyce's collision coverage will pay for the loss of Tanya's car. -Tanya's insurance will pay $100,000 of the bodily injury liability claim and all of the $25,000 property damage liability. Joyce's insurance will pay $75,000 of the bodily injury liability claim and none of the property loss. Tanya's collision coverage will pay for the loss of Tanya's car. -Tanya's insurance will pay $87,500 of the bodily injury liability claim and $12,500 of the property damage liability. Joyce's insurance will pay the balance of $87,500 of the bodily injury liability claim and $12,500 of the property loss. Joyce's collision coverage will pay $15,000 for the loss of Tanya's car and Tanya's insurance will pay $15,000. -Tanya's insurance will pay $87,500 of the bodily injury liability claim and $12,500 of the property damage liability. Joyce's insurance will pay the balance of $87,500 of the bodily injury liability claim and $12,500 of the property loss. Tanya's collision coverage will pay for the $30,000 loss of Tanya's car.

Tanya's insurance will pay $100,000 of the bodily injury liability claim and all of the $25,000 property damage liability. Joyce's insurance will pay $75,000 of the bodily injury liability claim and none of the property loss. Tanya's collision coverage will pay for the loss of Tanya's car. The insurance in this case "follows the car." Joyce borrowed Tanya's car with Tanya's permission. Tanya's bodily injury liability pays first to its maximum of $100,000; then Joyce's coverage assumes the balance of $75,000.

Kate’s car was 35% depreciated when it was completely wrecked in a car accident. She had bought it for $20,000 three years prior. The same car today costs $22,000. What is the actual cash value of her car, using the replacement cost less depreciation method? -$7,000 -$7,700 -$13,000 -$14,300

$14,300 Kate receives 65% of the replacement cost.

All of the following are eligibility requirements for persons or vehicles to acquire PAP insurance EXCEPT: -A vehicle that is leased under a written agreement if the lease is for at least thirty-six continuous months. -The vehicle must be owned by an individual or by a married couple who are residents of the same household. -The vehicle must be a four-wheel motor vehicle, other than a truck type, such as a car, van, sports utility vehicle. -The vehicle cannot be rented to others or used as a public or livery conveyance.

A vehicle that is leased under a written agreement if the lease is for at least thirty-six continuous months. A vehicle that is leased under a written agreement if the lease is for at least six continuous months.

Which of the following would help lower premium rates for a family's PAP coverage? a. Higher deductibles for collision coverage. b. Good driving records by all covered drivers. c. High vehicle safety ratings and lower weight of vehicles

a, b, and c

A personal umbrella policy can be purchased to supplement which of the following? -A personal auto policy -Homeowners insurance -Renters insurance -All of the above -None of the above

All of the above An umbrella policy can be used to supplement any and all of these forms of insurance.

All personal umbrella policies provide virtually identical coverage. -True -False

False Personal umbrella coverages can vary by carrier - actual risks covered, exclusions, etc., can vary.

Jake has a PAP policy with $300,000/$500,000/$50,000 liability limits as well as comprehensive and collision coverage. He also owns a personal liability umbrella policy that has a maximum limit of $2,000,000. He has an accident in his brand new Bentley that totaled the car. It was Jake's fault. The actual cash value of the car was $60,000. How much will the personal liability policy pay for the loss of his car? -$0 -$10,000 -$60,000

An umbrella policy will not pay for property damage to the insured's own property. In this case, his PAP collision or comprehensive coverage would pay for the damage.

Which of the following describes an indirect loss? -John's sandwich shop sustained broken windows on the front of his shop. The windows were boarded for a few days and then replaced. The shop remained open. -Bill's toy store had several items stolen from the shelves last month and had to order additional items as replacements. -Joyce's hair salon was flooded by a heavy rainstorm and a bad roof. She had to close for two weeks to move her salon to an adjacent space while her landlord had her space remodeled. After two months, she closed again for a week and moved back to her refurbished space. -Sonya's restaurant had a fire in the kitchen, which ruined a good bit of food, some dishes, and all of her linens.

Joyce's hair salon was flooded by a heavy rainstorm and a bad roof. She had to close for two weeks to move her salon to an adjacent space while her landlord had her space remodeled. After two months, she closed again for a week and moved back to her refurbished space. Clearly Joyce's business was interrupted and she incurred expenses to make two moves.

Peter purchased an apartment building for $15,000,000 five years ago. The apartments were appraised a few months ago for $19,500,000 (market value). The building has depreciated by $2,250,000. Peter has the apartment building insured for $14,000,000 on a replacement cost basis. The replacement cost is currently estimated at $18,000,000. The insurer requires 80% coverage for full replacement cost coverage. Recently, a fire damaged the top floor of the building and water damage to the next two floors. It will cost $4,000,000 to restore the building to its former condition. How much of the $4,000,000 replacement cost will the insurer pay? -$888,889 -$3,111,112 -$3,200,000 -$3,888,889 -$4,000,000

$3,888,889 The cost, current value, and depreciation are not relevant. The building is insured for 97.2% of the required amount, thus the policy will pay 97.2% of the loss.

All of the following are covered by commercial property insurance EXCEPT: -Real property -Installed fixtures in a building -Personal property used as a business -Personal property located in or on property described in the declarations and in the care, custody, and control of the insured. -All of the above would be insured by a commercial property insurance policy.

All of the above would be insured by a commercial property insurance policy.

A __________ is a person or organization in temporary custody of another's property for repair, maintenance, storage, or service such as a warehouse, auto repair shop, dry cleaner, etc. -Bailor -Bailee -Trustee -Guardian -Bailiff

Bailee

This insurance fills a gap in coverage by insuring equipment for hazards that are typically excluded in other property coverage. In addition, a large portion of the premium is allocated to the cost of inspections and loss prevention advice provided by insurance company engineers. This describes what type of insurance? -Commercial Property Insurance -Inland Marine -Ocean Marine -Boiler and Machine Insurance -Commercial Crime Insurance

Boiler and Machine Insurance

Which of the following descriptions comes closest to describing Inland Marine Insurance? -Covers shipping vessels and their cargo. -Covers personal property and equipment that is being transported and/or is likely to be moved on an occasional or regular basis. The insured property may be owned by the insured party or by a customer of the insured party. -Insurance intended to provide liability coverage for businesses engaged in auto sales, repair shops, service stations, auto storage garages, and public parking lots. -The proper name for watercraft insurance including only non-oceanic shipping.

Covers personal property and equipment that is being transported and/or is likely to be moved on an occasional or regular basis. The insured property may be owned by the insured party or by a customer of the insured party.

Commercial Auto Insurance is generally classified into three types or forms. Which of the following is not one of the three classifications? -Business Auto Coverage Form -Tractor-Trailer Coverage Form -Garage Coverage Form -Motor Carrier Coverage Form

Tractor-Trailer Coverage Form

Commercial Crime Insurance is written to indemnify the insured direct losses of three types of property. Which of the following is NOT one of the three types of property covered? -Money -Vehicles -Securities -Tangible personal property

Vehicles This property would be covered by Commercial Auto Insurance even if the vehicle is stolen.

A Commercial General Liability policy does not cover which of the following risks? -Bodily injury and property damage -Professional malpractice -Personal and advertising injury -Medical costs for bodily injuries to non-owners/employees

Professional malpractice This is specialized coverage written as a form of professional liability insurance.

