Chapter 7 215 questions

In a viatical settlement the viator is:

the policy owner

The rule of constructive receipt takes effect after:

60 days

Under a viatical settlement arrangement, an insured received $80,000 for his $100,000 life insurance policy. Which of the following statements are true?

A viatical arrangement is one in which a terminally ill individual sells his/her life insurance policy to another. Under the Health Insurance Portability and Accountability Act funds received by the insured are tax free. However, the amount paid to the buyer (above his cost basis) of the policy would be taxable.

Which of the following statements regarding the Fair Credit Reporting Act (FCRA) is CORRECT?

Applicants must be notified within a short period of time that their credit report has been requested.

All of the following statements concerning viatical death benefits are true except:

Chronically ill persons receive the same benefit as terminally ill people

Participating policy dividends are influenced by three factors which include all the following EXCEPT:

Dividends are a return of premium and are influenced by mortality cost savings, reserves interest earnings, and operating expenses.

What provision would allow the insurance company to pay the death benefit to someone not named as a beneficiary

Facility of Payment Provision

Which of the following is not a settlement option?

Fixed rate

Wilma the widow is receiving payments under the fixed period settlement option. The company is currently paying the payments at an interest rate of 5%. If, in the future, the company elects to raise the interest rate to Wilma, what effect would this have on her payout

Her payments would be higher.

Where does the company get general character and reputation info on the proposed insured?

Inspection report Explanation: The M.I.B. is for medical information. This is shared between member companies only. It's purpose is to keep premiums down through the prevention of misrepresentation and fraud. The inspection report investigates the applicant's background.

Under which option does the in insurer hold the death proceeds for a specified period of time and, at regular intervals, pay the beneficiary interest on the proceeds?

Interest-only

What is the beneficiary designation that can only be changed with the beneficiary's written agreement?

Irrevocable beneficiary

A field underwriter:

Is an agent

Which of the following statements about the Fair Credit Reporting Act is CORRECT?

It provides that consumers have the right to question reports made about them by investigating agencies.

The annuity rule would be applied to all of the following except:

Lump-sum cash option Explanation: This method allows the beneficiary to receive part of the proceeds tax free. Each portion of the payout would be partially taxed according to the formula (amount invested divided by the expected return). Each installment would actually consist of principal and interest. The portion attributed to interest would be taxable. Lump sum would be tax free because there is no interest, just a death benefit.

Which of the following factors is most important when computing basic premiums for life insurance?

Mortality

Avril was given a binding receipt for a $50,000 life insurance policy which required an exam. Two weeks later he was killed in an accident before the exam could be completed. Which of the following would the company do?

Pay the death benefit

Pover Tee is named by the insured, Kik LeBucket, as the first in line to receive the death benefit provided by Kik's accident policy. Their daughter, Spoilt Chile, is named as second in line to receive the benefit. Which statement is correct?

PoverTee is the primary beneficiary and Spoilt Chile is the contingent beneficiary. Explanation: The primary beneficiary is always the "first" in line. Only if all the primary beneficiaries died before the insured would any contingent or tertiary beneficiaries be entitled to any death benefits.

Which of the following statements pertaining to life insurance premiums is CORRECT?

Premiums for group term insurance covering employees are tax deductible, assuming certain requirements are met.

What presumption is made under the Uniform Simultaneous Death Act?

The beneficiary died first Explanation: If it is unknown who died first, such as in an airplane accident, the policy will pay as if the insued died last, or the benficiary died first. It is the same thing. Just two different ways of stating it.

If an applicant has been denied coverage based on a credit report, then the Fair Credit Reporting Act says that the insurance company must provide:

The credit reporting agency's name and address

Which of the following terms would be called "loading"?

The expense factor Explanation:The expense factor is sometimes called a "loading" charge.

Jane bought a life insurance policy and concealed that she had stage four breast cancer on the application. Eighteen months later she was killed in a car accident. How will the company respond? Kim mum

The insurance company will void the contract and refund the premium.

Which of the following statements pertaining to life insurance policy settlement options is NOT correct?

Under the fixed-period option, the payment of excess interest will lengthen the payment period.

