Life Section 2
What Life insurance policy provision applies if a policy lapsed last year and the insured wants it back? A. Grace Period B. Non-forfeiture C. Assignment D. Reinstatement
D— Reinstatement Explanation: If your policy lapses, most insurers will allow you to apply for reinstatement for up to 5 years. Reinstatement is subject to proof of insurability and the payment of all overdue premiums. It is better to reinstate rather than buy a new policy, since the premium on your reinstated policy will be based on your original age.
To add coverage for a child to your Whole Life policy you would purchase which of these riders? A. Guaranteed Insurability Rider B. Payor Benefit Rider C. Child Term Rider D. Waiver of Premium Rider
C— Child Term Rider Explanation: A Child Term Rider is the rider you would purchase to add Term coverage for a child to your existing Whole Life policy.
Grandma owns a policy on her grandchild. Which rider would kick in if Grandma should die tomorrow? A. Waiver of Premium Rider B. Payor Benefit Rider C. Child Term Rider D. Guaranteed Insurability Rider
B—Payor Benefit Rider Explanation: By adding the Payor Benefit Rider on a policy Grandma owns that covers the life of the child, the premium will be waived in the event of Grandma's death or total disability, keeping the grandchild's policy in force, until the grandchild reaches the age of majority. At the age of majority, the policy becomes the responsibility of the grandchild.
A beneficiary designation that prevents the policy owner from making certain changes in the policy is: A. Irrevocable B. Contingent C. Revocable D. Primary
A— Irrevocable Explanation: Most beneficiaries are 'revocable', which means that the policy owner can change it at any time. However, if a person is listed as 'irrevocable' beneficiary, the beneficiary cannot be changed without their consent, nor can the policy be changed in any way that would affect the interest of the irrevocable beneficiary. Irrevocable beneficiary designations are rare, but may be used in connection with Life insurance sold for a business purpose, or as part of a property settlement in a divorce.
In a policy insuring the life of a child, which of the following allows the premiums to be waived in the event of the death or disability of the person responsible for premium payments? A. Payor Benefit Rider B. Waiver of Premium provision C. Reduced Paid-Up option D. Reduction of Premium option
A— Payor Benefit Rider Explanation: The Payor Provision (sometimes called Payor Waiver of Premium) is an optional provision (or rider) often added to a policy insuring the life of a minor. The adult (usually the parent) may become sick or disabled and become incapable of paying the premium. This rider will then pay the premium on behalf of the sick or disabled payor. However, it is exactly like the Waiver of Premium Rider you would see on your own Life insurance policy in that both riders have a 6-month "waiting period" before premiums are retroactively paid. Both riders cost extra and will automatically drop off at age 60 or 65 at which time the premium would be reduced. The extra premium for these riders must be shown separately from the premium charged for the Life insurance. None of the extra premium charge goes toward cash-value accumulation.
Which of the following is true about the Misstatement of Age provision: A. It allows the insurer to change the premium B. It allows the insurer to adjust benefits C. It allows the insurer to void the contract D. It allows the insurer to contest a claim during the first 2 years
B— It allows the insurer to adjust benefits Explanation: A Life insurance claim may not be 'contested' for misstatement of age. However, if the insured understates his age in order to obtain a lower premium, at his death the insurer will adjust his benefits according to what the incorrect premium would have purchased at his correct age. The Misstatement of Age clause applies indefinitely.
Jim gets married and wants to add his new spouse to his existing Life insurance policy. Which rider should he add? A. Guaranteed Insurability Rider B. Other Insured Rider C. Payor Rider D. Term Rider
B— Other Insured Rider Explanation: The Other Insured Rider may be added to your Whole Life insurance policy at any time in order to provide Term Life coverage for a relative, such as a new spouse or child. Of course, the 'other' person would have to pass a physical exam and your premium would increase. This rider is often used to provide family coverage.
An insured died during the Grace Period of her Life insurance policy and had not paid the required annual premium. The insurance company is obligated to pay which of the following to the beneficiary? A. The full face amount of the policy B. The face amount of the policy less any earned premiums C. A refund of any premiums paid D. The cash value of the policy, if any
B— The face amount of the policy less any earned premiums Explanation: There are 3 Grace Periods to remember: 28 days on Industrial Life, 30 days on all other Life except Group, and 31 days on Group Life. The purpose of the Grace Period is to protect the insured who honestly forgot to pay on the due date. The policy will not actually lapse until the end of the Grace Period. If a client dies within the Grace Period, it is assumed he would have paid his premium, so the company will pay the face amount to the beneficiary, less any overdue premiums.
