Exam 4

There are four basic classes of life insurance. All of the selections listed below are regarded as ordinary insurance, except:

A group life insurance policy (Group (and industrial insurance) is never classified as ordinary insurance.)

A type of contract, which is considered a savings instrument used for accumulating investment funds for the purpose of eventually receiving those through a systematic program of withdrawal is a/an:

An annuity (This is the definition of an annuity.)

Which of the following is not an acceptable risk to the underwriting department of an insurance company?

All are acceptable risks (All of the risks listed would be accepted by the underwriting department.)

Select the policy riders frequently found in life insurance policies:

All of the above (These are frequently found in life policies.)

Every licensee must indicate on which of the following documents his or her license number?

All the above (Any form of advertisement must contain the license number.)

Which of these statements with regard to the tax treatment of life insurance is true?

Death benefits are generally exempt from taxation (This is how death benefits are treated under current tax law.)

When premiums are paid into a universal life insurance policy, insurers,must make certain adjustments to the cash value. The company will add the current premium paid, and:

Deduct for expenses and mortality costs, then add current interest (This is how universal life works.)

From the descriptions below, identify which one is a term policy:

Each year the premium increases as the insured grows older. After several years the coverage and premiums end simultaneously. Cash value is not created (These are characteristics of term life.)

Frank is an eligible employee who wishes to participate in group insurance. To get this coverage without having to provide the insurer with evidence of insurability, Frank must:

Enroll for insurance during the eligibility period (This is what Frank must do.)

A family life insurance policy that provides coverage for children may be converted to permanent insurance for the children, but evidence of insurability is required.

False (Children's coverage can be converted without evidence of insurability.)

When the insured of a non-participating paid-up-at-age-65 life insurance policy attains the age of 65, the cash value will equal the face amount.

False (The cash value equals the death benefit at age 100.)

Jennifer has reached a time in her life where she wishes to begin receiving payments from her tax-deferred annuity. Her agent has suggested she take the money by means of the "life income with 10 years certain" option. When she does, the insurer will make payments:

For at least 120 months or the remainder of her life (This is a description of how a life income with 10 years certain works.)

Juan has been named as an irrevocable beneficiary in a life insurance policy, Juan, therefore:

Has vested rights to the policy proceeds that, unless he gives consent, cannot be affected by the policy owner nor any creditors (These are characteristics of irrevocable beneficiaries)

When any change in residence address occurs, every licensee and every applicant for a license must notify the Commissioner?

Immediately (This is the requirement.)

Patrick has been diligent in investing money for his retirement. He has managed to put $100,000 of after-tax money into a tax-deferred annuity. Now he is ready to take it out, and the insurance company that issued the annuity says his guaranteed payment is $8,000 a year for the remainder of his life. This means he can expect a total amount of $200,000 back over his life. How much of each year's annuity payment is taxable?

$4,000 (Using the formula, this would be the amount he would have to pay taxes on) Half of his money goes to taxes

Survivorship life or second-to-die policies: 1. Are effectively used to cover the costs of estate taxes 2. Are issued in excess of $1 million in most cases 3. Reflect substantially lower premiums when compared to buying two separate policies

1 and 2 (This is a description of survivorship policies. Answer 3 is partially correct in that the premiums would be less than buying two separate policies but since the word "substantially" is used, it is not correct.)

Choose the correct statement about the ten-day free look provision In a life Insurance policy: 1. A full refund of premium is required if the policy is returned within 10 days of delivery 2. The contract is in force during the 10 day period and any claims must be paid even though the insured returns the contract

1 only (This is how the 10 day free look works.)

Settlement options provide a number of choices relating to how death benefits can be paid by the insurer. These choices: 1. Can be made by the policyowner at the time of submission of the application 2. Can be changed by the policyowner at any time before benefits are paid 3. Can be made by the beneficiary if, at the time of death of the insured, no option was established

1, 2 and 3 ( This is how settlement options work.)

