Unit 6 Quiz

"What is the default nonforfeiture option? A) Interest only B) Extended term C) Reduced paid-up D) Surrender value"

"Extended term Explanation If a permanent life policy lapses for nonpayment and the policyowner has not chosen a nonforfeiture option, the insurance company by default will choose extended term insurance. The company will purchase a 1-year term policy on the insured's behalf at his attained age with the same size death benefit as the policy that lapsed for nonpayment."

"Which of the following period certain income options would call for the highest payment rate per $1,000 of life policy proceeds? A) 15-year period certain B) 10-year period certain C) 20-year period certain D) 5-year period certain"

"5-year period certain Explanation The shorter the period certain, the higher the monthly payment rate."

"Jeremy did not designate a specific settlement option to be paid upon his death. How will the death benefit proceeds be distributed? A) Fixed-period benefits B) Lump-sum payments C) Fixed-amount benefits D) Interest-only payments"

"Lump-sum payments Explanation The lump-sum payment settlement option is automatic when the policyowner has not chosen a specific settlement option prior to death."

"With a participating life insurance policy, a policyowner may do all of the following with dividends received EXCEPT A) take the dividends in cash B) use the dividends to pay overdue premiums from previous years C) purchase additional life insurance protection D) allow the dividends to accumulate at interest"

"use the dividends to pay overdue premiums from previous years Explanation Policy dividends may be taken in cash, used to reduce the following year's premium, or used to purchase a 1-year term policy or additional life insurance protection. Dividends can also be allowed to accumulate at interest."

"Which of the following dividend options produces a result similar to taking dividends in cash and depositing them in a bank savings account? A) Applying dividends against premium payments B) Using dividends to buy 1-year term insurance C) Taking dividends in cash D) Leaving dividends to accumulate at interest"

"Leaving dividends to accumulate at interest Explanation Of the 5 common dividend options, leaving dividends with the company to accumulate at interest is the only choice that directly produces interest income."

"The settlement option that will pay the largest amount to the beneficiary regardless how long he lives is A) the life with period certain option B) the life only or straight life option C) the life with refund option D) the interest only option"

"the life only or straight life option Explanation The life only or straight life option provides a series of level payments to the beneficiary based on his life expectancy and are guaranteed for life. Payments cease upon the death of the beneficiary."

"Most participating whole life insurance policies allow all of the following uses of standard life insurance dividends EXCEPT A) to purchase additional units of paid-up life insurance B) to purchase 1-year term insurance C) to reduce future premium payments D) to increase the policy's face amount"

"to increase the policy's face amount Explanation Most participating whole life insurance policies allow the policyowner to apply dividends to pay up a policy earlier than otherwise expected, to buy paid-up permanent life insurance, to buy 1-year term insurance, or to reduce future premium payments. The policyowner cannot use dividends to increase the policy's face amount."

"Under a fixed-period life insurance settlement option, excess interest will A) shorten the payment period B) lengthen the payment period C) have no effect on payments D) increase the size of the payments"

"increase the size of the payments Explanation Under a fixed-period life insurance settlement option, excess interest will increase the size of payments. Insurers may choose to pay interest over and above the guaranteed rate if they have sufficiently high earnings."

"Insurance policies that pay dividends are referred to as A) participating policies B) preferred policies C) reserved policies D) nonparticipating policies"

"participating policies Explanation Insurance policies can be issued on a participating or a nonparticipating basis. Policies that pay dividends are referred to as participating policies. Policies that do not pay dividends are referred to as nonparticipating policies."

"At age 60, David decides to stop paying premiums on his $60,000 whole life policy and exchanges it for extended term insurance. What face value will the term insurance have? A) 45000 B) 10000 C) 30000 D) 60000"

"60000 Explanation When a policyowner stops paying premiums on a whole life policy and exchanges the policy for extended term insurance, a policy's cash surrender value is used to purchase an amount of term insurance equal to the original policy's face amount. The term insurance will last as long as the cash value is sufficient to pay premiums."

"Lynn elects to surrender her whole life policy for a reduced paid-up policy. The cash value of her new policy will A) decrease gradually B) continue to increase C) reduce immediately to $0 D) remain the same as in the old policy"

"continue to increase Explanation Once Lynn surrenders her whole life policy for a reduced paid-up policy, the face value is reduced but the cash value continues to increase."

