Chapter 3 Review Questions
a. factors motivating the sale of the policy
b. the precision of the estimated life expectancy
c. tax implications from the sale
*d. all of the above
a. HIV/AIDS
*b. illnesses other than AIDS
c. non-life threatening diseases
d. none of the above are true
a. universal life policies
*b. non-convertible term life policies
c. group life certificates
d. modified whole life policies
*a. the policyholder
b. the insured
c. the beneficiary
d. any of the above
a. fiduciaries
b. corporations
c. tax-exempt charitable organizations
*d. any of the above
a. age of the insured
*b. life expectancy of the insured
c. policyholder's need for funds
d. all of the above
a. 50% of the net death benefits
b. 60% of the net death benefits
c. 70% of the net death benefits
d. 80% of the net death benefits
a. age of the insured
*b. quality of the insurance carrier
c. willingness of the buyers and sellers to engage in the transaction
d. all of the above
a. the policyholder must be at least 65 years old
b. the insured must be diagnosed as "chronically ill"
c. both a and b
*d. neither a nor b
a. $100,000 or more
*b. $250,000 or more
c. $500,000 or more
d. $1 million or more
*a. the fragmented nature of the market
b. the number of potential sellers
c. anticipated growth of the market
d. all of the above
a. future premiums due on the policy
b. face value of the policy
c. rating of the insurance carrier
*d. all of the above
a. rate of return desired by the purchaser
*b. life expectancy of the insured
c. quality of the insurance carrier
d. none of the above
a. the suitability of the coverage
b. the affordability of the coverage
c. the investment performance of the policy
*d. all of the above
a. Mr. Green, a widower, age 66 owns a $1.5 million universal life policy. He has just undergone heart bypass surgery. He has a quadriplegic 25-year old son in need of custodial care.
b. Mrs. Peacock, age 76, owns a $1 million convertible term policy issued by a top-rated carrier. She has no dependents and has named the American Cancer Society as beneficiary. She has been diagnosed with inoperable brain cancer and needs funds to pay for experimental medical treatment.
* c. Colonel Mustard, recently retired from the military at age 70. He owns a $500,000 whole life policy with a mid-rated carrier. He was recently diagnosed with adult-onset diabetes and seeks to supplement his military pension.
d. Ms. Scarlet, age 75 in excellent health, owns a $500,000 million policy issued by a top-rated carrier. Her daughters are named as beneficiaries. Her sizable estate will provide adequately for her heirs and she wishes to spend more time traveling around the world.
Tom, Dick and Harry are partners in an accounting firm. They are all in their mid-fifties and have drafted a cross-purchase buy-sell agreement with each partner holding policies on the other two partners' lives. They decide to make their 30-year old office manager, Zack, a partner. In reviewing their buy-sell agreement Zach is concerned that he will have to pay premiums on three expensive policies insuring the older partners, and they will pay less to insure his life. He proposes the firm adopt an entity plan, in which the partnership holds a single policy on each partner's life. The partners agree to this change. Which would be the best course of action?
a. have the three older partners sell the existing policies in a lifetime settlement and have the partnership purchase new policies on the four partners' lives
b. have the three older partners assign their existing policies to the partnership and have the partnership purchase coverage on Zack's life
c. use a Section 1035 exchange to consolidate the coverage on each of the older partner's lives and obtain new coverage for Zack
*d. all of the above might be appropriate and the partners should explore the differences in premiums and policy coverage available under each of these alternatives
a. obtain more suitable coverage
b. repay debts or reorganize under bankruptcy
c. eliminate unneeded coverage and premium payments
*d. all of the above
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