Chapter 3 Quiz

"Which of the following is a liquid asset? A) Precious gems B) Life insurance proceeds C) Farming equipment D) Precious metals"

"Life insurance proceeds Explanation While life insurance proceeds are a liquid asset, precious metals, precious gems, and farming equipment are considered hard or illiquid assets."

"According to the principle of human life value, the purpose of life insurance is A) to determine an individual's eligibility for insurance B) to replace an individual's economic value C) to replace an individual's insurance based on life events D) to determine the amount of insurance an individual needs"

"to replace an individual's economic value Explanation The purpose of life insurance is to replace an individual's economic value, according to the principle of human life value. It is calculated by multiplying the individual's annual income by the number of years until retirement. The answer is the amount of money that will be earned by retirement."

"The net premium is defined as A) mortality plus expenses B) mortality plus interest C) mortality minus interest D) mortality minus expenses"

"mortality minus interest Explanation Mortality minus interest equals the net premium."

"Which of the following is NOT a business use of life insurance? A) Estate conservation B) Deferred compensation C) Key-person coverage D) Buy-sell funding"

"Estate conservation Explanation Estate conservation is one of the uses for personal life insurance, not business insurance."

"In the life insurance business, a word that is synonymous with expenses is A) underwriting B) controlling C) actuary D) loading"

"loading Explanation Each premium an insurer charges must carry its small proportion of normal operating expenses. The expense factor is computed and included in the premium rates for life insurance. The expense factor is also called the loading charge."

"Regular notices sent to policyowners for payment of their life insurance policy premiums reflect A) the net level premium B) the gross premium C) the net single premium D) the gross single premium"

"the gross premium Explanation The gross premium is determined by adding the net single premium to the expense factor. Policyowners pay the gross premium on life insurance policies. The gross premium is determined by adding the net single premium and interest amount together. The net single premium is defined as the single amount needed immediately to fund future benefits. When the net premium is combined with interest, that amount will be sufficient to pay a future death benefit. Policy premiums are generally paid over a number of years, rather than with a single payment. The net single premium is converted into annual level premiums, adjusted for the smaller amount of interest the premiums will earn."

"The loaded premium is A) the gross premium B) the base premium C) the net premium D) the modified premium"

"the gross premium Explanation The term loaded premium refers to the gross premium, which is calculated by adding the net premium and expense loading."

"An insurers' operating costs are known as A) the relativity load B) the interest dollars C) the rate of costing D) the expense load"

"the expense load Explanation Insurance company operating costs are referred to as the expense load. When this element is added to the premium, the term is known as loading."

"Which of the following would be a source of instant liquidity upon the death of an estate owner? A) Debts payable to the estate B) A life insurance policy on the estate owner's life, payable to the estate C) A home D) Bank certificates of deposits"

"A life insurance policy on the estate owner's life, payable to the estate Explanation The term instant liquidity refers to property that is readily convertible into cash without loss or cash itself. In this example, the only asset that would provide instant liquidity would be the life insurance policy."

"Cybil is insured under a key-person life insurance policy owned by Delta Corporation and then quits her job. Which of the following statements is NOT correct? A) Cybil can convert the policy to an individual policy. B) Delta can surrender the policy for cash. C) Delta can keep the policy in force. D) Delta can assign the policy."

"Cybil can convert the policy to an individual policy. Explanation If Cybil leaves Delta Corporation, the company can surrender the policy for cash, assign the policy, or keep it in force because there is no need to maintain an insurable interest. Cybil has no conversion right with respect to the key-person policy because she does not own the policy."

"Which of the following is NOT taken into account when using the needs approach to determine the proper amount of insurance protection? A) The projected future earnings of the breadwinner and the number of years she expects to work B) The amount of the family's retirement income needs C) The family's preretirement period needs D) The family's dependency period needs"

"The projected future earnings of the breadwinner and the number of years she expects to work Explanation The needs approach for determining how much insurance protection is needed requires an analysis of the family's financial needs, including the dependency, preretirement, and retirement periods, if the breadwinner dies. Future earnings are part of a human life value approach, but not the needs approach."