A client buys a Life insurance policy on July 1st and dies by suicide 6 months later. The insurance company will: A. Deny the claim B. Deny the claim, but refund the premium C. Pay the claim in full D. Pay half of the claim
B—Deny the claim, but refund the premium Explanation: All Life insurance policies will contain a suicide exclusion. This is done to prevent adverse selection. How long the suicide exclusion lasts for varies by state. It is generally one or two years. If an insured should commit suicide before the suicide clause has passed by, the insurer will refund the premiums paid to the beneficiary. After the suicide clause has passed by, suicide is covered.
Which of the following statements is true about exercising a Guaranteed Insurability option: I. The new insurance is available at the original issue age rate II. Evidence of insurability is not required III. The insured can exercise the option at any time after the age of 21 IV. The maximum purchase is specified in the contract
B—II and IV Explanation: The Guaranteed Insurability Option allows the insured specific option dates in the future to buy additional insurance, up to the original policy face amount, regardless of health at the insured's current age.
The clause that states the insurer's promise to pay the policy benefits in accordance with the contract's provisions is the: A. Incontestability Clause B. Insuring Clause C. Consideration Clause D. Beneficiary Clause
B—Insuring Clause Explanation: The Insuring Clause states that coverage is provided in accordance with the terms of the policy. It includes the insurer's promise to pay covered claims and is located on the first page of the policy.
If the insured dies 5 years after he bought a Life insurance policy and the insurer determines that there was material misrepresentation on his application, they will: A. Deny the claim but refund the premium B. Pay only a portion of the claim C. Pay the claim D. Deny the claim
C— Pay the claim Explanation: Under state law, Life insurance policies are only 'contestable' for the first 2 years. After 2 years, the policy is 'incontestable', which means that the insurer must pay all claims, even if there was material misrepresentation on the original application.
If the insured understated his age and the error is discovered after the insured's death, the insurance company will: A. Pay the claim, less a deduction for the amount of the underpaid premium B. Refund all premiums paid plus accumulated interest C. Deny the claim under the Incontestability clause D. Pay the amount that the premium paid would have purchased at the correct age
D— Pay the amount that the premium paid would have purchased at the correct age Explanation: A Life insurance claim may not be 'contested' for misstatement of age. However, if the insured understates his age in order to obtain a lower premium, at his death the insurer will adjust his benefits according to what the incorrect premium would have purchased at his correct age. The Misstatement of Age clause applies indefinitely
A $10,000 Life insurance policy with a Triple Indemnity clause has been in force for three years. The insured is injured in a train wreck and dies in a hospital five months later. The death proceeds payable under the policy would be: A. $30,000 B. $20,000 C. $ -0- D. $10,000
D—$10,000 Explanation: Accidental Death Benefit (ADB), sometimes called Double or Triple Indemnity, is a rider that may be attached to any Life insurance policy for an extra premium charge. The additional benefits are paid only if the insured dies within 90 days of an accident. If the insured lingers beyond 90 days, the policy reverts back to single indemnity only, and the face amount without the rider is paid, since it is assumed that death resulted more from natural causes than as a result of the accident.
The Life insurance rider that will pay the insured's premium after a period of disability due to accident or sickness is: A. Guaranteed Insurability B. Accidental Death and Dismemberment C. Automatic Premium Loan D. Waiver of Premium
D— Waiver of Premium Explanation: Waiver of Premium is a type of Health (also known as Disability) insurance that may be added to a Life policy for an additional premium. If the policy owner becomes totally disabled for a period of at least 6 months, the insurer will waive future premiums due until the policy owner recovers.
An insurance company will grant an advance from the cash value of a Life insurance policy when the policy owner requests which of the following? A. A policy loan B. A low-interest dividend loan C. A loan from Extended Term Insurance D. An automatic premium loan
A— A policy loan Explanation: A policy loan may be requested by the insured anytime there is a cash value present. Some companies do require that you leave a certain minimum amount in your cash value, so you cannot borrow it all. The maximum interest rate on policy loans varies by state law. However, your company may not charge an interest rate higher than the one stated in its policy initially. Loans do not have to be paid back while the insured is alive, since all loans plus overdue interest on them will be subtracted from policy proceeds in the event that the insured dies with a loan outstanding. Insurance companies may defer granting policy loans for up to 6 months, although they seldom do.
