FP512: Module 3

In the event of his death, Jim wants to provide funding for his daughter Lauren, 4, to attend four years of college, starting at age 18. The current annual cost of tuition is $25,000. Assume inflation of 6.5% and after-tax earnings of 6%. If Jim wants to have enough life insurance to assure adequate funds for Lauren when she begins college (should he die today), approximately how much insurance should he purchase for this need alone? (Round your answer to the nearest dollar.) A) $107,568 B) $103,417 C) $100,710 D) $108,076

A) $107,568 The solution to this requires using the three-step process used in education funding. Step 1: 14, N; 6.5 I/YR; 25,000, +/-, PV, and solve for FV = 60,371.85 Step 2: Set for BEG mode; 4, N; 1.06 / 1.065 = .9953 - 1 = -.004695 × 100 = -0.4695, I/YR; 0, FV (to clear it out), 60,371.85, +/-, PMT, and solve for PV = 243,201.44 Step 3: 14, N; 6, I/YR; 243,201.44, FV, 0, PMT (to clear it out), and solve for PV = 107,568

Which of the following dividend options may create an income tax liability for the policyowner? A) Accumulate at interest B) Paid-up additions C) Cash D) One-year term

A) Accumulate at interest While dividends are not taxable since they are considered a return of premium, interest earned on accumulated dividends may create an income tax liability to the extent the cash value and interest exceed the policyowner's basis in the policy. Cash is a return of premium and not taxed. With paid-up additions and one-year term, the dividend is effectively "spent" as it is used to acquire additional death benefit and is not taxed.

Which of the following statements regarding the misstatement of age clause in a life insurance policy is CORRECT? I. The face amount of the policy will be adjusted to the amount of insurance that the premium paid would have purchased based on the insured's correct age. II. In many cases of misstatement of age, insureds understate their age to reduce the premiums. A) Both I and II B) Neither I nor II C) II only D) I only

A) Both I and II By understating their age, insureds could reduce life insurance premiums. The misstatement of age clause provides that if a misstatement of the insured's age is discovered after the policy is issued, the insurance company can adjust the face amount of the policy to an amount that the premium would have purchased had the insured's age been stated correctly.

Which of the following statements regarding the accidental death benefit (ADB) rider is CORRECT? I. The ADB rider is no longer synonymous with the term double indemnity. II. For large amounts of life insurance, the maximum amount of ADB rider offered by an insurance company is usually substantially less than the face amount. A) Both I and II B) I only C) Neither I nor II D) II only

A) Both I and II The answer is both I and II. Both statements are true of the ADB rider.

Joint life insurance includes which type of policies? A) Both first-to-die and second-to-die policies B) Business ownership policies (BOPs) C) Second-to-die policies D) Group life policies

A) Both first-to-die and second-to-die policies Both first-to-die and second-to-die policies are joint life policies.

Which of the following statements regarding fixed annuities is CORRECT? I. The funds are held in the insurance company's general account, and the insurance company bears all of the investment risk. II. The funds are held in subaccounts, and the owner of the fixed annuity bears all of the investment risk. III. The fixed annuity is designed for a conservative investor who is more concerned with safety of principal than keeping up with inflation. A) I and III B) I and II C) II and III D) III only

A) I and III The fixed annuity pays a specified (or fixed) interest rate over a given period and provides more security of principal than a variable annuity, but it does not offer the potential for growth. The funds are held in the insurance company's general account, and the insurance company bears all of the investment risk.

Which of the following universal life options pay a level death benefit? I. Option A II. Option B A) I only B) Neither I nor II C) Both I and II D) II only

A) I only Option A pays a level death benefit. Option B provides an increasing death benefit, which is the net amount at risk plus the cash value.

Which of the following factors should be analyzed when assessing the cost of a universal life insurance policy? I. The actual interest rate credited to the policy II. The actual mortality charge assessed to the policy III. The guaranteed interest rate specified in the policy A) I, II, and III B) I and III C) II and III D) I and II

A) I, II, and III All of these factors should be analyzed when assessing the cost of a universal life insurance policy.

Universal life insurance gives policyowners the ability to adjust I. the premiums. II. the death benefit. III. the cash values. IV. the policy expenses. A) I, II, and III B) II, III, and IV C) I and III D) I and II

A) I, II, and III Universal life insurance policies allow policyowners to adjust the premiums, death benefit, and cash values. They do not allow policyowners to change the policy expenses.

Which of the following dividend options allows for acquiring additional insurance with no underwriting? A) Paid-up additions B) Cash C) Reduced premium D) Accumulate at interest

A) Paid-up additions The answer is paid-up additions. With the paid-up additions dividend option, a small amount of permanent insurance with a cash value equal to the dividend is purchased with no underwriting required. The paid-up additions and one-year term dividend options both allow the policyowner to acquire more death benefit at no additional cost, other than using the dividend instead of taking it as cash.

Which of the following life insurance policies is typically used to pay any federal estate tax obligation? A) Second-to-die life B) Endowment life C) Adjustable life D) First-to-die life

A) Second-to-die life Second-to-die life insurance is typically used to pay any federal estate tax obligation. First-to-die life is typically used to arrange buy-sell or business continuation agreements.

What is the general risk tolerance level of a client who is considering purchase of a variable universal life (VUL) insurance policy? A. Moderate to high B. Low C. Risk averse D. Low to moderate

A. Moderate to high VUL policies are best suited for clients with moderate to high risk tolerance levels. You should use risk tolerance as a guide in selecting a cash value type policy (whole life, universal, variable, or VUL) for any client.

Geraldo purchased a participating whole life insurance policy 15 years ago and now wishes to receive the policy's cash surrender value (CSV). He gives you the following information to assess the potential taxation of the surrender: CSV: $80,000 Dividends received: $12,500 Premiums paid: $60,000 What is the amount of cash value that is taxable to Geraldo and what is the character of this income? A) $0 B) $32,500 ordinary income C) $32,500 capital gain D) $40,000 ordinary income

B) $32,500 ordinary income Geraldo paid $60,000 in premiums. However, life insurance dividends are considered a return of premium, so his adjusted basis in the contract is $47,500. The current cash surrender value is $80,000. $80,000 - $47,500 = $32,500; therefore, his gain in the contract is $32,500. However, due to IRS rules, that amount will be taxed as ordinary income, not capital gain. $7,500 of his premiums paid are attributable to the cost of insurance.

Dan owns a life insurance policy on his own life. The beneficiary is his daughter, Rose. Dan unexpectedly dies, and Rose receives the death benefit in a lump-sum payment. Which of the following statements regarding the tax treatment of the death benefit is CORRECT? I. The life insurance death benefit will be included in Dan's gross estate for estate tax purposes. II. The life insurance death benefit will be included in Rose's gross income. A) Neither I nor II B) I only C) II only D) Both I and II

B) I only The life insurance death benefit will be included in Dan's gross estate because he had incidents of ownership in the policy. Generally, payments are excluded from the beneficiary's gross income.

