Assignment 9 - Life insurance Policy Provisions Exam

The Spendthrift Clause on a life insurance policy keeps the beneficiary from doing any of the following, EXCEPT: A Commuting the proceeds B Spending the proceeds C Assigning the proceeds D Transferring the proceeds

Text Explanation: B The spend thrift clause prevents the beneficiary from changing the way you specified you want the proceeds to be paid when you die. For example, you specified that the proceeds be paid to your beneficiary over a 20-year period in the event of your death. However, when you die your beneficiary would rather have the cash up front. The spend thrift clause prevents the beneficiary from commuting, assigning or transferring the proceeds to other parties in lieu of a lump sum cash payment. The proceeds must be paid out over the 20-year period as you specified.

All of the following are true regarding accelerated benefits, EXCEPT: A They are treated as a policy loan B They reduce the amount payable to the beneficiary at death of the insured C They are added as a rider to some policies but build into others as a provision D They pay a portion of the death benefit prior to death of the insured

Text Explanation: A Accelerated or living benefits are not treated as a loan and no interest will accrue, although any amounts paid will reduce the amount payable at death.

Which is not a reason to buy life insurance on the life of a child: A To provide the child with benefits in the event that a parent dies B To provide cash value for college C To provide coverage in the event the child dies D To provide for the child's retirement

Text Explanation: A A policy written on a child will pay benefits if the child dies, not the parent. Parents often purchase life insurance on children, which is a form of third party ownership. The parent is the owner, but the child is the insured. The parent has all the rights of ownership, but could 'assign' the policy to the child when they reach the age of majority. Audio Explanation:

Life insurance policy dividends are considered to be: A A sharing of company profits with the stockholders B A return of a premium overcharge C A sharing of company profits with the policyholders D A guaranteed amount paid to reduce the cost of insurance

Text Explanation: B Mutual insurers write 'participating' policies, which means that their policy owners MAY receive dividends, at the discretion of the Board of Directors. If paid, such dividends are not taxable, since the IRS considers them to be a return of a premium overcharge. Remember, premiums are paid with after-tax dollars. Dividends may never be guaranteed. Stock insurers write 'non-participating' policies.

Which Life insurance settlement option takes into account the life span of the beneficiary: A Life income option B Fixed amount option C Fixed period option D Interest option

Text Explanation: A The Life income settlement option is actually an annuity option. Remember, annuity payouts are based upon the expected life span of the annuitant, who in this case would be the beneficiary of the policy. This settlement option will make monthly payments to the annuitant for as long as they live, which could be longer than their expected life span.

Most assignments of life-insurance policies are made in order to protect the: A Insured's insurability B Insured's personal or business credit C Beneficiary from the claims of creditors D Insurance company from fraudulent claims

Text Explanation: B Collateral Assignments, in which the insured pledges his policy to the bank as collateral for a bank loan, are very common. When the loan is paid off, the Collateral Assignment drops off. A Collateral Assignment assures the bank that if the insured dies with the loan outstanding, the bank will be paid.

All of the following are a part of a life insurance policy, EXCEPT the: A Insuring Clause B Conditional Receipt C Copy of the application D Incontestability Clause

Text Explanation: B Under the Entire Contract Provision, a copy of the insured's application for life insurance is attached to the policy. If it weren't, any false answers (misrepresentations) by the insured would not be admissible, since they would not be part of the entire contract. However, the Conditional Receipt is not part of a life insurance policy. It is part of the application and is torn off and given to the applicant when he/she pays the initial premium at the time of application.

The insuring agreement or clause in a Life insurance policy contains all of the following EXCEPT: A The name of the insurer B The name of the insured C The coverages D How to change the beneficiary

Text Explanation: D The right to designate or change a beneficiary is stated in a section of the contract entitled 'owners rights'. The insuring agreement states the names of the parties to the contract, the coverage and the consideration for the contract.

Seth Brown, whose wife is his business partner, buys a life insurance policy on his wife's life. Because of this third-party ownership, the beneficiary should be the: A Policyholder B Policyholder's wife C Policyholder's estate D Policyholder's children

Text Explanation: A This is an example of Key Person insurance. The beneficiary is Mr. Brown, the policyholder. His wife, the key person, is the insured. Mr. Brown apparently feels that if his wife should die, he would need the funds from the policy proceeds to retrain someone capable of assuming her business duties. This type of policy is often written with the business as the beneficiary as well.

Which of the following beneficiary designations on a life insurance policy is "by class": A To both my children, Suzy and Scott equally B To my estate C To all my children D To my family trust

Text Explanation: C If you designate 'all your children' as primary beneficiaries of your life insurance policy, you have made a 'class' designation, rather than an individual designation. In other words, any person who can prove that they are your child would be entitled to an equal share of the proceeds upon your death.

An insurance company has which of the following options when an insured wishes to cash in his policy? A It must pay him within two weeks B It must pay him within 90 days C It may delay payment for one month D It may defer payment for as long as six months

Text Explanation: D In order to discourage a possible "run on the bank," so to speak, life-insurance companies do have six months to defer the granting of a policy loan or a cash surrender. However, most insurance companies will grant a loan or a cash surrender immediately, in the interest of good public relations.

