Life Practice questions

What is the maximum civil penalty for violating the Superintendent's cease and desist order?

$10,000 (Each violation of the Superintendent's cease and desist order will be subject to a civil penalty of not more than $10,000.)

Which of the following is true regarding the spendthrift clause in life insurance policies?

It can protect the policy proceeds from creditors of the beneficiary. (The spendthrift clause in a life insurance policy prevents the beneficiary's reckless spending of benefits, and protects the policy proceeds from creditors of the beneficiary or policyowner.)

The automatic premium loan provision is activated at the end of the

Grace Period (Provided there is sufficient cash value in the policy, this provision triggers a loan at the end of the grace period to keep a policy in force.)

Your client wants both protection and savings from the insurance, and is willing to pay premiums until retirement at age 65. What would be the right policy for this client?

Limited pay whole life (Premium payments will cease at her age 65, but coverage will continue to her death or age 100.)

Which of the following is an example of an unfair claims settlement practice?

Failure to promptly settle a claim when liability has been clearly established (After a claim has been adjusted and is found to be covered under the policy, the insurer must pay the claim upon receipt of a signed proof of loss.)

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 insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. This is known as survivor protection.)

All of the following could own group life insurance EXCEPT

A group needing low-cost life insurance. (Groups purchasing group life insurance must be formed for a reason other than purchasing insurance.)

Which of the following is NOT true about a group annuity?

It can be owned by individual employees. (Group annuity contracts can be obtained through an employer. Group annuities can be qualified, where an employer provides retirement benefits for employees through a tax-deferred annuity.)

An employee quits her job where she has a balance of $10,000 in her qualified plan. The balance was paid out directly to the employee in order for her to move the funds to a new account. If she decides to rollover her plan to a Traditional IRA, how much will she receive from the plan administrator and how long does she have to complete the tax-free rollover?

$8,000, 60 days (Generally, IRA rollovers must be completed within 60 days from the time the money is taken out of the first plan. If the distribution from the first plan is paid directly to the participant, 20% of the distribution must be withheld by the payor.)

All of the following are true regarding a decreasing term policy EXCEPT

The payable premium amount steadily declines throughout the duration of the contract. (Premiums remain level with a decreasing term policy; only the face amount decreases.)

Under which of the following circumstances would an insurer pay accelerated benefits?

An insured is diagnosed with cancer and needs help paying for her medical treatment. (Accelerated benefits are paid when insureds endure financial hardship due to severe illness. They may request immediate payment of some portion of the policy's death benefit, usually 50-100%, depending on the insurer. Benefits are not taxable.)

An insurance producer who by contract is bound to write insurance for only one company or group of companies is classified as a/an

Captive agent (A captive/exclusive agent has agreed, by contract, to produce insurance business only for the insurer they are contracted with.)

An insurer invests the money it receives from premiums paid by its insureds. Which of the following is TRUE regarding the interest earned on these investments?

It is used to lower premiums. (Because insurers receive premiums before they must pay out benefits, they can invest the premium money and use the interest to lower premium amounts charged to insureds.)

An insurance organization that does not issue insurance policies but provides a meeting place for underwriters to conduct business is known as a

Lloyd's association. (A Lloyd's association itself does not issue insurance policies or provide insurance protection. Lloyd's associations provide a meeting facility for the individual underwriters to conduct the business of insurance.)

An insured purchased an individual life insurance policy with a face amount of $15,000. He pays a premium each month. What type of policy is that?

Ordinary life (The distinguishing feature of Ordinary Life Insurance is that the policy is written on an individual basis with a face amount of $1,000 or more. The premiums are paid annually, semiannually, quarterly or monthly.)

If an immediate annuity is purchased with the face amount at death or with the cash value at surrender, this would be considered a

Settlement option. (A settlement option is exercised when an immediate annuity is purchased with the face amount at death or with the cash value at surrender.)

J transferred his life insurance policy to his son two years before his death. Which of the following is true?

The entire face value of the policy will be included in J's taxable estate. (If a policyowner transfers or gives away a life insurance policy within 3 years prior to his/her death, the entire face amount of the policy will be included in his or her taxable estate.)

An insured wants to transfer his personal insurance policy to a friend. Under what conditions would this be possible?

The insured will need a written consent of the insurer. (A personal insurance contract is written between an insurance company and an individual, and the company has a right to decide with whom it will and will not do business. An insured can transfer an insurance contract to another person, but he or she must first obtain the written consent of the insurer.)

