Chap 2 Contract Law

To be insurable, a risk must be all the following EXCEPT: Measurable in dollars.Economically significant to the applicant.Predictable in size so rates can be established by the insurer. (Your Answer)A certainty. (Correct Answer) Feedback Risk is a chance of loss. Insurance companies will not insure something if they know a loss will happen for certain.

3 X

Annuities can best be described as A substitute for life insurance.A tax free retirement vehicle. (Your Answer)A reasonable alternative to purchasing a disability income policy.The systematic liquidation of an estate. (Correct Answer) Feedback By definition.

4 X

An insurance company's challenge to an application is limited by: Errors and OmissionsThe Incontestable Clause (Your Answer)Company guidelinesThe Fair Credit Reporting Act Feedback The insurance company can only contest statements on an application for a limited amount of time. The amount of time is always stated in the Incontestable Clause.

5 guess

Insurance policies normally define a representation as A statement that must be absolutely true. A statement that must be true to the best of the applicant's knowledge and belief. (Your Answer) A statement made in writing on an application.An oral contract. A representation is a written or oral statement that the insured believes to be true.

A statement that must be true to the best of the applicant's knowledge and belief. (Your Answer) A representation is a written or oral statement that the insured believes to be true.

The formula used to determine the Gross Premium is Risk - Expenses + InterestRisk + Expenses - Interest (Your Answer)Risk + ExpensesRisk - Expenses Feedback The question is: How much premium does the insurance company charge (Gross Premium) the Policyowner for a specific risk (such as a life insurance policy), and how does the insurance company determined that premium? First, the company estimates the Risk associated with the risk group. For example, how many people are going to die in any specific year? The mortality tables are very helpful here. Second, the Expenses associated with running the insurance company are added to the Risk factor. Expenses would include office buildings, salaries, computer services, sales commissions, utilities, etc. Thirdly, all premiums are paid in advance. And since the insurance company has the use of the Policyowner's money, the company pays interest on the prepaid Premiums. Since the interest payments are being paid to the policyowner, they show up as a deduction on the Policyowner's premium bill. Hence the Interest factor is subtracted from the bill, which shows up as: Minus Interest: ( - Interest).

3

The Premium Mode (how often you pay your premiums, such as monthly, quarterly, or annually) has which of the following effects on total premium paid? The Premium Mode has no effect on the total amount of premium paidThe more frequently you pay your premiums, the lower will be the total amount of premium paid. (Your Answer)The more frequently you pay your premiums, the higher will be the total amount of premium paid. (Correct Answer)The Premium Mode has more effect on the total amount of premium paid than any other risk factor. Feedback There are two factors at work here. First, the more frequently you pay your premium, the less money the insurance company has as prepaid premium, and therefore the less money the company has to invest to make money. Secondly, the more frequently you pay your premium, the greater the administrative cost in collecting and recording the transactions. Therefore, the Premium Mode has a direct impact on the cost of life and health insurance.

3 X

Which of the following is true concerning AIDS testing and underwriting? A company may require an AIDS test of anyone who discloses that he or she has previously sought AIDS testing. (Your Answer)No specific permission is required for a company to conduct AIDS/HIV testing on an applicant.If one company's blood test reveals the presence of AIDS antibodies, other companies will have access to this knowledge through the MIB.A policy may not contain exclusions for AIDS/HIV losses. (Correct Answer) Feedback AIDS/HIV cannot be excluded in a Life contract once the policy is issued. The only thing that can be included in the MIB file concerning AIDS/HIV would be abnormal test results, but they would not mention the presence of HIV antibodies.

3 X

At age 30, Jolene purchased a Whole Life policy and has paid the premiums as agreed for 10 years. Now, at age 40, the policy's cash value is A function of the profitability of her company.Largely determined by Jolene's health at age 40.A function of the investment return enjoyed by her company over the last 10 years. (Your Answer)The amount that was guaranteed in the contract when she purchased it at age 30. (Correct Answer) Feedback Cash Value is guaranteed in the policy. It does not vary with the company's return or investment, the insured's health, or the actual mortality experience.

4 X

Which of the following contracts is primarily designed to provide a series of benefit payments at regular intervals following retirement throughout the lifetime of one or more persons? Convertible TermLife Annuity (Correct Answer)Annuity CertainWhole Life (Your Answer) Feedback A Life Annuity pays benefits for life. An Annuity Certain only pays for a specified period of time or in specified amounts until all the funds in the annuity are depleted.

4 X

Which of the following is NOT a way to pay the premium on a Whole Life policy? Single PremiumLimited Pay (Your Answer)Continuous Premium (Straight Life)Increasing Premium (Correct Answer) Feedback The answer to this question is based on memorizing the three ways to pay the premium for a Whole Life policy. But also clearly stated in the description of Whole Life is that Whole Life is always level premium payments, never increasing premium, or decreasing premium. One exception to the level premium rule is a policy we will study later on called Graded Premium Whole Life.

4 X

Which of the following is NOT normally considered a personal use of life insurance? Survivor protectionDisability Income benefits (Correct Answer)Estate creationLiquidity (Your Answer) Feedback Disability Income is a health insurance concept. Being disabled does not trigger a payment from a life insurance contract.

4 X

The Return of Cash Value Rider is constructed using which type of Term insurance? Increasing Term (Correct Answer)Decreasing TermLevel TermConvertible Term (Your Answer) Feedback In a Whole Life policy, the Cash Value is always increasing. Therefore, the Term policy that guarantees the return of cash value, must also be increasing. Hence, Increasing Term.

4 X bad

A single premium Whole Life policy will: Experience a slower growth of cash value. (Your Answer)Mature sooner.Be considered paid-up immediately. (Correct Answer)Expire at age 65. Feedback A single premium means no more premiums will be required. therefore, the life policy is all paid-up.

4 X brain fart

What is "increasing" in an Increasing Term insurance policy? the premium (Your Answer)the cash valuethe face amount (Correct Answer)the period of time Feedback Increasing Term means the face amount is going up. Decreasing Term means the face amount is going down. There is no cash value in a Term insurance policy. And the length of the contract (period of time) is a different element.

4 X didn't read

What is "level" in a Level Term insurance policy? the premium (Your Answer)the cash valuethe face amount (Correct Answer)the period of time Feedback Please do not confuse Level Term with Level Premium Term. Level Term means that the death benefit will never change. Level Premium Term means that the premium will never change.

4 X didn't read

Which of the following annuity pay out systems guarantees the return of at least all of the principal invested in the policy? Joint and Survivorship Life AnnuityRefund Life Annuity (Correct Answer)Life Annuity with Period Certain (Your Answer)Straight Life Annuity Feedback A Refund Life Annuity (both Installment Refund and Cash Refund) guarantees that if the annuitant dies before receiving an amount equal to the principal invested, the remaining balance will be paid to a beneficiary.

4 bad x

At age 65 you purchase a Single Premium Immediate Life Annuity with 10-Year Period Certain. Which of the following statements is true? The annuity will pay an income for a period of time not to exceed 10 years.The annuity will pay an income for as long as you live, but in no event less than 10 years. (Your Answer)The annuity will pay an income for the rest of your life, but if you die within the next 10 years the income will stop upon your death.You will start receiving an income benefit at age 75 for a period of 10 years. Feedback A Life Annuity with period certain guarantees payment for a limited time whether the annuitant is alive or dead. If the annuitant dies, monthly payments will be made to the estate until the end of the guaranteed period of time. Remember, if the annuitant is still alive, the Life Annuity with Period Certain continues to pay.

4 good guess

Any life insurance policy whose cash value grows faster than a 7 Pay Whole Life policy is considered a(n): Whole LifeEndowmentJoint and 2/3 Survivorship Life Annuity with Period CertainModified Endowment (Your Answer) Feedback If you pay your life insurance policy off in 7 years or less, it is defined as a MEC (Modified Endowment Contract). The other definition of an MEC is if the cash value exceeds the death benefit.

4 guess

The settlement option that offers the beneficiary the highest degree of flexibility is Cash (Your Answer)Interest (Correct Answer)Fixed AmountLife Income Annuity Feedback The Interest option is considered the most flexible of all of the settlement options.

6 X

Joe owns a participating Life insurance policy. All of the following statements are true regarding Joe's policy EXCEPT: Policy dividends can be used to shorten the payment period.Cash dividends received by Joe are not subject to income tax. (Your Answer)If Joe does not choose a dividend option, the automatic option that will be selected by the insurance company is the Paid Up Additions option.Joe's dividends are guaranteed. (Correct Answer) Feedback Dividends are never guaranteed.

