DLIE
Which of the following statements regarding the tax treatment of endowment contracts is correct?
Endowment contracts no longer get the good tax treatment given to life insurance policies.
Which of the following best describes how the insured's money is handled in a variable life insurance policy?
Premiums are placed in investment subaccounts maintained in the insurer's separate account. Variable contract insurance premiums are invested in subaccounts, selected by the policyowner, that have different investment objectives. These subaccounts are maintained in the insurer's separate account.
Jill is insured under a $250,000 convertible term policy and would like to convert to a permanent policy. Which of the following statements is most correct?
The amount of the new policy cannot exceed $250,000.
As a collateral assignee, Ned has first claim on the policy for the amount of the assignment. In these cases, what happens to the death benefit if the policyowner dies?
The insurer pays the assignee the balance of the loan still owed out of the death benefit, and the rest of the death benefit goes to the beneficiary. If the policyowner dies, the insurer pays the assignee the balance of the loan still owed out of the death benefit. The rest of the death benefit is paid to the beneficiary.
Which of the following statements regarding participating life insurance policies is correct?
They are eligible for policy dividends.
What is the main difference between decreasing term insurance and level term insurance?
Under decreasing term insurance, the death benefit decreases over the policy period while with a level term policy, the death benefit stays level over the policy period. Decreasing term life insurance provides face amount coverage that decreases over time, eventually reaching zero at the end of the term. Decreasing term premiums remain level for the full coverage term.
With respect to the difference between variable life insurance (VLI) and variable universal life insurance (VUL), which of the following statements is correct?
Variable life policies require a fixed premium payable for the life of the policy while variable universal life permits premium flexibility.
Both are considered securities products as well as life insurance.
Variable universal life policies are considered securities products as well as life insurance. Universal life insurance is not a security; it is a fixed interest flexible premium product.
The expense charge, or load factor, of a life insurance premium usually covers all the following EXCEPT:
a charge to reflect the insured's risk of death Death risk is covered by the premium's mortality category.
To qualify as life insurance for tax purposes, a policy must maintain a certain level of pure insurance protection. In practice, this means a UL policy's death benefit must include which of the following?
a corridor of insurance protection that depends on the insured's age
The convertibility provision of a term life policy lets the owner convert the term coverage into what type of policy?
a permanent life insurance policy
How is increasing term life insurance normally sold?
as a cost-of-living rider on a permanent life insurance policy
What is the actuary's first step in determining the premium to charge for a periodic premium life insurance policy?
calculate the net level premium
Which of the following types of life insurance policies would most likely be used to insure the declining balance of a home mortgage?
decreasing term
ABC Life Insurance has been chosen to underwrite group life insurance for the Big State Alumni Association. In underwriting the risk posed by the group, ABC can perform all of the following EXCEPT:
exclude members based on their risk profile The insurer cannot exclude one member from coverage based on that person's risk potential.
The premium that a policyowner pays for a periodic premium life insurance policy is called the:
gross level premium
Variable life insurers generally charge an annual maintenance fee that is primarily intended to cover which one of the following?
the cost of managing the complex investment element of the contract
What is the standard life insurance policy suicide exclusion period?
two years
All the following statements about term life insurance are correct EXCEPT:
A small cash value gradually accumulates while the policy is in force. Term life is pure insurance protection, with no cash value associated with it. If the insured dies during the coverage term, then the policy's death benefit is payable. If the insured is alive at the end of the coverage term, then the coverage ends, and the policy terminates without value.
Because insurers do not pay the proceeds of a life insurance policy to a minor because minors do not have the legal capacity to sign a binding receipt for the funds, what do they do if no adults are available to receive death benefits?
Insurers require the court to appoint a legal guardian before paying benefits to a minor child.
What happens to a signed life insurance application after the policy has been issued?
It becomes part of the contract between the insurer and the policyowner.
Joan owns a variable universal life insurance policy that now has a $100,000 cash value and is beyond its surrender charge period. This year, she plans to withdraw $25,000 from her policy's cash value to buy a new car. Which one of the following statements is most correct?
Joan's death benefit will be reduced by $25,000. VUL policyowners can access their policy's cash value through partial surrenders, not loans. Amounts taken from the cash value reduce the death benefit.
Bob bought a $100,000 ten-year level term insurance policy on March 1, 2008. What would happen if he died on March 15, 2018?
No death benefit would be payable. Term life is pure insurance protection, with no cash value associated with it. If the insured dies during the coverage term, then the policy's death benefit is payable. If the insured is alive at the end of the coverage term, then the coverage ends, and the policy terminates without value.
Carolyn bought a $500,000 five-year renewable term policy with a guaranteed renewal rate. Two years after buying it, she develops cancer and is no longer insurable. If Carolyn is alive at the end of the five-year term, which of the following statements is most correct?
She can renew the policy but must pay a higher premium based on her age at the time of renewal. Under a renewable term life insurance policy with a guaranteed renewal rate, Carolyn can renew the policy without proving evidence of insurability. However, the premium for the renewal coverage will be based on her age at the time of renewal and will therefore be higher than her initial premium.
Life insurance has been purchased by ABC Company on the lives of two partners, Hugh and Danny, and three key employees Eileen, Vern, and June. Which of the following would apply if Hugh and June were to leave the business?
The company could keep the life insurance it has on both Hugh and June, even though both are no longer employed there.
Gina owns a $200,000 five-year renewable term insurance policy and wants to renew the policy at the end of the term. In this case, which of the following statements is correct?
The premium for this policy is higher than it would be for a non-renewable term life policy of the same face amount.
All the following statements about endowment contracts are correct EXCEPT:
They receive preferential income tax treatment. If the policy endows while the insured is still alive, the policyowner receives a specified sum as a living benefit.
In calculating their life insurance premiums, which of the following statements generally guides insurance companies in determining the "loading" factor?
Total loading from all policies should cover total operating costs, provide a safety margin, and contribute to profits or surplus. In determining its load factors, insurers are generally guided by three objectives: cover total operating costs, provide a safety margin, and contribute to profits or surplus.