The owner of a non-par whole life policy never misses a payment, never borrows from the policy's cash value, and finally reaches the age of 100. What cash value is this person entitled to in comparison to the face amount?

100% of the cash value which is now the same as the face amount (This is how permanent cash value life insurance works.)

The California Insurance Code contains very specific regulations regarding the ability of a senior citizen to return a life insurance policy or annuity. The regulation: 1. Applies to group plans and individually issued policies equally 2. Allows a senior citizen a minimum of 30 days to return a life or annuity contract to the insurer. They are entitled to a full refund of premium 3. Specifies a senior citizen as an individual who is at least 65 year of age as of the purchase date

2 only (Older people have longer to review their policies.)

lerry is using a new time management technique in his insurance sales presentation. In order to cut the amount of time he spends at each appointment he no longer answers questions when they are first asked. Instead he answers them only if they are asked twice. He feels this will allow him to get to his next meeting quicker. Most insurance professionals would consider this:

An unethical practice (It would be unethical because he would be selling a product that the client does not understand.)

From the following, identify that which constitutes the 'entire contract" in a life insurance policy. The policy:

And a copy of the application when attached (Entire Contract = Policy + Application.)

Which of the following is false regarding the taxation of life insurance?

Annuity death benefits are totally exempt from taxation (Annuity death benefits are received tax free equal to the amount of money put into the annuity, but the interest it has earned is taxable upon death.)

Select the incorrect statement from the choices below concerning insurance applications:

Before the insurer can issue the policy, the beneficiary must acknowledge any changes by providing higher original initial (Any insured can name any beneficial, and the beneficiary does not have to approve or disapprove of being named.)

Employees that have group - life policies covering them are required to be issued a/an ____?

Certificate of insurance (Employees receive a certificate of insurance.)

Many insurance policies issued contain a common disaster provision. The provision is designed to protect:

Contingent beneficiaries (This is why the common disaster provision was created.)

Oscar owns a whole life policy that he.has been paying into for many years. He would like to continue having life insurance, and can afford to make the premium payments, but needs about 30% of the cash value for a couple of years. What would be the best course of action for Oscar to take?

Continue making the premium payments to keep the contract in force and borrow from cash value (As long as he keeps the policy current, the cash value will continue to increase. When he needs the funds he can take a loan and use the money as he wishes.)

Inflation can have a tremendous eroding effect on the purchasing power of benefits that are received from a disability income policy. What type of supplementary benefit rider can be used by the insured to offset the effects of inflation?

Cost of living adjustment rider (The COLA rider is put on policies to keep pace with inflation.)

Which of the following supports the Medical Information Bureau?

Insurance companies (The MIB is for the use of insurance companies and they pay for it.)

Select the correct statement about the Social Security system:

It is only meant to be a supplement to an individual's major income; it only supplies a minimum floor of income (This is a summary of the purpose of Social Security.)

What does the incontestable clause of a life insurance policy do?

It keeps the insurer from canceling the policy if, after two years, there is a discovery of error, concealment, or misstatement by the policy owner (This is the definition.)

Fran is comparing life insurance available through her employer and an independent life-only agent. Her employer provides automatic coverage and requires medical information than the life-only agent?

Less (Group life insurance is issued without medical information. Individual plans require medical information.)

All of the following are examples of the dividend options available on a whole life insurance policy, except:

Life income with period certain (This is a settlement option not a dividend.option.)

If no other selection is made, which of the following settlement options becomes the default or automatic mode of settlement for the death benefit of a life insurance policy?

Lump sum in cash (This is the default option.)

One of the provisions commonly found in life insurance is the "misstatement of age" clause. If the age of the insured is in error but not discovered until much 'later, the insurance company will:

Make an adjustment to the face amount to properly reflect the premiums that have been paid (This is the definition.)

Which of the following cannot legally be used when determining premium rates for life insurance?

Nationality (Using nationality would be discriminatory.)

