4382 - Risk Final

Andrea owns and runs a printing company that is organized as an S corporation. Unfortunately, she has an accident with a printing press and is rendered disabled. She receives $4,000 per month in disability payments. The S corporation had paid the premiums on the policy, but reported the payments on her W-2. How much of the benefit is subject to income tax?

$0.

Bentley has paid $40,000 in premiums on a whole life policy with a $250,000 death benefit. The policy has paid a dividend of $1,000 per year for the past 10 years. If Bentley surrenders the policy today for it's cash value of $55,000, what will be the amount of gain subject to taxation?

$55,000

Terry has a major medical policy with a $500 initial deductible per illness, an 80%/20% coinsurance requirement, and an internal limit of $500 per day for hospital room-and-board costs. During a recent hospital stay of four days, Terry incurred the following bills: Hospital room-and-board charge $2,600 Hospital lab fees and tests $4,400 Surgeon's fee$2,800 How much of Terry's medical bills will be paid by the major medical insurer?

$6,960.

Amanda owns a home with a $400,000 replacement value. This January, a snowstorm causes $75,000 in damages to the home. Amanda has an insurance policy with 80% coinsurance and a $1,000 deductible. How much will the insurer pay if Amanda carries $300,000 of coverage?

$69,312.50

Watson, Inc. has four equal partners. All four partners are interested in entering into a buy-sell arrangement. How many life insurance policies would be purchased to properly fund using a crosspurchase agreement?

12 policies.

Which of the following is false regarding a deferred compensation plan that is funded utilizing a rabbi trust?1. Participants have security against the employer's unwillingness to pay.2. Rabbi trust provide the participant with security against employer bankruptcy.3. Rabbi trusts provide tax deferral for participants.4. Rabbi trusts provide the employer with a current tax deduction.

2 and 4.

Which of the following statements regarding loss severity is true? 1. Loss severity is the expected number of losses that will occur within a given period. 2. Loss severity is the potential size or damage of a loss.

2 only

Short-term disability provides coverage for up to:

2 years.

For a short-term disability policy, what is the typical elimination period?

5 - 30 days.

The risk that individuals of higher than average risk will seek out or purchase insurance policies is called?

Adverse Selection

In a properly drawn business buy-sell agreement funded by life insurance for a six-person partnership: 1. The cross-purchase approach will be found to be more efficient than the entity approach. 2. The surviving partners are given the option to buy the interest of a deceased partner.

Both 1 and 2.

The section of a insurance contract that describes exactly which property or person is being covered is the:

Declarations section

Which of the following policies provides the greatest degree of protection to the insured?

Noncancelable.

Drew has a disability income policy that pays a monthly benefit of $3,000. Drew has been disabled for 60 days, but he only received $1,500 from his disability insurance. Which of the following is the probable reason that he only received $1,500?

The elimination period is 45 days.

John, who is seriously ill, is thinking about entering into a viatical agreement. Which of the following statements concerning a viatical agreement is (are) correct? 1. It is usually created only if the insured has less than 60 days to live. 2. It usually pays the insured something less than the life insurance policy's face amount.

2 only.

Which of the following statement(s) is/are correct regarding buy-sell arrangements? 1. Entity purchase arrangements increase the income tax basis for some survivors upon the death of another owner. 2. Cross-purchase arrangements increase the income tax basis for all survivors upon the death of another owner.

2 only.

A grace period is granted to the insured in the event that he or she is late making a premium payment. In a traditional health insurance policy, the grace period is:

31 days.

Allison, an employee at Initech Software Solutions, recently divorced her husband, Tony. Initech has provided group health insurance coverage to Allison and her family since she began working for the company. Tony is unemployed, but is entitled to COBRA continuation coverage for:

36 months

How long would someone have to wait to receive Social Security disability benefits if they qualify?

5 months.

Orlando buys a disability policy with a base benefit of $5,000 and an SIS offset benefit of $1,000. Orlando becomes disabled and eventually received $700 in Social Security disability benefits. How much will Orlando receive from the insurance company after Social Security benefits begin?

5,300

The Affordable Care Act (ACA) requires large employers to provide a minimum level of health insurance coverage to employees or face significant tax penalties. According to the ACA, a large employer is a company who, at any point during the year, employs at least:

50 people

Stephanie works for Blizzard Coolers Inc, which provides disability insurance for its employees, but only pays 60% of the premium. Stephanie pays the remaining 40% of the premium with after-tax dollars. If Stephanie is disabled, what percentage of her benefits is taxable?

