Insurance Practice Quiz

Drag each WORD to the correct category. 1. Value exchanged between parties may not be equal 2. The wording of insurance contracts is non-negotiable 3. Insurance contracts may be canceled if payment is not received 4. Only one of the parties to the contract is bound by a promise Conditional Unilateral Aleatory Adhesion

Solution: 1. Aleatory: Value exchanged between parties may not be equal 2. Adhesion: The wording of insurance contracts is non-negotiable 3. Conditional: Insurance contracts may be canceled if payment is not received 4. Unilateral: Only one of the parties to the contract is bound by a promise

Which of the following is NOT correct? A. LTC insurance is needed for everyone. B. Many people do not need LTC insurance. C. The very wealthy may not need LTC insurance. D. Many who need LTC insurance do not have it.

Solution: The correct answer is A

Match the following scenarios to the correct coverage. Lightning strikes the house. A. Coverage A B. Coverage B C. Coverage C D. Coverage D E. Coverage E F. Coverage F

Solution: The correct answer is A.

When must an insurable interest exist for a property insurance claim A. At the policy inception and time of loss B. At the policy inception only C. At the time of the loss D. Either at the policy inception or at the time of the loss

Solution: The correct answer is A.

Which of the following exchanges create a taxable event? I. Life insurance to life insurance II. Annuity to life insurance III. Life insurance to annuity IV. Annuity to annuity A. II only. B. III only. C. I and III only. D. II and III only.

Solution: The correct answer is A. 1035 exchange applies to: L→L or L→A or A→A An exchange will be taxable when: A→L

There are a number of definitions used to determine whether an insured is disabled. The split definition of disability includes the following two: A. 'Own occupation' changing to 'any occupation'. B. 'Modified any occupation' changing to 'own occupation'. C. 'Own occupation' changing to 'modified any occupation'. D. 'Any occupation' changing to 'own occupation'.

Solution: The correct answer is A. At first, the insured is considered disabled if he or she cannot perform his or her specific occupation. After a period of time (usually 2 to 3 years), the definition is broadened to include any occupation to which the insured is fit to undertake based education or training.

The principle of indemnity suggests that: A. A person is entitled to compensation only to the extent that financial loss has been suffered B. Insured cannot indemnify himself from both the insurance company and a negligent third party for the same claim C. The insured must be subject to emotional or financial hardship resulting from the loss D. The insured and insurer must both be forthcoming with all relevant facts about the insured risk and coverage provided for that risk

Solution: The correct answer is A. B describes subrogation. C describes an insurable interest D describes concealment

The principle of indemnity is: A. A person is entitled to compensation only to the extent that financial loss has been suffered. B. Insured cannot indemnify himself from both the insurance company and a negligent third party for the same claim. C. The insured must be subject to emotional or financial hardship resulting from the loss. D. The insured and insurer must both be forthcoming with all relevant facts about the insured risk and coverage provided for that risk.

Solution: The correct answer is A. B describes subrogation. C describes an insurable interest. D describes concealment.

Dave is 46, married and has an annual salary of $60,000. His employer offers group term life insurance coverage equal to 2 times his annual salary. The employer's cost for Dave is $.40 per $1,000 of which Dave pays $.15 per month per $1,000. The Table 1 (Section 79) rate for 45-49 year olds is $0.29 per $1,000. What additional income must Dave include in his taxable income this year resulting from the group term insurance? Round your answer to the nearest dollar. A. $28 B. $126 C. $210 D. $244

Solution: The correct answer is A. Dave is paying $216 each year for the coverage ($120 × 0.15 × 12). The Table I cost is calculated by subtracting $50,000 (the tax-free amount allowed under Section 79) from the $120,000 actually purchased, dividing the remainder by $1,000, multiplying the Table 1 rate of 0.29 times 12. ($120,000 - $50,000 / $1,000 × 0.29 × 12). So, the Table 1 premium is $244 (rounded.) Subtract the $216 already paid by Dave from the $244 Table 1 premium to determine the additional taxable income ($244 - $216 = $28).

Which of the following is taxable income? A. The policy dividends paid to the policy owner in excess of premiums paid. B. The guaranteed interest paid on the policy's accumulated cash value. C. The client's contribution to an annuity on a pro rata basis during the payout. D. Policy proceeds paid to a beneficiary in excess of the $14,000 annual exclusion.

Solution: The correct answer is A. Dividends represent a return of the insured's premium up to their basis (premiums paid) in the policy. Beyond this, dividends are a fully taxable event.

An HO-3 policy (Special form "open perils") is also known as an "all risks policy". It covers all losses except those specifically named as exclusions in the policy. If there are NO endorsements, which one of the following perils is excluded? A. Flood. B. Fire. C. Collapse. D. Weight of ice.

