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1

1. The risk that individuals of higher than average risk will seek out or purchase insurance policies is called?

a. Peril.
b. Hazard.
c. Law of Large Numbers.
d. Adverse Selection.

D. The underwriter attempts to manage adverse selection and minimize policy issuance to less desirable applicants

2

The principle of indemnity requires that:

a. A person is entitled to compensation only to the extent that financial loss has been suffered.

b. Insured cannot indemnify himself from both the insurance company and a negligent third party for the same claim.

c. The insured must be subject to financial hardship resulting from the loss.

d. The insured and insurer must both be forthcoming with all relevant facts about the insured risk and coverage provided for that risk.

A. Option B describes subrogation, option c describes an insurable interest; and option d describes utmost good faith

3

When must an insurable interest exist for a life insurance claim?

a. At the policy inception and time of loss.
b. At the policy inception only.
c. At the time of the loss only.
d. Either at the policy inception or at the time of the loss.

B. an insurable interest must exist at the policy inception and at the time of loss for a property insurance policy. For life insurance, and insurable interest must only exist at policy inception

4

Joe walks into his insurance agent’s office and notices his agent’s name on a business card and the insurer’s name on letterhead. If an agency agreement exists, what type of authority does Joe believe his agent has to enter into an insurance contract?

a. Express Authority.
b. Implied Authority.
c. Apparent Authority.
d. None of the Above.

B. Implied Authority includes the visual aids; business cards; letterhead; and signs on the door.

Apparent authority is based upon the agent's business card, letterhead, and insurance company sign on the door but in fact, no authority actually exists. The key different between apparent and implied authority is that with apparent authority, none actually exists. Express suthority is the agency agreement between the insurance agent and the insurance company

5

Which of the following statements regarding loss severity is true?

1. Loss severity is the expected number of losses that will occur within a given period.
2. Loss severity is the potential size or damage of a loss.

a. 1 only.
b. 2 only.
c. Both 1 and 2.
d. Neither 1 nor 2

B

Frequency measures the number of losses expected to occur. Severity measures the potential size in dollars

6

Non-cancelable health insurance contracts are different from guaranteed renewable contracts because:

a. Non-cancelable policies are not guaranteed renewable.
b. Non-cancelable policies cannot be canceled in mid-term.
c. Non-cancelable policies cannot have a premium change.
d. Non-cancelable policies have more liberal health benefits.

C

A non-cancellable health insurance policy (primarily used with disability insurance) is a continuous term contract guaranteeing the right to renew for a specified period of time with the premium at renewal guaranteed. If the premium were not guaranteed, the the insurance company would be able to raise the premium beyond affordability. Guaranteed renewable contracts allow for automatic renewal, but permit the insurance company to raise the premium for an entire class of insureds.

7

Mr. Johns has a major medical insurance policy with a $1,000 deductible, an 80% coinsurance clause, and an out-of-pocket maximum of $4,000. He becomes ill and is admitted to the hospital for several days. When he is discharged, his hospital bill is $5,000, and his doctor bills are $2,500. What is the amount that his insurance company will pay?

a. $5,200.
b. $6,000.
c. $6,500.
d. $7,500.

A

Loss = $7,500
Deductible = $1,000
________________
$6,500
Less 20% = $1,300
________________
$5,200

8

COBRA coverage is available for which of the following persons?
1. A retiring employee.
2. An employee who is terminated.
3. Spouses and dependents of a deceased employee. 4. An employee no longer able to work due to disability.

a. 3 only.
b. 3 and 4.
c. 1, 2, and 3.
d. 1, 2, 3, and 4.

D

Statements 1, 2, 3, and 4 are correct. All the persons qualify for COBRA coverage

9

The Watson family has a family medical policy that provides the following coverage for all four family members:
• $1,000 per person embedded deductible; $4,000 family deductible.
• $4,000 out-of-pocket limit per person.
• 80/20 coinsurance provision.

On a family trip, the Watson’s were involved in a bizarre accident when Mr. Watson, in the lead of the group, lost footing on a steep hiking trail and plowed into the rest of the family members, causing them all to tumble down the slope. All four family members were hurt. Each person incurred medical expenses of $21,000. How much will the insurance company pay?

a. $64,000.
b. $67,200.
c. $68,000.
d. $84,000.

C

Total Cost = $84,000
Deductible= $4,000
__________________
$80,000

20% Coinsurance = $16,000

Coinsurance + deductible = $20,000

Maximum out of pocket = $16,000 (4x4,000 = $16,000)

Insurance covers ($84,000 - $16,000) = $68,000

10

Which of the following is a characteristic of guaranteed renewability?
1. The insurer guarantees to renew the policy to a stated age.
2. The policy is non-cancelable and the premium may not be increased.
3. Renewal is solely at insurer’s discretion.
4. The insurer has the right to increase the premium rates for the underlying class in which the insured is placed. Note: not for a single individual.

a. 1 only.
b. 1 and 4.
c. 1, 2, and 4.
d. 1, 2, 3, and 4.

B

Statements 1 and 4 are correct

11

Which of the following life insurance policies provides the highest benefit for the lowest premium and is simply a pure death benefit policy?

a. Term.
b. Whole life.
c. Universal life.
d. All of the above.

A

Straight forward definition of a term life policy

12

Ryan and Jody are age 68 and 72, respectively, and are married. They have significant assets that will be subject to estate taxes upon the second spouse’s death. Which of the following life insurance policies would you recommend?

a. Annually renewable term.
b. Second-to-die whole life policy.
c. First-to-die whole life policy.
d. Ordinary whole life.

B

Second to die would reduce premiums and ensure availability of liquidity at the death of the second spouse

13

Which of the following is needed to calculate the client’s human-life value?
1. Average annual earnings to the age of retirement.
2. Estimated annual Social Security benefits after retirement.
3. Costs of self-maintenance.
4. Number of years from the client’s present age to the contemplated age of retirement.

a. 3 and 4.
b. 1, 2, and 4.
c. 1, 3, and 4.
d. 1, 2, 3, and 4.

C

This question asks what information is needed to calculate the value of a life. Clearly you need option 1, 3, and 4. Social security benefits are generally received after retirement and, therefore, are not counted

14

Terry has been advised by his insurance agent to purchase a variable universal life insurance policy. He has sought your advice regarding this purchase. All of the following are characteristics of a variable universal policy, except:

a. The policy features increasing or decreasing death benefits and flexibility of variable premium payments.
b. The policy owner has exclusive investment control over the cash value of the policy.
c. The death benefit is guaranteed to be equal to the face value.
d. The cash value of a variable universal life policy is dependent on premiums and investment returns.

C

All statements are correct except option c. The minimum death benefit of the VUL policy guaranteed. In addition, another characteristic of the policy is that the premium payments on the policy can be variable, subject to a required minimum to prevent lapse

15

Which one of the following statements concerning whole life insurance is false?

a. Level-premium whole life insurance accumulates a cash value that eventually reaches the face value of the policy at age 100 - 120.
b. Whole life insurance offers permanent protection throughout the insured’s lifetime.
c. Whole life insurance can be participating, which means the insured must participate in self-directed investments for the cash value.
d. Whole life insurance premiums paid throughout the insured’s lifetime are ordinary life policies.

C

Participating means the insured receives the dividends. All other statements are true

16

Betty owns a $150,000 whole life participating insurance policy that she purchased ten years ago. She has paid premiums of $4,000 each year since she bought the policy and the current cash surrender value is $60,000. Betty has received $10,000 in paid dividends since the policy inception. Which of the following statement(s) is/are correct regarding Betty’s policy?

1. If Betty surrenders the policy now, she will have a taxable gain of $30,000 taxed as ordinary income.
2. The dividends that were paid on Betty’s policy were subject to ordinary income tax treatment.

a. 1 only.
b. 2 only.
c. Both 1 and 2.
d. Neither 1 nor 2.

A

The ordinary taxable gain on the surrender of Betty's policy is $30,000. Premium payments of $40,000, less $10,000 of paid dividends, leave an adjusted basis of $30,000. The taxable gain is $30,000 ($60,000-$30,000)

17

Watson, Inc. has four equal partners. All four partners are interested in entering into a buy-sell arrangement. How many life insurance policies would be purchased to properly fund using a cross-purchase agreement?

a. 4 policies.
b. 6 policies.
c. 8 policies.
d. 12 policies.

D

Each owner would need to purchase a life insurance policy on the other owners. Therefore, 12 policies would be purchased in total (4x(4-1)=12

18

All of the following are reasons that an employer might favor a nonqualified plan over a qualified retirement plan except:

a. There is more design flexibility with a nonqualified plan.
b. A nonqualified plan typically has lower administrative costs.
c. Nonqualified plans typically allow the employer an immediate income tax deduction.
d. Employers can generally exclude rank-and-file employees from a nonqualified plan.

