FIN 350 WSU Exam 2
Which statement is true with regard to individual major medical insurance? I. The coverage provided is broad in scope. II. Major medical insurance plans emphasize first-dollar coverage by the insurer. (A) I only (B) II only (C) both I and II (D) neither I nor II
(A) I only Only the first statement is true. Major medical coverage is broad in scope. Major medical insurance does not emphasize first-dollar coverage. Indeed, there are several types of deductibles used in major medical plans.
Which statement is true with regard to the human life value approach? I. It crudely measures the economic value of a human life. II. It considers the specific needs of the family in determining the amount of life insurance to purchase. (A) I only (B) II only (C) I and II (D) neither I nor II
(A) I only The human life value is a crude estimate of the economic value of a human life. It does not, however, consider specific family needs (e.g., mortgage payments, number of children, etc.) in determining the amount of life insurance to purchase.
Which statement(s) is(are) true with regard to the surrender cost index? I. It is based upon the assumption that the policy will be surrendered after a specified period. II. It ignores the time value of money (A) I only (B) II only (C) both I and II (D) neither I nor II
(A) I only The surrender cost is based upon the assumption that the policy will be surrendered after a specified period and that the policy owner will receive the cash value at that time. The surrender cost index is an interest-adjusted technique because the time value of money is taken into consideration.
Bert purchased fire insurance on his dwelling. Shortly thereafter, he began to manufacture fireworks in the basement, near the furnace. When a fire severely damaged his home, the insurer denied liability because the policy stated "we will not be liable for any losses directly attributable to a material increase in hazard." This clause is an example of a(n): (A) condition (B) declaration (C) definition (D) insuring agreement
(A) condition This clause states a condition that must be satisfied (no material increase in hazard) for the insurer to provide indemnity. If the insured has violated the condition, as was the case here, the insurer can deny coverage of the loss.
Which statement(s) is(are) true with regard to the Linton yield technique? I. It determines a cost per thousand dollars of life insurance per year. II. It requires dividing the premium into two components: the cost of insurance protection and savings. (A) I only (B) II only (C) both I and II (D) neither I nor II
(B) II only The Linton yield does not determine a cost per thousand per year. Rather, an average annual rate of return is calculated. The premium must be divided into the cost of protection and the saving to calculate the Linton yield.
A life insurance policy that pays dividend to the policy owner is known as a participating life insurance policy.
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A straight deductible requires the insured to bear a portion of each loss before the insurer has any liability.
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Mary is concerned that inflation will reduce the purchasing power of her life insurance proceeds when she dies. To provide protection against this risk, she added a rider to her policy that allows her to purchase one-year term insurance equal to the cumulative change in the consumer price index from the issue date of the policy. This provision is called a: (A) cost-of-living rider (B) guaranteed purchase option (C) waiver-of-premium provision (D) change of plan provision
(A) cost-of-living rider Mary is using a cost-of-living rider to index her life insurance proceeds. As purchasing power erodes because of inflation, an offsetting amount of term insurance is purchased.
Thomas wants to participate in the growth of the stock market though a deferred annuity; however he wants downside protection against the loss of principal and prior investment earning if the annuity is held to term. Thomas should purchase a(n): (A) equity-indexed annuity (B) variable annuity (C) fixed annuity (D) life income (no refund) annuity
(A) equity-indexed annuity An equity-indexed annuity will accomplish the goals that Thomas has set forth. He has the downside protection of a guaranteed minimum rate of return, while he still has the potential of earning higher equity returns.
The part of an insurance contract that can be written on a named-perils or all-risk basis is the: (A) insuring agreement (B) conditions (C) exclusions (D) declarations
(A) insuring agreement The insuring agreement can be written on an all-risk or named-perils basis.
Nathan is interested in analyzing the cost of life insurance. He wants to perform the analysis based on the assumption that the life insurance coverage will remain in force. Which of the following techniques would be most appropriate for Nathan to use? (A) net payment cost index (B) traditional net cost (C) Linton yield (D) surrender cost index
(A) net payment cost index Nathan should use the net payment cost index. Three of the choice listed provide a cost per thousand per year of life insurance. The traditional net cost method has many flaws, and the surrender cost index assumes the policy will be surrendered after a specified period. The Linton yield calculates a rate of return rather than cost per thousand.
Tina's health insurance coverage includes a provision that excludes from coverage physical or mental conditions that existed prior to issuance of the policy and were not disclosed on the application. This provision is the: (A) preexisting conditions clause (B) second injury clause (C) recurrent disability clause (D) renewal provision
(A) preexisting conditions clause Such a provision is called a preexisting conditions clause.
One other-insurance provision assesses liability of an insurer in relation to the proportion that the company's insurance bears to the total amount of insurance in force. This other-insurance provision is: (A) pro rata liability (B) contribution by equal shares (C) percentage participation (D) primary and excess
(A) pro rata liability Pro rata settlements fit this description. If an insure has writhed 75 percent of the total coverage in force when a loss occurs, the insurer must pay 75 percent of the loss.
