L1.1. Long-Term Insurance Coverages
Which of the following statements about equity-linked insurance is not true? A Return on invested premiums is based on the performance of a real fund. B Policyholders will receive at least the value of their accumulated premiums upon death. C Variables annuities pay the benefit as a lump sum and will offer a GMDB and a GMMB. D Benefits on an equity-linked insurance policy will only increase or stay the same over time. E Unit-linked insurance policies generally do not offer a guaranteed minimum maturity benefit.
(D) is not true. Benefits on an equity-linked insurance policy may increase or decrease over time, in line with the underlying fund.
Determine which of the following statements is true with respect to insurable interest. 1. It is a requirement that the person contracting to pay the life insurance premiums should face a financial loss on the death of the insured life. 2. An insurance payoff should leave the beneficiary financially better off than if the insured life had not died. 3. It provides an incentive for a policyholder to hasten the death of the insured life.
1 only
Which of the following is not a traditional life insurance policy? A A whole life insurance policy. B A universal life insurance policy. C An endowment insurance policy. D A term insurance policy. E A joint life term insurance policy.
A universal life insurance policy is a type of modern insurance product. We don't have really provide a formal definition of traditional insurance contracts besides we think of them as more time-based, i.e., contracts which were traditionally issued until more modern insurance contracts came along. We have a list of these in our manual, including: Term insurance Whole life insurance Endowment insurance Participating insurance And then on these above there are variations and options available, including joint life insurance, multiple life insurance, critical illness insurance, etc.
Which of the following regarding chronic illness insurance is true? A The benefit is only payable upon the diagnosis of a chronic illness from which the policyholder can recover from. B A chronic illness must be severe enough such that the policyholder cannot perform one of the Activities of Daily Living (ADLs). C The benefit is only payable as a lump sum. D The benefit is only payable upon the diagnosis of a terminal illness. E None of (A), (B), (C), or (D) are true.
Chronic illness insurance pays the policyholder a lump sum benefit or an annuity upon the diagnosis of a chronic illness, defined as an incurable illness that is severe enough that the policyholder cannot perform two or more activities of daily living (ADLs). The correct answer is (E).
Which of these statements is not true with respect to structured settlements? A Structured settlements are often used for payments under Workers Compensation insurance. B Structured settlements are used for medical malpractice cases and personal injury claims. C If the injured party is severely injured, the level of long-term damage may only be known after a period of treatment and rehabilitation, and interim benefits may be made until the time of maximum medical improvement. D Annuity payments under structured settlements will normally be less than 100% of pre-injury earnings. E The top-down approach is more suitable for structured settlements as their objective is to match the pre-injury income of the IP.
Statement E is false. Two approaches can be used to determine the annuity payments in a structured settlement: Top-down approach: Determine an appropriate lump sum amount, then convert that amount to an annuity Bottom-up approach: Determine an appropriate income stream, then calculate the EPV of the payments The bottom-up approach is more suitable for structured settlements as their objective is to match the pre-injury income of the IP.
A self-employed small business owner purchased an insurance contract that will pay a benefit equal to 70% of salary in the event that the owner becomes sick and cannot work. The contract will cease at retirement age. Determine which of the following contracts provides these benefits. A Term life insurance B Disability income insurance C Long-term care insurance D Single premium immediate annuity E Critical illness insurance
The key feature mentioned above is that the benefit is payable upon the owner becoming sick and unable to perform their job, which eliminates answers A, C, and D. Additionally, since the benefit is paid as a portion of the insured's salary (and not a one-time lump-sum), we can determine that this contract is disability income insurance.
Which one of the following statements about term insurance is false? A The death benefit in an increasing term insurance policy can be used to match the yearly outstanding loan balance on a traditional mortgage. B Convertible term insurance may specify a maximum age at which conversion can take place. C In a yearly renewable term insurance policy, each individual contract has a one-year term. D The main purpose of term insurance is for family protection. E Most term insurance policies are funded by level monthly or annual premiums.
(A) is false. A traditional mortgage balance will decrease over time, and hence a decreasing term insurance policy can be used to match the yearly outstanding loan balance on a home.
