Illinois Life Insurance Exam
How are dividends taxed in participating policies?
Dividends are the return of unused premiums, so they are not considered income for tax purposes. However, if dividends are left with the insurer to accumulate interest, the interest earned on the dividend account is subject to taxation as ordinary income each year interest is earned
Name and describe at least 3 mandatory provisions in life policies issued in this state
Entire contract, grace period, incontestability, misstatement of age, payment of benefits, policy loan, reinstatement, settlement of proceeds
What information is gathered in Parts 1 & 2 of the application?
Part 1 of the application includes the general questions about the applicant, including name, age, address, birth date, gender, income, marital status, and occupation. Part 2 includes medical information about prospective insured.
Completing the Application
Part 1- General information Part 2- Medical information
What are the characteristics of whole life insurance?
Permanent protection to the insured's age 100, with living benefits such as cash value, policy loans and nonforfeiture options
Standard Risks
Persons who, according to a company's underwriting standards, are entitled to insurance protection without extra rating or special restrictions. Average
What is included under the term insurance transaction?
Solicitation, negotiating prior to execution of a contract, execution of a contract, and the transaction of any matters that arise as a result of the contract, as well as the actual process of insuring.
Upon what grounds can the Director revoke or suspend a producer license?
Some of the examples include: providing incorrect information in the application, obtaining a license through misrepresentation or fraud, improperly withholding any monies or properties, or engaging in unfair trade practices.
Upon policy delivery, the agent must confirm that all of the following are received
Statement of good health Payment of premium Correct and signed application
How does a substandard risk policy differ from a standard risk?
Substandard risk applicants are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. These policies could be issued with the premium rated-up (higher than the standard risk)
What are some common personal uses of life insurance?
Survivor protection, estate creation and conservation, cash accumulation, and liquidity
How can an insurance company use the information it obtains from the MIB?
It can use MIB information to conduct further investigation into an applicant's current insurability
Which dividend option increases the death benefit?
Paid-up additions increase the death benefit of the original policy by whatever amount the dividend will buy
What are the 2 premium payment options in anuities?
Single premium and periodic premiums
What is a life settlement?
A transaction in which the owner of a life insurance policy sells a life life insurance policy to a third party for some form of compensation, usually cash
What are the consequences of withdrawing money from a traditional IRA prior to age 59 1/2?
10% penalty on distribution unless it qualifies for an exemption
What is the maximum number of participants in a SIMPLE plan?
100 employees
How long do licensees have to inform the Director of a change of address?
30 days after the change
Insurers must maintain a file of advertisements. What must be included in this file?
A copy of every advertisement, when, where and how each ad was used, and the form number of the policy being advertised?
If a life insurance policy develops cash value faster than a seven-pay whole life contract, it is
A modified endowment contract It loses the benefits of a standard life contract
Who is a fiduciary?
A producer who handles insurer funds in a trust capacity
What is an accelerated benefit?
A provision or rider allowing for the early payment of some portion of the policy's face amount if the insured suffers from a terminal illness or injury
Who is eligible for a Keogh (HR-10) Plan?
A self-employed individual or partner working part time or full time who owns at least 10% of the business
What are the four elements of an insurance contract?
AGREEMENT- offer/acceptance, consideration, competent parties, legal purpose
Which rider allows the early payment of a portion of the death benefit to the insured?
Accelerated death benefits rider
Which riders increase the amount of the death benefit?
Accident Death Rider - pays double or triple the amount of face value, Cost of Living Rider - automatically increases the amount of insurance based on an inflation index. Return of Premium - pays back all the premiums in addition to the death benefit
What is the difference between absolute and collateral assignment?
An absolute assignment permanently transfers all rights of ownership to another person or entity. A collateral assignment is a transfer of partial rights to another person
What is the difference between an authorized/admitted and unauthorized/nonadmitted insurer?
An admitted or authorized insurer is qualified and received a Certificate of Authority from the Department of Insurance to transact insurance in the state. A nonadmitted or nonauthorized insurer is an insurance company that has not applied for, or has been denied a Certificate of Authority and may not transact insurance.
Substandard Risk
An applicant or insured who has a higher than normal probability of loss, and who may be subject to an increased premium. Due to physical condition, personal or family history of disease, occupation, dangerous habits
What is annually renewable tern insurance?
Annually renewable term (ART) is the purest form of term life insurance in which the death benefit remains level; the policy may be guaranteed renewable each year without proof of insurability, but the premium increases annually according tp the attained age
Which type of life insurance is most commonly used for group plans?
Annually renewable term- Group insurance is usually written for employee-employer groups
How do annuities differ from life insurance policies?
Annuities liquidate an estate (life insurance creates an estate). Annuities pay income to the annuitant while he or she is still living; life insurance pays the death benefit
Rebating
Any inducement offered to the insured in the sale of insurance products that is not specified in the policy
When does a life insurance policy become a Modified Endowment Contract?
Any life insurance policy that fails a 7-pay test is classified as a Modified Endowment Contract (MEC), and loses the standard tax benefits of a life insurance contract
What information does a Buyer's Guide provide?
