Introduction to Risk Management and Insurance, 10e (Dorfman/Cather)
Chapter 14 Professional Financial Planning
1) Which one of the following is not usually involved in the provision of funding for college
expenses?
A) Needs based life insurance
B) Life insurance trust
C) Section 529 plan
D) All of the above
2) Which of the following statements is false?
A) People with a small amount of assets do not typically need a will.
B) A parent can use a will to appoint a guardian for his/her children.
C) A valid will can minimize probate problems.
D) A legally enforceable will must be made when a person is of sound mind.
3) Which of the following is not a business use of life insurance?
A) To protect a business against loss caused by the death of a key person
B) To provide a means of rewarding and retaining valuable personnel
C) To lower business losses when an employee is fired
D) To provide some amount of life insurance to employees
4) All of the following are typical business uses of life insurance except:
A) protect the business against loss caused by the death of a key person
B) provide a means of rewarding and retaining valuable employees
C) provide severance pay to employees when jobs are terminated
D) protect the value of the partnership at the death of an owner/insured
5) For which year(s) is (are) the Federal Unified Estate Taxes known?
A) 2011
B) 2012
C) 2011 and 2012
D) All years after 2011
6) To properly handle the orderly transfer of business ownership at death, it is necessary to have:
A) an unfunded buy-and-sell agreement
B) a life insurance contract to fund the purchase and a buy-and-sell agreement
C) a verbal understanding of the valuation method
D) a verbal commitment of the heirs to sell the business
7) Federal Estate Taxes:
A) are also called uniform transfer taxes
B) are different from state to state
C) are levied on the fair market value of the gross estate
D) are levied on the taxable estate
8) The main financial problem associated with the early adult years is:
A) compensating for loss of income to the family in the event of a premature death of main wage
earner
B) loss of retirement income in the event of a premature death of main wage earner
C) the problem of paying estate taxes
D) providing lifelong income for the children
9) Purchasing life insurance on the homemaker:
A) makes no sense because the homemaker generates no income
B) should not be done because of the moral hazard it creates in the working spouse
C) makes sense in many cases due to the cost of service replacement and it would help the family
maintain a “normal” lifestyle
D) is very necessary when the homemaker has no minor children
10) When a person dies, the gross estate is:
A) taxed at the rate of 50%
B) adjusted for certain gifts made during the decedent’s lifetime
C) subject to the federal estate and gift tax
D) not taxed if death bed gifts are made to eligible children
11) Which formula shows the needs based method of estimating the amount of life insurance
needed?
A) Life insurance needed = present value of future income
B) Life insurance needed = burial + education – food – shelter
C) Life insurance needed = income + social security – savings
D) Life insurance needed = total needs – existing assets to meet the needs
12) Which of the following statements is false concerning the taxation of life insurance?
A) Beneficiaries receive death benefits free from any federal taxation.
B) The value of the life insurance death benefit is always included in the insured’s estate.
C) If a non-insured/owner dies, the value included in the decedent’s estate is approximately the
cash value of the insurance contract.
D) Interest earned on settlement proceeds is taxable.
13) When an insured dies with an incident of ownership in a life insurance contract:
A) the face amount is included in the gross estate
B) the face amount is not taxed at all due to a loophole in estate tax laws
C) only the cash value at death is included in the estate
D) only is taxed due to the spouse’s assumed half ownership
14) The text mentioned several reasons for purchasing “business” life insurance. Which of the
following reasons was not mentioned?
A) Business continuation
B) Fringe benefits
C) Key person insurance
D) Protection from creditors’ claims
15) Which of the following would not be considered a need in the needs-based approach?
A) Burial fund
B) Fund to cover the equity in the home
C) College education fund
D) Debt retirement fund
16) A business firm may utilize life insurance to protect against loss caused by the death of:
A) a key employee
B) a limited partner, not employed by the firm
C) a main supplier
D) a stockholder in a public corporation
17) Which of the following is true?
A) The government discourages retirement saving by providing no tax incentives.
B) To discourage the pre-retirement withdrawal of tax advantaged retirement savings plans, the
government imposes a 20% early withdrawal penalty.
C) To discourage the pre-retirement withdrawal of tax advantaged retirement savings plans, the
government imposes a 10% early withdrawal penalty on withdrawals made before age 62.
D) If a 40-year-old person becomes disabled, she may be allowed to withdraw tax advantaged
savings without paying a tax penalty.
18) Mr. & Mrs. Clinton are in their 80s. They have saved millions of dollars and need to begin
taking steps to minimize their estate tax liability. They have asked you for advice, and you tell
them, “Give each of your children, grandchildren, and great-grandchildren a cash gift to start
spending down your estate.” Is this correct?
A) Yes
B) No, because they still will have to pay income taxes on the gifts
C) No, because they will still be subject to the uniform transfer tax
D) No, because there are limits to yearly gifts
19) A “Certified Financial Planner”:
A) is a widely recognized financial planning credential
B) can assist people in the financial planning process
C) is not an existing credential
D) A and B above
20) Sound financial planning requires a trade off between:
A) risk and return alternatives
B) gratification and savings
C) investment and saving alternatives
D) fees and returns
21) Which of the following needs for life insurance would be considered permanent?
