Life Insurance Policies: Quiz

A Whole Life policy furnishes a form of Permanent protection because it never has to be:

Never has to be renewed or converted. The terms Whole Life and Straight Life are interchangeable. As used, either term means "continuous, level-premium Ordinary Life" insurance. A Whole Life policy may never be changed by the company. The premium can never go up. It never has to be renewed or converted. Therefore, it is known as "permanent protection."

Which of the following best describes the normal Conversion benefit available to terminated employees under a Group Life insurance policy?

The employee may convert to an individual Permanent Life policy within 31 days without submitting evidence of insurability. The conversion privilege on Group Life extends for 31 days after the insured terminates from the job. They can convert only to a Whole Life (Permanent insurance) policy written by the same company without submitting evidence of insurability. They cannot convert to more coverage than they had on the Group Life policy. They cannot convert to Term, only to Whole Life.

All of the following are true regarding graded premium whole life policies, EXCEPT:

They are also known as adjustable whole life. Graded premium whole life is sold initially at a discount, but the premium gradually increases over a period of time, although the face amount or policy limit stays the same. It is designed to attract customers who cannot afford whole life right now, but expect their future income to increase. Adjustable whole life is sold to people with fluctuating incomes who want a policy whose premium and/or face amount may be adjusted to meet their changing needs.

A person who enters into a viatical settlement is known as a:

Viator A person with a terminal illness may elect to sell their policy to a viatical settlement provider in order to obtain money to pay their medical bills. In a viatical settlement agreement, such a person is known as the "viator."

Francisco purchases a five year non-renewable level term policy with a $100,000 policy limit and dies eight years later. How much will his beneficiary receive:

0.00 In order for Francisco's beneficiary to receive the death benefit, he must die within the term of coverage. Once the term of coverage is up, no further coverage is provided.

Joint life can be written as all of the following, EXCEPT:

Accidental death and dismemberment. Joint life insurance policies may be written on any whole life or term insurance plan.

On term life insurance, the re-entry option is contingent upon:

Being able to pass a physical exam. The re-entry option is a common feature on many term policies that gives the insured the opportunity to pass a physical exam at the end of the term in order to qualify to renew the policy at a lower premium rate than the guaranteed rate available. Of course, if the insured fails the physical, they can always renew at the rate guaranteed in the policy.

An employee's evidence of participation in a Group Life plan is the:

Certificate of Insurance. Group Life the employer is the master policyholder. The Employee receives a Certificate of Insurance. The Employee merely receives a Certificate of Insurance indicating how much coverage they have, who their beneficiary is, and whether or not they have dependents' coverage.

Which policy provides the greatest amount of protection for an insured's premium dollar as well as some cash accumulation:

Whole Life. If we had not mentioned cash accumulation, the answer would have been Term. However, Term has no cash value, so the answer is Whole Life, which is the most inexpensive type of permanent insurance and is required to have a cash value after the third policy year. Although Limited Pay Life is a type of Whole Life, it is incorrect since it is usually quite expensive due to the shortened pay-in period. Annuities have no cash value except the money the annuitant paid in. Since there is no death benefit, no protection is offered.

What type of Life insurance has a rate of return that may keep up with inflation, but will never fall below the minimum guaranteed in the policy:

Equity indexed life. Equity Indexed life insurance or annuities have a guaranteed rate of return, but can earn excess interest above the guaranteed rate since performance is calculated using an indexing method that is usually linked to the S&P 500 stock index. The stock market generally keeps pace with inflation over a period of time.

Which statement about a Renewable Term policy is true:

It is renewable at the option of the insured. If most Term policies (except Decreasing Term) were not renewable, no one would buy them. This option allows the insured to renew the policy for another term without proving good health. Of course, the insured does not have to renew, it is at their option. Annual Renewable Term (ART) is a good example. It must be renewed every year. The rate goes up as the insured gets older, but no proof of good health is required. However, most Term policies are renewable only up to a certain age, usually age 60 or 65, depending on the company.

A single premium used to buy a Whole Life policy will pay up the policy:

For the life of the policy. If a single premium is used to purchase a whole life policy the policy will be paid up for the life of the policy. No further premiums need be paid. Whole Life policies can be purchased and paid for a number of different ways. Continuous premium traditional Whole Life policies were originally purchased with periodic premiums that were paid for the life of the insured. However, many people did not want to pay their life insurance premiums over their entire life, so the insurance company created a number of variations of premium payment. The insured can now select to pay their Whole Life policy premium for a specified number of years (Pay Life), or to a certain age (Life Paid-up). The insured can also select to pay the full premium on day one (Single Premium). Remember, the shorter the premium paying period the higher the premium and the faster the cash value will build.

