Insurance part 1

Paul dies with a $50,000 unpaid loan (including interest) against his $150,000 life insurance policy. What death benefit would the insurance company pay his beneficiary?

$100,000

How long is the typical permanent life insurance policy's free-look period?

10 days

ABC Life Insurance Co. sells term and whole life insurance policies through agents. If it sells a policy, it must give the customer the right to examine the policy for at least how long?

14 days. Life insurance policies must provide for a free-look period of at least 14 days after the policy is delivered to the policyowner. If unsatisfied with it for any reason, the policyowner or contract owner can return it to the insurer for a full refund of the premium paid.

Group life insurance policies must include a grace period of how long for paying any premium except the first?

31 days. After the group policyholder has paid the initial premium, it has a grace period of 31 days within which to pay every subsequent premium. The policy remains in force during the grace period.

BBX Insurers terminated Henry's appointment as its life insurance agent on December 1. How long will Henry remain eligible to be appointed as a life insurance agent by another insurer?

48 months. If an agent's appointment for a particular class of insurance has been terminated or not renewed, the agent remains eligible to be appointed as an agent for that line of business for 48 months. If the agent does not obtain an appointment during the 48-month period, then his or her qualification for that line of authority will expire.

Alice's annuity imposes a declining surrender charge that begins at 7 percent during the first year of the contract and declines 1 percentage point each year. What would the surrender charge rate be for a full withdrawal in the third year of the same contract?

5 percent

Failure to begin taking required minimum distributions (RMDs) from a qualified retirement plan when required can result is a penalty tax equal to

50 percent of the difference between the amount that was taken and the RMD amount that should have been taken. Failure to take an RMD results in one of the stiffest penalties the IRS imposes. This penalty is 50 percent of the difference between the amount that was taken and the amount that should have been taken.

In accordance with Section 1035 of the Tax Code, which of the following exchanges is permitted on a tax-free basis?

A deferred market-value adjusted annuity for an immediate variable annuity.

Which one of the following insurance sales arrangements is not affiliated with a single insurance company but instead represents multiple companies?

A sales office that is managed by a Personal Producing General Agent (PPGA). PPGAs manage independent agencies that are not affiliated with a single insurer but instead have sales agreements with multiple insurers.

Which statement about term life insurance is NOT correct?

A small cash value gradually accumulates while the policy is in force.

In addition to lump sums the surviving family will need immediately when an insured dies, they also will likely need an ongoing stream of income. Which one of the following statements regarding the need for ongoing income is most correct?

Additional amounts of life insurance may be needed to provide enough ongoing income for the surviving family.

All the following statements regarding life insurance cost indexes are correct EXCEPT

All cost indexes are based on the assumption that no cash value is withdrawn from the policy until the policy matures. The life insurance surrender cost index compares costs at a future date, prior to maturity (age 120) or death, when the policy might be surrendered for its cash value.

Agent Monroe helped her client Brian enter into a viatical settlement agreement with Best Insurers. Which of the following parties will receive the life insurance proceeds at Brian's death?

Best Insurers. A viatical settlement contract is a written agreement between a viatical settlement provider and a life insurance policyowner. At the policyowner's death, the provider receives the death benefit.

Which of the following is/are directly involved in the regulation of variable insurance products?

Both FINRA and state insurance departments

Brian earned $100,000 this year and contributed $10,000 to his 401(k) plan account. His employer contributed an additional $2,000 on his behalf. All the following statements regarding this are correct, EXCEPT

Brian's taxable income will be reduced by the amount that both he and his employer contributed to his 401(k) plan account.

Which of the following is an example of an unauthorized insurance company in Illinois?

Company B, an Illinois company that does not hold a certificate of authority and sells products that are not approved by the Illinois insurance department. An unauthorized company is one that is presenting the products it sells as 'insurance' when in fact it is not an admitted company and its product are not approved by the state insurance department.

When received in a lump sum, how are life insurance death benefits commonly taxed to the beneficiary?

Death benefits from a life insurance policy are generally not taxable to the beneficiary.

Which statement regarding life insurance policy dividends is NOT correct?

Dividends are guaranteed.

Who is the contingent beneficiary, second level, in the following beneficiary designation: "Sally Grant, wife of the insured, if she survives the insured; otherwise in equal shares to surviving children of the insured, if any; otherwise to Frank Grant, brother of the insured."

Frank Grant

Sam is planning to buy a deferred annuity. When will he select a settlement option?

