CFP Insurance Planning Final

The use of increased deductibles by the insured in insurance contracts is one example of: A: risk retention. B: risk avoidance. C: risk reduction. D: risk transfer.

A

When must an insurable interest exist for a property insurance policy? A: both at the time of loss and at the inception of the policy. B: at the time the loss settlement process takes place. C: at the inception of the policy. D: at the time of loss.

A

Which of the following statements concerning the characteristics of disability income insurance is (are) correct? I: The residual benefits clause preserves the purchasing power of the insured's disability income benefits. II: In a cost of living rider, an adjustment is made for each year of benefits paid to the insured and is computed by using the same rate of change as, say, the Consumer Price Index. A: I only. B: II only. C: Both I and II. D: Neither I nor II.

B

When must an insurable interest exist for a life insurance policy? A: both at the time of death and at the inception of the policy. B: at the time the beneficiary is paid. C: at the inception of the policy. D: at the time of death.

C

Which of the following statements comparing annuities to life insurance is (are) correct? I: The primary function of life insurance is to create an estate or principal sum; the primary function of an annuity is to liquidate a principal sum, regardless of how it was created. II: Both life insurance and annuities protect against loss of income-life insurance furnishes protection against loss of income arising out of premature death; an annuity provides protection against loss of income arising out of excessive longevity. A: I only. B: II only. C: Both I and II. D: Neither I nor II.

C

Which of the following statements concerning Social Security benefits is (are) correct? I: If an individual receives benefits based on his or her spouse's record, the individual's benefits will cease upon divorce unless the individual is age 62 or older and was married at least 10 years. II: Widows and widowers, whether divorced or not, will continue to receive survivors' benefits upon remarriage if the widow or widower is age 60 or older. A: I only. B: II only. C: Both I and II. D: Neither I nor II.

C

Which of the following statements concerning a personal auto policy's (PAP's) Part A - Liability coverage is (are) correct? I: Part A of the PAP provides bodily injury and property damage liability protection to any insured who is legally responsible for an automobile accident. II: The insurer agrees to pay defense costs until the limit of liability has been exhausted by payment of judgments or settlements. A: I only. B: II only. C: Both I and II. D: Neither I nor II.

C

Which of the following statements concerning life insurance is (are) correct? I:Term insurance is a form of life insurance in which the death proceeds are payable in the event of the insured's death during a specified period and nothing is paid if the insured survives to the end of that period. II: The mortality rate for term insurance is determined by the death rate for the attained age of the individual involved. A: I only. B: II only. C: Both I and II. D: Neither I nor II.

C

Which of the following statements concerning personal umbrella liability insurance is (are) correct? I: The personal umbrella policy is designed primarily to provide liability coverage for catastrophic legal claims or judgments. II: The personal umbrella policy requires the policy owner to carry certain underlying liability coverages of specified minimum amounts—a claim made under an umbrella policy will pay only after the limits of the underlying policy are exhausted. A: I only B: II only C: Both I and II D: Neither I nor II

C

Which of the following statements concerning the insurance terms is (are) correct? I: Subrogation is the right, upon paying the insured the amount of a loss, to try to collect from a responsible third party. II: Indemnity is when an insured is entitled to payment only to the extent of financial loss or legal liability. A: I only. B: II only. C: Both I and II. D: Neither I nor II.

C

Which of the following statements concerning the legal requirements of insurance as a contract is (are) correct? I: The agreement by which insurance is affected is a contract in which the insurer, in consideration of the payment of a specified sum by the policy owner, agrees to make good the losses suffered through the occurrence of a designated unfavorable contingency. II: To be valid and enforceable, insurance contracts must meet five general legal requirements: mutual consent, an offer by one party and an acceptance by another party; a legal purpose or object; legal competence of both parties; and performance or delivery by both parties to the agreement. A: I only. B: II only. C: Both I and II. D: Neither I nor II.

C

Which of the following statements concerning the need for long-term care insurance is (are) correct? I: Private medical expense insurance policies (both group and individual), in some cases, provide coverage only if a person also needs medical care; however, benefits are not provided if a person is merely "old" and needs someone to care for him or her. II: Medicare is inadequate because it does not cover custodial care if that is all that is needed. A: I only. B: II only. C: Both I and II. D: Neither I nor II.

C

Which of the following statements concerning universal life insurance is (are) correct? I: The policy owner has no ability to direct the investment of the policy's cash values. II: Universal life policy owners can choose the amount of premium they pay into their policies, subject to insurer minimums and maximums. A: I only. B: II only. C: Both I and II. D: Neither I nor II.

C

A pure risk is where there is: A: a possibility of either profit or loss. B: a possibility of neither profit nor loss. C: only the possibility of profit. D: only the possibility of loss or no loss.

D

What is the effect of an insurance policy being adhesive? A: the insurer can refuse to pay claims unless the insured has complied with all policy provisions. B: the insured cannot assign the policy without the insurer's consent. C: the insurer can require the insured to pay any premiums. D: the insured gets the benefit of the doubt if a policy contains any ambiguities or uncertainties.

D

Terry Madden purchased a 15-year old compact car with 100,000 miles for his teenage son who recently received his license. Which of the following auto insurance coverages should be included in the policy for this auto? I- Part A - liability coverage. II- Part B - medical payments coverage. III- Part C - uninsured motorist coverage. IV- Part D - damage to insured's auto. A- I, II and III only. B- I, II and IV only. C- I, III and IV only. D- II, III and IV only.

Solution: The correct answer is A. Being a 15-year old car with such high mileage, there are few insurers who would provide physical damage coverage. The other coverages are necessary.

When a property claim has been submitted, the adjuster is called in to do which of the following: I- Assist the insured in the preparing the proof-of-loss statement. II- Determine whether there was a loss covered by the policy. III- Classify the loss as standard, substandard, or ineligible. IV- Choose the arbitrator who will determine the amount of loss. A- I and II only. B- I and III only. C- I and IV only. D- II and III only.

Solution: The correct answer is A. Options "I" and "II" are roles of an adjuster. Option "III" is incorrect because the classification is the underwriter's job. Option "IV" is incorrect because the adjuster determines the amount of loss. An arbiter would enter into the situation only if the two sides cannot agree.

