General Principles Exam Questions Flashcards by Alexander Ling

Which of the following refers to the process of evaluating and classifying the risk level of applicants for insurance?

A)
Application
B)
Adverse selection
C)
Policy illustration
D)
Underwriting

d
Underwriting is the process of evaluating and classifying the risk level of applicants for insurance. Underwriting may also help insurers control adverse selection.

LO 1.1.1

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A client wants to limit their out of pocket insurance costs and decides to install storm shutters to protect their property. They also increase their deductible. What risk management techniques are demonstrated?

A)
Retention and avoidance
B)
Transfer and avoidance
C)
Reduction and avoidance
D)
Reduction and retention

The answer is reduction and retention. Installing storm shutters reduces the risk of damage to the homeowner’s property and increasing their deductible is retention of losses.

LO 1.2.1

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You have a meeting with Oscar, age 26, and his wife Judith, age 25, this afternoon to review their risk management plan. They have two children, two cars, a home, and a boat. Oscar works at the local bank, and Judith works at an engineering firm. Identify the CORRECT statement(s) regarding their risk management plan.

They have a limited amount of liability exposure.
They have a higher probability of becoming disabled versus experiencing premature death.
Having collision insurance on their cars is more important than liability coverage.
Long-term care insurance should not be a current priority within their risk management plan.
A)
II and IV
B)
I, II, and III
C)
IV only
D)
II, III, and IV

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

LO 1.2.2

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Preston called Joanna, an insurance broker, to obtain coverage on his 30-foot sailboat. Joanna told him to send in a binder premium of $75. She told him that by doing so, he would be covered and that he should go ahead and enjoy the boat. Joanna submitted an application for insurance to Boater’s Insurance Corp. for issuance of the policy. Boater’s declined the coverage. The day Joanna learned this, Preston called and told her a sudden wind caused him to lose control of his boat. He then smashed into another sailboat, causing substantial damage to both boats.

Who will be responsible for the damages?

A)
Joanna is responsible because, as a broker, she personally bound coverage for Preston but was unable to place the coverage before the accident.
B)
Boater’s will have to pay since Joanna collected a premium from Preston.
C)
Boater’s Insurance Corp. will have to pay the damages since it did not notify Preston that he was not covered.
D)
Preston will have to pay because no insurance policy is in force until the insurance company accepts the risk.

Joanna will have to pay because, as a broker, she personally bound coverage for Preston but was unable to place the coverage before the accident. Boater’s Insurance Corp. was never a party to an insurance contract with Preston. Since Joanna is a broker, her actions only speak for herself. There is no insurance coverage in force. Preston will need to make a claim against Joanna, which will likely be reviewed by her Errors and Omissions carrier. If Preston sues and wins, Joanna also could be held personally liable.

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Which of the following are duties of the courts in regulating insurers?

To render decisions on the meaning of policy terms
To enact laws that govern the conduct of insurers
To rule on the constitutionality of insurance laws
To determine requirements an insurer must meet to obtain a license
A)
III and IV
B)
II and IV
C)
I and IV
D)
I and III

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

LO 1.4.1

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Which of the following statements is true regarding insurance regulation?

A)
The National Association of Insurance Commissioners (NAIC) proposes model legislation that states can then adopt or modify to their needs.
B)
Individual states and the Supreme Court work together to regulate the insurance industry.
C)
The federal government oversees the insurance industry regulation, followed by individual states.
D)
The National Association of Insurance Commissioners (NAIC) proposes model legislation that is then adopted by all states.

Under the McCarran-Ferguson Act of 1945, insurance is regulated primarily at the state level. The NAIC issues model insurance legislation that the individual states are free to adopt if they choose, but the NAIC has no legislative authority in any state.

LO 1.4.1

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An individual decides to take a motorcycle road trip across the country. They ride during light hours and good weather conditions. However, they occasionally do not wear a helmet while riding. Which risk management term explains this situation?

A)
Risk
B)
Peril
C)
Hazard
D)
Moral hazard

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

LO 1.1.1

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Carmen and David received eight place settings of their sterling silver flatware pattern as wedding presents. Because the silverware cost nearly $500 per place setting, they wanted to make sure it was adequately insured. The couple called Jerry, an agent with Forest Insurance Co., and asked him what needed to be done to ensure that they had adequate insurance coverage. Jerry assured them that because they had less than 10 place settings, they were adequately insured.

If the silverware is stolen, which one of the following legal remedies will most likely be used to assure the loss is covered?

A)
Doctrine of estoppel
B)
Waiver doctrine
C)
Last clear chance
D)
Rescission

Jerry, representing Forest Insurance Co., made a statement on which Carmen and David relied. This represents the doctrine of estoppel. The insurance company cannot later state that the agent made a mistake and deny the claim. Waiver doctrine is used in the instance where, if the insurance company failed to exert its right to deny one claim, it may not later exert that right with a similar claim. Last clear chance is a liability defense raised in a case where a person either attempted or failed to attempt to make one final effort to prevent someone from suffering a loss. Rescission is a remedy where a contract is nullified—as if it had never existed.

LO 1.5.1

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If the silverware is stolen, which one of the following legal remedies will most likely be used to assure the loss is covered?

A)
Doctrine of estoppel
B)
Waiver doctrine
C)
Last clear chance
D)
Rescission

LO 1.5.1

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Bill offered to pay Jim, his friend of 24 years, $1,000 to slash the tires on the new car of Bill’s neighbor in retaliation for the neighbor’s dog barking at Bill. Jim agreed and accepted the offer. Which requirement is NOT in place to make this an enforceable contract?

A)
Legal object
B)
Consideration
C)
Competent parties
D)
Legal form

No contract that involves illegal activity is enforceable. Both parties are at least age 24 and can be presumed to be “competent.” The $1,000 was the consideration for the performance of the slashing. An oral contract is a legal form for some contracts. Bill made an offer and Jim accepted.

LO 1.6.1

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Which one of the following phrases describes an unintentional tort?

A)
An act of vengeance
B)
A criminal act
C)
A libelous attack
D)
A civil, negligent wrong

An unintentional tort is a civil, negligent wrong, over which the court may have jurisdiction (a noncriminal wrongdoing). A libelous attack and an act of vengeance would be intentional torts, and possibly criminal acts. Criminal acts are considered to be public wrongs and not torts (i.e., not civil).

LO 1.6.1

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William had an interior water pipe break, and water poured into his basement. Which of the following statements accurately reflect what may occur or be required of William subsequent to this break?

William should turn off the water and attempt to prevent any further damage immediately upon discovering the leak.
The insurance company likely will ask for an inventory of damaged items, and William is obligated to provide it if he wants the claim paid.
William can throw away any damaged property, relying on the insurance company to accept his inventory list as accurate.
The insurer may choose to repair or replace damaged property with that of like kind and quality, rather than pay William for the loss.
A)
I and II
B)
II and IV
C)
I and III
D)
I, II, and IV

The answer is I, II, and IV. After the leak is under control, he should call his agent or his insurer’s claims office to notify the insurance company of the loss. The insurance company has the right to ask for evidence of the loss. The insurer retains the right to determine what evidence is required, and the insured is obligated to provide whatever is available or run the risk of voiding the policy.

LO 1.7.1

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Which of the following are primary criteria that should be considered when selecting an insurer?

A favorable rating from several rating companies
The number of agents employed
High persistency rate
The fact it is not on the National Association of Insurance Commissioners’ (NAIC) Watchlist
A)
III and IV
B)
I, III, and IV
C)
I and II
D)
I, II, III, and IV

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

LO 1.8.1

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Agents operating under the American agency system who represent several insurance companies and decide on a case-by-case basis where they will place business are also known as which type of insurance producer?

A)
Captive agents
B)
Career agents
C)
Independent agents
D)
Brokers

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

LO 1.8.1

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Which of the following perils are covered by an HO15 endorsement to form HO3 for personal property?

Wind damage when property is away from the premises
Fire damage when property is on the premises
Groundwater damage when property is on the premises
Earth movement when property is away from the premises
A)
I, II, and IV
B)
II and III
C)
I and IV
D)
II, III, and IV

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

LO 2.1.1

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Chuck purchased Chuck’s Garage, Bar & Grill five years ago for $120,000. After extensive repairs, the building’s current replacement value is $240,000. Chuck originally insured the building for its original replacement cost of $120,000 and has not increased the coverage. His policy has an 80% coinsurance clause and a $1,000 deductible. Last week a fire in the kitchen caused $60,000 of damage.

How much will the insurance company pay Chuck for his loss?

A)
$59,000
B)
$36,500
C)
$60,000
D)
$29,000

(Amount of insurance owned/Amount required * Loss) -deductible

(120k/192k * 60k) -1000 = b

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For which of the following articles are floater policies generally available?

Professional-quality camera and all lenses taken on a trip to Europe
DVD player and 100 DVDs taken on a summer road trip
Motorboat
Appraised artwork moving between summer and winter residences
A)
I, III, and IV
B)
I and IV
C)
III only
D)
I, II, and IV

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

LO 2.1.2

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Which of the following statements correctly describe liability umbrella coverage?

