How To Plan For The Future

Transcription

1 Review Questions & Answers Financial Planning Process and Insurance

2 , College for Financial Planning, all rights reserved. This publication may not be duplicated in any way without the express written consent of the publisher. The information contained herein is for the personal use of the reader and may not be incorporated in any commercial programs, other books, databases, or any kind of software or any kind of electronic media including, but not limited to, any type of digital storage mechanism without written consent of the publisher or authors. Making copies of this material or any portion for any purpose other than your own is a violation of United States copyright laws. The College for Financial Planning does not certify individuals to use the CFP, CERTIFIED FINANCIAL PLANNER, and CFP (with flame logo) marks. CFP certification is granted solely by Certified Financial Planner Board of Standards, Inc. to individuals who, in addition to completing an educational requirement such as this CFP Board-Registered Program, have met its ethics, experience, and examination requirements. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP, CERTIFIED FINANCIAL PLANNER, and federally registered CFP (with flame logo), which it awards to individuals who successfully complete initial and ongoing certification requirements. At the College s discretion, news, updates, and information regarding changes/updates to courses or programs may be posted to the College s website at or you may call the Student Services Center at

3 Table of Contents Introduction... 1 /False Statements... 3 Module Module 1 Answers... 7 Module Module 2 Answers Module Module 4 Answers Module Module 5 Answers Module Module 6 Answers Module Module 7 Answers Module Module 8 Answers Module Module 9 Answers Multiple-Choice Questions Session 1 (Module 1) Session 1 Answers Session 2 (Modules 1 & 2)... 66

4 Session 2 Answers Session 3 (Module 2) Session 3 Answers Session 4 (Module 3) Session 4 Answers Session 5 (Module 4) Session 5 Answers Session 6 (Module 4) Session 6 Answers Session 7 (Module 5) Session 7 Answers Session 8 (Module 5) Session 8 Answer Session 9 (Module 6) Session 9 Answers Session 10 (Module 7) Session 10 Answers Session 11 (Module 7) Session 11 Answers Session 12 (Module 8) Session 12 Answers Session 13 (Module 8) Session 13 Answers Session 14 (Module 9)

5 Session 14 Answers Session 15 (Module 9) Session 15 Answers Session 16 (Module 9) Session 16 Answer Financial Planning Process & Insurance Final Review Final Review Questions Final Review Answers

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7 Introduction This Instructor Guide review now contains the end-of-class, multiple-choice practice exam, as well as true/false questions for every module. Please contact Jason Hovde with any questions you may have: Jason G. Hovde, MBA, CFP Senior Director of Certification Programs College for Financial Planning 9000 East Nichols Avenue, Suite 200 Centennial, CO Introduction 1

8 2 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

9 /False Statements Module 1 T F 1. The initial step in the financial planning process is gathering comprehensive data on each new client. T F 2. The financial planning process must follow the prescribed order, with no steps taking place at the same time as any other step in the process. T F 3. A cash flow statement shows all inflows (referred to as income) and all outflows (referred to as expenses) over a specified period of time. T F 4. For long-term success, planners generally recommend that individuals invest or save at least 15% of their gross income. T F 5. Family budgets are created to make sure that only planned expenses are incurred. T F 6. Special goals, such as early retirement or travel, must, by necessity, remain nebulous in the financial planning process. T F 7. Buying a home rather than renting is always a better choice, because homes always increase in value. T F 8. One of the most important areas a financial planner must deal with in divorce-related planning is that of child custody. T F 9. Opportunity funds and emergency funds use all of the same investment vehicles. T F 10. In the data gathering step of the financial planning process, a client survey form is completed. T F 11. Two tasks of the data gathering stage are reviewing client information and conducting an initial implementation meeting. /False Statements 3

10 T F 12. Two tasks of the gathering client data, including goals step are quantifying goals in terms of measurable objectives and ranking objectives in order of priority. T F 13. In step three analyzing and evaluating the client s financial status appropriate techniques for achieving client objectives are selected. T F 14. Two tasks of the analyzing and evaluating the client s financial status step are reviewing relevant legal papers and contracts and presenting financial planning strategies to the client. T F 15. In step four developing and presenting financial planning recommendations and/or alternatives the financial planner evaluates the general economic environment, selects alternative products, and follows the performance of each. T F 16. In step five implementing the financial planning recommendations the financial planner assists the client in acting on the recommendations and identifies existing or potential problems in the client s situation. T F 17. Two tasks of the implementing the financial planning recommendations step are using the assistance of other professionals, as needed, and providing the client with ideas for implementing the recommendations. T F 18. In step six monitoring the financial planning recommendations the financial planner establishes a system for plan review and revision to update it for changes in the client s situation. T F 19. Two tasks of the monitoring the financial planning recommendations step are periodically reviewing the implemented recommendations with the client and reassessing the client s objectives. T F 20. A financial planner gathers information on titling of assets in part because this may reveal estate distribution of property. 4 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

11 T F 21. A financial planner gathers information on the client s other financial advisors to determine where advice has been obtained in the past. T F 22. The cash/cash equivalents section of a statement of financial position would include vested pension benefits. T F 23. The invested assets section of a statement of financial position would include the purchase price of bonds. T F 24. The general rule for the inclusion of assets on the statement of financial position is to show them at their original cost. T F 25. The inflows section of a cash flow statement could include a category for investment inflows. T F 26. A mortgage note payment would normally be classified as a fixed expense in a cash flow statement. T F 27. Savings and investment outflows would normally be classified as a variable expense on a cash flow statement. T F 28. An emergency fund should contain two months expenses in liquid form. T F 29. Money market accounts and funds and savings accounts are appropriate to use in establishing an emergency fund. T F 30. A person with many sources of stable income usually is in a better position financially than a person with only one, or a few, sources of income. T F 31. Individuals generally should save 5% to 10% of their income on an ongoing basis. T F 32. A long credit card grace period is preferable to a short one. T F 33. A graduated payment mortgage entails making higher payments for a period of time, then lower payments for the duration of the mortgage term. T F 34. A reverse mortgage is one means of accessing home equity. /False Statements 5

12 T F 35. A budget is unnecessary if the client s economic situation is complex. T F 36. A disadvantage of budgeting is that it may discourage flexibility. T F 37. A critical component of budgeting is planning for expenses, such as car or home repairs, even when you don t know that they will occur in the near future. TF 38. Interest earnings on assets held in a minor s trust generally are exempt from the kiddie tax. T F 39. Custodial accounts generally involve high administrative costs. T F 40. Pell grants are available to graduate and undergraduate students. T F 41. Perkins loans are made available on the basis of financial need. T F 42. Monthly cash flow is the primary determinant in the lease or buy decision. 6 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

13 Module 1 Answers False 1. The initial step in the financial planning process is gathering comprehensive data on each new client. Rationale: The initial step in the financial planning process is establishing and defining the client-planner relationship. False 2. The financial planning process must follow the prescribed order, with no steps taking place at the same time as any other step in the process. Rationale: The steps in the process guide a planner regarding what must be done in a financial planning relationship. However, it is possible, and probable, that more than one step may happen in a single meeting with a client. 3. A cash flow statement shows income and expenses over a specified period of time. The definitions of income and expenses are broad here and not the same as used for defining income for income tax purposes. For example, a sale of an asset would be considered income even if part of it was return of principle. If the money were reinvested, it would all show as an expense in the form of savings outflow. False 4. For long-term success, planners generally recommend that individuals invest or save at least 15% of their gross income. Rationale: Planners generally recommend that clients save or invest from 5% to 10% of their gross income; some even recommend 20% because of the employment pattern shifting to more periods of unemployment and job changes. /False Statements 7

14 False 5. Family budgets are created to make sure that only planned expenses are incurred. Rationale: Family budgets are created to provide a guideline for effective money management. They are to be kept flexible. False 6. Special goals, such as early retirement or travel, must, by necessity, remain nebulous in the financial planning process. Rationale: It is impossible to plan for nebulous goals. For example, a client who wants to retire early or to travel must establish dollar amounts and time frames so that the financial plan can be set up to meet these goals. It doesn t mean that the target amounts and time frames won t change over time. False 7. Buying a home rather than renting is always a better choice, because homes always increase in value. Rationale: Homes do not always increase in value. Because of changing demographics, homes may decrease in value, and changes in the economy may cause housing prices to stagnate or drop. If one does not expect to stay in the same locale for more than a few years, renting may make more sense. False 8. One of the most important areas a financial planner must deal with in divorce-related planning is that of child custody. Rationale: Of all the areas in which a planner may be involved in divorce planning, child custody is clearly outside the scope of his or her expertise. However, the planner should be involved in adapting the client s financial plan to provide for child support. 8 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

15 False 9. Opportunity funds and emergency funds use all of the same investment vehicles. Rationale: Opportunity funds are typically invested in anything that is appropriate for emergency funds, but they are also invested in semiliquid investments. False False False False 10. In the data gathering step of the financial planning process, a client survey form is completed. 11. Two tasks of the data gathering stage are reviewing client information and conducting an initial implementation meeting. Rationale: Client information is reviewed in step three; implementing the planning recommendations is step five. 12. Two tasks of the gathering client data, including goals step are quantifying goals in terms of measurable objectives and ranking objectives in order of priority. 13. In step three analyzing and evaluating the client s financial status appropriate techniques for achieving client objectives are selected. Rationale: Selection of appropriate techniques is a task of step four. 14. Two tasks of the analyzing and evaluating the client s financial status step are reviewing relevant legal papers and contracts and presenting financial planning strategies to the client. Rationale: Presenting strategies to the client is a task of step four. 15. In step four developing and presenting financial planning recommendations and/or alternatives the financial planner evaluates the general economic environment, selects alternative products, and follows the performance of each. Rationale: Evaluating the economic environment is a task of step three; following performance of products is a task of step six. /False Statements 9

16 False False False 16. In step five implementing the financial planning recommendations the financial planner assists the client in acting on the recommendations and identifies existing or potential problems in the client s situation. Rationale: Identifying problems in the client s situation is a task of step three. 17. Two tasks of the implementing the financial planning recommendations step are using the assistance of other professionals, as needed, and providing the client with ideas for implementing the recommendations. 18. In step six monitoring the financial planning recommendations the financial planner establishes a system for plan review and revision to update it for changes in the client s situation. 19. Two tasks of the monitoring the financial planning recommendations step are periodically reviewing the implemented recommendations with the client and reassessing the client s objectives. 20. A financial planner gathers information on titling of assets in part because this may reveal estate distribution of property. 21. A financial planner gathers information on the client s other financial advisors to determine where advice has been obtained in the past. 22. The cash/cash equivalents section of a statement of financial position would include vested pension benefits. Rationale: Vested pension benefits would be included as invested assets because they generally would require time to liquidate even if they are in money markets (which is unlikely). 23. The invested assets section of a statement of financial position would include the purchase price of bonds. Rationale: It would include the current market value of the bonds. 10 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

17 False False False False 24. The general rule for the inclusion of assets on the statement of financial position is to show them at their original cost. Rationale: Assets should be shown at their fair market value unless there is a good reason to do otherwise. 25. The inflows section of a cash flow statement could include a category for investment inflows. 26. A mortgage note payment would normally be classified as a fixed expense in a cash flow statement. 27. Savings and investment outflows would normally be classified as a variable expense on a cash flow statement. Rationale: Savings and investments should be a separate category to reinforce the need to pay one s self first. 28. An emergency fund should contain two months expenses in liquid form. Rationale: An emergency fund generally should contain three to six months expenses. 29. Money market accounts and funds and savings accounts are appropriate to use in establishing an emergency fund. 30. A person with many sources of stable income usually is in a better position financially than a person with only one, or a few, sources of income. 31. Individuals generally should save 5% to 10% of their income on an ongoing basis. Rationale: Individuals generally should save at least 10% to 20% of their income. Depending on financial goals, greater savings may be required. Remember that employer matches count toward this goal. 32. A long credit card grace period is preferable to a short one. /False Statements 11

18 False False False 33. A graduated payment mortgage entails making higher payments for a period of time, then lower payments for the duration of the mortgage term. Rationale: A graduated payment mortgage entails making lower payments for a period of time, but these payments increase later. 34. A reverse mortgage is one means of accessing home equity. 35. A budget is unnecessary if the client s economic situation is complex. Rationale: Budgeting is helpful for clients with complex economic situations. 36. A disadvantage of budgeting is that it may discourage flexibility. 37. A critical component of budgeting is planning for expenses such as car or home repairs even when you don t know that they will occur in the near future. 38. Interest earnings on assets held in a minor s trust generally are exempt from the kiddie tax. Rationale: Any unearned income in a 2503(c) minor s trust is subject to the kiddie tax rules. False False 39. Custodial accounts generally involve high administrative costs. Rationale: Generally, administrative costs for custodial accounts are nonexistent. 40. Pell grants are available to graduate and undergraduate students. Rationale: Pell grants are available only to undergraduate students. 41. Perkins loans are made available on the basis of financial need. 12 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

19 False 42. Monthly cash flow is the primary determinant in the lease or buy decision. Rationale: Cash flow is only one factor in the decision; overall cost (based on many factors), tax bracket, and length of possession all contribute to the decision. /False Statements 13

20 Module 2 T F 1. The Investment Advisers Act of 1940 applies to persons who sell securities. T F 2. NASD Notices to Members and are applicable to insider trading. T F 3. The U.S. Supreme Court, as well as the SEC, has ruled that an investment adviser is a fiduciary with respect to his or her clients. T F 4. A registered investment adviser does not have to disclose to clients limitations in the scope of his or her recommendations and any ties with broker/dealer firms. T F 5. The Investment Advisers Act of 1940 definition of a security is confined to stock, bonds, and certificates of deposit. T F 6. Just because someone holds himself or herself out as an investment adviser or as one who provides investment advice does not mean that he or she is required to register as an investment adviser. T F 7. Anyone who meets the three-pronged test must register with the SEC. T F 8. Lawyers, accountants, engineers, or teachers whose advice is solely incidental to the practice of their respective professions qualify for an exemption from registration as an investment adviser. T F 9. Those who qualify under one of the six exceptions to the investment adviser registration requirements are not considered advisers and, therefore, do not have to comply with the antifraud provisions of the 1940 Act. T F 10. Form ADV, Part II, is required to disclose whether the adviser has any felony convictions or specified types of current injunctions. T F 11. Form U-4 must be submitted on behalf of every IAR seeking to be employed by the IA. 14 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

21 T F 12. A registered investment adviser may refer to himself or herself as an RIA. T F 13. A registered investment adviser may fulfill the brochure rule by providing clients and prospective clients with a copy of his or her Form ADV, Part II, or a separate narrative statement containing all the entries that appear on Part II. T F 14. Advisers who have less than $25 million under management, and are therefore required to register with their respective states, are still subject to SEC jurisdiction for antifraud violations. T F 15. For a willful violation of the 1940 Act, the SEC may impose fines of up to $25,000 and/or imprisonment of up to 10 years. T F 16. SEC rulings IA 770 and IA 1092 have the force of law. T F 17. To maintain more control over their representatives, large organizations become registered investment advisers rather than having each individual adviser in the organization register independently. T F 18. If an individual needs to register as an investment adviser, it is generally preferable to register as an individual rather than set up some other form of business, such as a corporation or limited liability company. T F 19. If an adviser has fewer than 12 clients in a state that is not his or her state of business, there is no need to register in that state. T F 20. Whenever an investment adviser who is also a registered representative with a securities broker/dealer provides any advice regarding investments that are not offered by his or her broker/dealer, he or she needs to obtain the broker/dealer s approval in each and every case. T F 21. A person who is registered with FINRA to sell securities is exempt from registering as an investment adviser. T F 22. Before 1981, anyone who wanted to sell securities had to meet the standards of the state in which he or she wanted to sell, and there were no consistent national standards. /False Statements 15

22 T F 23. It is acceptable under the Investment Advisers Act of 1940 to accept both fees and commissions from clients. T F 24. If an adviser collects both fees and commissions from a client, and does not point out that he or she is able to sell only products that are offered by his or her broker/dealer, the adviser may be in violation of the antifraud provisions of the Investment Advisers Act of T F 25. If an adviser normally charges a fee for advice but waives it if a client purchases insurance or securities from the adviser, the adviser is guilty of rebating. This is generally considered to be unethical, and it is illegal in most states. T F 26. If a financial planner who is not a licensed lawyer helps a client fill in blank forms designed to create a will or trust, the planner may be guilty of practicing law without a license. T F 27. Principles and rules embodied in codes of ethics have the force of law. T F 28. Steve Maloski recommends a specific investment strategy for a client. He knows that it is not the best one for the client, but it is a good strategy, and he will make more money by having the client implement it. In this case, Steve has violated his fiduciary duty to the client. T F 29. Conflicts of interest to which a financial planner may be subject can be overcome by full disclosure to the client. T F 30. New York Stock Exchange Rule 405 (the know your customer rule) requires a registered representative to meet with each client and get to know him or her on a personal basis. T F 31. If financial planners do not have expertise in a particular area of financial planning, they should nevertheless provide service in that area within the limits of their expertise. T F 32. After initial qualification as a financial planner, there is no continuing obligation to keep reasonably abreast of current practice and information in the field. 16 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

23 T F 33. CFP Board of Standards practice standard requires the scope of the financial services engagement to be in writing. T F 34. Under Practice Standard 200 2, if a practitioner is unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, he or she should refuse to provide the requested services. T F 35. Practice Standard deals primarily with gathering quantitative information and documents from clients. T F 36. Practice Standard states that a planner may not use any assumptions when analyzing client data. /False Statements 17

