Chapter 9 Life Policy Provisions

Even if suicide does occur during the 2 year period they will refund premiums

z

The period during which annuity benefits are received is called the A) payout period B) earnings period C) annuity period D) accumulation period

C

All of the following statements pertaining to the insuring clause in a life insurance policy are correct EXCEPT: A) It specifies the length of the grace period B) It names the beneficiary C) It gives the effective date of coverage D) It defines the responsibilities of the insurer

A The insuring clause explains the promise the insurer has made to the named insured to pay a death benefit to a designated beneficiary. The grace period is separate policy provision.

An assignment in which the assignee receives full control over the policy is called: A) a collateral assignment. B) an absolute assignment. C) a revocable assignment. D) a guaranteed assignment.

B

Alexandria assigns one of her $10,000 life insurance policies to a bank as collateral for a loan. The assignee is: A) the beneficiary of the policy. B) Alexandria, the insured. C) the bank. D) the insurance company.

C

All individual life insurance policies must include a reinstatement provision providing that the policy can be reinstated at any time within how many years from the date of premium default? A) One year. B) Four years. C) Two years. D) Three years.

D A policy must provide for reinstatement at any time within three years from the date of premium default if satisfactory evidence of insurability is given, back premiums (with interest) are paid and any other indebtedness on the policy is paid.

Which of the following phrases best describes a life insurance policy under the entire contract clause? A) Basic policy document only. B) Policy document plus riders and a copy of the signed application. C) Policy document plus riders and the initial premium deposit receipt. D) Policy document plus riders as agreed to by the applicant.

B The application, all endorsements or riders, waivers, and any attached documents make up the entire contract.

Which of the following statements BEST describes the nature of a cash value loan? A) It is a financial transaction in which the insurer loans the money and attaches a comparable portion of the cash value as collateral. B) It is a financial transaction in which future growth of the cash value is suspended until the loan amount plus interest is recovered. C) It is a financial transaction in which the cash value is reduced by the amount of the loan. D) It is a financial transaction in which the cash value is unaffected but the face amount is reduced by the amount of the loan plus interest.

A

All of the following statements pertaining to life policy assignment are correct EXCEPT: A) the policyowner must notify the company in writing of any assignment. B) the life insurance company assumes no responsibility for the validity of an assignment. C) the policyowner must obtain approval from the insurance company before a policy can be assigned. D) to secure a loan, the policy temporarily can be transferred to the lender as security for the loan.

C A policyowner may assign or transfer ownership of a life policy to anyone without the insurer's approval.

If an individual life insurance policy contains a spendthrift provision, the policy can prohibit the beneficiary from taking all of the following actions EXCEPT: A) exchanging the policy. B) surrendering the policy for cash. C) receiving equal installment payments under the policy. D) borrowing against the policy.

C A life insurance policy with a spendthrift provision can prohibit the beneficiary from exchanging, surrendering and borrowing against the policy. To ensure that the beneficiary does not spend all the proceeds at once, the policy will specify that proceeds are to be paid to the beneficiary in equal installments during the beneficiary's lifetime.

Which of the following statements about reinstating an individual life insurance policy is CORRECT? A) Policies may be reinstated at any time within 4 years from the date of premium default. B) Policies that have been surrendered for their cash value may be reinstated. C) The insured must pay all back premiums with interest before the policy can be reinstated. D) The insured does not have to show evidence of insurability.

C All individual life insurance policies must include a reinstatement provision stating that the policyowner can reinstate the policy within 3 years after a default in premium payments unless the policy has been surrendered or the paid-up term insurance has expired. The insured must make a written application, produce evidence of insurability, and pay all back premiums at the interest rate specified in the policy.

Betty owns a universal life insurance policy that was issued with a $100,000 face amount and now has total death benefit protection of $110,000. Several months ago she borrowed $15,000 from the policy. The outstanding loan balance (including interest) is $15,200. If Betty dies today, what will be the amount of the death benefit? A) $110,000.00 B) $100,000.00 C) $94,800.00 D) $95,000.00

C Outstanding policy loans plus interest are deducted from life insurance death benefit proceeds, leaving (in this case) a net death benefit of $94,800 (specifically, $110,000 - $15,200).

