8 - Life Insurance Premiums, Proceeds and Beneficiaries

The method used today to change beneficiaries is known as? A) The recording method. B) The change of designation method. C) The beneficiary alteration method. D) The assignment method.

A) The recording method. In the recording method, the policyowner notifies the insurance company in writing of the beneficiary change. When the insurance company records the change, it becomes effective as of the date the notice was signed.

Life insurance premiums are typically based on what increment of the face value? A) $10,000. B) $100. C) $1,000. D) $10.

C) $1,000. Life insurance premium rates are generally quoted as an annual cost per $1000 of face amount.

The beneficiary on Walter's life insurance policy reads, "Children of the Insured." Which of the following phrases best describes this type of beneficiary designation? A) Attractive nuisance beneficiaries. B) Juvenile beneficiaries. C) Class beneficiaries. D) Generational beneficiaries.

C) Class beneficiaries. Class designation means that rather specifying one or more beneficiaries by name, the policyowner designates a class or group of beneficiaries.

A factor in rate-making known as the loading charge is also referred to as what type of factor? A) Interest. B) Expense. C) Mortality. D) Investment.

B) Expense. Insurance companies are just like any other business. They have operating expenses which need to be factored into the premiums. The expense factor is also known as the loading charge.

Christine's policy has a clause that reads as follows: "Should the primary beneficiary and the insured die in the same accident and the primary beneficiary fails to survive the insured by 14 days, it will be assumed that the beneficiary predeceased the insured." Which of the following phrases best describes this clause? A) Secondary beneficiary provision. B) Facility-of-payment provision. C) Common disaster provision. D) Uniform Simultaneous Death Act.

C) Common disaster provision. In a common disaster provision, a policyowner can be sure that if both the insured and the primary beneficiary die within a short period of time, the death benefits will be paid to the secondary beneficiary.

If the only difference in life insurance premiums for men and women is based on the fact that women are expected to live longer, then the premium for women's life insurance should be? A) equal. B) higher. C) lower. D) unknown.

C) lower. Women tend to live longer than men, so their premiums are usually lower.

A cost involved in determining premium rates is called the loading charge. This is also known as? A) Interest factor. B) Mortality factor. C) Presumptive factor. D) Expense factor.

D) Expense factor. Each premium must carry its small proportionate share of normal operating costs. Thus, an expense factor is computed and included in the premium rates for life insurance. Sometimes the expense factor is called the "loading charge."

Under which option does the insurer hold the death proceeds for a specified period of time and, at regular intervals, pay the beneficiary a guaranteed rate of interest on the proceeds? A) Fixed-amount. B) Fixed-period. C) Life-income. D) Interest-only.

D) Interest-only. Under the interest-only option, interest is paid out rather than accumulated so the proceeds of the policy remain the same.

Mary names her husband, Rick, as primary beneficiary of her life insurance policy and her two children, Pam and Matt, as contingent beneficiaries. Rick dies in March. Pam and Matt are killed simultaneously in a car accident later that month. Hearing the news, Mary has a fatal heart attack. In this case, Mary's life insurance proceeds will be paid? A) To Mary's estate. B) To Rick's estate. C) In equal shares to Rick, Pam, and Matt's estates. D) One-half to Rick's estate and one-quarter each to Pam and Matt's estates.

A) To Mary's estate. If all primary and contingent beneficiaries are deceased at the time of insured's death, the proceeds are paid to the policyowner or to the policyowner's estate, if the policyowner is deceased.

Under a joint and survivor life income settlement option, payment is provided until? A) the last annuitant dies. B) the primary beneficiary dies. C) either beneficiary dies. D) the insured dies.

A) the last annuitant dies. The joint and full survivor option provides for payment of the annuity to two people. If either person dies, the same income payments continue to the survivor for life. When the surviving annuitant dies, no further payments are made to anyone.

Bill names his church as the beneficiary of his $300,000 life insurance policy. When Bill dies, who is responsible for the income taxes payable on the lump-sum proceeds received by the church? A) His estate is responsible. B) His church is responsible. C) No income tax is payable on the death proceeds. D) His estate and the beneficiary share the tax liability equally.

C) No income tax is payable on the death proceeds. Death benefits paid under a life insurance policy to a named beneficiary are generally free of federal income taxes.

Beth, age 50, the beneficiary of her late husband's life insurance policy, has elected to receive the proceeds in monthly installments over the next 5 years. Due to the insurer's interest earnings, Beth notices that the amount of the payments is often more than what she was guaranteed. What kind of settlement option did Beth select? A) Fixed-amount. B) Fixed-period. C) Cash value. D) Life-income.