Solution: The correct answer is A. Flood is excluded from homeowners. Remember, water damage done by water coming from the sky down (as in rain) is covered, but water coming from the ground up (as in flood) is not covered. It should be noted that personal property/contents are covered on a named perils basis in an unendorsed HO-3 policy.

Which of the following statements regarding loss frequency is true? A. Loss frequency is the expected number of losses that will occur within a given period B. Loss frequency is the potential size or damage of a loss C. Both A and B D. Neither A nor B

Solution: The correct answer is A. Frequency measures the number of losses expected to occur. Severity measures the potential size in dollars.

Which of the following statements about Health Savings Accounts (HSA) and/or Flexible Spending Accounts (FSA) is NOT correct? A. Funds deposited into an HSA must be used within 2 ½ months of the end of the year. B. Maximum annual contributions into an FSA are lower than the maximum annual contribution into an HSA. C. To establish an HSA, the individual must be covered by a high deductible health plan. D. To establish an FSA, the individual does not need to be covered by a high deductible health plan.

Solution: The correct answer is A. Funds in an HSA may be invested and used when needed in later years.

For a policy to meet the standards under the Health Insurance Portability Bill of 1996, contracts must meet certain guidelines. Which of the following meets the guidelines with reference to activities of daily living? A. The insured is unable to perform 2 of 6 ADLs. B. The insured is unable to perform 3 of 6 ADLs. C. The insured is unable to perform 4 of 6 ADLs. D. The insured is unable to perform 2 of 7 ADLs.

Solution: The correct answer is A. If the insured is unable to perform 2 of the 6 ADLs, the insured is considered chronically ill.

The following type of insurance would be described as an unbundled policy where the company selects the places of investment: A. Universal life insurance. B. Interest sensitive life insurance. C. Variable universal life insurance. D. Adjustable life insurance.

Solution: The correct answer is A. In all of these coverages, the monies above and beyond mortality and expenses are invested by the company in its general fund. Only variable life allows the investor to select investments. A universal policy is unbundled. The way this question is asked ("unbundled and selected by the company") points one toward the correct answer of universal life.

An insurable risk is characterized by an accidental loss, low cost, and a: A. Large number of exposure units. B. High chance of loss. C. Low amount of exposure. D. Limited number of perils.

Solution: The correct answer is A. Recall that there must be a large number of homogenous (or similar) exposure units to minimize the overall risk to the insurer. The insurer, however, does not want a high chance of loss. The others are not part of an insurable risk profile.

Andrea owns and runs a printing company that is organized as an S corp. She had an accident, became disabled and receives $4000 a month in disability benefits. The S corp paid the premiums and reported the payments on her W-2. How much of the benefit is taxable to Andrea? A. $0 B. $2000 C. $3000 D. $4000

Solution: The correct answer is A. Since it's reported to her on the W-2, it's the same treatment as if she had paid the premium.

Mike has the following split limits of coverage on his Personal Auto Policy of 100/300/50. Which of the following best describes Mike's coverage? A. $100,000 per person for bodily injury, $300,000 per occurrence for bodily injury and $50,000 for property damage B. $100,000 per covered auto, $300,000 per occurrence for covered auto and $50,000 for uninsured motorist C. $100,000 per person for bodily injury, $300,000 per occurrence for property damage and $50,000 for uninsured motorist D. $100,000 for property damage, $300,000 per person for bodily injury and $50,000 for property damage

Solution: The correct answer is A. Splits Limits Read: Bodily Injury / Per Occurrence for Bodily Injury / Property Damage

Which of the following life insurance policies provide the highest benefit, at the lowest premium, and is simply a pure death benefit policy? A. Term insurance B. Whole life insurance C. Universal life insurance D. All of the above

Solution: The correct answer is A. Straight forward definition of term life insurance.

Ryan and Jody are age 68 and 72, respectively. They have significant assets that will be subject to estate taxes upon the second spouses death. Which of the following life insurance policies would you recommend? A. Annually renewable term B. Second to die whole life policy C. First to die whole life policy D. Ordinary whole life

Solution: The correct answer is B

ABC Company wants to create a split dollar agreement for an executive. Which statement accurately describes a split dollar agreement? A. The employer owns the life insurance policy under a collateral assignment. B. The employer owns the life insurance policy under the endorsement method. C. The employee is primarily responsible for making the premium payment under the endorsement method. D. The employer is primarily responsible for making the premium payment under the collateral assignment method.

Solution: The correct answer is B.

Match the description with the correct form of life insurance: Rising premium, level death benefit, no savings component A. Annual Renewable Term B. Whole Life C. Decreasing Term D. Universal Life E. Variable Universal Life F. Variable Life

Solution: The correct answer is B.

Match the following scenarios to the correct coverage. Lightning strikes a storage building. A. Coverage A B. Coverage B C. Coverage C D. Coverage D E. Coverage E F. Coverage F

Solution: The correct answer is B.

