Chapter 3 quiz Answer Key

All of the following statements are correct regarding Credit Life Insurance EXCEPT A)Benefits are paid to the borrower's beneficiary. B)The amount of insurance permissible is limited per borrower. C)Premiums are usually paid by the borrower. D)Benefits are paid to the creditor.

A)Benefits are paid to the borrower's beneficiary.

Which of the following is an example of a limited-pay life policy? A)Life Paid-up at Age 65 B)Renewable Term to Age 70 C)Level Term Life D)Straight Life

A)Life Paid-up at Age 65 Reasons:

Your client wants both protection and savings from the insurance, and is willing to pay premiums until retirement at age 65. What would be the right policy for this client? A)Limited pay whole life B)Interest-sensitive whole life C)Life annuity with period certain D)Increasing term

A)Limited pay whole life Reason: Premium payments will cease at her age 65, but coverage will continue to her death or age 100.

Variable Life insurance is based on what kind of premium? A)Graded B)Level fixed C)Increasing D)Decreasing

B)Level fixed Reason: Variable Life insurance is a level fixed premium investment based product.

An employee has group life insurance through her employer. After 5 years, she decides to leave the company and work independently. How can she obtain an individual policy? A)She can convert her group policy to an individual policy without proof of insurability within 31 days of leaving the group plan. B)She will still be covered under the group plan, but will have to pay an individual policy premium. C)She can only convert her coverage without proof of insurability if she has the master policy. D)She must apply for a new policy, which requires her to provide proof of insurability.

A)She can convert her group policy to an individual policy without proof of insurability within 31 days of leaving the group plan. Reasons: If a person has life insurance under a group plan and then leaves the group, he/she may convert group coverage to individual coverage within 31 days of leaving the plan without proof of insurability.

Which type of life insurance policy generates immediate cash value? A)Single Premium B)Level Term C)Decreasing Term D)Continuous Premium

A)Single Premium Reasons: Like other types of whole life policies, Single Premium Whole Life (SPWL) endows for the face amount of the policy if the insured lives until the age of 100. The distinguishing feature of a SPWL is the fact that it generates immediate cash value, due to the lump-sum payment made to the insurer.

An insurance policy that only requires a payment of premium at its inception, provides insurance protection for the life of the insured, and matures at the insured's age 100 is called ASingle premium whole life. BModified Endowment Contract (MEC). CLevel term life. DGraded premium whole life.

A)Single premium whole life.

An insurance policy that only requires a payment of premium at its inception, provides insurance protection for the life of the insured, and matures at the insured's age 100 is called A)Single premium whole life. B)Modified Endowment Contract (MEC). C)Level term life. D)Graded premium whole life.

A)Single premium whole life. Reasons: Single premium whole life requires the entire premium to be paid in one lump sum at the policy's inception.

Which of the following policies would have an IRS required corridor or gap between the cash value and the death benefit? A)Universal Life - Option A B)Universal Life - Option B C)Equity Indexed Universal Life D)Variable Universal Life

A)Universal Life - Option A Reasons: Universal Life Option A (Level Death Benefit option) policy must maintain a specified "corridor" or gap between the cash value and the death benefit, as required by the IRS. If this corridor is not maintained, the policy is no longer defined as life insurance for tax purposes, and consequently loses most of the tax advantages that have been associated with life insurance.

When would a 20-pay whole life policy endow? A)When the insured reaches age 100 B)At the insured's age 65 C)After 20 payments D)In 20 years

A)When the insured reaches age 100 Reasons: A limited-pay whole life policy, just like straight life, endows for the face amount if the insured lives to age 100. The premium is, however, completely paid off in 20 years.

If the owner of a whole life policy who is also the insured dies at age 80, and there are no outstanding loans on the policy, what portion of the death benefit will be paid to the beneficiary? A)The face amount minus the premiums that would have been collected until the insured reached the age of 100 B)A full death benefit C)A death benefit equal to the cash value of the policy D)50% of the death benefit

B)A full death benefit Reasons: Whole life insurance policies guarantee the death benefit. If the insured lives to the age of 100, the insurance company pay the owner the face amount (equal the cash value). However, if the insured dies prior to the policy maturity date, the death benefit is paid to the beneficiary.

Which of the following features of the Indexed Whole Life policy is NOT fixed? A)Policy period B)Cash value growth C)Premium D)Death benefit

B)Cash value growth Reasons: Under the Indexed Whole Life policy, the premium is fixed, and the death benefit is guaranteed. Cash value is dependent upon the performance of the equity index although a minimum cash value is guaranteed.

The type of policy that can be changed from one that does not accumulate cash value to the one that does, is a A)Whole Life Policy. B)Convertible Term Policy. C)Renewable Term Policy. D)Decreasing Term Policy.

B)Convertible Term Policy. Reasons: A convertible term policy has a provision that allows the policyowner to convert to permanent insurance.