24 Module 2 Answers False 1. The Investment Advisers Act of 1940 applies to persons who sell securities. Rationale: The Investment Advisers Act of 1940 applies to persons who give investment advice. Persons who sell securities must register with the NASD. False 2. NASD Notices to Members and are applicable to insider trading. Rationale: NASD Notices to Members and are applicable to selling away. 3. The U.S. Supreme Court, as well as the SEC, has ruled that an investment adviser is a fiduciary with respect to his or her clients. False 4. A registered investment adviser does not have to disclose to clients limitations in the scope of his or her recommendations and any ties with broker/dealer firms. Rationale: SEC Release IA 1092 specifically requires such disclosure. False 5. The Investment Advisers Act of 1940 definition of a security is confined to stock, bonds, and certificates of deposit. Rationale: A security is defined by the Act in very broad terms and includes many other types of investments. False 6. Just because someone holds himself or herself out as an investment adviser or as one who provides investment advice does not mean that he or she is required to register as an investment adviser. Rationale: Generally, any person holding himself or herself out as an investment adviser or as one who provides investment advice would be required to register as an investment adviser. 18 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

25 False 7. Anyone who meets the three-pronged test must register with the SEC. Rationale: Prior to the National Securities Markets Improvement Act of 1996, this was true. The 1996 Act established rules for where an adviser needs to register. False 8. Lawyers, accountants, engineers, or teachers whose advice is solely incidental to the practice of their respective professions qualify for an exemption from registration as an investment adviser. Rationale: These groups of professionals are one of the six exceptions to the investment adviser requirement not one of the exemptions. 9. Those who qualify under one of the six exceptions to the investment adviser registration requirements are not considered advisers and, therefore, do not have to comply with the antifraud provisions of the 1940 Act. False False 10. Form ADV, Part II, is required to disclose whether the adviser has any felony convictions or specified types of current injunctions. Rationale: This information is required by Form ADV, Part I. 11. Form U-4 must be submitted on behalf of every IAR seeking to be employed by the IA. 12. A registered investment adviser may refer to himself or herself as an RIA. Rationale: Use of RIA is specifically prohibited by SEC rules. 13. A registered investment adviser may fulfill the brochure rule by providing clients and prospective clients with a copy of his or her Form ADV, Part II, or a separate narrative statement containing all the entries that appear on Part II. 14. Advisers who have less than $25 million under management, and are therefore required to register with their respective states, are still subject to SEC jurisdiction for antifraud violations. /False Statements 19

26 False False False False 15. For a willful violation of the 1940 Act, the SEC may impose fines of up to $25,000 and/or imprisonment of up to 10 years. Rationale: For a willful violation of the 1940 Act (as amended), the SEC may impose fines of up to $10,000 and/or imprisonment of up to five years. 16. SEC rulings IA 770 and IA 1092 have the force of law. Rationale: These rulings do not have the force of law, but they do indicate the thinking of the SEC. 17. To maintain more control over their representatives, large organizations become registered investment advisers rather than having each individual adviser in the organization register independently. 18. If an individual needs to register as an investment adviser, it is generally preferable to register as an individual rather than set up some other form of business, such as a corporation or limited liability company. Rationale: Because audited financial statements may be required and because of potential conflicts of interest, most individuals would be better off operating as a registered investment adviser through a business entity such as a corporation or an LLC rather than maintaining a sole proprietorship. 19. If an adviser has fewer than 12 clients in a state that is not his or her state of business, there is no need to register in that state. Rationale: If an adviser has fewer than five clients in a state that is not his or her state of business, there is no need to register in that state. 20. Whenever an investment adviser who is also a registered representative with a securities broker/dealer provides any advice regarding investments that are not offered by his or her broker/dealer, he or she needs to obtain the broker/dealer s approval in each and every case. 20 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

27 False False 21. A person who is registered with FINRA to sell securities is exempt from registering as an investment adviser. Rationale: Registration with FINRA permits an individual to sell securities. Whether he or she has to register as an investment adviser depends on whether they meet the three-pronged test or can rely on one of the exceptions or exemptions. 22. Before 1981, anyone who wanted to sell securities had to meet the standards of the state in which he or she wanted to sell, and there were no consistent national standards. 23. It is acceptable under the Investment Advisers Act of 1940 to accept both fees and commissions from clients. 24. If an adviser collects both fees and commissions from a client, and does not point out that he or she is able to sell only products that are offered by his or her broker/dealer, the adviser may be in violation of the antifraud provisions of the Investment Advisers Act of If an adviser normally charges a fee for advice but waives it if a client purchases insurance or securities from the adviser, the adviser is guilty of rebating. This is generally considered to be unethical, and it is illegal in most states. 26. If a financial planner who is not a licensed lawyer helps a client fill in blank forms designed to create a will or trust, the planner may be guilty of practicing law without a license. 27. Principles and rules embodied in codes of ethics have the force of law. Rationale: Codes of ethics often are based on laws, but they are not laws themselves. Failure to abide by a code of ethics is not a violation of law. 28. Steve Maloski recommends a specific investment strategy for a client. He knows that it is not the best one for the client, but it is a good strategy, and he will make more money by having the client implement it. In this case, Steve has violated his fiduciary duty to the client. /False Statements 21

28 False False False False 29. Conflicts of interest to which a financial planner may be subject can be overcome by full disclosure to the client. 30. New York Stock Exchange Rule 405 (the know your customer rule) requires a registered representative to meet with each client and get to know him or her on a personal basis. Rationale: Rule 405 requires a registered representative to gather essential information to have reasonable grounds for believing that a particular investment recommendation is suitable for the client, in terms of the client s overall financial situation, investment objectives, and risk tolerance level. The requirement far exceeds simply meeting with the client to get to know him or her on a personal basis. 31. If financial planners do not have expertise in a particular area of financial planning, they should nevertheless provide service in that area within the limits of their expertise. Rationale: A financial planner must be aware of his or her limitations and has an affirmative duty to consult with those who have the requisite expertise. 32. After initial qualification as a financial planner, there is no continuing obligation to keep reasonably abreast of current practice and information in the field. Rationale: Financial planners have a duty to keep current on how financial services industry changes may affect recommendations made to clients. 33. CFP Board of Standards Practice Standard requires the scope of the financial services engagement to be in writing. Rationale: Practice Standard does not require the scope of the engagement to be in writing but acknowledges that certain disclosures to the client may be required to be in writing. 22 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

29 False False False 34. Under Practice Standard 200 2, if a practitioner is unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, he or she should refuse to provide the requested services. Rationale: In this situation, a practitioner should either (1) restrict the scope of the engagement to those matters for which sufficient and relevant information is available or (2) terminate the engagement. 35. Practice Standard deals primarily with gathering quantitative information and documents from clients. Rationale: Practice Standard deals primarily with mutually defining a client s personal and financial goals, needs, and priorities. 36. Practice Standard states that a planner may not use any assumptions when analyzing client data. Rationale: Practice Standard states that the planner will use assumptions in at least two mutually agreed upon areas: the areas of personal and economic considerations. /False Statements 23

30 Module 4 T F 1. Risk management is best conducted using a set process because it reduces the likelihood of being sidetracked and missing important points. T F 2. Before developing a risk management program for a client, the planner should define the objectives for the client to fully cover their risks. T F 3. The planner should obtain all of the client s risk management data through the use of data survey forms and insurance checklists. T F 4. After the planner has provided the client with a comprehensive risk management plan accepted by the client, the client is poorly served unless the plan is implemented. T F 5. In deciding whether to insure a potential loss, the planner needs to consider the likelihood of the loss occurring. T F 6. Actuaries perform risk analysis and determine premium amounts by ascertaining if the elements of an insurable risk are present and if adverse selection is controllable. T F 7. Insurance is used to transfer the risk of loss to a group, of which each member faces the same potential loss and none want the loss to happen. T F 8. Adverse selection is the process of picking only the best risks. T F 9. Postselection underwriting is when the insurer reviews the insured s actions, risk factors, and claims history after the policy has been in effect for a period of time to determine whether to continue providing coverage or cancel it. T F 10. A variation of risk reduction is risk sharing that involves forming a business entity in which the potential loss is limited to the amount invested in the business. 24 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

31 T F 11. In spite of the financial danger involved in absorbing unexpectedly large losses, firms that employ self-insurance usually do not retain commercial coverage to cover losses above a certain dollar amount. T F 12. A company using a self-insured plan can exclude certain benefits that may not be excluded from an insured plan. T F 13. Forming a purchasing group guarantees lower fees and increases the availability of insurance. T F 14. Torts are always intentional. T F 15. While acting irresponsibly may invite liability, acting responsibly will prevent it. T F 16. All risk treatment devices, including insurance, should be viewed as tools that are only appropriate or inappropriate in a particular situation. T F 17. In order to help a client with his or her risk management plan, a planner should know not only what kind of work a client does, but what the client does when not at work. T F 18. A contract in which one of the parties is incompetent may be voided by either party. T F 19. An implied contract arises when a member of the public reasonably believes that a person has the authority or knowledge to act in a certain manner. T F 20. The doctrine of absolute liability holds an individual or company responsible only where there is fault or negligence. T F 21. When a planner fails to conduct himself or herself in a professional manner and causes harm to a client, one of the elements that must be present in order for the planner to be considered negligent is a causal connection between the action and the resulting harm. T F 22. Exercising due diligence or due care will help protect the planner from client accusations that he or she was negligent in recommending a particular product or plan of action. /False Statements 25

32 T F 23. The parol evidence rule applies to subsequent modifications after an agreement is in written form. T F 24. The doctrine of estoppel prevents a party from asserting a right to which he or she would otherwise be entitled where, because of his or her own actions or behavior, he or she misled someone (even though unintentionally) who relied on the understanding created thereby to his or her own detriment. T F 25. Rescission of a contract means that it is null from the point that it is rescinded. T F 26. Insurance policies are contracts of adhesion, which means that they are freely negotiated between the parties. T F 27. An aleatory contract is one where the outcome is controlled by chance, and the dollars that change hands are generally of substantially unequal amounts. T F 28. Because there are two parties in an insurance contract (the insurer and the insured), insurance contracts are said to be bilateral contracts. T F 29. The declarations section of an insurance policy includes information provided by the applicant. T F 30. General agents are independent businesspeople empowered by the life insurance company they represent to sell the products of the company in specified territories and to appoint agents to do business under their supervision. T F 31. The independent agent usually affiliates himself or herself with only one particular company. T F 32. Career agents must earn a minimum level of commissions to maintain their career agent contracts. T F 33. An insurance broker is the agent of the insurance company. T F 34. Generally, an insurance broker cannot bind the insurer and, therefore, a premium payment made to a broker is not payment to the insurer. 26 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

33 T F 35. Insurers are not legally liable for the acts of their agents performing their duties, even if agents make fraudulent statements unknown to or unauthorized by the insurers. T F 36. Even though an insurance agent has only apparent authority, any acts by the agent would bind the insurer. T F 37. An insurance producer is different than an insurance agent or broker. T F 38. The initial notice of loss that is required when there is an insurance claim must always be in writing. T F 39. Once an individual has submitted the required proof of loss statement, he or she does not have to do anything else the insurance company requests. T F 40. Although both processes are similar, there are differences in the duties of the insured and insurer when a loss arises. T F 41. If an insured loses one of a pair of expensive diamond earrings, the insurance company may choose to replace that one earring rather than pay for a new pair. T F 42. Under a commercial property insurance coinsurance provision, the insurer will pay the greater of (1) the replacement cost of the damaged part of the property or (2) the amount determined by use of a coinsurance formula. T F 43. The concept of insurance requires that every insured share the burden of the few who suffer losses. T F 44. The term coinsurance is applied uniformly in all types of insurance. T F 45. Subrogation permits the insured to collect twice for the same loss if he or she is fortunate enough to have duplicate insurance coverage. T F 46. If a financial planner is involved in the process of insurance needs analysis, there is seldom a need to involve an insurance agent when choosing the type of insurance to be purchased or the company from which it should be purchased. /False Statements 27

34 T F 47. If a consumer employs a competent insurance agent, it is not necessary to read and understand the insurance contract, which is often very complex. T F 48. If an insurance company has any of the NAIC s 12 financial ratios outside the usual range, it is put on the NAIC s Watchlist. T F 49. The RBC Ratios adjust an insurance company s assets to reflect the risk associated with the various assets. T F 50. The two primary forms of ownership of insurance companies are mutual companies and stock companies. T F 51. The purpose of the Life Insurance Policy Illustration Model Law is to give guidance to graphic illustrators in preparing graphic illustrations of life insurance policies. T F 52. The McCarran Ferguson Act provides primarily for federal regulation of the insurance industry. T F 53. The regulatory authority of the Securities and Exchange Commission extends to variable life insurance products. T F 54. Under HIPAA, a medical condition cannot be excluded as a preexisting condition. T F 55. The National Association of Insurance Commissioners (NAIC) passes laws that are imposed on the states. 28 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

35 Module 4 Answers 1. Risk management is best conducted using a set process because it reduces the likelihood of being sidetracked and missing important points. False 2. Before developing a risk management program for a client, the planner should define the objectives for the client to fully cover their risks. Rationale: Objectives of any risk management program must come from the client (perhaps working with the planner), not just the planner. False 3. The planner should obtain all of the client s risk management data through the use of data survey forms and insurance checklists. Rationale: The planner should also refer to (and see) relevant documents such as tax returns, brokerage statements, insurance policies, wills, and trust documents and conversations with the client. 4. After the planner has provided the client with a comprehensive risk management plan accepted by the client, the client is poorly served unless the plan is implemented. 5. In deciding whether to insure a potential loss, the planner needs to consider the likelihood of the loss occurring. 6. Actuaries perform risk analysis and determine premium amounts by ascertaining if the elements of an insurable risk are present and if adverse selection is controllable. 7. Insurance is used to transfer the risk of loss to a group, of which each member faces the same potential loss and none want the loss to happen. False 8. Adverse selection is the process of picking only the best risks. Rationale: Adverse selection is having a pool of insureds skewed toward those who represent higher risk. /False Statements 29

36 9. Postselection underwriting is when the insurer reviews the insured s actions, risk factors, and claims history after the policy has been in effect for a period of time to determine whether to continue providing coverage or cancel it. False False False False 10. A variation of risk reduction is risk sharing that involves forming a business entity in which the potential loss is limited to the amount invested in the business. 11. In spite of the financial danger involved in absorbing unexpectedly large losses, firms that employ self-insurance usually do not retain commercial coverage to cover losses above a certain dollar amount. Rationale: Such firms usually do retain some form of commercial coverage to cover losses above a certain dollar amount. 12. A company using a self-insured plan can exclude certain benefits that may not be excluded from an insured plan. 13. Forming a purchasing group guarantees lower fees and increases the availability of insurance. Rationale: Forming a purchasing group does not guarantee lower fees, but it may increase the availability of insurance. 14. Torts are always intentional. Rationale: A tort may be either intentional or unintentional. 15. While acting irresponsibly may invite liability, acting responsibly will prevent it. Rationale: Acting responsibly will not necessarily prevent liability. 16. All risk treatment devices, including insurance, should be viewed as tools that are only appropriate or inappropriate in a particular situation. 30 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

37 False False False 17. In order to help a client with his or her risk management plan, a planner should know not only what kind of work a client does, but what the client does when not at work. 18. A contract in which one of the parties is incompetent may be voided by either party. Rationale: If one of the parties is incompetent (such as a minor), the contract may be voided only by the incompetent party. 19. An implied contract arises when a member of the public reasonably believes that a person has the authority or knowledge to act in a certain manner. 20. The doctrine of absolute liability holds an individual or company responsible only where there is fault or negligence. Rationale: Under the doctrine of absolute liability, a party is held responsible even where there is no fault or negligence. 21. When a planner fails to conduct himself or herself in a professional manner and causes harm to a client, one of the elements that must be present in order for the planner to be considered negligent is a causal connection between the action and the resulting harm. 22. Exercising due diligence or due care will help protect the planner from client accusations that he or she was negligent in recommending a particular product or plan of action. 23. The parol evidence rule applies to subsequent modifications after an agreement is in written form. Rationale: The parol evidence rule states that evidence whether oral or written of prior understandings will not be admitted to contradict a final, complete, written agreement (in the absence of fraud, mutual mistake, duress, or the like). /False Statements 31

38 False False False 24. The doctrine of estoppel prevents a party from asserting a right to which he or she would otherwise be entitled where, because of his or her own actions or behavior, he or she misled someone (even though unintentionally) who relied on the understanding created thereby to his or her own detriment. 25. Rescission of a contract means that it is null from the point that it is rescinded. Rationale: Rescission of a contract means that it is null from the beginning. 26. Insurance policies are contracts of adhesion, which means that they are freely negotiated between the parties. Rationale: A contract of adhesion is one in which one party writes the contract and the other party either accepts it as is or rejects it. 27. An aleatory contract is one where the outcome is controlled by chance, and the dollars that change hands are generally of substantially unequal amounts. 28. Because there are two parties in an insurance contract (the insurer and the insured), insurance contracts are said to be bilateral contracts. Rationale: An insurance contract is unilateral, not bilateral, because only one party, the policyowner, can enforce its terms. The insurer cannot force the policyowner to pay the premium. 29. The declarations section of an insurance policy includes information provided by the applicant. 30. General agents are independent businesspeople empowered by the life insurance company they represent to sell the products of the company in specified territories and to appoint agents to do business under their supervision. 32 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

