Only $2.99/month

Foundations in Financial Planning

Terms in this set (313)

False

Whether to use an all-encompassing comprehensive financial plan or a more focused special needs plan will be determined by the individual's personal objectives and financial goals, not just his or her personal preferences. A client's goals may require a comprehensive plan, not just targeted planning.

Whether to use an all-encompassing comprehensive financial plan or a more focused targeted plan will be determined solely by the individual's personal preferences.

True/False

True

Financial planning can be described as a coordinated, continuous process of working with a client to set and achieve goals.

Financial planning involves a process.

True/False

True

Targeted planning typically involves addressing one objective.

Targeted planning usually focuses on only one client objective.

True/False

True

Comprehensive financial planning can touch upon many areas in order to help clients work toward and meet their goals.

Comprehensive financial planning can involve many areas, including cash management, risk management, investments, taxes, retirement, group benefits, and estate planning.

True/False

False

Goals need to be ranked primarily in order of importance. Time frame is certainly a significant factor, but a goal's relative importance is more relevant.

Goals need to be ranked in order of time frame rather than by their importance.

True/False

False

Personal financial planning is not only valuable to those people with large incomes and significant assets, it is also valuable to those with smaller incomes and fewer assets who are beginning to accumulate net worth.

Personal financial planning can generally help only those people with significant disposable income or accumulated assets.

True/False

True

Procrastination may be the number one reason why people do not plan.

A major reason that people do not engage in the financial planning process is procrastination.

True/False

False

A well defined goal does have three parts, but they are purpose, time frame, and amount (PTA).

A well defined goal has three parts: purpose, time frame, and rationale.

True/False

False

The step in the financial planning process where potential problems that may interfere with achieving a client's objectives are found, is the analyze information step.

The step in the financial planning process where potential problems that may interfere with achieving a client's objectives are found, is the gather information step.

True/False

False

The first step in the personal financial planning process is establishing and defining the relationship with the client.

The first step in the personal financial planning process is gathering data.

True/False

True

There are six steps in the financial planning process: establish, gather, analyze, develop, implement, and monitor (EGADIM).

There are six steps in the financial planning process.

True/False

True

Strengths and weaknesses must be identified by the planner first, before he or she can move on to developing possible solutions.

A major objective for the planner in the analyze step of the financial planning process is to identify strengths and weaknesses in the client's current situation.

True/False

False

Mismatches are part of what the planner should be identifying, and helping the client to recognize and resolve. There can not only be mismatches between a client's time horizon and stated goals, but also between the client's time horizon and current investments, and between the client's personality, current investments, and stated goals.

Any mismatches between a client's time horizon and stated goals is theirs to work out, the comprehensive planner is there to work on other issues, such as investments and retirement planning.

True/False

True

A SWOT analysis is an effective approach to analyzing a client's current situation.

A "SWOT" analysis is looking at the strengths and weaknesses of a client's situation, and opportunities and threats to achieving their goals.

True/False

False

Effective communication skills are vital to financial planners, through all six steps of the financial planning process

Effective communication skills are not that important for financial planners.

True/False

True

These are the three ways that most planners get paid.

Most planners get paid in one of three ways: commissions only, fee only, or a combination of the two.

True/False

False

Personal expenses are categorized as fixed or variable to better understand the nature of the expenses.

Personal expenses are grouped together into one category since they all need to be paid.

True/False

True

Due to the diverse areas of expertise required, a financial planner may only be one of a group of professionals serving a particular client.

With financial planning, it often becomes necessary to use other professionals to effectively serve a client.

True/False

True

The time frame is important when recommending an investment since it directly relates to the risk that can be taken (the shorter the time frame, the less risk can be taken).

One important piece of information needed when recommending an investment is the time frame for that investment.

True/False

True

Insurance coverages should be reviewed as part of a comprehensive financial plan.

Risk management is an important part of comprehensive financial planning, and should include a review of all insurance coverages.

True/False

False

Both possible sources of retirement income and the desired retirement income objective should be addressed.

When doing retirement planning it is only important for the planner to identify possible sources of retirement income.

True/False

True

Naming beneficiaries will enable assets to pass easily on to heirs, based on the client's wishes.

Part of estate planning is to make sure beneficiaries have been named on certain types of accounts.

True/False

True

Ethics are a necessary and very important component of any profession—they are the rules of the road for that profession.

Ethics are an important component of any profession.

True/False

True

Individuals who become Registered Paraplanners agree to, and are held to, specific Standards of Professional Conduct.

Registered Paraplanners are held to specific Standards of Professional Conduct.

True/False

True

A fiduciary obligation to the client includes, among other things, full and adequate disclosure of all material facts.

A fiduciary obligation to the client includes full and adequate disclosure of all material facts.

True/False

False

Some financial planners are considered fiduciaries, others are not. This can be confusing, especially for clients.

All financial planners are fiduciaries.

True/False

False

There is much confusion in this area, as someone calling themselves a financial planner may or may not be one. Planners can set themselves apart by earning a well-known and respected certification or designation.

A client can count on the fact that anyone holding themselves out as a financial planner is a financial planner.

True/False

True

Different regulators are involved depending upon the type of advice being given and services being offered.

Anyone working in the financial services industry needs to make sure they are properly registered with the appropriate regulators.

True/False

True

The SEC oversees and regulates both the securities markets and advisers who give advice involving securities.

The Securities and Exchange Commission (SEC) regulates both the securities markets and advisers.

True/False

False

RIAs are considered to be fiduciaries, and this means that they must provide a disclosure document (Form ADV Part 2) to clients. Verbal disclosure alone will not suffice.

Registered investment advisers (RIAs) are not considered to be fiduciaries and are not required to provide written disclosure to clients.

True/False

True

The three major components of a statement of financial position are assets, liabilities, and net worth. It is a financial statement that reflects information as of a given date.

A statement of financial position shows the assets, liabilities, and net worth for an individual or a family as of a given date.

True/False

False

A statement of financial position provides a financial snapshot as of a given date that covers a specific point in time; it does not cover a specific period of time.

A statement of financial position (balance sheet) provides a financial "snapshot" that covers a specific period of time.

True/False

False

Personal assets are shown on financial statements at their current fair market value. Only a business balance sheet values assets at their purchase price or their depreciated value, whichever is less.

Personal assets are shown on financial statements at their purchase value.

True/False

True

A cash flow statement shows an individual's cash receipts and disbursements over a given period of time.

A cash flow statement shows a person's pattern of spending, saving, and investing, over a given period of time.

True/False

True

Although taxes may be correctly considered to be almost a fixed outflow, prudent planning, changes in income, and changes in circumstances can either increase or reduce taxes, which would make it more appropriate to consider them as a variable cash outflow.

Income taxes are considered variable cash outflows since taxes can be reduced through prudent tax planning.

True/False

False

Assets are separated into three categories: cash/cash equivalents (liquid assets), invested assets, and use assets.

Assets are separated into two categories: invested assets and use assets.

True/False

cash and cash equivalents ÷ monthly expenses - savings - taxes

Cash and cash equivalents ÷ monthly expenses - savings - taxes is the calculation for the basic liquidity ratio. Savings and taxes are taken out because in the event one is no longer employed there would not be any taxable income, and any saving would stop until employed again.

Which one of the following is the formula for basic liquidity ratio?

annual nonmortgage debt repayment ÷ annual take-home pay

PITI ÷ annual gross income

annual debt repayments ÷ gross income

cash and cash equivalents ÷ monthly expenses - savings - taxes

True

Computing financial ratios, which compare two financial amounts, is a standard way of analyzing a person's financial situation.

One way to analyze a person's financial situation is by computing financial ratios.

True/False

True

Gross income is used in the front-end and back-end debt-to-income ratios, and after-tax (net) income is used for the nonmortgage debt-to-income ratio.

Gross income is used when calculating the front-end and back-end debt-to-income ratios, and net income is used when calculating the nonmortgage debt-to-income ratio.

True/False

False

The liquidity ratio is calculated by taking cash and cash equivalents and dividing by monthly expenses less savings and taxes. The emergency fund is in place in case income from a job is lost, and if one is not earning income then no new savings and investing will be taking place and no income taxes will need to be paid.

The basic liquidity (solvency) ratio is calculated by taking cash and cash equivalents and dividing by all monthly expenses.

True/False

True

The front-end debt-to-income ratio looks at the amount of principal, interest, taxes, and insurance (PITI) that will be needed to pay for housing costs, and it should not exceed 28%.

The front-end debt-to-income ratio is used to calculate the amount of income that can go toward purchasing a home.

True/False

True

Enough in liquid funds to pay three months of expenses is the minimum amount that should be in an emergency fund. The guideline is to have enough for three to six months' worth of expenses, less taxes and saving and investing.

The minimum number of months to have in reserve in an emergency fund should be three months of expenses, less taxes and saving and investing.

True/False

True

Collateral is used by lenders to secure a loan. If a borrower does not pay back the loan, the lender can sell the collateral to pay off the loan. Thus, if a borrower lacks sufficient collateral, a loan may not be approved.

Collateral is one factor used by lenders in evaluating a borrower. Collateral is the assets that are to be used to secure a debt.

True/False

False

Capacity is the income an individual has available for paying off a debt; capital is the net worth of an individual, which is taken into account by lenders.

One factor that lenders use in evaluating a borrower is capacity. Capacity is the net worth of an individual.

True/False

True

The range of FICO credit scores is 300 to 850.

