Chapter 4 Quiz

"Which of the following $50,000 limited-pay life policies will have the highest premium for an applicant who is age 30? A) 20-pay life policy B) Life paid-up at age 65 C) 30-pay life policy D) 25-pay life policy"

"20-pay life policy Explanation Limited-pay life insurance policies have shorter premium-paying periods. The shorter the period, the higher the premium."

"All of the following are distinguishing characteristics of straight whole life policies EXCEPT A) option to renew B) level premiums C) insurance protection to age 100 D) cash values"

"option to renew Explanation An option to renew is a feature of term insurance."

"Tom has a $50,000 whole life policy. If he continues to pay the required premiums and lives to age 100, he will receive A) the cash surrender value, a sum less than $50,000 B) nothing, because he outlived the term of the contract C) double the face amount, or $100,000 D) $50,000 as an endowment"

"$50,000 as an endowment Explanation By design, a whole life policy endows for its face amount at age 100. That means that when the policyowner is 100 years old, the cash value of the policy equals the face amount of the policy. At that point, the insurance is canceled, and the insured receives the face amount as an endowment."

"Which of the following life insurance policies with the same face value would have the highest premium if issued to the same person? A) 10-year renewable level term B) 10-year nonrenewable level term C) 10-year renewable and convertible level term D) 10-year decreasing term"

"10-year renewable and convertible level term Explanation The option to renew and the option to convert are available in term insurance for additional premiums."

"Ken, the insured, purchased a $40,000 5-year level term policy and a $100,000 whole life insurance policy when he was 49. When he died at age 56, his beneficiary received A) 40000 B) 100000 C) nothing D) 140000"

"100000 Explanation In this case, Ken died after his term policy expired. As a result, his beneficiary received nothing under that policy. However, the beneficiary would receive the $100,000 death benefit under the whole life insurance policy that continued in force."

"Darlene owned a $100,000 whole life policy that had a $75,000 cash value when she died at the age of 75. The amount paid by the insurance company as a death benefit was A) 100000 B) 75000 C) nothing D) 175000"

"100000 Explanation Upon the death of an insured, a whole life policy pays its face amount. In this case, the face amount is $100,000."

"Brian, a 45-year-old general contractor, wants financial protection for his family while $300,000 of his assets are tied up in a building project for the next 5 years. Which of the following types of life insurance policies would give him that protection at the lowest cost? A) 5-year level term B) Life paid-up at 50 C) Straight whole life D) Single premium whole life"

"5-year level term Explanation Level term insurance provides a level face amount of coverage for the term of the policy. Because it covers a specified term only and does not have a cash value, it is cheaper than whole and limited-pay (including single premium) life insurance. Because the $300,000 amount remains level, level term insurance is the recommended insurance product for Brian."

"Gerald, a 40-year-old building contractor, wants financial protection for his family while $150,000 of his assets are tied up in a building project for about 5 years. Which of the following types of life insurance policies would give him that protection at the lowest cost? A) Life paid-up at 45 B) Straight whole life C) 5-year level term D) Single premium whole life"

"5-year level term Explanation Level term insurance provides a level face amount of coverage for the term of the policy. Because it covers a specified term only and does not have a cash value, it is cheaper than whole and limited-pay (including single premium) life. Because the $150,000 amount remains level in this situation, level term insurance is best suited to Gerald's needs."

"Of the following, which statement best describes a 10-year renewable term life insurance policy? A) A 10-year renewable term is a policy with a level premium and a corresponding decreasing face amount. B) A 10-year renewable term is a policy in which the premium and face amount increase at the end of each 10-year period. C) A 10-year renewable term is a policy with a fixed face amount and a premium that increases at each 10-year renewal period. D) A 10-year renewable term is a policy in which both the premium and face amount remain level for the term of the policy."

"A 10-year renewable term is a policy with a fixed face amount and a premium that increases at each 10-year renewal period. Explanation A 10-year renewable term life insurance policy has a fixed face amount that remains the same during the term of coverage period. As the name implies, the policy can be renewed at the end of each designated 10-year policy period. The policy can typically be renewed for a specified number of years or up to a term period that corresponds with a specified age, at which time coverage ceases. The premium remains level during each designated 10-year policy period, and then increases with the renewal of each new 10-year policy period."

"Jorge would like to purchase a life insurance policy that offers level premiums from the time the policy is issued until his death. He also wants a policy that combines death protection with a savings element that can eventually be used for retirement purposes. Jorge should consider purchasing which of the following plans? A) A straight whole life insurance policy B) A single premium whole life insurance policy C) A family maintenance policy D) A 30-year term life insurance policy"

"A straight whole life insurance policy Explanation Jorge should consider purchasing a straight whole life insurance policy, which provides permanent level protection with level premiums from the time the policy is issued until his death (or age 100). It also includes a cash value element, which can be used for retirement purposes."

"Mitsuko is interested in buying a permanent insurance policy that will have a cash value and a death benefit. She wants a policy that will not tax any earnings until the policy is surrendered. What type of policy would best meet her needs? A) A variable policy B) A universal life policy C) A convertible term policy D) An interest-sensitive whole life policy"

"A variable policy Explanation The characteristics of a variable life insurance policy include lifetime coverage, cash value, and a death benefit. Policyowners may purchase funds or investments offered by the insurance company and do not pay tax on earnings until the policy is surrendered."

