NC Life Quizzes

Ben owns a $100,000 policy on his life. He sells the policy to his younger brother, Bart, for $50,000. Bart names himself beneficiary and is now responsible for paying the policy's annual $1,500 premium. Four years after the sale, Ben dies and Bart receives the policy's $100,000 death benefit. Under the transfer-for-value rule, what is Bart's taxable "gain" on the policy?

*$44,000* $50,000 $6,000 $38,000 Bart's gain in the policy is $44,000: the $100,000 death benefit less the $50,000 purchase price and $6,000 premiums paid.

Under traditional whole life insurance plans, policy loans can be as high as what percent of the cash value?

*100 percent* 50 to 75 percent 25 percent 75 to 90 percent Policy loans under traditional whole life insurance plans can be as high as 100 percent of the cash value.

Which statement about Section 457 plans is NOT correct?

*Earnings and contributions are not taxed when withdrawn.* Earnings accumulate tax deferred. Employees age 50 and older can make catch-up contributions to the plan. Employees defer salary into the plan on a pre-tax basis. Employees can contribute up to an annual limit to a section 457 plan. Those age 50 and older can also make catch-up contributions.

Which of the following statements best describes how employer-paid premiums for group life insurance are treated for tax purposes?

*Employers can deduct premiums paid on a group life insurance plan.* Employers may only deduct premiums paid for rank-and-file participants in a group life insurance plan. Group life insurance premiums are tax deductible to the employer to the extent that they exceed the income of the lowest-paid plan participant. Group life insurance premiums are not tax deductible to the employer. The employer can deduct premiums it pays on a group life insurance plan.

Which of the following sections of the Tax Code deals with the exchange of life insurance policies and annuities?

*Section 1035* Section 1515 Section 2525 Section 1045

Annuities are often referred to as "insurance against living too long" for all of the following reasons, EXCEPT:

*The annuity contract includes a face amount that pays a death benefit whether death occurs before or after annuitization.* The insurer guarantees income payments for whatever annuity payout period the annuitant selects. Annuities provide income payments that annuitants cannot outlive even if they surpass their life expectancy. The insurer can provide a guaranteed stream of income for a single life or for a joint life, based on life expectancies and its mortality experience. Deferred annuities pay death benefits if the owner/annuitant dies before annuitization.

Which one of the following statements about deferred compensation plans is most correct?

*They allow executives to delay receiving current compensation until a future time.* All employees over the age of 21 with at least one year of service must be eligible to participate in the plan. Although life insurance is not allowed to fund deferred compensation plans, annuities and mutual funds are allowed. They are considered qualified plans. Under a deferred compensation plan, senior executive employees agree to defer part of their salary or compensation until a future date, typically retirement.

Which of the following best describes a partial surrender of a permanent (non-universal) life insurance policy?

*Under a partial surrender, the death benefit is reduced proportionately by the amount of the surrender.* A partial surrender is a loan against the policy's cash surrender value. A partial surrender is the same as a cash withdrawal under a universal life insurance policy. Under a partial surrender, the death benefit is not affected by the amount of the surrender. The death benefit under a partial surrender is reduced proportionately by the amount of the surrender.

To receive favorable tax benefits, a life insurance policy must meet the definition of life insurance as defined in Section 7702 of the Tax Code. When was this section added to the Code?

*after flexible premium payment policies were introduced* after equity-based insurance was introduced after term insurance was introduced after group life insurance was introduced

Which of the following information about a proposed life insurance policy is not contained in the policy summary given to a buyer?

*appropriate amount of insurance* limitations and exclusions terms and conditions coverage and benefits The policy summary states the coverage, costs, benefits, limitations, exclusions, and terms of a proposed life insurance policy for the prospective buyer. Information about selecting the appropriate amount of insurance is provided in the life insurance Buyer's Guide.

The Acme Company sets up a plan that provides annuities to its employees when they retire. The individuals those annuities cover hold "certificates of participation." Which type of plan is that?

*group annuity* 403(b) plan fixed annuity multiple-lives annuity Annuities can also be used by employers on a group basis. A group annuity has the same features as an individual annuity, except that it is written on a group basis.

