AFC Insurance & Risk Management Strategies 5 — Questions and Answers
Question 1: A client is comparing a $500 deductible versus a $2,000 deductible on their auto insurance. From a financial counseling standpoint, which factor is most critical in this decision?
- Whether the client has sufficient liquid savings to cover the higher deductible if a claim occurs (Correct answer)
- The age and make of the vehicle only
- The insurer's financial strength rating
- The client's credit score
Correct answer: Whether the client has sufficient liquid savings to cover the higher deductible if a claim occurs
Choosing a higher deductible is only prudent if the client has adequate emergency savings to cover that amount out-of-pocket at the time of a claim.
Question 2: Which type of annuity provides a guaranteed income stream for the life of the annuitant, with no remaining value passing to heirs at death?
- Straight life (pure life) annuity (Correct answer)
- Joint and survivor annuity
- Period-certain annuity
- Variable annuity with death benefit rider
Correct answer: Straight life (pure life) annuity
A straight life annuity pays income for the annuitant's lifetime only; payments cease at death with no residual value, offering the highest per-period income but no death benefit.
Question 3: A financial counselor's client receives a Coordination of Benefits (COB) explanation from their insurer. What does COB primarily address?
- How two or more health plans share costs when a person has duplicate coverage (Correct answer)
- The process of appealing a denied insurance claim
- How Medicare coordinates with Medicaid for dual-eligible individuals
- The method insurers use to calculate premium increases
Correct answer: How two or more health plans share costs when a person has duplicate coverage
Coordination of Benefits rules determine which plan pays first (primary) and which pays second (secondary) when a person is covered by more than one health insurance plan.
Question 4: A client asks about the difference between replacement cost and actual cash value (ACV) in a homeowner's policy. Which statement is correct?
- ACV deducts depreciation from the replacement cost, while replacement cost pays the full cost to repair or replace without depreciation. (Correct answer)
- Replacement cost pays only the market value of the home at the time of loss.
- ACV always results in a higher payout than replacement cost.
- Both ACV and replacement cost pay the same amount for new items.
Correct answer: ACV deducts depreciation from the replacement cost, while replacement cost pays the full cost to repair or replace without depreciation.
Actual cash value equals replacement cost minus depreciation, meaning older items receive less compensation, while a replacement cost policy pays the full current cost to replace them.
Question 5: Which provision in a life insurance policy allows the policyowner to reinstate a lapsed policy within a specified period by paying overdue premiums plus interest?
- Reinstatement provision (Correct answer)
- Incontestability clause
- Grace period provision
- Waiver of premium rider
Correct answer: Reinstatement provision
The reinstatement provision gives policyowners the right to restore a lapsed policy within a set timeframe (often 3–5 years) by repaying missed premiums, interest, and proving continued insurability.
Question 6: A client who is self-employed wants to deduct health insurance premiums. Under current tax law, what is generally true?
- Self-employed individuals may deduct 100% of health insurance premiums paid for themselves and their family as an adjustment to gross income. (Correct answer)
- Self-employed individuals must itemize deductions to claim any health insurance premium deduction.
- The deduction is limited to 50% of premiums paid for self-employed individuals.
- Self-employed individuals cannot deduct health insurance premiums if they have a net loss for the year.
Correct answer: Self-employed individuals may deduct 100% of health insurance premiums paid for themselves and their family as an adjustment to gross income.
Self-employed individuals can generally deduct 100% of health, dental, and qualified long-term care insurance premiums as an above-the-line deduction on Schedule 1, subject to net profit limitations.
Question 7: A client in excellent health is applying for individual life insurance and is offered a 'preferred plus' rate classification. What does this indicate?
- The client presents the lowest mortality risk to the insurer and qualifies for the lowest available premium. (Correct answer)
- The client has minor health issues that result in a slight premium increase.
- The client is rated as a substandard risk requiring an extra premium.
- The client is applying for group life insurance through an employer.
Correct answer: The client presents the lowest mortality risk to the insurer and qualifies for the lowest available premium.
Preferred plus (or preferred elite) is the most favorable underwriting classification, reserved for applicants with excellent health history and lifestyle, resulting in the lowest available premium.
AFC Insurance & Risk Management Strategies 5
A client is comparing a $500 deductible versus a $2,000 deductible on their auto insurance.
From a financial counseling standpoint, which factor is most critical in this decision?