39 False False False False 31. The independent agent usually affiliates himself or herself with only one particular company. Rationale: The independent agent usually does not affiliate himself or herself with only one particular company, although it is not uncommon for the agent to favor one company. 32. Career agents must earn a minimum level of commissions to maintain their career agent contracts. 33. An insurance broker is the agent of the insurance company. Rationale: An insurance broker is the agent of the insurance buyer. 34. Generally, an insurance broker cannot bind the insurer and, therefore, a premium payment made to a broker is not payment to the insurer. 35. Insurers are not legally liable for the acts of their agents performing their duties, even if agents make fraudulent statements unknown to or unauthorized by the insurers. Rationale: Insurers are legally liable for the acts of their agents performing their duties, even if agents make fraudulent statements unknown to or unauthorized by the insurers. 36. Even though an insurance agent has only apparent authority, any acts by the agent would bind the insurer. 37. An insurance producer is different than an insurance agent or broker. Rationale: In those states that have producers licenses, there is no difference between any of the producers. All insurance salespeople are considered to be agents. /False Statements 33

40 False False False False 38. The initial notice of loss that is required when there is an insurance claim must always be in writing. Rationale: The initial notice of loss for most property claims is often done with a phone call. 39. Once an individual has submitted the required proof of loss statement, he or she does not have to do anything else the insurance company requests. Rationale: The insured is required to assist and cooperate with the insurance company during the adjustment process. 40. Although both processes are similar, there are differences in the duties of the insured and insurer when a loss arises. 41. If an insured loses one of a pair of expensive diamond earrings, the insurance company may choose to replace that one earring rather than pay for a new pair. 42. Under a commercial property insurance coinsurance provision, the insurer will pay the greater of (1) the replacement cost of the damaged part of the property or (2) the amount determined by use of a coinsurance formula. Rationale: The insurer will pay the greater of (1) the actual cash value of the damaged part of the property or (2) the amount determined by use of a coinsurance formula. 43. The concept of insurance requires that every insured share the burden of the few who suffer losses. 44. The term coinsurance is applied uniformly in all types of insurance. Rationale: The term coinsurance has an entirely different meaning when it is used in property insurance than when it is used in indemnity-type health insurance. 34 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

41 False False False False 45. Subrogation permits the insured to collect twice for the same loss if he or she is fortunate enough to have duplicate insurance coverage. Rationale: Subrogation precludes the insured from collecting twice for the same loss. 46. If a financial planner is involved in the process of insurance needs analysis, there is seldom a need to involve an insurance agent when choosing the type of insurance to be purchased or the company from which it should be purchased. Rationale: If insurance is not an area of specialization for a planner, it makes sense to seek the opinion of an expert insurance agent. 47. If a consumer employs a competent insurance agent, it is not necessary to read and understand the insurance contract, which is often very complex. Rationale: An insurance consumer should read and understand the insurance contract. 48. If an insurance company has any of the NAIC s 12 financial ratios outside the usual range, it is put on the NAIC s Watchlist. Rationale: If an insurance company has four of the 12 ratios outside the usual ranges, it is put on the NAIC s Watchlist. 49. The RBC Ratios adjust an insurance company s assets to reflect the risk associated with the various assets. 50. The two primary forms of ownership of insurance companies are mutual companies and stock companies. /False Statements 35

42 False False False False 51. The purpose of the Life Insurance Policy Illustration Model Law is to give guidance to graphic illustrators in preparing graphic illustrations of life insurance policies. Rationale: The purpose of this model law is to define and limit how an insurance company may illustrate life insurance policy values to potential insureds. 52. The McCarran Ferguson Act provides primarily for federal regulation of the insurance industry. Rationale: The McCarran Ferguson Act provides primarily for state regulation of the insurance industry. 53. The regulatory authority of the Securities and Exchange Commission extends to variable life insurance products. 54. Under HIPAA, a medical condition cannot be excluded as a preexisting condition. Rationale: HIPAA regulates the application of preexisting conditions, but it does not eliminate them. The Affordable Care Act eliminated them if an individual signs up on one of the exchanges during open enrollment. 55. The National Association of Insurance Commissioners (NAIC) passes laws that are imposed on the states. Rationale: The NAIC creates model laws that it encourages the states to adopt. 36 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

43 Module 5 T F 1. The benefit under a joint and survivor death benefit option is generally smaller than under a life-only option. T F 2. Unusual expenditures made by family members after a client s death often are referred to as adjustment funds. T F 3. Death benefit proceeds from life insurance policies are generally taxable as regular income. T F 4. Dividends received from participating life insurance policies are usually paid when the insurer earns more than 8% on invested policy reserves. T F 5. Annually renewable term (ART) insurance usually has a very low premium. T F 6. Although approximately one-third of all insurance policies sold are term, only about 5% of death claims are paid from term insurance policies. T F 7. One distinction between universal life (UL) policies and other permanent life policies is that UL policy elements are unbundled. T F 8. Interest rates credited to current premiums on UL policies are nearly always the same as rates credited to past premiums. T F 9. Surrender charges normally increase the longer the policyholder holds an insurance contract. T F 10. UL policy returns react faster than whole life policy returns when interest rates change. T F 11. Variable universal life (VUL) policies require the policyholder to bear the risk of the underlying investment. T F 12. The death benefit guarantee period in an adjustable life policy cannot change once the policy is issued. T F 13. Joint life policies cover more than one life. /False Statements 37

44 T F 14. Employer-paid premiums on group life insurance policies are taxable as income to employees. T F 15. The primary loads of life insurance products are mortality costs and acquisition and administration expenses. T F 16. Low-load life insurance features include lower premiums and lower cash surrender values. T F 17. For a life insurance claim to be filed, all that is required is a copy of the death certificate and a claim form signed by the beneficiary. T F 18. A revocable beneficiary designation ensures that the beneficiary cannot be changed without written permission. T F 19. Lump-sum distributions are the most popular method of settlement option. T F 20. The most common nonforfeiture option is reduced paid-up insurance. T F 21. Under the installments for a fixed period settlement option, the beneficiary specifies an amount of desired income, and the insurer determines how long the payments will last. T F 22. The life income with refund settlement option guarantees only that payments will last throughout the beneficiary s life. T F 23. A person who elects the reduced premium dividend option will receive a check whenever there is a policy surplus. T F 24. Under the provisions of a disability waiver of premium rider, the policyowner will not be required to repay any premiums waived due to a qualifying disability. T F 25. Under the provisions of the common disaster clause, if the insured and the primary beneficiary die in a common accident, the beneficiary is presumed to have died first. 38 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

45 T F 26. A deferred annuity means that the policyholder s premium payment is deferred until three months after signing the annuity application. T F 27. Generally, withdrawals from tax-deferred annuities prior to age 59½ will trigger an IRS-imposed 10% penalty. T F 28. Mortality refers to life expectancy and morbidity refers to rates of disability. T F 29. An insurance company s dividend scale is based on its profits and surplus. T F 30. Generally, last-to-die joint life policies have a lower lapse rate than individual policies. T F 31. It is usually sufficient for a planner to consider only a client s current insurance needs. Future needs should be considered in the future. /False Statements 39

46 Module 5 Answers 1. The benefit under a joint and survivor death benefit option is generally smaller than under a life-only option. 2. Unusual expenditures made by family members after a client s death often are referred to as adjustment funds. False 3. Death benefit proceeds from life insurance policies are generally taxable as regular income. Rationale: Death benefits from life insurance policies are generally received income tax free. False 4. Dividends received from participating life insurance policies are usually paid when the insurer earns more than 8% on invested policy reserves. Rationale: Insurers normally base dividends on a part of earnings over a very conservative interest rate, such as 3.5% per year. 5. Annually renewable term (ART) insurance usually has a very low premium. 6. Although approximately one-third of all insurance policies sold are term, only about 5% of death claims are paid from term insurance policies. 7. One distinction between universal life (UL) policies and other permanent life policies is that UL policy elements are unbundled. False 8. Interest rates credited to current premiums on UL policies are nearly always the same as rates credited to past premiums. Rationale: It is often the case that older premiums are credited at different rates than newer premiums. The combined rate received from older and newer rates is referred to as the blended rate. 40 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

47 False 9. Surrender charges normally increase the longer the policyholder holds an insurance contract. Rationale: Surrender charges decrease the longer a contract is held. Most surrender charges have durations from 5 15 years, and they gradually decrease over those time spans. False False False 10. UL policy returns react faster than whole life policy returns when interest rates change. 11. Variable universal life (VUL) policies require the policyholder to bear the risk of the underlying investment. 12. The death benefit guarantee period in an adjustable life policy cannot change once the policy is issued. Rationale: The death benefit guarantee period, cash value, and premium are all changeable in adjustable life policies. 13. Joint life policies cover more than one life. 14. Employer-paid premiums on group life insurance policies are taxable as income to employees. Rationale: Premiums paid for up to $50,000 of group life insurance are excluded from employees income. Employerpaid premiums for amounts over $50,000 must be included as income to employees. 15. The primary loads of life insurance products are mortality costs and acquisition and administration expenses. 16. Low-load life insurance features include lower premiums and lower cash surrender values. Rationale: Although low-load policies do require lower premiums, they feature high immediate cash surrender values. When short premium payment periods are chosen, typical cash surrender values may be 80% to 100% of the first-year premiums. /False Statements 41

48 False False False False 17. For a life insurance claim to be filed, all that is required is a copy of the death certificate and a claim form signed by the beneficiary. 18. A revocable beneficiary designation ensures that the beneficiary cannot be changed without written permission. Rationale: Revocable beneficiary designations can be changed by the policyholder at will. Beneficiary designations that require written permission for changes are termed irrevocable. 19. Lump-sum distributions are the most popular method of settlement option. 20. The most common nonforfeiture option is reduced paid-up insurance. Rationale: The most common nonforfeiture option is cash. Other common options are reduced paid-up insurance and extended term insurance. 21. Under the installments for a fixed period settlement option, the beneficiary specifies an amount of desired income, and the insurer determines how long the payments will last. Rationale: When a beneficiary specifies a certain amount of income, he or she has elected the installment of a fixed amount settlement option. In the installment for a fixed period option, the beneficiary specifies the period of time over which payments are to be received. 22. The life income with refund settlement option guarantees only that payments will last throughout the beneficiary s life. Rationale: The life income with refund settlement also guarantees a refund if the beneficiary dies without having at least received the death benefit principal. 42 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

49 False False False 23. A person who elects the reduced premium dividend option will receive a check whenever there is a policy surplus. Rationale: The reduced premium dividend option will result in the subsequent premium being reduced by the amount of the dividend credited. 24. Under the provisions of a disability waiver of premium rider, the policyowner will not be required to repay any premiums waived due to a qualifying disability. 25. Under the provisions of the common disaster clause, if the insured and the primary beneficiary die in a common accident, the beneficiary is presumed to have died first. 26. A deferred annuity means that the policyholder s premium payment is deferred until three months after signing the annuity application. Rationale: A deferred annuity means that income payments will not start until at least one year from the first premium payment. 27. Generally, withdrawals from tax-deferred annuities prior to age 59½ will trigger an IRS-imposed 10% penalty. 28. Mortality refers to life expectancy and morbidity refers to rates of disability. 29. An insurance company s dividend scale is based on its profits and surplus. 30. Generally, last-to-die joint life policies have a lower lapse rate than individual policies. 31. It is usually sufficient for a planner to consider only a client s current insurance needs. Future needs should be considered in the future. Rationale: Planners should consider their clients future insurance needs as well as their current needs. Insurance also can be used to fund education or estate needs that may not be required for 20 to 30 years. /False Statements 43

50 Module 6 T F 1. The advantages of keeping an existing life insurance policy should be considered before replacing the policy. T F 2. Survivors needs should be taken into account when considering the amount of life insurance coverage needed. T F 3. Prior to determining an appropriate amount of life insurance coverage, a client must determine life insurance goals. T F 4. Although a client s life insurance needs should be considered when determining an appropriate amount of coverage, her wants should probably be ignored. T F 5. The anticipated earnings of a surviving spouse should be considered when determining life insurance needs. T F 6. It is difficult to predict a child s higher-education costs. Accordingly, these costs should not be considered when determining life insurance coverage. T F 7. An emergency fund for survivors should be equivalent to one month of their fixed and variable expenses. T F 8. If a client can qualify for one type of insurance, he or she generally can qualify for any type of insurance (with exceptions). T F 9. A pitfall in selecting a life insurance product is to assume that a variable product will outperform a nonequity product. T F 10. One effective method used to compare the costs of two policies is to determine what they cost per $1,000 of coverage. T F 11. If the price of life insurance is roughly the same as the insurance company s cost to pay death claims (the raw material cost ), the insurance is reasonably priced. T F 12. There is no perfect method of evaluating an individual insurance policy, but some ways are more appropriate than others, depending upon individual circumstances. 44 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

51 T F 13. A client s life insurance coverage should be reviewed periodically to take into account the client s changing needs, goals, and circumstances. T F 14. The insurance commissioners in most states actively encourage replacement of existing insurance policies. T F 15. A consideration when determining life insurance coverage is whether the survivors want to exhaust the proceeds or preserve them. T F 16. Term insurance is frequently the least expensive short-term solution to cover large life insurance needs. /False Statements 45

52 Module 6 Answers 1. The advantages of keeping an existing life insurance policy should be considered before replacing the policy. 2. Survivors needs should be taken into account when considering the amount of life insurance coverage needed. 3. Prior to determining an appropriate amount of life insurance coverage, a client must determine life insurance goals. False 4. Although a client s life insurance needs should be considered when determining an appropriate amount of coverage, her wants should probably be ignored. Rationale: A client s wants are nearly as important as a client s needs. And once needs are met, wants should be given appropriate credence. 5. The anticipated earnings of a surviving spouse should be considered when determining life insurance needs. False 6. It is difficult to predict a child s higher-education costs. Accordingly, these costs should not be considered when determining life insurance coverage. Rationale: An estimate of higher-education costs must be made prior to determining insurance coverage. As the child gets older, higher-education costs will be easier to predict and the life insurance plan may be fine-tuned. False 7. An emergency fund for survivors should be equivalent to one month of their fixed and variable expenses. Rationale: An amount equivalent to three to six months of total expenses should be set aside for an emergency fund. 8. If a client can qualify for one type of insurance, he or she generally can qualify for any type of insurance (with exceptions). 46 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

53 9. A pitfall in selecting a life insurance product is to assume that a variable product will outperform a nonequity product. False 10. One effective method used to compare the costs of two policies is to determine what they cost per $1,000 of coverage. 11. If the price of life insurance is roughly the same as the insurance company s cost to pay death claims (the raw material cost ), the insurance is reasonably priced. 12. There is no perfect method of evaluating an individual insurance policy, but some ways are more appropriate than others, depending upon individual circumstances. 13. A client s life insurance coverage should be reviewed periodically to take into account the client s changing needs, goals, and circumstances. 14. The insurance commissioners in most states actively encourage replacement of existing insurance policies. Rationale: To discourage arbitrary replacement of policies, most state insurance commissioners require some form of agent disclosure when replacing an existing policy. 15. A consideration when determining life insurance coverage is whether the survivors want to exhaust the proceeds or preserve them. 16. Term insurance is frequently the least expensive short-term solution to cover large life insurance needs. /False Statements 47

54 Module 7 T F 1. Some health care plans are owned and operated by organizations that are not insurance companies. T F 2. Managed care programs can lower costs by contracting with a limited number of providers. T F 3. The deductible in a health care plan refers to the dollar amount that will be paid by the insurer. T F 4. Indemnity refers to an insurance philosophy that a policyholder should be made financially whole after suffering a loss. T F 5. In a per cause deductible policy, the insured pays a deductible for each separate illness, regardless of any amount previously paid for other illnesses. T F 6. Medical Savings Accounts (MSAs) are similar to Individual Retirement Accounts (IRAs) in that money is not available without penalty until age 59½. T F 7. There are currently 20 standard Medigap plans. T F 8. The precertification provisions in health care plans stipulate that the plan provider must approve certain medical procedures before the plan will cover the procedure. T F 9. UCR tables show what is usual, customary, and reasonable for medical services and are identical for all insurance companies. T F 10. If there is conflicting information between a group health care plan s summary of benefits (given to employees) and its comprehensive contract, the summary of benefits holds precedence. T F 11. Preexisting conditions clauses will, for the most part, no longer be in use with the passage of the Patient Protection and Affordability Act (PPACA) T F 12. Utilization review procedures may include second opinions. 48 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

55 T F 13. The higher the deductible paid by the insured, the higher the premium. T F 14. The lifetime benefit that insurers will pay for a covered individual is commonly $1 million. T F 15. Insurers employ coordination of benefits clauses to enable insureds to collect more than 100% of their financial loss. T F 16. A PPO s swing plan allows an insured to use the plan as either an indemnity plan or a PPO plan. T F 17. Point of Service (POS) plans cause covered individuals to utilize high-cost providers. T F 18. Job lock refers to the inability to change employment due to the fear of loss of health care benefits. T F 19. Under HIPAA, pregnancy cannot be excluded as a preexisting condition. T F 20. HIPAA made it virtually impossible for an individual to obtain an individual health care policy without proving insurability. /False Statements 49

56 Module 7 Answers 1. Some health care plans are owned and operated by organizations that are not insurance companies. 2. Managed care programs can lower costs by contracting with a limited number of providers. False 3. The deductible in a health care plan refers to the dollar amount that will be paid by the insurer. Rationale: The deductible is the financial responsibility of the insured. 4. Indemnity refers to an insurance philosophy that a policyholder should be made financially whole after suffering a loss. 5. In a per cause deductible policy, the insured pays a deductible for each separate illness, regardless of any amount previously paid for other illnesses. False 6. Medical Savings Accounts (MSAs) are similar to Individual Retirement Accounts (IRAs) in that money is not available without penalty until age 59½. Rationale: Unlike IRA deposits, MSA deposits can be withdrawn without penalty to pay for unreimbursed medical expenses. As is the case with IRAs, deposits are (within statute) deductible in the year invested. False 7. There are currently 20 standard Medigap plans. Rationale: There are currently 14 standard Medicare supplement plans (also known as Medigap plans). Although new plans E, H, I and J cannot be sold, existing plans can continue to be used. Plans K and L were added several years ago, and plans M and N are included in Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

