Chapter 12
15) Which of the following statements is true regarding an automatic premium loan provision?
A) Its purpose is to prevent a policy from lapsing because of nonpayment of premium.
57) Easy Pay Life Insurance Company allows a term insurance rider to be added to its whole life policies. The result is a policy that offers an increased death benefit with an affordable premium. The general name for such a policy is a(n)
A) blended policy.
52) A life insurance contractual provision protects the beneficiary by not permitting the insurer to introduce outside information to deny payment of the claim. Such outside information might be notes that the agent took while the insured completed the application. This contractual provision is the
A) entire contract clause.
39) Bruce lied about his health history when he purchased a life insurance policy. He died 3 years after the policy was issued. Which life insurance policy provision will require the life insurer to pay the beneficiary even though Bruce lied on the application?
A) incontestable clause
18) Which of the following is a common dividend option found in a participating life insurance policy?
C) paid-up additions
30) Which of the following statements about the guaranteed purchase option is true?
D) The additional coverage can be purchased without demonstrating insurability.
1) Which of the following statements about the ownership of a life insurance policy is (are) true? I. Under the ownership clause, the policyholder and beneficiary equally share all contractual rights in the policy while the insured is living. II. The policyholder can designate a new owner by filing an appropriate form with the insurance company.
B) II only
34) The cost-of-living rider typically bases increases in the policy face value on changes in the
C) consumer price index.
9) A contingent beneficiary in a life insurance policy has the right to
A) receive the policy proceeds if the primary beneficiary dies before the insured.
61) A large life insurance policy acquired by a group of investors with the specific intention of selling the policy in the secondary life insurance market for a substantial profit is called a(n)
C) stranger-owned life insurance policy.
16) What major feature distinguishes a participating policy from a nonparticipating policy?
C) the payment of dividends
11) Which of the following statements about the assignment of a life insurance policy is true?
A) The insurer must be notified of any assignment or the death proceeds will be paid to the named beneficiary.
13) The transfer of all ownership rights in a life insurance policy can be accomplished through a(n)
A) absolute assignment.
53) Which of the following is a standard nonforfeiture option?
C) extended term insurance
12) Which of the following statements about the assignment of a life insurance policy is (are) true? I. Under a collateral assignment, the policyowner assigns a life insurance policy to secure a loan. II. Under an absolute assignment, only limited ownership rights in a policy are transferred.
A) I only
24) All of the following statements about the interest settlement option are true EXCEPT
A) The minimum guaranteed interest rate is usually equal to the prime rate.
42) Tim purchased a 10-payment whole life insurance policy 15 years ago. Tim would like to donate this paid-up policy to a charity. Under which policy provision can Tim transfer all ownership rights in the policy to the charity?
A) absolute assignment
59) Marcus is concerned that inflation will erode the purchasing power of the face value of his life insurance policy. His agent suggested that Marcus add a provision that allows him to purchase one-year term insurance equal to the percentage change in the consumer price index without having to demonstrate insurability. This provision is called a(n)
A) cost-of-living rider.
62) Bruce, age 62, was approached by a representative of a group of investors. The representative asked Bruce to purchase a large life insurance policy which the investor group would purchase from Bruce. Bruce doesn't need life insurance. The investor representative told Bruce to tell the agent he needed the policy for estate liquidity. Bruce purchased the policy, and then sold it to the investor group. The arrangement described in this scenario is called a(n)
A) stranger-owned life insurance policy.
54) Which of the following statements about life insurance policy loans is (are) true? I. Interest is not required on a life insurance policy loan, as the policyholder is borrowing his or her own money. II. If there is an outstanding loan when the insured dies, payment to the beneficiary is reduced by the amount of the loan.
B) II only
38) Cal purchased a whole life policy 6 years ago. The policy requires annual premium payments. Cal forgot to pay the premium that was due 2 weeks ago. He wonders if his life insurance is still in force. Which life insurance policy provision is designed to keep the policy in force for a short time even if the premium payment is late?
B) grace period
36) The practice of buying the life insurance policy of a terminally ill insured at a discount is referred to as a
B) viatical settlement.
31) Which of the following statements about the guaranteed purchase option is true?
C) The option permits the insured to purchase specified amounts of life insurance in the future even if the insured has become uninsurable.
14) Which of the following statements about life insurance policy loans is true?
