Life Insurance Basics

Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy? A. Premiums are taxable to the employee B. Premiums are not tax deductible as a business expense C. Premiums are tax deductible by the key employee D. Premiums are tax deductible as a business expense

B. Premiums are not tax deductible as a business expense

Which of the following documents delivered to the policyowner includes information about premium amounts, cash values, surrender values, and death benefits for specific years?

A policy summary A policy summary usually includes all the listed information, and must be delivered along with a new policy.

Steven prints a pamphlet to advertise his life insurance business. In the pamphlet, he includes the full name of his insurance agency and the type of insurance that he offers. What else must he include?

Address of his principal office When a New York insurance agent or broker advertises services, he/she must list the full name of the insurer and the name of the city, town, or village that houses the principal office.

All of the following information about a customer must be used in determining annuity suitability EXCEPT A. Annual income B. Beneficiary's age C. Tax Status D. Financial Experience

B. Beneficiarys age To ensure suitability of annuity products, producers must obtain relevant information about the consumer's age, income, financial status, tax status, financial experience and objectives. Beneficiary's age is not a suitability factor.

A key person insurance policy can pay for which of the following? A. Hospital bills of the key employee B. Costs of training a replacement C. Loss of personal income D. Workers compensation

B. Costs of training a replacement A key person insurance policy will pay for costs of running the business and replacing the employee.

Which of the following is the basic source of information used by the company in the risk selection process? A. Warranty B. Consumer report C. Application D. Agents report

C. Application The application is the basic source of information an insurer uses in the risk selection process.

Which of the following types of insurance policies would perform the function of cash accumulation? A. Credit life B. Increasing term C. Whole life D. Term life

C. Whole life Life insurance is unique from other types of insurance in that it could perform the function of cash accumulation. Cash values are available in whole life policies.

Who might receive dividends from a mutual insurer?

Policyholders A mutual insurer has no stock, and is owned by the policyholders. Since they may receive a dividend (not guaranteed), such policies are known as participating policies. Dividends received by policyholders of a mutual insurer are not taxable.

Which is generally true regarding insureds who have been classified as preferred risks? A. They keep a high percentage of any interest earned on their policies B. Their premiums are lower C. They can borrow higher amounts off of their policies D. They can decide when to pay their monthly premiums

B. Their premiums are lower The preferred risk classification indicates that an insured is in excellent physical condition and employs healthy lifestyles and habits. These individuals qualify for lower premiums than those in the other categories.

In terms of social security, what is the name for the time period after the youngest child of a family turns 16 and before the surviving spouse may start receving retirement benefits?

Blackout Period Blackout period begins when the youngest child reaches the age of 16, and ends when the surviving spouse qualifies for retirement benefits, as early as age 60. No benefits are paid during this time.

Which of the following is an example of liquidity in a life insurance contract? A. The money in a savings account B. The cash value available to the policyowner C. The death benefit paid to the beneficiary D. The flexible premium

B. The cash value of availability to the policyowner Liquidity in life insurance refers to availability of cash to the insured. Some life insurance policies offer cash values that can be borrowed at any time and used for immediate needs.

A corporation is the owner and beneficiary of the key person life policy. If the corporation collects the policy benefit, then A. The benefit is subject to the exclusionary rule B. IRS has no jurisdiction C. The benefit is received as taxable income D. The benefit is received tax free

D. The benefit is received tax free Should a key person die, the benefit is treated as a reimbursement to the business for loss of services from that key person.

All of the following are true of key person insurance except A. There is no limitation on the number of key employee plans in force at any one time B. The employer is the owner, payor and beneficiary of the policy C. The key employee is the insured D. The plan is funded by permanent insurance only

D. The plan is funded by permanent insurance only Key Person coverage may be funded by any type of life insurance.

Joe, Larry, and Curly own a small business. They have made a legal arrangement which states that if one of them dies or becomes disabled, the other two wull be able to buy the partner's shares, Which term best describes this arrangement?

Business Continuation In a Business Continuation arrangement, the partners of a business can buy shares belonging to a recently deceased or disabled partner.

Upon policy delivery, the producer may be required to obtain any of the following EXCEPT A. signed waiver of premium B. Statement of good health C. Payment of premium D. Delivery receipt

A. Signed waiver of premium The policy does not go into effect until the premium has been collected. If the premium was not collected at the time of the application, the producer may also be required to get a Statement of Good Health from the applicant at the time of policy delivery. Waiver of premium is a rider that can be added to a life insurance policy, and not something to be obtained from the applicant.

What does "liquidity" refer to in a life insurance policy?

Cash values can be borrowed at any time Liquidity in life insurance refers to availability of cash to the insured through cash values.

Which of the following is NOT an example of a business use of Life Insurance? A. Key Person B. Worker's Compensation C. Buy-Sell funding D. Executive Bonuses

B. Workers Compensation Workers Compensation is a benefit payable when a worker is injured by a work-related injury, regardless of fault or negligence. It is not considered a business use of insurance.

