Chapter 1 Life Policies

John received a one-time distribution of $50,000 from his MEC. Prior to that, the contract's cash value was $150,000, the contract investment amount was $100,000, and the death benefit was $500,000. What percentage of the $50,000 distribution was taxable as ordinary income?

100%

What is a juvenile life insurance policy?

A life policy that covers the life of a minor

A nonparticipating whole life insurance policy was surrendered for its $20,000 cash value. The total premiums paid had totaled $16,000. What were the federal income tax consequences to the policyowner on receipt of the cash value?

$16,000 was recieved tax-free and $4,000 as ordinary income

Which of the following is generally a form of group credit life insurance? 1. Decreasing term insurance 2. Increasing term insurance 3. Level term insurance 4. Whole life insurance

1. Decreasing term insurance

A policyowner has just borrowed from a life insurance policy's cash value. Which of these statements is true? 1. In the event of death, the loan amount is deducted from the policy proceeds 2. The policy lapses if not repaid within 5 years 3. A policyowner must pre-qualify for the loan to determine creditworthiness 4. Interest on the loan amount is prohibited

1. In the event of death, the loan amount is deducted from the policy proceeds

Which statement concerning an adjustable life insurance policy is FALSE? 1. Cash surrender is possible 2. Evidence of insurability is required when there is a change in premium 3. Combines term and permanent insurance into a single plan 4. An extra premium is allowable

2. Evidence of insurability is required when there is a change in premium

Which statement regarding whole life insurance is accurate? 1. Cash value loans are not permitted 2. Insurance coverage can continue for life 3. Policy normally matures at retirement 4. No cash value accumulations

2. Insurance coverage can continue for life

Which of these policies is considered a whole life policy? 1. Credit life 2. Single premium life 3. Renewable life 4. Convertible life

2. Single premium life

Which statement concerning adjustable life insurance is accurate? 1. Cash value loans are not permitted 2. The face amount and premiums can be changed simultaneously by the policyowner 3. Settlement options are limited 4. Only the face amount can be changed by the policyowner

2. The face amount and premiums can be changed simultaneously by the policyowner

Which of these is NOT an advantage of term life insurance? 1. The greatest amount of coverage can be provided for the initial premium paid 2. It can be provided as a rider to another policy 3. A cash benefit will be provided if the insured is alive at the end of the policy period 4. Temporary insurance needs can be met

3. A cash benefit will not be provided if the insured is alive at the end of the policy period

Which statement regarding the cash value of a whole life insurance policy is correct? 1. Can be borrowed against, starting in the policy's fifth year 2. Cash value accumulation is based on the performance of a separate investment account 3. Available to the policyowner when policy has been surrendered 4. Start growing with the initial premium

3. Available to the policyowner when policy has been surrendered

Which of these life insurance policies does NOT contain a cash value provision? 1. Modified whole life 2. Universal life 3. Decreasing term life 4. Adjustable life

3. Decreasing term life

All of these are considered features of whole life insurance EXCEPT 1. Cash value accumulation 2. Permanent coverage 3. Initial premium is lower than for an equivalent amount of term insurance 4. Policy loans are allowed

3. Initial premium is lower than for an equivalent amount of term insurance

An individual who purchases a modified life insurance policy expects

An improvement in future income

Which is an accurate description of the premium in a graded premium life insurance policy?

Annual increases in premium for a stated number of years then remains level

What type of life insurance policy covers two of more persons and pays the face amount upon the death of the first insured?

Joint life

What type of life insurance policy covers two or more persons and pays the face amount upon the death of the first insured?

Joint life

What i the guaranteed cash value of a whole life insurance policy when the insured turns 65 years old?

Less than the policy's face amount

What type of premiums are associated with individual mortgage protection life insurance policies?

Level premiums

Laura added a children's rider to her life insurance policy. What type of coverage was added?

Level term

A life policy that has premiums that are lower than normal during the early years is called

Modified life

Which action will trigger a penalty tax on premature distributions from a modified endowment contract (MEC)?

Policy loans

What typically changes at the re-entry option date found in some term life policies?

Premium

Assets that back the non-guaranteed values of variable life insurance products are held in which account?

Separate account set up by the insurer

A material change in a modified endowment (MEC) results in

the seven pay test, adjusted for cash value, applies again

When a ten year renewable term life insurance policy issued at age 45 is renewed, the premium rate will be the current rate for

Ten year term life insurance for a person aged 55

Peter, age 50, surrenders his modified endowment contract (MEC). How is the gain treated in terms of federal income taxes?

The gain is treated as taxable income and a penalty tax is imposed on the gain

An advantage of owning a flexible premium life insurance policy would be

The policyowner can make policy changes without difficulty

How does a continuous premium whole life policy differ from a limited payment whole life policy?

The time period in which premiums will be paid

How long does protection normally extend to under a limited pay whole life policy?