All individual life insurance policies must contain a provision permitting the policyholder to return the policy within how many days to receive a full refund of premiums? A) 20 days. B) 10 days. C) 45 days. D) 30 days.

10 This is also called a free-look provision.

All of the following are conditions which must be met in order for an insured to borrow money on a life insurance policy EXCEPT: A) the preexisting condition restriction has not yet been satisfied. B) premiums have been paid for 3 years. C) the policy has a cash surrender value. D) no premium is in default beyond the grace period.

A All life insurance policies must include a provision stating that the insurer will advance, at an approved interest rate, the amount equal to or less than the policy loan value, provided premiums have been paid for three years, the policy has a cash surrender value, and no premium is in default beyond the grace period. There is no preexisting condition restriction that applies to loans.

Cash value life insurance must permit policyowners to take a policy loan up to the full loan value of the policy after the policy has been in force for: A) one year. B) three years. C) four years. D) two years.

B After a whole life or endowment policy has been in force for 3 full years with all premiums due paid, the insurer shall advance an amount up to but not exceeding the loan value of the policy to the policyholder. The insurer may defer granting the loan for up to 6 months after application (delay clause).

All of the following statements pertaining to reinstatement of a life insurance policy are correct EXCEPT: A) when reinstating a policy, the insurer must charge the policyowner for interest on past-due premiums. B) a suicide exclusion period is renewed with a reinstated policy. C) a new contestable period becomes effective in a reinstated policy. D) when reinstating a policy, the insurer must charge the policyowner for past-due premiums.

B When reinstating a life policy, no new suicide exclusion period goes into effect.

In which of the following circumstances would the incontestable clause of an insurance policy apply? A) Intent to murder. B) No insurable interest. C) Concealment of smoking. D) Impersonation of the applicant by another.

C After a policy has been in force for the specified term, the insurer cannot contest a death claim or refuse payment of proceeds for a concealment of smoking. A policy issued under one of the other three situations may be voided at any time, since it would not be considered a valid, enforceable contract.

The purpose of the common disaster provision is to: A) provide benefits in case of a common disaster, such as a flood. B) protect the interests of the primary beneficiary. C) provide benefits to the primary beneficiary's heirs. D) protect the interests of the contingent beneficiary.

D The common disaster provision provides a means for the policyowner to make certain that the contingent beneficiary receives the proceeds if both the insured and the primary beneficiary die within a short time of each other due to a common disaster. This provision states that the primary beneficiary muct outlive the insured by a specified time period in order to receive the benefits. If the primary beneficary does not, the policy proceeds go to the contingent beneficiary.

Which of the following statements about the spendthrift clause is NOT correct? A) It states that the life policy proceeds will be paid directly to the beneficiary. B) Once the beneficary has received payments from the proceeds, the creditors can take steps to attach those payments. C) It helps protect the death benefit proceeds from the beneficiary's creditors. D) It gives the beneficiary the right to leave the death proceeds with the insurance company to accumulate interest tax free.

D Does not accumulate interest tax free

Which of the following statements regarding the naming of a minor as life insurance beneficiary is NOT correct? A) If the beneficiary is a minor, it is possible for the insurer to elect to retain the policy proceeds until the child reaches the age of majority. B) If an insurer retains policy proceeds because the beneficiary is a minor, it may elect to make limited payments to an adult guardian for the benefit of the minor beneficiary. C) The youngest age at which an individual may be regarded as an adult for beneficiary purposes is age 18. D) The naming of a minor as beneficiary generally involves more legal issues and complications than naming an adult as beneficiary.

C In some states the age of majority for insurance beneficiary purposes is as young as 15. If the beneficiary is a minor, insurers are required to exercise caution in determining how to distribute proceeds, even if it means retaining some or all the proceeds until the minor reaches the age of majority.

Individual life insurance policies can exclude benefits if death occurs as a result of all of the following EXCEPT: A) aerial flight (except as a fare-paying passenger). B) specified hazardous occupation, if within 2 years from the date of policy issue. C) suicide, if within 5 years from the date of policy issue. D) war.

