Life Insurance Basics 7%

The factor added to the net premium to cover the costs of the insurer in obtaining and maintaining the business is called - Dividend accumulation - Premium tax - Expenses - Legal reserve

- Expenses Loading is another term for expenses. Net premium (mortality minus interest earned) plus expenses (or loading) equal the gross premium.

Most agents try to collect the initial premium for submission with the application. When an agent collects the initial premium from the applicant, the agent should issue the applicant a - Backdated receipt. - Warranty. - Premium receipt. - Statement of good health.

- Premium receipt. When collecting the initial premium, the agent should issue the applicant a premium receipt.

Which of the following stipulates that life insurance premiums can be paid in advance of policy insurance? - Grace period provision - Policy issuance clause - Prepayment clause - Payment of premium clause

- Payment of premium clause The clause that allows for life insurance premiums to be paid in advance is called the payment of premium clause.

When an employer offers to give an employee a wage increase in the amount of the premium on a new life insurance policy, this is called - Key person policy - Fraternal association - Aleatory contract - Executive bonus

- Executive bonus When an employer offers to give an employee a wage increase in the amount of the premium on a new life insurance policy, this is called an executive bonus.

What describes the specific information about a policy? - Illustrations - Buyer's guide - Producer's report - Policy summary

- Policy summary A policy summary describes the features and elements of the specific policy for which a person is applying.

If an applicant for a life insurance policy and person to be insured by the policy are two different people, the underwriter would be concerned about - Which individual will pay the premium. - Whether an insurable interest exists between the individuals. - The gender of the applicant. - The type of policy requested.

- Whether an insurable interest exists between the individuals. An insurable interest must exist at the time the policy is issued. Some relationships are automatically presumed to qualify as an insurable interest, e.g., spouses, parents, children and certain business relationships.

How long must an insurer keep the receipt of policy delivery to the policyowner if the delivery was by mail? - 4 years - 5 years - 1 year - 2 years

- 2 years When an individual policy is delivered by mail, the receipts and the certificate of mailing must be kept by the insurer for 2 years.

All of the following are personal uses of life insurance EXCEPT: - Cash accumulation - Buy-sell agreement - Survivor protection - Estate creation

- Buy-sell agreement. Personal uses of life insurance include survivor protection, estate creation and conservation, cash accumulation, and liquidity. A buy-sell agreement is for business uses of life insurance.

If an insured changes his payment plan from monthly to annually, what happens to the total premium? - Decreases - Stays the same - Doubles - Increases

- Decreases Because the insurer would have the entire premium to invest for a full year, they would reduce the premium amount.

When J. applied for a life insurance policy, the agent informed him that a medical exam would be required. The exam may be completed by - A physician of the applicant's choice and at his expense. - A home office underwriter. - A paramedic or examining physician at the insurer's expense. - The agent.

- A paramedic or examining physician at the insurer's expense. The applicant may be allowed to select the physician or paramedic facility to perform the examination. The insurer pays the cost of such an examination.

The term "illustration" in a life insurance policy refers to - A depiction of policy benefits and guarantees. - Pictures accompanying a policy. - Charts and graphs. - A presentation of nonguaranteed elements of a policy.

- A presentation of nonguaranteed elements of a policy. The term "illustration" means a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years.

Which of the following applicants could the insurer charge a higher rate of premium and not violate regulations regarding unfair discrimination? - An applicant who is a smoker - An applicant who was born in another country - An applicant who is legally blind - An applicant who has been a victim of domestic abuse

- An applicant who is a smoker Smoking or not smoking is a rating factor.

An underwriter is reviewing the medical questions in the application and needs further information due to a medical situation the applicant had in the past. What will the underwriter require? - Statement of Continued Good Health - Attending Physician Statement - A complete medical record - Sworn health affidavit from the applicant

- Attending Physician Statement The APS is used to obtain medical DETAILS about a specific condition which has shown up in the application; the insurance company orders the information directly from the physician, using a signed authorization which was part of the application.

In terms of Social Security, what is the name for the time period after the youngest child of a family turns 16 and before the surviving spouse may start receiving retirement benefits? - Benefit reduction - Accumulation period - Blackout period - Nonpayment interval

- Blackout period Blackout period begins when the youngest child reaches the age of 16, and ends when the surviving spouse qualifies for retirement benefits, as early as age 60. No benefits are paid during this time.

The full premium was submitted with the application for life insurance, and the policy was issued two weeks later as requested. When does the policy coverage become effective? - As of the first of the month after the policy issue - As of the policy issue date - As of the application date - As of the policy delivery date

- As of the application date If the full premium was submitted with the application and the policy was issued as requested, the policy coverage effective date would generally coincide with the date of application.

