Life Insurance Final Exam
Which of the following problems could be caused by the flexibility offered by a universal life insurance policy? a. Increases in the death benefit within in the first five policy years can cause the death benefit to become taxable income to the beneficiary. b. Skipping even one premium payment will cause the policy to lapse. c. A death benefit reduction may cause the policy to be classified as a modified endowment contract. d. The coverage of a key employee's life by a corporation will cause a transfer for value problem.
A death benefit reduction may cause the policy to be classified as a modified endowment contract.
A policy that originally is not a modified endowment contract will be subject to re-testing if there is a "material change" in the contract. Which of the following would likely be a material change? a. A cost-of-living increase in the death benefit based on the consumer price index. b. Increases in death benefits because of premiums paid for the policy to support the first seven contract years of benefits. c. An exchange of one policy for another policy in a 1035 exchange. d. A death benefit increase inherent in the policy design due to crediting of interest or other earnings.
An exchange of one policy for another policy in a 1035 exchange.
For which of the following is use of single premium whole life insurance LEAST appropriate? a. When maximum tax-deferred cash buildup in conjunction with life insurance is desired. b. When the objective is to prefund a specified minimum death benefit for a specific purpose. c. As a vehicle for gifts. d. As a good short-term tax-deferred investment.
As a good short-term tax-deferred investment.
Which of the following is a disadvantage of a current assumption whole life policy? a. most current assumption whole life policies charge back-end surrender charges should the policy lapse or be surrendered b. CAWL policies guarantee maximum mortality and expense rates c. Premium are level and fixed between redetermination periods.
CAWL policies guarantee maximum mortality expense rates
A common accident provision is a clause that provides for double indemnification if the insured and his or her spouse die in a common accident. True or False
False
A life insurance policy is a contract governed by federal law. True or False
False
The most important step in selecting a life insurance company is to assess its customer service strength. True or False
False
The policy illustration for a current-assumption whole life policy provides all the information a consumer needs to evaluate the contract. True or False
False
The primary reason for purchasing annuities is tax deferral True or False
False
Variable life or variable universal life insurance is well-suited to individuals desiring a minimum basic level of coverage. True or False
False
Which of the following statements about the tax aspects of ownership of variable life insurance is FALSE? a. Transfers of investment assets from one fund to another are tax-free. b. Gains received are taxable at capital gains rates. c. Investment earnings within the policy are tax deferred. d. Death benefits are usually paid free of federal income tax.
Gains received are taxable at capital gains rates.
Level-premium whole life insurance policies allow policyowners to borrow amounts under the policy. Typical loan provisions include which of the following requirements? a. Policy loans must be approved by the insurer's loan committee. b. If the policy is terminated the cash surrender value is reduced by any outstanding policy loans and unpaid interest. c. On the death of the insured, the death benefit is reduced by any unpaid interest but not by any outstanding policy loan. d. The amount of the loan is limited to the amount of the death benefit.
If the policy is terminated the cash surrender value is reduced by any outstanding policy loans and unpaid interest.
Which one of the following is not an advantage of group term life insurance? a. It provides insurance at standard rates for those who might otherwise be insurable at only an increased premium. b. It is can be used as a standard investment option under the employer's 401(k) plan. c. It provides a death benefit to employees at a relatively low cost. d. It typically enables terminated employees to convert to individual policies without submitting evidence of insurability.
It is can be used as a standard investment option under the employer's 401(k) plan.
The two policy comparison methods that compute the rates of return, or the prices of protection, for all years, or any subset of years the policies may be in force were developed by: a. Linton and Baldwin b. the National Association of Insurance Commissioners c. Joseph Belth d. A.M. Best
Joseph Belth
Which one of the items listed below is not an advantage of adjustable life insurance? a.The policyowner may change the face amount of coverage b. Cash value earnings accumulate on a tax deferred basis c. The policy cash values are not subject to market fluctuations d. Lifetime withdrawlas of cash values are exempt from income tax
Lifetime withdrawals of cash values are exempt from income tax.
Which of the following statements is true regarding current-assumption whole life insurance? a. Current-assumption whole life will not necessarily lapse if a premium payment is missed. b. In the early years of the policy, the amount of protection per premium spent is higher than with term insurance. c. Cash values are subject to market risk, much like other long-term fixed income investments. d. Policyowners bear more risk of adverse trends in mortality or expenses than if they own traditional whole life policies.
