Chapter 3 - Life Insurance Policies
Which of the following types of Term Life policies most likely contains a Renewablility feature?
10 Year Convertible Term Explanation: A 10 year Convertible Term life policy contains a Renewability provision
J is 35-years old and looking to purchase a whole life insurance policy. Which of the following types of policies will provide the most rapid growth of cash value?
20- Pay Life Explanation: The shorter the pay period, the faster the cash value growth
A potential client, age 40, would like to purchase a Whole Life policy that will accumulate cash value at a faster rate in the early years of the policy. Which of these statements made by the producer would be correct?
20-Pay Life accumulates cash value faster than Straight Life Explanation: In this situation, the statement "20-Pay Life accumulates cash value faster than Straight Life" woud be correct
What type of policy would offer a 40-year old the quickest accumulation of cash value?
20-pay life Explanation: In this situation, a 20-pay life offers the quickest acucumulation of cash value
N is a 40-year old applicant who would like to retire at age 70. He is looking to buy a life insurance policy with level premiums, permanent protection, and be paid-up at retirement. Which of these should N purchase?
30 Pay Life Explanation: Limited pay whole life policies have level premiums that are limited to a certain period
Which statement is TRUE regarding a Variable Whole Life policy?
A minimum guaranteed Death benefit is provided Explanation: A Variable Whole Life policy provides a minimum guaranteed death benefit
K, age 45, and his wife, age 43, have three children. They purchase a Family Policy that covers K's wife to age 65. All of these situations will pay a death benefit EXCEPT
K's wife dies at age 66 Explanation: K's wife has coverage only until age 65
An architecture firm would stand to lose a lot of money in the event of the death of its project manager. Which type of policy should the firm purchase on its project manager?
Key person insurance Explanation: Key person insurance is a type of life insurance policy that provides a death benefit to a business if its owner or another significant employee passes away
K is looking to purchase Renewable Term insurance. Which of these types of Term insurance may be renewable?
Level Explanation: A level term policy pays the same benefit amount if death occurs at any point during the term. Level term policies may be renewable
D needs life insurance that provides coverage for only a limited amount of time while also paying the lowest possible premium. What kind of policy is needed?
Level term Explanation: Life insurance written to cover a need for specified of time at the lowest premium is called level term insurance
Life insurance that covers an insured's whole life with level premium paid over a limited of time is called:
Limited Pay Life Explanation: Life insurance that covers an insured's whole life with level premiums paid over a limited time is called Limited Pay Life
Which type of policy is considered to be overfunded, as stated by IRS guidelines?
Modified Endowment Contract Explanation: A policy that is overfunded to where it does not meet the 7-pay test is considered Modified Endowment Contract
When a life insurance policy exceeds certain IRS table values, the result would create which of the following?
Modified Endowment Contract (MEC) Explanation: When a life insurance policy exceeds certain IRS table values, the result would create a Modified Endowment Contract (MEC)
J is issued a Life Insurance policy with a death benefit of $100,000. She pays $600 per year in premium for the first 5 years. The premium then increases to $900 per year in the sixth year, and remains level thereafter. The policy's death benefit also remains at $100,000. Which type of Life Insurance policy is this?
Modified Premium Life Explanation: Modified whole life policies are distinguished by premiums that are lower than typical whole life premiums during the first few years (usually five) and then higher than typical thereafter
Which of these insurance products require an agent to have a proper FINRA securities registration in order to sell them EXCEPT for:
Modified Whole Life Explanation: An agent must have proper FINRA securities registration to sell Variable Life, Universal Variable Life and Variable Annuity EXCEPT Modified Whole Life
Which of these life products is NOT considered interest-sensitive?
Modified Whole Life Explanation: Variable Universal Life, Interest Sensitive Whole Life, and Variable Life have an interest sensitive investment aspect EXCEPT Modified Whole Life
A father who dies within 3 years after purchasing a life insurance policy on his infant daughter can have the policy premiums waived under which provision?
Payor provision Explanation: A payor provision provides that in the event of death or disability of the adult premiumpayor, the premiums on a juvenile policy will be waived until the insured child reached a specific age or the maturity date of the contract
T would like to be assured $10,000 is available in 10 years to replace a roof on his house. What kind of $10,000 policy should T purchase?
Ten-Year Endowment Explanation: In this situation, a Ten-Year Endowment should be purchased to ensure the funds will be available when needed
What type of life insurance gives the greatest amount of coverage for a limited period of time?
Term life Explanation: Term insurance would provide the greatest amount of protection for a limited period of time
Q is looking to buy a life insurance policy that will provide the greatest amount of protection for a temporary time period. Which of these policies should Q purchase?
