****QUESTIONS THAT NEED REVIEW BEFORE EXAM *****

Assuming all are under age 59, who of the following will be assessed a premature distribution penalty when making a withdrawal from her IRA?

Daisy, who is suffering a financial hardship because she has been unemployed for two years Financial hardship is not an allowable exclusion that exempts an IRA distribution from the 10 percent penalty for a person not yet age 59½.

All of the following statements are true concerning whole life policies EXCEPT:

Over time, cash values decrease. In whole life policies, the cash value continues to grow throughout the life of the policy. It contributes to the policy's face amount or death benefit.

All of these are types of term life insurance policies EXCEPT:

permanent Permanent life insurance is the opposite of temporary or term insurance. It is not tied to a specific time period and can last for the duration of the insured's life or to age 100.

Over the life of a deferred annuity contract, how are the surrender charges affected?

Charges will decrease. The surrender charge is a percentage of the accumulated value of the annuity account. A 5 percent surrender charge on accumulated value of $20,000 would be a surrender amount of $1,000. As the charge decreases, so does the amount.

In a close corporation buy-sell agreement, the most common type of plan would be which of the following?

entity plan with stock redemption In contrast to a cross-purchase plan, an entity plan is one in which the business itself is a party to the agreement. If the business is a close corporation, the buy-out agreement is also called a stock redemption agreement.

Stan is a participant in his employer's group term life plan, and he is the senior employee in this plan. Stan's documentation takes the form of which of the following?

participant, with certificate of insurance The master policy is issued to the employer, trust, or labor union. Stan is a participant just like the other employees, and as such he receives a certificate of insurance.

Statewide Insurers routinely requires certain life insurance applicants to undergo a medical exam. For which of the following reasons can Statewide not request applicants to take a medical exam?

the applicant's sexual orientation An insurance company may require a medical exam or lab test based on information found in the application. Typically, a medical exam is requested based on the type or amount of the proposed insurance, the age of the applicant, or the health of the applicant, but not because of the applicant's sexual orientation.

Cliff is meeting with a client to discuss variable annuities. Before making a recommendation, Cliff must attempt to obtain information about all of the following EXCEPT:

the client's marital and family status Agents must make a reasonable effort to obtain information about a prospect's financial, tax, and investment objectives before recommending an annuity. Agents must therefore gather information about the prospect's income, investment horizon, tax status, and current assets.

All of the following are permitted as tax-free transactions under a Section 1035 exchange EXCEPT:

the exchange of an annuity contract for a life insurance contract IRS Section 1035 exchange rules do not allow the exchange of an annuity contract for a life insurance contract.

Tamara is 55. Her husband is 67 and now retired and receiving Social Security. They have a 15-year-old son. Tamara is eligible for what portion of her husband's PIA?

50 percent of the PIA If there is a dependent child under the age of 16, the spouse is entitled to the 50 percent benefit, no matter what his or her age.

Morgan is the owner and insured of a $1 million life insurance policy. At her death, the proceeds were payable to her son in a lump sum. What amount, if any, must be included in Morgan's estate?

$1 million For estate tax purposes, the value of any life insurance policy a person owned when he or she died is included in the value of the estate. Morgan's estate must therefore include the entire amount of the proceeds in her estate for purposes of determining any estate tax liability.

Andrew purchased a variable annuity on June 12 but decides not to keep it. How many days does he have to return the contract for a full refund of the premium?

10 days Annuity owners have the right to return the contract within 10 days of delivery and receive a full refund of premium if, after examining the contract, they are not satisfied for any reason.

Deborah is 40 years old. She is insured under a $500,000 life insurance policy and paid $2,500 in premiums for the policy this year. Which statement is correct when Deborah files her income taxes?

Deborah cannot take an income tax deduction for the premiums she paid because they are considered a personal expense. Life insurance a person owns is a personal expense. As such, the premiums paid for it are generally not tax deductible.

With respect to term life insurance, all of the following statements are true EXCEPT:

It provides a cash value when the policyowner dies. Temporary or term insurance offers coverage for a specific time period or to a certain age, but it does not accrue any cash value.

A prospective client, Joe, tells you he is covered under a defined contribution plan with his employer. What situation best describes the arrangement under Joe's retirement plan?

Joe contributes a determined percentage of his salary to the plan. Under a defined contribution plan, Joe will contribute a percentage of his annual salary, at whatever level the plan requires.

Settlement options for annuities are similar to those for life insurance in that they both can be based on which of the following?

a life contingency Both annuities and life insurance settlement options can be based on a life contingency, where the payments last as long as the annuitant lives.

Which of the following is not a factor in determining an individual's life insurance needs using the human life value approach?

cost of the life insurance The biggest disadvantage of the human life value approach is that it does not take into account a family's actual economic needs. It does not calculate the actual cost to ensure a family's future.

All of the following are exempt from federal income tax EXCEPT:

income from a deferred annuity Income from a deferred annuity is only tax deferred, not tax free.

Which clause in an insurance policy promises to pay the face amount to the policy beneficiary?

insuring clause The insuring clause states the promise that the insurer makes to pay the face amount to the beneficiary.

A life contingency option guarantees which of the following to an annuitant?

lifetime income to the annuitant A life contingency option guarantees income to the annuitant throughout his or her lifetime, regardless of how long the annuitant lives.

Under the terms of an annuity contract, periodic payments occur during what phase or period of the contract?

payout period The period during which funds are paid out in the form of periodic income payments is known as the annuity payout period.

Amy's retirement plan will provide her with a monthly income benefit equal to 2 percent of her salary for each of the years she is with her employer. What type of plan does Amy have?

defined benefit plan A benefit that an employee is to receive under a defined benefit plan can be defined in many ways. In this case, the benefit is 2 percent of the employee's salary for each year employed. Other plans may define the benefit as a percentage of final salary or as a specified dollar amount.

Kerry, age 41, just started working at Edison Industries. Once she works at the company for 12 months, Kerry will be eligible to participate in the company's retirement plan, which provides a specific, predetermined benefit to employees at retirement. The plan is funded entirely by employer contributions. Which type of plan does Edison Industries offer?

defined benefit plan A defined benefit plan is a qualified plan in which the employer makes contributions to provide a specified benefit at the participants' retirement. Defined benefit plans define the future benefit the employee is to receive. The benefit is typically paid monthly and usually for life.

Edward worked for a railroad company that offered a pension plan at the time he was hired. When he retires, he will receive 50 percent of his final salary, payable monthly, for life. What kind of plan does Edward have?

defined benefit plan Pension plans, which are not as common as they were, are a prime example of a retirement plan where the employer sets, or defines, the amount the former employee will receive.

Employee contributions to a 401 (k) plan are also known as which of the following?

elective deferrals Employee contributions to a 401(k) are known as elective deferrals because the employee can choose whether to participate in the plan and to defer a portion of wages for retirement.

Which of the following costs would not be covered under a business overhead expense policy?

employee wages Standard business overhead expense policies do not cover employee wages.

XYC Company buys insurance on one of its top officers. The company deducts the premium payments as employee compensation. What type of business insurance is this?

executive bonus plan Under an insured executive bonus plan, an employer agrees to pay some or all of the premiums on a life insurance policy an executive owns. The employer can deduct the premium payments as employee compensation.

Which of the following does not meet the requirements of a tax-qualified retirement plan?

executive stock option plan A qualified plan must not discriminate in coverage of employees. An executive stock option plan is generally for the benefit of key or highly compensated employees and therefore would not meet the requirements of a qualified plan.

Mark received a $275 life insurance dividend this year and used it to buy one-year term insurance up to the policy's $15,000 cash value. Which dividend option did Mark select?

fifth dividend option Mark elected the fifth dividend option, where the declared dividend each year is used to purchase one-year term insurance up to the policy's cash value.

Leo has chosen to receive a $1,500 monthly payment from his annuity, and payments will be made for as long as it takes to entirely liquidate the annuity principal whether or not Leo is alive. Which annuity settlement option has Leo chosen?

fixed amount Under a fixed amount option, the contract owner chooses a monthly payment amount, and the insurer then computes how long it will take to liquidate the principal at the selected amount. Income payments are made for as long as it takes to entirely liquidate the annuity principal.

Jayne is the beneficiary of a $200,000 life insurance policy and has selected a $2,000 monthly payment. She estimates that the payouts will extend for approximately 100 months. If she dies before all of the proceeds are paid, the remaining payments will continue to the contingent beneficiary. Which policy settlement option has Jayne selected?

fixed amount settlement option Under the fixed amount settlement option, the payee receives a specified fixed income amount for a certain period. The payment amount selected determines the length of time the payments will continue. The insurer then pays out the proceeds (including interest) on a schedule until the principal is exhausted.

Howard is 45 and has a modest but steady income. He wants to invest in a product that will provide him a steady, dependable monthly income when he turns 65. Which of the following products would be most suitable for Howard?

fixed deferred annuity Howard is seeking a specific monthly income in retirement, so an annuity that requires a fixed payment and will guarantee a stable income is his best choice.

Oscar has saved $250,000. He is 67 and working part time, and would like to fully retire now and receive monthly payments for life. What type of annuity is the best choice for Oscar?

fixed immediate annuity Oscar will make a single premium payment in an amount sufficient to generate immediate monthly income. An immediate annuity would provide Oscar with the near term income payments he needs

Settlement options can be based on which of the following?

fixed number of years or the length of the annuitant's life Settlement options for the annuity owner at the start of the payout period can be based on a certain number of years, the remainder of the annuitant's life, or a combination of the two.

Liza is guaranteed to receive annuity payments for 15 years from a $150,000 annuity fund. If she dies before the end of 15 years, income will be distributed to her beneficiary for the rest of the period. Under which settlement option is Liza receiving payments?

fixed period Under a fixed period annuity payout, payments are made for the specified number of years and then end. Common fixed period payouts are 10, 15, 20, and 25 years. If the annuitant dies during the payout period, income continues to the beneficiary for the rest of that period.

What are the two types of annuity payout options that are not based on a life contingency?

fixed period and fixed amount Annuity payouts that are not based on a life contingency are of two types: those that provide payments over a specified period, and those that pay specific periodic amounts.

John's life insurance policy guarantees a specified death benefit amount and a minimum rate of return on the policy's cash value. What type of life insurance does John have?

fixed whole life policy Under a fixed life insurance policy, the insurer guarantees a fixed death benefit and a minimum rate of return (interest crediting) on the policy's cash value.

Multiple employer welfare arrangements (MEWAs) come in two forms. These are which of the following?

fully insured and self-insured Fully insured MEWAs are formed by two or more employers. Self-insured MEWAs must get a state-issued certificate of authority and follow reporting guidelines similar to insurance companies, and they must have at least five employers and 200 employees.

What kind of annuity may an employer arrange for its employees' retirement?

group annuity Annuities can be used by employees on a group basis. Under a master contract, an employer sets up a group annuity plan that provides annuities to its employees when they retire.

Arnie, age 27, is married with two young children. He was just diagnosed with cancer and wants to increase his insurance coverage to protect his family should he die prematurely. Arnie can purchase additional insurance without having to provide evidence of insurability if his current life insurance policy contains which of the following riders?

guaranteed insurability rider The typical guaranteed insurability rider lets the policyowner buy more life insurance of a specified amount on policy anniversaries without having to provide proof of insurability.

Sammie, 58, is applying for Social Security disability benefits. She has worked for most of her life. If approved, her benefit amount will be based on which of the following?

her average indexed monthly earnings The benefit amount will be determined by average indexed monthly earnings (AIME).

Jane works for a company that provides for employee-managed contributions under a 401(k) plan. When will Jane become fully vested in her plan contributions?

immediately, upon initial participation in the plan A plan that is not employer-sponsored but offered through the employer cannot impose a vesting schedule on its employees. In this case, Jane would be completely vested at all times.

If an agent is performing actions in his day-to-day business dealings that are not stated in the agent's contract but are necessary to carry out his express authority, he is exercising what kind of authority?

implied The express authority given in the contract implies that the agent is authorized to perform other acts not specifically mentioned. This is the basis of the implied authority of an agent.

Jack has an interest-sensitive whole life policy. If the insurer's investment experience is unfavorable over a given period, Jack's premium rates will likely

increase. With interest-sensitive and current assumption whole life policies, premium rates can change in response to the insurer's actual mortality, interest, and expense experience. The insurer's unfavorable investment experience would probably cause premium rates to increase.

ABC Insurance Company sells whole life policies that carry premiums that may vary based on the insurer's actual experience. An example of such a policy is which of the following?

indeterminate premium whole life Two types of insurance policies base premium adjustments on the insurer's actual experience. They are indeterminate premium whole life and current assumption, or interest-sensitive whole life

Fred's wife was the primary beneficiary of his $750,000 life insurance policy. She received payments of approximately $900 a month in interest during her life, and at her death, their son received a lump-sum payment equal to $750,000. What settlement option was in effect at Fred's death?

interest-only option Under the interest-only option, the insurer holds the policy proceeds until a future date and instead pays out the interest that those proceeds earn. At the end of the interest-paying period (or upon request by the beneficiary), the proceeds the insurer held are paid out, either in a lump sum or under one of the other settlement options.

