Insurance Exam 2 MC

Julian, age 45, would like to determine how much life insurance to purchase using the human life value approach. He assumes his average annual earnings over the next 20 years will be $40,000. Of this amount, $20,000 is available annually for the support of his family. Julian will generate this income for 20 more years and he believes that 5 percent is the appropriate interest (discount) rate. The present value of one dollar payable for 20 years at a discount rate of 5 percent is $12.46. What is Julian's human life value?

$249,200

All of the following are defects which limit the usefulness of the human life value approach in determining the correct amount of life insurance to purchase EXCEPT Select one: A. Earnings during the individuals productive lifetime are ignored

Earnings during the individuals productive lifetime are ignored

Which of the following statements about the capital retention approach for determining life insurance needs is (are) true? I. It assumes that life insurance proceeds will be liquidated to provide income to survivors. II. It requires the preparation of a personal balance sheet.

II only

Which of the following statements about the ownership of a life insurance policy is (are) true? II. The policyholder can designate a new owner by filing an appropriate form with the insurance company.

II only

Which of the following statements about universal life insurance is (are) true? II. A monthly deduction is made from the policy's cash value for the cost of insurance protection.

II only

Which of the following statements about variable universal life insurance is (are) true? II. Variable universal life insurance allows the policyowner to decide where the premiums are invested.

II only

Which of the following statements is (are) true concerning the automatic premium loan provision? II. The basic purpose of an automatic premium loan is to prevent a life insurance policy from lapsing.

II only

Which of the following statements is (are) true regarding the results of studies by LIMRA and New York Life Insurance Company on the adequacy of life insurance owned by households in the United States? II. The average household is significantly underinsured against the risk of premature death.

II only

Which of the following statements about term insurance is true? Select one: A. Most policies can be renewed for additional periods without evidence of insurability. B. Most policies have a cash value that is refunded when coverage ceases. C. The coverage is appropriate if the goal is permanent lifetime protection. D. Premiums increase at a constant rate each time the policy is renewed.

Most policies can be renewed for additional periods without evidence of insurability.

Which of the following statements about savings bank life insurance is true? Select one: A. The objective of savings bank life insurance is to provide low-cost insurance to consumers by holding down expenses.

The objective of savings bank life insurance is to provide low-cost insurance to consumers by holding down expenses

What major feature distinguishes a participating policy from a nonparticipating policy?

The payment of dividends

Bruce lied about his health history when he purchased a life insurance policy. He died 3 years after the policy was issued. Which life insurance policy provision will require the life insurer to pay the beneficiary even though Bruce lied on the application?

incontestable clause

Which of the following statements about life insurance policy loans is true? Select one: A. They must be repaid on the basis of a schedule determined at the time of the loan. B. They are forgiven if the insured dies before the loans are repaid. C. The policyholder must pay interest on a life insurance policy loan. D. Loans are only permitted for specific reasons listed in the policy.

The policyholder must pay interest on a life insurance policy loan

Life insurance policy proceeds can be paid to a trustee upon the death of the insured. All of the following statements about having the proceeds paid to a trustee are true EXCEPT Select one: A. The trustee is not permitted to accept a fee for rendering services.

The trustee is not permitted to accept a fee for rendering services

What happens to the premiums for yearly renewable term insurance as an insured gets older?

They increase at an increasing rate.

Gwen purchased an interesting life insurance policy. A minimum interest rate is guaranteed on the cash value, but additional interest may be credited based on the investment performance of a group of common stocks. There is also a cap on the additional interest credited to the policy. Based on this information, what type of life insurance did Gwen purchase?

indexed universal life insurance

All of the following statements about universal life insurance are true EXCEPT Select one: A. Interest is credited to the policy's cash value each month.

interest is credited to the policy's cash value each month

Which of the following statements about nonforfeiture options found in life insurance policies is true? Select one: B. Under the reduced paid-up option, no additional premiums must be paid.

