Risk Management and Insurance Exam 3
According the 2001 CSO mortality table, the yearly probability of dying for a 40 year-old man is .00165. The present value of $1 one year from today, assuming a 5.5 percent interest rate, is .9479. What is the net single premium per $1,000 for a one-year term insurance policy sold to a man at age 40 assuming a 5.5 percent interest rate? Assume the premium is paid at the start of the year and the death benefit is paid at the end of the year. $7.18 $2.45 $1.56 $952.81
$1.56
Lynn works for a state university. In addition to the university's regular retirement plan, Lynn participates in another retirement savings plan. She elected to have $5,000 of her salary withheld and contributed to a tax-sheltered annuity with an insurer. The type of plan that Lynn established is called a 403(b) plan. defined benefit plan. profit sharing plan. SIMPLE plan.
403(b) plan.
Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). What is the exclusion ratio in this case? 33.33 percent 40.00 percent 66.67 percent 50.00 percent
50.00 percent
Beta Corporation has 1,000 employees eligible to participate in the firm's pension plan, and 100 of these employees are considered highly compensated. All of the highly compensated employees are covered by the plan. What is the minimum number of the 900 non-highly compensated employees who must be covered by the plan in order for the plan to satisfy the ratio percentage test? 900 630 500 667
630
Which of the following statements about the continuation of group health insurance under the COBRA law is true? The length of the continuation of coverage is 90 days. A continuation of coverage must be made available even if an employee voluntarily terminates employment. The employer must pay the entire cost of coverage during the continuation period. The option to continue coverage applies to minor children only, not to adults.
A continuation of coverage must be made available even if an employee voluntarily terminates employment.
Which of the following statements about group insurance underwriting principles is true? A group should be formed for the specific purpose of obtaining insurance. A flow of people through the group is desirable. The average age of the group should ideally increase over time. Employees should be required to remit premiums directly to the insurance company.
A flow of people through the group is desirable.
Which of the following statements about the tax implications of qualified pension plans is true? Investment income on plan assets is taxable in the year the investment income is earned. Distributions from qualified pension plans are received tax-free by the retiree. Employer contributions are deductible up to certain limits as an ordinary business expense. Employer contributions are considered taxable income to employees but are taxed at capital gains rates.
Employer contributions are deductible up to certain limits as an ordinary business expense.
Which of the following statements about recent developments in employer-sponsored health plans is true? Premiums for health insurance have continued to decline. Medical coverage for early retirees has increased over time. Traditional insured plans dominate preferred provider organization (PPO) plans. High-deductible health plans with a savings option have continued to grow.
High-deductible health plans with a savings option have continued to grow.
Which of the following statements about HMO managed care plans is (are) true? I. There is an emphasis on controlling costs. II. They provide narrow, limited, medical services to members. I only II only both I and II neither I nor II
I only
Which of the following statements about retirement ages in defined benefit pension plans is (are) true? I. The normal retirement age in most plans is 65. II. For a defined benefit plan, the early retirement age is the earliest age an employee can retire with full, unreduced benefits. I only II only both I and II neither I nor II
I only
Which of the following statements about tax-deferred retirement plans in the U.S. is true? I. Women, on average, receive lower employment-based retirement income than men. II. One way to hedge against inflation is to invest lump-sum pension distributions in fixed-income investments. I only II only both I and II neither I nor II
I only
Which of the following statements about the use of interest-adjusted cost data for comparing life insurance policies is (are) true? I. Using interest-adjusted cost data provides a more accurate measure of the cost of life insurance than is provided if the time value of money is ignored. II. Its use is most appropriate in deciding between policies when the cost variation is very small. I only II only both I and II neither I nor II
I only
Which of the following statements about the yearly-rate-of-return method (also known as the Belth method) of calculating the yearly rate of return for a life insurance policy is (are) true? I. The formula requires the use of benchmark prices per $1,000 of protection. II. The main drawback of the formula is its complexity, necessitating the use of a computer to calculate the rate of return. I only II only both I and II neither I nor II
I only
Which of the following statements concerning defined-benefit pension plans is (are) true? I. The contribution rate by the employer varies depending on the amount needed to fund the desired benefit. II. The retirement benefit is not known in advance. I only II only both I and II neither I nor II
I only
Which of the following statements is (are) true with respect to annuities? I. Annuities are the opposite of life insurance. II. The fundamental purpose of annuities is to replace lost income in case of premature death. I only II only both I and II neither I nor II
I only
Which of the following statements regarding recent developments in employer-sponsored health plans is (are) true? I. Preferred provider organizations (PPOs) continue to dominate group health insurance markets. II. The number of employers offering medical benefits to workers who retire early has increased. I only II only both I and II neither I nor II
I only
Why might the use of "grades" assigned by a life insurance company rating organization not be a reliable guide for consumers? I. There may be variations in grades assigned by different rating organizations. II. They ignore factors such as profitability and quality of investments. I only II only both I and II neither I nor II
I only
Charles, age 65, owns a paid-up $250,000 whole life policy on his own life. Charles is doing some estate planning and would not like this policy to be included in his gross estate for federal estate tax purposes. Which of the following statements is (are) true regarding the tax treatment of this policy? I. Charles can avoid having the policy proceeds included in his gross estate by naming his estate the beneficiary. II. If Charles makes an absolute assignment of the policy and dies more than three years later, the policy is not counted as part of his gross estate. I only II only both I and II neither I nor II
II only
Which of the following statements about the minimum vesting standards for a qualified defined benefit plan is (are) true? I. Under cliff vesting, an employee must be at least 50 percent vested after 5 years of service. II. Under graded vesting, an employee must be at least 20 percent vested after 3 years of service and 100 percent vested after 7 years. I only II only both I and II neither I nor II
II only
Which of the following statements about withdrawals from Section 401(k) plans is (are) true? I.The penalty tax does not apply to hardship withdrawals. II. Withdrawals may be made without penalty at age 59.5 or older. I only II only both I and II neither I nor II
II only
Which of the following statements concerning defined benefit and defined contribution pension plans is (are) true? I. The employer bears the investment risk with a defined contribution plan. II. Defined benefit plans favor workers who enter the plan at older ages. I only II only both I and II neither I nor II
II only
Which of the following statements concerning vesting under qualified retirement plans is (are) true? I. The same vesting rules apply to defined benefit plans and defined contribution plans. II. Employer contributions to a defined contribution plan must vest faster than employer contributions to a defined benefit plan. I only II only both I and II neither I nor II
II only
Which of the following statements is (are) true concerning a joint-and-survivor annuity? I. Under this annuity, payments begin after the first annuitant dies. II. This annuity is often selected by married couples. I only II only both I and II neither I nor II
II only
Which of the following statements is (are) true with regard to Roth IRAs? I. The portion of a Roth IRA distribution that is attributable to investment income is taxable. II. There is a maximum income level above which Roth IRA contributions are not allowed. I only II only both I and II neither I nor II
II only
Which of the following statements is (are) true with respect to SIMPLE retirement plans? I. Only large employers can start a SIMPLE plan, provided the employer does not maintain another qualified plan. II. SIMPLE plans are exempt from most nondiscrimination and administrative rules that apply to qualified plans. I only II only both I and II neither I nor II
II only
Which of the following statements regarding the taxation of individual annuities is (are) true? I. The exclusion ratio is the percentage of the annuity income that is taxable. II. After the net cost of the annuity has been paid to the annuitant, the total annuity payment is taxable. I only II only both I and II neither I nor II
II only
The average annual rate of return on a cash-value policy if it is held a specified number of years is called the policy's benchmark cost. interest-adjusted cost. Linton yield. net present value.
