Life Insurance
Bob bought a universal life insurance policy with a $100,000 stipulated amount and chose an Option 2 (increasing) death benefit. At his death ten years later, the policy's cash value had increased to $50,000. What will his beneficiary receive?
$150,000
With a traditional whole life insurance policy, policy loans can be as high as:
100 percent of the cash value, less any outstanding debt against the policy
Sally has $60,000 coverage under her employer's noncontributory group life insurance plan. What portion of that coverage is taxable to Sally?
$10,000
The suicide exclusion provision of a typical life insurance policy excludes coverage if death is the result of suicide within:
2 years following policy issue
Deliberately withholding material facts when applying for insurance is called:
concealment
Although persons may begin receiving Social Security retirement benefits as early as age 62, their benefits are
permanently reduced
Under which nonforfeiture option does permanent life insurance continue in force with no further need for premiums?
reduced paid-up option
What is the purpose of a life insurance policy's ownership provision?
to establish the conditions under which the policyowner can exercise certain rights of ownership
Why would a large manufacturer choose to self-insure rather than buy an insurance policy from an insurance company?
to save insurance premiums by paying relatively minor losses out of company funds
Jenny has purchased a variable annuity. She directs $2,500 of her $5,000 premium deposit into the contract's blue-chip stock sub-account when its net asset value is $10. How many accumulation units has Jenny bought?
250 accumulation units of the sub-account
What is a typical life insurance policy's grace period?
31 days
The penalty tax that is assessed on any distribution shortfall between an IRA owner's required minimum distribution (RMD) and the actual amount distributed is:
50 percent
Which of the following statements about a tort is correct?
A tort is a violation of rights created by law.
Regarding a group life insurance policy issued in California, which one of the following statements is correct?
All employees or all those of a class of employees must be insured.
Which of the following statements about a group life insurance policy in California is correct?
All employees or all those of a class of employees must be insured.
Which of the following best explains why Section 1035 of the Tax Code does NOT permit a tax-free exchange of an annuity for a life insurance policy?
Allowing a tax-free exchange of an annuity for life insurance would enable taxable annuity gain to escape taxation via the life insurance death benefit.
All of the following statements about binding receipts are correct EXCEPT:
Binding receipts are the most common type of premium receipt used with life insurance sales.
For which of the following people would an annuity probably NOT be suitable?
Charlie, age 79, who is looking for a place to save the proceeds from the recent sale of his vacation home.
Karen transfers all rights in her life insurance policy to her brother, David, through an absolute assignment. Who is responsible for paying the policy's premiums from that point forward?
David must pay the premiums.
All the following statements about life insurance policy riders that cover additional insureds are correct EXCEPT:
Each additional insured is issued his or her own separate policy.
All the following statements regarding an employer's group life insurance plan are correct EXCEPT:
Employee contributions are not permitted.
Gina owns a $200,000 five-year renewable term insurance policy and wants to renew the policy at the end of the term. In this case, all the following statements are correct, EXCEPT:
Gina must prove insurability before the insurer can renew the policy.
All of the following statements regarding a variable annuity's assumed interest rate (AIR) are correct, EXCEPT:
If the actual return is greater than the AIR, payments will decrease.
Which statement regarding the conversion of a traditional IRA to a Roth IRA is correct?
Income taxes must be paid on the traditional IRA when the account is converted.
Which of the following statements is correct regarding coverage for experimental medical treatment in California?
Insurers can deny coverage.
Which of the following explains why the human life value approach to determining insurance needs is rarely used today?
It doesn't factor in all that it takes to secure a family's financial future.
To be eligible to set up a SIMPLE plan, a business has to meet which one of the following basic requirements?
It must employ no more than 100 people.
Which of the following correctly describes the disability income benefit rider available with life insurance policies?
It pays a monthly income determined by a formula specified in the policy if the insured becomes disabled, without impacting the policy's cash value or face amount.
Which of the following statements correctly describes the accidental death benefit (ADB) rider on a life insurance policy?
It pays benefits only in the event of accidental death.
Mary lost her job on June 15. She wants to convert her group life insurance policy to an individual policy. To do so, Mary must apply for a conversion policy by:
July 16
As a general rule, insurers do not pay death benefits to designated beneficiaries who are minors because:
Minors do not have the legal capacity to sign a binding receipt for the funds.
All other factors being equal, which of the following applicants can expect to pay the lowest premium for a given face amount of life insurance protection?
Pete, a preferred risk
Which of the following explains why a traditional waiver of premium rider does not work with a universal life insurance policy?
Premium amounts for a universal life policy are flexible, whereas they are fixed for traditional life insurance policies.
Sarah, age 40, has just bought a 20-pay whole life policy. Which of the following statements is correct when she turns 60?
Premiums will no longer be required, but her coverage will remain in effect for her entire life.
Cindy and Rich each bought a $100,000 universal life insurance policy from the same insurer, each with a ten-year back-end surrender charge schedule. In year two, Cindy withdrew $5,000 from her policy. Rich withdrew $5,000 from his policy in year five. Which of the following statements is most correct regarding surrender charges they may face?
