Chapter 6: Markets and Social Security
With a Contributory Group Life Plan, what percentage of the employees must participate? A At least 50% B A full 100% C At least 60% D At least 75%
A Contributory Plan is one in which the participants pay all or a portion of the premiums. The high enrollment percentage, 75%, helps to minimize the risk of adverse selection.
All are correct statements concerning noncontributory group life, except: A Premiums are calculated by underwriting each individual in the group B Only the plan sponsor is responsible for paying premiums C The Conversion Period is 31 days D If employer-sponsored, an employee must work a minimum number of hours per week to be eligible
A: Since no proof of insurability is required on the part of the plan participants, the insurer looks at the group collectively, factoring a number of variables.
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 $150,000 B $50,000 C $75,000 D $100,000
A: 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)
The Social Security Survivor Benefit covers children to age ______ and may continue coverage to age ______ if enrolled in an accredited elementary or secondary school. A 18/19 B 21/26 C 19/21 D 20/21
A: 18/19 Children are covered to age 18 and may continue coverage to age 19 if enrolled in an accredited elementary or secondary school.
Social Security Retirement Benefits are available as early as age _______ but are less than if paid at the full retirement age. A: 62 B: 65 C: 63 D: 64
A: 62 Social Security Retirement Benefits start as early as age 62, but at a reduced amount.
Group Life Insurance is usually written as: A Annual Renewable Term B Increasing Term C Decreasing Term D Contributory Term
A: Annual Renewable Term Group Insurance is usually written as annual renewable term so that, based on a number of factors, the insurer may change the rate or the employer may change the plan.
________ Insured under Social Security means that a worker has at least 6 work credits during the 13-quarter period ending with the quarter in which the worker dies, becomes disabled, or reaches retirement age. A Currently B Not C Fully D Partially
A: Currently Currently Insured under Social Security means a worker has at least 6 work credits during the 13-quarter period ending with the quarter in which the worker dies, becomes disabled, or reaches retirement age.
The Social Security System is funded through: A Federal Insurance Contribution Act (FICA) taxes B The U.S. Treasury C Internal Revenue Service (IRS) income taxes D State income taxes
A: 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.
A buy-sell agreement can be used in all of the following businesses, except: A Large publicly held corporations B A sole proprietorship C Closed corporation stockholders D A partnership
A: Large publicly held corporations A buy-sell agreement may be used with a sole proprietorship, a partnership, or with stockholders of a closed corporation.
Which of the following is NOT true regarding a group insurance plan? A Proof of insurability is required to be eligible B Premiums are determined based on the underwriting of the group as a whole C Group coverage is often available for dependents and eligible employees D The employer chooses the coverage
A: Proof of insurability is usually not required under a group plan.
An individual can make changes to their group life insurance plan at any time for any one of the following reasons, except: A Change in employment status such as going to or from part-time to full-time B Changing health insurance carriers and deductibles C Adding an eligible dependent D Getting married
An individual can make changes at any time if they have a change in status, such as adding an eligible dependent or change in employment status such as going to or from full time to part time employment.
To be fully insured for Social Security, generally a person must have worked and paid into the Social Security system for a minimum of ______ years. A:30 B: 10 C: 20 D: 40
B: 10 To be fully insured for Social Security, the requirement is to accumulate 40 credits or 10 years of work paying social security taxes. A maximum of four credits may be earned in one calendar year of employment.
The widow or widower's Social Security blackout period lasts until a surviving, non-remarried spouse reaches age ________. A: 62 B: 60 C: 65 D: 50
B: 60 The blackout period ends at age 60.
A(n)__________ plan is when business partners buy life insurance policies on one another. A Partnership B Cross Purchase C Entity D Industrial
B: Cross Purchase A cross purchase plan calls for the partners to buy life insurance policies on one another. An entity plan has the business entity buy life insurance plans on the business owners.
Proceeds from a buy-sell agreement are received ___________. A Taxed to the extent that the amount exceeds $50,000 B Income tax free C Only after the deceased's estate is settled and a proper valuation of their share of the business D Taxable as income
B: Income tax free The premiums payable for a buy-sell agreement are not tax deductible, therefore the benefit is received income tax free.
