CFP - Insurance Planning

Bob is a key employee of BB Inc. Bob is retiring, and the company says they will sell the key man policy on Bob. Who can purchase the policy and not trigger a transfer for value problem? a. Bob b. Bob's wife c. Bob's children d. Bob's life insurance trust

Bob - only the insured can buy the policy without a transfer for value problem

Professor Smith was employed at State University. He earned $40,000 a year. The university funds a disability policy (180 elimination period) to replace 60% of his income. The policy is coordinated with SS disability benefits should the situation arise. In addition, he has a financial consulting practice that brings in $30,000 in net Schedule C income. He purchased an individual disability policy (90 day wait) based on 60% of his consulting practice income (with no SS coordination). Assume professor Smith is totally and permanently disabled and is awarded $800 per month disability payments from Social Security. What will be his gross benefit in the 5th, 6th, and 7th month from all three sources? a. $1,500; $1,500; $2,300 b. $1,500; $2,300; $3,500 c. $2,300; $2,300; $3,500 d. $2,300; $2,300; $4,300

$1,500; $2,300; $3,500 - payment would be $1,500 for month 5, month 6 would include $800 additional from SS, and month 7 the $2,000 would be offset by SS for a net of $1,200 additional so $3,500 total

Mr. Stillman purchased a $100,000 universal life policy in 1985. He elected the increasing death benefit option. Over the years, he accumulated $25,000 of cash value in the policy. After he died, an old friend told Mrs. Stillman she will lose the cash value of his policy. How much will the company pay her? a. $25,000 b. $75,000 c. $100,000 d. $125,000

$125,000 - will get death benefit plus the cash value because the policy used option B

What would Sara's basis be if she had used $10,000 in dividends to reduce the premium? a. $10,000 b. $28,000 c. $30,000 d $40,000 e. $0

$30,000 - the basis of $40,000 less the $10,000 dividends used

Sara Jane exchanges a $250,000 whole life insurance contract for an annuity contract. Sara's paid $40,000 of premium over the life of the contract. The cash value of the contract is $38,000. What is the basis of the annuity contract? a. $38,000 b. $38,000 - also client takes $2,000 ordinary loss c. $40,000 d. $250,000

$40,000 - the new basis represents the premium outlay in the insurance contract

Jay, a 57-year old employee, is provided with a $250,000 group term life insurance policy. For this coverage, Jay contributes $.20 per $1,000 of coverage per month. What amount is included in Jay's annual W-2 income if the Table 1 rate is $.43 per $1,000 of coverage per month? a. $36 b. $250 c. $432 d. $552 e. $690

$432 - (.43*200 - .20*250)*12 months

Question 2 continues. Mr. B's basis is $50,000. If he becomes disabled, the corporation will redeem the stock for $500,000. What amount of capital gains will Mr. B realize? a. $50,000 b. $250,000 c. $450,000 d. $500,000

$450,000 - capital gain will be redemption price ($500,000) - basis ($50,000)

What happens if SS pays $1,400?

$5,000 - she will only receive her base because SS will not pay the insurance policy

Shelly, age 60, bought a $100,000 limited pay whole life insurance policy with a yearly premium of $5,000. After 10 years, she decided to surrender the policy. The current values are the following: net cash value: $15,000 existing loan: $30,000 dividends used to reduce premiums: $10,000 What will her tax situation be? a. $5,000 capital gain b. $5,000 ordinary income c. $5,000 capital loss d. $5,000 ordinary loss e. $25,000 ordinary loss

$5,000 ordinary income ($15,000 net cash value + $30,000 existing loan) - ($50,000 of premiums billed - $10,000 used to pay dividends) when question uses net have to add existing loan

Dr. Quinn buys a disability policy with a base benefit of $5,000 and a SIS benefit of $1,200. Dr. Quinn is disabled and ultimately receives $600 in SS disability benefits. How much benefit will she receive form her policy when Social Security pays $600? a. $600/month b. $5,000/month c. $5,600/month d. $6,200/month

$5,600/month - the $1,200 SIS policy benefit will be reduced by $600 and will always get base plan

Linda's husband Joe died, leaving her a death benefit of $100,000 from life insurance. Linda, age 55, decided to take the payment in the form of a single life pure annuity. Interest rates are currently 9%. The payout will be $800 at the end of each month. Her life expectancy is 30 years. How much of the monthly payment is taxable if the basis of the insurance policy is $50,000? a. none - the death benefits from a life contract are tax free b. $278 is taxable income c. $522 is taxable income d. $278 is taxable income, plus a 10% early withdrawal penalty e. $644 is taxable income

$522 is taxable income - $800*12*30 = $288,000 so $100,000/$288,000 * 800 = 278 excluded which means $572 is taxable

What happens if SS turns her down?

