Ch. 4 Types of Life Policies Examfx

An individual has just borrowed $10,000 from his bank on a 5-year installment loan requiring monthly payments. What type of life insurance policy would be best suited to this situation? A.) Decreasing term B.) Variable life C.) Universal life D.) Whole life

A.) Decreasing term Rationale: A decreasing term policy's face amount decreases as the amount of debt is reduced.

The death benefit under the Universal Life Option B: A.) Gradually increases each year by the amount that the cash value increases B.) Decreases by the amount that the cash value increases C.) Increases for the first few years of the policy, and then levels off D.) Remains level

A.) Gradually increases each year by the amount that the cash value increases Rationale: Under Option B the death benefit includes the annual increase in cash value so that the death benefit gradually increases each year by the amount that the cash value increases.

An insurance policy that only requires a payment of premium at its inception, provides insurance protection for the life of the insured, and matures at the insured's age 100 is called: A.) Single premium whole life B.) Modified endowment contract (MEC) C.) Level term life D.) Graded premium whole life

A.) Single premium whole life Rationale: Single premium whole life requires the entire premium to be paid in one lump sum at the policy's inception.

A married couple owns a permanent policy which covers both of their lives and pays the death benefit only upon the death of the first insured. Which policy is that? A.) Survivorship life policy B.) Second-to-die C.) Family income policy D.) Joint life policy

B.) Second-to-die Rationale: Joint life policies cover the lives of two insureds; rates are blended. Upon the death of the first insured, the policy ends.

What does "level" refer to in level term insurance? A.) Cash value B.) Interest rate C.) Face amount D.) Premium

C.) Face amount Rationale: 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.

If an agent wishes to sell variable life policies, what license must the agent obtain? A.) Surplus lines B.) Personal lines C.) Securities D.) Adjuster

C.) Securities Rationale: Variable products are governed in part by the Securities and Exchange Commission; therefore, agents selling variable life policies must also secure a securities license.

All other factors being equal, the least expensive first-year premium payment is found in: A.) Annual renewable term B.) Increasing term C.) Decreasing term D.) Level term

A.) Annual renewable term Rationale: 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.

Which of the following is INCORRECT regarding a $100,000 20-year level term policy? A.) If the insured dies before the policy expired, the beneficiary will receive $100,000. B.) The policy will expire at the end of the 20-year period C.) At the end of 20 years, the policy's cash value will equal $100,000 D.) The policy premiums will remain level for 20 years

C.) At the end of 20 years, the policy's cash value will equal $100,000 Rationale: Term policies do not develop cash values. All the other statements are true.

Graded-premium whole life policy premiums are typically lower initially, but gradually increase for a period of 5-10 years. After the period of increase the premiums will: A.) Continue to increase B.) Return to the initial premium amount C.) Decrease again D.) Be level thereafter

D.) Be level thereafter Rationale: When a Graded-Premium Whole Life policy begins, the premium amounts are typically 50% lower than premiums for straight life policies. The premium then gradually increases each year for a period of usually 5 or 10 years and then remains level thereafter.

All of the following are true about variable products EXCEPT: A.) The minimum death benefit is guaranteed B.) The cash value is not guaranteed C.) Policyowners bear the investment risk D.) The premiums are invested in the insurer's general account

D.) The premiums are invested in the insurer's general account Rationale: 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.

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: A.) Until the policyowner reaches 65 B.) For 20 years C.) Until the policyowner's age 100, when the policy matures D.) For 20 years or until death, whichever occurs first.

D.) For 20 years or until death, whichever occurs first. Rationale: 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 an example of a limited-pay life policy? A.) Life paid-up at age 65 B.) Renewable term to age 70 C.) Level term life D.) Straight life

A.) Life paid-up at age 65 Rationale:Limited Pay Whole Life premiums are all paid by the time the insured reaches age 65. The policy endows when the insured turns 100. It is the premium paying period that is limited, not the maturity.