The term umbrella policy is the popular name for a personal catastrophic liability contract.
Liability related to personally owned aircraft and/or watercraft is always excluded from umbrella policies.
Because of the high amounts of coverage issued under an umbrella policy, this type of coverage is often far too expensive for most people who might otherwise be interested in purchasing it.
Damage to property of the insured is excluded.
A)
I and II
B)
I and IV
C)
III and IV
D)
II, III, and IV

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

LO 2.2.1

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Which risk holds the greatest potential for financial loss for a homeowner?

A)
Loss of the dwelling
B)
A liability claim
C)
Loss of the dwelling and contents
D)
Theft of contents from the dwelling

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

LO 2.2.1

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Which of the following coverages are included in the standard personal auto policy (PAP)?

Liability
Damage to your auto
Loss of use
Underinsured motorist
A)
I and III
B)
I, II, and IV
C)
II and IV
D)
II and III

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

LO 2.3.1

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Because Paul has a pickup truck, some friends have asked him to help move into their new apartment. Ryan, one of his friends, is in the back of the truck unloading furniture and slips and falls, breaking his arm. Which coverage of a personal auto policy (PAP) would cover the cost of Ryan’s subsequent emergency room bill?

A)
Comprehensive
B)
Collision
C)
Medical Payments
D)
Liability

The answer is Medical Payments. Medical Payments coverage is designed for just such a situation. It pays claims for people in, on, entering, or alighting a vehicle – whether by intention or accident. So, Paul’s PAP would cover Ryan’s emergency room bill up to the policy limit.

LO 2.3.1

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Which of the following types of insurance may be included in a commercial package policy (CPP)?

Workers’ compensation insurance
Property insurance
Inland marine insurance
Commercial auto
A)
I, II, III, and IV
B)
I and III
C)
II only
D)
II, III, and IV

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

LO 2.4.1

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Radhika, a family practice physician, owns a duplex office building in which her office takes up one half, and she leases the other half to an accountant. Radhika has four employees but has had trouble keeping a receptionist for more than a year. She has furnished the offices so that they present an appropriate professional image with modern furniture, stock art on the walls, desktop computers, and a high-end copier/scanner/printer. She also has her own X-ray machine so she can evaluate patients who need that service quickly. Based on this information only, which of the following should she consider to manage her property risks?

Building coverage for the entire duplex
A Commercial General Liability (CGL) policy
A Business Owner Policy (BOP)
Additional property coverage on the X-ray machine to ensure adequate coverage
A)
II only
B)
I, III and IV
C)
I and III
D)
III and IV

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

LO 2.4.1

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Which of the following generally is NOT covered by employment practices liability insurance?

A)
Wrongful termination
B)
Sexual harassment
C)
Discrimination in the workplace
D)
Government-imposed fines and penalties
Explanation

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

LO 2.4.1

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Which of the following are covered under a basic Commercial General Liability (CGL) policy? Injuries to customers Injuries to employees Business auto liability A) I, II, and III B) II and III C) I and II D) I only

The answer is I only. A basic CGL policy protects against non-auto, non-employee liability claims. While it may be possible to add coverage for employee liability and business auto liability, that is not a part of a basic CGL policy. LO 2.4.1

answer is I, II, III, and IV. Each option is correct. LO 3.1.1

Which one of the following is a characteristic of term life insurance? A) It provides a death benefit that decreases over time. B) The policy is locked into place and cannot be exchanged for another life insurance policy. C) It covers the insured for a specified period of time. D) The policy is renewed on an annual basis.

c The answer is it covers the insured for a specified period of time. As the name implies, term life insurance covers the insured for a specified period of time or term. LO 3.2.1

Choose the set of provisions best describes the attributes of a whole life insurance policy. A) Increasing death benefit, guaranteed minimum interest earnings, flexible premium B) High cash value, single premium, policy loans taxed as ordinary income on a last-in, first-out (LIFO) basis C) Fixed premium payments, lifetime life insurance protection, tax-deferred accumulation D) Level death benefit, increasing premium, low cash value

c The answer is fixed premium payments, lifetime life insurance protection, and tax-deferred accumulation. A whole life insurance policy is characterized by fixed premium payments, lifetime or long-term life insurance protection, and tax- deferred accumulation. LO 3.2.2

Which of the following are characteristics of a universal life insurance policy? Unbundled structure Flexible premium payment Minimum guaranteed cash value Flexible death benefit A) III and IV B) II and IV C) I, III, and IV D) I, II, and IV

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

Choose the type of life insurance policy that is commonly used in buy-sell or business continuation agreements to provide liquidity for one owner to buy out the family of the second owner. A) Adjustable life B) Survivorship or second-to-die life C) First-to-die life D) Endowment life

c The answer is first-to-die life. First-to-die life may be structured to pay out at the death of the first spouse or individual to die. This arrangement is commonly used in a buy-sell or business continuation agreement to provide liquidity for one owner to buy out the family of the second owner. LO 3.2.4

Several years ago, Diego purchased a $400,000 whole life insurance policy on his life. He has paid cumulative premiums over the years of $20,000 and has accumulated a cash value of $25,000. This year, he was diagnosed with a rare liver disease, and, as a result, his life expectancy is only six months. Because of his large medical costs, he is considering selling his policy to a viatical settlement company. The company has offered him $250,000 for the policy. He would also like to explore other ways to generate cash from the policy. Which of the following statements regarding Diego's situation are CORRECT? If Diego sells his policy to the viatical settlement company, he will be taxed on any gain from the sale if he dies more than two years later. If the viatical company collects the death benefit as a result of Diego's death, the proceeds will be tax free to the company. If Diego sold the policy to his cousin for $250,000, his cousin would be subject to ordinary income tax on a portion of the life insurance benefit when Diego dies. If Diego takes a loan from the policy, some or all of the loan will be subject to ordinary income tax if the policy is classified as a modified endowment contract (MEC). A) III and IV B) I, II, and IV C) I and II D) II and III

a The answer is III and IV. Because Diego is terminally ill (i.e., expected to die within two years), he will not be taxed on the proceeds received from the viatical settlement company, even if he lives longer than two years. When the viatical settlement company receives the death benefit, part of the death benefit will be taxed at ordinary income tax rates to the company. The sale of the policy to Diego's cousin would be considered a transfer for value. His cousin would be taxed on the death benefit (less any amounts paid) because the transfer-for-value rules cause the death benefit to become taxable. With a MEC, loans or distributions from the policy are taxed on a last in, first out basis, meaning that any earnings in the policy are taxed first. LO 3.2.4

Identify the CORRECT statements regarding the income tax treatment of policy loans from modified endowment contracts (MECs). They are subject to last-in, first-out (LIFO) tax treatment. They may be subject to a 10% income tax penalty if the policyowner is younger than 59½ years. A) I only B) Neither I nor II C) Both I and II D) II only Explanation

The answer is both I and II. Both of these statements are correct. LO 3.2.5

Cindy, age 62, owns a modified endowment contract (MEC). Her basis in the policy is $50,000, and the cash value is $75,000. This year, she takes out a policy loan of $20,000. Which of these statements regarding the income tax consequences of this loan is CORRECT? A) Cindy must include $20,000 in her gross income; the $20,000 is also subject to a 10% penalty. B) Cindy must include $20,000 in her gross income, but the 10% penalty does not apply. C) Cindy incurs no income tax consequences as a result of the loan. D) Cindy must include $25,000 in her gross income; the $25,000 is also subject to a 10% penalty.

b The answer is Cindy must include $20,000 in her gross income, but the 10% penalty does not apply. Loans from MECs are subject to last-in, first-out (LIFO) basis recovery. In other words, loans are considered to consist of taxable earnings until all the taxable earnings have been withdrawn. Cindy must include the entire $20,000 in her gross income. Because the contract is a MEC and Cindy is older than 59½, the taxable amount is not subject to a 10% penalty. LO 3.2.5

A client fails to pay their life insurance premium and subsequently dies shortly thereafter. What are the consequences of this scenario? A) The death benefits will not be paid to the beneficiaries. B) The full death benefit will be paid to the beneficiaries and retain its tax-free status. C) Death benefits will be paid tax-free to the beneficiaries, net of any outstanding premium payments due. D) The death benefits will be paid, but will be subject to income taxation due to the failure to pay final premiums.

c Death benefits will be paid tax-free to the beneficiaries, net of any outstanding premium payments due. The grace period allows the policy to remain in force following an insured's failure to pay a premium. LO 3.3.1

Sheryl's family has a history of heart disease. She is concerned about her ability to maintain her life insurance or to purchase more in the future in the event she develops a disabling heart problem. Which of the following optional life insurance policy provisions would be appropriate to answer Sheryl's concerns? Renewability Waiver of premium Conversion Guaranteed insurability A) I and III B) I, II, and IV C) I, II, III, and IV D) II and IV

c Waiver of premium will allow Sheryl to keep the existing insurance in force if she is disabled, and the guaranteed insurability option will allow her to purchase additional insurance if she develops a heart problem. Renewability prevents the insurance company from cancelling her insurance. Conversion provisions will neither pay premiums nor allow for additional purchases, but they will allow her to convert a term policy to a permanent one before the coverage terminates. LO 3.3.1

