CH 6

A partnership involving four equal partners is valued at $1,800,000. Under a Cross Purchase Plan, the amount of the policy on the life of each partner would be:

$150,000 Each partner's ownership share equals $450,000, thus each partner would own a $150,000 policy on the life of each of the other three partners under a Cross Purchase Plan (3 x $150,000 = $450,000). There would be a total of 12 (4 x 3) policies (12 x $150,000 each = $1,800,000).

As part of Social Security benefits, a one-time payment of $_______ may be made paid to a surviving spouse after a taxpayer's death.

255 Death benefits paid to the family of a covered worker is a one-time payment of $255 made after the taxpayer's death. This benefit may be paid to a surviving spouse or minor children if they meet certain requirements.

To be considered fully insured under Social Security, a worker generally needs how many quarter credits?

40

The widow or widower's Social Security blackout period lasts until a surviving, non-remarried spouse reaches age ________.

60

Social Security Retirement Benefits are available as early as age _______ but are less than if paid at the full retirement age.

62

Which of the following is NOT an example of Third-Party Ownership?

A business owner buying a life policy on his own life A business owner buying a life policy on his own life is only a two-party transaction. In the majority of individual policies, the insured and the owner is the same person. Any time they differ, Third-Party Ownership exists.

T has some heart health issues, but needs some additional life insurance coverage. What options should T consider?

A group life insurance plan For those who don't qualify for an individual policy because of age or health reasons, group life coverage might be a good option.

Which of the following best describes Third-Party Ownership?

A policy owned by one person insuring the life of another person When a policy is owned by someone other than the insured, it is a third-party ownership situation.

The underwriter's greatest concern when underwriting a group plan is ____________.

Adverse selection

An employee who is covered under an employer group life insurance plan may assume all of the following are TRUE of the opportunity of conversion, except:

An employee who is covered under an employer group life insurance plan may assume all of the following are TRUE of the opportunity of conversion, except: The greatest advantage of group life conversion is that evidence of insurability is not required. The insurance company requires conversion to a permanent policy, which will be more costly.

The Social Security Survivor Benefit is computed using which of the following?

FICA

The Social Security System is funded through:

Federal Insurance Contribution Act (FICA) taxes The Social Security System Funding is provided by both employee and employer through the Federal Insurance Contributions Act (FICA) tax. The employer withholds the employee's tax and pays it along with the employer's portion. Self-employed individuals pay an amount equal to the total of an employer and employee payment.

Under Social Security, a worker needs 10 years of work to be considered ________ insured.

Fully

In which market are Certificates of Insurance issued to insured individuals?

Group

In those instances in which the death of a valued employee could cause financial hardship for a company, the company might acquire additional funds through which type of coverage?

Key Person

The proceeds from a _________ plan provide the necessary funds to recruit, hire, and train a replacement employee.

Key employee Key employee life insurance plans provide the funds to recruit, hire, and train a replacement employee.

Buy-sell agreement life insurance premiums are

Not deductible and proceeds are income tax free

Buy-sell agreement life insurance premiums are:

Not deductible and proceeds are income tax free Premiums are not deductible, and policy proceeds are received income tax-free.

To help protect against ___________, group plans have a probationary period set by the group sponsor.

Preexisting conditions and immediate claims To help protect against preexisting conditions and immediate claims, group plans have a probationary period set by the group sponsor.

____________ individuals pay a FICA tax amount equal to the total of an employer and employee payment.

Self-employed The Social Security System Funding is provided by both employee and employer through the Federal Insurance Contributions Act (FICA) tax. The employer withholds the employee's tax and pays it along with the employer's portion. Self-employed individuals pay an amount equal to the total of an employer and employee payment.

Lorraine's position has been terminated, and she is interested in converting her group life coverage to an individual policy. In the process, she will find all of the following to be TRUE, except:

She will be converting her group term benefit to an individual term benefit

All of the following are parties to a life insurance contract, except:

The beneficiary

Which of the following is true in regard to an Entity Purchase Plan?

The business enters into an agreement to purchase the deceased's interest in the business

All of the following are correct regarding Key Person Insurance, except:

The policy primarily insures the employee's retirement plan A Key Person Plan is intended to help a company recover from the loss of a key employee until a replacement is found.

Group life insurance is a contract between what parties?

The sponsor and the insurer Only the plan sponsor receives a policy, the Master Policy from the insurer, which are the two parties to the contract.

The Social Security Death Benefit is payable to the ____________.

The surviving spouse

A grandparent purchases a life insurance policy on their granddaughter. This is an example of _________.

Third-Party Ownership If someone other than the insured is the policyowner, this is referred to as third-party ownership.

A consumer should know the following aspects of a group insurance policy, except:

Upon separating from the group, the group life coverage is not convertible There is a conversion period of 31 days in which the employee may, upon termination of eligibility and without evidence of insurability, convert their group life insurance benefit to an individual permanent policy.

When is an entity buy-sell agreement plan used?

When the entity buys life insurance on each of the owners Under an entity plan, a business entity enters into an agreement in which it is obligated to purchase the deceased's owner's interest. The entity typically buys life insurance policies on each of the owners and then would name itself as the beneficiary of each policy.

