512 Insurance

Brendan and Sasha, both age 28, are considering the purchase of an annuity to help them save monthly for their retirement at age 65. They want an annuity that will allow them to participate in the equities market, and because of their long-term investment horizon, they are not particularly concerned about safety of principal. Which of the following annuity products best meets their needs? A) Variable deferred annuity B) Fixed immediate annuity C) Single premium deferred annuity D) Fixed deferred annuity

A A variable annuity will allow the Brendan and Sasha to participate in the equities market. Fixed annuities are more suited for investors who are concerned with safety of principal. Because the couple wants to save monthly, a single premium deferred annuity is not a wise choice.

Which of the following perils are covered by an HO15 endorsement to form HO3 for personal property? Wind damage when property is away from the premises Fire damage when property is on the premises Groundwater damage when property is on the premises Earth movement when property is away from the premises A) I, II, and IV B) I and IV C) II, III, and IV D) II and III

A All risks are covered, but groundwater damage is only covered while personal property is away from the premises. HO15 modifies the earth movement exclusion so that it only applies to coverages for the dwelling and other structures.

A client fails to pay their life insurance premium and subsequently dies shortly thereafter. What are the consequences of this scenario? A) Death benefits will be paid tax-free to the beneficiaries, net of any outstanding premium payments due. B) The full death benefit will be paid to the beneficiaries and retain its tax-free status. C) The death benefits will be paid, but will be subject to income taxation due to the failure to pay final premiums. D) The death benefits will not be paid to the beneficiaries.

A Death benefits will be paid tax-free to the beneficiaries, net of any outstanding premium payments due. The grace period allows the policy to remain in force following an insured's failure to pay a premium.

Which of the following steps in the insurance adjustment process are correctly described? Notice: A phone call to the agent that a loss has occurred is generally adequate notice. Investigation: The primary purpose is to determine if an insured is likely to be submitting a false or exaggerated claim. Proof of loss: The insured generally must submit a sworn statement stating that a loss occurred, the amount of the claim, and the circumstances surrounding the loss. Payment or denial: In this stage, the insurance company usually reunderwrites the policy and reduces protection for any future claims. A) I and III B) II, III, and IV C) I, II, and III D) I and IV

A Generally, the purpose of an investigation is to determine whether or not a loss occurred, the extent of the loss, and whether it was covered. The payment or denial stage is limited to either paying the claim or explaining to the insured why the company will not pay it.

Carmen and David received eight place settings of their sterling silver flatware pattern as wedding presents. Because the silverware cost nearly $500 per place setting, they wanted to make sure it was adequately insured. The couple called Jerry, an agent with Forest Insurance Co., and asked him what needed to be done to ensure that they had adequate insurance coverage. Jerry assured them that because they had less than 10 place settings, they were adequately insured. If the silverware is stolen, which one of the following legal remedies will most likely be used to assure the loss is covered? A) Doctrine of estoppel B) Rescission C) Last clear chance D) Waiver doctrine

A Jerry, representing Forest Insurance Co., made a statement on which Carmen and David relied. This represents the doctrine of estoppel. The insurance company cannot later state that the agent made a mistake and deny the claim. Waiver doctrine is used in the instance where, if the insurance company failed to exert its right to deny one claim, it may not later exert that right with a similar claim. Last clear chance is a liability defense raised in a case where a person either attempted or failed to attempt to make one final effort to prevent someone from suffering a loss. Rescission is a remedy where a contract is nullified—as if it had never existed.

Preston called Joanna, an insurance broker, to obtain coverage on his 30-foot sailboat. Joanna told him to send in a binder premium of $75. She told him that by doing so, he would be covered and that he should go ahead and enjoy the boat. Joanna submitted an application for insurance to Boater's Insurance Corp. for issuance of the policy. Boater's declined the coverage. The day Joanna learned this, Preston called and told her a sudden wind caused him to lose control of his boat. He then smashed into another sailboat, causing substantial damage to both boats. Who will be responsible for the damages? A) Joanna is responsible because, as a broker, she personally bound coverage for Preston but was unable to place the coverage before the accident. B) Boater's will have to pay since Joanna collected a premium from Preston. C) Preston will have to pay because no insurance policy is in force until the insurance company accep

A Joanna will have to pay because, as a broker, she personally bound coverage for Preston but was unable to place the coverage before the accident. Boater's Insurance Corp. was never a party to an insurance contract with Preston. Since Joanna is a broker, her actions only speak for herself. There is no insurance coverage in force. Preston will need to make a claim against Joanna, which will likely be reviewed by her Errors and Omissions carrier. If Preston sues and wins, Joanna also could be held personally liable.

During the open enrollment process, a client is deciding between a low-deductible and high-deductible health insurance plan. They currently have no coverage. What risk management technique is being characterized in this situation? A) Risk transfer and retention B) Risk reduction and transfer C) Risk transfer D) Risk retention

A Purchasing insurance is an example of risk transfer; a person who buys insurance transfers the risk of loss to an insurance company. The choice between a high deductible vs. low deductible plan is an example of risk retention.

Bill and Arlene have two very active teenage children. Arlene refuses to allow either child to own or ride a motorcycle because of her fear that they would get hurt. However, Bill and Arlene also realize that other activities in which their children are involved—such as soccer, skiing, and mountain biking—could lead to broken bones and other injuries. To reduce the risk of untimely, large medical expenses, they purchased a supplemental accident indemnity policy to supplement their major medical insurance. Based on this information alone, which of the following methods of risk management are Bill and Arlene using? Risk avoidance Risk reduction Risk retention Risk transfer A) I, III, and IV B) II and IV C) III and IV D) I and II

A Risk avoidance is being used by eliminating potential injuries from motorcycle accidents; the supplemental accident policy and their health insurance is risk transfer. They still retain some of the risk, so that is risk retention. Risk reduction could be used by requiring proper protective equipment when participating in the other activities, but this is not addressed in the fact scenario.

Which of the following describe a characteristic of group term life insurance coverage? Provides payment of face amount to designated beneficiary at death of insured Low cost, simple to administer, and tax advantaged Seldom used because of unfavorable tax treatment Consists of individual contracts, not a master group policy A) I and II B) II and III C) III and IV D) I, II, and IV

A The answer is I and II. Characteristics of group term life insurance include payment of a face amount to the beneficiary named at the time of death of the insured and low cost, simple administration, and tax advantages.

Which of the following are life risk exposures? Death before loan repayment can be finished Spouse outliving a straight life annuitant Death or disablement of the person responsible for paying your retirement income, causing default Death before the accomplishment of financial objectives A) I, II, III, and IV B) I and II C) III and IV D) II and IV

A The answer is I, II, III, and IV. Each option is correct.

William had an interior water pipe break, and water poured into his basement. Which of the following statements accurately reflect what may occur or be required of William subsequent to this break? William should turn off the water and attempt to prevent any further damage immediately upon discovering the leak. The insurance company likely will ask for an inventory of damaged items, and William is obligated to provide it if he wants the claim paid. William can throw away any damaged property, relying on the insurance company to accept his inventory list as accurate. The insurer may choose to repair or replace damaged property with that of like kind and quality, rather than pay William for the loss. A) I, II, and IV B) I and III C) I and II D) II and IV

A The answer is I, II, and IV. After the leak is under control, he should call his agent or his insurer's claims office to notify the insurance company of the loss. The insurance company has the right to ask for evidence of the loss. The insurer retains the right to determine what evidence is required, and the insured is obligated to provide whatever is available or run the risk of voiding the policy.