Which of the following terms is used to describe a person, other than a viator, that enters into or effectuates a viatical settlement contract?

Viatical settlement provider ("Viatical settlement provider" means a person, other than a viator, that enters into or effectuates (makes effective) a viatical settlement contract.)

Z falls from the roof of his house while fixing it and damages his spinal column enough to render him disabled for a year. His insurance policy carries a Disability Income Benefit rider. Which of the following benefits will Z receive?

Monthly premium waiver and monthly income (The Disability Income Benefit rider waives the policy premiums, just like the Waiver of Premium rider. Unlike the Waiver of Premium rider, it also allows the insured to receive a weekly or monthly income during the disability period.)

An insured purchases a policy in 2008 and died in 2013. The insurance company discovers at that time that the insured concealed information during the application process. What can they do?

Pay the death benefit (The incontestability clause prevents an insurer from denying a claim due to statements in an application after the policy has been in force for 2 years, even on the basis of a material misstatement of facts or concealment of a material fact.)

Which of the following are generally NOT considered when underwriting group insurance?

The insureds' medical history (Group life insurance is written on a group, not individual basis. Each individual completes an application that identifies the participant and beneficiary. Then, the group is judged based on its nature and past claim experience. Generally, medical questions are not necessary.)

A deferred annuity is surrendered prior to annuitization. Which of the following best describes the nonforfeiture value of the annuity?

The surrender value should be equal to 100% of the premium paid, minus any prior withdrawals and surrender charges. (If a deferred annuity is surrendered prior to annuitization, the surrender value of the annuity is guaranteed (e.g. 100% of the premium paid, less any prior withdrawals and related surrender charges) due to the nonforfeiture provision.)

Which of the following statements is true concerning the alteration of optional policy provisions?

An insurer may change the wording of optional provisions, as long as the change does not adversely affect the policyholder. (Optional policy provisions can be changed by an insurer, as long as the changes do not adversely affect the policyholder.)

In an Adjustable Life policy all of the following can be changed by the policy owner EXCEPT

The type of investment. (Typically, the owner of an adjustable life policy has the following privileges: increasing or decreasing the premium, changing the premium-paying period, increasing or decreasing the face amount of coverage, or changing the period of protection.)

The Waiver of Cost of Insurance rider is found in what type of insurance?

Universal Life (The Waiver of Cost of Insurance rider is found in Universal Life policies. If the insured becomes disabled, the rider allows the cost of insurance to be waived, with the exception of premium costs required to accumulate cash value.)

Naming a trust as the beneficiary of a life insurance policy can accomplish all of the following for the policyowner EXCEPT

Allow the trustee to transfer the assets of the trust to their personal account. (A trustee is paid a fee to administer the trust; however, he or she cannot access the funds personally.)

An insurer neglects to pay a legitimate claim that is covered under the terms of the policy. Which of the following insurance principles has the insurer violated?

Consideration (The binding force in any contract is consideration. Consideration on the part of the insured is the payment of premiums and the health representations made in the application. Consideration on the part of the insurer is the promise to pay in the event of loss.)

Who assumes control over an insurance company's funds and management if they become insolvent?

Department of Insurance (In the event of an insurance company insolvency, the Department of Insurance will take over the management of the insurer in an effort to rehabilitate the company. If rehabilitation is not possible, they will liquidate the assets of the company.)

On its advertisement, a company claims that it has funds in its possession that are, in fact, not available for the payment of losses or claims. The company is guilty of

Misrepresentation. (Issuing or circulating any sales material that is false or misleading would be considered misrepresentation and is illegal.)

When a life insurance policy is cancelled and the insured has selected the extended term nonforfeiture option, the cash value will be used to purchase term insurance that has a face amount

Equal to the original policy for as long a period of time that the cash values will purchase. (With this option, the cash value is used as a single premium to purchase the SAME face amount as the original policy for as long a period of time as the cash will buy at the insured's current age.)

What is the tax consequence of amounts received from a Traditional IRA after the money was left in the tax-deferred account by the beneficiary?

Income tax on distributions and no penalty. (If the beneficiary chooses to leave the money in the tax-deferred account until the calendar year in which the owner would have attained age 70½, the distributions would be subject to income taxation at the rate at the time of withdrawal.)

Which of the following employees insured under a group life plan would be allowed to convert to individual insurance of the same coverage once the plan is terminated?

Those who have been insured under the plan for at least 5 years (If the master contract is terminated, every individual who has been on the plan for at least 5 years will be allowed to convert to individual insurance of the same coverage.)

