INS 3303 Unit 2

A policy that automatically increases the death benefit without evidence of insurability will typically violate the MEC rules. True/False

False

A survivorship life policy on a married couple becomes void if the couple divorces. True/False

False

An advantage of single premium life is that the amount of protection is high in relation to the premium paid True/False

False

An insurance contract entered into before 1988 can never be considered a modified endowment contract? True/False

False

Because of the way that it is taxed, a modified endowment contract is not considered a life insurance policy for tax purposes. True/False

False

Current Assumption Whole Life is also known as "straight life" or "traditional whole life" insurance True/False

False

Generally, the lower the number of payments, the lower the annual premium will be, consequently, the rate of growth of policy cash values drops. True/False

False

Generally, the lower the number of payments, the lower the annual premiums will be, consequently, the rate of growth of policy cash values drop True/False

False

Group life provides an after-tax benefit for employees and a deduction for employers. True/False

False

Limited-pay policies are designed for persons whose need for coverage is great and whose income is limited. True/False

False

Most universal life policies are issued with front-end load charges rather than back-end load charges. True/False

False

Once a policy is classified as a modified endowment contract, with certain corrections, it can be later treated as not a modified endowment contract. True/False

False

One of the advantages of group term insurance is that the premiums remain level on a per-employee basis regardless of the ages of the employees True/False

False

Survivorship life pays a death benefit at either the first or second death, depending on the wishes of the policy owner True/False

False

The Basic policy in a survivorship life plan is always a permanent form of insurance True/False

False

The basic policy in a survivorship life plan is always a permanent formterm-10 of insurance. True/False

False

The policy illustration for a Current-Assumption Whole Life policy provides all the information a consumer needs to evaluate the contract True/False

False

Under ERISA requirements, an employee covered by a group term life contract must name his spouse as beneficiary, if he is married. True/False

False

A 10% penalty applies to certain distributions from life insurance policies that are treated as modified endowment contracts. True/False

True

A combination of joint life and single life insurance is frequently more cost effective than two separate single life policies True/False

True

A term life insurance policy makes no promise to pay anything if the insured lives beyond the specified term. True/False

True

A traditional level-premium current assumption whole life policy includes a minimum interest guarantee True/False

True

All cash value policies must allow policyholders to borrow cash values from the policy True/False

True

All universal life policies have a guaranteed minimum interest rate. True/False

True

An important function of ordinary level-premium whole life is to direct family assets to family members while minimizing taxes. True/False

True

As long as cash values are sufficient to cover policy charges, a universal life policy owner may skip premium payments. True/False

True

If a policy is treated as a "MEC", amounts received as loans are subject to income tax to the extent of "gain" in the policy True/False

True

Joint Life Insurance may be offered in the form of permanent or term insurance, or additional-insured rides (AIRs) to single-life policies True/False

True

Joint Life coverage is appropriate in situations where the need for insurance is dependent on when someone dies rather than who dies True/False

True

Life insurance proceeds payable to someone other than the deceased's estate are not a matter of public record. True/False

True

Most group insurance is issued as yearly renewable term insurance True/False

True

Most insurance companies do not offer renewable term policies to new applicants after a certain age, which is usually between 60 and 70. True/False

True

One disadvantage of listed-pay whole life is that the amount of protection is lower relative to the premium spent than with level premium or term policies True/False

True

One disadvantage of universal life is that policy owners bear more risk of adverse trends in mortality or expenses than if they owned traditional whole life policies. True/False

True

One of the disadvantages of level premium whole life insurance is that the premiums may be unaffordable for persons of limited financial resources. True/False

True

One of the main advantages of Current-Assumption Whole Life insurance is the policy elements are "unbundled". True/False

True

One of the main advantages of current assumption whole life is that policy elements are "unbundled' True/False

True

Term life insurance is ideal for temporary needs, such as paying off funeral, estate, and inheritance taxes True/False

True

The most important reason for buying a single premium policy is the desire for maximum tax-deferred or tax-free investment in conjunction with life insurance. True/False

True

The policy cash value for limited-pay whole life policies typically grows more quickly than for policies with longer payment periods. True/False

True

The tax treatment of survivorship life insurance is the same as other types of life insurance. True/False

True

The unique feature of limited-pay life insurance are predictable cash outlays and accelerated tax-favored cash values. True/False

True

Variable Life and Variable Universal Life are especially suited for many business insurance situations where flexibility and growth of cash value are attractive features. True/False

True

Variable life is a whole life policy where the policy-owners bear all investment risk. True/False

True

Which of the following could never be treated as a modified endowment contract? a) A single-premium policy that was entered into on June 1, 1988. b) A single premium policy entered into after July 1, 1988. c) A single-premium policy that was entered into on June 1, 1988 that is exchanged for another policy in 1997. d) A policy that initially passes the seven-pay test.

a) A single-premium policy that was entered into on June 1, 1988.