Which of the following are primary criteria that should be considered when selecting an insurer? A favorable rating from several rating companies The number of agents employed High persistency rate The fact it is not on the National Association of Insurance Commissioners' (NAIC) Watchlist A) I, III, and IV B) I and II C) I, II, III, and IV D) III and IV

A The answer is I, III, and IV. The number of agents employed is not relevant. An insurer should have a favorable rating from several rating companies, have a high persistency rate (low lapse rate), and not be on the NAIC's Watchlist.

Several years ago, Diego purchased a $400,000 whole life insurance policy on his life. He has paid cumulative premiums over the years of $20,000 and has accumulated a cash value of $25,000. This year, he was diagnosed with a rare liver disease, and, as a result, his life expectancy is only six months. Because of his large medical costs, he is considering selling his policy to a viatical settlement company. The company has offered him $250,000 for the policy. He would also like to explore other ways to generate cash from the policy. Which of the following statements regarding Diego's situation are CORRECT? If Diego sells his policy to the viatical settlement company, he will be taxed on any gain from the sale if he dies more than two years later. If the viatical company collects the death benefit as a result of Diego's death, the proceeds will be tax free to the company. If Diego sold the policy to his cousin for $250

A The answer is III and IV. Because Diego is terminally ill (i.e., expected to die within two years), he will not be taxed on the proceeds received from the viatical settlement company, even if he lives longer than two years. When the viatical settlement company receives the death benefit, part of the death benefit will be taxed at ordinary income tax rates to the company. The sale of the policy to Diego's cousin would be considered a transfer for value. His cousin would be taxed on the death benefit (less any amounts paid) because the transfer-for-value rules cause the death benefit to become taxable. With a MEC, loans or distributions from the policy are taxed on a last in, first out basis, meaning that any earnings in the policy are taxed first.

Which of the following statements concerning flexible spending plans is NOT true? A) A company may allow participants to use expenses in the first 2½ months to spend the prior year's allocated amount and to roll over $500 into the next year. B) The amount that can be contributed annually is limited for flexible spending plans. C) Any funds remaining other than those meeting the federal requirements concerning the next year are forfeited to the company. D) Eligible expenses can include out-of-pocket expenses for health, dental, vision, and items such as tutoring for a child diagnosed with a learning disability.

A The answer is a company may allow participants to use expenses in the first 2½ months to spend the prior year's allocated amount and to roll over $500 into the next year. This is incorrect because a company may offer one of these exceptions but not both. They may allow expenses from the first 2½ months to be claimed against the prior year's balance OR allow a rollover of up to $500 of unused funds into the next year, but not both. All other statements are correct.

If the insured under a life insurance policy becomes totally disabled due to bodily injury or disease before a stated age, all premiums due during the period of total disability are waived under A) a disability waiver of premium rider. B) an own-occ disability waiver of premium rider. C) a modified disability waiver of premium rider. D) an any-occ disability waiver of premium rider.

A The answer is a disability waiver of premium rider. The disability waiver of premium rider prevents the policy from lapsing as a result of nonpayment of premiums during the insured's disability. The policy and benefits will continue as if the premiums have been paid. In most cases, total disability (as defined in the policy) is required before the rider is triggered. The policy does not need to meet a specific definition (i.e., own, any, or modified) in order to utilize this waiver.

Which of the following generally is NOT covered by employment practices liability insurance? A) Government-imposed fines and penalties B) Sexual harassment C) Discrimination in the workplace D) Wrongful termination

A The answer is government-imposed fines and penalties. Government fines and penalties are generally not covered. However, some insurance companies will cover punitive damages.

An individual decides to take a motorcycle road trip across the country. They ride during light hours and good weather conditions. However, they occasionally do not wear a helmet while riding. Which risk management term explains this situation? A) Hazard B) Peril C) Risk D) Moral hazard

A The answer is hazard: something that increases the likelihood of a loss occurring. Risk is the possibility of loss and perils are the causes of losses. Moral hazard is a result of the client being unethical or misrepresenting himself in order to obtain insurance or to induce the payment of a claim.

Express authority is authority that is A) specifically stated in the agent's contract. B) implied. C) incidental. D) expected by the public.

A The answer is specifically stated in the agent's contract. Express authority is expressly or specifically stated in the agent's contract. This type of authority is also referred to as stipulated authority, which means the powers are specifically stipulated in the contract. Implied authority is incidental, while apparent authority is expected by the public.

Which one of the following terms is correctly defined as it applies to disability income insurance? A) The elimination period serves a purpose similar to that of a deductible. B) The maximum benefit period is the maximum cumulative amount an insured can receive over his or her lifetime. C) The misstatement of age clause provides that if the insurance company finds that the applicant misstated his or her age on the application in order to obtain lower premiums, the policy can be terminated by the company. D) The presumptive disability clause states that if you cannot work in your own occupation, you are presumed to be disabled.

A The elimination period is the portion of a disability for which the insured must pay all expenses without disability income insurance benefits from the insurance company.

A small employer with 25 employees decides to start offering a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). No other group health coverage is offered to employees. Which of these employees qualifies for this plan? A) Employee A - a full-timer who has completed 100 days of service, is age 30, and a U.S. citizen B) Employee C - a full-timer who has completed 90 days of service, is age 30, and a nonresident alien C) Employee B - a part-timer who as completed 80 days of service, is age 30, and a resident alien D) None of these employees qualify.

A The plan is only offered to eligible employees. An eligible employee is an individual who has completed at least 90 days of service, attained the age of 25, is not considered part-time or seasonal, is not covered by a collective bargaining unit, and is not considered a nonresident alien for tax filing purposes.

Assume that a client has the following needs and objectives when purchasing a life insurance policy: Flexible premium payments Possibility of increasing death benefit Investment options Permanent protection Analyze the needs and objectives to determine a product recommendation. A) Whole life B) Variable universal life (VUL) C) Annually renewable term (ART) D) Variable life

B A VUL policy is the only type of policy that will meet all the client's needs. A VUL policy combines the flexibility of universal life with the possibility of an increasing death benefit and a higher cash value than traditional fixed products. Annually renewable term does not meet any of the client's needs and objectives.

Which one of the following phrases describes an unintentional tort? A) A libelous attack B) A civil, negligent wrong C) An act of vengeance D) A criminal act

B An unintentional tort is a civil, negligent wrong, over which the court may have jurisdiction (a noncriminal wrongdoing). A libelous attack and an act of vengeance would be intentional torts, and possibly criminal acts. Criminal acts are considered to be public wrongs and not torts (i.e., not civil)

Which one of the following medical policy provisions that can limit recovery by an insured is described correctly? A) The use of internal limits for treatment like chiropractic care by an insurance company assures insureds that their doctor's charges will be fully covered. B) The coordination of benefits clause is designed to prevent the insured from collecting benefits from two policies that together would equal more than 100% of the expense incurred. C) Based on the medical information provided on a policy application, the exclusions clause is written to exclude specific benefits for that applicant. D) A utilization review is used to determine if the insurance company is being charged the correct amount by providers of medical services.

B Coordination of benefits clause is designed to prevent the insured from collecting benefits from two policies that together would equal more than 100% of the expense incurred. Internal limits are used by insurance companies to limit the amount that is payable under the contract, not to guarantee full payment. The exclusions clause is generally the same for all policies issued by the same company. It lists those treatments, procedures, supplies, and providers for which no benefits will be paid. Utilization review is a process in which the insured generally must have a proposed procedure evaluated and approved by the insurance company prior to having it performed in order to have it be fully covered.

