Risk Management - Module 7 Case Study

This year, Devin and Lana withdraw $25,000 from their variable annuity to pay some unexpected bills. Assuming the annuity was issued in 2010, and the $125,000 balance in the annuity includes $50,000 in earnings, what is the amount of the $25,000 withdrawal that is subject to income tax? A) $25,000 B) $12,500 C) $0 D) $5,000

A) $25,000

As part of a life insurance needs analysis, the Kennedys should be concerned about a fund for which of the following? A) Income for the surviving spouse B) All of these C) Education of any dependents D) Dependency care income

B) All of these

Devin and Lana are thinking about selecting a settlement option for their variable annuity. Their objective is to have the annuity provide income until both of them are deceased. Which of the following settlement options will best meet their needs? A) Installment refund annuity B) Joint and survivor annuity C) Single (straight) life annuity D) Life annuity with period certain

B) Joint and survivor annuity

The Kennedys had a kitchen fire causing extensive damage to their dwelling. The cost of repairing the damage is $40,000. At the time of the loss, the limit on the dwelling under the Kennedys' policy was $200,000, but the adjuster estimates the replacement cost to be $250,000. What is the amount of loss the Kennedys will recover from their insurance company? A) The Kennedys will collect $32,000, minus the deductible. B) The cost of the repairs is covered in full, minus the deductible. C) The Kennedys will collect $40,000 if the policy includes the replacement cost endorsement. D) The Kennedys violated the replacement cost provision, and only the actual cash value of the loss will be paid, minus the deductible.

B) The cost of the repairs is covered in full, minus the deductible.

Regarding the Kennedys' deferred variable annuity, A) the insurer directs the cash value investment allocation. B) the amount of growth during the accumulation stage is uncertain. C) the contract fees will be less than if they owned a mutual fund. D) the return credited to the contract is fixed.

B) the amount of growth during the accumulation stage is uncertain.

If Devin's nonqualified deferred compensation plan is informally funded, which of the following statements regarding his plan is CORRECT? I. The assets funding the plan are owned by Magnum Corporation and are subject to the claims of its general creditors. II. Any earnings generated on the assets funding the plan are taxed to Magnum Corporation.

C) Both I and II

On May 20 of this year, Magnum Corporation grants Devin incentive stock options (ISOs) enabling him to purchase 1,000 shares of Magnum stock for $20 per share. At the time of the grant, the stock was selling for $20 per share. On November 23 of this year, when the stock was selling for $25 per share, Devin exercised all of the ISOs. Which of the following statements regarding the income tax treatment of these is CORRECT? I. Devin must recognize ordinary taxable income of $5,000 this year. II. Devin recognizes no ordinary taxable income this year. III. Devin must recognize the $5,000 as a positive alternative minimum tax (AMT) adjustment item this year.

C) II and III

What is the amount of coverage the Kennedys have on their personal property under their homeowners insurance policy? A) $20,000 B) $200,000 C) $50,000 D) $100,000

D) $100,000

Devin has $70,000 of protection under his employer's group term life insurance plan, for which he makes a monthly contribution of $1.50. Lana is the named beneficiary. The actual cost to the employer for his protection is $0.20 per month per $1,000 of insurance, and the uniform premium for group term insurance under the Internal Revenue Code is $0.09 per month per $1,000 of insurance. Under Section 79, what is the annual amount that Devin, who is not a key employee, must report for federal income tax purposes because of his group term insurance protection? A) $21.60 B) $30.00 C) $57.60 D) $3.60

D) $3.60

Devin and Lana are meeting with you next week and will bring information regarding Devin's group disability income insurance plan. What definition of disability would provide the most favorable protection for Devin? A) The inability of the insured to engage in his own occupation and not working in any gainful employment B) The inability of the insured to engage in any occupation C) The inability of the insured to engage in any reasonable occupation for which he is or might easily become qualified D) The inability of the insured to engage in his own occupation

D) The inability of the insured to engage in his own occupation