In life insurance policies, naming beneficiaries is an important part of the application process. Choose from below the best description of a contingent beneficiary:

One with the first right to receive proceeds if there is no surviving primary beneficiary and the insured dies (This is the definition of a contingent beneficiary.)

When the public purchases annuities, they are attempting to address the risk of:

Outliving the money they have saved for retirement (People who purchase annuities are interested in retirement and not outliving their money.)

Which of the following is not a legal activity in this state?

Participating in a plan to offer free insurance if a person buys some form of service (There is no such thing as free insurance.)

What type of life insurance policy gives the owner the right to share in the insurer's profits in the form of a dividend?

Participating policy (This is part of the definition of a participating policy.)

If the owner of a life insurance policy elects to pay an annual premium, she will:

Pay less as compared to paying premiums every 6 months (With an annual payment, the company has the money to invest for the ' entire year. Also, there are fewer expenses so the premium will be lower than if paid on any other mode.)

Choose the correct statement about a cost of living rider. The policy owner:

Pays an additional premium for the extra protection the rider provides and will see the face amount of the contract increase according to the increase - of the index (This is how the COLA rider works.)

Choose the best beneficiary designation for the following case: The children are to receive equal shares of the benefit. If any of the children die before the insured does, the insured wishes the remaining children receive the deceased child's share equally divided among them.

Per capita (This is the definition of per capita)

All of the following are used in determining life insurance rates, except:

Policy reserves (Policy reserves have nothing to do with rates. They are used to pay claims.)

According to the terms of the suicide clause found in a life insurance policy, if an insured commits suicide within six months after the policy is issued, what will the insurer do?

Refund all the premiums paid (This is how the suicide provision works.)

Variable life insurance policies and variable annuities are primarily governed by which agency?

SEC (They are governed by the SEC which oversees the NASD.)

Charles received a large inheritance from his uncle's estate. Because he can use the income, he buys an annuity with the full amount of his inheritance that will begin paying him monthly payments starting the following month. Charles has purchased a/an annuity?

Single premium immediate (This is a description of a singe premium immediate annuity)

Bill holds two jobs. If Bill were to apply for an insurance policy and the insurer reviews the risk exposure based on his occupation, which of the following would the insurer most likely use to classify him? The job:

That represents the highest hazard (The most hazardous job creates the greatest risk, so they would classify him based on the greatest risk.)

In an overall comparison of a savings account and a tax-deferred annuity, where the savings account and annuity both pay the same interest, on the same principal amount, and for the same period of time, which will generate the highest return on investment dollars?

The annuity will pay more because of the tax deferral qualities it has (This is one of the characteristics of how an annuity works.)

Choose the payments from an insurance policy which are not subject to federal income taxes:

The death benefit paid to a beneficiary in a lump sum (This is how lump sum payments are treated under current tax law.)

Identify the statement that is true about contributory group life insurance.

The employee will contribute to the premium payments (Contributory life requires a contribution from the employee.)

Harold, a variable annuity applicant, does not request the premium be invested in a stock or bond portfolio during the cancellation period. The policy is returned to the company within the cancellation period. What is Harold entitled to receive?

The entire premium (Cancellation period" is also known as "Free.Look" or 'Right to Return.")

All of the following are true regarding a policyowner that ceases making premium payments on a 10-pay life policy and selects the extended term insurance option, except:

The extended term policy will reflect the same cash value as the original policy (The cash value in the policy is being used to pay for the term insurance so the cash value will not be the same.)

From the examples below, choose the one that gives the best description of a reduced paid-up nonforfeiture option:

The insured decides to cease paying premiums on his $100,000 cash value policy. He uses the cash value to buy a paid-up policy of $40,000 face amount (This is the description of how the reduced paid up option works.)

Which of the following is true regarding the government's social insurance program known as Social Security?

The majority of workers in the U.S. must pay into the program (This is how Social Security works.)

In the life insurance planning process, the "blackout period" is considered:

The period of time when a surviving spouse does not receive any Social Security benefits (This is the definition of the "Blackout Period.")