Fred was backing his car down his driveway. In an effort to avoid his son's bicycle, he ran into his neighbor's fence. Under which of the following theories of liability would Fred be financially responsible for the damage? A) Strict liability B) Negligence C) Negligence per se D) Absolute liability

B Fred would be liable for this unintentional tort, also referred to as negligence.

Bill offered to pay Jim, his friend of 24 years, $1,000 to slash the tires on the new car of Bill's neighbor in retaliation for the neighbor's dog barking at Bill. Jim agreed and accepted the offer. Which requirement is NOT in place to make this an enforceable contract? A) Consideration B) Legal object C) Competent parties D) Legal form

B No contract that involves illegal activity is enforceable. Both parties are at least age 24 and can be presumed to be "competent." The $1,000 was the consideration for the performance of the slashing. An oral contract is a legal form for some contracts. Bill made an offer and Jim accepted.

Chuck purchased Chuck's Garage, Bar & Grill five years ago for $120,000. After extensive repairs, the building's current replacement value is $240,000. Chuck originally insured the building for its original replacement cost of $120,000 and has not increased the coverage. His policy has an 80% coinsurance clause and a $1,000 deductible. Last week a fire in the kitchen caused $60,000 of damage. How much will the insurance company pay Chuck for his loss? A) $60,000 B) $36,500 C) $29,000 D) $59,000

B The answer is $36,500. This is the correct computation: Payment = (Amount of insurance ownedAmount of insurance required×Loss)−DeductiblePayment = (Amount of insurance ownedAmount of insurance required×Loss)−Deductible Amount of insurance required = $240,000 x .8 = $192,000 ($120,000$192,000×$60,000)−$1,000=$36,500

Karla purchased a building to house her quilting supply business. The purchase price eight years ago was $75,000. After she upgraded the building with improvements and changes were made in traffic patterns around the building, she was told she could sell the property for $250,000. Due to the value of the land, the replacement cost would be $160,000. Over the years, she has increased the property insurance to its current level of $130,000. Last week, a gas leak caused an explosion, which blew out an entire wall of the building. The cost to repair the building will be $57,000. Her policy has an 80% coinsurance clause and a $1,000 deductible. How much will her insurance company pay toward repair of the damage? A) $45,313 B) $56,000 C) $56,891 D) $28,640

B The answer is $56,000. The building is insured for 81.25% of its replacement cost ($130,000 insurance coverage divided by $160,000 replacement cost). Since the amount of insurance exceeds 80% of the replacement cost (.8 x $160,000 = $128,000), the company will pay the amount of the loss, less the deductible. When adequate insurance is maintained, there is no coinsurance penalty. It is also good to remember that carrying more insurance than the minimum required (i.e., 80% in this case) will not result in more money than the actual claim being paid (e.g., based on having 81.25% coverage, which translates to 102% of the required 80% coverage, Karla would not receive $56,891).

Which of the following statements correctly describe liability umbrella coverage? The term umbrella policy is the popular name for a personal catastrophic liability contract. Liability related to personally owned aircraft and/or watercraft is always excluded from umbrella policies. Because of the high amounts of coverage issued under an umbrella policy, this type of coverage is often far too expensive for most people who might otherwise be interested in purchasing it. Damage to property of the insured is excluded. A) I and II B) I and IV C) III and IV D) II, III, and IV

B The answer is I and IV. Personally owned aircrafts and watercrafts may be covered if basic liability coverage is in place for them at the time the umbrella policy is purchased. The advantage of umbrella policies is their relatively low cost. It is not uncommon to be able to bring liability protection levels up to $1 million for less than $200 per year. Liability umbrella coverage is, as its name suggests, liability coverage; therefore, property damage is not covered.

Which of the following benefits are provided by workers' compensation? Medical expense reimbursement Disability income Death benefits Rehabilitation services A) I only B) I, II, III, and IV C) I and III D) II, III, and IV

B The answer is I, II, III, and IV. Workers' compensation provides all of these benefits. Medical expenses are covered in full in most states. Disability income benefits can be paid after the disabled worker satisfies a waiting period. Death benefits are paid if the worker dies as a result of a job-related accident or disease. All states provide rehabilitation services to restore workers to productive employment.

Which of the following expenses is typically payable from a flexible spending account (FSA)? Medical Dental Dependent care Individual life insurance premiums A) I only B) I, II, and III C) II, III, and IV D) I, II, III, and IV

B The answer is I, II, and III. FSAs are usually used only for medical, dental, and dependent care expenses. Individual life insurance premiums are not covered because the IRS does not consider them a qualified benefit.

Which of the following describe life insurance life income settlement options? The proceeds are paid to the beneficiary on the basis of life expectancy, and payments stop upon the death of the beneficiary. The beneficiary is paid a life income with a minimum number of payments guaranteed. The beneficiary is paid an income for life with any remaining proceeds paid to a contingent beneficiary. The proceeds are left with the company and interest is paid to the beneficiary. A) I and III B) I, II, and III C) II and IV D) I, II, III, and IV

B The answer is I, II, and III. Proceeds held by the company with interest paid to the beneficiary are not an actual life income option. Most companies will not allow proceeds to be left at interest indefinitely, so a life income cannot be provided by this option.

Which of the following are characteristics of a universal life insurance policy? Unbundled structure Flexible premium payment Minimum guaranteed cash value Flexible death benefit A) III and IV B) I, II, and IV C) I, III, and IV D) II and IV

B The answer is I, II, and IV. Universal life insurance has all of the features except for a minimum guaranteed cash value. Universal life insurance has a guaranteed minimum interest rate, but that only applies if there is a cash value.

In order to receive long-term care from Medicare, which of the following must be true? The patient must have a three-day hospital stay as an admitted patient. The patient must pay the coinsurance for the first 20 days of the stay. The patient must enter a Medicare-approved facility within 30 days of release from the hospital. The care must be at least at a skilled nursing care level. A) I and III B) I, III, and IV C) II and IV D) I, II, III, and IV

B The answer is I, III, and IV. Only statement II is incorrect. Skilled nursing care essentially means that a registered nurse is available and supervises the care 24 hours a day, and the care is required by a physician. If this is the case, the first 20 days in the facility are fully paid by Medicare. The next 80 days are also covered, but with a daily coinsurance.

Radhika, a family practice physician, owns a duplex office building in which her office takes up one half, and she leases the other half to an accountant. Radhika has four employees but has had trouble keeping a receptionist for more than a year. She has furnished the offices so that they present an appropriate professional image with modern furniture, stock art on the walls, desktop computers, and a high-end copier/scanner/printer. She also has her own X-ray machine so she can evaluate patients who need that service quickly. Based on this information only, which of the following should she consider managing her property risks? Building coverage for the entire duplex A Commercial General Liability (CGL) policy A Business Owner Policy (BOP) Additional property coverage on the X-ray machine to ensure adequate coverage A) III and IV B) I, III and IV C) I and III D) II only

B The answer is I, III, and IV. Option I is a risk reduction technique while options III and IV are risk transfer techniques. Option II is also risk transfer technique, but it is for liability and the question is addressing property risks only. Remember to always look at what the question is asking for and no more.