What is the term for the money that builds within a whole life insurance policy over the policy's life?
cash value A crucial part of every permanent insurance policy is its cash value. With whole life insurance, the cash value grows at a contractually guaranteed rate. This is necessary to support the guaranteed level death benefit and premiums.
For policyowners who do not pay premiums annually, insurance companies increase premiums to do which of the following?
offset the insurer's increased billing costs and lost earnings.
Part 1 of a life insurance application generally contains:
the applicant's personal information Part 1 of the application contains the applicant's personal information, including name, address, date of birth, occupation, and beneficiary information.
Who normally pays for medical exams or lab tests that insurance companies request?
the insurance company
A type of permanent life insurance that lets the policyowner increase, reduce or even skip premium payments at will without the policy lapsing best describes:
universal life insurance The key feature of universal life insurance is the flexibility such policies offer. The policyowner can, within certain limits, increase premiums, reduce premiums, or pay no premiums depending on the policy's cash value. Similarly, the policyowner can increase the benefit paid at death (subject to evidence of insurability) or can decrease it
In a cross-purchase buy-sell agreement involving three partners, how many life insurance policies does the business itself own?
0 In a cross-purchase buy-sell agreement, the business itself is not involved in the purchase agreement.
What is the grace period for group coverage
31 days for group coverage
John would like to buy life insurance to provide for his family in case he dies prematurely. To figure out how much life insurance John needs, the agent must look at all of the following, EXCEPT:
family health history To figure out how much life insurance John needs, the agent must look at his personal situation in detail, and will collect information about John's current income, assets and liabilities, goals and objectives, current and expected expenses, and risk tolerance.
In a fixed life insurance policy, who assumes the risk of investing the premiums?
insurer The insurer assumes all risk for investing premiums.
In a viatical settlement arrangement, who is the viator?
the insured policyowner who sells his or her policy through the arrangement
Joint insurance
when the first dies
All of the following statements about long-term care riders and long-term care policies under the Health Insurance Portability and Accountability Act (HIPAA) of 1996 are correct, EXCEPT:
The insured must spend time in a hospital before payment. Long-term care riders and policies cannot require time in a hospital before payment.
Which statement about determining the proper amount of life insurance is correct?
The needs approach is more commonly used today because it takes into account family financial goals and objectives.
To help determine how much life insurance a prospect needs, agent Jackson uses the needs approach which is based on the prospect's:
current financial situation and future needs The needs approach is based on a detailed analysis of a person's current situation. It examines personal and family income, liabilities, assets and future needs to calculate life insurance needs.
Six months ago, Bill surrendered his life insurance policy for its cash value. He now realizes his mistake and asks to reinstate his coverage. The insurance company is obligated to do which of the following?
do nothing as the company has no contractual obligation to the policy owner at this point Reinstatement is not possible if the policy has been surrendered and the cash value has been paid to the policyowner.
To qualify for and get the favorable tax treatment given to life insurance, a universal life insurance policy must meet which of the following tests?
guideline premium test
Anne, a life insurance applicant, wants to change an answer that she gave on the application. She should do which one of the following?
have the applicant cross out and initial the incorrect entry
What is the name of one of the first systems developed for determining how much life insurance is necessary, based on the economic value of a human life?
human life value approach
All of the following are true statements about the insuring clause of a life insurance policy EXCEPT:
it lists the policyowner's rights under the policy. The insuring clause states the company's promise to pay the policy's face amount (death benefit) to the named beneficiary if the insured dies while the policy is in force. Policyowner rights are listed in the policy's ownership provision.
The net single or net level premium of a life insurance policy reflects what two premium factors?
mortality and interest
All life insurance premiums are based generally on which of the following?
mortality charge, interest credit, and expense charge
All the following are common forms of split-dollar plan EXCEPT:
qualified split-dollar
All the following are factors in determining an individual's life insurance needs using the needs approach EXCEPT:
the applicant's economic value In contrast to the human life value approach, which attempts to quantify a person's economic value in a single sum, the needs approach determines personal life insurance needs based on a detailed review of each person's specific situation.
When calculating the surviving family's ongoing cash needs at the death of the prospective customer, the agent must consider all of the following expenses EXCEPT:
the insured's funeral expenses Paying for the insured's funeral is an immediate lump-sum cash need, not an ongoing cash need.
To determine how much life insurance a person needs, an agent will examine the individual's current income, assets and liabilities, goals, current expenses, and risk profile. What is this approach to determining the right amount of life insurance called?
the needs approach Under the needs approach, an agent will collect information about a person's income, assets and liabilities, goals, expenses, and risk tolerance.
What is another name for the insured in a viatical settlement?
viator
Alex owns a "home service" life insurance policy, which means he most likely pays his premiums in which of the following ways?
weekly or monthly by mail, automatic deduction from a bank account, or personally to the agent
All of the following statements about the regulation of the sale of variable products are correct, EXCEPT:
Agents who only sell variable life products and do not sell fixed life products are not required to hold a life insurance license.
In which of the following situations would the facility of payment clause of a life insurance policy NOT be applied?
The insurer learns, when paying the claim, that the designated beneficiary had no insurable interest in the insured at the time of death. A policyowner may designate anyone as beneficiary, without regard for insurable interest (which need only exist, between the owner and the insured, when the policy is issued).
What is the main appeal of joint life insurance?
lower cost The main appeal of joint life insurance is its lower cost. The premium is less than it would be for two separate policies offering the same death benefit.
Per IRS rules, what else is a single-premium life insurance policy called?
modified endowment contract
Placement, layering, and integration are steps in what kind of financial activity?
money laundering
Life insurance policies are generally prohibited from including provisions that would do any of the following EXCEPT:
require the policyowner to notify the insurer if he or she assigns the policy to a third party
If it cannot be determined which of two people died first in an accident, how does the "common disaster clause" resolve the question in cases where the two people are the insured and primary beneficiary of a life insurance policy?
the beneficiary is assumed to have died first allowing the proceeds to be paid to the contingent beneficiary.