Under the reduced paid-up option, no additional premiums must be paid

Which of the following types of families is likely to have the least need for a large amount of life insurance?

a single person family

When the capital retention approach is used to determine how much life insurance to purchase, all of the following are subtracted from total assets to calculate the capital available to produce income EXCEPT Select one: A. auto loans and credit card debt. B. investments in stocks and bonds. C. the amount of money needed to pay off the mortgage. D. non-income producing capital such as autos and the value of the home.

investments in stocks and bonds

All of the following statements about current assumption whole life insurance are true EXCEPT Select one: B. It is a form of participating whole life insurance that pays annual dividends.

it is a form of participating whole life insurance that pays annual dividends.

Which of the following statements is true regarding an automatic premium loan provision? Select one: A. If the provision is used, the insured must show evidence of insurability to resume regular premium payments. B. An automatic premium loan, unlike a regular policy loan, is forgiven if the insured dies before the loan is repaid. C. Its purpose is to prevent a policy from lapsing because of nonpayment of premium. D. Interest does not have to be paid on an automatic premium loan.

its purpose is to prevent a policy from lapsing because of nonpayment of premium

Which of the following statements about limited-payment life insurance is true? Select one: C. Its use may be appropriate if a person wants paid-up life insurance during retirement.

its use may be appropriate if a person wants paid-up life insurance during retirement

A whole life insurance policy in which premiums are reduced for an initial period (e.g. 3 years) and are higher thereafter is an example of a

modified life policy

Which of the following statements about industrial life insurance (also called home service life insurance) policies is true? Select one: C. Most industrial life insurance policies are cash value coverage.

most industrial life insurance policies are cash value coverage

Which of the following statements is (are) true concerning settlement options? I. A straight life annuity provides the lowest amount of periodic income of all the life income options. II. Fixed-period and fixed-amount are life income options.

neither

Which of the following statements about life income settlement options is (are) true? I. Under a joint-and-survivor life income option, payments cease at the death of the first annuitant. II. Under a life income with guaranteed period, a contingent beneficiary is guaranteed a minimum number of payments regardless of when the primary beneficiary dies.

neither I nor II

Which of the following statements about yearly renewable term insurance is (are) true? I. It requires evidence of insurability for renewal. II. It is most appropriate when an insured needs lifetime protection.

neither I nor II

Disadvantages of the capital retention approach include which of the following? I. Assets are often liquidated too quickly. II. It underestimates the amount of life insurance needed.

neither I or II

The difference between the legal reserve of a whole life policy and the face amount of insurance is the

net amount at risk

Most family heads need substantial amounts of life insurance. However, with limited income, money spent on life insurance reduces the amount of discretionary income available for other high-priority needs. What an insured person gives up when he or she purchases life insurance instead of using the premium dollars for other purposes is called the

opportunity cost of buying life insurance.

Which life insurance policy provision specifies that it is the policyholder, and not the insured or beneficiary, who possesses all contractual rights while the policy is in force? Select one: D. ownership clause

ownership clause

Alex, age 26, purchased a 20-payment whole life insurance policy. After Alex has made 20 premium payments, his life insurance policy is considered

paid-up

Beth purchased a participating life insurance policy 6 years ago. Her life insurance needs have increased, but she has developed a medical condition that makes it impossible for her to purchase more life insurance at affordable premiums. Which dividend option makes sense for Beth to use given her medical condition?

paid-up additions

Which of the following is a common dividend option found in a participating life insurance policy

paid-up additions

All of the following statements describe the flexibility available to the owner of a universal life insurance policy EXCEPT Select one: C. Policy loans are permitted on an interest-free basis.

policy loans are permitted on an interest-free basis

The human life value is defined as the

present value of the family's share of a deceased breadwinner's future earnings.

