2017 102 unit 10 no solns - static.kaplanlearn.com · 10-4 1010 collateral assignment method •...

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Course 102

Risk Management, Insurance, and Employee Benefits Planning

© 2016 Kaplan University School of Professional and Continuing Education

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Unit 10

Business Uses of Life Insurance and Other Employee Benefits


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Unit 10 Learning Objectives (1 of 3)• CFP Board Principal Knowledge Topics – D. Risk

Management and Insurance Planning• D.29. Business Uses of Insurance

– LO D.29.25 Describe how key employee insurance may be used by an employer to indemnify the corporation.

– LO D.29.26 Discuss the use of split-dollar life insurance.– LO D.29.27 Describe a Section 162 executive bonus plan

and its tax implications.


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Unit 10 Learning Objectives (2 of 3)– LO D.29.28 Discuss the characteristics and taxation of a

death benefit only (DBO) plan.– LO D.29.29 Identify the basic provisions and income tax

implications of group life insurance in a business setting.– LO D.29.30 Describe clients’ conversion privileges under

group life insurance plans.– LO D.29.31 Discuss the features and taxation of cafeteria

plans and flexible spending accounts (FSAs).– LO D.29.32 State the benefits offered through dental and

vision plans and the taxation of premiums and benefits.© 2016 Kaplan University School of Professional and Continuing Education

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Unit 10 Learning Objectives (3 of 3)– LO D.29.33 Describe how employees benefit from prepaid

legal services and give examples of benefits provided under such plans.

– LO D.29.34 Explain a voluntary employees’ beneficiary association (VEBA) and in what circumstances it may be used.

• CFP Board Principal Knowledge Topics – F. Tax Planning

• F.47. Tax Reduction/Management Techniques– LO F.47.1 Calculate the advantage of using tax-preferenced

flexible spending accounts.


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Key Employee Life Insurance (1 of 2)• Applied for, owned by, and payable to

business• Insures the life of key or highly valued EEs• Premiums not tax deductible• Death benefits income tax free


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Key Employee Life Insurance (2 of 2)• Death benefit minus premiums paid creates

adjusted current earnings for corporate AMT purposes

• Corporate AMT is a possibility for larger, regular corporations – Can avoid affect by purchasing more life insurance to

cover anticipated liability


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Split-Dollar Life Insurance • Sharing arrangement between ER and EE

of the costs and benefits of policy• Best suited for executives early in career

–Plan requires time to build up adequate cash values


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Establishing a Split-Dollar Arrangement• Two basic policy ownership methods:

–Collateral assignment method–Endorsement method


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Collateral Assignment Method• Collateral Assignment Method

–EE is policyowner and pays premiums–ER makes interest-free loans in amount of

premium ER has agreed to pay–Policy is assigned to ER as collateral–At insured EE’s death, ER recovers loan from

death proceeds as collateral assignee–Remainder paid to EE’s designated beneficiary


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Endorsement Method• Endorsement Method

–ER owns policy and pays premiums–Split beneficiary designation–ER receives portion of death benefit equal to cash

value of the policy, or at least a portion of death benefits equal to its premium outlay

–Remainder payable to EE’s designated beneficiary


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When Endorsement Method?When the executive benefiting from the plan is not a majority shareholder.

The reason for this recommendation under this circumstance is that if the employee is a majority shareholder, the ownership of the policy by the employer could be attributable to the employee and the policy death benefit may be included in the employee’s gross estate at death.


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When Collateral Assignment Method?

For situations when the executive benefiting from the plan is a majority shareholder.

The reason for this recommendation under this circumstance is that the employee can choose to establish an ILIT to own the policy; therefore, at death, neither the employer nor the employee owns the policy. This allows the death benefit to be excluded from the employee’s gross estate at death.


