Chapter Exam 2 - Policy Provisions, Options and Riders

Which of these are NOT an example of a Nonforfeiture option? Extended Term Reduced Paid-up Cash Surrender Life Income

Life Income All of these are examples of Nonforfeiture options EXCEPT Life Income.

B owns a Whole Life policy with a guaranteed insurability option that allows him to purchase, without evidence of insurability, stated amounts of

additional Whole Life coverage at specified times A guaranteed insurability option in a Whole Life Policy permits the policyowner to purchase, without evidence of insurability, stated amounts of Whole Life insurance at specified times.

The Accidental Death and Dismemberment (AD&D) provision in a life insurance policy would pay additional benefits if the insured

The Accidental Death and Dismemberment (AD&D) provision in a life insurance policy would pay additional benefits if the insured is blinded in an accident.

When does a Guaranteed Insurability Rider allow the insured to buy additional coverage?

at future dates specified in the contract with no evidence of insurability required This rider provides specific dates on which additional life insurance policies can be bought without providing proof of insurability.

S would like to use dividends from her life insurance policy to purchase paid-up additions. All of these would be factors that determine how much coverage can be purchased EXCEPT

beneficiary's age The age of the beneficiary is irrelevant in determining how much paid-up additions can be purchased.

Which life insurance rider typically appears on a Juvenile life insurance policy?

Payor Benefit rider payor benefit rider provides for waiver of premium if the adult-payor of the policy dies or becomes totally disabled.

Which of these Nonforfeiture Options continue a build-up of cash value?

Reduced Paid-Up A Reduced Paid-Up option would provide continuing cash value build-up.

The provision that can be used to put an insurance policy back in force after it has lapsed due to nonpayment is called

Reinstatement In cases where a policyowner wishes to reinstate a lapsed policy, the reinstatement provision allows the policyowner to do so with some limitations.

Which of these provisions require proof of insurability after a policy has lapsed?

Reinstatement Most insurers require evidence of insurability be provided upon reinstatement of a lapsed policy.

T took out a $50,000 life insurance policy with an Accidental Death and Dismemberment rider. Five years later, T commits suicide. How much will the insurer pay?

$50,000 The suicide occurred outside the Suicide clause period (normally 1-2 years), thus the face amount will be paid.

What does the insuring agreement in a Life insurance contract establish?

An insurer's basic promise The insuring agreement in a Life insurance contract establishes the basic promise of the insurance company.

Whose life is covered on a life insurance policy that contains a payor benefit clause?

Child. A payor benefit clause is generally added to a life policy that insures the life of a juvenile. It provides continuance of insurance coverage in the event of the death or total disability of the individual responsible for the payment of premiums.

N is covered by a Term Life policy and does not make the required premium payment which was due August 1. N dies September 15. What action will the insurer take?

Claim will be denied. In this situation, the insurance company will deny the claim, as the policy would have lapsed due to nonpayment by September 15.

How do life insurance companies handle cases where the insured commits suicide within the contract's stated Contestable period?

Claims are denied under the Suicide clause of the policy

Which of the following statements about accumulated interest earned on dividends from an insurance policy is TRUE?

It is taxed as ordinary income. Accumulated interest earned on dividends from an insurance policy is taxed as ordinary income.

All of the following statements are true regarding a policy's Grace period EXCEPT

Past due premiums are waived

S buys a $50,000 whole life policy with a $50,000 Accidental Death and Dismemberment rider. S dies 1 year later of natural causes. How much will the insurer pay the beneficiary?

the beneficiary is entitled to receive $50,000.

A potential client, age 40, would like to purchase a Whole Life policy that will accumulate cash value at a faster rate in the early years of the policy. Which of these statements made by the producer would be correct?

20-Pay Life accumulates cash value faster than Straight Life

A long-term care rider in a life insurance policy may trigger a benefit in the event of which of the following?

A long-term care rider in a life insurance policy may trigger a benefit in the event of the inability of the insured to perform more than 2 Activities of Daily Living (ADL's).

Which of the following statements is CORRECT about accelerated death benefits?

Accelerated death benefits provide for the early payment of some portion of the policy face amount should the insured suffer from a terminal illness or injury.

What action can a policyowner take if an application for a bank loan requires collateral?

Assign policy ownership to the bank

A young, married teacher has two children and owns a Whole Life policy. If the teacher wants an increasing Death Benefit to protect against inflation, the teacher should select which of the following Dividend Options?

Paid-Up Additional Insurance

M had an annual life insurance premium payment due January 1. She died January 10 without making the premium payment. What action will the insurer take?

Pay face amount minus the past due premium. In this situation, the insurer would pay the death benefit less the past-due premium because death occurred within the grace period.

Which of these life insurance riders allows the applicant to have excess coverage?

Term rider

Variable Whole Life Insurance can be described as

Variable Whole Life Insurance is both an insurance and securities product.

When a misrepresentation on a life insurance policy application is discovered, what action may an insurance company take?

Void the policy only if it is discovered during the Contestable period and proven to be material

What does the ownership clause in a life insurance policy state?

Who the policyowner is and what rights the policyowner is entitled to

M has an insurance policy that also has an outstanding policy loan at the time of M's death. The insurer will deduct the outstanding loan balance from the

policy proceeds . If not repaid by the time the insured dies, the loan balance and any interest accrued are deducted from the policy proceeds at the time of claim.

Which statement regarding the Misstatement of Age provision is considered to be true?

Coverage will be adjusted to reflect the insured's true age if a misstatement of age is discovered

Which of these is NOT considered to be a right given to a policyowner?

Modify a provision in the insurance contract

What benefit does the Payor clause on a Juvenile Life policy provide?

Premiums are waived if payor becomes disabled

Which of the following provisions guarantees that premiums will be waived if a Juvenile Life policyowner becomes disabled?

The correct answer is "Payor clause". A Payor clause ensures that premiums will be waived for a Juvenile Life policy if the policyowner becomes disabled.

In a life insurance policy, which provision states who may select policy options, designate and name a beneficiary, and be the recipient of any financial benefits from the policy?

"Owner's Rights" states who may select policy options, designate and name a beneficiary, and be the recipient of any financial benefits from the policy.

K pays on a $20,000 20-Year Endowment policy for 10 years and dies from an automobile accident. How much will the insurance company pay the beneficiary?

$20,000 death benefit If the insured dies before the endowment's maturity, the policy's face value — also known as the "death benefit" — is paid in a lump sum to any beneficiaries.

Which of these statements about a Guaranteed Insurability Option rider is NOT TRUE?

Evidence of insurability is required when the option is exercised

In a Life insurance contract, an insurance company's promise to pay stated benefits is called the

Insuring clause

All of these statements concerning Settlement Options are true EXCEPT -Increased proceeds can be provided through accumulation of interest -Rapid depletion of proceeds can be avoided -Proceeds can be administered by the insurance company -Only the beneficiary may select

Only the beneficiary may select

All of these Settlement options involve the systematic liquidation of the death proceeds in the event of the insured's death EXCEPT

The Interest Only option does NOT involve the systematic liquidation of the death proceeds.

What is the Suicide provision designed to do?

safeguard the insurer from an applicant who is contemplating suicide The purpose of a Suicide provision is to protect the insurer against the purchase of a policy in contemplation of suicide.

P is the insured on a participating life policy. Which statement is true if P's premiums are waived due to a disability?

P will still receive declared dividends. Even though premiums are waived because of the disability, the insured will continue to receive dividends just as if the insured were still making the payments themselves.

What provision in a life insurance policy states that the application is considered part of the contract?

Entire Contract provision The Entire Contract provision, found at the beginning of the policy, states that the policy document, the application (which is attached to the policy), and any attached riders constitute the entire contract.

Which statement is TRUE in regards to a policy loan?

Past-due interest on a policy loan is added to the total debt

A provision in a life insurance policy that pays the policyowner an amount that does not surpass the guaranteed cash value is called the

Policy Loan provision A policy loan will pay the policyowner an amount that, with interest, does NOT exceed the guaranteed cash value.

N is a student pilot with a large life insurance policy. Which of these features would limit the insurer's obligation in the event N was killed while flying as a student pilot?

Exclusion. Exclusions are specified hazards listed in a policy for which benefits will not be paid.

How are policyowner dividends treated in regards to income tax?

Interest on accumulations is taxed If the dividends exceed the total premium payments for the insurance policy, the excess dividends are considered taxable income.

The Accelerated Death Benefit provision in a life insurance policy is also known as a(n)

Living Benefit

P purchases a $50,000 whole life insurance policy in 2005. One of the questions on the application asks if P engages in scuba diving, to which P answers "No". The policy is then issued with no scuba exclusions. In 2010, P takes up scuba diving and dies in a scuba-related accident in 2011. What will the insurer pay to P's beneficiary?

$50,000 minus any outstanding policy loans. In this situation, the beneficiary will receive $50,000 less any outstanding loans and interest. At the time of the insured's death, the policy is beyond the contestable period.

P is blinded in an industrial accident. Which provision of his life insurance policy will pay a stated benefit amount?

Accidental Death and Dismemberment clause An AD&D clause provides benefits for death due to an accident or for the loss of one or more hands, feet, arms, legs, or loss of sight.

Which of the following Dividend options results in taxable income to the policyowner?

Accumulation at Interest While policy dividends are not taxable, any interest paid on them is taxable income in the year the interest is credited to the policy.

P died five years after purchasing a life policy. While investigating the claim, the insurer discovered material misrepresentations made by P during the application process. Which of these actions will the insurer take?

Beneficiary will be paid the Death Benefit The incontestable clause prevents the insurer from canceling the contract even for a material misrepresentation.

Which of these actions is taken when a policyowner uses a Life Insurance policy as collateral for a bank loan?

Collateral assignment A policyowner using the Life Insurance policy as collateral for a bank loan normally would make a collateral assignment.

The automatic premium loan provision is designed to

avoid a policy lapse". The purpose of the automatic premium loan is to keep the policy from lapsing.

The Consideration clause in a life insurance policy indicates that a policyowner's consideration consists of a completed application and

the initial premium

The Consideration clause in a life insurance contract contains what pertinent information?

Amount of premium payments and when they are due The Consideration clause in a life insurance policy specifies the amount and frequency of premium payments that the policyowners must make to keep the insurance in force.

An insured is past due on his life insurance premium, but is still within the Grace Period. What will the beneficiary receive if the insured dies during this Grace Period?

Full face amount minus any past due premiums. If an insured dies during the Grace Period of a life insurance policy before paying the past due premium, the beneficiary will receive the face amount of the policy less any past due premiums.

The agreement in a life insurance contract that states a specific sum of money will be paid to a designated person upon an insured's death is called a(n)

Insuring agreement. The insuring clause or provision sets forth the company's basic promise to pay benefits upon the insured's death.

An insured's inability to perform two or more activities of daily living may trigger which type of policy rider?

Long term care

A policy loan is made possible by which of these life insurance policy features?

Cash value provision

Which rider provides coverage for a child under a parent's life insurance policy?

Child term rider One of the best methods of adding coverage for a child on a parent's life insurance policy is to add a child term rider

Which of these types of policies may NOT have the Automatic Premium Loan provision attached to it?

Decreasing Term

D is the policyowner and insured for a $50,000 life insurance policy. The beneficiary is D's wife. D and his wife divorce and D remarries, transferring ownership of his policy to his new wife. If D dies without making any further changes, to whom will the policy proceeds be paid to?

Ex-wife D's ex wife is still the beneficiary of this policy, even though policy ownership has changed to his current spouse.

In a life insurance policy, which feature states that the policy will not cover certain risks?

Exclusion the feature of a life insurance policy stating that the policy will not cover certain risks is called an exclusion.

Which provision prevents an insurer from changing the terms of the contract with the policyowner by referring to documents not found within the policy itself?

The entire contract provision, found at the beginning of the policy, states that the policy document, the application (which is attached to the policy), and any attached riders constitute the entire contract. Nothing may be "incorporated by reference," meaning that the policy cannot refer to any outside documents as being part of the contract.

D was actively serving in the Marines when he was killed in an automobile accident while on leave. His $100,000 Whole life policy contains a War Exclusion clause. How much will D's beneficiary's receive?

The full face amount

Which of these types of life insurance allows the policyowner to have level premiums and to also choose from a selection of investment options?

Variable Life A life insurance policy that has a level premium but allows the policyowner to choose from a selection of investment options is known as Variable Life.

Which type of life policy contains a monthly mortality charge as well as self-directed investment choices?

Variable Universal Life is comprised of monthly mortality charges and self directed investment choices.

L takes out a life insurance policy and dies 10 years later. During the claim process, the insurer discovers that L had understated her age on the application. Under the Misstatement of Age provision, the insurer will

adjust the death benefit to a reduced amount

What action will an insurer take if an interest payment on a policy loan is not made on time?

automatically add the amount of interest due to the loan balance Unpaid interest from a policy loan is added to the loan balance if not paid by the due date.

The incontestable clause allows an insurer to

contest a claim during the contestable period The incontestable clause or provision specifies that after a certain period of time (usually two years from the issue date), the insurer no longer has the right to contest the validity of the life insurance policy so long as the contract continues in force.

Additional coverage can be added to a Whole Life policy by adding a(n)

decreasing term rider A decreasing term rider can add additional coverage to a whole life policy.

When an insurer issues a policy that refuses to cover certain risks, this is referred to as a(n)

exclusion Exclusions are features of a life insurance policy stating that the policy will not cover certain risks.

All of these statements about the Waiver of Premium provision are correct EXCEPT

Receiving Social Security disability benefits is not a requirement to be eligible for the Waiver of Premium.

J let her life insurance policy lapse 8 months ago due to nonpayment. She can reestablish coverage under which of the following provisions?

Reinstatement provision . In cases where a policyowner wishes to reinstate a lapsed policy, the reinstatement provision allows the policyowner to do so with some limitations.

S buys a $10,000 Whole Life policy in 2003 and pays an annual premium of $100. S dies 5 years later in 2008 and the insurer pays the beneficiary $10,500. What kind of rider did S include on the policy?

Return of premium rider

How are surrender charges deducted in a life policy with a rear-end loaded provision?

Deducted when the policy is discontinued

The option that provides an additional death benefit for a limited amount of time at the lowest possible cost is called a(n)

An Accidental Death and Dismemberment (AD&D) rider provides an additional death benefit for a limited period of time at the lowest possible cost.

S has a Whole Life policy with a premium payment due soon. Which provision would keep the policy in force if S does not make the required payment and the policy has adequate cash value from which the premium payment can be made?

The Automatic Policy Loan provision will keep a Whole Life policy in force if a required premium payment is not made and there is sufficient cash value.

A life insurance policy which ensures that the premium will be paid if the insured becomes disabled has what kind of rider attached?

Waiver of Premium The Waiver of Premium is a rider on a life insurance policy that guarantees that the premium will be paid if the insured is disabled for a specified period of time.

When is the face amount of a Whole Life policy paid?

When the insured dies or at the policy's maturity date, whichever happens first

A Return of Premium life insurance policy is

Whole life and Increasing term A Return of Premium life insurance policy is whole life insurance with a death benefit rider of increasing term insurance equal to the amount of premiums paid. If the insured dies within the period of term, the beneficiary will receive face amount plus the value of all paid premiums.