chapter 4

A nonparticipating whole life insurance policy was surrendered for its $20,000 cash value. The total premiums paid had totaled $16,000. What were the federal income tax consequences to the policyowner on receipt of the cash value?

$16,000 was received tax-free and $4,000 as ordinary income

A "premature" distribution from a modified endowment contract (MEC) incurs a penalty tax of

10%

John received a one-time distribution of $50,000 from his modified endowment contract (MEC). Prior to that, the contract's cash value was $150,000, the contract investment amount was $100,000, and the death benefit was $500,000. What percentage of the $50,000 distribution was taxable as ordinary income?

100%

A survivorship life insurance policy usually covers how many lives?

2

Which type of life insurance policy is best suited for paying off the outstanding balance of a 30-year mortgage in the event of the insured's death?

30-year decreasing term

Which of the following combinations best describe a universal life insurance policy?

A flexible premium deposit fund and a monthly renewable term insurance policy

Which is an accurate description of the premium in a graded premium life insurance policy?

Annual increases in premium for a stated number of years then remains level

When does the insured stop making payments under a thirty-payment whole life policy?

At the time of death or 30 years after the policy's inception, whichever comes first

Which statement regarding the cash value of a whole life insurance policy is correct?

Available to the policyowner when policy has been surrendered

What kind of life policy typically offers mortgage protection?

Decreasing term

Which of these life insurance policies does NOT contain a cash value provision?

Decreasing term life

Which of these is NOT considered a type of limited payment whole life insurance?

Endowment at age 70

Which statement concerning a decreasing term life policy is accurate?

Face amount decreases over the policy period

Which of these may NOT be deducted from premium payments or the cash value of a variable life insurance policy?

Federal premium taxes

Rick owns a variable universal life policy and chooses a variable death benefit option. What will typically happen to the death benefit as a result of this selection?

Fluctuate with changes in the cash account

How long does one premium payment cover in a single premium whole life policy?

Full life of the policy

A policyowner has just borrowed from a life insurance policy's cash value. Which of these statements is true?

In the event of death, the loan amount is deducted from the policy proceeds

All of these are considered features of whole life insurance EXCEPT

Initial premium is lower than for an equivalent amount of term insurance

Which statement regarding whole life insurance is accurate?

Insurance coverage can continue for life

What type of life insurance policy covers two or more persons and pays the face amount upon the death of the first insured?

Joint life

What is the guaranteed cash value of a whole life insurance policy when the insured turns 65 years old?

Less than the policy's face amount

Laura added a children's rider to her life insurance policy. What type of coverage was added?

Level term

A life policy that has premiums that are lower than normal during the early years is called

Modified life

Which of these statements accurately portrays an adjustable life insurance policy?

Policy can alternate between forms of term and whole life insurance

Which of the following is a TRUE statement regarding universal life insurance?

Policy indicates how much of each premium is used toward company expenses

These are all accurate statements regarding universal life insurance EXCEPT

Policy loans are not permitted

Which statement regarding an adjustable life insurance policy is NOT true?

Policy loans are not permitted

How are level term policies able to provide level premiums?

Premiums are averaged over the term of the policy

Which of the following would NOT be a reason for purchasing life insurance on a child's life?

Provide benefits for the child if the parents die

Which of the following could be a future use of the cash value that builds in a recently-purchased whole life insurance policy?

Provide supplemental income in 35 years

Assets that back the non-guaranteed values of variable life insurance products are held in which account?

Separate account set up by the insurer

Which of these policies is considered a whole life policy?

Single premium life

How does the cost for a survivorship life policy compare to the cost of combining two separate individual life insurance policies?

Survivorship life policy is lower

When a ten year renewable term life insurance policy issued at age 45 is renewed, the premium rate will be the current rate for

Ten year term insurance for a person aged 55

Which statement concerning adjustable life insurance is accurate?

The face amount and premiums can be changed simultaneously by the policyowner

All of these statements concerning group credit life insurance are false EXCEPT

The face amount is based on the outstanding loan balance

Peter, age 50, surrenders his modified endowment contract (MEC). How is the gain treated in terms of federal income taxes?

The gain is treated as taxable income and a penalty tax is imposed on the gain

Taxable income may be the result from all of these modified endowment contract (MEC) transactions EXCEPT for

The policy is surrendered for less than what was paid into it

An advantage of owning a flexible premium life insurance policy would be

The policyowner can make policy changes without difficulty

How does a continuous premium whole life policy differ from a limited payment whole life policy?

The time period in which premiums will be paid

Which of these is NOT a reason to buy a term life policy?

To accumulate savings

Which type of life insurance policy allows a policyowner the choice of investments along with flexible premium payments?

Variable universal life

When would evidence of insurability be required for a person already covered with a variable universal life policy?

When the death benefit is increased

At what point are death proceeds paid in a joint life insurance policy?

When the first insured dies

Which of the following is generally a form of group credit life insurance?

Which of the following is generally a form of group credit life insurance?

An individual who purchases a modified life insurance policy expects

an improvement in future income

The insurance coverage in a variable life insurance policy may vary based on the value of

its underlying investments

The death proceeds of a credit life insurance policy are typically paid to the

lender

Which action will trigger a penalty tax on premature distributions from a modified endowment contract (MEC)?

policy loans

What typically changes at the re-entry option date found in some term life policies?

premium

A material change in a modified endowment contract (MEC) results in

the seven pay test, adjusted for cash value, applies again

An insurance policy that can also be classified as a securities product is called

variable life