57 8. The precertification provisions in health care plans stipulate that the plan provider must approve certain medical procedures before the plan will cover the procedure. False 9. UCR tables show what is usual, customary, and reasonable for medical services and are identical for all insurance companies. Rationale: UCR tables may vary by insurance company and by geographic region. False False False 10. If there is conflicting information between a group health care plan s summary of benefits (given to employees) and its comprehensive contract, the summary of benefits holds precedence. Rationale: The comprehensive contract governs in cases where there are conflicts with the summary of benefits sheet given to employees. In many cases, however, employees have won court cases in similar disputes. 11. Preexisting conditions clauses will, for the most part, no longer be in use with the passage of the Patient Protection and Affordability Act (PPACA) Utilization review procedures may include second opinions. 13. The higher the deductible paid by the insured, the higher the premium. Rationale: The higher the deductible paid by the insured, the lower the premium. 14. The lifetime benefit that insurers will pay for a covered individual is commonly $1 million. Rationale: Maximum policy limits have been removed by enactment of the Patient Protection and Affordability Act (PPACA) /False Statements 51

58 False False False 15. Insurers employ coordination of benefits clauses to enable insureds to collect more than 100% of their financial loss. Rationale: Coordination of benefits clauses reinforce the concept of indemnity. If an insured is covered by two policies, these clauses will keep the insured from being reimbursed an amount exceeding his or her original payment. 16. A PPO s swing plan allows an insured to use the plan as either an indemnity plan or a PPO plan. 17. Point of Service (POS) plans cause covered individuals to utilize high-cost providers. Rationale: POS plans offer financial incentives to utilize low-cost providers, while still allowing many choices to covered individuals. 18. Job lock refers to the inability to change employment due to the fear of loss of health care benefits. 19. Under HIPAA, pregnancy cannot be excluded as a preexisting condition. 20. HIPAA made it virtually impossible for an individual to obtain an individual health care policy without proving insurability. Rationale: Within specific guidelines, HIPAA made it easier to obtain a policy without proving insurability. This further ameliorated the problem of job lock. ACA has made it possible for anyone under age 65 to acquire coverage through the exchanges at open enrollment. 52 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

59 Module 8 T F 1. Disability does not usually result in severe financial loss. T F 2. The majority of disabilities last less than 90 days. T F 3. Occupational classifications can be roughly categorized as blue collar, white collar, and professional. T F 4. A client can purchase the amount of coverage needed to protect their full lifestyle as long as they are insurable. T F 5. Generally, the more liberal a policy s definition of disability, the higher the premium. T F 6. Split definitions of disability are rare in group policies. T F 7. The elimination period in a disability policy refers to the period of time after the disability occurs and before benefit payments begin. T F 8. Group disability policies usually exclude bonuses and overtime when calculating maximum benefit payments. T F 9. Group disability policies can normally be converted to individual policies when an employee changes jobs. T F 10. Disability waiver of premium benefits are nearly always included as standard provisions in disability income policies. T F 11. Riders are specific provisions added to a contract to modify its coverage. T F 12. Cost-of-living riders are generally inexpensive to add to disability policies. T F 13. A financial advisor who offers disability insurance advice in his or her domestic state may always give advice in other states. T F 14. An insurer s legal department interprets what is meant by the language used in disability contracts. T F 15. Long-term care insurance is available only to people over 55 years old. /False Statements 53

60 T F 16. Living benefit riders accelerate death benefits in cases involving terminal illness. T F 17. LTC policy applications that do not ask extensive medical questions normally have comprehensive preexisting conditions exclusion clauses. T F 18. Respite care is one of the levels of care given to a person in a nursing home. T F 19. Long-term care premiums are not tax deductible. T F 20. Most long-term care policies contain waiver of premium provisions. T F 21. Medicare generally does not provide substantial long-term care benefits. 54 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

61 Module 8 Answers False 1. Disability does not usually result in severe financial loss. Rationale: Disability often results in devastating financial loss. A disabled individual often must continue to pay living expenses even though there may not be continued income. 2. The majority of disabilities last less than 90 days. 3. Occupational classifications can be roughly categorized as blue collar, white collar, and professional. False 4. A client can purchase the amount of coverage needed to protect their full lifestyle as long as they are insurable. Rationale: Clients are limited to the amount of income they can protect to avoid moral hazard. Most disability policies replace approximately two-thirds of a client s income 5. Generally, the more liberal a policy s definition of disability, the higher the premium. False 6. Split definitions of disability are rare in group policies. Rationale: Split definitions are common in group policies. Disability may be defined as own occ for a period of time, after which a stricter modified own occ definition may be invoked. 7. The elimination period in a disability policy refers to the period of time after the disability occurs and before benefit payments begin. 8. Group disability policies usually exclude bonuses and overtime when calculating maximum benefit payments. /False Statements 55

62 False 9. Group disability policies can normally be converted to individual policies when an employee changes jobs. Rationale: It is rarely the case that a group disability policy can be converted to an individual policy. Accordingly, leaving one s employer normally results in a loss of coverage. False False 10. Disability waiver of premium benefits are nearly always included as standard provisions in disability income policies. 11. Riders are specific provisions added to a contract to modify its coverage. 12. Cost-of-living riders are generally inexpensive to add to disability policies. Rationale: Cost-of-living riders are one of the most expensive riders that can be added to a disability policy. The potential loss to an insurer is substantial when this rider is added. 13. A financial advisor who offers disability insurance advice in his or her domestic state may always give advice in other states. Rationale: In many states, offering disability insurance advice is prohibited to individuals not licensed in those states. 14. An insurer s legal department interprets what is meant by the language used in disability contracts. False 15. Long-term care insurance is available only to people over 55 years old. Rationale: Many young people receive long-term care following accidents or some illnesses resulting in incapacity. Therefore, long-term care insurance coverage is also available to people younger than 55 years old. 56 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

63 False False 16. Living benefit riders accelerate death benefits in cases involving terminal illness. 17. LTC policy applications that do not ask extensive medical questions normally have comprehensive preexisting conditions exclusion clauses. 18. Respite care is one of the levels of care given to a person in a nursing home. Rationale: Respite care allows the primary caregiver a break, or respite, from the demands of caring for a client. 19. Long-term care premiums are not tax deductible. Rationale: Like all medical expenses, long-term care premiums may be tax deductible. Deductibility depends upon whether the policy is qualified as well as the status of the individual client s tax situation. 20. Most long-term care policies contain waiver of premium provisions. 21. Medicare generally does not provide substantial long-term care benefits. /False Statements 57

64 Module 9 T F 1. All states require the use of standard Insurance Services Office (ISO) forms for homeowners insurance. T F 2. If the replacement cost provisions of a homeowner s policy allow for 80% of replacement value and the homeowner insured the property for 80% of rebuilding costs the homeowner would be reimbursed only $80,000 if his $100,000 home were destroyed. (Note: do not consider automatic inflation-guard coverage or endorsements.) T F 3. For high-value items such as jewelry and furs, protection generally is available as an endorsement to a homeowners policy. T F 4. When a client does not need property coverage but does need personal liability coverage, he or she can purchase a Comprehensive Personal Liability (CPL) policy. T F 5. The claim expense provision in a CPL policy excludes costs for the insured s court defense. T F 6. Most professional liability insurance is inexpensive. T F 7. Umbrella liability policies are sometimes known as catastrophic liability insurance policies. T F 8. One of the responsibilities of a title insurance company is to research county records to ensure that there are no liens on a property. T F 9. Liability is the only portion of a Personal Auto Policy (PAP) that is mandatory. T F 10. Under pure no-fault coverage, an insured cannot sue another driver or another driver s insurance company. T F 11. If a PAP covers a client s auto, it also covers the client s trailer. 58 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

65 T F 12. Uninsured motorist coverage provides payment for client losses when an uninsured motorist is at fault. However, coverage does not extend to hit-and-run accidents. T F 13. Under the general provisions of a PAP, the bankruptcy of the insured does not eliminate insurer obligations. T F 14. It is often appropriate to carry no physical damage coverage on very old cars. T F 15. A disadvantage to Commercial Package Policies is that there is no discount for buying them as a package (multiple policies) rather than as a single unit. /False Statements 59

66 Module 9 Answers False 1. All states require the use of standard Insurance Services Office (ISO) forms for homeowners insurance. Rationale: Many states do not require standard ISO forms. Accordingly, most insurance policies are variations on these forms. 2. If the replacement cost provisions of a homeowner s policy allow for 80% of replacement value and the homeowner insured the property for 80% of rebuilding costs, a homeowner would be reimbursed only $80,000 if his $100,000 home were destroyed. (Note: do not consider automatic inflation-guard coverage or endorsements, as they are not mentioned in the original statement.) 3. For high-value items such as jewelry and furs, protection generally is available as an endorsement to a homeowners policy. 4. When a client does not need property coverage but does need personal liability coverage, he or she can purchase a Comprehensive Personal Liability (CPL) policy. False 5. The claim expense provision in a CPL policy excludes costs for the insured s court defense. Rationale: The claim expense provision states that, in addition to paying damages determined by the court, the policy will pay for the insured s defense. False 6. Most professional liability insurance is inexpensive. Rationale: The cost of professional liability insurance is quite high. This is necessitated by the fact that people are more likely to sue a professional for failure to use reasonable care. 7. Umbrella liability policies are sometimes known as catastrophic liability insurance policies. 60 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

67 8. One of the responsibilities of a title insurance company is to research county records to ensure that there are no liens on a property. 9. Liability is the only portion of a Personal Auto Policy (PAP) that is mandatory. False False 10. Under pure no-fault coverage, an insured cannot sue another driver or another driver s insurance company. 11. If a PAP covers a client s auto, it also covers the client s trailer. 12. Uninsured motorist coverage provides payment for client losses when an uninsured motorist is at fault. However, coverage does not extend to hit-and-run accidents. Rationale: Uninsured motorist coverage provides payment for losses caused by uninsured motorists and by hit-and-run drivers. 13. Under the general provisions of a PAP, the bankruptcy of the insured does not eliminate insurer obligations. 14. It is often appropriate to carry no physical damage coverage on very old cars. 15. A disadvantage to Commercial Package Policies is that there is no discount for buying them as a package (multiple policies) rather than as a single unit. Rationale: One advantage to these policies is that there is generally a discount for buying them as a package. This is far less expensive than buying individual policies for each commercial insurance need. /False Statements 61

68 Multiple-Choice Questions Session 1 (Module 1) 1. Paul King, a CFP certificant, is ready to help his clients, Nick and Faith, implement their financial plan. Which one of the following is most appropriate at this stage of the financial planning process? a. Paul will prepare a list of the professionals he has specified to prepare the necessary documents. b. Paul will hand the plan to Nick and Faith and tell them to contact him if they have any questions regarding the implementation process outlined in the plan. c. Paul will guide Nick and Faith through the steps required to put the plan in motion. d. Paul will establish priorities for Nick and Faith, clearly mapping out the order in which each facet of the plan is to be implemented. 2. Which of the following items are normally included in a statement of financial position? I. dividend income II. money market account balance III. mortgage note balance IV. vested pension benefits a. I only b. I and IV only c. II and III only d. II, III, and IV only 62 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

69 3. When discussing a mortgage on a client s personal residence, the concept of leverage explains which one of the following? a. the ability to convince the lender to make the loan b. the deductibility of the mortgage payment when calculating income taxes c. the ability to have a 20% gain when the value of the home increases by 4% d. the ability to borrow 95% of the value of the home Multiple-Choice Questions 63

70 Session 1 Answers 1. The correct answer is c. a. Professionals should be chosen by the client, not the planner. If a planner chooses the professionals, he or she is responsible for their performance. Paul will guide Nick and Faith through the steps required to put the plan in motion. b. Without the guiding hand of the planner, few plans will be implemented. Paul will guide Nick and Faith through the steps required to put the plan in motion. c. Without the guiding hand of the planner, few plans will be implemented. Paul will guide Nick and Faith through the steps required to put the plan in motion. d. The priorities must be the client s, not the planner s. Paul will guide Nick and Faith through the steps required to put the plan in motion. 2. The correct answer is: d a. Dividends are income, and income is included on a cash flow statement. The money market account balance, mortgage note balance, and vested pension benefits are included on a statement of financial position. b. Dividends are income, and income is included on a cash flow statement. The money market account balance, mortgage note balance, and vested pension benefits are included on a statement of financial position. c. This option does not include vested pension benefits, which should also be included on a statement of financial position. d. The money market account balance, mortgage note balance, and vested pension benefits are included on a statement of financial position. Income is included on a cash flow statement. 64 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

71 3. The correct answer is: c a. The creditworthiness of the borrower determines whether a loan is made. The ability to have a 20% gain when the value of the home increases by 4% is an example of leverage. b. This income tax issue reduces the cost of buying a home, but it is not considered leverage. The ability to have a 20% gain when the value of the home increases by 4% is an example of leverage. c. If the value of a $200,000 home increases by $8,000, the percentage increase is 4%. However, if the owner s equity increased from $40,000 to $48,000, the owner has had an increase in equity of 20%. d. This may lead to significant leverage, but it doesn t explain it. The ability to have a 20% gain when the value of the home increases by 4% is an example of leverage. Multiple-Choice Questions 65

72 Session 2 (Modules 1 & 2) 1. Which of the following are features that are shared in common between the Coverdell Education Savings Account and the Section 529 plans? I. Both have an income phaseout. II. Both have an age restriction for use of funds. III. Neither one of the plans provides any federal income tax deductibility to contributors. IV. Both can be undertaken simultaneously. a. I and II only b. I and IV only c. II and III only d. III and IV only 2. Which one of the following statements about FINRA and SEC registration is incorrect? a. An individual may perform activities requiring registration as an investment adviser that may not require FINRA registration. b. An individual may be required to register with FINRA but not with his or her state or the SEC. c. An individual may be required to register with both FINRA and the SEC (or his or her state). d. The SEC and FINRA are governmental agencies that register investment advisers. 66 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

73 3. Which one of the following is not in the category of being exempt from registration as an investment adviser under the Investment Advisers Act of 1940? a. an intrastate adviser in unlisted securities b. a publisher of a bona fide newspaper or financial publication of general and regular circulation c. an adviser whose only clients are insurance companies d. a private adviser who (1) during the previous 12 months had fewer than 15 clients; (2) does not hold himself or herself out generally to the public as an adviser; and (3) does not act as such for a registered investment company 4. Karen Manchego has made an excellent living by selling the stock of small local companies. She sells only to investors in her state, and none of the companies whose stock she sells are big enough to be listed on any exchange. She makes specific recommendations about the stock to all of her 250 clients, and the companies pay her a commission when she sells their stock. She sells about $40 million in shares each year. Should Karen register as an investment adviser? a. No, Karen does not need to register because the stock she sells is unlisted and all her clients live in her state. b. Yes, Karen should register in her state. c. Yes, Karen should register with the SEC. d. No, Karen does not need to register because she does not hold herself out as a financial planner. Multiple-Choice Questions 67

74 Session 2 Answers 1. The correct answer is: d a. False because only the CESA has an income phaseout. b. False because only the CESA has an age restriction at age 30. c. Neither plan is tax deductible for federal income tax purposes. Usually, 529 plans have state tax deductions and there are some gift tax benefits. d. Both can be used simultaneously. 2. The correct answer is: d a. It is possible for an individual to perform activities requiring registration as an investment adviser that may not require FINRA registration. FINRA is a self-regulatory organization, not a governmental agency. b. It is possible that an individual be required to register with FINRA, but not be required to register as a registered investment adviser with either the SEC or his or her state. FINRA is a self-regulatory organization, not a governmental agency. c. It is possible that an individual must register with both the SEC (or his or her state and FINRA. FINRA is a self-regulatory organization, not a governmental agency. d. FINRA is a self-regulatory organization (SRO) that registers persons who sell securities. 68 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

75 3. The correct answer is: b a. An intrastate adviser in unlisted securities is exempt from registration. b. A publisher of a bona fide newspaper or financial publication of general and regular circulation is one of six categories of exceptions, not the six exemptions. c. An adviser whose only clients are insurance companies is exempt from registration. d. A private adviser who (1) during the previous 12 months had fewer than 15 clients; (2) does not hold himself or herself out generally to the public as an adviser; and (3) does not act as such for a registered investment company, is exempt from registration. 4. The correct answer is: a a. Karen does not need to register because the stocks she recommends and sells are unlisted, and all of her clients are intrastate. She is considered to be an investment adviser, but she is exempt from registration. b. Karen does not need to register as an investment adviser because she fits under one of the exemptions from registration. c. Karen does not need to register as an investment adviser because the stocks she recommends and sells are unlisted, and all of her clients are intrastate. d. Karen does not need to register as an investment adviser, but not because she does not hold herself out as a financial planner. She clearly holds herself out as a provider of securities, she gives specific advice, and she receives compensation for that advice. Multiple-Choice Questions 69

76 Session 3 (Module 2) 1. Gary and Gabriella Gordon recently moved to your area and are meeting you for the first time. They ve expressed a desire to have adequate funds set aside for their son s college education in 15 years. They have a plan in place for Gilbert s college fund established with their previous planner, a CFP professional, and they ve told you, as they had told him, they want to keep the money in the college fund under their control. At your second meeting, when they bring in the plan document for Gilbert s college fund, you notice the plan their previous planner set up for them is an UGMA. What principle of the CFP Board Code of Ethics has the Gordons previous planner violated? a. competence b. fairness c. objectivity d. confidentiality 2. You have been working with this client for many years. The client calls and seems to be confused. She asks you to perform a trade that just yesterday she said not to do. She wants the proceeds transferred to the account that her caretaker has access to. When you ask her why, she just says the caretaker told her that account needs more money. What can you do? a. contact one of the grown children and express concern b. place the trade but call her attorney c. do not place the trade and call her doctor d. place the trade and contact the state department and report suspected abuse e. wait until the next day and call the client to reconfirm 70 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