Which of the following statements concerning buy-sell agreements is true? - Premiums paid are deductible as a business expense. - Benefits received are considered income taxable. - Buy-sell agreements pay in the event of a medical emergency. - Buy-sell agreements are normally funded with a life insurance policy.

- Buy-sell agreements are normally funded with a life insurance policy. A buy-sell agreement is simply a contract that establishes what will be done with a business in the event that an owner dies. Buy-sell agreements are normally funded with a life insurance policy.

If a change needs to be made to the application for insurance, the agent may do all of the following EXCEPT - Draw a line through the first answer, record the correct answer, and have the applicant initial the change. - Note on the application the reason for the change. - Destroy the application and complete a new one. - Erase the incorrect answer and record the correct answer.

- Erase the incorrect answer and record the correct answer. An agent should not use white-out, erase or obliterate any answers given to a question on an application. It could prevent an insurer from contesting the application, should it be necessary.

n the Executive Bonus plan, who is the owner of the policy, and who pays the premium? - Board of directors is the owner, and the board of directors pays the premium. - Company is the owner, and the company pays the premium. - Executive is the owner, and the executive pays the premium. - Company is the owner, but the executive pays the premium.

- Executive is the owner, and the executive pays the premium. Executive buys the policy and pays the premium, and the employer reimburses the executive for cost (or pays a bonus in the amount of the premium). Since the executive is receiving compensation, the amount paid by the employer would be considered taxable income.

Which of the following methods of calculating the amount of life insurance needed takes into account the insured's wages, years until retirement, and inflation? - Lump-sum approach - Human life value approach (HLVA) - Needs approach - Blackout approach

- Human life value approach (HLVA) Human life value approach is determined by the loss of income that would result with the death of the insured, after making adjustments for expenses, inflation, etc.

An insurer receives a report regarding a potential insured that includes the insured's financial status, hobbies and habits. What type of a report is that? - Underwriter's Report - Inspection Report - Medical Information Bureau's report - Agent's Report

- Inspection Report Inspection reports cover moral and financial information regarding a potential insured, usually supplied by private investigators and credit agencies. Companies that use inspection reports are subject to the rules outlined in the Fair Credit Reporting Act.

The Medical Information Bureau (MIB) was created to protect - Insureds from unreasonable underwriting requirements by the insurance companies. - Medical examiners that perform insurance physical examinations. - Insurance companies from adverse selection by high risk persons. - Insurance departments from lawsuits by policyowners.

- Insurance companies from adverse selection by high risk persons. The MIB makes information available to underwriters to assist them in the underwriting process. It is a nonprofit trade organization which receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals.

Which of the following statements regarding HIV testing for live insurance purposes is NOT true? - Positive test results will be forwarded to the state's Department of Health if a physician is not selected by the applicant. - The testing practices must meet the criteria of the U.S. Department of Health and Human Services. - HIV testing is regulated at the state level. - Insurers are barred from requesting HIV testing.

- Insurers are barred from requesting HIV testing. It is common for insurers to require HIV testing when an applicant seeks a policy with a large face amount. The insurer must abide by a variety of rules created by its respective state.

When Y applied for insurance and paid the initial premium on August 14, he was issued a conditional receipt. During the underwriting process, the insurance company found no reason to reject the risk or classify it other than as standard. Y was killed in an automobile accident on August 22, before the policy was issued. In this case, the insurance company will - Issue the policy anyway and pay the face value to the beneficiary. - Negotiate a reduced settlement with the beneficiary due to the unusual circumstances involved. - Return the premium to Y's estate, since it has no obligation to pay the death claim. - Keep the premium and reject the risk on the basis that the applicant died before the policy could be issued.

- Issue the policy anyway and pay the face value to the beneficiary. The conditional receipt says that coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last, as long as the applicant is found to be insurable as a standard risk, and policy is issued exactly as applied for

Which of the following best describes the MIB? - It is a rating organization for health insurance. - It is a nonprofit organization that maintains underwriting information on applicants for life and health insurance. - It is a government agency that collects medical information on the insured from the insurance companies. - It is a member organization that protects insured against insolvent insurers.

- It is a nonprofit organization that maintains underwriting information on applicants for life and health insurance. The Medical Information Bureau (MIB) is a nonprofit trade organization which receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals.

Which of the following individuals must have insurable interest in the insured? - Underwriter - Producer - Policyowner - Beneficiary

- Policyowner The policyowner must have an insurable interest in the insured (his/her own life if the policyowner and the insured is the same person), or in the life of a family member or a business partner.

