Chapter 3
Which policy cost comparison method compares the projected policy cash value to premiums paid after a certain number of years? Select one: a. Comparative interest rate method b. Surrender cost index c. Net payment cost index d. Loss ratio method
b. Surrender cost index
Employer-paid premiums used to fund group life insurance for the benefit of employees are: Select one: a. Paid with after-tax dollars b. Tax-deductible as a business expense c. Not tax-deductible d. Refunded to employers each year
b. Tax-deductible as a business expense
All of the following are considered minimum information that must be on a life insurance illustration, EXCEPT: Select one: a. Form number b. Dividend options, if any c. Nonguaranteed elements, if any d. Insured's marital status
d. Insured's marital status
Saul wants to sell variable life insurance products. Which license(s) must he hold? Select one: a. Life and variable products license b. Life and health license c. Securities license d. Life and variable products and securities licenses
d. Life and variable products and securities licenses
What will the insurer do if the insured dies during the grace period of a life insurance policy? Select one: a. Void the policy b. Cancel the policy and return the premiums, plus interest, pro rata to the insured's beneficiary c. Pay the full death benefit d. Pay the death benefit, but deduct the amount of the overdue premium
d. Pay the death benefit, but deduct the amount of the overdue premium
A life insurance policy summary includes all of the following, EXCEPT: Select one: a. The insurance agent's name b. Policy premium amounts c. Policy loan interest rates d. Policy illustrations
d. Policy illustrations
Which business continuation plan permits a deceased shareholder's heirs to maintain some ownership while the corporation redeems a portion of the deceased shareholder's shares? Select one: a. Key person insurance b. Split-dollar plan c. Entity plan d. Section 303 plan
d. Section 303 plan
All of the following are buy-sell agreements, EXCEPT: Select one: a. Stock redemption plan b. Cross-purchase plan c. Entity plan d. Split-dollar plan
d. Split-dollar plan
All of the following are true regarding executive bonus plans, EXCEPT: Select one: a. An employer gives an employee a bonus in the amount of the premium payments on a life insurance policy. b. The employee is the insured and the company is the owner of the policy. c. The employer pays the premiums, but receives a tax deduction in the amount of the premium because it is treated as a pay raise. d. The employee pays income tax on the amount of the pay raise, however the company may _bonus_ the amount of the income taxes.
b. The employee is the insured and the company is the owner of the policy.
Of the following statements, which correctly represents a split-dollar plan? Select one: a. When the employee dies, the employer receives the entire death benefit. b. The employer and employee split premiums and benefits. c. Premiums are paid by the employee, and the employer is both the policyowner and beneficiary. d. None of the above
b. The employer and employee split premiums and benefits.
Insurance producers are not permitted to use the existence of _____ to induce a sale of insurance or annuities.
a state guaranty association
Which of the following is a nonqualified employee benefit plan that permits employees to postpone some of their earnings on an after-tax basis? Select one: a. Deferred compensation b. Executive bonus c. Buy-sell d. Split-dollar
a. Deferred compensation
The ___________ approach calculates the amount of money a person is expected to earn over their lifetime to determine the face amount of life insurance needed, thereby placing a dollar value on the life of an individual. Select one: a. Human life value b. Needs c. Salary d. Social Security blackout
a. Human life value
The nonguaranteed elements of an insurance policy are: Select one: a. Illustrations b. Policy summary c. Policy face d. Policy terms and conditions
a. Illustrations
Which of the following is false regarding life insurance policy illustrations? Select one: a. Illustrations are part of the insurance contract. b. The insurance agent cannot make any changes to policy illustrations. c. The insurer must approve policy illustrations. d. Life insurance illustrations must differentiate between guaranteed amounts and nonguaranteed amounts.
a. Illustrations are part of the insurance contract.