A successful architect wants to purchase disability income insurance. She is concerned about becoming totally disabled, but also about a reduction in income if she is obliged to reduce her workload because of a less-than-total disability. To satisfy these concerns, which of the following should be included in her disability income coverage? A- Residual disability benefits. B- A change-of-occupation provision. C- Dismemberment benefits. D= A relation of earnings-to-insurance provision.

Solution: The correct answer is A. Residual benefits cover partial disability and directly address the concern that the client has expressed. Options "B," "C" and "D" are valid provisions, but do not in any way address the client's area of concern.

Which of the following statements accurately reflect the nature of buy-sell agreements? A- A stock redemption plan must have a corporation as a party to the contractual arrangement. B- A stock redemption plan increases the cost basis of surviving shareholders. C- Under a cross-purchase plan funded with life insurance, premiums paid are tax deductible to the payor. D- Proceeds of a life insurance policy owned by a surviving shareholder must be included in the gross estate of the decedent.

Solution: The correct answer is A. The corporation must be a party to the stock redemption plan. A stock redemption plan is a stock purchase by a corporation, so the cost basis of the surviving shareholders are not affected, thus they do not receive a step up in basis. Proceeds of a policy owned by a surviving shareholder are not includible in the decedent's gross estate. Premiums are not tax deductible.

Insured buy-sell agreements have the following characteristics, except: A- Stock redemptions (entity agreements) increase the cost basis of the surviving shareholders. B- Insured cross-purchase plans involve shareholders buying life insurance on each other. C - Parties to a cross-purchase agreement can agree to the purchase of remaining life insurance policies from the decedent's estate. D- Under a stock redemption (entity agreements) plan, life insurance owned by the corporation on the shareholder's life is not included in the decedent's estate.

Solution: The correct answer is A. The cost basis of surviving shareholder does not increase in an "entity" or stock redemption buy-sell, but would increase, in part, in a cross-purchase.

Which of the following with regard to identification of life risk exposures is not a business related exposure or need? A- Death of a spouse. B- Death of a partner. C- Death of a key employee. D- Employee retention

Solution: The correct answer is A. The spouse could be a partner, key employee or valued owner, but that is not mentioned here. That being the case, Option "A" is correct.

Which of the following statements concerning the choice of an entity versus a cross-purchase partnership buy-sell agreement funded with insurance is FALSE? A- The use of existing insurance to fund the agreement causes a transfer-for-value problem if an entity agreement is selected, but does NOT cause this problem if a cross-purchase approach is used. B- A cross purchase should be selected if the surviving partners expect to sell their interests during their lifetimes. C- An entity approach may solve the affordability problem if one partner is significantly older than the other. D- An entity agreement becomes more desirable as the number of partners included in the agreement increases.

Solution: The correct answer is A. The use of existing insurance does not cause a transfer-for-value situation in both entity and cross-purchase situations because the entity is presumed the same as the individual in a partnership. (B) is correct because if you do the cross purchase then each owner would have to sell, surrender, or hold onto the policy on the departing (not deceased, but retiring or fired) owner. Also, the departing owner would have multiple policies, each covering the other owners that (s)he would need to do something with. (C) is correct because the if we have owners significantly older than other owners then the young owners will have to pay a lot more in premiums to insure the older owners' lives in a cross-purchase agreement. (D) is correct because the number of policies needed in a cross purchase is N * (N-1).

Viatication will become an important issue if: A- The insured were suffering from a terminal illness. B- The insured were in need of a down payment for a home purchase. C- The insured were taking care of elderly parents. D- The insured were in need of bail money.

Solution: The correct answer is A. Viatication becomes an important issue if the insured were suffering from a terminal illness. Viatication is the term for a viatical company purchasing a life insurance policy. The only time a viatical company will purchase a life insurance policy is when someone is terminally ill or chronically ill.

Six years ago, Sonny Gates purchased a building for $400,000. Its current replacement cost is $800,000. The building is covered for fire-related perils by Commercial Carriers Insurance Company to $400,000, with an 80% coinsurance provision and a $2,000 straight deductible. Last week, a fire broke out in the building, causing $600,000 of covered damage. What amount will Commercial Carriers Insurance Company pay for this loss? A- $298,000 B- $373,000 C- $598,000 D- $600,000

Solution: The correct answer is B. (Face value ÷ coinsurance) × Loss - Deductible (insurance I have ÷ insurance I should have) x Loss - Deductible He has $400,000 of insurance. He should have 80% of 800,000 or 640,000. [400,000 ÷ (.80 × 800,000)] × 600,000 - 2,000 [(400,000 ÷ 640,000) × 600,000] - 2,000 (.6250 × 600,000) - 2,000 375,000 - 2,000 373,000 is what the insurance company will pay towards this loss.

Your client, John Kent, purchased a limited payment whole life policy 15 years ago. He would like to stop paying the premiums on his policy, but continues to need the same amount of insurance. If he did so, which one of the following is a non-forfeiture option he could use? A- Reduced paid-up insurance. B- Extended term insurance. C- Installments for a fixed period. D- One-year term.

Solution: The correct answer is B. An extended term insurance is correct because extended term insurance is the only choice that is a non-forfeiture option that fits his needs. Option "A" - Although this is a non-forfeiture provision, the amount of insurance coverage would be reduced. Option "C" is a settlement option, and Option "D" is a dividend option.

Your client, John Hotas, owns a whole-life insurance policy with a death benefit of $100,000 on the life of his wife Mary. The policy has a cash value of $6,500. The dividends are used to purchase additional paid-up life insurance. Their daughter, Ester, is the named beneficiary. If Mary were to die today, which of the following is true? A- John continues to own the policy for the benefit of the daughter. B- A taxable gift of the life insurance proceeds has been made from John to his daughter. C- John receives an amount equal to the cash value, and the daughter receives the remainder of the life insurance proceeds tax-free. D- The daughter must be at least 14-years old in order to collect the proceeds.

Solution: The correct answer is B. Because John owns the policy on Mary's life, when Mary dies and the proceeds go to Ester, their daughter, as beneficiary, they are considered a gift from the policy owner (John) to his daughter. Had Mary owned the policy on her life, the proceeds would have passed to her daughter tax-free.

All of the following statements are correct regarding Health Savings Accounts (HSAs) EXCEPT: A- HSAs can be established by self-employed individuals who are covered under a high deductible health plan. B- The 10% penalty associated with non-qualified distributions from an HSA will be waived once the participant attains age 59½. C- The tax benefits of HSAs are greatest for highly compensated employees. D- The balance in an employee's HSA can be carried forward if unused for expenses incurred during the tax year.