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Disadvantages of Both Split-Dollar Plans• EE must pay income taxes each year on

economic benefit– Economic benefit measured by Table 2001 – Regulations require any payment made by ER under

split-dollar arrangement must be accounted for either as loan (collateral assignment policy ownership method) or as compensation (endorsement method) to EE


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Key Employee Life Insurance QuestionAll of the following statements are correct regarding key employee life insurance EXCEPT

A. policy premiums are tax deductibleB. policy death benefits received by the company are

generally tax freeC. policy is owned by the companyD. policy applied for by the company


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Key Employee Life Insurance Solution


• Answers and rationales will be discussed in class.

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Section 162 Executive Bonus Plan• Employer pays bonus to employee equal to

premiums due on personally owned life insurance policy

–Employer deducts premium as additional compensation to employee

–Employee reports bonus as ordinary income• Used for executive employees


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Death Benefit Only Plan (1 of 2)• Employer/corporation is owner and

beneficiary of insurance policy on life of valued executive

• Death benefits paid (once received by employer as beneficiary) are forwarded to executive’s heirs in lieu of previously deferred compensation

• Payments made to executive’s heirs not generally included in insured’s gross estate


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Death Benefit Only Plan (2 of 2)• Exception if executive is a greater-than-50%

or controlling shareholder in employer/owner–Control rights are attributed to executive and

insurance proceeds are included in estate• Payment of death proceeds to exec’s heirs

constitutes income to them–Proceeds are paid in lieu of compensation to which

executive was entitled at death


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Business Use of Life Insurance QuestionWhich of the following statements regarding Section 162 executive bonus plans is NOT correct?

A. The employer pays a bonus to the employee equal to the premium

B. The employer deducts the bonus paid to employee in the amount of the premium as compensation to the employee

C. The employee reports the bonus/additional compensation as ordinary income

D. The employee does not have to pay taxes on the bonus/additional compensation


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Business Use of Life Insurance Solution



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Group Term Life Insurance• Premiums, up to the first $50,000 of face value paid

for by ER, income tax free to EE• Coverage provided for EE based on multiple of

gross salary • For any amount of group term coverage > than

$50,000, scheduled premium per $1,000 of coverage (Treasury Regulation Table 1) included in EE’s compensation (W-2) income


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GTLI Example (1 of 3)• MAD company maintains GTLI for all of its

employees equal to two times their current salary

• Susan, age 56, is an executive employee making $100,000 per year; thus, she has GTLI coverage of $200,000

• The cost of $1,000 of protection per month from Table 1 for age 56 participant is $.43


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GTLI Example (2 of 3)• If Susan contributes $350 annually toward the cost of

GTLI coverage, the amount included in her annual compensation (W-2) income will be $424, calculated as follows:

Excess coverage (in thousands) 150Cost per $1,000 of coverage × 0.43Monthly cost of coverage $64.50Multiplied by 12 for annual × 12Annual cost of coverage $774Less Susan’s contribution ($350)Taxable income amount $424


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GTLI Example (3 of 3)• If Susan is key EE and GTLI plan established by

ER discriminated on her behalf, she would lose $50,000 cost of coverage exemption

• Cost of coverage of ER-provided GTLI on life of EE’s spouse or dependent child not taxable to EE as long as face amount ≤ $2,000

• If death benefit for spouse or dependent is more than this amount, same Table 1 compensation income attribution and computation apply


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Conversion of GTLI Coverage• Typically includes conversion provision

–Conversion privilege is guaranteed benefit• Conversion policies tend to have higher

premiums than new individual policies–Adverse selection


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Group Permanent Insurance (1 of 2)• Essentially same as individual policies

– Simplified underwriting, group billing, and additional administrative costs

• Some large groups have no underwriting requirements but require certain percentage of EEs to participate

• When employee leaves or retires, group policy usually stays in force as individual policy


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Group Permanent Insurance (2 of 2)• Disadvantages:

–Simplified underwriting • Results in adverse selection for EEs who leave

–Policies of terminated and retired EEs generally treated as separate class, so only this class pays for adverse selection

