Life Insurance Ownership and Beneficiary Designations

In cases where a life insurance owner is not the insured, the named beneficiary must have insurable interest in the insured. a. True b. False

a. True

The significance of a policy being classified as a MEC is with the tax treatment of the contract's values: a. while the insured is living b. upon the insured's death c. both a and b d. neither a nor b

a. while the insured is living

For a life insurance policy to be valid and for the policy to pay its death benefit, insurable interest must exist between the policyowner and the insured when the policy is taken out and when the insured dies. a. True b. False

b. False

Under what circumstance might insurable interest have to exist between an insured and the beneficiary? a. when the owner of the policy is the insured b. when the owner of the policy is not the insured c. in all cases d. in no case

b. when the owner of the policy is not the insured

In terms of values and policies sold, the life settlement market is far larger than the viatical settlement market. a. True b. False

a. True

Which of the following would likely not be able to purchase and own a life insurance policy? a. Amy, age 41, who has no dependents b. Lyle, age 13, whose wealthy parents are deceased and who is supported by his elderly grandparents c. AML, Inc., a close corporation that has five owner-shareholders d. a trust created by 55-year old Nelson for the benefit of his two adult children

b. Lyle, age 13, whose wealthy parents are deceased and who is supported by his elderly grandparents

Andy, the owner-insured under a $100,000 life insurance policy, just died. The sole beneficiary of the policy was Andy's wife, Marie, who passed away a number of years ago; however, Andy never changed the beneficiary designation. How will the proceeds likely be paid? a. to Andy's next of kin b. to Andy's estate c. to Marie's next of kin d. to the insurance company

b. to Andy's estate

Life settlements are the sale of existing policies on insureds who are at least age __ or older. a. 45 b. 55 c. 65 d. 70½

c. 65

Which of the following arrangements is not considered to be a legitimate life insurance sales transaction? a. a viatical arrangement b. a life settlement arrangement c. a STOLI arrangement d. all of the above

c. a STOLI arrangement

What term refers to proceeds that are payable to a beneficiary's living descendants if the beneficiary predeceases the insured? a. per capita b. per head c. per stirpes d. per testate

c. per stirpes

What does the life insurance secondary market involve? a. the issue of life insurance policies to terminally ill insureds b. the purchase of life insurance policies by named beneficiaries c. the purchase of life insurance policies by third-party investors d. the exchange of currently owned policies for new policies

c. the purchase of life insurance policies by third-party investors

Lyle is the insured under a $500,000 life insurance policy. For which of the following reasons would the value of that policy be included in Lyle's estate when he died? I. Lyle was also the owner of the policy. II. Lyle gifted the policy to his son one year before he died. III. The proceeds of the policy were payable to Lyle's estate. a. I only b. I and II only c. III only d. I, II, and III

d. I, II, and III

All of the following are requirements for a valid life insurance contract EXCEPT: a. The contract must be for a legal purpose. b. The owner must have legal capacity to enter into the contract. c. The owner must have insurable interest in the person to be insured. d. The beneficiary must have the legal capacity to enter into the contract.

d. The beneficiary must have the legal capacity to enter into the contract.

Sam owns a $500,000 life insurance policy into which he has paid $30,000 in premiums. The policy's cash value is equal to $40,000. The policy is not a MEC. What is the maximum amount Sam could take as a cash distribution from the policy today without incurring any taxes? a. $10,000 b. $30,000 c. $40,000 d. $500,000

b. $30,000

Once issued, a valid life insurance contract cannot be canceled by the insurance company for any reason, and the owner must continue to pay premiums for the duration of the premium-paying period. a. True b. False

b. False

To contest a policy during its contestable period because of misrepresentation in the application, the insurer must prove that the misrepresentation was malicious, intentional, or willful. a. True b. False

b. False

How long does a life insurance policyowner have to rescind a settlement contract after the contract is executed and before he or she receives any funds? a. 10 days b. 30 days c. 60 days d. 90 days

c. 60 days

Who stands first in line to receive the proceeds of a life insurance policy upon the insured's death? a. the spouse b. the children c. the tertiary beneficiary d. the primary beneficiary

d. the primary beneficiary

Under a collateral assignment of a life insurance policy, the assignee is given all of the following rights EXCEPT: a. the right to surrender the policy for its surrender value b. the right to receive the policy's death benefit c. the right to receive dividends d. the right to designate and change the policy beneficiary

d. the right to designate and change the policy beneficiary

Insurance companies are responsible for determining the validity of a beneficiary change and challenging such changes if the owner's mental competency is in question. a. True b. False

b. False

What party controls the prematurity rights under a life insurance policy? a. the beneficiary b. the owner c. the insured d. the insurer

b. the owner

What is the earliest age at which most states allow children to accept and be paid the proceeds from a life insurance policy? a. 12 b. 15 c. 18 d. 21

c. 18

What party is responsible for verifying whether insurable interest exists when a life insurance policy is applied for? a. the applicant b. the beneficiary c. the insurer d. the insured

c. the insurer

As a general rule, what is the income tax treatment of life insurance death benefits paid in a lump sum to a named beneficiary? a. They are taxable to the extent they exceed premiums paid. b. They are tax free to the extent they exceed premiums paid. c. They are fully taxable. d. They are fully tax free.

d. They are fully tax free.

In which of the following situations would the payment of a life insurance policy's death benefit be taxable to the beneficiary? a. Geraldine is the irrevocable beneficiary of her father's $1 million policy. b. Marcus is the beneficiary of his father's $350,000 policy, which became a MEC in the fourth year following policy issue. c. Shirley is the owner and beneficiary of a policy on her husband's life, which was issued to her before the couple married. d. Tom purchased his friend's life insurance policy for $50,000, named himself as beneficiary, and collected the policy's $250,000 death benefit one year later when his friend died.

d. Tom purchased his friend's life insurance policy for $50,000, named himself as beneficiary, and collected the policy's $250,000 death benefit one year later when his friend died.

During the insured's life, the rights in a life insurance policy are vested in: a. the owner b. the insured c. the beneficiary d. the insurer

a. the owner