Life Insurance Basics - Quiz

All of the following are requirements for life insurance illustrations EXCEPT A. They must identify nonguaranteed values. B. They must differentiate between guaranteed and projected amounts. C. They must be part of the contract. D. They may only be used as approved.

C. They must be part of the contract. - An illustration may not be altered by an agent and must clearly state that it is not part of the contract. It is legal to list nonguaranteed values in the contract, but they must be specifically labeled as projected, not guaranteed values.

Which of the following is an example of liquidity in a life insurance contract? A. The death benefit paid to the beneficiary B. The flexible premium C. The money in a savings account D. The cash value available to the policyowner

D. The cash value available to the policyowner - Liquidity in life insurance refers to availability of cash to the insured. Some life insurance policies offer cash values that can be borrowed at any time and used for immediate needs.

During a pre-selection interview, an agent is allowed to do all of the following EXCEPT A. Inquire about specific details of the applicant's health history. B. Terminate the interview and reject the applicant. C. Ask questions that are not on the application but that are important for underwriting. D. Provide the applicants with negative information regarding their risk.

C. Ask questions that are not on the application but that are important for underwriting. - The producer is not allowed to collect information that is not asked for on the application, but can seek details for those items which do appear. This can include dosages and frequency of use of medications, extent of involvement in hazardous activities, and specifics regarding employment duties among others.

Another name for a substandard risk classification is A. Declined. B. Elevated. C. Rated. D. Controlled.

C. Rated. - Substandard risk classification is also referred to as "rated" since these policies could be issued with the premium rated-up, resulting in a higher premium.

If an insured changes his payment plan from monthly to annually, what happens to the total premium? A. Decreases B. Stays the same C. Doubles D. Increases

A. Decreases - Because the insurer would have the entire premium to invest for a full year, they would reduce the premium amount.

All of the following information about the applicant is identified in the General Information section of a life insurance application EXCEPT A. Occupation. B. Education. C. Age. D. Gender.

B. Education. - Education is not an underwriting factor nor is it information included on the application.

Which of the following is NOT required on an illustration used in the sale of a life insurance policy? A. Name of insurer B. Underwriting or rating classification upon which the illustration is based C. The name of the primary and secondary beneficiaries D. Generic name of policy

C. The name of the primary and secondary beneficiaries - Other required items include the name and business address of producer or insurer's authorized representative; the name, age and sex of proposed insured; underwriting or rating classification upon which the illustration is based; and the initial death benefit.

Under the Fair Credit Reporting Act, individuals rejected for insurance due to information contained in a consumer report A. Must be advised that a copy of the report is available to anyone who requests it. B. May sue the reporting agency in order to get inaccurate data corrected. C. Must be informed of the source of the report. D. Are entitled to obtain a copy of the report from the party who ordered it.

C. Must be informed of the source of the report. - Under the Fair Credit Reporting Act, if an insurance policy is declined or modified because of information contained in a consumer report, the consumer must be advised and provided with the name and address of the reporting agency.

A corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then A. IRS has no jurisdiction. B. The benefit is received as taxable income. C. The benefit is received tax free. D. The benefit is subject to the exclusionary rule.

C. The benefit is received tax free. - Should a key person die, the benefit is treated as a reimbursement to the business for loss of services from that key person.

Which of the following is NOT a type of Temporary Insuring Agreement? A. Conditional Receipt B. Acceptance Form of Receipt C. 30-day Interim Term Receipt D. Bridge Coverage Receipt

D. Bridge Coverage Receipt - The three types of Temporary Insuring Agreements are Conditional Receipt (which is the most commonly used), 30-day Interim Term Receipt and Acceptance Form of Receipt.

If a change needs to be made to the application for insurance, the agent may do all of the following EXCEPT A. Erase the incorrect answer and record the correct answer. B. Draw a line through the first answer, record the correct answer, and have the applicant initial the change. C. Note on the application the reason for the change. D. Destroy the application and complete a new one.

A. Erase the incorrect answer and record the correct answer. - An agent should not use white-out, erase or obliterate any answers given to a question on an application. It could prevent an insurer from contesting the application, should it be necessary.