Which of the following types of insurance may be included in a commercial package policy (CPP)? Workers' compensation insurance Property insurance Inland marine insurance Commercial auto A) I and III B) II, III, and IV C) II only D) I, II, III, and IV

B The answer is II, III, and IV. Workers' compensation insurance is not covered under a commercial package policy. Covered forms generally include property, general liability, crime, boiler and machinery, inland marine, commercial auto, and farm.

Doris, a widow, has asked you to look over a number of long-term care brochures she received. Which one of the following provisions will Doris probably want on a policy? A) RPL Insurance Co. states that if the insured needs help with only four of the five defined activities of daily living (ADLs), full benefits will be provided. B) PILICO material specifies that adult day care qualifies for home care level benefits. C) Marston Insurance Co. will cover any level of benefits following one week of hospitalization and/or skilled nursing care. D) Home care provided by family members is excluded by Ins. Co. of Rock Wells.

B The answer is PILICO material specifies that adult day care qualifies for home care level benefits. Adult day care is an addition that enhances the flexibility of available benefits and expand the number of options for care.

(Case Study Question) According to CFP Board's Code and Standards, which one of the following is not expected to be disclosed in writing to the Brewsters at the time you establish a client-planner relationship with them? A) A statement as to the method of your compensation B) A statement of all sources of income for the CFP® certificant C) Resumes of principals and employees of a firm who are likely to provide financial planning services to the client D) A statement of the basic philosophy of the CFP® certificant (or firm) in working with clients

B The answer is a statement of all sources of income for the CFP® certificant. As a CFP® certificant, you are expected to provide a substantial amount of information to clients; however, all sources of income are not relevant to the relationship. A planner receiving dividends or interest, alimony or child support payments, is under no obligation to disclose that information to clients. A statement of compensation related to the planning practice is appropriate and expected.

Identify the CORRECT statements regarding the income tax treatment of policy loans from modified endowment contracts (MECs). They are subject to last-in, first-out (LIFO) tax treatment. They may be subject to a 10% income tax penalty if the policyowner is younger than 59½ years. A) I only B) Both I and II C) II only D) Neither I nor II

B The answer is both I and II. Both of these statements are correct.

Choose the type of life insurance policy that is commonly used in buy-sell or business continuation agreements to provide liquidity for one owner to buy out the family of the second owner. A) Adjustable life B) First-to-die life C) Endowment life D) Survivorship or second-to-die life

B The answer is first-to-die life. First-to-die life may be structured to pay out at the death of the first spouse or individual to die. This arrangement is commonly used in a buy-sell or business continuation agreement to provide liquidity for one owner to buy out the family of the second owner.

Agents operating under the American agency system who represent several insurance companies and decide on a case-by-case basis where they will place business are also known as which type of insurance producer? A) Brokers B) Independent agents C) Career agents D) Captive agents

B The answer is independent agents. The phrasing in the questions defines independent agents who, ideally, base their decision on where to place business on the needs of the client and the suitability of the insurance company.

Carl and Jeri signed a contract for Jeri to provide certain consulting services for Carl's business. Six months later, Jeri realized that Carl had intentionally failed to tell her about some significant conflicts that would arise if she carried out the terms of the contract. What concept, doctrine, or remedy is likely to be used to correct the problem? A) Remedy of reformation B) Remedy of rescission C) Doctrine of estoppel D) Doctrine of specific performance

B The answer is remedy of rescission. There was misrepresentation in the negotiation of the contract. The doctrine of estoppel applies when an insurer voluntarily gives up one or more of its rights upon issuance of a policy, and the applicant relies on statements made by the insurer or agent. The doctrine of specific performance is a remedy where an individual uses the courts to force the other party to a contract to carry out his/her part of the agreement. Remedy of reformation is used where the parties agree that the contract needs to be rewritten to reflect their understanding of the agreed-upon terms.

Your client decides to take a road trip to Yellowstone National Park. The weather forecast is unfavorable, but they are willing to go anyway. To hedge their bets, they increase their auto policy coverage before leaving and also increase their deductible to keep the premiums affordable. In addition, they outfit their car with new lights and snow tires. Which risk management techniques are being demonstrated? A) Risk retention, risk reduction, risk acceptance B) Risk retention, risk reduction, risk transfer C) Risk reduction, risk retention, risk avoidance D) Risk transfer, risk reduction, risk avoidance

B The answer is risk retention, risk reduction, and risk transfer. The client is transferring their risk to the insurance company through their auto policy. They are also retaining some of the risk by opting for a higher deductible. Lastly, they are reducing their risk by outfitting their care with new lights and snow tires.

All of these are eligibility requirements for Veterans Benefits except A) service in the active military, naval, or air service and not have received a dishonorable discharge. B) a veteran's current health insurance coverage (regardless of type) can affect their ability to receive VA health care benefits. C) active-duty for training purposes does not qualify for VA health benefits. D) 24 months of continuous service must be satisfied, or the full period for which you were called to active duty.

B The correct answer is "A veteran's current health insurance coverage (regardless of type) can affect their ability to receive VA health care benefits." This statement is false. A veteran's current health insurance coverage (regardless of type) does not affect their ability to receive VA health care benefits now or in the future. All other statements are true.

Your client is invested in a registered indexed-linked annuity (RILA). The RILA contains a 7% buffer, an 80% participation rate, and an overall cap rate of 10%. Suppose in years one and two, the S&P-500 returns 14% and -10%, respectively. What interest rate would be credited to the RILA during these two years? A) Year 1: 11.2% / Year 2: -7% B) Year 1: 10% / Year 2: -3% C) Year 1: 11.2% / Year 2: -3% D) Year 1: 10% / Year 2: -7%

B The correct answer is Year 1: 10% / Year 2: -3%. In year one, the S&P-500 returns 14%, but the RILA contains an 80% participation rate and 10% overall cap rate. This limits the investor to a 10% return (14% x .8 = 11.2%, but limited to a 10% cap rate). In year two, the S&P-500 returns -10%, but the RILA contains a 7% buffer. This limits the investor to a maximum loss of -3%; only losses in excess of the 7% buffer are incurred.

What is one characteristic of an insurance contract? A) The insured has the right to change policy provisions unilaterally. B) The insured must meet certain conditions to collect for losses. C) The insurer and the insured exchange amounts of equal value. D) The insurer receives the benefit of the doubt in interpretations of ambiguity in the contract.

B The insured must meet certain conditions to collect for losses.

Which of the following is NOT one of the eight general exclusions that apply to all standard homeowners policies? A) War B) Vandalism C) Earth movement D) Neglect

B Vandalism is one of the 12 basic coverages provided by standard policies. It is not an exclusion.

For which of the following articles are floater policies generally available? Professional-quality camera and all lenses taken on a trip to Europe DVD player and 100 DVDs taken on a summer road trip Motorboat Appraised artwork moving between summer and winter residences A) I, III, and IV B) I, II, and IV C) I and IV D) III only

C Because a DVD player and DVDs are not high-value items, they are most likely covered under the personal property section of the homeowners policy or auto coverage, not under separate floaters. The camera and artwork need to be insured. Motorized boats need their own policy, and while they float, they aren't covered under this coverage.

Which one of the following is NOT an element of an insurable risk? A) The loss must not be catastrophic to the insurer. B) The loss must be unexpected or due to an accident. C) The loss must only be accidental in nature. D) The loss must be clear and have a measurable dollar value.

C For a risk to be insurable, the loss must be accidental or fortuitious.

