Life Final Exam 2

All of the following are Non-Forfeiture options on a cash value Life insurance policy, EXCEPT: A. Extended Term B. Reduced Paid-Up C. Automatic Premium Loan D. Cash Surrender

43. C— Automatic Premium Loan Explanation: Automatic Premium Loan is a rider, not a Non-Forfeiture option. Non-Forfeiture options protect the policy owner's cash value when a Life insurance policy lapses. The policy owner may select Cash Surrender, Reduced Paid-Up, or the Extended Term Non-Forfeiture option. Term Life policies have no Non-Forfeiture options, since they have no cash value.

The USA PATRIOT Act, which is designed to help detect money laundering and the international financing of terrorism, requires that a currency transaction report being filed with FinCEN for each financial transaction over which amount? A. $10,000 B. $2,000 C. $3,000 D. $9,000

A— $10,000 Explanation: The USA PATRIOT Act requires that a currency transaction report be filed for each financial transaction that is over $10,000.

Mr. Jones bought a $100,000 Term Life insurance policy on July 1, 2006 by paying an annual premium of $200. He died on July 15, 2007 without paying his renewal premium. How much will the policy pay, if any? A. $99,800 B. Zero C. $100,000 D. $100,000, less any loans outstanding

A— $99,800 Explanation: This is a question about the grace period. He paid his annual premium on July 1st, 2006. It is due again on July 1st, 2007. The grace period on an individual policy is 30 days. He died on July 15th, 2007, during the grace period. If the insured dies during the grace period, the insurer will pay the policy face amount minus the earned premium, to the beneficiary. This is not a loan, besides this was a Term Insurance policy. Hence, $100,000 minus the $200 premium, for $99,800.

Since insurance contracts are written by the insurance company, if there should ever be a lawsuit over ambiguity in the contract, it will always be found for the side of the insured. Which of the following describes this concept? A. Contracts of Adhesion B. Unilateral contracts C. Aleatory contracts D. Contracts of Utmost Good Faith

A— Contracts of Adhesion Explanation: All insurance contracts are considered to be contracts of 'adhesion', since they are written by the insurer and the insured has no opportunity to negotiate the contractual language. Changes in the contract may only be made by the insurer. However, if the contractual language is vague or unclear, any ambiguity will be construed in favor of the insured.

Which law governs the gathering of an applicant's investigative consumer report? A. Fair Credit Reporting Act B. Do Not Call List C. Employee Retirement Income Securities Act D. Social Security

A— Fair Credit Reporting Act Explanation: Consumer report and investigative report are the same thing. It is the Fair Credit Reporting Act that governs the gathering of a person's credit information.

Survivorship Life is often purchased to: A. Help with estate planning B. Provide money for the spouse C. Fund a retirement D. Provide money for kids

A— Help with estate planning Explanation: Survivorship Life insurance pays out when the last party dies. Estate taxes may be owed, depending upon the size of the estate, when the last party dies. Survivorship Life is often purchased to help with estate planning.

Which of the following is prohibited in setting rates for a Life insurance policy? A. Marital status B. Health C. Avocation D. Gender

A— Marital status Explanation: Although marital status is allowed to be used for certain types of policies, like your auto policy, it is not allowed when setting your Life insurance rates. There is no difference in your life expectancy based upon your marital status. Your age, health, gender, occupation, and your avocations (hobbies) all play a factor in determining your Life insurance premiums.

Which Life insurance policy provision allows the insurer to make adjustments in the face amount? A. Misstatement of Age Clause B. Incontestability Clause C. Suicide Clause D. Entire Contract Clause

A— Misstatement of Age Clause Explanation: If the insured lies about their age (or gender), the Misstatement of Age and Gender clause allows the insurer to take the premium that was paid at the correct age or gender and adjust the face amount. They do not ever change the premiums.

Which of the following statements concerning collecting credit information is correct? A. Pre-notification is required when checking someone's credit report B. Using credit scoring is never allowed C. You, the producer, must provide a copy of the applicant's credit report D. You only have to notify the applicant that you checked their credit if their application is rejected

A— Pre-notification is required when checking someone's credit report Explanation: Most states allow the use of credit as an underwriting factor. Pre-notification is required prior to checking an applicant's credit score.

The feature on most Term policies that allows the insured to continue coverage is: A. Renewability B. Cancelability C. Non-renewal D. Convertibility

A— Renewability Explanation: Most Term policies allow the insured to renew the policy, regardless of health.