All of the following are unfair insurer practices EXCEPT

investigating insurance applicants. Insurers are entitled to examine the risks that they may underwrite. They may obtain information about their risks through investigative agencies, credit agencies, and the Medical Information Bureau (MIB).

Stranger-originated life insurance (STOLI) involves an exchange between which of the following parties?

investor group and a consumer STOLI is an arrangement in which an investor or investor group enters into an agreement with a consumer� usually someone between the ages of 65 and 80� to buy an insurance policy on his or her life in exchange for a lump-sum payment from the investor or investor group.

After completing an application for health insurance but before the policy is delivered, Mack decides he wants a $1,000 deductible instead of the $500 deductible he told his agent. Agent Jackson already has the policy ready for delivery, so he changes the deductible, and they both initial it. This alteration

is prohibited under the terms of the policy. Policies must contain a provision that the policy, including any endorsements, constitutes the entire contract of insurance. No change in the policy is valid until approved by the insurer. An agent does not have authority to change the policy or to waive any of its provisions.

Sigourney and her husband, Todd, plan to annuitize an annuity contract so that they will receive an income stream for as long as they both live. The income stream will be higher while both are alive and will be reduced to two-thirds of the original amount after the first spouse dies. Which settlement option have Sigourney and Todd selected?

joint and survivor option Sigourney and Todd chose a joint and survivor settlement option, which provides monthly payments for the joint lives of two annuitants. When the first annuitant dies, payments continue for the remainder of the survivor's lifetime. In this case, the payment will be reduced to two-thirds of the original amount after the first spouse dies.

All of the following are reasons for categorizing insurance by class EXCEPT

keeping insurance products complex to hide their real cost. Insurance classifications help explain important difference between products and help consumers to compare and understand them.

Which of the following is not an example of a qualified retirement plan?

key employee retirement plan For a plan to be deemed qualified and receive favorable tax treatment, it cannot discriminate in coverage or exist mainly for the benefit of key employees or executives.

Insurance premiums are determined by which of the following?

level of risk The premium is the charge to the policyowner for the risk the insurance contract covers. The greater the risk, the higher the premium.

In addition to several premium payment modes, what two payment plans can you as a life insurance agent offer your client?

level or flexible Under a level premium payment plan, the premium is set and remains fixed over the policy's term. Under a flexible premium payment plan, the policyowner can change the premium payment amount at will after the first payment.

Increasing term insurance offers which of the following?

level premiums and an increasing death benefit Increasing term insurance offers level premiums and a death benefit that increases monthly over the term of the policy.

John has a new business and many of his assets are committed to its operation. He wants affordable life insurance to protect his family in the meantime. Which of the following policies might be recommended to meet his needs?

level term A level term policy for a limited time would provide life insurance during the growing years of the business. More coverage could be purchased as the business becomes established and generates more income.

Your client has a $100,000 deferred annuity and wants to receive monthly payments for as long as he lives with a lump sum payment payable to the beneficiary should he die before the $100,000 is fully paid out. What settlement option would you recommend to achieve that objective?

life income with refund guarantee The life income with refund guarantee payout option pays the annuitant an income for life no matter how long he or she lives, and the refund guarantee provides that the balance is paid to the chosen beneficiary.

Harold's annuity contract provides that he will have an income for life, no matter how long he lives. If he dies before the payout equals the contract's cash value, the remainder is paid to his son, as beneficiary. Which of the following income payment options has Harold chosen under his contract?

life income with refund guarantee The life income with refund guarantee payout option pays the contract owner an income for life no matter how long he or she lives. If he or she dies before total income payments equal the amount of the annuity's accumulated cash value that has been annuitized, the refund guarantee option provides that the balance is paid to the chosen beneficiary.

Marty receives a $1,000 monthly payment from his annuity, which are guaranteed for life. At his death, the annuity's remaining accumulated cash value (if any)will be paid to Marty's beneficiary. Under which settlement option did Marty receive benefits?

life income with refund guarantee option Under the life income with refund guarantee payout option, the annuitant receives an income for life no matter how long he or she lives. If the annuitant dies before total income payments equal the amount of the annuity's accumulated cash value that has been annuitized, the balance is paid to the beneficiary.

An insurance policy provides financial protection against which of the following?

losses caused by perils Hazards are dangers, such as slippery floors or unhealthy habits. Hazards lead to or cause perils, which in turn cause loss. Exposure refers to the state of being subject to a possible loss.

Your client asks you about flexibility in premium payment options. What choices can you as the agent offer?

monthly, quarterly, semi-annually, or annually To support the preference of most policyowners for more frequent and lower premium payments, insurers allow for four different payment modes.

The net single premium reflects what two premium factors?

mortality and interest The net single premium for a traditional life insurance policy reflects two of the premium factors: mortality and interest.

Which of the following would not be used by an underwriter in making a decision to accept or decline a risk?

mortality tables The underwriter at the insurance company home office relies on medical and/or background information about the proposed insured. Actuaries use data from mortality tables.

Bailey owns a $1.2 million life insurance policy and received a $200 check when Best Insurers declared a dividend on its participating policies. How will this dividend payment be treated for income tax purposes?

not taxable Life insurance dividends are considered to be a return to owners of participating policies of unearned premiums they paid on their policies. The dividends are basically premium amounts that were more than what the insurer required to cover the costs of its liabilities and operations. For that reason, policy dividends are not taxable when they are paid in cash to a policyowner.

All the following are factors in determining an individual's life insurance needs using the needs approach EXCEPT

number of years the individual can continue working In contrast to the human life value approach, the needs approach determines personal life insurance needs based on a detailed review of each person's specific situation.

The insurer has accepted Jane's application for a life insurance policy, and the insurer is expected to issue the policy. As parties to the contract, Jane and the insurer are which of the following?

offeree and offeror Once the offer is made and before the contract is entered into, the party making the offer is known as the offeror. The party to whom the offer is made is known as the offeree.

Art is interested in purchasing an immediate annuity. What is the maximum number of premium payments he can make towards its purchase?

one An immediate annuity is bought with a lump-sum single payment and is often referred to as a single premium immediate annuity.

Which of the following would be the best choice of insurance to fund a buy-sell agreement in a two-person partnership?

one joint life policy A joint life policy provides funds for the surviving partner to buy out the deceased partner's share of the business. A primary appeal is cost - the premium is less than it would be for two separate policies with the same death benefit.

All of the following are standard life insurance policy nonforfeiture options EXCEPT

one-year term insurance option Life insurance policies commonly contain three nonforfeiture options: cash surrender, extended term insurance, and reduced paid-up insurance.

Harry, age 18, is insured under a juvenile life insurance policy. His mother, Lara, can no longer pay the policy's premium after being partially disabled in a work-related accident. Which policy rider will waive the premiums until Harry reaches the age of majority?

payor benefit rider A payor benefit rider ensures that a juvenile life insurance policy stays in force by waiving the premium payment if the premium payor dies or becomes disabled.

Brianna, age 53 and a mother of five teenagers, has a retirement plan at work and a portfolio of stocks and bonds. She is now thinking about purchasing life insurance. For which of her following objectives would a life insurance policy be most suitable?

protecting the value of her estate at her death Purchasing life insurance now is not enough time to fund teenagers' educations or to build up cash value to pay off a looming debt, and it is not appropriate as a savings vehicle. However, life insurance is a way to protect an estate because it removes the need to sell assets or to tap into savings to meet administration expenses.

An insurance applicant asks you why he should buy personal life insurance. Which of the following would not be an appropriate consideration?

protection against outliving one's income The need to protect against outliving one's income would be best addressed not through life insurance, but through an annuity.

A disability income benefit rider differs from a waiver of premium rider in that the disability income benefit rider

provides a monthly income. The disability income benefit contrasts with the waiver of premium rider, which only waives the policy's premiums but provides no disability income.

Bob owns a whole life insurance policy that pays $400 in policy dividends this year. He decides to use the $400 to purchase additional whole life insurance. Which of the following has Bob selected as a dividend option to increase his coverage?

purchase of paid-up additions, buying paid-up insurance of the same type as the base policy Under the paid-up additions option, the dividend buys additional paid-up insurance of the same type as the base policy.

In contrast to key person life insurance, corporate-owned life insurance (COLI) insures which of the following?

rank and file employees A COLI plan typically covers rank and file employees who are insured for the benefit of the corporation. It is usually reserved for very large corporate employers or organizations.

Mr. Johnson buys an annuity when he turns 50 years old. An agent tells Johnson the account is set up so that the accumulated funds will be annuitized in 20 years. At that time, Mr. Johnson can expect to

receive a series of income payments. When his accumulated funds are annuitized, Mr. Johnson will start receiving ongoing, periodic income payments. The income will be taxable.

Which of the following describes a group whose members pay a pro-rata share of the losses suffered by other members in the group?

reciprocal insurer A reciprocal insurer is a group of people or businesses that exchange this promise: each member agrees to pay a pro-rata share of any loss suffered by any other member. A reciprocal insurer is essentially a formal risk-sharing arrangement.

Jackie's whole life insurance policy had a $30,000 cash value at the time it lapsed. She decides to apply the cash value to purchase $90,000 in whole life coverage, and no further premiums are required. Which nonforfeiture option did Jackie select?

reduced paid-up insurance Under the reduced paid-up insurance option, a lapsed policy's cash value is applied as a net single premium to buy a paid-up policy of the same type as the lapsed policy. A paid-up policy requires no further premium payments, and coverage will last for Jackie's lifetime.

Under contract law, an applicant's statements on an application for insurance are considered to be which of the following?

representations An applicant's statements on an application for insurance are considered representations and not warranties.

Which of the following is an standard practice used by insurers to reduce the chance of adverse selection in a group life insurance policy?

require a minimum group size The group is too small for the law of large numbers to be used to assess risk. The underwriter cannot discriminate or exclude any one member from coverage. A minimum group size requirement can offset the risk posed by one or more members of that group.

Which of the following is not a factor in determining life insurance premiums?

reserves Insurers consider three primary factors when setting premium rates: mortality, interest, and expense. Of these, the mortality factor has the greatest impact on premium calculations.

Mary wants to change the beneficiary of her life insurance policy. As her agent, you inform her that she may do this if the beneficiary is which of the following?

revocable The change of beneficiary provision allows the policyowner to change beneficiaries. However, a beneficiary can be changed only if the designation has not been made irrevocable, in which case he or she had been designated revocable.

Robin breaks a leg while snow skiing. Considering herself lucky it was only a leg, she decides she will never again attempt snow skiing. Which of the following is Robin using as a means of risk management?

risk avoidance Risk management by avoidance means avoiding situations that could result in loss.

Johnson Industries has nearly 1,000 workers and has chosen to create a reserve fund with its own assets to fund its workers' compensation program. If any losses occur, it will use these funds to pay workers' claims. What type of insurer is Johnson Industries?

self-insurer Johnson Industries is a self-insurer because it has chosen to retain certain risks and to self-fund to pay any future workers' compensation claims.

ABC Company and one of its key employees, Andrew, each pay a portion of the premium of a policy on his life. What type of policy is this?

split-dollar insurance Under split-dollar insurance, the premiums for the policy and the death benefits provided under it are split between the employer and the key employee or executive.

Margo applies for a $250,000 universal life insurance policy. During the underwriting process, the insurer determines that she fits its guidelines for policy issue without any special restrictions. What type of risk is Margo considered?

standard A person classified as a standard risk fits the insurer's guidelines for policy issue without any special restrictions. Such applicants have a standard, or normal, medical history. Most insurance applicants fall within this category.

Carol was 35 when she bought her deferred annuity. Now, at age 38, she needs to withdraw funds from the contract to meet a financial emergency. Carol is likely to encounter all of the following consequences in making the withdrawal EXCEPT:

statutory minimum withholding requirements Carol is under age 59½, so the withdrawal will be subject to a 10 percent premature distribution penalty tax. The withdrawal is also subject to last in-first-out (LIFO) income tax treatment and to surrender charges. There are no statutory minimum withholding requirements.

For a given amount of annuitized funds, which life contingency option provides for the highest monthly payment?

straight life income Under the straight life income option, no further payments are made to anyone after the owner dies. However, this option provides for the highest amount of monthly payments for a given amount of funds.

Jill, age 60, owns a deferred annuity. If she withdraws funds from the annuity within a set period after buying the contract, she may be forced to pay which of the following, imposed by the insurer?

surrender charges A deferred annuity owner may be forced to pay an insurer-imposed charge for withdrawing funds within a set period. These charges are called surrender charges.

Sam and Elena were married and had purchased a life insurance policy that covered both their lives. Sam died on June 1. One year later, Elena died, and the policy proceeds were paid to her son as beneficiary. Which type of policy did Sam and Elena own?

survivorship life Survivorship life insurance policies insure more than one person but pay the death benefit only when the second insured dies. In these policies, premiums are lower than they would be for two comparable single-life policies.

Which of the following is a form of temporary insurance?

ten-year level term policy Under a term policy, insurance coverage is temporary, applying only for a limited time. The time limit can be as short as one year, as long as 20 years, or until the insured reaches a specified age.