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A policyowner cancels his life policy but instructs the insurance company to transfer the cash value of his policy to an annuity. This nontaxable transaction is called

1035 exchange (In accordance with Section 1035 of the Internal Revenue Code, certain exchanges of life insurance policies and annuities may occur as nontaxable exchanges.)

All of the following information about a customer must be used in determining annuity suitability EXCEPT

Beneficiary's 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.)

Which of the following is true about the mandatory free look in a Life Insurance policy?

It commences when the policy is delivered. (The free look provision is a mandatory provision that allows the insured to examine a policy, and if dissatisfied for any reason, return the policy for a full refund of any premiums paid.)

All of the following statements are true regarding installments for a fixed period annuity settlement option EXCEPT

It is a life contingency option. (Under the installments for a fixed period annuity settlement option, the annuitant selects the time period for the benefits; the insurer determines how much each payment will be. This option pays for a specific amount of time only, and there are no life contingencies.)

According to the entire contract provision, what document must be made part of the insurance policy?

Copy of the original application (An insurance contract must contain a copy of the original application.)

A key person insurance policy can pay for which of the following?

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

During the accumulation period in a nonqualified annuity, what are the tax consequences of a withdrawal?

Taxable interest will be withdrawn first and the 10% penalty will be imposed if under age 59 ½. (When money is withdrawn from the annuity during the accumulation phase, the amounts are taxed on a last in first out basis (LIFO). Therefore, all withdrawals will be taxable until the owner's cost basis is reached.)

Which of the following is NOT true regarding the annuitant?

The annuitant cannot be the same person as the annuity owner. (While they don't have to be, the annuitant and annuity owner are often the same person. The annuitant is the person who receives benefits or payments from the annuity and for whom the annuity is written. Since the annuitant's life expectancy is taken into consideration, the annuitant must be a natural person.)

Which of the following is true regarding a modified guaranteed annuity?

The owner is guaranteed a fixed interest rate for a specific period of time. (Under a modified guaranteed (market value adjusted) annuity, the insurer guarantees a competitive interest rate for a specific period (the longer the period, the better the guaranteed rate). At the end of the period, the owner has the option of taking the accumulated value or reinvesting the values at a new interest rate.)

All of the following statements are true regarding installments for a fixed amount EXCEPT

The payments will stop when the annuitant dies. (Installments for a fixed amount option has no life contingencies. A specific amount of benefits will be paid until funds are exhausted whether or not the annuitant is living.)

If a beneficiary wants a guarantee that benefits paid from principal and interest would be paid for a period of 10 years before being exhausted, what settlement option should the beneficiary select?

Fixed Period (Under the fixed-period installments option (also called period certain), a specified period of years is selected, and equal installments are paid to the recipient. The payments will continue for the specified period even if the recipient dies before the end of that period.)

An insured and his wife are both involved in a head-on collision. The husband dies instantly, and the wife dies 15 days later. The company pays the death benefit to the estate of the insured. This indicates that the life insurance policy had what provision?

Common Disaster (Under the Uniform Simultaneous Death Law, Common Disaster provision, the law will assume that the primary beneficiary dies first in a common disaster as long as the beneficiary dies within this specified period of time following the death of the insured (usually 30 days). This provides that the proceeds will be paid to either the contingent beneficiary or the insured's estate, if no contingent beneficiary is designated.)

An insured owns a life insurance policy. To be able to pay some of her medical bills, she withdraws a portion of the policy's cash value. There is a limit for a withdrawal and the insurer charges a fee. What type of policy does the insured most likely have?

Universal Life (Universal Life policies allow for policyholders to withdraw a limited portion of the policy's cash value. Each withdrawal, however, is usually charged, and the amount and frequency of withdrawals are usually limited.)

Which type of life insurance policy allows the policyowner to pay more or less than the planned premium?

Universal life (The policyowner has the flexibility to increase the amount of premium going into the policy and to later decrease it again. In fact, the policyowner may even skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to compensate for the nonpayment of premium.)

Which of the following statements about the reinstatement provision is true?

It requires the policyowner to pay all overdue premiums with interest before the policy is reinstated. (Upon policy reinstatement, the policyowner will be required to pay all back premiums plus interest, and may be required to repay any outstanding loans and interest.)

