Life Insurance
For life and health insurance, insurable interest must exist at the time of: a. Application b. Loss c. Application and loss d. Policy delivery
A Insurable interest in a life and health insurance contract must exist at the time of application.
Which of the following is not a feature of term life insurance? a. Cash value b. Lower initial cost c. Limited duration d. Pure protection
A Term life insurance has no cash value and is often referred to as providing pure protection. Compared to the same face amount of whole life insurance, term will cost less
The face amount of insurance is also referred to as the: a. Cash value b. Policy proceeds c. Surrender value d. Loan value
B The face amount of insurance is the stated death benefit, or policy proceeds.
In an employer-sponsored group life insurance plan, the employee has control over which of the following? a. Amount of benefits b. Type of policy c. Naming a beneficiary d. Premium payment option
C In an employer-sponsored group life insurance plan, the employer determines the type of coverage, amount of coverage, and premium options, but naming the beneficiary is the employee's right
Dividend options do not include which of the following choices? a. Refund in cash b. Reduce premiums due c. Lifetime income d. Paid-up additional insurance
C Lifetime income is a death benefit settlement option.
Social Security monthly retirement benefits are determined using a formula that calculates which of the following? a. FICA b. FRA c. COLA d. PIA
. B The death of a key person can negatively impact business operations. The owner of a key person policy is the company and it may use the death benefit proceeds to cover the expense of recruiting, hiring, and training a replacement, which may take months to accomplish.
A long-term care rider a. Provides an amount equal to the death benefit plus any cash value to a terminally ill insured expected to die in the next 6 months b. Establishes a trust fund for the insured's family so that nursing home care can be paid for with insurance premiums instead of paying premiums directly to the life insurance company c. Pays 25% of the death benefit as monthly income for an insured who cannot perform all of the six activities of daily living d. Provides up to 100% of the policy benefits if the insured qualifies for benefits as specified in the rider but will reduce the amount of death benefit protection based on the amount paid under the rider
. D A long-term care rider provides up to 100% of the policy benefits if the insured qualifies for long-term care benefits as defined in the rider, such as the inability to perform 2 out of 6 activities of daily living. Any payout is an acceleration of the life insurance death benefit, meaning it will reduce the ultimate death benefit payable to the beneficiary.
A flexible premium deferred annuity permits all of the following, EXCEPT: a. A lump sum payment can be used to purchase the annuity b. Scheduled and unscheduled premiums may be payable at any time prior to annuitization c. Accumulated values in the account are not taxable until they are withdrawn d. Annuitization is allowed at any time
A A flexible premium annuity is not funded with a lump sum payment.
Which of these annuity distribution options promises the largest possible payment to a single annuitant? a. Life income only b. Life income with period certain c. Installment refund d. Lump sum refund
A A life income only option provides the largest possible payment since the insurer has no risk of paying income to a beneficiary. There is a greater possibility that the insurer will pay income beyond the life of the annuitant if any of the other options are selected.
When comparing life insurance to an annuity, an annuity: a. Protects against the annuitant living too long b. Provides tax-free payments for the lifetime of a beneficiary c. Creates a lump sum benefit to be paid upon the annuitant's death d. Guarantees a death benefit upon the insured's death
A Annuities protect against an annuitant living too long by providing a stream of income the annuitant cannot outlive. Annuities do not provide tax-free payments or guarantee a death benefit. Annuities liquidate an estate and life insurance creates an estate.
A Buy-Sell Agreement: a. Provides a business with funds in the event of the death of a key person who is not an owner b. Describes which relatives of a business owner have the right to purchase that person's interest in the business upon death c. Assures the continuation of the business by providing benefits to the surviving business partners to buyout a business partner's interest in the event one of them dies unexpectedly d. Specifies the conditions and requirements that are necessary to sell the business to a third party if a business owner dies unexpectedly
A In a contributory group insurance plan, eligible employees pay a portion of the premium. Part-time employees are usually not eligible. Dependents of an eligible employee do pay a required percentage of premium, the amount varies as determined by the employer. A contributory plan requires at least 75% participation of eligible employees. Noncontributory group plans require 100% participation.
In an employer-sponsored group life insurance plan, the employee's description of benefits is referred to as the: a. Certificate of Insurance b. Change of beneficiary form c. Master Policy d. Claim form
A The employees in a group life plan receive a certificate of insurance that describes the benefit, identifies the insurance company and policy and certificate numbers, and provides information about changing beneficiaries or filing a claim.