Which one of the following statements regarding Medicare is CORRECT? A) Medicare is the single largest resource for individuals who need long-term care. B) Medicare is a federally initiated program, but it is mostly administered, and at least partially funded, at the state level. C) Individuals who have end-stage renal (kidney) disease are eligible for Medicare regardless of their age. D) The Affordable Care Act (ACA) removed underwriting requirements and preexisting conditions from Medicare eligibility requirements.

C Individuals who have end-stage renal disease are eligible for Medicare regardless of their age. Medicare is a federal health care program for persons age 65 or older, certain disabled persons who qualify for Social Security Disability Insurance (SSDI) after 24 months, and anyone who has end-stage renal (kidney) disease.

Which of the following regarding fixed deferred annuities is NOT true? A) They carry excess current rates. B) They carry basic guarantee rates. C) They require initial premiums in excess of $10,000. D) Tax on accumulated interest is deferred until withdrawal.

C Initial premiums may be as low as $500-$1,000 for qualified accounts and $1,000-$5,000 for nonqualified accounts. Some annuities require higher premiums (some allow for even lower premiums).

Which of the following statements regarding health insurance under the Affordable Care Act (ACA) since the passage of the 2017 tax reform bill are true? The individual mandate has been repealed. The employer mandate is not being enforced. Plans need to provide the essential benefits the ACA mandated. Subsidies for lower-income families remain available. A) I, II, III, and IV B) I and IV C) I, III, and IV D) II and III

C Statement II is incorrect. The ACA employer mandate remains in effect and is currently being enforced.

The actual cash value (ACV) of a property loss is generally A) the face value of the policy less the property's replacement cost. B) more favorable than replacement cost. C) less favorable than replacement cost. D) the fair market value of the property less depreciation.

C The actual cash value (ACV), used with property losses, is the property's replacement cost less depreciation. It is generally less favorable than replacement cost value because the former pays for the full replacement cost whereas the latter only pays for the depreciated value.

Your client has a variable universal life policy with a cash value of $150,000. Their basis in the account is $70,000 and they have utilized a loan equal to 80% of the cash value. The loan has yet to be repaid, they are in the 22% marginal tax bracket, and the policy also contains a 10% surrender charge equal to the gross cash value of the policy. The policy unfortunately lapses. What is the net effect for your client? A) $15,000 net surrender cash value with $17,600 in long-term capital gains taxes due B) $30,000 net surrender cash value with $3,300 in ordinary income taxes due C) $15,000 net surrender cash value with $17,600 in ordinary income taxes due D) $30,000 net surrender cash value with $17,600 in short-term capital gains taxes due

C The answer is $15,000 net surrender cash value with $17,600 in ordinary income taxes due. Short-term and long-term capital gains do not apply to the growth portion of cash value life insurance. The net surrender cash value is calculated as follows: $150,000 - ($150,000 × .8) - ($150,000 × .1) = $15,000. The tax impact is calculated as follows: ($150,000 - $70,000) × .22 = $17,600. Note that loans and surrender charges do not reduce the gross value of the cash value policy for tax calculation purposes.

Stan and Sarah Straus want to make sure they will have enough funds available to send their daughter Hannah to college. Hannah is six years old and will begin a four-year college program at age 18. The annual tuition today is $8,200. Stan and Sarah estimate that the annual inflation rate for college tuition will be 6% and that they can get an 8% after-tax return on their money. If Stan or Sarah were to die today, what would be the amount of insurance needed to provide for Hannah's education? A) $25,018 B) $64,189 C) $25,490 D) $26,210

C The answer is $25,490. This is calculated by inflating the $8,200 at 6% for 12 years = $16,500. Then calculate the PV∆ (BEG) for four years using the inflated cost and the inflation-adjusted interest rate = $64,189. Finally, calculate the PV of that number discounted at the after-tax rate of return for 12 years = $25,490. The formula to determine the correct interest rate to use in the second step is: 1 plus the rate of return, divided by 1 plus the rate of inflation, minus 1, times 100 (1.08/1.06 - 1 × 100 = 1.8868). Step 1: 12 [N]; 6 [I/YR]; 8,200 [PV]; [FV] = 16,500 Step 2: 4 [N], 1.8868 [I/YR]; 16,500 [PMT]; 0 [FV]; [PV] (PV∆) = 64,189 Step 3: 12 [N]; 8 [I/YR]; 0 [PMT]; 64,189 [FV]; [PV] = 25,490

(Case Study Question) During 2022, Vic's mother Rose passed away. At that time, Vic discovered that she had a nonqualified variable annuity consisting of an initial investment of $50,000 made in 2001. The current value of the annuity is $126,000, and Vic is the sole primary beneficiary. If Vic chooses to take the entire $126,000 in a lump-sum distribution to help refinance the Brewsters' mortgage, what would be the tax consequence? A) $76,000 long-term capital gain B) $126,000 ordinary income C) $76,000 ordinary income D) $76,000 ordinary income plus a 10% penalty

C The answer is $76,000 ordinary income. Any payments, including death distributions, from a nonqualified annuity are taxed as ordinary income excluding the basis of the contract. The 10% penalty would not be applicable because the distribution was made as a result of a death.

Which of the following statements regarding disability insurance policies is CORRECT? An own occupation definition of disability may allow the insured to receive benefits, even if the insured can work in another occupation. Under a residual disability income benefit, the benefit paid is based on percentage of lost income. The insurance company can increase future premiums on a noncancelable disability policy. An own occupation disability policy is the least expensive. A) IV only B) I, II, III, and IV C) I and II D) I, II, and III

C The answer is I and II. The insurance company cannot raise premiums on a noncancelable disability policy. An own occupation (own occ) disability policy is the most expensive

Which of the following are duties of the courts in regulating insurers? To render decisions on the meaning of policy terms To enact laws that govern the conduct of insurers To rule on the constitutionality of insurance laws To determine requirements an insurer must meet to obtain a license A) II and IV B) I and IV C) I and III D) III and IV

C The answer is I and III. The courts render decisions on the meaning of policy terms and rule on the constitutionality of insurance laws. The state legislature completes the remaining two duties: enacts laws and may establish requirements that an insurer must meet to obtain a license to do business in that state.

Which of the following coverages are included in the standard personal auto policy (PAP)? Liability Damage to your auto Loss of use Underinsured motorist A) II and III B) II and IV C) I, II, and IV D) I and III

C The answer is I, II, and IV. Loss of use is a homeowners coverage, but liability, auto damage, and underinsured motorist coverages are included in the PAP. For an extra premium, a personal auto policy may provide rental reimbursement for loss of use.

Which of the following criteria may be used to classify annuities? The method by which values accumulate The gender and age of the annuitant When payments are to commence The method of premium payment A) II, III, and IV B) I, II, and IV C) I, III, and IV D) I and II

C The answer is I, III, and IV. Option II is incorrect because gender and age have nothing to do with annuity classification.

Which of the following statements regarding group disability income contracts is CORRECT? A group plan is sometimes broader than an individual plan and is usually less expensive. Short-term disability provides coverage for only up to six months. Long-term disability provides coverage until an employee's normal retirement age (usually age 65), until death, or for a specified term longer than two years. Many employers offer group long-term disability insurance with premiums generally paid for by the employee. A) I, II, and IV B) II and III C) I, III, and IV D) IV only

C The answer is I, III, and IV. Short-term disability provides coverage for up to two years (24 months).