"Which of the following statements pertaining to limited-pay life policies is CORRECT? A) Insurance protection exists only during the time premiums are actually paid. B) The total premium cost for a single premium life policy is more than the total premium cost for a policy with premiums spread over a period of years. C) A limited-pay life policyowner pays premiums of variable amounts during the life of the policy. D) Both limited-pay life and whole life policies endow at age 100."

"Both limited-pay life and whole life policies endow at age 100. Explanation Both limited-pay life and whole life policies endow at age 100. A single premium policy would cost less than a policy with payments spread over its term, since there are fewer administrative expenses involved with a single payment policy."

"Madge took out a $100,000 10-year convertible term policy at age 30. At age 36 she decides to convert the policy to permanent insurance of the same amount on an original-age basis. Which of the following statements is NOT correct? A) A higher premium will be charged for the new policy. B) The new policy will build cash values at a faster rate than if she converts at her attained age. C) Conversion will be contingent upon her evidence of insurability. D) She must make up the difference in premiums for the period between ages 30 and 36."

"Conversion will be contingent upon her evidence of insurability. Explanation Under term life insurance, the option to convert offers the insured the right to change the term policy to permanent insurance without evidence of insurability."

"Amanda took out a $250,000 home mortgage when she purchased her house 5 years ago. What type of life insurance policy would be the best choice to insure the remaining balance on her home mortgage? A) Whole life B) Level term C) Variable life D) Decreasing term"

"Decreasing term Explanation Amanda should consider purchasing a decreasing term insurance policy to cover the balance of her home mortgage, which decreases from year to year."

"Joe buys his first home after obtaining a 30-year mortgage from his bank. He is considering the purchase of life insurance to ensure that the mortgage will be paid in the event of his death, in which case he will leave the house to his spouse and children. What would be the best life insurance protection for Joe? A) Decreasing term B) Universal life C) Level term D) Whole life"

"Decreasing term Explanation Decreasing term insurance is the best policy for Joe to buy. It addresses his need for protection that will decline from year to year. This would be a good choice to insure the declining balance on a home mortgage."

"Which of the following statements regarding current assumption whole life insurance is NOT correct? A) During a period of relatively high interest rates the premiums could be reduced. B) During a period of relatively high interest rates the premiums could be increased. C) Premium adjustments are usually made on an annual basis. D) It is also known as interest-sensitive whole life."

"During a period of relatively high interest rates the premiums could be increased. Explanation Current assumption whole life policies, also known as interest-sensitive whole life, offer flexible premium payments that are tied into current interest rate fluctuations. Depending on interest rate fluctuation, the insurer reserves the right to increase or decrease the premium within a certain range. During periods of low interest rates, premiums could be increased. During periods of high interest rates, premiums could be reduced. Premium adjustments are typically made on an annual basis."

"Sean has a young family and needs affordable whole life insurance. He is looking for a policy with lower initial premiums but is not averse to paying more at a later time. What type of whole life insurance variation would be suitable for him? A) Single pay B) Graded premium C) Life paid-up at 65 D) 20-pay life"

"Graded premium Explanation Graded premium policies offer lower premiums during the initial period that gradually increase before leveling off for the duration of the contract. The total amount paid over the period of the policy would equal what is paid for a straight whole life policy. Graded premium policies work well for individuals who can expect to improve their financial condition. In life paid-up at 65 and 20-pay life policies, premium payments are completed before age 100. Single pay insurance is permanent cash value whole life insurance that is purchased with 1 large premium, which would probably not be affordable for Sean."

"Gene, age 20, purchased a $50,000 life insurance policy. The premium at issue is lower than normal whole life rates, and it increases each year for the first 5 years of the policy period. After that, the premium levels off. What type of policy does Gene own? A) Limited-pay at age 20 whole life B) Minimum deposit whole life C) Modified whole life D) Graded premium whole life"

"Graded premium whole life Explanation Graded premium whole life, like modified whole life, redistributes the policy premiums. The premium is lower than normal whole life rates during the preliminary period following issue (usually 5-10 years) and increases each year until leveling off after the preliminary period. A modified whole life policy has a level premium during the preliminary period."

"Jenna owns a policy in which the premium at the inception of the policy is lower than the continuous premium whole life rate and then increases each year for the first 5 years of the policy period. After 5 years, the premium levels off. What type of policy does Jenna own? A) Graded premium whole life B) Minimum deposit whole life C) Step-rate premium life D) Modified whole life"

"Graded premium whole life Explanation The premiums for a graded premium contract increase each year during the early years of the contract, usually for 5 years, and remain constant for the rest of the time. The initial premium charged is usually lower than the equivalent level premium for a straight life policy at the same age of issue."

"Which of the following individuals can access the cash value of her life insurance policy to provide extra retirement income? A) Harriet, who owns a $100,000 single premium whole life policy B) Judith, who is covered by a $500,000 key-person life insurance policy C) Rosa, who owns a $50,000 25-year level term policy D) Mai, who owns a $200,000 decreasing term policy"

"Harriet, who owns a $100,000 single premium whole life policy Explanation Only Harriet can access the cash values of her life insurance policy. Term life insurance policies, unlike permanent insurance, have no cash value. A key-person life insurance policy is considered a business asset, to be used for business purposes."

"Malia purchases a $50,000 5-year level term policy. Which of the following statements about Malia's coverage is NOT correct? A) If Malia dies at any time during the 5 years, her beneficiary will receive the policy's face value. B) If Malia dies after the specified 5 years, only the policy's cash value will be paid. C) If Malia lives beyond the 5 years, the policy expires and no benefits are payable. D) The policy provides a straight, level $50,000 of coverage for 5 years."