A liability policy written on a/an _________________ insures the covered liability risks for claim events that occur within the term of the policy regardless of when the claim is made. Thus, a liability claim would be insured "indefinitely" within guidelines of state law and the policy limits, if any. -Occurrence basis -Liability basis -Aggregate basis -Claims-made basis -Replacement cost basis

Occurrence basis

A liability policy written on a/an ________________ insures the covered liability risks for events that occur after a specified date (the "retroactive date" that is stated in the policy) and are reported to, and recorded by, the insurer during the policy period. The retroactive date is typically the date that the claims-paid policy was first in force. -Occurrence basis -Liability basis -Aggregate basis -Claims-made basis -Replacement cost basis

Claims-made basis

Which of the following liabilities would typically NOT be insured by Commercial General Liability Insurance? -Premises liability -Product liability -Business operations liability -Completed operations liability -All of the above would typically be covered by a Commercial General Liability Insurance policy

All of the above would typically be covered by a Commercial General Liability Insurance policy

Errors and Omissions coverage is intended to protect physicians from malpractice lawsuits. -True -False

False

Which of the following is not included in Employment Practices Liability Insurance for businesses? -Deprivation of career opportunity -Discrimination -Negligent evaluation -Sexual harassment -All of the above would be protected

All of the above would be protected

A typical BOP would NOT include the following coverages? -Commercial Property Insurance -Commercial Liability Insurance -Business Income and Extra Expense Insurance -Non-owned Auto Liability Insurance -Commercial Auto Insurance

Commercial Auto Insurance

Cora is a masseuse that is concerned about her potential liabilities as a sole practitioner. She is most concerned about the possibility of injuring a patient because she did not completely understand their physical condition. What type of coverage would address this issue? -Commercial General Liability Insurance. -Commercial Umbrella Liability Insurance -Professional Liability Insurance -Personal Liability Insurance

Professional Liability Insurance

Professionals are subject to liability damages when they fail to follow a professional standard of conduct by applying reasonable care to avoid harming other persons or entities or to use the degree of skill expected of a person in any particular profession. -True -False

True

Which of the following is/are a party that might sue an organization alleging mismanagement? a. Stockholders b. Retirees c. Government agencies

a, b, and c

The typical required underlying limits of coverage to underwrite an umbrella policy would include all of the following coverages EXCEPT: -Business Auto Liability -Commercial General Liability -Boiler and Machinery -Employers Liability

Boiler and Machinery

Which of the following benefits would not be provided by Worker's Compensation Insurance as a result of an occupational injury or disease? -Unlimited reimbursement for medical expenses -Unlimited income benefits as a result of disability -Death benefits to qualified survivors -Reimbursement for rehabilitation services

Unlimited income benefits as a result of disability Disability benefits would be limited by amount and duration as well as various limitations of policy provisions mandated by different states.

Employer's Liability Insurance could provide coverage for which of the following reasons? -An employee injury or occupational disease -Discrimination -Employment-related harassment -Negligent evaluation

An employee injury or occupational disease EL is typically Part Two of a commercial WC&EL Policy to insure the employer when it is sued because of occupational injuries to employees or because of an occupational disease. These lawsuits could arise typically because the injury/disease is not covered by workers' compensation, the family of the employee brings suit, or the injury/disease is not directly or obviously caused in the course of employment.

Which of the following statements about Employment Practices Liability Insurance is NOT correct? -EPLI covers businesses against claims by workers who allege that their legal rights as employees have been violated. -EPLI can be purchased as its own policy, or as a standard endorsement to the business owner policy. -EPLI is written on a claims-made basis with a retroactive discovery period. -A deductible of $1,000 to $25,000 and coinsurance of 5% - 25% usually apply. -All of the above are characteristics of EPLI.

All of the above are characteristics of EPLI.

Nick is worried that he will get stuck with an enormous medical bill if something catastrophic happens. You have assured Nick that because he has _____________ in his major medical policy, he should not be so worried. -A deductible carryover -A maximum out-of-pocket limit -A benefit period of 3 years -Coinsurance

A maximum out-of-pocket limit A maximum out-of-pocket limit will put a limit on the amount of the medical costs that would have to be paid by Nick.

Contributions to a Health Savings Account are tax-deductible to virtually all taxpayers regardless of the amount of their taxable income. -True -False

True

Major medical insurance is a common form of medical insurance, both as individual and group coverage. -True -False

True Major medical coverage is generally the basis for managed care plans such as HMO’s, PPO’s, and POS’s.

Medicare is not designed to provide medical care for which of the following demographics? -Elderly -Disabled -Impoverished -Persons with permanent kidney failure

Impoverished Health care for the impoverished is generally handled via Medicaid.

Jerry is a 67-year-old man covered under the Original Medicare Plan (Parts A & B). He is fully insured for Medicare. Which of the following statements is FALSE concerning his Medical coverage? -He will not pay any premiums for Part A. -Jerry's Part B premiums will be less than an individual who had earned only 30 credits. -Jerry's Part A coverage would pay all but a deductible for covered hospital expenses for a 50-day hospital visit. -Jerry will pay a coinsurance amount on all costs covered under Part B after paying his annual deductible.

Jerry's Part B premiums will be less than an individual who had earned only 30 credits. Part B premiums vary based on the adjusted gross income of the insured, not the number of credits.

Which of the following costs is NOT covered in all Medigap policies? -The Part A coinsurance amount for days 61-90 and lifetime reserve days. -The coinsurance amount for Medicare Part B services. -The first three pints of blood per calendar year. -Coverage for an additional 365 days during the insured's lifetime after using up all Medicare hospital benefits. -All of the above are covered

All of the above are covered

Medicare Advantage Plans were established to give Medicare participants the option of enrolling in a variety of private plans, including health maintenance organizations (HMOs), preferred provider organizations (PPOs), private fee-for-service organization (PFFS) plans, and Special Needs Plans. -True -False

True

Which of the following, if any, is false with respect to Medicaid? -The federal government has established general guidelines for Medicaid, but the states actually determine specific eligibility requirements and benefits provided. -Patients normally pay no part of costs for covered medical expenses except for a small copayment. -Medicaid services are generally comprehensive for medical care (much like comprehensive major medical) and may provide long-term care services. -It is designed to provide medical and health-related services to low-income people of every age who have no or inadequate medical insurance. -None of the above.

None of the above.

Larry is covered under his company's group health insurance. His primary care physician tells him that the arm he broke two months ago needs to be re-broken because it is not healing properly. Larry, obviously upset at this, goes to another doctor outside his network of doctors to have it done. Larry ends up spending significantly more of his own money than he did the first time. Which of the following are possible explanations for this? -I. Larry's insurance provider is an HMO, and because he went outside of the network of healthcare professionals, his deductible was significantly higher. -II. Larry's insurance provider is a PPO, and because he went to a doctor outside the network, Larry had to pay the entire bill. -III. Larry's insurance provider is a POS, and because he went outside of the network of healthcare professionals, his deductible was significantly higher. -IV. Larry's insurance provider is an HMO, and because he went to a doctor outside the network, Larry had to pay the entire bill. -V. Larry's insurance provider is a PPO.

III, IV, and V

HMO members are generally not responsible for filing claims with the HMO. -True -False

True

Which of the following are characteristics of traditional medical expense plans that are not typical characteristics of managed care plans? a. Ability of the member (the insured) to select his or her own provider without being restricted to a specific network of providers b. An emphasis on preventative care without deductibles or coinsurance for routine physicals and immunizations c. Typically utilize gatekeepers

a only Traditional indemnity plans allowed the member to select their own physician without being limited to a specific network of providers and did not emphasize preventative care or utilize gatekeepers.

All of the following are common characteristics of managed-care plans EXCEPT? -Controlled access to providers -Encourage preventative care -Comprehensive case management -Monitoring of providers -Waiver of deductible, co-pay, and coinsurance for emergency care

Waiver of deductible, co-pay, and coinsurance for emergency care The member must pay these costs for emergency care.

Managed care and traditional indemnity plans all typically provide comprehensive medical care. -True -False

True

PPOs will typically utilize care management strategies to minimize costs such as hospital preadmission certification, second surgical opinions, preauthorization for specialist visits, and review and monitoring of cases. PPOs tend to be more proactive at monitoring providers and effective at weeding out providers who provide unsatisfactory care. -True -False

False These are characteristics of HMOs.

The insured will pay a fixed monthly premium as a member of the PPO. In addition, copayments, coinsurance, and deductibles are the norm. -True -False

True This is also true of traditional indemnity plans.

In a POS plan, the insureds have the option of going outside the network to receive care. -True -False

True However, if the insured goes outside the network, the insured should expect higher out-of-pocket expenses. A gatekeeper may restrict access to specialists outside of the plan.