Which of the following CANNOT be included along with illustrations used to sell life insurance? A. Rating information B. Original death benefit C. Vanishing premium information D. Name of the insurer

C. Vanishing premium information - Illustrations used to sell life insurance cannot use the term "vanishing premium" - or any similar term - that implies the policy becomes paid up.

Stranger-originated life insurance policies are in direct opposition to the principle of A. Insurable interest. B. Law of large numbers. C. Good faith. D. Indemnity.

A. Insurable interest. - Because the purchaser of a stranger-originated life insurance policy doesn't know the insured, or have any interest in the insured's longevity, STOLI policies violate the principle of insurable interest.

Kayla's husband died in a plane crash. She needs a new source of funding that will help put her child through daycare. Which of the following would be the best source? A. State Education Waiver B. Viatical settlement C. Estate conservation D. Life insurance proceeds

D. Life insurance proceeds - There are many legitimate need-based expenses that can be paid by life insurance proceeds, from groceries to retirement income. Daycare is considered to be among these expenses.

Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy? A. Premiums are tax deductible by the key employee. B. Premiums are tax deductible as a business expense. C. Premiums are taxable to the employee. D. Premiums are not tax deductible as a business expense.

D. Premiums are not tax deductible as a business expense. - The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free.

When an employer offers to give an employee a wage increase in the amount of the premium on a new life insurance policy, this is called a(n) A. Executive bonus. B. Key person policy. C. Fraternal association. D. Aleatory contract.

A. Executive bonus. - When an employer offers to give an employee a wage increase in the amount of the premium on a new life insurance policy, this is called an executive bonus.

Harry has just received his life insurance policy. In reviewing the title page, Harry was able to ascertain the following information EXCEPT A. His spouse had been assigned the primary beneficiary. B. His children have been covered by a child rider. C. He had purchased a 20 year renewable term insurance policy in the face amount of $150,000. D. His total annual premium amount.

A. His spouse had been assigned the primary beneficiary. - Harry would not be able to ascertain from the title page who is the primary beneficiary of his life insurance policy.

Joe, Larry, and Curly own a small business. They have made a legal arrangement which states that if one of them dies or becomes disabled, the other two will be able to buy the partner's shares. Which term best describes this arrangement? A. Buy-up Distribution B. Business Continuation C. Shares Distribution D. Business Partner Disability Provision

B. Business Continuation - In a Business Continuation arrangement, the partners of a business can buy shares belonging to a recently deceased or disabled partner.

Which of the following is a generic consumer publication that explains life insurance in general terms in order to assist the applicant in the decision-making process? A. Policy Summary B. Illustrations C. Buyer's Guide D. Insurance Index

C. Buyer's Guide - The Buyer's Guide is a consumer publication that explains life insurance in general terms in order to assist the applicant in the decision-making process. It is a generic guide that does not address the specific policy of the insurer, instead explaining life insurance in a way that the average consumer can understand.

Concerning AIDS and HIV risks, all of the following acts may subject an insurer to liability claims or fines EXCEPT A. Disclosing test results to third party without applicant's consent. B. Requiring applicant to pay for HIV test in order to be underwritten. C. Declining applicant for a positive HIV test result. D. Not providing counseling contacts and educational information about HIV and AIDS.

C. Declining applicant for a positive HIV test result. - Companies pay for their medical testing and underwriting. At the time of application, information on HIV and AIDS and counseling options must be given to the clients. Applicants can be declined for HIV/AIDS (a true health risk). Disclosing health results to an unauthorized party is a violation.

What describes the specific information about a policy? A. Buyer's guide B. Producer's report C. Policy summary D. Illustrations

C. Policy summary - A policy summary describes the features and elements of the specific policy for which a person is applying.

The title page of the policy provides a summary of the benefits and coverages provided by the policy. All of the following information is included in the title page EXCEPT A. Type of policy, amount of coverage provided. B. The premium amount and modal. C. The effective date and the termination date of the policy. D. The insured's beneficiaries.

D. The insured's beneficiaries. - Although the named beneficiaries are important, it is information NOT contained within the first several pages of the policy which is known as the TITLE PAGE.

An applicant signs an application for a $25,000 life insurance policy, pays the initial premium, and receives a conditional receipt. If the applicant dies the following day, which of the following is TRUE? A. The beneficiary will receive the full death benefit if it is determined that the applicant qualified for the policy. B. The premium would be returned to the insured's estate because the policy was not issued. C. The death claim will be rejected. D. The application will be voided.

A. The beneficiary will receive the full death benefit if it is determined that the applicant qualified for the policy. - The conditional receipt provides that when the applicant pays the initial premium, coverage is effective on the condition that the applicant proves to be insurable either on the date the application was signed or the date of the medical examination, if one is required.

Which of the following is the best reason to purchase life insurance rather than annuities? A. To liquidate a sum of money over a period of years B. To create regular income payments C. To liquidate a sum of money over a lifetime D. To create an estate

D. To create an estate - With insurance, the death benefit creates an immediate estate should the insured die.

Which of the following statements concerning buy-sell agreements is true? A. Buy-sell agreements pay in the event of a medical emergency. B. Buy-sell agreements are normally funded with a life insurance policy. C. Premiums paid are deductible as a business expense. D. Benefits received are considered income taxable.

B. Buy-sell agreements are normally funded with a life insurance policy. - A buy-sell agreement is simply a contract that establishes what will be done with a business in the event that an owner dies. Buy-sell agreements are normally funded with a life insurance policy.

In the Executive Bonus plan, who is the owner of the policy, and who pays the premium? A. Company is the owner, but the executive pays the premium. B. Board of directors is the owner, and the board of directors pays the premium. C. Company is the owner, and the company pays the premium. D. Executive is the owner, and the executive pays the premium.

D. Executive is the owner, and the executive pays the premium. - Executive buys the policy and pays the premium, and the employer reimburses the executive for cost (or pays a bonus in the amount of the premium). Since the executive is receiving compensation, the amount paid by the employer would be considered taxable income.

Which of the following is NOT a type of information that needs to be gathered in order to determine the value of someone's life when using the needs approach? A. Expenses B. Estimated longevity C. Outstanding debt D. Mortgages

B. Estimated longevity - There are four main types of information that an insurer needs to obtain in order to determine the value of someone's life: debt status, income, mortgage, and expenses. Longevity is not a factor in the personal financial planning process.

A key person insurance policy can pay for which of the following? A. Hospital bills of the key employee B. Costs of training a replacement C. Loss of personal income D. Workers compensation

B. Costs of training a replacement - A key person insurance policy will pay for costs of running the business and replacing the employee.

The Federal Fair Credit Reporting Act A. Regulates telemarketing. B. Prevents money laundering. C. Regulates consumer reports. D. Protects customer privacy.

C. Regulates consumer reports. - The Federal Fair Credit Reporting Act regulates consumer reports, also known as consumer investigative reports, or credit reports.

The mode of premium payment A. Is the method used to compute the cash surrender value of the policy. B. Does not affect the amount of premium paid. C. Is defined as the frequency and the amount of the premium payment. D. Is the factor that determines the amount of dividends in a policy.

C. Is defined as the frequency and the amount of the premium payment. - The mode refers to the frequency the policyowner pays the premium: monthly, quarterly, semiannually, or annually. The amount of premium will change accordingly.

If a policy includes a free-look period of at least 10 days, the Buyer's Guide may be delivered to the applicant A. Upon issuance of the policy. B. Within 30 days after the first premium payment was collected. C. Prior to filling out an application for insurance. D. With the policy.

D. With the policy. - If a life insurance policy contains a free-look period of at least 10 days, the buyer's guide can be delivered with the policy. If it doesn't, the buyer's guide must be delivered prior to accepting the initial premium.

In the underwriting process, it was determined that the applicant for life insurance is in poor health and has some dangerous habits. Which of the following is true concerning the policy premium? A. It will likely be higher because the applicant is a substandard risk. B. It will likely be the average premium issued to standard risks. C. The applicant's habits and health do not affect the premiums. D. It will likely be lower because the applicant is a preferred risk.

A. It will likely be higher because the applicant is a substandard risk. - Applicants are considered substandard risks because of physical condition, personal or family history of disease, occupation, or dangerous habits. Substandard risks are usually issued a higher premium than standard risks.

Which of the following is NOT true regarding the needs approach method of determining the value of an individual's life? A. Need is predicted using the number of years until the insured's retirement. B. Coverage is based on the predicted needs of that family. C. The death of an insured must be premature. D. It must be assumed that the death of the insured will occur immediately.

A. Need is predicted using the number of years until the insured's retirement. - In the needs approach method, need is determined by the predicted needs of the family after the premature death of the insured, which must be assumed will happen immediately. The policy allows for benefits to be collected upon the insured's death.

All of the following are true of key person insurance EXCEPT A. The plan is funded by permanent insurance only. B. There is no limitation on the number of key employee plans in force at any one time. C. The employer is the owner, payor and beneficiary of the policy. D. The key employee is the insured.

A. The plan is funded by permanent insurance only. - Key Person coverage may be funded by any type of life insurance.

What is the purpose of a disclosure statement in life insurance policies? A. To explain features and benefits of a proposed policy to the consumer B. To obtain important underwriting information from the applicant C. To help consumers compare policy prices D. To protect agents and insurers against lawsuits

A. To explain features and benefits of a proposed policy to the consumer - Disclosure statements will help the applicants to make more informed and educated decisions about their choice of insurance.

Which of the following will be included in a policy summary? A. Copies of illustrations and application B. Comparisons with similar policies C. Primary and secondary beneficiary designations D. Premium amounts and surrender values

D. Premium amounts and surrender values - A policy summary must be delivered along with the policy and will provide the producer's name and address, the insurance company's home office address, the generic name of the policy issued, and premium, cash value, surrender value and death benefit figures for specific policy years.

A life insurance policy can be delivered by all of the following means, EXCEPT A. First class mail with a delivery receipt. B. Personal delivery by a trained employee of the insurer, with a delivery receipt. C. Certified mail. D. Priority mail.

D. Priority mail. - Acceptable methods of delivery include Registered or Certified Mail, Personal Delivery with a signed, written delivery receipt, 1st Class Mail with a signed written Delivery Receipt, or any reasonable means determined by the Commissioner. Priority mail does not establish an exact date of delivery or to whom it was delivered, and personally delivering the policy needs to be done by a properly licensed representative who can answer questions.

Which of the following types of risk will result in the highest premium? A. Substandard risk B. Standard risk C. Preferred risk D. All risks pay equal premiums

A. Substandard risk - The "substandard" rating indicates that an individual represents an under-average insurance risk because of physical condition, personal or family history of disease, occupation, habits or hobbies. This rating incurs the highest premium if policy is issued.

When an insured receives a written binder, A. The insured's coverage will be effective immediately. B. The insured will be locked into a contract for at least 2 years. C. The insured will be guaranteed premium rates for a specific amount of time. D. The insured will not have to submit an application to the insurer.

A. The insured's coverage will be effective immediately. - Written binders are rarely used in insurance. When agents give written binders to insureds, coverage is effective immediately.

All of the following statements concerning the use of life insurance as an Executive Bonus are correct EXCEPT A. The policy is owned by the company. B. Any type of insurance policy may be used. C. The employer pays a bonus to a selected employee to fund the policy. D. It is considered a nonqualified employee benefit.

A. The policy is owned by the company. - The policy is owned by the employee.

Which of the following methods of calculating the amount of life insurance needed takes into account the insured's wages, years until retirement, and inflation? A. Blackout approach B. Lump-sum approach C. Human life value approach D. Needs approach

C. Human life value approach -Human life value approach is determined by the loss of income that would result with the death of the insured, after making adjustments for expenses, inflation, etc.

Upon policy delivery, the producer may be required to obtain any of the following EXCEPT A. Payment of premium. B. Delivery receipt. C. Signed waiver of premium. D. Statement of good health.

C. Signed waiver of premium. - The policy does not go into effect until the premium has been collected. If the premium was not collected at the time of the application, the producer may also be required to get a Statement of Good Health from the applicant at the time of policy delivery. Waiver of premium is a rider that can be added to a life insurance policy, and not something to be obtained from the applicant.

