Chapter 4: Life Policy Provisions & Options

Frank, the owner of a life insurance policy, chooses a Settlement Option whereby the proceeds of his policy will be paid out over 20 years. Frank has chosen: A. Life Income Period Certain B. Fixed Amount C. Fixed Period D. Life Income Joint and Survivor

C. Fixed Period The Fixed Period settlement option pays out proceeds over a specified period of time.

Which provision allows an insurer to borrow from the cash value of a policy in order to pay premiums due and prevent a lapse in coverage? A. Automatic Premium Loan B. Partial Withdrawal C. Spendthrift D. Reinstatement

A. Automatic premium loan The Automatic Premium Loan Provision enables the insurer to borrow automatically from the policy's cash value, at the end of the grace period, to cover a premium payment to prevent the policy from lapsing.

Jamie has a $200,000 permanent policy and cannot continue making the premium payments. She still, however, wants the peace of mind of being covered for the same $200,000 in death benefit although it may be for an abbreviated period of time. The Nonforfeiture Option Jamie should choose is: A. One-Year Term B. Extended Term C. Reduced Paid-Up D. Paid-Up Additions

B. Extended term One-Year Term and Paid-Up Additions are dividend options, not nonforfeiture options. Since Jamie's concern is to sustain a like amount of death benefit, she should choose Extended Term.

Angela bought a policy from her friend, an insurance producer. After looking it over thoroughly, Angela only has one question. Will she receive dividends? She will if the policy is which of the following? A. Cash Value Policy B. Participating C. Nonparticipating D. Accumulating

B. Participating Dividends are declared under participating policies, are paid as declared, and are not guaranteed. The dividends are a return of excess premiums paid.

All of the following are Settlement Options, except: A. Fixed Amount B. Reduced Paid-Up C. Fixed Period D. Life Income Joint and Survivor

B. Reduced Paid-Up Reduced Paid-Up is a Nonforfeiture Option, not a Settlement Option.

All of the following are TRUE about the Automatic Premium Loan (APL) Provision, except: A. It is available on any type of life insurance policy B. It must be elected by the policyowner C. It becomes effective, if elected, at the end of the grace period D. It can be cancelled at any time by the policyowner

A. It is available on any type of life insurance policy The Automatic Premium Loan Provision is available on cash value policies only.

Individual life policies typically pay out a death benefit if death is a result of suicide after they have been in force for _____ years. A. 4 B. 2 C. 6 D. 5

B. 2 Two years is typically the standard suicide limitation period for individual life policies. In some states it may be different.

All of the following are Dividend Options, except: A. Cash B. Reduced paid-up C. One-year term D. Paid-up additions

B. Reduced paid-up Reduced paid-up is a nonforfeiture option, not a dividend option.

What are the two types of life insurance assignments? A. Revocable and irrevocable B. Complete and partial C. Absolute and collateral D. Entire amount and percentage amount

C. Absolute and collateral The two types of assignment are Collateral (temporary), and Absolute (permanent).

The interest earned on dividends is: A. Nontaxable B. Tax-deferred C. Taxable D. Tax-deductible

C. Taxable The dividends themselves are generally not taxable, but any interest earned on the dividends is taxable.

When a policy lapses due to nonpayment of premium, which nonforfeiture option is the automatic option? A. Extended term B. Cash surrender value C. Automatic premium loan D. Reduced paid-up

A. Extended term The automatic nonforfeiture option is extended term. Automatic premium loan is a policy provision which must be elected by the policyowner in advance of the policy lapsing.

Sylvia was the insured and owner of a policy that named her husband as the beneficiary. Upon her husband's death, she decided to change the beneficiary designation to her best friend since she has no close living relatives. The insurance company will: A. Decline the change due to lack of insurable interest B. Accept the beneficiary change C. Require Sylvia to prove insurability D. Require Sylvia to prove that her best friend is financially dependent on her

B. Accept the beneficiary change As the policyowner, Sylvia is free to change a revocable beneficiary at any time. She may also name a new beneficiary if an irrevocable beneficiary dies before the insured. A beneficiary is not required to have an insurable interest in the insured.

