CFP Practice Questions - Insurance Planning

Which of the following is a mandatory provision for health insurance policies? A. Grace period and reinstatement. B. Occupation. C. Misstatement of age. D. Suicide.

A All of the others are optional provisions for health insurance policies.

All the following statements describe benefits of a typical buy-sell agreement, EXCEPT: A. It provides liquidity to the deceased's estate for paying death taxes and other debts. B. It provides for continuation of the business by the surviving owners. C. It can establish the estate tax value of the business interest in the deceased's estate. D. It provides the surviving owners with the option to buy the deceased's business interest.

D A buy-sell agreement should provide for a commitment of the surviving owners to buy the deceased's interest, not just an option to buy. The owner wants to be assured that there will be a sale of the interest at the time of death, not just an option. The other statements are benefits of a buy-sell agreement.

A client recently purchased a new home from a builder for $150,000 including the lot valued at $40,000. How much insurance would you recommend that your client purchase to cover full replacement of the house in the event of a loss? $88,000 $110,000 $120,000 $150,000

$110,000 This is the value of the entire package minus the value of the land (e.g., $150,000 - $40,000 = $110,000).

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? $75,000 $112,500 $150,000 $250,000

$112,500 (Amt Purchased / coinsurance) × loss (300,000/(500,000 * .80)) × 150,000 = 112,500 ACV = .50 × 150,000 = 75,000

Hannah owns a house that has a replacement value of $300,000. The home is 20 years old and is 25% depreciated. She has an HO3 policy with an 80/20 coinsurance requirement. She is carrying $225,000 insurance on the dwelling and has a $1,000 deductible. During a recent storm, the home incurred $40,000 of damage. How much will the insurance company pay? $0 $36,500 $37,500 $39,000

$36,500 Greater of actual cash value: ($40,000 × 75% = $30,000) or Coinsurance calculation: 225/(80% of $300) 240 × $40,000 = $37,500 Less the deductible: so $37,500-$1,000 = $36,500

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

$373,000 (Face value ÷ coinsurance) × Loss - Deductible [400,000 ÷ (.80 × 800,000)] × 600,000 - 2,000 [(400,000 ÷ 640,000) × 600,000] - 2,000 (.6250 × 600,000) - 2,000 375,000 - 2,000 373,000

When Pete Morin purchased his $100,000 home, he insured it at the required coinsurance amount of 80% of the value. Over the last five years, the value of his home has increased and is now $160,000, but he has not increased his coverage. Pete has a $500 deductible. He has a kitchen fire causing $10,000 in damage. What amount will his insurer pay for repairs? $4,250 $5,750 $6,250 $9,500

$5,750 The amount carried divided by the amount required (80% of current value) times the loss, minus the deductible equals the payment. One of the tricks on this one is that he purchased $80,000 of coverage initially (80% of the purchase price). So, the covered loss equals [$80,000 / (.80 × $160,000)] × $10,000 = $6,250. The insurer will pay $6,250 - $500 = $5,750.

On homeowner policy forms where other structures are covered, the coverage is usually what percent of the dwelling? 10% 20% 30% 40%

10% On homeowner policy forms where other structures are covered, the coverage is usually 10% of the dwelling.

*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 $.08 per month per $1,000. The Table 1 (Section 79) rate for 45-49 year olds is $0.15 per $1,000. What additional income must Dave include in his taxable income this year resulting from the group term insurance? A. $10.80 B. $115.20 C. $126.00 D. $132.40

A Dave is paying $115.20 each year for the coverage ($120 × 0.08 × 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 0.15 times 12. ($120,000 - $50,000 / $1,000 × 0.15 × 12). So, the Table 1 premium is $126 (rounded.) Subtract the $115.20 already paid by Dave from the $126 Table 1 premium to determine the additional taxable income ($126 - $115.20 = $10.80).