C

Nonqualified plans do not allow the employer to take an income tax deduction until the employee recognizes the income. All of the other statements are correct.

19

Which of the following is false regarding a deferred compensation plan that is funded utilizing a rabbi trust?

1. Participants have security against the employer’s unwillingness to pay.
2. Rabbi trust provide the participant with security against employer bankruptcy.
3. Rabbi trusts provide tax deferral for participants.
4. Rabbi trusts provide the employer with a current tax deduction.

a. None, they are all true.
b. 2 and 4.
c. 1, 2, and
4. d. 1, 2, 3, and 4.

D

Rabbi trusts do not provide security against employer bankruptcy or a current tax deduction for the employer

20

A viatical settlement company purchased a $250,000 policy for $160,000. It paid additional premiums of $7,000 (in total) over the next three years before the insured died. What income must the viatical company report from the policy proceeds in the year of the insured’s death?

a. $0.
b. $83,000 ordinary income.
c. $83,000 capital gain.
d. $90,000 ordinary income.

B

The viatical company must report the gain as ordinary income. the amount of the viatical settlement plus the additional premiums are costs and are deducted from the proceeds in determining the gain

21

Which one of the following statements regarding disability insurance is false?

a. The longer the elimination period, the less expensive the policy.
b. An own-occupation policy will provide disability benefits if the insured is unable to perform the duties of his or her own occupation.
c. An any-occupation policy is less expensive than an own-occupation policy.
d. A residual benefit clause provides the insured with benefits that extend beyond the disability period.

D

Residual benefit makes up the difference between the wages before disability and wages after diability.

22

Gunther has a disability income policy that pays a monthly benefit of $2,400. Gunther has been disabled for 60 days, but he only received $1,200 from his disability insurance. Which of the following is the probable reason that he only received $1,200?

a. The policy has a deductible of $1,200.
b. The elimination period is 45 days.
c. The policy has a 50% coinsurance clause.
d. Gunther is considered to be only 50% disabled.

B

If the elimination period extends 15 days into the current month, Gunther will only have received half (15/30) of the monthly benefit. Disability policies do not have a deductible.

23

Andrea owns and runs a printing company that is organized as an S corporation. Unfortunately, she has an accident with a printing press and is rendered disabled. She receives $4,000 per month in disability payments. The S corporation had paid the premiums on the policy, but reported the payments on her W-2. How much of the benefit is subject to income tax?

a. $0.
b. $2,000.
c. $3,000.
d. $4,000

A

Even though the company paid for the premiums, she picked up the premiums as income. Therefore, the benefits are not taxable

24

How long would someone have to wait to receive Social Security disability benefits if they qualify?

a. 5 months.
b. 6 months.
c. 12 months.
d. Benefits are paid immediately if eligible.

A

The social security waiting period is five months

25

Caden has a disability policy with a 12-month elimination period. He was in a bizarre accident involving a crane falling on a building causing part of the building’s exterior wall to fall on his van. He lost the use of both of his legs in the accident. If his policy has a presumptive total disability coverage provision, when will he begin receiving benefits?

a. Immediately.
b. After six months as the provision accelerates the waiting period.
c. After a one month statutory administrative time period.
d. He will have to wait the 12 months.

D

The presumptive total disability coverage provision does not accelerate the elimination period.

26

Medicare is primarily for those people who meet the following eligibility requirements:

a. Disabled.
b. Children.
c. Low Income.
d. Elderly

D

Medicare is primarily for the elderly, age 65, but it can cover the diabled

27

Medicaid is primarily for those people who meet the following eligibility requirements:

a. Disabled.
b. Children.
c. Low Income.
d. Elderly

C

Medicaid is primarily for those with low income

28

All of the following are activities of daily living (ADLs) as provided under the Health Insurance Portability and Accountability Act (qualified plans), except:

a. Eating.
b. Bathing.
c. Maintaining continence.
d. Cognitive thinking.

D

An insured must be unable to perform two fo the six ADLs (Eating, Bathing, Dressin, Transferring from bed to chari, using the toilet, maintaining continence). Cognitive disability is not an ADL but is another way in which a person may become eligible for the long-term care benefits

29

There is more than one way to obtain benefits for nursing home coverage. All of the following sources provide some benefits, except:

a. LTC insurance.
b. Heath insurance.
c. Medicare.
d. Medicaid.

B

Health Insurance does not provide for this type of coverage. Madicare will provide coverage for up to 100 days

30

Which of the following is the highest level of care under the category of long-term care?

a. Custodial care.
b. Intensive care.
c. Skilled nursing care.
d. Advanced nursing care.

C

Custodial care is help with activities of daily living. Skilled nursing care requires doctors or nurses to assist with the patient care. Intensive care is medical care provided in a hospital and advanced nursing care is not a real type of care.

31

Which of the following is true?

a. A fixed annuity mitigates the risk of superannuation. b. A fixed annuity mitigates the risk of superannuation and inflation.
c. A fixed annuity is always a deferred annuity.
d. A fixed annuity is always for a single life expectancy.

A

Annuities migrate the risk of superannuation. Option B is incorrect as fixed annuities are subject to loss of purchasing power. Option c is incorrect as fixed annuities can either be deferred or immediate. Option D is incorrect as a fixed annuity can be for a single life, or for a guaranteed term.

32

Which of the following risks can an annuity mitigate?

a. Superannuation.
b. Mortality.
c. Superannuation and purchasing power.
d. Mortality and purchasing pow

C

Annuities can help lessen superannuation (risk of outliving funds) and purchasing power (if the annuity is variable). An annuity does not reduce the likelihood of dying (mortality)

33

Harry, age 63 purchased an immediate annuity. The annuity will provide monthly payments to Harry for as long as he lives. If he dies before receiving payments for 20 years, the remaining payments will go to his beneficiary. What type of annuity did Harry purchase?

a. A life annuity with a term-certain guarantee.
b. An installment refund annuity.
c. A straight-life annuity.
d. A joint and survivor annuity.

A

Harry purchased a life annuity with the guaranteed payments. In this case, the insurer has promised to make at least 240 payments (20 years x 12 months)

34

Kareem is a drug rep and planning on retiring next month. He is using his accumulated $200,000 to purchase an annuity. Which of the following options will give him the largest monthly annuity payment assuming his life expectancy is 20 years and his spouse’s life expectancy is 22 years.

a. 10 year term certain.
b. Single life annuity over Kareem’s life.
c. 100% joint life annuity over Kareem and his spouse’s lives.
d. 75% joint life annuity over Kareem and his spouse’s lives

A

Payments over 10 years will be larger than payments over 20 years or more. even if they are guaranteed

35

Perry, who is 50 years old, was building a new home for his family. However, he was running out of money and could not afford the pool they fell in love with. Since his family was upset, he decided to take a withdrawal from his annuity. He had contributed $100,000 to the annuity, and the value of the annuity today is $300,000. He decided to take a withdrawal of $60,000 from the annuity. Which of the following is correct?

a. $40,000 is taxable as ordinary income.
b. $40,000 is taxable as ordinary income and subject to the early withdrawal penalty.
c. $60,000 is taxable as ordinary income.
d. $60,000 is taxable as ordinary income and subject to the early withdrawal penalty.

D

When distributions (withdrawals) are taken from an annuity before annuitizing, the entire distribution muse be included in the taxpayer's gross income until all of that gain in the contract has been distributed. When taxable income is received from an annuity before the recipient (owner) reaches the age of 59 1/2, a 10 percent penalty tax (10 percent of the taxable income) is imposed.

36

Otto rents an apartment for $500 per month and has $50,000 content coverage. If he is unable to occupy his apartment due to a negligent fire caused by a neighbor, for up to how many months could he rent another apartment if the cost of the new apartment is $750 per month?

a. 60 months.
b. 6 months.
c. None because negligent acts are not covered.
d. None because content coverage does not cover reimbursement for rent

A

30% of the content equals $15,000. If the excess rent is $250 per month, Otto could continue to receive loss of use benefits for up to 60 months if that amount of time was reasonable

37

Mary lives in Idaho where she carries the state-mandated minimum liability insurance on her car (15/30/10) through her personal automobile policy (PAP). She is driving through Oklahoma and has a wreck with Gerri. Oklahoma requires minimum liability insurance of 30/50/20. Gerri suffers bodily injury in an amount of $40,000 and Gerri’s vehicle is damaged in an amount of $22,000. How much will Gerri collect from Mary’s PAP policy?

a. Bodily injury $40,000 and property $22,000.
b. Bodily injury $15,000 and property $10,000.
c. Bodily injury $30,000 and property $20,000.
d. Bodily injury $30,000 and property $22,000.