If a three-person business partnership wants to buy Life insurance to fund cross- purchase buy-sell agreement, how many policies would you have to sell? A. Six B. Nine C. One D. Three

A— Six Explanation: In this example, a producer would have to sell 6 policies in order to make this work. For example, Partner A would have to buy policies on both Partners B and C. Partner B would have to buy policies on both Partners A and C, and Partner C would have to buy policies on both Partners A and B. Premiums would not be tax deductible, and proceeds payable upon death would not be taxable.

Life insurance coverage becomes effective when: A. When the conditions in the conditional receipt are satisfied B. The applicant writes the check and receives a conditional receipt C. When the agent signs the application D. When the insurer receives the application in their office

A— When the conditions in the conditional receipt are satisfied Explanation: This question is an example of how you must read the entire question and all four answers to try to determine what is the test trying to get at. The only answer here that is correct for when is the coverage effective, is when the conditions in the conditional receipt are satisfied. None of the other choices are entirely correct.

The client receives both dividends and interest on dividends. What is the tax implication? A. Both taxed B. Dividends not taxed, interest is C. Interest not taxed, dividend is D. Neither taxed

B— Dividends not taxed, interest is Explanation: The IRS views dividends paid by a mutual insurance company on a participating policy as a return of premium, thus the dividends themselves are not taxable. If you elect to have the insurance company keep the dividends, but pay you interest on those dividends, the interest paid is taxable as ordinary income.

All are true about Life insurance tax implications, EXCEPT: A. Generally, Life insurance proceeds are exempt from taxes B. Generally, Life insurance premiums are tax deductible C. Generally, Life insurance dividends are exempt from taxes D. Generally, interest earned on Life insurance proceeds or dividends is taxable

B— Generally, Life insurance premiums are tax deductible Explanation: We are looking for what is false. Make sure that you reword the question without the EXCEPT. "Generally, Life insurance proceeds are exempt from taxes" is true. "Generally, Life insurance premiums are tax deductible" is false. Hence that is your answer. Remember, unless it says group, assume it is talking about an individual policy.

Which of the following is not a non-forfeiture option? A. Extended Term B. Paid Up Addition C. Reduced Paid Up D. Cash Surrender

B— Paid Up Addition Explanation: There are 3 non-forfeiture options. It is easy to remember them with the acronym of CER. Cash Surrender, Extended Term and Reduced Paid Up are the non-forfeiture options. Paid Up Additions is a dividend option.

When does the client's free look start? A. Approval of application B. Policy delivery C. Date of application D. Policy effective date

B— Policy delivery Explanation: The client's free look does not start until the policy has been delivered to the client.

Ron applied for Life insurance on July 1st. The insurer approved his application on July 15th and the agent delivered his new policy on August 1st. Ron returned the policy to the insurer on August 9th, but died before they received it. What will the company do? A. Deny the claim entirely B. Refund the premium to Ron's estate C. Pay the claim to Ron's beneficiary D. Pay half the claim

B— Refund the premium to Ron's estate Explanation: In this question it does not say that a premium has been paid, but the producer would never deliver a policy without receiving the premium payment, either on date of application or date of delivery. What starts at policy delivery? The free look. What does the insured have to do to exercise the free look? Return the policy to the insurer or the producer. Which is what the insured did, on August 9th Ron returned the policy, indicating that he did not want it. Too bad for his beneficiaries that he then died. The insurance company is only obligated to return the premiums paid.

A life insurance policy with a Guaranteed Insurability Rider (GIR) allows a policyholder to increase coverage based on all of the following rules, EXCEPT: A. Skipped options are lost B. The amount of increased coverage is based on the insured's health C. There are 5 or more option dates D. Rates are based on attained age

B— The amount of increased coverage is based on the insured's health Explanation: You are looking for what is false about the Guaranteed Insurability Rider. The choice of "increased coverage is based on the insured's health" is the right answer, because this statement is incorrect. With the Guaranteed Insurability Rider the insured can increase insurance regardless of health. There are specific option dates and if those dates are not exercised they are lost. The additional insurance purchased is based upon attained age.

On an application for Life insurance, which of the following statements is correct? A. The applicant is allowed to conceal material facts B. The applicant is required to make representations C. The applicant, who forgets to mention something, will never have coverage D. The applicant is required to make warranties

B— The applicant is required to make representations Explanation: On an application for Life insurance it is required that the applicant answers the questions with representations. Representations are the truth to the best of your knowledge. A warranty is a guarantee of truth. No one can give a warranty in regards to their health

Consideration for the insured consists of the answers to the questions on the application and which of the following? A. All premiums B. The first premium C. The free look D. The contract

B— The first premium Explanation: Consideration for the insured consists of the answers to the questions on the application, which are called representations, as well as the first premium paid. In order for coverage to exist the client must pay the first premium payment. All premiums are not required to be paid in order for the client to have fulfilled the consideration clause.