$6,200 - she gets the full $1,200 plus the base ($6,200 total)

A few years ago Mr. Peal purchased an annuity for $150,000. It is currently worth $200,000. She has decided to retire at age 68 and annuitize, presuming a single life expectancy of 16 years. If the annuity pays $1,500 a month, how much of her monthly payment is taxable? a. $718.80 b. $781.20 c. $458.40 d. $1,041.67

$718.80 - Basis $150,000 / payout 16*12*$1,500 = $150,000 / $288,000 = .5208 excluded means .4792 included so $1,500*.4792 = $718.80

Beth, age 45, earns $100,000. She is eligible for 5 times annual income in group life insurance. Non-key employees are only eligible for 1 times annual income. If Table 1 rate is $.15 per $1,000 per month, how much income is she charged (W-2 income) for this benefit for a full year? a. $75 b. $180 c. $600 d. $900

$900 - (.15*500)*12 months

John, a sole proprietor, owns a business. Through business dealings and poor personal planning, he owns a considerable debt. His business is producing significant income for John. John, age 35, also informs you that he may get married to Wendy, age 33, who has 3 children. What type of insurance do you recommend at this time? a. joint life b. decreasing term c. straight whole life d. 10-year level term

10 year level term - he can cancel the policy or convert to whole life but still has flexibility

Tom, age 32, wants the lowest premium/level death benefit for his insurance needs over the next 20 years. Which type of insurance protection would best fit his needs? a. first-to-die b. 10-year level term with re-entry provision c. yearly renewable term d. decreasing term

10-year level term with re-entry provision - after each 10 year period he may re-qualify for another 10 years and underwriting is simple

Mr. Beaty, age 54, and Mrs. Beaty, age 52, are considering purchasing LTC insurance. Their earned income and assets are average for their age bracket. They are concerned that a lengthy period of LTC could wipe out their assets. Which of the following policies would you suggest? a. 30-day elimination period, 3-year benefit period b. 60-day elimination period, 4-year benefit period c. 90-day elimination period, 6-year benefit period d. 120-day elimination period, 6-year benefit period e. 365-day elimination period, lifetime benefit period

120-day elimination period, 6-year benefit period - the best premium and coverage for couple in their 50s considering 5-year rule and deficit reduction act

Sue, age 32, is a single mother with two children ages 6 and 8. She makes $46,000 a year. Her employer gives her two times salary (max $50,000) group life insurance. She has a minimum amount of debt but very little in the way of assets. Which of the following types of insurance is most suitable for Sue? a. 15-year level term b. universal life c. whole life d. variable universal life

15-year level term - her need is for substantial amounts of protection and can't pay high premiums with income

Tom takes a large loan against his whole life policy. He is concerned about the reduced death benefit. Which dividend option should he elect? a. paid-up additions b. extended term c. reduced paid-up d. 5th dividend

5th dividend - will buy an amount of isnurance equal to the amount of the loan

How many policies would have to be purchased if there were 3 owners if they did a cross-purchase plan? a. 3 b. 4 c. 5 d. 6

6 - n(n-1) = 3(3-1) = 6

If they have an entity purchase agreement, how should be policy be structured?

AB Corp should be the owner and beneficiary, with the coverage as 50% of the $1,000,000 valuation ($500,000)

Mr. Vick, age 60, is a widower. He does not plan to get remarried. His children are grown and on their own. As he approaces retirement, he is trying to reduce his expenses. He plans to retire in 2+ years and drop all his company beneifts. He will elect COBRA to take him to age 65 and Medicare. His other benefits including group life (3 times salary) and group disability will cease. Many years ago, he bought a $100,000 whole life policy. He has accumulated a substantial amount of dividends that are buying additional paid-up insurance. What do you suggest he do if he would like to retain some life insurance and not pay any premium? a. cash the policy in and use the proceeds to buy a single premium variable universal life policy b. use future dividends to pay the premium in full c. each year surrender enough existing paid-up insurance and stop paying premiums d. elect non forfeiture provision - reduced paid-up

Elect the nonforfieture provisoin - reduced paid-up - the death benefit will be reduced, and premiums cease

Qualified long-term care policies have all of the following characteristics except which of the following? Must be noncancellable Limited premium deduction based on age (only if itemizing) Must provide skilled and Alzheimer's care. There is no daily limit for skilled care only

I and III - HIPPA requires LTC policies to be guaranteed renewable no requirement but could be noncancellable. Benefits received tax-free subject to dollar cap ($190/day)

Dr. Hill (a dentist) has given you a list of employee benefits. Which of the following perks can he provide tax-free to his employee? Occasional theater tickets 50% off on dental work $100,000 group life insurance Group disability insurance up to 50% of salary

I and IV - excludable amount with respect to services is 20% to employees

Paul has an incurable disease and a maximum life of expectancy of 2 years. He would like to live out his remaining days seeing the world. He has a life insurance policy with a death benefit of $500,000 and $40,000 of cash value. A viatical settlement company has offered him $325,000 in cash. If he sells the policy and the viatical company pays 8 more premiums of $4,000 each before Paul dies, which of the following is true? The $325,000 paid to Paul is received tax-free $285,000 ($325,000 paid less the $40,000 cash value) is taxable to Paul The $500,000 death benefit is tax-free to the viatical company $357,000 of the death benefit is tax-free to the viatical company

I and IV - when the $500,000 is paid as death benefit to company, the basis becomes $357,000 and difference of $143,000 is taxed as ordinary income to viatical company

