Financial Planning (risk managemnt)
All of the following statements regarding health insurance are correct except
individual health insurance premiums are deductible to the extent they exceed 2% of adjusted gross income. Individual health insurance premiums are deductible to the extent that they exceed 7.5% of adjusted gross income.
When evaluating medical insurance coverage, which of the following factors should be considered? Whether the doctors and hospitals the client wishes to use are in network. Total projected out-of-pocket costs including deductibles, copays, and maximum out-of-pocket expense limits.
Both of these factors should be considered.
Which of the following statements concerning short-term and long-term disability income plans is CORRECT? Short-term disability income contracts commonly contain an elimination period, which is the length of time a covered employee must be disabled before becoming eligible for benefits. Long-term disability policies may include coverage for both sickness and accidents.
Both statements regarding short-term and long-term disability are correct.
Which of the following is a counted asset for determining Medicaid eligibility?
Checking accounts are counted assets for determining eligibility for Medicaid. The other three assets are not counted.
All of the following are mandatory benefits under Medicaid except
Chiropractic services are optional, not mandatory, Medicaid benefits.
Which one of the following statements accurately describes a provision of the health insurance continuation coverage requirements of COBRA?
Employers with 20 or more full-time employees normally have to offer this extended health insurance coverage to terminated employees. In most cases, employees may maintain group health insurance benefits for up to 18 months after leaving work. The Department of Labor identifies several events that may allow for COBRA coverage, including voluntary or involuntary termination of the covered employee's employment for reasons other than gross misconduct and reduced hours of work for the covered employee.
Which of the following organizations provides a broad range of health services to a group of subscribers for a fixed monthly fee and involves a capitation fee?
HMOs provide health care on a prepayment basis. Blue Cross and Blue Shield organizations provide health insurance and handle both the administrative and claims processes (third party adminstrator). Self-insurance is another method of insurance in which a company hires a third-party administrator to perform all the required plan functions. Private health insurance is provided by commercial insurance companies, independent plans, and Blue Cross and Blue Shield organizations.
Which of the following statements regarding Medicare Part B are CORRECT? Coverage is mandatory for anyone enrolled in Part A. Insureds must pay a monthly premium. Insureds must satisfy an annual deductible.
Statement I is incorrect. Enrollment in Part B is voluntary, although enrollment is on an opt-out, not an opt-in, basis.
Under a Section 1035 exchange, which of the following policies may be exchanged on a tax-free basis? An endowment policy exchanged for another endowment policy, in which the beginning date for regular payments is no later than the original contract qualified long-term care contract, or annuity contract One annuity contract exchanged for another annuity contract A life insurance policy exchanged for another life insurance policy (on the same insured), annuity, or endowment contract An annuity contract exchanged for a life insurance policy
Statement IV is not an eligible tax-free exchange under Section 1035. A taxable event occurs if an annuity is exchanged for a life insurance policy or endowment contract.
Which of the following items are covered, but are subject to a specific dollar limit, under the personal property provision of a homeowners policy? Furs Jewelry Coin collections
The answer I, II, and III. All of these items have dollar limits under the standard homeowners policy. To increase this limit to an agreed-upon value, items need to be scheduled or endorsed.
Assume Greg dies of a heart attack, and Jackie receives the $50,000 death benefit provided by his group life insurance policy and $150,000 from his individually owned universal life insurance policy as lump-sum payments. What amount must Jackie include in her gross income?
The answer is $0. When Greg dies, Jackie receives a $50,000 death benefit under his 20-year level term policy and a $150,000 death benefit (two times his salary of $75,000) under his group life policy. Because she receives the benefits in one lump sum, they are not included in her gross income.
In the event of his death, Jim wants to provide funding for his daughter Lauren, 4, to attend four years of college, starting at age 18. The current annual cost of tuition is $25,000. Assume inflation of 6.5% and after-tax earnings of 6%. If Jim wants to have enough life insurance to assure adequate funds for Lauren when she begins college (should he die today), approximately how much insurance should he purchase for this need alone? (Round your answer to the nearest dollar.)
The answer is $107,568. The solution to this requires using the three-step process used in education funding. Step 1: 14, N; 6.5 I/YR; 25,000, +/-, PV, and solve for FV = 60,371.85 Step 2: Set for BEG mode; 4, N; 1.06 / 1.065 = .9953 - 1 = -.004695 × 100 = -0.4695, I/YR; 0, FV (to clear it out), 60,371.85, +/-, PMT, and solve for PV = 243,201.44 Step 3: 14, N; 6, I/YR; 243,201.44, FV, 0, PMT (to clear it out), and solve for PV = 107,568
Loretta has a $200 deductible and a 20% coinsurance for her medical expense plan. Her first medical bill of the year is $1,200. Loretta will pay the $200 deductible. How much money must she pay in addition to the deductible?