Rich will have a lower surrender charge than Cindy.
All of the following statements about the funding of Social Security benefits are correct, EXCEPT:
Self-employed workers pay a lower FICA tax than employees.
Which of the following statements accurately describes the difference between a joint and survivor (J&S) annuity settlement option and a joint life settlement option?
The J&S option continues payments until the second annuitant dies, while the joint life option terminates payments upon the first annuitant's death.
Which of the following statements correctly describes the relationship, if any, between the application and the insurance contract?
The application is part of the entire contract.
If an insured qualifies for and takes an accelerated benefit from a life insurance policy, which of the following accurately describes the impact this will have on the death benefit?
The death benefit is reduced by the amount of the accelerated benefit payment and may be further reduced to cover lost interest.
All of the following statements about the interest rates on deferred annuities are correct EXCEPT:
The guaranteed minimum rate is usually 5 to 6 percent.
With respect to third-party ownership of life insurance in the personal insurance market, all the following statements are true EXCEPT:
The insured has the right to name the beneficiary.
All the following statements regarding stranger-owned life insurance (STOLI) are correct EXCEPT:
The insured retains the right to designate the policy's beneficiary.
When may an insurer cancel either whole life or term life insurance?
The insurer may cancel both types of policies if the policyowner does not pay the premiums.
Jerry names a trust as the beneficiary of his life insurance. When Jerry dies, how will this trust work?
The insurer pays the death benefit to the trustee who manages the assets for the trust's beneficiaries, named by Jerry when the trust was formed.
In a life settlement, which of the following receives the death benefit when the insured dies?
The life settlement provider
To be considered insurable, a risk (and the potential loss it represents) must meet which one of the following requirements?
The loss must be definable as to time, cause, and location.
Which of the following statements about methods for determining life insurance needs is correct?
The needs approach takes into account actual family financial goals and objectives.
Dan owns a fixed whole life insurance policy. What type of death benefit is Dan guaranteed?
The policy guarantees a fixed death benefit amount.
Fred is terminally ill. He sells his $100,000 life insurance policy to a viatical settlement provider for $60,000. Six months later, Fred dies. Which of the following statements is correct?
The viatical settlement provider will receive the entire $100,000.
Which of the following statements regarding life insurance policy cost comparison methods is correct?
There are two types, the traditional net cost method and the interest-adjusted net cost method, and the interest-adjusted net cost method is most commonly used today.
How do actuaries compensate for the cost of running the business when determining the gross premium charged to the policyowner?
They add an expense load, which includes a safety margin factor, to the net premium to produce the gross premium.
When do funds in a deferred annuity become the owner's property?
They are nonforfeitable and always belong to the contract owner.
Endowment contracts are NOT considered life insurance (for tax purposes) because:
They endow before age 120.
Mary inherited $10 million several years ago. She has just bought a life insurance policy to help preserve her estate. All of the following statements regarding this are correct EXCEPT:
To keep policy proceeds out of her estate, Mary should make sure she is the owner.
Which of the following most correctly describes the difference between decreasing term insurance and level term insurance?
Under decreasing term insurance, the death benefit decreases over the policy period while a level term policy maintains a level death benefit over the policy period.
All of the following statements about key person life insurance are correct, EXCEPT:
Upon the insured employee's death, the employee's surviving family receives the policy's death benefit.
Which one of the following statements about variable life insurance is correct?
Variable life insurance policyowners can transfer funds between investment subaccounts and the insurer's general account.
To meet the federal definition of life insurance and thus qualify for life insurance's favorable tax treatment, all permanent life insurance policies must have:
a corridor of pure insurance protection between the cash value and death benefit, the amount of which depends on the insured's age
In accordance with Section 1035 of the Tax Code, which of the following exchanges is permitted on a tax-free basis?
a deferred market-value adjusted annuity for an immediate variable annuity
Term life insurance is well suited for all the following needs EXCEPT:
a source of emergency cash for any financial need
Which one of the following is the most appropriate use of life insurance?
buying life insurance to insure all the parties to a business buy-sell agreement
Which rider gives the policyowner the option to increase his or her life insurance policy's face amount based on an inflation index?
cost-of-living rider
Robert is purchasing a life insurance policy in which he is the insured. If he wants to keep the policy proceeds out of his estate for tax purposes, all of the following arrangements would help him meet that goal EXCEPT:
designate an irrevocable life insurance trust to be the owner and Robert's estate to be the policy beneficiary
Most states permit insurers to include a provision in their life insurance policies that does which of the following?
excludes coverage of death that occurs while the insured is operating an aircraft
Under the settlement option that Gary and Fran chose for their father's life insurance, they receive monthly payments until the second payee (survivor) dies. At that point, income payments stop. What option have Gary and Fran chosen?
joint and survivor life income
From an insurance risk perspective, an applicant engaging in adverse selection is demonstrating which type of hazard?
moral hazard
Loading reflects the costs that the insurance company can expect to pay for its operations. These costs include all of the following, EXCEPT:
mortality costs
All of the following can sponsor group life insurance plans EXCEPT:
neighborhoods
In a life insurance transaction that involves a policy replacement, who of the following does not have specific duties and responsibilities as set forth in the CIC?
the Insurance Commissioner
What is the only part of a nonqualified annuity's death benefit that is taxable?
the amount that exceeds the amount the owner paid into the contract
If a variable universal life policyowner chooses death benefit Option 3, what will the guaranteed minimum benefit equal?
the policy's net amount at risk plus the greater of total premiums paid or the policy's cash value
Which of the following will happen if the outstanding balance of a whole life insurance policy loan, including accrued interest, ever exceeds the policy's cash value?
