Kansas Life Insurance #4: Life Insurance Policies

modified endowment contract (MEC)

is an overfunded life insurance policy where proceeds are subject to taxation.

Insurance policies that will pay the face amount under one of 2 situations: 1) If the insured is alive at the contract maturity date, or 2) If the insured dies during the policy period are called

Endowment Insurance Policies

Deanna purchases a $100,000 life insurance policy at the age of 47 and is rated at $33.49. This means that for each $1,000 of coverage the woman is charged $33.49 per year. Her annual premium is $_________ .

Her annual premium is $2,378 ($33.49 x 100 = $3,349).

Technical and Miscellaneous Revenues Act (TAMRA)I

IRS legislation used to determine whether a life insurance policy is a MEC, using the 7-pay test under the TAMRA. The payout on endowment policies issued after January 1, 1985. If a life insurance policy matures prior to the insured reaching age 95, the contract is not treated as life insurance and loses its tax-favored status - the death benefit would be taxable.

The Consumer Price Index (CPI)

Is used to determine the inflationary effect on policies. Insurers provide index-linked policies with annually increasing premiums or offer a premium that is level, but higher, to estimate and account for expected index changes.

A survivorship life insurance policy

Pays a death benefit at the time the 2nd insured has died. It insures the lives of 2 or more people. Premiums for joint life policies are less expensive than if each life was insured on a separate policy.

Kathleen, Victor and Jeremy are all insured under by Mutual Life Insurance. They have a a $100,000 joint life policies with split proceeds between survivors. If where the policy proceeds are to be split between the survivors and Jeremy dies first, then Victor and Kathleen each receive $50,000 and the policy is terminated. If Jonas dies shortly after Jeremy, Victor will not receive any more proceeds. This is an example of (Select 1):

Survivorship Life Insurance Policy

What is the age and penalty for early withdrawals from a MEC (Select 1)? a. 59 1/2, 10% b. 60, 10% c. 59 1/2, 15% d. 70, 10%

The correct answer is: 59 1/2, 10%. A Modified Endowment Contract is an overfunded life insurance policy. It is subject to the 7-pay test, and it has a 10% withdrawal penalty before the age of 59 1/2.

An MEC is subject (Select 1): a. 7-pay test b. 6-pay test c. 8-pay test d. 10-pay test

The correct answer is: 7-pay test. A Modified Endowment Contract is an overfunded life insurance policy. It is subject to the 7-pay test, and it has a 10% withdrawal penalty before the age of 59 1/2.

T or F: A pure endowment contract policy only pays a stated amount if the insured is alive at the end of the designated time period. Since no death benefit is paid, an endowment policy combines level term insurance with pure endowment.

True

Survivorship: Second-to-Die life policy

Two lives are insured on one policy, and the policy pays out only upon the death of the second insure are frequently used for estate planning. Policy proceeds are used to pay estate taxes.

Term Rider

a term insurance policy that pays the sum assured on death of the policyholder. Since most of these riders are defined-benefit plans, the benefits are fixed against an insured event.

All of the following are considered minimum information that must be on a life insurance illustration, EXCEPT (Select 1): a. Insured's marital status b. Dividend options, if any c. Nonguaranteed elements, if any d. Form number

a) Insured's marital status. While life insurance illustrations require the insured's name, age and sex, the insured's marital status is not to be on the policy illustration.

A Modified Endowment Contract (Select 1): a. Is an overfunded life Policy b. Subject to the 6-pay test c. Has a withdrawal penalty after age 60 d. Withdrawal penalty is 15%

a) Is an overfunded life Policy A Modified Endowment Contract is an overfunded life insurance policy. It is subject to the 7-pay test, and it has a 10% withdrawal penalty before the age of 59 1/2.

commissioners standard ordinary mortality (CSO) Table

an actuarial table used to compute the minimum nonforfeiture values of ordinary life insurance policies. It reflects the probability that people in various age groups will die in a given year. The new 2001 CSO tables increased that age to 120.

This life insurance policy provides death protection for the insured's entire life, but premiums are not paid for the insured's entire life. (Select 1): a. Economistic life b. 20-pay life c. Modified whole life d. Indeterminate premium

b) 20-pay life Limited payment whole life policies provide life insurance protection for the insured's entire life, but premiums are paid for a limited period of time, such as 20 or 25 years.

What type policy would pay the death benefits after the first person dies if it covers two or more lives (Select 1): a. Survivorship life b. Joint life c. Term life d. Universal life

b) Joint life pays the death benefits after the first person dies. A survivorship life policy pays after the second person or last survivor dies.

An indexed-linked policy is linked to (Select 1): a. Consumer Price Index b. S&P 500 c. Dow Jones Industrial Average d. Individual Retirement Account

c) Consumer Price Index. An indexed-linked policy is linked to the CPI (Consumer Price Index).

Miriam is a policy owner with an MEC with $300,000 of principal that pays an interest rate of 10% and $30,000 of growth. Her total value is $330,000. She withdraws $30,000 from the policy. The entire amount withdrawn is: a) Must be placed in another policy to avoid penalties and additional estate taxes. b) The withdrawn amount will not be considered income and therefore, will not need to be reported on her tax return. c) Classified as dividend earnings, and is taxable at the time of withdrawal. d) Classified as ordinary income, because the growth in the contract is taxed first.

d) Classified as ordinary income, because the growth in the contract is taxed first.