Which of the following is an appropriate economic assumption that should be considered when evaluating a client's life insurance needs? A) The client's risk tolerance B) The inflation rate C) The client's goals D) The client's profile

B) The inflation rate The answer is the inflation rate. Inflation is a broad economic assumption that needs to be considered when evaluating a client's life insurance needs.

You have a client, Patrick, who wishes to cash surrender his existing ordinary life policy. He brings you the following nonforfeiture table included in his policy. Nonforfeiture Table (Dollar values are per $1,000 of face value) Policy Year-End | Cash Surrender Value | Reduced Paid-Up Insurance | Extended --------------------------------------------------------------------Term Insurance 1 | $0 | $0 | 0 Years 2 | $0 | $0 | 0 Years 3 | $10 | $65 | 5 Years 4 | $25 | $100 | 8 Years If Patrick bought a $200,000 ordinary life policy 3 years ago, what amount of cash value, if any, will he receive (assume he has not borrowed against the policy and the policy is not subject to surrender charges)? A. $0 B. $2,000 C. $5,000 D. $13,000

B. $2,000 Under the CSV option, Patrick would receive $2,000; ($10 × 200)

Michelle purchased a $100,000 life insurance policy on her life. To date, she has paid $50,000 in total premiums and received $10,000 in dividends. The policy currently has a net cash value of $15,000 and is subject to a $30,000 outstanding loan. If Michelle decides to surrender the policy, she will realize a gain of A) $15,000. B) $0. C) $5,000. D) $10,000.

C) $5,000. Michelle's gain upon the surrender of the policy would be $5,000. She has a basis in the policy of $10,000, calculated as follows: total premiums paid ($50,000) minus outstanding loan ($30,000) minus dividends received ($10,000) equals $10,000. Dividends received represent a return of premiums and, therefore, reduce the policyowner's basis in the policy. Michelle has a gain upon surrender of $5,000, calculated as follows: net cash value ($15,000) minus basis in policy ($10,000) equals gain upon surrender ($5,000).

Which of the following statements regarding the contestable clause of a life insurance policy is CORRECT? I. Generally, the clause prevents the insurance company from contesting the validity of the policy after it has been in force for two years. II. The validity of the contract cannot be questioned after the stated period except in limited situations. A) I only B) Neither I nor II C) Both I and II D) II only

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

Which of the following statements regarding various types of life insurance is true? I. Whole life is always more expensive than term, cash value can be used as a savings plan and accessed for emergencies, and there is low risk and low return on investments. II. Universal life has flexible premium payments, an adjustable death benefit, and an unbundled structure. It also provides access to cash values for emergencies; if inadequate deposits are made, the client will need to either increase premiums or allow the policy to lapse. III. Variable life has a guaranteed premium, guaranteed death benefit, and guaranteed cash value. The owner can choose from a number of investment options. High policy expenses may reduce the returns. IV. Term insurance does not provide cash accumulation; it provides more coverage per premium dollar than any other form of coverage. It may be too expensive for clients to retain after retirement. A) I, II, and III B) II and III C) I, II, and IV D) I and II

C) I, II, and IV The statements regarding whole life and universal life and term insurance are true. The incorrect statement is related to variable life. Variable life does have a guaranteed premium and death benefit, but it doesn't have guaranteed cash values.

All of the following factors are key considerations in determining a client's profile for life insurance purposes except A) income. B) age. C) education level. D) health.

C) education level. Age, income, and health are important factors in determining appropriate life insurance products. Though education level may affect earning capacity, it is relatively unimportant in terms of the life insurance profile.

All of the following are true for dividends left to accumulate at interest except A) they can increase the death benefit. B) they may be allowed to accumulate on a tax-deferred basis until they exceed premiums paid. C) they are taxable as earned. D) they can be used to purchase paid-up additional insurance.

C) they are taxable as earned. One of the benefits of life insurance cash values is that they grow on a tax-deferred basis, so the statement that they are taxable as earned is false.

The client is 50 years old but appears younger. She has applied for a life insurance policy that has an annual premium of $50 per $1,000 of coverage for age 50, and $30 per $1,000 of coverage for age 45. On the policy application, the client states her age as 45 and purchases a $40,000 life insurance policy, issued for someone of that age. She then dies unexpectedly one year later at her actual age of 51. What amount of death benefit will be paid to her beneficiary, assuming the insurance company discovers the misstatement of age on the application? A. $0 B. $20,000 C. $24,000 D. $40,000

C. $24,000 The insurance company will adjust the face amount of the policy to reflect the amount of insurance that could have been purchased for the correct age, calculated as follows: Total premium paid annually = $30 ($30 per $1,000 of coverage) × 40 ($40,000 of coverage) = $1,200 Premium per $1,000 of insurance for insured age 50 = $50 Face amount of policy (adjusted for correct age) = ($1,200 ÷ $50) × $1,000 = $24,000

Which of the following annuities includes a participation rate feature? A) Variable B) Single-premium C) Fixed D) Equity-indexed

D) Equity-indexed Equity-indexed annuities have participation rates that determine how much of the increase in the underlying index will be used to calculate the interest rate credited to the owner.

In calculating life insurance needs, which of the following can be defined as the present value of the family's share of the decedent breadwinner's future earnings? A) Portfolio value B) Conversion value C) Net present value D) Human life value

D) Human life value Human life value is the family's share of the earnings of the breadwinner. The projected value of the decedent breadwinner's future earnings is discounted to its present value to determine the human life value.

Which of the following is NOT a characteristic of term life insurance? A) In a decreasing term policy, the amount of the death benefit decreases while the premium remains level. B) Coverage is usually affordable (especially at younger ages). C) Most term life insurance policies permit the insured to renew the policy each year without having to provide evidence of insurability. D) Interest is accumulated on the cash value.

D) Interest is accumulated on the cash value. The answer is interest is accumulated on the cash value. Term life insurance does not have a cash value.

Whole life policy illustrations exhibit all of the following except A) guaranteed premiums. B) guaranteed death benefits. C) guaranteed cash values. D) anticipated earnings in variable subaccounts.

D) anticipated earnings in variable subaccounts. The answer is anticipated earnings in variable subaccounts. Traditional whole life policies do not contain variable subaccounts. Whole life policy illustrations exhibit guaranteed premiums, cash values, and death benefits.

All of the following statements concerning the methods of providing life insurance protection are correct except A) because death rates rise at an increasing rate as the insured ages, the net premium for term life insurance also rises at an increasing rate. B) term life insurance is a form of life insurance in which the death proceeds are payable if the insured dies during a specified period and nothing is paid if the insured survives to the end of that period. C) an insurance company can use two approaches to provide life insurance protection: term life insurance, which is temporary, or whole life insurance, which is permanent protection that builds up a cash reserve or savings component. D) term life insurance is a good choice for people who need permanent life insurance protection.

D) term life insurance is a good choice for people who need permanent life insurance protection. Term life insurance may not be appropriate for meeting a permanent life insurance need because the protection expires at the end of the term.