Jessica is an agent for LMN Life Insurance Company. She met with Brad, who was interested in purchasing life insurance. Jessica explained the various uses of life insurance, including income for Brad's wife during the 1- or 2-year period following Brad's death. This period is known as the

readjustment period

Lionel purchased a $200,000 ordinary life insurance policy when he was 25 years old and had significant life insurance needs. Now Lionel is 50. His mortgage is almost paid-off and his children have left home and are financially independent. Lionel no longer wants to pay premiums, but he would like to have some permanent life insurance in force. Which nonforfeiture option could Lionel employ to meet these objectives?

reduced paid-up insurance

All of the following are nonforfeiture options found in cash value life insurance policies EXCEPT Select one: C. reduction of premiums.

reduction of premiums

Which of the following statements about the guaranteed purchase option is true? Select one: B. The additional coverage can be purchased without demonstrating insurability.

the additional coverage can be purchased without demonstrating insurability

Which of the following would be a valid reason for an insurer to contest a policy after the contestable period has ended? Select one: C. The applicant had someone else take the medical examination required for policy approval for her.

the applicant had someone else take the medical examination required for policy approval for her

Which of the following statement is true regarding return of premium term insurance? Select one: C. The coverage is expensive and is not free when time value of money is considered.

the coverage is expensive and is not free when time value of money is considered.

Which of the following statements about the waiver-of-premium provision in life insurance is true? Select one: C. The disability must occur before a stated age, such as 65, for premiums to be waived.

the disability must occur before a stated age, such as 65, for premiums to be waived

Which of the following statements about a decreasing term insurance policy is true? Select one: A. The premium decreases during the policy period, but the face amount remains constant. B. Both the premium and the face amount of the policy decrease gradually over the policy period. C. The face amount of the policy decreases during the policy period, and the premium increases. D. The face amount of the policy decreases during the policy period, but the premium remains level.

the face amount of the policy decreases during the policy period, but the premium remains level.

All of the following statements about ordinary life insurance are true EXCEPT Select one: A. There is a build-up of cash value that can be borrowed by the policyholder. B. The face amount of the policy is paid if the insured lives to age 65. C. It offers the policyholder the flexibility to meet a wide variety of financial objectives. D. Premiums are level throughout the policy period.

the face amount of the policy is paid if the insured lives to age 65.

All of the following are requirements that must be satisfied before premiums are waived under a waiver-of-premium provision EXCEPT Select one: D. The insured must satisfy a 2-year waiting period.

the insured must satisfy a 2-year waiting period

All of the following statements about the interest settlement option are true EXCEPT Select one: . C. The minimum guaranteed interest rate is usually equal to the prime rate.

the minimum guaranteed interest rate is usually equal to the prime rate

Which of the following statements about the guaranteed purchase option is true? Select one: C. The option permits the insured to purchase specified amounts of life insurance in the future even if the insured has become uninsurable.

the option permits the insured to purchase specified amount of life insurance in the future even if the insured has become uninsurable

Which of the following pieces of information is needed to calculate a person's human life value?

the person's cost of self-maintenance.

Which of the following statements about variable life insurance is true? Select one: D. The policyowner has the option of investing the cash value in several investment accounts.

the policy owner has the option of investing the cash value in several investment accounts

Amy purchased a life insurance policy with the intent of committing suicide to pay all the debts that were burdening her family. If she commits suicide 9 months after the policy is purchased, and the insurer is able to prove that her death was a suicide, how much will be paid by the insurance company?

the premium paid for the policy

Which of the following statements about life insurance settlement options is true? Select one: D. Under the fixed amount option, the beneficiary can be given the right to increase or decrease the fixed amount.

under the fixed amount option the beneficiary can be given the right to increase or decrease the fixed amount

Ann is considering the purchase of a life insurance policy with these characteristics: flexible premium payments, the insurance and savings components are separate, the interest rate credited to the cash value is tied to a changing market interest rate but a minimum interest rate is guaranteed, and a monthly administrative fee is charged. Ann is considering buying

universal life insurance

Carl would like to purchase life insurance. He would also like to invest in a mutual fund. An agent told Carl about a form of life insurance in which Carl could select where the saving component is invested. This form of life insurance has fixed premiums and the cash value is not guaranteed. This type of life insurance is called

variable life insurance

The practice of buying the life insurance policy of a terminally ill insured at a discount is referred to as a

vatical settlement

Becky is considering the purchase of a whole life policy on her own life. She is concerned that if she becomes disabled, paying premiums will become a burden. Which provision can Becky attach to her life insurance policy to address this concern?

waiver-of-premium provision

Under the needs approach, when is the dependency period of a surviving spouse assumed to end?

when the youngest child reaches age 18

What is the length of the readjustment period which is considered when the needs approach is used to determine the amount of life insurance to own?

