ExamFx Chapter 1: Life Insurance Basics
An insurer's liability shall be limited to AThe face amount of an individual insurance policy as written. BThe amount of annual renewable term insurance that could have been purchased by the insured through the insurer with the available premium dollars. CThe total amount of insurance coverage for which the licensed agent represented to the client on a policy illustration during the sales process. DThe face amount of an individual insurance policy, subject to any exclusions and riders as applicable, minus any outstanding policy loans and interest payments due the insurer.
The face amount of an individual insurance policy, subject to any exclusions and riders as applicable, minus any outstanding policy loans and interest payments due the insurer.
A corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then AThe benefit is received tax free. BThe benefit is subject to the exclusionary rule. CIRS has no jurisdiction. DThe benefit is received as taxable income.
The benefit is received tax free.
Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy? APremiums are not tax deductible as a business expense. BPremiums are tax deductible by the key employee. CPremiums are tax deductible as a business expense. DPremiums are taxable to the employee.
Premiums are not tax deductible as a business expense.
Written binders provide insurance before the policy is actually issued. The time period between the issuance of the binder and the policy's effective date is called ATemporary term. BGrace period. CBinding period. DInterim term.
Temporary term.
Who is protected by a Temporary Insuring Agreement? AThe applicant and the insurer BThe applicant CThe beneficiaries of the policy DThe insurer
The applicant and the insurer
Which of the following is an example of liquidity in a life insurance contract? AThe death benefit paid to the beneficiary BThe flexible premium CThe money in a savings account DThe cash value available to the policyowner
The cash value available to the policyowner
Who is the owner and who is the beneficiary on a Key Person Life Insurance Policy?
The employer is the owner and beneficiary.
Why should the producer personally deliver the policy when the first premium has already been paid? ATo find out how the family has been doing since the initial presentation BTo make sure the policy is not stolen or lost CTo help the insured understand all aspects of the contract DTo ensure the producer gets paid commission
To help the insured understand all aspects of the contract
In underwriting health and disability insurance, two major considerations that have the potential to affect the proposed insured's' probability of experiencing a loss are A"Probability of illness" and the "probability of death." B"Probability of disability" and the "average severity of the disability." C"Probability of a death" and the "average severity of the accident." D"Probability of sickness" and the "average severity of the illness."
"Probability of disability" and the "average severity of the disability."
The full premium was submitted with the application for life insurance, and the policy was issued two weeks later as requested. When does the policy coverage become effective? AAs of the application date BAs of the policy delivery date CAs of the first of the month after the policy issue DAs of the policy issue date
As of the application date
Which of the following statements regarding Business Overhead Expense policies is NOT true? AAny benefits received are taxable to the business. BLeased equipment expenses are covered by the plan. CBenefits are usually limited to six months. DPremiums paid for BOE are tax-deductible.
Benefits are usually limited to six months.
Which of the following is NOT a type of Temporary Insuring Agreement? ABridge Coverage Receipt BConditional Receipt CAcceptance Form of Receipt D30-day Interim Term Receipt
Bridge Coverage Receipt
Joe, Larry, and Curly own a small business. They have made a legal arrangement which states that if one of them dies or becomes disabled, the other two will be able to buy the partner's shares. Which term best describes this arrangement? ABuy-up Distribution BBusiness Continuation CShares Distribution DBusiness Partner Disability Provision
Business Continuation
When the partners of a business develop an arrangement whereby should one of them die or become permanently disabled, the other partners would purchase the interest of the deceased or disabled partner at a predetermined price, this is called a/an ABusiness continuation plan. BKey person plan. CBusiness overhead expense plan. DExecutive bonus plan.
Business continuation plan.
Which of the following statements concerning buy-sell agreements is true? ABuy-sell agreements pay in the event of a medical emergency. BBuy-sell agreements are normally funded with a life insurance policy. CPremiums paid are deductible as a business expense. DBenefits received are considered income taxable.