When must an insurable interest exist for a life insurance claim A. At the policy inception and time of loss B. At the policy inception only C. At the time of the loss D. Either at the policy inception or at the time of the loss

Solution: The correct answer is B.

Donna owns a house with a replacement cost of $500,000 and a depreciated actual value equal to 50% of the replacement value. She purchases $300,000 of insurance with a coinsurance requirement of 80%. If Donna's house is hit by a hurricane and suffers a $150,000 loss, what will the insurer pay? A. $75,000 B. $112,500 C. $150,000 D. $250,000

Solution: The correct answer is B. (Amt Purchased / coinsurance) × loss (300,000/(500,000 * .80)) × 150,000 = 112,500 ACV = .50 × 150,000 = 75,000

The Watson family has a family group medical policy that provides the following coverage: $250/person deductible (3 person maximum) $1,000 out-of-pocket limit 80/20 coinsurance provision for major medical On a family trip, the Watsons were involved in a car accident. Four family members were hurt. Each person incurred medical expenses of $7,500. How much will the insurance company pay? A. $29,250 B. $29,000 C. $28,250 D. $23,400

Solution: The correct answer is B. 7,500 × 4 = 30.000 - 1,000 out of pocket limit = 29,000

An individual's personal assessment of the chance of a loss is an example of: A. A priori probability. B. Subjective probability. C. Objective risk. D. Objective probability.

Solution: The correct answer is B. A priori probability is calculated by logically examining a circumstance or existing information regarding a situation. Subjective probability is looking at risk from your point of view. Objective risk and probability would be looking at it from an unbiased standpoint.

Section II of a HO-3 policy provides what type of protection for the homeowner? A. Dwelling B. Damage to Other's Property C. Loss of Use D. Personal Property

Solution: The correct answer is B. A, C and D are in section I

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

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

Ricardo, age 33, is married and has a newly born son. Ricardo is concerned about providing for his family in the event of his premature death. He is concerned about the long term affordability of life insurance, but is able to budget a fixed amount for a period of time. Which of the following policies would you recommend? A. Annually renewable term B. Level term C. Whole life insurance D. Single premium annuity

Solution: The correct answer is B. Based upon being able to budget a fixed amount each year. Annually renewable term will get too expensive. Other policies are too expensive because of savings component.

Failure to lock the house because of the existence of insurance is an example of a: A. Moral hazard. B. Morale hazard. C. Speculative hazard. D. Physical hazard.

Solution: The correct answer is B. Failure to lock the house is morale hazard if due to insurance coverage (considers the loss as someone else's problem).

Which of the following statements regarding loss severity is true? A. Loss severity is the expected number of losses that will occur within a given period B. Loss severity is the potential size or damage of a loss C. Both A and B D. Neither A nor B

Solution: The correct answer is B. Frequency measures the number of losses expected to occur. Severity measures the potential size in dollars.

Joe walks into his insurance agent's office and notices his agent's name on a business card and the insurer's name on letterhead. If an agency agreement exists but the agent exceeded their authority, what type of authority does Joe believe his agent has to enter into an insurance contract? A. Express Authority B. Implied Authority C. Apparent Authority D. None of the Above

Solution: The correct answer is B. Implied Authority includes the visual aids: business cards, letterhead and signs on the door. Apparent authority is based upon the agents business card, letter head and insurance company sign on the door but in fact, no authority actually exists. The key difference between apparent and implied authority is that with apparent authority, none actually exists. Express authority is the agency agreement between the insurance agent and insurance company.

Which of the following is the most favorable definition of total disability in a disability insurance policy? A. Any occupation B. Own occupation C. Modified own occupation D. Split definition

Solution: The correct answer is B. Insured is more likely to meet the Own Occ definition

Which of the following offers identical coverage for all forms of a homeowners insurance policy? A. Section I B. Section II

Solution: The correct answer is B. Liability and Medical Payments Coverage is identical in all HO policies.

Insurance regulation is primarily conducted at what level? A. Securities and Exchange Commission B. State Insurance Commissioner C. Federal Insurance Commission D. FDIC

Solution: The correct answer is B. NAIC - national association of insurance commissioners try to have Commissioners implement similar laws across states, but the end results is that each State Insurance Commissioner regulates insurance products and companies.

Under the definition of long term care, the highest level of care provision which calls for services where residents are seen regularly by physicians is known as: A. Intensive nursing care. B. Skilled nursing care. C. Intermediate care. D. Custodial care.

Solution: The correct answer is B. Options "A" - There is no coverage known a "intensive nursing care." Options "C" - Intermediate care is identical to skilled nursing care defined above, but not seen with as much regularity by a physician (not daily). Both Options "B" & "C" are institutional care, whereas Option "D" is not.