Assume you have a client who has already purchased a whole life insurance policy. Identify the dividend option that should be chosen if the client wants to use the dividend to purchase additional temporary insurance equal to the policy's current net cash value. A) Extended term life insurance B) Accumulate at interest C) One-year term life insurance (or fifth dividend option) D) Interest only

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

Which one of the following dividend options purchases a small amount of additional insurance? A) Paid-up dividend additions B) Paid-up term life C) Paid-up variable life D) Cash

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

If the insured under a life insurance policy becomes totally disabled due to bodily injury or disease before a stated age, all premiums due during the period of total disability are waived under A) an own-occ disability waiver of premium rider. B) a disability waiver of premium rider. C) an any-occ disability waiver of premium rider. D) a modified disability waiver of premium rider.

b The answer is a disability waiver of premium rider. The disability waiver of premium rider prevents the policy from lapsing as a result of nonpayment of premiums during the insured's disability. The policy and benefits will continue as if the premiums have been paid. In most cases, total disability (as defined in the policy) is required before the rider is triggered. The policy does not need to meet a specific definition (i.e., own, any, or modified) in order to utilize this waiver. LO 3.3.3

The disability waiver of premium rider in a life insurance policy A) waives the premiums only for a total disability in most cases. B) waives the premiums for either total disability or partial disability in most cases. C) waives the premiums only for a partial disability in most cases. D) allows the policyowner to receive a portion of the policy's death benefit during the insured's lifetime.

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

Stan and Sarah Straus want to make sure they will have enough funds available to send their daughter Hannah to college. Hannah is six years old and will begin a four-year college program at age 18. The annual tuition today is $8,200. Stan and Sarah estimate that the annual inflation rate for college tuition will be 6% and that they can get an 8% after-tax return on their money. If Stan or Sarah were to die today, what would be the amount of insurance needed to provide for Hannah's education? A) $64,189 B) $25,490 C) $26,210 D) $25,018

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

The formula to calculate the amount of life insurance needed under the capital retention method is A) a three-step process similar to a college funding calculation. B) a simple capitalization method whereby the annual need is divided by the inflation-adjusted rate of return. C) a present value of an annuity due that incorporates an inflation-adjusted rate of return. D) simply dividing the annual need by the client’s assumed rate of return. Explanation

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

Assume that a client has the following needs and objectives when purchasing a life insurance policy: Flexible premium payments Possibility of increasing death benefit Investment options Permanent protection Analyze the needs and objectives to determine a product recommendation. A) Annually renewable term (ART) B) Variable life C) Variable universal life (VUL) D) Whole life

A VUL policy is the only type of policy that will meet all the client's needs. A VUL policy combines the flexibility of universal life with the possibility of an increasing death benefit and a higher cash value than traditional fixed products. Annually renewable term does not meet any of the client's needs and objectives. LO 3.5.1

Bennie and Jackie want to purchase life insurance policies that feature flexible premium payments and that will allow them to invest the cash value in various subaccounts. Identify the type of life insurance that will best meet the couple's objectives. A) Variable universal life (VUL) B) Variable life C) Universal life (UL) D) Whole life

VUL policies have the features that will meet Bennie and Jackie's needs because they allow flexible premium payments and the ability to invest the cash value in subaccounts. None of the other choices provide this combination of features. LO 3.5.1

Which of the following does NOT accurately describe a valid policy replacement scenario? A) Replacing a term policy through the policy’s conversion clause is usually the best and least expensive alternative. B) Replacing one term policy with another is usually the least complex of the alternatives. C) Replacing a cash value policy with a similar cash value policy usually is not advantageous. D) Replacing a cash value policy with a term policy usually is unwise.

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

Which of the following criteria may be used to classify annuities? The method by which values accumulate The gender and age of the annuitant When payments are to commence The method of premium payment A) I, II, and IV B) I and II C) I, III, and IV D) II, III, and IV

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

Which of the following regarding fixed deferred annuities is NOT true? A) They require initial premiums in excess of $10,000. B) They carry excess current rates. C) They carry basic guarantee rates. D) Tax on accumulated interest is deferred until withdrawal. Explanation

a Initial premiums may be as low as $500–$1,000 for qualified accounts and $1,000–$5,000 for nonqualified accounts. Some annuities require higher premiums (some allow for even lower premiums). LO 3.6.1

Your client is invested in a registered indexed-linked annuity (RILA). The RILA contains a 7% buffer, an 80% participation rate, and an overall cap rate of 10%. Suppose in years one and two, the S&P-500 returns 14% and -10%, respectively. What interest rate would be credited to the RILA during these two years? A) Year 1: 11.2% / Year 2: -3% B) Year 1: 11.2% / Year 2: -7% C) Year 1: 10% / Year 2: -7% D) Year 1: 10% / Year 2: -3%

d The correct answer is Year 1: 10% / Year 2: -3%. In year one, the S&P-500 returns 14%, but the RILA contains an 80% participation rate and 10% overall cap rate. This limits the investor to a 10% return (14% x .8 = 11.2%, but limited to a 10% cap rate). In year two, the S&P-500 returns -10%, but the RILA contains a 7% buffer. This limits the investor to a maximum loss of -3%; only losses in excess of the 7% buffer are incurred. LO 3.6.1

Brendan and Sasha, both age 28, are considering the purchase of an annuity to help them save monthly for their retirement at age 65. They want an annuity that will allow them to participate in the equities market, and because of their long-term investment horizon, they are not particularly concerned about safety of principal. Which of the following annuity products best meets their needs? A) Variable deferred annuity B) Fixed immediate annuity C) Fixed deferred annuity D) Single premium deferred annuity

a A variable annuity will allow the Brendan and Sasha to participate in the equities market. Fixed annuities are more suited for investors who are concerned with safety of principal. Because the couple wants to save monthly, a single premium deferred annuity is not a wise choice. LO 3.6.1

Which of the following describe life insurance life income settlement options? The proceeds are paid to the beneficiary on the basis of life expectancy, and payments stop upon the death of the beneficiary. The beneficiary is paid a life income with a minimum number of payments guaranteed. The beneficiary is paid an income for life with any remaining proceeds paid to a contingent beneficiary. The proceeds are left with the company and interest is paid to the beneficiary. A) II and IV B) I and III C) I, II, and III D) I, II, III, and IV

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

Which of the following regarding the life income-only annuitization option is NOT true? A) It is possible that the insurer will be required to make only a few payments. B) It provides income until the death of the annuitant. C) It prevents any portion of remaining proceeds from being included in the annuitant’s estate. D) If the annuitant dies without having received an amount at least equal to the principal, the insurer will refund the difference to a secondary beneficiary.

d The life income-only option precludes refunds. A beneficiary who wants to be guaranteed a return of principal should elect the life income with refund option. LO 3.6.2

Which of the following of the statements concerning the Affordable Care Act (ACA) is incorrect? A) Coverage for certain preventive care is now mandated. B) Lifetime limits on insurance coverage have been eliminated. C) Children may stay on their parents’ group coverage until age 26. D) Premiums can only be linked to gender and smoking but not health issues.

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

Which of the following statements regarding health insurance under the Affordable Care Act (ACA) since the passage of the 2017 tax reform bill are true? The individual mandate has been repealed. The employer mandate is not being enforced. Plans need to provide the essential benefits the ACA mandated. Subsidies for lower-income families remain available. A) II and III B) I, III, and IV C) I and IV D) I, II, III, and IV

Statement II is incorrect. The ACA employer mandate remains in effect and is currently being enforced. LO 4.1.1

Anya has a major medical insurance policy with a $500 deductible and an 80% coinsurance clause. She becomes ill and is admitted to the hospital for several days. When she is discharged, her hospital bill is $7,500 and her doctor bills are $3,250. Calculate the amount Anya's insurance will pay. A) $9,250 B) $8,200 C) $10,250 D) $7,000

b 8200 7500 + 3250 total loss -500 deductible 10250 -2050 less 20% 8200 insurance

To be eligible for long-term care benefits under Medicaid, the individual must be A) previously confined to a hospital. B) above a certain income and home equity level. C) indigent or impoverished. D) impoverished and eligible for Medicare.

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

Which one of the following medical policy provisions that can limit recovery by an insured is described correctly? A) Based on the medical information provided on a policy application, the exclusions clause is written to exclude specific benefits for that applicant. B) The coordination of benefits clause is designed to prevent the insured from collecting benefits from two policies that together would equal more than 100% of the expense incurred. C) A utilization review is used to determine if the insurance company is being charged the correct amount by providers of medical services. D) The use of internal limits for treatment like chiropractic care by an insurance company assures insureds that their doctor’s charges will be fully covered.