The answer is $200. Her first bill of the year is $1,200. She pays her $200 deductible and will still owe 20% of the $1,000 left over after the deductible is subtracted ($1,200 - $200 (deductible) = $1,000 × 20% coinsurance = $200).
The Smith family has a major medical policy that provides for the following: $250 per person deductible (3-person maximum) $5,000 maximum out-of-pocket 80/20 coinsurance During their vacation, the Smiths were involved in an automobile accident in which all four family members were hurt. Each person incurred medical expenses of $7,500. How much will the insurance company pay in reimbursing the Smiths for their injuries?
The answer is $25,000. The Smith family will have to pay $5,000. Recall, the deductible is limited to three people. The insurance company will pay the remainder of the claim, or $25,000.
Miguel purchased a $100,000 annuity and, based on his life expectancy, the insurance company determines he could anticipate 20 years of payments of $750 per monthly. What part of each monthly payment is taxable?
The answer is $333.33. Part of each $750 will be taxable, and part will be a nontaxable return of capital. The nontaxable amount is determined as follows: 750* 100,000/($750×12×20) = $750×0.5556=$416.67 For each $750 payment, $416.67 will be a nontaxable return of capital and $333.33 will be taxable.
Daniele has a universal life insurance policy with the Option B death benefit. The face amount is $500,000, and the current cash value is $225,000. The beneficiary is her son, Richard. If Daniele dies today, what amount will Richard receive as a death benefit?
The answer is $725,000. Under a universal life insurance policy with the Option B death benefit (also known as the increasing death benefit option), the death benefit is the face amount of the policy plus the cash value. Richard will receive $725,000 ($500,000 + $225,000).
Which of the following is the correct period of continuation coverage for an employee who voluntarily terminates employment under COBRA?
The answer is 18 months. Under COBRA, the required period of continuation coverage following termination of employment, whether voluntary or involuntary, is 18 months.
Under HIPAA, a chronically ill person is unable to perform _____ activities of daily living (ADLs) for a period of at least _____ days.
The answer is 2, 90. Under a qualified long-term care policy, a chronically ill person is expected to be unable to perform, without substantial assistance from another person, two ADLs for 90 days.
According to Medicaid law, how many months long is the look-back period for asset transfers to others?
The answer is 60 months. Medicaid law includes a provision defining a look-back period of 60 months for assets transferred to others (usually adult children) designed to impoverish the donor to become eligible for Medicaid. If a transfer is made within this 60 month look-back period, the applicant is ineligible for Medicaid benefits for a length of time equal to the amount transferred divided by the monthly cost of nursing home care for the region.
Which of the following rating agencies specializes in rating only insurance companies?
The answer is A.M. Best. The A.M. Best Company is the oldest of the rating services, rating over 4,500 insurance companies.
Which of the following statements regarding fixed annuities is CORRECT? The funds are held in the insurance company's general account, and the insurance company bears all of the investment risk. The funds are held in subaccounts, and the owner of the fixed annuity bears all of the investment risk. The fixed annuity is designed for a conservative investor who is more concerned with safety of principal than keeping up with inflation.
The answer is I and III. The fixed annuity pays a specified (or fixed) interest rate over a given period and provides more security of principal than a variable annuity, but it does not offer the potential for growth. The funds are held in the insurance company's general account, and the insurance company bears all of the investment risk.
Which of these types of life insurance policies pay a death benefit only if the insured dies during a specific time period? Term life insurance Ordinary life insurance Limited-pay life insurance
The answer is I only. Only a term life insurance policy pays a death benefit only if the insured dies within a specified period. In the case of term life insurance, the insured must die before the term expires for the beneficiary to collect the death benefit. Ordinary life and limited-pay life policies are types of permanent life insurance.
Which of the following universal life options pay a level death benefit? Option A Option B
The answer is I only. Option A pays a level death benefit. Option B provides an increasing death benefit, which is the net amount at risk plus the cash value.
Personal risk exposures that can be covered by life insurance include premature death before a debt is repaid. premature death before children's education is paid. the spouse without a retirement benefit outliving the spouse who is receiving a straight life annuity pension payout. premature death prior to funding the family's financial goals.
The answer is I, II, III, and IV. All of these are personal risk exposures that can be covered by life insurance.
