Life Insurance Basics

The primary reason for using third-party ownership in personal life insurance for estate planning purposes is to: a. remove the life insurance proceeds from the insured's estate and thus reduce the value of the taxable estate b. transfer the estate tax liability from the owner to the beneficiary c. reduce the tax rate used in calculating the estate tax d. convert the life insurance proceeds from an estate taxable asset to an income taxable asset

a. remove the life insurance proceeds from the insured's estate and thus reduce the value of the taxable estate Done correctly, third-party ownership of life insurance removes the value of the life insurance proceeds from the insured's estate.

Under the standard bring-back rule, assets transferred out of a decedent's estate will be valued in the estate if the transfer occurred within how many years before death? a. 4 years b. 5 years c. 3 years d. 7 years

c. 3 years

Which of the following best describes the premium tax insurance companies must pay when they receive premiums? a. It is federal tax paid to the U.S. Treasury. b. It is a state tax imposed by all states. c. It is a state tax imposed by relatively few states. d. It is a federal tax that is collected at the state level by all states.

c. It is a state tax imposed by relatively few states. It is a state tax imposed by few states that most companies pass on to their policyowners in some way.

Frank, an applicant for life insurance who is a substandard risk, can expect to pay a premium that is best described as which of the following? a. generally the same as for standard risks for the duration of the policy b. generally lower than for standard risks c. generally higher than for a standard risk d. generally the same as for standard risks, but over a shorter period of time

c. generally higher than for a standard risk An applicant who represents a substandard risk will pay a higher premium to offset the higher risk right from the beginning.

Which of the following statements generally guides insurance companies in determining "loading"? a. Expenses should be divided primarily among the company's most profitable plans and lowest mortality experience. b. The resulting net premiums should help the company maintain or improve its competitive position. c. Total loading from all policies should meet industry averages. d. Total loading from all policies should cover total operating costs, provide a safety margin, and contribute to profits or surplus.

d. Total loading from all policies should cover total operating costs, provide a safety margin, and contribute to profits or surplus. The resulting gross premiums should help the company maintain or improve its competitive position.

Loading reflects the costs that the insurance company can expect to pay for its operations. These costs include all of the following, EXCEPT: a. the insurance company's employee salaries b. employee benefits c. commissions paid to the insurer's agents d. mortality costs

d. mortality costs Loading costs include the insurer's expenses for salaries as well as commissions.

Stephanie is a policyowner who pays premiums monthly. How does her insurer cover the cost of sending her more frequent premium notices? a. The insurer charges higher premiums. b. The insurer charges a one-time lost-earnings fee. c. The insurer views the lost earnings as a cost of doing business. d. The insurer imposes policy loan restrictions.

a. The insurer charges higher premiums. For policyowners who do not want to pay premiums annually, insurance companies do not charge one-time "lost-earnings" fees.

Which statement best describes the restrictions an insurer must operate under when using information from the MIB? a. Insurers may rate or decline a life insurance applicant based solely on MIB information, as long as they do so consistently for all applications. b. Insurers cannot rate, but can decline, a life insurance applicant based solely on MIB information. c. Insurers cannot rate or decline a life insurance applicant based solely on MIB information. d. Insurers must rate or decline a life insurance applicant based solely on MIB information.

c. Insurers cannot rate or decline a life insurance applicant based solely on MIB information. An insurer cannot make underwriting decisions based solely on MIB information.

The activities a producer performs to support the insurance company in learning all it can about the applicant when seeking applications for insurance are generally called: a. field underwriting b. fiduciary process c. agency development d. due diligence

a. field underwriting While due diligence is an expected part of the producer's approach to business, this is not the answer.

Dan owns a fixed whole life insurance policy. What type of death benefit is Dan guaranteed? a. The amount depends on the number of premium payments Dan has made. b. The policy guarantees a fixed death benefit amount. c. The policy has no guaranteed death benefit. d. The policy guarantees a death benefit will be paid, but not the amount.

b. The policy guarantees a fixed death benefit amount. The insurer guarantees Dan a fixed death benefit, no matter when death occurs.