Which of the following is correct regarding a peril and hazard? A. A hazard is the proximate or actual cause of a loss B. A peril is the proximate or actual cause of a loss C. A peril is the condition that creates or increases the likelihood of a loss occurring D. None of the above

Solution: The correct answer is B. Peril is proximate cause of a loss. Hazard is a condition that creates or increases the likelihood of a loss occurring.

Risk transfer (or the use of insurance) would best be utilized in the case of: A. High frequency / high severity. B. Low frequency / high severity. C. High frequency / low severity. D. Low frequency / low severity.

Solution: The correct answer is B. Risk transfer (or the use of insurance) would be utilized in the case of low frequency / high severity. We use insurance to transfer risk for life, income and property. All areas we hope to have no losses, but if we did, they would alter our way of living.

Which of the following are uses of term life insurance? I. To provide coverage for temporary needs II. To provide lifetime coverage at the lowest cost III. To provide savings for financial emergencies IV. To provide more immediate death protection per premium dollar A. I and II only. B. I and IV only. C. II and III only. D. II and IV only.

Solution: The correct answer is B. Term insurance does not provide lifetime coverage nor does it have a savings element.

The subrogation clause means that: A. A person is entitled to compensation only to the extent that financial loss has been suffered B. Insured cannot indemnify himself from both the insurance company and a negligent third party for the same claim C. The insured must be subject to emotional or financial hardship resulting from the loss D. The insured and insurer must both be forthcoming with all relevant facts about the insured risk and coverage provided for that risk

Solution: The correct answer is B. The insurance company can collect against a negligent third party, after paying the claim.

Which of the following life insurance policies contain a cash value savings component that reaches the face value of the policy at age 100-120? A. Term B. Whole Life C. Universal Life D. Lifetime Annuity

Solution: The correct answer is B. Whole life pay premiums until age 100 when cash value equals the face of the policy.

Which of the following life insurance policies contain a cash value savings component that reaches the face value of the policy at age 100-120? A. Term. B. Whole Life. C. Universal Life. D. Lifetime Annuity.

Solution: The correct answer is B. Whole life policy holders pay premiums until age 100-120 when cash value equals the face of the policy.

Match the description with the correct form of life insurance: Level premium, declining death benefit, no savings component A. Annual Renewable Term B. Whole Life C. Decreasing Term D. Universal Life E. Variable Universal Life F. Variable Life

Solution: The correct answer is C

Match the following scenarios to the correct coverage. Fire from lightning strike burns den furniture. A. Coverage A B. Coverage B C. Coverage C D. Coverage D E. Coverage E F. Coverage F

Solution: The correct answer is C.

Pranav has covered medical expenses of $5,750. He has a $250 deductible on his health insurance policy with a 80/20 coinsurance up to the stop-loss of $5,000. His insurance company paid the following amount: A. $1,250 B. $1,750 C. $4,400 D. $5,500

Solution: The correct answer is C. $5,500 × .20 = $1,100 + $250 = $1,350 for insured $5,750 - $1,350 = $4,400 for the insurer Always take (Total Expenses - Deductible) × coinsurance %; not coinsurance × Stop Loss.

Alvaro has an individual major medical policy with a $250 annual deductible and an 80/20 coinsurance provision, with a $2,000 stop loss provision. Alvaro has emergency surgery that cost $8,000. How much will he have to pay for the surgery in total? A. $650 B. $1,600 C. $1,800 D. $2,250

Solution: The correct answer is C. $8,000 - deductible = covered loss $8,000 - $250 = $7,750 Insured's Portion $7,750 × .20 = $1,550 + $250 deductible = $1,800 Insurer's Portion $8,000 -$1,800 = $6,200

Donna has an individual major medical policy with a $250 annual deductible and an 80/20 coinsurance provision, with a $2,000 stop loss limit. Donna has emergency surgery that cost $12,000. How much will she have to pay for the surgery? A. $250 B. $2,000 C. $2,250 D. $2,600

Solution: The correct answer is C. 12,000-250= 11,750 Insured's portion: 11,750 × .2 = 2,350 Since this exceeds the $2,000 stop loss limit the insured pays: $2,000 + 250 deductible = $2,250

Sarah and her husband Ralph have been covered under her employer's group health plan. Ralph started a very successful small business and they have enjoyed a significant increase in earnings. Sarah has recently gone part time and her group health plan will no longer cover them. Ralph's business does not provide health insurance. Which of the following statements regarding COBRA coverage is correct? A. Because Sarah's change to part time is voluntary, COBRA rules do not apply. B. COBRA rules allow continuation of health coverage for up to 36 months. C. COBRA rules allow continuation of health coverage for up to 18 months. D. COBRA rules allow continuation of health coverage for up to 29 months.

Solution: The correct answer is C. 18 months is the correct continuation for going part time and it does not matter if it is voluntary or involuntary.