"If Malia dies after the specified 5 years, only the policy's cash value will be paid. Explanation If the insured lives beyond the 5-year period, the policy expires and no benefits are payable. There are no cash values in term policies."

"Which of the following statements pertaining to the conversion privilege in group health insurance policies is NOT correct? A) Insureds who resign or are terminated have 365 days in which to convert their coverage to individual policies. B) A conversion privilege applies when a group health policy is terminated. C) Some states specify minimum benefits for conversion policies. D) An insured who is terminated from the plan can obtain a conversion policy without evidence of insurability within a specified time."

"Insureds who resign or are terminated have 365 days in which to convert their coverage to individual policies. Explanation Concerning the conversion privilege in group health insurance, an insured employee who resigns or is terminated has 31 days in which to take out a conversion policy without having to show evidence of insurability."

"Which of the following statements about variable universal life insurance is NOT correct? A) It allows the insured to make withdrawals or to borrow from the policy during the insured's lifetime. B) It guarantees a minimum cash value in the investment account. C) It offers flexibility in premium payments and face amounts dependent on investment performance. D) It pays a death benefit to a named beneficiary and offers the insured tax-deferred cash value investment options."

"It guarantees a minimum cash value in the investment account. Explanation While most variable universal life products allow the policyholder to control the investment mix in order to build substantial cash value, a minimum cash value is seldom guaranteed. The death benefit and the cash value of the policy fluctuate according to the investment performance of a separate account fund. Most variable life insurance policies guarantee that the death benefit will not fall below a specified minimum. Because the policyowner assumes investment risk under variable life insurance policies, these products are considered securities contracts."

"Which of the following statements about a modified whole life policy is NOT correct? A) Cash value builds until the insured reaches age 100 so long as the policy is in force. B) Premiums are uniformly lower during the early years of the contract. C) It is basically an endowment policy. D) The premium-paying period continues to age 100."

"It is basically an endowment policy. Explanation The modified whole life policy is a variation of the traditional whole life policy, not an endowment policy. The premiums in a modified whole life policy are lower in the early years of the policy's term and higher in its later years."

"Which of the following statements describes variable life insurance? A) It gives voting rights to the contract holder that are determined by reference to state law and not the corporate bylaws. B) It can be sold by any agent licensed to sell life insurance. C) It varies in the benefits provided based on the investment experience of the insurer's general account. D) It provides insurance benefits that vary according to the investment experience of separate accounts maintained by the insurer."

"It provides insurance benefits that vary according to the investment experience of separate accounts maintained by the insurer. Explanation Variable contract insurers maintain separate accounts with stated investment objectives. Variable policies' cash values are linked to these accounts."

"Which of the following statements about a 1-year renewable term policy is CORRECT? A) Its premium increases each year on the basis of the insured's health. B) It has a premium that remains the same, no matter how many times it is renewed. C) It renews with an increase in premium based on the insured's age. D) It may not be renewed more than once."

"It renews with an increase in premium based on the insured's age. Explanation Under a renewable term policy, the premiums remain level for each term period, but increase at each renewal on the basis of the age of the insured."

"A family in which both parents work and, therefore, are in need of the same amount of coverage, would be a candidate for which of the following plans? A) Joint life B) Family maintenance C) Family plan D) Juvenile plan"

"Joint life Explanation A joint life plan is simply 1 policy covering 2 or more persons. Usually, permanent insurance is written."

"Carlos and Jenna both work to support their family. To provide the same amount of life insurance protection in the event either dies, they should consider purchasing which of the following plans? A) Family maintenance B) Family C) Joint life D) Juvenile"

"Joint life Explanation A joint life policy is 1 policy that covers 2 people. Using some type of permanent insurance, it pays the death benefit when the first insured dies. The survivor then has the option of purchasing a single individual policy without evidence of insurability."

"Juan owns a 5-year $50,000 term life insurance policy, and Maria owns a $50,000 whole life insurance policy. Which of the following statements is CORRECT? A) Both policies provide living benefits to the policyowners while alive. B) Juan's policy, but not Maria's, may have an option to convert. C) Juan and Maria will receive the cash surrender value if they cancel their policies. D) Maria's policy, but not Juan's, may have an option to renew."

"Juan's policy, but not Maria's, may have an option to convert. Explanation Two features of whole life insurance distinguish it from term insurance: cash values and maturity at age 100. These 2 features combine to produce living benefits to the policyowner. Juan's term insurance policy, however, may contain an option to convert, which gives him the right to convert or exchange the term policy for a whole life plan without evidence of insurability."

"Michelle has a term insurance policy in which the amount of protection remains constant during the term period. Which kind of term insurance does Michelle have? A) Level term B) Increasing term C) Family term D) Decreasing term"

"Level term Explanation Level term insurance provides a constant, or level, face amount of coverage for the term of the policy."

"Which of the following statements regarding basic forms of whole life insurance is NOT correct? A) A single premium life policy is purchased with a large onetime-only premium. B) Limited payment life provides protection only for the years during which premiums are paid. C) Generally, straight life premiums are payable, at least annually, for the duration of the insured's life. D) The owner of a 30-pay life policy will owe no more premiums after the 30th year the policy is in force."

"Limited payment life provides protection only for the years during which premiums are paid. Explanation Although the premium payments are limited to a certain period, the insurance protection extends until the insured's death or to age 100."

