Final Exam pre tests broke down.

1.3 Producers (Agents) and Rules of Agency & Responsibilities

-If an agent proposes to replace an insurance policy with another policy, the agent must discuss all of the following with the prospect EXCEPT: the terms of the new policy Notice Regarding Replacement of life insurance --a comparison of costs among similar policies from various insurers policy comparison statement Explanation: The agent is not required to compare costs of similar policies issued by various insurers. However, producers must be careful to avoid improper replacement and refrain from generating commissions when replacement is not in the applicant's best interest. -Which of the following best describes the purpose for the laws of agency? to govern the relationships between agents to govern the agent's transactions with the public to govern the relationships among insurance agencies --to govern the authority granted agents to represent the insurers Explanation: The document that defines the agency relationship is the agent's contract with the insurance company. The laws of agency expand the agent's authority from that granted in the contract. -Insurance companies may call a consumer on the Do Not Call list under which of the following circumstances? The DNC listing is in error. --The insurer has an existing relationship with the consumer. The insurer has not received the DNC request. The business relationship has been severed for less than 30 days. Explanation: If the consumer has an existing relationship with a business, the business can call for up to 18 months after the consumer's last purchase or payment. -Adam is an independent agent and solicits policies for several different insurers. Which best describes the type of relationship Adam has with each insurer? Correctfiduciary dependent presumptive non-contractual Explanation: Adam has a fiduciary relationship with every insurer with whom he does business. This means that he must avoid conflicts of interest and must act in good faith and with integrity in his dealings with various insurance companies. -Stacey is a captive agent for Best Rates Insurance Company. According to her agency contract, she can use business cards containing Best Rates' company logo and can also submit applications for their policies. Which type of authority does Stacey have to take these actions? apparent authority --express authority implied authority imputed authority Explanation: The agency contract between Stacey and Best Rates Insurance Company sets forth certain acts and duties that she is specifically authorized to perform, such as submitting applications and using the company's logo. This authority is called express authority -Fran signs a contract with ABC Insurance Company to represent the company. The contract gives her express authority to perform certain duties as agent. Which of the following is a correct statement with respect to Fran's actions? Fran has unlimited authority to represent the company. CorrectWhen Fran acts within her authority, she binds the company by her actions. Only Fran can be held responsible for her actions. Fran should not perform any actions without first consulting with her supervisor. Explanation: An agent who does what he or she is given express authority to do binds the insurance company by those actions. -Sam's contract with the insurer he represents gives him the authority to solicit insurance applications. Which of the following is likely implied by Sam's authority? Incorrectauthority to perform underwriting functions Correctauthority to telephone and email prospective clients to arrange sales meetings authority to represent any other insurer he wishes authority to set policy premiums Explanation: Implied authority comes from the powers that the insurer normally gives its agents. Although the authority to contact prospects to arrange sales meetings is generally not expressly given in the agent's contract, the authority to solicit applications implies this authority. -Jennifer applied for a $500,000 whole life insurance policy. The insurer issued the policy but classified Jennifer as a substandard risk, resulting in a higher premium. Which type of policy delivery would be preferred in this situation? constructive delivery preliminary delivery --legal delivery interim delivery Explanation: Legal delivery of a policy requires personal delivery to the client and an explanation. The agent should explain any terms of the policy that were imposed during the underwriting process as well as the reason for any additional premium charge that was not known at the time of application. -ABC Insurance Company fires Producer Renee. She continues to interview prospects, make sales presentations with company materials, and collect premiums, which she deposits in her personal account. Which of the following types of authority have her "prospects" relied on when paying what they believe to be premiums? Correctapparent authority actual authority implied authority express authority Explanation: Apparent authority is not intended to be granted to the agent by the insurer. However, it is the authority that appears to exist from the perspective of the customer or other third parties. - - - - -

1.4 Insurance Contracts

-Under an insurance contract, which of the following best describes the difference between a representation and a warranty? --A representation is not part of a contract, while a warranty becomes part of a contract. A representation is always part of a contract, while a warranty is part of a contract only under certain conditions. A representation is guaranteed to be true, while a warranty is not. A warranty determined to be false has no effect on the validity of a contract, and a representation is not regarded this way. Explanation: A representation is not guaranteed by its maker to be true; it is only believed to be true. A warranty is a statement guaranteed to be true, and it becomes a party of a policy contract. -While reviewing a life insurance policy issued by her home office, Agent Angela notices that the premium is considerably higher than she quoted the insured and the policy contains features that were not requested. Which of the following is her best course of action? Angela should present the policy as is; because it was generated by the home office, the extra features are probably required. --Angela should reschedule the upcoming appointment with the insured while the home office reviews the policy and recalculates the premium. Angela should recalculate the premium herself. Angela should call the client and delay, saying the insurer seems to have lost the policy. Explanation: Under the concept of utmost good faith, both parties are entitled to receive all the material facts related to the circumstances under which they enter into the contract -One month after paying the initial premium for a disability income policy, Suri was hit by a car and was seriously injured. She then received disability income payments for the next 12 months. The fact that Suri ultimately received more in value under the policy than what she paid demonstrates which characteristic of insurance contracts? adhesion --aleatory Incorrectconditional unilateral Explanation: An insurance policy is an aleatory contract, which means that one party may receive a benefit that is entirely out of proportion to the consideration he or she is giving. In this case, Suri only made one premium payment but received a much larger benefit in return. -In an insurance transaction, who gives consideration? only the applicant only the insurer --both the applicant and the insurer no one Explanation: Consideration, in the context of a contract, means something of value that both parties to the contract give. In an insurance contract, both parties give consideration. The insurance company promises to pay the amount specified in the contract, and the applicant pays the first premium -In an insurance transaction, what does the applicant give as consideration? --the initial premium the promise to pay premiums during the entire policy period the promise to be a responsible policyowner the promise to follow the terms of the insurance contract Explanation: In an insurance contract, both parties give consideration: the insurance company promises to pay the amount specified in the contract; the applicant pays the first premium. -For a life insurance contract to be enforceable, which of the following parties must be legally competent? applicant insurer applicant and insurer applicant, insurer, and beneficiary Explanation: For a contract to be enforceable, the applicant for an insurance policy must be legally competent. This means that a person must be mentally sound, of legal age, and not under the influence of drugs or alcohol. In addition, the insurer must be competent. This means that the company must have legal authority to issue a policy and also must be authorized by the state to offer insurance. -The fact that an insurance contract generally cannot be transferred to a third party without the insurer's consent makes it what type of contract? unilateral Correctpersonal aleatory conditional Explanation: Most insurance policies are personal contracts between the insurer and the policyowner. This means that the policyowner cannot transfer the agreement without the insurer's consent. Life insurance is an exception. The owner of a life insurance policy can do what he or she wants with the policy, such as using it as collateral on a loan or transferring it to a third party. -What will result if an insured decides to stop paying premiums for his or her insurance policy? The insurance company can require the insured to continue paying the premiums. The insured has breached the terms of the contract. The insurance company must return all premiums that have been paid if no claims have been made under the policy. CorrectThe insurance company is released from its promise to pay benefits and the contract expires. Explanation: In an insurance contract, the insured promises to pay the first premium only (a requirement for policy issue). After that, there is no ongoing requirement for the insured to continue to pay premiums and the insurance company cannot require the insured to continue paying premiums. An insured who fails to pay premiums has not breached the terms of the contract. -Which of the following parties makes an enforceable promise in an insurance contract? Correctthe insurance company the insured the beneficiary the agent Explanation: An insurance contract is unilateral. This means that only one party—the insurer—makes an enforceable promise to pay benefits if certain things happen or conditions are met. The insured makes no enforceable promise and must only continue paying premiums to keep the policy in force. - - - - - -