FICO credit scores range from 300 to 850.

True/False

False

Interest is a major cost of credit, but various fees are another important cost of credit.

In general, the cost of credit is the interest on the loan.

True/False

True

Credit cards are the charge cards or overdraft cards issued by retailers and banks, and they are the most common form of revolving credit.

The most common form of revolving credit is the credit card.

True/False

False

A mortgage is paid off through amortization, which includes payments that consist of both interest and principal.

A mortgage is paid off by making periodic interest payments.

True/False

True

Variable rate loans are available through banks and mortgage companies, which classify them as conventional loans.

A variable rate loan may also be a conventional loan.

True/False

False

Pell grants are used to finance education.

Pell grants are used to obtain low-income housing.

True/False

True

The Equal Credit Opportunity Act was specifically passed to prohibit credit discrimination based on sex, marital status, race, national origin, religion, age, or the receipt of public assistance.

The Equal Credit Opportunity Act was enacted to prohibit credit discrimination.

True/False

False

Chapter 7 bankruptcy requires liquidation of assets for distribution to creditors, and eliminates most but not necessarily all debts, such as alimony and child support. Chapter 13 bankruptcy is called the "wage earners plan" and provides the debtor with an orderly plan for debt repayment.

Chapter 7 bankruptcy provides a debtor with an opportunity to restructure his or her finances and repay as much of the debt as possible.

True/False

24 years.

Using the Rule of 72, prices are expected to double every 24 years with a 3% inflation rate: 72 ÷ inflation rate (or 72 ÷ 3) = 24 years.

Using the Rule of 72, an inflation rate of 3% results in prices doubling approximately every

2.16 years.

18 years.

24 years.

none of the above.

True

A budget should be reviewed monthly in order to identify items that are or are not on target. A less frequent review provides less financial control of those items.

A budget (especially a new budget) should be reviewed monthly.

True/False

False

A budget should be flexible enough to represent changing personal financial conditions. That does not mean that a client should not attempt to adhere to a budget; it should reflect an honest picture of the client's finances and be realistic regarding implementation. If a budget is too strict the client may abandon it altogether.

In order to be an effective planning tool, a budget should be a rigid document that should be adhered to at all costs.

True/False

False

The average American household spends the most on housing costs, according to the Bureau of Labor Statistics. The average amount spent on transportation is 17.6% of all expenses, but 33.6% of all expenses is spent on housing.

The average American household spends the most on transportation.

True/False

True

The envelope system has worked well for some, and it is easy to implement. Clients create as many categories as they wish, and budget a certain amount of money into each envelope, giving them the amount they have to spend for that month in that category.

The "envelope system" has been effective for some individuals in sticking to a budget.

True/False

True

Financial planning often requires tact, and this is one area that can be sensitive. The planner is there to help guide the process, not tell the client what to do.

The planner needs to be careful and avoid appearing to be judgmental with clients when working with them on developing a budget.

True/False

short-term disability

A short-term disability is temporary, and there is generally little or no impact on income, depending upon the length of the disability.

Which one of the following would cause the least amount of potential loss of income?

death

divorce

short-term disability

False

The process of deciding how much and what kind of insurance to buy is called insurance management. Risk management is looking at the big picture, and insurance is just one possible way to handle certain risks.

Insurance management is another name for risk management.

True/False

False

The probability of becoming disabled is greater than that of premature death at most ages.

At most ages, the probability of premature death is greater than that of becoming disabled.

True/False

One should insure against the most likely losses first.

This is the incorrect statement; one should insure against the potentially catastrophic losses first, even if their occurrence is unlikely.

Which one of the following statements is incorrect?

Personal risks include loss of income and potential disability.

One should insure against the most likely losses first.

Potential loss of income can occur with divorce.

False

This describes comparative negligence, not contributory negligence. With contributory negligence, if the injured party contributed in any way to the injury, he or she cannot collect any damages.

Contributory negligence is the concept that an injured party will have any settlement amount reduced to the extent he or she contributed to the injury.

True/False

assumption of risk.

The four components necessary to establish negligence are existence of a legal duty, failure to perform a legal duty, actual damage caused, and proximate cause established. Assumption of risk is a defense against negligence, whereby an individual understands the risks of a particular activity and is barred from collecting damages if injury results.

All of the following are examples of one of the components that an injured person must prove in order to collect damages from negligence except

proximate cause.

failure to perform a legal duty.

assumption of risk.

False

Risk reduction involves decreasing the chance that a loss will occur. Risk avoidance essentially eliminates the potential of a loss occurring by avoiding a certain activity altogether.

Risk avoidance involves decreasing the chance that a loss will occur.

True/False

False

Risk avoidance, along with risk reduction, are examples of risk control. Risk transfer and risk retention are examples of risk financing.

Both risk avoidance and risk transfer are examples of risk control.

True/False

True

Without adequate insurance coverage you become responsible for the loss; thus, you are retaining risk.

Failure to have adequate insurance coverage is a form of risk retention.

True/False

False

It is not only inappropriate, but it is also inadvisable and unrealistic to attempt insuring against all possible losses.

It is appropriate to advise clients to insure all of their assets against all possible loss.

True/False

Insure as much as you can.

You should only insure what is necessary, not as much as you can which would be prohibitively expensive. The three rules of risk management are "consider the odds," "don't risk more than you can afford to lose," and "don't risk a lot for a little."

Which one of the following is NOT a rule of risk management?

Consider the odds.

Insure as much as you can.

Don't risk a lot for a little.

True

It is the potentially catastrophic events (high severity) that should be insured for first, even if the probability of such an event occurring is low.

The high severity events should be insured for first, even if the probability of them occurring is small.

True/False

True

There are four types of pure risk, and by using insurance one may be able to recover most of a loss, but there is never a gain. Speculative risk, such as investing in the stock market, can result in either a gain or a loss.

With pure risk there is either a loss or no loss, whereas with speculative risk there could be a loss or a gain.

True/False

market risk.

The four types of pure risk are personal risk, property risk, liability risk, and failure of others.

All of the following are examples of pure risk except

personal risk.

failure of others.

property risk.

market risk.

Insurance policies insure against losses from perils.

A peril is the cause of the loss, and it is what is insured against, such as fire or vandalism. A hazard is what increases the chance of a loss, such as oily rags or leaving your home unlocked while away. A moral hazard is when people are dishonest.

Which one of the following statements is correct?

Insurance policies insure against losses from perils.

Insurance policies insure against losses from hazards.

Insurance policies insure against losses from moral hazards.

True

Moral hazard (dishonesty and fraud), and morale hazard (one behaving differently since they have insurance) both lead to higher insurance costs.

Both moral and morale hazards increase the cost of insurance.

True/False

False

The law of large numbers is one of the requirements that insurance companies use in determining whether a risk is insurable or not.

A risk is insurable whether or not the law of large numbers applies.

True/False

True

This is a correct statement. Without this requirement, one could profit from the death of an insured person they don't even know or care about.

One must have an insurable interest in the insured when a life insurance policy is first purchased.

True/False

False

Insurance contracts are unilateral, not bilateral. With a bilateral contract both parties are making enforceable promises to each other. With a unilateral contract only one party is legally bound. The insurance company is legally bound to fulfill the terms of the contract as long as premiums are paid, but the insurance company cannot force the insured to pay premiums.

Insurance contracts are bilateral.

True/False

True

Riders (with life and health insurance), and endorsements (with property and liability insurance) modify the insurance contract in some way, such as waiver of premium in the event the insured becomes disabled.

Riders and endorsements modify insurance policies.

True/False

Non-participating policies cannot be sold by mutual companies.

Mutual companies are owned by the policyholders, and any policies issued must be participating, meaning the policyholders share in the profits and receive dividends.

Which one of the following statements is correct?

Participating policies are traditionally issued by publicly traded stock companies.

Non-participating policies cannot be sold by mutual companies.

Non-participating policies are issued by both stock and mutual companies.

True

Since brokers are legal representatives of the insurance company they can bind coverage.

A potential advantage of using an agent rather than a broker is that agents can bind coverage.

True/False

False

Section I of the policy provides coverage for the home, other structures, personal property, and loss of use. This is a personal policy, meaning it does not cover business use of the home.

Section I of a homeowners policy contains four sections: coverage for the home, coverage for other structures, coverage for personal property, and coverage for business use of the home.

True/False

False

In order to avoid a co-insurance penalty the coverage amount must be at least 80%, not 90%, of the replacement cost of the home.

In order to avoid a co-insurance penalty on any claims, the insured must have coverage for at least 90% of the replacement cost of the home.

True/False

False

Basic personal property coverage is expressed as a percentage of the amount of home coverage found in Coverage A. A common amount found in policies is 50%—this would mean $300,000 coverage for the home would provide $150,000 of coverage for personal property.

If the home is insured for $300,000 in Coverage A, then a typical amount of personal property coverage in Coverage C will also be $300,000.

True/False

Your dog bites your neighbor.

Which of the following would be covered by the liability section (Coverage E) of a homeowner's policy?

You burn yourself barbequing hamburgers in the back yard.

Your dog bites your neighbor.

You get angry at your neighbor and throw a rock at him, causing a substantial injury.

True

These are the three main types of homeowners policies that are purchased.

The three main types of homeowners insurance policies that are issued are for single family homes, condominiums, and renters.

True/False

True

Damage from flooding is specifically excluded. There is a national flood insurance program that offers coverage for flooding; however, the amount of coverage that is available is limited. There are also specialty carriers who offer flood insurance.