Which of the following would NOT fall into the category of costs associated with death? A. Final medical expenses of the insured B. Day to day expenses of maintaining the family C. The expense of a vacation for surviving family members D. Funeral expenses

C. The expense of a vacation for surviving family members - These costs would take into account the final medical expenses of the insured, funeral expenses, and day to day expenses of maintaining the family including rent or mortgage payments, car payments, utilities, groceries, etc.

All of the following are personal uses of life insurance EXCEPT A. Buy-sell agreement. B. Survivor protection. C. Estate creation. D. Cash accumulation.

A. Buy-sell agreement. - Personal uses of life insurance include survivor protection, estate creation and conservation, cash accumulation, and liquidity. A buy-sell agreement is for business uses of life insurance.

If an insurance company wishes to order a consumer report on an applicant to assist in the underwriting process, and if a notice of insurance information practices has been provided, the report may contain all of the following information EXCEPT the applicant's A. Prior insurance. B. Ancestry. C. Credit history. D. Habits.

B. Ancestry. - The Fair Credit Reporting Act regulates what information may be collected and how the information may be used. Consumer Reports include written and/or oral information regarding a consumer's credit, character, reputation, and habits collected by a reporting agency from employment records, credit reports, and other public sources. Ancestry is not a relevant factor assessed in these reports.

An applicant who receives a preferred risk classification qualifies for A. Lower premiums than a person who receives a standard risk. B. Dividends payable for lack of claims. C. Higher premiums than a person who receives a sub-standard risk. D. Higher premiums than a person who receives a standard risk.

A. Lower premiums than a person who receives a standard risk. - The preferred risk category is reserved for those persons with a superior physical condition, lifestyle, and habits.

The full premium was submitted with the application for life insurance, and the policy was issued two weeks later as requested. When does the policy coverage become effective? A. As of the application date B. As of the policy delivery date C. As of the first of the month after the policy issue D. As of the policy issue date

If the full premium was submitted with the application and the policy was issued as requested, the policy coverage effective date would generally coincide with the date of application. - If the full premium was submitted with the application and the policy was issued as requested, the policy coverage effective date would generally coincide with the date of application.

Which of the following best describes a non-medical application? A. A screening application that is issued before the medical application, assessing demographic and lifestyle factors. B. An application that does not ask for a person's medical history or require a medical exam C. The medical portion of an application that asks for medical information but does not require a medical exam D. An application for a policy that only covers emergency care, not standard treatment for pre-existing or minor conditions.

C. The medical portion of an application that asks for medical information but does not require a medical exam - A non-medical application does not require the prospective insured to receive a medical exam. Instead, he/she must complete a health questionnaire and sign a statement affirming that the information is true.

The term "illustration" in a life insurance policy refers to A. A depiction of policy benefits and guarantees. B. Pictures accompanying a policy. C. Charts and graphs. D. A presentation of nonguaranteed elements of a policy.

D. A presentation of nonguaranteed elements of a policy. - The term "illustration" means a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years.

What is the term used when a person sells his assets as a way to gain money? A. Liquidation B. Buy-Sell C. Commerce D. Transfer

A. Liquidation - Liquidation is the process of selling one's assets in order to accumulate money. Keeping assets is called retention.

Which of the following must be disclosed in all advertisements and policies of term life insurance for individuals 55 years of age or older? A. Life insurance surrender cost index B. MIB report C. Life insurance policy illustrations D. Insurance monetary value index

D. Insurance monetary value index - When a term life insurance monetary value index is adopted by the Commissioner, it must be disclosed in all advertisements and policies of term life insurance for individuals age 55 and older.

What is the purpose of the buyer's guide? A. To allow the consumer to compare the costs of different policies B. To provide the name and address of the agent/producer issuing the policy C. To list all policy riders D. To provide information about the issued policy

A. To allow the consumer to compare the costs of different policies - The buyer's guide provides generic information about life insurance policies and allows the consumer to compare the costs of different policies. The policy summary provides specific information about the issued policy, as well as the insurer's information.

Attempting to determine how much insurance an individual would require based upon their financial objectives is known as A. Viatical approach. B. Needs approach. C. Human life value approach. D. Estate planning.

B. Needs approach. - Needs method determines how much benefit would be necessary to replace the loss income and increased expense should the insured die prematurely.