Ted's parents bought a $50,000 life insurance policy when he was age 2. Now at age 25, he is the owner of the policy. It has $10,000 of cash value. Ted is planning to get married shortly. He wants to know what his options are. He can cash it in for $10,000 (probably partially taxable) He can exchange the policy for a larger face value (tax-free exchange) with proof of insurability He can roll the cash value into an annuity (tax-free exchange) He can turn the cash value into a single life immediate annuity (tax-free payout) He can use the extended term non forfeiture option

I, II, III and V - answers II and III are 1035 exchanges and answers I and V are non forfeiture options. answer IV is incorrect

Which of the following are true about HSA distributions? HSA distributions can be used to pay the premiums for qualified long-term care insurance HSA distributions not used for qualified medical expenses are subject to a 20% penalty unless the individual dies, is disabled, or reaches the age of Medicare eligibility Money left in an HSA account at age 65 (or older) can be withdrawn tax-free for any purpose without penalty HSA distributions taken to pay qualified medical expenses are tax-free

I, II, and IV - money left in HSA at age 65 withdrawn for anything other than health care is taxed at ordinary income

Which insurance type policy premiums are an eligible expense under an HSA plan? Qualified long-term care insurance premium contracts COBRA premiums FSA premiums Medicare premiums

I, II, and IV - when you apply for Medicare, the HSA can pay the Medicare premium, also can pay for COBRA and LTC premiums

Which of the following are life insurance riders? Disability Waiver Provision - Company agrees to waive all premiums due after the insurance has become totally and permanently disabled Conversion Provision - Insured is granted option to exchange term contract for some type of permanent insurance without having to prove evidence of insurability Accidental Benefit Provision - If the death of the insured is caused by an accident, an additional sum equal to the face value of the policy will be paid Guaranteed Insurability - Insured may purchase additional amounts of insurance at stated intervals without providing evidence of insurability

I, III and IV - Conversion provision is not a rider it is a standard contract provision

What are the reasons an insurance company would send an owner a 1099? The dividends were being held under the dividend option accumulate with interest The dividends were being held under the dividend option paid-up additions The owner cashed in the policy with a basis greater than the cash value The policy was a MEC and the owner made a withdrawl The whole life policy was a MEC and dividends were used to reduce premiums

I, IV and V - interest is taxable but not in answers II and III

What are similarities and differences between FSAs and HSAs? FSAs are used for medical reimbursement but also dental and vision, but HSAs are for medical only FSA unused funds are lost when the plan year is over, whereas HSA unused amounts are not lost

II only - HSA medical expenses include medical, dental, and vision reimbursement

Which of the following are true about what Medicare will cover in regards to long-term care? It will pay up to the first 80 days of skilled care During the first 20 days, co-payment is available A hospital stay of 3 days consecutively is necessary to qualify for coverage The care needed must be defined to be skilled care More than 30 days can lapse between the hospital stay and admittance to a skilled nursing facility

III and IV - coverage up to 100 days, first 20 paid in full. Answer V is wrong generally less than 30 days

Steve is married with two children. Steve works TTI Inc. which has 50 employees. The company offers an HMO plan. If Steve divorces his wife, which of the following is true if he has family coverage under the HMO? He will get 18 months of COBRA coverage His ex-wife will get 18 months of COBRA coverage His ex-wife will get 36 months of COBRA coverage His children will get 36 months of COBRA coverage There is no COBRA under an HMO plan

III only - with an employer-provided HMO plan, a divorced spouse will get 36 months of COBRA coverage

Larry Homes works for ABC. He has group life insurance coverage of $200,000. If he terminates his employment with ABC, what are his group life options if he is un-insurable? Convert to a 20-year term insurance policy Continue the group life coverage Convert to a $250,000 ordinary life insurance policy Convert to a $200,000 universal life insurance policy

IV - new plan may be any type of permanent plan but not term. Limited to amount of group term insurance so III is incorrect

Under the endorsement form of split-dollar life insurance, which of the following is true concerning the insured's wife? She is the owner of the policy She is the primary beneficiary of the policy She is the premium payor She is like a secondary beneficiary

IV - under the endorsement form, the owner and premium payor is the corporation. Corporation is primary beneficiary, so insured's wife is functionally a secondary beneficiary

Bill and Jack own BI Industries, a corporation. They are considering adopting a cross-purchase buy-sell arrangement. Bill's wife is Lynn, and Jack's wife is Jane. Who should own and be the beneficiary of the policy on Bill's life. a. Jack should own the policy and should be the beneficiary b. Bill should own his policy and should be the beneficiary c. Jack should be the owner, and Jane should be the beneficiary d. Bill should be the owner, and Lynn should be the beneficiary

Jack should own the policy and should be the beneficiary - in a cross-purchase agreement, surviving owner buys out the deceased owner so needs to be both owner and beneficiary to keep policy out of Bill's estate and out of corporation's assets

Lisa and Penny own a business together, LP Inc. They plan to sell the business and retire. LP Inc. owns two policies - one on Lisa and one on Penny. Lisa and Penny want your recommendation on what to do with the policies. What do you suggest? a. LP Inc. should keep the policies b. Lisa and Penny should buy their own respective policies from LP Inc. c. Lisa should buy Penny's policy from LP Inc. and Penny should buy Lisa's policy d. Lisa's policy should be transferred to a family member or her irrevocable trust, and Penny should do the same thing with her policy

