FINANCIAL MARKETS AND INSURANCE

Question 1

Once a policy is classified as a modified endowment contract, with certain corrections, it can be later treated as not a modified endowment contract.

True

False

Question 2

Because of the way that it is taxed, a modified endowment contract is not considered a life insurance policy for tax purposes.

True

False

2 points

Question 3

A modified endowment contract is a life insurance policy that has failed

the test for life insurance

the seven-pay test

the transfer for value rule

the rule against perpetuities

2 points

Question 4

A policy received in a 1035 exchange has an investment in the contract in the amount of the fair market value of the old policy.

True

False

2 points

Question 5

Which of the following would NOT be a valid exchange under Section 1035?

A life insurance contract for an annuity contract.

An endowment contract for an annuity contract.

After 2009, an annuity contract for a life insurance contract.

After 2009, a life insurance contract for a qualified long-term care contract.

2 points

Question 6

Gain on the surrender of a life insurance policy is taxed at capital gains rates.

True

False

2 points

Question 7

The increase of a policy’s cash value is subject to tax at ordinary income rates.

True

False

2 points

Question 8

The proceeds of life insurance are always free from ordinary taxes.

True

False

2 points

Question 9

The transfer for value rule does not apply to transferees with a valid insurable interest in the life of the insured.

True

False

2 points

Question 10

The transfer for value rule will not apply if there is no consideration for a transfer of life insurance.

True

False

second set of 10 questions

Question 1

A modified endowment contract is a life insurance policy that has failed

the test for life insurance

the seven-pay test

the transfer for value rule

the rule against perpetuities

5 points

Question 2

The transfer for value rule may not apply to a transfer in which of the following situations?

the sale of a policy by the insured to his son

the sale of a policy by the insured to a co-shareholder

the sale of a policy by the insured to his spouse

all of the above

5 points

Question 3

Underwriting is defined as:

a concept in which a number of companies pool resources to assume a percentage of risks on a given policy

a process in which an insurance company analyzes the exposure to risk and designs and prices an insurance program

the process in which the terms of a treaty are negotiated and the contract is written, including pricing and exclusions

a concept in which reinsurers accept only specific policies for coverage

5 points

Question 4

Which of the following is the policy holder with the highest-risk tolerance?

A homeowner who has a $2,000 deductible on a house worth $150,000

A homeowner who has a $750 deductible on a house worth $150,000

A car owner who has a $50 deductible on a car worth $75,000

A renter who has a $100 deductible on personal property worth $100,000

5 points

Question 5

Jack is driving his car when Tom runs a red light and hits Jack. Both men have liability insurance. Whose insurance covers the cost of Jack’s car repairs and medical bills, and why?

Jack’s insurance pays for it all, because he is insured against accidents.

Tom’s insurance pays for the car repairs, but not the medical bills, because he is liable only for the damage to Jack’s personal property.

Jack’s insurance covers his repair bills, but not his medical bills, because he does not have medical insurance.

Tom’s insurance covers it all, because liability insurance means that both injury and damage are covered.

5 points

Question 6

Accelerated death benefit riders permit

the death benefit to be paid within 30 days rather than 90 days after the date of death

payment of all or part of the death benefit before death under certain circumstances

premiums to be waived if the insured becomes disabled

another insured person to be added to the policy

5 points

Question 7

The Law of Large Numbers states that:

the losses of the few are shared among the premiums of the many

more policies insure against an insurer’s financial success

the losses of the few are exactly balanced by the premiums of the many

policies shared among many result in lower rates

5 points

Question 8

The income replacement approach to determining a family’s insurance needs is based primarily on?

the earnings growth rate of long-term U.S. Treasury securities

regulations issued by the Department of Health and Human Services

the current balance in the accumulated adjustment account

the human life value concept

5 points

Question 9

For families with young children or couples with a living standard that is relatively high for their income, the amount of insurance needed will be high. As a result,

the priority should be to provide the most possible permanent insurance

the priority should be to provide adequate death protection

the couple should be encouraged to save for several years until they can afford to purchase permanent insurance

a combination of term and permanent insurance should always be recommended regardless of how little the client can afford

5 points

Question 10

The GST Tax may be triggered by which of the following events?

a direct gift to a grandchild

the death of a grantor’s child that leaves a grandchild as the last remaining beneficiary of a trust

a distribution from a trust to a grandchild of the grantor

all of the above