FiCEP Insurance Planning 5 — Questions and Answers
Question 1: A client owns a universal life policy and wants to know the effect of taking a policy loan versus a partial surrender. Which statement is CORRECT?
- Policy loans are taxable; partial surrenders are not
- Partial surrenders permanently reduce the death benefit; loans do not if repaid (Correct answer)
- Both loans and partial surrenders are always income-tax-free
- Policy loans must be repaid within 5 years by IRS rules
Correct answer: Partial surrenders permanently reduce the death benefit; loans do not if repaid
Partial surrenders permanently reduce the cash value and death benefit, while policy loans keep the death benefit intact as long as they are repaid with interest.
Question 2: Which long-term care insurance benefit trigger requires a policyholder to need assistance with at least two Activities of Daily Living (ADLs) to qualify for benefits?
- Medical necessity trigger
- HIPAA-qualified trigger (Correct answer)
- Cognitive impairment trigger
- Chronic illness trigger
Correct answer: HIPAA-qualified trigger
HIPAA-qualified LTC policies require inability to perform at least 2 of 6 ADLs or cognitive impairment to trigger tax-favored benefits.
Question 3: A business owner wants a buy-sell agreement funded by life insurance where each partner buys a policy on the other. This structure is called a:
- Entity purchase plan
- Cross-purchase plan (Correct answer)
- Split-dollar arrangement
- Key person insurance plan
Correct answer: Cross-purchase plan
In a cross-purchase plan, each co-owner buys life insurance on the other owners, with proceeds used to purchase the deceased owner's interest.
Question 4: Under the ACA, which provision requires insurance companies to spend a minimum percentage of premium dollars on medical claims rather than administrative costs?
- Guaranteed issue rule
- Medical loss ratio requirement (Correct answer)
- Essential health benefits mandate
- Community rating requirement
Correct answer: Medical loss ratio requirement
The ACA's medical loss ratio (MLR) rule requires insurers to spend at least 80–85% of premiums on healthcare claims and quality improvement.
Question 5: A client's group term life insurance coverage through work exceeds $50,000. The cost of coverage above $50,000 is treated as:
- A tax-free fringe benefit for any amount
- Taxable imputed income based on IRS Table I rates (Correct answer)
- A deductible business expense only
- A reportable capital gain
Correct answer: Taxable imputed income based on IRS Table I rates
IRS rules require the imputed cost of employer-provided group term life above $50,000 to be included in the employee's W-2 as taxable income using Table I rates.
Question 6: Which annuity payout option provides the highest monthly income but leaves no residual value or survivor benefit?
- Joint and survivor annuity
- Life with period certain
- Straight life annuity (Correct answer)
- Installment refund annuity
Correct answer: Straight life annuity
A straight life (life-only) annuity pays the maximum monthly amount because payments cease at death with no continuation or refund provision.
Question 7: A client suffered a loss due to flood damage, but their standard homeowners policy did not cover it. Through which federal program can homeowners typically purchase flood insurance?
- Federal Emergency Management Agency Supplemental Program
- National Flood Insurance Program (NFIP) (Correct answer)
- State Farm Federal Flood Division
- HUD Disaster Relief Insurance Fund
Correct answer: National Flood Insurance Program (NFIP)
The National Flood Insurance Program (NFIP), managed by FEMA, provides federally backed flood insurance to homeowners in participating communities.
FiCEP Insurance Planning 5
A client owns a universal life policy and wants to know the effect of taking a policy loan versus a partial surrender.
Which statement is CORRECT?