In addition to caring for their young children, Lyle and Lynn Thomas also support Lyle's father and Lynn's mother. This type of family is called a: (A) sandwiched family (B) blended family (C) nuclear family (D) traditional family
(A) sandwiched family This type of family is called a sandwiched family. A middle generation is supporting both younger and older dependents.
All of the following are characteristics of variable life insurance EXCEPT: (A) the premium payments are flexible (B) the cash value is not guaranteed (C) the policy owner selects where the saving reserve is invested (D) a minimum death benefit is guaranteed, but the death benefit can be higher if the investment performance is favorable
(A) the premium payments are flexible Premium payments are fixed, not flexible, with variable life insurance. The other choices listed are characteristics of variable life insurance.
Health insurance typically includes a two-year discovery period after which the insurer can't void coverage or deny a claim because of concealment or misrepresentation by the applicant. This provision is called: (A) the time limit on certain defenses provision (B) the recurrent disability provision (C) the renewal provision (D) the reinstatement provision
(A) the time limit on certain defenses provision The time limit on certain defense provisions provides for a two-year discovery period. This provision is similar to the incontestable clause in life insurance.
Exclusions are used in insurance contracts for all of the following reasons EXCEPT: (A) to provide a physical description of the property to be insured (B) to prevent moral hazard from occurring (C) to eliminate duplication of coverage (D) to avoid coverage for uninsurable perils
(A) to provide a physical description of the property to be insured A physical description of the property insured is found in the declarations section of the policy. Exclusions are used for the reasons listed in the other choices.
Which of the following statements is (are) true with respect to annuities? I. Annuities pool the risk of premature death. II. Life annuities provide an income that the annuitant cannot outlive. (A) I only (B) II only (C) both I and II (D) neither I nor II
(B) II only Only the second statement is true. Annuities do not pool the risk of premature death. Annuities pool the risk of excessive longevity. Life annuities continue to make payments for as long as the annuitant is alive.
Which statement is true with regard to long-term care insurance? I. This coverage is not needed if you are covered under Medicare. II. Coverage is typically provided for skilled nursing care and custodial care. (A) I only (B) II only (C) both I and II (D) neither I nor II
(B) II only Only the second statement is true. Medicare only covers skilled care for a limited time per benefit period and custodial care is excluded. Private long-term care plans typically cover skilled care, intermediate nursing care, and custodial care.
Which of the following statements is (are) true with respect to a joint and survivor annuity? I. Payments begin upon the death of the first annuitant. II. Payments end upon the death of the last annuitant. (A) I only (B) II only (C) both I and II (D) neither I nor II
(B) II only Only the second statement is true. Payments do not begin upon the death of the first annuitant. Payments are made jointly to the annuitants and continue until the last annuitant has died.
Which statement is true with regard to deductibles? I. Property insurance premiums are unrelated to deductibles. II. Deductibles help to eliminate small claims. (A) I only (B) II only (C) both I and II (D) neither I nor II
(B) II only The level of the deductible will affect the premium that is charged for the coverage. The lower the deductible, the higher the premium. Deductibles help to reduce the number of small claims submitted to insurers.
Karen is concerned about the rate of return she will earn on a cash value life insurance policy. To analyze the rate of return, she divided each premium into two components: cost of insurance coverage and saving. Then she calculated the average annual rate of return that would be needed to transform the annual saving contribution into the guaranteed cash value at a specific time. Karen calculated the: (A) net payment cost (B) Linton yield (C) yearly rate of return using the Belth method (D) surrender cost
(B) Linton yield Karen calculated the Linton yield. The Linton yield is the average annual rate of return required to transform the saving portion of each premium payment into the guaranteed cash value at a specified time.
All of the following statements about the tax treatment of life insurance are true EXCEPT: (A) While a cash value policy is in force, the cash value accumulates tax-free (B) Policyowners are required to pay taxes on policy owner dividends (C) Lump-sum death benefits are receive tax-free (D) If life insurance proceeds are paid through an annuity, the portion of the annuity payment that represents interest is taxable income
(B) Policyowners are required to pay taxes on policy owner dividends Policyowner dividends are received tax-free by the policy owner. Such dividends are considered to be a refund of over-paid premiums. If you are a stockholder in a life insurance company, dividends you receive on your shares of stock are taxable. All of the other statements are true.
Kathy would like to save for retirement. She selected a plan through which she can make a limited contribution each year. Her contribution is not tax deductible, however the investment income accumulates income tax free, and qualified distributions from the plan are not taxed. Kathy is funding a(n): (A) variable annuity (B) Roth IRA (C) traditional IRA (D) equity-indexed annuity
(B) Roth IRA Kathy is funding a Roth IRA. After-tax contributions are used, but qualified distributions from Roth IRAs after age 59.5 are received tax-free.