Which settlement option might provide payments that exceed the proceeds of the policy and the interest earned? A Life Annuity B Fixed Period C Fixed Amount D Interest Only

Text Explanation: A There are five settlement options from which a beneficiary may select upon death of the insured. 1) Cash, 2) Fixed Period (proceeds, plus interest, are all paid out over a fixed period of time, say 10 years), 3) Fixed Amount (the beneficiary elects to receive $1,000 per month, plus interest, for as long as the money lasts), 4) Interest (the proceeds are left with the company to accumulate additional interest) and 5) Life Annuity (paid as long as the beneficiary/annuitant lives).

A rider added to a life policy to create coverage for your entire family is the: A Family Income Rider B Family Rider C Family Maintenance Rider D Other Insured Rider

Text Explanation: B A Family Rider allows the breadwinner to add level, convertible term insurance as a rider to his or her whole life policy to cover their spouse and all their children. The term insurance on the spouse is often written for 10, 15 or 20 years. The children's coverage expires when they turn 18. Both the spouse and children can convert to whole life without a physical exam at expiration of their term. This is the cheapest way to provide a lot of coverage for your entire family.

Upon your death, if your beneficiary chooses the interest only settlement option, the: A Proceeds are taxable B Interest is taxable C Principal reverts to the insurer D Both the proceeds and the interest are taxable

Text Explanation: B Although the death benefit would not be taxable to the beneficiary any interest paid to the beneficiary on the death benefit amount would be taxable as ordinary income.

If the insured understated his age and the error is discovered after the insured's death, the insurance company will: A Refuse to pay the death claim B Refund all past premiums paid with any accumulated interest C Pay the face amount of the policy with a deduction for the amount of the underpayment of premium D Pay the amount the premium would have purchased at the correct age

Text Explanation: D Under the Misstatement of Age clause, the insurance company is protected against clients who state they are younger than they really are in order to obtain a lower rate. Although lying about your age will not void the policy, the company will adjust your Death benefit to the amount that the correct premium would have purchased had you told the truth.

All of the following are true about the reinstatement of a lapsed Life insurance policy EXCEPT: A Applicants must apply within a certain period of time B Applicants must pay back premiums C Reinstatement is based upon current age D Applicants must pass a physical exam

Text Explanation: C The right to apply for Reinstatement is a mandatory provision in a Life policy. If the policy lapses, the owner has the right to apply, but reinstatement is subject to underwriting and paying all back premiums due, plus interest. If an insurer approves, the original policy is reinstated, which means that future premiums will be based upon the insured's original age. However, a policy that has been surrendered for cash may not be reinstated.

All are true about life insurance, EXCEPT: A An Automatic Premium Loan rider will keep a Whole Life policy from lapsing B Reinstatement of a lapsed policy is subject to certain conditions C The cash value of a Whole Life policy may be used to supplement retirement D The 1035 Exchange must always be with the same company that issued the first policy

Text Explanation: D IRS rule 1035 allows the same person to defer taxes when switching from one life insurance policy to another as long as all the conditions are met. However, policies do not have to be with the same insurer.

Which of the following statements about Adjustable Whole Life is true: A Adjusting the premium will also adjust the face amount B Reducing the premium will increase the face amount C Increasing the premium will lengthen the premium payment period D In order to increase the face amount of coverage a physical exam is required

Text Explanation: A Adjustable Whole Life is the most flexible type of Whole life insurance. You can adjust the premium, amount of coverage and coverage period. Adjustments made to each feature will affect the other features. If you adjust the premium the coverage amount will change in relation to the change in premium.

A collateral assignment on a Life insurance policy: A Is an absolute change of ownership B Is a partial assignment of some rights to a creditor C Designates an irrevocable beneficiary D Allows early payment of proceeds in the event of a terminal illness

Text Explanation: B The owner of a Life policy may pledge the policy as collateral for a loan from a bank, who would then have a temporary lien against the policy. If the insured dies during the term of the loan, the insurer will pay off the bank. Any remaining proceeds are payable to the designated beneficiary.

In 1990, Mr. Smith bought a Life insurance policy on his 6 year old son, Jimmy, naming himself as beneficiary. Now that Jim is 18 years old, Mr. Smith may transfer all rights of ownership in the policy to him by executing a: A Viatical settlement B Absolute assignment C Acceleration of benefits D Change of beneficiary

Text Explanation: B The owner of a life insurance policy may absolutely assign (transfer) all their rights of ownership to another party by executing (signing) an 'absolute assignment'. The new owner would now have all the rights of ownership, including paying the premium, naming the beneficiary, taking a loan or taking cash surrender.

