Module 3 Life Insurance and Annuities
Geraldo purchased a participating whole life insurance policy 15 years ago and now wishes to receive the policy's cash surrender value (CSV). He gives you the following information to assess the potential taxation of the surrender: CSV: $80,000 Dividends received: $12,500 Premiums paid: $60,000 What is the amount of cash value that is taxable to Geraldo and what is the character of this income? A) $32,500 ordinary income B) $40,000 ordinary income C) $0 D) $32,500 capital gain
A) $32,500 ordinary income Geraldo paid $60,000 in premiums. However, life insurance dividends are considered a return of premium, so his adjusted basis in the contract is $47,500. The current cash surrender value is $80,000. $80,000 - $47,500 = $32,500; therefore, his gain in the contract is $32,500. However, due to IRS rules, that amount will be taxed as ordinary income, not capital gain. $7,500 of his premiums paid are attributable to the cost of insurance.
Which of the following life insurance policy riders pays an additional death benefit if the insured dies accidentally? A) Accidental death benefit rider B) Disability waiver of premium rider C) Accelerated death benefit rider D) Guaranteed insurability option rider
A) Accidental death benefit rider
When gathering client data to determine life insurance needs, which of the following are relevant? A) All of these B) Risk tolerance C) Survivors' needs D) Client goals and objectives
A) All of these
Frank and Julie recently purchased an annuity to help provide them with retirement income. They will pay the premiums with after-tax dollars, and they will begin receiving income payments from the annuity at age 65. After analyzing these facts, which type of annuity did Frank and Julie purchase? A) Deferred nonqualified annuity B) Immediate qualified annuity C) Deferred qualified annuity D) Immediate nonqualified annuity
A) Deferred nonqualified annuity
Which of the following statements regarding the accelerated death benefit rider is CORRECT? A source of funds for a terminally ill individual is to access a percentage of the death benefit of an existing policy. The advance received is taxable income. The main advantage of the accelerated death benefit rider is that terminally ill insureds may obtain advances of death benefits and use them for a variety of personal needs. A) I and III B) III only C) II and III D) I only
A) I and III
Charles was the beneficiary of his mother's life insurance policy. The face amount of the policy was $500,000, and there was an outstanding policy loan of $25,000 when Charles's mother died earlier this year. The settlement option for the policy was interest only, payable annually. This year, Charles receives his first payment of $14,250 from the insurance company. Which of the following statements regarding this arrangement is CORRECT? The death benefit payable under the policy was $475,000. The payment of $14,250 consists partly of interest and partly of principal. Charles must include $475,000 in this year's gross income. Charles must include $14,250 in this year's gross income. A) I and IV B) I only C) II and IV D) II and III
A) I and IV
Dan owns a life insurance policy on his own life. The beneficiary is his daughter, Rose. Dan unexpectedly dies, and Rose receives the death benefit in a lump-sum payment. Which of the following statements regarding the tax treatment of the death benefit is CORRECT? The life insurance death benefit will be included in Dan's gross estate for estate tax purposes. The life insurance death benefit will be included in Rose's gross income. A) I only B) II only C) Both I and II D) Neither I nor II
A) I only
Which of the following statements regarding dividend options is CORRECT? Cash received under the cash dividend option is not taxable. Dividends received under the dividend option are taxable. A) I only B) Neither I nor II C) Both I and II D) II only
A) I only
Which of the following characteristics of life insurance contracts create favorable tax treatment? Death benefits paid to a beneficiary are not usually taxable as income. Income taxes on investment gains are tax-deferred. The earnings on the cash value are not taxed during the accumulation period. A) I, II, and III B) I and II C) I and III D) II and III
A) I, II, and III
Which of the following is NOT a characteristic of term life insurance? A) Interest is accumulated on the cash value. B) Coverage is usually affordable (especially at younger ages). C) Most term life insurance policies permit the insured to renew the policy each year without having to provide evidence of insurability. D) In a decreasing term policy, the amount of the death benefit decreases while the premium remains level.
A) Interest is accumulated on the cash value.
