CPCU556

Joe and Maureen are a married couple. They are both eligible for Social Security retirement benefits and have decided to collect at age 66. At age 66, Joe expects to have a monthly Social Security retirement benefit of $2,000. Based on her work record, Maureen expects to have a monthly Social Security retirement benefit of $1,250. How much would Maureen receive if she decided to collect under Joe's spousal benefits?

$1,000 If Maureen decided to collect under Joe's spousal benefits, she would receive $1,000. When both are alive, Maureen's spousal benefit would be 50 percent of Joe's benefit.

Linda is a single mother and is concerned about financial support for her daughter if she should die. Her sister will take care of the daughter, but Linda would like to provide at least $150,000 toward the cost of her care. Linda would also like to have an additional $100,000 to fund her daughter's college education. Linda estimates her final expense need would be $10,000. Currently, Linda expects that there would be $25,000 left over from the sale of her house and car after her death. She has $35,000 of employer-provided life insurance, but no other employee benefits that would provide income for her daughter. Linda also has $10,000 in savings. Finally, she expects Social Security survivors benefits to be $130,000. Using the needs approach, how much life insurance should Linda purchase?

$60,000. Linda has current needs of $260,000 and $200,000 of resources to meet these needs

At which one of the following stages of the personal financial planning life cycle is tax planning important to consider?

All stages of the life cycle

Which one of the following statements about the transfer of assets to a child through a Uniform Transfer to Minors Act (UTMA) account is true?

Almost any type of asset can be transferred to the account.

At which one of the following stages of the personal financial planning life cycle is an individual most likely to make a maximum effort to divert income toward retirement?

An empty nester is most likely to make a maximum effort to divert income toward retirement

Joe receives payments as a result of structured settlement. In a structured settlement, a claimant typically receives a stream of periodic payments provided by which one of the following?

An immediate annuity is typically used to fund a structured settlement

Tanisha feels it is time to start planning for her retirement. She wants to build a diversified investment portfolio for which she can periodically reduce investment risk as she moves closer to retirement. Which one of the following investment strategy would best fit her goals?

Asset allocation

When Paula had a financial adviser look at her financial plan, the adviser realized Paula was an aggressive investor. The advisor was concerned that the investments in her portfolio could only be converted to cash with a possible loss of a significant amount of principal. The advisor suggested that she maintain a certain amount of her investments as an emergency fund that is very highly liquid and not subject to default risk. Which one of the following types of investments would be most appropriate if she accepts the adviser's recommendation?

Bank saving accounts are the only one of these investments that is both liquid and has a very low default risk.

Qualification for Social Security disability income benefits requires objective medical evidence that a worker's impairment meet which one of the following requirements with respect to duration?

Be expected to last at least 12 consecutive months or to result in death

A person designated in a life insurance policy to receive a death benefit is referred to as the

Beneficiary

Which one of the following statements about unemployment insurance is true?

Benefits are limited and vary from state to state.

The Connors' financial advisor told them that the accepted rule for an investment portfolio to meet future educational funding is to

Create a mix of investments that anticipates the prospective student's age and the number of years before the funds will be needed. The accepted rule is to create a mix of investments that anticipates the prospective student's age and the number of years before the funds will be needed.

Which one of the following is a characteristic of traditional whole life insurance?

Fixed, level premiums

Which one of the following types of investments relies primarily on capital appreciation for its total return?

Gold is a type of investment that relies solely on capital appreciation for its total return. Bonds, rental real estate, and value stocks all have a component of investment income.

Kevin recently purchased a long-term disability income policy. The policy states that he can renew the coverage until age 65 as long as he is gainfully employed. However, the insurer reserves the right to raise the premium at renewal. This policy is considered

Guaranteed renewable.

An individual's largest tangible asset is typically his or her

Home.

A unit benefit formula in a defined benefit pension plan bases the promised benefit on a participant's

Income and years of service.

Aileen established a will as part of her estate planning process. Which one of the following statements describes the nature of a will used as part of personal financial planning?

It specifies how property is to be distributed at death

Life insurance may be temporary or permanent. Which one of the following major categories of life insurance provides temporary coverage?

Term life insurance provides temporary death benefit coverage that ceases at the end of the term period. Ordinary whole life, universal life, and variable universal life all provide permanent coverage.

Patrick is using the needs approach to help a couple determine an adequate amount of life insurance based on the survivor's needs. They have determined that the total capital needed to meet the survivor's cash and income needs is $500,000. Which one of the following should be subtracted from this number to determine the amount of new life insurance required?

The amount of current life insurance owned should be subtracted from the $500,000 to determine the amount of new life insurance required.

Richard, who has reached his full retirement age, would like to surprise his wife with cruise for their fortieth wedding anniversary. He plans on taking a withdrawal of $25,000 from his traditional IRA. All contributions to the IRA were made with deductible contributions. Which one of the following correctly describes the federal income tax implications of this withdrawal?

The entire distribution is treated as ordinary income, but there is no penalty tax, because Richard has reached age fifty-nine and one-half.

The largest group of Medicaid recipients is

The largest group of Medicaid participants is children.

Mary and John recently purchased a condominium and have a 15-year mortgage loan. Because Mary is the couple's primary source of income, she wants to purchase term life insurance for this period so that the loan will be paid off if she dies. She has looked at both straight line decreasing term insurance and mortgage protection decreasing term insurance. Which one of the following statements describes how, if at all, these two types of policies differ?

The mortgage protection policy will provide more protection during much of the policy period, because the mortgage loan does not decrease on a straight line basis.

Which one of the following statements about a charitable remainder trust created by a will is true?

There will be a specified period before a charity becomes the owner of the trust assets

Which one of the following statements about health-related loss exposures is true?

Young, healthy individuals often do not recognize the financial benefits that health insurance can provide

Which one of the following statements about savings and investment planning as part of a comprehensive financial plan is true?

here are investment techniques that can reduce the risk inherent in the investment process. For individuals, there is an enormous variety of financial instruments available.

Eligibility to contribute to a Roth IRA is reduced under which one of the following circumstances?

person has adjusted gross income above a certain leve

Grant and Gretchen and their family are insured under a healthcare plan that allows them to see any physician, but they have higher copayments if they visit one who is not a member of the plan's network. They are also not required to select a primary care physician. This type of plan is

preferred provider organization

Charles purchased a life insurance with a death benefit of $250,000, and named his wife Kate as the beneficiary. When he died at age 55, Kate received the $250,000. Because Charles was so young, and he had purchased the policy at a discounted rate through his employer, his cost basis was only $10,000. What amount, if any, would be recognized as taxable for Kate?

$0 The entire death benefit would be tax free for Kate. Death benefits are tax free even though they may significantly exceed the policyholder's cost basis in the policy.

US Savings Bonds Series EE/Series I (owned by parent)

$10,000 maximum purchase per individual per calendar year and interest is free of federal tax if used to pay for qualified higher education expenses. Tax advantages phase out at a higher income level

Meghan decided to purchase a long-term care policy through her employer. The policy had a daily maximum limit of $150. She was fairly young and healthy at the time, so she selected a maximum policy period of two years. What is the maximum benefit for Meghan's long-term care policy?

$109,500 The policy has a maximum benefit of $109,500. The policy period is 730 days (365 x 2) and the maximum per day is $150. ($150 x 730 = $109,500)

Jane has read that when her son is ready to start college in 15 years, the cost of his freshman year tuition will be $35,000. Assuming that she can earn 6 percent on her investments, what is the cost of the freshman year tuition in current-day dollars?

$14,595 Using the formula PV =FV x 1/(1+ i)t , the cost of the freshman year tuition is $14,595. $35,000 x 1/ (1 + .06)15th = $35,000 x .417

Now that Clara and Trey have finished educating their children, Clara has decided to take early retirement at the age of fifty-five so that she can devote her time to volunteer work. She and Trey will be in a high federal income tax bracket after his retirement, so they would like to have some tax-free income at that time. As a result Clara has decided to roll over her 401(k) balance of $150,000 into a Roth IRA. Her 401(k) consists of $80,000 contributed by her employer and $70,000 of plan earnings. Clara has made no contributions to the plan. How much must Clara and Trey include in income for federal tax purposes when she makes this rollover?

$150,000 She will have $150,000 of taxable income, which represents the untaxed qualified plan amounts. The 10 percent tax penalty on early distributions does not apply to such rollovers.

Timothy currently needs some funds to meet an urgent obligation and has decided to take a policy loan from his life insurance policy. If the loan is $19.000, what amount of the loan would he need to report for federal income tax purposes if the loan amount is $19,000, he has a gain of $25,000 under the policy and surrenders the policy before repaying the loan?

$19,000 The amount that he would have to report is the smaller of the gain or the loan under the policy, or $19,000.

Assuming it is not reduced because the parents' income is too high, what is the maximum annual contribution that parents can make to a Coverdell Education Savings Account for any eligible child?

$2,000

Lucy was the beneficiary of a non-qualified annuity owned by her father. Her father died during the accumulation period, and Lucy received $50,000 in death benefits. Her father's cost basis on the annuity was $20,000. How much of the death benefit, if any, is subject to taxation for Lucy?

$30,000 Lucy will be required to pay taxes on $30,000 of the death benefits. This is calculated by subtracting the cost basis of $20,000 from the $50,000 in death benefits that she received

Series I Treasury bond returns rise and fall based on which one of the following?

Series I Treasury bond return rise and fall based on inflation

Required minimum distributions must be taken each year from a traditional IRA beginning when the owner reaches age

Seventy-two.

Personal financial planning must include Social Security, which includes income benefits to older persons. Recipients are not able to receive their full monthly benefit until they reach full retirement age. By 2027, the full retirement age will be

Sixty-seven. By 2027, the full retirement age will be sixty-seven

Which one of the following statements about original Medicare is true?

Some people under age 65 may be eligible for coverage.

Renewability

Some term life insurance policies can be renewed at the end of the coverage period without evidence of insurability. So, the premium for a renewable term life insurance policy normally increases each renewal term period to reflect the insured's increased age.

Preferred stock

Stock that is generally nonvoting but that has priority over common stock, usually regarding dividends and capital distribution if the corporation ends its existence.

Types of Life annuities

Straight-life annuity, Life Annuity with period certain guarantee, Refund Annuity, and Joint and Survivor annuity

Which one of the following statements about variable universal life insurance policies is true?

Subaccounts may differ from one another by such factors as asset class and risk.

An immediate annuity that is often used in a structured settlement and whose underwriting and premiums consider the applicant's health history and specific life expectancy is referred to a

Substandard annuity

A downturn in the economy may have a negative impact on all common stock. This is an example of which one of the following types of risk?

Systematic

Benefits of Annuities

Tax-Efficient Retirement Savings - interest on the principle is not taxed until annuitant receives as payment Income that cannot be totally Outlived Guaranteed Death Benefits

In general, which one of the following would be the last asset an individual should spend down if the goal is to maximize tax benefits?

Tax-deferred assets, such as assets in a 401(k) plan will be taxed at ordinary income tax rates.

Tax-deferred

Tax-deferred funding vehicles delay the taxation of investment earnings until the earnings are distributed. Unlike tax-deductible and tax-deferred investment vehicles, contributions to tax-deferred funding vehicles are made with after-tax funds, such as with a nonqualified annuity. No contribution limitations or lifetime required minimum distribution (RMD) rules apply to nonqualified annuities, but withdrawals may subject the owner to surrender charges; unfavorable last-in, first-out (LIFO) tax treatment; and tax penalties (if withdrawals are made before age 59.5).

