Chapter Bonus D – Managing Personal Finances
83. Variable annuities offer investment choices identical to mutual funds.
84. People who have health insurance seldom need disability insurance.
85. If you are relatively healthy, there is no real reason to buy health insurance.
86. Everything else constant, the higher the deductible on your car insurance policy, the
higher the premium for your car insurance.
87. Many employers offer health insurance coverage for their full-time employees.
BonusD-22
88. Disability insurance provides a relatively low cost way of protecting against lost income
due to an accident or illness that prevents you from working for an extended period of
time.
89. Due to the high cost of the insurance premiums, many people have found that it makes
financial sense to carry medical insurance only if their employer provides it.
90. The chances of becoming disabled at an early age are much higher than your chances of
dying from an accident.
91. Guaranteed replacement cost insurance coverage provides the insured with the
depreciated cost of assets.
92.
Chapter Bonus D – Managing Personal Finances
BonusD-23
Most homeowner’s insurance policies do not cover certain types of expensive items
unless you purchase a rider for the additional coverage.
93. An umbrella policy is an inexpensive policy that provides financial protection only in the
event of clearly defined major catastrophes such as hurricanes or earthquakes—events
which are referred to in the insurance industry as “rainy days.”
94. Don is young and newly married. He and his wife plan to have children in the near future
and Don wants to get a significant amount of life insurance coverage at as low a cost as
possible. He would be well advised to purchase a term insurance policy.
Feedback: Term insurance would most likely be the preferred approach in this situation. If
Don’s primary concern is insurance protection for his family, straight term insurance would
provide the greatest amount of coverage per dollar spent.
95.
Chapter Bonus D – Managing Personal Finances
Wendy wants to obtain life insurance at the lowest possible cost, but is leery of term
insurance because she has heard the premiums tend to go up every few years. One way
for her to avoid this concern would be to purchase multiyear level-premium insurance.
Feedback: Generally, term insurance is less expensive than whole life or universal life
because it provides pure protection. A new form of term insurance, called multiyear level-
premium insurance guarantees the same premium for the life of the policy. Using this
approach, many term insurance policies today offer fixed premiums for 20 years or more.
96. Carrie is trying to find a way to reduce her car insurance premium. She would be well
advised to decrease her insurance policy’s deductible.
Feedback: Other things held constant, the higher the deductible, the lower the insurance
premium.
97. One strategy used to lower car insurance premiums is to choose a policy with a large
deductible.
Feedback: By being willing to cover relatively small losses yourself, you reduce the risk of
payment for the insurance company. This will result in a lower premium.
BonusD-26
102. It is likely that young adults today will benefit from the recent trend in the Social
Security system to increase benefits and expand the cost-of-living adjustments.
103. The number of workers paying into Social Security per retired individual receiving
benefits is decreasing.
104. Regardless of potential changes, you can count on Social Security to provide you with
a comfortable retirement.
105. An IRA (individual retirement account) is a tax-deferred investment plan that
encourages workers to save for retirement.
106.
Chapter Bonus D – Managing Personal Finances
BonusD-27
A traditional IRA allows workers who qualify the opportunity to deduct from their
reported income the money they put into a qualified retirement account.
107. Both the Roth and traditional IRA allow individuals to put as much money as they
want into their retirement account.
108. A Roth IRA allows workers who qualify to get an up-front deduction for any money
they invest in the plan.
109. An advantage of both traditional and Roth IRAs is that both the income invested and
the earnings from these investments are never taxed.
110.
Chapter Bonus D – Managing Personal Finances
The benefit of opening an IRA while you’re young is the compounding of the money
invested tax-free over your working lifetime.
111. Funds deposited into an IRA cannot be withdrawn until you retire.
112. In order to qualify as a tax shelter, IRA saving plans must be invested in mutual
funds.
113. Withdrawals from an IRA prior to age 59½ generally are subject to taxes and a
penalty.