The insuring agreement in a life insurance policy states the: a. Insurance company is obligated to pay the policy proceeds upon presentation of valid proof of the death of the insured which occurred while the policy is in force b. Insurance company will not pay death claims in the event of suicide or other exclusion named in the policy unless all premiums are paid in advance c. Insurance company may refuse to pay a death claim in the event a mistake is found in the original application for insurance at the time of the insured's death d. Policyowner will indemnify the insurance company the policy proceeds if the beneficiary is not named in the application
A The insuring agreement is the basic promise to pay the benefit described in the policy when a claim is proved. In life insurance, a true certified copy of the death certificate is valid proof of death.
Which of the following is not true about life insurance applications? a. Primary source of underwriting b. Confidential communication between the agent and the insurer c. May contain all the necessary information to determine insurability d. Contains two parts: General Information and Health History
B A copy of the application will be included as part of the policy, and is therefore not confidential
A characteristic of a fixed annuity is that the: a. Annuitant cannot be changed b. Interest rate credited in the account varies based on the performance of the separate account c. Monthly income benefits are fixed and level d. Separate account has investment options
B A fixed annuity provides for a fixed level benefit payment to the annuitant when the contract is annuitized.
A warranty is defined as which of the following? a. Intentional misrepresentation on the application b. Statement in the application that is guaranteed to be true c. A false statement in the application d. A substantially true statement
B A warranty is a statement guaranteed true in all respects and if later discovered to be false, the contract may be voided.
The grace period in a life insurance policy is typically 31 days and provides for the: a. Insurance company to delay payment of the death benefit until it can determine the validity of the proof of death b. Payment of the premium to be received after its due date without a penalty or lapse in coverage c. Payment of the premium to be received after its due date with a maximum 5% penalty d. Policyowner to reinstate the policy before it lapses
B The grace period allows payment of the past due premium without a penalty or lapse in coverage. Any claim arising in the grace period is payable, but any unpaid premium will be deducted from the claim when paid.
Interest only, life income with period certain, lump sum, and life income only are all forms of which of these life insurance policy options? a. Nonforfeiture options b. Settlement options c. Dividend options d. Beneficiary options
B These are all examples of death benefit settlement options—how the beneficiary will receive the policy proceeds.
An advantage of key person life insurance is to: a. Provide the family of the deceased employee with up to ten years of the employee's lost future income b. Provide the owner of the policy with funds to recruit and train a replacement employee upon the death of an employee who contributes substantially to the success of a company c. Provide life insurance benefits to all eligible employees and their dependents d. Protect a partnership against the death of a partner by providing benefits to buyout a deceased partner's share of the business
C A Buy-Sell agreement is funded with life insurance and is designed to protect the business and assure continuation by providing benefits to the surviving business partners to buy out the deceased partner share of the business.
A contingent beneficiary has the right to: a. Share in the death benefit with the primary beneficiary b. Prevent the policyowner from taking a loan against the cash value c. Receive the policy proceeds if the primary beneficiary predeceases the insured d. Receive the policy proceeds if the primary beneficiary is a minor child
C A contingent beneficiary has no interest in the policy proceeds if there is a surviving primary beneficiary. Contingent and primary beneficiaries do not share the death benefit. Only an irrevocable primary beneficiary has the right to interfere with certain of the owner's rights in a life insurance policy
Which of the following is an insurance company that is organized under the laws of another state within the United States? a. Domestic b. Alien c. Foreign d. Authorized
C A foreign insurer is not organized under the laws of the state in which it is writing insurance, whereas a domestic insurer is organized under the laws of the state in which it is writing insurance.