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

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

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

Which one of the following statements regarding Medicare is CORRECT? A) Medicare is a federally initiated program, but it is mostly administered, and at least partially funded, at the state level. B) The Affordable Care Act (ACA) removed underwriting requirements and preexisting conditions from Medicare eligibility requirements. C) Individuals who have end-stage renal (kidney) disease are eligible for Medicare regardless of their age. D) Medicare is the single largest resource for individuals who need long-term care.

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

Which of the following statements regarding Medigap insurance policies is NOT correct? A) Medigap Policy A is the most expensive and most comprehensive form of coverage. B) Seniors may be sold only one Medigap Policy at a time. C) Medigap policies must accept all applicants who apply within the first six months of qualifying for Medicare. D) Medigap policies were standardized by Health Insurance Portability and Accountability Act (HIPAA) legislation.

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

Which one of the following exposures may NOT be protected against with the purchase of disability income insurance? A) David is unsure if he could work in another field if his skills become obsolete. B) Joan is paying down her student loans as well as substantial outstanding balances on her credit cards. C) Three accountants work together in the Smith, Jones, and Swartz CPA firm. They are each responsible for a third of the overhead. D) Steve and Carly recently purchased a house. They need both incomes to pay the mortgage payment and their other monthly bills. Explanation

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

Which one of the following terms is correctly defined as it applies to disability income insurance? A) The maximum benefit period is the maximum cumulative amount an insured can receive over his or her lifetime. B) The presumptive disability clause states that if you cannot work in your own occupation, you are presumed to be disabled. C) The elimination period serves a purpose similar to that of a deductible. D) The misstatement of age clause provides that if the insurance company finds that the applicant misstated his or her age on the application in order to obtain lower premiums, the policy can be terminated by the company.

c The elimination period is the portion of a disability for which the insured must pay all expenses without disability income insurance benefits from the insurance company. LO 4.5.1

Which of the following statements regarding disability insurance policies is CORRECT? An own occupation definition of disability may allow the insured to receive benefits, even if the insured can work in another occupation. Under a residual disability income benefit, the benefit paid is based on percentage of lost income. The insurance company can increase future premiums on a noncancelable disability policy. An own occupation disability policy is the least expensive. A) I, II, and III B) IV only C) I, II, III, and IV D) I and II

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

Kathy purchased a disability income policy six months ago. She recently had unexpected surgery and will be disabled for at least 6 months. Her policy provides for a monthly benefit of $2,400. Kathy has been unable to work for 60 days but has received only one check for $2,400 from the insurance company. Identify the most likely reason for this payment amount. A) Kathy is considered to be 50% disabled. B) Kathy has owned the policy for less than a year. C) The policy has a 30-day elimination period. D) The policy has a $2,400 deductible.

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

he Health Insurance Portability and Accountability Act (HIPAA) includes all of the following as activities of daily living (ADLs) as benefit triggers, except A) bathing. B) hearing. C) dressing. D) eating.

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

Which of the following stipulations must be met for Medicare to cover the cost of long-term care? A) The need for care can be determined by the patient’s family. B) The care can be either skilled or unskilled. C) The care can be needed either full or part time. D) The patient’s condition must be expected to improve. Explanation

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

Doris, a widow, has asked you to look over a number of long-term care brochures she received. Which one of the following provisions will Doris probably want on a policy? A) RPL Insurance Co. states that if the insured needs help with only four of the five defined activities of daily living (ADLs), full benefits will be provided. B) PILICO material specifies that adult day care qualifies for home care level benefits. C) Marston Insurance Co. will cover any level of benefits following one week of hospitalization and/or skilled nursing care. D) Home care provided by family members is excluded by Ins. Co. of Rock Wells.

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

In order to receive long-term care from Medicare, which of the following must be true? The patient must have a three-day hospital stay as an admitted patient. The patient must pay the coinsurance for the first 20 days of the stay. The patient must enter a Medicare-approved facility within 30 days of release from the hospital. The care must be at least at a skilled nursing care level. A) I, III, and IV B) I, II, III, and IV C) II and IV D) I and III

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

All of these are eligibility requirements for Veterans Benefits except A) a veteran’s current health insurance coverage (regardless of type) can affect their ability to receive VA health care benefits. B) 24 months of continuous service must be satisfied, or the full period for which you were called to active duty. C) service in the active military, naval, or air service and not have received a dishonorable discharge. D) active-duty for training purposes does not qualify for VA health benefits.

The correct answer is "A veteran's current health insurance coverage (regardless of type) can affect their ability to receive VA health care benefits." This statement is false. A veteran's current health insurance coverage (regardless of type) does not affect their ability to receive VA health care benefits now or in the future. All other statements are true. LO 4.7.1

The answer is I and II. Characteristics of group term life insurance include payment of a face amount to the beneficiary named at the time of death of the insured and low cost, simple administration, and tax advantages. LO 5.1.1

Which one of the following criteria must be met by a group life insurance plan to meet the nondiscrimination test? A) At least 66% of all employees benefit from the plan. B) At least 70% of participants are not key employees. C) The plan benefits a nondiscriminatory class of employees. D) Coverage for dependents is usually equal to the limits established for employees.

c The answer is the plan benefits a nondiscriminatory class of employees. The plan will meet the test if it benefits a nondiscriminatory class of employees. At least 70% of all employees benefit from the plan, and at least 85% of participants are not key employees. Coverage for dependents is usually equal to the limits established for employees. LO 5.1.1

Steve and Amy have a son, George, who is 25 years old. Steve has an employer-provided health care plan. George has moved out of the house and is married to Susie, age 23. Susie and George recently purchased their first home and live by themselves in the suburbs. Which of the following statements is CORRECT? Because George has moved out of the house and is married, he can no longer be covered by his father's health insurance plan. Because George is over 19 years old and not a student, he can no longer be covered by his father's health insurance plan. Steve can cover George on his health plan until George is age 26. Steve can cover Susie on his health plan until she is age 26. A) I and II B) III only C) I, II, and III D) I only

The answer is III only. The 2010 Health Care Reform Legislation provides that plans covering dependents must allow coverage for adult children until age 26. The child need not live at home or be claimed as a dependent for income tax purposes. The child may be married, but coverage does not extend to the child's spouse or children. LO 5.2.1

Which of the following statements concerning flexible spending plans is NOT true? A) A company may allow participants to use expenses in the first 2½ months to spend the prior year’s allocated amount and to roll over $500 into the next year. B) Eligible expenses can include out-of-pocket expenses for health, dental, vision, and items such as tutoring for a child diagnosed with a learning disability. C) The amount that can be contributed annually is limited for flexible spending plans. D) Any funds remaining other than those meeting the federal requirements concerning the next year are forfeited to the company.

The answer is a company may allow participants to use expenses in the first 2½ months to spend the prior year's allocated amount and to roll over $500 into the next year. This is incorrect because a company may offer one of these exceptions but not both. They may allow expenses from the first 2½ months to be claimed against the prior year's balance OR allow a rollover of up to $500 of unused funds into the next year, but not both. All other statements are correct. LO 5.2.2

A small employer with 25 employees decides to start offering a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). No other group health coverage is offered to employees. Which of these employees qualifies for this plan? A) None of these employees qualify. B) Employee C – a full-timer who has completed 90 days of service, is age 30, and a nonresident alien C) Employee B – a part-timer who as completed 80 days of service, is age 30, and a resident alien D) Employee A – a full-timer who has completed 100 days of service, is age 30, and a U.S. citizen

d The plan is only offered to eligible employees. An eligible employee is an individual who has completed at least 90 days of service, attained the age of 25, is not considered part-time or seasonal, is not covered by a collective bargaining unit, and is not considered a nonresident alien for tax filing purposes. LO 5.2.2

Which of the following statements regarding Section 125 cafeteria plans is CORRECT? Section 125 plans are most appropriate to implement when the employee benefit needs vary within the employee group. Highly compensated employees may lose the tax-free nature of included benefits if the plan is deemed to be discriminatory. A) II only B) I only C) Neither I nor II D) Both I and II

both I and II. Both statements I and II are correct. LO 5.2.2

Which of the following expenses is typically payable from a flexible spending account (FSA)? Medical Dental Dependent care Individual life insurance premiums A) I, II, III, and IV B) I, II, and III C) II, III, and IV D) I only

The answer is I, II, and III. FSAs are usually used only for medical, dental, and dependent care expenses. Individual life insurance premiums are not covered because the IRS does not consider them a qualified benefit. LO 5.2.2

Choose the CORRECT statement regarding Consolidated Omnibus Budget Reconciliation Act (COBRA) rules for group health plans. A) The rules require the employee or dependent to notify the employer within 60 days of a qualifying event, such as a divorce. B) The rules apply to any employer with a health plan and more than 15 covered employees. C) Continuation of coverage is automatic once a qualifying event occurs. D) The rules allow an employer to charge up to 120% of the cost of an active employee to cover administrative costs.

a The answer is the rules require the employee or dependent to notify the employer within 60 days of a qualifying event, such as a divorce. COBRA rules apply to an employer with 20 or more total (not just covered) employees. The employer can charge up to 102% (not 120%) of the cost of an active employee to cover administrative costs. Finally, the beneficiary/participant must request coverage after a qualifying event occurs because coverage is not automatic. LO 5.2.3