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

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

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

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

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

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

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

A Transfer-for-value problems can be created if existing policies are transferred between shareholders of a corporation in a cross-purchase agreement. An exception to transfer-for-value exists for transfers from a shareholder or officer to the corporation (to fund an entity purchase agreement), but not for transfers between shareholders. B is a true statement because when surviving owners expect to sell their business interest during lifetime, they will prefer a cross-purchase agreement to allow them to increase their cost basis in the business upon the death of one of the owners. C is a true statement because the business will be the owner, premium payer, and beneficiary of the policies in an entity purchase agreement. Since the business will be paying the high premium on the policy covering the older owner, the other owners are relieved of that financial hardship. D is a true statement because with an entity purchase agreement only one life insurance policy is needed for each owner. With a cross-purchase agreement the number of policies needed = n(n-1).

A supplier of your company experiences fire damage at their plant. They cannot provide an essential part to you for a number of weeks. This, of course, delays your operation. You are covered by a very extensive insurance. For this reason, you would go to collect from your: A. Contingent business interruption. B. Extra expense insurance. C. Business interruption. D. Lease hold interest coverage.

A You would go to collect from your contingent business interruption insurance because it is a business which you do not own that has a direct effect on your own business.

Which of the following life insurance transactions would result in the death benefit being subject to income tax under the transfer-for-value rule? A. Kerri's irrevocable life insurance trust purchases a new universal life policy with Kerri as the insured and her grandchildren as beneficiaries. B. Danny sells an existing $300,000 whole life insurance policy on his life to his former business partner for $60,000. The policy had a gift tax value of $45,000 at the time of the sale. C. Ross buys an 8-year-old $700,000 policy on his life from Mike, his brother-in-law and former business associate, in return for its $110,000 gift tax value. Ross names his wife Anne as beneficiary of the policy. D. Kate sells her son a $100,000 policy on her life for $1,000. At the time of the sale, the policy had a gift tax value of $4,000 and the mother had paid net premiums of $5,000.

B A is incorrect. Since the ILIT purchased a new insurance policy, this does not represent a transfer-for value. C is incorrect. The transfer of a policy to the insured represents an exception to the transfer for value rule. Therefore, the proceeds will remain income-tax free to Anne. D is incorrect. This represents a "part gift part sale." There has been a gift of $3,000 ($4,000 value of the policy less $1,000 paid by the son), and a sale for $1,000 of a policy worth $4,000. In this example, the transaction will be within the "carryover basis" exception of the transfer-for-value rule, because Kate's $5,000 basis was greater than the $1,000 she received (so there was no gain or adjustment to her basis by the son), and the gift value is greater than the consideration. Where the transferor's basis is GREATER than the consideration received, the transferee carries over the transferor's basis. Here, the son's basis (for purposes of determining gain or loss on subsequent policy transactions) will be the basis he can carry over from that of his mother's, i.e., $5,000. So, in spite of the valuable consideration paid by the son, he will receive the proceeds income-tax free.

Your client, Dennis and Daughter, Inc. (often referred to as DAD by the owners) is a C corporation with gross receipts of $3,000,000 for the past four years. The net earnings to the firm for the most recent fiscal year were $120,000. There are two shareholders, Dennis and his daughter, Denise. They have recently had an outside consultant perform a valuation of the firm using the capitalization method and a .10 capitalization rate. Based on this information, Dennis and Denise have decided to execute a buy-sell agreement. Using the above information, answer the following question. All the following would be true in a cross-purchase plan, if Dennis passed away first, EXCEPT: A. Life insurance owned by Denise will not be included in Dennis' probate estate. B. Life insurance and/or disability insurance premiums to fund the agreement are tax deductible as an ordinary business expense. C. Denise would receive an increased cost basis in Dennis' stock equal to the amount paid to redeem the shares from Dennis' estate. D. The transaction side-steps the entity and thus avoids constructive dividend concerns.

B Insurance premiums to fund buy-sell agreements in a cross-purchase plan are not tax deductible. In the case of an entity agreement, where the firm owns the policies, the premium would also NOT be tax deductible.

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

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

Which of the following statements accurately describes a fully insured group health insurance plan? A. Dismemberment benefits from accidental death and dismemberment coverage (AD&D) are taxable to the employee. B. Benefits from a comprehensive medical expense plan are always tax free to the employee. C. Death benefits from AD&D coverage are taxable to the employee's beneficiary if the contract does not meet the definition of a life insurance contract. D. Employer-paid premiums are deductible by the employer if the benefits are payable to the employer and are considered additional reasonable compensation.

