Life Insurance Exam: Chapter 2

Pure Death Protection

- if the insured dies during this term, the policy pays the death benefit to the beneficiary - if the policy is canceled or expires prior to the insured's death, nothing is payable at the end of the term - there is no cash value or living benefits

Annuities can be used to fund which of the following? a. variable life insurance b. group life insurance c. estate creation d. retirement plans

d. retirement plans

What is one common protection offered by all life insurance products?

death protection

T/F Term insurance provides what is known as pure death protection.

True

Which of the following is true for both equity indexed annuities and fixed annuities? a. they have guaranteed minimum interest rate b. they are both tied to an equity index c. both are considered to be more risky than variable annuities d. they invest on a conservative basis

a. they have guaranteed minimum interest rate

Which of the following types of policies allows the policyowner to skip premium payments, provided that there is enough cash value in the policy to cover the premium amount? a. universal life b. flexible life c. variable life d. adjustable life

a. universal life

When an annuity is written, whose life expectancy is taken into account?

annuitant

Pure Life Insurance

another name for term life insurance

The minimum interest rate on an equity indexed annuity is often based on a. the annuitant's individual stock portfolio b. the insurance company's general account investments c. an index like standard and poor's 500 d. the returns from the insurance company's separate account

c. an index like standard and poor's 500

An insurance policy that only requires a payment of premium at its inception, provides insurance protection for the life of the insured, and matures at the insured's age 100 is called a. level term life b. graded premium whole life c. single premium whole life d. modified endowment contract (MEC)

c. single premium whole life

Which of the following is true for both equity indexed annuities and fixed annuities? a. both are considered more risky than variable annuities b. they invest on a conservative basis c. they have a guaranteed minimum interest rate d. they are both tied to an equity index

c. they have a guaranteed minimum interest rate

When would a 20-pay whole life policy endow? a. after 20 payments b. in 20 years c. when the insured reaches age 100 d. at the insured's age 65

c. when the insured reaches age 100 A limited-pay whole life policy, just like straight life, endows for the face amount if the insured lives to age 100. The premium is, however, completely paid off in 20 years.

The death protection component of universal life insurance is always a. whole life b. adjustable life c. decreasing term d. annually renewable term

d. annually renewable term

In an adjustable life policy all of the following can be changed by the policy owner except a. the length of the coverage b. the premium c. the amount of insurance d. the type of investment

d. the type of investment

Securities

financial instruments that may trade for value (for example, stocks, bonds, options)

Why is an equity indexed annuity considered to be a fixed annuity?

it has a guaranteed minimum interest rate

Regarding the length of coverage, what are the two categories of all life insurance policies?

temporary and permanent protection

Level Premium

the premium that does not change throughout the life of a policy

T/F Term policies provide for the greatest amount of coverage for the highest premium as compared to any other form of protection.

False Term policies provide for the greatest amount of coverage for the lowest premium as compared to any other form of protection.

T/F There is usually a maximum age above which term insurance coverage will not be offered or at which coverage cannot be renewed.

True

Suitability

a requirement to determine if an insurance product is appropriate for a customer

Which of the following is incorrect regarding a $100,000 20-year level term policy? a. at the end of 20 years, the policy's cash value will equal $100,000 b. the policy premiums will remain level for 20 years c. if the insured dies before the policy expired, the beneficiary will receive $100,000 d. the policy will expire at the end of the 20 year period

a. at the end of 20 years, the policy's cash value will equal $100,000 Term level policies do not develop cash values.

In increasing and decreasing term policies, which policy component fluctuates during the policy term? a. death benefit b. premium c. cash value d. nonforfeiture values

a. death benefit

The term "fixed" in a fixed annuity refers to all of the following except a. death benefit b. guaranteed rate of interest c. equal annuity payments d. amount and length of payments

a. death benefit

What type of premium do both Universal Life and Variable Universal Life policies have? a. flexible b. level fixed c. decreasing d. increasing

a. flexible

Fixed annuities provide all of the following except a. hedge against inflation b. equal monthly payments for life' c. minimum guaranteed rate of interest d. future income payments

a. hedge against inflation

In which of the following cases will the insured be able to receive the full face amount from a whole life policy? a. if the insured lives to age 100 b. as soon as the cash value exceeds the face amount c. if there are no named beneficiaries when the policy is paid up d. at age 65

a. if the insured lives to age 100 Whole life insurance provides protection for the entire lifetime of the insured. If the insured lives to the age of 100, the company pays the face amount of the policy of the policy owner (usually the insured).

