quiz 3

Which of the following statements concerning the federal income tax treatment of monetary settlements is (are) correct? 1. Under a structured settlement related to bodily injury, the portion of each payment received that represents interest is taxed as income, while that represented by principal is tax-free. 2. Damages received because of employment discrimination are taxable as income. 3. Punitive damages are tax-free for the recipient.

2 only.

Last year Dwight set up a trust for his daughter and son consisting of all $200,000 of stocks and bonds in his investment portfolio. Dwight has retained his home valued at $300,000. This year, Dwight expects to enter a nursing home in a state where the average cost of nursing home care is $5,000 per month. How long is Dwight's penalty period on asset transfers before Medicaid will begin to pay for his nursing home expenses?

40 months

Approximately, what percent of persons over the age of 65 will require some long-term care services at some point in their lives?

70%

On the day Jenton Kim entered a nursing home, he and his wife Karena had countable assets of $88,000. What amount must the Kims spend down for Jenton to be eligible for Medicaid?

$42,000

Perry, who is 50 years old, was building a new home for his family. However, he was running out of money and could not afford the pool they fell in love with. Since his family was upset, he decided to take a withdrawal from his annuity. He had contributed $100,000 to the annuity, and the value of the annuity today is $300,000. He decided to take a withdrawal of $60,000 from the annuity. Which of the following is correct?

$60,000 is taxable as ordinary income and subject to the early withdrawal penalty.

A taxpayer who itemizes may take a deduction for premiums paid for which of the following types of individually owned insurance policies? 1. Long-term care insurance. 2. Disability income insurance. 3. Major medical expense insurance. 4. Life insurance with a long-term care rider.

1 and 3

Which of the following are among the ways in which a life insurance policy can be used to help finance the cost of the insured's long-term care? 1. Add an accelerated death benefits option to the policy. 2. Enter into a viatical settlement agreement. 3. Add a double indemnity rider to the policy. 4. Create a policy loan against the cash value.

1, 2, and 4

Fatima is a widow and 82 years of age. She gave her three children $20,000 each three years ago and has exhausted all of her other assets. Fatima has just entered a nursing home that costs $6,000 per month and applied for Medicaid. The average monthly cost of nursing home care in Fatima's state is $6,000. How long after entering the nursing home will Fatima be eligible for Medicaid payment of her nursing home care?

10 months.

Which of the following factors will be likely to require an increase in the premiums that will be paid for a long-term care policy? 1. A benefit trigger specifying a requirement of inability to perform two activities of daily living. 2. A decreased elimination period. 3. An inflation protection rider. 4. An insured who is married.

2 and 3

Which of the following is true?

A fixed annuity mitigates the risk of superannuation.

Selena is retiring in the next month. She was the bread winner in the family while Rafeal was the stay-at-home dad. They have limited assets but will receive Social Security. Which of the following is the best type of annuity for her to select?

A joint-life annuity on the lives of Selena and Rafeal.

All of the following are activities of daily living (ADLs) as provided under the Health Insurance Portability and Accountability Act (qualified plans), except:

Cognitive thinking

Annuities provide many benefits and have many advantages over other alternative types of investments. Which of the following is not an advantage of a single life annuity?

Distributions receive favorable capital gain treatment.

Medicare is primarily for those people who meet the following eligibility requirements:

Elderly

There are several types of annuities. Which of the following orders the investment options from least risky to most risky?

Equity-indexed, variable, fixed.

Quincy, age 33, plans to retire at age 67. Quincy is a consultant and his income varies widely on a monthly basis. Quincy wants to invest in an annuity over his work life expectancy. Which of the following annuities is most suitable for Quincy?

Flexible premium, deferred annuity.

Cody decided to purchase a variable annuity and invested $50,000. He made a few poor investment decisions and the market dropped. Like many investors, he decided to sell when the value was low. He surrendered the annuity and received $27,000, after the $3,000 surrender fee. Which of the following is true?

He can take an ordinary loss of $20,000.

There is more than one way to obtain benefits for nursing home coverage. All of the following sources provide some benefits, except:

Health insurance.

Which of the following statements concerning types of annuities is not correct?

In a variable annuity, the value of the accumulation units is fixed, while the value of the annuity units during the liquidation period fluctuates.

All of the following are requirements for Qualified Longevity Annuity Contracts (QLACs), EXCEPT?

In order to be qualified, a QLAC must be a variable annuity.

At the age of 40, Kennedy deposited $50,000 in a nonqualified, single-premium deferred annuity. Ten years later, she surrenders the contract for a lump-sum distribution of its $100,000 value. Which of the following statements is correct?

Kennedy will owe taxes and a 10% penalty on $50,000.