B Option "A" - AD&D benefits are not taxable to the employee's beneficiaries. Option "C" is false. Option "D" - Premiums are always deductible to the employer. In a self-funded plan which is discriminatory, some or all of the benefits may be taxable to key employees.

The HMO model under which the subscribers have the greatest flexibility is: A. The staffing model. B. The IPA model. C. The group model. D. The network model.8

B The IPA (Individual Practice Association) allows the greatest flexibility among HMO coverages.

Your client has a personal auto policy with the following characteristics: $250 deductible: comprehensive $500 deductible: collision 300/500/300 split liability limits Your client causes a multi-car accident. The damages to the other automobiles will require them to be totaled. The estimate for damages is $326,000. Medical bills are still coming in, and so far totaling $156,000. A total of 13 cars were involved on an ice roadway, and there were many broken bones and surgeries that were needed. Which of the following statements is true? A. Your client's policy will pay a total of $800,000 for bodily injury as a result of the accident. B. Your client's policy will cover up to $300,000 for damage to all automobiles involved in the accident. C. The deductible will be $250. D. The medical payments to others will be $100,000 each for up to 3 injured parties.

B The split limits in the policy are $300,000 per person, but not more than $500,000 in total for the accident, plus up to $300,000 of property damage. A is incorrect only $500,000 coverage for the entire accident. C is incorrect, the deductible will be $500. D is incorrect, the policy will pay $300,000 each for a total of $500,000.

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

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

Your client travels often for business. She often finds it necessary to rent a car when out of state on a business trip. She always declines the optional collision coverage offered by the car rental agency. Assume that she is at fault in an automobile accident while on one of these trips. Which of the following statements is correct? A. The rented car is a covered auto on her policy. B. The rented car is not a covered auto on her policy because she is out of state. C. The rented car is not a covered auto on her policy because she is on a business trip. D. Damage to the rented car will be covered by the rental car company with recourse to your client.

C If the client was on a personal trip, the damage to the rental car would be covered under her personal auto policy. Because she was on a business trip, the rental car is not a covered auto

Dana and George are retiring this year. They are both 65 and already have applied for social security benefits and enrolled in Medicare. They have elected Medicare Advantage in addition to Part A and B. They are slightly confused about Medicare Advantage but selected it to ensure more coverage. Which of the following statements could you say to help them? A. Medicare Advantage provides duplicate coverage and they could really save the money. B. They will only need to continue paying for Part A. C. Medicare Advantage works like a HMO. D. Medicare Advantage will cover all medical issues while traveling throughout the US.

C Medicare Advantage acts like an HMO, PPO or POS plan. It will cover vision, dental and hearing that are not covered under part A or B. A is incorrect. It provides coverage beyond what A and B offer. B is incorrect. Both part A and B will need to continue being paid for. D is incorrect. Only emergencies are covered outside their coverage area. The coverage area is very regional.

While John is working on his garage roof, he slips, falls off the roof, and lands on the driveway next to the car. John broke his arm in the fall. He should seek to collect and will be successful in doing so from which of his insurance policies? A. Coverage F, medical payment insurance on his homeowners. B. Medical pay on his auto insurance. C. His personal health insurance policy. D. His extended coverage on his life insurance policy.

C Option "A" - Homeowners does not pay for injury to the insured. Option "B" - Medical pay auto pays for the insured if he or she is injured "in, on, or about the covered auto." Here he was close, but not close enough. His personal health insurance (Option "C") will pay.

Which of the following statements accurately reflects the tax implications of the purchase of disability insurance? A. Employer paid policy on key employee = benefits taxable to employer. B. Employer paid policy on key employees = non-taxable benefits to employee. C. Employer paid policy on employee with employer as beneficiary = not deductible to employer. D. Business overhead expense policy = benefits are tax free to individual owner/operator who purchases policy on himself.

C Option "A" benefits would be taxable to the employee. Option "B" benefits would be taxable to the employee because they are employer paid and deducted premiums. Option "D" benefits are taxable but the premiums are tax deductible as a business expense. Note: A business overhead expense disability policy pays the insured's business overhead expenses if the insured becomes disabled. The policy is designed for small businesses that rely on one or two persons.

