MI Life Insurance Exam FX snapshot Q & A

What are the consequences of withdrawing money from a traditional IRA prior to age 59.5?

10% penalty on distribution unless it qualifies for an exemption.

Who can obtain a temporary license, and for what reasons?

A temporary license may be issued for the continuation of the business to the surviving spouse of a deceased producer, a producer who becomes mentally or physically disabled, or a designee of a licensed producer entering active service in the US Armed Forces.

Which rider allows the early payment of a portion of the death benefit to the insured?

Accelerated Death benefit rider

Which riders increase the amount of the death benefits?

Accident Death rider: pays double or triple the amount of face value Cost of Living rider: automatically increases the amount of insurance based on the inflation index. Return of Premium: pays back all the premiums in addition to the death benefit, and some others.

What are the four elements of an insurance contracts?

Agreement- offer and acceptance, consideration, competent parties, and legal purpose.

What settlement options are available in life insurance policies?

Cash payment (lump sum), life income, interest only, fixed period installments, and fixed amount installments.

What are the 3 non forfeiture options in life insurance policies?

Cash surrender value, reduced paid up insurance, or extended term option.

Which nontaxable exchanges are allowed under Section 1035 of the Internal Revenue Code?

Cash value life insurance to another cash value life insurance, endowment or annuity, an endowment to another endowment or annuity, and annuity to another annuity.

What are the main differences between a traditional IRA and a Roth IRA?

Contributions are after tax and can continue beyond age 70.5. Distributions do not have to begin at age 70.5

What are the three types of agent authority?

Express, apparent, and implied.

Who can contribute to a traditional IRA?

Individuals or married couples with earned income, up to the age of 70.5.

Where are the premiums invest in a fixed annuity?

Into the life insurance company's general account comprised mostly of conservative investments.

What is a free look period, and when does it begin?

It allows the policyowner a specified number of days after policy delivery to look over the policy, and if dissatisfied for any reason, return it for a full refund of premiums. The free look period begins when the policyowner receives the policy, not when the insurer issues it.

What is peril?

Perils are the causes of loss insured against in an insurance policy.

What are the continuing education requirements in this state?

Producers must complete 24 CE hours every 2 years, including 3 hours in ethical education.

What are some of the group characteristics important for underwriting?

Purpose, size, turnover and financial strength of the group

What constitutes rebating?

Rebating includes premiums payable on the policy, special favors or services, advantages in dividends or benefits, stocks, bonds, securities, and their profits (and similar inducements).

What is risk?

Risk is the uncertainty or chance of a loss occurring.

How does a substandard risk policy differ from a standard risk?

Substandard risk applicants are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. These policies could be issued with the premium rated up (higher than the standard risk).

Who owns a group life contract? What does the insured receive?

The actual policy (master policy/contract) is issued to the sponsor of the group, which is often an employer. The employees are the insured who are issued certificates of insurance.

What is the needs approach to determining amounts of life insurance based upon?

The needs approach is based on the predicted needs of a family after the premature death of the insured.

What does an insurance policy go in effect?

The policy will go into effect when the first premium is pad and the policyhas been delivered.

What does indemnify mean?

To "restore" an insured to the same financial status as before the loss.

What is the purpose of a grace period?

To prevent unintentional policy lapse for nonpayment of premiums.

What is underwriting?

Underwriting is the risk selection and classification process.

What are the four steps a producer must complete when replacing an existing policy?

1. Give applicant a Notice Regarding Replacement 2. Obtain a list of all existing life insurance policies to be replaced 3. Give the applicant the original or a copy of written or printed communications used for presentations to the applicant. 4. Submit to the replacing insurance company, with the application, a copy of the replacement notice.

When can life insurance death proceeds be included in the insured's taxable estate?

1. If the insured is the owner of the policy at the time of death or possessed any incidents of ownership at the time of death 2. If the insured's estate is the designated beneficiary at the time of the insured's death 3. If the insured, as policyowner, assigns or transfers ownership of the policy or makes a gift of the policy within 3 years prior to his/her death.

