Insurance

If one purchases a 20-Pay Life Policy, with a face amount of $25,000 and dies 15 years later, what amount will the beneficiary receive?

$25,000. All premiums will be paid in 20 years, but the cash value will not be equal to the face amount until age 100. If death occurs at any point prior to age 100, the beneficiary receives the death benefit of $25,000.

If Alvin purchases a Variable Life Policy with a face amount of $250,000, upon his death the amount of benefit payable to the beneficiary must be at least:

$250,000, minus any loans and loan interest. The original face amount (death benefit) is guaranteed under a Variable Life Policy. The amount payable to the beneficiary upon Alvin's death must at least equal $250,000, less any loans and loan interest.

Social Security pays an eligible surviving spouse a one-time benefit upon the death of the first spouse. Which of the following is the correct amount?

$255. A one-time benefit of $255 is paid to a surviving spouse or child if eligible for Social Security benefits.

Ted owns a $50,000 Whole Life Policy. At age 47, he decides to stop paying premiums on his policy and exercise the Extended Term Option. Ted's term benefit will be:

$50,000. The Extended Term Option uses the present cash value of the policy, upon its lapse, to buy a single premium term policy of the same face amount.

Compare 3 contracts, all with the face value of $100,000; put them in order from most expensive to least expensive.

10-Pay Life, Life Paid-Up in 20 years, Straight Life. The proper order from most expensive to least expensive would be 10 Pay Life (all premiums paid up in 10 years; matures age 100); Life Paid-Up in 20 years (all premiums paid up in 20 years; matures age 100); and Straight Life (premiums paid to age 100; matures age 100). The earlier one pays up the premium on a policy, the greater the cost.

XYZ Corporation purchased a group contract to cover all 59 employees and paid the total premium. What percentage of employees must participate under this arrangement?

100%. The question describes a Noncontributory Plan as the employer (XYZ Corporation) is paying the entire premium, thus 100% participation (all 59 employees) is required.

What is the time limit on life expectancy for a Viatical Trust candidate?

2 years. The time limit of life expectancy for a Viatical Trust candidate is normally a life expectancy of two years or less.

In California, the period within which to reinstate a lapsed life insurance policy is _______ years from the start of the lapsed status.

3

David's Family Income Policy will provide an income for 10 years. If David dies on the policy's seventh anniversary, how many years will the family receive an income benefit?

3 years. If the insured dies during the income period, a specified monthly income is paid from the date of the insured's death until a specified future date. Since David died seven years into the ten-year income period, his family would receive an income for three years.

To be fully insured for Social Security, a person that attained age 21 prior to 1950 must have been covered by Social Security for_____ quarters.

40. To be fully insured for Social Security if one attained age 21 prior to 1950, they must have been covered by Social Security for 40 quarters.

The Double Indemnity Rider expires within _____ days of the accident.

90. Death must occur within 90 days of the accident for the Accidental Death (Double Indemnity) Rider benefit to be paid.

Which statement is false?

A Joint Survivorship Life Policy pays the death benefit upon the first insured's death. A Joint Survivorship Life Policy pays the death benefit upon the death of the last insured to die.

Risk

A condition in which a chance of loss exists. There are two types of risk.

Insurance

A contract whereby one undertakes to indemnify against loss, damage, or liability arising from a contingent or unknown event.

Application

A document that provides information for underwriting purposes. After the policy is issued, any unanswered question is considered waived by the insurer. The application becomes part of the entire contract.

Supplemental Executive Retirement Plan (SERP)

A nonqualified deferred compensation plan that allows employers to provide additional retirement income to key, highly compensated employees. It allows employers to provide benefits beyond those of traditional qualified plans, such as 401(k) plans.

Which best describes a Renewable Term Policy?

A policy with increased premium at each renewal. Whether the policy period is one year, five years, ten years, etc., the premium will increase at each renewal to sustain the same specified death benefit that was purchased when the policy was written. The Renewability Option is based upon attained age.

Which of the following statements is false?

A provision may require contract forfeiture when an outstanding loan is less than the loan value. It is prohibited for a life insurance policy to require contract forfeiture when an outstanding loan is less than the loan value of the policy.

What are the two types of life insurance assignments?

Absolute and collateral. The two types of assignment are Collateral (partial), and Absolute (entire face amount).

Which of the following riders is used to increase the death benefit if death is the result of an unintended fatal injury, paying a multiple level of the face amount?

Accidental Death. If death is ruled to be accidental, the Accidental Death Rider pays a multiple (usually double) of the death benefit of the underlying policy.

Which Securities Act deals primarily with new securities issues?

Act of 1933. The Securities Act of 1933 deals principally with the regulation of new securities issues, while the Securities Act of 1934 deals with the regulation of the secondary securities markets.

All are true regarding funding of Social Security, except:

Actuarial value of contributions is related to actuarial value of benefits. The actuarial value of contributions is not related to the actuarial value of benefits.

Facultative Agreements

Allow the ceding insurer and the reinsurance companies an opportunity to exchange advice about the underwriting of each case. This agreement is more time-consuming and may result in a higher premium.

Conversion Option

Allows the insured to convert to some other type of policy, such as a term policy to a cash value policy.

Right to Examine Period (Free Look)

Allows the insured/policyowner a specified number of days following receipt of the policy to look it over and if dissatisfied for any reason to return it for a full refund of premium. The policy is in force with the free look period starting the date the owner receives the policy. In California, the free-look period on individual life insurance policies is not less than 10 days nor more than 30 days, if less than 60 years of age. If 60 years of age or older, not less than 30 days. a. Be able to identify the provisions regarding notice of right to return policy, involving individual life insurance with a face value of less than $10,000, issued on or after January 1, 1981, but prior to January 1, 1990. Every policy of individual life insurance with a face value of less than $10,000 that is issued for delivery in California, on or after January 1, 1981, but prior to January 1, 1990, must contain a notice regarding return of the policy for cancellation, by the owner to the insurer, of not less than 10 days or more than 30 days after its receipt by the owner. b. Be able to identify the provisions regarding notice of right to return policy, involving all individual life insurance policies, other than those subject to a. above, issued in California on or after January 1, 1990. c. Every policy of individual life insurance that is issued for delivery in California, on or after January 1, 1990, shall contain a notice regarding return of the policy for cancellation, by the owner to the insurer, of not less than 10 days or more than 30 days after its receipt by the owner. All premiums and any policy fee paid for the policy must be refunded to the owner within 30 days from the date that the insurer is notified of the cancellation. ! Individual Life Insurance 1) Identify the provisions about the face value less than $10,000, notice of right to return policy for cancellation and time limitation. 2) Identify the provisions regarding the notice of right to cancel policy. 3) Identify the provisions regarding the investment of variable annuity premiums, individual annuity insurance, and notification, cancellation, and refunds to senior citizens. 4) Identify the provisions regarding life insurance and annuity contracts, non-printed illustrations of non-guaranteed values for senior citizens.

Buy-Sell Agreement

An agreement among owners of a firm that provides the continuation of a business upon the premature death of an owner. Through legal contract, the deceased's estate must sell the deceased's interest back to the entity, who must buy at a predetermined price.

Cash accumulation

An amount of cash accessible to the policyowner.

Rider

An endorsement to an insurance policy that modifies the contract provisions of that policy. Life insurance riders normally increase the benefits, but may also be written to reduce benefits.

Albert purchased an Adjustable Life Policy that has all of the following characteristics, except

An increase in death benefit does not require evidence of insurability. An increase in death benefit usually requires evidence of insurability.

Group Class of Life Insurance Policy

An insurance plan normally owned by an employer, creditor or association, under which coverage is provided for the employees, debtors or members. Over 40% of all life insurance in force in the United States is group insurance. Presently 85% of the group coverage is employeremployee. Group insurance provides protection for an employee's named beneficiary or creditor. The coverage may be changed only within the confines of the Master policy. The coverage is normally written on a renewable term basis providing no cash value or living benefits as found in individual cash value policies.

Which is incorrect regarding annuities?

Annuities do not use the pooling technique to spread risk. Both life insurance and annuities utilize mortality tables and the pooling technique actuarially in spreading the risk to better predict life expectancy.

Which of the following is used to determine the amount of any systematic annuitization?

Assumed Interest Rate (AIR). The AIR is what an insurer uses for calculating the payments during the annuitization period. The higher the assumed interest rate, the greater the amount of each monthly benefit.

If a father were to add a Child Rider to a policy to cover his children, how old must a newborn be before coverage is in force?

At 14 or 15 days of age. Children born after the rider is issued are covered automatically after 14 or 15 days, depending on the insurer, at no additional premium.

With a Life Income Payment Option, what happens at the annuitant's death?