60%.

Marsha, age 35, is a single mother of one daughter, Skyler, age 9. Marsha is a secretary with annual income of $35,000 and a negative net worth. Marsha has two objectives: (1) to protect Skyler in the event of her untimely death and (2) to save for her own retirement. Which of the following life insurance policies should she buy?

A 20-year term insurance policy.

All of the following statements concerning non-qualified deferred compensation are correct EXCEPT:

A Rabbi trust provides the employee with protection against both a change in control and employer insolvency.

All of the following are correct regarding group disability coverage EXCEPT:

All of the above are correct (Premiums for group disability coverage are typically lower than premiums for individual policies. Employers may pay premiums on behalf of the employees or allow the employees to pay the premium directly through payroll deduction. Employer-sponsored group disability coverage is usually coordinated so that there is continuous income coverage between short-term and tong-term policies)

In order to achieve tax deferral in a non-qualified deferred compensation arrangement, which of the following is (are) true?

All of the above are correct. (The arrangement must be established in such a manner as to avoid a current economic benefit. The arrangement must be established in such a manner as to avoid constructive receipt. There must be a substantial risk of forfeiture.)

All of the following statements regarding insurance policies are correct EXCEPT:

An endorsement is a modification or change to a life or health insurance policy.

When must an insurable interest exist for a life insurance claim?

At the policy inception only.

Cate is an inquisitive person and wants an explanation of the legal characteristics of an insurance contract. All of the following statements are correct, EXCEPT:

B) An insurance contract is aleatory in the sense that equal monetary values are exchanged.

A subrogation clause means that:

B) Insured cannot indemnify himself from both the insurance company and a negligent third party for the same claim.

Which of the following statements is/are correct regarding insurance contracts? 1. The principle of insurable interest is closely aligned with the principle of indemnity, which both limit the insured from experiencing a gain using insurance. 2. A subrogation clause in an insurance policy requires that the insured relinquish a claim against a negligent third party if the insurer has already indemnified the insured.

Both 1 and 2.

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?

C) Recalculate the face value of the policy based on actual premiums paid.

Desi is 30 years old and recently began a job with a salary of $60,000. He is single but has been dating Lucy for three years. He expects to marry her within the next five years. Desi lives with his parents. What is the amount of life insurance that Fred currently needs?

$0.

Mackey learned that he had contracted a rare disease and is not expected to live more than five years, but is still able to perform all activities of daily living. He has a life insurance policy with a face value of $400,000 that he could sell to a viatical company for $200,000. On the policy, Mackey had paid premiums of $2,000 each year for 15 years, and the cash value is $26,000. What capital gain will Mackey have to report if he sells the policy to the viatical company?

$170,000

which of the following is a characteristic of guaranteed renewability? 1. The insurer guarantees to renew the policy to a stated age. 2. The policy is non-cancelable and the premium may not be increased. 3. Renewal is solely at insurer's discretion. 4. The insurer has the right to increase the premium rates for the underlying which the insured is placed. Note: not for a single individual.

1 and 4.

The principle of indemnity requires that:

A person is entitled to compensation only to the extent that financial loss has been suffered.

Which of the following statements regarding the characteristics of an insurance contract is false?

C) They are unilateral, meaning there is only one promise, which is a promise by the insured to pay the premium.

All of the following are true regarding Health Savings Accounts (HSAs) EXCEPT:

If an employer makes contributions to an HSA on behalf of an employee, the employer contributions are included in the taxable income of the employee.

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, what type of authority does Joe believe his agent has to enter into an insurance contract?

Implied Authority.

Which of the following best describes the advantages of a split-dollar life insurance plan?

It is useful for employers who wish to provide an executive with life insurance at low cost and low cash outlay for the executive.

Caesar, age 33, is married and has a newborn son. Caesar 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?

Level-premium term.

Deductibles are used in major medical policies for which of the following reasons? To reduce premium costs. To reduce malingering. To eliminate small claims.

NOT: "1, 2, and 3"

Which of the following statements regarding risk is incorrect?

Particular risk is a risk that will impact a large group of individuals simultaneously.

Which one of the following statements regarding disability insurance is false?

A residual benefit clause provides the insured with benefits that extend beyond the disability period.

Jack has a disability income policy that pays a monthly benefit of $2,400. Jack has been disabled for 60 days, but he only received $1,200 from his disability insurance. Which of the following is the probable reason that he only received $1,200?

The elimination period is 45 days.

An owner/insured of a viatical settlement is not subject to income tax on the capital gains of the policy if:

The individual is terminally ill.

