Life insurance Test questions

Which of the following best describes gross annual premium?

Net premium plus expenses Explanation : Gross annual premium is net premium plus expenses (loading).

If a policy includes a free-look period of at least 10 days, the Buyer's Guide must be delivered to the applicant

With the policy. Explanation : 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.

Contracts that are prepared by one party and submitted to the other party on a take-it-or-leave-it basis are classified as

Contracts of adhesion. Explanation : Insurance policies are written by the insurer and submitted to the insured on a take- it-or-leave-it basis. The insured does not have any input into the contract, but simply adheres to the contract.

Which of the following must an agent receive in order to sell variable life insurance policies?

FINRA registration Explanation : Agents selling variable life products must be registered with FINRA, and must be licensed within the state to sell life insurance. SEC registration is for securities, not agents.

What is the advantage of having a qualified annuity?

Favorable tax treatment Explanation :Those annuities meeting the IRS guidelines receive favorable tax treatment for funding qualified retirement plans.

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 STOLI policy. Explanation : 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.

Your client owns a Market Value Adjusted Annuity. In order to pay for a series of large, unexpected medical bills, he decides to surrender his policy prematurely. Which of the following will determine the penalty that the annuity owner will have to pay?

Current interest rate at the time of surrender Explanation : If a Market Value Adjusted Annuity owner surrenders his/her policy prematurely, a penalty is imposed, the amount of which depends directly upon the current interest rates at the time of surrender. The market value adjustment is calculated as a percentage of the difference between the contracted rate of interest in the annuity and the current interest rate at the time of the annuity's surrender.

In group life policies, individual certificates are given to

Each insured person. Explanation : In group life policies, individual certificates are given to the policyholder to give to each insured person.

Which of the following is true regarding the spendthrift clause in life insurance policies?

It can protect the policy proceeds from creditors of the beneficiary. Explanation : The spendthrift clause in a life insurance policy prevents the beneficiary's reckless spending of benefits, and protects the policy proceeds from creditors of the beneficiary or policy owner.

Which of the following is true about the premium on the children's rider in a life insurance policy?

It remains the same no matter how many children are added to the policy. Explanation : The premium does not change on the inclusion of additional children; it is based on an average number of children.

Which of the following is NOT true regarding the accumulation period of an annuity?

It would not occur in a deferred annuity. Explanation : The "accumulation period" is the period of time over which the annuitant makes payments (premiums) into an annuity. This is the period of time during which the payments earn interest and grow tax deferred (which would be the case in a deferred annuity).

Which statement is NOT true regarding a Straight Life policy?

Its premium steadily decreases over time, in response to its growing cash value. Explanation : Straight Life policies charge a level annual premium throughout the insured's lifetime and provide a level, guaranteed death benefit.

Which of the following is an example of a limited-pay life policy?

Life Paid-up at Age 65 Explanation : Limited Pay Whole Life premiums are all paid by the time the insured reaches age 65. The policy endows when the insured turns 100. It is the premium paying period that is limited, not the maturity.

An insured committed suicide one year after his life insurance policy was issued. The insurer will

Refund the premiums paid. Explanation : If the insured commits suicide within 2 years following the policy effective date, the insurer's liability is limited to a refund of premium.

A policyowner who is also the insured wants to name her husband as the beneficiary of her life policy. She also wishes to retain all of the rights of ownership. The policyowner should have her husband named as the

Revocable beneficiary. Explanation : The policyowner may change a revocable designation at any time and without the consent of the beneficiary. Irrevocable beneficiaries, on the other hand, have a vested interest in the policy, so the policyowner may not be able to exercise certain rights without their consent.

Which of the following statements concerning a Simplified Employee Pension plan (SEP) is INCORRECT?

SEPs are suitable for large companies. Explanation : An SEP is a benefit plan that is designed to be provided by a small employer for the benefit of the employees.

Who is the owner and who is the beneficiary on a Key Person Life Insurance Policy?

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

The paid-up addition option uses the dividend

To purchase a smaller amount of the same type of insurance as the original policy. Explanation : The dividends are used to purchase a single premium policy in addition to the face amount of the permanent policy.

Which of the following Life Insurance policies would be considered interest sensitive?

Universal life Explanation : As well as being a flexible premium policy, universal life is also an interest-sensitive policy. The insurer credits the cash value in the policy with a current (nonguaranteed) interest rate and backs the cash value with a contract (lower guaranteed) rate of interest.

