Chapter 3 (Exam Prep)

The nonguaranteed elements of an insurance policy are:

A In the field of insurance, illustrations are defined as depictions that explain the complex and nonguaranteed aspects of a policy.

An applicant does not have insurable interst in who:

cousins, in-laws, and similiary distant kinships

The cash value in variable contracts cannot be guaranteed. TRUE OR FALSE

TRUEEE

The third party that purchases a life insurance policy death benefit from a terminally ill insured is termed:

Viatical settlement provider (purchase chronically or terminally ill insureds' life insurance policies)

What are the three categories of insurable interest in life insurance?

A person's life lives of spouse/relatives business or financial relationships

Which of the following is not a characteristic of qualified plans? Select one: a. Plans cannot discriminate in favor of highly paid individuals. b. Employee contributions are not tax-deductible. c. Employer contributions are tax-deductible as a business expense. d. Interest earned is tax-deferred.

B Employee contributions to a qualified plan are made with pre-tax dollars.

Life insurance policy illustrations must contain all of the following, EXCEPT: a. Agent's name b. Only the guaranteed policy elements c. Generic name of policy d. Insured's age and sex

Answer B Life insurance policy illustrations depict the nonguaranteed policy elements.

Viatical Settlements

As the owner of the viator's life insurance policy, the viatical settlement provider pays the premiums and will receive the full death benefit, not subject to income tax, when the viator dies. Viatical producers and brokers sell viatical settlements. Viatical producers work for and represent viatical settlement providers. Viatical brokers work for and represent viators.

Life insurance premiums are based on the annual cost of coverage for each $1,000 of face amount.

Assume a woman purchases a $100,000 life insurance policy at the age of 40 and is rated at $23.78. This means that for each $1,000 of coverage the woman is charged $23.78 per year. Her annual premium is $2,378 ($23.78 x 100 = $2,378).

Which of the following does not constitute policy replacement? Life insurance coverage that is converted to reduced paid-up coverage b. Life insurance coverage in which a loan is not repaid to the insurer c. Life insurance coverage that is terminated d. Life insurance coverage that is lapsed

B. As long as there is enough cash value in the policy to pay the cost of premiums, then a policy loan does not constitute replaced coverage.

Required Retirement Plans need what to qualify?

Be approved by the IRS Be established for the exclusive benefit of the employees and/or their beneficiaries Cannot discriminate in favor of highly-paid employees, officers, or stockholders Be in writing and communicated to the employees in writing Explicitly define the plan's contributions or benefits Be permanent Meet vesting and benefit requirements

Business Uses of Life Insurance

Buy Sell Funding: used to assure the ownership of the business is properly transferred upon the death or disability of an owner or partner. Key Person Insurance: prevent the financial loss that may ensue when an owner, officer or manager dies.---prevent the financial loss that may ensue when an owner, officer or manager dies. Employee Benefit Plans: incentive to join and remain with the company long-term.

What are the rules of illustrations for advertiszing insurance policies!!!

Clear label indicating the document is a life insurance illustration Insurer's name Producer's name and address Insured's name, age, and sex Date of illustration Generic name of policy Company name of policy, if applicable Form number Any dividend options or nonguaranteed elements

Advantages of Qualified Plans

Contributions made by the employer are tax-deductible and are not treated as taxable income for the employee. Interest on the contributions grows tax-deferred. Distributions are taxed, both principal and interest, because neither the contributions nor interest was previously taxed. Tax-deferral is an advantageous benefit in retirement plans because plan participants are usually in a lower tax bracket upon retirement, so income tax from a qualified retirement plan is lower than if the contributions were made with taxed dollars.

Why would a creditor take out life insurance?

Creditors may take out life insurance policies on the lives of their debtors in the amount of the debt, with the debtors' consent. As the debt is paid off, the creditor's amount of life insurance on the debtor is reduced.

All of the following are characteristics of qualified retirement plans, EXCEPT: Select one: a. Employer's contributions are tax-deductible as a business expense. b. Employee contributions are made with pretax dollars. c. Contributions are not taxed until withdrawn. d. There are two types of qualified plans.

