FINANCE 321 Exam | Complete Solution

Here are the multiple choice and true/false questions.  
•    Highlight in YELLOW the answer(s) that are correct.  
•    Note: some questions ask for you to highlight ‘all that apply’.  
•    Also note: for the True/False questions, if you answer False, you must also indicate why where it says because:

1.    The ranking of countries by size and the analysis of ¬¬¬¬¬¬_______ growth has implications for the future of retirement systems and the management of life cycle risks.
a.    demographic
b.    economic
c.    chronic illness
d.    interest-rate

2.    The concept of pooling is critical to life insurance because the losses of the few can be paid for by __________________________________.
a.    relatively small contributions from the many.
b.    premium increases.
c.    federal tax subsidies.
d.    inheritance taxes.

3.    Mortality rates of the _________ populations tend to be better than those of the _______ populations.
a.    uninsured; insured
b.    insured; uninsured
c.    healthy; chronically ill
d.    aging; younger

4.    Actuarially, 8 to 15 percent of the population will die prior to retirement age.
a.    True
b.    False, because:

5.    Modern medicine, better living conditions, and _______ are all contributing to greater life expectancies.
a.    pooled losses
b.    office jobs
c.    lower premiums
d.    genetics

6.    The earlier one begins saving for retirement, the longer _____________ can be taken advantage of to help finance future living expenses.
a.    interest rates
b.    insurers
c.    pharmaceuticals
d.    low premiums

7.    Whole life insurance allows the policyholder the flexibility to change the amount of the premium periodically, discontinue premiums and resume them at a later date without lapsing the policy, and change the amount of death protection.
a.    True
b.    False, because: 

8.    ___________ express the ratio of dependents (children and people beyond working age) to the number of people in the working-age group.
a.    Population ratios
b.    Birth rates
c.    Dependency ratios
d.    Mortality rates

9.    ______________ is borne mainly by the dependents of the deceased.
a.    Mortality risk
b.    Insurability risk
c.    Premium risk
d.    Portfolio risk

10.    Life insurance premiums are adjusted for ___________________________________________.
a.    investment income, marketing/administrative costs, taxes, and actuarial risks
b.    investment income, taxes actuarial risks, credit score
c.    marketing/administrative costs, taxes, actuarial risks, credit scores
d.    taxes, actuarial risks, credit scores, investment income

11.    Medigap insurance policies are private, individual health contracts that replace coverage provided by Medicare
a.    True
b.    False, because:

12.    Global health statistics reveal ¬¬¬¬¬¬¬¬_________ correlation between the development level of the economy and the percentage of GDP spent on health-related costs
a.    a positive
b.    a negative
c.    no
d.    an inverse

13.    Which of the following are key underwriting determinants of accepting a group for insurance and pricing the group insurance (highlight all that apply):
a.    the reason for the group’s existence
b.    the employer’s financial stability and persistency
c.    prior experience of the plan
d.    the size of the group 
e.    the source and/or method of premium payment 
f.    stability of the group 
g.    eligibility provisions
h.    geographical location
i.    industry
j.    employees mix

14.    Actuarially, 85 to 92 percent of the population will not reach retirement age.
a.    True
b.    False, because:

15.    In whole life policies, the level premium is lower than necessary to pay claims and other expenses during the early years of the contract, and less than the cost of protection equal to the total death benefit during the later years.
a.    True
b.    False, because:

16.    The economic needs of _________ and the financial constraints of ________ must be balanced in designing benefit programs.
a.    employers; employees
b.    employees; employers
c.    insurance companies; employers
d.    employers; insurance companies

17.    Other qualified plans allowing tax-deferred contributions include 403(b), Section 457, Keogh, SEP, and SIMPLE.  Highlight all of the following descriptions that are incorrect:
a.    403(b)—for employees of tax-exempt organizations  
b.    Section 457—for employees of state and local governments and nonproft, noneducational institutions 
c.    Keogh plans—for the self-employed 
d.    SEP—individual retirement accounts (IRAs) that employers can contribute toward on a tax-deductible basis 
e.    SIMPLE—for employees of small businesses

