Units 11-13

Annuities may be purchased with all of the following EXCEPT: A) a schedule of fixed payments. B) a schedule of flexible payments. C) a single payment that may be deferred for 5 years. D) a single lump-sum payment.

C) a single payment that may be deferred for 5 years. Annuities may be purchased with a single lump-sum, a scheduled payment, or a flexible payment.

Which annuity settlement arrangement guarantees to pay at least a minimum amount equal to the original investment? A) Period certain annuity. B) Installment refund annuity. C) Joint and full survivor annuity. D) Pure life annuity.

B) Installment refund annuity.

Doris and Arnold receive $450 per month under a joint and one-half survivor life insurance option. What happens if Arnold should die first after payments are started? A) Monthly payments of $225 would be made to Doris as long as she lived. B) Doris would receive $450 per month as long as she lived. C) The remaining proceeds would be paid to Doris in a lump sum. D) Doris would have to select another settlement option.

A) Monthly payments of $225 would be made to Doris as long as she lived. (Survivor gets half the amount)

What type of annuity payment option provides a guaranteed income to the annuitant for life and, if the annuitant dies before the annuity is depleted, a lump-sum cash payment to the annuitant's beneficiary? A) Period certain option. B) Installment refund option. C) Cash refund option. D) Straight life option.

B) Installment refund option. An installment refund option pays out what is left to the beneficiary in the form of continued annuity payments.

All of the following statements regarding annuities are correct EXCEPT: A) an annuity contract provides for the purchase of income. B) an annuity is based on mortality assumptions and the law of large numbers. C) like life insurance, an annuity is used primarily to provide income at death. D) annuity payments are guaranteed.

C) like life insurance, an annuity is used primarily to provide income at death. Unlike life insurance, an annuity is used primarily to provide income during life; consequently, annuity payments are guaranteed to be paid as long as the annuitant lives.

Which of the following statements regarding annuities is NOT correct? A) An annuity can be classified as immediate or deferred, depending on when benefit payments begin. B) Pure life annuities provide income as long as the annuitant lives; benefits terminate at death. C) Annuities that pay benefits in specified dollar amounts are fixed annuities; annuities that pay benefits in relation to units are variable annuities. D) An installment refund annuity guarantees a specific amount of benefits, payable to the annuitant only; if death occurs before total payout, a portion of the premium is refunded to the annuitant's estate or beneficiary.

D) An installment refund annuity guarantees a specific amount of benefits, payable to the annuitant only; if death occurs before total payout, a portion of the premium is refunded to the annuitant's estate or beneficiary. ***A refund annuity will be paid whether or not the annuitant is alive to receive them.

John, age 52, has a straight whole life policy and decides to stop paying premiums and take a paid-up policy for a reduced amount. His paid-up policy will be: A) term insurance. B) an annuity. C) any type of policy he selects. D) whole life.

D) whole life. When a policyowner decides to stop paying premiums and take a paid-up policy for a reduced amount, the paid-up policy will be the same kind as the original policy.

If a plan is contributory, employee participation in the plan cannot be mandatory. However, at least 75% of the eligible employees must elect to participate. Noncontributory plans must cover 100% of the eligible employees.

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If the person insured under the group life insurance policy dies while eligible for conversion but before the individual policy becomes effective, the amount of life insurance that she would have been entitled to have issued under the individual policy is payable as a claim under the group policy, whether or not the individual application or payment of the first premium has been made.

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Individuals often purchase annuities to provide retirement income while businesses may use them to provide a guaranteed income at retirement for employees without having to administer a formal retirement plan. To ensure that annuities are used for retirement purposes, a 10% penalty tax is imposed on distributions from a deferred annuity to a person who has not yet reached age 59½. This penalty is imposed on the interest earned and withdrawn, not on the principal. However, the penalty tax does not apply to distributions made to an annuity owner who separates from service from an employer and has reached age 55.