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

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

Which of the following statements regarding a buy-sell agreement funded using an entity life insurance arrangement, with three business partners are true? I. Six policies are required to be purchased. II. Three policies are required to be purchased. III. There is no step-up in the surviving partners' basis at death. IV. There is a step-up in the surviving partners' basis at death. A. I and III only. B. I and IV only. C. II and III only. D. II and IV only.

Solution: The correct answer is C. An entity agreement is when the entity purchases an insurance policy on each of the owners. Cross purchase would use the formula n x (n-1).

The tendency of the "poorer than average" risk to seek to purchase insurance best describes: A. Risk transfer. B. Moral hazard. C. Adverse selection. D. Law of large numbers.

Solution: The correct answer is C. An example of adverse selection occurs when a smaller company changes health insurers frequently. Those who have a condition that is covered by the previous insurer would be turned down by the new insurance company due to adverse selection.

When the insured is silent to a fact that is material to the risk being insured, what has occurred? A. Breach of Warranty B. Misrepresentation C. Concealment D. Breach of Indemnity

Solution: The correct answer is C. Breach of Warranty - don't do something you agree to do. E.g. install a home alarm security system. Misrepresentation - say you don't smoke when you do.

All of the following statements are correct regarding a Personal Auto Policy Part B (Medical Payments) coverage except? A. Provides payment for medical expenses of an insured due to an auto accident B. Provides medical payments if struck as a pedestrian C. Provides payments for medical expenses for household pets if struck by the covered auto D. Provides payment for medical expenses of anyone occupying the insured's covered auto.

Solution: The correct answer is C. Does not cover pets. Does cover as a pedestrian.

All of the following statements are correct regarding a Personal Auto Policy Part C (Uninsured Motorists) coverage except? A. Payment for property damage B. Payment for lost wages C. Payment for punitive damages D. All of the above

Solution: The correct answer is C. Does not pay for punitive damages. Cannot sue yourself for liability.

Jackie, 70 with no dependents, has $200,000 and needs current income. She want to maximize her current income. Which of the following annuities is the most suitable? A. Longevity annuity B. 20 year term certain, fixed annuity C. Single premium immediate pure life annuity D. Fixed deferred annuity

Solution: The correct answer is C. Needs money now, has the investment money, want max income

Raymond lived in New Orleans during hurricane Katrina. His home was destroyed by wind damage and he was forced to live in a hotel for three months. Which section of his homeowners policy would reimburse him for the increased living expenses associated with the hotel stay? A. Dwelling B. Other Structures C. Loss of Use D. Personal Property

Solution: The correct answer is C. Only for increase in living expenses.

Which of the following is true of a Modified Endowment Contract (MEC)? I. No money can be withdrawn from the contract without incurring a 10% penalty. II. Once a contract is a MEC, it remains so even after a 1035 Exchange for a different policy. III. Any withdrawals are made on a LIFO basis. IV. The contract owner can borrow the money out of the policy without incurring the penalty. A. I and II only. B. I and IV only. C. II and III only. D. III and IV only.

Solution: The correct answer is C. Option "I" is false because once all the earnings are withdrawn and tax and penalty paid on them, the basis is not taxed, nor is there a penalty. Option "IV" is false because even loans from a MEC are taxable and the penalty is applied.

All of the following statements concerning whole life insurance are true except? A. Level premium whole life insurance accumulates a cash value that eventually reaches the face value of the policy at age 100-120. B. Whole life insurance offers permanent protection throughout the insured's lifetime. C. Whole life insurance can be participating which means the insured must participate in self directed investments for the cash value. D. Whole life insurance premiums paid throughout the insured's lifetime are ordinary life policies.

Solution: The correct answer is C. Participating means the insured receives dividends. All other statements are true.

All of the following are true regarding COBRA except? A. The employer is allowed to charge up to 102% of the health insurance premium. B. COBRA must be offered because of voluntary or involuntary termination of the employee or reduction in hours from full time to part time. C. Termination of employment requires 36 months of coverage. D. Divorce or legal separation requires 36 months of coverage.

Solution: The correct answer is C. Termination of employment only requires 18 months of coverage.

Jennifer is applying for life insurance, with her two children as the beneficiary. Jennifer has always been told she looks young for her age and although she is 58, she stated that she is 28 on her life insurance application. What would the insurer be most likely to do if Jennifer's beneficiaries attempt to collect on the life insurance policy? A. Void the policy B. Require payment on premiums for a 58 year old insured C. Recalculate the face value of the policy based on actual premiums paid D. Bring a lawsuit against the estate

Solution: The correct answer is C. The insurance company will simply calculate how much coverage she could have bought based upon her real age and actual premiums paid.

Which of the following statements regarding the characteristics of an insurance contract is false? A. They are a contract of adhesion, which means the insured must accept it or leave it B. They are aleatory contracts, which means amounts exchanged may be unequal C. They are unilateral, meaning there is only one promise, which is a promise by the insured to pay the premium D. The contracts are conditional, which means the terms are under the condition that premiums are paid.

