Life - Policy Provisions, Options and Riders Test

A business owner was trying to obtain a bank loan to fund the purchase of a new business facility, but the bank required proof of additional assets to secure the loan. The business owner then decided to use her $250,000 life insurance policy to secure the loan. Which provision makes this possible? A) Collateral assignment B) Insurable interest C) Modification clause D) Ownership provision

A) Collateral assignment The business owner could make a collateral assignment of his or her life insurance policy to the bank.

Which is TRUE about the cash surrender nonforfeiture option? A) Funds exceeding the premium paid are taxable as ordinary income. B) After the cash surrender, the insured is covered for a grace period of one month. C) The policy remains active for some time after the policyholder opts for cash surrender. D) The policyholder receives the original cash value of the policy.

A) Funds exceeding the premium paid are taxable as ordinary income. Correct! The insurers surrender the policy at its current cash value. Only any excess of value is taxable as income. Once the policyholder opts for cash surrender, the policy is immediately inactive.

Which of the following statements is TRUE about a policy assignment? A) It authorizes an agent to modify the policy. B) It transfers rights of ownership from the owner to another person. C) It is the same as a beneficiary designation. D) It permits the beneficiary to designate the person to receive the benefits.

B) It transfers rights of ownership from the owner to another person. The policyowner may assign a part of the policy (collateral assignment) or the entire policy (absolute assignment).

Which of the following is TRUE about the 10-day free-look period in a Life Insurance policy? A) It applies only to term life insurance policies. B) It is optional on all life insurance policies. Which of the following is TRUE about the 10-day free-look period in a Life Insurance policy? C) It begins when the policy is delivered. D) It begins when the application is signed.

C) It begins when the policy is delivered. Correct! The 10-day free-look provision is a mandatory provision that allows the insured to examine a policy, and if dissatisfied for any reason, return the policy for a full refund of any premiums paid.

The Waiver of Cost of Insurance rider is found in what type of insurance? A) Joint and Survivor B) Juvenile Life C) Universal Life D) Whole Life

C) Universal Life The Waiver of Cost of Insurance rider is found in Universal Life policies. If the insured becomes disabled, the rider allows the cost of insurance to be waived, with the exception of premium costs required to accumulate cash value.

What is the waiting period on a Waiver of Premium rider in life insurance policies? A) 30 days B) 3 months C) 5 months D) 6 months

D) 6 months Correct! Most insurers impose a 6-month waiting period from the time of disability until the first premium is waived.

If a settlement option is not chosen by the policyowner or the beneficiary, which option will be used? A) Life income B) Fixed period C) Fixed amount D) Lump sum

D) Lump sum Correct! Upon the death of the insured, or endowment, the contract is designed to pay the proceeds in cash, called a lump sum, unless the recipient chooses an optional mode of settlement.

What limits the amount that a policyowner may borrow from a whole life insurance policy? A) Cash value B) Premiums paid C) Amount stated in the policy D) Face amount

A) Cash value The amount available to the policyowner for a loan is the policy's cash value. If there are any outstanding loans, that amount will be reduced by the amount of the unpaid loans and interest.

The rider in a whole life policy that allows the company to forgo collecting the premium if the insured is disabled is called A) Waiver of premium. B) Guaranteed insurability. C) Waiver of cost of insurance. D) Payor benefit.

A) Waiver of premium. Waiver of premium rider waives the premium if the insured owner has been totally disabled for a predetermined period. The payor benefit provides for an owner other than the insured and the waiver of cost of insurance is found in Universal Life.

Under which nonforfeiture option does the company pay the surrender value and have no further obligations to the policyowner? A) Cash surrender B) Reduced paid-up C) Paid-up options D) Extended term

A) Cash surrender Correct! Once the cash surrender value is paid, the contract is over.

When a policyowner designates a group of individuals as the beneficiary of a life insurance death benefit without specifically naming the individuals, this is called A) Revocable designation. B) Irrevocable designation. C) Stirpes designation. D) Class designation.

D) Class designation. Correct! A designation such as the child of the insured, or all children of the insured, or all current members of a group, is called a "class designation." The individuals need not be specifically named, since each who meet the qualifications of being included in the class will share in the benefit.

An absolute assignment is a A) Transfer of some ownership rights in a policy. B) Change of beneficiary. C) Change of insurer. D) Transfer of all ownership rights in a policy.

D) Transfer of all ownership rights in a policy. Correct! Absolute Assignment involves transferring all rights of ownership to another person or entity. This is a permanent and total transfer of all the policy rights. The new policyowner does not need to have an insurable interest in the insured.