Variable universal life (VUL) policies have the same two death benefit options as those in fixed interest UL policies. As a third death benefit option, what do some VUL polices offer?
a death benefit equal to the sum of the policy's specified amount plus the greater of total premiums paid or actual cash valueVariable universal life (VUL) policies have the same two death benefit options as those in fixed interest UL policies.
In a universal life insurance policy, an insurer will make all of the following monthly adjustments EXCEPT:
deducting a surcharge from the cash value to cover the possibility that the insured has become uninsurable Each month, the insurer will credit to a universal life policy any premiums received since the last month.
Carl is a life insurance policyowner who wants to pay the policy premiums monthly, not annually. Is this possible, and if so, will the insurer make any adjustments to the premium to accommodate this?
Yes, the insurer will add a fee to the annual premium and divide it by 12.
The interest rate that is credited to an indexed universal life policy is based on:
changes in an equity index like the S&P 500
The USA PATRIOT Act strengthens federal enforcement in the fight on terror by, among other things, requiring that all financial institutions create, execute, and maintain training programs regarding:
money laundering
What happens when a whole life insurance policy matures (or endows)?
the policy's cash value equals its face amount
Which of the following primarily regulates life insurance companies?
the state in which the insurance company is domiciled
Under which of the following do the cash values and death benefits rise and fall on the basis of the policy's subaccount investment performance, and for which the insurer does not guarantee a rate of return on the cash value invested?
variable life With a variable life insurance policy, premiums are invested in investment subaccounts selected by the policyowner and managed by the insurer. The investment performance of these subaccounts is not guaranteed, and the death benefit and cash value will vary in response to the subaccounts' changing values. The insurer guarantees a minimum death benefit, usually the face amount of the policy at issue, but that's it. The cash value is not guaranteed.
The basic agreement between the insured and the company, stating the company's promise to pay the policy's face amount (the death benefit) to the named beneficiary, is contained in which one of following parts of the life insurance policy?
the insuring clause
If a variable universal life policyowner chooses death benefit option 3, what will the benefit equal?
the policy's specified amount plus the greater of total premiums paid or actual cash value Death benefit option 3 under a variable universal life insurance policy pays a death benefit equal to the policy's specified amount plus the greater of total premiums paid or actual cash value. This appeals to consumers who are concerned that a drop in market values could mean the cash value is less than the sum of premiums paid.
If your client wants a permanent life insurance policy that will provide him maximum flexibility to alter premiums and even the death benefit (within limits) in the future, which of the following products would be the best recommendation?
universal life policy The popular appeal of universal life insurance is due mainly to its flexibility in premiums and coverage. It also credits interest based on current interest rates, which increases savings when interest rates are favorable.
Insurers use inspection reports to verify the information applicants provide to agents and examiners. Who is most likely to be the subject of an inspection report?
applicants who ask for very high amounts of life insurance or business insurance
Sylvia owns a life insurance policy with a modest face amount that is designed primarily to pay her burial expenses. What type of policy does Sylvia most likely own?
industrial life insurance Provided by home service insurance companies, industrial life insurance was originally sold as 'burial insurance.' Today it is recognized as an important source of life insurance for consumers with relatively modest death benefit needs.
Life insurance company underwriters may request a medical exam or lab test based on any of the following criteria, EXCEPT:
the sex of the applicant State laws prohibit discrimination against any individual based on race, creed, religion, gender, sexual orientation, or physical defects (including blindness) when determining eligibility for coverage.
What is the purpose of the Notice of Information Practices on an insurance application?
to inform the applicant about the practices that insurers use during the review and underwriting processes
An insurable interest is presumed to exist in all of the following relationships EXCEPT:
two friends In general, spouses have an insurable interest in each other, and parents have insurable interests in their children. Businesses also have insurable interests in their key employees. Absent a close familial or business tie, an insurable interest will not exist between two friends.
Natasha is insured under a $500,000 universal life insurance policy. Her son, Todd, is the beneficiary. On October 1, Natasha took a $15,000 loan from the policy and died six months later without paying it back. What amount will Todd receive?
$485,000 less any interest owed on the loan The policy's death benefit is reduced on a dollar-for-dollar basis for the amount of the full, unpaid loan at Natasha's death. The insurer will also deduct any unpaid interest from the proceeds. Todd would, therefore, receive $485,000 less any interest owed on the loan.
A family life insurance policy provides:
whole life on the primary insured and term life insurance coverage on the spouse and each child to age 21 Under a family life insurance policy, an entire family receives life insurance coverage under a single policy. While the principal insured is covered by a whole life policy, the spouse and children are covered by term life insurance policies.
Life insurers are prohibited from requiring disgruntled policyowners who want to sue the insurer from doing so within (that is, no later than):
1 year after the triggering event is noted Most states prohibit insurance companies from including any provision in their contracts that would limit the period for filing a lawsuit against the insurance company to anything less than one year after a triggering event is noted.
Life insurance policies issued since 2009 must be based on the 2001 CSO mortality table, which presumes all people die by age:
120
To convert group life insurance coverage to an individual policy, a terminated employee must typically apply for a conversion policy within how many days after being laid off?
31
Four partners own ABCD Company, which is supported by an insured entity purchase buy-sell agreement. If one partner dies, which of the following correctly describes what happens to that partner's share in the business?
ABCD uses the life insurance proceeds to buy the deceased partner's share of the business, automatically increasing each surviving partner's share of the business to a one-third share.
Ann is the beneficiary of an annuity owned by Jim. Jim intended to annuitize the contract at retirement but died shortly before retiring and selecting a payout option. What benefits will Ann receive from the annuity?
Ann will receive the annuity's accumulated value and may select a payout option. If the owner or annuitant dies before the contract has annuitized, the beneficiary will receive the contract's funds.
Which of the following statements best describes the purposes that annuities serve?
Annuities accumulate and/or distribute sums of money.
John owns a whole life insurance policy with a $250,000 death benefit. Over the years, the policy's cash value has grown to $25,000. All the following statements regarding this are correct EXCEPT:
At John's death, the beneficiary receives the policy's cash value plus its face amount. With a permanent life insurance policy, the cash value is an integral part of the policy's face amount. It is not paid in addition to the face amount but distributed as part of the face amount.