Solution: The correct answer is B. If a non-qualified distribution is made from an HSA, the distribution will be subject to income tax and a 20% penalty. The penalty will be waived if the individual has attained age 65 (not 59½).

Disability income insurance benefits typically terminate for the following reasons: I- Insured has returned to work. II- Maximum benefit period has been reached. III- Group coverage has been canceled. A- I only. B- I and II only. C- II only. D- I, II and III only.

Solution: The correct answer is B. If one is on disability and the company cancels the policy, coverage is still continued.

Which of the following is/are fundamental regarding the characteristics of insurance? I- Law of large numbers. II- Transfer of risk from individual to group. III- Insurance is a form of speculation. IV- Probability (possibility and predictability of a loss). A- I and II only. B- I, II and IV only. C- I, II and III only. D- IV only.

Solution: The correct answer is B. Insurance is considered aleatory, meaning it is a contract of chance. It is not a speculation or a contract that offers possibility of loss or gain. It is an indemnity contract designed to make one whole again after a loss. It is not designed to provide a gain.

Which of the following correctly describes benefits provided by Medicare? A- Coverage for eye care. B- No stop-loss limits. C- Coverage for custodial care. D- Coverage for dental care.

Solution: The correct answer is B. Medicare is an 80/20 split without stop-loss limits. Medicare does not provide custodial care coverage, eye care or dental coverage.

Which of the following statements about split-dollar life insurance and its uses is incorrect? A- Stock redemption plans can be funded by split-dollar life insurance. B- All policy values and benefits of a split-dollar life insurance policy are subject to the claims of company general creditors. C- The insurance premium of a split-dollar life insurance contract is generally divided between the employee and the employer. D-The insurance death benefit of a split-dollar life insurance policy is generally divided between the employee and the employer.

Solution: The correct answer is B. Only the portion of benefit in the policy that is attributable to the actual contributions of the company are subject to the claims of company creditors.

The 'principle of indemnity' refers to which of the following: A- The right of a party to collect from third parties who are responsible for having caused the loss. B-The right of the insured to be made whole after a loss occurs. C- The right of the insured to bring tort action against the tortfeasor. D- The stake or interest in a matter, person, property, or other business concern that might be damaged if the peril insured against occurs.

Solution: The correct answer is B. Option "A" is vicarious liability. Option "C" is the right to bring suit. Option "D" is an insurable interest.

All of the following are to be counted among the four primary methods of treating risk, except: A- Risk Reduction. B- Risk Elimination. C- Risk Avoidance. D- Risk Transfer.

Solution: The correct answer is B. Risk elimination is not a risk management technique. Risk retention and risk sharing are other techniques that may be used as risk management options

The conversion privilege found in some life insurance policies refers to: A- The conversion of universal life to variable universal life. B- The conversion of term life to permanent life insurance. C- The conversion of interest sensitive life to permanent life insurance. D- The conversion of whole life insurance to universal life insurance.

Solution: The correct answer is B. Term life can be converted to cash value or permanent life insurance.

Which of the following clauses, included in a life insurance policy, could permit the payment of the death benefit, even if fraud exists in the life insurance application? A- Suicide clause. B- Incontestable clause. C- Entire contract clause. D- Spendthrift clause.

Solution: The correct answer is B. The incontestable clause prevents the insurer from contesting the policy after a certain period of time, usually two years. If the contestable period elapses, the insurer generally cannot contest the policy, even if fraud exists in the application.

An insured gave his correct age as 45, but when it was written down by the agent, the numbers were transposed presenting the insured as age 54 on the application. The insured purchased and was approved for the insurance and paid regular premiums. One day after three years of ownership, the insured came across the policy and noticed the error. He called the company. What was the company most likely to do? A- Cancel the policy and take the insured to court for fraud. B- Provide the insured with a policy representing the face amount that the premiums would have purchased. C- Give the insured back the difference with interest. D- Remove excess amounts from the interpolated required reserve and place them in the general fund.

Solution: The correct answer is B. The insured would be provided with a policy that represented the amount of life insurance the premium would have purchased at the younger age of 45.

Your client has split-limit liability coverage of $100,000/$300,000 on his policy. He has asked what this means if he is involved in an accident. You tell him: A- If he is involved in an accident, he will be able to sue the other party only if the amount of damages are between $100,000 and $300,000. B- If he is liable for the accident as his insurer, your company will pay up to $100,000 per person or $300,000 total for his liability. C- If the other party has less than $100,000 insurances, your client will still have coverage of $300,000 based on liability provisions of the policy. D- After the other party's insurer has paid up to $100,000 your company will pay the balance up to $300,000.

Solution: The correct answer is B. The split limit is a per person, per accident amount that will be paid by the company to meet the insured's liability.

Where no-fault auto insurance is involved, which of the following is a correct match? A- Pure no-fault: Several states have enacted this system. B- Verbal threshold: Lawsuits may be allowed when there is a fatal injury. C- Modified no-fault: In no way impedes the right of tort action. D- Pure no-fault: Allows for tort action under certain conditions.

Solution: The correct answer is B. There is no "pure no-fault" in existence in any state in the U.S. Modified no-fault allows suits when verbal and dollar thresholds have been crossed. Dollar threshold is damage occurring above a certain amount, not a limit to actionable compensatory amounts.

Karl sold a permanent life insurance policy on his life to a viatical settlement company for $60,000. Karl was terminally ill at the time of the sale. The company paid an additional $15,000 in premiums before Karl died. At the time of Karl's death, the viatical settlement company collected the $200,000 death benefit. How much of the death benefit will be included in the gross income of the viatical settlement company for federal income tax purposes? A- $0. B- $125,000. C- $140,000. D- $200,000.

Solution: The correct answer is B. When a life insurance policy is sold, the transaction is considered a transfer-for-value for income tax purposes. When a transfer-for-value has occurred, the death benefit of the policy is included in the recipient's gross income at the time of the insured's death. Although there are several exceptions to the transfer-for-value rule, the sale of a policy to a viatical settlement company is not one of the exceptions. Therefore, the sale to the viatical settlement company is considered a transfer-for-value and will cause the death benefit to be taxable to the company at the time of Karl's death. The company can reduce the taxable amount by any amounts paid by the company for the policy. The amount taxable to the company is $125,000, calculated as follows: Taxable Amount = Death Benefit - Purchase Price of Policy - Premiums Paid Taxable Amount = $200,000 - $60,000 - $15,000 Taxable Amount = $125,000

All of the following are settlement options except: A- Fixed period payments. B- Fixed amount installments. C- Reduced paid-up insurance. D- Interest Only

Solution: The correct answer is C. All of the following are settlement options except reduced paid-up insurance, which is a non-forfeiture provision.