All the following statements regarding the interest factor in life insurance premium calculations are correct EXCEPT: a. Interest is treated as a credit in the calculation process. b. The higher the interest rate assumed by the actuary in calculating premiums, the lower the premium is likely to be. c. Interest is the income the insurance company can expect to earn on premiums it receives. d. To maximize the interest factor, insurers invest all traditional life insurance policy premiums in investment subaccounts.

d. To maximize the interest factor, insurers invest all traditional life insurance policy premiums in investment subaccounts. The interest factor works as a credit, so that the higher the interest rate, the lower the premium will be. However, if the interest rate decreases, the insurer must charge a higher premium.

With respect to third-party ownership of life insurance in the personal insurance market, all the following statements are true EXCEPT: a. The insured has the right to name the beneficiary. b. Policy ownership can be transferred to anyone without there having to be an insurable interest between that person and the insured. c. Third-party ownership is the basis of stranger-oriented life insurance (STOLI). d. Third-party ownership is common in estate planning.

a. The insured has the right to name the beneficiary. After the policy is issued the need for insurable interest is no longer required.

All the following statements regarding stranger-owned life insurance (STOLI) are correct EXCEPT: a. The insured retains the right to designate the policy's beneficiary. b. STOLI and investor-owned life insurance (IOLI) are the same thing. c. STOLI is an arrangement in which investors convince an individual to purchase a life insurance policy on himself which is transferred to the investor in exchange for a sum of money. d. STOLI is financed through premium loans during the first several years, until it is transferred from the insured to the investors.

a. The insured retains the right to designate the policy's beneficiary. Investor-owned life insurance (IOLI) is another name for STOLI.

Which of the following most accurately describes the basic function of a life insurance policy's net premium? a. The net single premium is the amount required to cover the policy's promised benefits, without accounting for the insurer's policy-related expenses. b. The net premium represents the insurer's mortality charge. c. The net premium is the amount actually charged to the policyowner. d. The net premium is the amount an individual actually pays to provide all the benefits promised in the policy regardless of premium mode.

a. The net single premium is the amount required to cover the policy's promised benefits, without accounting for the insurer's policy-related expenses. The net premium is the theoretical amount, excluding the load factor, which would be needed to fund the face amount for the duration of the policy. The amount paid by the policyowner is the gross premium.

All of the following statements regarding life insurance premium modes are correct EXCEPT: a. There is no additional cost for paying premiums more frequently than annually. b. The sum of premiums paid monthly over the course of a year will be greater than the annual premium for that policy. c. common premium modes include monthly, quarterly, and semi-annually d. Actuaries base premium calculations on the assumption that the premium will be paid annually, at the start of the policy year.

a. There is no additional cost for paying premiums more frequently than annually. To accommodate policyowners who want to spread out their premium payments, insurers offer policyowners the ability to pay premiums monthly, quarterly, and semi-annually as well as annually.

In setting premiums for a new policy, when do actuaries assume those premiums will be paid? a. They will be paid in full at the beginning of the policy year. b. They will be paid in full in the middle of the policy year. c. They will be paid monthly. d. They will be paid in full at the end of the policy year.

a. They will be paid in full at the beginning of the policy year. Actuaries do not assume premiums will be paid monthly.

Which of the following most accurately describes "insurable interest" in a life insurance policy? a. Insurable interest is the relationship between the person paying for the insurance and the designated beneficiary. b. Insurable interest is the financial relationship at the time of application between the person applying for life insurance and the person whose life is to be insured. c. Insurable interest is the relationship between the person applying for insurance and the insured at the time of the insured's death. d. Insurable interest is the primary factor in determining how much life insurance the insurer will issue on a person.

b. Insurable interest is the financial relationship at the time of application between the person applying for life insurance and the person whose life is to be insured. Insurable interest is the financial relationship between the person applying for life insurance and the person whose life is to be insured at the time of the application, not at the time of the insured's death.

Which of the following play a role in the regulation of variable insurance product sales? a. the Securities Exchange Commission (SEC) only b. both FINRA and state insurance departments c. state insurance departments only d. Financial Industry Regulatory Authority (FINRA) only

b. both FINRA and state insurance departments Producers must be licensed through their state's department of insurance to sell variable annuities, and must also be registered with FINRA.

Which of the following is the actuary's first step in determining the premium charged for a policy? a. calculate the annual policy dividend b. calculate the net premium c. calculate the expected profit d. calculate the gross premium

b. calculate the net premium The gross premium is determined in the second step of the calculation process. The actuary must add an amount for expenses and contingencies (called loading) to the net premium to produce the gross premium.

