Life & Health Insurance

Brian's required minimum distribution from his traditional IRA was $6,000 this year. However, he only took a $2,000 distribution. What tax penalty will Brian have to pay?

$2,000: Failure to take the required minimum distribution results in a 50 percent penalty tax, which is applied to the difference between the amount taken and what should have been taken. As a result, Brian will have to pay a $2,000 penalty tax.

An equity-indexed annuity (EIA) is purchased at $10,000 and the S&P 500 increased 10 percent during the contract's term. The contract's participation rate is 75 percent. How much did the contract earn for that period?

$750: For that period the contract earned $750 ($10,000 X .075).

According to FCRA, an insurer who requests an MIB, inspection, or consumer report, is responsible for which of these follow-up actions with the applicant?

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What do covered employees receive to show they have coverage under a group life insurance policy?

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Under traditional whole life insurance plans, policy loans can be as high as what percent of the cash value?

100 percent: Policy loans under traditional whole life insurance plans can be as high as 100 percent of the cash value.

When a surviving spouse reaches age 65, how much of the deceased worker's PIA is he or she entitled to in benefits?

100%: When a surviving spouse reaches age 65, he or she is entitled to 100 percent of the deceased worker's PIA in benefits.

What is the minimum number of people that a group must cover to be eligible to provide group life insurance according to the NAIC?

10: A group must cover at least ten persons under one master policy.

George bought a 25-year family income policy that will provide $2,000 per month income for his survivors. If George died after ten years, how many years of income would they receive?

15: Under a family income policy if the insured dies within a specified period, the family will receive a stated amount of income from the date of death until the end of the period. Because George bought a 25-year family income policy that will provide $2,000 per month income for his survivors, and he died after 10 years, the surviving family would receive 15 years of income.

A child of a totally disabled worker is eligible to receive a monthly social security benefit until what age?

18: A child of a totally disabled worker is eligible to receive a monthly social security benefit until age 18.

What is a typical life insurance policy's grace period?

31 days: Although the premium is due on its due date, the policyowner has 31 days after this date to pay the premium before the policy lapses.

Based on the provisions reviewed, if a policyowner fails to pay a premium on its due date, generally how long does he or she have to pay the premium before the policy lapses?

31 days: The policyowner generally has 31 days to pay a premium after its due date before the policy lapses.

A policyowner can normally borrow against a policy's cash value after the policy has been in force for ___ years.

3: A policyowner can normally borrow against a policy's cash value after the policy has been in force for 3 years.

Gene wants to participate in a retirement plan that his employer, West Independent School District, has set up. The plan is reserved specifically for non-profit entities like schools. It calls for pre-tax contributions by both Gene and his employer to be made to an account in Gene's name. Based on the description, which plan is designed for Gene and his employer?

403(b) plan: The 403(b) plan is reserved for employees of non-profit organizations such as schools. Both the employee and employer make pre-tax contributions to an account set up in the employee's name.

Which qualified plan allows catch-up contributions yearly for participants 50 years or older?

457 plans: 457 plans allow catch-up contributions for those age 50 and older.

In general, what is the earliest age at which a person can take a distribution from a qualified plan without penalty?

59 ½: A 10 percent premature distribution penalty tax will generally be imposed on distributions taken from qualified plans before age 59 1/2 unless the withdrawal falls within certain exceptions.

What is the minimum age at which Gary can withdraw funds from his market value adjusted annuity (MVA) without incurring a tax penalty?

59 ½: Tax penalties apply if an MVA owner is younger than 59.

Under a disability waiver of premium rider, an insured most commonly must be totally disabled for how long before the waiver begins?

6 months: Most waiver of premium riders require that the insured be totally disabled for six months before the waiver begins.

How long does a participant have to complete a rollover transaction after receiving the funds for a rollover?

60 days: The participant has 60 days to open an IRA rollover account after receiving funds before tax and penalties apply.

The earliest age that a fully insured person can begin receiving retirement benefits is __________.

62: A fully insured worker can start to receive permanently reduced benefits as early as age 62. However to receive full benefits, the worker must wait until his or her full retirement age.

Under variable life insurance plans, policy loans can be as high as what percent of the cash value?

75 to 90 percent: Loans taken from variable life policies are typically limited to 75 to 90 percent of the cash value.

Which of the following statements is TRUE about a legal contract?

A contract is enforceable at law. A contract is enforceable by law. Once all of the elements of the contract have been met then the contract is binding on all parties.

Which of the following statements about cross-purchase buy-sell agreements is correct?

A cross-purchase buy-sell agreement is a contract between individual partners or shareholders. In this agreement, the partners or shareholders agree to buy the interest of the other(s) in the event that one of them dies or withdraws from the business.

Which of the following statements about the disability income benefit rider is correct?

A disability income benefit rider pays a certain sum of monthly income to the insured if he or she becomes disabled. A disability income benefit rider pays a certain sum of monthly income to the insured if he or she becomes disabled.

With regard to qualified plans, the term "vesting" refers to which of the following points?

A plan participant achieves a nonforfeitable right to employer contributions made on his or her behalf. Vesting refers to the point at which a plan participant achieves a nonforfeitable right to the contributions made by the employer on his or her behalf. At all times, however, an employee is fully vested in amounts he or she contributed or deferred into a plan.

Which of the following statements about structured annuity settlements is correct?

A structured settlement annuity pays out a stream of payments over the specified period. This type of annuity pays out a stream of payments over the specified period.

The terms of an insurance policy must be accepted or rejected as presented; they are not open to negotiation. Which term describes this characteristic of insurance policies?

Adhesion: An insurance contract is a contract of adhesion. This means it is drafted by the insurer and offered to the prospective policyowner on a take-it-or-leave-it basis.

An insurance company that has received a certificate of authority from the state to sell insurance in that state is known as a(an) ___________ insurer.

Admitted: An insurance company that has received a certificate of authority from the state to sell insurance in that state is known as a(an) admitted insurer. Agents who, within a given state, sell insurance for a non-admitted insurance company face severe penalties.

Which of the following statements about annuity units is correct?

After the first payment under a variable annuity is made, the payment is converted into annuity units by dividing the initial payment by the contract's current accumulation unit values.

In an insurance transaction, the insurance salesperson in the agency system who legally represents the insurer is known as the __________.

Agent: In an insurance transaction, the insurance salesperson in the agency system who legally represents the insurer is known as the agent. (A broker, on the other hand, has traditionally and legally been viewed as a representative of the applicant rather than of the insurer.)

Which of the following characteristics is TRUE for group life insurance?

All participants pay the same premium rate. All participants pay the same premium rate. (Premium rates are averaged for the entire group.)

Which of the following statements about equity-indexed annuities (EIAs) is correct?

An EIA participation rate is the percentage of the index increase that is actually credited to the annuity.

Which of the following best describes an agent's responsibilities?

An agent has to act in the best interests of insureds, applicants, and insurers. In addition to the duties an agent owes to the insurer, the agent also must act only in the best interests of the applicant or insured.

Which of the following statements is TRUE regarding insurable interest?

An applicant can take out a policy on a business partner in a small business. Business partners have a legitimate insurable interest in one another since the death of one would be very harmful to the business.

Which of the following statements about immediate annuities is correct?

An immediate annuity's monthly payments last for as long as the owner wants.

Which of the following statements about the conditions for LTC payments is correct?

An insured who bought an LTC rider becomes eligible for its benefit when he or she is diagnosed as chronically ill. An insured who bought an LTC rider becomes eligible for its benefit when he or she is diagnosed as chronically ill.

Ann is beneficiary of an annuity owned by Jim. If Jim annuitizes the contract at retirement and dies shortly afterward, what benefits will Ann receive from the annuity?

Ann's right to any funds will be based on the income payout option Jim selected. If the owner/annuitant dies after annuitization begins, then the beneficiary's right to any funds will be based on the income payout option the owner selected.

Which of the following statements about annuities is NOT true?

Annuitization is the beginning of the annuity's accumulation period. Annuitization is NOT the beginning of the annuity's accumulation period; it is the beginning of the annuity's payout period.

Modern accidental death benefit (ADB) riders provide an additional death benefit that is__________________.

Any multiple of the policy's face amount Although many ADB riders are for double or triple the policy's face amount, modern ADB riders are available for any mutiple of the policy's face amount that the policyowner chooses.

Who can make contributions to IRA qualified plans?

Anyone younger than 70½ with earned income can contribute to an IRA. Earned income can consist of wages, salary and tips, commission income, self-employment income, or taxable alimony and maintenance.

The agent holds three types of authorities. The authority that a customer believes that an agent holds based on the agent's statements and which may make the insurer liable for the agent's acts is called _________ authority.

Apparent: The authority that a customer believes that an agent holds based on the agent's statements and which may make the insurer liable for the agent's acts is called apparent authority.

Distributions from a qualified plan to a participant must begin no later than _________.

April 1st of the year following the calendar year that the participant turns 70½: Beginning no later than April 1st of the year following the calendar year that the participant turns 70½ or upon retirement, whichever comes later, distributions from a qualified employer plan must begin.

Which of the following statements describes the insurance aspects of annuity products?

As an insurance product, annuities provide protection in the form of guaranteed death benefits; and if the product is annuitized, it can provide a payout of lifelong income.

In a universal life insurance policy, why are the three factors central to the policy—mortality, interest, and expenses—considered to be "unbundled?"

As separate policy elements, they individually impact the universal life insurance policy and allow much of its flexibility. In a universal life insurance policy, the three factors central to the policy—mortality, interest, and expenses—are considered to be "unbundled" because as separate policy elements, they individually impact the universal life insurance policy and allow much of its flexibility.

If the applicant makes a mistake on an application, which of the following actions should the agent take?

Ask the applicant to cross out the mistake, make the correction and initial the change. If the applicant makes a mistake on an application, he or she should cross out the incorrect entry, add the correct entry and initial the change.

What must an annuity owner do to withdraw funds from his or her annuity contract?

Ask the insurer: An annuity owner who wants to withdraw any values from his or her contract must simply notify the insurer. The insurer cannot withhold these funds or refuse to honor the owner's request.

If Ken becomes eligible (by a medical reason) for payments under his life insurance long-term care rider, he must be certified as unable to perform which of the following?

At least two activities of daily living for at least 90 days: To become eligible for payments under a long-term care rider for a medical reason, the insured must be certified as unable to perform at least two activities of daily living for at least 90 days.

Mary refuses to fly on a commercial airplane for her business. This is an example of risk ________.

Avoidance: Mary refuses to fly on a commercial airplane for her business. This is an example of risk avoidance.

What will happen if a person starts receiving Social Security retirement benefits before reaching his or her full retirement age and continues to work and earn money that exceeds specified earnings limits?

Benefits will be reduced each year until the worker attains full retirement age. If a person retires early and continues to work, his or her Social Security benefits can be reduced if the amount earned exceeds the annual earnings limit. For every $2 earned over this limit, benefits are reduced by $1. This limit continues until the worker reaches full retirement age. At that point, no earnings limit is imposed, and the person may work and receive full benefits.

