RISK MANAGEMENT, INSURANCE PLANNING, AND EMPLOYEE BENEFITS

Which of the following is the role of the NAIC in regulating the insurance industry within a state? A) Creating accreditation programs to maintain state regulation of the insurance industry B) Interpreting and applying the laws in place relative to the insurance industry C) Creating model legislation relative to the insurance industry D) Enforcing the laws passed by Congress in relation to insurance

A. The answer is creating accreditation programs for state adoption in order to maintain state regulation of the insurance industry, rather than Congress. The legislative branch votes on and passes laws relative to the insurance industry. These laws are enforced by the executive branch, and disputes concerning the interpretation or application of the law is handled by the judicial branch. The National Association of Insurance Commissioners provides model legislation that may or may not be enacted by the several states.

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

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

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

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

Which of the following is the role of the executive branch in regulating the insurance industry within a state? A) To enforce the laws in place relative to the insurance industry B) To interpret and apply the laws in place relative to the insurance industry C) To create model legislation relative to the insurance industry D) To pass laws relative to the insurance industry

A. The answer is to enforce the laws in place relative to the insurance industry. The legislative branch votes on and passes laws relative to the insurance industry. These laws are enforced by the executive branch, and disputes concerning the interpretation or application of the law is handled by the judicial branch. The National Association of Insurance Commissioners provides model legislation that may or may not be enacted by the several states.

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

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

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

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

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

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

Which of the following perils are covered by an HO-15 endorsement to form HO3 for personal property? Wind damage when property is away from the premises Fire damage when property is on the premises Groundwater damage when property is on the premises Earth movement when property is away from the premises A) I, II, and IV B) I and IV C) II and III D) II, III, and IV

A. All risks are covered, but groundwater damage is only covered while personal property is away from the premises. HO-15 modifies the earth movement exclusion so that it only applies to coverages for the dwelling and other structures

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

A. BOTH

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

A. Each option is correct

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

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

Which of the following statements regarding the principles of risk and insurance are CORRECT? Risk is a condition in which there is a possibility of an adverse result from the expected desired outcome. A hazard is the cause of a financial loss and is the actual event for which the individual purchases insurance. A peril is a condition that increases the probability that a financial loss will occur. Pure risk involves only the chance of loss or no loss. A) I and IV B) I, II, and III C) I, II, III, and IV D) I and II

A. Risk is the condition in which there is a possibility of an adverse result from the expected desired outcome. A peril is the cause of a financial loss, and a hazard is a condition that increases the chance of financial loss. Pure risk is the risk that only involves the chance of loss or no loss.

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

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

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

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

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

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

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

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

Which of the following are important when selecting an insurance producer? Experience Training Education Production awards earned A) I, II, and III B) II and III C) I, II, III, and IV D) IV only

A. The answer is I, II, and III. Options I, II, and III, along with competence, inclination to service, specialization, and a good reputation, are important when selecting an insurance producer. The production awards earned are an indication of sales ability, but not necessarily what should be sought in an insurance producer.

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

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

The insurance provision that states that the insured will split the costs of a loss to some degree, usually on a percentage basis, describes which of the following? A) Coinsurance B) A split-cost arrangement C) A deductible D) Rider supplement

A. The answer is coinsurance. The question defines coinsurance, which is a splitting of costs. A deductible is what the insured must pay before the insurance company pays anything. It is possible to have a loss that is valued at an amount below the deductible, and nothing would be owed by the insurance company. It is not possible for the insurance company and the insured to not split costs when coinsurance applies.

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. 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Which of the following terms is correctly matched with its definition? A) Doctrine of waiver: prevents a party from asserting a right to which he would otherwise be entitled where, because of his own actions or behavior, he misled someone (even though unintentionally) who relied on the understanding created, thereby to his own detriment. B) Adhesion: one party writes the contract, and the other party has no say in the matter—she only accepts or rejects the contract. C) Reformation: an equitable remedy by which the original contract entered into by the parties is deemed null from its beginning. D) Doctrine of estoppel: a party, by her own actions (or the actions of her agent), has voluntarily relinquished a known right.

B. The answer is adhesion: one party writes a contract, and the other party has no say in the matter—she only accepts or rejects the contract. This is an accurate description of adhesion.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

C. BOTH

Which of the following are methods of managing risk? A professional athlete retiring early to avoid potential medical problems The use of an emergency savings fund to cover unexpected expenses Wearing a seatbelt and driving only in good weather conditions A surgeon utilizing disability insurance to cover lost earnings A) III and IV B) II, III, and IV C) I, II, III, and IV D) I and II

C. The answer is I, II, III, and IV. All of these are examples of risk management techniques. The professional athlete is using "avoidance" to mitigate the risk of injury. An emergency savings fund is an example of an individual retaining some of the risk and associated costs before utilizing insurance. Wearing a seatbelt and driving in good weather conditions is an example of reducing risk. The use of disability insurance by the surgeon is an example of transferring risk.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Barbara left her car parked on top of a hill while visiting at a friend's house. Unfortunately, she forgot to apply her emergency brake, and her car rolled down the hill, injuring two children who were playing in the street. Which of the following doctrines may influence Barbara's liability in this situation? A) Assumption of risk only B) Attractive nuisance C) Negligence only D) Negligence and assumption of risk

C. The answer is negligence and assumption of risk. The doctrine of attractive nuisance is exemplified by a homeowner not fencing in a below-ground swimming pool and then children drowning in the pool. Barbara, by failing to apply her emergency brake at the top of a hill, was negligent. However, the children are also assuming risk by playing in the street.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Which of the following statements best describes a morale hazard? A) A client being unethical or misrepresenting themselves in order to obtain insurance or to induce the payment of a claim B) An unintentional tort in the form of an action or omission that leads to the injury of another party C) An act or condition that increases the likelihood of the occurrence of a peril and/or increases the severity of a loss if a peril does occur D) A condition of carelessness or indifference on the part of an individual as to whether a loss occurs and/or the size of a loss if one does occur

D. A morale hazard is a condition of carelessness or indifference as to whether a loss occurs and/or the size of a loss if one does occur. Moral hazard is a result of an individual being unethical or misrepresenting himself in order to obtain insurance or to induce the payment of a claim.