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

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

Kathleen recently died. She was currently insured for Social Security. Which of the following persons would be entitled to survivorship benefits based on her work record? A. Her husband, Robert, who is age 65. B. Her mother, Joy, age 70, who was a dependent of Kathleen before her death. C. Her daughter, Nora, age 18 and in high school. D. None of the above.

C Since she was only currently insured Robert and Joy are not entitled to survivorship benefits. Her daughter is still eligible for benefits even though she is 18 because she is in high school. SS benefits chart

The group model of the HMO: A. Is a corporation and medical staff members including doctors, nurses and clerical staff are employees of the HMO. B. Is a type of HMO organization that is made up of physicians who have their own office locations. C. Is an arrangement that is sometimes known as the network model. D. Has no gatekeeper within the structure of this model.

C The group model of the HMO is an arrangement that is sometimes known as the network model. Option "A" describes a staff model. Option "B" describes an IPA. Option "D" is incorrect as ALL HMOs employ gatekeepers.

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

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

What is one characteristic of a Comprehensive Personal Liability (CPL) policy? A. It generally includes coverage for legal liability that may arise as a result of professional errors and omissions. B. It provides coverage limited to claims of catastrophic proportions. C. It provides coverage for legal liability stemming from business activities of the insured by use of a simple extension of coverage amendment. D. It may be part of a standard ISO homeowners policy or a stand-alone policy.

D CPL policies are never used to cover Errors and Omissions types of coverage requirements, nor are they used to cover business pursuits.

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

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

Which one of the following risk management techniques is accurately paired with the appropriate activity? A. Risk avoidance - installing sprinkler systems. B. Risk retention - wearing protective clothing. C. Risk reduction - establishing a general partnership. D. Risk sharing - incorporation.

D Incorporating is an example of risk sharing. Option "A" - Installing sprinklers is risk reduction, as is Option "B", protective clothing. Option "C" - Establishing a general partnership is risk sharing.

An insurance contract is known as an aleatory contract. This means that: A. The insurance contract is said to be a one-sided contract. B. The insurance contract is a personal contract between the insured and the insurer. C. The terms of the contract are those written and set forth by one of the parties and agreed to and accepted in their entirety by the other party. D. The insurance contract is an agreement affected by chance occurring when the involved parties pay an unequal number of dollars.

D Option "A" is unilateral. Option "B" is a personal contract. Option "C" describes a contract of adhesion.

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

D Options "A," "B" and "C" simply describe the various levels of care one could receive through an LTC policy.

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

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

Which branch of government is charged with interpreting and enforcing state insurance code rulings that have the force of law? Judicial. Executive. Legislative. Public Safety.

Executive The key word here is "enforcing." That is what the executive branch does. Had the question asked about interpreting and rendering opinions, it would have been referring to the state judicial branch.

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

HO-3 HO-1 is almost non-existent basic coverage. HO-5 is an endorsement to HO-3 coverage. HO-6 is condominium owner coverage. HO-4 is renter's coverage.

The National Association of Insurance Commissioners (NAIC) is involved in the process of regulating the insurance industry by: I. Direct involvement through the development of specific regulations for all states to follow. II. The regulation of the insurance commissioners of all states. III. Indirectly by providing for the exchange of information and preparation of recommendation. IV. Assuring that all state insurance regulation is somewhat uniform. V. Accrediting state insurance regulatory offices.

III & V NAIC works to see that information is adequately communicated as circumstances arise. The organization also sees that recommendations of action serve as the basis for decision-making by setting precedents for states to draw from voluntarily. The NAIC also provides recognition though accreditation of state insurance offices.

The particular type of disability insurance that is renewable is: I. Non-cancelable. II. Guaranteed Renewable. III. Cancelable.

I & II Cancelable policies are not renewable. These are one-time temporary policies, not seen very often anymore and best avoided.