Which of the following information about the applicant is NOT included on Part 1 of the application for life insurance. A. Occupation B. Marital Status C. Medical Background D. Gender

C. Medical Background Part 1 of the application includes the general questions about the applicant, including name, age, address, birth date, gender, income, marital status, and occupation. The applicant's medical background is addressed in Part 2 - Medical Information.

Attempting to determine how much insurance an individual would require based upon their finacial objectives is known as

Needs Approach Needs method determines how much benefit would be necessary to replace the loss income and increased expense should the insured die prematurely.

Which of the following would least likely be considered a legitimate need that would be paid by insurance proceeds? A. Debt cancellation B. Day care C. Vacation travel expenses D. Travel expenses for family to come to the funeral

C. Vacation travel expenses There are many legitimate need-based expenses that can be paid by life insurance proceeds, from groceries to retirement income. Vacation travel expenses are most likely to be considered a luxury and not a need.

Based on Human Life Value Approach, which of the following is NOT used to calculate an individual's life value? A. Predicted needs of the family after the insured's death B. Insureds current and future income C. Insured's annual expenses D. Effect of inflation on income over time

A. Predicted needs of the family after the insured's death The Human Life Value Approach to determining the value of an individual's life requires the calculation of probable future earnings of the insured, which involves wages, expenses, inflation, amount of time until retirement, and the time value of money. Predicted needs of the family after the insured's death are used in the needs approach.

All of the following are personal uses of life insurance EXCEPT A. Estate Creation B. Cash Accumulation C. Buy-Sell agreement D. Survivor Protection

C. Buy-sell agreement Personal uses of life insurance include survivor protection, estate creation and conservation, cash accumulation, and liquidity. A buy-sell agreement is for business uses of life insurance.

Insurance producers must ensure that contracts they recommend are in the best interest of the insured. This is called

Suitability Insurance producers must adhere to the concept of suitability by ensuring that, to the best of their belief, the purchase, sale or exchange of a policy is in the best interest of the insured.

Which of the following would be the best option that would help the surviving spouse of the insured to put her child through daycare after the insured's death? A. Estate conservation B. Life insurance proceeds C. State Education Waiver D. Viatical settlement

B. Life insurance prodceeds There are many legitimate need-based expenses that can be paid by life insurance proceeds, from groceries to retirement income. Daycare is considered to be among these expenses.

Which of the following documents must be provided to the policyowner or applicant during policy replacement? A. Notice regarding replacement B. Disclosure authorization form C. Buyers guide and policy summary D. Policy illustrations

A. Notice regarding replacement During policy replacement, the replacing producer must present to the applicant a Notice Regarding Replacement that is signed by both the applicant and the producer.

Which of the following statements is NOT true concering insurable interest as it applies to life insurance? A. A debtor has insurable interest in the life of a lender B. Business partners have an insurable interest in each other C. A husband or wife has an insurable interest in their spouse D. An individual has an insurable interest in her or her own life

A. A debtor has an insurable interest in the life of a lender. A lender has an insurable interest in the life of a debtor, but only to the extent of the debt. The debtor does not have an insurable interest in the life of the lender.

Which of the following statements concerning buy-sell agreements is true? A. Benefits received are considered income taxable B. Buy-Sell Agreements pay in the event of a medical emergency C. Buy-Sell agreements are normally funded with a life insurance policy D. Premiums paid are deductible as a business expense

C. Buy-Sell agreements are normally funded with a life insurance policy A buy-sell agreement is simply a contract that establishes what will be done with a business in the event that an owner dies. Buy-sell agreements are normally funded with a life insurance policy.

All of the following are business uses of life insurance EXCEPT A. Compensating executives B. Funding against financial loss caused by the death of a key employee C. Funding business continuation agreements D. Funding against general company financial loss.

D. Funding against general company financial loss Both life and health insurance can be used for a variety of purposes in a business setting, including the funding of business continuation agreements, compensating executives, and protecting the firm against financial loss resulting from the death or disability of key employees.

Which of the following is the best reason to purchase life insurance rather than annuities? A. to liquidate a sum of money over a period of years B. To create regular income payments C. To liquidate a sum of money over a lifetime D. To create an estate

D. To create an estate With insurance, the death benefit creates an immediate estate should the insured die.

An agent and an applicant for a life insurance policy fill out and sign the application. However, the applicant does not wish to give the agent the initial premium, and no conditional receipt is issued. When will coverage begin?

When the agent delivers the policy, collects the initial premium, and the applicant completes and acceptable statement of good health If the initial premium is not paid with the application, the agent will be required to collect the premium at the time of policy delivery. In this case, the applicant will most likely need to fill out a Statement of Good Health.

Most agents try to collect the initial premium for submission with the application. When an agent collects the initial premium from the applicant, the agent should issue the applicant a

Premium Receipt When collecting the initial premium, the agent should issue the applicant a premium receipt.