Life Review Questions

Certain riders allow the insured to add people to the policy as additional insureds. Which of the following is a type of additional insured rider? a. Family term rider b. Payor rider c. Substitute insured rider d. Disability rider

A A family term rider combines the spouse and the children's rider to cover the family. The payor rider provides for premiums to be paid if the payor of the premiums for a juvenile dies or becomes disabled. The substitute insurance rider is commonly used in business to exchange (substitute) one employee for another on a policy - as when an employee leaves the company and is replaced by another (new) employee.

Timothy has a plan that provides coverage for life, but the premiums are not due beyond age 65. It has guaranteed premium, accumulates cash value and the coverage will never decrease. Timothy has purchased: a. A limited payment life plan b. An endowment at age 65 plan c. A term to age 65 plan d. A variable life plan

A A limited payment life plan is one that provides the same benefits as a standard whole life plan, but has a shorter premium paying period. Limited payment plans can range from single premium whole life to life paid up at a specified age, for instance age 65. The policy holder pays the approximate same premium, discounted for interest earnings, as he would for a whole life plan payable for life.

For those considering an immediate annuity, which of the following is not an advantage of this type of investment? a. Loan privileges b. Tax treatment c. Sheltering assets d. Creditor protection

A Annuities have no loan privileges. Once the money is put into an annuity, the annuitant usually has no access to it. Because of the exclusion ratio, immediate annuities have very favorable tax treatment. Annuities can be used to shelter assets. Immediate annuities allow the annuitant to remove the funds from his/her estate (for Medicaid purposes). In most states a fixed immediate annuity cash value cannot be touched by creditors.

As Samantha considers her options to purchase life insurance, she looks at the advantages of a graded premium life policy. Which of the following is not an advantage of such a policy? a. In the beginning, a greater amount of the premium is applied to the death benefit, less to the cash value. b. The policy has a level death benefit as long as it remains in force. c. Once the premiums level off, they remain level for the remaining term of the policy. d. The initial premium is much lower than whole life insurance.

A Because of the lower premium, cash values grow much more slowly, initially. A greater percentage of the premium in the initial years is applied to the death benefit, less is applied to cash values. This is a disadvantage of this type of policy.

Universal life policies are similar to whole life in that they: a. Both provide death protection and cash value b. Both provide flexibility c. Both treat cash withdrawals as a partial surrender d. Both provide fixed and guaranteed benefits.

A Both a whole life policy and a universal life policy provide death protection and cash value. The similarities end there. The universal life policies offer flexibility, but benefits are not fixed and guaranteed as they are in the whole life policies. Whole life policies do not treat cash withdrawals as partial surrenders.

A common life insurance provision is the ___________, which states that if there is insufficient proof to show order of death when the insured and beneficiary die in the same accident, it is presumed that the insured died last, and the proceeds are payable to the named contingent beneficiary. a. Uniform simultaneous death act b. Per capita and per stirpes c. Facility of payment d. Spendthrift clause

A Both the uniform simultaneous death act and the common disaster provision state that when death of the insured and the beneficiary occur at the same time, it is presumed that the insured died last. This allows the benefits of the policy to be paid to the secondary beneficiary or the insured's estate - as opposed to the estate of the primary beneficiary. Per stirpes pertains to the beneficiary's living children getting equal shares of the benefits. Per capita is per person - meaning that policy proceeds are paid only to the named - living - beneficiaries. Facility of payment is a provision that allows the insurance company to select a beneficiary if the named beneficiary is deceased, a minor, or cannot be found. Spendthrift clause allows the insured to protect the proceeds of a policy from a beneficiary that spends lavishly. The proceeds are paid in something other than a lump sum, and protected from the beneficiary's creditors.

When a minor child is the insured, which of the following is true about the payor rider? a. If the premium payor dies, premiums are waived until the insured child is a specified age such as 21 or 25. b. Premiums are waived if the minor child dies. c. Premiums are doubled if the minor child becomes disabled. d. None of the above

A If the person responsible for paying the premium dies, the rider waives premiums until the insured child reaches a specified age such as 21 or 25.

The nonforfeiture option is designed to protect the policyholder from losing their entire investment if a policy is cancelled or surrendered. Which of the following is not a nonforfeiture option? a. Non-participating b. Cash surrender value c. Reduced paid up insurance d. Extended term insurance

A Non-participating pertains to policy dividends. Cash surrender value is an option for the policyholder to surrender the policy for the cash value. The value increases each year that the policy remains in force. When the policy is surrendered, it is returned to the insurance company, and they have 6 months to pay the cash value to the insured. Reduced paid up insurance gives the policyholder the option to use the cash value of the policy to purchase a single premium contract of the same form (i.e., 20-pay life, ordinary life, etc.) as the original policy. The face amount of the coverage will be less, but no premium payments will be required. Extended term option offers an extended term policy in place of the cash value policy. The policyholder can ask the insurer to use the existing cash value to purchase term insurance - equal to the face amount of the original policy.

The owner of an annuity can stop making premium payments during the accumulation period without losing the value that has accumulated in the annuity. The right to the cash value that has accumulated in the annuity is called the: a. Nonforfeiture option b. Flexible option c. Withdrawal option d. Fixed payout option

A Nonforfeiture options are available for deferred annuities. If the contract owner chooses to surrender the annuity before the payout phase begins or to stop making premium payments, two nonforfeiture options are available: 1. Surrender - the entire amount of premiums paid into the annuity, minus the surrender charges and prior withdrawals, will be refunded in a lump-sum; or 2. Annuitize - the contract based on the amount of cash accumulated at that point.

Maggie's life policy has lapsed. There are several ways she can recover some of the value of her policy. Which of the following is NOT a non-forfeiture option? a. One-year term b. Reduced paid-up c. Extended term d. Cash surrender

A Of the selections, a one-year term is not a nonforfeiture option.

A qualified retirement plan differs from a non-qualified retirement plan in all of the following ways, EXCEPT: a. Contributions to a non-qualified plan are deductible on a current basis. b. Qualified plans have specific rules on participation and non-qualified plans do not. c. Highly compensated employees may be limited by qualified plans and non- qualified plans do not have the same limits. d. Qualified plans are subject to annual discrimination tests and non-qualified plans are not.

A One of the primary features of a non-qualified plan is that contributions are not deductible on a current basis. There is a specific set of rules concerning eligibility, participation, contributions and discrimination that must be followed on a qualified plan for it to maintain its status. There is considerable latitude with non-qualified plans that does not exist with qualified plans.