Which of the following is NOT true regarding employer group life insurance:

The employer is the beneficiary. In order for an employer to tax deduct the premiums they pay for group life insurance, the coverage must be written to benefit someone other than the employer. Employees covered by group life policies may designate anyone they choose as beneficiary.

All of the following are true regarding traditional straight whole life insurance, EXCEPT:

Death benefits are taxable to the beneficiary. Life insurance proceeds are not taxable to the beneficiary.

Which of the following policies provides only a Death benefit that declines over a definite and limited period of time:

Decreasing Term. Often used to protect home mortgages or for temporary needs, Decreasing Term insurance has no cash values. Usually written for 5, 10, 15, or 20 years, the premium remains the same each year. However, since the amount of insurance decreases, you could say that the cost actually is going up each year. Decreasing Term is not renewable but it is usually convertible to Whole Life at the option of the insured without proof of good health.

An insurance prospect wants to purchase a policy that will accumulate the largest amount of cash by the age of 65. Which policy would be most likely to satisfy the prospect's needs:

Endowment at age 65 Since an Endowment at age 65 reaches maturity at age 65, rather than age 120, it will be much more expensive than an LP 65. Since it is more expensive, it will also build cash values much faster, since the face amount and the cash value must be at least equal by age 65.

amela has a $100,000 ten year level term policy. If she dies three years into the term, how much will her beneficiary receive:

$100,000. In a level term policy, both the premium and the amount of coverage are level. Regardless of when Pamela dies, as long as she dies during the term, her beneficiary will receive the full face amount of protection.

Cheryl Schultze, age 27, is advised by her producer to purchase life insurance to cover a 20-year-amortized $50,000 business-improvement loan. Which plan would adequately protect Ms. Schultze at the minimum premium outlay:

A $50,000 Decreasing Term policy for 20 years. The key words here are "minimum premium." Term is the most inexpensive type of coverage. Since Cheryl's $50,000 loan will be paid off over 20 years and the loan balance will decrease each year, Decreasing Term makes sense. Decreasing Term is not renewable or convertible.

Which of the following statements about Adjustable Whole Life is true:

Adjusting the premium will also adjust the face amount. Adjustable Whole Life is marketed to meet an insured's changing needs and ability to pay premiums in an uncertain economic climate. It is the most flexible type of Whole Life insurance. The insured can adjust the premium, face amount or the length of coverage. If the insured increases the premium they pay, the cash value will build faster and the face amount of coverage will increase. However, no physical exam is required unless the insured wants to increase the face amount above that which they originally purchased.

The insured can receive the face amount of an Endowment policy if they are still living when the policy's:

Cash value equals the face amount. Endow means, the cash value equals the face amount at maturity. On an Endowment policy, the insured's cash value will equal the face amount of the policy at maturity, which is a predetermined time, say age 65, set by the insured when they buy the policy. Whole Life policies always reach maturity at age 120. You could say that a Whole Life policy endows at age 120. A true Endowment policy will always mature earlier than age 120. Endowments are just like Whole Life, except that the maturity is always earlier.

All of the following are true regarding Variable life insurance, EXCEPT:

It has a flexible premium feature. Variable life insurance is sold with a fixed, level premium. It is variable/universal life that has a flexible premium.

Which of the following is an example of a Limited-Pay life policy:

Life Paid-Up at age 65 There are three basic types of life insurance: 1) Whole Life 2) Term 3) Endowment. Limited Pay Life policies, such as LP 65 and 20-Pay Life, are variations of Whole Life or Straight Life. The premium-paying period has been shortened, but the policy still does not mature until age 120.

What type of life insurance has limits on either the number of years premiums must be paid or the age by which all premiums must be paid:

Limited pay whole life is a type of whole life, where the premiums are due only to a certain age, such as a LP 65, or are payable only for a certain number of years, such as a 20 pay life.

All of the following are true about Universal Life insurance, EXCEPT:

Proceeds payable to a beneficiary are taxable. An advantage of UL is the flexibility of premium payments, meaning that if there is adequate cash value in the policy, the customer may skip premium payments and the policy won't lapse. UL policies are also considered to be "transparent," meaning that the expenses, such as the cost of insurance protection, must be clearly shown. Policy loans are permitted, but proceeds payable to a beneficiary are not taxable.