All of the following are characteristics of health savings accounts (HSAs) EXCEPT: (A) Contributions to a qualified HSA are income tax deductible (B) There is no annual contribution limit to an HSA (C) HSAs are used in conjunction with a high deductible health plan (D) HSA investment income accumulates income tax-free and distributions are tax-free if used to pay qualified medical expenses
(B) There is no annual contribution limit to an HSA There are annual contribution limits to HSAs. The limits apply to individuals and to family coverage plans. The limits are indexed each year for inflation.
Which of the following $100,000 yearly renewable term (YRT) policies would require the LOWEST premium? (A) YRT purchased by a man age 30 (B) YRT purchased by a woman age 30 (C) YRT purchased by a man age 60 (D) YRT purchased by a woman age 60
(B) YRT purchased by a woman age 30 Yearly renewable term insurance premiums vary with the age and gender of the insured. Younger individuals pay less per-thousand for term life insurance than do older individuals. Women pay less for life insurance than men of the same age, given that women, on average, live longer than men.
Tom was disabled and unable to work. Before he was able to collect benefits under his disability income insurance policy, he was required to serve a two-week period during which no benefits were paid. This two-week period is called a(n): (A) franchise deductible (B) elimination (waiting) period (C) corridor deductible (D) percentage participation clause
(B) elimination (waiting) period A waiting or elimination period is an initial period at the start of a covered disability during which no benefits are paid. It is really a deductible expressed in time, rather than dollars.
A written provision that adds to, deletes from, or in some other way alters an insurance contract is call a(n): (A) deductible (B) endorsement or rider (C) binder (D) coninsurance provision
(B) endorsement or rider Endorsements and riders are added to insurance contracts to amend the underlying policy.
Tom was just diagnosed with an inoperable brain tumor. According to his doctor, Tom has less than three months to live. A life insurance premium noticed just arrived. Tom purchased this whole life policy over 40 years ago. Tom does not want to pay the premium. Which nonforfeiture option should Tom exercise? (A) reduced paid-up insurance (B) extended term insurance (C) cash value (D) life income
(B) extended term insurance Given the scenario described, extended term insurance would be a logical nonforfeiture option. Under this option, the full-face amount of coverage remains in force. Given that the policy was purchased over 40 years again, there will be enough accumulated cash value to provide term insurance coverage for far longer than Tom's three-month life expectancy.
All of the following are dividend options EXCEPT: (A) dividend accumulations (B) fixed-period option (C) paid-up additions (D) reduction of premiums
(B) fixed-period option Fixed-period is a settlement option, not a dividend option
Julie purchased a life insurance policy with these characteristics: the policy was nonparticipating, the maximum premium that the insurers could charge was stated in the policy, and the insurer is permitted to adjust the premium based on anticipated future experience. What type of life insurance did Julie purchase? (A) current assumption whole life (B) indeterminate-premium whole life insurance (C) variable universal life (D) industrial life experience
(B) indeterminate-premium whole life insurance Julie purchased an indeterminate-premium whole life policy. This nonparticipating policy permit the insurer to adjust premiums (within limits) based on anticipate future experience.
Income paid to an annuitant under a life annuity is comprised of all of the following EXCEPT: (A) interest earnings (B) insurer expenses (C) premiums paid (D) unliquidated funds from those who die early
(B) insurer expenses Insurer expenses are not part of life annuity payments. Annuity payments are comprised of a return of premiums paid, interest, and unliquidated funds from annuitants who die early.
Agnes, age 62, purchased an immediate annuity. The annuity will provide month payments to Agnes for as long as she lives. If Agnes dies before receiving payments for 10 years, the balance of these payments will go to a beneficiary. Agnes purchase a(n) (A) life annuity (no refund) (B) life annuity with guaranteed payments (C) installment refund annuity (D) joint-and-survivor annuity
(B) life annuity with guaranteed payments Agnes purchased a life annuity with guaranteed payments. In this case, the insurer has promised to make at least 120 payments (10 years X 12 months)
All of the following are costs associated with premature death of the breadwinner EXCEPT: (A) loss of the family's share of the decreased breadwinner's future income (B) personal maintenance expenses of the deceased (C) a reduction in the family's standard of living (D) additional expenses, such as funeral expenses and uninsured medical bills
(B) personal maintenance expenses of the deceased The personal maintenance expenses of the deceased are not a cost of premature death. Indeed, following premature death, the personal maintenance expenses of the deceased individual are no longer incurred.
Which statement is true with regard to yearly renewable term insurance? (A) premiums remain level from year to year (B) premiums increase at an increasing rate from year to year (C) the insured must demonstrate insurability to renew the coverage (D) yearly renewable term premiums are unrelated to the probability of death
(B) premiums increase at an increasing rate from year to year Yearly renewable term premiums track the probability of death. As individuals grow older, the probability of death increases at an increasing rate, hence yearly renewable term insurance premiums also increase at an increasing rate.
