Chapter 6 Exam: Life Insurance Premiums, Proceeds, and Beneficiaries

D) Liquidity

Insurance premium is determined by each of the following factors EXCEPT A) Mortality B) Interest C) Expenses D) Liquidity

A) Monthly

Over the course of a year, which premium payment mode is most expensive? A) Monthly B) Quarterly C) Semi-Annually D) Annually

A) monthly Note: Monthly is always the highest

The premium payment mode that results in the highest overall cost would be A) monthly B) quarterly C) semi- annual D) annual

C) mortality tables

The probability of death, listed by year, is demonstrated in A) risk tables B) frequency tables C) mortality tables D) morbidity tables

A) Rate

What is the price of insurance for each exposure unit? A) Rate B) Premium C) Rating D) Expense

D. Mortality Note: Mortality is the component of a life insurance premium that age and gender affects

When calculating life insurance premium rates, which component is affected by an insured's age and gender? A) Insurer's expense B) Morbidity C) Investments D) Mortality

A) Insurer's expenses Note: The agent's commission is considered part of the insurer's expenses and is a component of the premium.

When calculating life insurance premium rates, which component would an agent's commission fall under? (No age and gender) A) Insurer's expenses B) Morbidity C) Mortality D) Occupation

B) Mortality rate

Which of the following describes the number of deaths in a year compared to the number of people in a select group? A) Law of large number ratio B) Mortality rate C) Morbidity rate D) Risk ratio

D) Irrevocable Note: An irrevocable beneficiary designation requires the beneficiary's signature

Sharon is the policyowner of a $50,000 life insurance policy. Her son, Mike, is the beneficiary. If Sharon MUST obtain Mike's signature in order to change the beneficiary, what kind of beneficiary designation is this? A) Tertiary B) Contingent C) Revocable D) Irrevocable

C) Exempt from federal income taxes

How are death benefits that are received by a beneficiary normally treated for tax purposes? A) taxable at the beneficiary's current tax bracket B) Subject to state and local taxes only C) Exempt from federal income taxes D) Taxable as a capital gain

C) Extended term Note: The extended term option is a nonforfeiture option, not a settlement option

All of these are settlement options for life insurance policies EXCEPT A) Life income B) Lump sum C) Extended term D) Fixed period

D) 1035 Exchange Note: A 1035 Exchange tax free Exchange is the IRS tax code that allows for the rollover of a non-qualified annuity (or transfer of a life insurance policy) to a new annuity or life policy of equal or greater value

Tonya has replaced her whole life policy with an annuity without incurring a tax penalty. This transaction is called a(n) A) Modified Exchange B) Endowment Exchange C) 1040 Exchange D) 1035 Exchange

A) Dividends Note: Dividends are not a component when determining policy premiums.

Which of the following is NOT a component of determining policy premiums? A) Dividends B) Mortality C) Interest D) expenses

D) Irrevocable beneficiary Note: An irrevocable beneficiary designation prohibits the policyowner from making any charges to the policy without the beneficiary's written consent

A policyowner is prohibited from making any changes to the policy without the beneficiary's written consent under which beneficiary designation? A) Contingent beneficiary B) Tertiary beneficiary C) Revocable beneficiary D) Irrevocable beneficiary

D) After first premium is paid, the face amount may be available to the beneficiary Note: An immediate estate can be created because the face amount may be available to the beneficiaries after the first premium is paid

How does life insurance create an immediate estate? A) Cash value may be borrowed upon at any time B) Nonforfeiture options are immediately available C) The insured's estate receives the death benefit D) After first premium is paid, the face amount may be available to the beneficiary

B) Specified amount of money Note: Life insurance guarantees to the beneficiary a specified sum of money in the event of the insured's death

What does a life insurance policy guarantee to the stated beneficiary upon the death of the insured? A) Policy Dividend B) Specified amount of money C) Policy's cash value D) Funeral expense fund

D) Income tax is typically not owned on proceeds paid directly to a beneficiary Note: One of the major tax advantages of life insurance is that the beneficiary generally does not pay income tax on the proceeds

Which of these is considered a major tax advantage of life insurance? A) Tax credits are available for life insurance premiums paid B) Annual earnings are tax free C) Premiums are tax deductible by an employee if paid for by an employer D) Income tax is typically not owned on proceeds paid directly to a beneficiary

A) Bi-weekly Note: A bi-weekly payment mode is normally not an option to policyowners

Which of these premium payment frequencies is not typically available to a policyowner? A) Bi-weekly B) Monthly C) Quarterly D) Semi-annual

A) interest only Note: The settlement option that allows proceeds to remain with the insurer and earnings to be paid to the beneficiary on a monthly basis is called interest only.

