Life Final Exam 1
Which of the following statements about Renewable Term insurance is/are true? I. When a Renewable Term policy is renewed, the Incontestability Clause is renewed II. An insurance company must renew a Renewable Term policy at the policy owner's request regardless of the insurability status of the insured A. II only B. I only C. Both I and II D. Neither I nor II
1. A— II only Explanation: The Incontestability Clause covers a two-year period during which the insurance company may "contest" a Life insurance claim based upon material misrepresentations contained in the application. Even if the policy purchased is Annual Renewable Term (ART), the Incontestability Clause only covers the first 2 years the policy is continuously in force. The clause does not repeat upon renewal. It does repeat upon reinstatement, however. The purpose of this clause is to protect the insurance company during the first 2 years of the policy from those who lie. Thereafter, it protects insureds, who no longer have to worry about misrepresentation voiding their coverage.
When an insured purchases a Decreasing Term policy, which of the following decreases each year? A. The face amount B. The premium C. The cash value D. The reserve
5. A— The face amount Explanation: Accidental Death Benefit (ADB), sometimes called Double or Triple Indemnity, is a rider that may be attached to any Life insurance policy for an extra premium charge. The additional benefits are paid only if the insured dies within 90 days of an accident. If the insured lingers beyond 90 days, the policy reverts back to single indemnity only, and the face amount without the rider is paid, since it is assumed that death resulted more from natural causes than as a result of the accident.
Your client has a $100,000 policy with triple indemnity. Your client dies in a car accident. How much will the policy pay? A. $300,000 B. $100,000 C. $200,000 D. $400,000
A— $300,000 Explanation: Triple indemnity means that if the client should die in an accident then the policy will pay three times the face amount, thus the $300,000. If the client had died of cancer, then the policy would have only paid the face amount of $100,000.
When a corporation establishes a contributory Group Term contract, what percentage must be met for participation? A. 75% B. 100% C. 50% D. 67%
A— 75% Explanation: All Group Life insurance is Term Insurance. Actually it is Annual Renewable Term (ART) and is rated on the average age and claims experience of the entire group, which is called "experience rating." Remember, this type of insurance has a 31-day Grace Period and is convertible to Whole Life upon leaving employment. A Contributory Group plan requires that both the employer and the employees pay part of the premium. At least 75% of those eligible must participate, so the group is sure to get most of the healthy employees as well as those that are sick. In a Noncontributory plan, the employer pays 100% of the premiums and 100% of those eligible must participate. States have a minimum number of persons required to form a group for life insurance. The minimum is generally between three to ten persons, depending upon the state. If only the sick employees were to enroll, the insurance company would be the victim of "adverse selection" and their loss ratio (claims ratio) could suffer, causing the rates to go up.
The plan of Permanent Life insurance that offers cash value at the lowest premium is: A. A Whole Life policy B. An Annuity contract C. A Term policy D. A Limited-Pay Life policy
A— A Whole Life policy Explanation: Since Whole Life has the longest premium payment period (to age 100); it also has the lowest premium of any policy with a cash value. Limited Pay policies are more expensive, since the premium-payment period has been shortened. Term policies have no cash value. Annuities are the opposite of insurance. There is no Death benefit. They only pay you if you live.
Which of the following applicants for Life insurance is most likely to obtain coverage as a standard risk? A. A traveling heavy-equipment salesperson B. A person employed as a steeplejack C. An obese office worker D. A person who skydives
A— A traveling heavy-equipment salesperson Explanation: Applicants with dangerous hobbies, health problems, or dangerous occupations are most likely to be surcharged when buying Life insurance. Of the choices here, only the traveling salesperson is likely to be able to buy insurance at standard rates.
