Policy Riders, Amendments, and Options Questions

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 Living need rider. B Payor rider. C Cost of living rider. D Accelerated benefit rider.

C 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.

The interest earned on policy dividends is A Tax deductible. B 40% taxable, similar to a capital gain. C Taxable. D Nontaxable.

C Dividends are a return of unused premiums on which the insured has already paid taxes. Any interest earned is taxable as ordinary income.

The accelerated benefits provision will provide for an early payment of the death benefit when the insured A Becomes terminally ill. B Needs to borrow money. C Has earned enough credits. D Becomes disabled.

A The accelerated benefits provisions allow the owner to be advanced a significant portion of the death benefit when the insured is terminally ill.

Which of the following protects the insured from an unintentional policy lapse due to a nonpayment of premium? A Automatic premium loan B Extended term C Reinstatement D Reduced paid-up option

A Automatic premium loan provision is not required, but is commonly added to contracts with a cash value at no additional charge. This is a special type of loan that prevents the unintentional lapse of a policy due to nonpayment of the premium.

The policyowner pays for her life insurance annually. Until now, she has collected a nontaxable dividend check each year. She has decided that she would rather use the dividends to help pay for her next premium. What option would allow her to do this? A Reduction of premium B Paid-up addition C Accumulation at interest D Cash option

A 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.

An insured purchased a life insurance policy on his life naming his wife as primary beneficiary, and his daughter as contingent beneficiary. Under what circumstances could the daughter collect the death benefit? A If the primary beneficiary predeceased the insured B When the insured dies, the primary and contingent beneficiaries share death benefits equally. C With the primary beneficiary's written consent D If the insured died from accidental means

A The daughter, as contingent beneficiary, would need to outlive the insured and primary beneficiary.

When calculating the amount a policyowner may borrow from a variable life policy, what must be subtracted from the policy's cash value? A Outstanding loans and interest B The face amount C Mortality costs D The cash surrender amount

A To calculate the loan value an insured may take out of the variable life insurance policy, any unpaid loans and interest must be subtracted from the policy's cash value.

When a life insurance policy was issued, the policyowner designated a primary and a contingent beneficiary. Several years later, both the insured and the primary beneficiary died in the same car accident, and it was impossible to determine who died first. Which of the following would receive the death benefit? A The insured's contingent beneficiary B The insurance company C The insured's estate D The primary beneficiary's estate

A Under the Uniform Simultaneous Death Law, the law will assume that the beneficiary dies first in a common disaster. This provides that the proceeds will be paid to the contingent beneficiary or to the insured's estate if none is designated.

An insured has a life insurance policy from a participating company and receives quarterly dividends. He has instructed the company to apply the policy dividends to increase the death benefit. The dividend option that the insured has chosen is called A Paid-up additions. B One-year term purchase. C Accumulation at interest. D Reduction of premiums.

A When this option is selected, the annual dividend acts as a single premium each year to buy additional amounts of insurance, based on the insured's currently attained age.

Which of the following is true regarding the spendthrift clause in life insurance policies? A It is the same as irrevocable settlement clause. B It can protect the policy proceeds from creditors of the beneficiary. C It allows the beneficiary to select a different settlement option. D It is only used when the beneficiary is a minor.

B The spendthrift clause in a life insurance policy prevents the beneficiary's reckless spending of benefits, and protects the policy proceeds from creditors of the beneficiary or policyowner.

If a settlement option is not chosen by the policyowner or the beneficiary, which option will be used? A Fixed amount B Lump sum C Life income D Fixed period

B Upon the death of the insured, or endowment, the contract is designed to pay the proceeds in cash, called a lump sum, unless the recipient chooses an optional mode of settlement.

A couple owns a life insurance policy with a Children's Term rider. Their daughter is reaching the maximum age of dependent coverage, so she will have to convert to permanent insurance in the near future. Which of the following will she need to provide for proof of insurability? A Her parents' federal income tax receipts B Medical exam and parents' medical history C Proof of insurability is not required. D Medical exam

C If a Children's Term rider is attached to a life insurance policy, children can be covered under the policy until they reach the maximum age stated in the policy. At that point, they can convert their coverage to a new policy without having to issue proof of insurability.

If a policy has an automatic premium loan provision, what happens if the insured dies before the loan is paid back? A The policy beneficiary takes over the loan payments. B The policy is rendered null and void. C The balance of the loan will be taken out of the death benefit. D The policy beneficiary receives the full death benefit.

C If the loan and interest are not repaid and the insured dies, then it will be subtracted from the death benefit.

An insured had a $10,000 term life policy. The annual premium of $200 was due on February 1; however, the insured failed to pay the premium. He died on February 28. How much would the beneficiary receive from the policy? A $0 B $200 C $9,800 D $10,000

C In this scenario, the death occurred within the mandatory 30-day grace period. Past due premium would be subtracted from the face amount of the policy.

A father purchases a life insurance policy on his teenage daughter and adds the Payor Benefit rider. In which of the following scenarios will the rider waive the payment of premium? A If the daughter is disabled for more than 3 months B If the daughter is disabled for any length of time C If the father is disabled for more than 6 months D If the father is disabled for at least a year

C Payor benefit only pays if the owner, the father in this example, is disabled for at least 6 months.

