Chapter 2 Life Insurance Basics

When must insurable interest exist in a life insurance policy?

At the time of application

The Mode of Premium Payment

Is defined as the frequency and the amount of the premium payment. The mode refers to the frequency the policyowner pays the premium: monthly, quarterly, semiannually, or annually. The amount of premium will change accordingly.

Which of the following is NOT an example of insurable interest?

Debtor in creditor The three recognized areas in which insurable interest exists are as follows: a policyowner insuring his or her own life, the life of a family member (relative or spouse), or the life of a business partner, key employee, or someone who has a financial obligation to them. A debtor does not have an insurable interest in the creditor.

If an insured changes his payment plan from monthly to annually, what happens to the total premium?

It decreases Because the insurer would have the entire premium to invest for a full year, they would reduce the premium amount.

Part 2 of the application for life insurance provides questions regarding all of the following EXCEPT

Other insurance coverages. Part 2 of the application contains questions regarding the applicants' health history. Part I of the application includes questions regarding current coverage being applied for as well as any other insurance coverage with the same or other insurers.

Key Person

Someone that caries heavy financial weight, the breadwinner, or if they are lost, it will cause a heavy financial weight.

What does "liquidity" refer to in a Life Insurance Policy?

Cash values can be borrowed at any time

Which is the primary source of information used for insurance underwriting?

Application The application contains most of the information used for underwriting purposes. This is why its completeness and accuracy are so crucial.

All of the following are true of key person insurance EXCEPT

The plan is funded by permanent insurance only. Key Person coverage may be funded by any type of life insurance.

Which of the following statements is NOT true concerning insurable interest as it applies to life insurance?

A debtor has an insurable interest in the life of a lender. A lender has an insurable interest in the life of a debtor, but only to the extent of the debt. The debtor does not have an insurable interest in the life of the lender.

Insurance producers must ensure that contracts they recommend are in the best interest of the insured. This is called

Suitability Insurance producers must adhere to the concept of suitability by ensuring that, to the best of their belief, the purchase, sale or exchange of a policy is in the best interest of the insured.

If an applicant for a life insurance policy is found to be a substandard risk, the insurance company is most likely to

Charge a higher Premium The premium rate will be adjusted to reflect the insurer's increased risk.

Most agents try to collect the initial premium for submission with the application. When an agent collects the initial premium from the applicant, the agent should issue the applicant a

Premium Receipt

Which of the following best details the underwriting process for life insurance?

Selection, classification, and rating of risks The underwriting process is accomplished by reviewing and evaluating information about an applicant and applying what is known of the individual against the insurer's standards and guidelines for insurability and premium rates.

An agent and an applicant for a life insurance policy fill out and sign the application. However, the applicant does not wish to give the agent the initial premium, and no conditional receipt is issued. When will coverage begin?

When the agent delivers the policy, collects the initial premium, and the applicant completes an acceptable Statement of Good Health If the initial premium is not paid with the application, the agent will be required to collect the premium at the time of policy delivery. In this case, the applicant will most likely need to fill out a Statement of Good Health.

A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as

Survivor Protection Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. This is known as survivor protection.

The responsibility of making certain that an application for insurance is filled out completely, correctly, and to the best of his or her knowledge is the responsibility of whom?

The Producer

Which of the following individuals must have insurable interest in the insured?

Policyowner The policyowner must have an insurable interest in the insured (his/her own life if the policyowner and the insured is the same person), or in the life of a family member or a business partner.

A prospective insured receives a conditional receipt but dies before the policy is issued. The insurer will

Pay the policy proceeds only if it would have issued the policy. The conditional receipt says that coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last, as long as the applicant is found to be insurable as a standard risk, and policy is issued exactly as applied for.

The insurer discovered that one of the applicants for life insurance missed a couple of questions on the application. What should the insurer do with the application?

Return to Applicant for Completion

All of the following are requirements for life insurance illustrations EXCEPT

They must be apart of the contract. An illustration may not be altered by an agent and must clearly state that it is not part of the contract. It is legal to list nonguaranteed values in the contract, but they must be specifically labeled as projected, not guaranteed values.

Which of the following is the best reason to purchase life insurance rather than annuities?

To create an Estate With insurance, the death benefit creates an immediate estate should the insured die.

Which of the following would least likely be considered a legitimate need that would be paid by insurance proceeds?

Vacation Travel Expenses