Lisa and Penny should buy their respective policies from LP Inc. - answer a is ineffective and answers c and d violate transfer for value rules

Other than LTC insurance, what other means provide nursing home care coverage for longer than 100 days? a. Medicare b. Medicaid c. Medicare supplemental insurance d. Medigap insurance

Medicaid - Medicare limited to 100 days and others would only provide rehabilitation stay not nursing home

Mr. A is a 50% owner with Mr. B in AB Corporation. They have a cross-purchase buy-sell agreement. How should the policy on Mr. A's life be structured if the corporation is worth $1,000,000 a. Mr. B (owner); Mr. B (beneficiary) $500,000 (coverage) b. Mr. B (owner); Mr. B (beneficiary) $1,000,000 (coverage) c. Mr. B (owner); Mrs. A (beneficiary) $500,000 (coverage) d. AB Corp (owner); AB Corp (beneficiary) $500,000 (coverage) e. AB Corp (owner); Mr. B (beneficiary) $500,000 (coverage)

Mr. B should be the owner and beneficiary and coverage should be for 50% of $1,000,000 valuation ($500,000)

Which of the following is not true about employee group health insurance? a. employees may use PPO physicians or go elsewhere under a PPO plan b. employees must use the HMO gatekeeper first under an HMO plan c. HMOs emphasize cost containment d. HMOs have a fixed monthly fee e. PPOs provide medical care on a prepaid basis

PPOs provide medical care on a prepaid basis - provided on a fee-for-service basis

Sandy has her Series 6 and all applicable state licenses. Which investment can she not sell? a. variable annuity b. variable life insurance c. mutual funds d. REITs

REITs - they are tradeable securities and she would need a Series 7 to sell.

Sally has an HSA plan with a $2,200 deductible. If she incurs $2,600 of medical expenses, what will be her tax?

The HSA trustee will reimburse the $2,200 out of the HSA account tax-free, and the insurance will reimburse the remaining $400 tax-free

What distribution option is most appropriate for a retired married couple with no other source of income? a. an interest-only distribution b. a joint-life annuity c. a single-life annuity with a 10-year period certain on the spouse with the longest life expectancy d. a joint and survivor annuity

a joint and survivor annuity - a joint-life annuity is similar, but payments cease on the death of the first annuitant.

An FSA can cover which of the following? a. dependent care for a child under age 13 b. dependant care for a mentally dependant spouse c. dependant care for a physically dependent adult d. answers a, b, and c

answers a, b, and c - can be provided to (a) child under 13 or (b) taxpayer's dependent or spouse who is physically or mentally unable to care for himself/herself

Your client, age 62+, tells you he plans to retire now. He is married. His wife is 61+. He says they want to travel now because her health is worsening. If COBRA is available how would you counsel them? a. they will not get Medicare coverage until age 65 b. COBRA is only available for 18 months c. the COBRA cost could be $3,000+ per month d. apply for coverage under the Affordable Care Act

apply for coverage under the Affordable Care Act - answers a, b, and c are true however answer d is best answer according to open enrollment section

Mr. Jensen age 58, got married late in life to a younger lady. Now he is considering that he may not be able to retire until 70. She has two younger kids, 16 and 12, who wants to attend college and then go to law school or become doctors. His wife has informed him that he will have to pay for the education. He is an attorney with a reasonably successful practice. He is worried about his disability insurance. Which would give him the greatest concern? a. definition - own occupation b. guaranteed renewable c. elimination period - 120 days d. benefit amount - 50% of salary e. benefit period - to age 65

benefit period - to age 65 - answers a,c, and d are the best he can get. guaranteed renewable is a concern but benefit period greatest because he may need coverage until 70

An insurance agent makes a recommendation that his client needs $5,000 per month in individual disability benefits. The client agrees to buy the policy. The agent will need to obtain all the following information for the insurance underwriter except which of the following? a. client's earned income (W-2 or 1099) b. client's net worth c. client's existing disability coverage (including group disability) d. client's complete cash flow statement

client's complete cash flow statement - disability requires much more for underwriting and usually needs earned and unearned income but not full cash flow

Sandra is the CEO of a small, profitable corporation. She wants more personal life insurance, and she would like the corporation to pay the premium. Which policy would benefit her the most? a. endorsement type split-dollar b. collateral assignment type split-dollar

collateral assignment type split-dollar - Sandra will own the policy, the premiums paid by the corporation are assigned back but any cash value above premiums will be Sandra's. This is the advantage.