In those instances in which the death of a valued employee could cause financial hardship for a company, the company might acquire additional funds through which type of coverage? A Preferred Insured B Key Person C Business Reimbursement D Employer-Employee Cross Purchase
B: Key Person The business would likely purchase a Key Person (Key Employee) Policy on the life of the valued employee to offset the expenses and financial losses due to the death of that employee.
When an insurer wishes to implement changes to a group life policy, whom must it notify? A The beneficiaries B The group sponsor C Each participant individually D Management only
B: The Group Sponsor Just as in individual contracts, the owner controls the policy. In this case, only the plan sponsor has a policy (i.e. the Master Policy). As such, the insurer must notify the group sponsor of the changes.
The Social Security Death Benefit is payable to the ____________. A The estate of the insured B The surviving spouse C The named beneficiary D The next of kin
B: The Social Security Death Benefit is payable to the surviving spouse or minor children if they meet certain requirements.
Which of the following concerning Noncontributory Group Life insurance is FALSE? A 100% participation is required B The employee pays none of the premium C An employer pays 75% of the premium D No evidence of insurability is required on the part of the participant
C: An employer pays 75% of the premium To minimize the effects of adverse selection, a noncontributory group life policy must cover 100% of the eligible employees. The employer pays 100% of the premium.
After the blackout period has ended, the widow or widower may receive a Social Security income benefit based on the ___________. A Social Security Death Benefit B FICA taxes that are paid by employers C PIA of the deceased spouse D FICA taxes that are paid by the employees
C: PIA of the deceased spouse The widow or widower may receive a Social Security income benefit based on the PIA of the deceased spouse.
Under Social Security, a worker needs 10 years of work to be considered ________ insured. A Over B Currently C Partially D Fully
D: Fully To be considered fully insured, a worker generally needs 10 years of work (40 credits).
Each of the following pertaining to group life insurance is true, except: A Group life insurance is term insurance B The insured receives a Certificate of Insurance C The group sponsor receives a Master Policy D Group members are required to prove insurability
D: 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.
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 $450,000 B $150,000 C $1,800,000 D $900,000
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 grandparent purchases a life insurance policy on their granddaughter. This is an example of _________. A Wealth Transfer B Key Person Insurance C Two-Party Ownership D Third-Party Ownership
If someone other than the insured is the policyowner, this is referred to as third-party ownership.
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 $100,000 B $150,000 C $50,000 D $75,000
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).
In which market are Certificates of Insurance issued to insured individuals? A Group B Industrial C Franchise D Individual
In the group market, no individual policies are issued. The employer receives the Master Contract and the employees or members receive Certificates of Insurance.
All of the following are correct regarding Key Employee Life Insurance, except: A Premiums are deducted from the employee's salary B The beneficiary (the employer) typically receives the death benefit free of federal income tax C The employer has an insurable interest in the key employee D
Key Employee Life Insurance is designed to indemnify a company against the loss of a key employee. The employer has an insurable interest in the key employee, and is the owner, premium payor and beneficiary. The premiums are not tax deductible, and the death benefit is federal income tax free.
Group life insurance is a contract between what parties? A The sponsor and the insurer B The insurer and the insured's beneficiaries C The sponsor and the insureds D The insureds and the insurer
Only the plan sponsor receives a policy, the Master Policy from the insurer, which are the two parties to the contract.
Generally, children receive Social Security Survivor Benefits until age ________. A: 18 B: 17 C: 15 D: 16
A: 18 Children generally receive benefits up to age 18. They may receive benefits up to age 19 only if they are still in school
All of the following are correct regarding Key Person Insurance, except: A The policy is the source of funds to replace any lost revenue due to the death of the employee B The policy primarily insures the employee's retirement plan C The policy can be term or permanent D The policy is owned by the employer
B: A Key Person Plan is intended to help a company recover from the loss of a key employee until a replacement is found.
How is the funding for Social Security provided? A Through the PIA B Through FICA taxes that are paid by both employers and employees C Through FICA taxes that are paid by employees D Through FICA taxes that are paid by employers
Both the employer and employee fund Social Security through paying FICA taxes. Self-employed persons pay the entire amount.
