Section 1 Quiz - Life Insurance
Which of the following is an example of a Limited Pay Life policy?
B. There are two basic types of Life Insurance: Whole Life and Term. Limited Pay Life policies, such as LP65 and 20-Pay Life, are variations of Whole Life (sometimes called Straight Life or Ordinary Life): the premium paying period has been shortened, but the policy still does not mature until age 100
Which of the following contracts requires that a series of benefit payments be made a specified intervals?
B When an Annuity policy is in the Pay-Out period, it will pay the annuitant back all the monies the annuitant paid in, plus interest, over his lifetime. The principal amount is guaranteed and will be paid out as long as the annuitant lives. The amount paid is based upon the annuitant's expected life span, sex, and the annuity pay out option selected. Annuity benefit payments to the annuitant are usually paid monthly. Insurance companies offer Annuities to the beneficiaries of insureds who have dies, enabling these beneficiaries to reinvest the policy proceed with a high degree of safety and the guarantee of lifetime income.
A life insurance policy whose cash value will fluctuate depending upon the performance of a separate account is:
D Variable Life has no guaranteed rate of return since its performance is tied to an underlying separate account, which is very similar to a mutual fund. However, variable life does have a minimum guaranteed death benefit, which will never be less than the amount of coverage initially purchased. A securities license is required.
Which of the following policies provides the greatest amount of protection for an insured's premium dollar as well as some cash accumulation?
D. If this question had not mentioned cash accumulation, the answer would have been Term. However, Term has no cash value, so the answer is Whole Life, which is the most inexpensive type of permanent insurance and is required to have a cash value after the third policy year. Although Limited Pay Life is a type of Whole Life, it is incorrect since it is usually quite expensive due to the shortened pay in period. Annuities have no cash value except those monies the annuitant paid in. Since there is no death benefit, no protection is offered.
John Livingston owns a 30- Pay Life policy that he purchased at age of 30. The cash value will equal the face amount of the policy when he reaches the age of:
D. 100 Limited Pay life insurance policies such as Life Paid Up at 65 or 20- pay Life are simply variations of Whole Life polices. The cash value will equal face amount of the policy (at least) at the maturity of the policy, which is always age 100 on Whole Life policies. These limited-pay policies are designed so that the insured may pay his or her premiums faster and be "paid up" at a certain age. However, just because the premiums are paid up doesn't mean the policy has matured.
At age 30, Tom Morris wishes to purchases a Whole Life policy. His producer explains that he can pay for the policy in several ways. One method is called 20-Pay Life, and another, Straight Life. Tom wishes to know which plan will accumulate cash value at a faster rate in the early years of policy. Which of the following would be the producers most appropriate response?
B. "20-Pay Life will accumulate cash value faster." You can simply remember this truism: The shorter the premium-paying period, the more expensive the premiums and the faster the cash value builds. Since all the polices mentioned are forms of Whole Life, reaching their maturity at age 100, the only thing different is the premium paying period. A 20-Pay Life requires that all the premiums be paid within 20 years from the day it is purchased. A straight (or Ordinary) Whole Life policy requires the premiums to be paid to age 100. If Tom is now 30, the assumption is that he would have to pay premium to age 100, or 70 years. Obviously, 20-Pay Life, which would require the premiums to be paid in over three times as fast, would be much more expensive and would also build cash value much faster.
A business owner with a fluctuating income who wants a life insurance policy that can be changed to suit economic conditions should buy:
A Adjustable Whole Life insurance is sold to persons who have fluctuating incomes, such as stock brokers or real estate agents. It allows the insured to adjust the amount of the death benefit, the amount of the premium or even the type of coverage as their needs change. Increases in the death benefit may require the insured to pass a physical exam.
Which of the following individual policy conversions is usually permitted without any evidence of insurability?
A The Conversion privilege is simply a marketing tool that allows insureds who buy Term Insurance to convert to Whole Life without proving continued good health. Without this privilege, few would but Term Insurance. You cannot convert Term to Term or convert to a higher or lower face amount, and you cannot convert Whole Life to Term.
A 45 year old customer who is seeking to supplement his retirement income at age 65 would not buy a:
B An immediate annuity has no accumulation period. For example, if Aunt Mary died and left you 1 million dollars, you could buy an immediate annuity and start to receive monthly payments rights away for as long as you may live. On a deferred annuity, you would pay money in now, but take it out later, perhaps at retirement. Immediate annuities are often used to fund sate lottery payouts.
Which of the following statements about a Renewable Term policy is true?
B. If most Term policies (except Decreasing Term) were not renewable, no one would buy them. This option allows the insured to renew the policy for another "term" without proving good health. Of course, the insured does not have to renew, it is at his option. Annual Renewable Term (ART) is a good example. It must be renewed every year. The rate goes up as the insured gets older, but no proof of good health is required. However, most Term policies are renewable only up to a certain age usually age 60 or 65, depending on the company.
In order to sell variable life insurance you must be registered with which of the following?
C In order to sell variable policies you must not only have your life insurance license, but also either a Series 6 license (mutual funds and variable products) or your series 7 (stockbroker's license). In order to get your series 6 and series 7 you must be registered with the NASD (National Association of Securities Dealers). The NASD is now known as FINRA (Financial Industry Regulatory Authority). You may see the term NASD and/or FINRA on your exam.