Claire, 49, owns a life insurance policy. Her basis in the policy is $50,000, and the cash value is $75,000. The policy is not a modified endowment contract. Claire is dissatisfied with the policy and is interested in surrendering it or exchanging it for another financial product, but she does not want to incur an income tax liability. Which of the following transactions would allow Claire to accomplish her goal? I. Surrender the policy for $75,000 in cash and purchase another policy II. Exchange the policy for another life insurance policy III. Exchange the policy for a variable annuity IV. Exchange the policy for a qualified long-term care insurance policy A) II, III, and IV B) I and III C) II and III D) II only

A) II, III, and IV Statements II, III, and IV describe transactions that can be accomplished under Section 1035 of the Internal Revenue Code without recognizing any gain or loss. Statement I (surrendering the policy for cash and purchasing another policy) would result in taxable income of $25,000.

Dawn, 55, recently received a lump sum settlement of $100,000 from a civil suit she filed against a drunk driver. She wants to invest the $100,000 in an annuity that will begin making monthly payments to her when she retires at age 65. She does not expect to make any additional premium payments to the annuity. Dawn has a high risk tolerance and wants to be able to invest her premium in subaccounts of her own choosing. She is not interested in receiving a guaranteed minimum return on her investment. Which of the following annuities best meets Dawn's needs? A) Single premium deferred variable annuity B) Flexible premium deferred equity-indexed annuity C) Fixed, single premium immediate annuity D) Flexible premium deferred variable annuity

A) Single premium deferred variable annuity Because Dawn expects to make only one premium payment and wants income payments to begin in the future, a single premium deferred annuity best meets her needs. She needs a variable annuity because neither a fixed annuity nor an equity-indexed annuity will allow her to invest in subaccounts.

All of the following are dividend options provided by a whole life insurance policy except A) life income option. B) reduce premiums. C) one-year term insurance option. D) cash option.

A) life income option. The life income option is a settlement option, not a dividend option.

The human life value method used to calculate life insurance needs A) uses an individual's income-earning ability as the basis for determining the amount of necessary life insurance. B) examines all recurring expenses and any unusual expenditures that may result from a person's death. C) applies a discount rate to a future sum (either riskless or expected investment rate of return) to determine the future value of a life. D) uses a capital retention model.

A) uses an individual's income-earning ability as the basis for determining the amount of necessary life insurance. The answer is uses an individual's income-earning ability as the basis for determining the amount of necessary life insurance. The human life value method projects the income a person will earn during her employment career and then uses a discount rate to determine the present value of those future earnings.

Jane owns an equity-indexed annuity (EIA) with a participation rate of 90%. This year, the underlying equity index increases by 10%. What is the interest that will be credited to her annuity? A. 9% B. 10% C. 11% D. 19%

A. 9% Because Jane's participation rate is 90%, she will be credited with an interest rate equal to 90% of the increase in the underlying index or 9%; (90% × 10% = 9%).

Generally, which type of annuity does NOT guarantee a specific amount of annuity payment? A. A variable annuity B. A single premium annuity C. A fixed annuity D. A nonqualified annuity

A. A variable annuity A variable annuity does not guarantee a specific annuity payment. Rather, the payment is based on the performance of the assets in which the variable annuity is invested.

Assume that you have a client who currently has a need for permanent (cash value type) life insurance but cannot afford that form of insurance. Based on the client's need, what is a reasonable recommendation? A. Convertible term life insurance B. Annual renewable term life insurance C. Reentry term life insurance D. Variable annuity

A. Convertible term life insurance If there is a need for permanent insurance, your client should purchase a form of convertible term life insurance. Convertible term allows for the exchange of the policy for permanent life policy without evidence of insurability.

What is the planning situation in which a financial planner would typically use a second-to-die life insurance policy? A. Estate planning B. College education planning C. Retirement planning D. Emergency fund planning

A. Estate planning A financial planner would typically use a second-to-die life insurance policy in the estate planning process to provide liquidity at the death of the surviving spouse.

Which exchange transaction is NOT a tax-free exchange under IRC Section 1035? A. Exchanging a variable annuity for a whole life insurance policy B. Exchanging a universal life insurance policy for a variable life insurance policy C. Exchanging a variable annuity for a qualified long-term care contract D. Exchanging a variable life insurance policy for a variable annuity

A. Exchanging a variable annuity for a whole life insurance policy Exchanging an annuity for a life insurance policy is not a tax-free exchange under Section 1035.

Mark, age 58, has a nonqualified variable annuity worth $455,000 with a cost basis of $325,000. He decides to withdraw $11,000 to pay off the balance of a credit card. What are the tax consequences of this transaction? A. Ordinary income tax and a 10% penalty on the $11,000 distribution B. Long-term capital gains tax on the $11,000, plus a 10% penalty C. Ordinary income tax on $11,000 D. Transaction considered a tax-free distribution

A. Ordinary income tax and a 10% penalty on the $11,000 distribution Mark is under the age of 591⁄2, and there is no exception for paying off credit cards, so he will pay the 10% early withdrawal penalty plus ordinary income tax on the distribution

Which of the following statements regarding policy illustrations is CORRECT? Footnotes should be evaluated as an integral part of the illustration. The guaranteed columns present a worst-case scenario because they assume the highest mortality and expense charges along with the highest interest rate. A) II only B) I only C) Both I and II D) Neither I nor II

B) I only The guaranteed columns present a worst-case scenario because they assume the highest mortality and expense charges along with the lowest, not highest, interest rate.

Which of these regarding Registered Indexed-Linked Annuities (RILAs) is true? A) From least-to-most conservative products, the ordering is RILA-floor, RILA-buffer, and then EIAs. B) From most-to-least conservative products, the ordering is RILA-floor, EIAs, and then RILA-buffer. C) From least-to-most conservative products, the ordering is RILA-buffer, RILA-floor, and then EIAs. D) From most-to-least conservative products, the ordering is EIAs, RILA-buffer, and then RILA-floor.

C) From least-to-most conservative products, the ordering is RILA-buffer, RILA-floor, and then EIAs. Equity-indexed annuities (EIAs) are the most conservative of the three indexed products in that they offer some potential for gain and no risk of loss. RILAs with a floor option enjoy more potential for gain with some risk of loss. Lastly, RILAs with a buffer offer the greatest gain and loss potential.

Which of the following is the definition of human life value in life insurance planning? A) The future value of the family's share of the deceased person's current earnings B) An individual's average earnings over the past 10 years C) The present value of the family's share of the breadwinner's future earnings D) The difference between the family's total needs at the breadwinner's death and the existing financial assets

C) The present value of the family's share of the breadwinner's future earnings A human life value is a present value amount and represents the family's share of the present value of a breadwinner's future earnings that would be lost due to death.

The client owns a UL insurance policy with the Option A death benefit on his own life. The death benefit is $375,000, and the current cash value is $75,000. If the client dies today, which death benefit will be paid to the beneficiary? A. $0, because the NAR exceeds the current cash value B. $300,000 C. $375,000 D. $450,000

C. $375,000 The death benefit under Option B of a UL policy is the NAR plus the cash value. The client's policy will pay a total death benefit of $350,000; ($275,000 + $75,000).