The payor rider is sometimes added to a life insurance contract on a juvenile. The purpose of the rider is to make sure that the coverage on the juvenile does not lapse if the adult (the person responsible for paying premiums) becomes disabled or dies. Which of the following is not true about the payor rider? a. There is no added premium for this rider. b. The premiums can be waived until the juvenile reaches a specified age. c. The premiums can be waived until the maturity date of the contract. d. The insurance remains in force even if the premiums are not paid.

A Payor rider is important if you are buying a policy on a juvenile (child). By taking this rider the payor (person that is making the premium payments) makes sure that in case of his/her unfortunate death/ dismemberment, before the premium payment term ends, the premiums are waived and the policy remains in force.

How benefits are paid to a beneficiary upon death in a life policy is a: a. Settlement Option b. Nonforfeiture Option c. Dividend Option d. Beneficiary designation

A Settlement Options are how a beneficiary can receive the death proceeds.

To have an approved presentation of a variable annuity the prospect must receive which of the following documents? a. A prospectus and an approved illustration b. A sample policy and an approved illustration c. An outline of all expenses and charges separate from the sample policy d. A financial report from the insurance company and a sample policy

A Since a variable is considered a securities product, regulations require that the prospect receive a full prospectus at the time of the sale. The prospectus will have information about expenses, mortality charges, investment sub-account expenses, surrender charges and other pertinent information. An approved illustration may contain projected results, but it must also have an illustration if investment accounts perform poorly over time.

Valerie is looking at types of insurance to enhance her retirement. Which of the following should she NOT consider in planning her retirement? a. Term insurance b. Endowment c. Whole life d. Current Assumption Whole life

A Term is not considered a retirement plan policy. Term is used to cover a need for a fixed period of time. There is no cash value at the end of the term.

To protect a policyholder from an inadvertent lapsing of a contract, the automatic premium loan (APL) provision may be added to a cash value life policy. Which of the following statements is not true about this provision? a. It can be applied for at any time. b. The policy will lapse if there is not enough cash value to cover the premium payment. c. Reinstatement is not available if the policy lapses for lack of payment. d. Outstanding loan amounts are deducted from the death benefit.

A The APL provision usually must be requested at the time of the original policy application. The policy will lapse if there is insufficient cash to cover the premium payment and if the policy lapses for this reason, it cannot be reinstated. Any outstanding policy loans are deducted from the death benefit.

Karl's grandmother has been diagnosed as being in end-stage renal failure. What provision of her life policy will giver her access to funds for rent, food and necessary medical services? a. Accelerated benefits b. Disability income c. Cost of living d. Waiver of premium

A The accelerated benefits provision/rider allows the insured tax free access to policy death benefits when the insured is suffering from a terminal or severe chronic illness. These funds are commonly used for rent, food and medical services. The disability income rider waives premium payments when the policyowner is totally disabled and also provides the policyowner with an income each month. A cost of living rider helps to guard against inflation eroding the benefits of a policy. The insured can increase the amount of insurance without providing proof of insurability. The waiver of premium rider provides that if the insured becomes totally (and permanently) disabled, the premium payments are waived and the insurance contract remains in force.

Helen and Mark have purchased a policy to cover both of their lives. They know that there are benefits and also disadvantages of such a policy. Which of the following is not something that would be regarded as a benefit of a joint policy? a. Premiums and face value cannot be changed. b. Premiums usually are lower than for two separate policies. c. The policy can be written as whole life or term life. d. The premiums are usually lower.

A The fact that the premiums and face value of the policy cannot be changed are regarded as drawbacks of a joint life policy. Another drawback is that the premiums are an average of the ages of the two policyholders which could result in the younger policyholder paying more than he/she would if they took out an individual policy.

What happens if an estate is named as a beneficiary on a life policy? a. Proceeds are included in the gross estate. b. Proceeds are divided equally to relatives. c. Proceeds are tax-free. d. All of the above

A The proceeds are included in the gross estate when an estate is named as a beneficiary on a life policy.

A war clause exclusion can be enforced at which of the following times? a. During wartime b. At the insurer's discretion c. Always d. Never

A The war clause exclusion is enforced during wartime.

Term life insurance policies are used to provide temporary insurance protection, usually for a specific amount of time. If an insured provides evidence of insurability at the end of a term and qualifies for reduced premiums rates, the insured has a(n): a. Convertible term policy b. Reentry term policy c. Renewable term policy d. Interim term policy

B A convertible term policy allows the insured to convert his/her temporary protection policy to a form of permanent protection without having to provide proof of insurability. It is the reentry term that allows the insured to take out new coverage at a reduced rate, providing he/she can show proof of insurability. Renewable term is for a specific time and can be renewed without providing evidence of insurability. The premiums will go up because it is based on the insured's age. Interim term is coverage used when the insured is contemplating some sort of permanent insurance. Usually it has an automatically convertible feature.

A fixed annuity may offer any of the following income options, EXCEPT: a. A life income without refund at death b. A joint income for three individuals c. A 10 year certain d. An installment refund annuity

B A joint annuity is for two people, not three. A joint income is primarily a plan for a couple. Life income with no refund is standard and most annuities are factored as a function of a life annuity. A year certain annuity is an annuity that will pay for the life of the annuitant, but if the annuitant dies before the period certain expires, the beneficiary will receive payments for the balance of that certain period. For example, an annuitant dies after 5 years' payments on a 10 year certain plan. The beneficiary will receive an additional 5 years' payment. An installment refund contract will guarantee that all principle deposited will be paid out.

Matthew has recently purchased a variable life insurance policy. In reading his prospectus, he sees that the various accounts have the same managers as some of the mutual funds he owns. Matthew should understand which of the following: a. The money manager co-mingles the funds from his and other variable life plans with their various mutual funds. b. The insurance company maintains separate accounts for each investment and they are not co-mingled with other assets. c. Matthew does not need to be concerned about the performance, as it will mirror the performance of the mutual fund of the same name. d. Matthew can withdraw his money at any time penalty free.

B Always remember that the investments in a variable product are referred to as a separate account. While the name of the manager on the account may be the same as well known investment companies, the investments may not be exactly the same. The account will be managed by the same people and the same philosophy, but money flow and timing may cause the performance of a separate account to differ from the mutual fund managed by the same managers.