Linton yield.
Which of the following statements about health savings accounts (HSAs) is true? The health insurance plan covering the HSA account beneficiary is not permitted to use a deductible. There are no limits to annual contributions that an individual may make to his or her HSA. Once an individual has reached age 65 or is covered by Medicare, no additional contributions to the HSA may be made. HSAs offer no tax benefits for the individual who establishes the account.
Once an individual has reached age 65 or is covered by Medicare, no additional contributions to the HSA may be made.
Insurers offering variable annuities charge a number of fees and expenses. One category of fees and expenses is charged to cover the cost of record keeping, paperwork, and periodic reports to annuity owners. This expense is the administrative charge. front-end load. investment management charge. surrender charge.
administrative charge.
Turner Company self-insures its group health insurance plan. Turner entered into an agreement with ABC Insurance through which ABC handles the plan design, claims processing, and record keeping for Turner. The agreement between Turner and ABC is called a(n) administrative services only contract. point-of-service contract. exclusive provider agreement. preferred provider agreement.
administrative services only contract.
What are the minimum age and service requirements that can be imposed on employees eligible to participate in a retirement plan? age 21 and 1 year of service age 21 and 3 years of service age 25 and 4 years of service age 18 and 6 months of service
age 21 and 1 year of service
Life insurance policy reserves are paid to the beneficiary when the insured dies. are a major liability of life insurance companies. are always equal to the policy's cash surrender value. are a major asset of life insurance companies.
are a major liability of life insurance companies.
Which of the following statements concerning individual medical expense insurance is (are) correct? I. Once a calendar year deductible is satisfied, no additional deductible is payable during the calendar year. II. Family deductibles are substantially higher than individual deductibles. I only II only both I and II neither I nor II
both I and II
Which of the following statements concerning managed care plans is true? I. Most employees are covered under some form of managed care plan. II. Managed care plans emphasize cost controls and preventative care. I only II only both I and II neither I nor II
both I and II
Which of the following statements is (are) true concerning high deductible health plans? I. An employee can withdraw money tax-free from a health savings account or health reimbursement arrangement to pay covered medical costs. II. There is a cap on an employee's out-of-pocket expenses under the plan. I only II only both I and II neither I nor II
both I and II
Which of the following statements is (are) true with regard to a qualified longevity annuity contract (QLAC)? I. A lump sum premium is paid to provide income at some future date. II. A QLAC can be purchased to address the risk of exhausting retirement income from an employer-sponsored qualified retirement plan. I only II only both I and II neither I nor II
both I and II
Which of the following statements is (are) true with regard to an annuity payout option that includes a cost-of-living adjustment? I. The initial monthly payment is lower than the initial payment a fixed annuity would have provided if purchased at the same age. II. Periodic payments to the annuitant are adjusted for inflation. I only II only both I and II neither I nor II
both I and II
Which of the following statements is (are) true with regard to using interest-adjusted cost data when shopping for life insurance? I. Cost indexes apply to new policies and should not be used to determine whether to replace a policy. II. Cost indexes should only be used to compare similar plans of insurance. I only II only both I and II neither I nor II
both I and II
Which of the following statements is (are) true with respect to the cash annuity settlement option? I. The taxable portion of the distribution is subject to federal and state income taxes. II. The option results in adverse selection against the insurer as those in poor health are more likely to take cash than to annuitize the funds. I only II only both I and II neither I nor II
both I and II
Which of the following statements is (are) true with respect to variable annuities? I. The price at which accumulation units can be purchased fluctuates during the funding period. II. The value of annuity units fluctuates over time. I only II only both I and II neither I nor II
both I and II
Which of the following statements is (are) true with respect to vesting under a qualified defined benefit retirement plan? I. Vesting helps to reduce labor turnover. II. An employee who terminates employment after four years of service has no vested retirement benefit under cliff vesting. I only II only both I and II neither I nor II
both I and II
HMOs typically pay network physicians or medical groups a fixed annual or monthly payment for each member, regardless of the frequency or type of service provided. This payment is called a pro-rata charge. corridor payment. persistency bonus. capitation fee.
capitation fee.
Winslow Corporation has many long-term employees. The company has never had a pension plan. Recently, a new management team was hired. The new president said he would like to start a pension plan through which he could reward the long-term service provided by many employees. Which of the following types of plans should Winslow Corporation adopt? defined contribution plan section 403(b) plan section 401(k) plan defined benefit plan
defined benefit plan
The first step in "shopping for life insurance" is to determine if you need life insurance. decide whether you want a policy which pays dividends. decide on the best type of life insurance for you. estimate the amount of life insurance to purchase.
determine if you need life insurance.
