PFS Reading & Literacy Support 3 — Questions and Answers
Question 1: A client struggles to understand a life insurance illustration showing 'non-guaranteed' columns. What should a PFS emphasize when explaining this document?
- Non-guaranteed values are contractually promised by the insurer
- Non-guaranteed columns project hypothetical future values that depend on dividends or credited rates that may change (Correct answer)
- Non-guaranteed values are irrelevant and can be ignored
- Non-guaranteed columns show past policy performance
Correct answer: Non-guaranteed columns project hypothetical future values that depend on dividends or credited rates that may change
Non-guaranteed illustration columns show projections based on current non-guaranteed elements like dividends or interest credits, which the insurer may change.
Question 2: When reading a Social Security statement, a client sees 'estimated retirement benefit at age 70.' What assumption does this estimate rely on?
- The client will stop working immediately
- The client continues working and earning at their current level until age 70 (Correct answer)
- The estimate is adjusted for inflation automatically each year
- The benefit includes spousal benefit amounts
Correct answer: The client continues working and earning at their current level until age 70
SSA benefit estimates at a future age assume continued earnings at the current level through that claiming age.
Question 3: A client receives a Schedule K-1 from a partnership and does not understand what 'ordinary business income (loss)' on Line 1 means. How should a PFS explain it?
- It is the partner's share of capital gains from asset sales
- It is the partner's allocable share of the partnership's regular business income or loss, taxable as ordinary income (Correct answer)
- It represents tax-exempt interest passed through to the partner
- It is the cash distribution the partner received during the year
Correct answer: It is the partner's allocable share of the partnership's regular business income or loss, taxable as ordinary income
Line 1 of Schedule K-1 shows the partner's share of ordinary business income or loss, which flows through to the partner's individual return as ordinary income.
Question 4: A client reads their homeowner's insurance policy and finds an 'exclusion' for flood damage. What does this mean in practical terms?
- Flood damage is covered but requires a separate deductible
- The policy will not pay for losses caused by flooding; separate flood insurance is needed (Correct answer)
- Flood coverage applies only to the structure, not personal property
- The exclusion applies only during declared federal disasters
Correct answer: The policy will not pay for losses caused by flooding; separate flood insurance is needed
An exclusion removes a specific peril from coverage, meaning the insurer has no obligation to pay for losses caused by that peril.
Question 5: A client asks what 'fiduciary duty' means after seeing the term in their investment advisory agreement. What is the most accurate explanation?
- The advisor earns a commission on each trade executed
- The advisor is legally obligated to act in the client's best interest at all times (Correct answer)
- The advisor manages only bonds and cash equivalents
- The advisor must follow the client's instructions regardless of suitability
Correct answer: The advisor is legally obligated to act in the client's best interest at all times
A fiduciary duty requires the advisor to place the client's interests above their own and avoid conflicts of interest.
Question 6: In a charitable gift annuity agreement, a client notices the phrase 'irrevocable transfer.' What does this mean for the donor?
- The donor can reclaim the gift if financial circumstances change
- Once the gift is made, the donor permanently relinquishes ownership of the transferred assets (Correct answer)
- The charity must return the assets if the donor lives beyond age 90
- The transfer can be reversed within 60 days under federal law
Correct answer: Once the gift is made, the donor permanently relinquishes ownership of the transferred assets
An irrevocable transfer means the donor permanently gives up all rights to the transferred property and cannot reclaim it.
Question 7: A client's health insurance EOB (Explanation of Benefits) shows 'amount not covered' for a service. What is the most likely reason?
- The deductible was met for the year
- The service is excluded from the policy or was provided by an out-of-network provider (Correct answer)
- The provider submitted a duplicate claim
- The client reached the out-of-pocket maximum
Correct answer: The service is excluded from the policy or was provided by an out-of-network provider
Amounts not covered typically result from policy exclusions, out-of-network services, or charges that exceed the plan's allowed amount.
PFS Reading & Literacy Support 3
A client struggles to understand a life insurance illustration showing 'non-guaranteed' columns.
What should a PFS emphasize when explaining this document?