quizzes

Question 1 The mathematical concept of probability that helps insurers estimate the statistical likelihood of mortality or morbidity losses at any given age is called the law of large numbers underwriting principle actuarial principle law of probability Based on the idea that predictions become more accurate as the number of exposures increase, the law of large numbers is the mathematical principle of probability that insurance is based on. Question 2 All of the following are insurable risks EXCEPT the risk of premature death. the risk of incurring dementia requiring long-term medical care. the risk of one's home value decreasing due to a drop in market prices. the risk of becoming ill and requiring hospitalization. Only pure risks (representing the chance of loss but not gain) are insurable. Speculative risks are not. Premature death, illness and disability are recognized as insurable risks. Question 3 From an insurance risk perspective, a person who smokes heavily and drinks alcohol to excess exhibits which of the following traits? physical hazard moral hazard morale hazard legal hazards Moral hazards are individual traits or habits, like smoking and excessive drinking, that increase the chance of a loss. Question 4 Karen purchased an individual life insurance policy at an early age because of her family's history of cancer, and now that she has reached the age where her mother died of cancer she is seeking to purchase more coverage. Which of the following describes Karen's tendency to buy and maintain life insurance? adverse selection The tendency of persons to buy and keep insurance if they perceive themselves to be at a greater risk of a loss is called adverse selection. Question 1 To be considered insurable, a risk must meet all the following requirements EXCEPT The loss must be definable as to time, cause, and location. The loss must be measurable. The loss cannot be catastrophic. The loss must be certain to occur. To be insurable, a loss must be definable, measurable, uncertain, and not catastrophic. Question 2 Lucy is applying for an individual health insurance policy. The application asks about her current health and whether she has any known medical conditions. Lucy discloses that she is diabetic, which would be considered which of the following? a morale hazard a moral hazard a physical hazard a critical hazard A physical hazard is a physical characteristic, such as diabetes, that increases the chance of loss. Question 3 From an insurance perspective, the term exposure means The extent to which insurers are required to open their financial books for public inspection. The extent to which an insurer is subject to a possible losses. The extent to which an insurer discloses its marketing practices to the public. The extent to which an insurer discloses the components making up its policy premium rates. Also called loss exposure, exposure is the state of being subject to a possible loss. The extent of loss exposure facing an insurer has a direct bearing on the premium it charges. Question 4 Jane is stopped at a traffic light when thieves carjack her vehicle. She refuses to own another car, saying that she never wants to be subjected to this type of trauma again. Which of the following is Jane using as a means of risk management? risk avoidance risk retention risk reduction risk sharing By refusing to own a car, Jane is avoiding the risk of a future carjacking. The insurance company function that is responsible for evaluating the insurable risks and assigning appropriate premium rates. sales division actuarial division underwriting division claims division The underwriting division is responsible for evaluating insurable risks and assigning appropriate premium rates. Question 2 The Royale Insurance Company, headquartered in Toronto, Canada, conducts business legally in New York. In New York, Royale is a(n) foreign insurance company alien insurance company unauthorized insurance company domestic insurance company An alien insurer is one that is domiciled in a different country Question 3 The federal Risk Retention Act of 1986 contains guidelines for which of the following entities? risk retention groups surplus lines insurance companies reinsurance companies risk purchasing groups The RRA '86 does not apply to surplus lines insurers. Question 4 Why would a large manufacturer choose to self-insure rather than buy an insurance policy from an insurance company? For tax abatement purposes To save insurance premiums by paying relatively minor losses. To avoid having to comply with individual state laws To cover severe losses. Self-insurance is often used to cover relatively minor losses. You answered 50% of the questions correctly Question 1 Lisa is a producer for an insurance company that sells its products to the general public and which specializes in life insurance policies designed for burial and last expense purposes, generally with face amounts of $10,000 or less, for which she oftentimes collects premiums weekly. Lisa most likely represents a(n) home service insurance company social insurance provider. fraternal insurance company ordinary life insurance company. Representing fraternal benefit societies, fraternal insurers sell only to the society's members. Most fraternal insurers sell ordinary life insurance products. Question 2 The Excalibur Insurance Company, headquartered in Iowa, conducts business legally in Nebraska. In Nebraska, Excalibur is a(n) alien insurance company foreign insurance company domestic insurance company nonadmitted insurance company Insurers doing business in the state in which they are domiciled are classified as domestic companies in that state. Question 3 All the following are characteristics of a stock insurance company EXCEPT they have minimum capital requirements that must be met before they can conduct business. they are governed by a board of directors. they may issue dividends. they are owned by policyowners. Stock insurance companies are owned by stockholders. Mutual insurance companies are owned by their policyowners. Question 4 Which of the following is an example of an unauthorized insurance company in Illinois? Company C, a non-admitted Florida company whose products are approved by the Illinois insurance department. Company B, an Illinois company that does not hold a certificate of authority and sells products that are not approved by the Illinois insurance department. Company D, a Canadian company that holds a certificate of authority in Illinois. Company A, an Illinois company that holds a certificate of authority. An unauthorized company is one that is presenting the products it sells as 'insurance' when in fact it is not an admitted company and its product are not approved by the state insurance department Question 1 The contract between the producer and insurer, setting forth certain acts and duties the producer is specifically authorized to perform, is an example of Implied authority Apparent authority Express authority* Agency authority Express authority is described, in writing, in contracts and related agreements. Question 2 A producer has a fiduciary responsibility to The customer only. Both the insurer and the customer.* The insurer only. Neither the insurer nor the customer. Producers have a fiduciary duty to their customers as well as their insurance company, and must act in good faith and with integrity in their dealings with both. Question 3 With respect to the field of insurance, who are the two parties bound by common law rules of agency? The state insurance department and the insurer. The producer and the policyowner. the insurer and the producer* the insurer and the insured. Insurers and their producers are bound by common law rules of agency. Question 4 An agent for ABC Insurance Company met with a client to talk about long-term care policies. The agent showed the client ABC's sample policies, referred to the ABC rate book, gave him an ABC business card, and told the client that ABC has given him unlimited binding authority, which, in fact, the company did not do. If the client assumes the agent has binding authority, which of the following describes the type of agent's authority illustrated in this case? imputed authority apparent authority implied authority express authority Implied authority refers to other acts that an agent can perform that the agent's contract does not specifically mention. An agent's authority is implied when the insurer intends to give it. It usually relates to the general customs of the business, and the contract does not create or specifically explain it. Question 1 Which of the following is NOT one of an agent's responsibilities to an applicant? *helping write an applicant's insurance policy disclosing all important information about a proposed policy avoiding replacing an insurance policy unless doing so will clearly benefit the applicant recommending insurance products that are suitable for the customer's needs Agents must act in the applicant's or insured's best interests at all times. This means that agents must disclose all important information about a proposed policy. They cannot misrepresent the terms or conditions of a policy, and must avoid replacing policies unless it is in the applicant's best interests. Agents do not help write the actual insurance policy. Question 2 Which of the following best describes an agent's responsibilities? *An agent has to act in the best interests of insureds, applicants, and insurers. An agent only has to act in the best interests of the insured or applicant, but not the insurer. An agent has no fiduciary duty toward insurers, applicants, or insureds. An agent only has to act in the best interests of the insurer he or she represents. In addition to the duties an agent owes to the insurer, the agent also must act only in the best interests of the applicant or insured. Question 3 The main purpose for errors and omissions insurance (E&O) is to Pay for an insurance company executive to meet with a policyowner to correct an error made by the producer during the sales process. Provide legal protection to the producer who is charged with willfully engaging in an unfair trade practice. Allow the producer to be less diligent in complying with insurance sales disclosure requirements. *Cover damages that arise due to services a producer non-willfully failed to render. E&O insurance covers injuries and damages that occur due to professional services a producer rendered or failed to render without the willful intent to injure the customer. Question 4 The purpose for the Buyer's Guide, which must be given to every insurance prospect, is to Provide buyers with details of the insurance policy they are considering for purchase. Explain the step-by-step process involved in purchasing the recommended product. Advise the buyer to consider an alternative to the insurance product being considered. *Explain the general features, benefits, and conditions of the type of insurance being considered. Provided to a prospective buyer when he or she is first solicited, the Buyer's Guide explains the general features, benefits, and conditions of the type of insurance being considered. Question 1 What will result if an insured decides to stop paying premiums for his or her insurance policy? *The insurance company is released from its promise to pay benefits and the contract expires. The insurance company must return all premiums that have been paid if no claims have been made under the policy. The insured has breached the terms of the contract. The insurance company can require the insured to continue paying the premiums. An insurance contract is a unilateral contract, which means that only one party-the insurer-makes a promise that can be enforced. The insured must only pay the first premium. The insurer cannot require the policyowner to pay more premiums. However, if the policyowner does not pay any required premiums, the insurer is released from its promise to pay the benefit and the contract expires. Question 2 What are statements made in a life insurance application? conditional promises unconditional promises *representations warranties An applicant's statements on an application for insurance are considered representations and not warranties. A representation is a statement made at the time the contract was formed but not guaranteed by the maker to be true. A misrepresentation on the application allows the insurer to end the contract only if the misrepresentation was material. Question 3 What are statements that are guaranteed to be true called? petitions declarations *warranties representations A warranty is a statement that its maker guarantees to be true in all ways. If a warranty is found false, the other party has the right to end the contract, even if the statement was not important to the contract's formation. However, statements made by insurance applicants on the application are deemed to be representations, not warranties. Question 4 An applicant for an insurance policy submits an application without the first premium. Which of the following is correct? The applicant has made an offer to the insurer. The insurer may not make a counteroffer to the applicant. *The applicant has invited the insurer to make an offer. The insurer has made an offer to the applicant. When an applicant submits an application without the first premium, the applicant has invited the insurer to make an offer. In contrast, when an applicant submits an application to the insurer with the first premium payment, the applicant has made an offer that the insurer may or may not accept. Question 1 The fact that a health insurance contract generally cannot be transferred to a third party without the insurer's consent makes it what type of contract? unilateral conditional *personal aleatory Most insurance policies are personal contracts between the insurer and the policyowner. This means that the policyowner cannot transfer the agreement without the insurer's consent. Life insurance is an exception. The owner of a life insurance policy can do what he or she wants with the policy, such as using it as collateral on a loan or transferring it to a third party. Question 2 Which of the following statements about utmost good faith in insurance contracts is correct? Only the insurer must act in utmost good faith. Only the insured and the beneficiary must act in utmost good faith. *Both the insured and insurer must act in utmost good faith. Only the insured must act in utmost good faith. An insurance contract requires that both the insured and the insurer act in utmost good faith. Under this concept, both parties can expect complete, relevant, and accurate information. If one party fails to disclose critical information, the other party usually can void the contract. Question 3 Which of the following contract characteristics is unique to insurance contracts but not all contracts? competent parties consideration *unilateral legal purpose All legally enforceable contracts must be made between parties that are legally competent. In an insurance transaction, the applicant is deemed competent (unless proven otherwise) when he or she applies for a policy. The insurer must also be authorized by the state to issue a policy. Question 4 Sandra and David orally agree that Sandra will pay David $25,000 to set fire to her ex-husband's house and the house burns to the ground. Which of the following statements is correct? David can void the contract if he changes his mind about setting fire to the house. The contract is unenforceable because it is not in writing. The contract is unenforceable because the consideration will be paid after the act is performed. *The contract cannot be enforced because its purpose is illegal. Because the purpose of Sandra and David's contract is illegal, it is not enforceable. Whether or not David can void the contract is irrelevant, since the contract is not for a legal purpose. Question 1 Which of the following is not a duty of the Georgia Insurance Commissioner? issuing orders making rules to help administer the Insurance Code -soliciting insurance contracts enforcing the insurance laws Enforcing the insurance laws, issuing orders, and making rules are all duties of the Commissioner. The Commissioner does not solicit insurance contracts. Question 2 How often must the Commissioner examine the affairs of a domestic insurer? at least once every three years only when a written request is made by an insurer's shareholders -at least once every five years at least once every year The Commissioner can examine the books and records of an insurer as often as necessary, but at least once every five years. Question 3 What is an insurance company's license to transact business called? evidence of licensure -certificate of authority corporate authorization license of good standing An insurance company's license to transact business is called a certificate of authority. The certificate specifies the kinds of insurance that the insurer is authorized to transact in the state. Question 4 Which of the following penalties may the Commissioner impose if a person violates a cease and desist order? restitution lawsuit in federal court *license suspension or revocation fine of up to $50,000 The Commissioner can suspend or revoke a license or impose a fine of up to $10,000 per violation. He or she may also impose any other penalty that may be appropriate. Question 1 On what date does an insurer's certificate of authority in Georgia expire every year? July 1 December 1 *June 30 May 30 An insurer's certificate of authority remains in force until midnight on June 30 each year. Question 2 Which of the following penalties may the Commissioner impose if, after a hearing, he or she determines that an agent has committed an unfair trade practice? termination of the agent's appointment imposition of civil damages and restitution lawsuit in federal court *termination of an agent's license If the Commissioner finds that an agent has committed an unfair trade practice, he or she can issue a cease and desist order, impose a fine, or suspend or revoke an agent's license. Question 3 For which of the following acts may the Commissioner suspend or revoke an insurer's certificate of authority? advertising its policies in other states transacting surplus lines insurance *refusing to be examined permitting agents to sell replacement policies The Commissioner may suspend or revoke a certificate of authority if an insurer refuses to be examined or to produce its accounts, records, and files for examination by the Commissioner. Question 4 Which of the following statements best describes an authorized insurer? an insurer with at least 25 appointed agents in Georgia an insurer authorized to transact insurance for other insurers in Georgia a domestic insurer authorized to transact insurance in all 50 states *an insurer with a certificate of authority to transact insurance in Georgia An authorized insurer has a certificate of authority to transact insurance in Georgia. An insurer that does not have a certificate of authority is a nonadmitted or unauthorized insurer. Question 1 Terry has been licensed in Georgia as a life and health insurance agent for six years. To maintain his license, how many hours of continuing education must he complete every two years? 20 *24 15 10 An agent licensed for less than 20 years must complete a total of 24 hours before every license renewal. An agent licensed for at least 20 years must complete a total of 20 hours before every license renewal. Question 2 To qualify for a resident insurance agent's license in Georgia, a person must comply with all of the following EXCEPT *earning a college degree. being at least 18 years old. paying the licensing fee. passing the licensing exam. To qualify for a resident agent's license, an applicant must be at least 18 years old, pay the required fee, pass the licensing exam, complete a prelicensing education program, submit a set of fingerprints, and be a Georgia resident for at least six months every year. Question 3 Which of the following is not a requirement to obtain a resident agent's license? being at least 18 years of age *being appointed by at least two insurers successfully completing the licensing examination having good character To receive a resident agent's license, a person must be at least 18 years old, have good character, complete a prelicensing course of study, submit a set of fingerprints, and pass the licensing exam. Agents are not required to be appointed by two insurers. Question 4 Abby lives in North Carolina, where she is licensed as an insurance agent. She wants to apply for a nonresident license in Georgia. Which of the following conditions must she satisfy? She must be sponsored by an agent licensed in Georgia. *She must give the Commissioner a certified copy of the license application from her home state. She must surrender her North Carolina license. She must move to Georgia. A person who is not a resident of Georgia may be licensed as an insurance agent in Georgia if he or she is a licensed agent in another state, applies for licensure and pays the required fees, and gives the Commissioner a certified copy of the license application from his or her home state (or an original Uniform Application). The person's home state must also grant nonresident agent licenses to Georgia residents on the same basis. Question 1 Thomas moved his insurance office to a different town in Georgia on May 1. Within how many days must he notify the Commissioner of the change of address? 10 60 *30 20 Agents, limited subagents, counselors, and adjusters must maintain a place of business in Georgia where they transact insurance. A licensee must notify the Commissioner within 30 days of any change in business address. Question 2 The Commissioner can suspend or revoke an agent's license for all of the following reasons EXCEPT: *failing to meet projected sales goals having an agent's license revoked in another state conviction of a felony misrepresentation in obtaining the license The Commissioner may place on probation, suspend, revoke, or refuse to continue an agent's license for misrepresentation, conviction of a felony, and having a license revoked in another state. A license may not be revoked if an agent fails to meet projected sales goals. Question 3 Which of the following is not a requirement to obtain a resident agent's license? being at least 18 years of age *being appointed by at least two insurers successfully completing the licensing examination having good character To receive a resident agent's license, a person must be at least 18 years old, have good character, complete a prelicensing course of study, submit a set of fingerprints, and pass the licensing exam. Agents are not required to be appointed by two insurers. Question 4 Which of the following persons would not qualify for a temporary agent's license in Georgia? person designated by an agent on active military duty *part-time agent of a licensed agency surviving spouse of a deceased agent spouse of a disabled agent Anyone who transacts insurance in Georgia, even on a part-time basis, must obtain an insurance producer's license. Question 1 Which penalty can the Commissioner impose if an agent commingles premiums with his or her personal funds? bond forfeiture *license suspension or revocation up to one year imprisonment restitution The Commissioner may impose a fine and place on probation, suspend, or revoke a person's license for violating the commingling rules. A willful violation is considered a misdemeanor or a felony if the amount involved is more than $500. Question 2 The Georgia Life and Health Insurance Guaranty Association does not provide coverage for which of the following types of insurance? group life insurance policies *reinsurance policies individual life insurance policies annuity contracts The Georgia Life and Health Insurance Guaranty Association provides coverage for individual life insurance policies, health insurance policies, annuity contracts, contracts supplemental to life and health insurance policies and annuity contracts, and direct group life insurance policies, health insurance policies, and annuity contracts. Question 3 When holding insurance premiums and other funds, producers act in which of the following capacities? guarantor trustee *fiduciary principal Licensed producers hold insurance premiums and other funds in a fiduciary capacity. A willful violation of the duties imposed upon a fiduciary is considered a misdemeanor. Question 4 Zelda, a producer selling health insurance, assures a prospective applicant that the insurance company she represents is backed by the protections of the Georgia Life and Health Insurance Guaranty Association. Which of the following is a correct statement regarding this kind of assurance? It is highly regulated by the Insurance Department. It is recommended when selling health insurance. *It is prohibited at all times. It is required when selling to Medicare-eligible individuals. It is an unfair trade practice to use the existence of the Georgia Life and Health Insurance Guaranty Association, or the protections the association offers, for the purpose of selling life or health insurance. When asked about the payment of dividends by a prospect, Maloney states that policy dividends are always guaranteed, even though they are not. Which unfair trade practice has the agent committed?m coercion unfair discrimination *misrepresentation twisting It is considered misrepresentation to circulate misleading information about an insurance contract, such as by assuring policyholders that they will receive future dividends when they are not guaranteed. Question 2 Malloy received $10,000 in premiums from clients on June 1. Which statement best describes his responsibilities with regard to these funds? He must deliver the premiums to the insurer within 5 days. He must immediately deposit the premiums in a trust account and remit them to the insurer within 10 days. *He must promptly pay all premiums to the insurer and may not commingle them with his personal funds. He must deposit the premiums in a trust account and deliver them to the insurer within 21 days. An agent may not commingle insurance premiums with personal funds and must promptly pay all funds to the insurer or insured. However, agents are not required to maintain a separate bank deposit for the funds of each principal, if the funds are readily ascertainable from the agent's accounts and records. Question 3 Acme Insurance and Apogee Insurance agree to offer different premium rates for persons of equal risk within a particular class. They also agree to limit benefits paid to insureds within this class if the insureds live in certain towns in Georgia. What are Acme and Apogee engaging in? acceptable marketing and underwriting practices insurance fraud false advertising *unfair and prohibited business practices Acme and Apogee are agreeing to an unreasonable restraint of trade in the insurance business of Georgia. Furthermore, they are engaging in unfair discrimination by charging persons of the same class and substantially equal risk different premium rates and by paying different benefits to persons in this class. Question 4 Smith received $20,000 in premiums from his clients and used half of the funds to buy a new entertainment system for his office. Which of the following penalties may be imposed for this misconduct? license suspension for up to six months fine of up to $50,000 *felony conviction restitution An agent may not commingle premiums with his or her personal funds and must promptly pay all funds to the insurer or insured. A willful violation is considered a misdemeanor or a felony if the amount involved is more than $500. To boost her insurance sales at the end of the year, Trudy offered potential clients a $250 cash gift card in exchange for purchasing a life insurance policy. Which ethical sales practice has Trudy violated? false information twisting churning *rebating Agents cannot offer anything of value to induce someone to buy insurance, including a rebate of the premium, dividends, stocks or bonds, or paid employment. They also cannot pay or offer to pay anything of value that is not specified in the insurance contract. This unfair trade practice is known as rebating. Question 2 When meeting with a prospect to discuss life insurance, Tyler makes disparaging comments about the financial stability and reputation of a competitor to dissuade the prospect from purchasing its policies. Which unfair trade practice has Tyler committed? rebating *defamation coercion unfair discrimination It is considered defamation to publish or circulate a false, deceptive, or misleading statement about—or a statement that is maliciously critical of or derogatory to—the financial condition of an insurer, when such a statement is designed to injure anyone in the insurance business. Question 3 Which statement describes the purpose of the Georgia Life and Health Insurance Guaranty Association? *It protects policyholders against an insurance company's failure to perform its contractual obligations because of impairment or insolvency. It provides access to life and health insurance to individuals who would otherwise be uninsurable. It protects domestic and foreign insurers that are experiencing financial problems. It guarantees that insurers will pay minimum returns on variable insurance and annuity contracts. The Georgia Life and Health Insurance Guaranty Association protects policyowners, insureds, and beneficiaries if insurers become impaired or insolvent and unable to perform their contractual obligations. Question 4 When comparing her insurance company's policies to those of Zenith Insurance, Melanie makes a misleading statement to convince an insurance prospect to terminate a policy with Zenith and buy one from Melanie's company. What has Melanie engaged in? rebating *twisting defamation unfair discrimination A person cannot make a false or misleading statement or comparison about an insurance policy in order to induce someone to lapse, surrender, terminate, retain, or convert an insurance policy or buy a policy with another insurer Question 1 Which of the following most accurately describes "insurable interest"? Insurable interest is the length of the relationship between the person applying for insurance and the insured. For insurable interest to exist, the buyer must have known the insured for at least three years. *Insurable interest is the relationship between the person applying for life insurance and the person whose life is to be insured. It is a necessary element in the issuing of a life insurance contract. With life insurance, insurable interest is the relationship between the person paying for the insurance and the designated beneficiary. Insurable interest is the reason one person is insuring the life of another. Though of interest to the insurer, Insurable interest is not a necessary element for a life insurance contract to be issued. The relationship between the person paying for insurance and the designated beneficiary is irrelevant. Question 2 The Acme Supply Company might buy life insurance to do all of the following, EXCEPT: *to provide insurance coverage for large-volume customers to insure liquidity in case one of the owners or key employees dies to insure partners' lives to provide liquidity to fund buy-out agreements to insure the lives of key employees or owners Businesses may buy life insurance to insure the lives of key employees or owners. Question 3 What of the following best describes the meaning or purpose of insurable interest? *Insurable interest exists only if the person buying the contract will suffer a financial loss when the insured dies Insurable interest can protect business owners from fraudulent claims of creditors. Insurable interest must always be present for as long as the coverage lasts with all types of insurance. Insurable loss exists only if the parties involved are married. For insurable interest to exist, the person buying the insurance must suffer a loss when the insured dies. That loss can come from close familial ties or financial ties. Question 4 Which of these personal relationships does NOT automatically constitute insurable interest? Dependent children have insurable interest in their parents or grandparents. *Neighbors have insurable interest in each other. People have insurable interest in themselves. Spouses have insurable interest in each other In general, people have insurable interest in themselves. Question 