You have a young client who has recently married. He and his wife are expecting their first child. He needs the most death protection that he can get for the smallest amount of premium. Which of the following products would you recommend?

ten-year term policy with a re-entry option A term policy with a re-entry option allows the insured to renew his or her coverage at a lower rate than would otherwise be charged upon renewal.

The guaranteed insurability rider is generally available under all of the following policies EXCEPT:

term insurance A guaranteed insurability rider allows the policyowner to buy ordinary whole life insurance, limited payment life insurance, or universal life insurance. Term insurance, however, is not normally available under this rider.

Which of these is not an example of a whole life limited payment policy?

term to age 65 The term policy's premiums and coverage end at age 65. In contrast, a whole life policy that is paid up at age 65 will no longer require premiums after the policyowner turns 65 years old even though coverage continues to age 120.

A viatical settlement provider buys a life insurance policy from a policyholder who most likely is which of the following?

terminally ill The viatical settlement provider is the organization that acquires the life insurance policy from the policyholder, or viator. The viator can then use the money from the policy sale to fund health expenses or end of life care.

Genevieve borrowed $300,000 from XYZ Home Mortgage Corporation and purchased an individual credit life insurance policy to guarantee repayment of the debt. Which of the following will not be stated in her policy?

that the entire amount of proceeds will be payable to Genevieve's named beneficiary or estate at death Individual and group credit life insurance policies must state the insurer's name and home office address, the amount and term of coverage, and the circumstances under which premium refunds are payable to the debtor. Policies must also state that benefits will be paid to the creditor to reduce any unpaid indebtedness at the debtor's death.

An indexed whole life policy ties death benefits and premiums to which of the following?

the Consumer Price Index (CPI) Indexed whole life insurance ties its death benefit and its premiums to a specified index, most commonly the Consumer Price Index (CPI).

Louise is applying for Social Security disability benefits. The initial disability determination will be made by local Social Security Administration field offices and by what state government agency?

the Disability Determination Service (DDS) State Disability Determination Services (DDS) agencies are 100 percent federally funded and make their decisions according to SSA rules and regulations.

Tim is 50 years old. He makes monthly premium payments on an annuity from which he expects to draw $1,000 a month starting at age 70. The next 20 years are referred to as which of the following?

the accumulation period In order to receive guaranteed monthly payments after funding the annuity, Tim first goes through the "pay-in" stage, also known as the accumulation period.

Bob participates in a defined contribution retirement plan with his employer. The benefit Bob receives at retirement is determined by which of the following?

the amount of contributions and their investment performance Under a defined contribution plan, the benefit Bob receives at retirement will be determined from the contributions plus interest earned on the contributions.

An employer's annual contribution to a defined benefit plan is determined by which of the following?

the amount of future benefits it agreed to fund The employer's annual contribution to a defined benefit plan is determined by the amount of future benefits it agreed to fund as well as by the date the scheduled benefits are due to begin.

As it applies to life insurance, the insurable interest rule is based on the relationship between which two entities?

the applicant and the person whose life is to be insured The insurable interest rule is based on the relationship between the person applying for insurance and the person whose life is to be insured. Insurable interest is a necessary element to the validity of a life insurance contract.

After Lydia's husband, Paul, died, she learned that she will not receive any Social Security benefits until she reaches age 60. However, she plans to use the proceeds from Paul's life insurance policy to provide income during this period. What is the name for this period?

the blackout period Surviving family members will need income during the Social Security "blackout" period, which is the period from the time children reach age 18 until the spouse's Social Security retirement benefits begin at age 60 or 62.(No Social Security income benefits are paid to the surviving spouse during the blackout period.)

Which of the following establishes that in exchange for the premium, the insurer promises to indemnify the insured against loss covered by the terms of the policy?

the consideration clause The consideration clause establishes that in exchange for the consideration the insurer promises to indemnify the insured against loss covered by the terms of the policy.

Susie was named beneficiary under her husband's life insurance policy but predeceased him. The proceeds were then paid to her son, Abe, who is considered which of the following?

the contingent beneficiary Abe is considered the contingent or secondary beneficiary. The contingent beneficiary is the next person (or class of persons) in line to receive the policy proceeds. Contingent beneficiaries receive the proceeds if the primary beneficiary is removed or dies before the insured.

Who is the policyholder under a group credit life insurance policy?

the creditor The lives of a group of individuals may be insured under a policy issued to a creditor, who is considered the policyholder.

Tax treatment requirements for employer-offered qualified plans were designed to protect whom?

the employee-participant Plan qualification requirements were designed to ensure that the plan is set up, maintained, and operated for the benefit of the employee-participant.

Which of the following is represented by the sum of the present values of all expected benefits under a life insurance policy?

the net single premium The net single premium is the sum of the present values of all the expected benefits under the policy. That is, the net single premium is the premium that a person would need to pay in a lump sum to receive all the benefits promised in the policy if no insurer expenses were considered.

Angela is the beneficiary of her mother's group life insurance policy. At her mother's death, Angela decides to receive the proceeds under a life with term certain settlement option. Which portion of the payments will be subject to taxation?

the portion representing the interest on the death proceeds The death benefits paid to the employee's beneficiary under a group life insurance plan are exempt from income taxes if they are paid in a lump sum. If they are paid under a settlement option, the interest portion of each periodic payment is taxable to the beneficiary.

Coverage under an insurance policy typically takes effect when

the premium has been collected. The effective coverage date depends on when the applicant pays the first premium.

George and Martha are married and file a joint tax return. They ask you, the agent, about opening up a Roth IRA. What is the first piece of information do you need from them before you can advise them?

their joint income Current tax laws prohibit George and Martha from participating in a Roth IRA if their combined income exceeds an annually adjusted limit.

John's employee retirement plan includes employer matching contributions under a cliff vesting schedule. How soon after beginning his participation in the plan will John be completely vested?

three years If John's plan includes employer matching contributions, cliff vesting is reduced from a five- to a three-year schedule. Therefore, John will be fully vested after three years of participation in his company retirement plan.

A disabled life insurance policyowner can use a policy's cash values for all of the following purposes EXCEPT

to buy an even larger life insurance policy A policyowner can use a life insurance policy's cash values to pay for a child's education, to supplement retirement income, and to serve as a source of funds in an emergency, among other reasons. These are known as the living benefits of life insurance ownership.

Why does an insurance company issue a conditional receipt?

to cover the proposed insured before policy issue A conditional receipt provides for conditional coverage before the policy is issued. It begins on the date of application or on the date of a medical exam, if required, whichever is later.

All of the following are typical uses of business life insurance EXCEPT

to fund the funeral of a key employee Business life insurance has several uses in protecting a business through policies that cover key employees. Funeral expenses are generally covered by personal insurance and not by business life insurance.

Which of the following best describes the purpose for the laws of agency?

to govern the authority granted agents to represent the insurers The document that defines the agency relationship is the agent's contract with the insurance company. The laws of agency expand the agent's authority from that granted in the contract.

Why would a large corporation choose to self-insure rather than buy an insurance policy from an insurance company?

to insure against frequent but low-severity losses A large company that is willing and financially able to assume certain risks can self-insure by creating a reserve fund and using that money to pay claims. This type of system is used for frequently occurring claims such as workers' compensation or pension plans.

The main difference between a traditional deferred compensation plan and a salary continuation plan is that

under a salary continuation plan, the employer funds the benefit. In the traditional deferred compensation plan, the employee funds the benefit by deferring a portion of current compensation. With the salary continuation plan, the employer funds or pays for the future benefit.

Your client is considering a life insurance policy. She tells you that she anticipates a need to withdraw cash in the next five to ten years. What policy would you recommend?

universal life Term life policies generate no cash value, and whole life policies require full or partial policy surrender to access cash. But universal life insurance policies allow withdrawals from their cash values.

Jordan can vary the premium payments and adjust the death benefit over the term of his permanent life insurance policy. After owning the policy for 16 years, the policy's cash values have grown to the point that Jordan decided not to pay premiums for the next six months. What type of policy does Jordan own?

universal life The key feature of universal life insurance is the flexibility such policies offer. The policyowner can, within certain limits, increase premiums, reduce premiums, or pay no premiums depending on the policy's cash value. Similarly, the policyowner can increase the benefit paid at death (subject to evidence of insurability) or can decrease it.

Your prospect is 31 years old, is married, and has two children. He wants a life insurance policy, but he insists that it must accrue cash value. He cannot afford much premium. What would you recommend?

universal life policy with a guaranteed insurability rider A universal life policy with a guaranteed insurability rider would provide the lowest premium for the greatest life insurance protection in this situation.

Under a Section 1035 exchange, how many contracts can be exchanged for a single contract?

unlimited The number of contracts that can be exchanged for one contract under a 1035 exchange is unlimited. However, all contracts involved must have all the same insureds and have the same owner.

If the insurer provides a ten-day free-look period for a life insurance policy it sells, when may it give the Buyer's Guide and policy summary to the policyowner?

when the policy is delivered If an insurer provides for a free-look period of at least ten days, it may deliver the Buyer's Guide and policy summary with the policy to the policyowner, but not any later. Otherwise, the insurer must deliver the Buyer's Guide and policy summary before it accepts the initial premium.

A prospective client, Nick, wants to open an individual retirement account. As the agent on this transaction, what would be the first thing you want to know about Nick before you advise him on his purchase?

whether he is covered by an employer-sponsored retirement plan As of 1986, tax deductibility of traditional IRA contributions depends on two factors: whether the IRA owner is covered by an employer-sponsored retirement plan and the owner's income level if covered under such a plan. If Nicholas is not already covered, his initial IRA contribution is fully deductible up to $5,500.

What is the difference between participating and nonparticipating insurance?

whether the policyowner is eligible for policy dividends Participating life insurance policies are eligible for dividends when they are declared by the insurer.

When discussing settlement options with an annuity owner, what is the agent likely to advise a client?

which annuity income option to select During the payout period, there are several ways an annuity owner can receive income payments. These ways are called settlement options.

All of the following are broad classifications of life insurance policies EXCEPT:

whole life and permanent life Life insurance can easily be classified into general groups, including individual and group coverage, permanent and term insurance, participating and nonparticipating insurance, and fixed and variable products.

An applicant for a life insurance policy has been approved and a policy delivery is scheduled. The applicant is instructed to accept the offer in writing by December 15. What are the applicant's options for acceptance?

written notice on or before December 15 Under common law, an offeree who wants to accept an offer must abide by every condition in the offer. If written notice must be provided by a certain date, that condition must be met.

In a cross-purchase buy-sell agreement involving three partners, what portion of the partnership does the business itself own?

zero In a cross-purchase buy-sell agreement, the business itself is not involved in the purchase agreement.

Jack's required minimum distribution from his 401(k) plan this year was $8,000. However, he mistakenly withdrew only $6,000. Jack must pay a penalty tax equal to what amount?

$1,000 A person who does not take the correct required minimum distribution from a qualified plan must pay a penalty tax equal to 50 percent of the difference between the amount that was taken and the amount that should have been taken. Jack must therefore pay a $1,000 penalty tax (50 percent of $2,000).

Micki purchased a nonqualified deferred annuity with a $50,000 deposit. Ten years later, the contract has grown to $67,000, and Micki decides to withdraw $16,000 from the annuity. How much, if any, of the withdrawal is subject to income tax?

$16,000 Annuity withdrawals are now treated on a last-in/first-out (LIFO) basis: that which is last put into the contract is deemed first to be withdrawn. Therefore, the full amount of Micki's withdrawal will be subject to tax because it is deemed to be a withdrawal of interest earnings.

Catherine, age 45, purchased a life insurance policy with a single $100,000 premium payment, causing the policy to be deemed a MEC. Eight years later, the policy's current cash value is $120,000. What are the tax consequences if Catherine withdraws $25,000 from the MEC to pay for her son's college education?

$20,000 of the withdrawal is subject to income tax and a 10 percent penalty tax. MEC withdrawals are treated on a LIFO (last-in, first-out) basis, which means that they are considered to be distributions of interest earnings first. Only after all interest has been distributed (and taxed) are amounts distributed from a MEC deemed a nontaxable return of invested premium. In addition, distributions of earnings taken before the owner's age 59½ are generally subject to a 10 percent tax penalty.

Jenna's life insurance policy has a $1 million face value. She has paid $150,000 in premiums over the years, and the policy now has a cash value of $200,000. If Jenna exchanges her current policy for a new life insurance policy under Section 1035, what will be her basis in the new contract?

$200,000 Jenna's new life insurance policy will take the basis of the policy exchanged for it. The new contract's basis will therefore be equal to her interest in the old policy, or $200,000.

Your client has a $200,000 life insurance policy with a return of premium rider. The insured dies within the stated period in the rider after having paid $15,000 in premiums. How much will the beneficiary receive?

$200,000 The beneficiary under a life insurance policy with return of premium rider would be entitled to the death benefit if the insured died within the stated period in the rider, but not to the premiums paid. The premiums would be returned if the insured were still alive at the end of the stated period.

Julia owns a $250,000 whole life policy that she plans to cancel. If she elects to exercise the extended term nonforfeiture option with the policy's $25,000 cash value, Julia will receive a term policy with a face value equal to what amount?