Which of the following is NOT correct regarding Ordinary Whole Life policies?
D An ordinary Whole Life (also known as Straight Whole Life) is a type of permanent insurance. Coverage last until you die, or until reach age 100. Premiums are owed annually. A Limited Pay Whole Life policy would have the cash value to grow more quickly in the beginning years of the policy.
Sandra Timms, age 27, is advised by her producer to purchase Life insurance to cover a 20 year amortized $50,000 business improvement loan. Which of the following plans would adequately protect Ms. Timms at the minimum premium outlay?
D The key here is "minimum premium". Term is the most inexpensive type of coverage. Since Sandra's $50,000 loan will be paid off over 20 years and the loan balance will decrease each year, Decreasing Term makes sense. Decreasing Term is not renewable.
If a person wants to invest a lump sum in an annuity that may appreciate along with market and economic conditions, they should buy a:
D Variable Annuities are considered to be securities, since the insurer invests the customer's premiums in an underlying separate account', which is very similar to a mutual fund. Most mutual funds invest in common stock, which may keep up with the rate of inflation over a period of time, although rates of return may not be guaranteed.
A life insurance policy that combines term insurance protection, a flexible premium, and cash value accumulation is:
A The protection portion of a Universal Life insurance policy is actually Term insurance. As a result, the cost of protection goes up gradually as the insured ages, which means that over a period of time, more of the premium paid will be allocated to the cost of mortality and less will be allocated to the cash value account. The flexible premium feature of a UL policy allows the insured to skip premiums as long as there is adequate cash value available to pay for the cost of insurance protection.
Most Term Life insurance:
B Most Term Life is both renewable and convertible. Insureds may renew without a physical exam up to a certain age, as specified in the policy (often age 65). Most Term is also convertible to Whole Life without a physical exam based upon current age. Since the Whole Life costs more than Term, premiums will go up upon conversion. However, you cannot convert Whole Life to Term.
A life insurance policy that covers two parties, but only pays when the last party dies is known as:
C Survivorship Life insurance, also known as a last to dies policy, covers two insureds, but only pays when the last party dies. It is often purchased to pay estate taxes, which are due when the last spouse dies. However, although Joint life insurance also covers two insureds, the death benefit is payable upon the death of the first party.
If a client wants cash value life insurance with a flexible premium and an adjustable death benefit that will allow the policy owner a choice of various cash value investment options, he should buy:
A Variable Life has a fixed premium and a minimum guaranteed death benefit, but since it allows customers to self direct their cash value into several non guaranteed sub accounts, it is considered to be a securities product which requires the producer to have both a state life insurance licenses and a federal securities license. Although Universal Life (also known as Interest Sensitive' Whole Life) is not considered to be a security, it does offer current rate of return, flexible premiums and adjustable death benefits. If you combine the two products, you have Variable/Universal Life, which offers the best features of both contracts.
An insurance producer selling a Variable Annuity whose cash value depends on the performance of an underlying investment account must be registered with:
D Producers selling Variable Life and Variable Annuities must have a state life insurance license plus a federal securities license (Series 6 or 7), which are now issued by FINRA, formerly known as the National Association of Securities Dealers (NASD).
Which of the following types of insurance policies would provide the greatest amount of protection for a temporary period during which an insured will have limited financial resources?
A. The word "term" means time. Time is temporary. A Term policy, since it is the most inexpensive type of insurance, would provide an applicant the greatest amount of protection (face amount) on a temporary basis. However, in the long run, Term may be the most expensive type of insurane.
You have a client that is a real estate agent. Which of the following types of permanent protection is best for this type of client?
C. Adjustable Whole Life is sold to clients with fluctuating incomes. A real estate agent is a perfect client for this type of policy.
Which of the following is an example of a Limited Pay Life policy?
Limited pay policies are just like Ordinary (or Straight) Whole Life, except the premiums are paid faster. The faster the premiums are paid, the faster the cash value will build. There are two main types of life insurance: Whole Life (which includes both traditional and limited pay) and Term.
Which of the following statements is true about the premium payment schedule for a Whole Life policy?
A Whole life insurance assumes that the insured will pay the premiums until he dies or until age 100, whichever comes first. If the insured is still alive at age 100, the policy will reach maturity and pay the insured the face amount or cash value, whichever is more. This is because the insurance company's Mortality Table states that everyone has dies by their 100th birthday. An insured, who would like to retire at age 65, keeping his Life insurance in force but discontinuing premium payments, should consider buying an LP65, which is a Whole Life policy with a limited payment period. Of course, the shorter the premium paying period, the higher the premium.
An Annuity is designed to provide which of the following financial features?
A. Life insurance proceeds create an estate. Annuities are designed to liquidate an estate over a period of time with a high degree of safety. They are the opposite of Life insurance, in that you do not have to be in good health to buy one and they pay you as long as you live. All annuities are for the lifetime of the annuitant; they do not have a death benefit. You must have a life insurance license to sell Fixed Annuities, which have a guaranteed minimum rate of return. To sell Variable, you need both a life insurance license and a FINRA (NASD) securities licenses. Variable Annuities are backed by stocks. Interest, paid by insurance companies on Annuities, accumulates on a tax-deferred basis and is not taxable until the money is withdrawn.