"An individual wishes to purchase whole life insurance but does not wish to pay premiums past retirement age. Which of the following policies should the person buy? A) Limited-pay B) Graded premium C) Modified life D) Single premium"

"Limited-pay Explanation With a limited-pay life policy, the insured pays premiums for a specified amount of time, with 2 stipulations: (1) the premium payment period must last at least 10 years; and (2) premiums must be paid up by the age of 65. Single premium life insurance is permanent cash value whole life insurance that is purchased with 1 large premium. As its name implies, it requires no further premiums to keep the coverage in force for the life of the insured. Modified premium policies typically have a lower fixed premium for the first 3- or 5-year period, at which point premiums increase. Graded premium policy premiums are lower in the initial period and gradually increase before leveling off for the duration of the contract."

"Which of the following statements regarding limited-pay life insurance is NOT correct? A) Limited-pay policies mature more quickly than do continuous premium whole life policies. B) Limited-pay policy death benefits remain level for the duration of the policy. C) Cash value grows more quickly in limited-pay life policies than it does in continuous premium whole life policies. D) Limited-pay policies endow when the insured is 100 years old."

"Limited-pay policies mature more quickly than do continuous premium whole life policies. Explanation Limited-pay policies emphasize savings more than straight life policies do. These policies also make it possible for an insured to stop premium payments at the expiration of a specified period without any reduction in the amount of the insurance for as long as the insured survives. The most common types of limited-pay policies are 10-pay life, 20-pay life, and life paid-up at age 65."

"A prospect with a young family needs affordable whole life insurance. As a rising young executive, it is likely that the prospect's current limited resources will increase substantially over the next 15 years. What type of whole life insurance variation would you recommend? A) Modified life B) Single pay C) 20-pay life D) Straight Whole Life"

"Modified life Explanation In a modified whole life policy, premiums are generally lower in the first years of the policy and higher in later years. This type of policy is designed for persons with limited financial resources who have the promise of higher resources in later years. The total over the period of the policy would be equivalent to the straight whole life policy."

"Which of the following provides for an enhanced death benefit on a universal life policy? A) Option A B) The corridor C) The cost basis D) Option B"

"Option B Explanation Option B (or option 2) allows the cash value in the account to be added to the death benefit. For example, if a $100,000 policy has $25,000 of cash value, the beneficiary will receive $125,000."

"Mark purchased a 20-year $100,000 level term life insurance policy and a $250,000 straight whole life insurance policy. Which of the following statements is CORRECT? A) Premiums for both policies are set at the time of policy issue and remain level throughout the term of the policies. B) If Mark takes a loan from either policy that is still outstanding when he dies, the amount of the loan plus interest due will be subtracted from the death benefit. C) Mark can take a policy loan from either policy, provided the loan is paid back within the 20-year period. D) The whole life insurance policy will mature when Mark reaches age 65; the term life insurance policy will expire in 20 years."

"Premiums for both policies are set at the time of policy issue and remain level throughout the term of the policies. Explanation The premiums for both the level term life insurance policy and the straight whole life insurance are calculated at the time of policy issue and remain level throughout the term of the policies. Because only whole life insurance policies have cash value, Mark cannot take a policy loan from his term policy. Any amounts outstanding at his death will be subtracted from the death benefit."

"Which of the following statements applies to universal life insurance? A) A rate of interest higher than that paid on whole life is paid for the term of the policy. B) Premiums generally may be increased or decreased at the policyowner's option. C) It is similar to endowment insurance. D) The policy involves a cash account and increasing term insurance coverage."

"Premiums generally may be increased or decreased at the policyowner's option. Explanation Universal life insurance functions as whole life insurance but is essentially level or decreasing term insurance plus an investment account. It matches a client's needs in that she can adjust premium payments, the face amount of the policy, or both. Interest is based on the current rate or the guaranteed policy minimum, whichever is greater."

"Of the following, which best describes a need that decreasing term insurance is often used to meet? A) Providing long-term coverage at a reasonable premium B) Providing funds to pay off an outstanding loan at a reasonable premium C) Providing funds for final expenses at a reasonable premium D) Providing funds to pay off an outstanding loan at a high premium"

"Providing funds to pay off an outstanding loan at a reasonable premium Explanation Decreasing term insurance is often used to provide funds to pay off an outstanding loan in the event the insured dies before the loan has been fully repaid. The decreasing coverage can often track with the outstanding loan balance at a premium that remains level. Compared to other types of life insurance policies, decreasing term can typically be purchased at a reasonable premium."

"Assume 4 individuals, all age 30, purchase the following life insurance policies. If all policies are still in force 10 years later, who will have the largest cash value in his policy? A) Dennis, who has a $100,000 life paid-up at 65 policy B) Jack, who has a $100,000 life paid-up at 55 policy C) Luis, who has a $100,000 straight whole life policy D) Rajesh, who has a $100,000 20-pay life policy"

"Rajesh, who has a $100,000 20-pay life policy Explanation The larger the face amount of the policy, the larger the cash values. The shorter the premium payment period, the quicker the cash values grow. The longer the policy has been in force, the greater the buildup in cash values."

"Sophia has a $250,000 10-year convertible term policy and would like to convert it to a permanent policy. Her agent provides her with the following information. Which statement is NOT correct? A) The new premium will be based on either her original or her attained age. B) She may convert to the permanent policy for up to 12 months following the term policy's expiration. C) Sophia will not have to provide evidence of insurability. D) A new application will not be required."