1 Life insurance applies to business arrangements in all of the following ways, EXCEPT: Life insurance is often bought by businesses to cover the lives of their key employees or owners. Partners often insure each other's lives (naming themselves as beneficiaries) in order to provide funds that can be used to buy out the business interest of the one who dies *Life insurance is used to make up for the financial losses that might occur when an important customer dies. Partners and partnerships use life insurance to ensure liquidity cash on hand. Partners often insure each other's lives (naming themselves as beneficiaries) in order to provide funds that can be used to buy out the business interest of the one who dies. Question 2 In life insurance, for how long must insurable interest exist? It must exist when a claim is submitted. It must continue for the life of the policy. If no insurable interest exists when a policyowner buys a life insurance policy, the contract may still be enforced. *Insurable interest must exist only at the time the applicant enters into a life insurance contract. Insurable interest need not exist when the claim is submitted. Question 3 The requirement that an insurable interest must exist when life insurance is purchased is intended to prevent people from doing which of the following? *using life insurance for wagering or betting designating an ineligible person as the policy beneficiary using life insurance to fund future cash needs overusing life insurance In part, underwriting procedures, not the requirement for insurable interest, are intended to stop the use of life insurance for criminal purposes. Question 4 Life insurance has been purchased by ABC Company on the lives of two partners, Hugh and Danny, and three key employees Eileen, Vern, and June. Which of the following would apply if Hugh and June were to leave the business? The company would have to drop its coverage for both Hugh and June within 30 days of their departures. *The company could keep the life insurance it has on both Hugh and June, even though both are no longer employed there. The company could keep the life insurance it has on Hugh, since he is a principal of the company, but would have to drop June's coverage, because she is not. The company can only retain its coverage on June because she is not a principal of the company. The company can retain its coverage on both June and Hugh. That June is not a principal of the company is irrelevant. Question 1 Sylvia's insurer guarantees a fixed death benefit for the policy she owns. Based on this, which one of the following benefits is also most likely guaranteed with this policy? to reinstate Sylvia's policy if it ever lapses to pay premiums for Sylvia in the event of emergencies *a minimum rate of return on the policy's cash value to send an agent to Sylvia's home to collect the premiums Sylvia's policy does guarantee a minimum rate of return on the policy's cash value. Question 2 Which of the following is/are directly involved in the regulation of variable insurance product sales? *Both FINRA and state insurance departments The Securities Exchange Commission (SEC) Financial Industry Regulatory Authority (FINRA) only state insurance departments only FINRA regulates variable insurance products and sales from an investment perspective while state insurance departments regulate variable products and sales as insurance products. Question 3 When may an insurer cancel either whole life or term life insurance? The insurer may cancel either type of policy without reason at any time. The insurer may cancel either type of policy if the insured exhibits moral turpitude. *The insurer may cancel both types of policies if the policyowner does not pay the premiums. The insurer may not cancel either type of life insurance policy. The insurer may cancel either type of life insurance policy if the policyowner does not pay the premiums. Question 4 Bob's only goal is to provide a death benefit to protect his family in case he dies while his children are young. What type of life insurance is best suited to this need? whole life insurance *term insurance business insurance group insurance Whole life insurance lasts for the insured's entire lifetime or until age 120. Question 1 Permanent life insurance can also provide funds, through its cash value, that may be used during the insured's lifetime. What is that feature called? permanent values *living benefits capital accumulation the money feature Permanent life insurance can provide funds out of its cash value accumulations for use during the insured's lifetime. Thus, this feature is called living benefits. Question 2 Harry and Constance want life insurance to provide death benefits in case either dies, as well as living benefits in the event of financial emergencies. Which of the following would this couple most likely buy? group insurance *whole life insurance business life insurance term insurance Businesses may buy business life insurance to insure the lives of key employees or owners. Individuals, like Harry and Constance, would have no reason to purchase business life insurance unless they were in business together. Question 3 Which one of the following best describes a policy that requires no medical exam to qualify and premiums that are paid to an insurance agent who generally calls on the policyowner at home on a weekly or monthly basis to collect the premium? *industrial insurance term insurance group insurance individual insurance Under a term policy, insurance coverage is temporary, applying to only a limited period of time. The time limit can be as short as 1 year or as long as 20 years (or until the insured reaches a specified age, such as 65). Medical exams may be required, but the premiums are not collected by an agent calling on the insured. Question 4 Which of the following statements about permanent life insurance cash values is NOT correct? The policyowner owns the cash value in the policy and can access it. Cash values grow over the life of the policy, designed to reach the face amount at the insured's age 120. As long as premiums are paid, the insurance stays in force, the cash values grow, and the policy is guaranteed to pay its death benefit. *The beneficiary has full access to the cash value. Only the policyowner owns the cash value in a permanent life policy and can access it. Question 1 In a participating policy, the insurance company pays the policyowner a dividend out of which of the following? *earnings apportioned from company profits earnings available for distribution (the divisible surplus) the company's cash reserves set amounts prescribed in the policy Companies do not pay dividends out of earnings apportioned from company profits. Question 2 All of the following statements about participating policies are correct EXCEPT The owner can leave the dividend in the policy or use it to buy term insurance. *The owner can only take the dividend as cash. The insurance company pays the owner a dividend out of its earnings that are available for distribution (the divisible surplus). The owner can apply the dividend to the premium payment in some form. The owner can take the dividend as cash or apply it to the premium payment in some form. Question 3 Alex owns a "home service" life insurance policy, which means he most likely pays his premiums in which of the following ways? with a single premium payment quarterly by checking account debit. annually by personal check. *weekly or monthly, often personally to the agent who comes to the policy owner's home. Also known as industrial insurance, home service insurance policyowners pay premiums weekly or monthly, either by mail, automatic deduction from a bank account, or in person to the agent. Question 4 All of the following statements about the regulation of the sale of variable products are correct, EXCEPT: *Agents who only sell variable life products and do not sell fixed life products are not required to hold a life insurance license. Agents who sell variable life products are required to comply with all state laws and regulations dealing with the sale of life insurance. Many states also require a state-issued variable life or variable producer's license The sale of variable products is regulated by the Financial Industry Regulatory Authority (FINRA). Selling variable life products also requires a valid life insurance license. Question 1 Loading reflects the costs that the insurance company can expect to pay for its operations. These costs include all of the following, EXCEPT: employee benefits salaries and commissions *mortality costs the insurer's expenses for rent Loading reflects an insurance company's cost of operation, excluding mortality costs. Question 2 Actuaries calculate net single premiums based on which of the following? *mortality and interest assumptions mortality and assumed bond rates morbidity and interest assumptions mortality and dividend assumptions The net single premium for a traditional life insurance policy reflects two of the premium factors: mortality and interest. Question 3 What is the result of Alice paying her life insurance premiums more frequently than once a year? no effect higher annual premiums to account for the increased risk to the insurer lower annual premiums *higher annual premiums to account for lost interest and additional insurer costs Paying more frequently than once a year results in higher annual premiums to account for lost interest and additional insurer costs. Question 4 Which of the following statements generally guides insurance companies in determining "loading"? The resulting net premiums should help the company maintain or improve its competitive position. Total loading from all policies should meet industry averages. Expenses should be divided primarily among the company's most profitable plans and lowest mortality experience. *Total loading from all policies should cover total operating costs, provide a safety margin, and contribute to profits or surplus. Total loading from all policies should cover total operating costs, provide a safety margin, and contribute to profits or surplus. Question 1 Which one of the following statements best describes if and when a life insurance premium may change under the level premium concept? *Premiums are set and remain fixed over the full term of the premium-paying period. Premiums may vary each time they are due based on the insured's current insurability. Premiums may change if the risk to the insurer increases over time. Premiums are either fixed or flexible at the option of the insurer. The payment amount does not change even though the risk to the insurer increases over time. Question 2 Actuaries begin the process of calculating life insurance premium rates by using mortality tables, which help predict future experience but not with 100 percent certainty. How do actuaries compensate for this uncertainty when determining the gross premium charged to the policyowner? *They add an expense load, which includes a safety margin factor, to the net premium to produce the gross premium. They add a safety margin load to the mortality charge, increasing the net premium. They assume a higher rate of interest than actually expected, which provides a safety margin by increasing the gross premium. They assume there will be fewer deaths than their past mortality experience would predict, which provides a safety margin by increasing the gross premium. Actuaries add an expense factor (also called a load factor) to the net premium to produce the gross premium. Providing a safety margin to overcome mortality uncertainty is a key objective for the load. Question 3 An insurance company is developing a new product. Which one of the following is the actuaries' most important responsibility? *deciding the premium for the new product assuring that the new product will be appealing to average consumers deciding the classification of the new product creating a product with competitive features and benefits This would be done by another department in an insurance company. Question 4 Which of the following best describes the premium tax insurance companies must pay when they receive premiums? *Most companies pass this tax on to their policyowners in some way, either directly or indirectly. Companies absorb these expenses and do not pass them along to policyowners. It is imposed by the federal government. It is a federally mandated tax that is collected at the state level by all states. Most companies pass this tax on to their policyowners in some way, either directly or indirectly. Question 1 What is the actuary's first step in determining the premium to charge for a policy? *Calculate the net single premium. Calculate expenses and contingencies. Calculate the annual dividend schedule. Calculate the gross premium. Calculating expenses and contingencies comes later in the process. Question 2 Which one of the following do actuaries use to predict the likelihood of an individual dying at any certain age in the premium rate-making process? *mortality company experience morbidity industry-wide rating history Mortality is the element of premium rate-making that reflects the rate of death of prospective insureds. Question 3 An actuary is setting life insurance rates. What affect will it have on a policy if higher interest assumptions are used? Premiums will be higher. *Premiums will be lower. It will have no effect. The effect cannot be known. In making life insurance rates, higher assumed interest earnings reduce premiums. Question 4 The expense component of the pricing process is known as the loading. It reflects the costs, other than mortality costs, that the insurance company can expect to incur for all of its operations. All of the following are among the considerations that guide insurance companies in determining loading, EXCEPT: *Expenses should be weighted to older issue ages. Expenses should be apportioned equitably over the company's various plans. Total loading from all policies should cover total operating costs, provide a safety margin, and contribute to profits or surplus. The resulting gross premiums should permit the company to be competitive in the insurance market. Expenses should be apportioned equitably over the company's various plans and issue age. Question 1 The primary reason for using third-party ownership in personal life insurance for estate planning purposes is to *remove the value of the life insurance proceeds from the insured's estate. reduce the tax rate used in calculating the estate tax. transfer the estate tax liability from the owner to the beneficiary. convert the life insurance proceeds from an estate taxable asset to an income taxable asset. Done correctly, third-party ownership of life insurance removes the value of the life insurance proceeds from the insured's estate. Question 2 In a third-party life insurance contract, the parties to the contract are the the owner, the insured and the beneficiary. the insurance company, the owner and the beneficiary. the insured, the beneficiary and the insurance company. *the owner, the insured and the insurance company. The two parties in a standard two-party insurance contract are the owner and the insurance company. In a third-party contract, the owner and the insured are different people. Question 3 Robert is purchasing a life insurance policy, which he wants to keep out of his taxable gross estate. Which of the following arrangements would help him meet that goal? Robert could transfer ownership of his life insurance to a third-party owner any time before his death. The death benefits must be paid to Robert's estate. *A third party (such as an irrevocable trust) can apply for and own the policy from the beginning. Robert must transfer ownership to a third-party irrevocable trust within three years before his death. If the insured transfers the life insurance policy to a third party and then dies within three years after the transfer, the policy death benefits are included in the insured's estate for tax purposes. Question 4 Under the standard bring-back rule, assets transferred out of a decedent's estate will be valued in the estate if the transfer occurred within how many years before death? 5 years 4 years *3 years 7 years Assets that the original owner transferred are included in the gross value of the estate if the transfer occurred within the three years before his or her death. Question 1 In personal insurance, what is the disadvantage to third-party ownership? The beneficiary holds rights to the policy's cash values The policyowner has no right to name the beneficiary The insured has access to the policy's cash values *The insured has no right to name the beneficiary. The insured has no right to name the beneficiary. Question 2 All the following statements regarding stranger-owned life insurance (STOLI) are correct EXCEPT *The insured retains the right to designate the policy's beneficiary. STOLI and investor-owned life insurance (IOLI) are the same thing. STOLI is financed through premium loans during the first several years, until it is transferred from the insured to the investors. STOLI is an arrangement in which investors convince an individual to purchase a life insurance policy on himself which is transferred to the investor in exchange for a sum of money. Premium financing is arranged by the investor to assure the applicant that he or she will not have to pay anything to purchase the policy Question 3 All of the following statements about key person life insurance are correct, EXCEPT: Life insurance used as key person life is normally owned by the business rather than the insured. Key person, or key employee, life insurance is an example of third-party ownership. *Upon the insured employee's death, the surviving family receives the policy's death benefit. The business applies for, owns, and is the beneficiary of the policy covering the life of a key employee Upon the insured employee's death, the business receives the policy's death benefit. Question 4 Who normally owns life insurance used to meet business insurance needs? *the business the employees the business jointly with the insured the insured The business alone-not jointly with an insured individual-usually owns life insurance used to meet business insurance needs. Question 1 Replacement is considered to have occurred if a life insurance policy is purchased and, in conjunction with that purchase, any of the following occur with an existing policy EXCEPT The existing policy is surrendered. *The existing policy's beneficiary designation is changed. The existing policy is converted to reduced paid-up insurance. The existing policy is amended with a reduction in benefits. As long as the existing policy remains fully intact, a replacement does not occur merely because the beneficiary designation is changed. Question 2 All the following are federal laws or related rulings that have a direct impact on anti-money laundering requirements EXCEPT the: Bank Secrecy Act FinCEN final rules of 2005 USA PATRIOT Act *Fair Credit Reporting Act The USA PATRIOT Act expands the AML directives of the Bank Secrecy Act, and FinCEN's final rules amended the USA PATRIOT Act to address the insurance company needs. The FCRA does not directly relate to money laundering. Question 3 Anne, a life insurance applicant, wants to change an answer that she gave on the application. She should do which one of the following? Erase the original entry and enter the correct information. Write over the incorrect entry with the correct information. Cover up the incorrect entry and enter the correct information. *Cross out and initial the incorrect entry, and enter the correct information next to it. If an applicant wants to change an answer that he or she has already written on the application, then the applicant should cross out and initial the incorrect entry. Question 4 Someone other than the insured often applies for and owns a life insurance policy. Which of the following can NOT be an applicant and owner? a spouse an employer an adult child of the insured *a minor child of the insured The applicant and owner cannot be a minor child. Question 1 By submitting an application without the first premium, Larry is doing which of the following? *inviting the insurer to make an offer showing confidence that the insurance company will issue the policy making an offer to the insurer suggesting that the insurer should not issue the policy for some reason When Larry submits an application without the first premium, he is inviting the insurer to make an offer. Question 2 The activities a producer performs to support the insurance company in learning all it can about the applicant when seeking applications for insurance is called Fiduciary process *Field underwriting Due diligence Agency development While producers do have a fiduciary responsibility to the insurer, this is not the answer. Question 3 The insurance coverage provided under a temporary insurance receipt is whatever type of life insurance was applied for. temporary whole life insurance. *temporary term insurance. not insurance coverage at all, but the insurer's general account assets. The insurance coverage provided under a temporary insurance receipt is a form of temporary term insurance. Question 4 In cases where an existing life insurance policy is going to be replaced by new life insurance policy, the producer must do all the following EXCEPT: list all existing life insurance policies that will be replaced. *require the applicant to sign a waiver exempting the producer from any liability associated with the replacement. give the applicant a "Notice to Applicants Regarding Replacement of Life Insurance." give the applicant a policy comparison statement signed by the producer. While there are several things a producer must do when a customer replaces a life insurance policy, requiring the customer to sign a waiver is not one of them. Question 1 Sue, an applicant who is a preferred risk, can expect to pay a premium that is best described as which of the following? generally the same premiums as for standard risks *generally lower premiums than for standard risks generally the same premiums as for standard risks, but over a shorter period of time generally higher premiums than for a standard risk An applicant who presents a very low risk of loss to the insurer is a preferred risk. A person who is a preferred risk presents a low risk of loss to the insurer so he or she will usually pay lower premiums. Question 2 All other factors being equal, which of the following applicants can expect to pay the lowest premium for a given face amount of life insurance protection? *Pete, a preferred risk. Carl, a sub-standard risk. Jim, a standard risk. Sean, whose application was declined as uninsurable. Preferred risks generally enjoy lower rates (all other factors being equal) than standard risks, reflecting the lower risk they represent to the insurer. Question 3 An underwriter must keep application information confidential to comply with the Fair Credit Reporting Act (FCRA) of 1971. The FCRA does which of the following? sets procedures insurers must follow to make sure they use information effectively sets protocols agents must follow when requesting confidential financial information from applicants *sets procedures credit reporting agencies must follow to ensure confidentiality, accurate reporting, and proper use of the information monitors the code the Medical Information Bureau (MIB) uses to send confidential information to insurers The FCRA does not set protocols agents must follow when requesting confidential financial information from applicants-that is the insurer's responsibility. Question 4 Insurers use inspection reports to verify the information applicants provide to agents and examiners. Who is most likely to be the subject of an inspection report? all applicants business life insurance applicants who have already been issued high amounts of life insurance *applicants who ask for very high amounts of life insurance or business insurance applicants whom the agent knows well Insurers usually do not order inspection reports on businesses who are already clients. Question 1 What happens to Peter's signed application after it has been submitted to the insurer? It is destroyed. It becomes property of the state. It becomes the insurer's property and is filed away. *It becomes part of the contract between the insurer and the policyowner. The signed application becomes part of the contract between the insurer and the policyowner. Question 2 In which of the following areas may a life insurance underwriter discriminate in determining policy eligibility and coverage limits? Race Sexual orientation Physical defects *Personal health history State laws permit underwriting discrimination that is based on statistical data that distinguish one applicant's risk from another's, including personal health history. Question 3 In what form does the MIB present its information to insurers? A telephone call from a MIB analyst discussing the MIB's findings on the applicant *Numeric codes that are communicated electronically A written report detailing the MIB's findings on the applicant A posting on the MIB website describing the applicant's medical history To protect the applicant's privacy, the MIB does not provide detailed explanations of the data it gathers. Question 4 Jim's life insurance application is the first source of information an underwriter reviews. An accurate and complete application provides critical information about which of the following? *the applicant's personal data and health the agent the reason for the requested coverage the applicant's wealth An accurate and complete application provides critical information about personal data about the applicant and the insured, the requested insurance coverage, and the applicant's health. ina owns a $200,000 five-year renewable term insurance policy and wants to renew the policy at the end of the term. In this case, all the following statements are correct, EXCEPT: The premium for the renewal coverage will be higher than for the initial coverage. The insurer will base the premium for the renewal coverage on Gina's age at the time of renewal. -Gina must prove insurability before the insurer can renew the policy. Gina will be able to renew the policy any time up to age 65 or 70 (as defined in the policy). Most term policies set upper age limits on renewing policies. Thus, if Gina is over age 65 or 70, she will probably not be able to renew the policy. Question 2 Andrea bought a $300,000 term-to-55 policy. Which of the following statements about the policy is NOT correct? The premium for the policy stays the same until the policy ends. The policy gives $300,000 of coverage until Andrea reaches age 55. -The policy will pay the entire death benefit only if Andrea reaches age 55. If Andrea dies before age 55, the policy will pay a $300,000 death benefit. If the insured dies during the term of coverage, then the policy pays the death benefit. Question 3 The convertibility provision of a term life policy lets the owner convert the term coverage into what type of policy? a renewable term policy a convertible term policy *a permanent life insurance policy a paid-up whole life insurance policy The convertibility provision of a term life policy lets the owner convert the term coverage into a permanent life insurance policy without proving insurability. Question 4 What is a term insurance policy in which the protection and premium amounts stay the same during the term period known as? decreasing term increasing term renewable decreasing term -level term Level term insurance offers a level death benefit and premium during a set period. During the term of coverage, neither the death benefit nor the premium changes. How is increasing term life insurance normally sold? as an endorsement as a modified endowment contract *as a rider as a permanent insurance policy Insurers offer increasing term insurance as a "cost of living increase" rider on another policy. Question 2 All the following are common types of term life insurance EXCEPT: *adjustable term insurance annually renewable term increasing term insurance level term insurance While there is a form of permanent life insurance called adjustable life, there is no type of term insurance by this name. Question 3 Which statement about term life insurance is NOT correct? -A small cash value gradually accumulates while the policy is in force. Upon issue, it is generally less expensive than permanent insurance of comparable face amount. It offers protection for a specified, limited period. It pays a benefit only if the insured dies during the specified period. Unlike permanent life insurance, term insurance does not build any cash value. Question 4 To renew a term life insurance policy at a lower rate than the guaranteed rate, what must the insured prove? an insurable interest exists he or she is under age 60 his or her attained age -insurability With renewable term policies, insurers may offer a lower re-entry renewal rate that allows the insured to renew coverage at a lower rate than the guaranteed rate. However, he or she must first prove insurability. Question 1 Which of the following statements best explains the basic level premium concept of ordinary whole life insurance? Funds are withdrawn from the policy's cash value in the later years to pay the rising cost of pure insurance. *The steady reduction of the policy's net amount at risk offsets the cost of pure insurance that rises with age. The death benefit is decreased to offset the rising cost of insurance with age. The policyowner pays more than necessary in the early years to offset the higher cost of insurance in the later years. Ordinary whole life insurance features a level death benefit and a level premium. Question 2 Which of the following statements regarding the way whole life insurance differs from term life insurance is most correct? Only whole life insurance offers level premium payments. *Only whole life insurance builds a cash value. Only whole life insurance can be renewed. Only whole life insurance offers protection until age 80. Unlike term life insurance, whole life insurance builds cash value. In addition, it offers permanent protection for the insured's whole life. Question 3 Which one of the following statements about variable life insurance is correct? With a variable life insurance policy, the insurer assumes most of the investment risk. The death benefit under a variable life insurance policy will never be more than the stated minimum. Variable life insurance policies do not guarantee a minimum death benefit. *Variable life insurance policyowners can transfer funds between subaccounts and the insurer's general account. Variable life insurance policyowners can transfer funds between subaccounts. They can also transfer funds between subaccounts and the insurer's general account. Question 4 What is the term for the money that builds within a whole life insurance policy over the policy's life? *cash value accrued value death benefit policy reserve Cash value is the money that accumulates and builds within the policy over the policy's life Question 1 Which one of the following statements about variable life insurance is correct? Variable life's premiums are only invested in safe, conservative investments. Variable life policyowners cannot choose how their contract premiums are invested. There is no guaranteed death benefit with variable life. *Variable life's policy values can be invested in subaccounts, which are unsecured and nonguaranteed. Variable life insurance differs from traditional whole life insurance in the way its values are invested. Variable life insurance policy values are invested in investment accounts known as subaccounts, which can consist of a variety of stock, bond, and related securities. Subaccounts are unsecured and nonguaranteed. Question 2 Under an indeterminate premium whole life policy, what happens to premium rates if an insurer earns more on its investments than was factored into the premium calculation? Premiums stay the same. Premiums increase. Premiums return to the initial fixed rate. *Premiums decrease. An indeterminate premium whole life policy is issued with two premium rates: a lower fixed rate and a guaranteed maximum rate. The policyowner pays the lower fixed rate for a specified number of years. At the end of that period, the premium rate moves up or down based on the investment earnings that the insu