Which of the following term life insurance policies is designed to protect the insured's mortgage? A) Annual renewable term life insurance B) Level term life insurance C) Reentry term life insurance D) Decreasing term life insurance

D) Decreasing term life insurance Decreasing term life insurance features a level premium with a decreasing death benefit. This type of policy has been historically used as mortgage protection insurance because the decrease in policy death benefit roughly approximates the declining principal balance as mortgage payments are made by the homeowner.

Which of the following factors should be considered when utilizing the financial needs analysis method in determining the required amount of life insurance? I. The family expenses that will remain after the wage earner dies II. The value of the wage earner's life III. The income that can be generated by the surviving spouse IV. The number of dependents A) I, II, III, and IV B) I and III C) II, III, and IV D) I, III, and IV

D) I, III, and IV The value of the life lost is not considered in the needs approach. Rather, the focus is on the financial needs and remaining resources of the surviving dependents.

The final expenses of an estate include all of the following except A) expenses of last illness. B) the decedent's outstanding debts. C) burial expenses. D) the decedent's investments.

D) the decedent's investments. The decedent's investments would be considered assets, not expenses. Though disposition of these assets could possibly incur some expense, the assets themselves are not expenses.

Whole life insurance nonforfeiture options allow a policyowner to I. surrender a whole life insurance policy and receive the net cash value (cash value less any applicable surrender charges and/or outstanding policy loans). II. stop paying premiums on a whole life insurance policy and exchange the net cash value for a reduced paid-up single-premium permanent life insurance policy. III. stop paying premiums on a whole life insurance policy and use the net cash value as a single premium to purchase a paid-up term life insurance policy with a face amount equal to the face amount of the original policy for a specified period. A) III only B) II and III C) I and II D) I, II, and III

D) I, II, and III There are three common nonforfeiture options available when surrendering or discontinuing premium payments on a whole life insurance policy. Under the cash surrender value option, a policyowner can surrender the policy and receive the net cash value. By electing the reduced paid-up insurance option, a policyowner leaves the net cash value of the original life insurance policy with the company and receives a smaller amount of fully paid-up insurance of the same type. If the policyowner chooses the extended term insurance option, the net cash value is used as a net single premium to purchase a paid-up term insurance policy.

Which of the following is a dividend option? A) Reduced paid-up B) Life income C) Fixed payment D) Paid-up additions

D) Paid-up additions Using dividends to purchase small amounts of paid-up insurance is a dividend option. Reduced paid-up is a nonforfeiture option, while fixed payment and life income are settlement options.

A life insurance contract with low fixed premiums during the first three to five years and higher fixed premiums for the remainder of the policy period is called A) an increasing term policy. B) a variable life policy. C) a limited-pay whole life policy. D) a modified premium whole life policy.

D) a modified premium whole life policy. Modified premium whole life policies are designed for individuals, such as young professionals, who want permanent life insurance but are not yet able to afford the higher premiums of traditional whole life insurance. The increase to an ultimately higher premium should match an anticipated increase in the policyowner's income.

Jorge and Margarita would like to know how much life insurance they need to pay for college for their six-year-old daughter, Aida, when she is 18. Average college expenses today are $22,500 per year, and they believe these costs will increase by 5% per year. Jorge and Margarita believe they can get a 7% return on their savings. What amount should they allocate today to have enough to pay for all four years of Aida's college costs? A)$65,937 B)$69,681 C)$38,315 D)$69,777

D)$69,777 The answer is $67,777 (rounded). The following is a three-step calculation. The keystrokes for this problem are as follows: Step 1: 12, N; 5, I/YR; 22,500, +/-, PV; solve for FV = 40,406.7673 Step 2: set for BEG mode; 4, N; 1.07 ÷ 1.05 = 1.019 - 1 = 0.01905 × 100 = 1.9048, I/YR; 40,406.7673, +/-, PMT; 0, FV; solve for PV = 157,151.6738 Step 3: 12, N; 7, I/YR; 0, PMT; 157,151.6738, FV; solve for PV = 69,777.22

The client owns a UL insurance policy with the Option B death benefit. The net amount at risk (NAR) is $275,000, and the current cash value is $75,000. What is the amount of death benefit that will be paid if the client died today? A. $0, because the NAR exceeds the current cash value B. $75,000 C. $275,000 D. $350,000

D. $350,000 The death benefit under Option B of a UL policy is the NAR plus the cash value. The client's policy will pay a total death benefit of $350,000; ($275,000 + $75,000).

Elizabeth, age 57, wants to ensure that a 7-year loan on her new BMW will be paid off in the event of her death. She wants a predictable, inexpensive premium. Which policy would best meet her need? A. A decreasing term policy B. An annual term policy C. A 5-year term policy D. A 10-year term policy

D. A 10-year term policy The 5-year term and annual term options will require renewals at a higher premium. It is unlikely she will find a 7-year decreasing term policy because those are typically 15-year or 30-year products to align with typical mortgage terms.

Which factor(s) should you consider before replacing a life insurance policy? A. The issuing company's A.M. Best rating and other ratings B. The appropriateness of the policy for the needs of the client C. The client's risk tolerance level D. All of these

D. All of these All of these are correct. Also, the existing policy's relative value, any possible (or intervening) changes in the client's insurability, and the financial cost of the client starting over with a new policy also should be considered.

Which factor(s) should be considered while reviewing a universal life (UL) insurance policy for a client? A. The mortality charge specified in the policy B. The mortality charge being assessed to the policy C. The interest rate being credited to the policy D. All of these

D. All of these All the listed items are potential costs in a UL policy and should be considered by the planner.

Enrico wants to ensure his life insurance policy does not lapse in the event he is sick or injured and cannot work. Which rider should he have on his policy? A. Disability income rider B. Accidental death rider C. Return of premium rider D. Disability waiver of premium rider

D. Disability waiver of premium rider The disability waiver of premium rider is designed to specifically keep a policy in force when the insured is disabled.

Which settlement option(s) in a life insurance policy are available upon the death of the insured? Remember, life insurance settlement options are the same as annuity payout options. I. Interest only II. Life income with period certain III. Cash surrender value (CSV) IV. Joint and last survivor A. IV only B. I and II C. I, II, and III D. I, II, and IV

D. I, II, and IV CSV is a nonforfeiture option. When the insured dies, the cash value in a whole life policy is retained by the insurance company.