Basic information about life insurance policies and comparison of policy cost
How do accelerated benefits differ between terminally ill and chronically ill insureds?
Benefits to a terminally ill insured are received tax free, while benefits paid to a chronically ill insured are tax free up to a certain limit
Required Signatures on the Application
Both the agent and the proposed insured
Who is required to sign an application for life insurance?
Both the agent and the proposed insured (usually the applicant) must sign the application
What settlement options are available in life insurance polices?
Cash payment (lump sum), life income, interest only, fixed-period installments, and fixed-amount installments
What are the 3 nonforfeiture options in life insurance policies?
Cash surrender value, reduced paid-up insurance or extended term option
What taxation rules apply to contributions and excess contributions on a Roth IRA?
Contributions on a Roth IRA are not tax deductible. If contributions are greater than the allowed maximum, they are subject to a 6% penalty
What are the main differences between a traditional IRA and a Roth IRA?
Contributions to a traditional IRA are mad with pre-tax dollars, while contributions to a Roth IRA are made with after-tax dollars. Required minimum distributions (RMD) from a traditional IRA must begin at the age of 72. Both IRAs do not have RMD requirements
How are income payments from a 403(b) plan taxed?
Funds contributed are excluded from the employee's current taxable income, but are taxable upon withdrawl
What are the steps a producer must follow when replacing an existing policy?
Give applicant a Notice Regarding Replacement; obtain a list of all existing life insurance policies to be replaced; give the applicant the original or a copy of written or printed communications used for presentation to the applicant; and submit to the replacing insurance company the application and a copy of the replacement notice
Pure Life Annuity
Has the potential for providing the maximum income per dollar of premium if the annuitant lives beyond their life expectancy. However if the annuitant dies before the entire benefit has been paid out, payments cease and there is no refund of payments to survivor
What is the purpose of the life solicitation regulation?
Helping buyers select appropriate life insurance plan, understand the basic features of policies they are considering and evaluate costs of similar plans
How are life insurance death proceeds taxed?
If taken as a lump sum, proceeds are tax free. If other than lump sum, principal is tax free and interest is taxable
Under what conditions would it be illegal to receive compensation for an insurance transaction?
If that person is required to be licensed but does not have a license
What happens to the benefit if the annuitant dies during the accumulation period?
If the annuitant dies before annuitization (payout period), his/her beneficiary will receive the amount paid into the plan or the cash value, whichever is greater
When would an insured be required to sign a statement of good health?
If the initial premium is not paid with the application, the agent may need to obtain the statement of good health at policy delivery
Which nonforfeiture options is automatically selected if the policy owner has not made a selection?
If the policy owner has neglected to select one of these nonforfeiture options, the insurer will automatically implement the extended term option in the event of termination of the original policy
What happens to an unpaid policy loan at insured's death?
If there are outstanding loans at the time of the insured's death, the amount will be considered a debt to the policy and the death benefit will be reduced by the amount of indebtness
How soon can payments begin in a deferred annuity?
In a deferred annuity, income payments begin after 1 year from the date of purchase
Who can contribute to a traditional IRA?
Individuals or married couples with earned income, regardless of age
Preferred Risks
Individuals who meet certain requirements and qualify for lower premiums than the standard risk these applicants have a superior physical condition, lifestyle and habits
In a life insurance policy, when must insurable interest exist?
Insurable interest must exist between the policyowner and the insured at the time of application (or time of policy issue), but NOT at the time of loss
What is a controlled business?
Insurance written to cover the producer, the producer's spouse, or the producer's employer's life, property or risks
What is the difference between a consumer report and an investigative consumer report?
Investigative consumer reports are similar to consumer reports in that they also provide information on the consumer's character, reputation, and habits. The primary difference is that the information is obtained through an investigation and interviews with associates, friends and neighbors of the consumer
What is the purpose of the Automatic Premium Loan Provision?
It prevents the unintentional lapse of a policy due to nonpayment of the premium
What is the purpose of the Insurance Guaranty Association?
It protects policy owners, insureds, beneficiaries, annuities, payees, and assignees against insurer insolvency
What are the characteristics of term life insurance?
It provides temporary, pure death protection, with no cash value
In regards to Social Security, what does the term fully insured mean?
It refers to someone who has earned 40 quarters of coverage, and is therefore entitled to receive Social Security retirement, Medicare, and survivor benefits
What are the requirements for insurance licensing in this state?
Minimum age, prelicensing education and examination, application and fees
Insurable Interest
Must exist at time of application
Who is exempt from the licensing requirement in this state? (Illinois)
Officers, directors, or employees of an insurer or of an insurance producer who do not receive commission on policies written or sold are exempt from licensing requirements.
What are the death benefit options in universal life policies?
Option A is the level death benefit option and Option B is the increasing death benefit option
Field Underwriter
Proper solicitation of applicants Helping prevent adverse selection Completing the application Obtaining the required signatures Collecting the initial premium and issuing the receipt if applicable Delivering the Policy
What are some of the group characteristics important for underwriting?
Purpose, size, turnover, and financial strength of the group
What constitutes rebating?