Which of the following are insurance company rating services? Moody's A.M. Best Standard and Poor's NASDAQ A) I, II, III, and IV B) II and IV C) I and II D) I, II, and III

D. All except NASDAQ are insurance company rating services. - A.M. Best specializes in rating only insurance companies rating over 4,500 insurance companies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Which of the following statements regarding self-insurance by a business is CORRECT? A) Small-to-medium-sized companies commonly utilize self-insurance to avoid the cost of traditional insurance premiums. B) The organization should have enough homogeneous exposure units to make losses unpredictable. C) Self-insurance funds generally should be held in the businesses' general funding account. D) The self-insurer must be able to competently manage the investment of the self-insurance fund.

D. The self-insurer must be able to competently manage the investment of the self-insurance fund. Relatively few firms are good candidates for self-insurance, which is a method of risk retention. For example, small-to-medium sized firms tend to rely on insurance to cover losses, with only large companies utilizing self insurance methods. If funds are set aside, they should be held in emergency accounts rather than the general business checking account. The organization that self-insures should have enough homogeneous exposure units to make losses somewhat predictable.

Which of the following is a representative of the insured and cannot bind the insurer? A) A broker B) An independent agent C) A producing general agent D) A registered representative

The answer is a broker. Brokers represent potential insureds. Agents represent insurance companies.

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

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

Augusto is not paying attention when driving to work and runs a stop sign, narrowly missing Regena. Although frightened by the event, Regena continues driving and uses her cell phone to call her spouse to tell him what just happened. While dialing the phone, she crashes into a telephone pole. Would she be able to hold Augusto liable for the damage to her car? A) No, because Augusto did not owe Regena a duty to drive his car in a safe manner. B) No, because Augusto's actions were not the proximate cause of Regena's loss. C) Yes, because Augusto breached his duty to avoid damaging Regena's car. D) Yes, because there were actual damages as a result of Augusto's actions.

B. To be liable for an unintentional tort, four elements of negligence must exist. First, a duty is owed, and second, that duty is breached. Then, there must be actual damages and, finally, the breach must be the proximate cause for the damage. In this case, Augusto had a duty to drive his car in a safe manner, and he and breached that duty when he ran the stop sign. While Regena's car did, in fact, have actual damages, the proximate cause of the damage was her trying to use her cell phone while driving. Proximate cause is an uninterrupted sequence of events that brings about damage, and Regena using her cell phone interrupted that sequence. Had she swerved to avoid Augusto and hit a telephone pole, then the proximate cause would have been Augusto's actions and he could be found negligent.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Preston called Joanna, an insurance broker, to obtain coverage on his 30-foot sailboat. Joanna told him to send in a binder premium of $75. She told him that by doing so, he would be covered and that he should go ahead and enjoy the boat. Joanna submitted an application for insurance to Boater's Insurance Corp. for issuance of the policy. Boater's declined the coverage. The day Joanna learned this, Preston called and told her a sudden wind caused him to lose control of his boat. He then smashed into another sailboat, causing substantial damage to both boats. Who will be responsible for the damages? A) Boater's Insurance Corp. will have to pay the damages since it did not notify Preston that he was not covered. B) Boater's will have to pay since Joanna collected a premium from Preston. C) Preston will have to pay because no insurance policy is in force until the insurance company accepts the risk. D) Joanna is responsible because, as a broker, she personally bound coverage for Preston but was unable to place the coverage before the accident.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Which statement is correct with regard to insurance producers? A) Agent C is limited to where they will place their business, but can operate with a maximum of five carriers. They are an independent agent. B) Agent D is allowed to use normal distribution channels within a given state, but must refer to a specialist when going out of state. They are a surplus-line broker/agent. C) Agent B is licensed to represent one common insurer and several subsidiary companies of that insurer. They are a broker(s). D) Agent A represents several companies under common ownership, but with different operating business names. They are a captive agent.

D. The answer is captive agents. Captive agents sell for direct writers, including their subsidiaries if under common ownership. Examples include State Farm, Allstate, and Farmers Insurance. Brokers can represent multiple companies. Independent agents have no cap on the number of carriers they can work with. Surplus-line broker/agents can operate in and out of state.

An insurance contract requires an exchange of value to be considered a legally binding document. What is the term used to describe this requirement? A) Payment of premiums B) Offer and acceptance C) Compensation D) Consideration

D. The answer is consideration. Consideration occurs when there is an exchange of value. The insurance contract requires an exchange of value to be legally binding. For most insurance, the promise to pay the premium is usually sufficient consideration to make the contract binding; however, for life insurance, the premium must be paid before the insurance contract is binding for the insurer. The submission of a completed insurance application (offer) plus the payment of the first premium (consideration) to the insurance company will generally create a binding contract if the application would pass standard underwriting requirements.

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

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

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

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