When purchased inside of an IRA, what type of annuity would NOT be required to comply with the required minimum distribution (RMD) regulations? A. Variable annuity contract B. Indexed annuity contract C. Fixed annuity contract D. Qualified longevity annuity contract (QLAC)

D. Qualified longevity annuity contract (QLAC) The final rules made qualified longevity annuity contracts (QLACs) accessible to 401(k) plans and other employer-sponsored individual account plans and IRAs by amending the RMD regulations so that longevity annuity payments will not need to begin prematurely in order to comply with RMD regulations

Which factor should NOT be considered when selecting a life insurance policy? A. The duration of the need B. The amount of life insurance needed C. The risk tolerance level of the proposed owner of the policy D. The risk tolerance level of the insurance agent

D. The risk tolerance level of the insurance agent The risk tolerance of the proposed owner of the policy, not the insurance agent, must be considered. The risk tolerance of the sales representative is not a factor that should be considered when selecting a life insurance policy.

Rosaline was the beneficiary of her father's variable life insurance policy. The policy had a face amount of $500,000, and Rosaline's father had a basis in the policy of $300,000. During her life, Rosaline's father had invested the cash value in subaccounts containing blue-chip stocks, which achieved significant capital appreciation during most of the years the policy was in effect. When her father died, Rosaline received the $500,000 death benefit in a lump sum. How much of the $500,000 death benefit must Rosaline include in her gross income? A) $0 B) $200,000 C) $300,000 D) $500,000

A) $0 Lump-sum death benefits received from a life insurance policy as a result of the insured's death are generally excludable from gross income.

Assume Greg dies of a heart attack, and Jackie receives the $50,000 death benefit provided by his group life insurance policy and $150,000 from his individually owned universal life insurance policy as lump-sum payments. What amount must Jackie include in her gross income? A) $0 B) $150,000 C) $50,000 D) $200,000

A) $0 When Greg dies, Jackie receives a $50,000 death benefit under his 20-year level term policy and a $150,000 death benefit (two times his salary of $75,000) under his group life policy. Because she receives the benefits in one lump sum, they are not included in her gross income.

Which of the following life insurance policy riders was developed in response to viatical settlements? A) Accelerated death benefits rider B) Family income benefit rider C) Critical illness rider D) Long-term care rider

A) Accelerated death benefits rider The accelerated death benefits rider was developed in response to increased demand for viatical settlements (where policyowners sell their life insurance policy for a portion of the value of the death benefit). Once an insured meets the definition of terminally ill per the policy, a portion of the death benefits as defined by the policy (ranging between 25% and 98%) may be accessed.

Under which life insurance settlement option are proceeds paid to the beneficiary at a set dollar amount per month until all principal and interest are exhausted? A) Fixed amount B) Life income C) Interest only D) Fixed period

A) Fixed amount Under the fixed-amount option, a fixed amount is paid until both the principal and interest are exhausted. The amount paid remains unchanged, but the period in which the payments are made depends on how much is to be paid each period.

When designing a life insurance program under the financial needs analysis method, which of the following should be considered? I. Funeral expenses related to the death of a wage earner II. Education costs of dependents III. Payment of debts and mortgages IV. Retirement of the surviving spouse A) I, II, III, and IV B) I, II, and III C) I and II D) III and IV

A) I, II, III, and IV Funds to cover all of these needs should be considered when designing a life insurance program.

Which of the following characteristics of life insurance contracts create favorable tax treatment? I. Death benefits paid to a beneficiary are not usually taxable as income. II. Income taxes on investment gains are tax-deferred. III. The earnings on the cash value are not taxed during the accumulation period. A) I, II, and III B) I and II C) I and III D) II and III

A) I, II, and III All of these are income tax characteristics of a life insurance policy. Generally, such a policy is accorded favorable tax treatment under law.

Which of the following statements regarding the disadvantages of annual renewable term life insurance are CORRECT? I. Term life insurance does not develop cash values or a savings plan. II. Term life insurance becomes increasingly uneconomical as the policyowner grows older. III. At the end of a stipulated period of time, the policyowner may be declined for renewal coverage. IV. Initially, term life insurance has a higher premium than whole life insurance for the same amount of coverage. A) I, II, and III B) I and IV C) II and III D) I, II, III, and IV

A) I, II, and III The answer is I, II, and III. Initially, term life insurance has a lower premium than whole life insurance. Over time, however, the cost of a term life insurance policy will far exceed that of a whole life policy with the same face amount of coverage.

Reginald is the beneficiary of his father's life insurance policy. The face amount of the policy is $250,000, and Reginald selects the single life annuity settlement option. His life expectancy is 20 years. Assuming Reginald lives for only 12 years after payments begin, which of the following statements regarding payments to him under this settlement option is CORRECT? I. Payments will continue to Reginald's designee for an additional eight years. II. A portion of each payment Reginald receives is includible in his gross income. III. Any unrecovered tax basis in the settlement option that remained at Reginald's death is deductible on his final income tax return. A) II only B) I only C) I and III D) I and II

A) II only Under the single life annuity settlement option, the annuity payments stop when the beneficiary dies. Each payment includes a taxable interest component and a nontaxable principal component. A beneficiary of an annuity from a life insurance settlement option who dies before his life expectancy cannot deduct any unrecovered basis.

A client is in the process of purchasing a universal life insurance policy. The client desires an increasing death benefit. Which of the following universal life death benefit options will meet the client's needs? A) Option B B) Option A C) Option D D) Option C

A) Option B Option B provides an increasing death benefit.

Assume you have a client who owns a modified premium whole life insurance policy and has recently taken a large loan against the cash value. She is aware that the death benefit payable to her husband, who is the sole beneficiary of the policy, will be reduced by the amount of the loan and asks you whether she can preserve at least a portion of the original death benefit. The policy is a participating policy. What is the best option for the client to choose? A. Fifth dividend option B. Reduced paid-up insurance option C. Cash dividend option D. Have dividends applied to reduce the premium

A. Fifth dividend option The fifth dividend option would permit her to purchase one-year term insurance equal to the net cash value of the policy and add it to the policy's death benefit. In this way, she could recoup at least a portion of the otherwise reduced death benefit.

A client owns a whole life insurance policy in which his premiums were lower in the initial years after the policy was issued and then increased once thereafter. What type of whole life policy does the client own? A. Modified premium whole life B. Limited-pay whole life C. Ordinary (straight) life D. Single premium whole life

A. Modified premium whole life Modified premium whole life premiums are lower for the initial years of the policy and are generally increased once thereafter.

Which method of calculating the life insurance need is designed to use the interest only on a portion of the death benefit for income replacement? A. The capital retention method B. The capital utilization method C. The LIFE method D. The multiple of salary method

A. The capital retention method The capital retention method is intended to provide income from the interest on the amount allocated to income replacement. Capital utilization uses up the principal over time so that at some point in the future the money is all gone. Both the LIFE and multiple of salary methods are overall needs analysis methods.

When gathering client data to determine life insurance needs, which of the following are relevant? A) Risk tolerance B) All of these C) Client goals and objectives D) Survivors' needs

B) All of these Each of the listed items is relevant when determining life insurance needs.

Frank and Julie recently purchased an annuity to help provide them with retirement income. They will pay the premiums with after-tax dollars, and they will begin receiving income payments from the annuity at age 65. After analyzing these facts, which type of annuity did Frank and Julie purchase? A) Immediate qualified annuity B) Deferred nonqualified annuity C) Deferred qualified annuity D) Immediate nonqualified annuity

B) Deferred nonqualified annuity They purchased a deferred annuity because income payments will begin in the future. Also, the annuity is nonqualified because the premiums are paid with after-tax dollars.