He can choose the settlement option when the deferred contract annuitizes or when he buys the annuity.

Which one of the following best describes the restrictions an insurer must operate under when using information from the Medical Information Bureau (MIB)?

Insurers cannot rate or decline a life insurance risk based solely on MIB information.

Which of the following statements best describes an annuity payout period?

It guarantees income will be paid for any period the owner wants. One of the unique features of an annuity is that it can guarantee income will be paid for any period the owner wants. This period can be a set number of years or for the length of one's life.

What typically happens to the face amount of an indexed whole life insurance policy over time?

It increases annually to reflect increases in the Consumer Price Index.

Kyle set up a Section 529 college savings plan and named his only son, Joe, as beneficiary. Which of the following statements is correct?

Kyle controls how the funds in the account are used. With a Section 529 college savings plan, the account holder controls the account at all times. Even when Joe reaches the age of majority, he will not have control over the account.

Justine leaves her position with her employer on March 1. She wants to convert her employer's group life insurance coverage to an individual policy. In order to convert her group coverage, she must apply for an individual policy no later than what date?

March 31

What is the standard life insurance policy suicide exclusion period?

Most states have a two-year suicide exclusion period, though some limit this period to one year.

With respect to life insurance policy cost comparison methods, the primary difference between the traditional net cost method and the interest adjusted net cost method is

One method recognizes the interest that the insurer credits the cash value while the other does not.

Which one of the following statements best describes if and when a life insurance premium may change under the level premium concept?

Premiums are set and remain fixed over the full term of the premium-paying period.

With respect to adjustable life insurance, which one of the following statements is correct?

Premiums can increase or decrease to suit the policyowner's changing needs.

Sasha, Kendall, Adam, and Julio are licensed agents in Florida. The Department of Financial Services would NOT be able to suspend or revoke which agent's license for engaging in the following acts?

Sasha, who sold insurance policies to family members and friends this year. The Department can revoke or suspend the licenses of agents who engage in all of the listed acts but cannot suspend or revoke a license because an agent sells insurance to family and friends.

Which of the following does NOT provide independent ratings of insurance companies' financial strength and claims-paying abilities?

Securities and Exchange Commission. A.M. Best, Moody's, Duff and Phelps and Standard & Poor's are all well-known insurance company rating organizations. The SEC (Securities and Exchange Commission) is not an independent insurance company rating organization.

In addition to the fiduciary responsibility they have with all customer premiums and assets, producers are expected to do all the following EXCEPT

Seek opportunities to replace existing policies with newer products. While policy replacement is not prohibited, it is discouraged and most states have rules in place to identify unsuitable replacement.

Which of the following best typifies the use of a structured settlement annuity?

Shirley was paralyzed in a car accident, and a jury awarded her $2 million which must be paid to her over a 20 year period.

In its fiduciary responsibility to its principal, a producer is required to do all the following EXCEPT

Solicit business that is certain to be profitable to the insurer. While producers are expected to use care not to present unsuitable applicants to insurers, it is understood that some business will lapse early or incur unexpected claims and thus not be profitable.

What is the only restriction on naming an annuitant?

The annuitant must be a natural person.

Which of the following best describes the tax treatment of fixed annuity death benefit payments?

The beneficiary must pay taxes on any amount he or she receives that exceeds the sum of the premiums paid into the contract.

Which of the following will happen if a traditional IRA owner dies before all of the funds in his or her account have been paid out?

The funds will be paid and taxed to the beneficiary.

In some states, employers can buy group life insurance for their employees through a Multiple Employer Trust (MET). All of the following statements about METs are correct EXCEPT

The individual employers are the policyowners.

What will result if an insured decides to stop paying premiums for his or her insurance policy?

The insurance company is released from its promise to pay benefits and the contract expires. An insurance contract is a unilateral contract, which means that only one party-the insurer-makes a promise that can be enforced. The insured must only pay the first premium. The insurer cannot require the policyowner to pay more premiums. However, if the policyowner does not pay any required premiums, the insurer is released from its promise to pay the benefit and the contract expires.

All of the following statements about long-term care riders and long-term care policies under the Health Insurance Portability and Accountability Act (HIPAA) of 1996 are correct, EXCEPT:

The insured must spend time in a hospital before payment.

Which one of the following statements about the tax treatment of viatical settlements is most correct?

The insured pays no federal income tax on the money from a viatical settlement.

Which statement about children's term riders in life insurance is NOT correct?

