2.4 - Life Insurance Policy Options and Riders

Which statement about life policy riders that cover additional insureds is NOT correct? Policy riders can provide needed coverage on more than one insured at a lower premium. Each additional insured is issued his or her own separate policy. These riders cover someone other than the base policy insured. These riders typically take the form of term insurance.

Each additional insured is issued his or her own separate policy. Explanation: Policy riders can provide needed coverage on more than one insured at a lower premium. The policyowner buys an additional insured or other insured rider, which is added to the base policy.

Margaret has a life insurance policy with a face value of $100,000. She took a $25,000 loan against the policy and died a week later after spending $10,000 and without making any payments toward the loan. How will the policy's death benefit be affected? The death benefit will be $100,000. The death benefit will be $90,000. The death benefit will be $85,000. The death benefit will be 75,000.

The death benefit will be 75,000. Explanation: The death benefit is reduced on a dollar-for-dollar basis for the unpaid loan at the insured's death.

Benefits paid through a life insurance policy's accelerated benefits rider: must be used for medical expenses directly related to the reason for the insured's terminal illness or disabling injury can be used for any purpose as long as the expense is medical-related must be used for long-term care expenses can be used for any purpose

can be used for any purpose Explanation: Though intended to help cover living and medical care expenses, accelerated benefits funds can be used for any purpose.

What type of life insurance policy distributes its surplus after the company accounts for liabilities, reserves, capital, and expenses? participating policy non-participating policy industrial insurance policy commercial insurance

participating policy Explanation: A participating policy is a life insurance policy that participates in the divisible surplus of the insurer. The divisible surplus is the part of an insurance company's earnings available for distribution to policyowners.

What is the maximum amount of time most states allow insurers to delay paying cash surrender values when a life insurance policy is canceled? one month six months nine months one year

six months Explanation: Most states allow insurers to delay paying the cash surrender value for up to six months, though few companies wait this long.

Natasha is insured under a $500,000 universal life insurance policy. Her son, Todd, is the beneficiary. On October 1, Natasha took a $15,000 loan from the policy and died six months later without paying it back. What amount will Todd receive? $0 $15,000 less any interest owed on the loan $485,000 less any interest owed on the loan $500,000 less any interest owed on the loan

$485,000 less any interest owed on the loan Explanation: The policy's death benefit is reduced on a dollar-for-dollar basis for the amount of the full, unpaid loan at Natasha's death. The insurer will also deduct any unpaid interest from the proceeds. Todd would, therefore, receive $485,000 less any interest owed on the loan.

Under which of the following settlement options are the insurer's responsibilities under the contract fulfilled upon the death of the insured? lump-sum cash payment interest only fixed amount fixed period

lump-sum cash payment Explanation: Under the lump-sum cash payment option, the insurer distributes proceeds at once upon the death of the insured or surrender of the policy and has fulfilled its responsibilities.

What type of life insurance company is owned by the policyowners? universal insurance company mutual company privately-traded company stock company

mutual company Explanation: Mutual companies are owned by the policyowners.

Which of the following are the two most basic categories of life insurance settlement options? those that base payments on one life and those that base them on two lives those that pay benefits for a fixed period and those that pay a fixed amount those with a life contingency and those without a life contingency those that guarantee a minimum benefit payment period and those that do not guarantee a minimum payment period.

those with a life contingency and those without a life contingency Explanation: Settlement options fall into two categories: those without a life contingency, and those with a life contingency.

Under a disability waiver of premium rider, an insured most commonly must be totally disabled for how long before the waiver begins? 6 weeks 10 months 6 months 12 weeks

6 months Explanation: Most waiver of premium riders require that the insured be totally disabled for six months before the waiver begins.

Which provision protects against the unintentional lapse of a life insurance policy? policy surrender provision automatic premium loan provision return of premium provision guaranteed insurability provision

Explanation: An automatic premium loan provision prevents a policy from lapsing if the policyowner fails to pay the premium. It directs the insurer to deduct any unpaid premium from the cash value of the policy as a loan. automatic premium loan provision

Polly bought a long-term care rider. She becomes eligible for its benefit if she is diagnosed as chronically ill and the diagnosis is the result of which of the following? non-terminal cancer only either a medical or cognitive (mental health) reason any medical problem any accidental, non-fatal injury

Explanation: This benefit is not available to insureds with any medical problem. either a medical or cognitive (mental health) reason

To qualify for the accelerated benefit rider, an insured must prove he or she either has had a permanently disabling injury or a terminal illness that can be expected to result in death within: 90 days 5 months 12 months 24 months

Explanation: To be classified as terminally ill, the person must be certified by a doctor as having a condition that can be expected to result in death within 24 months. 24 months

Which statement about spouse/other insured term riders on a life insurance policy is NOT correct? A person can buy a term life insurance rider to cover the life of a spouse (or other adult). Usually the coverage ends sometime before the other insured's age 100. The intent of this coverage is temporary. A policyowner often buys a term life insurance rider on a spouse to provide additional coverage once the children have grown and moved out on their own.