The process of evaluating risks standard or sub-standard is known as:

Underwriting Explanation: It is the process of underwriting. Rating is a process of underwriting, underwriting is not a process of rating. Ex. When an insurance company is evaluating a prospect they are making a determination whether to accept, reject, of RATE him or her. Rating is for sub-standard risks.

Which mode of premium will result in the highest cost of the policy?

Weekly

All of the following statements about the classification of applicants are correct EXCEPT

a substandard applicant can never be rejected outright by the insurer

Binding receipts:

are a maximum of $100,000 and not more than 60 days.will pay for accidental death within 30 days of the agreement, even if a required exam was not completed.

A STANDARD RISK applicant submits an application REQUIRING a medical exam and receives a CONDITIONAL RECEIPT for his premium. The policy is first effective:

as of the completion of the required medical examination

To be considered chronically ill and qualify for benefits under an accelerated benefit rider, a licensed health care practitioner must certify that the person is unable to perform:

at least two activities of daily living for 90 days

In Florida, all of the following must appear in the application except:

beneficiary

An accelerated death benefit rider could be found in which type of policy?

both group and individual

The primary distinction between the insurability and approval types of conditional receipts is when the

coverage goes into effect

Elaine signs an application for a $50,000 non medical life policy, pays the first premium and receives a conditional insurability receipt. If Elaine were killed in an auto accident two days later

her beneficiary would receive $50,000, if Elaine qualified for the policy as applied for

All of the following are primary premium factors EXCEPT

dividends

Which of the following transactions would not result in a taxable event according to the 1035 exchange rules?

exchanging a life insurance contract for an annuity contract Explanation: Under the 1035 exchange rules, certain exchanges are deemed to be equal in the eyes of the IRS. Going from life insurance to annuities will be O.K., but not from annuities to life insurance.

All of the following statements concerning a common disaster provision are correct EXCEPT

the provision stipulates that if the primary beneficiary outlives the insured by more than 48 hours, then the proceeds will be paid to the primary beneficiary's estate

Preliminary term insurance can be used for how long?

1 to 11 months

Dude paid a total of $25,000 for his $100,000 life insurance policy. He borrows $35,000 against the cash value. How much will Dude have to report as a gain?

0 Explanation: As long as the cash value remains inside the policy there will be no taxable event. It was a loan. How did the cash become so much higher than the amount he paid in? Interest.

Harry the Hobo has no estate problems. His estate is worth very little. He finds some money under the bridge and buys a $100,000 whole life insurance policy, naming his mother as beneficiary. (We don't want to get toooo serious.) How has this changed his estate.

100,000

Lucy has a $100,000 life insurance policy with $25,000 accumulated as cash value. If she were to borrow $20,000 from her policy how much cash value would be in her policy the next day?

25,000 Explanation: The cash value is not borrowed from the policy, it is borrowed against it. Instead, the policy's cash value is used as collateral. The money is coming from the company's general account. They are not lending you your own money.

All the following issues about BENEFICIARIES are true EXCEPT

Beneficiaries must always be named as individuals.

Beth, age 50, the beneficiary of her late husband's life insurance policy, has elected to receive the proceeds in monthly installments over the next five years. Due to the insurer's interest earnings, Beth notices that the amount of the payments is often more than what she was guaranteed. What kind of settlement option did Beth select?

Fixed-period

Define a legal reserve

Future liabilities paid to policyholders Explanation: Reserves are moneys required to be set aside by insurance companies to pay claims and appear as a liability on the company's balance sheet.

Which of the following statements pertaining to life insurance premiums is CORRECT?

Harold and Billy, both age 25, each buy a whole life policy from the same company. However, Harold has a participating policy, while Billy's policy is nonparticipating. Harold will pay a higher premium.

John owned a life insurance policy on his sister. His sister's children were named as the beneficiaries. If his sister and her children were killed in an accident, to whom would the insurance company pay the benefits?

John Explanation: If all named beneficiaries are deceased at the time of insured's death the proceeds will be paid to the owner or the owner's estate.

Kevin, the insured under a $200,000 life insurance policy, and his sole beneficiary, Lynda, are killed instantly in a car accident. Under the Uniform Simultaneous Death Act, to whose estate will the policy proceeds be paid?