For replacement transactions, an insurance producer's duties include all of the following, EXCEPT: Select one: a. Notify existing insurers of policies to be replaced b. Provide the applicant with a policy cost comparison statement c. Make a list of all existing policies the applicant intends to replace d. Leave a notice regarding replacement with the applicant
a. Notify existing insurers of policies to be replaced
Which of the following is true regarding level premiums? Select one: a. Policyholders are paying more premium than is needed in the early years of policy b. Policyholders are paying less premium than is needed in the earlier years of the policy. c. Level premiums can only be paid annually d. Level premiums are the only premium option
a. Policyholders are paying more premium than is needed in the early years of policy
What business continuation agreement would you recommend to a corporation with 3 shareholders so that when a shareholder dies, all other shareholders agree to purchase a portion of the deceased shareholder's stock at an agreed price? Select one: a. Stock purchase plan b. Section 303 stock redemption c. Entity plan d. Stock redemption plan
a. Stock purchase plan
Ben applies for a life insurance policy on himself. How much insurable interest does Ben have in his own life? Select one: a. Unlimited b. Up to $100,000 c. Up to $1 million d. Up to $100 million
a. Unlimited
Level premium life insurance policies usually have ______ premiums in order to account for the greater risk of death with advancing age. Select one: a. higher b. lower c. increasing d. decreasing
a. higher
Which of the following business continuation agreements is most appropriate for Teri and Annette's business partnership? Select one: a. Entity plan b. Cross-purchase plan c. Stock redemption plan d. Key person
b. Cross-purchase plan
Insurance agent Sam is helping Joyce determine the proper amount of life insurance for her needs. Sam uses Joyce's age, net annual salary, number of working years remaining prior to retirement, expenses and the rate at which the value of the dollar is depreciating. Which of the following methods is Sam using? Select one: a. Needs approach b. Human life value approach c. Estate conservation approach d. Lump-sum approach
b. Human life value approach
Which of the following does not constitute policy replacement? Select one: a. Life insurance coverage that is converted to reduced paid-up coverage b. Life insurance coverage in which a loan is not repaid to the insurer c. Life insurance coverage that is terminated d. Life insurance coverage that is lapsed
b. Life insurance coverage in which a loan is not repaid to the insurer
Life insurance policies with cash value provide the insured with immediate availability of funds, referred to as: Select one: a. Estate conservation b. Liquidity c. Survivor protection d. Viatical settlements
b. Liquidity
Another term for insurers' expense is: Select one: a. Interest earnings b. Loading c. Morbidity d. Premium
b. Loading
The ____________ approach calculates the amount of money a family needs immediately upon the death of the insured to pay for their expenses and basic necessities. Select one: a. Human life value b. Needs c. Salary d. Social Security blackout
b. Needs
Life insurance policy illustrations must contain all of the following, EXCEPT: Select one: a. Agent's name b. Only the guaranteed policy elements c. Generic name of policy d. Insured's age and sex
b. Only the guaranteed policy elements
Martin pays his policy premiums on a monthly basis. Which of the following terms best describes the frequency that Martin pays his premiums? Select one: a. Exclusion ratio b. Premium payment mode c. Net single premium d. Premium cycle
b. Premium payment mode
Which of the following best describes a business continuation plan intended for a corporation in which the corporation purchases a portion of the deceased stockholder's shares? Select one: a. Cross-purchase plan b. Section 303 plan c. Stock purchase plan d. None of the above
b. Section 303 plan
Which of the following plans allows a corporation to redeem a portion of the deceased shareholder's shares without handing over control of the corporation's ownership? Select one: a. Split-dollar plan b. Stock redemption plan c. Key person d. Cross-purchase plan
b. Stock redemption plan
Which of the following is a reason a business would buy life insurance? Select one: a. To provide employee benefits b. To insure the lives of key employees c. To assure the outlook of the business d. All of the above
d. All of the above
Smith has a life insurance policy that allows his business partner to purchase his share of the lawn-cutting business upon his death. Smith has a: Select one: a. SEP b. Profit-sharing plan c. Keogh d. Buy-sell agreement
d. Buy-sell agreement
All of the following are categories of insurable interest in life insurance, EXCEPT: Select one: a. A person's own life b. The lives of relatives or spouses c. Business/financial relationships d. Friends and coworkers
d. Friends and coworkers
cross-purchase plan is best for businesses with ___ partners?
