Principles of Life Insurance Exam

In an employer-related group life contract, an employee may choose any of the following individuals or entities to serve as his or her policy's beneficiary EXCEPT

the employer.

Which type of business life insurance 'buyout' agreement is used to purchase the interest of a deceased partner so that the business can continue to operate without financial interruption?

Buy-Sell agreement

The following statements regarding 401(k) retirement plans are correct EXCEPT:

Plans rarely have a matching contribution component by an employer 401(k) plans often involve a 'matching component' by an employer, which are not taxed to an employee at the time of deposit. This 'match' is often a portion of what is deposited by the employee.

Which of the following statements BEST describes the Social Security 'blackout' period?

The blackout period begins when the youngest dependent child turns age 16 and continues until the surviving spouse reaches the age of 60.

Social Security does NOT provide financial assistance in the event of:

hospitalization

In the event that a parent dies or becomes disabled, which rider allows surviving child coverage to continue until the child reaches a specified age?

Payor Rider

In a qualified employer retirement plan, an employee is entitled to what percentage of the vested interest in benefits that accrue from his or her contributions?

100%

Which of the following life policy settlement options provides installments composed of both the policy's face amount and earned interest, the amount of which is determined by the length of time in which payments are to be made to the policy's beneficiary?

Fixed-Period Option

Which provision or clause below will illustrate the frequency and amount of policy premiums?

Consideration clause The consideration clause specifies the premium amount and frequency that payments must be made to maintain the policy. Policyowners can pay on a monthly, quarterly, semi-annual, or annual basis depending on their ability to afford such payments.

When a primary beneficiary dies before the insured, the beneficiary who will then receive policy proceeds is called the:

Contingent beneficiary A contingent beneficiary receives policy proceeds in the event that the primary beneficiary dies before the insured. Some policies include a third 'contingent beneficiary, known as a tertiary beneficiary.

Which formula is used to compute the taxable portion of an annuity payment?

Exclusion ratio

A person in a position of financial trust is known as a(n):

Fiduciary

In the event a whole life policy is cancelled or lapses due to nonpayment, all of the following nonforfeiture options are available to the policyowner EXCEPT

Fixed-Period option Reduced Paid-Up option Extended Term option Cash Surrender option Mandated by most state legislatures, the Standard Nonforfeiture Law requires insurers to pay any accumulated cash value in a life policy to the insured if the insured stops paying policy premiums to the insurer and includes the cash surrender, extended term and reduced paid-up options. The 'fixed-period' option is a life policy settlement option, not a nonforfeiture option.

Linda has decided to make her husband John the beneficiary to her life insurance policy. She has chosen a beneficiary designation that can only allow her to change beneficiaries with the written consent of her husband. This type of beneficiary designation is known as a(n):

Irrevocable designation

In order for a beneficiary to receive double indemnity, which of the following scenarios must occur?

The death of the insured due to an accident Referred to as 'double indemnity,' an Accidental Death Benefit rider provides an additional amount of life insurance, equal to the face amount of the policy, to the designated beneficiary if the insured's death results from an accident.

When pertaining to a defined contribution plan, all of the following are incorrect EXCEPT:

The final fund available to any one participant depends on total amounts contributed, plus interest and dividends earned Defined Contribution plans focus on the contributions paid into the plan instead of the benefits distributed out of the fund. All contributions invested, plus interest and possible dividends earned, represent the total accumulation of funds available at the time of the employee's retirement.

According to the NAIC Life Insurance Solicitation Model, when soliciting life insurance, a producer is required to provide a prospect with a ______ and a _______ specific to the product being marketed.

General buyer's guide; policy summary Known as the NAIC Life Insurance Solicitation Model Regulation, most states have adopted its methods over the years as it has expanded to include more accurate comparisons as well as more detailed disclosures to consumers. Such disclosures include requiring a prospectice buyer to be provided with a general buyer's guide and a policy summary specific to the product being marketed.