C

Mary's policy limits will increase to the amount required in Oklahoma. Gerri will have to sue Mary for her excess non-insured losses

38

Which of the following would not be considered an insured person for the purposes of Part A (Liability Coverage) for a Personal Auto Policy?

a. You.
b. Any family member.
c. Any person using “your covered auto” with permission.
d. Any person using “your covered auto” without permission.

D

A person using an automobile without permission is not covered

39

Mike has the following split limits of coverage on his Personal Auto Policy of 100/300/50. Which of the following best describes Mike’s coverage?

a. $100,000 per person for bodily injury, $300,000 per occurrence for bodily injury and $50,000 for property damage.
b. $100,000 per covered auto, $300,000 per occurrence for covered auto and $50,000 for uninsured motorist.
c. $100,000 per person for bodily injury, $300,000 per occurrence for property damage and $50,000 for uninsured motorist.
d. $100,000 for property damage, $300,000 per person for bodily injury and $50,000 for property damage.

A

Split limits read: bodily injury per person/per occurrence for bodily injury/property damage

40

All of the following statements are correct regarding a personal liability umbrella policy except:

a. The PLUP provides protection above and beyond the liability limits of your homeowners and automobile insurance policies.
b. The PLUP requires the insured to carry certain underlying minimum amounts of liability for homeowners and PAP.
c. The PLUP insurer provides legal defense to the insured.
d. The PLUP is only appropriate for individuals with a high net worth.

D

Future earnings can be garnished. a PLUP may protect against garnished wages

41

Why are auto loans generally the easiest loans to get?

a. Due to consumer protection.
b. There is usually a down payment, and an auto loan is secured.
c. An auto loan only requires a minimum credit score.
d. Automobiles are easy to repossess due to GPS being placed in all cars with loans.

B

The auto serves as security for the loan, and borrowers are more likely to pay their car loans than other debts.

42

Which of the following likely has the highest credit score?

a. Forrest has five credit cards, credit utilization of 40%, and a perfect payment history for five years.
b. George has three credit cards, credit utilization of 29%, an installment loan, a mortgage, and a perfect payment history for three years.
c. Connor has two credit cards totaling a $50,000 limit.
d. Floyd has a 30-year mortgage in the 10th year with a perfect payment history and the mortgage is his only deb

B

Payment history, credit utilization, mix of credit, and history are all critical to credit scores. George has a lower utilization and a broader mix of credit

43

The two most well-known credit scores are?

a. FICO and Auto.
b. Auto and Vantage.
c. Vantage and FICO.
d. FICO and Rico.

C

FICO and Vantage are the two most well-known credit scores

44

Which of the following is the acronym recommended by the U.S. Justice Department to avoid identity theft?

a. SCRAM.
b. SNAG.
c. SHAKE.
d. SCAM.

D

SCAM: Stingy, Check, Ask, Maintain

45

Which of the following is incorrect about credit freezes and extended fraud alerts?

a. A credit freeze stops all access to the credit report.
b. An extended fraud alert allows the consumer two free credit reports within 12 months from each of the reporting agencies.
c. The extended alert lasts 24 continuous months.
d. Some states charge a fee for placing a credit freeze.

C

The extended fraud alert lasts 7 years

46

Social Security is funded through all of the following except:

a. Employee payroll tax.
b. Employer payroll tax.
c. Sales tax.
d. Self-employment tax.

C

Employee and Employer payroll tax and self-employment tax are the sources of funding for Social Security. Sales tax does not fund Social Security

47

Brisco, now deceased, was married for 12 years. He had two dependent children, ages 10 and 12, who are cared for by their mother age 48. His mother, age 75, was his dependent and survived him. At the time of his death, he was currently but not fully insured under Social Security. His dependents are entitled to all of the following benefits except:

a. A lump-sum death benefit of $255.
b. A children’s benefit equal to 75% of Brisco’s PIA.
c. A caretaker’s benefit for the children’s mother.
d. A parent’s benefit

D

A lump-sum death benefit of $255 is payable to the surviving spouse or children of the deceased worker if he was fully or currently insured. The children's benefit is payable because Brisco was either currently or fully insured. It is 75% of his PIA. The children's mother would be entitled to a benefit for caring for the children under the age of 16. His dependent mother is only entitled to a benefit if he was fully insured, not currently insured.

48

Medicare Part A provides hospital coverage. Which of the following persons is not covered under Part A?

a. A person 62 or older and receiving railroad retirement.
b. Disabled beneficiaries regardless of age that have received Social Security for two years.
c. Chronic kidney patients who require dialysis or a renal transplant.
d. A person 65 or older entitled to a monthly Social Security check.

A

Medicare Part A requires a person to be age 65. People who are disabled or have permanent kidney failure are entitled to Medicare at any age

49

A person receiving Social Security benefits under full retirement age can receive earned income up to a maximum threshold without reducing Social Security benefits by the earnings test. Which of the following count against the earnings threshold?

a. Dividends from stocks.
b. Rental income.
c. Pensions and insurance annuities.
d. Self-employment income.

D

Earnings that count against the earnings threshold include W-2 wages and net self-employment income. All the other are not earned income for Social Security purposes

50

All of the following statements concerning Social Security benefits are correct except:

a. The maximum family benefit is determined through a formula based on the worker’s PIA.
b. If a worker applies for retirement or survivors’ benefits before his 65th birthday, he must also file a separate application for Medicare.
c. People who are disabled or have permanent kidney failure can get Medicare at any age.
d. The Social Security Administration is concerned with beneficiaries’ combined income, which, on the 1040 federal tax return, includes adjusted gross income and nontaxable interest income

B

If a worker applies for retirement or survivor's benefits before his or her 65th birthday, there is no need to file a separate application for Medicare

51

All of the following statements regarding risk are correct EXCEPT:


A: Objective risk is the difference between the expected and actual losses.
B: Particular risk is a risk that will impact a large group of individuals simultaneously.
C: Subjective risk is the risk that an individual perceives based on that person’s prior experiences.
D: Speculative risk is the chance of loss, no loss, or a profit.

The correct answer is (B).

Fundamental risk will impact a large group of individuals simultaneously, whereas a particular risk only impacts one individual.

52

Which of the following is a risk reduction technique?


A: Purchasing life insurance
B: Parking your car at the end of the parking lot, away from other cars
C: Choosing not to go skydiving
D: Buying a warranty on your new TV

The correct answer is (B).

Parking your car away from other vehicles is an example of a risk reduction technique because you are reducing the likelihood of car damage. Purchasing a life insurance policy and buying a warranty are risk transfer techniques, and choosing not to go skydiving is an example of risk avoidance.

53

The immediate cause and reason for a loss occurring, such as a hurricane, is referred to as a(n)


A: hazard.
B: insurable risk.
C: peril.
D: risk.

The correct answer is (C).

A peril is the immediate cause and reason for a loss occurring. A hazard is a specific condition that increases the likelihood of a loss occurring. Risk is simply the possibility of a loss occurring, and an insurable risk is merely a risk for which an insurance company is able to offer protection.

54

Icy roads and wet floors that increase the likelihood of a loss occurring are known as which type of hazard?


A: Physical hazard
B: Character hazard
C: Moral hazard
d: Morale hazard

The correct answer is (A).

Physical hazards are those physical conditions that increase the likelihood of a loss occurring. Examples of physical hazards are wet floors or icy roads. A moral hazard is the potential for loss caused by the character of the individual. A morale hazard is defined as indifference to risk due to the fact that the insured has insurance. There is no such thing as a character hazard.

55

Which of the following statements is (are) correct regarding insurance contracts?

I. The principle of insurable interest is closely aligned with the principle of indemnity, in that both limit the insured from experiencing a gain using insurance.
II. A subrogation clause in an insurance policy requires that the insured relinquish a claim against a negligent third party if the insurer has already indemnified the insured.


A: I only
B: II only
C: Both I and II
D: Neither I and II

The correct answer is (C).

Both statements are correct with regards to insurance contracts.

56

Which of the following is not an element of the principle of utmost good faith?


A: Concealment
B: Warranty
C: Representation
D: Waiver

The correct answer is (D).

A waiver is not an element of the principle of utmost Good good faith. A waiver occurs when a party to a contract relinquishes a known legal right.

57

The section of an insurance contract that describes exactly which property or person is being covered is the


A: declarations section.
B:inclusions section.
C: definitions section.
D: conditions section.

The correct answer is (A).

The declarations section describes exactly which property or person is being covered. An inclusions section is not usually included in an insurance contract. The definitions section defines key words or phrases used throughout the contract. The conditions section lists provisions that require an insured to perform certain duties.