When evaluating life insurance needs, which of the following factors should be considered by a married person with children? The length of time until Social Security or other benefits will be available to the surviving spouse The duration of financial support for the surviving spouse Whether the surviving spouse and children have the financial resources needed to avoid financial hardship Whether adequate financial resources are available to the children to pay for higher education costs
The answer is I, II, III, and IV. All of these factors should be considered. Another factor is whether the surviving spouse will be self-supporting at a level that will allow for a satisfactory standard of living.
Which of the following persons are eligible for COBRA? A child who ceases to be an eligible dependent A former spouse after a divorce from a covered employee An employee who changes to part-time status A dependent child of a deceased worker
The answer is I, II, III, and IV. All of these persons qualify for COBRA coverage.
Which of the following persons are eligible for COBRA coverage? Employee converting from full-time to part-time status Employee terminated for incompetence Spouses and dependents of a deceased employee Employee no longer able to work due to permanent disability
The answer is I, II, III, and IV. All of these persons qualify for COBRA coverage. In statement II, the employee was terminated for incompetence. Therefore she would be eligible for COBRA. Had she been terminated for gross misconduct, this would not have been the case.
Which of the following statements concerning the cost of long-term care and Medicare are CORRECT? Medicare pays for a limited amount of skilled nursing care. Medicare will pay 100% of the first 20 days of skilled nursing care. After 20 days, Medicare will pay everything over a specified amount per day for 80 days of skilled nursing care. Medicare benefits for long-term care are subject to substantial limitations.
The answer is I, II, III, and IV. All of these statements are correct. Medicare will pay for some skilled nursing care, but these benefits are subject to substantial limitations.
Which of the following statements regarding different types of annuities is CORRECT? The owner of a variable annuity contract directs the investment of the contract's cash value among subaccounts and bears the investment risk. The variable annuity prospectus contains all of the variable annuity's investment choices as well as the fees, expenses, investment objectives, investment strategies, risks, performance, and pricing for each investment choice. A bonus annuity may offer a bonus in the form of a credit that may be added to the initial premium (investment). An equity-indexed annuity (EIA) is a specialized type of annuity whereby the insurance company credits the contract owner with a return that is based on changes in an equity index, such as the Standard & Poor's 500 Index.
The answer is I, II, III, and IV. In a variable annuity, the owner of the contract directs the investment of the contract's cash value among subaccounts and bears the investment risk. Any financial planner who solicits or presents a variable annuity to a client should read and understand the variable annuity prospectus. The prospectus contains, but is not limited to, all of the variable annuity's investment choices as well as the fees, expenses, investment objectives, investment strategies, risks, performance, and pricing for each investment choice. Any type of annuity that offers a credit based on a percentage of the premium paid is considered a bonus annuity. EIAs combine the features of traditional insurance products (e.g., guaranteed minimum return) with those of a security (e.g., returns linked to equity markets).
Which of the following statements concerning the cost of long-term care and Medicare are CORRECT? Medicare pays for a limited amount of skilled nursing care. Medicare will pay for the first 20 days of skilled nursing care. After 20 days, Medicare will pay everything over a specified amount per day for 80 days of skilled nursing care. Medicare benefits for long-term care are subject to substantial limitations.
The answer is I, II, III, and IV. Medicare will pay for some skilled nursing care, but these benefits are subject to substantial limitations. For options II and III, a hospital admission of three days is required.
Which of the following characteristics of life insurance contracts create favorable tax treatment? Death benefits paid to a beneficiary are not usually taxable as income. Income taxes on investment gains are tax-deferred. The earnings on the cash value are not taxed during the accumulation period.
The answer is I, II, and III. All of these are income tax characteristics of a life insurance policy. Generally, such a policy is accorded favorable tax treatment under law.
Which of the following statements regarding the disadvantages of annual renewable term life insurance are CORRECT? Term life insurance does not develop cash values or a savings plan. Term life insurance becomes increasingly uneconomical as the policyowner grows older. At the end of a stipulated period of time, the policyowner may be declined for renewal coverage. Initially, term life insurance has a higher premium than whole life insurance for the same amount of coverage.
The answer is I, II, and III. Initially, term life insurance has a lower premium than whole life insurance. Over time, however, the cost of a term life insurance policy will far exceed that of a whole life policy with the same face amount of coverage.