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Tony, age 65 and in excellent health, wants to buy an annuity with $100,000 he recently gained on the sale of his home. He wants to select an income option that will provide him the highest monthly income possible. Which annuity income option best meets Tony's objective? A) A straight life annuity income option. B) An installment refund annuity income option. C) It is not possible to answer this question with the limited information provided. D) A 10-year period certain and life annuity income option.

A) A straight life annuity income option. Regardless of the annuitant's age, health, or marital status, a straight life annuity income option will provide more monthly income than any life annuity income option that includes a guarantee feature.

Larry owns a deferred annuity for which his wife Karen is the designated annuitant and his son Chris is the designated beneficiary. If Larry were to die before the contract is annuitized, to whom would the contract's death benefit be payable? A) Chris. B) No one; there is no death benefit under these circumstances. C) Karen. D) Larry's estate.

A) Chris. A deferred annuity's death benefit (which is equal to the contract's accumulated value) is payable to the contract's beneficiary, not the annuitant.

Horace wants his $85,000 life insurance policy arranged to pay his wife a monthly income if he dies first, but most or all of the proceeds to go to their two children after her death. Which of the following settlement options could Horace select to provide income for his wife and conserve the proceeds for the children? A) Interest-only option. B) Fixed-amount option. C) Fixed-period option. D) Life income option.

A) Interest-only option.

For which of the following situations would a life income settlement using the joint-and-survivor option be suitable? A) The insured wants to use the proceeds to provide his son and daughter-in-law with income that will last as long as either is alive. B) The insured wants to make sure his wife receives income for life, but if she predeceases him, he wants his daughter to receive the money according to the settlement option she chooses. C) The insured wants to use the proceeds to fund a trust to provide financial protection for his children. D) The insured wants to split the proceeds equally between his son and daughter and wants to use the money to provide each with income for life.

A) The insured wants to use the proceeds to provide his son and daughter-in-law with income that will last as long as either is alive. The joint-and-survivor option makes the most sense when the goal is to provide a couple with income for as long as either is alive.

When a policyowner surrenders a life insurance policy, the insurance company may withhold payment of the policy's cash values for up to: A) 2 years. B) 6 months. C) 1 year. D) 9 months.

B) 6 months. While in most instances the insurer will send the cash value much sooner, the insurer has up to six months to pay the cash surrender value to the policyowner.

What settlement option is designed to pay out a specified amount of income at regular intervals, over an unspecified period of time? A) Fixed period option. B) Fixed amount option. C) Life income option. D) Interest-only option.

B) Fixed amount option.

What are the 3 main types of Social Security benefits? A) Life insurance, disability, and retirement B) Retirement, survivors, disability C) Death benefits, Medicaid, retirement D) Retirement, disability, Medicaid

B) Retirement, survivors, disability

Which of the following statements about annuities is NOT correct? A) The 10% penalty tax on early distributions does not apply to distributions made to the annuity owner after separating from service from the employer after the owner reaches age 55. B) The 10% penalty tax on early distributions does not apply to distributions made to pay for higher education. C) Annuities may be appropriate investments for both individuals and corporations. D) The 10% penalty tax is imposed on the interest earned and withdrawn, not on the principal.

B) The 10% penalty tax on early distributions does not apply to distributions made to pay for higher education.

Which of the following statements is CORRECT with regard to policy dividends? A) They are issued on nonparticipating policies. B) They are a result of favorable operating or investment income. C) Though they may vary from year to year, they are guaranteed to be paid each year. D) They are not available to insureds after a specified age, such as 60.

B) They are a result of favorable operating or investment income. Policy dividends, issued on participating policies (policies in which the insureds may participate in the operating and investment results of the insurer), are a reflection of favorable operations, investment or mortality results.

As primary beneficiary under a cash refund option in a life insurance policy, Jeffrey received $355 per month for five years before suffering a fatal heart attack. The policy's original proceeds amounted to $50,000. Jeffrey's daughter, the secondary beneficiary, will now receive: A) nothing. B) a lump-sum payment of $28,700. C) $355 per month, as payments continue in her name. D) a lump-sum payment of $50,000.