Nick has paid a large lump sum of cash to the insurance company for an immediate fixed annuity. That money will be invested by the insurance company in what fund? a. A separate account for annuitants b. The company's general fund c. A private retirement account d. A real estate trust for retirees

B Fixed annuity values are invested in the company's general fund. Since the annuity is an obligation of the general assets of the company, the general fund is where it is invested.

If an insured commits suicide __________, the insurer will return the premiums to the beneficiary. a. After the initial 2 years b. Within 2 years c. After 3 years d. Within 5 years

B If the insured commits suicide within the first two years of the policy, the insurance company will return the premiums paid to the beneficiary.

The Global Company is starting a marketing campaign to provide prospective applicants with the information needed to make a decision on whether or not to purchase an annuity. They must determine their target audiences. Which of the following would be most likely to purchase an immediate annuity? a. Newly married couple b. Man who received a settlement for injuries occurring from an automobile accident c. Couple about to adopt a baby d. All of the above

B Immediate annuities are purchased with a single premium and they guarantee a level payment for the life of the annuitant. SPIAs (single premium immediate annuities) are often purchased when an individual comes into some money i.e., a settlement, inheritance, or life insurance proceeds. The annuity can be either single premium immediate, or single premium deferred. If the annuitant chooses the immediate option, the benefit payments begin within 12 months of purchase. If he/she selects the single premium deferred, it is purchased with a single premium, but the benefits are deferred to a later time.

Group life insurance has similar characteristics and also characteristics that are different from individual life policies. Which of the following is not a similarity that the two types of policies share? a. Proceeds are not taxable when received as a lump sum payment b. Both can deduct premium payments c. Premiums paid by a company are not considered income to an employee d. All of the above

B It does not matter if the premiums for a group life policy are paid entirely by the employer or shared by the employer and employee, the employee cannot deduct the premiums. The employer can deduct the premium payments as a business expense. Lump-sum proceeds are not taxable from either a group or individual policy. Premiums are not considered income to the employee.

A participating life policy refunds a portion of the premiums paid to the insured. These refunds are in the form of an annual dividend. Dividends are determined by the difference between the gross premiums paid, and the loss experience of the insurer. What option allows the policyholder to leave the dividends with the insurer to accumulate interest? a. Cash dividend option b. Accumulation at interest option c. Paid-up additions option d. Paid-up option

B It is the accumulation at interest option that allows the policyholder to leave the dividends with the insurer to accumulate interest. The cash dividend option provides that dividends credited to the policyholder be paid with a check. The paid-up additions option allows the policyholder to purchased additional insurance which is added to the face amount of the policy. The paid-up option gives the policyholder the opportunity to pay the policy up early - using the dividends.

Claire has a policy with a payor provision and a 9 year old child. What happens if the child becomes disabled? a. The premiums stop. b. Nothing happens. c. The premiums are waived until the child is 21. d. The face amount becomes payable.

B Nothing happens. The payor provision is for the adult that is paying the premium for the policy.

Margaret began receiving monthly benefits from her annuity in November of 2017. In May of 2018, her aunt passed away and she received an inheritance. She would like to provide a guaranteed income stream for twenty years. What are her options? a. She can add to her current annuity. b. She can purchase a life annuity certain. c. She can purchase a refund life annuity. d. She can purchase a life annuity - no refund.

B She cannot add to her current annuity. She can, however, purchase another annuity. A life annuity certain provides income for a guaranteed period of time, without regard to whether or not the annuitant is alive. A refund life annuity pays the annuitant for life. If the annuitant dies soon after the annuity period begins, the undistributed principal is refunded to the beneficiaries. A life annuity, no refund pays benefits for the life of the annuitant with no obligation following the death of the annuitant. This option pays the highest monthly income because it is based only on life expectancy. If the annuitant dies early, much of the value is surrendered to the insurance company.

If Louise wants to provide her beneficiary with equal payments for a specific period of time using the proceeds of her life insurance, she would select which of the following options? a. Installment plan b. Fixed period c. Fixed amount d. Life with period certain

B She should choose the fixed period option. The insurer will come up with a figure that is consistent each month, and make it last for an exact period of time.

Frank has set up a monthly payment from his fixed annuity. He knows that he will receive $2,000 per month until his death. Frank's family has a history of living well into their 90s. What is Frank's biggest risk if he lives that long? a. Running out of money b. Inflation c. Insurance company insolvency d. Choosing another option

B Since Frank will most likely live longer than average, he will collect more money than average. Inflation will most likely erode Frank's purchasing power over time, making it more difficult for him to meet monthly expenses. The bright side is that Frank will always be guaranteed his monthly check and there are guaranty associations in every state to assure he will receive his benefit. It is rare that an insurance company will allow a change in income options once one is elected.

Most life policies have exclusions. The most common exclusion in a life policy is: a. Flight on a commercial airline b. Suicide c. Flight on a private jet d. Illegal acts

B Suicide is always excluded in a life policy.

Samantha wants to purchase life insurance, but her funds are limited at this time. Her agent has recommended a whole life policy that starts out with a premium that is lower than usual. The premium increases every year for a specified number of years. This type of policy is called a: a. Modified life policy b. Graded premium life policy c. Universal life policy d. Variable whole life policy

B The advantage is that she can get into the policy for a relatively low premium (similar to a term premium). The disadvantage is that in the long run, the insurance may cost her more. This type of policy is sometimes referred to as a graduated premium life insurance policy.

Which of the following regulates variable life insurance products? a. Department of Insurance b. Securities and Exchange Commission c. NAIC d. The state legislature

B Variable life insurance products are securities contracts and are regulated by the Securities and Exchange Commission (SEC).

For a single premium deferred annuity, what is the time between the purchase date and the date when benefits begin? a. Annuity phase b. Accumulation phase c. Premium determination d. Benefit phase

B The annuity phase is the time when the cash value of the annuity is converted to income payments. The accumulation phase is the time when the contract owner pays premiums, the time between the purchase date and the date when benefits begin. Premium determination deals with factors on how much premium is to be charged. The term benefit phase, is not used with annuities.

Which of the following statements about the automatic premium loan provision of a whole life policy is NOT true? a. Using the provision prevents the risk of inadvertent lapse. b. Its use causes dividends to be withheld c. If premiums are missed, the automatic premium loan provision uses cash values. d. Using the provision preserves insurability

B The automatic premium loan provision does not cause dividends to be withheld.