Barb, age 40, buys a ten-pay life policy while Jill, age 40, buys a life paid up at age 65 policy. All other factors being equal, which of the following statements is most correct?
Barb will pay a higher premium than Jill. Jill must pay premiums until age 65 while Barb will only pay premiums for a ten-year period.
Variable life and variable universal life insurance are similar in all of the following ways EXCEPT:
Both require fixed, set premiums. Variable life insurance policies have a fixed, set premium payable for the life of the policy. Variable universal life policies generally require a minimum initial premium to cover first year costs and a minimum death benefit. After that, policyowners do not pay a set amount on a set schedule.
Cindy owns a $100,000 straight whole life insurance policy. If she paid the required premiums and lived to age 120, which of the following statements best describes what will happen?
She would get $100,000 as an endowment.
People generally buy life insurance for all of the following reasons EXCEPT:
Individuals typically do not expect to make a profit when selling a life insurance policy later on. Instead, it is most often used to provide financial security for an insured and his or her family when the insured dies.
What does a viatical settlement allow?
It allows a chronically or terminally ill insured to gain a sum of money that is needed to pay medical expenses or to enhance the quality of life. A viatical settlement allows a chronically or terminally ill insured to gain a sum of money that might be needed to pay medical expenses or to enhance quality of life.
Which one of the following most illustrates the biggest drawback to the human life value approach to determining insurance needs?
It fails to consider a family's unique financial needs. The human life value approach to determining insurance needs fails to consider a family's unique needs.
What is the main disadvantage of designating the insured's estate as the beneficiary of a life insurance policy?
It places the policy benefits into the estate where they are subject to creditors and estate taxes. The main disadvantage to a trust designation is that it places the policy proceeds into the estate, making them subject to the claims of creditors and estate taxes.
Which statement about life insurance beneficiary designations is NOT correct?
Legal entities, such as trusts and corporations, cannot be beneficiaries of individual life insurance. A life insurance beneficiary can be a legal entity such as a corporation, partnership, or trust.
Life insurance is commonly used for all the following purposes, EXCEPT:
Life insurance is used to make up for the financial losses that might occur with the death of an important customer. While life insurance serves a number of important purposes in the business market, making up for the death of a big customer is not one of them.
All the following statements about variable annuity accumulation units are correct EXCEPT:
Like a fixed annuity, a variable annuity's growth is guaranteed. A variable annuity's growth is not guaranteed, unlike a fixed annuity.
Which of the following best illustrates the intended use of an annuity?
Maura purchases an annuity to convert a sum of money into a series of payments to herself.
All of the following are true regarding buy-sell agreements EXCEPT:
Most buy-sell arrangements require that an heir of a deceased partner must be made a partner in the business. Avoiding this scenario is the primary reason for having a buy-sell agreement.
Two months after buying a single premium life insurance policy, Norton kills himself. As a result, what will Norton's family receive from Norton's life insurance policy?
a return of the premiums paid, plus interest
All of the following statements about annuities are generally correct, EXCEPT:
The historic purpose of annuities is to create estates over a certain period. The purpose of life insurance is to create an estate. But the historic purpose of annuities is to liquidate an estate over a certain period.
If the insured under a whole life policy is diagnosed with terminal cancer and wishes to use his life insurance to take a final vacation with his family, which of the following statements is most correct?
The insured could enter into a viatical settlement, which would provide him up to 50 to 80 percent of the policy's death benefit. In a viatical settlement, the provider buys the life insurance policy for a percentage of the policy's face value (death benefit). Typically, the policyowner receives 50 to 80 percent of the death benefit.
All the following are contained in the NAIC's Fraudulent Viatical Settlements Model Act EXCEPT:
a requirement that only life insurance companies may serve as viatical settlement providers
To avoid any appearance that the life settlement involves stranger-originated life insurance (STOLI), life settlement providers typically require that the policy being purchased:
be past its contestability period To avoid any appearance that the life settlement involves stranger-originated life insurance (STOLI), which is illegal in many states, life settlement providers typically require that the policy being purchased be past its contestability period.
Walter has a whole life insurance policy with a $100,000 cash value, which he can pledge as security for a business loan through a(n):
collateral assignment A collateral assignment does not transfer or assign all rights. Rather, it makes an assignment of the policy's values only to the point necessary to secure the loan.
Besides key person life insurance, which of the following types of life insurance plans exists solely for the employer's benefit?
corporate-owned life insurance Aside from key person life insurance (which serves a clear business need), there is one type of life insurance plan that exists solely for the employer's benefit: corporate-owned life insurance (COLI). A COLI is any type of individual life insurance taken out by a company on the lives of its employees for the exclusive benefit of the company.
The type of business insurance arrangement under which a senior employee agrees to postpone receipt of a portion of compensation until a future date (usually retirement is called a(n):
deferred compensation plan A nonqualified, deferred compensation plan enables an employee to delay receiving current compensation until a future time.
All of the following are common uses of key person life insurance EXCEPT:
encouraging employee loyalty
The types of charges and fees common to variable annuities include all of the following EXCEPT:
guaranteed cash value fee
A policyowner can access the cash value of many life insurance policies through withdrawals, loans, or policy surrender. Which of the following terms describes the ability to easily convert life insurance into cash?
liquidity An investment with liquidity is easy to convert into cash. Life insurance policies with cash accumulation features offer important liquidity options such as loans or withdrawals.
Under which of the following settlement options are the insurer's responsibilities under the contract fulfilled upon the death of the insured?
lump-sum cash payment Under the lump-sum cash payment option, the insurer distributes proceeds at once upon the death of the insured or surrender of the policy and has fulfilled its responsibilities.
When an insured dies, what are the two main categories of needs that arise?
lump-sum needs and ongoing income needs
The most common method used in determining a prospective client's life insurance needs today is the:
needs approach Because it takes a realistic look at a person's future financial needs, the needs approach is now used most often to determine life insurance needs.