All of the following are typically what key employee life insurance proceeds are used for, except to: A Recruit a replacement B Train 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.
After the blackout period has ended, the widow or widower may receive a Social Security income benefit based on the ___________. A Social Security Death Benefit B FICA taxes that are paid by the employees C FICA taxes that are paid by employers D PIA of the deceased spouse
D: PIA OF DECEASED SPOUSE The widow or widower may receive a Social Security income benefit based on the PIA of the deceased spouse.
The 31 days in which the employee may change his/her group policy to an individual policy upon termination and without evidence of insurability, is known as: A Ownership Rights Provision B The Contestable Period C Change of Policy Provision D The Conversion Period
D: The Conversion Period As the name implies, the Conversion Period is the period in which an employee may convert the group term death benefit to an individual permanent policy upon termination and without evidence of insurability.
ABC Enterprises is worth $300,000. There are 3 shareholders and each shareholder is an equal owner of the company. If they establish an entity buy-sell agreement, the entity would have to buy policies in the amount of $____________ on each of the owners. A $75,000 B $150,000 C $50,000 D $100,000
If ABC Enterprises is worth $300,000 and each shareholder is an equal owner of the company, then the company would buy three $100,000 life insurance policies, one on the life of each owner. The policy would be owned by the company. The company would be named as the beneficiary. At death of one of the owners, the company would have the funds necessary to buy the deceased's stock in the company.
Buy-sell agreement life insurance premiums are: A Deductible and proceeds are income tax free B Deductible and proceeds are not income tax free C Not deductible and proceeds are income tax free D Not deductible and proceeds are not income tax free
Premiums are not deductible, and policy proceeds are received income tax-free.
Which of the following is NOT true regarding a group insurance plan? A The employer chooses the coverages B Premiums are determined based on the underwriting of the group as a whole C Group coverage is often available for dependents and eligible employees D Proof of insurability is required to be eligible
Proof of insurability is usually not required under a group plan.
Who are the parties in a third-party life insurance ownership situation? A The insured, the insurer, and the beneficiary B The policyowner, the insured, and the insurer C The policyowner, the insured, and the beneficiary D The policyowner, the insurer, and the beneficiary
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.
The underwriter's greatest concern when underwriting a group plan is ____________. A The amount of dividends that may have to be paid out B The anticipated investment returns C The overall cost of the plan D Adverse selection
The underwriter's greatest concern when underwriting a group plan is adverse selection.
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: 3 B: 6 C: 9 D: 1
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.
Which of the following meets the criterion for being a natural group for group life insurance purposes? A All members of the group live within the same zip code B The group has at least 500 members C Members of the group all have a college degree D The group was formed for a purpose other than for procuring or reducing the cost of insurance
To be eligible for a group plan, the group must be a natural group, meaning it was formed for a purpose other than for procuring or reducing the cost of insurance.
To help protect against ___________, group plans have a probationary period set by the group sponsor. A Preexisting conditions and immediate claims B Inventory shrinkage and bad hires C Lazy and unmotivated employees D High employee turnover
To help protect against preexisting conditions and immediate claims, group plans have a probationary period set by the group sponsor.
Under an Entity Purchase Plan form of a Buy-Sell Agreement, the business is all of the following, except: A Insured B Policyholder C Premium payor D Beneficiary
Under an Entity Purchase Plan form of a Buy-Sell Agreement, the business is the owner, premium payor, and beneficiary of a policy written upon each of the partners or shareholders who are the insureds.
A Social Security retirement benefit recipient will receive the greatest benefit starting at which of the following ages? A 63 1/2 B 62 C 65 D 60
The earlier retirement benefits are requested and received, the smaller they are.
Social Security pays an eligible surviving spouse (or minor child) a one-time benefit upon the death of a covered worker. Which of the following is the amount of that benefit? A $255 B $250 C $350 D $355
A one-time benefit of $255 is paid to a surviving spouse or child if he/she is eligible for Social Security benefits.
