CFC Insurance and Risk Management 2 — Questions and Answers
Question 1: A whole life insurance policy's cash value can be accessed through all of the following EXCEPT:
- Policy loans
- Partial surrenders
- Paid-up additions (Correct answer)
- Collateral for a bank loan
Correct answer: Paid-up additions
Paid-up additions are optional riders that use dividends to purchase additional coverage, not a method to access existing cash value.
Question 2: Which Medicare supplement (Medigap) plan is the most comprehensive, covering nearly all cost-sharing gaps in original Medicare?
- Plan A
- Plan F (for those eligible before 2020) (Correct answer)
- Plan D
- Plan N
Correct answer: Plan F (for those eligible before 2020)
Medigap Plan F covered virtually all Medicare cost-sharing including deductibles and coinsurance, though it is no longer available to newly eligible Medicare beneficiaries as of 2020.
Question 3: In property insurance, 'replacement cost value' (RCV) coverage differs from 'actual cash value' (ACV) in that RCV:
- Pays the depreciated market value of the property
- Pays the cost to replace property with new equivalent without depreciation deduction (Correct answer)
- Covers only structural damage
- Applies only to commercial properties
Correct answer: Pays the cost to replace property with new equivalent without depreciation deduction
RCV pays the full cost to replace damaged property with new comparable property, while ACV deducts depreciation from the replacement cost.
Question 4: A 'key person' life insurance policy is owned and paid for by:
- The key employee
- The employee's spouse
- The business (Correct answer)
- A trust
Correct answer: The business
Key person insurance is purchased by and payable to the business to offset financial losses caused by the death or disability of an essential employee.
Question 5: When does a split-dollar life insurance arrangement typically work best for a closely held business?
- When the employee needs term coverage only
- When the employer wants to provide tax-advantaged permanent life insurance benefits to select executives (Correct answer)
- When all employees must receive equal benefits
- When the business wants to minimize premium costs
Correct answer: When the employer wants to provide tax-advantaged permanent life insurance benefits to select executives
Split-dollar arrangements allow a company to fund permanent life insurance for key executives on a cost-sharing basis, offering a tax-efficient executive benefit.
Question 6: Which risk management technique involves retaining a risk but setting aside funds to pay potential losses?
- Risk avoidance
- Risk transfer
- Risk reduction
- Self-insurance (funded retention) (Correct answer)
Correct answer: Self-insurance (funded retention)
Funded self-insurance retains the risk internally but establishes a reserve fund to pay losses when they occur, a common strategy for large deductibles or specific risks.
CFC Insurance and Risk Management 2
A whole life insurance policy's cash value can be accessed through all of the following EXCEPT: