Life Insurance Policy Provisions, Riders, and Options
A rider that may be attached to a life insurance policy that will adjust the face amount based upon a specific index, such as the Consumer Price Index, is called: (A) Accelerated benefit rider. (B) Living need rider. (C) Payor rider. (D) Costof living rider.
(D) Cost of living rider. (A "cost of living" rider adjusts the face amount of a policy to maintain the relationship of the face amount and increases in the cost of living)
Which of the following is true regarding a single life settlement option? (A) It provides income the beneficiary cannot outlive. (B) Payments continue until the entire principal is exhausted. (C) Proceeds are paid out in a lump sum. (D) It provides income for a specified period of time.
(D) It provides income the beneficiary cannot outlive (Payments stop upon death of the beneficiary)
What is the waiting period on a Waiver of Premium rider in life insurance policies?
6 months (Most insurers impose a 6-month waiting period from the time of disability until the first premium is waived)
An individual applied for a life insurance policy on Jan. 10. The policy was issued on Jan. 31; however, because the insured's agent wa on vacation at that time, the policy was not delivered until Feb. 8. After reading through the policy provisions, the insured decided to return the policy to the insurer. When would the insured need to return the policy for a refund of premium?
By Feb. 18, or within 10 days of policy delivery (The 10 free-look period begins when the policy is delivered)
Which of the following is NOT typically excluded from life policies?
Death due to plane crash for a fare-paying passenger (Generally, policies do not exclude conditions in which an insured is a fare-paying passenger on a commercial airline)
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Dividends are a return of excess premiums; therefore, not taxable when paid to the policyholder.
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Extended term is the automatic nonforfeiture option: same face amount, shorter term of coverage.
The automatic premium loan provision is activated at the end of the
Grace period (Provided there is sufficient cash value in the policy, this provision triggers a loan at the end of the grace period to keep a policy in force)
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Grace periods protect policyholders from losing insurance coverage if they are late on a premium payment.
An individual purchased a life insurance policy on his life naming his wife as primary beneficiary, and their daughter as contingent beneficiary. Under what circumstances could the daughter collect the death benefit?
If the primary beneficiary predeceases the insured (The contingent beneficiary would need to outlive the insured and primary beneficiary)
Life income joint and survivor settlement option guarantees:
Income for 2 or more recipients until they die. (The Life Income Joint and Survivor option guarantees an income for two or more recipients for the duration of their lives. Most contracts stipulate that the surviving partner will receive a reduced payment after the other dies, although some will continue to pay the same amount. There is no guarantee that all the life insurance proceeds will be paid out)
The policyowner wants to make sure that upon his death, the life policy will pay a portion of the proceeds annually to his spouse, but that the principal will be paid to their children when they reach a certain age. Which settlement option should the policyowner choose?
Interest only option (With the interest-only option, the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient (beneficiary) at regular intervals)
Which of the following is true about the mandatory 10-day free look in a Life Insurance policy?
It commences when the policy is delivered
The type of settlement option which pays throughout the lifetimes of two or more beneficiaries is called
Joint and survivor. (A joint and survivor option pays while either beneficiary is still living)
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Nonforfeiture options are triggered by policy surrender or lapse.
The dividend option in which the policyowner uses dividends to purchase a term policy for one year is referred to as the:
One-Year term option (The dividend is utilized to purchase one year term insurance)
When a whole life policy lapses or is surrendered prior to maturity, the cash value can be used to
Purchase a single premium policy for a reduced amount. (When a whole life policy lapses or is surrendered prior to maturity, the cash value can be used by the insurer as a single premium to purchase a completely paid up permanent policy that has a reduced face amount from that of the former policy)
A policyowner who is also the insured wants to name her husband as the beneficiary of her life policy. She also wishes to retain all of the rights of ownership. The policyowner should have her husband named as the:
Revocable beneficiary (Policy owner may change designation at any time without beneficiary consent)
Which of the following is TRUE about nonforfeiture values?