2-3
Funding a college education, Saving for retirement, or Purchasing a home are all common purposes for:
Cash Accumulation
Permanent life insurance policies have ____
Cash Value
The advantages of a Section 303 are:
The heirs can maintain control over the business, and The cash provided by the partial redemption is not taxed as a dividend.
A life insurance death benefit may be used to maintain an ____
estate.
In a viatical settlement, the third party that purchases the insured's life insurance policy is termed the
viatical settlement provider
the ______ pays the premiums and will receive the full death benefit, not subject to income tax, when the viator dies.
viatical settlement provider
The portion of the death benefit the viator receives in a viatical settlement ranges from ____ percent of the death benefit.
50 to 80
_____ is purchasing a new life insurance policy or annuity contract to replace an existing policy or contract.
Policy replacement
When a stockholder dies, the corporation purchases, or redeems, the deceased stockholder's share.
Stock redemption plan
Who is responsible for the dissemination and content of insurance advertisements? Select one: a. The advertising company b. The producer c. The insurer d. The state department of insurance
c. The insurer
If a duly licensed agent knows that an existing insurance policy is going to lapse, and based on their recommendation, will be invested in a security, the agent must notify the policyowner within ____ days before investing in the security.
15
Term policies strictly provide _____ and do not accrue _____
Death Benefit cash value.
The plan is nonqualified and does not receive tax-advantages from the IRS.
Deferred Compensation
Life insurance policy owned by employees but paid for by the business
Executive bonus
an employer gives an employee a bonus in the amount of the premium payments on a life insurance policy.The employer pays the premiums, but receives a tax deduction in the amount of the premium because it is treated as a pay-raise.
Executive bonus plan
A business that buys life insurance on a key employee has purchased:
Key person insuracne
Typically _____ insurers are associated with issuing participating policies and _____ insurers with nonparticipating policies;
Mutual; stock
____ are whole life policies that are effective for the entire life of the insured or up to the age of 100.
Permanent life insurnace
Payment of less than the policy face amount occurs in the following circumstances:
Policy loan Premium payment overdue Misstatement of age/sex
____ is a type of stock redemption plan where the corporation redeems a portion of the stock to provide the shareholder's heirs with cash to cover the costs of: The deceased's death taxes, Estate administration, and Funeral expenses.
Section 303 Stock Redemption
___ earn a fluctuating rate of interest.The cash value in ____ contracts cannot be guaranteed.
Variable
In a viatical settlement, the insured is termed the ____
Viator
Betty and Jack have a partnership. If their partnership is worth $800,000 how much life insurance is issued on each partner if a cross-purchase plan is used? Select one: a. $200,000 b. $400,000 c. $800,000 d. $1 million
b. $400,000
Each member insured under a group life insurance policy receives a(n): Select one: a. Master policy b. Certificate of insurance c. Insurance policy d. Whole life coverage
b. Certificate of insurance
The _____ is the time during which a surviving spouse is ineligible to receive Social Security Survivors benefits.
blackout period
In the needs approach, all of the following information is used to establish how much insurance needs to be purchased, EXCEPT: Select one: a. Expenses b. Maintenance income c. Debts d. The amount of money the insured is expected to earn over their lifetime
d. The amount of money the insured is expected to earn over their lifetime
When must insurable interest be shown for a life insurance policy? Select one: a. When death benefits are paid b. When submitting the claim c. When the policy is delivered d. Upon policy application
d. Upon policy application
The ______ cost method uses the time value of money to compare policy costs.
interest-adjusted net
The _____ excludes the cash value and only predicts the average annual premium cost.
net payment cost index
Which of the following is NOT a major risk factor in determining a premium? A.) Mortality B.) Interest C.) Expense D.) Age/Sex.
