Life Insurance Exam Flashcards - Chapter 3

Which of these is an element of a variable life policy? a. A fixed, level premium b. insurer assumes the investment risk c. no investment risk to the policyowner d. rate of returns are guaranteed

a. a fixed, level premium

Misstatement of Age of Sex Provision

-Because the age and sex are important factors in figuring the premiums that will be charged for a life insurance policy, this provision allows the insurance company to adjust the policy at any time due to a misstatement of age or gender. -In the event of a claim the insurance company is allowed to adjust the death benefit or the premium to the correct age or gender.

Cash Value

Created by the accumulation of premiums is scheduled to equal the face amount of the policy when the insured reaches age 100.

Insuring Clause

Is the insurance company's agreement and promise to pay the Death Benefit

Limited Pay Whole Life

-unlike straight life, limited pay life is designed so that the premiums for the coverage will be completely paid up well before age 100. -most versions of limited pay life are 20 years pay. Whereby coverage is completely paid for in 20 years -or life paid up at 65 whereby the coverage is completely paid up by the insured at age 65

Free Look Provision

allows the policy owner a free look at the policy for a specific number of days. -Period starts when the policy owner receives the policy from the insurance company in the mail, or is delivered by an insurance agent.

How long does the coverage normally remain on a limited pay life policy? a. age 65 b age 100 c. when premium payments stop d. at the discretion of the insurer

b. age 100 explanation: even though premium payments are limited to a certain period, the insurance protection extends until the insureds death or to age 100.

What action will an insurer take if an interest payment on a policy loan is not made on time? a. cancel the policy if not paid within the grace period b. automatically add the amount of interest due to the loan balance c.subtract from any dividends owed d. disallow any further loans

b. automatically add the amount of interest due to the loan balance

Grace Period Provision

-period of time after the premium payment is due (usually 30 days) -purpose is to protect the policyholder against an unintentional lapse of the policy. -If insured dies during this period the benefit is payable, however any past due premiums will be deducted from the death benefit.

5 Dividend options

-take dividends in cash -apply dividends against premium payments -allow dividends to accumulate interest -buy paid up additions (which is a whole life policy) -purchase one year term insurance

Renewable

A term policy that is renewable allows the policy owner the right to renew the coverage at the expiration date without evidence of insurability -The Premiums for the new tern policy will be based only on the insured's current attained age.

3 Basic Types of Term Coverage

-Level Term Insurance -Increasing Term Insurance -Decreasing Term Insurance

Exclusions

-types of risks that an insurance policy will not cover -most common are: war aviation(noncommercial pilot) hazardous occupation or hobbies commission of a felony suicide

Convertible

Allows the policy owner the right to convert the coverage to a permanent whole life insurance policy without evidence of insurability. -The premiums for the new whole life permanent policy will be based only on the insured's current attained age.

How does a typical Variable Life Policy investment account grow? a. Tied to price of gold b. Through mutual funds, stocks, bonds c. Based on returns from insurer's general account d. Tied to Treasury Bills

b. through mutual funds, stocks, bonds

Q would like to purchase $100,00 of permanent protection on his wife and $50,00 of Term coverage on himself under the same policy. What kind of policy should Q purchase? a. Joint policy b. Joint survivor policy c. Whole life policy with other insured rider d. Whole life policy with a Guaranteed Insurability option

c. Whole life policy with other insured rider

In a life insurance policy, which provision states who may select policy options, designate and name a beneficiary, and be the recipient of any financial benefits from the policy? a. nonforfeiture b. entire contract c. insuring clause d. owner's right

d. owner's rights

Term Life

-Temporary life insurance provided for a specific period of time (aka pure life insurance). -Temporary protection because it only provides coverage for a specific period of time. -Term policies provide for the greatest amount of coverage for lowest premiums -Provides pure death protection: insured dies during terms, the pays a death benefit to beneficiary -no cash value or any living benefits available

A 15-year mortgage is best protected by what kind of life policy? a. Modified whole life b. 15-year level term c.15-year decreasing term d.adjustable life

15-year decreasing term

Single Premium Whole Life

-With a single premium whole life, a one time lump sum payment is made, which will provide a level death benefit to the insured at age 100. -the policy is completely paid up and will generate cash value immediately.

