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Kevin and Sonya Shim are conducting an insurance review with their financial planner.

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Case 4 The Shim Case


Kevin and Sonya Shim are conducting an insurance review with their financial planner. Kevin and Sonya consider themselves middle-Americans—with a small but positive cash flow and a modest net worth. Kevin (age 63) is just a few years away from retirement, whereas Sonya (age 61) plans to work a few more years once Kevin officially retires. The following discussion provides a summary of the Shims’ insurance planning situation. Life Insurance Kevin owns a $250,000 universal life insurance policy. Sonya is the insured and their son Wilbur (age 37) is the beneficiary. The policy has a cash value of $23,450 and a living benefits provision; all account earnings are used to offset premium expenses. Sonya owns a 20-year $100,000 level-term life policy that she purchased five years ago. She pays approximately $450 per year in premium costs. Property and Casualty Insurance Kevin and Sonya own a home as JTWROS that has a market and replacement value of $245,000. The house is insured with a Standard HO-3 policy for $210,700. The policy requires that the Shims pay a $500 deductible per claim occurrence. Other provisions include the following:

10% coverage on detached structures
Coverage up to $250 for cash
Coverage up to $1,500 for collectibles, artwork, and similar assets
Personal property contents coverage equal to 20% of the insured dwelling
Living expense coverage for six months
Coverage up to $100,000 for personal liability
A replacement cost coverage endorsement is in place.

The Shims’ two cars are insured under a personal automobile policy with split-limit coverage of $250,000/$500,000/$50,000. They also have a $1-million-dollar excess liability policy. Health Insurance The Shims are covered under Sonya’s group health insurance plan. The traditional plan has a lifetime maximum benefit equal to $1 million for the family, a $500-per-person deductible, and an 80% coinsurance clause, with a family stop-loss limit of $2,500.

Use the preceding case information to answer the questions that follow. Case Questions

1. In preparation for retirement, Kevin is exploring his Social Security and Medicare insurance coverage. Which of the following is a benefit provided by Medicare?

a. Hospice benefits for terminally ill persons.
b. A stop-loss limit for annual medical expenses in excess of $2,500.
c. Coverage for custodial care.
d. Coverage for nonprescription drugs.

2. Kevin is considering purchasing a 12-year-old pickup truck for use when he goes hunting. The truck that he has his eye on has 90,000 miles but is in generally good condition. Which of the following insurance coverage(s) should Kevin probably exclude when purchasing an insurance policy for this truck?

I. Part A—liability coverage.
II. Part B—medical payments coverage.
III. Part C—uninsured motorist coverage.
IV. Part D—damage to insured’s auto coverage.
a. IV only
b. II and IV only
c. I, II, and III
d. I, III, and IV
e. II, III, and IV

3. If Sonya were to die today, which of the following is true in relation to the $250,000 universal life insurance policy owned by Kevin?

a. Kevin will continue to own the policy for the benefit of Wilbur.
b. Kevin will make a taxable gift of life insurance proceeds to Wilbur.
c. Kevin will receive an amount equal to the cash value, and Wilbur will receive the remainder of the life insurance value as a tax-free gift.
d. Kevin will receive the proceeds of the policy.
e. Kevin must include the $250,000 face value of the policy as an asset when he calculates Sonya’s taxable estate.

4. What will be the result if Sonya decides to cancel her term life insurance policy?

a. She will incur a $2,250 tax liability based on the level of premium paid over the past five years.
b. She will receive $450 in premium paid for last year’s coverage as a refund from the insurance company, and this amount will be fully taxable at the Federal level.
c. She will not have a tax liability associated with the cancellation.
d. She would incur a tax liability on the face amount received if she were to die after canceling the policy but before receiving refunded premiums.

5. If the Shims sustain an $80,000 loss to their dwelling from a fire, how much will the insurance company pay (after the deductible) toward the dwelling loss claim?

a. $64,000
b. $68,000
c. $79,500
d. $80,000

6. If a shed valued at $13,000 in the backyard is also destroyed in the fire, what is the maximum amount that the insurance company will pay, prior to the deductible, to replace the shed and any other detached dwellings?

a. $225,000
b. $25,000
c. $21,070
d. $13,000
e. $1,300 7. Sonya believes that her husband is a reckless driver, and she worries about what will happen if he is ever in a serious car accident. If Kevin is involved in a car accident and causes physical harm to another motorist in the amount of $300,000, how much will be paid from the personal automobile policy (PAP) and how much from the excess liability policy?

a. $300,000 PAP and $0 excess liability.
b. $0 PAP and $300,000 excess liability.
c. $150,000 PAP and $150,000 excess liability.
d. $50,000 PAP and $250,000 excess liability.
e. $250,000 PAP and $50,000 excess liability.

8. How much will the Shims’ health insurance company pay if Sonya files a claim for a broken foot that cost $2,000 for emergency room treatment, $700 for bone setting, and $300 in rehabilitation services?

a. $0
b. $500
c. $2,000
d. $2,500
e. $3,000

9. The Shims are curious about the alternatives available when planning for possible nursing home care costs in the future. Which of the following long-term care insurance strategies listed below is an appropriate financial planning alternative for the Shims?

I. Use the living benefits provision within an accelerated death benefit rider available in the universal life insurance policy.
II. Purchase a life insurance policy that has a long-term care insurance endorsement.
III. Systematically save for future health care costs and use Medicare as the primary insurance coverage for long-term care expenses.
IV. Use Medicaid coverage for long-term care expenses after age 65.

a. II only
b. I and II only
c. II and III only
d. III and IV only
e. I, II, and III only

10. Currently, neither Kevin nor Sonya has disability insurance coverage. Kevin and Sonya would like more information about disability insurance. Which of the following statements is (are) true in relation to disability insurance?

I. Shorter elimination periods result in lower premium costs.
II. Benefits paid from employer-provided group disability plans are received income tax free.
III. If a guaranteed renewable contract is used, the insurance company cannot increase premiums on individual policies but can raise premiums for all individuals covered by the policy.
IV. Disability policies are nearly always designed to provide lifetime benefits.

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[Solved] Kevin and Sonya Shim are conducting an insurance review with their financial planner.

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