Which of the following is false about HSA contribution rules? a. contributions can be made by the employer, the individual, or both b. contributions made by the employer are tax-deductible and not taxable to the individual c. contributions made by the individual are an above-the-line tax deduction for AGI d. contributions are not aggregated

contributions are not aggregated - contributions from employee and employer are not combined

Which of the following benefits is not included under VEBA? a. deferred compensation b. unemployment benefits c. legal expenses d. disability benefits

deferred compensation - benefits do not include any benefit that is similar to a pension/annuity at the time of retirement

Under which of the following employer provided plans will the employee receive benefits tax-free? a. dependent care under an FSA b. prepaid legal plan paid for by the employer c. individual disability plan paid for by employer d. group disability plan paid for by the employer

dependent care under an FSA - other answers are taxable to employee because employer deducts premiums

Bob, a CPA went through some hard economic times in his 60s. Now at age 65, his disability policy is about to expire. Unfortunately, he still needs disability coverage. What are his options? a. none b. buy a new policy c. exercise his conditionally renewable policy d. sue his agent

exercise his conditionally renewable policy - he will be able to extend coverage beyond 65 (conditionally renewable provision)

If a client opted to use one of the non forfeiture options for his $100,000 whole life policy, which one of the options allows the insurance company to use a higher mortality table than on the origianl if the cash value is $10,000? a. reduced paid-up whole life b. extended term c. one-year term d. 5th dividend option e. premium loan provisoins

extended term - puts the company more at risk than reduced paid up and insurance companies permitted to use higher mortality tables

Bud purchased a $50,000 whole life policy 10 years ago. He would like to continue the $50,000 policy for a period of time but pay no additional premiums. If he does, which option should he use? a. pure life b. one-year term c. reduced paid-up insurance d. extended term

extended term - would keep the $50,000 policy in force for a term of years

Bill (age 31) and Rita (age 35), joint owners of BR Properties, want a simple buyout policy should one of them die. Which type of policy will best fit their needs? a. 20-year level term b. annual renewable term c. second-to-die d. first-to-die

first-to-die - pays the benefit at death of either passing

Which of the following is a benefit provided by Medicare Part B? a. coverage for prescription drugs can be self-administered b. coverage for a skilled nursing home stay up to 100 days c. free preventative care services d. hospital care beyond 150 days of one stay

free preventative care services - medicare b coverage for prescription drugs limited to drugs that cannot be self-administered and others Medicare part A

Assume the prior question continues. The trial attorney had been making $240,000 a year and had a total disability benefit of $10,000 per month. Due to voice problems, his practice was suffering and his income decreased by approximately half to around $120,000 over the last year. Since completely losing his voice, the attorney's firm has been paying him $15,000 per month to do research. The insurance company has denied his claim. After you review his policy, what is your advice to him? a. he has an own occupation policy b. he has a loss of income policy

he has a loss of income policy - this disability insurer will review his earnings history and the policy should pay

Toby is considering purchasing either a whole life policy or a variable universal policy. What would be the most important reason for buying the whole life policy? a. he must pay premiums until age 100 b. he has a low risk-tolerance c. he will get premanent protection until age 100 d. he will have a cash value he can borrow should he need money

he has a low risk tolerancce - the risk tolerance is the most important factor

Your client, a trial attorney, lost his voice a year ago. He now works for a law firm doing trial research only. He is upset because his disability company will not pay for disability benefits. After you review his policy, what is your advice to him? a. he has an own occupation policy b. he has a dual definition policy c. he has a loss of income policy d. he has an any occupation policy

he has an any occupation policy - best answer because he is still a practicing attorney

Larry Jones, widower, has two children. He elected $5,000 for dependent care under his FSA. He deposited $5,000 from his January paycheck into the account and then used $420 the first month. On February 1st, he marries Jennifer Young. She is a stay-at-home mom and will take care of two young children. What happens to his dependent care fund? a. the remainder is refunded to him b. he loses the remainder c. he will have to take the remainder as compensation d. He should not have gotten married

he loses the remainder - if a single person elects to withhold funds for childcare and then gets married the same year, the remaining funds are unusable

Jack Jones, CFP, is also an insurance agent. He writes an insurance application that requires many forms. As he goes to submit the application to the carrier, he notices one of the client signatures is missing. What should he do if he knows the client wen on vacation? a. as an agent, he has implied authority, he can sign for the client b. he should try to track the client down, even if on vacation c. he should set aside the application until the client returns d. he should send the application to the client's residence by certified mail with a note to sign when the client returns

he should try to track the client down, even if client is on vacation - regulatory requirements would require client to sign, but you need to act in case of fatality

Mr. Chase, age 55, is single and in good health. He has never been married. He is an executive with a medium-sized company. The company has a 401(k). He has been deferring the maximum and the company matches 6% plus an occasional profit sharing contribution. Besides this plan, he has saved and invested out of his cash flow. He plans to retire at 62+ but before NRA. Which of his employee benefits would you counsel him on and its potential portability? a. his group disability insurance (about 30% of his salary) b. his health insurance c. his group life insurance (2x salary) d. his 401(k)

his health insurance - his real problem is he will have more than 18 months from retirement to Medicare, able to buy an ACA plan

Sally just turned age 65. If she qualifies for Social Security, which of the following is true. a. if Sally applies at age 65 for Medicare A and B, she is automatically covered b. if Sally applies at age 65 for Medicare A only, she can never apply for Medicare B later c. if Sally declines coverage at age 65, she can never apply for Medicare A or B later d. if Sally applies for Medicare B at a later date (after age 65), the coverage is automatic, and the premium is the same as age 65

if Sally applies at age 65 for Medicare A and B, she is automatically covered

If Sam purchased the policy in 1990, what would be true?