C) The policyholder must pay interest on a life insurance policy loan.
49) Life insurance policy proceeds can be paid to a trustee upon the death of the insured. All of the following statements concerning payment of proceeds to a trustee are true EXCEPT
C) The trustee is not permitted to accept a fee for rendering services.
35) Which of the following statements about accelerated death benefits riders is (are) true? I. The benefit paid is usually less than the full face amount. II. Several different medical conditions may trigger the payment of benefits.
C) both I and II
6) All of the following statements about the requirements to reinstate a lapsed life insurance policy are true EXCEPT
D) There is no time limit on when the policy may be reinstated.
51) A life insurance policyholder may no longer need life insurance. Such a policyholder may sell the policy to a third party for more than its cash value. The purchaser becomes the new beneficiary and is responsible for subsequent premium payments. Such a financial transaction is called a(n)
D) life settlement.
47) Which of the following statements is (are) true concerning settlement options? I. A straight life annuity provides the lowest amount of periodic income of all the life income options. II. Fixed-period and fixed-amount are life income options.
D) neither I nor II
43) Beth purchased a participating life insurance policy 6 years ago. Her life insurance needs have increased, but she has developed a medical condition that makes it impossible for her to purchase more life insurance at affordable premiums. Which dividend option makes sense for Beth to use given her medical condition?
D) paid-up additions
21) Which of the following dividend options, sometimes called the "fifth dividend option," is not offered by all insurers that sell participating life insurance coverage?
D) term insurance
41) Becky is considering the purchase of a whole life policy on her own life. She is concerned that if she becomes disabled, paying premiums will become a burden. Which provision can Becky attach to her life insurance policy to address this concern?
B) waiver-of-premium provision
5) Which of the following statements about the grace period in a whole life insurance contract is (are) true? I. The purpose of the grace period is to prevent the policy from lapsing by giving the policyowner additional time to pay an overdue premium. II. If the insured dies during the grace period, the death benefit is reduced by 50 percent.
A) I only
60) Janet is the beneficiary of her uncle's $200,000 life insurance policy. When her uncle died, Janet selected a settlement option that pays monthly benefits for as long as she lives. If Janet dies before receiving $200,000, payments will continue to a contingent beneficiary until a total of $200,000 has been paid. What settlement option did Janet select?
B) life income with guaranteed total amount
44) Lionel purchased a $200,000 ordinary life insurance policy when he was 25 years old and had significant life insurance needs. Now Lionel is 50. His mortgage is almost paid-off and his children have left home and are financially independent. Lionel no longer wants to pay premiums, but he would like to have some permanent life insurance in force. Which nonforfeiture option could Lionel employ to meet these objectives?
B) reduced paid-up insurance
40) Which life insurance policy provision specifies that it is the policyholder, and not the insured or beneficiary, who possesses all contractual rights while the policy is in force?
D) ownership clause
32) Which of the following statements about a typical accidental death benefit rider is (are) true? I. Accidental injury must be the cause of death for the increased benefit to be paid. II. The accidental death must occur prior to some specified age for the increased benefit to be paid.
C) both I and II
17) Sources of life insurance dividends include which of the following? I. Excess interest earned on the assets necessary to maintain legal reserves II. Favorable mortality experience
C) both I and II
20) Advantages of selecting the paid-up additions dividend option in a life insurance policy include which of the following? I. Evidence of insurability is not required to purchase additional insurance. II. The additions are purchased at net rates without a loading for expenses.
C) both I and II
4) Amy purchased a life insurance policy with the intent of committing suicide to pay all the debts that were burdening her family. If she commits suicide 9 months after the policy is purchased, and the insurer is able to prove that her death was a suicide, how much will be paid by the insurance company?
B) the premiums paid for the policy will be refunded
19) Which of the following statements about dividend options is (are) true? I. The interest on dividends left to accumulate with the insurer is not considered to be taxable income. II. Paid-up additions are additional units of whole life insurance.
B) II only
8) Which of the following statements about beneficiary designations is (are) true? I. The primary beneficiary is entitled to the death proceeds of a life insurance policy only if the contingent beneficiary dies before the insured. II. If a revocable beneficiary designation is used, the policyowner must obtain the beneficiary's permission to change the beneficiary.