An insured under a life insurance policy has been diagnosed with a terminal illness and has 6 months to live. The insured knows that his financial state will worsen even more with the upcoming medical expenses. What option could the insured utilize?

Viatical settlement Explanation : A viatical statement allows an insured with a life-threatening condition to sell the existing policy in order to receive benefits when they are most needed. Viators typically receive a percentage of the policy's face value from the person who purchases the policy.

If an annuity contract has defaulted due to nonpayment of premiums, when can it be reinstated?

Within 1 year Explanation : If an annuity defaults due to nonpayment of premium, it can be reinstated within 1 year from the date it defaulted.

An agent accepts the premium payment 35 days after it is due, telling the insured that there will not be a problem keeping the policy in force. This is an example of what type of agent authority?

Apparent Explanation : An agent who accepts a premium after the end of the grace period appears to the client to have the authority to prevent the policy from lapsing. In fact, the agent has no such power.

An insurance producer who by contract is bound to write insurance for only one company or group of companies is classified as a/an

Captive agent. Explanation : A captive/exclusive agent has agreed, by contract, to produce insurance business only for the insurer they are contracted with.

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)

Executive bonus. Explanation : 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.

When an employee terminates coverage under a group insurance policy, coverage continues in force

For 31 days. Explanation : An employee has 31 days under the conversion privilege to convert to an individual policy.

Insurance institutions and producers must provide notice of their information gathering practices to applicants and policyholders no later than

The time the policy is delivered. Explanation : Insurance institutions and producers must provide notice of their information practices to applicants and policyholders, no later than the time the policy is delivered. A notice is not required in the case of policy renewal if information is gathered only from the policyholder or public records, or if a notice has been provided within the prior 12 months.

In Arizona, the grace period on a group life insurance policy applies to every premium payment EXCEPT

The first. Explanation : The grace period for group life insurance policies in Arizona is 31 days for every payment except the first.

Your client's employer does not offer a company-wide annuity contract. What type of annuity contract could your client obtain?

Individual Explanation : There are two main types of annuities arrangements: group and individual. Group contracts can be obtained through an employer. If that option is not available, individuals could obtain an individual annuity, which, as the name implies, is available for purchase and ownership solely by individuals.

All of the following are true regarding a decreasing term policy EXCEPT

The payable premium amount steadily declines throughout the duration of the contract. Explanation : Premiums remain level with a decreasing term policy; only the face amount decreases.

Which of the following provisions in annuity contracts allow the owner to surrender the annuity if interest rates drop to a specified level?

Bail-out Explanation : Some annuity contracts contain a bail-out provision. This provision allows the owner to surrender the annuity without charge if interest rates drop a specified amount within a certain timeframe.

When an applicant purchased a life insurance policy, the agent dated the application 4 months prior. When asked by the applicant, the agent said he was allowed to backdate policies up to 6 months if it would

Lower the insured's premium. Explanation: An agent may backdate an application for up to 6 months to accomplish a lower premium rate for the insured.

Based on Human Life Value Approach, which of the following is NOT used to calculate an individual's life value?

Predicted needs of the family after the insured's death. Explanation :The Human Life Value Approach to determining the value of an individual's life requires the calculation of probable future earnings of the insured, which involves wages, expenses, inflation, amount of time until retirement, and the time value of money. Predicted needs of the family after the insured's death are used in the needs approach.

A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as

Survivor protection Explanation : Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. This is known as survivor protection.

During the accumulation period in a non-qualified annuity, what are the tax consequences of a withdrawal?

Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 ½. Explanation : When money is withdrawn from the annuity during the accumulation phase, the amounts are taxed on a last in first out basis (LIFO). Therefore, all withdrawals will be taxable until the owner's cost basis is reached.

The president of a company is starting an annuity and decides that his corporation will be the annuitant. Which of the following statements is true?

The annuitant must be a natural person. Explanation: Owners of annuities can be individuals or entities like corporations and trusts, but the annuitant must be a natural person, whose life expectancy is taken into consideration for the annuity.

All of the following could own group life insurance EXCEPT

A group needing low-cost life insurance. Explanation : A group needing low-cost life insurance.

If a change needs to be made to the application for insurance, the agent may do all of the following EXCEPT

Erase the incorrect answer and record the correct answer. Explanation: 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.