Life Insurance Basics
An investor buys a life policy on an elderly person in order to sell it for a life settlement. This is an example of
A STOLI Policy. Stranger-originated life insurance (STOLI) policies are usually purchased by people who have no relationship with the insured with the intention of selling them for life settlements.
All of the following are duties and responsibilities of producers at the time of application EXCEPT
Change any incorrect statement on the application by personally initialing next to the corrected statement. Any changes to information on the application must be initialed by the applicant.
An applicant wants to buy a life insurance policy in which he can count on receiving the same benefits as stated in the contract. Which type should he buy?
Fixed Fixed life insurance policies offer minimum guaranteed or fixed benefits stated in the contract. Variable life insurance or annuities are contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance.
An insured has a life insurance policy with a face amount of $500. He pays a premium each week to the agent who sold him the policy. What kind of policy does the insured have?
Industrial life Industrial life insurance is written on an individual basis in small amounts, usually with a face amount of less than $1,000, with premium payable weekly or monthly. As a general rule, these policies are written nonmedically.
Stranger-Originated Life Insurance policies are in direct opposition to the principle of
Insurable interest. Because the purchaser of a stranger-originated life insurance policy doesn't know the insured, or have any interest in the insured's longevity, STOLI policies violate the principal of insurable interest.
The mode of premium payment
Is defined as the frequency and the amount of the premium payment. The mode refers to the frequency the policyowner pays the premium: monthly, quarterly, semiannually, or annually. The amount of premium will change accordingly.
Which of the following would be the best option that would help the surviving spouse of the insured to put her child through daycare after the insured's death?
Life insurance proceeds There are many legitimate need-based expenses that can be paid by life insurance proceeds, from groceries to retirement income. Daycare is considered to be among these expenses.
Which of the following information about the applicant is NOT included in the General Information section of the application for insurance?
Medical background Part 1- General Information of the application includes the general questions about the applicant, including name, age, address, birth date, gender, income, marital status, and occupation. The applicant's medical background is addressed in Part 2- Medical Information
Which of the following best describes gross annual premium?
Net premium plus expenses Gross annual premium is net premium plus expenses (loading).
all of the following are true of key person insurance EXCEPT
The plan is funded by permanent insurance only. Key Person coverage may be funded by any type of life insurance.
Which of the following types of risk will result in the hightest premium?
substandard risk The "substandard" rating indicates that an individual represents an under-average insurance risk because of physical condition, personal or family history of disease, occupation, habits or hobbies. This rating incurs the highest premium if policy is issued.
Replacing insurers that use producers must provide applicants with the right to return their policy within a few days of its delivery. How many days?
30 Replacing insurers that use producers must provide the applicant the right to return the policy within 30 days of delivery.
The term "illustration" in a life insurance policy refers to
A presentation of non-guaranteed elements of a policy. The term "illustration" means a presentation that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years. Illustrations must also include the name of the insurer and the agent, information about the proposed insured, and the policy itself.
To which of the following policies would the State regulations on illustrations NOT apply?
An individual variable life policy The life insurance illustrations regulation applies to all individual and group policies except variable life insurance; individual and group annuity contracts; credit life insurance; group term life, or life insurance policies and certificates with guaranteed scheduled death benefit of $10,000 or less.
If an insurance company makes a statement that its policies are guaranteed by the existence of the Insurance Guaranty Association, that would be considered
An unfair trade practice. It is unfair trade practice to make any statement that an insurer's policies are guaranteed by the existence of theInsurance Guaranty Association. Though it is illegal to advertise, the statement is still true and would not be considered a misrepresentation.
The full premium was submitted with the application for life insurance, and the policy was issued two weeks later as requested. When does the policy coverage become effective?
As of the application date If the full premium was submitted with the application and the policy was issued as requested, the policy coverage effective date would generally coincide with the date of application.
when must insurable interest exist in a life insurance policy?
At the time of application In life insurance, insurable interest must exist at the time of application.
an underwriter is reviewing the medical questions in the application and needs further information due to a medical situation the applicant had in the past. What will the underwriter require?
Attending Physician Statement The APS is used to obtain medical DETAILS about a specific condition which has shown up in the application; the insurance company orders the information directly from the physician, using a signed authorization which was part of the application.