Donald is married and has two small children. Both he and his spouse are employed outside the home. They spend both incomes, have a mortgaged home, keep credit cards with outstanding balances each month, have little savings, and care for aging parents. Based on Donald's current life risk exposures, which of the following can be addressed with life insurance? I. Death before debt repayment II. Death before accomplishing personal goals III. Death of an income earner IV. Estate tax liability A) I and II B) I and III C) III and IV D) II and IV

B) I and III In this situation, the risks Donald should address are paying off debt and replacing lost income. Given these facts, there is no current concern for estate taxes, and personal goals are not something that can be insured against.

Which of the following statements regarding different types of annuities is CORRECT? I. The owner of a variable annuity contract directs the investment of the contract's cash value among subaccounts and bears the investment risk. II. The variable annuity prospectus contains all of the variable annuity's investment choices as well as the fees, expenses, investment objectives, investment strategies, risks, performance, and pricing for each investment choice. III. A bonus annuity may offer a bonus in the form of a credit that may be added to the initial premium (investment). IV. An equity-indexed annuity (EIA) is a specialized type of annuity whereby the insurance company credits the contract owner with a return that is based on changes in an equity index, such as the Standard & Poor's 500 Index. A) III and IV B) I, II, III, and IV C) II and III D) IV only

B) I, II, III, and IV In a variable annuity, the owner of the contract directs the investment of the contract's cash value among subaccounts and bears the investment risk. Any financial planner who solicits or presents a variable annuity to a client should read and understand the variable annuity prospectus. The prospectus contains, but is not limited to, all of the variable annuity's investment choices as well as the fees, expenses, investment objectives, investment strategies, risks, performance, and pricing for each investment choice. Any type of annuity that offers a credit based on a percentage of the premium paid is considered a bonus annuity. EIAs combine the features of traditional insurance products (e.g., guaranteed minimum return) with those of a security (e.g., returns linked to equity markets).

Azumi purchased an annuity for $26,000 in the current year. Under the contract, Azumi will receive $300 each month for the rest of her life starting next month. According to actuarial estimates, Azumi will live long enough to collect 100 payments, and she will receive a 3% return on her original investment. Which of the following statements regarding the taxation of Azumi's annuity income is CORRECT? A) If Azumi dies after collecting a total of 50 payments, she has an economic loss that is not tax deductible. B) If Azumi collects more than 100 payments, all amounts received after the 100th payment must be fully included in her gross income. C) If Azumi lives to collect more than 100 payments, she must amend her prior years' tax returns to increase her taxable portion of each payment received in the past. D) If Azumi collects $3,000 in the current year, the $3,000 is treated as a recovery of basis, and thus, is not taxable.

B) If Azumi collects more than 100 payments, all amounts received after the 100th payment must be fully included in her gross income. Payments beyond projected life expectancy are fully taxable unless the annuity payments began on or before December 31, 1986. If the annuitant dies before life expectancy and has not completely recovered her basis, the unrecovered basis is deductible on the annuitant's final income tax return as a miscellaneous itemized deduction not subject to the 2% of adjusted gross income floor. For contracts where annuity payments began after December 31, 1986, the exclusion ratio is only used to the extent of recovering the basis; therefore, the taxpayer will not use the exclusion ratio for payments made after life expectancy and will be taxed on the entire amount.

Barb is the beneficiary of a $1 million life insurance policy. The insured recently died, and Barb is considering different settlement options. If her primary objective is to avoid paying any income taxes on the amounts received under the settlement option, which of the following settlement options will best meet her needs? A) Single life annuity B) Lump sum C) Fixed-amount installments D) Fixed-period installments

B) Lump sum The answer is lump sum. Life insurance death benefits received in a lump sum are generally excluded from gross income. The payments under the other settlement options include both a taxable interest component and a tax-free principal component.

Nancy and Joe are married and in need of permanent life insurance. They anticipate their incomes substantially increasing in the next three to eight years, but right now, they are on a tight budget. Which of the following is the best form of permanent life insurance for the couple? A) Decreasing term insurance B) Modified premium whole life C) Limited-pay whole life D) Current assumption whole life

B) Modified premium whole life With a modified premium whole life insurance policy, premiums are lower for the initial three to five years after issue and then increase once thereafter. As such, modified whole life is simply an ordinary life policy with a unique premium payment structure that accommodates a policyowner who expects to experience an increasing salary in the near future.

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) Fixed immediate annuity B) Variable deferred annuity C) Fixed deferred annuity D) Single premium deferred annuity

B) Variable deferred annuity 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.

A client is insured by a life insurance policy with a face amount of $250,000. The client dies during the policy's grace period with an unpaid premium of $800. What amount will the insurance company pay to the beneficiary listed on the policy? A. $0 B. $249,200 C. $250,000 D. $250,800

B. $249,200 If the insured dies during the grace period, the insurance company deducts the unpaid premiums from the death benefit payable to the beneficiary; therefore, the beneficiary receives $249,200.

Meaghan purchased a participating whole life insurance policy 15 years ago and now wishes to receive the policy's cash surrender value (CSV). She gives you the following information to assess the potential taxation of the surrender: CSV: $80,000 Dividends received: $12,500 Outstanding loan: $40,000 Premiums paid: $60,000 What is the amount of cash value that is taxable to Meaghan and what is the character of this income? A. $0 B. $32,500 ordinary income C. $40,000 capital gain D. $72,500 ordinary income

B. $32,500 ordinary income Investment in contract = premiums paid - dividends received. $60,000 − $12,500 = $47,500 gain at surrender = cash surrender value − investment in contract - outstanding loans or withdrawals. $80,000 − $47,500 = $32,500 ordinary incomeMeghan paid $60,000 in premiums. However, life insurance dividends are considered a return of premium for tax purposes. So her adjusted basis in the contract is $47,500. The current Cash Surrender Value is $80,000. $80,000 - $47,500 = $32,500. Therefore her gain in the contract is $32,500. However, due to IRS rules, that amount will be taxed as ordinary income, not capital gain. Note that the insurance company will withhold $40,000 of cash surrender proceeds to satisfy the outstanding policy loan.

Rex purchased a $500,000 whole life, double indemnity policy on his life on September 1 of the current year (premiums were $450 per month). On November 30 of the following year, he committed suicide. Premiums were paid as agreed up to November 1 of the following year. Assuming that his policy included a suicide clause, what amount will be paid or refunded by the insurance company? A. $0 B. $6,750 C. $500,000 D. $1 million

B. $6,750 The two-year suicide clause, a common whole life policy provision, will preclude payment of the face value of the policy. Rather, only the premiums paid through the date of suicide will be returned without interest. The amount of premium returned is $6,750 (15 months × $450).