To help determine how much life insurance a prospect needs, agent Smith uses the human life value approach which is essentially based on an estimate of the prospect's:
net future earnings discounted to a present value The human life value approach starts by estimating a person's net future earnings, which it then discounts to a lump-sum amount that represents the person's economic value.
All of the following are common business uses of life insurance EXCEPT:
pay for a company's capital expenditures
All of the following are standard permanent exclusions found in life insurance policies EXCEPT:
suicide A risk that is excluded from coverage means that it is not covered and that the policy's benefit will not be paid if death results from that risk. A suicide clause only restricts coverage until after a certain amount of time has passed, typically two years, and then death by suicide is covered.
All the following are possible ways to access a universal life insurance policy's cash value EXCEPT:
with a policy loan Though traditional whole life policies provide access to cash values through policy loans, policy loans are not possible with universal life insurance policies. Instead, policyowners who want to access some of their policy's cash value do so through a withdrawal (called a partial surrender).
All the following statements regarding the "spendthrift clause" of a life insurance policy are correct EXCEPT:
The spendthrift clause keeps beneficiaries from claiming any death benefits until the insurer checks their personal and business credit histories. Spendthrift provisions keep creditors from claiming any of the death proceeds before they are paid to the beneficiary. The insurer has no interest in the beneficiary's credit history.
Which of the following individuals is the person upon whose life the annuity payment amount and duration are based when the contract is annuitized?
annuitant The annuitant under an annuity contract is normally the person named to receive the benefits from the annuity, and the annuitant's life is the measuring life for payments. Often, the annuitant is also the contract owner, but this need not be the case
A variable annuity's purchase rate is the amount of ongoing income that can be provided by $1,000 of the contract's accumulated value. The purchase rate is based on which one of the following?
assumed interest rate (AIR) When a variable annuity is annuitized, the owner or annuitant selects an assumed interest rate or AIR. The AIR is the rate of interest or rate of return that the contracts values are assumed to earn over the annuitization period. It sets the standard for how the contract will perform in the future. The AIR and the payout option determine the annuity purchase rate.
If the insured purchased a term life insurance policy six months and committed suicide today, which of the following best describes the action the insurer will take?
deny the death claim and return the premiums paid to date If an insured commits suicide during the two-year exclusion period, the insurance company returns the premiums paid, with interest, to the policyowner (if different from the insured) or the beneficiary (if the insured was the policyowner).
Which of the following correctly describes the comparison between a family income policy and a family maintenance policy?
family income policy provides a lump-sum death benefit and a stream of income to a specified date if death occurs before that date, while a family maintenance policy pays a lump-sum death benefit and a stream of income for a fixed period of time upon the insured's death.
Under which of the following are payments made for as long as it takes to liquidate the annuity principal, with the contract owner choosing a monthly amount, and the insurance company computing how long it will take to liquidate the principal at the selected amount?
fixed amount option Income payments under a fixed amount option are made for as long as it takes to entirely liquidate the annuity principal. The contract owner chooses a monthly amount and the insurance company pays that amount every month until the principal is liquidated.
Which type of annuity guarantees both the annuity's principal and a specified rate of interest to be credited to the contract?
fixed annuity Fixed annuities guarantee both the annuity principal and a specified rate of interest to be credited to the contract.
Under which of the following are payments made for a specified number of, and then end?
fixed period option Under a period certain-only annuity payout option, payments are made for the specified number of years and then end. Common term certain payouts are 10, 15, 20, and 25 years.
Which of the following annuities specifies the exact premium payment amounts (and when they must be paid) for the contract to generate the desired future income payments?
fixed premium deferred annuity A fixed premium deferred annuity specifies the exact premium payment amounts (and when they must be paid) for the contract to generate the desired future income payments.
Fran has an annuity into which she is making monthly fixed premium deposits of a specified amount and which she intends to use to supplement her income when she retires in 15 years. The annuity is credited with the higher of a current or guaranteed rate of interest. What type of policy does Fran most likely own?
fixed premium deferred annuity Under a fixed premium deferred annuity, the owner makes on-going, fixed, and level premium deposits of specific amounts. The owner makes these deposits at specified times (annually, quarterly, monthly) during the contract's accumulation period.
If an annuity requires only that each premium deposit be above a certain minimum, this is most likely which type of annuity?
flexible premium deferred annuity Flexible premium deferred annuities allow the owner to make premium deposits of any amount whenever he or she wants. However, a certain minimum amount may be required.
An agent is using the needs approach to calculate the amount of life insurance that a person should have. What is the agent's first step?
gather and analyze personal information about the prospective customer
What type of annuity settlement option pays income for a specified number of years, regardless of how long the annuitant lives?
period certain-only option An annuity certain income option pays income over a set number of years or in specified amounts.
Corporate-owned life insurance (COLI) insures which of the following?
rank and file as well as key employees
Market conduct
refers to the marketing practices of insurers and agents that involve interaction with insureds, claimants, or consumers
In a fixed annuity, what is the declared rate after the initial rate period called?
renewal rate Unlike guaranteed rates, declared rates are subject to change. Most insurers lock in the initial interest rate for a minimum period (e.g., two years) after the annuity is issued. Beyond the initial rate period, renewal rates can be changed at any time, though most insurers limit changes to no more than once per year.
XYZ Company agrees to pay a portion of Sally's salary for three years following her retirement. This type of deferred compensation is known as a(n):
salary continuation plan
After being injured in an automobile accident, Chris was awarded a sum of money by the court. The award was not made all at once; payments were made over several months. Which of the following best describes this arrangement?
structured settlement The correct term is structured settlement.
A type of life insurance that covers two people and pays the death benefit only upon the second insured's death is called
survivorship life
Funds distributed through a viatical settlement are:
tax-free at the federal level and taxable at the state level in some states
A viatical settlement provider would buy a life insurance policy from a policyholder who most likely is which of the following?
terminally ill The viatical settlement provider is the organization that acquires the life insurance policy from the policyholder, or viator. The viator can then use the money from the policy sale to fund health expenses or end of life care.
What is the name of the period during which premium funds are paid into an annuity contract?
the accumulation period The period during which premium funds are paid into the contract is the "accumulation period."
