2 - Life Insurance Policies - Provisions, Options and Riders Chapter Exam 1

All of the following statements about term insurance are correct EXCEPT? A) builds cash value during the specified period. B) it pays a benefit only if the insured dies during the a specified period. C) level, decreasing, and increasing are basic forms of term insurance. D) it provides protection for a temporary period of time.

A) builds cash value during the specified period. Term policies do not build cash value. Only whole life and variable life policies provide cash values.

In contrast to traditional whole life insurance policies, which statement regarding variable life insurance products is correct? A) Cash values are not guaranteed. B) Investments match the insurer's contractual guarantees and liabilities. C) Premiums are invested in an insurer's general account. D) The insurer assumes the investment risk.

A) Cash values are not guaranteed. Variable life insurance cash values are invested in riskier, but potentially higher-yielding assets. This makes variable life insurance cash values non-guaranteed.

Credit life insurance would provide coverage for a loss caused by? A) disability. B) death. C) voluntary unemployment. D) abnormal pregnancy.

B) death. Credit life insurance is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid. The beneficiary of such a policy is usually the lender.

All of the following statements regarding basic forms of whole life insurance are correct EXCEPT? A) the owner of a 30-pay life policy will owe no more premiums after the 30th year the policy is in force. B) a single-premium life policy is purchased with a large one-time only premium. C) limited payment life provides protection only for the years during which premiums are paid. D) generally, straight life premiums are payable, at least annually, for the duration of the insured's life.

C) limited payment life provides protection only for the years during which premiums are paid. This is an incorrect statement. Whole life policies provide coverage for life.

Bryce purchased a $100,000 Joint Life policy that covered his life as well as his wife's. He died 3 years later in an airplane accident. How much of a death benefit will his wife receive? A) $200,000. B) Nothing. C) $50,000. D) $100,000.

D) $100,000. In joint life policies, the death benefit is paid upon the first death only.

In a universal life policy, all of the following are tax-free EXCEPT? A) Cash withdrawal. B) Policy loan. C) Death benefit of the insured. D) Cash surrendered.

D) Cash surrendered. When a universal life policy's cash value is surrendered, or "cashed-in", the gains are subject to taxes.

The insured purchases a policy in the face amount of $10,000. The agent tells the insured that the insured will have to pay the premium for 20 years and will then receive the entire $10,000. Which plan has the insured purchased? A) 20-year endowment. B) 20-pay variable annuity. C) 20-pay whole life plan. D) 20-pay life plan.

A) 20-year endowment. This plan describes the characteristics of an endowment policy.

Insurers generally offer all of the following forms of term insurance EXCEPT? A) Modified graded term. B) Increasing term. C) Level term. D) Decreasing term.

A) Modified graded term. Insurers normally offer either level, decreasing, or increasing term insurance. They also normally offer modified graded WHOLE life, not modified graded term.

Which type of life coverage does NOT provide both living and death benefits? A) Term. B) Universal Life. C) Variable Life. D) Endowment.

A) Term. Term policies do not gain cash value, therefore they cannot provide a living benefit.

Carl purchases a $100,000 5-year level term policy. All of the following statements about Carl's coverage are correct EXCEPT? A) the policy provides a straight, level $100,000 of coverage for 5 years. B) if the insured dies beyond the specified 5 years, only the policy's cash value will be paid. C) if the insured dies at any time during the 5 years, his beneficiary will receive the policy's face value. D) if the insured lives beyond the 5 years, the policy expires and no benefits are payable.

B) if the insured dies beyond the specified 5 years, only the policy's cash value will be paid. It will not have any cash value because term policies do not build cash value.

Due to its design and flexibility, which of these are more expensive than conventional term or whole life policies? A) Modified whole life. B) Universal life. C) Adjustable life. D) Variable universal life.

C) Adjustable life. Adjustable life policies are distinguished by their flexibility that comes from combining term and permanent insurance into a single plan. Due to its design and flexibility, adjustable life is usually more expensive than conventional term or whole life policies.

Which of the following statements describing whole life insurance is CORRECT? A) Whole life insurance is designed to mature at age 100. B) The policy's cash value decreases each year the policy is in force. C) The shorter the premium period, the slower the cash value will grow. D) The face amount of the policy gradually increases the longer the policy remains in force.