Which statement is FALSE regarding Nonforfeiture Options? A. They add flexibility to a cash value policy B. They are used when the insured lives to the endowment date of the policy or at the insured's death C. They protect the policyowner against total loss of benefits if the policy should lapse or be cancelled D. The 3 nonforfeiture options are Cash Surrender, Reduced Paid-Up, and Extended Term

B. They are used when the insured lives to the endowment date of the policy or at the insured's death Distribution options used when the insured lives to the endowment date of the policy or at the insured's death are Settlement Options, not Nonforfeiture Options.

Ted owns a $50,000 Whole Life Policy. At age 47, he decides to stop paying premiums on his policy when it has $15,000 of cash value and exercise the Extended Term Option. Ted's term benefit will be: A. $65,000 B. $15,000 C. $50,000 D. $35,000

C. $50,000 The Extended Term Option uses the present cash value of the policy, upon its lapse, to automatically buy a single premium term policy of the same face amount for a specified number of years and days as listed in the policy's nonforfeiture table.

When is the earliest a beneficiary designation can be made? A. Upon policy delivery B. At time of claim C. Upon policy renewal D. At the time of policy application

D. At the time of policy application Beneficiaries are indicated for the first time when the application for life insurance is completed for submission to the home office of the insurer.

All of the following are nonforfeiture values, except: A. Cash surrender B. Reduced paid-up C. Extended term D. Automatic premium loan

D. Automatic Premium Loan Nonforfeiture values go into effect after a policy lapses. The automatic premium loan will keep a policy from lapsing.

A beneficiary receives ample income each month from the interest earned while the insurance company retains the principal. This is referred to as which of the following? A. Conservative Earnings B. Capital Gains C. Net Capital D. Capital Conservation

D. Capital Conservation The Interest Only settlement option leaves the principal (capital) with the insurer, thus conserving the capital, and the interest income generated is taxed as ordinary income.

A _______ Option protects the policyowner against total loss of benefits in the event of a lapsed policy. A. Dividend B. Spendthrift C. Nonforfeiture D. Settlement

C. Nonforfeiture Nonforfeiture Options are found in life insurance policies that generate a cash value, and protect the owner against total loss of that cash value, if the policy should lapse or is cancelled.

The insuring clause is found: A. On the first page of the policy B. Right before the copy of the application C. On the last page of the policy D. In front of a copy of the paramedical exam results

A. On the first page of the policy The insuring clause is typically found on the front or first page of the policy.

Which of the following is responsible for paying the premiums due on a life insurance policy? A. The insured B. The producer C. The policyowner D. The beneficiary

C. The policyowner It is the policyowner's responsibility to pay the premiums due in full and on time.

Mona let her permanent policy lapse. She discovered there was $2,498 in cash value remaining in the policy and decided to pay off some of her credit card debt. She exercised which Nonforfeiture Option? A. Fixed Amount B. Reduced Paid-Up C. Extended Term D. Cash Surrender

D. Cash Surrender Mona surrenders the policy for its cash value and then uses that cash value to reduce her debt load.

Failure to repay a loan or loan interest will void a life insurance policy: A. After the insurer calls in the loan with 30 days advance notice B. After the loan has been outstanding for more than 5 years C. If interest rates increase by more than 3% in any 1 year D. If the total amount due equals or exceeds the policy's cash values

D. If the total amount due equals or exceeds the policy's cash values Failing to repay a loan or loan interest will not void a policy until the total amount due becomes greater than the policy's cash value.

Burt named Liz as his beneficiary; however, he did not choose a Settlement Option. At the time of his death, who determines the option to be used to receive the benefits? A. The insurer decides when the election is not made by the policyowner prior to death B. Liz the beneficiary determines which option she would like to have C. Lump sum is the automatic option when no option was preselected prior to death of the insured D. Burt's estate, since no Settlement Option was chosen

B. Liz the beneficiary determines which option she would like to have If the owner of the policy does not select a Settlement Option while alive, then the beneficiary may choose an option at the time of claim.