D). Age/Sex
The amount a policy owner actually pays for the policy.
Gross Annual Premium
Mortality (Risk) + Loading - Interest =
Gross Single Premium
Three Major Factors In Premium Determination (MIX)
Mortality Interest Exepenses
Gross Annual Premium =
Mortality - Interest + Expenses
____ includes mortality and interest. This is the total dollar amount required to fund the entire life insurance death benefit.
Net Single Premium
Money set aside to pay claims =
Reserves
Acme Fireworks Company needs a business continuation policy to ensure the business ownership is properly transferred in the event a partner dies or becomes disabled. What policy would you recommend if there are 3 partners and the business is a partnership? Select one: a. Cross-purchase plan b. Stock purchase plan c. Entity plan d. Stock redemption plan
a. Cross-purchase plan
A furniture company is owned by five partners. What business continuation plan would you suggest to the company? Select one: a. Entity plan b. Cross-purchase plan c. Stock redemption plan d. Key person
a. Entity plan
Insurance companies need to set aside a certain amount of funds called reserves. Reserves are treated as a(n): Select one: a. Liability b. Benefit c. Premium d. Asset
a. Liability
Net single premium is: Select one: a. Mortality - Interest b. Loading + Gross Premium c. Interest - Gross Premium d. Mortality + Loading
a. Mortality - Interest
Which factor is the most crucial for underwriting life insurance? Select one: a. Proposed insured's age b. Proposed insured's sex c. Proposed insured's place of residence d. Proposed insured's occupation
a. Proposed insured's age
Which of the following are the actuarial tables used by insurers for underwriting? Select one: a. Morbidity tables b. C.S.O. tables c. Insurable tables d. Risk pool tables
b. C.S.O. tables
Judas and John are identical twins. Judas and John go to the same insurance agent and end up buying the exact same policy. The only difference between their policies is: John pays his premiums monthly and Judas pays his premiums annually. Whose policy has higher premiums? Select one: a. Judas b. John c. Judas' and John's premiums are the same d. Not enough information is provided
b. John
All of the following statements are true regarding the premium payment mode, EXCEPT: Select one: a. If premiums are paid more frequently, the insurer incurs an additional loading expense. b. More frequent premium payments means lower premiums. c. Insurers accept premium payments annually, semi-annually, quarterly, monthly and weekly. Some insurers may accept a single lump-sum premium payment. This applies to life insurance. d. The premium payment mode is the frequency that premium payments are made.
b. More frequent premium payments means lower premiums.
Premiums are invested to earn interest. __________ interest rates allow insurers to charge ________ premiums. Select one: a. Lower; lower b. Higher; higher c. Higher; lower d. Fixed; monthly
c. Higher; lower
What is the term used to describe an insurer that cannot pay its claim obligations? Select one: a. Reinsured b. Bankrupt c. Insolvent d. Nonadmitted
c. Insolvent
Which of the following is not used to calculate the premium for life insurance contracts? Select one: a. Loading b. Interest c. Morbidity d. Mortality
c. Morbidity
Generally, premiums paid on business life insurance policies are: Select one: a. Tax-deductible b. Paid with pre-tax dollars c. Not tax-deductible d. Refunded to policyowners each year
c. Not tax-deductible
Generally, premiums paid on individual life insurance policies are: Select one: a. Tax-deductible b. Paid with pre-tax dollars c. Not tax-deductible d. Considered a nontaxable refund
c. Not tax-deductible
Which of the following would not be used to determine the premium rate for a life insurance policy? Select one: a. Mortality b. Interest earnings c. Loading d. Morbidity
d. Morbidity
Insurers' expenses include all of the following costs, EXCEPT: Select one: a. Overhead b. Acquisition costs c. Immediate claims payments d. Premiums
d. Premiums
Premiums are invested to ___
earn interest
Entity type plans are best for businesses with _____ partners
several
Executive benefit an employer can use to pay a highly paid employee at a later date, such as upon disability, retirement or death.
