Chapter 11 Policy Options
Insurance policies that pay dividends are referred to as: A) nonparticipating policies. B) reserved policies. C) preferred policies. D) participating policies.
Participating
Basil has a combination policy consisting of $25,000 whole life and a $20,000 term rider. He stops paying premiums and elects to take a paid-up policy, which will be a reduced amount of insurance based on an original face amount of: A) $20,000.00 B) $25,000.00 C) $35,000.00 D) $45,000.00
B A reduced paid-up policy is based on the original whole life policy amount; the term rider amount is not considered.
As beneficiary, Kathryn receives $800 monthly from her deceased husband's life insurance under a fixed amount option. Each payment consists partly of principal (proceeds) and partly of interest. How is this income taxed? A) Each payment is fully taxed. B) The portion of each payment consisting of principal is taxed; the remainder is tax free. C) The portion of each payment consisting of interest is taxed; the remainder is tax free. D) Each payment is received fully tax free.
C The monthly payment to the beneficiary under the fixed-amount option is considered a partially taxable installment (similar to an annuity payment). A fixed, unchanged portion of each payment is considered a return of principal and is therefore not taxed. The balance, however, is taxable as interest income.
Death benefits paid out to a beneficiary may NOT be protected from the insured's creditors: A) if they are held in trust by the insurer. B) if the beneficiary is the insured's estate. C) if they are paid out in a lump sum. D) if they are paid out in installments.
B
Which of the following statements about life insurance policy settlement options is NOT correct? A) Payments under the interest-only option may be made at a rate higher than the guaranteed minimum. B) Under the fixed-period option, the payment of excess interest will lengthen the payment period. C) By using the interest-only option, 2 or more settlement options can be combined for added flexibility. D) Debra and Renee each are receiving monthly income from their deceased husbands' identical life insurance policies under the fixed-period option. Debra's payments are to be made for 15 years and Renee's for 20 years. Debra receives the larger monthly payments.
B Under the fixed-period option, the payment of excess interest will be used to make each payment larger, not to extend the payment period.
Leland elects to surrender his whole life policy for a reduced paid-up policy. The cash value of his new policy will: A) decrease gradually. B) decrease by 50% immediately. C) continue to increase. D) remain the same as in the old policy.
C When Leland surrenders his whole life policy for a reduced paid-up policy, the face value is reduced but the cash value continues to increase.
Doris and Arnold receive $450 per month under a joint and one-half survivor life insurance option. What happens if Arnold should die first after payments are started? A) Doris would have to select another settlement option. B) Doris would receive $450 per month as long as she lived. C) The remaining proceeds would be paid to Doris in a lump sum. D) Monthly payments of $225 would be made to Doris as long as she lived.
D The joint and one-half survivor life income option provides an income for two people. In this case, the couple, while both are living, gets the full amount; the survivor gets half the amount, or $225.
Unlike corporate dividends, insurance policy dividends: A) are guaranteed to be declared and payable every year. B) are not considered taxable income. C) are the same as marketable securities. D) are reported on an insured's income tax filing.
B Policy dividends are not taxable income because they are considered a partial return of premiums paid.
Beth is secondary beneficiary of a life policy, receiving monthly income benefits under an installment refund option. Her mother, the primary beneficiary, received a total of $4,200 in benefits before she died. The original proceeds totaled $22,000. Assuming Beth lives long enough, she will be paid monthly benefits until she has received a total of: A) $17,800.00 B) $22,000.00 C) $18,700.00 D) $4,200.00
A Under an installment refund option, the same income payments continue to the secondary beneficiary after the primary beneficiary dies, until the entire death benefit amount is paid.
Horace wants his $85,000 life insurance policy arranged to pay his wife a monthly income if he dies first, but most or all of the proceeds to go to their two children after her death. Which of the following settlement options could Horace select to provide income for his wife and conserve the proceeds for the children? A) Fixed-amount option. B) Life income option. C) Fixed-period option. D) Interest-only option.
d Under the interest-only option, only the interest on the face amount will be paid to the wife on a regular basis. The face amount ($85,000) will be preserved for the children.
Once a life insurance settlement option has been put into effect, the relationship between a beneficiary and the insurance company is that of: A) payee/trustee. B) recipient/donor. C) heir/grantor. D) creditor/debtor.
D
Most participating whole life insurance policies allow the following uses of standard life insurance dividends EXCEPT: A) to reduce future premium payments. B) to increase the policy's face amount. C) to purchase additional units of paid-up life insurance. D) to purchase 1-year term insurance.
B Most participating whole life insurance policies allow the policyowner to apply dividends to pay up a policy earlier than otherwise expected, to buy paid-up permanent life insurance, to buy 1-year term insurance, or to reduce future premium payments. The policyowner cannot use dividends to increase the policy's face amount.
Which of the following statements regarding the paid-up additions life insurance policy dividend option is NOT correct? A) Paid-up additions consist of permanent life insurance of the same type as the base policy. B) The paid-up additions dividend option is only available to insureds that remain insurable. C) The amount of paid-up coverage acquired is based on the insured's attained age at the time the dividend is declared. D) A paid-up addition increases the policy's total cash value as well as its death benefit.