Tax-free

Tax-free retirement funding vehicles offer investors nontaxable earnings, but the downside is that contributions to them are made with after-tax funds. Two types of funding vehicles that offer tax-free distributed income for qualified distributions are municipal bonds, which are debt obligations of a state or local government entity, and Roth IRAs. Unlike funds contributed to tax-deductible and tax-deferred funding vehicles, contributions made to these vehicles may be withdrawn without penalty (in most cases) or taxes.

Characteristics of Term Life Insurance

Temporary protection, no cash value, renewable Lower initial premium Renewability Convertibility

An annuity contract whose value fluctuates with that of an underlying securities portfolio and which has no guarantee as to principal or minimum interest rates is referred to as a

variable annuity is an annuity contract whose value fluctuates with that of an underlying securities portfolio and which has no guarantee as to principal or minimum interest rates.

Income replacement ratio method

The individual's estimated earned income in the final three years of employment is averaged together. A specified percentage (generally 60 percent to 80 percent) is then applied to that figure to approximate the amount of income that person will need in the first retirement year.

The insurer

The insurer collects annuity payments, invests the principal, and makes periodic payments to the annuitant.

Exclusion ratio

A ratio for an annuity that is determined by dividing the cost basis by the expected return under the annuity. The result is the portion of each periodic payment that is excludible from income until the entire cost basis has been fully recovered

Evidence of insurability

A requirement by a life insurer that the insured demonstrate that he or she still meets the insurer's underwriting standards. The insured is usually required to submit a medical questionnaire or have a physical examination to show that he or she is in good health.

Simplified employee pension (SEP) plan

A retirement plan that closely resembles an IRA but that has higher annual contribution limits and is sponsored by employers.

Qualified retirement plan

A retirement plan that meets the requirements established by the Internal Revenue Code for favorable tax treatment

Roth IRA

A retirement savings plan by which an individual can accumulate investment income on a tax-free basis (subject to certain limitations)

Traditional IRA

A retirement savings plan by which an individual can use tax-deductible and tax-deferred methods for accumulating funds

Treasury bills (T-bills)

A short-term debt instrument purchased at a discount and redeemed at par. The difference between the purchase price and the par value is the interest income.

John wants to set up a trust for his minor grandchildren, but he does not want them to have their share of the trust corpus until they reach age twenty-five. However, he would like his daughter, who is the trustee, to have the discretion to use trust assets to pay for special needs such as college costs and medical expenses. This trust should have which one of the following provisions to meet this objective?

A sprinkling clause will provide his daughter with the discretion to make such payments.

Free Application for Federal Student Aid (FAFSA)

A standardized need-analysis form necessary to receive any form of financial aid from federal, state, or university sources

529 plan

A state-sponsored, professionally administered savings plan for postsecondary education expenses that accumulates funds that are federal tax deferred and may be exempt from certain state taxes.

American opportunity credit

A tax credit that reduces one's tax liability for money spent each year on qualified higher educational expenses and, being refundable, is even available to taxpayers who have no federal income tax liability and is paid to such taxpayers as a tax refund.

Tax deferral

A tax-planning strategy that enables a taxpayer to delay the recognition of income for tax purposes

Level term life insurance

A term life insurance policy in which the death benefit remains unchanged throughout the life of the policy.

Certificates of deposit (CDs)

A type of commercial paper issued by a financial institution that acknowledges receipt of money and promises to repay it, with interest, at a specific time. A minimum deposit is often required, and substantial interest penalties may apply if the CD is redeemed before its scheduled maturity. The primary advantage of CDs is their relatively higher interest rate compared with other savings accounts.

Indemnity plan

A type of healthcare plan that allows patients to choose their own healthcare provider and reimburses the patient or provider at a certain percentage (usually after a deductible is paid) for services provided.

Managed-care plan

A type of healthcare plan that provides members with comprehensive services and encourages them to use providers belonging to the plan.

Which one of the following statements about a typical term life insurance policy is true?

A typical term life insurance policy terminates without value at the end of the specified period of coverage.

Expense method

Estimates needed retirement income by considering the retiree's anticipated total expenses in the first year of retirement. Because a retiree's expense estimate is particularly speculative when retirement is many years away, the financial planning professional and the individual should estimate the needed income and revise it regularly.

Chuck is in search of financial assistance for his college expenses. What is the frequency with which he and his family will need to repeat the Free Application for Federal Student Aid (FAFSA) form?

Every year Chuck is enrolled in a qualified postsecondary program

Corporate bond

Evidence of debt issued by a corporation

EFC (expected family contribution) Formula

Expected parent contribution + expected student contribution

Calculating the Future Value of Tuition

FV = PV x (1 + e)n FV - Future Value PV - Present Value e- education inflation rate n - number of years until the year school being paid for

"First in, first out" (FIFO) income tax treatment

Favorable income tax treatment under which all tax-free cost basis is deemed distributed before any taxable gain is distributed.

Which one of the following statements about personal financial planning is true?

Financial goals often create conflicts because individuals have limited resources to achieve their goals.

Uncertainty about the future investment returns of a given asset because of the amount of debt of the organization on which the investment is based is called

Financial risk is the uncertainty about the future investment returns of a given asset because of the amount of debt of the organization on which the investment is based.

Rick's daughter will be getting married soon, and he has decided to take a loan from his qualified retirement plan at work to pay for the wedding expenses. Which one of the following is the maximum period of time he can have to pay these funds back without them becoming a taxable distribution?

Five years

Compensation

For purposes of IRA eligibility, compensation means wages, salary, professional fees, and other income received for services actually performed

Qualified Annuities

Gain is tax deferred income tax treatment of qualified annuity premiums is determined by the tax treatment given to the qualified plan with which it is used

Nonqualified Annuities

Gain is tax deferred until distributed Distributions, including withdrawals and loans, are taxed on a generally unfavorable interest-first—or last in, first out (LIFO)—basis

Arlene is a financial advisor. She knows that it is important to realize how the owner of assets wants to have them distributed upon his or her death. At which step in the estate planning process is it most appropriate to solicit this information?

Gather facts How the owner of assets wants them distributed upon death is part of gathering facts in step 1.

Types of municipal bonds

General obligation bonds, revenue bonds and Assessment bonds

Types of Stock

Growth stock, common stock, cyclical stock, defense stock, income stock, penny stock

Alexa, a financial planning professional, is preparing for an estate planning meeting with new clients. Which one of the following is the best way for Alexa to gather important information on the estate owners' intentions and their present and anticipated financial situation?

Have the estate owners complete a questionnaire The best way to gather this important information for estate planning is to have the estate owners complete a questionnaire.

Joe has been unemployed for the past two years and has decided to use some of his meager savings to obtain additional education. His expenses qualify for the federal American opportunity credit. However, he will not have an income tax liability for this year. Which one of the following correctly describes the extent that the credit will benefit Joe?

He can receive the credit as if it were a tax refund for a year that he had eligible expenses.

Xavier purchased an asset that increased in value almost immediately. How long after the purchase must he wait until he can sell the asset and receive favorable long-term capital gains treatment?

He has to wait more than one year to receive long-term capital gains treatment.

Which one of the following statements about insurance treatment of health-related, disability, and long-term care loss exposures is true?

High costs associated with medical care, disability, and long-term care can force some individuals and families into bankruptcy.

Money market mutual funds

Highly secure, liquid investments that investors commonly use for the liquid portion of their investment portfolios. They are managed by investing in ultra-safe, short-term securities such as United States Treasury bills. Investment yields are slightly higher than with savings or money market accounts, but these accounts are not protected by the FDIC. Fees and minimum-balance requirements can reduce returns.

Regular savings accounts

Highly secure, liquid, and convenient investments that pay a fixed rate of interest and are insured by the Federal Deposit Insurance Corporation (FDIC).

Which one of the following statements about tax planning as part of the personal financial planning process is true?

If done efficiently, it can reduce the cost of health insurance.

Total Need-Based Financial Aid

If the EFC plus additional financial aid totals less than the cost of attendance (COA), which includes tuition and fees, room and board, books and supplies, and transportation, the student qualifies for need-based aid.

Which one of the following statements about structured settlements that are funded with annuities is true?

If the claimant is eligible for Medicare or Medicaid, the settlement may need to be reviewed and approved by the Centers for Medicare and Medicaid Services.

Parties to an Annuity Contract

The insurer, The Contract Owner and The annuitant

Which one of the following is the distinguishing feature of an asset allocation (life-cycle) fund?

The investment mix becomes less risky over time The distinguishing feature is that the investment mix becomes less risky over time.

Holding period

The length of time an asset is owned, which generally determines whether the capital gain is subject to taxation as a long- or short-term capital gain.

Bond Interest Rate Risk

The market value of a bond moves inversely with market interest rates, so bond prices go down when interest rates go up. The longer the bond's maturity, the greater the bond's price sensitivity to interest rate risk.

Which one of the following describes what can be contributed to a Coverdell Education Savings Account for each beneficiary?

The maximum annual contribution is fixed, but this amount is reduced for contributors with modified adjusted gross incomes above specified limits.

Which one of the following is the most common advice that employees receive regarding employer-sponsored 401 (k) plans?

The most common, and perhaps best, advice that employees receive regarding employer-sponsored 401 (k) plans is to contribute enough to ensure that they receive their employers' maximum match.

Kiddie tax

The net unearned income of children under age 14 that is taxed to the child but at the child's parents' top marginal federal income tax rate, assuming this rate is higher than the child's tax rate

Distribution period

The part of a savings program during which accumulated funds are disbursed

Accumulation period

The part of a savings program during which funds are accumulated

The annuitization period of a deferred annuity is

The period during which the annuity's cash value is systematically liquidated.

Jack and Eva are a couple without children and have wills that name each other as primary beneficiaries. They recently decided to have a financial plan prepared for them. As a result, it came to their attention that they should also have contingent beneficiaries in case they were both to die at the same time. Therefore, each named a relative as the contingent beneficiary. This is an example of which step in the financial planning process?

Implementing the plan

Cost basis

In a life insurance policy or an annuity contract, generally the after-tax amount paid for the policy or contract

Incidents of ownership

In a life insurance policy the power to designate or change the policy's beneficiary, surrender the policy, and assign or borrow the policy's cash value

Convertibility

In addition to being renewable, term life insurance policies are typically convertible to any kind of permanent life insurance the insurer is offering on the date of conversion. And as with renewals, the insured can convert the policy without having to provide evidence of insurability. Usually, conversions can be made only up to a maximum insured age.

Open-end funds

In an open-end fund, new shares are continuously offered for sale, and the mutual fund itself will redeem any outstanding shares based on the current per-share value of the underlying investments. More than 90 percent of mutual funds are open-end funds.

Claire's currently makes almost $250,000 per year and would like to make after-tax contributions to help fund her retirement. She currently works for an employer with a 401(k) plan, but she makes no personal contributions to the plan. She has also been looking at a deferred annuity and various types of IRAs. If her primary goal is current federal tax minimization, which one of the following is the first place she should put her money?

In the 401(k) plan as an elective deferral She should put money into the 401(k) plan as an elective deferral, up to the limit allowed, as it is with before-tax dollars.

With the exception of spousal IRAs, the eligibility rules that apply to all traditional IRAs require individuals to have earned income of

In the year the contribution is made.

Income from a grantor trust is taxed to which one of the following?

Income from a grantor trust is taxed to the grantor.

William had diversified portfolio of common stocks. As he approached retirement, he decided to shift more of his portfolio into stocks of companies with an established record of stable dividend payments. William should increase his investment in which one of the following types of common stock?

Income stock is issued by a company with an established record of stable dividend payments

Index funds

Index funds are mutual funds that aim to mirror a particular index, such as the S&P 500 stock index, by purchasing the same set of assets that are included in the target index.

Which one of the following groups is eligible to make a catch-up contribution to a traditional IRA?