77 3. Harry Harris, CFP, owns a planning firm with $8 million under management. CFP Board recently told Harry his rights to use the CFP marks were suspended for six months. Harry immediately removed the marks from his stationery, business cards, and website. Thirty calendar days before the suspension was over, Harry filed an affidavit with the Board stating that he had fully complied with the terms of the suspension, then immediately added the marks back. Did Harry violate any Rules of Conduct? a. No, he immediately removed the marks from all aspects of his business. b. Yes, Harry must wait for written confirmation that the suspension has ended before adding the marks back to his business. c. Yes, Harry did not notify his employees that his right to use the marks had been suspended. d. Yes, Harry did not notify his existing clients that his right to use the marks had been suspended. 4. Which of the following is the primary reason that CFP Board simply doesn t say that all CFP professionals are fiduciaries? a. CFP Board recognizes different definitions of fiduciary responsibility among financial planning services. b. Some CFP professionals are not involved in providing financial planning services to clients. c. Though all financial planning services are of a fiduciary nature, some firms do not wish their representatives to take on the title of fiduciary. d. Not all financial planning services require a high duty of care. Multiple-Choice Questions 71

78 5. Bernie made off with 5% of his clients accounts and was convicted for the act. At a hearing with the CFP Board s Hearing Panel, Bernie makes a $100,000 settlement offer. Bernie s settlement offer details his embezzlement, his admission that he did indeed commit the crime in question, and an apology. Bernie proposes that the Board suspend his marks for one year instead of revoking his right to use the credentials. Which of the following is not allowable in response to Bernie s offer? a. The Commission rejects Bernie s offer and revokes Bernie s right to use the CFP marks. b. The Commission accepts Bernie s offer. c. Subject to final approval by the Commission, the Hearing Panel counters, offering to suspend Bernie s right to use the mark for 10 years instead of the one year Bernie proposed. d. The Hearing Panel makes a counteroffer: Bernie must pay a fine of $200,000 and the suspension will run for one year. 72 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

79 Session 3 Answers 1. The correct answer is a. This question calls for the planner to be aware of two pieces of information. The client wishes control of the college funding assets. An UGMA is not in the control of the client. They are merely custodians for assets belonging to the minor. The client who made this request was dealing with a planner who did not have full knowledge of the products he was providing to clients. This clearly violates the ethics principle of competence. 2. The correct answer is d. Confidentiality and state law says you must place the trade and unless you have signed permission, you cannot disclose any information. You are however, legally charged with reporting any potential suspected abuse. Many advisers are now discussing with their clients what they would like them to do in these situations and having the appropriate documentation that allows them to contact someone if signs of dementia or other issues are present. 3. The correct answer is d. According to rule 4.7 of the Rules of Conduct, Harry must advise all current clients of any suspension or revocation received from CFP Board. If Harry had been an employee he would have an obligation to report the suspension to his employer, but as the owner there is no obligation to notify the employees. Any suspension that lasts less than one year will automatically end upon the certificant s filing with CFP Board within 30 calendar days of the expiration of the period of suspension an affidavit stating that the suspended certificant has fully complied with the order of suspension, unless such condition was waived by the Commission. 4. The correct answer is b. The Standards require that all CFP professionals who provide financial planning services will be held to the duty of care of a fiduciary, as defined by CFP Board. Since some CFP professionals are not involved in providing financial planning services to clients, it would be inappropriate to hold these individuals to a duty of care that may not apply to their professional activities. While CFP Board s fiduciary standard is reserved for financial planning services, the Standards nevertheless require a high duty of care for all CFP professionals in any type of client relationship: "A CFP professional shall at all times place the interest of the client ahead of his or her own." Multiple-Choice Questions 73

80 5. The correct answer is c. Article 4.3 of the CFP Board s Disciplinary Rules and Procedures states that the Commission may order suspension for a specified period of time, not to exceed five (5) years, for those individuals it deems can be rehabilitated. Under Article 13 of the Rules and Procedures, the Hearing Panel may negotiate settlements and endorse the Offer of Settlement to the Commission. The Commission has the final decisionmaking authority to accept or reject an Offer of Settlement according to Article Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

81 Session 4 (Module 3) 1. Anne Marie wants to accumulate a sum of money that will provide her with an additional $5,000 of income per year. How much will she need to have in the fund to provide that amount of money each year, assuming the funds earn 8% annually? a. $33,550 b. $36,234 c. $62,500 d. $78, Wayne Johnson wants to accumulate enough funds to send his son, Mark, to college. Mark is 4 years old, and it is expected that he will begin a four-year college program at age 18. The annual tuition today is $12,500. Wayne estimates that the annual inflation for college tuition will be 6% and he can get an 8% return on his money. How much does Wayne need to put aside today in order to meet this goal? a. $36,738 b. $37,432 c. $38,487 d. $109, An individual has $2,500 to invest and wants to accumulate $4,000 at the end of five years. What annual rate of return is required to meet this goal if earnings on the investment are compounded monthly? a. 9.4% b. 9.6% c. 9.7% d. 9.8% Multiple-Choice Questions 75

82 Session 4 Answers 1. The correct answer is: c a. This answer incorrectly solved for PV, using a 10-year time frame and an 8% interest rate. b. This answer incorrectly solved for PVAD, using a 10-year time frame and an 8% interest rate. c. This answer correctly divided the desired $5,000 by 8%. This is a capitalization calculation. d. This answer incorrectly solved for FV, using a 10-year time frame and an 8% interest rate. 2. The correct answer is: b a. This answer was incorrectly calculated in the end mode. b. This answer was correctly solved using the following three-step calculation. First, inflate $12,500 at 6% for 14 years = $28,261. Second, calculate the PVAD for four years using the inflated cost ($28,261) and the inflation-adjusted interest rate (1.8868) = $109,944. Finally, calculate the PV of $109,944, discounted at the after-tax rate of return for 14 years = $37,432. c. This answer incorrectly multiplied $12,500 by 4, then inflated that amount for 14 years at 6%, and discounted the result at 8% for 14 years. d. This answer correctly followed the process, but it did not discount the answer back 14 years at 8%. 3. The correct answer is: a a. This answer correctly solved for I/YR, by entering 12 (P/YR), 2,500 +/ (PV), $4,000 (FV), 5 ( P/YR; or 60 P/YR). b. This answer incorrectly used semiannual compounding. c. This answer incorrectly used annual compounding. d. This answer incorrectly entered 5 (N) instead of 5 ( P/YR). 76 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

83 Session 5 (Module 4) 1. Which of the following best describes the law of large numbers from the perspective of an insurance company? a. The loss must be large enough and almost catastrophic to be considered for coverage. b. The loss must be sizable enough to be measurable in terms damages sustained. c. There must be enough insured entities to spread the risk around adequately. d. There must be a sufficiently large number of units involved in a fortuitous occurrence to generate enough premium. 2. What is one legal requirement for an enforceable insurance contract? a. The parties to the contract must give up goods or services of equal value. b. The applicant must be given the right to alter or change provisions in the contract. c. The applicant must be considered a competent party to make a valid contract. d. The insured must be of majority age for the contract to be valid. e. The performance of the contract cannot be contingent on the occurrence of an event that is subject to chance. Multiple-Choice Questions 77

84 Session 5 Answers 1. The correct answer is: c Option a. is incorrect; the loss must not be catastrophic from the standpoint of the insurance company. Option b. is correct in that the loss must be measurable, but that has nothing to do with the law of large numbers. Option d. is also correct in premise, in that the loss must be accidental (or fortuitous), but it has nothing to do with premium and even less to do with the law of large numbers. Option c. describes the law of large numbers perfectly. 2. The correct answer is: c a. Insurance is an aleatory contract in that the parties give up goods or services of unequal value the insurance premium versus promise to pay for a covered loss. The correct answer is (c): an applicant must be mentally competent to make a valid contract. b. The applicant has no such right in an insurance contract. The correct answer is (c): an applicant must be mentally competent to make a valid contract. c. An applicant must be considered mentally competent to make a valid contract. d. If an insurance contract is entered into by an insured who is not of majority age, the contract is still valid, but it is voidable by the minor only. The correct answer is (c): an applicant must be mentally competent to make a valid contract. e. An insurance contract is by its nature contingent on the occurrence of an event that is subject to chance. The correct answer is (c): an applicant must be mentally competent to make a valid contract. 78 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

85 Session 6 (Module 4) 1. Daryl Jackson is an agent for the Accountable Insurance Company (AIC). During the most recent year, the company instructed its agents not to write fire insurance policies on day care centers. However, when Day Care Center of America applied for a policy, Daryl bound the coverage. The Day Care Center of America was destroyed by a fire a month later. What is the obligation of AIC in this situation? Consider carefully the supporting rationale in selecting your answer. a. AIC is required to pay because Daryl had express authority to bind the company. b. AIC is required to pay because Daryl had an ostensible authority (i.e., apparent) to do what the public reasonably believed he could do. c. AIC is not required to pay because Daryl is the agent of the insured. d. AIC is not required to pay because Daryl failed to disclose his full knowledge of the situation. 2. Which one of the following statements about the law of agency is incorrect? a. A power of attorney is an example of express authority. b. A telephone call from your client telling you to take care of that matter can be considered implied authority. c. Authority to act as an agent cannot be implied simply because the client fails to object to a series of known, unauthorized acts. d. An agent can have apparent authority if the principal fails to notify the agent s clients directly, stating that the agent s contract with the principal has been terminated. Multiple-Choice Questions 79

86 3. The doctrine of waiver provides for which one of the following remedies in settling insurance contract disputes? a. The insurer may alter the contract provisions upon notifying the policyholder. b. The insurer may void the contract in cases of misrepresentation. c. The insurer may be held to any relinquishment of a contractual right. d. The insurer may be held only to those terms written in the contract. e. The insurer will not be allowed to contradict any prior position taken in court. 4. Which of the following statements about the risk-based capital (RBC) ratios of insurance companies are true? I. They adjust an insurer s capital base to reflect risk. II. They consider the risk with respect to an insurer s assets, the risk of adverse insurance experience, the interest rate risk with respect to the insurer s business, and all other business and other relevant risks as set forth in the RBC instructions. III. If the numbers drop far enough, federal regulators step in and take action until the numbers improve. IV. They can be used by insurance companies in publications to promote their financial strength. a. I and III only b. III and IV only c. I, II, and III only d. I and II only 80 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

87 5. Which of the following are primary criteria that should be considered when selecting an insurer? I. a favorable rating from several rating companies II. the number of agents employed III. favorable risk-based capital ratios IV. the fact it is not on the NAIC s Watchlist a. I and II only b. III and IV only c. I, III, and IV only d. II, III, and IV only e. I, II, III, and IV Multiple-Choice Questions 81

88 Session 6 Answers 1. The correct answer is: b a. Daryl did not have express authority. In fact, his company had advised him not to sell such policies. Daryl had implied authority. b. Daryl had an ostensible authority (apparent). It is reasonable that the public would have believed he had the authority to write such policies. c. Daryl is the agent of the insurance company, not the insured. AIC is required to pay because Daryl had an apparent authority to do what the public reasonably believed he could do. d. Even if Daryl failed to disclose certain information to the insured, he is the company s agent, and therefore the company is bound by his acts. 2. The correct answer is: c a. A power of attorney is an example of express authority. b. This situation would give rise to implied authority. c. Authority to act as an agent can be implied if the client fails to object to a series of unauthorized acts known to the client. d. This is a correct statement. An agent can have apparent authority if the principal fails to contact the agent s clients directly, stating that the agent s contract with the principal has been terminated. 3. The correct answer is: c a. This is a false statement because insurance contracts are contracts of Adhesion. The insurance company cannot alter the contract. b. This is a true statement but has nothing to do with doctrine of waiver. Additionally in order to void the contract, the misrepresentation must be material on the part of the insured. If the misrepresentation was on the part of an agent or company to the insured, the company will be held liable under the doctrine of estoppel. c. This is the correct definition of doctrine of waiver. 82 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

89 d. The concept that the insurer is held to the terms of the contract is related to parol evidence rule meaning that the written contract in the absence of fraud, mutual mistakes, duress, etc. is all that is need and evidence of prior understandings before the contract is signed will into be admitted. e. It is true that an insurer cannot use one argument in one case and reverse themselves in another case if it helps their position but this has nothing to do with doctrine of waiver. 4. The correct answer is a. I and II are correct. III and IV are incorrect. If RBC ratios drop far enough, state insurance commissioners may intervene and prescribe corrective action. Insurers are prohibited from using their RBC ratios in any type of company publication. 5. The correct answer is c. The number of agents employed has little to do with the strength and viability of the insurance company. They may be solely supported by brokers. Multiple-Choice Questions 83

90 Session 7 (Module 5) 1. Which one of the following correctly identifies an acceptable 1035(a) exchange? a. an endowment contract for a term life policy b. an annuity contract for a whole life policy c. an annuity contract for an endowment contract d. an endowment for an annuity contract 2. Which one of the following is not an advantage of universal life (UL) insurance? a. It has flexible premium payments. b. It lends itself to a compulsory savings program. c. It has an adjustable death benefit. d. It has an unbundled structure. 3. Modified endowment contracts can only be created in which of the following types of life insurance policies? I. term life policies II. whole life policies III. universal life policies IV. variable universal life policies a. I and II only b. III and IV only c. II, III, and IV only d. I, II, III, and IV 84 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

91 4. All of the following are true regarding life insurance beneficiaries, except a. primary beneficiaries are paid before secondary beneficiaries. b. there is no limit to the number of beneficiaries in any one class. c. spouses are the most commonly named primary beneficiaries. d. most beneficiary designations are irrevocable. 5. Which one of the following is not true regarding second to die policies? a. The policy pays when the last person dies. b. Premiums are generally lower than the cost for two separate policies. c. They are generally not a very useful tool for estate planning purposes. d. They may be generally advantageous when one of the two insureds is older and highly rated. Multiple-Choice Questions 85

92 Session 7 Answers 1. The correct answer is: d a. An endowment can be exchanged for a similar endowment or an annuity contract. An endowment cannot be exchanged for a term policy. b. An annuity contract can be exchanged for another annuity contract, not a whole life policy. c. An annuity cannot be exchanged for an endowment. d. An endowment can be exchanged for an annuity. 2. The correct answer is: b a. Universal life allows flexible premium payments. Payments can be increased, reduced, and even occasionally omitted. b. Due to flexible premiums, universal life insurance does not lend itself to compulsory savings. It is often the case that people reduce payments to the point that universal life effectively becomes expensive term insurance. c. The death benefit of universal life policies can be adjusted up or down to meet the needs of the client. d. Universal life policies are unbundled so clients can see the cost of expenses and charges. 86 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

93 3. The correct answer is: c a. The only policy in which a MEC cannot be created (though technically possible with a single payment) is a term life policy because it has no investment capacity and lasts only to the end of the term. b. A whole life policy has no premium flexibility, but can be structured as a single payment policy and therefore becomes a MEC. c. UL policies have unbundled premiums and can become a MEC. d. VUL unbundled premium structure can become a MEC. 4. The correct answer is: d a. Primary beneficiaries are paid prior to all other classes of beneficiary. b. The number of beneficiaries in any class is limitless. c. Spouses are the most common primary beneficiaries. Surviving children are the most common secondary beneficiaries. d. Most beneficiary designations are revocable. Only a small percentage are irrevocable. 5. The correct answer is: c a. Second-to-die policies pay when the last, not first, person dies. b. As is most often the case, the cost of buying a single policy is less than if two policies are purchased. c. Second-to-die policies are quite useful as estate planning tools. In the case of married couples, when the second spouse dies, the policy can provide liquidity for estate taxes. If structured correctly, the proceeds also can avoid estate taxes d. These are excellent policies if one of the proposed insureds is older and/or highly rated. The underwriting on these policies will concentrate on the person who is most likely the second to die. Multiple-Choice Questions 87

94 Session 8 (Module 5) 1. In which of the following annuities do payments to the policyholder begin shortly after purchase? a. variable, flexible installment, immediate annuity fixed installment, deferred annuity b. single premium, immediate annuity c. single premium, variable deferred with some fixed subaccounts Session 8 Answer 1. The correct answer is: c a. There is no such animal as a flexible premium, immediate annuity, and variable refers only to the underlying investments. b. Immediate annuities begin paying the policyholder shortly after payment of premium. c. All deferred annuities begin payments at some point in the future. Variable and fixed refer only to the underlying investments. 88 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

95 Session 9 (Module 6) 1. Postmortem expenses typically include all of the following except a. funeral expenses. b. investment funds. c. last illness expenses. d. estate taxes. 2. Which of the following does not accurately describe a valid policy replacement scenario? a. Replacing one term policy with another is usually the least complex of the alternatives. b. Replacing a cash value policy with a similar cash value policy usually is not advantageous. c. Replacing a cash value policy with a term policy usually is unwise. d. Replacing a term policy through the policy s conversion clause is usually the best and least expensive alternative. 3. Which of the following are broad economic assumptions (rather than an individual s personal situation) that must be made during the life insurance selection process? I. the rate of return a client can earn on investments II. the inflation rate for the calculation period III. current resources available to purchase insurance IV. the client s risk tolerance a. I and II only b. II and III only c. III and IV only d. I and IV only Multiple-Choice Questions 89

