Exam 3 Insurance

Minerva's employer has offered to provide her with life insurance under a Sec. 162 double bonus plan. If the premium for the policy is $15,000 per year, and Minerva is in the 32% tax bracket, what will be the amount of her salary bonus this year? $15,000. $22,059. $30,000. $46,875.

$22,059.

All of the following statements concerning nonqualified deferred compensation are correct EXCEPT: An employer is permitted to discriminate in favor of key executives in offering plan benefits. A Rabbi trust provides the employee with protection against both a change in control and employer insolvency. A secular trust becomes taxable to the employee when there is no longer a substantial risk of forfeiture. Nonqualified deferred compensation is frequently used as a tool to retain key employees (golden handcuffs).

A Rabbi trust provides the employee with protection against both a change in control and employer insolvency.

Homeowners policies have limits for items such as rare coins and jewelry. Which of the following should an insured homeowner consider obtaining if they have significant investments in these items? A personal liability insurance riders. A professional liability insurance rider. A scheduled personal property endorsement. An automatic inflation adjustment endorsement.

A scheduled personal property endorsement

Homeowners policies provide coverage for losses from which of the following? Fire or other listed perils. Loss of use. Personal property. All of the above.

All of the above

In order to achieve tax deferral in a nonqualified deferred compensation arrangement, which of the following is (are) true? There must be a substantial risk of forfeiture. The arrangement must be established in such a manner as to avoid constructive receipt. The arrangement must be established in such a manner as to avoid a current economic benefit. All of the above are correct.

All of the above are correct.

Which of the following is a test to determine whether or not a life insurance contract meets the definition of a modified endowment contract (MEC)? Corridor test. 7-pay test. Both of the above. Neither of the above.

Both of the above

Which of the following clauses states that full payment of damages to structures under the homeowners policy will be made only if the insurance equals 80 or more percent of the replacement cost of the structure and is carried on the property at the time of the loss? Coinsurance clause. Inflation rider clause. Reinsurance clause. Replacement clause

Coinsurance clause.

Which of the following best describes the advantages of a split-dollar life insurance plan? It is useful for employers who wish to provide an executive with life insurance at low cost and low cash outlay for the executive. It is useful to provide protection for the business in the event of the death of a key employee. It is useful to provide funding for a cross-purchase buy-sell agreement. It is useful for employers in funding a Rabbi trust.

It is useful for employers who wish to provide an executive with life insurance at low cost and low cash outlay for the executive.

Consuelo has purchased a life insurance policy with a $1 million death benefit and named her spouse as the beneficiary. She is concerned about her spouse's spendthrift tendencies and would like to ensure that the death benefit proceeds will last throughout her spouse's lifetime. Which of the following settlement options should she select? Lump sum payment. Fixed amount. Life annuity. Joint and last survivor annuity.

Life Annuity

Karma Kamilyon has a personal auto policy (PAP) that covers the sleek new convertible she recently purchased. If Karma's convertible is damaged when she collides with a deer, which part of the auto policy will cover the damage? Part A. Part B. Part C. Part D.

Part D

Which of the following losses in not covered by a standard homeowners policy? Personal liability. Theft. Medical payments. Personal vehicle.

Personal vehicle

An owner/insured of a viatical settlement is not subject to income tax on the capital gains of the policy if: The death benefit is less than $1 million. The individual is less than 65 years of age. The individual is terminally ill. Viatical settlements are never tax-free.

The individual is terminally ill.

All of the following statements concerning whole life insurance are correct EXCEPT: The insurer retains the investment risk on a whole ordinary life policy. The premium on a limited-pay policy will be less than the premium on an ordinary (straight) life policy. Policy dividends are a non-guaranteed "return of premium." All of the above are correct.

The premium on a limited-pay policy will be less than the premium on an ordinary (straight) life policy.

Cross-purchase agreements are usually preferred from a tax planning perspective because: They permit the surviving shareholders to increase their basis in the business interest. They will never result in a transfer for value if the owner's transfer existing policies to one another. The premiums paid by each owner are tax deductible. The death benefits are taxable to the policy owner, but are then deducted as a business expense.

They permit the surviving shareholders to increase their basis in the business interest.

Which of the following statements regarding entity purchase buy-sell agreements is correct? If the business has five owners, 20 life insurance policies must be purchased. When one of the owners dies, the surviving owners will have an increased cost basis in their share of the business. When an owner dies, the death benefit received by the business is income tax-free as long as the rules of IRC Sec. 101(j) have been followed. The business entity will purchase a life insurance policy on each owner and will pay the premiums, which are tax deductible as a business expense.

When an owner dies, the death benefit received by the business is income tax-free as long as the rules of IRC Sec. 101(j) have been followed.

Alexa is a 35-year-old accountant who earns $70,000 per year. She is married and has 3 children. She expects her salary to increase at an annual rate of 5% until her retirement at age 70 and anticipates that inflation will average 3% per year. During this time period, Alexa expects to earn 6% on her investments. Alexa and her husband's income places them in the 25% average tax bracket (including state and federal), and she uses 20% of her after-tax income for personal consumption. Using the Human-Life Value Approach, how much life insurance should Alexa purchase for herself? $1,245,109. $1,059.598. $687,716. $608,926.

$1,245,109.