If an employer pays part of an employee's HDHP premium and/or makes a contribution to an employee's HSA, which of the following statements is NOT true? -The employer premium payments for the employee's HDHP insurance are deductible as a business expense. -The employer contributions to the employee's HSA are not deductible as a business expense. -The employer contributions to the employee's HSA are deductible as a business expense. -The employee does not report the employer contributions to his or her HSA as taxable income. -The employee does not report the employer premium payments for HDHP insurance taxable income.

The employer contributions to the employee's HSA are not deductible as a business expense.

Trevor was diagnosed with diabetes only 2 months before he had planned to quit for a higher paying job in a larger corporation. If he changed jobs, he would only have one week off between jobs and his insurance at the new job would not be effective for one month after his start date. The new employer’s group health insurance plan is fully subject to PPACA requirements and is not a grandfathered plan. He decides not to go through with the job change because he is worried that his new insurer will not cover the diabetes. Is Trevor right? -Partly - Trevor's diabetes would eventually be covered by his new employer's plan, but only after a preexisting condition exclusionary period. -No - Under PPACA, his new employer’s group plan must cover his preexisting diabetes treatment. -Yes - Because Trevor's diabetes was diagnosed in the past two months, the new insured could subject him to a preexisting condition exclusion period. -No - The preexisting condition exclusion period is no longer permitted under any circumstances, but he will be subject to lifetime limits for his diabetes care costs.

No - Under PPACA, his new employer’s group plan must cover his preexisting diabetes treatment.

Which of the following statements concerning COBRA is FALSE? -Coverage under COBRA is either 18 or 36 months, depending on the qualifying event. -Employees who are laid off would be subject to the same benefits as employees who quit. -COBRA is beneficial to employees, but not to employers, due to the fact that the employer must continue to pay the premium for as long as the former employee is on COBRA. -For employees working at firms with less than 20 employees, the COBRA law does not apply.

COBRA is beneficial to employees, but not to employers, due to the fact that the employer must continue to pay the premium for as long as the former employee is on COBRA. The employees must pay the premiums for COBRA, not the employer.

Jackie, age 22, graduates from college and is seeking employment. What is probably her best option for continuing medical expense insurance? Assume she is not married. -Purchasing an individual medical policy from a PPACA Marketplace -Acquire COBRA coverage for 36 months -Stay on her parents’ employer-sponsored coverage

Stay on her parents’ employer-sponsored coverage This is probably her best option, at least until her employment situation sorts itself out, and there would be no changes to her coverage. She should check on individual coverage if she can find it at a lower price, depending on the premium structure of the group plan. When she turns 26, or when she gets married, whichever is sooner, she will need to acquire her own coverage.

Jack and Jeanie are married, and both are enrolled in employer-sponsored group medical plans as a result of their respective jobs. Jack’s plan has dependent coverage that covers only their children. Jeanie has just had minor surgery. Which plan will pay for Jeanie’s medical expenses? -Jack's plan -Jeanie's plan -Either Jack’s or Jeanie’s plan at Jeanie’s discretion -Both plans, Jack’s plan is primary -Both plans, Jeanie’s plan is primary

Jeanie's plan Jeanie is not a dependent on Jack’s plan. If she was, her coverage would be primary, and Jack's coverage would be secondary, meaning it might cover expense gaps of Jeanie's coverage.

Michael knows his dental plan allows $50 for a regular cleaning. Which type of dental plan does he most likely have? -Scheduled plan -Non-scheduled plan

Scheduled plan A scheduled plan provider provides a list of fixed allowances for each dental procedure.

Which of the following allows the insured to select from among various benefits? -Managed care plan -Dental care plan -Cafeteria plan -COBRA

Cafeteria plan

Vision Care is a very important supplemental insurance coverage to assure eye care in the event of the need for treatment of eye diseases or eye surgery. -True -False

False Comprehensive medical coverage will cover medical treatment of the eyes. Vision care will typically cover routine eye exams, frames, and lenses.

Jill is employed by Yummy Bakeries, Inc. that provides all full-time employees with a group life plan, group disability income plan, and group medical expense coverage. In addition, Yummy offers a cafeteria plan with an option in which the employee reduces their pre-tax compensation so that the employer can pay the employee’s insurance premiums. What is this type of plan called? -An optional carve-out plan -A premium-conversion plan -A supplemental insurance plan -There is no such plan

A premium-conversion plan

Which of the following statements about Health Reimbursement Arrangements (HRAs) is NOT true? -The HRA is often set up with a high deductible health plan (HDHP), but any type of underlying medical expense coverage with any or no deductible is acceptable. -Technically, the employee owns the HRA account and contributes to the account. -With an HRA, the employer contributes to an HRA or can reimburse an employee directly for qualified expenses. -In the event of termination of employees, the employer will decide whether or not the employees can continue to have access to any unused balances in the HRAs.

Technically, the employee owns the HRA account and contributes to the account. The employer, not the employee, owns the HRA. Only employers contribute to HRAs.

In general, employer-paid group medical expense insurance premiums paid by an employer for employees are deductible as a business expense to the employer and not reportable as income to the employee. -True -False

True

Benefits that do not exceed costs to the employee are not taxable to the employee. If the insurance benefits exceeded the employee's costs, the excess would be taxable income to the employee. -True -False

True

As long as employer-paid benefits for medical expenses are not discriminatory in favor of highly paid employees, the benefits paid directly by the employer are deductible as a business expense and not reportable as income to the employee. -True -False

True

In the event of long-term disability, an individual MAY be able to get financial assistance from all of the following resources EXCEPT: -Social Security -Workers' Compensation -State Disability Insurance -All of the above resources may provide assistance in the event of long-term disability.

All of the above resources may provide assistance in the event of long-term disability.

In the event of long-term disability, an individual MAY be able to get financial assistance from all of the following resources EXCEPT: -Employer self-funded sick-pay plan -Group disability insurance plan -Spousal earned income -Personal savings and assets -All of the above resources may provide assistance in the event of long-term disability.

All of the above resources may provide assistance in the event of long-term disability.

Which of the following are NOT characteristics of group long-term disability income insurance? -Premiums are not guaranteed and the carrier can cancel the coverage. The employer may terminate the coverage. -Group LTD is typically payable for non-occupational disabilities only, or benefits are reduced by workers' compensation payments. -The group coverage usually provides monthly benefits up to about 60% of salary only (not bonuses, deferred compensation, stock options, qualified plan contributions, etc.). -The Waiting Period of a group long-term disability policy is typically 7 to 15 days. -Benefits are typically reduced by Social Security, state disability plans, and other employer-provided disability benefits including pension benefits paid in the event of disability.

The Waiting Period of a group long-term disability policy is typically 7 to 15 days. The Waiting Period for group LTD is usually 90 or 180 days. Group STD usually has a very short waiting period.

Rhonda purchases group long-term disability income insurance with pre-tax dollars in her employer's cafeteria plan. If she becomes disabled, what portion of the benefits from the group LTD will be taxable income? -None -15% -50% -100%

100%

In most cases, eligibility for long-term care is based on the number of activities of daily living a person can’t perform. -True -False

True

In a study by The American Association for Long-Term Care Insurance of LTCi claims, which of the following types of care resulted in the most substantial benefits paid to policyholders? -Nursing home care -Assisted living care -Home health care

Home Health Care

Deficiencies in cognitive function are reflected in the inability to perform certain instrumental activities of daily living (IADLs), which typically include all of the following EXCEPT: -Preparing meals -Managing money -Using the telephone -Toileting -Managing medication

Toileting

The Elimination Period (EP) is a form of "deductible." It is a "waiting period" of time that an insured must wait before qualifying for long-term care policy benefits. A longer Elimination Period will _________ premium payments and a shorter EP will ________ premiums. -decrease/ increase -increase/decrease -decrease/not affect -increase/not affect -not affect/not affect

decrease/ increase

As an inflation hedge, the ___________ provides the most comprehensive coverage. Under this policy structure, the daily or monthly benefit will increase at a pre-determined rate (typically a maximum of 3% to 5%) each year on a compound basis. The benefit amount increases each year, beginning on the first anniversary of the policy, regardless of whether the insured is or is not collecting benefits under the policy. -Shared Coverage Benefit -Simple Percentage Benefit -Compound Percentage Benefit -Maximum Benefit Period

Compound Percentage Benefit

Which one of the following statements regarding qualification for Social Security disability benefits is FALSE? -Benefits may be reduced if the person also receives workers' compensation payments. -There is a 5-month waiting period. -The individual must have attained fully insured status. -Benefits may be taxable. -Substance abuse may preclude the receipt of benefits.

