FINC 475 Exam 3

Traditional Net Cost Method

cash value and expected dividends are subtracted from annual premiums to obtain a net cost per year figure

\
\-doesn’t consider TVM

Surrender Cost Index Method

measures the cost of life insurance if you surrender the policy at the end of some time period, such as 10 or 20 years, takes interest into account

Interest Adjusted Cost Method

more accurate because it considers TVM

\-can be used to compare policies across insurers

\-pays to shop around

\-most consumers use premiums as a basis for comparison but agents will supply cost indices

Linton Yield

the average annual rate of return on a cash value policy if it is held for a specified number of years

\-current information is not readily available, limited use of this method

Under the ____________________________ cost method, the annual premiums for some time period are added together. Total expected dividends to be received during the same period and the cash value at the end of the period are then subtracted from the total premiums to determine the net cost of life insurance.

tradition net

T/F: The traditional net cost method takes into consideration the TVM.

False

The ____________________ cost index measures the cost of life insurance if you surrender the policy at the end of some time period, such as 10 or 20 years, and takes compound interest into account.

surrender

The _________________________________ cost method developed by the National Association of Insurance Commissioners is a more accurate measure of life insurance costs.

interest-adjusted

T/F: The interest adjusted cost method takes into consideration the TVM.

True

The following are subcategories of the _________________________________ cost method.

\- surrender cost index \n - net payment cost index

interest-adjusted

The _________________ yield is the average annual rate of return on a cash value policy if it is held for a specified number of years.

Linton

What is the life insurance tax treatment for a lump sum paid to a designated beneficiary?

Income Tax Free

If the proceeds of a life insurance policy are periodically liquidated under a settlement option, the payments consist of both principal and interest.

What is the tax treatment of the principal and interest?

The component attributable to the principal is received income-tax free, but the interest is taxable as ordinary income.

If the insured has any ownership interest in a life insurance policy at the time of death, how are estate taxes treated?

the entire proceeds are included in the gross estate of the insured for federal estate tax purposes.

What are the seven steps in shopping for life insurance?

1. Determine Whether You Need Life Insurance
2. Estimate the Amount of Life Insurance You Need
3. Decide on the Best Type of Life Insurance for You
4. Decide Whether You Want a Policy That Pays Dividends
5. Shop Around for a Policy That Provides Good Value
6. Consider the Financial Strength of the Insurer
7. Deal with a Professional Agent

___________________________________ is defined as the present value of the future death benefit.

Net Single Premium

If premiums are paid annually, the _______________________________________ must be the mathematical equivalent of the NSP.

Net Annual Level Premium

An _____________________ annuity pays periodic income payments that are guaranteed and fixed in amount; the first payment is due one payment interval from the date of purchase.

Immediate

A _______________ annuity provides periodic income payments at some future date.

Deferred

Under a _____________________________ annuity, the income payments terminate when the death of the first covered person dies.

joint life

A __________________________ annuity pays benefits based on the lives of two or more annuitants.

joint and survivor

A __________________ annuity pays a lifetime income, but the income payments vary depending on the investment experience of the sub accounts in which premiums are invested, such as a common stock fund.

variable

A _______________________________ annuity is a deferred annuity that allows the annuity owner to participate in the growth of the stock market and also provides downside protection against the loss of principal and prior interest earnings.

fixed indexed

A ________________ annuity is a single premium deferred annuity that begins paying benefits only at an advanced age, such as age 80 or 85.

longevity

A _________________________________________________________ is a deferred income annuity contract in which a lump sum premium is paid today to provide lifetime income at some future date, typically 2 to 40
years in the future.

Qualified longevity Annuity Contract (QLAC)

A ___________________________________________________ is a deferred annuity that allows you to invest a lump sum for a specific time period at a fixed rate of interest, typically 3 to 10 years. It is similar to a certificate of deposit (CD) in a bank
except the interest rate is substantially higher.

multi-year guaranteed annuity (MYGA)

T/F: Most annuity contracts are not annuatized.