B) a lump-sum payment of $28,700. Under the cash refund option, the company will pay the difference between the original proceeds ($50,000) and the total payments made to the primary beneficiary ($21,300). That amount is paid to the secondary beneficiary in a lump sum.

Under a fixed-period life insurance settlement option, excess interest will: A) lengthen the payment period. B) increase the size of the payments. C) have no effect on payments. D) shorten the payment period.

B) increase the size of the payments.

Hector's wife was the primary beneficiary of his $250,000 life insurance policy. She received payments of approximately $700 a month as long as she lived and, at her death, their two children received lump-sum payments of $125,000 each. What settlement option was in effect on Hector's policy? A) Installment refund option. B) Period certain option. C) Interest-only option. D) Life income option.

C) Interest-only option. The fact that the policy's proceeds of $250,000 were available for distribution upon the wife's death indicates that they had been preserved while she received interest payments.

Which of the following dividend options produces a result similar to taking dividends in cash and depositing them in a bank savings account? A) Taking dividends in cash. B) Using dividends to buy 1-year term insurance. C) Leaving dividends to accumulate at interest. D) Applying dividends against premium payments.

C) Leaving dividends to accumulate at interest.

Basil has a combination policy consisting of $25,000 whole life and a $20,000 term rider. He stops paying premiums and elects to take a paid-up policy, which will be a reduced amount of insurance based on an original face amount of: A) $20,000.00 B) $35,000.00 C) $45,000.00 D) $25,000.00

D) $25,000.00. A reduced paid-up policy is based on the original whole life policy amount; the term rider amount is not considered.

If a group life insurance plan is contributory, what percentage of eligible employees must participate in it? A) 95%. B) 90%. C) 50%. D) 75%.

D) 75%.

A variable annuity is based on which of the following? A) The Dow Jones Industrial Average. B) The bond market. C) Nonlevel premiums. D) Equity investments.

D) Equity investments.

Susan, while in the process of converting her group life insurance to an individual policy, dies. What happens to the claim her beneficiary submits? A) It is paid under the new individual policy. B) It is not paid by either policy. C) It is paid pro rata by both plans. D) It is paid under the old group plan.

D) It is paid under the old group plan.

Which of the following statements pertaining to tax-sheltered annuities (TSAs) is CORRECT? A) TSAs are available to any worker not covered by an employer-sponsored retirement plan. B) Fred, a schoolteacher participating in a tax-deferred annuity, will receive his benefits tax-free. C) Alice, a vice-president of a computer software company, can invest in a tax-sheltered annuity. D) TSAs are available to employees of certain nonprofit organizations.

D) TSAs are available to employees of certain nonprofit organizations. Tax-sheltered annuities are available to employees of certain nonprofit organizations, such as schools. Participants do not pay current taxes on their contributions, but will be taxed on benefits when they are received.

Tammy owns a participating whole life insurance policy for which she has elected the paid-up additions option. If the insurer declares a dividend of $500 in the current year, how will this amount be used with this dividend option? A) The insurer adds $500 to the face amount of Tammy's base policy. B) The insurer adds a paid-up unit of whole life insurance with a cash value that is equal to $500. C) The insurer adds a paid-up unit of whole life insurance with a $500 face amount to Tammy's base policy. D) The insured uses the $500 as if it were a single premium to purchase a unit of paid-up whole life insurance based on Tammy's attained age.

D) The insured uses the $500 as if it were a single premium to purchase a unit of paid-up whole life insurance based on Tammy's attained age.

Paul, age 62, is applying for a universal life insurance policy and wants to arrange the beneficiary designation in such a way as to use the proceeds to provide lifetime income to his wife, Marsha. Which of the following settlement options is best suited for this purpose? A) Leave the proceeds with the insurance company to accumulate interest, and distribute the interest to Marsha. B) Distribute the proceeds in a lump-sum payment, deposit the money in a bank account, and then set up a periodic distribution plan for Marsha. C) Select the fixed-period option and base the distribution period on Marsha's life expectancy at the time of Paul's death. D) Use the proceeds to purchase an immediate annuity with Marsha as the annuitant.