Individuals age 50 or older

What is the effect of inheritance taxes on an estate?

Inheritance taxes reduce the value of heirs' inheritance.

Which one of the following statements about various categories of investment risk is true?

Interest rate risk is associated with the market price of older bonds falling relative to the price of new bonds

Mark recently inherited $200,000, and he has decided to invest it in bonds. He plans on using a five-year laddering approach to earn the higher interest rates associated with longer maturities while preserving liquidity and reducing interest rate risk. What should he do the first year?

Invest $40,000 in each of five bonds that have one-year, two-year, three-year, four-year, and five-year maturities Under a laddering strategy, he would invest $40,000 in each of five bonds that have one-year, two-year, three-year, four-year, and five-year maturities. At the maturity of each bond, he would use the proceeds to buy a five-year bond.

Jim and Eileen were considering investing in a 529 plan for their son's tuition. Which one of the following statements about 529 plans is true?

Investments accumulate on a tax-deferred basis, and withdrawals may also receive favorable tax treatment

Money market accounts

Investments that are similar to regular savings accounts, but the number of withdrawals per month is typically limited. They may require higher balances than savings accounts, might pay slightly higher interest rates, and are sometimes insured by the FDIC.

Which one of the following statements about an asset allocation investment strategy is true?

It allows an investor to tailor an investment portfolio to his or her own risk tolerance.

Several friends advised Maureen to purchase Medicare Supplement Insurance (Medigap) when she turned 65. Which one of the following statements about Medicare Supplement Insurance (Medigap) is true?

It fills gaps in the Original Medicare program (Part A and Part B)

Which one of the following statements describes a characteristic of a defined contribution retirement plan?

It has individual participant accounts.

Which one of the following describes what can be contributed to a Coverdell Education Savings Account for each beneficiary?

It is a fixed amount, but this amount is reduced for contributors with modified adjusted gross incomes above specified limits.

Information in the Free Application for Federal Student Aid (FAFSA) leads to a measure of a family's strength called the Expected Family Contribution (EFC). Which one of the following statements about the EFC is true?

It is affected by family size.

Many states levy a death tax that is sometimes called a pickup or sponge tax. Which one of the following describes the nature of this tax?

It is an estate tax that equals the credit for death taxes available under the federal estate tax.

In a deferred annuity, interest is credited to the cash value that accumulates during the accumulation period. Which one of the following statements describes the income tax treatment of this interest if the annuity is owned by a living person?

It is deferred and not subject to taxation until it is distributed

The personal financial planning process results in a financial plan that has which one of the following characteristics?

It is tailored to specific needs as they exist at the time the plan is established.

Which one of the following statements best describes personal financial planning?

It is the process used to develop and implement a comprehensive plan for achieving financial goals

Which one of the following statements about the federal lifetime learning credit is true?

It may apply to the taxpayer, a spouse, or a child.

Universal Life Insurance

It offers permanent protection but the cash value must be sufficient to enable the insurer to make its monthly deductions from the policy's cash value for mortality costs and expenses

Which one of the following statements about the basic provisions of the Affordable Health Care Act of 2010 is true?

It requires insurers to spend set percentages of premiums received on direct medical care or improvements in the quality of care provided.

Which one of the following statements about the Free Application for Federal Student Aid (FAFSA) is true?

It requires the reporting of taxed as well as untaxed income

Which one of the following statements about a substandard annuity is true?

Its underwriting and premium consider an applicant's health history and specific life expectancy.

Tran borrowed money at a fixed interest rate to purchase 1,000 shares of stock in a new business venture that he expects will make him wealthy. Tran is engaging in which one of the following?

Leverage is the practice of using borrowed money to invest.

Permanent life insurance

Life insurance designed to remain in force for an insured's entire life and provide a death benefit at death, characterized by the presence of a cash value

Which one of the following offers a way to help pay the costs of skilled nursing facilities, adult daycare facilities, and home healthcare services for individuals suffering from serious medical conditions?

Long term care insurance has emerged as a way to pay expenses associated with treating serious, long-term medical conditions such as cancer, Alzheimer's disease, and multiple sclerosis. It helps pay the cost of skilled nursing and adult daycare facilities, as well as home healthcare services.

Treasury notes and bonds

Long-term debt instruments that pay periodic interest payments (coupons). Treasury notes are issued with maturities from 2 to 10 years, while Treasury bonds are issued with maturities over 10 years.

Which one of the following statements describes the renewability feature found in most level term life insurance policies?

The policy is guaranteed continuable for an additional period without the insured needing to prove continuing insurability. Under the typical level term life insurance policy renewability feature, coverage is continuable for an additional period without the need to prove continuing insurability.

Quinn received a merit scholarship from a local university. The use of the funds to pay for which one of the following will result in taxable income for federal income tax purposes?

The portion of merit scholarships used for room and board is taxable

Investment risk is

The possible variation in total return on an investment

Investment risk

The possible variation of total return on an investment

The fewest number of people recognize which one of the following personal financial exposures?

The potential financial devastation they could face if they or their spouse were to became disabled

Leverage

The practice of using borrowed money to invest

Which one of the following statements is correct regarding how the single premium for a substandard life annuity tends to compare to the premium for an otherwise identical standard life annuity?

The premium for the substandard life annuity is less because of the annuitant's reduced life expectancy.

Lower initial premium

The principal attraction of term life insurance coverage is its low initial premium cost. Insurers generally offer a rate guarantee for an initial multiyear period, after which premiums are either guaranteed at a relatively low (but increased) rate for an additional multiyear period or changed to yearly renewable term coverage at a current, nonguaranteed premium rate that is significantly increased.

The probate estate upon a decedent's death consists of

The probate estate upon a decedent's death consists of property passed to others by will or intestacy laws.

Al died six months before his planned retirement. A lump-sum death benefit was payable from his qualified retirement plan. Assuming the death benefit was not from life insurance, which one of the following statements describes the federal income tax treatment of these proceeds to his beneficiary?

The proceeds, less Al's cost basis, are fully taxable.

Realized capital gain

The profit earned on an asset, such as a bond or stock, when it is sold for more than its cost.

Donee

The recipient of a gift

Compound annual rate of return

The return earned on reinvested investment income in addition to the return earned on the principal.

Elizabeth's estate planning team has advised her that one of her estate planning goals should be to have cash on hand to cover outstanding bills, estate taxes, probate costs, and income taxes at the time of death. Which one of the following risks can be avoided by maintaining cash on hand?

The risk of having to sell off assets at a loss Maintaining cash on hand can avoid the risk of having to sell off assets at a loss. If there is not adequate cash in the estate, the executor may have to sell off other assets at a loss in order to cover probate costs, outstanding bills, estate and income taxes.

Liquidity risk

The risk that an asset cannot be sold on short notice without incurring a loss

Total return

The sum of the capital appreciation (or losses) and the income earned on an investment over a specified period

total return

The sum of the capital appreciation (or losses) and the income earned on an investment over a specified period.

Werner received a gift of property that exceeded the donor's adjusted cost basis. Werner's cost basis in the property is which one of the following?

The sum of the donor's adjusted cost basis and part of any gift tax paid

Dollar cost averaging

The systematic investing of the same amount of money in the same stock or group of stocks over a period of time, regardless of the changing share prices

An annuity used as a funding vehicle in a qualified retirement plan is referred to as a qualified annuity. What determines the federal tax treatment of such an annuity?

The tax treatment of the plan with which it is associated

Benefits provided under a disability income policy

vary depending on the type of policy. They tie together all of the policy features—such as the waiting period, the benefit periods, the perils insured against, and the definition of disability—with options such as the amount of coverage and the payment period (weekly, monthly), and any terms for coordination of benefits with other disability income policies.

Paula is a successful business woman. She is married with three grown children. Paula has always been very grateful for her college experience, and feels that it is responsible for much of her success. She has made a pledge of $50,000 to the college when she dies. She would like to fund this pledge through a life insurance policy. Which one of the following types of life insurance policy should she purchase to guarantee that the separate funds are available to satisfy this pledge?

whole life insurance policy is appropriate to provide the funds to meet her pledge to the college at the time of her death. It provides permanent and level life insurance. The premiums are also fixed.

Characteristics of a nonqualified plan

· Do not meet IRX section 401 requirements · Do not receive favorable tax treatment · Flexible as to benefits and coverage (may cover as few as one participant)

Characteristics of a Qualified plan

· Must meet various internal revenue code (IRC) section 401 requirements to obtain tax advantages · Receive favorable tax treatment General less flexible due to the need to meet coverage, vesting, and other requirements

Now that their children are grown, Timothy and Zoe feel they have the resources to plan for their retirement, which they expect will be in about fifteen years. They are in good health and hope to have a long retirement to enjoy their hobbies and to travel. Over what period should they take into account the effect of inflation?

They need to consider the effect of inflation during their current planning period and through their entire retirement years.

Which one of the following distinguishes 529 prepaid tuition plans from other 529 plans?

They offer a hedge against rising costs of postsecondary because they allow beneficiaries to pay a specific school's tuition rates at current levels.

advantages of Cash Value Life Insurance

minimum guaranteed interest rate, tax-deferred or tax free earnings depending on the circumstances, and increased liquidity

Jim and Louise have been retired for a number of years. Their retirement income from Social Security, pension plans, and payments from a life annuity allows them to meet their day-to-day expenses. They are planning a trip to Italy and will need to access the funds from one of their accounts. Which one of the following accounts will result in the smallest income tax liability?

Louise's designated Roth account would provide the smallest income tax liability because it is tax-free.

Salary reduction plan

nonqualified plan under which executives may defer compensation until termination of employment to reduce current income tax liability and save for retirement.

Expected parent contribution

parents earned income, nontaxable income, interest from bonds, capital gains earnings, & qualified retirement plans contributions, cash, savings, checking balances, stocks and bonds, other investments or business interests - exclusions are the family residence, qualified retirement plan balances, & income and assets of noncustodial parents.

Revenue Bond

payable entirely from the revenue received from the users or beneficiaries of the projects that the bonds finance.

Assessment bonds

payable from taxes and assessments on those who benefit from the improvements that the bonds finance.

Whole Life Insurance

permanent, and the periodic premium is always the same

Business Risk

risk that is inherent in the operation of a particular organization, also affects most investments to some degree. Some business risk factors are controllable, but some are not

Annual rate of Return (no compounding) formula

the amount of money gained or lost at the end of the term and dividing it by the initial investment at the beginning

straight line decreasing term life insurance

the death benefit declines evenly over the term of the policy and is zero at the end of the period

Average compounded annual rate of return formula

the rate of return is divided by number of investment years

consumer directed health plans

three major components: A health savings account (HSA) or a health reimbursement arrangement (HRA) High-deductible medical coverage with no charge for preventive care Access to informational tools to make informed healthcare decisions

A life insurance specialist

to initiate the development of an estate plan or review of an existing plan and to recommend appropriate insurance products

An investment counselor

to provide advice about maintaining and increasing the estate's value

A trust officer

to provide expertise if a trust is used to implement an estate plan

An attorney

to provide legal advice about the overall plan and to draft and review wills and other legal instruments

An accountant

to provide technical advice on taxes and financial statements

Interest Rate Risk

uncertainty about an investment's future value because of changes in interest rates

Market Risk

uncertainty about an investment's future value because of potential changes in the market for that type of investment

Exchange Rate Risk

uncertainty about an investment's value because of potential changes in the exchange rate between currencies

Financial Risk

uncertainty about the future investment returns of a given asset because of the amount of debt held by the organization on which the investment is based

inflation risk

uncertainty about the future value of investment principal and investment return caused by changes in the overall price level of goods and services in the economy

An applicant for a universal life insurance policy specified an initial death benefit and selected an option that provided for a benefit upon death equal to this specified amount plus the policy's cash value. This applicant elected a death benefit option that is referred to as

Option B provides a death benefit equal to the specified amount plus the cash value

An irrevocable trust passed income through to the beneficiaries of the trust. The trust would have been taxed on this income as ordinary income if it had been retained in the trust. Beneficiaries are generally taxed as if this income is

Ordinary income The income generally retains its character when passed through to trust beneficiaries, so ordinary income remains ordinary income.