An important consideration in determining the amount of life insurance to purchase is the need for income during the one- or two-year period after death of the breadwinner. This period is called the: (A) blackout period (B) readjustment period (C) accumulation period (D) dependency period
(B) readjustment period The one- or two-year period following the death of the breadwinner is known as the readjustment period.
The gross estate can be reduced by the value of property passed to a surviving spouse. This reduction is known as: (A) the unified tax credit (B) the marital deduction (C) the absolute assignment (D) the homestead exemption
(B) the marital deduction The amount transferred to the surviving spouse is called the marital deduction.
The difference between the face amount of a life insurance policy and the legal reserve of the policy is called: (A) the human life value (B) the net amount of risk (C) the level premium (D) the cash value
(B) the net amount of risk The net amount at risk is the difference between the face amount and the legal reserve.
Ned purchased a life insurance policy on his own life. He was concerned that he might be able to pay premiums if he became disable. He added a provision to his policy that relieved him from paying premiums if he becomes totally disabled before a specified age. This provision is called a(n): (A) guaranteed purchase option (B) waiver-of-premium provision (C) automatic premium loan provision (D) reinstatement provision
(B) waiver-of-premium provision A waiver-of-premium provision relieves the insured from the payment of premiums if he or she becomes totally disabled before a specified date.
All of the following statements about traditional IRAs are true EXCEPT: (A) No traditional IRA contributions are allowed for the tax year in which the participant attains age 70.5 (seventy and one-half) or for any later year (B) If pre-tax contributions fund the IRA, the entire distribution is taxable (C) Everyone is eligible to establish a traditional IRA and make fully tax-deductible contributions (D) IRA funds can be invested in stocks, bonds, mutual funds, and certificates of deposit
(C) Everyone is eligible to establish a traditional IRA and make flu tax-deductible contributions There are eligibility rules for establishing a traditional IRA. Contributions may be fully, partially, or not tax deductible, depending on an individuals' income and whether he or she is covered under an employer's retirement plan.
Which of the following statements is true with regard to shopping for life insurance? (A) You can use the surrender cost index to determine how much coverage to purchase (B) The financial strength of the insurer writing the coverage is unimportant. (C) The financial rating assigned to life insurers are sometimes unreliable and confusing. (D) You can use the needs approach to determine the cost of life insurance per thousand per year.
(C) The financial rating assigned to life insurers are sometimes unreliable and confusing. The rating assigned are sometimes unreliable and confusing. Some insurers that have become insolvent had favorable ratings from one or more of the rating services before the company became insolvent. Confusion may also develop because the rating assigned are not standard among the rating services, and at least five different services assign ratings.
Rod committed suicide four months after purchasing a $100,000 life insurance policy. His insurer must pay: (A) $100,000 (B) $100,000 less the premiums paid for the coverage (C) a refund of the premiums paid (D) nothing
(C) a refund of the premiums paid If the insured commits suicide during the suicide exclusion period, the insurer is only liable for a refund of premiums paid.
How are surgeons and physicians commonly reimbursed under individual major medical health policies? (A) based on a fee schedule (B) at the physician or surgeon's discretion (C) based on reasonable and customary charges (D) using a flat hourly rate regardless of the service delivered
(C) based on reasonable and customary charges Surgeons and other physicians are commonly reimbursed on the basis of reasonable and customary charges which vary by insurer.
Which of the following statements is true regarding a traditional IRA? I. Contributions may be fully deductible, partially deductible, or not deductible. II. In certain circumstances, withdrawals are permitted before age 59.5 without triggering the early withdrawal penalty tax. (A) I only (B) II only (C) both I and II (D) neither I nor II
(C) both I and II Both statements are true. Depending on the eligibility status of the contributor and his or her income level, the contribution may be full tax deductible, partially tax deductible, or not tax deductible. There are a number of situations in which distribution may be taken from traditional IRAs before age 59.5 without triggering the 10 percent penalty tax.
Which statement about second-to-die life insurance is true? I. Second-to-die life insurance is often used in estate planning. II. Second-to-die life insurance costs less than purchasing two separate policies. (A) I only (B) II only (C) both I and II (D) neither I nor II
(C) both I and II Both statements are true. Estate liquidity is often needed upon the death of the second spouse, and this type of life insurance is well-suited for this contingency. As only one death benefit is paid, the insurance costs less than purchasing two separate policies.
Which statement is true with regard to disability-income insurance? I. An increase in the elimination period will decrease the premium. II. Disability can be defined in a number of ways. (A) I only (B) II only (C) both I and II (D) neither I nor II
(C) both I and II Both statements are true. If you increase the elimination period, it increases the time period you must wait to receive benefits. This change is analogous to increasing the size of a deductible. There are several definitions of disability used in private disability insurance coverages.
