Am Pro Chapter 14

Sharon has a Life policy and has selected a settlement option that will pay an income to her husband for his life. Which settlement option did she choose? Select one: a.Paid up additions b.Cash Settlement Option c.Annuity Settlement Option d.Interest Settlement Option

Annuity Settlement Option

Which of the following is the automatic dividend option? Select one: a.Additional Paid-Up Insurance b.Paid Up Life c.Reduced Premium d.Cash

Additional Paid-Up Insurance

Kobi purchased a Whole Life policy at age 23. At age 45, she is tired of paying the premium each month. If she discontinues the payments, which nonforfeiture option will automatically be used? Select one: a.Extended Term Insurance b.Reinstatement c.Reduced Paid-Up Insurance d.Cash

Extended Term Insurance

Which nonforfeiture option provides the greatest level of death benefit if exercised? Select one: a.Cash b.Extended Term Insurance c.Paid-Up Additions d.Reduced Paid-Up Insurance

Extended Term Insurance

Who selects the settlement option? Select one: a.The Insured. b.The beneficiary. c.The agent. d.The policy owner.

The policy owner.

Which of the following dividend options purchases fully paid whole life insurance on a net single premium basis? Select one: a.Paid Up Additions Option b.Term Insurance Option c.Accumulate at Interest Option d.Reduction of Premium Option

With the Paid Up Additions Dividend Option, each year the Insured will receive a smaller paid-up Whole Life policy with a single premium. It is called a single "net" premium because the producer gets no commission on the policy. The correct answer is: Paid Up Additions Option

Which of the following provides the beneficiary with periodic income payments for the life of the beneficiary? Select one: a.Grace Period b.Cash Settlement Option c.Interest Settlement Option d.Annuity Settlement Option

Annuity Settlement Option

Kent selects the Paid-Up Additions Dividend Option for his participating Whole Life policy. Which of the following is true? Select one: a.Each dividend paid goes toward reducing the amount of time the Insured will need to continue paying premiums. b.Each dividend purchases a little extra Term Insurance on a gross premium basis. c.Each dividend purchases a little extra Term Insurance on a single net premium basis. d.Each dividend purchases more Whole Life Insurance on a single net premium basis.

The Paid-Up Additions Dividend Option is used to purchase more small whole life policies on a single net premium basis. The divided is not used to purchase term insurance unless the Term Insurance Dividend Option is selected. The correct answer is: Each dividend purchases more Whole Life Insurance on a single net premium basis.

Which of the following statements IS true? Select one: a.Dividends paid by stock companies represent a refund of overcharged premiums. b.Mutual companies are known as participating companies. c.Stock companies are known as participating companies. d.Mutual companies always pay dividends.

Mutual companies are known as participating companies.

Each of the following is a dividend option EXCEPT? Select one: a.Additional Paid-Up Insurance b.Automatic Policy Loan c.Reduced Premium d.Accumulate at Interest

The Automatic Policy Loan is a rider that loans the money to pay the premium if the Insured defaults after the 31-day Grace Period. This has nothing to do with the Dividend Options. The correct answer is: Automatic Policy Loan

A Whole Life policy owner chose the Extended Term Nonforfeiture Option. The new Term policy will have a death benefit: Select one: a.exactly the same as the Whole Life policy. b.more than the Whole Life policy. c.less than the Whole Life policy. d.exactly double the death benefit of the Whole Life policy.

The Extended Term policy will have exactly the same death benefit as the Whole Life policy. What is uncertain is how long the Term will be extended. That depends on the attained age of the Insured and the amount of money in the cash value account at the time of lapsation. The correct answer is: exactly the same as the Whole Life policy.

Which of the following is NOT a nonforfeiture option? Select one: a.Automatic Premium Loan b.Reduced Paid-Up Insurance c.Extended Term Insurance d.Cash

Automatic Premium Loan

Which of the following is NOT a nonforfeiture option? Select one: a.Extended Term Insurance b.Reduced Paid-Up Insurance c.Cash d.Paid-Up Additions

Paid-Up Additions

Which of the following dividend options would be of importance to an Insured's tax accountant? Select one: a.cash b.accumulate at interest c.paid-up life d.reduced premium

The "accumulate at interest" dividend option results in an increase in income for the Insured - that would be reportable on the Insured's tax return and would increase the Insured's taxable income. The correct answer is: accumulate at interest

Phil purchased a Whole Life policy. The first year he paid $400 in premium, the second year he paid $320 in premium, the third year he paid $338 in premium. What is the most likely explanation for his fluctuating payments? Select one: a.He reduced the face value. b.He received a discount for referring a friend. c.His health has improved. d.He selected the Reduced Premium Dividend Option.

