Life insurance Ch-2
When J. applied for a life insurance policy, the agent informed him that a medical exam would be required. The exam may be completed by ______ - A paramedic of examining physician at the insurer's expense - the agent - a physician of the applicant's choice and at his expense - a home office underwriter
a paramedic or examining physician at the insurer's expense - applicant can select the physician or paramedic - insurer pays the cost of such an examination
Based on Human Life Value Approach, which of the following is NOT used to calculate an individuals life value? - Insured's annual expenses - Effect of inflation on income over time - Predicted needs of the family after the insured's death - Insured's current and future income
- Predicted needs of the family after the insured's death - Human Life Value Approach determines the value of an individual's life
Minor
A person under legal age
Estate
A persons net worth
Solvency
Ability to meet financial obligations EX. insurance company maintains enough assets to pay claims
All of the following are personal uses of life insurance EXCEPT ________ - Estate creation - Cash accumulation - Buy-sell agreement - Survivor protection
Buy sell agreement
Life insurance
Coverage on human lives
If an insured changes his payment plan from monthly to annually, what happens to the total premium? - Doubles - Increases - Decreases - Stays the same
Decreases - due to the insurer needed to have the entire premium to invest for a full year, they would reduce the premium amount
Cash accumulation
Life insurance may be used to accumulate monies for specific needs with guarantees that the money will be available when needed
All of the following statements concerning the use of life insurance as an executive bonus are correct EXCEPT ________ - the employer pays a bonus to a selected employee to fund the policy - It is considered a nonqualified employee benefit - The policy is owned by the company - Any type of insurance policy may be used
The policy is owned by the company - the policy is owned by the EMPLOYEE
Viatical brokers
represent the insureds
Which of the following is the best reason to purchase life insurance rather than annuities? - To liquidate a sum of money over a lifetime - To create an estate - To liquidate a sum of money over a period of years - To create regular income payments
to create an estate
Why should the producer personally deliver the policy when the first premium has already been paid? - to find out how the family is doing since the initial presentation - to make sure the policy is not stolen or lost - to help the insured understand all aspects of the contract - to ensure the producer gets paid commission
to help the insured understand all aspects of the contract - it is the producers responsibility to make sure that the policy is understood by the insured and all of their questions are satisfied, and the delivery receipt is signed
Stock purchase
used by privately owned corporations when each stockholder buys a policy on each of the others
Cross purchase
used in partnerships when each partner buys a policy on the other
Stock redemption
used when the corporation buys one policy on each shareholder
Entity purchase
used when the partner buys the policies on the partners
What is the name of the insured who enters into a viatical settlement? - contingent - viatical broker - viator - third party
viator - owner of a life insurance policy who enters into or seeks to enter a viatical settlement contract
If a change needs to be made to the application for insurance, the agent may do all of the following EXCEPT - erase the incorrect answer and record the correct answer - Draw a line through the first answer, record the correct answer, and have the applicant initial the change - Note on the application the reason for change - Destroy the application and complete a new one
Erase the incorrect answer and record the correct answer - an agent cannot use white-out, erase or obliterate any answers given to a question on an application
Human Life Value Approach (HLVA)
Gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured - looks at insureds wages, inflation, number of years till retirement etc.
Which of the following methods of calculating the amount of life insurance needed takes into account the insured's wages, years until requirement, and inflation? - Lump-sum approach - Human life value approach (HLVA) - Needs approach - Blackout approach
Human life value approach (HLVA)
The Medical Information Bureau (MIB) was created to protect _______ - Insurance departments from lawsuits by policyowners - Insureds from unreasonable underwriting requirements by the insurance companies - Medical examiners that perform insurance physical examinations - Insurance companies from adverse selection by high risk persons
Insurance companies from adverse selection by high risk persons - nonprofit trade organization which receives adverse medical information from insurance companies and maintains confidential medical impairment information on individuals
Lump-sum
Payment of the entire benefit in one sum
Liquidity
Policy's cash values can be borrowed against at ay time and used for immediate needs
Survivor protection
Providing funds for surviving spouses and dependents in the case of loss
Liquidation
Selling assets in order to raise capital
Cash value
equity amount accumulated in permanent life insurance
Part 2 of the application for life insurance provides questions regarding all of the following EXCEPT ___________ - Other insurance coverages - family health history - alcohol and tobacco consumption - recent surgeries
other insurance coverages - part 2 of the application contains questions regarding the applicants' health history - part 1 of the application contains questions regarding current coverage being applied for as well as any other insurance coverage
When an agent collects the initial premium from the applicant, the agent should issue the applicant a __________
premium receipt
Insurable interest
something of value that, if lost, would cause you financial harm - policyowner's own life - the life of a family member (spouse or close blood relative) - Life of a business partner, key employee, or someone who has financial obligation to the policyowner)
Which of the following types of risk will result in the highest premium? - substandard risk - standard risk - preferred risk - all risks pay equal premiums
substandard risk - indicates that an individual represents an under-average insurance risk b/c of physical condition, personal or family history of disease, occupation, habits, or hobbies
A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as ___________ - Survivor protection - Life planning - Survivorship insurance - Juvenile protection provision