–Expense charges on policies written for departing EEs may be higher


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Group Carve-Out Plans (1 of 2)• Older, higher-paid EEs carved out of group

term life insurance plan and provided with permanent CV life

• Cost of coverage provided to higher-paid EEs without attribution of W-2 income limited to $50,000

• Provides alternative to either GTLI or group permanent coverage


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Group Carve-Out Plans (2 of 2)• Simple mechanics• GTLI coverage on highly paid EEs reduced to

no more than $50,000• Remainder of benefit in permanent CV life

insurance owned by EE (ER pays premium)• Entire premium taxable to EE and fully

deductible by ER


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Life Insurance in Qualified Plans• Plan meets incidental death benefit requirement• Plan must pass one of two tests

– The 25% test• Aggregate premiums paid for term or universal life

insurance cannot exceed 25% of ER’s contributions

• 50% for whole life insurance– Second test applies to defined-benefit plans

• Death benefit cannot be more than 100 times expected monthly benefit to be paid to EE


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Group Carve-Out Plan QuestionWhich group of employees are typically carved out of group term life insurance plans?

A. Older, higher paid employeesB. Younger, lower paid employeesC. Employees with less than three years of

serviceD. Employees with more than three years of

service


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Group Carve-Out Plan Solution



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GTLI QuestionABC company provides its employees with GTLI equal to 2 times salary. Bob’s salary is $75,000 per year and the cost of $1,000 of life insurance is $.63 per month per Table 1 for an individual of Bob’s age. What is the monthly amount included in Bob’s compensation?

A. $63.00B. $756.00C. $15.75D. $94.50


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GTLI Solution



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Other Employee Benefits• Section 125 Cafeteria Plans• Flexible Spending Accounts• Dental and Vision Insurance• Prepaid Legal Services• Voluntary Employees’ Beneficiary

Association


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Section 125 Cafeteria Plans (1 of 2)• EEs choose benefits from options provided

by ER• Plans must include a cash option

–Taxable as W-2 compensation income • Qualified benefits, which exclude the cash

option, are an exception to constructive receipt rules


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Section 125 Cafeteria Plans (2 of 2)• Most appropriate when EE benefit needs

vary within group• Highly compensated employees

–May lose tax-free nature of qualified benefits if plan discriminates on their behalf


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Cafeteria Plan Qualified Benefits (1 of 3)• Not included:

– Scholarships and fellowships– Educational assistance– Employee discounts – Retirement or nonqualified plan benefits

• Flexible Spending Account (FSA)– Cafeteria plan funded entirely through EE salary

reductions


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Cafeteria Plan Qualified Benefits (2 of 3)• Qualifying small businesses can adopt SIMPLE

cafeteria plans• Eligible employers include those that employed, on

average, 100 or fewer employees during either of the preceding two years

• Generally, all non-excludible employees with at least 1,000 hours of service during the preceding plan year must be allowed to participate


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Cafeteria Plan Qualified Benefits (3 of 3)• Major advantage of SIMPLE cafeteria plans is their

reduced administrative burden• For example, SIMPLE cafeteria plans that meet

certain minimum eligibility, participation, and contribution requirements are not subject to the complex nondiscrimination requirements that otherwise apply to cafeteria plans


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Flexible Spending Accounts (1 of 5)• Consists of tax-free benefits funded entirely through EE

salary reductions– Maximum dollar amount– Maximum percentage of compensation

• EE salary reduction elections applied to nontaxable benefits not subject to income tax or payroll (FICA) tax – Health FSA limit = $2,550; Dependent Care FSA limit = $5,000

• Appropriate when EE benefit plan costs increased and ER must impose additional EE cost sharing


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Flexible Spending Accounts (2 of 5)• Appropriate when need for benefits difficult to provide on

group basis• Most provide for salary reduction dollars to pay:

– deductibles on group health insurance policies,– coinsurance provisions on group health policies, and– dependent care (child care) expenses

• Due to ER administrative costs, FSAs usually impractical for businesses with only few employees

• FSA benefits cannot be provided to self-employed or partners


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Flexible Spending Accounts (3 of 5)• “Use or Lose” rule

– FSA’s allow $500 of unused amounts remaining at the end of a plan year to be used in the following year.