Which of the following are features of the Medicaid program? Provides health care benefits for the indigent and impoverished Administered by the states with financial assistance from the federal government Includes a provision defining a look-back period of 60 months for assets transferred to others designed to impoverish the donor to become eligible for Medicaid Administered by the federal government
The answer is I, II, and III. Medicaid provides health care for low-income individuals. The program was established by the federal government, which also set up the regulations and minimum standards for eligibility. However, the Medicaid program is administered by each individual state. The states remit payments to eligible participants and are partially reimbursed by the federal government.
Which of the following typically are enacted by the state legislative branch of government to regulate insurers? Laws that a foreign company must follow to obtain a license Laws that set forth the standards of solvency for insurance companies in that state Laws that govern the conduct of insurers in that state Laws that determine the meaning of policy terms
The answer is I, II, and III. Options I, II, and III are definitely within the purview of the legislative branch of state governments; however, policy terms are defined by the insurance companies. Courts will interpret any ambiguity in terms against the insurance company, but the company defines its own terms.
Which of the following are important when selecting an insurance producer? Competence Training Specialization Length of service with the company
The answer is I, II, and III. Options I, II, and III, along with experience, inclination to service, education, and a good reputation, are important when selecting an insurance producer. The length of time with a single insurance company may indicate nothing more than the ability to keep one's job. Experience, which should be sought in an insurance producer, is intentionally developed expertise.
Which of the following statements regarding variable universal life insurance is CORRECT? This policy contains investment options and no minimum guaranteed rate of return. Planners must have state variable insurance and securities licenses to sell variable universal life insurance. Cash values can decline to zero, causing the policy to lapse unless additional premium payments are made. Variable universal life insurance policies are suited for individuals with lower risk tolerances and investment experience.
The answer is I, II, and III. Variable universal life insurance policies are suited for individuals with higher, not lower, risk tolerances and investment experience.
Which of the following are requirements of an insurable risk? A large, homogenous exposure to loss so as to adequately make reasonable prediction of the loss Economically feasible premium Catastrophic loss Calculable chance of loss
The answer is I, II, and IV. Insurers wish to avoid all catastrophic losses.
Which of the following statements concerning term life insurance is CORRECT? The convertible feature of a term life insurance policy permits the policyowner to exchange the term contract for a contract of permanent life insurance within a specified time without evidence of insurability. If the term life insurance policy is converted, the insured's attained age may determine the premium rate. Term life insurance provides life insurance protection for a limited period only. The face amount of the policy is payable if the insured dies during the specified period, and a reduced amount is paid if the insured survives. The premium for term life insurance is initially lower because most term contracts do not cover the period of old age when death is most likely to occur and the cost of insurance is high.
The answer is I, II, and IV. Statement III is incorrect because nothing is paid if the insured survives the period specified in the term life insurance policy.
Which of the following types of Medicaid assets generally count when calculating one's eligibility for Medicaid? Checking and savings account Life insurance with a face amount of under $1,500 Certificates of deposit Stocks and bonds
The answer is I, III, and IV. Life insurance with a face amount under $1,500, one motor vehicle, personal property and household belongings, and one's primary residence with some limitations generally do not count when calculating eligibility for Medicaid.
Which of the following is important when selecting an insurance producer? Length of service with the company Professional designations earned Inclination to service Production awards earned
The answer is II and III. Options II and III, along with competence, experience, specialization, and a good reputation, are important when selecting an insurance producer. The production awards earned are an indication of sales ability but not necessarily what should be sought in an insurance producer. The length of time with a single insurance company may indicate nothing more than the ability to keep one's job. Experience, which should be sought in an insurance producer, is intentionally developed expertise.
Which of the following statements regarding Medigap insurance is CORRECT? Medigap policies may duplicate some benefits provided by Medicare. All standard Medigap policies must include at least some of cost of the first three pints of blood.
The answer is II only. All standard Medigap plans must include at least some of the cost of the first three pints of blood. Medigap policies may not duplicate benefits provided by Medicare.
Which of the following statements regarding Medigap plans are CORRECT? Medigap policies may duplicate benefits provided by Medicare. 10 approved plans are available.
The answer is II only. Medigap policies may not duplicate benefits provided by Medicare.
Which of the following are examples of risk reduction? Decreasing insurance deductibles Moving from a high-risk neighborhood Maintaining a safe rate of speed while driving Installing dead bolt locks in a residence
The answer is II, III, and IV. Options II, III, and IV are all methods of reducing risk because, while the potential for loss to the individual remains, it is lessened. Option I is a form of risk transfer because by lowering one's deductible, more risk is transferred to an insurance company.