He selected the Reduced Premium Dividend Option.

Teri, the owner of a Whole Life policy, knows that she will have limited cash funds for the next few years. If she is most concerned about limited cash outlay, which Dividend Option would you recommend for Teri? Select one: a.Additional Paid Up Dividend Option b.Cash Dividend Option c.Reduced Premium Dividend Option d.One Year Term Dividend Option

I know that the answer to this question is debatable, but with the Reduced Premium Dividend Option, her dividend will be applied to her next premium payment. The result is that she will have the smallest cash outlay for next year's premium because part of the premium will already have been paid by her dividend. Reduced Premium Dividend Option would result in the lowest future cash outlays for premium payments over the life of the policy. If Teri chooses any of the other Dividend Options, her premium payments won't be reduced, so those other choices won't solve her limited cash outlay problem for the next few years. The correct answer is: Reduced Premium Dividend Option

Jenna has a Life Insurance policy with a death benefit of $200,000 and a cash value of $50,000. She takes a maximum policy loan and dies EXACTLY one year later. How much will be paid to her beneficiary? Select one: a.$144,800 b.$147,500 c.$150,000 d.$200,000

Jenna will be able to borrow only about $48,500 because the Insurer will want to have enough cash in the cash value account to pay back the loan plus the approximately $1,500 interest. Thus, at the end of EXACTLY one year, Jenna will owe the $48,500 plus interest - a total of $50,000. The correct answer is: $150,000

A life policy's settlement option specifies a fixed period installment. Which of the following statements is TRUE? Select one: a.The payments continue at least for the life of the beneficiary. b.The longer the fixed payment period, the smaller each payment will be.

LH Addendum Page 14-1, Lines 36-40. This is not an annuity so payments aren't determined by the life of the beneficiary. A longer fixed payment period will result in a smaller payment. The correct answer is: The longer the fixed payment period, the smaller each payment will be.

The purpose of the Accelerated Death Benefit is to pay for the unexpected medical expenses of the: Select one: a.Insured's children b.Insured's spouse c.Insured d.Insured's dependents

LH Addendum, Page 14-1, Line 17. The Accelerated Death Benefit pays if the Insured has major medical expenses, not if the Insured's dependents have medical expenses. The correct answer is: Insured

Each of the following is a dividend option EXCEPT? Select one: a.Annuity b.Cash c.Accumulate at Interest d.Paid-Up Additions

Picky point! An annuity is a settlement option upon death. It is not a dividend option. The correct answer is: Annuity

Each of the following is true of policy dividends EXCEPT? Select one: a.Policy dividends can never be promised. b.Policy dividends represent a refund of premium. c.Policy dividends are a distribution of profits. d.Policy dividends are not taxable income.

Policy dividends are a distribution of profits.

Which policy provision is designed to shield a policyowner from the irrevocable loss of cash value due to nonpayment of premium? Select one: a.Nonforfeiture Provision b.Insurable interest

The Nonforeiture Provision says that once the Grace Period Expires, the policyowner will receive either the cash value account, an Extended Term policy, or a Reduced Paid-up Whole Life policy. Watch out, another possible answer to this question could be Grace Period (although that wasn't a listed choice). The correct answer is: Nonforfeiture Provision

The age and gender of the beneficiary will have an impact on which Settlement Option? Select one: a.Interest b.Annuity c.Cash d.All of the above

The age and gender of the beneficiary determine the amount to be paid monthly under an Annuity. The older the beneficiary is at the time of the Insured's death, the less the Annuity will have to pay out over the life of the beneficiary. Also, the Annuity will pay out more over the life of a female beneficiary because actuarially women live longer than men. The Beneficiary's age and gender have no impact on the Interest or Cash Settlement Options. The correct answer is: Annuity

Which is the only one of the three Nonforfeiture Options that will result in a cash value account that will continue to grow? Select one: a.cash b.extended term c.reduced paid-up

With the "reduced paid-up insurance" Nonforfeiture Option, we convert the lapsed whole life policy to the smaller paid-up whole life policy. The new reduced paid-up policy is a whole life policy that will have its own cash value account that will grow each year at its guaranteed rate. If we choose to take the cash and run or choose extended term as the Nonforfeiture Option, there is no cash value account at all. Thus, there can only be continued cash value account growth if we select "reduced paid-up" as our Nonforfeiture Option. The correct answer is: reduced paid-up

Which of the following actions would be permitted by the policy owner without the consent of the irrevocable beneficiary? Select one: a.Assign the policy. b.Take out a loan against the policy. c.Surrender the policy. d.Increase the death benefit.