Living Benefits

-With a whole life policy, a policy owner can borrow against the cash value while the policy is in effect, or can receive the cash value when the policy is surrendered. -Cash value is also referred to as nonforfeiture values.

What kind of life insurance product covers children under their parent's policy? a. Family Maintenance rider b. Term rider c. Family Income rider d. Payor benefit

b. A term rider explanation: Family plan policies usually cover the family head with permanent insurance and the coverage on the spouse and children is term insurance in the form of a rider.

Credit life insurance is typically issued with which of the following types of coverage? a. annual renewable term b. decreasing term c. individual whole life d. group term

b. decreasing term

Which of these Nonforfeiture Options continue a build-up of cashvalue? a. waiver of Premium b. extended term c. reduced paid-up d. cash surrender

c. reduced paid-up

S would like to use dividends from her life insurance policy to purchase paid-up additions. All of these would be factors that determine how much coverage can be purchased except: a. type of life insurance b. S's attained age c. dividend amount used toward purchase d. beneficiary's age

d. beneficiary's age

D was actively serving in the Marines when he was killed in an automobile accident while on leave. His $100,000 Whole life policy contains a War Exclusion clause. How much will D's beneficiary receive? a. refund of premiums paid plus interest b. nothing, due to actively serving in the armed forces c. double the face amount cause of death was accidental d. full face amount

d. full face amount

Which of the following statements is CORRECT about the period in which a Term Policy can be converted? a. It is the same in all contracts b. it is set by state regulation c. it can be changed by the insured d. it varies according to the contracts

d. it varies according to the contracts

The Consideration clause in a life insurance policy indicates that a policyowner's consideration consists of a completed application and a. the initial premium b. agreeing to a physical examination c. delivery of policy d. disclosure of any medical conditions

a. the initial premium also, insurers promise to pay death benefit

Waiver of Premium Rider

-waives the premium for the policy if the insured becomes totally disabled -most insurance companies impose a 6 month waiting period from the time of disability -coverage remains in force until the insured is able to return to work -if the insured is never able to return to work, the premiums will continue to be waived by the insurance company. -the waiver of premium rider usually expires when the insured reaches age 65

Guaranteed Insurability Rider

allows the insured to purchase additional coverage at specific future dates, without the evidence of insurability, the new premiums will be calculated only on the person's attained age.

How are policyowner dividends treated in regards to income tax? a. dividends are not taxable b. interest on accumulations is taxed c. taxed as ordinary income d. taxed as capital gains

b. interest on accumulations is taxed

When is the face amount of a Whole Life Policy paid? a. at the policy's maturity date only b. when the insured dies or at the policy's maturity date, whichever happens first c. only when the insured dies d. when the policy is surrendered

b. When the insured dies or at the policy's maturity date, whichever happens first

Which statement is TRUE in regards to a policy loan? a. past-due interest payments not paid after 3 months will void the policy b. past-due interest on a policy loan is added to the total debt c. insurance companies can send delinquent interest accounts to a collection agency d. insurance companies can charge an interest rate based on the policyowner's credit report

b. past-due interest on a policy is added to the total debt

3 Options for Non-forfeiture cash value

-cash surrender - take the cash -reduce paid-up - cash value is used to purchase a paid up whole life policy; will have a smaller face amount from the original policy. There will be no premium payments due and it will continue to gain cash value. -extended term - cash used to buy new term policy.. it will have the same face value amount as the original and will last for a set period of time based on the amount the cash value available used. There will not be any additional premium payments due.

What kind of insurance policy supplies an income stream over a set period of time that starts when the insured dies a. Family Maintenance Policy b. Family Income Policy c. Survivor Policy d. Family Survivor Policy

a. Family Maintenance Policy

Policy Riders

added to a policy and ride along, on the basic insurance policy. -riders only have value when attached to a policy, they have no independent value -are added to help people customize their insurance policy for individual needs -policy riders are not free; their cost is added to the life insurance policy premium.