Actuaries at Term Life Insurance Company calculated the net single premium per thousand for a five-year term policy for a man age 32 to be $5.04. To calculate the net level premium for this policy, the net single premium should be divided by the future value life annuity due factor for $1 for five years. divided by the present value ordinary life annuity factor for $1 for five years. divided by 5. divided by the present value life annuity due factor for $1 for five years.
divided by the present value life annuity due factor for $1 for five years.
The Affordable Care Act requires employers with 100 or more employees to provide health insurance on the employees or pay a penalty if at least one employee receives a tax credit and coverage through the Health Insurance Marketplace. This requirement-providing insurance or paying a fine-is known as the single-payer solution. portability requirement. employer shared responsibility. essential benefit requirement.
employer shared responsibility.
The Affordable Care Act requires all new medical expense plans to provide a comprehensive set of coverages and services. This comprehensive set of coverages and services that must be provided are called long-term care benefits. dread disease benefits. essential health benefits. respite care benefits.
essential health benefits.
When selling life annuities, what risk is the insurer pooling? excessive longevity bad investment performance premature death bad expense experience
excessive longevity
For a long-term employee who is covered by a defined benefit plan, the highest retirement income will be obtained if his/her retirement income is based on career-average pay. final average pay. initial average pay. random year annual pay.
final average pay.
A financial institution that provides for the accumulation or administration of the funds that will be used to pay pension benefits is called a funding agency. trust fund. funding instrument. mutual fund.
funding agency.
ABC Company offers a qualified retirement plan. ABC selected a funding instrument with an insurer in which the insurer promised to pay a specified interest rate for a number of years on a lump sum deposit. This funding instrument is called a separate investment account. trust-fund plan. group deferred annuity. guaranteed investment contract.
guaranteed investment contract.
Ellen purchased a health insurance policy. Under the provisions of the Affordable Care Act, which of the following renewal provisions must the insurer use in the policy? guaranteed issue conditionally renewable renewable at the insurer's option cancellable
guaranteed issue
Because of the Affordable Care Act, all new medical expense plans that offer individual and group coverage must accept all individuals and employers in the state who apply for coverage. These insurers are required to continue to renew the coverage at the option of the individual or plan sponsor. Thus, under the Affordable Care Act, the renewal provision is nonrenewable. renewable at the insurer's option. guaranteed issue. conditionally renewable.
guaranteed issue.
Kevin has an individual disability income policy that his insurer agrees to keep in force until age 60. However, the company has the right to increase the premium each year for the underwriting class in which Kevin has been placed. Which renewal provision is found in Kevin's policy? guaranteed renewable conditionally renewable nonrenewable. noncancellable
guaranteed renewable
An employer-funded plan with favorable tax advantages, which repays employees for medical care not covered by the employer's standard medical plan is a(n) individual retirement account (IRA). flexible spending account (FSA). 401(k) account. health reimbursement arrangement (HRA).
health reimbursement arrangement (HRA).
Greta purchased a long-term care policy. Under a typical policy, Greta's eligibility for benefits may be triggered by inability to perform activities of daily living. continuous hospitalization for at least 60 days. how long premiums have been paid. eligibility for Medicare benefits.
inability to perform activities of daily living.
Under older group medical expense plans, physicians were paid a fee for each covered service and were reimbursed on the basis of reasonable and customary charges, up to a maximum limit. These older group medical expense plans were called service medical plans. indemnity plans. point-of-service plans. managed care plans.
indemnity plans.
Under older group medical expense plans, physicians were paid a fee for each covered service and were reimbursed on the basis of reasonable and customary charges, up to a maximum limit. These older group medical expense plans were called service medical plans. indemnity plans. point-of-service plans. managed care plans.
indemnity plans.
The Affordable Care Act required that most U.S. citizens and legal residents have qualifying health insurance or pay a financial penalty. This provision of the Affordable Care Act was known as the individual mandate. premium subsidy option. Health Insurance Marketplace option. public option.
individual mandate.
Med Profs is a group of 18 doctors. These doctors work out of their own offices and treat patients on a fee-for-service basis. In addition, Med Profs doctors also agree to treat HMO members at reduced fees. The type of HMO that uses organizations like Med Profs is called a(n) network model plan. group model plan. individual practice association plan. closed panel plan.
individual practice association plan.
Under the Affordable Care Act, if a health insurer does not meet the minimum medical loss ratio requirement, the insurer must pay a fine to the federal government. not sell any health insurance for a period of one year. issue rebates to the people the insurer covered. reduce the premium on the policies it sells the following year.
issue rebates to the people the insurer covered.
James is concerned that if he purchases a fixed immediate annuity his funds will be tied-up and not accessible if an emergency arises. His insurance agent said that a rider could be attached to his annuity to address this concern. The rider is a(n) partial cash withdrawal rider. waiver-of-premium rider. return of premium rider. guaranteed purchase option rider.
partial cash withdrawal rider.
Barb was injured in an auto accident. She was totally disabled and collected disability income benefits for 8 months. She would like to return to work on a part-time basis to see if her recovery is complete. During this period, her insurer will pay reduced disability income benefits. This type of disability is called permanent disability. recurrent disability. partial disability. presumptive disability.
partial disability.
The inability of the insured to perform some but not all of the important duties of his or her occupation is called recurrent disability. total disability. partial disability. residual disability.
partial disability.
Some managed care plans use physicians, hospitals, and health care organizations that agree to make medical services available to insureds at discounted fees. Insureds are not required to use these entities, but if they do, health care costs are less than if these entities are not used. Such health care entities are called health savings accounts (HSAs). health maintenance organizations (HMOs). Blue Cross/Blue Shield Plans. preferred provider organizations (PPOs).
preferred provider organizations (PPOs).
All of the following statements about the income tax treatment of individually-purchased life insurance are true EXCEPT premiums paid for individual life insurance are a tax deductible expense. policyowner dividends are received tax-free. life insurance proceeds paid to a beneficiary in a lump-sum are received tax-free. the annual increase in cash value is not taxable while the policy remains in force.
premiums paid for individual life insurance are a tax deductible expense.
Beth's disability income insurance policy provides benefits for accidental death, dismemberment, and loss of sight. The maximum amount payable under this benefit is known as the monthly benefit. principal sum. cash value. face value.
principal sum.
New employees at Jarvis Company cannot participate in the group term life insurance plan until they have worked at the company for three months. This initial period before a new employee can participate is called a(n) probationary period. open enrollment period. eligibility period. elimination period.
probationary period.
