Insurance Chapter 3

Betty and Jack have a partnership. If their partnership is worth $800,000 how much life insurance is issued on each partner if a cross-purchase plan is used?

$400,000

ABC insurer is incorporated in Texas. Which of the following is true?

ABC insurer is incorporated in Texas, so it is a domestic in Texas, foreign in Louisiana and alien in Great Britain.

Life insurance policy illustrations must contain all of the following, EXCEPT:

Agent's name Generic name of policy Insured's age and sex * Only the guaranteed policy elements

LMO Insurer is incorporated in New Hampshire, conducts business in all of the eastern seaboard states and in Germany. How is LMO Insurer classified in Germany?

Alien

What is business life insurance used for?

An employee benefit A funding tool Business interruption insurance

Which of the following are the actuarial tables used by insurers for underwriting?

C.S.O. tables

Each member insured under a group life insurance policy receives a(n):

Certificate of insurance

Level premium life insurance policies usually have ______ premiums in order to account for the greater risk of death with advancing age.

Higher

Agents are appointed to work on behalf of:

Insurance companies

Insurance companies need to set aside a certain amount of funds called reserves. Reserves are treated as a(n):

Liability

Which factor is the most crucial for underwriting life insurance?

Proposed insured's age

Who is responsible for the dissemination and content of insurance advertisements?

The insurer

Premiums are invested to earn interest. __________ interest rates allow insurers to charge ________ premiums.

higher; lower

Generally, premiums paid on business life insurance policies are:

not tax-deductible

Which of the following plans allows a corporation to redeem a portion of the deceased shareholder's shares without handing over control of the corporation's ownership?

stock- redemption plan

Net single premium is

the amount an applicant would pay if he were to only pay one premium on the policy. *Net single premium = mortality - interest

Three partners use a buy-sell agreement to assure the business ownership will be properly transferred upon the death of one or more partners. If a cross-purchase plan is used as the business continuation agreement, how many policies will be issued?

6

A furniture company is owned by five partners. What business continuation plan would you suggest to the company?

Entity plan

Mary's Cosmetics purchases a life insurance policy on Samantha, the leading makeup salesperson in the nation. Which business continuation plan did Mary's Cosmetics buy?

Key persons insurance

Insurers' expenses include all of the following costs, EXCEPT:

Overhead Acquisition costs Immediate claims payments * Premiums

Of the following statements, which correctly represents a split-dollar plan?

The employer and employee split premiums and benefits.

Which of the following is a reason a business would buy life insurance?

To provide employee benefits To insure the lives of key employees To assure the outlook of the business

All of the following statements regarding unauthorized insurers are true, EXCEPT:

Unauthorized insurers are insurers that are unlicensed because they have not yet applied for a certificate of authority, have applied and been denied licensure, or are excess and surplus lines insurers. All excess and surplus lines insurers are unauthorized. Unauthorized insurers are also referred to as nonadmitted insurers, and do not hold a certificate of authority. * Excess and surplus lines insurers must apply for a certificate of authority to become admitted.

Ben applies for a life insurance policy on himself. How much insurable interest does Ben have in his own life?

Unlimited

Employer-paid premiums used to fund group life insurance for the benefit of employees are:

tax deductible as a business expense

Which of the following is a nonqualified employee benefit plan that permits employees to postpone some of their earnings on an after-tax basis?

Deferred compensation

All of the following are true regarding deferred compensation plans, EXCEPT:

Life insurance-funded deferred compensation is an executive benefit that an employer can use to pay a highly paid employee at a later date, such as upon disability, retirement or death. When the employee retires, the employer surrenders the policy for its cash value and uses the funds to pay the retiree monthly retirement income. If the employee dies before retirement, the employee's spouse receives the policy proceeds income tax-free because the premiums paid by the employer were not tax-deductible. *Typically, the employee keeps his right to deferred compensation when he leaves the company to work for another company.

An excess and surplus lines insurer is categorized as a(n):

Unauthorized insurance company

All of the following are true regarding purchase of personal life insurance for charity, EXCEPT:

Coverage is taken out on the life of the person buying the policy. The charity is named as the beneficiary. The person buying the policy pays the premiums, which are usually tax-deductible. *The person purchasing life insurance for charity must have insurable interest in the lives of the charity's members.

To determine the premium rate for health insurance policies, all of the following are used, EXCEPT:

Interest earnings Loading Morbidity * Mortality

Interest-adjusted Net Cost Method:

uses the time value of money to compare policy costs. Interest is applied to policy premiums and dividends to account for the time value of money. There are two versions of this method: Surrender cost index and Net payment cost index.

For replacement transactions, an insurance producer's duties include all of the following, EXCEPT:

Provide the applicant with a policy cost comparison statement Make a list of all existing policies the applicant intends to replace Leave a notice regarding replacement with the applicant * Notify existing insurers of policies to be replaced

Which business continuation plan permits a deceased shareholder's heirs to maintain some ownership while the corporation redeems a portion of the deceased shareholder's shares?

Section 303 Plan

Which of the following best describes a business continuation plan intended for a corporation in which the corporation purchases a portion of the deceased stockholder's shares?

Section 303 plan

Personal life insurance is purchased for all of the following reasons, EXCEPT:

To fund a charitable organization To accumulate cash To preserve an estate *To fund a buy-sell agreement

Four partners share in the ownership of a bowling alley. Which of the following business continuation plans best fits their needs?

Entity plan

In life insurance the risk of death increases with age, so premiums must be ______ in ______ years to account for this risk.

Higher; later

The ____________ approach calculates the amount of money a family needs immediately upon the death of the insured to pay for their expenses and basic necessities.

Needs

A person with this risk classification will have a discounted premium from the rates provided in the C.S.O. tables.

Preferred

A domestic insurer is:

An insurance company conducting business in the state in which it is incorporated.

Which of the following best describes the tool underwriters use to determine the rate at which a group of people die?

Mortality table

Martin pays his policy premiums on a monthly basis. Which of the following terms best describes the frequency that Martin pays his premiums?

Premium payment mode

The nonguaranteed elements of an insurance policy are:

illistrations

Surrender Cost Index:

measures the cost of an insurance policy by projecting the total amount of cash value in a policy (sum of dividends and cash accrued) and deducting the total cost of premiums after a certain number of years. This method provides a net cost of the policy over a certain number of years by averaging the cost per $1,000 of coverage if a policy was surrendered at a specified time in the future.

All of the following are true regarding executive bonus plans, EXCEPT:

An employer gives an employee a bonus in the amount of the premium payments on a life insurance policy. The employer pays the premiums, but receives a tax deduction in the amount of the premium because it is treated as a pay raise. The employee pays income tax on the amount of the pay raise, however the company may _bonus_ the amount of the income taxes. *The employee is the insured and the company is the owner of the policy.

There are three types of private insurers. Which of the following is a true statement about the different insurers?

An insurer that conducts business in countries that it was not incorporated in is an alien insurer.

Julian Grocery stores has locations in all 50 states. It is a privately-held corporation. What business continuation agreement does Julian Grocery stores most likely have?

Close corporation stock redemption plan

The time period during which children are young and financially dependent upon their parents is termed the:

Family dependency period

Angela took out a $2,000 policy loan from her whole life insurance policy. The policy face amount is $200,000. If Angela does not repay the loan, how will the death benefit be affected?

The death benefit will be decreased by $2,000 plus interest.

All of the following are true regarding claims for life insurance policies, EXCEPT:

The only claim in a life insurance policy is the insured's death. Upon the insured's death, the policy proceeds are paid to the beneficiary. Life insurance claims are typically paid within a few days of the insured's death, but the insurer may have up to 60 days to pay claims. * In order for death benefits to be paid, the insurer must receive notice of the insured's death, but does not need the death certificate.

Gross annual premium

the actual amount of annual premium payments. The gross annual premium is the net annual level premium with expenses. *Gross single premium = net single premium + expenses

Acme Fireworks Company needs a business continuation policy to ensure the business ownership is properly transferred in the event a partner dies or becomes disabled. What policy would you recommend if there are 3 partners and the business is a partnership?

Cross- purchase plan

Which of the following business continuation agreements is most appropriate for Teri and Annette's business partnership?

Cross- purchase plan

What business continuation agreement would you recommend to a corporation with 3 shareholders so that when a shareholder dies, all other shareholders agree to purchase a portion of the deceased shareholder's stock at an agreed price?

Stock purchase plan

All of the following are buy-sell agreements, EXCEPT:

Stock redemption plan Cross-purchase plan Entity plan *Split-dollar plan

Comparative Interest Rate Method:

calculates an interest rate that must be earned in a side fund of a buy term and invest the difference, in order for the value of the side fund to be equivalent to the surrender value of the policy that has the higher premium at a specific time. As the CIR increases, the policy with the higher premium is actually lower in cost compared to the lower-premium policy.

Agents who own the policies they sell and can work for multiple insurers are known as:

independent agents

Another term for insurers' expense is:

loading

When must insurable interest be shown for a life insurance policy?

upon policy application

A foreign insurer is:

An insurance company conducting business in a state in which it wasn't incorporated

All of the following are true regarding viatical settlements, EXCEPT: Select one:

A terminally or chronically ill insured can sell their life insurance policy to a third party in exchange for payment of a large portion of the death benefit. In a viatical settlement, the third party that purchases the insured's life insurance policy is termed the viatical settlement provider, and the insured is termed the viator. The portion of the death benefit the viator receives in a viatical settlement ranges from 50 to 80 percent of the death benefit. *Viatical settlements are a type of life insurance contract.

Smith has a life insurance policy that allows his business partner to purchase his share of the lawn-cutting business upon his death. Smith has a:

Buy-sell agreement

The third party that purchases a life insurance policy death benefit from a terminally ill insured is termed:

Viatical settlement provider

Which of the following terms means the ways insurance products are marketed and sold to the public?

Distribution system

All of the following are considered minimum information that must be on a life insurance illustration, EXCEPT:

Form number Dividend options, if any Nonguaranteed elements, if any *Insured's marital status

The ___________ approach calculates the amount of money a person is expected to earn over their lifetime to determine the face amount of life insurance needed, thereby placing a dollar value on the life of an individual.

Human life value

All of the following statements are true regarding the premium payment mode, EXCEPT:

If premiums are paid more frequently, the insurer incurs an additional loading expense. Insurers accept premium payments annually, semi-annually, quarterly, monthly and weekly. Some insurers may accept a single lump-sum premium payment. This applies to life insurance. The premium payment mode is the frequency that premium payments are made. * More frequent premium payments means lower premiums.

Life insurance policies with cash value provide the insured with immediate availability of funds, referred to as:

Liquidity

Which of the following is not used to calculate the premium for life insurance contracts?

Morbidity is not used but loading, interest, and mortality are.

A life insurance policy summary includes all of the following, EXCEPT:

The insurance agent's name Policy premium amounts Policy loan interest rates * Policy illustrations

Net Payment Cost Index:

The primary difference between the surrender cost and net payment cost methods is the cash value component. The net payment cost index excludes the cash value and only predicts the average annual premium cost.