They are required by state law to be included in the policy.
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if no beneficiary is named, policy proceeds go to the insured's estate
What is the clause that describes the method of paying the death benefit in the event that the insured and beneficiary are both killed in the same accident?
Common Disaster Clause (The Common Disaster Clause provision states that when an insured and beneficiary die in a common accident, and the beneficiary dies before or within a specific period of time after the insured, the insurer will proceed as if the insured outlived the beneficiary)
When the insured selects the extended term nonforfeiture option, the cash value will be used to purchase term insurance with what face amount?
Equal to the original policy for as long as the cash value will purchase (With this option, the cash value is used as a single premium to purchase the same face amount as the original policy for as long a period of time as the cash will buy at the insured's current age)
Which of the following settlement options in life insurance is known as straight life?
Life Income (The life-income option, also known as straight life, provides the recipient with an income that he or she cannot outlive. It pays the benefit while the beneficiary is alive; however, the payments stop at the beneficiary's death)
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Settlement options are triggered by the insured's death or age 100.
An insured purchased a 15-year level term life insurance policy with a face amount of $100,000. The policy contained an accidental death rider, offering a double indemnity benefit. The insured was severely injured in an auto accident, and after 10 weeks of hospitalization, died from the injuries. How much will the beneficiary receive from the policy?
$200,000 (The beneficiary will most likely receive twice the face value of the policy, since the insured's fatal injuries were caused by an accident and he died within the 90-day benefit limit stipulated in most policies)
An insured owns a $50,000 whole life policy. At age 47, the insured decides to cancel his policy and exercise the extended term option for the policy's cash value, which is currently $20,000. What would be the face amount of the new term policy?
$50,000 (The face of the term policy would be the same as the face amount provided under the whole life policy)
What kind of policy allows withdrawals or partial surrenders? (A) 20-pay life (B) Term policy (C) Variable whole life (D) Universal life
(D) Universal life (Universal Life products allow the partial withdrawal, or surrender, of the policy cash value)
An insured stops making payments on a loan taken from his cash value policy. What will most likely happen? (A) The insurer will increase the interest rate on the loan and charge a penalty. (B) The insurer will not permit the policyowner to take out any more loans. (C) The policy will be reduced to an extended term option. (D) The policy will terminate when the loan amount with interest equals or exceeds the cash value
(D) The policy will terminate when the loan amount with interest equals or exceeds the cash value (In most policies, failure to pay back a loan will result in termination of the policy if the total amount of the loan and accrued interest equals the cash value)
For how long is an insurance company allowed to defer policy loan requests?
6 months. (Insurers writing variable life insurance policies may defer loan requests for up to 6 months. This excludes loan requests used to pay policy premiums)
Which of the following is true of a children's rider added to an insured's permanent life insurance policy? (A) It is permanent insurance. (B) The policy covers only the natural children of the insured. (C) Each child covered must show evidence of insurability. (D) It is term coverage that is convertible to permanent insurance at or prior to the child reaching the maximum coverage age.
(D) It is term coverage that is convertible to permanent insurance at or prior to the child reaching the maximum coverage age. (Children's rider is term insurance covering all of the children in the family, including newly born children, and is convertible to permanent insurance upon a child reaching the maximum age without evidence of insurability)
An insured misstates her age at the time the life insurance application is taken. This misstatement may result in: (A) Automatic lapse (B) Recession of the policy. (C) Adjustment in the amount of death benefit. (D) No change whatsoever.
(C) Adjustment in the amount of death benefit. (If the applicant has misstated his or her age or gender on the application, the insurer, in the event of a claim, is allowed under this provision to adjust the benefits to an amount that the premium at the correct age or gender would have otherwise purchased)
All of the following are TRUE statements regarding the accumulation at interest option EXCEPT (A) The interest is credited at a rate specified by the policy. (B) The policyholder has the right to withdraw the accumulations at any time. (C) The interest is not taxable since it remains inside the insurance policy. (D) The annual dividend is retained by the company.