Nancy and Joe are married and in need of permanent life insurance. They anticipate their incomes substantially increasing in the next three to eight years, but right now, they are on a tight budget. Which of the following is the best form of permanent life insurance for the couple? A) Modified premium whole life B) Current assumption whole life C) Limited-pay whole life D) Decreasing term insurance
A) Modified premium whole life
A client is in the process of purchasing a universal life insurance policy. The client desires an increasing death benefit. Which of the following universal life death benefit options will meet the client's needs? A) Option B B) Option A C) Option C D) Option D
A) Option B
Which of the following statements about private placement life insurance (PPLI) is true? A) PPLI policies are highly customizable and allow for a great deal of flexibility with how the cash value account is invested. B) PPLI policies allow for a great deal of flexibility, and that is why they are typically structured as whole life policies. C) The IRS more closely scrutinizes "off the shelf" life insurance policies than PPLI policies. D) The flexibility with how the cash value account is invested makes these policies ideal for individuals with modest to moderate incomes.
A) PPLI policies are highly customizable and allow for a great deal of flexibility with how the cash value account is invested.
55 received lump sum settlement of $100,000. She wants to invest the $100,000 in an annuity that will begin making monthly payments to her when she retires at age 65. She does not expect to make any additional premium payments to the annuity. high risk tolerance and wants to be able to invest her premium in subaccounts of her own choosing. not interested in receiving a guaranteed minimum return on her investment. Which annuities best meets needs? A) Single premium deferred variable annuity
A) Single premium deferred variable annuity
Which of the following is an appropriate economic assumption that should be considered when evaluating a client's life insurance needs? A) The inflation rate B) The client's profile C) The client's goals D) The client's risk tolerance
A) The inflation rate
purchased term life insurance death benefit of $200,000 two-year suicide clause. He committed suicide less than six months after he purchased the policy. required payment from the insurance company to the beneficiary? A) The insurance company would return all premiums without interest to the beneficiary. B) The insurance company would pay half of the death benefit. C) The insurance company would not pay anything. D) The insurance company would pay the full $200,000 death benefit.
A) The insurance company would return all premiums without interest to the beneficiary.
Which of the following correctly identifies the primary purpose of a buy-sell agreement funded with life insurance? A) To allow the business to purchase a deceased owner's share of the business from the estate B) To include policy cash values as a corporate asset C) To guarantee marketability of closely held stock D) To pay the deceased's estate tax liability
A) To allow the business to purchase a deceased owner's share of the business from the estate
couple both age 28, are considering the purchase of an annuity to help them save monthly for their retirement at age 65. They want an annuity that will allow them to participate in the equities market, and because of their long-term investment horizon, they are not particularly concerned about safety of principal. Which of the following annuity products best meets their needs? A) Variable deferred annuity B) Fixed immediate annuity C) Fixed deferred annuity D) Single premium deferred annuity
A) Variable deferred annuity
Whole life policy illustrations exhibit all of the following except A) anticipated earnings in variable subaccounts. B) guaranteed cash values. C) guaranteed death benefits. D) guaranteed premiums.
A) anticipated earnings in variable subaccounts.
All of the following are true for dividends left to accumulate at interest except A) they are taxable as earned. B) they can be used to purchase paid-up additional insurance. C) they may be allowed to accumulate on a tax-deferred basis until they exceed premiums paid. D) they can increase the death benefit.
A) they are taxable as earned.
The human life value method used to calculate life insurance needs A) uses an individual's income-earning ability as the basis for determining the amount of necessary life insurance. B) uses a capital retention model. C) examines all recurring expenses and any unusual expenditures that may result from a person's death. D) applies a discount rate to a future sum (either riskless or expected investment rate of return) to determine the future value of a life.
A) uses an individual's income-earning ability as the basis for determining the amount of necessary life insurance.
Which of the following statements match the appropriate use of a settlement option to meet the client's objective? Ralph's estate attorney has talked with him about the possibility of disclaiming assets. He has no need of funds and is waiting to get clarity from the attorney. He picks interest only. Mario is the beneficiary of a substantial policy. He is a very conservative investor. He would like to receive some income for his life, but he would also like it to continue to support his disabled duaghter. He is uninsurable and has not been able to purchase coverage to provide for her lifetime. He is concerned that someone may take the resources from her after his death. He chooses a life income option of joint and survivor income with his daughter. A) Both
A) Both
Which of the following insurance policy riders prevents the policy from lapsing as a result of nonpayment of premiums during the insured's disability? A) Accelerated death benefit rider B) Disability waiver of premium C) Guaranteed insurability option D) Accidental death benefit rider
B) Disability waiver of premium
Which of these regarding Registered Indexed-Linked Annuities (RILAs) is true? A) From least-to-most conservative products, the ordering is RILA-floor, RILA-buffer, and then EIAs. B) From least-to-most conservative products, the ordering is RILA-buffer, RILA-floor, and then EIAs. C) From most-to-least conservative products, the ordering is EIAs, RILA-buffer, and then RILA-floor. D) From most-to-least conservative products, the ordering is RILA-floor, EIAs, and then RILA-buffer.