Claire, 49, owns a life insurance policy. Her basis in the policy is $50,000, and the cash value is $75,000. The policy is not a modified endowment contract. Claire is dissatisfied with the policy and is interested in surrendering it or exchanging it for another financial product, but she does not want to incur an income tax liability. Which of the following transactions would allow Claire to accomplish her goal? Surrender the policy for $75,000 in cash and purchase another policy Exchange the policy for another life insurance policy Exchange the policy for a variable annuity Exchange the policy for a qualified long-term care insurance policy
The answer is II, III, and IV. Statements II, III, and IV describe transactions that can be accomplished under Section 1035 of the Internal Revenue Code without recognizing any gain or loss. Statement I (surrendering the policy for cash and purchasing another policy) would result in taxable income of $25,000.
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).
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.
Which of the following are important when selecting an insurance company? Competence Training Ratings by the ratings companies History
The answer is III and IV. Options III and IV, along with the NAIC Watchlist, the size and age of the company, operating ratios, persistency, average policy size, lines of business, investment returns, and direct recognition, are all things one should look at when evaluating an insurance company. Competence and training are important when evaluating insurance producers, not companies.
Which of the following statements regarding business overhead expense (BOE) insurance is CORRECT? Benefits are received tax free by the business. BOE policies will cover the owner for his salary during disability. BOE insurance is designed to cover the expenses that are usual and necessary in the operation of the business, should the owner become disabled.
The answer is III only. Because policy premiums are a deductible business expense to the company, the benefits payable are taxable income to the business. Most BOE policies will cover the expenses that are usual and necessary in the operation of a business, with the exception of the owner's salary.
Which of the following government programs may pay for Harry's nursing home expenses, assuming he is indigent and requires only custodial care?
The answer is Medicaid. Medicaid may pay for custodial nursing home care if the patient is indigent. Medicare Part A pays some nursing home expenses if the patient needs skilled nursing care, but does not pay for custodial care. Medicare Part B does not cover nursing home expenses, and Medicare Part D covers prescription drugs.
Which of the following parts of Medicare is intended to provide protection for seniors who have considerable prescription drug costs and covers both generic and brand-name drugs?
The answer is Part D. Everyone covered under Medicare Part A is eligible for Medicare Part D, regardless of current income or available assets. Medicare Part A is hospital coverage, and Medicare Part B is supplementary medical insurance.
Evelyn recently turned 65 and signed up for Medicare parts A, B, and D. She is concerned with how she'll pay for the deductibles and copayments. Which policy would you recommend she purchase to manage those expenses?
The answer is a Medicare supplement policy. Medicare supplement policies are specifically designed to help manage the out-of-pocket costs not covered by original Medicare.
If the insured becomes disabled, the definition of disability in the insurance contract due to bodily injury or disease before a stated age, all premiums due during the period of total disability are suspended under
The answer is a disability waiver of premium rider. This rider protects insureds who become disabled and are unable to pay premiums. The policy and benefits will continue as if the premiums have been paid by the premium payer.
A periodic annuity payment that is guaranteed to pay a set amount is a feature of
The answer is a fixed annuity. To guarantee fixed payments to the annuitant, the insurer invests the premiums during the accumulation period in bonds, mortgages, and other fixed-income securities with a guaranteed return.
Which of the following insurance concept definitions is CORRECT?
The answer is an aleatory contract is one in which one party might receive benefits substantially greater in value than the benefits received by the other party. Insurance is an aleatory contract. As such, one party (the insured) may receive benefits substantially greater in value than those of the other party (the insurance company).
Which of the following statements regarding tax-qualified, long-term care insurance is CORRECT?
The answer is benefits are generally excludible from taxable income, subject to a $380 per-day limit (2020). Deductions for premiums are limited on the basis of age and adjusted gross income for taxpayers who itemize their deductions.
Which of the following statements regarding the contestable clause of a life insurance policy is CORRECT? Generally, the clause prevents the insurance company from contesting the validity of the policy after it has been in force for two years. The validity of the contract cannot be questioned after the stated period except in limited situations.
The answer is both I and II. Both of these statements are correct.
Select the common characteristics of preferred provider organizations. Participating providers are paid on a fee-for-service basis as their services are used. Covered individuals have financial incentives to receive treatment within the preferred provider network.
The answer is both I and II. Both statements I and II are correct.
Which of the following statements regarding the misstatement of age clause in a life insurance policy is CORRECT? The face amount of the policy will be adjusted to the amount of insurance that the premium paid would have purchased based on the insured's correct age. In many cases of misstatement of age, insureds understate their age to reduce the premiums.