Ted, and the beneficiary to his policy Robin, have both perished in an accident. Considering there is no sufficient evidence to show who died first, Ted is considered to have outlived Robin in regards to policy proceeds as a result of the:

Uniform simultaneous death act

Which two life insurance riders can Bill purchase to guarantee that his policy will continue without further commitment from him and that income will be paid to him if he becomes totally and permanently disabled?

Waiver of premium and Disability Income Riders Both the Waiver of Premium Rider and the Disability Income Rider provide monthly income that is paid to the insured if total and permanent disability occurs.

If an individual wants to transfer funds from their 401(k) plan into a Rollover IRA, what is the maximum allowed time in order to be eligible for a tax-free rollover?

60 days

Carl purchased an Immediate Annuity with a 5-year 'life with period certain option,' which pays him $1,000 per month. Exactly 3 years after his policy start date Carl dies. How much money will his beneficiary receive for the remainder of the policy?

$24,000

Mr. Baker has named his son as the beneficiary to his life insurance policy, but he is worried about his son's spending habits and the money his son might already owe when he receives the death benefit. Which policy provision, clause or rider best fits his situation?

Spendthrift Provision A Spendthrift Provision protects the proceeds of a life insurance policy from the beneficiary's spending habits or any redirection of proceeds to any of the beneficiary's creditors.

All of the following are sources for obtaining information regarding an applicant's insurability EXCEPT:

the application Medical Information Bureau (MIB) the medical report Central Medical Bureau (CMB)

Social Security is also known as:

Old Age Survivors and Disability Insurance (OASDI) Titled as Old Age, Survivors and Disability Insurance (OASDI) by the Social Security Administration, this federal entitlement program is funded primarily through employer and employee payroll taxes, known as 'FICA taxes,' and provides a wide variety of social insurance programs to qualified recipients.

The period of time in which an annuity's value increases as a result of tax-deferred compounding interest is called the

accumulation period. During the annuity's growth period, known as the 'accumulation period,' interest that is earned by the investment is 'compounded,' or reinvested on a tax-deferred basis, thus allowing for a greater accumulation of funds for the annuitant.

What is the maximum number of Social Security credits an individual can earn per year?

4 credits One credit can be earned for each quarter in the calendar year that an employee pays FICA payroll taxes, with a maximum annual accumulation of 4 quarters of coverage, or credits, per calendar year, beginning after an individual turns 21 years old.

What is the full amount of Social Security credits needed to be fully insured for benefits?

40 credits Once an individual has earned 40 quarters of coverage, he or she is permanently eligible for Social Security once he or she retires, or if he or she becomes disabled, regardless of whether or not he or she continues to work in the future.

For individuals who have reached their normal retirement age, their spouses are entitled a retirement benefit that is equal to what percentage of the retired worker's primary insurance amount (PIA)?

50% A worker will receive 100% of his or her PIA at age 65, upon retirement. The spouse and dependent children are also eligible for 50% of the worker's PIA upon the worker's retirement.

In order to be considered currently insured and thus eligible for limited survivor benefits from Social Security, a worker must have earned ___ credits during the 13-quarter period ending with the quarter in which the worker died.

6 An individual qualifies as Currently Insured if he or she has accumulated at least 6 quarters of coverage within the last 13 calendar quarters. If a worker is currently insured at his or her time of death, continued benefits would still be payable to dependent children of the deceased recipient.

Under a stock redemption corporate buy-sell agreement, how many policies must be written if the corporation is owned by 7 shareholders?

7

Which of the following is established to fund a multiemployer plan?

A multiemployer plan is established through a type of trust, known as a Taft-Hartley Trust, which is specific to employers who are associated through a common bargaining agreement.

In the event that a life insurance policy has lapsed, which of the following actions is NOT required of the policyowner before an insurance company will reinstate the policy?

A new application for insurance must be established

Which statement regarding annuities is CORRECT?