58

All of the following statements regarding insurance policies are correct EXCEPT:


A: Adverse selection is the tendency of those who most need insurance to purchase insurance policies while those with the least perceived risk are less likely to pay the necessary premiums for insurance.
B: An endorsement is a modification or change to a life or health insurance policy.
C: Co-payments are loss-sharing arrangements whereby the insured pays a flat dollar amount or percentage of the loss in excess of the deductible.
D: Deductibles serve as motivation for an insured to take precautions to avoid losses or to prevent the filing of false claims.

The correct answer is (B).

An endorsement is a modification or change to an existing property insurance policy, whereas a change to a health or life insurance policy is a rider.

59

Premium rates set by insurance companies are regulated at which level of government?


A: Federal
B: State
c: Local
D: None of the above

The correct answer is (B).

Insurance premiums are regulated at the state level.

60

Ashley owns a home with a $400,000 replacement value. This February, a blizzard causes $75,000 in damages to the home. Ashley has an insurance policy with 80 percent coinsurance and a $1,000 deductible. How much will the insurer pay if Ashley carries $300,000 of coverage?


A: $60,000.00
B: $69,312.50
C: $70,312.50
D: $75,000.00

The correct answer is (B).

[$300,000 ÷ (0.80 × $400,000)) )] × $75,000 = $70,312.50 − $1,000 deductible = $69,312.50

61

The Affordable Care Act (ACA) requires large employers to provide a minimum level of health insurance coverage to employees or face significant tax penalties. According to the ACA, a large employer is a company that, at any point during the year, employs at least


A: 25 people
B: 40 people
C: 50 people
D: 100 people

The correct answer is (C).

The ACA defines a large employer as a company that, at any point during the year, employs at least 50 people.

62

Belinda is a participant in her employer’s group comprehensive major medical insurance plan. The plan has a $500 deductible, a $2,500 out-of-pocket maximum, and 80 percent coinsurance. If Belinda is injured in an accident resulting in $2,000 in medical costs, how much will Belinda need to pay for the medical bills?


A: $0
B: $400
C: $800
D: $2,000

The correct answer is (C).

Belinda will need to pay the first $500 to cover the deductible, then 20% of the remaining $1,500 (that is, $300) for a total of $800.

63

A grace period is granted to the insured in the event that he or she is late making a premium payment. In a traditional health insurance policy, the grace period is


A: 15 days.
B: 31 days.
C: 60 days.
D: 90 days.

The correct answer is (B).

The grace period is usually 31 days. During the grace period, a policy may not be canceled by the insurer.

64

Indemnity health insurance plans are one of the ________ flexible types of insurance policies in terms of having the freedom to pick one’s own providers, but participants pay some of the ________ premiums.


A: Most; highest
B: Most; lowest
C: Least; highest
D: Least; lowest

The correct answer is (A).

Indemnity health insurance plans give participants the freedom to choose their own health care providers, but they pay some of the highest premiums.

65

Which of the following policies provides the greatest degree of protection to the insured?


A: Conditionally renewable
B: Noncancelable
C: Guaranteed renewable
D: Optionally renewable

The correct answer is (B).

A noncancelable policy offers the greatest amount of protection for the insured since the insured can force the insurance company to provide continued coverage, at the same premium, simply by paying the premium on the policy.

66

Amanda, an employee at Computer Solutions, recently divorced her husband, Carlos. Computer Solutions has provided group health insurance coverage to Amanda and her family since she began working for the company. Carlos is unemployed but is entitled to COBRA continuation coverage for


A: 12 months.
B: 18 months.
C: 29 months.
D: 36 months.

The correct answer is (D).

Carlos may obtain group health insurance coverage under Amanda’s plan for 36 months after the divorce.

67

All of the following are true regarding health savings accounts (HSAs) EXCEPT:


A: HSA funds can be invested.
B: Contributions made to the HSA by the plan participant are tax-deductible as an adjustment to gross income (above-the-line).
C: If an employer makes contributions to an HSA on behalf of an employee, the employer contributions are included in the taxable income of the employee.
D: To be eligible to make HSA contributions, an individual must be covered by a high-deductible health insurance plan.

The correct answer is (C).

If an employer makes contributions to an HSA on behalf of an employee, and the contribution limits are not exceeded, the employer contribution is not included in the taxable income of the employee.

68

A health savings account (HSA) and a flexible spending account (FSA) have several similarities including


A: that all funds carry over from year to year.
B: their use of pretax contributions.
C: that funds are invested.
D: all of the above.

The correct answer is (B).

Both FSAs and HSAs use pre-tax contributions. Funds only carry over from year to year in an HSA, not in an

FSA. Only funds in an HSA are invested; FSA funds are not invested.

69

Which of the following is true of medical expense insurance?


A: It meets the requirements for minimal essential coverage under the Affordable Care Act (ACA).
B: The policy limits are likely to be very low, compared with major medical policies.
C: Planners usually recommend medical expense insurance because it offers the same coverage as group major medical insurance for a similar price.
D: All of the above are true.

The correct answer is (B).

The policy limits for medical expense insurance are likely to be much lower compared to major medical policies. Medical expense insurance, on its own, will not qualify for minimal essential coverage under the Affordable Care Act (ACA).

70

Which of the following is true of group health insurance?


A: Employer group health insurance plans that require all employees be eligible for the plan pose the greatest adverse selection risk.
B: Group policies are underwritten by assessing specific health risks of the individuals in the group.
C: One of the downfalls of group health insurance is the high administrative costs for each of the participants.
D: None of the above are true.

The correct answer is (D).

All of the above are incorrect. Group insurance plans that require all employees to enroll in the program pose little adverse selection risk because healthy individuals do not have the ability to opt- out. To do so would leave only those with greater expected health care needs covered in the plan. Group policies are underwritten based on the characteristics of the entire group, not on individual health assessments. One of the benefits of a group insurance policy is that the administrative costs are spread out among all the individuals, leaving less administrative costs per person, compared to individual policies.

71

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


A: The assignment clause combats abuse by the insurance company, stating that once a policy has been in effect for a period of time, the insurer may not cancel the policy due to a material misrepresentation or omission.
B: The suicide clause is designed to hedge against the risk that individuals with suicidal thoughts will purchase life insurance and, shortly thereafter, commit suicide.
C: Most life insurance policies provide a grace period, typically spanning one month (31 days) after the premium due date for the policy owner to pay an overdue premium.
D: All of the above are correct.

The correct answer is (A).

Option (A) describes the incontestability clause. Assignment is the process of transferring all or part of the policy’s ownership rights.

72

Isaiah, a financial planner, is working with his clients to determine their life insurance needs. Isaiah is determining each person’s life insurance need by estimating the cash needs of the family during and after the insured’s death. Some of the financial needs that Isaiah is considering are the payment of final expenses, medical care, and eliminating debts. Which of the following models is Isaiah using to determine the life insurance needs?


A: The human life-value approach
B: The capitalized earnings approach
C: The needs approach
D: The discretionary cash flow approach

The correct answer is (C). Isaiah is using the needs approach to determine the life insurance needs of his clients.

73

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


A: An individual’s mortality risk affects the price of the term insurance premiums.
B: Term insurance policies tend to be used by older individuals more frequently than by younger individuals.
C: Unlike other forms of life insurance, term life insurance policies do not have cash accumulation features.
D: An annual renewable term policy (ART) permits the policyholder to purchase term insurance in subsequent years without evidence of insurability.

The correct answer is (B).

The premiums for term life insurance increase as the mortality risk increases. Therefore, premiums for term life insurance are often unaffordable for older individuals, making this type of life insurance much more common among younger individuals.

74

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


A: The insurer retains the investment risk on an ordinary whole life policy.
B: The premium on a limited-pay policy will be less than the premium on an ordinary (straight) life policy.
C: Policy dividends are a non guaranteed “return of premium.”
D: All of the above are correct.

The correct answer is (B).

The premium on a limited-pay policy is greater than that of an ordinary life policy because the payments are being front-loaded over the payment period.

75

Violetta sells commercial real estate and works on a commission. She wants a substantial amount of permanent life insurance protection, but because of her irregular income, she is not sure she will be able to pay a fixed premium every year. Which of the following should Violetta consider?


A: A guaranteed renewable term insurance policy
B: A modified whole life insurance policy
C: A single-premium immediate annuity
D: A universal life insurance policy

The correct answer is (D).

Option (A) is incorrect because a guaranteed renewable term policy has a fixed premium. Option (B) is incorrect because, although a lower premium is charged for the first few years, a modified whole life insurance policy still has a fixed premium. Option (C) is incorrect because Violetta is currently interested in permanent life insurance protection, not an annuity.