A) Education fund for surviving children
B) Income fund for surviving children
C) Debt-retirement fund
D) Burial fund
22) Which of the following is one of the three largest financial problems facing middle income
Americans?
A) Financing a teenager’s automobile
B) Financing college
C) Financing the income needs of a surviving spouse with children
D) Financing the early working years
23) Choose the answer that best describes the purpose of a Section 529 Plan:
A) funding retirement with tax-deferred dollars
B) funding retirement with completely tax-free dollars
C) funding a college education
D) funding retirement
24) With respect to a trust fund, what is the role of the trustee?
A) Provide the initial funding for the trust
B) Receive the benefits of the trust
C) Provide management of the trust’s property
D) Determine the beneficiary of the trust
25) “Probate” is best-defined as:
A) choosing investments for a trust fund at death
B) selecting the beneficiary of a trust fund after death of the donor
C) administration of an estate following death of an individual
D) supervising the transfer of property at death
26) Financing retirement is a challenge for many Americans. Which of the following is not a
reason that retirement planning has become more challenging?
A) Many employers no longer fund retirement programs for their employees.
B) Many employees have complicated but generous health insurance plans provided by their
employer.
C) Social Security has increased the normal retirement age and lowered benefit targets.
D) Increases in longevity put a greater burden on retirement savings.
27) The best financial plan for financing a child’s college education requires:
A) a savings plan
B) a 401(k) plan
C) premature death protection
D) both A and C
28) Life insurance policy owners have several ways by which to access the cash savings in their
life insurance policies while the insured is still alive. Which of the following is not one of those
ways?
A) Invest cash value in the insurer’s stock and then receive shareholder dividends
B) Participating policy dividends
C) Withdraw the cash value
D) Take a lump sum settlement if the insured is terminally ill
29) Why would a company favor a cross-purchase plan over an entity plan?
A) Tax benefits
B) A cross-purchase plan has fewer policies
C) When they have a lot of so-called “key employees”
D) When a buy-and-sell agreement is not feasible
30) Why would a company favor an entity plan over a cross-purchase plan?
A) Tax benefits
B) An entity plan has fewer policies
C) When they have a lot of so-called “key employees”
D) When a buy-and-sell agreement is not feasible
31) Financial planners:
A) should be knowledgeable of many topics
B) will make decisions for their clients
C) can assist people in the financial planning process
D) A and C above
32) Which of the following is not a task of a financial planner?
A) Help their clients develop financial goals for the future
B) Collect data about the various aspects of the financial situation of their clients
C) Decide on the implementation of a financial plan
D) Educate their clients with respect to the optimal financial plan
33) Typically which of the following results from a financial plan?
A) Start saving more
B) Write or update a will
C) Purchase more life insurance
D) All of the above
34) Which of the following is not a feature of a 529 Plan?
A) Withdrawals for nonqualified expenses are prohibited.
B) The contributor owns the account.
C) The account owner can change the beneficiary.
D) The account owner determines the investment strategy.
35) Which of the following is not an issue when planning for retirement?
A) Estimating the age of retirement
B) Estimating the income of the children, if any
C) Estimating the age at death
D) Estimating expenses during retirement
36) The fact that women live longer than men has the following impact on planning for
retirement:
A) they require income for a longer period of time
B) life insurance on a husband should take this fact into account
C) they require more health insurance
D) All of the above are correct.
37) What is a charitable deduction?
A) A deduction from the cash value to a qualified charitable organization
B) A deduction from the taxable estate to a church
C) A deduction from the taxable estate to a qualified charitable organization
D) A deduction from the gross estate to a qualified charitable organization
38) The trustee of a trust fund is responsible for determining the beneficiary of the fund’s assets.
39) The maximum estate tax rate is 58.
40) The Federal Estate Tax is a flat percent on all assets owned at death.
41) In a key-employee insurance purchase, the business should be the owner and the beneficiary
of the policy.
42) The federal estate tax will take a greater percentage of a large estate as well as a larger
number of dollars.
43) With five owners of a business, an entity purchase plan usually makes more sense than a
cross-purchase plan.
44) There is never any income tax when an individual surrenders his life insurance contract.
45) People are more likely to purchase adequate amounts of life than property insurance.
46) The needs-based approach should be used to determine whether life insurance is needed and
how much.
47) The use of life insurance for estate preservation is needed only by the very wealthy.
48) For most people, the greatest need for life insurance is to retire the debts of the primary wage
earner.
49) A terminally ill insured may be able to withdraw life insurance death benefits on tax-free
basis while still alive.
50) The early adult years are mainly characterized by pre-retirement planning.
51) The present value of an education fund increases as one gets closer to the college years.
52) The needs-based approach is one technique for calculating how much life insurance one
needs. Explain briefly the method for calculating this amount.
53) What are the main financial planning problems encountered in the “early adult” years?
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54) Why is it necessary to buy life insurance on a non-wage earning spouse?