Chapter 5 Quiz

"The insured in a $25,000 life insurance policy died of a heart attack. Since the policy had a double indemnity provision, the policy beneficiary received A) 12500 B) 50000 C) 25000 D) nothing"

"25000 Explanation Under a double indemnity provision, the policy beneficiary would receive double the face amount in the event of a fatal accidental injury. Since the insured's death was not due to an accident, the policy paid its $25,000 face amount."

"For a beneficiary to receive accidental death benefits, the death of the insured generally must occur within how many days following the accident? A) 30 days B) 90 days C) 60 days D) 45 days"

"90 days Explanation For a beneficiary to receive accidental death benefits, the death of the insured generally must occur within 90 days following an accident."

"Josie has been totally disabled for 2 years. During that time, the insurance company has paid all premiums (a total of $1,200) on her $25,000 life policy, which has a waiver of premium clause. If Josie dies now, the insurance company will pay a death benefit of A) 23800 B) 12500 C) 25000 D) 23300"

"25000 Explanation The waiver of premium rider only waives the policyowner's responsibility of paying the life policy premiums if she suffers a disability and is unable to work after 90 days. The waiver of premium only waives the policyowner's responsibility to pay; it does not accelerate any portion of the death benefit to the insured. Therefore, Josie's life policy pays its death benefit of $25,000."

"Jay has a $50,000 life insurance policy with an accidental death benefit that pays triple the face amount. If Jay commits suicide 3 years after purchasing the policy, how much will his beneficiary receive? A) 50000 B) 150000 C) 0 D) 100000"

"50000 Explanation An accident is defined as an event that is unknown and unforeseen by nature. Therefore, suicide does not qualify as an accident because it is done willfully, and there is no coverage under the accidental death rider. Moreover, the base policy includes a 2-year suicide clause that excludes coverage if the insured commits suicide during that period following the effective date. Because the suicide occurred more than 2 years after the policy effective date, the face amount will be paid from the base policy only."

"Which of the following riders provides for changes in the benefit payable based on changes in the Consumer Price Index? A) Payables rider B) Guaranteed insurability rider C) Social Security rider D) Cost-of-living adjustment rider"

"Cost-of-living adjustment rider Explanation The cost-of-living adjustment (COLA) rider allows for indexing the monthly or weekly benefit payable under a disability policy to changes in the Consumer Price Index."

"If an insured does not exercise the option to increase coverage under a guaranteed insurability rider, what is the result? A) The coverage will not change and the option automatically expires. B) The policy is canceled. C) The insurer automatically increases the coverage, per the amount stated in the option. D) The premiums on the underlying policy are lowered proportionately because no increase in insurance coverage was purchased."

"The coverage will not change and the option automatically expires. Explanation When no purchase is made under a guaranteed insurability option, the option for that particular age expires automatically. There is no change in the underlying policy. Normally, the insured will have 90 days in which to exercise an optional purchase."

"Which of the following statements about accelerated living benefits is NOT correct? A) They are provided at no additional cost to the policyowner. B) The proceeds must be spent on the insured's medical expenses. C) They allow access to the policy's face value. D) They are standard in life insurance policies."

"The proceeds must be spent on the insured's medical expenses. Explanation Accelerated benefit provisions are standard in life insurance policies and are included at no additional cost to the policyowner. They allow access to the policy's face value if the insured suffers from a terminal illness or injury. (The death benefit, less any accelerated payment, is still payable.) The insured can spend the proceeds in any manner."

"An option whereby additional insurance may be purchased at various times without evidence of insurability is known as A) waiver of premium B) payor benefit C) constructive delivery D) guaranteed insurability"

"guaranteed insurability Explanation Many insurance companies now offer a guaranteed insurability option (GIO), also known as a guaranteed insurability benefit (GIB), which allows a policyholder to purchase specified amounts of additional insurance without evidence of insurability."

"What can an insured add to a permanent insurance policy which will provide additional coverage, yet cost less than purchasing a separate policy? A) Double indemnity rider B) Return of premium rider C) Other insured rider D) Term insurance rider"

"Term insurance rider Explanation A term insurance rider may be added to a permanent policy. If the insured dies while the term rider is in force, the beneficiary will receive the death benefit from the permanent policy and the term policy. Adding a rider to an existing policy has a lower premium than writing it as a stand-along policy."

"The payor benefit option or rider is typically used with A) juvenile policies B) adjustable life policies C) family policies D) joint life policies"

"juvenile policies Explanation The juvenile policy's payor benefit rider provides that the policy premiums will be waived if the policyowner dies or becomes totally disabled."

"The payor benefit typically waives premiums on a juvenile policy if A) the person who pays the premium dies or becomes disabled before the insured child reaches a certain age B) the policy is converted before the insured reaches a specified age C) the insured child dies before reaching a specified age, usually 21 or 25 D) the insured child becomes disabled"

"the person who pays the premium dies or becomes disabled before the insured child reaches a certain age Explanation The payor benefit rider provides that in the event of the premium payor's death or disability, premiums on the policy will be waived until the insured child attains a specified age or until the maturity date of the contract, whichever occurs first."

