Chapter 2: Types of Life Insurance Policies PRACTICE QUESTIONS / QUIZ

For variable products, underlying assets must be kept in

A separate account NOTE: Under a variable life insurance policy, assets must be placed in a separate fund, used primarily for the investment of stocks, bonds, and other security investment options.

The LEAST expensive first-year premium is found in which of the following policies?

Annually Renewable Term NOTE: Annually renewable term is the purest from of term insurance. The death benefit remains level, but the premium increases each year with the insured's attained age. In decreasing policies, while the dace amount decreases, the premium remains content throughout the life od the contracts. In level term of the policy. Therefore, in the other types od level policies, the first year premium would not different from any other year.

An individual has been making periodic premium payments on an annuity. The annuity income payments are scheduled to begin after 1 year since the annuity was purchased. What type of annuity is it?

Deferred NOTE: Deferred annuities may be purchased with either a single lump sum or periodic payments, but they do not begin the income payments until sometime after 1 year from the date of purchase.

What does "level" refer to in level term insurance?

Face amount NOTE: Level term policies maintain level death benefit (or face amount) throughout the term of the policy. In level term insurance, the premium also remains consistent over the years, unlike the premium of many policies, which increase as the policyholder ages.

What are the two components of a universal policy?

Insurance and cash account NOTE: A universal policy has two components: an insurance component and a cash account. The insurance component of a universal life policy is always annual renewable term insurance. The cash account accumulates on a tax deferred basis each year and earns either the guaranteed contract rate or the current rate. whichever is higher.

An insured buys a 5-year level premium term policy with a face amount of $10,000. The policy also contains renewability and convertibility options. When the insured renews the policy in 5 years, what will happen to the premium?

It will increase because the insured will be 5 years older than when the policy was originally purchased. NOTE: The premium will remain level during the entire level premium term policy period. If the policy renews at the end of the term, the premium will be based on the insured's attained age at the time of renewal.

Which of the following is an example of a limited-pay life policy?

Life Paid-up at Age 65 NOTE: Limited Pay Whole Life premiums are all paid by the time the insured reaches age 65. The policy endows when the insured turns 100. It is the premium paying period that is limited, not the maturity.

Which od the following policies would be classified as a traditional level premium contract?

Straight Life NOTE: Straight whole life policies have a level guaranteed face amount a level premium for the insured.

Which of the following types of insurance policies would provide the greatest amount of protection for temporary period during which an insured will have limited financial resources?

Term NOTE: Term insurance provides a death benefit only; cost per $1,000 of coverage is less tan other types pf policies that create cash values.

Which of the following best describes what the annuity period is?

The annuity period is the time during which accumulated money is converted into an income stream.

Who bears all of the investment risk in a fixed annuity?

The insurance company NOTE: Fixed annuities guarantee a minimum amount of interest to be credited to the purchase payment. Income payments do not vary from one payment to the next. The insurance company can afford to make guarantees because the money of a fixed annuity is placed in the general account of the insurance company, which is part of its investment portfolio. The company makes conservative enough investments to insure a guaranteed rate to the annuity owners.

All of the following are true regarding a decreasing term policy EXCEPT

The payable premium amount steady declines throughout the duration of the contract. NOTE: Premiums remain leven with a decreasing term policy; only the face amount decreases.

Which of the following is TRUE regarding the premium in the term policies?

The premium is lever for the term of policy NOTE: The Premium on a term life insurance policy is level throughout the term of policy. Only the amount of the death benefit may change. This does not apply on annual renewable term insurance, in which the premium increases annually according to the attained age.

All of the following are true about variable products EXCEPT

The premiums are invested in the insurer's general account. NOTE: Insurers selling variable products invest their customer's monies in a separate account, which is very similar to a mutual fund. Since there is no guaranteed rate of return, customers must bear the investment risk.

Which of the following is a key distinction between variable whole life and variable universal life products?

Variable whole life has a guaranteed death benefit. NOTE: Variable universal life insurance may or may not have a minimum death benefit, unlike variable whole life insurance which guarantees a minimum death benefit.

The annuity period is the time during which accumulated money is converted into an income stream.

100 NOTE:The annuity period is the time during which accumulated money is converted into an income stream.

Which of the following products requires a securities license?

Variable annuity NOTE: A variable annuity is considered to be a security and is regulated by the Securities Exchange Commission (SEC) in addition to state insurance regulations. For that reason, a person must hold a securities license in addition to a life agent's license in order to sell variable annuities.

An individual purchased a $100,000 Joint Life policy on himself and his wife. Eight years later, he died in an automobile accident. How much will his wife receive from the policy?

$100,000 NOTE: In joint life policies, the death is paid upon the first death only.

When would a 20-pay whole life policy endow?

When the insured reaches age 100 NOTE: A limited-pay whole life policy, just like straight life, endows for the face amount if the insured lives to age 100. The premium is, however, completely paid off in 20 years.

In a survivorship life policy, when does the insurer pay the death benefit?

Upon the last death