Joe and Mary, a retired married couple, have no sources of income other than the interest and dividends from investments and Social Security. At this time, Joe is considering the purchase of an immediate annuity. Joe has asked you, his financial planner, which settlement option he should select. His primary objective is to ensure that Mary is provided for subsequent to his death and that she has as much income available to her as possible. What is the best recommendation for a settlement option? A. A joint and 50% survivor annuity B. A joint and 100% survivor annuity C. A life annuity with a 20-year period certain D. A single life annuity

B. A joint and 100% survivor annuity Given Joe's objectives (particularly that of providing as much income as possible to Mary subsequent to his death), a joint and 100% survivor annuity is preferable. Although a life annuity with a period certain of 20 years could provide significant income to Mary, she could also outlive the payment period.

Which of the following is NOT a characteristic of variable universal life (VUL) insurance? A. The policy must be offered with a prospectus. B. Cash values held in subaccounts are part of the insurance company's general account. C. There are increasing or decreasing death benefits. D. There are flexible premium payments

B. Cash values held in subaccounts are part of the insurance company's general account. Cash values held in subaccounts are not part of the insurance company's general account. VUL insurance policies must be offered with a prospectus because of the subaccount investment options. VUL policies also feature a flexible death benefit along with flexible premiums. However, the cash values inside of the subaccounts are not part of the insurance company's general account.

A client owns a life insurance policy that will provide permanent paid-up protection for the rest of her life after she has paid premiums for 20 years. What type of policy does the client own? A. Whole life B. Limited-pay whole life C. Single premium whole life D. Convertible term

B. Limited-pay whole life Limited-pay whole life premiums are payable for only a limited number of years, after which the policy becomes paid up for its stated face amount.

Jason, age 35, is married with children and has only a limited amount of disposable income. He needs life insurance protection but wants to keep his premium payments as low as possible for the next 20 years. He anticipates being in good health throughout this period. Assuming he remains healthy, what type of term policy would be most beneficial to Jason? A. Decreasing term insurance B. Reentry term insurance C. Annual renewable term insurance D. Modified whole life term insurance

B. Reentry term insurance Given that Jason anticipates being in good health, he may benefit from purchasing a level term policy (probably for five years) with a reentry provision that allows him to requalify for lower premiums at the end of this term provided he can demonstrate satisfactory evidence of insurability

Which of the following definitions describes an accelerated death benefit rider found in insurance policies? A) A benefit under long-term care insurance that provides reimbursement for occasional full-time care at home for a person who is receiving home health care B) A benefit under a long-term care insurance policy that continues to pay a long-term care facility for a limited time if a patient must temporarily leave because of hospitalization C) A benefit rider that pays a portion of the death benefit to an individual deemed terminally ill, usually with a life expectancy of 24 months or less D) A provision for the replacement of lost earnings due to less-than-total disability

C) A benefit rider that pays a portion of the death benefit to an individual deemed terminally ill, usually with a life expectancy of 24 months or less The answer is a benefit rider that pays a portion of the death benefit to an individual deemed terminally ill, usually with a life expectancy of 24 month or less. If the accelerated death benefit rider is included in an existing policy, it serves as a source of funds for either a terminally or chronically ill insured. This rider typically provides that, if an individual is terminally ill, usually with a life expectancy of 24 months or less, the insurance company will pay out a portion of the death benefit. The most common amount paid is 50% of the face amount. The other 50% is paid out as an income tax-free death benefit to the insured's named beneficiary.

Antonio is looking for ways to reduce expenses in retirement. He has been paying premiums on a whole life policy. His health is not great, and his life expectancy will be shorter than a normal person his age. Which of the following strategies and reasons would be appropriate for Antonio? A) Antonio could take a reduced paid-up life policy and eliminate future premiums. Since his health is not great, this would give his heirs the maximum inheritance if he died within the next 10 years. B) Antonio could surrender the policy for cash because he could invest the money for his heirs at a better return and still reduce his expenses. C) Antonio could convert his policy to an extended term policy. According to the insurance company, his policy would last past a normal life expectancy, and the full death benefit would go to his heirs without additional out-of-pocket expenses, as long as he passes away within the extended term period. D) Antonio could add an accidental death and disability (AD&D) rider

C) Antonio could convert his policy to an extended term policy. According to the insurance company, his policy would last past a normal life expectancy, and the full death benefit would go to his heirs without additional out-of-pocket expenses, as long as he passes away within the extended term period. According to the insurance company, his policy would last past a normal life expectancy, and the full death benefit would go to his heirs without additional out-of-pocket expenses, as long as he passes away within the extended term period. Because of his shortened life expectancy, taking a cash surrender would provide the least amount of money for his heirs. Utilizing an extended term policy would create the most resources for his heirs. The AD&D rider would do nothing to benefit Antonio.

A client just purchased a house and took out a $300,000 mortgage with a repayment term of 15 years. She wants to purchase a life insurance policy that will provide a death benefit equal to the unpaid mortgage balance if she dies with a mortgage. She wants a level premium and does not feel she will need life insurance once the mortgage is paid off. Which of the following life insurance policies best meets the client's needs? A) Whole life insurance B) 30-year level term life insurance C) Decreasing term life insurance D) Decreasing whole life insurance

C) Decreasing term life insurance A decreasing term life insurance policy is the best choice for this client because it provides a level premium and a death benefit that decreases over time. Historically, this type of policy has been used as mortgage protection insurance because the decrease in death benefit approximates the declining principal as mortgage payments are made by the homeowner. Level term life insurance provides fixed premiums, but the face amount remains constant. Decreasing whole life insurance is not a type of policy. Whole life insurance is not appropriate because, although the premiums are fixed, the face amount remains constant, and the policy provides a cash value.

Charles was the beneficiary of his mother's life insurance policy. The face amount of the policy was $500,000, and there was an outstanding policy loan of $25,000 when Charles's mother died earlier this year. The settlement option for the policy was interest only, payable annually. This year, Charles receives his first payment of $14,250 from the insurance company. Which of the following statements regarding this arrangement is CORRECT? I. The death benefit payable under the policy was $475,000. II. The payment of $14,250 consists partly of interest and partly of principal. III. Charles must include $475,000 in this year's gross income. IV. Charles must include $14,250 in this year's gross income. A) I only B) II and III C) I and IV D) II and IV

C) I and IV The outstanding policy loan of $25,000 reduces the death benefit payable under the policy to $475,000. Because the settlement option was interest only, the entire payment of $14,250 consists of interest, and the $475,000 principal amount remains on deposit with the insurance company. The principal amount of a life insurance death benefit is income tax free. Charles must include $14,250 in this year's gross income because the payment consists entirely of interest. In addition, the $14,250 of taxable income may be subject to the 3.8% Medicare contribution tax.

Which of the following statements regarding dividend options is CORRECT? I. Cash received under the cash dividend option is not taxable. II. Dividends received under the dividend option are taxable. A) Neither I nor II B) Both I and II C) I only D) II only

C) I only Cash received under the cash dividend option is not taxable because they are considered a return of premium. Dividends received under the dividend option are not taxable as they are also considered a return of premium.

