Life Insurance Exam 2
Which of the following could never be treated as a modified endowment contract?
A single-premium policy that was entered into on June 1, 1988. A single premium policy entered into after July 1, 1988. A single-premium policy that was entered into on June 1, 1988 that is exchanged for another policy in 1997. A policy that initially passes the seven-pay test.
Which of the following is true regarding the interest credited to universal life policies?
A. "Portfolio" rates are generally more responsive to changing market interest rates than "New Money" rates. B. The rate used is based on the return on investments selected by the policyholder and held in a segregated asset account. C. Insurance companies are no longer allowed complete freedom in interest crediting due to some companies abusing such discretion in the past. D. The rate used may be linked to a well-known index of yields if it exceeds a minimum rate guaranteed in the policy.
A policy that originally is not a modified endowment contract will be subject to re-testing if there is a "material change" in the contract. Which of the following would likely be a material change?
A. A cost-of-living increase in the death benefit based on the consumer price index. B. Increases in death benefits because of premiums paid for the policy to support the first seven contract years of benefits. C. An exchange of one policy for another policy in a 1035 exchange. D. A death benefit increase inherent in the policy design due to crediting of interest or other earnings.
Which of the following statements regarding universal life insurance is true?
A. Because they are not reported separately, elements of the policy such as interest credits, mortality charges, and death benefits are difficult to track. B. Universal life allows policyowners to participate in favorable investment, mortality and expense experience of the company. insurance policies. C. Annual increases in cash value are taxable due to the unique nature of the universal life contract. D. Because universal life is a current-assumption policy universal life is a security and a prospectus must be provided before each sale.
Which of the following statements is true regarding current-assumption whole life insurance?
A. Current-assumption whole life will not necessarily lapse if a premium payment is missed. B. In the early years of the policy, the amount of protection per premium spent is higher than with term insurance. C. Cash values are subject to market risk, much like other long-term fixed income investments. D. Policyowners bear more risk of adverse trends in mortality or expenses than if they own traditional whole life policies.
Advantages of single premium life include all of the following except
A. Entire premium goes into cash value B. Cash value interest or earnings accumulate tax-free or tax-deferred C. The amount of protection is low relative to the premium paid D. Policy cash values can be borrowed at low or zero net interest.
Advantages of ordinary level-premium whole life include all of the following except
A. Fixed and known annual premium B. Interest on policy loans is generally non deductible C. Tax-free, or tax-deferred, accumulation of cash values D. Policy cash values can be borrowed at low net cost
Which of the following problems could be caused by the flexibility offered by a universal life insurance policy?
A. Increases in the death benefit within in the first five policy years can cause the death benefit to become taxable income to the beneficiary. B. Skipping even one premium payment will cause the policy to lapse. C. A death benefit reduction may cause the policy to be classified as a modified endowment contract. D. The coverage of a key employee's life by a corporation will cause a transfer for value problem.
Which of the following is a disadvantage of a current assumption whole-life policy?
A. Most current assumption whole life policies charge back-end surrender charges should the policy lapse or be surrendered. B. Premium are level and fixed between redetermination periods. C. CAWL policies guarantee maximum mortality and expense rates D. Policy cash values can be borrowed at a low net cost.
Level-premium whole life insurance policies allow policyowners to borrow amounts under the policy. Typical loan provisions include which of the following requirements?
A. Policy loans must be approved by the insurer's loan committee. B. If the policy is terminated the cash surrender value is reduced by any outstanding policy loans and unpaid interest. C. On the death of the insured, the death benefit is reduced by any unpaid interest but not by any outstanding policy loan. D. The amount of the loan is limited to the amount of the death benefit.
Which of the following statements is true regarding current-assumption whole life insurance?
A. The amount in the "accumulation account" is based on the performance of investments selected by the policy holder. B. Most current-assumption policies charge relatively high front-end loads, but have no surrender charges. C. The amount of premiums remains fixed for the term of the contract. D. The insurer promises to credit at least a minimum guaranteed rate of interest.
Which of the following statements regarding universal life insurance is not true?
