Types of Policies and Riders (Ch. 3)

A Variable Universal Life (VUL) is a combination of:

Universal and Variable Life

C has a $250,000 30-year term life insurance policy with a waiver of premium rider at age 45. The base policy costs $500 and the rider $50. The rider expires at age 65. If C renews the policy beyond age 65, what is the total cost of the policy to C?

$500 **The Waiver of Premium rider, along with its cost, drops at an age stipulated in the contract, such as age 65.

A $100,000 policy with a waiver of premium rider and $30,000 of cash value is in force. The base policy costs $750 and the rider is $50. What is the total premium annually the policyowner must pay to keep the policy in force?

$800 **Riders such as the waiver of premium are a provided benefit for an additional cost, therefore the annual premium would be $800 ($750 + $50).

What is required to add a nonfamily member to a life insurance policy under a term rider?

Insurable interest **Nonfamily riders can cover insured who are not family members such as business partners.

Which type of term protection has an increasing face value as the insured gets older?

Increasing Term **Increasing Term, as its name implies, increases the death benefit on an annual basis. Used primarily as a rider attached to a permanent policy, the annual premium typically stays level.

At what age does the cash value equal the face amount of a traditional whole life policy issued 25 years ago?

100 **Traditional Whole life is permanent protection that matures at the insured's age of 100. It pays the face amount to the owner if the insured lives to age 100.

In a viatical settlement, a third party purchases a policy from a terminally ill insured for approximately _____ to _____% of the policy's face amount.

60/80

Which of the following best describes an Annual Renewable Term Policy?

A policy with a level death benefit, but with increased premium at each renewal **Whether the policy period is 1 year, 5 years, 10 years, etc., the premium will increase at each renewal to sustain the same specified death benefit that was purchased when the policy was written. At renewal the premium is based upon attained age.

When the death of an insured occurs within a specified period, causing the policy to pay double or triple benefits, this policy must have which of the following riders?

Accidental Death Rider **Also known as the Double Indemnity Rider, the policy pays the stated multiple of the face amount should the insured die as the result of an accident.

Which type of rider pays out a capital sum in case an insured loses a limb or their eyesight?

Accidental Death and Dismemberment **The Accidental Death portion of the rider pays out a principal sum. The dismemberment part pays out a capital sum. The capital sum is paid when there is a loss of limb, eyesight, fingers, or toes.

A Child Rider that is added to an insured's permanent policy includes which of the following features?

All children (beyond 14 or 15 days of age) are covered, and the rider may be converted to permanent coverage at a specified age without evidence of insurability **The benefit of a Child Rider is twofold. It provides basic coverage, and is convertible to a permanent policy without proof of insurability, when the child reaches the maximum age.

Which of the following best describes the return of premium rider?

An increasing term benefit that matches the cumulative premiums paid **The return of premium rider is an increasing term policy which allows the insurer to pay out the policy's death benefit plus the cumulative premiums paid.

With Joint Life Insurance policies, the premium is based on the:

Average age of both insureds **The premium on a Joint Life Policy is calculated on the average age of both insureds.

All of the following about Universal Life are true, except: -The mortality charge is determined annually, based on age -Increases in face amount do not require proof of insurability if under $100,000 -The premium paid can be increased, decreased, or even skipped -The fixed expense charges from the policy are deducted monthly from the cash values

Increases in face amount do not require proof of insurability if under $100,000 **The insured can increase or decrease the face amount. Any increase in the face amount will require evidence of insurability.

A married couple wants to have funds available so that the heirs to their estate have the funds necessary to pay the estate taxes. Which of the following would be the most economical and effective way to accomplish this?

Buy a Joint Survivorship Life policy **Joint Survivorship Life pays upon the death of the last to die, and for this reason it is a popular policy with couples who want to defer estate taxes until both are deceased. It is also more economical to buy this one policy than to buy two separate policies.

______________ is a form of whole life in which the insurance company can change the premiums or interest rate being credited to the account based on current money market rates.

Current Assumption Whole Life **Current Assumption or Interest-Sensitive Whole Life is a form of whole life in which the insurance company can change the premiums or interest rate being credited to the account based on current money market rates.

Term life insurance will not pay out a death claim in which of the following situations?

Death after the term expires **Term life insurance will pay out a death claim if the insured dies while the policy is in force from whatever cause, except for any exclusions specifically written into the policy.

With a Variable Life Policy, which of the following is guaranteed?

Death benefit **In a VL policy a death benefit is guaranteed as long as all premiums are paid on time. There is both a guaranteed minimum death benefit and a higher stated face amount. The face amount and cash value are not guaranteed and could be higher or lower than expected.

As the cash value increases in a traditional whole life policy, the net amount at risk ____________, but the face amount of the policy would remain the same.

Decreases

Which of the following is a type of life insurance that provides an amount of coverage that diminishes while the policy is in effect and is most often used to pay an outstanding loan or mortgage balance upon the death of the insured?

Decreasing Term **Decreasing Term reduces in death benefit while the policy is in effect. It is most often used to cover the balance of an outstanding loan, for example, a mortgage.