All of the following would be considered an insurance transaction EXCEPT

Obtaining an insurance license. (An insurance transaction means the carrying on of business in insurance, which could include the solicitation of a policy, advising, negotiation, or inducement related to coverage or claims. Obtaining an insurance license is a prerequisite to transacting insurance.)

If an annuitant dies before annuitization occurs, what will the beneficiary receive?

Either the amount paid into the plan or the cash value of the plan, whichever is the greater amount (If an annuitant dies before annuitization, the beneficiary will receive either the amount paid into the plan or the cash value of the plan, whichever is greater.)

For an individual who is NOT covered by an employer-sponsored plan, IRA contributions are

Tax deductible. (Individuals who are not covered by an employer-sponsored plan may deduct the full amount of their IRA contributions regardless of their income level.)

Which of the following is a characteristic of a Reciprocal Insurance Exchange?

The chief administrator of the insurer is called an "attorney-in-fact". (A "reciprocal" is an unincorporated aggregation of individuals, called subscribers, who exchange insurance risks. If the premiums charged for coverage are not sufficient to pay the losses of the group, subscribers may be assessed an additional premium. A reciprocal is administered by an attorney-in-fact who is empowered to bind each subscriber to assume a share of the losses of the group.)

What is the advantage of reinstating a policy instead of applying for a new one?

The original age is used for premium determination (The reinstatement provision allows the policyowner an opportunity to put a lapsed policy back in force, subject to proving continued insurability. If the policyowner elects to reinstate the policy, as opposed to purchasing a new policy, the reinstated policy is restored to its original status.)

Which nonforfeiture option provides coverage for the longest period of time?

Reduced paid-up (The reduced paid-up nonforfeiture option would provide protection until the insured reaches 100, but the face amount is reduced to what the cash would buy.)

An insurance company forwards fixed annuity premiums to their general account, where the money is invested. The guaranteed minimum interest is set at 3%. During an economic downswing, the investments only drew 2.5%. What interest rate will the insurer pay to its policyholders?

3% (Insurance companies promise guaranteed minimums on the fixed annuities (3% in this scenario). This means that if the investments draw less than 3%, the company will have to pay 3% anyway. If the investments earn over 3%, the company will pay that excess.)

What is the penalty for IRA distributions that are below the required minimum for the year?

50% (If there are no distributions at the required age, or if the distributions are not large enough, the penalty is 50% of the shortfall from the required annual amount.)

Which of the following would be deducted from the death benefit paid to a beneficiary, if a partial accelerated death benefit had been paid while the insured was still alive?

Amount paid with the accelerated benefit, plus the earnings lost by the insurance company in interest income from the accelerated benefit (If an insured withdraws a portion of the death benefit by the use of this rider, the benefit payable at death will be reduced by that amount, plus the amount of earnings lost by the insurance company in interest income.)

When an individual is covered under two health insurance policies that have duplicate benefits which could make a claim for benefits because of an injury or illness profitable, it is called

Overinsurance (Overinsurance is a term used to describe the situation that is created when an individual purchases duplicating coverage with the intent to collect from each policy for a single loss.)

Under what circumstances may a life insurance agent deliver a policy that is dated up to 3 months before the application was taken?

To avoid an increase in premium rate for the insured (Agents may backdate policies up to 3 months in order to obtain a better premium rate for the insured.)

Who can make a fully deductible contribution to a traditional IRA?

An individual not covered by an employer-sponsored plan who has earned income (Individuals who are not covered by an employer-sponsored plan may deduct the full amount of their IRA contributions regardless of their income level.)

In a group life insurance policy, the employer may select all of the following EXCEPT

The beneficiary. (Employees must be allowed to select a beneficiary. Review ContentNext Question)

An insured had paid only part of her total number of IRA premiums before she died. What effect will this have on the insured's estate?

Only the premiums paid will be included in the estate. (If a person dies before paying all of IRA premiums, only the amount paid would be included in the estate; the remaining premium amounts would not be deducted.)

Which of the following is NOT true regarding the accumulation period of an annuity?

It would not occur in a deferred annuity. (The "accumulation period" is the period of time over which the annuitant makes payments (premiums) into an annuity. This is the period of time during which the payments earn interest and grow tax deferred (which would be the case in a deferred annuity).)

What describes the specific information about a policy?

Policy summary (A policy summary describes the features and elements of the specific policy for which a person is applying.)

Which of the following authorities is responsible for assessing the financial ability of insurers?

Superintendent (The Ohio Insurance Department is headed by the Superintendent of Insurance, who is empowered to make and enforce rules and regulations that implement the insurance laws of Ohio. Among these responsibilities is making sure that insurers are financially stable.)