The provision in a life insurance policy that provides protection against unintentional policy lapse is known as the: A Reduction of Premium Option B Waiver of Premium Benefit C Payor Clause D Automatic Premium Loan Provision

Text Explanation: D Automatic Premium Loan (APL) is a rider that can be added to any life insurance policy that has or will have a cash value. It cannot be added to Term insurance. It is usually free, but the producer or client must check this option on the application. If the policy has a cash value and the insured forgets to pay the premium when due, the policy will not lapse, since it will borrow from itself to pay the overdue premium. Remember: This is a rider, not a non-forfeiture option. However, when the insured dies, all loans are subtracted from policy proceeds, so the beneficiary's pay-out may be reduced.

When an insured sells or assigns their life insurance policy to another party in order to get money to pay for terminal expenses, it is known as a(an): A Absolute Assignment B Collateral assignment C Accelerated benefit D Viatical settlement

Text Explanation: D If you get a terminal illness, you may need money to pay for the cost of care prior to your death. You can sell your policy to an investor at a discount by assigning your rights of ownership to the investor, who now names himself as beneficiary. When you die, they get the policy proceeds, which is more than they paid you. This is known as a viatical settlement. Some insurers now include a provision or rider in their policies called "accelerated" or "living" benefits. This allows an insured to receive funds from their own policy in advance of death and eliminates the need to make a viatical settlement.

Generally, all are true, EXCEPT: A Mutual life insurers cannot guarantee their future dividend scale B Misrepresentation on an application can void coverage, if material C Agents act in a fiduciary capacity when handling premiums D You can project future dividends on a non-participating policy

Text Explanation: D Only "participating" policies issued by mutual insurers might pay dividends to policyholders. Non-participating policies are issued by stock insurers and may pay dividends only to shareholders. In either case, it is illegal to guarantee future dividends.

When a creditor has a temporary interest in a life insurance policy, it is known as a: A Lien B Absolute assignment C Ownership provision D Collateral assignment

Text Explanation: D There are two types of assignments, absolute and collateral. An absolute assignment would occur when you sign over your ownership of a life policy you bought on your child to the child when they attain age 21. You are giving up all rights of ownership irrevocably. A collateral assignment is temporary. For example, you take out a loan from the bank who asks you to provide life insurance to pay off the loan if you should die. Since you already have life insurance, you direct your insurer to pay off the loan out of the proceeds of your life policy. Neither type of assignment is valid unless the insurer is notified in writing.

When the insured lists a group of beneficiaries it is known as a: A Class designation B Individual designation C Minor designation D Trust designation

Text Explanation: A The owner of the policy can designate the beneficiary anyway they choose. The designation described in the question is a class designation such as "all my children".

All of the following are true when a life insurance premium is overdue, EXCEPT: A The policy will lapse at the end of the grace period B Non-forfeiture provisions apply to lapsed whole life policies C A policy may be reinstated if certain conditions are satisfied D A policy will be reinstated without a physical exam if overdue premiums are paid

Text Explanation: D Although the right to apply for reinstatement is a mandatory provision in a life policy, the insurer will usually require that the insured pass a physical exam as well as pay the overdue premiums prior to reinstatement.

If an insured buys the Return of Premium Rider and dies, the policy will pay the beneficiary: A The face amount only B All premiums paid up until the date of death C The cash value plus the face amount D The face amount plus all premiums paid up until the date of death

Text Explanation: D The Return of Premium rider is a type of 'increasing' term insurance. If a person wants their beneficiary to have the face amount of their life insurance plus all the premiums they paid in up to the date of their death, they can add this rider to the policy for an additional premium charge. A similar rider is known as the Return of Cash Value rider, which is also 'increasing' term insurance. If this rider is added, the beneficiary will receive the face amount of the insured's policy plus all of the cash value in the contract.

All are true about the rider called Accidental Death Benefit, EXCEPT: A It has a lower cost per $1,000 than does life insurance B It pays double when the insured dies as a result of sickness C It requires death to occur within a certain period of time D It drops off the policy automatically at a certain age, causing the overall premium to decrease

Text Explanation: B ADB or accidental death benefit rider is a type of health insurance that can be added to a life policy by means of a rider. The rider costs about $1.00 per $1,000 of coverage, but drops off the policy at older ages since the chance of accidental death increases. It does not cover sickness.

A life insurance benefit payable while the insured is still living is: A Double indemnity B Accelerated benefits C Fixed amount settlement option D Accidental death benefit

Text Explanation: B Accelerated benefits may be paid out to an insured while still living. For example, if an insured has a terminal illness he may request that the insurer pay out part of his death benefit early. The insured may use the funds for any purpose, but any amount paid out will reduce the amount paid to his beneficiary upon his eventual death. Accelerated benefits are not considered to be a loan and are not taxable.

The cash value of a life insurance policy may be used for all, EXCEPT: A To supplement retirement B To generate funds that will be available 15 years from now C To serve as collateral for a policy loan D To meet the expenses of college tuition one year after purchase

Text Explanation: D Although single premium whole life policies will develop a cash value immediately, most life insurance policies take three years to develop a cash value, and even then it will be minimal. The cash value generally grows very gradually and it will take a long time before the cash value of a policy exceeds the amount of premiums paid.