Which of the following benefits would not create taxable income for employees, assuming that the plans are nondiscriminatory? Country club dues paid by the employer De minimis fringe benefits Qualified employee discounts Business use of an employer-owned automobile A) II and III B) I and II C) II, III, and IV D) I, II, III, and IV

C The answer is II, III, and IV. The payment of country club dues by the employer would create taxable income. The other benefits listed are excludible.

Steve and Amy have a son, George, who is 25 years old. Steve has an employer-provided health care plan. George has moved out of the house and is married to Susie, age 23. Susie and George recently purchased their first home and live by themselves in the suburbs. Which of the following statements is CORRECT? Because George has moved out of the house and is married, he can no longer be covered by his father's health insurance plan. Because George is over 19 years old and not a student, he can no longer be covered by his father's health insurance plan. Steve can cover George on his health plan until George is age 26. Steve can cover Susie on his health plan until she is age 26. A) I and II B) I only C) III only D) I, II, and III

C The answer is III only. The 2010 Health Care Reform Legislation provides that plans covering dependents must allow coverage for adult children until age 26. The child need not live at home or be claimed as a dependent for income tax purposes. The child may be married, but coverage does not extend to the child's spouse or children.

Because Paul has a pickup truck, some friends have asked him to help move into their new apartment. Ryan, one of his friends, is in the back of the truck unloading furniture and slips and falls, breaking his arm. Which coverage of a personal auto policy (PAP) would cover the cost of Ryan's subsequent emergency room bill? A) Collision B) Liability C) Medical Payments D) Comprehensive

C The answer is Medical Payments. Medical Payments coverage is designed for just such a situation. It pays claims for people in, on, entering, or alighting a vehicle - whether by intention or accident. So, Paul's PAP would cover Ryan's emergency room bill up to the policy limit.

Which of the following statements regarding Medigap insurance policies is NOT correct? A) Medigap policies were standardized by Health Insurance Portability and Accountability Act (HIPAA) legislation. B) Medigap policies must accept all applicants who apply within the first six months of qualifying for Medicare. C) Medigap Policy A is the most expensive and most comprehensive form of coverage. D) Seniors may be sold only one Medigap Policy at a time.

C The answer is Medigap Policy A is the most expensive and most comprehensive form of coverage. Medigap Policy A is the least expensive and least comprehensive form of Medigap coverage.

Which of the following statements regarding Section 125 cafeteria plans is CORRECT? Section 125 plans are most appropriate to implement when the employee benefit needs vary within the employee group. Highly compensated employees may lose the tax-free nature of included benefits if the plan is deemed to be discriminatory. A) Neither I nor II B) I only C) Both I and II D) II only

C The answer is both I and II. Both statements I and II are correct.

Which one of the following correctly matches a legal term to an example of the term? A) Absolute liability: assault B) Negligence: battery C) Intentional tort: libel D) Strict liability: arson

C The answer is intentional tort: libel. Libel is an example of an intentional tort. Battery is an intentional act and would not constitute negligence. Arson is an example of a criminal act, not strict liability. Assault is an example of an intentional tort, not absolute liability.

Which one of the following statements about the National Association of Insurance Commissioners' (NAIC's) accreditation program is incorrect? A) If all states become accredited by the NAIC, it will make a good argument for Congress leaving regulation of the insurance industry to the states. B) The purpose of the NAIC is to increase the reliability of its oversight of insurance companies. C) It is the goal of the NAIC to transfer regulation of the insurance industry to the federal government. D) States may achieve accreditation by enacting the NAIC's model laws.

C The answer is it is the goal of the NAIC to transfer regulation of the insurance industry to the federal government. The NAIC's goal is the exact opposite. States may achieve accreditation by enacting the NAIC's model laws. If all states become accredited by the NAIC, it will make a good argument for Congress leaving regulation of the insurance industry to the states. The purpose of the NAIC's accreditation program is to increase the reliability of its oversight of insurance companies.

Assume you have a client who has already purchased a whole life insurance policy. Identify the dividend option that should be chosen if the client wants to use the dividend to purchase additional temporary insurance equal to the policy's current net cash value. A) Extended term life insurance B) Interest only C) One-year term life insurance (or fifth dividend option) D) Accumulate at interest

C The answer is one-year term life insurance (or fifth dividend option). The one-year term life insurance (or fifth dividend) option pays a death benefit equal to the guaranteed net cash value (which is typically increasing annually). Extended term life insurance is a nonforfeiture option and interest only is a settlement option. Accumulate at interest is a dividend option where dividends are left with the insurance company to accumulate with interest. The amount accumulated is then added to the death benefit if the insured dies or to the cash value if the policy is surrendered.

A client wants to limit their out of pocket insurance costs and decides to install storm shutters to protect their property. They also increase their deductible. What risk management techniques are demonstrated? A) Retention and avoidance B) Reduction and avoidance C) Reduction and retention D) Transfer and avoidance

C The answer is reduction and retention. Installing storm shutters reduces the risk of damage to the homeowner's property and increasing their deductible is retention of losses.

Which of the following stipulations must be met for Medicare to cover the cost of long-term care? A) The care can be either skilled or unskilled. B) The need for care can be determined by the patient's family. C) The patient's condition must be expected to improve. D) The care can be needed either full or part time.

C The answer is the patient's condition must be expected to improve. Medicare will not cover long-term care costs if the patient's health is not expected to improve.

Which one of the following criteria must be met by a group life insurance plan to meet the nondiscrimination test? A) At least 70% of participants are not key employees. B) At least 66% of all employees benefit from the plan. C) The plan benefits a nondiscriminatory class of employees. D) Coverage for dependents is usually equal to the limits established for employees.

C The answer is the plan benefits a nondiscriminatory class of employees. The plan will meet the test if it benefits a nondiscriminatory class of employees. At least 70% of all employees benefit from the plan, and at least 85% of participants are not key employees. Coverage for dependents is usually equal to the limits established for employees.

Choose the CORRECT statement regarding Consolidated Omnibus Budget Reconciliation Act (COBRA) rules for group health plans. A) The rules apply to any employer with a health plan and more than 15 covered employees. B) The rules allow an employer to charge up to 120% of the cost of an active employee to cover administrative costs. C) The rules require the employee or dependent to notify the employer within 60 days of a qualifying event, such as a divorce. D) Continuation of coverage is automatic once a qualifying event occurs.

C The answer is the rules require the employee or dependent to notify the employer within 60 days of a qualifying event, such as a divorce. COBRA rules apply to an employer with 20 or more total (not just covered) employees. The employer can charge up to 102% (not 120%) of the cost of an active employee to cover administrative costs. Finally, the beneficiary/participant must request coverage after a qualifying event occurs because coverage is not automatic.

The disability waiver of premium rider in a life insurance policy A) allows the policyowner to receive a portion of the policy's death benefit during the insured's lifetime. B) waives the premiums only for a partial disability in most cases. C) waives the premiums only for a total disability in most cases. D) waives the premiums for either total disability or partial disability in most cases.

C The answer is waives the premiums only for a total disability in most cases. Typically, an insured needs to be totally disabled (as defined in the policy) before the rider may be used.

Which of the following regarding the life income-only annuitization option is NOT true? A) It provides income until the death of the annuitant. B) It prevents any portion of remaining proceeds from being included in the annuitant's estate. C) If the annuitant dies without having received an amount at least equal to the principal, the insurer will refund the difference to a secondary beneficiary. D) It is possible that the insurer will be required to make only a few payments.

C The life income-only option precludes refunds. A beneficiary who wants to be guaranteed a return of principal should elect the life income with refund option.