Which of the following employees of ABC Computers could NOT convert their group life coverage to an individual policy?

Bill, who switched to part-time status: Group term life insurance normally ends when a person leaves the group. With an employee group, insurance ends when a person retires or decides to work for another employer. Regardless of the reason for leaving the group, the employee can convert coverage to an individual policy. Bill could not convert his policy because he is still an employee.

Bob bought a $100,000 ten-year level term insurance policy on March 1, 2002. What will happen if he dies on March 10, 2012?

Bob's beneficiary will not get any benefits. Bob's $100,000 ten-year level term policy gives him a level $100,000 of coverage during the ten-year period. If Bob dies after the ten-year period, the policy will have expired and no benefits will be payable.

In what way are variable annuities and fixed annuities alike?

Both can be bought as either immediate or deferred annuities: Both the fixed annuity and variable annuity can be bought as either immediate or deferred annuities.

Both mutual insurance companies and stock insurance companies have which of the following features in common?

Both can issue dividends:The stock company can issue dividends to its stockholders; the mutual company can issue dividends to its policyowners.

Brackman Brothers Candy company has bought key person life insurance on both brothers, Harry and Jerry, under a third-party ownership arrangement. Both men have made wills leaving their estates to their spouses and surviving children. When Jerry dies suddenly, who is paid the life insurance policy's death benefit?

Brackman Brothers Candy company: Brackman Brothers Candy company bought the key person insurance on Jerry's life and is the beneficiary of the policy. No other party has any rights to the life insurance proceeds.

On the specified option date, what does the guaranteed insurability rider allow the policyowner to do?

Buy additional permanent insurance of a specified amount without providing evidence of insurability. On the pre-identified option date, the guaranteed insurability rider guarantees that the policyowner can buy additional permanent life insurance of a specified amount without being required to provide evidence of insurability. (Term insurance, however, is not normally available under this type of rider.)

What is the actuary's first step in determining the premium to charge for a policy?

Calculate the net single premium: The actuary will first calculate the net single premium.

Jack sets up an insurance policy with two types of beneficiaries. He names his wife Judy as the first in line to receive the policy's death benefit. He names his brother Jason as the next in line to receive the death benefit, in the event Judy dies before Jack. In this scenario, Jason is considered the _________ beneficiary.

Contingent: The contingent or secondary beneficiary is the person or class of persons in line to receive the policy proceeds if the primary beneficiary or beneficiaries are removed or predecease the insured.

ABC Insurance reviews Henry Garrett's application for insurance and decides to insure Henry for an amount that is less than what Henry applied for. It presents Henry with a policy for $100,000 instead of the $200,000 he requested. The legal term that refers to the action taken by ABC Insurance is __________.

Counteroffer: ABC Insurance has rejected Henry's offer and made a counteroffer.

Robert has two children insured under a children's term rider attached to his whole life insurance policy. His older daughter has just turned 21, which is the limiting age on the rider. What happens to coverage under this rider now?

Coverage terminates for the older child but continues in force for his younger child. The coverage for any covered child normally terminates when the child reaches the limiting age. Depending on the insurer, that limiting age may be 18, 21 or 25. Coverage under the rider for other covered children continues in force.

Which of the following statements about defined benefit plans is correct?

Defined benefit plans define the future benefit the employee is to receive. The benefit is typically paid monthly and usually for life. Accordingly, employer contributions are made in such a way and in such amounts so as to fund the future benefit.

Generally speaking, which one of the following most correctly describes the taxation of a Roth IRA distribution to a person who is age 59 1/2 or older?

Distributions are generally tax free. Once a Roth IRA owner reaches age 59 1/2, he or she can take distributions income tax free, as long as he or she has held the account for at least five years.

Which of the following statements about dividend options is TRUE?

Dividends are not guaranteed: Dividends are not guaranteed. When a life insurance policy participates, it is eligible to receive dividends from the insurer if and when declared. Dividends are generally received income-tax free. There are four basic dividend options. Various combination dividend options are also available.

Premiums paid on a group life insurance plan are fully tax-deductible to the ______________.

Employer: Premiums paid on a group life insurance plan are fully tax-deductible to the employer.

A buy-sell agreement in which the business buys the deceased owner's interest in the business is known as a(an) _______________plan.

Entity: Under an entity plan, the business buys the interest or shares of a deceased partner or shareholder using insurance to fund the buy-sell agreement.

Fred's policy clearly states that he must send his premiums directly to the insurer's home office in Columbus, Ohio. For five years, however, Fred always paid his life insurance premiums to his agent instead. The agent then passed them on to the home office. Last month, on the 20th, Fred was hit by a truck and killed two days after receipt by the agent of Fred's latest annual premium. The insurer denied the death claim by stating the contract premium was not paid. However, the beneficiary is able to collect the death benefit based on application of which of the following legal principles?

Estoppel: Estoppel involves one party's giving up of a right, involuntarily. In this case, the insurer gives up the right to deny a claim based on the issue of where premiums are paid because he has accepted the arrangement for the prior five years.

At annuitization, the portion of each annuitized income payment that is not taxed is determined by the _____________________ ratio.

Exclusion: At annuitization, the portion of each annuitized income payment that is not taxed is determined by the exclusion ratio.

All the following are federal laws or related rulings that have a direct impact on anti-money laundering requirements EXCEPT the:

Fair Credit Reporting Act: The USA PATRIOT Act expands the AML directives of the Bank Secrecy Act, and FinCEN's final rules amended the USA PATRIOT Act to address the insurance company needs. The FCRA does not directly relate to money laundering.

With regard to an insurance contract, which of the following would constitute grounds to void the contract?

Fraud: Fraud is the act of deceiving with the intent to gain something of value. It is grounds to void a contract.

Which of the following is defined as increasing the severity or frequency of loss?

Hazard: A hazard does indeed increase the number of, or the severity of, losses.

What is a person's alcoholism?

Hazard: A hazard is a condition that increases the frequency or severity of the loss. Therefore, a person's alcoholism is a health hazard that may cause illness or early death.

Jason, age 27, is single, works for a small computer company, and earns $175,000 a year. Because the company does not have any retirement plan for its employees, Jason set up and contributed the maximum amount to a traditional IRA this year. What is he allowed to deduct from his taxes in the current year?

He can deduct the full amount of his contribution. Because Jason is not covered by a qualified employer plan, he can deduct the full amount that he contributes to a traditional IRA, up to the maximum allowed.

Carl decides to surrender his life insurance policy. Which of the following most correctly describes the option(s) available to him?

He may choose from all settlement options that are available with the policy's death benefit.

Instead of a lump-sum payout, Jack chose to receive a $250,000 death benefit from his mother's life insurance policy in monthly payments over the next 10 years. How will income tax be applied?

He pays taxes on the interest only: When death benefits are paid in a form other than a lump sum, the beneficiary receiving the funds • owes taxes on any interest earned. • does not owe taxes on the principal amount of the death benefit.

Steve decides to retire this year at age 69. What will happen when he applies for Social Security retirement benefits?

His benefits will be slightly higher than if he had retired at normal retirement age. If Steve delays retirement until sometime after reaching his full retirement age, he will receive slightly greater benefits. If he instead chooses to retire as early as age 62, his benefits would be permanently reduced.

Fred, age 65, never married and has been working for more than 40 years. He provided more than 80 percent of his elderly mother's financial support. He died a year after he began caring for her. Which of the following statements is correct?

His mother is eligible to receive monthly benefits equal to 82.5 percent of Fred's primary insurance amount (PIA). Beginning at age 62, each parent of a deceased worker is eligible to receive monthly survivor benefits if the parent was at least one-half supported by the worker when the worker died. If only one parent is eligible, he or she receives 82.5 percent of the worker's PIA.

Which of the following features is TRUE about the automatic premium loan (APL) provision?

If a premium is not paid, the APL is applied on the last day of the premium payment's grace period. The APL directs the insurer to deduct an unpaid premium from the policy's cash value on the last day of the premium payment's grace period.

Which of the following best describes the bring back rule?

If an insured dies within three years after transferring life insurance to a third party, the policy death benefits become part of the insured's estate for tax purposes. If the insured dies within three years after transferring the policy to a third-party owner, the policy death benefits become part of the insured's estate for tax purposes.

An annuity contract under which the premium is converted to a series of income payments that must begin one payment interval after the premium is paid is known as a/an __________ annuity.

Immediate: An immediate annuity is an annuity contract under which the premium is immediately converted to a series of income payments. The income payments in an immediate annuity must begin one payment interval after the premium is paid.

Julie accepts Tom's application for a life insurance policy. She also takes his premium and sends it directly to the insurance company's home office. Her agency contract does not mention the handling of premiums. Which type of authority allows Julie's actions?

Implied Authority: Julie's handling of the premium is an example of implied authority. While not specifically mentioned in her agent's contract, the contract implies Julie's authority to collect and remit premiums because it is required to carry out her duties as an agent.

What is the primary reason for the decline in popularity of endowments?

In 1984, federal legislation passed requiring that no life insurance policy can endow before age 95. In addition to inflation, the popularity of endowments among consumer was passage of federal legislation in 1984 setting a new statutory definition of life insurance on flexible premium contracts. Under tax code Section 7702, no life insurance policy can endow before age 95.

Which statement is NOT true about riders covering additional insureds?

In a family with several children, a separate rider must be bought for each child. In a family with several children, it is not necessary to buy a separate rider for each child; many children can be covered under one rider.

Defined benefit and defined contribution plans each have certain advantages and disadvantages. Which one of the following comparisons is most correct?

Individual accounts are typically created for each employee participating in a defined contribution plan but not for defined benefit plans. Under a defined contribution plan, individual accounts are typically set up for each participating employee. In contrast, no individual accounts are set up for individual employees under a defined benefit plan.

Funds collect within an annuity on a tax-deferred basis. What does this mean?

Interest earnings and growth are not taxable to the owner while they accumulate in the contract.

Which of the following factors used in calculating life insurance premiums identifies what the insurer expects to earn on the premiums it receives?

Interest: Interest is the income that the insurance company can expect to earn on the premiums it receives.

The three factors that are unbundled in a universal life insurance policy, permitting flexibility are: mortality, expenses, and _________.

Interest: The three factors that are unbundled in a universal life insurance policy, permitting flexibility are: mortality, expenses, and interest.

XYZ Corporation wants to set up a qualified employer plan for its employees who wish to participate. What benefit can it expect to receive?

It can deduct all contributions it makes which lowers its income tax. A business can deduct all contributions it makes to a qualified plan as a business expense. This lowers the employer's income tax.

Which statement regarding the practice of backdating a life insurance application is NOT correct?

It effectively extends the incontestability period by adding the backdated period to the two-year incontestability period provided in the contract. The policyowner must agree to pay all premiums owed to the backdated date of issue. He or she also agrees to make this date the contract's official anniversary date, meaning the incontestability period ends two years from the backdated policy effective date.

Howard, 33, and Mary, 32, want to fund their 13-year-old daughter's college education. Which one of the following would be the most appropriate advice about using a deferred annuity?

It is not recommended. Deferred annuities typically impose surrender charges on funds withdrawn during a contract's early years, and withdrawals from annuities before the owners reach age 59 may be subject to a tax penalty. Howard and Mary are too young to escape a tax penalty for withdrawing funds from their annuity before 59 1/2, considering that their daughter will be starting college in less than seven years.

Marcia had a mental breakdown six months ago. Under the terms of a typical long-term care rider, what would need to be done to prove Marcia is eligible for long-term care?

It must be proven that Marcia's health or safety would be at risk without supervision. Marcia must prove that her health or safety would be at risk without supervision due to her mental health condition. The insured must be certified within the last 12 months.

What two features of whole life insurance distinguish it from term insurance?

It provides permanent protection for the insured's whole life and it includes a cash value feature. Whole life provides permanent protection for the insured's whole life and it includes a cash value feature.

John Campo names his son James and daughter Rosalie as his primary beneficiaries with each to receive $50,000 from his $100,000 life insurance policy at his death. James has two children, and Rosalie has a daughter. John arranges for the proceeds to be paid out per stirpes. Unexpectedly, James dies before his father. How are the death benefits distributed when John Campo dies?

James' children split $50,000 equally; Rosalie receives $50,000. Under the per stirpes arrangement set up by John Campo., James' children split $50,000 equally and Rosalie receives $50,000.

Ralph, Jerry, and Paula are primary and equal beneficiaries of the $600,000 insurance policy on the life of their mother, Judy. Ralph dies before his mother. He leaves two children, Tim and Hal. Judy's life insurance policy designates the death benefit per capita. How will the insurer distribute the policy benefits?

Jerry and Paula will each receive $300,000: If the death benefit was designated per capita, Ralph's share of the benefit will go to the primary and equal beneficiaries—his brother and sister—when his mother dies.

The insurer has approved the policy, with conditions that the applicant must meet before delivery is official. The type of policy delivery that the agent should make in this situation is called ________.

Legal: If any conditions are attached to delivery of a policy then legal delivery is preferred. Legal delivery requires personal delivery of the policy to the client, along with an explanation.

In an ordinary life policy, death benefits and premiums are always_________.

Level: In an ordinary life policy, death benefits and premiums are always level.

Settlement options with life contingencies all involve income payments that last a ____________.

Lifetime: Settlement options with life contingencies all have a common element: they involve lifetime income payments. These are income payments that the payee cannot outlive.

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.

In a modified premium whole life policy, premiums in the earlier policy years are generally ________ than they are in later years.

Lower: In a modified premium whole life policy, premiums in the earlier policy years are generally lower than they are in later years.

Which of the following statements is TRUE about the tax treatment of MECs?

MEC withdrawals are always considered as withdrawals of interest first, which are taxed, and then premiums, which are not taxed.

A single premium life policy becomes a _________ because it fails the 7-Pay Test.

MEC: The 7-pay test considers the amount of premiums paid into the contract during its first 7 years. If this amount exceeds the net level premiums needed to produce future benefits (such as a paid-up policy) after seven level annual payments are made, the policy is a modified endowment contract, or MEC. It is still life insurance, but its emphasis on tax-deferred increase in cash value causes it to lose some of the favorable tax treatment otherwise given to life insurance.

Two or more employers from the same industry who form a trust to buy group insurance for their employees is known by its acronym, _________.

MET: Two or more employers who form a trust to buy group insurance for their employees is known by its acronym, MET (Multiple Employer Trust).

Under which premium mode would the policyowner pay the highest total premium (when converted to an annualized amount)?

Monthly: A monthly premium mode includes the most in charges to cover the insurers increased expenses and lost earnings.

Which of the following factors is included in calculating the net single premium?

Mortality: Mortality and interest are the only factors considered in calculating the net single premium.

The FICA tax collected from each employee and his/her employer pays for ___________________.

OASDI (retirement, survivor, and disability benefits) and the hospital portion of Medicare only. The FICA tax collected from each employee and his/her employer pays for OASDI (retirement, survivor, and disability benefits) and the hospital portion of Medicare only.

Which of the following statements about straight life annuities is correct?

Of the various life contingency income options, the straight life income option provides the largest monthly income payment for a given amount of annuity funds.

Which of the following actions taken with a life insurance policy would be taxed?

On a withdrawal, the amount that exceeds the premiums paid in would be taxed.

Which of the following statements about spousal benefits is correct?

Once the youngest child reaches age 16, spousal benefits stop until the spouse turns age 60: Once the youngest child reaches age 16, these spousal benefits then stop until the spouse turns age 65. (This period is called the black-out period.)

Which of the following statements about the taxation of partial or full withdrawals of policy's cash values during the insured's life is correct?

Only the amount that exceeds the premiums paid is subject to income tax.

What information about the proposed insured is available from the Medical Information Bureau to assist the underwriter in making a decision?

Only the applicant's medical impairments reported by other insurers are available. The Medical Information Bureau maintains a database of confidential information on applicants for life and health insurance that have been underwritten by member insurers and found to possess a medical impairment. While all impairments must be reported, the insurer does not report its underwriting decision, therefore this decision is not available to the next insurance underwriter.

Which of the following statements is TRUE about insurance policies?

Only the insurer is required to make an enforceable promise. In a unilateral contract such as an insurance contract, only the insurer is required to make an enforceable promise.

Allen chose the life income with ten-year certain settlement option for his life insurance. When Allen died, his beneficiary, his wife, Fran, received income from Allen's death proceeds for six years. When Fran died, payments continued to Allen's contingent payee, his son, Vern, for another four years. What would have happened if Fran had lived beyond the guarantee period?

Payments would continue until Fran died and then be discontinued. Under the life income with term certain, a payee receives income payments for life. However, he or she is guaranteed that the payments will be made for a specified term. For example, a life income with ten-year term certain provides payments to the payee for life. It also guarantees that those payments will be made for at least ten years. So, if the payee died six years after payments begin, then payments will continue to a contingent payee for the remaining four years of the term. If the payee lives beyond the guarantee period, payments will continue until he or she dies.

A hurricane is an example of a(n)

Peril: A hurricane is an example of a peril. A peril is a condition that involves danger or risk and is the cause of a loss. Insurance policies are written to provide financial protection against losses from stated perils.

Convertible term life insurance allows the policyowner to exchange the coverage for a ________ life insurance policy without proving insurability.

Permanent: Convertible term life insurance allows the policyowner to exchange the coverage for a permanent life insurance policy without proving insurability.

An insurance product characterized by whole life coverage as long as the premiums are paid in any dollar amount. It offers both a death benefit and living benefits. It is not regulated by FINRA. What is this policy called?

Permanent: Permanent insurance lasts for the entire life of the insured. It offers both a death benefit and living benefits.

In a third-party ownership situation, the _________ holds all rights in the policy.

Policyowner: In a third-party ownership situation, the policyowner holds all rights in the policy. The insured has no rights. In the personal insurance market, the main reason for setting up a life insurance policy with a third-party ownership arrangement is to keep the policy's death benefit out of the insured's gross estate for tax purposes. In the personal insurance market the primary reason for setting up a life insurance policy with a third-party ownership arrangement is to keep the policy's death benefit out of the insured's gross estate for tax purposes.

Under a flexible premium payment plan, the person/entity to decide the amount of the premium (after paying the first premium) is the _______________.

Policyowner: Under a flexible premium payment plan, the person/entity to decide the amount of the premium (after paying the first premium) is the policyowner.

Which of the following is a characteristic of both interest-sensitive and current assumption life insurance policies?

Premium rates can change over time in response to the insurer's actual mortality, interest, and expense experience. Interest-sensitive and current assumption policies have premium rates that can change over time in response to the insurer's actual mortality, interest, and expense experience.

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 owned by the policyowner. Under a variable life insurance policy, premiums are placed in investment subaccounts owned by the policyowner.

With respect to adjustable life insurance, which one of the following statements is correct?

Premiums can increase or decrease to suit the policyowner's changing needs. The policyowner can adjust death benefits, premiums, or cash value to suit changing needs.

Which statement about level premium payment plans is NOT correct?

Premiums may be adjusted by the insurer only as long as premiums are increased for all policies of that type issued by the insurer. The premium is set and remains fixed over the policys term.

In the event of the total disability of a whole life policy insured, generally what does the waiver of premium rider cover?

Premiums paid during a required waiting period are refunded; future premiums until the insured is no longer disabled are waived. Under the waiver of premium rider, premiums are waived after an initial waiting period for an insured who becomes disabled. Premiums paid during the waiting period are refunded. Future premiums are waived as long as the disability continues.

An actuary is setting life insurance rates. What affect will it have on a policy if higher interest assumptions are used?

Premiums will be lower: In making life insurance rates, higher assumed interest earnings reduce premiums.

Which of the following best describes the present value of money?

Present value is the sum of money needed today to grow to a specified sum in the future, using a specified rate of interest. Present value is the value today that a given sum of money will grow to in the future, with interest earnings added.

Under the rules of agency, the party for whom the agent acts is called the ______.

Principal: Under the rules of agency, the party for whom the agent acts is called the principal. An agent and principal are the two parties involved in the agency relationship.

Ralph, Jerry, and Paula are primary and equal beneficiaries of the $600,000 insurance policy on the life of their mother, Judy. Ralph dies before his mother. He leaves two children, Tim and Hal. If Judy's life insurance policy designates the death benefit be paid "per stirpes," how will the insurer distribute the policy benefits?

Ralph's $200,000 share will pass equally to his two children when Judy dies. The surviving siblings, Jerry and Paula, will each receive $200,000. Under a per stirpes designation, Ralph's $200,000 share will pass equally to his two children when Judy dies. The surviving siblings, Jerry and Paula, will each receive $100,000.

A group of people who agree to pro-rate and share the losses suffered by other members is called a(an) ______________ insurer.

Reciprocal: A group of people who agree to pro-rate and share the losses suffered by other members is called a reciprocal insurer.

Term insurance that may be extended at the end of the term for an additional period without requiring the insured to present proof of insurability is known as _____ term insurance.

Renewable: Renewable term life insurance is term insurance that may be extended at the end of the term period for an additional term period without requiring proof of insurability.

The policyowner can make beneficiary changes at will as long as the beneficiary was originally named a(n) _________ beneficiary.

Revocable: The policyowner can change revocable beneficiaries at will. No notice or permission from the beneficiary or anyone else is required.

Which of the following plans accept contributions from employers but does not accept contributions from employees?

SEPs: SEP plans do not accept employee contributions. The employer sets up individual retirement accounts (IRAs) for each participating employee and makes contributions to them.

Which of the following plans replaces the SAR-SEP which is no longer offered?

SIMPLE: When the tax laws got rid of SAR-SEPs, they replaced them with SIMPLE plans. SIMPLE plans are designed solely for small businesses.

Gerry selected a settlement option for her policy that makes payments to her for life but stops immediately when she dies, if she dies after receiving at least one income payment. No further payments are made to a contingent payee. Under the settlement options with life contingencies, which of the following lifetime income options has Gerry selected?

Straight life income: Under the straight life income option, payments are made for the life of the payee. However, payments stop when the payee dies, if he or she dies after receiving at least one income payment. No payment is made to any contingent payees.

Ted is taking out a life insurance policy naming his sister Gail as the insured. Their brother Randy is the beneficiary. Ted will be responsible for paying the premiums. Who is required to sign the application?

Ted and Gail: Both the applicant and the insured must sign the application in this case.

Jon buys a $100,000 straight whole life policy. His twin brother, Ted, buys a $100,000 ten-pay life policy. All other factors being equal, which of the following statements is most correct?

Ted will pay higher premiums than Jon. Under a limited pay life insurance policy, premiums are paid for a shorter period of time. As a result, the premiums are higher than those charged for an ordinary straight life policy. Ted will pay higher premiums for a shorter time period than Jon.

Which of the following statements is TRUE regarding the terms of a typical cost-of-living (COL) rider?

The COL rider rate of increase is tied to an inflation index, such as the Consumer Price Index: The COL rider rate of increase is tied to an inflation index, such as the Consumer Price Index.

Which of the following statements about Social Security retirement benefits is correct?

The age at which full retirement benefits are payable is called the full retirement age, or FRA.

What type of information is typically found in the agent's report?

The agent's report is the primary source for information about any prior insurance policy, if the new coverage is a replacement policy. The agent may also be able to identify other policies the applicant has.

What is the only restriction on naming an annuitant?

The annuitant must be a natural person.

Which of the following statements about life income with refund guarantee payout options is correct?

The beneficiary can receive payment in a lump-sum cash payment or as monthly installment payments.

Which is NOT a situation in which the facility of payment clause is applied?

The beneficiary dies before the policyowner and the named contingent beneficiary is alive. The facility of payment clause is not applied if the beneficiary died before the policyowner and a named contingent beneficiary is alive. The death proceeds will simply be paid to the contingent beneficiary.

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. A company can keep the life insurance it carries on its employees, even when they are no longer employed there.

Which of the following statements about how fixed annuities accumulate is correct?

The contract owner deposits premium payments into the contract. The owner is then guaranteed a specified rate of interest to be credited to the account for a specified period. With a fixed annuity, the contract owner deposits premium payments into the contract. The owner is then guaranteed a specified rate of interest to be credited to the account for a specified period.

Which of the following statements is TRUE regarding fixed annuities?

The contract's current declared rate can never be less than the minimum rate of interest.

Which of the following statements about guaranteed minimum interest rates and current (declared) interest rates is correct?

The declared rate can change: The declared rate can change. It remains in effect for a limited period, such as one or two years after it is declared. At that time, the insurer announces a new current rate.

To be eligible for participation in an employer's Simplified Employee Pension (SEP) plan, an employee must meet all the following requirements EXCEPT

The employee must own at least 5 percent or more of the business or be recognized as a key employee. Under a SEP plan, an employer sets up individual retirement accounts (IRAs) for each participating employee. All employees who are age 21 or older, have worked for the employer for three of the past five years, and earn at least $450 yearly must be included in the plan. A participant need not own any part of the business.

Which of the following statements about the conversion of group life insurance to individual coverage is correct?

The employee who is converting must normally apply for a conversion policy within 31 days after termination or retirement from the group. The employee who is converting must normally apply for a conversion policy within 31 days after termination or retirement from the group.

Which of the following statements about the employee's participation in a qualified plan is TRUE?

The employee's contributions are made with pre-tax dollars. The employee's contributions are made with pre-tax dollars. That is, they are made directly into the plan before income taxes are assessed. This lowers the employee's taxable income.

Which statement about corporate-owned life insurance (COLI) plans is NOT correct?

The employees own the policies: Under a COLI plan, the corporation takes out and owns individual policies on individual employees. It is also the beneficiary under the policies.

The feature that is unique to endowment contracts versus other life insurance policies is

The endowment pays a living benefit if the policy endows while the insured is still alive. This feature is unique to endowment contracts: The endowment pays a living benefit if the policy endows while the insured is still alive. Other life insurance policies do not offer this option.

A traditional IRA owner, who is 30, decides to take a distribution from her IRA to pay the down-payment on her first home. What will she owe on her distribution?

The entire amount of the distribution is subject to income tax. However, the penalty tax does not apply to certain distributions, such as those used to buy a first house (as in this case) or to pay for education expenses.

Which of the following statements about buy-sell agreements is correct?

The entity who buys the business owner's interest is usually a partner, co-stockholder, or the business itself. Because of this agreement, the business owner's death creates a need for cash with which to complete the promised purchase. The entity who buys the deceased owner's interest is usually a partner, co-stockholder, or the business itself. Because of this agreement, the business owner's death creates a need for cash with which to complete the promised purchase.

Which of the following is a characteristic of both the true deferred compensation plan and the salary continuation plan?

The executive defers receiving income until some time in the future when he or she is likely to be in a lower marginal income tax bracket.

Adverse selection arises from which of the following?

The fact that people in poor health are more likely to buy and keep insurance. Adverse selection is the tendency of people more likely to have a claim to buy and keep insurance. These people are selecting against the insurance company. For example, a person who is sick is more likely to buy health insurance and to keep the policy in force than a healthy person.

Annuities are often referred to as "insurance against living too long" for all of the following reasons, EXCEPT:

The insurer provides a guaranteed death benefit: Deferred annuities pay death benefits if the owner/annuitant dies before annuitization.

Which of the following statements about key person insurance is correct?

The loss of a key person can result in the loss of key suppliers, customers, sources of credit, or other losses.

Which of the following statements is TRUE about a deferred annuity?

The most commonly selected deferred annuity option is the flexible premium deferred annuity

Audrey owns a five-year non-renewable term life insurance policy. What occurs if Audrey is alive at the end of its five-year term?

The policy ends without value. If Audrey is alive at the end of her non-renewable term life insurance policy's five-year term, the policy ends without value.The essence of term life insurance is that it is coverage that continues for a specified term. If the insured dies during the term of coverage, the death benefit is paid. If the insured is alive at the end of that term, the coverage ends without value.

Which one of the following statements about term insurance is correct?

The policy pays a death benefit only if the insured dies during the term. Term insurance pays a death benefit only if the insured dies during the term.

Andrea bought a $300,000 term-to-55 policy. Which of the following statements about the policy is NOT correct?

The policy will pay the entire death benefit only if Andrea reaches age 55. Andrea's $300,000 term-to-55 policy gives $300,000 of coverage until she reaches the age of 55. The policy will pay the entire death benefit as long as Andrea dies sometime within the term of coverage.

Which of the following statements about beneficiary designations is correct?

The policyowner can choose a natural person such as a spouse, a child, or children, or a legal entity, such as a corporation, partnership, or trust.The policyowner can choose a natural person such as a spouse, a child, or children, or the beneficiary can be a legal entity, such as a corporation, partnership, or trust.

Which one of the following statements most correctly describes a universal life insurance feature that is NOT available with traditional whole life insurance?

The policyowner can withdraw part of the policy's cash value. A policyowner can take partial withdrawals from a universal life policy's cash value. Under a traditional whole life policy, the policyowner has access to cash values only through policy loans or full surrender of the contract.

Which of the following statements is TRUE about government insurers?

The populace, through taxation, funds the insurance program. Government insurance is funded through taxation.

If a policyowner partially surrenders a life insurance policy, which of the following happens?

The premium goes down. If a policyowner partially surrenders a policy, the premium goes down, reflecting the remaining smaller death benefit.

All of the following statements about joint life (first-to-die) life insurance are correct, EXCEPT:

The premium is more than it would be for two separate policies providing the same death benefit. The premium is less than it would be for two separate policies providing the same death benefit.

Which of the following is TRUE with respect to limited payment life insurance policies?

The premium-paying period is shorter than for ordinary whole life insurance, and a higher premium is charged for otherwise identical ordinary whole life insurance coverage. The premium-paying period is shorter than for ordinary whole life insurance, and a higher premium is charged for otherwise identical ordinary whole life insurance coverage.

Which of the following statements about viatical settlements is correct?

The provider buys the policy for a percentage of the policy's face value (death benefit). The policyowner then receives anywhere from 50 to 80 percent of the death benefit. The provider becomes the policyowner, responsible for paying the premiums, and receives the death benefit when the insured dies.

Which of the following is considered an element of insurable risk?

The risk of loss must be measurable with a dollar value defined.

Which of the following statements about children's term riders is CORRECT?

The same premium applies to all of the insured's children, no matter how many are covered. Under a children's term rider, the same premium applies to all of the insured's children whether a child is covered or 20 are covered.

All of the following statements about deferred annuity surrender charges are correct, EXCEPT:

The surrender charge is typically a fixed percentage of the contract's accumulated value.

A married couple is insured under a joint life policy. The first spouse dies. What can the surviving spouse do with the policy?

The surviving spouse may convert the policy without proving insurability. When the first spouse dies in a joint life policy, the surviving spouse has a conversion right that allows him or her to buy an individual policy with the same or lesser face amount. The surviving insured does not have to prove insurability.

Which of the following statements about credit life insurance is correct?

The type of insurance used for credit life is usually decreasing term insurance. The type of insurance used for credit life insurance is usually decreasing term insurance.

After taking a policy loan, Bob decides not to repay it. What is the result of that decision?

The unpaid policy loan interest incurs interest, and the death benefit is reduced dollar-for-dollar by the amount of the unpaid loan (plus accrued interest). The loan incurs interest charges at the same rate as the loan. In addition, the death benefit is reduced by the loan amount at the insured's death.

Which of the following statements about variable annuity accumulation units is correct?

The value of an accumulation unit in a subaccount is called its net asset value.

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.

Which statement about life insurance accelerated living benefits riders or provisions is NOT correct?

They are commonly used to supplement an individual's retirement income. Accelerated living benefits riders are designed to release a portion of the policy's death benefit to help the terminally ill or permanently confined insured with final expenses.

According to FCRA, an insurer who requests an MIB, inspection, or consumer report, is responsible for which of these follow-up actions with the applicant?

They are responsible for disclosing to the applicant all requests for reports, what each covers, and how to contact the reporting agency for a copy of a report. The FCRA requires the requesting agency (in this case the insurer) to notify the applicant that a report is being requested. What the report will cover must also be disclosed to the applicant. If the applicant is denied insurance based in part on a report, then the insurer must also provide the reporting agency contact information so that the applicant can request a copy of the report.