Which one of the following statements about cash dividends and bonuses offered by participating insurance is not true? A Bonuses are more expensive to operate. B Cash dividends are more flexible than bonuses. C Bonuses provide more potential for future profit. D Cash dividends are not as tax efficient as bonuses. E Policyholders have a higher risk of losing a significant portion of the profits on surrender if the profits are distributed as bonuses rather than cash dividends.
(A) is false. Cash dividends are more expensive to operate because the company has to pay every policyholder a dividend each year. (B) is true. Cash dividends are more flexible than bonuses because cash can be used to offset premiums or buy more insurance. Bonuses are always awarded as additional insurance. (C) is true. Cash dividends require the insurer to liquidate assets, which limits the potential for future profit. (D) is true. Cash dividends are not tax-efficient as they may be taxable. (E) is true. If profits are distributed as cash dividends, policyholders lose at most one year's profit share on surrender. If profits are distributed as bonuses, policyholders who surrender may only receive a small portion of the profits.
Which of the following is most likely to be true with respect to a structured settlement following a serious injury to the injured party? A There will be no payment until the time of Maximum Medical Improvement. B If the injured party does not recover sufficiently to return to work, then the annuity benefits will be reduced. C Structured settlements decrease the injured party's dissipation risk compared with a lump sum benefit. D The injured party is generally better off using a structured settlement buy-out from a specialist firm. E The structured settlement value would be determined using unadjusted standard mortality tables.
(A) is false. There may be an interim arrangement of benefits until the time of Maximum Medical Improvement. (B) is false. If the injured party does not recover sufficiently to return to work, then the annuity payment may just cease at some point, or it may continue indefinitely. (C) is true. An annuity relieves the IP from investment risk and from dissipation risk (the risk of spending the funds too early). (D) is false. Buy-out firms were making excessive profits on structured settlement buy-out, so the injured party is generally worse off using a structured settlement buy-out. (E) is false. A serious injury would increase the IP's mortality, so the structured settlement value should be determined using adjusted mortality tables, such as applying a simple age rating or an additional force of mortality to the standard mortality tables. Therefore, (C) is the correct answer.
Which one of the following statements about endowment insurance is true? A Endowment insurance pays a lump sum benefit if and only if the insured survives to the end of a specified term. B Endowment insurance is a hybrid of a whole life insurance policy and a fixed term investment. C Endowment insurance is still commonly offered through mainstream insurers in North America and the UK. D Ignoring lapses, the probability of a payout on an endowment insurance policy is 100%. E None of (A), (B), (C), or (D) are true.
(A) is false. This is the definition of a pure endowment insurance policy. (B) is false. Endowment insurance is the hybrid of a term insurance policy and a fixed term investment. (C) is false. Endowment insurance has become a relatively obsolete product in North America and the UK; mainstream insurers no longer offer endowment insurance policies. (D) is true. Like whole life insurance, the probability that an endowment insurance pays a benefit is 100%. The correct answer choice is (D)
Which of the following statements about mutual and proprietary insurers is not true? A A proprietary insurance company does not have any with-profit policyholders. B A proprietary insurance company is more efficient than a mutual insurance company. C All profits of a mutual insurance company are distributed to the with-profit policyholders. D A proprietary insurance company has more access to capital than a mutual insurance company. E A proprietary insurance company has a clearer corporate structure than a mutual insurance company.
(A) is not true. A proprietary insurance company has shareholders and with-profit policyholders. Shareholders are the owners. The participating (with-profit) policyholders are not owners, but they have a specified right to receive some of the profits.
Which of these statements with respect to life annuities is false? A The underwriting process for regular annuities is more strict for younger lives than older lives. B Annuity sales methods are similar to those in life insurance. C Annuities, once purchased, cannot be surrendered. D The difference between a regular premium deferred annuity and a single premium deferred annuity is the timing of premium payments. E Annuity pricing assumes that invested premiums are used to offset the costs of annuities for surviving annuitants.
(B), (C), (D), & (E) are all true. (A) is false. There is no underwriting for regular annuities because the risk to the annuity provider is that the annuitant lives longer than expected but it is not feasible to seek health evidence that potential annuitants live too long.