Term life Explanation: Term life provides the greatest amount of protection for a temporary period
Which kind of life insurance product covers children under their parent's policy?
Term rider Explanation: Family plan policies usually cover the family head with permanent insurance and the coverage on the spouse and children is term insurance in the form of a rider
The most important factor to consider when determining whether to convert term insurance at the insured's attained age or the insured's original age is:
The cost Explanation: The cost of insurance is most important when an insured owner is trying to decide whether to convert term insurance at the insured's original age or the insured's attained age
Whole Life Insurance is sometimes referred to as "Straight Life". What does the word "Straight" indicate when using this phrase?
The duration of premium payments Explanation: The word "straight" denotes the duration of premium payments, usualy for the rest of the owner's life
What advantage does the renewablity feature give to term policy?
The insured may extend the coverage period Explanation: The advantage a renewability feature gives to the insured is it allows him/her to extend the coverage period. Usually a premium increase is involved upon renewal
Which of these statements describe a Modified Endowment Contract (MEC)?
Exceeds the maximum amount of premium that can be paid into a policy and still have it recognized as a life insurance contract Explanation: Policies that do not meet the 7-pay test are considered MECs and will lose favorable tax treatment . The test is designed to discourage premium schedule that would result in a paid-up policy before the end of a seven year period
Term insurance has which of the following characteristics?
Expires at the end of the policy period Explanation: With term insurance, the policy expires at the end of the policy period
What kind of life insurance policy pays a specified monthly income to a beneficiary for 30 years and then pays a lump sum benefit at the end of that 30 years?
Family Maintenance Policy Explanation: A Family Maintenance Policy pays a monthly income from the date of death of the insured to the end of the preselected period. The payment of the face amount of the policy is payable at the end of such preselected period
What kind of insurance policy supplies an income stream over a set period of time that starts when the insured dies?
Family Maintenance Policy Explanation: A policy that provides an income for a specific period starting at the death of the insured is a Family Maintenance Policy
P is looking to purchase a life insurance policy that will pay a stated monthly income to his beneficiaries for 20 years after he dies and a lump sum of $20,000 at the end of that 20 year period. What type of policy should P purchase?
Family Maintenance Policy Explanation: In this situation, Family Maintenance Policy should be purchased. It pays a monthly income from the date of death of the insured to the end of the preselected period. The payment of the face amount of the policy is payable at the end of such preselected period
Which of the following actions require a policyowner to provide proof of insurabilty in an Adjustable Life policy?
Increase face amount Explanation: Decrease face amount, increase premium paying period and decrease premium payment can be taken by a policyowner without proof of insurability except for increase face amount
Who has the option to renew a Renewable Term Policy?
Insured Explanation: A Renewable Term Policy is renewable at the option of the Insured
Which of these needs is satisfied by Adjustable Life insurance?
Insured's need for flexible premium Explanation: As financial needs and objectives change, the policyowner can make adjustments to the premium and/or face amount
What type of life policy covers two lives and pays the face amount after the first one dies?
Joint Life Policy Explanation: A policy that promises to pay the face amount on the death of first of two lives covered by the policy is called Joint Policy
All of these statements about Equity Indexed Life Insurance are correct EXCEPT
The premiums can be lowered or raised, based on investment performance Explanation: Cash value has a minimum rate of accumulation, If the gain on the index goes beyond the policy's minimum rate of return, there cash value will mirror that of the index are correct. Equity indexed life insurance is permanent life insurance that allows policyholders to the accumulation values to a stock market index
How does a typical Variable Life Policy investment account grow?
Through mutual funds, stocks, bonds Explanation: A Variable Life Policy has investment values based instruments such as mutual funds, stocks, and bonds
Which of the following is considered an element of a Variable Life Policy?
Underlying equtiy investment Explanation: One characteristics of a Variable life policy is contains an underlying equity investment
The Cash value in a(n) _____ life policy may fluctuate to reflect changing assumptions regarding mortality cost, interest, and expense factors.
Universal Explanation: A Universal Life Policy has a cash value that may flunctuate to reflect changing assumptions regarding mortality cost interest, and expense factors
K purchases a Life Insurance policy in 1986 which paid 10% interest in the early years of the policy. Twenty years after the purchase, she received a notice from the insurer stating that the policy will soon terminate unless a much-higher premium is paid because of falling interest rates. This type of policy is known as a(n) ___________ life policy
Universal Explanation: Universal life insurance, popular in the 1980s, worked as advertised for years, when interest rates were in the high single digits and above. Interest rates have since taken a dramatic fall, which negatively affected the performance of Universal Life policies issued iin the 1980's. This ultimately resulted in the policyowner paying a much higher premium due to the increased cost of the underlying Term life policy and having no cash value to offset premiums.
