CLU HS 323 Chp. 1 Quiz
A client has determined that he should provide benefits for a surviving spouse in the amount of $80,000 annually. The client is in the 25% income tax bracket. Under the capital needs analysis, what capital fund is required if the fund can realistically be invested to earn a 4% return after taxes? (A) $2,000,000 (B) $2,500,000 (C) $2,666,667 (D) $3,200,000
(A) $2,000,000
Which of the following statements best describes the human life value approach? (A) A client should have life insurance equal to the capitalized value of his net earnings. (B) A client should have life insurance equal to his family's needs at his death (C) A client should have life insurance adequate to provide perpetual income for dependents. (D) A client should have life insurance so a survivor will not outlive the income stream
(A) A client should have life insurance equal to the capitalized value of his net earnings.
Which of the following statements concerning the federal income tax treatment of life insurance when used for key person indemnification is (are) correct? I - The life insurance premiums are deductible. II - The life insurance limp-sum death benefit proceeds are tax-free. (A) I only (B) II only (C) Both I and II (D) Neither I nor II
(B) II only II - The life insurance limp-sum death benefit proceeds are tax-free.
Which of the following statements about trust arrangements is true? (A) A trust company or bank trust department may be used as trustee to provide professional management the beneficiaries cannot outlive. (B) Disabled children who will never be able to manage their own finances cannot be beneficiaries under a trust arrangement (C) A spouse or children who cannot manage money would not be good candidates for trust beneficiaires (D) Trusts designed to extend family financial management are primarily used to distribute funds in a lump-sum after a specified number of years.
(A) A trust company or bank trust department may be used as trustee to provide professional management the beneficiaries cannot outlive.
Which of the following is an element of the technically accurate method of calculating the economic value of an individual's human life? (A) Deduct the cost of the individual's self-maintenance, life insurance premiums, and personal income taxes. (B) Discount for the contingency of the individual's death, but not for the contingencies of his or her disability or unemployment. (C) Reduce the residual income of the individual to its future value. (D) Calculate the size of a fund whose investment earnings will be sufficient to replace the dependents' share of the individual's income.
(A) Deduct the cost of the individual's self-maintenance, life insurance premiums, and personal income taxes.
Which of the following is (are) among the typical results following death of a major stockholder in a closely held corporation? I - The deceased stockholder's spouse acquires the ownership interest of the deceased stockholder II - The surviving stockholders legally become liquidating trustees. III - The operations of the corporation will go on, without disruption. (A) I only (B) II only (C) III only (D) I & III only
(A) I only I - The deceased stockholder's spouse acquires the ownership interest of the deceased stockholder
In a typical group life insurance plan, which of the following statements is (are) correct? I - The employer bears all or a portion of the premium cost. II - The employee selects the amount of coverage on his or her life. (A) I only (B) II only (C) Both I and II (D) Neither I nor II
(A) I only I - The employer bears all or a portion of the premium cost.
Income payments to a surviving spouse can consist solely of investment earnings on a capital sum or a combination of investment earnings and a gradual liquidation of the capital sum. Which of the following is (are) among the advantages of the former approach? I - The surviving spouse will not outlive the income. II - The capital sum needed is smaller than in the latter approach (A) I only (B) II only (C) Both I and II (D) Neither I nor II
(A) I only I - The surviving spouse will not outlive the income.
Which of the following statements concerning the economic value of the typical human life is (are) correct? I - It tends to diminish with the passage of time II - It is at its peak when the individual's annual earnings reach their peak (A) I only (B) II only (C) Both I and II (D) Neither I nor II
(A) I only. I - It tends to diminish with the passage of time
All of the following are results from the death of a general partner, EXCEPT: (A) The deceased partner's spouse is legally entitled to take the place of the deceased partner in the ongoing operation of the partnership. (B) There is likely to be shrinkage in the value of the partnership's assets (C) The surviving partners take on the role of liquidating trustees. (D) The partnership is legally dissolved.
(A) The deceased partner's spouse is legally entitled to take the place of the deceased partner in the ongoing operation of the partnership.
Which of the following applicants is the most common use of the qualified terminal interest property trust (QTIP)? (A) To provide a life income for a surviving spouse and the trust corpus is distributed to children (B) To provide discretionary payments to enhance the standard of living of children (C) To pay for essential services to the household lost by death of a non income-earning spouse (D) To provide benefits for a child who may not be capable of managing their own finances
(A) To provide a life income for a surviving spouse and the trust corpus is distributed to children
Assume that a 40-year old man who plans to retire at age 60 will have gross average annual earnings of about $90,000 during the next 20 years. Assume also that about two-thirds of the income will go for the support of the man's dependents. Assume further that the present value of $1.00 per year for 20 years at a 6% rate of interest is $11.47. Based on the information, which of the following is the approximate economic value of the man's life? (A) $344,000 (B) $688,000 (C) $1,032,000 (D) $1,200,000
(B) $688,000
All of the following statements about charitable gifts are true, EXCEPT: (A) A charitable arrangement can benefit a charity, the donor's family, or both. (B) A charity can be the beneficiary but may not be the owner of a life insurance policy (C) In most states, insurable interest of a charity in the life of a donor is not an issue. (D) Life insurance and trust arrangements can be used to fund charitable gifts
(B) A charity can be the beneficiary but may not be the owner of a life insurance policy
Which of the following statements about trusts is (are) true? I - Trusts provide for ownership of assets by the beneficiaries II - The trust is established by the trustee and managed by the trustor. III - A trust may be arranged specifically to pay life insurance premiums and receive the proceeds at death IV - In a trust, assets are managed for the benefit of the trustee (A) I & II only (B) I & III only (C) II & IV only (D) II, III, & IV only
(B) I & III only I - Trusts provide for ownership of assets by the beneficiaries III - A trust may be arranged specifically to pay life insurance premiums and receive the proceeds at death
When the liquidating approach is used, which of the following ways can be used to eliminate the problem of the beneficiary outliving the money? I - Benefit payments can include principal and investment income. II - Life annuities can be purchased for the beneficiary. (A) I only (B) II only (C) Both I and II (D) Neither I nor II
(B) II only II - Life annuities can be purchased for the beneficiary.