The insurer will cancel the policy.
An insurance producer tells a life insurance applicant that he has the authority to waive the medical exam that is normally required by the insurer with every application. The insurer may be required to accept the application without a medical exam due to the producer's:
apparent authority
Assets that support the contractual obligations of the insurer's fixed and guaranteed products are maintained in the company's:
general account
A deferred annuity rider that lets the annuity owner commit only part of the annuity's funds to providing guaranteed lifetime income, leaving the remainder available for withdrawal at the owner's discretion, is called a:
guaranteed income rider
Using a deferred annuity for short-term accumulation goals may result in all the following consequences EXCEPT:
loss of accrued interest earnings upon distribution
What is the main appeal of joint life insurance?
lower cost than two separate policies
When an insurer accepts an application for a policy that will replace another insurer's policy, the replacing insurer must
notify the existing insurer.
What type of life insurance policy distributes its divisible surplus to policyowners in the form of policy dividends?
participating policy
A whole life insurance policy matures, or endows, when:
the policy's cash value equals its face amount
Under a survivorship life insurance policy, when does the insurer pay the death benefit?
upon the death of the insured who dies second
A producer must be registered with the Financial Industry Regulatory Authority (FINRA) to sell which one of the following types of life insurance?
variable life insurance
What is the term for voluntarily giving up a known right?
waiver
Cash value withdrawals from a non-MEC life insurance policy are generally treated on a first-in/first-out (FIFO) basis for tax purposes, which means the first funds withdrawn are recognized as:
a return of premiums
Which of the following statements is correct regarding an insurer that cancels a policy based on medical information it requests and receives after the policy was issued?
It has engaged in post-claims underwriting.
All the following statements regarding term life riders covering additional insureds are correct EXCEPT:
It is not necessary for the policyowner to have an insurable interest on the insured who is covered under the additional insured rider.
The charge-free withdrawals provision of a deferred annuity contract does which of the following?
It permits annuity contract owners to withdraw a specified percentage of the accumulated value annually without imposing a surrender charge.
Nicole, age ten, is the insured in a traditional "jumping juvenile" policy with a $5,000 face amount. When she reaches age 21, what will most likely happen to the policy's face amount?
It will increase to $25,000.
Which of the following statements about nonqualified deferred compensation plans is correct?
When an executive receives the deferred compensation, he or she will generally be in a lower tax bracket and will pay lower taxes.
In California, all of the following must be specified in an insurance contract EXCEPT:
the financial rating of the issuing insurer
Sue, an annuity owner, names her 15-year-old son and 10-year-old daughter as joint annuitants of her contract. Upon whose life (or lives) are income payments determined?
the joint life expectancy of Sue's son and daughter
Eligibility for OASDI benefits is determined on the basis of:
the number of quarters of coverage the worker has earned
What is another name for the annuitization phase of an annuity contract?
the payout stage
When they receive funds in the course of their insurance business, insurance licensees are deemed to act as
fiduciaries
Under which of the following annuity settlement options are payments made for a specified number of years and then end, whether the annuitant is alive or not?
fixed period option
Alexis, age 62, just bought a variable deferred annuity. Unless Alexis indicates otherwise, where will her premium deposit be invested during the contract's free-look period?
in the contract's money market or fixed account
Cal bought a $100,000 universal life policy ten years ago. He has paid $8,000 in premiums into the policy. He now decides to surrender the policy for its full $15,000 cash value and must pay taxes on $7,000 of that cash value. Which one of the following most correctly describes the type of tax that is applicable in this case?
ordinary income tax
Which of the following statements regarding the replacement of a life insurance policy is correct?
replacing a policy will require the insured to go through a new contestability period
The Fair Credit Reporting Act (FCRA) of 1971 does which of the following?
sets procedures credit reporting agencies must follow to ensure confidentiality, accurate reporting, and proper use of the information
Which of the following distributes income payments over time beginning soon after purchase and can be funded only with a single lump-sum premium payment?
single premium immediate annuity
Regarding life insurance policy dividend options, which of the following types of life insurance is purchased under the paid-up additions option?
single premium life insurance
What is the maximum amount of time most states allow insurers to delay paying cash surrender values?
six months
Julie is the beneficiary of her husband's $150,000 life insurance policy. When he dies, she chooses a settlement option that will pay monthly benefits to her as long as she lives, and will cease when she dies, with no further payments owed to anyone. Julie has chosen which settlement option?
straight life income settlement option