96 Session 9 Answers 1. The correct answer is: b a. Funeral expenses are considered a postmortem expense. b. Investment funds are an asset, not an expense. c. Last illness expenses are considered a postmortem expense. d. Although some clients may not be subjected to estate taxes, these are considered a postmortem expense. 2. The correct answer is: d a. This is one of the simplest replacement scenarios, because there is no concern about built-up cash values. b. Such a replacement seldom is beneficial for the client. A new front-end load along with a higher age-rated premium increases the new premium. c. Once a reasonably good cash value policy has been purchased, retaining it usually is more advantageous than exchanging it for another policy. d. 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. 3. The correct answer is: a a. The rate of return and the inflation rate are broad economic variables that must be assumed to determine the appropriate amount of life insurance coverage. b. The inflation rate is a broad economic variable that must be assumed, but current resources, though important in the insurance selection process, are not a necessary economic assumption. c. Current resources, though important in the insurance selection process, are not a necessary economic assumption, and risk tolerance is important in the insurance selection process, but it is a client attribute, not an economic assumption. d. The rate of return is a broad economic variable that must be assumed to determine the appropriate amount of life insurance, but risk tolerance though important in the insurance selection process, is a client attribute, not an economic assumption. 90 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

97 Session 10 (Module 7) 1. The portability/preexisting conditions provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) apply to a. disability income insurance. b. comprehensive health care plans. c. workers compensation insurance. d. long-term care insurance. 2. Under the Patient Protection and Affordable Care Act of 2010 (PPACA 10), which one of the following has been eliminated for comprehensive major medical indemnity plans? a. copayments b. maximum policy limits c. coinsurance amounts below 80/20 d. deductible amounts above $1, Which of the following statements are NOT accurate about client transitions? a. A parent has 30 days to get a child listed for health insurance to avoid preexisting conditions. b. A widow has 60 days from notice to enroll for COBRA and can remain on that coverage for 36 months. c. A child can stay on their parent s coverage as long as they are a dependent up to age 26. d. Enrollment for Medicare and the various components ranges from three months prior, the birth month, and three months after. If the client does not sign up at that point penalties in additional lifelong premiums and preexisting conditions issues can apply. Multiple-Choice Questions 91

98 4. Which of the following are true concerning FSAs? a. If a client is in the 25% federal and 5% state, the tax savings for $1,000 contribution would be $300. b. An employer can allow $500 to be rolled into the next year and expenses for the first 2½ months of the year to use up any remaining money so the employee doesn t lose it. c. If an employee signed up for the full $2,550, if they have expenses of $1,000 in January, they must wait until the account has accumulated to get reimbursed. d. If an employee leaves before the end of the year, the employer cannot require the employee to reimburse funds paid out. 92 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

99 Session 10 Answers 1. The correct answer is: b a. HIPAA portability provisions do not apply to limited coverage policies such as disability insurance. b. HIPAA portability provisions were enacted to apply to comprehensive health care plans. c. HIPAA portability provisions do not apply to specialty policies such as workers compensation insurance. d. HIPAA does address long-term care insurance (LTCI), but the portability provisions do not apply to LTCI. 2. The correct answer is: b a. Copayments were not impacted by ACA. b. Maximum policy limits were eliminated by PPACA. c. There is no limit (up or down) on coinsurance splits between insurer and insured. d. There are no limitations on deductible amounts (in fact, HSAs require high deductible health policies (HDHP). 3. The false statement is: c a. This is a true statement; it is the only 30 day time period related to health care. If a parent fails to sign up their child, the child can be denied or preexisting conditions can apply. b. It is true that a widow has 60 days plus they can keep coverage for 36 months. c. This is incorrect because a child does NOT have to be a dependent to maintain coverage to age 26. d. It is true that there is an extended enrollment period but after that, preexisting conditions and significant lifelong increases in premiums occur. Multiple-Choice Questions 93

100 4. The true statement is: d a. A is incorrect because it fails to recognize the FICA savings. No payroll taxes are deducted from contributions so the savings would be 37.65%. For every $1000 a client puts into a flexible spending plan, they are saving $ b. B is incorrect because the employer can do one or the other but not both. c. C is incorrect because the employer is on the hook for paying up to the amount the employee signed up independent of the date of expenses. d. D is correct. Both the employer and employee take a risk. If the employee contributes too much money they could forfeit the money to the employer and if the employee leaves, the employer could be on the hook for the amount utilized that was not contributed. 94 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

101 Session 11 (Module 7) 1. Richard Weiss is insured through his employer in a group indemnity health care plan. His annual deductible is $1,000, after which Richard must pay 20% of additional charges, with a MOOP limit of $5,000. In his first claim of the year, Richard has $1,500 of covered medical expenses. How much will his insurer pay? a. $300 b. $400 c. $1,100 d. $1, Which one of the following is not considered to be a managed care program? a. Health Maintenance Organizations (HMOs) b. Preferred Provider Organizations (PPOs) c. Provider Service Networks (PSNs) d. Medicaid (CMA) 3. Which of the following is not a true statement? a. Part A covers hospitalization and most people pay a small premium. b. Part B covers doctors and expenses outside of hospitalization and there is a penalty in terms of increased premiums if a client fails to sign up unless they maintained credible coverage. c. If a client has Medicare Advantage plan, part D drug coverage is incorporated into the coverage. d. Medicare Supplement/Medigap plans are an alternative if an area does not have Medicare Advantage plans. Multiple-Choice Questions 95

102 Session 11 Answers 1. The correct answer is b. a. This answer is incorrect because it is simply 20% of the entire $1,500 bill. b. This is the correct answer because it subtracts the $1,000 deductible and then applies the 80% coinsurance the insurer will pay. $1,500 - $1,000 = $500 x.8 = $400 c. This is incorrect because this is what Richard will owe. d. This answer represents 80% of the total expenses of $1,500 and fails to account for the deductible. ($500 $200) x 80% = $ The correct answer is d. Medicaid is not a managed care program. It is a form of welfare funded by the federal government and each state. 3. The false statement is a. a. Most people do NOT pay a premium. If they are insured for 40 quarters there is no premium. b. It is true there is a penalty if a client fails to sign up for part B unless they have maintained credible coverage. Preexisting conditions can also apply and the penalty never goes away except in cases of very low income individuals. c. It is true that Medicare Advantage plans have drug coverage incorporated. d. Where Medicare Advantage plans do not exist or the client wishes different coverage/different premiums, Medicare Supplement plans are an option. 96 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

103 Session 12 (Module 8) 1. Marcus is single and is helping to support his widowed mother. The out-ofpocket expenses to cover a basic lifestyle for both of them requires after-tax income of $4,000 per month. His average tax rate is 20%. His group coverage is 60% of his base salary paid by the employer. Marcus earns $100,000 of which $10,000 is bonus. What will Marcus have to live on if he becomes permanently disabled? a. $5,000; he will be able to meet the income and save. b. $4,500; he will be able to meet the income, save some initially but inflation will make meeting the income in the future difficult. c. $4,000; he will be able to meet the income but will be unable to save for retirement and inflation will make it impossible to meet the goal in the future d. $3,600; he will not be able to meet current needs and inflation will create a larger gap, let alone save for retirement. 2. All of the following are differences between typical blue collar disability coverage and white collar disability coverage, except a. the definition of disability becomes progressively more liberal when approaching the white collar level. b. the duration of benefit payable becomes progressively longer when approaching the white collar level. c. benefit payments become progressively lower when approaching the white collar level. d. the availability of other policy riders increases when approaching the white collar level. Multiple-Choice Questions 97

104 3. Which one of the following is true regarding group disability insurance? a. Group policies are usually offered with riders. b. Most policies provide an own occupation definition of disability to age 65. c. A group policy often has a more stringent long-term definition of disability than an own occupation individual policy. d. Group policies are usually issued after asking the individuals in the group health-related questions. 4. Which of the following is true regarding business (disability) overhead expense insurance? a. It is most often purchased by large businesses with public ownership. b. Benefits normally extend for years. c. It most often is purchased to cover costs such as office rent, utility expenses, staff salaries, and so forth. d. It is usually purchased by blue collar individuals. 98 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

105 Session 12 Answers 1. The correct answer is: d a. There are two errors. First, the bonus must be subtracted and then the taxes. b. This addresses the bonus but fails to address the taxes. c. This calculation addresses the taxes but not the bonus d. This is the correct calculation. He will not be able to meet current income needs, inflation will eat away his security and he will have no ability to save for the time when the group coverage ends. 2. The correct answer is: c a. There is generally a more liberal definition of disability at the white collar level. More own occupation policies are written at this level. b. Benefits are often received for a longer period of time at the white collar level. Blue collar workers are often limited to a five-year benefit, while white collar workers may receive lifetime benefits. c. Benefit payments are driven by income, not by classification, so it is unlikely that they would decrease at the typical white collar income level. d. More policy riders are generally available to white collar workers than to blue collar workers. 3. The correct answer is: c a. Group policies generally do not have any riders. b. Own occupation definitions of disability usually expire after 2 5 years. c. Most group policies lean toward modified any occupation definitions of disability. These are more stringent than own occupation definitions. Group policies may also use a split definition that begins with an own occupation definition, but this is almost always modified after a relatively brief period of time. Multiple-Choice Questions 99

106 d. Perhaps the biggest single benefit of a group policy is that most insurance companies issue the policy without asking health-related questions. 4. The correct answer is c. Business overhead expense insurance is most valuable to businesses with few owners. Benefit periods are usually limited to 12 or 24 months. Benefits are paid to cover office expenses that will exist even if an owner is disabled. The most common expenses are overhead costs such as rent, utilities, and staff salaries. Business overhead expense insurance is generally limited to white-collar and professional individuals. 100 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

107 Session 13 (Module 8) 1. Which one of the following is considered to be the highest level of long-term care? a. custodial care b. respite care c. skilled nursing care d. intermediate care e. home care 2. Which of the following stipulations must be met for Medicare to cover the cost of long-term care? a. The care can be needed either full- or part-time. b. The patient s condition must be expected to improve. c. The need for care can be determined by the patient s family. d. The care can be either skilled or unskilled. 3. HIPAA requires qualified long-term care policies to adhere to which of the following guidelines? I. They must recognize five or six ADLs. II. They must cover cognitive impairment. III. Reinstatement must be possible if a policy lapses due to cognitive impairment. a. I only b. II only c. I and III only d. I, II, and III Multiple-Choice Questions 101

108 4. When determining how much long-term care insurance to buy, all of the following should be considered except a. the cost of long-term care in the client s area. b. marital status of the client. c. HIPAA qualification. d. daily benefit amount offered by the policy. 102 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

109 Session 13 Answers 1. The correct answer is: c a. Custodial care is generally nonmedical and encompasses assistance with bathing, eating, and so forth. It is not at as high a level as skilled nursing care. b. Respite care is the provision of a replacement caretaker so that the regular caretaker can take a break from duties. It is not considered a high level of care. c. Skilled nursing care is the highest level of long-term care. It generally refers to 24-hour-a-day availability of a registered nurse under a doctor s supervision. d. Intermediate care refers to less-intensive nursing or rehabilitative care. e. Home care is not under a physician and is the least intense level of all. 2. The correct answer is: b a. Care must be needed full time. b. Medicare will not cover long-term care costs if the patient s health is not expected to improve. c. The need for care must be certified by a physician. d. Medicare will cover skilled care only. 3. The correct answer is: d a. Qualified policies must recognize five or six ADLs. However, they must also cover dementia and allow for reinstatement due to lapses caused by cognitive impairment. b. Qualified policies must cover dementia. However, they must also recognize five or six ADLs and allow for reinstatement due to lapses caused by cognitive impairment. c. Qualified policies must recognize five or six ADLs and must allow for reinstatement due to lapses caused by cognitive impairment. However, they must also cover dementia. Multiple-Choice Questions 103

110 d. Qualified policies must adhere to all three of these guidelines. Additionally, qualified policies must provide nonforfeiture provisions and be guaranteed renewable. 4. The correct answer is: c a. The cost of long-term care in the client s area is an important consideration unless the client plans to move to a different geographical area. b. The marital status of a client is important due to the differences in household expenses once a client enters a nursing home. If the client is married, household expenses are unlikely to change as much as if the client were single. c. HIPAA qualification should be considered when comparing policies, but it is of little or no importance when determining how much coverage to purchase. d. Daily benefit amounts currently range from $50 to $300, with most falling between $50 and $150. Accordingly, these are an important consideration when determining an appropriate amount of coverage to purchase. 104 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

111 Session 14 (Module 9) 1. Which one of the following is not one of the eight general exclusions that apply to all standard ISO homeowners policies? a. vandalism b. earth movement c. war d. neglect 2. Which HO policy form, or combination of forms, provides the highest level of building and personal property coverage? a. HO b. HO c. HO d. HO Teresa s residence was insured ten years ago for $300,000 with a replacement value policy and a $1,000 deductible. Today the market value is $550,000 and replacement costs are $500,000. If she had damage that cost $100,000, how much would the insurance company pay her? a. $59,000 b. $60,000 c. $74,000 d. $75,000 e. $100,000 Multiple-Choice Questions 105

112 4. Comprehensive personal liability coverage (CPL) can be acquired in all of the following ways except as a. an individual CPL policy. b. part of a homeowners policy. c. an endorsement to a monoline dwelling form. d. an endorsement to a personal auto policy (PAP). 5. Which one of the following is not generally excluded from coverage in Comprehensive Personal Liability (CPL) policies? a. the use of automobiles b. renting a room in a house to a single tenant c. liabilities incurred by physicians d. the use of boats (with some exceptions) 106 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

113 6. Personal property floater (inland marine) policies are available for which of the following items? I. silverware II. musical instruments III. golfing equipment IV. installed carpeting a. I and II only b. II and III only c. I, II, and III only d. I, II, III, and IV Multiple-Choice Questions 107

114 Session 14 Answers 1. The correct answer is: a a. Vandalism is one of the ten basic coverages of standard ISO policies. It is not an exclusion. b. Earth movement is an ISO exclusion unless it is caused by theft, fire, explosion, or breakage of glass. c. War is an ISO exclusion. d. Neglect is an ISO exclusion. This encourages policyholders to use reasonable means to keep their properties safe and habitable. 2. The correct answer is: d a. The HO policy form only provides broad form coverage on buildings and personal property. b. The HO form only provides broad form coverage for personal property. c. The HO personal property endorsement, provides open perils coverage on personal property. This endorsement is usually added to the HO d. The HO policy provides open perils coverage on both buildings and personal property. 3. The correct answer is c. Coinsurance applies as follows: 80% of $500,000 = $400,000 of required coverage. She carries $300,000. (Amount Carried/Required Amount) x Loss Amount = Total claim payable by insurer, subject to the deductible. $3000,000/$400,000 = 75% x $100,000 = $75,000 - $1,000 deductible = $74, The correct answer is: d a. Most CPL coverage is available via individual policies. b. CPL coverage can be included in Section II of a homeowners policy. c. CPL coverage may be added to monoline dwelling forms through endorsement. 108 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

115 d. CPL coverage is not available through PAPs. 5. The correct answer is: b a. Because every state requires that automobiles have their own liability coverage, automobiles usually are excluded from CPL policies. b. Although property rental usually is excluded from CPL policies, renting a room to fewer than three tenants does not normally trigger exclusion. c. Liabilities incurred by physicians, attorneys, financial planners, and other professionals are covered by professional liability policies. They are therefore excluded from CPL policies. d. Boats are generally excluded from CPL policies (with some exceptions). 6. The correct answer is: c a. Personal property floaters are available for silverware and musical instruments, but they also are available for golfing equipment. b. Personal property floaters are available for musical instruments and golfing equipment, but they also are available for silverware. c. Personal property floaters are available for silverware, musical instruments and golfing equipment, but they are not available for installed carpeting (this is considered a fixture and covered under the HO policy itself, however, coverage would be available for an item such as an antique rug). d. Personal property floaters are available for silverware, musical instruments, and golfing equipment, but not for installed carpeting (however, coverage would be available for an item such as an antique rug). Multiple-Choice Questions 109

116 Session 15 (Module 9) 1. A client mentions that her brother and nephew are going to move in with them for the next year because they are going through a rough patch after a spouse s death and business loss. She figures it will allow them to get back on their feet. They are going to pay some minimal rent of $200.They will be able to save expenses, such as rent and having a second car for the nephew because he will be able to use theirs. The nephew has had some trouble with drugs and alcohol this last year receiving a DUI, which they hope the counseling they are going to pay for will help. What issues should you as their planner raise? a. property coverage b. automobile coverage for nephew c. disclosure to insurance company about DUI and additional residents d. umbrella coverage e. all of the above 2. The PAP endorsement that covers people who borrow cars is known as a. extended liability coverage. b. the named non-owner endorsement. c. the motor home endorsement. d. the miscellaneous-type vehicle endorsement. 3. Which one of the following systems of handling automobile claims does not allow an insured to sue another driver or the other driver s insurance company? a. traditional tort system b. pure no-fault c. modified no-fault d. expanded no-fault 110 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

