Life Insurance 101

$250

What is the fine for using an unapproved assumed name by a producer?

Adverse Selection

when risks with higher probability of loss are seeking insurance more often than other risks, this is known as what?

Creditor is the policyowner

who is the policy owner in credit life insurance?

increasing

A Return of Premium term life policy is written as what type of term coverage?

A universal policy has two components: an insurance component and a cash account. The insurance component (or the death protection) of a universal life policy is always annual renewable term insurance.

A Universal Life Insurance policy is best described as a/an

Guaranteed and Current; The insurer credits the cash value in the policy with a current (nonguaranteed) interest rate and backs the cash value with a contract (lower guaranteed) rate of interest.

A Universal Life insurance policy has two types of interest rates that are called

If the payor (usually a parent or guardian) becomes disabled for at least 6 months or dies, the insurer will waive the premiums until the minor reaches a certain age, such as 21.

A father owns a life insurance policy on his 15-year-old daughter. The policy contains the optional Payor Benefit rider. If the father becomes disabled, what will happen to the life insurance premiums?

Monthly premium waiver and monthly income; The Disability Income Benefit rider waives the policy premiums, just like the Waiver of Premium rider. Unlike the Waiver of Premium rider, it also allows the insured to receive a weekly or monthly income during the disability period.

After a back injury, an insured is disabled for a year. His insurance policy carries a Disability Income Benefit rider. Which of the following benefits will he receive?

specified; Beneficiary designations determine the order in which benefits will be paid: primary or contingent, which includes secondary and tertiary.

All of the following are beneficiary designations EXCEPT

This rider is available to all insureds with no additional premium; The guaranteed insurability rider may be structured to allow for specific additional amounts of insurance to be purchased at specific ages, dates and events without proving insurability; however, the coverage is purchased at the insured's attained age and the maximum allowable purchase is specified in the base policy. This rider usually expires at the insured's age 40.

All of the following are true regarding the guaranteed insurability rider EXCEPT

The policy is owned by the company.

All of the following statements concerning the use of life insurance as an Executive Bonus are correct EXCEPT

2.5%

An insurance company forwards fixed annuity premiums to their general account, where the money is invested. The guaranteed minimum interest is set at 2.5%. During an economic downswing, the investments only drew 2%. What interest rate will the insurer pay to its policyholders?

2.5%; Insurance companies promise guaranteed minimums on the fixed annuities (2.5% in this scenario). This means that if the investments draw less than that, the company will have to pay 2.5% anyway. If the investments earn over 2.5%, the company will pay that excess.

An insurance company forwards fixed annuity premiums to their general account, where the money is invested. The guaranteed minimum interest is set at 2.5%. During an economic downswing, the investments only drew 2%. What interest rate will the insurer pay to its policyholders?

$9,800; In this scenario, the death occurred within the mandatory 30-day grace period. Past due premium would be subtracted from the face amount of the policy.

An insured had a $10,000 term life policy. The annual premium of $200 was due on February 1; however, the insured failed to pay the premium. He died on February 28. How much would the beneficiary receive from the policy?

Predicted needs of the family after the insured's death.

Based on Human Life Value Approach, which of the following is NOT used to calculate an individual's life value?

Predicted needs of the family after the insured's death; The Human Life Value Approach to determining the value of an individual's life requires the calculation of probable future earnings of the insured, which involves wages, expenses, inflation, amount of time until retirement, and the time value of money. Predicted needs of the family after the insured's death are used in the needs approach.

Based on Human Life Value Approach, which of the following is NOT used to calculate an individual's life value?

Apparent authority (also known as perceived authority) is the appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created.

Because an agent is using stationery with the logo of an insurance company, applicants for insurance assume that the agent is authorized to transact on behalf of that insurer. What type of agent authority does this describe?

Flexible premium. Variable universal life, like universal life itself, has a flexible premium that can be increased or decreased as the policyowner chooses, so long as there is enough value in the policy to fund the death benefit.