B) From least-to-most conservative products, the ordering is RILA-buffer, RILA-floor, and then EIAs.
Which of the following questions regarding policy replacements is CORRECT? Replacing a cash value policy with another cash value policy usually is not advantageous. The new policy will have the same contestable and suicide clause periods as the existing policy. A) Both I and II B) I only C) II only D) Neither I nor II
B) I only
The life insurance needs analysis method considers any recurring expenses and any unusual expenditures that may result from a person's death. Which of the following are variables that are considered when conducting this analysis? Final expenses Readjustment and dependency period funds Mortgage fund Education fund(s) A) IIII and IV B) I, II, III, and IV C) I, II, and III D) I and II
B) I, II, III, and IV
When evaluating life insurance needs, which of the following factors should be considered by a married person with children? The length of time until Social Security or other benefits will be available to the surviving spouse The duration of financial support for the surviving spouse Whether the surviving spouse and children have the financial resources needed to avoid financial hardship Whether adequate financial resources are available to the children to pay for higher education costs A) III and IV B) I, II, III, and IV C) I and II D) I and III
B) I, II, III, and IV
Insurance policy the policy is not a modified endowment contract (MEC). is $10,000. This year, he pays premiums of $1,000 on the policy, receives dividends of $300 in cash, and takes a withdrawal of $5,000. In addition, the cash value of the policy increases by $2,000. income tax consequences CORRECT. The $2,000 increase in cash value is excluded from gross income. B) II only
B) II only
Which of the following is NOT a whole life insurance policy dividend option? A) Cash option B) Life income option C) Fifth dividend option D) Paid-up additions
B) Life income option
Barb is the beneficiary of a $1 million life insurance policy. The insured recently died, and Barb is considering different settlement options. If her primary objective is to avoid paying any income taxes on the amounts received under the settlement option, which of the following settlement options will best meet her needs? A) Fixed-amount installments B) Lump sum C) Fixed-period installments D) Single life annuity
B) Lump sum
Which feature of most life insurance policies can be used to customize the policy to meet the client's needs? A) Policy loans B) Riders C) Dividends D) Beneficiaries
B) Riders
Which of the following statements regarding variable annuity living benefit riders is CORRECT? A) The guaranteed minimum withdrawal benefit (GMWB) is the most popular rider currently with almost 70% of annuity buyers selecting it. B) The guaranteed lifetime withdrawal benefit (GLWB) is the most popular rider currently with almost 70% of annuity buyers selecting it. C) None of the answers are correct. D) The guaranteed minimum accumulation benefit (GMAB) guarantees that there will be a minimum account value at the end of a specified guaranteed date.
B) The guaranteed lifetime withdrawal benefit (GLWB) is the most popular rider currently with almost 70% of annuity buyers selecting it.
All of the following factors are key considerations in determining a client's profile for life insurance purposes except A) income. B) education level. C) health. D) age.
B) education level.
All of the following statements concerning the methods of providing life insurance protection are correct except B) term life insurance is a good choice for people who need permanent life insurance protection. D) because death rates rise at an increasing rate as the insured ages, the net premium for term life insurance also rises at an increasing rate.
B) term life insurance is a good choice for people who need permanent life insurance protection.
Carolyn was the beneficiary of her spouse's life insurance policy with a face amount of $1,000,000. She elected the single life annuity settlement option. The settlement option will pay her $4,500 per month, and her life expectancy is 30 years. How much of each monthly payment is taxable? A) $2,778 B) $0 C) $1,722 D) $3,034
C) $1,722 The answer is $1,722 (rounded). The total amount Carolyn will receive from the settlement option is $1,620,000 ($4,500 × 360). Her tax basis is $1,000,000, so her exclusion ratio is 0.6173 ($1,000,000 ÷ $1,620,000). Therefore, $2,777.85 of each payment is excluded from gross income ($4,500 × 0.6173), and the remainder ($1,722.15) is taxable. In addition, the taxable income may be subject to the 3.8% Medicare contribution tax.