If an insured continually uses the automatic premium loan option to pay the policy premium,

The policy will terminate when the cash value is reduced to nothing. (This option, usually elected at the time of application, provides that in case of a possible policy lapse, the premium will be automatically paid form the contract's guaranteed cash value. However, once the cash value is exhausted, the policy will terminate.)

What type of insurance would be used for a Return of Premium rider?

Increasing Term (The Return of Premium Rider is achieved by using increasing term insurance. When added to a whole life policy it provides that at death prior to a given age, not only is the original face amount payable, but also all premiums previously paid are payable to the beneficiary.)

All other factors being equal, the least expensive first-year premium payment is found in

Annually Renewable Term. (Annually renewable term is the purest form of term insurance. The death benefit remains level, but the premium increases each year with the insured's attained age. In decreasing policies, while the face amount decreases, the premium remains constant throughout the life of the contracts. In level term and increasing term policies, the premium also remains level for the term of the policy. Therefore, in the other types of level policies, the first-year premium would not be different from any other year.)

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 able to buy the interest of the deceased partner. What type of insurance policy may be used to fund this agreement?

Any form of life insurance (Any form of Life insurance may be used to fund a buy-sell agreement.)

Which authority is NOT stated in an agent's contract but is required for the agent to conduct business?

Implied (Implied authority is not written in the agent's contract but is required in order for the agent to conduct business. Implied authority exists because not every single detail of an agent's authority can be written in a contract.)

Which type of a hospital policy pays a fixed amount each day that the insured is in a hospital?

Indemnity (A Hospital Indemnity policy pays a fixed amount each day the insured is hospitalized, unrelated to medical expenses.)

All other factors being equal, what would the premium be like in a survivorship life policy as compared to the premium in a joint life policy?

Lower (Survivorship Life is much the same as joint life in that it insures two or more lives for a premium that is based on a joint age. The major difference is that survivorship life pays on the last death rather than upon the first death. Since the death benefit is not paid until the last death, the joint life expectancy in a sense is extended, resulting in a lower premium than that which is typically charged for joint life.)

Which of the following best describes gross annual premium?

Net premium plus expenses (Gross annual premium is net premium plus expenses (loading).)

An insured has a continuous premium whole life policy. She would like to use the policy dividends to pay off her policy sooner than would have been possible otherwise. What dividend option could she use?

Paid-up option (With the paid-up option, the insurer can accumulate dividends at interest and then use them, in addition to interest and the policy's cash value, to pay the policy earlier than planned. This is different from paid-up additions, in which the dividends are used to buy additional policies that increase the face amount of the original policy.)

Rose bought three policies from the same insurer. Her benefits have exceeded the maximum allowed by the insurer. Which of the following will happen?

Pro rata benefit reduction (When an insured carries multiple policies from the same insurer and the benefits exceed the maximum allowed amount, the Other Insurance in this Insurer Provision provides for a pro rata benefit reduction and return of premium in order to prevent overinsurance.)

A provision found in insurance policies which prevents the insured from collecting twice for the same loss is called

Subrogation. (When the insureds accept loss payment from the insurance company, they must transfer their rights to recovery to the insurer. This prevents the insured from collecting twice for the same loss, and allows the insurer to indemnify the insurance company.)

Which of the following is NOT a goal of risk retention?

To minimize the insured's level of liability in the event of loss (Retention usually results from three basic desires of the insured: to reduce expenses and improve cash flow, to increase control of claim reserving and claims settlements, and to fund losses that cannot be insured.)

An IRA uses immediate annuities to pay out benefits; the IRA owner is nearly 75 years old when he decides to collect distributions. What kind of penalty would the IRA owner pay?

50% tax on the amount not distributed as required (When immediate annuities are used to pay IRA benefits, distributions must begin no later than age 70½ in order for the annuitant to avoid penalties. The penalty is 50% of the shortfall from the required annual amount.)

The term "illustration" in a life insurance policy refers to

A presentation of nonguaranteed elements of a policy. (The term "illustration" means a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years.)

Which of the following is the basic source of information used by the company in the risk selection process?

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

Circulating deceptive sales material to the public is what type of Unfair Trade Practice?

False advertising (This is considered to be false, deceptive or misleading advertising.)

What is the advantage of having a qualified annuity?

Favorable tax treatment (Those annuities meeting the IRS guidelines receive favorable tax treatment for funding qualified retirement plans.)