Chapter 6 ~ Markets and Social Security

All of the following are characteristics of Credit Life Insurance, except: a). This insurance is normally Decreasing Term and the amount of insurance reduces as the obligation reduces b). The amount of the insurance benefit must not exceed the total amount of indebtedness c). The debtor generally is both policyowner and beneficiary d). The insurance is either a form of individual coverage on the life of a debtor, or a form of group insurance issued to a creditor providing coverage for debtors

c). The debtor generally is both policyowner and beneficiary The creditor (not the debtor) is normally both the policyowner and beneficiary.

Which one of the following statements about nonqualified deferred compensation plans is false? A If the employee dies before retirement, the life insurance benefit is paid to the employer tax free, who in turn pays the employee's heirs, who will pay income tax but if the employee lives to retirement, the policy may be surrendered to pay the deferred compensation B Income taxes are deferred until the employee takes possession of the incentive funds c). The employee is the policyowner and the beneficiary is the employee's spouse D It is an incentive plan in which an employer promises to pay highly compensated employees the full value of their voluntary salary deferral at a defined future point in time

c). The employee is the policyowner and the beneficiary is the employee's spouse The employer is both the policyowner and the beneficiary.

Which of the following is a likely outcome if a buy-sell agreement in a two person partnership is not in place when one of the partners dies? A Partnership transfer taxes are due within 9 months B The value of the business will increase C The agreement will need to go through the probate process d). The surviving spouse of the deceased becomes the other partner

d). The surviving spouse of the deceased becomes the other partner Without a Buy-Sell Agreement in place, the surviving spouse of the deceased partner will likely step in as the new partner.

Which of the following types of buy-sell agreements provides for a business to purchase a life insurance policy on each business partner? a). Entity Plan B Cross Purchase Plan C Key Employee Plan D Stock Redemption Agreement

a). Entity Plan The Entity Buy Sell Plan is a contract in which the business entity buys a life insurance policy on each of the owners. The Cross Purchase Plan requires each business partner to purchase a policy on the other business partners. The Stock Redemption Agreement is not for business partners, but for shareholders in a closely held corporation. The Key Employee Plan is not a buy-sell agreement.

In which market are Certificates of Insurance issued to insured individuals? a). Group b). Franchise c). Individual d). Industrial

a). Group In the group market, no individual policies are issued. The employer receives the Master Contract and the employees or members receive Certificates of Insurance.

Which of the following is a requirement in order for a third-party ownership policy to be issued by a life insurance company? a). Insurable interest must exist between the policyowner and the insured B An annual premiums must be paid with the application C The policy must be for no more than $100,000 D A proper beneficiary must be named

a). Insurable interest must exist between the policyowner and the insured Insurable interest must exist at the time of policy issuance in order for the insurer to issue the policy.

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? a). Key Person B Preferred Insured C Employer-Employee Cross Purchase D Business Reimbursement

a). Key Person The business would likely purchase a Key Person (Key Employee) Policy on the life of the valued employee to offset the expenses and financial losses due to the death of that employee.

Buy-sell agreement life insurance premiums are: a). Not deductible and proceeds are income tax free b). Deductible and proceeds are income tax free c). Deductible and proceeds are not income tax free d). Not deductible and proceeds are not income tax free

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

A mandatory participation rate for noncontributory group plans is designed to: a). Reduce adverse selection B Allow the employer to obtain the greatest premium discount C Maximize the premium an insurer collects D Achieve economies of scale

a). Reduce adverse selection Requiring 100% of eligible employees to participate in a noncontributory employer group life insurance plan reduces the risk of adverse selection.

An employee who becomes entitled under the terms of the group policy to have an individual policy issued without evidence of insurability must: a). Submit an application along with the initial premium B Document the need for coverage C Request the coverage within 90 days D File for unemployment

a). Submit an application along with the initial premium If an employee under a group policy becomes entitled under the terms of the policy to have an individual policy issued without evidence of insurability, he/she must submit an application with the initial premium.

All of the following are correct regarding Key Person Insurance, except: a). The policy primarily insures the employee's retirement plan B The policy is owned by the employer C The policy can be term or permanent D The policy is source of funds to replace any lost revenue due to the death of the employee

a). 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.

If an employee does not enroll during open enrollment and they still want coverage, what happens? a). They must provide proof of insurability B They cannot obtain as much coverage as those who enrolled during the open enrollment C The forms of insurance are more limited when they do apply for coverage D They pay more in premiums than those who enrolled during the open enrollment

a). They must provide proof of insurability They must provide evidence of insurability unless they wait until the next open enrollment period.

