Unit 3 - Basics of Life Insurance
A deferred compensation plan is
A NONQUALIFIED PLAN FUNDED BY THE EMPLOYER Deferred compensation plans are agreements between employers and employees. Funds are set aside by an employer for when an employee retires. If the plan is funded with life insurance, the company is the owner, premium payor, and beneficiary fo the plan and the employee is the insured. These types of plans are non qualified because they do not meet participation, nondiscrimination, and other requirements of qualified plans.
Which of the following would be a source of instant liquidity upon the death of an estate owner?
A LIFE INSURANCE POLICY ON THE ESTAT OWNER'S LIFE, PAYABLE TO THE ESTATE The term instant liquidity refers to property that is readily convertible into cash without loss or cash itself. In this example, the only asset that would provide instant liquidity would be the life insurance policy.
Which of the following would be a source of instant liquidity upon the death of an estate owner?
A LIFE INSURANCE POLICY ON THE ESTATE OWNER'S LIFE, PAYABLE TO THE ESTATE The term 'instant liquidity' refers to property that is readily convertible into cash without loss or cash itself. In this example, the only asset that would provide instant liquidity would b the life insurance policy.
Another name for an entity plan is
A STOCK REDEMPTION PLAN Entity plans are a type fo buy-sell agreement. When a business is a corporation, entity plans are also called stock redemption plans because the corporation is actually redeeming the deceased owner's stock.
Which of the following statements about executive bonus plans is NOT correct?
AT THE EMPLOYEE'S DEATH, THE COMPANY RECEIVES THE DEATH PROCEEDS FREE OF TAX An executive bonus plan is a non qualified plan in which life insurance is purchased by an employer as an alternative to paying a cash bonus. The employee owns the policy and names the beneficiary, so the employer retains no policy rights. At the employee's death, the beneficiary receives the death proceeds free fo tax. The premiums paid by the employer as a bonus are deductible by the employer, and the amount of the premiums paid for the employee is reportable as income.
Which of the following terms refers to the period following the death of a breadwinner during which the children are living at home?
DEPENDENCY PERIOD The dependency period is the period following the death of a breadwinner during which the children are living at home. The need for family income is greatest while the children are growing up.
When using the needs approach to determine the amount of life insurance required, all of the following are income needs EXCEPT
EMERGENCY FUND NEEDS The needs approach is broken down into cash needs and income needs. The income need is broken down into three time periods: dependency, preretirement, and retirement periods. An emergency fund is a cash need rather than an income need.
All of the following factors are usually considered cash needs when determining the life insurance needs of a family EXCEPT
FUNDS TO SUPPORT SPOUSAL RETIREMENT The family cash needs are the amount of cash required at death to pay for a deceased breadwinner's last illness and funeral costs, outstanding debts and taxes, children's education costs, and n emergency fund. Spousal retirement is a family income need.
Which of the following statements pertaining to sole proprietor buy-sell plans is CORRECT?
LIFE INSURANCE IS AN IDEAL MEDIUM FOR FUNDING A BUY-SELL AGREEMENT BEAUSE, FOR A REASONABLE PREMIUM, IT MAKES MONEY AVAILABLE WHEN NEEDED TO ACTIVATE THE SALE OF THE BUSINESS When a sole proprietor dies, the business can come to a sudden halt unless some arrangement has been made beforehand to continue the business. A buy-sell agreement funded by a life insurance policy purchased by an employee (or other party) on the life of the proprietor will transfer the business from the owner to the other party at an agreed-upon price. The agreement must be drafted by an attorney.
In the life insurance business, a word that is synonymous with expenses is
LOADING Each premium an insurer charges must carry its small proportion of normal operating expenses. The expense factor is computed and included in the premium rates for life insurance. The expense factor is also called the loading charge.
The net premium is defined as
MORTALITY MINUS INTEREST Mortality minus interest equals the net premium.