At death, all payments cease. Because all payments cease upon the annuitant's death, the amounts of the monthly income payments are larger while the annuitant is alive, than under any other option.

When is the Automatic Premium Loan Provision activated?

At the end of the grace period. The Automatic Premium Loan provision automatically becomes effective at the end of the grace period to prevent the policy from lapsing.

The premium charged for exercising the Guaranteed Insurability Rider is based upon:

Attained age. Anytime the Guaranteed Insurability Rider is exercised, the premium charged for the additional amount of insurance is based on the attained age of the insured.

Which provision allows an insurer to borrow from the cash value of a policy to pay premiums due and prevent the lapse of coverage?

Automatic Premium Loan. The Automatic Premium Loan Provision enables the insurer to borrow automatically from the policy's cash value, at the end of the grace period, to cover a premium payment to prevent the policy from lapsing.

With Joint Life Insurance policies, the age is based on:

Average age of both insureds. The premium on a Joint Life Policy is calculated on the average age of both insureds.

Which of the following statements regarding exclusions under a life policy is true?

Aviation is excluded, except for fare-paying passengers on a commercial flight. Without an Aviation Rider on the policy, death as a result of aviation is excluded, except for a fare-paying passenger on regularly scheduled commercial flights.

Which of the following provisions is not a standard provision?

Backdating a policy. The other answers are standard provisions. Backdating a policy is a prohibited provision, other than to conserve age.

Which of the following statements is accurate concerning the changing of an irrevocable beneficiary?

Beneficiary may be changed only with the written consent of the present beneficiary. Once an irrevocable beneficiary has been declared by the owner of the policy, the only way that the irrevocable beneficiary can then be changed is only with the irrevocable beneficiary's prior written consent. An irrevocable beneficiary has a vested interest in the policy benefits.

What do both life insurance and annuities have in common?

Both use the pooling technique to spread the risk. Annuity mortality tables reflect a greater life expectancy than do life insurance tables, and annuities are sold to give a greater income at an older age, whereas life insurance is sold to create an immediate income in the case of premature death.

Cancellation

Cancellation is the termination of the policy before the end of its term. Either the insurer or the insured may cancel a policy. An insurer may cancel for material causes and must give the insured a certain number of days advance notice, depending upon the type of policy and the reason for cancellation. The insured may cancel a policy at any time for any reason. The insurer may require the return of the policy. If that's not possible, it may have the insured sign a 'lost policy release' form.

An investor receives ample income each month from the interest earned while retaining his/her principal. This is referred to as which of the following?

Capital Conservation. The Interest Option of settlement leaves the principal (capital) with the insurer, thus conserving the capital, and the interest income generated is taxed as ordinary income.

The cash received by the policyowner when he/she terminates a policy is known as what?

Cash Surrender Value. The Cash Surrender Value is the Nonforfeiture Option that allows the owner to withdraw the cash value upon the surrender of the policy.

Mona let her permanent policy lapse. She discovered there was $2,498 in cash remaining in the policy and decided to reduce her debt load. She exercised which Nonforfeiture Option?

Cash Surrender. The only Nonforfeiture Option listed is Cash Surrender. Mona surrenders the policy for its cash value and then uses that cash value to reduce her debt load.

All are characteristics of Franchise Insurance, except:

Certificates of Insurance are issued. No Master Policy or Certificates of Insurance are issued as compared to formal group. Although a group is being written, it is through individual policies.

Which of the following is true concerning reinstatement of a life insurance policy?

Companies have the right to require medical examinations. To reinstate a lapsed policy, back premiums plus interest need be paid, proof of insurability is required, and a request for reinstatement has a time limit.

Exclusions

Conditions stipulated in the contract for which the insurer will not provide coverage. The insurer cannot add or alter any of the exclusions.

Entire Contract

Consists of the policy, plus any riders, and a copy of the application. All statements made by the insured in the application are, in the absence of fraud, deemed representations and not warranties. The application is included because insurance policies are contracts, and contracts are based on information that is, or is believed to be accurate. Without the information supplied on the application, the insurer cannot issue a contract based upon acceptable risk.

Which of the following are types of Whole Life policies?

Continuous, Limited pay, Single premium. Since all Whole Life policies mature at age 100, Continuous, Limited Pay, and Single Premium simply describe how long premiums will be paid.

Which provision allows the insured to change to another type of policy form?

Conversion Option. The Conversion Option, as the name implies, allows the insured to convert to some other type of policy, such as a term policy, to a permanent policy.

A Term Insurance Policy with a Convertibility Option may be:

Converted to permanent insurance. The Convertibility Option of a Term Policy allows the policy to be converted to a permanent policy without proof of insurability. The premium upon conversion is based upon either attained age or issue age dependent upon the insurer.

What are the requirements for currently insured status by Social Security?

Covered for six quarters out of the last 13 quarters, counting the present quarter. The question addresses currently insured status, not fully insured status. Currently insured status is achieved by a worker being covered at least six quarters during the full 13-quarter period, ending with the quarter in which he/she dies, becomes disabled, or is entitled to retirement benefits.

Normally, Credit Life is written in connection with a loan. Who is generally named as the beneficiary?

Creditor. When a credit beneficiary designation is made, the grantor of the credit (creditor) is normally the beneficiary.

The method of purchasing insurance for a Buy-Sell Agreement in which each party involved purchases insurance on the life of his/her partner(s) or employer is called:

Cross Purchase Plan. A Cross Purchase Plan is used when each party to a Buy-Sell Agreement purchases life insurance on each other or the employer.

Frieda wants coverage until she has paid back her business loan in ten years. The ideal contract with the least expense would be:

Decreasing Term. Decreasing Term reduces in death benefit as the loan obligation reduces in balance. It is the least expensive form of term insurance as the insurer's obligation, in the way of death benefit, reduces over the period of the note or loan.

Which of the following is a type of life insurance that provides an amount of coverage that diminishes while the policy is in effect?

Decreasing Term. Decreasing Term reduces in death benefit while the policy is in effect.

Credit

Designated by assignment or named at application to cover indebtedness. a. The named beneficiary is normally the creditor. b. The debtor makes a collateral assignment (partial) to the lender covering the amount of loan. If the loan remains outstanding until insured's death, the death benefit (consideration) received by the named beneficiary will be reduced. ! Identify the rights of the following, after the life insureds death: (a) beneficiaries; (b) creditors. Identify which method used to designate beneficiaries (spouse, children) best serves the needs of a policy owner in common situations.

Moral

Dishonesty - giving false information on an application.

Aviation

Does not apply to fare-paying passengers on regularly scheduled commercial flights.

Mr. Zamboni is the owner and the annuitant. Should Mr. Zamboni die, Mrs. Zamboni, the designated beneficiary, assumes all ownership rights and tax deferment if Mr. Zamboni's death occurs during what period?

During the Accumulation Period. If Mr. Zamboni's death were to occur during the Annuitization Period, the Payment Option chosen would prevail.

A provision that states that the policy, any riders and a copy of the application form the contract between the owner and the insurer is called the:

Entire contract. The Entire Contract Provision stipulates that the policy, any riders and a copy of the application form the contract between the owner and the insurer.

Alice finds she no longer is able to pay premiums on her $50,000 Whole Life Policy, but needs that amount of protection for her family. Which Nonforfeiture Option provides this protection?

Extended Term. Extended Term would allow the present cash value of the policy to buy a single premium term policy of the same face amount for as long a period as it will buy. Fixed Amount is a Settlement Option, and Paid-Up Option is a Dividend Option.

If an insured has a Life Paid-Up at 75 Policy (a limited-pay life paid-up at age 75), what would the beneficiary receive if the insured died at age 68?

Face amount. The full-face amount (death benefit) is payable to the beneficiary anytime death occurs while the policy is in force.

The Uniform Simultaneous Death Law states if the insured and primary beneficiary are killed in a common disaster, it will be deemed that the insured died first.

False

All of the following are characteristics of a Family Income Policy, except:

Family Income is more expensive than Family Maintenance. Family Income would be less expensive than Family Maintenance for a like amount of insurance because it uses Decreasing Term as opposed to Level Term to accomplish its objective. In addition, the term benefit is payable only until a specified future date as opposed to a selected period of years beginning with the insured's death.

All members of a family are covered by this contract with Whole Life Coverage on the wage earner and Level Term Coverage on the spouse and children. Which policy has these characteristics?

Family Policy. The Family Policy (Family Protection Plan) covers all members of the family with Whole Life Coverage on the head (wage earner) of the family and Level Term Coverage in the form of a rider on the spouse and children.

Which is correct regarding annuities?

Fixed - guarantees a minimum rate of interest credited during the accumulation period. Fixed Annuities do not use separate account(s); Variable Annuity values fluctuate according to the performance of the separate account(s); and Variable Annuities require both a life license and securities license.