76

Which of the following statements concerning the uncertainty of investment gains or losses in a variable life insurance policy is correct?


A: It is jointly borne by both policyowner and insurer.
B: It is nonexistent.
C: It is borne by the policyowner.
D: It is borne by the insurer.

The correct answer is (C).

Options (A), (B), and (D) are incorrect because the policyowner bears the risk of investment gains or losses in a variable life insurance policy.

77

Which of the following statements concerning universal life insurance is (are) correct?

I. Policyowners must pay a minimum target premium each year.
II. A withdrawal of cash value is treated as a loan.


A: I only
B: II only
C: Both I and II
D: Neither I nor II

The correct answer is (D).

Statement I is incorrect because the target premium is only a suggested premium. Statement II is incorrect because withdrawals from a universal life policy resemble withdrawals from a savings account and incur no indebtedness

78

Which of the following statements concerning insurable interest is (are) correct?

I. Life insurance requires that insurable interest exists at the time of a claim.
II. Without an insurable interest, insurance would be a wager or gambling contract.

A: I only
B: II only
C: Both I and II
D: Neither I nor II

The correct answer is (B).

Statement I is incorrect because life insurance requires an insurable interest only when an insurance contract is purchased.

79

In conducting a needs analysis to determine the amount of life insurance an individual with dependents requires, all the following types of needs must be considered EXCEPT


A: income to meet the individual's retirement needs.
B: ongoing income needs of the surviving dependent family members.
C: the need to fund the children's education.
D: lump-sum cash needs at the individual's death.

The correct answer is (A).

A needs analysis presumes that the individual dies. Retirement needs of the individual's survivors, however, are considered.

80

Which of the following statements describes factors that should be considered when deciding whether it is better to buy term life insurance or to buy permanent insurance and invest the premium difference?


A: The cash value of a permanent life insurance policy can readily be liquidated.
B: For clients in higher marginal tax brackets, the cost of permanent policy premiums is somewhat offset by their tax deductibility.
C: Only the death benefit from a term policy is received income-tax-free.
D: Increases in life insurance cash values are subject to federal income taxes as they accrue.

The correct answer is (A).

(B) is incorrect because life insurance premiums are not tax deductible. (C) is incorrect because death benefits from both term and permanent policies are received income-tax-free. (D) is incorrect because increases in cash values are not subject to federal income taxes as they accrue, in contrast to the earnings in a separate investment program, which are often taxed as ordinary income.

81

Which of the following statements concerning a properly designed buy-sell agreement is (are) correct?

I. It ensures that a business owner's estate can sell the business for a reasonable price.
II. It should specify how the purchase price will be established.


A: I only
B: II only
C: Both I and II
D: Neither I nor II

The correct answer is (C).

Both I and II are correct.

82

Members of a three-person partnership want to enter into a buy-sell arrangement. How many life insurance policies would need to be purchased to properly fund coverage of the partnership using an entity-purchase agreement?


A: One policy
B: Three policies
C: Six policies
D: Nine policies

The correct answer is (B).

With an entity-purchase buy-sell arrangement, the business would purchase life insurance policies on each owner. Therefore, a total of 3 policies, one for each owner, would need to be purchased.

83

Members of a four-person partnership want to enter into a buy-sell arrangement. How many life insurance policies would need to be purchased to properly fund coverage of the partnership using a cross-purchase agreement?


A: One policy
B: Four policies
C: Eight policies
D: Twelve policies

The correct answer is (D).

Each owner would need to purchase a life insurance policy on each of the other owners. Therefore a total of 12 policies would need to be purchased.

4 × (4 − 1) = 4 × 3 = 12

84

Which of the following test(s) can be used to determine whether or not a life insurance contract meets the definition of a modified endowment contract (MEC)?

I. The corridor test
II. The seven-pay test


A: I only
B: II only
C: Both I and II
D: Neither I nor II

The correct answer is (C).

Both the corridor test and the seven-pay test are used to determine whether or not a life insurance contract is a MEC.

85

Cross-purchase agreements are usually preferred from a tax planning perspective because


A: they permit the surviving shareholders to increase their basis in the business interest.
B: the death benefit on life insurance owned by individuals is not subject to the possible imposition of the alternative minimum tax.
C: life insurance owned by business owners outside of a corporation does not trigger any potential accumulated earnings tax.
D: all of the above.

The correct answer is (D).

All of the above are correct.

86

A Section 1035 exchange would allow which of the following tax-free exchanges?


A: A modified endowment contract (MEC) to typical life insurance policy.
B: A deferred annuity to a life insurance policy.
C: A modified endowment contract (MEC) to an annuity.
D: All of the above.

The correct answer is (C).

A life insurance policy, whether a typical policy or a MEC, may be exchanged tax-free for an annuity. Answer (A) is incorrect because a MEC cannot be converted to a typical policy; “once a MEC, always a MEC”. Answer (B) is incorrect because annuities may not be exchanged for life insurance policies tax-free under Section 1035.

87

An insured’s life insurance policy has been classified as a modified endowment contract (MEC). When the insured passes away, the policy’s death benefit is subject to which of the following tax treatments?


A: The beneficiary receives the death benefit tax-free.
B: The death benefit is subject to ordinary income taxation.
C: The death benefit is subject to capital gains taxation.
D: The sum of all premiums paid are received as a tax-free return of basis while the remainder of the death benefit is subject to capital gains taxation.

The correct answer is (A).

Whether a policy is classified as a MEC does not affect the tax treatment of that policy’s death benefit: the death benefit is still received tax-free by the beneficiary.

88

An owner-insured of a viatical settlement is not subject to income tax on the capital gains of the policy if


A: The death benefit is less than $1 million.
B: the individual is less than 65 years of age.
C: the individual is terminally ill.
D: the owner-insured’s basis in the policy is greater than $1 million dollars.

The correct answer is (C).

If the owner-insured of a life insurance policy is terminally ill at the time the policy is sold, the gain in the policy is not subject to income tax. Terminal illness is defined as having a life expectancy of less than 24 months.

89

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


A: $25,000
B: $50,000
C: $75,000
D: $100,000

The correct answer is (B).

The first $50,000 of death benefit protection received by the employee is tax-free.

90

Which of the following is a taxable event?


A: A beneficiary receives the death benefit from a modified endowment contract (MEC).
B: An insured takes a policy loan from the cash value of a universal life insurance policy.
C: An insured receives an interest payment after electing the interest-only surrender option.
D: A beneficiary receives a $100,000 death benefit from a group term life insurance policy.

The correct answer is (C).

When the interest-only surrender option is selected, the death benefit is left with the insurance company. Gains on that balance are received as taxable interest income. Answer (A) is incorrect because death benefits from a MEC are received tax-free by the beneficiary. Answer (B) is incorrect because policy loans, like all loans, are not considered taxable income. Answer (D) is incorrect because death benefits from group term life insurance policies are received tax-free by the beneficiary.

91

Which of the following is true as it relates to disability insurance?


A: From a risk perspective, short-term disability coverage is far more important than long-term coverage.
B: As a general rule, an individual’s mortality risk is usually much higher than the individual’s morbidity risk.
C: Most working professionals should have a minimum 60 to 70 percent of their gross income protected with a disability insurance policy.
D: All of the above are correct.

The correct answer is (C).

At minimum, working professionals should usually have 60 percent to 70 percent of their gross income covered with a disability policy.

From a risk perspective, long-term coverage is more important than short-term coverage because short-term cover- age usually only lasts for 1 to 2 years. Morbidity risk is significantly higher than mortality risk.

92

What is the purpose of disability income insurance?


A: To provide a one-time payment for the insured while he or she is injured or ill
B: To provide regular income for the insured while that person is working and when he or she is unable to work due to injury on the job
C: To provide a regular income while the insured is unable to work due to illness or injury
D: To provide a one-time payment for the insured while that person is working and when he or she is unable to work due to illness or injury

The correct answer is (C).

Disability insurance is income replacement insurance for covering sickness and accidents.

93

For a short-term disability policy, what is the typical elimination period?


A: 5 to 30 days
B: 30 to 45 days
C: 45 to 660 days
D: 1 to 2 years

The correct answer is (A).

Short-term disability policies typically have a shorter elimination period (5 to 30 days) than the elimination period of long-term policies (30– to 180 days).

94

Chen has a disability income policy that pays a monthly benefit of $3,000. Chen has been disabled for 60 days, but he only received $1,500 from his disability insurance. Which of the following is the probable reason that he only received $1,500?


A: The policy has a deductible of $1,500.
B: The elimination period is 45 days.
C: The policy has a 50 percent coinsurance clause.
D: Chen is considered to be only 50 percent disabled.