(C) The interest is not taxable since it remains inside the insurance policy. (The interest credited under this option is TAXABLE, whether or not the policyowner receives it)
A business owner was trying to obtain a bank loan to fund the purchase of a new business facility, but the bank required proof of additional assets to secure the loan. The business owner then decided to use her $250,000 life insurance policy to secure the loan. Which provision makes this possible?
Collateral assignment (The business owner could make a collateral assignment of his life insurance policy to the bank)
An insured and his wife are both involved in a head-on collision. The husband dies instantly, and the wife dies 15 days later. The company pays the death benefit to the estate of the insured. This indicates that the life insurance policy had what provision?
Common Disaster (Under the Uniform Simultaneous Death Law, Common Disaster provision, the law will assume that the primary beneficiary dies first in a common disaster as long as the beneficiary dies within this specified period of time following the death of the insured (usually 30 days). This provides that the proceeds will be paid to either the contingent beneficiary or the insured's estate, if no contingent beneficiary is designated)
When calculating the amount a policyowner may borrow from a variable life policy, what must be subtracted from the policy's cash value?
Outstanding loans and interest
The interest earned on policy dividends is
Taxable. (Dividends are a return of unused premiums on which the insured has already paid taxes. Any interest earned is taxable as ordinary income)
An absolute assignment is a
Transfer of all ownership rights in a policy (Absolute Assignment involves transferring all rights of ownership to another person or entity. This is a permanent and total transfer of all the policy rights. The new policyowner does not need to have an insurable interest in the insured)
Which is true about a spouse term rider? (A) The rider is usually level term insurance. (B) Coverage is allowed for an unlimited time. (C) The rider is decreasing term insurance. (D) Coverage is allowed up to age 75.
(A) The rider is usually level term insurance. (The spouse term rider allows a spouse to be added for coverage. It is available for a limited amount of time, typically expiring at age 65. A spouse term rider (just like any other insured rider) is usually level term insurance)
If a beneficiary wants a guarantee that benefits paid from principal and interest would be paid for a period of 10 years before being exhausted, what settlement option should the beneficiary select?
Fixed Period (Under the fixed-period installments option (also called period certain), a specified period of years is selected, and equal installments are paid to the recipient. The payments will continue for the specified period even if the recipient dies before the end of that period.)
Which of the following statements is TRUE concerning irrevocable beneficiaries? (A) They may be changed at any time. (B) They can never be changed. (C) They may be changed only on the anniversary date of the policy. (D) They can be changed only with the written consent of that beneficiary.
(D) They can be changed only with the written consent of the beneficiary
Which of the following components must a life insurance policy have to allow policy loans? (A) Cash value (B) Dividends (C) Flexible premiums (D) Face amount
(A) Cash Value (The policy loan option is found only in policies that contain cash value)
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Children's term rider: one premium for ALL children.
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Entire contract = policy + copy of application + any riders or amendments
What is the other term for the cash payment settlement option?
Lump sum (Upon the death of the insured, the contract is designed to pay the proceeds in cash, called a lump sum)
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Misstatement of age on the application will result in adjustment of premiums or benefits
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Policy loans are ONLY available in policies that have cash value (whole life).
If a policy has an automatic premium loan provision, what happens if the insured dies before the loan is paid back?
The balance of the loan will be taken out of the death benefit (If the loan and interest are not repaid and the insured dies, then it will be subtracted from the death benefit)
A father owns a life insurance policy on his 15-year-old daughter. The policy contains the optional Payor Benefit rider. If the father becomes disabled, what will happen to the life insurance premiums?
The insured's premiums will be waived until she is 21. (If the payor (usually a parent or guardian) becomes disabled for at least 6 months or dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21)
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Common disaster clause protects the contingent beneficiary
If the policyowner, the insured, and the beneficiary under a life insurance policy are three different people, who has the ownership rights?