2.7 Qualified Plans and Social Security

Which of the following statements is true if a traditional IRA owner is covered by an employer-sponsored qualified plan? The amount that he or she can contribute to the IRA will be limited. No deduction can be taken for amounts contributed to the IRA. Contributions to the IRA will not be subject to income tax when withdrawn. CorrectThe amount he or she can deduct for IRA contributions may be limited, depending on his or her income level. Explanation: If a person is covered by a qualified employer plan, he or she can contribute up to the maximum amount allowed by law to a traditional IRA. However, the deduction that can be taken may be limited if his or her adjusted gross income exceeds certain limits

3.1.3 Marketing Practices

- when comparing her insurance company's policies to those of Zenith Insurance, Melanie makes a misleading statement to convince an insurance prospect to terminate a policy with Zenith and buy one from Melanie's company. What has Melanie engaged in? --twisting rebating unfair discrimination defamation Explanation: A person cannot make a false or misleading statement or comparison about an insurance policy in order to induce someone to lapse, surrender, terminate, retain, or convert an insurance policy or buy a policy with another insurer. -When meeting with a prospect to discuss life insurance, Tyler makes disparaging comments about the financial stability and reputation of a competitor to dissuade the prospect from purchasing its policies. Which unfair trade practice has Tyler committed? --defamation rebating unfair discrimination coercion Explanation: It is considered defamation to publish or circulate a false, deceptive, or misleading statement about—or a statement that is maliciously critical of or derogatory to—the financial condition of an insurer, when such a statement is designed to injure anyone in the insurance business. -To boost her insurance sales at the end of the year, Trudy offered potential clients a $250 cash gift card in exchange for purchasing a life insurance policy. Which ethical sales practice has Trudy violated? twisting false information --rebating churning Explanation: Agents cannot offer anything of value to induce someone to buy insurance, including a rebate of the premium, dividends, stocks or bonds, or paid employment. They also cannot pay or offer to pay anything of value that is not specified in the insurance contract. This unfair trade practice is known as rebating. -Smith received $20,000 in premiums from his clients and used half of the funds to buy a new entertainment system for his office. Which of the following penalties may be imposed for this misconduct? license suspension for up to six months restitution --felony conviction fine of up to $50,000 Explanation: An agent may not commingle premiums with his or her personal funds and must promptly pay all funds to the insurer or insured. A willful violation is considered a misdemeanor or a felony if the amount involved is more than $500. -Malloy received $10,000 in premiums from clients on June 1. Which statement best describes his responsibilities with regard to these funds? He must deliver the premiums to the insurer within 5 days. He must deposit the premiums in a trust account and deliver them to the insurer within 21 days. --He must promptly pay all premiums to the insurer and may not commingle them with his personal funds. He must immediately deposit the premiums in a trust account and remit them to the insurer within 10 days. Explanation: An agent may not commingle insurance premiums with personal funds and must promptly pay all funds to the insurer or insured. However, agents are not required to maintain a separate bank deposit for the funds of each principal, if the funds are readily ascertainable from the agent's accounts and records -The Georgia Life and Health Insurance Guaranty Association does not provide coverage for which of the following types of insurance? --reinsurance policies group life insurance policies annuity contracts individual life insurance policies Explanation: The Georgia Life and Health Insurance Guaranty Association provides coverage for individual life insurance policies, health insurance policies, annuity contracts, contracts supplemental to life and health insurance policies and annuity contracts, and direct group life insurance policies, health insurance policies, and annuity contracts. -Acme Insurance and Apogee Insurance agree to offer different premium rates for persons of equal risk within a particular class. They also agree to limit benefits paid to insureds within this class if the insureds live in certain towns in Georgia. What are Acme and Apogee engaging in? acceptable marketing and underwriting practices --unfair and prohibited business practices insurance fraud false advertising Explanation: Acme and Apogee are agreeing to an unreasonable restraint of trade in the insurance business of Georgia. Furthermore, they are engaging in unfair discrimination by charging persons of the same class and substantially equal risk different premium rates and by paying different benefits to persons in this class. -When holding insurance premiums and other funds, producers act in which of the following capacities? trustee --fiduciary principal guarantor Explanation: Licensed producers hold insurance premiums and other funds in a fiduciary capacity. A willful violation of the duties imposed upon a fiduciary is considered a misdemeanor. - - - - - - - - - - - -

2.7.2.1 Types of Qualified Plans

-Defined benefit plans provide a specific, defined benefit for plan participants when they reach retirement age. Which of the following statements regarding defined benefit plans is NOT correct? Tax laws limit the amounts that plan participants can receive. --The employee typically contributes a portion of the plan funding, through pre-tax contributions. No individual accounts are set up for individual employees in a defined benefit plan. When the plan participant reaches retirement, the employer will use plan funds to buy an annuity. Explanation: Under a defined benefit plan, only the employer makes contributions -Which statement about profit-sharing plans is NOT correct? It is a type of defined contribution plan. The employer is not required to make the same amount of contributions every year. --Both the employer and employee contribute to the plan. The employer is not required to contribute every year. Explanation: The employer is the sole contributor to a profit-sharing plan. Contributions are calculated using a pre-determined formula, which is usually based on a percentage of an employee's salary. -Brown Industries has 25 employees and is deciding whether to establish a simplified employee pension (SEP) plan or a SIMPLE plan. Which comparison is correct? Brown would only be eligible to establish a SIMPLE plan. --Higher contributions could be made each year to a SEP than to a SIMPLE plan. Brown would be required to establish individual retirement accounts (IRAs) for its employees under both plans. Under both plans, all of Brown's employees would be required to participate in the plan. Explanation: The annual amount that an employer can contribute to a person's SEP is limited to either 25 percent of the employee's compensation or to a dollar limit that is adjusted for inflation annually, whichever is less. SIMPLE plan contribution limits are lower than SEP limits. -An employer's annual contribution to a defined benefit plan is determined by which of the following? the IRS or local taxing authority guidelines the payout choice of the employee the market performance of the underlying accounts Correctthe amount of future benefits it agreed to fund Explanation: The employer's annual contribution to a defined benefit plan is determined by the amount of future benefits it agreed to fund as well as by the date the scheduled benefits are due to begin. - - - - - - - - - - -

2.3.7 Policy Loans and Withdrawal Provisions

-Henry, age 34, has a SIMPLE IRA account with his employer; the account has increased in value to $80,000. He is fully vested in the account and decides to take a $10,000 distribution to use as a down payment on his first house. Which of the following statements regarding tax consequences of this action is correct? IncorrectAn early distribution penalty tax will apply. A capital gains tax will apply. A 30 percent penalty tax will be imposed. CorrectNo penalty tax will be imposed. Explanation: The early distribution penalty tax will not apply to distributions from SIMPLE plans before age 59.5; if used to purchase a first house, to pay for higher education expenses, or to pay health insurance premiums while unemployed. -Some states allow contributions to Section 529 college savings plans to be deducted for state tax purposes -Jack's required minimum distribution from his 401(k) plan this year was $8,000. However, he mistakenly withdrew only $6,000. Jack must pay a penalty tax equal to what amount? $0 Correct$1,000 (50% of 2000) -If an employer establishes a 401(k) plan for its employees, which of the following statements is correct? Any matching contributions the employer makes will be currently taxable to the employees. CorrectEmployees can contribute a percentage of their salary every year, up to specified limits, on a pre-tax basis. Amounts that employees contribute to the plan will be included in their gross incomes. The employees must be the sole contributors to the plan. Explanation: The maximum amount that an employee can defer into a 401(k) plan is limited by the tax laws -Which of the following statements is true if a traditional IRA owner is covered by an employer-sponsored qualified plan? The amount that he or she can contribute to the IRA will be limited. No deduction can be taken for amounts contributed to the IRA. Contributions to the IRA will not be subject to income tax when withdrawn. CorrectThe amount he or she can deduct for IRA contributions may be limited, depending on his or her income level. -A worker became totally disabled and eligible for Social Security disability benefits. If he has a wife and a ten-year-old child, which of the following is true? CorrectBoth his wife and his child are eligible to receive benefits from Social Security -Ken owns a life insurance policy with a $100,000 face amount. Long ago he took a $25,000 loan on the policy, which he never repaid, and the loan accrued $5,000 interest. He recently died in a car crash. How much will be paid to the beneficiaries? $75,000 --$70,000 $95,000 $100,000 Explanation: A cash value loan on a life insurance policy does not need to be paid back, though it does accrue interest that is added to the loan. With interest, Ken's loan grew to $30,000 before he died. Deducing this amount from the face amount leaves $70,000 for the beneficiaries -Your client asks you how an automatic premium loan (APL) works. What is the best explanation you can provide? It works like a home improvement loan. It covers unforeseen expenses. It provides emergency cash. --It prevents a policy from lapsing if the policyowner fails to pay the premium by creating a policy loan to cover premiums owed. Explanation: An automatic premium loan (APL) is an optional benefit that a life insurance policyowner can elect when he or she buys the policy. It directs the insurer to deduct any unpaid premium as a loan from the policy's cash value. -If the total amount of a policy loan plus interest is less than the policy's cash surrender value, which of the following will happen? The policy will lapse. The policy will be surrendered for cash. The policy will automatically go on the extended term option. --The policy will remain in effect. Explanation: As long as the total amount of the loan plus interest is not greater than the cash surrender value, the policy remains in effect. -If the policy loan amount plus interest owed is greater than the policy's cash value, which of the following will happen? --The insurer will cancel the policy. The policy will automatically go on the extended term option. The policy will be surrendered for cash. The policy will remain in effect. Explanation: If the loan amount plus interest owed is greater than the cash value, then the insurer cancels the policy - - - - - - - - - - - -

3.2.1 Marketing and Sales Practices

-When selling a life insurance policy that replaces an existing policy, the agent must leave all of the following items with the applicant EXCEPT: Notice Regarding Replacement signed by the producer and applicant originals or copies of marketing communications used in the sale copies of documents used in the transaction --confirmation that any existing insurers have been notified of the replacement Explanation: The insurer, not the agent, confirms that any existing insurers are notified of the replacement. However, the insurer is not required to provide this confirmation to the applicant. -Abby wishes to buy a $500,000 term life insurance policy on her husband, Al, who is the family breadwinner. Which statement is correct? Abby may buy the policy only if Al consents. Abby does not have an insurable interest in Al's life. --Abby may buy the policy without Al's consent. Abby cannot buy a policy on Al's life. Explanation: A spouse is not required to obtain the other spouse's consent when purchasing insurance on his or her life. -Which of the following statements about Georgia's life insurance advertising rules is CORRECT? Advertisements do not include prepared sales talks. Advertisements cannot mention any limitations or benefits offered by the policy. Advertisements cannot use testimonials. --Advertisements must clearly identify the insurer and policy being sold. Explanation: Advertisements must clearly identify the insurer and the policies or services advertised. -What must a replacing insurer do when replacement is involved in a life insurance transaction? --notify the existing insurer within three days of the proposed replacement send a copy of the replacement notice and its premium rates to the applicant notify the Commissioner of the proposed replacement require the agent to sign a sworn statement that replacement is in the applicant's best interests Explanation: When replacement is involved, the replacing insurer must notify an existing insurer that may be affected by the proposed replacement within three business days of receiving the application for the replacement policy. -If a person buys a new life insurance policy to replace an existing one, the agent must give the applicant the Notice Regarding Replacement form no later than when? when the initial premium is paid --when the application is taken when the person is first solicited when the policy is delivered Explanation: If a new life insurance policy will replace an existing one, the agent must give the Notice Regarding Replacement form to the applicant no later than at the time the application is taken. -The Notice Regarding Replacement provides all of the following information to the life insurance applicant EXCEPT: a list of any life insurance policies that will be replaced whether an existing policy will fund the new policy the insurer's identity --protections of the Life and Health Insurance Guaranty Association Explanation: As is the case with the sale of any life insurance policy, an insurer or producer is prohibited from using the existence of the state's Life and Health Insurance Guaranty Association for the purpose of selling a policy -Jason purchased a life insurance policy five years ago and surrendered it to purchase a newer policy this year. Which of the following describes this transaction? conversion twisting --replacement reissuance Explanation: Replacement occurs when a new life insurance policy or annuity contract is purchased, and the agent or insurer knows or should know that with the purchase, an existing policy or contract is going to be lapsed, forfeited, surrendered, or otherwise terminated. -ABC Insurers just received an application from a customer who plans to buy a new policy to replace one issued by Heritage Insurers. Within how many days must ABC Insurers notify Heritage Insurers of the proposed replacement? two --three five seven Explanation: When replacement is involved, the replacing insurer must notify any existing insurers that may be affected by the proposed replacement within three business days of receiving the application. -For how long after the sale of a life insurance policy must replacing insurers keep copies of the Notice Regarding Replacement? --three years five years seven years ten years Explanation: Replacing insurers are required to keep copies of the Notice Regarding Replacement for at least three years following the sale of the life insurance policy. - - - - - - - - - - - - - -

2.4.1.3 Annuity Income Payment Options

-What type of annuity option pays income over a set number of years or in specified amounts? --annuity certain income option life contingent payout option annuity contingent income option life annuity certain option Explanation: An annuity certain income option pays income over a set number of years or in specified amounts. -An annuity owner has many options for receiving annuity income payments. What are these payout options generally called? payout provisions annuitization provisions Correctsettlement options death benefits Explanation: An annuity owner has many options for receiving annuity income payments. These payout options are called "settlement options." - - - - - - - - - - - - -