Kevin's estate

Which of the following settlement options might provide payments that exceed the proceeds of the policy and the interest earned?

Life Annuity Explanation: This is really an annuity and will pay for life, no matter how long that life lasts.

If an irrevocable beneficiary dies before the policy owner, who of the following gains control of a life insurance policy with a reversionary irrevocable clause?

Policy owner

Information regarding premiums, dividends and cash surrender values would be found in which of the following?

Policy summary

Under a viatical settlement arrangement, an insured received $80,000 for his $100,000 life insurance policy. Which of the following statements are true?

The $80,000 will be tax free. The $20,000 gain paid to the buyer will be taxable. A viatical arrangement is one in which a terminally ill individual sells his/her life insurance policy to another. Under the Health Insurance Portability and Accountability Act funds received by the insured are tax free. However, the amount paid to the buyer (above his cost basis) of the policy would be taxable.

Which of the following statements pertaining to the Medical Information Bureau (MIB) is CORRECT?

The MIB provides assistance in the underwriting of life insurance

Which of the following does NOT constitute "constructive delivery"?

When the policy is delivered and an inspection receipt obtained Explanation: An inspection receipt says there is no coverage until the first premium has been paid. This kind of receipt is given when no premium has been paid and allows the applicant to "inspect" the policy. To have a valid contract the policy must be delivered. Constructive delivery satisfies this requirement. When the insurance company mails the policy to the agent , even if the agent never actually delivers it, there IS constructive delivery.

The method used today to change beneficiaries is known as the

recording method

When a policy owner cannot exercise his rights of ownership without the policy beneficiary's consent, the beneficiary is designated

irrevocable

In the formation of a life insurance contract, the special significance of a conditional receipt is that it:

is intended to provide coverage on a date earlier than the date of the issuance of the policy.

All of the following are methods of tax deducting life insurance premiums except:

key person life Explanation: If a business were to tax deduct the premiums for key person insurance (not allowed) then the entire death benefit would become taxable.

Which type of settlement option could possibly be paid out to the beneficiary completely tax free?

lump sum

All of the following statements about facility of payment provisions are correct EXCEPT

minors cannot be named life insurance beneficiaries

Which of the following is not used in calculating life insurance premiums?

morbidity Explanation: Morbidity tables are used for health insurance.

Allen, a cancer survivor, was rated by the insurance company to cover the additional risk. Which of the following rating methods would increase his cash value?

none of the above Explanation: The extra charge only covers the extra risk brought to the insurance company. It does not increase cash values or dividends. If the condition which caused the rating disappears, for whatever reason, then the insured may apply to have the rating removed.

Where would information relating to the identity of the agent, the company, the policy and each rider be found

policy summary

If a proposed insured has a hazardous occupation the insurance company will probably:

rate the insured and charge an extra premium.

An agent takes an application from a proposed insured without receiving payment of the first premium.The insurance company issues the policy and, when the agent visits the proposed insured to deliver it, she realized that the health of the applicant has deteriorated significantly since the application was taken. The agent should:

refuse to deliver the policy or to accept any premium offered.

The transfer for value rule states that if a policy is sold any amounts received by the purchaser above his cost basis would be taxable at ordinary income rates. This would not apply to which of the following?

If transferred to the insured If transferred to a partner of the insured If transferred to a corporation in which the insured is an officer

Christine's policy has a clause that reads as follows, "Should the primary beneficiary and the insured die in the same accident and the primary beneficiary fails to survive the insured by 14 days, it will be assumed that the beneficiary predeceased the insured." Which of the following phrases best describes this clause?

Common disaster provision

Sarah, age 65, owner of a $150,000 whole life policy, decides to surrender the policy and take the $90,000 cash value in a lump sum. Over the years she has paid a total of $54,000 in premiums. How much, if any, of the payment will be taxed?

36,000

When a policy owner notifies the company in writing of a beneficiary change, this is called:

A recording method Explanation:This beneficiary change takes place when the request was signed, even if the policyowner has died before the company has changed the beneficiary.

Who is responsible for completing the application?

Although the application requires the signatures of the agent, the applicant, and the insured it is the agent's responsibility to make sure the application is completed.

