Insurance

All choices accurately describe the variable life contract

A client has asked you, as her planner, to review her life policies. The variable life insurance contract that she owns may be characterized as a/an: I. Unilateral contract. II. Aleatory contract. III. Conditional contract. IV. Personal contract of adhesion.

A) Residual disability benefits residual benefits cover partial disability and directly address the concern of income reduction if she is not totally disabled

A successful architect wants to purchase disability income insurance. She is concerned about becoming totally disabled, but also about a reduction in income if she is obliged to reduce her workload because of a less-than-total disability. To satisfy these concerns, which of the following should be included in her disability income coverage? A) Residual disability benefits. B) A change-of-occupation provision. C) Dismemberment benefits. D) A relation of earnings-to-insurance provision.

only one party is legally obligated to perform

Unilateral contract

I & II Bathing Eating Dress Toilet and transferring Continence

Activities of daily living are standards also known as ADLs. These are activities the patient must be able to perform. Which of the following are common ADLs? I. Eating and dressing. II. Toileting and transferring. III. Maintaining continence and meal preparation. IV. Bathing and walking.

Those who need this contract most will try to buy it

Adverse selection

C) Reduced paid-up insurance this is a NON FORFEITURE provision

All of the following are settlement options except: A) Fixed period payments. B) Fixed amount installments. C) Reduced paid-up insurance. D) Interest Only

A) Large number of exposure units there MUST be a LARGE NUMBER of homogeneous (or similar) exposure units to minimize the overall risk to the insurer

An insurable risk is characterized by an accidental loss, low cost, and a: A) Large number of exposure units. B) High chance of loss. C) Low amount of exposure. D) Limited number of perils.

life insurance is designed to make one whole

Indemnity contract

B) Jerry has a taxable gain of $15,000. This gain will be treated as ordinary income 40,000 CV - 30,000 premiums paid - 5,000 dividends = 25,000 (basis) 40,000 - 25,000 = $15,000 is treated as ordinary income, taxable in the year it is received CV-premiums paid-dividends = basis

Jerry Rivers owns a $250,000 level-term life policy which he purchased five years ago. He has paid premiums of $400 per year for the past five years. He also owns a $125,000 whole life policy which he purchased fifteen years ago. He has paid premiums of $2,000 per year for the past 15 years, and now the policy has a cash surrender value of $40,000. Over the years, the whole life policy has paid cash dividends to Jerry. The cumulative dividends paid to Jerry since inception totals $5,000. Jerry has decided to cancel his $125,000 whole life policy. Which statement is true? A) Jerry has a taxable gain of $10,000. This gain will be treated as a long-term capital gain. B) Jerry has a taxable gain of $15,000. This gain will be treated as ordinary income. Rationale C) Jerry has a taxable gain of $70,000. This gain will be treated as ordinary income. D) Jerry has NO taxable gain.

D) one party pays more than the other party

Life insurance is an aleatory contract. This means that: A) Life insurance is designed to make one whole B) Those who need this contract most will try to buy it. C) Only one party is legally obligated to perform. D) One party pays more than the other party.

II & III - Paid up additions - Accumulate at interest ***Other dividend options = cash, reduce premiums, one year term CRAP-O- the other choices (reduced paid up & extended term) are non-forfeiture options

Of the following policy options and provisions, which are dividend options available to policyholders of a participating whole life insurance policy? I. Reduced paid-up insurance. II. Paid-up additions. III. Accumulate at interest. IV. Extended term.

D) the beneficiary receives the death benefit free of income tax but the death benefit is includable in Mrs. Ketch's GE for estate tax purposes **proceeds must be included in the estate value of the decedent**

Mrs. Ketchenbaum owns a life insurance contract on her life that is a modified endowment contract. If Mrs. Ketchenbaum dies, which of the following statements is correct concerning the tax consequences of paying the death benefit to the designated beneficiary? A) A portion of the death benefit is subject to income tax. B) A portion of the death benefit is subject to income tax and penalty. C) The beneficiary receives the death benefit free of income tax and the death benefit is not includible in Mrs. Ketchenbaum's gross estate for federal estate tax purposes. D) The beneficiary receives the death benefit free of income tax but the death benefit is includible in Mrs. Ketchenbaum's gross estate for estate tax purposes.

arrange an orderly legal structure to assure monies paid on an insurance policy are not simply absorbed by the company without recourse in the event that an insured decides to terminate coverage

Non Forfeture rights of policyholders:

III, II, IV, & I

Rank from most likely to the least likely the possibility of an increase in annual premiums on the following life insurance policies on a male age 35. Premiums are projected to vanish at 65. After reviewing each company's Insurance Questionnaire, it is determined that all companies use realistic expense, mortality and lapse assumptions. All companies have good historical results for policyholders, and an assumption is made that a 30-year Treasury bond yields 7% and all companies will experience similar future investment returns. I. Interest sensitive whole life insurance (illustrated at current rate of 8.5% and funded at full target premium). II. Universal life insurance (illustrated at current projected new money rate of 6.75%). III. Whole life insurance 9.25% base policy, with 5.5% guarantee; 75% term rider -- ledger illustrated at company's portfolio rate of 9.5% -- company's net investment yield is 9.66% for this current year. IV. Variable universal life insurance (illustrated to endow at age 100, run at 8% gross and allocated 100% to common stock sub-account).

A) Own occupation changing to modified any occupation at first, the insured is considered disabled if he or she cannot perform his or her specific occupation after a period of time (2 to 3 years), definition is broadened to include any occupation to which the insured is fit to undertake based on education or training

There are a number of definitions used to determine whether an insured is disabled. The split definition of disability includes the following two: A) 'Own occupation' changing to 'modified any occupation'. B) 'Modified any occupation' changing to 'own occupation'. C) 'Own occupation' changing to 'any occupation'. D) 'Any occupation' changing to 'own occupation'.

A) To guard against adverse selection - limit setting --> determined by company policy - insurance rates --> set by the state

What is the main responsibility of the underwriting department of a life insurance company? A) To guard against adverse selection. B) To set a limit on the amount of insurance issued. C) To set adequate insurance rates. D) To avoid exposures that could result in loss.

D) the identification of the "level" of care required

When a person is deemed to need skilled care, intermediate care, or custodial care, what is being established relative to a long-term care policy? A) Whether the patient really needs long-term care, or if some other way can be found to meet the patient's needs. B) Where the care required is classified in the Medicare DRG table. C) Whether the care must be delivered by a hospital or nursing home. D) The identification of the "level of care" required.

I - Assist the insured in the prep of proof-of-loss statement II - Determine whether there was a loss covered by the policy

When a property claim has been submitted, the adjuster is called in to do which of the following: I. Assist the insured in the preparing the proof-of-loss statement. II. Determine whether there was a loss covered by the policy. III. Classify the loss as standard, substandard, or ineligible. IV. Choose the arbitrator who will determine the amount of loss.

A) contingent business interruption you would collect contingent business interruption insurance because it is a business which you do not own that has a direct effect on your own business

A supplier of your company experiences fire damage at their plant. They cannot provide an essential part to you for a number of weeks. This, of course, delays your operation. You are covered by a very extensive insurance. For this reason, you would go to collect from your: A) Contingent business interruption. B) Extra expense insurance. C) Business interruption. D) Lease hold interest coverage.

C) $1,140 subtract deductible first --> $4,700 - $250 = $4,450 4,450 x 20% = 890 890 + 250 = 1,140 paid by the insured

An insured with a $250 deductible and an 80% - 20% coinsurance with a stop-loss limit of $5,250 would be responsible for how much of covered expenses totaling $4,700? A) $1,250.00 B) $3,560.00 C) $1,140.00 D) $1,190.00

A) guaranteed purchase option guaranteed purchase options cannot be purchased with guaranteed purchase option provisions. It would be like making the third wish for three more wishes

If a permanent life policy provides a guaranteed option to purchase additional insurance on the original policy, that option will include all of the following features in the new policy, except: A) Guaranteed purchase option. B) Disability waiver of premium. C) Accidental death benefit. D) Non-forfeiture provisions.

B) Advantage is required to pay because Bill had apparent authority to do what the public reasonably believes he can do policy must be bound bc Bill was an agent with clear binding authority

Bill Commisky is an agent for the Advantage Insurance Company. For the last year, the company has informed its agents not to write auto insurance policies on flower shops. However, when Flowers R Us applied for a policy, Bill bound the coverage. Flowers R Us had a driver totally destroy a truck 6 weeks later. What is the obligation of the Advantage Insurance Company in this situation? (Note: Consider carefully the supporting rationale in selecting your answer.) A) Advantage is required to pay because Bill had express authority to bind the company. B) Advantage is required to pay because Bill had apparent authority to do what the public reasonably believes he can do. C) Advantage is NOT required to pay because Bill is the agent of the insured. D) Advantage is NOT required to pay because Bill failed to disclose full knowledge of the situation.

A) $28 120 x 0.15 x 12 = $216 (what Dave pays) (150-50) x 0.29 x 12 = $243.60 243.60 - 216 = $28 (taxable income)

Dave is 46, married and has an annual salary of $60,000. His employer offers group term life insurance coverage equal to 2 times his annual salary. The employer's cost for Dave is $.40 per $1,000 of which Dave pays $.15 per month per $1,000. The Table 1 (Section 79) rate for 45-49 year olds is $0.29 per $1,000. What must Dave include in his taxable income this year resulting from the group term insurance? Round your answer to the nearest dollar. A) $28 B) $126 C) $210 D) $244

D) the change of occupation provision will permit the insurer to reduce benefits payable for increased risk on a disability policy: insurer will reduce coverage to match premium at new riskier premium REDUCE COVERAGE

If the insured under a disability income insurance policy moves to a more hazardous job and receives an increase in compensation with the job change, what will be the likely effect on the disability coverage? A) The relation of earnings to insurance clause will require an adjustment in the benefits payable. B) The definition of disability will automatically change from "own-occupation" to "any-occupation". C) The change of risk clause will require new underwriting of the risk. D) The change of occupation provision will permit the insurer to reduce benefits payable.

I, II, & III - AM Best - Standard & Poors - Moodys

In selecting insurance coverage for a client, the prudent planner should consult which of the following independent sources for determining company strength? I. A.M. Best Reports II. Standard and Poor's III. Moody's Investors Services IV. Dun & Bradstreet

D) John can only borrow from the cash value with Jennifer's WRITTEN approval because she has a conditionally vested interest in the policy - IRREVOCABLE beneficiaries have all the rights of the policy owner. - MUST secure permission from beneficiary to any activity

Jennifer Anton was named by her husband, John Anton, as irrevocable beneficiary of his life insurance policy based on a court order. John would now like to borrow from the policy's cash value. What right does John have to the cash value? A) John can borrow the cash value, but he may not surrender the policy because of Jennifer's interest in the policy. B) Jennifer must allow John to borrow from the cash value because he is the owner of the policy and as such has a right to do so. C) John may borrow from the cash value because Jennifer has only a contingent interest in the policy. D) John can only borrow from the cash value with Jennifer's written approval because she has a conditionally vested interest in the policy.

C) the cash dividends received by Jerry to date are treated as non-taxable - if dividends paid are LESS THAN premiums paid = NOT TAXABLE - if dividends paid are GREATER THAN premiums paid = amount above is fully taxable as income

Jerry Rivers owns a $250,000 level-term life policy which he purchased five years ago. He has paid premiums of $400 per year for the past five years. He also owns a $125,000 whole life policy which he purchased fifteen years ago. He has paid premiums of $2,000 per year for the past 15 years, and now the policy has a cash surrender value of $40,000. Over the years, the whole life policy has paid cash dividends to Jerry. The cumulative dividends paid to Jerry since inception totals $5,000. Assume the whole life policy is a participating policy and has paid Jerry $5,000 in dividends since inception. Which statement is true? A) The cash dividends received by Jerry to date are treated as taxable. B) If Jerry died today, his beneficiary would receive a death benefit of $120,000 from the whole life policy. C) The cash dividends received by Jerry to date are treated as non-taxable. D) The cash dividends received by Jerry should have been reported as a long-term capital gain on his personal income tax return in the year they were paid.

B) Modified Any Occupation any occupation --> would say you are employable even in the severest disabilities split definition --> uses own occupation to begin with and moves toward modified any occupation (allows for training in new field) loss of income --> avoids having to define disability

The policy which insures an individual when "the insured is unable to perform the duties pertaining to any gainful occupation for which they are suited by education, experience, or training" best describes what definition of disability? A) Any Occupation. B) Modified Any Occupation. C) Split Definition. D) Loss of Income.

A) GUARANTEED renewable (only policy where if rate change is made, it MUST BE FOR AN ENTIRE CLASS) for non-cancelable -- renewable on a guarateed basis, PREMIUM CANNOT BE CHANGED cancelable and renewable = allow for premium change

These policies guarantee renewability, not level premiums. Premium levels can be changed as long as it is done for an entire rate class. A) Guaranteed renewable. B) Non-cancelable. C) Cancelable. D) Renewable.

B) the right of the insured to be made whole after a loss occurs A) --> vicarious liability C) --> the right to bring suit D) --> insurable interest Principle of Indemnity --> an insured is only entitled to compensation to the extent of the insured's financial loss --> an insured CANNOT make a profit from an insurance contract

The 'principle of indemnity' refers to which of the following: A) The right of a party to collect from third parties who are responsible for having caused the loss. B) The right of the insured to be made whole after a loss occurs. C) The right of the insured to bring tort action against the tortfeasor. D) The stake or interest in a matter, person, property, or other business concern that might be damaged if the peril insured against occurs.

III & V - Assuring that all state insurance regulation is somewhat uniform - Accrediting state insurance regulatory offices NAIC: 1) works to see that information is adequately communicated as circumstances arise 2) sees that recommendations of action serve as the basis for decision-making by setting precedents for states to draw from voluntarily 3) provides recognition through accreditation of state insurance offices

The National Association of Insurance Commissioners (NAIC) is involved in the process of regulating the insurance industry by: I. Direct involvement through the development of specific regulations for all states to follow. II. The regulation of the insurance commissioners of all states. III. Indirectly by providing for the exchange of information and preparation of recommendation. IV. Assuring that all state insurance regulation is somewhat uniform. V. Accrediting state insurance regulatory offices.

B) a joint and last to die life insurance policy owned by an irrevocable trust the "last to die" will pay for the second death, and if held in a trust, it will NOT add to the insured estate tax due because it will not increase the taxable estate.

The best life insurance policy for the payment of federal estate taxes for a 50-year old couple with illiquid assets is: A) An individual whole-life policy on each spouse on a cross-ownership basis. B) A joint and last-to-die life insurance policy owned by an irrevocable trust. C) A joint last-to-die life insurance policy owned by the spouse with the larger estate. D) A joint and last-to-die life insurance policy owned by the spouse with the smaller estate.

B) replacing term insurance with cash value insurance conversion privileges are generally part of the term insurance policy that allows them to be changed over to cash value insurance without proof of insurability

This particular type of life insurance replacement may be achievable through use of a conversion privilege that is generally available on the original policies. A) Replacing universal insurance with a term policy. B) Replacing term insurance with cash value insurance. C) Replacing cash value insurance with another cash value policy. D) Replacing cash value insurance with term insurance.

B) Verbal threshold: law suits may be allowed when there is a fatal injury A) Pure no-fault: Several states have enacted this system. (there is NO PURE NO-FAULT in existence) C) Modified no-fault: allows suits when verbal and dollar thresholds have been crossed

Where no-fault auto insurance is involved, which of the following is a correct match? A) Pure no-fault: Several states have enacted this system. B) Verbal threshold: Law suits may be allowed when there is a fatal injury. C) Modified no-fault: In no way impedes the right of tort action. D) Pure no-fault: Allows for tort action under certain conditions.

B) Executive - key word = ENFORCING. That is what the executive branch does. - "interpreting/rendering" = state judicial branch

Which branch of government is charged with interpreting and enforcing state insurance code rulings that have the force of law? A) Judicial. B) Executive. C) Legislative. D) Public Safety.

II & IV - to determine if an insurer meets the requirements to obtain a license - to conduct financial investigations of insurers operating in the state options I&II are under the purview of the state courts

Which of the following are duties of insurance commissioners in regulating insurers? I. To rule on the constitutionality of insurance laws II. To determine if an insurer meets the requirements to obtain a license III. To render decisions on the meaning of policy terms IV. To conduct financial investigations of insurers operating in the state

A) policy persistency - deductibles are the burden of the insured - coinsurance is the burden of the insured - a policy cannot be insured without insurable interest

Which of the following is not a factor affecting and limiting the liability of the insurer? A) Policy persistency B) Deductibles C) Coinsurance D) Insurable interest

A) FDIC the rest ARE INDIRECT federal gov involvement for regulation over the insurance industry

Which of the following is not an example of a form of indirect federal regulation over the insurance industry? A) FDIC: Federal Deposit Insurance Corporation. B) IRC: Internal Revenue Codes. C) SEC: Securities Exchange Commission. D) ERISA: Employees Retirement Income Security Act.

C) Dynamic risk = in which the core risk resides in the change in the environment caused by the changing human condition Pure risk = there is a chance of loss or no loss (death, auto, etc) Speculative = there is a chance of profit, loss, or no loss (entrepreneurs, not insurable) Subjective = subjective risk differs based upon an individuals perception of risk (buying a radar detector bc his neighbors told him cops are everywhere) Objective = does not depend on an individuals perception, but is measurable and quantifiable (statistics on things)

Which of the following pairs matches correctly: A) Pure risk; which occurs in the event of possible loss and/or possible gain. B) Speculative risk; which exists when there is an uncertain possibility of loss and no chance of gain. C) Dynamic risk; in which the core of risk resides in the change in the environment caused by the changing human condition. D) Static risk; which is dependent on the state of the individual and is measurable and observable.

