CFP 512 Practice Exam Questions

What is the minimum for the deductible on a high deductible plan for an individual and a family?

At least $1,200 for an individual and $2,400 for a family

(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) Neither I nor II B) Both I and II C) II only D) I only

B) Both I and II

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) a forfeiture of premium clause. B) an incontestable clause. C) the grace period. D) a disability waiver of premium rider.

D) a disability waiver of premium rider. 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.

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 level. C) eligible for Medicare. D) indigent or impoverished.

D) indigent or impoverished.

The insurance industry is regulated primarily by A) the federal government. B) the Supreme Court. C) the National Association of Insurance Commissioners (NAIC). D) the individual states.

D) the individual states. The answer is the individual 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.

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) I, III, and IV B) II and III C) I, II, and IV D) IV only

A) I, III, and IV

Which of the following refers to the process of evaluating and classifying the risk level of applicants for insurance? A) Underwriting B) Actuarial science C) Adverse selection D) Utilization review

A) Underwriting

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 and II B) I, III, and IV C) II, III, and IV D) I, II, and IV

B) I, III, and IV

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 only B) III only C) I, II, and III D) I and II

B) III only

Which one of the following phrases describes an unintentional tort? A) A criminal act B) A libelous attack C) A civil, negligent wrong D) An act of vengeance

C) A civil, negligent wrong

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 only D) I and II

C) 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.

The 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) dressing. C) hearing. D) eating.

C) hearing.

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) II only C) I and III D) II, III, and IV

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.

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

A) $36,500 The answer is $36,500. This is the correct computation: Payment = (Amount of insurance owned / Amount of insurance required×Loss)−Deductible Amount of insurance required = $240,000 x .8 =$192,000 ($120,000 / $192,000×$60,000)−$1,000=$36,500

Which of the following generally is NOT covered by employment practices liability insurance? A) Government-imposed fines and penalties B) Discrimination in the workplace C) Sexual harassment D) Wrongful termination

A) Government-imposed fines and penalties

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

A) I, II, III, and IV

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

A) I, III, and IV

Which one of the following is a CORRECT statement about a funded nonqualified deferred compensation plan that funds future benefits with real estate and is not currently taxable to plan participants? A) It must be subject to a substantial risk of forfeiture. B) The benefit is subject to the claims of the employer's creditors. C) The benefit must be protected by a surety bond. D) It will provide tax deferral for an employer.

A) It must be subject to a substantial risk of forfeiture. The answer is it must be subject to a substantial risk of forfeiture. To avoid immediate taxation to the participant, a funded nonqualified deferred compensation plan must be nontransferable and subject to a substantial risk of forfeiture.

Choose the method of risk management that is implemented by a homeowner who installs storm shutters. A) Reduction B) Retention C) Transfer D) Avoidance

A) Reduction

Which one of the following statements regarding coinsurance is NOT correct? A) Typical coinsurance provisions require that the plan provider pays 20% of the bills and the recipient of the care pays 80%. B) A coinsurance percentage is applied to all covered charges that are above the deductible until the maximum out-of-pocket (MOOP) limit has been reached. C) The coinsurance provision for health care plans refers to a splitting of the costs of medical care between the insurance company and the insured. D) Coinsurance is different for health care plans than for property insurance.

A) Typical coinsurance provisions require that the plan provider pays 20% of the bills and the recipient of the care pays 80%.

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, II, and IV B) I, III, and IV C) I and IV D) III only

C) I 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.

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

C) Independent agents

Which one of the following dividend options purchases a small amount of additional insurance? A) Reduced premium B) Accumulate at interest C) Cash D) Paid-up dividend additions

D) Paid-up dividend additions

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

D) The patient's condition must be expected to improve.

Mrs. Hopkins 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 Mrs. Hopkins's insurance will pay. A) $8,200 B) $9,250 C) $10,250 D) $7,000

A) $8,200 Got this question right! The answer is $8,200. The answer is calculated as follows: Total loss: $10,750 ($7,500 + $3,250) Deductible: −500 Equals $10,250 Less 20% −2,050 Insurance $8,200

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) Any funds remaining other than those meeting the federal requirements concerning the next year are forfeited to the company. C) The amount that can be contributed annually is limited for flexible spending plans. D) 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.

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. 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.

Which risk holds the greatest potential for financial loss for a homeowner? A) A liability claim B) Loss of the dwelling and contents C) Theft of contents from the dwelling D) Loss of the dwelling

A) A liability claim 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.