Policyowners bear more risk of adverse trends in mortality or expenses than if they own traditional whole life policies.
Which of the following is an advantage of adjustable life? a. lifetime withdrawals of cash values are fully excluded from income tax b. interest paid on policy loans is deductible from capital gain on other investments c. policyowners have flexibility of selecting the schedule of premiums they will pay until they request a change in coverage d. adjustable life policies are not subject to surrender charges
Policyowners have flexibility of selecting the schedule of premiums they will pay unitl they request a change in coverage
Advantages of single premium life include all of the following EXCEPT: a. Entire premium goes into cash value b. Cash value interest or earnings accumulate tax-free or tax-deferred c. The amount of protection is low relative to the premium paid d. Policy cash values can be borrowed at low or zero net interest.
The amount of protection is low relative to the premium paid
Which of the following statements regarding universal life insurance is NOT true? a. The policyowner can easily track the policy's different elements. b. It is generally best suited to long term coverage needs. c. If the policyowner skips a premium payment the policy will not lapse. d. The policy is not susceptible to inadvertently becoming a modified endowment contract.
The policy is not susceptible to inadvertently becoming a modified endowment contract.
In which of the following situations would a level-premium whole life insurance policy be appropriate? a. To provide a fund needed only if death should occur within a short period of time after purchase b. When the policyowner desires to control the investments of the cash value of the policy c. When the policyowner desires to vary the death benefit depending upon life circumstances d. To provide funds for the continuation of a business through a "buy-sell" agreement
To provide funds for the continuation of a business through a "buy-sell" agreement
A 10% penalty applies to certain distributions from life insurance policies that are treated as modified endowment contracts. True or False
True
One of the disadvantages of level premium whole life insurance is that the premiums may be unaffordable for persons of limited financial resources. True or False
True
One of the main advantages of current assumption whole life is that policy elements are 'unbundled'. True or False
True
The income replacement approach assumes the insurance should be equal to the value of the person's future earnings potential to the surviving family members. True or False
True
The policy cash value for limited-pay whole life policies typically grows more quickly than for policies with longer payment periods. True or False
True
An increasing premium, level death benefit term policy to age 65 is: a mortgage insurance b. usually offered as a rider to another basic policy, and is commonly called a "return-of-premium" benefit c. a one-year term policy, renewable to age 65 d. a term policy offered during open enrollment periods, which offers to repay premiums if the insured dies within the first few years but pays no death benefit until the insured has survived the first few years of the policy
a one-year term policy, renewable to age 65
Settlement options frequently include some combination of the following a. Cash b. a fixed amount over time c. an amount over a fixed period d. all of the above
all of the above
If a limited-pay whole life insurance policy is determined to be a "MEC" (Modified Endowment Contract): a. cash value increases cease immediately b. distributions, including policy loans, will likely be includable in income c. death benefits are paid only if cancer is the cause of death d. the policy will be administered by the state insurance commissioner
distributions, including policy loans, will likely be includable in income
Which of the following items are NOT treated as income-first when distributed from a modified endowment contract? a. dividends retained by the insurer to premiums or other consideration for the contract b. cash dividends c. policy loans to pay premiums and for all other purposes d. withdrawals
dividends retained by the insurer to premiums or other consideration for the contract
A typical "incontestable clause" will prevent an insurer from challenging an insurance contract because of: a. non-payment of premiums b. fraudulent misrepresentations in the application c. lack of insurable interest in that applicant at the inception of the contract d. procurement of the policy with intent to murder
fraudulent misrepresentation in the application
Which of the following items should not be taken into account when performing a "due care" analysis? a. assessing the general characteristics and financial information of the company b. reviewing profitability, leverage and liquidity tests c. looking at the company's ratings by the major rating services d. inspecting the company's marketing materials
inspecting the company's marketing materials
A conceptually sound approach to valuing key employees should a. ignore the financial consequences of the timing of lost employee contributions b. discount for trends in employee contributions c. recognize that most, if not all, the value of key employee contributions will be recovered over time through change or adapting