Which of the following policies can the term of coverage be changed? A. Adjustable Whole Life B. Term insurance C. Variable Whole Life D. Ordinary Whole Life
A— Adjustable Whole Life Explanation: The Adjustable Whole Life policy has a flexible premium. With an Adjustable Whole Life policy, the insured is able to adjust the policy's face amount, the term of coverage and the premiums. As the flexible premiums change, the term of coverage and/or face amount will adjust to meet your client's needs. It is important to note however, that with an Adjustable Whole Life policy the coverage may not be increased above the face amount that the insured was originally underwritten for, unless the insured should undergo and pass a physical exam
Which of the following statements about Accidental Death coverage in Life insurance is/are true? I. It does not increase the non-forfeiture values of the basic policy or the dividends under a participating policy II. Benefits are payable when the death of the insured is the result of an accident A. Both I and II B. I only C. II only D. Neither I nor II
A— Both I and II Explanation: The ADB (Accidental Death Benefit) rider pays double or triple indemnity if the insured dies as a result of an accident. Death must result within 90 days of the accident or it is termed to be from natural causes and only single indemnity is paid. The extra premium charged for this rider does not go toward cash-value accumulation and it must be shown separately from the Life insurance premium. It has nothing to do with the amount of dividends that a policyholder, who has a "participating" policy, may receive. A participating policy is one issued by a mutual insurance company; dividends paid out by mutual insurance companies are considered to be a return of overpayment of premium in the first place and therefore not taxable according to the IRS.
The Waiver of Premium benefit covers disabilities resulting from which of the following? I. Sickness or accident II. Sudden and permanent non-occupational injury A. Both I and II B. I only C. Neither I nor II D. II only
A— Both I and II Explanation: Waiver of Premium is a rider or endorsement attached to most Life insurance policies. It costs extra, but not much. It is actually a form of Health insurance, since it covers both accidental injury and sickness. Covered injuries, however, must be non-occupational, since occupational injuries are already covered by Workers' Compensation. This rider will automatically drop off the policy by age 65 and the premium will be reduced accordingly. The premium charged for all riders must be shown separately from the Life insurance premium. None of the extra premium charged goes towards cash-value accumulation. This rider has a 6-month "waiting period" (sometimes called the "elimination period") before any premiums are paid. The client must be injured or sick for 6 consecutive months before any premiums are waived. If the 6-month "waiting period" is met, the insurance company will waive premiums on a retroactive basis and reimburse the insured for any premiums paid during the "waiting period". If the insured recovers, the waiver stops, and the insured must resume premium payments.
Which of the following statements about Renewable Term policies is/are true? I. An insurance company can limit the number of renewals by policy provision II. The policy owner can choose to renew with premiums based on original age or attained age A. I only B. II only C. Neither I nor II D. Both I and II
A— I ONLY Explanation: Most Level Term policies are renewable, because if they were not, no one would buy them. The best example is 10-year Level Term. Here the company simply uses an "average rate" over the 10-year period, so it would have been cheaper for the client to buy Annual Renewal Term (ART) for the first four years of the contract and more expensive to buy ART after the fifth year of the contract. Renewals of Term Insurance are permitted without proof of good health and are always at the insured's current (attained) age. However, Term policies are only renewable up to a certain age, usually age 60 or 65. After that point, the insurance company does not want to renew your coverage since the chance of death has greatly increased. In the 10-year Level Term example above, the insured is going to get a huge rate jump in the eleventh year, since the renewal will be offered using the average rate for the next 10 years. This is the reason that lapse ratio on Term insurance is so high. Remember, most Level Term is both renewable and convertible, but it is not required to be. Read the policy language to be sure that it is.
A standard-risk male is insured under a Whole Life policy with a typical Accidental Death Benefit provision. Which of the following statements about the benefit is/are true? I. The Accidental Death Benefit amount is usually equal to or twice the face amount of the policy II. If the insured dies in an accident at age 72, the Accidental Death Benefit is payable A. I only B. Both I and II C. II only D. Neither I nor II
A— I only Explanation: Accidental Death Benefit (ADB, or Double Indemnity) is a rider that may be attached to any Life insurance policy by paying an extra charge. It pays double only in the event of accidental death. Death must occur within 90 days of the accident, or it is termed to be natural causes and the company will only pay single indemnity. As with most riders, the ADB rider automatically drops off of most policies by age 60 or 65, since the chance of accidental death has increased dramatically. Of course, the extra premium charged for the rider also drops off.
A Life insurance company may contest a policy during the Contestable period for which of the following reasons? A. Material misrepresentation B. Nonpayment of premiums C. Misstatement of age D. Change of occupation
A— Material misrepresentation Explanation: The Incontestability Clause states that the policy is "contestable" for the first 2 years for material misrepresentation by the insured on the application for insurance. Life insurance policies do not have a change-of-occupation clause. The Misstatement of Age Clause permits the insurance company to adjust benefits up or down in the event the insured has lied about his age at the time of application.