A life insurance company may contest a policy during the Contestable period for which of the following reasons? A Nonpayment of premiums B Material misrepresentation C Change of occupation D Misstatement of age

Text Explanation: B The Incontestability clause states that the policy is "contestable" for the first two years for material misrepresentation by the insured on the application for insurance. Life-insurance policies do not have a change-of-occupation clause. The Misstatement of Age clause permits the insurance company to adjust benefits up or down in the event the insured has lied about his age at the time of application.

The owner of a business is insured under a $100,000 Key Employee Life policy that contains a Double Indemnity clause and a Suicide Clause. The business has paid the annual premium of $2,000. Six months after the inception date of the policy, the insured commits suicide. The insurance company will pay the beneficiary: A $200,000 B $100,000 C $2,000 D $0

Text Explanation: C If an insured dies by suicide within the first two years of a new life insurance policy, there is no coverage. However, the insurance company will refund the premium paid to the beneficiary.

Which of the following statements is true about a policy assignment: A It permits the beneficiary to designate the person or persons to receive the benefits B It is valid during the insured's lifetime only because the death benefit is payable to the named beneficiary C It transfers the owner's rights under the policy to the extent expressed in the assignment form D It is the same as a beneficiary designation

Text Explanation: C There are two types of assignment: Absolute and Collateral. An Absolute Assignment transfers all of the policyholder's rights to another party, such as when a parent assigns the policy to the child who is also the insured. A Collateral Assignment occurs when the insured pledges his policy proceeds to the bank for a loan. This is seldom done anymore, since interest rates on life insurance loans are generally lower than those on bank loans.

The purpose of a Grace Period provision is to: A Protect the insurance company against adverse selection by policyholders B Protect the policyholder against unintentional lapse C Permit the beneficiary to establish an insurable interest D Permit the insurance company to determine the cause of death

Text Explanation: B Grace Periods are: 30 days on Whole Life, Term, and Endowment; 28 days on Industrial Life, and 31 days on Group Life. If the insured dies within the grace period, the overdue premium is subtracted from policy proceeds and the beneficiary receives the remainder.

A life insurance rider added to cover a child is usually what type of insurance: A Whole life B Level term C Decreasing term D Increasing term

Text Explanation: B A 'rider' is something added to a policy to modify its terms, usually for an additional premium charge. The cheapest way to provide life insurance coverage for your entire family is to add a 'family' rider to your whole life insurance policy. This rider provides level, convertible term coverage for your spouse and minor children. For example, you have a $100,000 whole life policy on yourself. You could add a family rider to cover your spouse for $50,000 for 10 years and each of your children for $5,000 until they reach the age of majority. 'Level' refers to the face amount of the rider, which remains constant until expiration. 'Convertible' means that the family members could convert to whole life prior to expiration without a physical exam.

Which of the following best describes the waiver of premium rider: A It is a rider that can only be added to a cash value life insurance policy which creates a loan against the cash value in order to pay the premium for the insured B It is a rider that can only be added to a cash value life insurance policy that will pay the insured's premium if they become totally disabled C It is a rider that can be added to any policy, that will pay the insureds premium after a waiting period if the insured becomes totally disabled D It is a non-forfeiture option that will provide the insured with term life insurance for a limited period of time if their original policy lapses

Text Explanation: C The waiver of premium rider can be added to any policy and will waive the insureds premium after a six month waiting period if the insured becomes totally disabled. During the six month period the insured is responsible for paying their premium. If, after the six months, they are still totally disabled the rider goes into effect and will pay the insured back the premium they paid during the six months and waive the ongoing premium as long as they are disabled. Waiver of premium is a rider NOT a non-forfeiture option. Answer A is describing the Automatic Premium Loan rider, which can only be added to a cash value policy. Answer D is describing the extended term non-forfeiture option.

All of the following are dividend options on a life insurance policy issued by a mutual insurer, EXCEPT: A Extended term option B Cash C Apply to premium when due D Paid-up additions

Text Explanation: A Be sure to know the difference between the "non-forfeiture" options and the "dividend" options. All policies with a cash value must have non-forfeiture options but only policies issued by mutual insurers have dividend options. The three non-forfeiture options are cash surrender, reduced paid up and extended term. You should understand them fully.

Darla Jenkins purchased a $100,000 individual Whole Life policy January 1, 2009 and paid an initial annual premium of $1,000. After her policy is issued Darla becomes interested in hang gliding and dies in a hang gliding accident on January 15, 2010, without paying her annual premium. What will the insurer pay to her beneficiary: A $99,000 B Zero, since she died hang gliding C $100,000 D Zero, since she did not pay her premium

Text Explanation: A Since Darla died during the grace period, the insurer will pay the face amount minus the overdue premium she should have paid ($100,000-$1,000=$99,000). If Darla had died after the 30 day grace period without paying her premium there would be no coverage. There are three grace periods you must know for Life insurance: 28 days on industrial life, 30 days for all other types of life insurance including annuities, and 31 for group life. Although Darla died while participating in a dangerous hobby, the question makes no mention of hang gliding being excluded in the policy, so you have to assume that it is covered. Since Darla picked up this dangerous hobby after the policy had already been issued it will not affect her coverage.