1 to 2 years

Which of the following $100,000 whole life insurance policies, issued by the same company to a man age 32, would require the highest first-year premium?

10-payment whole life

Which of the following statements about second-to-die life insurance is (are) true? II. The premium is lower than the combined cost of purchasing a life insurance policy on each insured.

II only

The transfer of all ownership rights in a life insurance policy can be accomplished through a(n)

Absolute assignment

Which of the following statements about indexed universal life insurance is true? Select one: A. Although a minimum interest rate is guaranteed, the rate credited can be higher if a specified stock index performs well.

Although a minimum interest rate is guaranteed, the rate credited can be higher if a specified stock index performs well.

Which of the following statements about policies sold to preferred risks is (are) true? I. Preferred risks are people whose mortality experience (deaths per thousand at a given age) is expected to be more favorable than average. II. Insurers require preferred risks to purchase at least a minimum amount of life insurance, such as $250,000.

Both I and II

Advantages of selecting the paid-up additions dividend option in a life insurance policy include which of the following? I. Evidence of insurability is not required to purchase additional insurance. II. The additions are purchased at net rates without a loading for expenses.

Both I and Ii

All of the following statements about the conversion of a term policy are true EXCEPT Select one: A. Evidence of insurability is required before a conversion is permitted. B. Most insurers require original age conversion to take place within a specified period (5 years, for example) of the issue of the term policy. C. Under an original age conversion, the policyowner must pay a financial adjustment in addition to the premium for the new policy. D. Under an attained age conversion, the premium is based on the insured's attained age at the time of conversion.

Evidence of insurability is required before a conversion is permitted.

A dividend option that allows the policyholder to purchase 1-year term insurance is referred to as the

Fifth dividend option

Which of the following statements about accelerated death benefits riders is (are) true? I. Under a terminal illness rider, after a partial payment is made to the insured, there is a reduction in the face amount of insurance, cash value, and premiums.

I only

Which of the following statements about endowment insurance policies is (are) true? I. The face amount is paid if the insured dies during the policy period or at the end of the policy period if the insured is still alive.

I only

Which of the following statements about life insurance cash values is (are) true? I. Cash values are a result of the level premium method of purchasing life insurance.

I only

Which of the following statements about the assignment of a life insurance policy is (are) true? I. Under a collateral assignment, the policyowner assigns a life insurance policy to secure a loan.

I only

Which of the following statements about the needs approach for estimating the amount of life insurance to purchase is (are) true? I. It involves an analysis of various family needs which must be met if a family breadwinner dies.

I only

Which statement is true concerning the economic problem of premature death in the United States? I. The economic impact of premature death of the breadwinner varies for different types of families.

I only

The purchase of term insurance is justified by which of the following circumstances? II. The insured has a temporary need for life insurance protection.

II only

Which of the following statements about a variable universal life insurance policy is (are) true? II. The policyowner has a variety of investment options for the investment of premiums.

II only

Which of the following statements about dividend options is (are) true? I. The interest on dividends left to accumulate with the insurer is not considered to be taxable income. II. Paid-up additions are additional units of whole life insurance.

II only

Which of the following statements about the entire contract clause is true? Select one: A. It specifies that all statements in the application are considered warranties. B. It specifies that the life insurance policy and the attached application constitute the complete agreement between the parties. C. It prevents the insurance company from contesting a policy after it has been in force for two years during the lifetime of the insured. D. It allows the insurer to change the policy terms without the insured's consent.

It specifies that the life insurance policy and the attached application constitute the complete agreement between parties.

Which of the following statements about the assignment of a life insurance policy is true? Select one: D. The insurer must be notified of any assignment or the death proceeds will be paid to the named beneficiary.

The insurer must be notified of any assignment or the death proceeds will e paid to the named beneficiary.