Present Value of Future Tuition

PV =FV × 1/(1 + i) t PV - Present Value FV - Future Value i - interest rate t - number of years from enrollment date

Treasury Inflation-Protected Securities (TIPS)

Securities that pay a specified rate of interest. The par value adjusts to reflect inflation. For example, if inflation were 2 percent this year, the par value of a TIPS bond would increase by 2 percent, as would future interest payments. TIPS bonds effectively eliminate inflation risk.

Coverdell ESA

limits up to $2,000 per calendar year per child and income and capital gains are not taxed if used for primary, secondary, or postsecondary education costs

Temporary Annuities

may be either fixed-period annuities or fixed-amount annuities

"cost of insurance"

means that the net amount of risk multiplied by the death rate at the insured's attained age decreases over time. the premium remains level

ruce and Sue are trying to decide how much additional life insurance is needed if he should die. Currently, Sue does not work outside the home. They have come up with the following needs of Sue and the family as a result of Bruce's death: NEED AMOUNT Final expenses $15,000 Debt elimination $340,000 Family living expenses $400,000 Special needs $25,000 Sue's retirement needs $350,000 Bruce and Sue currently have $10,000 in bank accounts. Bruce has $150,000 of employer provided life insurance, $300,000 of individually purchased life insurance, and a $50,000 death benefit in a pension plan. Sue is the beneficiary of all of these. The estimated Social Security survivors benefits upon Bruce's death are $230,000. Using the needs approach, how much additional life insurance should Bruce purchase?

$390,000. This is calculated by subtracting the $740,000 of resources available to them from the $1,130,000 of needs that would arise from Bruce's death.

Joel is a 50-year-old accountant who is earning an annual salary of $150,000. He plans to retire at age 65, and expects to need 80 percent of his earned income to maintain the lifestyle that he desires for retirement. His Social Security retirement will provide an annual income of $30,000 and his defined-benefit pension will provide an annual income of $45,000. What is Joel's annual retirement income shortfall that needs to be funded?

$45,000 Joel's annual retirement income short fall that needs to be funded is $45,000. His annual income of $150,000 times 80 percent equals $120,000 in annual retirement income needed. The $30,000 in Social Security and $45,000 in pension benefits are subtracted, leaving an annual short fall of $45,000

Tom and his spouse, Roz, want to give the maximum amount to each of their two children without creating any gift tax consequences. Assuming the annual gift tax exclusion remains at $15,000, what is the total amount of gifts that they can give annually?

$60,000 The amount is $60,000. They jointly can give $30,000 of this amount to each of their children.

Harriett, and her daughter, Hannah, own an apartment building as joint tenants with rights of survivorship. Harriett paid for two-thirds of the cost of the property, and Hannah paid the remaining cost. These amounts are documented. If the property has a value of $900,000 on the valuation date of Harriet's estate, how much of this amount will be included in Harriett's federal gross estate?

$600,000 because of the consideration furnished rule Because it can be documented that she paid for two-thirds of the cost of the property, two-thirds of its value will be in included in Harriett's gross estate.

Phil recently purchased a nonqualified annuity with a single premium of $105,000. The annuity will pay him a fixed income of $10,000 per year for the next fifteen years. Which one of the following describes how the annuity payments be taxed for federal income tax purposes?

$7,000 of each payment will be tax-free, and $3,000 will be ordinary income There is an exclusion ratio of 70 percent, which is determined by dividing his cost basis ($105,000) by his expected return ($150,000). Therefore, $7,000 of each payment will be tax-free, and $3,000 will be ordinary income.

Suggested Order of Asset Liquidation

1. Investments that have been losing money, for tax purposes, losses can be used to offset capital gains and up to $3,000 annually of ordinary income. 2. Available cash. 3. Investments that will produce long-term capital gains (because they are taxed at a lower rate than short-term gains). 4. Investments that will produce short-term capital gains. 5. Tax deferred assets, such as assets in 401(k) and 403(b) plans.

Harold is about to retire at his Social Security full retirement age of sixty-six. His financial planner has suggested that he might want to wait until age seventy to begin Social Security benefits and to withdraw funds from his low-yielding money market fund in the interim. By what percentage will his Social Security retirement benefits increase if he waits four year to start them?

32 - They will increase by 32 percent.

Meredith is a doting grandmother with significant financial resources. She wants to create sizeable funds to pay for the college educations of each of her nine grandchildren. She plans on putting at least $3,000 into each fund every year. She is also a controlling grandmother and wants to maintain total control of the plan to make sure withdrawals are used for education purposes. If the funds are not used for this purpose, she intends to reclaim them. Which one of the following types of funding vehicles bests meets Meredith's objectives?

529 plan A 529 plan best meets her objectives. She will lose control of the funds when each child reaches the age of majority if she uses a trust or an UGMA account. She cannot contribute enough to a Coverdell Savings Account.

Aaron and Brittany want to start putting aside some money for the education of their twin daughters, who they expect to attend the local state university from which three generations of family members have already graduated. They estimate that they can put away about $2,500 per year for each girl. They hope to increase these contributions in the future. They also would like to maintain total control of the funds, including withdrawals as long as the girls are in college. Aaron also feels he is a savvy investor, and he would like some ability to have a choice among investment options. Which one of the following funding vehicles best satisfies their objectives?

529 plan A 529 plan best satisfies their objectives. UGMA account owners do not have total control over withdrawals after the beneficiary reaches the age of majority. A Coverdell saving account has too low a contribution limit. Series EE savings bonds do not allow any alternative investment options.

The Carters would like to fund the education of their children at a local state college. They are looking for a funding method that guarantees the cost of future tuition so they can properly determine how much money they need to set aside each year. They should explore which one of the following types of plans?

529 plan Many states have 529 prepaid tuition plans that allow beneficiaries to pay future tuition to a specific school at current levels

The income replacement ratio method for determining needed retirement income usually uses which one of the following income replacement percentages?

60 to 80

Establishment of a disability period under Social Security disability

A "period of disability" under the Social Security law is a continuous period during which an individual is disabled. The established period of disability is not counted in determining either an individual's insured status under Social Security or the monthly benefit amount payable to the worker and his or her dependents. This period of disability is used to determine other types of Social Security benefits for the worker's family. A period of disability must be established during a worker's disability or within 12 months after the disability ends, assuming it lasted at least 5 consecutive months. Special exceptions exist to the 5-month waiting period; for example, the period is not required if the worker suffers a subsequent disability.

Meredith is a doting grandmother with significant financial resources. She wants to create sizeable funds to pay for the college educations of each of her nine grandchildren. She plans on putting at least $3,000 into each fund every year. She is also a controlling grandmother and wants to maintain total control of the plan to make sure withdrawals are used for education purposes. If the funds are not used for this purpose, she intends to reclaim them. Which one of the following types of funding vehicles bests meets Meredith's objectives?

A 529 plan best meets her objectives. She will lose control of the funds when each child reaches the age of majority if she uses a trust or an UGMA account. She cannot contribute enough to a Coverdell Savings Account.

Series EE savings bond

A U.S. savings bond sold in denominations of $25 to $10,000 that pay a fixed rate of return

Par value

A bond's face amount or the amount that the issuer will pay at a bond's maturity

Closed-end funds

A closed-end fund generally sells a fixed number of shares in the mutual fund itself. The shares are not redeemable by the mutual fund but can be sold to outside parties. Shares of closed-end mutual funds are traded in the securities markets and might sell at a price that is higher or lower than their net asset value (NAV).

Nonqualified annuity

A contract funded by after-tax funds between an insurer and a contract owner under which the insurer guarantees to provide periodic payments in return for one or more premium payments.

Coverdell Education Savings Account (ESA)

A custodial savings account, formerly called an Education Individual Retirement Account (IRA), whose earnings grow tax-free on behalf of a minor beneficiary if used to pay for primary, secondary, or postsecondary education expenses

Floating rate bond

A debt instrument that pays interest at a rate that is indexed to the rates on U.S. Treasury securities or other money market instruments.

Municipal bond

A debt obligation of a state or local government entity

For federal income tax purposes, a "below-the-line" deduction refers to which one of the following?

A deduction from adjusted gross income to determine taxable income

Cash balance plan

A defined benefit plan in which each participant has an account to which interest and employer contributions are credited.

Savings incentive match plan for employees (SIMPLE)

A plan that a small business with fewer than 100 employees can establish to allow its sole proprietors, partners, and employees to save for retirement on a tax-deferred basis.

Darlene recently gave her son, Fred, a gift of $100,000 to start a new business. Which one of the following correctly describes the federal tax implications of this transaction?

A portion of the gift is subject to gift taxation, but it is the donor (Darlene) who is responsible for any taxes due.

Definition of disability

A definition of "disability" might be based on the insured's inability to perform occupational duties, the amount of earned income lost, or both. If the first basis is used, the description might refer to "any occupation," "own occupation," or "split definition," with "any occupation" meaning that the individual is totally disabled and unable to perform the duties of any occupation and "own occupation" meaning the insured is unable to return to the duties of his or her specific occupation. With an "own occupation" policy, if the insured is able to earn income from another occupation, he or she will still receive 100 percent of the disability benefits. When the definition of disability is based on the amount of earned income lost, a specified percentage of this income will correspond with payment of benefits—for example, payment for a 30 percent decrease in salary.

Perils insured against by a disability income policy

A disability income policy provides specified benefits in the event that the insured suffers any illness, accident, or injury that causes him or her to lose income. Some disability policies pay disability income benefits for certain types of permanent injuries, such as the loss of a limb or blindness.

Benefit periods

A disability income policy specifies a benefit period (which ends when the disabled person returns to work) and a maximum benefit period (which specifies a date that benefits will end, regardless of the disabled person's work status) for a disabled person (the insured). Various benefit periods are available, up to a lifetime benefit

Qualified dividend

A dividend paid by a United States corporation, a corporation incorporated in a U.S. possession, a foreign corporation located in a country eligible for certain U.S. tax treaty benefits, or a foreign corporation whose stock can be readily traded on an established U.S. stock market and which meets applicable holding period requirements.

Designated Roth 401(k) account

A feature that combines the advantages of a Roth IRA with the convenience of a 401(k) plan.

Expected family contribution (EFC

A financial index derived from the income, assets, and other household information reported on the Free Application for Federal Student Aid used to determine a student's level of eligibility to receive federal, state, and institutional financial aid

Stretch IRA

A financial planning strategy designed to maximize tax deferral of IRA assets by extending minimum distributions for ten years beyond the death of the IRA account holder

Income fund

A fund that invests in bonds and a few stable dividend stocks and focuses on investment income rather than capital appreciation. While this fund earns a lower rate of return, the investment risk is considerably lower than that of the other alternatives.

Aggressive growth fund

A fund that is higher risk because it invests in stocks with higher-than-average growth potential and relies mainly on capital appreciation, or gain, to generate investment returns.

Long-term capital gain

A gain realized on the sale of a capital asset held for longer than 12 months.

Short-term capital gain

A gain realized on the sale of a capital asset held for one year or less

Certain gifts are exempt from the limits of the federal gift tax exclusion. Which one of the following gifts beyond the exclusion is subject to federal gift taxation?