The life insurance policy provision that prevents the insurer from modifying a policy after it has been issued is the: A. Entire Contract Clause B. Consideration Clause C. Insuring Clause D. Incontestability Claus
A— Entire Contract Clause Explanation: The Entire Contract Clause prevents the insurer from modifying a policy once it has been issued. The Entire Contract, which consists of the policy and the application, if attached, is the only document that is admissible in court.
The purpose of the Grace Period is to: A. Protect the policy owner against unintentional lapse B. Give the beneficiary time to prove that insurable interest exists C. Protect the insurer against adverse selection D. Give the insurer time to determine the cause of death
A— Protect the policy owner against unintentional lapse Explanation: A Life insurance policy will lapse (terminate) at the end of the grace period, which may be as long as 31 days. During the grace period, the insured is still covered, and death claims will be paid, less the overdue premium.Protect the policy owner against unintentional lapse
The time period covered by the Free Look provision of a Life insurance contract starts: A. When the insured receives the contract and makes the first premium payment, if needed B. When the contract is issued and mailed to the agency office from the home office of the insurance company C. When the contract is received in the agency office and given to the producer D. When the insured receives the contract and a "right to look" receipt
A— When the insured receives the contract and makes the first premium payment, if needed Explanation: The Free Look never begins until the policy is actually delivered. Even if the premium had been paid previously, the Free Look would not have begun until policy delivery. If the client returns the policy to the insurer within the time period specified (varies by state law), she would get all of her money back.
A customer buys a $25,000 Life insurance policy with a $25,000 Accidental Death Benefit rider attached. If he dies of cancer, how much will his policy pay A. $25,000 B. $75,000 C. $50,000 D. Nothing
A—$25,000 Explanation: Accidental Death Benefits (also known as Double Indemnity) are actually a type of Health insurance policy that may be added to a Life insurance policy for an additional premium. This rider covers accidents only and death must result within a specified period of time after the accident, usually within 90 days. Cancer is a sickness, not an accident.
A client buys a $50,000 Whole Life policy on himself and wants to add $25,000 in Term coverage for his spouse. He should add which of the following riders to his policy? A. Other Insured Rider B. Spousal Rider C. Family Rider D. Additional Insured Rider
A—Other Insured Rider Explanation: The Other Insured Rider may be added to your Whole Life insurance policy at any time in order to provide Term Life coverage for a relative, such as a new spouse or child. Of course, the 'other' person would have to pass a physical exam and your premium would increase. This rider is often used to provide family coverage.
The contingent beneficiary will receive policy proceeds when: A. The primary beneficiary pre-deceases the insured B. No beneficiary has been designated C. The insured pre-deceases the primary beneficiary D. The insured pre-deceases all designated beneficiaries
A—The primary beneficiary pre-deceases the insured Explanation: A contingent' beneficiary is also known as a 'secondary' beneficiary, since they will only receive the policy proceeds if the primary beneficiary dies before the insured and no new primary beneficiary is named.
A client applied for Life insurance on October 1st. The application was approved and the policy was issued on October 10th. It was delivered to the customer on October 18th. When did the Free Look start? A. October 1st B. October 18th C. October 10th D. October 31st
B—October 18th Explanation: The Free Look starts at the time of policy delivery. During the Free Look, the policy owner may return the policy for any reason and receive a full refund. Of course, once the policy is returned, no coverage will apply.
The Life insurance policy clause that prevents an insurance company from denying payment of a death claim after a specified period of time is known as the: A. Insuring clause B. Reinstatement clause C. Incontestability clause D. Misstatement of Age clause
C— Incontestability clause Explanation: The Incontestability Clause protects the client who may have lied (misrepresentation) on his original application for Life insurance. The company has 2 years to investigate the insured from the original date of application. If the client dies within the first 2 years and the insurance company can prove that he lied about a material fact on his original application, they can deny the claim. However, after the 2-year period has elapsed, they must pay the claim even if he lied. So, those who lied can quit worrying after 2 years!
Which of the following is true about the Insuring Clause? A. It states the policy owner's rights B. It requires that the application be attached to the policy C. It contains the insurer's enforceable promise to pay covered claims D. It states that the insurer may contest a claim for material misrepresentation
C— It contains the insurer's enforceable promise to pay covered claims Explanation: The Insuring Clause states that coverage is provided in accordance with the terms of the policy. It includes the insurer's promise to pay covered claims and is located on the first page of the policy.