Every group policy containing a life insurance benefit must contain a reasonable extension of benefits upon discontinuance of the policy for employees who, while insured under the policy, become: a). Totally disabled B Laid-off C Partially disabled D Retired

a). Totally disabled Every group policy containing a life insurance benefit must contain a reasonable extension of benefits upon discontinuance of the policy with respect to employees who become totally disabled while insured under the policy and who continue to be totally disabled at the date of discontinuance of the policy.

All of the following regarding credit life are true, except: a). Usually the creditor pays the premium B It can be either in the form of individual or group coverage C The coverage is on the life of the debtor D The form of coverage is normally decreasing term insurance

a). Usually the creditor pays the premium Usually the individual debtor pays the premium.

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? A Nothing, since L is no longer in the group plan b). $50,000, less any premiums due C Nothing, since L has not paid the required premium D $50,000

b). $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.

Social Security Retirement Benefits are available as early as age _______ but are less than if paid at the full retirement age. A 64 b). 62 C 63 D 65

b). 62 Social Security Retirement Benefits start as early as age 62, but at a reduced amount.

An individual can make changes to their group life insurance plan at any time for any one of the following reasons, except: A Change in employment status such as going to or from part-time to full-time b). Changing health insurance carriers and deductibles C Getting married D Adding an eligible dependent

b). Changing health insurance An individual can make changes at any time if they have a change in status, such as adding an eligible dependent or change in employment status such as going to or from full time to part time employment.

Buy-Sell agreements are used for all of the following entities, except: A Partnerships b). Large Public Corporations C Sole Proprietorships D Closely held businesses

b). Large Public Corporations Public corporations are not candidates for Buy-Sell agreements. The Buy-Sell agreement is for privately-owned entities.

The primary categories of Social Security Benefits provided are: a). Retirement, Death, and Cost of Living b). Retirement, Death, and Survivor c). Retirement, Disability, and Unemployment d). Retirement, Survivors, and FICA

b). Retirement, Death, and Survivor The Social Security System provides Retirement, Death, and Survivor benefits.

Which of the following is not one of the most common methods of determining group insurance benefits? A Position in the company b). Tax bracket C Percentage of income D Flat benefit

b). Tax bracket The most common methods of determining group insurance benefits are flat benefit (all employees receive the same insurance amounts), percentage of income (employees receive 100%, 150%, or 200% of their annual base wage, subject to imputed income), and position in the company (the employer may establish different benefits for specific classes of employees, but may not discriminate between employees in the same class).

The premium for optional dependent group insurance can be payable by: A Both the employee and employer must contribute b). The employer, the employee, or both C The employee only D The employer only

b). The employer, the employee, or both Optional dependent coverage may be paid for by the employer, the employee, or both.

Credit Life insurance is usually what type? A Increasing Term B Variable Term c). Decreasing Term D Level Term

c). Decreasing Term Since the amount of the outstanding debt declines over time, decreasing term would make the most sense.

Under Social Security, a worker needs 10 years of work to be considered ________ insured. a). Partially b). Over c). Fully d). Currently

c). Fully To be considered fully insured, a worker generally needs 10 years of work (40 credits).

A buy-sell agreement can be used in all of the following businesses, except: a). A partnership b). A sole proprietorship c). Large publicly held corporations d). Closed corporation stockholders

c). Large publicly held corporations A buy-sell agreement may be used with a sole proprietorship, a partnership, or with stockholders of a closed corporation.

All of the following are correct regarding Key Employee Life Insurance, except: a). The beneficiary (the employer) typically receives the death benefit free of federal income tax b). The employer is the owner/applicant of the policy c). Premiums are deducted from the employee's salary d). The employer has an insurable interest in the key employee

c). 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.

As specified by the California Insurance Code, the validity of a group policy cannot be contested, except for nonpayment of premiums, after it has been in force for: a). 2 years b). 9 months c). 1 year d). 18 months

a). 2 years As specified by the California Insurance Code, the validity of a group policy cannot be contested, except for nonpayment of premiums, after it has been in force for 2 years.

Group insurance plans must have a grace period of how many days? a). 60 b). 45 c). 30 d). 31

a). 60 Group insurance plans must have a grace period of 60 days.

The lowest monthly Social Security retirement benefit would occur if started at age _______. a). 62 B 67 C 60 D 65

a). 62 Full Social Security Retirement Benefits are paid when workers reach their full retirement age (FRA). Reduced benefits can start at age 62 and only survivor benefits start at age 60.

Which of the following is NOT an example of Third-Party Ownership? a). A business owner buying a life policy on his own life B A Key Employee Policy C A parent purchasing a policy on the life of his or her child D A policy used to fund a Buy-Sell Agreement

a). 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.

