Chapter 5 "Life Insurance Basics" Insurance Questions

A furniture company is owned by five partners. What business continuation plan would you suggest to the company? Select one: a. Entity plan b. Cross-purchase plan c. Stock redemption plan d. Key person

(A) Entity Plan Entity plans are best for partnerships with several partners.

Which of the following is true regarding level premiums? Select one: a. Policyholders are paying more premium than is needed in the early years of policy b. Policyholders are paying less premium than is needed in the earlier years of the policy. c. Level premiums can only be paid annually d. Level premiums are the only premium option

(A) Policyholders are paying more premium than is needed in the early years of policy. Level premium policyholders are essentially paying more in the earlier years of the policy, and less in later years than the risk of death warrants. The excess premium paid in earlier years funds the higher premium required in later years.

What business continuation agreement would you recommend to a corporation with 3 shareholders so that when a shareholder dies, all other shareholders agree to purchase a portion of the deceased shareholder's stock at an agreed price? Select one: a. Stock purchase plan b. Section 303 stock redemption c. Entity plan d. Stock redemption plan

(A) Stock purchase plan A stock purchase plan is a cross-purchase plan used by corporations to buy the stock from deceased shareholders. Each shareholder agrees to buy a portion of the deceased shareholder's stock at an agreed price. Each shareholder purchases, pays the premiums and is a beneficiary on a life insurance policy on each of the other shareholders.

Ben applies for a life insurance policy on himself. How much insurable interest does Ben have in his own life? Select one: a. Unlimited b. Up to $100,000 c. Up to $1 million d. Up to $100 million

(A) Unlimited

Betty and Jack have a partnership. If their partnership is worth $800,000 how much life insurance is issued on each partner if a cross-purchase plan is used? Select one: a. $200,000 b. $400,000 c. $800,000 d. $1 million LH52022 Feedback

(B) $400,000 Each partner insures the life of the other partner at $400,000. Therefore the total amount of life insurance on each partner is $400,000 ( of the business_ worth).

All of the following are true regarding executive bonus plans, EXCEPT: Select one: a. An employer gives an employee a bonus in the amount of the premium payments on a life insurance policy. b. The employee is the insured and the company is the owner of the policy. c. The employer pays the premiums, but receives a tax deduction in the amount of the premium because it is treated as a pay raise. d. The employee pays income tax on the amount of the pay raise, however the company may _bonus_ the amount of the income taxes.

(B) . The employee is the insured and the company is the owner of the policy. The employee is the insured and owner of the policy. The employer pays the premiums, but receives a tax deduction in the amount of the premium because it is treated as a pay raise. The employee pays income tax on the amount of the pay raise; however, in some cases the employer will _bonus_ the amount of the income taxes.

Each member insured under a group life insurance policy receives a(n): Select one: a. Master policy b. Certificate of insurance c. Insurance policy d. Whole life coverage

(B) Certificate of insurance The group entity is issued the master policy, and each member insured receives a certificate of insurance as proof of coverage.

Which of the following business continuation agreements is most appropriate for Teri and Annette's business partnership? Select one: a. Entity plan b. Cross-purchase plan c. Stock redemption plan d. Key person

(B) Cross-Purchase plan Cross-purchase plans are business continuation agreements intended for business partnerships with two or three partners. There are only two partners in Teri and Annette's partnership, so this plan fits their needs.

Which of the following does not constitute policy replacement? Select one: a. Life insurance coverage that is converted to reduced paid-up coverage b. Life insurance coverage in which a loan is not repaid to the insurer c. Life insurance coverage that is terminated d. Life insurance coverage that is lapsed

(B) Life insurance coverage in which a loan is not repaid to the insurer As long as there is enough cash value in the policy to pay the cost of premiums, then a policy loan does not constitute replaced coverage.

Life insurance policies with cash value provide the insured with immediate availability of funds, referred to as: Select one: a. Estate conservation b. Liquidity c. Survivor protection d. Viatical settlements

(B) Liquidity

All of the following statements are true regarding the premium payment mode, EXCEPT: Select one: a. If premiums are paid more frequently, the insurer incurs an additional loading expense. b. More frequent premium payments means lower premiums. c. Insurers accept premium payments annually, semi-annually, quarterly, monthly and weekly. Some insurers may accept a single lump-sum premium payment. This applies to life insurance. d. The premium payment mode is the frequency that premium payments are made.

(B) More frequent premium payments means lower premiums

The ____________ approach calculates the amount of money a family needs immediately upon the death of the insured to pay for their expenses and basic necessities. Select one: a. Human life value b. Needs c. Salary d. Social Security blackout

(B) Needs The needs approach calculates the amount of money a family needs immediately upon the death of the insured to pay for their expenses and basic necessities.

Life insurance policy illustrations must contain all of the following, EXCEPT: Select one: a. Agent's name b. Only the guaranteed policy elements c. Generic name of policy d. Insured's age and sex

(B) Only the guranteed policy elements Life insurance policy illustrations depict the nonguaranteed policy elements.

