Chapter 6: Exam

Buy-Sell agreements are used for all of the following entities, except: A) Closely held businesses B) Sole Proprietorships C) Partnerships D) Large Public Corporations

D) Large Public Corporations Public corporations are not candidates for Buy-Sell agreements. The Buy-Sell agreement is for privately-owned entities.

A partnership involving four equal partners is valued at $1,800,000. Under a Cross Purchase Plan, the amount of the policy on the life of each partner would be: A) $1,800,000 B) $150,000 C) $900,000 D) $450,000

B) $150,000 Each partner's ownership share equals $450,000, thus each partner would own a $150,000 policy on the life of each of the other three partners under a Cross Purchase Plan (3 x $150,000 = $450,000). There would be a total of 12 (4 x 3) policies (12 x $150,000 each = $1,800,000).

A partnership has 3 partners who each have an equal ownership interest in their $3,000,000 business. How many policies would have to be purchased under a traditional cross purchase buy-sell agreement plan? A) 9 B) 3 C) 1 D) 6

D) 6 There would need to be 6 policies purchased in a traditional cross purchase buy-sell agreement plan (3x2). Each partner would be acquiring a policy on the other two partners.

Examples of third-party ownership include all of the following, except: A) A viatical settlement B) A life settlement C) A buy-sell agreement D) An adjustable life policy bought by Sam on Sam

D) An adjustable life policy bought by Sam on Sam Third-party ownership is when an applicant buys a policy on someone other than themselves.

All of the following are typically what key employee life insurance proceeds are used for, except to: A) Train a replacement B) Recruit a replacement C) Hire a replacement D) Close down the business

D) Close down the business A key person life insurance policy provides the necessary funds to recruit, hire, and train a replacement employee, restore lost profits, and reassure customers that business operations will continue.

A key person is typically all of the following, except: A) Not directly involved in sales, production, or service B) Part of the management team C) More highly paid D) Respected by customers, creditors, suppliers, or vendors

A) Not directly involved in sales, production, or service Key persons are employees whose contributions have a significant impact on the revenue and profitability of the company, especially in small businesses. They are typically: part of the management team, more highly paid, respected by customers, creditors, suppliers, and vendors, and have direct responsibilities for sales, production, or service.

After the blackout period has ended, the widow or widower may receive a Social Security income benefit based on the ___________. A) PIA of the deceased spouse B) Social Security Death Benefit C) FICA taxes that are paid by the employees D) FICA taxes that are paid by employers

A) PIA of the deceased spouse The widow or widower may receive a Social Security income benefit based on the PIA of the deceased spouse.

To be considered fully insured under Social Security, a worker generally needs how many quarter credits? A) 20 B) 40 C) 80 D) 10

B) 40 To be considered fully insured, a worker generally needs 40 quarter credits (10 years of work).

Key Person Life Insurance is written for the benefit of the ______. A) Employee B) Employer C) Employee's spouse D) Employer's retirement plan

B) Employer The most valuable assets any company has are its employees. The company has the right to protect itself against loss as it would in the case of any other asset. Even though the employer has an insurable interest in the key employee, the employee must still consent to being covered.

The Social Security System is funded through: A) The U.S. Treasury B) Federal Insurance Contribution Act (FICA) taxes C) State income taxes D) Internal Revenue Service (IRS) income taxes

B) Federal Insurance Contribution Act (FICA) taxes The Social Security System Funding is provided by both employee and employer through the Federal Insurance Contributions Act (FICA) tax. The employer withholds the employee's tax and pays it along with the employer's portion. Self-employed individuals pay an amount equal to the total of an employer and employee payment.

To help protect against experiencing immediate claims, group plans have a(n) _______ period set up by the group sponsor. A) Conversion B) Probationary C) Elimination D) Open enrollment

B) Probationary A probationary period is set up to help reduce the chance of facing immediate claims.

The LMC Partnership has 3 partners and is concerned about what would happen to their $300,000 business if one of the partners should die. If they consider a buy-sell agreement, then each partner would have to buy a policy in the amount of $__________ on the other partners. A) $75,000 B) $100,000 C) $50,000 D) $150,000

C) $50,000 If there are 3 partners in a company valued at $300,000, then each would have a $100,000 interest in the company. Each partner would purchase a policy on the other partners, providing for a total of 6 policies (3x2 = 6). Each policy would be valued at $50,000 (6 x $50,000 =$300,000).

Examples of third-party ownership include all of the following, except: A) A parent buying a policy on one of their children B) A business partner buying a policy on another business partner C) A person buying a policy on themselves D) A business buying a policy on a key employee

C) A person buying a policy on themselves Third-party ownership is when an applicant buys a policy on someone other than themselves.

Each of the following pertaining to group life insurance is true, except: A) The group sponsor receives a Master Policy B) The insured receives a Certificate of Insurance C) Group members are required to prove insurability D) Group life insurance is term insurance

C) Group members are required to prove insurability The primary benefit of group coverage is that proof of insurability on the part of the group participant is not required.

Who are the parties in a third-party life insurance ownership situation? A) The insured, the insurer, and the beneficiary B) The policyowner, the insurer, and the beneficiary C) The policyowner, the insured, and the insurer D) The policyowner, the insured, and the beneficiary

C) The policyowner, the insured, and the insurer The three parties involved in third-party ownership are the policyowner, the insured, and the insurer. The beneficiary is not a party to the contract.