Chapter 2: Life Basics
A typical life insurance application contains how many parts? A: 2 B: 1 C: 4 D: 3
A. 2 A typical life insurance application contains two parts, part 1 is general information and part 2 is medical information.
By properly naming the ________, life insurance proceeds will bypass the probate process. A: Beneficiary B: Applicant C: Insured D: Policyowner
A. Beneficiary Death benefits are paid outside of the probate process so long as the beneficiary is designated properly.
Which of the following personal uses of life insurance is specifically designed to provide benefits to the policyowner while the insured is still alive? A: Cash accumulation B: Estate conservation C: Estate creation D: Charitable bequests
A. Cash accumulation Cash accumulation is the only choice given that will provide benefits while the insured is still alive. All of the other choices are available once the insured has died.
All of the following are underwriting criteria taken into account by the insurer in the underwriting of individual life insurance cases, except: A: Education level completed B: Physical condition C: Medical history D: Gender
A. Education level completed Underwriting for educational level completed would be discriminatory.
All of the following are characteristics of Term Insurance, except: A: High premium outlay in the early years B: No cash or loan value C: Will expire at an attained age or after a specified period of time D: Can be written separately or with other types of insurance as a rider
A. High premium outlay in the early years Term Insurance is characterized by a low initial premium outlay when the insured is young and increases as the insured's age advances.
Which of the following would be considered a good result from an underwriter's action when an individual Life Insurance Policy is issued as applied for? A: Issued standard B: Issued rated-up C: Issued with exclusions or limitations D: Application is rejected
A. Issued standard To be issued standard is the most favorable action listed, as the coverage requested is issued at the rate that was quoted.
Mortality cost ______ interest (investment earnings) = equals the pure rate. A: Minus B: Divided by C: Multiplied by D: Plus
A. Minus Mortality cost minus interest (investment return) = net premium (pure rate).
If it is known or should be known by the agent that an existing policy is going to be lapsed, forfeited, surrendered or terminated in favor of a new policy, the agent must submit a: A: Notice of Replacement B: Cancellation of Service C: Statement of Release D: Notice of Conservation
A. Notice of Replacement Replacement rules require a Notice of Replacement.
Which of the following types of life insurance provides the largest portion of all coverage in force? A: Ordinary B: Variable C: Group D: Industrial
A. Ordinary Ordinary life insurance represents the largest portion of all life insurance in force in the United States.
Martin is age 30 when he applies for life insurance. The underwriter classifies him the same as a person age 40 and his policy is issued with a premium for a person age 40. What substandard rating has been applied to Martin's policy? A: Rated-up Age B: Flat C: Graded D: Tabular
A. Rated-up Age As the name implies, Rated-up Age is a substandard rating assigned to the insured whose insurable characteristics appear to be the same as those for someone much older, resulting in a higher premium than anticipated.
What should the producer do, if the insured is in the hospital with a heart condition pending surgery on the day the newly issued policy was to be delivered and initial premium collected? A: Return the policy to the insurer with a letter of explanation B: Collect additional premium at the time of delivery to reflect the higher risk the insurer now faces C: Deliver the policy to an immediate family member and collect any outstanding premium D: Hold onto the policy until the insured is discharged from the hospital and then deliver the policy
A. Return the policy to the insurer with a letter of explanation Producers must return the policy to the insurer if they know that the insured's health status has materially changed since the time of application.
When an applicant completes the insurance application in its entirety and provides the producer with a premium check, what in effect has taken place? A: The applicant is making an offer to the insurer B: The producer is making an offer of insurance to the applicant C: The applicant is accepting the producer's offer of coverage D: The applicant has given the producer the authority to negotiate the terms of the contract with the insurer
A. The applicant is making an offer to the insurer When an application accompanies the initial premium, the applicant is making an offer to the insurer. Before acceptance can take place, an offer must first be made. The insurer accepts the offer when the policy is issued.
Which of the following is used by an insurer to collect information from the applicant/insured for underwriting purposes? A: An amendment B: An application C: A rider D: A receipt
B. An application A producer collects field underwriting information from the applicant/insured on an insurance application.
