Ch. 11 Quiz Policy Options

1. Emily has chosen to receive the payout from her husband's life insurance policy so that she will receive an income for the next 15 years. At the end of that time, the entire proceeds from the policy will have been paid out. Emily has selected A. the interest-only option B. the fixed-period option C. the fixed-amount option D. the life-income option

B. The Fixed Period Option -This settlement option involves liquidating the proceeds and interest over a period of years, without reference to a life contingency (paid even if the beneficiary dies) It provides for the payment of policy proceeds in equal installments over a definite period of months or years. - The amount of proceeds, the period of time, the guaranteed rate of interest, and the frequency of payments all determine the amount of each installment. - The fixed period option is the best option when the most important consideration is to provide income for a definite period of time. Ex.If the policy proceeds total $100,000, earn 6% annual interest, and are to be paid out over a 10 year period, the beneficiary can expect to receive approximately 1,100 each month for a total of $132000. However, if the proceeds are paid out over a 15 year period, the beneficiary would receive approximately $845 per month for a total of $152,100. Note that in both examples the total amount paid exceeds the policy proceeds because of the interest earned.

12. Thomas has chosen to receive the settlement from his wife's $100,000 life insurance policy according to the life income option. Under the option he chooses, he will receive an income for his life and his daughter will receive payments if he dies before receiving $100,000 in income. Thomas has selected A. a straight life income option B. a refund annuity option C. a life income certain option D. a joint and survivorship life income option

B. a refund annuity option Refund Life Income Option: - May take the form of a cash refund annuity or an installment refund annuity.

11. Which of the following is not a factor in determining the amount the beneficiary will receive each time a payment is made under the fixed amount option? A. The specified amount of each payment B. The principal amount C. The interest earned on the principal D. The capital amount

D. The Capital Amount

13. Walter is the beneficiary of his mother's life insurance policy. He wants to make sure the proceeds will last not only as long as he lives but also as long as his wife is alive. Walter should select A. the straight life income option B. the refund annuity option C. the life income certain option D. the joint and survivorship life income option

D. The joint and survivorship life income option - occurs when, if at the death of the first party the second party is till living, installments are continued during the latter lifetime.

Exercise 11. C 1. Virgil uses his dividend every year toward paying for the policy early. 2. Bonita applies her annual dividend toward the net annual premium. 3. Charlotte allows her policy dividends to remain with the insurer, where they are subject to annual earnings.

1. B. Paid-up Option 2. C. Reduce Premium Dividend Option 3. A. Accumulated at interest option

15.Carl has not selected a dividend option for his nonparticipating policy. What happens to his dividends? A. No dividends are paid. B. They are used to purchase paid-up additions to the policy. C. They are used to purchase one-year term insurance. D. They are paid to Carl in cash.

A. No dividends are paid Dividend Option - Cash Dividend Option - Accumulation at Interest Option - Paid Up Additions Option - Reduce Premium Dividend Option - Accelerated Endowment - Paid Up Option - One year Term Dividend Option

16. Which of the following statements about paid-up additions is TRUE? A. The dividends are used to purchase additional insurance protection. B. The additional protection is almost always restricted to term insurance. C. The single premium for the added coverage will be based on the insured's original age. D. The operating expenses of putting this coverage in force are higher than original policy expenses.

A. The dividends are used to purchase additional insurance protection.

Exercise 11.B 1. Amanda has stopped paying the premium on her $50,000 whole life policy. She has accumulated $5,000 in cash value, but she has not contacted the insurance company or selected a nonforfeiture option. What will happen next? A. The insurance company will mail her a check for $5,000. B. The insurance company will use the cash value to purchase $50,000 worth of term insurance. C. The insurance company will use the cash value to purchase a reduced amount of whole life insurance. D. The insurance company will pay back the cash value in monthly installments.

B. The "extended term" option is used when the policy owner has not otherwise elected a nonforfeiture option.

8. Which of the following statements regarding settlement options is NOT true? A. Most insurers will agree to distribute the proceeds under any reasonable and actuarially sound settlement model. B. Interest earnings on the retained proceeds are guaranteed. C. The money is safe with the insurance company. D. The beneficiary invests the money at the suggestion of the insurer.