Combination plans are intended to be representative of the needs of the insured. One such plan is called the ______________ , which combines ordinary life and level term insurance. It provides monthly income for a stated period of 10, 15, or 20 years, or to an age, as selected by the insured. a. Family income policy b. Family maintenance policy c. Family protection policy d. Endowment policy

B The family income policy, not commonly sold, combines whole life and decreasing term. The family maintenance policy combines ordinary life and level term and does provide an income stream for a designated number of years of a designated age. The family protection policy consists of whole life on the breadwinner, and convertible term on the spouse and children.

The front page of all insurance policies must contain which of the following? a. A list of riders b. Insuring clause c. Incontestable clause d. Consideration clause

B The insuring clause is a statement of the policy particulars, including what the insurance company is responsible for, what they will do, and how claims will be handled. The insuring clause is always on the front page of the policy.

At what point does an insurance policy become incontestable, even if fraud is evident? a. 1 year b. 2 years c. 5 years d. Never, if fraud is involved

B The policy is incontestable when it has been in force for 2 years.

If an insured becomes permanently and totally disabled, a waiver of premium rider on their life insurance contract would allow coverage to remain in force, without payment of premiums, during the period of the disability. Which of the following is not true about a waiver of premium rider? a. The premium charged for the waiver does not increase cash value of the policy. b. The disability must always occur prior to age 75. c. The premiums are waived retroactively after the insured has completed the required waiting period. d. All of the above

B The premium for the waiver of premium disability rider does not increase cash value of the policy. Premiums are waived retroactively when the waiting period has been met. Most insurance companies specify the disability that must occur before the insured is 60 or 65 years of age.

Charles and Rick have started an electronics business. Their business is young and their cash flow is tight. What is the primary advantage of them purchasing a modified premium whole life policy? a. It is guaranteed renewable. b. They are able to purchase a larger policy than traditional whole life. c. They are able to add term riders. d. It has a level premium.

B The primary advantage of modified premium whole life is that you get more for you money in the initial phase. Modified whole life is often used early in the life of a business, to supplement retirement, and to protect family and mortgage.

The provision in a life insurance contract which states that the entire agreement between the insurer and the insured is contained in the contract, including the application if attached, insuring agreements, exclusions, conditions, declarations and endorsements is called the: a. Insuring clause b. Entire contract clause c. Consideration clause d. All of the above

B The provision in a life insurance contract that states that the entire agreement between the insurer and the insured is contained in the contract, including the application if attached, insuring agreements, exclusions, conditions, declarations and endorsements is called the entire contract clause. The insuring clause states that in consideration for the payment of a premium, the insurer agrees to provide life insurance protection for the insured. The consideration clause states that the insurance protection is provided in consideration of the application made by the insured and the payment of the initial premium. The premium payment and representations made in the application are the insured's consideration. The promise to pay the benefits is the insurer's consideration.

Annuities offer various premium payment options. Which of the following is not an annuity premium payment option? a. Flexible premium b. Indexed premium c. Level premium d. Single premium

B There is no such thing as an indexed premium. The payment options for annuities are: Flexible premium -multiple premiums are paid into the annuity; both the amount and frequency of the payments are flexible, but normally must fall within certain guidelines set up by the insurer. Level premium -multiple premiums are paid into the annuity prior to the start of benefits and the premium is level (i.e., the same amount) throughout the entire accumulation phase. Single premium -a single (lump sum) payment can be used to purchase an annuity.

An agent who wants to qualify to sell variable life plans must: a. Seek an exemption from the state to endorse his license b. Secure a license from FINRA, as well as the state c. Secure a license from FINRA, which supersedes the state d. Test for a special state variable product license

B To offer variable products, an agent must be licensed from both the state and FINRA (formerly NASD), because variable plans are regulated as securities. Failure to do either could result in some very harsh penalties.

Arnold has purchased an Adjustable Life plan. His agent has told him that he may do all of the following, EXCEPT: a. Pay varying premiums each year b. Quit paying premiums after 7 years when they vanish. c. Pay a minimum amount as long as he funds the mortality cost d. Pay a higher premium if he wants to build cash faster

B Using the term vanishing premium is not legal. While it may be possible to fund a life policy to eliminate premiums over time, that feature is not guaranteed and it depends on a number of factors that may change after the illustration has been prepared. As an example: Interest rates were much higher in 1995 than they are in 2012. That change in interest rates can create a substantial difference in what might be available in the policy in later years.

Angelina purchased a policy with a face value of $100,000. She died 10 years later and the policy paid a death benefit of $50,000. Why? a. Her policy was a level term. b. Her policy was not renewed. c. Her policy was a decreasing term. d. Her policy was an increasing term.

C

Jennifer has a $200,000 life policy. Her husband is a 50% beneficiary. Her son and daughter are beneficiaries with 25% each. Before she dies, she takes out a $100,000 loan, which is not repaid. What does her daughter get upon her death? a. $125,000 b. $50,000 c. $25,000 d. $10,000

C $200,000 minus the $100,000 loan results in her husband receiving $50,000 and her son and daughter receiving $25,000 each.

As Howard was filling out his life insurance application, he questioned whom he should name as his primary and contingent (or secondary) beneficiaries. He decided to name his wife Helena as the primary beneficiary, and his son Collin as the contingent beneficiary. What is the most likely circumstance for Collin to receive the benefits of Howard's policy? a. Howard dies before Helena b. Collin receives the benefits from Howard's estate c. When Howard dies, Helena has already passed away d. When Howard dies, Helena has received benefits from another policy

C A beneficiary is a person (or entity) entitled to death benefits paid by a life insurance policy. If Helena were alive when Howard dies, she would receive the death benefit. If Helena were no longer alive when Howard dies, Collin would receive the death benefit from Howard's policy. The contingent beneficiary can only receive the death benefit if the primary beneficiary dies before the insured.

Which of the following statements is true about a waiver of premium rider? a. A waiver of premium rider can only be added to a regular life policy. b. A waiver of premium rider cannot be added to a term policy. c. A waiver of premium rider can be added to a term policy. d. A waiver of premium rider cannot be added to a life policy once the policy is approved.

C A waiver of premium rider can be added to a term policy is a true statement.