survivor protection - provides the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death
Adverse selection
tendency of individuals with higher probability of loss to purchase insurance more often than those who present a lower risk
Death benefit
the amount paid upon the death of the insured in a life insurance policy
Which of the following is an example of liquidity in a life insurance contract? - the death benefit paid to the beneficiary - the flexible premium - the money in a savings account - the cash value available to the policy owner
the cash value available to the policy owner - availability of cash to the insured
The mode of premium payment ________ - Is the factor that determines the amount of dividends in a policy - Is the method used to compute the cash surrender value of the policy - Does not affect the amount of premium paid - Is defined as the frequency and the amount of the premium payment
the frequency and the amount of the premium payment
Estate Creation and Conservation
When young families have not had time to accumulate assets, they will have an estate of at least that amount the moment the first premium is paid
Which of the following best describes gross annual premium? - Expense premium - Net premium plus expenses - Annual loading - Basic insurance rate plus commission
net premium plus expenses
Illustrations
presentation or depiction of nonguaranteed elements of a life insurance policy
An investor buys a life policy on an elderly person in order to sell it for a life settlement. This is an example of _____ - a prearranged funeral plan - a viatical settlement - third-party ownership - a STOLI policy
a STOLI policy - stranger oriented life insurance policies are usually purchased by people who have no relationship with the insured with the intention of selling them for life settlements
the insurance company underwriter could find information concerning the personal activities and character of an applicant from which of the following reports? - Insurance company who provided the prior coverage - Medical Information Bureau - Producer's report - Attending physician
Producer's report - agent communicates their observations concerning an applicant in the producer's report
An insured under a life insurance policy has been diagnosed with a terminal illness and has 6 months to live. The insured knows that his financial state will worsen even more with the upcoming medical expenses. What option could the insured utilize? - Viatical settlement - Estate liquidation - Nonpayment of premium - Change of beneficiary
Viatical settlement
Are insurance company underwriters allowed to discriminate? - No, higher risks pay higher premium - No, discrimination is an unfair practice - Yes, but only for gender - Yes, but not unfairly
Yes, but not unfairly - the company will discriminate in favor of good risks and poor risks - cannot discriminate unfairly with race, gender etc.
viatical producers
represent the providers
Viatical Settlements
allow someone living with a life-threatening condition to sell their existing life insurance policy and use the proceeds before their death - not a policy option, but a separate contract in which the insured sells the death benefit to a third party at a discounted rate
Which of the following applicants could the insurer charge a higher rate of premium and not violate regulations regarding unfair discrimination? - an applicant who is a smoker - an applicant who was born in another country - an applicant who is legally blind - an applicant who has been a victim of domestic abuse
an applicant who is a smoker - smoking or not smoking is a rating factor
If an insurance company makes a statement that its policies are guaranteed by the existence of the insurance guaranty association, that would be considered ________ - a required disclosure - a legal representation of association - an unfair trade practice - a misrepresentation
an unfair trade practice - cannot make any statement that an insurer's policies are guaranteed by the existence of the insurance guaranty association - the statement is true, just cannot advertise this
Life settlement
any financial transaction in which the owner of a life insurance policy sells a policy that is no longer needed to a third party for some form of compensation (usually cash)
Partners in a business enter into a buy-sell agreement to purchase life insurance, which states that should one of them die prematurely, the other would be financially responsible to buy the interest of the deceased partner. What type of insurance policy may be used to fund this agreement? - Term insurance only - Permanent insurance only - Universal life insurance only - Any form of life insurance
any form of life insurance may be used to fund a buy-sell agreement
An underwriter is reviewing the medical questions in the application and needs further information due to a medical situation the applicant had in the past. What will the underwriter require? - statement of continued good health - attending physician statement - a complete medical record - sworn health affidavit from the applicant
attending physician statement - the APS is used to obtain medical DETAILS about a specific condition shown in the application - the insurance company orders the information directly from the physician
Which of the following statements concerning buy-sell agreements is true? - Benefits received are considered income taxable - Buy-sell agreements pay in the event of a medical emergency - Buy-sell agreements are normally funded with a life insurance policy - Premiums paid are deductible as a business expense
buy-sell agreements are normally funded with a life insurance policy - buy-sell is a contract that establishes what will be done with the business in the event that an owner dies
What does "liquidity" refer to in a life insurance policy? - the insured receives payments each month in retirement - cash values can be borrowed at any time - the death benefit replaces the assets that would have accumulated if the insured had not died - the policyowner receives dividend check each year
cash values can be borrowed at any time
If an applicant for a life insurance policy is found to be a substandard risk, the insurance company is most likely to _______ - require a yearly medical examination - lower its insurability standards - refuse to issue the policy - charge a higher premium
charge a higher premium - premium rate is adjusted to reflect the insurer's increased risk
A producer agent must do all of the following when delivering a new policy to the insured EXCEPT _______ - disclose commissions earned from the sale of the policy - explain the policy provisions, riders, and exclusions - collect any premium due - explain the rating procedures if the policy is rated differently than applied for