$250,000 If Julia chose the extended term nonforfeiture option, the insurer will apply the cash value of the lapsed policy to buy a term insurance policy. The term insurance is bought in an amount equal to the face amount of the lapsed policy, or $250,000. The term coverage lasts for whatever period the cash value buys.

Happy bought a deferred annuity with a single premium payment of $20,000. The contract has accumulated $3,000 in interest earnings. If Happy is 45 at the time of her $5,000 withdrawal, how much tax penalty, if any, will she incur?

$300 Because Happy is under age 59½, her withdrawal will be subject to a 10 percent penalty tax on the taxable amount of the withdrawal. Here, $3,000 of the $5,000 withdrawal will be treated as taxable interest, because this represents earnings. The 10 percent penalty tax is imposed on $3,000, so she must pay a $300 penalty tax.

Natasha is insured under a $500,000 universal life insurance policy. Her son, Todd, is the beneficiary. On October 1, Natasha took a $15,000 loan from the policy and died six months later without paying it back. What amount will Todd receive?

$485,000 less any interest owed on the loan The policy's death benefit is reduced on a dollar-for-dollar basis for the amount of the full, unpaid loan at Natasha's death. The insurer will also deduct any unpaid interest from the proceeds. Todd would, therefore, receive $485,000 less any interest owed on the loan.

Shannon, age 56, works full-time and maintains both a traditional and a Roth IRA. She wants to contribute the maximum amount possible to her accounts and has already made a $1,000 catch-up contribution to her traditional IRA this year. How much can she contribute to her Roth IRA if she does not contribute any more funds to her traditional IRA?

$5,500 A person can maintain both a Roth IRA and a traditional IRA and can make contributions to both for a given year. However, the maximum amount that a person can contribute to both combined is limited to the overall contribution limit. Shannon can therefore contribute a total of $5,500 plus a $1,000 catch-up contribution.

Fred has an annuity valued at $150,000. His annuity purchase rate is $5 per $1,000 of accumulated value. Fred's income from this annuity will be what amount?

$750 Under a straight life payout option, at $5 per $1,000, Fred's $150,000 annuity will pay him $5 multiplied by 150, or $750 a month for life.

Anthony becomes a producer for Acme Insurance Company. Acme has not filed the notice of appointment with the Commissioner. It must do so within how many days?

15 The insurer must file a notice of appointment with the Commissioner within 15 days of making the producer its agent or receiving the first insurance application from the producer.

Insurers earn interest on the policy premiums they receive. What is the commonly assumed rate of return insurers expect?

2.5 to 3 percent Because of the need for adequate financial safety margins, an insurer commonly assumes that it will earn 2.5 percent or 3 percent on the premiums it receives.

Susie was laid off at Best Computers on January 20. To convert her group life insurance policy to an individual policy, Susie must typically apply for a conversion policy within how many days after being laid off?

31 Group term life offers employees the right to convert their terminating group term life insurance coverage to an individual policy when their group coverage ends because of their retirement or another reason for termination. The employee who is converting must normally apply for a conversion policy within 31 days following termination or retirement from the group.

A 10 percent premature distribution penalty tax may be imposed on distributions from a qualified plan before what age?

59.5 Distributions from a qualified plan before age 59.5 may be subject to a 10 percent penalty tax, unless the distribution qualifies for an exception (e.g., death, disability, medical expenses).

When Brady left Beta Industries to work for Alpha Corporation, he received a distribution of the entire account balance from his 401(k) plan on March 1. He now plans to roll it over into his IRA. How many days does Brady have to complete the rollover without penalty?

60 If a participant receives retirement plan funds directly and plans to roll them over into an IRA, he or she has 60 days to complete the rollover transaction. If the new account is not opened and the funds deposited within 60 days, then they are subject to tax and a potential tax penalty.

Tina just left her previous employer for a better position at a different firm. She has accumulated savings in her 401(k) and elects to receive the funds personally. What is the maximum length of time Tina has to complete a rollover transaction without penalty?

60 days As a plan participant, Tina has 60 days to complete the rollover transaction. If she doesn't do so within this period, the funds she receives are subject to income tax and a possible tax penalty.

Candace submitted an application for a producer license and paid the licensing fee on June 1. She also obtained a temporary work authority on the same date. When will Candace's work authority expire?

60 days The Commissioner may issue a temporary work authority that allows an applicant for a license to begin work when the person has submitted a licensing application and fee. A temporary work authority expires 60 days after it has been issued.

At the age of 56, Carmen opens a Roth IRA. What is the earliest age at which she can take a withdrawal of earnings from her account without being subject to tax or penalty?

61 Roth IRAs require a minimum holding period of five years, regardless of the owner's age when the account is opened. In this case, Carmen would have to wait five years, or until she's 61, to be able to take a withdrawal of earnings without tax or penalty.

Chris is an eligible worker under Social Security. In the event of his death, what percentage of Social Security survivor benefits would go to his dependent son?

75 percent, indefinitely, if the son is disabled A deceased worker's dependent child under age 18 is eligible to receive survivor benefits equal to 75 percent of the deceased worker's PIA, which continue until the child is 18 years old. These benefits continue indefinitely if the child is disabled.

Peter is 80 years old, a widower, and living with his employed son who has been fully supporting Peter. In the event of his son's death, what level of Social Security benefit could Peter receive?

82.5 percent of the son's PIA Each parent of a deceased worker is eligible for monthly survivor benefits if the parent was at least one-half supported by the worker at death. If only one parent is eligible, he or she receives 82.5 percent of the worker's PIA.

Able has been diagnosed with a terminal illness. After responding to an advertisement, he signs an agreement under which he will receive part of the death benefit of his life insurance policy in exchange for transferring ownership of the policy. Who (or which) of the following is the viator in this scenario?

Able The viator owns a life insurance policy (or the certificate holder under a group policy) and enters into a viatical settlement contract.

All of the following are true regarding buy-sell agreements EXCEPT:

All buy-sell plans require that a surviving partner must bring the deceased partner's heirs into the partnership. Buy-sell agreements are typically designed to enable existing business owners to continue owning the business when the owner dies. The agreements involve the owners, or the business itself, not the owner or partner heirs.

Which of the following is not a requirement for employer-sponsored group insurance?

All employees must be insurable. Individual insurability is not a factor in determining eligibility. If the plans are contributory, 75 percent of the group must be enrolled in the plan. If the plan is noncontributory, 100 percent of the group must be enrolled.

Juan has been diagnosed with terminal cancer and has six months left to live. He is currently insured under a life insurance policy in which his wife and daughter are named beneficiaries. If Juan enters into a viatical settlement with All-Pro Insurers, which party will receive the insurance proceeds at his death?

All-Pro Insurers In a viatical settlement, the owner of a life insurance policy sells it to a third party, which is a settlement company. Upon acquiring the policy, the viatical company changes the beneficiary designation, pays the policy's premiums, and collects the policy's death benefit when the insured dies.

Melissa turns 70 on August 1 this year. Her first required distribution from her 403(b) plan must be taken no later than what date?

April 1 two years from now The required beginning date for qualified plan distributions is April 1 of the year following the year a person turns 70½. In this case, Melissa turns 70½ next year. Therefore, she must take her initial distribution no later than April 1 two years from now.

Jane has a life policy with a cost of living rider. How does the rider protect Jane against the effects of inflation?

As prices increase, so does the coverage amount. A cost of living (COL) rider is tied to an inflation index such as the Consumer Price Index (CPI). As the CPI increases, so does the policyowner's coverage. Proof of insurability is not required for the increased coverage.

After buying a variable annuity, Ben decides that the product is too risky given the fact that he is nearing retirement. If Ben decides to return the annuity one week later, what is the likely result?

Ben can cancel the annuity and receive a refund of the premium paid. Most states give annuity purchasers the right to examine the annuity for a certain time after purchase (typically 30 days) and to return the annuity if not satisfied for any reason. The insurer must then refund the entire premium paid.

Blackstone Insurance Company routinely uses Medical Information Bureau (MIB) reports when underwriting life insurance applicants. Which action can Blackstone take if an MIB report reveals that an applicant suffered from pancreatic cancer but did not reveal this information on the application?

Blackstone cannot decide to rate or decline the policy based solely on the MIB report. An insurer cannot take any adverse underwriting action based solely on the contents of the MIB report. Instead, the insurer must decide through other means that the impairment noted on the MIB report calls for a "rated" or "declined" decision.

All of the following are eligible to make contributions (tax-deductible or otherwise) to a traditional IRA EXCEPT:

Bud, age 68, whose income consists of his pension and Social Security benefits A person who is younger than age 70½ at the end of the year and who has earned income for that year can make an IRA contribution. Earned income does not include interest or dividend income, Social Security benefits, unemployment benefits, disability income payments, or pension benefits.

All of the following statements are true with regard to whole life insurance EXCEPT:

Cash value cannot be accessed until the insured's death. In a whole life insurance policy, the policyowner owns the cash value in the policy and can access it through policy loans or by surrendering the policy.

Dana has made $85,000 in deductible contributions to her traditional IRA over the years and plans to retire at age 67. Her IRA is now worth $125,000. What are the tax consequences if she takes a lump sum distribution of her entire IRA account?

Dana must pay income tax on the entire $125,000 distribution. When funds are taken from a traditional IRA, they are subject to ordinary income tax if they were not taxed before. In other words, any previously deducted contributions and any untaxed fund earnings are taxed when they are received. Dana must therefore pay income tax on the entire distribution.

Who of the following will be considered a preferred risk?

Delta, who has excellent health and works as a seamstress A person typically qualifies as a preferred risk if she enjoys excellent health, does not have risky habits or dangerous hobbies, works in a low risk job; and has no family history of heart disease or cancer at an early age.

Diana pays $3,000 each year in premiums for her variable annuity and plans to annuitize the contract when she retires in ten years. Which of the following statements is correct while Diana's annuity is still in the accumulation phase?

Diana's premium payments will grow on a tax-deferred basis. During the accumulation phase, an annuity's earnings will grow on a tax-deferred basis. When withdrawn, earnings are taxed as ordinary income.

Which federal law imposes a number of requirements pertaining to coverage, vesting, participation, and funding that retirement plans must comply with to obtain favorable tax treatment?

ERISA The Employee Retirement Income Security Act of 1974 (ERISA) protects the rights of employees covered under employer-sponsored retirement plans. It imposes a number of requirements pertaining to coverage, vesting, participation, and funding that plans must comply with to receive favorable tax treatment.

All of the following are eligible for favorable tax treatment of their retirement plans EXCEPT:

Eastern Widget Limited, which provides deferred compensation plans to its key employees All of the examples provided, except Eastern Widget, are offering qualified plans, which receive favorable federal tax treatment. A deferred compensation plan is a nonqualified plan.

All of the following are true regarding Social Security Benefits EXCEPT:

Eligibility for full benefits begins at age 62. For those who were born before 1938, full Social Security retirement benefits are payable beginning at age 65. Persons born between 1938 and 1959 are entitled to full retirement benefits at a gradually increasing age. For those born in 1960 or later, full benefits begin at age 67.

All of the following statements are correct regarding life insurance EXCEPT:

Exclusions are used to reduce the cost of the premium. Exclusions, or items not covered in a policy, are used to reduce an insurer's risk, not the policyowner's premium payments.

Smith is meeting with several potential life insurance purchasers this week. When determining if life insurance is a suitable product for these applicants, he will be considering all of the following EXCEPT:

Frank's conviction for a felony offense Facts for consideration include such things as annual income, financial experience, financial objectives, time horizon, liquidity needs, and others. The applicant's criminal record is not relevant to determining the suitability of life insurance.

Which of the following is not true about deferred annuities?

Funds cannot be accessed until the payout period. Funds in a deferred annuity belong at all times to the owner. The insurer cannot withhold the funds or refuse to honor the owner's request.

Mr. Jones is a senior executive with his company and considered a key employee. Which of the following statements is correct about key person coverage for Mr. Jones?

He has no ownership rights in the policy. Upon the key employee's death, the business receives the death benefit. The key employee has no ownership rights in a life insurance policy that is used for key person coverage.

Beth pays her permanent life insurance policy for 16 years. She loses her job, is unemployed for two years, and surrenders her policy to pay bills. Which of the following will Beth learn about nonforfeiture benefits under her policy?

Her policy will contain some nonforfeiture benefit. At all times, the policyowner owns cash value. If the policy lapses or is surrendered, the policyowner cannot be deprived of the cash value. That is, cash value cannot be forfeited to the insurance company. Therefore, all permanent policies include nonforfeiture options.

Brown Industries has 25 employees and is deciding whether to establish a simplified employee pension (SEP) plan or a SIMPLE plan. Which comparison is correct?

Higher contributions could be made each year to a SEP than to a SIMPLE plan. The annual amount that an employer can contribute to a person's SEP is limited to either 25 percent of the employee's compensation or to a dollar limit that is adjusted for inflation annually, whichever is less. SIMPLE plan contribution limits are lower than SEP limits.

Roberta selected a life annuity with period certain option when she annuitized her contract and chose a 20-year term. After receiving a monthly payment of $1,500 for 18 years, Roberta died. What is the result?

Income payments will continue to Roberta's beneficiary for the balance of the 20 years. A life annuity with period certain option guarantees that income is paid for the length of the annuitant's life. However, the income is paid for no less than a certain number of years. If the annuitant dies before the chosen term period ends, then income payments continue to his or her beneficiary for the balance of the period.

