Chapter 5: Life Insurance Premiums, Proceeds, and Beneficiaries
Pam is the primary beneficiary of a life insurance policy and wants to let the death benefit accumulate and receive only the monthly investment proceeds. Which settlement option should she choose? A) Lump sum option B) Interest Option C) Life income option D) Fixed amount option
B) Interest Option
What would be an expense factor in an insurance program? A) Premiums collected B) Mortality costs C) Opportunity costs D) Investment interest
B) Mortality costs
Which of the following describes the number of deaths in a year compared to the number of people in a select group? A) Law of large number ratio B) Mortality rate C) Morbidity rate D) Risk ratio
B) Mortality rate
What is the primary feature of a viatical settlement? A) No interest on policy loans B) Reduced death benefit prepayment C) Longer contestable period D) Lower premiums
B) Reduced death benefit prepayment
Which of the following enables a life policy to be replaced with another life policy and results in the postponement of the tax consequence? A) Section 1040 exchange B) Section 1035 exchange C) Nonforfeiture Option D) Spendthrift Option
B) Section 1035 exchange
What does a life insurance policy guarantee to the stated beneficiary upon the death of the insured? A) Policy Dividend B) Specified amount of money C) Policy's cash value D) Funeral expense fund
B) Specified amount of money
A creditor would be allowed rights to life insurance policy proceeds if which of the following beneficiaries is chosen? A) The insured's mother B) The insured's estate C) The insured's children D) The insured's spouse
B) The insured's estate
Where would policy proceeds be paid if both the insured and primary beneficiary were killed in the same accident? A) primary beneficiary's estate B) contingent beneficiary C) insured's estate D) children of the insured
B) contingent beneficiary
Mortality is calculated by using a large risk pool of A) hobbies and time B) people and time C) family history and geographical area D) insurance companies and agents
B) people and time
All of these are settlement options for life insurance policies EXCEPT A) Life income B) Lump sum C) Extended term D) Fixed period
C) Extended term
What happens to the total amount of premium paid for an insurance policy when the payment frequency increases? A) No difference in cost B) Decreases C) Increases D) Depends on the type of coverage
C) Increases
When calculating life insurance premium rates, which component would an agent's commission fall under? A) Morbidity B) Mortality C) Insurer's expenses D) Occupation
C) Insurer's expenses
A beneficiary has just received a claim payment for a life insurance policy. Which of the following is TRUE regarding the federal income tax liability owed? A) A flat tax of 10% is owed on all proceeds B) Federal income tax is owed if proceeds exceed $250,000 C) No federal income tax is owed on life insurance proceeds D) Tax liability owed depends on the type of life insurance policy
C) No federal income tax is owed on life insurance proceeds
A tax-free Section 1035 Exchange of a life insurance policy to a different policy is permitted if it occurs A) in the same state as the original transaction B) within a 12 month period C) from insurer to insurer and no cash is received by the policyowner D) from agent to agent as long as the agents are licensed in the same line
C) from insurer to insurer and no cash is received by the policyowner
The probability of death, listed by year, is demonstrated in A) risk tables B) frequency tables C) mortality tables D) morbidity tables
C) mortality tables
A beneficiary change can occur A) only upon the request of the revocable beneficiary B) only on specified dates within the policy C) normally at any time during the policy term D) at no time
C) normally at any time during the policy term
Proceeds from a life insurance policy are protected from the beneficiary's creditors by which clause? A) protection clause B) creditor clause C) spendthrift trust clause D) beneficiary trust clause
C) spendthrift trust clause
Premiums are best described as A) money paid by the insurer for settling a claim B) money paid by the insured to acquire a policy's benefits C) the amount an insured pays per unit of coverage D) commissions payable to the writing agent
C) the amount an insured pays per unit of coverage
Which of these is affected by the frequency of an insurance policy's premium payments? A) Settlement options B) Cash value C) Death benefit D) Cost
D) Cost
What is created after policy proceeds are obtained in a lump sum and then immediately invested? A) Viatical Settlement B) Emergency Fund C) Lump Sum Fund D) Estate
D) Estate
Which of the following is NOT a life insurance settlement option? A) Lump sum option B) Fixed amount option C) Life income option D) Extended term option
D) Extended term option
A policyowner is prohibited from making any changes to the policy without the beneficiary's written consent under which beneficiary designation? A) Contingent beneficiary B) Tertiary beneficiary C) Revocable beneficiary D) Irrevocable beneficiary
D) Irrevocable beneficiary
Insurance premium is determined by each of the following factors EXCEPT A) Mortality B) Interest C) Expenses D) Liquidity
D) Liquidity
Which of these is the automatic mode of settlement for life insurance policy proceeds? A) Fixed period B) Interest only C) Extended term D) Lump-sum
D) Lump-sum
When calculating life insurance premium rates, which component is affected by an insured's age and gender? A) Insurer's expense B) Morbidity C) Investments D) Mortality
D) Mortality
Which of the following is NOT an insurer policy expense? A) Rent B) Salaries C) Commissions D) Premiums
D) Premiums
Which of these factors help determine an insured's life insurance premium? A) insured's salary B) marital status C) place of residence D) avocation (hobby)
D) avocation (hobby)
Purchasing a life insurance policy in order to avoid the forced sale of assets upon death is called A) estate funding B) capital withholding C) capital gains D) estate conservation
D) estate conservation