"All of the following are personal uses of life insurance EXCEPT A) auto protection B) survivor protection C) estate creation D) mortgage payoff"

"auto protection Explanation The personal uses of life insurance include survivor protection, mortgage payoff, estate creation, estate conservation, liquidity, and cash accumulation."

"An example of an illiquid asset is A) life insurance proceeds B) real estate C) bank savings accounts D) checking accounts"

"real estate Explanation An asset that can be quickly and easily turned into cash without losing its value is considered a liquid asset. Real estate is an illiquid asset."

"All of the following are basic premium factors EXCEPT A) the insurer's expenses B) the insured's annual income C) interest earnings D) the mortality rate"

"the insured's annual income Explanation Three basic factors must be considered when computing the premium rate for a life insurance policy: mortality (the event or risk the insured wants to protect against); interest (the amount assumed to be earned on the insurer's funds); and expenses (the overhead charges the insurer incurs)."

"The annual gross premium of a life insurance policy is defined as A) net premium plus mortality B) interest plus expense less mortality C) mortality costs plus loading D) net premium plus expense"

"net premium plus expense Explanation Gross premium equals net single premium plus expense (the insurer's expense of doing business). The gross premium is what the policyowners are required to pay."

"Of the following payment modes, which is generally the least expensive? A) Quarterly B) Monthly C) Semiannual D) Annual"

"Annual Explanation The annual payment mode is generally the least expensive due to the lower billing and handling costs involved and the fact that the insurer has the full annual premium to invest all at once."

"All of the following are premium elements EXCEPT A) expenses B) interest C) morality D) mortality"

"morality Explanation Calculating premium rates for life insurance is based on 3 elements: mortality, interest, and expenses. Morality is 1 of the 3 types of hazards (physical, moral, and morale)."

"After a family's breadwinner dies, the blackout period generally can be defined as the period A) during which children only receive Social Security benefits B) that begins when the youngest child turns 16 and ends when the surviving parent reaches age 60 C) that begins when the surviving parent retires D) during which minor children are living at home"

"that begins when the youngest child turns 16 and ends when the surviving parent reaches age 60 Explanation The blackout period is the time during which no Social Security benefits are payable to a surviving spouse. This period begins when the youngest child reaches age 16 and continues until, at the earliest, the surviving spouse reaches age 60."

"The needs approach can be used to determine all of the following EXCEPT A) the amount needed to replace the breadwinner's projected increasing annual salary B) the amount needed to pay for a child's education C) the amount of income needed if the breadwinner dies D) the amount needed to provide income for the surviving spouse's retirement"

"the amount needed to replace the breadwinner's projected increasing annual salary Explanation The needs approach to determine how much life insurance is needed is not limited to fulfilling objectives in the event of death only, such as final expenses and immediate debts that need to be paid. It also considers a family's (or business's) living needs, such as maintenance income for the family, providing for a child's education, and planning for the surviving spouse's retirement income. Replacement of the breadwinner's projected increasing annual salary is a factor that is taken into account when using the human life value approach to determine how much life insurance is needed."

"Upon the issuance of a life insurance policy, an insurable interest must exist between A) the agent and the applicant B) the insured and the beneficiary C) the applicant and the beneficiary D) the applicant and the insured"

"the applicant and the insured Explanation Upon the issuance of a life insurance policy, the applicant must have an insurable interest in the life of the individual to be insured. While an insurable interest must exist at the time of issuance, it need not exist at the time of the insured's death."

"An insurable interest may be found in which of the following? A) An employee in the life of another employee of the same company B) A partner in the life of a former partner C) A shareholder in the life of another shareholder of the same corporation D) An employer in the life of a key employee"

"An employer in the life of a key employee Explanation To have an insurable interest in another person, a person or business must stand to gain by the insured's survival, suffer financial loss if the insured individual dies, or both. An employer has an insurable interest in the life of a key employee. A partner has an insurable interest in the life of any other current partner, but not of a former partner. Just the fact that 2 shareholders had invested in the same corporation or that 2 employees worked for the same company would not constitute an insurable interest."