18.    Term life insurance—provides protection for a specified period; is renewable (at increased premiums) and convertible and has a death benefit that is level, increasing, or decreasing depending on need.
a.    True 
b.    False, because:

19.    The IRS imposes tax penalties on participants who receive distributions from retirement plans prior to age ____________ and requires that benefits begin by age ___________ (regardless of retirement occurring).
a.    fifty-nine and a half; seventy and a half
b.    seventy and a half; fifty-nine and a half
c.    sixty-five; seventy-one and a half
d.    sixty-five; seventy and a half

20.    Group insurance is less expensive than individual insurance due to streamlined marketing costs, employer responsibilities, and lack of medical examinations
a.    True
b.    False, because:

21.    _______________ allow insured to receive up to 50 percent of death benefit to improve quality of life before death.
a.    Chronic illness riders
b.    Conversion clauses
c.    Accelerated death benefits
d.    Lump-sum conversion riders

22.    Employers rarely contribute to long-term care premiums, but premiums can be paid with before-tax income by employees.
a.    True
b.    False, because:

23.    Employees can purchase additional coverage on a post-tax basis under a premium conversion plan after exhausting flexible credits.
a.    True
b.    False, because:

24.    Monthly life and health insurance rates in group plans are weighted to account for age, sex, mortality, and morbidity features of _________________. 
a.    employees in the group
b.    industry-wide demographics
c.    demographics of the local community
d.    the general population

25.    There is _________ on death benefits in life insurance (nor on dividends in participating policies).
a.    no tax
b.    some tax
c.    taxation at the insured’s marginal rate
d.    a 15% flat tax

26.    Group health insurance premiums paid by the employer are tax deductible but are taxable income to employees.
a.    True 
b.    False, because:

27.    Insureds may realize the cash value of a life insurance policy by doing which of the following (highlight all that apply):
a.    designating a new beneficiary
b.    surrendering the policy
c.    placing the policy in a trust
d.    taking out a loan against the policy
e.    letting the policy mature as part of the policy’s death benefit

28.    Defined benefit plans require less employer commitment by guaranteeing only contribution amounts toward employees’ retirement accounts
a.    True
b.    False, because:

29.    Which of the following is not one of the regulations that establishes minimum vesting standards regarding employees’ rights to employers’ contributions to retirement plans.
a.    TRA86 
b.    PPACA
c.    ERISA 
d.    EGTRAA 2001
e.    Pension Protection Act of 2006

30.    The difference between the _______ and the _______ amount of the life insurance policy is the net amount at risk for the insurer and the protection element for the insured.
a.    reserve, face
b.    face, reserve
c.    initial, ending
d.    budgeted, actual

31.    Defined benefit plans require the greatest degree of employer commitment by guaranteeing specified retirement benefits for employees.
a.    True
b.    False, because:

32.    Distributions from annuities funded with after-tax dollars are not taxable; distributions from annuities funded with tax-deferred, before-tax dollars (as in pension plans) are taxable up to 2% of MAGI.
a.    True
b.    False, because:

33.    The definition of disability is usually less stringent in short-term disability than in long-term disability and varies more among group policies than individual policies.
a.    True
b.    False, because:

34.    Short-term disability usually provides higher income replacement than long-term disability.
a.    True
b.    False, because:

35.    Mortality and investment return factors are guaranteed in annuities, adding to the ________.
a.    issuer’s risk
b.    issuer’s benefit
c.    insured’s benefit
d.    insured’s risk

Next, scroll down to the five essay questions.  Be sure to answer all five of them, with a substantive response and in your own words.  Paraphrase and cite, but do not directly quote, your sources.  (Direct quotations do not indicate that you know how to answer the question from your own understanding.) 
 