A. The policyowner can easily track the policy's different elements. B. It is generally best suited to long term coverage needs. C. If the policyowner skips a premium payment the policy will not lapse. D. The policy is not susceptible to inadvertently becoming a modified endowment contract.
Which of the following statements about the tax aspects of ownership of variable life insurance is false?
A. Transfers of investment assets from one fund to another are tax-free. B. Gains received are taxable at capital gains rates. C. Investment earnings within the policy are tax deferred. D. Death benefits are usually paid free of federal income tax
For which of the following is use of single premium whole life insurance least appropriate?
A. When maximum tax-deferred cash buildup in conjunction with life insurance is desired. B. When the objective is to prefund a specified minimum death benefit for a specific purpose. C. As a vehicle for gifts. D.As a good short-term tax-deferred investment.
A single premium life insurance policy issued before June 21, 1988 is "grandfathered," that is not subject to the MEC (Modified Endowment Contract) tax rules. However, it can lose this tax status if there is:
A. a death benefit increase inherent in the policy design due to crediting of interest or other earnings B. a death benefit increase needed to keep the relationship between the death benefit and cash values required to satisfy the tax code definition of life insurance C. a cost-of-living increase based on a broad based index such as the Consumer Price Index D. an exchange of the policy for another policy
If a limited-pay whole life insurance policy is determined to be a "MEC" (Modified Endowment Contract):
A. cash value increases cease immediately B. distributions, including policy loans, will likely be includable in income C. death benefits are paid only if cancer is the cause of death D. the policy will be administered by the state insurance commissioner
Group life insurance is a welfare benefit plan. As a result:
A. coverage may not exceed $50,000 per employee an equal amount of coverage must be provided to B. all employees C. it is subject to securities regulations D. it is subject to ERISA
Which of the following items are NOT treated as income-first when distributed from a modified endowment contract?
A. dividends retained by the insurer to premiums or other consideration for the contract B. cash dividends C. policy loans to pay premiums and for all other purposes D. withdrawals
If a term policy is convertible it means the policy:
A. gives the policyholder a contractual right to change the term policy for some other type of life insurance policy without evidence of insurability B. offers a flexible feature that allows the policyholder to set up a customized pattern of premiums and face amounts even after issue, within limits C. offers renewal premiums based on rates comparable to premiums for newly issued policies provided that the insured continues to show evidence of insurability at periodic intervals D. provides for automatic cost-of-living increases in the death benefit
Advantages of term life insurance include all of the following, except:
A. it allows a person to acquire the greatest death benefit for the lowest premium when the policy is first issued B. death proceeds are generally exempt from income tax C. it is the most cost effective when the duration of the needed protection is over 15 years D. a high degree of flexibility can be made available by combining term insurance riders with permanent insurance
Which of the following accurately describes a disadvantage of survivorship life insurance?
A. it provides no benefits at the first death, unless a special rider is added B. it cannot be used to fund charitable bequests C. the premiums are higher than for equivalent coverage in two separate policies D. medical underwriting standards are stricter than in the case of two separate policies
An increasing premium, level death benefit term policy to age 65 is:
A. mortgage insurance B. usually offered as a rider to another basic policy, and is commonly called a "return-of-premium" benefit C. a one-year term policy, renewable to age 65 D. a term policy offered during open enrollment periods, which offers to repay premiums if the insured dies within the first few years but pays no death benefit until the insured has survived the first few years of the policy
A single premium current-assumption life policy generally guarantees all of the following, except:
A. no further premiums will be required to keep the coverage in force B. the face value of the policy will never decline C. a fixed level of dividends will be paid throughout the term of the policy D. the cash values will never fall below a fixed schedule of minimum values.
Which item is not a key factor to be weighed in choosing the best variable life or variable universal life policy?
A. policy loadings and expenses B. the amount of the cash value guarantees C. suitability and variety of investment options D. relative performance of the insurance company's alternative investment account
Insurers offer options that can make joint life particularly attractive. Which of the following options is not offered?