recognize that most, if not all, the value of key employee contributions will be recovered over time through change or adapting
The total dollar outlay for life insurance protection is most easily determined for: a. term insurance b. level-premium whole life insurance c. limited pay whole life insurance d. single premium whole life insurance
single premium whole life insurance
Which of the following features represents an advantage of an annuity over a mutual fund investment? a. greater participation in favorable market performance b. stepped up basis in the hands of a beneficiary after the owner's death c. tax deferred growth d. lower fees for acquisition
tax deferred growth
The income replacement approach to determining a family's insurance needs is based primarily on? a. the earnings growth rate of long-term U.S. Treasury securities b. regulations issued by the Department of Health and Human Services c. the current balance in the accumulated adjustment account d. the human life value concept
the human life value concept
If the annuitant dies after annuity benefit payments have started under a "pure life annuity" settlement option a. the payments cease b. the payments continue to his beneficiary for at least five years c. the payments continue to his beneficiary for at least ten years d. the payments cease during the Social Security blackout period but begin again when the beneficiary reaches age 65
the payments cease
A survivorship rider permits a. the purchase of increased coverage on the insured if the life designated in the rider dies before the insured b. an increased benefit from a qualified pension plan c. the purchase of shares of stock from the deceased's estate d. the substitution of insureds, with evidence of insurability
the purchase of increased coverage on the insured if the life designated in the rider dies before the insured
Most states require that life insurance contracts contain a grace period of one month, during which the policy remains in force even if the insured dies without having made the premium payment. True or False
True
One disadvantage of limited-pay whole life is that the amount of protection is lower relative to the premium spent than with level premium or term policies. True or False
True
The principal economic purpose of life insurance is to accumulate capital True or False
True
Variable Life and Variable Universal Life are especially suited for many business insurance situations where flexibility and growth of cash value are attractive features. True or False
True
Variable life is a whole life policy where the policyowners bear all investment risk. True or False
True
Life Insurance companies with better mortality experience than other companies tend to have: a. higher underwriting standards b. nonqualified deferred compensation plans for general agents c. a mutual holding company structure d. a 401(k) matching program for employees
higher underwriting standards
Adjustable Life is not a good choice for life insurance when a. flexibility is desired b. guaranteed protection is needed c. forced savings is preferred d. interest on policy loans can be deducted
interest on policy loans can be deducted
Group life insurance is a welfare benefit plan. As a result: a. coverage may not exceed $50,000 per employee b. an equal amount of coverage must be provided to all employees c. it is subject to securities regulations d. it is subject to ERISA
it is subject to ERISA
Planners are not responsible for the financial stability of life insurance companies they recommend. True or False
False
Survivorship life pays a death benefit at either the first or second death, depending on the wishes of the policyowner. True or False
False
Term insurance is always the least expensive form of insurance regardless of the duration of needed coverage. True or False
False
The basic policy in a survivorship life plan is always a permanent form of insurance. True or False
False
The longer the period into the future that policy values are projected or illustrated, the more likely that they will be accurate True or False
False
Variable annuities not are considered securities under federal law. True or False
False
The automatic premium loan provision is activated when a. the policy cash value drops below the bailout rate b.the agent-of-record files the correct form c. the applicable Table I rate us exceeded by at least 10% d. a policy premium remains unpaid at the end of the premium payment grace period
A policy premium remains unpaid at the end of the premium payment grace period
Life insurance is essentially an investment vehicle that ensures a desired wealth accumulation by the time of death, regardless when death occurs. True or False
True
Which of the following is a disadvantage of a current assumption whole-life policy? a. Most current assumption whole life policies charge back-end surrender charges should the policy lapse or be surrendered. b. Premium are level and fixed between redetermination periods. c. CAWL policies guarantee maximum mortality and expense rates d. Policy cash values can be borrowed at a low net cost.