"Betty owns a universal life insurance policy that was issued with a $100,000 face amount and now has total death benefit protection of $110,000. Several months ago she borrowed $15,000 from the policy. The outstanding loan balance (including interest) is $15,200. If Betty dies today, what will be the amount of the death benefit? A) 100000 B) 110000 C) 94800 D) 95000"

"94800 Explanation Outstanding policy loans plus interest are deducted from life insurance death benefit proceeds, leaving, in this case, a net death benefit of $94,800 ($110,000 - $15,200)."

"All the following are standard life insurance dividend options EXCEPT A) taking the dividend as an income tax-free cash distribution from the insurer B) using the dividend to purchase a unit of paid-up whole life insurance C) using the dividend to increase the base whole life policy's face amount D) leaving the dividends with the insurer to accumulate at interest in a cash account"

"using the dividend to increase the base whole life policy's face amount Explanation The paid-up addition dividend option uses the dividend to purchase units of paid-up permanent life insurance coverage, which, added to the base policy, creates a steadily increasing amount of coverage. It is generally not possible to increase the face amount of a whole life insurance policy, whether by dividend payment or any other means."

"What settlement option is designed to pay out a specified amount of income at regular intervals over an unspecified period of time? A) Life income option B) Fixed-period option C) Fixed-amount option D) Interest-only option"

"Fixed-amount option Explanation The fixed-amount settlement option provides for the payment of a policy's death benefit in specified amounts at regular intervals. The duration of the payments is not specified; payments are made until the proceeds—or principal—and interest are exhausted."

"Arnold buys a $25,000 participating whole life policy. He has a definite need for more life insurance but believes he cannot afford it. Which of the following dividend options would help to solve this problem automatically? A) Applying dividends against premium payments B) Using dividends to buy paid-up additions C) Leaving dividends to accumulate at interest D) Taking dividends in cash"

"Using dividends to buy paid-up additions Explanation Under a participating whole life policy, if an individual needs more life insurance, he can use dividends to buy paid-up additions."

"Heather wants her $85,000 life insurance policy arranged to pay her spouse a monthly income if she dies first, but most or all of the proceeds to go to their 2 children after her spouse's death. Which of the following settlement options could Heather select to provide income for her spouse and conserve the proceeds for the children? A) Fixed-period option B) Fixed-amount option C) Life income option D) Interest-only option"

"Interest-only option Explanation Under the interest-only option, only the interest on the face amount will be paid to the spouse on a regular basis. The face amount ($85,000) will be preserved for the children."

"Which of the following statements about life insurance policy settlement options is NOT correct? A) Under the fixed-period option, the payment of excess interest will lengthen the payment period. B) Debra and Renee are each receiving monthly income from their deceased spouses' identical life insurance policies under the fixed-period option. Debra's payments are to be made for 15 years and Renee's for 20 years. Debra receives the larger monthly payments. C) By using the interest-only option, 2 or more settlement options can be combined for added flexibility. D) Payments under the interest-only option may be made at a rate higher than the guaranteed minimum."

"Under the fixed-period option, the payment of excess interest will lengthen the payment period. Explanation Under the fixed-period option, the payment of excess interest will be used to make each payment larger, not to extend the payment period."

"Which of the following options is designed to protect the policyowner should the policy be in danger of lapsing for nonpayment of premiums? A) Waiver of premium B) Premium exclusion C) Automatic premium loan D) Guaranteed insurability"

"Automatic premium loan Explanation Under the automatic premium loan provision, the cash values will be used to pay the premium if the premium due has not been paid by the end of the grace period."

"Doris and Arnold receive $450 per month under a joint and one-half survivor life insurance option. What would happen if Arnold were to die first after the payments have started? A) Doris would have to select another settlement option. B) Monthly payments of $225 would be made to Doris as long as she lived. C) Doris would receive $450 per month as long as she lived. D) The remaining proceeds would be paid to Doris in a lump sum."

"Monthly payments of $225 would be made to Doris as long as she lived. Explanation The joint and one-half survivor life income option provides an income for 2 people. In this case, the couple, while both are living, gets the full amount; the survivor gets half the amount, or $225."