All of the following is true about Universal Life, EXCEPT:

The death benefit paid to the beneficiary is taxable as ordinary income. Remember, Universal Life is a type of Whole Life insurance and is sometimes referred to on the exam as "interest sensitive" whole life. Universal Life policies have a cash value with a minimum guaranteed interest rate and an excess current interest rate. The return the insured receives on the cash value will vary and is interest rate sensitive. Loans are permitted, and if taken will definitely have an effect on the cash value accumulation. However, death benefit proceeds are not taxable.

All of the following are true regarding Universal life insurance policies, EXCEPT:

They have no minimum guaranteed rate of return. Universal life has a fixed, guaranteed rate of return. It is variable/universal life that doesn't.

Mr. Shulkin owns a 30-Pay life policy that he purchased at the age of 30. The cash value will equal the face amount of the policy when he reaches the age of:

120. Limited pay life insurance policies such as Life Paid Up at 65 or 20-Pay Life are simply variations of Whole Life policies. The cash value will equal the face amount of the policy (at least) at the maturity of the policy, which is always age 120 on Whole Life policies. These limited-pay policies are designed so that the insured may pay their premiums faster and be "paid up" at a certain age. However, just because the premiums are paid up doesn't mean the policy has matured.

Which policy is generally used to accumulate funds for education:

Endowment. Endowment policies are usually sold either for retirement purposes at age 65 or to children to fund their college education. This type of policy reaches maturity at a predetermined time selected by the insured or policyholder. An E 65 would reach maturity at 65 and the cash value would equal the face amount. A 15-year Endowment covering a three-year-old would endow at the child's age of 18 and the funds could be used for their college education. Of course, if the insured dies during the policy period (before the policy endows) then the company would pay the face amount to the beneficiary. Endowments are always the most expensive type of life insurance. Endowment policies also contain the three non-forfeiture options, since they do have a cash value.

Which of the following is NOT true regarding Universal Life insurance policies:

Loans are prohibited Universal Life (UL) policies are actually just a variation of whole life policies. They have minimum guaranteed cash values and rates of return and policy owners may take loans by using the cash value as collateral. The main advantage of UL is that premiums are flexible, meaning that once the cash value is sufficient, the policy owner may stop making premium payments and allow the insurer to debit the cash value to pay for the increasing cost of mortality as the insured grows older.

If an insured makes an assignment to a third party for an amount less than the death benefit of the policy, it is known as a:

Life settlement. A life settlement is a contract between a policy owner and a third party, who agrees to buy the owner's policy for more than its cash value but less than its face amount. The owner then assigns the ownership of the policy to the third party (absolute assignment), who names themselves as beneficiary. A life settlement is very similar to a viatical settlement, except on a life settlement, the policy owner does not have a terminal illness.

An employee becomes ineligible for the group plan. The employee has the option to convert their $10,000 of group coverage to individual coverage within 31 days. Which of the following is true:

The employee can convert to a maximum of $10,000 of whole life coverage without a physical exam, with the premium based on the insured's age at conversion. The insured is eligible to convert from the group policy to an individual policy issued by the same insurer within 31 days of ineligibility. The insured CANNOT convert to term, but they can convert to a more expensive type of life insurance, such as whole life. There is no underwriting to convert to an individual policy, however the ex-employee would be responsible for paying the entire premium, which is based on their age at conversion (attained age), not age of enrollment in the group. When converting from a group policy the individual can only convert to a face amount that is no higher than that of the group policy.

Which type of insurance policy would provide the greatest amount of protection for a temporary period during which an insured will have limited financial resources:

The word "term" means time. Time is temporary. A Term policy, since it is the most inexpensive type of insurance, would provide an applicant the greatest amount of protection (face amount) on a temporary basis. However, in the long run, Term may be the most expensive type of insurance.

All of the following are true regarding survivorship life insurance policies, EXCEPT:

They pay a death benefit only when the first party dies Survivorship life insurance policies only pay when the last party dies and are often used to pay estate taxes.

At age 30, Clark Peterson wishes to purchase a Whole Life policy. His producer explains that he can pay for the policy in several ways. One method is called 20-Pay Life, and another, Straight Life. Clark wishes to know which plan will accumulate cash value at a faster rate in the early years of the policy. Which of the following would be the producer's most appropriate response:

"20-Pay Life will accumulate cash value faster."' With the exception of the Endowment policy, which is always the most expensive and always builds cash values the fastest, you can simply remember this truism: The shorter the premium-paying period, the more expensive the premiums and the faster the cash value builds. Since all the policies mentioned are forms of Whole Life, reaching their maturity at age 120, the only thing different is the premium-paying period. A 20-Pay Life requires that all the premiums be paid within 20 years from the day it is purchased. A Whole Life (or Straight Life) policy requires the premiums to be paid to age 120. If Clark is now 30, the assumption is that he would have to pay premium to age 120, or 90 years. Obviously, 20-Pay Life, which would require the premiums to be paid in over three times as fast, would be much more expensive and would also build cash values much faster.