"At the age of 34, Ben purchased a whole life policy with a guaranteed insurability option. How many opportunities will he have to purchase additional life insurance in the future? A) 5 B) 4 C) 2 D) 3"

"2 Explanation Typically, the guaranteed insurability option allows the insured to purchase additional insurance at 3-year intervals between ages 25 and 40. In this case, Ben would be able to exercise this option at age 37 and at age 40."

"Which of the following statements about accelerated benefit provisions is NOT correct? A) The death benefit, less the accelerated payment, is still payable. B) The insured must be expected to die within 6 months. C) They are standard in life insurance policies. D) They provide for the early payment of part of a policy's face amount if the insured suffers from a terminal illness or injury."

"The insured must be expected to die within 6 months. Explanation An accelerated benefit rider provides for the early payment of a portion of a policy's face amount if the insured is expected to die within 24 months."

"Which of the following statements regarding a spousal rider to a life insurance policy is NOT correct? A) This rider usually consists of level term life insurance. B) There is a premium for this coverage in addition to the base policy premium. C) This is a form of other insureds rider. D) This rider usually provides coverage that lasts as long as the coverage that is provided through the base policy."

"This rider usually provides coverage that lasts as long as the coverage that is provided through the base policy. Explanation Like any additional insured rider, the spousal rider usually consists of level term life insurance coverage that terminates at a specified date (e.g., 10 years after policy issue) or age (e.g., the spouse's 65th birthday)."

"Which of the following types of life insurance riders is NOT based on term life insurance? A) Spousal B) Waiver of premium C) Cost-of-living D) Return-of-premium"

"Waiver of premium Explanation The waiver of premium rider is based more on the actuarial principles of disability insurance than life insurance. All the other riders listed are based on some form of term life insurance."

"A rider on a whole life policy that adds temporary coverage for a spouse and children is A) a family income rider B) a family maintenance rider C) a multiple protection policy D) a family term rider"

"a family term rider Explanation The family term rider is attached to the base policy covering the insured and insures family members other than the insured."

"Because increasing term insurance can be added to permanent policies and, when added, is less expensive than a stand-alone policy, it is almost always sold as A) an option B) a rider C) a whole life policy D) an endorsement"

"a rider Explanation Increasing term insurance is used primarily to provide a benefit that increases over time. As such, it is usually sold as a rider"

"Steve is diagnosed with inoperable cancer and learns that he has only a few months to live. He wants to take an extended vacation with his spouse and needs some immediate funds. He has held a whole life insurance policy for many years. Which of the following options would be the best source of funds, if Steve wants a lump-sum payment? A) Steve cannot withdraw any cash value B) Policy loan C) Policy surrender D) Accelerated benefit rider"

"Accelerated benefit rider Explanation The accelerated benefit rider allows the insured to access a portion of the death benefit in advance if he has been diagnosed as terminally ill and is expected to die within 24 months. The portion of the death benefit given to the insured is not taxable. The death benefit is reduced by the amount accelerated to the insured, and the remaining amount of death benefit is paid to the beneficiary upon the insured's death."

"Which of the following statements regarding a cost-of-living rider on a life insurance policy is NOT correct? A) An inflation index determines the amount of inflation adjustment that must be made to the policy up to a maximum percentage increase. B) A cost-of-living rider seeks to protect against inflation's erosion of life insurance policy values. C) The cost-of-living adjustment is tied to the gross domestic product (GDP). D) The cost-of-living rider provides increases in insurance without requiring the insured to provide evidence of insurability."

"The cost-of-living adjustment is tied to the gross domestic product (GDP). Explanation A cost-of-living (COL) or cost-of-living adjustment (COLA) rider is tied to an increase in an inflation index, most commonly the Consumer Price Index (CPI). The COL rider provides for automatic increases in the policy death benefit in proportion to increases in the CPI."

"Which of the following statements regarding a disability income rider is NOT correct? A) A disability income rider is a form of health insurance. B) The only way to provide disability benefits in a life insurance policy is through a disability income rider. C) A disability income rider does not provide benefits for partial or temporary disability. D) Most disability income riders do not cover disabilities that develop after age 60 or 65."

"The only way to provide disability benefits in a life insurance policy is through a disability income rider. Explanation A waiver of premium rider (a type of disability coverage) is generally included with guaranteed renewable and noncancelable individual disability income policies. It is a valuable provision because it exempts the policyowner from paying premiums during periods of total disability."

"An accidental death and dismemberment (AD&D) policy rider's principal sum is equal to A) a reimbursement policy B) double consideration C) the death benefit on the base life insurance policy D) principal twice"

"the death benefit on the base life insurance policy Explanation An AD&D principal sum is paid out if the insured dies within 90 days of an accident. The principal sum paid from the rider is equal to the death benefit on the base life insurance policy. Essentially, this could be considered a double death benefit or double indemnity."

