Chapter 4 - Life Policy Provisions & Options

If the policyowner specifies the time over which all settlement option installments are to be paid, he/she has chosen which Settlement Option? A. Fixed Amount B. Extended Term C. Fixed Period D. Life with Period Certain

C. Fixed Period

A life Insurance policyowner receives an annual dividend. One option for this dividend is to use it to offset the annual obligation to the insurer. What is this option called? A. Paid up additions B. Cash C. Cash Surrender D. Premium Reduction

D. Premium Reduction The obligation the policyowner has to the insurer is the premium. Under the Premium Reduction Dividend Option, the dividend payable is used to reduce the current year's premium. Any excess could be used according to the other dividend options.

The interest earned on dividends is: A. Nontaxable B. Tax-deferred C. Taxable D. Tax-deductible

C. Taxable

A client purchases an individual disability income policy and receives the policy from the insurer 45 days after application. Upon receipt of the policy, the client typically has ______days to review and return the policy to receive a full refund for any reason. A. 10 B. 35 C. 45 D. 20

A. 10 The standard Free Look, or Right to Examine provision allows the insured to return the policy for any reason within 10 days after policy delivery.

Which of the following is an example of a collateral assignment? A. A business using a life insurance policy to secure a bank loan B. A parent turning over the juvenile policy to the now adult child C. A corporation signing over a policy on the life of an executive upon their retirement D. A wealthy person signing over a life insurance policy to their irrevocable trust for estate planning purposes

A. A business using a life insurance policy to secure a bank loan A collateral assignment is typically used when an insurance policy is used as collateral for a loan. This is a temporary assignment until the debt is paid in full.

Frank, the owner of a life insurance policy, chooses a Settlement Option whereby the proceeds of his policy will be paid out over 20 years. Frank has chosen: A. Fixed Period B. Fixed Amount C. Life Income Joint and Survivor D. Life Income Period Certain

A. Fixed Period

If a beneficiary has the choice and is interested in capital conservation, then which of the following settlement options should be chosen? A. Interest Only B. Period Certain C. Fixed Amount D. Life Only

A. Interest Only With interest only, the death benefit proceeds may be left with the insurer while interest payments are paid at least annually or more frequently. The principal amount does not decrease. This method of providing income is known as capital conservation.

Burt named Liz as his beneficiary; however, he did not choose a Settlement Option. At the time of his death, who determines the option to be used to receive the benefits? A. Liz the beneficiary determines which option she would like to have B. The insurer decides when the election is not made by the policyowner prior to death C. Burt's estate, since no Settlement Option was chosen D. Lump sum is the automatic option when no option was preselected prior to death of the insured

A. Liz the beneficiary determines which option she would like to have

All of the following are traditional whole life policy nonforfeiture values, except: A. Renewable and convertible features B. Cash surrender values C. Extended term insurance D. Reduced paid-up insurance

A. Renewable and convertible features

All of the following are situations in which the insurer is obligated to pay out a death benefit after the insured has died, except: A. The premiums have not been paid and have been overdue for 3 years B. The insured was an experienced pilot who died in a plane crash but had a policy issued with an aviation rider for an additional premium C. An insured commits suicide 7 years after the policy was issued D. The insurer discovers the gender of the insured was misstated

A. The premiums have not been paid and have been overdue for 3 years The insuring clause states that the policy must be in force. A policy that has overdue premiums unpaid will cause the policy to lapse which means no coverage was in effect.

Paul is the insured and policyowner. Paul named Danny and Kayla as co-primary beneficiaries per stirpes of Paul's $400,000 policy. Danny and Kayla each have 3 children. Danny dies, then Paul dies, so Kayla is entitled to receive $____________. A. $300,000 B. $200,000 C. $400,000 D. $100,000

B. $200,000

Dividend options do not include which of the following choices? A. Refund in cash B. Lifetime income C. Paid-up additional insurance D. Reduce premiums due

B. Lifetime income Income for life is an annuity form of death benefit settlement option.

Tom is the insured/owner of a $500,000 life insurance policy and dies leaving four surviving children, Mary, Carrie, Larry, and Barry, and each child receives $125,000 upon his death. This is an example of what type of distribution? A. Per Stirpes B. Per Capita C. Pro Rata D. Pro Forma

