Chapter 5

Which statement is true regarding policy dividends?

A dividend option is selected by the insured at the time of the policy purchase. (Insureds elect a dividend option at the time of policy purchase.)

Which of the following does a policyowner NOT have a right to change?

Dividend schedule (All of these are considered rights of a policyowner EXCEPT the right to change the dividend schedule.)

Which policy provision protects the policyowner from unintentional lapse of the contract?

Grace period (The grace period provision protects the policyowner from an unintentional lapse of the contract.)

When does a life insurance policy's waiver of premium take effect?

Insured becomes totally disabled (A life insurance policy's waiver of premium takes effect if an insured becomes totally disabled.)

Mike and Ike are 30 year old identical twins. Both are in excellent health. Each brother purchases a life policy that has a $750 annual premium. Mike buys a 10-year renewable term policy. Ike purchases a whole life policy. All of the following statements are true EXCEPT

Mike has the option of using his cash value to purchase a reduced amount of paid-up whole life insurance (Since a term policy provides for no cash value, there are no nonforfeiture benefit options available to Mike.)

How is a life insurance policy dividend legally defined?

A return of excess premium and not taxable. (Life insurance policy dividends are a return of part of the premiums paid. As such, policy dividends are generally not taxable income.)

If an insured dies because of an accident, which type of life insurance rider will provide additional coverage?

Accidental death rider (An accidental death rider provides additional coverage in the event of accidental death.)

What are collateral assignments normally associated with?

Bank Loans (Collateral loans are normally associated with bank loans.)

What time period allows an insured's life insurance policy to remain in force even if the premium was not paid on the due date?

Grace Period (The grace period allows an insured's life insurance policy to remain in force even if the premium was not paid on the due date.)

A life insurance policy can be surrendered for its cash value under which policy provision?

Nonforfeiture options (Nonforfeiture options allow a policyowner to surrender a policy for its net cash value.)

In a life insurance policy, the entire contract consists of

Policy and attached application (The entire contract of a life policy consists of the policy and attached application.)

When an accidental death benefit is added to a whole life policy, how does this affect the policy's cash value?

Policy's cash value life is not affected (When an accidental death benefit is added to a whole life policy, the policy's cash value is not affected.)

An insurer can be protected from adverse selection with which policy provision?

Suicide clause (The suicide clause protects the insurer against possible adverse selection.)

When a life insurance policy is surrendered, how does the cost recovery rule apply?

The policy's cost basis is exempt from taxation (Correct. ​ ​ ​ ​ The cost basis of the policy is exempt from taxation as it pertains to the cost recovery rule.)

Jerry is an insured who understated his age on his life insurance application, paying $12 per $1,000 of insurance instead of $15 per $1,000. If he dies, how will the adjusted death benefit be calculated?

12/15th of the policy's face amount (In this situation, the adjusted death benefit will be calculated at 12/15th of the policy's face amount.)

Bruce is involved in an accident and becomes totally and permanently disabled. His insurance policy continues in force without payment of further premiums. Which policy provision is responsible for this?

Waiver of premium provision (A waiver of premium provision relieves a policyowner of paying premiums in the event of total and permanent disability.)

Which of these is NOT a valid policy dividend option?

Monthly income payments ("Monthly income payments" is not a valid policy dividend option.)

What does the guaranteed insurability option allow an insured to do?

Purchase additional coverage with no evidence of insurability required (The guaranteed insurability option allows an insured to purchase additional coverage with no evidence of insurability required.)

Which provision will pay a portion of the death benefit prior to the insured's death due to a serious illness?

Accelerated Death Benefit (The accelerated death benefit provision will pay a portion of the death benefit prior to the insured's death due to a serious illness.)

After a policy has lapsed, which provision allows the insured to continue coverage?

Reinstatement Provision (The reinstatement provision allows an insured to continue coverage under a previously lapsed policy.)