117 Session 15 Answers 1. The correct answer is e. Depending on the type of coverage and the insurance company, there are several risks here which could cause problems. Some companies raise premiums if a driver with a DUI is living in the residence and has access to the car even if they have their own. Some companies require listing of residents if other than immediate family. Unless you are expert in these areas, you will want the clients to have a conversation with their agent and make sure all facts are disclosed in order to protect themselves. 2. The correct answer is: b a. Extended liability coverage is an endorsement that applies to various automobiles that would normally be excluded from coverage. It is not applicable for covering people who might borrow a car. b. The named non-owner endorsement provides coverage for individuals who borrow cars. These endorsements are used when the owner of the borrowed car does not have adequate coverage. c. The motor home endorsement applies to motor homes. d. The miscellaneous-type vehicle endorsement extends coverage to motorcycles, scooters, all-terrain vehicles, mini-bikes, and so forth. 3. The correct answer is: b a. Suing another party has always been a hallmark of the traditional tort system. b. Pure no-fault insurance prohibits an insured from suing another party. It has not been implemented in any state, but it does exist on paper as a form of no-fault insurance. c. Modified no-fault allows an insured to sue under narrow circumstances (when losses exceed the amount paid by the policyholder s insurance company). d. Expanded no-fault allows the insured a greater freedom to sue another driver or the driver s insurance company. Multiple-Choice Questions 111

118 Session 16 (Module 9) 1. All of the following professionals would be likely to purchase errors and omissions insurance except a. financial planners. b. accountants. c. physicians. d. attorneys. Session 16 Answer 2. The correct answer is: c a. Errors and omissions insurance is generally purchased by professionals who are in a position to cause their clients fiscal harm. Financial planners may cause fiscal harm if they are not diligent in their work. b. Accountants are likely to purchase errors and omissions policies due to the high possibility of causing their clients fiscal harm. c. Physicians generally purchase malpractice insurance rather than errors and omissions insurance. d. Attorneys are excellent candidates for errors and omissions policies. A lack of diligence on their part immediately exposes their clients to fiscal harm. 112 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

119 Financial Planning Process and Insurance Final Review Final Review Questions 1. The second stage of the financial planning process involves gathering data. Which of the following are functions of this stage? I. constructing a personal financial plan II. obtaining qualitative information about the client III. establishing goals and objectives IV. identifying potential barriers to achieving goals a. I and II only b. I and III only c. I and IV only d. II and III only e. III and IV only 2. If a planner identifies existing or potential problems that can negatively affect a client's ability to achieve objectives, which one of the following actions taken to prevent such a problem is most likely to require immediate attention? a. establishing an adequate emergency fund b. retitling of assets for estate tax purposes c. reallocating long-term investments d. selecting investment vehicles that are tax-efficient Financial Planning Process and Insurance Final Review 113

120 3. Bill and Karen Stapher have the following financial information. Total monthly expenses: $4,000 Checking account balance: $3,900 Money market fund balance: $9,500 Current value of 12-month CD: $5,000 Life insurance cash value: $4,000 Based on this information, how much is reasonably available for their emergency fund? a. $ 9,500 b. $13,400 c. $14,500 d. $22, Margaret is in the market for a new automobile. An automobile dealer has suggested that she lease a vehicle. The proposed lease terms include making 36 monthly payments of $325 and returning the vehicle to the dealer at the end of the lease period. Margaret may owe the lease company additional money if the car s actual value is less than the projected value. What type of lease agreement is the dealer proposing to Margaret? a. closed-end lease b. fixed-cost lease c. finance lease d. operating lease 114 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

121 5. Renee and Alonzo want to create a college tuition fund for their child, Elysa. They want Elysa to be able to get income from the trust, but do not want her to have access to the principal when she reaches age 21. To meet their objectives, Renee and Alonzo should establish a a. UGMA account. b. UTMA account. c. 2503(c) (minors) trust. d. Crummey (demand) trust. 6. Jayne Rand is a financial services professional who does not do comprehensive financial planning. Jayne sells mutual funds, listed stocks, and bonds to her clients, but does not specifically hold herself out as an investment adviser. Jane earns commissions on the products she sells to clients, who all live in her home state. Is Jane considered an investment adviser? a. No, because she does not qualify under any part of the three-pronged test. b. No, because all of Jayne's clients reside in the state in which she has her principal office. c. Yes, because she is indirectly compensated for giving advice. d. Yes, because she does not fall under one of the exceptions or exemptions to the registration requirement. Financial Planning Process and Insurance Final Review 115

122 7. Alex Reyner, a college finance professor, recently began publishing an independent monthly newsletter that provides information about business and investments to paid subscribers. Alex advertises his newsletter in all newspapers in his state to attract subscribers of which he now has 3,200. The publication discusses, among other things, general characteristics of investment vehicles and advice regarding the purchase of various investment vehicles. Alex does not provide any personal financial advice to individuals other than through the newsletter. Is Alex required to register with the SEC? Consider the supporting rationale in selecting your answer. a. yes, because he issues investment advice b. yes, because he receives compensation from the subscribers c. no, because he is considered to be an investment adviser, but he fits under one of the exemptions from registration d. no, because he is not considered to be an adviser, and he is excepted from registration 116 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

123 8. Bill Stout, CFP, is a registered investment adviser. As a normal part of his practice, Bill invests his clients' money in a predetermined mix of five stocks, a government bond, and two unit investment trusts. Bill decided to use these investments after reading their advertising literature in a trade magazine. He has not read any prospectuses, nor does he adjust the investment mix for any client. However, his clients believe Bill has made the investment choices after careful evaluation. Bill knows almost nothing about unit investment trusts, but he is afraid to ask his peers or make referrals for fear of losing some clients. Bill does try to follow the current performance of these investments, and he reads articles related to them. Based only on this information, which of the following duties has Bill failed to fulfill? I. diagnosis II. consultation III. keeping current IV. disclosure a. I and II only b. III and IV only c. I, II, and IV only d. II, III, and IV only Financial Planning Process and Insurance Final Review 117

124 9. Juanita has just discovered that her wallet is missing from her purse. She immediately calls her credit card companies and learns that the following charges have been applied to her accounts: Account Charges Account Charges VISA $500 Master Card $1,250 American Express $1,500 Conoco $45 Sears $225 What is the total amount of these charges that Juanita is required to pay? a. $0 b. $245 c. $250 d. $3, Which one of the following terms is used to describe a Chapter 13 bankruptcy? a. a Title 9 plan b. a wage-earner plan c. a Regulation Z plan d. a liquidation-recovery plan 118 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

125 11. Rhonda Conley wants to establish a fund that will provide $8,000 interest per year that she can give to her favorite causes. She expects to earn 6% per year. How much does she need to put into the fund today so that she can give away the $8,000 each year, starting next year at this time? a. $97,625 b. $126,095 c. $133,333 d. $140, Jean deposited $2,000 into her IRA yesterday. If she puts nothing else into the account, about how many years will it take to grow to $15,000, assuming it earns interest at an annual rate of 8%, compounded quarterly? a. 25 years b. 26 years c. 27 years d. 104 years 13. Your client invested $15,000 in a certificate of deposit (CD) 7 years ago. The CD matures today at a value of $36,825. If interest was compounded semiannually over the 7-year period, what annual compounded rate of return did he realize on his investment? a. 6.21% b. 6.63% c % d % Financial Planning Process and Insurance Final Review 119

126 14. Alonso Garcia wants to open a business in five years. He will need an additional $200,000 (stated in today's dollars) at that time. Alonso plans to fund this goal using a serial payment. He assumes that inflation will average 4% and that he can earn a 10% compound after-tax return on investments. What serial payment should he invest at the end of the first year (i.e., one year from today) to attain this goal? (Round your answer to the nearest dollar.) a. $33,699 b. $34,810 c. $35,047 d. $35,643 e. $37, An investor wants to accumulate $16,000 by the end of seven years to achieve a financial goal. He plans to invest a sum of $4,000 in a mutual fund today toward the goal. In addition, he plans to invest a fixed sum each month, beginning one month from today, for the next seven years. If the investor can earn a 9% annual return, compounded monthly, over the term of the investment, how much must he invest each month to achieve his goal? a. $72.53 b. $73.07 c. $ d. $ Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

127 16. Which of the following are examples of risk avoidance? I. participating only in non-contact sports or hobbies II. installing burglar alarms in a residence III. using public transportation instead of owning a car IV. increasing the deductible on a homeowners policy a. I and III only b. II and IV only c. I, II, and III only d. I, II, III, and IV 17. Which of the following are disadvantages of a funded self-insurance program to a business? I. The relationship between employer and employee may influence claim settlement. II. Contributions to the self-insurance fund are nondeductible. III. Premium taxes must be paid on fund contributions. IV. Losses incurred are not deductible. a. I and II only b. III and IV only c. I, II, and IV only d. II, III, and IV only Financial Planning Process and Insurance Final Review 121

128 18. From the insurance company's point of view, all of the following are elements of an insurable risk except a. the insurable interest must be clear and continuous. b. the loss produced by the risk must be definite and measurable. c. the loss must not be catastrophic. d. there must be a sufficiently large number of homogeneous exposure units to make the losses reasonably predictable. e. the loss must be fortuitous or accidental. 19. Last week, a postal carrier was injured on Jacob's driveway when he slipped on a skateboard left there by Jacob's daughter. Which one of the following legal bases may influence Jacob's liability? a. trespass b. strict liability per se c. vicarious liability d. negligence 122 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

129 20. Bill Johnson's son, Johnny, goes over to a neighbor's house where, after a disagreement, he punches his neighbor's son in the stomach. The neighbor sues and obtains a judgment for $50,000. Bill consults his insurance agent to see if his comprehensive personal liability policy will pay the judgment. Will Bill's insurance provide coverage, and why? a. Yes; the policy covers Bill because he is vicariously liable for Johnny's action. b. Yes; the policy covers Johnny because, as a family member, he comes under the definition of a covered insured. c. No; the policy does not cover intentional torts. d. Yes; the policy covers the incident because it occurred in an adjacent house. e. No; the policy only covers liability arising out of use of the home and the lot on which it is situated. 21. Which one of the following does not describe a life insurance contract? a. an aleatory contract b. a contract of utmost good faith c. a contract of adhesion d. a bilateral contract e. a personal contract Financial Planning Process and Insurance Final Review 123

130 22. An insurance company is prohibited from using a right given to it in a policy if, by its own actions, it gave up the right to the policyowner under which one of the following? a. doctrine of equity b. doctrine of estoppel c. doctrine of rescission d. doctrine of reformation e. doctrine of waiver 23. Susan Williams is a broker for a casualty insurance company. She solicited an auto insurance policy for your client, Howard Jones. Howard had a history of traffic violations, but he did not disclose this to Susan when she took his application. The company issued a policy to Howard. Two weeks later, Howard had a car accident. What is the company's obligation to your client in this situation? a. The company is required to pay because Susan had express authority to bind the company. b. The company is not required to pay because Susan failed to disclose full knowledge of the situation. c. The company is required to pay because Susan had the implied authority to do what the public reasonably believes she can do. d. The company is not required to pay because Howard failed to disclose relevant information. 124 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

131 24. As part of the process of evaluating insurance companies for a client, you see the following facts about A+ Life Company: a mutual company, rated only by A.M. Best, assets of $205 million, in business for 100 years, 3% lapse ratio, not on the NAIC Watchlist, and high risk-based capital (RBC) ratio numbers. Would you consider doing business with this company, and why? a. No, because mutual companies are always rated by several rating agencies. b. No, because they have a low lapse ratio and high RBC numbers. c. Yes, because mutual insurers with high RBC numbers are always good companies. d. Yes, because they have a solid financial status and a low lapse ratio. 25. Ann Gables can save $100 per month toward retirement. Which one of the following types of contracts would be most appropriate for Ann? a. variable life insurance b. universal life insurance c. participating whole life insurance d. single premium deferred annuity e. flexible premium deferred annuity Financial Planning Process and Insurance Final Review 125

132 26. Natalie Gregson named her brother, David, irrevocable beneficiary of a life insurance policy she owns on her life. Now Natalie would like to borrow from the policy's cash value. What right does David have to the cash value? a. David has a conditionally vested interest in the policy and can deny her permission to borrow from the cash value. b. Even though David has a vested interest in the policy, he must allow Natalie to borrow from the cash value. c. Because David has an insurable interest in the policy he can deny Natalie permission to borrow from the cash value. d. Because David has no legal claim to the policy, he must allow Natalie to borrow from the cash value. 27. Which of the following dividend options, used in combination, generally provides the greatest total death benefit and tax-deferred growth in a participating whole life insurance policy? I. accumulation at interest II. fifth dividend option III. reduced premium IV. paid-up additions option a. I and II only b. I and III only c. II and IV only d. III and IV only 126 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

133 28. Which one of the following is not a nonforfeiture option available on a participating whole life insurance policy? a. surrender of cash value b. extended term insurance c. reduced paid-up insurance d. accumulate at interest 29. Which one of the following statements regarding annuities is false? a. A single premium variable deferred annuity generally permits additions to the invested amount once each year. b. A joint and full survivor annuity guarantees a level payment as long as either annuitant is alive. c. A flexible premium variable annuity generally limits changes in the investment mix to some extent. d. A life annuity with 10 years certain and continuous will pay benefits for at least 10 years if the annuitant dies 6 years after the initial distribution is made. Financial Planning Process and Insurance Final Review 127

134 30. Adam and Liz Driscoll have just had their first child, Jennifer. The Driscolls want to purchase life insurance that will ensure that funds will be available for Jennifer's college education in the event that one or both of them die prematurely. They want a policy that is flexible, and also want the insurance to build some cash value. Their budget is tight right now, and the couple's approach to risk management decisions is conservative. Which type of life insurance policy would best meet the Driscoll's current needs? a. universal life insurance policy b. variable life insurance policy c. second-to-die whole life insurance policy d. variable universal life insurance policy 31. Darren and Susan Starr want to provide funding for their daughter Jerri, age 10, to attend four years of college, starting at age 18. The current annual cost of tuition is $9,000. Assume inflation of 4% and after-tax earnings of 5%. If Darren wants to have enough life insurance to assure adequate funds for Jerri 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. $32,530 b. $32,560 c. $32,855 d. $32, Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

135 32. Which of the following are accurate statements related to Mary Smith s rights and responsibilities related to health care. Mary left her job 45 days ago. Mary had been covered under her former employer's plan for 18 months. She is pregnant. I. Mary can still sign up under COBRA. II. Mary can sign up under the exchanges. III. If she purchases a policy outside of the exchanges or COBRA, the pregnancy could be a preexisting condition. IV. Mary must notify the insurance company within 60 days of the birth of the child to have the child covered. a. I and II only b. II and IV only c. I, II, and III only d. I, II, III, and IV 33. Under the maximum out-of-pocket (MOOP) provision in medical expense insurance, a. benefits are based on a schedule of specified maximum amounts per service. b. unreimbursed covered expenses are limited to a maximum amount per year. c. all risks are covered except those specifically excluded under the policy. d. benefits are paid only to a specified limit. Financial Planning Process and Insurance Final Review 129

136 34. Juan Blanco has a choice of several medical insurance plans through his employer. They include an HMO, a PPO, and an indemnity plan. He has brought you the benefit descriptions for each plan and asked for your assistance in sorting them out. Which one of the following statements correctly matches the description with the type of plan? a. One plan states that it uses gatekeeper physicians. We know, therefore, that this must be a PPO plan. b. One plan states that it has internal policy limits for mental and nervous conditions. We know, therefore, that this must be an HMO plan. c. One plan states that it has a $5,000 MOOP provision. We know, therefore, that this must be a HMO plan. d. One plan states that it has a list of independent physicians that the employee must use if he or she is to obtain the lowest possible out-of-pocket cost. We know, therefore, that this is likely to be a PPO plan. 35. Walter Wimmer's first medical expenses for the year were incurred for an operation costing $23,250 in covered expenses. Walter has a comprehensive major medical plan with a $2,500 deductible, a 20% coinsurance provision, and a $5,000 MOOP. How much will Walter's insurer have to pay? a. $16,600 b. $18,250 c. $18,600 d. $23, Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

137 36. Which of the following are true statements related to disability? I. Group coverage benefits are almost always received income tax free. II. Individual policies purchased with after tax income are received income tax free. III. Group coverage covers all income including pretax medical contributions, bonuses, and stock grants. IV. Benefits from individual policies purchased on a pretax basis are received income tax free. a. II only b. IV only c. II and III only d. II, III, and IV only 37. Which one of the following listings of groups that are commonly underwritten for disability income insurance are ranked in ascending order of desirability, as perceived by the insurer? a. professionals, white collar workers, and blue collar workers b. white collar workers, professionals, and blue collar workers c. blue collar workers, professionals, and white collar workers d. blue collar workers, white collar workers, and professionals Financial Planning Process and Insurance Final Review 131

138 38. Which of the following statements about disability income concepts are correct? I. A disability policy with a provision that allows the company to increase premiums but does not allow the company to terminate the policy is said to be guaranteed renewable. II. The elimination period is the time period the insurance company has to cancel a policy if incorrect information was put in the application. III. A residual benefit is normally paid when there is a loss of income due to a disability, even if the insured is still able to work, following a period of total disability. IV. The probation period in a disability policy is the time between submission of the application and its approval or rejection. a. I only b. I and III only c. III and IV only d. I, II, and III only e. I, III, and IV only 39. Wade Casslin, age 68, is interested in obtaining long-term care insurance. He is a widower, is in good health, and wants to make sure he is taken care of if he is incapacitated. He also wants his estate of a few hundred thousand dollars left to his children. Which one of the following considerations should Wade want to apply to his decision? a. He should definitely not have a plan that provides home care. b. A policy that lasts a year or so would give him time to qualify for Medicaid. c. A policy with a hospitalization requirement is a sound way to save on premium. d. An inflation benefit is a good idea. 132 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

139 40. A person who wants to use Medicaid to pay for long-term care expenses may be required to "spend down" his or her assets. Which of the following are assets that likely would be exempt from the Medicaid spend-down provisions? a. a home and an automobile b. tax-exempt funds below $50,000 c. certificates of deposit with a maturity longer than two years d. Treasury bills, notes, and bonds 41. Which one of the following types of adjusters works for the insured? a. a bureau adjuster b. an independent insurance agent c. a public adjuster d. a contract adjuster e. a staff adjuster 42. Debbie Dublin recently lost one of her diamond earrings and she filed an insurance claim. Which one of the following is not an option for the insurer? a. replace both earrings b. require Debbie to surrender the remaining earring before receiving a check c. replace the lost earring d. issue a check for the replacement value of the earrings Financial Planning Process and Insurance Final Review 133