Until age 100

An insurance policy than can also be classified as a securities product is called

Variable life

Which type of life insurance policy allows a policyowner the choice of investments along with flexible premium payments?

Variable universal life

At what point are death proceeds paid in a joint life insurance policy?

When the first insured dies

What kind of life policy typically offers mortgage protection?

decreasing term

The death proceeds of a credit life insurance policy are typically paid for to the

lender

Which of the following combinations best describe a universal life insurance policy? 1. A mutual fund and an endowment policy 2. A term insurance policy and a whole life policy 3. A modified endowment policy and an annual term insurance policy 4. A flexible premium deposit fund and a monthly renewable term insurance policy

4. A flexible premium deposit fund and a monthly renewable term insurance policy

Which of these is NOT considered a type of limited payment whole life insurance? 1. Life paid-up at 65 2. 20 payment life 3. 15 payment life 4. Endowment at age 70

4. Endowment at age 70

How long does one premium payment cover in a single premium whole life policy?

Full life of the policy

Which of these statements accurately portrays an adjustable life insurance policy? 1. Policy can alternate between forms of term and whole life insurance 2. Cash value loans are not permitted 3. Evidence of insurability required for conversion 4. Settlement options are limited

1. Policy can alternate between forms of term and whole life insurance

Straight whole life insurance can be accurately described in all of these statements EXCEPT 1. Policy protection normally expires at age 65 2. Nonforfeiture values are available to the policyowner 3. Provides level protection with level premiums 4. Cash value loans are permitted

1. Policy protection normally expires at age 65

Which of the following would NOT be a reason for purchasing life insurance on a child's life? 1. Provide benefits for the child of the parents die 2. Pay for the child's funeral expenses 3. Provide a start on the child's personal insurance 4. Help provide funds for the child's education

1. Provide benefits for the child of the parents die

Under an adjustable life insurance policy, which of the following may NOT be changed without further underwriting? 1. The person insured 2. The period of coverage 3. The payment period 4. The plan of coverage

1. The person insured

Which statement concerning a decreasing term life policy is accurate? 1. Cash value decreases over the policy period 2. Premium decreases over the policy period 3. Face amount decreases over the policy period 4. Face amount stays the same over the policy period

3. Face amount decreases over the policy period

Taxable income may be the result from all of these modified endowment contract (MEC) transactions EXCEPT for 1. A cash value loan is taken out 2. Automatic premium loan provision is utilized 3. The policy is surrendered for less than what was paid for it 4. Dividend is issued

3. The policy is surrendered for less than what was paid for it

Which of the following statements about universal life insurance is NOT true? 1. Death benefits can be increased 2. Premiums are flexible 3. Universal life insurance normally has a minimum guaranteed cash value for duration of the policy 4. The cash value interest rate must equal or exceed a guaranteed minimum value

3. Universal life insurance normally has a minimum guaranteed cash value for duration of the policy

Which type of life insurance policy is best suited for paying off the outstanding balance of a 30-year mortgage in the event of the insured's death?

30-year decreasing term

Which statement regarding a single premium life insurance policy is NOT correct? 1. No further premiums are necessary 2. Policy loans are permitted 3. Cash value is immediately created 4. Additional premiums may be required under certain conditions

4. Additional premiums may be required under certain conditions

Which of these may NOT be deducted from premium payments or the cash value of a variable life insurance policy? 1. Mortality costs 2. Administrative charges 3. Investment management fees 4. Federal premium taxes

4. Federal premium taxes

Rick owns a variable universal life policy and chooses a variable death benefit option. What will typically happen to the death benefit as a result of this selection? 1. Remain the same 2. Decrease but never increase 3. Increase but never decrease 4. Fluctuate with changes in the cash account

4. Fluctuate with changes in the cash account

Which of the following is a TRUE statement regarding universal life insurance? 1. Death benefits are normally taxable 2. policy loans are not permitted 3. Premiums or face amount cannot be changed 4. Policy indicates how much of each premium is used toward company expenses

4. Policy indicates how much of each premium is used toward company expenses

Which statement regarding an adjustable life insurance policy is NOT true? 1. Combines term and permanent insurance into a single plan 2. Allows flexibility as insurance needs change 3. Plan of coverage may be changed by the policyowner 4. Policy loans are not permitted

4. Policy loans are not permitted

Which of the following could be a future use of cash value that builds in a recently-purchased whole life insurance policy? 1. Convert the cash value to a paid-up term policy 2. Gives policyowner ability to borrow against funds within two years 3. increases the policy's face amount 4. Provide supplemental income in 35 years

4. Provide supplemental income in 35 years

All of these statements concerning group credit life insurance are false EXCEPT 1. Cash value loans are allowable 2. Dividends can reduce the premium payments 3. The face amount and premiums are flexible 4. The face amount is based on the outstanding loan balance

4. The face amount is based on the outstanding loan balance