Which of the following is a provision of the Affordable Care Act? elimination of flexible spending accounts introduction of annual and lifetime limits to control costs prohibition of harmful practices by insurers. strengthening the use of pre-existing conditions exclusions
prohibition of harmful practices by insurers.
One long-term care insurance benefit trigger considers whether the insured needs supervision to protect against threats to health or safety due to memory loss or disorientation. This benefit trigger is referred to as a(n) severe cognitive impairment trigger. medical necessity trigger. activities of daily living trigger. needs test trigger.
severe cognitive impairment trigger.
Advantages of cafeteria plans include all of the following EXCEPT employees can select benefits that best match their needs. greater employer control over increasing benefit costs. simplicity of benefit administration. reduced taxes for employees.
simplicity of benefit administration.
Under one type of HMO, the physicians are employees of the HMO and are paid a salary and sometimes an incentive bonus to hold down costs. This type of HMO is called a(n) network model. individual practice association (IPA). staff model. group model.
staff model.
All the following are common exclusions in a medical expense insurance policy EXCEPT long-term care. dental care. surgeons' fees. routine eye care.
surgeons' fees.
Bridget started to fund a variable annuity. Three years later, she experienced financial difficulty. She called her agent and cancelled the contract. The insurer returned all but 4 percent of the account balance. The 4 percent kept by the insurer is a(n) front-end load. investment management fee. surrender charge. account administration fee.
surrender charge.
The Affordable Care Act includes a provision designed to help small employers make health insurance coverage available to their employees. This provision allows small employers to reduce their federal income tax by a percentage of the employer's contribution to health insurance for employees. This subsidy, in the form of reduction of income taxes, is called a marginal tax rate. tax credit. tax deduction. tax bracket.
tax credit.
The gross premium is defined as the net premium minus expenses. the net premium plus the loading allowance. the sum of all acquisition expenses. the terminal reserve plus the commission.
the net premium plus the loading allowance.
Most group health insurance plans have adopted the coordination-of-benefits rules developed by the National Association of Insurance Commissioners. Under these rules, if a dependent child is covered by both of the health insurance plans of the child's married parents, which health plan is primary for the child's medical expenses? always the mother's plan the plan of the parent whose birthday occurs first in the calendar year the plan of the parent who works for the larger employer, based on number of total employees always the father's plan
the plan of the parent whose birthday occurs first in the calendar year
To level a net single premium (NSP), the NSP is divided by the present value of a life annuity due of $1 for the premium payment period. the ordinary life annuity factor for the premium payment period. the deferred life annuity factor for the premium payment period. the maximum number of years the premium could be paid.
the present value of a life annuity due of $1 for the premium payment period.
Marshall is interested in determining the cost per thousand of his life insurance policy. Which of the following will provide Marshall the most meaningful measure of the cost per thousand dollars per year of his life insurance? the human life value approach the traditional net cost method the surrender cost index the needs approach
the surrender cost index
Under the traditional net cost method, the net cost of life insurance for a given period (e.g., 20 years) is determined by which of the following formulas? the sum of the total dividends received during the period and the cash value at the beginning of the period less the total premiums paid for the period the total premiums for the period less the sum of the total dividends received during the period and the cash value at the end of the period the total premiums for the period less the policy reserve at the end of the period the sum of the total premiums and dividends for the period less the cash value at the end of the period
the total premiums for the period less the sum of the total dividends received during the period and the cash value at the end of the period
What is the purpose of stop-loss insurance that is used with self-insured group medical expense plans? to obtain administrative services from a commercial insurer to require employees to buy insurance for losses in excess of some specified amount to have a commercial insurer pay claims that exceed a specified limit to exempt self-insured plans from state insurance laws that require mandated benefits
to have a commercial insurer pay claims that exceed a specified limit
Brad owns a cash value life insurance policy. Last year, the cash value increased by $300. Brad received $100 in policyowner dividends on the policy last year. Brad was the beneficiary named in his grandmother's $50,000 life insurance policy. When she died this past year, Brad received $50,000. How much taxable income relating to life insurance must Brad report for federal income tax purposes? $100 $50,400 $0 $400
$0
David purchased a $100,000 participating whole life policy. The annual premium is $2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20 years will be $35,260. If the premiums were invested at 5 percent interest for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent interest for 20 years, they would grow to be $24,400. The amount to which $1 deposited annually will accumulate in 20 years at 5 percent interest is $34.719. Based on this information, what is the net payment cost per thousand per year of David's policy over the 20-year period? $27.38 $5.62 $13.75 $15.77
$15.77
ABC Life Insurance Company is offering a new product. The product is a two-year term insurance policy funded by a single premium at the start of the first year. Death claims are paid at the end of the year in which death occurs. A portion of the appropriate mortality table is shown below. The first number is age, the second is the number alive at the start of the year, and the last number is the number dying during the year. Age 39 693,539 14,928 Age 40 678,611 15,970 Using a 5.5 percent interest rate, the present value of $1 one year from today is .9479, and the present value of $1 two years from today is .8985. Assuming a 5.5 percent interest rate, what is the net single premium for a $1,000 two-year term policy issued at age 39? $5.67 $2.94 $1.49 $12.83
$2.94
Beth purchased a $50,000 nonparticipating whole life insurance policy. The annual premium was $1,278. The cash value of the policy after 10 years will be $13,740. The future value of $1 deposited at the start of the year for 10 years, assuming 5 percent interest, is $13.207. If the premiums were invested at 5 percent interest for 10 years, the premiums would grow to $16,878.55. Assuming 5 percent interest, what is the net payment cost of this policy, per thousand per year, over the first 10 years the policy is in force? $17.24 $25.56 $12.71 $14.82
$25.56
Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). Assume that Juanita receives 12 monthly payments of $500 the first year. How much taxable income must she report? $3,000 $4,500 $4,000 $6,000
$3,000
Kristen has an individual medical expense policy with a $1,000 calendar-year deductible, a $5,000 annual out-of-pocket limit, and 80-20 coinsurance. Kristen was hospitalized for a surgical procedure in March, her first health care treatment received during the year. The total bill was $20,000. Considering the deductible and coinsurance, how much of this amount must Kristen pay? $4,400 $4,800 $5,100 $5,000
$4,800
Beth purchased a $50,000 nonparticipating whole life insurance policy. The annual premium was $1,278. The cash value of the policy after 10 years will be $13,740. The future value of $1 deposited at the start of the year for 10 years, assuming 5 percent interest, is $13.207. If the premiums were invested at 5 percent interest for 10 years, the premiums would grow to $16,878.55. Assuming 5 percent interest, what is the surrender cost of this policy, per thousand per year, over the first 10 years the policy is in force? $4.75 $4.48 $5.16 $4.92
$4.75
David purchased a $100,000 participating whole life policy. The annual premium is $2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20 years will be $35,260. If the premiums were invested at 5 percent interest for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent interest for 20 years, they would grow to be $24,400. The amount to which $1 deposited annually will accumulate in 20 years at 5 percent interest is $34.719. Based on this information, what is the surrender cost per thousand per year of David's policy over the 20-year period? $13.75 $27.38 $15.77 $5.62
$5.62
Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). If Juanita is alive 20 years later, how much of the $6,000 received during the year is taxable? $4,500 $3,000 $6,000 nothing
$6,000
Which of the following statements about pension funding agencies and funding instruments is true? Under a guaranteed investment contract, the insurer guarantees the principal of a lump sum deposit but does not guarantee the interest rate. A separate investment account is a group pension account with a life insurance company. If the funding instrument is a commercial bank, the plan is called an insured plan. Under a trust-fund plan, individual annuities are purchased each year for employees participating in the plan.