J applied for a life insurance policy on January 10. The policy was issued on January 31. J's agent was vacationing at the time the policy was issued, so J did not receive the policy until February 18. J decides that he does not want the policy. When would J need to return the policy to the insurer in order to receive a full refund of premium paid? A) February 28th, or 10 days after the time the policy is delivered. B) The time varies from one policy to another. C) It was already too late when J received the policy because the 10-day free-look period had expired. D) Anytime, because the agent did not deliver the policy promptly.

A) February 28th, or 10 days after the time the policy is delivered. Correct! The 10-day free-look period begins when the policy is delivered.

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? A) Reduction of premium B) Paid-up addition C) Accumulation at interest D) Cash option

A) Reduction of premium 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.

An insured receives an annual life insurance dividend check. What term best describes this arrangement? A) Accumulation at Interest B) Cash option C) Reduction of Premium D) Annual Dividend Provision

B) Cash option The cash option allows an insurer to send the policyholder an annual, nontaxable dividend check.

If a life policy allows the policyowner to make periodic additions to the face amount at standard rates, without proving insurability, the policy includes a A) Nonforfeiture option. B) Guaranteed insurability rider. C) Paid-up additions option. D) Cost of living provision.

B) Guaranteed insurability rider. The Guaranteed Insurability rider allows the policyowner to purchase specific amounts of additional insurance at specific dates or events, without proving continued insurability. Rates for the additions are based upon attained age.

An individual purchased a life insurance policy on his life naming his wife as primary beneficiary, and their daughter as contingent beneficiary. Under what circumstances could the daughter collect the death benefit? A) If the insured dies from an accident B) If the primary beneficiary predeceases the insured C) The primary and contingent beneficiaries share death benefits equally D) With the primary beneficiary's written consent

B) If the primary beneficiary predeceases the insured The contingent beneficiary would need to outlive the insured and primary beneficiary.

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? A) $0 B) $50,000 (50% of the policy value) C) $100,000 D) $300,000 (triple the amount of policy value)

C) $100,000 Correct! 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.

If a life policy allows the policyowner to make periodic additions to the face amount at standard rates, without proving insurability, the policy includes a A) Cost of living provision. B) Nonforfeiture option. C) Guaranteed insurability rider. D) Paid-up additions option.

C) Guaranteed insurability rider. Correct! The Guaranteed Insurability rider allows the policyowner to purchase specific amounts of additional insurance at specific dates or events, without proving continued insurability. Rates for the additions are based upon attained age.

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? A) Fixed amount option B) Interest only option C) Life income with period certain D) Joint and survivor

B) Interest only option 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.

An insured purchased a 15-year level term life insurance policy with a face amount of $100,000. The policy contained an accidental death rider, offering a double indemnity benefit. The insured was severely injured in an auto accident, and after 10 weeks of hospitalization, died from the injuries. How much will the beneficiary receive from the policy? A) $0 B) $100,000 C) $200,000 D) $100,000 plus the total of paid premiums

C) $200,000 Correct! The beneficiary will most likely receive twice the face value of the policy, since the insured's fatal injuries were caused by an accident and he died within the 90-day benefit limit stipulated in most policies.

A rider attached to a life insurance policy that provides coverage on the insured's family members is called the A) Juvenile rider. B) Payor rider. C) Other-insured rider. D) Change of insured rider.

C) Other-insured rider. The other-insureds rider is useful in providing insurance for more than one family member. The type of insurance offered by this rider is usually term insurance, with the right to convert to permanent insurance.

Which of the following named beneficiaries would NOT be able to receive the death benefit directly from the insurer in the event of the insureds' death? A) A business partner of the insured B) The wife of the deceased insured C) The former wife of the deceased insured D) A minor son of the insured

D) A minor son of the insured Correct! Because a minor does not have the legal capacity to release the insurer from further obligation, benefits normally have to be passed through a guardian or trustee.

What limits the amount that a policyowner may borrow from a whole life insurance policy? A) Premiums paid B) Amount stated in the policy C) Face amount D) Cash value

D) Cash value Correct! The amount available to the policyowner for a loan is the policy's cash value. If there are any outstanding loans, that amount will be reduced by the amount of the unpaid loans and interest.

The rider in a whole life policy that allows the company to forgo collecting the premium if the insured is disabled is called A) Guaranteed insurability. B) Waiver of cost of insurance. C) Payor benefit. D) Waiver of premium.

D) Waiver of premium. Correct! Waiver of premium rider waives the premium if the insured owner has been totally disabled for a predetermined period. The payor benefit provides for an owner other than the insured and the waiver of cost of insurance is found in Universal Life.

Who can make changes to the policy once it is in effect? A) An executive officer of the insurer B) The insured C) The policyowner D) The agent

A) An executive officer of the insurer Correct! Any changes made to a policy must be endorsed and attached to the policy over the signature of an authorized officer of that insurer. No other individual has the authority to make changes or waive policy provisions.