Which of the following Life insurance policies combine term insurance with an investment element
Universal Life Explanation: A Universal Life policy combines term insurance and an investment element
What type of life insurance incorporates flexible premiums and an adjustable death benefit?
Universal Life Explanation: It is designed to provide flexible premiums and an adjustable death benefit
A(n)_________Life Policy offers the owner investment in products such as money-market funds, long term bonds and equities
Variable Explanation: A Variable Life Policy offers the owner investment in products such as money-market funds, long term bonds and equities
In order to sell a(n)__________Life policy, a producer is required to register with the Financial Industry Regulatory Authority (FINRA)
Variable Explanation: In order to sell a Variable Life Policy, the producer must register with the FINRA
Which of these types of life insurance allows the policyowner to have level premiums and to also choose from a selection of investment options?
Variable Life Explanation: A life insurance policy that has a level premium but allows the policyowner to choose from a selection of investment options is known as Variable Life
Which policy requires an agent to register with the National Association of Securities Dealers (NASD) before selling?
Variable Life Explanation: Beause of the transfer of investment risk from the insurer to the policyowner, variable insurance products are considered securities contracts as well as insurance contracts
A life policy with a death benefit and cash value that can fluctuate according to the performance of its underlying investment portfolio is referred to as"
Variable Life Explanation: The cash value and death benefits of a Variable Life Policy can fluctuate according to the performance of its underlying investment portfolio
A(n) ________ __________ Life policy combines investment choices with a form of Term coverage
Variable Universal Explanation: Variable Universal Life combines investment choices with a form of Term coverage
A life policy that contains a monthly mortality charge as well as self-directed investment choices is called a(n)
Variable Universal Life Policy Explanation: It is comprised of monthly mortality charges and self directed investment choices
S owns a life insurance policy with cash values that fluctuate according to the underlying investment performance of common stocks. Which of these policies does S own?
Variable Whole Life Explanation: Variable whole life insurance is an insurance policy in which the cash value are determined by the performance of the underlying securities in the policy
Life Insurance immediately creates an estate upon the death of an insured. Which of the following policies is characterized by a guaranteed minimum death benefit?
Variable life Explanation: The variable nature of a variable while life insurance is its death benefit. However, if investment performance is poor, the death benefit will not go lower than the policy's guaranteed minimum
At what point does a Whole Life Insurance policy endow?
When the cash value equals the death benefit Explanation: A Whole Life Insurance Policy endows when the cash value equals the death benefit
When is the face amount of a Whole Life policy paid?
When the insured dies or at the policy's maturity date, whichever happens first Explanation: The face amount of Whole life policy will be paid when the insured dies or at the policy's maturity date, whichever happens first
What type of insurance offers permanent life coverage with premiums that are payable for life?
Whole Life Explanation: A policy that provides permanent life insurance with premiums payable for life is called Whole Life
What kind of life policy either pays the face value upon the death of the insured or when the insured reaches age 100?
Whole Life Explanation: Whole life insurance is designed to mature at age 100
Y purchased $100,000 worth of permanent protection on himself and $50,000 worth of 10-year Term coverage for his wife on the same policy. Which of these policies did Y purchase?