Both Universal Life and Variable Universal Life have a

Obtain a list of all life insurance policies that will be replaced; The replacing insurance company must require from the producer a list of the applicant's life insurance or annuity contracts to be replaced and a copy of the replacement notice provided to the applicant, and send each existing insurance company a written communication advising of the proposed replacement.

During replacement of life insurance, a replacing insurer must do which of the following?

Risk, or the chance of loss occurring, is the basic reason for buying insurance.

For the purpose of insurance, risk is defined as

Uncertainty of loss

For the purpose of insurance, what is risk?

Coercion; Coercion, for example, is when the bank won't give you an auto loan unless you agree to buy auto insurance from them.

Forcing a client to buy insurance from a particular lender as a condition of granting a loan is defined as

Agreement (offer and acceptance), consideration, competent parties, and legal purpose

Four elements of an insurance contract

The entire face value of the policy will be included in J's taxable estate; If a policyowner transfers or gives away a life insurance policy within 3 years prior to his/her death, the entire face amount of the policy will be included in his or her taxable estate.

J transferred his life insurance policy to his son two years before his death. Which of the following is true?

Any form of Life insurance may be used to fund a buy-sell agreement.

Partners in a business enter into a buy-sell agreement to purchase life insurance, which states that should one of them die prematurely, the other would be financially able to buy the interest of the deceased partner. What type of insurance policy may be used to fund this agreement?

Tax deductible.

Taxation rules for Traditional IRA contributions

Insurance companies from adverse selection by high risk persons. The MIB makes information available to underwriters to assist them in the underwriting process. It is a nonprofit trade organization which receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals.

The Medical Information Bureau (MIB) was created to protect

Annually Increasing Term

The death protection component of Universal Life Insurance is always

one-year term

The dividend option in which the policyowner uses dividends to purchase a term policy for one year is referred to as the

tax-deductible contributions for the year of the contribution (based on the person's income); contributions must be made in "cash" in order to be tax deductible; excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA; and tax-deferred earnings are not taxed until withdrawn.

The following taxation rules apply to contributions made to traditional IRA plans:

As of the application date; If the full premium was submitted with the application and the policy was issued as requested, the policy coverage effective date would generally coincide with the date of application.

The full premium was submitted with the application for life insurance, and the policy was issued two weeks later as requested. When does the policy coverage become effective?

$100,000

The insured under a $100,000 life insurance policy with a triple indemnity rider for accidental death was killed in a car accident. It was determined that the accident was his fault. The triple indemnity rider in the policy specifies that the death must not be contributed to by the insured in any manner. In this case, what will the policy beneficiary receive?

$1,000; Statutes limit the fine to 'up to $1,000', unless the person knew the act was in violation, in which case it may be increased to as much as $25,000.

The minimum fine for violating the Insurance Code is

Promote public welfare; The purpose of the State Insurance Department is to protect the public's interest in matters concerning insurance.

The purpose of insurance regulation is to:

moral

an applicant conceals relevant health info on insurance app. what type of hazard do they present?

limited pay whole life premium payments will cease at age 65 but coverage continues until death or age 100

your client wants both protection and savings from insurance and is willing to pay premiums until retirement until age. what would be the right policy for this client?

The rider is usually level term insurance. (The spouse term rider allows a spouse to be added for coverage. It is available for a limited amount of time, typically expiring at age 65. A spouse term rider (just like any other insured rider) is usually level term insurance.)

Which is true about a spouse term rider?

Only written statements can be considered fraud. any oral or written statement by any person engaged in the business of insurance that are false or any omissions of material fact are considered unlawful insurance fraud

Which of the following is NOT correct regarding false statements by a person engaged in the business of insurance?

The application given to a prospective insured; Consideration is something of value that is transferred between the two parties to form a legal contract.