Which of the following items are NOT treated as income-first when distributed from a modified endowment contract? a) dividends retained by the insurer to premiums or other consideration for the contract b) cash dividends c) policy loans to pay premiums and for all other purposes d) withdrawals

a) dividends retained by the insurer to premiums or other consideration for the contract

Which of the following accurately describes a disadvantage of survivorship life insurance? a) it provides no benefits at the first death, unless a special rider is added b) it cannot be used to fund charitable bequests c) the premiums are higher than for equivalent coverage in two separate policies d) medical underwriting standards are stricter than in the case of two separate policies

a) it provides no benefits at the first death, unless a special rider is added

A Limited-Pay Whole Life insurance policy with a short premium pay period runs the risk of becoming a "MEC" if: a) the insured pays the full annual premium and dividend are applied as additional premiums b) the policy passes the seven-pay test c) the policy passes the incidental benefit test d) table 38 rates, rather than PS 58 rates, are used to measure the employee's economic benefit

a) the insured pays the full annual premium and dividend are applied as additional premiums

A survivorship rider permits a) the purchase of increased coverage on the insured if the life designated in the rider dies before the insured b) an increased benefit from a qualified pension plan c) the purchase of shares of stock from the deceased's estate d) the substitution of insureds, with evidence of insurability

a) the purchase of increased coverage on the insured if the life designated in the rider dies before the insured

A survivorship rider permits a) the purchase of increased coverage on the insured if the life designated in the rider dies before the insured b) an increased benefit from a qualified pension plan c) the purchase of shares of stock from the deceased's estate d) the substitution of insureds, with evidence of insurability

a) the purchase of increased coverage on the insured if the life designated in the rider dies before the insured

An important use of joint life insurance has been: a) to fund buy-sell agreements in closely-held businesses b) to provide liquidity for estate taxes and the death of a second spouse c) to provide less expensive protection than a single-life policy of the same face amount d) as a rider that permits the owner of a single-life policy to replace one insured with another insured

a) to fund buy-sell agreements in closely-held businesses

An employee does not have to report any income with respect to what amount of group term life insurance coverage (assuming the plan is not discriminatory)? a) zero b) $50,000 c) $100,000 d) $125,500

b) $50,000

Insurers offer options that can make joint life particularly attractive. Which of the following options is NOT offered? a) A rider that permits substitution of insured with evidence of insurability b) A provision for the exchange, under Section 1035, of the joint life policy for a long-term care insurance policy c) A provision that if both insureds die in a common disaster, the insurer will pay the face amount on each death d) a guaranteed purchase rider that permits surviving insured to purchase insurance on themselves or other surviving

b) A provision for the exchange, under Section 1035, of the joint life policy for a long-term care insurance policy

Which of the following statements about the tax aspects of ownership of variable life insurance is FALSE? a) Transfers of investment assets from one fund to another are tax-free. b) Gains received are taxable at capital gains rates. c) Investment earnings within the policy are tax deferred. d) Death benefits are usually paid free of federal income tax.

b) Gains received are taxable at capital gains rates.

Level-premium whole life insurance policies allow policyowners to borrow amounts under the policy. Typical loan provisions include which of the following requirements? a) Policy loans must be approved by the insurer's loan committee. b) If the policy is terminated the cash surrender value is reduced by any outstanding policy loans and unpaid interest. c) On the death of the insured, the death benefit is reduced by any unpaid interest but not by any outstanding policy loan. d) The amount of the loan is limited to the amount of the death benefit.

b) If the policy is terminated the cash surrender value is reduced by any outstanding policy loans and unpaid interest.

Advantages of ordinary level-premium whole life include all of the following except a) Fixed and known annual premium b) Interest on policy loans is generally non deductible c) Tax-free, or tax-deferred, accumulation of cash values d) Policy cash values can be borrowed at low net cost

b) Interest on policy loans is generally non deductible

Which of the following is not an advantages of Group Term Life insurance? a) it provides insurance at standard rates for those who might otherwise be insurance at only an increased premium b) It can be used as a standard investment option under the employer's 401(k) plan c) it provides a death benefit to employees at a relatively low cost d) it typically enables terminated employees to convert to individual policies without submitting evidence of insurability

b) It can be used as a standard investment option under the employer's 401(k) plan

Which of the following statements regarding universal life insurance is true? a) Because they are not reported separately, elements of the policy such as interest credits, mortality charges, and death benefits are difficult to track. b) Universal life allows policyowners to participate in favorable investment, mortality and expense experience of the company insurance policies. c) Annual increases in cash value are taxable due to the unique nature of the universal life contract. d) Because universal life is a current-assumption policy universal life is a security and a prospectus must be provided before each sale.

b) Universal life allows policyowners to participate in favorable investment, mortality and expense experience of the company insurance policies.