"She may convert to the permanent policy for up to 12 months following the term policy's expiration. Explanation Conversion of a policy must be made before the term policy expires."

"Which of the following statements pertaining to term insurance is CORRECT? A) Nancy and Jennifer are the same age and have term policies of identical face amounts. Nancy's policy is renewable; Jennifer's policy is nonrenewable. Jennifer pays the higher premium. B) A term policy cannot be both renewable and convertible. C) Term insurance provides protection for only a temporary period. D) Jorge decides to exercise an option to renew his term insurance, but first he must pass a physical examination."

"Term insurance provides protection for only a temporary period. Explanation A term policy can be purchased with an option to renew, an option to convert, or both. The option to renew allows the policyowner to renew the policy (at the then-attained age premium) without evidence of insurability. The option to convert allows the policyowner to convert the term policy to permanent insurance (with an adjustment to premium), without evidence of insurability. Renewable policies carry higher premiums than nonrenewable policies."

"In addition to the Department of Insurance, who has the authority to regulate variable life insurance? A) The Securities Exchange Commission B) The National Association of Insurance Commissioners C) The Federal Deposit Insurance Corporation D) Insurance companies"

"The Securities Exchange Commission Explanation Because variable life insurance is considered a securities product, the SEC has jurisdiction over variable life insurance products."

"Michelle, age 31, just purchased a $50,000 variable life insurance policy. Which of the following statements is NOT correct? A) The death benefit of $50,000 is not guaranteed. B) She directs the insurer as to how her cash values are to be invested. C) The cash value growth of her policy will depend on how the investments supporting those values perform. D) Her premium payments will be fixed and level for the duration of the contract."

"The death benefit of $50,000 is not guaranteed. Explanation A variable life insurance policy invests its cash values in securities at the owner's direction. There are no guarantees as to the cash value growth or accumulation. Although the death benefit may fluctuate in response to the cash values, a minimum death benefit, the policy's face amount, is guaranteed. Premiums are fixed and payable over the life of the policy."

"Which of the following statements pertaining to a whole life policy is NOT correct? A) It provides both insurance protection and living values. B) The face amount may be paid as a lump sum at the policyowner's selected retirement age. C) It is designed to mature or endow at the insured's age 100. D) The policy offers insurance protection to age 100."

"The face amount may be paid as a lump sum at the policyowner's selected retirement age. Explanation The face amount of a whole life policy may be paid as a lump sum at the policyowner's death, not at retirement age."

"Which of the following differentiates a variable life product from a conventional life product? A) The fact that the product has a separate account which is distinct from the general account B) The lack of an assignment provision C) The fact that the product was purchased through a direct response mailing D) The fact that performance is guaranteed to provide a stable rate of returns"

"The fact that the product has a separate account which is distinct from the general account Explanation Unlike conventional life insurance, which is classified as a fixed product with a specific (guaranteed) benefit, variable life products provide insurance and benefits that vary according to the investment experience of their underlying accounts. These underlying accounts, which are separate accounts the insurer establishes and maintains, are typically are made up of equities such as stocks, the values of which rise and fall and cannot be guaranteed. A purchaser of a variable life policy incurs a degree of risk not associated with a fixed whole life policy."

"Leo purchases a $50,000 5-year level term policy. Which of the following statements about Leo's coverage is CORRECT? A) The policy provides a straight, level $50,000 of coverage for 5 years. B) If Leo dies at any time during the 5 years, his beneficiary will receive the policy's face value plus the policy's cash value. C) If Leo lives beyond the 5 years, the premium for the existing policy will increase. D) If Leo dies after the specified 5 years, only the policy's cash value will be paid."

"The policy provides a straight, level $50,000 of coverage for 5 years. Explanation A straight 5-year level term policy provides coverage for the stipulated 5-year time period in an amount equal to the policy's face value. If the insured lives beyond the 5-year period, the policy expires and no benefits are payable. There are no cash values in term policies. Since the policy expires at the end of the 5-year period, there is no longer a policy in force, which in turn means any premium once involved is no longer applicable."

"Which of the following statements pertaining to modified whole life and graded premium whole life policies is NOT correct? A) Modified whole life contracts build cash values and have premium-paying periods to age 100. B) The premium for modified whole life increases each year after the first few years of policy issue. C) The premium for graded premium whole life increases each year during the first few years after policy issue. D) Graded premium whole life policies build cash values and have premium-paying periods to age 100."

"The premium for modified whole life increases each year after the first few years of policy issue. Explanation Premiums for modified whole life policies do not increase annually after the first few years. They level off after the premium period."

"Willa purchases a 5-year $50,000 level term policy with an option to renew. Which of the following statements about the policy's renewability is CORRECT? A) The premium for the renewal period will be the same as the initial period, but a onetime service charge will be assessed upon renewal. B) The premium for the renewal period will be lower than the initial period. C) The premium for the renewal period will be the same as the initial period. D) The premium for the renewal period will be higher than the initial period."

"The premium for the renewal period will be higher than the initial period. Explanation Premiums for the renewal period will be higher because of the insured's advanced age and increased risk."

"Helen has just taken out a modified whole life policy. Which of the following statements is CORRECT? A) The face amount will be lower during the next few years and then be increased to a higher, constant level. B) The face amount will be higher during the next few years and then remain constant at a lower level. C) The premium will be higher during the next few years and then remain constant at a lower level. D) The premium will be lower during the next few years and then be increased to a higher, constant level."