– Under grace period rule, Section 125 cafeteria plan may permit an employee to use amounts remaining from the previous year to pay expenses incurred for certain qualified benefits during the period of up to two months and 15 days immediately following the end of the plan year.

– Employees should verify which provision their FSA is subject to in order to avoid losing benefit amount.


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Flexible Spending Accounts (4 of 5)• Substantial tax savings • Contributions not subject to federal or state

income tax or Medicare and Social Security payroll taxes


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Flexible Spending Accounts (5 of 5)• Example: $2,000 flexible spending account

contribution which 100% was used for qualified medical expenses

• Assume: − 15% federal income tax rate− 4% state income tax rate− 1.45% Medicare payroll tax − 6.2% Social Security payroll tax

• Total tax savings = 15% + 4% +1.45% + 6.2%, which equals 26.65%

• 26.65% of $2,000 equals $533© 2016 Kaplan University School of Professional and Continuing Education

4747

Dental and Vision Insurance• Dental insurance

–Group benefit–Premiums paid by ER are tax deductible–Benefits are tax free

• Vision insurance –Covers care and treatment for eyes

• Annual eye exams, glasses, contact lenses, and glaucoma screening

–Taxation similar to other health plans© 2016 Kaplan University School of Professional and Continuing Education

4848

Prepaid Legal Services• May provide bankruptcy assistance,

adoption assistance, divorce legal fees assistance, and preparation of estate planning documents

• ER pays cost and deducts expenses necessary to maintain plan


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Voluntary Employees’ Beneficiary Association (1 of 2)• Type of welfare benefit (IRC Section 419) plan

into which ERs make deposits used to pay specified EE benefits–Severance pay plan for selected execs

• Vacation and EE sabbatical benefits frequently included


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Voluntary Employees’ Beneficiary Association (2 of 2)• Tax-exempt trust established by ER• Income from trust exempt from regular income tax if

VEBA meets certain requirements• VEBA permits ER’s tax deduction for certain EE

benefits to be accelerated (or prefunded) while also generating tax-free income to assist in payment of benefits


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Flexible Spending Accounts QuestionFSAs may provide funds to pay all of the following EXCEPT

A. deductibles on group health insurance policiesB. coinsurance provisions on group health

policiesC. self-employed person’s health insurance

deductiblesD. dependent care expenses


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Flexible Spending Accounts Solution



5353

CFP® Exam-Level Question - Unit 10

Which of the following statements regarding a flexible spending account (FSA) provided to an employee are CORRECT?1. Employee contributions to the account will not be subject to federal income taxes.2. Employee contributions to the account will not be subject to Social Security taxes.3. A flexible spending account is a cafeteria plan funded through employee salary

reductions.4. FSA are used quite often by self-employed persons or partners.

A. 2, 3, and 4B. 1 and 3C. 1 and 4D. 1, 2, and 3


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CFP® Exam-Level Question - Unit 10 Solution



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CFP® Exam-Level Question - Unit 10 Rationale



5656© 2016 Kaplan University School of Professional and Continuing Education


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Course 102

Risk Management, Insurance, and Employee Benefits Planning


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Michael and Marie Allen

Case StudyQuestions and Solutions


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Personal Background and Information (1 of 9)• Assume today is January 1, 2017• Michael and Marie Allen

– Married for 12 years. – Two children, Max and Sam. – Michael has a son, Alex, and a daughter, Abby, from a

previous marriage.


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Personal Background and Information (2 of 9)• Michael (Age 45)

– Vice president of Asher Bank and Trust – Employed for 12 years– $70,000 annual salary

• Marie (Age 40)– Approached by top architecture firm to be a part-time

independent contractor– Annual earnings at least $50,000


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Personal Background and Information (3 of 9)• Family

– Alex, 20 years old, junior at State University on a partial scholarship.

