Life Insurance Test
An expense load is also known as
the insurers operating costs Expense loading is added to the net premium in order to cover all expenses and contingencies, have funds for expenses when needed, and spread cost equitably among insureds. Expenses-insurer operating costs, referred to as the expense load. Adding the expense element to insurance premiums is called loading.
Which of the following would NOT be permitted as a Section 1035 policy exchange?
An annuity contract exchanged for a life contract An annuity contract can be exchanged only for another annuity contract under a Section 1035 exchange
With life insurance, insurable interest must exist
At the time of application In property and casualty insurance (auto, homeowners, etc.), insurable interest must exist at the time a loss or claim occurs. With life insurance, insurable interest is only required at the time of application.
All of the following individuals are required to sign documents to complete the insurance application EXCEPT:
The Beneficiary
Part 1 of the insurance application includes all of the following EXCEPT
The applicant's current medical treatments
The punishment for fraud or making false statements may include:
fines, imprisonment, or both
Which of the following statements about whole life insurance is INCORRECT?
the initial premium is lower than term insurancs The whole life policy is providing lifetime coverage, the initial premium for whole life is higher than term insurance
One of the greatest advantages of convertible and renewable term policies is that
the insured is not required to show proof of insurability in order to renew or convert Both convertible and renewable term policies allow the insured to get insurance when the original term of coverage has expired without proving the ability to be insured again
Alma, age 35, earns $50,000 a year and expects to retire when she is 65. What is Alma's human life value?
1.5 Million Human life values can be estimated by multiplying earnings ($50,000) by the number of working years (30)
Which statement about accelerated death benefits is CORRECT?
Benefits could be paid up to a certain percentage of the death benefit An accelerated death benefit payment can be requested when the insured has limited life expectancy or meets certain medical circumstances. Generally, death must be expected within 24 months. Accelerated death benefit payments range from 25-100% of the death benefit, not the cash value. Medicaid rules are not a factor determining accelerated death benefit amounts.
The suicide clause states that if an insured commits suicide:
During the first two years after the policy is in effect, the insurance company will only pay the premium paid by the insured, not the face amount of the policy
Which of the following is considered an income need when determining the amount a person needs for personal life insurance?
Family Dependency Income needs are those created by ongoing living expenses such as food, clothing, utilities, and a mortgage. There are three distinct income need periods; Family dependency, Pre-retirement, and Retirement
Nathan and Sarah want to fund their IRA. Which of the following vehicles for funding is NOT allowed?
Life Insurance Types of products not allowed to fund an IRA: life insurance collectibles hard assets Products that may be used: flexible premium annuities bank accounts brokerage accounts mutual funds
The type of annuity that guarantees to pay total income at least equal to the purchase price of the contract is a
Life with refund annuity The life with refund annuity makes payments to the annuitant for life. If the annuitant dies before an amount equal to the purchased price is paid, the remainder of the contract costs are paid to the annuitant's beneficiary.
A relative frequency of deaths in a specific population is known as
Mortality -Mortality is one of the three elements that goes into the calculation of premiums
The term annuity period refers to which of the following?
The time during which payments are made to the annuitant
Which of the following life insurance policies was designed for individuals who want flexible premiums and flexible coverage over the course of their lifetime?
Universal life Universal life (UL) was designed for people who want flexible premiums and flexible coverage over the course of their lifetime. UL premiums are flexible, not fixed, like whole life. Premiums paid into a universal life policy accumulate as interest in the policy's cash value
The type of annuity in which the values grow according to the performance of the investment medium, and in which benefits may fluctuate according to market performance, is called a
Variable annuity The value of a variable annuity varies with the performance of the investment medium, increasing both the possibility of gain and loss for the annuitant
An insured allows a permanent policy to lapse. Unless otherwise instructed, the insurance company
Will automatically institute the extended term option Generally, the extended term option is used automatically, when a cash value policy has lapsed and the policyowner makes no choice of non-forfeiture option and no effort to reinstate the policy
When the annuity period begins in a variable contract, the accumulation units are converted to
annuity units When the annuity period begins, the accumulation units are converted to annuity units. From that point on, the number of annuity unit stays the same throughout the annuity period; However, the value of an annuity unit varies with the value of the investment in a separate account
Mr. and Mrs. Burden receive a monthly annuity payment. Mr. Burden dies, but Mrs. Burden continues to receive a monthly annuity payment. The Burdens have a
joint life and survivorship annuity settlement option. With a joint life and survivor annuity settlement option, the primary joint annuitant receives payments for as long as they live. Upon the death of the primary annuitant, the survivor continues to receive payments of equal or lesser amount until they die.
Paul dies before his annuity has paid out an amount at least equal to the purchase price of the annuity, so Paul's beneficiary continues to receive annuity payments until that amount has been reached. This type of annuity is a
life with refund annuity The beneficiary received a balance of the cost of the contract because it was a refund life annuity. If the annuitant had lived longer, he would've received an income for life, possibly greater than the total contract cost
The death benefit of a variable life policy
may go up or down but will never fall below the guaranteed minimum amount specified in the policy Changes in investment results can cause changes in the amount of the death benefit of a variable policy, but the death benefit amount will never fall below the guaranteed minimum amount specified in the policy
Producers selling variable life insurance
must have a valid life license and must be registered with FINRA Because variable life insurance requires the policy owner to bear investment risk, producers selling it must be registered with FINRA and hold valid life license
Which is the proper term for a company owned by its policyowners?
mutual insurance company
An insurance policy is a unilateral contract because
only the insurance company is bound to live up to its side of the agreement
Ed has a $50,000 policy with cash values of $10,000. Including the interest owed, there is a $2,000 policy loan outstanding. Ed finds he can no longer make premium payments on this policy. If Ed chooses the cash surrender value option, he will receive
$8,000 A policy owner choosing the cash surrender value option can receive the cash surrender value minus any outstanding policy loans or benefits paid to the owner
When a group plan is contributory, what percentage of employees must want and be willing to pay for coverage?