2.2.1 Classification of Life Insurance Policies

-All of the following statements about the regulation of the sale of variable products are correct, EXCEPT: --Agents who only sell variable life products and do not sell fixed life products are not required to hold a life insurance license. Agents who sell variable life products are required to comply with all state laws and regulations dealing with the sale of life insurance. The sale of variable products is regulated by the Financial Industry Regulatory Authority (FINRA). Many states also require a state-issued variable life or variable producer's license Explanation: Selling variable life products also requires a valid life insurance license. -All of the following are broad classifications of life insurance policies EXCEPT: --whole life and permanent life individual and group insurance permanent and term insurance fixed and variable products Explanation: Life insurance can easily be classified into general groups, including individual and group coverage, permanent and term insurance, participating and nonparticipating insurance, and fixed and variable products. Whole life is a form of permanent life insurance -Alex owns a "home service" life insurance policy, which means he most likely pays his premiums in which of the following ways? annually by money order quarterly by cash or money order --weekly or monthly by mail, automatic deduction from a bank account, or personally to the agent with a single premium payment Explanation: Also known as industrial insurance, home service insurance policyowners pay premiums weekly or monthly, either by mail, automatic deduction from a bank account, or in person to the agent. -Ben and Sylvia own life insurance that is designed to pay their burial expenses. What type of policies do Ben and Sylvia most likely own? fixed insurance variable life insurance --industrial life insurance term insurance Explanation: An industrial insurance policy offers individual coverage in small amounts, usually around $1,000 to $2,000. This class of insurance was originally designed for workers with limited incomes who wanted to cover last illness and burial expenses for all family members. - - - - - - - - - -

2.6.2 Taxation of Group Life Insurance

-Sally is a 25-year-old clerk employed by Acme, Inc. Under Acme's employer-pay-all group life plan, Sally's coverage is $60,000. The premiums for what portion of that coverage are taxable to Sally? --$10,000 $20,000 $30,000 $40,000 Explanation: The cost of the first $50,000 of coverage is tax exempt for employees. Because Sally has $60,000 of coverage, $10,000 ($60,000 - $50,000) is taxable to her. -Pam is a 56-year-old vice president employed by Gulf, Inc. Under Gulf's employer-pay-all group life plan, Pam's coverage is $300,000. The premiums for what portion of that coverage are taxable to Pam? $150,000 $300,000 --$250,000 $100,000 Explanation: The cost of the first $50,000 of coverage is tax exempt for employees. Because Pam has $300,000 of coverage, $250,000 is taxable to Pam, and will be included on her W-2. -Tandy Enterprises pays $25,000 in premiums each year for its group term life insurance plan, which covers all of its rank-and-file employees. When filing its income tax return, what can (or cannot) Tandy Enterprises do? It can take a partial deduction for the premiums. --It can take a deduction for the entire premium paid. It cannot take a deduction for the premium. It can take a deduction only if it also pays the premium for a group plan covering highly compensated employees. Explanation: An employer can deduct premiums it pays on a group term life insurance plan. However, the plan cannot discriminate against rank-and-file employees. -To ensure that a group life insurance plan is not discriminatory, what must the plan do? benefit at least one-half of all employees cover at least 25 percent of an employer's key employees provide at least $25,000 in benefits to each employee --benefit at least 70 percent of all employees Explanation: A group life insurance plan cannot discriminate against rank-and-file employees. To ensure that this does not happen, the plan must benefit at least 70 percent of all employees. Alternately, at least 85 percent of the employees who participate in the plan must not be key employees. - - - - - - - - - - - -

2.2.3 Group Life Insurance Policies

-Insureds under a group life insurance plan have all of the following rights EXCEPT the right to name a beneficiary the right to assign the death benefit --the right to convert to an individual policy at any time the right to use the coverage for a viatical settlement if allowed by the policy Explanation: Insureds under a group life insurance plan can convert coverage to an individual policy when their group coverage ends. The employee must normally apply for a conversion policy within 31 days after termination or retirement. -What is credit life insurance designed to cover? --the borrower's life the creditor's life an employee's life an association member's life Explanation: Credit life insurance covers the life of a borrower in the amount of his or her outstanding loan. Decreasing term insurance is typically used for this purpose. - - - - - - - - - - - - -

2.3.4 Life Insurance Policy Beneficiaries

-A life insurance policyowner who has named a beneficiary irrevocably must observe all the following restrictions, EXCEPT: no taking a policy loan without the consent of the irrevocable beneficiary no changing the beneficiary without his or her signed consent --no designating a new beneficiary if the irrevocable beneficiary dies before the insured no adding a second primary beneficiary unless the irrevocable beneficiary agrees to it Explanation: If the irrevocable beneficiary dies before the insured, then the policyowner may designate a new beneficiary. -What is the primary difference between a revocable and an irrevocable beneficiary? --the policyowner's ability or inability to change the beneficiary designation. the policyowner's responsibility to pay the premiums the company's responsibility to notify the insured about any changes in its financial condition the requirement for the insurer to tell the beneficiary if the insured has moved Explanation: The main difference between a revocable and an irrevocable beneficiary is the policyowner's ability or inability to remove the beneficiary. A policyowner can remove a revocable beneficiary at any time. The policyowner can only remove an irrevocable beneficiary if this beneficiary agrees. -If insurers do not allow minors to be beneficiaries of life insurance, what do they do if no adults are available to receive death benefits? Insurers hold the proceeds in trust until the child reaches maturity. The state receives the funds and holds them in escrow until the child is age 21. --Insurers require the court to appoint a legal guardian before paying benefits to a minor child. Each state treats these situations differently. Explanation: Even if the child has a surviving parent, the insurer requires the court to appoint a legal guardian before paying out proceeds to a minor child, because a surviving parent does not automatically qualify as a guardian for his or her children. -In which of the following situations would the facility of payment clause of a life insurance policy NOT be applied? --The insurer learns, when paying the claim, that the designated beneficiary had no insurable interest in the insured at the time of death. The beneficiary dies before the policyowner and the policyowner did not name a contingent beneficiary. The beneficiary is a minor. A claim was not submitted within a reasonable time. Explanation: A policyowner may designate anyone as beneficiary, without regard for insurable interest (which need only exist, between the owner and the insured, when the policy is issued). - - - - - - - - - - -

2.2.2.4 Specialized Life Insurance Policies

-A married couple is insured under a joint life policy. The first spouse dies. What can the surviving spouse do with the policy? The surviving spouse can renew the policy. The surviving spouse can convert the policy if he or she proves insurability. --CorrectThe surviving spouse may convert the policy without proving insurability. The surviving spouse cannot convert the policy. Explanation: When the first spouse dies in a joint life policy, the surviving spouse has a conversion right that allows him or her to buy an individual policy with the same or lesser face amount. The surviving insured does not have to prove insurability. -Under a survivorship life insurance policy, when does the insurer pay the death benefit? when the first insured dies --Correctwhen the surviving spouse dies when either insured dies when both insureds die Explanation: Survivorship life insurance policies are commonly known as second-to-die policies. They insure more than one person but pay the death benefit only when the second insured (the surviving spouse) dies. -Which one of the following types of insurance would an agent recommend for a married couple that wants the policy exclusively to provide funds to pay estate taxes and settlement costs when the second spouse dies? joint life family income policy family maintenance policy --Correctsurvivorship life Explanation: Survivorship life insurance policies insure more than one person but pay the death benefit only when the second insured dies. Married couples often buy these policies to create a sum of money that will be needed at the second spouse's death. The benefit is used to pay estate taxes and other estate settlement costs. -What were survivorship life insurance policies primarily created to do? serve as a low-cost insurance plan for family needs --Correctpay estate taxes and other settlement costs when the second insured dies pay a monthly income to a family when the breadwinner dies give temporary insurance protection to families Explanation: Survivorship life insurance policies were created to pay estate taxes and other settlement costs when the second insured dies. -Under a joint life insurance policy, when does the insurer pay the death benefit? --when the first insured dies when the surviving insured dies when either insured dies when both insureds die Explanation: Under a joint life insurance policy, the insurer pays the death benefit when the first insured dies. The surviving insured has a conversion right, which allows him or her to buy an individual policy with the same or lesser face amount. -Stacey has three young children and wants to purchase permanent life insurance protection in case she dies prematurely. She wants to purchase a policy with a lower early premium that gradually increases and then levels off for the life of the policy. Which policy would best suit Stacey's needs? level premium term insurance --graded premium whole life insurance limited payment life insurance endowment policy Explanation: Stacey should purchase a graded premium whole life insurance policy, which has premiums that begin very low. They then increase annually for a long period and eventually stay level for the rest of the life of the policy. The period during which premiums increase each year may be 10 to 15 years and is called the grade-in period. -Blake, age 39, just purchased a 20-pay whole life policy. What happens when he turns age 59? He receives the policy's cash value. His policy will endow. --He stops paying premiums. Coverage under the policy will end. Explanation: Limited payment life insurance premiums can be paid for 10, 15, or 20 years or, as is common, to a specified age, such as 65. At the end of the selected payment period, the policy is paid up. No more premium payments are necessary or possible. However, the insurance stays in force and coverage continues. -What is the main appeal of joint life insurance? higher death benefit Correctlower cost renewal feature ability to cover an entire family Explanation: The main appeal of joint life insurance is its lower cost. The premium is less than it would be for two separate policies offering the same death benefit. - - - - - - - -

2.1 Life Insurance Basics

Allen's insurance agent thinks Allen's habits and personal character should be examined further than is possible through the application alone. He believes Allen might have left out information to get a more favorable rating. What would the agent use to explain his concerns to the underwriters? the credit report an e-mail to the underwriter the comments section of the application Correctthe Agent's Report Explanation: Written from the agent's perspective, the Agent's Report includes information that the agent knows about the client that would be useful to the underwriter. For example, the agent might include information about the applicant's finances, personal character, habits, other policies held, and the like. Assuming no relation other than that stated, in which of the following situations does insurable interest exist? CorrectAl takes out a life insurance policy on his wife. Al takes out a life insurance on his neighbor. Al takes out a life insurance policy on his doctor. Al takes out a life insurance policy on his night school teacher. Explanation: The general rule governing insurable interest is that insurable interest exists when a loss is suffered at the death of the insured. That loss can be the result of close familial ties or financial ties. If the Alpha-Omega Corporation wants to provide life insurance for all its full-time employees, it will most likely buy which of the following? Incorrectbusiness life insurance whole life insurance Correctgroup insurance term insurance Explanation: Businesses often buy business life insurance to insure the lives of key employees or owners individually, but these types of policies are not suitable to providing cost-effective death benefit protection for large numbers of employees. Who completes an attending physician's statement (APS)? Correctthe proposed insured's doctor, who is familiar with how the medical condition is being treated a doctor assigned by the insurer in the state where the insurance is being written Incorrecta local doctor, other than applicant's, who is familiar with how the medical condition is being treated a member of the Medical Information Bureau Explanation: A local doctor who never treated the applicant would not be qualified to write the APS, since the "A" stands for "Attending."

2.3.3 Life Insurance Premiums

-The expense component of the pricing process is known as the loading. It reflects the costs, other than mortality costs, that the insurance company can expect to incur for all of its operations. All of the following are among the considerations that guide insurance companies in determining loading, EXCEPT: Total loading from all policies should cover total operating costs, provide a safety margin, and contribute to profits or surplus. Expenses should be apportioned equitably over the company's various plans and issue age. --Expenses should be weighted to older issue ages and greater risks. The resulting gross premiums should permit the company to maintain or improve its competitive position. Explanation: Expenses should be apportioned equitably over the company's various plans and issue age, not weighted to older ages and greater risks. -An actuary is setting life insurance rates. What affect will it have on a policy if higher interest assumptions are used? It will have no effect. --Premiums will be lower. Premiums will be higher. The effect cannot be known. Explanation: In making life insurance rates, higher assumed interest earnings reduce premiums. -Loading reflects the costs, other than mortality costs, that the insurance company can expect to pay for its operations. These costs include all of the following, EXCEPT: the insurer's expenses for rent --profit factor employee benefits salaries and commissions Explanation: While insurers hope to profit in their business, there is no profit factor in the expense loading. -Actuaries use mortality and morbidity factors in determining premiums. How would they factor in the calculating of a life insurance premium? Both factors are of equal importance. --Mortality is the primary factor. Factors are determined on an individual basis. Morbidity is a primary factor; mortality is second. Explanation: Mortality is the rate of death in the target population. It is a significant factor in calculating life insurance premiums. For health insurance, morbidity rates, or incidences of illness, are a primary premium factor. -Insurers earn interest on the policy premiums they receive. What is the commonly assumed rate of return insurers expect? 1 to 2 percent --2.5 to 3 percent 3 to 4 percent 5 percent Explanation: Because of the need for adequate financial safety margins, an insurer commonly assumes that it will earn 2.5 percent or 3 percent on the premiums it receives. -The expense component of insurance premium pricing is also known as which of the following? commissioning processing forwarding --loading Explanation: The expense component of the pricing process is known as the loading. It reflects the costs, other than mortality costs, that the insurance company can expect to incur for all of its operations. - - - - - - - - - -

2.2.2.1 Term Life

-Under the re-entry method, an insured can renew a level term insurance policy at the end of the specified term at a lower rate than the guaranteed rate by doing what? proving that he or she is under age 50 --proving insurability submitting to a medical examination agreeing to convert to a permanent life insurance policy Explanation: An insured can renew a level term insurance policy at a lower re-entry renewal rate if he or she first proves insurability. -Gina owns a $200,000 five-year renewable term insurance policy and wants to renew the policy at the end of the term. In this case, all the following statements are correct, EXCEPT: --Gina must prove insurability before the insurer can renew the policy. The insurer will base the premium for the renewal coverage on Gina's age at the time of renewal. Gina will be able to renew the policy any time up to age 65 or 70 (as defined in the policy). The premium for the renewal coverage will be higher than for the initial coverage. Explanation: If the insurer offers a guaranteed renewal rate, Gina can renew the coverage without proving insurability. -Carolyn bought a $500,000 five-year renewable term policy with a guaranteed renewal rate. Two years after buying it, she develops cancer and is no longer insurable. If Carolyn is alive at the end of the five-year term, which of the following statements is most correct? --She can renew the policy but must pay a higher premium based on her age at the time of renewal. She must prove insurability before the insurer can renew the policy. The insurer can increase her premiums because of her health problems. She will not be able to renew the policy. Explanation: Under a renewable term life insurance policy with a guaranteed renewal rate, Carolyn can renew the policy without proving evidence of insurability. However, the premium for the renewal coverage will be based on her age at the time of renewal and will therefore be higher than her initial premium. -The convertibility provision of a term life policy lets the owner convert the term coverage into what type of policy? a convertible term policy a renewable term policy --a permanent life insurance policy a paid-up whole life insurance policy Explanation: The convertibility provision of a term life policy lets the owner convert the term coverage into a permanent life insurance policy without proving insurability. -Jill is insured under a $250,000 convertible term policy and would like to convert to a permanent policy. Which of the following statements is most correct? She must first prove insurability. --The amount of the new policy cannot exceed $250,000. The premiums for the new policy will be based on Jill's age when she applied for the term policy. She must pay a conversion penalty. Explanation: The amount of Jill's new policy cannot exceed the amount of coverage under her term insurance policy at the time of conversion. The new policy therefore cannot exceed $250,000. -When a policyowner converts a term life insurance policy into a permanent life insurance policy, which one of the following statements is most correct? The insured must prove insurability. --The amount of the new policy cannot exceed the amount of the term policy. The premiums for the new policy will be based on the insured's age when he or she applied for the term policy. The premium and death benefit of the new policy cannot exceed the premium and death benefit of the term policy. Explanation: When a policyowner converts a term life insurance policy to a permanent policy, the amount of the new policy cannot exceed the amount of coverage under the term insurance policy. For example, a $150,000 term policy may be converted to a $150,000 permanent policy. - - - - - - - - - - -

2.4.1.1 Nature and Purpose of Annuities

-What is the name of the period during which premium funds are paid into an annuity contract? the annuity period the benefit period --the accumulation period the annuity payout Explanation: The period during which premium funds are paid into the contract is the "accumulation period."" -What is the name of the period during which funds are paid out of an annuity contract in the form of periodic income payments? --the annuity payout period the benefit period the accumulation period the annuity payout Explanation: The period during which funds are paid out in the form of periodic income payments is called the "annuity payout period. .-How would an insurance producer best explain flexible premium deferred annuities to a client? They are a way to save money tax-free for retirement. They are designed for the purpose of deferring retirement. --They are a way to accumulate money over time by deferring the date at which the contract will begin distributing income. They are a flexible way to both save money and receive income from the contract simultaneously. Explanation: Flexible premium deferred annuities allow the owner to make premium deposits of any amount whenever he or she wants. However, a certain minimum amount may be required. Deferred annuities grow tax-deferred, not tax-free. -Which of the following statements best describes the purposes that annuities serve? --Annuities accumulate and/or distribute sums of money. Annuities collect premiums to pay them back to the annuitant in a lump sum some time in the future. Annuities are a form of life insurance that ensures lifetime income. When "annuitized," funds accumulated in an annuity are paid out and the contract expires with no value. Explanation: The annuity is set up to accumulate and/or distribute a sum of money.- - - - - - - - - - -