I & II - Incontestable Clause (prevents the provider from voiding coverage due to a misstatement after a specific amount of time has passed) - Suicide Clause - there is a one to two year period during which incontestable and suicide clauses are in effect

Which of the following provisions allow a life insurance company to refuse to make payment on a policy claim based on the amount of time the policy has been in force. I. Incontestable Clause. II. Suicide Clause. III. Entire Contract Clause. IV. Ownership Clause.

III & IV - At conversion, the billing is switched to the insured - the policy may be converted from a term policy to an individual permanent life policy - you cannot convert to a term product in a group life insurance - group term-to-permanent conversions will occur without evidence of insurability

Which of the following statements about the conversion privilege is/are true regarding group life insurance plan provided by employers? I. The policy may be converted from a permanent product to a term product. II. The policy may be converted if the insured provides evidence of insurability. III. At conversion, the billing is switched to the insured. IV. The policy may be converted from a term policy to an individual permanent life policy.

C) employer paid policy on employee with employer as beneficiary = not deductible to employer - business overhead expense = taxable benefit

Which of the following statements accurately reflects the tax implications of the purchase of disability insurance? A) Employer paid policy on key employee = benefits taxable to employer. B) Employer paid policy on key employees = non-taxable benefits to employee. C) Employer paid policy on employee with employer as beneficiary = not deductible to employer. D) Business overhead expense policy = benefits are tax free to individual owner/operator who purchases policy on himself.

C) the period of time the insured must wait before specified illnesses or injuries are covered TIME insured must wait before conditions are COVERED

Which of the following statements best describes the probation period in a disability income policy? A) The period of time that must elapse before the policy is activated. B) The period of time available for the insurer to cancel coverage under the policy. C) The period of time the insured must wait before specified illnesses or injuries are covered. D) The period of time the insured must wait before benefits are payable.

A) the use of existing insurance does not cause a transfer-for-value situation in both entity and cross-purchase situations bc the entity is presumed the same as the individual in a partnership - a stock redemption should be used if the surviving partners expect to sell their interests during their lifetimes --> if a cross purchase then each owner would have to sell, surrender, or hold onto the policy on the departing owner. --> the departing owner would have multiple policies, each covering the other owners that she/he would need to do something with

Which of the following statements concerning the choice of an entity versus a cross-purchase partnership buy-sell agreement funded with insurance is FALSE? A) The use of existing insurance to fund the agreement causes a transfer-for-value problem if an entity agreement is selected, but does NOT cause this problem if a cross-purchase approach is used. B) A stock redemption should be selected if the surviving partners expect to sell their interests during their lifetimes. C) An entity approach may solve the affordability problem if one partner is significantly older than the other. D) An entity agreement becomes more desirable as the number of partners included in the agreement increases.

D) availability of a guaranteed minimum cash value UNDER NO CIRCUMSTANCES does a variable policy guarantee cash value IT WILL guarantee a min death benefit as long as premiums are paid

Your client is considering the purchase of a Variable Universal Life (VUL) policy and asks for your advice about this type of insurance. Which of the following is NOT a feature of this type of policy? A) Flexibility as to premium payments. B) Choice as to investment funds. C) Availability of a guaranteed minimum death benefit. D) Availability of a guaranteed minimum cash value.

B) a taxable gift of the life insurance proceeds has been made from John to his daughter - bc John OWNS the policy on the life of another, the proceeds are "gifted" - if Mary owned the policy on her OWN life, the proceeds would have passed to her daughter tax-free

Your client, John Hotas, owns a whole-life insurance policy with a death benefit of $100,000 on the life of his wife Mary. The policy has a cash value of $6,500. The dividends are used to purchase additional paid-up life insurance. Their daughter, Ester, is the named beneficiary. If Mary were to die today, which of the following is true? A) John continues to own the policy for the benefit of the daughter. B) A taxable gift of the life insurance proceeds has been made from John to his daughter. C) John receives an amount equal to the cash value, and the daughter receives the remainder of the life insurance proceeds tax-free. D) The daughter must be at least 14-years old in order to collect the proceeds.

B) Extended term insurance extended term is the only choice that is a NON-FORFEITURE option. reduced-paid up = non-forfeiture provision/amount of coverage would be reduced installments for fixed period = settlement option one year term = dividend option

Your client, John Kent, purchased a limited payment whole life policy 15 years ago. He would like to stop paying the premiums on his policy, but continues to need the same amount of insurance. If he did so, which one of the following is a non-forfeiture option he could use? A) Reduced paid-up insurance. B) Extended term insurance. C) Installments for a fixed period. D) One-year term.