Which of the following statements regarding universal life insurance is true? a) Because they are not reported separately, elements of the policy such as interest credits, mortality charges, and death benefits are difficult to track. b) Universal life allows policyowners to participate in favorable investment, mortality and expense experience of the company. insurance policies. c) Annual increases in cash value are taxable due to the unique nature of the universal life contract. d) Because universal life is a current-assumption policy universal life is a security and a prospectus must be provided before each sale.

b) Universal life allows policyowners to participate in favorable investment, mortality and expense experience of the company. insurance policies.

If a limited-pay whole life insurance policy is determined to be a "MEC" (Modified Endowment Contract): a) cash value increases cease immediately b) distributions, including policy loans, will likely be includable in income c) death benefits are paid only if cancer is the cause of death d) the policy will be administered by the state insurance commissioner

b) distributions, including policy loans, will likely be includable in income

Which item is NOT a key factor to be weighed in choosing the best variable life or variable universal life policy? a) policy loadings and expenses b) the amount of the cash value guarantees c) suitability and variety of investment options d) relative performance of the insurance company's alternative investment account

b) the amount of the cash value guarantees

A modified endowment contract is a life insurance policy that has failed a) the test for life insurance b) the seven-pay test c) the transfer for value rule d) the rule against perpetuities

b) the seven-pay test

A key feature of variable life insurance is a) the dividends are guaranteed b) there is no guaranteed minimum cash value c) death benefit claims are always paid in shares of company stock rather than in cash d) it can be sold only by registered traders on the New York exchange

b) there is no guaranteed minimum cash value

Current-Assumption Whole lIfe insurance is generally a hybrid of: a) term and traditional cash-value life insurance b) traditional whole life and universal life insurance c) universal life insurance and a variable annuity d) traditional whole life insurance and an indexed annuity

b) traditional whole life and universal life insurance

Approximately what percentage of all insurance in face in the United States is on a group basis? a) 15% b) 30% c) 40% d) 55%

c) 40%

Which of the following problems could be caused by the flexibility offered by a universal life insurance policy? a) Increases in the death benefit within in the first five policy years can cause the death benefit to become taxable income to the beneficiary. b) Skipping even one premium payment will cause the policy to lapse. c) A death benefit reduction may cause the policy to be classified as a modified endowment contract. d) The coverage of a key employee's life by a corporation will cause a transfer for value problem.

c) A death benefit reduction may cause the policy to be classified as a modified endowment contract.

A policy that originally is not a modified endowment contract will be subject to re-testing if there is a "material change" in the contract. Which of the following would likely be a material change? a) A cost-of-living increase in the death benefit based on the consumer price index. b) Increases in death benefits because of premiums paid for the policy to support the first seven contract years of benefits. c) An exchange of one policy for another policy in a 1035 exchange. d) A death benefit increase inherent in the policy design due to crediting of interest or other earnings.

c) An exchange of one policy for another policy in a 1035 exchange.

Which of the following is a disadvantage of a current assumption whole-life policy? a) Most current assumption whole life policies charge back-end surrender charges should the policy lapse or be surrendered. b) Premium are level and fixed between redetermination periods. c) CAWL policies guarantee maximum mortality and expense rates d) Policy cash values can be borrowed at a low net cost.

c) CAWL policies guarantee maximum mortality and expense rates

Advantages of single premium life include all of the following EXCEPT: a) Entire premium goes into cash value b) Cash value interest or earnings accumulate tax-free or tax-deferred c) The amount of protection is low relative to the premium paid d) Policy cash values can be borrowed at low or zero net interest.

c) The amount of protection is low relative to the premium paid

A single premium current-assumption life policy generally guarantees all of the following, EXCEPT: a) no further premiums will be required to keep the coverage in force b) the face value of the policy will never decline c) a fixed level of dividends will be paid throughout the term of the policy d) the cash values will never fall below a fixed schedule of minimum values

c) a fixed level of dividends will be paid throughout the term of the policy

An increasing premium, level death benefit term policy to age 65 is: a) mortgage insurance b) usually offered as a rider to another basic policy, and is commonly called a "return-of-premium" benefit c) a one-year term policy, renewable to age 65 d) a term policy offered during open enrollment periods, which offers to repay premiums if the insured dies within the first few years but pays no death benefit until the insured has survived the first few years of the policy

c) a one-year term policy, renewable to age 65

All of the following items should be considered in relation to a joint life policy EXCEPT: a) substitute-insured options b) guaranteed-purchase riders c) an "own occupation" definition of disability d) joint premium waiver

c) an "own occupation" definition of disability

Important disadvantages of Joint Life include all of the following EXCEPT: a) all coverage ceases with the first death b) cost is greater than single life with the same face value c) in business markets, joint life may eliminate the need for redundant coverage when the need is to insure the first death amount several lives d) ownership issues and tax traps

c) in business markets, joint life may eliminate the need for redundant coverage when the need is to insure the first death amount several lives