An insured has a 30-year decreasing term life insurance policy with a $90,000 policy limit. If they die 20 years into the policy period, how much will the insurer pay:

$30,000 Since the amount of coverage decreases on a decreasing term policy, you can easily eliminate one of the answers, since you know they will not pay the full face amount. From there you can determine that the face amount will have decreased by 2/3rds since the coverage term is 2/3rds complete. 2/3rds of $90,000 is $60,000, which would leave 1/3rd or $30,000 remaining.

When a corporation establishes a contributory Group Term contract, what percentage test must be met for participation:

All Group Life insurance is Term insurance. Actually it is Annual Renewable Term and it is rated on the average age and claims experience of the entire group, which is called "experience rating." Remember, this type of insurance has a 31-day Grace Period and is convertible to Whole Life upon leaving employment. A Contributory Group plan requires that both the employer and the employees pay part of the premium. At least 75% of those eligible must participate, so the group is sure to get most of the healthy employees as well as those that are sick. In a Noncontributory plan, the employer pays 100% of the premiums and 100% of those eligible must participate. In most states, there must be at least 10 persons eligible to form a Group plan. If only the sick employees were to enroll, the insurance company would be the victim of "adverse selection" and their loss ratio (claims ratio) could suffer, causing the rates to go up.

Life settlement contracts are between the:

Policy holder and a third party A life settlement is a contract between a policy owner and a third party, who agrees to buy the owner's policy for more than its cash value but less than its face amount. The owner then assigns the ownership of the policy to the third party, who names themselves as beneficiary. A life settlement is very similar to a viatical settlement, except on a life settlement, the policy owner does not have a terminal illness.

Which statement is true about the premium payment schedule for a Whole Life policy:

Premiums are payable throughout the insured's lifetime, and coverage continues until the insured's death. Whole Life insurance assumes that the insured will pay the premiums until death or until age 120, whichever comes first. If the insured is still alive at age 120, the policy will reach maturity and pay the insured the face amount or cash value, whichever is more. This is because the insurance company's Mortality Table states that everyone has died by their 120th birthday. An insured who would like to retire at age 65, keeping the life insurance in force but discontinuing premium payments, should consider buying an LP 65, which is a Whole Life policy with a limited payment period. Of course, the shorter the premium paying period, the higher the premium. An insured buying Straight Whole Life, which matures at age 120, could also stop paying their premiums at age 65 by selecting the Reduced Paid Up Non-forfeiture option. This would result in the insured having a new Whole Life policy paid up to age 120 with a cash value and a death benefit somewhat reduced from their original policy, but no further premiums would be due.

The plan of Permanent Life insurance that offers cash value at the lowest premium is:

Since Whole Life has the longest premium payment period (to age 120), it also has the lowest premium of any policy with a cash value. Limited Pay policies are more expensive, since the premium-payment period has been shortened. Term policies have no cash value. Annuities are the opposite of insurance. There is no Death benefit. They only pay you if you live.

Which type of Life insurance is written as whole life:

Single Premium: Whole life insurance can be purchased with an annual premium for life, or as limited pay whole life, such as 20-pay life, life paid-up at age 65 or even with a large, single premium. Single premium policies would have an immediate cash value and are subject to the seven-pay test to determine if they are Modified Endowment Contracts. All of the other policies listed are types of term life insurance.

All of the following statements about Credit Life insurance are true, EXCEPT:

The coverage is unlimited. Credit life is a type of decreasing term insurance written on the life of the debtor. Proceeds from the policy are payable to the creditor to extinguish the debtor's debt. The maximum policy period cannot exceed the life of the loan, and the policy limit cannot exceed the amount owed. It is not unlimited!

When an insured purchases a Decreasing Term policy, which of the following decreases each year:

The face amount. Although the premium remains the same each year on Decreasing Term insurance, the face amount decreases, usually straight line each year. So, if you bought a 20-year Decreasing Term policy, after 10 years your face amount would be reduced by half. However, since the premium remains the same, you could say the cost of your insurance had doubled! Decreasing Term has no cash value. It is usually convertible, but not renewable.

If a client buys a new $50,000 life insurance policy and dies 1 month later:

The insurer must pay the claim. Assuming the premium has been paid, life insurance coverage becomes effective once the underwriter approves the application and issues the policy, and coverage will apply unless the insured lied about a material fact on their application or died as a result of suicide in the first 2 years.