Solution: The correct answer is C. The promise is by the insurer to pay if a loss occurs.

Which of the following life insurance policies have a fixed premium, a cash value and death benefit that can fluctuate based on investment performance? A. Annually renewable term B. Variable renewable term C. Variable whole life D. Variable lifetime annuity

Solution: The correct answer is C. Variable Whole Life has fixed premium, death benefit can fluctuate based on investment performance. No such thing as variable renewable term.

Which of the following life insurance policies have a fixed premium, a cash value and death benefit that can fluctuate based on investment performance? A. Annually renewable term. B. Variable renewable term. C. Variable whole life. D. Variable lifetime annuity.

Solution: The correct answer is C. Variable Whole Life has fixed premium, death benefit can fluctuate based on investment performance. No such thing as variable renewable term.

Match the description with the correct form of life insurance: Flexible premium, variable death benefit, insurer directs investments A. Annual Renewable Term B. Whole Life C. Decreasing Term D. Universal Life E. Variable Universal Life F. Variable Life

Solution: The correct answer is D

Match the following scenarios to the correct coverage. The family lives in a hotel while their house is being repaired. A. Coverage A B. Coverage B C. Coverage C D. Coverage D E. Coverage E F. Coverage F

Solution: The correct answer is D

There are four business partners. They are preparing a buy-sell agreement. It will be funded using a cross purchase life insurance arrangement. How many policies will be purchased by the partners? A. 0 B. 4 C. 8 D. 12

Solution: The correct answer is D

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

Solution: The correct answer is D

Which of the following statements are accurate regarding the taxation of disability insurance? I. Premiums paid by the employer, benefits are taxable to the employee. II. Premiums paid by the employer, benefits are non-taxable to the employee. III. A private disability policy paid with after tax dollars, then benefits are taxable. IV. A private disability policy paid with after tax dollars, then benefits are non-taxable. A. I and III only. B. II and III only. C. II and IV only. D. I and IV only.

Solution: The correct answer is D.

Which of the following would not be considered an insured person for the purposes of Part A (Liability Coverage) for a Personal Auto Policy? A. You B. Any family member C. Any person using your covered auto with permission D. Any person using your covered auto without permission

Solution: The correct answer is D. By definition.

Sam, age 40, is a consultant with widely varying income from year to year. He wants to invest in an annuity over his RWLE. Which of the following is the most suitable for Sam? A. Fixed premium, immediate annuity B. Single premium, immediate annuity C. Fixed premium, deferred annuity D. Flexible premium, deferred annuity

Solution: The correct answer is D. He want to invest over his RWLE (deferred) and income varies (flexible)

Diane, an ER surgeon, buys a disability policy with a base benefit of $6000 and an SIS offset benefit of $1200. Diane becomes disabled and eventually receives $1000 in Social Security disability benefits. How much will she receive from her policy initially? A. $4800 B. $6000 C. $6200 D. $7200

Solution: The correct answer is D. Initially, she receives the full benefit. Once SS starts paying her benefit would drop to $6200.

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

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

Which of the following is not a requisite for an insurable risk? A. A large number of homogeneous exposure units must exist B. Insured losses must be accidental from the insured's standpoint C. Insured losses must be measurable and determinable D. Loss must not pose a catastrophic risk for the insured

Solution: The correct answer is D. Loss must not pose a catastrophic risk for the insurer. All others are a requisite for an insurable risk.

Which of the following is not a requisite for an insurable risk? A. A large number of homogeneous exposure units must exist. B. Insured losses must be accidental from the insured's standpoint. C. Insured losses must be measurable and determinable. D. Loss must not pose a catastrophic risk for the insured.

Solution: The correct answer is D. Loss must not pose a catastrophic risk for the insurer. All others are a requisite for an insurable risk.

A lump sum of cash is paid to an annuity with payments to the annuitant slated to begin within one payment interval from purchase and proceeds are invested in a portfolio generating rates similar to current market rates. I have purchased: I. Immediate annuity. II. Variable annuity. III. Deferred annuity. IV. Single premium annuity. A. I and II only. B. II and III only. C. II, III and IV only. D. I, II and IV only.

Solution: The correct answer is D. Lump sum is single premium. Annuity beginning one payment interval later is immediate (this effectively eliminates Options "III" - deferred annuity), and market rates refers to variable rather than fixed annuities.

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

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

Ralph, age 35, deposited $55,000 in a non-qualified single premium deferred annuity. Fifteen years later he surrenders the contract for a lump sum distribution of $100,000. Which of the following is correct? A. Ralph owes income tax on $45,000. B. Ralph owes income tax on $100,000. C. Ralph owes income tax on $100,000 + 10%. D. Ralph owes income tax on $45,000 + 10%.