Which of the following is TRUE about the 10-day free-look period in a Life Insurance policy? A It applies only to term life insurance policies. B It is optional on all life insurance policies. C It begins when the policy is delivered. D It begins when the application is signed.

C The 10-day free-look provision is a mandatory provision that allows the insured to examine a policy, and if dissatisfied for any reason, return the policy for a full refund of any premiums paid.

What type of insurance would be used for a Return of Premium rider? A Decreasing Term B Annually Renewable Term C Increasing Term D Level Term

C 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.

Which life insurance settlement option guarantees payments for the lifetime of the recipient, but also specifies a guaranteed period, during which, if the original recipient dies, the payments will continue to a designated beneficiary? A Single life B Fixed-amount C Life income with period certain D Joint and survivor

C The life income with period certain option guarantees payments for the life of the recipient and also specifies a guaranteed period of continued payments. If the recipient should die during this period, the payments would continue to a designated beneficiary for the remainder of the period.

All of the following are true regarding insurance policy loans EXCEPT A The policy will terminate if the loan plus interest equals or exceeds the cash value of the policy. B Policyowners can borrow up to the full amount of their whole life policy's cash value. C Policy loans can be made on policies that do not accumulate cash value. D The amount of the outstanding loan and interest will be deducted from the policy proceeds when the insured dies.

C The policy loan option is only found in policies that contain cash value.

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 A Contingent beneficiary. B Irrevocable beneficiary. C Revocable beneficiary. D Secondary beneficiary.

C The policyowner may change a revocable designation at any time and without the consent of the beneficiary. Irrevocable beneficiaries, on the other hand, have a vested interest in the policy, so the policyowner may not be able to exercise certain rights without their consent.

The insured under a $100,000 life insurance policy with a triple indemnity rider for accidental death was killed in a car accident. It was determined that the accident was his fault. The triple indemnity rider in the policy specifies that the death must not be contributed to by the insured in any manner. In this case, what will the policy beneficiary receive? A $0 B $50,000 (50% of the policy value) C $100,000 D $300,000 (triple the amount of policy value)

C The triple indemnity accidental death rider obligates the company to pay three times the face amount of the policy if the insured dies as a result of an accident. The death must be accidental and not contributed to by any other factors and must occur within 90 days of the accident. In this case, since the insured contributed to his own death, the triple indemnity rider is void, but the beneficiary will still receive the policy's death benefit.

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 A Waiver of cost of insurance. B Accelerated benefits. C Cost of living. D Guaranteed insurability.

D 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 is the waiting period on a Waiver of Premium rider in life insurance policies? A 30 days B 3 months C 5 months D 6 months

D Most insurers impose a 6-month waiting period from the time of disability until the first premium is waived.

All of the following are Nonforfeiture options EXCEPT A Cash surrender B Extended term C Reduced paid-up D Interest only

D Nonforfeiture values include cash surrender, extended term and reduced paid-up. Interest only is a settlement option.

A long stretch of national economic hardship causes a 7% rate of inflation. A policyowner notices that the face value of her life insurance policy has been raised 7% as a result. Which policy rider caused this change? A Value Adjustment Rider B Return of Premium Rider C Inflation Rider D Cost of Living Rider

D The Cost of Living rider annually adjusts the policy's face value in accordance with the national rate of inflation or deflation. This rider adjusts the face amount of the policy to correspond with the rate of inflation, in order to keep the initial value of the policy constant over time.

Which nonforfeiture option has the highest amount of insurance protection? A Conversion B Decreasing Term C Reduced Paid-up D Extended Term

D The Extended Term nonforfeiture option has the same face amount as the original policy, but for a shorter period of time.

What limits the amount that a policyowner may borrow from a whole life insurance policy? A Premiums paid B Amount stated in the policy C Face amount D Cash value

D The amount available to the policyowner for a loan is the policy's cash value. If there are any outstanding loans, that amount will be reduced by the amount of the unpaid loans and interest.

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 insureds with no additional premium.

D 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.

The provision which states that both the policy and a copy of the application form the contract between the policyowner and the insurer is called the A Total contract. B Aleatory contract. C Complete contract. D Entire contract.

D The policy, together with the attached application, constitutes the entire contract. This provision limits the use of evidence other than the contract and the attached application in a test of the contract's validity. This is a mandatory provision in life insurance.

What type of account will most likely be established for a minor? A Annuity B Credit life C Estate planning D Trust

D Trusts are commonly established for minors, or to create a scholarship fund.

Who can make changes to the policy once it is in effect? A An executive officer of the insurer B The insured C The policyowner D The agent

A Any changes made to a policy must be endorsed and attached to the policy over the signature of an authorized officer of that insurer. No other individual has the authority to make changes or waive policy provisions.

The Ownership provision entitles the policyowner to do all of the following EXCEPT A Assign the policy. B Designate a beneficiary. C Set premium rates. D Receive a policy loan.

C The insurer sets premium rates based upon underwriting considerations.