Buy-sell agreements are normally funded with a life insurance policy.
If an insured changes his payment plan from monthly to annually, what happens to the total premium? AStays the same BDoubles CIncreases DDecreases
Decreases
All of the following are personal uses of life insurance EXCEPT
Estate liquidation.
Which of the following is NOT a type of information that needs to be gathered in order to determine the value of someone's life when using the needs approach? AMortgages BExpenses CEstimated longevity DOutstanding debt
Estimated longevity
When an employer offers to give an employee a wage increase in the amount of the premium on a new life insurance policy, this is called a(n) AExecutive bonus. BKey person policy. CFraternal association. DAleatory contract.
Executive bonus.
In the Executive Bonus plan, who is the owner of the policy, and who pays the premium? ACompany is the owner, but the executive pays the premium. BBoard of directors is the owner, and the board of directors pays the premium. CCompany is the owner, and the company pays the premium. DExecutive is the owner, and the executive pays the premium.
Executive is the owner, and the executive pays the premium.
Which of the following methods of calculating the amount of life insurance needed takes into account the insured's wages, years until retirement, and inflation? ABlackout approach BLump-sum approach CHuman life value approach DNeeds approach
Human life value approach
Stranger-originated life insurance policies are in direct opposition to the principle of AIndemnity. BInsurable interest. CLaw of large numbers. DGood faith.
Insurable interest.
Which of the following must be disclosed in all advertisements and policies of term life insurance for individuals 55 years of age or older? AMIB report BLife insurance policy illustrations CInsurance monetary value index DLife insurance surrender cost index
Insurance monetary value index
Attempting to determine how much insurance an individual would require based upon their financial objectives is known as AHuman Life Value Approach. BEstate Planning. CViatical Approach. DNeeds Approach.
Needs Approach.
All of the following are requirements for life insurance illustrations EXCEPT AThey may only be used as approved. BThey must identify nonguaranteed values. CThey must differentiate between guaranteed and projected amounts. DThey must be part of the contract.
They must be part of the contract.
Which of the following is the best reason to purchase life insurance rather than annuities? ATo liquidate a sum of money over a period of years BTo create regular income payments CTo liquidate a sum of money over a lifetime DTo create an estate
To create an estate
What is the purpose of a disclosure statement in life insurance policies?
To explain features and benefits of a proposed policy to the consumer
An insurer invests the money it receives from premiums paid by its insureds. Which of the following is TRUE regarding the interest earned on these investments? AIt is used to fund executive bonuses BIt is used to increase the death benefit. CIt is used to lower premiums. DIt is paid out as dividends. Correct! Because insurers receive premiums
It is used to lower premiums.
An investor buys a life policy on an elderly person in order to sell it for a life settlement. This is an example of AA prearranged funeral plan. BA viatical settlement. CThird-party ownership. DA STOLI policy.
A STOLI policy.
Which of the following documents delivered to the policyowner includes information about premium amounts, cash values, surrender values and death benefits for specific policy years? AA policy summary BA notice regarding replacement CA privacy notice DA buyer's guide
A policy summary
The term "illustration" in a life insurance policy refers to AA depiction of policy benefits and guarantees. BPictures accompanying a policy. CCharts and graphs. DA presentation of nonguaranteed elements of a policy.
A presentation of nonguaranteed elements of a policy.
All of the following are true of key person insurance EXCEPT AThere is no limitation on the number of key employee plans in force at any one time. BThe employer is the owner, payor and beneficiary of the policy. CThe key employee is the insured. DThe plan is funded by permanent insurance only.
The plan is funded by permanent insurance only.
Which of the following is true regarding an application for a large amount of insurance? AThe applicant must submit a statement of good health. BThe agent, and not the applicant, will complete all of the medical information. CThe insurer might require a medical examination by a professional. DThe insurer will accept a non-medical application.
The insurer might require a medical examination by a professional.