Which of the following is NOT an example of Third-Party Ownership? A A business owner buying a life policy on his own life B A policy used to fund a Buy-Sell Agreement C A Key Employee Policy D A parent purchasing a policy on the life of his or her child
A: A business owner buying a life policy on his own life is only a two-party transaction. In the majority of individual policies, the insured and the owner is the same person. Any time they differ, Third-Party Ownership exists.
Who are the parties in a third-party life insurance ownership situation? A The policyowner, the insured, and the insurer B The insured, the insurer, and the beneficiary C The policyowner, the insurer, and the beneficiary D The policyowner, the insured, and the beneficiary
A: 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.
With a Noncontributory Group Life Plan, what percentage of the employer's employees must participate? A 100% B 90% C 50% D 75%
A: 100% A Noncontributory Group Life Plan is one in which the participant does not pay premiums. State law requires that 100% of eligible employees are covered. The insurer can be certain that all employees will enroll and it will not be subject to adverse selection.
The arrangement under a Buy-Sell Agreement in which each party purchases insurance on the life of his/her partner(s) is called a: A Cross Purchase Plan B Entity Purchase Plan C Deferred Compensation D Split-Dollar Plan
A: Cross Purchase Plan is used when each party to a Buy-Sell Agreement purchases life insurance on the other(s).
When an underwriter evaluates the risks presented with a particular group life application, which of the following is considered the most important? A Group size, turnover, average age and purpose of the group B The overall health of the group C The sales volume of the employer D The plan sponsor's credit rating
A: Group size, turnover, average age and purpose of the group The cost of a typical group plan is a function of a number of variables, most notably average age and size of the group, industrial classification, financial stability of the sponsor, and claims experience if the group is of sufficient size.
All of the following are true about a buy/sell agreement, except: A It can only be funded with term life insurance B It contractually establishes a price for the business interest C It provides the funds necessary to carry out the terms of the agreement D It contractually establishes the intent to buy and sell a business interest
A: It can only be funded with term life insurance The agreement contractually establishes a price with the intent to purchase, at a predetermined value, the assets of a business should one of the contract participants predecease the other participant(s). It is funded with life insurance to assure that the funds are available to carry out the agreement, but it can be funded with permanent or term insurance.
The proceeds from a _________ plan provide the necessary funds to recruit, hire, and train a replacement employee. A Key employee B Group C Cross purchase D Entity
A: Key employee life insurance plans provide the funds to recruit, hire, and train a replacement employee.
Barry has just been hired by OPQ Corporation and finds that he cannot enroll for coverage under OPQ's group health insurance plan for 30 days. This 30-day period is known as a: A Probationary Period B Elimination Period C Deductible D Policy Period
A: Probationary Period The specified period of time set by the employer before an employee is eligible to enroll for group benefits is known as a Probationary Period. It usually is 30 days in length but could be up to 90 days.
Which of the following meets the criterion for being a natural group for group life insurance purposes? A All members of the group live within the same zip code B The group was formed for a purpose other than for procuring or reducing the cost of insurance C The group has at least 500 members D Members of the group all have a college degree
B: To be eligible for a group plan, the group must be a natural group, meaning it was formed for a purpose other than for procuring or reducing the cost of insurance.
Which of the following types of buy-sell agreements provides for a business to purchase a life insurance policy on each business partner? A Key Employee Plan B Entity Plan C Stock Redemption Agreement D Cross Purchase Plan
B: Entity Plan The Entity Buy Sell Plan is a contract in which the business entity buys a life insurance policy on each of the owners. The Cross Purchase Plan requires each business partner to purchase a policy on the other business partners. The Stock Redemption Agreement is not for business partners, but for shareholders in a closely held corporation. The Key Employee Plan is not a buy-sell agreement.
All of the following are generally the main business uses of life insurance, except: A To cover the unexpected death of a key employee B To provide funds for the deceased's heirs C To provide funds for the continuation of the business D To cover the unexpected death of a business partner
B: To provide funds for the deceased's heirs Business uses of insurance often mirror individual needs - to cover the unexpected death of business partners, executives, and key employees by providing funds for the continuation of the business, not for the heirs of the decedent.