Which of the following will be included in a policy summary? - Copies of illustrations and application - Comparisons with similar policies - Primary and secondary beneficiary designations - Premium amounts and surrender values

- Premium amounts and surrender values A policy summary must be delivered along with the policy and will provide the producer's name and address, the insurance company's home office address, the generic name of the policy issued, and premium, cash value, surrender value and death benefit figures for specific policy years.

Which of the following best details the underwriting process for life insurance? - Issuance of policies - Reporting and rejection of risks - Selection, classification, and rating of risks - Solicitation, negotiation and sale of policies

- Selection, classification, and rating of risks The underwriting process is accomplished by reviewing and evaluating information about an applicant and applying what is known of the individual against the insurer's standards and guidelines for insurability and premium rates.

Which of the following statements is correct about a standard risk classification in the same age group and with similar lifestyles? - Standard risk pays a higher premium than a substandard risk. - Standard risk requires extra rating. - Standard risk is also known as high exposure risk. - Standard risk is representative of the majority of people.

- Standard risk is representative of the majority of people. Standard risks are representative of the majority of people in their age and with similar lifestyles. They are the average risk.

A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as - Survivorship insurance - Juvenile protection provision - Survivor protection - Life planning

- Survivor protection Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. This is known as survivor protection.

A corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then - The benefit is subject to the exclusionary rule. - IRS has no jurisdiction. - The benefit is received as taxable income. - The benefit is received tax free.

- The benefit is received tax free. Should a key person die, the benefit is treated as a reimbursement to the business for loss of services from that key person.

An individual applied for an insurance policy and paid the initial premium. The insurer issued a conditional receipt. Five days later the applicant had to submit to a medical exam. If the policy is issued, what would be the policy's effective date? - The date of application - The date of medical exam - The date of policy delivery - The date of issue

- The date of medical exam If the company acknowledges receipt of the premium with a conditional receipt, the policy is in effect on the date of the application or the date of the medical exam (whichever is later), provided that the applicant is found insurable at the rate applied for.

Who is the owner and who is the beneficiary on a Key Person Life Insurance Policy? - The employer is the owner and the key employee is the beneficiary. - The key employee is the owner and beneficiary. - The key employee is the owner and the employer is the beneficiary. - The employer is the owner and beneficiary.

- The employer is the owner and beneficiary. With the key-person coverage, the business (the employer) is the applicant, owner, premium payer, and beneficiary.

Which of the following would NOT fall into the category of costs associated with death? - Final medical expenses of the insured - Day to day expenses of maintaining the family - The expense of a vacation for surviving family members - Funeral expenses

- The expense of a vacation for surviving family members These costs would take into account the final medical expenses of the insured, funeral expenses, and day to day expenses of maintaining the family including rent or mortgage payments, car payments, utilities, groceries, etc.

All of the following are true of key person insurance EXCEPT - The key employee is the insured. - The plan is funded by permanent insurance only. - There is no limitation on the number of key employee plans in force at any one time. - The employer is the owner, payor and beneficiary of the policy.

- The plan is funded by permanent insurance only. Key Person coverage may be funded by any type of life insurance.

All of the following statements concerning the use of life insurance as an Executive Bonus are correct EXCEPT - The employer pays a bonus to a selected employee to fund the policy. - It is considered a nonqualified employee benefit. - The policy is owned by the company. - Any type of insurance policy may be used.

- The policy is owned by the company. The policy is owned by the employee.

All of the following statements concerning the use of life insurance as an Executive Bonus are correct EXCEPT: - The policy is owned by the company. - Any type of insurance policy may be used. - The employer pays a bonus to a selected employee to fund the policy. - It is considered a nonqualified employee benefit.

- The policy is owned by the company. The policy is owned by the employee.

Which is generally true regarding insureds who have been classified as preferred risks? - They can borrow higher amounts off of their policies. - They can decide when to pay their monthly premiums. - They keep a higher percentage of any interest earned on their policies. - Their premiums are lower.

- Their premiums are lower. The preferred risk classification indicates that an insured is in excellent physical condition and employs healthy lifestyles and habits. These individuals qualify for lower premiums than those in the other categories.

What is the purpose of the buyer's guide? - To provide the name and address of the agent/producer issuing the policy - To list all policy riders - To provide information about the issued policy - To allow the consumer to compare the costs of different policies

- To allow the consumer to compare the costs of different policies The buyer's guide provides generic information about life insurance policies and allows the consumer to compare the costs of different policies. The policy summary provides specific information about the issued policy, as well as the insurer's information.