B) Fixed-period. Under the fixed-period option, if company earnings are large enough to permit paying excess interest, the excess interest will be used to make each payment larger.

Amounts of money that together with future premiums, interest, and survivorship benefits will fulfill an insurance company's obligations to pay future claims are known as? A) loan values. B) reserves. C) settlement options. D) net level premiums.

B) reserves. Reserves are the amounts of money that together with future premiums, interest, and survivorship benefits will fulfill an insurance company's obligations to pay future claims.

Assume the following persons buy identical life insurance policies from the same company. Generally speaking, who will pay the lowest premium, if all have standard ratings? A) Joe, age 45. B) Louise, age 40. C) Linda, age 28. D) Thomas, age 28.

C) Linda, age 28. On average, women live five or six years longer than men. Their premium rates have been lower than those for men, given the same age, based on this statistic.

All of the following statements about accelerated death benefits and viatical settlements are correct EXCEPT? A) A terminally ill person receives accelerated death benefits tax-free. B) Accelerated benefit provisions are standard in most individual and group life insurance policies. C) The maximum amount of accelerated benefits that a chronically ill person can exclude from income is limited. D) An insured who sells an insurance policy to a viatical company usually receives 100% of the policy's face value.

D) An insured who sells an insurance policy to a viatical company usually receives 100% of the policy's face value. Under NAIC guidelines, insureds normally receive anywhere between 50-80% of the policy face value. The viatical company then receives 100% of the policy face value when the insured dies.

Sandra has a life insurance policy that states her husband, Gerald, is to receive the full death benefit. If he predeceases her, their 3 children are to share the benefit equally. If her husband and all 3 children predecease her, the benefit is payable to the First Community Church. All of the following statements are correct EXCEPT? A) Gerald is the primary beneficiary. B) The 3 children are all secondary beneficiaries. C) The First Community Church is the tertiary beneficiary. D) The designation of the First Community Church can be contested by any of Sandra's relatives who survive the children.

D) The designation of the First Community Church can be contested by any of Sandra's relatives who survive the children. Tertiary beneficiaries stand third in line to receive the proceeds of a life insurance policy. First Community Church is considered the tertiary beneficiary, or third in line, to receive the proceeds of the policy.

Upon the death of an insured who possesses a life insurance policy with a named beneficiary, the proceeds? A) pass to the beneficiary and are subject to income taxes, but income averaging is permitted B) pass in part to the beneficiary, but the policy's cash values first pass to the insured's creditors, if any. C) are held to satisfy any claims of the beneficiary's creditors before being paid to the beneficiary. D) pass directly to the beneficiary and are not subject to attachment by the insured's creditors.

D) pass directly to the beneficiary and are not subject to attachment by the insured's creditors. Death benefit proceeds pass directly to the beneficiary and are not subject to attachment by the insured's creditors.

Mr. Williams names his son John a beneficiary of his life insurance policy. What designation should he use if he wants to make sure that John's children would receive John's share of the life insurance policy proceeds should John predecease his father? A) Per stirpes. B) All my children. C) Per capita. D) Grandchildren.

A) Per stirpes. A Per Stirpes distribution means that a beneficiary's children will receive the proceeds in equal shares should the beneficiary die before the insured.

The policyowner must obtain the consent of the named beneficiary before taking out a policy loan if the named beneficary is? A) a right-of-succession beneficiary. B) an irrevocable beneficiary. C) a collateral beneficiary. D) a unilateral beneficiary.

B) an irrevocable beneficiary. The policyowner must obtain the consent of the named beneficiary before taking out a policy loan if the named beneficiary is an irrevocable beneficiary.

The Facility of Payment provision in a life insurance policy? A) is used if claims are submitted by several beneficiaries. B) requires that proceeds be paid only to the estate. C) is used when the named beneficiary is deceased. D) is not found on industrial life policies.

C) is used when the named beneficiary is deceased. The Facility of Payment provision is used when an insurer must pay proceeds to someone not designated as a beneficiary, such as when the named beneficiary is deceased.

All of the following statements concerning a common disaster provision are correct EXCEPT? A) The provision gives a policyowner assurance that proceeds will be distributed according to the policyowner's wishes. B) The provision activates when the insured and primary beneficiary die as a result of the same accident. C) The provision stipulates that if the primary beneficiary outlives the insured by more than 48 hours, then the proceeds will be paid to the primary beneficiary's estate. D) The provision stipulates that if the insured and primary beneficiary die in the same accident, it is presumed that the insured died last.

C) The provision stipulates that if the primary beneficiary outlives the insured by more than 48 hours, then the proceeds will be paid to the primary beneficiary's estate. This is inaccurate. With a common disaster clause, typically the primary beneficiary must outlive the insured by either 14 or 30 days or it is assumed the insured died last.