Which statement(s) is(are) true with respect to the traditional net cost method of calculating the cost of life insurance? I. It ignores the time value of money. II. Life insurance is often shown to be free. (A) I only (B) II only (C) both I and II (D) neither I nor II
(C) both I and II Both statements are true. Insurance is often shown to be free (to have a negative cost) because the time value of money is ignored.
Which statement about universal life insurance is true? I. Universal life allows the policy owner to vary premium payments. II. Universal life allows the policy owner to earn a market-based rate of return on the cash value. (A) I only (B) II only (C) both I and II (D) neither I nor II
(C) both I and II Both statements are true. Premium payment flexibility is a characteristic of universal life insurance. This form of life insurance also permits the policy owner to earn a rate of return tied to some market-based index.
Which statement is true with regard to endorsements? I. If there is a conflict between the endorsement and the underlying contract, the endorsement usually takes precedence. II. An endorsement can be used to add coverage for additional perils. (A) I only (B) II only (C) both I and II (D) neither I nor II
(C) both I and II Both statements are true. The endorsement takes precedence unless it is in violation of the law. Endorsements are commonly used to broaden coverage by adding perils.
Which statement is true with regard to the incontestable clause? I. It protects the beneficiary if the insurer attempts to deny payment of the death claim more than two years after the policy was purchased. II. It allows the insurer to deny a death claim during the first two years of coverage on the basis of concealment or misrepresentation by the applicant. (A) I only (B) II only (C) both I and II (D) neither I nor II
(C) both I and II Both statements are true. The incontestable clause protects beneficiaries from nonpayment of the face value after the policy has been in force for two years. The clause also protects the insurers against concealment and misrepresentation during the first two years.
Bill purchased a nonparticipating life insurance policy. The cash value was based on the insurer's present mortality, expense, and investment experience. His premium was guaranteed for an initial period, and is "redetermined" after three years. Bill purchased: (A) universal life insurance (B) variable life insurance (C) current assumption whole life insurance (D) indeterminate-premium whole life insurance
(C) current assumption whole life insurance Bill purchased current assumption whole life insurance. The premiums is based on the current experience of the insurer. This policy is somewhat similar to indeterminate-premium whole life, however indeterminate-premium policies base the premium on anticipated future experience rather than actual current experience.
All of the following are settlement options EXCEPT: (A) fixed period (B) interest option (C) extended term insurance (D) life income
(C) extended term insurance Extended term insurance is a nonforfeiture option, not a settlement option.
Ted's health insurance lapsed because he didn't pay the premium on time. Ted wants the coverage back in force. Which policy provision explains the requirements he must satisfy to place the coverage back in force? (A) time limit on certain defenses (B) renewal provision (C) reinstatement provision (D) claims provision
(C) reinstatement provision An explanation of how to put lapsed coverage back in force is provided in the reinstatement provision.
Which of the following provides the most meaningful cost index (dollars and cents per thousand per year) of cash value life insurance? (A) traditional net cost (B) Linton yield (C) surrender cost index (D) human life value
(C) surrender cost index Of the methods listed, only the traditional net cost and the surrender cost provide a dollars and cents per thousand per year cost index. The traditional cost method has numerous flaws, most notably the failure to consider the time value of money. The surround cost is more meaningful.
All of the following should be considered when determining whether to replace a life insurance policy EXCEPT: (A) the incontestable clause (B) the cost of "getting out of" your present coverage (C) the grace period (D) tax considerations
(C) the grace period The grace period is not a consideration in the policy replacement decision as it is a standard provision in all life insurance contracts. The grace period does not influence whether a policy is a "good" policy or a "bad" policy. All of the other choices represent valid concerns when considering a policy replacement.
Which $50,000 life insurance policy, if purchased at age 32, would have the highest cash value when the insured was 50 years old? (A) whole life paid-up at age 65 (B) 10-year level term insurance (C) continuous premium whole life insurance (D) 10-payment whole life insurance
(D) 10-payment whole life insurance The 10-payment life whole life insurance policy is paid-up. All the premiums required for the 10-payment, whole life insurance policy have been paid by the time the insured is 42 years old. Paid-up policies of the same face value have a higher cash value than policies of the same face value that are not paid-up.
Some employers make a lump-sum distribution of pension assets to workers who are terminating employment. To avoid receiving the account assets directly and have to pay taxes on the distribution, the funds may be deposited tax-free into a special account called: (A) spousal IRA account (B) Roth IRA account (C) Section 401(k) account (D) IRA rollover account
(D) IRA rollover account Distributions made to an IRA rollover account do not result in current taxation.
Which statement is true with regard to the yearly rate of return method developed by Belth? (A) It ignores dividend payments (B) It calculates a cost per thousand per year (C) It ignores the increase in cash value from year to year (D) It uses an assumed price per thousand dollars of coverage
(D) It uses an assumed price per thousand dollars of coverage An assumed price per thousand is used in the calculation. The cash value increase from one year to the next and dividends paid to the policy owner are considered. A rate of return, rather than a cost per thousand per year, is the result of the calculations.
