CH 2: Life Insurance EXAM FOUR

An insurance policy specifies that it will pay $600 for a specific loss. The policyowner suffers a loss of $535. How much will the policy pay? A. $300 B. $500 C. $535 D. $600

$535 Applying the principle of indemnity, the insurer will pay the actual cost of the loss, up to the limit stated in the policy. In this case, the insurer will pay $535.

Which of the following documents delivered to the policyowner includes information about premium amounts, cash values, surrender values and death benefits for specific policy years? A notice regarding replacement A privacy notice A buyer's guide A policy summary

A policy summary A policy summary usually includes all the listed information, and must be delivered along with a new policy.

What is reinsurance? A. An agreement between a ceding insurer an assuming insurer B. An agreement between an originating insurer and a ceding insurer C. An agreement between a domestic insurer and a foreign insurer D. An agreement between an insurer and an insured

An agreement between a ceding insurer an assuming insurer The originating company that procures insurance on itself in another insurer is called the ceding insurer. The other insurer is called assuming insurer.

The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called A. Sharing. B. Avoidance. C. Transfer. D. Reduction.

Avoidance Risk avoidance is elimination of risk of loss by avoiding any exposure to an event that could give rise to such loss.

When the partners of a business develop an arrangement whereby should one of them die or become permanently disabled, the other partners would purchase the interest of the deceased or disabled partner at a predetermined price, this is called a/an A. Executive bonus plan. B. Business continuation plan. C. Key person plan. D. Business overhead expense plan.

Business continuation plan. A business continuation plan is an agreement between business owners whereby they agree, should one of them die or become disabled, the surviving owners will purchase the interest of the deceased or disabled owner at a predetermined price. Such a plan is usually funded by each owner purchasing insurance on each of the other owners.

Which of the following features of the Indexed Whole Life policy is NOT fixed? A. Death benefit B. Policy period C. Cash value growth D. Premium

Cash value growth Under the Indexed Whole Life policy, the premium is fixed, and the death benefit is guaranteed. Cash value is dependent upon the performance of the equity index although a minimum cash value is guaranteed.

The type of policy that can be changed from one that does not accumulate cash value to the one that does, is a A. Whole Life Policy. B. Convertible Term Policy. C. Renewable Term Policy. D. Decreasing Term Policy.

Convertible Term Policy. A convertible term policy has a provision that allows the policyowner to convert to permanent insurance.

An annuity owner is funding an annuity that will supplement her retirement. Because she does not know what effect inflation may have on her retirement dollars, she would like a return that will equal the performance of the Standard and Poor's 500 Index. She would likely purchase a(n) A. Equity Indexed Annuity. B. Variable Annuity. C. Flexible Annuity. D. Immediate Annuity.

Equity Indexed Annuity. The interest rates of Equity Indexed Annuities are tied to the Standard and Poor's Index.

Stranger-originated life insurance policies are in direct opposition to the principle of A. Law of large numbers. B. Good faith. C. Indemnity. D. Insurable interest.

Insurable interest. Because the purchaser of a stranger-originated life insurance policy doesn't know the insured, or have any interest in the insured's longevity, STOLI policies violate the principle of insurable interest.

Who makes up the Medical Information Bureau? A. Hospitals B. Former insured C. Physicians and paramedics D. Insurers

Insurers The Medical Information Bureau is made up of insurers so the companies can compare the information they have collected on a potential insured with information other insurers may have discovered.

Credit Life insurance A. Insures the life of a creditor. B. Has a maximum term for insurance of 20 years. C. Insures the life of a debtor. D. Is purchased on an installment basis.

Insures the life of a debtor. Credit insurance is a special type of coverage written to insure the life of the debtor and pay off the balance of a loan in the event of the death of the debtor.

Which statement is NOT true regarding a Straight Life policy? A. It has the lowest annual premium of the three types of Whole Life policies. B. Its premium steadily decreases over time, in response to its growing cash value. C. The face value of the policy is paid to the insured at age 100. D. It usually develops cash value by the end of the third policy year.

Its premium steadily decreases over time, in response to its growing cash value. Straight Life policies charge a level annual premium throughout the insured's lifetime and provide a level, guaranteed death benefit.

Which life insurance settlement option guarantees payments for the lifetime of the recipient, but also specifies a guaranteed period, during which, if the original recipient dies, the payments will continue to a designated beneficiary? A. Life income with period certain B. Fixed amount C. Single life D. Universal life

Life income with period certain The life income with period certain option guarantees payments for the life of the recipient and also specifies a guaranteed period of continued payments. If the recipient should die during this period, the payments would continue to a designated beneficiary for the remainder of the period.