A separate investment account is a group pension account with a life insurance company.
Which of the following statements about retirement benefits under pension plans is true? Past service benefits are the result of bonuses and overtime pay during the period an employee participated in the plan. A unit-benefit formula considers both earnings and years of service. Under a flat percentage of annual earnings defined benefit formula, each employee receives the same dollar benefit. A benefit using final pay is usually based on an employee's earnings during the last month of plan participation.
A unit-benefit formula considers both earnings and years of service.
All of the following statements about optional disability income benefits are true EXCEPT A Social Security rider pays additional benefits if the insured is turned down for Social Security disability benefits. Adding a return of premium rider results in a lower initial premium. Under a cost-of-living rider, benefits are periodically adjusted for inflation. Under an option to purchase additional insurance, the insured has the right to buy additional insurance at specified times without evidence of insurability.
Adding a return of premium rider results in a lower initial premium.
All of the following statements about the tax treatment of Health Savings Accounts (HSAs) are true EXCEPT Contributions to a qualified HSA are tax deductible. Distributions from a qualified HSA used to fund medical expenses are taxable income. Distributions from a qualified HSA prior to age 65 for nonmedical purposes are subject to a 20 percent penalty tax. Investment income in a qualified HSA accumulates income tax free.
Distributions from a qualified HSA used to fund medical expenses are taxable income.
Which of the following statements about Section 401(k) plans is true? If an employee takes the funds made available to him or her in cash, the money received is not taxable. There is no limit on the actual percentage of salary that can be deferred by highly compensated employees under a qualified plan. These plans are exempt from rules that prevent discrimination in favor of highly compensated employees. Elective salary deferrals to these plans are free of federal income taxation until the funds are actually withdrawn.
Elective salary deferrals to these plans are free of federal income taxation until the funds are actually withdrawn.
Which of the following is (are) characteristics of HMO managed care plans? I. Unlimited choice of physicians and hospitals II. Emphasis on controlling the cost of covered services I only II only both I and II neither I nor II
II only
Which of the following statements about Roth 401(k) plans is true? I. Contributions to a Roth 401(k) plan are made with before-tax dollars. II. Qualified distributions from a Roth 401(k) are received income-tax free. I only II only both I and II neither I nor II
II only
Which of the following statements about cafeteria plans is (are) true? I. Unspent flexible spending account balances are refunded in cash to the employee, tax-free, at year-end. II. Cafeteria plans enable employees to select benefits that meet their specific needs. I only II only both I and II neither I nor II
II only
Which of the following statements about disability and disability income insurance is (are) true? I. Most disability income policies replace 100 percent of gross earnings. II. The probability of being disabled before age 65 is much higher than commonly believed. I only II only both I and II neither I nor II
II only
Which of the following statements about group insurance underwriting principles is (are) true? I. If a plan is contributory, 100 percent of the eligible employees must be covered. II. Ideally, there should be a flow of younger people into the group and older people out of the group. I only II only both I and II neither I nor II
II only
Which of the following statements about individual disability income policies that use a two-part definition of total disability is (are) true? I. During the initial period of disability, the insured must be unable to perform the duties of any gainful occupation. II. After the initial period of disability, the insured must be unable to perform the duties of any occupation for which he or she is reasonably fitted by education, training, and experience. I only II only both I and II neither I nor II
II only
Which of the following statements about long-term care insurance is (are) true? I. Long-term care insurance is inexpensive, especially if purchased at older ages. II. Purchasers have a choice of daily benefits and benefit periods. I only II only both I and II neither I nor II
II only
Which statement is true with regard to problems and issues with tax-deferred retirement plans in the United States? Inadequate participation in employer-sponsored retirement plans can create economic insecurity for retired employees. Employees do not invest sufficient amounts in the common stock issued by the companies where they work. Retirement benefits for women are higher than retirement benefits for men, reflecting the higher wages women are paid. Pension benefits are too often indexed for inflation, burdening employers with high pension costs.
Inadequate participation in employer-sponsored retirement plans can create economic insecurity for retired employees.
Which of the following statements is true regarding disability income insurance? Increasing the elimination period reduces the premium for disability income insurance. Disability income insurance usually replaces 100 percent of lost income. The purchase of disability income insurance is not necessary if you are covered under workers compensation. A uniform definition of disability appears in all disability income policies.
Increasing the elimination period reduces the premium for disability income insurance.
Which of the following statements about the surrender cost index for measuring the cost of life insurance is true? It takes into account the settlement options available in the policy. It takes the amount and timing of each dividend into consideration. It does not consider the cash value in the policy. It is based on the assumption that the policy will be in force indefinitely.
It takes the amount and timing of each dividend into consideration.