Without the consent of an irrevocable beneficiary, the owner can't in any way harm the beneficiary's position. However, the owner can improve the irrevocable beneficiary's position by increasing the death benefit. That doesn't require consent of the irrevocable beneficiary. The correct answer is: Increase the death benefit.

A Life policy will NOT be reinstated if it was terminated due to: Select one: a.nonpayment of premium. b.expiration of the grace period. c.fraud. d.lapsation.

fraud

An Insured wants monthly earning from the death benefit to be paid to a charity for 10 years and then the balance equally divided among his surviving family members. The appropriate settlement option is: Select one: a.Interest Only b.Lump Sum Cash

Any weird settlement option (such as the one described) is referred to as an Interest Only settlement option. Another one of those memorization points! The correct answer is: Interest Only

Which of the following does not involve the systematic liquidation of death benefit proceeds? Select one: a.Fixed Period Annuity Certain Settlement Option b.Straight Life Annuity Settlement Option c.Fixed Amount Annuity Certain Settlement Option d.Cash Settlement Option

Cash Settlement Option

Which of the following deals with the policy owner's equity in a policy? Select one: a.Nonforfeiture Options b.Beneficiary Designation c.Dividend Options d.Settlement Options

Equity refers to the owner's value of ownership - that is, the cash value account. The correct answer is: Nonforfeiture Options

The Whole Life policy owner has chosen the cash dividend option. When the Insured died, there was an outstanding policy loan and a postmortem dividend that had been announced by the Insurer but not yet paid. The Insurer will pay to the beneficiary: Select one: a.The full death benefit plus the dividend b.The full death benefit c.The full death benefit minus the loan and loan interest d.The full death benefit plus the dividend minus the loan and loan interest

LH Addendum, Page 14-1, Lines 5-7. The loan and interest are always subtracted from the death benefit. The dividend announced postmortem must be paid to the policy owner, not to the beneficiary. The owner (not the beneficiary) owns the dividend. The correct answer is: The full death benefit minus the loan and loan interest

A policy owner who has taken a loan must pay back what portion of the loan prior to death? Select one: a.None. b.At least 50 percent. c.The entire balance including principal and interest. d.At least 80 percent.

None is the best answer because the balance plus interest will simply be deducted from the death benefit. It does not have to be repaid prior to death. The correct answer is: None.

Which increases the policy's flexibility in the event the Insured is no longer able to pay the premiums? Select one: a.Nonforfeiture Option b.Guaranteed Insurability Rider

Nonforfeiture Option

Policy loans can only be made for policies that have which of the following options? Select one: a.Death Benefits b.Beneficiary Designation c.Nonforfeiture Options d.Settlement Options

Nonforfeiture Options

With regard to taxation and policy dividends, which of the following statements is true? Select one: a.Only the accumulated interest portion of the dividends will be taxed. b.Dividends represent a distribution of profit and are taxed as capital gains. c.Because dividends are guaranteed in the policy, the taxes are typically paid in advance. d.Dividends represent income and are therefore taxed.

Only the accumulated interest portion of the dividends will be taxed.

Which of the following dividend options increases the death benefit at the lowest cost? Select one: a.Cash b.Reduced Premium Option c.Accumulate at Interest d.Paid Up Additions Option

Paid Up Additions Option

What are the tax consequences of dividends paid by mutual companies? Select one: a.The dividends are taxable in the year they are paid. b.The dividend is only taxable if taken as cash. c.The dividend is not taxable until the policy matures. d.The dividends are not taxable.

Policy dividends paid by a mutual insurance company are considered to be merely a return of excess premium paid to the Insurer. Thus, this is not income and is not taxed unless the Insurer pays interest on the dividend. The correct answer is: The dividends are not taxable.

An Insured wishing to reinstate a policy may be required to furnish all of the following EXCEPT: Select one: a.Proof of insurability. b.All missed premiums with interest. c.Prepayment of the next premium. d.A reinstatement application.

Prepayment of the next premium.