Solution: The correct answer is D. Proceeds - basis is ordinary income for early withdrawal (earnings first). 10% penalty because this occurred prior to age 59 ½.

All of the following statements regarding disability insurance are correct except? A. The longer the elimination period, the less expensive the policy. B. An own occupation policy will provide disability benefits if the insured is unable to perform the duties of their own occupation. C. An any occupation policy is less expensive than an own occupation policy. D. A residual benefit clause provides the insured with benefits that extend beyond the disability period.

Solution: The correct answer is D. Residual benefit makes up the difference between wages before disability and wages after disability.

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

Solution: The correct answer is D. Since the insurer has the advantage in drawing up the agreement and is expected to clearly represent the intent of the parties, it is generally held that where the terms of the policy are ambiguous, obscure, or susceptible to more than one interpretation, the construction most favorable to the policyowner must prevail.

Under a HO-3 Policy, all perils are covered, with some exceptions. All of the following are perils that are excluded from a HO-3 policy, except: A. Termite Damage B. Flood C. Earthquake D. Tornado

Solution: The correct answer is D. Termite damage is slow, so it's excluded. Flood and earthquake is definitely excluded.

COBRA coverage is available for an employee who worked for an employer that has a health plan and at least 20 employees for which of the following persons? 1. A retiring employee 2. An employee who is terminated 3. Spouses and dependents of a deceased employee 4. An employee no longer able to work due to disability A. 3 only B. 3 and 4 C. 1, 2, and 3 D. 1, 2, 3, and 4

Solution: The correct answer is D. The answer is D, if the below assumptions are made: 1 is correct if the retiring employee is under age 65. 2 is correct as long as the employee is not terminated for gross misconduct. 3 is correct if the employer has a plan and the spouse and dependents were covered under that plan. 4 is correct because the person is terminated regardless of disability.

The tendency for individuals of higher than average risk to seek out or purchase insurance policies is? A. Peril B. Hazard C. Law of Large Numbers D. Adverse Selection

Solution: The correct answer is D. The underwriter attempts to manage adverse selection and minimize policy issuance to less desirable applicants.

What is the maximum stay in a skilled nursing care facility for those covered by Medicare? A. 20 days B. 60 days C. 90 days D. 100 days

Solution: The correct answer is D. There is no deductible for the first 20 days following a hospital stay.

All of the following statements concerning universal life insurance are true except? A. The insured has the flexibility to adjust premiums, face value and cash value of the policy. B. Insured has flexibility without the investment responsibility of the cash value. C. Cash value of the policy can be used to pay the premiums. D. The death benefit of a universal life insurance policy is fixed.

Solution: The correct answer is D. Universal policies have a death benefit that depends on investment performance and premiums paid. The death benefit is not fixed. All other statements are true.

All of the following statements concerning universal life insurance are true EXCEPT? A. The insured has the flexibility to adjust premiums, face value and cash value of the policy. B. Insured has flexibility without the responsibility of investing the cash value. C. Cash value of the policy can be used to pay the premiums. D. The death benefit of a universal life insurance policy is fixed.

Solution: The correct answer is D. Universal policies have a death benefit that depends on investment performance and premiums paid. The death benefit is not fixed. All other statements are true.

Family members are covered for the purposes of Part A (Liability Coverage) for a Personal Auto Policy when operating all of the following except? A. Your covered auto B. Rented auto C. Borrowed car D. Replacement car after 31 days

Solution: The correct answer is D. You have a duty to notify the insurance company within first 30 days of purchasing a new car.

Match the following scenarios to the correct coverage. Insured is sued because their deck collapsed during a party. A. Coverage A B. Coverage B C. Coverage C D. Coverage D E. Coverage E F. Coverage F

Solution: The correct answer is E

Match the description with the correct form of life insurance: Flexible premium, variable death benefit, insured directs investments A. Annual Renewable Term B. Whole Life C. Decreasing Term D. Universal Life E. Variable Universal Life F. Variable Life

Solution: The correct answer is E.

Match the following scenarios to the correct coverage. Insured takes friend to emergency room after they slip on sidewalk. A. Coverage A B. Coverage B C. Coverage C D. Coverage D E. Coverage E F. Coverage F

Solution: The correct answer is F

Life Settlements and Viatical Settlements are similar in that? A. Buyers of life policies in both are subject to Transfer For Value tax rules B. Sellers of life policies in both are subject to income taxation C. Life Settlement seller (insured) must be terminally ill D. Viatical Settlement sales are not taxable to chronically ill insured

The correct answer is A. In both cases, the buyers are subject to Ordinary Income Tax on the Death Benefit (FMV) less the purchasers basis in the policy. Value received from a viatical or life settlement company by the insured is tax-free if the insured is terminally ill. If the insured is chronically ill, the proceeds will be tax-free when used for medical or long term care, any other use would subject the insured to income tax.