In the event of his death, Jim wants to provide funding for his daughter Lauren, 4, to attend four years of college, starting at age 18. The current annual cost of tuition is $25,000. Assume inflation of 6.5% and after-tax earnings of 6%. If Jim wants to have enough life insurance to assure adequate funds for Lauren when she begins college (should he die today), approximately how much insurance should he purchase for this need alone? (Round your answer to the nearest dollar.) A) $103,417 B) $100,710 C) $107,568 D) $108,076
C) $107,568 The answer is $107,568. The solution to this requires using the three-step process used in education funding. Step 1: 14, N; 6.5 I/YR; 25,000, +/-, PV, and solve for FV = 60,371.85 Step 2: Set for BEG mode; 4, N; 1.06 / 1.065 = .9953 - 1 = -.004695 × 100 = -0.4695, I/YR; 0, FV (to clear it out), 60,371.85, +/-, PMT, and solve for PV = 243,201.44 Step 3: 14, N; 6, I/YR; 243,201.44, FV, 0, PMT (to clear it out), and solve for PV = 107,568
Michelle purchased a $100,000 life insurance policy on her life. To date, she has paid $50,000 in total premiums and received $10,000 in dividends. The policy currently has a net cash value of $15,000 and is subject to a $30,000 outstanding loan. If Michelle decides to surrender the policy, she will realize a gain of A) $10,000. B) $15,000. C) $5,000. D) $0.
C) $5,000. The answer is $5,000. Michelle's gain upon the surrender of the policy would be $5,000. She has a basis in the policy of $10,000, calculated as follows: total premiums paid ($50,000) minus outstanding loan ($30,000) minus dividends received ($10,000) equals $10,000. Dividends received represent a return of premiums and, therefore, reduce the policyowner's basis in the policy. Michelle has a gain upon surrender of $5,000, calculated as follows: net cash value ($15,000) minus basis in policy ($10,000) equals gain upon surrender ($5,000).
Which of the following definitions describes an accelerated death benefit rider found in insurance policies? A) A benefit under a long-term care insurance policy that continues to pay a long-term care facility for a limited time if a patient must temporarily leave because of hospitalization B) A provision for the replacement of lost earnings due to less-than-total disability C) A benefit rider that pays a portion of the death benefit to an individual deemed terminally ill, usually with a life expectancy of 24 months or less D) A benefit under long-term care insurance that provides reimbursement for occasional full-time care at home for a person who is receiving home health care
C) A benefit rider that pays a portion of the death benefit to an individual deemed terminally ill, usually with a life expectancy of 24 months or less
Which of the following statements concerning federal income tax and annuities is CORRECT? The premium invested in the annuity accumulates on a tax-deferred basis. Generally, amounts received as withdrawals during an annuity's accumulation period are taxable, to the extent the withdrawal represents gains earned by the contract. A) I only B) Neither I nor II C) Both I and II D) II only
C) Both I and II
Which of the following statements regarding the contestable clause of a life insurance policy is CORRECT? Generally, the clause prevents the insurance company from contesting the validity of the policy after it has been in force for two years. The validity of the contract cannot be questioned after the stated period except in limited situations. A) II only B) I only C) Both I and II D) Neither I nor II
C) Both I and II
Which of the following statements regarding the misstatement of age clause in a life insurance policy is CORRECT? The face amount of the policy will be adjusted to the amount of insurance that the premium paid would have purchased based on the insured's correct age. In many cases of misstatement of age, insureds understate their age to reduce the premiums. A) II only B) Neither I nor II C) Both I and II D) I only
C) Both I and II
Which of the following life insurance riders is an extension of benefits rider? A) Guaranteed insurability rider B) Accidental death rider C) Critical illness rider D) Spouse term rider
C) Critical illness rider
What of the following types of life insurance have historically been used as mortgage protection? A) Modified premium whole life insurance B) Level-term life insurance C) Decreasing term life insurance D) Convertible term life insurance
C) Decreasing term life insurance
Under which life insurance settlement option are proceeds paid to the beneficiary at a set dollar amount per month until all principal and interest are exhausted? A) Interest only B) Life income C) Fixed amount D) Fixed period
C) Fixed amount
