Life Insurance (Types of Life policies)
The insured is also the policyowner of a whole life policy. What age must the insured attain in order to receive the policy's face amount?
(100) Whole life insurance policies mature when the insured reaches the age of 100. The cash value at that time is scheduled to equal the face amount; therefore, when the insurance company pays the face amount, it also, in effect, pays the cash value.
The death protection component of Universal Life Insurance is always
(Annually Renewable Term.) A universal policy has two components: an insurance component and a cash account. The insurance component (or the death protection) of a universal life policy is always annual renewable term insurance.
All other factors being equal, the least expensive first-year premium payment is found in
(Annually Renewable Term.) Annually renewable term is the purest form of term insurance. The death benefit remains level, but the premium increases each year with the insured's attained age. In decreasing policies, while the face amount decreases, the premium remains constant throughout the life of the contracts. In level term and increasing term policies, the premium also remains level for the term of the policy. Therefore, in the other types of level policies, the first-year premium would not be different from any other year.
A Universal Life Insurance policy is best described as a/an
(Annually renewable term policy with a cash value account) A universal policy has two components: an insurance component and a cash account. The insurance component (or the death protection) of a universal life policy is always annual renewable term insurance.
If the annuitant dies during the accumulation period, who will receive the annuity benefits?
(Beneficiary) If the annuitant dies during the accumulation period, the beneficiary receives benefits from the annuity: either the amount paid into the plan or the cash value - whichever is greater.
What does "level" refer to in level term insurance?
(Face amount) Level term policies maintain level death benefit (or face amount) throughout the term of the policy. In level term insurance, the premium also remains consistent over the years, unlike the premiums of many policies, which increase as the policyholder ages.
Both Universal Life and Variable Universal Life have a
(Flexible premium.) Variable universal life, like universal life itself, has a flexible premium that can be increased or decreased as the policyowner chooses, so long as there is enough value in the policy to fund the death benefit.
Under a 20-pay whole life policy, in order for the policy to pay the death benefit to a beneficiary, the premiums must be paid
(For 20 years or until death, whichever occurs first.) Under a 20-pay life policy, all of the premiums necessary to cause the policy to endow at the insured's age 100 are paid during the first 20 years; however, if the insured dies before all of the planned premiums are paid, the beneficiary will receive the face amount as a death benefit.
Which of the following is NOT a type of whole life insurance?
(Increasing term) There are several types of whole life policies. The first three, Straight Life, Limited Payment, and Single Premium, are the basic forms of whole life. Increasing term is a type of term insurance.
What are the two components of a universal policy?
(Insurance and cash account) A universal policy has two components: an insurance component and a cash account. The insurance component of a universal life policy is always annual renewable term insurance. The cash account accumulates on a tax deferred basis each year and earns either the guaranteed contract rate or the current rate, whichever is higher.
Why is an equity indexed annuity considered to be a fixed annuity?
(It has a guaranteed minimum interest rate.) While equity indexed annuities earn higher interest rates than fixed annuities, both types of annuities guarantee a specific minimum interest rate.
Which of the following best describes annually renewable term insurance?
(It is level term insurance.) Annually renewable term is a form of level term insurance that offers the most insurance at the lowest cost.
Which statement is NOT true regarding a Straight Life policy?
(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.
Twin brothers are starting a new business. They know it will take several years to build the business to the point that they can pay off the debt incurred in starting the business. What type of insurance would be the most affordable and still provide a death benefit should one of them die?
(Joint Life) Joint Life policy covering two lives would be the least expensive because the premiums are based on an average age, and it would pay a death benefit only at the first death.
A policy will pay the death benefit if the insured dies during the 20-year premium-paying period, and nothing if death occurs after the 20-year period. What type of policy is this?
(Level term) A 20-year term policy is written to provide a level death benefit for 20 years.
All other factors being equal, what would the premium be like in a survivorship life policy as compared to the premium in a joint life policy?
(Lower) Survivorship Life is much the same as joint life in that it insures two or more lives for a premium that is based on a joint age. The major difference is that survivorship life pays on the last death rather than upon the first death. Since the death benefit is not paid until the last death, the joint life expectancy in a sense is extended, resulting in a lower premium than that which is typically charged for joint life.
Which of the following is another term for the accumulation period of an annuity?
(Pay-in period) The accumulation period is also known as the pay-in period. It is the period of time over which the annuitant makes payments (premiums) into an annuity.
Which of the following is NOT one of the three basic types of coverages that are available, based on how the face amount changes during the policy term?
(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 level throughout the term of the policy.
Equity indexed annuities
(Seek higher returns). Equity Indexed Annuities are not securities, but they invest on a relatively aggressive basis to aim for higher returns. Like a fixed annuity the Equity Indexed Annuity has a guaranteed minimum interest rate. The current interest rate that is actually credited is often tied to a familiar index like the Standard and Poor's 500
Which type of life insurance policy generates immediate cash value?
(Single Premium) Like other types of whole life policies, Single Premium Whole Life (SPWL) endows for the face amount of the policy if the insured lives until the age of 100. The distinguishing feature of a SPWL is the fact that it generates immediate cash value, due to the lump-sum payment made to the insurer.
All of the following entities regulate variable life policies EXCEPT
(The Guaranty Association). Variable life insurance is regulated by both the state and federal government, as well as the Insurance Department, and the SEC.