Which Settlement Option pays a specified dollar amount until benefits are exhausted?

Fixed Amount. The key words are specified dollar amount. Fixed Amount pays benefits at a specified dollar amount (such as $1,000/month) until the benefits are exhausted.

A beneficiary wants a guarantee that benefits will be paid for a period of ten years before the funds are exhausted, which of the following options should the beneficiary select?

Fixed Period. Anytime the policyowner specifies payments to be guaranteed for a specific period regardless of who may receive the payments, policyowner or beneficiary, is the Fixed Period Settlement Option.

Which Settlement Option pays for a specified period, regardless of who may receive the payments?

Fixed Period. As the name implies, Fixed Period establishes that the policy proceeds are guaranteed to be paid over a set period (i.e. 30 years) regardless of who may receive the payments, policyowner or beneficiary. The other choices are not Settlement Options.

If the policyowner specifies the time over which all installments are to be paid, he/she has chosen which Settlement Option?

Fixed Period. The key word is time. Anytime the policyowner specifies payments to be guaranteed for a specific period regardless of who may receive the payments, policyowner or beneficiary, is the Fixed Period Settlement Option. Acceleration of Endowment is a Dividend Option, and Extended Term is a Nonforfeiture Option.

Which statement is true?

Franchise - a Master Policy is not issued. Remember in the Franchise Market that, although a group is being covered, it is with individual policies and no Master Policy or Certificates of Insurance are issued.

If the insured dies while this provision is activated, the death benefit is payable minus the premiums due.

Grace Period. If the insured dies during the grace period, the death benefit of the policy is payable to the beneficiary minus any premiums or loans due.

All are characteristics of Group Insurance, except:

Group is typically written utilizing Permanent Insurance. Group Insurance is typically written on a Renewable Term basis. However, some insurers do make Permanent Insurance available.

In which market are Certificates of Insurance issued to insured individuals?

Group. In the group market, no individual policies are issued. The employer receives the Master Contract and the employees or members receive Certificates of Insurance.

Ed purchased policies on behalf of his grandchildren. He wanted to be certain they could purchase additional policies at specified ages. He was able to do this by adding which rider?

Guaranteed Insurability Rider. The Guaranteed Insurability Rider would allow his grandchildren at future specified dates, ages, or events to purchase additional amounts of insurance without evidence of insurability.

Primary Succession

Has first claim to policy proceeds following death of insured.

All of the following are characteristics of Term Insurance, except:

High premium outlay in early years. Term Insurance is characterized by a low initial premium outlay when the insured is young and increases as the insured's age advances.

Ed purchased a policy naming his children as per capita beneficiaries. Upon his death the proceeds are paid to:

His surviving children, who will share the proceeds equally. Per capita means that surviving beneficiaries share equally in death benefits. If Ed's policy is $100,000 in death benefit, and if upon his death, there are two surviving children, each gets $50,000.

Which approach is a measure of the actual future earnings and services of a person at risk in the event of a premature death?

Human Life Value Approach. The objective of the Human Life Value Approach is to provide the proper amount of coverage as determined by the value of the insured individual to his/her dependents.

All of the following are characteristics of Ordinary Whole Life Insurance, except:

If insured lives to age 100 the lifetime total of all premiums are returned. If the insured lives to age 100, the face amount of the policy is paid to the owner of the policy. At age 100 the cash value equals the face value.

Which of the following best defines the Uniform Simultaneous Law?

If it cannot be determined who expired first, the insured or primary beneficiary, the insured will be presumed to have survived the beneficiary. The purpose of the Uniform Simultaneous Law is to establish that if it cannot be determined whether the insured or primary beneficiary died first in a common disaster, the insured will be presumed to have survived the beneficiary and the proceeds of the policy will be paid to the estate of the insured (beneficiary sequence).

Suicide

If suicide is committed within a specified period of time (usually 2 years), the insurer's liability is limited to a refund of premium(s), not the death benefit or face amount. In California, if the insured commits suicide within the first 2 years the policy is in force, the insurer's liability is limited to a refund of premium. If the insured's death is a result of suicide after the first 2 years, then the insurer pays the fullface amount (death benefit) of the policy.

Liquidity

Immediate funds available upon death to pay creditors, taxes and final expenses.

The Needs Analysis Approach always assumes death of the client to be:

Immediate. The Needs Analysis Approach always assumes the death of the individual to be immediate, and assesses various factors to calculate all financial needs caused by an immediate death.

Principle of Indemnity

In a property and casualty contract, the insured is restored to the same financial condition as prior to the loss. The insured should not profit from or lose from an insurance transaction. Identify the meaning and effect of indemnity, a special characteristics of an insurance contract.

Which of the following are types of Term Policies?

Increasing, Decreasing, Re-entry, Level and Life-Expectancy. The question asks about types of Term Policies, not options available to Term Policies. Straight is a type of permanent insurance, not term insurance.

Morale

Indifference - driving without seat belts, smoking, driving too fast, etc.

The Facility of Payment Clause allows an insurer to pay anyone it deems entitled in the absence of a designated beneficiary. This Clause is found in which policy?

Industrial. The Industrial (Home Service) policies contain a Facility of Payment Clause, due in part to the lower face value of the policy, and that the policy is usually associated with reducing funeral costs.

Speculative risks

Instances where there is a chance of loss or gain. Example: Slot machines, gambling games or horse racing

Annulment and Divorce

Insurance is considered a form of property in a divorce. The owner of the insurance policy controls the policy and has the right to name the beneficiaries. Although some laws prohibit the changing of insurance policies while a divorce or annulment is pending, once it is final, insurance can become an important issue. Some decrees include a provision for life insurance on the provider, to protect the support order.

All are Payment Options available upon annuitization, except:

Interest Only. Annuity Payment Options are nearly identical to life insurance Settlement Options, except for Interest Only.

Settlement Options may be used if the insured dies or if the insured:

Is alive at maturity and receives the face amount. Settlement options are used when the insured lives to the endowment date or at the insured's death.

Which is not a trait of a Fixed Annuity?

It must include a projected schedule of cash availability on its anniversary date, for a minimum of 10 years. A 20-year projected schedule of cash availability must be shown of each anniversary.

Which of the following is true as regards a Deferred Compensation Plan?

It provides a certain amount of money at retirement. Income taxes are deferred until the funds are received. It is an incentive plan.

What type of policy is a single policy covering two or more lives, resulting in premium savings, that pays benefits upon the death of the first insured?

Joint Life. A Joint Life Policy covers two or more lives under a single policy, resulting in a reduction in premium, with the death benefit payable upon the death of the first to die.

The Payment Option that pays an income to two annuitants while both are living, and stops upon the death of the first annuitant, is which of the following?

Joint Life. The Payment Option described is Joint Life, which pays to two annuitants while living, but stops upon the death of the first annuitant rather than continuing to the surviving annuitant.

A working couple conveys to you that upon a premature death, the survivor would need money to maintain the present living standard. Which of the following policies would you suggest?

Joint Life. Under a Joint Life Policy, the proceeds are paid upon the death of the first to die so that the surviving spouse has the policy proceeds to maintain a present living standard, among other objectives.

Which policy could be used when a married couple wants to defer the estate taxes until both are deceased?

Joint Survivorship Life. Joint Survivorship Life pays upon the death of the last to die, and for this reason is a popular policy with couples who want to defer estate taxes until both are deceased.

Mr. Smith received monthly benefits from his annuity, and upon his death, Mrs. Smith receives a reduced amount. What annuity payment option did Mr. Smith choose?

Joint and Survivorship. The Payment Option that would continue to pay to Mrs. Smith a reduced amount is Joint & Survivorship. The only other Payment Option shown (Life Income) would stop upon Mr. Smith's death.

Fred owns a 40-Pay Life Policy. He designated his wife, Ethel, as primary beneficiary. Upon Fred's death, Ethel receives a set amount for life. Fred chose which Settlement Option?

Life Income Only. Life Income Only guarantees payment for the lifetime of the recipient. Paid-Up Additions is a Dividend Option.

An annuity is payable for as long as the annuitant lives, and upon death, all the payments cease. This is which Payment Option?

Life Income Option. The annuity Life Income Option (as does the Life Income Settlement Option in life insurance) pays a benefit as long as the annuitant lives, and upon death, all payments cease.

The Payment Option that pays an income for the life of the annuitant or for a specified period, whichever occurs last, is:

Life Income with Period Certain. All responses are payment options, but the question is specifically defining Life Income with Period Certain.

Viatical settlements

Life insurance policies purchased from a terminally ill insured.

Burt named Liz as his beneficiary, however he did not choose a Settlement Option. At the time of his death, who determines the option to be used to receive the benefits?