A limited payment life insurance policy is best suited for (Select 1): a. Johnathon, an 19-year old student with limited funds. b. Kelly, a 45-year single waitress who wants the most insurance protection for the least amount of money. c. Kelly and Tamara, newlyweds who need a life insurance policy to cover the mortgage on their house. d. Damon, a 21-year old successful entrepreneur with extra funds, who doesn't want to pay life insurance premiums when he retires.

d) Damon, a 21-year old successful entrepreneur with extra funds, who doesn't want to pay life insurance premiums when he retires. Limited payment policies are suitable for clients who do not want to pay premiums for their entire lives or people who are nearing retirement with liquid capital who don't already have permanent life insurance.

In a MEC, all of the following are taxable EXCEPT (Select 1): a. Policy Surrenders b. Policy loans c. Death benefits d. Withdrawals

The correct answer is: Death benefits. Death benefits are not taxable in a MEC, but a loan, surrender or withdrawal is taxable.

Which statement is false regarding the cash value in an ordinary whole life policy (Select 1): a. It may be used as a policy loan without affecting the death benefit. b. It grows tax-deferred. c. It is a nonforfeiture value that is fully guaranteed to the policy owner. d. It can be used to pay policy premiums.

a) It may be used as a policy loan without affecting the death benefit. Unpaid policy loans are deducted from the policy death benefit upon maturation.

All of the following are advantages of whole life insurance, EXCEPT: (Select 1): a. The premium-paying period may extend beyond the income-earning years. Life insurance protection is provided for the insured's entire life. b. Premiums are level. c. The policy has living benefits _ grows cash value. d. Life insurance protection is provided for the insured's entire life.

a) The premium-paying period may extend beyond the income-earning years. Because permanent (whole) life insurance protects the insured for their entire life, premiums are due each year until the insured dies. This may prove to be expensive when the insured is retired, and does not earn an income.

Which of the following does not constitute policy replacement (Select 1): a. Life insurance coverage that is converted to reduced paid-up coverage b. Life insurance coverage in which a loan is not repaid to the insurer c. Life insurance coverage that is terminated d. Life insurance coverage that is lapsed

b) Life insurance coverage in which a loan is not repaid to the insurer. As long as there is enough cash value in the policy to pay the cost of premiums, then a policy loan does not constitute replaced coverage.

For replacement transactions, an insurance producer's duties include all of the following, EXCEPT (Select 1): a. Provide the applicant with a policy cost comparison statement, b. Notify existing insurers of policies to be replaced c. Make a list of all existing policies the applicant intends to replace d. Leave a notice regarding replacement with the applicant

b) Notify existing insurers of policies to be replaced. The insurer is responsible for notifying existing insurers of policies to be replaced.

Life insurance policy illustrations must contain all of the following, EXCEPT (Select 1): a. Agent's name b. name of policy c. Only the guaranteed policy elements d. Insured's age and sex

c) Only the guaranteed policy elements. Life insurance policy illustrations depict the non guaranteed policy elements.

All of the following are characteristics of whole life insurance, EXCEPT (Select 1): a. Whole life insurance is permanent protection providing death protection for the insured's entire life. b. Whole life insurance provides living benefits in addition to permanent life insurance. c. The cash value in a permanent life insurance policy is not a nonforfeiture benefit. d. Whole life insurance policies use the insured's age at issue to establish policy premiums.

c) The cash value in a permanent life insurance policy is not a nonforfeiture benefit.The cash value in a whole life policy is a nonforfeiture value, meaning that said funds cannot be forfeited, and the policyowner is entitled to such values.

Maricella took out a $4,000 policy loan from her whole life insurance policy. The policy face amount is $400,000. If Maricella does not repay the loan, how will the death benefit be affected (Select 1): a. The death benefit will be increased by $4,000. b. The death benefit will be decreased by $4,000. c. The death benefit will be decreased by $4,000 + interest. d. The death benefit will remain the same.

c) The death benefit will be decreased by $2,000 plus interest. If a loan is not paid back before the insured dies, the amount of the policy loan plus interest will be deducted from the policy face amount. Angela's beneficiary will receive $198,000 minus interest on the $2,000 policy loan.

Francine and DJ purchased life insurance policies that would be paid up in 20 years. What type of policies did they purchase (Select 1): a. Economatic policies b. Continuous payment policies c. Limited payment policies d. Single premium policies

c) The limited payment policy allows the policyholder(s) to pay for the entire policy in a shorter period of time. The correct answer is: Limited payment policies

What policy type is tied to an index like the S&P 500 or the DJIA (Select 1)? a. Adjustable life b. Indexed-linked c. Credit life d. Equity-indexed Equity-indexed

d) Equity-indexed. An equity-indexed life policy is tied to an index like the S&P 500 or the DJIA.

Yolanda and Edward are looking at joint life and survivorship policies, which should they buy if they want to pay the taxes on the estate? Select one: a. Joint life b. Annuity c. Term Policy d. Survivorship Life

d) Survivorship Life. They should buy a survivorship policy. It pays after the second person dies, which would allow it to be used to pay estate taxes.

Whole life policies more expensive than some other insurance options because (Select 1): a. Whole life is generally not more expensive. b. They last a really long time. c. The policyholders are high risk. d. They must cover cash values, net insurance and mortality costs, as well as expenses.

d) The correct answer is: They must cover cash values, net insurance and mortality costs, as well as expenses. Because whole life policies include cash values in addition to net insurance, the premiums must cover mortality costs, expenses and the savings amount.