The correct answer is (B).

If the elimination period is 45 days, Chen will only have received half (15/30) of the monthly benefit for month two.

95

Short-term disability insurance policies provides coverage for up to


A: 1 year.
B: 2 years.
C: 5 years.
D: 10 years.

The correct answer is (B).

Short-term disability insurance policies usually provide coverage for up to 2 years.

96

Seamus has a disability policy and had an accident sliding into third while participating in his local softball league. As a result of Seamus’s accident, he is no longer able to perform all of the requirements of his prior job. His new job pays 30 percent less than his salary before the accident. Which of the following provisions in his disability policy would provide continuing benefits to Seamus to offset his loss in income?


A: A residual benefit provision
B: An elimination period provision
C: A partial disability provision
D: A COLA rider

The correct answer is (A).

The residual benefit provision will provide continuing benefits for an insured who returns to work but suffers a loss of income due to the disability.

97

Jacques bought a disability policy with a base benefit of $5,000 and an SIS offset benefit of $1,000. Jacques became disabled and eventually received $700 in Social Security disability benefits. How much will Jacques receive from the insurance company after Social Security benefits begin?


A: $5,000
B: $5,300
C: $5,700
D: $6,000

The correct answer is (B).

Jacques will receive $5,300.

Base benefit + SIS offset – SS benefits

$5,000 + $1,000 – $700 = $5,300

98

All of the following are correct regarding group disability coverage EXCEPT:


A: Premiums for group disability coverage are typically lower than premiums for individual policies.
B: Employer-sponsored group disability coverage is usually coordinated so that there is continuous income coverage between short-term and long-term policies.
C: Employers may pay premiums on behalf of the employees or allow the employees to pay the premium directly through payroll deduction.
D: The definition of disability for group disability policies is almost always own-occupation.

The correct answer is (D).

Group insurance policies commonly use the any-occupation definition of disability, either throughout the entire benefit period or 2 years into the benefit period.

99

Dana works for Argos, Inc., which provides disability insurance for its employees but only pays 60 percent of the premium. Dana pays the remaining 40 percent of the premium with after-tax dollars. If Dana is disabled, what percentage of her benefits is taxable?


A: 0%
B: 40%
C: 60%
D: 100%

The correct answer is (C).

Sixty percent of Dana’s benefits are taxable. Only the portion paid by the employer (with pre tax dollars) is taxable.

100

Tom has a disability policy and was recently injured, causing him to permanently lose hearing in both of his ears. Which of the following provisions might come into play causing Tom to receive disability benefits quicker than with a normal disability claim?


A: Own occupation policy
B: Presumptive total disability
C: Residual benefit provision
D: Waiver of premium rider

The correct answer is (B).

With presumptive total disability coverage, if a condition such as losing hearing in both ears arises, the policy automatically presumes total disability and will begin payments according to the contract.

101

All of the following are considered activities of daily living (ADLs) EXCEPT


A: dressing.
B: bathing.
C: cognitive ability.
D: transferring from a bed to a chair.

The correct answer is (C).

The six ADLs are eating, bathing, dressing, transferring from a bed to a chair, using the toilet, and maintaining continence. Cognitive ability is not an ADL.

102

Which of the following is (are) required for an insured to qualify for long-term care benefits?

I. The insured is unable to perform two of the six ADLs for at least 90 days.
II. The insured has substantial cognitive impairment requiring substantial supervision for his or her protection.


A: I only
B: II only
C: Either I or II
D: Neither I nor II

The correct answer is (C).

The insured must meet one of the two criteria (statement I or II) to be eligible for long-term care benefits.

103

All of the following are a requirements of a qualified long-term care insurance policy EXCEPT:


A: The benefit of the policy must offer inflation protection.
B: The contract must offer to cover pre existing conditions.
C: The contract must be guaranteed renewable.
D: The contract must offer to pay a non forfeiture benefit.

The correct answer is (B).

For a long-term care policy to be considered a qualified plan, the plan must be guaranteed renewable and offer inflation protection and a non forfeiture benefit. The contract does not need to offer to cover pre existing conditions.

104

A chronically ill person is entitled to receive benefits under a long-term care policy and is defined as someone who is unable to perform activities of daily living for a period of at least days.


A: Four; 90
B: Two; 60
C: Two; 90
D: Three; 90

The correct answer is (C).

Under a qualified long-term care policy, a chronically ill person must be unable to perform without the substantial assistance of another person two ADLs for 90 days

105

Janet is 83 years old and has been blind for 4 years. She is no longer able to drive or cook for herself. Assuming she has a qualified long-term care plan, is she considered chronically ill?


A: Yes, she has been unable to perform two activities of daily living for over 90 days.
B: Yes, but she must prove to the insurance company that she is unable to perform these tasks.
C: No, sight is not considered an activity of daily living, although cooking is.
D: No, cooking, and driving, and being able to see are not considered ADLs.

The correct answer is (D).

Cooking, driving, and being able to see are not considered ADLs. The Health Insurance Portability and Accountability Act defines chronically ill as being unable to perform two of the six activities of daily living (ADLs). The six ADLs are eating, bathing, dressing, transferring from a bed to a chair, using the toilet, and maintaining continence

106

Eric, aged 80, and Victoria, aged 75, file their 2020 federal income taxes jointly. How much can they claim as a medical expense for itemized deductions for their two long-term care policies?


A: $1,630
B: $4,350
C: $5,430
D: $10,860

The correct answer is (D).
If Eric and Victoria own qualified long-term care policies, they each have an annual deduction of $5,430 in 2020. Their combined total is $10,860.

107

Which of the following is correct regarding how employer payments for long-term care are treated for federal income tax purposes? Employer payments for long-term care group premiums are


A: deductible to the employer and not taxable income to the employee.
B: deductible to the employer but are taxable income to the employee.
C: not deductible to the employer and not taxable income to the employee.
D: not deductible to the employer and are taxable income to the employee.

The correct answer is (A).
Employer payments for long-term care group premiums are tax deductible to the employer and not taxable income to the employee.

108

Leo, Declan, Anthea and Willa all live at the South Hampton Home for Distinguished Musicians. Which of these meet(s) the criteria for being chronically ill under qualified long-term care provisions?

I Leo, who cannot drive, hear, or dress himself
II Declan, who cannot speak, feed himself, or dress himself
III Anthea, who cannot hear, walk, or feed herself
IV Willa, who cannot drive, walk, or dress herself

A: Anthea only
B: Declan only
C: Declan and Willa
D: Leo and Anthea

The correct answer is (B).
The inability to feed and dress yourself without assistance are two of the listed tasks that constitute a chronically ill person under a qualified long-term care policy. Declan is the only one who qualifies as chronically ill.

109

Long-term care can be extremely expensive. Which of the following statements is (are) correct regarding the cost of long-term care?

I. Medicare is a practical way to pay for long-term care.
II. Most people who need long-term care will receive at least some financial assistance from Medicaid.


A: I only
B: II only
C: Both I and II
D: Neither I nor II

The correct answer is (D).
Statement I is incorrect because Medicare is not a good option to pay for long-term care because it is limited and restrictive and will only pay for up to 100 days. Statement II is incorrect because only people who meet fairly strict income and asset tests qualify for Medicaid. While these tests vary somewhat by state, generally people must have nearly no income and very little assets to qualify for financial assistance from Medicaid.

110

Where do most people receive long-term care services?


A: In their home
B: In an assisted-living facility
C: In skilled-nursing care
D: In a hospital

The correct answer is (A).
Most people receive long-term care in their home.

111

Which of the following accurately describes a variable annuity?


A: A variable annuity offers a fixed rate of return.
B: A variable annuity mitigates the risk of superannuation and inflation.
C: A variable annuity is always a deferred annuity.
D: A variable annuity is always for a single life expectancy.

The correct answer is (B).
Option (B) is correct as variable annuities can mitigate the risk of superannuation and mitigate the loss of purchasing power from inflation. Option (A) is incorrect because variable annuities offer a variable rate of return. Option (C) is incorrect as variable annuities can either be deferred or immediate. Option (D) is incorrect as a variable annuity can be for a single life, joint life, or for a guaranteed term.

112

Alice, a single 38-year-old, wants to invest in the stock market on a tax-deferred basis from now until she retires. She believes that the stock market will fluctuate up and down over time but that, over the long term, it will be significantly higher than it is today. She does not want to pay for product features that she does not value. What type of annuity is most suitable for Alice?