Liz. If the owner of the policy does not select a Settlement Option while alive, then the beneficiary may choose an option at the time of claim.

Term

Lowest of premium outlay and designed for someone with a large insurance need but with limited cash flow. This coverage is often referred to as temporary, as it is written to cover a short time period. This policy does not build equity and the benefit will either remain level or decrease or increase depending on the type of policy. It is used to cover mortgages or short term obligations. ! Identify each of the following special policies or riders and why needed: mortgage redemption.

What effect, if any, does the Dividend Option-Acceleration of Endowment have on a policy?

Makes the endowment date sooner. Acceleration of Endowment uses dividends to reduce (shorten) the period for the policy to mature or endow.

With a Variable Annuity, a fee is stated for investing the owner's money within a family of funds. The fee is referred to as:

Management fee. Fund managers normally charge a management fee, which is stated in the prospectus and in the Variable contract.

Per stirpes

Means "per beneficiary." The heirs of those beneficiaries who predecease the insured will receive their portion of the claim proceeds and not have it split between living beneficiaries.

Per capita

Means "per person." The surviving beneficiaries share equally in death benefits.

Modifications (Changes)

Must be in writing, signed by an executive officer of the insurer, approved by the policyowner and made part of the entire contract. An agent cannot alter or waive provisions.

Status Clause

No coverage for individuals with military status (seldom used).

Results Clause (War Clause)

No coverage if death is the result of war declared or undeclared. If death occurs during the period of war, only the premiums are refunded.

The premiums paid to add the Automatic Premium Loan (APL) Provision has the following effect on a life policy:

No effect, there is not a premium for APL. The Automatic Premium Loan Provision is available on cash value policies only, with no additional premium.

Policy Provisions Prohibited By Law

No provision shall limit the time for any legal action to be taken to less than one year after the act (or lack of an act) occurs. No provision shall allow backdating a policy for other than conserving the age of the applicant and then only for a maximum period of 6 months. Backdating is not a standard policy provision. In California, there is no regulation or statute to support backdating, nor any time frame. No provision shall allow the settlement to be less than the face amount at maturity or death. It is the insurer's responsibility to pay the beneficiary or policyowner the amount less any indebtedness. No provision shall designate the agent as the representative of the insured. No provision shall require contract forfeiture when an outstanding loan is less than the loan value.

If an annuitant suffered a long-term disability and used the funds from an annuity as a result, what surrender charges would be assessed?

None. Annuity surrender charges are generally waived if the annuitant is hospitalized for an extended period, placed in a nursing facility, becomes disabled, or dies.

A ____ Option protects the policyowner against total loss of benefits in the event of a lapsed policy and add flexibility to a cash value policy.

Nonforfeiture. Nonforfeiture Options are found in life insurance policies that generate a cash value, and protect the owner against total loss of that cash value, if the policy should lapse or it is cancelled.

Estate

Normally the unnamed tertiary beneficiary resulting in an estate tax liability. a. If the only named beneficiary predeceases the insured or if a beneficiary isn't named, benefits are paid to the insured's estate, increasing the estate value. b. Commonly utilized by an administrator or executor.

Risk avoidance

Not being involved in the activity that gives rise to the chance of loss.

Misstatement of Age or Sex

On the application allows the insurer, at time of claim, to adjust benefits according to the amount the premiums would have purchased at the correct age or sex. Adjustments required due to misstatement of age are normally computed as a fraction with what was being paid, divided by what should have been paid. This provision never cancels or voids a policy. The incontestability clause does not apply to the misstatement of age/sex provision.

A retiree elected the Ten Years Certain and Life Income Option. He dies the day after receiving 119 monthly payments. The contingent payee will receive:

One more payment. Since the retiree died within the period certain (10 years or 120 months), then the contingent payee would receive only one more payment since the retiree has received 119 monthly payments. If the retiree had lived beyond the 10 years, then they would have been paid a benefit as long as they lived.

All statements regarding annuities are true, except:

Only people on fixed incomes can purchase annuities. Anyone that is desirous to own an annuity can. People with fixed incomes would likely purchase a Fixed Annuity, whereas those with discretionary incomes would likely purchase a Variable Annuity.

There are considerable differences in life insurance policies. Which of the following helps to establish basic continuity?

Options. Life insurance policy options (Settlement, Nonforfeiture, and Dividend) establish basic continuity to the interpretation of life insurance policies.

A policyowner has the right to receive the cash value and dividends, change beneficiaries, assign the policy, and to exercise all other privileges and options. Which of the following provisions allows these actions?

Ownership Provision. The Ownership Provision stipulates the policyowner's right to exercise all privileges and options under the policy.

The Social Security Survivor Benefit is computed using which of the following?

PIA. The Social Security Survivor Benefit is the amount of income that may be expected from the Primary Insurance Amount (PIA) of the insured.

Frank's policy lists his wife as beneficiary. Upon Frank's death, she is to receive a stipulated amount until the benefit is exhausted. While he pays premiums, he chooses to have the dividends increase the death benefit. Which of the following Dividend Options was chosen?

Paid-Up Additions. Frank's objective is to use his dividends to increase the death benefit. Paid-Up Additions purchases single premium additional permanent benefits at the insured's attained age. The additional insurance is added to the face amount and it generates cash values and dividends as if the paid-up additional benefit was part of the original policy.

Which of the following terms correctly matches the given definition?

Paid-Up Option - dividends are used to pay up a policy sooner than scheduled. One-year Term and Paid-Up Additions are incorrect as they are Dividend Options, and dividends (not the cash value) are used to fulfill the objective. Life Income Period Certain is incorrect because term insurance has no cash value.

Angela bought a policy from her friend. After looking it over thoroughly, Angela only has one question. Will she receive dividends? Yes, if it is which of the following?

Participating. Dividends are declared under participating policies, are paid as declared, and are not guaranteed. The dividends are a return of excess premiums paid.

A misstatement of an insured's age was not discovered until death. The policy had been in effect for three years. What will the insurer do to correct the problem?

Pay benefits based on what past premiums would have purchased at the correct age. The Misstatement of Age or Sex Provision states that if the insured's age or sex has been misstated, the insurer is allowed, at the time of claim, to adjust benefits according to the amount the premiums would have purchased at the correct age or sex.

If an insured dies during the policy's grace period, the insurer will:

Pay the death benefit, less the amount of premium due. The policy is in force during the grace period and the Grace Period Provision states that if death occurs during the grace period, the insurer pays the death benefit, minus any premiums or loans due.

All of the following are disadvantages of not having a Buy-Sell Agreement, except:

Places a value on the business at a previously agreed price. Placing a value on the business at a previously agreed upon price would be an advantage of having a Buy-Sell Agreement, not a disadvantage.

Which of the following is not a trait of an Endowment Policy?

Places more emphasis on the death benefit than the savings element. Endowment policies place greater emphasis on savings than on the death benefit.

Participating policies (par)

Policies that may pay annual dividends to policyowners. ! Differentiate between the following types of life insurance policies: (a) par and non-par.

Ned insures his grandchild with a Variable Life Policy that will increase in value as the child gets older. This policy has all of the following traits, except:

Policy has a guaranteed minimum cash value. Under a Variable Life Policy, the policyowner has no control over the investment fluctuations, but assumes the investment risk.

Consideration

Policyowner must pay something of value (premium) in exchange for the insurer's promise to pay benefits.

Ownership

Policyowners have the right to all cash values, loans, dividends, and any other benefits. He/she may change the beneficiary, assign the policy and exercise all privileges and options of ownership. The insured and owner need not be the same person.

Risk sharing

Pooling the risk of a large number of persons (corporation). Identify the major components of the personal (non-property/liability) risk management process identifying, quantifying, and treating loss exposures.

All are characteristics of annuities, except:

Premature distributions are subject to a 15% penalty tax in order to discourage the use of annuity contracts as a short-term tax shelter. A penalty of 10% (not 15%) is levied to discourage annuities as short-term tax shelters.

Beth owns a 20-Pay Life participating policy. She has chosen the Settlement Option that guarantees payments over a specified period and the dividends are applied toward future premiums. Which Dividend Option did she choose?

Premium Reduction. The Dividend Option that allows the dividends to be applied toward the next premium due is Premium Reduction. Fixed Period and Fixed Amount are Settlement Options.

Which characteristic is unique to a Graded Premium Whole Life Policy?

Premiums increase each of the early years and remain level thereafter. A Graded Premium Whole Life Policy increases in premium each year for a specified period, such as five years, with the premiums becoming level thereafter. This feature makes Permanent Insurance affordable when the cost of traditional Whole Life products might be prohibitive.

Which of the following is the proper sequence of beneficiaries?

Primary, contingent and tertiary. The question refers to proper succession of beneficiaries, not types or designations. The proper succession is primary, contingent, and tertiary.