The individual must have attained fully insured status. The individual must have attained disability insured status, which is not necessarily the equivalent to fully insured status.

Social Security disability benefits should be considered as a primary component of insuring the risk of disability for every client's financial plan. -True -False

False

What is the earliest age that a worker can receive Social Security retirement benefits? -Age 55 -Age 57 -Age 60 -Age 62 -Age 65

Age 62

Which of the following statements could be true of Eric, whose entire work experience is confined to a single job? -Eric has worked continuously for the past 7 years, earning an average of $45,000 per year. Eric has earned enough credits to be fully insured. -Eric has earned 45 credits in the past 8 years. -Eric only worked 3 out of every four years from 1965-1982, so he could not have earned enough credits to be fully insured under Social Security. -Eric worked from age 22 to age 33 and then retired. When he turns 62, he will be eligible to collect Social Security retirement benefits.

Eric worked from age 22 to age 33 and then retired. When he turns 62, he will be eligible to collect Social Security retirement benefits. Eric worked enough years to earn the necessary amount of credits to be fully insured and, thus, he could be eligible for retirement benefits if he earned enough income to earn sufficient credits.

Which of the following statements is correct regarding Social Security retirement benefits? -The earliest any individual can begin receiving full Social Security retirement benefits is at their early retirement age. -The current maximum Normal Retirement Age for Social Security retirement benefits is age 67, if the insured was born in 1960 or later. -For a person retiring at age 62, their Social Security benefits will be reduced by no more than 20%. -Regardless of a worker’s date of birth, by age 66, every American will have reached Normal Retirement Age. -All of the above are true.

The current maximum Normal Retirement Age for Social Security retirement benefits is age 67, if the insured was born in 1960 or later.

Jill meets the definition of disabled as defined by the Social Security Administration. She is 23 years old, but has only been working continuously for the past 4 years. She earned 4 credits for each of the 4 years she worked. Jill asks you, her advisor, what Social Security Disability Income (SSDI) benefits she is eligible for. Which of the following, if any, would be a correct response? -Jill is not eligible for SSDI benefits because she has not earned 40 work credits during the 10 years prior to commencement of disability. -Jill is not eligible for SSDI benefits because she has not earned 20 work credits during the 5 years prior to commencement of disability. -Jill is eligible for SSDI benefits because she has earned at least 6 credits during the 3 years prior to commencement of disability. -None of the above.

Jill is eligible for SSDI benefits because she has earned at least 6 credits during the 3 years prior to commencement of disability.

Cleo and Tony are divorced. The marriage lasted 15 years and Tony just died. Cleo never remarried and is caring for her healthy son Marc, age 10. Cleo and Tony are Marc’s parents. Tony was currently insured, not fully insured, at his death. Will Cleo qualify for Social Security survivorship benefits as a result of her marriage to Tony? Assume Cleo is age 45. -True -False

True Cleo is caring for a qualifying child, the marriage lasted at least 10 years, and she never remarried. Despite Tony having only currently insured status, Cleo will receive survivorship benefits until Marc reaches age 16.

An insured worker died while currently (not fully) insured. Only certain children of the deceased worker or a spouse (or eligible former spouse) who is caring for a qualifying child will be considered for survivorship benefits. -True -False

True Children under the age of 18 (19 if in high school) or children of any age if disabled before the age of 22 will receive survivorship benefits. Widows or widowers caring for a qualifying child will generally receive benefits. Former spouses caring for a qualifying child and otherwise eligible may also receive survivorship benefits.

Which of the following individuals is NOT eligible for survivor benefits at the death of a fully insured worker covered by Social Security? -Spouse, age 61 -Spouse, age 55, with no dependents -Divorced spouse who was married to a deceased worker for 12 years and who is unmarried and age 60 -Unmarried child, age 17 -Dependent mother, age 83

Spouse, age 55, with no dependents

Up to what percentage of Social Security benefits can be subject to income taxation? -0% -33% -50% -85% -100%

85%

After adjusting for taxes, Social Security, insurance premiums, and maintenance expenses, John's expected earnings are $2,000,000 over the next 20 years ($100,000 per year) leading to his retirement. Using a rate of 5%, what is John's human life value? -$1,246,221 -$1,308,532

$1,308,532 Payment +/- 100,000 PMT Number of Periods 20 N Interest Rate I/YR 5 Human Life Value PV = $1,308,532 Note: PMT should be entered as a negative cash flow & BEG Mode

The face amount of a life insurance policy is its cash surrender value. -True -False

False

Susan recently purchased a 5-year Term Life Insurance policy. If this is a Level Term policy, her annual premiums will: -Increase each year -Remain the same each year -Decrease each year -Change each year in response to market conditions

Remain the same each year In a Level Term policy, the premiums remain the same during the course of the term.

Which of the following is NOT a typical characteristic of Term Life Insurance? -Renewability at level rates -Renewability with no requirement for evidence of insurability -Convertibility to Permanent Insurance without requiring evidence of insurability -Absence of cash value

Renewability at level rates While most Term policies are renewable at the end of the term, the premiums typically increase due to the advanced age of the insured.

All of the following are features of Whole Life Insurance EXCEPT: -A fixed face amount is guaranteed -Premiums are guaranteed not to increase above the amount(s) stated in the policy -Premiums may be paid over one's lifetime, for a limited number of years, or in a lump sum -A policyowner can borrow up to the face amount of the policy that must be paid back in cash before a death claim is paid.

A policyowner can borrow up to the face amount of the policy that must be paid back in cash before a death claim is paid. Loans are available up to the current cash value of the policy less the current interest rate charged on loans. If an insured dies with a loan against the policy, the loan, plus accrued interest, will be deducted from the death benefit.

Assuming the following policies have the same amount of coverage and were issued at the same time, which policy will have the largest cash value at any given point in time? -Ordinary Life -Limited Payment Whole Life -Modified Premium Whole Life

Limited Payment Whole Life Because a Limited Payment Whole Life policy is paid up before the other policies, it has the largest premium and will thereby accumulate the most cash value at any point in time.

Because the components of a Universal Life policy are unbundled, it is easier to do a cost-benefit comparison of Universal policies than it is to compare traditional Whole Life policies. -True -False

True

Five years ago, Sandra purchased a $100,000 Universal Life policy with Option A death benefits. Its current cash value is $25,000. What is the insurer's net amount at risk and what would Sandra's beneficiary receive if she died today? -$100,000 at risk; $100,000 to her beneficiary -$75,000 at risk; $100,000 to her beneficiary -$100,000 at risk; $125,000 to her beneficiary -$125,000 at risk; $125,000 to her beneficiary

75,000 at risk; $100,000 to her beneficiary Option A provides a death benefit equal to the face amount. Therefore, the net amount at risk is the face amount less the cash value. Try again.

The TEFRA Corridor imposes limits on the cash value allowed in Permanent, particularly Universal Life, policies. -True -False

True

Characteristics that distinguish a Variable Universal Life policy from a Universal Life policy are: I. Investment Subaccounts II. No guaranteed rate of interest III. Can only be sold by a FINRA registered representative IV. A prospectus must be presented at or prior to the initial sales call

I, II, III, and IV

Mr. and Mrs. James Madison have an estate plan that avoids estate taxes when the first one dies, but face a severe estate tax bill when the survivor later dies. They wish to use insurance to provide the liquidity they will need to pay the estate tax. The solution that specifically addresses this need, typically at the lowest cost, is: -Separate policies for each -A First-to-Die policy -A Second-to-Die policy

A Second-to-Die policy

Which one of the following statements about Group Term Life Insurance is NOT true? -Premium payments by the employer are tax deductible as a business expense. -Employees must report taxable income for Group Life Insurance paid for by the employer until the coverage exceeds $50,000. -For employees who have terminated employment or become ineligible for Group coverage, they have a right for 31 days to request conversion of their Group Life coverage to a Permanent Life policy at standard rates without proof of insurability. -Employees must report taxable income for Group Life Insurance paid for by the employer when the coverage exceeds $50,000. -Group Term Life Insurance written in large groups is usually underwritten on a guaranteed issue basis.