Which of the following Settlement Options might provide payments that exceed the proceeds of the policy and the interest earned? A. Fixed Amount B. Fixed Period C. Life Annuity D. Interest Only
C— Life Annuity Explanation: There are 5 settlement options from which a beneficiary may select upon death of the insured. 1) Cash; 2) Fixed Period (proceeds, plus interest, are all paid out over a fixed period of time, the client chooses the time period); 3) Fixed Amount (the beneficiary elects to receive a specific dollar amount monthly, for as long as the money lasts); 4) Interest (the proceeds are left with the company to accumulate additional interest), and 5) Life Annuity (paid as long as the Beneficiary/Annuitant lives).
Which of the following statements about a typical Suicide clause in a Life insurance policy is true? A. Suicide is covered for a specific period of years and excluded thereafter B. Suicide is excluded as long as the policy is in force C. Suicide is excluded for a specific period of years and covered thereafter D. Suicide is covered as long as the policy is in force
C— Suicide is excluded for a specific period of years and covered thereafter Explanation: The Suicide Clause, which is completely separate from the Incontestability Clause, excludes coverage for death resulting from suicide during the suicide exclusion (this time period varies by state, typically it is one to two years). After that, suicide is covered. If the insured dies by suicide during the suicide exclusion, there is no coverage, but the insurance company will refund the premiums paid in to date to the beneficiary, less any loans outstanding
A rider that keeps a policy from lapsing due to non-payment of premium by borrowing from the cash value is A. Extended Term Option B. Mode of Payment C. Automatic Premium Loan D. Reduced Paid-Up Option
C—Automatic Premium Loan Explanation: You can add a rider called Automatic Premium Loan (APL) to any cash value Life insurance policy to keep the policy from lapsing due to non-payment of premium. The policy will automatically borrow from itself, which creates an interest bearing loan, which will be subtracted from proceeds upon your death. APL cannot be added to a Term Life policy, since there is no cash value.
All of the following are considered to be owner's rights under a Life insurance policy, EXCEPT: A. Changing a dividend option B. Selecting a settlement option prior to death C. Changing an irrevocable beneficiary D. Taking a policy loan
C—Changing an irrevocable beneficiary Explanation: The policy owner has all the rights of ownership, which includes paying the premium, designating the beneficiary, taking a policy loan and making an absolute or collateral assignment. Remember, the policy owner is not necessarily the person insured. When a policy has an irrevocable beneficiary, the beneficiary may not be changed by the policy owner.
Margaret May wants to name her husband as the beneficiary of her Life policy; however, she wishes to retain all of the rights of ownership. Mrs. May should name her husband as: A. Secondary beneficiary B. Tertiary beneficiary C. Revocable beneficiary D. Irrevocable beneficiary
C—Revocable beneficiary Explanation: Most people are both the insured and the owners of their own Life insurance policies. As such, they may designate any beneficiaries they desire and they may change their designation any time they so choose, since their choice is revocable at their option. However, anyone may appoint an Irrevocable Beneficiary if they so desire. This designation, once chosen, may never be changed by the insured without the consent of the irrevocable beneficiary. Policy loans may not be taken without that person's consent either. Irrevocable designations are rare, but are sometimes used for business purposes, in divorce settlements, or for children.
Dividend projections may be included in a proposal for Life insurance when which of the following is true? A. The projected amounts do not exceed the dividends previously paid by the same insurance company B. The applicant has requested that they be included C. There is a clear statement that payment of future dividends is not guaranteed D. The projected amounts are calculated on the basis of the Commissioners Standard Ordinary Mortality Tables
C—There is a clear statement that payment of future dividends is not guaranteed Explanation: Dividends MAY be paid to policyholders of a Mutual Insurance Company, such as Mutual of New York. Dividends are considered to be a return of an overpayment by the IRS and, therefore, are not taxable. Although a company may state its past dividend history in a proposal, it is illegal to guarantee future dividends, since they might not occur
Dividend projections may be included in a proposal for Life insurance: A. When they are required to be applied to future premiums due B. Only upon the request of the applicant C. When there is a clear statement that they are not guaranteed D. When past results are used as the basis for future projections
C—When there is a clear statement that they are not guaranteed Explanation: Mutual insurers issue 'participating policies' which might pay dividends to the policy holders, since they own the company. However, dividends may never be guaranteed. Dividends are not taxable.