A: A deferred fixed annuity
B: A single-premium variable annuity
C: A flexible variable annuity
D: An equity-indexed annuity

The correct answer is (C).
The equity-indexed annuity allows participation in the stock market while guaranteeing her principal against losses; however, it comes at a cost. A fixed annuity does not expose the investment to the equity market. The single-premium annuity does not accommodate funding over a career.

113

Annuities have a variety of features and benefits. Which one of the following types of annuities allows for investment returns that are exposed to the stock market but has a minimum rate of return?


A: An equity-indexed annuity
B: A variable annuity
C: A fixed annuity
D: A single-premium variable annuity

The correct answer is (A).
An equity-indexed annuity has the protection of a guaranteed minimum rate of return while still having the potential of earning higher equity returns. A fixed annuity will have a guaranteed rate of return but will not have any participation in the stock market.

114

When determining the percentage of an annuity payment that is subject to tax, the investment in the annuity is divided by the total of the expected payments to be received. Which of the following is the name of the portion that is subject to tax?


A: The inclusion ratio
B: The exclusion ratio
C: The current ratio
D: The working-capital ratio

The correct answer is (A).
The exclusion ratio equals the owner’s investment in the annuity contract divided by the expected return on the annuity. The resulting percentage is multiplied by the distribution, or payment, received to calculate the portion of the payment that is not subject to income tax.

115

Equity-indexed annuities have several different indexing methods. Which of the following is one of them?


A: The oscillation neutrality method
B: The uptick method
C: The high watermark method
D: The trailing 3-year average method

The correct answer is (C).
Option (C) is the correct answer. Other methods include the point-to-point method and the annual reset (ratcheting) method. Choices (A), (B), and (D) are not real indexing methods.

116

Annuities are financial products that solve a variety of problems. All of the following problems are intended to be mitigated by annuities EXCEPT


A: dying prematurely.
B: running out of money.
C: subjecting earnings to current income tax.
D: maintaining the purchasing power of assets.

The correct answer is (A).
Annuities can help lessen superannuation (the risk of outliving funds) and purchasing power (if the annuity is variable). However, an annuity does not reduce the likelihood of dying (mortality).

117

Lila is a 55-year-old widow with no source of income. Her husband died recently, and she has received insurance proceeds from a policy on his life. She wants to invest in an annuity that will produce income starting today and continuing until she plans to collect Social Security at age 65. She wants to receive the most she can in monthly income. Which of the following is the most suitable annuity for Lila based on her objectives?


A: A longevity annuity
B: A 10-year term-certain fixed annuity
C: An immediate single-premium life annuity
D: A deferred fixed annuity

The correct answer is (B).
Lila wants the greatest amount of income for the next 10 years. She has no other source of income and must rely on the annuity until she begins collecting Social Security benefits. A term-certain annuity is the best choice for her objectives.

118

Which of the following are correct regarding qualified annuities?


A: They can be purchased with funds from life insurance proceeds or IRA assets.
B: The payments generally have a 50 percent exclusion ratio.
C: The payments avoid the 10 percent early withdrawal penalty.
D: They must comply with the minimum distribution rules.

The correct answer is (D).
Option (D) is correct. Option (A) is incorrect as funds must be from a qualified source (not life insurance). Option (B) is incorrect as the exclusion ratio is generally zero. Option (C) is incorrect as payments may be subject to the 10 percent penalty

119

Hugo owns an annuity. He decides that he no longer has a need for it and wants to exchange it for a life insurance policy. To get the policy he wants, he will need to exchange the annuity and add additional money. Which of the following is correct?


A: He can make the exchange, but it will be taxable to the extent of the value of the annuity.
B: He can make the exchange, but it will be taxable to the extent of the annuity less the additional money he puts into the life insurance policy.
C: He can make the exchange under Section 1035, and it will not be taxable.
D: He can make the exchange, which will not be taxable, but his basis will not reflect any of the investment into the life insurance policy.

The correct answer is (A).
An exchange from an annuity to a life insurance policy is not a tax-free exchange under Section 1035.

120

Which of the following is correct?


A: Annuities are considered IRD assets.
B: Nonqualified annuities are generally required to comply with the minimum distribution rules.
C: An exchange of a life insurance policy for an annuity is not a tax-free exchange under Section 1035.
D: A loss on a variable annuity can be deducted even if the annuity is exchanged for another annuity.

The correct answer is (A).
Option (A) is correct. Option (B) is incorrect, as nonqualified annuities do not generally have minimum distribution requirements. Option (C) is incorrect as Section 1035 only permits tax-free exchanges of life insurance policies to other life insurance policies or annuities to life insurance policies. Option (D) is incorrect as losses are deductible if not exchanged.

121

Insurance coverage relies on the law of large numbers, meaning


A: events that are statistically difficult to predict for a specific individual are more predictable for a large number of individuals.
B: events that are statistically difficult to predict for a large number of individuals are more predictable for an individual.
C: insurers can statistically predict whether an individual will suffer a loss more accurately than they can statistically predict whether a large number of individuals will suffer losses.
D: insurers can adequately predict the losses expected for an individual but are unable to predict the losses expected for large numbers of individuals.

The correct answer is (A).
Perils, which are the causes of losses, are more predictable the larger the homogeneous pool.

122

Homeowners policies provide coverage for losses from which of the following?


A: Fire or other listed perils
B: Loss of use
C: Personal property
D: All of the above

The correct answer is (D).
Homeowners policies cover all of the above in Section 1 of the policy.

123

Which of the following is not a category of property risk?


A: Loss of property due to fire, wind, theft, or other hazards
B: Liability losses resulting from negligent use of property
C: Loss of value from economic obsolescence
D: Financial loss resulting from the death or disability of a guest

The correct answer is (C).
Economic obsolescence is not a covered peril; in fact, it specifically is excluded.

124

Which of the following losses is not covered by a standard homeowners policy?


A: Personal liability
B: Theft
C: Medical payments
D: Personal vehicle

The correct answer is (D).
Homeowners policies do not generally cover any vehicles.

125

Which of the following clauses states that full payment of damages to structures under the homeowners policy will be made only if the insurance equals 80 or more percent of the replacement cost of the structure and is carried on the property at the time of the loss?


A: A coinsurance clause
B: An inflation rider clause
C: A reinsurance clause
D: A replacement clause

The correct answer is (A).
The coinsurance clause requires 80 percent coverage to avoid the insured becoming a coinsurer.

126

The standard form of the homeowners policy excludes which of the following?


A: Fire and other perils
B: Animals, birds, and fish
C: Personal liability
D: Theft

The correct answer is (B).
Animals, birds, and fish generally are excluded, although liability coverage may be available for pets.

127

Colin has a replacement-cost homeowners policy. The value of the home is $450,000, and he carries $350,000 worth of insurance. How much would the insurance company owe him in the event of a $100,000 loss due to fire (without regard to a deductible)?


A: $80,000
B: $85,000
C: $97,222
D: $100,000

The correct answer is (C).
$450,000 × 0.80 = $360,000
$350,000 ÷ $360,000 = 0.97222
0.97222 × $100,000 = $97,222

128

Antonio’s television was stolen. The television cost $1,500 when it was first bought, but it now has a fair market value of $750. If Antonio has a homeowners policy that covers losses for personal property at actual cash value (ACV), what amount is Antonio entitled to recover?


A: $600
B: $750
C: $1,500
D: The current retail price for a new replacement television

The correct answer is (B).
The actual cash value is equal to the replacement cost, less depreciation. Antonio is entitled to recover $750, or the depreciated value of the television.

129

Homeowners policies generally insure personal property at actual value rather than replacement value. Which of the following should an insured homeowner consider obtaining if he or she has a significant amount of older personal property such as televisions and other electronics?


A: A personal liability insurance rider
B: A professional liability insurance rider
C: An endorsement on that property
D: A separate agreed value policy

The correct answer is (C).
An endorsement on personal property allows that property to be insured for replacement rather than actual value, usually without a deductible for a premium increase.

130

Which of the following is correct about a subrogation clause?


A: It is used by insurance companies to avoid payment of claims directly to the insured.
B: It requires someone who is injured or suffers loss by the negligence of another person to sue that person directly.
C: It is the right of an insurer to recover from another person any loss that the insurer pays to its insured.
D: The insured parties sue for their losses privately before making a claim under an insurance policy.

The correct answer is (C).
Subrogation means one party stands in the place of another. In this case, the insurance company effectively buys the claim from its insured and becomes the claimant.

131

Which of the following is an example of a secured loan?


A: A student loan
B: A home mortgage
C: A debt-consolidation loan
D: A personal loan

The correct answer is (B).
Secured loans are those secured by collateral that may be repossessed if the loan is not repaid as agreed. Mortgages are secured because the house is considered collateral toward the debt.

