Chapter 3 Unknowns
Jason has a Whole Life insurance policy with a face amount of $100,000, an annual premium of $1,000, and a cash value of $10,000. If he wants to borrow money from the insurer, what is the maximum he can obtain? The sum of the premiums paid up to that point in time $10,000 $90,000 $100,000
$10,000 (When using a whole life policy for collateral for a loan from the insurer, the maximum amount of that loan is the amount of cash value in the policy.)
An insured purchases a 20-Pay Life Policy with a face amount of $25,000 and an annual premium of $1,000. The insured dies 15 years later when the cash value is $5,000. What amount will the beneficiary receive? $15,000 $25,000 $20,000 $30,000
$25,000 (the beneficiary receives the death benefit of $25,000)
Which of the following traditional whole life policies has the highest first-year annual premium, all other factors being equal? A. 20-pay life B. 10-pay life C. 40-pay life D. 30-pay life
10-pay life The shorter the premium paying period, the higher the premium. A Limited Pay Life policy of 10 years would have a higher premium than a 20-pay, 30-pay, or 40-pay life policy.
What is the typical time limit on life expectancy for a Viatical Settlement candidate? 4 years 3 years 5 years 2 years
2 years (or less)
Which of the following term life insurance policies would have the lowest 1st-year annual premium, all other factors being equal? A - 1-year B - 5-year C - 10-year D - 15-year
A - 1-year The 1-year term life insurance policy would have the lowest first-year premium of the choices provided. In essence, one year of coverage is less risky to the insurer than being locked in to more years.
Joe has a whole life policy with a guaranteed insurability rider. He was 21 at the time the policy was issued. If he exercises all of the options at the ages specified under the typical rider, how many policies will he end up with? A - 7 B - 3 C - 6 D - 2
A - 7 Under the typical guaranteed insurability rider, Joe would have options to buy additional policies of the same type and face amount at ages 25, 28, 31, 34, 37, and 40, therefore he would buy 6 more to bring his total policies owned to 7.
How much of a cash value policy loan will an insurer normally grant with a variable type policy? A - 75-90% B - 50-75% C - 100% D - 80-90%
A - 75-90% Policy loans are available from either the general account or the separate account. Typically 75-90% of the cash value can be borrowed against.
Which of the following term life insurance policies cannot be renewed? A - Decreasing B - Level C - Increasing D - Re-entry
A - Decreasing Decreasing term follows the debt repayment schedule and once the debt has been paid off the policy ends, therefore it cannot be renewed.
Which of the following term policies cost the least all other factors being the same? A - Nonrenewable and non-convertible B - Renewable and convertible C - Renewable and non-convertible D - Nonrenewable and convertible
A - Nonrenewable and non-convertible The fewer features a policy has the less it will cost the consumer.
In the event a parent becomes disabled or dies while paying premiums on a life insurance policy for a minor child, which provision would allow the policy to continue in force until the child reaches a predetermined age? A - Payor Benefit (Waiver of Payor Premium) B - Minor Child Rider C - Return of Premium Rider D - Cost of Premium Rider
A - Payor Benefit (Waiver of Payor Premium) A Payor benefit rider waives the policy premium in the event of the death or total disability of the premium payor. Usually found in policies covering children to the child's age 21 or 25.
An insured owns a $50,000 permanent life policy that she purchased 4 years ago that has a disability waiver of premium. The insured becomes disabled and pays premiums during the waiting period until the waiver begins. Once the waiver begins, what happens to the premiums she paid during the waiting period? A - The insurer refunds it B - It is added to the policy's cash values C - It is kept by the insurer as part of the cost of providing the benefit D - It is held in escrow until the disability is over then refunded
A - The insurer refunds it Once the waiver of premium takes effect, it is retroactive to the date of the disability. The insurer refunds the premiums paid during the waiting period essentially recognizing the fact that the disability was covered from the first day.
All of the following are correct pertaining to Decreasing Term, except: A - The premium declines throughout the term of the policy B - Its most common use is in credit life insurance C - The death benefit decreases D - The premium stays level
A - The premium declines throughout the term of the policy A decreasing term policy has a death benefit that reduces over a defined number of years, but the premium remains the same in all years.
How would a term policy normally be used to pay off a mortgage upon death? A - Using the death proceeds after the insured has died B - By using the policy as collateral for a policy loan C - Through a viatical or life settlement D - By using the policy's cash values
A - Using the death proceeds after the insured has died Term can be used as mortgage insurance which typically provides a decreasing term benefit.