disclose commissions earned from the sale of the policy
An insured has a life insurance policy with a face amount of $500. He pays a premium each week to the agent who sold him the policy. What kind of policy does the insured have? - credit life - ordinary life - franchise life - industrial life
industrial life - written on an individual basis in small amounts, usually with a face amount of less than $2,000 - payed weekly or monthly - written nonmedically
Stranger-originated life insurance policies are in direct opposition to the principle of _____ - Law of large numbers - Good faith - Indemnity - Insurable interest
insurable interest - b/c the purchaser of a stranger-originated life insurance policy doesn't know the insured, or have any interest in the insured's longevity, STOLI policies violate the principle of insurable interest
Preferred risk classification
insured is in excellent physical condition and employs healthy lifestyle & habits - qualify for lower premiums than those in other categories
Which of the following statements regarding HIV testing for life insurance purposes is NOT true? - the testing practices must meet the criteria of the U.S. Department of Health and Human Services - HIV testing is regulated at the state level - Insurers are barred from requesting HIV testing - positive test results will be forwarded to the state's Department of Health if a physician is not selected by the applicant
insurers are barred from requesting HIV testing - common if applicant seeks a policy with a large face amount
Which of the following is usually true of a participating life insurance policy? - it pays dividends to policyowners - it may be converted to a term life policy - it pays dividends to stockholders - it assesses premiums against stockholders
it pays dividends to policyowners - participating is a term used to refer to any insurance policy that distributes its dividends by cash payments, reduced premiums, units of paid-up life insurance, a savings program, or by the purchase of term insurance
Buy-sell agreement
legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled - also called business continuation agreement
Which of the following information about the applicant is NOT included in the General Information section of the application for insurance? - occupation - marital status - medical background - gender
medical background - part 1 (general information includes name, age, address, birth date, gender, income, marital status, occupation) - part 2 (medical information)
Which of the following premium modes would result in the highest annual cost for an insurance policy? - monthly - quarterly - semi-annual - annual
monthly - there will be an additional charge (loading) because the company will not have the premium to invest for a full year, and the company will have additional expenses in billing the premium
Which of the following will be included in a policy summary? - copies of illustrations and application - comparisons with similar policies - primary and secondary beneficiary designations - premium amounts and surrender values
premium amounts and surrender values - a policy summary must be delivered along with the policy and will provide the producer's name and address, the insurance company's home office address, the generic name of the policy issued, and premium, cash value, surrender value and death benefit figures for specific policy years
All of the following are characteristics of group life insurance EXCEPT ________ - Certificate holders may covert coverage to an individual policy without evidence of insurability - Premiums are determined by the age, sex, and occupation of each individual certificate holder - Group life insurance is written as a master policy - Individuals covered under the policy receive a certificate of insurance
premiums are determined by the age, sex, and occupation of the entire group, not for each individual insured
Where would the underwriter find relevant information not presented by the applicant on the insurance application but communicated by the producer? - Inspection report - Producers report - Statement of continued good health - Conditional receipt
producers report
Which rule would apply if an agent knows an applicant is going to cash in an old policy and use funds to purchase new insurance? - Reinstatement rule - Conversion rule - Disclosure rule - Replacement rule
replacement rule - anytime a new policy is issued that replaces or modifies existing insurance, a replacement form must be submitted to the ceding company
Insurance producers must ensure that contracts they recommend are in the best interest of the insured. This is called _______ - Suitability - Client protection - Approval - Underwriting
suitability - to the best of the insurance producers belief, the purchase, sale or exchange of a policy is in the best interest of the insured
An individual applied for an insurance policy and paid the initial premium. the insurer issued a conditional receipt. Five days later the applicant had to submit to a medical exam. If the policy is issued, what would be the policy's effective date? - The date of policy delivery - The date of issue - The date of application - The date of medical exam
the date of medical exam - if the company acknowledges receipt of the premium with a conditional receipt, the policy is in effect on the date of the application or the date of the medical exam (whichever is later), provided that the applicant is found insurable at the rate applied for
Viators
the insureds in a viatical settlement
Viatical settlement provider
the person or company that buys the life insurance policy
All of the following are true of key person insurance EXCEPT - the key employee is the insured - the plan is funded by permanent insurance only - there is no limitation on the number of key employee plans in force at any one time - the employer is the owner, and beneficiary of the policy
the plan is funded by permanent insurance only - key person coverage may be funded by any type of life insurance
Which of the following is NOT true about life settlements? - They could be sold for an amount greater than the current cash value - they involve insurance policies with large face amounts - the seller must be terminally ill - they could be used for a key person coverage
the seller must be terminally ill - unlike with viatical settlements, the seller does not need to be terminally ill
Which is generally true regarding insureds who have been classified as preferred risks? - they can decide when to pay their monthly premiums - they keep a higher percentage of any interest earned on their policies - their premiums are lower - they can borrow higher amounts off of their policies
their premiums are lower - the insured is in excellent physical condition and employs healthy lifestyle & habits