True

Under the __________________________________________________, the funds can be withdrawn in a lump sum or in installments.

cash or guaranteed installment option

A ___________________________________ is similar but pays the beneficiary a lump sum.

cash refund option

A ___________________________________ provides a life income to the annuitant only while the annuitant remains alive.

life annuity (no refund) option

A ___________________________________________ pays a life income to the annuitant with a certain number of guaranteed payments.

life annuity with guaranteed payments

A ________________________________________ pays a life income to the annuitant with a certain number of guaranteed payments.

life annuity with period certain

An __________________________________________ pays a life income to the annuitant. If the annuitant dies before receiving total income payments equal to the purchase price of the annuity, the payments continue to the beneficiary until they equal the purchase price.

installment refund option

What are the three sources of life annuity payments?

1. Premium Payments
2. Interest Earnings
3. Unliquidated principal of annuitants who die early

What are the eligibility requirements for a Traditional IRA?

The participant must have earned income during the year & must be under the age of 70.5

What is the contribution limit for a Traditional IRA?

the maximum annual contribution is $5,500 or 100% of taxable compensation whichever is less

What is the penalty for early withdrawal on a Traditional IRA?

distributions before age 59.5 are subject to a 10% penalty

What is the tax treatment for distributions from a traditional IRA?

Distributions are treated as ordinary income and are fully taxable

What are the eligibility requirements for a Roth IRA?

The contributions must be made with earned income and income cannot exceed certain limits

What is the contribution limit for a Roth IRA? If you are under the income limits, the maximum contribution is $5,500 or 100% of taxable compensation, whichever is less.

What is the penalty for early withdrawal on a Roth IRA? Distributions before age 59.5 are subject to a 10% penalty.

What is the tax treatment for distributions from a traditional IRA? If the Roth IRA account has been open for a five

year holding period, the distributions at retirement are qualified and not taxable.

What features differ a Roth IRA from a Traditional IRA?

tax treatment

All of the following are the provisions of what act?

Prohibition of harmful insurer practices

\_____________________________ is the percentage of the bill in excess of the deductible, which the insured must pay out

of

What are the two main provisions of co

insurance?

What is the purpose of the annual out of pocket limit? reduce the crushing financial burden of a catastrophic loss

T/F: Insurers can place lifetime or annual limits on the benefits received by policyholders on essential health benefits. False

T/F: Insurers can place lifetime or annual limits on the benefits received by policyholders on non

essential health benefits. True

T/F: All of the following are covered under medical expense insurance.

o Acupuncture
o Bariatric surgery
o Cosmetic surgery
o Dental care (adults)
o Hearing aids
o Infertility aids
o Long

term care
o Private

the insurer cannot change, cancel, or refuse to renew the policy as long as premiums are paid on time. In addition, the insurer cannot change the premiums or the rate structure specified in the policy.

guaranteed renewable policy

this type of renewal provision is one in which the insurer guarantees to renew the policy at each anniversary date; however, they can increase the premiums.

guaranteed renewable policy

the policyholder can renew the policy until a specified age, and the insurer has the right to decline renewal under conditions specified in the contract.

guaranteed renewable policy

What is the definition of a total disability?

Inability to perform the material and substantial duties of your regular occupation

What is the definition of partial disability? Partial disability means that you can perform some but not all of the duties of your occupation.

What is the definition of a residual disability? residual disability means that you are gainfully employed and not totally disabled but, solely because of sickness or injury, your loss of income is at least 15 percent of your prior income.

What are the three types of managed care plans?

Health maintenance organizations (HMOs)

What are the characteristics of an Health Maintenance organization (HMO)?

an organized system of health care that provides comprehensive medical services to its members on a prepaid basis

Do HMOs have a gatekeeper physician? YES

A \________________________________ contracts with physicians, hospitals, and other healthcare providers to provide covered medical services to policyholders at discounted fees.

Health maintenance organizations (HMOs)

What is the most popular managed care plan?

Health maintenance organizations (HMOs)

What are additional characteristics of a preferred provider organizations (PPOs)?

PPO providers typically are paid on a fee

A \_____________________________________ plan is typically structured as an HMO, but members are allowed to go outside the network for medical care.

Health maintenance organizations (HMOs)

Do PPOs use a gatekeeper physician? No

What are the group insurance underwriting principals? o The group should not be formed for the sole purpose of obtaining insurance
o There should be a flow of persons through the group
o Benefits should be automatically determined by a formula
o A minimum percentage of eligible employees must participate
o The plan should be easy to administer

A \___________________________________________ plan is a medical expense plan with an annual deductible that is substantially higher than deductibles in traditional medical expense plans. Proponents believe that these plans make employees more sensitive to healthcare costs, provide a financial incentive to avoid unnecessary care, and seek out providers. high

deductible health

\__________________________________________ means that the employer pays part or all of the cost of providing health insurance to the employees. Self

insurance (also called self

Why employers self

insure group medical expenses plans? This is much cheaper once the company reaches a certain size.