Heidi suffers from a chronically diagnosed heart condition which prevents her from performing any activities outside the home. Under the Accelerated benefits provision of her life insurance policy, how much of the benefit would be tax free?

Anything below a certain limit Explanation: Accelerated benefits paid for CHRONICALLY ill individuals would be taxable on anything received above a certain limit determined by law, (roughly $110,000) per year. TERMINALLY ill benefits would NOT be taxed

When would the insurance company require a statement of the insured's good health?

At the delivery of the policy if no money was given with the application Explanation: If money was not given at the time of the application, the insurance company would require this statement. The insurance company has a right to know that the insured's health has not changed since he completed the application and the time he gave them money.

Which of the following statements pertaining to a life insurance policy application is CORRECT?

If an applicant's age is shown erroneously on a life insurance application as 28 instead of 29, the result may be a premium quote that is higher than it should be.

On May 8, a prospect filled out an application for a life insurance policy but paid no premium. The insurance company approved the application on May 14 and issued the policy on May 15. The agent delivered the policy on May 26 and collected the first premium. The coverage became effective on:

May 26th

Which of the following premium factors have the greatest effect on rate making?

Mortality

Allen, a cancer survivor, was rated by the insurance company to cover the additional risk. Which of the following rating methods would increase his cash value?

None

On May 1, a producer accepts an application and check for the premium from an applicant and issues the applicant a receipt. On May 3, the producer gives the application and premium check to the underwriter, but then realizes the check was not signed. On May 4 the producer returns to the insured's home to have the check signed, only to be told by her son that the applicant died on May 2. When the son asks about the life insurance policy, what should the producer tell him?

There is no coverage because the check was not signed.

The spendthrift trust clause:

protects the beneficiary from the claims of the beneficiary's creditors it shelters life insurance proceeds that have not yet been paid out to a beneficiary states that the proceeds are not assignable

Generally, the party who delivers the insurance policy to the new policy owner is the

sales agent

Underwriting is a process of

selection, classification and rating of risks

A clause that states that policy distributions payable to the beneficiary after the insured dies are not assignable or transferable and may not be attached in any way is called a

spendthrift trust clause

The insured and the beneficiary are killed as a result of the same accident, but the beneficiary survived the insured by 24 hours. Which provision would stipulate that proceeds of the policy be paid as if the insured died last?

the Common Disaster Provision

Which of the following statements about the Fair Credit Reporting Act is correct?

It provides that consumers have the right to question reports made about them by investigative agencies

The annuity rule applies to all of the following except:

Lump sum

What statement concerning cash value is true

Cash values are an asset to the policy owner

If Lobster, a diver, diagnosed as chronically ill, sold his life insurance policy, which of the following would be correct concerning taxation?

the benefits would be tax free to Lobster

Sandra has a life insurance policy that states that her husband, Gerald, is to receive the full death benefit. If he predeceases her, their three children are to share the benefit equally. If her husband and all three children predecease her, the benefit is payable to the First Community Church. All of the following statements are correct EXCEPT

the designation of the First Community Church can be contested by any of Sandra's relatives who survive the children

Mary names her husband, Rick, as primary beneficiary of her life insurance policy and her two children, Pam and Matt, as contingent beneficiaries. Rick dies in March. Pam and Matt are killed simultaneously in a car accident later that month. Hearing the news, Mary has a fatal heart attack. In this case, Mary's life insurance will be paid

to Mary's estate

Louie Longlife, age 65, has elected a life income settlement option. He has, according to the insurance company, a life expectancy of 20 years. If Louie passed away at age 95, how long did he receive payments?

until age 95 Explanation: A life income option pays until Louie no longer can fog up a mirror. It pays for life, no matter how long that life lasts. Life expectancies are calculated on averages. Some live longer, some die sooner. It evens out for the insurance company.

A prospect's statements made in the application for insurance constitute a part of which of the following?

Consideration Clause Explanation:Consideration consists of the COMPLETED application (a prospect's statements) and the premium

Life insurance premiums are typically based on what increment of the face value?

Correct Answer: $1,000

Art, the owner and insured under a $75,000 life policy, is killed in an accident. He had paid total premiums of $26,000. How much of the $75,000 death benefit that was paid to Art's wife in a lump sum is taxable income to her?