C Individual life insurance policies generally cannot exclude or restrict liability for certain named causes of death. However, policies can exclude or restrict coverage if death occurs as a result of war, from any aerial flight (except as a fare-paying passenger), while engaged in a specified hazardous occupation if within 2 years of the date of policy issue, or from suicide if within 2 years from the date of policy issue.

Which of the following best describes the basic purpose for the facility-of-payment clause found in some life insurance policies? A) It authorizes the insurer to change the beneficiary designation if the current beneficiary does not have an insurable interest in the insured. B) It authorizes the insurer to distribute the life insurance death benefit as a lump-sum cash payment, even if the owner selected a different settlement option, if the death benefit is below a specified limit. C) It authorizes the insurer to designate the payee of life insurance death benefits if the designated beneficiary cannot be located. D) It requires the insurer to distribute the death benefit in a settlement option that it believes is best suited for the beneficiary's needs.

C The facility of payment clause exists to expedite the claims process for life insurance companies by authorizing them to pay death benefit proceeds to a beneficiary of their choosing if the designated beneficiary cannot be located or the designated beneficiary is invalid (e.g., a minor).

Winston, the insured, and his wife, Irene, his sole beneficiary, both died in a hotel fire. Hospital physicians witnessed that Irene lived at least two hours longer than Winston. The life policy had no common disaster clause. Which of the following will likely receive the policy proceeds? A) Irene's estate. B) The state. C) Winston's estate. D) Winston's secondary beneficiary.

A In light of the witnesses to the deaths in this problem and in the absence of the common disaster clause, Irene's estate should receive the proceeds. She, as primary beneficiary, outlived the insured policyowner.

Ken owns a participating whole life insurance policy that was issued with a $100,000 face amount and now has total death benefit protection of $120,000 because he uses the paid-up additions dividend option. If Ken were to borrow $10,000 from the policy, what would be the value of the policy's face amount (including paid-up additions)? A) $100,000.00 B) $130,000.00 C) $110,000.00 D) $120,000.00

A Unlike policy withdrawals, policy loans do not reduce the face amount of the policy. The actual benefit paid out could be reduced to the extent of outstanding loan and interest balances, but the face amount remains fixed while the policy is active. In this case, Ken applied the dividends from the base policy ($100,000 face amount) toward single-premium life policies, which have now added up to an additional $20,000, for a total of $120,000 in death benefit protection. If he borrows $10,000 from the policy, he will have $110,000 remaining in the policy's death benefit, but the face amount is still $100,000.

Under a common disaster clause in a life insurance policy, it is assumed that the: A) primary beneficiary died last, unless the insured lives beyond a stipulated period. B) insured died last, unless the primary beneficiary lives beyond a stipulated period. C) contingent beneficiary is entitled to the policy proceeds. D) insured and primary beneficiary died simultaneously.

B Under a common disaster clause in a life insurance policy, it is assumed that the insured died last, unless the primary beneficiary lives beyond a stipulated period (usually 14 or 30 days). If the primary beneficiary does not live beyond that period, proceeds are payable to the insured's secondary beneficiary or to his or her estate.

What is the usual grace period for a semiannual premium policy? A) 7 days. B) 31 days. C) 20 days. D) 60 days.

31 Depending on the state, the minimum grace periods that may be specified are typically seven days for policies with weekly premiums (such as industrial policies), ten days for policies with premiums payable on a monthly basis, and 31 days for other policies. Some states, however, require a standard grace period of 31 days, regardless of the frequency of premium payment or policy term.

Kelly, age 48, owns a universal life insurance policy (non-MEC) with a current death benefit of $270,000 and a cash value of $20,000. Her basis in the policy is $12,000. Kelly is interested in either borrowing or withdrawing $15,000 from this policy. What would be the tax consequences if she were to borrow the $15,000 through a policy loan? A) There would be no income taxation on any portion of the amount borrowed, but if she did not repay the loan, $3,000 would be subject to income taxation. B) There would be no income taxation on any portion of the amount borrowed, whether or not she repaid the policy loan. C) Of the amount borrowed, $12,000 would be income tax free, $3,000 would be subject to income taxation, and there would be an additional penalty tax. D) Of the amount borrowed, $12,000 would be income tax free and $3,000 would be subject to income taxation.