Lorraine's position has been terminated, and she is interested in converting her group life coverage to an individual policy. In the process, she will find all of the following to be TRUE, except: A She has 31 days of eligibility to convert to the private plan without having to prove insurability B If she waits until the eligibility period has closed, the insurer may require evidence of insurability to reduce adverse selection C She will be converting her group term benefit to an individual term benefit D The premium will be higher than the group premium
C: She will be converting her group term life to an individual term benefit to an individual term benefit. ****She will be converting her group term life to an individual permanent policy.******
Which of the following is true in regard to an Entity Purchase Plan? A The entity buys life insurance on non-owner key employees B It is an incentive plan for key employees C The business enters into an agreement to purchase the deceased's interest in the business D The owners are named as beneficiaries in the policy acquired
C: The business enters into an agreement to purchase the deceased's interest in the business An entity purchase plan is one in which life insurance provides the funds necessary to buy out the business interest of the deceased.
When is an entity buy-sell agreement plan used? A When insurability is an issue B When the owners are not in the financial position to buy the policies on their own C When the entity buys life insurance on each of the owners D When the entity needs an additional tax deduction
C: When the entity buys life insurance on each of the owners Under an entity plan, a business entity enters into an agreement in which it is obligated to purchase the deceased's owner's interest. The entity typically buys life insurance policies on each of the owners and then would name itself as the beneficiary of each policy.
An employee who is covered under an employer group life insurance plan may assume all of the following are TRUE of the opportunity of conversion, except: A The policy to which the employee converts is individual permanent insurance B No proof of insurability is required C The premiums are greater than what was being paid for the group life insurance D The employee chooses which type of insurance to convert to
D: The employee chooses which type of insurance to convert it to The greatest advantage of group life conversion is that evidence of insurability is not required. The insurance company requires conversion to a permanent policy, which will be more costly.
An employee who is covered under an employer group life insurance plan may assume all of the following are TRUE of the opportunity of conversion, except: A The premiums are greater than what was being paid for the group life insurance B No proof of insurability is required C The policy to which the employee converts is individual permanent insurance D The employee chooses which type of insurance to convert to
D: The employee chooses which type of insurance to convert to The greatest advantage of group life conversion is that evidence of insurability is not required. The insurance company requires conversion to a permanent policy, which will be more costly.
A consumer should know the following aspects of a group insurance policy, except: A The plan sponsor has a say in the form and amount of coverage available to plan participants B If covered under an employer group plan, the employer can discontinue the plan at any time C At renewal, the premium can be increased, in which case it may become unaffordable D Upon separating from the group, the group life coverage is not convertible
D: Upon separating from the group, the group life coverage is not convertible There is a conversion period of 31 days in which the employee may, upon termination of eligibility and without evidence of insurability, convert their group life insurance benefit to an individual permanent policy.
All of the following are characteristics of Group Life Insurance, except: A Claims are not contestable after an employee has been covered for 2 years B Evidence of insurability is usually not required C Group is typically written utilizing Permanent Insurance D Most states require a minimum number of enrollees at date of issue
Group Insurance is typically written on a Renewable Term basis. However, some insurers do make Permanent Insurance available.
____________ individuals pay a FICA tax amount equal to the total of an employer and employee payment. A Employed B Unemployed C Part-time employed D Self-employed
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.
Harry and Sally were equal partners in a catering business worth $400,000. They entered into a buy-sell agreement that provided funding whether one of them died or was disabled. The annual premium for each of the disability insurance policies was $2,000. All of the following statements are correct, except: A Harry and Sally each own the policy on the other partner B The premiums are tax deductible C Harry and Sally are each respectively named as the beneficiary on the policy which each of them owns D Harry and Sally would receive the policy benefit, which each would use to buy out the disabled partner, on an income tax free basis
The premiums would not be deductible since the non-disabled partner would individually receive the benefit from a disability policy that he or she individually owns.
The Social Security blackout period for surviving spouses begins when the youngest child reaches age ______, and ends when the surviving spouse reaches age ______. A 18/65 B 16/62 C 16/60 D 18/60
When the youngest child reaches age 16, the widow's/widower's blackout period begins. It continues until a surviving (non-remarried) spouse reaches age 60.