Which of the following accurately reflect(s) the taxation of an annuity owned by a decedent? A- The decedent's will determines who receives proceeds of annuity because beneficiary designation become null and void at death. B- Accumulated interest is income tax exempt. C- Deferred interest is subject to Income in Respect to a Decedent (IRD) D- The annuity proceeds must always be probated.

Solution: The correct answer is C. Annuities are a contract and as such avoid probate and pay proceeds to a named beneficiary. Accumulated interest income is taxable. IRD is estate and income taxable, but the income tax will be offset by estate tax paid.

Ron asks a CFP® professional, Tara, to help him analyze his disability insurance need. Ron is age 35 and in good health. Which of the following represents the least important information for Tara to obtain to assist Ron with the analysis? A- Ron's existing disability coverage. B- Ron's existing emergency fund. C- Ron's existing medical insurance coverage. D- Ron's current income level.

Solution: The correct answer is C. Disability insurance sufficiency analysis requires consideration of multiple factors. These factors include financial needs, existing coverage, and current levels of income. Health insurance coverage is the least relevant coverage in performing a disability insurance sufficiency analysis.

Which of the following statements is incorrect in regard to the regulation of the insurance industry? A- Insurance costs are unknown at the time the premium is established and unregulated insurers might charge too little or too much. B- Beneficiaries are usually entirely different from the insured. They are not present to protect their self-interest when the contract is made. C- Upon death of an insured under a life insurance policy, federal regulators are able to secure income tax proceeds prior to lump sum payments. D- Insurance is a service that is paid for in advance, but its benefits are reaped in the future.

Solution: The correct answer is C. Generally, there is no income tax on life insurance proceeds except in the case of transfer for value sales of a policy.

Gloria and her husband, Michael, are each 50% shareholders of K-9 Corporation, a closely-held C corporation. The corporation owns a life insurance policy on Gloria's life, and their son Archibald is the named beneficiary of the policy. K-9 Corporation needs cash flow but wants to minimize taxes. To meet these objectives, the policy should be sold to: A- Archibald. B- A UTMA account for the benefit of Archibald. C- Gloria. D- Michael.

Solution: The correct answer is C. If a life insurance policy is sold, the transfer-for-value rule generally applies. If the transfer-for-value rule applies to a life insurance policy, the death benefit received from the policy will be subject to income taxes. One exception to the transfer-for-value rule is a transfer of the policy to the insured. Gloria can purchase the policy, thereby meeting the need to raise cash for K-9 Corporation, and since this is an exception to the transfer-for-value rule, there will be no income tax to the beneficiary on the death benefit.

Which of the following provisions allow a life insurance company to refuse to make payment on a policy claim based on the amount of time the policy has been in force. I- Incontestable Clause. II- Suicide Clause. III- Entire Contract Clause. IV- Ownership Clause. A- I only. B- II and IV only. C- I and II only. D- II and III only.

Solution: The correct answer is C. In most states, it is a one or two-year period during which incontestable clauses and suicide clauses are in effect. Entire contract and ownership are not based on the passage of time.

Your client has asked you to review an annuity that he owns. It is structured so that it pays an income to two people and continues until both die. What does he own? A- Deferred annuity. B- Refund annuity. C- Joint and survivor annuity. D- Pure life annuity.

Solution: The correct answer is C. Option "A" - Deferred simply defers the time when annuity payments will begin. Option "B" - A refund annuity returns the unused portion of the principal. Option "D" - Pure life pays only during the life of one person and stops all payments when that person dies.

In selecting insurance coverage for a client, the prudent planner should consult which of the following independent sources for determining company strength? I- A.M. Best Reports II- Standard and Poor's III- Moody's Investors Services IV- Dun and Bradstreet A- I and III only. B- I and IV only. C- I, II and III only. D- II, III and IV only.

Solution: The correct answer is C. Options "I," "II" and "III" all provide rating services within the insurance industry. Dun & Bradstreet concerns itself more with credit standings of a firm not with insurance.

All of the following require a special endorsement rider or a separate policy for coverage to be effective, except: A- A house involved in flooding. B- A house involved in an earthquake. C- A car involved in flooding. D- A piece of jewelry valued at $10,000.

Solution: The correct answer is C. Personal auto policies are the only ones that offer coverage for flooding. On a homeowners policy, water damage is covered "from the sky coming down," but not "from the ground coming up."

Which of the following individuals will be eligible for Medicare coverage A and B this year? A- A 63-year old federal government employee hired in 1982. B- A corporate director, age 55, whose only income is from being a corporate director. C- A 68-year old proprietor filing Schedule F. D- A 65-year old business owner who, over his lifetime, has received only dividend income from the S-corp business.

Solution: The correct answer is C. Persons "A" and "B" are too young. Person "D" did not receive any income which was ever subject to self-employment or social security taxes, therefore, did not ever become qualified. Someone without 40 quarters of coverage would not be considered eligible, but could purchase part A (qualified receives part A at no cost) and part B.

An insured who wishes to leave the death proceeds to a spouse, with continued payments to children for a specific period of time after the death of the spousal beneficiary might consider the following settlement option: A- Pure Life Annuity. B- Reduced Paid-Up Insurance. C- Life Income Period Certain. D- One Year Term Insurance.

Solution: The correct answer is C. Pure life stops when the first recipient dies. One-year term insurance is a dividend option. Reduced paid-up is a non-forfeiture provision.

Which of the following statements regarding assignments is/are true? I- A collateral assignment is a temporary transfer of some or all of the ownership rights on condition such rights revert to the assignee. II- A collateral assignment is a temporary transfer of some or all of the ownership rights whereby such rights revert to the assignor upon satisfaction of agreed-upon conditions. III- A collateral assignment is a temporary transfer of some or all of the ownership rights on condition such rights revert to the insurance company upon satisfaction of agreed-upon conditions. IV- An absolute assignment is an irrevocable transfer of all ownership rights which can be accomplished through a sale or gift. A- I, II and III only. B- I and III only. C- II and IV only. D- IV only.