Factors affecting the premium (purchase payment) required for a Joint and Survivor Life Annuity include which of the following? I. Ages and sexes of the applicants II. Occupations of the applicants A. Neither I nor II B. I only C. Both I and II D. II only
A— Neither I nor II Explanation: The premium paid for any annuity is the amount the annuitant agrees to pay in, either as a lump sum at purchase or over a period of time. Since Annuities are not Life insurance, and there is no Death benefit, the company does not care about the annuitant's health, occupation or dangerous hobbies. None of those figure into the premium paid. The premium for a $10,000 Annuity is $10,000. If the annuitants are buying a Joint and Survivor Annuity, which pays them until the death of the last survivor, the pay-out would be based upon the ages and expected life spans of the annuitants and on their sexes, since women still live longer than men.
If the insured understated his age and the error is discovered after the insured's death, the insurance company will: A. Pay the amount the premium would have purchased at the correct age B. Refuse to pay the death claim C. Pay the face amount of the policy with a deduction for the amount of the underpayment of premium D. Refund all past premiums paid with any accumulated interest
A— Pay the amount the premium would have purchased at the correct age Explanation: Under the Misstatement of Age clause, the insurance company is protected against clients who state they are younger than they really are in order to obtain a lower rate. Although lying about your age will not void the policy, the company will adjust your Death benefit to the amount that the correct premium would have purchased had you told the truth.
The purpose of a Grace Period provision is to: A. Protect the policy owner against unintentional lapse B. Permit the insurance company to determine the cause of death C. Protect the insurance company against adverse selection by policy owners D. Permit the beneficiary to establish an insurable interest
A— Protect the policy owner against unintentional lapse Explanation: Grace Periods are: 30 days on Individual Whole Life and Term; 28 days on Industrial Life, and 31 days on Group Life. If the insured dies within the grace period, the overdue premium is subtracted from policy proceeds and the beneficiary receives the remainder.
If the insured's age was overstated at the time a Life insurance policy was purchased, and the error is discovered on the death of the insured, the insurance company will: A. Provide the additional insurance in the amount that has been purchased by the additional premium B. Be prevented from taking any action according to the provisions of the Incontestability clause C. Refund the overcharge in premiums to the beneficiary D. Void the policy
A— Provide the additional insurance in the amount that has been purchased by the additional premium Explanation: This is the reverse of the typical situation, in which the insured usually understates his age in order to have a lower premium. If he had overstated his age, then of course, he would have been paying a higher premium all along than he should have. So the formula works in reverse, too. The company would adjust his face amount to be higher, based on the amount the incorrect premium would have bought at his correct age.
Protection against unintentional lapse of a Life policy is afforded by: A. A Non-forfeiture option B. An Automatic Premium Loan C. A Dividend option D. A policy loan
B— An Automatic Premium Loan Explanation: Automatic Premium Loan (APL) is a rider, usually free, that may be attached to any Life insurance policy that has or will have a cash value. It is not a Non-forfeiture option or Dividend option. If the insured fails to make a premium payment when due, the rider will cause the policy to borrow from itself to make the premium payment. Of course, this creates a policy loan, which eventually must be repaid, plus interest, upon the death of the insured. If a policy continues to borrow from itself until there is no cash value left, the policy would eventually lapse.
When insuring substandard Life insurance risks, provisions are usually made for the expected higher death rate by: A. Establishing special risk groups B. Charging an extra premium C. Reducing the producer's commission D. Reducing the Death benefit
B— Charging an extra premium Explanation: A substandard risk in Life insurance is a client with a history of health problems, overweight, or a dangerous hobby or occupation. Most of these clients are insurable, if they are willing to pay a higher premium or surcharge to the "standard" rate tables.
When the primary beneficiary predeceases the insured, the proceeds are paid to the: A. Tertiary beneficiary B. Contingent beneficiary C. Alternate beneficiary D. Collateral beneficiary
B— Contingent beneficiary Explanation: Often the insured will name a Contingent Beneficiary to receive policy proceeds if the Primary Beneficiary has predeceased the insured. If no Contingent Beneficiary had been named in this instance, the policy proceeds would go to the estate of the insured to be distributed under the terms of the insured's Last Will and Testament. There are no such things as Alternate and Collateral Beneficiaries!
Which of the following Settlement Options provides for payments to be made in regular installments of a specified amount until the principal and interest are exhausted? A. Life Income B. Fixed Amount C. Fixed Period D. Interest
B— Fixed Amount Explanation: When the insured dies, the beneficiary may select any one of 5 Settlement Options. They are: Cash; Fixed Amount (for example, the beneficiary elects to receive $1,000 a month for as long as the money lasts); Fixed Period (the beneficiary chooses to be paid out over a 20-year period); Interest (the beneficiary leaves all the proceeds with the company to accumulate additional interest), and Life Income (the beneficiary takes the policy proceeds as cash and buys a Straight Life or Pure Life Annuity).
Which of the following statements about underwriting selection is/are true? I. Insurance companies may use family history to rate an applicant, if the history reveals a family characteristic that also appears in the applicant II. An applicant is required to furnish proof of age at the time he applies for insurance A. Both I and II B. I only C. Neither I nor II D. II only
B— I only Explanation: An insurance underwriter may use family history (such as cancer or heart disease) as a factor in determining risk selection and/or premium surcharges. However, under the Misstatement of Age Clause, the insurance company is protected from clients who may lie about their age, since this clause allows the company to reduce benefits to those that the correct premium would have purchased. Remember, the Death Certificate contains the insured's correct age and must be submitted to the insurance company as Proof of Loss when making a claim.
Which of the following statements about a Conditional Receipt is/are true? I. It guarantees that a policy will be issued II. It is a receipt for the first full premium A. I only B. II only C. Both I and II D. Neither I nor II
B— II only Explanation: A Conditional Receipt is a receipt for the first full premium paid by the applicant. It does not guarantee that the policy will be issued, since often the applicant must first take and pass a physical exam. It does state, however, that if the applicant meets all the conditions required of him by the company, coverage could be effective as early as the date of application, assuming the premium was also paid at that time.
Which of the following benefits is/are provided by a Payor (Applicant Waiver) clause in a Life insurance policy written on the life of a child? I. If the child becomes disabled for six months or longer, premiums are waived for the length of the disability II. If the premium payor dies, premiums are waived until the child reaches a specified age A. Both I and II B. II only C. I only D. Neither I nor II
B— II only Explanation: Payor Waiver of Premium (or the Payor clause) in a policy written on the life of a child insures the premium payor (usually the parent or guardian) in the event the payor becomes sick, disabled, or dies. There is a six-month "waiting period," just as there is in regular Waiver of Premium. Benefits are retroactive if the "waiting period" is satisfied. If the payor dies, premiums are paid only until the child reaches a certain age, which varies by state. At that point, it is assumed that the child can afford to pay her own premiums. Of course, the "waiting period" does not apply upon death of the payor.
Which of the following statements about a Waiver of Premium provision in a Whole Life policy written on a standard risk is/are true? I. It increases the policy's cash value II. It must be continued by the insurance company when the insured changes from a low-hazard to a high-hazard job A. I only B. II only C. Both I and II D. Neither I nor II
B— II only Explanation: None of the extra premium paid by an insured for riders, such as Waiver of Premium, goes towards cash-value accumulation. In fact, such extra premiums must be shown separately from the premium charged for the Life insurance protection. Since this rider was attached to a Whole Life policy, which can never be changed by the company, the rider would continue with no increase in premium charged if the insured changes from a low-hazard to a high-hazard job. Remember, this rider will eventually drop off of the policy, usually at age 60 or 65.
If a Life insurance policy does not permit the policy owner to change the beneficiary, the beneficiary is: A. Contingent B. Irrevocable C. Subsequent D. Guaranteed
B— Irrevocable Explanation: Typically, the insured or policy owner may change the beneficiary designation at any time. This is called Revocable Beneficiary designation. However, if the insured or policy owner elects to appoint an Irrevocable Beneficiary, the designation may not be changed without the consent of the irrevocable beneficiary, nor may a policy loan be taken out. Some 99% of all beneficiary designations are revocable. Irrevocable designations are usually made only in rare situations, such as when the policy's cash value becomes part of a divorce settlement.
A Whole Life policy furnishes a form of permanent protection, because it never has to be: A. Reduced B. Renewed or converted C. Reinstated D. Used for a loan
B— Renewed or converted Explanation: In this test, Whole Life and Straight Life are interchangeable. As used, either term means "continuous, level-premium Ordinary Life" insurance. A Whole Life policy may never be changed by the company. The premium can never go up. It never has to be renewed or converted. Therefore, it is known as "permanent protection."
Which of the following best describes the normal Conversion benefit available to terminated employees under a Group Life insurance policy? A. The employee may convert to an Individual Term policy within 31 days by submitting evidence of insurability B. The employee may convert to an Individual Permanent Life policy within 31 days without submitting evidence of insurability C. The employee may convert to an Individual Term policy within 31 days without submitting evidence of insurability D. The employee may convert to an Individual Permanent Life policy within 31 days by submitting evidence of insurability
B— The employee may convert to an Individual Permanent Life policy within 31 days without submitting evidence of insurability Explanation: The Conversion privilege on Group Life extends for 31 days after the insured terminates from the job. He can convert only to a Whole Life (Permanent insurance) policy written by the same company without submitting evidence of insurability. He cannot convert to more coverage than he had on the Group Life policy. He cannot convert to Term, only to Whole Life.
Which of the following statements about the Automatic Premium Loan provision in a Life insurance policy is true? A. A loan taken under the provision is not interest-bearing B. The provision must be elected by the policy owner C. The provision cannot be revoked by the policy owner D. The provision applies only to Whole or Limited-Pay Life policies
B— The provision must be elected by the policy owner Explanation: Automatic Premium Loan (APL) is a rider that may be attached to Whole Life policies, but never to Term policies. It must be elected by the policyholder, even though it is usually free. The purpose of the rider is to keep the policy in force if the insured forgets to pay the premium. The policy, with this rider attached, would automatically borrow from itself to pay the overdue premium, therefore avoiding lapse. Of course, the policy would have to have a cash value before such a "loan" could be taken. Also, all loans must be subtracted from policy proceeds (plus interest on the loan) in the event of the insured's death, so benefits will be reduced. Whole Life policies are required to have a cash value no later than the end of the 3rd full year.
A Life insurance rider that allows a terminally ill client to obtain part of his death benefit while he is still living is called: A. Term rider B. Accidental Death and Dismemberment rider C. Accelerated Benefits rider D. Cost of Living rider
C— Accelerated Benefits rider Explanation: When an insured has a terminal illness, they may receive a portion of their death benefit as 'accelerated benefits' while they are still living. Generally, accelerated benefits are not taxable, but they will reduce the amount paid to the beneficiary upon the insured's eventual death. Accelerated benefits are usually included in newer policies, but were required to be added as riders on older contracts.
The principal use of an Annuity is to: A. Create capital for the annuitant's heirs B. Provide for the beneficiary's lifetime income C. Arrange an income for old age D. Provide for the liquidation of debts at retirement
C— Arrange an income for old age Explanation: An Annuity will pay the annuitant as long as they live. The funds are paid out to the living policyholder, not the beneficiary. Most Annuities do not have a beneficiary, except during the Pay-In period. Remember, on a Straight Life or Pure Life annuity, the company pays you as long as you live, but if you die, the company keeps the money.
An employee's evidence of participation in a Group Life plan is the: A. Proof of employment B. Master contract C. Certificate D. Policy
C— Certificate Explanation: On Group Life, the employer is the master policyholder and the employee merely receives a Certificate of Insurance indicating how much coverage he has, who his beneficiary is, and whether or not he has dependents' coverage.
Which of the following statements about a Life Annuity with 10 Years Certain is/are true? I. If the annuitant lives for 20 years after the start of the Income Payment period she will receive income payments for 20 years II. If the annuitant dies 5 years after the start of the Income Payment period, the beneficiary will receive Income payments for an additional 10 years A. II only B. Neither I nor II C. I only D. Both I and II
C— I only Explanation: Remember, all Annuities are for life. This one also has a 10-year Period Certain, which means that if the annuitant dies after five years, someone else will get the remaining five years. Had she died after the tenth year, no one would get anything, since the insurance company would be entitled to keep the funds. However, if she lives for 50 more years, the insurance company is obligated to continue payments the entire time.
Which of the following statements about representations and warranties is/are true? I. A warranty may be true insofar as the applicant is aware, but a representation must be absolutely and literally true II. In order to invalidate a contract, a representation must be proved both incorrect and material, whereas a warranty must only be proved incorrect A. Both I and II B. Neither I nor II C. II only D. I only
C— II only Explanation: Representations are the answers given by the applicant on the application for insurance. They are the truth to the best of the applicant's knowledge. In Life insurance, a misrepresentation can void the coverage during the first 2 years of the policy under the terms of the Incontestability Clause IF it is "material." Lying about your middle name would be immaterial, but lying about your health is material. Warranties are never required of an applicant. By definition, however, a warranty is a sworn statement of truth.
Which of the following is not true regarding the provisions of the federal Fair Credit Reporting Act: A. If adverse action is taken as a result of a report, the customer must be informed of the specific reason for such action B. It applies to consumer reports ordered in relation to credit, insurance or employment C. If adverse action is taken as a result of a report, the insurer must give the customer a copy of the report D. If adverse action is taken as a result of a report, the customer must be informed of the source of the report
C— If adverse action is taken as a result of a report, the insurer must give the customer a copy of the report Explanation: Under the Fair Credit Reporting Act, when adverse action (such as rejection of insurance) is taken, the applicant must be informed of the specific reason and the source of the consumer (or credit) report. Although the applicant can obtain a copy of the report from the credit reporting agency, neither the producer nor the insurer has to give the applicant a copy of the report.
All of the following may be included in the Accelerated Death Benefit Rider, EXCEPT: A. Nursing home benefits B. Hospice Care C. Long-term Disability D. Cancer Insurance
C— Long-term Disability Explanation: Remember, with the Accelerated Death Benefit (also known as the Living Benefits Rider), the insured gets an advance of the face amount in the event of a terminal illness. This money must be used for the illness. So, of the choices, long-term Disability makes the least sense.
All of the following are true about Social Security benefits, EXCEPT: A. Virtually all employed persons are covered B. Benefits may include a lump-sum Death benefit and a monthly income to survivors C. Monthly payments must remain the same once benefits commence D. Benefits are financed through taxes
C— Monthly payments must remain the same once benefits commence Explanation: Social Security is a type of social insurance. Social Security actually covers Old Age (retirement), Survivors Benefits, Health Insurance (Medicare), and Disability Income insurance. There is a lump-sum death benefit, but it is only $255.00. Since Social Security benefits are tied to the Consumer Price Index, the amounts of monthly benefits will usually go up over a period of time.
A statement that an applicant for Life insurance makes on their application, that is the truth to the best of their knowledge, is a(n): A. Warranty B. Guaranty C. Representation D. Affidavit
C— Representation Explanation: Applicants for insurance are not required to make sworn statements of truth (warranties) on their application. However, they are required to tell the truth to the best of their knowledge, which is known as a representation.
A plan, usually funded by Life insurance, to purchase a deceased partner's share of a business is known as a: A. Qualified Retirement plan B. Key Employee Life policy C. Deferred Compensation plan D. Buy-sell Agreement
D— Buy-sell Agreement Explanation: A Buy-sell Agreement is usually set up by an attorney in an effort to reach a predetermined decision on who will own the business in the event one of the partners dies. Without Life insurance policies to fund the agreement, it would be of little value, since no funds would be available to purchase the share of the business owned by the spouse or estate of the deceased business partner. A Deferred Compensation plan is a fringe benefit some companies offer to key executives as a way to defer income from one tax year to another. A "Qualified" Retirement Plan is one in which the contributions paid in are not subject to current taxation, meaning it meets IRS qualifications. A Key Employee Life insurance policy is usually purchased by a business, naming the business as beneficiary, in the event a key person dies. The policy proceeds would be used to train a new Key Employee.
Your client has a Whole Life policy and would like to add coverage for his child. Which one of the following riders would you recommend? A. Payor Benefit Rider B. Guaranteed Insurability Rider C. Waiver of Premium Rider D. Child Term Rider
D— Child Term Rider Explanation: Make sure to answer just the question that is asked. Some of these riders would be beneficial for your client, for example the Payor Benefit Rider may be useful. But the rider that would add coverage for the child is the Child Term Rider. When you add coverage for another person to a Whole Life policy, you do so through an Other Insured Rider. Since this additional insured is a child, the Child Term Rider is the best choice
A period following the termination of employment during which the employee may exchange their group coverage for an individual policy is which of the following? A. Reinstatement period B. Eligibility period C. Probationary period D. Conversion period
D— Conversion period Explanation: Group Life policies are convertible within 31 days of the date the insured terminates her job to individual Whole Life policies issued by the same company without a physical exam.
Which of the following policies only provides a Death benefit that declines over a definite and limited period of time? A. Whole Life B. Annuity C. Joint Life D. Decreasing Term
D— Decreasing Term Explanation: Often used to protect home mortgages or for temporary needs, Decreasing Term insurance has no cash value. Usually written for 5, 10, 15, or 20 years, the premium remains the same each year. However, since the amount of insurance decreases, you could say that the premium actually is going up each year. Decreasing Term is not renewable but it is usually convertible to Whole Life at the option of the insured without proof of good health.
Of the following statements which one is incorrect? A. An employee can be enrolled in a qualified plan at work and have an IRA B. A MEC (Modified Endowment Contract) is a Life insurance policy that loses some of its tax benefits because its cash value exceeds the premiums paid in the first seven years C. A Keogh is a qualified plan for the self-employed D. ERISA was established in 2001
D— ERISA was established in 2001 Explanation: ERISA (Employee Retirement Income Securities Act) was established in 1974. Choice "ERISA was established in 2001" is right because you are looking for a "false" answer. All of the other statements are true.
Which of the following statements about the Assignment of a Life insurance policy is/are true? I. Most insurance companies require that notice of any assignment of a policy be filed at the home office II. An insurance policy cannot be assigned to a lending institution for the purpose of securing a loan A. Both I and II B. II only C. Neither I nor II D. I only
D— I only Explanation: There are two types of assignment - Absolute and Collateral. An Absolute assignment is made when the parent, who bought a Life insurance policy on a minor child years ago, elects to "assign" all interests in the policy to the child, who is now old enough to pay his own premium. Under the terms of a Collateral assignment, the insured's policy may be assigned to a bank or other financial institution as collateral for a loan. When the insured pays off the loan, the Collateral assignment is removed. Of course, in order for either type of assignment to be valid, it would have to be on file at the insurance company's home office, otherwise how would the company know about it?
Insurance may be considered to be in force when the: A. Agency manager deposits the initial premium check into an escrow account B. Proposed insured signs an application and a medical examiner acceptable to the insurance company completes an examination of the proposed insured C. Producer completes the application and the proposed insured signs it D. Insurance company mails a policy to the producer and the producer delivers it to the proposed insured and collects the first premium
D— Insurance company mails a policy to the producer and the producer delivers it to the proposed insured and collects the first premium Explanation: This is an instance of making sure you know the "best answer." Answers "Producer completes the application and the proposed insured signs it," "Proposed insured signs an application and a medical examiner acceptable to the insurance company completes an examination of the proposed insured," and "Agency manager deposits the initial premium check into an escrow account" all need more wording in order to make them complete. Answer "Insurance company mails a policy to the producer and the producer delivers it to the proposed insured and collects the first premium" is simply the best answer.
Most assignments of Life insurance policies are made in order to protect the: A. Insured's insurability B. Insurance company from fraudulent claims C. Beneficiary from the claims of creditors D. Insured's personal or business credit
D— Insured's personal or business credit Explanation: Collateral Assignments, in which the insured pledges his policy to the bank as collateral for a bank loan, are very common. When the loan is paid off, the Collateral Assignment drops off. A Collateral Assignment assures the bank that if the insured dies with the loan outstanding, the bank will be paid.
The Survivor Life Annuity contract calls for the beneficiary to receive a: A. Lump sum benefit on the death of the insured B. Payment each month for 10 years C. Deferred income to be paid when the age of 65 is reached D. Predetermined income for life
D— Predetermined income for life Explanation: The Joint & Survivor Annuity option pays benefits, although reduced, to the death of the last survivor. Technically this last survivor is not a true beneficiary, but rather, a joint annuitant on the contract, so this question is somewhat vague.
If a proposed insured has a hazardous occupation, the insurance company may: A. Lower the premium B. Reduce the dividends C. Cancel the application D. Rate the insured
D— Rate the insured Explanation: The underwriting department can offer Life insurance to nearly everyone who is willing to pay the premium. To "rate" or "surcharge" the policy means the underwriter offers coverage at rates higher than the "standard" or rate published in the producer's manual. It's then up to the applicant to decide if she still wants to purchase the policy at the higher price.
Answers on the applications are which of the following? A. Guarantees B. Warranties C. Best guesses D. Representations
D— Representations Explanation: The insurance company asks that the insured answer the questions on the application with the truth to the best of their knowledge. This is a representation. A warranty is a guarantee of truth and no person can guarantee their health!
The Fair Credit Reporting Act provides: A. The funding for a national clearinghouse of credit information for Life insurance companies' underwriting operations B. For the availability of Credit Life insurance on a fair and impartial basis C. Protection to debtors against harassment by lending institutions in the event of default D. That the applicant for insurance be informed that a consumer report may be requested
D— That the applicant for insurance be informed that a consumer report may be requested Explanation: The Fair Credit Reporting Act is a federal law, that is designed to protect applicants from unfair investigative reporting. It requires that an investigative reporting agency have the applicant's written consent prior to ordering a report (pre-notification) and it also requires that in the event adverse underwriting action is taken based on the information found in this report, the applicant has the right to obtain a copy of the report from the reporting agency involved (post-notification).
A person has inherited a sum of money. She is age 60 and desires to purchase an Annuity that will appreciate with market and economic conditions. Which of the following types of Annuities should she consider? A. Fixed B. Deferred C. Refund D. Variable
D— Variable Explanation: A Variable Annuity is the most risky type of annuity. The insurance company invests the annuitant's funds in a "separate account" that is usually invested in equities (stocks). This type of annuity MAY appreciate with market and economic condition or it MAY NOT. This type of annuity is not backed by the State Guaranty Fund and it is considered very risky, meaning the client could lose her invested capital due to poor performance of the stock market. Salespersons selling Variable Annuities need to have a Life insurance license plus a Financial Industry Regulatory Authority's (FINRA) license. In addition, the State Department of Insurance requires a Variable Annuities endorsement on your Life insurance license. Fixed Annuities are much safer, since the insurance company invests the funds of the annuitant in its "general account" in much the same way it invests its other funds. A Fixed Annuity has a guaranteed, fixed minimum rate of return, guaranteed by the insurance company and backed by the State Guaranty Fund, so the annuitant cannot lose his invested capital. The fixed minimum rate of return may be quite low, such as 4%, but companies often pay more than the minimum. A life insurance license is all that is needed to sell Fixed Annuities. A Deferred Annuity may be either Variable or Fixed. It is simply an annuity that is bought over a period of time, say by investing $100 a month from age 35 to age 65. This is called the Accumulation period, or Pay-In period. If the annuitant should die during the Pay-In period, all invested capital up to that point, plus interest, would go directly to his beneficiary or estate. Remember, this is not a Death benefit; it is a return of the annuitant's invested funds. The interest earned during the Pay-In period accumulates on a tax-deferred basis; the annuitant is not taxed on his earnings until he starts the Pay-Out (Annuity) period, and then only on the interest earned, since the initial contributions were made with after-tax dollars. An Immediate Annuity means that the annuitant purchases either a Fixed or Variable Annuity with a lump-sum amount, say $100,000. This would be considered the "premium" paid for the annuity. The annuitant wants the insurance company to start paying him back immediately, starting with monthly payments based on his expected life span, sex, and annuity option selected. Remember, all annuity pay-out options pay the annuitant for life. You cannot outlive the income from an annuity! As you can see, insurance companies began to offer annuities as a way to keep the money when a life insurance client died. By offering the surviving beneficiary the option to purchase an annuity with a lifetime income, the company was in a position to reinvest the policy proceeds they would have otherwise had to pay out as a lump-sum cash Death benefit. When the annuitant starts the pay-out period or annuity period, he must select an annuity pay-out option. Of course, he could always select lump sum cash at that point and pay tax on all interest earned up to that point. Other annuity "settlement" options are: Straight Life or Pure Life Annuity — The most risky option, it also has the highest pay-out. Based on your expected life span and sex, the insurance company will pay you an amount monthly that would "annuitize" your invested capital over a period of time. If you die, payments stop immediately and the insurance company keeps what is left of your funds. If you live, the insurance company will continue to pay you until you die, even if you collect more then you invested. Period Certain Annuity — With this option, either you, your designated beneficiary or estate is guaranteed to receive funds from the insurance company for a period of time designated by the annuitant, say 10 years. If you die after 5 years, the payments for the remaining 5 years go to your beneficiary or estate, so there is less risk. But the amount paid out is less. If you die in the eleventh year, the insurance company keeps your remaining funds. However, if you live to be 105, it will continue to pay you, since all Annuities are for life. The Period Certain can be 5, 10, 15, or 20 years. Refund Annuity — Probably the Annuity with the least risk. If you die before receiving back everything you invested, your designated beneficiary or estate will continue to be paid by the insurance company, either on an installment basis or on a lump-sum cash basis until it has paid out everything you paid in. This is less risky, but the pay-out is lower. Joint & Survivor Annuity — This option has two or more annuitants, and benefits are payable as long as the last survivor lives. Usually selected by husband and wife, the benefits are reduced if the husband dies, but the wife continues to be paid until she dies (or vice versa).