The life insurance needs analysis method considers any recurring expenses and any unusual expenditures that may result from a person's death. Which of the following are variables that are considered when conducting this analysis? I. Final expenses II. Readjustment and dependency period funds III. Mortgage fund IV. Education fund(s) A) I, II, and III B) I and II C) I, II, III, and IV D) IIII and IV

C) I, II, III, and IV All of these are components used in the life insurance needs analysis method.

Which of the following factors should be considered when determining the most appropriate type of life insurance? I. The duration of the need II. The amount of disposable income available to the proposed policyowner III. The financial discipline of the proposed policyowner IV. The risk tolerance level of the proposed policyowner A) I and IV B) I, III, and IV C) I, II, III, and IV D) II and III

C) I, II, III, and IV All of these factors should be considered in determining what type of life insurance is most appropriate.

Which of the following correctly identifies the primary purpose of a buy-sell agreement funded with life insurance? A) To guarantee marketability of closely held stock B) To include policy cash values as a corporate asset C) To allow the business to purchase a deceased owner's share of the business from the estate D) To pay the deceased's estate tax liability

C) To allow the business to purchase a deceased owner's share of the business from the estate The answer is to allow the business to purchase a deceased owner's share of the business from the estate. The primary purpose of a buy-sell agreement funded with life insurance is to provide the cash required by the agreement to allow the surviving partner(s) to buy the deceased partner's share from his heirs or estate in the event he dies before retiring.

Which of the following client objectives can be satisfied by a client owning a variable universal life insurance contract, with no special additional coverages, on his life? A) To have a minimum guaranteed cash value B) To have a minimum guaranteed death benefit amount available to provide for estate liquidity at the client's death C) To direct investment of premium dollars to alternative investment vehicles D) To be assured of a constantly increasing cash surrender value

C) To direct investment of premium dollars to alternative investment vehicles Variable universal life policies offer a variety of investment options inside the subaccount options. There is no guaranteed death benefit, and the cash value cannot be guaranteed to increase or attain any specific value.

All of the following statements concerning categories of annuities are correct except A) an annuity may be paid periodically in a fixed amount for a period determined by the insurer. B) a straight life annuity provides periodic (usually monthly) income payments that continue as long as the annuitant lives and terminates at the annuitant's death. C) a deferred annuity is one in which the first benefit payment is made one payment interval after the date of purchase. D) a joint-and-last-survivor annuity provides income that ceases only upon the last death among the covered lives.

C) a deferred annuity is one in which the first benefit payment is made one payment interval after the date of purchase. The answer is a deferred annuity is one in which the first benefit payment is made one payment interval after the date of purchase. A single premium immediate annuity is one in which the first benefit payment is made one payment interval after the date of purchase.

Trisha is a financial planner for XYZ Company. She is scheduled to meet with Tim and Jodi this afternoon for a follow-up meeting. In their first meeting, Trisha learned that Tim and Jodi have three young children and no life insurance coverage. Trisha also discovered that they owe a substantial amount on their current mortgage. Moreover, Tim's family has a history of diabetes and heart disease. What is the next planning action for Trisha? A. She should communicate her recommendations to the clients. B. She should recommend that the clients purchase a convertible term life insurance policy for the appropriate face amount because of Tim's family history. C. She should analyze and evaluate the clients' current financial status before developing and communicating any recommendations. D. She should recommend a decreasing term life insurance policy for both Tim and Jodi to make sure the mortgage is taken care of in the unlikely event one of them should die prematurely.

C. She should analyze and evaluate the clients' current financial status before developing and communicating any recommendations. Trisha should analyze and evaluate the clients' current financial status before developing and communicating any recommendations. Tim and Jodi should purchase a convertible term life insurance policy to help protect their children's financial future or a decreasing term life insurance policy to cover the mortgage; however, Trisha has not completed the necessary step to reach the point of recommending financial solutions. At this point, Trisha needs to analyze and evaluate the clients' current financial status.

Sandra has just been informed that she is the beneficiary of her grandmother's life insurance policy. She has decided to choose a settlement option for the $500,000 death benefit. Which settlement option would prevent the risk of superannuation? A. Lump sum distribution B. Fixed-period installments C. Single or straight life annuity D. Fixed-amount installments

C. Single or straight life annuity The single life annuity is the only settlement option that would provide lifetime income and prevent the risk of superannuation. A lump sum distribution could be exhausted prior to death. Fixed-period installments only last for a specific period of time. Fixed-amount installments may also be exhausted prior to death.

Carolyn was the beneficiary of her spouse's life insurance policy with a face amount of $1,000,000. She elected the single life annuity settlement option. The settlement option will pay her $4,500 per month, and her life expectancy is 30 years. How much of each monthly payment is taxable? A) $3,034 B) $1,722 C) $0 D) $2,778

B) $1,722 The total amount Carolyn will receive from the settlement option is $1,620,000 ($4,500 × 360). Her tax basis is $1,000,000, so her exclusion ratio is 0.6173 ($1,000,000 ÷ $1,620,000). Therefore, $2,777.85 of each payment is excluded from gross income ($4,500 × 0.6173), and the remainder ($1,722.15) is taxable. In addition, the taxable income may be subject to the 3.8% Medicare contribution tax.

Which of the following items are covered, but are subject to a specific dollar limit, under the personal property provision of a homeowners policy? I. Furs II. Jewelry III. Coin collections A) I and III B) I, II, and III C) I and II D) II and III

B) I, II, and III All of these items have dollar limits under the standard homeowners policy. To increase this limit to an agreed-upon value, items need to be scheduled or endorsed.

Policies that pay dividends are said to be participating policies. Which of the following policies pay dividends? A) Multi-year term life policies B) Whole life policies C) Annual term policies D) Universal life policies

B) Whole life policies Only participating whole life policies pay dividends that are essentially a return of premium when a mutual life insurance company has better-than-expected operating results. While universal life policies pay interest, neither universal nor term life policies pay dividends.

Which of the following is a life insurance dividend option? A) Fixed payment B) Extended term C) Reduced premium D) Reduced paid-up

C) Reduced premium Using the dividend to reduce premium is a dividend option. Reduced paid-up and extended term are nonforfeiture options. Fixed payment is a settlement option.

Ruby, 30, wants to purchase an annuity by making monthly premium payments until she retires at age 60. She wants to be able to vary the amount of the premium payments depending on her disposable income. She wants to attain a guaranteed minimum return on her investment, but also wants to be able to earn returns linked to the stock market. Which of the following annuities best meets her needs? A) Flexible premium deferred fixed annuity B) Flexible premium deferred variable annuity C) Single premium deferred equity-indexed annuity D) Flexible premium deferred equity-indexed annuity

D) Flexible premium deferred equity-indexed annuity Because the client wants to make varying premium payments over a period of years, she needs a flexible premium deferred annuity. An equity-indexed annuity will provide her with both a guaranteed minimum return and the opportunity to earn returns linked to the stock market.