The type of term insurance that provides increasing benefits as the insured ages is called a. increasing term b. flexible term c. interest-sensitive term d. age-sensitive term

a. increasing term

An insured buys a 5-year level premium term policy with a face amount of $10,000. The policy also contains renewability and convertibility options. When the insured renews the policy in 5 years, what will happen to the premium? a. it will increase because the insured will be 5 years older than when the policy was originally purchased b. it will remain the same for the new 5-year term c. it will decrease for the new 5-year term since the insured is now a lesser risk to the company d. it will increase each year during the next 5 years as the face amount increases each year

a. it will increase because the insured will be 5 years older than when the policy was originally purchased

A married couple owns a permanent policy which covers both of their lives and pays the death benefit only upon the death of the first insured. Which policy is that? a. joint life policy b. survivorship life policy c. second to die d. family income policy

a. joint life policy

Variable whole life insurance is based on what type of premium? a. level fixed b. increasing c. flexible d. graded

a. level fixed

Which of the following has the right to convert the existing term coverage to permanent insurance? a. policyowner b. insurer c. beneficiary d. producer

a. policyowner Convertible term insurance give the policyowner the right to convert the policy to a permanent insurance policy without evidence of insurability.

In terms of policies, what happens to the premium throughout the term of the policy? a. remains level b. gradually increases c. gradually decreases d. fluctuates

a. remains level There are three basic types of term coverage available, based on how the face amount (death benefit) changes during the policy term: Level, Increasing, and Decreasing. Regardless of the type of term insurance purchased, the premium is often level throughout the term of the policy.

Which of the following policies would be classified as a traditional level premium contract? a. straight life b. adjustable life c. universal life d. variable universal life

a. straight life Straight life policies have a level guaranteed face amount and a level premium for the life of the insured.

Which of the following is called a "second-to-die" policy? a. survivorship life b. family income c. juvenile life d. joint life

a. survivorship life

Which of the following types of insurance policies would provide the greatest amount of protection for a temporary period during which an insured will have limited financial resources? a. term b. whole life c. annuity d. variable life

a. term Term insurance provides a death benefit only; cost per $1,000 of coverage is less than other types of policies that create cash values.

All of the following are true of an annuity owner except a. the owner must be the party to receive benefits b. the owner pays the premium to the annuity c. the owner has the right to name the beneficiary d. the owner is the party who may surrender the annuity

a. the owner must be the party to receive benefits

All of the following are true about variable products except a. the premiums are invested in the insurer's general account b. the minimum death benefit is guaranteed c. the cash value is not guaranteed d. policyowners bear the investment risk

a. the premiums are invested in the insurer's general account

A straight life policy has what type of premium? a. a variable annual premium for the life of the insured b. a level annual premium for the life of the insured c. an increasing annual premium for the life of the insured d. a decreasing annual premium for the life of the insured

b. a level annual premium for the life of the insured

Your customer doesn't mind paying a higher premium as long as he gets a life insurance product that would allow for faster growth of the cash value. What kind of policy would you recommend? a. a whole life policy b. an endowment policy c. a term policy d. an annuity

b. an endowment policy

Which of the following terms best describe the coverage provided by term policies, as compared to any other form of protection? a. longest b. greatest c. least d. most comprehensive

b. greatest Term policies provide for the greatest amount of coverage for the lowest premium, as compared to any other form of protection

What are the two components of a universal policy? a. seperate account and policy loans b. insurance and cash account c. insurance and investments d. mortality cost and interest

b. insurance and cash account

Which of the following best describes annually renewable term insurance? a. it provides an annually increasing death benefit b. it is level term insurance c. it requires proof of insurability at each renewal d. neither the premium nor the death benefit is affected by the insured's age

b. it is level term insurance Annually renewable term is a form of level term insurance that offers the most insurance at the lowest cost

A policy will pay the death benefit if the insured dies during the 20-year premium-paying period, and nothing if the death occurs after the 20-year period. What type of policy is this? a. limited pay whole life b. level term c. term to specified age d. ordinary life policy

b. level term A 20-year term policy is written to provide a level death benefit for 20 years.