Which of the following sets regulations and enforces laws that directly regulate the insurance industry? State insurance departments State judiciaries The National Association of Insurance Commissioners (NAIC) The federal government A) II and III B) I and II C) I only D) I, II, and IV

C The state insurance department, headed by the state insurance commissioner, enforces laws passed by the state legislature. They also set regulations and make rulings that have the force of law. The judiciary interprets the laws; it does not set regulations or enforce laws. The NAIC had no regulatory powers and does not enforce laws or set regulations. The federal government may pass laws that indirectly affect the insurance industry, but setting regulations and enforcing the laws falls to the state department of insurance and commissioner.

Which one of the following statements regarding coinsurance is NOT correct? A) Coinsurance is different for health care plans than for property insurance. B) The coinsurance provision for health care plans refers to a splitting of the costs of medical care between the insurance company and the insured. C) Typical coinsurance provisions require that the plan provider pays 20% of the bills and the recipient of the care pays 80%. D) A coinsurance percentage is applied to all covered charges that are above the deductible until the maximum out-of-pocket (MOOP) limit has been reached.

C Typical coinsurance provisions require that the plan provider pays 20% of the bills and the recipient of the care pays 80%. This would be an uncommon split between providers and recipients, though in some plans an 80/20 split can be found where the insurer pays 80% of the coinsurance split amount. Although the most common coinsurance split is 80% paid by provider and 20% paid by participant, some plans may have 70/30 or 60/40 splits

Which of the following statements is true regarding insurance regulation? A) Individual states and the Supreme Court work together to regulate the insurance industry. B) The federal government oversees the insurance industry regulation, followed by individual states. C) The National Association of Insurance Commissioners (NAIC) proposes model legislation that states can then adopt or modify to their needs. D) The National Association of Insurance Commissioners (NAIC) proposes model legislation that is then adopted by all states.

C Under the McCarran-Ferguson Act of 1945, insurance is regulated primarily at the state level. The NAIC issues model insurance legislation that the individual states are free to adopt if they choose, but the NAIC has no legislative authority in any state.

Bennie and Jackie want to purchase life insurance policies that feature flexible premium payments and that will allow them to invest the cash value in various subaccounts. Identify the type of life insurance that will best meet the couple's objectives. A) Whole life B) Universal life (UL) C) Variable universal life (VUL) D) Variable life

C VUL policies have the features that will meet Bennie and Jackie's needs because they allow flexible premium payments and the ability to invest the cash value in subaccounts. None of the other choices provide this combination of features.

The Health Insurance Portability and Accountability Act (HIPAA) includes all of the following as activities of daily living (ADLs) as benefit triggers, except A) dressing. B) bathing. C) eating. D) hearing.

D Hearing is not included as one of the Health Insurance Portability and Accountability Act's (HIPAA's) six ADLs. The six ADLs are dressing, eating, bathing, transferring (getting from bed to chair), toileting, and maintaining continence.

You have a meeting with Oscar, age 26, and his wife Judith, age 25, this afternoon to review their risk management plan. They have two children, two cars, a home, and a boat. Oscar works at the local bank, and Judith works at an engineering firm. Identify the CORRECT statement(s) regarding their risk management plan. They have a limited amount of liability exposure. They have a higher probability of becoming disabled versus experiencing premature death. Having collision insurance on their cars is more important than liability coverage. Long-term care insurance should not be a current priority within their risk management plan. A) I, II, and III B) IV only C) II, III, and IV D) II and IV

D Oscar and Judith have unlimited liability exposure. A car accident could lead to an unlimited amount of liability depending on the circumstances, as well as the possibility of negligence occurring on their property. There is a higher probability of becoming disabled than of experiencing premature death at their ages, and it is much more important to have liability insurance on a vehicle than collision coverage. Liability claims may be much higher than any type of collision damage to a vehicle. Both Oscar and Judith are too young to consider long-term care insurance at this time.

(Case Study Question) Select the statement(s) that accurately describe(s) the Brewsters' current risk management plan. They have inadequate life insurance. The Brewsters' home would be covered for smoke damage. If Vic becomes disabled, he will be taxed on his monthly benefit. The Brewsters' home would not be covered for damage due to windstorms and hail. A) II only B) I, II, and IV C) I, III, and IV D) I and II

D The amount of life insurance Vic currently has is inadequate. Vic is the sole income provider for his wife and children along with being responsible for a home mortgage. At the very minimum, he would need enough life insurance to cover the mortgage. Tiffany currently does not have any life insurance. Vic's disability income monthly benefit would be received income tax free. The Brewsters have an HO3 homeowners insurance policy, which covers the perils of smoke, and windstorms and hail.

(Case Study Question) Vic's son Andrew had an unexpected injury resulting in a $2,500 hospital bill. Calculate the amount of the bill Vic's medical plan will cover. A) $2,500 B) $600 C) $2,300 D) $1,600

D The answer is $1,600. Vic's medical plan will pay a total of $1,600. This is calculated as follows: $2,500 - $500 deductible = $2,000 × 0.80 coinsurance = $1,600

Anya has a major medical insurance policy with a $500 deductible and an 80% coinsurance clause. She becomes ill and is admitted to the hospital for several days. When she is discharged, her hospital bill is $7,500 and her doctor bills are $3,250. Calculate the amount Anya's insurance will pay. A) $9,250 B) $10,250 C) $7,000 D) $8,200

D The answer is $8,200. The answer is calculated as follows: Total loss:$10,750 ($7,500 + $3,250)Deductible: −500 Equals$10,250Less 20% −2,050 Insurance $8,200

The one rating company that rates only insurance companies is A) Standard & Poor's Rating Services. B) Moody's Investors Service. C) Weiss Research. D) A.M. Best Company.

D The answer is A.M. Best Company. The A.M. Best Company is the only rating company that rates only insurance companies.

Cindy, age 62, owns a modified endowment contract (MEC). Her basis in the policy is $50,000, and the cash value is $75,000. This year, she takes out a policy loan of $20,000. Which of the following statements regarding the income tax consequences of this loan is CORRECT? A) Cindy must include $20,000 in her gross income; the $20,000 is also subject to a 10% penalty. B) Cindy incurs no income tax consequences as a result of the loan. C) Cindy must include $25,000 in her gross income; the $25,000 is also subject to a 10% penalty. D) Cindy must include $20,000 in her gross income, but the 10% penalty does not apply.

D The answer is Cindy must include $20,000 in her gross income, but the 10% penalty does not apply. Loans from MECs are subject to last-in, first-out (LIFO) basis recovery. In other words, loans are considered to consist of taxable earnings until all the taxable earnings have been withdrawn. Cindy must include the entire $10,000 in her gross income. Because the contract is a MEC and Cindy is older than 59½, the taxable amount is not subject to a 10% penalty.

Which one of the following exposures may NOT be protected against with the purchase of disability income insurance? A) Joan is paying down her student loans as well as substantial outstanding balances on her credit cards. B) Steve and Carly recently purchased a house. They need both incomes to pay the mortgage payment and their other monthly bills. C) Three accountants work together in the Smith, Jones, and Swartz CPA firm. They are each responsible for a third of the overhead. D) David is unsure if he could work in another field if his skills become obsolete.

D The answer is David is unsure if he could work in another field if his skills become obsolete. While obsolescence of skills may cause a loss of income, it is not considered a disability. Skill obsolescence may in fact cause a loss of earning ability, but no disability insurance policy will cover that possibility.