"Which of the following statements about executive bonus plans is NOT correct? A) They are considered nonqualified plans. B) At the employee's death, the company receives the death proceeds free of tax. C) The bonus paid to the employee is includable in his gross income. D) The employee is the policyowner."

"At the employee's death, the company receives the death proceeds free of tax. Explanation An executive bonus plan is a nonqualified plan in which life insurance is purchased by an employer as an alternative to paying a cash bonus. The employee owns the policy and names the beneficiary, so the employer retains no policy rights. At the employee's death, the beneficiary receives the death proceeds free of tax. The premiums paid by the employer as a bonus are deductible by the employer, and the amount of the premiums paid for the employee is reportable as income."

"Which of the following statements regarding buy-sell agreements is NOT correct? A) The buyer of the business is the beneficiary. B) Buy-sell agreements may be funded with life insurance. C) The death benefit is the purchase price of the business interest. D) Buy-sell agreements are only funded with annuities."

"Buy-sell agreements are only funded with annuities. Explanation Buy-sell agreements are also known as business continuation plans. Their purpose is to provide the funds for the sale of a business should the owner die or become disabled. The owner is the insured and the buyer is the beneficiary. The death benefit is equal to the purchase price of interest in the business, which is stated in the buy-sell agreement."

"Which of the following terms refers to the period following the death of a breadwinner during which the children are living at home? A) Blackout period B) Provision period C) Child-rearing period D) Dependency period"

"Dependency period Explanation The dependency period is the period following the death of a breadwinner during which the children are living at home. The need for family income is greatest while the children are growing up."

"Jordan wants to set aside money so that his grandchildren's college tuition will be paid. While he is only 58, he is concerned that if he dies too young, he will not have had enough years to accumulate assets. What is Jordan's reason for purchasing life insurance? A) Mortgage payoff B) Estate creation C) Liquidity D) Estate conservation"

"Estate creation Explanation Jordan purchases life insurance because he wants to make sure he can create an estate for his grandchildren if he dies prematurely."

"Which of the following would most likely NOT be a reason to purchase a life insurance policy for the purpose of accumulating cash? A) Planning for retirement B) Purchasing a new water heater C) Going on a shopping spree D) Going back to college"

"Going on a shopping spree Explanation Permanent life insurance policies build cash value over time. The funds that are accumulated are often called living benefits because they may be used by the policyholder while he is still alive."

"Which of the following statements regarding life insurance is NOT correct? A) A creditor has an insurable interest in a debtor. B) Spouses are automatically considered to have insurable interest in each other. C) All individuals are considered to have insurable interest in themselves. D) Insurable interest must be maintained throughout the life of the contract."

"Insurable interest must be maintained throughout the life of the contract. Explanation For life and health insurance policies, insurable interest is required only when the contract is issued. It does not have to be maintained throughout the life of the contract, nor is it necessary at the time of a claim."

"Which of the following statements regarding the mortality rate is NOT correct? A) It is taken from the mortality table and converted into a dollar-and-cents rate. B) It is used in the determination of health insurance rates. C) It is used in the determination of life insurance rates. D) It is defined as the number of deaths per 1,000 people."

"It is used in the determination of health insurance rates. Explanation The mortality rate is defined as the number of deaths per 1,000 people. It is 1 of the 3 factors used in determining life insurance rates, and it is taken from the mortality table and then converted into a dollar-and-cents rate. Morbidity is used in determining health insurance rates."

"Which of the following statements pertaining to sole proprietor buy-sell plans is CORRECT? A) In a sole proprietor buy-sell agreement, the sole proprietor is the owner of the policy. B) Life insurance is an ideal medium for funding a buy-sell agreement because, for a reasonable premium, it makes money available when needed to activate the sale of the business. C) Concerning disposition of the business after the proprietor's death, the only alternatives open to a sole proprietor are to dissolve the business or leave it to an heir as a bequest. D) A buy-sell agreement for a sole proprietor can be drafted by the proprietor or the life insurance agent."