A gift to pay college room and board is subject to federal gift taxation to the extent it, and other gifts to the same person, exceed the annual exclusion.

Which one of the following statements about estate planning is true?

A goal of estate planning is to create liquidity needed at the time of death.

Amelia's employer offers a point-of-service (POS) healthcare plan. A POS plan is a hybrid healthcare plan that has characteristic of which two other types of healthcare plans?

A health maintenance organization (HMO) and a preferred provider organization (PPO) A POS plan has characteristics of an HMO and a PPO

Beta

A measure of an asset's volatility relative to that of the overall market for that type of asset.

Renewal or continuance provision

A noncancelable disability income policy can never be canceled by the insurer. Additionally, the insurer cannot change the benefits provided, the rates, or other policy features unless the insured requests a change. A guaranteed renewable policy will continue as long as premiums are paid, up to a specified age, as long as the insured is gainfully employed. Even though the insurer must renew the policy at the insured's request, the insurer reserves the right to raise premiums on renewal for reasons specified in the contract. A conditionally renewable policy gives the insurer the option to increase the premium and change the policy terms at renewal. Also, it allows the insurer to cancel the contract if the conditions for renewal are not met.

Some long-term care policies now provide nonforfeiture options. Which one of the following is the benefit of a nonforfeiture option?

A nonforfeiture option gives the insured party a choice of ways to use the cash value if the policy is terminated.

Reduced paid-up insurance

A nonforfeiture option whereby the owner accepts a reduced paid-up amount of permanent insurance that requires no further premium payments.

Series I savings bond

A nonnegotiable U.S. Treasury obligation that pays investors a composite fixed rate plus an inflation-based rate of return that is adjusted annually and is issued at a face value

Supplemental executive retirement plan (SERP)

A nonqualified plan that provides retirement benefits in addition to those provided by qualified plans, usually for highly compensated employees.

Lifetime learning credit

A nonrefundable, dollar-for-dollar reduction of one's tax liability for money spent each year on qualified higher educational expenses.

Defined benefit pension plan

A pension funded by an employer that promises to make a set payment (the defined benefit) to the employee when he or she retires.

Employee stock ownership plan (ESOP)

A qualified retirement plan that is funded by the employer's stock.

Brad is single and 50 years old. He recently had a promotion at work and has decided to use some of his salary increase to fund additional retirement income. He participates in the 403(b) plan of his employer, but he contributes just enough to get the full employer matching contribution. He has not made any additional elective deferrals under the plan, even though he could do so. His adjusted gross income this year is such that he can only contribute to an IRA on an after-tax basis, and he is ineligible to establish a Roth IRA. He expects to be in a low income tax bracket after retirement, and his objective today is to minimize his current taxable income. Which one of the following would best meet Brad's objective?

Additional elective deferrals under the 403(b) plan Elective deferrals under his 403(b) plan will reduce his taxable income.

Modified adjusted gross income (MAGI)

Adjusted gross income increased by specified items, such as tax-free foreign earned income

Which one of the following is the basis used to determine charitable deduction limitations for federal income tax purposes?

Adjusted gross income is the basis used to determine charitable deduction limitations for federal income tax purposes

Cash value withdrawals from life insurance policies generally receive favorable "first-in, first-out" tax treatment. What does this mean?

All tax-free cost basis is deemed distributed before any taxable gain is distributed

Income in respect of a decedent (IRD)

All the income a deceased would have received if death had not occurred; it cannot be included in the deceased's final tax return

Grad PLUS loans

Allow graduate and professional degree students to borrow the cost of tuition, room and board, supplies, and transportation, minus any other aid. Although Grad PLUS loans are credit-based aid (not need-based), similar to a private student loan, applicants still must complete the FAFSA. Annual amounts are limited to the actual COA less other financial aid for the same academic year.

Rollover IRA

An IRA funded by assets transferred from a qualified retirement plan or another IRA designed to delay taxation of transferred funds

Financial needs analysis is part of the financial planning process. This analysis translates an individual's retirement goals into which one of the following

An accumulation goal that must be met.

Deduction

An amount that reduces an individual's income subject to tax

Immediate qualified life annuity

An annuity designed to provide guaranteed income payments for life that begin between one month and a year after purchase and are purchased with funds from a tax-advantaged account

Qualified annuity

An annuity that is used as a funding vehicle in a qualified plan, such as an individual retirement account, a tax-sheltered annuity, or a 401(k) plan

Deferred annuity

An annuity with an accumulation period that usually lasts a number of years

Rate of return

An asset's or activity's annual profit or surplus, expressed as a percentage of its original cost.

rate of return

An asset's or activity's annual profit or surplus, expressed as a percentage of its original cost.

Which one of the following statements about the estate planning process is true?

An estate plan should be designed to avoid involuntarily liquidating any estate assets.

Sandy was named in her mother's will as the person to oversee the settlement of her mother's estate. In this capacity, Sandy is called the

An executor is the person named in will to oversee the settlement of an estate

Substandard annuity

An immediate annuity often used in structured settlements whose underwriting and premium consider the applicant's health history and specific life expectancy.

Belinda and her husband had managed to live comfortably on his pension, Social Security benefits, income from his part-time work, and income from several rental properties they owned. He recently died, and with him went his income and a portion of the pension and Social Security benefits that they had been receiving. Belinda did, however, receive the proceeds of a life insurance policy that her husband had purchased several years ago. She would like to use these proceeds to start providing herself with a guaranteed monthly income as soon as possible and with as little investment risk as possible. She is not concerned about inflation as the survivor benefits from her husband's pension and Social Security have cost-of-living adjustments. And because of inflation, she can increase the rents on her properties. Her children are well off financially and will inherit the rental properties. Belinda feels there is no reason to provide any additional inheritance to them at her death. Which one of the following products would best meet her objectives?

An immediate straight life annuity

Chris and Bill have their family insured under a plan that allows them to select their own healthcare provider without any restrictions. The plan then reimburses them for a percentage of their medical expenses after the satisfaction of a deductible. This is an example of

An indemnity plan

Balanced growth fund

An investment that's less risky than the aggressive fund and includes a mixture of growth stocks and large cap income stocks.

As the amount of investment risk associated with an investment return increases, the average investor will typically want a

An investor typically wants a higher rate of return as investment risk increases

Common stock

An ownership interest in a corporation that gives stockowners certain rights and privileges, such as the right to vote on important corporate matters and to receive dividends

Health maintenance organization (HMO)

Contracts with healthcare providers to provide comprehensive services to its members for a low, fixed, prepaid fee, with small co-payments for routine visits. To control costs, a primary care physician usually must preapprove specialists' visits, and members must get preapproval for specified services.

A young married couple has decided it is time to create a personal financial plan. They are currently reviewing their monthly expenses and categorizing them into three groups. The groups includes those that have to be paid, those that are necessary but could be reduced in a pinch, and those that could be eliminated if necessary. The couple is in which one of the following steps of the personal financial planning process?

Analyze the Current Situation During Step 3: Analyze the Current Situation, the couple would evaluate their current monthly expenses relative to their monthly income.

Paul and Lori are a married couple with 2 adult children. Their current wills were arranged when they were 50- years-old, and their children were entering college. They are now retired, their children are married, and they have 4 grandchildren. They are evaluating tax laws, and considering annual gifts to their children and establishing trusts to help with the grandchildren's education. Paul and Lori are in which one of the following steps of the estate planning process?

Analyze the Existing Estate Plan Paul and Lori are in the Analyze the Existing Estate Plan step of estate planning. They are evaluating their current wills and other legal documents based on changes in their financial position, family priorities, and tax laws.

Life Annuities

Annuity payout options which guarantee income for the entire life of the annuitant.

Variable Annuity

Annuity that has a varying rate of return based on the mutual funds in which one has invested characterized by a general lack of guarantees. That is, no guarantees as to principal or minimum interest rates apply.

Which one of the following statements about determining annual savings needs for retirement is true?

Anticipated inflation must be taken into account.

Gail received a death benefit from a nonqualified annuity that her father was funding for his retirement? What is the federal income tax consequence of such an inheritance?

Any gain under the contract is treated as taxable income.

The main difference between a long-term capital gain and a short-term capital gain is the

Asset's holding period

Thomas owns a small house and a car, and has accumulated a modest investment account. He is not married and does not have any children. Thomas would like to leave a small portion of his estate to his favorite charity, and then have the remainder split between two of his nephews who have helped care for him. His main goal of the estate planning process is to make sure that his assets are distributed according to his wishes. Which one of the following members of an estate planning team would have the expertise to help Thomas achieve this goal?

Attorney An attorney would have the expertise to help Thomas draft a will and other legal documents to assure that his assets are distributed according to his wishes.

Which one of the following statements about structured settlements is true?

Attorneys who fail to recommend a structured settlement may be sued when their clients squander lump-sum settlements.

A disability income policy has a rider that increases the monthly benefit amount by 4 percent for each of the first five years the policy is in force, if benefits have not yet begun. This is an example of which one of the following types of riders?

Automatic increase

Parent PLUS loans

Available for eligible credit-worthy parents and legal guardians to partially cover education expenses on behalf of an eligible undergraduate or graduate dependent. To qualify, applicants complete a separate application and an MPN. After graduation, Parent PLUS loans can be converted into a home equity loan or line of credit to allow the parents to deduct future interest payments on their federal tax return. Annual amounts are limited to the actual COA less other financial aid for the same academic year.

Don is the owner of a significant amount of universal life insurance that names his daughter as beneficiary. How will this life insurance be treated for estate planning purposes at his death?

Because of the named beneficiary, the life insurance is not part of his probate estate. However, all his assets, including life insurance, are part of his gross estate.

Lou has money to invest. Because she does not want to actively manage her investments on a day-to-day basis, she feels a mutual fund is the correct vehicle for her to use. She is interested in a fund that has a very diversified portfolio, while emphasizing safety as well as performance. Which one of the following types of mutual funds would be best for her?

Blended mutual fund A blended mutual fund is the only alternatives that will give her a diversified portfolio of stocks and bonds that emphasize safety as well as performance.

Bond funds

Bond funds typically specialize in tax-free municipal bonds, U.S. Treasury securities, high-quality corporate bonds, high-risk corporate bonds, international bonds, or a combination of these asset classes.

Laddering is an appropriate strategy for which one of the following types of investments?

Bonds Laddering is a technique for staggering the maturity dates of fixed income investments, such as bonds or certificates of deposit.

Bond Default risk

Bonds are generally classified as either investment-grade bonds or junk bonds (also called noninvestment-grade bonds or high-yield bonds). Junk bond yields may be higher because they also present a higher risk of default.

Exclusive provider organization (EPO)

Contracts with insurers to provide healthcare to plan members at a low premium. The EPO charges insurers an access fee, negotiates with healthcare providers, and helps resolve insurer and provider issues. Except in emergencies, plan members must use EPO network providers. In contrast to an HMO, EPO providers receive payment only for services they provide (rather than on a monthly basis).

Jerry, age 67, has funds in a Roth IRA plan of a former employer. He retired from this employer at age 59. He is currently working for another employer and participates in its 401(k) plan. As long as he is working, he has no need for the retirement income and would like to postpone taking the required minimum distributions from both plans for as long as possible. This strategy will minimize his income taxes while he is working and will enable him to have a larger income when he does eventually retire. Which one of the following correctly describes when he must start the required minimum distributions?

By April 1 of the calendar year following the year in which he reaches age 72 for the 401(k) plan and there is no required minimum distribution for the Roth IRA plan He must start the required minimum distributions by April 1 of the calendar year following the year in which he reaches age 720 1/2 for the 4013(kb) plan and there is no required minimum distribution for the Roth IRA plan.