if he borrows $40,000, he will have to pay income tax on the loan plus 10% penalty if under age 59 1/2

Sam purchased a $100,000 whole life policy in 1985. He deposited $50,000 in a single premium. Today, the policy has a cash value of $90,000 and a death benefit of $130,000. Which of the following are true? a. if he withdraws $40,000, he will have to pay income tax on the withdrawal b. if he borrows $40,000, he will have to pay income tax on the loan c. the excess $30,000 of death benefits will be income taxable if he dies d. if he cashes in the policy, he will have to declare the $40,000 as income e. there is no deferral on the increase in cash value because the policy is violating the cash value accumulation test

if he cashes in the policy, he will have to declare the $40,000 as income - the policy was purchased before 1988, so MEC rules don't apply

Mark plans to buy a participating whole life policy. He is trying to make a decision on the dividend options. Which of the following is true? a. if he uses the dividends to reduce his premium, the dividends will be taxable b. if he lets the dividends accumulate with interest, the interest is taxable c. if he purchases paid-up additions with his dividends, the death benefit of the base policy will decrease d. if he buys one-year term with the dividends, the policy will expire when the dividends are too low to pay the premium

if he lets the dividends accumulate with interest, the interest is taxable - unless a MEC, dividends are tax-free. Paid-up additions will increase benefit and only the option will expire not the policy

Patricia buys a whole life policy. She pays the normal level premium. Which of the following is not true? a. She can borrow money from the contract tax free b. If she borrows money from the contract, the loan interest is personal interest and is not deductible c. if she dies, the death proceeds are income tax-free d. if she surrenders the contract, the cash value paid to her will be tax-free

if she surrenders the contract, the cash value paid to her will be tax-free - policy is not a MEC and interest on policy loans no longer deductible

Group long-term care coverage differs from individual LTC care in which of the following ways? a. individuals typically have more choice in amount and duration of benefits than employees under a group plan b. the cost of group coverage is usually more than the cost of individual coverage because individual plans are subject to medical questionnaires c. Individual coverage is easier to qualify for than group coverage

individuals typically have more choice in amount and duration of benefits than employees under a group plan - group benefits normally selected by the employer and normally applied to all employees and both subject to questionnaires

Which provision of long-term care (LTC) policy is most important? a. coverage for Alzheimer's disease b. guaranteed renewable c. custodial care d. inflation protection

inflation protection - no exclusion for Alzheimers and msut be guaranteed renewable (HIPPA) and most policies have custodial care

Mr. Adamson purchased a $250,000 universal life policy in 1985. He paid a lump sum. He has decided to increase the death benefit by $100,000. Will the policy become a MEC? a. it has always been a MEC b. It may if he has to prove insurability c. no, it retains its grandfathered status d. yes, it will become a MEC

it may if he has to prove insurability - if policy death benefit increases by any amount and the insured has to provide additional evidence of insurability, it may lose grandfathered status

Sandy only has her Series 6. Which investment can she sell? a. variable annuity b. variable life insurance c. mutual funds d. REITs

mutual funds - she can only sell the mutual funds because she does not have a variable license

Mr. Thomas is turning age 65. He is going to elect Medicare A but not buy Medicare B. Can he get a Medigap policy? a. no, the gap is too large b. yes, but it will only cover him for Medicare A c. Yes, it will completely cover him for Medicare A but will only partially pay under the B portion d. no

no - cannot buy it unless he enrolls in Medicare B

Company X takes out a group term life insurance policy on each of its employees for $100,000. It is the owner and beneficiary of the policy. Can the company deduct the premium? a. yes b. no, only for the first $50,000 of coverage c. no, not unless it charges each employee for the cost of insurance in excess of $50,000 d. no

no - the beneficary is not up to the employee, so no deduction will be allowed for cost of insurance on employee

Jane has an HSA with with a $2,300 deductible. Jane recently made a Medical claim for $3,000. The insurance carrier reimbursed her $700. Jane took a $2,300 distribution from her HSA for the remaining $2,300 for qualified medical expenses. Is the distribution taxable? a. no amount is taxable b. 65% is taxable c. 35% is taxable d. 100% is taxable

no amount is taxable - distributions used for qualified medical expenses are tax-free, 65/35 related to contributions

Mr. Williamson purchased a $200,000 universal life policy years ago with a $150,000 guaranteed option (GIO). He will exercise the $150,000 option to increase the death benefit. Will the policy become a MEC? a. it has always been a MEC b. It may if he increases the death benefit by more than $150,000 c. no, it retains its grandfather status d. yes, it will become a MEC

no, it retains its grandfather status - he is only increasing benefit by $150,000 and does not have to prove insurability

An individual in an HSA becomes eligible for Medicare. Does he/she become ineligible as a participant? a. yes, even if they enroll in Medicare b. yes, HSAs stop at age 65 c. no, they can remain an HSA participant d. no, Medicare is not an issue with HSA plans

no, they can remain an HSA participant - eligibility for Medicare does not preclude HSA contributions, only when enrolled in Medicare A and B