"Life insurance is an ideal medium for funding a buy-sell agreement because, for a reasonable premium, it makes money available when needed to activate the sale of the business. Explanation When a sole proprietor dies, the business can come to a sudden halt unless some arrangement has been made beforehand to continue the business. A buy-sell agreement funded by a life insurance policy purchased by an employee (or other party) on the life of the proprietor will transfer the business from the owner to the other party at an agreed-upon price. The agreement must be drafted by an attorney."

"What factor in life insurance is comparable to the morbidity factor in health insurance? A) Mortality B) Interest C) Premium D) Loading"

"Mortality Explanation The morbidity factor, the incidence of disability due to accidents or sickness at various ages, is to health insurance what the mortality factor (incidence of death) is to life insurance."

"Which of the following premium factors has the greatest effect on life insurance premium calculations? A) Expense B) Mortality C) Health D) Interest"

"Mortality Explanation Three primary factors are considered when computing the basic premium for life insurance: mortality, interest, and expense. Of these, the mortality factor has the greatest effect on premium calculations. While an insurer's interest and expense factors are generally the same for all of its policyowners, the mortality factor can vary greatly depending on the personal characteristics of individual insureds."

"What tool do life insurance actuaries use to help establish premium rates based on the probabilities of death at various ages? A) Annuity table B) Morbidity table C) Mortality table D) Survivor table"

"Mortality table Explanation A mortality table is used to help establish life insurance premium rates, since it helps actuaries predict the number of deaths and, thus, the number of insurance claims an insurer could expect to experience in any given year. Morbidity tables predict disabilities."

"Alaina, age 39, is married and has a small son. She is employed as a sales manager by R.J. Links, a sole proprietorship that owes much of its success to Alaina's efforts. She recently borrowed $50,000 from her brother-in-law, Pete, to finance a vacation home. Which of the following individuals does NOT have an insurable interest in Alaina's life? A) Her brother-in-law B) Her employer C) Her spouse D) One of her customers"

"One of her customers Explanation Generally, a person has an insurable interest in another person if they are related by blood or marriage or if their relationship is such that the insured's continuing to live will benefit that individual or the insured's death will cause that individual financial or economic loss. Spouses are assumed to have an automatic insurable interest in each other. Thus, in this case, all 3 individuals have an insurable interest in Alaina's life."

"Ben is considering the purchase of a $75,000 whole life policy. Which of the following options would tend to lower his premiums? A) The waiver of premium option B) The addition of a cost-of-living rider C) Paying premiums annually as opposed to monthly D) The addition of a guaranteed insurability rider"

"Paying premiums annually as opposed to monthly Explanation The less frequently premiums are collected on a life insurance policy, the less it costs the insurer to administer that policy and the more the insurer will have to invest. Consequently, an annual premium payment mode would be less expensive than a monthly premium payment mode. Options that add value to a policy, like guaranteed insurability, waiver of premium, and cost-of-living riders, would tend to increase the cost of the policy."

"Which of the following uses life insurance death benefits to provide financial support for dependents when the primary wage earner dies? A) Estate conservation B) Survivor protection C) Estate creation D) Investments"

"Survivor protection Explanation The death benefit proceeds are used for survivor protection to provide financial support for a family when an income earner dies."

"Who would NOT have an insurable interest for a life insurance policy? A) The employer of a key employee insured B) The daughter of the insured C) The spouse of the insured D) The closest friend of the insured"

"The closest friend of the insured Explanation Insurable interest is defined as interest created by love and affection for those persons closely related by blood or law. For those who are not related, an insurable interest is a lawful economic interest in having the life of the insured continue."