(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 of all sources of income for the CFP® certificant B) Resumes of principals and employees of a firm who are likely to provide financial planning services to the client C) A statement of the basic philosophy of the CFP® certificant (or firm) in working with clients D) A statement as to the method of your compensation

A) A statement of all sources of income for the CFP® certificant 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.

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, II, and IV B) I and III C) II and III D) II and IV

A) I, II, and IV 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.

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) I, III and IV B) I and III C) II only D) III and IV

A) I, 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.

Which one of the following is a correct statement about the constructive receipt doctrine? A) It may tax income that is made available but is not yet received by a taxpayer. B) It taxes payments made in the future that are based on a company's earnings. C) It prevents a deferred compensation agreement from being informally funded. D) This doctrine states that when the employee's benefit has become substantially vested or essentially equivalent to the receipt of cash, current income taxation will result.

A) It may tax income that is made available but is not yet received by a taxpayer. The answer is it may tax income that is made available but is not yet received by a taxpayer. The constructive receipt doctrine taxes income that is made available, even though the income is not actually received. The constructive receipt doctrine applies to formally funded plans, not unfunded (informally funded) plans. Unfunded plans are based on promise only. The economic benefit doctrine states that when the employee's benefit has become substantially vested or essentially equivalent to the receipt of cash, current income taxation will result.

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

A) No, the Brewsters are not eligible to establish a health savings account because they are not covered by a high deductible health plan. 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 2020, 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.

A beneficiary who receives the survivor benefits from a nonqualified deferred compensation plan is subject to which one of the following taxes? A) Ordinary income tax B) Capital gains tax C) Social Security tax D) Accumulated earnings tax

A) Ordinary income tax

Which one of the following terms is correctly defined as it applies to disability income insurance? A) The elimination period serves a purpose similar to that of a deductible. B) The presumptive disability clause states that if you cannot work in your own occupation, you are presumed to be disabled. C) 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. D) The maximum benefit period is the maximum cumulative amount an insured can receive over his or her lifetime.

A) The elimination period serves a purpose similar to that of a deductible. 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.

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

A) They require initial premiums in excess of $10,000. 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).

Which one of the following is an important reason for establishing an unfunded nonqualified excess benefit plan? A) To provide additional retirement benefits for highly compensated employees B) To reduce the employer's current tax liability C) To provide benefits for key employees in the event their employer becomes bankrupt D) To provide additional retirement benefits for rank-and-file employees.

A) To provide additional retirement benefits for highly compensated employees The answer is to provide additional retirement benefits for highly compensated employees. An important reason for establishing a nonqualified plan is to provide additional retirement benefits for highly compensated employees. Contributions to a nonqualified plan are not deductible until the plan benefits are actually received by the plan participant. Funds used by the employer to provide an unfunded nonqualified deferred compensation benefit must be available to bankruptcy creditors.

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

A) Variable universal life (VUL) 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.

The grace period provision in a life insurance policy is a period during which A) the policy remains in force following an insured's failure to pay a premium. B) the insured may reinstate a lapsed policy subject to meeting specified requirements. C) the insurer may not deny a claim because of concealment by the insured. D) an insurer may postpone payment of the cash surrender value requested by the insured.

A) the policy remains in force following an insured's failure to pay a premium.

(Case Study Question) During 2020, 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 1997. 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 longterm capital gain B) $76,000 ordinary income C) $126,000 ordinary income D) $76,000 ordinary income plus a 10% penalty

B) $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.

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) Fixed premium payments, lifetime life insurance protection, tax-deferred accumulation C) Level death benefit, increasing premium, low cash value D) High cash value, single premium, policy loans taxed as ordinary income on a last-in, first-out (LIFO) basis

B) Fixed premium payments, lifetime life insurance protection, tax-deferred accumulation 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.

Which of the following describe a characteristic of group term life insurance coverage? Provides payment of face amount to designated beneficiary at death of insured Low cost, simple to administer, and tax advantaged Seldom used because of unfavorable tax treatment Consists of individual contracts, not a master group policy A) II and III B) I and II C) I, II, and IV D) III and IV

B) I and II

(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) I, II, and IV B) I and II C) I, III, and IV D) II only

B) I and II 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.

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, III, and IV B) I and II C) I, II, and III D) IV only

B) I and II 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.

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) I and IV B) I and III C) III and IV D) II and IV

B) 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.

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

B) I 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.

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) II and IV B) I, II, and IV C) I, III, and IV D) III and IV

B) I, II, and IV 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.

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) I and II B) I, III, and IV C) I, II, III, and IV D) III and IV

B) I, 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.