Which of the following is not true about decreasing term insurance?

It can be renewed. Decreasing term insurance provides coverage for decreasing needs, such as payment to survivors who would pay down a declining mortgage balance. It can be converted to a permanent policy, but it cannot be renewed.

Tandy Enterprises pays $25,000 in premiums each year for its group term life insurance plan, which covers all of its rank-and-file employees. When filing its income tax return, what can (or cannot) Tandy Enterprises do?

It can take a deduction for the entire premium paid. An employer can deduct premiums it pays on a group term life insurance plan. However, the plan cannot discriminate against rank-and-file employees.

As the insured continues to pay premiums for a whole life policy, what happens to the insurer's net amount at risk in that policy?

It decreases. Because the policy's cash value constantly increases as the insured pays premiums, the net amount at risk constantly decreases.

All of the following are true statements about the insuring clause EXCEPT:

It explains what would nullify the policy. The insuring clause states the promise to pay the benefit and has nothing to do with exclusions or limitations.

Jack and Delta Enterprises enter into a split-dollar plan. Delta is the policyowner, and Jack and Delta both pay premiums. Which party will receive the insurance proceeds at Jack's death?

Jack and Delta, equally In a split-dollar plan, a permanent life insurance policy is bought on the life of an employee. Either the executive or the employer may own the policy. The premiums for the policy and the death benefits provided under it are split between the employer and the executive (or another third party).

Which of the following individuals will be subject to the 10 percent penalty tax?

Jayne, age 57, who took a withdrawal from her Roth IRA after having owned it for two years If a withdrawal from a Roth IRA is taken before the owner's age 59½, the earnings portion is subject to a 10 percent tax penalty. However, the penalty tax will not apply if the owner has owned the account for at least five years and is over age 59½. A withdrawal is also exempt from the penalty if taken before the traditional or Roth IRA owner reaches age 59½ if the owner is disabled or other conditions are met.

Bill, Mary, and John Jr. are primary and equal beneficiaries of a $300,000 life insurance policy taken out by their father, John Sr. John Jr. dies before his father. John Jr. leaves one child, John III. John Sr.'s life insurance policy designated the death benefits per stirpes. What is the distribution of benefits when John Sr. dies?

John III gets $100,000, and Bill and Mary each get $100,000. Under a per stirpes beneficiary designation, the proceeds of John Sr.'s estate designated for his son John Jr. would pass down to the next generation if John Jr. dies before his father.

All of the following are examples of hazards EXCEPT:

John is taking medications to control his high blood pressure. A hazard is a condition that increases the number of losses or the severity of losses.

Johnson is an executive covered under a deferred compensation plan. Which of the following is not true regarding this plan?

Johnson is covered under a qualified plan. A deferred compensation plan is generally associated with senior executives. Because it is not available to everyone in the company, it would be a nonqualified plan.

Sam has heard that life insurance can be used to create an estate. When his agent meets with him to discuss the product, all of the following will be relevant to their discussion of Sam's objective EXCEPT:

Life insurance can be used to fund Sam's retirement. While it is true that life insurance can be used to fund retirement, funding retirement is not relevant to Sam's objective of creating an estate.

Marvin, age 70, owns a Roth IRA and still works full-time as a pharmacist. When he asks his advisor about when he must begin taking distributions from his account, the advisor informs him of which of the following?

Marvin is not required to take minimum distributions from the account. Unlike a traditional IRA that requires distributions to begin by an owner's age 70½, a Roth IRA does not require mandatory distributions. The funds can stay in the account for as long as the owner desires and can even be passed on to beneficiaries and heirs.

Lydia's life insurance policy has been in effect for six months. She becomes unemployed and wishes to take a loan against her policy. Is this possible?

No, because the policy has not been in force long enough. After some stated period (typically after three full years' premiums have been paid), if the policy has a cash surrender value with no premium in default, the company will advance a loan against a life insurance policy with the contract as collateral at any time while the policy is in force.

XYZ Company issues a memo to its employees that their matched retirement contributions will be vested when the company changes ownership. The date of the ownership change is uncertain. Does XYZ Company meet the requirements of a qualified plan?

No, because the vesting schedule is not compliant with federal regulations. To be considered qualified, a plan must provide for comprehensive vesting schedules. In doing so, it must provide a way for employee-participants to achieve full rights to the contributions the employer makes on their behalf.

Annette, Joan, Calvin, and Noah each own an individual life insurance policy. Which person will most likely be able to take an income tax-free loan from his or her life insurance policy?

Noah, who bought a $1 million variable life policy five years ago Policyowners who own life insurance policies that contain cash values can borrow up to the amount of the cash surrender value in their policies. Loans against the cash value are normally available after the policy is in force for a specified time, typically three years.

An employee is insured under a $100,000 group life insurance policy. At his death, the proceeds are paid to his beneficiary in a lump sum. What are the tax consequences?

None of the proceeds are subject to income tax. The death benefits paid to the employee's beneficiary under a group life insurance plan are exempt from income taxes if they are paid in a lump sum. If paid under a settlement option, the interest portion of each periodic payment is taxable to the beneficiary.

Richard is the sole proprietor of a successful bakery. To provide for his family, he wants to ensure that the business continues when he dies or if he becomes disabled. Richard's trusted employee, Tom, is capable and willing to take over the business, so the two enter into a buy-sell agreement for the sale and purchase of the business in the event of Richard's death or disability. Will the agreement serve the purpose of ensuring that the business endures?

Only if a guaranteed means of funding the purchase is established. The buy-sell agreement makes clear the parties' intent. However, if funds are not available to make the purchase, the agreement cannot be carried out. Life insurance on Richard paid by Tom or by the company will ensure that the funds are available when needed.

Assuming no relation other than that stated, insurable interests exists in all of the following situations EXCEPT:

Peyton on his life coach The general rule governing insurable interest is that insurable interest exists when a loss is suffered at the death of the insured. That loss can be the result of close familial ties or financial ties. Also, individuals have an insurable interest in themselves.

Which statement about life insurance policy dividends is correct?

Policy dividends are considered a return of unearned premium. Only participating life insurance policies pay dividends, which are considered a return of unearned premium. Dividends are not guaranteed and are generally received income tax free.

Stone owns a life insurance policy and has chosen the straight life income settlement option. He is the beneficiary. Which of the following best describes distribution of the policy proceeds?

Policy proceeds will be converted into payments that Stone will receive for as long as he lives. The straight life income settlement policy proceeds are made for the life of the payee. The payments stop upon his or her death.

All of the following are incentives for employers to establish and maintain qualified plans for their employees EXCEPT:

Qualified plan contributions are available to the contributing employer for other business uses. For an employer plan to be deemed qualified and to receive favorable tax treatment, it must meet very specific standards and requirements. These requirements are designed to ensure that the plan is set up, maintained, and operated for the benefit of employees. The requirements also ensure that the employees' rights in and to the plan are protected.

Sam and Mary both have group term life insurance. Sam's employer plan is a contributory plan, while Mary's is noncontributory. What is the difference?

Sam and his employer share premium payments, while Mary's employer pays the entire premium. If the cost of the premium is shared by the employer and employee, the plan is a contributory plan. If the premium is paid entirely by the employer, it is a noncontributory plan.

Who (or which) of the following is a viatical settlement provider?

Sam, a licensed insurance producer who offers to negotiate a viatical settlement agreement A viatical settlement provider is a person who solicits, enters into, or negotiates viatical settlement contracts. The other answer options do not fit the definition of a viatical settlement provider.

Which of the following is not a typical use for an annuity in setting up a tax-qualified plan?

Section 529 college plan Annuities are not used to fund Section 529 college plans.

Monica wants to access her insurance policy's cash value for the second time. She has not repaid the first loan. Which of the following describes what Monica will find when she attempts to take another loan against the policy?

She can borrow up to the cash surrender value, less her outstanding obligation. The policyowner can borrow the entire cash surrender value less any prior debt against the policy. However, the death benefit is reduced on a dollar-for-dollar basis for the full unpaid loan at the insured's death.

Lisa is 70 years old and is thinking about purchasing a fixed deferred annuity. Which of the following indicates that she is not well suited for this product?

She has a short investment timeline. A customer's investment objectives, risk tolerance, and time horizon affect suitability of the product. In this case, the customer has a short investment timeline, and annuities should be considered long-term investments.

Which of the following is a correct statement about a creditor requiring that a debtor buy credit life insurance?

Some states prevent creditors from forcing borrowers to purchase credit life insurance. Upon issue, credit life insurance may not exceed the value of the loan. Some state laws prevent creditors from forcing borrowers to buy credit life insurance. Upon issue, credit life insurance may not exceed the value of the loan.

All of the following people want to roll over their qualified retirement savings. Each asks that the plan trustee release the funds to her personally. Who will escape the mandatory 20 percent withholding?

Sue, an IRA owner Indirect rollover transactions from qualified employer retirement plans whereby funds are given directly to the plan participant for the rollover are subject to a mandatory 20 percent withholding. The mandatory withholding does not apply to IRAs.

Edgar is insured under a $1 million life insurance policy and dies during the grace period. What happens if Edgar had not yet paid the premium when he died?

The amount of premium due is subtracted from the policy proceeds paid to the beneficiary. During the grace period, the policy remains in force. In the event that death occurs during the grace period while the premium remains unpaid, the unpaid premium is generally deducted from the death benefit proceeds.

Your client asks you about the need for a cost of living rider. Under which of the following circumstances would you not recommend the addition of a COL rider?

The client has a universal life policy. Universal life policies, with their highly flexible terms, are not good candidates for the addition of a COL rider.

Margaret has a life insurance policy with a face value of $100,000. She took a $25,000 loan against the policy and died a week later after spending $10,000 and without making any payments toward the loan. How will the policy's death benefit be affected?

The death benefit will be reduced by the outstanding loan amount. The death benefit is reduced on a dollar-for-dollar basis for the unpaid loan at the insured's death.

Leslie, Leah, and Lori are the daughters of Bill and have been named primary and equal beneficiaries under his life insurance policy. The policy designates the death benefit be paid per stirpes. Leslie predeceases her father. What does this mean for Leah and Lori at Bill's death?

The deceased daughter's share of the policy proceeds will go to her children. Per stirpes means that the proceeds of a life insurance policy pass down to the beneficiary's children if the named beneficiary dies before the insured.

As a type of defined contribution plan, a profit-sharing plan is unique in what way?

The employer is the sole contributor. Profit-sharing plans operate much like other kinds of defined contribution plans, but the main difference is that the employer is the only contributor.

Which statement about group life insurance plans is not correct?

The employer must pay the entire premium. A group plan may be contributory (where the group sponsor and participants share the premium) or noncontributory (where the group sponsor pays the entire premium). A master policy is issued to the group sponsor, and each participant receives a certificate of insurance. A group policy must typically cover at least ten persons, and medical exams are generally not required.

Carlos entered into a viatical settlement with Dawson Life Settlement Providers and received $300,000 in proceeds. He had paid $50,000 in premiums for the policy, and the policy had a $100,000 cash value when it was sold. What are the federal tax consequences?

The entire $300,000 is not subject to federal income tax. The policyowner receives sales proceeds in a viatical settlement income tax free. To qualify for tax-free treatment, the viatical proceeds must be paid by a qualified viatical settlement provider, which is one that regularly engages in such transactions and is licensed for such purposes in the insured's state.

What are the rights of the insured in a third-party ownership situation?

The insured has no rights. In a third-party ownership situation, the insured under the life insurance policy generally has no rights under the policy.

Phoebe and her sisters have created a partnership to design and sell baby clothes. They do not have a business continuation plan. Phoebe's oldest sister, Diane, dies suddenly. How will this affect the partnership business and her sister's estate?

The partnership will be dissolved, and Diane's estate will receive its share of partnership assets. When a partner dies or withdraws from a partnership, the partnership must be dissolved. Surviving partners can reconstitute the business absent the missing partner. A life insurance policy paid by the individual partners or the partnership could have provided funding to purchase Diane's portion of the partnership assets. The family would be paid for the business interest, and the partnership assets would remain intact.

ABC, Inc., provides a defined benefit pension plan for its employees. Twenty-two year old Judy went to work for ABC and four years later, she leaves for a better job. She accrued no benefit under the plan. Based on these facts, which of the following statements is true?

The plan has a cliff vesting schedule. Under a cliff vesting schedule, the participant is not vested at all in a plan's contributions or benefits for the first four years of participation. In the fifth year, the participant is 100 percent vested.

To be considered qualified, a retirement plan must meet all of the following requirements EXCEPT:

The plan must cover all employees. A qualified plan is not required to cover all employees. However, a qualified plan cannot discriminate in coverage, which means that the employer cannot set up the plan mainly for the benefit of key employees or business owners. Also, a qualified plan must be in writing and must meet minimum funding levels, and contributions must be made by the employer, the employees, or both.

The comprehensive vesting schedule for employer-qualified plans requires which of the following?

The plan must offer a way for employees to receive full rights to the employer contributions. The vesting schedule requirement holds that a qualified plan must provide a way for employee-participants to achieve full rights to the contributions the employer makes on their behalf.