6 dumb guess

Assume that Joe dies leaving Jolene as the beneficiary of a $100,000 Term policy. Also assume that Joe did not select a settlement option prior to his death. Jolene may now select any of the following settlement options found in Joe's policy EXCEPT to have the proceeds Invested in the stock market with the company acting as the money manager. (Your Answer)Left on deposit with the insurance company which will pay Jolene interest on the money.Paid as a monthly income to Jolene in either a fixed amount or for a fixed number of years.Paid to Jolene as a life income, with or without certain guarantees as available in the policy. Feedback Settlement options include: cash, interest option, fixed period or fixed amount annuity certain, and life annuity. There is no option that would have the insurance company acting as a stockbroker.

6 good guess

Under the Accumulate at Interest dividend option, which of the following is true about the taxation of the interest earned on reinvested dividends? The interest on the dividends is tax deferred until the money is withdrawn from the account.The interest earned on the dividends is tax free.The interest on the dividends is taxable in the year in which the interest is earned. (Your Answer)The interest earned on the dividends is tax sheltered just as the interest earned on the cash value is sheltered. Feedback Dividends are not taxable, but interest earned on dividends would be taxed in the year in which it is earned.

6 good guess

The nonforfeiture option that provides the same face amount of coverage as the original policy but for a lesser period of time is called: Reduced Paid-UpPaid-up Life (Your Answer)Extended Term (Correct Answer)Re-entry Term Feedback The Extended Term nonforfeiture option means the face amount of the policy remains the same, but the coverage period is reduced.

6 no clue

Which dividend option would result in the insured incurring a current year tax obligation? Accumulate at Interest (Correct Answer)Paid-up LifePaid-up AdditionsOne Year Term (Your Answer) Feedback Dividends are not taxable, but interest earned on dividends would be taxed in the year in which it is earned.

6 no clue

Joe purchases a $100,000 Continuous Premium Whole Life policy at age 20. At age 40, he no longer wishes to make premium payments. If he stops paying premiums and fails to select a nonforfeiture option, the option automatically assigned by his company would be which of the following? CashReduced Paid-Up (Your Answer)Extended Term (Correct Answer)Convertible Term Feedback Extended Term insurance is the automatic option.

6 no clue X

Which of the following life insurance disability riders would be most appropriate for a Juvenile Life policy? Waiver of Premium (Your Answer)Payor Benefit (Correct Answer)Disability IncomeWaiver of Cost of Insurance Feedback A Payor Benefit rider is used to insure a juvenile's policy will not laps if the payor (the person who is paying the premiums) dies or becomes disabled.

7 X

A life insurance policy with a Payor Benefit Rider protects: The insurance company against misrepresentations should the insured become disabled.The beneficiary by forbidding a change in beneficiary designations.The insured from paying premiums until their 21st birthday if the policyowner becomes disabled. (Correct Answer)The policyowner by providing income during any period of disability. Feedback A Payor Benefit rider is used to insure a juvenile's policy will not lapse if the payor (the person who is paying the premiums) dies or becomes disabled.

7 X brain fart

Of the following, which is the most appropriate way to fund a Buy and Sell Agreement? Joint Life (Correct Answer)Survivorship Life (Your Answer)Split-DollarDecreasing Term Feedback A Joint Life policy covers two lives and matures upon the death of the first.

7 X dumb

Which of the following statements is true regarding an Interest Sensitive Whole Life policy? Since the cash values are invested in the stock market, there is no guaranteed rate of return.The policy guarantees a minimum growth of cash value, but it may pay a higher rate of return based on current interest rates. (Correct Answer)The insurance company will pay a competitive rate of interest on the cash value, but there is no guaranteed minimum rate of return. (Your Answer)Interest Sensitive Whole Life is the same as Variable Whole Life. Feedback The company guarantees a minimum interest rate, but if they make more, so does the policyowner. If the company earns a higher rate of interest than projected, they will pay a higher rate of interest on the cash value.