The annual gross premium of a life insurance policy is defined as
NET PREMIUM PLUS EXPENSE Gross premium equals net single premium plus expense (the insurer's expense of doing business). The gross premium is what the policyowners are required to pay.
A life insurance gross premium is
NET SINGLE PREMIUM PLUS EXPENSE A life insurance gross premium is the amount a policyowner is expected to pay. It comprises the mortality charge less interest (net single premium) plus normal operating costs associated with providing coverage (expense charge)
The needs approach can be used to determine all of the following EXCEPT
THE AMOUNT NEEDED TO REPLACE THE BREADWINNER'S PROJECTED INCREASING ANNUAL SALARY The needs approach to determine how much life insurance is needed is not limited to fulfilling objectives in the event of death only, such as final expenses and immediate debts that need to be paid. It also considers a family's (or business's) living needs, such as maintenance income for the family, providing for a child's education, and planning for the surviving spouse's retirement income. Replacement of the breadwinner's projected increasing annual salary is a factor that is taken into account when using the human life value approach to determine how much life insurance is needed.
Which of the following statements regarding nonqualified deferred compensation plans is NOT correct?
UNDER A NONQUALIFIED DEFERRED COMPENSATION PLAN, AN EMPLOYEE CAN RELY ON GUARANTEED FUTURE BENEFITS Because most nonqualified deferred compensation plans are unfunded, an employee cannot rely on guaranteed future benefits. Typically, the employer finances its obligations on a pay-as-you-go basis.
Another name fo ran entity plan is
A STOCK REDEMPTION PLAN Entity plans are a type of buy-sell agreement. When a business is a corporation, entity plans are also called stock redemption plans because the corporation is actually redeeming the deceased owner's stock.
The loaded premium is
THE GROSS PREMIUM The term loaded premium refers to the gross premium, which is calculated by adding the net premium and expense loading.
Which of the following is NOT taken into account when using the needs approach to determine the proper amount of insurance protection?
THE PROJECTED FUTURE EARNINGS OF THE BREADWINNER AND THE NUMBER OF YEARS SHE EXPECTS TO WORK The needs approach for determining how much insurance protection is needed requires an analysis of the family's financial needs including dependency, preretirement, and retirement periods, if the breadwinner dies. Future earnings are part of a human life value approach, but not the needs approach.
Which of the following statements pertaining to sole proprietor buy-sell plans is CORRECT?
LIFE INSURANCE IS AN IDEAL MEDIUM FOR FUNDING A BUY-SELL AGREEMENT BECAUSE, FOR A REASONABLE PREMIUM, IT MAKES MONEY AVAILABLE WHEN NEEDED TO ACTIVATE THE SALE OF THE BUSINESS When a sole proprietor dies, the business can come to a sudden halt unless some arrangement has been made beforehand to continue the business. A buy-sell agreement funded by a life insurance policy purchased by an employee (or other party) on the life of the proprietor will transfer the business from the owner to the other party at an agreed-upon price. The agreement must be drafted by an attorney.
Which of the following statements regarding deferred compensation plans is NOT correct?
THE EMPLOYEE MAY CONVERT THE FUNDS TO ANOTHER PLAN IF HE LEAVES THE COMPANY The benefits from a deferred compensation plan are forfeited if the employee leaves the company before retirement. Otherwise, the benefits received at retirement, and if the plan has been funded with life insurance, the beneficiary designated by the employee will receive the deferred compensation plan death benefit proceeds.
Which of the following statements regarding executive bonus plans is NOT correct?
THE EMPLOYER BECOMES THE POLICYOWNER OF THE INSURANCE POLICY An executive bonus plan, or Section 162 bonus plan, is a non qualified employee benefit arrangement in which an employer pays a bonus to a particular employee. The bonus is tax deductible to the employer. The employee in turn uses the bonus to pay the premiums on a life insurance policy covering her life. The employee is the owner of the policy, and the bonus is included in the employee's gross income. When the employee dies, the beneficiary named in the policy receives the death proceeds free of tax.