Bill was 59 years old when he died. He was fully insured for Social Security survivorship benefits. Surviving Bill are: Wife Amy, age 40 (Bill married Amy when she was 21 years old, he was 40) Son Jack, age 18 Daughter Amanda, age 15 First wife Karen, age 59 (Bill and Karen married when there were 17 and divorced at age 28) Who is entitled to receive a benefit this year? I, II, III, IV I, II, III I, III, IV I, III

I and III Daughter is under age 18 so is entitled to a benefit. Wife Amy is entitled to caretaker benefit because daughter is under age 16. Son is too old. First wife Karen is not entitled to a survivor benefit because she is under age 60

What benefits are available to the survivors of a deceased worker who was currently insured but not fully insured at death? I. Lump sum death benefit of $255. II. Mother or father's spousal benefit for caring for a qualifying child under age 16. III. Income benefits to a child under age18. IV. Survivor benefit to spouse (assume not remarried) at their full retirement age. I and III only. II, III and IV only. I, II and III only. All of the above.

I, II & III There are no survivor benefits to a surviving spouse with no qualifying child.

Casey Russell, age 45, comes to see you because he has just been diagnosed with a terminal illness. His doctor told him he will NOT be able to work more than another 4 months and that his life expectancy is only 12 months. Casey also tells you that he has always been self-employed and with the exception of the last two years, has NEVER paid into Social Security. What benefits will be available to Casey and his family from Social Security as a result of his death? Assume his wife is also 45-years old, and his two children are ages 15 and 19. I. Monthly survivor's benefit for the worker's child, under age 18 (or age 18 if the child is a full-time high school or elementary school student). II. Monthly survivor's benefit for the worker's spouse, or former spouse, who is caring for a dependent child under age 16 who is eligible for benefits. III. Monthly survivor's benefit for the worker's spouse until age 65. IV. Lump-sum death benefits of $255 for the worker's spouse or child. I, II and III only. I, II and IV only. III and IV only. I and II only.

I, II & IV Monthly survivor's benefit for the worker's spouse occur only if there are minor children for the surviving spouse to raise. Once the children are of age, benefits to the spouse cease.

Which of the following accurately reflects the use of split-dollar life insurance in a business setting? I. It can be a fringe benefit to an employee. II. Insurance premiums are usually split between the employer and the employee (insured). III. It may be used to fund a buy-sell stock redemption agreement. I only. I, and II only. II and III only. I, II and III.

I, II and III All these statements are correct. Split dollar life insurance is an arrangement where an employee and employer generally share the premium cost and cash value for death benefit of a life insurance policy covering the life of the employee.

One of your clients, Fred Majors, age 70, a widower with NO close relatives, has crippling rheumatoid arthritis. Fred is unable to walk and is confined to a custodial nursing home. Which of the following programs is/are most likely to pay benefits towards the cost of Fred's nursing home stay? I. Medicare may pay for up to 100 days of care after a 20-day deductible. II. Long-term care insurance may pay part if coverage of the facility type is broad enough. III. Private medical insurance may pay part if it is a comprehensive major medical policy. IV. Medicaid may pay if the client has income and assets below state thresholds. I, II and III only. I and III only. II and IV only. IV only.

II & IV Option "I" - Medicare will not pay because the client has no possibility of recovery and this is a "must" to secure Medicare payment. Option "III" - Private medical insurance does not pay for custodial nursing home stays, except possibly in a convalescent situation. The clarification on why Option "III" above is incorrect in that a comprehensive major medical policy would pay for treatments for the arthritis, but not for the custodial care which is required because Fred cannot perform the functions of daily living (i.e., dressing, feeding, bathing, etc.)

All of the following regarding the taxation of disability benefits is correct, except: I. Benefits received under a disability policy are tax free if paid by the insured with after tax dollars. II. Benefits received under an employer provided policy are taxable as wages. III. Benefits received under a disability policy purchased through a cafeteria plan are taxable as wages. IV. Benefits received under a disability policy where the premiums are paid 70% by the employer and 30% by the employee are tax free. III only. IV only. II and IV only. II and III.

IV Because a cafeteria plan uses pre-tax dollars to pay disability premiums, benefits received are taxable. When premiums are paid with both pre-tax and after tax dollars, any benefit is partially taxable based on the pro rated amount of the premiums paid with pre-tax dollars. Statement IV is incorrect because the benefit would be partially taxed based on the employer's portion of the premium.