140 43. Tom and Mary Lynn Brown are evaluating their homeowners insurance. Their house has a current value of $1.5 million. Both Tom and Mary Lynn enjoy fine art and have a collection valued at $500,000. Tom recently bought Mary Lynn a two-carat diamond ring valued at $30,000. The declarations page of the Brown's homeowners coverage shows the following information: Type HO Dwelling: $1.4 million Personal Property: $800,000 HO Personal Property Endorsement Liability: $300,000 each occurrence Deductible: $500 loss deductible clause Based only on your analysis of the information presented here, which of the following would you tell the Browns about their personal property coverage? a. Coverage is more than adequate. b. Coverage should be supplemented with a personal property endorsement (i.e., floater) for the fine art and the diamond ring. c. Basic coverage is inadequate, but the HO increases coverage to make it adequate. d. The HO personal property coverage should be increased by $530,000 to cover the art collection and jewelry. 134 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

141 44. Which one of the following statements about different forms of homeowners coverage is correct? a. HO policies apply different perils (forms) for Coverages A through D. b. HO policies provide basic structural coverage. c. HO policies cover valuable personal property completely. d. HO policies provide replacement cost coverage on insured homes. e. HO policies generally provide a greater amount of coverage for personal property than they provide for any structure. 45. Professional liability refers to liability arising from a. failure to use due care and the degree of skill expected of a person in a particular profession. b. compliance with the wishes of a client based on a belief that the customer is always right, even if the client s desires are incompatible with his or her needs. c. loss of income by a client during the rendering of professional services. d. a person practicing his or her hobby. Financial Planning Process and Insurance Final Review 135

142 46. Which of the following statements about title insurance are correct? I. An attorney's opinion as to the accuracy of the abstract on a given piece of property provides the same protection as title insurance. II. The title insurance policy protects the property purchasers from all defects in title except those listed in the policy. III. Title insurance policies can last 50 years or more. IV. Under the Torrens System, a person who holds title to the property gets compensated for his or her loss, but the most recent buyer keeps the property. a. I and III only b. II and IV only c. III and IV only d. I, II, and III only e. II, III, and IV only 47. Which one of the following best describes the "medical payments" section of a personal auto policy? a. It provides benefits to the insured and anyone riding in the insured's vehicle, up to the policy limit. b. It covers liability for persons driving the insured's vehicle without permission, up to the policy limit. c. It pays for medical expenses incurred by the driver of another automobile that has been in an accident with the covered vehicle. d. It provides limited coverage for expenses incurred by uninsured motorists involved in an accident with the covered vehicle. 136 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

143 48. Bonny Clausen purchased her company s main building for $450,000. Its replacement cost is $375,000. She has the building insured for $350,000, with a $1,000 deductible and an 80% coinsurance clause. Assume a fire caused $100,000 of damage to the building. How much will her insurance policy pay? a. $ 79,000 b. $ 96,222 c. $ 96,250 d. $ 99,000 e. $100, Personal automobile insurance with other than by collision (comprehensive) coverage provides coverage, up to the policy limit, for a. property damage to another vehicle caused by the insured while driving a covered vehicle. b. damage to the insured's car. c. liability resulting from damage to other vehicles. d. liability resulting from damage to personal property other than vehicles. 50. Commercial general liability insurance insures against a. nonautomobile liabilities of the business, except those that involve injuries to employees. b. every type of business liability. c. automobile liabilities incurred by the business. d. professional liability. Financial Planning Process and Insurance Final Review 137

144 Final Review Answers 1. d. Constructing a personal financial plan and identifying barriers to achieving goals are done after the data is gathered. (LO 1-1) 2. a. This question focuses on situations requiring immediate attention. Each of the other answer options may well be required, but none really require immediate attention. Establishing an adequate emergency fund is a foundational financial planning item, and should be one of the very first areas addressed. Not doing so may hamper all the other areas. Risks are covered before establishing savings to achieve goals. (LO 1-4) 3. a. With monthly expenses of $4,000 the Staphers cannot use the $3,900 in checking (remember, one-month s expenses must be reserved). However, there is no need to make up the difference from any other source, so the entire money market balance ($9,500) may be used. The 12-month CD and life insurance cash values would not normally be used, because of the penalties for doing so. (LO 1-4) 4. c. A finance lease is also known as an open-end (or equity) lease. These leases are based on a projected value, and if the car is not worth that amount due to excess wear-and-tear, high mileage, etc. Margaret may have to pay some extra money to close out the lease. (LO 1-7) 5. d. Each of the options can be used for college funding. However, only the Crummey trust (along with the current income trust) will allow them to avoid having to distribute the trust proceeds to Elysa when she reaches age 21. Not mentioned here are 529 plans and Coverdell Education Savings Accounts, which may be less expensive options. (LO 1-8) 6. a. In order to be considered an investment adviser under the 1940 Act, an individual must satisfy the three-pronged test, which includes: giving advice or analysis concerning securities; the business standard; and compensation. Jane does not satisfy any of these (she just sells financial products). (LO 2-1) 7. d. Alex fits under one of the six categories identified as exceptions under the Investment Adviser s Act of Publishers of a bona fide financial newsletter (among other categories) with general and regular circulation fit into this category and are not considered advisers under the Act. (LO 2-2) 138 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

145 8. c. Bill does follow the current information of his recommended investments, so he is keeping current. However, he is not doing any diagnosis of his recommendations (or related to client suitability), he does not consult with any of his peers, and he certainly does not disclose his operating procedures to his clients. (LO 2-3) 9. b. Remember, the rule states that there is a limit of credit card liability of $50 per card. However, the $45 charged to Conoco will not be grossed-up to $50. (LO 2-4) 10. b. None of the other options is related to bankruptcy. (LO 2-4) 11. c. This is a capitalization question solved by dividing $8,000 by.06. The resulting amount will allow Rhonda to have $8,000 per year, essentially forever. (LO 3-1) 12. a. The keystrokes are: Pre-set to quarterly compounding (4; Shift; P/YR) I/YR = 8; PV = 2,000 (+/-); FV = 15,000. Solve for N. The answer (101.75) is the number of quarters, and must be adjusted to years by dividing the answer by 4. (LO 3-4) 13. c. The keystrokes are: Pre-set to semi-annual compounding (2; Shift; P/YR); N=14 (7; Shift; xp/yr); PV=15,000 (+/-); FV=36,825. Solve for I/YR. If you forgot to enter 14 for N (or 7; Shift; xp/yr), your answer will be (LO 3-5) 14. e. This is a serial payment for a future sum calculation. The keystrokes are: Set for annual compounding. Set calculator to END mode. N=5; I/YR=5.7692*; FV=200,000. Solve for PMT. Financial Planning Process and Insurance Final Review 139

146 The $35,643 answer must be adjusted for one year s inflation by multiplying $35,643 by Do this because the first payment is not going to be made until one year after today, so an inflation adjustment must be made. Calculate I/YR using the following formula: 1 + Rate of return Rate of inflation ([1.10/1.04] -1) X 100 = (LO 3-7) 15. b. The keystrokes are: Pre-set to monthly compounding (12; Shift; P/YR) N=84 (7; Shift; xp/yr); I/YR=9; PV=$4,000 (+/-); FV=16,000. Solve for PMT. If you forgot to enter PV as a negative (+/-) your answer will be $ (LO 3-8) 16. a. Not participating in contact sports/hobbies and using public transportation avoids the risks related to those activities. Installing burglar alarms is risk reduction, and increasing a deductible is risk retention. (LO 4-2) 17. a. No premium taxes are paid on self-insurance fund contributions (because the payments are not premiums going to an insurer). Losses are deductible, but payments into the fund are not deductible. (LO 4-3) 18. a. Insurable interest is only required at time of issue, and primarily for property possibly at the time of claim. There is no requirement that insurable interest be continuous (although this must be clear). (LO 4-3) 19. c. He was not being negligent, but Jacob (the parent) may be held vicariously liable for the actions of his daughter. (LO 4-7) 20. c. With rare exception (e.g., certain malpractice situations), intentional acts are not covered by insurance policies. Johnny s actions were intentional and, therefore, not covered. (LO 4-9) 21. d. Life insurance contracts are unilateral, not bilateral. Each of the other options does describe a life insurance contract. (LO 4-9) 140 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

147 22. e. When an insurer gives up a contractual right (as in this case), the doctrine of waiver says that they cannot try to reassert that right at a later time (with the same insured). The doctrine of estoppel is essentially used to enforce the doctrine of waiver (i.e., the insurer will be estopped from reasserting its previously waived right). (LO 4-10) 23. d. Susan is a broker (not an agent). As such, she has limited authority, and a more limited relationship to the insurer than if she were an agent. Additionally, Howard intentionally concealed material information, and the company therefore has the right to void the contract. (LOs 4-9, 4-12) 24. d. Two of the primary tools for evaluating an insurance company are to look at its financial status as well as its lapse ratio. A+ Life does have a low lapse ratio and high RBC numbers, but this is a reason to do business with the company rather than not to do business. To say that mutual insurers are always good companies is false. (LO 4-13) 25. e. The question does not identify any need for insurance. Therefore, no need can be assumed. As such, the first three options are inappropriate. Ann wants to save $100 per month. This requires a flexible premium, rather than a single premium, deferred annuity. (LO 5-2, 5-10) 26. a. When a policyowner creates an irrevocable beneficiary, the policyowner is, for all practical purposes, assigning most policy rights to that beneficiary. This means that an irrevocable beneficiary must give approval to any substantive policy change. About the only thing that a policyowner can do without an irrevocable beneficiary s approval is stop paying the premiums. David s interest is conditional, in that Natalie is still the owner and insured. David cannot terminate the policy, and he will not receive full policy benefits, until Natalie dies. David, in his capacity as beneficiary, does not have an insurable interest in the policy. Had he wanted to take out a life insurance policy on Natalie s life, it might be shown that he does have an insurable interest. However, that is not relevant to this question and cannot be considered. (LO 5-3) 27. c. The key here is policy growth both in death benefit and in cash value. The fifth dividend (one-year term) does not add any cash value, but it provides the greatest amount of additional death benefit in a given year. Paidup dividend additions build death benefit as well as cash value. Dividends left to accumulate at interest would have been the next best answer, but this option does not provide the same tax-deferred growth as PUAs. Reducing premiums does nothing to accomplish either objective. (LO 5-4) Financial Planning Process and Insurance Final Review 141

148 28. d. Accumulate at interest is a dividend option. Each of the others is a nonforfeiture option. (LO 5-8) 29. a. Single premium annuities only allow for the initial payment (hence, the name single premium ). Each of the other answer options is correct. (LO 5-10) 30. a. Neither the variable nor second-to-die whole life policy provide the required flexibility. Their conservative risk management position points away from either variable policy. The UL policy will give them the flexibility they desire in a relatively conservative insurance vehicle. (LOs 6-2, 6-13) 31. d. This question is answered using the three-step serial payment for a present value calculation. The steps and keystrokes follow. Step 1: Inflate the first year s tuition amount for eight years at 4% N=8; I/YR=4; PV=9,000; solve for FV (12,317) This gives you the first year tuition amount when Jerri will begin College. Step 2: Calculate the lump sum (PVAD) needed to pay for four years of tuition payments that will continue increasing (by inflation) each year. Calculate using a serial payment and an inflation-adjusted rate of return. Place calculator in BEGIN mode N=4; I/YR=.9615*; PMT=12,317; FV=0; solve for PVAD (48,569) Step 3: Discount the amount from Step 2 back to today using the 5% discount (investment) rate. N=8; I/YR=5; PMT=0; FV=48,569; solve for PV (32,874) Your answer may vary slightly depending on the exact number you enter into I/YR in Step 2. (LO 6-2) 32. a. Mary has 60 days to sign up for the exchanges or COBRA so statements I and II are accurate because of the triggering event of leaving her job. Option III is incorrect because pregnancy can no longer be considered a preexisting condition in any health insurance policy. Option IV is incorrect because parents must notify the insurance company within 30 days of the birth of the child, not 60. (LO 7-2) 33. b. The stop-loss provision of a health care plan limits the insured s out-ofpocket expenses (i.e., the insured s loss). After reaching the stop-loss limit, the insured has no further liability for the year. (LO 7-3) 142 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

149 34. d. PPO plans typically have a provider list from which the insured must choose to get maximum plan benefits. Some, but not all, PPO plans use a gatekeeper. Option b. might be an HMO plan, but it might also be a major medical, or other, plan. Option c. is a major medical plan. (LO 7-3) 35. b. Walter will pay a $2,500 deductible, which brings remaining covered expenses to $20, % of the remaining $20,750 is $4,150, which is above the MOOP of $5,000, so Walter will pay $2,500 and the company will pay the rest $20,750 $2,500 = $18,250. For the rest of the year, if Walter has additional covered expenses, 100% of the approved charges will be paid by the insurer. (LO 7-5) Expense Amount Category Walter Insurer Deductible $2500 $2,500 $0 Balance of Expenses $20,750 80/20 $2,500 $18,250 Total Paid $5,000 $18, a. Most group disability premiums are paid by the employer, therefore, the benefits are taxable so statement I is incorrect. Statement II is correct in that after-tax premiums mean tax-free benefits. Statement III is incorrect because group coverage usually only covers base salary independent of everything else that is going on with employee benefits. Statement IV is incorrect because even though the income is taxable for federal and state tax purposes, FICA is NOT paid on it, therefore, Social Security benefits will be reduced because if premiums are pretax or tax deductible, benefit payments are subject to federal and state income tax (if the individual is in a state that has income taxes) and FICA taxes for the first six months. (LOs 8-2, 8-3) 37. d. The question asks to rank categories in ascending (not descending) order. Option a. is in descending order of desirability. (LO 8-2) 38. b. Guaranteed renewable policies have the second best renewability option noncancelable is the best option, because premiums cannot be increased during the policy period. Residual benefits usually require an initial period of total disability. Benefits are paid, on a reduced basis, to cover decreased income levels related to the disability. The elimination (or waiting) period is analogous to the deductible in a health policy. This is the period of time after the disability begins and before benefits are payable. The probation period is the period of time a policy must be in force before disabilities caused by certain perils or illnesses will be covered. (LO 8-3) Financial Planning Process and Insurance Final Review 143

150 39. d. An inflation benefit probably is a good idea to consider. Home care benefits should also be considered. Wade does not want a hospitalization requirement before benefits will be paid, as this places too much of a restriction on the policy. Medicaid has a five-year look-back period. (LO 8-6, 8-7, 8-8) 40. a. In addition to being able to keep a home and automobile, Medicaid regulations allow for the retention of some income and other assets. These regulations vary by state. (LO 8-7) 41. c. Each of the adjusters work for the insurer. (LO 9-1) 42. b. The insurer can request that Debbie surrender the earring for its salvage value, but it cannot require her to do so. If Debbie decides to keep the earring, the insurer will adjust the amount of the claim check to reflect this. (LO 9-1) 43. b. High value jewelry and other personal property requires a personal property endorsement (or inland marine policy); increasing basic policy coverage will not work. Merely adding an HO endorsement will not provide adequate coverage it will just change the perils covered from broad form to open perils. (LO 9-3, 9-8) 44. e. HO policies cover condominiums. Therefore, any personal property coverage included in the policy will normally be much greater than any coverage on the structure (which only covers the interior structure). HO 02 policies cover everything on a broad form basis. HO 04 forms are renters policies, and, therefore, do not provide any structural coverage. HO 08 policy forms provide coverage on an actual cash value (rather than replacement cost) basis. (LO 9-3) 45. a. A client losing money will not automatically create a professional liability situation (although some clients might try to make it so). Doing what the client specifically requests also does not automatically create professional liability. Hobbies, of course, are irrelevant to this issue. (LO 9-5) 46. e. An attorney s opinion and abstract do not provide the same protection as title insurance. In the event of a problem, the individual would have to file a lawsuit against the attorney (and hope for good errors and omissions coverage). Each of the other option is correct. (LO 9-7) 144 Financial Planning Process and Insurance 1996, 2003, , College for Financial Planning, all rights reserved.

151 47. a. The medical payments section of a PAP normally covers occupants in the insured s vehicle along with the insured, whether or not he or she is in the vehicle. There is no coverage for people driving the vehicle without permission, nor does coverage extend to people in other vehicles. (LO 9-9) 48. d. Bonny s building is insured for greater than 80% of the replacement value, so the claim will not be subject to a coinsurance penalty. To double-check this, you can use the following formula: 375,000 x 0.8 = 300,000; 350,000 > 300,000; or 350,000/375,000 =.9333; 93.33% > 80% required, which means there is no coinsurance penalty. To determine the claim payment, remember to subtract the $1,000 deductible from the claim amount. (LO 9-2) 49. b. The two property-related coverages (collision and other than by collision, or comprehensive) cover damage to the insured vehicle. Neither provides liability coverage (the policy s liability section does that). Collision essentially provides coverage when the insured causes damage to the vehicle (i.e., is at fault), while other than by collision provides coverage when the insured does not cause the damage. A simple way to remember the two is: collision provides coverage when you hit something, other than by collision (comprehensive) provides coverage when something hits you. (LO 9-9) 50. a. CGL policies do not normally cover business automobile liabilities. They also do not usually cover employee injuries. Both business auto and employee injury coverage can be obtained using other policy forms. (LO 9-10) Financial Planning Process and Insurance Final Review 145