Two components of Total Return

Capital appreciation or Capital Loss

Kaitlin is trying to decide whether to invest in a cash value life insurance policy or a mutual fund. Which one of the following statements is true when comparing cash value life insurance with mutual funds?

Cash value life insurance offers a minimum guaranteed interest rate that is not offered in mutual funds.

Catharine just turned 60, and is beginning to think about retirement. Her hope is to retire when she turns 66. She does not have any children and has been able to accumulate a significant investment amount for retirement. Catharine has always been interested in capital appreciation from her investments. Her retirement investments are currently allocated 70 percent in stock market mutual funds and 30 percent in bond mutual funds. As she approaches retirement and has more of a need for investment income and security, which one of the following reflects the most appropriate allocation of her resources?

Catharine should reduce her allocation in stock mutual funds to closer to 20 percent and increase the bond mutual funds to closer to 80 percent

Which one of the following statements about the benefits and costs of postsecondary education is true?

Census data suggests a lower unemployment rate among the more highly educated.

Inflation risk is uncertainty about an investment's future value because of

Changes in the overall price level of goods and services in the economy. Inflation risk is uncertainty about an investment's future value because of changes in the overall price level of goods and services in the economy.

Fixed Annuity

Characterized by insurer guarantees. Under a fixed deferred annuity, the insurer guarantees that interest will be credited to the annuity's cash value at an interest rate at least as high as the rate specified in the contract and that cash value will not be lost

Equipment trust bonds also called equipment trust certificates

Collateralized by business personal property, usually heavy equipment such as freight cars, locomotives, buses, airplanes, etc

Collateral trust bonds

Collateralized by specific securities, usually the bonds or common stock of other corporations

Mortgage Bonds

Collateralized by the issuing corporation's real property - land, buildings or both

Monthly discretionary income calculation

Combined net monthly pay - Monthly expenses =Monthly discretionary income

Point-of-service (POS)

Combining the characteristics of an HMO and a PPO, this plan has a network of preferred providers who charge members little or nothing. Healthcare received out of the network is covered, but members must pay substantially higher charges and a deductible. Members must choose a primary care physician. The POS handles paperwork and billings for network care, while the member handles paperwork and bills for out-of-network care.

income stock

Company has an established record of stable dividend payments

cyclical stock

Company's revenue and earnings closely correlated with economic cycles

growth stock

Company's revenue and earnings growing faster than economy

Defense stock

Company's revenues and earnings are less effected by economic cycle

Penny Stock

Company's stock price trades for less than $1

The rate of return on reinvested investment income in addition to the return on the principal of an investment is referred to as

Compound annual rate of return The rate of return on reinvested investment income in addition to the return on the principal of an investment is referred to as the compound annual rate of return.

Marjorie and Burt are wealthy. At their deaths, their children and grandchildren will be well taken care of. However, they are both in very good health and expect to see their grandchildren graduate from college and even postgraduate school. They want to pay their grandchildren's college costs, no matter where they go to college and no matter what it costs. They have explored their state's 529 plan, and they are unimpressed with its investment performance and high management fees. They have done much better investing their own monies. The age of majority in their state is eighteen, and they do not want to directly give large sums of money to their grandchildren at that age. While tax benefits are a factor if all other things are equal, they are not a major factor in what they will do. Which one of the following strategies would work best for Marjorie and Burt now that they have ruled out a 529 plan?

Continue to invest their own funds, pay tuition directly to their grandchildren's schools, and gift their grandchildren for any other education costs incurred

Which one of the following statements about individual long-term disability income insurance plans is true?

They may have a provision that defines how disability income benefits from programs such as Social Security will affect benefits under the plan

Jerry is considering two funding vehicles for retirement and will put the same amount of money into either. His financial adviser has told him that one of the investments will actually leave him with more current spendable money. Which one of the following explains the adviser's comment?

Contributions to only one of the funding vehicles are tax deductible. Because he can get a tax deduction for his contributions to one vehicle, his spendable income will be greater than if there were no such deduction.

Postsecondary Education Savings Vehicles

Coverdell ESA, 529 Savings Account & prepaid tuition plan, US Savings Bonds, and regular savings

Currently taxable

Currently taxable funding vehicles are financial products in which after-tax investments are made, and their earnings are taxable in the year credited. So, when calculating income for tax purposes each year, an individual must include—and pay taxes on—any earnings from the investment product. In short, currently taxable funding vehicles offer individuals no accumulation tax advantages. Currently, taxable funding vehicles include certificates of deposit (CDs), regular savings accounts, money market accounts, and money market mutual funds. The principal benefit of these funding vehicles is that they make it easy to access funds.

Sugartown Manufacturing Company (SMC) has revenues and earnings that are closely correlated with the expansions and recessions that occur in the economy. The stock issued by SMC is categorized as

Cyclical stock is the category of stock issued by companies whose revenues and earnings are highly correlated with the economic cycle of expansion and recession.

The policyowner of a universal life insurance policy has flexibility with respect to

Death benefits The insured of a universal life insurance policy can increase or decrease the death benefit. Mortality charges, expense charges, and the interest crediting rate are determined by the insurer.

Types of corporate bonds without collateral

Debentures, Subordinated debentures, income bonds

Which one of the following statements about the costs of a postsecondary education is true?

Decreases in government funding have forced colleges and universities to pass additional costs on to their students.

Serena recently took out a five-year loan to finance repairs on her elderly parents' home, and she must make equal monthly payments during this period to repay the loan. She wants the loan to be paid off if she should die before its maturity. The purchase of which one of the following would meet her objective in the most cost-effective manner?

Decreasing term life insurance

James and Jill are at the one step in the personal financial planning process that requires them to identify and evaluate alternatives. It is in this step that which one of the following will be done?

Determine potential retirement plans

One of the steps in the personal financial planning process is to gather relevant information. This includes which one of the following?

Developing personal financial statements

Which one of the following statements about the federal income tax treatment of qualified tuition programs is true?

Distributions for eligible room and board expenses are excludible from income

Laddering

Diversifying the bond and CD portions (fixed income) of an investment portfolio by staggering the maturity dates of instruments in the portfolio, to protect the portfolio from interest rate risk.

Which one of the following statements about mutual funds is true?

Dividends reinvested within a fund by an investor are taxed in the same way they would have been taxed if paid directly to the investor.

Part B of original Medicare (medical insurance) provides benefits for which one of the following?

Doctors' services

Which one of the following will often take place in the "execute and monitor" step of the estate planning process?

Drawing up of new legal documents is often part of the final step of the estate planning process.

Which one of the following statements about decreasing term life insurance is true?

During the policy period, the death benefit decreases, but the premium remains level.

Which one of the following is the principal advantage of accumulating retirement funds in a currently taxable funding vehicle?

Ease in which funds can be accessed The principal advantage of accumulating retirement funds in a currently taxable funding vehicle is the ease in which funds can be accessed.

When calculating the annual amount needed to set aside to fund future education costs, the expected annual investment rate of return is offset by the

Education inflation rate

Soon after he turned 50, Anthony's insurance agent suggested that he consider purchasing a long-term care (LTC) insurance policy. The agent advised him that the policy has many features and options that affect the premium, as well as the coverage. One important feature states the length of time an insured must be under care before coverage begins. This is the

Elimination period

Which one of the following is the major source of health insurance in the U.S.?

Employer-sponsored health plans

Which one of the following statements about 401(k) plans is true?

Employers may make matching contributions

Rate of Return Formula

End Value minus beginning value plus dividends or interest payments. All divided by beginning value

Five Goals of Estate planning

Ensures assets are given the the person (s) you wish for inherit Minimize State taxes and state taxes Minimum probate costs Minimum income taxes have cash on hand to settle estate

Tom and Annie have been married for two years, and are considering starting a family. They have decided that they should develop a financial plan. The first step in the personal financial planning process is

Establishing and prioritizing financial goals.

Which one of the following statements about profit-sharing plans is true?

They must provide a formula for allocating contributions.

Perkins loans

Low-interest financial aid available to undergraduate and graduate students who have extraordinary financial need. Perkins loans differ from other government-backed loans in that participating institutions and the federal government both contribute to the funding pool. Financial aid officers serve as lenders and administrators to distribute Perkins loans directly to students or as credits against their bills for tuition, fees, and other expenses. Perkins loans are capped for annual and total degree program disbursements and are repaid directly to the school.

The Gordons can afford to make modest annual contributions to the future education cost of each of their four children. However, they realize that each of the children will need a significant amount of financial aid. Their primary objective is to undertake a financing strategy that will enable their children to qualify for the maximum amount of financial aid. This will most likely cause them to rule out which one of the following financing methods?

Make annual contributions under the Uniform Gifts to Minors Act They will most likely rule out contribution to the Uniform Gift to Minors Act, because the assets and income will belong to the children and therefore be weighed more heavily in the EFC formula. With the other options, the assets and income are still considered as belonging to the parents.

Which one of the following is an example of a tax-deferral strategy rather than a tax-avoidance strategy for federal income tax purposes?

Making contributions to a 401(k) plan is an example of a tax-deferral strategy for federal income tax purposes.

Maureen has been saving for her daughter's postsecondary education for the last 10 years. Her daughter is now entering her junior year of high school. Which one of the following adjustments should Maureen make to the college fund portfolio?

Maureen should shift a larger portion of her portfolio to more conservative investments such as cash savings and bonds.

Which one of the following is a social insurance program that must be incorporated into a personal financial plan?

Medicare

A Medicare alternative that allows beneficiaries to select a Medicare managed care plan, a private fee-for-service plan or a special needs plan, is known as

Medicare Advantage (Part C) A Medicare alternative that allows beneficiaries to select a Medicare managed care plan or a private fee-for-service option is known as Medicare Advantage (Part C).

Preferred provider organization (PPO)

Members may choose any provider, but preferred, or in-network, providers offer decreased medical service costs and lower deductibles. No primary care physician is required, and any physician may make specialist referrals.

Eligibility for a Roth IRA depends on which one of the following factors for a participant?

Modified adjusted gross income Eligibility for a Roth IRA is determined by an individual's modified adjusted gross income.

All life insurance premiums have three traditional elements. These include which one of the following sets of items?

Mortality, expense, and interest The three traditional elements of all life insurance premiums are mortality, expense, and interest

Types of corporate bonds

Mortgage bonds, Collateral trust bonds, equipment trust bonds

Which one of the following statements about long-term care insurance is true?

Most individual policies have a guaranteed renewability provision.

What type of renewability provision is found in most long-term care insurance policies?

Most long-term care insurance policies are guaranteed renewable.

According to the Council for Disability Awareness, which one of the following is the top cause of disabilities?

Musculoskeletal disorders According to the Council for Disability Awareness, musculoskeletal disorders are the top cause of disabilities.

Regular savings owned by parent

No contribution limits and no tax advantages over other plans

Ulysses had an insurance contract on his life that satisfied all the requirements to meet the statutory definition of life insurance. At the time of his death, the face amount of the policy was $100,000, and the policy had a cash value of $40,000. His cost basis in the policy was $30,000. What is the amount that his beneficiary will have to include in income for federal income tax purposes?

Nothing will be included in the beneficiary's taxable income because death benefits are tax-free.

Ed purchased an individual disability income policy several years ago and continued to pay the annual premium with after-tax dollars. He recently was severely disabled and is not expected to ever return to work. His monthly benefit is $4,000, which represents 60 percent of his predisability earnings. The present value of his expected benefits is $240,000, and the aggregate premiums he has paid for the policy are $60,000. How much of each monthly benefit is subject to income taxation?

Nothing, because benefits from individual policies that are purchased with after-tax dollars are not taxable to the insured.