114. Earnings from traditional IRA investments are taxable at the time they are earned.
BonusD-33
133. Ricardo desires to reduce his current taxable income and save for retirement. He
should consider a traditional IRA.
Feedback: A traditional IRA gives qualified individuals an incentive to save for retirement by
allowing them to deduct from their reported income the money they put into an account.
134. IRA funds are not available for withdrawal until you are 59 ½ years old.
Feedback: The funds can be withdrawn prior to the investor turning 59 ½ years old; however
a 10 percent penalty for early withdrawal must be paid as well as the taxes due on the IRA’s
earnings. The government recently relaxed these restrictions even further, allowing people
with IRAs to withdraw a certain amount to help pay for education or a first home.
135. Roberto has just opened a 401(k) retirement plan. The money he invests in this plan
will reduce Roberto’s present taxable income.
Feedback: Both the money invested and the earnings from the plan are tax deferred until the
funds are withdrawn.
136.
Chapter Bonus D – Managing Personal Finances
Bernie owns a sports trading-card business. He can participate in a Keogh plan to save for
his retirement.
Feedback: Keogh plans are like an IRA for entrepreneurs. Self-employed individuals invest in
a Keogh plan because they do not have the benefit of a corporate retirement system.
137. Miko is in need of advice regarding investments, taxes, and insurance for herself and
her family. She would be well advised to seek the advice of an insurance salesperson.
Feedback: Personal financial advisors can help you to develop a comprehensive plan that
covers investments, taxes, insurance, and other financial matters. Not all insurance
salespeople will have the expertise to develop a comprehensive plan. Moreover, such
salespeople often are more interested in selling the products offered by their companies than
in providing unbiased advice about a variety of alternatives.
138. A person in the 25 percent tax bracket who invests $1,000 in a traditional IRA
immediately postpones $250 in taxes.
Feedback: Funds invested in a traditional IRA are sheltered from current taxes. Earnings of
$1,000 would have been taxed at the 25 percent rate, $1,000 x 25% = $250. If the $1,000 is
invested in a traditional IRA, the tax liability is deferred until the funds are withdrawn at
retirement.
BonusD-36
140. Financial planning begins with:
A. spending money wisely.
B. earning money.
C. insuring your assets against an unexpected loss.
D. saving money.
141. Throughout history an investment in ________ has yielded an excellent return,
regardless of the state of the economy or political changes.
A. antiques
B. a good education
C. government bonds
D. savings accounts
142. On average, a person with a college education earns _________ over the course of his
or her career.
A. about $300,000 more than a high school graduate
B. barely enough to justify the additional cost of going to college
C. more in dividends and interest income than in salaries
D. about $1.6 million more than a high school graduate
BonusD-39
149. Personal financial planners often encourage their clients to write down every single
penny they spend each day. The main purpose of this is to:
A. focus attention on the spending levels for each item.
B. eliminate the need for accountants.
C. do a better job of tax planning.
D. accumulate data needed to prepare a personal balance sheet.
150. A(n) _______ is a personal financial plan that allows you to take control of future
spending.
A. expense tracker
B. revenue sheet
C. budget
D. debt manager
151. Budgets are:
A. useful for businesses, but too restrictive to be used by individuals or households.
B. a financial plan of projected revenues and expenses.
C. just another name for cash flow statements.
D. only helpful to people who earn more than $50,000 per year.
152.
Chapter Bonus D – Managing Personal Finances
Preparing and living with a personal budget is:
A. not necessary if your have sufficient income.
B. similar to activities needed to handle the finances of a small business.
C. often more trouble than the benefits justify.
D. an excellent technique to prepare for a career in accounting.
153. A financial planner would encourage you to borrow money:
A. only to buy assets that are likely to generate income or increase in value.
B. to pay your day-to-day expenses and then to invest your income.
C. only when facing bankruptcy.
D. in order to reduce your debt level.
154. Many financial experts advise that you set up a contingency fund equal to about
________ of your earnings and keep these funds in highly liquid accounts.
A. two months
B. six months
C. one year
D. three years
155.