How long is the insurance license valid?

A license is valid as long as the licensee remains in good standing with the Department, all annual renewal and appointment fees are paid, and CE requirements are met.

An annuity has 2 distinct periods. What are they called, and what happens during each?

Accumulation Period (Pay In Period): the period of time over which the annuitant makes payments (premiums) into an annuity. Annuity Period (Annuitization, Liquidation, Pay Out Period) : is the time when money is distributed to the annuitant.

What is the difference between absolute and collateral assignment?

An absolute assignment permanently transfers all rights of ownership to another person, a collateral assignment is a transfer of partial rights.

What is the difference between an authorized/admitted and unauthorized/nonadmitted insurer?

An admitted or authorized insurer is qualified and received a Certificate of Authority from the DOI to transact insurance in the state. A nonadmitted or unauthorized insurer is an insurance company that has not applied for, or had been denied a Certificate of Authority and may not transact insurance.

What is annually renewable term insurance?

Annually renewable term (ART) is the purest form of term insurance in which the death benefit remain level; the policy may be guaranteed renewable each year without proof of insurability, but the premium increases annually according to the attained age.

How do annuities differ from life insurance policies?

Annuities liquidate an estate ( life insurance creates an estate). Annuities pay income to the annuitant while he or she is still living; life insurance pays the death benefit.

What happens to the contract value if the owner decides to surrender a deferred annuity prior to annuitization?

At surrender, the owner gets the premium, plus interest (the value of the annuity), minus the surrender charge.

What information does a Buyer's Guide provide?

Basic information about life insurance policies and comparison of policy cost.

What qualifications must candidates meet to become licensed insurance agents in this state?

Be a state resident, be at least 18 years of age, complete prelicensing education and examination requirements, pay the required fee.

Who is required to sign an application for life insurance?

Both the agent and the proposed insured (usually the applicant) must sign the application.

How are dividends taxed in participating policies?

Dividends are the return of unused premiums, so they are not considered income for tax purposes. However, if dividends are left with the insurer to accumulate interest, the interest earned on the dividend account is subject to taxation as ordinary income each year interest is earned.

In a fixed annuity, how are the guaranteed and current interest rate related?

During the accumulation phase, the insurer will invest the principal, and give the annuitant a guaranteed interest rate based on a minimum rate as specified in the annuity, or the current interest rate, whichever is higher.

How are life insurance death proceeds taxed?

If taken as a lump sum, proceeds are tax free. If other than the lump sum, principal is tax free and interest is taxable.

What happens to the benefit if the annuitant dies during the accumulation period?

If the annuitant dies before annuitization ( or payment period), his/her beneficiary will receive the amount paid into the plan or the cash value, whichever is greater.

When would an insured be required to sign a statement of good health?

If the initial premium is not paid with the application, the agent may need to obtain the statement of good health at policy delivery.

Which non forfeiture option is automatically selected if the policyowner has not made a selection?

If the policyowner has neglected to select one of these nonforfeiture options, the insurer will automatically implement the extended term option in the event of termination of the original policy.

What happens to an unpaid policy loan at insured's death?

If there are outstanding loans at the time of the insured's death, the amount will be considered a debt to the policy and the death benefit will be reduced by the amount of the indebtedness.

How soon can payments begin in a deferred annuity?

In a deferred annuity, income payments begin sometime after one year from the date of purchase.

Hoe does inflation affect the purchasing power of a fixed annuity?

Inflation can erode the purchasing power of income payments.

In a life insurance policy, when must insurable interest exist?

Insurable interest must exist between the policyowner and the insured at the time of application ( or the time of policy), but not at the time of loss.

What is insurance?

Insurance transfers the risk of loss from an individual or business entity to an insurance company, which in turn spreads the costs of unexpected losses to many individuals.

How can an insurance company use the information it obtains from the MIB?