A policyowner often buys a term life insurance rider on a spouse to provide additional coverage once the children have grown and moved out on their own. Explanation: A policyowner often buys a term life insurance rider on a spouse to provide additional coverage while children are young and to ensure needed funds in case the other covered spouse dies.

Which of the following statements regarding life insurance accelerated benefits is correct? The insured can use these funds only for medical care. An accelerated benefit is only available as a rider. An accelerated benefit is only available as a provision of the policy itself, not as a rider. An accelerated benefit rider pays out part or all of the policy's face value while the insured is still living.

An accelerated benefit rider pays out part or all of the policy's face value while the insured is still living. Explanation: An accelerated benefits rider pays out part or all of the policy's face value while the insured is still living. Some portion of the death benefit payment is accelerated and paid while the insured is still alive.

All the following statements regarding a life insurance policy's cost-of-living (COL) rider are correct EXCEPT: The policy's death benefit amount can increase without requiring the insured to prove insurability. COL riders are best suited for universal life insurance policies. COL riders are commonly tied to the consumer price index (CPI). The maximum death benefit increase is usually limited to about 5 percent annually.

COL riders are best suited for universal life insurance policies. Explanation: With their highly flexible face amount and premium terms, universal life policies are not good candidates for the addition of a COL rider.

With respect to the interest-only life insurance settlement option, what happens to the death benefit proceeds that the insurer was holding upon request by the beneficiary? The insurer pays the proceeds in a lump sum. The insurer pays the proceeds, either in a lump sum or under one of the other settlement options. The insurer pays the proceeds to the beneficiary. The insurer keeps the interest, thus increasing the death benefit amount.

Explanation: The insurer pays the proceeds to the insured. If the person is alive, or the beneficiary, if not. The insurer pays the proceeds, either in a lump sum or under one of the other settlement options.

If a life insurance policyowner cancels his policy and instructs the company to send the cash value to him as a check, which of the following nonforfeiture options is he using? cash surrender option extended term option reduced paid-up insurance option policy loan and withdrawal provision

cash surrender option Explanation: Under the cash surrender option, the owner surrenders the policy and the insurer pays the cash value to the policyowner in a lump sum.

The death benefit amount under a children's term rider may be limited to a specified amount and/or: the face amount of the base policy a small percentage of the base policy's face amount up to five times the base policy's face amount any amount selected by the base policy's owner

Explanation: Death benefit amounts are usually modest, reflecting the rider's intent'provide the funds needed to cover funeral costs if a child's dies. Riders may be limited to a specified amount (e.g., $5,000 or $10,000) and/or a small percentage of the base policy's face amount (e.g., 10 percent). a small percentage of the base policy's face amount

Under the other insured term rider, a person can buy a term life insurance rider to cover the life of a spouse (or other adult). This coverage usually ends sometime before the primary insured reaches which of the following ages? 21 50 70 120

Explanation: The other insured term rider can be used to insure any adult with whom the policyowner has an insurable interest, with spouses and partners most commonly covered. Coverage usually ends when the policyowner (who is usually the policy's insured) reaches age 65 or 70. 70

Which of the following riders waives the cost of insurance from being deducted from a universal life insurance policy's cash value in the event the insured becomes disabled? traditional life insurance waiver of cost of insurance rider disability rider waiver of monthly deductions rider waiver of payor rider

Explanation: The traditional waiver of premium rider works only when the policy premium is a fixed amount payable on a scheduled basis (as with term life and whole life). The equivalent rider most commonly used with universal life (UL) and variable universal life (VUL) is the waiver of monthly deductions rider. waiver of monthly deductions rider

Under which of the following settlement options does the insurer distribute all the proceeds upon the death of the insured or surrender of the policy, with none held by the insurer? lump-sum cash payment interest only fixed period fixed amount

Explanation: A cash payment of policy proceeds is often called a lump-sum cash payment. Under this payment method, the person receives the death benefit proceeds or the cash value surrender amount in the form of a single payment. lump-sum cash payment

Which of the following statements regarding life insurance policy dividends is correct? Dividends are guaranteed in the policy. Policy dividends are income taxable. Policy dividends are paid only by stock insurance companies. Policy dividends can be paid to policyowners under a variety of different options.