Variable annuity units are fixed but the annuity payment will vary according to the value of the annuity unit. If an individual owns an annuity, the interest is generally taxable during the accumulation period. Annuity payments begin the next day for an immediate annuity. Variable annuities provide a fixed rate of return if funds are invested moderately.

Which type of whole life insurance policy is characterized by affordable premiums in its initial years, then gradually increasing over the next few years until finally leveling off at a slightly higher rate than a standard whole life policy?

Graded Premium Whole Life A Graded Premium Whole Life policy is similar to a Modified Whole Life policy with more affordable premiums for the initial years, graded premium whole life gradually increases for the next few years until finally leveling off at a lightly higher rate than standard whole life.

What is the most common type of employment-related group life insurance?

Annual Renewable Term

In the event that a whole life insurance policy lapses due to nonpayment or it is intentionally cancelled, which of the following nonforfeiture options are available to the policyowner?

Cash surrender option, reduced paid-up option and extended term option

All of the following are likely policy exclusions EXCEPT:

Commercial aviation War Commission of a felony Hazardous occupations Although private aviation such as flying a private airplane is excluded from life insurance protection, a passenger on a commercial flight does not exclude life insurance coverage.

According to the NAIC Model Group Life Insurance Provisions, what is the standard grace period?

30-31 days

Annuity policies written by dually licensed agents are monitored by which group?

Securities and Exchange Commission (SEC) The Securities and Exchange Commission (SEC) regulates the sale of variable annuities as a security and an agent must maintain a state insurance license as well as be registered with the Financial Industry Regulatory Authority (FINRA).

An individual, company or legal entity that purchases ownership of a life insurance contract from a policyowner who, in return, receives compensation amounting to less than the policy's death benefit, usually 60%-80% of the policy's proceeds is known as a :

Viatical settlement provider

Charles has a $85,000 25-year mortgage and wants to purchase a life insurance policy that would cover any outstanding balance on the mortgage if he were to pre-maturely die, which of the following policies would be the most logical for him to purchase?

25-year $85,000 Decreasing Term Life policy A decreasing term life policy provides a mortgage holder with a face amount equal to the mortgage amount and decreases over the mortgage period as the amount of mortgage decreases until both the term policy and mortgage reach zero.

How is a conditional receipt BEST described?

A receipt given to an applicant when an agent collects both the application and initial premium. Under a conditional receipt, the applicant is covered against loss, should it occur, before the policy becomes effective, on the 'condition' that the applicant is found to be insurable as applied for by the insurer's underwriting department upon completion of its underwriting process.

Which type of life insurance includes a weekly premium mode, a small face amount and is referred to as 'burial' insurance?

Industrial Life Insurance

Nicholas has purchased a whole life insurance policy; however, while completing his life insurance application he accidentally wrote down an incorrect date of birth. As a result, the insurance company believes he is 2 years younger than his actually age. When he brings this to the attention of the insurance company, what will likely be the course of action as a result of the Misstatement of Age provision?

The company will adjust the amount of future premiums and request payment of the additional premium Nicholas should have paid

In the event that a policyowner surrenders his or her individual whole life policy, which outcome will likely occur?

Interest earned will be taxed, but premiums paid into the policy will not be taxed. In the event that a policyowner surrenders his or her policy to the insurer, proceeds equaling the premium paid into the policy are tax free, while policy surrender proceeds that exceed the cost of the policy are taxable by the IRS. Any pre-tax premium payments and earned interest before forfeiting the plan are taxable as earned income.

In a group life contract, evidence of insurability is

required only after the enrollment period ends.

Under the 1035 policy exchange provision, which of the following will NOT receive favorable tax treatment?

An annuity contract exchanged for a life insurance policy An annuity can only be exchanged for another annuity without being taxed.

Which of the following is NOT a retirement vesting schedule?