Which of the following best describes the unfair trade practice of defamation? A. Refusing to deal with other insurers B. Making derogatory oral statements about another insurer's financial condition C. Assuming the name and identity of another person D. Issuing false advertising material

Making derogatory oral statements about another insurer's financial condition Making oral or written statements directly or indirectly which are derogatory or maliciously critical of another insurer would be an example of the unfair trade practice of defamation.

On a participating insurance policy issued by a mutual insurance company, dividends paid to policyholders are A. Paid at a fixed rate every year. B. Taxable as ordinary income. C. Guaranteed. D. Not taxable since the IRS treats them as a return of a portion of the premium paid.

Not taxable since the IRS treats them as a return of a portion of the premium paid. With participating policies, policyowners are entitled to dividends, which, in the case of mutual companies, are nontaxable because they are considered a return of excess premiums.

Which of the following documents must be provided to the policyowner or applicant during policy replacement? A. Policy illustrations B. Notice Regarding Replacement C. Disclosure Authorization Form D. Buyer's Guide and Policy Summary

Notice Regarding Replacement During policy replacement, the replacing producer must present to the applicant a Notice Regarding Replacement that is signed by both the applicant and the producer.

During replacement of life insurance, a replacing insurer must do which of the following? A. Designate a new producer for a replaced policy B. Send a copy of the Notice Regarding Replacement to the Department of Insurance C. Obtain a list of all life insurance policies that will be replaced D. Guarantee a replacement for each existing policy

Obtain a list of all life insurance policies that will be replaced The replacing insurance company must require from the producer a list of the applicant's life insurance or annuity contracts to be replaced and a copy of the replacement notice provided to the applicant, and send each existing insurance company a written communication advising of the proposed replacement.

An insurance agent was born in 1973. He obtained his New York insurance license in 2008. When will the agent's license expire? A. January 1st every even-numbered year B. Every year on the license issue date C. Every 2 years on the license issue date D. On the agent's birthday every odd-numbered year

On the agent's birthday every odd-numbered year Agent licenses last for 2 years. The licenses of all insurance agents born in odd-numbered years will expire on their birthdays in odd-numbered years. The licenses of all insurance agents born in even-numbered years will expire on their birthdays in even-numbered years.

The dividend option in which the policyowner uses dividends to purchase a term policy for one year is referred to as the A. Accelerated endowment. B. Paid-up additions. C. One-year term option. D. Paid-up option.

One-year term option. The dividend is utilized to purchase one year term insurance.

Most agents try to collect the initial premium for submission with the application. When an agent collects the initial premium from the applicant, the agent should issue? A. Premium receipt B. Statement of good health C. Backdated receipt D. Warranty

Premium receipt

The policyowner pays for her life insurance annually. Until now, she has collected a nontaxable dividend check each year. She has decided that she would rather use the dividends to help pay for her next premium. What option would allow her to do this? A. Cash option B. Reduction of premium C. Paid-up addition D. Accumulation at interest

Reduction of premium The Reduction of Premium option allows the policyholder to apply policy dividends toward the next year's premium. The dividend is subtracted from the premium amount, yielding the new premium due for the next year.

An insured will be allowed to reactivate her lapsed life insurance policy if action is taken within a certain period of time, and proof of insurability is provided. Which policy provision allows this? A. Reinstatement provision B. Waiver of premium provision C. Incontestable clause D. Grace period

Reinstatement provision

Which rule would apply if an agent knows an applicant is going to cash in an old policy and use the funds to purchase new insurance? A. Disclosure rule B. Replacement rule C. Reinstatement rule D. Conversion rule

Replacement rule Anytime a new policy is issued that replaces or modifies existing insurance, a replacement form must be submitted to the ceding company.

If an immediate annuity purchased with the face amount at death or with the cash value at surrender, this would be considered a A. Settlement option B. Nonforteiture option C. Rollover D. Nontaxable exchange

Settlement option

In a life settlement contract, whom does the life settlement broker represent? A. The owner B. The beneficiary C. The life settlement intermediary D. The insurer

The owner. Life Settlement Broker is a person who, for compensation, solicits, negotiates, or offers to negotiate a life settlement contract. Life settlement brokers represent only the policyowners.

The owner of a life insurance policy wishes to name two beneficiaries for the policy proceeds. What will the soliciting insurance producer say? A. The proceeds will be split evenly between the two beneficiaries. B. The policyowner can specify the way proceeds are split in the policy. C. The way proceeds are split between beneficiaries is decided by which type of policy is chosen. D. Life insurance policies may have only one beneficiary.

The policyowner can specify the way proceeds are split in the policy. The owner of a life insurance policy may name any individual as a beneficiary for the policy proceeds. The owner may name more than one individual, in which case the individual beneficiaries will split the benefit by the percentage specified in the policy.