A universal life plan differs from a whole life plan in all of the following ways, EXCEPT: a. A whole life plan displays a detailed list of all mortality, expense and interest payments in the premium calculation. b. A universal life plan may have features that are not guaranteed. c. The cost of life insurance may vary from year to year on a universal life contract. d. The administrative expenses are a listed charge in universal life.

C A whole life plan bundles all expenses and charges and they are not listed separately in the policy or any illustration. Universal life lists each component of the premium, which includes the cost of pure life insurance (mortality charge), the administrative expense and any cash accumulation after the first two expenses are accounted for. The cash account will also have a variable interest rate and the account may or may not have a guaranteed element involved.

Mrs. Kupchock, who is 78 years old, has received the benefits of her husband's life insurance policy. Although she is quite frail, her agent has recommended that she invest the proceeds in an immediate annuity. Her grandson does not think it is her best option. Why? a. An immediate annuity is a suitable option for a healthy individual who probably will live longer than most people in his/her age group. b. Because her life expectancy is not very good, she will probably lose most of her investment. c. Both of the above d. None of the above

C An immediate annuity would be suitable if she was healthy and stood a good chance of living for many years. The fact that she is frail, makes it her least suitable choice. Annuities can be a good choice if the chances of outliving the actuarial predictions are good. Because they guarantee income for life, annuities primary concern is longevity.

All of the following are true concerning Interest Sensitive Whole Life (ISWL), EXCEPT: a. The death benefit is guaranteed as long as premiums are paid. b. Policy loans are available. c. The policyholder will always know the amount of cash value available. d. The cash account accumulates tax free inside the policy.

C By definition, the cash value of an interest sensitive policy will vary. There may be a minimum guarantee, but the final cash account will be determined by the actual interest credited from year to year. An interest sensitive plan will allow the policyholder to earn a market-based interest, but the minimum guarantees for the plan are generally lower than a standard whole life.

Clarice is the owner of the life insurance policy on her husband Herb. Which of the following can she NOT do without Herb's consent? a. Change the designated revocable beneficiary b. Make a policy loan c. Increase the amount of the insurance d. Surrender the policy for its cash value

C Clarice cannot increase the amount of the insurance without Herb's consent.

Which of the following types of whole life policy offers flexible premium payments tied to interest rate fluctuations? a. Continuous premium whole life b. Limited payment whole life c. Current assumption whole life d. Economatic whole life

C Continuous premium whole life, the most common type of whole life, has premium payments over the life of the insured up to 100 years of age. With a limited payment whole life policy, the entire policy is paid up at a specific age, usually a shorter period of time. Limited premium whole life policies have higher premiums because they are paid over a shorter period of time. Current assumption whole life offers flexible payments tied to interest rates. The premiums can be raised or lowered by the insurance company, usually annually. A term rider is part of the economatic policy that uses dividends to purchase additional paid-up insurance.

Credit life insurance is a type of decreasing term insurance. It was designed to protect creditors in the event that the debtor dies. All of the following are true statements about credit life, EXCEPT: a. It can be written on both a group and an individual basis. b. The insurance premiums are often financed in conjunction with the item purchased. c. The number of insureds on the policy can range from 1-50. d. The policy does not have a conversion option.

C Credit life policy provisions include that a certain level of insureds must be maintained (usually 100+). If the number of insureds drops below the specified level, the insurer may not insure new debtors.

Carly's grandfather wants to stop paying premiums on his life policy. If he wants coverage for the remainder of his life, which of the following options would provide this coverage? a. Term b. Extended term c. Reduced paid-up d. Endowment

C He would select reduced paid-up which would provide coverage for the remainder of his life without any more premium payments. The policy would have a reduced face value based on no longer paying premiums. The extended term option would not provide coverage for life.

If Karl's grandmother decides to exercise the accelerated benefit option of her life policy, which of the following is a responsibility of the insurer? a. Provide the policyholder with an illustration showing the effects on the death benefit b. Notify policyholder that the recipients eligibility for Medicaid could be affected c. Both of the above d. None of the above

C If Karl's grandmother exercises her accelerated benefit option, the insurer must provide her with an illustration that demonstrates the effects on cash value, death benefit, premium payments, and loans. The illustration must also demonstrate affects on Medicaid eligibility.

Matt is a little short on cash and wants to access some of the cash in his life policy. A partial cash value distribution can be made. If he has the intention to repay the cash he takes out from his policy, it is considered a: a. Withdrawal b. Partial surrender c. Policy loan d. None of the above

C If Matt intends to pay the money back, it is considered a loan. There is no legal requirement to pay it back, but interest is assessed by the insurer on the borrowed funds. Outstanding loans are deducted from the death benefit if the insured dies without repaying them. A withdrawal and partial surrender are presumed not to be repaid. They have the same impact on benefits. Withdrawals can be taxable, loans generally are not taxed.

A grace period is a component of every life insurance contract. The grace period is the amount of time, following the date that the premium is due, that the policy will remain in force. If the insured dies during the grace period, how will it affect the proceeds of the policy? a. No effect at all b. The policy is voided. c. The benefits are paid to the beneficiary, minus the outstanding premium. d. The insurer will wait until the premium is paid before distributing benefits.

C If the insured dies during the grace period, the insurer would pay benefits, minus the outstanding premium.

Randall purchased a 20-year family maintenance policy when he was 30 years old. He died at age 40. How many years will benefits be paid to his beneficiaries? a. None, because he died before the policy matured b. 10 years c. 20 years d. 25 years

C In a family maintenance policy, the benefits would be paid for 20 years from when the death occurs.

The individual on whose life the annuity has been issued is the annuitant. If the annuitant is the contract owner, which of the following is a right and/or responsibility of the annuitant? a. The annuitant pays the premiums. b. The annuitant chooses the beneficiary. c. Both of the above d. None of the above

C In most cases the annuitant is also the contract owner. The contract owner pays premiums and chooses the beneficiary. In the event that the annuitant is not the contract owner, he/she would not pay premiums nor would he/she select the beneficiary.

There are two basic types of annuities - immediate and deferred. Which of the following is not a true statement about deferred annuities? a. A deferred annuity has annuity periods that begin sometime in the future. b. A deferred annuity can have a one-time premium payment. c. A deferred annuity payout period must begin within 12 months of purchase. d. A deferred annuity can have multiple premium payments.

C It is an immediate annuity where benefit payments must begin within 12 months of purchase. With a deferred annuity the benefit payments are usually postponed to a later date, i.e., retirement.