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: a. purchase the policy as the owner, but then transfer policy ownership to a third party at least three years before his death b. designate an irrevocable life insurance trust to be the owner and Robert's estate to be the policy beneficiary c. designate an irrevocable life insurance trust to be the owner and beneficiary of the policy d. designate an adult son to be the owner and allow him to designate a beneficiary other than Robert's estate

b. designate an irrevocable life insurance trust to be the owner and Robert's estate to be the policy beneficiary As long as the insured is not the owner and the insured's estate is not the beneficiary, policy proceeds will not be included in the insured's estate.

Who normally pays for medical exams or lab tests that insurance companies request during the life insurance underwriting process? a. the MIB b. the insurance company c. the agent d. the applicant

b. the insurance company The insurance company normally pays. The MIB is not involved in applicant medical exams and lab tests.

Alice wants to spread her life insurance premiums over the year, rather than pay a single annual premium. She asks her agent what that would mean in terms of the sum of premiums paid. Which of the following is the correct response? a. Whichever mode of premium she chooses, the sum of premiums over the course of the year is the same. b. The sum of premiums will be lower than if she paid a single annual premium. c. The sum of premiums will be higher than if she paid a single annual premium. d. The sum of premiums may be higher or lower than the single annual premium, depending on whether the annual premium is paid at the start or end of the policy year.

c. The sum of premiums will be higher than if she paid a single annual premium. Rather than having no effect, paying more frequently than once a year results in higher annualized premiums.

How do actuaries compensate for the cost of running the business when determining the gross premium charged to the policyowner? a. They assume a higher rate of interest than actually expected, which provides a safety margin by increasing the gross premium. b. They assume there will be fewer deaths than their past mortality experience would predict, which provides a safety margin by increasing the gross premium. c. They add an expense load, which includes a safety margin factor, to the net premium to produce the gross premium. d. They increase the mortality charge, increasing the net premium.

c. They add an expense load, which includes a safety margin factor, to the net premium to produce the gross premium. Assuming a higher rate of interest would result in a lower net premium, which would eliminate the safety margin.

A life insurance applicant who is a preferred risk can expect to pay a premium that is best described as which of the following? a. generally lower premiums than for standard risks, but over a short period of time, at which point rates increase to the same as standard rates b. generally higher premiums than for a standard risk c. generally lower premiums than for standard risks for the life of the policy d. generally the same premiums as for standard risks, for the life of the policy

c. generally lower premiums than for standard risks for the life of the policy A preferred risk will usually pay lower premiums-not standard rates. The premium-paying period is not a factor in risk classification.

Bob's insurance goal is to provide additional death benefit protection for his family in case he dies while his children are young. What type of life insurance is best suited to this need? a. group life insurance b. business life insurance c. term life insurance d. whole life insurance

c. term life insurance Whole life insurance lasts for the insured's entire lifetime or until age 120.

Alex owns a "home service" life insurance policy, which means he most likely pays his premiums in which of the following ways? a. with a single premium payment b. annually by personal check c. weekly or monthly, often personally to the agent who comes to Alex's homed d. quarterly by checking account debit

c. weekly or monthly, often personally to the agent who comes to Alex's homed This is one way that ordinary life premiums may be paid.

All the following statements about the net premium for a traditional life insurance policy are correct EXCEPT: a. The net premium is the insurer's estimated cost to provide the policy benefits without accounting for the insurer's expenses. b. Calculating the net single premium is the first step in calculating the gross premium charged to the policyowner. c. The net premium reflects two of the three premium factors: mortality and interest. d. The net single premium for a traditional life insurance policy is the amount actually charged to the policyowner who wants to purchase the policy with a single premium payment.

d. The net single premium for a traditional life insurance policy is the amount actually charged to the policyowner who wants to purchase the policy with a single premium payment. Net single premium reflects two of the premium factors: mortality and interest.

Who completes an attending physician's statement (APS)? a. a doctor assigned by the insurer in the state where the insurance is being written b. a local doctor, other than applicant's, who is familiar with how the medical condition is being treated c. a member of the MIB d. the proposed insured's doctor, who is familiar with how the medical condition is being treated

d. the proposed insured's doctor, who is familiar with how the medical condition is being treated A home office doctor who never treated the applicant would not be qualified to write the APS, since the "A" stands for "attending."