Sebordinated debentures

Offer the right to receive income and assets only after the rights of the debenture bondholders have been satisfied

Stafford loans

Offered through government-subsidized funding (at a lower interest rate than otherwise available for need-based students) or through unsubsidized funding that is not based on financial need. First-time Stafford loan recipients complete a Master Promissory Note (MPN), a legal document that outlines the loan's terms, conditions, and methods to repay the principal, interest, and fees to the U.S. government.

Which one of the following statements about estate planning is true?

One of its goals is to minimize taxes

disadvantages of Cash Value Life Insurance

Opaque expenses, you don't know what the cost of investment is, commissions are relatively high and surrender charges may apply

Universal Life Insurance death benefit options

Option A - A level death benefit equal to the specified amount Option B - A generally increasing death benefit equal to the specified amount plus the cash value Option C - An increasing death benefit equal to the specified amount plus total premiums paid

Monthly cash benefits under social security

Payment of benefits requires a five-month waiting period. Benefits are paid to individuals who have yet to reach full retirement age under Social Security. The monthly cash benefit is generally equal to the primary insurance amount (PIA) as described in the Social Security law. Auxiliary benefits may also be provided for a qualified disabled worker's eligible dependents. Disabled worker benefits may be reduced because of workers compensation and other disability benefits

Municipal bonds can be used as a vehicle for retirement funding. Which one of the following is a characteristic of the tax-ramifications of such bonds used for this purposes?

Penalty-free withdrawals

Joint and survivor annuity

Periodic payments continue as long as a covered person is alive, and the annuity typically covers two people. Upon the death of the first annuitant, periodic payments continue at the same or a reduced level, such as 75 or 50 percent, until the remaining annuitant dies. Joint and survivor annuities may also contain minimum payment guarantees.

Straight-life annuity

Periodic payments continue for the annuitant's life and cease upon the annuitant's death if at least one periodic payment has been made

Life annuity with period certain guarantee

Periodic payments continue for the life of the annuitant but are payable at least as long as the period selected. Typical periods are 5, 10, 15, or 20 years but may be of any duration that the insurer agrees to.

Refund annuity

Periodic payments continue for the life of the annuitant. However, if periodic payments at least equal to the funds annuitized have not been made by the time of the annuitant's death, the balance will be refunded.

Samantha is covered by a 401(k) plan at work. She contributes 8 percent of her salary to the plan, and her employer makes a matching 4 percent contribution. Which one of the following statements about the federal income taxation associated with her participation in the plan is true?

Plan income is deferred until distributed

During the retirement years on the personal financial planning life cycle, risk management planning refocuses on which one of the following?

Preserving wealth

Traditional IRA owners can convert their traditional IRAs to Roth IRAs. Which one of the following is the federal tax ramification of such a transaction?

Previously untaxed contributions and earnings are subject to income tax, but there is no penalty tax.

Which one of the following statements about personal financial planning goals is true?

Priorities must be established regarding the timing to achieve goals.

Debentures

Provide the highest priority on payment. The offer the right to receive income and assets after the rights of the holders of collateralized or other senior bonds have been satisfied

Income bonds

Provide the lowest priority on payment, and owners receive interested only if the corporation has earnings fro which interest can be paid.

Graham has an annuity that pays him a periodic income as long as he lives. In addition, if total periodic payments received during his lifetime do not equal or exceed the principal sum annuitized, the difference will be paid to a beneficiary. This is an example of a

Refund annuity.

Roger owns shares in a mutual fund. Rather than taking dividends in cash, he uses them to buy additional shares in the mutual fund. Which one of the following investment strategies is Roger using?

Reinvestment

Charlene has considerable assets and has never worried about retirement. Several of her investments have had poor results in the last few years, and she now wants to put some money away for retirement. She has told her financial adviser the following: · She wants to make tax-deferred contributions. · She wants tax-deferred accumulation of funds. · She wants tax-free distribution. · She wants to be able to withdraw funds for any purpose prior to retirement if she so wishes. · Some of her friends have mentioned the possibility of IRAs, municipal bonds, and annuities. What should her adviser tell her?

Rethink your objectives, as there is no funding vehicle that will do everything you want it to do.

Both tax-deductible and tax-deferred

Retirement funding vehicles that are tax-deductible (before-tax contributions) and offer investment gains that are tax-deferred (taxes paid at a future date) are generally considered qualified retirement plans. Examples of these plans include traditional individual retirement accounts (IRAs), Section 401(k) plans, Section 403(b) plans (other than designated Roth accounts), and Section 457 deferred compensation plans. Qualified retirement plans can lower an individual's taxable income because the amount a person contributes to them is exempt from current federal income taxes. Also, because the contributions to these plans are made on a before-tax basis, the contributions are worth more. However, these plans often impose certain limitations, such as having maximum annual contributions, limiting access to funds before retirement or termination of employment, and having required minimum distribution rules and dates.

In comprehensive personal financial planning, which one of the following loss exposures is typically handled in some way other than through insurance?

Retirement loss exposures

Unsystematic risk (specific risk)

Risk that arises from factors that are unique to a particular investment

Systematic risk

Risk that is common to all securities of the same general class and that therefore cannot be eliminated by diversification.

Activities of Daily Living (ADLs)

Routine, daily activities individuals must be able to perform without assistance to live independently, such as bathing, dressing, eating, maintaining continence, and transferring.

The federal Expected Contribution Formula (EFC) for financial aid takes into consideration which one of the following assets?

Savings account balances

Todd feels he has enough life insurance to meet the day-to-day living expenses of his family if he should die. He also feels he will be able to contribute significantly to the education costs of his three teenage children when they go to college as long as he is alive during that period and earning his six-figure salary. However, he is concerned about these education costs if he should die prematurely. The youngest child should finish college in about ten years. After that time, Todd feels his current insurance and resources are adequate to meet any needs at death and provide him and his wife with a reasonable retirement income. What type of life insurance is most appropriate to guarantee that these education costs will be funded in as risk-free a manner as possible?

Term life insurance is appropriate because this is a temporary need, and Todd is unwilling to assume any investment risk. He also does not seem to need any of the cash value that a permanent policy might provide.

Which one of the following statements is correct regarding the convertibility of most term life insurance policies?

Term life insurance policies are typically convertible to any kind of permanent life insurance the insurer is offering on the date of conversion without having to provide evidence of insurability.

Yearly renewable term (YRT)

Term life insurance whose term period is one year in length. It may be renewed for an additional one-year period at an increased premium.

In determining the gross estate for federal estate purposes, the executor must select a valuation date. This can be either the date of death or a date that is

The alternate value date is six months later.

Capital appreciation (capital gain)

The amount by which an asset's selling price exceeds its purchase price.

Capital loss

The amount by which the proceeds from the sale of a capital asset are less than the adjusted cost of acquiring it

The first step in the process of calculating postsecondary education funding is to calculate the cost of college. In addition to the current cost of college, this requires a consideration of

The annual education inflation rate and the number of year until enrollment.

The annuitant

The annuitant receives periodic payments made under the annuity, although in some cases the payee could be someone other than the annuitant.

Kate decided to roll over an existing individual retirement account (IRA) balance into an immediate qualified life annuity. The annuity will provide her with guaranteed income payments for the rest of her life. Which one of the following statements is correct regarding these funds?

The annuity's periodic payments will be taxable in the year that they are received by Kate.

Asset allocation

The apportioning of investments among categories of assets

Which one of the following statements is true regarding Social Security Disability Insurance (SSDI)?

The average SSDI benefit is only slightly above the poverty line for a one-person household.

Bond Inflation risk

The cash flows from the bond may lose purchasing power over time if inflation becomes higher than expected

Archie has an investment that will accumulate total return over a period of several years. Which one of the following explains why the compound annual rate of return is a better measure of his total return than the rate of return would be?

The compound annual rate of return takes into account the return on invested income

The contract owner

The contract owner is the person who purchases the annuity from the insurer and who is responsible for premium payments. In most, but not all, cases, the contract owner is also the annuitant.

Fixed amount

The contract owner specifies the amount of each periodic payment, and the insurer calculates the period over which the funds will be completely liquidated at the insurer's interest rate.

Fixed period

The contract owner specifies the period, such as 10 or 20 years, over which the funds are to be liquidated as periodic payments, and the insurer determines the amount of each periodic payment based on the interest rate offered.

Which one of the following statements about the income tax treatment of nonqualified annuities is true?

The contract owner's investment in the contract is recovered without additional tax payment when distributed.

Most long-term care policies have a provision that provides the services of a care coordinator. Which one of the following statements about this provision is true?

The coordinator helps arrange for and monitor care.

Liquidity

The ease with which an asset can be converted to cash with little or no loss of value.

When his uncle died after retirement, Michael inherited the balance in his uncle's IRA. The uncle, who was over age seventy two at the time of his death, had purchased the IRA solely with before-tax dollars. How much of the proceeds must Michael include as income for federal income tax purposes?

The entire balance inherited

The basis in inherited property may be stepped-up at the time of death. In this case, the basis for the inherited property becomes which one of the following?

The fair market value of the property at the time of the decedent's death If property receives a stepped-up basis, the new basis is the fair market value of the property at the time of the decedent's death

Eileen is planning her retirement and is using the income replacement ratio method to determine her needed retirement income. She should start by averaging estimated earned income during what period of time?

The final three years of employment

Which one of the following statements about a Coverdell Education Savings Accounts established by a grandparent with a child as a beneficiary is true?

The grandparent can change the beneficiary of the account as long as it is another eligible family member.

Which one of the following statements about a revocable living trust is true?

The grantor can reclaim the trust assets at any time

A common coverage trigger in a long-term care insurance policy is

The inability to perform a certain number of activities of daily living.

Sandra put $100,000 into a three-year certificate of deposit that paid interest on the principal as well as on the accumulated interest, which Sandra did now withdraw. The interest rate stated by her bank was 1.5 percent compounded annually. For first year, Sandra received $1,500 in interest. For second year, she received $1522.50 in interest. At the end of third year, she received $1545.34 in interest as well as her $100,000 principle. What was Sandra's compound average annual rate of return?

The total return, divided by the principal, divided by the number of years equals her compound average annual rate of return. ($1,500 + $1,522.50 + $1,545.84) ÷ $100,000 ÷ 3 = .0152 (1.52%)

Which one of the following is a major characteristic of a consumer-directed health plan?

The use of a health savings account (HSA) or a health reimbursement arrangement (HRA)

Tax avoidance

The use of legal methods to reduce or eliminate taxes

Egnar owns several bonds and is concerned about how their value might change with changes in market interest rates. What can he expect to happen to the value of his bonds if market interest rates drop?

The value will rise, because it moves inversely with changes in interest rates

A statistic called beta is reported for a firm's stock. Beta indicates which one of the following?

The volatility of the firm's stock relative to overall market volatility for that type of asset

waiting period (elimination period)

The waiting period may be 7 days for a short-term disability policy, or 30 days or a year or more for a long-term disability policy. Shorter waiting periods require higher insurance premiums to cover the insurer's costs.

Greg and Terri would like to put more money aside for their retirement in a plan that will allow before-tax contributions as well as tax-deferred accumulation. They expect the adjusted gross income on their joint return for this year to be almost $200,000. Both work, and Greg fully participates in his employer's 401(k) plan. Terri's job is only part-time, and she is not eligible for an employer-sponsored retirement plan. Which one of the following alternatives that they have explored would be most appropriate?

Their adjusted gross income is too high for either of them to contribute to a Roth IRA.

Which one of the following statements about savings and investment planning as part of a comprehensive financial plan is true?

There are investment techniques that can reduce the risk inherent in the investment process.

Numerous loans to meet education costs are available under the Federal Direct Loan Program. Which one of the following statements about such loans is true?