Solution: The correct answer is C. The correct answer is "C." Option "I" incorrectly describes a collateral assignment, reversion right should go back to the assignor. Option "III" almost describes a collateral assignment, but reversion of rights return to the insured, not the insurance company

Which of the following statements best describes the probation period in a disability income policy? A- The period of time that must elapse before the policy is activated. B- The period of time available for the insurer to cancel coverage under the policy. C- The period of time the insured must wait before specified illnesses or injuries are covered. D- The period of time the insured must wait before benefits are payable.

Solution: The correct answer is C. The probation period, when included in a Disability Income policy, is the time the insured must wait after the issue of the policy before specified conditions will be covered

When a circumstance exists where there is an uncertain possibility of loss and no chance of gain, the following type of risk is said to exist: A- Speculative risk. B- Dynamic risk. C- Pure risk. D- Subjective risk.

Solution: The correct answer is C. This same situation with a chance of gain is known as speculative risk.

Two fairly common defenses used against charges of negligence have been contributory negligence and: A- Lack of injury. B- Combined negligence. C- Assumption of risk. D- Lack of negligence.

Solution: The correct answer is C. Today, more and more we are seeing cases presented on a comparative negligence basis. This allows one to collect even if one party did in some way contribute to the accident.

Your client is considering the purchase of a Variable Universal Life (VUL) policy and asks for your advice about this type of insurance. Which of the following is NOT a feature of this type of policy? A- Flexibility as to premium payments. B- Choice as to investment funds. C- Availability of a guaranteed minimum death benefit. D- Availability of a guaranteed minimum cash value.

Solution: The correct answer is D. A VUL policy is unbundled allowing for option "A" and it is variable, allowing for options "B" and "C." Under no circumstances does a variable policy guarantee cash value. It will, however, guarantee a minimum death benefit as long as premiums are paid.

Which of the following represents the LEAST favorable means of securing long-term care coverage? A- Continuing Care Retirement Communities. B- Disability Income Policy Rider. C- Association Arrangements. D- Life Insurance Policy Rider.

Solution: The correct answer is D. Continuing Care Retirement communities are structured specifically for Long-Term Care (LTC) coverage, as are the individual policies. Association arrangements are also LTC specific. These three all provide excellent means to obtain LTC coverage. The disability income policy rider takes a coverage that can no longer be carried after age 65 and converts it to useful LTC coverage, another excellent plan. The least favorable is to have diminished coverage that one will most definitely need at some point - life insurance.

Gina and Jacque moved into their first new home. They threw a housewarming party and invited a few family and friends. They also invited some of their new neighbors. One of the guests tripped on a stair that was in need of repair and broke her wrist catching herself during the fall. Which coverage under their homeowner's policy will cover the guest's medical expenses? A- Coverage A. B- Coverage B. C- Coverage E. D- Coverage F.

Solution: The correct answer is D. Coverage F is for medical payments to others. Stupid trick "They have fallen and can't get up". A is incorrect. Coverage A covers damage to the dwelling. B is incorrect. Coverage B covers unattached structures. C is incorrect. Coverage E is for personal liability, which may come in handy if their new neighbor decides to sue them for the injury.

Which of the following Homeowners Forms is known as Special Form and provides open peril coverage on both dwelling and appurtenant structures? A- HO-1 B- HO-4 C- HO-6 D- HO-3

Solution: The correct answer is D. HO-1 is almost non-existent basic coverage. HO-4 is renter's coverage. HO-6 is condominium owner coverage. HO-3 is special form coverage with open peril on coverage A and B. HO-5 (not listed) is comprehensive form coverage.

Derek Baldwin purchased a 20-year limited payment whole life policy 15 years ago. He would like to stop paying the premiums on his policy. If he does so, which one of the following is a nonforfeiture option he could possibly use? A- Installments for a fixed amount. B- Life annuity. C- Installments for a fixed period. D- Extended term insurance.

Solution: The correct answer is D. Ideally the insured should simply use dividends to meet premium obligations over the next five years and have a fully paid-up policy. However, this is not one of the choices. Therefore, the best possible answer would be extended term, Option "D". Options "A", "B" and "C" are settlement options.

If the insured under a disability income insurance policy moves to a more hazardous job and receives an increase in compensation with the job change, what will be the likely effect on the disability coverage? A- The relation of earnings to insurance clause will require an adjustment in the benefits payable. B- The definition of disability will automatically change from "own-occupation" to "any-occupation". C- The change of risk clause will require new underwriting of the risk. D- The change of occupation provision will permit the insurer to reduce benefits payable.

Solution: The correct answer is D. In the case of increased risk on a disability policy the insurer will generally reduce coverage to match what the premium will purchase at the new, riskier position.

Mrs. Ketchenbaum owns a life insurance contract on her life that is a modified endowment contract. If Mrs. Ketchenbaum dies, which of the following statements is correct concerning the tax consequences of paying the death benefit to the designated beneficiary? A- A portion of the death benefit is subject to income tax. B- A portion of the death benefit is subject to income tax and penalty. C- The beneficiary receives the death benefit free of income tax and the death benefit is not includible in Mrs. Ketchenbaum's gross estate for federal estate tax purposes. D- The beneficiary receives the death benefit free of income tax but the death benefit is includible in Mrs. Ketchenbaum's gross estate for estate tax purposes.

Solution: The correct answer is D. Life insurance contracts, even a modified endowment contract, acts as a life policy in that there are no income taxes levied on the proceeds to the beneficiary, while the proceeds must be included in the estate value of the decedent for calculation of the gross estate.

An employer is required to extend medical coverage (under COBRA, the Consolidated Omnibus Budget Reconciliation Act) to eligible members of the employee's family if the employee: I- Dies. II- Retires. III- Divorces. IV- Terminates employment (prior to retirement.) A- I, II and III only. B- I and III only. C- II and IV only. D- I, II, III and IV.

Solution: The correct answer is D. One of the few exceptions to continued COBRA coverage is termination due to gross misconduct.

When a person is deemed to need skilled care, intermediate care, or custodial care, what is being established relative to a long-term care policy? A- Whether the patient really needs long-term care, or if some other way can be found to meet the patient's needs. B- Where the care required is classified in the Medicare DRG table. C- Whether the care must be delivered by a hospital or nursing home. D- The identification of the "level of care" required.