Policyowner (Only the policyowner has the ownership rights under the policy, and not the insured or the beneficiary)
Which of the following is TRUE about a class designation? (A) Beneficiaries are not identified by name. (B) Beneficiaries must be part of the insured's immediate family. (C) It is not allowed. (D) It determines the succession of beneficiaries.
(A) Beneficiaries are not identified by name. (A class of beneficiary is using a designation such as "my children". This can be a vague term if the insured has been married more than once, or has adopted or illegitimate children. Many insurers encourage the insured to name each child specifically and to state the percentage of benefit they are to receive)
An insured pays $1,200 annually for her life insurance premium. The insured applies this year's $300 worth of accumulate to the next year's premium, thus reducing it to $900. What option does this describe? (A) Flexible Premium (B) Reduction of Premium (C) Accumulation at Interest (D) Cash option
(B) Reduction of Premium (The Reduction of Premium option allows the policyholder to apply policy dividends toward the next year's premium. The dividend is subtracted from the premium amount, yielding the new premium due for the next year)
All of the following are beneficiary designations EXCEPT (A) Contingent (B) Primary (C) Specified (D) Tertiary
(C) Specified (Beneficiary designations determine the order in which benefits will be paid: primary or contingent, which includes secondary and tertiary)
When an insured under a life insurance policy died, the designated beneficiary received the face amount of the policy, as well as a refund of all of the premiums paid. Which rider is attached to the policy?
A Return of premium (The Return of Premium Rider pays the beneficiary not only the face amount of the policy but also the amount that had been paid in premiums. The rider stipulates that death must occur prior to a certain age in order for the premium amount to be returned. The Return of Premium Rider is funded by using increasing term insurance)
Which of the following statements best describes the effect the Accelerated Benefit provision would have on the benefits paid to the beneficiary?
It will decrease the benefits paid to the beneficiary. (Accelerated Benefit provision allows the early payment of some portion of the death benefit if the insured becomes terminally ill or is confined to a long-term care facility. The face amount of insurance is therefore reduced, which will decrease the benefits paid to the beneficiary)
When a reduced paid-up nonforfeiture option is chosen, what happens to the face amount of the policy? (A) It is reduced to the amount of what the cash value would buy as a single premium. (B) It is increased when extra premiums are paid. C) It decreases over the term of the policy. D) It remains the same as the original policy, regardless of any differences in value.
(A) It is reduced to the amount of what the cash value would buy as a single premium (In a reduced paid-up policy, the original policy's cash value is used as single premium to pay for a permanent policy with a reduced face amount from the original, hence the name. The new policy accumulates in cash value until its maturity or the insured's death)
Which of the following riders would NOT cause the Death Benefit to increase? (A) Cost of Living Rider (B) Accidental Death Rider (C) Payor Benefit Rider (D) Guaranteed Insurability Rider
(C) Payor Benefit Rider (Payor Benefit Rider does not increase the Death Benefit; it only pays the premium if the payor is disabled or dies. With Guaranteed Insurability Rider, the policyowner can increase DB at specified ages or events, i.e. marriage or birth of a child; Cost of Living Rider increases DB to keep pace with inflation; in Accidental Death Rider, if the insured dies from an accident, DB is a multiple of the Face Amount)
In a case where the primary beneficiary predeceases the insured, in the event of the insured's death, the death benefit proceeds will be paid to: (A) The insured's spouse. (B) The policyowner. (C) The insurance company. (D) The contingent beneficiary.
(D) The contingent beneficiary (A contingent beneficiary receives the death benefit if the primary beneficiary predeceases the insured. If there are no designated beneficiaries surviving the insured, the benefits are paid to the estate of the insured)
When a policyowner designates a group of individuals as the beneficiary of a life insurance death benefit without specifically naming the individuals, this is called
Class designation (A designation such as the child of the insured, or all children of the insured, or all current members of a group, is called a "class designation." The individuals need not be specifically named, since each who meet the qualifications of being included in the class will share in the benefit.)