Estate conservation

Provides money to pay any estate taxes or loans which must be satisfied upon the death of the estate owner preserving the insured's estate.

Survivor protection

Providing funds for dependents.

Tertiary Succession

Receives policy proceeds if both primary and contingent beneficiaries predecease the insured. At this time the benefits are typically paid to the estate of the insured. The insurer never owns a policy and cannot designate a beneficiary.

Contingent Succession

Receives policy proceeds if primary beneficiary dies before insured.

All of the following are Settlement Options, except:

Reduced Paid-Up. Reduced Paid-Up is a Nonforfeiture Option, not a Settlement Option.

Which is not a Dividend Option?

Reduced Paid-Up. Reduced Paid-Up is a Nonforfeiture Option; the other answer choices are Dividend Options.

Lyle owns a $50,000 20-Pay Life Policy that he lets lapse at the end of the fourth year. The Nonforfeiture Option providing the longest period of coverage would be:

Reduced Paid-Up. Reduced Paid-Up provides the longest period of coverage. Extended Term would provide the most protection. The other two answers are not Nonforfeiture Options.

Beth exercised an owner's option on a life policy to stop paying premiums but continue to be covered until she was age 100. Which Nonforfeiture Option did she choose?

Reduced Paid-Up. The Nonforfeiture Option that would allow Beth to stop making premium payments and continue to be covered to age 100, but for a reduced face amount, is Reduced Paid-Up. Application to Reduce Premiums and Paid-Up Option are Dividend Options.

Risk reduction

Reducing, but not preventing the risk.

Reinstatement

Requires the insured to pay back premiums, plus interest and prove insurability if the policy was not surrendered for its cash value. Reinstatements are designed to put a policy back in force when in a lapsed mode and before it is cash surrendered, usually 3 years from the start of the lapsed status. In California, The period within which to reinstate a lapsed life insurance policy is 3 years. Identify why reinstating a lapsed policy might be wiser for a policy owner than purchasing a new policy.

Social Security Benefits provided are:

Retirement, Death, Disability Income and Medicare. The Social Security System provides benefits in four areas, retirement, death, disability income, and Medicare.

An insured dies within the time limit of an Increasing Term Rider and the beneficiary receives the face amount plus the value of all paid premiums. Which rider is attached to the policy?

Return of Premium. With a Return of Premium Rider, if the insured dies within the period of the term, the beneficiary receives the death benefit of the Whole Life Policy and, through an increasing term rider, the equivalent of the premiums paid on the Whole Life Policy.

What are the two types of beneficiaries found in a life insurance policy?

Revocable and irrevocable. The question is asking about types of beneficiaries, not succession of beneficiaries or beneficiary designations.

Linda names her husband as the beneficiary of her life policy but wants to retain all rights of ownership. Which of the following best defines this type of beneficiary?

Revocable beneficiary. By naming her husband as a revocable beneficiary, Linda would retain all rights of ownership. To name her husband irrevocably would give her husband a vested interest in policy benefits. The other answers refer to beneficiary sequence.

Individual Term policies are generally stand-alone policies, but may be written with other types of policies as a/an:

Rider. Through a rider, term coverage may be added to a Permanent Policy. A Term Rider cannot be added to a Term Policy.

Mary decides to convert her Term Policy to permanent protection. Which of the following statements is true regarding the conversion?

She may convert without evidence of insurability. The Conversion Option of a Term Policy allows conversion to a Permanent Policy without evidence of insurability.

Bess received information in regard to her individual Term Insurance explaining that she could convert the policy by agreeing to which of the following conditions?

Sign the conversion application agreeing to pay premiums computed at her attained age. Bess does not have to prove insurability to convert her individual Term Policy, but she will pay a higher premium with the conversion application because she is older than when she purchased the Term Policy, and is converting to a Permanent Policy.

You purchase an annuity in December and begin receiving monthly benefits in May. What type of annuity do you own?

Single Premium Immediate Annuity. The question addresses when the actual receipt of benefits from an annuity begins. When benefits begin within a year of the issue date, this is referred to as 'immediate'.

What are the different methods of purchasing annuities?

Single Premium Immediate, Single Premium Deferred, Flexible Premium Deferred. The question addresses the different methods of purchasing annuities, not types of annuities.

Incontestability

States that the insurer cannot contest statements contained in the application after the policy has been in force (usually 2 years) including errors, misstatements, and even fraud. In California, the incontestability period on individual life insurance policies is 2 years. ! Identify the effect of the Incontestability clause.

Hazardous Occupation

Stunt people, auto racing, etc.

What is the greatest marketable benefit of a Flexible Premium Deferred Annuity?

Tax deferment. All responses could be argued as characteristics of a FPDA, but the greatest marketable benefit is tax deferment.

The interest earned on dividends is:

Taxable. The dividends themselves are not taxable, but any interest earned on the dividends is taxable.

Which statement is true of Term Insurance?

Term may be written for a specified number of years. Term premiums increase as the insured's age increases. Term is more expensive as the insured's age increases. Term Insurance provides protection, but does not generate a cash value.

Which statement is correct?

Term rates are based on the insured's age. Term Insurance provides temporary, not permanent, protection. Term Insurance may (not must) be used to protect a home mortgage. Term Insurance can be written stand-alone as well as with another type of coverage.

Common Disaster Clause (Uniform Simultaneous Death Law)

The Common Disaster Clause provides that if it cannot be determined whether the insured or primary beneficiary died first, the insured will be presumed to have survived the beneficiary and proceeds will be paid to a named contingent beneficiary of the insured, or to the insured's estate. Example: Often, the contingent beneficiary will be a trust for the benefit of minor children.

The Uniform Simultaneous Law presumes the beneficiary preceded the insured in death when the time of death cannot be determined. This is also known as:

The Common Disaster Clause. The Uniform Simultaneous Law is also known as the Common Disaster Clause, as both the insured and beneficiary died as a result of a common event.

The 31 days in which the employee may change his/her group policy to an individual policy upon termination and without evidence of insurability, is known as:

The Conversion Period. As the name implies, the Conversion Period is the period in which an employee may convert the group term death benefit to an individual permanent policy upon termination and without evidence of insurability.

All are characteristics of Home Service (Industrial) Insurance, except:

The Grace Period is 10 days. The Grace Period under industrial policies is four weeks, not 10 days.

Spendthrift Clause

The Spendthrift Clause denies the beneficiary the right to commute, alienate, or assign his/ her interest in the policy proceeds. The purpose is to prevent creditors of a beneficiary from claiming any benefits payable to him/her before he/she actually receives the benefits.

Insurability

The ability of an individual to meet an insurer's underwriting requirements.

Which statement is false regarding Credit Life Insurance?

The amount of coverage is dependent upon the duration of the loan. The amount of the coverage is dependent upon the amount of indebtedness, not the duration of the loan.

The face amount of a Whole Life Policy is:

The amount payable to the beneficiary upon the insured's death. Face amount is the same as the death benefit. In other words, the face amount is the amount payable to the beneficiary upon the insured's death.

All of the following statements regarding the Living Need Rider are true, except:

The annual report must include the amount of benefit remaining. A monthly report details the benefit amount remaining, not an annual report.

In those instances in which the death of a valued employee could cause financial hardship for a company, the company might acquire additional funds through which type of coverage?

The business would likely purchase a Key Person (Key Employee) Policy on the life of the valued employee to offset the expenses and financial losses due to the death of that employee.

Peril

The cause of a possible loss. Identify a definition of peril.

All are characteristics of Ordinary (Individual) Insurance, except:

The cost of the plan is determined only by the individual's gender. The cost of individual insurance is also determined by the individual's age, weight, health, and tobacco use.

Face amount

The death benefit payable on a life policy; may also be called limit of liability.

All are characteristics of Credit Life Insurance, except:

The debtor generally is both policyowner and beneficiary. The creditor (not the debtor) is normally both the policyowner and beneficiary.

Individual/Named

The designation is very specific, such as Mary Doe - wife; John Doe - husband. This allows conveyance of the death benefit to the beneficiary outside of probate proceedings.

All of the following are characteristics of a Deferred Compensation Plan, except:

The employee may own the Deferred Compensation Plan. The employer is both the policyowner and beneficiary of a Deferred Compensation Plan. The employee is the insured.

Loss Exposure

The extent to which one may be affected by a peril. Identify a definition or the correct usage of the term loss exposure.

Albert owned a $100,000 policy that had accumulated a cash value of $9,580, of which he had borrowed $2,500. His beneficiary will receive which of the following amounts?

The face amount, less the loan and accrued interest. Any outstanding loans not paid upon the insured's death will be deducted from the face amount (death benefit) along with any interest due.