Mr. Butler, who has recently turned 85, has been blind for two years. He has trouble walking and is unable to cook for himself since he lost his sight. His family has told him that he needs to consider entering an assisted living home. Assuming he has a qualified long-term care plan, is he considered chronically ill under the Health Insurance Portability and Accountability Act?

No, neither sight nor cooking is considered an activity of daily living.

What is/are the goal(s) of long-term care?

Promote function independence.

Which of the following individuals is more likely to have a need for long-term care insurance? • Gonzo has always had menial jobs and owns a small home and little else. • Rosita has worked as a middle manager her entire career and has pension and Social Security income, in addition to a home and a modest amount of savings.

Rosita.

When determining the percentage of an annuity income that is not taxable, the investment in the annuity is divided by the total of the expected payments to be received. What is this quotient is called?

The exclusion ratio.

Ted and Joan Kramer have assets of $290,000 and are planning for Joan to enter a nursing home. The Kramers would like to apply for Medicaid benefits to pay for Joan's care. What should they do to spend down assets so Joan will be eligible immediately?

Transfer all of their assets to Ted, and Ted will buy a Medicaid-compliant annuity with any assets exceeding the community spouse's resource allowance.

Andrew, who is 76 years old, was diagnosed with Alzheimer's disease last week. He purchased a long-term care policy when he was 50. Would he be covered under the policy if he entered a nursing home?

Yes. He is covered because he has Alzheimer's disease.

For Medicare beneficiaries, the maximum stay in a skilled nursing facility during a benefit period cannot exceed how many days?

100 days

Drake is a financial planner whose client, Bernice, is a widow. Bernice is 67 years old and about to retire, but is concerned about outliving her money since her parents both lived into their 90's. Drake has discussed the idea of a life annuity with Bernice, but she is concerned that if she were to die sooner than expected, the amount she invested might be lost. She would prefer an investment that would at least provide something for her grandson if she were to die in a short period of time without receiving back her total premiums. Which of the following is an appropriate recommendation for Drake to make to Bernice?

A life annuity with cash refund.

Patrick is age 67 and receives Social Security retirement income that covers 60 percent of his monthly expenses. He has no dependents. He would like to invest $200,000 in an annuity that will mitigate inflation and provide him with the highest monthly income. Although he has a 20-year table life expectancy, he thinks he has a much longer life expectancy. Which annuity is most suitable for Patrick?

A single-premium, variable annuity.

Pedro was seriously injured in an auto accident and was awarded $750,000 in damages. Instead of accepting the money in a lump sum, Pedro's attorney worked out with the defendant's attorney an arrangement under which Pedro would receive the following amounts: * $100,000 in cash now * An income of $10,000 per month, starting after one month and continuing for 5 years * A lump-sum payment of $350,000 at the end of the fifth year, concurrent with the final $10,000 income check The arrangement worked out between the two sides in this case is called:

A structured settlement.

Hugh purchased a single premium annuity for $200,000. The annuity pays him $1,000 per month. If his life expectancy was 20 years when he purchased it, how much of each payment is not subject to tax?

$833. Exclusion ratio = $200,000 / (20 years x 12 month x $1,000) = 83.33% Taxable portion = 1- exclusion ratio = 17.67% Non-taxable portion of the payment = $833

What is/are the key factors in determining the need for long-term care?

Inability to perform activities of daily living.

Saul purchased a life insurance policy with a face value of $100,000. Unfortunately for Saul, and his wife, Rhea, he died racing "import cars." At the time of death, the life insurance policy had a cash value of $40,000. The beneficiary was his wife. Rhea, who has a life expectancy of 40 years, decided to take the single life annuity option with the life insurance proceeds. This option will pay her $500 per month for the rest of her life. How much of the monthly payment is taxable?

$292. Exclusion ratio = investment / expected payments = $100,000 / (40 years x 12 months x $500) = 41.7%. Inclusion ratio = 1 - exclusion ratio = 58.3% Taxable amount = $500 x 58.3% or $292

Clara purchases an annuity with after-tax dollars and wants payments to begin next month. What type of annuity did Clara purchase? 1. Immediate Annuity. 2. Deferred Annuity. 3. Qualified Annuity. 4. Nonqualified Annuity.

1 and 4.

Harry, age 63 purchased an immediate annuity. The annuity will provide monthly payments to Harry for as long as he lives. If he dies before receiving payments for 20 years, the remaining payments will go to his beneficiary. What type of annuity did Harry purchase?

A life annuity with a term-certain guarantee.

Neil is 67 years old and about to retire. His table life expectancy is 20 years. He has $25,000 in a retirement plan for which there is no lump-sum withdrawal option. Neil has 2 children and wants to make sure he receives all of the $25,000 and that he can leave his other assets to his children. He wants to participate in equity returns. Which is the most suitable for Neil?