When someone other than the insured is the owner of a life insurance policy, the owner may do all of the following without the insured's consent, EXCEPT: A Surrender the policy for its cash value B Increase the amount of insurance C Make a policy loan D Change the beneficiary

Text Explanation: B As owner of the policy, this "third party" has the right to control the policy, including the beneficiary designation, taking a loan or even surrendering the policy for cash. However, under the Doctrine of Insurable Interest, the policyholder would need the written consent of the insured to increase the policy limits. Remember: Life insurance policy limits may not usually be increased once the policy is in force, anyway, unless the policy contains the GIO rider.

Which of the following is a non-forfeiture option that provides continuing cash-value buildup: A Extended Term B Cash Surrender C Reduced Paid-up D Deferred Annuity

Text Explanation: C There are only three non-forfeiture options: 1) Cash Surrender, 2) Reduced Paid-Up and the automatic option, 3) Extended Term. Their purpose is to protect the insured's accumulated cash values in case the Whole Life or Endowment policy lapses. A client has 60 days from the policy's premium-due date to select the option he/she prefers. If none is selected, the company will give the client the automatic option, Extended Term. Here, the face amount of the new policy is the same as on the initial policy. The accumulated cash value is used internally by the company to pay the premium for a new Term policy at the insured's attained age. The policy term is, however, as long as that amount of money will buy. There is no cash value, and at the expiration of the term, the policy expires and the insured has no further coverage. If the client selects the Reduced Paid-Up option, the company then uses all of the accumulated cash values to buy the client internally a new Whole Life policy paid up to age 100. It would have an immediate cash value, but no further premiums would ever be due. The face amount would be more than the accumulated cash value, but less than the original face amount of the initial policy, so it is called Reduced Paid-Up. Cash value would continue to accumulate, and at maturity (age 100) the cash value would equal the face amount. No physical exam is required. Of course, if the client takes Cash Surrender, there is no further coverage.

If the beneficiary of a life policy wants the proceeds to be paid out in equal monthly payments, they should select which settlement option: A Period certain B Fixed period C Fixed amount D Interest

Text Explanation: C There are five life insurance settlement options: 1) cash; 2) fixed period; 3) fixed amount; 4) interest only; and 5) the annuity option. If the beneficiary selects the fixed amount option, the proceeds will be paid out in equal monthly installments until they are exhausted.

An insured has a Whole Life policy with a $100,000 face amount and a $40,000 cash value. The insured's policy lapses, which non-forfeiture option should they select to provide lifetime coverage: A Reduced Paid-up B Cash Surrender C Extended Term D Paid-up Additions

Text Explanation: A Once the insured's policy lapses the insurer has to offer the insured the choice of what they want to do with their cash value. The three non-forfeiture options are: Cash Surrender, Extended Term and Reduced Paid-up. If the insured wants permanent life insurance they would select the Reduced Paid-up non forfeiture option. If selected, the insurer uses the insured's cash value to purchase the insured a single premium whole life policy, with a reduced face amount. Since the insured will never pay another premium, the face amount will be reduced from that of the original policy.

Which of the following is true if the insured/owner of the policy does not pre-designate a settlement option for the beneficiary prior to death: A The beneficiary may select the settlement option upon death of the insured B The insurer may select the settlement option upon death of the insured C The insurer will keep the death benefit since no settlement option was designated D The insurer will automatically pay out a fixed dollar amount to the beneficiary, since it is the automatic option

Text Explanation: A The insured/owner of the policy has the right to pre-designate how they would like the beneficiary to receive the face amount of the policy upon their death. However, if the insured does not, the beneficiary has the right to select from the settlement options offered by the insurer. It is the beneficiaries choice, not the insurer. If no option is selected, the automatic settlement option is cash.

Which of the following Settlement Options provides for payments to be made in regular installments of a specified amount until the principal and interest are exhausted? A Fixed Amount B Fixed Period C Interest D Life Income

Text Explanation: A When the insured dies, the beneficiary may select any one of five Settlement Options. They are: Cash; Fixed Amount (for example, the beneficiary elects to receive $1,000 a month for as long as the money lasts); Fixed Period (the beneficiary chooses to be paid out over a 20-year period); Interest (the beneficiary leaves all the proceeds with the company to accumulate additional interest), and Life Income (the beneficiary takes the policy proceeds as cash and buys a Straight Life or Pure Life Annuity).

A client bought an annual renewable term policy with a face amount of $100,000 on June 1, 2009 for an annual premium of $200. If he died on June 20th, 2010 without paying his renewal premium when due, the insurer would pay: A Zero B $99,800 C $100,000 D $100,000 less any outstanding loans

Text Explanation: B 'Ordinary' life insurance, which consists of whole life, term and endowment, is required by law to have a grace period of at least 30 days. Since this client died within the grace period, the insurer has to pay the face amount, less the overdue premium. If he had died after the end of the grace period, there would have been no coverage. The grace period on industrial life is 28 days and on group life the grace period is 31 days.