The type of insurance sold to a debtor and designed to pay the amount due on a loan if the debtor dies before the loan is repaid is called A)Multiple Protection insurance. B)Credit life. C)Credit health. D)Decreasing whole life.

B)Credit life. Reasons: Credit life is most often sold by lenders and is term insurance written with a face amount and term that is matched to the amount and length of the loan period. Credit insurance is a special type of coverage written to insure the life of the debtor and pay off the balance of a loan in the event of the death of the debtor.

Which of the following is NOT allowed in credit life insurance? A)Creditor becoming a policy beneficiary B)Creditor requiring that a debtor buys insurance from a certain insurer C)Creditor having a collateral assignment on the policy D)Creditor requiring that a debtor has a life insurance

B)Creditor requiring that a debtor buys insurance from a certain insurer Reasons: In credit life insurance, creditor may require that the debtor has a life insurance, but they cannot tell you who to buy the insurance from.

All of the following are the types of term insurance depending on how the face amount changes during the policy term EXCEPT A)Increasing. B)Renewable. C)Decreasing. D)Level.

B)Renewable Reason: There are three basic types of term coverage available, based on how the face amount (death benefit) changes during the policy term: Level, Increasing, and Decreasing. Regardless of the type of term insurance purchased, the premium is often level throughout the term of the policy. Only the amount of the death benefit may fluctuate.

All of the following entities regulate variable life policies EXCEPT A)The Insurance Department. B)The Guaranty Association. C)Federal government. D)The SEC.

B)The Guaranty Association. Reasons: Variable life insurance is regulated by both the state and federal government, as well as the Insurance Department, and the SEC.

The initial amount of credit life insurance may NOT exceed A)The borrower's annual income. B)The amount to be repaid under the contract. C)An amount set by statute and adjusted regularly for inflation. D)The borrower's monthly income.

B)The amount to be repaid under the contract. Reasons: The initial amount of credit life insurance may not exceed the total amount repayable under the contract of indebtedness.

In a group life insurance policy, the employer may select all of the following EXCEPT A)The premium payor. B)The beneficiary. C)The type of insurance. D)The amount of insurance.

B)The beneficiary. Reasons: Employees must be allowed to select a beneficiary.

An employee quits his job on May 15 and doesn't convert his Group Life policy to an individual policy for 2 weeks. He dies in a freak accident on June 1. Which of the following statements best describes what will happen? A)The insurer will pay nothing because the employee has terminated his group insurance and hasn't started the individual one. B)The insurer will pay the full death benefit from the group policy to the beneficiary. C)The insurer will pay a reduced death benefit to the beneficiary. D)The insurer will pay the death benefit minus one month's premium.

B)The insurer will pay the full death benefit from the group policy to the beneficiary. Reasons: The employee usually has a period of 31 days after terminating from the group in order to exercise the conversion option. During this time, the employee is still covered under the original group policy.

All of the following are true about variable products EXCEPT A)Policyowners bear the investment risk. B)The premiums are invested in the insurer's general account. C)The minimum death benefit is guaranteed. D)The cash value is not guaranteed.

B)The premiums are invested in the insurer's general account. Reason: Insurers selling variable products invest their customer's monies in a separate account, which is very similar to a mutual fund. Since there is no guaranteed rate of return, customers must bear the investment risk.

Which of the following employees insured under a group life plan would be allowed to convert to individual insurance of the same coverage once the plan is terminated? A)Those who have no history of claims B)Those who have been insured under the plan for at least 5 years C)Those who have worked in the company for at least 3 years D)Those who have dependents

B)Those who have been insured under the plan for at least 5 years Reasons: If the master contract is terminated, every individual who has been on the plan for at least 5 years will be allowed to convert to individual insurance of the same coverage.

In a survivorship life policy, when does the insurer pay the death benefit? A)If the insured survives to age 100 B)Upon the last death C)Upon the first death D)Half at the first death, and half at the second death

B)Upon the last death Reasons: Survivorship life pays on the last death rather than upon the first death.

What does "level" refer to in level term insurance? A)Cash value B)Interest rate C)Face amount D)Premium

C)Face amount Reasons: Level term policies maintain level death benefit (or face amount) throughout the term of the policy. In level term insurance, the premium also remains consistent over the years, unlike the premiums of many policies, which increase as the policyholder ages.

When an employee terminates coverage under a group insurance policy, coverage continues in force A)Until the employee can obtain coverage under a new group plan. B)Until the employee notifies the group insurance provider that coverage conversion policy is issued. C)For 31 days. D)For 60 days.

C)For 31 days.

Annually renewable term policies provide a level death benefit for a premium that A)Remains level. B)Fluctuates. C)Increases annually. D)Decreases annually.

C)Increases annually. Reasons: Annually renewable term policies provide a level death benefit for a premium that increases each year with the age of the insured.

Credit Life insurance A)Insures the life of a creditor. B)Has a maximum term for insurance of 20 years. C)Insures the life of a debtor. D)Is purchased on an installment basis.