Employees must report taxable income for Group Life Insurance paid for by the employer until the coverage exceeds $50,000. The first $50,000 of coverage paid for by the employer is tax-free for employees.

A supplementary Group Term Insurance plan is usually offered as a noncontributory plan. -True -False

False The employees who participate in the plan usually pay for Supplementary Group Term.

Which of the following is NOT a requirement for a plan to qualify as Group Term Insurance under Section 79? -The plan must provide a general death benefit, accidental death benefit or health benefits. -The plan must be offered to a group of employees as compensation for services. -The employer must pay at least part of the cost of the plan. -The plan must not discriminate in favor of key employees. -Insurance amounts for employees must be determined under a formula that precludes individual selection.

The plan must provide a general death benefit, accidental death benefit or health benefits. The plan must provide a general death benefit. Accident and health insurance or travel insurance does not qualify.

Which of the following are characteristics of Group Universal Life Insurance? -Group Universal is usually only available in larger groups. -Group Universal is very portable. -Employee participants pay the premiums.

1, 2, and 3

All of the following are characteristics of a Section 162 Executive Bonus Plan EXCEPT: -A life insurance policy is acquired on the life of an executive. -The employer either pays the premium to the insurer directly or pays a bonus to the executive for the amount of premium due. -The amount of the premium payment or bonus is taxable compensation to the executive. -The executive can select a beneficiary of his or her choice and may change it at any time. -The business is the owner of the policy.

The business is the owner of the policy. The EMPLOYEE is always the owner of the policy.

Split Dollar Premiums paid by an employer are tax-deductible. -True -False

False Split Dollar premium payments are NEVER deductible to any party of the Split Dollar Plan agreement.

When establishing a Split Dollar Plan, employers run a high risk of making substantial premium payments and forfeiting the cash outlays if the executives leave the company. -True -False

False A Split Dollar Plan is always set up with a "first lien" to the cash values in order to secure the premium payments of the employer.

Ralph is deciding between two companies that would like to hire him. He has decided to go with ABC Company because, in addition to providing normal retirement benefits and insurance, ABC also has a program whereby they pay Ralph additional salary with which Ralph will purchase a life insurance policy on his life that he will own. The only stipulation is that Ralph will not be able to access the cash value of the policy until he retires. ABC Company is offering which of the following plans? -401(k) Overlay Plan -Nonqualified Deferred Compensation Plan -Section 162 Executive Bonus Plan -412(e)(3) Plan

Section 162 Executive Bonus Plan

Which of the following statements about Section 162 Executive Bonus Plans is/are correct? -Employers receive a tax deduction for funding the plan. -The additional salary or bonus received by the employee for the purpose of purchasing life insurance is non-taxable to the employee. -Because the payments for premiums came from the employer, death benefits from the life insurance policy will NOT be included in the estate of the decedent employee. -Regardless of the type of insurance policy purchased by the employee, loans and withdrawals may be made on the policy free from any fees or penalties.

Employers receive a tax deduction for funding the plan.

All of the following are advantages of a DBO Plan EXCEPT: -DBO Plans typically do not allow participants access to lifetime benefits to the executive because this benefit would very likely cause the death benefits to be included in the deceased executive’s estate. -If an executive owns less than 50% of the business, a well-designed DBO Plan will keep the death benefits out of the participant's estate. -Benefits paid are tax-deductible to the employer. -Accruing benefits to the participants during their lifetime is not taxable to the participants. -Benefits paid to the executive's beneficiary are received income tax-free.

Benefits paid to the executive's beneficiary are received income tax-free. This statement is false. Death benefits paid by the business are tax-deductible to the business and taxable income to the beneficiary.

Because of the ________________, Josh was able to use his life insurance policy as collateral for a loan. -Incontestable clause -Grace period -Assignment clause -Policy loan provision

Assignment Clause

The misstatement of age or gender clause protects insurers against false claims of age or gender by the insured, but the protection is forfeited when the insured dies. -True -False

False If the insurer discovers a misstatement of age or gender at the time of death, the insurer can still adjust the death benefit.

Jill owns a life insurance policy. Upon her death, the benefits are supposed to go to Eric. In the event Eric dies before the insured, the benefits are to be split between Jill’s three sisters. What type of beneficiary would Eric be? -Primary beneficiary -Secondary beneficiary -Contingent beneficiary

Primary Beneficiary

Jill owns a life insurance policy. Upon her death, the benefits are supposed to go to Eric. In the event Eric dies before the insured, the benefits are to be split between Jill’s three sisters. What type of beneficiaries would Jill’s three sisters be? -Primary beneficiaries -Contingent beneficiaries

Contingent beneficiaries

Because of the suicide clause, the beneficiaries of a life insurance policy can never collect the benefits if the insured commits suicide. -True -False

False The suicide clause generally has a 2-year limit. After 2 years, insurers will pay the death benefit.

Rebecca owns a participating policy, but cannot decide what to do with the dividends. She mentioned that she purchased the policy in November 2000 and that it would be nice to have a little extra money each year to buy Christmas gifts. Which dividend option would you suggest? -Dividends paid in cash -Dividends to reduce premiums -Dividends used to buy paid-up additions -Dividends to accumulate at interest -Participating policies do not pay dividends

Dividends paid in cash This is probably the best option if she would like to have some extra cash around the holidays because the insurance company would send her dividend checks in November.

Which of the following was not listed among the non-forfeiture options of a life insurance policy? -Paid-up insurance -Guaranteed purchase option -Extended term insurance

Guaranteed purchase option The guaranteed purchase option is an option to increase coverage.

Which two of the following are most similar in purpose? -I. Waiver of premium -II. Accidental death benefit rider -III. Accelerated death benefit rider -IV. Guaranteed purchase option -V. Viatical settlements

III and V Both the accelerated death benefit rider and viatical settlements can provide cash to the policyowner if the insured has a terminal illness.

Factors that affect underwriting of life insurance could include all of the following EXCEPT? -Age -Credit score -Driving record -Family health history -All of the above could be considered in underwriting life insurance

All of the above could be considered in underwriting life insurance

Twisting occurs when an agent directly or indirectly offers or gives any portion of the premium back to the purchaser as an incentive to purchase insurance. -True -False

False This describes rebating.

The traditional net cost method of determining the cost of life insurance is recognized by the National Association of Insurance Commissioners (NAIC) as a valid method because it does not assume the policyowner will surrender the policy. -True -False

False The use of the traditional net cost method is prohibited by the NAIC, partly because it does assume the policy is surrendered.

Of the two interest-adjusted methods for determining the cost of life insurance, which will adjust the premium payments to reflect the time value of money and which will adjust the dividend payments? -The surrender cost index adjusts the premium payments only and the net payment cost index adjusts the dividend payments only. -The surrender cost index adjusts the dividend payments only and the net payment cost index adjusts the premium payments only. -Both the surrender cost index and the net payment cost index will adjust both premium and dividend payments to reflect the time value of money. -Neither the surrender cost index nor the net payment cost index will adjust either the premium or dividend payments to reflect the time value of money.

Both the surrender cost index and the net payment cost index will adjust both premium and dividend payments to reflect the time value of money.

Using the net payment cost index, figure the net cost of insurance/ year/unit through the 20th policy year given the following information. Round your answer to the nearest penny. -Total interest adjusted premiums = $18,350 -Total interest adjusted dividends = $4,280 -Face value of policy = $40,000 -20-year Annuity due factor = $34.72 -Cash value = $9,000

Solution : Total interest adjusted premiums $18,350 -Total interest adjusted dividends$4,280 =Total Cost of Insurance $14,070 ÷Annuity due factor $34.72 Annual Interest-Adjusted Cost $405.24 ÷Units of insurance owned40 Net Cost of Insurance/unit/year $10.13

Stephen owns a $100,000 Whole Life Insurance policy on himself. The policy has a current cash value of $5,000. To date, he has paid $12,000 in premiums, has received $500 in cash dividends, and has made a withdrawal of $1,000. What is Stephen¿s cost basis? -$5,000 -$10,500 -$11,000 -$11,500 -$12,000

$10,500 The cost basis is the amount paid in premiums less dividends and less non-taxable withdrawals.