Whole Life Policy with an Other insured Rider Explanation: In this situation: the applicant purchased a Whole Life Policy with an Other Insured Rider
A life insurance policy that provides a policyowner with cash value along with a level face amount is called:
Whole life Explanation: Whole life provides the insured with a cash value as well as a level face amount
Under a Graded Premium policy, the premiums
are lower during the policy's early years Explanation: A graded premium life policy provides for annual increases in premiums for a constant face amount of insurance during defined preliminary period, with the purpose of making initial payments more affordable. The premium increases each year during the early years of the contract (usually five years) and remains the same after that time
Variable Whole Life Insurance can be described as
both an insurance and securities product Explanation: Variable Whole Life Insurance is both an insurance and securities product
Under an Interest Sensitive Whole Life Policy
cash values are determined by interest rates Explanation: Under an Interest Sensitive Whole Life Policy, the cash value accrues according to market value, except in the case of some companies which offer a guaranteed interest rate independent of markets
A Universal Life policy is sometimes referred to as an unbundled Life Policy because the owner can see the interest earned, expense charges, and the
cost of insurance Explanation: A Universal Life policy is sometimes referred to as an unbundled Life Policy because the policyholder can see the interest earned, expense charges, and the cost of insurance
A(n) ____________ term life policy is normally used when covering an insured's mortgage balance
decreasing Explanation: A decreasing term life policy is normally used when covering an insured's mortgage balance
Additional coverage can be added to a Whole Life policy by adding a(n)
decreasing term rider Explanation: A decreasing term rider can add addtional coverage to a whole life policy
A variable insurance policy:
does not guarantee a return on its investment accounts Explanation: In contast, variable insurance products do not guarantee contract cash values, and it is the policyowner who assumes the investment risk. Variable life insurance contracts do not make any promises as to either interest rates or minimum cash values
A Universal Life Policy is sometimes referred to as an unbundled Life Policy because the owner can see the interest earned, cost of insurance, and the
expense charges Explanation: The Universal Policy is called an unbundled Life Poicy because policyholder can see the expense charges, the interest earned, and the cost of insurance
All of these are characteristics of an Adjustable Life policy EXCEPT
face amount can be adjusted using policy dividends Explanation: An insured may make adjustable premiums, adjustable premium payment period, combination of term and whole life insurance EXCEPT face amount can be adjusted using policy dividends
Credit Life Insurance is:
issued in an amount not to exceed the amount of the loan Explanation: Credit life insurance is designed to cover the life of a debtor and pay the amount due on a loan if the debtor dies before the loan is repaid
What kind of premium does a Whole Life policy have?
level Explanation: A whole life insurance policy has a level premium
Who benefits in Investor-Originated Life Insurance (IOLI) when the insured dies?
policyowner Explanation: The policyowner (investor) benefits upon the death of the insured
The investment gains form a Universal Life Policy goes toward:
the cash value Explanation: In Universal Life Policy income is usually directed toward the cash value
The amount of coverage on a group credit life policy is limited to:
the insured's total loan value Explanation: With a group credit life policy, the amount of insurance on the life of a debtor is limited to the total amount of the insured loan
Under Graded Premium Whole Life Policy
the premium increases each year during the early years of the contract and remains the same after that time Explanation: With a graded premium whole life policy, the premium increases each year during the early years of the contract (usually five years) and remains the same after that time
Under a Renewable Term policy,
the renewal premium is calculated on the basis of the insured's attained age Explanation: Under a Renewable Term Policy, the renewal premium is calculated on the basis of the insured's attained age
Stranger-Owned Life Insurance (STOLI) is when a person purchases life insurance only to sell to a(n):
third party with no insurable interest Explanation: STOLI is when a person purchases life insurance only to sell to a third party with no insurable interest, who would therefore be unable to legally purchase the original policy. STOLI is a way to circumvent the insurable interest requirement when purchasing a life insurance policy. To legally purchase life insurance on someone else, the purchaser must have an insurable interet in that person's life. STOLI is prohibited in most states
When is the face amount paid under a Joint Life and Survivor policy?
upon death of the last insurer Explanation: A Joint and Survivor policy pays benefits after the death of the last insured
A term life insurance policy matures
upon the insured's death during the term of the policy Explanation: Term life policies can only mature (pay out the face amount) if death occurs during the term of the policy
Term Life Policies that have the ability to be converted to permanent coverage may do so during a specific time period. This conversion period
varies according to the contract Explanation: The conversion period varies according to the contracts
A policy that becomes a Modified Endowment Contract (MEC):
will lose many of its tax advantages Explanation: When a policy becomes MEC, many of the tax advantages are lost
If a 10-Year Term Life policy contains a Renewability provision, the policy will renew
without evidence of insurability Explanation: Renewablility term refers to a provision in many term life insurance policies that allow for its renewal without the need for new underwriting. With renewable term, coverage cna be extended even if the insured's health has declined, but the new premiums will reflect their older age
Which of the following types of policies pays a benefit if the insured goes blind?
AD&D Explanation: An Accidental Death and Dismemberment (AD&D) policy can provide financial benfits if an insured is killed, loses a limb, suffers blindness, or is paralyzed in a covered accident
A company that owns a life insurance policy on one its key employees may do all of the following EXCEPT
Change the policy's interest rate Explanation: The company may borrow against cash value, cancel policy, change beneficiary with a Key person insurance policy EXCEPT Change the policy's interest rate
A is covered by a whole life policy. Which insurance product can cover his children?
Child term rider Explanation: This means providing life insurance on the children of a person who is covered by a life insurance policy is by a child term rider
Which of the following features of a group Term Life policy enables an individual to leave the group and continue his or her insurance without providing evidence of insurability?