Which of the following statements regarding group disability income contracts is CORRECT? A group plan is sometimes broader than an individual plan and is usually less expensive. Short-term disability provides coverage for only up to six months. Long-term disability provides coverage until an employee's normal retirement age (usually age 65), until death, or for a specified term longer than two years. Many employers offer group long-term disability insurance with premiums generally paid for by the employee. A) II and III B) IV only C) I, II, and IV D) I, III, and IV

The answer is I, III, and IV. Short-term disability provides coverage for up to two years (24 months). LO 5.3.1

Which of the following benefits would not create taxable income for employees, assuming that the plans are nondiscriminatory? Country club dues paid by the employer De minimis fringe benefits Qualified employee discounts Business use of an employer-owned automobile A) I and II B) II and III C) II, III, and IV D) I, II, III, and IV

Explanation The answer is II, III, and IV. The payment of country club dues by the employer would create taxable income. The other benefits listed are excludible. LO 5.4.1

Which of the following benefits are provided by workers' compensation? Medical expense reimbursement Disability income Death benefits Rehabilitation services A) I, II, III, and IV B) I and III C) I only D) II, III, and IV Explanation

The answer is I, II, III, and IV. Workers' compensation provides all of these benefits. Medical expenses are covered in full in most states. Disability income benefits can be paid after the disabled worker satisfies a waiting period. Death benefits are paid if the worker dies as a result of a job-related accident or disease. All states provide rehabilitation services to restore workers to productive employment. LO 5.4.1

(Case Study Question) During 2022, Vic's mother Rose passed away. At that time, Vic discovered that she had a nonqualified variable annuity consisting of an initial investment of $50,000 made in 2001. The current value of the annuity is $126,000, and Vic is the sole primary beneficiary. If Vic chooses to take the entire $126,000 in a lump-sum distribution to help refinance the Brewsters' mortgage, what would be the tax consequence? A) $76,000 long-term capital gain B) $76,000 ordinary income plus a 10% penalty C) $126,000 ordinary income D) $76,000 ordinary income

The answer is $76,000 ordinary income. Any payments, including death distributions, from a nonqualified annuity are taxed as ordinary income excluding the basis of the contract. The 10% penalty would not be applicable because the distribution was made as a result of a death. LO 6.1.1

(Case Study Question) Select the statement(s) that accurately describe(s) the Brewsters' current risk management plan. They have inadequate life insurance. The Brewsters' home would be covered for smoke damage. If Vic becomes disabled, he will be taxed on his monthly benefit. The Brewsters' home would not be covered for damage due to windstorms and hail. A) II only B) I and II C) I, III, and IV D) I, II, and IV

b The amount of life insurance Vic currently has is inadequate. Vic is the sole income provider for his wife and children along with being responsible for a home mortgage. At the very minimum, he would need enough life insurance to cover the mortgage. Tiffany currently does not have any life insurance. Vic's disability income monthly benefit would be received income tax free. The Brewsters have an HO3 homeowners insurance policy, which covers the perils of smoke, and windstorms and hail. LO 6.1.2

(Case Study Question) Krista, Tiffany's friend, visits the Brewsters. As she is sitting at the dinner table, her chair collapses and results in her foot being broken. Choose the part(s) of the Brewsters' homeowners insurance policy that would cover Krista's broken foot. Coverage F: Medical Payments to Others Coverage E: Personal Liability A) Both I and II B) I only C) Neither I nor II D) II only

a The answer is both I and II. Coverage E protects the insured homeowner and all resident family members against liability for bodily injury and property damage that may occur on the premise. Coverage F pays necessary medical expenses of others that result from bodily injury arising out of the insured's activities, premises, or animals. Generally, Coverage F will pay up to $1,000 per person per occurrence. Coverage F will automatically pay regardless of fault. Coverage E only pays when the insured is at fault. In this case, the broken chair puts the insured at fault, and Krista may seek to be reimbursed for pain and suffering, lost wages, and medical bills. LO 6.2.1

(Case Study Question) Vic's son Andrew had an unexpected injury resulting in a $2,500 hospital bill. Calculate the amount of the bill Vic's medical plan will cover. A) $600 B) $2,500 C) $1,600 D) $2,300

The answer is $1,600. Vic's medical plan will pay a total of $1,600. This is calculated as follows: $2,500 – $500 deductible = $2,000 × 0.80 coinsurance = $1,600 LO 6.2.2

(Case Study Question) Could the Brewsters set up a health savings account for the family? A) No, the Brewsters cannot set up a health savings account because only an employer can set one up. B) No, the Brewsters are not eligible to establish a health savings account because they are not covered by a high deductible health plan. C) Yes, the Brewsters are eligible because the family is covered by a low deductible health plan. D) Yes, the Brewsters are eligible to set up a health savings account because they have children.

b The answer is no, the Brewsters are not eligible to establish a health savings account because they are in a low deductible health plan. For 2022, the minimum amount the family deductible is required to be is $2,800 in order to be eligible for a health savings account. The Brewsters' family health insurance family deductible is only $1,500. The plan does not have to be sponsored by an employer. LO 6.3.1

(Case Study Question) According to CFP Board's Code and Standards, which one of the following is not expected to be disclosed in writing to the Brewsters at the time you establish a client-planner relationship with them? A) A statement as to the method of your compensation B) A statement of all sources of income for the CFP® certificant C) A statement of the basic philosophy of the CFP® certificant (or firm) in working with clients D) Resumes of principals and employees of a firm who are likely to provide financial planning services to the client

b The answer is a statement of all sources of income for the CFP® certificant. As a CFP® certificant, you are expected to provide a substantial amount of information to clients; however, all sources of income are not relevant to the relationship. A planner receiving dividends or interest, alimony or child support payments, is under no obligation to disclose that information to clients. A statement of compensation related to the planning practice is appropriate and expected. LO 6.3.2

Your client decides to take a road trip to Yellowstone National Park. The weather forecast is unfavorable, but they are willing to go anyway. To hedge their bets, they increase their auto policy coverage before leaving and also increase their deductible to keep the premiums affordable. In addition, they outfit their car with new lights and snow tires. Which risk management techniques are being demonstrated? A) Risk transfer, risk reduction, risk avoidance B) Risk reduction, risk retention, risk avoidance C) Risk retention, risk reduction, risk transfer D) Risk retention, risk reduction, risk acceptance

The answer is risk retention, risk reduction, and risk transfer. The client is transferring their risk to the insurance company through their auto policy. They are also retaining some of the risk by opting for a higher deductible. Lastly, they are reducing their risk by outfitting their care with new lights and snow tires. LO 1.2.1

Which of the following are elements of an insurable risk? The expected loss must not be catastrophic to the insurer. The law of large numbers must apply to make the risk predictable. The loss must be accidental only. The risk must produce a loss that is definite and measurable. A) I, II, III, and IV B) I, II, and III C) II and III D) I, II, and IV

Which of the following is a CORRECT example of applying a rule of risk management? A) After replacing the windshield in her car for the second time this year, Carol is tired of the hassle. She increases the deductible on her personal auto policy so she has to pay full replacement cost each time the windshield is broken. B) Steve’s new mountain bike costs $1,300. He has a great lock and keeps the bike in his garage. He decides to have it insured for a premium of $12 per year. C) Jake’s car is worth $1,800. He has savings of over $4,000. Since he must have a car to get to and from work, he maintains full coverage for damage to his car. D) The last earthquake in Joan’s city happened 100 years ago and was very mild causing no property damage. No additional earthquakes are predicted. She decides to insure her home for an earthquake.

Amy purchases health insurance from Joseph, who claims to be an agent for XYZ Insurance Company. XYZ Insurance Company knows that Joseph uses the company logo on his stationery, even though he is not an agent for XYZ, but does nothing to stop him. XYZ must honor the terms of the insurance contract on the basis of A) relied authority. B) implied authority. C) express authority. D) apparent authority.

Choose the type of authority that the insurance company does NOT expressly give to agents, but that agents in similar circumstances normally possess. A) Granted authority. B) Express authority. C) Apparent authority. D) Implied authority.

Which of the following statements regarding insurance industry regulation are CORRECT? The state legislative branch makes laws concerning the conduct of the insurance business within a state's borders. The state courts rule on the constitutionality of state insurance laws. The Commissioner of Insurance enforces insurance laws passed by the legislative branch and makes rulings, where necessary, to implement the legislative branch's intent. The NAIC originates model legislation that may be enacted by the state legislatures. A) II, III, and IV B) I, II, III, and IV C) II and IV D) I and II

Billy, age 16, purchased a $100,000 term life insurance contract. He died one year later. The insurer is trying to avoid payment under the contract since Billy was under the age of majority when he purchased the insurance. Which of the following legal concepts, or categories, would be most applicable to Billy's situation? A) The conditions section of the policy B) A contract of adhesion C) The difference between a void and a voidable contract D) The principle of estoppel

Ann, irritated with her Aunt Myrna, walked into Myrna's house, picked up a knife, and threw it, barely missing Myrna. Ann faces risk exposures from which of the following? Tort liability Contract liability Criminal responsibility A) I, II, and III B) III only C) I and III D) I and II

The principle of indemnity will reimburse the insured only up to the actual amount of the loss. Which insurance product is an exception to that rule? A) Disability and health insurance B) Indexed universal life insurance C) Deferred variable annuity D) Standard long-term care

Which of the following scenarios will NOT allow an insurance company to make a claim on the basis of utmost good faith? A) The client accidentally misstates their age. B) The client intentionally withholds reporting their prior felony conviction. C) An applicant misstates their health conditions to the principal underwriter. D) The client signs a warranty verifying that all application information is correct.