Damage from flooding is not covered in a typical homeowners policy.

True/False

loss of use.

Loss of use coverage, which includes expenses incurred above and beyond ordinary living costs while the dwelling is uninhabitable due to damage, is included in Coverage D.

Coverage D of Section I of a homeowner's policy insures

the dwelling.

other structures on the premises.

personal property.

loss of use.

True

Coverage E of Section II of a homeowner's policy covers personal liability.

Section II of a homeowners policy covers personal liability.

True/False

True

A homeowners policy is meant for personal use coverage, not business. If business use is involved then additional coverage will be needed.

Running a business in the home is generally not covered by a homeowners policy without a special endorsement or separate policy.

True/False

False

Errors and omission insurance is used by financial planners and insures against financial, not physical, harm that may happen to a client. Physical harm is covered by malpractice insurance, and is used by professionals such as doctors and dentists.

Errors and omissions insurance is available to financial planners who want to insure against physical harm that may happen to a client.

True/False

personal property

Personal property in the car would be covered under a homeowners policy, not the personal auto policy.

Which one of the following is not an area of coverage in a personal automobile policy?

uninsured motorist

medical payments

personal property

physical damage

income.

Correct. The income of the driver is not a factor in the cost of auto insurance.

All of the following are primary factors in the cost of auto insurance except the driver's

age.

sex.

driving record.

income.

False

Automobile liability (Part A) protects the insured against legal liability for damage to another's property, while physical damage (Part D) protects the insured's auto against damage.

Physical damage coverage (Part D) in a PAP protects against damage to property not owned by the insured.

True/False

True

All states have a requirement of some sort to have automobile insurance.

All states require drivers to have some form of automobile insurance or to show evidence of their ability to meet their financial responsibility.

True/False

True

If you have physical damage coverage (collision and other than collision) under you PAP, then your use of a rental car should be covered as a non-owned auto under the PAP.

If you have physical damage coverage under a PAP then you will typically have coverage as a nonowned auto for use of a rental car.

True/False

True

The higher the deductible, the lower the premium will be.

A good way to save on auto insurance premiums is to raise the deductible.

True/False

False

The umbrella liability policy almost never stands alone but is coupled with a minimum amount of underlying liability coverage in both homeowners and automobile policies. The umbrella policy then provides excess coverage (it does not replace the original coverage).

An umbrella policy will replace coverage originally provided by automobile and homeowners policies.

True/False

True

This is true since umbrella liability policies have few exclusions—fewer exclusions than homeowners or automobile policies.

An umbrella policy may cover liability exposures that are not covered in the underlying auto and homeowners policies.

True/False

whole life

Whole life is considered to be the traditional form of permanent life insurance.

Which one of the following is not considered a nontraditional form of permanent life insurance?

universal life

variable life

whole life

term life

True

This is true since term is pure insurance, there is no investment component (cash value).

At any given age term life insurance will always be the least expensive for any given level of coverage.

True/False

False

Premiums increase at each renewal, but the coverage (death benefit amount) does not change.

The premium amount for annually renewable term insurance remains constant throughout the insured's life.

True/False

False

Whole life premiums are level throughout the life of the policy.

Whole life premiums are readjusted periodically.

True/False

True

Both the income-based (human life value) method and the needs-based method use a discount factor to determine the present value of the insurance required.

The human life value method of determining the necessary amount of life insurance coverage applies a discount factor to determine the required amount of insurance.

whole life

Whole life is traditional permanent insurance, with a stable premium and guaranteed return on the cash value. Variable life involves selecting investment options that include stocks, and the cash value can go down in value. Universal life has flexible funding with a guaranteed return, and it is unbundled so it would not be as predictable as whole life.

Which one of the following policies might be best for someone who is very risk averse and wants predictability?

whole life

variable life

universal life

False

Suicide is covered after an exclusion period of one or two years, depending upon the state.

Suicide is not covered under most life insurance policies.

True/False

False

The grace period is usually 30 or 31 days after the premium is due.

The grace period for the payment of life insurance premiums is typically 20 days.

True/False

paid-up additions

Paid-up additions would purchase additional permanent insurance.

Which one of the following dividend options would purchase additional permanent insurance?

apply toward premium payments

purchase one-year term

accumulate at the company

paid-up additions

False

They can be the same person but they don't have to be. As long as there is an "insurable interest," one person can take out an insurance policy on another, such as a wife being the owner of an insurance policy on her husband.

The owner of a life insurance policy and the insured have to be the same person.

True/False

True

Generally one may borrow up to 90% of the cash value of his or her policy.

Generally the maximum amount that at individual can borrow from the cash value of his or her life insurance policy is 90%.

True/False

True

It is more important to have the proper level of coverage than it is to own a particular kind of insurance. For example, if $500,000 of coverage is needed, and the choices are either a $500,000 term policy or a $70,000 whole life policy, then the $500,000 term policy should be chosen.

Making sure that a life insurance need is taken care of is more important than the type of insurance chosen in the life insurance selection process.

True/False

nursing home care

Nursing home care is not required, and can be insured with a long-term care policy.

Which of the following is not one of the 10 essential health benefits required under the Patient Protection and Affordable Care Act?

emergency services

maternity and newborn care

prescription drugs

nursing home care

True

One often hears "Obamacare" when someone is referring to the Affordable Care Act, which was passed in 2010.

The Affordable Care Act is often referred to as "Obamacare."

True/False

weight

The four factors that health insurance premiums can be based upon under the Affordable Care Act are age, family size, smoking status, and geography.

Which one of the following is not one of the four factors that premiums can be based upon under the Affordable Care Act?

age

weight

family size

geography

True

Medicare is a federal health care program open to persons age 65 or older; additionally, it is open to some disabled persons.

Medicare is a federal health care insurance plan primarily for persons age 65 or older.

True/False

False

The coinsurance provision begins immediately after the deductible, but does not include the deductible. Maximum out-of-pocket (MOOP) expenses paid by the insured would include the deductible.

The coinsurance provision includes the deductible required to be paid by the insured before an insurance company will pay any expenses.

True/False

True

This is correct, the maximum out-of-pocket amount is the total amount the insured will pay before the insurance company pays 100% of health care expenses.

Maximum out-of-pocket amount (MOOP) includes both the deductible and the insured's coinsurance amount.

True/False

$3 300

Bob would be responsible for the first $3 000 (the deductible), and 20% of the remainder (20% of $1 500), which is $300. The total out-of-pocket for Bob is $3 000 + $300 = $3 300.

The Allegro family has a family policy with a $3,000 family deductible, 20% coinsurance, and a MOOP of $10,000. Bob Allegro has an accident and acquires $4,500 in health care costs. How much would Bob have to pay out of pocket, assuming this is the Allegro's first health care claim of the year?

$3 000

$3 300

$3 600

$4 000

False

Individuals who contribute to a HSA can take an "above the line" deduction for any HSA contributions, meaning an individual's adjusted gross income (AGI) is reduced by the contribution amount, making the contribution pretax.

Contributions made by an individual to a Health Savings Account (HSA) are after-tax.

True/False

False

The penalty tax is 20%, not 10%. At age 65 there will still be income taxes due for non-health care distributions but the penalty tax goes away.

The penalty tax for distributions taken from a Health Savings Account (HSA) for non-health care reasons prior to age 65 is 10%.

True/False

True

One must have a high deductible health plan (HDHP) in order to participate in a health savings account (HSA). The minimum deductible in 2015 for a family was $2,600.

The insured must have a high deductible health care plan in order to establish and fund a health savings account (HSA).

True/False

no waiting period before benefits may begin

There is a five- or six-month waiting period before benefits may be paid.

Which one of the following requirements for obtaining disability benefits under OASDHI (Old Age, Survivors, Disability, and Health Insurance, typically called Social Security) is not correct?

must be insured for disability benefits

must file an application for disability

must be disabled for 12 months, or expected to be disabled for at least 12 months, or have a disability that will result in death

no waiting period before benefits may begin

False

The probability of suffering a long-term disability is much greater than the probability of premature death until around age 60.

The probability of premature death is greater than the probability of suffering a long-term disability at all ages in life.

True/False

False

When disability insurance premiums are paid with pretax dollars, any benefits received will be subject to current income taxes. If premiums are paid with after-tax dollars then they are tax free.

When disability insurance premiums are paid with pretax dollars, any benefits received are income tax free.

True/False

False

Generally one can replace up to around 60% to 75% of salary with a long-term disability policy.

Generally, one can replace up to only 50% of salary with a long-term disability policy.

True/False

True

The elimination period is the length of time one must wait until they start receiving benefits, such as 3 or 6 months. This makes it a kind of deductible the insured must meet before they can start receiving any benefits.

The elimination period acts like a deductible with long-term disability policies.

True/False

False

The Social Security definition of disability is very restrictive. Insurance companies use "any occupation," "modified any occupation," or "own occupation" as different levels and definitions of disability.

Disability policies issued by insurance companies use the same definition of disability as Social Security.

True/False

False

Workers' compensation provides minimal benefits; additional disability coverage is needed.

Workers who are covered by workers' compensation do not need disability coverage.

True/False

True

A waiver of premium means that the premium will be waived in the event of a disability. This means that the policyholder does not have to pay any premiums in the event he or she becomes disabled. In effect, the insurance company is paying the premiums for him or her.

A waiver of premium rider on a disability policy means that the policyholder does not have to pay premiums if he or she becomes disabled.