All of the following are examples of third-party ownership, except: a). A mother buys a policy for herself and names her son as beneficiary B A grandparent buys life insuranc on a granddaughter C A key employee plan D A cross purchase plan

a). A mother buys a policy for herself and names her son as beneficiary A key employee plan and a cross purchase plan have an owner other than the insured, as does the policy bought by the grandmother on the life of her grandchild.

The extension of group benefits for an employee or dependent may terminate if: a). It has been more than 36 months since the extension of benefits have been provided for the employee, or 24 months for the dependent b). The employee qualifies for Medicare or the dependent obtains coverage through Medi-Cal c). The employee or dependent is no longer totally disabled d). The employee or dependent attains the limiting age

c). The employee or dependent is no longer totally disabled The extension of group benefits may be terminated if the employee or dependent is no longer totally disabled or at such time as a succeeding carrier may elect to provide replacement coverage to that employee or dependent without limitation as to the disabling condition.

Group insurance is a contract between: a). The insurance company and the employees b). The employees and his/her dependents c). The sponsor and the insurance company d). The sponsor and the employees

c). The sponsor and the insurance company Group insurance is a contract between the sponsor and the insurance company.

A consumer should know the following aspects of a group insurance policy, except: A The plan sponsor has a say in the form and amount of coverage available to plan participants B If covered under an employer group plan, the employer can discontinue the plan at any time c). Upon separating from the group, the group life coverage is not convertible D At renewal, the premium can be increased, in which case it may become unaffordable

c). 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? a). When the owners are not in the financial position to buy the policies on their own b). When insurability is an issue c). When the entity buys life insurance on each of the owners d). When the entity needs an additional tax deduction

c). 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.

XYZ Corporation has 59 employees. The company decides to purchase a group life policy and will pay the total premium. What percentage of employees must participate under this arrangement? A 75% B 50% C 25% d). 100%

d). 100% The question describes a Noncontributory Plan as the employer (XYZ Corporation) is paying the entire premium, thus 100% participation (all 59 employees) is required.

As specified by the California Insurance Code, an employer group policy may exclude or limit coverage for losses arising from conditions relating to all of the following, except: A War B Aviation exposures C Military service d). Change in job classification

d). Change in job classification As specified by the California Insurance Code, an employer group policy may provide for the exclusion or limitation of coverage for losses arising from conditions relating to war, military service, or aviation exposures.

Each of the following pertaining to group life insurance is true, except: A Group life insurance is term insurance B The insured receives a Certificate of Insurance C The group sponsor receives a Master Policy d). Group members are required to prove insurability

d). 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.

The proceeds from a _________ plan provide the necessary funds to recruit, hire, and train a replacement employee. a). Cross purchase b). Entity c). Group d). Key employee

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

To help protect against experiencing immediate claims, group plans have a(n) _______ period set up by the group sponsor. A Conversion B Open enrollment C Elimination d). Probationary

d). Probationary A probationary period is set up to help reduce the chance of facing immediate claims.

A mandatory participation rate for noncontributory group plans is designed to: a). Allow the employer to obtain the greatest premium discount b). Maximize the premium an insurer collects c). Achieve economies of scale d). Reduce adverse selection

d). Reduce adverse selection Requiring 100% of eligible employees to participate in a noncontributory employer group life insurance plan reduces the risk of adverse selection.

If an employee under a group policy becomes entitled under the terms of the policy to have an individual policy issued without evidence of insurability and is not given notice of this right within 15 days prior to the conversion period expiring, which of the following is correct? a). The employer must provide the coverage at a 20% discount b). The employee will be given the coverage free of charge for the first year c). The employer will be fined by the Insurance Commissioner d). The employee must be given an additional period of time to exercise this right

d). The employee must be given an additional period of time to exercise this right If an employee under a group policy becomes entitled under the terms of the policy to have an individual policy issued without evidence of insurability and is not given notice of this right within 15 days prior to the 31-day expiration period, the employee must be given an additional period to exercise this right.

Which of the following meets the criterion for being a natural group for group life insurance purposes? A All members of the group live within the same zip code B Members of the group all have a college degree C The group has at least 500 members d). The group was formed for a purpose other than for procuring or reducing the cost of insurance

d). 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.

Which one of the following statements about nonqualified deferred compensation plans is false? a). If the employee dies before retirement, the life insurance benefit is paid to the employer tax free, who in turn pays the employee's heirs, who will pay income tax but if the employee lives to retirement, the policy may be surrendered to pay the deferred compensation b). It is an incentive plan in which an employer promises to pay highly compensated employees the full value of their voluntary salary deferral at a defined future point in time c). Income taxes are deferred until the employee takes possession of the incentive funds d). the employee is the policyowner and the beneficiary is the employee's spouse

d). the employee is the policyowner and the beneficiary is the employee's spouse The employer is both the policyowner and the beneficiary.