First-to-die and last-to-die life insurance policies have in common all of the following, EXCEPT: A. They both continue in force after one of the named insureds dies B. They are both issued by an insurance company C. They both require premiums to be paid on time D. Generally they cover the lives of two people, typically husband and wife
A. They both continue in force after one of the named insureds dies With first-to-die, the policy ends with a death claim after the first insured dies. With last-to-die, the policy remains in force until the last named insured dies.
If Jon dies with an outstanding policy loan of $10,000 on his $100,000 policy that has $15,000 of cash value, what will his beneficiary receive at the time of claim? A - $115,000 B - $90,000 C - $100,000 D - $105,000
B - $90,000 Upon death, the insurance company recovers any outstanding loan prior to paying out a claim to the beneficiary.
What is the name of the rider (benefit) that, in the event of a claim, the policy normally pays double or triple the face amount if death was a result of an accident. A - Occupational B - Accidental Death C - Auto Insurance D - Additional Indemnity
B - Accidental Death Accidental Death Benefit (Double or Triple Indemnity) is a benefit that is payable only if death occurs before a specific age and within 90 days of the accident. It does not add any additional values to the base policy.
All of the following are true of a Universal Life policy, except: A - It allows the owner to make additional contributions that increase the cash value or skip some premiums if the owner desires to do so B - Any borrowing or partial withdrawal from the cash value account terminates the policy C - Adjustments to the face amount may be requested by the policyowner to reflect changes in need D - The cash value account earns interest at the current rate with a guaranteed minimum rate established
B - Any borrowing or partial withdrawal from the cash value account terminates the policy Any borrowing or partial withdrawal from the cash value would not terminate the policy. However, loans might reduce the interest amount credited to the cash value as well as reducing the overall payout upon death to the beneficiary.
A married couple wants to have funds available so that the heirs to their estate have the funds necessary to pay the estate taxes. Which of the following would be the most economical and effective way to accomplish this? A - Buy a Whole Life policy on each spouse B - Buy a Joint Survivorship Life policy C - Have one spouse buy a whole life policy and the other one a Universal Life policy D - Buy a Joint Life policy
B - Buy a Joint Survivorship Life policy Joint Survivorship Life pays upon the death of the last to die, and for this reason it is a popular policy with couples who want to defer estate taxes until both are deceased. It is also more economical to buy this one policy than to buy two separate policies.
Which of these best describes a disability income rider? A - Provides for double the face amount if the insured is disabled and has no income B - Pays a percentage of the death benefit as monthly income to the insured when totally disabled C - Automatically creates an unlimited loan fund in the amount of the death benefit, secured by the cash value, when an insured is totally disabled D - Pays a percentage of the annual premiums as monthly income to the insured if they are totally disabled
B - Pays a percentage of the death benefit as monthly income to the insured when totally disabled
What does a long-term care rider do that a Living Needs (Terminal Illness) rider does not? A - Pays a percentage of the death benefit as monthly income for an insured who cannot perform any 1 of the 6 activities of daily living B - Provides an advance payment of the death benefit for the covered expenses of long term care a chronically ill person may incur C - Provides money equal to a portion of the death benefit to an insured expected to die in the next 2 years D - Establishes a trust fund for the insured's family so that home health care can be paid for with insurance premiums instead of paying the money to the life insurance company
B - Provides an advance payment of the death benefit for the covered expenses of long term care a chronically ill person may incur A long-term care rider provides an advance payment of the death benefit for the covered expenses of long-term care a chronically ill person may incur.
In order to convert a term policy to a permanent policy as of the original issue age, all of the following must occur, except: A - Interest will be charged and have to be paid at the time of conversion B - The cash values will have to be paid out first before the conversion can be effected C - The request for conversion must be made on a timely basis D - Back premiums will have to be paid at the time of conversion
B - The cash values will have to be paid out first before the conversion can be effected If the conversion is as of the issue or original age, back premiums plus interest will be required to be paid at the time of conversion.