Beta Industries set up a retirement plan solely for the benefit of its top executives, and it plans to contribute the same amount to each employee's account every year. Which statement is correct if Beta wants to obtain IRS approval as a qualified plan?

The plan will not be considered a qualified plan because it discriminates in coverage. A qualified plan cannot discriminate in coverage, which means that the employer cannot set up the plan mainly for the benefit of key employees or the business owners. Beta's plan will therefore not meet the general requirements for obtaining qualified plan status.

The entire contract provision states which of the following?

The policy and the application together constitute the contract. The entire contract provision holds that the policy and attached application make up the contract, and any promise or change not included in the contract is invalid. Any such changes must be attached to the policy and signed by an executive officer of the insurance company.

Which statement is correct when a universal life insurance policy lapses?

The policyowner can only surrender the policy for its full cash value. Unlike other permanent policies, universal life policies normally do not contain the standard nonforfeiture options for policy lapses. However, a universal life policyowner always has the option of surrendering the policy for its full (or partial) cash value.

Increasing term insurance is characterized by which of the following?

The premium stays level while the death benefit increases. Under increasing term insurance, the death benefit increases while the premium remains level. Increasing term insurance is usually included as a rider on another policy and cannot stand on its own.

Steve takes out a life insurance policy on himself, naming his wife, Ellen, as the primary beneficiary and his two sons as contingent and equal beneficiaries. Ellen dies before Steve. Assuming no changes have been made to the policy, how will the policy proceeds be distributed after Steve dies?

The proceeds will be split equally between the two sons. The contingent beneficiary is the next person(s) or class of persons in line to receive the policy proceeds. Contingent beneficiaries receive the proceeds if the primary beneficiary is removed or dies before the insured.

Sue withheld information about a medical impairment in her application for life insurance. A Medical Information Bureau report discovers the adverse information. Which of the following is true concerning Sue's application?

The underwriter will need more information to make a decision. An insurer cannot make an underwriting decision based solely on information in the MIB report.

Steve's auto repair business is a sole proprietorship. He and the shop's manager, Larry, have entered into a buy-sell agreement in which the business will be sold to Larry at Steve's death or disability. They bought a life insurance policy on Steve's life to finance the purchase but did not have any professional advice beyond that. Steve is named the owner of the policy even though Larry pays premiums through payroll deductions. What is the adverse consequence to this arrangement when Steve dies?

The value of the death benefit will be taxable to Steve's estate. The value of life insurance proceeds is included in the policyowner's gross estate if he or she possessed any incidents of ownership in the policy at the time of death.

How would an insurance producer best explain flexible premium deferred annuities to a client?

They are a way to accumulate money over time by deferring the date at which the contract will begin distributing income. Flexible premium deferred annuities allow the owner to make premium deposits of any amount whenever he or she wants. However, a certain minimum amount may be required. Deferred annuities grow tax-deferred, not tax-free.

Which of the following is true about warranties in an insurance contract?

They are guaranteed to be true. A warranty is a statement the maker guarantees to be true in every respect. The warranty becomes a part of the contract.

Which statement about SIMPLE retirement plans is not correct?

They can be used along with another employer-sponsored qualified plan. SIMPLE plans are reserved for businesses that employ no more than 100 people and that do not already have a qualified plan in place. They can be structured as 401(k) plans or individual IRAs for each employee. Employers can make matching contributions or nonelective contributions.

Which of the following individuals will be able to access their life insurance policy's cash values through a withdrawal?

Tim, who owns a universal life insurance policy Universal life insurance policies allow withdrawals from their cash values, while owners of traditional whole life policies can access their cash values only through policy loans or through full or partial policy surrenders.

For which of the following individuals and his or her intended use of the product would purchasing an insurance policy be the least appropriate?

Tina, who wants an immediate source of income in case of an emergency Life insurance can be used to fund retirement, provide for surviving family members, and provide funding for college education. Life insurance is not appropriate, however, as an immediate source of income.

All the following statements regarding the tax benefits of qualified retirement plans are correct EXCEPT

Upon distribution, employees are required to pay taxes only on the interest earned on plan contributions but not on the contribution amount itself. The federal government encourages employers to set up qualified retirement plans for the benefit of their employees by offering tax incentives. For example, an employer can deduct the contributions it makes to a plan, and employees will not be currently taxed on contributions made on their behalf to the plan. Benefits are taxed to employees only when distributed or withdrawn.

A city policeman covered under a pension plan is informed that the age at which he may retire to receive benefits is 60. Can the retirement age be dictated by the policeman's employer?

Yes; a defined pension benefit plan can determine the eligibility age. A defined benefit plan is set by the employer, who can in turn determine the age of retirement. Civil servants who are in hazardous or physically demanding jobs, such as policemen, often retire earlier than age 65.

Walter has a life policy with a $100,000 cash value. He pledges half of that value as security for a business loan. This type of assignment would be which of the following?

a collateral assignment A collateral assignment does not transfer or assign all rights. Rather, it makes an assignment of the policy's values only to the point necessary to secure the loan.

If an agent proposes to replace an insurance policy with another policy, the agent must discuss all of the following with the prospect EXCEPT:

a comparison of costs among similar policies from various insurers The agent is not required to compare costs of similar policies issued by various insurers. However, producers must be careful to avoid improper replacement and refrain from generating commissions when replacement is not in the applicant's best interest.

Marge has purchased a form of life insurance that protects a company to which she is indebted. If she dies, the policy will pay off her debts. In the meantime, as her loan balance decreases, her coverage decreases. What type of life insurance policy does Marge own?

a credit life policy A credit life policy is designed to cover the life of a borrower in the amount of his or her outstanding loan. If the borrower dies, the policy pays the death benefit to the creditor. The coverage is matched to the declining balance on the loan. As the insured's loan balance decreases, so does the coverage.

Gerry is covered under a retirement plan in which the employer contributes 3 percent of each employee's salary to an individual account. Gerry does not know what his final benefit will be under the plan at retirement. Instead, it depends on whatever the contributions and earnings grow to. What type of plan does Gerry have?

a defined contribution plan Under a defined contribution plan, individual accounts must be set up for each participating employee, and the final benefit that a participant will receive at retirement is not known in advance. Rather, it depends on the amount to which the contributions and the earnings on those contributions have accumulated.

Melanie is young and purchases a variable annuity. She has a high risk tolerance, her investment horizon is long, and she intends to use the annuity as a retirement funding vehicle. She wants to allocate all premiums to the insurer's separate account. If she makes such an allocation, which of the following is she least likely to be investing in?

a fixed account Along with market-driven subaccounts, variable annuities usually offer owners the opportunity to allocate premiums to a fixed account. Melanie is probably willing to allocate all of her premiums to the insurer's separate account because of her intended use of the funds and her high risk tolerance and long

Richard just retired at age 72 and owns a $500,000 life insurance policy. Because he no longer needs insurance protection, Richard would like to sell his policy and use the proceeds to travel during retirement. Which option would be best suited for this purpose?

a life settlement A life settlement sale is reserved for seniors age 65 or older who are not facing a life-threatening illness. Life settlements offer a way for an owner to sell a policy and derive the largest possible value from the policy, short of its death benefit

Which of the following would be likely to offer credit life insurance?

a mortgage bank Credit life insurance is designed to cover a borrower in the amount of his or her outstanding loan, which has a decreasing balance over a specific term. A mortgage loan is an example of such a loan.

A customer's investment objectives, risk tolerance, and time horizon affect suitability for annuity purchases. Which of the following indicates that a customer is not suited for an annuity?

a need for current liquidity The need for current liquidity does not correspond with the fact that annuities are considered long-term investments.

XYZ Company is a close corporation with several shareholders. The company buys the ownership interest of a recently deceased shareholder. This buy-sell agreement is known as an entity plan or which of the following?

a stock redemption agreement If the business that owns the entity plan is a close corporation, the buy-out agreement is also called a stock redemption agreement.

Cora is a widow and has no relatives to whom she wishes to transfer assets at her death. She wants to invest some of her assets into an immediate annuity that will give her the largest periodic payment and will continue for her entire life. Which of the following annuity settlement options is best suited for her objective?

a straight life annuity Under a straight or pure life income contract, the owner is paid an income for his or her lifetime, regardless of how long the owner lives. At the owner's death, no further payments are made, and the contract ends.

Group life insurance can be provided through a group insurance contract or through

a trustee of the employer fund As in estate planning, a trustee would manage the transfer of funds for the payment of claims to individual members of the group plan.

A rider that is attached to a life insurance policy and gives the insured a reprieve from premiums during a period of total disability is what type of rider?

a waiver of premium rider Under the waiver of premium rider, the policy's premiums are waived if the insured becomes totally disabled for a period stated in the rider.

Jeremy and his brothers each purchased individual health insurance policies at a young age, and have kept their policies in force over the years, because of their family history of cancer . Which of the following describes the tendency of Jeremy and his brothers to seek insurance?

adverse selection Adverse selection is the tendency of persons more likely to have a claim to buy and keep insurance. For example, individuals with a family history of cancer may be more likely to buy health insurance and to keep it in force than individuals without such family history.

Brenda owns a deferred annuity that she no longer needs. Through a Section 1035 exchange, she can exchange her annuity income tax free for which of the following?

an annuity Section 1035 of the Internal Revenue Code allows life insurance, annuity, and long-term care insurance contracts to be exchanged tax free for other similar products. Specifically, an annuity can be exchanged tax free for another annuity or for a qualified long-term care insurance policy.

Wally pays his own life insurance premiums at predetermined intervals, and the face amount of his policy is $100,000. He is the only insured under the policy. Which of the following types of policies does Wally own?

an individual ordinary life insurance policy An ordinary life policy offers individual coverage in any face amount. The individual owner pays premiums based on a preset schedule from monthly to annually.

Allan plans to purchase a $250,000 term life insurance policy. Which premium payment method should he select to ensure that the insurer will not charge an additional fee?

annual Allan should pay premiums annually to avoid having an extra charge imposed. When premiums are paid more often than once a year, an additional charge applies. This charge reflects the interest the insurer lost because the full annual premium is not paid at the beginning of the policy year. The additional charge also includes costs the insurer incurs to process and administer premium payments that are made more often than annually.

Which of the following individuals' lives is typically used in determining the monthly income amount that will be derived from an annuity?

annuitant The annuitant under an annuity contract is normally the person named to receive the benefits from the annuity, and the annuitant's life is the measuring life for payments. Often, the annuitant is also the contract owner, but this need not be the case.

Annuity certain income options differ from life contingency options in that they

are based on time, not on the annuitant's life. As opposed to a payout option that is based on the death of the annuitant, an annuity certain pays either specified amounts or over a specified period such as 10, 15, or 20 years.

Which provision protects against the unintentional lapse of a life insurance policy?

automatic premium loan An automatic premium loan provision prevents a policy from lapsing if the policyowner fails to pay the premium. It directs the insurer to deduct any unpaid premium from the cash value of the policy as a loan.

Level term insurance provides which of the following?

both a level premium and a level death benefit Level term insurance provides a level death benefit and charges a level premium for the duration of the coverage term. At the end of the term, coverage expires and protection ends.

An insured files a claim for $20,000. The insurance company offers to settle the claim immediately for $12,000 if he signs a release now. Otherwise, the insurer will take a year to fully investigate the claim and arrive at a settlement. This violates state laws that relate to which of the following?

claims settlement practices When reviewing applications and applying underwriting standards, insurance companies are required to use the same criteria with all applicants. State laws prohibit discrimination when settling claims.

Mr. Jones has a life insurance policy that covers his entire family. Which of the following would not be one of the living benefits of this policy?

conservation of his estate Cash value withdrawals and policy loans to meet current needs are living benefits of a life insurance policy. Estate conservation involves use of the policy death benefit by the beneficiaries.

Abbott Computers offers a group life insurance plan issued by ABC Insurance for its employees and pays 80 percent of the premium for the group coverage. The employees pay the remaining 20 percent. What type of group plan does Abbott offer?

contributory If an employer pays the entire premium under a group life insurance plan, the plan is known as a noncontributory plan. If shared by the employer and employee, the plan is known as a contributory plan.

Which of the following usually offers credit life insurance in connection with a transaction?

creditor Typically, the creditor in a given situation, such as a mortgage bank, would offer credit life insurance.

When an insurance company determines the appropriate premium for an insurance policy, which of the following will it not consider as part of its loading costs?

death risk of insured Loading costs include the insurer's expenses for rent, salaries, benefits, commissions, and field expenses. The insurer also accounts for a margin of profit it wants to earn on its operations. Death risk falls within the mortality category.

Allie is insured under a $50,000 individual credit life insurance policy. Which type of insurance is typically used for this purpose?

decreasing term insurance Credit life insurance is designed specifically to cover the life of a borrower in the amount of his or her outstanding loan. If the borrower dies, then the policy pays the policy's death benefit to the creditor. The type of insurance plan used for this purpose is usually decreasing term insurance.

Your client borrows money from a bank for home repairs. He is concerned about his health and wants to be sure that his family will be able to repay the loan if anything happens to him. What kind of insurance might best serve this client's need?

decreasing term insurance Decreasing term insurance is commonly sold by creditors such as banks to offer the ability to pay a debt that decreases over time, such as a loan.