A contract that is designed to accumulate value over time with the intent to provide a stream of income over the lifetime of an individual is called _________. a. Whole life insurance b. Variable life insurance c. Term insurance d. An annuity
D Annuities are designed to provide a stream of income for the lifetime of an individual. Life insurance policies such as whole life, variable life, and term insurance are designed to provide death benefits
HIPAA's privacy rules are implemented to: a. Allow an insurer to obtain investigative, medical, and financial reports to complete the underwriting process b. Protect the applicant from providing evidence of insurability c. Require all insurers to perform testing for HIV d. Protect the privacy of all individually identifiable health information
D HIPAA's Privacy Rules require insurers to preserve and protect patient confidentiality when obtaining individually identifiable health information
A policyowner who wishes to maintain all rights in the policy should designate a(n): a. Irrevocable beneficiary b. Primary beneficiary c. Contingent beneficiary d. Revocable beneficiary
D In order to maintain all rights in the policy, a policyowner should name a revocable beneficiary. An irrevocable beneficiary would have to provide consent for certain changes to a policy. Primary, contingent, and tertiary beneficiaries can be named as either revocable or irrevocable
Information from a third party collected by the insurance company in the application for insurance and during underwriting of the policy may be subject to the jurisdiction of which of the following? a. Unfair Claims Practices Act b. USA PATRIOT Act c. HIPAA d. Fair Credit Reporting Act
D The Fair Credit Reporting Act has jurisdiction over information collected through a thirdparty for underwriting purposes.
A federal regulation called the ______________ protects consumer privacy. a. Consolidated Omnibus Budget Reconciliation Act b. Fraudulent Insurance Act c. Privacy Protection Act d. Fair Credit Reporting Act
D The Fair Credit Reporting Act protects consumer privacy by ensuring that data collected by companies on a person is confidential, accurate, relevant, and used for a proper purpose.
A producer is explaining the concept of limited-pay life insurance to a 40-year-old client. When comparing a straight life policy with a 10-pay life policy, which of the following statements is correct? a. A 10-pay life policy will have a lower annual premium than a straight life b. A straight life policy has immediate cash value c. A policy fully paid up in 10 years will endow at the client's age of 50 d. The cash value in a straight life policy will accumulate at a slower rate than the cash value in a 10-pay life
D The actual amount of premium per year in a 10-pay life policy will be higher than straight life since the number of payments is reduced. Because of this, the cash value will accumulate faster in a 10-pay life and slower in a straight life policy. Both policies will endow at age 100. Neither a straight life or 10-pay life policy has immediate cash value.
A "level term" policy means that the _________ remains the same throughout the entire policy period. a. Cash value b. Loan value c. Beneficiary d. Face amount
D The death benefit or face amount of insurance remains level throughout the term of the policy. Term policies do not have cash value or loan value.
Each of the following is an element of a legal contract, EXCEPT: a. Consideration b. Legal Purpose c. Agreement d. Indemnity
D The fourth element of a legal contract is a competent party or someone that has the legal capacity to enter into a legal contract.
A viatical settlement is an agreement between a third party and a(n) ___________. a. Terminally ill insured's spouse and children who don't want to wait until the insured dies to collect the death benefit b. Policyowner insuring the life of a terminally ill insured with 2 years or less life expectancy c. Insurance agent representing the family of the terminally ill insured d. Lender who owns the mortgage on a terminally ill insured's home or business property
B A viatical settlement is an agreement between a third party and a life insurance policyowner insuring the life of an individual with a life-threatening or terminal illness, normally with a life expectancy of 2 years or less.
Which of the following products requires a producer to obtain a securities registration in addition to an insurance license in order to solicit? a. Universal Life b. Variable Universal Life c. Indexed Life d. Current Assumption Whole Life
B All variable products are subject to SEC regulation and can only be sold by individuals with a life insurance license and a FINRA (securities) registration
All of the following are characteristics of a qualified retirement plan, EXCEPT: a. Employer contributions are immediately tax deductible to the employer b. Employee contributions are either pre-tax or tax deductible c. The penalty for premature distributions may be waived for death, disability, qualified education costs, medical expenses and first -time homebuyers d. Employers in private industry are required to establish pension plans
. D A policy that does not pass the 7-Pay Test will be deemed a Modified Endowment Contract for the life of the contract. A policy can avoid being deemed a MEC if the policyowner receives a refund of excess premiums by the insurer within 60 days of the end of the contract year
All of the following statements regarding a Modified Endowment Contract are correct, EXCEPT: a. Distributions received from a MEC are subject to a LIFO tax treatment b. Distributions on gains withdrawn from a MEC prior to age 59 1/2 are subject to a 10% penalty in addition to taxation c. A policy that fails the 7-pay test will be deemed a MEC d. If a policy is deemed a MEC, the owner has 7 years to receive a refund of excess premiums and remove the MEC status
A As long as the insurance death benefit is not payable to the employer when an employee dies, the premiums paid for the life insurance are deductible to the business.