"A corporation has key-person life insurance on its president. If the president dies, which of the following statements would be CORRECT? A) The policy premiums will be returned to the beneficiary. B) The company may use the death benefit proceeds to search for and retain a new president. C) The death benefit proceeds will be distributed equally to the executives. D) The proceeds will be paid to the president's beneficiary."

"The company may use the death benefit proceeds to search for and retain a new president. Explanation With key-person life insurance, the business organization is the owner, premium payor, and beneficiary of the policy. The death benefit proceeds may be used to search for, retain, and train a replacement."

"Which of the following statements about the differences between individual and group life insurance is CORRECT? A) Employees or members are individual policy owners. B) Each person within a group chooses the amount of insurance they want or need. C) Individuals pay less than employees or members pay for group insurance. D) The cost of group life insurance is generally lower than individual insurance."

"The cost of group life insurance is generally lower than individual insurance. Explanation Premiums for group life insurance are usually much lower than what an individual would pay for similar coverage because the cost is based upon the group."

"Which of the following statements regarding a deferred compensation plan is CORRECT? A) The employer purchases a whole life insurance policy, the cash value of which the employee can access only while working for the employer. B) The employer purchases a whole life insurance policy on key employees and receives the death benefits if the employee dies before retirement. C) The employee uses part of his current income to purchase a whole life insurance policy, the cash value of which can be accessed only while he is employed by his current employer. D) The employee agrees to forgo part of his current income until a specified future date, typically retirement, and may use life insurance as the funding vehicle for the plan."

"The employee agrees to forgo part of his current income until a specified future date, typically retirement, and may use life insurance as the funding vehicle for the plan. Explanation A deferred compensation plan is an arrangement in which an employee (or owner) agrees to forgo some portion of his current income (such as annual raises or bonuses) until a specified future date, typically retirement. Life insurance is a popular funding vehicle for these plans in that the amounts deferred are used to pay premiums on cash value life insurance. At retirement, the cash values are available to the employee to supplement his income. If the employee dies before retirement, his beneficiary receives the policy proceeds."

"Which of the following statements pertaining to executive bonus plans is CORRECT? A) The business owns the life insurance policy. B) The employee has access to the policy's living benefits. C) Death benefits are paid to the business. D) Premiums are paid by the employee."

"The employee has access to the policy's living benefits. Explanation With an executive bonus plan, the business pays the premiums on the life insurance policy, in place of giving a yearly cash bonus. The employee owns the policy and has full access to its living benefits. The death benefit proceeds are paid to the employee's beneficiary."

"Which of the following statements regarding deferred compensation plans is NOT correct? A) The employee may convert the funds to another plan if he leaves the company. B) The death benefit proceeds from the plan are paid to the employee's beneficiary. C) The funds are taxable at retirement. D) The business pays the premiums on a life insurance policy owned by the employer."

"The employee may convert the funds to another plan if he leaves the company. Explanation The benefits from a deferred compensation plan are forfeited if the employee leaves the company before retirement. Otherwise, the benefits are received at retirement, and if the plan has been funded with life insurance, the beneficiary designated by the employee will receive the deferred compensation plan death benefit proceeds."

"Which of the following statements regarding executive bonus plans is NOT correct? A) The bonus is included in the employee's gross income. B) The employer may alternatively use the bonus to pay the premiums on a life insurance policy covering the employee's life. C) An executive bonus plan is a nonqualified employee benefit arrangement in which an employer pays a bonus to a particular employee. D) The employer becomes the policyowner of the insurance policy."

"The employer becomes the policyowner of the insurance policy. Explanation An executive bonus plan, or Section 162 bonus plan, is a nonqualified employee benefit arrangement in which an employer pays a bonus to a particular employee. The bonus is tax deductible to the employer. The employee in turn uses the bonus to pay the premiums on a life insurance policy covering her life. The employee is the owner of the policy, and the bonus is included in the employee's gross income. When the employee dies, the beneficiary named in the policy receives the death proceeds free of tax."