Stephen owns a $100,000 Whole Life Insurance policy on himself. The policy has a current cash value of $5,000. To date, he has paid $12,000 in premiums, has received $500 in cash dividends, and has made a withdrawal of $1,000. If Stephen were to make another $1,000 withdrawal from the cash value of the policy today, would he have to pay income tax on the withdrawal (assuming it is not an MEC)? -Yes -No

No Remember that the withdrawal is only taxable to the extent that it exceeds the cost basis. Since Stephen¿s current cost basis is $10,500, the additional $1,000 withdrawal would not be taxable.

Cynthia has been making payments on her life insurance policy for 30 years and has made no changes to her policy. Her policy: -Can never become an MEC since the contract was issued before 6/21/1988. -Can never be classified as an MEC, provided she never exceeded the "7-pay" limit. -Will become an MEC if there is a material change in the policy. -Will become an MEC if after a material policy change, she violates the "7-pay" limit.

Will become an MEC if after a material policy change, she violates the "7-pay" limit. A material policy change starts a new 7-year period in which the premiums cannot exceed specified limits. If, during that time, the 7-pay limit is violated, then the policy becomes an MEC.

Which of the following statements is TRUE regarding a modified endowment contract (MEC)? -Distributions prior to age 59½ may be subject to a 10% penalty. -The death benefit no longer qualifies for income tax-free treatment. -While cash distributions can be treated as taxable income, loans cannot be treated as taxable income. -The owner's basis in the policy is computed for MEC purposes just like it is computed for any other policy.

Distributions prior to age 59½ may be subject to a 10% penalty.

All of the following are correct statements regarding the income taxation of life insurance EXCEPT: -Premiums for personal life insurance are usually tax-deductible. -Income taxes are not due as the cash value of a policy increases. -The withdrawal of the cash value from a cash value policy will be taxable only to the extent that the total value in the policy exceeds the policy's basis. -Dividends are not taxable until the cumulative dividends exceed the cumulative cost basis of the policy. -There is generally no income tax on the death benefits paid to the beneficiary.

Premiums for personal life insurance are usually tax-deductible. Personal life insurance premiums are rarely deductible.

Mike has owned a $300,000 Whole Life policy for 30 years. He has paid all of the premiums of $3,500 per year. He has applied the dividends to purchase paid-up additions. The gross cash value is $200,000 (including the loan). He has an outstanding policy loan of $75,000. What is Mike's cost basis in the policy? -$30,000 -$105,000

$105,000 Remember that the total amount paid for a life insurance policy is called cost basis. On a whole life policy, it includes the sum of all premium payments made. Any distributions received from the policy are subtracted from the cost basis. Dividends reinvested in the policy do not normally affect cost basis. If dividends are not reinvested, they are considered refund of excess premium and are not added to the cost basis. Money borrowed from your policy does not lower cost basis.

Mike has owned a $300,000 Whole Life policy for 30 years. He has paid all of the premiums of $3,500 per year. He has applied the dividends to purchase paid-up additions. The gross cash value is $200,000 (including the loan). If Mike surrenders the policy, what is his taxable gain? -$95,000 -$170,000

$95,000 Gross cash value of $200,000 less cost basis of $105,000. Mike would receive a check at surrender for $125,000 ($200,000 less $75,000 loan balance).

Which of the following does not qualify as a non-taxable Section 1035 Exchange? -A life insurance policy for an annuity -An annuity for a life insurance policy -A life insurance policy for a life insurance policy -An annuity for an annuity

An annuity for a life insurance policy This would not qualify as a Section 1035 Exchange.

The simplest way to avoid paying estate taxes on life insurance is to: -Not to own it. -Not be named as a beneficiary -Not be able to name a beneficiary -Not be able to borrow against the policy

Not to own it

The three-year rule states that insurance must be transferred within three years of purchase if it is to be excluded from the owner's estate: -True -False

False The three-year rule has nothing to do with when a policy was purchased. Rather, it is relative to when the policy was transferred to another owner.

A trust arrangement where the owner of the insurance policy names an unfunded trust as the beneficiary but does not transfer ownership is typically referred to as a(an): -Irrevocable Life Insurance Trust -Revocable Life Insurance Trust -Wealth Replacement Trust -Asset Replacement Trust

Revocable Life Insurance Trust

When an Irrevocable Life Insurance Trust is funded solely with a life insurance policy, the trust is said to be a(an): -Funded Irrevocable Life Insurance Trust -Unfunded Irrevocable Life Insurance Trust

Unfunded Irrevocable Life Insurance Trust

In deciding whether the use of a Crummey power is merely a sham to avoid taxes, the courts tend to focus on: -A. Whether the trustee is obligated to deliver assets to the beneficiaries if demand is made -B. Whether the beneficiary has an immediate and unfettered present interest in the gifted property -C. The intent of the donor

A and B

Attorneys typically advise titling a trust as an "Irrevocable Life Insurance Trust" when it is for the purpose of keeping life insurance outside of the grantor's estate. -True -False

False

The Grantor and Trustee of an ILIT should not be one and the same. -True -False

True

If the purpose of an ILIT is to provide liquidity for the payment of estate taxes, the document should explicitly direct that the insurance proceeds be used for that purpose. -True -False

False

The lapse of a Crummey power could potentially result in a taxable transfer on the part of the beneficiary who allows the power to lapse. -True -False

True

Crummey powers in an ILIT are more effective if the grantor pays the insurance premiums directly to the insurance company. -True -False

False

The courts have generally held that beneficiaries may waive their right to future notices regarding Crummey powers. -True -False

False

Which of the following is an incident of ownership? -Ability to change beneficiaries -Ability to cash in the policy -Ability to borrow against the policy -All the above.

All the above

Which of the following is a true statement regarding Key Employee Life Insurance? -In addition to providing a benefit when a key employee dies, it also provides insurance payments in the event a key employee becomes disabled. -The death benefit would go directly to the key employee's surviving spouse or children. -It can provide needed cash to the company in the event of the loss of a key employee. -Proceeds are taxable

It can provide needed cash to the company in the event of the loss of a key employee.

Which of the following statements is/are true? -Key Employee Disability Insurance provides benefits similar to Key Employee Life Insurance, but instead protects against disability. -The company pays premiums on the policy with tax-deductible dollars. -Supplemental disability income insurance premiums paid by the employer are not tax-deductible -All of the above

Key Employee Disability Insurance provides benefits similar to Key Employee Life Insurance, but instead protects against disability.

A Buy-Sell Agreement would NOT be appropriate for which of the following type of business organization? -S Corporation -Sole Proprietorship -LLC -Buy-sell agreements are appropriate for all forms of businesses

Buy-sell agreements are appropriate for all forms of businesses Buy-Sell Agreements may be an appropriate business succession solution for all kinds of business organizations.

With which type of Buy-Sell Agreement would a surviving owner purchase the interest of a deceased owner? -Cross Purchase Plan -Stock Redemption/Entity Plan -Either a Cross Purchase Plan or a Stock Redemption/Entity Plan -In neither plan would this happen

Cross Purchase Plan

Buy-Sell Agreements are typically funded with which of the following? -Company stock -Debt -Life and disability insurance -Business cash flow

Life and disability insurance Typically, a Buy-Sell Agreement is funded with life insurance and disability insurance.