D

Which of the following would not be used to determine the premium rate for a life insurance policy? Select one: a. Mortality b. Interest earnings c. Loading d. Morbidity

D Morbidity describes the rate at which illness occurs, and is used to calculate health insurance premiums. Mortality describes the rate at which a specific population dies, and is used to calculate life insurance premiums. The correct answer is: Morbidity

Angela took out a $2,000 policy loan from her whole life insurance policy. The policy face amount is $200,000. If Angela does not repay the loan, how will the death benefit be affected? Select one: a. The death benefit will be increased by $2,000. b. The death benefit will be decreased by $2,000. c. The death benefit will remain the same. d. The death benefit will be decreased by $2,000 plus interest.

D If a loan is not paid back before the insured dies, the amount of the policy loan plus interest will be deducted from the policy face amount. Angela's beneficiary will receive $198,000 minus interest on the $2,000 policy loan.

A life insurance policy summary includes all of the following, EXCEPT: Select one: a. The insurance agent's name b. Policy premium amounts c. Policy loan interest rates d. Policy illustrations

D Policy illustrations are the nonguaranteed elements of a policy and are not part of the policy summary.

All of the following are considered minimum information that must be on a life insurance illustration, EXCEPT: Select one: a. Form number b. Dividend options, if any c. Nonguaranteed elements, if any d. Insured's marital status

D. While life insurance illustrations require the insured's name, age and sex, the insured's marital status is not to be on the policy illustration.

What are the three income periods?

Dependency period preretirement period (children no longer dependent) retirement period (The surviving spouse no longer earns income. Retirement benefits start)

Charachterize non-qualified retirement plans

Employer's contributions are tax-deductible as a business expense. Employee contributions are made with pretax dollars - contributions are not taxed until withdrawn. Interest earned on contributions is tax-deferred until withdrawn upon retirement.

qualified

Employer's contributions are tax-deductible as a business expense. Employee contributions are made with pretax dollars - contributions are not taxed until withdrawn. Interest earned on contributions is tax-deferred until withdrawn upon retirement.

conversion to individual policy

Evidence of insurability cannot be required upon conversion. The individual whole life premiums will be determined based upon the insured's attained age, and the face amount will be the same as was provided under the group policy. The premium is likely to be higher.

What are the four pieces of info needed to determine the proper amount of personal life insurance:

Expenses Maintenance income Debts/mortgages Dependent children's education.

Exceptions to Taxation on premiums!!!

Here are the exceptions to these rules: Premiums used for a charity are tax-deductible. Life insurance premiums paid by an ex-spouse as court-ordered alimony are tax-deductible. Employer-paid premiums used to fund group life insurance for the benefit of employees are tax-deductible.

What are the two ways to determing the amounf of life insurance an individual might need?

Human Life Value Approach (ased on the financial loss a family would experience if a wage earner died. The human life value approach calculates the amount of money a person is expected to earn over their lifetime to determine the face amount of life insurance needed, thereby placing a dollar value on the life of an individual.) To determine value:n The insured's age, Net annual salary, Number of remaining working years, Annual expenses, and The rate at which the dollar depreciates. The Needs Approach: the amount of money a family needs immediately upon the death of the insured to pay for their expenses and basic necessities. The needs approach may be more appropriate for families with two income earners.

In pariticipating life insurance policies...

Policyholders can choose what form they want to receive their dividend: Cash, Accumulate with interest, Purchase more coverage, Reduce premium, Pay up policy or Purchase one-year term insurance.

Taxation of Group Life Policies!!!

Premiums for group life insurance paid by the employee are not tax-deductible, but the employer can deduct premiums it pays as a business expense. Proceeds from a group life policy are tax-free, if taken in a lump sum. Proceeds taken in installments will be subject to taxes on the interest portion of the installments.

Taxation of premiums

Premiums paid on individual life insurance policies are generally not deductible. Premiums for life insurance used for business purposes are generally not tax-deductible either.