Christine has a paid-up $50,000 whole life policy. She would like to transfer all ownership rights in the policy to her favorite charity. Christine can accomplish the transfer through a(n): (A) change of plan provision (B) guaranteed purchase option (C) reinstatement period (D) absolute assignment
(D) absolute assignment Christine can accomplish this transfer through an absolute assignment of all rights under the policy to the charity.
Carson Company purchased a commercial property insurance policy. Under one provision of the policy, Carson would pay all covered losses until the sum paid reached $50,000; then the insurer would cover all future losses. This provision is a(n): (A) corridor deductible (B) percentage participation clause (C) coinsurance clause (D) aggregate deductible
(D) aggregate deductible The provision described is an aggregate deductible.
Rochelle is preparing to do her taxes. To determine what percentage of her individual annuity income was taxable and not taxable, Rochelle divided her investment in the annuity by the total of the expected payments that she will receive through the annuity. This quotient is called the: (A) percentage participation (B) break-even point (C) coinsurance percentage (D) exclusion ratio
(D) exclusion ratio Rochelle calculated the exclusion ratio. The ratio tells her what percentage of the individual annuity distribution she can exclude from taxation as it represents a return of premiums paid for the annuity. The balance (the amount not excluded) is fully taxable.
One form of life insurance has a reduced premium for the first three to five years, with the premium increased after this initial period. This type of whole life insurance is called: (A) variable life insurance (B) indeterminate-premium whole life insurance (C) current assumption whole life insurance (D) modified life insurance
(D) modified life insurance The type of life insurance described is called modified life insurance.
Which statement is true about the conditions section of an insurance policy? I. It contains a description of the property or life that is insured. II. It explains what types of perils, losses, and property are covered under the contract. (A) I only (B) II only (C) both I and II (D) neither I nor II
(D) neither I nor II Neither statement is true with regard to conditions. The first statement describes the declarations section; the second statement describes the exclusion section.
Which statement is true with regard to the options available in life insurance contracts? I. All life insurance policies provide dividend options II. All life insurance policies provide nonforfeiture options (A) I only (B) II only (C) both I and II (D) neither I nor II
(D) neither I nor II Neither statement is true. Only participating (dividend-paying) life insurance policies have dividend options. Only cash value life insurance policies provide nonforfeiture options.
All of the following are characteristics of major medical insurance EXCEPT: (A) coinsurance (percentage participation) (B) deductibles (C) high limits (D) no exclusions
(D) no exclusions Major medical insurance policies contain a number of common exclusions. Major medical plans typically have the other characteristics listed (coinsurance, deductibles, and high limits).
Susan's health insurance coverage cannot be canceled, is guaranteed renewable to age 65, and under no circumstances can her premium be increased. What type of renewal provision is found in Susan's health insurance coverage? (A) renewable at the insurer's option (B) conditionally renewable (C) guaranteed renewable (D) noncancellable
(D) noncancellable Susan's health insurance policy contains the most favorable and most expensive renewal provision. This type of renewal provision is called "noncancellable."
Barb purchased a whole life policy on her son, Tom, twelve years ago. She named herself the beneficiary. Tom, now age 19, would like to take out a policy loan to help fund the purchase of a sports care. Barb does not believe that Tom has the right to take out a policy loan. Which contractual provision supports Barb's position? (A) the assignment clause (B) the incontestable clause (C) extended term insurance (D) the ownership clause
(D) the ownership clause The ownership clause vests the right to make decisions about the policy with the policy owner. The policy owner, not the insured, decides whether a policy loan will be made.
The best life insurance for your to purchase is: (A) the policy with the highest surrender cost index (B) the policy that pays the highest dividends (C) the policy that has the highest Linton yield (D) the policy that best fits your needs
(D) the policy that best fits your needs The best policy for you to purchase is the policy that best fits your needs.
All of the following are major problems with the health care system in the United States EXCEPT: (A) rising healthcare expenses (B) waste and inefficiency (C) uneven quality of medical care (D) too many people covered under the present system
(D) too many people covered under the present system Lack of coverage, rather than "too many people covered," is a major problem. Millions of Americans have no health insurance coverage.
All of the following are characteristics of long-term care insurance EXCEPT: (A) benefit triggers used to determine eligibility for benefits (B) inflation protection (C) elimination (waiting) periods (D) unlimited benefits
(D) unlimited benefits Benefits are limited under most long-term care policies. There are daily limits, such as $100 or $120 per day; and a limit placed on benefits paid over the insured's lifetime, such as $250,000 or $500,000.
Although the United States spends a significant percentage of gross dome sting product on health care, not everyone has insurance coverage.
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Annuities can be funded through a single premium or through multiple premiums.
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Premature death is defined as death before reaching life expectancy.
F Premature death can be defined as death of the family head with outstanding, unfulfilled, financial obligations.
Reduced paid-up insurance is a divined option.