Which Settlement Option pays a specified dollar amount until benefits are exhausted? A. Paid-Up Option B. Fixed Amount C. Life Income D. Life Income with Period Certain

B. Fixed amount The key words are specified dollar amount. Fixed Amount pays benefits at a specified dollar amount (such as $1,000/month) until the benefits are exhausted.

The _________ period keeps a policy in force for a short time after the premium due date, allowing policyowners a little extra time to pay an overdue premium without a lapse in coverage. A. Reinstatement B. Settlement C. Grace D. Nonforfeiture

C. Grace The grace period is designed to prevent unintentional policy lapse by allowing overdue premiums to be paid, typically within one month of the premium due date, while the coverage remains in effect.

All of the following are situations in which a life insurance company can legally get out of paying a death claim after the insured has died, except: A. The insured died by suicide 9 months after the policy was issued B. Within 6 months after the policy issue date, the insurer discovers material misrepresentations made on the application which, had they been known, the policy would not have been issued C. Five years after the policy was issued, the insurer discovered that the insured was actually older than was stated on the application D. The insured dies when he crashes his plane into the ground 2 hours after receiving his pilot's license

C. Five years after the policy was issued, the insurer discovered that the insured was actually older than was stated on the application There is no time limit when it comes to misstatement of age or gender. The insurer must pay the claim but can reduce the amount of the payout based on a ratio of what was paid to what should have been paid.

Which of the following is FALSE regarding Settlement Options? A. A policyowner may change a previously chosen settlement option before the insured dies B. If the policyowner has chosen an option prior to death, the beneficiary cannot change it at time of claim C. Settlement Options are used when the insured wants to convert a policy's cash values into a living benefit D. Both principal and interest received as a result of a settlement option are taxed as ordinary income to the beneficiary

D. Both principal and interest received as a result of a settlement option are taxed as ordinary income to the beneficiary Only the interest would be taxed to the beneficiary, not the principal.

Generally, an insurer may defer the granting of a policy loan for up to ______ months. A. 9 B. 12 C. 6 D. 3

C. 6 An insurer, by law, can defer granting a policy loan for up to 6 months.

Albert owned a $100,000 policy that had accumulated a cash value of $20,000, against which he had borrowed $10,000. If he dies with this loan outstanding, his beneficiary will receive which of the following amounts? A. $120,000 B. $80,000 C. $90,000 D. $110,000

C. $90,000 Any outstanding loans at the insured's death will be deducted from the face amount (death benefit) along with any interest due.

How long, typically, is the reinstatement period from policy lapse? A. 1 year B. 2 years C. 3 years D. Indefinitely

C. 3 years Typically, the reinstatement period is three years, but it can be up to 5 years with some policies or some insurers.

Fred owns a 40-Pay Life Policy. He designated his wife, Ethel, as primary beneficiary. Upon Fred's death, Ethel receives a set amount for life. Fred chose which Settlement Option? A. Extended Term B. Joint Life C. Fixed Period D. Life Income Only

D. Life Income Only Life Income Only guarantees payment for the lifetime of the recipient. Extended term is a nonforfeiture option.

Beth owns a 20-Pay Life participating policy. She has decided that the dividends should be applied toward future premiums. Which Dividend Option did she choose? A. Accumulate at Interest B. Premium Reduction C. Cash D. Paid-Up Option

B. Premium reduction The Dividend Option that allows the dividends to be applied toward the next premium due is Premium Reduction.

Which of the following death benefit settlement options pays out a benefit that is 100% income tax-free to the recipient? A. Fixed Amount B. Fixed Period C. Life Income Only D. Lump Sum

D. Lump Sum The only settlement option that pays out its benefit 100% income tax-free to the beneficiary is the lump sum option.