A Second to Die policy would be the most appropriate recommendation for which of the following? a. A husband and wife concerned about paying estate taxes after they have died b. A business owner who wants to make sure his wife has enough money to buy the business from his partner if he should die before his partner does c. A corporation concerned that its CEO might die before the end of his employment contract d. Two business partners who are concerned about the future success of the business and want to provide funds to purchase the business from the decedent's family
A Married couples worried about estate taxes would be best served in most cases by a Second to Die, or Joint Survivorship, Life policy.
A _______________ policy has a death benefit that will increase or decrease over time based on the performance of the separate account, provides a guaranteed minimum death benefit, offers a choice of subaccounts in which cash value may be allocated, and a has fixed premium. a. Variable Life b. Variable Universal Life c. Indexed Life d. Universal Life
A Only Variable Life has all of these characteristics. Variable Universal Life does not have a guaranteed minimum death benefit. Neither Indexed Life nor Universal life permits allocation of cash value in a separate account
Which of these modes would result in the insured paying the least amount per year for life insurance? a. Annual b. Semi-annual payroll deduction c. Monthly automatic bank draft d. Quarterly
A Paying premiums on an annual basis is always the least costly premium mode. Paying premiums monthly is usually the most expensive mode. Although some insurers may offer a discount for automatic monthly bank drafts, not all do, so this is not an acceptable choice. Payroll deduction is not a "mode."
Which of the following is NOT required to sign a completed application? a. Beneficiary b. Producer c. Applicant d. Insured or guardian
A The applicant, insured (or guardian if a minor) and the producer's signatures are all required in an application for insurance. The beneficiary is not required to sign the application
J is named in a policy as the individual who is entitled to receive the policy proceeds upon the death of T. Which of the following statements best applies to this scenario? a. J is named as the owner of T's policy b. T is the insured in the policy and J is the named beneficiary c. T is the owner and beneficiary of the policy d. J is the insured and beneficiary of the policy
B Based on the information provided, the only assumption that can be made is that T is the insured and J is the named beneficiary. The owner of the policy is not specified and could either be J or T.
All of the following statements regarding sources of underwriting are correct, except: a. A consumer investigative report may include a credit report b. The applicant may be denied coverage based solely on the MIB report c. A medical exam may be requested based on the amount of coverage being applied for d. The agent's report is confidential between the producer and the insurer
B The applicant may not be denied coverage based solely on the MIB report. This report is used as an alert for the insurer to gather additional information and to help detect fraud.
Which of the following statements is correct regarding an employer's ability to deduct the premiums it pays for an employee's life insurance benefit? a. Premiums are deductible as long as the business does not derive a direct benefit from the policy b. Premiums can be deductible if the business does not receive more than 50% of the death benefit c. An employer cannot ever deduct premiums it pays for an employee's life insurance benefit d. Employers can always deduct the premiums it pays for an employee's life insurance benefit
B The cost basis in this scenario is $20,000. Only the amount withdrawn that exceeds the cost basis is taxable. Therefore, of the $30,000 withdrawn, $10,000 is taxable.
All of the following are characteristics of a variable annuity, except: a. Premiums made into the annuity purchase accumulation units b. Designed to protect against inflation c. The separate account provides for a guaranteed minimum return d. Each month the payment will increase, decrease, or remain the same as the previous month's payment based on the actual return as compared to the assumed interest rate (AIR)
C A variable annuity does not provide for any minimum guarantees.
All of the following statements are correct regarding an annuity, EXCEPT: a. An annuity can be characterized by immediate or deferred income b. Annuity premiums can be made in single or periodic payments c. An immediate annuity must start providing income within 3 years of the first premium payment d. The accumulation value grows tax-deferred
C An immediate annuity must start providing income within one year of the first premium payment.
An application for insurance is completed and submitted to an insurance company. In order for coverage to be effective immediately, all of the following conditions must be met, except: a. A medical exam is not required b. A conditional receipt is issued c. The policy is issued at a higher risk than the standard risk applied for d. The initial premium is submitted with the application
C In order for coverage to be effective immediately, the policy must be issued as applied for
The incontestability clause states that after 2 years the: a. Insurer will not argue about which beneficiary is primary or contingent b. Insurer will only pay for suicide if the insured was insane at the time c. Insurer will not refuse to pay a death claim based on misinformation in the original application for insurance d. Policyowner cannot sue the insurer for misstatements made by the producer in the sale of the policy
C Incontestability means that the insurance company cannot use the statements in the original application for insurance as a reason to avoid paying a death claim. The policy becomes incontestable after two years in most states.