In terms of Social Security, what is the name for the time period after the youngest child of a family turns 16 and before the surviving spouse may start receiving retirement benefits?
Blackout period Blackout period begins when the youngest child reaches the age of 16, and ends when the surviving spouse qualifies for retirement benefits, as early as age 60. No benefits are paid during this time.
which of the following would describe a legal document which would dictate who can buy a deceased partner's share of a business and for what amount?
Buy-sell agreement A buy-Sell agreement (also referred to as a business continuation agreement) is a legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled.
Which of the following statements concerning buy-sell agreements is true?
Buy-sell agreements are normally funded with a life insurance policy. A buy-sell agreement is simply a contract that establishes what will be done with a business in the event that an owner dies. Buy-sell agreements are normally funded with a life insurance policy.
which of the following is used to compare the cost of one life insurance policy against another in order to guide prospective purchasers to policies that are competitively priced?
Cost comparison methods Cost comparison methods are used to compare the cost of one life insurance policy against another in order to guide prospective purchasers to policies that are competitively priced.
A key person insurance policy can pay for which of the following?
Costs of training a replacement A key person insurance policy will pay for costs of running the business and replacing the employee.
If an insured changes his payment plan from monthly to annually, what happens to the total premium?
Decreases Because the insurer would have the entire premium to invest for a full year, they would reduce the premium account.
all of the following are factors that an underwriter could use to select and classify risk EXCEPT
National origin. The company will discriminate in favor of good risks and not of poor risks; however, it cannot discriminate unfairly by using factors such as race or national origin in their underwriting.
During replacement of life insurance, a replacing insurer must do which of the following?
Obtain a list of all life insurance policies that will be replaced The replacing insurance company must require from the producer a list of the applicant's life insurance or annuity contracts to be replaced and a copy of the replacement notice provided to the applicant, and send each existing insurance company a written communication advising of the proposed replacement.
A prospective insured receives a conditional receipt but dies before the policy is issued. The insurer will
Pay the policy proceeds only if it would have issued the policy. The conditional receipt says that coverage will be effective either on the date of the application of the medical exam, whichever occurs last, as long as the applicant is found to be insurable as standard risk, and policy is issued exactly as applied for.
Which of the following is usually true of a participating life insurance policy?
Pays dividends to policyowners. Participating is a term used to refer to any insurance policy that distributes its dividends by cash payments, reduced premiums, units of paid-up life insurance, a savings program, or by the purchase of term insurance.
what describes the specific information about a policy?
Policy Summary A policy summary describes the features and elements of the specific policy for which a person is applying.
Based on Human Life Value Approach, which of the following is NOT used to calculate an individual's life value?
Predicted needs of the family after the insured's death. the Human Life Value Approach to determining the value of an individual's life requires the calculation of probable future earnings of the insured, which involves wages, expenses, inflation, amount of time until retirement, and the time value of money. Predicted needs of the family after the insured's death are used in the needs approach.
Which of the following will be included in a policy summary?
Premium amounts and surrender values A policy summary must be delivered along with the policy and will provide the producer's name and address, the insurance company's home office address, the generic name of the policy issued, and premium, cash value, surrender value and death benefit figures for specific policy years.
All of the following are characteristics of group life insurance EXCEPT
Premiums are determined by the age, sex and occupation of each individual certificate holder. Premiums are determined by the age, sex and occupation of the entire group, not for each individual insured.
Upon policy delivery, the producer may be required to obtain any of the following EXCEPT
Signed waiver of premium. The policy does not go into effect until the premium has been collected. If the premium was not collected at the time of the application, the producer may also be required to get a Statement of Good Health from the applicant at the time of policy delivery. Waiver of premium is a rider that can be added to a life insurance policy, and not something to be obtained from the applicant.
Insurance producers must ensure that contracts they recommend are in the best interest of the insured. This is calld
Suitability Insurance producers must adhere to the concept of suitability by the ensuring that, to the best of their belief, the purchase, sale or exchange of a policy is in the best interest of the insured.
A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as
Survivor protection Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. This is known as survivor protection.
Which of the following may NOT be included in an insurance company's advertisement?