Which of the following statements about individual disability income policies is true? Benefits paid for partial disabilities are usually greater than benefits paid by the same policy for total disabilities. Benefits are typically paid only for disabilities resulting from sickness. Most policies pay a benefit equal to 100 percent of the disabled person's lost income. Many policies provide or make available a residual disability benefit for persons who are able to work but at a reduced income.
Many policies provide or make available a residual disability benefit for persons who are able to work but at a reduced income.
Maria is covered under a group medical expense plan as an employee. She is also covered under her husband's plan as a dependent. If Maria is hospitalized, how will each plan respond to her medical bills if both plans have the typical coordination-of-benefits provision? Her husband's plan is primary, and Maria's plan is excess. The primary plan is determined by which birthday, Maria's or her husband's, occurs first in the year. Both plans will pay benefits on a pro rata basis. Maria's plan is primary, and her husband's plan is excess.
Maria's plan is primary, and her husband's plan is excess.
The Affordable Care Act has a provision that expands a public assistance program designed to make health coverage available to low-income individuals by increasing the maximum amount of income that can be earned and still qualify for benefits. As a result, millions of individuals are eligible for coverage under this program. This public assistance program is called Health Insurance Marketplace Exchange. Medicaid. health maintenance organization. Medicare.
Medicaid.
Which statement is true regarding IRA distributions? Minimum annual distribution rules apply to Roth IRAs. The IRA penalty tax applies to all traditional IRA distributions before age 59.5 with no exceptions. Minimum annual distribution rules apply to traditional IRAs. Distributions from a Roth IRA are taxed at the individual's marginal tax rate.
Minimum annual distribution rules apply to traditional IRAs.
Which of the following is an advantage of a longevity annuity? The policyowner has unrestricted access to the funds during the deferral period through loans and cash withdrawals. It is an immediate annuity. Monthly benefits begin at an advanced age when other assets are likely to have been depleted. Death benefits are paid to a beneficiary if death occurs during the deferral period.
Monthly benefits begin at an advanced age when other assets are likely to have been depleted.
All of the following statements about long-term care insurance are true EXCEPT Policies currently sold are guaranteed renewable. Protection against inflation is usually made available as an optional benefit. Premiums can be reduced by electing shorter elimination periods. A common benefits trigger is the inability to perform a certain number of activities of daily living.
Premiums can be reduced by electing shorter elimination periods.
All the following statements concerning a Roth 401(k) plan are true EXCEPT Qualified distributions at retirement are fully taxable. After-tax dollars are used to fund the plan. Investment earnings accumulate on a tax-free basis. Employees at all income levels may contribute to the plan, but annual contributions are limited
Qualified distributions at retirement are fully taxable.
Rita is 66 years old. She earned $25,000 this year working part-time at a store and her modified adjusted gross income was $35,000. Rita is considering making a $4,000 contribution to her traditional IRA. Which of the following statements is true regarding this contribution? Rita cannot contribute to her traditional IRA because she is over age 65. Rita can make a $3,000 contribution to her traditional IRA, but it is only partially tax deductible. Rita can make a $3,000 contribution to her traditional IRA, and it is fully tax deductible. Rita can make a $3,000 contribution to her traditional IRA, but it is not tax deductible.
Rita can make a $3,000 contribution to her traditional IRA, and it is fully tax deductible.
Which of the following statements about group short-term disability income plans is true? Disability is usually defined in terms of a worker being unable to work in any substantial, gainful employment. Most plans have a short elimination period for accidents but cover sickness from the first day of disability. The amount of disability income benefits typically is equal to some percentage of a worker's normal earnings. Most short-term plans cover occupational disability only.
The amount of disability income benefits typically is equal to some percentage of a worker's normal earnings.
All of the following statements about the tax treatment of life insurance purchased by an individual are true EXCEPT Premium payments are usually not tax deductible. The annual increase in the cash value is currently taxable. Policyowner dividends are not considered taxable income. Death benefits received in a lump sum are not taxable income.
The annual increase in the cash value is currently taxable.
Which of the following statements about the traditional net cost method of measuring the cost of life insurance is (are) true? I. The traditional net cost method does not consider the time value of money. II. The traditional net cost method can show that life insurance has a negative cost. I only II only both I and II neither I nor II
both I and II
All of the following are potential disadvantages to employees covered by a defined contribution pension plan EXCEPT The contribution rate by the employer is uncertain. The retirement benefit can only be estimated in advance of retirement. The investment losses are borne by the employees. The benefit formula may produce an inadequate benefit if an employee enters the plan at an older age.
The contribution rate by the employer is uncertain.
All of the following are circumstances under which withdrawals from a traditional IRA may be made prior to age 59.5 without incurring a substantial penalty EXCEPT The withdrawal is in substantially equal installments paid over the individual's life expectancy. The distribution is to the beneficiary of a deceased IRA owner. The withdrawal is used to pay living expenses after unemployment insurance benefits cease. The withdrawal is because of income needed due to the individual's disability.
The withdrawal is used to pay living expenses after unemployment insurance benefits cease.
Which of the following statements is true concerning traditional and Roth IRAs? There are minimum distribution requirements for traditional IRAs. There are no limits on the tax deductibility of traditional IRA contributions once the account owner has reached age 50. The investment income portion of Roth IRA distributions must be reported as taxable income. Roth IRA contributions are tax deductible.
There are minimum distribution requirements for traditional IRAs.
Which of the following statements about SIMPLE retirement plans is true? They are limited to employers with 100 or fewer eligible employees and who do not maintain another qualified plan. Employers are subject to more stringent nondiscrimination rules than those that apply to most qualified plans. Employees are not permitted to make SIMPLE plan contributions. Employer contributions are fully taxable in the year of the contribution, but qualified distributions are received tax-free.
They are limited to employers with 100 or fewer eligible employees and who do not maintain another qualified plan.
All of the following statements about cost controls in dental insurance plans are true EXCEPT The coinsurance percentage used may vary by type of dental service. The limit on benefits may be expressed as an annual limit or as a lifetime limit for certain types of dental services. Cosmetic dental work is usually excluded. To eliminate small claims, there is no coverage for routine oral examinations, X-rays, or cleaning teeth.
To eliminate small claims, there is no coverage for routine oral examinations, X-rays, or cleaning teeth.