Variable annuities have all of the following features, EXCEPT: a. Account values accumulate tax deferred. b. There are usually a variety of investment choices. c. Money can be withdrawn at any time without penalty. d. Optional riders are available for an extra charge.

C Like a fixed annuity, a variable annuity will permit tax-deferred accumulation of assets. There is generally a wide choice of sub-accounts to meet the owner's risk profile. Withdrawing money prior to age 59 and one half or before the surrender period has expired may generate both tax consequences and surrender fees. The newer versions of variable annuities do allow for riders to be attached that provide a variety of benefits, but they add extra fees to the plan.

Naomi is the tertiary beneficiary on her uncle's life insurance policy. Under what circumstances would she collect the benefits of the plan? a. When the primary beneficiary dies b. When the secondary beneficiary dies c. When both the primary and secondary pre-decease the tertiary beneficiary d. None of the above

C Naomi would collect benefits if both the primary and the secondary beneficiaries die before she does.

Ron and Jack are partners. The business assignment of their life insurance policies was made to protect which of the following? a. The beneficiary from the claims of creditors b. The insurance company from fraudulent claims c. The financial interest that the lender has in the insured d. The ability of the insureds to maintain their insurability

C The business assignment of a life insurance policy is made to protect the lender's financial interest in the insured. This assignment insures that if the insured dies before the loan is paid off, the lender will be paid.

The cash value in a whole life policy is held in the insurance company's: a. Cash value account b. Separate account invested in government bonds c. General account d. Separate account for that class of policies

C The cash value of a whole life policy is held in the company's general account. That means the money is co-mingled with other assets and the investments for that account are usually subject to state and/or federal regulation. When a policyholder makes a loan, for instance, on a whole life plan, the money is loaned from the general fund, and not the cash value of the policy.

Ms. Swanson has a $75,000 mortgage and assigns a $150,000 policy. The assignee and the mortgagee received a check payable to them jointly. What is this agreement called? a. Partial assignment b. Absolute assignment c. Collateral assignment d. Divisible assignment

C The collateral assignment is used when a check is to be paid jointly to both parties.

Annuities have a variety of payout options. These options provide the annuitant with choices on how the annuity settlement will occur. All of the following are annuity payout options, EXCEPT: a. Cash (lump sum) b. Annuity certain c. Flexible payment d. Refund life annuity

C The flexible payment is not an annuity payout option. The most common options are: 1. Cash (lump sum) where the annuitant receives the value of the annuity in one payment. Only the interest earned on the principal is taxable upon receipt. 2. Annuity certain is income for a fixed time period as opposed to one's entire life. 3. Refund life annuity insures that the full value of the annuity will be paid to someone. The annuitant will receive income for life and then the beneficiary will receive the balance of premiums, plus interest (minus benefits already paid). 4. Life annuity is a payout option that guarantees income that the annuitant cannot outlive.

The 10-day free look period gives the insured the opportunity to look over a policy to decide if he/she is satisfied that it meets their requirements. When does the free look period begin? a. When the policy is issued b. When the application is made c. When the policy is physically delivered d. When the first claim is filed

C The free look period begins when the policy is physically delivered to the insured.

April completed her insurance application on the 9th of August. She paid her initial premium on the 10th of August. The insurance company issued the policy on the 16th of August. Her agent delivered the policy on the 17th of August. The insurer has a 15-day free look provision. When does she need to return the policy if she decides she does not want to purchase it, and wants her premium refunded? a. September 15th b. September 10th c. September 2nd d. August 31st

C The free look period starts when the policy is delivered. If April decides against purchasing the policy, she must return it by September 2nd. (15 days from when it was delivered) in order to get a full refund.

Mrs. Olsen worries that her health may deteriorate in the future. She wants to provide adequate coverage for herself and her family. Which rider should she consider for her life policy? a. Payor rider b. Disability income rider c. Guaranteed insurability rider d. Waiver of premium rider

C The guaranteed insurability rider allows a policyholder to purchase additional life insurance coverage in the future without providing evidence of insurability. The rider provides specific dates on which additional life insurance policies can be bought. The older the insured gets, the fewer dates he/she has to purchase more life insurance. In some instances, after a certain age, the rider may not be able to be purchased or added. The guaranteed insurability rider could be considered a worthwhile investment to include in a life insurance quote if Mrs. Olsen worries that her health might change.

Dominic has decided to cash in his life policy. How soon must the cash surrender values become available to him? a. 1 month b. 60 days c. 6 months d. 1 year

C The insurance company has six months to make the cash available to him.

When setting up a policy, the policyholder chooses how he/she wants the benefits to be paid when the policy matures. Which of the following is not a settlement option available to most policyholders? a. Fixed amount option b. Fixed period option c. Paid-up additions option d. Life income option

C The paid-up addition option is a dividend option. The fixed amount option is used if the primary consideration is the amount of time during which policy proceeds are liquidated. A fixed amount of income is designated to be paid at fixed intervals until funds are gone. The fixed period option involves liquidation of proceeds over a period of years - paid even if the beneficiary dies. Proceeds are paid in equal installments over a fixed period of time. The life income option is where distribution of proceeds is based on life contingencies. They are like a life annuity and serve much the same functions.

Riders are available to help the insured customize their life insurance contract to fit their individual needs. All of the following are common riders, EXCEPT: a. Waiver of premium b. Accelerated death benefit c. Variable life d. Return of premium

C Variable life is a type of life insurance contract - not a rider. Waiver of premium is a popular rider that serves as a type of disability insurance for those under age 60 or 65. If the insured becomes disabled during the term of the policy and cannot pay premiums, a waiver-of-premium rider ensures that the policy will be maintained by the insurer through the policy term. The provision continues as long as the insured remains disabled or until the policy term expires. The accelerated death benefit rider is designed to anticipate cases such as terminal illness involving high medical costs, whether in a hospital stay or in hospice care. This rider allows the insured to collect some or all of the payout while still alive - to provide for care and living expenses. The return of premium rider is as close as you can get to a money-back guarantee. Some or all of the insureds premiums will be returned if the insured survives the policy's term. The premiums are significantly higher up front.

A variable annuity has each of the following features, EXCEPT: a. Accumulation units in the accumulation phase b. Annuity units in the income phase c. A minimum guaranteed income benefit d. Varying sub-accounts or investment

C When a variable annuity is in the accumulation phase, the investment units are referred to as accumulation units. When the owner wishes to begin taking income they become annuity units. Neither has a guaranteed value. While the newer versions of variable annuities have riders that will provide a guaranteed income, that is not a standard feature. Generally, it is better to assume that variable annuities do not have guarantees.

