Chapter 3

All of the following statements concerning life insurance contracts are correct EXCEPT: 1. The assignment clause combats abuse by the insurance company, stating that once a policy has been in effect for a period of time, the insurer may not cancel the policy due to a material misrepresentation or omission. 2. The suicide clause is designed to hedge against the risk that individuals with suicidal thoughts will purchase life insurance and, shortly thereafter, commit suicide. 3. Most life insurance policies provide a grace period, typically spanning one month (31 days) after the premium due date for the policy owner to pay an overdue premium. 4. All of the above are correct.

1. The assignment clause combats abuse by the insurance company, stating that once a policy has been in effect for a period of time, the insurer may not cancel the policy due to a material misrepresentation or omission.

Which of the following statements describes factors that should be considered when deciding whether it is better to buy term life insurance or to buy permanent insurance and invest the premium difference? 1. The cash value of a permanent life insurance policy can readily be liquidated. 2. For clients in higher marginal tax brackets, the cost of permanent policy premiums is somewhat offset by their tax deductibility. 3. Only the death benefit from a term policy is received income-tax-free. 4. Increases in life insurance cash values are subject to federal income taxes as they accrue.

1. The cash value of a permanent life insurance policy can readily be liquidated.

In conducting a needs analysis to determine the amount of life insurance an individual with dependents requires, all the following types of needs must be considered EXCEPT 1. income to meet the individual's retirement needs. 2. ongoing income needs of the surviving dependent family members. 3. the need to fund the children's education. 4. lump-sum cash needs at the individual's death.

1. income to meet the individual's retirement needs.

All of the following statements concerning term life insurance are correct EXCEPT: 1. An individual's mortality risk affects the price of the term insurance premiums. 2. Term insurance policies tend to be used by older individuals more frequently than by younger individuals. 3. Unlike other forms of life insurance, term life insurance policies do not have cash accumulation features. 4. An annual renewable term policy (ART) permits the policyholder to purchase term insurance in subsequent years without evidence of insurability.

2. Term insurance policies tend to be used by older individuals more frequently than by younger individuals.

All of the following statements concerning whole life insurance are correct EXCEPT: 1. The insurer retains the investment risk on an ordinary whole life policy. 2. The premium on a limited-pay policy will be less than the premium on an ordinary (straight) life policy. 3. Policy dividends are a non guaranteed "return of premium." 4. All of the above are correct.

2. The premium on a limited-pay policy will be less than the premium on an ordinary (straight) life policy.

Which of the following statements concerning the uncertainty of investment gains or losses in a variable life insurance policy is correct? 1. It is jointly borne by both policyowner and insurer. 2. It is nonexistent. 3. It is borne by the policyowner. 4. It is borne by the insurer.

3. It is borne by the policyowner.

Isaiah, a financial planner, is working with his clients to determine their life insurance needs. Isaiah is determining each person's life insurance need by estimating the cash needs of the family during and after the insured's death. Some of the financial needs that Isaiah is considering are the payment of final expenses, medical care, and eliminating debts. Which of the following models is Isaiah using to determine the life insurance needs? 1. The human life-value approach 2. The capitalized earnings approach 3. The needs approach 4. The discretionary cash flow approach

3. The needs approach

Violetta sells commercial real estate and works on a commission. She wants a substantial amount of permanent life insurance protection, but because of her irregular income, she is not sure she will be able to pay a fixed premium every year. Which of the following should Violetta consider? 1. A guaranteed renewable term insurance policy 2. A modified whole life insurance policy 3. A single-premium immediate annuity 4. A universal life insurance policy

4. A universal life insurance policy

Which of the following statements concerning insurable interest is (are) correct? I. Life insurance requires that insurable interest exists at the time of a claim. II. Without an insurable interest, insurance would be a wager or gambling contract. I only II only Both I and II Neither I nor II

II only

Which of the following statements concerning universal life insurance is (are) correct? 1. Policyowners must pay a minimum target premium each year. II. A withdrawal of cash value is treated as a loan. I only II only Both I and II Neither I nor II

Neither I nor II