In regards to life insurance contracts, the temporary term is A. An initial policy put in effect until a permanent policy can be put into effect. B. The period of time during which a binding receipt covers a policyholder. C. The policy issued by a producer with a temporary license. D. The short-term benefits policy.

B. The period of time during which a binding receipt covers a policyholder. - During the temporary term period, an insurance company is liable for the maximum amount guaranteed under the binding receipt or temporary insurance agreement.

Which of the following is the basic source of information used by the company in the risk selection process? A. Warranty B. Consumer report C. Application D. Agent's report

C. Application - The application is the basic source of information an insurer uses in the risk selection process.

When Y applied for insurance and paid the initial premium on August 14, he was issued a conditional receipt. During the underwriting process, the insurance company found no reason to reject the risk or classify it other than as standard. Y was killed in an automobile accident on August 22, before the policy was issued. In this case, the insurance company will A. Negotiate a reduced settlement with the beneficiary due to the unusual circumstances involved. B. Return the premium to Y's estate, since it has no obligation to pay the death claim. C. Keep the premium and reject the risk on the basis that the applicant died before the policy could be issued. D. Issue the policy anyway and pay the face value to the beneficiary.

D. Issue the policy anyway and pay the face value to the beneficiary. - The conditional receipt says that coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last, as long as the applicant is found to be insurable as a standard risk, and policy is issued exactly as applied for.

Which of the following would be least likely to be considered a legitimate need that would be paid by insurance proceeds? A. Travel expenses for family to come to the funeral B. Debt cancellation C. Day care D. Vacation travel expenses

D. Vacation travel expenses - There are many legitimate need-based expenses that can be paid by life insurance proceeds, from groceries to retirement income. Vacation travel expenses are most likely to be considered a luxury and not a need.

When the partners of a business develop an arrangement whereby should one of them die or become permanently disabled, the other partners would purchase the interest of the deceased or disabled partner at a predetermined price, this is called a/an A. Business continuation plan. B. Key person plan. C. Business overhead expense plan. D. Executive bonus plan.

A. Business continuation plan. - A business continuation plan is an agreement between business owners whereby they agree, should one of them die or become disabled, the surviving owners will purchase the interest of the deceased or disabled owner at a predetermined price. Such a plan is usually funded by each owner purchasing insurance on each of the other owners.

Which is the appropriate action by the insurer if a prospective insured submitted an incomplete application? A. Fill in the blanks to the best of the insurer's knowledge B. Return the application to the applicant for completion C. Issue a policy anyway since the application has been submitted D. Ask the producer who solicited the policy to complete and resign the application

B. Return the application to the applicant for completion - Any unanswered questions need to be answered before the policy is issued. If the insurer receives incomplete applications, they need to be returned to the applicants for completion.

An investor buys a life policy on an elderly person in order to sell it for a life settlement. This is an example of A. A prearranged funeral plan. B. A viatical settlement. C. Third-party ownership. D. A STOLI policy.

D. A STOLI policy. - Stranger-originated life insurance (STOLI) policies are usually purchased by people who have no relationship with the insured with the intention of selling them for life settlements.

Who is the owner and who is the beneficiary on a Key Person Life Insurance policy? A. The employer is the owner and the key employee is the beneficiary. B. The key employee is the owner and beneficiary. C. The key employee is the owner and the employer is the beneficiary. D. The employer is the owner and beneficiary.

D. The employer is the owner and beneficiary. - With the key-person coverage, the business (the employer) is the applicant, owner, premium payer, and beneficiary.

If an insurer issued a policy based on the application that had unanswered questions, which of the following will be TRUE? A. The insurer may deny coverage later, because of the information missing on the application. B. The policy will be interpreted as if the insurer waived its right to have an answer on the application. C. The policy will be interpreted as if the insured did not have an answer to the question. D. The policy will be void.

B. The policy will be interpreted as if the insurer waived its right to have an answer on the application. - Any unanswered questions need to be answered before the policy is issued. If a policy is issued with questions left unanswered, the contract will be interpreted as if the insurer waived its right to have an answer for the question, and will not be able to deny coverage later because of unanswered questions.