An agent completes a Life insurance application and sends it to the underwriter who approves it. When is coverage effective? A. On the day the underwriter approves the application B. When the agent delivers the policy and picks up the premium C. On the day the application was filed out D. Immediately

B— When the agent delivers the policy and picks up the premium Explanation: This question is asking when coverage is effective, but it is missing one very important thing, and that is a valid premium.

Adjustable Life insurance is a combination of Term and: A. Whole Life plus an Annuity B. Whole Life C. An Annuity D. Equity-indexed Life

B— Whole Life Explanation: Adjustable Life insurance is a combination of Term and Whole Life.

Automatic Premium Loan is not available on which of the following types of Life insurance policies: A. Traditional Whole Life B. Life Paid-Up at age 65 C. 5-year Level Term D. 20 Pay Life

C— 5-year Level Term Explanation: Applicants with dangerous hobbies, health problems, or dangerous occupations are most likely to be surcharged when buying Life insurance. Of the choices here, only the traveling salesperson is likely to be able to buy insurance at standard rates.

An insured buys a $150,000 Life insurance policy naming his sons T & S as primary beneficiaries and a spouse as contingent beneficiary. When both the insured and his son T die in a train wreck, who gets the money? A. All goes to the spouse B. 1/2 goes to S and 1/2 to the spouse C. All goes to S D. 1/2 goes to S and 1/2 to T's estate

C— All goes to S Explanation: When there is more than one person listed as primary beneficiary and one has died, the proceeds will go, in its entirety, to the remaining primary beneficiary.

The Guaranteed Insurability Rider (GIR) allows the insured to increase the face amount of their policy: A. At specified times based upon original age B. Subject to proof of continued good health C. At specified times based upon current or attained age D. Any time and for any amount

C— At specified times based upon current or attained age Explanation: The Guaranteed Insurability Rider costs extra and allows the insured, at specific option dates, to purchase more insurance. At each option date the insured is allowed to purchase another policy, up to the original policy's face amount, no matter their health, without having to pass a physical, based upon their attained age. If they do not choose to purchase more insurance at that specific option date, that option is lost.

On submittal of an application, why is it important for a producer to deliver the policy and collect the premium ASAP? A. To make sure the client doesn't back out B. To get the money C. Because the insured is waiting for coverage to start D. Because the insured is already covered

C— Because the insured is waiting for coverage to start Explanation: Remember on this test it is always your job to pick the best answer. When a client submits an application, but you do not collect the initial premium, it is important to remember that the client was looking to buy insurance. The client will not have coverage until you collect the premium. The client is waiting for coverage to start.

If an insured designates an irrevocable beneficiary on their Life insurance policy, they could do which of the following without the consent of that beneficiary: A. Appoint a new primary beneficiary B. Take cash surrender C. Change a dividend option D. Take a policy loan

C— Change a dividend option Explanation: Dividends have no effect on an irrevocable beneficiary's vested interest in a Life insurance contract, so the policy owner may change a dividend option at any time.

Term conversion is based upon: A. Original age B. Age 30 C. Current age D. Current health

C— Current age Explanation: Conversion is based upon a client's attained (also called current) age.

Policies written on a third-party ownership basis are usually written to cover: A. Your friend B. Estate needs C. Family members or business needs D. Yourself

C— Family members or business needs Explanation: When you own insurance on your spouse or on your children this is an example of third-party ownership. You may also buy insurance on a key person in your business. Third-party ownership is usually seen on policies that cover family members or business needs.

J buys Life insurance and names S as the primary beneficiary. If both die as a result of the same accident and it cannot be determined who died first, the proceeds will go to: A. Heirs of S B. S's estate C. J's estate D. J's heirs

C— J's estate Explanation: The uniform states common disaster clause states that if the insured and the primary beneficiary die as a result of the same accident, it is assumed that the insured died last. In the event there is no beneficiary listed when the insured dies, the policy face amount will go to the insured's estate. That would be J in this case.

The IRS classifies a policy whose cash value builds too fast according to IRS rules as which of the following? A. PPO B. MEWA C. MEC D. MET

C— MEC Explanation: If the cash value of a Life insurance policy exceeds the premiums paid in in the first seven years, the IRS will classify the Life insurance policy as a Modified Endowment Contract (MEC) and the Life insurance policy will lose its tax favorability.