Which of the following statements are true regarding loans on a Whole Life Insurance policy which is deemed to be a MEC? A. Subject to Income tax on gains (LIFO) B. Can include up to 100% of the internal cash value of the policy C. Must be repaid D. Decreases the Face Value of a life insurance policy

The correct answer is A. Once a contract is deemed a MEC, the tax advantages of a traditional life insurance policy are flipped. MEC are treated as LIFO for distributions, loans are taxable. MECs are similar to traditional life insurance for loan repayments and retaining face value with outstanding loans. The death benefit would be reduced if the loan is outstanding at the insured's death.

Which of the following is a false statement regarding a secular trust? A. Irrevocable trusts designed to hold funds and assets for the purpose of paying benefits under a non-qualified deferred compensation arrangement. B. Assets within a secular trust are not currently taxable to the employee. C. A secular trust does not create a substantial risk of forfeiture to the employee. D. Assets set aside in a secular trust results in immediate inclusion of income to the employee.

The correct answer is B. B is the false statement the question was asking for. The statement would be correct for a Rabbi Trust. The remaining answer choices are true statements.

Owl Enterprises would like to reward some of their top three executives. They have chosen to purchase whole life policies on each of them and use a split dollar arrangement. Which financing option would best meet fit their decision? A. Collateral Assignment Split Dollar plan B. Endorsement Split Dollar plan C. Residual Endorsement Split Dollar plan D. Endorsed Assignment Split Dollar plan

The correct answer is B. In a collateral Assignment method, the policy is owned by the employee with an assignment to the employer. Under the Endorsement method, the employer owns the policy. The other two options do not exist.

Non-qualified plans are often informally funded by the purchase of: A. Annuities B. Life Insurance C. Cash D. Physical assets

The correct answer is B. Informally funding a non-qualified plan requires the employer sets aside specific assets which are intended to pay the promised benefits. these assets remain part of the general assets of the business and available to creditors. Life insurance has the advantage of internal build up of cash that is not taxable to the employer. Annuities owned by businesses do not have the same tax deferred status as individually owned policies. Corporate owned policies are taxable. Cash would be better used elsewhere, plus the company can only hold so much in cash without issue. Physical assets (computers, equipment, etc.) of the employer should not be used for employee benefits.

A cash value life insurance policy which fails the 7-Pay Test is deemed to be? A. An Endowment B. A Modified Endowment Contract C. Eligible for tax-free loans and withdrawals D. Can avoid MEC status by exchanging for a new life insurance policy

The correct answer is B. The basic test to determine whether a policy is a Modified Endowment Contract is the 7-pay test. If at anytime during the first seven years of a life insurance policy's existence, the cumulative premium exceeds the net level premium for the policy, it will be deemed a MEC.

A viatical settlement company purchased a $300,000 policy for $210,000 from a chronically ill individual. It paid additional premiums of $9,000 over the three years prior to the insured death. What income must the viatical company report from the policy proceeds in the year of the insured's death? A. $0 B. $81,000 ordinary income C. $81,000 capital gains D. $90,000 ordinary income

The correct answer is B. The viatical company must report the gain as ordinary income. The amount of the viatical settlement plus the additional premiums are costs and are deducted from the proceeds in determining the gain. $300,000 death benefit - $210,000 purchase price - $9,000 premiums paid = $81,000

Green Grass Lawn Care, LLC has executed a buy/sell agreement between the 4 owners. They started the business shortly after they all graduated from high school and built sizable business together over the last 20 years. GGLC, LLC is not an incorporated entity, therefore the only life insurance funding option for them is the cross-purchase agreement. How may polices will need to be purchased to complete the funding? A. 4 B. 8 C. 12 D. 16

The correct answer is C. The policy formula is n x (n - 1). For the 4 person partnership, they will need 4 x (4 - 1) = 12 policies.

In key person life insurance: A. The premiums are tax-deductible B. The employee is the beneficiary C. The employer pays the cost D. The employee is the policy owner

The correct answer is C. The premiums are not tax-deductible. The employer is the owner, premium payer, and beneficiary. Therefore, A, B, and D are incorrect.

Which of the following statement is true in regards to a Non-Qualified Deferred Compensation (NQDC) arrangement? A. NQDC is subject to ERISA rules B. NQDC distributions must begin at Age 72 C. NQDC is not subject to a substantial risk of forfeiture D. NQDC is allowed to be discriminatory

The correct answer is D. Non-qualified deferred compensation is not subject to ERISA rules. NQDC is not subject to minimum distributions or a substantial risk of forfeiture. NQDC is a retirement benefit for select employees. NQDC allows for flexibility to discriminate the benefit to the employees chosen by the employer. It does not need to be a benefit for all employees.