All life policies require that some sort of beneficiary be named. Usually it is a person, but it can also be an estate, trust, charity, church, or a company. A beneficiary that can be changed at any time is a revocable beneficiary. An irrevocable beneficiary, however, cannot be changed so easily. All of the following statements are true about irrevocable beneficiaries, EXCEPT: a. The beneficiary cannot be changed without written consent. b. The policyowner makes premium payments. c. The policyowner retains the right to borrow against the policy. d. All of the above

C With an irrevocable beneficiary designation, the policyowner cannot borrow against the policy without the consent of the irrevocable beneficiary. Irrevocable beneficiaries are common in divorce settlements, and also in some cases with private loans for business ventures and mortgages. The person or company lending the money can require that insurance be in place to cover the debt and is named as an irrevocable beneficiary to insure that no changes are made to the life policy without their consent.

One of the most common types of life insurance is the whole life insurance policy. Which of the following is a typical characteristic of a whole life policy? a. The premiums remain level for the entire period that the policy is in force. b. Whole life policies have a guaranteed cash value. c. The face amount of the policy does not change while the policy is in force. d. All of the above

D

What type of life insurance policy offers the same guarantees as traditional whole life insurance with a lower initial premium that remains level for the first five years of the policy? a. Ordinary life b. Adjustable life c. Equity-indexed life d. Modified life

D Modified life is a life insurance policy that offers the same guarantees as traditional whole life insurance with a lower initial premium that remains level for the first five years of the policy.

When the policyholder sells, gives or pledges a policy as collateral, it is called: a. Incontestability b. Consideration c. Settlement d. Assignment

D A policy assignment provision in a life insurance contract is one that permits the owner of the policy to sell, give or pledge the policy as collateral. Consideration - a requirement for a valid informal contract that is met when each party gives or promises to give something of value to the other party. Incontestability is the clause that prevents an insurer from denying a claim, except for nonpayment of premiums, after the policy has been in force for over 2 years. Settlement is how the proceeds of the policy are to be paid when the policy matures.

Earl has deposited a large lump sum with an insurance company and he will begin receiving monthly payments next month. Earl has purchased: a. A flexible premium deferred annuity b. A single premium flexible annuity c. A single premium deferred annuity d. A single premium immediate annuity

D A single premium immediate annuity allows the annuitant to receive an income immediately. Flexible premium and deferred annuities will allow annuitization some time in the future. There may be an age when annuitization is required. The income options with a single premium immediate annuity are the same as any other type of income annuity.

Tim has added an accidental death rider to his life insurance contract. He knows that he will be charged an additional premium for this coverage, but because he lives in a dangerous neighborhood, he thinks the coverage is a good idea. For which of the following will the insurer exclude the payment of benefits? a. Conducting an illegal activity b. Acts of war c. Flying an experimental aircraft d. All of the above

D All insurers maintain a list of events and circumstances that void the insured's entitlement to the accidental death benefit. Death by illness, suicide, non-commercial aviation, war, and natural causes are generally not covered by the accidental death benefit. Death while under the influence of any non-prescribed drugs or alcohol are usually exempt, as well. Participating in illegal activities also exempt the insured from coverage.

Term coverage has many applications, such as mortgage protection. It gives the insured the best "bang for their buck." It is not without its disadvantages, however. Which of the following is a disadvantage of term insurance? a. It is pure death protection with no cash value b. It is generally not renewable after age 65 or 70. c. It becomes more expensive over time. d. All of the above

D All of the items listed are disadvantages of term insurance. Although usually less expensive in the beginning, it becomes more and more expensive as the insured ages. Because it is generally not renewable after a certain age, betting on protection may be very difficult for the insured, once he/she attains that age.

Samuel is explaining the exclusions in a life insurance policy to his new client. Which of the following is an exclusion that would be found in a life policy? a. Hazardous occupation b. War c. Suicide d. All of the above

D All of the items listed are exclusions that would be found in a life insurance policy.

A long-term care rider is a provision that can be added to a cash value life insurance policy. If the insured becomes confined to a nursing home, this rider would reimburse health care expenses. Certain optional benefits may also be provided such as: a. Hospice care b. Adult day care c. Cost of living expenses d. All of the above

D All of the items listed can be optional long term care benefits. The structure of the benefits includes elimination periods of 10-100 days, benefits triggered by impaired daily living activities, and skilled, custodial and home health care.

All periodic premium annuities are: a. Level premium b. Flexible premium c. Fixed d. Deferred

D All periodic premium annuities are deferred annuities. Different deferral periods can be involved. Benefits may begin after the last premium payment or they can be deferred to a later date. Level premium is an arrangement in which premiums are paid in installments - often annually. Premiums can be paid monthly, quarterly, or semiannually. Flexible premium means the purchaser has the option to vary the amount of each premium payment - within preset guidelines. A fixed annuity is a type of annuity which provides a fixed, guaranteed accumulation or payout.

In order to sell variable annuities, the sales person must be qualified. What is required to qualify to sell variable annuities? a. A specialty license from the state b. A "Blue Sky" license from the state c. An annuity license from the state d. Registration with FINRA and an insurance license from the state

D FINRA (formerly NASD) regulates variable annuity products in addition to the state. It is usual to require a minimum of a Series 6 license, a state securities registration and an insurance license to sell variable annuities. Penalties are severe for improper registration.

As with all investments, there are risks and rewards, advantages and disadvantages. All of the following are disadvantages of immediate annuities, EXCEPT: a. Once the annuity is purchased, there is no turning back - the annuitant loses access to the principal. b. The guaranteed income may be less than could be earned in another investment. c. If the annuitant does not outlive the actuarial predictions, substantial monies could be lost. d. In the event of a downturn in the market, the benefit payments remain level.

D If there is a downturn in the market, the fact that the benefit payments do not go down is an advantage, not a disadvantage. All of the other items are considered disadvantages of immediate annuities.