Kelly owns a deferred annuity. What options does she have for using the funds accumulating in her contract before the annuitization date?

They can be withdrawn, partially or in full, before the contract annuitizes. These values can be left intact in the contract for future annuitization. Or, they can be withdrawn, partially or in full, before the contract annuitizes.

Straight whole life, limited pay whole life, and modified and graded premium whole life all share a common trait. What is that trait?

They offer fixed, "known in advance" premium amounts. Straight whole life, limited pay whole life, and modified and graded premium whole life all share a common trait: they offer fixed, "known in advance" premium amounts. That fixed amount may increase over time, as is the case with modified and graded premium policies.

Which of the following statements about the taxation of accelerated benefits is correct?

To qualify for the tax exemption of accelerated benefits, HIPAA requires insureds to meet the definition of terminally ill or chronically ill.

Which of the following statements is TRUE about the accelerated benefits rider?

To qualify, the insured must prove that his or her injury or illness will result in death within a stated period. This period is usually two years.

Which of the following statements generally guides insurance companies in determining "loading"?

Total loading from all policies should cover total operating costs, provide a safety margin, and contribute to profits or surplus. Total loading from all policies should cover total operating costs, provide a safety margin, and contribute to profits or surplus.

Which of the following statements about simplified employee pensions (SEPs) is correct?

Under a SEP plan, an employer sets up individual retirement accounts (IRAs) for each participating employee. The employer makes contributions to these accounts on behalf of the employee. These contributions into an employee's SEP are not included in the employee's gross income.

All of the following statements about key person life insurance are correct, EXCEPT:

Upon the insured employee's death, the surviving family receives the policy's death benefit.

Which one of the following most correctly describes a key difference between variable life and variable universal life insurance?

Variable life policies require a fixed premium payable for the life of the policy while variable universal life permits premium flexibility. Variable life policies have a fixed premium payable for the life of the policy. Variable universal life policies generally require a minimum first premium, but policyowners do not pay a fixed amount on a set schedule after this period.

Which one of the following statements about non-qualified deferred compensation plans is most correct?

When an executive receives the deferred compensation, he or she will generally be in a lower tax bracket and will pay lower taxes. A non-qualified deferred compensation plan lets an employee delay receiving current compensation until a future date, usually retirement. At retirement, he or she will generally be in a reduced tax bracket and will pay lower taxes.

All the following statements about life insurance accelerated benefit riders are correct, EXCEPT

When the insured dies, the accelerated payment has already been deducted from the proceeds. The insurer then pays the remainder to the beneficiary.

Which statement is TRUE of both Roth IRAs and traditional IRAs?

Withdrawals are both taxed and penalized when the owner is under age 59½. Roth IRAs and traditional IRAs differ in the limits of adjusted gross income at which full contributions are no longer allowed. Contributions to a traditional IRA are tax deductible, but those to a Roth IRA are taxed. Only persons age 50 and over can make catch-up contributions to their accounts. Funds withdrawn before the owner is 59 1/2 years old and within five tax years will be taxed and incur a 10% penalty on earnings. (Withdrawals for certain reasons may avoid the penalty.)

If Sam, who owns a deferred annuity, withdraws funds as a full or partial surrender before the contract annuitizes, what happens?

Withdrawals are taxable until accrued earnings have been fully withdrawn, at which point remaining withdrawals (of principal) are not taxable. If Sam withdraws funds as full or partial surrenders before the contract annuitizes, any withdrawn annuity interest earnings are taxable.

A settlement option in which the income stream is not affected by the death of the payee (the individual receiving the death benefit) is called a settlement option ______ life contingency.

Without: A settlement option in which the income stream is not determined or affected by the death of the payee (the individual receiving the death benefit) is called a settlement option without life contingency.

What is the form in which the MIB sends its reports to insurers?

Written codes: The MIB sends information to insurers in written code, which helps protect the confidentiality of the information.

Which of the following services does Lloyd's of London provide?

a common meeting ground where member associations can conduct insurance business: Lloyd's of London provides a common meeting ground where member associations can conduct insurance business.

If the employer and the employee share the premiums for a group term life insurance policy, the plan is called

a contributory plan: If the employer and the employee share the premiums of group term life insurance, the plan is called a contributory plan.

XYZ Insurance, incorporated in Texas, has agents authorized to sell life insurance in Arkansas. In Arkansas, XYZ Insurance is categorized as which of the following?

a foreign insurer: In Arkansas, XYZ Insurance is categorized as a foreign insurer.

Which of the following would provide instant liquidity upon the death of an estate owner?

a life insurance policy on the owner's life, payable to his estate: An investment with liquidity is easily converted into cash. Life insurance policies with cash accumulation features offer liquidity, as do policies that are payable at death to the insured's estate. In this case, the only asset with instant liquidity is the life insurance policy. The other assets can not be easily converted into cash.

Someone other than the insured often applies for and owns a life insurance policy. Which of the following can NOT be an applicant and owner?

a minor child of the insured: The applicant and owner cannot be a minor child.

At age 49, Caleb took a $15,000 distribution from his deferred annuity. In addition to paying income tax on the $15,000 withdrawal, what else will Caleb probably have to pay?

a penalty tax of $1,500: In addition to paying income tax on the $15,000 withdrawal, Caleb also pays a 10 percent penalty, or $1,500.

In most states, insurance companies can include a provision in their contracts that allows which of the following?

a provision that makes the acts or representations of the agent binding on the insurer. In general, acts of the agent are binding on the insurer. The insurer is the agent's principal.

When a state bars the sale of a particular coverage within its boundaries, a typical insurance company cannot cover it. In this case, an insurer not licensed in the state can underwrite this insurance through a third party broker. What type of insurer can underwrite the coverage in this case?

a surplus lines insurer: A surplus lines insurer is not licensed to do business in the state. However, it must be eligible to provide unique coverage when requested through the surplus lines market.

Which of the following is NOT an exception to the transfer-for-value rule?

a transfer made to the spouse or child of the insured: Transfers made to the spouse or child of the insured are NOT exceptions to the transfer-for-value rule.

In which of the following situations would the nonforfeiture option generally apply?

a whole life policy that has lapsed: Nonforfeiture options are available only under permanent life insurance policies, such as whole life, that have lapsed. They also must contain cash value. Universal life and term insurance do not contain nonforfeiture options.

Which one of the following best describes what an agent's goals should be in completing an application for insurance?

accuracy, thoroughness, and clarity: When completing an application for insurance, the agent must aim for accuracy, thoroughness, and clarity. From a legal point of view, the application must be completely clear, thorough, and accurate. However, the agent has an additional vested interest in being thorough and accurate when completing the application because the applied-for policy has a better chance of being promptly issued.

To receive favorable tax benefits, a life insurance policy must meet the definition of life insurance as defined in Section 7702 of the Tax Code. When was this section added to the Code?

after flexible premium payment policies were introduced: Section 7702 was added to the Tax Code after flexible premium payment policies were introduced.

Under the code section 1035, which type of exchange CANNOT be exchanged tax-free?

an annuity for a life insurance policy: An annuity for a life insurance policy CANNOT be exchanged tax-free under a 1035 exchange. This is because annuity values are taxed when withdrawn or paid out.

Which of the following would be most appropriate for Haley, 55, if her primary objective is to ensure having an income she cannot outlive?

an annuity: Annuities provide benefits during one's life. They ensure that one's income cannot be outlived.

Based on the definition of a legal contract, which of the following statements represents an offer?

an application for coverage presented by the applicant with the first premium. An application for coverage presented by the applicant with the first premium constitutes a legal offer.

Under an annuity, the annuitant is _________________?

any natural person: The annuitant is always a natural person. The annuitant cannot be a non-natural entity like a corporation.

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: Insurers most often order inspection reports on applicants who ask for very high amounts of life insurance or business insurance.

How do insurers treat a flood?

as a peril: A flood is a peril, which is a condition that involves danger or risk and causes a loss. Insurance policies offer financial protection against losses caused by perils.

Why do variable life policies carry charges and fees that traditional whole life policies do not?

because of the product's investment feature and the costs associated with separate account investing: Because of VLI's investment feature and costs associated with subaccount investing, the insurer may also charge a policy administrative expense or operational charge and a fee for the expenses incurred by the separate investment accounts' investment advisory fees.

A premium receipt that guarantees coverage for the period after the application is signed and before the underwriter makes a decision is called a

binding receipt: A binding receipt guarantees temporary coverage for the applicant for the entire underwriting period. This holds true even if the insured is later found to be uninsurable.

Jeff and his wife Anne each took out life insurance policies. Jeff named Anne and his son Andy as joint beneficiaries; Anne named Jeff and Andy as joint beneficiaries. Ten years later, they divorced. Sixteen months later, Jeff suddenly dies of a heart attack. At the time of Jeff's death, the policy was in force, and no changes had been made. According to the concept of insurable interest, who collects the death benefit?

both Anne and Andy: Because the insurable interest existed at the time the policy was written, the named beneficiaries, Anne and Andy, share in the death benefit.

Any dividend greater than the amount required to buy the one-year term insurance is applied to the policyowner's choice of one of the other four basic dividend options. Which is NOT one of the four basic dividend options?

buying one-year term insurance: The additional dividend amount cannot be used to buy one-year term insurance. The additional dividend amount can be used to buy paid-up insurance additions.

Which of the following is a nonforfeiture option available under a whole life insurance policy?

cash surrender: Cash surrender is one of three nonforfeiture options offered. The other two are1. reduced paid-up insurance, and 2. extended term insurance.

In an ordinary life insurance policy, which of the following features increases over the policy's lifetime?

cash value: Under an ordinary life insurance policy, the net amount at risk decreases while the cash value increases.

What do covered employees receive to show they have coverage under a group life insurance policy?

certificate of insurance: The insureds get a certificate of insurance to show that they have coverage under the policy.

Which of the following can be used as a funding vehicle for a traditional IRA?

certificates of deposit: Very few restrictions exist on the kinds of vehicles that can be used to fund a traditional IRA. For example, certificates of deposit, securities, annuities, and real estate are all permitted funding vehicles. However, life insurance and collectibles (such as artwork, stamps, rare books, or antiques) are not allowed.

The agent's primary responsibility(ies) during field underwriting is to

collect the right data from the applicant and disclose the insurer's underwriting and policy issue practices to the applicant. The two most important duties that the agent performs during field underwriting are to collect the right data to help the insurer decide whether to accept the application; and to disclose information about the insurer's underwriting and policy issue practices.

The agent's primary responsibility(ies) during field underwriting is to

collect the right data from the applicant and disclose the insurer's underwriting and policy issue practices to the applicant.The two most important duties that the agent performs during field underwriting ar to collect the right data to help the insurer decide whether to accept the application; and to disclose information about the insurer's underwriting and policy issue practices.