Which of the following is a purpose of an insuance company's underwriting process? A) To make it easy for agents to market insurance by allowing concentrations in limited specific geographical and homogenous groups B) To allow individuals to obtain as much life insurance as they want C) To establish guidelines that will apply to the majority of policyholders D) To permit the issuance of policies that protect against an almost certain risk

Which of the following are primary factors that are most reasonable to use in selecting an insurance company? NAIC criteria Form of insurance company ownership A.M. Best, Standard & Poor's, and Demotech ratings the company's method of policy distribution (e.g., agents versus brokers versus direct) A) I, III, and IV B) III, and IV C) I, II, and III D) I and III

Suzanne regularly leaves her side door unlocked when she leaves for work. One afternoon a thief entered her apartment and stole all of her jewelry. What was the type of hazard in this example? A) Moral B) Morale C) Physical D) Location

Thomas wants the maximum comprehensive protection for his home and personal property. Which homeowners policy should he purchase? A) HO-1 B) HO-8 C) HO-5 D) HO-3

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Thomas wants the maximum comprehensive protection for his home and personal property. Which homeowners policy should he purchase? A) HO-1 B) HO-8 C) HO-5 D) HO-3

Juanita owns a diamond bracelet valued at $12,000. She wants to be sure it is properly covered by insurance. You correctly advise her that A) if she mentioned it when obtaining her homeowners policy, she can assume it is properly covered by the standard policy. B) it should be covered using an inland marine policy form. C) with the cost of such coverage, self-insurance is a much more cost-efficient alternative. D) it is covered adequately by her standard homeowners policy.

Which of the following statements regarding comprehensive personal liability (CPL) coverage are CORRECT? Generally, intentional injury is excluded. Liability due to slander or libel is included. Liability arising from the use of an automobile is included. They exclude most liabilities due to the operation of watercraft. A) II and IV B) I, III, and IV C) I and IV D) I, II, and III

Select the FALSE statement regarding a personal liability insurance needs analysis. A) The client's net worth and income are important factors. B) It is necessary to review a client’s liability insurance policies to ensure that there are not any coverage gaps. C) A personal liability umbrella policy (PLUP) does not guarantee there will not be a coverage gap. D) Personal liability umbrella policies (PLUPs) are relatively expensive and only affordable to high net worth clients.

Which of the following is considered a property exclusion under the physical damage coverage (Part D) of the personal auto policy (PAP)? Sound systems permanently installed in the automobile Camper bodies or trailers not listed in the policy Radar detection devices Mechanical or electrical breakdown A) II and IV B) I, II, and III C) II, III, and IV D) III and IV

Which of the following would generally be covered under a typical personal auto policy? A) Damage caused by radioactive contamination or by the discharge of a nuclear weapon, or by war in all its forms B) Destruction or confiscation by the government because of the auto's use in illegal activities C) Damage to any auto used as a replacement for an insured auto while the insured auto is being repaired D) Damage due and confirmed to wear and tear, freezing, mechanical or electrical breakdown or failure, and road damage to tires

Which of the following is not a part of a Business Owner's Policy (BOP)? A) Commercial package policy B) Property coverage C) Common policy conditions D) Causes of loss and exclusions

Which of the following statements regarding a Commercial Package Policy (CPP) are CORRECT? It is a package of monoline forms. It includes both property and liability coverage. Additional coverages can be added to customize coverage. It operates in a similar manner to a BOP. A) III and IV B) I, II, III, and IV C) I and II D) II and III

Commercial general liability insurance insures against which of the following? A) Non-automobile liabilities of the business, other than injuries to employees B) Every type of business liability C) Professional liability D) Automobile liabilities incurred by the business

Bob, the owner of XYZ Widgets Inc., is concerned that his company may unwittingly manufacture a dangerously defective widget. Which one of the following types of insurance would be appropriate to address Bob's concern? A) Commercial liability coverage B) Professional liability insurance C) Personal umbrella liability insurance D) General liability policies for individuals

Jerrel has been discussing his life insurance needs. Which one of the following situations would Jerrel most likely cover today with personally owned life insurance on his own life? A) Jerrel's sister, Jennine, is a single mother of three. B) Jerrel wants the debts of his incorporated business to be paid off if he dies prematurely. C) Jerrel's parents have a substantial estate. D) Jerrel wants his children to have a college education.

Which descriptions of a basic life insurance policy provision are CORRECT? The purpose of the incontestable clause is to protect the policyowner from the insurance company contesting a claim after the policy has been in force for two years. The purpose of the misstatement of age clause is to explain how the benefits of the policy will be adjusted if the age of the insured is determined to be different from that shown in the policy. The purpose of the suicide clause is to protect the insurance company by stating that whenever an insured commits suicide, the benefits of the policy will be limited to the greater of the return of all premiums, plus interest, OR the policy's cash surrender value. The grace period provides that premiums received within 60 days after the due date are treated as though received on time. A) II and IV B) I, III, and IV C) I and III D) I and II

Assume that a client enters into, keeps in force, and does not borrow against a traditional whole life insurance contract. The policy names the client as the insured and the client's spouse as the policy beneficiary. Which of the following client objectives will NOT be satisfied by using a traditional whole life insurance contract? A) To have a premium payment that will remain level throughout the contract period B) To be assured of an increasing cash surrender value C) To provide a guaranteed death benefit amount D) To direct investment of premium dollars to alternative investment vehicles

Sarah has purchased an indefinite duration, nonparticipating life insurance policy that pays a current interest rate on cash values. Which one of the following types of life insurance did Sarah purchase? A) Term life B) Endowment life C) Dividend-paying whole life D) Universal life

Which of these policies are typically used in the estate planning process to provide liquidity upon the death of the surviving spouse? A) Survivorship life B) Endowment life C) Adjustable life D) Interest sensitive whole life

A client has a cash value account worth $50,000, $15,000 of which is attributable to growth. They currently have a loan outstanding equal to 20% of the cash value and just now received $5,000 in dividend payments. They are in the 22% marginal tax bracket. What is their tax liability should they surrender the policy? A) $6,600 B) $2,200 C) $4,400 D) $3,300

Gina, your 54-year-old client, has a modified endowment contract (MEC) with a basis of $25,000 and a cash value of $50,000. Gina needs to withdraw $10,000 from the MEC to pay the balances of her credit cards. Which of these is a tax consequence of Gina's withdrawal? A) $10,000 long-term capital gain B) $10,000 is received ordinary income tax free, but a 10% tax penalty is payable on the withdrawal C) $10,000 taxed as ordinary income plus a 10% tax penalty on the withdrawal D) $10,000 short-term capital gain

Carl purchased a life insurance policy when he was 44. However, on the application, he indicated he was 42. When the discrepancy is discovered in a review of insurance company files five years later, A) the policy will be canceled because of misrepresentation. B) the coverage will be reduced because the premium has been lower than it should have been. C) the coverage will be increased because the premium has been higher than it should have been. D) the policy will not change because the incontestable period will have passed.

Which of the following factors affect the pricing of life insurance policy premiums? Mortality rates Investment income Expenses Actual experience A) I, II, III, and IV B) II and III C) I and II D) III and IV

Under the dividend accumulation option, in a participating life insurance policy, dividends are left with the insurer A) and used to increase whole life coverage at net single-premium rates. B) and earn interest. C) to provide one-year term life coverage at net rates. D) to pay the current premium payment.