2.2.2.2 Whole Life

-Which one of the following is most correct with respect to the contract charges and fees charged by variable life and traditional whole life policies? Both charge investment advisory fees. Both charge a fee for expenses incurred by the separate investment accounts. Both charge account transfer fees. --Both base the premium on a mortality charge that reflects the insured's risk of death. Explanation: Both types of policies charge a premium, which is based on a mortality charge, to cover the policy's death benefit. -Variable life insurance policies may carry all of the following charges and fees EXCEPT a fixed rate charged for policy loans a fee for expenses incurred by the separate investment accounts investment advisory fees --fees for reviewing the prospectus Explanation: In addition to premiums, variable life policies may charge a policy administrative expense or operational charge, a fee for the expenses incurred by the separate investment accounts, investment advisory fees, a fixed rate for loans, account transfer fees, and a charge for processing withdrawals or cash surrenders. But a fee is not imposed for reviewing the prospectus. -Jessica, age 25, buys a $100,000 life insurance policy. The initial premium is lower than straight whole life rates and increases each year for the first ten years of the policy period. After that, the premium levels off and stays at that amount for the life of the policy. What type of policy does Jessica own? indeterminate premium whole life single premium life --graded premium whole life 20-pay life Explanation: Jessica owns a graded premium whole life policy. Its premiums begin very low compared to straight whole life, increase annually for a long period (such as ten years), and stay level for the rest of the policy. -Straight whole life, limited pay whole life, and modified premium whole life have which one of the following characteristics in common? level premiums higher initial premiums when the policy is issued --fixed premium amounts that are known in advance lower premiums at the end of the policy Explanation: Straight whole life, limited pay whole life, and modified premium whole life share a common trait: they offer fixed premium amounts that the policyowner can know in advance. - - - - - - - - - -

2.5.2 Business Uses of Life Insurance

-Which statement about basic split-dollar plans is NOT correct? A permanent life insurance policy is bought on the life of a key executive. Either the executive or employer owns the policy. --The amount of the premium paid by the employer is not taxable income to the executive. The employer typically receives an amount equal to the cash value when the executive dies. Explanation: Under a split-dollar plan, the portion of the premium that the employer pays is considered taxable income to the employee. -Which statement is true under a split-dollar life insurance plan? The employee gets temporary insurance protection. The employee pays all of the premiums. --The employer and employee split the premiums. The employee receives the entire death benefit. Explanation: Under a split-dollar life insurance plan, a permanent life insurance policy is bought on the life of a key executive. The premiums for the policy and the death benefits provided under it are split between the employer and the executive. -Mr. Jones is a senior executive with his company and considered a key employee. Which of the following statements is correct about key person coverage for Mr. Jones? The employee must pay for it if the company will deduct the cost. --He has no ownership rights in the policy. It can only cover vested employees. If Mr. Jones dies, his family will receive the death benefit. Explanation: Upon the key employee's death, the business receives the death benefit. The key employee has no ownership rights in a life insurance policy that is used for key person coverage. -All of the following are true regarding buy-sell agreements EXCEPT: If a partner dies, the other owners agree to buy the deceased's interest in the business. Either the business or the other partners can be an entity in the agreement. --All buy-sell plans require that a surviving partner must bring the deceased partner's heirs into the partnership. Entity buy-sell agreements are more commonly used than cross-purchase plans in businesses with many owners. Explanation: Buy-sell agreements are typically designed to enable existing business owners to continue owning the business when the owner dies. The agreements involve the owners, or the business itself, not the owner or partner heirs. - - - - - - - - - - -

2.7.5.1 The Basics of Social Security

-A worker who is considered fully insured is entitled to all of the following benefits under Social Security EXCEPT: retirement benefits --medical care benefits survivor benefits disability benefits Explanation: Fully insured status entitles a worker to full OASDI benefits under Social Security. This includes retirement benefits, survivor benefits at the worker's death, and disability benefits (after meeting additional requirements). Medical care benefits come from Medicare once a worker reaches age 65. -Janet, age 62, plans to quit her job and apply for Social Security retirement benefits this year. Which of the following statements is correct if Janet claims retirement benefits before she reaches her full retirement age? The amount of her benefits will not be affected. Janet's benefits will be reduced, but only until she reaches full retirement age. --Janet's benefits will be permanently reduced. Janet cannot begin receiving Social Security retirement benefits at age 62. Explanation: The earliest age at which a person can begin receiving Social Security retirement benefits is 62. Early retirement benefits are permanently reduced and will not be increased to a higher level when a person reaches his or her full retirement age. - - - - - - - - - - - - -

2.6.4 Section 1035 Exchanges

-All of the following are permitted as tax-free transactions under a Section 1035 exchange EXCEPT: the exchange of a life insurance contract for a life insurance contract the exchange of a life insurance contract for an annuity contract --the exchange of an annuity contract for a life insurance contract the exchange of an endowment contract for an annuity contract Explanation: IRS Section 1035 exchange rules do not allow the exchange of an annuity contract for a life insurance contract. -A life insurance policyowner can exchange his or her life insurance policy tax free through a Section 1035 exchange for which of the following? --an annuity a mutual fund a disability income policy a nonqualified long-term care contract Explanation: A life insurance policyowner can exchange the policy tax free under Section 1035 for another life insurance policy, an annuity, or an endowment policy. - - - - - - - - - - - -

2.3.9.3 Living Benefit Riders

-All of the following statements about long-term care riders and long-term care policies under the Health Insurance Portability and Accountability Act (HIPAA) of 1996 are correct, EXCEPT: An insured who bought an long-term care rider becomes eligible for its benefit when he or she is diagnosed as chronically ill. --The insured must spend time in a hospital before payment. There may be an elimination or waiting period of 10 to 100 days before benefits are payable. The insured's diagnosis can be the result of either a medical or cognitive (mental health) reason. If for a medical reason, then the insured must be certified as unable to perform at least two activities of daily living (ADLs) for at least 90 days. Explanation: Long-term care riders and policies cannot require time in a hospital before payment. -Under the integrated long-term care option, the beneficiary receives the remainder of the face amount as the death benefit at the insured's death. In this way, the long-term care integrated option is similar to which of the following? term life insurance a family term rider --an accelerated benefits rider a disability income benefit rider Explanation: The long-term care integrated option is similar to the accelerated death benefit rider, which pays out part or all of the policy's face value while the insured is still living. - - - - - - - - - - - -

2.3.2 Policy Exclusions, Limitations, or Restrictions

-All the following statements about standard policy exclusions are correct EXCEPT, If an insurer excludes a risk from coverage, then it is not covered, and the insurer will not pay the policy's benefit if death results from that risk. Standard exclusions found in most policies last for the life of the policy, even after the contestability period ends. --The war and commission of a felony exclusions are required by law. The war exclusion usually excludes paying the death benefit if the death directly resulted from war. Explanation: The war and commission of a felony exclusions are not required by law. However, insurance companies commonly include them. -Which of the following statements about aviation and hazardous occupation and hobbies exclusions in life insurance is NOT correct? --Insurance companies always exclude aviation and hazardous occupations and hobbies. If the aviation exclusion is included, then the insurer will not pay a death claim if the insured was serving as an aircraft crew member. The hazardous occupations or hobbies exclusions exclude a death benefit if the insured dies as a result of his or her occupation or hobby Some policies allow coverage of these risks, but they would likely charge an additional premium if the insured engages in these activities. Explanation: Depending on the insurer, aviation and hazardous occupations and hobbies may or may not be excluded. -Andrea is applying for a $500,000 whole life insurance policy from White Insurers. On the application, Andrea disclosed that she works full-time as a nurse and is an amateur racecar driver. Which of the following actions is White Insurers likely to take if it decides to issue a policy to Andrea? --charge an additional premium issue a policy at a lower face amount issue a term rather than a whole life insurance policy issue a policy at a lower face amount and increase the premium Explanation: An insurer may exclude coverage if the insured dies as a result of the occupation or hobby. Alternatively, some policies will cover these risks but will likely charge an additional premium. -Jacob is purchasing a life insurance policy from Delta Insurance Company. Which provision could Delta include in the policy? a provision that allows the policy to be forfeited if the total owed on a policy loan is less than the policy's loan value a provision that makes the agent's representations binding on Jacob a provision that limits the period for filing a lawsuit against Delta to less than one year --a provision that requires Jacob to notify Delta for permission to assign the policy to a third party Explanation: The only provision that Delta could lawfully include in the policy is a provision requiring Jacob to notify it if he plans to assign the policy to a third party. The other provisions are typically prohibited by state law. - - - - - - - - - - - -

2.4.1.2 Parties to an Annuity

-Ann is the beneficiary of an annuity owned by Jim. Jim intended to annuitize the contract at retirement but died shortly before retiring. What benefits will Ann receive from the annuity? --Ann will receive the annuity's accumulated value and may select a payout option. Ann's right to any funds will be based on the income payout option that Jim selected. Ann will receive income for life. Ann will receive the contract's funds in a lump sum. Explanation: If the owner or annuitant dies before the contract has annuitized, the beneficiary will receive the contract's funds. -Ann is beneficiary of an annuity owned by Jim. If Jim annuitizes the contract at retirement and dies shortly afterward, what benefits will Ann receive from the annuity? Ann will receive the annuity proceeds. --Ann's right to any funds will be based on the income payout option Jim selected. Ann will receive lifetime income. Ann's will receive income for 20 years. Explanation: If the owner/annuitant dies after annuitization begins, then the beneficiary's right to any funds will be based on the income payout option the owner selected. -Which of the following best describes the role of the annuitant under an annuity contract? The annuitant is always the contract owner. --The annuitant is always the person upon whose life the annuity payout will be based. The annuitant is the always beneficiary of contract proceeds. The annuitant is always different from the contract owner. Explanation: The annuitant is the person whose life governs the duration of annuity payments. The annuitant may be, but is not necessarily, the contract owner. - - - - - - - - - - - - - -

2.7.2.2 Section 529 Plans

-Diane invested $6,000 two years ago in a Section 529 college savings plan for her daughter, Cathleen, age 5. The account earned $400 the first year and $450 the second year. Which of the following statements is correct? Income tax on the earnings must be paid this year at Diane's tax rate. Income tax on the earnings must be paid this year at Cathleen's tax rate. Income tax on the earnings must be paid this year at the combined rate of Diane and Cathleen. --No income tax must be paid on the earnings this year. Explanation: Funds in a Section 529 college savings plan accumulate tax free for federal income tax purposes. When later used to pay for higher education expenses, all of the money, including earnings, comes out income tax free. -Chester and his wife, Nellie, established a 529 plan for their daughter and contributed $5,000 to her account this year. Six months later, they withdrew $20,000 to pay for their daughter's college tuition. Which statement is correct? Chester and Nellie can take an income tax deduction for their contribution. CorrectChester and Nellie do not have to pay tax on the distribution. Chester and Nellie must pay tax only on the earnings portion of the withdrawal. Chester and Nellie can take an income tax deduction for their withdrawal. Explanation: Funds withdrawn from a Section 529 plan (and the interest earned on those funds) are not taxable. To escape taxes, these funds must be used for qualifying college expenses, such as tuition, fees, room and board, and books. Although contributions are not federally tax deductible, some states may allow contributions to be deducted for state tax purposes. - - - - - - - - - - -

2.5.3 Uses of Annuities

-For what purpose are annuities used most often? income accumulation short-term savings Correctretirement planning income protection Explanation: People use annuities most often for retirement planning purposes: to accumulate retirement savings and/or to pay out retirement funds on a periodic basis for a period that can be guaranteed to last as long as they do. -Lisa is 70 years old and is thinking about purchasing a fixed deferred annuity. Which of the following indicates that she is not well suited for this product? --She has a short investment timeline. Her investment objective is for tax-deferred, guaranteed accumulation. She has a low risk tolerance. She will eventually want the annuity to provide lifetime income. Explanation: A customer's investment objectives, risk tolerance, and time horizon affect suitability of the product. In this case, the customer has a short investment timeline, and annuities should be considered long-term investments. - - - - - - - - - - - - -

2.7.5.2 Types of Social Security Benefits

-Fred, age 65, never married and has been working for more than 40 years. He provided more than 80 percent of his elderly mother's financial support. He died a year after he began caring for her. Which of the following statements is correct? His mother will receive a $500 lump-sum payment. His mother is eligible to receive monthly benefits equal to 75 percent of Fred's primary insurance amount (PIA). --His mother is eligible to receive monthly benefits equal to 82.5 percent of Fred's primary insurance amount (PIA). His mother will not receive any survivor benefits. Explanation: Beginning at age 62, each parent of a deceased worker is eligible to receive monthly survivor benefits if the parent was at least one-half supported by the worker when the worker died. If only one parent is eligible, he or she receives 82.5 percent of the worker's PIA. -What is the name for the period of years during which no Social Security benefit is payable to the surviving spouse of a deceased, fully insured worker until the survivor qualifies for his or her own benefits? dependency period --blackout period survivor period early retirement period Explanation: The blackout period is the time during which no Social Security benefit is payable to the surviving spouse of a deceased, fully insured worker. It begins when the surviving spouse's youngest child reaches age 16 and lasts until the surviving spouse reaches age 60. - - - - - - - - - - - - -

2.6.3 Taxation of Annuities

-If Sam, who owns a deferred annuity, withdraws funds as a full or partial surrender before the contract annuitizes, what happens? Fifty percent of Sam's withdrawals are taxable income. Up to $40,000 of Sam's withdrawals are tax free. --Withdrawals are taxable until accrued earnings have been fully withdrawn, at which point remaining withdrawals (of principal) are not taxable. Sam's annuity withdrawals are tax free. Explanation: If Sam withdraws funds as full or partial surrenders before the contract annuitizes, any withdrawn annuity interest earnings are taxable. -Caleb bought a single-premium deferred annuity ten years ago. He paid $25,000. Today, the contract's value is $46,000. What would the tax consequence be if Caleb withdrew $15,000? It would not be subject to tax because it would come from interest. It would be subject to a 50 percent tax because it would come from interest. It would not be subject to tax because it would come from principal. --It would be fully subject to income tax. Explanation: If Caleb were to withdraw $15,000, it would be fully subject to tax, since it would be deemed to come from interest. - - - - - - - - - - - - -

2.5.1 Personal Uses of Life Insurance

-If a group policy allows for the insurance coverage to be used for a viatical settlement, what might that settlement be used for? the benefit of the surviving spouse the benefit of an unemployed insured the benefit of the insured's children --the benefit of a terminally ill insured Explanation: Viatical settlements are for the benefit of the terminally or chronically ill. Their purpose is to provide funds to enhance quality of life. -Which of the following is not a factor in determining an individual's life insurance needs using the human life value approach? net annual salary net annual expenses -- cost the life insurance number of years the individual can continue working Explanation: The biggest disadvantage of the human life value approach is that it does not take into account a family's actual economic needs. It does not calculate the actual cost to ensure a family's future. -As whole life insurance policies mature, they build cash value, which can be accessed through loans, withdrawals, or policy surrender. What is the ability to use a policy's cash value in these ways generally called? death benefit personal benefit --living benefit survivor's benefit Explanation: While living, the policyowner can access the policy's cash value through loans, withdrawals, or policy surrender. These are the living benefits of permanent life insurance ownership. -Which of the following would provide instant liquidity upon the death of an estate owner? the estate owner's home bank certificates of deposit --a life insurance policy on the owner's life, payable to his estate real estate owned by the owner for investment purposes Explanation: An investment with liquidity is easily converted into cash. Life insurance policies with cash accumulation features offer liquidity, as do policies that are payable at death to the insured's estate. In this case, the only asset with instant liquidity is the life insurance policy. The other assets can not be easily converted into cash. - - - - - - - - - - -

2.3.9.4 Other Common Policy Riders

-Jane has a life policy with a cost of living rider. How does the rider protect Jane against the effects of inflation? Premiums stay stable even when interest rates rise. --As prices increase, so does the coverage amount. Premiums are guaranteed to rise no faster than the rate of inflation. Premiums rise no more than 2 percent in any period. Explanation: A cost of living (COL) rider is tied to an inflation index such as the Consumer Price Index (CPI). As the CPI increases, so does the policyowner's coverage. Proof of insurability is not required for the increased coverage. -Your client has a $200,000 life insurance policy with a return of premium rider. The insured dies within the stated period in the rider after having paid $15,000 in premiums. How much will the beneficiary receive? $185,000 $200,000, less premiums that would have been paid up to age 65 --$200,000 $215,000 Explanation: The beneficiary under a life insurance policy with return of premium rider would be entitled to the death benefit if the insured died within the stated period in the rider, but not to the premiums paid. The premiums would be returned if the insured were still alive at the end of the stated period. -Which of the following riders is NOT generally available with most life insurance policies? the guaranteed insurability rider the accidental death and dismemberment (AD&D) rider the cost-of-living-adjustment rider --the guaranteed dividend rider Explanation: Policy dividends can never be guaranteed, by rider or otherwise. -Policyowners can buy additional permanent life insurance without proof of insurability under which type of rider? --guaranteed insurability rider accidental death and dismemberment (AD&D) rider cost-of-living-adjustment rider term rider Explanation: The guaranteed insurability rider guarantees that the policyowner can buy additional permanent life insurance on the insured's life without proving insurability. - - - - - - - - - - - -