All of the following statements about traditional and Roth IRAs are true EXCEPT Contributions to Roth IRAs are made with after-tax dollars. Qualified distributions from Roth IRAs are received income tax free. Traditional IRA contributions may be fully, partially, or not income tax deductible. Traditional IRAs are exempt from the penalty tax on premature distributions.
Traditional IRAs are exempt from the penalty tax on premature distributions.
Which of the following statements about mandatory provisions in individual health insurance policies is true? The usual length of the grace period is 180 days. Insurers are not permitted to place time limits on filing claims or providing proof of loss. Under the reinstatement provision, a health insurance policy that has lapsed can be put back in force. The time limit on certain defenses provision prohibits the insurance company from denying a claim based on a fraudulent misstatement by the applicant after the policy has been in force three months.
Under the reinstatement provision, a health insurance policy that has lapsed can be put back in force.
Which of the following statements about the withdrawal of funds from a traditional IRA is true? Withdrawals must begin no later than April 1 of the year following the calendar year in which an individual attains age 70.5. Withdrawals must be taken in the form of an annuity. Withdrawals of deductible contributions between the ages of 59.5 and 65 are subject to a tax penalty unless they are withdrawn because of specified circumstances such as death or long-term disability. Amounts attributable to nondeductible contributions are fully taxable as ordinary income when received.
Withdrawals must begin no later than April 1 of the year following the calendar year in which an individual attains age 70.5.
Paul is shopping for a life insurance policy. An agent asked Paul if he would like to purchase a participating policy. What is a "participating" policy? a policy which has a cash value a policy which pays dividends a policy which provides for an increasing death benefit a policy which invests in common stock
a policy which pays dividends
Major defects in the health care system in the United States health care system include I. Rising healthcare expenditures II. Considerable waste and inefficiency in the healthcare system I only II only both I and II neither I nor II
both I and II
Purposes of life insurance policy reserves include which of the following? I. Legal test of the insurer's solvency II. Formal recognition of the obligation to pay future claims I only II only both I and II neither I nor II
both I and II
Reasons for having a minimum participation requirement before a group is eligible for insurance include which of the following? I. To lower the expense rate per unit of insurance II. To minimize the possibility of insuring a group which consists largely of unhealthy individuals I only II only both I and II neither I nor II
both I and II
Under the Affordable Care Act, which of the following statements are true? I. Health insurers cannot use pre-existing conditions exclusions. II. Health insurers cannot impose annual benefit limits and lifetime benefit limits. I only II only both I and II neither I nor II
both I and II
Which of the following distributions from a qualified retirement plan would be exempt from the 10 percent penalty tax if the distribution occurred before the covered employee was age 59.5? I. A distribution made to an employee with a qualifying disability. II. A distribution made to a beneficiary or to the employee estate's after the employee's death. I only II only both I and II neither I nor II
both I and II
Which of the following statements about Blue Cross and Blue Shield plans is (are) true? I. Most plans combine Blue Cross and Blue Shield into a single entity. II. Some form of managed care plan covers the majority of Blue Cross and Blue Shield enrollees. I only II only both I and II neither I nor II
both I and II
Which of the following statements about group accidental death and dismemberment (AD&D) insurance is (are) true? I. The principal sum is paid if the employee dies in an accident. II. A percentage of the principal sum is paid for certain types of dismemberments. I only II only both I and II neither I nor II
both I and II
JKL Company just converted its traditional defined-benefit plan to another type of plan. Under the plan, benefits are defined in terms of a hypothetical account balance, with retirement benefits dependent upon the value of the participant's account at retirement. Each year, employees receive an interest rate credit and a pay credit which is a specified percentage of compensation. This type of plan is called a trust fund plan. cash-balance plan. deposit-administration plan. section 401(k) plan.
cash-balance plan.
Some employers offer employees a choice of health care plans which are designed to make employees more sensitive to health care costs, to provide an incentive to avoid unneeded care, and to seek low-cost health care providers. Such plans are called cafeteria plans. employee assistance plans. consumer-directed health plans. preferred provider organization (PPO) plans.
consumer-directed health plans.
The effect of an annual out-of-pocket limit in an individual medical expense policy is to put a cap on annual benefits the insurer will pay. limit the lifetime benefits payable under the policy. prevent the insured from receiving duplicate benefits if medical expenses are also covered under workers compensation insurance. cover 100 percent of eligible medical expenses after an insured has incurred a specified amount of annual out-of-pocket expenses.
cover 100 percent of eligible medical expenses after an insured has incurred a specified amount of annual out-of-pocket expenses.
Stan paid an insurance company $50,000 for a fixed annuity when he was 50 years old. At age 62, Stan plans to begin to receive payments from the insurer. There are no guarantees on the number of payments he will receive. Based on the description provided, this annuity can be described as a(n) variable annuity. immediate annuity. deferred annuity. life annuity with guaranteed payments.
deferred annuity.
Agnes and Mary Clare, two elderly sisters, own an annuity covering both of their lives. The annuity pays benefits to them until the first sister dies, then the annuity terminates. Agnes and Mary Clare own a(n) longevity annuity. joint life annuity. flexible premium annuity. joint-and-survivor annuity.
joint life annuity.
Cassie, age 62, paid a life insurer $100,000 in exchange for a life annuity. If Cassie dies before receiving 120 monthly payments from the insurer, the remaining payments will be made to a beneficiary. If Cassie dies after receiving 120 payments, no additional payments are made by the insurer. The annuity payout option Cassie selected is installment refund annuity. cash refund annuity. life annuity with period certain. life annuity, no refund.
life annuity with period certain.
Each of the following helps to reduce federal estate taxes EXCEPT expenses such as the cost of the funeral, estate settlement costs, and probate costs. the marital deduction. life insurance policies in which the deceased had an incidents of ownership at the time of death. the applicable unified tax credit amount.
life insurance policies in which the deceased had an incidents of ownership at the time of death.
Some insurers offer a single-premium deferred annuity that does not begin paying benefits until an advanced age, such as 85. This product is called a(n) longevity annuity. life income with guaranteed payments annuity. equity-indexed annuity. endowment insurance.
longevity annuity.