Group Insurance

Individuals are not issued their own policy; instead, a master policy is issued to the organization sponsoring the insurance. Each individual member of the group is issued a certificate of insurance. Group life insurance must be issued to all members under nondiscriminatory rules. Each individual is issued the same amount of coverage and at the same rate. Members have the right to convert group life insurance to individual coverage upon leaving the group. Group Insurance provides a mechanism for reducing administrative costs.

Insureres expenses are called...loading

Loading is comprised of the following costs: Acquisition costs: cost of effectuating insurance policies, of which a producer's first year commission makes up the greatest portion Overhead: insurer's salaried staff, rent, and furniture Contingency funds: additional premium may be required if original premium is insufficient - only some insurers (i.e., assessment mutuals) have the right to charge additional premium Immediate claims payments: insurers assume that all claims are paid at the end of the year when establishing rates, when in reality claims are paid all year

Net Single Premium = Mortality - Interest Gross Annual Premium = Mortality - Interest + Expenses

Net Single Premium The amount needed to fund the entire life insurance benefit. This is the amount if the insured were to only pay one premium. Since it is calculated based on one premium, the expenses are not used as a factor. The amount a policy owner actually pays for the policy.

Why get Life Insurance?

Survivor Protection, Estate Creation, Cash Accumulation-(some life insurance policies accrue cash value which is said to have living benefits---for funding collge, save for retirement, purchasing home), Liquidity (insured may borrow any amount up to the cash value in the policy whenever needed as long as the policy provides for cash values), Estate Conservation, Viatical Settlements (A terminally or chronically ill insured can sell their life insurance policy to a third party in exchange for payment of a large portion of the death benefit.), Charity

Define term policies

Term policies strictly provide life insurance protection (a death benefit) and do not accrue cash value.

Social Security Blackout Period

The blackout period is the time during which a surviving spouse is ineligible to receive Social Security Survivors benefits. This period occurs once an unmarried child reaches the age of 16, and until the age of 18 or 19, if attending high school full time. Social Security benefits are paid to the child, not the widow. At the earliest, the blackout period ends when the surviving spouse reaches the age of 60. Regardless of age, if a dependent child is disabled, the surviving spouse may be eligible to receive Social Security Survivors benefits.

Conversion Period

The conversion option must be exercised during the conversion period, and the individual is covered under the group policy throughout the conversion period. The conversion period is limited to a maximum of 60 days from the date of group coverage termination. If the individual is not made aware of their conversion rights, then a 15-day extension period is granted to convert the coverage. If the individual dies during the conversion period, the full death benefit will be paid by the insurer, regardless of whether the application for individual coverage was submitted.

WHat must a policy summary include?

The name and address of the insurer, The name and address of the agent, The policy's generic name, A list of all the policy riders, Premiums, Dividends, Benefits, Cost indexes, Cash surrender values, and Policy loan interest rates.

However, distributions made for the following reasons are not subject to the early distribution penalty tax: The plan participant dies or incurs a disability A loan is taken from the plan Distribution made as part of a divorce decree Level payments made at least annually to the participant over their life Distribution made as a qualified rollover

Tom has a qualified plan in which he must withdraw $3,000 per month upon reaching age 70½. The penalty amount for a $2,000 withdrawal is half of the difference between the amount withdrawn and the required amount. $3,000 - $2,000 = $1,000 $1,000 ÷ 2 = $500 Tom's penalty is $500.

Describe key person insurance

With key person insurance, the company purchases, pays the premiums and is the beneficiary of the life insurance policy on the key person.

What type of group plan requires 75% participation? Select one: a. Contributory b. Noncontributory c. Consideration d. Contributing

a

A nonqualified plan: Select one: a. Permits discrimination in favor of certain employees. b. Must be approved by the IRS. c. Has tax-deductible contributions. d. Does not have tax-deferred interest.

a Nonqualified plans are characterized by the following: do not need to be approved by the IRS, can discriminate in favor of certain employees, contributions are not tax-deductible, and interest earned on contributions is tax-deferred until withdrawn upon retirement.