"For a waiver of premium rider to become operative, the insured must be A) terminally ill B) totally disabled C) partially disabled D) chronically ill"

"totally disabled Explanation An insured must be totally disabled for a waiver of premium rider to become operative. The policyowner does not have to pay premiums as long as the disability continues. Instead, the insurer continues to pay all premiums that become due while the insured is disabled to the age listed in the policy."

"How can an insured access all or a portion of a life insurance benefit to pay for a long-term illness or life-threatening disease? A) Use the grace period provision B) Purchase an accelerated benefit rider C) Purchase an inflation protection option D) Use the nonforfeiture option"

"Purchase an accelerated benefit rider Explanation An accelerated benefit option allows for the early payment of a portion (or all, in some cases) of a policy's face amount. To qualify for early payment, the insured either must suffer from a terminal medical condition or have a qualified covered condition that requires skilled nursing care."

"Which of the following statements regarding the standard cost-of-living rider used with life insurance policies is NOT correct? A) There is typically a percentage cap on the amount of yearly increase that is available to the policyowner with this rider. B) A cost-of-living rider can involve attaching an increasing term insurance rider to the base policy. C) This rider provides the policyowner with the option to increase the death benefit of her life policy to match an increase in the cost-of-living index. D) There is no additional premium required to pay for increases in the death benefit resulting from the cost-of-living rider."

"There is no additional premium required to pay for increases in the death benefit resulting from the cost-of-living rider. Explanation With the cost-of-living rider, any increase in the death benefit as a result of this rider will also result in an increase in premium."

"Sarah owns a life insurance policy with a $50,000 face amount and a 10-year return-of-premium rider. She pays an annual premium of $700. If she were to die 6 years after purchasing the policy, what would be the total amount payable to the beneficiary? A) 50000 B) 50700 C) 54200 D) 57000"

"54200 Explanation The return-of-premium rider increases the death benefit by the sum or premiums paid to date."

"Which of the following statements regarding the cost-of-living rider is NOT correct? A) The typical cost-of-living rider is provided through a form of term insurance coverage. B) If the face amount is increased through the cost-of-living adjustment, there is typically an increase in the premium. C) A drawback of the rider is that a drop in the Consumer Price Index (CPI) can result in a decrease in the coverage previously added. D) It is not necessary for the insured to demonstrate evidence of insurability to receive the increased coverage provided through a cost-of-living adjustment."

"A drawback of the rider is that a drop in the Consumer Price Index (CPI) can result in a decrease in the coverage previously added. Explanation Declines in the CPI are not matched by a decline in the amount of coverage; instead, future increases are held off until the CPI exceeds its prior high point."

"A life insurance policy may pay death benefits before the insured dies for all of the following reasons EXCEPT A) terminal illness B) eligibility for long-term care C) financial difficulties D) catastrophic illness"

"financial difficulties Explanation Life insurance policies may pay death benefits before the insured dies if the insured has a catastrophic or terminal illness or becomes eligible for long-term care. This is called an accelerated benefit provision."

"Which of the following statements regarding accelerated death benefits is NOT correct? A) A written disclosure must be given to the applicant explaining the effect on various aspects of the policy. B) The inability to perform activities of daily living (eating, dressing, bathing etc.) is considered a qualifying event. C) An insured may request an accelerated death benefit payment if death is expected within 24 months due to terminal illness. D) Accelerated death benefit payments are always 100% of the death benefit."

"Accelerated death benefit payments are always 100% of the death benefit. Explanation Because accelerated death benefit payments reduce the actual death benefit, payments range anywhere from 25-100% of the death benefit."

"Which of the following life insurance policy riders will allow insureds to purchase additional insurance at future dates, regardless of their health? A) Conversion option B) Guaranteed insurability option C) Double indemnity option D) Waiver of premium option"

"Guaranteed insurability option Explanation The guaranteed insurability option (or rider) permits the insured, at stated intervals, to buy specified amounts of additional insurance without evidence of insurability. The option requires an additional premium and is usually attached to a permanent life policy at the time of purchase."

"What are accelerated benefits? A) Health insurance benefits paid in advance to providers of health care services B) Health benefits paid before the expenses are incurred C) Life insurance cash values paid in a lump sum to the beneficiary D) Life insurance death benefits paid before the death of an insured with a terminal illness"

"Life insurance death benefits paid before the death of an insured with a terminal illness Explanation Accelerated benefits are life insurance death benefits that are paid before the death of an insured if he is suffering from a terminal illness."

"Upon the insured's death, which of the following policies will pay the face amount of the policy plus a sum equal to all or a portion of the premiums paid? A) Guaranteed dividend policy B) Adjusting benefit policy C) Return-of-premium policy D) Cost-of-living policy"

"Return-of-premium policy Explanation Return-of-premium policies promise to pay the policy face amount plus a sum equal to all or a portion of the premiums paid."