Bentley has paid $40,000 in premiums on a whole life policy with a $250,000 death benefit. The policyhas paid a dividend of $1,000 per year for the past 10 years. If Bentley surrenders the policy today for it's cash value of $55,000, what will be the amount of gain subject to taxation? $0. $15,000. $25,000. $55,000.

$25,000.

With regards to employer-paid group term life insurance, the employee is free from income tax liability for the first of term life insurance protection? $25,000. $50,000. $75,000. $100,000.

$50,000

The standard form of the homeowners policy Coverage C excludes which of the following? Fire and other perils. Animals, birds, and fish. Personal liability. Theft.

Animals, birds, and fish

Zuko's stereo was stolen. The stereo cost $1,500 new but has a fair market value of $750. If Zuko has a homeowners policy that covers losses for personal property for ACV, what amount is Zuko entitled to recover? $600. $750. $1,500. The current retail price for a new replacement stereo.

$750

All of the following statements concerning life insurance contracts are correct EXCEPT: (A) The assignment clause combats abuse by the insurance company stating that once a policy has been in effect for a period of time, the insurer may not cancel the policy due to a material misrepresentation or omission. (B) The suicide clause is designed to hedge against the risk that individuals with suicidal thoughts will purchase life insurance and, shortly thereafter, commit suicide. (C) Most life insurance policies provide a grace period, typically spanning one month (31 days), after the premium due date for the policy owner to pay an overdue premium. (D) All of the above are correct.

(A) The assignment clause combats abuse by the insurance company stating that once a policy has been in effect for a period of time, the insurer may not cancel the policy due to a material misrepresentation or omission.

Which of the following statements is true regarding a Section 1035 exchange of life insurance policies? If Theo enters into a 1035 exchange of his whole life policy for a variable life policy there will be no tax on the exchange and the cost basis will carry over from the old policy to the new policy. Lucas can make a 1035 exchange of a policy on his life for a policy on the life of his spouse. Apollo, who has surrendered his universal life policy, can accomplish a 1035 exchange by using the cash surrender value to purchase another life insurance policy within 60 days of surrender. Athena can exchange her annuity for a life insurance policy under a Sec. 1035 exchange.

If Theo enters into a 1035 exchange of his whole life policy for a variable life policy there will be no tax on the exchange and the cost basis will carry over from the old policy to the new policy.

Which of the following is not a category of property risk? Loss of property due to fire, wind, theft, or others hazards. Liability losses resulting from negligent use of property. Loss of value from economic obsolescence. Financial loss resulting from death or disability of a guest.

Loss of value from economic obsolescence.

Which of the following is not a type of permanent life insurance? (A) Modified Endowment Contract (MEC). (B) Universal Life Insurance. (C) Term Life Insurance. (D) Variable Life Insurance.

Term Life Insurance

All of the following statements concerning term life insurance are correct EXCEPT: (A) An individual's mortality risk affects the price of the term insurance premiums. (B) Term-insurance policies tend to be used by older individuals more frequently than younger individuals. (C) Unlike other forms of life insurance, term insurance policies do not have cash accumulation features. (D) An annual renewable term policy (ART) permits the policyholder to purchase term insurance in subsequent years without evidence of insurability.

Term-insurance policies tend to be used by older individuals more frequently than younger individuals.

Rosie, age 30, would like to purchase a life insurance policy that will accumulate a cash value which will be paid to her beneficiaries in addition to the death benefit, and that will allow her to access the cash value during her lifetime via withdrawals. Which of the following policies is most likely to meet her needs? 20-year term with a double indemnity rider. Ordinary whole life. Universal life option A. Universal life option B.

Universal life option B.

Devish has an HO3 policy with $100,000 of coverage under Coverage E, liability. He also has an umbrella liability policy for $2 million, which requires underlying liability coverage in the homeowners policy of $250,000. Devish's friend slipped on the icy steps when coming to visit and sustained serious injuries, resulting in a liability claim of $800,000. What amount will be covered by the umbrella policy? $0. $550,000. $700,000. $800,000.

$550,000

Rizzo has a replacement cost homeowners policy. The value of the home is $450,000, and he carries $350,000 worth of insurance. How much would the insurance company owe him in the event of a $100,000 loss due to fire (without regard to a deductible)? $80,000. $85,000. $97,222. $100,000.

$97,222

Benson, a financial planner, is working with his clients to determine their life insurance needs. Benson is determining the life insurance need by estimating the cash needs of the family during and after the insured's death. Some of the financial needs that Benson is considering are the payment of final expenses, medical care, and eliminating debts. Which of the following models is Benson using to determine the life insurance needs? Human-Life Value Approach. Capitalized-Earnings Approach. Needs Approach. Discretionary Cash Flow Approach.

Needs Approach

Redball Inc. would like to use key employee life insurance to provide protection in the event of the death of the owner and key employee, Red Baldwin. Which of the following is correct regarding the key employee insurance? Redball, Inc. will own a policy on Red's life and pay the premiums on the policy, and Red's spouse will be the beneficiary of the policy. Red will own a policy on his own life and Redball, Inc. will pay the premiums and be the beneficiary of the policy. Redball, Inc. will be the policy owner, premium payer, and beneficiary of a policy on Red's life. Red will own the policy on his own life, Redball, Inc. will pay the premium, and Red's spouse will be the beneficiary of the policy.

Redball, Inc. will be the policy owner, premium payer, and beneficiary of a policy on Red's life.