Which of the following statements is false regarding the conversion option for group life insurance policies? Select one: a. Converted coverage may be term or whole life, depending on the needs of the insured. b. The insured must receive a notice of their right to convert. c. The face amount of the converted coverage may be no more than that under the group coverage. d. Coverage during the conversion period is provided by the group policy.

a The converted coverage must be whole life.

What are the two terms used to describe whether or not special federal tax benefits apply to retirement plans? Select one: a. Qualified; nonqualified b. Advantaged; disadvantaged c. Favorable; unfavorable d. None of the above

a The federal government distinguishes qualified plans as those offering special tax benefits. Nonqualified plans are those which do not offer special federal tax benefits.

For replacement transactions, an insurance producer's duties include all of the following, EXCEPT:

a. Notify existing insurers of policies to be replaced b. Provide the applicant with a policy cost comparison statement c. Make a list of all existing policies the applicant intends to replace d. Leave a notice regarding replacement with the applicant A. The insurer is responsible for notifying existing insurers of policies to be replaced.

What type of group plan requires 100% participation? Select one: a. Contributory b. Noncontributory c. Consideration d. Contributing

b

Maggie incurred a 10% penalty to distributions from her qualified plan because they were made before she turned: Select one: a. 55 1/2 b. 59 1/2 c. 62 d. 65

b A 10% penalty tax is applied to distributions made from a qualified plan prior to the plan participant reaching the age of 59 1/2.

What happens if Becky takes her distributions from her qualified plan prior to age 59 1/2? Select one: a. The plan is cancelled and all cash accumulation in the plan is forfeited. b. A 10% penalty tax is assessed. c. Distributions cannot be made for one year. d. She loses her accrued interest.

b If distributions from a qualified plan are made prior to the age of 59 1/2, then a 10% penalty tax is imposed.

Serena dies 15 days after her group life insurance coverage is terminated. She did not apply for individual coverage. Which of the following is true? Select one: a. Serena's beneficiary will receive 50% of the death benefit. b. Serena's beneficiary will receive the full death benefit. c. Serena's beneficiary will receive the death benefit minus the initial premium for the converted coverage. d. Serena's beneficiary will not receive the death benefit because Serena's group coverage was terminated.

b The insured is covered under the group policy during the conversion period. The full death benefit will be paid to Serena's beneficiary.

All of the following are true regarding viatical settlements, EXCEPT: Select one: a. A terminally or chronically ill insured can sell their life insurance policy to a third party in exchange for payment of a large portion of the death benefit. b. Viatical settlements are a type of life insurance contract. c. In a viatical settlement, the third party that purchases the insured's life insurance policy is termed the viatical settlement provider, and the insured is termed the viator. d. The portion of the death benefit the viator receives in a viatical settlement ranges from 50 to 80 percent of the death benefit.

b. Viatical settlements are a type of life insurance contract. Viatical settlements are completely separate from life insurance contracts.

All of the following are true regarding claims for life insurance policies, EXCEPT: Select one: a. The only claim in a life insurance policy is the insured's death. b. Upon the insured's death, the policy proceeds are paid to the beneficiary. c. In order for death benefits to be paid, the insurer must receive notice of the insured's death, but does not need the death certificate. d. Life insurance claims are typically paid within a few days of the insured's death, but the insurer may have up to 60 days to pay claims.

c Prior to paying the proceeds, the insurer must receive proof of the insured's death (the death certificate). Upon receipt of the death certificate, the insurer will verify that the policy was in force when the insured died, whether or not the suicide clause applies, and that the proceeds are paid to the stated beneficiaries.

Mildred is age 58. She withdraws a sum of money from her qualified plan. What is the penalty? Select one: a. 2% penalty tax b. 5% penalty tax c. 10% penalty tax d. 20% penalty tax

c A 10% penalty tax is applied to distributions made from a qualified plan prior to the plan participant reaching the age of 59 1/2.