Martin pays his policy premiums on a monthly basis. Which of the following terms best describes the frequency that Martin pays his premiums? Select one: a. Exclusion ratio b. Premium payment mode c. Net single premium d. Premium cycle

(B) Premium Payment Mode Premium payment mode describes the frequency that premiums are paid.

Employer-paid premiums used to fund group life insurance for the benefit of employees are: Select one: a. Paid with after-tax dollars b. Tax-deductible as a business expense c. Not tax-deductible d. Refunded to employers each year

(B) Tax-deductible as a business expense Employer-paid premiums used to fund group life insurance for the benefit of employees are tax-deductible as a business expense.

All of the following are true regarding viatical settlements, EXCEPT: Select one: a. A terminally or chronically ill insured can sell their life insurance policy to a third party in exchange for payment of a large portion of the death benefit. b. Viatical settlements are a type of life insurance contract. c. In a viatical settlement, the third party that purchases the insured's life insurance policy is termed the viatical settlement provider, and the insured is termed the viator. d. The portion of the death benefit the viator receives in a viatical settlement ranges from 50 to 80 percent of the death benefit.

(B) Viatical settlements are a type of life insurance contract

Four partners share in the ownership of a bowling alley. Which of the following business continuation plans best fits their needs? Select one: a. Key person b. Stock redemption plan c. Entity plan d. None of the above

(C) Entity Plan

The time period during which children are young and financially dependent upon their parents is termed the: Select one: a. Blackout period b. Preretirement period c. Family dependency period d. Support period

(C) Family dependency period

Premiums are invested to earn interest. __________ interest rates allow insurers to charge ________ premiums. Select one: a. Lower; lower b. Higher; higher c. Higher; lower d. Fixed; monthly

(C) Higher; lower

All of the following are true regarding claims for life insurance policies, EXCEPT: Select one: a. The only claim in a life insurance policy is the insured's death. b. Upon the insured's death, the policy proceeds are paid to the beneficiary. c. In order for death benefits to be paid, the insurer must receive notice of the insured's death, but does not need the death certificate. d. Life insurance claims are typically paid within a few days of the insured's death, but the insurer may have up to 60 days to pay claims.

(C) In order for death benefits to be paid, the insurer must receive notice of the insured's death, but does not need the death certificate. Prior to paying the proceeds, the insurer must receive proof of the insured's death (the death certificate). Upon receipt of the death certificate, the insurer will verify that the policy was in force when the insured died, whether or not the suicide clause applies, and that the proceeds are paid to the stated beneficiaries.

Which of the following would not be used to determine the premium rate for a life insurance policy? Select one: a. Mortality b. Interest earnings c. Loading d. Morbidity

(D) Morbidity Morbidity describes the rate at which illness occurs, and is used to calculate health insurance premiums. Mortality describes the rate at which a specific population dies, and is used to calculate life insurance premiums.

All of the following are buy-sell agreements, EXCEPT: Select one: a. Stock redemption plan b. Cross-purchase plan c. Entity plan d. Split-dollar plan

(D) Split-dollar plan Business continuation agreements, or buy-sell agreements, include cross-purchase plans, stock purchase plans, entity plans, and stock redemption plans. Split-dollar plans are employee benefit plans.

Angela took out a $2,000 policy loan from her whole life insurance policy. The policy face amount is $200,000. If Angela does not repay the loan, how will the death benefit be affected? Select one: a. The death benefit will be increased by $2,000. b. The death benefit will be decreased by $2,000. c. The death benefit will remain the same. d. The death benefit will be decreased by $2,000 plus interest.

(D) The death benefit will be decreased by $2,000 plus interest.

Level premium life insurance policies usually have ______ premiums in order to account for the greater risk of death with advancing age. Select one: a. higher b. lower c. increasing d. decreasing

(A) Higher Level premium policies usually have higher premiums in order to account for the greater risk of death with advancing age. With this in mind, level premium policyholders are essentially paying more in the earlier years of the policy, and less in later years than the risk of death warrants.

Which of the following are the actuarial tables used by insurers for underwriting? Select one: a. Morbidity tables b. C.S.O. tables c. Insurable tables d. Risk pool tables

(B) C.S.O tables The C.S.O. tables are mortality tables that portray the chance of a person dying at a particular age.

Mary's Cosmetics purchases a life insurance policy on Samantha, the leading makeup salesperson in the nation. Which business continuation plan did Mary's Cosmetics buy? Select one: a. Split-dollar b. Executive bonus plan c. Key person insurance d. Section 303 plan

(C) Key person insurance Mary's Cosmetics purchased key person insurance. Samantha is a key employee, because she is responsible for much of the company's profitability.