Which settlement option involves having the proceeds remain with the insurer and earnings paid on a monthly basis to the beneficiary? A) interest only B) dividends only C) extended interest D) fixed period

A) Individual

Which type of beneficiary should be named if the insured wants to give explicit directions on how the policy proceeds should be paid? A) Individual B) Group C) Class D) Estate

C) normally at any time during the policy term

A beneficiary change can occur A) only upon the request of the revocable beneficiary B) only on specified dates within the policy C) normally at any time during the policy term D) at no time

C) No federal income tax is owed on life insurance proceeds Note: There are NO federal income tax on life insurance proceeds if you receive the proceeds under a life insurance contract as a beneficiary

A beneficiary has just received a claim payment for a life insurance policy. Which of the following is TRUE regarding the federal income tax liability owed? A) A flat tax of 10% is owed on all proceeds B) Federal income tax is owed if proceeds exceed $250,000 C) No federal income tax is owed on life insurance proceeds D) Tax liability owed depends on the type of life insurance policy

A) Interest option Note: The settlement option that allows proceeds to remain with the insurer and earning to be paid to the beneficiary on a monthly basis is called interest only

A beneficiary receives only the death benefit earnings in which settlement option? A) Interest option B) Life option C) Stock option D) Fixed amount option

A) The insured's estate Note: Creditors have rights to life insurance policy proceeds when the beneficiary is the insured's estate.

A creditor would be allowed rights to life insurance policy proceeds if which of the following beneficiaries is chosen? A) The insured's estate B) The insured's mother C) The insured's children D) The insured's spouse

D) named living primary beneficiaries Note: "Per capita" is a method of life insurance members distribution using total number of individuals. This means that all living members that are identified in the life insurance policy will receive an equal amount of the life insurance proceeds. Using per capita distribution means that if one of the beneficiaries becomes deceased before the insured, then the other beneficiaries will simply have their share increased accordingly.

A life insurance claim which involves a per capita distribution of policy proceeds would be payable to the A) estate of the insured only B) estate of the deceased beneficiaries only C) named contingent beneficiaries only D) named living primary beneficiaries

D) restricts the ability of the beneficiary to assign benefits Note: A spendthrift clause prevents a beneficiary from recklessly spending benefits

A spendthrift clause in a life insurance policy A) permits the beneficiary to borrow from a policy's cash value B) evenly distributes benefits among all named living beneficiaries C) assigns a policy's face amount to the insured's estate if the beneficiary dies before the insured D) restricts the ability of the beneficiary to assign benefits

B) Increases

How is the cost of a policy affected when a policyowner pays premiums more frequently? A) Not affected B) Increases C) Decreases D) Depends on the type of coverage

A) the insured outlived the beneficiary

If the beneficiary dies from the same accident as the insured individual, the insurer will proceed as if A) the insured outlived the beneficiary B) the beneficiary outlived the insured C) both the insured and beneficiary died at the same time D) the estate was listed as beneficiary

D) have premiums that are averaged over the policy period Note: The policyowner pays more in the early years for protection to help cover the cost in later years.

Level premium term life insurance policies A) build cash value in a separate account B) automatically convert to permanent insurance at a predetermined date C) automatically renew at predetermined dates D) have premiums that are averaged over the policy period

B) people and time

Mortality is calculated by using a large risk pool of A) hobbies and time B) people and time C) family history and geographical area D) insurance companies and agents

B) Interest Option

Pam is the primary beneficiary of a life insurance policy and wants to let the death benefit accumulate and receive only the monthly investment proceeds. Which settlement option should she choose? A) Lump sum option B) Interest Option C) Life income option D) Fixed amount option

B) Interest Option Note: In this situation, the beneficiary should select the interest option

Pam is the primary beneficiary of a life insurance policy and wants to let the death benefit accumulate and receive only the monthly investment proceeds. Which settlement option should she choose? A) Lump sum option B) Interest Option C) Life income option D) Fixed amount option

C) the amount an insured pays per unit of coverage Note: Premiums can be best defined as the amount an insured pays per unit of coverage

Premiums are best described as A) money paid by the insurer for settling a claim B) money paid by the insured to acquire a policy's benefits C) the amount an insured pays per unit of coverage D) commissions payable to the writing agent

C) spendthrift trust clause Note: The clause in a life insurance policy protecting its proceeds from the beneficiary's creditors is referred to as the spendthrift trust clause

Proceeds from a life insurance policy are protected from the beneficiary's creditors by which clause? A) protection clause B) creditor clause C) spendthrift trust clause D) beneficiary trust clause

B) contingent beneficiary Note: If the insured and the primary beneficiary are killed in the same accident, the policy proceeds will be paid to the contingent beneficiary of the insured

Where would policy proceeds be paid if both the insured and primary beneficiary were killed in the same accident? A) primary beneficiary's estate B) contingent beneficiary C) insured's estate D) children of the insured

B) Section 1035 exchange Note: Section 1035 exchange enables a life policy to be replaced with another life policy and results in the postponement of the tax consequences

Which of the following enables a life policy to be replaced with another life policy and results in the postponement of the tax consequence? A) Section 1040 exchange B) Section 1035 exchange C) Nonforfeiture Option D) Spendthrift Option