True/False

False

This used to be the case, but most long-term care policies now pay a daily benefit amount, and can be used for various levels of care, such as skilled nursing, intermediate care, custodial care, and home health care.

Most long-term care policies cover only nursing home care.

True/False

False

A person who cannot perform at least two of the ADLs for at least 90 days is certified as being eligible for long-term care benefits.

A person who cannot perform at least three of the activities of daily living (ADLs) for at least 90 days is certified as being eligible for long-term care benefits.

True/False

True

The other ADLs are transferring and maintaining continence.

Activities of daily living (ADLs) include dressing, eating, bathing, and toileting.

True/False

True

Medicaid is meant to be a safety net for those who really need it for long-term care costs. It is not meant to cover long-term care costs for those who can afford it.

Medicare is not designed for long-term care costs, and Medicaid can cover long-term care costs, but only for impoverished individuals.

True/False

The benefit period for LTC policies is typically for life.

The typical benefit period for LTC policies can range from two to three years up to lifetime. Lifetime policies can be quite expensive, so many policies typically provide benefits for five years or less.

Which of the following statements about LTC insurance is not correct?

LTC benefits are expressed as a daily benefit amount.

All else being equal, the longer the elimination period the lower the premium.

The benefit period for LTC policies is typically for life.

False

Cognitive impairment by itself is adequate to trigger LTC benefits.

Cognitive impairment by itself would not qualify someone for LTC benefits, they would still have to be unable to perform two or more ADLs for 90 days to qualify for benefits.

True/False

exclusion ratio formula

The exclusion ratio formula is used to determine how much of the payment received from an annuity is excluded from income taxes as a recovery of basis. The amount of the payments depends on several variables, including the amount invested, the return earned on that amount, the age of the annuitant when payments begin and the period for which the payments are guaranteed.

Which one of the following is not a determining factor in the amount of payments an annuitant would receive at the "annuity start date?"

exclusion ratio formula

amount invested in the annuity contract

return earned on invested funds

age of the annuitant when payments begin

True

The accumulation period is the time elapsed between the issuance of an annuity contract and the time when the funds are annuitized.

The accumulation period is the time elapsed between the issuance of a deferred annuity contract and the time when the contract is annuitized.

True/False

True

A key advantage of annuities is that if a life income option is chosen, annuity payments cannot be outlived.

Annuitants cannot outlive an annuity when the life income option is chosen.

True/False

False

The first half of the statement is correct; however, the second primary reason that individuals purchase annuities is as a long-term tax-deferred investment. Annuities should only be used with a long-term time horizon, not short-term.

The two primary reasons that individuals purchase annuities are 1.) to receive periodic payments for a lifetime (or specified period of time) and 2.) to earn competitive short-term rates of return.

True/False

False

Surrender charges can often be seven or eight years, or possibly even as long as 15 years. Clients need to be aware of these potential surrender fees when they purchase an annuity.

Surrender charges on annuities are never longer than five years.

True/False

ordinary income taxes plus a 10% penalty

Any earnings from an annuity are taxed as ordinary income, and if it is a non-periodic withdrawal and the owner is under age 59½ there is also a 10% early withdrawal penalty.

What would the tax consequence be of a nonperiodic withdrawal of earnings from a tax-deferred annuity by a 55-year-old?

capital gains taxes

ordinary income taxes

ordinary income taxes plus a 10% penalty

use assets

The four major investment asset classes are cash/cash equivalents, stocks, bonds, and real estate. Use assets are for personal use, not investment.

Which one of the following is not one of the four major investment asset classes?

cash/cash equivalents

bonds

real estate

use assets

False

Money market funds, which are offered by mutual fund companies and not banks, do not have FDIC insurance.

Both money market accounts and money market funds have FDIC insurance.

True/False

Treasury bonds

Cash equivalents would include stable value funds, Treasury bills, money market accounts and funds, and CDs. Treasury bonds have maturities of 10 to 30 years, so they have too much liquidity risk. The individual may lose principal if interest rates go up and he or she is forced to sell in order to meet a short-term need.

Which one of the following would not be considered a cash equivalent?

stable value fund

Treasury bonds

short-term CDs

money market account

True

Another term for equity is ownership.

Equity is ownership.

True/False

True

These are two rights that common shareholders have—the right to receive dividends and the right to vote for members of the board of directors.

Common shareholders have certain rights, such as the right to receive dividends and vote for members of the board of directors.

True/False

False

A shareholder owning 1,000 shares, where 100,000 are outstanding, owns 1% of the company. Different shareholders will own different percentages of the company, depending upon the number of shares that they own.

A common stockholder who owns 1,000 shares of a company that has a total of 100,000 shares issued is considered an equal percentage owner with the other shareholders.

True/False

False

The chance to earn capital appreciation returns would be increased if the stock were undervalued when purchased, not overvalued.

The chance to earn capital appreciation returns would be increased if the stock were overvalued when purchased.

True/False

True

Earnings per share is calculated as net of taxes and payments to bondholders and preferred shareholders. Generally, higher earnings per share indicate better dividends and overall stock stability and performance.

Earnings per share is a good indicator of a company's financial health.

True/False

True

Proxy forms are sent to shareholders prior to a given meeting and are used by shareholders who are unable to attend the meeting.

A proxy is a written power of attorney authorizing someone to vote on behalf of, and under the instructions of, a shareholder.

True/False

False

Debt should be managed responsibly, not avoided. For example, there are many good uses of debt, such as borrowing to buy a home or car. Purchasing debt as an investment to earn income is also a good use of debt.

Debt should be avoided whenever possible.

True/False

The amount of principal due at maturity is called "par value."

Which of the following is a correct statement about bonds?

The date when interest must be repaid is called the "maturity date."

Bonds typically pay interest every quarter.

The amount of principal due at maturity is called "par value."

mortgage bonds

The two main types of municipal bonds are general obligations (GOs) and revenue bonds, tied to a specific project such as a toll road. Mortgage bonds are issued by federal, not state, agencies.

Which of the following is not one of the major types of municipal bonds?

mortgage bonds

general obligations bonds

revenue bonds

True

$60/$1020 = .059 = 5.9%.

The current yield of a bond trading at $1,020 with $60 in annual interest payments is 5.9%.

True/False

True

Bond prices and interest rates move in opposite directions. If interest rates go up, bond prices go down, and vice versa.

The price of a bond and the direction of interest rates have an inverse relationship.

True/False

$1 063

2 P/YR, end mode, C ALL. 35 PMT, 8, downshift , N (16 compounding periods), 1000 FV, 6 I/YR, solve for PV = $1,062.81.

Hank Industries has a 7% coupon bond outstanding with 8 years until it matures at $1,000. If interest rates have dropped to 6%, what is the current value of this 7% coupon bond?

$989

$1 033

$1 063

True

Every bond issue has an indenture spelling out the legal terms of that particular issue.

A bond indenture is a legal document specifying the terms and conditions of a bond issue.

True/False

False

Real estate is usually illiquid, as it can be difficult to convert to cash quickly.

Real estate is generally very liquid, which is one of the reasons that it can be a good investment.

True/False

True

Real estate investing normally involves borrowing part of the purchase price and, therefore, involves leverage.

Investing in real estate normally involves leverage.

True/False

business

Remember the acronym "PRIME" for the types of systematic risk: purchasing power, reinvestment, interest rate, market, and exchange rate. Business risk is a type of unsystematic risk.

Which of the following is not a type of systematic risk?

business

interest rate

market

True

Credit risk is the risk that a bond may be downgraded, and default risk includes the risk that a company may become unable to make interest and/or principal payments.

Individual corporate bonds have both credit risk and default risk.

True/False

An example of a nondiversifiable risk is interest rate risk.

Nondiversifiable risks are systematic risks, and interest rate risk is a type of systematic risk.

Which of the following statements is true?

Systematic risk is also referred to as diversifiable risk.

An example of a diversifiable risk is purchasing power risk.

An example of a nondiversifiable risk is interest rate risk.

False

This is event risk; financial risk is related to how much debt a company uses.

Financial risk is the possibility that a company may be affected by an unexpected and damaging event.

True/False

True

This is a true statement. Another way to think of standard deviation is "bumpiness of the ride." The bumpier the ride, the wider the variability around the average return, and the more risk there will be.

Standard deviation tells an investor how far from the average return a security's returns are likely to vary.

True/False

True

This is possible if there is a low correlation—meaning, the asset being added doesn't move and behave the same as the assets that are already in the portfolio.

It is possible to add an asset to a portfolio, even if it has a high standard deviation that may bring down the overall risk of the portfolio.

True/False

False

If the index goes up 7%, then Fund A will go up by about 7.7% (7% x 1.1).

If Fund A has a beta of 1.1, and the index it is being compared to goes up 7%, then Fund A will also go up 7%.

True/False

True

8/0.9 = 8.89%.

If Fund Alpha has a return of 8% with a 0.9 beta, then its risk adjusted return is 8.9%.

True/False

True

Duration is the approximate change in price given a 1% change in interest rate. With a duration of 10, a 1% change in interest rates would cause an approximate change of 10%. In this case, it is a 0.5% change in interest rates, so one-half of 10 would give us a 5% change. The bond fund would go down in price since interest rates went up. There is an inverse relationship between a bond's price and interest rates.

If a bond fund has a duration of 10, and interest rates go up 0.5%, then the bond fund would go down approximately 5%.