Individual Class of Life Insurance Policy

The greatest difference between group and individual life insurance is the full latitude of ownership. Unlike group, individual policies may be of any classification or type of insurance. The policyowner may use the policy proceeds to his/her advantage while living, when the type and age of the policy is sufficient to build equity (cash value). Individual life insurance may assist in savings, encourage thrift, minimize worry and furnish some income in the form of an annuity. Individual life policies may also build or preserve an estate or provide a living benefit for the terminally ill.

Hold Harmless Agreement

The hold harmless agreement is a contractual agreement removing the liability of one party from a second party. These agreements are used mostly in group health replacements and could be considered as a measure of risk avoidance.

Which of the following statements regarding Whole Life is incorrect?

The longer the premium paying period, the higher the annual premium. The shorter the premium-paying period, the higher the annual premium, a $100,000 Limited Pay Policy at Age 65 will have a higher annual premium than a $100,000 Straight Whole Life Policy, because the Limited Policy at Age 65 will be paid-up, in terms of premium, at age 65 as opposed to age 100. Both policies will mature at age 100.

Endow (Endowment)

The maturity date or time at which the cash value equals the face amount. If the policy matures, it is said to endow, and the proceeds are paid to the policyowner.

Which would be incorrect regarding a Variable Annuity?

The number of annuity units received, and the unit value, remain level. Under Variable Annuities, upon annuitization, the number of units remains level, but the unit values fluctuate.

Designation Options

The original beneficiary designation is selected at time of application. Any changes may be requested with a signed written request by the policyowner to the insurer during the life of the policy. A request becomes effective when recorded by the insurer as of the date on the request.

Which of the following is not a characteristic of a Universal Life policy?

The owner receives a biannual statement detailing expenses, mortality, and earnings. The owner of the policy receives an annual statement detailing expenses, mortality, and interest earnings.

Applicant

The party making application, offering himself/herself or another person to be insured by contract.

Fixed

The policy has a fixed amount of coverage, benefits and premium. Without riders, future inflationary trends and money values will depreciate the policy's effectiveness.

Revocable

The policyowner may change the beneficiary at any time. This beneficiary does not have a vested interest in the policy.

Irrevocable

The policyowner may not change the beneficiary, assign the policy, transfer ownership or surrender the policy without the written consent of this beneficiary. Unlike the revocable, this beneficiary has a vested interest in the policy benefits. A minor would not likely be designated as an irrevocable beneficiary due to legal capacity. Identify policy owners' and beneficiaries' rights and options regarding: (d) selecting / changing settlement options.

Which statement is true of annuity contracts?

The purchase of an annuity helps to protect against out-living your income. Annuities guard against living too long, life insurance guards against premature death. Annuity mortality tables project one to live longer that life insurance tables. Annuities are not a form of Decreasing Term Life Insurance.

What is a characteristic of both Whole Life and Endowment policies?

The shorter the payment period is, the higher the premium is. Endowments and Whole Life policies have the common characteristic that the shorter the premium-paying period is, the higher the premium is.

Assignment

The transfer of ownership rights to another party. The two types are Collateral (partial) and Absolute (the entire face amount). Assignments can reduce a beneficiary's claim settlement at the time of death because an assignment must be paid first. An insurer is not responsible for the validity or effect of an assignment but will recognize the notice upon receipt. Identify policy owners' and beneficiaries' rights and options regarding: (a) assignment / transfer of policy; (1) know how viatical settlements are effected through the use of absolute assignment.

What happens to the nonforfeiture values when a policy lapses for nonpayment of premium?

The values are returned to the policyowner. Nonforfeiture means not to be given up. The purpose of Nonforfeiture Options is to protect the policyowner against total loss of benefits if the policy should lapse or if it is cancelled.

What are the Nonforfeiture Options in a Decreasing Term Policy?

There are none. There are no Nonforfeiture Options in a Term Policy, as Term policies do not accumulate a cash value.

Which of the following statements is true?

There are several dividend options. Dividends are declared under participating policies; they are not guaranteed; if received the dividend itself is not taxable; and they can be withdrawn anytime there is an accumulation.

Self-funding

There is no law requiring California residents to purchase life or health insurance. Furthermore, such policies can be employer-provided or funded by the person insured, or a combination of both.

Insured

This is the person who is covered by the policy. The insured may or may not be the policy owner. The insured may have beneficiaries, who will receive benefits upon the insured's death.

Change of Insured

This provision is found in corporate owned life insurance when an executive moves to another company or retires, etc. This provision authorizes: 1. Changing the insured. 2. Removes new policy loading at the time of change. 3. Proof of insurability is always required.

How is the funding for Social Security provided?

Through FICA taxes that are paid by both employers and employees. Unless one is self-employed, both the employer and employee fund Social Security through paying FICA taxes.

Income Objective

To analyze the insurance needs in either approach one must also take into consideration the income objective of the proposed insured. One may use two methods of income objectives to arrive at the amount of insurance needed to fill the human life value or needs analysis requirements.

Risk transfer

Transferring the risk to another (insurance company).

What is the main difference between a Whole Life Policy and a Universal Life Policy?

Universal Life premium is flexible and a Whole Life premium is fixed. Universal Life offers a flexible premium feature, whereas with Whole Life the premium is level and fixed.

A life insurance premium is paid each month; the insurer subtracts a mortality charge and expenses from the policy's cash value. This describes a:

Universal Life. All premiums paid to a Universal Life Policy are placed in the policy's cash value account. The mortality charge (cost of protection) and expenses are then deducted from the cash value account.

Which statement is true regarding Fixed Annuities?

Upon annuitization, the annuity payments are level. Premiums are allocated to the insurer's general account; the insurer has the investment risk; and fixed annuities may be immediate or deferred.

Class

Used in instances where each beneficiary is not directly identified by name. Normally minor children are designated by class. This has proven very costly and time consuming in the past when a child or children were left without a named guardian or trust. Without a named trust or guardian, a general guardian is appointed to receive the proceeds for the children. Insurers are reluctant to pay the proceeds of a life insurance policy to a minor because of the lack of capacity to enter into a legal contract or conduct business. Legally, the minor could request a second payment of proceeds upon attaining legal age stating he/she has never received the first benefit. The courts always rule in favor of the minor making the insurer pay the same claim twice. The wording of the class designation must be specific and carefully worded to remove any doubt of the owner's/insured's intentions. 1) "To all present and future children born of this marriage," leaves out any adopted or stepchildren; 2) "To all my minor children," minor children will someday be adults; 3) "To all my living children upon my death," an unborn child born after the father's death is not a beneficiary.

All are true regarding Variable Annuities, except:

Values and benefits may increase, but not decrease. The investment varies according to the funding medium, which fluctuates.

Which is true regarding Variable Annuities?

Values are determined by the performance of the separate account(s); they are sold by life and securities licensed individuals; and life insurance, not annuities, generates an immediate estate.

This policy's premium and death benefits are flexible, the excess cash is placed in a separate account(s), and the insurer allows the policyowner to switch from one account to another during the life of the policy. This describes a/an:

Variable Universal Life. The characteristics as stated in the question are descriptive of Variable Universal Life, offering the ultimate in flexibility of the flexible design policies.

Your client wants a policy that provides good coverage, but lets her choose where she might invest her excess premiums. Which of the following policies is best for her situation?

Variable Universal Life. The concern is for the owner to be in control of where she might invest the excess premiums. Of the choices given, the only one that allows this flexibility is Variable Universal Life through the separate account(s).

You may deposit your lump sum or ongoing contributions in four types of annuities. What are they?

Variable, Fixed, Equity Indexed and Market Value. The question references types of annuities, not qualified plans, or dates that benefits begin, or methods of purchase.

An annuity purchased 10 years ago would have some value at this time. The accumulation units may now be converted to annuity units. What type of annuity is this?

Variable. Remember, Variable Annuities are paid in terms of units, rather than dollars. Upon annuitization, accumulation units are converted to annuity units, and the income is paid on the value of the annuity units.

Quentin has terminal cancer with a life expectancy of one year. XYZ Inc. purchased his policy for less than the face amount and is now the policyowner and premium payor. This was which of the following transactions?

Viatical Trust Settlement Agreement. A Viatical Trust Settlement Agreement is a transaction between a business firm (XYZ Inc.) and a life insurance policyowner (Quentin) insuring the life of an individual with a life threatening or terminal illness.

Under which rider are the insured and owner two different individuals?

Waiver of Payors Premium. Under the Waiver of Payors Premium Rider, the insured is typically a child and the owner is the adult parent. If the adult owner and premium payor becomes disabled, the premiums are waived, sparing the policy from lapse.

Which rider allows a disabled insured policyowner to forgo future premiums while continuing to enjoy policy benefits?