The biggest drawback to the human life approach to determining how much personal life insurance to buy is that it doesn't

consider the family's actual financial needs for the future: The biggest drawback to the human life approach to determining how much personal life insurance to buy is that it doesn't consider the family's actual financial needs for the future.

At the end of a contract period, market value adjusted annuity owners can do all of the following, EXCEPT

convert to a variable annuity: At the end of a contract period, an MVA owner can stay with the same rate, move to another contract period, or withdraw funds. Converting to a variable annuity is not an option.

In which of the following cases would the insured not be covered, based on standard exclusion or suicide provisions?

death while on active military duty in a war zone: Death while on active military duty in a war zone is a common exclusion; the policy's death benefit will NOT be paid if death results during this activity.

An insurance company is developing a new product. Which one of the following is the actuaries' most important responsibility?

deciding the premium for the new product: The actuaries' most important input in the process is determining the premium.

In a universal life insurance policy, an insurer will make all of the following monthly adjustments EXCEPT

deducting future premium payments from the policy's cash value, if agreed to by the policyowner. Universal life policies have monthly adjustments and interest crediting tasks. Each month, on the monthly deduction day, the insurer will credit to the policy any premiums received since the last month as well as the interest on the cash value for the previous month. The insurer also will deduct from the policy the cost of insurance (the mortality charge) and an expense charge. Premium payments are not deducted from the policy's cash value.

Which of the following actions does the insurer take on a universal life insurance's monthly deduction day?

deducts the cost of insurance and any expense charge: The insurer deducts the cost of insurance and any expense charge from the universal life policy's cash value.

A qualified plan under which each participating employee has an individual account is called a ______________ plan.

defined contribution: A defined contribution plan is a qualified plan under which each participant has an individual account.

If the annuitant dies after annuitization begins, who has primary rights to the funds in the annuity?

depends on the income payout option the owner selected at annuitization: The person who has primary rights to the funds in an annuity during the payout period depends on the income payout option the owner selected at annuitization.

According to FCRA, an insurer who requests an MIB, inspection, or consumer report, is responsible for which of these follow-up actions with the applicant?

disclosing to the applicant all requests for reports, what each covers, and how to contact the reporting agency for a copy of a report: The FCRA requires the requesting agency (in this case the insurer) to notify the applicant that a report is being requested. What the report will cover must also be disclosed to the applicant. If the applicant is denied insurance based in part on a report, then the insurer must also provide the reporting agency contact information so that the applicant can request a copy of the report.

Which of the following statements is TRUE under a universal life insurance policy's death benefit Option 1? Increases in cash value ____________________.

do not increase the death benefit: Under a universal life insurance policy's death benefit Option 1, increases in cash value, do not increase the death benefit paid at the insured's death.

Policy dividends are not taxable unless they are

earning interest: Policy dividends are taxable when the dividends earn interest. In this case, the interest earned on the dividends is taxable.

Polly bought a long-term care rider. She becomes eligible for its benefit if she is diagnosed as chronically ill and the diagnosis is the result of which of the following?

either a medical or cognitive (mental health) reason: An insured who buys a long-term care rider becomes eligible for its benefit when he or she is diagnosed as chronically ill for a medical or cognitive (mental health) reason.

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.

According to the rules governing how annuitized income is taxed, the interest portion is taxed and the principal is not. Which phrase explains how this division is achieved?

exclusion ratio: According to the rules governing how annuitized income is taxed, the interest portion is taxed and the principal is not. This division is achieved through the exclusion ratio.

Which of the following is added to the net single premium during loading to produce the gross premium amount?

expenses and contingencies: The actuary adds an amount for expenses and contingencies called "loading" to produce the gross premium.

What authority does an insurer give to an agent through the agent's contract?

express authority: The contract between the agent and insurer gives the agent express authority. An agent's contract specifies the activities the agent can perform and outlines the agent's duties.

The owner of a policy that was issued on a standard basis has not chosen a nonforfeiture option. The policy has now lapsed.Which nonforfeiture option would the insurer automatically apply according to common practice?

extended term insurance: Common practice is for the insurer to apply the extended term insurance option. This occurs automatically if the owner of a lapsed policy issued on a standard basis fails to elect one of the nonforfeiture options.

Which of the following features is the same for ordinary whole life, modified premium whole life, and graded premium whole life policies of the same amount?

face amount: The face amount is the same for ordinary whole life, modified premium whole life, and graded premium whole life policies of the same amount.

To qualify for Social Security disability benefits, a worker must satisfy a waiting period of how many months?

five months: To qualify for Social Security disability benefits, a worker must be totally disabled, which means that he or she is unable to engage in any substantial gainful employment. The disability must be expected to last at least 12 months (or result in an earlier death). Benefits will begin only after the worker has satisfied a waiting period of five consecutive months, during which he or she must remain disabled.

Rick wants a settlement option that pays him $1000 a month until the principal in his annuity is liquidated. If he dies before then, he wants his wife Jenny to receive that $1,000 monthly payment until the principal is gone. Which settlement option does Rick want?

fixed amount certain payout: Under the fixed amount certain payout, Rick can receive the $1,000 a month that he requested until the annuity's principal is liquidated. If he dies before the principal reaches zero, Jenny will receive $1,000 a month until it is gone.

The minimum guaranteed interest rate ensures that an equity-indexed annuity (EIA) contract will grow by at least that amount. Because of that feature, EIA contracts most closely resemble which of the following?

fixed annuities: Because of the protection of principal created by the minimum guaranteed interest rate, most equity-indexed annuities are classified as a form of fixed annuity.

Henry wants his life insurance policy's proceeds to be paid out in the following manner: the proceeds placed under the option are to be held by the insurer, and along with interest, are to be paid out monthly over the next ten years until the balance is zero. Which settlement option does Henry want?

fixed period settlement option: Under the fixed period settlement option, the policyowner or beneficiary selects the period over which payments are to be made. The amount of the payment is calculated so that the principal plus the interest it earns is reduced to zero at the end of the period selected.

The Grand Halvorson Lodge has 250 members, united by a common Danish heritage. For 50 years they have also run an annual carnival for the purpose of sponsoring families in need of medical care for their children. All the money brought in through dues and fund-raising events is used to support their non-profit work with needy families. The Grand Halvorson Lodge offers life insurance to its members. What type of insurer is it considered?

fraternal benefit society: The members of a lodge or fraternal organization can provide life insurance for their members.

Policyowners can buy additional permanent life insurance without proof of insurability under which type of rider?

guaranteed insurability rider: The guaranteed insurability rider guarantees that the policyowner can buy additional permanent life insurance on the insured's life without proving insurability.

Which one of the following can be funded only with a single lump-sum premium payment, but it distributes income payments over time beginning soon after purchase?

immediate annuity: Immediate annuities are funded and can only be bought with a single lump-sum premium payment. They then regularly distribute a given sum of money over time soon after purchase.

Cal bought a $100,000 universal life policy ten years ago. He has paid $8,000 in premiums into the policy. He now decides to surrender the policy for its full $15,000 cash value and must pay taxes on $7,000 of that cash value. Which one of the following most correctly describes the type of tax that is applicable in this case?

income tax: It is taxed at ordinary income tax rates, not capital gains tax rates, transfer-of-value rates or alternative-minimum rates.

An insurance product characterized by small coverage amounts, with premiums paid on a weekly or monthly basis, and a death benefit but no living benefits, is called a(n) _________ policy.

industrial insurance: An industrial insurance policy offers individual coverage in small amounts usually around $1,000 to $2,000, with premiums paid frequently. Since little cash value accumulates, these policies do not offer living benefits.

What type of information is typically found in the agent's report?

information about any prior insurance policy, if the new coverage is a replacement policy: The agent's report is the primary source for information about any prior insurance policy, if the new coverage is a replacement policy. The agent may also be able to identify other policies the applicant has.

Because actuaries really don't know the mortality when determining the gross premium for the future of a life insurance policy, they typically

intentionally underestimate expected future earnings and overestimate expected future mortality and expenses. Actuaries really don't know the mortality when determining the gross premium for the future of a life insurance policy. So, they intentionally underestimate expected future earnings and overestimate expected future mortality and expenses. This provides a margin of financial safety that ensures benefits payments due 100 years in the future will be paid.

Unlike a traditional current assumption whole life policy, an interest-sensitive whole life insurance policy includes one feature that is NON-guaranteed. Which is it?

interest credited to the policy's cash value: In an interest-sensitive whole life insurance policy, only the interest to be credited to the cash value is non-guaranteed. Unlike current assumption whole life insurance, the mortality and expense charges are guaranteed.

Under which settlement option is an income paid until the second of the two annuitants dies, and at the second death, no further payments are made to anyone?

joint and survivor life income: Under a joint and survivor life income option, an income is paid until the second of the two annuitants dies. When the second annuitant dies, no further payments are made to anyone.

This term is the principle that the greater the number of incidents of a random process, the more likely that the expected number of incidents and the actual numbers of incidents will be the same.

law of large numbers: The law of large numbers describes the principle that the greater the number of incidents of a random process, the more likely that the expected number of incidents and the actual numbers of incidents will be the same. This fact allows the insurer to predict the extent of risk.

A customer has purchased over a dozen life insurance and annuity contracts over the past year, using cashier's checks to pay the premiums. If this action is part of a money laundering operation, what stage does it represent?

layering stage: Money laundering is a process that moves illegal money through three stages on its way to apparent legitimacy: placement, layering, and integration. The second stage, layering, is achieved by using cash or cash equivalents to purchase multiple financial instruments that can subsequently be converted into clean money.

Which annuity settlement option guarantees that income is paid for the length of the annuitant's life, but no less than a specified number of years?

life income with period certain: The life with period (or term) certain option guarantees that income is paid for the length of the annuitant's life. However, the income is paid for no less than a certain number of years. If the annuitant dies before the chosen period ends, income payments continue to the beneficiary for the balance of the period.

The same settlement options that are available to pay a policy's death benefit can also be applied to paying out the policy's cash value. As beneficiary of her husband's life insurance, Beth chooses to receive payments for life. However, she is guaranteed that the payments will be made for ten years. Beth has chosen which of the following?

life income with period certain: Under the life income with period certain, a payee receives income payments for life. He or she is guaranteed to receive payments for a specified period. For example, a life income with ten-year period certain provides payments to the payee for life and guarantees payments for at least ten years. If the payee dies six years after payments begin, then payments will continue to a contingent payee for the remaining four years. If the payee lives beyond the guarantee period, payments will continue until he or she dies.

Dave wants a life income settlement option that pays him an income for life. In addition, if he dies before the annuity's cash value has been paid out, he wants to make sure that his beneficiary receives the balance of cash value that remains as a lump sum. Which settlement option does Dave want?

life income with refund guarantee: The life income with refund guarantee pays the annuitant an income for life. In addition, if the annuitant dies before all cash value has been paid out of the annuity, it promises to pay a beneficiary the balance of cash value that remains.

