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Paul is 70 years old. At age 65, for $50,000, he purchased a single-premium annuity that pays him $300 per month. If his life expectancy was 25 years when he purchased the annuity, about how much of each payment is subject to tax? a. $133 b. $167 c. $192 d. $300

The correct answer is (A). The exclusion ratio can be found by dividing the owner's investment in the annuity contract by the expected return. The taxable portion of the payment can be found by subtracting the exclusion ratio from 1 and multiplying the resulting percentage by the payment amount. $50,000 ÷ (25 years × 12 months × $300) = 55.56% 1 − exclusion ratio = 44.44% $300 × 44.44% = $133.32 The taxable portion of the payment is $133.32, or about $133.

Annuities have a variety of features and benefits. Which one of the following types of annuities allows for investment returns that are exposed to the stock market but has a minimum rate of return? a. An equity-indexed annuity b. A variable annuity c. A fixed annuity d. A single-premium variable annuity

The correct answer is (A).An equity-indexed annuity has the protection of a guaranteed minimum rate of return while still having the potential of earning higher equity returns. A fixed annuity will have a guaranteed rate of return but will not have any participation in the stock market.

Hugo owns an annuity. He decides that he no longer has a need for it and wants to exchange it for a life insurance policy. To get the policy he wants, he will need to exchange the annuity and add additional money. Which of the following is correct? a. He can make the exchange, but it will be taxable to the extent of the value of the annuity. b. He can make the exchange, but it will be taxable to the extent of the annuity less the additional money he puts into the life insurance policy. c. He can make the exchange under Section 1035, and it will not be taxable. d. He can make the exchange, which will not be taxable, but his basis will not reflect any of the investment into the life insurance policy.

The correct answer is (A).An exchange from an annuity to a life insurance policy is not a tax-free exchange under Section 1035

The standard form of the homeowners policy excludes which of the following? a. Fire and other perils b. Animals, birds, and fish c. Personal liability d. Theft

The correct answer is (B).Animals, birds, and fish generally are excluded, although liability coverage may be available for pets

All of the following are considered activities of daily living (ADLs) EXCEPT a. dressing. b. bathing. c. cognitive ability. d. transferring from a bed to a chair.

The correct answer is (C). The six ADLs are eating, bathing, dressing, transferring from a bed to a chair, using the toilet, and maintaining continence. Cognitive ability is not an ADL.

Homeowners policies generally insure personal property at actual value rather than replacement value. Which of the following should an insured homeowner consider obtaining if he or she has a significant amount of older personal property such as televisions and other electronics? a. A personal liability insurance rider b. A professional liability insurance rider c. An endorsement on that property d. A separate agreed value policy

The correct answer is (C).An endorsement on personal property allows that property to be insured for replacement rather than actual value, usually without a deductible for a premium increase.

Because it is a common exclusion from most homeowners insurance policies, homeowners must generally find supplemental coverage for which of the following perils: a. Fire b. Theft c. Flood d. Medical payments to others

The correct answer is (C).Damage from flooding is generally excluded from HO policies.

Which of the following individuals is most likely to be covered by malpractice insurance? a. A lawyer b. A financial planner c. A physician d. An architect

The correct answer is (C).Medical doctors, including physicians, are typically covered by malpractice insurance. The other professionals are generally covered by errors and omissions insurance.

All of the following statements are correct regarding a Personal Auto Policy Part C (Uninsured Motorists) coverage except: a. Payment for property damage. b. Payment for lost wages. c. Payment for punitive damages. d. Uninsured motorists coverage will cover all of the above.

The correct answer is C.The PAP uninsured motorist does not pay for punitive damages.

Annuities are financial products that solve a variety of problems. All of the following problems are intended to be mitigated by annuities EXCEPT a. dying prematurely. b. running out of money. c. subjecting earnings to current income tax. d. maintaining the purchasing power of assets.

The correct answer is (A).Annuities can help lessen superannuation (the risk of outliving funds) and purchasing power (if the annuity is variable). However, an annuity does not reduce the likelihood of dying (mortality).

Which of the following is correct regarding how employer payments for long-term care are treated for federal income tax purposes? Employer payments for long-term care group premiums are a) deductible to the employer and not taxable income to the employee. b) deductible to the employer but are taxable income to the employee. c) not deductible to the employer and not taxable income to the employee. d) not deductible to the employer and are taxable income to the employee.