Which of the following is true of medical expense insurance?

The policy limits are likely to be very low compared with major medical policies.

What is the purpose of disability income insurance?

To provide a regular income while the insured is unable to work due to illness or injury.

A cross-purchase buy-sell agreement provides more favorable tax treatment for the surviving owners versus an entity purchase agreement.

True

The high cost of individual health insurance is partly due to the inability of the insurer to spread the risk among the group's participants.

True

Mr. Johns has a major medical insurance policy with a $1,000 deductible, an 80% coinsurance clause, and an out-of-pocket maximum of $4,000. He becomes ill and is admitted to the hospital for several days. When he is discharged, his hospital bill is $5,000, and his doctor bills are $2,500. What is the amount that his insurance copay will pay?

$5,200

The Watson family has a family medical policy that provides the following coverage for all four family members: • $1,000 per person deductible (4 person maximum). • $4,000 out-of-pocket limit per person. • 80/20 coinsurance provision. On a family trip, the Watson's were involved in a car accident when a deer ran into their car while they were driving at 75mph. All four family members were hurt. Each person incurred medical expenses of $21,000. How much will the insurance company pay?

$68,000

Malinda is a participant in her employer's group comprehensive major medical insurance plan. The plan has a $500 deductible, a $2,500 out-of-pocket maximum, and has 80% coinsurance. If Malinda is injured in an accident, resulting in $2,000 in medical costs, how much will Malinda need to pay for the medical bills?

$800.

A viatical settlement company purchased a $250,000 policy for $160,000. It paid additional premiums of $7,000 (in total) over the next three years before the insured died. What income must the viatical company report from the policy proceeds in the year of the insured's death?

$83,000 ordinary income.

Betty owns a $150,000 whole life participating insurance policy that she purchased ten years ago. She has paid premiums of $4,000 each year since she bought the policy and the current cash surrender value is $60,000. Betty has received $10,000 in paid dividends since the policy inception. Which of the following statement(s) is/are correct regarding Betty's policy? 1. If Betty surrenders the policy now, she will have a taxable gain of $30,000 taxed as ordinary income.2. The dividends that were paid on Betty's policy were subject to ordinary income tax treatment.

1 only.

COBRA coverage is available 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.

1, 2, 3, and 4.

In which of the following events would COBRA rules apply for the benefit of the covered employee, employee's spouse, or dependent child? The death of the covered employee. The covered employee is fired for incompetence. The employee changes status from full-time to part-time and, as a result, loses coverage. The covered employee gets a divorce.

1, 2, 3, and 4.

Which of the following is true regarding employer contributions to secular trusts for employeeparticipants of a nonqualified deferred compensation agreement? 1. Participants have security against an employer's unwillingness to pay at termination. 2. Participants have security against an employer's bankruptcy. 3. Secular trusts provide tax deferral for employees until distribution. 4. Secular trusts provide employers with a current income tax deduction.

1, 2, and 4.

When utilizing the needs approach in the determination of the amount of life insurance, which factors should be considered? 1. The family expenses that will remain after the wage earner dies. 2. The value of the wage earner's life in the event he or she dies. 3. The income that can be generated by the surviving spouse. 4. The number of dependents.

1, 3, and 4.

Medical insurance is commonly known as health insurance and can be purchased from private insurance companies. Which of the following best describes the classes of medical insurance?

Coverage for hospital expense, surgical expense, physician expense, and major medical expense.

A COLA rider will increase the benefit based on increases in the insured's income

False

A Rabbi trust is used exclusively to meet the unique nonqualified deferred compensation needs of religious organizations.

False

A buy-sell agreement is used as the contractual arrangement for the sale of a life insurance policy to a viatical settlement provider to ensure the best tax treatment.

False

Americans are far more likely to die prematurely than to suffer a disability?

False

Generally, an own occupation policy will be slightly less expensive than an any occupation policy?

False

Incontestability clauses protect the insurance company from misstatements or misrepresentations by the insured.

False

Once an insured meets the out-of-pocket maximum, not taking into account the deductibles paid, the insurer pays the full amount, up to a specified ceiling.

False

Risk reduction is the process of avoiding pure risk that is high in frequency and low in severity.

False

Subjective risk is the variation of actual amount of losses that occur over a period of time compared to the expected amount of losses

False

Under a Section 1035 exchange, a life insurance policy can be exchanged for another life insurance policy or for a MEC but cannot be exchanged tax-free for an annuity.