D. The beneficiary invests the money at the suggestion of the insurer. Settlement Options -At the time of life insurance contract is purchased, a policy owner should consider the manner in which the proceeds of the policy will be paid when it matures or when the insured dies. The most common form of distribution is the LUMP SUM PAYMENT. a lump sum settlement is not really considered an option since life insurance contracts automatically provide fora lump sum settlement in the event of an insureds death.

3. Jim has selected to receive only the interest from his mother's life insurance policy. When Jim dies, his children will receive the lump-sum benefit in addition to the benefit from his life insurance policy. Jim has selected A. the interest-only option B. the fixed-period option C. the fixed-amount option D. the life-income option

A. The Interest Only Option Under this settlement option, the policy owner may leave policy proceeds with the insurer to earn interest. The proceeds are left with the insurer, and the interest is paid to the beneficiary on an installment basis. This type of settlement option is generally selected when the policy owner wants to provide for contingent beneficiaries (such as children) after the death of the primary beneficiary (such as the parent) - This option may also provide additional flexibility for the beneficiary since the proceeds are retained by the insurer until needed.

10. Which of the following is NOT a factor in determining the amount the beneficiary will receive each time a payment is made under the fixed period option? A. The age of the beneficiary B. The principal amount C. The interest earned on the principal D. The length of time payments are to be made

A. The age of the beneficiary is not a factor in deterring the amount the beneficiary will receive each time a payment is made under the fixed period option.

Exercise 11.A 1. Which settlement option pays only the earnings on the death benefit to a beneficiary? A. Life income B. Fixed amount C. Fixed period D. Interest only

D. Interest Only - The interest only settlement option pays earnings on principal only to the beneficiary Interest Only - The proceeds are left with the insurer, and the interest is paid to the beneficiary on an installment basis. This type of settlement option is generally selected when the policy owner wants to provide for contingent beneficiaries (such as children) after the death of the primary beneficiary (such as the parent) - This option may also provide additional flexibility for the beneficiary since the proceeds are retained by the insurer until needed.

9. Ken is receiving interest-only payments on the settlement of his father's life insurance policy. If Ken dies before the lump sum is paid to him, what happens to the balance of the money? A. It is retained by the insurer. B. It is paid to any contingent beneficiary named in the original policy, or if there is no contingent beneficiary, it is paid to Ken's estate. C. It is paid to any primary beneficiary named in the original policy or into Ken's father's estate. D. It is paid directly into Ken's estate.

B. it is paid to any contingent beneficiary named in the original policy, or if there is no contingent beneficiary it is paid to Kens estate. Interest only payments - Under this settlement option, the policy owner may leave policy proceeds with the insurer to earn interest. The proceeds are left with the insurer, and the interest is paid to the beneficiary on an installment basis. This type of settlement option is generally selected when the policy owner wants to provide for contingent beneficiaries (such as children) after the death of the primary beneficiary (such as the parent) - This option may also provide additional flexibility for the beneficiary since the proceeds are retained by the insurer until needed.

14. Which of the following factors does NOT affect the payment of dividends? A. Mortality B. Assumed Interest C. Morbidity D. Operating expenses or loading

C. Morbidity Policy Dividend Sources The source of funds from which life insurance policy dividends are paid is the same as the three factors used in premium computations, which are Mortality, Interest, Expense: Mortality - The mortality table tell us that a certain number of insureds in each group will probably die during the next year. If fewer people die than predicted, the life insurance company experiences a mortality savings. Assumed Interest - A life insurance company estimates that invested money will earn a given rate over the long run, usually around 4% but the invested premiums actually earn 8%, the company has earned excess interest. Operating Expenses or loading - Past experience tels a company that it will cost so many dollars per $1,000 coverage to keep the company going. Such costs as accounting, rent, office equipment, and so forth are relatively predictable. Any savings realized will help reduce operating expenses or loaded.