Tim purchased a 10-payment whole life insurance policy 15 years ago. Tim would like to donate this paid-up policy to a charity. Under which policy provision can Tim transfer all ownership rights in the policy to the charity?

absolute assignment

Malcolm would like to purchase life insurance. He is concerned that he might need additional life insurance in the future and that he might be uninsurable at that time. What provision can Malcolm add to his life insurance policy that will permit him to purchase additional life insurance at specified times in the future without providing evidence of insurability?

guaranteed purchase option

which of the following statements about the change of plan provision in a life insurance contract is (are) true? I. A change to a lower premium policy results in a refund of the difference in the cash values of the two policies.

i only

Bill is attempting to determine how much life insurance to purchase. He has two dependent children and his wife does not work outside of the home. An advisor suggested that Bill should consider Social Security benefits when doing his life insurance planning. One concern in this regard is the period after Social Security benefits to a widow terminate until they resume again. This period is called the

blackout period

The period during which a surviving spouse is ineligible for Social Security benefits is referred to as the

blackout period

Reasons for NOT purchasing an accidental death benefit rider include which of the following? I. Most people die as a result of a disease rather than from an accident. II. The economic value of a human life is not increased if death occurs because of an accident.

both

Which of the following statements about a typical accidental death benefit rider is (are) true? I. Accidental injury must be the cause of death for the increased benefit to be paid. II. The accidental death must occur prior to some specified age for the increased benefit to be paid.

both

Disadvantages of life insurance settlement options include which of the following? I. Higher yields can often be obtained elsewhere. II. Life income options have limited usefulness at younger ages.

both I and II

Sources of life insurance dividends include which of the following? I. Excess interest earned on the assets necessary to maintain legal reserves II. Favorable mortality experience

both I and II

Which of the following is a cost/expense that an estate clearance fund is designed to pay?

burial expenses

The cost of living rider typically bases increases in the policy face value on changes in the

consumer price index

Tamara purchased a term insurance policy when she had high life insurance needs and limited income. Now Tamara can afford whole life insurance. What term life insurance provision will permit Tamara to switch her term insurance to whole life insurance without having to show that she is still insurable?

conversion provision

Dave purchased a life insurance policy. The policy is nonparticipating and the cash values are based on the insurer's present mortality, investment, and expense experience. After 2 years, the insurer will recalculate the premium based on the mortality, investment, and expense experience at that time. Dave purchased

current assumption whole life

To calculate a human life value, it is necessary to deduct certain costs from a person's average annual earnings. These costs include

income taxes

Michael wants to make sure that life insurance proceeds are available to pay his outstanding mortgage balance if he dies. He purchased a type of life insurance in which the amount of coverage gradually declines, just as his outstanding mortgage balance gradually declines. This type of life insurance is called

decreasing term insurance

When using the needs approach, several "special needs" should be considered. One special need is money to cover unexpected events, such as major car repairs, dental bills, or home repairs. Money set aside for this purpose is called a(n)

emergency fund

Al was named the beneficiary in his mother's life insurance policy. His mother died during the contestable period. The insurer denied payment, citing a material misrepresentation on the application. Al believes the insurer should pay the claim because the misrepresentation occurred on the application, and the application is not part of the formal agreement between the insurer and the policyholder. Which provision protects the insurer by making the application part of the formal agreement between the parties to the contract?

entire contract clause

A common use of second-to-die life insurance is

estate planning

A legal reserve in life insurance is a result of

excess premiums in the early policy years being invested at compound interest.

The net amount at risk for an ordinary life insurance policy is the difference between the

face amount of the policy and the legal reserve.

Jane purchased a life insurance policy on her own life and named her daughter, Cheryl, as beneficiary. Cheryl has a history of not managing money well. Jane wants the death benefit paid to Cheryl in monthly installments over 20 years. Which settlement option should Jane pre-select for Cheryl?

fixed period

Cal purchased a whole life policy 6 years ago. The policy requires annual premium payments. Cal forgot to pay the premium that was due 2 weeks ago. He wonders if his life insurance is still in force. Which life insurance policy provision is designed to keep the policy in force for a short time even if the premium payment is late

grace period