As whole life insurance policies mature, they build cash value, which can be accessed through loans, withdrawals, or policy surrender. What is the ability to use a policy's cash value in these ways generally called?

living benefit: While living, the policyowner can access the policy's cash value through loans, withdrawals, or policy surrender. These are the living benefits of permanent life insurance ownership.

Which of the following life insurance riders provides financial support for medical care, nursing home care, and assisted living care for extended periods?

long-term care rider: The long-term care rider provides financial support for medical care, nursing home care, and assisted living care for extended periods.

When an insured dies, what are the two main categories of needs that arise?

lump-sum needs and ongoing income needs: When an insured dies, the two most basic categories of needs that arise are immediate needs that require a lump-sum cash amount (such as to pay final expenses and estate taxes) and an ongoing income stream to cover monthly expenses.

Which type of annuity pays a fixed rate on payments paid in during each contract period combined with an interest rate adjustment feature tied to early withdrawals?

market-value adjusted annuity: The market-value adjusted annuity pays a fixed rate on payments paid in during each contract period combined with an interest rate adjustment feature tied to early withdrawals. Payments paid in are fixed at the market rate for that contract period; withdrawals are subject to a market value adjustment that affects how much the owner receives.

Which of the following terms identifies the highest premium that the policyowner can pay based on the policy's death benefit and still maintain the policy's qualification as life insurance?

maximum premium: The maximum premium is the highest amount the policyowner can pay based on the policy's death benefit and still permit the policy to meet the guideline premium test. This test qualifies the policy as life insurance. Please try again.

All of the following are standard exclusions found in most policies, EXCEPT:

military service: Serving in the military is not an automatic exclusion, but the "war exclusion" usually excludes paying a death benefit if the death directly resulted from war.

Jack, the policyowner, recorded his age as 35 when he bought a life insurance policy five years ago. At this point the insurer finds out his actual age at the time of application was 36. Which provision describes the actions the insurer can take to adjust the policy's benefits?

misstatement of age or sex: The misstatement of age or sex provision describes what recourse the insurer has to adjust the policy's benefits and recover premiums owed if the insured's age is misstated on the application.

During the accumulation stage, an annuity contract owner normally has the right to

name the annuitant and the beneficiary and receive some or all of the cash value in a partial or complete surrender of the contract. During the accumulation stage, an annuity contract owner normally has the right to name the annuitant and the beneficiary and receive some or all of the cash value in a partial or complete surrender of the contract.

A group insurance plan that is paid entirely by the group sponsor is known as a

non-contributory plan: A non-contributory plan is one in which the group sponsor pays the entire premium amount.

Under a life insurance policy's incontestability clause, after a certain period the insurer cannot contest a claim for any reason, EXCEPT

non-payment of premiums: The incontestability clause states that after a policy has been in force for a set period, the insurer cannot contest a claim for any reason, except for non-payment of premiums.

The premiums the Acme Company pays for business life insurance on the lives of a business owner or key executive are generally

not tax deductible: Premiums a business pays for business life insurance on the lives of a business owner or key executive are generally not deductible.

When a producer determines that the sale of a life insurance policy will replace an existing policy, the producer must do all of the following EXCEPT

notify the state insurance department. A producer is not required to notify the state insurance department of a transaction that involves the replacement of a life insurance policy.

When a producer determines that the sale of a life insurance policy will replace an existing policy, the producer must do all of the following EXCEPT

notify the state insurance department: A producer is not required to notify the state insurance department of a transaction that involves the replacement of a life insurance policy.

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 interest: The additional premiums do offset the insurer's increased billing costs and lost interest.

Under the captive agency system, who employs an agent?

one insurance company. Under the captive (or career) agency system, one insurance company employs the agent. The agent works at a branch of the company and earns commissions for sales. A general agent supervises the agent.

An agent is figuring out how much money a surviving family would immediately need when an insured dies. The agent must estimate the amount of money that they would need immediately to pay for all of the following, EXCEPT

ongoing monthly expenses: In addition to lump sums that will be needed immediately when an insured dies, the surviving family will also typically need an ongoing income stream later on to pay for daily and monthly expenses.

What information about the proposed insured is available from the Medical Information Bureau to assist the underwriter in making a decision?

only the applicant's medical impairments reported by other insurers: The Medical Information Bureau maintains a database of confidential information on applicants for life and health insurance that have been underwritten by member insurers and found to possess a medical impairment. While all impairments must be reported, the insurer does not report its underwriting decision, therefore this decision is not available to the next insurance underwriter.

Under the pre-paid state tuition plan, ________________.

parents can lock in the future cost of college for a child at current prices. Under the pre-paid state tuition plan parents can lock in the future cost of college for a child at current prices.

If a payee dies before the end of a fixed-period settlement option, what can the insurer do?

pay a contingent payee the pre-set payment amount until the fixed period ends: If a payee dies before the end of a fixed-period settlement option, the insurer continues to make the pre-set payments to a contingent beneficiary until the end of the period. Or, the insurer can pay the contingent beneficiary the current value of the remaining amount in a lump-sum. (This latter option would include principal plus interest to the end of the period.)

The purpose of the return of premium rider is to_______________.

pay the beneficiary a sum that equals all premiums paid plus the death benefit if the insured dies within a stated period. The return of premium rider pays the beneficiary a sum that equals all premiums paid plus the death benefit if the insured dies within a stated period.

Will has held his traditional IRA for three years. Now he wants to convert his $105,000 traditional IRA to a Roth IRA before he turns 60. His adjusted gross income for the year is $90,000. What is he required to do?

pay the income taxes on the IRA amount moved into the Roth IRA: Will has put his money in an IRA, where contributions plus earnings have built up tax-free. Now he must pay the income taxes on the IRA funds he moved into the Roth IRA. He is not required to pay a 10 percent penalty for withdrawing funds from his traditional IRA before age 59½.

Life insurance settlement options are best described as which of the following?

payment alternatives a policyowner or beneficiary can choose to receive life insurance policy proceeds: Settlement options are payment alternatives a policyowner or beneficiary can choose to receive life insurance policy proceeds.

Henry wants to buy a rider to waive the premiums he pays on his son's life insurance policy. Henry wants to do this in case he were to become totally disabled and were unable to make those premium payments. What type of rider does Henry need?

payor benefit: Under the provisions of the payor benefit rider, the premium payor's total disability before a specified age—usually age 55 or 60—will result in the premiums on the juvenile's policy being waived for the duration of the total disability.

Which of the following is considered a defined benefit plan?

pension plan: Defined benefit plans define the future benefit the employee is to receive. The benefit is typically paid monthly and usually for life. Accordingly, monthly employer contributions to a pension plan fund the future benefit.

The beneficiary designation in which the proceeds of a policy are paid only to the beneficiaries who are alive and have been named in the policy, and the beneficiary's share is not passed down to his or her children is called

per capita: Per capita designations mean that proceeds of the policy are paid only to the beneficiaries who are alive and have been named in the policy. The share of a per capita beneficiary is not passed down to his or her children. Instead, the share is paid to the policy's other named beneficiaries.

Nine out of ten people fall into which two risk classifications based on the underwriter's evaluation process?

preferred and standard: Nine out of ten people fall into the preferred and standard risk classifications based on the underwriter's evaluation process.

Under this dividend option the dividend is kept by the insurance company and used to lower the amount of the next premium due. What is this dividend option called?

premium reduction option: Under the premium reduction option, the dividend is kept by the insurance company and used to lower the next premium due.

Which of the following features of an adjustable life insurance policy requires the agreement of both the insurer and the policyowner to change?

premiums only: It's important to understand that with an adjustable life insurance policy, any change in the premium requires a formal adjustment to the policy. Both the policyowner and the insurer must agree to the change before it can be made.

In which annuity situation are taxes NOT applied?

premiums paid into a individually owned annuity plus the interest that accumulates while funds remain in the annuity: Taxes are not applied to premiums paid in plus the interest that accumulates while funds remain in an individually owned annuity.

When an insurance company cedes part of an insurance risk to another insurance company, the process is known as

reinsurance: When an insurance company wants to transfer some or all of the risks represented by its insureds, the process is known as reinsurance. The company accepting the risk being transferred is the reinsurance company.

Pamela replaces the batteries in her smoke alarms throughout the house and tests them once a year. This is an example of

risk reduction: Risk reduction is an option to lessen the possibility of loss when a risk cannot be avoided. In this case, the risk of fire that could result in severe loss is reduced through having active fire alarms.

Under which of the following insurance plans does the employer agree to keep on paying a portion of the employee's salary after he or she retires?

salary continuation plan: Under a salary continuation plan the employer agrees to keep on paying a portion of the employee's salary after he or she retires.

Which term below refers to a deduction made from a VUL premium by the insurer to recover its new business acquisition costs?

sales load: The sales load allows the insurer to recover its new business acquisition costs (first year commissions, field expenses, underwriting costs, etc.)

An underwriter must keep application information confidential to comply with the Fair Credit Reporting Act (FCRA) of 1971. The FCRA does which of the following?

sets procedures requesting agencies must follow to ensure confidentiality, accurate reporting, and proper use of the information. The FCRA sets procedures that requesting agencies must follow to ensure confidentiality, accurate reporting, and proper use of the information.

When reviewing applications and applying underwriting standards, insurance companies must use the same selection criteria with all applicants. State laws prohibit discrimination against specific groups of people in all of the following, EXCEPT

setting premiums: Premiums are determined on the basis of the applicant's risk. If a specific group, by its nature, constitutes a higher risk, the insurer has the right to set premiums generally higher for that group.

An annuity owner has many options for receiving annuity income payments. What are these payout options generally called?

settlement options: An annuity owner has many options for receiving annuity income payments. These payout options are called "settlement options."

The banding together of individuals who collectively agree to cover a loss suffered by any group member is the definition of which method of handling risk?

share the risk: Under risk-sharing each member of a group agrees to share the financial burden of a loss that could be suffered by any member.

Brenda received a $500,000 inheritance check from her Uncle Phil's estate. She wants to exchange this check for an annuity. She is not ready to retire yet, but will be in ten years. She doesn't plan to make any more payments into the annuity. What type of annuity would give her what she wants?

single premium deferred annuity: Brenda should buy a single premium deferred annuity (SPDA) with her single, lump-sum payment. Her $500,000 would earn interest within the contract until the contract annuitizes. Once she buys the SPDA, no additional premium payments are accepted.

Allen buys an annuity with a single, lump-sum payment, which grows in the contract until he accesses the funds or the contract annuitizes. No additional premium payments are accepted. What type of annuity has Allen bought?

single-premium deferred annuity: A person can buy a single-premium deferred annuity (SPDA) with a single lump-sum payment. This money grows in the contract until the owner accesses the funds or the contract annuitizes. Once a person buys an SPDA, no additional premium payments are accepted.

In insurance, a type of risk that involves the chance of loss or gain and which is therefore uninsurable is called

speculative risk: Speculative risk is risk that may result in loss or gain. This type of risk is generally uninsurable.

An insurer receives a "B" rating from a rating organization. Based on that rating, what is its ability to meet its contract obligations?

speculative under stressful circumstances: If an insurer receives a "B" rating, then the rating organization sees its ability to honor its insurance obligations under stressful circumstances as speculative.

What is the name of the provision that states that the death benefit to be paid to a beneficiary cannot be claimed by another party before it is paid out to the beneficiary?

spendthrift clause: The name of the provision that states that the death benefit to be paid to a beneficiary cannot be claimed by another party before it is paid out to the beneficiary is the spendthrift clause.

Which of the following business insurance policies can be owned by either the employee or the employer?

split-dollar plan: Under a split-dollar plan, either the executive or the employer owns the policy. Premiums for the policy and the death benefit proceeds are split between the employer and employee.

In a variable whole life insurance (VLI) policy, the policyowner allocates premium payments to one or more variable _________ and/or a fixed account.

sub-accounts: In a variable whole life insurance (VLI) policy, the policyowner allocates premium payments to one or more variable sub-accounts and/or a fixed account. The VLI cash values are the sum of the balance in each variable sub-account plus the balance in the fixed account.

A worker with a currently insured status is eligible for ______________.

survivor benefits at the worker's death: A worker with a currently insured status is eligible for survivor benefits at the worker's death.

When an employee retires, what is the general tax treatment of the payments he or she receives under a deferred compensation plan?

taxable to the employee as he or she receives benefits: A non-qualified deferred compensation plan lets an employee delay receiving current compensation until a future time. The employee must then pay taxes on the benefits as he or she receives them. However, the employee will typically be in a lower tax bracket than when he or she was working.

Bob's only goal is to provide a death benefit to protect his family in case he dies while his children are young. What type of life insurance is best suited to this need?

term insurance: Under a term policy, insurance coverage is temporary, applying to only a limited period of time. At the end of that time, the policy expires. The policy pays a death benefit only if the insured dies during the term.

Generally, a family protection policy provides whole life insurance coverage for the principal insured and the following coverage for other family members?

term life insurance for the spouse to age 65 and each child to age 21: Generally a family protection policy provides whole life insurance coverage for the principal insured; term life insurance coverage on the spouse to age 65; and term life insurance coverage on each child to age 21.

Which rider offers the policyowner the ability to increase the death benefit payable for any cause of death during a limited time period?

term rider: The term rider offers the policyowner the ability to increase the death benefit payable for any cause of death during a limited time period.

George's wife, Ellen, will receive income payments from George's annuity when he dies. Under the annuity contract, what is Ellen?

the beneficiary: The beneficiary is the person the owner chooses to receive the contract's values if either the owner or the annuitant dies.

Under a universal life insurance policy death benefit option 2, the death benefit is equal to what amount?

the cash value plus the policy's specified amount: The death benefit is equal to the policy's specified amount plus its cash value.

What part of group life insurance—if any—is tax exempt for employees?

the cost of the first $50,000 of coverage: The cost of the first $50,000 of coverage is tax exempt for employees. In other words, the premium charged for the first $50,000 of coverage is not taxable to the employee. But the cost of any amount over that level of coverage is taxable.

A policy's effective coverage date begins on

the date of the receipt of a first payment or the date of a medical exam, if required. The date of the receipt of a first payment or the date of a medical exam, if required, controls when the insurance coverage goes into effect. A binding or conditional receipt identifies this date when the premium is submitted with the application. If the premium is not submitted until the policy is delivered, the date the applicant pays the first premium is still the effective date of coverage.

When does the free look period begin?

the date the policy is delivered to the owner: The free-look period begins on the date that the policy is delivered to the policyowner. If the policyowner is not satisfied for any reason, he or she can return the policy for a full refund of the premium paid.

What decreases under a decreasing term insurance policy or rider?

the death benefit: Under a decreasing term insurance policy or rider, the death benefit decreases. Just like level term insurance, decreasing term insurance provides temporary protection for a specified period of time. The significant difference between level term insurance and decreasing term insurance is that in decreasing term insurance the death benefit decreases monthly over the policy term until it reaches zero at the end of the term.

Adverse selection can be described as

the fact that people in poor health are more likely to buy and keep insurance. Adverse selection is selection against an insurer. It refers to the tendency of persons who are likely to make a claim based on their circumstances to buy and keep insurance. For example, a person who is sick is more likely to buy health insurance and to keep the policy in force than a healthy person.

Sue, an annuity owner, names her 15-year-old son and 10-year-old daughter as joint annuitants of her contract. Upon whose life (or lives) are income payments determined?

the joint life expectancy of Sue's son and daughter: If two people are named jointly as annuitants, then their joint life expectancy is the measurement for the contract's income payments.

Which of the following is an example of pure risk?

the loss of life: The loss of a life is a good example of pure risk because there is no possible gain in this situation.

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.

Adjustable life insurance lets the policyowner change all of the following elements of a life insurance policy EXCEPT

the policy type. Adjustable life insurance does not let the policyowner change the policy so that it functions as universal life insurance. However, the policy can function at any one time as a term life insurance policy, an ordinary whole life insurance policy, or a limited payment life insurance policy.

If a variable universal life policyowner chooses death benefit option 3, what will the benefit equal?

the policy's specified amount plus the total premiums paid: Death benefit option 3 under a variable universal life insurance policy pays a death benefit equal to the policy's specified amount plus the total premiums paid.

Who has the first right to choose how the proceeds of an insurance policy are paid out when the insured dies?

the policyowner: According to the Payment of Claims provision, the policyowner has the first right to choose which payout or settlement option to use. However, he or she can defer that decision to the beneficiary at the time that the proceeds are due to be paid out.

Under group life insurance paid by an employer, the IRS taxes the employee for

the premium charged on coverage over $50,000: Under group life insurance paid by an employer, employer-paid premiums are considered income. However the first $50,000 of coverage is exempt. The IRS taxes the employee for the premium charged on coverage over $50,000.

What feature stays level under an increasing term insurance policy or rider?

the premium: Under an increasing term insurance policy or rider, the premium stays level. However the death benefit increases.

Which of the following would NOT be considered when using the needs approach method to determine how much life insurance to buy?

the prospect's needs for health insurance: When using the needs approach method to determine how much life insurance to buy the agent does not need to consider how much health insurance to suggest. That's a consideration for another day.

The insurance company can require a medical exam or lab tests based on information found in the application. The insurance company may request a medical exam based on any of the following criteria, EXCEPT

the sex of the applicant: Insurers do not ask for medical exams based on the sex of applicants.

The death benefit payable under VUL death benefit Option 3 is equal to

the specified amount plus the total premiums paid: The death benefit payable under VUL death benefit Option 3 is equal to the specified amount plus the total premiums paid.The three VUL death benefit options are Option 1: The death benefit is equal to the policy's specified amount. Option 2: The death benefit is equal to the sum of the policy's specified amount plus the cash value. Option 3: The death benefit is equal to the sum of the policy's specified amount plus the total premiums paid.

The death benefit in most life insurance policies is called the policy's face amount. In universal life insurance policies, the amount of death benefit the policyowner initially buys is called

the specified amount: In universal life insurance policies, the amount of death benefit the policyowner initially buys is called the "specified amount."

Cash value withdrawals from life insurance are generally treated on a first-in/first-out basis. If a policyowner withdraws funds from a policy, the funds withdrawn first come from what?

the total premium deposits: In a life insurance contract, the premium payments are put into the contract first (first in). When the policyowner makes a withdrawal, he or she withdraws first from the total premium deposits.

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.

In most situations, the policyowner is also the insured. However, in many cases, the insured and policyowner are different people. This situation is called which of the following?

third-party ownership: This situation is called third-party ownership.

Interest crediting in an indexed universal life insurance policy is

tied to an external index: Indexed universal life operates like a declared rate universal life policy except that the interest, instead of being declared by the insurer, is tied to an external index. The interest credited to the contract's values is based on the change in the associated index.

Which of the following is NOT a use for permanent life insurance?

to allow the beneficiary to borrow against the future proceeds to pay the beneficiary's debts while the insured is still living: The beneficiary has no rights to the life insurance proceeds while the insured still lives. Therefore, he or she cannot borrow against the policy's future proceeds to pay his or her own debts.

Which of the following is NOT a use of an annuity?

to provide monthly payments to the child whose parent has died: An annuity would not be used to pay income to a child who has lost a parent.

What is the purpose of surrender charges in universal life insurance policies?

to recover the insurer's business acquisition costs: The purpose of surrender charges in universal life insurance policies is to recover the insurer's business acquisition costs.It is not unusual, considering first year commissions, field expenses and underwriting expenses, for the acquisition cost of new business to be 150% or more of the first year premium. These business acquisition costs can be recovered by the insurer through deductions from each premium, the imposition of surrender charges, or both premium deductions and surrender charges.

Four business partners enter into a cross-purchase buy-sell agreement. How many life insurance policies are bought to fund the purchase of an owner's interest when he or she leaves the company or dies?

twelve—each partner buys life insurance on each of the other three partners' lives: Each of the four partners buys life insurance on each of the other three partners' lives (4 x 3 = 12).

Settlement options can be based on the length of the joint lives of which of the following?

two or more annuitants: Settlement options can be based on the length of the joint lives of two or more annuitants.

Which type of life insurance policy allows withdrawals?

universal life insurance: Universal life insurance policies allow withdrawals from their cash values; whole life policies do not allow withdrawals.

When a person dies, the survivors often immediately need a certain amount of money to cover costs. The survivors will need an immediate lump sum to pay for all of the following EXCEPT

utilities and clothing: In addition to lump sum amounts that are needed immediately at an insured's death, the surviving family will also typically need income to cover ongoing needs such as utilities, food, clothing, and transportation.

Which type of annuity DOES NOT guarantee a minimum rate of return?

variable annuity: Under a variable annuity, the insurer makes no guarantees regarding either the annuity's principal or the credited interest rate.

A producer must be licensed by the Financial Industry Regulatory Authority (FINRA) to sell which one of the following types of life insurance?

variable life insurance: Producers who sell variable life products must hold both a life insurance license and a NASD Series 6 or 7 securities license.

The name of the agreement under which a terminally ill or chronically ill person sells his or her interest to a third party for a percentage of the death benefit is called ________________.

viatical settlement: The name of the agreement under which a terminally ill or chronically ill person sells his or her interest to a third party for a percentage of the death benefit is called a viatical settlement.

Harry and Constance want life insurance to provide death benefits in case either dies, as well as living benefits in the event of financial emergencies. Which of the following would this couple most likely buy?

whole life insurance: Whole life insurance pays death benefits for the insureds' lifetimes, or until age 100. Whole life policies also accumulate cash values, which grow over the life of the policy. These are the "living benefits" Harry and Constance are seeking.