Which of the following are dividend options available under a participating life insurance policy? Receive the cash value Cash Accumulate at interest Purchase of paid-up additions A) I, II, III, and IV B) I, II, and III C) I, III, and IV D) II, III, and IV

Which of the following statements regarding life insurance policy riders are CORRECT? The disability waiver of a premium rider prevents the policy from lapsing as a result of nonpaid premiums during the insured's disability. The guaranteed insurability rider allows the insured to purchase additional insurance up to a certain age, regardless of insurability. The accidental death benefit rider usually pays three times the face amount of the policy if the insured dies accidentally. The accelerated death benefit rider allows the policyowner to receive a portion of the policy's death benefit during the insured's lifetime if the insured contracts a terminal illness. A) II and IV B) I, II, and IV C) I and III D) I, II, III, and IV

Wiley is evaluating his life insurance needs. He wants his wife to have $34,000 of additional retirement income, paid at the beginning of each year. Wiley expects 6% inflation and 8% net interest on savings, and wants the income to be adjusted annually for inflation. He thinks that his wife will live another 20 years after retirement, and he wants to use up the entire amount of principal and interest during that period. For calculation purposes, assume that the retirement income will begin today. How much additional life insurance is required to fund this need? A) $572,676 B) $566,667 C) $425,000 D) $360,522

Angelica is evaluating her life insurance needs. She wants her husband to have $50,000 of additional income, paid at the beginning of each year, for 20 years after her death. She wants to use up the entire amount of principal and interest during that period. Angelica expects a 3% inflation and 7% net interest on savings, and wants the income to be adjusted annually for inflation. Assuming she dies today, how much additional life insurance is required to fund this need? A) $679,516 B) $713,244 C) $686,581 D) $706,697

Allison is a single mother who recently got a promotion at work. The additional income will help her cash flow. She is looking to buy additional life insurance so she can ensure her children, currently ages 13 and 11, can go to college, and there is money to fund a trust for them should she die before they get to college. She anticipates needing at least $500,000 in death benefit. Which of the following types of life insurance would best fit her need? A) A whole life policy B) A 10-year term policy C) A variable universal life policy D) A 30-year term policy

Ann can save $100 per month toward retirement. Which one of the following types of contracts would be most appropriate for her? A) Variable life insurance B) Participating whole life insurance C) Flexible premium deferred annuity D) Universal life insurance

Which of the following factors are likely to influence a recommendation to either keep, or replace, an existing whole life insurance policy? You read in the newspaper that the agent making a recommendation received a national sales award. Your client had heart bypass surgery two years ago. Your favorite financial weekly published an article reaffirming the high ratings of your client's current insurer. The proposed replacement policy is of a type that better addresses your client's needs. A) I, II, and IV B) I and III C) II, III, and IV D) III and IV

Angela has a life insurance policy that allows her to vary the amount of her premium payments and invest the cash value in subaccounts. The amount of the death benefit is NOT guaranteed, and the cash value could possibly decline to zero because there is no guaranteed rate of return. What type of policy does Angela have? A) Variable universal life B) Modified life C) Variable life D) Whole life

Which of the following are important characteristics of an immediate straight life variable annuity? It provides a stream of income for the life of the annuitant. It is payable to the annuitant's estate upon his or her death. The policy is taxed in the same manner as mutual funds. It is included in the annuitant's gross estate. A) III and IV B) I only C) I and III D) I, III, and IV

Which one of the following statements regarding annuities is NOT true? A) A single-premium variable deferred annuity generally permits additions to the invested amount once each year. B) A joint and full survivor annuity guarantees a level payment as long as either annuitant is alive. C) A flexible premium variable annuity generally limits changes in the investment mix to some extent. D) A life annuity with ten years certain and continuous will pay benefits for at least ten years if the annuitant dies six years after the initial distribution is made.

Your client, Carl, has a $100,000 annuity. He wants to guarantee an income for life and assurance that no less than $100,000 will be paid out by the insurance company. Which of the following annuitization options would you recommend for Carl? A) Life income with refund B) Joint life income C) Joint and survivor income D) Straight life income

Managed care plans do NOT involve which of the following? A) Gatekeepers B) Deductibles C) Copayments D) Primary care physicians (PCPs)

Marcus, age 21, is graduating from college and has yet to find a job. He has been insured on his parents' health insurance plan. Which of the following options are available for him? Marcus can purchase coverage using one of the marketplaces. He can remain on his parents' coverage until he reaches age 26, regardless of his dependency status. He can utilize COBRA provisions for 36 months when he loses his dependency status. If Marcus has a child, the child can be covered under COBRA. A) II, III, and IV B) I, II, and III C) II and III D) I and IV

Which of the following are advantages of an HSA? HSAs can receive contributions up to the lesser of 100% of earned income or $19,500. HSA funds can be used to pay long-term care insurance. HSA funds can be used to pay COBRA premiums. A limited one-time rollover from an IRA can be made into an HSA. A) I and III B) I, II, III, and IV C) II, III, and IV D) I, II, and III

Which of the following best describes the MOOP (maximum out of pocket) limit in a health insurance policy? A) It is the period of time the insured must wait before benefits are payable. B) It is the maximum amount the insurer will pay during a benefit period. C) It is the initial amount the insured must pay before insurance begins. D) It is the point after the insurer pays all covered medical expenses.

Walter's first medical expenses for the year were incurred for an operation costing $23,250 in covered expenses. Walter has a comprehensive major medical plan with a $1,500 deductible, an 80% coinsurance provision, and a $5,000 maximum out of pocket limit. How much will Walter's insurer have to pay? A) $23,250 B) $17,400 C) $18,250 D) $21,750

Which of these statements regarding the hospital insurance program under Medicare Part A is CORRECT? A) The insurance is voluntary and costs the participant a monthly premium. B) The insurance requires that the insured visit certain specified physicians. C) The insurance covers all persons who earn less than a specified minimum. D) The insurance provides coverage for hospital care, home health services, and hospice care.

Which of these statements regarding the medical insurance program under Medicare Part B is CORRECT? A) The cost is based on the prior year's modified adjusted gross income. B) The insurance coverage is free if enough quarters of coverage are obtained. C) Late sign up will result in a temporary premium penalty for the following year. D) Medicare Part B has a standard seven-month enrollment period in the year in which the participant turns age 65.

All of the following statements regarding Medicare supplement (Medigap) insurance policies are correct except A) they cover some of the co-payments and deductibles imposed by Medicare. B) policies must be guaranteed renewable. C) the most comprehensive and expensive policy form is Policy A. D) policies may not exclude pre-existing conditions.

Which of the following statements concerning disability income policies is CORRECT? Noncancelable policies guarantee the insured the right to renew the policy for a stated number of years, or until a specified age for a premium guaranteed upon renewal. A guaranteed renewable policy does not guarantee renewal at a level premium. Noncancelable policies provide the most liberal continuation provision. Noncancelable polices permit the company to adjust premiums for individual insureds. A) III and IV B) I and II C) I, II, and IV D) I, II, and III

Your new client, Valerie, age 45, is a graphic artist earning $70,000 annually. She provides you with the following information from her individual disability insurance policy. The policy has an "own occ" definition of disability. Her policy provides a base benefit of $3,500 per month for total disability and provides that her benefits will be reduced by any Social Security disability benefits she receives. Elimination Period: 30 Days Base Benefit for Total Disability: $3,500 per month Maximum Benefit Period Sickness/Injury: Age 65 Cost-of-Living Rider: 3% If Valerie became totally disabled for her total benefit period, and was eligible for an $800 per month benefit from Social Security, how much would she receive from her insurer? A) $192,000 B) $0 C) $840,000 D) $648,000

Elijah has the opportunity to purchase one of two disability income policies. One is noncancelable, and the other is guaranteed renewable. Which of the following is the most likely reason he should choose the noncancelable policy? A) Certain conditions will be excepted under the renewed policy. B) The renewal is for a stated period only. C) The premium is guaranteed at renewal. D) The premium may be adjusted for an entire class.

The maximum monthly benefit payment of a disability policy is affected by all of the following EXCEPT A) whether it is an individual or group policy. B) the marital status of the claimant. C) the annual earnings of the claimant. D) coordination of benefits clauses.

Which of the following accurately describes LTC partnership qualified policies? A) Partnership qualified plans are limited to pools of $500,000. B) The premiums for such a policy do not qualify for the federal tax deduction. C) The policy provides a specific dollar amount of assets, which would be protected if the client exhausted all of the LTC insurance benefit and had to apply for Medicaid. D) The state subsidizes the long-term care policy if it qualifies as a partnership policy.

Which of the following statements regarding group life insurance is CORRECT? A) Group paid-up life is group life coverage consisting of increasing amounts of whole life and decreasing amounts of group-term coverage. B) Dependents group life is a separate group policy that offers whole life insurance for the dependents of eligible employees. C) Retired lives reserve is an employer-provided group permanent coverage for retired employees. D) Contributory group life is when the employer contributes the entire premium as part of the employee benefit program.

Mildred has a long-term care insurance policy that pays benefits in the event she is unable to perform three activities of daily living (ADLs). Mildred is now partially disabled and would like to know if she qualifies for benefits. As her adviser, which of the following should you do to assist her in this determination? A) See if her inability to perform the activities would impoverish her life and, therefore, elevate her need to the level for which the policy provides a benefit. B) See if the activities she is unable to perform are ADLs a normal person is expected to engage in within a 24-hour period. C) See if the activities she is unable to perform are ones that her family would be expected to assist with, and, if not done, whether the policy will cover such assistance. D) Check her policy to see if the activities she is unable to perform are listed specifically as ADLs and whether she is unable to perform enough of them to qualify for benefits.

Which of the following statements regarding $100,000 of group-term life insurance coverage provided on a noncontributory basis by an employer to an employee is CORRECT? A) There are no income tax consequences to the employee so long as the coverage is nondiscriminatory. B) The employee is taxed on the cost of coverage up to $50,000. C) The employee is taxed on the full cost of employer-paid coverage. D) The employee is taxed on the cost of coverage in excess of $50,000.