2.3.6 Policy Nonforfeiture Options

-Jerry asks his insurance company to pay him the cash value of his permanent life insurance and cancel the policy. Jerry is using which of the following nonforfeiture options? --cash surrender option extended term option reduced paid-up insurance option policy loan and withdrawal provision Explanation: Under the cash surrender option, the owner surrenders the policy and the insurer pays the cash value to the policyowner in a lump sum. -What is the maximum amount of time most states allow insurers to delay paying cash surrender values? one month --six months nine months one week Explanation: Most states allow insurers to delay paying the cash surrender value for up to six months. However, few companies wait this long to pay. -A policy owner of a lapsed policy can take the reduced paid-up nonforfeiture option unless the lapsed policy was which of the following? --universal life policy participating policy issued on a standard or substandard (rated) basis non-participating policy Explanation: Unlike other permanent policies, universal life policies normally do not contain the standard nonforfeiture options for policy lapses because universal life insurance remains in force as long as the cash value allows the insurer to make a monthly deduction to cover the policy's insurance and operational costs. -Under which nonforfeiture option does permanent life insurance continue in force with no further need for premiums? cash surrender option extended term option --reduced paid-up option cash withdrawal provision Explanation: A paid-up policy under the reduced paid-up option requires no further premiums (nor can any be paid). The paid-up policy retains a cash value that will continue to grow throughout the life of the policy. However, it will grow much more slowly than during the period that premiums were being paid. - - - - - - - - - - - -

2.3.9.1 Policy Riders for Disability

-Joe, age 35, has a limited payment life insurance policy that will be paid up at age 60. Under the waiver of premium rider with this policy, should Joe become totally and permanently disabled tomorrow, premiums will be waived for 10 years until the policy matures --until the policy is paid up until age 100 Explanation: For limited payment life policies with a waiver of premium rider, the premiums for an insured who becomes totally disabled before age 60 will be waived for as long as the total disability continues until the policy is paid up. -Your client has a universal life policy. He wants to be assured that the death benefit will remain intact if he becomes disabled and stops premium payments. What type of rider would accomplish this? return of premium --waiver of stipulated premium waiver of cost of insurance cost of living adjustment Explanation: The waiver of stipulated premium provides that a preset premium payment amount is waived if the insured becomes disabled for at least six months. -Which one of the following choices most correctly explains why a waiver of premium rider functions differently with a universal life insurance policy than with a traditional whole life policy? Premium payments for a universal life policy are predetermined. --Premium payment for a universal life policy is flexible, and premiums need not be paid consistently. Premium payment for a universal life policy is flexible but must be consistent. Premium payment for a universal life policy is not flexible and must be paid quarterly. Explanation: Because universal life premium payment is flexible, they need not be paid consistently. Therefore, a waiver of premium for the disability of a universal life policyowner must operate differently than is common with traditional policies. -When can Hank add a waiver of premium or a waiver of cost rider to his universal life policy? only when the policy is issued only six months after the policy has been issued --when the policy is issued or at a later date one year after the policy is issued Explanation: Usually, a policyowner can add both UL riders when the policy is issued or at a later date. - - - - - - - - - -

2.7.4 Individual Retirement Plans

-Teddy's 403(b) plan account was worth $200,000 when he was laid off from his job. He plans to roll over the entire amount into an IRA and has asked the plan administrator to distribute his account balance directly to him. What amount will Teddy receive from the 403(b) plan administrator? $200,000 $180,000 --$160,000 $120,000 Explanation: If a rollover distribution is paid directly to an employee, the employer is required to withhold 20 percent. To avoid this requirement, the employee must tell the employer to transfer the funds directly to an IRA or qualified plan (known as a direct trustee-to-trustee rollover). -A prospective client, Nick, wants to open an individual retirement account. As the agent on this transaction, what would be the first thing you want to know about Nick before you advise him on his purchase? his age --whether he is covered by an employer-sponsored retirement plan his level of savings when he plans to retire Explanation: As of 1986, tax deductibility of traditional IRA contributions depends on two factors: whether the IRA owner is covered by an employer-sponsored retirement plan and the owner's income level if covered under such a plan. If Nicholas is not already covered, his initial IRA contribution is fully deductible up to $5,500. -Assuming all are under age 59, who of the following will be assessed a premature distribution penalty when making a withdrawal from her IRA? Iris, who has a stroke and is now disabled Rose, who makes the withdrawal to purchase her first home Dahlia, who is unemployed and needs the money to pay her health insurance premiums --Daisy, who is suffering a financial hardship because she has been unemployed for two years Explanation: Financial hardship is not an allowable exclusion that exempts an IRA distribution from the 10 percent penalty for a person not yet age 59½. -Terry decides to open a new IRA with her broker and wants to roll over all of the funds that are in her IRA at her bank. The current IRA is worth $200,000. How much will the bank withhold from the distribution? --$0 $10,000 $20,000 $40,000 Explanation: This change is a direct transfer and no penalty applies. - - - - - - - - - - -

2.1.1 Insurable Interest

-The requirement that insurable interest must exist prevents people buying life insurance from doing which of the following? overusing life insurance misusing life insurance for criminal purposes --using life insurance for wagering or betting using life insurance to fund future cash needs Explanation: The insurable interest requirement prevents the possibility that insurance is used for wagering or betting. -At what point do insurers need to decide if insurable interest exists? when they issue a policy before the applicant submits an application before the insured dies --before entering into the contract Explanation: Insurers decide whether insurable interest exists before entering into the insurance contract. -In life insurance, for how long must insurable interest exist? --Insurable interest must exist only at the time the applicant enters into a life insurance contract. It must continue for the life of the policy. It must exist when a claim is submitted. If no insurable interest exists when a policyowner buys a life insurance policy, the contract may still be enforced. Explanation: With life insurance, insurable interest need exist only at the time the applicant enters into the life insurance contract. - - - - - - - - - - -

2.1.2 Individual Underwriting by the Insurer

-The review process between the time an insurance producer takes the application of a proposed insured and the time the policy is delivered to the new policyowner is known as which of the following? policy review --underwriting risk classification application review Explanation: During the underwriting process, the insurer determines whether to insure the risk as applied for and the appropriate premium to charge the applicant for the coverage. -Which of the following would not be used by an underwriter in making a decision to accept or decline a risk? --Correctmortality tables physician's statement inspection or consumer report agent's report Explanation: The underwriter at the insurance company home office relies on medical and/or background information about the proposed insured. Actuaries use data from mortality tables. -Who of the following presents the highest life insurance underwriting risk? Remy, a yoga expert --hang-gliding hobbyist, Philip unemployed Carla, whose full-time hobby is painting retired Harry, who spends nearly all day in his garden Explanation: Avocations, or hobbies, are underwriting considerations. A hang glider presents a higher risk than a yoga expert, a painter, or a gardener. -Who of the following presents the lowest life insurance underwriting risk? --John, who has never smoked Rachel, who is a borderline diabetic Diane, who has gained 75 pounds in the last year Ron, who is an alcoholic Explanation: Current health and physical condition are significant underwriting factors. -Roberta owns a whole life insurance policy and has indicated her desire to provide the beneficiary with a settlement option "without a life contingency". At her death, all of the following are available to her beneficiary EXCEPT: a lump-sum cash payment Incorrectinterest-only payments on the policy proceeds fixed payments of both principal and interest for a temporary period Correctincome payments for life or for a specified number of years, whichever is longer Explanation: Lump-sum, interest-only, and temporary fixed payments of principal and interest are Roberta's options under the "without a life contingency" settlement option. Income payments for life or for a specified number of years (life with period certain) would be available only if she had chosen a "with a life contingency" settlement option. - - - - - - - - -

2.7.1 General Requirements for Qualified Plans

-To be considered qualified, a retirement plan must meet all of the following requirements EXCEPT: The plan must be in writing and communicated to employees. --The plan must cover all employees. The employer, the employees, or both must contribute to the plan. The plan must meet minimum funding levels. Explanation: A qualified plan is not required to cover all employees. However, a qualified plan cannot discriminate in coverage, which means that the employer cannot set up the plan mainly for the benefit of key employees or business owners. Also, a qualified plan must be in writing and must meet minimum funding levels, and contributions must be made by the employer, the employees, or both. -Phil just began participating in his company's 401(k) plan. During the first four years of his employment, he will not be vested at all in the employer's contributions to the plan. In the fifth year, he will be 100 percent vested. Which vesting schedule is the employer using? percentage vesting increment vesting --cliff vesting graded vesting Explanation: Under a cliff vesting schedule, the participant is zero percent vested in a plan's contributions or benefits for the first four years of participation. Then, in the fifth year, he or she is 100 percent vested -Beta Industries set up a retirement plan solely for the benefit of its top executives, and it plans to contribute the same amount to each employee's account every year. Which statement is correct if Beta wants to obtain IRS approval as a qualified plan? The plan will probably receive qualified plan status. The plan must benefit at least 75 percent of its top executives to receive qualified plan status. The plan will not be considered a qualified plan because it does not consider an employee's earnings when determining contributions to the plan. --The plan will not be considered a qualified plan because it discriminates in coverage. Explanation: A qualified plan cannot discriminate in coverage, which means that the employer cannot set up the plan mainly for the benefit of key employees or the business owners. Beta's plan will therefore not meet the general requirements for obtaining qualified plan status. -All the following statements regarding the tax benefits of qualified retirement plans are correct EXCEPT Employers can take an income tax deduction, within limits, for contributions they make to the plan. Employees are not currently taxed on contributions to the plan made on their behalf by the employer. Benefits are taxed to employees only when they are withdrawn or distributed. --Upon distribution, employees are required to pay taxes only on the interest earned on plan contributions but not on the contribution amount itself. Explanation: The federal government encourages employers to set up qualified retirement plans for the benefit of their employees by offering tax incentives. For example, an employer can deduct the contributions it makes to a plan, and employees will not be currently taxed on contributions made on their behalf to the plan. Benefits are taxed to employees only when distributed or withdrawn. - - - - - - - - - - -

3.1.2 State Regulation of Insurance Producers

-To qualify for a resident insurance agent's license in Georgia, a person must comply with all of the following EXCEPT --earning a college degree. passing the licensing exam. paying the licensing fee. being at least 18 years old. Explanation: To qualify for a resident agent's license, an applicant must be at least 18 years old, pay the required fee, pass the licensing exam, complete a prelicensing education program, submit a set of fingerprints, and be a Georgia resident for at least six months every year. -Terry has been licensed in Georgia as a life and health insurance agent for six years. To maintain his license, how many hours of continuing education must he complete every two years? 15 --24 20 10 Explanation: An agent licensed for less than 20 years must complete a total of 24 hours before every license renewal. An agent licensed for at least 20 years must complete a total of 20 hours before every license renewal. -The Commissioner can suspend or revoke an agent's license for all of the following reasons EXCEPT: misrepresentation in obtaining the license conviction of a felony --failing to meet projected sales goals having an agent's license revoked in another state Explanation: The Commissioner may place on probation, suspend, revoke, or refuse to continue an agent's license for misrepresentation, conviction of a felony, and having a license revoked in another state. A license may not be revoked if an agent fails to meet projected sales goals -Thomas moved his insurance office to a different town in Georgia on May 1. Within how many days must he notify the Commissioner of the change of address? 10 20 --30 60 Explanation: Agents, limited subagents, counselors, and adjusters must maintain a place of business in Georgia where they transact insurance. A licensee must notify the Commissioner within 30 days of any change in business address. -Abby lives in North Carolina, where she is licensed as an insurance agent. She wants to apply for a nonresident license in Georgia. Which of the following conditions must she satisfy? She must move to Georgia. She must surrender her North Carolina license. She must be sponsored by an agent licensed in Georgia. CorrectShe must give the Commissioner a certified copy of the license application from her home state. Explanation: A person who is not a resident of Georgia may be licensed as an insurance agent in Georgia if he or she is a licensed agent in another state, applies for licensure and pays the required fees, and gives the Commissioner a certified copy of the license application from his or her home state (or an original Uniform Application). The person's home state must also grant nonresident agent licenses to Georgia residents on the same basis. - - - - - - - - - - - - -

2.6.1 Taxation of Personal Life Insurance

-Tom owns several life insurance policies (none of which are modified endowment contracts). In which of the following events associated with his policies will their be a tax consequence? He surrenders a policy, and the cash value does not exceed his premiums paid. He takes out a loan against a policy and uses it to pay credit card balances. One of the policies provides dividends which he uses to buy additional insurance. --He owns several cash value policies when he dies. Explanation: The value of life insurance proceeds is included in the policyowner's gross estate if he or she possessed any incidents of ownership in the policy at the time of death. -Morgan is the owner and insured of a $1 million life insurance policy. At her death, the proceeds were payable to her son in a lump sum. What amount, if any, must be included in Morgan's estate? $0 $500,000 $750,000 --$1 million Explanation: For estate tax purposes, the value of any life insurance policy a person owned when he or she died is included in the value of the estate. Morgan's estate must therefore include the entire amount of the proceeds in her estate for purposes of determining any estate tax liability. -In a few situations, premiums paid for a life insurance policy are tax deductible. These situations include all of the following, EXCEPT: The life insurance is a group policy that the employer pays for as an employee benefit expense. A qualified charitable organization owns the life insurance. --A spouse is paying for the life insurance. A business creditor buys the life insurance as collateral security for a debt. Explanation: In this situation, the premiums are not tax deductible. -To receive favorable tax benefits, a life insurance policy must meet the definition of life insurance as defined in Section 7702 of the Tax Code. When was this section added to the Code? after group life insurance was introduced --after flexible premium payment policies were introduced after term insurance was introduced after equity-based insurance was introduced Explanation: Section 7702 was added to the Tax Code after flexible premium payment policies were introduced. - - - - - - - - - - -

2.3.1 Required, Standard or Common Provisions

-What rule lets a policyowner return a policy for a refund of premiums paid for a certain period of time after the policy is issued? --right to examine (free look) grace period get-acquainted period consideration Explanation: All insurance policies require a free-look provision. Grace has a set period in which to review the policy and to decide whether to keep it. The free look begins when the agent delivers the policy. -How long is the typical permanent life insurance policy's free-look period? 5 days --10 days 15 days 30 days Explanation: The free-look provision gives the new policyowner a set period, usually ten days, in which to review the policy and to decide whether to keep it. -When does the free-look period for a variable life insurance policy end? Incorrect7 days after the policy is delivered 30 days after the policy is delivered 21 days after the policy is delivered --10 days after the policy is delivered, or it can be extended to 45 days after the insurance application is completed, whichever is later Explanation: The free-look period for a variable life policy generally ends 10 days after the policy is delivered, or it can extend for 45 days after the insurance application is completed, whichever is later. Some states require longer free-look periods. -To own life insurance, Hank, MUST be which one of the following? an American citizen Correcteither a natural or non-natural person a married individual a business owner Explanation: The owner of a policy can either be a natural person or a non-natural person. -A life insurance policyowner has the right to do all of the following, EXCEPT: transfer the policy and pledge the policy's values pledge the policy's cash values --select and change the contract's dividend schedule elect settlement options and non-forfeiture provisions Explanation: Policyowners may not select and change the contract's dividend schedule. -The purpose of Tom's life insurance policy's rights provision is which of the following? --to establish Tom's rights as policyowner and the conditions under which he can exercise those rights to determine who gets policy proceeds if the insured is incapacitated to establish the rights of the beneficiary under the contract to decide whether the owner is a natural or non-natural person Explanation: A life insurance policy's rights provision establishes the rights of the policyowner and the conditions under which he or she can exercise those rights. - - - - - - - - - -

1.1 Insurance Concepts

-Which of the following conditions must exist for a risk to be considered insurable? --Loss must be ascertainable. (Explanation: An ascertainable loss can be covered because it can be measured and determined with some degree of certainty) -In classifying insurance risks, which method is used most often by insurance underwriters? --numerical rating system (Under the numerical rating system, credits are added for favorable risk factors. Debits are subtracted for adverse or unfavorable factors. This system has largely replaced the judgment method.) -Which of the following is not a requirement for a risk to be insurable? --Loss must be catastrophic.(A catastrophic loss is not the determining factor. The potential loss must be ascertainable for the risk to be insurable.) -Dan, age 43, is applying for an individual health insurance policy. The application asks about his current health and whether he has any known medical conditions. Dan discloses that he is partially blind, which would be considered which of the following? a peril a moral hazard a morale hazard --a physical hazard Explanation: A hazard is a characteristic that increases the chance of a peril occurring. A physical hazard is a physical characteristic, such as blindness, that increases the chance of loss. A physical hazard exists due to a person's physical condition as opposed to arising from his or her character. -Emily is married, has two children, and is the primary breadwinner in the family. She knows that her family would suffer serious financial consequences if she were to die prematurely. However, she continues to put off purchasing a life insurance policy, saying that her family would use its savings to take care of final expenses should she die prematurely. Which method is Emily using to deal with risk? --retention avoidance reduction transfer Explanation: Rather than taking measures to reduce the risk to her family, such as purchasing life insurance, Emily has chosen to do nothing and live with the exposure to the risk. This method of handling risk is known as risk retention. -Jeremy and his brothers each purchased individual health insurance policies at a young age, and have kept their policies in force over the years, because of their family history of cancer . Which of the following describes the tendency of Jeremy and his brothers to seek insurance? implied selection --adverse selection exposure reduction risk avoidance Explanation: Adverse selection is the tendency of persons more likely to have a claim to buy and keep insurance. For example, individuals with a family history of cancer may be more likely to buy health insurance and to keep it in force than individuals without such family history. - - -

2.2.5 Life Settlements

-Which of the following life insurance settlement options is the least complicated? Correctstraight life life income with period certain life income with refund joint and survivor Explanation: The straight life income option is the least complicated of the life income settlement options. Under this option, the policy's proceeds are converted into payments that are made for the life of the payee. The payments stop upon his or her death. -Richard just retired at age 72 and owns a $500,000 life insurance policy. Because he no longer needs insurance protection, Richard would like to sell his policy and use the proceeds to travel during retirement. Which option would be best suited for this purpose? a viatical settlement an accelerated benefits settlement --a life settlement a cash value settlement Explanation: A life settlement sale is reserved for seniors age 65 or older who are not facing a life-threatening illness. Life settlements offer a way for an owner to sell a policy and derive the largest possible value from the policy, short of its death benefit. -Jill is the beneficiary of her uncle's life insurance policy and is guaranteed to receive income payments for life. However, she is also guaranteed to receive payments for at least ten years. Under which settlement option is Jill receiving the life insurance proceeds? straight life --life with term certain joint and survivor minimum guaranteed term certain Explanation: Under the life income with term certain, the life insurance beneficiary receives income payments for life. However, he or she is guaranteed that the payments will be made for at least a specified term, such as 5, 10, or 20 years.

