Chapter 5: Life Insurance Premiums, Proceeds, and Beneficiaries

Which would be described as a beneficiary designation by class?

Children of the insured

Al surrenders his life insurance policy for its cash value. The total of premiums paid into the policy minus total dividends received in cash or used to offset premiums is referred to as the

Cost basis

What effect does interest income have upon insurance premiums?

Decreases premium (The actual formula for a bundled insurance premium is as follows: Mortality costs (based upon age and gender) less assumed interest = Net premium. Assumed interest ALWAYS lowers the mortality costs and thus, lowers the total premium)

Death benefits from a life insurance policy are normally considered to be

Exempt from federal income tax

Where will a life insurance policy's proceeds be directed to if all the beneficiaries die before the insured?

Insured's estate

T is covered by an Accidental Death and Dismemberment (AD&D) policy that contains an irrevocable beneficiary. What action will the insurance company take if T requests a change of beneficiary?

Request of the change will be refused

Which statement regarding the joint and survivor life insurance settlement option is NOT true?

The amount of each installment is larger than the single life income option

Which statement regarding a fixed period settlement option is correct?

The installment payment amount is determined by the total number of installments

Who is the beneficiary in a life insurance policy?

The stated person or entity who is designated to receive the death proceeds

Which life insurance settlement option pays lifetime benefits to two or more people?

Joint and survivor

A life insurance beneficiary died after receiving only six payments under the policy's life income settlement option. What happens with the remaining balance of the death proceeds?

Kept by the insurance company

How much is normally paid to a policyowner is a life (viatical) settlement?

Less than the death benefit

A policyowner fell behind on the premium payments of a whole life policy and is now in the grace period. how much will the beneficiary receive if the insured dies during this grace period and the policy also contains an outstanding policy loan?

Face amount minus the loan balance and past-due premiums

What tax is normally associated with an individual's death?

Federal estate tax

Which of these factors does NOT affect life insurance premium rates?

Producer Certification

Which of the following statements about the installments for a fixed period settlement option in life insurance policies is NOT true?

The periodic payment amount is determined by the beneficiary's age (The amount of the periodic payment in a fixed period settlement option is based on the length of the benefit period, not the beneficiary's age)

Which of these is an accurate statement regarding the fixed period settlement option on a life insurance policy?

A portion of the payments paid to the beneficiary stems from interest generated from the proceeds

Which tax cost is normally associated with death?

Federal estate tax

Which life insurance settlement option pays a stated monthly benefit until both principal and interest are exhausted?

Fixed amount installment option

Which settlement option makes minimum guaranteed dollar payments over a stated number of years?

Fixed-Period

Death proceeds from a life insurance policy are typically included in a deceased insured's gross estate

For federal income tax reasons

Life insurance premiums are computed on what three factors?

Mortality, interest, expenses

Wyatt is shopping for life insurance and is mainly concerned with the policy's death benefit. Which index should he be looking at when making comparisons?

Net Payment Cost Index

A life insurance company just paid a $100,000 death benefit to a beneficiary. When the insured died, the cash value was $15,000 and the total premiums-paid equal $10,000. How much of the proceeds will be added to the beneficiary's gross income for federal income tax purposes?

Nothing (When an insured dies, proceeds of a life insurance policy paid as a lump-sum death benefit to a beneficiary are exempt from federal income tax)

What would be a disadvantage of naming a trust as beneficiary of a life insurance policy?

Trust administration fees would reduce policy proceeds

A policyowner with a terminal illness who sells his life insurance policy to a third party is called a

Viator

When a policy loan is requested by a policyowner and it requires the consent of the beneficiary, what kind of beneficiary designation is this?

Irrevocable beneficiary

A life insurance policy's contingent beneficiary is the

Person who receives the death benefits if the primary beneficiary dies before the insured

Which of these occurrences could improve an insurer's ability to reduce premiums?

Rate of earnings on investments increase

When there is a named beneficiary on a life insurance policy, the death benefits

Are paid directly to the beneficiary without interference from the insured's creditors

Kevin has an existing life insurance policy and assigns it to another insurer for a new contract. How would this transaction be treated for tax purposes?

As a Section 1035 exchange

Switching life insurance policies without tax consequences is permitted under

Section 1035 rules

The highest mortality rate belongs to which group?

Age 70 males

When premiums are determined, one factor would be the expenses of the

Insurer (They have operating expenses which need to be factored into the premiums)

Which statement is INCORRECT about the interest-only settlement option in a life insurance policy?

Interest on proceeds must be paid by the beneficiary

During the early years of a whole life insurance policy, the cash value will normally be?

Less than the total premiums paid

Which statement best describes a single premium whole life policy?

Paid-up policy that offers lifetime protection

The beneficiary of a life insurance policy is normally selected by whom?

Policyowner

What kind of arrangement gives the policy owner the right to change the beneficiary?

Revocable Designation

Which life insurance policy provision prohibits a beneficiary from "commuting, encumbering, withdrawing, or assigning" any portion of the proceeds prior to actual receipt from the company?

Spendthrift Clause

How long do most states allow an insurance company to delay the payment of a cash surrender under the Delayed Payment provision?

6 months

A life policy's spendthrift clause would have no effect if the beneficiary is paid the proceeds as a

Lump-sum payment

What would be a valid reason for naming a trust as the beneficiary of a life insurance policy as opposed to naming an individual?

Management of proceeds would be provided

What is considered a valid reason for an insurer's refusal to pay policy proceeds directly to a minor?

Minors are normally not capable of handling money in a reasonable manner

A terminally ill policyowner decides to sell his life insurance policy at a discount to help support his family. This sale is called a(n)

Viatical Settlement