The LMC Partnership has 3 partners and is concerned about what would happen to their $300,000 business if one of the partners should die. If they consider a buy-sell agreement, then each partner would have to buy a policy in the amount of $__________ on the other partners.

$50,000 If there are 3 partners in a company valued at $300,000, then each would have a $100,000 interest in the company. Each partner would purchase a policy on the other partners, providing for a total of 6 policies (3x2 = 6). Each policy would be valued at $50,000 (6 x $50,000 =$300,000).

L is no longer eligible for the employer's $50,000 group life insurance plan. L dies 28 days later without sending in the required conversion paperwork. What will their beneficiaries receive?

$50,000, less any premiums due The conversion period is also a grace period. In the event a terminated or ineligible employee dies during the conversion period, whether they were going to elect individual coverage or not, a death claim will be paid by the group policy, less the premium due for the benefit.

A Social Security retirement benefit recipient will receive the greatest benefit starting at which of the following ages?

65

Which of the following is truly a Key Person (Key Employee)?

An executive sales manager In a Key Person Insurance plan, the key person is part of the management team, is more highly paid than the other employees, is respected by customers and vendors, and has direct responsibilities for sales, production, or service.

Group Life Insurance is usually written as:

Annual renewable term Group Insurance is usually written as annual renewable term so that, based on a number of factors, the insurer may change the rate or the employer may change the plan.

An agreement that establishes a price with the intent to purchase the assets of a business should one of the parties to the agreement predeceases the other is called a ___________.

Buy-Sell Agreement A Buy-Sell Agreement is a legal and binding contract. A method of valuing the business is critical for the buy/sell to be effective and carried out in a timely manner. In an Entity Purchase Plan, the company is the beneficiary. In a Cross Purchase Plan, each partner is the owner and beneficiary of policies purchased on the other partners.

All of the following are typically what key employee life insurance proceeds are used for, except to:

Close down the business A key person life insurance policy provides the necessary funds to recruit, hire, and train a replacement employee, restore lost profits, and reassure customers that business operations will continue.

The Social Security Survivor Benefit is based on the Primary Insurance Amount of the:

Deceased The Social Security Survivor Benefit is based on the Primary Insurance Amount of the deceased.

Each of the following pertaining to group life insurance is true, except:

Group members are required to prove insurability The primary benefit of group coverage is that proof of insurability on the part of the group participant is not required.

A buy-sell agreement can be used in all of the following businesses, except:

Large publicly held corporations

A key person is typically all of the following, except:

Not directly involved in sales, production, or service Key persons are employees whose contributions have a significant impact on the revenue and profitability of the company, especially in small businesses. They are typically: part of the management team, more highly paid, respected by customers, creditors, suppliers, and vendors, and have direct responsibilities for sales, production, or service.

All are correct statements concerning noncontributory group life, except:

Premiums are calculated by underwriting each individual in the group

All of the following are correct regarding Key Employee Life Insurance, except:

Premiums are deducted from the employee's salary Key Employee Life Insurance is designed to indemnify a company against the loss of a key employee. The employer has an insurable interest in the key employee, and is the owner, premium payor and beneficiary. The premiums are not tax deductible, and the death benefit is federal income tax free.

To help protect against experiencing immediate claims, group plans have a(n) _______ period set up by the group sponsor.

Probationary

The 31 days in which the employee may change his/her group policy to an individual policy upon termination and without evidence of insurability, is known as:

The Conversion Period As the name implies, the Conversion Period is the period in which an employee may convert the group term death benefit to an individual permanent policy upon termination and without evidence of insurability.

When an insurer wishes to implement changes to a group life policy, whom must it notify?

The group sponsor Just as in individual contracts, the owner controls the policy. In this case, only the plan sponsor has a policy (i.e. the Master Policy). As such, the insurer must notify the group sponsor of the changes.

Which of the following meets the criterion for being a natural group for group life insurance purposes?

The group was formed for a purpose other than for procuring or reducing the cost of insurance To be eligible for a group plan, the group must be a natural group, meaning it was formed for a purpose other than for procuring or reducing the cost of insurance.

All of the following are generally the main business uses of life insurance, except:

To provide funds for the deceased's heirs Business uses of insurance often mirror individual needs - to cover the unexpected death of business partners, executives, and key employees by providing funds for the continuation of the business, not for the heirs of the decedent.

When is a cross purchase buy-sell agreement plan used?

When parties purchase life insurance on each other A Cross Purchase Plan is used when parties purchase life insurance on each other. At the death of one of the parties, policy proceeds are used to purchase that person's interest in the business from his/her heirs. Each partner owns insurance on each of the other partner(s).

Which of the following concerning Noncontributory Group Life insurance is FALSE?

An employer pays 75% of the premium To minimize the effects of adverse selection, a noncontributory group life policy must cover 100% of the eligible employees. The employer pays 100% of the premium.

Barry has just been hired by OPQ Corporation and finds that he cannot enroll for coverage under OPQ's group health insurance plan for 30 days. This 30-day period is known as a:

Probationary Period The specified period of time set by the employer before an employee is eligible to enroll for group benefits is known as a Probationary Period. It usually is 30 days in length but could be up to 90 days.