3.1.1 State Regulation of Insurance

-Which of the following penalties may the Commissioner impose if, after a hearing, he or she determines that an agent has committed an unfair trade practice? termination of the agent's appointment lawsuit in federal court imposition of civil damages and restitution --termination of an agent's license Explanation: If the Commissioner finds that an agent has committed an unfair trade practice, he or she can issue a cease and desist order, impose a fine, or suspend or revoke an agent's license. -During an examination, what are an insurer's officers and employees required to do? pay for the cost of the examination --make all books, records, and files accessible to the Commissioner prepare a summary report of the insurer's activities during the past year provide data regarding each agent's sales activities during the past year Explanation: Officers and employees of an insurer that is being examined must cooperate with the Commissioner and make all books, records, and files accessible to the Commissioner and his or her examiners. -Which of the following penalties may the Commissioner impose if a person violates a cease and desist order? --license suspension or revocation restitution fine of up to $50,000 lawsuit in federal court Explanation: The Commissioner can suspend or revoke a license or impose a fine of up to $10,000 per violation. He or she may also impose any other penalty that may be appropriate -How often must the Commissioner examine the affairs of a domestic insurer? --at least once every five years at least once every three years at least once every year only when a written request is made by an insurer's shareholders Explanation: The Commissioner can examine the books and records of an insurer as often as necessary, but at least once every five years. -An insurance company that is incorporated under the laws of Alabama is considered what type of insurer in Georgia? domestic alien --foreign reciprocal Explanation: An insurer that is incorporated in another state but transacting insurance in Georgia is considered a foreign insurer in Georgia. -What is an insurance company's license to transact business called? --certificate of authority evidence of licensure corporate authorization license of good standing Explanation: An insurance company's license to transact business is called a certificate of authority. The certificate specifies the kinds of insurance that the insurer is authorized to transact in the state. -Joseph is the newly appointed Commissioner of Insurance for Georgia. He has a reputation for being strict on law enforcement and is expected to implement regulations that will benefit consumers. As Commissioner, he can be expected to do all of the following EXCEPT investigate insurers and producers for compliance with the law. impose civil fines on those who break the law. issue cease and desist orders to prevent violations of the law. --impose jail terms upon those who are convicted of violating the law. Explanation: As Commissioner, Joseph can investigate violations of the law, issue cease and desist orders to prevent violations of the law, and impose fines and penalties upon offenders. He cannot sentence anyone to jail because that is beyond his authority as Commissioner. -Joseph is the newly appointed Commissioner of Insurance for Georgia. He has a reputation for being strict on law enforcement and is expected to implement regulations that will benefit consumers. As Commissioner, he can be expected to do all of the following EXCEPT investigate insurers and producers for compliance with the law. impose civil fines on those who break the law. issue cease and desist orders to prevent violations of the law. Correctimpose jail terms upon those who are convicted of violating the law. Explanation: As Commissioner, Joseph can investigate violations of the law, issue cease and desist orders to prevent violations of the law, and impose fines and penalties upon offenders. He cannot sentence anyone to jail because that is beyond his authority as Commissioner. - - - - - - - - - - -

1.2 Insurers

-Which of the following set of terms is used to categorize insurers by their location or domicile? --domestic, foreign, and alien (Insurers are categorized by their location or domicile as either foreign, domestic, or alien.( -ABC Insurance Company is domiciled in Delaware and does business in Ohio. Which of the following is a correct statement about ABC? --ABC is a domestic insurer in Delaware and a foreign insurer in Ohio. (Insurers doing business in the state in which they are domiciled are classified as domestic companies in that state. A company that does business in states other than the one in which it is domiciled is classified as a foreign company in those states.) -The federal Risk Retention Act of 1986 contains guidelines for which of the following entities? Correctself-insuring businesses re-insurers credit life insurance companies high-risk business insurers Explanation: A risk retention group (RRG) is an insurance company that provides self-insurance services to owner-members. These members all have a business, occupation, or professional relationship with one another. -Which of the following terms applies to an insurance company that operates in State A but is domiciled in State B, from the perspective of residents in State A? alien company --foreign company unauthorized company domestic company Explanation: Any company that does business in a state other than the one in which it is domiciled is classified as a foreign company in the state where it does business. - - - - - - -

2.4.2.1 Immediate vs. Deferred Annuities

-Which one of the following can be funded only with a single lump-sum premium payment, but it distributes income payments over time beginning soon after purchase? --immediate annuity deferred annuity variable annuity nonforfeiture annuity Explanation: Immediate annuities are funded and can only be bought with a single lump-sum premium payment. They then regularly distribute a given sum of money over time soon after purchase. -When do funds in a deferred annuity become the owner's? They belong to the owner at annuitization. They belong to the owner only after they have accumulated for the period stated in the contract. They belong to the owner only when paid as income to the annuitant. --They always belong to the contract owner. Explanation: Funds in a deferred annuity always belong to the contract owner. -What must an annuity owner do to withdraw funds from his or her annuity contract? --Ask the insurer. Pledge a certain amount of collateral, and agree to a repayment schedule. The funds must remain in the contract until annuitization. Provide proof of the owner's need for those funds. Explanation: An annuity owner who wants to withdraw any values from his or her contract must simply notify the insurer. The insurer cannot withhold these funds or refuse to honor the owner's request. -What options does an insurer have when asked by an annuity owner for a full withdrawal of an annuity contract's accumulated value? The insurer can ask for proof of need. --The insurer must comply with the request. The insurer must pay the values in a lump sum. The insurer can ask the owner to agree to a repayment schedule. Explanation: The insurer cannot withhold these funds or refuse to honor the owner's request. - - - - - - - - - - -

2.5 Suitability and Use of Life Insurance and Annuities

If the business that owns the entity plan is a close corporation, the buy-out agreement is also called a stock redemption agreement. In a cross-purchase buy-sell agreement involving three partners, what portion of the partnership does the business itself own? Correctzero one-fourth ownership Incorrectone-third ownership one-third ownership if one partner dies Explanation: In a cross-purchase buy-sell agreement, the business itself is not involved in the purchase agreement. A viatical settlement broker arranges the agreement between the viatical settlement purchaser, provider, and viator. The broker works on behalf of the viator and must be licensed in most state All of the following statements regarding viatical settlement brokers are correct, EXCEPT: They must be licensed in most states. They work on behalf of the viator in the agreement. They arrange the viatical settlement agreement between the viatical settlement purchaser, provider, and viator. CorrectThey fund a viatical settlement on behalf of the viatical settlement provider. All of the following statements regarding the use of deferred annuities in retirement planning are correct, EXCEPT IncorrectFederal tax law permits the use of deferred annuities with qualified retirement plans such as IRAs, SEPs, or 403(b) plans. There are both group as well as individual annuity contracts that make it possible for employers as well as individuals to use them for a retirement plan. CorrectEarnings grow on a tax-free basis when a deferred annuity is used to fund a qualified retirement plan. Depending on the type of qualified plan (and the rules of the plan), the premiums may be tax deductible by the plan owner or sponsor. Explanation: People can use annuities as a vehicle for qualified retirement plans such as IRAs, SEPs, or 403(b) plans.

2.4.1 Annuity Principles and Concepts

Sam is planning to buy a deferred annuity. When will he select a settlement option? The choice of settlement option is built into the contract; the owner chooses a contract with the preferred settlement option. IncorrectHe can only choose the settlement option when the deferred contract annuitizes. CorrectHe can choose the settlement option when the deferred contract annuitizes or when he buys the annuity. Annuities provide benefits during one's life. They ensure that one's income cannot be outlived. The annuitant is the person whose life governs the duration of annuity payments. The annuitant may be, but is not necessarily, the contract owner. Which of the following annuities specifies the exact premium payment amounts (and when they must be paid) for the contract to generate the desired future income payments? immediate annuity deferred annuity Correctfixed premium deferred annuity flexible premium deferred annuity Explanation: A fixed premium deferred annuity specifies the exact premium payment amounts (and when they must be paid) for the contract to generate the desired future income payments. Which of the following statements best describes an annuity payout period? CorrectIt guarantees income will be paid for any period the owner wants. If an annuity requires only that each premium deposit be above a certain minimum, this is most likely which type of annuity? immediate annuity fixed premium deferred annuity Correctflexible premium deferred annuity immediate variable annuity Explanation: Flexible premium deferred annuities allow the owner to make premium deposits of any amount whenever he or she wants. However, a certain minimum amount may be required.

2.6 Federal Tax Considerations for Life Insurance and Annuities

The group term life insurance premiums an employer pays are fully tax deductible to the employer. For a covered employee, the value of coverage under $50,000 is not taxable -When a deferred annuity is annuitized, which one of the following most correctly describes the tax treatment of the contract's "gain" (i.e., accrued interest) portion of each payment? It is tax exempt. CorrectIt is taxable. Gain is exempt from taxation until basis has been distributed; then it becomes taxable. A 29 percent tax is applied. Explanation: The exclusion ratio is applied to each annuity payment to determine the portion that is excluded from tax. The balance (the portion attributed to interest earnings) is taxable. A life insurance policyowner can exchange the policy tax free under Section 1035 for another life insurance policy, an annuity, or an endowment policy.

2.3 Life Insurance Policy Provisions, Options and Riders

The owner of a policy can either be a natural person or a non-natural person. -Policies under extended term insurance are not normally eligible to receive dividends. Policyowners can buy additional permanent life insurance without proof of insurability under which type of rider? Correctguaranteed insurability rider As the policyowner, Mark can pledge or transfer ownership of his life insurance policy by using which of the following? Correctassignment The purpose of Tom's life insurance policy's rights provision is which of the following? Correctto establish Tom's rights as policyowner and the conditions under which he can exercise those rights Joe, age 35, has a limited payment life insurance policy that will be paid up at age 60. Under the waiver of premium rider with this policy, should Joe become totally and permanently disabled tomorrow, premiums will be waived for 10 years until the policy matures Correctuntil the policy is paid up Incorrectuntil age 100 Explanation: For limited payment life policies with a waiver of premium rider, the premiums for an insured who becomes totally disabled before age 60 will be waived for as long as the total disability continues until the policy is paid up. Which of the following primarily regulates life insurance? the federal government Incorrectthe state in which the policyowner resides Correctthe state in which the insurance company is licensed Your client has a universal life policy. He wants to be assured that the death benefit will remain intact if he becomes disabled and stops premium payments. What type of rider would accomplish this? return of premium Correctwaiver of stipulated premium Incorrectwaiver of cost of insurance cost of living adjustment Explanation: The waiver of stipulated premium provides that a preset premium payment amount is waived if the insured becomes disabled for at least six months. If Dale decides not to exercise his guaranteed insurability rider on an option date, what becomes of that option date? It can be extended for 12 months. CorrectIt expires and cannot be used late

2.3.8 Policy Dividends and Dividend Options

What type of life insurance company is owned by its stockholders? universal insurance company mutual company privately held company --stock company Explanation: Stock companies are owned by stockholders, just like other public companies. -What type of life insurance company is owned by the policyowners? universal insurance company --mutual company privately-traded company stock company Explanation: Mutual companies are owned by the policyowners. --Which statement about the accumulation dividend option is NOT correct? The dividends are retained in the insurer's general account. The insurer credits a rate of interest to the dividends as they remain on deposit with the insurer. --The policyowner can only withdraw the accumulated dividends and interest on the policy's anniversary date. Participating policy dividends are not generally taxable. Explanation: The policyowner does not have to wait to the anniversary date to withdraw the accumulated dividends and interest. -Policyowners can withdraw the interest earnings on their dividends or allow the interest to continue to accumulate. In either case, how is the interest treated for income tax purposes? --The dividend itself is tax free but the interest earned on the dividend is reported as taxable income in the year credited. The interest earned is not tax free but it is tax deferred. The interest earned is not taxable. The interest earned on the dividend is taxable if withdrawn, but if paid out as part of the death benefit it is income tax free. Explanation: The interest earned on the dividend is taxable and is included in the policyowner's income in the year credited - - - - - - - - - - -

2.2 Types of Life Insurance Policies

Which type of life insurance policy would most likely be used to insure the declining balance of a home mortgage? Correctdecreasing term Which one of the following statements about the conversion provision in group life insurance policies is most correct? CorrectIt allows the employee to convert to an individual policy when his or her group coverage ends Ted is the insured under a ten-year family income policy that will pay a $500 monthly income. What will happen if he dies 15 years after taking out the policy? Ted's family will get a $500 monthly income for ten years. Ted's family will get a $500 monthly income for five years. IncorrectTed's family will get a $500 monthly income for ten years plus the face amount of the underlying policy. CorrectTed's family will not receive monthly income payments but will only be paid the face amount of the underlying policy as the death benefit. Explanation: Because Ted died after the term period, the insurer pays only the face amount of the underlying policy as the death benefit. All of the following are broad classifications of life insurance policies EXCEPT: Correctwhole life and permanent life How does variable life insurance differ from traditional whole life insurance? It has flexible premiums. It has a cash value. CorrectIt has a non-guaranteed investment feature. Stone owns a life insurance policy and has chosen the straight life income settlement option. He is the beneficiary. Which of the following best describes distribution of the policy proceeds? CorrectPolicy proceeds will be converted into payments that Stone will receive for as long as he lives. Stone will receive payments for the remainder of his life or for a specified period, whichever is longer. Stone will receive payments for life, but if he dies before receiving the full amount in his settlement option, his heirs will receive the remaining payments. Stone and his heirs will share the policy proceeds. Explanation: The straight life income settlement policy proceeds are made for the life of the payee. The payments stop upon his or her death. Variable life insurance differs from traditional whole life insurance in the way its values are invested. Variable life insurance policy values are invested in investment accounts known as subaccounts, which can consist of a variety of stock, bond, and related securities. Subaccounts are unsecured and nonguaranteed. Bob was covered by a $50,000 group life insurance policy when he decided to retire. If he chooses to convert the policy to an individual policy, which of the following statements is most correct? IncorrectHe must first give evidence of insurability. CorrectThe maximum amount of the new policy cannot be more than $50,000. Sally has owned a $100,000 convertible decreasing 30-year term policy for 29 years. With the end of the coverage term barely a year away, which of the following most correctly describes the action she may take with the policy? Sally can renew the policy at the current death benefit amount but not convert it. CorrectSally can convert the policy at the current death benefit amount but not renew it. Sally can renew the policy at its original face amount but not convert it. Sally can convert the policy at its original face amount but not renew it. Explanation: Decreasing term life policies are generally convertible to a permanent life policy at the death benefit amount in effect at the time of the conversion. However, decreasing term policies are generally not renewable. Under the joint and survivor settlement option with a period certain, payments are made to two payees until the second payee dies.