After a back injury, an insured is disabled for a year. His insurance policy carries a Disability Income Benefit rider. Which of the following benefits will he receive? (A) Monthly premium waiver and monthly income (B) Percentage of medical costs pald by the insurer (C) Payments for life (D) Yearly premium waiver and income
(A) Monthly premium waiver and monthly income (The Disability Income Benefit rider waives the policy premiums, just like the Waiver of Premium rider. Unlike the Waiver of Premium rider, it also allows the insured to receive a weekly or monthly income during the disability period)
All of the following are true regarding insurance policy loans EXCEPT (A) Policy loans can be made on policies that do not accumulate cash value. (B) The amount of the outstanding loan and interest will be deducted from the policy proceeds when the insured dies. (C) The policy will terminate if the loan plus interest equals or exceeds the cash value of the policy. (D) Policyowners can borrow up to the full amount of their whole life policy's cash value.
(A) Policy loans can be made on polices that do not accumulate cash value.
Which of the following statements about a suicide clause in a life insurance policy is TRUE? (A) Suicide is excluded for a specific period of years and covered thereafter. (B) Suicide is covered for a specific period of years and excluded thereafter. (C) Suicide is covered as long as the policy is in force. (D) Suicide is excluded as long as the policy is in force.
(A) Suicide is excluded for a specific period of years and covered thereafter.
Which of the following statements is TRUE concerning the Accidental Death Rider? (A) It is only available in group insurance. (B) It will pay double or triple the face amount. (C) It is also known as a triple indemnity rider. (D) This rider is only available to insureds over the age of 65.
(B) It will pay double or triple the face amount (The accidental death rider pays 2 or 3 times the face amount if death is the result of an accident as defined in the policy and occurs writhing 90 days of such an accident)
If an insured continually uses the automatic premium loan option to pay the policy premium: A) The insurer will increase the premium amount. B) The policy will terminate when the cash value is reduced to nothing C) The face amount of the policy will be reduced by the automatic premium loan amount. D) The cash value will continue to increase
(B) The policy will terminate when the cash value is reduced to nothing. (This option, usually elected at the time of application, provides that in case of a possible policy lapse, the premium will be automatically paid form the contract's guaranteed cash value. However, once the cash value is exhausted, the policy will terminate).
What required provision protects against unintentional lapse of the policy?
Grace Period (The grace period is the period of time after the premium due date that the policyowner has to pay the premium before the policy lapses (usually 30 or 31 days). The purpose of the grace period provision is to protect the policyholder against an unintentional lapse of the policy)
Which of the following statements about the reinstatement provision is true? (A) It guarantees the reinstatement of a policy that has been surrendered for cash. (B) It requires the policyowner to pay all overdue premiums with interest before the policy is reinstated. (C) It permits reinstatement within 10 years after a policy has lapsed. (D) It provides for reinstatement of a policy regardless of the insured's health.
(B) It requires the policy owner to pay, with interest, all premiums that are in arrears in order for the policy to be reinstated (Upon policy reinstatement, the policyowner will be required to pay all back premiums plus interest, and may be req repay any outstanding loans and interest)
If a life policy allows the policyowner to make periodic additions to the face amount at standard rates, without proving insurability, the policy includes a: (A) Cost of living provision. (B) Nonforfeiture option. (C) Guaranteed insurability rider. (D) Paid-up additions option.
(C) Guaranteed insurability rider. (The Guaranteed Insurability rider allows the policyowner to purchase specific amounts of additional insurance at specific dates or events, without proving continued insurability. Rates for the additions are based upon attained age)
What would be an advantage to naming a contingent (or secondary) beneficiary in a life insurance policy?
It determines who receives policy benefits if the primary beneficiary is deceased.
Which of the following is true about the premium on the children's rider in a life insurance policy?
It remains the same no matter how many children are added to the policy (The premium does not change on the inclusion of additional children; it is based on an average number of children)
What is the purpose of a fixed-period settlement option?
To provide a guaranteed income for a certain amount of time
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Under life-income (straight life) settlement option, the recipient cannot outlive the benefit payments.