Which of the following is NOT required on an illustration used in the sale of a life insurance policy? AGeneric name of policy BName of insurer CUnderwriting or rating classification upon which the illustration is based DThe name of the primary and secondary beneficiaries
The name of the primary and secondary beneficiaries
The title page of the policy provides a summary of the benefits and coverages provided by the policy. All of the following information is included in the title page EXCEPT AThe premium amount and modal. BThe effective date and the termination date of the policy. CThe insured's beneficiaries. DType of policy, amount of coverage provided.
The insured's beneficiaries.
Which of the following is a risk classification used by underwriters for life insurance? APoor BNormal CExcellent DStandard
Standard
All of the following statements concerning the use of life insurance as an Executive Bonus are correct EXCEPT AAny type of insurance policy may be used. BThe employer pays a bonus to a selected employee to fund the policy. CIt is considered a nonqualified employee benefit. DThe policy is owned by the company.
The policy is owned by the company.
If an insurer issued a policy based on the application that had unanswered questions, which of the following will be TRUE? AThe policy will be void. BThe insurer may deny coverage later, because of the information missing on the application. CThe policy will be interpreted as if the insurer waived its right to have an answer on the application. DThe policy will be interpreted as if the insured did not have an answer to the question.
The policy will be interpreted as if the insurer waived its right to have an answer on the application.
The responsibility of making certain that an application for insurance is filled out completely, correctly, and to the best of his or her knowledge is the responsibility of whom? AThe beneficiary of the applicant BThe insurance company CThe applicant DThe producer
The producer
Which is generally true regarding insureds who have been classified as preferred risks? AThey can borrow higher amounts off of their policies. BThey can decide when to pay their monthly premiums. CThey keep a higher percentage of any interest earned on their policies. DTheir premiums are lower.
Their premiums are lower.
Which of the following would be considered a nonmedical insurance application? AAn application that does not ask any questions about the applicant's medical history BAn application submitted with the Agent's Report CAny application for life insurance DAn application on which the medical information is completed by the applicant and the agent only
An application on which the medical information is completed by the applicant and the agent only
Which is the primary source of information used for insurance underwriting? AApplication BApplicant interviews CMedical records DPrivate investigations
Application
Which of the following would be the basic source of information used by the company in the risk selection process? AReceipt BWarranty CRepresentation DApplication
Application
Which of the following is a generic consumer publication that explains life insurance in general terms in order to assist the applicant in the decision-making process? AIllustrations BBuyer's Guide CInsurance Index DPolicy Summary
Buyer's Guide
When Y applied for insurance and paid the initial premium on August 14, he was issued a conditional receipt. During the underwriting process, the insurance company found no reason to reject the risk or classify it other than as standard. Y was killed in an automobile accident on August 22, before the policy was issued. In this case, the insurance company will AIssue the policy anyway and pay the face value to the beneficiary. BNegotiate a reduced settlement with the beneficiary due to the unusual circumstances involved. CReturn the premium to Y's estate, since it has no obligation to pay the death claim. DKeep the premium and reject the risk on the basis that the applicant died before the policy could be issued.
Issue the policy anyway and pay the face value to the beneficiary.
Based on Human Life Value Approach, which of the following is NOT used to calculate an individual's life value? AEffect of inflation on income over time. BPredicted needs of the family after the insured's death. CInsured's current and future income. DInsured's annual expenses.
Predicted needs of the family after the insured's death.
Upon policy delivery, the producer may be required to obtain any of the following EXCEPT ADelivery receipt. BSigned waiver of premium. CStatement of good health. DPayment of premium.
Signed waiver of premium.
Which of the following would be least likely to be considered a legitimate need that would be paid by insurance proceeds? AVacation travel expenses BTravel expenses for family to come to the funeral CDebt cancellation DDay care
Vacation travel expenses
Which of the following CANNOT be included along with illustrations used to sell life insurance? ARating information BOriginal death benefit CVanishing premium information DName of the insurer
Vanishing premium information