Frequently, juvenile life policies contain a payor rider. This rider states that in the event the payor of premiums is disabled or dies, and the juvenile has yet to reach a specific age:

The premiums will be paid by the insurer until the child reaches the age of 21 or 25 (This is a description of how thy payor benefit works.)

Insurance companies have several departments handling various responsibilities in the insurance of policies. Which department is primarily involved with the selection of risks?

The underwriting unit (Underwriting selects the risks.)

Assume two people apply for life insurance with exactly the same monthly premiums. One individual buys a whole life policy, and the other, a 10-year renewable term plan. Both are standard risks with no difference in their age or health rating. Select the statement from below which is false:

The whole life policy will pay a higher amount to the beneficiary should the insured die within the first 10 years (The type of insurance has nothing to do with the payout of the death benefit. If the insured dies while the premium is paid current, the death benefit will be paid out.)

All of the following are reasons for an individual to purchase personal life insurance, except:

To cover a buy/sell agreement (Buy/sell agreements are used in business situations.)

Why would a business use a key person life insurance policy?

To protect the company from the financial consequences of the death of a vice president . (Vice President = Key Person.)

Which of the following is false about dividends paid from life insurance policies? A dividend is:

Treated as a return of excess premium paid by the owner and is therefore taxable (Dividends are a return of excess premium but they are not taxable)

A binding receipt issued on the sale of a life insurance policy becomes effective from the date the receipt is given--no matter what the insurability of the applicant.

True (Life insurers (not life-only agents) sometimes use binding receipts.)

Generally, it is unfair to discriminate against any one class of individuals in the business of insurance. However, the code does permit the charging of a higher premium if such premiums can be supported by mortality tables segregated by sex (gender).

True (Sex is not discriminatory.)

An irrevocable beneficiary has certain rights to policy proceeds not shared by revocable beneficiaries. For example, an irrevocable beneficiary must grant permission for the policyowner to borrow from the cash value.

True (This is a characteristic of an irrevocable beneficiary.)

Decreasing term insurance is frequently used to pay the unpaid balance of a mortgage upon death of the mortgage holder.

True (This is how and why decreasing term is used.)

The master policy owner of a group insurance policy is responsible for paying the premiums, submitting information about the employees, forwarding the applications to the insurer and maintaining the policy.

True (This is how group insurance works.)

An additional amount of premium used to pay for an accidental death benefit provision does not increase the cash value of the policy.

True (This is one of the characteristics of how ADB works.)

An agent makes a misleading comparison of a policy he is selling in order to convince a prospect to lapse an old insurance policy. What is this called?

Twisting (This is the definition.)

An annuity which may be used to help fund retirement in a few years maintains a 'separate account." The owner purchases "accumulation units." This is called a annuity?

Variable (Variable annuities always maintain a separate account and while in the accumulation phase, the payments buy "accumulation units.")

The dividends and cash value continue, and all features of the policy remain in force, even though the insurance company, not the owner, is making the premiums. This is a description of a rider?

Waiver of premium (The state exam often asks more than one question about the same test area.)

When an insured becomes totally and permanently disabled, her condition triggers a provision that keeps the policy in force even though the insured stops making premium payments. This is a/an:

Waiver of premium provision (This is the definition.)

A policy owner makes the last premium payment on his $250,000 non-par whole life policy today. The owner is 70 years of age. When will the cash value reach $250,000?

When he reaches the age of 100 (This is how permanent cash value life insurance works.)

Beth wants to purchase more life insurance through her current policy. She calls you, the agent, and asks your opinion. You know Beth has a guaranteed insurability rider on the policy. She can buy more insurance:

Without the need to prove insurability on her life at specific ages (This is how the guarantee insurability rider works.)

When applying for insurance, there is usually the owner of the contract, the insured and the applicant. They may be: 1. Three different individuals 2. The same person

both 1 and 2 (Both of the scenarios presented are possible.)