Mr. V (salary $90,000) has only $3,000 per month of disability benefits. The "non can" policy has a 5-year max benefit, own occupation, and a 90-day wait. What can Mr. V do to improve this or another policy without substantial changes in premium? a. purchase a policy with increased benefits payable until age 65 but change the definition to any occupation b. purchase a policy with increased benefits payable until age 65 but increase the elimination period to 120 days c. purchase a policy with increased benefits payable at age 65 but change to a guaranteed guaranteed renewable policy d. increase the benefits of the existing policy

purchase a policy with increased benefits payable at age 65 but change to a guaranteed guaranteed renewable policy - generally a guaranteed renewable policy is less expensive than a non cancellable policy

Which type of prescription drugs are not covered by Medicare Part B? a. certain oral cancer drugs b. injections at the doctor's office c. self-administered drugs d. drugs with types of durable medical equipment e. no

self-administered drugs - even if you did not know about answer d, answer c is not covered

Kate is divorced. Due to favorable settlement, she is very well off. In addition, her ex is still paying alimony. Kate enjoys investing in the stock market. She follows market considerations very closely. As part of the divorce settlement, her ex-husband has agreed to allow her to own a policy on him. What do you suggest she do? a. nothing, she is financially secure b. nothing, she does not have an insurable interest c. she should buy a variable universal life policy and pay extra premium into the policy d. she should buy a universal life policy and pay the minimum premium

she should buy a variable universal life policy and pay extra premium into the policy - if she pays extra, she can manage the sub accounts.

Beth works for B&B Interiors. The company has a contributory long-term group disability policy. Beth's benefits under the policy are $3,000 per month. If she contributes 50% of the premium due each month, what happens if she becomes disabled? a. she will only receive $1,500 of benefits tax-free b. she will receive $3,000 of benefits c. she will receive $3,000 of benefits. 50% will be taxable, and 50% will be tax-free d. she will receive $1,500 of benefits tax-free, and the company will get $1,500 of benefits (taxable)

she will receive $3,000 of benefits, 50% will be taxable and 50% will be tax-free - she is paying for 1/2 the premium with after-tax dollars, so only half will be received tax-free

A company has a formal salary continuation plan using individual diability policies. Due to cash flow problems, the company changes the plan to an informal plan (premium is a bonus to the employee). How will the insurance premiums paid and the insurance benefits be treated? a. tax-deductible premiums paid by the company, tax-free benefits to the employee b. nondeductible premiums paid by the company, tax-free benefits to the employee c. nondeductible premiums paid by the company, taxable benefits to the employee d. tax-deductible premiums paid by the company, taxable benefits to the employee

tax-deductible premiums paid by the company, tax-free benefits to the employee - premiums paid and benefits paid work opposite (if one is tax-deductible and not taxable to employee than benefits are taxable)

If Frank had purchased a $500,000 policy on Howie with a single premium (MEC policy) and Howie died, how would the death benefits be treated? a. subject to income tax b. subject to income tax plus a 10% penalty c. tax-free

tax-free - death benefits from MEC contracts are tax-free. Living benefits are subject to MEC rules

Vickie owns an S corporation. The corporation pays her individual disability insurance premium under a salary continuation agreement. Which of the following is true? a. benefits are tax-free to Vickie b. the benefits are taxable to Vickie c. the corporation cannot deduct the premium d. the premiums paid the corporation are not a tax consequence to Vickie

the benefits are tax-free to Vickie - the corporation can deduct the premium and the S corp charged her for premiums paid

Terry is both a shareholder with Albe Inc. and VP of sales. The company wants to offer a private incentive plan to Terry. They only want to informally fund the plan for Terry and a few select other key employees using disability insurance. Since only selected employees are eligible, Able will pay the insurance premium with a salary bonus to those employees. Which of the following is true? a. if Terry becomes disabled, the disability policy benefits are taxable b. the company cannot deduct the premium because the plan is discriminatory c. the company can deduct the premium d. an informally funded incentive plan is typically funded with life insurance rather than disability insurance

the company can deduct the premium - company is paying the policy and charging him the income which is subject to tax

From the non forfeiture table and example above (Jay), what would be true after 3 years? a. if he cashed the policy in, he would get $200 b. if he elected the extended term option, he would get $10,000 of paid-up insurance for 6 years c. if he elected the extended term option, after 6 years of coverage, he would be paid $2,000 in cash d. The extended term option will use the $2,000 in cash to pay the premium for 6 years

the extended term option will use the $2,000 in cash to pay the premium for 6 years - non forfeiture options in universal and variable life policies have some special characteristics that differentiate them from whole life

Which one of the following describes the conversion provision in a life insurance policy? a. the insured may exchange a term policy (ART) for a 30-year level term policy without proof of insurability b. the insured may exchange term insurance for permanent insurance without having proof of insurability c. the insured may exchange permanent insurance for term insurance without having proof of insurability d. the insured is guaranteed the right to exchange term insurance for permanent insurance only if he/she becomes disabled

the insured may exchange term insurance for permanent insurance without having proof of insurability - you can only exchange term for permanent