K pays on a $20,000, 20-Year Endowment policy for 10 years and dies from an automobile accident. How much will the insurance company pay the beneficiary?

c. 20,000 death benefit

A term life insurance policy matures a. upon endowment of the contract b. upon death of the insured c. when the cashvalue equal the death benefit d. upon the insureds death during the term of the policy

d. upon the insured's death during the term of the policy

Consideration Clause

policy owners promise to make premium payments

Rights of Ownership

the assignment provision specifies the policy owner's right to transfer ownership of the policy.

Absolute Assignment

Involves transferring all rights of ownership to another person or entity. -It is a permanent and total transfer of all the policy rights -The new policy owner does not need to have an insurable interest in the insured.

Three Basic Types of Whole Life Insurance

-Straight Whole Life -Limited Pay Whole Life -single premium whole life

Cost of Living Rider

-addresses inflation by automatically increasing the amount of insurance without evidence of insurability -the face value of the policy may increase by the cost-of-living factor tied to an inflation index such as the Consumer Price Index

T has a term policy that allows him to continue the coverage after expiration of the initial policy period. What type of term coverage is this? a. renewable b. increasing c. level d. decreasing

a. Renewable Term policy

K purchases a $10,000 life policy that will pay the face amount to her if she lives to age 65, or to her beneficiary if she dies before age 65. K purchased which of the following types of policies? a. limited-pay life b. term to age 65 c. whole life paid-up at age 65 d. endowment at age 65

d. Endowment at age 65 explanation: is characterized by cash values that grow at a rapid pace so that the policy matures or endows at a specified date before age 100.

M has an insurance policy that also has an outstanding policy loan at the time of M's death. The insurer will deduct the outstanding loan balance from the a. cash value b. estate of the insured c. policy proceeds d. nonforfeiture value

c. policy proceeds explanation: if not repaid by the time the insured dies, the loan balance and any interest accrued are deducted from the policy proceeds at the time of claim.

When a misrepresentation on a life insurance policy application is discovered, what action may an insurance company take? a. void the policy if found during the contestable period b. void the policy, no matter when it is discovered c. void the policy at any time only if it is found to be material d. void the policy only if it is discovered during the contestable period and proven to be material

d. void the policy only if it is discovered during the contestable period and proven to be material

Which of the following statements is CORRECT about accelerated death benefits? a. The full face amount is available as an accelerated death benefit b. those on Social Security disability automatically qualify for this benefit c. this provision is usually provided with an increase in premium d. must have a terminal illness to qualify

d. must have a terminal illness to qualify (or injury)

Automatic Premium Loan Provision

Commonly added to contracts with cash value at no additional charge. -special type of loan that prevents the unintentional lapse of a policy due to the nonpayment of premiums

Special features of Term Policies

-Most term policies are: renewable convertible renewable and convertible

Decreasing term policies

-Primarily used when the amount of protection need to decrease over a period of time. -Most common use for a decreasing term is to insure the payment of a mortgage -The policy amount decreases as the outstanding mortgage loan balance decreases each year -In a decreasing term policy, the death benefit will be zero dollars at the end of the policy term.

Straight Whole Life

-aka Continuous Premium Whole Life, is a basic whole life policy where the policy owner pays a fixed premium for the time the policy is issued until the insured's death or age 100.

What type of life policy has a death benefit that adjusts periodically and is written for a specific period of time? a. modified whole life b. 20-year paid up poloicy c. endowment d. decreasing term

d. decreasing term

Policy Loan Provision

-is found only in policies that contain cash value -policy owner is allowed to borrow an amount equal to the available cash value. -if there are any outstanding loans at the time of the insured's death, the death benefit will be reduced by the amount of the outstanding loan