Level premium term life insurance policies A) build cash value in a separate account B) automatically convert to permanent insurance at a predetermined date C) automatically renew at predetermined dates D) have premiums that are averaged over the policy period
D) have premiums that are averaged over the policy period
A life insurance claim which involves a per capita distribution of policy proceeds would be payable to the A) estate of the insured only B) estate of the deceased beneficiaries only C) named contingent beneficiaries only D) named living primary beneficiaries
D) named living primary beneficiaries
A spendthrift clause in a life insurance policy A) permits the beneficiary to borrow from a policy's cash value B) evenly distributes benefits among all named living beneficiaries C) assigns a policy's face amount to the insured's estate if the beneficiary dies before the insured D) restricts the ability of the beneficiary to assign benefits
D) restricts the ability of the beneficiary to assign benefits
Which type of beneficiary should be named if the insured wants to give explicit directions on how the policy proceeds should be paid? A) Individual B) Group C) Class D) Estate
A) Individual
Which of these premium payment frequencies is not typically available to a policyowner? A) Bi-weekly B) Monthly C) Quarterly D) Semi-annual
A) Bi-weekly
A beneficiary receives only the death benefit earnings in which settlement option? A) Interest option B) Life option C) Stock option D) Fixed amount option
A) Interest option
Over the course of a year, which premium payment mode is most expensive? A) Monthly B) Quarterly C) Semi-Annually D) Annually
A) Monthly
What is the price of insurance for each exposure unit? A) Rate B) Premium C) Rating D) Expense
A) Rate
Which of these ensures that proceeds of a life insurance policy will be free from attachment or seizure by the beneficiary's creditors? A) Spendthrift Clause B) Protection Clause C) Viatical Clause D) Settlement Clause
A) Spendthrift Clause
A policyowner can receive a percentage payment of the death benefits prior to death by using what kind of contract? A) Viatical settlement agreement B) Funding medium agreement C) Split dollar plan D) Buy-sell plan
A) Viatical settlement agreement
How is the cost of a policy affected when a policyowner pays premiums more frequently? A) Not affected B) Increases C) Decreases D) Depends on the type of coverage
B) Increases
An example of naming a beneficiary by class would be A) "To the children born of my union with Ned Jackson: David Jackson, Jennifer Jackson, and Scott Jackson" B) "To the child born of my union with Ned Jackson: Scott Jackson" C) "To the children born of my union with Ned Jackson" D) "To Ned Jackson"
C) "To the children born of my union with Ned Jackson"
Naming a contingent beneficiary as "all surviving children" is described by which term? A) Contingent designation B) Primary designation C) Class designation D) Tertiary designation
C) Class designation
Tonya has replaced her whole life policy with an annuity without incurring a tax penalty. This transaction is called a(n) A) Modified Exchange B) Endowment Exchange C) 1040 Exchange D) 1035 Exchange
D) 1035 Exchange
How does life insurance create an immediate estate? A) Cash value may be borrowed upon at any time B) Nonforfeiture options are immediately available C) The insured's estate receives the death benefit D) After first premium is paid, the face amount may be available to the beneficiary
D) After first premium is paid, the face amount may be available to the beneficiary
Which of the following is NOT a component of determining policy premiums? A) Dividends B) Mortality C) Interest D) Expenses
A) Dividends
Which settlement option involves having the proceeds remain with the insurer and earnings paid on a monthly basis to the beneficiary? A) interest only B) dividends only C) extended interest D) fixed period
A) interest only
The premium payment mode that results in the highest overall cost would be A) monthly B) quarterly C) semi- annual D) annual
A) monthly
If the beneficiary dies from the same accident as the insured individual, the insurer will proceed as if A) the insured outlived the beneficiary B) the beneficiary outlived the insured C) both the insured and beneficiary died at the same time D) the estate was listed as beneficiary
A) the insured outlived the beneficiary
A policyowner can receive an immediate payment before the insured dies by using a(n) A) viatical settlement contract B) buy-sell arrangement C) adhesion agreement D) spendthrift plan
A) viatical settlement contract
Pat is insured with a life insurance policy and Karen is his primary beneficiary. They are both involved in an automobile accident where Pat dies instantly and Karen dies 5 days later. Which policy provision will protect the rights of the contingent beneficiary to receive the policy benefits? A) Nonforfeiture clause B) Common disaster clause C) Spendthrift clause D) Accident indemnity clause
B) Common disaster clause
Elizabeth is the beneficiary of a life insurance policy. She is receiving the death benefit in payments of $10,000 per month until the principal and interest has been paid out. Which option was chosen? A) Fixed period B) Fixed amount C) Life income D) Interest only
B) Fixed amount
How are death benefits that are received by a beneficiary normally treated for tax purposes? A) taxable at the beneficiary's current tax bracket B) Subject to state and local taxes only C) Exempt from federal income taxes D) Taxable as a capital gain
C) Exempt from federal income taxes
Which of these is considered a major tax advantage of life insurance? A) Tax credits are available for life insurance premiums paid B) Annual earnings are tax free C) Premiums are tax deductible by an employee if paid for by an employer D) Income tax is typically not owned on proceeds paid directly to a beneficiary
D) Income tax is typically not owned on proceeds paid directly to a beneficiary
Sharon is the policyowner of a $50,000 life insurance policy. Her son, Mike, is the beneficiary. If Sharon MUST obtain Mike's signature in order to change the beneficiary, what kind of beneficiary designation is this? A) Tertiary B) Contingent C) Revocable D) Irrevocable
D) Irrevocable