A life insurance policy is being applied for on Z's life. In order for the contract to be valid, all of the following have an insurable interest and could be the owner of the policy, except: a. Z b. Z's spouse c. Z's neighbor d. Z's business partner
C Insurable interest is defined as having a relationship which would result in a financial or economic loss if the insured dies. A neighbor is not an example of a party that meets this definition
Policy loan provisions include all of the following, EXCEPT: a. Interest is charged annually b. Unpaid interest is added to the value of the loan c. The death benefit of a policy is automatically reduced when a loan is requested d. Outstanding loans will be deducted from the face amount at time of claim
C Policy loans do not automatically reduce the death benefit in a policy. If an outstanding loan exists at the time of death, the amount of the loan will then reduce the benefit paid to the beneficiary.
C paid $20,000 in premiums into a $100,000 universal life insurance policy. The accumulated cash value was $35,000 when C received a cash withdrawal of $30,000. How much of the cash withdrawal was taxable? a. $20,000 b. $10,000 c. $0 d. $30,000
C Policy loans, cash dividends, and withdrawal of cost basis are not subject to taxation. Interest paid as part of a death benefit settlement option is taxed as ordinary income
Which rider waives the cost of insurance and expenses if an insured becomes disabled? a. Payor Benefit b. Return of Premium c. Waiver of Monthly Deduction d. Accelerated Death Benefit
C The Waiver of Monthly Deduction will waive the cost of insurance and expenses if the insured becomes disabled. The payor benefit rider will waive premiums if the owner of a policy (not the insured) becomes disabled; a return of premium rider will pay a refund of premiums if the insured is still living when the policy expires; and the accelerated death benefit rider will provide benefits if the insured is terminally ill.
A ______________ insurance company is owned by its policyholders. a. Stock b. Reciprocal c. Fraternal Benefits Society d. Mutual
D Its members, also called policyholders, own a mutual insurance company.
What is the primary advantage to the policyowner in the reinstatement of a life insurance policy? a. The insurance company cannot start a new period of contestability b. The insured is not required to prove insurability if under age 40 c. All policy loans that were outstanding at the time of lapse are forgiven and full cash value is restored d. The policyowner continues to enjoy the benefits that were provided in the original policy, including the original premium
D Reinstatement restores the policy to its original condition as if it were never lapsed. Even though the policy is reinstated at a later age, the original issue premium is all that the insurer will require.
A producer provided a conditional receipt to an applicant on May 5 at the time of an application based on a standard risk. The insurer required a routine medical exam, which was completed on May 15. The policy was issued based on a substandard risk on May 20 and the producer delivered the policy on May 22. The effective date of coverage is: a. May 5 b. May 15 c. May 20 d. May 22
D Since the policy was not issued as applied for, coverage is not effective until the producer delivers the policy on May 22 and explains the changes in coverage or increased premium due to a substandard risk. The applicant must accept the counteroffer.
A policy is applied for on September 2, accepted as an insurable risk on September 20, mailed to the producer on September 22, and delivered by the producer inperson to the policyowner on September 25. The free look begins September ___. a. 2 b. 20 c. 22 d. 25
D The free look period begins on the date the policyowner takes possession of the policy
All of the following factors are used to determine the monthly benefit payment of an annuity, except: a. Accumulated account value b. Age of annuitant c. Annuity payment option selected d. Annuitant's medical history
D The monthly annuity payment is based on several factors, including the accumulated value, interest rate, age and gender of annuitant and the payment option selected. Since there are no insurability requirements, the annuitant's medical history is not a factor
Which of the following distributions in a life insurance policy is taxable? a. Policy loans b. Cash dividend from a participating policy c. Interest paid on a death benefit settlement option d. Withdrawal of cost basis
D To be eligible for SS all benefits and be considered fully insured, a worker must have earned 40 credits.
Which of the following are characteristics of universal life insurance policies? a. Fixed death benefit for life with premiums that may be increased or decreased b. Adjustable death benefit with premiums that are fixed for life c. Two death benefit options with premiums that are fixed for life d. Two death benefit options, an adjustable death benefit and flexible premiums
D Two death benefits options are a key characteristic of all forms of universal life insurance. All UL policies permit the policyowner to make changes in both the amount and timing of premium payments, including making no payments at all providing flexible premiums, and the death benefit may be increased or decreased in accordance with the terms and provisions of the policy