Which of the following are covered under a basic Commercial General Liability (CGL) policy? Injuries to customers Injuries to employees Business auto liability A) II and III B) I, II, and III C) I and II D) I only

D The answer is I only. A basic CGL policy protects against non-auto, non-employee liability claims. While it may be possible to add coverage for employee liability and business auto liability, that is not a part of a basic CGL policy.

Which risk holds the greatest potential for financial loss for a homeowner? A) Theft of contents from the dwelling B) Loss of the dwelling and contents C) Loss of the dwelling D) A liability claim

D The answer is a liability claim. While the total loss of a dwelling and all contents could be significant, the unlimited potential of the dollar size of a liability claim holds the greatest potential for financial loss for a homeowner. For example, imagine the size of the lawsuit for a child who drowns in a homeowner's pool because it wasn't properly fenced or the total of the claims of a second story deck collapsing with 20 guests on it.

The formula to calculate the amount of life insurance needed under the capital retention method is A) simply dividing the annual need by the client's assumed rate of return. B) a three-step process similar to a college funding calculation. C) a present value of an annuity due that incorporates an inflation-adjusted rate of return. D) a simple capitalization method whereby the annual need is divided by the inflation-adjusted rate of return.

D The answer is a simple capitalization method whereby the annual need is divided by the inflation-adjusted rate of return. The capital retention calculation is a simple capitalization calculation whereby the annual need is divided by the inflation-adjusted rate of return.

(Case Study Question) Krista, Tiffany's friend, visits the Brewsters. As she is sitting at the dinner table, her chair collapses and results in her foot being broken. Choose the part(s) of the Brewsters' homeowners insurance policy that would cover Krista's broken foot. Coverage F: Medical Payments to Others Coverage E: Personal Liability A) Neither I nor II B) II only C) I only D) Both I and II

D The answer is both I and II. Coverage E protects the insured homeowner and all resident family members against liability for bodily injury and property damage that may occur on the premise. Coverage F pays necessary medical expenses of others that result from bodily injury arising out of the insured's activities, premises, or animals. Generally, Coverage F will pay up to $1,000 per person per occurrence. Coverage F will automatically pay regardless of fault. Coverage E only pays when the insured is at fault. In this case, the broken chair puts the insured at fault, and Krista may seek to be reimbursed for pain and suffering, lost wages, and medical bills.

Choose the set of provisions best describes the attributes of a whole life insurance policy. A) High cash value, single premium, policy loans taxed as ordinary income on a last-in, first-out (LIFO) basis B) Increasing death benefit, guaranteed minimum interest earnings, flexible premium C) Level death benefit, increasing premium, low cash value D) Fixed premium payments, lifetime life insurance protection, tax-deferred accumulation

D The answer is fixed premium payments, lifetime life insurance protection, and tax-deferred accumulation. A whole life insurance policy is characterized by fixed premium payments, lifetime or long-term life insurance protection, and tax- deferred accumulation.

To be eligible for long-term care benefits under Medicaid, the individual must be A) impoverished and eligible for Medicare. B) above a certain income and home equity level. C) previously confined to a hospital. D) indigent or impoverished.

D The answer is indigent or impoverished. Medicaid is a state/federal welfare program that provides benefits to those who are indigent or impoverished. Each state determines the level of income and assets that qualifies. An individual does not have to be eligible for Medicare to obtain Medicaid benefits, and there is no requirement for prior hospital confinement.

Which one of the following is a characteristic of term life insurance? A) The policy is locked into place and cannot be exchanged for another life insurance policy. B) It provides a death benefit that decreases over time. C) The policy is renewed on an annual basis. D) It covers the insured for a specified period of time.

D The answer is it covers the insured for a specified period of time. As the name implies, term life insurance covers the insured for a specified period of time or term.

(Case Study Question) Could the Brewsters set up a health savings account for the family? A) Yes, the Brewsters are eligible because the family is covered by a low deductible health plan. B) No, the Brewsters cannot set up a health savings account because only an employer can set one up. C) Yes, the Brewsters are eligible to set up a health savings account because they have children. D) No, the Brewsters are not eligible to establish a health savings account because they are not covered by a high deductible health plan.

D The answer is no, the Brewsters are not eligible to establish a health savings account because they are in a low deductible health plan. For 2022, the minimum amount the family deductible is required to be is $2,800 in order to be eligible for a health savings account. The Brewsters' family health insurance family deductible is only $1,500. The plan does not have to be sponsored by an employer.

Which one of the following dividend options purchases a small amount of additional insurance? A) Paid-up variable life B) Paid-up term life C) Cash D) Paid-up dividend additions

D The answer is paid-up dividend additions. Additional insurance is purchased with this option. This small amount is fully paid-up with no premiums due to keep it in force.

Which of the following of the statements concerning the Affordable Care Act (ACA) is incorrect? A) Lifetime limits on insurance coverage have been eliminated. B) Children may stay on their parents' group coverage until age 26. C) Coverage for certain preventive care is now mandated. D) Premiums can only be linked to gender and smoking but not health issues.

D The answer is premiums can only be linked to gender and smoking but not health issues. Under the ACA, premiums cannot be linked to gender or health issues. All of the other statements are true.

Which of the following does NOT accurately describe a valid policy replacement scenario? A) Replacing a cash value policy with a similar cash value policy usually is not advantageous. B) Replacing a cash value policy with a term policy usually is unwise. C) Replacing one term policy with another is usually the least complex of the alternatives. D) Replacing a term policy through the policy's conversion clause is usually the best and least expensive alternative.

D The answer is replacing a term policy through the policy's conversion clause is usually the best and least expensive alternative. The use of a policy's conversion clause may not be the best alternative. As stated in the module, the term company may not have the most desirable cash value policy, and costs may be higher than with another company.

Kathy purchased a disability income policy six months ago. She recently had unexpected surgery and will be disabled for at least 6 months. Her policy provides for a monthly benefit of $2,400. Kathy has been unable to work for 60 days but has received only one check for $2,400 from the insurance company. Identify the most likely reason for this payment amount. A) Kathy is considered to be 50% disabled. B) The policy has a $2,400 deductible. C) Kathy has owned the policy for less than a year. D) The policy has a 30-day elimination period.

D The answer is the policy has a 30-day elimination period. Disability income insurance policies do not have deductibles (or coinsurance provisions). If the elimination period is 30 days and Kathy is disabled for 60 days, she will have received only one monthly benefit check for $2,400.

Which of the following refers to the process of evaluating and classifying the risk level of applicants for insurance? A) Adverse selection B) Application C) Policy illustration D) Underwriting

D Underwriting is the process of evaluating and classifying the risk level of applicants for insurance. Underwriting may also help insurers control adverse selection.

Sheryl's family has a history of heart disease. She is concerned about her ability to maintain her life insurance or to purchase more in the future in the event she develops a disabling heart problem. Which of the following optional life insurance policy provisions would be appropriate to answer Sheryl's concerns? Renewability Waiver of premium Conversion Guaranteed insurability A) I and III B) I, II, and IV C) II and IV D) I, II, III, and IV

D Waiver of premium will allow Sheryl to keep the existing insurance in force if she is disabled, and the guaranteed insurability option will allow her to purchase additional insurance if she develops a heart problem. Renewability prevents the insurance company from cancelling her insurance. Conversion provisions will neither pay premiums nor allow for additional purchases, but they will allow her to convert a term policy to a permanent one before the coverage terminates.