CAWL policies guarantee maximum mortality and expense rates
One of the advantages of adjustable life is that increases in the face amount do not require evidence of insurability True or False
False
A policy that automatically increases the death benefit without evidence of insurability will typically violate the MEC rules. True or False
False
A private annuity is an annuity product offered by an insurance company that is made available only to private individuals meeting certain income and asset requirements. True or False
False
A reasonable estimate for long-term growth in earnings might be 3% (inflation rate (5%) minus the average real growth rate of earnings (2%) True or False
False
A survivorship life policy on a married couple becomes void if the couple divorces. True or False
False
Adjustable life insurance is essentially a hybrid of term life and whole life insurance True or False
False
Death benefits on joint life coverage are generally includable in gross income by the beneficiary. True or False
False
Group life provides an after-tax benefit for employees and a deduction for employers. True or False
False
In choosing life insurance policies, match the problem to the product True or False
False
Insurance company ratings have been shown to be too variable and wide-ranging to provide any reliable prediction of long term solvency and financial strength. True or False
False
Key employee insurance is based on the premise that the cost of replacing a key employee is generally minimal and the full value of the individual to the organization can be recouped through life insurance. True or False
False
Once a policy is classified as a modified endowment contract, with certain corrections, it can be later treated as not a modified endowment contract. True or False
False
Advantages of ordinary level-premium whole life include all of the following except a. Fixed and known annual premium b. Interest on policy loans is generally non deductible c. Tax-free, or tax-deferred, accumulation of cash values d. Policy cash values can be borrowed at low net cost
Interest on policy loans is generally non deductible
Which of the following statements is true regarding current-assumption whole life insurance? a. The amount in the "accumulation account" is based on the performance of investments selected by the policy holder. b. Most current-assumption policies charge relatively high front-end loads, but have no surrender charges. c. The amount of premiums remains fixed for the term of the contract. d. The insurer promises to credit at least a minimum guaranteed rate of interest.
The insurer promises to credit at least a minimum guaranteed rate of interest.
Most insurance companies do not offer renewable term policies to new applicants after a certain age, which is usually between 60 and 70. True or False
True
Which of the following is true regarding the interest credited to universal life policies? a. "Portfolio" rates are generally more responsive to changing market interest rates than "New Money" rates. b. The rate used is based on the return on investments selected by the policyholder and held in a segregated asset account. c. Insurance companies are no longer allowed complete freedom in interest crediting due to some companies abusing such discretion in the past. d. The rate used may be linked to a well-known index of yields if it exceeds a minimum rate guaranteed in the policy.
The rate used may be linked to a well-known index of yields if it exceeds a minimum rate guaranteed in the policy.
A term life insurance policy makes no promise to pay anything if the insured lives beyond the specified term. True or False
True
A traditional level-premium current assumption whole life policy includes a minimum interest guarantee. True or False
True
A waiver of premium rider is a form of disability insurance. True or False
True
Adjustable life insurance provides the policyholder more flexibility to change the plan of insurance. True or False
True
Amounts received by a terminally ill insured under an accelerated death benefit provision are excluded from gross income. True or False
True
An annuity is the only investment that can guarantee the investor will not outlive his or her income. True or False
True
As long as cash values are sufficient to cover policy charges, a universal life policy owner may skip premium payments. True or False
True
Estoppel is a legal way of arriving at a fair and just result when one party has misled another, resulting in a loss. True or False
True
Joint life coverage is appropriate in situations where the need for insurance is dependent on when someone dies rather than who dies. True or False
True
Which of the following statements about variable universal and variable life insurance death benefits is NOT true? a. The certainty of death benefit levels is greater under variable universal life than variable life, as long as premiums are paid at necessary levels. b. The death benefit under a variable universal life policy is adjustable, within limits and subject to insurability requirements, at the discretion of the insured. c. Variable universal life offers greater certainty of death benefit levels than variable life as long as premiums are paid at the level necessary to maintain the death benefit. d. Variable Life and Variable Universal Life bear no mortality or expense risk.
Variable Life and Variable Universal Life bear no mortality or expense risk.
the 'optional modes of settlement' include all of the following except: a. leaves the proceeds with the insurer at interest b. accepts the proceeds in fixed-amount installments c. accepts the proceeds in fixed-year installments d. accepts the proceeds as a life annuity for the life of the insured.
accepts the proceeds as a life annuity for the life of the insured.
a fixed annuity might be a good choice when: a. safety of principal is paramount b. a guaranteed interest rate is wanted c. a conservative complement to other investment vehicles is desired d.all of the above
all of the above
All of the following items should be considered in relation to a joint life insurance policy EXCEPT: a. substitute-insured options b. guarenteed-purchase riders c. an 'own occupation" definition of disability d. joint premium waiver
an "own occupation" definition of disability
A single premium life insurance policy issued before June 21, 1988 is "grandfathered," that is not subject to the MEC (Modified Endowment Contract) tax rules. However, it can lose this tax status if there is: a. a death benefit increase inherent in the policy design due to crediting of interest or other earnings b. a death benefit increase needed to keep the relationship between the death benefit and cash values required to satisfy the tax code definition of life insurance c. a cost-of-living increase based on a broad based index such as the Consumer Price Index d. an exchange of the policy for another policy
an exchange of the policy for another policy
Which of the following statements is true regarding current-assumption whole life insurance? a.The amount in the "accumulation account" is based on the performance of investments selected by the policy holder b.Most current-assumption policies charge relatively high front-end loads, but have no surrender charges c. the amount of premiums remains fixed for the term of the contract. d. The insurer promised to credit at least a minimum guaranteed rate of interest.
he insurer promises to credit at least a minimum guaranteed rate of interest.
