CPCU 556 Practice Exam 2

1. Edward has a 3-year-old daughter that he hopes will attend college at the age of 18. When constructing an investment portfolio for the accumulated education savings, Edward would be wise to:

2. Janet converted her traditional IRA to a Roth IRA. Which one of the following statements is correct regarding the income tax treatment of this conversion?

3. Although many expenses decline during retirement, certain types of expenses may increase. Which one of the following expenses is most likely to increase during retirement?

4. Which one of the following is generally an eligibility requirement for Medicare?

5. Dollar cost averaging represents what type of personal financial planning strategy?

6. Stan and Cindi, a married couple, retired several years ago. They fund their annual expenses with a combination of Social Security benefits, employer-sponsored retirement plan benefits, and an annuity. They want to take an expensive vacation and are wondering which account to withdraw the money. Their goal is to minimize the income taxes associated with the withdrawal, since they are currently in a high income tax bracket. From which of the following accounts should they take the needed funds?

7. Jamie, age 25, is interested in saving for her retirement. She currently earns a salary of $50,000 and is willing to set aside $5,000 per year to fund her retirement. Her employer offers a Section 401(k) plan, with a dollar-for-dollar match up to 5% of compensation. Which of the following retirement savings vehicles should Jamie first consider when saving for her retirement?

8. ABC Corporation wants to establish a retirement plan that closely resembles an IRA. The company would like to make all the contributions to the plan and would like to make higher annual contributions each year than those permitted under a traditional IRA or Roth IRA. Which of the following would be the most appropriate plan for ABC Corporation?

9. At the time of his death, Stan bequeathed shares of ExTell stock worth $500,000 to his daughter Susan via his Will. Assuming this was the only bequest to Susan from her father, what is Susan’s primary concern?

10. Which one of the following individuals would be eligible to make a $5,000 contribution to a traditional IRA?

11. Which one of the following retirement vehicles is subject to both contribution limits and required minimum distributions?

12. The main reason a financial plan must be monitored and revised is because:

13. Probate costs must be considered when formulating an estate plan for an individual. Probate costs include:

14. The waiver of premium provision in a disability income insurance policy:

15. Which one of the following is a health insurance plan that allows patients to choose their own healthcare provider and reimburses the patient or provider at a certain percentage for services provided?

16. Ken purchased a long-term care insurance policy that contains a 30-day elimination period. The policy pays Ken $200 per day for covered treatment. During the current year, Ken experienced the following events:
• February-March – spent 60 days in a drug addiction treatment facility.
• July-October – spent 110 days in a nursing home because of injuries sustained in a boating accident.
What amount would be covered under the policy?

17. Dennis has $30,000 that he plans to set aside as an emergency fund. He is willing to take on some investment risk in order to earn a higher rate of return on these funds, but he has decided to limit his choices to highly liquid investments with relatively little risk to the principal. Which one of the following types of investments would be most likely to generate the highest rate of return for his emergency fund investment?

18. Johnny, age 31, has $60,000 he wants to invest in tax-advantaged securities that emphasize income over capital appreciation. He currently makes the maximum allowable contribution to his 401(k) plan sponsored by his employer. Which one of the following securities would allow him to receive a relatively stable level of income while at the same time minimizing his current year tax liability?

19. Stuart and Joanna, both aged 33, are considering appropriate funding vehicles for their three-year-old daughter Carla’s college education expenses. They would like to purchase life insurance that could be used to meet both their premature death loss exposure goals and their education expense funding goals. Stuart and Joanna have a long-term planning horizon and are risk tolerant. Which one of the following types of life insurance would be most appropriate based on their objectives?

20. A manufacturing company announced that it was laying off 5,000 workers because of a fire that occurred in its main production facility. The company’s common stock price immediately declined by 10% per share. The decline in share price is an example of:

21. An advantage of a defined benefit plan is that:

22. An investor wanting to purchase an investment that focuses on capital appreciation with some investment income should purchase:

23. If an irrevocable trust pays income to the trust beneficiary, the income is typically taxed to the:

24. Which one of the following statements is correct regarding level term life insurance?

25. If a financial planner is attempting to determine a client’s appropriate emergency fund, the best resource to determine the amount of the emergency fund is a:

26. Which one of the following statements is correct regarding state death taxes?

27. Stacy, age 45, purchased a single premium nonqualified annuity several years ago, paying a non-deductible premium of $50,000. The annuity currently has a cash value of $75,000. Assuming Stacy takes a $9,000 loan from the cash value today, how much would be included in her gross income for federal income tax purposes?

28. Which one of the following statements is correct regarding the parties to an annuity contract?

29. In the case of a variable annuity, the insurer is subject to the risk that the annuitant will outlive their table life expectancy. To compensate for this risk, the insurer includes which one of the following in the premium?

30. Vince, age 25, wants to purchase a whole life insurance policy on his own life. Which one of the following policies, each offering the same death benefit, would result in the lowest premiums?

31. Which one of the following represents a social insurance program that must be incorporated into a risk management plan?

32. Which one of the following is required information when estimating the cost of a four-year college education?

33. Which one of the following statements is correct regarding education funding vehicles?

34. A 20-year certain annuity will provide:

35. If an employee elects to defer a portion of their salary into a Roth 401(k) plan, the employee contributions are:

36. The primary factor in determining the cost of a long-term care policy is:

37. Which one of the following statements is correct regarding dividend reinvestment plans (DRIPs)?

38. Which one of the following education savings vehicles would permit the highest contribution by a donor in a single year?

39. Which one of the following statements is correct regarding planning for the funding needs to meet postsecondary education goals?

40. When determining an individual’s income tax liability, which one of the following would usually be the largest amount?

41. For a young, newly married couple with no children, which one of the following typically represents the primary focus of personal financial planning?

42. When determining the annual savings needed to successfully fund a retirement, which one of the following would be subtracted from the targeted income amount in arriving at the retirement income shortfall?

43. If an individual elects to defer Social Security benefits beyond their full retirement age, their benefits will increase by:

44. Anna, age 35, made $50,000 of pre-tax contributions to a traditional IRA over a ten-year period. The account is now worth $70,000, and she has decided to convert the traditional IRA to a Roth IRA. If she completes the conversion, what will be the income tax consequences?

45. For purposes of determining the gross estate, the decedent’s property can be valued on either the date of death or the date:

46. The executor of an estate is an important consideration in an individual’s estate plan. Which of the following represents a role of an executor?

47. Five years ago, Tara purchased publicly traded stock for $20,000. Two years ago, when the value of the stock was $30,000, Tara gifted the stock to her daughter, Jessica. Last month, Jessica sold the stock for $35,000. What was Jessica’s basis in the stock at the time of the sale?

48. Which one of the following statements is correct regarding the renewability feature of a term policy?

49. Which one of the following represents a common trigger that determines eligibility for benefits under a long-term care policy?

50. Which one of the following statements is correct regarding structured settlements?