The insurer must write separate riders for each child in a family.

All of the following are required for a risk to be insurable EXCEPT

The loss must be catastrophic. To be insurable, a loss must be definable, measurable, uncertain, and not catastrophic.

What happens when a universal life insurance policy's cash value no longer covers the monthly deductions to cover the policy's insurance and operational costs?

The policy lapses. When the cash value no longer covers those deductions, a universal life insurance policy lapses.

Which one of the following statements about Multiple Employer Welfare Arrangements (MEWAs) is most correct?

They are usually created by employers in the same industry.

Endowment contracts are not considered life insurance (for tax purposes) because

They endow before age 120. To meet the legal definition of life insurance, a policy cannot endow before age 120. However, endowment contracts build cash values quickly and endow well before age 120.

Which statement about the interest-only life settlement option is NOT correct?

Though a policy guarantees a minimum interest rate, if the interest earned is more than the guaranteed minimum, the company pays the lower amount.

Which statement about variable life insurance is NOT correct?

Variable life insurance offers guaranteed cash values. Variable life insurance offers fixed, permanent premiums and a minimum guaranteed death benefit. However, it differs from traditional whole life in that it is a securities-based insurance product that does not have guaranteed cash values.

Alex sold an insurance policy before his license lapsed and earned a commission on the sale. Is he entitled to a commission if the policy is renewed?

Yes, because he was licensed when the policy was sold. Commission earned on the renewal of a policy can be paid to a person for selling, soliciting, or negotiating the policy if the person was licensed to transact insurance at the time of the sale, solicitation, or negotiation of the policy.

The convertibility provision of a term life policy lets the owner convert the term coverage into what type of policy?

a permanent life insurance policy. The convertibility provision of a term life policy lets the owner convert the term coverage into a permanent life insurance policy without proving insurability.

Jones commits suicide 18 months after buying a life insurance policy that contains a standard suicide provision. Jones's beneficiary will get which of the following from the insurer?

a return of premiums paid, plus interest. Because the suicide occurred within the suicide exclusion period, the insurer will not pay the death benefit but will instead return the premiums paid, plus interest.

Which one of the following entities would be eligible to set up a Keogh plan?

a three-person law partnership

A "jumping juvenile" whole life insurance policy typically increases its face amount when the insured turns

age 21.

An agent for ABC Insurance Company met with a client to talk about long-term care policies. The agent showed the client ABC's sample policies, referred to the ABC rate book, gave him an ABC business card, and told the client that ABC has given him unlimited binding authority. If the client assumes this is true, then which of the following describes the agent's authority in this case?

apparent authority. Apparent authority is authority that a third party (such as a prospect) assumes that an agent has, based on the agent's actions or words. The contract does not create this type of authority and the insurer does not intend it. In this case, the client could reasonably assume that the agent has unlimited binding authority because the agent has ABC Insurance Company's business cards, rate book, and sample policies.

Jason has owned a whole life insurance policy for seven years. If he takes a loan from the policy, the insurer

can charge a fixed interest rate of up to 10 percent annually.

Medical expense insurance policies are typically what type of contracts?

contracts of indemnity. A medical expense insurance contract is a contract of indemnity. This means that the benefit cannot exceed the contract owner's actual loss (or the policy's maximum benefit amount, if less). A valued contract, such as a life insurance policy, pays a stated amount regardless of the amount of the loss.

Conrad obtained a life insurance agent's license primarily to write insurance for his family members and friends. Which unfair trade practice has Conrad engaged in?

controlled business. The Department will not grant or continue a license if it believes that an agent will use the license primarily to engage in controlled business. Controlled business is insurance that is written primarily on the lives, property, or risks of the agent or of the agent's family members, employer, or business associates.

Which of the following riders gives the policyowner the option to increase his or her life insurance policy's face amount based an inflation index?

cost-of-living rider

When meeting with a prospect to discuss life insurance, Agent Tyler makes disparaging comments about the financial stability and reputation of a competitor to dissuade the prospect from purchasing its policies. Which unfair trade practice has Agent Tyler committed?

defamation. It is considered defamation to publish or circulate a false, deceptive, or misleading statement about-or a statement that is maliciously critical of or derogatory to-the financial condition of an insurer, when such a statement is designed to injure anyone in the insurance business.