"Which of the following statements pertaining to life insurance premiums is NOT correct? A) The interest factor is a premium charge based on assumed lost earnings after claims. B) An insurance company invests the premium money it collects to earn interest. C) The expense factor in premium ratemaking frequently is referred to as loading. D) For an insurance company, the costs of doing business must be reflected in its premiums."

"The interest factor is a premium charge based on assumed lost earnings after claims. Explanation The premium factors include the insurer's operating costs, also called loading; the mortality charge; and a credit for the insurer's use of the premiums until a claim occurs."

"Which of the following statements regarding key-person coverage is NOT correct? A) Premiums are paid by the business. B) The business owns the policy. C) The key person designates the beneficiary. D) The business is the beneficiary."

"The key person designates the beneficiary. Explanation Key-person coverage exists to protect a company in the event that a key individual in the company dies. The business is the beneficiary on the policy and may use the insurance proceeds to offset financial losses, pay for attracting and training a replacement, or both."

"Which of the following statements pertaining to key-person life insurance is CORRECT? A) The owner of a company cannot be considered a key person. B) At the death of the key person, proceeds are paid to that person's beneficiary. C) The policy is a company-owned asset. D) The insured key person controls the policy."

"The policy is a company-owned asset. Explanation A key person is any person in an organization whose contributions are essential to its success. With key-person insurance, the business is the owner, premium payor, and beneficiary of the policy. The purpose of the insurance is to protect the business against the economic loss it would suffer if the key person were to die."

"Which of the following has the greatest impact in making one individual's life insurance premium different from that of another individual, assuming both own the same type of policy? A) The policy's expense factor B) The policy's mortality factor C) The policy's interest factor D) The policy's issue date"

"The policy's mortality factor Explanation Of the 3 basic premium factors, the mortality charge has by far the greatest impact in distinguishing one person's rate from another."

"Which of the following situations constitutes an insurable interest? A) The beneficiary, by definition, has an insurable interest in the insured. B) The insured must have a personal or business relationship with the beneficiary. C) The policyowner must expect to benefit from the insured's death. D) The policyowner must expect to suffer a loss when the insured dies or becomes disabled."

"The policyowner must expect to suffer a loss when the insured dies or becomes disabled. Explanation Insurable interest requires that the policyowner be expected to benefit from the insured's continuing to live or enjoying good health or to suffer a loss when the insured dies or is disabled. An insurable interest must exist between the applicant and the insured. It does not need to exist between the applicant and the beneficiary. For life and health insurance policies, an insurable interest must exist at the inception of the policy, but it does not need to be maintained for the term of the policy."

"Which of the following statements regarding nonqualified deferred compensation plans is NOT correct? A) Most deferred compensation plans are unfunded. B) A deferred compensation plan is an unsecured promise made by an employer to pay an employee part of the employee's compensation in the future. C) Under a nonqualified deferred compensation plan, an employee can rely on guaranteed future benefits. D) The employer receives no tax deduction for the amount of the compensation deferred until the compensation is actually distributed."

"Under a nonqualified deferred compensation plan, an employee can rely on guaranteed future benefits. Explanation Because most nonqualified deferred compensation plans are unfunded, an employee cannot rely on guaranteed future benefits. Typically, the employer finances its obligations on a pay-as-you-go basis."

"Herb and Felicia have been married for several years and are interested in increasing their life insurance protection as their family grows. Herb is a lawyer with a midsized firm. Felicia is a freelance writer of children's books. In planning for the future, when might they expect that their family will have its greatest need for income should one of them die? A) If Herb is diagnosed with a terminal illness B) When the children move away from the home and are self-supporting C) While the children are in elementary school D) If Felicia survives Herb and lives to an old age"

"While the children are in elementary school Explanation The greatest need the survivor might have is when the children are young. Cash needs for paying the mortgage and bills, as well as saving money for college educations may be met through purchasing adequate amounts of life insurance."