True/False

decrease (lower durations)

Rising interest rates would cause bond prices to go down, so Fritz would want lower durations in order to minimize the amount that his bonds will go down in price.

Fritz is concerned that interest rates are going to increase. If this is the case, should Fritz increase or decrease the duration of bonds in his portfolio?

increase (higher durations)

decrease (lower durations)

Buy the Meditation Fund since its Sharpe ratio is higher.

The Sharpe ratio measures how much return over the risk-free rate that an investor is receiving, taking into account the amount of risk that he or she is taking—the higher the number, the better.

John is considering purchasing a large cap mutual fund and has narrowed his choice down to two funds, the Yoga Fund and the Meditation Fund. The Yoga Fund has a Sharpe ratio of 0.44, and the Meditation Fund has a Sharpe ratio of 0.73. John wants to know which fund would give him the most return for the amount of risk he is taking. Which of the following would you advise him to do?

Buy the Yoga Fund since its Sharpe ratio is lower.

Buy the Meditation Fund since its Sharpe ratio is higher.

There is not enough information to make a decision; the Sharpe ratio doesn't take risk into account.

True

This is a true statement. As beta increases, it means that the stock or fund is more volatile relative to the market.

The higher a stock's or fund's beta, the more volatile and more risky it will be.

True/False

arbitrage

Arbitrage is a trading technique taking advantage of pricing differences for the same asset in two different markets; it is not a mutual fund investment objective. The three main objectives are capital growth, income, and capital appreciation.

Which one of the following is not a fundamental investment objective for which a mutual fund may be striving?

arbitrage

income

capital preservation

trades just like stock

Mutual funds only trade once a day at the end of each trading day. ETFs trade just like stock. Pooling of money, diversification, and professional management are major advantages of investing in mutual funds.

Which one of the following is not an advantage of investing in mutual funds?

diversification

trades just like stock

professional management

False

Mutual funds may have purchase fees, which are called "load funds," but some funds do not have any purchase fees, and these are called "no-load" funds.

All mutual funds have purchase fees, which are called "loads."

True/False

True

Target funds enable the 401(k) plan participant to choose just one fund, rather than having to choose how much to allocate in a variety of different funds.

Target funds are a "fund of funds," meaning that the target fund is made up of other mutual funds. This can provide a one-stop shopping choice for 401(k) plan participants.

True/False

True

These are two main advantages of ETFs.

ETFs are generally very tax efficient and have low annual expenses.

True/False

False

ETFs track many markets, not just equity. For example there are bond, currency, and commodity ETFs.

ETFs only track broad-based equity indexes.

True/False

Mutual funds can enable even small investors to have the benefits of diversification.

This is a true statement. One of the advantages of mutual funds is that even small investors can participate in many of them, and diversification, along with pooling of funds and professional management, are all advantages to investing in mutual funds.

Which one of the following statements is correct?

More money is invested in ETFs than in mutual funds.

Mutual funds can enable even small investors to have the benefits of diversification.

There are no disclosure requirements for brokers selling mutual funds.

True

Index funds have lower expense ratios than actively managed funds. Actively managed funds are relying on the skill of a portfolio manager, and there are fees associated with this. Index funds, on the other hand, are funds that are set up to mirror an index (benchmark), and the benchmark dictates the security selection. There is no active management involved, nor any fees that would be associated with active management.

Actively managed mutual funds will have higher expense ratios than index funds.

True/False

True

These are two of the items that should be contained in an IPS. The IPS is a roadmap guiding both the adviser and the client. Having an investment return objective while taking into account the amount of risk that the client is comfortable with will help to determine how assets are allocated and invested.

An investment policy statement (IPS) should contain the risk tolerance of the client, as well as the investment return objective.

True/False

time frame.

SWOT is an acronym for strengths, weaknesses, opportunities, and threats.

"SWOT" stands for all of the following except

weaknesses.

opportunities.

time frame.

strengths.

8.9% return, 8% standard deviation

Choice c has the highest return, and also the lowest risk as measured by standard deviation, so it must be the best choice on a risk-adjusted basis.

John has narrowed his investment choices down to the following three options. He wants to choose the investment that has had the best risk-adjusted return. Which investment should he choose?

7.7% return, 9% standard deviation

8.6% return, 13% standard deviation

8.9% return, 8% standard deviation

True

This is true. For example, from 2000-2010, U.S. large company stocks performed poorly and even had a slightly negative annualized return (not counting dividends). This reinforces the need for diversification.

History has shown us that even over a period as long as 10 years an individual asset class can perform poorly.

True/False

True

This is true. The long-term return for large company stocks is 10.1%, with a standard deviation of 20.1%. Small company stocks have a long-term return of 12.2%, but with a standard deviation of 32.1%.

Historically, small company stocks have outperformed large company stocks, but with much more risk.

True/False

home equity

Home equity is generally not a source of income. It can be borrowed against, but it is not a primary source. The three primary sources of retirement income are Social Security, employer-provided retirement plans, and individual savings and investments.

Which of the following is not one of the "three-legged stool" primary income sources in retirement?

Social Security

employer provided retirement plans

home equity

April 15th

The deadline is the same deadline for filing taxes, April 15th.

What is the deadline for making an IRA contribution?

April 1st

April 15th

August 15th

False

The over age 50 population is increasing as the baby boomers grow older.

The growth of the over age 50 population has remained about the same for the past 10 years.

True/False

Medicare provides coverage for long-term care.

Medicare is health insurance and does not provide long-term care coverage. The safety net for individuals who need help with long-term care is Medicaid.

Which one of the following is not a correct statement about issues related to retirement?

Reduction or elimination of debt before retiring is preferred.

Longevity risk is the risk of outliving your money.

Medicare provides coverage for long-term care.

False

The life expectancy is longer for females, At age 65 the life expectancy for males is 17.2 years, and for females 19.9 years.

The life expectancy for males and females is about the same.

True/False

False

There is no such thing as a joint IRA. A spousal IRA is when one uses the earned income of the working spouse in order to be eligible to contribute to an IRA for the non-working spouse.

A spousal IRA is also known as a joint IRA.

True/False

False

Only individuals age 70½ or under with earned income can contribute to a deductible IRA.

A 71-year-old individual with earned income can contribute to a deductible IRA.

True/False

True

Deductibility is determined by both adjusted gross income and whether one is an active participant in a company retirement plan.

A traditional IRA contribution may be deductible, partially deductible, or nondeductible.

True/False

True

There are limits as to how high one's adjusted gross income can be in order to be eligible for making contributions to a Roth IRA. Whether one is an active participant in an employer plan is not relevant as far as Roth IRA eligibility is concerned, only income is taken into account.

Roth IRA eligibility is based upon income and not whether one is an active participant in an employer plan.

True/False

The contribution limit for IRAs in 2015 is $5,500.

Which of the following statements is correct about IRAs?

The contribution limit for IRAs in 2015 is $5,500.

When a distribution is taken from a Roth IRA, earnings are considered to be withdrawn first.

IRA rollovers must be completed within 90 days or else it is considered to be a taxable distribution.

deductibility of contributions

Contributions into a Roth IRA are not deductible.

Which of the following is not a similarity between traditional IRAs and Roth IRAs?

contribution limits

tax deferral within the plan

deductibility of contributions

Defined benefit plans cannot have a vesting schedule.

Since the employer is the one contributing to the plan, there can be a vesting schedule.

Which one of the following statements is not correct about defined benefit plans?

Defined benefit plans cannot have a vesting schedule.

Defined benefit plans provide a specific benefit outlined in the plan.

Generally, only the employer contributes to a defined benefit plan.

it can have 401(k) provisions

Profit sharing plans can, and often do, have 401(k) provisions that allow the employees to defer income, pre-tax, into the fund.

Which one of the following is a correct statement about profit sharing plans?

the maximum contribution limit to the plan is 35% of total compensation

it has a fixed contribution formula

it can have 401(k) provisions

True

$18,000 is the deferral limit. If one is age 50 or older they can also defer another $6,000 as a catch-up contribution.

The maximum employee deferral amount into a 401(k) plan for a 43-year-old is $18,000 in 2015.

True/False

False

403(b) plans can only be offered by tax-exempt organizations, such as public schools and universities.

403(b) plans can be offered by any company, but not governmental agencies.

True/False

False

SIMPLE IRAs require the employer to contribute either a 3% match or 2% nonelective contribution.

SIMPLE IRAs do not require an employer contribution.

True/False

True

Both plans are popular with small businesses because of their simplicity. They are both easy to set up and maintain, and involve minimal paperwork.

Two plans that are popular with small businesses are the SIMPLE IRA and SEP IRA.

True/False

True

Plan participants have until April 1st of the following year in which to take the first required minimum distribution. All RMDs after that must be taken by December 31stof each year.

When a plan participant reaches age 70½ he or she must take a required minimum distribution by April 1st of the next year.

True/False

False

After six years of service, a plan participant would be 100% vested in a two-to-six year graded vesting schedule.

With two-to-six-year graded vesting, a plan participant would be 80% vested in the plan after six years of service.

True/False

$1 800

The company's match would be $1 800, which is 3% of $60 000. John is contributing a total of $3 000 (5% of $60 000); however, the company only has to match the first 3% of compensation, the first $1 800, dollar for dollar,

John contributes 5% of his $60,000 in compensation into a SIMPLE IRA for the year. If the company is providing a 100% match on the first 3% of compensation, how much will the company's contribution be?