Advantages of term life insurance include all of the following, EXCEPT: a) it allows a person to acquire the greatest death benefit for the lowest premium when the policy is first issue b) death proceeds are generally exempt from income tax c) it is the most cost effective when the duration of the needed protection is over 15 years d) a high degree of flexibility can be made available by combining term insurance riders with permanent insurance

c) it is the most cost effective when the duration of the needed protection is over 15 years

For which of the following is use of single premium whole life insurance LEAST appropriate? a) When maximum tax-deferred cash buildup in conjunction with life insurance is desired. b) When the objective is to prefund a specified minimum death benefit for a specific purpose. c) As a vehicle for gifts. d) As a good short-term tax-deferred investment.

d) As a good short-term tax-deferred investment.

Which of the following statements regarding universal life insurance is NOT true? a) The policyowner can easily track the policy's different elements. b) It is generally best suited to long term coverage needs. c) If the policyowner skips a premium payment the policy will not lapse. d) The policy is not susceptible to inadvertently becoming a modified endowment contract.

d) The policy is not susceptible to inadvertently becoming a modified endowment contract.

Which of the following is a characteristic of a level-premium non-participating whole life insurance policy? a) In the early years of the policy, the amount of protection is higher relative to premium spent than term insurance. b) Federal income tax must be paid on cash value accumulations. c) There is a periodic adjustment of premium and death benefit. d) There is a schedule of guaranteed cash values.

d) There is a schedule of guaranteed cash values.

In which of the following situations would a level-premium whole life insurance policy be appropriate? a) To provide a fund needed only if death should occur within a short period of time after purchase b) When the policyowner desires to control the investments of the cash value of the policy c) When the policyowner desires to vary the death benefit depending upon life circumstances d) To provide funds for the continuation of a business through a "buy-sell" agreement

d) To provide funds for the continuation of a business through a "buy-sell" agreement

Which of the following statements about variable universal and variable life insurance death benefits is NOT true? a) The certainty of death benefit levels is greater under variable universal life than variable life, as long as premiums are paid at necessary levels. b) The death benefit under a variable universal life policy is adjustable, within limits and subject to insurability requirements, at the discretion of the insured. c) Variable universal life offers greater certainty of death benefit levels than variable life as long as premiums are paid at the level necessary to maintain the death benefit. d) Variable Life and Variable Universal Life bear no mortality or expense risk

d) Variable Life and Variable Universal Life bear no mortality or expense risk.

A single premium life insurance policy issued before June 21, 1988 is "grandfathered," that is not subject to the MEC (Modified Endowment Contract) tax rules. However, it can lose this tax status if there is: a) a death benefit increase inherent in the policy design due to crediting of interest or other earnings b) a death benefit increase needed to keep the relationship between the death benefit and cash values required to satisfy the tax code definition of life insurance c) a cost-of-living increase based on a broad based index such as the Consumer Price Index d) an exchange of the policy for another policy

d) an exchange of the policy for another policy

The total dollar outlay for life insurance protection is mostly determined for: a) term insurance b) level-premium whole life insurance c) limited-pay whole life insurance d) single premium whole life insurance

d) single premium whole life insurance

Which of the following types of life insurance requires the greatest amount of annual premium fo rate same amount of death benefit? a) survivor whole life insurance b) level-premium whole life insurance c) limited-pay whole life insurance d) single premium whole life insurance

d) single premium whole life insurance

Which of the following statements is true regarding Current-Assumption Whole Life Insurance? a) the amount in the "accumulation account" is based on the performance of investments selected by the policy holder b) most current-assumption policies charge relatively high from-end loans, but have no surrender charges c) the amount of premiums remains fixed for the term of the contract d) the insurer promises to credit at least a minimum guaranteed rate of interest

d) the insurer promises to credit at least a minimum guaranteed rate of interest

Which of the following is true regarding the interest credit to universal life policies? a) "portfolio" rates are generally more responsive to changing market interest rates than "New Money" rates b) the rate used is based on the return on investments selected by the policyholder and held in a segregated asset account c) iInsurance companies are no longer allowed complete freedom in interest crediting due to some companies abusing such discretion in the past d) the rate used may be linked to a well-known index of yields if it exceeds a minimum rate guaranteed in the policy

d) the rate used may be linked to a well-known index of yields if it exceeds a minimum rate guaranteed in the policy