All of the following are true regarding re-entry term, except: A. The new policy's premium will be based on the rates in effect by the insurer at the time of re-entry B. The new policy's premium will be based on the insured's original age C. The new policy's premiums will be based on the insured's attained age D. The new policy's premium will be based on the premium class approved by the company
B. The new policy's premium will be based on the insured's original age The new policy's premium will be based on the insured's attained age, the rates in effect by the insurer at the time of re-entry, and the premium class approved by the company
The applicant/insured wants a term life insurance policy that will last for 20 years and understands that the premium can be increased to a new premium level prior to the end of the term, so the producer should show him/her a(n): A - 20 year indeterminate premium term life insurance policy B - 20 year adjustable premium term life insurance policy C - 20 year non-guaranteed level premium term life insurance policy D - 20 year increasing premium term life insurance policy
C - 20 year non-guaranteed level premium term life insurance policy Non-guaranteed level premium has premiums that can be increased to a new premium level for the remainder of the term.
Adjustable life allows the policyowner to do all of the following, except: A - Adjust the premium B - Adjust the death benefit C - Change the insured D - Adjust the premium paying period
C - Change the insured Adjustable life allows policyowners to manipulate the period of protection (to age 100 or shorter), increase or decrease the face amount with insurability, raise or lower the premium amount, and change the length of the premium payment period.
A participating life insurance policy has a long-term care rider. The insured qualifies for the benefit. Where does the initial benefit money come from? A - From the insurance company by policy loan B- From the policy's dividends C - It is an advance of the face amount of the policy D - From the cash values of the policy
C - It is an advance of the face amount of the policy The Long-Term Care Rider's initial benefit is from an advance of the death benefit, after which additional dollars are paid out by the insurer. The amount the insurer is responsible to pay out maximum is determined at the time the rider is acquired. The bigger the benefit the more the rider costs.
Mary decides to convert her Term Policy to permanent protection. Which of the following statements is true regarding the conversion? A - Premiums and the amount of coverage remain the same B - She may convert after proof of insurability C - She may convert without evidence of insurability D - She may convert at any time
C - She may convert without evidence of insurability The Conversion Option of a Term Policy allows conversion to a Permanent Policy without evidence of insurability, but it is not an option that lasts forever. Typically the policyowner must do so within the first 10 years or so, and not after a specified age, such as 60.
What is the 'waiver of premium' called on a Universal Life insurance policy? A - Waiver of flexible premium B - Monthly premium waiver C - Waiver of Cost of Insurance D - Disability premium income
C - Waiver of Cost of Insurance Waiver of Cost of Insurance is a rider that waives the deduction of the monthly cost of insurance and expense charges associated with a Universal Life type policy while the insured is totally disabled, usually after 6 months of continuous disability.
A is the insured under a $100,000 10 year term life insurance policy with her spouse named as her beneficiary. If she dies in year 9, what will her spouse receive? A. The policy's cash value B. Nothing since this is term insurance C. The face amount of the policy D. A refund to all premiums paid
C. The face amount of the policy Since the policy was in force when Angie died, Richard will receive a claim payment equal to the face amount of the policy.
If a consumer would like to make sure that survivors are left with a paid-off car, boat, and home, at an affordable price, what type of policy should he or she consider acquiring at the time each one of those items were purchased? A. Whole life insurance B. Credit life insurance C. Increasing term insurance D. Variable life insurance
Credit life insurance Credit life insurance is used to pay off the outstanding balances of loans. The decreasing term protection is closely matched to the amount of the debt outstanding based on the loan repayment schedule.
A "level term" policy means that the _____________ remains the same throughout the lifetime of the policy. A - Policyowner B - Cash value C - Pure cost of insurance D - Policy proceeds
D - Policy proceeds The policy proceeds are also known as the death benefit or face amount. The name of the policy (level, decreasing or increasing term) specifies what happens to the face amount or policy proceeds. A level term policy means that the policy proceeds remain the same throughout the lifetime of the policy.
Equity Indexed, Variable, and Variable Universal all have which of the following characteristics in common? A - The owner chooses the separate account(s) to invest the cash values in B - All have a guaranteed death benefit C - A securities license is required to sell each policy D - The overall policy performance has something to do with the stock market in general
D - The overall policy performance has something to do with the stock market in general All of these policies do not have a guaranteed death benefit, and the Equity Indexed life policy does not require a securities registration. However, all of them have a death benefit that is somehow tied to the stock market.