Deferred Compensation
____is a way to provide life insurance to many people under one policy.
Group life insurance
All of the following are true regarding viatical settlements, EXCEPT: Select one: a. A terminally or chronically ill insured can sell their life insurance policy to a third party in exchange for payment of a large portion of the death benefit. b. Viatical settlements are a type of life insurance contract. c. In a viatical settlement, the third party that purchases the insured's life insurance policy is termed the viatical settlement provider, and the insured is termed the viator. d. The portion of the death benefit the viator receives in a viatical settlement ranges from 50 to 80 percent of the death benefit.
b. Viatical settlements are a type of life insurance contract.
an attorney drafts a ___ stating the employee's agreement to purchase the proprietor's estate and sell the business at a price that has been agreed-upon beforehand.
buy-sell plan
Three partners use a buy-sell agreement to assure the business ownership will be properly transferred upon the death of one or more partners. If a cross-purchase plan is used as the business continuation agreement, how many policies will be issued? Select one: a. 20 b. 12 c. 6 d. 3
c. 6
Four partners share in the ownership of a bowling alley. Which of the following business continuation plans best fits their needs? Select one: a. Key person b. Stock redemption plan c. Entity plan d. None of the above
c. Entity plan
The time period during which children are young and financially dependent upon their parents is termed the: Select one: a. Blackout period b. Preretirement period c. Family dependency period d. Support period
c. Family dependency period
All of the following are true regarding claims for life insurance policies, EXCEPT: Select one: a. The only claim in a life insurance policy is the insured's death. b. Upon the insured's death, the policy proceeds are paid to the beneficiary. c. In order for death benefits to be paid, the insurer must receive notice of the insured's death, but does not need the death certificate. d. Life insurance claims are typically paid within a few days of the insured's death, but the insurer may have up to 60 days to pay claims.
c. In order for death benefits to be paid, the insurer must receive notice of the insured's death, but does not need the death certificate.
Mary's Cosmetics purchases a life insurance policy on Samantha, the leading makeup salesperson in the nation. Which business continuation plan did Mary's Cosmetics buy? Select one: a. Split-dollar b. Executive bonus plan c. Key person insurance d. Section 303 plan
c. Key person insurance
Which of the following best describes the tool underwriters use to determine the rate at which a group of people die? Select one: a. Exclusion ratio grid b. Morbidity rate graph c. Mortality table d. None of the above
c. Mortality table
All of the following are differences between permanent and term life insurance, EXCEPT: Select one: a. Permanent life insurance policies have cash value, whereas term life insurance policies do not accrue cash value. b. Permanent life insurance provides death protection to the insured for the insured's entire life, whereas term life insurance is effective for a designated period of time. c. Permanent life insurance policies are nonparticipating, whereas term life insurance policies are participating. d. Permanent life insurance provides death protection and builds cash value, whereas term life insurance strictly provides death protection.
c. Permanent life insurance policies are nonparticipating, whereas term life insurance policies are participating.
All of the following statements regarding key person insurance are true, EXCEPT: Select one: a. A business that purchases life insurance on a key employee has purchased key person insurance. b. Key person insurance is intended to offset the loss to a business when a top-selling salesperson, manager or employee dies. c. The key employee is the policyowner and pays the premiums; the company is the beneficiary. d. Premiums are not tax-deductible, but the death benefit is received tax-free.
c. The key employee is the policyowner and pays the premiums; the company is the beneficiary.
Which of the following statements is false regarding viatical settlements? Select one: a. The owner of the viator's life insurance policy is called the viatical settlement provider, who pays the premiums and will receive the full death benefit, not subject to income tax, when the viator dies. b. Viatical producers and brokers sell viatical settlements. c. Viatical brokers work for and represent viatical settlement providers, whereas viatical producers work for and represent insureds. d. Viatical settlement providers, producers and brokers all must be licensed with the state in which they transact business.
c. Viatical brokers work for and represent viatical settlement providers, whereas viatical producers work for and represent insureds.