B. Per Capita

The insuring agreement in a life insurance policy states which of the following? A. The insurance company may refuse to pay a death claim in the event a mistake is found in the original application for insurance at the time of the insured's death B. The obligation of the insurance company to pay the policy proceeds upon presentation of valid proof of the death of the insured which occurred while the policy is in force C. The policyowner will indemnify the insurance company of the policy proceeds if the beneficiary is not named in the application D. The insurance company will not pay death claims in the event of suicide or other exclusion named in the policy unless all premiums are paid in advance

B. The obligation of the insurance company to pay the policy proceeds upon presentation of valid proof of the death of the insured which occurred while the policy is in force

The grace period in a life insurance policy is typically 31 days and provides for the: A. The payment of the premium after the due date with a maximum 5% penalty B. The payment of the premium after the due date without a penalty or lapse in coverage C. The policyowner to reinstate the policy before it lapses D. The insurance company to delay payment of the death benefit while it determines the validity of the proof of death

B. The payment of the premium after the due date without a penalty or lapse in coverage The grace period allows payment of the past due premium without a penalty or lapse in coverage. Any claim arising in the grace period is payable, but any unpaid premium will be deducted from the claim when paid.

What is meant when a life insurance policy becomes incontestable? A. After 2 years, the insurer will only pay for suicide if the insured was insane at the time of death B. After 2 years, the insurer will not argue about which beneficiary is primary or contingent C. After 2 years, the insurer will not refuse to pay a death claim based on misinformation in the original application for insurance D. After 2 years, the policyowner cannot sue the insurer for misstatements made by the producer in the sale of the policy

C. After 2 years, the insurer will not refuse to pay a death claim based on misinformation in the original application for insurance

The spendthrift laws of each state protect life insurance proceeds against the claims of which of the following? A. Primary beneficiaries only B. Contingent beneficiaries only C. Creditors of any beneficiary D. Creditors of the insured only

C. Creditors of any beneficiary

What happens if a premium due is not paid before the end of the grace period? A. The coverage continues until the home office and the policyowner can work out a payment plan B. The policy is automatically renewed C. The policy lapses D. The policy is converted to one that is more affordable for the client

C. The policy lapses

A contingent beneficiary has the right to which of the following? A. The policy proceeds if the primary beneficiary is a minor child B. Prevent the policyowner from taking a loan against the cash value C. The policy proceeds only when there is no primary beneficiary D. Share in the death benefit with the primary beneficiary

C. The policy proceeds only when there is no primary beneficiary Contingent is also referred to as secondary

What is the primary advantage to the policyowner in the reinstatement of a life insurance policy? A. All policy loans that were outstanding at the time of lapse are forgiven and full cash value is restored B. The insurance company cannot start a new period of contestability C. The policyowner continues to enjoy the benefits that were provided in the original policy, including the original premium D. The insured is not required to prove insurability if under age 40

C. The policyowner continues to enjoy the benefits that were provided in the original policy, including the original premium

Which of the following is a reason why "class" designations of beneficiaries may be a problem? A. They specify the exact persons who may claim policy proceeds B. They are intended to allow unnamed persons to share policy proceeds C. They are vague descriptions of beneficiaries that could result in a court having to decide which person(s) will or will not receive the policy proceeds D. They prevent contingent beneficiaries from being named

C. They are vague descriptions of beneficiaries that could result in a court having to decide which person(s) will or will not receive the policy proceeds

Which of the following beneficiary designations is a class designation? A. Frank Jones - son B. Mary Smith - spouse C. Bank of Springfield - creditor D. Any children of this marriage

D. Any children of this marriage A class designation is when the beneficiary is not directly identified by name.

Interest only, life income with period certain, lump sum, and life income only are all forms of which of these life insurance policy options? A. Nonforfeiture options B. Beneficiary options C. Dividend options D. Settlement options

D. Settlement options These are all forms of settlement options - how the beneficiary will receive the policy proceeds. Nonforfeiture options are concerned with cash value.

Policy loan provisions include all of the following, EXCEPT: A. Outstanding loans will be deducted from the face amount at time of claim B. Unpaid interest is added to the value of the loan C. Interest is charged annually D. The death benefit of a policy is automatically reduced when a loan is requested

D. The death benefit of a policy is automatically reduced when a loan is requested Policy loans do not automatically reduce the death benefit in a policy. If an outstanding loan exists at the time of death, the amount of the loan will then reduce the benefit paid to the beneficiary.

By what means is a transfer for value made? A. By requesting a change in the beneficiary designations B. By a partial withdrawal C. By way of collateral assignment D. Through an absolute assignment

D. Through an absolute assignment To effect a transfer for value, an absolute assignment needs to take place.