Which policy requires an agent to register with the National Association of Securities Dealers (NASD) before selling? a. Variable Life b. Credit Life c. Universal Life d. Interest-Sensitive Whole Life

a. Variable Life

How are surrender charges deducted in a life policy with a rear-end loaded provision? a. deduced from the death benefit b. deducted when the policy is discontinued c. deducted from policy's cash value d. deducted when assigned to another policyowner

b. deducted when the policy is discontinued

P is insured on a participating life policy. Which statement is true if P premiums are waived due to a disability? a. P cannot borrow against the policy's cash value while disabled b. P will have to pay income taxes on the amount of premiums waived c. P will still receive declared dividends d. P cannot assign ownership of the policy while premiums are being waived

c. P will still receive declared dividends

Additional coverage can be added to a Whole Life policy by adding a(n) a. payor rider b. accelerated benefit rider c. decreasing term rider d. automatic premium loan rider

c. decreasing term rider

What kind of premium does a whole life policy have? a. decreasing b. adjustable c. level d. deferred

c. level

Which type of life policy contains a monthly mortality charge as well as self-directed investment choices? a. joint life b.adjustable life c. variable universallife d. universal life

c. variable universal life

Which of the following features of a group Term Life policy enables an individual to leave the group and continue his or hr insurance without providing evidence of insurability? a. Owners Rights clause b. Incontestable Period c. Insuring Agreement d. Conversion privilege

d. Conversion privilege

When i the face amount paid under a Joint Life and Survivor policy? a. when policy reaches maturation b. upon death of the first insured c. upon death of the last insured d. when one of the insureds becomes disabled and no longer able to make premium payments

c. upon death of the last insured

Which of the following actions require a policyowner to provide proof of insurability in an Adjustable Life policy? a. increase face amount b. decrease face amount c. increase premium-paying period d. decrease premium payment

a. increase face amount explanation: rest dont need proof of insurability

Which of these types of policies may NOT have the Automatic Premium Loan provision attached to it? a. Modified Whole life b. 20-pay Life c. Decreasing Term d. Endowment

c. decreasing term

Collateral Assignment

-Collateral assignment involves a transfer of partial rights to another person; this is usually done in order to secure a loan. -is a temporary assignment. Once the debt or loan is repaid the rights are returned to the policy owner.

Entire Contract Provision

-Stipulates that the policy and a copy of the application along with any riders or amendment's makeup the entire contract.

Level Term Insurance

-most common type of temporary protection -word level refers to the death benefit that does not change throughout the life of the policy

Incontestable Clause

-prevents the insurance company from denying a claim because of incorrect information or a concealment of facts after the policy has been in force for 2 years.

Variable Whole Life Insurance can be described as a. both an insurance and securities product b. an insurance product only c. a securities product only d. the insurance company assumes the investment risk

a. both an insurance and securities product

Suicide Provision

-protects insurance companies against people using suicide for a quick payment of the death benefit. -if insured commits suicide within the first 2 years, insurance company will not pay death benefit. -they will only return the premiums that have been paid.

Which of the following characteristics is CORRECT about Interest Sensitive Whole Life? a. There is a flexible premium payment b. There are no guaranteed minimum interest rates c. Mortality charges do not impact the investmentamount d. Interest rates determine cash values

a. There is a flexible premium payment

A Return of Premium life insurance policy is a. a Nonforfeiture option b. Whole life and increasing term c. interest-sensitive d. variable life

b. Whole life and increasing term explanation: a return of premium life insurance policy is whole life insurance with a death benefit rider of increasing term insurance equal to the amount of premiums paid. If the insured dies within the period of term, the beneficiary will receive face amount plus the value of all paid premiums.

Which provision allows the policyowner to change a term life policy to a permanent one without providing proof of good health? a. modification b. conversion c. exchange d. adjustable

b. conversion

A variable insurance policy a. guarantees a minimum rate of return b. does not allow the policyowner to assume the investment risk c. does not guarantee a return on its investment accounts d. does not guarantee an assignment provision

c. does not guarantee a return on its investment accounts

Which of the following combination plans is designed to protect an insured from an unpaid mortgage balance upon premature death? a. survivorship life b. family plan c. joint life d. whole life and level term rider

c. joint life explanation: joint life covers two or more people. using some type of permanent insurance (as opposed to term), it pays the death benefit at the first insured's death.