Most life insurance policies have common exclusions. That means there are circumstances, conditions, etc. in which they are not obligated to pay benefits of a policy in force. Which of the following is not such an exclusion? a. Suicide b. Dangerous activity c. Aviation d. Sexual orientation

D Insurance companies are not allowed to exclude people because of their sexual orientation. The suicide clause usually states that the company will not pay the face amount of the policy if the policyholder commits suicide within two years of purchase. In these cases, the only payment is a refund of premiums paid. The aviation exclusion usually states that the policy will not pay if the policyholder dies in a private plane crash as opposed to being a passenger on a commercial flight. The dangerous activity exclusion states that there will be no payment if the policyholder dies while participating in a certain activity, such as hang-gliding, rock-climbing, or auto racing. These exclusions are rare, however, as most companies will cover an individual at a higher rate if he/she regularly participates in these types of activities. Another common exclusion - the war exclusion states that the policy will not pay in the event that the policyholders death occurs as the result of a war.

The Clark family's insurance policy lapsed when Mr. Clark was out of work. The policy was not surrendered for its cash value. Under what conditions can the policy be reinstated? a. Proof of insurability may be required b. All back premiums need to be paid c. It has not been more than three years since the policy lapsed d. All of the above

D Reinstatement is usually possible if it has not been more than three years, proof of insurability is provided, back premiums are paid and it was not surrendered for its cash value. It is advantageous to reinstate a lapsed policy as opposed to purchasing a new policy because the age of the insured when the policy was first issued is used - resulting in a lower premium. The incontestability clock would start again on a reinstatement.

Continuous premium, limited premium and single premium are types of whole life policies. Which of the following is indicative of a continuous premium method? a. It has immediate cash value. b. It is also called 20-pay life. c. It has the lowest cost over the life of the insured. d. It has the lowest annual premium.

D The continuous premium whole life has the lowest annual premium, and requires that payments be made for the longest period of time. The cash value grows slowly with a continuous premium policy. It is a single premium whole life policy that has immediate cash value, and the lowest cost over the life of the insured. A limited pay whole life is also called 20-pay life.

Daniel has a disability income rider on his life policy. With a disability income rider: a. The insurer pays Daniel a specified amount each month. b. The income continues for the duration of the disability. c. There is a waiting period before benefits are paid. d. All of the above

D The disability income rider pays a specified amount each month - based on the face amount of the policy. The income continues for the length of the disability, after waiting period requirements have been fulfilled. The disability must meet the insurer's criteria for total and permanent, and is usually determined by a physician approved by the insurer.

How long can an insurance company delay payment of a cash surrender? a. The insurer must pay immediately. b. 30 days c. 60 days d. 6 months

D The insurer can delay payment of a cash surrender for six months.

Premium payments for life insurance are made in advance. Typically they are paid to the insurer's home office or to the agent. The premium payment mode defines the timing of the payments. Usually the payment mode with the best economy is: a. Monthly b. Quarterly c. Bi-annually d. Annually

D The less frequently the insurance company has to process premium payments, generally, the more economical the payments. If the annual premium on a policy is $480, the bi-annual premium might add up to $490, the quarterly premiums might add up to $500 and the monthly premiums might add up to $520 per year.

Insurance companies use 5 major factors to determine annuity premiums. All of the following are common factors used to determine premiums for annuities, EXCEPT: a. The age of the annuitant b. The sex of the annuitant c. The payment guarantee to the annuitant d. The marital status of the annuitant

D The marital status of the annuitant is not a factor in premium determination. The five factors used to determine annuity premiums are: the annuitant's age and sex, the assumed interest rate, the periodic income amount and payment guarantees, and also, company expenses (or load). The age is important for the insurer to determine how long it will be obligated to make payments to the annuitant. Example: If Sally wants to receive $500/month for life beginning at age 65 and Kim wants to receive $500/month beginning at age 60, if all other things are equal, the insurer will charge Kim a higher premium than Sally, because they will be paying for a longer period of time. The reason that the annuitant's sex is a factor is because statistically women live longer than men. If the annuitant is a woman, the premium is higher because she is expected to live longer and will receive income payments for a longer period of time. If Sally and John purchase annuities with all things being equal, Sally's premium will be higher. The third factor used is the assumed rate of interest. Insurance companies invest premium dollars and earn interest on their investments. The insurers estimate the amount of interest their invested premium dollars will earn. The fourth factor is the amount of periodic income to be paid and payment guarantees that the insurer made (i.e., a 10-year period certain). A higher amount of income and/or a longer payment period will be cause for a higher premium. Virtually all life policies and annuities include a factor that helps pay the insurer's operating expenses. Premiums have this factor loaded into them.

When considering a variable annuity, the prospect should review all of the following, EXCEPT: a. The mortality charge b. The expense charge c. The investment fee for each separate account d. The expected return for each separate account

D The mortality, expense and investment fees will have a bearing on the account results. Returns are net of expenses. A higher expense ratio will cause lower net return or create a situation where the money manager must accept a higher risk. Since the accounts are not guaranteed, there is no assurance what the future return might be on any given sub-account.

A clause that protects a beneficiary from creditors coming after the proceeds of a policy is called which of the following? a. Beneficiary protection clause b. Insuring clause c. Incontestable clause d. Spendthrift clause

D The spendthrift trust clause protects the beneficiary by leaving the proceeds with the insurer. A creditor of the beneficiary cannot make claims against money held by the insurer. This does not apply to lump sum proceeds.

Randall's company has taken out a life insurance policy on a key employee - John. John is the insured, but the company is the owner of the policy. What rights does John have as the insured? a. Choice of premium mode b. Beneficiary designation c. Take out a policy loan d. None of the above

D Usually the owner and the insured are the same, but not always. The company is the owner. In this case, the insured has none of the rights listed. It is the policyowner that maintains all of the rights.

Mary has reached age 65 and she wants to begin a monthly income on her fixed annuity. She has funded her plan with after-tax contributions, and she wants to know what her tax liability will be going forward. Her agent explains that her tax will be calculated using: a. Income averaging b. Morbidity tables c. Tax rates based on her age d. The exclusion ratio

D When a person annuitizes a non-qualified annuity, part of the money returned is considered principal and part is considered earnings. The exclusion ratio is used to determine which part of the payment will be excluded from income tax liability. Once that number is calculated, it remains constant.

The payout option for an annuity is selected by the owner of the annuity. Which of the following is true? a. The accumulation period may also be described as a benefit period. b. Once the payout option is selected, it cannot be changed after payments begin. c. The settlement option can be changed within 5 years of annuitizing. d. None of the above

Once selected, the payout option for an annuity cannot be changed after payments begin.