All of the following are correct regarding renewable term insurance, except: -Evidence of insurability is required to renew the policy -The policy is renewable until the expiration date -The premium increases at renewal based on attained age -The policy renews as long as the premium continues to be paid

Evidence of insurability is required to renew the policy **Evidence of insurability is not required upon renewal. As long as the premium continues to be paid, the policy will renew until the expiration date and the premiums will increase based on attained age.

A client wants coverage for himself as well as coverage for his wife and children all under one policy at an affordable price. Which of the following would best meet the need?

Family Rider

The investor must do all of the following in a STOLI/IOLI transaction, except:

Fill out the application for life insurance on behalf of the insured **After the investors have paid for the policy, they will change the ownership and beneficiary designations. The investors will also have to pay premiums to keep the policy in force. Upon death of the insured the investors will file a claim for the death benefit.

C has a $100,000 traditional whole life insurance policy with a $30,000 cash surrender value. He applies for and receives a $10,000 policy loan from the insurer. All of the following about this transaction are true, except:

If C were disabled, his beneficiaries would receive $70,000, less any outstanding interest charges **Policy loans carry a fixed or variable loan interest rate. If the policy is surrendered or a death claim is paid, the proceeds are reduced by the outstanding policy loan and policy loan interest.

What happens to the overall policy premium when most riders on a life insurance policy expire?

It goes down **Most life insurance policy riders have a premium associated with it. Once the rider expires so too does the obligation to continue paying its premium.

Why have many states prohibited STOLI/IOLI transactions?

It is a violation of the insurable interest rule **The practice of STOLI and IOLI has resulted in fraudulent abuses causing many states to outlaw STOLI and IOLI policies due to a lack of insurable interest.

What is the name of a single policy covering two or more lives that pays benefits upon the death of the first insured?

Joint Life **A Joint Life Policy covers two or more lives under a single policy, resulting in a reduction in premium, with the death benefit payable upon the death of the first to die.

If X has a life insurance policy that is no longer wanted or needed and is considering selling their policy, how much might X receive if the premiums are $10,000 annually, the cash value is $200,000, and the face amount is $1,000,000?

More than $200,000 but less than $1,000,000 **A Life Settlement is similar to a viatical settlement in that it is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its death benefit.

Variable Whole Life has all of the following features, except:

Partial surrender are allowed **Partial surrenders are not allowed from a variable whole life policy.

A married couple wants to make sure that if either of them dies, the survivor has enough funds to maintain their standard of living but want to accomplish this in the most economical way. Which of the following recommendations is best suited to accomplish their goal?

Purchase a Joint life policy **Joint Life pays on the death of the first insured. It is less expensive than buying two separate policies

Sara applies for a $100,000 30 year level term life insurance policy. The producer quoted her a price of $750 annually if issued as applied for. She wants to make sure that the policy premiums are taken care of just in case she has a total disability. The policy is issued but the premium is now $825. What is the most likely reason why the overall premium increased?

Sara now has added a waiver of premium rider, which requires an additional premium payment **A waiver of premium rider has a premium associated with it. The combination of the base policy and the rider is what Sara must now pay if she wants both benefits in the policy.

The owner of a Variable Life Policy may allocate the premium into a sub-account which is owned by the insurer, this sub-account is a part of what is also known as the:

Separate Account

What is the net amount at risk in a Whole Life Insurance policy?

The face amount less the cash values

All of the following are TRUE regarding a Waiver of Premium Rider, except:

The insured must repay the unpaid premiums **To have to repay the unpaid premiums would defeat the purpose of the rider.

If a policyowner of a convertible term life insurance policy exercises his/her right to convert, which of the following will happen?

The term policy will be replaced by a permanent life insurance policy **The Convertibility Option of a term policy allows the policy to be converted to a permanent policy without proof of insurability. The premium upon conversion is usually based upon attained age which results in a much higher premium. Some insurers will allow the new premium to be based on issue age of the original policy, but in that case, all back premiums (that is, the difference in cost between the original policy and the new policy for all years that the original policy was in force) will have to be paid at the time of conversion.

All of the following would be reasons why a policyowner would sell their policy in a life settlement transaction, except:

There are no alternative ways to obtain needed cash **A policyowner may choose to sell their policy because the premiums are too high or they want to purchase a different policy. However, there are alternative ways to obtain cash without selling the policy such as using the policy as collateral for a loan from a bank, from an insurance company, policy loan, cash surrender values, etc.

A life insurance premium is paid each month. The insurer then subtracts a mortality and expense charge from the policy's cash value. This best describes which of the following life insurance policies?

Universal Life **All premiums paid to a Universal Life Policy are placed in the policy's cash value account. The mortality charge (cost of protection) and expenses are then deducted from the cash value account.

How would a term policy normally be used to pay off a mortgage upon death?

Using the death proceeds after the insured has died **Term can be used as mortgage insurance which typically provides a decreasing term benefit.

A __________ is a contractual agreement that allows a company or person to buy one or more of the rights of ownership in a life policy on the life of another person, should the owner/insured become terminally ill.

Viatical Settlement

The net amount at risk to the insurance company at the endowment date is:

Zero **Net amount at risk is the difference between the face amount and cash surrender value. Since the policy endows, there is no spread between them. Therefore, there is no net amount at risk to the insurer.