Advantages of term life insurance include all of the following, EXCEPT: a. it allows a person to acquire the greatest death benefit for the lowest premium when the policy is first issued b. death proceeds are generally exempt from income tax c. it is the most cost effective when the duration of the needed protection is over 15 years d. a high degree of flexibility can be made available by combining term insurance riders with permanent insurance
it is the most cost effective when the duration of the needed protection is over 15 years
Accelerated death benefit riders permit a. the death benefit to be paid within 30 days rather than 90 days after the date of death b. payment of all or part of the death benefit before death under certain circumstances c. premiums to be waived if the insured becomes disabled d. another insured person to be added to the policy
payment of all or part of the death benefit before death under certain circumstances
Financial services professionals should examine policy illustrations with emphasis on: a. traditional net cost b. ledger statements c. policy loans and dividends d. value comparison
policy loans and dividends
Which of the following types of life insurance requires the greatest amount of annual premium for the same amount of death benefit? a. survivor whole life insurance b. level-premium whole life insurance c. limited pay whole life insurance d. single premium whole life insurance
single premium whole life insurance
Which of the following statements is true regarding the legal aspects of a life insurance contract? a. because the insurance contract is the result of "give and take" negotiations, courts require strict compliance by both the policy owner and the insurance company. b. a statement by the applicant or the insured is considered a warranty. c. states require certain provisions in the contract to safeguard the interests of the policy owner and beneficiary. d. if the policyowner does not pay the premiums, the insurer can compel payment by filing suit against the policyowner.
states require certain provisions in the contract to safeguard the interests of the policy owner and beneficiary.
A waiver-of-premium rider provides a. the policy will pay a greater death benefit if death is caused by accidental means b. the policyowner may switch from Option A to Option B at any time c. the policyowner may waive ERISA notification requirements d. that the basic policy will continue in force if the insured becomes disabled
that the basic policy will continue in force if the insured becomes disabled
Which item is NOT a key factor to be weighed in choosing the best variable life or variable universal life policy? a. policy loadings and expenses b. the amount of the cash value guarantees c. suitability and variety of investment options d. relative performance of the insurance company's alternative investment account
the amount of the cash value guarantees
A limited-pay whole life insurance policy with a short premium paying period (e.g., 10 years) runs the risk of becoming a "MEC" (Modified Endowment Contract) if: a. the insured pays the full annual premium and dividends are applied as additional premiums b. the policy passes the seven-pay test c. the policy passes the incidental benefit test d. Table 38 rates, rather than PS 58 rates, are used to measure the employee's economic benefit
the insured pays the full annual premium and dividends are applied as additional premiums
The most important factors that should be considered in choosing an insurance company include all of the following, except: a. the quality of the company's policy illustrations b. the company's financial stability c. the company's reputation for service and fairness to policy holders d. the availability of products that meet the needs of the customer
the quality of company's policy illustration
The parties to a life insurance contract include all of the following, except a.the insurer b. the state in which the insurer does business c.the insured d.the beneficiary
the state in which the insurer does business
The easiest policy comparison method to understand and use is the a. interest-adjusted net payment cost index b. traditional net cost method c. Baldwin method d. equal outlay method
traditional net cost method
Current-assumption whole life insurance is generally a hybrid of: a. term and traditional cash-value life insurance b. traditional whole life and universal life insurance c. universal life insurance and a variable annuity d. traditional whole life insurance and an indexed annuity
traditional whole life and universal life insurance
A significant advantage of a split dollar plan using survivorship life instead of a single-life policy is that a. very low joint and survivor rates are used to measure the pure insurance cost of survivorship life while both insureds are alive, instead of the higher single-life rates b. a survivorship life policy offers a split option that permits policy ownership to be split more easily between the business and the employee c. recent tax regulations provide several safe harbor methods for determining mortality charges on split dollar policies d. the Internal Rate of Return is higher for a survivorship life policy than for a single-life policy
very low joint and survivor rates are used to measure the pure insurance cost of survivorship life while both insureds are alive, instead of the higher single-life rates