When an insurer pays proceeds, including interest and principal, in minimum guaranteed dollar payments over a specified number of years, it is referred to as the? A) Cash Refund option. B) Fixed-Amount option. C) Fixed-Period option. D) Interest-Only option.

C) Fixed-Period option. The Fixed-Period Proceed Option pays proceeds (including interest and principal) in minimum guaranteed dollar payments over a specified number of years.

Sonya wants to name her husband as the beneficiary of her life policy. She also would like to retain all of the rights of ownership. Sonya should have her husband named as? A) Tertiary beneficiary. B) Secondary beneficiary. C) Revocable beneficiary. D) Irrevocable beneficiary.

C) Revocable beneficiary. When beneficiaries are designated as revocable, the policyowner may change the designation at any time. It also means the policyowner retains ownership of the policy. The policyowner can make policy changes at any time.

All of the following statements about the taxation of insurance proceeds are correct EXCEPT? A) Interest earned on policy dividends is exempt from income tax. B) A policyowner who receives the cash value for a surrendered policy must pay taxes on any gain. C) Generally, no gain or loss is recognized when one insurance policy is exchanged for another. D) A beneficiary will not be taxed on insurance proceeds paid as a lump sum death benefit.

A) Interest earned on policy dividends is exempt from income tax. Interest paid on death benefit proceeds left with the insurance company is taxable income.

Which of the following factors is most important when computing basic premiums for life insurance? A) Mortality. B) Interest. C) Reserves. D) Expense.

A) Mortality. While an insurer's interest and expense factors are generally the same on all its policyholders, the mortality factor can vary greatly, depending on the characteristics of each insured.

When a policyowner cannot exercise his rights of ownership without the policy beneficiary's consent, the beneficiary is designated? A) Irrevocable. B) Vested. C) Contractual. D) Primary.

A) Irrevocable. If a beneficiary is designated irrevocable, the policyowner gives up the right to change the beneficiary.

If an irrevocable beneficiary dies before the policyowner, who of the following gains control of a life insurance policy with a reversionary irrevocable clause? A) Irrevocable beneficiary's children. B) Policyowner. C) Insurer. D) Insured.

B) Policyowner. Reversionary irrevocable clauses revert all rights to the policyowner if the beneficiary dies before the policyowner. An absolute irrevocable clause keeps vested interest in the life insurance contract with the beneficiary even if the beneficiary predeceases the policyowner.

What is the beneficiary designation that can only be changed with the beneficiary's written agreement? A) Revocable beneficiary. B) Per stirpes. C) Irrevocable beneficiary. D) Wife of the insured.

C) Irrevocable beneficiary. An irrevocable beneficiary has a vested right in the policy. The policyowner cannot exercise any right that would affect the vested rights of the beneficiary without consent.

Under the Delayed Payment provision, most states permit an insurer to postpone payment of cash surrender values after policyowners request payment for a period not to exceed? A) 30 days. B) 6 months. C) 3 months. D) 60 days.

B) 6 months. Most states permit insurers to postpone payment of cash surrender values for up to 6 months after policyowners request payment. This provision is a proactive measure for companies should an economic crisis arise, but such delays are rarely invoked.

Kevin, the insured under a $200,000 life insurance policy, and his sole beneficiary, Lynda, are killed instantly in a car accident. Under the Uniform Simultaneous Death Act, to whose estate will the policy pay benefits to? A) Both Kevin's and Lynda's estate, equally. B) Kevin's estate. C) Lynda's estate. D) The proceeds will transfer to the state.

B) Kevin's estate. Under the Uniform Simultaneous Death Act, if the insured and primary beneficiary die in the same accident, it is presumed that the insured died last and the proceeds will go to the insured's estate.

A clause that states that policy distributions payable to a beneficiary after the insured dies are not assignable or transferable and may not be attached in any way is called? A) A spendthrift trust clause. B) An assignment clause. C) A debtors protection clause. D) A facility-of-payment clause.

A) A spendthrift trust clause. A spendthrift trust clause is used to help protect beneficiaries from the claims of their creditors. It states policy distributions are not assignable or transferable and may not be attached in any way.

All of the following are primary premium factors EXCEPT? A) Dividends. B) Interest. C) Expense. D) Mortality.

A) Dividends. The three primary factors used when computing the basic premium for life insurance are mortality, interest, and expense.

Under which option does the beneficiary receive guaranteed income for life no matter how long the beneficiary lives? A) Life income option. B) Interest-only option. C) Fixed-amount option. D) Fixed-period option.