A single-life, variable annuity with a term certain of 20 years.

The elderly do not constitute a homogeneous group, therefore:

A variety of services are needed.

Colson wants to participate in the stock market by purchasing a deferred annuity but wants protection against the loss of his principal. What annuity is best suited for Colson?

An equity-indexed annuity.

Kim, a single 40-year-old, would like to invest in the stock market but wants her principal guaranteed against losses. What type of annuity is most suitable for Kim?

An equity-indexed annuity.

Arline is a 70-year-old widow with no dependents. She wants to invest in an annuity that will produce income now. She has $100,000 to invest and wants to receive the most she can in monthly income. Which of the following is the most suitable annuity for Arline based on her objectives?

An immediate, single-premium life annuity.

Ted just retired and has several sources of income. He has Social Security and a pension from his employer, HTD Enterprises. Social Security is adjusted for inflation, but his pension is not. Ted is concerned about outliving his funds. What might he purchase to provide protection against running out of money late in retirement?

Longevity annuity.

Which of the following is the highest level of care under the category of long-term care?

Skilled nursing care.

Which of the following risks can an annuity mitigate?

Superannuation and purchasing power.

When Artie was 45 years old, he invested $60,000 in an annuity. Ten years later, the value of the annuity was $180,000. He took a withdrawal from the annuity in the amount of $10,000. How is the withdrawal taxed?

The $10,000 is taxable as ordinary income and is subject to the 10 percent early withdrawal penalty.

In terms of qualifying for Medicaid, which of the following is counted as income?

Veterans Benefits

Kareem is a drug rep and planning on retiring next month. He is using his accumulated $200,000 to purchase an annuity. Which of the following options will give him the largest monthly annuity payment assuming his life expectancy is 20 years and his wife's life expectancy is 22 years.

10 year term certain.

Which of the following parties to an annuity contract serves as the measuring life? 1. Owner. 2. Annuitant. 3. Beneficiary.

2 only.

Tax qualified long-term care insurance policies must offer all of the following features, provisions, or options except:

An option to purchase skilled nursing care coverage only.

Custodial or personal care is?

Assisted with daily living tasks.

Luther owns a life insurance policy. He decided that he no longer has a need for life insurance and wants to exchange it for an annuity. To get the annuity he wants, he will have to exchange the life policy and add additional money. Which of the following is correct?

He can make the exchange, which will not be taxable.

Mig purchased a straight life annuity from Confident Results Annuity Provider using funds from his 401(k) plan. Which of the following is correct?

His annuity will have no return of basis.

With an equity-indexed annuity, there are several indexing methods. Which of the following is not one of them?

Oscillation neutrality method.

What is the primary function of long-term care insurance?

Protect against catastrophic risks.

Meg has money in a 401(k) plan with her employer. She has no dependents or heirs and wants to maximize her monthly income. She is retiring and wants to move the money into an annuity contract. Which would be the best option for Meg?

Single-premium life annuity.

Which of the following most accurately describes the criteria required for an insured to qualify for long-term care benefits for a qualified plan under the Health Insurance Portability and Accountability Act?

The insured may qualify by meeting either a or b. A)The insured is unable to perform two of the six ADLs for 90 days. B)The insured has substantial cognitive impairment requiring substantial assistance.

Mason, who is now 70 years old, was a diligent saver during his working years and accumulated $100,000 at age 60. He used his savings to purchase a single premium annuity, which pays him $1,000 per month. If his life expectancy was 25 years when he purchased it, how much of each payment is subject to tax?

$667. Exclusion ratio = $100,000 / (25 years x 12 month x $1,000) = 33.33% Taxable portion = 1- exclusion ratio = 66.67% Taxable portion of the payment = $667

Which of the following can be excluded in a tax qualified long-term care insurance policy?

Alcoholism

Which of the following statements about annuities is not correct?

All annuities are subject to minimum distribution rules.

Long-term care facilities include all of the following except:

Ambulatory centers.

There are many options regarding the type of annuity one can purchase. Which of the following is correct?

An equity-indexed annuity generally has less risk than a variable annuity.

Which of the following statements concerning the income tax treatment of long term care insurance is correct?

Limited amounts of premiums paid for traditional long term care insurance are deductible as medical expenses.

Which of the following is incorrect?

Long-term care insurance is needed for everyone.

Medicaid is primarily for those people who meet the following eligibility requirement:

Low income

Which of the following statements concerning state recovery of Medicaid costs is correct?

The state may place liens on the homes of Medicaid recipients during their lifetimes.