The provision in a Life insurance policy that provides protection against unintentional policy lapse is known as the: A. Payor clause B. Reduction of Premium option C. Waiver of Premium benefit D. Automatic Premium Loan provision
D— Automatic Premium Loan provision Explanation: Automatic Premium Loan (APL) is a rider that can be added to any Life insurance policy that has or will have a cash value. It cannot be added to Term insurance. It is usually free, but the producer or client must check this option on the application. If the policy has a cash value and the insured forgets to pay the premium when due, the policy will not lapse, since it will borrow from itself to pay the overdue premium. Remember, this is a rider, not a non-forfeiture option. However, when the insured dies, all loans are subtracted from policy proceeds, so the beneficiary's pay-out may be reduced
Which of the following statements about the Misstatement of Age provision in a Life insurance policy is true? A. It is an optional provision B. It becomes inoperative after the expiration of the policy's Contestable period C. If the insured's age has been overstated, it provides that a premium refund and the face amount of the policy will be payable D. If the insured's age has been understated, it provides that a death benefit smaller than the face amount of the policy will be payable
D— If the insured's age has been understated, it provides that a death benefit smaller than the face amount of the policy will be payable Explanation: The Misstatement of Age provision is separate from the Incontestability Clause. Lying about your age cannot void the policy. However, it can reduce the amount of benefits paid at the time of your death. The formula to calculate this is as follows: The client is 40, but states he is 30, to get a lower rate. He buys a $100,000 policy. His premium paid is $200 per year. At the correct age, he should have paid $400 per year. (CLIENT DID PAY $200 ÷ CLIENT SHOULD PAY $400) x FACE AMOUNT $100,000 = AMOUNT PAID AT DEATH $50,000 The formula is: "Did" / "Should" x Face Amount = Amount Paid. In this example, the insurance company will pay 200/400, or 1/2 of the face amount the client thought he was buying.
Which of the following statements about the Reinstatement provision is true? A. It permits reinstatement within 10 years after a policy has lapsed B. It provides for reinstatement of a policy regardless of the insured's health C. It guarantees the reinstatement of a policy that has been surrendered for cash D. It requires the policy owner to pay, with interest, all premiums that are in arrears in order for the policy to be reinstate
D— It requires the policy owner to pay, with interest, all premiums that are in arrears in order for the policy to be reinstated Explanation: Most companies will offer the right to apply for Reinstatement up to 5 years after a policy has lapsed. Although the client may have the right to apply, the company does not have to take him. He must prove continued good health, pay back premiums plus interest, and any loans taken plus interest. The company has nothing to lose by offering Reinstatement. The client's only reasons to apply for Reinstatement, rather than applying for a new policy, are that, if accepted, his Reinstated policy would have his Original age and perhaps a lower interest rate on policy loans than a new policy may have.
On Life insurance, the purpose of the Entire Contract Clause is to: A. Spell out the rights of the policy owner B. Require that the insurer attach the application to the policy at issue C. Spell out the rights of the beneficiary D. Limit the policy to the contract plus the application, if attached
D— Limit the policy to the contract plus the application, if attached Explanation: The Entire Contract Clause prevents the insurer from modifying a policy once it has been issued. The Entire Contract, which consists of the policy and the application, if attached, is the only document that is admissible in court.
Which of the following is a Non-Forfeiture Option that provides continuing cash value buildup? A. Deferred Annuity B. Cash Surrender C. Extended Term D. Reduced Paid-Up
D— Reduced Paid-Up Explanation: There are only three non-forfeiture options: Cash Surrender, Reduced PaidUp, and the automatic option, Extended Term. Their purpose is to protect the insured's accumulated cash value in case the Whole Life policy lapses. A client has 60 days from the policy's premium due date to select the option she prefers. If none is selected, the company will give the client the automatic option, Extended Term. Here, the face amount of the new policy is the same as on the initial policy. The accumulated cash value is used internally by the company to pay the premium for a new Term policy at the insured's attained age. The policy term is however long that amount of money will buy. There is no cash value, and at the expiration of the term the policy expires and the insured has no further coverage. If the client selects the Reduced Paid-Up option, the company then uses all of the accumulated cash values to buy the client internally a new Whole Life policy paid up to age 100. It would have an immediate cash value, but no further premiums would ever be due. The face amount would be more than the accumulated cash value, but less than the original face amount of the initial policy, so it is called Reduced Paid-Up. Cash value would continue to accumulate, and at maturity (age 100) the cash value would equal the face amount. No physical exam is required. Of course, if the client takes Cash Surrender, there is no further coverag
Which of these is a rider that would ensure you can purchase additional insurance coverage, at specified ages, regardless of health? A. Guaranteed Insurability Rider B. Payor Benefit Rider C. Child Term Rider D. Waiver of Premium Ride
A— Guaranteed Insurability Rider Explanation: When you add the Guaranteed Insurability Rider to a Life insurance policy you have specific dates where you can increase your coverage, regardless of health, based upon your current age