If a medical exam is required as part of the underwriting process, who normally conducts the exam? A: The producer B: A physician or nurse C: A chiropractor D: The producer's manager in the agency's office
B. A physician or nurse Physicians, nurses, or paramedics are the ones who conduct medical exams which may include blood tests, urine tests, EKGs, and medical histories among other things.
To purchase the greatest amount of coverage, for the least amount of initial premium, a client would purchase which of the following? A: A variable life policy B: A term policy C: A participating policy D: An ordinary life policy
B. A term policy A person at any given age, for a specified dollar amount of premium, can always own more term insurance than any other class of life insurance, because all they are purchasing is a death benefit (protection) for a temporary period of time.
The Attending Physician's Statement (APS) is completed by: A: A physician providing a required medical exam at the time of application B: An applicant's physician to provide information about the applicant's medical history C: The agent after the medical questions are answered by the applicant D: The Medical Information Bureau
B. An applicant's physician to provide information about the applicant's medical history An Attending Physician's Statement (APS) is used in cases where the individual application and/or medical reports reveal conditions for which more information is required. The treating physician will provide information regarding the medical history of the applicant. An applicant must sign a written release to enable a release of the APS. The insurer pays for this.
If a home office underwriter obtains MIB codes inconsistent with information provided on the application, what is the underwriter required to do? A: Automatically reject the application and order any premium paid refunded B: Conduct further investigation to obtain more information prior to making a decision C: Issue the policy at a higher premium due to the undisclosed higher risk D: Refer the case to the state Insurance Department for possible insurance fraud
B. Conduct further investigation to obtain more information prior to making a decision When the home office underwriter receives MIB codes that are inconsistent with information provided on the application, the underwriter is required to conduct a further investigation to obtain more information prior to making an underwriting decision. Underwriting decisions cannot be based solely on MIB codes since there could be a reasonable explanation for the discrepancy.
Interest earned on premiums paid to an insurer helps to ________ the premiums charged. A: Stabilize B: Lower C: Standardize D: Increase
B. Lower Interest earned on premiums assists in premium rate reduction.
Normally, when the insurer determines that the insured is an acceptable risk, the insurer will send the policy to the ____________. A: Policyowner B: Producer C: Insured D: Beneficiary
B. Producer Normally, the insurer will mail the issued policy to the producer for delivery so that if any outstanding premium is due, it can be collected, if a statement of good health is required, it can be obtained, and any questions the applicant has about the policy can be answered.
Which of the following best describes producer field underwriting? A: Obtaining the applicant's medical records, conducting a credit history check, and logging in to the MIB B: Taking the time to probe beyond the stated questions on the application based upon the applicant's responses C: Interviewing the applicant's neighbors about the applicant's morals and character D: Conducting blood pressure readings, taking the applicant's pulse, and drawing blood
B. Taking the time to probe beyond the stated questions on the application based upon the applicant's responses Probing beyond the stated questions in the application based upon the applicant's responses is field underwriting. The producer does not engage in any of the other listed activities.
When soliciting insurance, producers are governed by state rules and regulations under the title of ___________. A: Solicitation Rules B: Unfair Trade Practices C: Rules of Fair Practice D: Fair Competition Rules
B: Unfair Trade Practices Each state has identified Unfair Trade Practices governing what producers can and cannot say when soliciting insurance.
A generic brochure developed by the NAIC to provide consumers with descriptions of basic types of life insurance as well as the comparative costs of each is called the _______. A: Consumer Information Kit B: Policy Summary C: Buyer's Guide D: Sales Illustration
C. Buyer's Guide It is required that prospective life insurance buyers receive the NAIC Buyer's Guide to assist them in their life insurance purchase decision.
Frieda wants coverage until she has paid back her business loan in 10 years. The ideal life insurance policy with the least expense would be: A: Universal Life B: Participating Permanent Life C: Decreasing Term Life D: Variable Universal Life
C. Decreasing Term Life Decreasing Term reduces in death benefit as the loan obligation reduces in balance. Term insurance is the least expensive form of insurance as it is temporary and does not build any cash values. The death benefit reduces over the period of the note or loan.