A) Whole life insurance is designed to mature at age 100.

The principal advantage of term policies being converted to permanent life insurance is that? A) no evidence of insurability is required. B) the premium remains the same. C) the amount may be increased. D) the premium is tax deductible.

A) no evidence of insurability is required. No evidence of insurability is required when converting a term policy to a permanent (whole) life policy.

When level premium insurance is renewed, the premium amount rises to reflect the increased mortality risk of the insured's older age. What phrase best describes this approach to increasing premiums? A) Seniority rate. B) Variable rate. C) Targeted rate. D) Step-rate.

D) Step-rate. Premiums for renewable term coverage are often called 'step-rate' premiums because at each subsequent renewal the premium is likely to be higher.

How is a family plan life insurance policy normally structured? A) Whole life insurance on the husband or wife. Term insurance on the spouse. Term insurance on all of the children. B) Whole life insurance on the husband or wife. Term insurance on the spouse. Whole life insurance on all of the children. C) Term insurance on the husband or wife. Whole life insurance on the spouse. Term insurance on all of the children. D) Term insurance on the husband or wife. Term insurance on the spouse. Whole life insurance on all of the children.

A) Whole life insurance on the husband or wife. Term insurance on the spouse. Term insurance on all of the children. Family plan insurance provides whole life insurance on the husband or wife, term insurance on the spouse, and term insurance on the children. The spouse and children normally appear as term riders on the policy.

What type of term insurance has a benefit amount that can be tied in to a cost of living index? A) Decreasing term. B) Adjustable term. C) Increasing term. D) Level term.

C) Increasing term. Increasing term provides a death benefit that increases at periodic intervals over the policy's term. The amount of increase is usually stated as specific amounts or as a percentage of the original amount. It may be tied to a cost-of-living index, such as the Consumer Price Index.

Mrs. Williamson purchases a 5-year $50,000 level term policy with an option to renew. At the end of the 5-year term, she renews the policy. Which of the following statements is CORRECT? A) The premium for the renewal period will be the same as the initial period. B) The premium for the renewal period will be the same as the initial period, but a one-time policy fee will be imposed. C) The premium for the renewal period will be higher than the initial period. D) The premium for the renewal period will be lower than the initial period.

C) The premium for the renewal period will be higher than the initial period. The new premium will be higher, because the new premium will be based on the applicants attained age at the time of the renewal.

A universal life policyowner may do all of the following EXCEPT? A) make partial withdrawals from the cash value account. B) change the frequency of premium payment. C) increase the amount at stated intervals without evidence of insurability. D) increase premium payments within limits of the insurance company and statutory law.

C) increase the amount at stated intervals without evidence of insurability. The policy owner can increase at stated intervals but does have to provide evidence of insurability.

All of the following statements regarding term life insurance are correct EXCEPT? A) both the option to renew and the option to convert relieve the insured from furnishing evidence of insurability. B) a 3-year renewable policy allows a term policyowner to renew the same coverage for another 3 years. C) an option to convert provides that a term life insurance policy can be exchanged for a permanent one. D) a 3-year renewable policy allows a term policyowner to increase coverage for the next 3 years.

D) a 3-year renewable policy allows a term policyowner to increase coverage for the next 3 years. A 3-year renewable policy would actually allow the policyowner to renew the SAME coverage amount for another 3 years.

Which is true concerning a variable life insurance policy? A) Benefits vary and are linked to the Dow-Jones stock averages. B) It provides a guaranteed minimum death benefit. C) It has a guaranteed minimum cash value. D) Premiums and benefits are both variable.

B) It provides a guaranteed minimum death benefit. Variable life insurance is permanent life insurance with many of the same characteristics of traditional whole life insurance. With variable life insurance policies, the policy values are invested in the insurer's separate accounts which house common stock, bond, money market, and other securities investment options.

Which of the following statements regarding modified endowment contracts (MECs) is CORRECT? A) a 1988 revenue act, commonly known as TAMRA, greatly increased the popularity of MECs. B) to avoid being classified as an MEC, a life insurance policy must satisfy the "7-pay test." C) congress has granted the MEC the most favorable tax status among all life insurance policies. D) according to the "7-pay test," if the total amount a policyowner pays into a life contract during its first 7 years is less than the sum of the net level premiums that would have been payable to provide paid-up future benefits in 7 years, the policy is an MEC.