The answer is both I and II. By understating their age, insureds could reduce life insurance premiums. The misstatement of age clause provides that if a misstatement of the insured's age is discovered after the policy is issued, the insurance company can adjust the face amount of the policy to an amount that the premium would have purchased had the insured's age been stated correctly.
Medicare Part D is intended to provide protection for seniors who have considerable prescription drug costs and covers: generic drugs brand-name drugs
The answer is both I and II. Medicare Part D covers both generic and brand-name drugs.
Which of the following are common characteristics of preferred provider organizations (PPOs)? Participating providers are paid on a fee-for-service basis as their services are used. Covered individuals have financial incentives to receive treatment within the PPO.
The answer is both I and II. Participating providers are paid on a fee-for-service basis as their services are used, and covered individuals have financial incentives to receive treatment within the PPO.
Noncancelable disability income insurance policies are different from guaranteed renewable disability income insurance policies because noncancelable disability income policies
The answer is cannot have a premium change. A noncancelable disability income insurance policy is a continuous term contract guaranteeing the right to renew for a specified period with a guaranteed premium. Therefore, all noncancelable disability income policies are also guaranteed renewable. Guaranteed renewable disability income contracts allow for automatic renewal but permit the insurance company to raise the premium for an entire class of insureds. Noncancelable policies are more expensive than guaranteed renewable policies.
What of the following types of life insurance have historically been used as mortgage protection?
The answer is decreasing term life insurance. Decreasing term life insurance features a level premium with a decreasing death benefit and has historically been used for mortgage protection because the death benefit can be set up to track the declining principal balance on a mortgage.
The primary purpose of the conditions section of an insurance policy is to
The answer is define the duties and rights of both parties. The conditions section of an insurance policy outlines what is required of the insured and what rights the insured has under the policy. Statements of the insured are in the application riders or the policy itself and outline additional coverage provided. Exclusions are covered in the exclusion section.
Melissa was involved in an accident that left her unable to work for an extended period of time. She has a policy that will pay her a stated amount of income on a regular basis while she is off work. Melissa most likely has
The answer is disability income insurance. Disability income insurance is also called income replacement insurance or loss-of-time coverage.
Frank is severely injured in an automobile accident caused by another driver, Henry. At trial, the court orders Henry to pay Frank $100,000 as compensation for the pain and suffering resulting from his injuries. Which of the following types of damages for which the award was granted is CORRECT?
The answer is general. General damages compensate an injured party for intangible losses, such as pain and suffering, which cannot be measured monetarily.
Which of the following is the period during which the owner of a life insurance policy is allowed to pay an overdue premium?
The answer is grace period. The insurance remains in force during the grace period. The grace period prevents the policy from lapsing by providing the policyowner with additional time to pay an overdue premium. If the insured dies within the grace period, the company deducts the overdue premium from the death benefit payable to the beneficiary.
Which of the following renewal provisions within a disability income insurance policy provides that the right to renewal is guaranteed, and the insurer cannot increase premiums except on a class basis?
The answer is guaranteed renewable. When a disability income insurance policy is guaranteed renewable, the right to renew is guaranteed. The insurer may only increase the premiums for an entire class of policyholders.
All of the following are services provided by a long-term care insurance policy except
The answer is home cleaning service. Home cleaning services are not reimbursed or provided by a long-term care insurance policy. Other covered services include intermediate nursing care, home health care, assisted living, and hospice care.
In calculating life insurance needs, which of the following can be defined as the present value of the family's share of the decedent breadwinner's future earnings?
The answer is human life value. Human life value is the family's share of the earnings of the breadwinner. The projected value of the decedent breadwinner's future earnings is discounted to its present value to determine the human life value.
All of the following are steps in the risk management process except
The answer is identifying the insurance required to cover every risk. While insurance is certainly an option for handling risk, it is not and should not be the only option utilized to cover every risk.
Which of the following definitions best describes vicarious liability?
The answer is legal responsibilities extended to someone other than the person who caused the injury. Vicarious liability is legal responsibility extended to someone other than the person who caused the injury. For example, parents may be liable for torts committed by their children, and employers can be liable for torts committed by their employees.
All of the following are dividend options provided by a whole life insurance policy except
The answer is life income option. The life income option is a settlement option, not a dividend option.
Which of the following statements describes how the Affordable Care Act limits the definition of pre-existing conditions?
The answer is limitations can no longer be applied to pre-existing conditions. Limitations can no longer be applied to pre-existing conditions at all under any circumstances for health insurance.