Which of the following is NOT the consideration in a policy?

Either on the date of the application or the date of the medical exam (whichever occurs last)

at what point does coverage begin when an agent issues a conditional receipt for a life insurance policy?

a method of risk management by which a person tries to eliminate loss by avoiding any exposure to an event that could five rise to such loss. effective but seldom practical (ex. never riding in a car to avoid an accident)

avoidance

Flexible Premium

both universal life and variable universal life have a

a special type of coverage written to insure the life of the debtor and pay off the balance of a loan in the event of the death of the debtor.

credit life insurance

-invest on an aggressive basis to yield higher returns -HAVE guaranteed min. interest rates -less risky than variable annuities -earn higher interest rates than fixed annuities

equity indexed annuities

the insurer uses the policy cash value to convert term insurance for the same face amount as the former permanent policy (usually whole life)

extended term non-forfeiture option

made when insurance companies attempt to hide their financial troubles from the public and government officials

false financial statement

loss must be due to chance, definite and measurable, statistically predictable, not catastrophic, and coverage =/= mandatory

five characteristics of an ideally insurable risk

a presentation of guaranteed elements of a policy

illustration

blackout period

in terms of social security, what is the name for the time period after the youngest child turns 16 and before the surviving spouse may start receiving retirement benefits?

an increasing term insurance policy that pays an additional death benefit to the beneficiary equal to the amount of the premiums paid.

return of premium (ROP)

Annually Renewable Term

the death protection component of universal life insurance is ALWAYS

-waives the policy premiums -allows the insured to receive weekly or monthly income during disability period

the disability income benefit rider

insurable interest and consent

what are two elements necessary for a life insurance contract to have a legal purpose?

The annuitant receives a fixed amount of return; Equity indexed annuities have a guaranteed minimum interest rate, so while they are aggressive in nature, the annuitant will not have to worry about receiving less than what the minimum interest rate would yield.

All of the following statements about equity index annuities are correct EXCEPT

Among other factors, the annuity income amount is based upon the annuitant's age and gender. An annuitant whose life expectancy is shorter will have the largest income installments. In this example, an older man will have the shortest life expectancy.

All other factors being equal, which of the following individuals would receive the largest monthly check from a single premium straight life immediate annuity?

Concealment; In insurance, concealment is the withholding of information that will result in an imprecise underwriting decision.

An applicant knowingly fails to communicate information that would help an underwriter make a sound decision regarding coverage. This is an example of

$50,000; The face of the term policy would be the same as the face amount provided under the whole life policy.

An insured owns a $50,000 whole life policy. At age 47, the insured decides to cancel his policy and exercise the extended term option for the policy's cash value, which is currently $20,000. What would be the face amount of the new term policy?

pay the death benefit; The incontestability clause prevents an insurer from denying a claim due to statements in an application after the policy has been in force for 2 years, even on the basis of a material misstatement of facts or concealment of a material fact.

An insured purchased a life policy in 2010 and died in 2017. The insurance company discovers at that time that the insured had concealed information during the application process. What can they do?

Mutual

An insured purchased an insurance policy 5 years ago. Last year, she received a dividend check from the insurance company that was not taxable. This year, she did not receive a check from the insurer. From what type of insurer did the insured purchase the policy?

The insured will need a written consent of the insurer; A personal insurance contract is written between an insurance company and an individual, and the company has a right to decide with whom it will and will not do business. An insured can transfer an insurance contract to another person, but he or she must first obtain the written consent of the insurer.

An insured wants to transfer his personal insurance policy to a friend. Under what conditions would this be possible?

If an insurance company decides to transact insurance illegally, it still will be responsible for paying any claims that are filed under its fraudulent policies.

An insurer conducts business in Louisiana without a certificate of authority. Hundreds of policies are sold, and claims start rolling in. Which of the following is true?