Under which of the following circumstances is a person most likely to be eligible for reinstatement? Select one: a.Leslie cancelled her Term policy six months ago. b.Stan surrendered his Whole Life policy one year ago and opted for the Reduced Paid-Up Insurance Nonforfeiture Option. c.Howie surrendered his policy six years ago and is still covered under his Extended Term Insurance Nonforfeiture Option. d.Jan surrendered her policy two months ago and took the Cash Nonforfeiture Option.

Stan surrendered his Whole Life policy one year ago and opted for the Reduced Paid-Up Insurance Nonforfeiture Option.

Under which of the following circumstances may a policy be reinstated? Select one: a.The policy was a Term policy and was cancelled only one month ago. The Insured has no health issues. b.The policy was a Whole Life policy and the Extended Term Insurance Nonforfeiture Option was used. c.The policy was a Whole Life policy and was surrendered for its cash value. d.The policy was a Whole Life policy and an automatic premium loan was issued to prevent lapsation.

Term policies often lack a reinstatement provision. With a whole life policy, if the Insured has "severed the sheets" by taking the cash and running, the Insurer will not permit reinstatement. If there was an Automatic Premium Loan provision, there probably wasn't a lapse and thus there would be no need for reinstatement. The correct answer is: The policy was a Whole Life policy and the Extended Term Insurance Nonforfeiture Option was used.

Which of the following dividend options would result in an increase in taxable income for the policy owner? Select one: a.Cash b.Paid Up Additions c.Accumulate at Interest d.Reduction of Premium

The IRS taxes you on money you have earned. The only choice where the Insured "earned" money is the "Accumulate at Interest" option. Only the interest is taxed because the dividend itself is considered to be a return of excess premium. The correct answer is: Accumulate at Interest

Each of the following statements regarding the Accumulate at Interest Dividend Option is true EXCEPT? Select one: a.The option is basically the same as putting the dividends in a savings account with the insurance company. b.The dividends and any interest earned will not be taxed. c.The option will increase the amount paid if the policy is surrendered for cash. d.The option will increase the amount paid when the policy matures.

The dividends and any interest earned will not be taxed.

Which statement best describes the settlement options feature in a policy? Select one: a.The various choices the policy owner has in deciding how the death benefit will be distributed to the beneficiary. b.The agreed method by which the insurance company and the client will settle disputes. c.The various choices the policy owner has in deciding how the cash value will be handled if the policy is surrendered or lapses. d.The method by which a policy owner may convert a Term policy to a Permanent policy and the restrictions.

The various choices the policy owner has in deciding how the death benefit will be distributed to the beneficiary.

Which of the following statements is true regarding the Settlement Option selection? Select one: a.If the policy Owner selected the Interest Only Settlement Option, the Beneficiary can change this to the Cash Option. b.If the policy Owner did not select a Settlement Option prior to policy maturity, the Beneficiary will receive cash under the Automatic Selection. c.If the policy Owner selected the Annuity Option, the Beneficiary may change this to the Cash Option. d.The Beneficiary is always permitted to chose the Settlement Option.

There are only 3 settlement options: cash, interest, and annuity. If the Insured did not make a selection, the beneficiary will receive cash which is the automatic settlement option. The Insured may then ask the Insurer to convert the cash option to either the interest option or the annuity option (which the Insurer will cheerfully do to earn more income). The correct answer is: If the policy Owner did not select a Settlement Option prior to policy maturity, the Beneficiary will receive cash under the Automatic Selection.

Each is true about paid up additions EXCEPT? Select one: a.They are not the automatic (default) dividend option selection. b.They are Whole Life policies. c.They may generate dividends. d.They are purchased on a net single premium basis.

They are not the automatic (default) dividend option selection.

Which portion of the Accumulate at Interest dividend payments would be subject to taxation? Select one: a.The interest in the year it was earned. b.The dividend is taxed when paid and the interest is tax deferred. c.Neither the dividend payment nor the interest is taxable as income. d.The dividend in the year it was paid, plus interest accumulated that year.

This is a very, very common test point. The correct answer is: The interest in the year it was earned.

If a life policy specifies a cash lump sum settlement benefit: Select one: a.The cash is taxable as ordinary income when received. b.The beneficiary may change the payment to an annuity.

We know that the beneficiary always receives the death benefit tax free. The lump-sum cash option gives the beneficiary the most flexibility, including the choice of switching the settlement option to interest only or an annuity. The correct answer is: The beneficiary may change the payment to an annuity.