Which of the following is the best reason to purchase life insurance rather than annuities? - To liquidate a sum of money over a period of years - To create regular income payments - To liquidate a sum of money over a lifetime - To create an estate

- To create an estate With insurance, the death benefit creates an immediate estate should the insured die.

What is the purpose of key person insurance? - To provide health insurance to the families of key employees - To insure retirement benefits are available to all key employees - To maintain an account that insures the owner of a company remains solvent - To lessen the risk of financial loss because of the death of a key employee

- To lessen the risk of financial loss because of the death of a key employee A business can suffer a financial loss because of the premature death of a key employee that has specialized knowledge, skills or business contacts. A business can lessen the risk of such loss by the use of key person insurance.

Which of the following would least likely be considered a legitimate need that would be paid by insurance proceeds? - Debt cancellation - Day care - Vacation travel expenses - Travel expenses for family to come to the funeral

- Vacation travel expenses There are many legitimate need-based expenses that can be paid by life insurance proceeds, from groceries to retirement income. Vacation travel expenses are most likely to be considered a luxury and not a need.

When is the earliest a policy may go into effect? - When the insurer approves the application - After the underwriter reviews the policy - When the application is signed and a check is given to the agent - When the first premium is paid and the policy has been delivered

- When the application is signed and a check is given to the agent The policy can be effective as early as the date of the application, if the premium is submitted with the application and the policy is issued as applied for.

If a policy includes a free-look period of at least 10 days, the Buyer's Guide may be delivered to the applicant - With the policy. - Upon issuance of the policy. - Within 30 days after the first premium payment was collected. - Prior to filling out an application for insurance.

- With the policy. If a life insurance policy contains a free-look period of at least 10 days, the buyer's guide can be delivered with the policy. If it doesn't, the buyer's guide must be delivered prior to accepting the initial premium.

Partners in a business enter into a buy-sell agreement to purchase life insurance, which states that should one of them die prematurely, the other would be financially able to buy the interest of the deceased partner. What type of insurance policy may be used to fund this agreement? - Term insurance only - Permanent insurance only - Universal life insurance only - Any form of life insurance

- Any form of life insurance Any form of Life insurance may be used to fund a buy-sell agreement.

All advertisements are the responsibility of the - Advertising agency - Department of Insurance - Insurer - Soliciting agent

- Insurer The insurer whose policies are advertised is responsible for all its advertisements, regardless of who wrote, created, presented, or distributed them.

Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy? - Premiums are not tax deductible as a business expense - Premiums are tax deductible by the key employee - Premiums are tax deductible as a business expense - Premiums are taxable to the employee

- Premiums are not tax deductible as a business expense. The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free.

Which of the following is a generic consumer publication that explains life insurance in general terms in order to assist the applicant in the decision-making process? - Policy Summary - Illustrations - Buyer's Guide - Insurance Index

- Buyer's Guide The Buyer's Guide is a consumer publication that explains life insurance in general terms in order to assist the applicant in the decision-making process. It is a generic guide that does not address the specific policy of the insurer, instead explaining life insurance in a way that the average consumer can understand.

Why should the producer personally deliver the policy when the first premium has already been paid? - To ensure the producer gets paid commission - To find out how the family has been doing since the initial presentation - To make sure the policy is not stolen or lost - To help the insured understand all aspects of the contract

- To help the insured understand all aspects of the contract It is the producer's responsibility to make sure that the policy is understood by the insured and all of their questions are satisfied, and the delivery receipt is signed.

An applicant who receives a preferred risk classification qualifies for - Higher premiums than a person who receives a sub-standard risk. - Higher premiums than a person who receives a standard risk. - Lower premiums than a person who receives a standard risk. - Dividends payable for lack of claims.

- Lower premiums than a person who receives a standard risk. The preferred risk category is reserved for those persons with a superior physical condition, lifestyle, and habits.

Which of the following types or risk will result in the highest premium? - Substandard risk - Standard risk - Preferred risk - All risks pay equal premiums

- Substandard Risk The "substandard" rating indicates that an individual represents an under-average insurance risk because of physical condition, personal or family history of disease, occupation, habits or hobbies. This rating incurs the highest premium if policy is issued.

Which is the primary source of information used for insurance underwriting? - Applicant interviews - Medical records - Private investigations - Application

- Application The application contains most of the information used for underwriting purposes. This is why its completeness and accuracy are so crucial.

What does "liquidity" refer to in a life insurance policy? - The insured receives payments each month in retirement. - Cash values can be borrowed at any time. - The death benefit replaces the assets that would have accumulated if the insured had not died. - The policyowner receives dividend checks each year.

