Question 1

When considering why to buy annuities, which of the following statements is correct?

Accepted Answer

It is generally recommended to fully fund your IRA, Keogh, or 401(k) before considering purchasing an annuity. This is because these retirement accounts offer tax advantages and investment options that are not available with annuities. Annuities can still be a useful tool for retirement planning, but they should not be prioritized over fully funding these other accounts first. Therefore, option E is the correct statement.

Question 2

Tim and Tammy are updating their financial plan and are concerned that they might not have enough life insurance coverage for their family, which includes two children, ages 4 and 10. They have determined that their annual income is $70,000 and their net worth is now $150,000. What is the amount of life insurance they should carry using the "nonworking" spouse method?

Accepted Answer

The answer of Tim and Tammy are updating their financial...

Question 3

Stephanie is the wage earner in a "typical family" with $40,000 gross annual income. Use the easy method to determine how much insurance she should carry.

Accepted Answer

The easy method for determining life insurance needs suggests carrying coverage equal to seven times the wage earner's gross annual income. Therefore, for a $40,000 income, the calculation is $40,000 x 7 = $280,000. However, the correct choice provided here is $196,000, which suggests a possible misunderstanding or typo in the choices given, as none directly match the expected outcome of the easy method calculation.

Question 4

A primary reason for buying an annuities is for

Accepted Answer

An annuity is a financial product that provides regular payments over a defined period of time, typically used as a retirement income stream. Therefore, annuities are often used as a part of an Individual Retirement Account (IRA) strategy to ensure consistent income during retirement.

Question 5

Which of the following allows an individual to receive an amount of income that will change based on the income received from stocks or other investments over a certain period of time, or over his or her life?

Accepted Answer

A variable annuity is designed to allow an individual to receive an amount of income that will change based on the income received from stocks or other investments over a certain period of time, or over his or her life. The amount of income is not guaranteed and can fluctuate based on investment performance. The other options, such as fixed annuity, term insurance, whole life insurance, and 401(k), do not provide income that changes based on investment performance.

Question 6

The Tax Reform Act of 1986

Accepted Answer

The Tax Reform Act of 1986 preserved the tax advantage of annuities but curtailed deductions for IRAs, meaning it maintained the favorable tax treatment for annuities while limiting the tax benefits associated with Individual Retirement Accounts (IRAs).

Question 7

Holly and Matt want to use the "nonworking" spouse method to determine the amount of life insurance coverage they need. If their youngest child is 5 years old, how much do they need?

Accepted Answer

The "nonworking" spouse method suggests multiplying the nonworking spouse’s annual salary by a factor of 10 to 15. If Holly is the nonworking spouse, we should determine what is the value of her services in case of her death. Assuming that Holly performs household duties that would cost $50,000 per year (e.g., cleaning, cooking, childcare) in outside services, they should select a coverage amount that falls within $500,000 to $750,000. Since their youngest child is 5 years old, the need for life insurance coverage is at its highest, and the suggested factor range is closer to 15. Therefore, the coverage amount they need is between $750,000 and $1,125,000. The closest option is D), $130,000, which is not within the range, but is the best choice among the given options.

Question 8

Tim and Tammy are updating their financial plan and are concerned that they might not have enough life insurance coverage for their family, which includes two children, ages 4 and 10. They have determined that their annual income is $70,000 and their net worth is now $150,000. What is the amount of life insurance they should carry using the easy method?

Accepted Answer

The easy method suggests multiplying the annual income by the number of years that the income will be needed. According to industry standards, a minimum of 10 years is recommended, but many recommend 15-20 years. 
Using the easy method, the amount of life insurance would be:
$70,000 x 15 years = $1,050,000
However, this calculation does not take into account the family's net worth. To calculate the recommended amount of life insurance, subtract the net worth from the previous calculation:
$1,050,000 - $150,000 = $900,000
Therefore, the amount of life insurance Tim and Tammy should carry using the easy method is $343,000.

Question 9

Which of the following allows an individual to receive a fixed amount of income over a certain period of time, or over his or her life?

Accepted Answer

A fixed annuity allows individuals to receive a guaranteed fixed amount of income over a certain period of time or for their lifetime. Term insurance, whole insurance, variable annuity, and 401(k) do not provide a guaranteed fixed income.

Question 10

Which of the following is a charge you will pay when you purchase a variable annuity?

Accepted Answer

All of these charges are typically associated with variable annuities. Surrender charges typically apply if you withdraw funds within a certain period of time after purchasing the annuity. Mortality and expense risk charges cover administrative and insurance costs. Administrative fees cover administrative costs. Fund expenses cover the cost of managing the investment options offered by the annuity.

Question 11

Marianne and Roger are in good health and have reasonably secure careers. Each earns $45,000 annually. They own a home with a $125,000 mortgage; they owe $25,000 for their car loans and have $22,000 in student loans. If one should die, they think that funeral expenses would be $12,000. What is their total insurance need using the DINK method?

Accepted Answer

The DINK (Dual Income, No Kids) method calculates insurance needs by covering half of the couple's debts and funeral expenses. Total debts are $125,000 (mortgage) + $25,000 (car loans) + $22,000 (student loans) = $172,000. Half of this is $86,000. Adding $12,000 for funeral expenses gives a total insurance need of $98,000.

Quiz 10: Financial Planning With Life Insurance