Which of the following describe(s) a practical difficulty of insuring an indiviual for the full amount of his or her economic human life value? I - The economic value of the human life is usually far less than the minimum amount of insurance a typical life insurance company will issue II - The economic value of the human life is typically greatest during the years when the individual's ability to pay premiums is low. (A) I only (B) II only (C) Both I and II (D) Neither I nor II
(B) II only II - The economic value of the human life is typically greatest during the years when the individual's ability to pay premiums is low.
Under the analysis-of-needs approach to determining how much life insurance should be carried, all of the following are components of the cleanup fund, EXCEPT: (A) Last illness expenses that are not covered by insurance (B) Income for the dependents for a 2-year readjustment period (C) The costs of estate administration (D) The balance due on unpaid notes, such as automobile loans
(B) Income for the dependents for a 2-year readjustment period
The prematurity values of a life insurance policy are generally most useful for which of the following purposes? (A) Transferring assets to younger generations (B) Nursing home care for the insured (C) Discreetly providing for confidential needs (D) Making large gifts to individuals at death
(B) Nursing home care for the insured
All of the following statements about trusts are true, EXCEPT: (A) A trust may own one or more life insurance policies (B) A trust may be the beneficiary of a life insurance policy (C) A trust is required to pass any life insurance proceeds through to individual beneficiaries within nine months. (D) A trust arrangement may be used to minimize the estate tax liability
(C) A trust is required to pass any life insurance proceeds through to individual beneficiaries within nine months.
Which of the following statements concerning the use of life insurance to enhance the credit of the owner of a small business is (are) correct? I - If the lender is concerned only with the possibility of default due to the death of the business owner, the life insurance policy used to enhance the owner's credit need not have cash values. II - If the lender is concerned with the possibility of default due to the death of the business owner or with the business owner's financial inability to repay the loan, the life insurance policy used to enhance the owner's credit should have cash values. (A) I only (B) II only (C) Both I and II (D) Neither I nor II
(C) Both I and II I - If the lender is concerned only with the possibility of default due to the death of the business owner, the life insurance policy used to enhance the owner's credit need not have cash values. II - If the lender is concerned with the possibility of default due to the death of the business owner or with the business owner's financial inability to repay the loan, the life insurance policy used to enhance the owner's credit should have cash values.
The ongoing income needs of the typical family following the death of the breadwinner include all the following, EXCEPT: (A) Income for a readjustment period (B) Income until the youngest child is self-sufficient (C) Income with which to create an emergency fund (D) Income for the surviving spouse after Social Security and pension benefits begin
(C) Income with which to create an emergency fund
Life Insurance is primarily concerned with which of the following aspects of the human life value? (A) The religious value (B) The social value (C) The economic value (D) The moral Value
(C) The economic value
According to the analysis-of-needs approach, the type of life insurance carried will be most relevant to meeting which of the following needs? (A) The need for income during the dependency period (B) The need for a life income for the surviving spouse (C) The need for a retirement income for the insured (D) The need for an income during the readjustment period
(C) The need for a retirement income for the insured
All the following are steps in the five-step process of estimating a person's economic value for purposes of life insurance, EXCEPT: (A) Estimate the person's average annual earnings from personal efforts during the remainder of the person's working years. (B) Deduct the cost of the person's self-maintenance, life insurance premiums, and income taxes. (C) Select a reasonable rate of interest to use in discounting future earnings. (D) Determine the remaining number of years in the person's life expectancy. (E) Multiply the person's net earnings by the present value of $1.00 per year, based on the selected interest rate and the remaining number of years until the person's planned retirement date.
(D) Determine the remaining number of years in the person's life expectancy.
A Human Life may have an economic value that can logically serve as the basis for life insurance in which of the following situations? I - The individual is age 23 and unmarried and has no children II- The individual has only one dependent, an aged father III - The individual has no dependents but makes sizable periodic gifts to a favorite charity (A) II Only (B) I & III only (C) II and III only (D) I, II, III
(D) I, II, III
Which of the following statements about charitable giving is (are) true? I - Charitable gifts can be used to minimize estate taxes. II - A donor can give an existing life insurance policy to a charity, but the charity is not allowed to pay premiums. III - A donor can name the charity as beneficiary of an existing life insurance contract. IV - Life Insurance to fund family needs can free assets and other property to be given to charity. (A) I & II only (B) II & III only (C) I, II & III only (D) I, III, & IV only
(D) I, III, & IV only I - Charitable gifts can be used to minimize estate taxes. III - A donor can name the charity as beneficiary of an existing life insurance contract. IV - Life Insurance to fund family needs can free assets and other property to be given to charity.
Under the analysis-of-needs approach to determining how much life insurance should be carried, which of the following statements concerning the dependency period is correct? (A) It typically lats for one or two years. (B) It depends mainly on the age of the oldest child when the breadwinner dies. (C) It is sometimes referred to as the Social Security "Blackout" period (D) It depends in part on the type of education planned for the children
(D) It depends in part on the type of education planned for the children
Which of the following statements concerning the need for key person indemnification is (are) correct? I - Since even a key person can be replaced after a reasonable period of time, term life insurance typically is the appropriate type of life insurance to meet this need. II - The principal financial element of this need is the cost of locating and training a replacement for the deceased key person. (A) I only (B) II only (C) Both I and II (D) Neither I nor II
(D) Neither I nor II