Which of the following states that the applicant must provide both a signed application and payment of the first premium for the policy to become effective?
the consideration clause The consideration clause states that the applicant's consideration (one of the three basic elements of a legal contract) consists of both the signed application and payment of the first premium.
On what is the human life value approach to calculating the amount of life insurance an insured needs based?
the economic value of a human life
Which of the following best describes income payments under the period certain payout option?
the longer the payout period, the smaller the amount of each monthly payment Under a period or term certain annuity payout, payments are made for the specified number of years and then end. Common term certain payouts are 10, 15, 20, and 25 years. Thus, the larger the payout period, the smaller the amount of each monthly payment.
What do most insurance agents and buyers use today to figure out how much life insurance to buy?
the needs approach Because the human life value approach does not consider a person's unique needs, many insurance buyers and agents today use the needs approach instead. Under the needs approach, an agent examines a person's financial situation in detail.
John, a life insurance policyowner, exercises an absolute assignment of the policy to his daughter, Jane, at which point Jane becomes:
the policyowner In an absolute assignment, policyowners give or sell full rights under the policy to an assignee, who now becomes the policyowner and has all the rights the previous owner had.
What is the primary difference between a revocable and an irrevocable beneficiary?
the policyowner's ability or inability to change the beneficiary designation
Agent Smith is working with a married prospect who has three children. Agent Smith is using the needs approach to figure out how much insurance the prospect needs and the type of policy that is most appropriate. She must gather information about all of the following EXCEPT:
the prospect's employment history When using the needs approach, Agent Smith does not gather information about the prospect's employment history.
After a viatical settlement agreement is signed, which party owns the life insurance policy?
the viatical settlement provider A viatical settlement provider is the organization that acquires the life insurance policy from the viator. It owns the policy after the viatical settlement agreement is signed and receives the proceeds at the insured's death.
What is the typical life insurance contract's reinstatement provision period?
three years or longer depending on the insurer and state law
The ABC Company offers a fixed annuity, guaranteeing a minimum rate of 3 percent, which Jim buys with a $10,000 premium payment. At the time Jim bought his contract, ABC had declared a "crediting rate" of 6 percent for two years. For how long will Jim receive a 6 percent interest rate?
two years Jim's contract is guaranteed to earn 6 percent for the first two years.
Deferred annuities accumulate funds for future distribution. Under what circumstances are these funds forfeitable to the insurer?
under no circumstances Accumulated funds in a deferred annuity always belong to the owner. They are not forfeitable, even if the owner stops making premium payments.
All the following are examples of a survivor's immediate cash needs upon an insured's death EXCEPT:
utilities and clothing
In a viatical settlement arrangement, the party who enters into the arrangement with the policyowner is called a:
viatical settlement provider The viator is the insured policyowner who sells his or her policy to a viatical settlement provider.
Which standard provision in a life insurance policy forbids changes to any policy provision unless it is agreed to and signed by an officer of the insurance company?
entire contract provision The entire contract provision states that no change or waiver of any policy provision can be made unless it is agreed to and signed by an executive officer of the insurance company.
What must an agent do to figure out a family's lump sum needs if the breadwinner dies?
estimate the amount of cash needed to pay debts, taxes, and funeral expenses To determine a family's lump-sum needs at the breadwinner's death, the agent must estimate the amount of cash that survivors would need immediately to pay debts, taxes, and funeral expenses, as well as the amount needed for emergencies, dependent care, and education.
XYC Company buys insurance on one of its top officers, naming her as the policyowner, and pays the premiums which the employee must report as income. What type of nonqualified plan is this?
executive bonus plan
Pierre retires early and purchases an annuity. He wants his payout to begin immediately and last only for the next 15 years, at which time his pension will begin. Which of the following annuity options best suits Pierre's wish?
fixed period payout
Four business partners each agree to buy the others' business interests in case a partner dies or leaves the partnership. What is the total number of life insurance policies needed to fund this cross-purchase buy-sell agreement?
12 In a cross-purchase buy-sell agreement, the four partners can fund the agreement by buying life insurance on the lives of the others. Each partner must buy 3 life insurance policies, for a total of 12 policies.
what is the free look period if a life insurance policy is being replaced?
20 days otherwise its 10
In most states, if a new life insurance policy is replacing an existing policy, the 'free look' period for the replacement policy is:
30 days While 10 days is the shortest free-look period permitted in any state, most states require a longer free-look period (typically 30 days) when the new life insurance policy is replacing an existing one.
To qualify for a viatical settlement, the insured must be diagnosed as terminally ill or chronically ill. If qualifying as terminally ill, the insured's life expectancy should be no more than:
48 to 60 months A person with a life expectancy of no more than 48 to 60 months is generally considered terminally ill for purposes of a viatical settlement.
Under the other insured term rider, a person can buy a term life insurance rider to cover the life of a spouse (or other adult). This coverage usually ends sometime before the primary insured reaches which of the following ages?
70 The other insured term rider can be used to insure any adult with whom the policyowner has an insurable interest, with spouses and partners most commonly covered. Coverage usually ends when the policyowner (who is usually the policy's insured) reaches age 65 or 70.
Which of the following correctly describes the difference between a viatical settlement and a life settlement?
A viatical settlement requires that the insured be terminally or chronically ill while a life settlement requires only that the insured be over a certain age. Unlike a viatical settlement, a life settlement does not require the insured to be terminally or chronically ill. Instead, the only qualification requirement with a life settlement is that the insured must typically be at least 65 years old.
With respect to variable annuity annuitization, which of the following statements is NOT correct?
Annuitization under a variable annuity contract provides for income payments that are fixed and unchanging, like a fixed annuity. Annuitization under a variable annuity contract provides for income payments that are not fixed and unchanging, like a fixed annuity.
All of the following statements regarding the use of deferred annuities in retirement planning are correct, EXCEPT:
Earnings grow on a tax-free basis only when a deferred annuity is used to fund a qualified retirement plan. Whether used in a qualified plan or not, the earnings in a deferred annuity accumulate on a tax-deferred basis. There are no unique tax-free benefits associated with annuities.