Essay question 1, 15 points
Mary Koonce describes herself as an optimist who does not wish to dwell on the unpleasant what-ifs in life. She is urged by her financial planner to perform a family needs analysis to insure against the risk of premature death. Mary insists this is unnecessary because she already made such an assessment ten years ago and has a life insurance policy guaranteeing a $250,000 death benefit. 
Mary is divorced, has two teenage sons and a seven-year-old daughter, and purchased her first home a year ago. 
Do you agree with Mary’s judgment regarding her needs analysis? If you were her financial advisor, what would you tell her? Consider all the planning needs relevant to Mary’s life. 

Your Response:

 
Essay question 2, 15 points
Clancy knew he could not meet the physical requirements for insurability, so he had his twin brother, Clarence, take the physical examination in his place. A policy was issued, and three years later, Clancy died. 
The insurance company claims manager learned that Clancy’s twin took the examination in his place and refused to pay the claim. Clancy’s beneficiary sued the company for the proceeds, claiming that the two-year contestable period had expired. Did the company have to pay? Why or why not?

Your Response:

 
Essay question 3, 15 points
The following insureds have accidental death benefit riders on their life insurance policies. Discuss why you think this rider will or will not pay the beneficiary in each of the following situations. Respond to each of the 3 situations separately in the space below, using as much space as necessary.
a. The insured dies from a fall through a dormitory window on the tenth floor. The door to his room is locked from the inside, and the window has no ledge. There is no suicide note. He had not appeared despondent before his death. 
b. The insured dies in a high-speed single-car automobile accident on a clear day and with no apparent mechanical malfunction in the vehicle. He had been very depressed about his job and had undergone therapy with a counselor, during which he had discussed suicide; however, there is no note. 
c. The insured contracts pneumonia after she is hospitalized due to injuries received from a fall from a ladder while rescuing a cat from a tree. She has a history of pneumonia and other serious respiratory problems. She dies of pneumonia thirty days after the fall.

Your Responses:
a.

b.

c.
 
Essay question 4
Knowledge Networking, Inc., provides a growing business of high-tech and electronics equipment and software. It is a specialty retail and online business that has tripled its revenues in the past seven years. The company started fifteen years ago and includes fifty outlets on both the East and West coasts. In 2005, the company went public and now, despite the major financial crisis, it is doing very well with innovation and creative offerings. 
The company has 5,600 full-time employees and 1,000 part-time employees. Knowledge Networking, Inc., provides all the social insurance programs and offers its employees a cafeteria plan with many choices. Employees have generous choices of health, life insurance, and disability coverages; dental and vision care; premium conversion plan; and flexible spending accounts as part of the cafeteria plan. Each employee receives $5,500 a year from the employer to pay for the benefits. Respond to each of the 3 situations separately in the space below, using as much space as necessary.
a. Describe in detail your understanding of the structure of the cafeteria plan of Knowledge Networking, Inc. (design this cafeteria plan). What are the advantages and disadvantages of this cafeteria plan? 
b. Knowledge Networking, Inc., follows the federal laws: FMLA, ADA, Civil Rights Act, and Age Discrimination in Employment Act. If you were the employee benefits manager, how would you explain the impact of each of these acts on the employee benefits of the employees? 
c. How would the group insurance rates be computed (what factors play into the computation) for such a company? d. Why might Knowledge Networking, Inc., prefer to self-insure their workers’ compensation and health insurance rather than buy insurance?

Your response:
a.

b.

c.

 
Essay question 5, 15 points
Henry Wooster meets with the employee benefits manager to discuss enrolling in the company’s 401(k) plan. He finds that if he enrolls, he must choose the amount of salary to defer and also direct his fund investment. Having no college education and no business experience, Henry lacks confidence about making these decisions. Respond to each of the 3 situations separately in the space below, using as much space as necessary.
a. Should Henry enroll in the 401(k) plan? Do the advantages outweigh the difficulties he may have in managing the plan? 
b. What would you recommend that Henry do to educate himself about fund management? How can the benefits manager help? 
c. Is it appropriate for the employer to establish a plan that requires employees to take so much responsibility for retirement planning? Explain your answer.

Your Response:

a.

b.

c.