Explanation: Mutual insurance companies, not stock companies, distribute their divisible surplus to their policyowners in the form of policy dividends. Policy dividends can be paid to policyowners under a variety of different options.

Len decides to surrender his policy for its cash value. All the following statements concerning his decision are correct EXCEPT: The insurer may decide to pay the cash value either in a lump sum or monthly installments. The policy is canceled and the insurer's responsibility under the terms of the contract ends. The policy cannot be reinstated. The insurer will send Len a check for the policy's cash surrender value.

The insurer may decide to pay the cash value either in a lump sum or monthly installments. Explanation: Under the cash surrender option, the policyowner surrenders the policy and the insurer pays the cash value to the policyowner in a lump sum.

Your client has a $200,000 term life insurance policy with a return of premium rider. If the insured dies within the term life coverage period after having paid $15,000 in premiums, how much will the beneficiary receive? $0 $185,000, less premiums that would have been paid up to age 65 $200,000 $215,000

Explanation: The beneficiary under a life insurance policy with return of premium rider would be entitled to the death benefit if the insured died within the stated period in the rider, but not to the premiums paid. The premiums would be returned if the insured were still alive at the end of the stated period. $200,000

Which of the following statements regarding the extended term nonforfeiture option is correct? An extended term option allows the policyowner to continue insurance coverage for some period with a reduced premium. Policies issued under the extended term insurance are eligible to receive policy dividends if the surrendered policy had received them. The extended term option is not available if the original policy was issued on a substandard (rated) basis. If the owner of a lapsed policy does not choose a nonforfeiture option, the insurer is prohibited from automatically applying the extended term insurance option.

Explanation: No nonforfeiture option requires the continued payment of premiums. The extended term option is not available if the original policy was issued on a substandard (rated) basis.

When Ralph is injured in an accident at home, he asks that the disability waiver of premium rider go into effect. How will the policy's premiums be handled during the waiting period? The premiums are paid under an automatic policy loan provision. Ralph may suspend premium payments but will be expected to catch up at the end of the waiting period if the disability waiver is not activated. Ralph must pay the premiums, and they will not be repaid if the disability waiver is not activated. Ralph must pay the premiums, which the disability waiver will repay if Ralph is still disabled at the end of the policy's waiting period.

Explanation: Ralph must pay the premiums. They will not be suspended, but they will be returned to him if the rider is activated at the end of the policy's waiting period. Ralph must pay the premiums, which the disability waiver will repay if Ralph is still disabled at the end of the policy's waiting period.

Which of the following statements most correctly explains the nature of a life insurance policy loan? A policy loan draws money directly out of the cash value. A policy loan uses the cash value as collateral, and the cash value stops accruing interest while the loan remains unpaid. A policy loan uses the cash value as collateral, and the cash value continues earning interest only if the loan is being repaid on schedule A policy loan uses the cash value as collateral, and the cash value continues earning interest whether the loan is repaid or not.

Explanation: Life insurance policy loans use the cash value as collateral, and the cash value continues earning interest. Policy loans do not have a repayment schedule. A policy loan uses the cash value as collateral, and the cash value continues earning interest whether the loan is repaid or not.

All the following are standard life insurance policy dividend options EXCEPT: receiving dividends in cash leaving dividends with the insurer to accumulate at interest using dividends to buy additional paid-up life insurance using dividends to buy a new permanent life insurance policy without evidence of insurability

Explanation: The most common dividend options include receiving the dividends in cash. using dividends to buy a new permanent life insurance policy without evidence of insurability

Your client has a universal life policy for which the target premium is $300 per month. He wants to be assured that if he becomes totally disabled the full $300 premium will be waived. What type of rider would accomplish this? waiver of premium rider waiver of stipulated premium rider waiver of cost of insurance rider disability income rider

waiver of stipulated premium rider Explanation: Waiver of premium riders are not available with universal life insurance. The waiver of stipulated premium provides that a preset premium payment amount is waived if the insured becomes disabled for at least six months.