Rebating includes premiums payable on the policy, special favors or services, advantages in dividends or benefits, stocks, bonds, securities, and their profits (and similar inducements)
What qualifications are required to sell variable life insurance products?
Registration with the FINRA, a securities license, and a state issued life insurance license
What are the broad powers and duties of the Director of Insurance?
Regulate the affairs of the Insurance Department, prescribe forms and procedures, aid in interpretation of laws, issue, renew, or suspend and revoke licenses and certificates of authority
What does representation mean and how does it differ from a warranty?
Representations are statements believed to be true to the best of one's knowledge. A warranty is an absolutely true statement upon which the validity of the insurance policy depends.
What are the continuing education requirements in Illinois?
Resident producers must complete a minimum of 24 hours of continuing education credits every 2years, 3 of which on the subject of ethics
Adverse Selection
Risks which are more likely to suffer a loss
What is stranger-originated life insurance (STOLI)?
STOLI is an arrangement in which a person purchases an insurance policy on another without having insurable interest with the insured. STOLIs are purchased with the intent to sell policies for life settlements
HR-10 PLAN
Self-employed persons
What must the replacing insurer do about the issue of the policy when replacement is involved?
Send the applicant a Buyer's Guide, notify the existing insurer of replacement within 3 working days, and maintain records of replacement for 3 years
The agent does NOT need to confirm this upon policy delivery
Signed waiver of premium
An annuity has 2 distinct periods. What are they called, and what happens during each?
The accumulation period, also known as the pay-in period, is the period of time over which the annuitant makes payments (premiums) into an annuity. The annuity period, also referred to as the annuitization period, liquidation period, or payout period, is the time when money is distributed to the annuitant
What is the purpose of the Fair Credit Reporting Act?
The act established procedures that consumer-reporting agencies must follow in order to ensure that records are confidential, accurate, relevant, and properly used. It also protects consumers against the circulation of inaccurate or obsolete information
Who owns a group life contract? What does the insured receive?
The actual policy (master policy/contract) is issued to the sponsor of the group, which is often an employer. The employees are the insured who are issued certificates of insurance
What is the purpose of the agent's report?
The agent's (producer's) report is used by the agent to discuss his or her personal observations concerning the proposed insured.
For the purpose of insurance, risk is defined as
The chance of loss
What is a free-look period, and when does it begin?
The free-look period allows the policyowner a specified number of days from receipt to look over the policy, and if dissatisfied for any reason, return it for a full refund of premium. It starts when the policy owner receives the policy, not when the insurer issues the policy
What is the difference between a revocable and irrevocable beneficiary?
The policy owner may change a revocable beneficiary at any time. An irrevocable designation, however, may not be changed without written consent of the beneficiary
What information must be included in a life policy illustration?
The name and address of the insurer and agent, the name, age and gender of the proposed insured, underwriting or rating classification on which the illustration is based, the generic name of the policy, the insurer's product name and form number, the initial death benefit, and the dividend option election or application of non guaranteed elements
What are the general requirements for qualified plans?
The plan must be for the exclusive benefit of the employees and their beneficiaries and be formally written and communicated to the employees. The plan's benefit or contribution formula cannot discriminate in favor of the "prohibited group", or be geared exclusively to the prohibited group. The plan must be permanent, be approved by the IRS and have a besting requirement.
What constitutes the entire contract?
The policy and a copy of the application, along with any riders or amendments, constitute the entire contract
When does the insurance policy go in effect?
The policy will go into effect when the first premium is paid and the policy has been delivered
How does continuous premium straight life differ from 20-year limited pay life?
The premiums for straight life will be spread over the insured's lifetime, thus enabling the insurance company to charge a lower annual premium. When the premium-paying period is condensed to 20 years, a higher annual premium is required
What is the purpose of disclosure requirements for life insurance?
The purpose is to provide adequate information to improve the buyer's ability to select the most appropriate product that best suits their needs.
What is insurance?
The transfer of the risk of loss from the individual or business entity to an insurance company
To whom may a temporary license be issued?
To an applicant in the process of obtaining a producer license for 90 days or to the surviving spouse or court-appointed representative of a licensee who dies or becomes disabled; a member or employee of a business entity licensed as an insurance producer; or the designee of a licensee who enters into active military service for 180 days
What is the purpose of key person insurance?
To minimize the risk of a financial loss because of the premature death of a key employee that has specialized knowledge, skills or business contacts
What is the purpose of a grace period?
To prevent unintentional policy lapse for nonpayment of premiums
What is underwriting?
Underwriting is the risk selection and classification process
Which authorities regulate variable life policies?
Variable life insurance products are dually regulated by the State and Federal Government: the Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the State Department of Insurance
In a Viatical Settlement, what does the viator receive when the policy is sold?
Viators, or those who are originally insured under the policy, usually receive a percentage of the policy's face value from the person who purchases the policy
Underwriting
is the risk selection process- purpose is to protect insurer against adverse selection Responsibilities: selecting only risks that are insurable and meet the insurers standards
Annuities Certain
short term annuities that limit the amounts paid to a certain fixed period or until a certain fixed amount is liquidated