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) I, II, and III B) II and IV C) IV only D) II, III, and IV

B) II 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.

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

B) Individuals who have end-stage renal (kidney) disease are eligible for Medicare regardless of their age. 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.

Which one of the following is a characteristic of term life insurance? A) It has a flexible premium and an adjustable death benefit. B) It covers the insured for a specified period of time. C) It provides guaranteed, permanent coverage for the entire term of the life of the insured. D) It provides benefits to a living insured when the policy term ends.

B) It covers the insured for a specified period of time.

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

B) Medical Payments 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.

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

B) Medigap Policy A is the most expensive and most comprehensive form of coverage. 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.

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) Home care provided by family members is excluded by Ins. Co. of Rock Wells. D) Marston Insurance Co. will cover any level of benefits following one week of hospitalization and/or skilled nursing care.

B) PILICO material specifies that adult day care qualifies for home care level benefits. 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.

Which of the following does NOT accurately describe a valid policy replacement scenario? A) Replacing one term policy with another is usually the least complex of the alternatives. B) Replacing a term policy through the policy's conversion clause is usually the best and least expensive alternative. 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.

B) Replacing a term policy through the policy's conversion clause is usually the best and least expensive alternative. 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.

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

B) The plan benefits a nondiscriminatory class of employees. 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.

Assume that an employer plans to use corporate-owned life insurance to informally fund a nonqualified deferred compensation agreement and would like to have the flexibility to invest in a number of different asset categories. Which one of the following types of life insurance should this employer choose? A) Universal life insurance B) Variable life insurance C) Whole life insurance D) Term insurance

B) Variable life insurance

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

The disability waiver of premium rider in a life insurance policy A) doubles the death benefit of the policy. B) waives the premiums only for a total disability in most cases. C) allows the insured to purchase additional insurance without evidence of insurability. D) allows the policyowner to receive a portion of the policy's death benefit during the insured's lifetime.

B) waives the premiums only for a total disability in most cases.

(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) $2,300 B) $600 C) $1,600 D) $2,500

C) $1,600 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 7.2.2

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) II only B) Neither I nor II C) Both I and II D) I only

C) Both I and II

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

C) David McCorkle is unsure if he could work in another field if his skills become obsolete. The answer is David McCorkle 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.

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) First-to-die life 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.

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) II and IV C) I, II, III, and IV D) I, II, and IV

C) I, II, III, and IV

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, II, III, and IV C) I, II, and III D) I and III

C) I, II, and III

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

C) II, III, and IV 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.

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

C) Legal object 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.

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

C) 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.

Which one of the following medical policy provisions that can limit recovery by an insured is described correctly? A) 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) Based on the medical information provided on a policy application, the exclusions clause is written to exclude specific benefits for that applicant. C) 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. D) A utilization review is used to determine if the insurance company is being charged the correct amount by providers of medical services.

C) 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. 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.

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) The policy has a $2,400 deductible. B) Kathy is considered to be 50% disabled. C) The policy has a 30-day elimination period. D) Kathy has owned the policy for less than a year.

C) The policy has a 30-day elimination period. 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.

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

C) The rules require the employee or dependent to notify the employer within 60 days of a qualifying event, such as a divorce.

Stock options give an employee (usually an executive) the right to A) sell a fixed number of shares of employer stock at a predetermined price over a stated period. B) purchase a maximum of 500 employer stock shares at a predetermined price over a stated period. C) purchase a fixed number of shares of employer stock at a predetermined price over a stated period. D) sell a maximum of 1,000 employer stock shares at a predetermined price over a stated period.

C) purchase a fixed number of shares of employer stock at a predetermined price over a stated period. The answer is purchase a fixed number of shares of employer stock at a predetermined price over a stated period. Stock options give the employee (usually an executive) the right to purchase a fixed number of shares of employer stock at a predetermined price over a stated period.

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) $26,210 B) $25,018 C) $64,189 D) $25,490

D) $25,490 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

Which statement does NOT correctly describe a concept related to nonqualified deferred compensation or stock plans? A) In a salary reduction plan, the employee elects to give up a specified portion of current compensation. B) Employee stock purchase plans (ESPPs) can be offered at a discount, unlike ISOs. C) If an employee makes a Section 83 election upon the grant of restricted stock, he or she will not be taxed when the restricted stock becomes vested. D) A disqualifying disposition with an incentive stock option (ISO) will result in ordinary income taxes, as well as FICA and FUTA taxes.