"In the sale of life insurance, all references to policy dividends A) generally address the insurance policy as an investment vehicle B) must include a statement that dividends are not guaranteed C) should project dividend return at least 15 years into the life of the policy D) must state the guaranteed rate of return"

"must include a statement that dividends are not guaranteed Explanation Any reference to policy dividends in the presentation of a life insurance policy must include a statement that dividends are not guaranteed."

"Denise, age 52, has a straight whole life policy and decides to stop paying premiums and take a paid-up policy for a reduced amount. Her paid-up policy will be A) term insurance B) whole life C) any type of policy she selects D) an annuity"

"whole life Explanation When a policyowner decides to stop paying premiums and take a paid-up policy for a reduced amount, the paid-up policy will be the same kind as the original policy."

"All of the following are dividend options EXCEPT A) assigning dividends to pay off a mortgage B) accumulate at interest C) reduced premiums D) paid-up additions"

"assigning dividends to pay off a mortgage Explanation There are 5 common dividend options: taking dividends in cash, applying dividends against premium payments, leaving dividends with the company to accumulate at interest, buying paid-up additions, and buying 1-year term protection."

"Leland elects to surrender his whole life policy for a reduced paid-up policy. The cash value of his new policy will A) remain the same as in the old policy B) decrease gradually C) decrease by 50% immediately D) continue to increase"

"continue to increase Explanation When Leland surrenders his whole life policy for a reduced paid-up policy, the face value is reduced but the cash value continues to increase."

"Hector's spouse was the primary beneficiary of his $250,000 life insurance policy. She received payments of approximately $700 a month as long as she lived and, at her death, their 2 children received lump-sum payments of $125,000 each. What settlement option was in effect on Hector's policy? A) Interest-only option B) Life income option C) Period certain option D) Installment refund option"

"Interest-only option Explanation The fact that the policy's proceeds of $250,000 were available for distribution upon the spouse's death indicates that they had been preserved while she received interest payments."

"Susan, the beneficiary on John's $500,000 life policy, chose life-only as her settlement option. Susan received 5 years of settlement checks from the insurance company, totaling $150,000. How much will Susan's beneficiary receive upon her death? A) Nothing, because life-only states that when the beneficiary dies, any remaining death benefit is kept by the insurance company B) Susan's beneficiary will receive checks for the rest of his life C) $350,000 minus taxes and fees D) 350000"

"Nothing, because life-only states that when the beneficiary dies, any remaining death benefit is kept by the insurance company Explanation In the life-only settlement option, the beneficiary will receive monthly checks for the rest of her life. If there is any death benefit remaining at the beneficiary's death, the insurance company keeps the balance."

"Which of the following statements regarding the paid-up additions life insurance policy dividend option is NOT correct? A) Paid-up additions consist of permanent life insurance of the same type as the base policy. B) A paid-up addition increases the policy's total cash value as well as its death benefit. C) The paid-up additions dividend option is only available to insureds that remain insurable. D) The amount of paid-up coverage acquired is based on the insured's attained age at the time the dividend is declared."

"The paid-up additions dividend option is only available to insureds that remain insurable. Explanation It is not necessary to demonstrate evidence of insurability to elect the paid-up additions dividend option. Paid-up additions are based on the insured's underwriting status when the policy was issued, and the amount of the addition is based on the insured's attained age when the dividend is declared."

"Suppose Max wants to arrange the distribution of his life insurance proceeds so that his spouse, as beneficiary, will receive monthly payments for as long as she lives. Which of the following settlement options will meet this need? A) Life income option B) Fixed-amount option C) Interest-only option D) Fixed-period option"

"Life income option Explanation The life income option provides for the guaranteed payment of the proceeds for the life of the beneficiary."

"Beth is secondary beneficiary of a life policy, receiving monthly income benefits under an installment refund option. Her mother, the primary beneficiary, received a total of $4,200 in benefits before she died. The original proceeds totaled $22,000. Assuming Beth lives long enough, she will be paid monthly benefits until she has received a total of A) 22000 B) 18700 C) 4200 D) 17800"

"17800 Explanation Under an installment refund option, the same income payments continue to the secondary beneficiary after the primary beneficiary dies, until the entire death benefit amount is paid."