B) to avoid being classified as an MEC, a life insurance policy must satisfy the "7-pay test." The "7-pay test" basically limits the amount that you can pay into your policy within the first seven years.

What feature best describes universal life insurance? A) Guaranteed. B) Fixed. C) Flexible. D) Permanent.

C) Flexible. Universal life allows it's policyowners to determine the amount and frequency of premium payments and adjust the face amount up and down. This allows universal life policies to be "flexible" as opposed to whole life policies that have fixed premiums and fixed face amounts.

When does the cash value in a limited pay life policy increase more rapidly? A) With a later endowment date. B) As the premium payment period shortens. C) As the premium payment period lengthens. D) With the insured's attained age.

B) As the premium payment period shortens. The cash value in a limited pay life policy increases as the premium payment period shortens

Why was variable life insurance created? A) To help offset the effects of inflation on death benefits. B) To allow the owner to pay a varying amount as the premium. C) To allow for less expensive premiums. D) To eliminate the need for whole life insurance.

A) To help offset the effects of inflation on death benefits. With variable life insurance, each year that the actual return exceeds the assumed rate of return, there is a positive net investment return and the death benefit is increased. Like traditional whole life insurance, variable life insurance requires the payment of set premiums on a scheduled basis.

All of the following statements about variable insurance policies are correct EXCEPT? A) state laws protect consumers and promote meaningful communication. B) sales presentations must be preceded or accompanied by a prospectus. C) full and fair disclosure must be provided to prospective policyowners. D) materials used in selling variable policies must be approved by the State Office of Insurance Regulation.

D) materials used in selling variable policies must be approved by the State Office of Insurance Regulation. This is inaccurate. The transfer of investment risk in variable insurance products is shifted from the insurer to the policyowners. They are considered securities contracts as well as insurance contracts. Therefore, they fall under the regulatory arm of both State Offices of Insurance Regulation as well as the Securities and Exchange Commission (SEC).

Which of the following is a characteristic of universal life insurance? A) Premiums are fixed for the life of the policy. B) Flexible premium and adjustable death benefit. C) Death benefit may not be adjusted. D) Maturity date cannot be changed by the policyowner.

B) Flexible premium and adjustable death benefit. Universal life is a variation of whole life insurance, characterized by considerable flexibility. Unlike whole life, with its fixed premiums, fixed face amounts, and fixed cash value accumulations, universal life allows its policyowners to determine the amount and frequency of premium payments and to adjust the policy face amount up or down to reflect changes in needs.

Which of the following types of insurance attempts to make premiums more manageable by offering lower premiums during the first few years following issue? A) Variable premium whole life. B) Modified whole life. C) Minimum deposit whole life. D) Indexed whole life.

B) Modified whole life. The purpose of this kind of coverage is to make the initial purchase of whole life more affordable and more attractive.

Which of the following terms best describes a life insurance policy that provides a straight $100,000 of coverage for a period of five years? A) Permanent level. B) Variable term. C) Level term. D) Whole term.

C) Level term. Level term insurance provides a level amount of coverage for a specified period of time.

The cash values of life insurance policies belong to which of the following? A) Beneficiary. B) Insurer. C) Insured. D) Policyowner.

D) Policyowner. The policyowner owns and controls the cash value in an insurance policy.

Which form of life insurance would be purchased for a specific period and then expire without value? A) Universal life. B) Temporary whole life. C) Variable life. D) Term life.

D) Term life. Term insurance provides insurance protection for a specified period (or term) and pays a benefit only if the insured dies during that period. There are no cash values in term policies.

A policy in which the ages of the insureds are "averaged" and a single premium is charged is known as? A) credit life. B) family plans. C) multiple protection. D) joint life.

D) joint life. The premium for a joint life policy is less than the premium for separate, multiple policies. The ages of the insureds are "averaged" and a single premium is charged for each life.

Bo's bank approves him for a 100K loan to start a new business. What type of insurance will his bank require him to have? A) Universal life insurance B) Credit life insurance C) Adjustable life insurance D) Franchise life insurance

B) Credit life insurance Credit life insurance is designed to cover the debt of an individual or group. It will pay the amount due on a loan if the debtor dies before the loan is repaid.