Hillary purchased a fixed deferred annuity from ABC Insurers and named her daughter, Bess, as annuitant and her husband, Charles, as beneficiary. Which of these parties is specifically authorized to make withdrawals from the annuity prior to annuitization?
Hillary Only Hillary, the annuity owner, has the right to withdraw all or part of the investment. As owner, Hillary also has the right to choose a payout option, to change the parties to the contract, and to make investment decisions, among other rights.
Mr. Jones is a senior executive with his company and is insured under a key person life insurance policy. Which of the following statements is correct about this coverage?
Mr. Jones pays no premium and has no rights to the policy's benefits. Upon the key employee's death, the business receives the death benefit. The key employee has no ownership rights in a life insurance policy that is used for key person coverage.
All of the following statements about annuity beneficiaries are correct, EXCEPT:
The beneficiary of an annuity is guaranteed to receive funds from the contract. Unlike the beneficiary of a life insurance policy, the beneficiary of an annuity may or may not receive any funds from the contract. If the owner or annuitant dies before the contract has annuitized, the beneficiary will receive the contract's funds. If the death occurs after annuitization, the beneficiary's right to any funds will be based on the income payout option the owner has selected.
Edgar is insured under a $1 million life insurance policy and dies during the grace period. What happens if Edgar had not yet paid the premium at the time of his death?
The death benefit will be paid after the premium due is subtracted from it. During the grace period, the policy remains in force. In the event that death occurs during the grace period while the premium remains unpaid, the unpaid premium is generally deducted from the death benefit proceeds.
Jerry names a trust as the beneficiary of his life insurance. When Jerry dies, how will this trust work?
The insurer pays the death benefit to the trustee who manages the assets for the trust's beneficiaries, named by Jerry when the trust was formed.
Reggie has not paid his whole life insurance policy premium, and the policy is in the grace period. If he dies of a heart attack during this time, which of the following will occur?
The insurer will pay the death benefit after deducting the premium that is owed. The policy continues in force during the grace period, but if a claim arises under the policy during the grace period, any premium due will be deducted from the policy proceeds.
Mary inherited $10 million several years ago. She has just bought a life insurance policy to help preserve her estate. All of the following statements regarding this are correct EXCEPT:
The policy's death benefit cannot be used to pay Mary's estate taxes or settlement fees. For people with substantial assets, life insurance offers a way to protect their estates. The death benefit can be used to pay estate taxes, settlement costs, and other debts that the estate may face upon a person's death.
When do funds in a deferred annuity become the owner's?
They always belong to the contract owner. Funds in a deferred annuity always belong to the contract owner.
What is the purpose of the prohibited policy provisions imposed on insurers by most states?
They protect policyowners from unfair manipulation and detrimental behavior by insurance companies and their representatives.
a lapsed policy must be reinstated within how many years?
Three years
Which of the following best illustrates the difference between a life settlement and a viatical settlement?
To effect a viatical settlement, the policyowner must be diagnosed with a terminal illness; a life settlement does not require the diagnosis of a terminal illness for transfer to occur
XYZ Co. is a close corporation with several shareholders. Under which of the following types of buy-sell sell arrangement would XYZ Co. use life insurance proceeds to buy a deceased owner's shares in the business?
a stock redemption agreement If the business that owns the entity-purchase plan is a close corporation, the buy-out agreement is also called a stock redemption agreement.
When an annuity owner makes premium deposits and allocates them among the contract's subaccounts, what are these funds used to buy?
accumulation units When the annuity owner makes premium deposits and allocates them among the contract's subaccounts, they are used to buy accumulation units, which are then credited to the owner's contract.
If an insured accidentally misstated her age on her life insurance application, what will the insurer do if this is discovered after the end of the contestability period?
The insurer will re-calculate the death benefit.
In helping a prospective customer determine the lump sum of money his survivors would need at his death, it's necessary for the agent to consider all the following EXCEPT:
ongoing monthly expenses Although it is important to consider how monthly expenses will be managed, this is not considered an immediate cash need upon the insured's death.
Which of the following parties to a deferred annuity contract is the person upon whose life the annuity payment amount and duration are based when the contract is annuitized?
the annuitant The annuitant is the person upon whose life the annuity payment amount and duration are based when the contract is annuitized. The annuitant and the owner are usually the same person. However, an owner can choose anyone as the annuitant. The only restriction is that the annuitant must be a natural person.
Which of the following parties to a deferred annuity contract has the right to decide on the contract's annuitization date?
the annuity owner Annuity owners have all the rights and responsibilities of contract ownership, including the right to decide if and when the contract will be converted to an immediate annuity (i.e., annuitized).
The human life value approach to determining life insurance needs is essentially based on which of the following factors?
the applicant's estimated net future earnings The human life value approach starts by estimating a person's net future earnings, which it then discounts to a lump-sum amount that represents the person's economic value. The biggest disadvantage of the human life value approach is that it does not take into account a family's actual economic needs. It does not calculate the actual cost to ensure a family's future.
Which of the following is the primary advantage of the level premium concept of permanent life insurance?
avoiding high premiums in older age If an insured were to pay a premium that factored in only the chance of death, premiums would be considerably expensive in older age, and the insured may not be able to afford them. Leveling the premium avoids such extremes in cost, even though it means premiums are a little higher than required in the policy's early years.
Susie was the intended recipient of death benefit proceeds from a life insurance policy insuring her husband, but she died a few months before him. Per the policy's beneficiary designation, the proceeds were paid to their son, Abe, who is considered the:
contingent beneficiary Abe is considered the contingent or secondary beneficiary. The contingent beneficiary is the next person (or class of persons) in line to receive the policy proceeds if the primary beneficiary predeceases the insured.
Which of the following life insurance products is best suited for insuring a mortgage or other long-term loan with the least premium possible?
decreasing term life insurance Because it has a decreasing face amount, decreasing term life insurance is ideally suited for mortgage protection programs in which the face amount matched the decreasing loan balance.