Ruby, 30, wants to purchase an annuity by making monthly premium payments until she retires at age 60. She wants to be able to vary the amount of the premium payments depending on her disposable income. She wants to attain a guaranteed minimum return on her investment, but also wants to be able to earn returns linked to the stock market. Which of the following annuities best meets her needs? A) Single premium deferred equity-indexed annuity B) Flexible premium deferred variable annuity C) Flexible premium deferred equity-indexed annuity D) Flexible premium deferred fixed annuity
C) Flexible premium deferred equity-indexed annuity
Donald is married and has two small children. Both he and his spouse are employed outside the home. They spend both incomes, have a mortgaged home, keep credit cards with outstanding balances each month, have little savings, and care for aging parents. Based on Donald's current life risk exposures, which of the following can be addressed with life insurance? Death before debt repayment Death before accomplishing personal goals Death of an income earner Estate tax liability A) I and II B) II and IV C) I and III D) III and IV
C) I and III
Which of the following statements regarding policy illustrations is CORRECT? Footnotes should be evaluated as an integral part of the illustration. The guaranteed columns present a worst-case scenario because they assume the highest mortality and expense charges along with the highest interest rate. A) Both I and II B) II only C) I only D) Neither I nor II
C) I only
Which of the following universal life options pay a level death benefit? Option A Option B A) II only B) Neither I nor II C) I only D) Both I and II
C) I only
Which of the following are risk exposures that may indicate a need for life insurance on a primary income earner? Final expenses Debts and mortgages Education expense Support of elderly parents A) I and IV B) I, III, and IV C) I, II, III, and IV D) I and II
C) I, II, III, and IV
Universal life insurance gives policyowners the ability to adjust the premiums. the death benefit. the cash values. the policy expenses. A) II, III, and IV B) I and III C) I, II, and III D) I and II
C) I, II, and III
Which of the following are features of a straight life, fixed, single premium immediate annuity? Payments do not increase with inflation. Payments stop when the annuitant dies. The annuitant may die before a return of the principal is realized. The income level may drop if the underlying investments go down in value. A) I and III B) II, III, and IV C) I, II, and III D) I, II, and IV
C) I, II, and III
Which of the following items are covered, but are subject to a specific dollar limit, under the personal property provision of a homeowners policy? Furs Jewelry Coin collections A) I and III B) II and III C) I, II, and III D) I and II
C) I, II, and III
Reginald is the beneficiary of his father's life insurance policy. The face amount of the policy is $250,000, and Reginald selects the single life annuity settlement option. His life expectancy is 20 years. Assuming Reginald lives for only 12 years after payments begin, which of the following statements regarding payments to him under this settlement option is CORRECT? Payments will continue to Reginald's designee for an additional eight years. A portion of each payment Reginald receives is includible in his gross income. Any unrecovered tax basis in the settlement option that remained at Reginald's death is deductible on his final income tax return. C) II only
C) II only
Which one of the following factors is the only true statement about policy replacement? The new policy's contestable clause will be waived. The new policy will likely have higher initial costs. A) I only B) Both I and II C) II only D) Neither I nor II
C) II only
Marcellus just annuitized his variable annuity and selected a life income with a 10-year period certain payout option. His first monthly income payment from the annuity is $1,500. If Marcellus dies after receiving income payments for 12 years, which of the following statements is CORRECT? A) Income payments will continue to the beneficiary for life; the income payments are guaranteed to be at least $1,500 per month for 10 years. B) Income payments will continue to the beneficiary for 10 years; the amount of each monthly income payment will depend on the investment returns of the underlying subaccounts. C) Income payments will stop. D) Income payments will continue to the beneficiary for 10 years; each monthly payment is guaranteed to be at least $1,500.
C) Income payments will stop.
Which of the following statements regarding the reinstatement clause in a life insurance policy is true? A) Policy loans are forgiven due to the lapse. B) Proof of insurability is never required prior to reinstatement. C) No insurance coverage will have been in place from the date of the lapse to the date all reinstatement requirements are submitted. D) The owner can reinstate a lapsed policy without repaying missed premiums.
C) No insurance coverage will have been in place from the date of the lapse to the date all reinstatement requirements are submitted.