It can use the MIB information to conduct further investigation into an applicant's current insurability.

What is the purpose of the Automatic Premium Loan provision?

It prevents the unintentional lapse of a policy due to nonpayment.

What are the characteristics of term life insurance?

It provides temporary, pure death protection, with no cash value.

What are the elements of insurable risk?

Loss must be 1. due to chance 2. definite and measurable 3. statistically predictable 4. not catastrophic 5. with large loss exposure 6. insurance cannot be mandatory.

What are the 3 factors that determine the premium for a particular policy?

Mortality, interest earnings, and expense.

Who is exempt from the licensing requirements in this state?

Officers, directors, or employees of an insurer of of an insurance producer who do not receive commission on policies written or sold are exempt from licensing requirements.

What are the death benefits options in universal life policies?

Option A is the level death benefit option, Option B is the increasing death benefit option.

Which dividend option increases the death benefit?

Paid up additions increase the death benefit of the original policy by whatever amount the dividend will buy.

What information is gathered in Parts 1 and 2 of the application?

Part 1 of the application includes general questions about the applicant, including name, age, address, birth date, gender, income, martial status, and occupation. Part 2 includes medical information about the prospective insured.

What are the characteristics of whole life insurance?

Permanent protection to the insured's age 100, with living benefits such as cash value, policy loans, and non forfeiture options.

What does representation mean and how does it differ from a warranty?

Representations are statements believed to be true to the best of one's knowledge. A warranty is an absolutely true statement upon which validity of the insurance policy depends.

What are the two premium payment options in annuities?

Single premium and periodic premiums

What does insurance solicitation mean?

Solicitation of insurance means an attempt to persuade a person to buy an insurance policy, and it can be done verbally or in writing.

What are common personal uses of life insurance?

Survivor protection, estate creation and conservation, cash accumulation, and liquidity.

What is the purpose of the agent's report?

The agent's (producer's) report is used by the agent to discuss his or her personal observations concerning the proposed insured.

What is the limit on the amount of credit life insurance on a debtor?

The amount of credit life on a debtor cannot exceed the amount owned to the creditor.

Who is the owner and who is the beneficiary of a credit life policy?

The creditor is the owner and the beneficiary of the policy.

Who has all of the rights in an annuity report?

The owner of the annuity has all of the rights such as naming the beneficiary and surrendering the annuity.

What are the general requirements for qualified plans?

The plan must be for the exclusive benefit of the employees and their beneficiaries, must be formally written and communicated to the employees, and cannot discriminate in favor of the prohibited group. The plan must be permanent, approved by the IRS, and have a vesting requirement.

What constitutes the entire contract?

The policy and a copy of the application, along with any riders or amendments, from the entire contract.

What is the difference between a revocable and irrevocable beneficiary?

The policyowner may change a revocable beneficiary at any time. An irrevocable beneficiary; however, has a vested interest in the policy and may not be changed without the beneficiary's written consent.

How does continuous premium straight life differ from 20 year limited pay life?

The premiums for straight life will be spread over the insured's lifetime, thus enabling the insurance company to charge a lower annual premium. When the premium paying period is condensed to 20 years, a higher annual premium is required.

What is the purpose of licensing?

To ensure that a producer meets educational and ethical standards required to fulfill producer's responsibilities to the insurer and to the public.

What is the purpose of key person insurance?

To minimize the risk of a financial loss because of the premature death of a key employee that has specialized knowledge, skills, or business costs.

What is the purpose of the state Life and Health Insurance Guarantee Association?

To protect insureds and beneficiaries from financial loss due to the insolvency of insurance companies.

Which authorities regulate variable life policies?

Variable life insurance policies are dually regulated by the State and Federal Government; the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the State Department of Insurance.

Upon what grounds can a producer's license be suspended or revoked?

Willful violations of or noncompliance with the Insurance Code or any other state and federal laws.

How long does a licensee have to notify the Commissioner of a change of address or telephone number?

Within 30 days of the change