Besides giving the producer the opportunity to explain policy benefits, terms, and riders, policy delivery begins which of the following periods?
free-look period The policy's free-look period (during which the policyowner may return the policy for a full refund of money paid) begins upon policy delivery.
In a back-end loaded universal life contract, when and from where does an insurer deduct administration fees?
from full or partial surrenders during the first 10 or so policy years. To cover the costs of administering a product as complex as universal life insurance, insurers charge fees that may be assessed either as a front-end load directly from every premium payment or as a back-end surrender charge on partial or full surrenders. Policy surrender charges decline over time. While 10 years is common, surrender charges may extend for the first 15 policy years or longer.
Eric is a single, self-employed young man of modest means who needs a small amount of life insurance, primarily as a burial fund. Which one of the following types of insurance is most designed for this need?
industrial insurance Industrial insurance offers individual coverage in small amounts, usually around $1,000 to $2,000. This class of insurance was originally designed for workers with limited incomes who wanted to cover last illness and burial expenses for all family members. This type of policy would be a good fit for Eric.
In applying for a whole life insurance policy, Andrea disclosed that she is an avid rock climber. To account for this high-risk hobby, the insurer may do any of the following EXCEPT:
issue a term life rather than a whole life insurance policy In dealing with an elevated risk posed by an applicant, life insurers may counteroffer with a rated policy, but they do not counteroffer with a different type of insurance.
A life insurance policyowner who has named a beneficiary irrevocably must observe all the following restrictions, EXCEPT:
not designating a new beneficiary if the irrevocable beneficiary dies before the insured If the irrevocable beneficiary dies before the insured, then the policyowner may designate a new beneficiary.
If the insured dies during a life insurance policy's grace period without having paid the premium, what will be the insurance company's response?
pay the death benefit after deducting the unpaid premium
Under the re-entry renewal method, an insured can renew a level term insurance policy at the end of the specified term at a lower rate than the guaranteed rate by doing what?
proving insurability
James bought a life insurance policy 18 months ago. If he were to commit suicide today, what, if anything, would the insurer be obligated to pay to the beneficiary?
refund of the premiums paid The suicide provision denies the payment of a policy's death benefit if, during the first two years following policy issue, the insured commits suicide. After the two-year period passes, death by suicide is covered
Which of the following is the primary regulator of those who sell variable life insurance?
state insurance departments and Financial Industry Regulatory Authority (FINRA) To be properly registered to sell variable insurance contracts, producers must hold either a FINRA Series 6 or Series 7 registration, obtained by passing a FINRA exam. They must also hold a valid life insurance license in the state(s) where they do business.
Which of the following entities regulates variable insurance products?
state insurance departments and Securities and Exchange Commission
As part of the underwriting process, a life insurance company may require an applicant to undergo a medical exam for all the following reasons EXCEPT:
the applicant's sexual orientation
Charlene owns a "home service" life insurance policy, which means she most likely pays her premiums in which of the following ways?
weekly to her agent who comes to her home
Which of the following statements regarding third-party ownership of a life insurance policy is correct?
The insured has no rights in the policy.
Which statement about survivorship life insurance policies is NOT correct?
The premiums are about the same as for two comparable single-life policies. Survivorship life insurance policies are commonly known as second-to-die policies. They insure more than one person but pay the death benefit only when the second insured (the survivor) dies.
All of the following are eligible to purchase a group life insurance policy EXCEPT:
Stan and his neighbors, who form their own group to buy group coverage at a lower cost than their individual coverages A group cannot be formed solely for the purpose of obtaining insurance.
If a universal life insurance policyowner chooses death benefit option 1, which of the following correctly describes the death benefit?
The death benefit will generally remain level but may vary based on the amount of premiums actually paid. Under death benefit option 2, the death benefit equals the policy's specified amount plus its cash value.
For universal life insurance, an insurer credits interest to a policy's cash value based on which of the following?
current interest rates The insurer credits to the policy a guaranteed minimum amount of interest each month. However, this amount is not based on the performance of any underlying subaccounts.
Under a policy's facility of payment provision, what does an insurer do with the death benefit if a valid beneficiary is not identifiable?
The insurer names a blood relative or someone with a valid claim as the new beneficiary. In these cases, the insurer names a blood relative or someone with a valid claim as the new beneficiary.
In setting up a viatical settlement, the provider pays the policyowner a lump-sum payment that is typically in the range of:
50 to 80 percent of the policy's face amount
With respect to a deferred annuity's declared interest rate, which of the following statements is NOT correct?
Declared interest rates are credited to the annuity whether they are higher or lower than the annuity contract's guaranteed rate. Fixed annuities today credit deferred annuities with the higher of the guaranteed minimum rate or a declared rate that reflects current market rates.
Which of the following statements about the net premium for a life insurance policy is NOT correct?
It is the amount charged to the policyowner. The net premium, which is the insurer's estimated cost to provide the policy's benefits without accounting for its expenses, uses the factors of mortality and interest but excludes the expense load factor.
Leslie, Leah, and Lori, each of whom have children, are the daughters of Bill and have been named primary per stirpes beneficiaries under his life insurance policy. If Leslie dies before Bill, which of the following will apply when he dies?
Leah and Lori will each receive one-third of the death benefit, and the remaining third will be paid to Leslie's children. Per stirpes means that the proceeds of a life insurance policy pass down to the beneficiary's children if the named beneficiary dies before the insured.
Certain safeguards keep the policyowner from losing benefits because of nonpayment or late payment. One of these safeguards, available with every life insurance policy, is which of the following?
grace period The grace period is one of the safeguards that keeps the policyowner from losing benefits in case of nonpayment or late payment.
Stranger-originated life insurance (STOLI) involves a third-party policy ownership arrangement between which of the following parties?
investor group and a consumer
When determining a life insurance applicant's eligibility for coverage, an underwriter may discriminate between individuals based on their:
personal hobbies While state laws generally prohibit discrimination against an applicant based on race, creed, religion, gender, sexual orientation, or physical defects when determining eligibility for life insurance coverage, underwriters may discriminate based on directly relevant risk factors such as their health, hobbies, and job responsibilities.