That its policies are covered by a state Guaranty Association It is illegal for insurers to state that their policies are guaranteed by the existence of a guaranty association.
An individual applied for an insurance policy and paid the initial premium. The insurer issued a conditional receipt. Five days later the applicant had to submit a medical exam. If the policy is issued, what would be the policy's effective date?
The Date of medical exam If the company acknowledges receipt of the premium with a conditional receipt, the policy is in effect on the date of the application or the date of the medical exam (whichever is later), provided the applicant is found insurable at the rate applied for.
Which of the following is NOT true?
The Life and Health Guaranty Association is comprised of representatives from the DOI's of every state. Any company selling life and/or health insurance must belong to the guaranty association, not the DOI
which of the following would provide an underwriter with information concerning an applicant's health history?
The Medical Information Bureau An agent's report and inspection report provide personal information. Medical exams provide information on current health. Only the MIB will provide information about an applicant's medical history.
which of the following would NOT fall into the category of costs associated with death?
The expense of a vacation for surviving family members These costs would take into account the final medical expenses of the insured, funeral expenses, and day to day expenses of maintaining the family including rent or mortgage payments, car payments, utilities, groceries, etc.
In a life settlement contract, whom does the life settlement broker represent?
The owner. Life settlement broke is a person who, for compensation, solicits, negotiates, or offers to negotiate a life settlement contract. Life settlement brokers represent only the policyowners.
All of the following statements concerning the use of life insurance as an executive bonus are correct EXCEPT
The policy is owned by the company. The policy is owned by the employee.
How must a replacing producer respond to an applicant wishing to replace existing life insurance?
The producer must provide the applicant with a Notice Regarding Replacement. In a replacement transaction, a producer must present to the applicant a Notice Regarding Replacement, signed by both the applicant and the producer.
Which of the following statements regarding deferred compensation funds is INCORRECT?
They are usually qualified plans. Deferred Compensation Funding refers to any employer retirement, savings, or other deferred compensation plan that is not a qualified retirement plan. Funding involves a contractual commitment between the employer and employee to pay compensation in future years. These plans are typically made with selected employees to provide additional retirement benefits.
Which of the following is the best reason to purchase life insurance rather than annuities?
To create an estate With insurance, the death benefit creates an immediate estate should the insured die.
An insured receives a monthly summary for his life insurance policy. He notices that the cash value of the policy is significantly lower this month than it was last month. What type of policy does the insured have?
Variable Variable life policies vary in value, as the name suggests, because the value is based on the stocks that support the policy. If a policyholder wants a more stable, reliable value, he/she should invest in a fixed policy.
An agent and an applicant for a life insurance policy fill out and sign the application. However, the applicant does not wish to give the agent the initial premium, and no conditional receipt is issued. When will coverage begin?
When the agent delivers the policy, collects the initial premium and the applicant completes an acceptable Statement of Good Health If the initial premium is not paid with the application, the agent will be required to collect the premium at the time of policy delivery. In this case, the applicant will most likely need to fill out a Statement of Good Health.
Who is the owner and who is the beneficiary on a Key Person Life Insurance policy?
With the key-person coverage, the business (employer) is the applicant, owner, premium payer, and beneficiary.
Which of the following documents must be provided to the policyowner or applicant during the policy replacement?
Notice Regarding Replacement During policy replacement, the replacing producer must present to the applicant a Notice Regarding Replacement that is signed by both the applicant and the producer.
An insurer wants to obtain information from investigators regarding an applicant for insurance. What must the insurer do in order to legally acquire this information?
Present the insured with a Disclosure Authorization Notice Before an insurer can obtain information from investigators regarding an applicant, it must first present the insured with a Disclosure Authorization Notice. This notice states the insurer's information collection practices and how the information will be used.
which of the following would be a violation of life policy illustration regulation in Oregon?
Providing a customer with an incomplete illustration A producer cannot provide an applicant with an incomplete illustration. All the other statements describe producer responsibilities in using illustrations.
If a policy includes a free-look period of at least 10 days, the Buyer's Guide may be delivered to the applicant
With the policy If a life insurance policy contains a free-look period of at least 10 days, the buyer's guide can be delivered with the policy. If it doesn't, the buyer's guide must be delivered prior to accepting the initial premium.