All of the following are characteristics of qualified retirement plans, EXCEPT: Select one: a. Contributions made by the employer are tax-deductible as a business expense. b. Interest earned on the investment is tax-deferred until funds are withdrawn. c. Contributions are not tax-deductible for the employee. d. Plans are non-discriminatory.

c Employee contributions to a qualified plan are made with pre-tax dollars

Tim's Toy Shop has gone bankrupt and needs to terminate all employees. Tim informs all employees of their right of conversion under the employer-sponsored group life plan. How many days are Tim's employees allotted to convert their group life coverage to individual coverage? Select one: a. 10 days b. 15 days c. 31 days d. 60 days

c The conversion period is 31 days after termination from group coverage. This means the individual must apply for individual coverage within 31 days after the date of group coverage termination. The extension does not apply because Tim notified his employees of the conversion right.

Comparative Interest Rate Method

calculates an interest rate that must be earned in a side fund of a buy term and invest the difference, in order for the value of the side fund to be equivalent to the surrender value of the policy that has the higher premium at a specific time. This interest rate is called the comparative interest rate or CIR. As the CIR increases, the policy with the higher premium is actually lower in cost compared to the lower-premium policy.

what do permanent life insurance policies have?

cash value!

Conversion from a group policy to an individual policy must be made within a maximum of how many days of termination from the group coverage? Select one: a. 15 b. 30 c. 45 d. 60

d

If Becky wants to take a distribution from her qualified retirement plan, she should know that distributions can be made: Select one: a. Only upon retirement. b. Only after age 59 1/2 c. Only after age 70 1/2 d. At any time.

d Distributions from a qualified retirement plan may be made regardless of age when an employee retires, the employee ceases employment, or the plan is terminated. However, if distributions from a qualified plan are made prior to the age of 59 , then a 10% penalty tax is imposed.

Jacob has been insured under his employer-sponsored group life insurance plan for seven years. He becomes totally disabled upon termination of his group coverage. Which of the following is true? Select one: a. Jacob has 10 days to convert his policy after the date of termination from group coverage. b. Jacob has 20 days to convert his policy after the date of termination from group coverage. c. Jacob may only continue his coverage through OBRA. d. Jacob must be permitted to continue group coverage for six months.

d Group members who become totally disabled will be allowed to continue their group coverage for a maximum of six months after the onset of the total disability. The premium will not change.

All of the following are true regarding purchase of personal life insurance for charity, EXCEPT: Select one: a. Coverage is taken out on the life of the person buying the policy. b. The charity is named as the beneficiary. c. The person buying the policy pays the premiums, which are usually tax-deductible. d. The person purchasing life insurance for charity must have insurable interest in the lives of the charity's members.

d. The person purchasing life insurance for charity must have insurable interest in the lives of the charity's members. Life insurance may be purchased for charitable reasons. To make life insurance a charitable gift, a person purchases life insurance on themself and names the charity as beneficiary. In most cases, the insured's premium payments are tax deductible.

non-qualified

do not have the tax advantages of qualified plans. Nonqualified plans permit employers to offer retirement plans only to their key employees. examples) Split dollar plans, Deferred compensation, and Executive bonus plans. personal savings account or an individual deferred annuity.

What are the differences between group life?

do not have to provide evidence of insurability, are not issued individual policies, and do not own the contract.

Members insured under the group plan are not party to the contract, only the insurance company and the group entity are.

each member insured receives a CERTIFICATE OF INSURANCE

What do Fixed life insurance policies and fixed annuities earn?

earn a constant rate of interest, thereby providing a guaranteed minimum of benefits. The cash value in fixed policies is guaranteed.

Master Policy Cancellation

ndividual member who has been insured under the group contract for at least five years is permitted to convert the group coverage to individual whole life coverage. The converted coverage will have a face value at least equivalent to that provided under the group policy, less the amount of any new coverage purchased during the conversion period, or $10,000, whichever is less. Individuals must apply for policy conversion within one month of the master policy cancellation.

Qualified = Nonqualified =

tax benefits no tax benefits