The correct answer is (A).Employer payments for long-term care group premiums are tax deductible to the employer and not taxable income to the employee

Where do most people receive long-term care services? a. In their home b. In an assisted-living facility c. In skilled-nursing care d. In a hospital

The correct answer is (A).Most people receive long-term care in their home.

Which of the following clauses states that full payment of damages to structures under the homeowners policy will be made only if the insurance equals 80 or more percent of the replacement cost of the structure and is carried on the property at the time of the loss? a. A coinsurance clause b. An inflation rider clause c. A reinsurance clause d. A replacement clause

The correct answer is (A).The coinsurance clause requires 80 percent coverage to avoid the insured becoming a coinsurer.

When determining the percentage of an annuity payment that is subject to tax, the investment in the annuity is divided by the total of the expected payments to be received. Which of the following is the name of the portion that is subject to tax? a. The inclusion ratio b. The exclusion ratio c. The current ratio d. The working-capital ratio

The correct answer is (A).The exclusion ratio equals the owner's investment in the annuity contract divided by the expected return on the annuity. The resulting percentage is multiplied by the distribution, or payment, received to calculate the portion of the payment that is not subject to income tax.

An individual is trying to qualify for Medicaid by gifting away their assets. Assets they gift away in the past 60 months might still be considerable countable assets because they were gifted away during the: a. Lookback period b. Elimination period c. Benefit period d. Qualifying period

The correct answer is (A).The purpose of the look-back period is to determine whether an individual only qualifies for Medicaid because they recently gave away assets. The lookback period is 60 months long.

All of the following are a requirements of a qualified long-term care insurance policy EXCEPT: a. The benefit of the policy must offer inflation protection. b. The contract must offer to cover pre existing conditions. c. The contract must be guaranteed renewable. d. The contract must offer to pay a non forfeiture benefit.

The correct answer is (B). For a long-term care policy to be considered a qualified plan, the plan must be guaranteed renewable and offer inflation protection and a non forfeiture benefit. The contract does not need to offer to cover pre existing conditions

Which of the following accurately describes a variable annuity? a. A variable annuity offers a fixed rate of return. b. A variable annuity mitigates the risk of superannuation and inflation. c. A variable annuity is always a deferred annuity. d. A variable annuity is always for a single life expectancy

The correct answer is (B). Option (B) is correct as variable annuities can mitigate the risk of superannuation and mitigate the loss of purchasing power from inflation. Option (A) is incorrect because variable annuities offer a variable rate of return. Option (C) is incorrect as variable annuities can either be deferred or immediate. Option (D) is incorrect as a variable annuity can be for a single life, joint life, or for a guaranteed term.

Lila is a 55-year-old widow with no source of income. Her husband died recently, and she has received insurance proceeds from a policy on his life. She wants to invest in an annuity that will produce income starting today and continuing until she plans to collect Social Security at age 65. She wants to receive the most she can in monthly income. Which of the following is the most suitable annuity for Lila based on her objectives? a. A longevity annuity b. A 10-year term-certain fixed annuity c. An immediate single-premium life annuity d. A deferred fixed annuity

The correct answer is (B).Lila wants the greatest amount of income for the next 10 years. She has no other source of income and must rely on the annuity until she begins collecting Social Security benefits. A term-certain annuity is the best choice for her objectives.

Leo, Declan, Anthea and Willa all live at the South Hampton Home for Distinguished Musicians. Which of these meet(s) the criteria for being chronically ill under qualified long-term care provisions? I Leo, who cannot drive, hear, or dress himself II Declan, who cannot speak, feed himself, or dress himself III Anthea, who cannot hear, walk, or feed herself IV Willa, who cannot drive, walk, or dress herself a)Anthea only b)Declan only c)Declan and Willa d) Leo and Anthea

The correct answer is (B).The inability to feed and dress yourself without assistance are two of the listed tasks that constitute a chronically ill person under a qualified long-term care policy. Declan is the only one who qualifies as chronically ill.

Equity-indexed annuities have several different indexing methods. Which of the following is one of them? a. The oscillation neutrality method b. The uptick method c. The high watermark method d. The trailing 3-year average method

The correct answer is (C) .Option (C) is the correct answer. Other methods include the point-to-point method and the annual reset (ratcheting) method. Choices (A), (B), and (D) are not real indexing methods.