Barb is the beneficiary of a $1 million life insurance policy. The insured recently died, and Barb is considering different settlement options. If her primary objective is to avoid paying any income taxes on the amounts received under the settlement option, which of the following settlement options will best meet her needs?
The answer is lump sum. Life insurance death benefits received in a lump sum are generally excluded from gross income. The payments under the other settlement options include both a taxable interest component and a tax-free principal component.
Which of the following statements regarding long-term care expenses is CORRECT? Medicare is one of the best ways to pay for long-term care expenses because the benefits can be used for up to five years. Medicaid planning (transferring assets in order to qualify for Medicaid) is an important tool that planners should use to help their clients meet their long-term care goals.
The answer is neither I nor II. Medicare is not a good option to pay for long-term care because it is limited, restrictive, and will only pay for up to 100 days of skilled nursing care. Financial advisers and planners who assist senior citizens in Medicaid planning can be convicted of a misdemeanor if they knowingly advise a client to make a transfer that results in the imposition of a look-back period.
Which of the following is NOT true regarding annual deductibles?
The answer is once the annual deductible is met in a calendar year, it does not have to bet met in subsequent years. Annual deductibles must be met each calendar year. Annual deductibles generally must be met by related expenses in the same year. Some plans allow for a carryover of the deductible to subsequent years. This is, in effect, a reward for making few claims in the first nine months of a year. Coinsurance begins after the annual deductible is met. At this point, the plan provider and the participant are responsible for their respective percentages of expenses.
You have a client who is interested in purchasing an individual disability income insurance policy. She is an attorney and, because her practice is doing well, she is not overly concerned about the cost of the policy. She does want the most favorable definition of disability for her profession. Which of the following definitions of disability should you recommend to your client?
The answer is own occupation. Clearly, the client should purchase a disability income policy including the own occupation definition. This will be the most favorable definition and make it easier to qualify for benefits.
Conner is a highly compensated emergency room doctor. Which of the following definitions of disability should Conner's disability income policy contain to offer the best protection?
The answer is own occupation. Own occupation defines disability as "the inability to engage in your own occupation." With this definition, the insured is eligible for benefits if she is unable to perform the major duties of her own occupation, even if she can still perform in some other occupation. Based on this definition and her occupation, Conner should own a policy containing the own occupation definition of disability.
Which of the following definitions of disability is important to athletes or surgeons who use their hands or feet to engage in their occupations?
The answer is presumptive disability. Presumptive disability may be extremely important for athletes or surgeons who use their hands or feet (or both) to engage in their occupation.
The pairs and sets option of loss settlement under a homeowners policy allows the insurance company to
The answer is repair or replace any part of the pair or set to its value before the loss. This option allows the insurer to repair or replace any part of a set or pair, or pay the insured the difference between the actual cash value of the pair or set before and after the loss.
Which of the following is a risk-financing technique?
The answer is risk retention. Risk retention (financing the risk oneself) and risk transfer (passing the cost of the risk to another, most commonly via insurance) are risk financing techniques. Risk reduction and risk avoidance are risk control techniques, and risk evaluation is neither risk financing nor control.
A client had a partnership long-term care policy with a benefit of $175,000. The client was forced to use the policy's entire $175,000 benefit after she was admitted to the local nursing home. The client is wondering if she will qualify for Medicaid. Her partnership long-term care policy's benefit has been depleted, and she only has $127,000 in assets. Which of the following statements is CORRECT?
The answer is she can qualify for Medicaid because she will be allowed to retain up to $175,000 in assets plus approximately $2,000. The other statements are incorrect.
All of the following are considered activities of daily living (ADLs) under the Health Insurance Portability and Accountability Act (HIPAA) except
The answer is talking. Talking is not an ADL. The other activities are all ADLs under HIPAA.
What is adverse selection?
The answer is the concept that people who expect to have claims will want insurance more than people who expect to have few or no claims. Adverse selection is the concept that those who are more likely to have claims will want insurance more than someone who may have few, if any, claims. For example, a person who believes he is very likely to develop Alzheimer's disease is more likely to want long-term care insurance than someone who has no such expectation. Insurance companies want to limit the number of high-risk candidates so the pool of insureds is more representative of the population as a whole.
Jalen purchased a term life insurance contract with a death benefit of $200,000 and a two-year suicide clause. He committed suicide less than six months after he purchased the policy. What is the required payment from the insurance company to the beneficiary?
The answer is the insurance company would return all premiums without interest to the beneficiary. The suicide clause stipulates that, if the insured commits suicide within a specified period (usually two years), the insurance company is only liable for a return of the insured's premium payments, not the policy's death benefit.