Whole Life insurance policies are contractually guaranteed to provide each of the following EXCEPT a. cash value that will ultimately replace the death benefit b. nonforfeiture benefit options c. premiums that remain fixed for the life of the policy d. partial withdrawal features beyond a surrender charge period

d. partial withdrawal features beyond a surrender charge period

What kind of special need would a policyowner require with an Adjustable Life insurance policy? a. level premiums b. flexible premiums c. flexible nonforfeiture options d. level death benefits

flexible premiums

Standard Policy Provisions

-While there is not a set standard of policy provision in life insurance, the standard policy provisions adopted by the (NAIC) National Association of Insurance Commissioners does create uniformity amongst life insurance policies.

Reinstatement Provision

-allows a lapsed policy to be put back in force. -if the policy owner elects to reinstate the policy, they will have to provide evidence of insurability, pay all back premiums with interest and maybe required to repay any outstanding loans.

Level Premiums

-for whole life policies are based on the age of the individual when originally purchased. -therefore, premiums remain the same throughout the entire life of the policy.

What does a Face Amount Plus Cash Value Policy supposed to pay at the insured's death?

a. Face amount plus the policy's cash value

L takes out a life insurance policy and dies 10 years later. During the claim process, the insurer discovers that L had understated her age on the application. Under the Misstatement of Age provision, the insurer will.. a. pay the death benefit in full b. adjust the death benefit to an increased amount c. adjust the death benefit to a reduced amount d. deny the claim

c. adjust the death benefit to a reduced amount

What type of life insurance incorporates flexible premiums and an adjustable death benefit? a. endowment policy b. modified whole life c. decreasing term d. universal life

d. Universal life explanation: designed to provide flexible premiums and an adjustable death benefit

A potential client, age 40, would like to purchase a Whole Life policy that will accumulate cash value at a faster rate in the early years of the policy. Which of these statements made by the producer would be correct? a. Straight life accumulates faster than limited-pay life b. 20-paylife accumulates cash value faster than straight life c. cash value accumulation of both 20-pay life and straight life depend on the insurer's financial rating d. 20-pay life and straight life accumulate cash value at the same rate

b. 20-Pay Life accumulates cash value faster than Straight life

A 42-year old executive wants to purchase life insurance that will allow for increases or decreases to coverages his/her needs change. Which of the following policies will best meet this need? a. Endowment at Age 75 b. Universal Life c. GradedBenefit Whole Life d. Modified Whole life

b. Universal Life explanation: characterized by flexible premiums and an adjustable death benefit

Increasing term policies

-Feature level premiums and a death benefit that increases each year. -amount of increase is usually set at a specific amount of percentage.

Level Death Benefit

-Guaranteed and remains level for the entire lifetime of the policy.

Dividends

Are paid only on participating policies -When the policy owner purchases the policy from a participating insurance company, they are eligible to receive dividends. -When receiving dividends they have the following 5 options

Non-Forfeiture Options

Because permanent whole life insurance policies have cash values, certain guarantees are built into the policy that cannot be forfeited by the policy owner -If a whole life insurance policy owner wants to surrender the policy, because he does not want it anymore, he must make a decision on what he would like to do with his cash value.

Which is true concerning a Variable Universal Life policy? a. policyowner controls where the investment will go and selects the amount of the premium payment b. policyowner has no say where the investment will go but can choose the premium mode c. the investment vehicle for this type of policy is held in the insurer's general portfolio d. the death benefit can vary but the policyowner has no say in the premium amount paid

a. Policy owner controls where the investment will go and selects the amount of the premium payment

Whole Life

Also called permanent life insurance, these are policies that remain in effect to age 100 as long as the premium is paid. -provides lifetime protection and includes a savings element known as cash value -policies endow at the age 100, which means the cash value created by the payment of premiums is scheduled to equal the face amount of the policy at age 100. -Premiums for whole life policies are usually higher than those for term life insurance.

What type of policy would offer a 40-year old the quickest accumulation of cash value? a. paid-up at 65 b.20-pay life c.30-pay life d. straight whole life

b. 20-pay life

When an insurer issues a policy that refuses to cover certain risks, this is referred to as a(n): a. elimination b. exclusion c. limitation d. exception

b. exclusion

Life insurance that covers an insured's whole life with level premiums paid over a limited time is called a. adjustable life b. renewable term c. limited pay life d. joint life

c. limited pay life