75%
A rollover refers to which of the following?
A transfer of funds from one IRA to another A rollover can occur when the money from an IRA or qualified retirement plan is transferred to a different IRA or qualified retirement plan.
Which of the following situations most likely calls for the purchase of term insurance?
George has no income and 2 years of medical school to complete. He and his wife have 1 child. Term insurance, particularly convertible term insurance, is useful for people with limited income and a significant need for life insurance.
Susan has been classified as a standard risk by her insurance company. This means that Susan
Has average health and a normal life expectancy
Which of the following statements about a modified endowment contract (MEC) is INCORRECT?
MEC's are not life insurance but do offer tax-free death benefits MECs are still life insurance and offer tax free death benefits and tax deferred cash value accumulation. If a policy becomes a MEC and no distributions are taken from that policy during the insured's lifetime, they will not experience any adverse tax implications due to the contract's MEC status.
The Lozenge Company provides a $5,000 monthly bonus plan to retirees who served as senior executives. This benefit is not available to other retirees of the other company. This is an example of a
Non qualified plan A non qualified plan does not meet IRS requirements as to participation, funding, vesting, and other factors. These plans do not get the favorable tax treatment given to qualified plans. They do not meet the participation, non-discrimination, and other general requirements of qualified plans. Employers can design these plans in any way they wish.
When the entire death benefit is paid in a lump sum to a beneficiary, it is
Not taxable as income When the entire death benefit amount-"lump sum"- is paid to a named beneficiary, it is not taxable as income whether the policy is owned by the individual or business
Which of the following classification of risk would typically have the lowest premium paid?
Preferred Risks Preferred risks reflect a below average risk of loss for the insurer and thus typically have the lowest premium payment
All of the following are elements of a contract EXCEPT
assignment
In group insurance, the evidence of an agreement between the insurer and the employer or association is the
contract In group insurance, as in individual insurance, The policy is evidence of a contract. In group insurance, the contract is between the insurer and the employer or association, and is sometimes referred to as the master policy or master contract. Individual insureds do you not receive a copy of the policy, since there is no agreement between the insureds and the insurer
An insurance contract is an aleatory contract. This means
equal value is not given by both parties to the contract An aleatory contract is one in which equal value is not given by both parties to the contract
A policyowner allows a policy to lapse, and the insurance company converts the policy to the extended term option. Which of the following from the original policy will automatically carry over into the new policy?
face value With the extended term option, the accumulated cash value is used to buy paid-up term insurance with the same face value as the original policy
A variable life policy
has a death benefit that varies to reflect the investment results of the underlying separate account but will not drop below a guaranteed minimum The death benefit of a variable life policy varies with the value of the securities in the separate account, but this benefit will not drop below the policy's guaranteed minimum.
The Medical Information Bureau is
non-profit trade association that maintains medical information on applicants for life and health insurance The insurance industry sponsored Medical Information Bureau tries to help insurers reveal misrepresentation or potential fraud by applicants
Income payments made from an annuity are
only partly subject to federal taxation Federal law states that a fixed part of each annuity income payment is return of capital rather than new income and is not subject to taxation.
Once a policy has lapsed, the insured usually can reinstate the policy, provided proof of insurability is shown, if all back premiums due
plus interest have been repaid and fewer than 3 years have elapsed a lapsed policy can be reinstated if the insured applies for reinstatement within 3 years and all back premiums plus interest have been repaid. The premium for the reinstated policy will be the same as the original. A reinstated policy usually starts a new contestability period (two years); but it does not require a new suicide period.
Warden and Wilma have a joint life policy. Warden dies, and the policy pays nothing. Later on, Wilma dies and the policy death benefit is paid to the beneficiary. This is called a
survivorship, or second to die, policy survivors, or second to die, policies cover two lives and pay proceeds only when the second insured dies
In a whole life insurance policy
the cash value is greatest at the end of the policy period, and the insurance protection is greatest at the start of the policy At the start, a whole life policy is all insurance protection. At the end of the policy period, it is all cash value. Cash values increase each year, the insurance protection element decreases each year.
When Jonas died, it was discovered that he was actually 6 years older than he had claimed when applying for an insurance policy. As a result of this discovery, the insurance company
will pay only the amount of insurance that Jonas' premiums would have purchased at his correct age When a discrepancy between the age used for settling premiums and actual age exists, the insurer must determine the insurance amount the premium would have bought at the insured's correct age and pay that face amount to the beneficiary
Which of the following is NOT necessary for the formation of a valid contract?
written documents Insurance policies are legal contracts and are subject to the general law of contracts. To form a valid contract, four elements must be present: -Legal Purpose -Agreement (offer and acceptance) -Consideration -Competent Parties
All of the following statements about individual life insurance tax treatment are correct EXCEPT
Premiums paid are tax deductible premiums paid for individual life insurance are NOT tax-deductible
All of the following are characteristics of annuity EXCEPT:
Protects against dying too soon While both have features that resemble each other, their purpose is very different. Life insurance provides money when you die to pay for any remaining bills, cover the cost of the funeral, give money to loved ones or for any other financial obligation or desire you wish to fulfill even in death. Annuities provide tax deferred savings for retirement.
Which of the following methods of handling risk means that the individual will pay for the loss of it occurs?
Retention Risk retention means the individual will pay for the loss if it occurs. Without health insurance a person will have to pay the bill if they need hospitalization. This is an example of intentionally retaining a risk.