What is a non-qualified deferred compensation plan funded by?

employee deferrals of current compensation

To qualify for Social Security disability benefits, a worker must satisfy a waiting period of how many months?

five months

If a group health insurance policy terminates, an employee can elect to convert coverage provided he or she has been insured under the plan for how long before it terminates?

five years. To be eligible to convert to an individual policy, an employee or member must have been continuously insured for at least five years before the date of termination.

A type of not-for-profit insurance provider that is operated by an organization that has a representative form of leadership, operates on a lodge system, and exists solely for the benefit of its members and their beneficiaries is called a

fraternal insurance company. Sponsored by fraternal societies, fraternal insurers are not-for-profit organizations that specialize primarily in life insurance and annuity products that are usually available only to the society's members.

Agents must act in the best interests of applicants and insureds. What does this require them to do?

give all important information about a proposed policy. Agents must act in the applicant's or insured's best interests at all times. This means that agents must give all important information about a proposed policy. Also, they cannot misrepresent the terms or conditions of a proposed policy.

Jessica, age 25, buys a $100,000 life insurance policy. The initial premium is lower than straight whole life rates and increases each year for the first ten years of the policy period. After that, the premium levels off and stays at that amount for the life of the policy. What type of policy does Jessica own?

graded premium whole life

If the parties disagree over the terms of an insurance contract, courts will typically interpret anything unclear in the contract in favor of which party?

insured. Because the insurer drafts the insurance contract and offers it to the applicant "as is," applicants have little or no ability to change the terms of the policy. As a result, courts typically rule in favor of a policyowner if policy provisions are not clear.

Thomas, a licensed health insurance agent, plans to sell variable annuities. Which of the following licenses must he obtain before he can sell variable annuities?

life insurance agent's license and a license issued by the Financial Industry Regulatory Authority. To sell variable insurance products, an individual must be licensed as a life insurance agent and must also hold a license issued by the Financial Industry Regulatory Authority.

Before selling an annuity, an agent must make reasonable efforts to obtain information about the prospect with respect to all of the following EXCEPT:

marital status. Before selling an annuity, an agent or insurer must make reasonable efforts to obtain information concerning the consumer's financial status, tax status, investment objectives, and other information considered to be reasonable in making recommendations to the consumer.

From an insurance risk perspective, a person who smokes heavily and drinks alcohol to excess exhibits which of the following traits?

moral hazard. Moral hazards are individual traits or habits, like smoking and excessive drinking, that increase the chance of a loss.

The life insurance Buyer's Guide helps prospective buyers determine all of the following EXCEPT:

most qualified insurer

Which type of insurer is incorporated, owned by its policyholders, but does not have capital stock?

mutual insurer

An agent's license can be suspended or revoked for all of the following reasons EXCEPT:

paying commissions to a licensed agency. A life insurance agent's license may be suspended or revoked for all of the listed reasons except for paying commissions to a licensed agency with which the agent is affiliated.

Billy's parents purchase life insurance for their son. To ensure that the insurance stays in force by waiving the premium payment if a designated parent dies or becomes disabled, they could buy which of the following?

payor benefit rider

Andrea owns a participating life insurance policy, which means that the insurer will pay dividends to whom?

policyowners from company surplus. A participating life insurance policy pays dividends to policyowners from company surplus. The dividends are considered a return of premium based on the insurance company's financial success but are not guaranteed. Under a participating policy, the insurer must annually ascertain and apportion the divisible surplus, if any, beginning no later than the end of the third policy year.

Dan surrenders his whole life policy and decides to apply its $20,000 cash value to buy $35,000 of whole life coverage for the remainder of his life. Dan has chosen which of the following?

reduced paid-up option. Dan has chosen the reduced paid-up insurance option under which a policy's cash value buys a paid-up policy of the same type as the lapsed policy. The paid-up death benefit is the amount that the cash value buys as a single premium at the insured's age.

Which activity is NOT prohibited by the Code of Ethics?

replacement. The Code of Ethics addresses four main activities: misrepresentation, twisting, rebating, and defamation.

What are statements made in a life insurance application?

representations

The Commissioner of the Office of Insurance Regulation issued an order prohibiting Agent Theo from describing himself as a financial planner and senior insurance expert in his advertising materials. Agent Theo continues to use the marketing materials, despite the order. Which penalty may the Commissioner NOT impose?

restitution. If a person violates a cease and desist order, the Department or Office may impose a fine of up to $50,000, suspend or revoke the person's license, or impose a fine and suspend or revoke a license.

Which of the following risk management techniques best describes the role of insurance?

risk transfer. Risk transfer—transferring the loss to a third party—is the basis for most forms of insurance today. Through risk transfer an individual or business transfers the risk of loss to an insurance company in exchange for the payment of a premium.

Which one of the following is an additional charge imposed by an insurer to recover the cost of getting new business?

sales load

To be considered currently insured, a worker must have earned how many quarters of coverage in the 13-quarter period before he or she dies?

six

In insurance, a type of risk that involves the chance of loss or gain and which is therefore uninsurable is called

speculative risk: Speculative risk is risk that may result in loss or gain. This type of risk is generally uninsurable.

In a collateral assignment, policyowners may (or must) do all the following, EXCEPT

surrender the policy.

At the end of an equity-indexed annuity (EIA) contract's term, what can the owner or annuitant do?

take the accumulated values free of surrender charge or leaves them in the contract to continue for another term

Variable life and variable universal life insurance policies are regulated by whom?

the Office of Insurance Regulation and the Securities and Exchange Commission. As insurance products, variable life and variable universal life insurance policies are regulated by the Office of Insurance Regulation. Because variable life insurance policies are also considered securities, they are governed by the Securities and Exchange Commission.

Who normally owns life insurance used to meet business insurance needs?

the business. Life insurance used to meet business insurance needs is normally owned by the business rather than the insured.

The basic agreement between the insured and the company, stating the company's promise to pay the policy's face amount (the death benefit) to the named beneficiary, is contained in which one of following parts of the life insurance policy?

the insuring clause

What does the employer own under a group insurance plan?

the master policy

Aaron purchased a variable annuity two years ago and receives an annual report from the insurer. Which of the following pieces of information must be included in Aaron's report?

the number of units credited to the contract and the dollar value of a unit. Insurers must provide an annual report to each annuity owner, which shows the number of units credited to the contract and the dollar value of a unit. The valuation must be dated no more than two months before the date the report is mailed.

What is another name for the annuitization phase of an annuity contract?

the payout stage

From an insurance perspective, underwriting is best defined as

the process of determining if an applicant is an insurable risk. Through the underwriting process, insurance company underwriters determine if the risk proposed for insurance should be accepted or rejected. That is, it seeks to determine if the applicant represents an insurable risk.

All of the following are insurable risks EXCEPT

the risk of one's home value decreasing due to a drop in market prices. Only pure risks (representing the chance of loss but not gain) are insurable. Speculative risks are not. Premature death, illness and disability are recognized as insurable risks.

All the following are characteristics of a stock insurance company EXCEPT

they are owned by policyowners. Stock insurance companies are owned by stockholders. Mutual insurance companies are owned by their policyowners.

All the following are characteristics of a mutual insurance company EXCEPT

they are owned by stockholders. Mutual insurance companies are owned by their policyowners.

When comparing her insurance company's policies to those of Zenith Insurance, Melanie makes a misleading statement to convince an insurance prospect to terminate a policy with Zenith and buy one from Melanie's company. What has Melanie engaged in?

twisting

Acme Insurance and Apogee Insurance agree to offer different premium rates for persons of equal risk within a particular class. They also agree to limit benefits paid to insureds within this class if the insureds live in certain towns in Florida. What are Acme and Apogee engaging in?

unfair and prohibited business practices. Acme and Apogee are agreeing to an unreasonable restraint of trade in the insurance business of Florida. Furthermore, they are engaging in unfair discrimination by charging persons of the same class and substantially equal risk different premium rates and by paying different benefits to persons in this class.

The requirement that an insurable interest must exist when life insurance is purchased is intended to prevent people from doing which of the following?

using life insurance for wagering or betting

To protect his family in case he died prematurely, John applied for a $1 million life insurance policy. When he died two years later, the insurer paid $1 million in benefits, even though John was unemployed when he died. What is this type of insurance contract?

valued contract. Life insurance policies are valued contracts, which means they pay a stated amount in the event of a loss. Life insurance contracts, unlike contracts of indemnity, do not try to judge the actual amount of the loss. Because John bought a life insurance policy insuring his life for $1 million, that is the amount the policy paid when he died, regardless of the fact that he was unemployed at the time. A contract of indemnity, on the other hand, limits the benefit to the amount of the insured's actual loss.

What is another name for the insured in a viatical settlement?

viator

James is a licensed agent who lives in Florida. He moves to Georgia. When must he notify the Department of Financial Services of his move?

within 30 days. An agent who changes his or her residential or business address must notify the Department within 60 days of moving.