"How can the cash value accumulation in a straight whole life insurance policy be accessed while the insured is living and while keeping the coverage in force? A) Through a cash value surrender B) Through a policy loan C) Through a dividend payment D) Through a partial cash value withdrawal"

"Through a policy loan Explanation The cash values of a straight whole life policy can be accessed through a policy loan or through a complete withdrawal of the entire cash value. A policy loan allows the policy to continue in force (though any amount not paid back with interest at the time of death will be subtracted from the death benefit). A complete withdrawal constitutes a surrender of the policy and coverage ends."

"Which of the following factors is NOT used to calculate each payment with the fixed period option? A) A guaranteed interest rate B) The length of the chosen period C) The chosen payment amount D) The amount of the death benefit"

"The chosen payment amount Explanation The chosen payment amount is a factor for the fixed amount settlement option, not the fixed period option."

"Under an installment refund settlement option, if the primary beneficiary dies, the secondary beneficiary will receive A) a lump-sum payment B) the same income payments for a fixed number of years C) the same income payments until the total amount paid out to both beneficiaries equals the original amount of proceeds D) half of the remaining proceeds"

"the same income payments until the total amount paid out to both beneficiaries equals the original amount of proceeds Explanation Under an installment refund settlement option, if the primary beneficiary dies, the secondary beneficiary will receive the same income payments until the total amount paid out to both beneficiaries equals the original amount of proceeds."

"A policyowner stops paying premiums on a whole life policy with an accidental death benefit and exchanges the policy for extended term insurance. Which of the following statements pertaining to this situation is NOT correct? A) The policyowner will have continued protection for a limited period of time. B) There will be no accidental death benefit with the new policy. C) The term policy has no cash value. D) The term policy will have a reduced face value."

"The term policy will have a reduced face value. Explanation When a policyowner stops paying premiums on a whole life policy with an accidental death benefit and exchanges the policy for extended term insurance, the policy's cash surrender value is used to purchase an amount of term insurance equal to the original policy's face amount. The term insurance will last as long as the cash value is sufficient to pay premiums. An accidental death benefit would not be included."

"Which of the following is NOT a standard life insurance policy nonforfeiture option? A) 1-year term insurance option B) Extended term insurance option C) Reduced paid-up (permanent) insurance option D) Cash surrender option"

"1-year term insurance option Explanation Policyowners have 3 nonforfeiture options from which to choose: cash surrender, reduced paid-up insurance, and extended term insurance. The cash surrender option allows a policyowner to request an immediate cash payment of the cash value when the policy is surrendered. The reduced paid-up option lets the policyowner take a paid-up policy for a reduced face amount of insurance. The policyowner may also use the policy's cash value to buy a term insurance policy in an amount equal to the original policy's face value, for as long a period as the cash value will buy, by selecting the extended term option."

"Which of the following statements best describes the nature of a cash value loan? A) It is a financial transaction in which the insurer loans the money and attaches a comparable portion of the cash value as collateral. B) It is a financial transaction in which future growth of the cash value is suspended until the loan amount plus interest is recovered. C) It is a financial transaction in which the cash value is reduced by the amount of the loan. D) It is a financial transaction in which the cash value is unaffected but the face amount is reduced by the amount of the loan plus interest."

"It is a financial transaction in which the insurer loans the money and attaches a comparable portion of the cash value as collateral. Explanation A cash value loan is a loan from the insurer to the policyowner. A comparable portion of the policy's cash value is used as collateral to secure the loan."

"Carl and Laura receive $270 per month under a joint and two-thirds survivor life policy settlement option. What would happen if Carl died within a year after payment started? A) Laura would receive $135 per month for as long as she lived. B) Laura would receive $180 per month for as long as she lived. C) Laura would continue to receive a monthly benefit of $270 for as long as she lived. D) The balance of the proceeds would be paid to Laura in a lump sum."

"Laura would receive $180 per month for as long as she lived. Explanation The joint and two-thirds survivor life income option provides an income for 2 people: the full amount for the couple, while both are living, and two-thirds of the amount for the survivor."