An universal life insurance policy has all the following EXCEPT? A) Contributions (premiums) may be increased or decreased by the policy payor. B) The face amount may be increased (subject to evidence of insurability), or decreased (subject to the IRS corridor). C) Without its adjustable features it resembles an endowment policy. D) It is considered a form of permanent life insurance.

C) Without its adjustable features it resembles an endowment policy. This is an incorrect statement. Universal life is a variation of whole life insurance characterized by considerable flexibility. Unlike whole life, with its fixed premiums, fixed face amounts, and fixed cash value accumulations, universal life allows its policyowners to determine the amount and frequency of premium payments and to adjust the policy face amount up or down to reflect changes in needs.

When a child under a family plan policy reaches a certain age, usually 18 or 21, they have the following option? A) convert their term policy to a whole life policy without evidence of insurability. B) take the dividends. C) convert their term policy to an annuity. D) surrender it for the cash value.

A) convert their term policy to a whole life policy without evidence of insurability. Once a child reaches a certain age, usually 18 or 21, they can convert their policy to a whole life policy without evidence of insurability.

Adjustable life policies combine the following into a single plan? A) term and permanent insurance. B) term insurance and annuity. C) permanent and annuity. D) increasing and decreasing term.

A) term and permanent insurance. Adjustable life policies combine term insurance and permanent insurance into a single plan. This makes them flexible in both premium cost and face amount.

What type of life insurance is known for small face values with premiums collected weekly or monthly by an agent at the policyowners home? A) Group life insurance. B) Industrial life insurance. C) Ordinary life insurance. D) Whole life insurance.

B) Industrial life insurance. Industrial life insurance is known for small issue amounts, usually $1,000 to $2,000, and premiums are collected by agents at the policyowners home. It is usually marketed and sold as burial insurance. Note: Industrial life policies with a single insurance company that total $3,000 or more in face value can be converted into an ordinary life insurance policy without evidence of insurability.

Which of the following policies would best suit a prospective insured who desires permanent insurance but does not want to pay premiums indefinitely? A) Graded premium whole life policy. B) Limited pay life policy. C) Modified whole life policy. D) Indeterminate premium whole life insurance.

B) Limited pay life policy. A limited pay life policy is designed for the insured who desires permanent insurance but does not want to pay premiums indefinitely- such as a 20-pay life policy or a life paid-up at 65.

Which of the following characteristics does NOT apply to a Variable Life policy? A) A minimum death benefit is guaranteed. B) Nonforfeiture amounts are guaranteed. C) Cash values fluctuate and are not guaranteed. D) Death benefits fluctuate over the minimum.

B) Nonforfeiture amounts are guaranteed. This is incorrect. Variable insurance products do not guarantee contract cash values, and it is the policyowner who assumes the investment risk. Variable life insurance contracts do not make any promises as to either interest rates or minimum cash values (nonforfeiture amount).

For cash value accumulations to receive favorable tax treatment, a specific percentage of universal life policy premiums must be used to purchase? A) one-year term insurance. B) death benefits. C) payor benefits. D) paid up additions.

B) death benefits. For cash value accumulations to receive favorable tax treatment, a specific percentage of universal life policy premiums must be used to purchase death benefits.

Increasing term insurance death benefits increase by? A) random amounts or a percentage of the face amount. B) specific amounts or a percentage of the original face amount. C) random amounts or a percentage of cash value. D) specific amounts or a percentage of the premium.

B) specific amounts or a percentage of the original face amount. Increasing term death benefits increase at specific amounts or a percentage of the original face amount.

What type of policy would be best used when the need for protection declines from year to year? A) Level term. B) Universal life. C) Decreasing term. D) Whole life.

C) Decreasing term. Decreasing term policies are characterized by benefit amounts that decrease gradually over the term of protection. A common example would be decreasing term mortgage insurance. The benefit amount decreases as the amount of the mortgage decreases from year to year.

What are the licensing requirements for someone who sells variable universal life insurance? A) Life and Health license. B) Life and Variable license. C) Life and securities. D) Variable and Securities license.

C) Life and securities. An individual must be licensed to sell both life insurance products and securites in order to sell variable universal life.