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?
(The annuitant must be a natural person.) Owners of annuities can be individuals or entities like corporations and trusts, but the annuitant must be a natural person, whose life expectancy is taken into consideration for the annuity.
The policyowner of an adjustable life policy wants to increase the death benefit. Which of the following statements is correct regarding this change?
(The death benefit can be increased by providing evidence of insurability.) The policyowner (insured) would need to prove insurability for the amount of the increase.
Which of the following best describes what the annuity period is?
(The period of time during which accumulated money is converted into income payments) The annuity period is the time during which accumulated money is converted into an income stream
All of the following are true about variable products EXCEPT
(The premiums are invested in the insurer's general account.) Insurers selling variable products invest their customer's monies in a separate account, which is very similar to a mutual fund. Since there is no guaranteed rate of return, customers must bear the investment risk.
Which of the following best defines target premium in a universal life policy?
(The recommended amount to keep the policy in force throughout its lifetime) The target premium is a recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime.
Which type of life insurance policy allows the policyowner to pay more or less than the planned premium?
(Universal life) The policyowner has the flexibility to increase the amount of premium going into the policy and to later decrease it again. In fact, the policyowner may even skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to compensate for the nonpayment of premium.
What is the waiting period on a Waiver of Premium rider in life insurance policies?
6 months (Most insurers impose a 6-month waiting period from the time of disability until the first premium is waived.)
Who is a third-party owner?
A policyowner who is not the insured (Third-party owner is a legal term used to identify an individual or entity that is not an insured under the contract, but that has a legally enforceable right under it.)
The term "illustration" in a life insurance policy refers to
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.)
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?
Any form of life insurance (Any form of Life insurance may be used to fund a buy-sell agreement.)
If the annuitant dies during the accumulation period, who will receive the annuity benefits?
Beneficiary (If the annuitant dies during the accumulation period, the beneficiary receives benefits from the annuity: either the amount paid into the plan or the cash value - whichever is greater.)
Which of the following best describes fixed-period settlement option?
Both the principal and interest will be liquidated over a selected period of time. (Under the fixed-period option (also called period certain), a specified period of years is selected, and equal installments are paid to the recipient. Both the principal and interest are liquidated together over the selected period of time.)
An individual is purchasing a permanent life insurance policy with a face value of $25,000. While this is all the insurance that he can afford at this time, he wants to be sure that additional coverage will be available in the future. Which of the following options should be included in the policy?
Guaranteed insurability option (The guaranteed insurability option allows the insured to purchase specific amounts of additional insurance at specific times without proving insurability.)
A policy will pay the death benefit if the insured dies during the 20-year premium-paying period, and nothing if death occurs after the 20-year period. What type of policy is this?
Level term (A 20-year term policy is written to provide a level death benefit for 20 years.)
An insured pays $1,200 annually for her life insurance premium. The insured applies this year's $300 worth of accumulated dividends to the next year's premium, thus reducing it to $900. What option does this describe?
Reduction of Premium (The Reduction of Premium option allows the policyholder to apply policy dividends toward the next year's premium. The dividend is subtracted from the premium amount, yielding the new premium due for the next year.)
An insured committed suicide one year after his life insurance policy was issued. The insurer will
Refund the premiums paid. (If the insured commits suicide within 2 years following the policy effective date, the insurer's liability is limited to a refund of premium.)
Which two terms are associated directly with the way an annuity is funded?
Single payment or periodic payments (Annuities are characterized by how they can be paid for: either a single payment (lump sum) or through periodic payments in which the premiums are paid in installments over a period of time. Periodic payment annuities can be either level, in which the annuitant/owner pays a fixed installment, or the payments can be flexible, in which the amount and frequency of each installment varies.)
Which of the following determines the length of time that benefits will be received under the Fixed-Amount settlement option?
Size of each installment (The size of each installment determines the length of time that benefits are received under the Fixed Amount settlement option. It logically follows that larger installments translate into shorter benefit periods.)
Which of the following would be considered a nonqualified retirement plan?
Split-dollar plan (Examples of nonqualified plans are individual annuities and deferred compensation plans for highly paid executives, split-dollar insurance arrangements, and Section 162 executive bonus plans.)
All of the following are TRUE statements regarding the accumulation at interest option EXCEPT
The interest is not taxable since it remains inside the insurance policy. (The interest credited under this option is TAXABLE, whether or not the policyowner receives it.)
If an insurer issued a policy based on the application that had unanswered questions, which of the following will be TRUE?
The policy will be interpreted as if the insurer waived its right to have an answer on the application. (Any unanswered questions need to be answered before the policy is issued. If a policy is issued with questions left unanswered, the contract will be interpreted as if the insurer waived its right to have an answer for the question, and will not be able to deny coverage later because of unanswered questions.)
Under an extended term nonforfeiture option, the policy cash value is converted to
The same face amount as in the whole life policy. (Under this option the insurer uses the policy cash value to convert to term insurance for the same face amount as the former permanent policy.)
Which of the following is the best reason to purchase life insurance rather than annuities?
To create an estate (With insurance, the death benefit creates an immediate estate should the insured die.)
Which of the following statements regarding the taxation of Modified Endowment Contracts is FALSE?
Withdrawals are not taxable. (Any distributions from MECs are taxable, including withdrawals and policy loans. All of the other statements are true.)