Which of the following is not used to calculate the premium for life insurance contracts? Select one: a. Loading b. Interest c. Morbidity d. Mortality

(C) Morbidity

Which of the following best describes the tool underwriters use to determine the rate at which a group of people die? Select one: a. Exclusion ratio grid b. Morbidity rate graph c. Mortality table d. None of the above

(C) Mortality Table

Generally, premiums paid on business life insurance policies are: Select one: a. Tax-deductible b. Paid with pre-tax dollars c. Not tax-deductible d. Refunded to policyowners each year

(C) Not tax-deductible

Generally, premiums paid on individual life insurance policies are: Select one: a. Tax-deductible b. Paid with pre-tax dollars c. Not tax-deductible d. Considered a nontaxable refund

(C) Not tax-deductible Premiums paid on individual life insurance policies are generally not tax deductible

Who is responsible for the dissemination and content of insurance advertisements? Select one: a. The advertising company b. The producer c. The insurer d. The state department of insurance

(C) The insurer

The third party that purchases a life insurance policy death benefit from a terminally ill insured is termed: Select one: a. Viator b. Viatical settlement c. Viatical settlement provider d. Insurance producer

(C) Viatical Settlement Provider

All of the following are considered minimum information that must be on a life insurance illustration, EXCEPT: Select one: a. Form number b. Dividend options, if any c. Nonguaranteed elements, if any d. Insured's marital status

(D) Insured's marital status While life insurance illustrations require the insured's name, age and sex, the insured's marital status is not to be on the policy illustration.

When must insurable interest be shown for a life insurance policy? Select one: a. When death benefits are paid b. When submitting the claim c. When the policy is delivered d. Upon policy application

(D) Upon policy application

Which factor is the most crucial for underwriting life insurance? Select one: a. Proposed insured's age b. Proposed insured's sex c. Proposed insured's place of residence d. Proposed insured's occupation

(A) Proposed insured's age

Another term for insurers' expense is: Select one: a. Interest earnings b. Loading c. Morbidity d. Premium

(B) Loading

What is business life insurance used for? Select one: a. An employee benefit b. A funding tool c. Business interruption insurance d. All of the above

(D) All of the above

The ___________ approach calculates the amount of money a person is expected to earn over their lifetime to determine the face amount of life insurance needed, thereby placing a dollar value on the life of an individual. Select one: a. Human life value b. Needs c. Salary d. Social Security blackout

(A) Human life value

The nonguaranteed elements of an insurance policy are: Select one: a. Illustrations b. Policy summary c. Policy face d. Policy terms and conditions

(A) Illustrations In the field of insurance, illustrations are defined as depictions that explain the complex and nonguaranteed aspects of a policy.

Which business continuation plan permits a deceased shareholder's heirs to maintain some ownership while the corporation redeems a portion of the deceased shareholder's shares? Select one: a. Key person insurance b. Split-dollar plan c. Entity plan d. Section 303 plan

(D) Section 303 plan With a Section 303 plan, a deceased stockholder's heirs can retain control over the portion of business owned.

Insurance companies need to set aside a certain amount of funds called reserves. Reserves are treated as a(n): Select one: a. Liability b. Benefit c. Premium d. Asset

(A) Liability

Net single premium is: Select one: a. Mortality - Interest b. Loading + Gross Premium c. Interest - Gross Premium d. Mortality + Loading

(A) Mortality-Interest

Which of the following statements correctly describes net single premium? Select one: a. Net single premium is mortality minus interest b. Net single premium is loading. c. Net single premium is loading and interest. d. Net single premium is the same as gross single premium.

(A) Net single premium is mortality minus interest

For replacement transactions, an insurance producer's duties include all of the following, EXCEPT: Select one: a. Notify existing insurers of policies to be replaced b. Provide the applicant with a policy cost comparison statement c. Make a list of all existing policies the applicant intends to replace d. Leave a notice regarding replacement with the applicant

(A) Notify existing insurers of policies to be replaced The insurer is responsible for notifying existing insurers of policies to be replaced.

All of the following are personal uses of life insurance, EXCEPT: Select one: a. Survivor protection b. Estate creation c. Cash accumulation d. Business financial relationship

(D) Business financial relationship There are many reasons a person seeks to purchase life insurance. Some of these include: survivor protection, estate creation, cash accumulation, liquidity, estate conservation, viatical settlements and charity. Life insurance purchased for a business financial relationship is a business use of life insurance.

A life insurance policy summary includes all of the following, EXCEPT: Select one: a. The insurance agent's name b. Policy premium amounts c. Policy loan interest rates d. Policy illustrations

(D) Policy Illustrations

All of the following are true regarding purchase of personal life insurance for charity, EXCEPT: Select one: a. Coverage is taken out on the life of the person buying the policy. b. The charity is named as the beneficiary. c. The person buying the policy pays the premiums, which are usually tax-deductible. d. The person purchasing life insurance for charity must have insurable interest in the lives of the charity's members.

(D) The person purchasing life insurance for charity must have insurable interest in the lives of the charity's members.

In life insurance the risk of death increases with age, so premiums must be ______ in ______ years to account for this risk. Select one: a. lower; earlier b. higher; earlier c. lower; later d. higher; later

(D) higher; later In life insurance the risk of death increases with age, so premiums must be higher in later years to account for this risk.