Which of the following statements pertaining to insurance concepts is CORRECT?
The answer is the law of large numbers theory asserts that with more members in a group, the probability that the actual loss experience will equal the expected loss experience is greater. A peril is the cause of a financial loss. A morale hazard is the indifference to loss that creates carelessness and increases the chance of loss because of insurance. Risk is the dispersion of actual from expected results.
Which of the following terms best describes the probability of an insured becoming disabled?
The answer is the morbidity rate. Morbidity rate is the probability of a person becoming disabled.
Alec is an insurance agent and meets with Tina to arrange for her to purchase a homeowners insurance policy. They agree to the terms, and Tina writes a check for the initial premium, but no paperwork is completed. For which of the following reasons would this verbal agreement to insure a home make it a void contract?
The answer is there was no legal form. Insurance contracts are required by law to be in writing in order to be of legal form.
Policies that pay dividends are said to be participating policies. Which of the following policies pay dividends?
The answer is whole life policies. Only participating whole life policies pay dividends that are essentially a return of premium when a mutual life insurance company has better-than-expected operating results. While universal life policies pay interest, neither universal nor term life policies pay dividends.
All of the following statements regarding partial and residual benefit payment provisions are correct EXCEPT
These provisions are structured to correspond to percentages of lost income. Barring fraud, it is highly unlikely that an individual could receive benefits after achieving 100% of their predisability income.
You have a meeting with Oscar, 26, and his wife Judith, 25, this afternoon to review their risk management plan. They have two children, two cars, a home, and a boat. Oscar is a business banker and Judith is an office manager. Which of the following statements regarding their risk management plan is CORRECT? They have a limited amount of liability exposure. They have a higher probability of becoming disabled versus experiencing premature death. Having liability insurance on their cars is more important than collision coverage. Long-term care insurance need not be an immediate priority within their risk management plan.
They 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, 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.
All of the following statements regarding Medicare Supplement (Medigap) plans are correct except
under HIPAA, Medigap policies must accept all applicants within the first nine months of when they qualify for Medicare, regardless of any pre-existing conditions.
Which of the following are features of managed care plans? Copayments Primary care physicians (PCPs) Gatekeepers Deductibles
Copayments, PCPs, gatekeepers, and deductibles are all features of managed care plans.
Which of the following individuals are eligible for coverage under Medicare? A person who is at least 65 years old A person who has been receiving Social Security disability benefits for at least 24 months A person who is receiving kidney dialysis treatments and is in end-stage renal failure
The answer is I, II, and III. All of these individuals are eligible for Medicare coverage.
Which of the following services are covered by Medicare Part B? Physicians services Outpatient hospital services Diagnostic tests and x-rays Hospice care
The answer is I, II, and III. Hospice care is covered under Part A, not Part B.
Which of the following client objectives can be satisfied by a client owning a variable universal life insurance contract, with no special additional coverages, on his life?
Variable universal life policies offer a variety of investment options inside the subaccount options. There is no guaranteed death benefit, and the cash value cannot be guaranteed to increase or attain any specific value.
All of the following statements regarding whole life insurance are correct except
Whole life insurance provides for the payment of the policy's face amount upon the death of the insured, regardless of when death occurs.
Albert is a full-time employee of the ABC Company. ABC has 18 full-time employees, eight part-time employees, and it provides a group health plan for its full-time employees. This year, Arthur turns 65 and voluntarily terminates his employment with ABC in order to retire. Assuming Arthur was covered by the ABC health plan when he retired, which of the following statements regarding Arthur's eligibility for COBRA continuation coverage is CORRECT?
Albert is eligible for up to 18 months of continuation coverage under COBRA. Termination of employment—including voluntary resignation and retirement—is a qualifying event for purposes of COBRA, as is becoming eligible for Medicare. Each of ABC's eight part-time employees counts as half an employee for purposes of the 20-employee rule, so ABC is subject to the COBRA requirements.
Which of the following is NOT a definition that would qualify an insured for individual disability income benefits?
An illness or injury that results in an inability to perform two of the five activities of daily living applies to long-term care insurance, not disability income insurance.
Which of the following best defines insurable interest?
Insurable interest exists when an interested party will suffer a financial loss if the insured loss occurs.
Larry was offered two disability policies: One was noncancelable, and the other was guaranteed renewable. Which of the following is the most likely reason he chose the noncancelable policy?
Premiums on guaranteed renewable policies, while initially lower, may increase with each renewal. While initially more expensive, the noncancelable policy's premiums never increase, and so in the long run, it may end up being less expensive.