"The premium will be lower during the next few years and then be increased to a higher, constant level. Explanation The modified whole life policy is issued with a level premium payable during the first few (usually 5) years that is lower than the normal whole life policy rates. The premium increases and is higher than normal thereafter."

"Roland is 45 years old and married. He has a 19-year-old son who is in his first year of studies at a local university. He also has an 8-year-old daughter. A decreasing term policy could be recommended for Roland for which of the following reasons? A) To provide a future college education for his daughter B) To provide an emergency source for loans C) To supplement Roland's retirement income D) To guarantee that his son's college tuition will be covered"

"To guarantee that his son's college tuition will be covered Explanation Decreasing term insurance is designed to address needs that decrease from year to year. A decreasing term policy could be written for an amount of insurance to equal the remaining cost of the son's tuition. It would not be used as a method to create funds for the daughter's education, nor does it create any cash value that could be borrowed."

"For which of the following reasons would a domestic insurer set up separate accounts? A) To simplify its bookkeeping system and allow for variables B) To provide for annuities to be payable in fixed or variable amounts or for variable life insurance C) To pay claims to individual claimants for different classes of insurance D) To justify the volatility of investment returns"

"To provide for annuities to be payable in fixed or variable amounts or for variable life insurance Explanation The varying market values in a separate account provide income for variable life insurance products."

"Which of the following statements regarding universal life is INCORRECT? A) UL premiums are fixed, however the policyowner may increase or decrease the death benefit. B) Withdrawals and policy loans are taken from the cash value account. C) UL premiums are flexible and the policyowner may increase or decrease the death benefit. D) Death benefits are flexible, subject to insurability requirements."

"UL premiums are fixed, however the policyowner may increase or decrease the death benefit. Explanation UL premiums are flexible, not fixed. The policy owner may increase or decrease the death benefit based on insurability requirements. Both withdrawals and loans are permitted and are taken from the cash value account."

"While a policy loan is generally an available option with any form of permanent life insurance, a partial withdrawal of cash value from the policy is available only with which of the following types of life insurance? A) Modified premium whole life B) Variable life C) Universal life D) Straight whole life"

"Universal life Explanation While policy loans are available with any type of permanent life insurance policy, partial cash value withdrawals require the policy flexibility that only universal life insurance offers."

"Patrick owns an adjustable life policy. Which of the following statements is CORRECT? A) Upon showing evidence of insurability, Patrick can increase the face amount of his policy. B) The company has a right to raise or lower the premium on the basis of its investment earnings. C) Any adjustments made on the policy will have retroactive effects on the policy's provisions. D) Decreasing the premium shortens the premium-paying period."

"Upon showing evidence of insurability, Patrick can increase the face amount of his policy. Explanation Adjustable life is a whole life policy with adjustable features. Premiums can be increased or decreased at the policyowner's request, as can the face amount of the policy (usually subject to evidence of insurability). None of the changes made in an adjustable life policy have any retroactive effect on any of the provisions; adjustments apply only to the future. Increasing the premiums could lengthen the coverage period or shorten the premium-paying period. Decreasing the premiums reduces cash values, shortens the protection period, or lengthens the premium-paying period."

"With respect to the regulation of variable contracts and those who sell them, which of the following statements is most accurate? A) Variable contracts and their distribution are regulated exclusively by the Department of Insurance because state regulation supersedes federal regulation. B) Variable contracts and their distribution are regulated separately (often with conflicting regulatory demands) by the Department of Insurance, the SEC, and FINRA. C) Variable contracts and their distribution are regulated separately but in a fairly coordinated fashion between the Department of Insurance, the SEC, and FINRA D) Variable contracts and their distribution are regulated exclusively by the Securities Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) because federal regulation supersedes state regulation."

"Variable contracts and their distribution are regulated separately but in a fairly coordinated fashion between the Department of Insurance, the SEC, and FINRA Explanation Insurers that set up separate accounts to manage variable contracts must be licensed by the Commissioner and registered with FINRA. The Department of Insurance, the SEC, and FINRA regulate the sale of variable contracts separately, but in a fairly coordinated manner."

"Which of the following types of life insurance requires that the agent be licensed by FINRA before selling the policy? A) Adjustable life B) Variable life C) Term life D) Universal life"

"Variable life Explanation To sell variable life insurance, an individual must hold a life insurance producer's license and a FINRA registered representative's license."

"Which of the following statements pertaining to variable life insurance is CORRECT? A) The benefits of variable life insurance vary according to the amount of premiums paid. B) With a variable life insurance policy, the insurance company assumes the investment risk. C) In a variable life insurance policy, cash values and the death benefit are not guaranteed. D) Variable life insurance cannot be proposed in a sales situation unless the proposal is preceded or accompanied by a prospectus."

"Variable life insurance cannot be proposed in a sales situation unless the proposal is preceded or accompanied by a prospectus. Explanation Because variable life insurance is considered a security, a prospectus must precede any sale of it."

"Which of the following policies endows at age 100? A) Whole life and limited-pay life B) Level term and whole life C) Any endowment policy D) Endowment and decreasing term"

"Whole life and limited-pay life Explanation A policy endows when it reaches the point when the cash value equals the face amount. Endowment policies can endow at different ages. Whole life and limited-pay life policies endow at age 100. Term policies do not endow."