7 X lazy

Assume that you are seriously disabled and are eligible for Social Security Disability Income benefits. Your income benefits will be determined by which of the following? The amount of benefit that your Disability Income policy will pay, which is stated in the policy (only up to the limits).The type of coverages that your employer purchased under the Social Security Act.Your age and current income at the time of your loss.Your PIA, which is based upon your average monthly wage during your earning years. (Your Answer) Feedback Your Primary Insurance Amount will determine the benefit you receive. The PIA is based upon your average monthly wage during the years you were employed.

8 Correct but more PIA

A qualified participant in an Individual Retirement Account (IRA) may make tax-deductible contributions through all of the following investment vehicles EXCEPT an individual Retirement account at a bank or savings and loan association.Flexible premium retirement annuity issued by a life insurance company. (Your Answer)Universal Life insurance policy. (Correct Answer)Retirement bond purchased from the United States government. Feedback As a general rule, life insurance cannot be used to fund a qualified retirement plan.

8 X

Which of the following statements is true of the Old Age Survivors and Disability Insurance Program (OASDI: better known as Social Security)? In order to be fully insured under the program you have at least forty years of employment.The amount that you will receive as a Social Security retirement benefit will be dependent upon your Primary Insurance Amount (PIA). (Correct Answer)The definition of disability under Social Security is easier to qualify for than is normal under individual disability income policies.Most benefits only require that you are currently insured. (Your Answer) Feedback Your Primary Insurance Amount will determine the benefit you receive. The PIA is based upon your average monthly wage during the years you were employed.

8 X need to study PIA

Which of the following is NOT true in calculating your PIA? Income earned above the Social Security limit is not counted in calculating your PIA.You may eliminate your five lowest earning years in the PIA calculations.You may eliminate any years during which you were disabled from your calculations.Your unearned income will be included in your PIA calculations. (Your Answer) Feedback PIA calculations only consider earned income.

8 correct PIA

A nonqualified retirement plan is one which Is designed for the exclusive benefit of the employees or their beneficiaries.Must not discriminate in favor of officers, stockholders, or highly compensated employees.Is formalized in writing and must be communicated to the employees in writing.Does not qualify for special IRS tax treatment and therefore does allow for discrimination in favor of key officers, stockholders, or highly compensated employees. (Your Answer) Feedback Non-qualified means the plans do not qualify for special IRS tax treatment, and therefore can discriminate in favor of highly-paid employees. Qualified plans may not discriminate.

8 correct but did not read

To protect the insuring public, in order to apply for insurance on someone else's life, an applicant must have which of the following? An insurable interest in the life of the proposed insured on the effective date of coverage. The proposed insured's help in completing the application. An insurable interest in the life of the proposed insured throughout the term of the policy. The proposed insured's written consent as well as an insurable interest in his or her life on the effective date of coverage. (Your Answer) Feedback Both consent of the insured and insurable interest are required to purchase a policy on the life of another.

The proposed insured's written consent as well as an insurable interest in his or her life on the effective date of coverage. (Your Answer) Feedback Both consent of the insured and insurable interest are required to purchase a policy on the life of another.

An Agent tells a prospective Client that the Agent can cover the Client for up to $10,000 of life insurance without obtaining insurance company approval, when in fact this is NOT the case. The Client believes that the Agent has such authority. The Agent tells the Client that they are now covered for $10,000 in life insurance. The Client dies, and their estate files a claim with the insurance company. Which of the following is true? The insurance company would have to pay the claim because the Agent's word is legally binding on the insurance company. (Correct Answer)The insurance company would deny the claim because the Agent was operating outside their legal authority. (Your Answer)The Agent would have to pay the $10,000 because the Agent exceeded their legal authority as outlined in their Agency Agreement.The Agent's Errors and Omissions insurance policy would pay the $10,000 claim. Feedback Under the theory of Apparent Authority, the Client could logically conclude that the Agent could have authority to bind coverage on low amounts of life insurance. Therefore, the insurance company would be bound to the risk, as the Agent is the legal representative of the insurance company, and therefore speaks with the authority of the insurance company. The company is responsible for whatever the Agent says. However, the company could sue the Agent in a separate action to recover the cost of the claim.

X

In life insurance underwriting, who normally makes the offer? The agentThe proposed insured (Correct Answer)the insurance company (Your Answer)the insurance agency Feedback Life insurance Agents typically assist the Applicant for life insurance in completing the application, and collect the first premium payment. The statements on the application, plus the payment of the first premium, legally constitute an offer.

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