– When not at school, he lives with his mother, Nicole. – During the summers, Alex works at Asher Bank and

Trust as an intern and lives with Michael and Marie. – Nicole claims Alex as a dependent.


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Personal Background and Information (4 of 9)

– Abby, 16 years old, lives in another state with her mother and attends public school.

– She has aspirations to study at The Juilliard School upon graduation.

– She is also Nicole's dependent for income tax purposes.


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– Max, 10 years old, attends Woodridge Academy, a private school.

– He plays the trombone in the school band and attends band camp each summer.

– He also plays on the school’s basketball team.


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– Samantha (Sam), 7 years old, second grade at Woodridge Academy.

– She meets with a private tutor once a week to get help with her reading skills.


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– Carol, Michael's mother, died last month at age 70.– Her estate is in probate.– She had been using her investments to meet her living

expenses.– Michael is the sole beneficiary and executor of her

estate.


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– Grant and Rose, Marie’s parents, are in good health and have agreed to pay for Max and Sam’s tuition through the 8th grade. • They want to know about any gift-tax consequences regarding

these payments.

– They are interested in making additional gifts for education.

– They are retired and travel year-round. – Marie is their only child.


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– Nicole, Michael’s ex-wife, lives in another state.– She is an attorney for the Department of Justice.– No child support agreement for Abby.

The Allens have also asked you to offer recommendations on any area of their current finances that have weaknesses and/or opportunities for improvement.


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Economic Information (1 of 2)• They expect medical inflation to be 5% annually

and the annual inflation rate to average 3% over both the short and long terms.

• Average credit card interest rate is approximately 16%.

• Risk-free rate is 3.25%.• Their required rate of return is 8%.


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Economic Information (2 of 2)• Mortgage rates

– 6% for 30-year fixed mortgages – 5.5% for 15-year fixed mortgages

• Closing costs will approximate 3% of any mortgage refinanced and will be paid separately.


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Insurance Information—Health• Family major medical plan.

– $500 per person deductible– 80/20 conisurance– $2,500 family stop-loss limit

• His employer pays 100% of the premium.


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Insurance Information—Life• Michael has a group term life insurance policy with a

face amount of $60,000.• He is not a highly compensated employee. • Beneficiary is Marie. • Premium of $9 per month is paid by his employer. • Section 79 table cost per $1,000 of protection is

$0.15 per month for Michael's age.• They want to complete a life insurance needs

analysis.


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Insurance Information—Disability (1 of 2)• Michael has a private disability insurance policy

covering accidental total disability for own occupation with a 30-day elimination period. – $2,700 monthly benefit until Michael's normal

retirement age, defined as Michael's retirement age under the Social Security Act on the date of his disability.

• Annual premium is $761.−Paid by Michael.


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Insurance Information—Disability (2 of 2)• Michael has asked you to explain the tax

treatment of the disability insurance benefits in the event he is disabled.


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Insurance Information—Homeowners• HO-3 policy

– Dwelling extension and replacement cost on contents – $1,000 deductible– $950 annual premium


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Insurance Information—Automobile• Automobile liability and bodily injury coverage. −$100,000/$300,000/$100,000.

• Comprehensive and collision. −Deductibles are $250 (comprehensive) and $500

(collision), respectively. • Annual premium is $900.• They wish to review their carrier and seek a

better rate.


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Investment Information (1 of 2)• ABC stock inherited by Marie in 2016.− ABC stock has paid a steady dividend of $3.50 per year,

expected to grow 5% per year.− They want to know if the stock is overpriced or underpriced. − They are concerned that ABC stock may drop in price and

would consider investment strategies to protect their position.

• College fund certificates of deposit.• Moderate risk takers (7/10).


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Investment Information (2 of 2)• The Allens have asked you to determine the tax

that would be incurred if they choose to sell the stock at the current FMV.