Deferred Vesting Employers can provide 'Immediate Vesting' to allow their employees to gain immediate ownership of employer contributions. 'Cliff Vesting' occurs when an employer requires a certain number of years of plan accumulation and then provides 100% vesting to the employee. Finally, 'Graded Vesting', also referred to as 'graduated' vesting, occurs over a number of years where a larger percentage of ownership is gradually transferred to the employee, who eventually gains ownership of 100% of the employer's contributions.

Due to the historical mismanagement of employee retirement plans, which federal law did Congress pass to protect employee retirement plans against misuse?

Employee Retirement Income Security Act (ERISA) Enacted by Congress in 1974, ERISA protects employee retirement plans by establishing rules that 'qualified' plans must follow to ensure that insurers and plan administrators do not misuse plan funds.

Linda now owns a $120,000 term life policy after she forfeited her whole life policy and reinvested its cash value. As described by her actions, which nonforfeiture option did Linda exercise?

Extended Term Option The 'Extended Term Option' is similar to the reduced paid-up option, except the policyowner uses the policy's cash value to buy a term life policy with the same face amount as the surrendered whole life policy at a lesser term length, based on the amount of cash value available at surrender.

Tonya failed to pay her life policy's premium on the date in which it is normally due and is currently 23 days late. As a result of her policy's grace period provision, which outcome will occur?

Tonya is within her grace period and can pay her premium up to 30 or 31 days after the date in which the premium is normally due; however, she does not need to pay back any outstanding loans to the insurer. If a policyowner fails to pay his or her life insurance policy's premium by the date stated in the contract, the policy's grace period will prevent the policy from lapsing. Typically, a life insurance policy grace period extends for either 30 or 31 days after the date in which the premium is normally due. Outstanding loans are only required to be paid back to the insurer in the event that a policy has lapsed and is reinstated by the policyowner.

Which of the following is NOT associated with a term life policy?

Cash value Conversion Insurable interest Step-rate premiums An important feature of whole life insurance that is not associated with term life insurance is that a whole life policy includes an investment component which accumulates 'cash value' and increases over time based on earned interest.

Susan has been paying premiums on her whole life policy for the past 14 years. Recently, she decided to stop making payments, but did not select a nonforfeiture option. Since she did not select such option, what actions will her insurer take?

Her insurer will issue a paid-up term life policy with the same face value as the original whole life policy and a term length based on the amount of cash value that the forfeited whole life policy can purchase. If the policyowner fails to select a nonforfeiture option, the insurer will automatically issue a 'paid-up' term life insurance policy with the same face value as the original whole life policy and a term length based on the amount of cash value that the forfeited whole life policy can purchase using the available cash value funds from the original (forfeited) whole life policy.

Leon currently receives $650 per month from his variable annuity. Since he is scheduled to receive payments from his variable annuity for the remainder of his life, what will most likely occur to Leon's distribution payment amount as time goes on?

His distribution payment amount will fluctuate depending on the return of interest at the time of each distribution payment

All of the statements below pertaining to group life insurance are correct EXCEPT:

If the insurance coverage is less than $75,000, employees do not have to report the employer-paid premiums as income In a group life policy, employee premium contributions are not tax deductible; however, employees do not need to report their employer-paid premiums as income as long as their policy coverage is $50,000 or less.

All of the following are true in regards to the rights of ownership in a life insurance contract EXCEPT

In a term life insurance contract, the policyowner has the right to take out loans against his or her policy's cash value, or use it as collateral on a loan. The policyowner has the right to choose and/or change beneficiaries dependent on the revocable status of the contract. The policyowner has the right to assign the insurance contract to another party. If the policyowner purchases a life insurance contract through a mutual insurer (as opposed to a stock insurer), he or she has the right to receive dividends (return of premium) and the choice of payment options from the mutual insurer. A term life contract does not accumulate cash value; therefore, a policyowner cannot take out a loan against hist or her term life contract.