Your client wants both protection and savings from the insurance, and is willing to pay premiums until retirement at age 65. What would be the right policy for this client? a. increasing term b. limited pay whole life c. interest-sensitive whole life d. life annuity with period certain

b. limited pay whole life Premium payments will cease at client's age 65, but coverage will continue to their death or age 100.

Which two terms are associated directly with the way an annuity is funded? a. renewable and convertible b. single payment or periodic payments c. increasing or decreasing d. immediate or deferred

b. single payment or periodic payments

an insurance policy that only requires a payment of premium at its inception, provides insurance protection for the life of the insured, and matures at the insured's age 100 is called a. graded premium whole life b. single premium whole life c. modified endowment contract (MEC) d. level term life

b. single premium whole life

Which of the following is true regarding variable annuities? a. a person selling variable annuities is required to have only a life agent's license b. the annuitant assumed the risk of investment c. the funds are invested in the company's general account d. the company guarantees a minimum interest rate

b. the annuitant assumed the risk of investment

The policy owner of an adjustable life policy wants to increase the death benefit. Which of the following statements is correct regarding this change? a. the death benefit can be increased only by exchanging the existing policy for a new one b. the death benefit can be increased by providing evidence of insurability c. the death benefit cannot be increased d. the death benefit can be increased only when the policy has developed a cash value

b. the death benefit can be increased by providing evidence of insurability

Which of the following best describes what the annuity period is? a. the period of time from the effective date of the contract to the date of its termination b. the period of time during which accumulated money is converted into income payments c. the period of time from the accumulation period to the annuitization period d. the period of time during which money is accumulated in an annuity

b. the period of time during which accumulated money is converted into income payments

Which of the following statements is correct regarding a whole life policy? a. the death benefit may increase or decrease during the policy period b. the policyowner is entitled to policy loans c. cash values are not guaranteed d. the policy premium is based on the attained age.

b. the policyowner is entitled to policy loans

Why is term insurance temporary?

because it only provides coverage for a specific period of time.

Nonforfeiture Values

benefits in a life insurance policy that the policyowner cannot lose even if the policy is surrendered or lapses

Which of the following is not fundable by annuities? a. a person's retirement b. estate liquidation c. death benefits d. cash accumulation for any reason

c. death benefits

An individual has just borrowed $10,000 from his bank on a 5-year installment loan requiring monthly payments. What type of life insurance policy would be best suited to this situation? a. universal life b. whole life c. decreasing term d. variable life

c. decreasing term A decreasing term policy's face amount decreases as the amount of debt is reduced.

A lucky individual won the state lottery, so the state will be sending him a check each month for the next 25 years. What type of annuity products are they likely to use to provide these benefits? a. flexible payment annuity b. deferred interest annuity c. immediate annuity d. variable annuity

c. immediate annuity

Which statement is not true regarding a straight life policy? a. it usually develops cash value by the end of the third policy year b. it has the lowest annual premium of the three types of whole life policies c. its premium steadily decreases over time. in response to its growing cash value d. the face value of the policy is paid to the insured at age 100

c. its premium steadily decreases over time. in response to its growing cash value Straight life policies charge a level annual premium throughout the insured's lifetime and provide a level, guaranteed death benefit.

An insured has a life insurance policy that requires him to only pay premiums for a specified number of years until the policy is paid up. What kind of policy is that? a. adjustable life b. graded premium life c. limited-pay life d. variable life

c. limited-pay life

All of the following are types of term policies based on what happens to the face amount during the policy term except a. level b. increasing c. renewable d. decreasing

c. renewable There are three basic types of term coverage available, based on how the face amount (death benefit) changes during the policy term: Level, Increasing, and Decreasing. Regardless of the type of term insurance purchased, the premium is often level throughout the term of the policy. Only the amount of the death benefit may fluctuate.

the president of a company is starting an annuity and decides that his corporation will be the annuitant. Which of the following statements is true? a. a corporation can be an annuitant as long. as the beneficiary is a natural person b. the contract can be issued without an annuitant c. the annuitant must be a natural person d. a corporation can be an annuitant as long as it is also the owner

c. the annuitant must be a natural person

The policyowner of a universal life policy may skip paying the premium and the policy will not lapse as long as a. the policyowner cannot skip premiums without the policy lapsing b. the next month's premium is sufficient to cover both the current premium amount and the skipped amount c. the policy contains sufficient cash value to cover the cost of the insurance d. the previous premium payments were high enough to create an excess of premium

c. the policy contains sufficient cash value to cover the cost of the insurance

In a survivorship life policy, when does the insurer pay the death benefit? a. half at the first death, and half at the second death b. if the insured survives to age 100 c. upon the last death d. upon the first death

c. upon the last death

Which of the following products requires a securities license? a. equity indexed annuity b. deferred annuity c. variable annuity d. fixed annuity

c. variable annuity A variable annuity is considered to be a security and is regulated by the Securities Exchange Commission (SEC) in addition to state insurance regulations.