Solution: The correct answer is D. Options "A," "B" and "C" simply describe the various levels of care one could receive through an LTC policy.

Which of the following statements are true regarding the ownership of individual life insurance? I- A policy can only be issued to the insured. II- Generally, assigning a policy requires proof that the insured is still "insurable" (meaning still in good health). III- Only a person with an insurable interest, generally a relative, a business associate, or lender, can be named as a beneficiary. IV- The owner can assign (transfer) the policy to whomever he or she chooses, even if the assignee has NO insurable interest. A- I, II and III only. B- I only. C- II and IV only. D- IV only.

Solution: The correct answer is D. Reasons each of the following statements are incorrect: Option "I" - An individual with an insurable interest in the insured can purchase a policy. Option "II" - Policy assignments can be made regardless of the insured's health as long as the policy is in force. Option "III" - The policy owner can name anyone a beneficiary.

A typical life insurance policy that your client bought eight months ago has the following provision relating to incontestability: "This policy shall be incontestable after it has been in force during the lifetime of the insured for two years from its date of issue." When your client bought the policy, she deliberately understated her age by four years to obtain a lower premium rate for the coverage. She died yesterday. In this situation, which of the following statements is correct? A- The policy became incontestable as soon as your client died. B- The incontestable clause is a relevant consideration in the payment of this claim. C- The misstatement of age clause became irrelevant in this case because the misstatement apparently was not discovered while your client was still alive. D- None of the above is correct.

Solution: The correct answer is D. The incontestable provision does not apply, eliminating options "A" and "B." Misstatement of Age clause applies and will cause the insurance company to simply pay the amount of death benefit proceeds that would have been correctly purchased at the age and premium amount that were paid.

All of the following statements concerning the Social Security system are correct EXCEPT A: The Social Security retirement benefit is payable at normal retirement age with reduced benefits available as early as age 59 1/2, to anyone who has obtained at least a minimum amount of Social Security benefits. B: Disability benefit recipients must have a severe physical or mental impairment that is expected to either prevent them from performing "substantial" work for at least a year, or result in death. C: The family benefit is provided to certain family members of workers eligible for retirement or disability benefits. D: Survivors benefits apply to those family members listed for family benefits, and may also include the worker's parents if the worker was their primary means of support.

The correct answer is A. Age 62 is the minimum retirement age.

All of the following statements concerning annuities are correct EXCEPT A: The pure life annuity is ideal for the person who needs maximum income spread out over a lifetime and has several living dependents to whom he or she wishes to leave assets. B: A life annuity with guaranteed minimum payments ensures that the annuitant either receives a minimum number of payments, or will have lifetime income; whichever is greater. C: In an installment refund annuity, the insurer promises to continue periodic payments after the annuitant has died until the sum of all annuity rent payments equals the purchase price of the annuity. D: A joint and survivor annuity is an annuity based on the lives of two or more annuitants, usually husband and wife.

The correct answer is A. Annuities do not leave any assets to heirs

Which of the following statements concerning major medical plans is (are) correct? I: Major medical expense plans contain a coinsurance provision, whereby the plan will pay only a specified percentage of the covered expenses that exceed the deductible. II: Some major medical contracts limit the amount of lifetime coverage. A: I only. B: II only. C: Both I and II. D: Neither I nor II.

The correct answer is A. Lifetime limits are prohibited by the PPACA.

Which of the following statements concerning the characteristics of disability income insurance is (are) correct? I: During the elimination period, disability income benefits are not being paid. II: During the elimination period, partial disability income benefits are paid. A: I only B: II only C: Both I and II D: Neither I nor II

The correct answer is A. No benefits are paid during the elimination period

Benefits of Rabbi Trusts and Secular Trusts include all except: A: Rabbi Trusts are not subject to risk of bankruptcy B: Rabbi Trusts are not subject to risk of merger, acquisition or change of heart C: Secular Trusts are not subject to risk of bankruptcy D: Tax deferral for executive employee with Rabbi Trust

The correct answer is A. Rabbi Trust is not subject to risks associated with merger, acquisition or change of heart by sponsoring entity, but is subject to bankruptcy risk.

Which of the following statements concerning term life insurance is (are) correct? I: Because death rates rise at an increasing rate as ages increase, the mortality cost for term insurance also rises at an increasing rate. II: Term insurance has a cash value. A: I only B: II only C: Both I and II D: Neither I nor II

The correct answer is A. Term insurance is not permanent and does not accumulate cash value.

Which of the following statements concerning the personal auto policy's (PAP's) Part C Uninsured Motorists coverage is (are) correct? I: Under Part C of the PAP, the insurer agrees to pay compensatory damages that an insured is legally entitled to recover from the owner or operator of an uninsured motor vehicle because of bodily injury (and property damage in a few states) sustained by an insured and caused by an accident. II: The uninsured motorists coverage applies to claims for medical expenses, lost wages, and pain and suffering, punitive or exemplary damages. A: I only B: II only C: Both I and II D: Neither I nor II

The correct answer is A. Uninsured motorists does not cover pain, suffering or punitive damages.

Chris has a HO-3 policy that provides $300,000 of insurance on his dwelling, which has a current replacement value $500,000. Ignoring any deductible, how much will Chris collect if he suffers a covered loss to the dwelling with a replacement value of $60,000 but an actual cash value of $30,000? A: $30,000 B: $45,000 C: $48,000 D: $60,000

The correct answer is B. 300,000 / (.80 × 500,000) = .75 × 60,000 = 45,000 The 80% co-insurance is standard on all partial claims. It is part of the formula you will need to memorize for the CFP® exam.

Which of the following likely has the highest credit score? A: Sally has 5 credit cards, credit utilization of 40% and a perfect payment history for 5 years. B: Ralph has 3 credit cards, credit utilization of 20%, an installment loan, a mortgage, and a perfect payment history for 3 years. C: Jack's only debt is 2 credit cards totaling $50,000 limit. D: Francine has a 30-year mortgage in the 10th year with a perfect payment history. This is her only debt.

The correct answer is B. A mix of credit is best as long as you do not exceed 30% utilization and don't have a negative payment history.

Which of the following describes adverse selection? A: the insurer's financial results will be improved. B: persons most likely to suffer losses are most likely to seek insurance. C: costs are reduced. D: premiums will go down.