False

Underwriting a large amount of people spreads the actuarial risk among the pool for group health insurance, but participants drive up the administrative costs.

False

Roger has a disability policy with a 12-month elimination period. He was in a bizarre accident involving a crane falling on a building causing part of the building's exterior wall to fall on his van. He lost the use of both of his legs in the accident. If his policy has a presumptive total disability coverage provision, when will he begin receiving benefits?

He will have to wait the 12 months.

Which of the following statements is true regarding a Section 1035 exchange of life insurance policies?

If Theo enters into a 1035 exchange of his whole life policy for a variable life policy there will be no tax on the exchange and the cost basis will carry over from the old policy to the new policy.

Which of the following is true as it relates to disability insurance?

Most individuals should have a minimum 60 to70 percent of their gross income protected with a disability insurance policy.

Indemnity health insurance plans are one of the ________ flexible types of insurance policies, in terms of having the freedom to pick your own providers, but participants pay some of the ________ premiums.

Most; highest.

Minerva's employer has offered to provide her with life insurance under a Sec. 162 double bonus plan. If the premium for the policy is $15,000 per year, and Minerva is in the 32% tax bracket, what will be the amount of her salary bonus this year?

NOT: "$15,000."

Jerome has a major medical policy with a $250 deductible, 80%/20% coinsurance, and a $4,000 cap on his total out-of-pocket cost. Jerome had bills of $200 for visits in the first part of the year and then had bills of $3,750 for a prolonged illness near the end of the year. What amount of medical expenses will Jerome have to pay for the year?

NOT: "$790."

Redball Inc. would like to use key employee life insurance to provide protection in the event of the death of the owner and key employee, Red Baldwin. Which of the following is correct regarding the key employee insurance?

NOT: "Red will own a policy on his own life and Redball, Inc. will pay the premiums and be the beneficiary of the policy."

Cross-purchase agreements are usually preferred from a tax planning perspective because:

NOT: "The premiums paid by each owner are tax deductible."

Non-cancelable health insurance contracts are different from guaranteed renewable contracts because:

Non-cancelable policies cannot have a premium change.

Which of the following is true of group health insurance?

None of the above. (One of the downfalls of group health insurance is the high administrative costs for each of the participants. Employer group insurance plans that require all employees be eligible for the plan pose the greatest adverse selection risk. Group policies are underwritten by accessing specific health risks of the individuals in the group.)

All of the following are reasons that an employer might favor a nonqualified plan over a qualified retirement plan except:

Nonqualified plans typically allow the employer an immediate income tax deduction.

Which of the following is a risk reduction technique?

Parking your car at the end of the parking lot, away from other cars.

The immediate cause and reason for a loss occurring, such as a hurricane, is referred to as a:

Peril

Which type of hazard results from a physical condition that increases the likelihood of a loss occurring?

Physical Hazard.

A health savings account (HSA) and a flexible savings account (FSA) have several similarities including:

Pre-tax contributions.

Frank has a disability policy and was recently injured, causing him to permanently lose the sight in both of his eyes. Which of the following provisions might come into play causing Frank to receive disability benefits quicker than a normal disability claim?

Presumptive total disability.

Sean has a disability policy and was injured during a workplace accident. As a result of Sean's accident he is no longer able to perform all of the requirements of his prior job. His new job pays 30% less than his previous salary before the accident. Which of the following provisions in his disability policy would provide continuing benefits to Sean to offset his loss in income?

Residual Benefit Provision

Premium rates set by insurance companies are regulated at which level of government?

State

A group comprehensive major medical insurance plan is a combination plan that covers both basic and major health risks.

True

A viatical settlement may be attractive to a terminally ill policy owner/insured who does not qualify for accelerated death benefits under the policy provision or rider.

True

Pure risks include many of the same risks all individuals are exposed to and the types of risk a planner must evaluate and plan for each client.

True

Reasonable premiums and no required proof of insurability (i.e., a physical) are two of the most attractive attributes of group health insurance.

True

Selecting the appropriate risk management technique is the most critical component of the risk management process.

True

The law of large numbers is useful for insurance companies because the larger the insured pool, the more likely actual losses will approach the probability of losses.

True

The premium and the elimination period are generally inversely related.

True

Which of the following is not an element of the Principle of Utmost Good Faith?

Waiver

Which of the following statements regarding entity purchase buy-sell agreements is correct?

When one of the owners dies, the surviving owners will have an increased cost basis in their share of the business.

Which of the following life insurance policies contains a cash-value savings component that reaches the face value of the policy at age 100 -120?

Whole life.