The third party that purchases a life insurance policy death benefit from a terminally ill insured is termed: Select one: a. Viator b. Viatical settlement c. Viatical settlement provider d. Insurance producer
c. Viatical settlement provider
The ____ calculates an interest rate that must be earned in a side fund of a buy term and invest the difference, in order for the value of the side fund to be equivalent to the surrender value of the policy that has the higher premium at a specific time.
comparative interest rate method
In a _____ each partner buys, pays the premiums, and is the beneficiary of a life insurance policy on each of the other partners. The amount of the policy is equivalent to each partner's share of the business.
cross-purchase plan
Agent Sam is using the human life value approach to assess Mary's life insurance needs. How much life insurance should Sam advise Mary to purchase if her annual income is $75,000 and she intends to work for another 20 years? Select one: a. $75,000 b. $100,000 c. $1 million d. $1.5 million
d. $1.5 million ($75,000 x 20 working years remaining = $1,500,000).
A life insurance policy is considered replaced if: Select one: a. An existing life insurance policy is lapsed, forfeited, surrendered or terminated b. Converted to reduced paid-up insurance c. Reissued with a reduction in cash value d. All of the above
d. All of the above
What is business life insurance used for? Select one: a. An employee benefit b. A funding tool c. Business interruption insurance d. All of the above
d. All of the above
Angela took out a $2,000 policy loan from her whole life insurance policy. The policy face amount is $200,000. If Angela does not repay the loan, how will the death benefit be affected? Select one: a. The death benefit will be increased by $2,000. b. The death benefit will be decreased by $2,000. c. The death benefit will remain the same. d. The death benefit will be decreased by $2,000 plus interest.
d. The death benefit will be decreased by $2,000 plus interest.
All of the following are true regarding purchase of personal life insurance for charity, EXCEPT: Select one: a. Coverage is taken out on the life of the person buying the policy. b. The charity is named as the beneficiary. c. The person buying the policy pays the premiums, which are usually tax-deductible. d. The person purchasing life insurance for charity must have insurable interest in the lives of the charity's members.
d. The person purchasing life insurance for charity must have insurable interest in the lives of the charity's members.
Personal life insurance is purchased for all of the following reasons, EXCEPT: Select one: a. To fund a charitable organization b. To accumulate cash c. To preserve an estate d. To fund a buy-sell agreement
d. To fund a buy-sell agreement
When does the Social Security blackout period begin? Select one: a. When the oldest child reaches age 18 b. When the youngest child reaches age 18 c. When the oldest child reaches age 16 d. When the youngest child reaches age 16
d. When the youngest child reaches age 16
In life insurance the risk of death increases with age, so premiums must be ______ in ______ years to account for this risk. Select one: a. lower; earlier b. higher; earlier c. lower; later d. higher; later
d. higher; later
In an ____, the partnership itself agrees to buy the deceased partner's share of the business. the business purchases, pays the premiums and is the beneficiary on life insurance of each partner.
entity type plan
____ earn a constant rate of interest, thereby providing a guaranteed minimum of benefits. The cash value in ___ policies is guaranteed.
fixed
Participating life insurance policies (par) pay dividends to
policyholders
A _____works the same as deferred compensation, except that the employer funds the plan rather than the employee. The employer establishes an agreement, whereby an employee will continue to receive income payments upon death, disability or retirement.
salary continuation plan
Viatical settlements are completely ____ from life insurance contracts.
separate
Nonparticipating life insurance policies (nonpar) pay dividends to
shareholders
A _____ is an arrangement where an employer and an employee share in the cost of purchasing an individual life insurance policy on the employee
split-dollar plan
____requires the surviving stockholders to purchase the deceased stockholder's interest in the company, and the deceased stockholder's estate to sell the interest to the surviving stockholders.
stock purchase plan
The ____ the cost of an insurance policy by projecting the total amount of cash value in a policy (sum of dividends and cash accrued) and deducting the total cost of premiums after a certain number of years.
surrender cost index measures