Children's riders attached to whole life policies are usually issued as what type of insurance?
Term insurance (Children's term riders provide term insurance with coverage expiring when the minor reaches a certain age)
The Ownership provision entitles the policyowner to do all of the following EXCEPT (A) Set premium rates. (B) Receive a policy loan. (C) Assign the policy. (D) Designate a beneficiary.
(A) Set premium rates
The sole beneficiary of a life insurance policy dies before the insured. If the policyowner fails to change the beneficiary before the insured's death, the proceeds of the policy will go to: (A) The insured's estate. (B) Probate. (C) The state. (D) The beneficiary's estate.
(A) The insured's estate (In the absence of a viable beneficiary, proceeds will be paid to the estate of the insured)
Which nonforfeiture option has the highest amount of insurance protection? (A) Decreasing Term (B) Reduced Paid-up (C) Extended Term (D) Conversion
(C) Extended Term (The Extended Term nonforfeiture option has the same face amount as the original policy, but for a shorter period of time)
Which of the following applies to the 10-day free-look privilege? (A) It can be waved only by the insurance company. (B) It is granted only at the option of the agent. (C) It permits the insured to reject the policy with a full refund. (D) It allows the insured 10 days to pay the initial premium.
(C) It permits the insured to reject the policy with a full refund
An insured has chosen joint and 2/3 survivor as the settlement option. What does this mean to the beneficiaries? (A) The beneficiary will receive 2/3 of the lump sum up front, and the remaining 1/3 will be paid over time. (B) The beneficiary will receive 2/3 of the total benefit, with the final 1/3 payable when the first beneficiary dies. (C) One of the beneficiaries will receive 1/3 and the other 2/3 of the proceeds when the insured dies. (D) The surviving beneficiary will continue receiving 2/3 of the benefit paid when both beneficiaries were alive.
(D) The surviving beneficiary will continue receiving 2/3 of the benefit paid when both beneficiaries were alive. (When the reduced option is written as "joint and 2/3 survivor," the surviving beneficiary receives 2/3 of what was received when both beneficiaries were alive)
All of the following are true regarding the guaranteed insurability rider EXCEPT: (A) The insured may purchase additional coverage at the attained age. (B) The insured may purchase additional insurance up to the amount specified in the base policy. (C) It allows the insured to purchase additional amounts of insurance without proving insurability only at specified dates or events. (D) This rider is available to all insured.
(D) This rider is available to all insured (The guaranteed insurability rider may be structured to allow for specific additional amounts of insurance to be purchased at specific ages, dates and events without proving insurability; however, the coverage is purchased at the insured's attained age and the maximum allowable purchase is specified in the base policy. This rider usually expires at the insured's age 40)
At the time the insured purchased her life insurance policy, she added a rider that will allow her to purchase additional insurance in the future without having to prove insurability. This rider is called:
Guaranteed insurability. (Guaranteed insurability is a rider that is included at the time of application (or can be added at a later date) which allows the insured to increase the amount of insurance without proving evidence of insurability)
What type of insurance would be used for a Return of Premium rider?
Increasing Term (The Return of Premium Rider is achieved by using increasing term insurance. When added to a whole life policy it provides that at death prior to a given age, not only is the original face amount payable, but also all premiums previously paid are payable to the beneficiary)
During partial withdrawal from a universal life policy, which portion will be taxed?
Interest (During the withdrawal, the interest earned on the withdrawn cash value may be subject to taxation)
Upon the death of the insured, the primary beneficiary discovers that the insured chose the interest only settlement option. What does this mean?
The beneficiary will only receive payments of the interest earned on the death benefit. (With the Interest Only settlement option, the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient (beneficiary) at regular intervals (monthly, quarterly, semiannually, or annually).)
Under an extended term nonforfeiture option, the policy cash value is converted to:
The same face amount as in the whole life policy (Under this option the insurer uses the policy cash value to convert to term insurance for the same face amount as the former permanent policy)