All of the following are true about an LP 65, EXCEPT: A. It is a type of Whole Life insurance B. Cash value equals face amount at age 100 C. Premiums are payable until age 100 D. Coverage is provided until death or age 100, whichever comes first

C— Premiums are payable until age 100 Explanation: An LP 65 is a type of Whole Life where the premium pay in period has been shortened. In this case the premiums are payable until the age of 65. Cash value equals face amount at age 100.

Social Security Disability Income benefits are based upon: A. Your need B. Your age C. Primary Insurance Amount D. Your health

C— Primary Insurance Amount Explanation: Social Security Disability Income benefits are based upon your Primary Insurance Amount (PIA). The PIA is a formula that takes into account how long you have been in the system, how much you have paid in, how old you are when you need your benefit and determines how much you will receive.

On submittal application, when delivering a policy: A. Producer should loan the applicant the premium B. COD submittal application is not allowed C. Producer should get 1st premium and statement of continued good health D. You should make sure that no matter the insured's health you get their money

C— Producer should get 1st premium and statement of continued good health Explanation: When you collect an application from the client, but not the initial premium, this is called a COD submittal application. When you deliver the policy to the client, you will need to collect the first premium and get a statement of continued good health. If the client's health has changed at all, do not collect the premium from your client, call your insurance company and ask how you should now proceed.

The rider that will pay the premium on a child's policy if a parent becomes disabled is: A. Cost of Living rider B. Waiver of Premium rider C. Payor Benefit rider D. Guaranteed Insurability rider

C— That the applicant for insurance be informed that a consumer report may be requested Explanation: The Payor Benefit rider is designed to be added to a policy owned on the life of a child for an additional premium. In the event that the person responsible for paying the premium on the policy should die or become totally disabled, this rider will take effect and keep the policy written on the life of the child in force, until the child reaches the age of majority. At that point absolute assignment would occur and the policy would become the property of the child.

An employer buys and pays the entire premium on a $50,000 Group Life policy for all of his employees. All are true, EXCEPT: A. Proceeds are paid tax free B. This is a noncontributory group C. The employer is the beneficiary D. Employer's premiums are tax deductible

C— The employer is the beneficiary Explanation: Remember to always reword the question without the "except". In this case you are looking for what is false. If the employer buys Group Life for the employees and pays the entire premium, this means it is a noncontributory group. Life insurance proceeds are tax free. Any premium paid by the employer is tax deductible. The answer is "the employer is the beneficiary". This is false. It is right because it is wrong. In fact, on a group policy, the employer may not be named as the beneficiary. On Group Life it is the employee that selects the beneficiary.

On Life insurance, what is the purpose of the Entire Contract Clause? A. To spell out the rights of the policy owner B. To limit the policy to the contract itself, plus the attached application C. To limit the policy to the contract itself, plus any riders or endorsements attached with mutual consent of the parties D. To spell out the rights of the beneficiary

C— To limit the policy to the contract itself, plus any riders or endorsements attached with mutual consent of the parties Explanation: Remember, if faced with two answers, both of which are correct, always pick the most correct answer.

A policy that allows for changes in premiums, cash values and death benefits based on changes in mortality, expenses and interest rates is: A. Variable Life B. Adjustable Life C. Universal Life D. Increasing Term

C— Universal Life Explanation: Remember, Universal Life is tied to interest rates. If interest rates where to drop dramatically, the insured may be asked to pay in more in premiums.

Which of the following policies does not have a guaranteed interest rate or cash value? A. Equity-indexed Life B. Universal Life C. Variable/Universal Life D. Interest Sensitive Whole Life

C— Variable/Universal Life Explanation: Variable/Universal Life insurance invests the client's money into the stock market. The stock market does not have a guaranteed interest rate.

A 30-year old wants cash value Life insurance that will cover him until he dies, but that he can pay up before he retires at age 60. Which of the following policies would be most appropriate? A. Traditional Whole Life B. Endowment C. 30-year Level Term D. 30 Pay Life

D— 30 Pay Life Explanation: This client would like a type of insurance that provides permanent protection, but has a limited pay in period. If he purchases a 30 Pay Life policy at age 30, the premiums will be paid up by age 60, but the protection will last until the client dies or reaches age 100.

A rider that keeps the policy from lapsing by borrowing from the cash value is: A. Payor Benefit rider B. Waiver of Premium rider C. Guaranteed Insurability D. Automatic Premium Loan

D— Automatic Premium Loan Explanation: In order to have a policy remain in force the premium must be paid. The Automatic Premium Loan rider can exist on any policy that has cash value. In the event the client forgets to pay the premium; this rider will create a loan against the cash value and keep the policy in force.