A) Life income option. This unique concept is successful because the principal and interest of life insurance proceeds are paid out simultaneously. Even if the principal is depleted, income payments will continue as long as the primary beneficiary is alive.

Which of the following statements pertaining to life insurance policy settlement options is NOT correct? A) Under the fixed-period option, the payment of excess interest will lengthen the payment period. B) Payments under the interest-only option may be made at a rate higher than the guaranteed minimum. C) By using the interest-only option, two or more settlement options can be combined for added flexibility. D) Diane and Rhonda each are receiving monthly income from their deceased husbands' identical life insurance policies under the fixed-period option. Diane's payments are to be made for 15 years and Rhonda's for 20 years. Diane receives the larger monthly payments.

A) Under the fixed-period option, the payment of excess interest will lengthen the payment period. Under the fixed-period option, the company pays the beneficiary equal amounts of money at regular intervals over a specified period of years.

All of the following statements about facility-of-payment provisions are correct EXCEPT? A) They permit insurance proceeds to be paid to someone not named in the policy when the named beneficiary is a minor. B) They are typically found in industrial policies. C) They are often found in group life policies. D) They permit an insurer to pay all or part of the proceeds to a party who is not named in the contract.

C) They are often found in group life policies. A facility-of-payment provision is typically found in industrial policies. It permits an insurer to pay all or a portion of the proceeds to someone who is not named in the contract.

A tertiary beneficiary stands where in line to receive proceeds of a life insurance policy? A) Fourth. B) Second. C) Third. D) First.

C) Third. A tertiary beneficiary stands third in line to receive the proceeds of a life insurance policy. Tertiary beneficiaries receive benefits in cases where all primary and secondary beneficiaries predecease the insured.

Proceeds from which of the following policies are subject to federal income tax? A) Double indemnity policy. B) Group term policy. C) Those payable in installments. D) Individual policy.

C) Those payable in installments. Death benefit proceeds paid in installments are subject to federal income tax.

The named beneficiary of a life insurance policy is the one? A) named in the will. B) selected by the insured. C) selected by the policyowner. D) named in the estate plan.

C) selected by the policyowner. There are few restrictions on who may be named a beneficiary of a life insurance policy. The owner of the policy is

"At age 50, out of 100,000 born the same year, 87,623 will still be alive. Of these, 729 will die this year." The preceding information is used to determine premium rates and is found in which of the following types of tables? A) Mortality. B) Participating. C) Insurability. D) Morbidity.

A) Mortality Mortality is a measure of the number of deaths in a given population. Insurance companies use mortality tables to help predict the life expectancy and probability of death for a given group.

Which of the following statements is CORRECT? A) If a policyowner designates a per stirpes distribution of the proceeds, the designation becomes irrevocable once a beneficiary predeceases the policyowner. B) A per stirpes distribution means that a beneficiary's share of a policy's proceeds will be passed down to the beneficiary's living child or children if the named beneficiary predeceases the insured. C) A per capita distribution ensures that an insured's surviving family will share in the insurance proceeds. D) A per capita distribution is the most common method of distributing proceeds to beneficiaries.

B) A per stirpes distribution means that a beneficiary's share of a policy's proceeds will be passed down to the beneficiary's living child or children if the named beneficiary predeceases the insured. Per stirpes distribution will be passed down to the beneficiary's living children in equal shares should beneficiary die before the insured. Per capita distributes a policy's proceeds only to the beneficiaries who are living and have been named in the policy.

Which of the following statements pertaining to life insurance premiums is CORRECT? A) The most significant factor in premium rate calculation is interest. B) Premium rates usually are lower for men than women. C) Harold and Billy, both age 25, each buy a whole life policy from the same company. However, Harold has a participating policy, while Billy's policy is nonparticipating. Harold will pay a higher premium. D) Lucy, who is substantially overweight, has applied for a life insurance policy. Her weight may affect her insurability, but not the amount of premium on her policy.

C) Harold and Billy, both age 25, each buy a whole life policy from the same company. However, Harold has a participating policy, while Billy's policy is nonparticipating. Harold will pay a higher premium. The premium payments for a participating policy are usually higher than a nonparticipating policy, although dividends can be used to reduce these premiums. Nonparticipating policies do not receive dividends.

For a person to be considered terminally ill, a physician must certify that the person? A) has a similar disability level as defined by regulation. B) requires substantial assistance to perform one activity of daily living due to a functional capacity loss. C) has a condition or illness that will result in death in two years. D) requires substantial supervision to protect. safety due to severe cognitive impairment.

C) has a condition or illness that will result in death in two years. To be considered terminally ill, a person must have a condition or illness that will result in death in two years.