Which of the following dividend options allows for acquiring additional insurance with no underwriting? A) Cash B) Reduced premium C) Paid-up additions D) Accumulate at interest
C) Paid-up additions
Which of the following is a dividend option? A) Fixed payment B) Reduced paid-up C) Paid-up additions D) Life income
C) Paid-up additions
If a client wishes to be rewarded with lower life insurance premiums for maintaining good health, which of the following types of life insurance policies would be most appropriate? A) Whole life B) Decreasing term C) Reentry term D) Convertible term
C) Reentry term
Which of the following life insurance policies is typically used to pay any federal estate tax obligation? A) Adjustable life B) Endowment life C) Second-to-die life D) First-to-die life
C) Second-to-die life
Which of the following is the definition of human life value in life insurance planning? A) The future value of the family's share of the deceased person's current earnings B) The difference between the family's total needs at the breadwinner's death and the existing financial assets C) The present value of the family's share of the breadwinner's future earnings D) An individual's average earnings over the past 10 years
C) The present value of the family's share of the breadwinner's future earnings
All of the following statements concerning categories of annuities are correct except A) a joint-and-last-survivor annuity provides income that ceases only upon the last death among the covered lives. C) a deferred annuity is one in which the first benefit payment is made one payment interval after the date of purchase. D) an annuity may be paid periodically in a fixed amount for a period determined by the insurer.
C) a deferred annuity is one in which the first benefit payment is made one payment interval after the date of purchase.
Assume Greg dies of a heart attack, and Jackie receives the $50,000 death benefit provided by his group life insurance policy and $150,000 from his individually owned universal life insurance policy as lump-sum payments. What amount must Jackie include in her gross income? A) $150,000 B) $200,000 C) $50,000 D) $0
D) $0
Rosaline was the beneficiary of her father's variable life insurance policy. The policy had a face amount of $500,000, and Rosaline's father had a basis in the policy of $300,000. During her life, Rosaline's father had invested the cash value in subaccounts containing blue-chip stocks, which achieved significant capital appreciation during most of the years the policy was in effect. When her father died, Rosaline received the $500,000 death benefit in a lump sum. How much of the $500,000 death benefit must Rosaline include in her gross income? A) $200,000 B) $300,000 C) $500,000 D) $0
D) $0
reduce expenses in retirement. paying premiums on a whole life policy. His health is not great, life expectancy shorter than a normal person his age. What should he do? D) Antonio could convert his policy to an extended term policy. According to the insurance company, his policy would last past a normal life expectancy, and the full death benefit would go to his heirs without additional out-of-pocket expenses, as long as he passes away within the extended term period.
D) Antonio could convert his policy to an extended term policy. According to the insurance company, his policy would last past a normal life expectancy, and the full death benefit would go to his heirs without additional out-of-pocket expenses, as long as he passes away within the extended term period.
Norberto and Maria are considering purchasing an annuity to provide additional retirement income, but they are concerned about needing to withdraw funds from the annuity before they retire. Which of the followings statements regarding withdrawals from their annuity is CORRECT? Withdrawals will consist of taxable earnings until all the earnings have been withdrawn (LIFO rule). Withdrawals may be subject to a 10% penalty tax if taken before age 59½. A) Neither I nor II B) I only C) II only D) Both I and II
D) Both I and II
Which of the following life insurance policies is commonly used in business continuation agreements? A) Adjustable life B) Endowment life C) Second-to-die life D) First-to-die life
D) First-to-die life
Which of these types of life insurance policies pay a death benefit only if the insured dies during a specific time period? Term life insurance Ordinary life insurance Limited-pay life insurance A) I, II, and III B) I and II C) III only D) I only
D) I only
When designing a life insurance program under the financial needs analysis method, which of the following should be considered? Funeral expenses related to the death of a wage earner Education costs of dependents Payment of debts and mortgages Retirement of the surviving spouse A) I and II B) III and IV C) I, II, and III D) I, II, III, and IV
D) I, II, III, and IV
Limited-pay whole life insurance policies require the owner to pay premiums for a shorter period than traditional whole life insurance policies. provide lifetime coverage. have cash value accumulation. require premiums to be paid for the entire life of the insured. A) III and IV B) II and III C) I and II D) I, II, and III
D) I, II, and III
Whole life insurance nonforfeiture options allow a policyowner to surrender a whole life insurance policy and receive the net cash value (cash value less any applicable surrender charges and/or outstanding policy loans). stop paying premiums on a whole life insurance policy and exchange the net cash value for a reduced paid-up single-premium permanent life insurance policy. stop paying premiums on a whole life insurance policy and use the net cash value as a single premium to purchase a paid-up term life insurance policy with a face amount equal to the face amount of the original policy for a specified period. A) I and II B) II and III C) III only D) I, II, and III
D) I, II, and III
Which of the following factors should be considered when utilizing the financial needs analysis method in determining the required amount of life insurance? The family expenses that will remain after the wage earner dies The value of the wage earner's life The income that can be generated by the surviving spouse The number of dependents A) I and III B) II, III, and IV C) I, II, III, and IV D) I, III, and IV
D) I, III, and IV
Claire, 49, owns a life insurance policy. Her basis in the policy is $50,000, and the cash value is $75,000. The policy is not a modified endowment contract. Claire is dissatisfied with the policy and is interested in surrendering it or exchanging it for another financial product, but she does not want to incur an income tax liability. Which of the following transactions would allow Claire to accomplish her goal? Surrender the policy for $75,000 in cash and purchase another policy Exchange the policy for another life insurance policy Exchange the policy for a variable annuity Exchange the policy for a qualified long-term care insurance policy D) II, III, and IV
D) II, III, and IV
Azumi purchased an annuity for $26,000 in the current year. Under the contract, Azumi will receive $300 each month for the rest of her life starting next month. According to actuarial estimates, Azumi will live long enough to collect 100 payments, and she will receive a 3% return on her original investment. Which of the following statements regarding the taxation of Azumi's annuity income is CORRECT? A) If Azumi lives to collect more than 100 payments, she must amend her prior years' tax returns to increase her taxable portion of each payment received in the past. D) If Azumi collects more than 100 payments, all amounts received after the 100th payment must be fully included in her gross income.