Settlement options that effectively work like an annuity by providing income payments the payee cannot outlive are called which of the following?

*life income options* temporary settlement options principal and interest settlement options guaranteed income options These settlement options are called life income options, since they are based on the lifespan of the payee.

Funds withdrawn from a market value adjusted annuity (MVA) before its contract period ends are subject to which of the following?

*market value adjustment and surrender charge* interest adjustment surrender charge only withdrawal penalty

Under which nonforfeiture option does permanent life insurance continue in force with no further need for premiums?

*reduced paid-up option* cash surrender option cash withdrawal provision extended term option A paid-up policy under the reduced paid-up option requires no further premiums (nor can any be paid). The paid-up policy retains a cash value that will continue to grow throughout the life of the policy. However, it will grow much more slowly than during the period that premiums were being paid.

What is the name of the period during which premium funds are paid into an annuity contract?

*the accumulation period* the annuity period the annuity payout the benefit period

The group term life insurance premiums an employer pays are fully tax deductible to the employer. Which of the following statements is true for a covered employee?

*the value of coverage under $50,000 is not taxable* the value of coverage over $30,000 is not taxable the value of coverage under $30,000 is not taxable the value of coverage under $70,000 is not taxable The group term life insurance premiums an employer pays are fully tax deductible to the employer. For a covered employee, the value of coverage under $50,000 is not taxable.

From an insurance perspective, all the following statements regarding risk and loss are correct EXCEPT:

Risk is defined as the chance of loss. *Only speculative risk is insurable.* Depending on the type of insurance, both direct losses and indirect losses may be insurable. A loss is defined as an unplanned reduction in value. Only pure risks (representing the chance of loss but not gain) are insurable. Speculative risks, which involve the chance of gain as well as loss, are not insurable.

George purchased an annuity in which his wife will receive income for as long as she lives. In this scenario, what is George most correctly called?

The annuity owner is the person (or entity) who buys the contract.

Which statement about spouse/other insured term riders on a life insurance policy is NOT correct?

The intent of this coverage is temporary. A person can buy a term life insurance rider to cover the life of a spouse (or other adult). Usually the coverage ends sometime before the other insured's age 100. *A policyowner often buys a term life insurance rider on a spouse to provide additional coverage once the children have grown and moved out on their own.* A policyowner often buys a term life insurance rider on a spouse to provide additional coverage while children are young and to ensure needed funds in case the other covered spouse dies.

Which statement about key person insurance coverage is NOT correct?

The key employee has no ownership rights in the policy. *The key person's family receives the death benefits.* The business applies for and owns the policy. The amount of coverage typically reflects the financial loss that the business would suffer if the key employee died. Under a key person plan, the business applies for, owns, and is the beneficiary of the policy covering the life of a key employee. The employee's family is not the beneficiary under the policy.

To be considered insurable, a risk must meet all the following requirements EXCEPT

The loss must be measurable. *The loss must be certain to occur.* The loss cannot be catastrophic. The loss must be definable as to time, cause, and location.

All the following statements regarding the career agency distribution system are correct EXCEPT

The managerial form of career agency system uses company employees as the agency managers. The general agency system is a form of career agency system. *Personal producing general agents (PPGAs) are commonly hired to manage career agencies.* It uses producers who primarily if not exclusively represent one insurer. PPGAs manage independent agencies that are not affiliated with a single insurer under the independent agency system

Once annuitized income payments begin, what are they generally considered?

capital gains tax deferred revocable *irrevocable* Once annuitized payments begin, they are generally irrevocable. This means they cannot be changed or discontinued.

Which of the following is NOT recognized as a standard life insurance nonforfeiture options?

cash surrender *policy loans* extended term insurance reduced paid-up insurance

Jenny was born in 1940 and is now eligible for full death, retirement, and disability benefits under Social Security. What is her Social Security worker status?

completely insured partially insured *fully insured* currently insured

Which of the following unfair trade practices involves using misrepresentations to induce a policyholder to let an existing life insurance policy lapse and purchase a new policy instead?

controlled business rebating defamation *twisting* It is also unlawful to make a misrepresentation to induce a policyholder to lapse, forfeit, or surrender a policy and purchase another (known as twisting).