Which whole life non-forfeiture option provides lifetime coverage: A Extended term B Reduced Paid up C Paid up additions D Life income

Text Explanation: B All cash value life insurance policies must contain 'non-forfeiture' options or provisions, which are also known as 'guaranteed' values. In other words, the cash value in the policy belongs to the policy owner and cannot be forfeited to the insurer if the policy lapses. There are three non-forfeiture options: 1) Cash surrender; 2) Reduced Paid-Up; and 3) Extended Term. Upon lapse, the policy owner can simply ask the insurer to send him his accumulated cash value (cash surrender), which is taxable to the extent that it exceeds the amount of premiums paid in. Or, the policy owner can ask the insurer to keep his cash value and use it as a single premium to buy him a new smaller whole life policy that is paid up for life, or age 100, whichever comes first (reduced paid-up). Or, the policy owner can ask the insurer to keep his cash value and use it as a single premium to buy him a new term policy with the same face amount as his original policy for as long as the money will last (extended term). All three of these options (or provisions) are required by state law and the policy owner may choose which one they prefer at any time. No physical exam is required to exercise any of these options and no agent is involved. Of course, none of these options apply if the client's original policy was term life, since term has no cash value to forfeit.

Which of the following statements about the Automatic Premium Loan provision in a life-insurance policy is true? A A loan taken under the provision is not interest-bearing B The provision must be elected by the policyholder C The provision applies only to Whole or Limited-Pay Life policies D The provision cannot be revoked by the policyholder

Text Explanation: B Automatic Premium Loan (APL) is a rider attached to Whole Life or Endowment policies, never Term. It must be elected by the policyholder, even though it is usually free. The purpose of the rider is to keep the policy in force if the insured forgets to pay the premium. The policy, with this rider attached, would automatically borrow from itself to pay the overdue premium, therefore avoiding lapse. Of course, the policy would have to have a cash value before such a "loan" could be taken. Also, all loans must be subtracted from policy proceeds (plus interest on the loan) in the event of the insured's death, so benefits will be reduced. Whole Life and Endowment policies are required to have a cash value no later than the end of the third full year.

All are false about Automatic Premium Loan on a Life insurance policy EXCEPT: A It is a non-forfeiture provision B It pays premiums due at the end of the grace period C It is a rider requiring the payment of an additional premium D It is attached to all Whole Life and Term Life policies

Text Explanation: B Automatic Premium Loan (APL) is a rider that may be added only to a cash value Life insurance policy. Although most riders cost extra, this rider is free, since it is designed to keep the policy from lapsing, which benefits both the insured and the insurer. Although the rider is free, it is not automatically added to a policy unless the owner requests it. It is not a non-forfeiture option and it cannot be added to a term policy. If this rider is attached and the owner fails to make a premium payment by the end of the grace period, the policy will automatically borrow from itself an amount sufficient to pay the overdue premium, so the policy will not lapse and will not go into non-forfeiture. However, the amount borrowed is a loan and will be subject to interest charges. If the insured dies with a loan outstanding, the amount of the loan, plus interest, will be subtracted from the policy proceeds.

Protection against unintentional lapse of a Life policy is afforded by: A A policy loan B An automatic-premium loan C A non-forfeiture option D A Dividend option

Text Explanation: B Automatic Premium Loan (APL) is a rider, usually free, that may be attached to any life-insurance policy that has or will have a cash value. It is not a Nonforfeiture option or Dividend option. If the insured fails to make a premium payment when due, the rider will cause the policy to borrow from itself to make the premium payment. Of course, this creates a policy loan, which eventually must be repaid, plus interest, upon the death of the insured. If a policy continues to borrow from itself until there is no cash value left, the policy would eventually lapse.

If the interest on a policy loan is not repaid: A It will be added to the premiums due B It will be added to the amount of the loan outstanding C It will have no effect on the policy benefits D It will be turned over to a collection agency

Text Explanation: B Interest on life insurance policy loans accrues annually on a pre-paid basis. Assuming the interest rate on a policy loan is 8% (the maximum allowed in most states), a client borrowing $10,000 from his insurer using his cash value as collateral would actually owe $10,800 on day one. Although the client may repay the loan plus interest at any time, there is no requirement that he do so. In other words, the interest on the loan will continue to accrue on an annual basis, which will have the effect of increasing the total amount owed. Once the amount owed equals the collateral (the cash value in the policy), the policy will lapse unless the client begins repayment. Of course, if the client dies with a loan outstanding, the amount of the loan plus accrued interest will be subtracted from what the beneficiary will receive.

An insured on a tight budget who has a Whole Life insurance policy written by a mutual insurer should select which dividend option: A Cash B Reduction of premiums C Paid up additions D Interest option

Text Explanation: B Mutual insurers write 'participating' policies, which might pay a dividend to policyholders. If a dividend is declared, the policyholder may choose from 5 different dividend options: 1) cash; 2) interest; 3) apply to next premium when due; 4) paid-up additions; or 5) 1 year term insurance. If a policy owner is on tight budget, he will most likely elect to apply a dividend towards his next premium, when due. For example, if the annual premium is $1,000 and the dividend is $100, the policy owner will only have pay $900 out of pocket. A policy owner may change the dividend option at any time, even if the policy has an irrevocable beneficiary.