How long, typically, is the grace period on a $500,000 level term life insurance policy? A. One month B. One week C. One quarter D. One year

A. One month Typically, the grace period runs one month (30 or 31 days) from the premium due date.

Cranston wants a Settlement Option for his beneficiary that will guarantee the beneficiary an income as long as the beneficiary lives. Cranston should choose: A. Interest B. Fixed Period C. Life Income Only D. Fixed Amount

C. Life Income Only The option that will guarantee the beneficiary an income as long as she/he lives is Life Income Only.

Which Settlement Option pays for a specified period, regardless of who may receive the payments? A. Fixed Period B. Life Income with Period Certain C. Paid-Up Additions D. Fixed Amount

A. Fixed Period As the name implies, Fixed Period establishes that the policy proceeds are guaranteed to be paid over a set period (i.e., 30 years) regardless of who may receive the payments, the policyowner or the beneficiary.

A life insurance policy lists the names of 3 people as primary beneficiaries. Other than listing the person's names, which of the following is the most important next step? A. Indicate what percentage of the death benefit each is entitled to receive B. Specify the occupation of each beneficiary C. Include the beneficiary's middle name or initial D. Make certain the names are listed in alphabetical order

A. Indicate what percentage of the death benefit each is entitled to receive Percentage should be used instead of dollar amounts just in case the policy has an outstanding loan or premium at the time of death.

Which of the following statements about policy dividends is TRUE? A. There are several dividend options to choose from B. Dividends can only be withdrawn at certain specified intervals C. Nonparticipating policies are eligible for dividends D. Dividends are guaranteed and taxable as income when received

A. There are several dividend options to choose from Dividends are declared under participating policies. They are not guaranteed, and if received, the dividend itself is generally not taxable. They can be withdrawn any time there is an accumulation.

Beth exercised an owner's option on a life policy to stop paying premiums but continue to be covered until she was age 100. Which Nonforfeiture Option did she choose? A. Paid-Up Option B. Reduced Paid-Up C. Paid-Up Additions D. Extended Term

B. Reduced Paid-Up The Nonforfeiture Option that would allow Beth to stop making premium payments and continue to be covered to age 100, but for a reduced face amount, is Reduced Paid-Up. Paid-Up Additions and the Paid-Up Option are Dividend Options.

Albert, as the owner of a life insurance policy insuring his son David, wants a Settlement Option that, if David were to die, would provide guaranteed payments to Albert and his wife Lois, until both of them die. Albert should choose: A. Life Income Period Certain B. Joint Life C. Life Income Joint and Survivor D. Fixed Amount

C. Life Income Joint and Survivor Albert's desire would be Life Income Joint and Survivor, as he is concerned with payments continuing until both he and Lois have died.

A partial withdrawal is permitted on which of the following policies? A. Current Assumption Whole Life B. Whole Life C. Universal Life D. Variable Whole Life

C. Universal Life Policies on a universal life platform allow for partial withdrawals.

If the premiums are not paid on a Traditional Whole Life policy that has been in force for decades with no loan outstanding, what happens? A. The insurer mails a check to the policyowner in the amount of the policy's cash value B. The policy becomes a reduced paid-up policy C. Unless specified otherwise, the cash values buy extended term D. The policy lapses and is of no value to the policyowner

C. Unless specified otherwise, the cash values buy extended term Upon non-payment of premium due, the extended term option kicks in automatically and is paid for by the cash values of the policy. The policy has nonforfeiture values which are available to the policyowner.

Frank has a life insurance policy in which he chooses to have the dividends increase the death benefit. Which Dividend Option did he select? A. Fixed Amount B. Paid-Up Option C. Acceleration of Endowment D. Paid-Up Additions

D. Paid-Up Additions Frank's objective is to use his dividends to increase the death benefit. Paid-Up Additions purchases single premium additional permanent benefits at the insured's attained age. The additional insurance is added to the face amount and it generates cash values and dividends as if the paid-up additional benefit was part of the original policy.