Life Insurance - Basics (chapter 3)

Which of the following types of insurance policies would perform the function of cash accumulation?

whole life - Life insurance is unique from other types of insurance in that it could perform the function of cash accumulation. Cash values are available in whole life policies.

Which of the following must be disclosed in all advertisements and policies of term life insurance for individuals 55 years of age or older?

Insurance monetary value index - When a term life insurance monetary value index is adopted by the Commissioner, it must be disclosed in all advertisements and policies of term life insurance for individuals age 55 and older.

What is the purpose of the buyer's guide?

To allow the consumer to compare the costs of different policies - The buyer's guide provides generic information about life insurance policies and allows the consumer to compare the costs of different policies. The policy summary provides specific information about the issued policy, as well as the insurer's information.

An investor buys a life policy on an elderly person in order to sell it for a life settlement. This is an example of

A STOLI policy - Stranger-originated life insurance (STOLI) policies are usually purchased by people who have no relationship with the insured with the intention of selling them for life settlements.

A policy available to business owners that provides payment for normal business expenses in the event that the owner is disabled is called

Business Overhead Expense - Business Overhead insurance is often purchased by small employers to pay the ongoing business expenses (such as payroll) in the event the owner of the business becomes disabled. Premiums paid are tax deductible as a business expense, but proceeds paid are taxable as income.

All of the following are duties and responsibilities of producers at the time of application EXCEPT

Change any incorrect statement on the application by personally initialing next to the corrected statement. - Any changes to information on an application must be initialed by the applicant.

Which of the following methods of calculating the amount of life insurance needed takes into account the insured's wages, years until retirement, and inflation?

Human life value approach - Human life value approach is determined by the loss of income that would result with the death of the insured, after making adjustments for expenses, inflation, etc.

Which of the following will be included in a policy summary?

Premium amounts and surrender values - A policy summary must be delivered along with the policy and will provide the producer's name and address, the insurance company's home office address, the generic name of the policy issued, and premium, cash value, surrender value and death benefit figures for specific policy years.

Stranger-originated life insurance policies are in direct opposition to the principle of

insurable interest - Because the purchaser of a stranger-originated life insurance policy doesn't know the insured, or have any interest in the insured's longevity, STOLI policies violate the principle of insurable interest.

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

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.

In the event of a loss, business overhead insurance will pay for

Rent - Business overhead insurance is designed to pay the ongoing business expenses of a small business owner while they are disabled and unable to work. It does not pay the salary of the business owner or their loss of profits. However, it will provide the funds needed to pay the salary of employees other than the owners and their other ongoing business expenses, such as rent.

Signing and dating a delivery receipt for a life insurance policy helps to establish all of the following timeframes EXCEPT

The Grace Period - When the customer signs and dates the policy delivery receipt, the exact date of acceptance is established, which starts the incontestability period. The client also has between 10 to 30 days to review the policy and return for a full refund, called the Right of Rescission, or Free Look Period. The grace period refers to the time period allowed after subsequent premium payments during which a policy will not lapse.

A life insurance policy can be delivered by all of the following means, EXCEPT

priority mail - Acceptable methods of delivery include Registered or Certified Mail, Personal Delivery with a signed, written delivery receipt, 1st Class Mail with a signed written Delivery Receipt, or any reasonable means determined by the Commissioner. Priority mail does not establish an exact date of delivery or to whom it was delivered, and personally delivering the policy needs to be done by a properly licensed representative who can answer questions.

Which of the following would be least likely to be considered a legitimate need that would be paid by insurance proceeds?

Vacation travel expenses - There are many legitimate need-based expenses that can be paid by life insurance proceeds, from groceries to retirement income. Vacation travel expenses are most likely to be considered a luxury and not a need.

Which of the following would NOT fall into the category of costs associated with death?

The expense of a vacation for surviving family members - These costs would take into account the final medical expenses of the insured, funeral expenses, and day to day expenses of maintaining the family including rent or mortgage payments, car payments, utilities, groceries, etc.

A small hardware store owner is involved in a car accident that renders him totally disabled for half a year. Which type of insurance would help him pay for expenses of the company during the time of his disability?

Business overhead expense policy - Business Overhead Expense (BOE) insurance is sold to small business owners for the purpose of reimbursing the policyholder for various business overhead expenses during a period of total disability. Expenses such as rent, utilities, and employee salaries are covered.

When the partners of a business develop an arrangement whereby should one of them die or become permanently disabled, the other partners would purchase the interest of the deceased or disabled partner at a predetermined price, this is called a/an

Business continuation plan - A business continuation plan is an agreement between business owners whereby they agree, should one of them die or become disabled, the surviving owners will purchase the interest of the deceased or disabled owner at a predetermined price. Such a plan is usually funded by each owner purchasing insurance on each of the other owners.

An applicant signs an application for a $25,000 life insurance policy, pays the initial premium, and receives a conditional receipt. If the applicant dies the following day, which of the following is TRUE?

The beneficiary will receive the full death benefit if it is determined that the applicant qualified for the policy. - The conditional receipt provides that when the applicant pays the initial premium, coverage is effective on the condition that the applicant proves to be insurable either on the date the application was signed or the date of the medical examination, if one is required.