\______________________________ insurance means that a commercial insurer will pay claims that exceed a certain dollar amount overall, or for a particular participant. This takes place when employers are self

insuring the company. This agreement provides protection against unusual spikes in losses that could severely damage the financial position of an employer. Stop

Group plans typically have a \_______________________________ deductible an amount of loss that insurerds must pay each calendar year before benefits will commence. calendar

year

Medical expense plans have \______________________________ provisions that require an employee to pay a certain percentage of covered expenses, such as 20 percent, 25 percent, or 30 percent. coinsurance

Most participants in HMO, PPO, and POS plans face \____________________ for certain charges such as an office visit to a primary care physician or specialist, or purchase of a prescription drug. copays (copayment)

A \_________________________________________ provision specifies the order of payment when an insured is covered under two or more group health insurance plans. coordination

of

A \________________________ plan allows employees to select those benefits that meet their specific needs. In many of these plans, the employer gives each employee a certain number of dollars or credits to spend on benefits or take as cash. cafeteria

This provision allows the insurer to review the treatment plan and determine the amount that will be paid. The employee is informed of the cost then decides on whether to proceed with the proposed plan. predetermination of benefits

The \___________________________________________________ helps small firms provide high

quality health and dental insurance to their employees. Small Business Health Options Program (SHOP)

What is the age requirement for participation in work retirement plans? 21

What is the service requirement for participation in work retirement plans? 1

year of service

In a \____________________________________, the retirement benefit is known in advance, but the contributions will vary depending on the amount needed to fund the desired benefit.

defined

contribution plan
defined

What are characteristics of a defined benefit plan?

investment losses are borne by the employer

What are the formulas used to determine an employees defined benefit?

unit

Some retirement plans pay a flat percentage of annual earnings through a \____________________________.

unit

Some retirement pay a flat amount for each year of service.

unit

Under a \_____________________________, both earnings and years of service are considered.

unit

In a \_____________________________________, the contribution rate is fixed but the actual retirement benefit is variable.

defined

contribution plan
defined

What are characteristics of a defined contribution plan?

For 2018, the maximum annual contribution to a defined

A \__________________________________ is a financial institution that provides for the accumulation and/or administration of the funds that will be used to pay pension benefits. funding agency

A \___________________________________ is a trust agreement or insurance contract that states the terms under which the funding agency will accumulate, administer, and disburse the pension funds. funding instrument

A \_______________________ plan is a qualified cash or deferred arrangement (CODA) that allows eligible employees the option of receiving funds as taxable compensation or putting money into the plan on a tax

deferred basis. Typically, both the employer and the employees contribute, and the employer matches part or all of the employee's contributions. Section 401(k)

What is the name of the test a firm must satisfy to ensure the prevention of discrimination in favor of highly compensated employees? actual deferral percentage test

What are characteristics of a 401(k) plan?

If funds are withdrawn before age 59½ , a 10 percent penalty applies, with some exceptions

A \__________________________, or \________________________________________, is a retirement plan designed for employees of public educational systems and tax

exempt organizations. Section 403(b) plan; tax

Characteristics of section 403(b) plans.

Eligible employees voluntarily invest a fixed amount of their salaries in the plan

\____________________________ refers to the employee's right to (or ownership of) the employer's contributions, or benefits attributable to the contributions, if employment terminates prior to retirement. Vesting

Under the \____________________________ vesting, the worker must be 100 percent vested after 5 years of service.

5

Under \_______________________________________ vesting, the worker must be 20 percent vested by the 3rd year of service, and the minimum vesting increases another 20 percent for each year until the worker is 100 percent vested at year 7.

5

A \________________________________________ is a retirement plan in which the employer contributes to an IRA established for each eligible employee simplified employee pension (SEP)

A \_________________________________________________________________ plan is limited to employers that employ 100 or fewer employees and do not maintain another qualified plan. Savings Incentive Match Plan for Employees (SIMPLE)

What are the four types of social insurance programs?

Social security

The following are characteristics of \_______________________ insurance programs.

Compulsory programs