Liquidation of an Estate

converting a person's net worth into a cash flow

The type of policy that can be changed from one that does not accumulate cash value to the one that does is a a. Renewable Term Policy b. Decreasing Term Policy c. Whole Life Policy d. Convertible Term Policy

d. Convertible Term Policy A convertible term policy has a provision that allows the policyowner to convert to permanent insurance.

For variable products, underlying assets must be kept in a. a revenue account b. a money market account c. a general account d. a separate account

d. a separate account

What characteristic makes whole life permanent protection? a. guaranteed death benefit b. guaranteed level premium c. living benefits d. coverage death or age 100

d. coverage death or age 100 Whole Life policies are referred to as permanent protection, since as long as the premium is paid coverage will continue for the life of the insured or till the insured's age 100.

What does "level" refer to in level term insurance? a. premium b. cash value c. interest rate d. face amount

d. face amount The word level refers to the death benefit that does not change throughout the life of the policy.

A man purchased a $90,000 annuity with a single premium and began receiving payments 2 months after that. What type of annuity is it? a. flexible b. deferred c. variable d. immediate

d. immediate With an immediate annuity, distribution started within 1 year of purchase

Why is an equity indexed annuity considered to be a fixed annuity? a. it has modest investment potential b. it has a fixed rate of return c. it is not tied to an index like the S&P 500 d. it has a guaranteed minimum interest rate

d. it has a guaranteed minimum interest rate

Which of the following is not a type of whole life insurance? a. single premium b. straight life c. limited payment d. level term

d. level term

A man decided to purchase a $100,000 Annually Renewable Term Life policy to provide additional protection until his children finished college. He discovered that. his policy a. built cash values b. required proof of insurability every year c. decreased death benefit at each renewal d. required a premium increase each renewal

d. required a premium increase each renewal

Equity indexed annuities a. are more risky than variable annuities b. are security instruments c. invest conservatively d. seek higher returns

d. seek higher returns

A domestic insurer issuing variable contracts must establish one or more a. liability accounts b. annuity accounts c. general accounts d. separate accounts

d. separate accounts

Which type of life insurance policy generates immediate cash value? a. level term b. decreasing term c. continuous premium d. single premium

d. single premium

An insurance policy that only requires a payment of premium at its inception, provides insurance protection for the life of the insured, and matures at the insured's age 100 is called a. modified endowment contract (MEC) b. level term life c. graded premium whole life d. single premium whole life

d. single premium whole life

Which of the following would help prevent a universal life policy lapsing? a. face amount b. adjustable premium c. corridor of insurance d. target premium

d. target premium

The annuitant dies while the annuity is still in the accumulation stage. Which of the following is true? a. the owner's estate will receive the money paid into the annuity b. the insurance company will retain the cash value and pay back the premiums to the owner's estate c. the money will continue to grow tax-deferred until the liquidation period, and then will be paid to the beneficiary d. the beneficiary will receive the greater of the money paid into the annuity or the cash value

d. the beneficiary will receive the greater of the money paid into the annuity or the cash value

The policy owner of a universal life policy may skip paying the premium and the policy will not lapse as long as a. the previous premium payments were high enough to create an excess of premium b. the policyowner cannot skip premiums without the policy lapsing c. the next month's premium is sufficient to cover both the current premium amount and the skipped amount d. the policy contains sufficient cash value to cover the cost of insurance

d. the policy contains sufficient cash value to cover the cost of insurance

Which of the following policies would have an IRS-required corridor or gap between the cash value and the death benefit? a. universal life - option b b. equity-indexed universal life c. variable universal life d. universal life - option a

d. universal life - option a

All of the following are true regarding the convertibility option under a term life insurance policy except a. evidence of insurability is not required b. most term policies contain a convertibility option c. upon conversion, the premium for the permanent policy will be based upon attained age d. upon conversion, the death benefit of the permanent policy will be reduced by 50%

d. upon conversion, the death benefit of the permanent policy will be reduced by 50%

What is the most common type of temporary protection purchased?

level term

Face Amount

the amount of benefit stated in the life insurance policy

Endow

the cash value of a whole life policy has reached the contractual face amount

Attained Age

the insured's age at the time the policy is issued or renewed

When would a 20-pay whole life policy endow?

when the insured reaches age 100

T/F Term insurance has cash value.