- Cash values can be borrowed at any time. Liquidity in life insurance refers to availability of cash to the insured through cash values.

All of the following are duties and responsibilities of producers at the time of application EXCEPT - Check to make sure that there are no unanswered questions on the application. - Change any incorrect statement on the application by personally initialing next to the corrected statement. - Explain the nature and type of any receipt the producer is giving to the applicant. - Probe beyond the stated questions if the producer feels the applicant is misrepresenting or concealing information.

- Change any incorrect statement on the application by personally initialing next to the corrected statement. Any changes to information on an application must be initialed by the applicant.

If an agent fails to obtain the applicant's signature on the insurance application, what must the insurer do? - Sign the application for the applicant. - Sign the application, stating it was by the agent. - Send the application to the insurer with a note explaining the absence of signature. - Return the application to the applicant for a signature.

- Return the application to the applicant for a signature. All applications must have the appropriate authorized signatures.

All of the following are factors that an underwriter could use to select and classify risk EXCEPT - Occupation - Avocation - National origin - Morals

- National origin The company will discriminate in favor of good risks and not of poor risks; however, it cannot discriminate unfairly by using factors such as race or national origin in their underwriting.

All of the following are duties and responsibilities of producers at the time of the application EXCEPT: - Check to make sure that there are no unanswered questions on the application. - Change any incorrect statement on the application by personally initialing next to the corrected statement. - Explain the nature and type of any receipt the producer is giving to the applicant. - Probe beyond the stated questions if the producer feels the applicant is misrepresenting or concealing information.

- Change any incorrect statement on the application by personally initialing next to the corrected statement. Any changes to information on an application must be initialed by the applicant.

If an applicant for a life insurance policy is found to be a substandard risk, the company is most likely to - Charge a higher premium. - Require a yearly medical examination. - Lower its insurability standards. - Refuse to issue the policy.

- Charge a higher premium The premium rate will be adjusted to reflect the insurer's increased risk.

A key person insurance policy can pay for which of the following? - Hospital bills of the key employee - Costs of training a replacement - Loss of personal income - Workers compensation

- Costs of training a replacement A key person insurance policy will pay for costs of running the business and replacing the employee.

Which of the following is NOT an example of a valid insurable interest? - Business partners in each other's lives - Employer in key employee's life - Child in parents' lives - Debtor in the life of the creditor

- Debtor in the life of the creditor The three recognized areas in which insurable interest exists are as follows: a policyowner insuring their own life, the life of a family member (relative or spouse), or the life of a business partner, key employee, or someone who has a financial obligation to the policyowner. A debtor does not have an insurable interest in the creditor.

Are insurance company underwriters allowed to discriminate? - Yes, but not unfairly - No, higher risks pay higher premium - No, discrimination is an unfair practice - Yes, but only for gender

- Yes, but not unfairly The company will discriminate in favor of good risks and not of poor risks; however, it cannot discriminate unfairly by using factors such as race or national origin in their underwriting.

An individual policy was delivered to the policyowner by an agent in person. Which of the following is true? - The policy is not considered delivered for 10 more days. - The delivery receipt must be kept on file for 3 years. - The receipt of delivery must contain the policy number and the date of delivery. - The agent must sign the delivery receipt.

- The receipt of delivery must contain the policy number and the date of delivery. When an individual policy is delivered to the policyowner by hand by an agent or broker, the policyholder must sign a delivery receipt. The receipt must contain the policy number and the date of delivery, and must be retained by the insurer for 2 years.

A producer must do all of the following when delivering a new policy to the insured EXCEPT: - Explain the policy provisions, riders, and exclusions - Collect any premium due - Explain the rating procedures if the policy is rated differently than applied for - Disclose commissions earned from the sale of the policy

- Disclose commissions earned from the sale of the policy. A producer must explain policy provisions, exclusions, and riders at the time of delivery, as well as the rating procedures, especially if the policy is rated differently than applied for. The producer must also collect any due premium and have the insured sign the statement of continued good health.

An agent and an applicant for a life insurance policy fill out and sign the application. However, the applicant does not wish to give the agent the initial premium, and no conditional receipt is issued. When will coverage begin? - On the designated effective date - On the application date - When the agent submits the application to the company and the company issues a conditional receipt - When the agent delivers the policy, collects the initial premium, and the applicant completes an acceptable Statement of Good Health

- When the agent delivers the policy, collects the initial premium, and the applicant completes an acceptable Statement of Good Health If the initial premium is not paid with the application, the agent will be required to collect the premium at the time of policy delivery. In this case, the applicant will most likely need to fill out a Statement of Good Health.