$1 800

$2 400

$3 000

SEP

SEPs are entirely employer funded, employee contributions are not allowed.

Which one of the following retirement plans only allows employer contributions?

SIMPLE

SEP

401(k)

True

52% of elderly married couples receive 50% or more of their income from Social Security.

About one-half of elderly married Social Security beneficiaries receive 50% or more of their income from Social Security.

True/False

True

The Old Age and Survivors Disability Insurance and Hospital Insurance (OASDI-HI) taxes are split evenly between the employee and the employer—7.65% each for a total of 15.30% of compensation up to $118,500 in 2015.

OASDI-HI taxes are split evenly and paid by both the employee and the employer.

True/False

Retirement benefits are only paid to individuals who are fully insured.

One must be fully insured in order to receive retirement benefits. It takes 40 quarters of coverage to be fully insured.

Which of the following is a true statement about Social Security?

Retirement benefits are only paid to individuals who are fully insured.

The primary insurance amount is the amount paid at age 62.

It takes 60 quarters of coverage in order to be fully insured.

64

The youngest FRA is age 65, and FRA can be as late as age 67 for those born in 1960 or later.

Which one of the following could not be a full retirement age (FRA)?

64

66

67

A nonworking spouse can file for benefits, even if the working spouse has not.

The working spouse must file for benefits before the nonworking spouse can file. The working spouse can file and suspend in order to not receive benefits now but receive a higher benefit later. This would then allow the nonworking spouse to apply for his or her benefit, which is 50% of the working spouse's PIA if the nonworking spouse is at FRA.

Which one of the following statements about Social Security is not correct?

A former spouse may be entitled to a spousal Social Security retirement benefit.

A nonworking spouse at FRA is entitled to 50% of the PIA of the working spouse.

A nonworking spouse can file for benefits, even if the working spouse has not.

Social Security benefits are weighted in favor of lower-paid workers.

Social Security benefits are skewed to the lower-income individual, and their benefit as a percentage of their AIME will be higher than that of a higher-paid worker.

Which of the following is a correct statement concerning Social Security?

Social Security benefits are weighted in favor of lower-paid workers.

Retirement benefits can be taken as early as age 60.

If benefits are delayed past FRA, then the benefit amount increases by 6% of the PIA amount per year.

True

This is an advantage of file and suspend—the ability to go back to FRA and receive a lump-sum check for all the benefits that would have been paid since FRA. If Fred did not file and suspend the maximum he could go back would be six months.

Fred files and suspends at his full retirement age (FRA) of 66, and two years later needs a sum of money quickly for an investment. Fred can file with the Social Security office to receive a lump-sum amount for all his suspended benefits going back to his FRA.

True/False

True

The FRA for workers born in 1960 or later is age 67.

The full retirement age (FRA) for workers born in 1960 or later is 67.

True/False

True

Above a certain threshold there is a reduction of $1 for each $2 earned from age 62 to the year before retirement, and a $1 for each $3 earned in the year up until the FRA date. Once a worker reaches FRA there will no longer be any reduction.

If a worker has started to receive Social Security retirement benefits and the worker's earned income is too high prior to FRA then their benefit can be reduced or even eliminated,

True/False

False

Medicare benefits start at age 65, not FRA.

Medicare benefits start at full retirement age (FRA).

True/False

True

Longevity risk is the risk that one can outlive his or her income. In other words, one's money does not last as long as he or she does.

Longevity risk is the risk of outliving one's income.

True/False

False

Even though a large loss would not be welcome at any time during retirement, there is special concern for avoiding large losses at the beginning of retirement; this could cause some serious readjustments to be made right when retirement is starting.

Avoiding large losses is of equal concern throughout retirement.

True/False

True

Most employers require loans to be paid off when employees leave so that the employer no longer has to deal with administering the loan. Any part of the loan that is not repaid will be characterized as a distribution, and taxes, including the 10% early withdrawal penalty tax (if applicable), will apply.

One potential pitfall with taking out a loan from a 401(k) or 403(b) is that upon leaving the employer most loans must be repaid within a short period of time.

True/False

True

These are two classic signs of potential fraud. If there is not full and open disclosure, the investment should be avoided.

Lack of written information and secrecy about an investment should be seen as a warning sign.

True/False

True

Individuals may be taxed at the federal, state, or local levels.

Individuals may be subject to taxation at the federal, state, and local government levels.

True/False

False

Several states do not assess a state income tax upon its citizens. They would then have to raise revenue with other taxes, such as property and sales taxes.

All states impose an income tax upon its citizens.

True/False

rental

Rental income is a type of passive income. Active, portfolio, and passive are the three categories.

Which one of the following is not one of the three main types of income?

passive

portfolio

rental

passive income.

Passive income is in the passive category, royalties and capital gains are in the portfolio income category.

Portfolio income includes all of the following except

passive income.

royalties.

capital gains.

True

Schedules or worksheets are often used to assist in the calculation of numerical information that is entered on Form 1040.

Generally, a schedule is a worksheet that is used to calculate an amount that is entered on Form 1040.

True/False

earned income

Correct. The earned income tax credit is for low-income taxpayers, not education.

Which one of the following is not a type of education credit?

American Opportunity

earned income

Lifetime Learning

False

Both Form 1040A and Form 1040EZ are a simpler version of Form 1040, the individual federal income tax form.

Form 1040 is the most simplified type of federal income tax form an individual may use to file their annual income tax return.

True/False

False

Whether an individual is required to file a federal income tax return is determined by marital status, age, gross income, and whether that person can be claimed as a dependent on another taxpayer's federal income tax return.

Whether an individual must file a federal income tax return is determined only by gross income.

True/False

True

An individual who is required to file a federal income tax return must file under one of five filing statuses: single, married filing jointly, married filing separately, head of household, or qualifying widow or widower.

There are five filing statuses for federal income tax return purposes.

True/False

False

Personal exemptions (and dependency exemptions) are deductions from adjusted gross income (AGI).

A personal exemption is a deduction from gross income.

True/False

False

A taxpayer may generally only claim an exemption for himself or herself, his or her spouse, or an individual who qualifies as a dependent. Typically, to qualify as a dependent, the taxpayer must provide over half of the individual's support.

An individual may claim an exemption for any individual who lives at his or her residence.

True/False

charitable contributions

Charitable contributions are on Schedule A, itemized deductions, and are a deduction from AGI after AGI has been determined.

Which one of the following is not a type of deduction for AGI?

IRA contributions

HSA contributions

charitable contributions

False

Total or gross income (line 22 on Form 1040), not taxable income (line 43 on Form 1040), is the total income a taxpayer receives during the year. Deductions for AGI, the standard or itemized deduction, and the exemption deduction are all taken before arriving at taxable income.

Federal taxable income is the total income a taxpayer receives during the year.

True/False

True

Gross income is defined as all income from whatever source derived, unless specifically excluded.

Gross income generally includes the income that a taxpayer receives from any source.

True/False

True

Unearned income is defined as investment (portfolio) income, including interest and dividends. Unearned income is not subject to Social Security taxes—earned income is.

Unearned income includes investment income.

True/False

True

AGI is important because it is used to determine the minimum or maximum limits on the deductibility of many expenses. Phaseout limits are calculated based on the taxpayer's AGI, not gross income.

Calculation of adjusted gross income is important because AGI is used to determine the limitations of many deductions.

True/False

False

Itemized deductions are reported on Schedule A. Interest and dividends are reported on Schedule B.

Itemized deductions are reported on Schedule B.

True/False

False

The greater of the standard deduction or total itemized deductions is subtracted from AGI as part of the calculation to determine taxable income.

The lesser of the standard deduction or total itemized deductions is subtracted from AGI as part of the calculation to determine taxable income.

True/False

False

Tax credits have a more significant impact on tax liability than tax deductions do. Tax credits reduce the actual tax liability (dollar for dollar), whereas deductions reduce the taxable income.

A tax credit and a tax deduction have the same effect on tax liability.

True/False

True

Tax credits directly reduce a tax liability dollar-for-dollar.

Tax credits result in a dollar-for-dollar reduction of a tax liability.

True/False

child support received

Child support received is excluded from income; both lottery winnings and alimony must be reported and will be taxed.

Which one of the following is excluded from income?

child support received

lottery winnings

alimony

True

Itemized deductions and exemptions have phaseouts for higher income taxpayers.

Both itemized deductions and exemptions have phaseouts for higher income taxpayers.

True/False

False

The maximum charitable deduction of cash to a public charity is 50%. The 30% limitation is for property, such as when contributing stock.

The maximum charitable deduction allowed for cash contributed to a public charity is 30% of AGI.

True/False

True

The American Opportunity tax credit is only available for the first four years of postsecondary education. The Lifetime Learning credit is available for life.

The American Opportunity tax credit is only available for the first four years of postsecondary education.

True/False

location

The location of a capital asset is generally not used to determine whether a gain or loss results from a sale of the asset.

Which one of the following is not used to determine the amount or character of a gain or a loss from the sale of an asset?

adjusted basis

holding period

class or type of property

location

False

A taxpayer's basis in inherited property is generally the fair market value of the property on the date the decedent died, or it is the fair market value six months after death, if the alternate valuation date is elected. This is called a "step-up in basis."

A taxpayer's basis in property received as an inheritance is the same basis as that of the person from whom they inherited it.

True/False

False

Property held to sell to others in the course of a trade or business is not classified as a capital asset, but inventory.

Capital assets include property held by a taxpayer to sell to others in the course of a trade or business.