132

The FICO score calculation includes all of the following EXCEPT


A: credit card payment history.
B: credit utilization.
C: credit mix.
D: salary increases.

The correct answer is (D).
The FICO score is calculated using a formula including payment history, debt burden/credit utilization, credit history, new credit, and types of credit. Salary increases do not impact a person’s FICO score.

133

What law provides that U.S. citizens have free access to their credit scores?


A: The Consumer Credit Reporting Act
B: The Fair Credit Opportunity Act
C: The Fair Credit Reporting Act
D: The Consumer Credit Information Ac

The correct answer is (C).
The Fair Credit Reporting Act of 1971 provides that U.S. citizens have free access to their credit reports and credit scores. In the event credit is denied, they also have the right to know why their credit request was denied.

134

Lisa has a credit score of 650. She wants to improve her credit score before buying a house. What can she do to improve her credit score?


A: Make consistent, timely payments.
B: Open new credit card accounts.
C: Reduce her credit mix.
D: Close credit card accounts.

The correct answer is (A).
Payment history is a key factor in a good credit score. Therefore Lisa should start making more consistent, timely payments to improve her credit score.

135

Which of the following individuals most likely has the highest credit score?


A: Michaela has two credit cards, credit utilization of 15 percent, an installment loan, a mortgage, and a perfect payment history for 3 years.
B: Andrew has a 30-year mortgage in the 10th year with a perfect payment history, and the mortgage is his only debt.
C: June has four credit cards, credit utilization of 50 percent, and a perfect payment history for 10 years.
D: Will has one credit card with a $50,000 limit.

The correct answer is (A).
Payment history, credit utilization, and mix of credit are critical to credit scores. Michaela has a lower utilization and a broader mix of credit.

136

All of the following are advantages of a credit card EXCEPT:


A: Credit cards are similar to a line of credit.
B: Credit cards permit the purchase of goods and services even when funds are low.
C: Credit cards generally have higher interest rates than other sources of credit.
D: Credit card fraud is relatively low and easy to contest.

The correct answer is (C).
Interest rates are generally higher for credit cards than for other sources of credit. This is not an advantage.

137

Luis must pay the full balance on his card every month. What type of card does he have?


A: A credit card
B: A charge card
C: A debit card
D: A bank card

The correct answer is (B).
Charge cards are similar to credit cards but require the issuer to pay the full balance within 30 days.

138

The U.S. Department of Justice uses what acronym to assist the public in avoiding identity theft?


A: SCAM
B: SCRAM
C: SALE
D: SAM

The correct answer is (A).
S—Be stingy with information.
C—Check financial information often.
A—Ask for credit reports, and review them regularly.
M—Maintain careful records.

139

Cam just learned that he is a victim of identity theft. What should he do to minimize the damage?


A: Place a fraud alert with the credit-reporting agencies.
B: Request a credit report from each of the principal credit-reporting agencies.
C: Contact all of his creditors and financial institutions.
D: Complete all of the above.

The correct answer is (D).
All of the listed actions should help minimize the damage of identity theft.

140

Generally, how long does a fraud alert last?


A: 30 days
B: 60 days
C: 90 days
D: 120 days

The correct answer is (C).
A fraud alert placed with the credit-reporting agencies remains on the credit report for 90 days but can be renewed.

141

Which of the following concerning the Social Security earnings test is correct?


A: It applies only to workers between age 62 and the normal age of retirement.
B: It applies to all retirees receiving Social Security benefits.
C: It taxes earned income at 25 percent.
D: All of the above are correct.

The correct answer is (A).
The Social Security earnings test applies to all Social Security beneficiaries who are younger than the normal age of retirement.

142

Social Security retirement benefits are


A: subject to income taxes for those with certain income levels.
B: nontaxable for all beneficiaries.
C: subject to federal income taxes but not state income tax.
D: subject to capital-gains taxes.

The correct answer is (A).
Social Security retirement benefits are taxable depending on other income.

143

To determine a specific Social Security retirement benefit, the Social Security Administration considers the amount of money the worker earned over what time frame?


A: The highest-earning 35 years
B: The most recent 25 years
C: The highest-earning 25 years
D: The most recent 35 years

The correct answer is (A).
The Social Security Administration considers the average from the highest 35 years of indexed earnings subject to Social Security.

144

If a worker has employment earnings after starting full Social Security retirement benefits, which of the following is correct?


A: The Social Security benefit will be reduced by a percent of the earnings.
B: There is no reduction in Social Security benefits.
C: Benefits are reduced if the earnings are in excess of the annual earnings limit.
D: The worker will be ineligible to receive future Social Security benefits.

The correct answer is (B).
Full Social Security retirement benefits means full-age or normal-age retirement. There is no earnings test or limit on the amount of earnings beyond full retirement age.

145

Leroy and Doris are married. Upon Leroy’s death, and assuming they have been married long enough to qualify, which of the following Social Security benefits will Doris continue to receive?


A: Both Leroy and Doris’s benefits
B: Just Doris’s benefits
C: Both benefits for up to one year after the death, then the higher of the two benefits
D: The higher of either benefit but not both

The correct answer is (D).
The higher of two benefits but not both.

146

How are Social Security retirement benefits taxed?


A: Social Security benefits are not subject to income tax. They were already taxed.
B: Income tax is based on the individual or couple’s MAGI and half of their Social Security benefits.
C: Up to 100 percent of Social Security benefits can be subject to tax.
D: Up to 50 percent of Social Security benefits can be subject to tax.

The correct answer is (B).
Taxation depends on modified adjusted gross income and the amount of Social Security benefits.

147

When are individuals eligible to receive full Social Security retirement benefits?


A: Age 55
B: Age 62
C: Age 65
D: It depends on when the worker was born.

The correct answer is (D).
Age 62 will permit reduced Social Security retirement benefits. Full benefits occur between age 65 and age 67.

148

If already receiving Social Security, approximately how much can you earn from employment at age 64 without reducing your benefit?


A: Unlimited
B: Between $30,000 and $100,000
C: Between $25,000 and $50,000
D: Less than $18,241

The correct answer is (D).
The earnings test for those under the normal age requirement is up to an exempt amount of $18,240 for 2020.

149

The Social Security tax on payroll is a matching tax, meaning that


A: the government matches the amount that each worker pays.
B; both workers and their employers pay the Social Security tax based on the workers’ earnings.
C: the benefits workers receive are larger than the taxes paid.
D: the benefits a worker will receive are proportional to the taxes paid.

The correct answer is (B).
Both employee and employer pay Social Security payroll taxes.

150

The worker’s Social Security retirement benefits at full retirement age are based on all of the following EXCEPT


A: PIA calculation.
B: AIME.
C: birth year.
D: income in retirement.

The correct answer is (D).
Income in retirement does not affect retirement benefits after full retirement age.

151

Subrogation

Insured cannot indemnify himself from both the insurance company and a negligent third party for the same claim.

152

insurable interest

The insured must be subject to financial hardship resulting from the loss.

153

utmost good faith

The insured and insurer must both be forthcoming with all relevant facts about the insured risk and coverage provided for that risk.

154

Actual Cash Value

Represents the depreciated value of the property.

155

Adhesion

A take it or leave it contract.

156

Adverse Selection

The tendency of those that most need insurance to seek it out.

157

Agents

Legal representatives of an insurer and act on behalf of an insurer.

158

Aleatory

A type of insurance contract in which the dollar amounts exchanged are uneven.

159

Apparent Authority

When the third party believes implied or express authority exists, but no authority actually exists.

160

Appraised or Agreed Upon Value

Used for hard to value items and where the insured may own property that exceeds standard limits of property insurance policy.

161

Concealment

When the insured is intentionally silent regarding a material fact during the application process.

162

Copayment

A loss-sharing arrangement whereby the insured pays a flat dollar amount or percentage of the loss in excess of the deductible.

163

Fundamental Risk

A risk that can impact a large number of individuals at one time (earthquake or flood).

164

Implied Authority

The authority that a third party relies upon when dealing with an agent based upon the position held by the agent.

165

Moral Hazard

The potential loss occurring because of the moral character of the insured, and the filing of a false claim with their insurance company.

166

Morale Hazard -

The indifference to a loss created because the insured has insurance.

167

Objective Risk

The variation of actual amount of losses that occur over a period of time compared to the expected amount of losse

168

Principle of Indemnity

Asserts that an insurer will only compensate the insured to the extent the insured has suffered an actual financial loss.

169

Reinsurance

A means by which an insurance company transfers some or all of its risk to another insurance company.

170

Consumer-Directed Health Plan

A combination of a high deductible medical insurance policy and Health Savings Account which is used to accumulate funds on a tax-advantaged basis to pay health care expenses as a result of deductibles and other cost sharing.