High deductible group health insurance plans have all of the following characteristics EXCEPT coinsurance. health savings accounts or health reimbursement arrangements. low coverage limits. high dollar deductibles.
low coverage limits.
Lisa does not want her life insurance policy included in her gross estate when she dies. Lisa can remove the life insurance policy from her estate if she does which of the following more than 3 years before she dies? borrow the cash value of the policy select a lump sum settlement option and name her estate the beneficiary change the beneficiary to someone who does not have insurable interest make an absolute assignment of the policy to someone else
make an absolute assignment of the policy to someone else
Chris, age 52, invested $50,000 in a 10-year deferred annuity that pays an interest rate higher than the rate offered on bank certificate of deposits. After 10 years, Chris can annuitize the account balance, withdraw part of all of the balance, or leave the funds invested at a renewed rate of interest. The deferred annuity contract Chris purchased is a multi-year guaranteed annuity (MYGA). life annuity (no refund). qualified longevity annuity contract (QLAC). longevity annuity.
multi-year guaranteed annuity (MYGA).
Which of the following is a permissible IRA investment alternative? life insurance mutual funds antiques fine art
mutual funds
Which of the following statements is (are) true regarding cash-balance pension plans? I. Cash balance plans are defined contribution plans. II. Under a cash balance plan, the employer creates an investment account for each employee into which the employer makes actual contributions and allocates investment gains and losses. I only II only both I and II neither I nor II
neither I nor II
An HMO that contracts with two or more independent group practices to provide medical services to covered members is called a(n) group model HMO. network model HMO. individual practice association HMO. staff model HMO.
network model HMO.
Individual medical expense insurance sold in the Health Insurance Marketplace is characterized by which of the following? narrow range of benefits no exclusions first-dollar coverage no lifetime benefit limits
no lifetime benefit limits
Marv is covered by a group health insurance plan at work. His employer funds the entire cost of the group health insurance. Because of this characteristic, the group health insurance plan can be described as contributory. noncontributory. defined contribution. defined benefit.
noncontributory.
Which of the following is a common investment mistake that many retirement plan participants make? not investing heavily enough in common stock issued by the employer participating in an employer-sponsored retirement plan to obtain matching employer contributions participating in an employer-sponsored retirement plan and contributing the maximum amount allowed panicking when stock prices fall and selling at low prices
panicking when stock prices fall and selling at low prices
The difference between the present value of future benefits payable under a life insurance policy and the present value of net premiums for the policy is the policy's prospective reserve. retrospective reserve. admitted assets. policyholders surplus.
prospective reserve.
The fundamental purpose of a variable annuity is to guarantee a fixed-dollar benefit throughout retirement. provide a hedge against inflation. fund the purchase of cash value life insurance. provide funding flexibility to the purchaser.
provide a hedge against inflation.
One provision of the Affordable Care Act is designed to benefit young adults up to age 26. This provision allows these young adults to receive low-interest government loans to finance their health insurance. remain covered under their parents' health insurance policies. receive a tax credit for their health insurance premium if they are unemployed. receive coverage under Medicare if they are not covered by a private health insurance plan.
remain covered under their parents' health insurance policies.
Prior to passage of the Affordable Care Act, insurers could go back to the date a health insurance policy became effective and render the policy void due to a clerical error. This practice, which is prohibited under the Affordable Care Act except in cases of fraud or intentional misrepresentation of a material fact, is called estoppel. reformation. retention. rescission.
rescission.
The net premiums collected by a life insurer for a particular block of policies, plus interest income at an assumed rate, less assumed death benefits paid is called the retrospective reserve. net amount at risk. prospective reserve. cash value.
retrospective reserve.
A factor that can be ignored when determining the cost of life insurance is time value of money. settlement options. dividends. premiums paid.
settlement options.
Under a 401(k) plan, what is compared to determine if the plan unfairly discriminates in favor of highly compensated employees? the percentage of highly compensated employees over age 50 who participate is compared to the percentage of all other employees who participate the average percentage of salary made available to the highly compensated to defer is compared to the average percentage of salary made available to other eligible employees to defer the ratio of eligible highly compensated employees is compared to the ratio of eligible other employees the average percentage of salary deferred by the highly compensated is compared to the average percentage of salary deferred by other eligible employees
the average percentage of salary deferred by the highly compensated is compared to the average percentage of salary deferred by other eligible employees
Vesting refers to the employee's right to the employer's contributions or benefits attributable to the contributions if employment terminates prior to retirement. the employer's right to terminate contributions if a pension plan is adequately funded. the employer's right to recapture employee contributions to a pension plan if employment terminates prior to retirement. the employer's right to discriminate against non-highly compensated employees when determining pension benefit levels.
the employee's right to the employer's contributions or benefits attributable to the contributions if employment terminates prior to retirement.
Carl is concerned that if he purchases a fixed indexed annuity, he will lose money long-term if the stock index declines. Which equity indexed annuity provision assures Carl that he will not lose money if he holds the equity indexed annuity to term? the indexing method the maximum rate cap the participation rate the guaranteed minimum value
the guaranteed minimum value
All of the following are reasons why employers self-insure medical expense plans EXCEPT to retain funds until needed to pay claims. to reduce certain costs, such as premium taxes and commissions. to transfer the risk of medical expenses to another party. to eliminate the need to comply with separate state laws.
to transfer the risk of medical expenses to another party.
Rita went to work for a manufacturing company. The company offers a defined-benefit pension plan. The retirement benefit is equal to 1.5 percent multiplied by years of service with the company, and the result is multiplied by average salary in the three highest consecutive years of paid employment with the company. The benefit formula used at Rita's company is a flat dollar amount for each year of service. unit-benefit formula. flat dollar amount for all employees. flat percentage of annual earnings.
unit-benefit formula.
All of the following are historical reasons for the increase in health care expenditures in the U.S. EXCEPT cost insulation because of third-party payers. employer-sponsored health insurance. technological advances in health care. universal health insurance coverage.
universal health insurance coverage.
Daryl, age 42, quit his job. His employer offered a defined contribution pension plan, and the balance in the account was $30,000 when Daryl quit. He can avoid immediate taxation of these funds by using the funds to purchase common stock issued by the former employer. using an IRA rollover account. receiving the money through four equal installments. taking a lump-sum distribution.
using an IRA rollover account.