How is Variable Whole Life different from Variable Universal Life? A - It is designed to provide a hedge against inflation B - Cash values can be invested in a separate account C - The policyowner takes on all of the investment risk D - The policy has a guaranteed minimum face amount
D - The policy has a guaranteed minimum face amount Generally speaking, Variable Whole Life has a guaranteed minimum death benefit provided that all premiums are paid in full and on time as scheduled, whereas a Variable Universal Life policy has no guaranteed death benefit.
A viatical settlement is made between a purchaser of a person's life insurance policy and ____________________. A - The lender who owns the mortgage on the terminally ill insured's home or business property B - The terminally ill insured person's spouse and children who don't want to wait until the insured dies to collect the death benefit C - The agent representing the family of the terminally ill insured D - The terminally ill insured who must receive at least as much as would be available from the insurance company under any full cash surrender or living needs rider
D - The terminally ill insured who must receive at least as much as would be available from the insurance company under any full cash surrender or living needs rider The viatical life settlement laws which have been adopted by the states are intended to protect a terminally ill person from exploitation. They must not obtain a lesser benefit than they could obtain on their own by taking a loan or cash surrender from their life insurance company or through a living needs provision or rider in their policy.
What happens if a Return of Premium Term policy is not held to the end of term? A - All premiums paid can be 'rolled-over' into an annuity using the IRS Code 1035 exchange rules B - There will be no return of any premium paid C - All premiums paid can be used to offset the first year cost of a traditional whole-life insurance policy D - There will be a nominal return of premiums paid, the amount will depend upon how long the policy was in-force
D - There will be a nominal return of premiums paid, the amount will depend upon how long the policy was in-force A Return of Premium Term policy charges a higher premium than level term insurance with the additional premium providing a nonforfeiture value which will offer a nominal return of premiums paid if the policy is not held to the end of term depending upon how long the policy was in-force.
Which of the following best describes an Annual Renewable Term Policy? A. A policy with decreasing premium at each renewal B. A policy with an increased face value at each renewal C. A policy with increasing cash value at each renewal D. A policy with a level death benefit, but with increased premium at each renewal
D. A policy with a level death benefit, but with increased premium at each renewal Whether the policy period is 1 year, 5 years, 10 years, etc., the premium will increase at each renewal to sustain the same specified death benefit that was purchased when the policy was written. At renewal the premium is based upon attained age.
Level, decreasing and increasing term refer to which policy feature? Premium Renewable and Convertible Death benefit Cash value
Death benefit (the amount paid to a beneficiary upon the death of an insured person)
Ed purchased policies on behalf of his grandchildren. He wanted to be certain they could purchase additional policies at specified ages. He was able to do this by adding which rider? Guaranteed Insurability RiderCost of Living Rider Waiver of Premium Rider Child Rider
Guaranteed Insurability Rider (allows for at future specified dates, ages, or events to WITHOUT evidence of insurability)
Which of the following Whole Life insurance policies has the lowest annual premium payment per $1,000 of coverage for a 35-year-old, all other factors being equal? A. 30-Pay Ordinary Life B. Ordinary Straight Whole Life C. 20-Pay Ordinary Life D. Limited Pay Ordinary Whole to age 85
Ordinary Straight Whole Life - The longer the premium-paying period, the lower the annual premium. A $100,000 Ordinary Straight Whole Life Policy spreads the payments out over a longer period of time than a limited premium payment policy.
Variable Whole Life has all of the following features, except: The owner may select which separate account they want their premium to be invested in The premium is determined by the insurer and remains fixed and level throughout the contract The policy provides for both a general account and a separate account Partial surrender are allowed
Partial surrender are allowed
What is the name of the rider that requires that the premium pay or become totally and permanently disabled before it will pay a claim? A. Payor Benefit (Waiver of Payor's Premium) B. Minor age waiver of premium C. Juvenile Waiver D. Jumping Waiver
Payor Benefit (Waiver of Payor's Premium) - A Payor Benefit (Waiver of Payor's Premium) is a rider most typically available on a juvenile insurance policy. The premium is waived if the premium payor becomes totally disabled or dies prior to the juvenile's reaching the age of majority.
All of the following would be reasons why a policy owner would sell their policy in a life settlement transaction, except: The existing premiums are too high There is no longer a need for the policy There is a need for a different form of life insurance There are no alternative ways to obtain needed cash
There are no alternative ways to obtain needed cash (ways to obtain cash without selling the policy such as using the policy as collateral for a loan from a bank)