D) Use the proceeds to purchase an immediate annuity with Marsha as the annuitant. Only an annuity can provide income that is guaranteed to continue for the life of the annuitant. The life income settlement option purchases an immediate annuity with the policy proceeds.

Which of the following statements regarding the paid-up additions life insurance policy dividend option is NOT correct? A) The paid-up additions dividend option is only available to insureds that remain insurable. B) Paid-up additions consist of permanent life insurance of the same type as the base policy. C) The amount of paid-up coverage acquired is based on the insured's attained age at the time the dividend is declared. D) A paid-up addition increases the policy's total cash value as well as its death benefit.

A) The paid-up additions dividend option is only available to insureds that remain insurable.

All of the following statements regarding variable annuities are correct EXCEPT: A) the payments to the annuitants are variable. B) if the net contribution to a variable annuity account is $350 and the cost of one accumulation unit is $87.50, 3 units would be assigned to that account. C) the rate of growth is variable. D) during the accumulation period, the number of accumulation units in the account will continue to grow.

B) if the net contribution to a variable annuity account is $350 and the cost of one accumulation unit is $87.50, 3 units would be assigned to that account.

All of the following are annuity premium factors EXCEPT: A) sex. B) medical history. C) age. D) assumed interest rate.

B) medical history. Age, sex, and assumed interest rate are annuity premium factors. Annuities do not require any medical underwriting for issuance.

All of the following are true about the group conversion option EXCEPT A) Group life policies must include a conversion privilege B) the option guarantees the member that coverage will continue for 60 days. C) If the member dies during the conversion period, the insurer will pay the death benefit in full. D) The member can convert to any type of insurance except term insurance.

B) the option guarantees the member that coverage will continue for 60 days. **Only guaranteed for 31 days.

Individual certificates issued to all individuals insured under an insurance policy must include the following information EXCEPT: A) a statement of the insurance protection provided. B) the premium amount. C) a conversion provision. D) a statement as to whom benefits are payable.

B) the premium amount.

Bill owns a nonqualified deferred annuity that has a current value of $50,000. He has 2 children, ages 11 and 17. If he decides to devote this annuity solely to help pay for their college education, which of the following is the best option if the goal is to maximize the annuity income payments? A) Convert to an immediate annuity with an installment refund annuity income option. B) Convert to an immediate annuity using a 10-year period certain and life annuity income option. C) Convert to an immediate annuity using a 10-year period certain annuity option. D) Convert to an immediate annuity using straight life annuity income option.

C) Convert to an immediate annuity using a 10-year period certain annuity option. Distributing a lump sum of money over a specified period of time with a period-certain-only annuity will generate a higher annuity payment amount than any option that includes a life contingency.

A policyowner stops paying premiums on a whole life policy with an accidental death benefit and exchanges the policy for extended term insurance. All of the following statements pertaining to this situation are correct EXCEPT: A) the term policy has no cash value. B) there will be no accidental death benefit with the new policy. C) the policyowner will have continued protection for a limited period of time. D) the term policy will have a reduced face value.

D) the term policy will have a reduced face value. A policy's cash surrender value is used to purchase an amount of term insurance equal to the original policy's face amount. Riders are not included.

What type of annuity payment option provides a guaranteed income to the annuitant for life and, if the annuitant dies before the annuity is depleted, a lump-sum cash payment to the annuitant's beneficiary? A) Straight life option. B) Period certain option. C) Installment refund option. D) Cash refund option.

D) Cash refund option.

Lynn elects to surrender her whole life policy for a reduced paid-up policy. The cash value of her new policy will: A) reduce immediately to $0. B) continue to increase. C) decrease gradually. D) remain the same as in the old policy.

B) continue to increase. Once Lynn surrendered her whole life policy for a reduced paid-up policy, the face value is reduced but cash values continue to increase.