Kerry, Bill, and Sharon are equal owners in ABC Company. They established a Cross Purchase Agreement five years ago and have funded it with life insurance policies. Kerry is involved in an auto accident and dies. If the Cross Purchase Agreement valued each owners' interest in the business at $1.5 million, which of the following statements are true? -Bill and Sharon should each pay $750,000 to purchase one-half of Kerry's interest. -For Kerry's estate tax purposes, the sale price would probably not exceed $1.5 million -The sale of the business to Sharon and Bill will be treated as a sale or exchange for tax purposes -All of the above are true -None of the above are true

All of the above are true

Assume that instead of creating a Cross Purchase Buy-Sell Agreement five years ago, the ABC Company established a Stock Redemption Buy-Sell Agreement. Which of the following statements would be true? -The price Sharon and Bill would pay for Kerry's interest would remain the same -ABC would receive the proceeds of the life insurance policy on Kerry -Sharon and Bill would both end up with 50% interest in the firm, with a new basis of interest in the business increased by $750,000. -All of the above are true -None of the above are true -Impossible to tell

ABC would receive the proceeds of the life insurance policy on Kerry ABC would receive the benefits from the life insurance policy, which would then be used to purchase Kerry's ownership interest in the business.

Which of the following is NOT a primary characteristic of a deferred fixed annuity? -Offers a certain or guaranteed level of interest earnings -Removes the investment risk from the annuity owner -Transfers the investment risk to the annuity owner -Subjects the owner to interest rate risk, and possibly inflation risk -None of the above

Transfers the investment risk to the annuity owner The insurance company assumes the investment risk in a fixed annuity.

The four key contractual parties to a deferred annuity contract include which of the following? A. The owner B. The insurance company C. The investment company D. The annuitant

A, B, and D

All states impose a state premium tax on the value of deferred or immediate annuity purchases, either at the date of the initial deposit(s) or at the date of annuitization. -True -False

False A few states impose a premium tax.

Which of the following are distinguishing safety features of a deferred variable annuity contract underwritten by a life insurance company? -A. The investment "sub-accounts" are segregated from the insurance company's general account and held in sub-account-specific accounts managed by trustees. -B. All states require that insurance companies set up reserves for annuity obligations as well as surplus requirements and required minimum levels of capital to offer these contracts. -C. Deferred annuity premiums (deposits) and account balances are FDIC-insured.

A and B Annuity balances are not FDIC-insured.

All of the following are typically withdrawal options from a deferred variable annuity during the accumulation period EXCEPT: -Make partial unscheduled withdrawals. -Surrender the policy for cash. -Make scheduled withdrawals not based on the life expectancy of the annuitant(s), such as a flat dollar amount, a stated percentage per year, etc. -Elect to receive an income based on the life expectancy of the annuitant(s). -Elect for the direct transfer of accumulated funds to another "like account" without creating a taxable event. -None of the above. All are withdrawal options during the accumulation period.

None of the above. All are withdrawal options during the accumulation period.

All of the following are typically withdrawal options from a deferred variable annuity at the Annuity Date EXCEPT? -Make partial unscheduled withdrawals. -Surrender the policy for cash. -Make scheduled withdrawals not based on the life expectancy of the annuitant(s), such as a flat dollar amount, a stated percentage per year, etc. -Elect to receive an income based on the life expectancy of the annuitant(s). -Elect for the direct transfer of accumulated funds to another "like account" without creating a taxable event. -None of the above. All are withdrawal options at the Annuity Date.

Make partial unscheduled withdrawals. At the Annuity Date, the annuity balance typically must be cashed in, taken as scheduled payments or transferred to another like kind account.

Section 1035 of the IRS Tax Code allows for the direct transfer of accumulated funds in a life insurance policy, endowment policy, or annuity policy to another "like account" without creating a taxable event. All of the following will qualify as a "like account" exchange EXCEPT: -An annuity exchanged for another annuity -A life insurance policy for another life insurance policy -A life insurance policy for an annuity -An annuity for a life insurance policy

An annuity for a life insurance policy

All of the following charges almost always apply to both fixed and deferred variable annuities EXCEPT: -Annual contract or administration fees -Surrender charges in the first five to ten years -Commissions -Guarantee of capital fees

Guarantee of capital fees

All of the following are advantages of deferred fixed annuities EXCEPT: -The principal value does not fluctuate with changes in market interest rates. -When purchased from a highly rated and regulated insurance company, the guarantees of principal and rates are relatively secure. -Any deferred annuity provides the leverage of tax deferral on earnings until withdrawn. -Costs and fees are minimal. -None of the above.

None of the above.

All of the following are disadvantages of deferred fixed annuities EXCEPT: -There is no tax deferral of investment earnings during the accumulation phase. -Withdrawals in excess of 10% per year may be subject to surrender charges during an initial period of (generally) five to ten years. -The purchasing power of annuitant’s payout may decline unless inflation protection is purchased at added cost.

There is no tax deferral of investment earnings during the accumulation phase. This is not a disadvantage because it is an incorrect statement. Virtually all annuities provide tax deferral of investment earnings until withdrawn.

Which of the clients described below, if any, would generally be attracted to an equity-indexed annuity? -Wish to select investments from a menu of many mutual funds -Need to avoid all investment risk -Desire to maintain (1) at least a partial level of inflation protection and (2) long-term purchasing power -None of the above

Desire to maintain (1) at least a partial level of inflation protection and (2) long-term purchasing power

All of the following are advantages of deferred variable annuities EXCEPT: -Deferred variable annuities offer a broad range of investment options. -Investment assets are held in the general account of the insurance company, which provides the leverage of tax deferral on earnings until withdrawn. -Changes in asset allocation and/or "rebalancing" can be accomplished without incurring taxable gains and usually without any charges. -Professional management of portfolios and possible availability of index funds.

Investment assets are held in the general account of the insurance company, which provides the leverage of tax deferral on earnings until withdrawn.

All of the following are advantages of deferred variable annuities EXCEPT: -The payout to the annuitant may increase, based on investment performance, to protect the purchasing power of the payout during the annuitization phase. -A standard death benefit is generally offered without additional cost. -Accumulated earnings from equity investments are taxed at long-term capital gain rates when withdrawn, but only if holding period requirements are met.

Accumulated earnings from equity investments are taxed at long-term capital gain rates when withdrawn, but only if holding period requirements are met. All earnings are taxed as ordinary income rates, even if invested in equity securities, when withdrawn.

State premium taxes range from .50% to 2.35% in all states and are typically assessed at the time the premium is paid. -True -False

False

All of the following are correct statements regarding taxation of deferred annuities EXCEPT: -All types of earnings, whether they are derived from capital gains, dividends, interest, etc., are taxed at ordinary income tax rates when they are withdrawn from the deferred annuity. -Funds used to pay premiums into a nonqualified deferred annuity have already been taxed. These funds become the principal of the account and are not taxed again. -For all deferred annuities issued since August 13, 1982, the IRS taxes distributions during the accumulation period on a LIFO (last in first out) basis as long as the withdrawals consist of substantially equal periodic payments over the life of the owner or over the combined lives of the owner and a designated beneficiary. -The 10% tax penalty that applies to withdrawals from a deferred annuity prior to age 59½ only applies to distributed earnings, not return of principal. -When deferred annuity distributions consist of substantially equal periodic payments over the life of the owner or over the combined lives of the owner and a designated beneficiary (that is, the funds are annuitized), a portion of normal annuity payments is considered a return of principal.

For all deferred annuities issued since August 13, 1982, the IRS taxes distributions during the accumulation period on a LIFO (last in first out) basis as long as the withdrawals consist of substantially equal periodic payments over the life of the owner or over the combined lives of the owner and a designated beneficiary. For all contracts issued since August 13, 1982, the IRS taxes distributions during the accumulation period on a LIFO (last in first out) basis unless the withdrawals consist of substantially equal periodic payments over the life of the owner or over the combined lives of the owner and a designated beneficiary.

Regardless of amount, the benefits paid at the deferred annuity owner's death are income taxable to the beneficiaries to the degree the proceeds exceed the owner's net cost basis. -True -False

True

When the owner dies during the accumulation phase, the account value of the deferred annuity is included in the owner's estate. In addition, the basis of a deferred annuity is NOT stepped-up at death for deferred annuities purchased after 10/19/1979. The beneficiaries of the annuity retain the owner's basis and, therefore, may owe income taxes for distributions withdrawn. -True -False

True

Which of the following investor profiles would you consider to be the best candidate for an investment in a deferred variable annuity vehicle from a suitability standpoint? -High risk tolerance, little investment experience, high consumer debt, and no cash reserves. -Very low risk tolerance, modest investment experience, and clear short-term investment objectives. -Moderate risk tolerance, moderate investment experience, and clear long-term investment objectives.