The correct answer is B. Adverse selection is when individuals needing medical attention chose to seek medical care and find the need for insurance. Insurance companies screen to avoid adverse selection by asking medical questions on the application. Insurance companies that cover only individuals that will utilize insurance coverage would not be able to afford to remain in business.

Which of the following statements concerning the Social Security system is (are) correct? I: Workers entitled to retirement benefits can currently take early retirement benefits as early as age 59 1/2. II: The worker who takes early retirement benefits will receive a reduced benefit because he or she will receive more monthly benefit payments, as payments commence earlier than if the worker had waited and retired at full retirement age. A: I only B: II only C: Both I and II D: Neither I nor II

The correct answer is B. Age 62, not 59 1/2.

The following statements about HO-6 coverage are true EXCEPT: A: It includes personal liability coverage. B: It provides no coverage for improvements and alterations. C: It covers personal property on an actual cash value basis. D:It provides limited coverage for loss assessments.

The correct answer is B. B is a false statement because, HO-6 provides minimal coverage under Coverage A to cover damage to interior walls of the unit. If an addition was added to the structure, it will be covered at the minimal limit. Improvements to property will not be covered.

All of the following statements concerning whole life insurance are correct EXCEPT A: Whole life insurance provides for the payment of the policy's face amount upon the death of the insured, regardless of when death occurs. B: If the whole life insurance premiums are to be paid throughout the insured's lifetime, the insurance is known as limited-payment; if the whole life insurance premiums are to be paid only during a specified period, the insurance is designed as ordinary life. C: Whole life insurance offers permanent protection with cash values, and it can be either participating or nonparticipating. D: The protection afforded by the whole life insurance contract is permanent-the term never expires, and the policy never has to be renewed or converted.

The correct answer is B. Limited pay is paid during a specified period of time and ordinary life is paid throughout the insured's lifetime.

All of the following statements regarding a MEC are correct EXCEPT? A: A life insurance policy that fails the 7 pay test is deemed a MEC. B: Withdrawals from a MEC are subject to FIFO tax treatment. C: A 10% penalty applies to withdrawals prior to age 59½. D: The primary issue on a MEC is the taxation of withdrawals because the death benefit is generally tax free.

The correct answer is B. MECs are subject to LIFO tax treatment.

Claiming a theft happened when it didn't to collect insurance proceeds is an example of a A: morale hazard. B: moral hazard. C: risk. D: physical hazard.

The correct answer is B. Morale - careless indifference Moral - lying, stealing, cheating Risk - possibility of loss Physical hazard - physical condition such as ice on a sidewalk.

Which of the following statements concerning property insurance is (are) correct? I: Broad named policies cover all losses to covered property unless the loss is specifically excluded. II: Insurance policies fall into two broad categories with respect to covered perils - named perils policies and "all risks" policies. A: I only B: II only C: Both I and II D: Neither I nor II

The correct answer is B. Named Perils covers both Basic and Broad named perils. Open peril polices cover all loses unless specifically excluded. From the Insurance Planning textbook: Broad coverage, as its name implies, provides protection for all of the named perils covered in basic coverage, plus additional protection for named perils not covered under basic coverage. Instructor Note: You need to know the base principals, as the wording may not be identical on all exams, including the CFP Board Exam.

Reasons an employer may prefer a Non-Qualified Retirement Plan over a Qualified Plan include the following except: A: More design flexibility with a Non-Qualified Plan B: Immediate tax deduction for employer with Non-Qualified Plan C: No Form 5500 reporting with a Non-Qualified plan D: No specific (DOL/IRS) limitations on how much executive compensation can be contributed and tax deferred each year

The correct answer is B. The employer generally cannot take a tax deduction for executive compensation deferred until the executive employee has actual or constructive receipt of the compensation.

Which of the following property is covered under the personal property coverage (Coverage C) of HO- 3? A: a bird owned by the named insured. B: a skateboard owned by a stepchild living with the named insured. C: CDs located in the named insured's automobile. D: jewelry insured under a separate floater.

The correct answer is B. The skateboard would be covered under coverage C for an individual living in the home. Birds are not covered under Coverage C. CD's in the automobile are covered under PAP. Jewelry has its own coverage.

Sally has a major medical policy with a $500 annual deductible and an 80/20 coinsurance provision, with a $2,000 stop loss provision. Sally breaks a leg dancing and has surgery that costs $12,000. How much will she have to pay for the surgery in total? A:$500 B:$2,300 C:$2,500 D:$2,800

The correct answer is C. $12,000 - $500 = $11,500 covered loss Insured Portion $11,500 × .20 = $2,300 Max is $2,000 + $500 = $2,500

Robin's stereo was stolen. The stereo cost $3,000 when purchased. A similar new stereo now costs $2,400. Assuming the stereo was 50% depreciated, what is the actual cash value of Robin's loss? A: $400 B: $800 C: $1,200 D: $1,500

The correct answer is C. 2,400 × .50 = 1,200 (How much she paid is irrelevant to actual cash value).

Which of the following statements concerning the reduction of Social Security benefits is (are) correct? I: Besides early retirement, there are two other situations in which beneficiaries can have their benefits reduced: through the retirement earnings limitations test and through taxation of benefits. II: A person generally can continue to work even though he or she is considered "retired" under Social Security: however, those earnings obtained by a beneficiary under normal retirement age above certain limitations will reduce the benefit. A: I only. B: II only. C: Both I and II. D: Neither I nor II.

The correct answer is C. Both are true. SS Full Retirement Age (FRA) is dependent on year of birth, it is either, 65, 66, or 67. Early benefits can be taken between age 62 and the taxpayer's FRA. If early benefits are taken prior to FRA, and earnings exceed the limits, the SS benefit can be reduced.

False statements made by an applicant for insurance are: A: breaches of warranty. B: lack of offer and acceptance. C: misrepresentations. D: concealments.

The correct answer is C. Concealment is being silent regarding material facts to the underwriting process. Warranty is promising to do something.

Which homeowners policy is designed for the tenants of rental property? A: HO-2 B: HO-3 C: HO-4 D: HO-6

The correct answer is C. Remember, HO-4, for rent.