D) A disqualifying disposition with an incentive stock option (ISO) will result in ordinary income taxes, as well as FICA and FUTA taxes. The answer is disqualifying disposition with an ISO will result in ordinary income taxes, as well as FICA and FUTA taxes. ISOs, when there is a disqualifying disposition, are subject to ordinary taxes, but they are not subject to FICA or FUTA taxes.

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 the following 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 incurs no income tax consequences as a result of the loan. C) Cindy must include $25,000 in her gross income; the $25,000 is also subject to a 10% penalty. D) Cindy must include $20,000 in her gross income, but the 10% penalty does not apply.

D) Cindy must include $20,000 in her gross income, but the 10% penalty does not apply. 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 $10,000 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.

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

D) Doctrine of estoppel 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.

Which one of the following factors is a disadvantage of an incentive stock option (ISO) plan for an executive? A) Ordinary income must be recognized when the option is exercised. B) Ordinary income must be recognized when the option is granted. C) Capital gains must be recognized when the option is exercised. D) Exercise of the option may trigger the alternative minimum tax.

D) Exercise of the option may trigger the alternative minimum tax. The answer is exercise of the option may trigger the alternative minimum tax. An employee-recipient may be subject to the alternative minimum tax, since the bargain element of the option is considered to be an adjustment for purposes of the alternative minimum tax.

Which one of the following is the correct definition of a term related to risk management? A) Risk: something that causes a loss B) Moral hazard: something that increases the likelihood of risk due to indifference C) Peril: the possibility of loss occurring D) Hazard: something that increases the likelihood of a loss occurring

D) Hazard: something that increases the likelihood of a loss occurring 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.

Which of the following are life risk exposures? Death before loan repayment can be finished Spouse outliving a straight life annuitant Death or disablement of the person responsible for paying your retirement income, causing default Death before the accomplishment of financial objectives A) II and IV B) I and II C) III and IV D) I, II, III, and IV

D) I, II, III, and IV

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) II and III B) II, III, and IV C) I and IV D) I, II, and IV

D) I, II, 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.

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

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.

Which of the following is a characteristic of an employee stock purchase plan (ESPP)? Because an ESPP is not a qualified plan, the plan may discriminate in favor of highly compensated employees. No employee can acquire the right to buy more than $100,000 of stock per year, valued at the time the ESPP option is granted. The employee may be required to recognize ordinary income upon the sale of the employer stock acquired through an ESPP. A) I and III B) I only C) I, II, and III D) III only

D) III only At the date of disposition of the shares, the employee will recognize ordinary income on the basis of the lesser of (1) the fair market value (FMV) of the stock at the grant date less the option price, or (2) the FMV of the stock on the disposition date (or date of death, if sooner) less the option price. ESPP purchases are limited to a maximum value of $25,000 per calendar year.

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

D) Joanna is responsible because, as a broker, she personally bound coverage for Preston but was unable to place the coverage before the accident. 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.

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) Interest only B) Extended term life insurance C) Accumulate at interest D) One-year term life insurance (or fifth dividend option)

D) One-year term life insurance (or fifth dividend option) 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.

Which one of the following statements regarding employee stock purchase plans (ESPPs) is CORRECT? A) There is a $100,000 annual grant limit on ESPPs. B) The maximum permitted discount from fair market value is 25%. C) ESPPs require management, but not shareholder, approval. D) The holding period requirement to receive preferential capital gains treatment is two years from the grant date and one year from the date of exercise.

D) The holding period requirement to receive preferential capital gains treatment is two years from the grant date and one year from the date of exercise. The holding period requirement to receive preferential capital gains treatment is two years from the grant date and one year from the date of exercise. The annual limit for ESPPs is $25,000, and ESPPs, just like ISOs, do require shareholder approval. The maximum permitted discount from fair market value is 15%.

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) Whole life B) Annually renewable term (ART) C) Variable life D) Variable universal life (VUL)

D) Variable universal life (VUL) 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.

Which one of the corporations in the following situations would most likely benefit from a supplemental executive retirement plan (SERP)? A) Z Corporation wants to provide a tax-free death benefit of $500,000 to a key employee. B) W Corporation has $50,000 it would like to set aside as a severance benefit for a key employee. C) Y Corporation has a president to whom it would like to pay a bonus. D) X Corporation would like to establish an unfunded plan that will provide benefits for a vice president in excess of those provided by the company's qualified plan.

D) X Corporation would like to establish an unfunded plan that will provide benefits for a vice president in excess of those provided by the company's qualified plan. A supplemental executive retirement plan is a funded or an unfunded plan providing benefits for select employees in excess of those provided by the employer's qualified retirement plan.