The date on which insurance coverage is no longer in effect is referred to as the _________ date. A: Policy B: Conversion C: Expiration D: Renewal
C. Expiration The expiration date is when insurance coverage ends.
When an individual qualifies for a lower premium or rate than standard risks, the insured is considered a: A: Higher risk B: Substandard risk C: Preferred risk D: Bad risk
C. Preferred Risk The question defines a preferred risk.
The factors necessary for an insurer to calculate a Net Premium are: A: Mortality rate and expenses B: Premiums paid plus interest earned C: Rate of interest assumed and mortality rate D: Expenses and rate of interest assumed
C. Rate of interest assumed and mortality rate Mortality Rate - Rate of Interest Assumed = Net Premium.
Which of the following is not a factor in premium determination? A: Mortality B: Interest C: Reserves D: Expenses
C. Reserves Premiums are based on expected mortality, interest, and expenses.
When an insurer accounts for the interest and mortality factors, then adds additional charges to meet all costs of a contract, it derives __________. A: The policy reserves B: The dividends C: The gross premium D: The net premium
C. The gross premium Insurer expenses (loading) are added to the net premium rate to enable an insurer to meet all costs under the contract, such as operating costs, commissions, medical examination costs, etc.
Which of the following signatures would not be considered valid on an application for insurance? A: The policyowner B: A guardian applicant C: The licensed producer D: A minor insured
D. A minor insured Both the producer or agent and the applicant/insured must sign the application unless the guardian is signing for a minor.
Which underwriting source is primarily used when an application reveals conditions for which more medical information is required? A: Agent's Report B: Medical Information Bureau Report C: Inspection Report D: Attending Physician's Statement
D. Attending Physician's Statement The Attending Physician's Statement would be ordered by the underwriter to secure the additional medical information.
When producer Pete delivers a policy, he should also do which of the following? A: Collect at least 3 referrals B: Collect any amounts due for postage and handling C: Demand the balance of the annual premium D: Explain the policy fully
D. Explain the policy fully It is the producer's or agent's responsibility to deliver the policy, verify the insured has remained in good health, and explain the policy to be sure the insured understands the benefits, including endorsements and riders.
The Do Not Call Registry and the Telemarketer Sales Rule were created by the _______. A: Securities and Exchange Commission (SEC) B: Federal Insurance Office (FIO) C: National Association of Insurance Commissioners (NAIC) D: Federal Trade Commission (FTC)
D. Federal Trade Commission (FTC) The Do Not Call Registry and the Telemarketer Sales Rule were developed by the FTC to protect consumers from unwanted telephone solicitations.
In determining the proper amount of life insurance coverage for an insured, the ________ approach measures the projected future earnings and the value of the insured's services in the event of his or her premature death. A: Needs Analysis B: Capital Liquidation C: Capital Retention D: Human Life Value
D. Human Life Value The Human Life Value Approach concerns itself with the replacement of future earnings and the value of the insured's services in the event of premature death.
The Medical Information Bureau (MIB) is formed by: A: The Government B: Medical professionals C: Employers D: Insurance companies
D. Insurance companies The MIB is a member-owned corporation that operates on a not-for-profit basis in the United States and Canada. The MIB's Underwriting Services are used exclusively by MIB-member life and health insurance companies to assess an individual's risk and eligibility during the underwriting of life, health, disability income, critical illness, and long-term care insurance policies.
A (an)_________ is used when the insured's age, medical history, or amount of coverage does not require a medical exam for underwriting purposes. A: Inspection report B: Short form C: Agent's report D: Nonmedical application
D. Nonmedical application A nonmedical application is used when the insured's age, medical history, or amount of coverage does not call for a medical exam.
A life insurance applicant pays the initial premium at the time of application and receives a Conditional Receipt. If coverage is issued as applied for, when did coverage go into effect? A: The date the policy was delivered B: The date the policy was issued C: The day the check clears the bank D: The date of the application or upon the completion of any required medical exam (whichever is later)
D. The date of the application or upon the completion of any required medical exam (whichever is later) In the case of a Conditional Receipt, the coverage is effective as of the date of the application or upon the completion of any required medical exam, unless it is declined within a stipulated period.
A ___________ settlement is when a terminally ill insured sells his or her life insurance policy to a third party other than an insurance company, for an amount less than the policy's death benefit, but greater than its cash values. A: Stranger originated B: Investor originated C: Senior D: Viatical
D. Viatical Viatical settlements are a way for a terminally ill insured to sell his or her policy for much needed cash when no other sources are readily available.