There are loans available to parents as well as to students

Which one of the following statements about Roth IRAs is true?

There are no required distributions during an owner's lifetime.

Expected student contribution

These are weighted higher than parents considers income from any part time or full time work, monetary gifts, or investment income, cash, savings, checking balances, stocks and bonds, other investments or business interests

Series EE and Series I savings bonds

These bonds accrue interest that the investor receives when the bond is redeemed. Series EE bonds earn a fixed rate of interest, while Series I bonds earn a relatively lower fixed rate but also earn the average inflation rate.

Blended Funds

These funds invest in bonds and stocks in a diversified portfolio of investments that emphasize safety as well as performance.

Money market mutual funds

These funds invest in safe and secure low-risk liquid assets.

Actively managed mutual funds

These funds seek to earn higher-than-average rates of return for their investors through superior investment skill. Most cannot consistently beat the market, but the active management may still add value by moving investments in the fund into higher- or lower-risk investments as market conditions warrant.

Which one of the following statements about corporate bonds is true?

They are evidence of corporate debt.

Jared plans to open a traditional IRA and make the maximum tax-deductible contributions each year. Which one of the following statements describes the extent to which distributions from the IRA will be taxed as ordinary income?

They are fully taxed Distributions are fully taxed as ordinary income.

Which one of the following statements about Blue Cross and Blue Shield plans is true?

They are often administered by for-profit organizations

Policy loans are a common characteristic of permanent life insurance. Which one of the following statements about such loans is true?

They are part of the surrender proceeds and treated as a distribution to the extent they are outstanding when a policy is surrendered.

Individuals may be eligible for federal income tax credits. Which one of the following statements describes how these credits are applied to determine federal tax owed?

They are subtracted from the income tax due to get the total tax owed

Daniel was excited to learn that he may be eligible for a Pell grant. Pell grants are the primary grant program for EFC-qualified low- and middle-income families. Which one of the following statements about such grants is true?

They can be used for online programs

Which one of the following statements about wills is true?

They can be written to enable an estate to provide an income to family member while the estate is being settled.

Which one of the following statements about Medicare Advantage (Part C) plans is true?

They can take several forms, including managed care and fee-for-service plans.

Grace's parents used Series EE savings bonds as a way to save for her postsecondary education. Which one of the following is a disadvantage of using Series EE savings bonds as a savings vehicle to pay future postsecondary education costs?

They have a relatively low rate of return.

As people age, healthcare costs usually change in which one of the following ways?

They increase

Jack and Ella are a married couple with three grown children and six grandchildren. They did a good job of planning for retirement and have accumulated significant wealth. Jack and Ella began their estate planning process about five years ago. They updated their wills and began giving each of their children the maximum amount allowable under the annual gift tax exclusion every year. As they are aging, Jack and Ella they are looking for a ways to minimize estate taxes. They would like to give money to each of the grandchildren, but are concerned that they are still young and may not properly manage the money. Which one of the following would allow them to meet their goals of reducing their estate taxes and providing a gift for the grandchildren to use at a later date?

They should establish irrevocable living trusts for each of the grandchildren and name the parent as the trustee. They should establish irrevocable living trusts for each of the grandchildren and name the parent as the trustee. Because it is an irrevocable living trust, it will reduce the estate value and taxes. Naming the parent as a trustee allows them to maintain some control over grandchild's use of the gift.

Which one of the following describes the relationship between the contract owner of an annuity and the annuitant?

They usually are the same party.

At the end of the accumulation period of his deferred variable annuity, Sam elected to annuitize the contract's cash value under a variable settlement option. Under this option, he received 500 accumulation units. How, if at all, will his number of annuity units change over time?

They will remain the same. However, the value of each annuity unit, and therefore his income, will change as a result of investment experience of the selected subaccounts.

Stock funds

This class of mutual funds includes those with a wide variety of investment strategies regarding what kinds of stocks they purchase. Some aim for growth, while others aim for the greatest value for the purchasing dollar, and so forth.

The goal of diversification in an investment portfolio is

To achieve maximum investment return while minimizing investment risk.

Workers are entitled to Social Security retirement benefits if they are "fully insured" when they retire. To be "fully insured" an individual must have

To be "fully insured" an individual must have worked a minimum of six quarters of a year, or six "quarters of coverage."

Social Security Disability definition

To be considered "disabled" under Social Security, a worker must be unable to engage in any substantial gainful activity because of a "medically determinable" physical or mental impairment as defined in the Social Security law. A substantial gainful activity is one that requires significant activities that are physical, mental, or a combination of the two, in work that is performed for profit, even if no profit is realized. This work qualifies whether it is full or part time. This disability definition is comparable to an "any occupation" definition. Additionally, the worker's impairment must be established by objective medical evidence and expected to last for at least 12 consecutive months or to result in the individual's death. Other, nonmedical criteria must also be met.

Kate decided to purchase an annuity as part of her retirement plan. Which one of the following is the fundamental purpose of an annuity?

To provide a source of periodic income that the annuitant cannot outlive

The cost basis for a life insurance policy is considered to be which one of the following?

Total premiums paid

Eric and Elizabeth are retirees who have been providing some financial support to Elizabeth's disabled sister. They want to continue this support if they predecease the sister. However, they are concerned that she might lose access to government programs if they directly give her assets. Which one of the following is a method of meeting their objective?

Transfer property to a trust

Although many expenses typically decline in retirement, certain types of expenses may increase. One type of expense that falls into this category is

Travel is one type of expense that may increase. Retirement plan contributions, taxes, and work related expenditures typically decline.

Categories of Postsecondary education expenses

Tuition & fees, Books & Supplies, Room & Board, Transportation, and incidental expenses such as entertainment, clothing & other personal services

While costs may vary because of many factors, which one of the following categories of educational expenses tends to be the largest single cost category to consider when planning for postsecondary education?

Tuition and fees

Chet has determined that he needs an additional $400,000 of life insurance to protect his family. He already has existing term insurance to meet his short term needs. Therefore, he wants a policy that provides permanent protection. He also wants the flexibility to change the premiums and the death benefits, but he does not want the responsibility for making investment decisions. Which one of the following types of life insurance best addresses his objectives?

Universal life insurance

Several years ago, Aimee purchased an oil painting for $15,000 as a long-term investment. She recently had the painting appraised, and the appraiser has determined its market value to now be $25,000. Which one of the following best categorizes this increase in value?

Unrealized capital gain It is an unrealized capital gain because the investment has changed in value, but the investor has not assumed the gain by selling the asset.

529 Savings account and prepaid tuition plan

Up to $380,000 per beneficiary in many states and income and capital gains are not taxed if used for postsecondary education costs. Some states allow for a tax deduction on contribution

Janelle has decided to start a monthly investment program by using dollar cost averaging. The first month she used $200 to buy 10 shares of stock of the ABC Corporation. Which one of the following should Janelle do the second month?

Use $200 to buy ABC stock at its current market price With dollar cost averaging, she would continue to use $200 to buy ABC stock at its current market price.

Investment risks

inflation risk, financial risk, business risk, interest rate risk, market risk, exchange rate risk, liquidity risk, systematic risk, and unsystematic risk

Which one of the following statements about an employee stock ownership plan (ESOP) is true?

it can serve as an estate planning tool for closely held business owners

Keith and Lynn are both ready to retire. They have no children upon whom they can rely if necessary. Because of this, they have purchased long-term care insurance. They want to make sure that they have adequate income in their retirement years, particularly while they remain in good health. Social Security and their employer-sponsored pensions will provide about 75 percent of their essential living expenses. They feel that they have plenty of resources to provide the remaining 25 percent, but they are concerned that they could outlive their resources or that the resources could decrease in value. They are very risk averse and want to do something to "guarantee" the additional income they will need. Which one of the following is the best strategy for them?

Use some of their assets to purchase a joint and survivor life income annuity This will guarantee an income for life

The Sheppards are uncertain whether their son will obtain a postsecondary education and have made a decision not to do any special prefunding. They do hope he will go to a state college or university and are willing to help him financially if and when he does attend. Their finances and attitude are such that they expect him to pay a significant portion of his college expenses. As a result, they would like to enable him to obtain the maximum financial aid. Which one of the following action on their part would minimize the Expected Family Contribution (EFC) often used for financial aid purposes?

Use some of their savings to pay off their mortgage loan faster

Now that Kara and her husband, Lyle, have educated their children, they want to focus more on providing funds for their retirement. Because of their pensions and Social Security, they do not have to worry about starving in retirement. However, they would like to travel extensively and be able to give financial support to other family members when necessary. They are willing to be reasonably aggressive investors in the short run and are looking for investments that have a high potential for price appreciation. They hope to be able to get returns that exceed those of investment markets in general. They are not interested in current income. Which one of the following types of investments would best meet their objectives?

Value stocks Value stocks are appropriate because they have a high potential for price appreciation as undervalued share prices return to long-run average intrinsic values.

Fritz and Emma have determined that they should purchase more life insurance on Fritz to meet their long-term needs, including retirement income and paying estate settlement costs. Because his income fluctuates, they want a premium that is flexible. They also want a policy that will build a cash value that they can borrow or withdraw. They are highly risk tolerant and are willing to take significant investment risk to potentially increase this cash value. Which one of the following type of life insurance is most appropriate?

Variable universal life insurance Variable universal life insurance is the only type of policy that meets all of their requirements

Settlement options

Various ways of paying life insurance policy proceeds to the beneficiary

Victor is 62 and thinking about retiring in the next 3-5 years. He has taken full advantage of his employer-sponsored 401 (k) plan over the years, and has additional savings in an investment account. Victor is very concerned about being a burden to his relatives, so he also purchased long-term care insurance. He has determined that if he waits until age 67 to retire, his Social Security benefits and employer-sponsored pension plan will cover about 70 percent of his essential living expenses. Victor has significant savings, but is always concerned that this money could run out and is looking for some way to guarantee the additional income he will need for the rest of his life. Which one of the following is the best way for Victor to plan for this income?

Victor should plan to roll-over some of his 401 (k) plan funds into a qualified life annuity which will guarantee the income for the remainder of his life. Victor should plan to roll-over some of his 401 (k) plan funds into a qualified life annuity which will guarantee the income for the remainder of his life. Also the amount rolled over is not taxable at the time of the rollover, only the periodic payments are taxable in the year they are received.

Which one of the following is the major distinction between a supplemental executive retirement plan (SERP) and a nonqualified salary reduction plan?

Whether the employer or the participant pays for the benefits

Jason recently purchased a term insurance policy that can be renewed at one year intervals for an increasing premium, even though the death benefit remains constant. This policy is referred to as a

Yearly renewable term policy

Sybil is a divorcee who is not employed outside the home. Her income is derived from alimony, interest, and dividends. Does she have earned income for purposes of eligibility to make an IRA contribution?

Yes, alimony is considered earned income for purposes of IRA eligibility.

Last-In, First-Out (LIFO)

all taxable gain is deemed to be distributed before the distribution of any nontaxed investment in the contract. Distributions of gain before the contract owner reaches age 59.5 are subject to a premature distribution tax penalty equal to 10 percent of the distribution unless an exception applies

General obligation bonds

are secured by the full faith, credit, and taxing authority of the issuing state or municipality

value stock

company is under valued - has a higher potential for appreciation

accepted rule for saving for postsecondary education expense

create a mix of investments in the education portfolio that takes into account the prospective student's age and the number of years before the funds will be needed

Decreasing Term Life Insurance

death benefits of decreasing term life insurance decline over the life of the policy while the premium, which is less expensive because the death benefit decreases, remains the same

time value of money concept

given a positive annual rate of return, money invested in current dollars or present value will grow to a larger future value within a specific number of years