Waiver of Premium. If the insured policyowner were to become totally disabled, the Waiver of Premium Rider would waive future premiums for the duration of the disability and still allow the cash value and dividends to continue as though the premiums were being paid.

If an insured becomes totally disabled, normally after a six-month elimination period, premiums are waived for the duration of the disability if the _______ Rider is attached.

Waiver of Premium. The Waiver of Premium Rider would waive premiums for a disabled insured. If the insured also wanted to replace income due to disability, then they would purchase the Waiver of Premium/Disability Income Rider.

All of the following are Dividend Options, except:

Waiver of Premium. Waiver of Premium is a rider available to most life insurance policies.

Which statement is true regarding annuities?

When a contract is surrendered, any surrender charges reduce the contract payout. Annuities do not fund Term Life Plans; the Life Income Option pays more than any other option; and annuities are long-term as opposed to short-term savings plans.

Trust

When a recipient is not to have direct access to the death benefits, such as in the case of minor children, and the proceeds are to be distributed as per the insured's directions set forth in a trust.

Over insurance

When more insurance is in force than the insured has the potential to lose. The excess amount will not be paid. Over insurance does not apply to life insurance.

An annuity pays a benefit to a named beneficiary...

When the annuitant dies before receiving any annuity payments. If the annuitant dies after receiving any annuity payments, then the payment option chosen determines the receipt of any annuity payment.

Which of the following statements is false?

When using the Human Life Value approach, the amount of past earnings and debts must also be calculated. The Human Life Value Approach concerns itself with the replacement of future earnings and services of the insured in the event of a premature death, not past earnings.

When you own a Single Premium Immediate Annuity (SPIA), this means you begin receiving payments:

Within 1 year. Under a SPIA, the idea is to have immediate access to income. There is essentially no accumulation period, benefits begin within one year of the issue date.

Rider

a form changing the provisions and attached to a policy. Given an insurance situation, identify the following terms correctly: a. application, policy, rider

Policy Loan Rate Provisions

a. Policy loans with fixed rates have a maximum fixed interest rate of 8%. b. Policies with adjustable (variable) loan interest rates, the maximum rate is based upon Moody's corporate bond yield average. c. The policy loan amount cannot exceed the available cash value. d. Interest not paid when due is added to the total debt.

Industrial (Home Service)

synonymous with debit life insurance and makes up only about .03 % of the life insurance today. These small policies, normally $250 to $1,000, were originally sold to pay funeral expenses. In recent years, the industrial policy has given way to the Home Service policy. The Home Service policy is known as the Monthly Debit Ordinary policy (MDO). The agent must service the account monthly, collecting the premium from the insured, and remitting it directly to the insurer. The home service concept of the industrial policy is still used with face amounts normally, $5,000 to $25,000. The Home Service agent may also be referred to as a Debit agent.

Insurable Interest

1. Possibility of an economic loss due to sickness or death (business partner, key employee, etc.). 2. No one may purchase an insurance contract without the consent of the insured (the exception would be in the case of a parent purchasing insurance on the life of a minor child). 3. In Life insurance, insurable interest must exist at the time of application (but not necessary at time of loss). 4. The insurable interest on one's own life is generally regarded as unlimited. 5. Some insurers recognize love and affection as insurable interest, such as grandparent to a grandchild, brothers and sisters, marriage partners, etc. Normally the love and affection insurable interest requirements are not satisfied when trying to insure a mother-in-law, father-in-law, or someone with whom we have a long lasting friendship.

Ideally Insurable Risk

1. There must be a large number of homogeneous (like) units to make losses reasonably predictable. 2. The loss must be definite in terms of cause, time, place and amount (calculable). 3. The loss must be accidental. 4. The loss must cause financial hardship. 5. The policy must exclude catastrophic perils, such as war, nuclear hazard and illegal operations. ! Recognize the requisites of an ideally insurable risk.

Deferred Compensation

1. This plan is an incentive plan in which an employer promises to pay key employees certain amounts of money at a specified future date (usually retirement). 2. Income taxes are deferred until the employee takes possession of the incentive funds. 3. The employer is the policyowner and beneficiary. If the employee dies before retirement, the life insurance benefit is paid to the employer, who in turn pays the employee's heirs. If the employee lives to retirement, the policy may be surrendered to pay the deferred compensation.

Reinsurance (Risk Sharing)

A device used by insurers to transfer or share in a risk. This process disperses the probability of a large loss and in turn provides coverage for a possibly otherwise uninsurable risk. There are at least two insurers involved, the primary insurer who originates the application (ceding company) and the company or companies who share in the risk (reinsurance insurers). The agreement of reinsurance is strictly between the two insurance companies and will be classified as either an Automatic or Facultative Agreement.

Permanent

A durable policy that remains level in amount and premium. It does not require renewability and normally provides protection to age 100 or until the policy is surrendered or cancelled. The premium is always higher than that on a term policy when the amount and underwriting factors are equal. This policy is best used as protection for the beneficiary and a form of living benefits for the policyowner or insured. This policy has many options available to the policyowner as described later in the text.

Premiums

A payment or periodic payments made by the insured/owner to the insurer to keep an insurance policy in effect.

Attained age

A person's age at any point or time (age at policy issue, renewal or conversion).

Variable

A policy introduced in the 1970's that uses separate account(s) for the cash value accumulation. The separate account(s) are normally mutual funds and a securities license is required to sell this policy. ! Identify each of the following special policies or riders and why needed: policies linked to indexes.

Participating

A policy marketed by a mutually owned company. The word participating means a dividend will be paid to the policyowner as dividends are declared. The company is not required to issue only participating policies (mutual companies are controlled by a board of directors voted into office by the policyholders).

Third Party Ownership

A policy owned by one person insuring the life of another person. The three parties involved in a Third Party Ownership are the policyowner, insured and insurer. Examples: 1. Parent owns a policy on an under age child. 2. Buy-Sell agreement. 3. Key Person (employee) insurance.

Law of Large Numbers

A principle stating that the larger the number of exposures considered, the more closely the losses reported will equal the probability of loss. The probability of loss is more predictable, thus a loss ratio is more readily available. This law is the basis for the statistical expectation of loss and is used by insurers to calculate rates (premiums) and predict losses over a given period of time.

Nonparticipating

A pure cost policy marketed by a company owned by stockholders with all future values guaranteed. A stock company is under the control of the stockholders who would receive any profits or dividends.

Hazard

A specific situation that increases the probability of a loss arising from a peril or that may influence the extent of the loss. There are three types of hazards. Identify a definition of hazard. Differentiate between moral, morale, and physical hazards.

To purchase the greatest amount of coverage for the least amount of premium, a client would purchase which of the following?

A term policy. A person at any given age, for a specified dollar amount spent (premium), can always own more term insurance than any other class of life insurance, because all they are purchasing is a death benefit (protection) for a temporary period of time.

Insurable events

Any event, whether past or present, which may cause loss or damage to a person having an insurable interest or create a liability against him/her.

Declarations Page/Insuring Clause

Defines who is insured by whom and the amount of benefit/coverage provided by the policy. It states the obligation of the insurer and the risk that is considered: premature death. The declaration page is like a quick guide to the insurance policy, providing all of the basic information the policyholder needs to know. It includes: a. The name and address of the insurance agency, b. Information about the issuing agent, c. The contact information for the insured individual, d. What is insured, for how much, under which circumstances, and for how long, e. Endorsements, additions to the policy beyond the basic coverage already described. Regarding the life insurance policy, identify the types of information recorded on the policy title page.

Flexible

Fixed policies have served the public's needs for decades. Recently the marketing of new flexible policies, such as Universal and Variable Universal Life, have given the policyowner more flexibility in terms of premiums, investment objectives and other policy benefits. These policies assist the insured during inflationary periods with the natural flexibility of each policy.

Nonparticipating policies (nonpar)

Insurance policies that do not pay dividends to policyowners.

Under an Entity Plan funding of a Buy-Sell Agreement, the business is all of the following, except:

Insured. Under an Entity Plan funding of a Buy-Sell Agreement, the business is the owner, premium payer, and beneficiary of a policy written upon each of the partners or shareholders who are the insureds.

Ordinary Life Insurance

Is defined as any type of life insurance that is not group, industrial or government insurance. A large number of people are insured with an ordinary life policy making this the larger portion of the life insurance in force today.

Key Person (Key Employee)

Life insurance purchased to offset the expense and financial losses due to the death of a valued employee. This policy will provide funds for decreased cash flow, recruiting cost, cost of training and cost of replacing the key employee. The Key Person insurance does not provide an employee retirement, replace group life insurance or affect any present or future group or retirement benefits. The Key Person coverage is written for the benefit of the employer, not the employee's family. The employer is the owner, premium payor and usually the beneficiary. If the owner is not the beneficiary, the premiums may be used as a business expense for IRS purposes. If the owner is the named beneficiary, the premiums are not considered business expense by the IRS.