Moderate risk tolerance, moderate investment experience, and clear long-term investment objectives.

All of the following are positive indicators for an investment in a deferred variable annuity by a prospect EXCEPT: -The prospect has no need for current income. -The prospect has already maximized the use of employer-sponsored retirement plans and IRAs. -The prospect was unsolicited, has a good deal of investment experience, and the registered representative has a fair understanding of the prospect's current financial position and objectives. -The prospect can effectively utilize the tax deferral advantages of a deferred annuity.

The prospect was unsolicited, has a good deal of investment experience, and the registered representative has a fair understanding of the prospect's current financial position and objectives. The registered representative should have more than a fair understanding of the prospect's current financial position and objectives.

Variable annuities are issued in units (as opposed to a dollar amount), with an initial designated unit value based on assumed or guaranteed long-term interest rates. -True -False

False The unit value is based on the number of outstanding units and the market value of the underlying assets in the sub-account at the time of the purchase.

All of the following factors affect the pricing of immediate annuities EXCEPT: -The age/life expectancy of the annuitant(s) -The number of annuitants -The frequency of annuity payments -Administrative costs -All of the above are factors that affect the pricing of immediate annuities.

All of the above are factors that affect the pricing of immediate annuities.

Which of the following is most likely to be found in an equity-indexed annuity? -A guaranteed interest rate that will always be higher than the interest rate guaranteed in an immediate fixed annuity -A guaranteed return equal to 100% of the index return -A guaranteed minimum interest rate coupled with the potential to earn a higher interest rate based upon the performance of a linked index

A guaranteed minimum interest rate coupled with the potential to earn a higher interest rate based upon the performance of a linked index

All of the following are characteristics of an Assumed Investment Return (AIR) in an immediate variable annuity EXCEPT: -The AIR must be lower than the rates of the immediate fixed annuity offered by the same insurance company. -The initial payment is calculated exactly as a fixed annuity payment EXCEPT that the investment rate must be estimated, or more accurately, is selected by the owner in the application as a "benchmark rate." -The insurance company usually offers a short menu of rate of return assumptions, which typically range from 3% to 6%.

The AIR must be lower than the rates of the immediate fixed annuity offered by the same insurance company. The AIR is often lower, or selected to be lower, than a current fixed rate annuity, but it is not mandatory.

A variable annuity issued with an AIR of 3.5% is more likely to increase future monthly income payments than an otherwise identical variable annuity issued for the same annuitant with an AIR of 5%. -True -False

True Because it is simply more likely that net investment performance will exceed 3.5% than 5.0%.

Which of the following is the best definition of a Life Annuity or Straight Life Fixed Annuity? -Provides an income for life regardless of how long the annuitant lives. It pays the maximum income of life annuity choices, but provides no "refund" if the annuitant lives only a short time, nor does it provide any benefit to survivors [no beneficiary]. -Provides an income for life regardless of how long the annuitant lives with a specified number of guaranteed payments. If the annuitant dies prior to receiving payments for the guaranteed period, the designated beneficiary will receive the balance of payments for the guaranteed period. -Provides an income for life, regardless of how long the annuitant lives, with a guaranty that if the annuitant dies prior to receiving total payments equal to the initial purchase price, the balance, or a portion of the balance, will be paid to the designated beneficiary in cash or installments.

Provides an income for life regardless of how long the annuitant lives. It pays the maximum income of life annuity choices, but provides no "refund" if the annuitant lives only a short time, nor does it provide any benefit to survivors [no beneficiary].

Bonnie Boone purchases a nonqualified immediate fixed annuity for $250,000 in February 20X1, which will begin straight life annuity payments of $1,900 per month on March 1, 20X1. According to Table V of the Actuarial Tables for Taxing Annuities published and periodically amended by the IRS, the "expected return multiple" (or life expectancy of Bonnie) is 24.0 years. Apply the following formula to determine how much of the income is taxable: (Total Net Investment in the Immediate Annuity ÷ Total Expected Return from the Annuity) = Percentage of Income Excluded from Taxation -$1,031.70 per month is taxable. -$868.30 per month is taxable. -$1,000.30 per month is taxable. -$1,148.30 per month is taxable. -All of the income is taxable.

$1,031.70 per month is taxable. [$250,000 ¿¿ ($1,900 x 12 x 24)] = .457 or 45.7% non-taxable 1.0 - .457 = .543 or 54.3% taxable .543 x $1,900 = $1,031.70

Samantha Houston purchases a nonqualified immediate variable annuity for $300,000 in February 20X1, which will begin straight life annuity payments of $2,000 per month on March 1, 20X1, based on an AIR of 4.5%. According to Table V of the Actuarial Tables for Taxing Annuities published and periodically amended by the IRS, the "expected return multiple" (or life expectancy of Samantha) is 22.5 years. Apply the following formula to determine how much of the income is taxable: Total Net Investment in the Immediate Annuity ÷ Total Number of Payments Expected = Amount of Income Excluded from Taxation -$1,111.00 per month is taxable. -$888.89 per month is taxable. -$160.00 per month is taxable. -$799.20 per month is taxable. -$792.00 per month is taxable.

$888.89 per month is taxable. [$300,000 ¿¿ (12 x 22.5))] = $1,111.11/month nontaxable $2,000 - $1,111.11 = $888.89 taxable

Which of the following are advantages of using immediate annuities for retirement income planning? -1. Unless choosing a fixed period certain annuity, the annuity income cannot be outlived. -2. There is no access to funds (liquidity feature). -3. Income payments above basis, if any, are taxed at ordinary income tax rates. -4. Per dollar of capital generally provides more cash flow than withdrawals from a conventional investment portfolio of comparable risk, with the addition of no risk of outliving capital.

1 and 4 only

All of the following are reasons to use immediate annuities to generate retirement income in lieu of, or in combination with, systematic withdrawals from an investment portfolio EXCEPT: -Immediate annuities provide the maximum cash flow per level of risk, particularly with fixed annuities in the short term. -The annuitant(s)/owner cannot outlive the income. -If an annuity is to be personally held, versus in a tax-deferred account, assets may need to be sold to acquire an annuity, which may result in taxable gains. -Immediate fixed annuities are simple. The owner just receives checks without the burden of administrative logistics and allocation decision-making. -Immediate annuities can presume average life expectancy, i.e., an insurer must account for a shorter life expectancy that is based on pooled averages rather than in a systematic withdrawal plan which must assume potential life expectancy.

If an annuity is to be personally held, versus in a tax-deferred account, assets may need to be sold to acquire an annuity, which may result in taxable gains. This is a true statement, but can be a disadvantage of using immediate annuities.

All of the following are advantages of a systematic withdrawal approach to providing retirement income EXCEPT: -The portfolio offers liquidity/access to cash -This strategy must presume possible versus average life expectancy. -This approach offers substantial flexibility. -If held as a personal asset versus a tax-deferred account, capital gains are taxed at special rates when realized.

This strategy must presume possible versus average life expectancy. This strategy must account for a longer life expectancy than a commercial annuity that is based on pooled averages. A true statement, but not an advantage of the systematic withdrawal approach.

All of the following statements regarding the estate and income taxation of immediate annuities are correct EXCEPT: -Any remaining value of a nonqualified immediate annuity at the death of the owner is included in the owner's estate for estate tax purposes. -If a deceased annuity owner/annuitant was receiving a straight life annuity, there is no value to be included in the owner's estate. -If the annuity being received by the deceased owner was a straight life annuity with a cash refund feature, the value of the remaining annuity payments, if any, payable to the owner's estate would not be included in the estate of the deceased owner/annuitant. -The deceased owner's income tax basis of an immediate annuity passing to a beneficiary is retained by the beneficiary. -A beneficiary can take an income tax deduction for any estate taxes paid that are attributable to an annuity in the owner/decedent's estate.

If the annuity being received by the deceased owner was a straight life annuity with a cash refund feature, the value of the remaining annuity payments, if any, payable to the owner's estate would not be included in the estate of the deceased owner/annuitant.

Insurance Planning Flashcards

(248 cards)