"Norris is the primary beneficiary of a life insurance policy. He dies after receiving $275 per month for 6 years, under a 10-year period certain income option. His son, Neil, is the secondary beneficiary. Which of the following statements pertaining to this situation is CORRECT? A) Neil will receive $275 per month for as long as he lives. B) Neil will receive a lump-sum payment of $13,200. C) Neil will receive income checks in the same amount as his father for 4 years. D) Neil will receive nothing, since Norris did not survive the 10-year period certain."

"Neil will receive income checks in the same amount as his father for 4 years. Explanation Under a period certain income option, installments are payable for the duration of that period, whether or not the primary beneficiary lives. In this case, installments are payable for a period of 10 years. Since the primary beneficiary died after 6 years, the secondary beneficiary will be paid the same installments for 4 more years."

"Paul, age 62, is applying for a universal life insurance policy and wants to arrange the beneficiary designation in such a way as to use the proceeds to provide lifetime income to his spouse, Marsha. Which of the following settlement options is best suited for this purpose? A) The insurer can distribute the proceeds in a lump-sum payment, deposit the money in a bank account, and then set up a periodic distribution plan for Marsha. B) Paul, as the owner, can pick life income as the settlement option his spouse must take when he dies. This option will give Marsha a monthly income she cannot outlive. C) Paul can select the fixed-period option and base the distribution period on Marsha's life expectancy at the time of Paul's death. D) Paul can leave the proceeds with the insurance company to accumulate interest and distribute the interest to Marsha."

"Paul, as the owner, can pick life income as the settlement option his spouse must take when he dies. This option will give Marsha a monthly income she cannot outlive. Explanation Life income is a life settlement option that will pay the beneficiary a monthly income for the rest of her life, taking into account the size of the death benefit and the life expectancy of the beneficiary. If there is any balance when the beneficiary dies, the insurance company keeps the balance."

"Unlike corporate dividends, insurance policy dividends A) are the same as marketable securities B) are not considered taxable income C) are reported on an insured's income tax filing D) are guaranteed to be declared and payable every year"

"are not considered taxable income Explanation Policy dividends are not taxable income because they are considered a partial return of premiums paid."

"Which of the following statements about participating and nonparticipating life insurance policies is NOT correct? A) Participating policy premiums are normally slightly higher than nonparticipating policy premiums. B) Policy dividend payments cannot be guaranteed. C) An extra charge to cover unexpected contingencies is built into the premiums of participating policies. D) Policy dividends are considered taxable income."

"Policy dividends are considered taxable income. Explanation The payment of policy dividends will vary from year to year and, therefore, cannot be guaranteed. Unlike corporate dividends, life insurance policy dividends are considered a return of part of the premiums paid and are not taxable income. A slightly higher premium is typically charged for participating policies than for nonparticipating policies because an extra charge to cover unexpected contingencies is built into premiums for participating policies."

"John, age 55, owns a whole life policy with a face amount of $100,000 for which the annual premium is $1,000. John explains to his agent that he lost his job and cannot afford his $1,000 annual premium but still desires to have life insurance to age 100. What nonforfeiture option could John's agent recommend to him? A) Reduced paid-up policy B) Reduced premium C) Modified endowment contract D) There are no options, since John can't afford to pay the premium anymore"

"Reduced paid-up policy Explanation With the reduced paid-up nonforfeiture option, the cash value of John's policy will be used to purchase a single premium whole life policy based on his attained age for a reduced face amount. The advantage for John is that he will continue to have insurance protection and will not be required to pay any additional premiums."

"Lisa exercised her automatic premium loan provision to pay her annual premium on her $50,000 life insurance policy. She died 4 months after the loan was taken, never having a chance to repay it. Which of the following statements is CORRECT? A) The amount paid to Lisa's beneficiary as the death proceeds was reduced by the amount of the loan plus interest due. B) The type of insurance Lisa owned was term. C) The premium was paid by the insurance company from its reserves. D) The policy was canceled, since the loan was not repaid."

"The amount paid to Lisa's beneficiary as the death proceeds was reduced by the amount of the loan plus interest due. Explanation The policyowner's cash values are used to pay premium loans. If the loan is not repaid at the time of the insured's death, the amount of the loan plus interest is subtracted from the death proceeds."