Colin has a replacement-cost homeowners policy. The value of the home is $450,000, and he carries $350,000 worth of insurance. How much would the insurance company owe him in the event of a $100,000 loss due to fire (without regard to a deductible)? a. $80,000 b. $85,000 c. $97,222 d. $100,000

The correct answer is (C). $450,000 × 0.80 = $360,000 $350,000 ÷ $360,000 = 0.97222 0.97222 × $100,000 = $97,222

Sue purchased a single-premium deferred annuity 10 years ago at age 35 for $50,000. Recently, she decided to surrender the annuity for a lump-sum distribution of its $95,000 value. Which of the following statements is correct? a. She will owe income taxes on $45,000. b. She will owe income taxes on $95,000. c. She will owe income taxes and a 10% penalty on $45,000. d. She will owe income taxes and a 10% penalty on $95,000.

The correct answer is (C). She will owe income tax on $45,000 of the earnings. In addition, the distribution is prior to age 59½ and is subject to the 10 percent early withdrawal penalty on the taxable portion.

Which of the following is (are) required for an insured to qualify for long-term care benefits? I. The insured is unable to perform two of the six ADLs for at least 90 days. II. The insured has substantial cognitive impairment requiring substantial supervision for his or her protection. a. I only b. II only c. Either I or II d. Neither I nor II

The correct answer is (C). The insured must meet one of the two criteria (statement I or II) to be eligible for long-term care benefits.

A chronically ill person is entitled to receive benefits under a long-term care policy and is defined as someone who is unable to perform activities of daily living for a period of at least days. a. Four; 90 b. Two; 60 c. Two; 90 d. Three; 90

The correct answer is (C). Under a qualified long-term care policy, a chronically ill person must be unable to perform without the substantial assistance of another person two ADLs for 90 days.

Alice, a single 38-year-old, wants to invest in the stock market on a tax-deferred basis from now until she retires. She believes that the stock market will fluctuate up and down over time but that, over the long term, it will be significantly higher than it is today. She does not want to pay for product features that she does not value. What type of annuity is most suitable for Alice? a. A deferred fixed annuity b. A single-premium variable annuity c. A flexible variable annuity d. An equity-indexed annuity

The correct answer is (C).The equity-indexed annuity allows participation in the stock market while guaranteeing her principal against losses; however, it comes at a cost. A fixed annuity does not expose the investment to the equity market. The single-premium annuity does not accommodate funding over a career.

Janet is 83 years old and has been blind for 4 years. She is no longer able to drive or cook for herself. Assuming she has a qualified long-term care plan, is she considered chronically ill? a. Yes, she has been unable to perform two activities of daily living for over 90 days. b. Yes, but she must prove to the insurance company that she is unable to perform these tasks. c. No, sight is not considered an activity of daily living, although cooking is. d. No, cooking, and driving, and being able to see are not considered ADLs.

The correct answer is (D). Cooking, driving, and being able to see are not considered ADLs. The Health Insurance Portability and Accountability Act defines chronically ill as being unable to perform two of the six activities of daily living (ADLs). The six ADLs are eating, bathing, dressing, transferring from a bed to a chair, using the toilet, and maintaining continence.

Long-term care can be extremely expensive. Which of the following statements is (are) correct regarding the cost of long-term care? I. Medicare is a practical way to pay for long-term care. II. Most people who need long-term care will receive at least some financial assistance from Medicaid. a. I only b. II only c. Either I or II d. Neither I nor II

The correct answer is (D). Statement I is incorrect because Medicare is not a good option to pay for long-term care because it is limited and restrictive and will only pay for up to 100 days. Statement II is incorrect because only people who meet fairly strict income and asset tests qualify for Medicaid. While these tests vary somewhat by state, generally people must have nearly no income and very little assets to qualify for financial assistance from Medicaid.

All of the following are generally covered by comprehensive coverage on a personal automobile policy EXCEPT: a. Fire b. Theft c. Vandalism d. Collisions

The correct answer is (D).Collisions with other vehicles are covered under liability coverage. Coverage with other objects is covered by collision coverage.

Homeowners policies provide coverage for losses from which of the following? a. Fire or other listed perils b. Loss of use c. Personal property d. All of the above

The correct answer is (D).Homeowners policies cover all of the above in Section 1 of the policy.

Which of the following losses is not covered by a standard homeowners policy? a. Personal liability b. Theft c. Medical payments d. Personal vehicle

The correct answer is (D).Homeowners policies do not generally cover any vehicles.