False Term insurance has no cash value.

What license or licenses are required to sell variable annuities?

both life insurance and securities licenses are required

Qualified Plan

a retirement plan that meets the IRS guidelines for receiving favorable tax treatment

The least expensive first-year premium is found in which of the following policies? a. decreasing term b. level term c. annually renewable term d. increasing term

c. annually renewable term Annually renewable term is the purest form of term insurance.

Which component increases in the increasing term insurance? a. interest on the proceeds b. premium c. death benefit d. cash value

c. death benefit

If the owner of a whole life policy who is also the insured dies at age 80, and there are no outstanding loans on the policy, what portion of the death benefit will be paid to the beneficiary? a. a full death benefit b. a death benefit equal to the cash value of the policy c. 50% of the death benefit d. the face amount minus the premiums that would have been collected until the insured reached the age of 100

a. a full death benefit Whole life insurance policies guarantee the death benefit. If the insured lives to the age of 200, the insurance company pay the owner the face amount (equal the cash value). However, if the insured dies prior to the policy maturity date, the death benefit is paid to the beneficiary.

Cash Value

a policy's savings element or living benefit

The premium of a survivorship life policy compared with that of a joint life policy would be a. lower b. higher c. as high d. half the amount

a. lower

Which of the following determines the cash value of a variable life policy? a. the performance of the policy portfolio b. the company's general account c. the policy's guaranteed d. the premium mode

a. the performance of the policy portfolio The cash value of a variable life policy is not guaranteed and fluctuates with the performance of the portfolio in which the premiums have been invested by the insurer.

Which policy component decreases in decreasing term insurance? a. premium b. face amount c. cash value d. dividend

b. face amount

The main difference between immediate and deferred annuities is a. the amount of each payment b. when the income payments begin c. how the annuity is purchased dd. the number of insureds

b. when the income payments begin

Annually renewable term policies provide a level death benefit for a premium that a. decreases annually b. remains level c. fluctuates d. increases annually

d. increases annually

Which of the following is not true regarding equity indexed annuities? a. the insurance company keeps a percentage of the returns b. they have guaranteed minimum interest rates c. they are less risky than variable annuities d. they earn lower interest rates than fixed annuities

d. they earn lower interest rates than fixed annuities

Policy Maturity

in life policies, the time when the face value is paid out

Deferred

withheld or postponed until a specified time or event in the future

Living Benefit

The policyowner can borrow against the cash value while the policy is in effect, or can receive the cash value when the policy is surrendered. The cash vale, also called nonforfeiture value, does not usually accumulate until the third policy year and it grows tax deferred.

A universal life insurance policy is best described as an a. annually renewable term policy with a cash value account b. variable life with a cash value account c. whole life policy with two premiums: target and minimum d. flexible premium variable life policy

a. annually renewable term policy with a cash value account

To sell variable life insurance policies, an agent must receive all of the following except a. a life insurance license b. SEC registration c. FINRA registration d. a securities license

b. SEC registration

Which of the following is an example of a limited-pay life policy? a. level term life b. straight life c. life paid-up at age 65 d. renewable term to age 70

c. life paid-up at age 65

Which of the following is true regarding the annuity period? a. during this period of time the annuity payments grow interest tax deferred b. it is also referred to as the accumulation period c. it is the period of time during which the annuitant makes premium payments into the annuity d. it may last for the lifetime of the annuitant

d. it may last for the lifetime of the annuitant

Level term insurance provides a level death benefit and a level premium during the policy term. If the policy renews at the end of a specified period of time, the policy premium will be a. adjusted to the insured's age at the time of renewal b. determined by the health of the insured c. based on the issue age of the insured d. discounted

a. adjusted to the insured's age at the time of renewal

Death Benefit

the death benefit is guaranteed and also remains level for life