The type of business insurance under which a senior employee agrees to postpone receipt of a portion of compensation is known as which of the following?

deferred compensation plan A nonqualified, deferred compensation plan enables an employee to delay receiving current compensation until a future time.

A double indemnity is a rider most commonly found on what type of policy?

AD&D policy An accidental death benefit rider provides an additional amount of insurance if the insured dies as a result of an accident. The additional amount is typically double or triple the amount of the base policy's face value.

Which of the following is not true regarding the law of agency?

The principal has express authority; the agent does not. Under the law of agency, in an agency relationship several types of authority are automatically given by the principal to the agent. This includes express authority.

Christina has a group term policy, but she is leaving her employer for another position in a different industry. Can she convert to an individual policy?

Yes, she can, without evidence of insurability, with 31 days' notice. An individual whose coverage in a group term policy is terminated may convert coverage to an individual policy, and is entitled to have an individual term policy issued without evidence of insurability, if the individual applies for the policy no more than 31 days after termination from the group plan.

Your prospective insured has just submitted to you a completed application for life insurance with the first premium payment. As the agent, what do you then provide?

a premium receipt Premium receipts are designed to offer interim coverage while the application is being approved and the policy is being formally issued.

A disability waiver under a universal life policy can take the form of a waiver of stipulated premium or a waiver of which of the following?

cost of insurance For universal life policies, a disability waiver can take one of two forms: a waiver of stipulated premium or a waiver of the cost of insurance.

In classifying insurance risks, which method is used most often by insurance underwriters?

numerical rating system Under the numerical rating system, credits are added for favorable risk factors. Debits are subtracted for adverse or unfavorable factors. This system has largely replaced the judgment method.

Teddy's 403(b) plan account was worth $200,000 when he was laid off from his job. He plans to roll over the entire amount into an IRA and has asked the plan administrator to distribute his account balance directly to him. What amount will Teddy receive from the 403(b) plan administrator?

$160,000 If a rollover distribution is paid directly to an employee, the employer is required to withhold 20 percent. To avoid this requirement, the employee must tell the employer to transfer the funds directly to an IRA or qualified plan (known as a direct trustee-to-trustee rollover).

Wally annuitized his fixed annuity and now receives $1,800 each month. Of this amount, $1,500 represents his investment in the annuity, and $300 represents interest earnings. Which statement regarding the taxation of Wally's annuity payments is correct?

$300 is taxed as ordinary income. Annuitized income is taxed by applying the exclusion ratio, which calculates the proportion of income that is attributable to principal and is not taxed. In this case, $1,500 of Wally's monthly payment is a return of principal and is not taxable; the remaining $300 in interest earnings is taxed as ordinary income.

Ted, Ella, Theresa, and Christian are equal partners in a small publishing company. If they enter into a cross-purchase buy-sell agreement and fund it with life insurance, how many policies will be needed?

12 If there are 4 partners to a cross-purchase buy-sell agreement, 12 life insurance policies will be needed. This is determined by using the formula N (N - 1), where "N" equals the number of partners or shareholders.

Under an insurance contract, which of the following best describes the difference between a representation and a warranty?

A representation is not part of a contract, while a warranty becomes part of a contract. A representation is not guaranteed by its maker to be true; it is only believed to be true. A warranty is a statement guaranteed to be true, and it becomes a party of a policy contract.

Why might Mr. and Mrs. Mays choose the joint and survivor life income settlement option under their life insurance policy?

Both payees will receive payments and when one dies, payments will continue for the remaining life of the survivor. Under the joint and survivor settlement option with a period certain, payments are made to two payees until the second payee dies.

Patty is considering purchasing a life insurance policy, and Agent Brown asks if she has any existing policies. She does, and states that she would not maintain her current policy if she purchased the policy that Agent Brown presented. Therefore, Agent Brown has which of the following duties?

He must inform Patty of the consequences of replacing the policy. The producer must inform the applicant of the real and potential consequences of replacing the policy and must act only in the applicant's best interests. The producer and the applicant must sign a form indicating that the required disclosures have been made and that the applicant understands the consequences of the replacement.

Which of these is not an independent agency that rates insurance companies?

Lloyd's of London A-M Best, Duff and Phelps, and Standard and Poor's are all rating agencies. Lloyd's of London is an association of individuals and companies that underwrite insurance on their own accounts.

In which of the following cases did the Supreme Court uphold the right of states to regulate insurance by ruling that the sale of insurance is not considered interstate commerce?

Paul v. Virginia In 1868, the U.S. Supreme Court decided the case of Paul v. Virginia, in which it held that the sale and issuance of insurance is not considered interstate commerce, thereby upholding the right of states to regulate insurance.

The death benefit payable under a group life insurance plan is exempt from income taxes in all the following situations EXCEPT

The benefits are taken as relatively equal periodic payments spread over 5 years. The death benefits paid to the employee's beneficiary under a group life insurance plan are exempt from income tax if they are paid in a lump sum. Interest earned on distributions spread over time is taxable. It is not necessary for life insurance beneficiaries to have an insurable interest in the insured.

Insurance companies may call a consumer on the Do Not Call list under which of the following circumstances?

The insurer has an existing relationship with the consumer If the consumer has an existing relationship with a business, the business can call for up to 18 months after the consumer's last purchase or payment..

What is the primary distinction between individual life insurance and group life insurance?

The number of lives covered under the policy. Under individual coverage, a single owner owns the policy on the life of an insured and on possible additional insureds named in the policy.

Reggie has not paid his life insurance policy premium, and the policy is in the grace period. He dies of a heart attack during this time. How will the policy respond?

The policy will pay the death benefit after deducting the premium that is owed. The policy continues in force during the grace period, but if a claim arises under the policy during the grace period, any premium due or overdue may be deducted from the policy proceeds.

A policyowner can exercise the right to transfer ownership of a life insurance policy by using which of the following methods?

assignment Assignment is the method by which a policyowner transfers ownership. Beneficiary change and contract surrender are rights the policyowner has.

If the insurer provides a ten-day free-look period for a life insurance policy it sells, when may it give the Buyer's Guide and policy summary to the policyowner?

when the policy is delivered If an insurer provides for a free-look period of at least ten days, it may deliver the Buyer's Guide. Otherwise, the insurer must deliver the Buyer's Guide and policy summary before it accepts the initial premium.

Your client wants to draw money from his universal life policy. Which of the following would not be a proper way to do this?

with a Section 1035 transfer The client can take a loan from the cash value account of his policy or surrender it early. A 1035 transfer would not provide cash.

Mary, an agent for ABC insurance company, works with her client Joe to set up an annuity. What respective roles do Mary and Joe play in this scenario?

Agent and owner An annuity is a contract between a person (the annuity owner) and a life insurance company (the annuity issuer). The agent is not a party to the contract.

Janet, age 62, plans to quit her job and apply for Social Security retirement benefits this year. Which of the following statements is correct if Janet claims retirement benefits before she reaches her full retirement age?

Janet's benefits will be permanently reduced. The earliest age at which a person can begin receiving Social Security retirement benefits is 62. Early retirement benefits are permanently reduced and will not be increased to a higher level when a person reaches his or her full retirement age.

Compared with life insurance, which of the following statements regarding annuities is most correct?

Benefits are typically paid while the contract owner is alive. Annuities pay benefits to a contract holder during their lifetime, while life insurance pays benefits upon the death of the insured.

Roger presents a prospective insured, Diane, with an application. Diane completes the application, writes a check for the first premium, and gives these to Roger. The insurance company approves Diane's application and issues her policy. Which of the following best describes this process?

Diane made an offer to buy the policy, and the insurance company accepted. In an insurance transaction, typically the applicant makes the offer by submitting a completed application and paying the first premium. Upon approval of the application, the insurance company formally accepts the offer by issuing the insurance policy.

Annuities are often called the mirror image of life insurance. Why is this?

Life insurance creates an estate, while annuities liquidate an estate. The purpose of life insurance is to create an estate over a certain period. Annuities liquidate a principal sum over a certain period by converting that lump sum into a series of income payments.

Tim is applying for life insurance, and Agent Angeles issues him a receipt conditioned on Tim's passing a physical exam to meet underwriting standards. Tim passes the physical exam but dies before the policy is issued. Which of the following is a correct statement?

The policy will pay the death benefit. If the insured dies after the date of the application (or medical exam) and the insurer would have issued the policy, then the coverage takes effect as of the date of the application. A death benefit would then be paid.

What is the source of funds for the death benefit paid on a whole life policy?

cash value plus the insurer's amount at risk The total death benefit is a combination of accumulated cash value and any remaining obligation of the insurer. The combination equals the death benefit, or face value, of the policy.

In filling out an application for a life insurance policy, Ken withholds information about his health history to avoid paying a higher premium. However, Ken has been in excellent health for the past five years. Has he committed fraud?

Yes, because he made a misstatement with the intent of material gain. Fraud is the deliberate act to deceive with the intent to gain something of value. By withholding information in order to pay a lower premium, Ken has committed fraud. If the fraud is discovered within two years of policy issue, the insurer can void the contract.

An agent assures a client that she will have insurance coverage of a certain amount. If the coverage is denied and the client relied on the agent's assurance to her detriment, the insurer could be liable to the client on the basis of which of the following?

the client's reasonable expectations Because the applicant had a reasonable expectation that he or she had insurance coverage, this or her future claim for a loss may be upheld.

Zeta Company plans to form a Multiple Employer Welfare Arrangement (MEWA) to offer group insurance to its employees. All of the following conditions apply in this case EXCEPT

A certificate of authority is necessary if the MEWA is to be fully insured. The requirement for a state-issued certificate of authority applies to self-insured MEWAs, not to those that will be fully insured.

The premiums paid for life insurance are tax deductible in all of the following situations EXCEPT:

Abby's Restaurant takes out a life insurance policy on its manager, considering him a key executive, and pays the policy premiums. Premiums that a business pays for business life insurance on the lives of a business owner or key executive are not tax deductible.

Chester and his wife, Nellie, established a 529 plan for their daughter and contributed $5,000 to her account this year. Six months later, they withdrew $20,000 to pay for their daughter's college tuition. Which statement is correct?

Chester and Nellie do not have to pay tax on the distribution. Funds withdrawn from a Section 529 plan (and the interest earned on those funds) are not taxable. To escape taxes, these funds must be used for qualifying college expenses, such as tuition, fees, room and board, and books. Although contributions are not federally tax deductible, some states may allow contributions to be deducted for state tax purposes.

Who of the following is entitled to receive workers' compensation benefits?

Chester, who was run over by a forklift truck at work State workers' compensation provides benefits to workers who become sick or injured because of a job-related event.

Tom owns several life insurance policies (none of which are modified endowment contracts). In which of the following events associated with his policies will their be a tax consequence?

He owns several cash value policies when he dies. The value of life insurance proceeds is included in the policyowner's gross estate if he or she possessed any incidents of ownership in the policy at the time of death.

Which of the following statements is true regarding types of insurance sales systems?

Direct response companies sell insurance directly to consumers through the mail or television advertising, without the use of a licensed producer. By their very nature, brokers represent multiple companies and are not affiliated with a "primary company."

Social Security benefits are funded through payroll taxes, which are shown as what on a payroll statement?

FICA Social Security benefits are funded through payroll taxes known as FICA taxes, which appear on payroll statements.

Tom is a career agent of ABC Insurance Company. He is licensed to sell a variety of products only for this company. Which of the following best describes Tom as an agent?

He is a captive agent. Under the captive or career agency system, the agent is employed by a single insurance company.

Leo, age 60, decides to take early retirement. Because he does not currently need the funds in his 401(k), he rolls them over into an IRA at his local bank. How much penalty will Leo be assessed as a result of this transaction?

He will not be assessed a penalty. This change is a direct transfer and no penalty applies.

The 10 percent penalty tax on early distributions from an annuity will apply to which of the following individuals?

Liam, age 55, who has owned his annuity for three years and took a $5,000 withdrawal to make a down payment on a vacation home. If a withdrawal is taken from an annuity before the owner reaches age 59½, a 10 percent early distribution penalty tax will be imposed. The penalty will not be imposed, however, if a distribution is taken after the owner becomes disabled or dies or if substantially equal payments are taken over the owner's life expectancy.

Mary is applying for a life insurance policy on her son, Noah. Mary's husband, Nick, will be the beneficiary. An insurable interest must exist between which two parties?

Mary and Noah An insurable interest must exist between the applicant/owner and the insured at the time the life insurance contract is created. It does not have to exist between the insured and the beneficiary.

Henry, age 34, has a SIMPLE IRA account with his employer; the account has increased in value to $80,000. He is fully vested in the account and decides to take a $10,000 distribution to use as a down payment on his first house. Which of the following statements regarding tax consequences of this action is correct?

No penalty tax will be imposed. The early distribution penalty tax will not apply to distributions from SIMPLE plans before age 59.5; if used to purchase a first house, to pay for higher education expenses, or to pay health insurance premiums while unemployed.

Who of the following are parties to an annuity contract?

Paul, the contract owner, and ABC Insurance Company, the issuer The annuity contract is between the contract owner and the issuer. The contract owner may also be the annuitant but is not necessarily so.