The life insurance policy clause that prevents an insurance company from denying payment of a death claim after a specified period of time is known as the: A Misstatement of Age Clause B Incontestability Clause C Reinstatement Clause D Insuring Clause

Text Explanation: B The Incontestability Clause protects the client who may have lied (misrepresentation) on the original application for life insurance. The company has two years to investigate the insured from the original date of application. If the client dies within the first two years and the insurance company can prove that he/she lied about a material fact on the original application, they can deny the claim. However, after the two-year period has elapsed, they must pay the claim even if the client lied. So, those who lied can quit worrying after two years!

Which statement about the Misstatement of Age Provision in a life insurance policy is true? A If the insured's age has been overstated, it provides that a premium refund and the face amount of the policy will be payable B If the insured's age has been understated, it provides that a death benefit smaller than the face amount of the policy will be payable C It becomes inoperative after the expiration of the policy's contestable period D It is an optional provision

Text Explanation: B The Misstatement of Age Provision is separate from the Incontestability Clause. Lying about age cannot void the policy. However, it can reduce the amount of benefits paid at the time of your death. The formula to calculate this is as follows: The client is 40, but states 30, to get a lower rate. The client buys a $100,000 policy. The premium paid is $200 per year. At the correct age, The client should have paid $400 per year.

Which statement about a typical Suicide Clause in a life insurance policy is true? A Suicide is excluded as long as the policy is in force B Suicide is excluded for a specific period of years and covered thereafter C Suicide is covered for a specific period of years and excluded thereafter D Suicide is covered as long as the policy is in force

Text Explanation: B The Suicide Clause, which is completely separate from the Incontestability Clause, excludes coverage for death resulting from suicide during the first two years of a policy. After that, suicide is covered. If the insured dies by suicide during the first two years, there is no coverage, but the insurance company will refund the premiums paid in to date to the beneficiary.

All of the following are non-forfeiture options on a Whole Life insurance policy EXCEPT: A Cash surrender B Paid up additions C Extended term D Reduced paid up

Text Explanation: B There are only 3 non-forfeiture options: 1) cash surrender; 2) reduced paid-up; and 3) the extended term option. 'Paid-up additions' is a dividend option, which is available only on whole life policies issued by mutual insurers who issue participating policies. For example, an insured owns a whole life policy issued by a mutual. He would like to buy more life insurance, but can no longer pass a physical exam. However, if his insurer declares a policy dividend, he could use that dividend as a single premium to buy a small, additional whole life policy (without a physical exam) that would be paid-up until his death or age 100, whichever comes first. If he used his dividend in this manner every year, he could end up with substantially more insurance coverage. Don't confuse non-forfeiture options with dividend options. All cash value life insurance policies must contain non-forfeiture options. However, only life insurance policies issued by mutual insurers have dividends options.

If a life-insurance policy does not permit the policyholder to change the beneficiary, the beneficiary is: A Subsequent B Irrevocable C Contingent D Guaranteed

Text Explanation: B Typically, the insured or policyholder may change the beneficiary designation at any time. This is called Revocable Beneficiary designation. However, if the insured or policyholder elects to appoint an Irrevocable Beneficiary, the designation may not be changed without the consent of the irrevocable beneficiary nor may a policy loan be taken. Some 99% of all beneficiary designations are revocable. Irrevocable designations are usually made only in rare situations, such as when the policy's cash value becomes part of a divorce settlement.

A $10,000 life insurance policy with a Triple Indemnity Clause has been in force for three years. The insured is injured in a train wreck and dies in a hospital five months later. The death proceeds payable under the policy would be: A $30,000 B $20,000 C $10,000 D $0

Text Explanation: C Accidental Death Benefit (ADB), sometimes called Double or Triple Indemnity, is a rider that may be attached to any life insurance policy for an extra premium charge. The additional benefits are paid only if the insured dies within 90 days of an accident. If the insured lingers beyond 90 days, the policy reverts back to single indemnity only, and the face amount without the rider is paid, since it is assumed that death resulted more from natural causes than as a result of the accident.

A life insurance customer misstates his age as being five years less than it really is. The rate he pays is $13 per $1,000 of coverage, but the correct rate is $15 per $1,000. If he dies, how much will the insurer pay: A None, since the policy is voided if the client dies within the first two years B All, since misstatement of age is not a material misrepresentation C 13/15s of the face amount purchased D All, but the overdue premium is subtracted from the face amount at death

Text Explanation: C It is too late to adjust the premium, so the insurer will adjust the face amount instead. The adjustment is based on what the premium that the client paid would have purchased if he would have disclosed his true age. He did pay $13 per $1,000 but he should have paid $15 per $1,000, so the insurer will only pay 13/15ths of the face amount.