0

The policyowner has how many days, after the maturity date, to exercise an annuity option before the rule of constructive receipt takes effect?

60 days Explanation: When a policy endows, or matures, it is time to take the money. Taking the money over a period of time (annuitizing) could be a good tax strategy, as opposed to taking the money in a lump sum.

Clockster surrenders his $25,000 life insurance policy with $10,000 of cash value. He has paid a total of $5,000 in premiums. He had received $2,000 of dividends of which he bought $7,000 of paid-up insurance. How much will Clockster have to report to the IRS as a gain?

7000 Explanation: The dividends are a return of the premium and must be subtracted from the premiums paid to arrive at the cost basis. $10,000(amount received)-($5,000-$2,000)= $7,000

Father buys a life insurance policy, naming Mother as beneficiary, his child is named as contingent beneficiary. Mother dies before the father, then father dies. Who receives the proceeds?

A contingent beneficiary is someone other than a primary beneficiary. A secondary or tertiary (third) beneficiary is contingent (conditioned) upon the person ahead of them dying (being dead) before the insured.

For the benefit of a lower premium, Tommy stated on his insurance application that he was five years younger than his actual age. The policy was issued as applied for and 15 months later Tommy died in an automobile accident. Which course of action would the insurance company take?

A reduced benefit would be paid. Explanation: The company would pay an adjusted benefit. Age is not a material fact. It would not have altered the company's decision to issue the policy. However, the premium would have been higher. So, the death benefit in this case would be reduced. Had all this been discovered before he died the premium

When insuring substandard life insurance risks, provision is usually made for the expected higher death rate by:

Charging an additional premium

The beneficiary on Walter`s life insurance reads, "Children of the Insured." Which of the following phrases best describes this type of beneficiary designation?

Class beneficiaries

Bill names his church as the beneficiary of his $300,000 life insurance policy. When Bill dies, who is responsible for the income taxes payable on the lump-sum proceeds received by the church?

No income tax is payable on the death proceeds.

Which of the following is not true about life insurance policy proceeds?

They are never part of the insured's estate Explanation: If no beneficiary is named or if all named beneficiaries are dead the proceeds are payable to the estate. The estate would then be probated. Proceeds can not be contested because the company will follow the insured/policyowner's wishes as spelled out in the beneficiary designation. Proceeds paid to a named beneficiary are not probated. If paid to the estate, they would be probated.

All of the following are exceptions to the "transfer for value" rule except:

transfers to a relative Explanation: The transfer for value rule states that if a policy is sold or assigned (absolute), the transferee (the person buying the policy) will be taxed according to the gain. Gain would be defined as anything over the cost basis. Cost basis includes the money paid for the policy plus any premiums paid by the transferee. Exceptions to the rule are the insured, a partner of the insured, or a corporation in which the insured is a shareholder or officer

Until what time will a "fixed amount" settlement option pay?

until the funds are exhausted Explanation: Under the fixed amount annuity option,one is choosing a fixed dollar amount to be paid. This will last until the funds are exhausted.

Art, the owner and insured under a $75,000 life policy, is killed in an accident. He had paid total premiums of $26,000. How much of the death benefit will be included in the gross estate for estate tax purposes?

$75,000

Mr. Williams names his son John a beneficiary of his life insurance policy. What designation should he use if he wants to make sure that John's children would receive John's share of the life insurance policy proceeds should John predecease his father?

Per stirpes

Which beneficiary term would designate the children of a DECEASED named beneficiary as recipients of the death benefits?

Per stripes

The insured and the primary beneficiary are in an accident together. The insured dies at the scene and the beneficiary dies 15 days later. If the common disaster provision in the policy is 14 days, which of the following is correct?

The benefit is paid to the primary beneficiary's estate. Explanation: The common disaster provision says that if the primary beneficiary outlives the insured, that they have to outlive the insured by at least 14 days to get the benefit

All of the following statements about accelerated death benefits and viatical settlements are correct EXCEPT

interest earned on policy dividends is exempt from income tax

All of the following statements about the taxation of insurance proceeds are correct EXCEPT

interest earned on policy dividends is exempt from income tax