"All of the following are basic factors used to compute life insurance premiums EXCEPT A) an interest factor that offsets part of the mortality and expense charges B) an expense factor that covers the cost of issuing and maintaining the policy C) a mortality factor that covers the risk of dying prematurely D) a morbidity factor that covers the risk of becoming disabled and triggering the waiver of premium provision"

"a morbidity factor that covers the risk of becoming disabled and triggering the waiver of premium provision Explanation Morbidity (the risk of suffering a serious illness or injury) is a basic factor in the calculation of health insurance premiums, but it is not a factor in the basic calculation of life insurance premiums."

"An individual may purchase a life insurance policy on all of the following persons EXCEPT A) a dependent B) a business partner C) a spouse D) a neighbor"

"a neighbor Explanation An individual may purchase a life or health insurance policy on a party with whom she has an insurable interest. A spouse, a business partner, and a dependent are people in whom the policyowner would have an insurable interest. In other words, the policyowner has a reasonable expectation of benefiting from the continuance of these people's lives or will suffer a loss from their deaths."

"A deferred compensation plan is A) a nonqualified plan funded by the employee B) a qualified plan funded by the employer C) a nonqualified plan funded by the employer D) a qualified plan funded by the employee"

"a nonqualified plan funded by the employer Explanation Deferred compensation plans are agreements between employers and employees. Funds are set aside by an employer for when an employee retires. If the plan is funded with life insurance, the company is the owner, premium payor, and beneficiary of the plan and the employee is the insured. These types of plans are nonqualified because they do not meet participation, nondiscrimination, and other requirements of qualified plans."

"Another name for an entity plan is A) a stock redemption plan B) a cross-purchase plan C) a deferred compensation plan D) a business continuity plan"

"a stock redemption plan Explanation Entity plans are a type of buy-sell agreement. When a business is a corporation, entity plans are also called stock redemption plans because the corporation is actually redeeming the deceased owner's stock."

"An executive bonus plan is an employee benefit arrangement in which A) an employer pays the premiums on a permanent life insurance policy that is owned by the employee B) an employer contributes to a variable annuity C) an employer contributes to a 401(k) plan D) an employer contributes to a deferred compensation plan"

"an employer pays the premiums on a permanent life insurance policy that is owned by the employee Explanation An executive bonus plan is an employee benefit arrangement in which an employer pays a bonus to a particular employee in the form of paying premiums on a life insurance policy covering the employee's life. The employee, not the employer, is the policyowner."

"With a life insurance contract, an insurable interest must exist A) at the inception of the contract B) when the proceeds are paid out C) as long as the insured lives D) at the insured's death"

"at the inception of the contract Explanation With life insurance, an insurable interest is only required upon policy application and inception. It does not have to continue through the duration of the contract, nor does it have to exist at the insured's death for the policy's proceeds to be claimed. This is in contrast to property and casualty insurance, which requires that an insurable interest exist at the time of the claim."

"Insurable interest must exist between the policyowner and the insured A) when the beneficiary collects the death benefit B) at the time the contract is entered into C) throughout the life of the contract D) when the policyowner dies"

"at the time the contract is entered into Explanation Any legally competent individual may buy an insurance contract on his life for the benefit of any person. However, buying an insurance contract on the life of someone else is prohibited unless the benefits are payable either to that individual, his personal representatives, or a person having a personal interest in the insured. That interest must exist at the time the contract is entered into. The interest does not have to exist at the time the beneficiary collects the benefit."

"When a cross-purchase plan is funded by life insurance, A) premiums must be paid by the eldest partner B) the surviving partner's policy is automatically canceled C) each partner owns a policy on the lives of each of the other partners D) the business owns the policies"

"each partner owns a policy on the lives of each of the other partners Explanation Cross-purchase plans are 1 of the 2 types of buy-sell agreements. Each partner owns a policy on the lives of each of the other partners, and the surviving owners purchase the deceased owner's interest in the business"

"To determine the amount of life insurance required, the needs approach takes into account all of the following expenses EXCEPT A) emergency fund needs B) retirement income needs C) preretirement needs D) family dependency needs"

"emergency fund needs Explanation To determine the amount of life insurance required, the needs approach considers the amount of monthly income the family will need during the dependency, preretirement, and retirement periods. An emergency fund is a cash need rather than an income need."