True/False

True

Capital asset sales do receive preferential treatment under the federal tax system, if the asset was held for more than one year. Maximum long-term capital gain rates are 0%, 15%, or 20% depending upon the taxpayer's tax bracket. There is also a 28% capital gain tax rate for collectibles.

The gain on the sale of capital assets held for more than one year receives special treatment under the federal tax system.

True/False

True

The total amount that a taxpayer has invested in an asset is that taxpayer's basis in the asset.

Basis is defined as the total amount that a taxpayer has invested in an asset.

True/False

True

A deduction for a loss incurred on the sale of personal-use property is generally not allowed for federal income tax purposes. However, the taxpayer is taxed on any gain from the sale of personal use property.

A taxpayer generally may not deduct a loss on the sale of personal-use property.

True

The adjusted basis of a property is subtracted from the amount realized on the sale to determine the amount of capital gain or loss.

The amount of capital gain or loss from the sale of a capital asset is determined by subtracting the adjusted basis of the property from the amount realized.

True/False

False

A taxpayer may only deduct up to $3,000 of net capital losses annually.

A taxpayer may deduct up to $5,000 of net capital losses annually.

True/False

True

Certain capital gains may be deferred until a future date (or not taxed at all) under the nonrecognition provisions. Gains are deferred with like-kind exchanges, and no tax may be due at all (limits apply) on the gain realized when selling a personal residence.

Nonrecognition provisions allow the recognition of certain capital gains transactions to be deferred until a future date, or eliminated entirely.

True/False

False

The exclusion ratio is calculated by taking the total amount invested in the contract divided by the total dollar amount of expected payments. Taking the total amount invested in the contract and dividing by the number of expected payments is the calculation used for variable annuities.

To calculate the exclusion ratio for a fixed annuity, one takes the total amount invested in the contract divided by the number of expected payments.

True/False

True

Earnings are considered to be withdrawn first and are taxable; principal comes out last and is nontaxable.

Generally, lump-sum distributions from an annuity are treated as return of earnings first and then return of principal.

True/False

28%

The long-term capital gains rate for collectibles is 28%. Taxpayers in a lower marginal tax bracket will pay the lower rate.

Which one of the following is the long-term capital gains tax rate for collectibles?

15%

20%

28%

$4 000

When an asset is gifted to another, and the asset is now worth more than the donor's basis, then the donor's basis will carry over to the individual receiving the gift.

Mary is gifting stock to her daughter, Melinda. At the time of the gift the stock is worth $12,000, and Mary's basis in the stock is $4,000. What will Melinda's basis be?

0

$4 000

$12 000

He should pay long-term capital gains taxes on $8 000.

If after netting short-term and long-term gains and losses separately and one is a gain and the other a loss, they should then be netted against each other. In this case the $13 000 long-term capital gain can be netted against the $5 000 short-term loss for a net long-term capital gain of $8 000.

Jake is doing his taxes and has come up with $5 000 in net short-term capital losses, and $13 000 in net long-term capital gains. What should he report on his income tax return?

He should take a deduction for the $5 000 loss, and pay long-term capital gains taxes on $13 000.
He should take a deduction for a $3 000 loss, and pay long-term capital gains taxes on $13 000.
He should pay long-term capital gains taxes on $8 000.

True

This is true. If the employer provides more than $50,000 worth of coverage then the employee will have any premiums paid to provide the additional insurance above $50,000 reported as taxable income.

Employees can have up to $50,000 of group term life insurance provided for them without any tax consequences.

True/False

season tickets for a local team

Tickets to one game would probably be fine, but getting season tickets would be a taxable event.

Which one of the following is not a category of non-cash fringe benefits that an employee may exclude from income?

no additional cost services

qualified employee discounts

season tickets for a local team

de minimis fringe benefits

True

FSAs are free of both income taxes and Social Security taxes, making them a very unique and a very tax-efficient way in which to pay health care, dental, and vision costs.

Any contributions to an FSA are not only income tax-free, but also free of any Social Security taxes.

True/False

False

A flexible spending account is funded by money taken from the employee's salary, not by employer contributions.

A flexible spending account is funded by money contributed by the employer.

True/False

False

Up to 85% of a Social Security benefit may be taxable.

Social Security benefits are never taxable.

True/False

$35,700

The maximum percentage amount of Social Security that can be subject in income taxes is 85%; 85% of $42,000 would be $35,700.

The Andersons have substantial income (over $100,000 a year), and receive $42,000 a year in Social Security retirement benefits. What is the maximum amount of the Social Security benefit that would be taxable?

$21,000

$35,700

$42,000

at least three years

Tax records used to substantiate information on a tax return should be kept for at least three years.

Any tax records substantiating tax returns should generally be kept for how many years?

a minimum of two years

at least three years

at least five years

at least seven years

the withdrawal slip from a bank for a bribe paid to a foreign official to expedite a building permit.

Illegal bribes to officials or government officers (foreign or otherwise) are not tax deductible; therefore, receipts are not required.

In order to substantiate tax record information for a tax return, a taxpayer should keep records for all of the following items except

receipts for business expenses claimed by a self-employed individual.

the withdrawal slip from a bank for a bribe paid to a foreign official to expedite a building permit.

detailed records from mutual fund transactions.

the name, address, and employer ID number of an organization that took care of the taxpayer's child.

False

The government generally has three years to audit a return after the later of (1) the date the tax return was actually filed or (2) the due date of the tax return.

The government generally has only two years to audit a return after the later of (1) the due date of a tax return or (2) when the taxpayer actually files the return.

True/False

False

The IRS default method is first-in-first-out (FIFO), not average cost. The taxpayer can elect any of three approaches: FIFO, average cost, or specific identification.

If a taxpayer does not choose either specific identification or first-in-first-out (FIFO) for cost basis, then the IRS choice is the average cost method.

True/False

accelerating the receipt of income

Deferring, not accelerating, the receipt of income is a major tax planning strategy.

Which one of the following is not a major tax planning strategy?

deferring the receipt of income

shifting the payment of income tax to others

accelerating the receipt of income

eliminating or reducing the income tax owed

available for just postsecondary education

Coverdell accounts are available for K-12 as well as postsecondary education. The contribution limit is $2,000, which is subject to phaseouts depending upon the income of the taxpayer.

Which one of the following is not a characteristic of a Coverdell Education Savings Account?

$2,000 annual contribution limit

available for just postsecondary education

contribution amount is subject to phaseouts depending upon the taxpayer's income

investment in a term life insurance policy

A term life insurance policy does not accumulate cash value during the insured's lifetime and, therefore, does not defer the receipt of any income.

Which one of the following is not a common method of deferring receipt of taxable income?

investment in a term life insurance policy

investment in an IRA

investment in a life insurance policy with cash value

investment in a 401(k) plan

True

Gifting an income-producing asset to taxpayers in a lower tax bracket may result in an overall lower tax liability.

A possible tax planning strategy is to shift the taxation of income to others.

True/False

False

Section 529 plans have very high limits that are set by each state based on the estimated tuition needed to attend four years of college, which can be substantial. This is an advantage of 529 plans, as is the fact that there are no contribution amount phaseouts for high income taxpayers.

Section 529 plans are limited to a contribution of $5,500 per year.

True/False

True

The most common method of deferring the receipt of taxable income is retirement plans, such as IRAs and 401(k) plans.

A common method of deferring the receipt of taxable income is retirement plans.

True/False

stock held in an individual's name

All of the assets are held in the form of sort of a will bypass, except for the stock held in an individual's name, which would go through probate and be distributed according to the will.

Which of the following assets would go through probate?

life insurance policy with a named beneficiary

individual bank account with TOD

stock held in an individual's name

stock brokerage account held JTWROS

True

Personal property can be either tangible or intangible.

There are two categories of personal property.

True/False

False

This statement is the definition of a trustee. A testator is a person who makes a will.

A testator is the holder of legal title to trust property.

True/False

True

This is a true statement. Retirement accounts funded with pre-tax contributions will be taxable when distributed to the recipient.

Generally, when property is transferred from an estate the recipient enjoys a stepped-up income tax basis, except in the case of retirement accounts.

True/False

False

This is a gift given while Luke is living, so it would be a carryover of basis to Fred; meaning Fred's basis will be $22,000. A step-up in basis would occur if Luke were to die and bequest the shares to Fred.

Luke has gifted $35,000 worth of stock to his son, Fred. Luke's basis in the stock is $22,000, but Fred's basis in the stock will now be $35,000 since he gets a step-up in basis.

True/False

False

Property received from an estate is usually valued as of the date of death; meaning, Dexter's cost basis will be $50,000. Oftentimes there will be a step-up in basis, but there can also be a step-down in basis if an asset is worth less than what the decedent purchased it for, as is the case for Dexter.

Dexter's mother died and left Dexter property valued at $50,000 as of the date of her death, which his mother had purchased for $65,000. Since the purchase price was less than the current price, Dexter's cost basis will be $65,000.

True/False

establishing and funding an inter vivos trust

Since a will is only operative on property owned by the testator at death, it cannot be used to establish or fund an inter vivos trust, which must be done during a grantor's lifetime. A testamentary trust could be established, which is a trust created under a will that does not become operative until after the creator's death.

Which of the following objectives cannot be accomplished by using a will?

designating persons to receive the testator's property at death

establishing and funding an inter vivos trust

appointing a personal representative

nominating a guardian for minor children

True

The probate process applies to property that is passed both by will and by the laws of intestate succession if there is not a will. Intestate means that the deceased did not have a will.