B) II only
37) Al was named the beneficiary in his mother's life insurance policy. His mother died during the contestable period. The insurer denied payment, citing a material misrepresentation on the application. Al believes the insurer should pay the claim because the misrepresentation occurred on the application, and the application is not part of the formal agreement between the insurer and the policyholder. Which provision protects the insurer by making the application part of the formal agreement between the parties to the contract?
B) entire contract clause
22) All of the following are nonforfeiture options found in cash value life insurance policies EXCEPT
B) reduction of premiums.
25) Which of the following statements about life insurance settlement options is true?
C) Under the fixed amount option, the beneficiary can be given the right to increase or decrease the fixed amount.
23) Which of the following statements about nonforfeiture options found in life insurance policies is true?
C) Under the reduced paid-up option, no additional premiums must be paid.
27) Disadvantages of life insurance settlement options include which of the following? I. Higher yields can often be obtained elsewhere. II. Life income options have limited usefulness at younger ages.
C) both I and II
33) Reasons for NOT purchasing an accidental death benefit rider include which of the following? I. Most people die as a result of a disease rather than from an accident. II. The economic value of a human life is not increased if death occurs because of an accident.
C) both I and II
58) Which statement about the incontestable clause is true? I. It protects the beneficiary if the insurer tries to deny a claim years after the policy is issued. II. If protects the insurer from having to pay a claim during the first two years if the insured made a material misrepresentation or concealed material information in the application.
C) both I and II
55) If a life insurance policy lapses for nonpayment of premiums, and the policyholder has not elected another option, which nonforfeiture option usually goes into effect in most policies?
C) extended term insurance
46) Malcolm would like to purchase life insurance. He is concerned that he might need additional life insurance in the future and that he might be uninsurable at that time. What provision can Malcolm add to his life insurance policy that will permit him to purchase additional life insurance at specified times in the future without providing evidence of insurability?
B) guaranteed purchase option
2) Which of the following statements about the entire contract clause is true?
C) It specifies that the life insurance policy and the attached application constitute the complete agreement between the parties.
3) Which of the following would be a valid reason for an insurer to contest a policy after the contestable period has ended?
C) The applicant had someone else take the medical examination required for policy approval for her.
29) All of the following are requirements that must be satisfied before premiums are waived under a waiver-of-premium provision EXCEPT
D) The insured must satisfy a 2-year waiting period.
10) Which of the following statements about the change of plan provision in a life insurance contract is (are) true? I. A change to a lower premium policy results in a refund of the difference in the cash values of the two policies. II. A change to a higher premium policy requires evidence of insurability.
A) I only
48) Which of the following statements is (are) true concerning the automatic premium loan provision? I. Unlike other policy loans, interest is not charged on automatic premium loans. II. The basic purpose of an automatic premium loan is to prevent a life insurance policy from lapsing.
B) II only
50) Which of the following statements is (are) true regarding exclusions in life insurance contracts? I. Life insurance policies are remarkably restrictive, including numerous exclusions. II. A life insurer may exclude death attributable to certain activities or hobbies disclosed on the application.
B) II only
45) Jane purchased a life insurance policy on her own life and named her daughter, Cheryl, as beneficiary. Cheryl has a history of not managing money well. Jane wants the death benefit paid to Cheryl in monthly installments over 20 years. Which settlement option should Jane pre-select for Cheryl?
C) fixed period
56) Which of the following statements regarding the accidental death benefit rider (also known as double indemnity) is true?
D) The death benefit is doubled only if an accidental injury is the direct cause of death and death occurs prior to a specified age.
28) Which of the following statements about the waiver-of-premium provision in life insurance is true?
D) The disability must occur before a stated age, such as 65, for premiums to be waived.
7) Bert purchased a life insurance policy 4 years ago. He inadvertently stated that he was 1 year younger than his actual age. If Bert dies today, how much will the insurance company pay?
B) less than the policy face value
26) Which of the following statements about life income settlement options is (are) true? I. Under a joint-and-survivor income option, payments cease at the death of the first annuitant. II. Under a life income with guaranteed period, a contingent beneficiary is guaranteed a minimum number of payments regardless of when the primary beneficiary dies.
D) neither I nor II
63) Which of the following statements is (are) true concerning stranger-owned life insurance (STOLI)? I. Life insurers welcome the sale of life insurance contracts used in STOLI arrangements. II. At least one of the investors who purchases the policy must have an insurable interest in the insured.
D) neither I nor II