"Vanita and Tarun have an estate worth $10 million, most of which is invested in their family business. In order to pay the federal estate tax that will be due at the death of the survivor, their reason for purchasing life insurance would be for A) tax evasion B) liquidity C) estate conservation D) estate creation"

"estate conservation Explanation For Vanita and Tarun, having life insurance will be important so that the expenses (estate taxes and probate expenses) will be paid upon their deaths."

"All of the following factors are usually considered cash needs when determining the life insurance needs of a family EXCEPT A) children's education costs B) funds to support spousal retirement C) last illness and funeral costs D) outstanding debts"

"funds to support spousal retirement Explanation The family cash needs are the amount of cash required at death to pay for a deceased breadwinner's last illness and funeral costs, outstanding debts and taxes, children's education costs, and an emergency fund. Spousal retirement is a family income need."

"The phrase "the applicant for insurance has more to gain if the insured continues to live than if the insured dies" is the rule defining A) insurable interest B) the aleatory nature of an insurance contract C) a legal wagering contract D) one's legal capacity to enter into an insurance contract"

"insurable interest Explanation A person acquiring a life insurance contract must be subject to loss upon the death of the individual to be insured. This is known as insurable interest, and it is required before a life insurance policy will be issued."

"Selena is a single parent paying for her home. She is concerned about where her children will live if she suddenly dies. Her primary reason for purchasing life insurance is A) cash accumulation B) liquidity C) estate creation D) mortgage payoff"

"mortgage payoff Explanation Life insurance is primarily used for providing income for survivors, mortgage payoff, creating an immediate estate, and providing funds for expenses that would be applicable upon the death of the insured. Selena's primary concern is that her children will be able to stay in their own home, so her reason for purchasing life insurance is to pay off the mortgage on her home."

"A life insurance gross premium is A) net single premium plus mortality B) mortality costs plus loading C) interest plus expense less mortality D) net single premium plus expense"

"net single premium plus expense Explanation A life insurance gross premium is the amount a policyowner is expected to pay. It comprises the mortality charge less interest (net single premium) plus normal operating costs associated with providing coverage (expense charge)."

"All of the following are examples of liquid assets EXCEPT A) real estate B) mutual funds, stocks, or bonds (depending on the timing of the sale) C) life insurance proceeds D) checking or savings accounts"

"real estate Explanation Liquid assets are those that can be converted to cash without loss of value. Real estate is based on market value and is subject to the asking price and selling price, which are negotiated between the buyer and seller."

"A mortality table reflects A) the average number of deaths that will occur during a given year for a given age group of individuals B) who among a given group of individuals will die within a given year C) the average lifespan for any given individual D) the declining probability of death as the age of a given group of individuals increases"

"the average number of deaths that will occur during a given year for a given age group of individuals Explanation A mortality table reflects the average number of deaths that will occur in a certain year for a given group of people. Mortality is the relative incidence of death within a given group."

"With individual life insurance, all of the following would factor into the premium rate EXCEPT A) the insurer's interest earnings B) the insurer's reserves C) the insurer's expenses D) the applicant's mortality"

"the insurer's reserves Explanation Life insurance premium factors include interest earnings, expenses, and mortality. Reserves are funds set aside by the insurer for the payment of future claims and are not one of the premium elements."

"With regard to a breadwinner's death, the blackout period generally can be defined as A) a time when life insurance is rarely needed B) the period that begins when the youngest child is 16 and ends when the surviving parent turns 60 C) the period during which the children are living at home and are dependent D) the period from the surviving spouse's retirement to his death"

"the period that begins when the youngest child is 16 and ends when the surviving parent turns 60 Explanation The blackout period is the period during which no Social Security benefits are payable to a surviving spouse. This period begins when the youngest child reaches age 16 and continues until the surviving parent reaches the earliest retirement age at 60."