When property passes at death by application of the intestate succession statutes, the property is subject to the probate process.

True/False

True

Common law states allow a surviving spouse to elect to take a statutory share in order to prevent such a spouse from being disinherited. You can disinherit children, but you cannot disinherit a spouse.

A surviving spouse of a decedent in a common law state usually has a right to elect to take a statutory share of the decedent's estate rather than what is left to him or her under the decedent's will.

True/False

False

An intestate's property will escheat to the state only if the intestate has no surviving blood relatives who are entitled to inherit under the laws of intestate succession. These circumstances are rare.

It is a common occurrence for an intestate's property to escheat to the state.

True/False

False

Property that is owned in joint tenancy with right of survivorship passes by right of survivorship, but tenancy in common property must be passed by will or by the laws of intestate succession.

Property owned in joint tenancy with right of survivorship and property owned tenancy in common both pass by right of survivorship.

True/False

True

This statement is particularly true of revocable trusts, where the grantor is not seeking to achieve tax objectives that require him or her to surrender more control.

It is possible for the same person to be the grantor, the trustee, and the beneficiary of a trust.

True/False

False

UTMA and UGMA accounts are used solely for the benefit of minors (generally under age 18-21).

UTMA and UGMA accounts can be used to handle the financial affairs of an incompetent adult.

True/False

True

For gifted property, there usually is a carryover of basis, i.e., the donee assumes the donor's basis in the property.

The donee (receiver) of a gift does not receive a stepped-up basis in the gifted property for income tax purposes.

True/False

False

A will bypass, such as property held JTWROS or a beneficiary named on a life insurance policy or retirement account, trumps the will.

A will is the ruling document if the beneficiary named in a will bypass is different.

True/False

True

The tax-free accumulation of any earnings, and the ability to make tax-free withdrawals for higher education coats, are characteristics that can make Section 529 accounts an attractive savings vehicle for higher education costs.

Contributions made to a Section 529 plan are not deductible for federal income tax purposes, but any earnings accumulate tax-free, and there are no taxes on any withdrawals as long as the funds are used for higher education costs.

True/False

True

TBE can only be used by spouses, and requires that both spouses agree to the disposition of the asset—in other words, one spouse cannot sell his or her share without the permission of the other. Permission of the other party is not needed with JTWROS.

Tenants by the entirety (TBE) can only be used by spouses.

True/False

True
Community property states require that assets acquired during the marriage are considered to be owned one-half by the husband and one-half by the wife, regardless of how they are titled. Certain property is exempt, such as property acquired before the marriage and titled in just the one spouse's name, or an inheritance received by one spouse who keeps it titled in just his or her name.

Property acquired in a marriage is considered to be jointly owned in a community property state, regardless of how it is titled.

True/False

estate taxes

Estate taxes can be an expense of settling an estate, but they are taxes and not administrative expenses. Very few estates end up paying any estate taxes since the exemption amount is $5.43 million (in 2015).

Which one of the following is not an administrative expense that is often incurred when settling an estate?

legal fees

a personal representative's fee

estate taxes

tax return preparation fees

False

Only certain property transferred within three years of death (such as personal life insurance on the decedent) must be included in a decedent's gross estate.

All property transferred by a decedent within three years of death must be included in the decedent's gross estate.

True/False

True

Because of the high exemption amount of $5.43 million (in 2015), very few estates actually end up paying estate taxes.

Less than 1% of all estates pay estate taxes.

True/False

True

Unlimited means just that: If you leave property to a spouse and/or a charity the entire amount is exempt from any estate taxes. There are limitations if the spouse is not a U.S. citizen.

The unlimited marital deduction and the unlimited charitable deduction would mean if you were to leave your entire estate to your spouse and charity you would not owe any estate taxes, even if your gross estate was $1 billion.

True/False

True

With proper estate planning, it is possible for each spouse to take advantage of his or her $5.43 million exemption; meaning, between the two of them, a couple could shelter up to $10.86 million from estate taxes (in 2015).

It is possible for a married couple to shelter up to $10.86 million (in 2015) from estate taxes, which is twice the $5.43 million exemption amount for individuals.

True/False

A conservator is appointed in the incapacitated person's durable power of attorney.

A conservator is appointed by a court when no advance incapacity planning has been done.

Which one of the following statements regarding a conservator or financial guardian is not correct?

A conservator is appointed in the incapacitated person's durable power of attorney.

A conservator may have to post a performance bond.

A conservator is a fiduciary.

A conservator may have to file periodic reports with a court.

The agent's authority in a DPOAHC is effective only if the principal is terminally ill.

The agent's authority in a DPOAHC is operative whenever the principal becomes unable to understand or communicate medical decisions, whether or not the principal is in a terminal condition.

Which one of the following statements regarding durable powers of attorney for health care (DPOAHCs) is not correct?

A DPOAHC is revocable while the principal is competent.

The agent's authority in a DPOAHC is effective only if the principal is terminally ill.

The agent's authority in a DPOAHC is effective only when the principal is unable to understand or communicate medical decisions.

False

This person is known as the agent or attorney in fact. The principal is the person who grants authority to the agent.

In a power of attorney, the person who receives authority to act for another is known as the principal.

True/False

False

A contingent trust receives substantial funds only when the grantor is declared incapacitated or incompetent.

A contingent trust usually receives substantial assets immediately upon creation.

True/False

True

A living will can be revoked at any time when the maker is competent.

Living wills are revocable.

True/False

True

Each state controls who can make a DPOAHC, what is required to execute a DPOAHC, who can be appointed as an agent under a DPOAHC, and the circumstances in which a DPOAHC is valid.

Durable medical powers of attorney for health care (DPOAHC) are controlled by state law.

True/False

False

There are four documents. In addition to those listed, one should have a durable power of attorney for financial matters

There are only three documents everyone should have for estate planning purposes: a will, a durable power of attorney for health care, and a living will.

True/False

True

Medicaid is the social safety net for individuals needing long-term care.

Medicaid planning may be necessary for a retiree who is developing Alzheimer's and does not have enough saved to afford long-term care costs.

True/False

False

All powers of attorney cease upon the death of the principal.

A regular power of attorney ceases upon death of the principal, but a durable power of attorney does not.

True/False

True

Any assets transferred for less than fair market value during the five-year lookback period will delay eligibility for Medicaid.

For Medicaid there is a five-year "lookback" period for assets transferred for less than fair market value.

True/False

True

The calculator must be set in the correct mode—either begin or end—in order to correctly calculate an answer.

Knowing whether periodic payments are at the beginning of the period or end of the period is important when doing calculations involving payments.

True/False

False

Whenever a certain number of payments per year is entered on the HP10BII+ calculator, it will stay set at that number until it is proactively changed. Turning the calculator off and then back on will not result in a reset.

When the HP10BII+ calculator is turned off, and is then turned on again, the number of payments per year will automatically reset to 12 payments per year.

True/False

False

The HP10BII+ calculator will stay in whatever mode it is in until proactively changed. Turning the calculator off and on will not automatically reset the calculator to the end mode.

Every time the HP10BII+ calculator is turned on, it will automatically reset to the "end" mode.

True/False

True

"C ALL" stands for clear all, and this will clear out the previous problem that was entered. This will not impact the last number of payments that was entered, nor will it impact the last mode that was entered.

Part of preparing the calculator for each problem is to strike the downshift key and then the "C ALL" key.

True/False

False

It is very important to take inflation into account and use an inflation-adjusted return when doing retirement income projections, as this can have a major impact on whether a plan is realistic or not.

Taking inflation into account when doing retirement income projections is helpful, but not necessary.

True/False

True

This statement is true. Since an inflation-adjusted return takes into account any loss of buying power to inflation, anything above and beyond the inflation rate is a "real" return.

"Inflation-adjusted return" can also be referred to as "real" return.

True/False

True

This statement is true.

If the rate of return is 6%, and inflation is 2%, then the inflation-adjusted return would be approximately 4%.

True/False

False

This is stated backward. The longer the time horizon, the greater the impact changes in interest rate assumptions will have.

The longer the time horizon, the less impact changes in interest rate assumptions will have on financial projections in a financial plan.

True/False

THIS SET IS OFTEN IN FOLDERS WITH...

Module 1: The Financial Planning Process

30 terms

Module 2: Cash Management and the Use of Debt

48 terms

Module 3: The Time Value of Money

25 terms

Module 4: Insurance Basics and Property Insurance

73 terms

Insurance

144 terms

CA Insurance Exam

165 terms

Financial Management: insurance

50 terms

369 Exam 2: Beth Scull

85 terms

OTHER QUIZLET SETS

Financial literacy chapter 1

35 terms

Cost Accounting (Test 1)

45 terms

managerial accounting

45 terms

ac 432 exam 1 quizzes

53 terms

Foundations in Financial Planning

Terms in this set (313)

THIS SET IS OFTEN IN FOLDERS WITH...

Module 1: The Financial Planning Process

Module 2: Cash Management and the Use of Debt

Module 3: The Time Value of Money

Module 4: Insurance Basics and Property Insurance

YOU MIGHT ALSO LIKE...

Insurance

CA Insurance Exam

Financial Management: insurance

369 Exam 2: Beth Scull

OTHER QUIZLET SETS

Financial literacy chapter 1

Cost Accounting (Test 1)

managerial accounting

ac 432 exam 1 quizzes