Which type of insurance is designed for individuals and families with low income who need minimal protection in the event of death?

Industrial Life Insurance Also known as 'burial' insurance, industrial life insurance provides minimal coverage (usually less than $2,000) in the event an insured dies, providing their beneficiary with enough money to cover basic final expenses.

The primary function of an Equity Index Annuity is to:

Link excess interest to the upward movement of an outside market index, such as the S&P 500, while maintaining a minimum guaranteed interest rate

All of the following statements are true in regards to the incontestability of a life insurance policy EXCEPT

Once this period of time ends, an insurance company cannot contest the validity of a policy and must pay its death benefits, even if a policyowner had no insurable interest in the insured at the time of application. Once this period of time ends, an insurance company cannot contest the validity of a policy and must pay its death benefits, even if a policyowner intentionally concealed material facts on the application. Once this period of time ends, an insurance company can contest the validity of a policy if it later finds the policyowner impersonated someone else on the application for insurance. Once this period of time ends, an insurance company cannot contest the validity of a policy and must pay its death benefits, even if a policyowner has no insurable interest in the insured at the time of claim. After 2 years (or in some states only 1 year), as long as a policy remains in force, an insurance company cannot contest the validity of a policy and must pay its death benefit even in the event that a policyowner intentionally concealed material facts or committed other forms of fraud, except for impersonation on the application, a policy with no insurable interest at the time of application (not time of claim), or the intent of murder.

If Justin submitted an initial premium with his life insurance application, was provided a conditional receipt by the insurance company and was ultimately issued a policy as applied for, when would his insurance policy be considered in force?

The date of his application or the day he completed any required medical exam. A policy is legally considered in force on the date that the application is completed and signed by the prospective insured, or the date that a medical exam is completed (if necessary), so long as the applicant is found insurable as standard risk. Any substandard risk would not be in force until the applicant accepts the substandard policy (counter offer) and pays the additional premium.

During the annuity period, which of the following is considered correct in regards to variable annuities?

The number of annuity units is fixed, but the value of each unit will fluctuate. As the variable annuity pays out to the annuitant, the number of annuity units will remain 'fixed,' or constant, but the value of each unit will fluctuate due to the variable annuity's underlying stock investment.

Barbara is currently in her Social Security 'blackout' period. Which answer BEST describes this period?

The period after a surviving spouse's youngest child is no longer eligible and before the surviving spouse turns age 60, or age 50 if he or she is disabled. A surviving spouse's Social Security blackout period begins, and survivor benefits end, after his or her children are no longer dependent and before he or she reaches age 60, or age 50 if he or she is disabled. Upon reaching age 60, survivor benefits resume again.

Barbara is currently within her Social Security 'blackout' period. Which of the following BEST describes this period of time?

The period of time after a surviving spouse's youngest child is no longer eligible and before the surviving spouse turns age 60.

Which of the following reasons would justify a policy replacement?

The policy no longer meets the needs of the client

The Incontestable Clause states that the insurer cannot contest the validity of a life insurance policy as long as it remains in force after what period of time?

Usually 2 years, but in some states only 1 year After 2 years (or in some states only 1 year), as long as a policy remains in force, an insurance company cannot contest the validity of a policy and must pay its death benefit even in the event that a policyowner intentionally concealed material facts or committed other forms of fraud, except fr impersonanation on the application, a policy with no insurable interest or the intent of murder.

Shelly is considered to be terminally ill and has decided to sell her life insurance policy in exchange for living benefits to fulfill some final comforts and expenses before her death. In selling her life insurance policy, Shelly is referred to as a(n)_________and she will receive a percentage of her life policy's face amount in exchange for ownership of her policy.

Viator A viator is a life insurance policy owner who sells his or her policy to a viatical settlement provider in return for an amount less than the death benefit, often 60% to 80% of the policy's proceeds. This individual is often terminally ill and is in need of funds to pay for healthcare costs.