C)Insures the life of a debtor. Reasons: Credit insurance is a special type of coverage written to insure the life of the debtor and pay off the balance of a loan in the event of the death of the debtor.

Which Universal Life option has a gradually increasing cash value and a level death benefit? A)Term insurance B)Option B C)Option A D)Juvenile life

C)Option A

Which of the following is called a "second-to-die" policy? A)Juvenile life B)Joint life C)Survivorship life D)Family income

C)Survivorship life Reason: Survivorship life (also referred to as "second-to-die" or "last survivor" policy) is much the same as joint life in that it insures two or more lives for a premium that is based on a joint age.

Which of the following types of policies allows the policyowner to skip premium payments, provided that there is enough cash value in the policy to cover the premium amount? A)Variable life B)Adjustable life C)Universal life D)Flexible life

C)Universal life Reason: The policyowner has the flexibility to increase the amount of premium going into the policy and to later decrease it again. In fact, the policyowner may even skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to compensate for the nonpayment of premium.

A Straight Life policy has what type of premium? A)An increasing annual premium for the life of the insured B)A decreasing annual premium for the life of the insured C)A variable annual premium for the life of the insured D)A level annual premium for the life of the insured

D)A level annual premium for the life of the insured Reasons:

An employee quits his job and converts his group policy to an individual policy; the premium for the individual policy will be based on his A)Experience Rating. B)Group rate. C)Insurer's scheduled rate. D)Attained age.

D)Attained age Reason: If an employee terminates membership in the insured group, the employee has the right to convert to an individual whole life policy without proving insurability. The insurer will determine what type(s) of policy an employee may convert to, but it must be issued at a standard rate, based on the individual's attained age.

Which of the following is TRUE about credit life insurance? A)Debtor is the annuitant. B)Creditor is the insured. C)Debtor is the policy beneficiary. D)Creditor is the policyowner.

D)Creditor is the policyowner. Reason: In credit life insurance, the creditor is the policyowner and the beneficiary; the debtor is the insured.

Which of the following types of insurance policies is most commonly used in credit life insurance? A)Increasing term B)Whole life C)Equity indexed life D)Decreasing term

D)Decreasing term Reasons: Credit insurance is a special type of coverage written to insure the life of the debtor and pay off the balance of a loan in the event of the death of the debtor. It is usually written as decreasing term insurance.

Which of the following best describes annually renewable term insurance? A)It requires proof of insurability at each renewal. B)Neither the premium nor the death benefit is affected by the insured's age. C)It provides an annually increasing death benefit. D)It is level term insurance.

D)It is level term insurance. Reasons: Annually renewable term is a form of level term insurance that offers the most insurance at the lowest cost.

A married couple owns a permanent policy which covers both of their lives and pays the death benefit only upon the death of the first insured. Which policy is that? A)Survivorship Life Policy B)Second-to-Die C)Family Income Policy D)Joint Life Policy

D)Joint Life Policy Reasons: Joint life policies cover the lives of two insureds; rates are blended. Upon the death of the first insured, the policy ends.

A domestic insurer issuing variable contracts must establish one or more A)Liability accounts. B)Annuity accounts. C)General accounts. D)Separate accounts.

D)Separate accounts. Reasons: Any domestic insurer issuing variable contracts must establish one or more separate accounts. The insurer must maintain in each separate account assets with a value at least equal to the reserves and other contract liabilities connected to the account.

Which of the following policies would be classified as a traditional level premium contract? A)Adjustable Life B)Universal Life C)Variable Universal Life D)Straight Life

D)Straight Life Reason: Straight whole life policies have a level guaranteed face amount and a level premium for the life of the insured.

Which of the following would help prevent a universal life policy from lapsing? A)Face amount B)Adjustable premium C)Corridor of insurance D)Target premium

D)Target premium Reasons: The target premium is a recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime.

All of the following are characteristics of a group life insurance plan EXCEPT A)The participants receive a Certificate of Insurance as their proof of insurance. B)A minimum number of participants is required in order to underwrite the plan. C)The cost of the plan is determined by the average age of the group. D)There is a requirement to prove insurability on the part of the participants.

D)There is a requirement to prove insurability on the part of the participants. Reasons: There is no individual underwriting for group life insurance.

Which type of life insurance policy allows the policyowner to pay more or less than the planned premium? A)Variable life B)Decreasing term C)Straight whole life D)Universal life

D)Universal life Reason: The policyowner has the flexibility to increase the amount of premium going into the policy and to later decrease it again. In fact, the policyowner may even skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to compensate for the nonpayment of premium.

Which of the following Life Insurance policies would be considered interest sensitive? A)Adjustable life B)Whole life C)Increasing term D)Universal life

D)Universal life Reasons: As well as being a flexible premium policy, universal life is also an interest-sensitive policy. The insurer credits the cash value in the policy with a current (nonguaranteed) interest rate and backs the cash value with a contract (lower guaranteed) rate of interest.