Under an insured cross-purchase buy-sell agreement, what is the major problem at the death of one shareholder with 5 other shareholders? a. it is cumbersome to get all the money together b. the purchase of shares from the estate will cause income tax problems to the estate c. the life insurance will be subject to the creditors of the corporation d. the sale of the policies Tom owns to the other owners affects taxation of the death benefits

the sale of the policies Tom owns to the other owners affects taxation of the death benefits - when policies are sold by Tom's estate to other owners, not the insured, transfer for value problems occur

Dr. Ted Swan bought a guaranteed renewable policy at age 35. Now 20 years later, the carrier doubled his premium. What are his options? a. to pay the original premium b. to lapse the policy c. to buy a new policy at a cheaper premium

to lapse the policy - under guaranteed renewable, his only other choice is to pay the higher premium which would not be favorable

Which of the following is true about long-term care insurance a. premiums paid are deductible in full b. unreimbursed expenses are subject to 10%-of-AGI floor c. premiums paid are included as fully deductible medical expenses subject to 10%-of-AGI floor

unreimbursed expenses are subject to 10%-of-AGI floor - premiums not fully deductible and depends on client's age

Mr. X (age 50), owner and president of X Inc. wants to be bough out by Mr. T in 15 years. Which type of policy will best fit Mrs. T's needs? a. variable life b. whole life c. 10-year level term d. annual renewable term

variable life - cash value component with the growth potential is best solution for funding a buy-sell agreement

Timmy, age 30, is considering four different policies for his family's needs. Timmy's dad and mother have already died to due to health problems. If he makes it to retirement, he would like the policy to meet some of his retirement needs. Which policy is the best option? a. variable universal b. whole life c. 20-year level term d. annual renewable term

variable universal - would meet family needs, insurability, and retirement needs with flexible premiums

Mr. Jones, age 65, purchased a whole life policy with Mutual Benefit Life in 1980. In 1991, the company failed, and his policy cash value rights were restricted for almost 10 years. He has come to you for advice on additional insurance needs. He has told you of his concerns about carrier failure. What type of policy should you advise him to buy? a. 20-year level term b. universal life c. single premium universal life d. variable universal life

variable universal life - should suggest a variable policy (separate account)

Tommy, age 30, has a wife and 2 young children. Tommy makes a lot of money, but both he and his wife spend most of it. Tommy does not feel this will ever change. He feels he needs a life insurance program that will force him to put away money. Which program would you suggest? a. 30-year level term b. variable universal life c. whole life d. second-to-die whole life e. universal life

whole life - a whole life policy will force him to pay premium, serve as a forced savings plan, and will last his whole life

Can you contribute to both an HSA and FSA in the same year? a. yes b. no

yes - IRS allows one to participate in both an LPFSA and an HSA at the same time because LPFSA restricts reimbursement for HSA purposes

Can an employee's spouse obtain more than $2,000 group term coverage? a. yes b. no

yes - an employee's spouse can be covered for more in death benefit but only $2,000 can be tax-free

Bob wants to sell his life insurance policy to a viatical company. Does he have to prove to the company that he is terminally ill to get the proceeds free from federal income tax? a. no, the sale of the policy is automatically tax-free b. no, the sale is just a return of his cash and unused premium c. yes, the viatical company must justify the purchase of the policy to their investors d. yes, he must be certified by a physician as having a condition that can be reasonably expected to result in death within 24 months of certification

yes, he must be certified by a physician as having a condition that can be reasonably explained to result in death within 24 months of certification - these companies typically require the insured to sign a release allowing the company access to applicant's medical records to provide assurance of life expectancy

Is the taxable income form Question 1 subject to FICA or self-employment tax? a. no, the plan is an employee benefit b. yes, it is subject to FICA c. yes, it is subject to self-employment tax

yes, it is subject to FICA - the income is W-2 compensation subject to FICA and FUTA taxes because employee of company

Most business days, ABC company employs 12 full-time employees and 18 part-time employees. If a full-time participating employee terminates, will he or she be covered under COBRA? a. yes, the company has more than 20 employees. coverage will continue for 18 months b. yes, the company has more than 20 employees. coverage will continue for 36 months. c. no, the company has less than 20 employees d. no, more than half of the total employees must be full-time employees

yes, the company has more than 20 employees. coverage will continue for 18 months - company has 21 employees (12 +(18*.5))

In the year 2000, Bob applies for life insurance. He was born in 1951. When the agent asks him his age, he says 51, and the agent writes 1949 on the application. If Bob dies, will the carrier pay the death benefit? a. yes, the death benefit will be adjusted upward b. yes, the death benefit will be adjusted downward c. no, the policy will be deemed null and void, and the premiums will be returned

yes, the death benefit will be adjusted upward - he is younger, therefore premium will buy more insurance (misstatement of age clause)

How would you best explain guaranteed insurability to your client? a. you will never have to take an insurance exam again to purchase more insurance b. if you exercise the option, the premium is guaranteed for the life of the contract c. you can purchase the right to acquire additional insurance in specified amounts at specific ages or times d. if you exercise the option, you have the right to continue to keep a policy in force by timely payments of the premium

you can purchase the right to acquire additional insurance in specified amounts at specific ages or times - this is the definition