Cash value

Money accumulated in a permanent policy that the policyowner may borrow as a policy loan or receive if the policy is surrendered before maturity. Surrender charges may be assessed at policy surrender. Upon maturity or endowment the cash value is paid to the policyowner. Some financial authors suggest that cash value may be a source of supplemental income.

Which of the following types of coverage is best used to protect the beneficiary, and to provide a living benefit for the policyowner?

Permanent. Permanent insurance is designed not only to provide the beneficiary a death benefit if the insured dies, but also to provide the insured/owner a build up of cash value from which they may borrow for emergency expenses.

Estate creation

Providing large sums of money for dependents and beneficiaries. Once a life policy is in force, there are immediate financial assets the insured can pass on to his heirs. Thus, life insurance creates an immediate estate. Identify the meaning of the statement "Life insurance creates an immediate estate."

Risk retention

Retaining the responsibility for the loss.

Pure risk

Situations where only the chance of loss and no chance for gain exist. Example: Ice on a concrete stairway, impending tornado or flood.

Payment of Premium (Mode of Premium)

Stipulates when the premiums are due, frequency of payment (monthly, quarterly, semiannually or annually), and to whom. The more frequent the payment the greater the cost. The insured may select the payment mode as offered by the insurer. The payment mode can be changed as allowed by the insurer. Regarding the life insurance policy, identify premium payment mode (annual, semiannual, monthly, etc.)

Physical

Tangible characteristics.

Lapse

Termination of a policy because premium has not been paid by end of the grace period.

Automatic Agreements

The ceding company must transfer the amount of insurance in excess of the retention level immediately and automatically upon receipt of the premium. The transfer is automatic in accordance with the reinsurance agreement.

Effective date

The date when insurance coverage begins (may also be known as inception date).

Beneficiary

The designated recipient of the life insurance benefits or proceeds upon the death of the insured. The beneficiary designation is the right and responsibility of the policyowner.

Which of the following is false regarding Split-Dollar plans?

The employee does not have to prove insurability. Since an individual life insurance policy is being issued, proof of insurability is required.

Policyowner

The individual who has the ownership rights in a policy. The policyowner and insured are usually the same, but not necessarily. Any changes made to a policy must be approved by the policyowner in writing with his/her signature. Identify examples or definitions of: (a) life insurance; (b) applicant, policy owner, insured, beneficiary.

Issue age

The individual's actual or closest age on the policy issue date.

To determine one's Human Life Value, a producer would check all of the following, except:

The individual's annual income before taxation. The individual's annual income before taxation is the exception, because it states the individual's annual income before taxation, as opposed to after-tax annual income.

Primary Insurer

The insurance company that transfers its loss exposure to another insurer in a reinsurance transaction and is called the 'ceding' company. Identify that a primary insurer is the insurance company who transfers its loss exposure to another insurer in a reinsurance transaction.

Adverse Selection

The insuring of risks that are more prone to losses than the average (standard) risk. These risks tend to seek or continue insurance at a higher participation rate than does an average (standard) or above average (preferred) risk.

All of the following are correct regarding Key Person Insurance, except:

The policy insures the employee's retirement plan. A Key Person Plan does not insure the employee's retirement. The employer is the owner and beneficiary, not the employee.

Underwriting

The process of evaluating a risk for the purpose of issuing insurance coverage. Underwriting is necessary because it reduces the financial risk the insurer bears and thus reduces the risk of losses which would result in insolvency.

Human Life Value Approach

This approach is a measure of the actual future earnings and services of a person at risk in the event of a premature death. The objective is to provide the proper amount of coverage as determined by the value of the individual to his/her dependents using the following factors: a. The individual's after-tax annual salary. b. The individual's annual expenses, not to include hobby or habit expenses. c. The value of all personal assets. d. The number of years remaining for the individual's expected ability to work. e. Ages of all family members which determines the dependency period of the family members. f. The value of the individual's dollar as it depreciates over time. g. Present salaries of all wage earners in the home.

Minimum Deposit Plans

This is a process where the policy loans are used to pay the premiums on cash value life insurance policies under a systematic plan of borrowing. 1. Loans are to be for the amount of each premium and no greater sum. 2. The policyowner must be advised each year as to how much, if any, to borrow under the policy, and that the loan transaction has been completed. 3. Each year's interest is to be paid in cash in order to receive any advantage to being deductible under a policy owned by a business and covering the lives of officers, employees or others financially interested in the business.

Split-Dollar Plans

This is not a tax-qualified plan, but it does provide a benefit for the employee's family upon the death of an employee. Upon an employee's termination of employment the policy may be purchased from the employer at an agreed price. 1. Insures the employee's life with premium payments split between an employee and the employer. 2. If death occurs while with this employer, the employer receives a portion of the death benefit equal to the cash value or total of premiums paid. The balance is paid to the employee's beneficiary. 3. A certain period of time must elapse before an employee is entitled to any of the cash value. ! Identify the following business uses of life-only insurance: a. key person insurance; b. buy-sell insurance; c. split dollar.

Non-renewal

This is the termination of a policy at the end of its term. Either the insurer or the insured may decide to non-renew a policy. If the insurer decides not to renew a policy, it must give the insured a specified number of days advance notice before the policy expires. The insured may nonrenew a policy simply by not paying renewal premiums when due, or notify the insurer of his decision not to renew. Identify the steps in the underwriting process.

What is the purpose of determining the proper amount of insurance needed by a prospective buyer?

To prevent both over and under insuring. The purpose in determining the proper amount of life insurance to own in the event of a premature death is to avoid both over and under insuring of the individual.

Cross Purchase Plan

Used when parties purchase life insurance on each other or the employer.

Entity Plan

Used when the business owns the policies on the parties and is the designated beneficiary for each contract participant. A closed corporation might purchase policies on the senior or majority stockholders, providing funds for the corporation to retain ownership.

Face amount

the death or maturity benefit payable to a beneficiary or policyowner from a life policy. Sometimes referred to as a limit of liability. Identify what is meant by the term limit of liability in a life policy.

Grace Period

A time period after the premium due date and before a policy lapses. If the insured dies during this period, the death benefit is payable minus any premiums or loans due. The cash value remains unchanged and the policy may be surrendered, or loans may be taken against the policy during the grace period. In California, the grace period for individual life insurance policies is at the insurer's discretion. Likely, an insurer would use 31 days as opposed to 30 days for competitive purposes. Given an insurance situation, be able to identify the following terms correctly: cancellation, lapse, renewal and nonrenewal, grace period

Capital Liquidation

Assumes both principal (capital) and interest are liquidated over the relevant time period to provide the required income for the dependents.

Capital Retention/Conservation

Assumes the desired income will be generated by the investment earnings only, thus retaining or conserving the principal or capital invested.

Which of the following statements is true regarding life insurance?

There are many uses of life insurance in addition to survivor protection, such as cash accumulation, liquidity, estate creation and conservation.

Executive Bonus Plans

These plans are an arrangement under a Corporate Cross Purchase Buy-Sell Agreement where the corporation bonuses the premium to each shareholder to cover the cost of the policies they own on the other shareholders' lives. 1. Each shareholder reports the premium he/she is bonused as additional compensation that, presumably, is deductible by the corporation. 2. Corporate records need to be established treating the premiums as compensation to shareholders, not dividends. 3. There typically is added a policy provision that forbids any surrenders, withdrawals or other actions unless endorsed by the corporation.

Buy-Sell Agreement

This agreement contractually establishes a price with the intent to purchase, at a predetermined value, the assets of a business should one of the contract participants predecease other participant(s). This agreement may be used with a sole proprietorship, a partnership or with stockholders of a closed corporation. There are two types of Buy-Sell Agreements.

Needs Analysis Approach

This approach determines a need for coverage upon the premature death of an individual. It always assumes the death of the individual to be immediate and uses the following factors to arrive at the proper amount of coverage needed. a. Calculate all financial needs caused by an immediate death. To properly calculate this need one must know the age of each dependent child. b. Subtract any assets available to fund financial needs after death. c. Purchase adequate life insurance to fill all gaps between needs and available assets. d. Regardless of age, some needs are permanent, such as retirement, disability funds and funeral expenses while some needs are disappearing, such as mortgage and educational funds. e. An Emergency Reserve Fund could be part of the calculation to provide for unexpected emergencies the family might encounter immediately after the death of the insured. For educational funds, consideration must be given to the type of education, tuition costs, and number of children. Medical expense during college is not an educational cost factor. Identify the major components of the personal (non-property/liability) risk management process identifying, quantifying, and treating loss exposures: