Life Insurance Basics: Quiz

Which of the following presents the highest mortality risk:

50-year-old male According to the Commissioner's Standard Ordinary Mortality Table, which is based upon the law of large numbers, the average 50-year-old male will not live as long as the average 50-year-old female, which means they will pay more for life insurance.

All of the following are true about Life insurance "inspection reports" EXCEPT:

A Life insurance "inspection report" is also known as an investigative consumer report. It is usually ordered by the underwriter to verify an applicant's credit, character and habits. Inspection reports fall under the provisions of the Federal Fair Credit Reporting Act.

Life insurance mortality tables are based upon which of the following:

A life insurance mortality table measures people (10,000,000 individuals) and time, which is the average life expectancies of those people.

An insurable interest must exist when:

A life insurance policy is issued. Insurable interest is based upon love, devotion, economics or a family relationship. An insurable interest must exist at the time of application for one person to buy a policy on the life of another. It need not exist at the time of claim. This requirement prevents gambling or the possibility of murder.

If an applicant for a life insurance policy is a student pilot, which of the following is true:

A standard risk is an average person. A preferred risk is a person who is in exceptional health, and would receive a discount from the standard rate. A person who is a student pilot would have to pay a higher premium than the standard risk. However, if the insurance company wanted to exclude coverage while the insured was learning to fly, and the applicant agreed, the premium would be reduced. But if the insured died in a plane crash while learning how to fly there would be no coverage.

When insuring substandard life-insurance risks, provision is usually made for the expected higher death rate by:

A substandard risk in Life insurance is a client with a history of health problems, 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.

Which of the following applicants for Life insurance is most likely to obtain coverage as a standard risk?

A traveling heavy-equipment salesperson 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.

An underwriter does all of the following, EXCEPT:

Adjust losses It is an insurance adjuster who adjusts losses, not an underwriter.

Which of the following is true when Life insurance is used to fund an Executive Bonus plan:

Although Life insurance may not be considered to be a retirement plan, some employers utilize it to fund Executive Bonus plans. Although the employer pays the premium, the policy belongs to the employee, who may surrender it for cash upon retirement.

Regarding Social Security survivors benefits, the period of time between when the youngest child turns age 16 and a surviving spouse becomes eligible for Social Security benefits is called the:

Black-out period Under Social Security, survivors benefits are only paid to surviving spouses who have children under age 16. For example, a 30-year-old widow's youngest child is age 10 when her husband dies. Social Security will pay the widow survivor's benefits until that child reaches age 16, or in this case, 6 years, at which time the widow will be age 36. After that, survivor's benefits will stop until the widow reaches retirement age, which is age 60 for widows whose retirement is based upon their deceased husband's social security contributions. This period of time, which in this example is 24 years, is known as the "black-out" period.

A plan, usually funded by Life insurance, to purchase a deceased partner's share of a business is known as a:

Buy and Sell Agreement. 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.

If an applicant for a life insurance policy is found to be a substandard risk, the insurance company is most likely to:

Charge an extra premium Most clients are insurable, it's just a matter of selecting the proper premium to match the risk being undertaken. When the client completes the application and writes a check for the first premium, they are making an offer to buy insurance from the company. If the company declines to write coverage at the premium quoted, they may offer to do so at a higher price. This would constitute a counteroffer by the company. The applicant would then have the right to accept or reject the new offer.

Which federal law explains to a customer their legal rights when a consumer report will be ordered by an insurer:

Fair Credit Reporting Act

In order to avoid unfair discrimination, life and health insurance rates must be the same:

For those who present essentially the same hazard L&H insurers will vary their rates based upon gender, age and/or health. Such discrimination is considered to be fair, since it is based upon verifiable statistical data filed with the Commissioner. However, it would be unfair discrimination to charge different rates for those who present essentially the same hazard.

Fixed life insurance products are guaranteed by the insurance company's:

General account All fixed insurance policies are guaranteed by the insurance company's general account. The portfolio of the general account is invested in medium-term fixed-income-producing debt securities such as bonds and real estate mortgages. The insurer assumes the risk in a fixed product since it guarantees a minimum amount of interest in the contract. If the earnings in the general account are not sufficient to equal the minimum interest due the insurer must make up the difference. Variable products are funded by the insurer's separate account.

Insurance underwriters may check an applicant's records with all, EXCEPT:

IRS records are confidential and are not available to insurance underwriters.

Insurance may be considered to be in force when the:

Insurance company mails a policy to the producer and the producer delivers it to the proposed insured and collects the first premium. This policy was ordered on a COD (collect-on-delivery), or "submittal" basis, meaning there is no coverage until the company issues the policy AND the first premium is paid.

The insurance business is regulated primarily by:

Insurance is regulated by state law. The National Association of Insurance Commissioners (NAIC) works to provide some uniformity in state insurance laws, but there is a long way to go.

Which of the following is true concerning life insurance purchased by business partners

It is based upon a contractual "buy/sell" agreement Life insurance "buy/sell" agreements are contracts that state that a surviving spouse must sell and a surviving partner must buy out the interests of the deceased partner.

All of the following are true about insurable interest on life insurance, EXCEPT:

It must exist at the time of death. Although insurable interest must exist at the time of application, it need not continue to exist at the time of death.

All of the following statements about Life insurance and the risk it covers are true, EXCEPT:

Life insurance is like a mutual fund in that a certain sum of money must be set aside each year to meet the contractual obligations of the insured. Life insurance is based upon the Law of Large Numbers. A life insurance Mortality Table starts with 10,000,000 lives. By age 120, all have died, making death a certainty. All the responses to this question are correct except D, and it is correct also, EXCEPT for the reference to Mutual Funds. Remember, any part of a question that is false makes the entire question false. Life insurance has nothing in common with Mutual Funds, which are regulated under Federal securities laws. It is true, however, that life insurance companies do have to set aside a certain sum of money each year to meet the future contractual obligations they have to the insured.

All of the following are life insurance policy premium modes, EXCEPT:

Life insurance premiums may be paid annually, semi-annually, quarterly, or monthly.

All of the following are true about Social Security benefits, EXCEPT:

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.

On May 8, a prospect filled out an application for a life insurance policy but paid no premium. The insurance company approved the application on May 14 and issued the policy on May 15. The producer delivered the policy on May 26 and collected the first premium. The coverage became effective on:

May 26 No valid contract can exist without consideration, which in this case, was not offered until the policy was delivered on May 26. Had the initial premium been collected when the application was first completed on May 8, coverage could have been effective at that time assuming the applicant met all the requirements contained in the company's Conditional Receipt. All contracts must contain these four essential elements: 1) Consideration, 2) Offer, 3) Acceptance and 4) Legal Purpose and Capacity. (Remember: C-O-A-L)

A binder may be what:

P&C producers often have the authority to make "binders" of coverage, which may be either oral or written. Although a binder creates temporary coverage while the application is being underwritten, it does not guarantee that the policy will be issued. L&H producers do not have binding authority. Instead, they utilize either a Conditional Receipt, which states that there is no coverage until all conditions are satisfied, or a Binding Receipt, which provides a limited amount of coverage while the application is in underwriting.

If a proposed insured has a hazardous occupation, the insurance company may:

Rate the Insured The underwriting department can offer Life insurance to nearly everyone who is willing to pay the premium. To "rate" or "surcharge" the policy means that 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 they still want to purchase the policy at the higher price.

A producer takes an application from a proposed insured without receiving payment of the first premium. The insurance company issues the policy and, when the producer visits the proposed insured to deliver it, the producer realizes that the health of the applicant has deteriorated significantly since the application was taken. The producer should:

Refuse to deliver the policy or to accept any premium offered Remember, due to lack of consideration, no valid contract exists yet. Therefore, the producer, who is bound to protect the company, should refuse to deliver the policy or accept any premium offered.

Statements made by an applicant for a life insurance policy that are supposed to be true are referred to as:

Representations Insurance law only requires that applicants answer questions by stating the truth to the best of their knowledge. These answers are called representations. Warranties, which are sworn statements of truth, are not required.

The Fair Credit Reporting Act provides:

That the applicant for insurance be informed that a consumer report may be requested. 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 if 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).

In the formation of a life insurance contract, the special significance of a Conditional Receipt is that it:

The Conditional Receipt is just that, conditional. This means that coverage is conditional upon the applicant meeting all of the underwriting requirements of the company and paying the premium. If the applicant does meet all the conditions, then it is possible that coverage could begin as early as the date of application.

An applicant has been denied insurance coverage because of information contained in a consumer report. According to the Fair Credit Reporting Act, all of the following statements are true about this situation, EXCEPT:

The applicant has the right to obtain a copy of the consumer report directly from an insurance company that used the report. The Fair Credit Reporting Act is a Federal law that is designed to protect individuals who are being investigated by consumer reporting agencies or credit bureaus. The law requires pre-notification of any possible investigation and post-notification if any adverse underwriting action is taken by the company as a result of the information received from a credit bureau. An applicant for insurance also has the right to request a copy of the credit report that the company obtained. However, this report may not be obtained directly from the insurance company, but only from the credit bureau that made the report. In addition to this Federal law, many states have their own Privacy Protection Act, which states basically the same things. Remember, pre-notification must be in writing and when the applicant signs an application, this disclosure by the company that it may order an investigative type report is usually located right above the applicant's signature line.

A life insurance policy summary is required to include all of the following information, EXCEPT:

The name of the beneficiary By law, a life insurance policy summary is required to include certain items. The name of the beneficiary is not one of those items required to be included.

In life insurance, insurable interest must exist at which point in time:

The time of application only. In order to purchase life insurance on another person you have to prove insurable interest at the time of application. If you would benefit from the continued life of an individual, you have an insurable interest in their life. In life insurance, insurable interest only has to be present at the time of application, NOT at the time of loss. Insurable interest is generally based on blood (family) or money (business partner or key employee). For example, an individual would not be able to purchase life insurance on their best friend, since they do not have insurable interest. Insurable interest was created to prevent people from profiting from the death of others.

A life insurance preferred risk has all of the following characteristics, EXCEPT:

There are 3 main risk classifications: 1) The standard risk, which is presented by the average person; 2) the non-standard risk, which is presented by a person who may be overweight, smokes or has health problems; and 3) the preferred risk, which is presented by a person who does not drink or smoke and exercises regularly. A person's income level has nothing to do with their risk classification.

Which of the following is true of the duties of the Securities and Exchange Commission (SEC):

They are responsible for enforcing Federal securities laws. The Securities and Exchange Commission (SEC) is responsible for enforcing Federal securities laws, such as the Securities Exchange Act of 1934. Securities licensing is administered by the Financial Industry Regulatory Authority (FINRA). The statutes administered by the SEC are designed to promote full public disclosure and protect the investing public against malpractice in the securities markets. Insurance is regulated at the state level by the Director or Commissioner, who is the head of the Department or Division of Insurance in the state. Fixed insurance products are regulated by the Department of Insurance, NOT the SEC. The same goes for the non-resident insurance agents.

Which of the following is true of the duties of the Financial Industry Regulatory Authority (FINRA):

They are responsible for making sure that their members follow Federal laws and rules. The Financial Industry Regulatory Authority (FINRA) is a nonprofit self regulatory organization that is responsible for oversight of its members (broker/dealers and registered representatives). The main objective of FINRA is to self regulate the over-the-counter securities market. Since variable insurance products are considered to be securities under Federal law, insurance producers must also obtain a FINRA license in order to sell them. Although FINRA is responsible for Securities Licensing exams, the state Department or Division of Insurance is responsible for insurance licensing and administering licensing exams, in addition to regulating insurance agencies

The department within an insurer that is concerned with the acceptance or denial of applicants, as well as the determination of what risk those applicants pose, is the:

Underwriting department It is the underwriting department that determines if an applicant is acceptable to underwrite, and if so, at what premium.