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Income Tax Information• They are in the 15% federal income tax bracket. • They pay $1,320 annually in state and local income

taxes.• They are concerned about the tax ramifications of Marie

going back to work.– They are remodeling a bedroom as office space for Marie. – Marie has asked if there are any tax benefits associated with

maintaining an office in their home.• They are concerned about the tax consequences related

to Michael’s employer-provided life and health insurance.


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Retirement Information (1 of 2)• Michael wants to retire at age 62 with income equal to

80% of his preretirement income. • He expects to receive Social Security benefits of $24,000

(in today’s dollars) for himself and $12,000 for Marie (in today’s dollars) at full retirement age 67.

• The Allens are aware that Social Security retirement benefits are reduced if claimed before their full retirement age, but they have asked you to determine the approximate benefit if Michael retires at age 62.

• With Marie returning to work, she may earn a higher benefit on her own work record.


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Retirement Information (2 of 2)• The bank offers a Section 401(k) plan. − Michael is an active participant. − Matches contributions dollar for dollar up to 3% of salary. − Michael currently defers 3% of his salary.

• They want to know the amount of required capital, after considering Social Security, to support their retirement goal.

• Marie wants to know what type of retirement plan would allow her to maximize her contributions if her new job generates sufficient income.


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Education Information (1 of 4)• Max, 10 years old, is attending fifth grade at

Woodridge Academy, which he will attend through high school.

• Michael and Marie have $2,500 in CDs that they contribute to once a year ($500 each year) for Max. – Account will be used for college and is in Max’s name.


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Education Information (2 of 4)• Samantha (Sam), 7 years old, is in second grade

at Woodridge Academy and will attend the academy through high school.

• Michael and Marie have $1,000 in CDs to which they contribute once a year ($500 each year) for Sam. −Account will be used for college and is in Sam’s name.


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Education Information (3 of 4)• Michael and Marie invested in CDs for Max and

Sam's college educations; the CDs are owned by Michael and Marie. − 6% rate of return− Current balance is $15,000

• They want to send their children to school for five years. − To pursue a master’s or graduate degree

• The current cost of college (including room, board, tuition, and books) is $15,000 per year per child.


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Education Information (4 of 4)• They expect their children to start college at the age of 18. • They expect an educational CPI of 5%.• They want to know the best way to assist Alex and Abby with future

college costs from a tax perspective and available funding sources. • They want to know the annual savings required to provide college for

Max and Sam.• The Allens are open to ideas you may have regarding any investment

alternatives they should consider for the college savings currently invested in certificates of deposit.


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Gifts, Estates, Trusts, and Will Information• Michael’s will leaves everything to Marie conditioned

on a six-month survivorship clause, otherwise, equally in separate trusts for the four children.

• Marie does not have a will.• The Allens want to know the next step for them to

take to begin basic estate planning and what areas are critical to include in the plan at this time.


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Carol’s Estate (1 of 5)• Nonqualified variable annuity consisting of an

initial investment of $50,000 made in 1995. • Current value is $126,000.• Michael is the sole primary beneficiary. • If Michael chooses to take the entire $126,000 in

a lump-sum distribution to help refinance the mortgage, what would be the tax consequence?


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Carol’s Estate (2 of 5)• Universal life policy with a stated face amount of $100,000.• Policy had a cash surrender value of $18,000.• Carol had paid total premiums of $15,000. • Carol had elected death benefit option B at the time the policy

was issued. • Michael wants to know the amount he will receive from the

policy after taxes.


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Carol’s Estate (3 of 5)• Nonqualified fixed annuity in which she had invested a

total of $40,000.• Contract was purchased in 1997. • Current value of $93,000.• Michael is the sole beneficiary. • He decided to take the life income option. • Michael's life expectancy is 35 years.• He will receive $500 per month for the rest of his life. • He has asked how much of this monthly distribution is

taxable.


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Carol’s Estate (4 of 5)• Roth IRA with an account balance of $50,000.• Contributions of $30,000 had been made over

the past 10 years.• Michael would like to make this account part of

their retirement savings.• He has asked about his options regarding this

account and the respective income tax treatment of those options.


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Carol’s Estate (5 of 5)• Mutual fund valued at $30,000 at the time of Carol's death.• She invested $10,000 initially in the mutual fund.• Fund had generated $5,000 in dividends and capital gains

(all reinvested) over the 10 years she held the fund.• Michael is considering liquidating the fund once ownership is

established in his name and wants to know the tax consequences.

• He has also asked to be briefed on the general responsibilities as executor.


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Statement of Cash Flows (1 of 3) Michael and Marie AllenFor the Year 2017 (Expected)


INFLOWSSalary – MichaelSchedule C Income – Marie

$70,00050,000

Total Salary and Schedule C IncomeInvestment Income

$120,000

Interest (taxable) $900

Dividends 150

Total investment income $1,050TOTAL INFLOWS $121,050OUTFLOWSSavings

Reinvestment interest/dividends $1,050

Section 401(k) plan elective contribution 2,100

College fund CDs 1,000

Total savings $4,150

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Ordinary living expenses

Food $6,000

Clothing 3,600

Child care 600

Entertainment 1,814

Utilities 3,600

Auto maintenance 2,000

Church contributions 3,500

Total ordinary living expenses $21,114

Other payments

Credit card payments1 960

Mortgage payments2 21,954

Boat loan3 3,040

Total payments $25,954

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Insurance premiumsAutomobile $900

Disability 761

Homeowners 950

Total insurance premiums $2,611

Tuition and education expenses $1,000Taxes

Federal FICA and withholding $22,855

State and city income tax 1,320

Property tax (principal residence) 1,000

Total Taxes $25,175TOTAL OUTFLOWS $80,004NET CASH FLOW (SURPLUS) $41,0461Credit card payments: Principal $345; Interest $6152Mortgage payments: Principal $1,234; Interest $20,7203Boat loan payments: Principal $1,493; Interest $1,547

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Statement of Financial Position (1 of 4) Michael and Marie AllenJanuary 1, 2017


ASSETS1

Liquid assetsJT Checking account $1,500

JT Savings account 1,000

Total liquid assets $2,500

InvestmentsS2 ABC stock (100 shares)2 $13,000

JT Certificates of deposit (college fund) 15,000

S1 Section 401(k) vested plan balance 43,000

Total investments $71,000

JT Personal real estate – residence3 $250,000

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Other personal assetsJT Automobiles $15,000

JT Boat 20,000

JT Jewelry 13,500

JT Furniture/household 60,000

Total other personal assets $108,500

TOTAL ASSETS $432,000

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LIABILITIES4 AND NET WORTHCurrent liabilities

JT Credit cards $4,000Long-term liabilities

JT Mortgage on residence6 197,888

JT Boat loan 13,559

Total long-term liabilities $211,447

TOTAL LIABILITIES $215,447ALLEN FAMILY NET WORTH $216,553TOTAL LIABILITIES AND NET WORTH $432,000



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S1 – Michael Allen; S2 – Marie Allen; JT – jointly owned by Michael and Marie AllenOther notes to Statement on Financial Position: 1 Assets are stated at fair market value.2 The ABC stock was inherited from Marie’s grandmother on November 15, 2016. Her

grandmother originally paid $20,000 for it on October 31, 2016. The fair market value at her grandmother’s death was $12,000.

3 The replacement value of the Allen’s home is $225,000.4 Liabilities are stated at principal only.5 Note that some statements of financial position may show the current year’s mortgage

liability as a current liability. However, the total liability may also be listed as a long-term liability, as done in this case.



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Question 1Which of the following statements accurately describes the Allens' current risk management plan?

1. They have inadequate life insurance.2. If Michael becomes disabled, he will be taxed on his

monthly benefit.3. The Allens' home would not be covered for a volcanic

eruption.4. The Allens' home would be covered for lightning damage.

A. 1 and 2 B. 1 and 4 C. 1, 2, and 3 D. 1, 2, and 4


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Solution 1



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Question 2Assume Michael became disabled on August 1, 2017. How much disability income benefit would he be entitled to from his policy in 2017? A. $2,700 B. $10,800 C. $13,500 D. $21,600


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Solution 2



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Question 3Michael’s son Max had an unexpected injury resulting in a $2,500 hospital bill. How much of this bill will Michael’s medical plan cover?A. $660 B. $1,600 C. $2,300 D. $2,500


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Solution 3



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Question 4The Allens' home was recently damaged by fire causing $48,000 in required repairs. Michael mentioned to you at your last meeting that their current homeowners insurance policy insured the home for $150,000. How much will the insurance company reimburse the Allens for these damages?

A. $48,000 B. $38,998 C. $47,750 D. $45,000


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Solution 4



5050

Question 5Michael hits a deer on his way home from work resulting in $4,000 of damages to his car. How much of these damages will the Allens' automobile policy cover?

A. $4,000 B. $3,750 C. $3,500D. $0


5151

Solution 5



11-18

5252

Question 6During 2016, Michael’s mother Carol passed away. At that time, they discovered that she had a nonqualified variable annuity consisting of an initial investment of $50,000 made in 1995. The current value of the annuity is $126,000, and Michael is the sole primary beneficiary. If Michael chooses to take the entire $126,000 in a lump-sum distribution to help refinance the mortgage, what would be the tax consequence?

A. $76,000 ordinary income plus a 10% penalty B. $76,000 long-term capital gain C. $126,000 ordinary income D. $76,000 ordinary income


5353

Solution 6



5454

Question 7 (1 of 2)Carol had a universal life insurance policy with a death benefit of $100,000. The policy had a cash value of $18,000. They noticed that she had marked death benefit option B and made Michael the sole beneficiary. Michael has decided he wants to take the cash option and invest his inheritance in a lakefront property that he feels will grow in value over the next several years. How much money is Michael going to receive from the insurance company, and what are the tax consequences of this transaction?


11-19

5555

Question 7 (2 of 2)A. Michael will receive $100,000 and have to pay

ordinary income tax on the entire distribution. B. Michael will receive $100,000 and have zero tax

consequences on the transaction. C. Michael will receive $118,000 and pay ordinary

income taxes on the entire distribution. D. Michael will receive $118,000 and have zero tax

consequences on the transaction.


5656

Solution 7



5757

Question 8Carol had a nonqualified fixed annuity in which she had invested a total of $40,000. This contract was purchased in 1997 and has a current value of $93,000. Michael is the sole beneficiary. He decided to take the life income option on this portion of his inheritance to help out with the entertainment section of the budget. Michael’s life expectancy is 35 years, and he is to receive $500 per month for the rest of his life. How much of this monthly distribution is taxable?

A. $0 B. $500 C. $95.25 D. $404.75


11-20

5858

Solution 8



5959

Question 9Bob Smith comes over to visit the Allens. As he is walking up the steps to enter the house, the staircase collapses and results in his leg being broken. What part of the Allens' homeowners insurance policy would cover Mr. Smith’s broken leg? I. Coverage E: Personal Liability II. Coverage F: Medical Payments to Others

A. I only B. II onlyC. Both I and II D. Neither I nor II


6060

Solution 9



11-21

6161

Question 10Could the Allens set up a health savings account for the family?

A. The Allens are not eligible to establish a health savings account because they are not covered by a high deductible health plan.

B. Yes, the Allens are eligible to set up a health savings account because they have children.

C. No, the Allens cannot set up a health savings account because only an employer can set one up.

D. Yes, the Allens are eligible because the family is covered by a low deductible health plan.


6262

Solution 10




11-22




11-23




2017 102 unit 10 no solns - static.kaplanlearn.com · 10-4 1010 collateral assignment method •...

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