When the primary beneficiary predeceases the insured, the proceeds are paid to the: A Tertiary beneficiary B Alternate beneficiary C Contingent beneficiary D Collateral beneficiary

Text Explanation: C Often the insured will name a Contingent Beneficiary to receive policy proceeds if the Primary Beneficiary has predeceased the insured. If no Contingent Beneficiary had been named in this instance, the policy proceeds would go to the estate of the insured to be distributed under the terms of the insured's Last Will and Testament. There are no such things as Alternate and Collateral Beneficiaries!

In a policy insuring the life of a child, which of the following allows the premiums to be waived in the event of the death or disability of the person responsible for premium payments? A Waiver of Premium Provision B Reduction of Premium Option C Payor Provision D Reduced Paid-Up Option

Text Explanation: C The Payor Provision (sometimes called Payor Waiver of Premium) is an optional provision (or rider) often added to a policy insuring the life of a minor. The adult (usually the parent) may become sick or disabled and become incapable of paying the premium. This rider will then pay the premium on behalf of the sick or disabled payor. However, it is exactly like the Waiver of Premium Rider you would see on your own life insurance policy in that both riders have a six-month waiting period before premiums are retroactively paid. Both riders cost extra and will automatically drop off at age 60 or 65 at which time the premium would be reduced. The extra premium for these riders must be shown separately from the premium charged for the life insurance. None of the extra premium charge goes toward cash-value accumulation.

A revocable beneficiary: A Must give their consent before a loan may be taken B Must give their consent before cash surrender may be taken C Has no vested interest in the policy D May never be changed

Text Explanation: C The owner of a life insurance policy may change (or revoke) the beneficiary at any time, unless he initially made an 'irrevocable' designation. Irrevocable designations are rare, although they are sometimes required as part of a property settlement in the event of a divorce. Irrevocable beneficiaries have a 'vested' interest in the policy, meaning that the owner could not take out a policy loan without their prior permission. Most beneficiary designations are 'revocable'.

Which of the following riders is added to a policy written on the life of a child to make sure the premium is paid if the policyholder dies or becomes disabled: A Automatic premium loan B Extended term option C Payor benefit rider D Accelerated benefits rider

Text Explanation: C The payor benefit rider is like waiver of premium, except it is added to a policy written on the life of a child.

An insured died during the grace period of her life insurance policy and had not paid the required annual premium. The insurance company is obligated to pay which of the following to the beneficiary: A The cash value of the policy, if any B The full face amount of the policy C The face amount of the policy less any earned premiums D A refund of any premiums paid

Text Explanation: C There are three grace periods to remember: 28 days on Industrial Life, 30 days on all other life except group, and 31 days on group life. The purpose of the grace period is to protect the insured who honestly forgot to pay on the due date. The policy will not actually lapse until the end of the grace period. If a client dies within the grace period, it is assumed he/she would have paid the premium, so the company will pay the face amount to the beneficiary, less any overdue premiums.

A Life insurance rider that provides Whole Life on the primary insured and Term Life on the insured's spouse and children is the: A Combination rider B Family income rider C Family maintenance rider D Family rider

Text Explanation: D Adding the Family Rider to your whole life policy is the cheapest way to provide coverage for your entire family. For example, you have a $100,000 permanent whole life policy on yourself. You add a $50,000 10 year level term to cover your spouse and a $5,000 level term rider to cover each of your children until they reach the age of majority. The term coverage on your spouse and children is temporary, but provides coverage for your entire family when you most need it for the lowest possible price. When the term insurance expires, your total premium will be reduced. Further, the term coverage on your spouse and children is convertible to whole life upon expiration, without a physical exam.

If a parent purchases life insurance on their child all of the following are true EXCEPT: A The parent is the owner of the policy B The child is the insured C The parent is responsible for the premium D The parent is the insured

Text Explanation: D This is an example of third party ownership. Remember, the owner and the insured are not always the same person. In this example the parent is the policy owner and the child is the insured. The policy owner retains all the rights of ownership, such as paying the premium, designating the beneficiary, and taking loans. In this situation if the parent died, the policy would NOT pay a death benefit, since the parent is not the insured, the child is. Once the child reaches a certain age the parent could execute an absolute assignment and assign ownership of the policy to the child. If done, the child would now be the owner/insured and would be responsible for paying the premium, could change the beneficiary, or even take cash surrender.

If the insured's age was overstated at the time a life-insurance policy was purchased and the error is discovered on the death of the insured, the insurance company will: A Void the policy B Be prevented from taking any action according to the provisions of the Incontestability clause C Refund the overcharge in premiums to the beneficiary D Provide the additional insurance in the amount that has been purchased by the additional premium

Text Explanation: D This is the reverse of the typical situation, in which the insured usually understates their age in order to have a lower premium. If the insured had overstated their age, then of course, they would have been paying a higher premium than they should have. So the formula works in reverse, too: The company would adjust the face amount to be higher, based on the amount the incorrect premium would have bought at the insured's correct age.