A. rider that permits substitution of insureds with evidence of insurability. B. A provision for the exchange, under Section 1035, of the joint life policy for a long-term care insurance policy. C. A provision that if both insureds die in a common disaster, the insurer will pay the face amount on each death. D. A guaranteed purchase rider that permits surviving insureds to purchase insurance on themselves or other surviving insureds without evidence of insurability.
All of the following items should be considered in relation to a joint life insurance policy except
A. substitute-insured options B. purchase riders C. an "own occupation" definition of disability D. joint premium waiver
A survivorship life plan that involves a greater proportion of term insurance than permanent insurance:
A. tends to be the most expensive B. is based on unrealistic mortality assumptions c. is sensitive to changes in yields, or interest rates D. does not guarantee bonus credits or terminal dividends
Current-assumption whole life insurance is generally a hybrid of:
A. term and traditional cash-value life insurance B. traditional whole life and universal life insurance C. universal life insurance and a variable annuity D. traditional whole life insurance and an indexed annuity
Which of the following types of life insurance allows the greatest amount of death benefit to be purchased for a set amount of premium?
A. term insurance B. level-premium whole life insurance C. limited-pay whole life insurance D. single premium whole life insurance
A key feature of variable life insurance is
A. the dividends are guaranteed B. there is no guaranteed minimum cash value C. death benefit claims are always paid in shares of company stock rather than in cash D. it can be sold only by registered traders on the New York exchange
A limited-pay whole life insurance policy with a short premium paying period (e.g., 10 years) runs the risk of becoming a "MEC" (Modified Endowment Contract) if:
A. the insured pays the full annual premium and dividends are applied as additional premiums B. the policy passes the seven-pay test C. the policy passes the incidental benefit test D. Table 38 rates, rather than PS 58 rates, are used to measure the employee's economic benefit
A survivorship rider permits
A. the purchase of increased coverage on the insured if the life designated in the rider dies before the insured B. an increased benefit from a qualified pension plan C. the purchase of shares of stock from the deceased's estate D. the substitution of insureds, with evidence of insurability
A modified endowment contract is a life insurance policy that has failed
A. the test for life insurance B. the seven-pay test C. the transfer for value rule D. the rule against perpetuities
A significant advantage of a split dollar plan using survivorship life instead of a single-life policy is that
A. very low Table 38 rates are used to measure the pure insurance cost of survivorship life while both insureds are alive, instead of the higher P.S. 58 rates B. a survivorship life policy offers a split option that permits policy ownership to be split more easily between the business and the employee C. recent tax regulations provide several safe harbor methods for determining mortality charges on split dollar policies the Internal Rate of Return is higher for a D. survivorship life policy than for a single-life policy
A policy that automatically increases the death benefit without evidence of insurability will typically violate the MEC rules.
True False
A term life insurance policy makes no promise to pay anything if the insured lives beyond the specified term.
True False
All universal life policies have a guaranteed minimum interest rate, generally ranging from four to six percent.
True False
An insurance contract entered into before 1988 can never be considered a modified endowment contract?
True False
Because of the way that it is taxed, a modified endowment contract is not considered a life insurance policy for tax purposes.
True False
Group life provides an after-tax benefit for employees and a deduction for employers.
True False
Most group insurance is issued as yearly renewable term insurance.
True False
Most insurance companies do not offer renewable term policies to new applicants after a certain age, which is usually between 60 and 70.
True False
Most universal life policies are issued with front-end load charges rather than back-end load charges.
True False
Once a policy is classified as a modified endowment contract, with certain corrections, it can be later treated as not a modified endowment contract.
True False
One disadvantage of universal life is that policy owners bear more risk of adverse trends in mortality or expenses than if they owned traditional whole life policies.
True False
One of the advantages of group term insurance is that the premiums remain level on a per-employee basis regardless of the ages of the employees.
True False
Term insurance is always the least expensive form of insurance regardless of the duration of needed coverage.
True False
Variable Life and Variable Universal Life are especially suited for many business insurance situations where flexibility and growth of cash value are attractive features.
True False
Variable life is a whole life policy where the policyowners bear all investment risk.
True False
Variable life or variable universal life insurance is well-suited to individuals desiring a minimum basic level of coverage.
True False