F Reduced paid-up insurance in a nonforfeiture option.
Cancellation rights and subrogation provisions are miscellaneous provisions in insurance contracts.
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A blended family is one in which a son or daughter with children is also supporting an aged parent or parents.
F A blended family is one in which a divorced or widowed spouse with children remarries, and the new spouse also has children.
All ownership rights in a policy are transferred through a collateral assignment.
F A collateral assignment is a limited form of assignment designed to provide security for a loan. The assignee's rights are limited to the outstanding loan value.
Income from individual annuities is received tax-free by the annuitant at retirement.
F A portion of the distribution, the amount which is attributable to a return of premiums paid, is received tax-free. The balance, which is investment income, is full taxable. After the basis in the annuity has been recovered, the entire distribution becomes taxable income.
Insurance policies written on an all-risk basis cover all perils.
F All risks are covered except those risks that are specifically excluded.
The guaranteed renewable renewal provision provides the greatest security to a health insurance purchaser.
F Although the coverage is guaranteed renewable, the insurer can increase premiums for the entire underwriting class. The noncancellable renewal provision provides coverage that is guaranteed renewable until a specified age and also specifies that the premium cannot be increased.
Belth's yearly rate of return method can only be used for participating life insurance policies.
F Belth's yearly rate of return method can be used for participating and nonparticipating policies. If a nonparticipating policy is analyzed, a value of zero is assigned for the dividend term.
Coinsurance in property insurance and coinsurance (percentage participation) in health insurance operate in the same way.
F Coinsurance in property insurance requires the policy owner to insure for specified percentage of value in order to collect in full for a partial loss. Coinsurance in health insurance determines the loss sharing after the deductible is satisfied.
When shopping for cash value life insurance, you can simply compare premiums to determine which policy is best.
F Comparing premiums will not tell you which policy is best. You must also consider what you receive in exchange for the premiums. For example, is the coverage participating and what is the guaranteed cash value after a specified period? There are factors besides cost that should also be considered, such the financial strength of the insurer.
Disability income insurance usually replaces all of a disabled person's lost income.
F Disability-income insurance typically replaces less than all of the disabled person's lost income. Most insurers limit the amount of income replace to no more than 60 to 80 percent of the person's gross earnings. Replacing less than the full amount of lost income reduces moral hazard and provides and incentive to recover and return to work.
Consumer experts agree that dread disease policies are a wise purchase.
F Dread disease policies (e.g., cancer insurance) are not recommended by consumer experts. These policies are narrow, providing benefits only if you have the "correct" illness.
During the funding period, a variable annuity purchaser is credited with annuity units.
F During the funding period, the variable annuity purchaser is credited with accumulation units, not annuity units.
Each family head needs exactly five times his or her annual salary in life insurance.
F Each family head needs an amount of life insurance necessary to provide financial security to his or her family in case of premature death. For some families, that amount is significant. Other families may need little, if any, life insurance.
Qualified distributions from traditional IRAs are received income tax-free after age 59.5
F If pre-tax dollars are used to fund traditional IRAs, distributions from traditional IRAs at retirement are fully taxable. If any after-tax contributions were used to fund the traditional IRA, the portion of the distribution attributable to the after-tax contribution is received tax-free.
Industrial life insurance is group term coverage sold to industrial workers.
F Industrial life insurance is individual, cash value, life insurance. The coverage is sold in low face amounts, with the premiums collected at the insured's home.
A key advantage of variable annuities is that insurers marketing these products do not charge any fees.
F Insurers marketing variable annuities charge a variety of fees and expenses, including management fees, administrative fees, surrender charges, and expense charges.
Life insurance is an example of a named-perils coverage.
F Life insurance is all-risk coverage, with very few exclusions.
Failure to pay a life insurance premium by the due date automatically results in a policy lapse.
F Life insurance policies include a grace period provision which extends coverage beyond the premium due date if the premium has not been paid.
Individuals must be mentioned by name in order to be covered under insurance contracts.
F Often times a description of an insured is used (e.g., spouse of the insured, children of the insured, employees of the insured) in an insurance contract.
Evidence of insurability must be demonstrated to purchase additional life insurance under a guaranteed purchase option.
F One of the beneficial aspects of this option is that additional life insurance can be purchased without having to demonstrate insurability.
Residual disability refers to whether a second disability is considered a continuation of a prior disability or considered a new disability.
F Residual disability refers to a reduction in earning because of the accident or sickness once the worker is able to return to the work force.
Roth IRA contributions are tax deductible regardless of a person's income and whether or not her or she is covered by an employer-sponsored retirement account.
F Roth IRA contributions are never tax deductible. Roth IRA contributions are made with after-tax dollars, but the distributions at retirement are received tax-free.
The difference between the face amount of a life insurance policy and the legal reserve is the cash value.
F The difference between the face amount of a life insurance policy and the legal reserve is called the net amount of risk.
Interest is not required on life insurance policy loans.
