Life Insurance Quiz 5
Which of the following items are NOT treated as income-first when distributed from a modified endowment contract? dividends retained by the insurer to premiums or other consideration for the contract cash dividends policy loans to pay premiums and for all other purposes withdrawals
a
Variable life is a whole life policy where the policyowners bear all investment risk. True False
true
A key feature of variable life insurance is the dividends are guaranteed there is no guaranteed minimum cash value death benefit claims are always paid in shares of company stock rather than in cash it can be sold only by registered traders on the New York exchange
b
A modified endowment contract is a life insurance policy that has failed the test for life insurance the seven-pay test the transfer for value rule the rule against perpetuities
b
Which of the following statements about the tax aspects of ownership of variable life insurance is FALSE? Transfers of investment assets from one fund to another are tax-free. Gains received are taxable at capital gains rates. Investment earnings within the policy are tax deferred. Death benefits are usually paid free of federal income tax.
b
One disadvantage of universal life is that policy owners bear more risk of adverse trends in mortality or expenses than if they owned traditional whole life policies. True False
true
A 10% penalty applies to certain distributions from life insurance policies that are treated as modified endowment contracts. True False
true
As long as cash values are sufficient to cover policy charges, a universal life policy owner may skip premium payments. True False
true
Once a policy is classified as a modified endowment contract, with certain corrections, it can be later treated as not a modified endowment contract. True False
false
Which of the following statements regarding universal life insurance is true? Because they are not reported separately, elements of the policy such as interest credits, mortality charges, and death benefits are difficult to track. Universal life allows policyowners to participate in favorable investment, mortality and expense experience of the company. insurance policies. Annual increases in cash value are taxable due to the unique nature of the universal life contract. Because universal life is a current-assumption policy universal life is a security and a prospectus must be provided before each sale.
b
Which of the following problems could be caused by the flexibility offered by a universal life insurance policy? Increases in the death benefit within in the first five policy years can cause the death benefit to become taxable income to the beneficiary. Skipping even one premium payment will cause the policy to lapse. A death benefit reduction may cause the policy to be classified as a modified endowment contract. The coverage of a key employee's life by a corporation will cause a transfer for value problem.
c
Which of the following statements regarding universal life insurance is NOT true? The policyowner can easily track the policy's different elements. It is generally best suited to long term coverage needs. If the policyowner skips a premium payment the policy will not lapse. The policy is not susceptible to inadvertently becoming a modified endowment contract.
d
An insurance contract entered into before 1988 can never be considered a modified endowment contract? True False
false
Which of the following is true regarding the interest credited to universal life policies? "Portfolio" rates are generally more responsive to changing market interest rates than "New Money" rates. The rate used is based on the return on investments selected by the policyholder and held in a segregated asset account. Insurance companies are no longer allowed complete freedom in interest crediting due to some companies abusing such discretion in the past. The rate used may be linked to a well-known index of yields if it exceeds a minimum rate guaranteed in the policy.
d
Which of the following statements about variable universal and variable life insurance death benefits is NOT true? The certainty of death benefit levels is greater under variable universal life than variable life, as long as premiums are paid at necessary levels. The death benefit under a variable universal life policy is adjustable, within limits and subject to insurability requirements, at the discretion of the insured. Variable universal life offers greater certainty of death benefit levels than variable life as long as premiums are paid at the level necessary to maintain the death benefit. Variable Life and Variable Universal Life bear no mortality or expense risk.
d
Because of the way that it is taxed, a modified endowment contract is not considered a life insurance policy for tax purposes. True False
false
Most universal life policies are issued with front-end load charges rather than back-end load charges. True False
false
Variable life or variable universal life insurance is well-suited to individuals desiring a minimum basic level of coverage. True False
false
A policy that automatically increases the death benefit without evidence of insurability will typically violate the MEC rules. True False
false
Variable Life and Variable Universal Life are especially suited for many business insurance situations where flexibility and growth of cash value are attractive features. True False
true