Which of the following prevents overinsurance and the duplication of benefits when an insured is covered under more than one group health insurance plan? A) Coordination of cost provision B) Reimbursement of benefits provision C) Coordination of benefits provision D) Coinsurance provision

Which of these are benefits typically included in a health flexible spending account (FSA)? A) Split-dollar life insurance premiums and bonuses to cover Section 162 insurance premiums B) Education assistance and employee discounts C) Sabbaticals and vacation days D) Health insurance deductibles and coinsurance provisions on group health policies

Which of the following statements regarding the Consolidated Omnibus Budget Reconciliation Act (COBRA) rules for group health plans is CORRECT? A) COBRA rules require the employee or dependent to elect coverage within 60 days of a qualifying event. B) COBRA rules allow an employer to charge up to 120% of the cost of an active employee to cover administrative costs. C) COBRA rules apply to any employer with a health plan and 15 or more employees. D) COBRA protection does not apply to divorced spouses of covered employees.

Marco's new job pays $100,000, consisting of a base salary of $85,000 and a guaranteed bonus of $15,000 for the first three years. The employer-paid group disability benefit covers 100% for the first 60 days, then 60% of base income until age 65. It integrates with workers' compensation and Social Security. The disability coverage is modified own occupation for the first three years, then any occupation after that. Which of the following statements is CORRECT? A) Marco will receive $4,250 per month from the start of his disability until age 65 if he remains disabled. B) Marco will be able to collect Social Security disability and his full group benefit. C) If Marco cannot return to his current job or one for which he is reasonably trained and fitted for, he will continue to receive benefits. D) Marco's benefit will be reduced by taxes.

Assuming an employee pays $200 per month in disability premiums and receives a corresponding $5,000 monthly benefit, all while being in the 22% tax bracket, what is the most favorable tax outcome? A) The employer pays the full cost. B) The employee pays the full cost with pretax dollars. C) The employee pays the full cost with after-tax dollars. D) The employer and employee share the cost of insurance.

Which of the following is a nontaxable employee fringe benefit? A) Season tickets for entertainment or sporting events B) Personal use of a company automobile or plane C) De minimis fringe benefits D) Discounts available only to highly paid employees

(Case Study Question) Which of these government programs may pay for George's nursing home expenses, assuming he is indigent and requires only custodial care? A) Medicare Part B B) Medicare Part D C) Medicaid D) Medicare Part A

(Case Study Question) Which of these statements regarding the Mires' group health coverage is CORRECT? The Mires are allowed to seek care outside the network of plan doctors and hospitals but may incur additional fees. The participating providers are likely paid on a fee-for-service basis. A) I only B) II only C) Both I and II D) Neither I nor II

(Case Study Question) The Mires are planning to purchase additional life insurance to meet the objectives stated in the case. They want to purchase policies that feature flexible premium payments and that will allow them to invest the cash value of the policy in various subaccounts. Which type of life insurance will best meet the Mires' objectives? A) Whole life B) Variable universal life (VUL) C) Variable life D) Universal life

(Case Study Question) Panorama Enterprises pays the bar association dues for Bryan and all the other attorneys in the company. Which of the following statements regarding the tax treatment of the payment of dues is correct? Panorama Enterprises can deduct the association dues paid. Bryan must pay tax on the association dues paid for him by Panorama Enterprises. A) II only B) I only C) Neither I nor II D) Both I and II

(Case Study Question) Assume the monthly Table I rate for Bryan's age is $0.09 per thousand. What is the amount of group-term life insurance premiums paid by Panorama Enterprises that Bryan is required to include as income? A) $108 B) $90 C) $216 D) $45

(Case Study Question) Clients may be able to recover civil damages, in a lawsuit from their financial planner, if advice given is improper or inappropriate because advisers have a responsibility to the client as A) a fiduciary. B) an insurance agent . C) a broker-dealer. D) a registered representative.

Your client is considering purchasing an insurance product to hedge against longevity risk. The client is willing to take on investment risk, and understands that some losses may occur, but they also want to limit their downside losses to a degree and avoid maximum loss potential. Which product best suits their needs? A) RILA – buffer B) RILA – minimum floor C) IUL D) EIA

A veteran was recently accepted into the VA health care program. They have the option of dropping their private insurance coverage in order to save premium dollars. Which of these is not a potential risk of such action? A) The veteran may incur a VA health insurance “penalty” tax and face higher respective premiums due to loss in outside coverage. B) VA health is dependent upon Congressional funding, thus lower priority Veterans may lose benefits in the event of inadequate funding and need to use private insurance as a backup. C) If a veteran has Medicare Part B, but later cancels it, they will not be eligible until January of the following year and may have to pay a lifetime penalty to regain coverage. D) A veteran’s family members are normally not covered under VA health, so loss of private insurance could impact family health coverage.

Your client is married. Both spouses have access to their respective employer's health insurance plan. One spouse also has access to an excepted benefit health reimbursement arrangement (EBHRA). They are concerned about their coverage and benefits should they switch to their spouse's plan. What should you advise this client? A) They are permitted to use their EBHRA with their spouse’s outside plan and can request that the spouse’s employer fund their EBHRA. B) They are not permitted to use their EHBRA outside of their employer’s group health plan and should spend down the account before opting into their spouse’s outside plan. C) They are permitted to use their EBHRA even if they opt out of their employer’s group health plan in favor of their spouse’s outside plan. D) They can utilize their EBHRA even if they opt into their spouse’s outside plan, but only have 180 days to spend down the account.

Your elderly client has been struggling with their health recently. In particular, they are having difficulty performing daily living tasks. For the past 90-days, they have struggled with bathing and transferring. More recently, within the past 30–60 days, they have struggled with continence and toileting. They are concerned about needing long-term care, but do not have access to a qualified policy if needed. What do you advise? A) The client is ineligible for long-term care benefits at this time. B) The client is partially eligible for long-term care benefits at this time. C) The client is eligible for long-term care benefits at this time. D) The client is only eligible for Medicaid long-term care benefits at this time.

Your client is in need of additional long-term disability insurance via a personal policy, as their group policy does not fully replace their lost income. Your client is construction worker and has limited savings. They also are concerned about any tax consequences related to claims. What is the best suited advice for this client? A) Recommend an “own-occupation” policy with a longer elimination period and inform the client that claims payouts will be tax-free. B) Recommend an “own-occupation” policy with a longer elimination period and inform the client that claims payouts will be taxable. C) Recommend an “own-occupation” policy with a shorter elimination period and inform the client that claims payouts will be tax-free. D) Recommend a “modified-occupation” policy with a longer elimination period and inform the client that claims payouts will be taxable.

Your client is debating on which health benefit plan they should utilize. Their employer has 25 full-time employees, the majority of whom favor cost sharing arrangements. The employee surveys indicate the desire to save for health care expenses and accrue benefits over time. They are also concerned about long-term savings and taxation. Which of these plans is most appropriate? A) Health savings account B) Voluntary employee benefit associate plan C) Flexible spending account D) Health reimbursement account

Your client, age 56, overfunds their cash value life insurance policy, causing it to become a modified endowment contract (MEC). They are in need of cash as a result of a recent qualified disability. All of these statements are true, except A) your client may withdraw funds from the cash value account and will pay ordinary income tax on the growth portion of the withdrawal, but no 10% early withdrawal penalty. B) the client may utilize a loan from the cash value account and will avoid ordinary income tax plus the 10% early withdrawal penalty because of their qualifying disability. C) the death benefits of the policy will maintain their tax-free status despite now being a MEC. D) the MEC will be taxed on a “last-in-first-out” (LIFO) basis.

Your client is concerned about health issues as they get older and they have family medical history indicating such. The client is concerned about their ability to afford a long-term care policy and taxation, though they are willing to pay any necessary expenses if need be. They also are interested in leaving a legacy for their children. All of these statements regarding long-term care are true, except A) Medicare and Medicaid long-term care are two viable options to offset long-term care needs. B) consider the utilization of a long-term care annuity insurance rider. C) consider the utilization of a long-term care life insurance rider. D) consider purchasing a conventional long-term care policy while relatively young.

A nightclub owner is concerned about their business being properly insured. In particular, the owner is concerned about scrupulous customers potentially suing the business in the event of bar fights involving security. Which of these statements is false regarding torts and liability? A) The nightclub is eligible for their actions and the actions of their employees. B) The owner should consider comprehensive business insurance coverage. C) The owner is solely liable for torts they personally commit. D) Torts can either be intentional or unintentional.

A married client owns a deferred variable annuity and is reaching retirement age. They would like to annuitize the policy and start receiving a stream of income to supplement their other retirement resources. In particular, they would like a fairly large payout, but they are also concerned about their dependent spouse and providing for their needs. Which payout scheme is least appropriate? A) Life with period certain B) Life-only C) Life with fixed amount D) Life with survivor

General Principles Exam Questions Flashcards

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