4. Carmen has selected to receive $10,000 per month until the principal and interest on her husband's life insurance policy have been paid out. Carmen has selected A. the interest-only option B. the fixed-period option C. the fixed-amount option D. the life-income option

C. The Fixed-amount option The amount of income is the primary concern rather than a period of time during which policy proceeds and interest earned are to be liquidated. Under this option, a fixed amount of income is designated to be paid at specific intervals ($2,000 per month) This amount is continued until the proceeds and any interest earned are exhausted. - In most cases, this settlement option is more advantageous than the fixed period option , since it is much more flexible. Insurers allow the insure to specify varying amounts of income at various times. - the amount of each installment is the controlling actor under this option as the dollar amount to be paid is established and not the length of time for which installments are to be paid.

2. Heath has chosen to receive the payout from his wife's life insurance policy in such a way that he will have an income for the remainder of his life, regardless of how long he lives. Heath has selected A. the interest-only option B. the fixed-period option C. the fixed-amount option D. the life-income option

D. The Life-Income Option -The amount of each installment paid depends upon the type of life income selected, the amount of the proceeds, the rate of interest assumed, the age of the beneficiary when the income begins, and the sex of the beneficiary. - Life income options are a form of life annuity and serve the same functions.

5. Tina has a whole life insurance policy on her life that has been in effect for 15 years. Tina and her husband review their insurance coverage and decide that this policy, which was purchased before their marriage, is no longer necessary for their financial future. If Tina decides to stop paying the premiums, what will happen? A. The policy will lapse when the grace period expires, and Tina will lose the cash values built up in the policy. B. The policy has not built up cash values because it is a whole life policy. C. The policy has not been in force long enough to have built up cash values, so when it lapses, Tina will receive nothing. D. The policy will lapse, and Tina will be able to select a nonforfeiture option to receive value for the cash value built up in the policy.

D. The policy will lapse, and Tina will be able to select a nonforfeiture option to receive value for the cash value built up in the policy. Nonforfeiture Options - protect a policy owner from losing her entire investment when a life insurance policy is cancelled, surrendered, or when premium payments stop. (Nonforfeiture options area viable only for life policies that accumulate cash value). There are three nonforfeiture options. - Cash Surrender Value - Extended Term Insurance - Reduced paid Up Insurance.

7. Which of the following statements about reduced paid-up insurance option is NOT true? A. The new policy will build cash values for the policyowner. B. No further premiums need to be paid on the reduced policy—it is paid up. C. The new protection is for the same amount as the original policy. D. A full share of expense loading is usually not included in the premium on the reduced coverage because the costs of setting up the coverage are greatly reduced.

C. The new protection is for the same amount as the original policy. The reduced paid up amount is simply the amount of paid up insurance that can be purchased using the existing cash value. Reduced Paid Up Option With this option, the insurance company uses the cash value of the contract to purchase a single premium insurance contract of the same form (e.g. 20 pay life, ordinary life, and modified life) as the original policy. The amount of coverage will be much less than the original policy, but no more premium payments will be required. Thus, the policy owner/insured will receive a policy that is paid in full for life.

6. Ann quits paying premiums on her whole life policy that has been in effect for 17 years. She does not select a nonforfeiture option. What happens to the cash value in her policy? A. The insurer will issue a paid-up term insurance policy with the same face value as the policy with a term as long as the cash value will purchase. B. The insurer will issue Ann's bene ciary check for the eligible amount of cash value in the policy. C. The insurer will issue a check for the eligible amount of cash value in the policy. D. The insurer may keep the cash value if a nonforfeiture option is not selected.

A. The insurer will issue a paid-up term insurance policy with the same face value as the policy with a term as long as the cash value will purchase. - usually, the extended term nonforfeiture option goes into effect automatically if the policy owner fails to make an election Extended Term This nonforfeiture option provides extended term insurance in place of the cash value policy. Under this option, the policy owner may request term insurance equal to the face amount of the original policy with a single net premium. This term insurance will remain in effect for as long a period of time that can be purchased with the cash value available. Extended term is not arable for rated policies. Cash value is used as a single premium to purchase the same amount of coverage as the original policy, but is not a term policy. - "Default option:" If the policy owner fails to select one of the nonforfeiture options when premium payments cease, this option generally goes into effect automatically.