"Diane would like to purchase a life insurance policy in which the face amount remains level and the cash value grows each year until she dies (or reaches age 100). Which type of policy should she purchase? A) Whole life policy B) Limited-pay life policy C) Term policy D) Endowment policy"

"Whole life policy Explanation The cash values of a whole life policy grow steadily, and if Diane lives and premiums are paid to age 100, she will be entitled to the face amount."

"A life insurance policy in which the face amount remains level and the cash value grows to an amount equal to the face amount when the insured reaches age 100 is A) a whole life policy B) a level term policy C) an endowment policy D) a decreasing term policy"

"a whole life policy Explanation The cash values of a whole life policy grow steadily and, if the insured lives and premiums are paid to age 100, will equal the face amount."

"Jane, age 35, has just purchased a 20-pay whole life policy. When she turns 55, she will A) no longer be covered by the policy B) receive the policy's face amount benefit C) cease paying premiums D) have a fully matured policy"

"cease paying premiums Explanation Limited-pay whole life policies have level premiums that are limited to a certain period (less than life). This period can be of any duration. For example, a 20-pay whole life policy is one in which premiums are payable for 20 years from the policy's inception, after which no more premiums are owed."

"In contrast to traditional whole life insurance policies, with variable life insurance products A) premiums are invested in an insurer's general account B) investments match the insurer's contractual guarantees and liabilities C) contract cash values are not guaranteed D) the insurer assumes the investment risk"

"contract cash values are not guaranteed Explanation Variable insurance products do not guarantee contract cash values. This is because policyowners can direct the investment of the funds backing their variable contracts through separate account options. Instead of a fixed return, the investment account will earn a variable return depending on the account's investment performance."

"All of the following are purposes of juvenile insurance EXCEPT A) providing funds for a child's final expenses B) beginning a life insurance program for a child at a low premium rate C) funding a college education D) covering the medical expenses of a child"

"covering the medical expenses of a child Explanation Juvenile insurance may provide funds for a child's final expenses, for a college education, or to begin a life insurance program for a child, at relatively low premium rates. Juvenile insurance also can ensure a child has some life insurance if he becomes uninsurable later."

"Withdrawals from a universal life policy A) only decrease the cash value B) only decrease the death benefit C) are taxed as ordinary income D) do not require repayment"

"do not require repayment Explanation Universal life policies allow both policy loans and withdrawals from the cash value in the policy. Both the death benefit and cash value are reduced by the amount of the withdrawal."

"Variable universal life policies provide all of the following EXCEPT A) cash values B) a flexible premium capability C) a death benefit D) fixed premiums"

"fixed premiums Explanation Variable universal life insurance combines many characteristics of variable life (such as a death benefit and an equities-based cash value) with universal life (such as flexible premium payments and adjustable death benefits)."

"If a policyowner purchases a $250,000 single premium whole life insurance policy and needs additional funds for retirement 6 months later, A) he can draw on the cash value to supplement his retirement income B) he can take a loan from the policy to supplement his retirement income but must repay it within 1 year C) he can take a withdrawal but not a loan from the policy D) he cannot access the policy's cash value because there has not been enough cash value accumulation buildup in the policy"

"he can draw on the cash value to supplement his retirement income Explanation Because a single premium whole life policy involves a large, onetime premium payment at the beginning of the policy period, the policy is completely paid for at that point. The payment of a single premium gives it an immediate cash value. As a result, the policyowner can draw on the cash value of a whole life insurance policy to supplement his retirement income."

"Equity index life insurance policy values are determined by a specified participation rate and A) aggressive investment in the stock market B) flexible premium payments C) dividends from stocks in a particular stock market index D) indirect links to a stock market index"

"indirect links to a stock market index Explanation Equity index life insurance links policy values, based on a specified participation rate, to potential increases in a particular market index, such as the Standard & Poor's 500 Index. The life insurance policy is not participating in the actual stock market index or in the actual stocks that are in that index. Consequently, it does not benefit from the dividends of those stocks. Equity index or equity linked universal life insurance allows a conservative indirect link to a stock market index and allows a certain participation percentage of increase based on the increase in the stock market index. While it is true that the premium payments are flexible, this question is about how equity index life insurance policy values are determined. This question is not about how policy values might be affected, which is where flexible premiums come into play."

"David has a $300,000 nonrenewable 5-year term policy. The premium he pays for this policy would be A) more than for a $300,000, 5-year renewable term policy B) increased each year during the 5-year period C) the same as for a $300,000, 5-year renewable term policy D) less than for a $300,000, 5-year renewable term policy"

"less than for a $300,000, 5-year renewable term policy Explanation Nonrenewable policies are less expensive than renewable policies, all other things being equal. This is because the renewal provision provides continued coverage without evidence of insurability, putting the insurer at greater risk."

"Nora, age 25, just started working and would like to purchase life insurance to ensure that her spouse and child are protected if she dies prematurely. She has very limited funds but would eventually like to have permanent protection. Nora should consider purchasing A) variable life insurance B) whole life insurance C) limited-pay whole life insurance D) level term life insurance"

"level term life insurance Explanation Because permanent life insurance protection costs more than term insurance protection, Nora should consider purchasing a term life insurance policy. Most term policies include a conversion option that guarantees policyowners the right to convert the policy to permanent protection without having to provide evidence of insurability."

"A policy loan is generally available with all of the following types of life insurance policies EXCEPT A) modified premium whole life insurance B) universal life insurance C) variable life insurance D) level term life insurance"

"level term life insurance Explanation While cash value withdrawals are available only with universal life insurance policies, policy loans are available with any type of permanent life insurance policy. Because they have no cash value, term life insurance policies do not accommodate policy loans."