Which of the following is NOT taken into account when using the needs approach to determine the proper amount of insurance protection?
THE PROJECTED FUTURE EARNINGS OF THE BREADWINNER AND THE NUMBER OF YEARS SHE EXPECTS TO WORK The needs approach for determining how much insurance protection is needed requires an analysis of the family's financial needs, including the dependency, preretirement, and retirement periods, if the breadwinner dies. Future earnings are part of a human life value approach, but not the needs approach.
The phrase "the applicant for insurance has more to gain if the insured continues to live than if the insured dies" is the rule defining
INSURABLE INTEREST A person acquiring a life insurance contract must be subject to loss upon the death of the individual to be insured. This is know as insurable interest, and it is required before a life insurance policy will be issued.
The phrase "the applicant for insurance has more to gain if the insured continues to live than if the insured dies" is the rule defining
INSURABLE INTEREST A person acquiring a life insurance contract must be subject to loss upon the death of the individual to be insured. This is known as insurable interest, and it is required before a life insurance policy will be issued.
Which of the following statements regarding the mortality rate is NOT correct?
IT IS USED IN THE DETERMINATION OF HEATLH INSURANCE RATES The mortality rate is defined as the number of deaths per 1,000 people. It is 1 of the 3 factors used in determining life insurance rates, and it is taken from the mortality table and then converted into a dollar-and-cents rate. Morbidity is used in determining health insurance rates.
The needs approach can be used to determine all of the following EXCEPT
THE AMOUNT NEEDED TO REPLACE THE BREADWINNER'S PROJECTED INCREASING ANNUAL SALARY The needs approach to determine how much life insurance is needed is not limited to fulfilling objectives in the event fo death only, such as final expenses and immediate debts that need to be paid. It also considers a family's (or business's) living needs, such as maintenance income for the family, providing for a child's education, and planning for the surviving spouse's retirement income. Replacement of the breadwinner's projected increasing annual salary is a factor that is taken into account when using the human life value approach to determine how much life insurance is needed.
Regular notices sent to policy owners for payment of their life insurance policy premiums reflect
THE GROSS PREMIUM The gross premium is determined by adding the net single premium to the expense factor. Policyowners pay the gross premium on life insurance policies. the gross premium is determined by adding the net single premium and interest amount together. ht net single premium is defined as the single amount needed immediately to fund future benefits. When the net premium is combined with interest, that amount will be sufficient to pay a future death benefit. Policy premiums are generally paid over a number of years, rather than with a single payment. The net single premium is converted into annual level premiums, adjusted for the smaller amount of interest the premiums will earn.
With regard to a breadwinner's death, the blackout period generally can be defined as
THE PERIOD THAT BEGINS WHEN THE YOUNGEST CHILD IS 16 AND ENDS WHEN THE SURVIVING PARENT TURNS 60 The blackout period is the period during which no Social Security benefits are payable to a surviving spouse. This period begins when the youngest child reaches age 16 and continues until the surviving parent reaches the earliest retirement age at 60.
Which of the following situations constitutes an insurable interest?
THE POLICYOWNER MSUT EXPECT TO SUFFER A LOSS WHEN THE INSURED DIES OR BECOMES DISABLED Insurable interest requires that the policy owner be expected to benefit from the insured's continuing to live or enjoying good health or to suffer a loss when the insured dies or is disabled. An insurable interest must exist between the applicant and the insured. It does not need to exist between the applicant and the beneficiary. For life and health insurance policies, an insurable interest must exist at the inception of the policy, but it does not need to be maintained for the term of the policy.
According to the principle of human life value, the purpose of life insurance is
TO REPLACE AN INDIVIDUAL'S ECONOMIC VALUE The purpose of life insurance is to replace an individual's economic value, according to the principle of human life value. It is calculated by multiplying the individual's annual income by the number of years until retirement. The answer is the amount of money that will be earned by retirement.