B Except in the case of a MEC, life insurance policy loans are income tax free.

Which of the following is stated in the consideration clause of a life insurance policy? A) Benefits payable upon the insured's death. B) Amount and frequency of premium payments. C) Insured's risk classification. D) Insured's general health condition.

B The consideration clause specifies the amount and frequency of premium payments that the policyowner must make to keep the insurance in force.

Which of the following options is designed to protect the policyowner should the policy be in danger of lapsing for nonpayment of premium? A) waiver of premium. B) automatic premium loan. C) premium exclusion. D) guaranteed insurability.

B Under the automatic premium loan provision, the cash values will be used to pay the premium if the premium due has not been paid by the end of the grace period.

Which of the following statements pertaining to the spendthrift clause in a life insurance policy is NOT correct? A) It is designed to protect beneficiaries against the claims of creditors. B) A beneficiary receives $125 per month from a life policy under the fixed-amount settlement option and a spendthrift clause. The beneficiary may have the company send the payments to a creditor to pay off a debt. C) The exemption applies only to money held in trust by the insurance company that is payable at some future time to the named beneficiary. D) It does exempt proceeds paid to beneficiaries in a lump sum.

B The spendthrift clause in a life insurance policy is designed to protect beneficiaries from their creditors by providing that the death benefits payable are not subject to creditor claims. This clause applies only while the insurer holds the money, and only to installment payments.

While a policy loan is generally an available option with any form of permanent life insurance, a partial withdrawal of cash value from the policy is available only with which of the following types of life insurance? A) Modified premium whole life insurance policy. B) Universal life insurance policy. C) Variable life insurance policy. D) Straight whole life insurance policy.

B While policy loans are available with any type of permanent life insurance policy, partial cash value withdrawals require the policy flexibility that only universal life insurance offers.

The death benefit proceeds of a life insurance policy are protected from the beneficiary's creditors unless: A) they are paid to a contingent beneficiary. B) they are paid out in a lump sum. C) they are held in trust by the insurer. D) they are paid out in installments.

B The spendthrift clause is designed to protect the proceeds of a life insurance policy from the beneficiary's spending habits and creditors. When this clause is included in the policy, the creditors cannot attach the death benefit proceeds before they are made to the beneficiary. Once the beneficiary has received the proceeds, however, the creditors can take steps to attach those proceeds. Since a lump sum settlement would immediately place all of the proceeds in the beneficiary's possession, the proceeds would not be protected from the beneficiary's creditors.

Which one of the following is NOT a condition under which a loan may be made against a life insurance policy? A) The policy has a cash surrender value. B) Premiums have been paid for at least 3 full years. C) The money will be used for medical expenses or the purchase of a first home. D) No premium is in default beyond the grace period for payment.

C ndividual life insurance policies (except term insurance and industrial life insurance) must contain a policy loan provision stating that the insurer will advance an amount equal to or less than the policy's loan value (at an approved interest rate) if premiums have been paid for 3 full years, the policy has a cash surrender value, and no premium is in default beyond the grace period for payment. There is no requirement that loan proceeds must be used to pay for medical expenses or the purchase of a first home. That is for IRAs

Harold, age 52, owns a variable universal life insurance policy (non-MEC) with a current death benefit of $122,000 and a cash value of $18,000. His basis in the policy is $12,000. Harold is interested in either borrowing or withdrawing $15,000 from this policy. What would be the tax consequences if he were to withdraw $12,000 and borrow $3,000 through a policy loan? A) The $3,000 borrowed would be income tax free, and of the amount withdrawn, $9,000 would be income tax-free but $3,000 would be subject to income taxation. There will be no income taxation on the $12,000 withdrawal but the $3,000 loan is subject to income tax. B) The full $15,000 is subject to income taxation. C) The $12,000 withdrawn and the $3,000 borrowed would be income tax free unless he did not repay the loan in which case the $3,000 is subject to income taxation. D) There will be no income taxation on any portion of the amount withdrawn or borrowed.

D The "withdrawal to basis" method is a tax-effective way to access a universal life insurance policy's cash value. Non-MEC withdrawals are tax-free up to basis. Treating the gain as a policy loan avoids taxation on that portion of the distribution.