D) Extended term option

Which of the following is NOT a life insurance settlement option? A) Lump sum option B) Fixed amount option C) Life income option D) Extended term option

D) Premiums Note: Insurance companies are like any other business. They have operating expenses which need to be factored into premiums. this includes salaries, agent compensation, rent, legal fees, postage

Which of the following is NOT an insurer policy expense? A) Rent B) Salaries C) Commissions D) Premiums

B) Common disaster clause Note: With a common disaster provision, a policyowner can be sure that if both the insured and the primary beneficiary die within a short period of time, the death benefits will be paid to the contingent beneficiary

Pat is insured with a life insurance policy and Karen is his primary beneficiary. They are both involved in an automobile accident where Pat dies instantly and Karen dies 5 days later. Which policy provision will protect the rights of the contingent beneficiary to receive the policy benefits? A) Nonforfeiture clause B) Common disaster clause C) Spendthrift clause D) Accident indemnity clause

A) Interest option Note: The interest-only settlement option allows ONLY THE death benefit earnings to be paid to the beneficiary

A beneficiary receives only the death benefit earnings in which settlement option? A) Interest option B) Life option C) Stock option D) Fixed amount option

D) estate conservation Note: Estate conversation involves purchasing life insurance to avoid the forced sale of assets upon death

Purchasing a life insurance policy in order to avoid the forced sale of assets upon death is called A) estate funding B) capital withholding C) capital gains D) estate conservation

C) from insurer to insurer and no cash is received by the policyowner Note: The internal Revenue Code (IRC) enables a ta-free Section 1035 Exchange of a life insurance policy to a different policy if it occurs from insure to insurer and the policyowner does not receive any cash.

A tax-free Section 1035 Exchange of a life insurance policy to a different policy is permitted if it occurs A) in the same state as the original transaction B) within a 12 month period C) from insurer to insurer and no cash is received by the policyowner D) from agent to agent as long as the agents are licensed in the same line

A) Spendthrift Clause Note: A spendthrift Clause is a statement in a settlement agreement that indicates that the proceeds of the policy will be free from attachment or seizure by the beneficiary's creators

Which of these ensures that proceeds of a life insurance policy will be free from attachment or seizure by the beneficiary's creditors? A) Spendthrift Clause B) Protection Clause C) Viatical Clause D) Settlement Clause

B) Fixed amount Note: The fixed amount installment option pays a fixed death benefit in special installment amounts until the principal and interest are exhausted

Elizabeth is the beneficiary of a life insurance policy. She is receiving the death benefit in payments of $10,000 per month until the principal and interest has been paid out. Which option was chosen? A) Fixed period B) Fixed amount C) Life income D) Interest only

D) Lump-sum Note: The Lump-sum cash settlement is considered the automatic (or "default") option for most life insurance contracts

Which of these is the automatic mode of settlement for life insurance policy proceeds? A) Fixed period B) Interest only C) Extended term D) Lump-sum

B) Mortality costs Note: Mortality costs are considered an expense factor in an insurance program

What would be an expense factor in an insurance program? A) Premiums collected B) Mortality costs C) Opportunity costs D) Investment interest

D) avocation (hobby)

Which of these factors help determine an insured's life insurance premium? A) insured's salary B) marital status C) place of residence D) avocation (hobby)

D) Cost

Which of these is affected by the frequency of an insurance policy's premium payments? A) Settlement options B) Cash value C) Death benefit D) Cost

C) Increases

What happens to the total amount of premium paid for an insurance policy when the payment frequency increases? A) No difference in cost B) Decreases C) Increases D) Depends on the type of coverage

D) Estate

What is created after policy proceeds are obtained in a lump sum and then immediately invested? A) Viatical Settlement B) Emergency Fund C) Lump Sum Fund D) Estate

B) Reduced death benefit prepayment

What is the primary feature of a viatical settlement? A) No interest on policy loans B) Reduced death benefit prepayment C) Longer contestable period D) Lower premiums

C) Class designation Note: All surviving children is an example of naming a beneficiary by class designation

Naming a contingent beneficiary as "all surviving children" is described by which term? A) Contingent designation B) Primary designation C) Class designation D) Tertiary designation

A) viatical settlement contract Note: A viatical settlement contract is a transaction that involves an immediate payment to the policyowner prior to the death of the insured

A policyowner can receive an immediate payment before the insured dies by using a(n) A) viatical settlement contract B) buy-sell arrangement C) adhesion agreement D) spendthrift plan

C) "To the children born of my union with Ned Jackson" Note: "To children born of my union with Ned Jackson" is an example of naming a beneficiary by class

An example of naming a beneficiary by class would be A) "To the children born of my union with Ned Jackson: David Jackson, Jennifer Jackson, and Scott Jackson" B) "To the child born of my union with Ned Jackson: Scott Jackson" C) "To the children born of my union with Ned Jackson" D) "To Ned Jackson"