Which of the following is not an owner's right? A. Selecting the dividend option B. Changing the beneficiary C. Paying the premium D. Changing an irrevocable beneficiary

D— Changing an irrevocable beneficiary Explanation: Changing an irrevocable beneficiary is not an owner's right.

The clause that prevents the insurer from changing a policy after issue is which? A. Time Limit on Certain Defenses B. Consideration C. Incontestability D. Entire Contract

D— Entire Contract Explanation: The Entire Contract Clause prevents the insurer from changing a policy after is has been issued. The Entire Contract consists of the policy, plus the application, if attached.

A person selling Variable Life insurance must be registered with the: A. NALU B. NAIC C. AARP D. FINRA

D— FINRA Explanation: To sell variable products you must be registered with FINRA (Financial Industry Regulatory Authority), have your Series 6 or Series 7 license and your life and variable authority. FINRA used to be called the NASD.

In an Equity-indexed Annuity, which of the following statement is correct? A. They require a securities license to sell B. Equity-index Annuities are illegal C. If the index performs well, the annuitant's premium will be less D. If the index performs well, the annuitant will be credited with the extra earnings

D— If the index performs well, the annuitant will be credited with the extra earnings Explanation: An Equity-indexed product is not considered a security, but can be sold with your insurance license. An equity indexed product does pay a minimum interest rate. The product's interest (earnings) is tied to the performance of an index. If the index performs well, the client's earning will be credited with extra earnings.

The name of the rider that waives premiums on a child's policy should the payor die or become disabled is called: A. Beneficiary Clause B. Accelerated Benefits Clause C. Waiver of Premium D. Payor Benefit

D— Payor Benefit Explanation: Be careful not to confuse Waiver of Premium Rider, which you would add to a policy owned on your own life, with the Payor Benefit Rider, which you would add to a policy owned on the life of a child.

A life policy that is guaranteed to have $480 of cash value per $1,000 of face amount in the 20th year is what type of policy: A. Increasing Term B. Universal Life C. Variable Life D. Straight Whole Life

D— Straight Whole Life Explanation: cash value, so right of the bat you know it can't be Term, since Term has no cash value. It also can't be Variable Life, since in Variable Life the cash value goes into the separate account, which acts like a mutual fund and invests in the stock market, and there is no guarantee in the stock market. So you are left to choose between Universal Life and Straight Whole Life. In a Universal Life policy the face amount (death benefit option A) is made up of Term insurance. The cash value in Universal Life has a current rate that is guaranteed for 1 year only. It also has a minimum guaranteed interest rate (around 4%). The only way the cash value is going to pay out is if the insured has selected, and paid extra, for death benefit option B. So that leaves you with, Straight Whole Life. In Straight Whole Life the premium is fixed, based upon your original age, gender, health, hobbies and occupation when you purchased the policy. The premium never changes. Straight means that the premium is payable from the original age until death or age 100, whichever happens first. The premium goes into the insurance company's general account, which has a minimum guaranteed interest rate (4%). So as the insured you know exactly what the cash value will be at each specific age when you purchase Straight Whole Life.

Marie sent in a change of beneficiary to her Life insurance company, but died before they received it. Which of the following is true? A. The change was effective upon mailing B. The change is effective when the company received it C. The change is null and void due to her death D. The change is effective when a company officer accepts it

D— The change is effective when a company officer accepts it Explanation: In this question Marie would like to change her beneficiary. Remember, before any change can be valid it must be countersigned by the insurer. When the insurance company receives Marie's change request, a company officer will check her file. If it says that she has an irrevocable primary beneficiary, then no change will be made. If the beneficiary is revocable, the company officer will accept the change.

Of the following statements about the Insuring Clause, which is correct? A. The insuring clause is found on the last page of the policy B. The insured has the legally enforceable promise C. The insurer has no obligation to perform D. The insurer's legally enforceable promise is found in the insuring clause

D— The insurer's legally enforceable promise is found in the insuring clause Explanation: The insurer has the legally enforceable promise to pay. This promise to pay is found on the first page of the policy in the insuring clause.

A client wants cash value Life insurance with a flexible premium and an adjustable death benefit that will allow him to self direct where the cash value in the separate account is invested. He should buy: A. Variable Annuity B. Variable Life C. Traditional Whole Life D. Variable/Universal Life

D— Variable/Universal Life Explanation: The only policy that allows the client to self-direct funds within the separate account is the Variable/Universal Life policy.