"A whole life policy that makes it possible to stop premium payments at the end of a specified time without a reduction in the death benefit is called A) single pay B) graded premium C) limited-pay D) modified premium"

"limited-pay Explanation Whole life limited-pay policies make it possible to stop premium payments at the end of a specified time period without a reduction in the death benefit. In other words, the policy becomes fully paid before the insured turns 100. The most common examples of this are 10-pay life, 20-pay life, and life paid-up at 65."

"When he was 45, Frank purchased a $40,000 5-year level term policy. When he died at age 52, his beneficiary received A) nothing B) 20000 C) the cash value of the policy D) 40000"

"nothing Explanation In this case, the insured died after his term policy period had expired. As a result, his beneficiary received nothing."

"Universal life is distinguished from whole life insurance in that A) no withdrawals can be made from the policy's cash value account B) policy loans can be taken from the policy C) partial withdrawals can be taken from the cash value account D) complete withdrawals of the cash value can be taken"

"partial withdrawals can be taken from the cash value account Explanation A factor that distinguishes universal life from whole life is that partial withdrawals can be made from the policy's cash value account. Whole life insurance allows a policyowner to tap cash values only through a policy loan or a complete cash surrender of the policy's cash values, in which case the policy terminates."

"In contrast to traditional whole life insurance policies, term life insurance A) provides both pure insurance protection and cash value B) offers tax-advantaged borrowing and withdrawals C) cannot be renewed D) provides pure insurance protection only"

"provides pure insurance protection only Explanation Both term and permanent life insurance include pure insurance protection. However, only permanent life insurance includes a cash value that is the policyowner's property at all times."

"Variable life insurance policies are regulated by A) the Securities and Exchange Commission (SEC) B) the SEC, FINRA, and the states C) the Financial Industry Regulatory Authority (FINRA) D) the states"

"the SEC, FINRA, and the states Explanation Because of the securities element of variable life products, these policies are regulated by the SEC and FINRA in addition to traditional state regulation, which applies to all insurance policies. Variable life products may only be offered by properly licensed representatives of a broker-dealer."

"With interest-sensitive whole life insurance, A) the policy always pays a dividend B) the interest rate is guaranteed by the insurer C) the cash value is based on the interest rate stated in the policy D) the cash value fluctuates in accordance with interest rates"

"the cash value fluctuates in accordance with interest rates Explanation Interest-sensitive whole life policies are whole life insurance policies that do not pay dividends. Instead, the cash value grows in an accumulation account from premium payments paid in and interest credited (the interest is paid on the reserve cash value in the policy's accumulation account). The cash value fluctuates in accordance with interest rates. A life insurance charge is also deducted from this accumulation account to pay for mortality costs and the insurer's other expenses."

"Variable life insurance policies are regulated by the Securities Exchange Commission and FINRA because A) the insurer assumes the risk of market value losses B) the policyholder receives the full benefit of any investment gains after policy charges are deducted C) the cash values are tied to the actual performance of investment funds D) the cash values are tied to the insurance company's general investment account"

"the cash values are tied to the actual performance of investment funds Explanation Because of the relationship of variable life products to the stock market, they are regulated by the SEC and FINRA in addition to the states. A variable life insurance policy ties cash values and possibly death benefits to the actual performance of a particular investment fund or a combination of funds, not necessarily to the insurance company's general investment account. Variable life allows the policyholder to invest the premiums among the various investment options available within the policy structure. The policyholder assumes the risk of market value losses and receives the full benefit of any investment gains after policy charges are deducted. Variable life products may be offered only by properly licensed representatives of a broker-dealer."

"All of the following elements of an adjustable life policy are adjustable EXCEPT A) the face amount B) the premium C) the cash value D) the policy loan rate"

"the policy loan rate Explanation This policy contains adjustable provisions that allow premiums to be increased or decreased, the face amount to be increased or decreased, and an extra premium to be paid."

"The party to whom the life insurance policy cash values belong is A) the beneficiary B) the policyowner C) the insured D) the insurer"

"the policyowner Explanation The accumulation that builds over the life of a policy is referred to as the policy's cash value. It belongs to the policyowner, who may or may not be the insured."

"A significant feature of adjustable life insurance is that A) the premiums may be increased or decreased from time to time by the policyowner B) the policyowner may make retroactive adjustments in the policy's provisions C) the policyowner need not pay premiums after the policy has been in force for a certain number of years D) the cash value is 3 times greater than in traditional whole life insurance"

"the premiums may be increased or decreased from time to time by the policyowner Explanation An adjustable life policy is simply a whole life policy with adjustable features, such as premiums that may be increased or decreased from time to time by the policyowner. These adjustments cannot be made retroactively."

"Decreasing term insurance could be recommended for all of the following EXCEPT A) for protection while a business loan is outstanding B) to build a retirement fund C) for mortgage protection D) to protect a family while children are growing up"

"to build a retirement fund Explanation Decreasing term insurance is designed to address needs that decrease from year to year, such as mortgage or loan protection. By the end of the term period, the face amount decreases to nothing. This would not help create a retirement fund."

"Limited representatives can sell any of the following kinds of insurance EXCEPT A) credit health B) credit life C) title insurance D) variable life"

"variable life Explanation A limited representative is appointed by an insurer to sell vehicle liability and damage insurance or credit life and credit health insurance."