Conversion priviledge Explanation: The conversion priviledge allows an individual to leave the group term plan and continue his or her insurance without providing evidence of insurability
When a policyowner exchanges a term policy for a whole life policy without providing proof of good health, which of these apply?
Conversion provision Explanation: The option to convert gives the insured the right to convert or exchange the term policy for a whole life (or permanent) plan without evidence of insurability
What kind of life insurance starts out as temporary coverage but can be later modified to permanent coverage without evidence of insurability?
Convertible Term Explanation: Convertibe Term provides temporary coverage that may be changed to permanent coverage without evidence of insurabilty
The combination of Whole Life and _______Term insurance is referred to as a Family Income Policy
Decreasing Explanation: A Family Income Policy is a combination of Whole Life and Decreasing Term Insurance
Which of these types of policies may NOT have the Automatic Premium Loan provision attached to it?
Decreasing Term Explanation: The Automatic Premium Loan provision can be incorporated into Modified Whole Life, 20- Pay Life and Endowment policies EXCEPT decreasing term.
What type of life insurance are credit policies issued as?
Decreasing Term Explanation: The type of insurance used is decreasing term, with the term matched to the length of the loan period (through usually limited to 10 years or less) and the decreasing insurance amount matched to the declining loan balance
What type of life policy has a death benefit that adjusts periodically and is written for a specific period of time?
Decreasing term Explanation: A decreasing term policy has a death benefit that adjusts periodically and is written for a specific period of time
Credit life insurance is typically issued with which of the following types of coverage?
Decreasing term Explanation: The type of insurance used for Credit life is typically decreasing term, with the term matched to the length of the loan period
F needs life insurance that provides coverage for only a limited amount of time with a death benefit that changes regularly according to a schedule. What kind of policy is needed?
Decreasing term policy Explanation: A life nsurnace policy written for a specified period of time with a death benefit that changes regularly according to a schedule is a decreasing term policy
A 15-year mortgage is best protected by what kind of life policy?
Decreasing term policy Explanation: 15-year decreasing term is best protected by a 15 year decreasing term policy
P owns a $25,000 Life Policy that pays the face amount to him if he lives to age 70, or to his beneficiary if he dies before age 70. What kind of policy does P own?
Endowment at Age 70 Explanation: An endowment policy is characterized by cash value that grow at a rapid pace so that the policy matures or endows at a specified date (or before 100)
Which of the following information is NOT required to be included in a Whole Life Policy?
Policy's guaranteed dividend table Explanation: Policy's loan interest rate, Policy's premium, and Policy's cash value table must be included in a Whole Life Policy EXCEPT Policy's guaranteed dividend table
Which is true concerning a Variable Universal Life policy?
Policyowner controls where the investment will go and selects the amount of the premium payment Explanation: With Variable Universal Life, the policyowner controls the investment of cash value and selects the timing and amount of premium payments
Which of these characteristics is consistent with a Straight Life Policy
Premiums are payable as long as there is insurance coverage in force Explanation: Straight whole life provides permanent level protection with level premiums from the time the policy is issued until insured's death (or age 100)
Which statement is correct regarding the premium payment schedule for whole life policies?
Premiums are payable throughout the insured's lifetime/coverage lasts until death of the insured Explanation: With whole life insurance, premiums are payable throughout the insured's lifetime, and coverage continues the insured's death
Which of the following actions is NOT possible with a Universal Life Policy?
Premiums may be applied as a credit against income tax Explanation: Policy's cash value may be used to pay premiums, Premium payments may be made at unscheduled times, Face amount may be adjusted are all possible with a Universal Life Policy EXCEPT Premiums may be applied as a credit against income tax
T has a term policy that allows him to continue the coverage after expiration of the initial policy period. What type of term coverage is this?
Renewable Explanation: Renewable Term policies guarantee the insured the right to continue term coverage after expiration of the initial policy period
Which of the following types of permanent life insurance policies offers the highest initial cash value?
Single premium Explanation: Single Premium whole life allows the insured to pay the entire premium to one lump-sum and have coverage for his/her entire life. This type of permanent coverage has the highest initial cash value
K is shopping for a permanent life insurance policy that will offer her the MOST protection per dollar of annual premium. Which of these policies best fits her needs?
Straight life Explanation: Straight life insurance policies provide an insured the greatest amount of permanent protection per dollar of annual premium
What type of life policy covers two people and pays upon the death of the last insured?
Survivorship Explanation: A survivorship life policy insures two individual and is designed to pay a benefit upin the second death