Which one of the following statements about cash dividends and bonuses offered by participating insurance is not true? A Bonuses are more expensive to operate. B Cash dividends are more flexible than bonuses. C Bonuses provide more potential for future profit. D Cash dividends are not as tax efficient as bonuses. E Policyholders have a higher risk of losing a significant portion of the profits on surrender if the profits are distributed as bonuses rather than cash dividends.
A Bonuses are more expensive to operate. (A) is false. Cash dividends are more expensive to operate because the company has to pay every policyholder a dividend each year. (B) is true. Cash dividends are more flexible than bonuses because cash can be used to offset premiums or buy more insurance. Bonuses are always awarded as additional insurance. (C) is true. Cash dividends require the insurer to liquidate assets, which limits the potential for future profit. (D) is true. Cash dividends are not tax-efficient as they may be taxable. (E) is true. If profits are distributed as cash dividends, policyholders lose at most one year's profit share on surrender. If profits are distributed as bonuses, policyholders who surrender may only receive a small portion of the profits.
Alice purchases a disability income insurance on January 1, 2018, which pays a monthly benefit during eligible periods of sickness. The policy will expire on December 31, 2025. The benefit payment term is 1 year. The waiting period is 2 months and the off period is 4 months. Alice becomes sick on July 1, 2018. She recovers and returns to work on December 1, 2018. On March 1, 2019, she becomes sick again, until she returns to work on November 1, 2019. She remains in work until the end of 2019. How many months of sickness benefit are paid under the policy in the period January 1, 2018 to December 31, 2019?
Alice is sick for 5 months from July-November 2018; of this 2 months is eliminated through the waiting period, giving three months benefit. She is not sick for three months and then sick again for 8 months. Because the recovery period is less than the off period of the benefit, the payments start again as soon as she becomes ill the second time, with 8 months of benefit payable. That gives a total of 11 months of sickness benefit during the two years 2018-2019.
Which one of the following statements about the cash value of a traditional whole life policy is true? A Cash values at early durations may be negative to allow the insurer to recover the acquisition costs. B Non-forfeiture laws require insurers to pay specified cash values, or equivalent, for traditional whole life insurance. C Cash values for whole life policies tend to decrease at later durations. D Whole life policies with cash values can be terminated early at the discretion of the insurer. E The cash value may become greater than the sum insured in the later durations of a policy.
B is correct. A is incorrect. Cash values at early durations are allowed to be zero to reflect the need of insurers to recover the acquisition costs. C is incorrect. Cash values for whole life policies tend to increase at later durations. D is incorrect. Whole life policies with cash values can be terminated early at the discretion of the policyholder. E is incorrect. Cash values may be substantial in the later durations of a policy but not greater than the sum insured.
An annuity that makes payments to the annuitant after the death of the insured, for as long as the annuitant survives, is known as a: A temporary life annuity. B joint life annuity. C last survivor annuity. D reversionary annuity. E guaranteed annuity.
D reversionary annuity.
Which of the following types of insurance is being offered in developing nations for microinsurance? A Term insurance B Whole life insurance C Endowment insurance D Participating insurance E Universal life insurance
Endowment insurance is becoming popular in developing nations for microinsurance where the amounts involved are small.
Which of these statements is true with respect to equity-linked insurance? A Equity-linked insurance policies sold in North America are known as unit-linked insurance. B Equity-linked insurance policies sold outside of North America are known as variable annuities. C Variable annuities generally do not offer a GMMB. D Segregated funds offer a GMDB and GMMB. E Unit-linked insurance policies generally do not offer a GMDB.
Equity-linked insurance policies pay benefits on the earlier of the policyholder's death and the end of the contract term. Policyholders generally receive a cash surrender value if they surrender their contracts before the end of the term, with a surrender penalty deducted at early durations. The death, surrender, and maturity benefits are linked to the performance of a specified investment fund. There are two key differences between equity-linked insurance policies and unitized with-profit policies. Benefits of an equity-linked insurance policy are based on a real fund, not a notional collection of assets within the insurer's general account, as for a UWP contract. Equity-linked insurance benefits may increase or decrease over time, while the benefits for UWP will only increase or stay the same. Policyholders of equity-linked insurance policies will receive at least the value of the accumulated premiums upon death or survival to the end of the contract. They could receive more if the policies have a Guaranteed Minimum Death Benefit (GMDB) and a Guaranteed Minimum Maturity Benefit (GMMB). Equity-linked insurance policies sold in North America are known as variable annuities or segregated funds. The use of the term "annuity" for these contracts is misleading because the death benefits are designed with a lump sum payout, though there will be an option to convert the lump sum to an annuity. These policies will offer a GMDB and a GMMB. Equity-linked insurance policies sold outside of North America are known as unit-linked insurance policies as the policyholders' funds are expressed in units, or shares, of the underlying assets. Unit-linked policies generally do not offer a GMMB. The death benefit is often a multiple of the value of the policyholder's units at the time of death. Statement A is false. Equity-linked insurance policies sold in North America are known as variable annuities or segregated funds. Statement B is false. Equity-linked insurance policies sold outside of North America are known as unit-linked insurance. Statements C and E are false. Statement D is true. Variable annuities or segregated funds policies will offer a GMDB and a GMMB. Unit-linked policies generally do not offer a GMMB.
Which of these statements is not true with respect to long-term care insurance? A Payment of benefits is triggered when the policyholder cannot perform at least one out of six Activities of Daily Living by themselves. B A waiting period of 90 days is common for an LTC contract. C At issue, the policyholder may select a specific benefit term or choose to have payments continue while care is needed. D If benefits are paid using the accelerated benefit approach, LTC benefits will be paid from the face amount that is set at issue and will reduce the face amount directly. E Benefit payments can be made in the form of reimbursement or fixed annuity payments.
Payment of benefits is triggered when the policyholder cannot perform at least one out of six Activities of Daily Living by themselves.
Which of these statements is not true with respect to pensions? A A defined contribution pension plan specifies the level of retirement benefits the employee will receive. B Plans specifying the benefit amount in relation to salary near retirement are known as final salary plans. C Plans that specify the amount of benefit in relation to salary throughout employment are known as career average earnings plans. D Defined benefit plans may also offer withdrawal benefits for employees who leave before they retire. E Defined benefit plans may also offer death in service benefits for employees who die during their employment.
Statement A is false. A defined benefit pension plan specifies the level of retirement benefits the employee will receive. A defined contribution pension plan specifies the amount, usually as a percentage of salary, the employer will contribute into the pension fund.
MARK Which of these statements is false with respect to annuity? A For a joint life annuity, the contract makes annuity payments while one of the lives survives and stops on the second death of the two lives. B For a reversionary annuity, the contract makes payments to the annuitant after the death of the insured, for as long as the annuitant survives. C For a reversionary annuity, no payments will be made while the insured survives. D A guaranteed annuity is paid for a minimum period, regardless of whether or not the annuitant is alive or dead. E A temporary life annuity contract makes payments for some maximum period while the annuitant is alive.
Statement A is false. For a joint life annuity, the contract makes annuity payments while both lives survive and stops on the first death of the two lives. For a last survivor annuity, the contract is similar to a joint life annuity contract, except that payments continue until the second death of the couple.
Which one of the following statements about a term insurance policy is false? A Premiums are usually very small relative to the lump sum benefit. B Renewable term insurance offers the policyholder the option to renew the policy at the end of the original term with some further evidence of their state of health. C The premiums for renewed renewable term insurance would normally increase. D Typical term insurance contract terms range from 10 to 30 years. E One purpose of term insurance is to protect business against losses arising from the deaths of key employees.
Statement B is false. Renewable term insurance offers the policyholder the option to renew the policy at the end of the original term without further evidence of their state of health.
Which of these statements is not true with respect to disability income insurance? A The waiting period is the time between the beginning of a period of disability and the beginning of the benefit payments. B If the policyholder can work but cannot earn his or her full salary, then benefits will be paid based on partial disability. C The off period is the maximum length of time that must pass between two periods of disability for them to be considered separate rather than together. D A disability income insurance policy with "own job" coverage makes benefit payments when the policyholder cannot perform his or her own job due to the disability. E The amount of benefit is usually related to the policyholder's salary.