D) If Azumi collects more than 100 payments, all amounts received after the 100th payment must be fully included in her gross income.
A client is in the process of purchasing a universal life policy. The client desires a level death benefit. Which of the following universal life death benefit options would help the client achieve this goal? A) Option B B) Option C C) Option D D) Option A
D) Option A
Esmeralda purchased an indefinite duration life insurance policy that has a guaranteed cash value and pays annual dividends. Which of the following types of life insurance did Esmeralda purchase? A) Universal life B) Endowment life C) Term life D) Participating whole life
D) Participating whole life
Which of the following client objectives can be satisfied by a client owning a variable universal life insurance contract, with no special additional coverages, on his life? A) To have a minimum guaranteed cash value B) To have a minimum guaranteed death benefit amount available to provide for estate liquidity at the client's death C) To be assured of a constantly increasing cash surrender value D) To direct investment of premium dollars to alternative investment vehicles
D) To direct investment of premium dollars to alternative investment vehicles
Policies that pay dividends are said to be participating policies. Which of the following policies pay dividends? A) Universal life policies B) Annual term policies C) Multi-year term life policies D) Whole life policies
D) Whole life policies
All of the following are dividend options provided by a whole life insurance policy except A) cash option. B) one-year term insurance option. C) reduce premiums. D) life income option.
D) life income option.
The final expenses of an estate include all of the following except A) burial expenses. B) the decedent's outstanding debts. C) expenses of last illness. D) the decedent's investments.
D) the decedent's investments.
Jorge and Margarita would like to know how much life insurance they need to pay for college for their six-year-old daughter, Aida, when she is 18. Average college expenses today are $22,500 per year, and they believe these costs will increase by 5% per year. Jorge and Margarita believe they can get a 7% return on their savings. What amount should they allocate today to have enough to pay for all four years of Aida's college costs? D) $69,777
The answer is $67,777 (rounded). The following is a three-step calculation. The keystrokes for this problem are as follows: Step 1: 12, N; 5, I/YR; 22,500, +/-, PV; solve for FV = 40,406.7673 Step 2: set for BEG mode; 4, N; 1.07 ÷ 1.05 = 1.019 - 1 = 0.01905 × 100 = 1.9048, I/YR; 40,406.7673, +/-, PMT; 0, FV; solve for PV = 157,151.6738 Step 3: 12, N; 7, I/YR; 0, PMT; 157,151.6738, FV; solve for PV = 69,777.22
A life insurance contract with low fixed premiums during the first three to five years and higher fixed premiums for the remainder of the policy period is called A) a modified premium whole life policy. B) a variable life policy. C) an increasing term policy. D) a limited-pay whole life policy.
A) a modified premium whole life policy.