B It is not necessary to demonstrate evidence of insurability to elect the paid-up additions dividend option. Paid-up additions are based on the insured's underwriting status when the policy was issued, and the amount of the addition is based on the insured's attained age when the dividend is declared.
As primary beneficiary under a cash refund option in a life insurance policy, Jeffrey received $355 per month for five years before suffering a fatal heart attack. The policy's original proceeds amounted to $50,000. Jeffrey's daughter, the secondary beneficiary, will now receive: A) $355 per month, as payments continue in her name. B) a lump-sum payment of $28,700. C) nothing. D) a lump-sum payment of $50,000.
B Under the cash refund option, the company will pay the difference between the original proceeds ($50,000) and the total payments made to the primary beneficiary ($21,300). That amount is paid to the secondary beneficiary in a lump sum.
At age 60, Bob decides to stop paying premiums on his $60,000 whole life policy and exchanges it for extended term insurance. What face value will the term insurance have? A) $45,000.00 B) $10,000.00 C) $60,000.00 D) $30,000.00
C When a policyowner stops paying premiums on a whole life policy and exchanges the policy for extended term insurance, a policy's cash surrender value is used to purchase an amount of term insurance equal to the original policy's face amount. The term insurance will last as long as the cash value is sufficient to pay premiums.
The privilege of accessing the cash value of an insurance policy if it is surrendered is known as the: A) nonforfeiture provision. B) reinstatement provision. C) conversion privilege. D) entire contract provision.
A After a life insurance policy has been in effect for a specified amount of time, the policy may provide for access to the policy's cash value. Under certain circumstances, the money can be used to pay for a premium that is in default, paid as a lump sum in cash or paid as a cash amount in return for the surrender of the policy. Policies must explain the mortality table and interest rate used to calculate the cash surrender values. A conversion privilege is found in a group life policy. It allows for a terminated plan member to convert the group policy to an individual policy under certain circumstances. The reinstatement provision allows for the reinstatement of a lapsed policy. The entire contract provision stipulates that the application and policy itself comprise the entire contract of insurance.
All the following are standard life insurance dividend options EXCEPT: A) using the dividend to increase the base whole life policy's face amount. B) leaving the dividends with the insurer to accumulate at interest in a cash account. C) using the dividend to purchase a unit of paid-up whole life insurance. D) taking the dividend as an income tax-free cash distribution from the insurer.
A The paid-up addition dividend option uses the dividend to purchase units of paid-up permanent life insurance coverage which, added to the base policy, creates a steadily increasing amount of coverage. It is generally not possible to increase the face amount of a whole life insurance policy, whether by dividend payment or any other means.
A policyowner stops paying premiums on a whole life policy with an accidental death benefit and exchanges the policy for extended term insurance. All of the following statements pertaining to this situation are correct EXCEPT: A) the term policy will have a reduced face value. B) the term policy has no cash value. C) the policyowner will have continued protection for a limited period of time. D) there will be no accidental death benefit with the new policy.
A When a policyowner stops paying premiums on a whole life policy with an accidental death benefit and exchanges the policy for extended term insurance, a policy's cash surrender value is used to purchase an amount of term insurance equal to the original policy's face amount. The term insurance will last as long as the cash value is sufficient to pay premiums. An accidental death benefit would not be included.
When a policyowner surrenders a life insurance policy, the insurance company may withhold payment of the policy's cash values for up to: A) 9 months. B) 1 year. C) 6 months. D) 2 years.
C One of the nonforfeiture provisions required in life insurance policies is the cash surrender value option. While in most instances the insurer will send the cash value much sooner, the insurer has up to six months to pay the cash surrender value to the policyowner.
Tammy owns a participating whole life insurance policy for which she has elected the paid-up additions option. If the insurer declares a dividend of $500 in the current year, how will this amount be used with this dividend option? A) The insurer adds $500 to the face amount of Tammy's base policy. B) The insurer adds a paid-up unit of whole life insurance with a cash value that is equal to $500. C) The insurer adds a paid-up unit of whole life insurance with a $500 face amount to Tammy's base policy. D) The insured uses the $500 as if it were a single premium to purchase a unit of paid-up whole life insurance based on Tammy's attained age.
D The paid-up additions dividend option uses the annual policy dividend as if it were a single premium to purchase a paid-up whole life insurance policy.
Which of the following descriptions of life insurance policy settlement options is CORRECT? A) Today, most life insurance proceeds are not paid out as a lump sum. B) Glenn chooses a life-income-only option, and Jerry chooses a life-income-with-cash-refund option. Jerry's income is based on the higher rate per $1,000 of proceeds. C) Under a life-income-only option, if a primary beneficiary dies after receiving income payments for only 3 months, the balance of the proceeds would be paid in a lump sum to the secondary beneficiary. D) Under an installment refund option, if the primary beneficiary dies, payments of the same amount continue to the secondary beneficiary until all installments to both beneficiaries equal the original amount of proceeds.
d Under an installment refund option, if the primary beneficiary dies, installments of the same amount continue to the secondary beneficiary until all installments paid to both beneficiaries equal the original amount of proceeds. Under a life-income-only option, installments are paid to the primary beneficiary as long as he lives, with no return of principal guaranteed. Therefore, this option provides the largest installments per $1,000 of proceeds. The lump sum option is still the most commonly used settlement option.