Inspection reports cover moral and financial information regarding a potential insured, usually supplied by private investigators and credit agencies. Companies that use inspection reports are subject to the rules outlined in the Fair Credit Reporting Act.

An insurer receives a report regarding a potential insured that includes the insured's financial status, hobbies and habits. What type of a report is that?

Yes, but not unfairly; The company will discriminate in favor of good risks and not of poor risks; however, it cannot discriminate unfairly by using factors such as race or national origin in their underwriting.

Are insurance company underwriters allowed to discriminate?

If $100,000 of life insurance proceeds were used in a settlement option paying $13,000 per year for 10 years, $10,000 per year would be income tax free (as principal) and $3,000 per year would be income taxable (as interest).

If $100,000 of life insurance proceeds were used in a settlement option, which paid $13,000 per year for ten years, which of the following would be taxable annually?

Because the insurer would have the entire premium to invest for a full year, they would reduce the premium amount.

If an insured changes his payment plan from monthly to annually, what happens to the total premium?

Upon the last death

In a survivorship life policy, when does the insurer pay the death benefit?

the type of investment; Typically, the owner of an adjustable life policy has the following privileges: increasing or decreasing the premium, changing the premium-paying period, increasing or decreasing the face amount of coverage, or changing the period of protection.

In an Adjustable Life policy all of the following can be changed by the policy owner EXCEPT:

Handling insurer funds in a trust capacity.

In insurance transactions, fiduciary responsibility means

An applicant submits an application to the insurer.

In insurance, an offer is usually made when:

Policyowner; The policyowner must have an insurable interest in the insured (his/her own life if the policyowner and the insured is the same person), or in the life of a family member or a business partner.

Individuals that must have insurable interest in the insured?

$10K; The triple indemnity accidental death rider obligates the company to pay three times the face amount of the policy if the insured dies as a result of an accident. The death must be accidental and not contributed to by any other factors and must occur within 90 days of the accident. In this case, since the insured contributed to his own death, the triple indemnity rider is void, but the beneficiary will still receive the policy's death benefit.

The insured under a $100,000 life insurance policy with a triple indemnity rider for accidental death was killed in a car accident. It was determined that the accident was his fault. The triple indemnity rider in the policy specifies that the death must not be contributed to by the insured in any manner. In this case, what will the policy beneficiary receive?

The Reduction of Premium option allows the policyholder to apply policy dividends toward the next year's premium. The dividend is subtracted from the premium amount, yielding the new premium due for the next year.

The policyowner pays for her life insurance annually. Until now, she has collected a nontaxable dividend check each year. She has decided that she would rather use the dividends to help pay for her next premium. What option would allow her to do this?

With the interest-only option, the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient (beneficiary) at regular intervals.

The policyowner wants to make sure that upon his death, the life policy will pay a portion of the proceeds annually to his spouse, but that the principal will be paid to their children when they reach a certain age. Which settlement option should the policyowner choose?

LOWER; Survivorship Life is much the same as joint life in that it insures two or more lives for a premium that is based on a joint age. The major difference is that survivorship life pays on the last death rather than upon the first death. Since the death benefit is not paid until the last death, the joint life expectancy in a sense is extended, resulting in a lower premium than that which is typically charged for joint life.

The premium of a survivorship life policy compared with that of a joint life policy would be

The term "illustration" means a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years.

The term "illustration" in a life insurance policy refers to:

Joint and survivor. A joint and survivor option pays while either beneficiary is still living.

The type of settlement option which pays throughout the lifetimes of two or more beneficiaries is called

The same face amount as in the whole life policy; Under this option the insurer uses the policy cash value to convert to term insurance for the same face amount as the former permanent policy.

Under an extended term nonforfeiture option, the policy cash value is converted to

When the application is signed and a check is given to the agent; The policy can be effective as early as the date of the application, if the premium is submitted with the application and the policy is issued as applied for.

When is the earliest a policy may go into effect?