F The funds borrowed legally belong to the insurer. When premium rates were determined, it was assumed the insurer would have these fund to invest. Thus interest is required on life insurance policy loans to compensate the insurer for lost investment income.
The future value ordinary annuity factor is used to calculate the future value of the premiums when the interest-adjusted methods are employed.
F The future value ordinary annuity factor assumes the premiums are paid at the end of the period. Life insurance premiums, like rent payments, are paid at the start of the period. The future value annuity due factor must be used to properly value the cash flows.
The blackout period is the one or two-year period following the death of the breadwinner.
F The one or two-year period following the death of the breadwinner is called the readjustment period.
For a cash value life insurance policy in force long enough to have a cash value, the surrender cost per thousand per year will always be greater than the net payment cost per thousand per year.
F The surrender cost index per thousand per year will always be less than the the net payment cost per thousand per year for policies with a cash value. Under the surrender cost method, the cash value is subtracted from the net premiums and the resulting difference is converted to an annual cost. Under the net payment cost method, the net premiums are concerted to an annual cost. Note that under the net payment cost method, the cash value is not subtracted from the net premiums.
A single, uniform, definition of disability is used in all disability income policies.
F There are variations in the definition of disability. That is why it is important to review the definition of disability before you purchase coverage.
Since all life insurance companies are determining rates for the same risk, death, there is little variation in cost among similar life insurance contracts.
F There are wide variations in the cost of coverage. It is worthwhile to shop for a good policy because buying the wrong policy can cost you thousands of dollars over time, and it may be expensive to obtain coverage under a new policy.
Under the level premium method of providing life insurance protection, premiums paid during the early years are lower than what is needed to pay death claims.
F Under the level premium method, premiums paid in early years are greater than what is needed to pay death claims. This over-payment policy in early years is used to help pay death claims in later policy years while holding the premium level.
The insurance-adjusted methods ignore the time and magnitude of dividend payments.
F When an interest-adjusted method is used, the future value of each dividend payment is calculated, assuming a specified interest rate. Thus the timing and magnetite of dividend payments are considered.
It is impossible for an insurer to make a profit by selling a refund annuity.
F While it is true that the insurer will pay out an amount that is at least equal to the premium paid for the annuity, the issue is timing. The repayment of all of the money paid for the annuity may take many years. At the same time, however, the insurer will be investing the funds and earning investment income on the premiums.
To determine if a peril is covered under an all-risk policy, you have to read the list of covered perils.
F You would have to read the list of exclusions. If the peril is not excluded, the peril is covered.
Cash value life insurance contracts include nonforfeiture options.
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Contributions to health savings accounts (HSAs) are tax deductible.
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Deductibles are not used in life insurance.
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A change-of-plan provision permits the policy owner to exchange his/her present policy for a different life insurance contract.
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Equity-indexed annuities provide downside protection against the loss of investment income if the annuity is held to term.
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Financial dependency is a major justification for the purchase of life insurance.
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High deductible health savings account plans limit annual out-of-pocket expenses.
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If a policy loan has not be repaid by the time the insured dies, the amount paid to the beneficiary is reduced by the amount of the debt.
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If the insured has any incidents of ownership in a life insurance policy when he or she dies, the entire proceeds are included in his or her gross estate for federal estate tax purposes.
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In some cases, qualified distributions from Roth IRAs can be made before age 59.5
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It is wise to shop around when purchasing life insurance.
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Long-term care insurance is expensive.
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Low-load life insurance is characterized by low marketing expenses.
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Major medical insurance policies typically cover the daily cost of a semi-private hospital room.
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Most spouses who do not work outside of the home can make a fully deductible contribution to a traditional IRA even though their spouse is covered under a retirement plan at work.
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Other-insurance provisions are designed to prevent profiting from insurance and violating the principle of indemnity.
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Preferred risks have a lower-than-average probability of death.
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Qualified distributions from Roth IRAs are received income tax-free after age 59.5
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Riders and endorsements are used to amend insurance contracts.
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Settlement options are available on all life insurance contracts.
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The cost comparison techniques should be used to compare similar plans of insurance.
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The dependency period refers to the period until the youngest child reaches age 18.
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The economic loss from long-term total disability can be greater than the economic loss that results from premature death.
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The financial strength of the company issuing the life insurance contract should be taken into consideration by a prospective purchaser.
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The fundamental purpose of a life annuity is to provide an income that cannot be outlived.
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The purpose of the suicide clause is to reduce adverse selection against the insurer.
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Under a common accident provision in major medical insurance, only on deductible must be paid if two family members are injured in the same accident.
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Under a primary and excess other insurance settlement, it is possible that only one insurer will be required to pay when a loss occurs.
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Under a waiver-of-premium provision, if the insured becomes totally disabled before a stated age, all premiums coming due during the period of disability are waived.
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Yearly renewable term insurance premiums increase at an increasing rate as the insured grows older.
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