"Tammy owns a participating whole life insurance policy for which she has elected the paid-up additions option. If the insurer declares a dividend of $500 in the current year, how will this amount be used with this dividend option? A) The insurer adds a paid-up unit of whole life insurance with a cash value that is equal to $500. B) The insurer adds a paid-up unit of whole life insurance with a $500 face amount to Tammy's base policy. C) The insurer adds $500 to the face amount of Tammy's base policy. D) The insured uses the $500 as if it were a single premium to purchase a unit of paid-up whole life insurance based on Tammy's attained age."

"The insured uses the $500 as if it were a single premium to purchase a unit of paid-up whole life insurance based on Tammy's attained age. Explanation The paid-up additions dividend option uses the annual policy dividend as if it were a single premium to purchase a paid-up whole life insurance policy."

"Which of the following statements regarding policy dividends is CORRECT? A) They are not available to insureds after a specified age, such as 60. B) They are the difference between the gross premium charged and the actual experience of the insurer. C) Though they may vary from year to year, they are guaranteed to be paid each year. D) They are issued on nonparticipating policies."

"They are the difference between the gross premium charged and the actual experience of the insurer. Explanation Policy dividends issued on participating policies (policies in which the insureds may participate in the operating and investment results of the insurer) are a reflection of favorable operations, investment, or mortality results. They are never guaranteed. In fact, most states require life insurance proposals that contain dividend illustrations to state that future dividends are not guaranteed."

"Which of the following descriptions of life insurance policy settlement options is CORRECT? A) Under an installment refund option, if the primary beneficiary dies, payments of the same amount continue to the secondary beneficiary until all installments to both beneficiaries equal the original amount of proceeds. B) Glenn chooses a life-income-only option, and Jeri chooses a life-income-with-cash-refund option. Jeri's income is based on the higher rate per $1,000 of proceeds. C) Under a life-income-only option, if a primary beneficiary dies after receiving income payments for only 3 months, the balance of the proceeds will be paid in a lump sum to the secondary beneficiary. D) Today, most life insurance proceeds are not paid out as lump sums."

"Under an installment refund option, if the primary beneficiary dies, payments of the same amount continue to the secondary beneficiary until all installments to both beneficiaries equal the original amount of proceeds. Explanation Under an installment refund option, if the primary beneficiary dies, installments of the same amount continue to the secondary beneficiary until all installments paid to both beneficiaries equal the original amount of proceeds. Under a life-income-only option, installments are paid to the primary beneficiary as long as she lives, with no return of principal guaranteed. Therefore, this option provides the largest installments per $1,000 of proceeds. The lump-sum option is still the most commonly used settlement option."

"Wendy has a $100,000 whole life participating policy. She recently married and is planning to have a family. She wants to increase her life insurance coverage but at minimal additional cost. Which of the following dividend options would be most suitable for her needs? A) Allow dividends to accumulate at interest B) Apply dividends against premium payments C) Use dividends to buy 1-year term insurance D) Use dividends to buy paid-up additions"

"Use dividends to buy paid-up additions Explanation By using dividends to buy paid-up additions, Wendy can increase her life insurance coverage without significantly adding to the cost. The dividends buy paid-up additions of life insurance, of the same kind as the original or base policy. The premium rate is based on her attained age at the time the paid-up addition is purchased. Although she can also use dividends to buy 1-year term insurance, her need for increased coverage in the coming years will remain unsatisfied. Applying dividends against premium payments will lower the cost of her insurance, but it will not increase her coverage as desired. And while allowing dividends to accumulate at interest gives her a source of funds for withdrawal at any time, it too fails to meet her need for increased coverage."

"The privilege of accessing the cash value of an insurance policy if it is surrendered is known as the A) entire contract provision B) reinstatement provision C) nonforfeiture provision D) conversion privilege"

"nonforfeiture provision Explanation After a life insurance policy has been in effect for a specified amount of time, the policy may provide for access to the policy's cash value. Under certain circumstances, the money can be used to pay for a premium that is in default, paid as a lump sum in cash, or paid as a cash amount in return for the surrender of the policy. Policies must explain the mortality table and interest rate used to calculate the cash surrender values. A conversion privilege is found in a group life policy. It allows for a terminated plan member to convert the group policy to an individual policy under certain circumstances. The reinstatement provision allows for the reinstatement of a lapsed policy. The entire contract provision stipulates that the application and policy itself comprise the entire contract of insurance."