Implied authority is not written in the agent's contract but is required in order for the agent to conduct business. Implied authority exists because not every single detail of an agent's authority can be written in a contract.

Which authority is NOT stated in an agent's contract but is required for the agent to conduct business?

The spouse term rider allows a spouse to be added for coverage. It is available for a limited amount of time, typically expiring at age 65. A spouse term rider (just like any other insured rider) is usually level term insurance.

Which is true about a spouse term rider?

The reduced paid-up nonforfeiture option would provide protection until the insured reaches 100, but the face amount is reduced to what the cash would buy.

Which nonforfeiture option provides coverage for the longest period of time?

Owner's Rights

Which of the following explains the policyowner's right to change beneficiaries, choose options, and receive proceeds of a policy?

They earn lower interest rates than fixed annuities; Equity Indexed Annuities invest on an aggressive basis in order to yield higher returns. Like a fixed annuity, Equity Indexed Annuities have guaranteed minimum interest rates. The insurance company often keeps a predetermined percentage of the return and pays the rest to the annuity owner. Equity Indexed Annuities are less risky than variable annuities and earn higher interest rates than fixed annuities.

Which of the following is NOT true regarding Equity Indexed Annuities?

Premiums are not tax deductible as a business expense. The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free.

Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy?

It insures the life of a debtor.

Which of the following is correct regarding credit life insurance?

Universal Life - Option A; Universal Life Option A (Level Death Benefit option) policy must maintain a specified "corridor" or gap between the cash value and the death benefit, as required by the IRS. If this corridor is not maintained, the policy is no longer defined as life insurance for tax purposes, and consequently loses most of the tax advantages that have been associated with life insurance.

Which of the following policies would have an IRS required corridor or gap between the cash value and the death benefit?

Payor Benefit Rider does not increase the Death Benefit; it only pays the premium if the payor is disabled or dies. With Guaranteed Insurability Rider, the policyowner can increase DB at specified ages or events, i.e. marriage or birth of a child; Cost of Living Rider increases DB to keep pace with inflation; in Accidental Death Rider, if the insured dies from an accident, DB is a multiple of the Face Amount.

Which of the following riders would NOT cause the Death Benefit to increase?

Withdrawls are not taxable; Any distributions from MECs are taxable, including withdrawals and policy loans. All of the other statements are true

Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE?

Calls based from outside of the United States

Which of the following would NOT be considered an exception to the National Do Not Call List?

Under Option B the death benefit includes the annual increase in cash value so that the death benefit gradually increases each year by the amount that the cash value increases. At any point in time, the total death benefit will always be equal to the face amount of the policy plus the current amount of cash value.

Which option for Universal life allows the beneficiary to collect both the death benefit and cash value upon the death of the insured?

Insureds cannot be randomly selected; Granting insurance must not be mandatory, selecting insureds randomly will help the insurer to have a fair proportion of good risks to poor risks. All other statements are true.

Which statement regarding insurable risks is NOT correct?

-term coverage that is convertible to permanent insurance at or prior to the child reaching the maximum coverage age -covers all children in the family including newborns -no evidence of insurability necessary to

children's rider aded to an insured's permanent life policy

joint and survivor option pays while either beneficiary is still living

type of settlement option that pays through the lifetimes of two or more beneficiaries

-restriction of coverage -refusal to accept a risk -accepting that risk at a higher rate

what are the strategies used by underwriters to prevent adverse selection?

One-sided, only one party makes an enforceable promise.

what is the definition of an unilateral contract?

Inspection Report

what type of report provides information about the applicant's hobbies, habits, and financial status?

the annuitant they recieve the payments can be the annuity owner but do not have to be

when an annuity is written, whose life expectancy is taken into an account?

When the insurer approves a prepaid application

when does acceptance of insurance contracts normally occur?

DEATH BENEFIT increasing term features level annual premiums and a DB that increases each year over policy's term

which component increases in the increasing term insurance