Which of the following statements regarding various types of life insurance is true? Whole life is always more expensive than term, cash value can be used as a savings plan and accessed for emergencies, and there is low risk and low return on investments. Universal life has flexible premium payments, an adjustable death benefit, and an unbundled structure. It also provides access to cash values for emergencies; if inadequate deposits are made, the client will need to either increase premiums or allow the policy to lapse. Term insurance does not provide cash accumulation; it provides more coverage per premium dollar than any other form of coverage. It may be too expensive for clients to retain after retirement. A) I and II B) II and III C) I, II, and III D) I, II, and IV
A) all three are correct
Which of the following life insurance riders allows for additional term life coverage on a cash value policy for the named insured? A) A children's term rider B) A term rider C) A spouse term rider D) A guaranteed insurability rider
B) A term rider
Which of the following life insurance policy riders was developed in response to viatical settlements? A) Family income benefit rider B) Accelerated death benefits rider C) Critical illness rider D) Long-term care rider
B) Accelerated death benefits rider
Joint life insurance includes which type of policies? A) Group life policies B) Both first-to-die and second-to-die policies C) Business ownership policies (BOPs) D) Second-to-die policies
B) Both first-to-die and second-to-die policies
Which of the following term life insurance policies is designed to protect the insured's mortgage? A) Reentry term life insurance B) Decreasing term life insurance C) Annual renewable term life insurance D) Level term life insurance
B) Decreasing term life insurance
In calculating life insurance needs, which of the following can be defined as the present value of the family's share of the decedent breadwinner's future earnings? A) Portfolio value B) Human life value C) Conversion value D) Net present value
B) Human life value
Which of the following statements regarding fixed annuities is CORRECT? The funds are held in the insurance company's general account, and the insurance company bears all of the investment risk. The funds are held in subaccounts, and the owner of the fixed annuity bears all of the investment risk. The fixed annuity is designed for a conservative investor who is more concerned with safety of principal than keeping up with inflation. A) I and II B) I and III C) II and III D) III only
B) I and III
Which of the following items should be considered when reviewing an existing life insurance policy for possible replacement? The client's risk tolerance level The existing policy's relative value The companies' A.M. Best, Inc., and other ratings Any possible changes in the client's insurability A) I, II, and III B) I, II, III, and IV C) II, III, and IV D) I and IV
B) I, II, III, and IV
Which of the following factors should be analyzed when assessing the cost of a universal life insurance policy? The actual interest rate credited to the policy The actual mortality charge assessed to the policy The guaranteed interest rate specified in the policy A) I and II B) I, II, and III C) I and III D) II and III
B) I, II, and III
Which of the following statements regarding the disadvantages of annual renewable term life insurance are CORRECT? Term life insurance does not develop cash values or a savings plan. Term life insurance becomes increasingly uneconomical as the policyowner grows older. At the end of a stipulated period of time, the policyowner may be declined for renewal coverage. Initially, term life insurance has a higher premium than whole life insurance for the same amount of coverage. A) I and IV B) I, II, and III C) II and III D) I, II, III, and IV
B) I, II, and III
Which of the following are the primary factors that should be considered when deciding to keep or replace a policy? Lower cash value or dividends with a new policy New policy acquisition costs Length of time the insurer has been in business Agent service A) II and IV B) I, II, and IV C) II, III, and IV D) I, II, and III
B) I, II, and IV
Which of the following statements regarding participating and nonparticipating life insurance is CORRECT? A) Participating life insurance is a policy in which no annual dividends are paid to the policyowners. B) Stock companies are owned by the stockholders and usually offer nonparticipating policies. C) Mutual companies are owned by their stockholders and usually offer nonparticipating policies. D) Nonparticipating life insurance is a policy in which dividends are paid only on the excess of premium.
B) Stock companies are owned by the stockholders and usually offer nonparticipating policies.
Which of the following dividend options may create an income tax liability for the policyowner? A) One-year term B) Cash C) Accumulate at interest D) Paid-up additions
C) Accumulate at interest
Gracie, your client, is in the process of purchasing a universal life policy. She would like a level death benefit. Which of these universal life death benefit options would help Gracie achieve this goal? A) Option D B) Option C C) Option A D) Option B
C) Option A
Which of the following is a life insurance dividend option? A) Extended term B) Fixed payment C) Reduced premium D) Reduced paid-up
C) Reduced premium
Which of the following is a life insurance dividend option? A) Cash surrender B) Extended term C) Joint income D) Cash
D) Cash
Which of the following annuities includes a participation rate feature? A) Fixed B) Single-premium C) Variable D) Equity-indexed
D) Equity-indexed
Which of the following factors should be considered when determining the most appropriate type of life insurance? The duration of the need The amount of disposable income available to the proposed policyowner The financial discipline of the proposed policyowner The risk tolerance level of the proposed policyowner A) I and IV B) I, III, and IV C) II and III D) I, II, III, and IV
D) I, II, III, and IV