Statement C is false. The off period is the minimum length of time that must pass between two periods of disability for them to be considered separate rather than together.
Which one of the following statements about a traditional whole life policy is false? A Premiums for a regular-premium whole life insurance contract are often payable only up to some maximum age. B Whole life insurance policies are significantly more expensive than term insurance policies. C In the early years of the policy, the cash values tend to be low. D In later years, the cash values are typically more than the sum insured. E Non-forfeiture laws require insurers to pay specified cash values, or equivalent, for traditional whole life insurance.
Statement D is false. In later years, the cash values may be substantial, but typically less than the sum insured.
Which one of the following statements about a participating insurance policy is false? A It is also known as with-profit insurance policy. B The profit-sharing takes the form of cash dividends or reduced premiums in North America. C Reversionary bonuses are applied to the contracts in force, increasing the benefits by a specified percentage. D Simple reversionary bonus means the bonus rate is applied to the total of the sum insured and the previous reversionary bonus. E Only profits are shared, not losses.
Statement D is false. Reversionary bonuses are applied to the contracts in force, increasing the benefits by a specified percentage. There are three variations: Simple reversionary bonus: bonus rate is applied to the original sum insured only. Compound reversionary bonus: bonus rate is applied to the total of the sum insured and previous reversionary bonus. Super-compound reversionary bonus: two bonuses rate each year, the first applies to the original sum insured, and the second applies to the total of previous bonus declarations.
Which of these statements is not true with respect to critical illness insurance (CII) policy? A A CII policy pays a lump sum benefit when a policyholder is diagnosed with a covered illness or condition. B Once the benefit is paid, no further benefits are paid on subsequent occurrences. C There may be a partial return of premium if the policy expires or lapses with no benefits paid. D With an accelerated benefit rider, the CII benefit will be paid from the death benefit of the life insurance policy. E When the death benefit is partially accelerated, the policy expires when the CII benefit is paid.
Statement E is false. Critical illness insurance may be offered as an accelerated benefit rider on a life insurance policy. With this rider, the critical illness insurance benefit will be paid from the death benefit of the life insurance policy. The CII benefit is either equal to the full death benefit or part of the death benefit. When the death benefit is partially accelerated, which means that only part of the face amount is paid as the CII benefit, the remainder will be paid upon the policyholder's death. If the full benefit is accelerated, then the policy expires when the CII benefit is paid.
Which of these statements is false with respect to defined benefits and defined contributions pension plans? A A defined benefit pension plan specifies the amount of annual pension the employee will receive. B In a defined benefit pension plan, a multiple of the annual pension may be offered as a lump sum retirement benefit. C In a defined benefit pension plan, the annual retirement benefit depends on the member's pensionable salary and interest earned on the fund. D A defined contribution pension plan specifies the amount, usually as a percentage of salary, the employer and the employee will contribute into the pension fund. E In a defined contribution pension plan, the proceeds are available as a lump sum to the employee when he or she leaves or retires.
Statements A, B, D, and E are true. Statement C is false. In a defined benefit pension plan, the annual retirement benefit does not depend on interest earned on the fund. The annual retirement benefit of a DB plan is calculated using the formula: Annual retirement benefit=n⋅S⋅αAnnual retirement benefit=n⋅S⋅α where: nn is the total number of years of service, αα is the accrual rate, typically between 0.01 and 0.02, SS is the pensionable salary. The measure of pensionable salary depends on the plan type, which can be one of the following: Final salary pension plan: Also known as a final average salary plan, this type of plan specifies SS as the average salary over the last few years of employment. Career average earnings pension plan: SS is the average of the employee's salary throughout his or her career at the company. Career average revalued earnings pension plan: SS is the average of the employee's salary throughout his or her career, but with all salaries adjusted for inflation.
Which of the following is not a common feature of universal life insurance? A Premiums that are flexible, subject to minimum account value conditions. B A terminal bonus that is added to the benefit at maturity. C A credited interest rate that is subject to a minimum value ≥≥ 0%. D Surrender charges that apply during the first few years of the policy. E Monthly deductions that cover the cost of insurance and other expenses.
Terminal bonus is a feature of participating insurance, not universal life insurance.