Ben is 67 years old and receives Social Security benefits. His 40-year-old son cannot work because of a total disability. Ben's son can receive medical benefits through which of the following?

Social Security disability The disability program under Social Security provides disability income to people under age 65 who become totally disabled.

Which of the following individuals would not be able to establish and contribute to a traditional IRA?

Tammy, age 72, who works part-time as a nurse Anyone who is younger than 70½ and has earned income can set up and contribute to an IRA. IRAs can also be set up for nonworking spouses of eligible income earners.

Which of the following best describes the role of the annuitant under an annuity contract?

The annuitant is always the person upon whose life the annuity payout will be based. The annuitant is the person whose life governs the duration of annuity payments. The annuitant may be, but is not necessarily, the contract owner.

Gina has paid $18,000 in premiums over the past six years for her universal life policy, which has a $750,000 face amount. She withdraws $15,000 this year from her policy's cash value to buy a car. How will Gina's withdrawal be taxed?

They will be non-taxable Cash value withdrawals from life insurance are generally treated on a "first-in/first-out" basis. This means that the first funds put into the contract (i.e., the premiums paid) are the first ones taken out. Any withdrawals that Gina makes after all her premium deposits are fully withdrawn will come from interest that has accrued and will be taxable.

Lisa works for a local college, and her sister, Peg, works for a nonprofit organization. Both participate in the same type of retirement plan through their employers, which means that they are most likely covered by which type of plan?

a 403(b) plan Tax-sheltered 403(b) plans are reserved for nonprofit organizations and their employees. Such organizations include charitable, educational, and religious organizations. The employer and/or the employee contribute funds to the plan.

Carol applied for life insurance in the amount of $250,000. Her agent gives her a document that provides $100,000 of coverage during the underwriting period. What did the agent give her?

a conditional receipt During the underwriting period of determining insurability, an insured may be granted coverage through an insurance receipt. A conditional receipt usually limits this coverage to less than the face amount applied for.

It may be said that an insurance policy is a "take-it-or-leave-it" contract. What is this type of contract called?

a contract of adhesion An insurance contract is a contract of adhesion. It is offered to prospective policyowners on a take-it-or-leave-it basis, without negotiation of its terms.

Michael owns a whole life policy that requires him to pay premiums up to age 65. This type of policy would be which of the following?

a limited payment whole life policy Limited payment life insurance premiums can be paid for 10, 15, or 20 years or, as is common, to a specified age, such as age 65.

All of the following are basic elements of a legally enforceable contract EXCEPT:

a named beneficiary For a contract to be legally enforceable, its basic elements must include offer and acceptance and exchange of consideration. A named beneficiary is not essential.

The definition of a SIMPLE plan is which of the following?

a plan reserved for small companies with no existing qualified employee retirement plan SIMPLE plans, or Savings Incentive Match Plans for Employees, are designed for businesses with no more than 100 employees. They are easier to set up and have less burdensome compliance requirements than traditional qualified plans.

Under the fixed period payout option, Tom is considering a $100,000 annuity fund that would generate $700 per month over 15 years. To guarantee a higher monthly payment, what adjustment is needed?

a shorter payout period If the insurer can guarantee a higher interest rate, Tom's 15-year annuity could generate more than $750 every month. If the interest rate cannot go higher, another option would be to shorten the payout period to 10 years.

A prospective client wants to buy a life insurance policy that has a level premium and a level death benefit. What would you recommend?

a straight or ordinary whole life policy A straight whole life policy would provide a level premium with an increasing cash value that would contribute to the eventual death benefit.

During the application process, insurance coverage can be provided under a conditional receipt or which of the following?

a temporary insurance receipt An alternative to the conditional receipt that insurers sometimes use in their application process is a temporary insurance receipt.

Nell is insured under a variable life insurance policy with a $500,000 face amount. After being diagnosed with cancer, she has incurred significant medical expenses. Nell can access part or all of her policy's face value to pay these bills if her insurance policy contains which of the following riders?

accelerated benefit rider An accelerated benefits rider pays out part or all of the policy's face value while the insured is still living. The insured can then use these funds for a range of needs, from standard living expenses to medical care, or for anything else he or she wants.

All of the following are means of regulation for the insurance business EXCEPT:

agency regulation Agencies are not permitted to regulate themselves. Regulation of insurance is now principally in the hands of the individual states, though the federal government and the industry itself have roles in this regulation.

In the case of an insurer that employs agents in the field, which of the following has primary responsibility for delivering a new policy to the policyholder?

agent At the end of the underwriting process, the insurer sends the issued policy to the agent, who then delivers the policy to the client.

One month after paying the initial premium for a disability income policy, Suri was hit by a car and was seriously injured. She then received disability income payments for the next 12 months. The fact that Suri ultimately received more in value under the policy than what she paid demonstrates which characteristic of insurance contracts?

aleatory An insurance policy is an aleatory contract, which means that one party may receive a benefit that is entirely out of proportion to the consideration he or she is giving. In this case, Suri only made one premium payment but received a much larger benefit in return.

Shannon forgot to pay the $1,000 premium for her life insurance policy, and the policy lapsed. She can reinstate the policy by doing all of the following EXCEPT

applying for reinstatement within seven years. Shannon can reinstate her policy if she submits a written request or application for reinstatement (typically within three years), provides of proof of insurability, and pays all back premiums plus interest.

At what point does the annuity beneficiary receive any benefits under the contract?

at the death of the owner or annuitant The beneficiary of an annuity contract has no role or rights until the death of either the owner or the annuitant (unless he or she is an irrevocable beneficiary). While the owner and annuitant are alive, the benefits of the annuity are designed to flow primarily to them, with the remaining benefits passing to the beneficiary only after their deaths.

All of the following are elements of all legal contracts EXCEPT

counteroffer The offer, consideration, and acceptance are all parts of a contract.

What is technical term for that portion of an insurance company's earnings that is available for distribution to policyowners in the form of policy dividends?

divisible surplus The divisible surplus is the portion of an insurance company's earnings that is available for distribution to policyowners. The surplus is distributed after accounting for liabilities, reserves, capital, and expenses.

OMG Corporation has agreed to pay part of the premium on life insurance policies that its three top executives own. While each executive must include the premium payment in income, he or she can exercise all ownership rights in the policy. Which type of arrangement has OMG Corporation established?

executive bonus plan Under an insured executive bonus plan, an employer agrees to pay some or all of the premiums on a life insurance policy an executive owns. The executive must include the employer's premium payment as income. Because the executive owns the life insurance policy, he or she can choose the beneficiary and enjoys all of the other policy ownership rights.

Pamela invested $120,000 in a fixed deferred annuity over the past ten years and will annuitize the contract next year when she retires. Which of the following must Pamela know to calculate the amount of her annuity income that will be subject to tax?

expected return To determine the amount of the annuity income that will be taxable, Pamela must know the amount of her investment in the contract as well as the expected return, which is the total amount that she can expect to receive as income payments under the contract.

Stacey is a captive agent for Best Rates Insurance Company. According to her agency contract, she can use business cards containing Best Rates' company logo and can also submit applications for their policies. Which type of authority does Stacey have to take these actions?

express authority The agency contract between Stacey and Best Rates Insurance Company sets forth certain acts and duties that she is specifically authorized to perform, such as submitting applications and using the company's logo. This authority is called express authority.

Adam is an independent agent and solicits policies for several different insurers. Which best describes the type of relationship Adam has with each insurer?

fiduciary Adam has a fiduciary relationship with every insurer with whom he does business. This means that he must avoid conflicts of interest and must act in good faith and with integrity in his dealings with various insurance companies. Even brokers have a contractual relationship with the companies they use.

Which of the following terms applies to an insurance company that operates in State A but is domiciled in State B, from the perspective of residents in State A?

foreign company Any company that does business in a state other than the one in which it is domiciled is classified as a foreign company in the state where it does business.

The laws of agency that govern the relationship between insurers and their producers are derived from common law. The common law originated with which of the following?

ideas and judicial decisions that existed in England at the time of the American Revolution Common law refers to the unwritten law based on the customs, ideas, and judicial decisions that existed in England at the time of the American Revolution. It became the basis of the American legal system.

Which of the following is not a commonly used joint life annuity settlement option?

joint and 200 percent survivor Joint and survivor annuity settlement options continue payments to surviving annuitants at an equal or lesser amount. No joint and survivor option increases the monthly payment to the survivor.

Jennifer applied for a $500,000 whole life insurance policy. The insurer issued the policy but classified Jennifer as a substandard risk, resulting in a higher premium. Which type of policy delivery would be preferred in this situation?

legal delivery Legal delivery of a policy requires personal delivery to the client and an explanation. The agent should explain any terms of the policy that were imposed during the underwriting process as well as the reason for any additional premium charge that was not known at the time of application.

The three factors included in calculating life insurance premiums are which of the following?

mortality, interest, and expenses Actuaries base traditional life insurance premiums on mortality, or the incidence of death among a given group; interest, or the amount of earnings the insurer can expect from its premium investments; and expenses the insurer incurs in the course of business.

Belinda owns a $750,000 life insurance policy and received a $200 check for her first dividend payment from Alpha Insurers. How will this dividend payment be treated for income tax purposes?

not subject to income tax To the extent that dividends issued to participating policyowners do not exceed the policyowner's total premiums for the policy, they are not income taxable. In other words, they are generally received income tax free.

Jane has insured her child's life, and she pays the premiums. In the event that Jane were to die, what kind of rider would prevent the policy from lapsing due to nonpayment of the premium?

payor benefit rider A payor of a child's life insurance policy may become disabled or die, leaving the policy subject to lapse if the premium is unpaid. Buying a payor benefit rider avoids this problem.

Insurers and their producers are bound by the common law rules of agency. Who are the two parties to this relationship?

principal and agent A principal is the party on whose behalf the agent acts. An agent is the party who acts on behalf of another, the principal.

Miranda's medical bills are piling up, and she allows her permanent life insurance policy to lapse. She wants some protection for her two small children, so she uses the cash value in the policy to purchase coverage in a lesser amount that will require no additional premium payments. Which of the following nonforfeiture options has Miranda chosen?

reduced paid up Under the reduced paid up insurance option, the lapsed policy's cash value is applied as a net single premium to buy a paid up policy of the same type as the lapsed policy. The paid death benefit is the amount that the cash value buys as a single premium at the insured's age.

Emily is married, has two children, and is the primary breadwinner in the family. She knows that her family would suffer serious financial consequences if she were to die prematurely. However, she continues to put off purchasing a life insurance policy, saying that her family would use its savings to take care of final expenses should she die prematurely. Which method is Emily using to deal with risk?

retention Rather than taking measures to reduce the risk to her family, such as purchasing life insurance, Emily has chosen to do nothing and live with the exposure to the risk. This method of handling risk is known as risk retention.

The federal Risk Retention Act of 1986 contains guidelines for which of the following entities?

self-insuring businesses A risk retention group (RRG) is an insurance company that provides self-insurance services to owner-members. These members all have a business, occupation, or professional relationship with one another.

Which of the following entities regulates variable insurance products?

state insurance departments and the SEC Variable products contain both insurance and securities elements. As such, they are regulated by both insurance and securities authorities.

Jerry won $100,000 in the state lottery. The state offers the choice of a lump sum payment or income spread over 20 years. If Jerry chooses the income stream option, which of the following types of products would the state most likely use?

structured settlement annuity A structured settlement annuity would pay to the lottery winner a stream of regular payments over a specified period.

John is a life insurance policyowner. Under the policy, his wife Mary is the insured. What is this situation known as?

third-party ownership In cases where the insured and policyowner are different, a third-party ownership situation exists.

Which of the following does the waiver of premium rider define as the inability to perform the duties of any occupation for which the individual is suited by experience, education, or training?

total disability Most waiver of premium riders require that the insured be totally disabled for six months before the waiver begins.

The review process between the time an insurance producer takes the application of a proposed insured and the time the policy is delivered to the new policyowner is known as which of the following?

underwriting During the underwriting process, the insurer determines whether to insure the risk as applied for and the appropriate premium to charge the applicant for the coverage.

Your client has a 10-year-old son and wants to set up a life insurance policy that would have flexibility for college funding. Which of the following products should you recommend?

universal life policy The popular appeal of universal life insurance is due mainly to its flexibility in premiums and coverage. It also credits interest based on current interest rates, which increases savings when interest rates are favorable.

Val has owned a whole life insurance policy for the past 25 years. She would like to use the values in her existing policy to purchase a new variable universal life policy. Which strategy should she use to ensure neutral tax treatment and to avoid taxation of any policy gain?

use a Section 1035 exchange of the existing policy for a new policy Val should use a Section 1035 exchange to exchange her existing policy for a new policy. Under this Internal Revenue Code Section, life insurance, annuities, and long-term care insurance contracts can be exchanged income tax free for other similar products, and there are no tax consequences to the policyowner.

Jane asks her insurance agent to stop notifying her when her policy is due for renewal and tells him to notify her attorney instead. What is this an example of?

waiver Waiver occurs when a party to a contract voluntarily relinquishes a known right. In this case, Jane is giving up or waiving her right to personal notification of her policy renewal date.