All of the following statements concerning the methods of providing life insurance protection are correct EXCEPT A: An insurance company can use three approaches to provide life insurance protection; term insurance, which is temporary, or cash value insurance, which is permanent protection that builds up a reserve or savings account, or universal insurance which combines elements of both approaches. B: Term insurance is a form of life insurance in which the death proceeds are payable in the event of the insured's death during a specified period and nothing is paid if the insured survives to the end of that period. C: The net premium for term insurance is determined by the survival rate for the attained age of the individual involved. D: Because death rates rise at an increasing rate as ages increase, the net premium for term insurance also rises at an increasing rate.

The correct answer is C. The premium is based on mortality rates.

All of the following statements regarding a Health Savings Account are true except A: Contributions made to the HSA by the plan participant are tax-deductible as an adjustment to gross income (above the line). B: Distributions from the HSA to pay for medical expenses are excluded from income. C: An employer makes contributions to an HSA on behalf of an employee, and the contribution limits are not exceeded, the employer contribution is not included in the taxable income of the employee. D: A 10% penalty applies to non-medical expense withdrawals prior to age 65.

The correct answer is D. A 20% penalty applies to non-qualified medical expense withdrawals prior to age 65.

All of the following statements concerning the legal characteristics of insurance contracts are correct EXCEPT A: The insurance contract is personal and follows the person rather than the property concerned. B: Insurance contracts are conditional in nature; that is, the failure of one party to perform relieves the other party of his or her obligation. C: An insurance contract is a contract of adhesion whereby the insurer prepares all contract details and the policy owner accepts the policy as prepared (adheres to it). D: It is generally held that where the terms of the policy are ambiguous, obscure, or susceptible to more than one interpretation, the construction most favorable to the insurer will prevail.

The correct answer is D. Any ambiguities in an insurance contract will be found in favor of the insured because insurance contracts are adhesive (take it or leave it).

A Corporation has 10 equity partners, interested in a Buy Sell arrangement. They would like to fund the agreement with term life insurance, and are comparing the Cross Purchase and Entity (No stock) methods. All observations are correct except: A: Basis step up for surviving partners with Cross Purchase B: Entity method administratively easier C: No basis step up for surviving partners with Entity Method D: Fewer policies required for a Cross Purchase

The correct answer is D. Cross Purchase will require 90 policies while Entity will require 10 - hence Entity administratively easier. Surviving partners get Basis Step Up with Cross Purchase, but not Entity.

Sally, age 59 ½, was employed full time at JMG corporation. The company has 25 full time and 10 part time employees but does not offer group health insurance. The company was recently forced to down size. What should Sally do for health insurance while unemployed? A: Elect 18 months of COBRA coverage. B: Elect COBRA for up to 36 months or until she has group coverage with a new employer. C: Elect Medicare coverage. D: Purchase an individual major medical policy until she obtains group coverage with a new employer.

The correct answer is D. Employers with 50 or more employees are required to offer health care benefits under the ACA. The employer is not required to offer COBRA because they do not have group health insurance. She is not eligible for Medicare until age 65.

Section II of the HO-3 policy provides coverage for which of the following: A: loss of use. B: personal property. C: other structures. D: medical payments.

The correct answer is D. Section II (parts E and F) covers liability and medical payments to others. Section I covers parts A (attached structures), B (other structures), C (contents) and D (damage).

Anu, age 36, owns a social media consulting firm. Her income fluctuates from year to year in an unpredictable manner. She wants to invest in an annuity on a regular basis until her retirement. Which of the following is the most suitable for her? A: Fixed premium, immediate annuity B: Single premium, immediate annuity C: Fixed premium, deferred annuity D: Flexible premium, deferred annuity

The correct answer is D. She wants to invest over her RWLE (deferred) and income varies (flexible).

All of the following statements concerning COBRA benefits are correct EXCEPT: A: The benefit recipient must pay the full cost of coverage plus up to 2% of the premium to cover administrative expenses (if required by the employer). B: Qualifying events for COBRA include death of a covered employee and reduction of the employee's hours from full-time to part-time. C: COBRA requires certain employers to provide previously covered persons with the same coverage received prior to discontinuation of coverage. D: Employers must offer coverage for 36 months if the employee is terminated, and for 18 months if the covered employee dies.

The correct answer is D. Termination is 18 months and death is 36 months. Normal events are typically 18 months and catastrophic events are 36 months. If a disability happens during the first 18 months of COBRA, you can have an additional 11 months for a total of 29.

All of the following statements concerning whole life insurance are correct EXCEPT A: There are multiple types of whole life insurance, including ordinary life insurance and limited-payment life insurance. B: If the whole life insurance premiums are to be paid throughout the insured's lifetime, the insurance is known as ordinary life. C: Ordinary life insurance is a type of whole life insurance for which premiums are based on the assumption that they will be paid until the insured's death. D: Because the premium rate for an ordinary life contract is calculated on the assumption that premiums will be payable throughout the whole of life, the highest premium rate for any type of whole life policy is produced.

The correct answer is D. The highest premium rate would be for a limited pay policy over a specified period of time.

Which of the following most accurately describes the criteria required for an insured to qualify for long-term care benefits for a qualified plan under the Health Insurance Portability and Accountability Act? A: The insured is unable to perform two of the six ADLs for 90 days. B: The insured has substantial cognitive impairment requiring substantial service. C: The insured must meet both A and B. D: The insured may qualify by meeting either A or B

The correct answer is D. The insured can meet either of the criteria.

All of the following statements concerning variable life insurance are correct EXCEPT: A: Variable life is a type of whole life insurance that has a fixed premium and fluctuating death benefit and cash values. B: Variable whole life policies must be regulated by the Securities and Exchange Commission (SEC). C: The owner of a variable universal life policy has the option to invest in a variety of investments. D: If the variable life policy investment experience is weak, the death benefit amount may be reduced to zero.

The correct answer is D. The policy will still have the face value benefit, even if the cash value has suffered from poor investment results.

All of the following statements concerning disability income insurance are correct EXCEPT: A: Premiums for disability income insurance coverage are a function of the insured's health, gender, age, and the level of income benefits provided by the policy. B: To qualify for disability income, one must become disabled while the policy is in force and remain so until the elimination (exclusion) period has ended. C: A policy that integrates with Social Security will reduce payable benefits by the amount of Social Security the disabled person is eligible to receive. D: The Social Security program requires the disabled person to wait 1 month before receiving benefits.

The correct answer is D. There is a 5 month waiting period for SS Disability. Individual must be not able to perform substantial work, expected to be disabled for one year or more, or result in death.