When an employee retires, what is the general tax treatment of the payments he or she receives under a deferred compensation plan?

entirely tax free *taxable to the employee as he or she receives benefits* taxable to the employee as a lump-sum benefit partially tax free A non-qualified deferred compensation plan lets an employee delay receiving current compensation until a future time. The employee must then pay taxes on the benefits as he or she receives them. However, the employee will typically be in a lower tax bracket than when he or she was working.

The terms "double indemnity rider" and "triple indemnity rider" are common names for which type of life insurance policy rider?

guaranteed insurability rider return of premium rider cost-of-living rider *accidental death benefit rider* The accidental death benefit rider doubles or triples the policy death benefit in the event of an accidental death, and is sometimes called a "double indemnity rider" or "triple indemnity rider".

For any given life policy death benefit amount, which of the following settlement options generally provides the largest monthly income to the payee?

life income with refund *straight life income settlement option* joint and survivor life income life income with period certain

Under which one of the following circumstances does a fixed deferred annuity contract provide a death benefit?

never because deferred annuities do not provide one whether the owner dies before or after the contract is annuitized *if the contract owner or annuitant dies during the accumulation period* only if the owner has bought a death benefit rider

What type of life insurance company is owned by the policyowners?

privately-traded company stock company universal insurance company *mutual company*

Which of the following riders is NOT available with any type of life insurance policy?

the accidental death and dismemberment (AD&D) rider the cost-of-living-adjustment rider the guaranteed insurability rider *the guaranteed dividend rider*

What is the name of the period during which funds are paid out of an annuity contract in the form of periodic income payments?

the accumulation period *the annuity payout period* the annuity payout the benefit period

All the following are characteristics of a mutual insurance company EXCEPT

they are governed by a board of directors. they may issue dividends. *they are owned by stockholders.* they have minimum capital requirements that must be met before they can conduct business. Mutual insurance companies are owned by their policyowners.

What type of life insurance company is owned by its stockholders?

universal insurance company mutual company privately held company *stock company*

An equity-indexed annuity (EIA) is purchased at $10,000 and the S&P 500 increased 10 percent during the contract's term. The contract's participation rate is 75 percent. How much did the contract earn for that period?

$350 $500 $1,400 *$750* For that period the contract earned *$750 ($10,000 X .075)*.

Emily, age 48, withdrew $8,000 from her SIMPLE plan to buy a car. How much penalty tax will she owe?

$0 $1600 $4000 *$800* Because Emily's withdrawal does not fall within any exceptions to the 10 percent premature distribution penalty tax, she will have to pay a penalty of $800. She will also owe regular income tax on the withdrawal.

Cal bought a $100,000 universal life policy ten years ago. He has paid $8,000 in premiums into the policy. He now decides to surrender the policy for its full $15,000 cash value. What amount is taxable?

$100,000 $15,000 $8,000 *$7,000* The difference between what Cal paid into the policy and the cash value he receives is $7,000. This amount is considered taxable income.

Pam is a 56-year-old vice president employed by Gulf, Inc. Under Gulf's employer-pay-all group life plan, Pam's coverage is $300,000. The premiums for what portion of that coverage are taxable to Pam?

$150,000 $100,000 *$250,000* $300,000 The cost of the first $50,000 of coverage is tax exempt for employees. Because Pam has $300,000 of coverage, $250,000 is taxable to Pam, and will be included on her W-2.

Frank is a 70-year-old owner/annuitant of a $300,000 variable annuity contract. He wants to annuitize this contract under a straight life option. Assuming that an annuity purchase rate of 5 percent AIR for a straight life income stream for a 70-year-old man is $6.50, what is the amount of Frank's first income payment under that payout option?

$2,225 $1,250 *$1,950* $1,500 Applying his contract's purchase rate to an income payout option produces *$1,950 ($6.50 X 300)*. That is Frank's first income payment from the contract.

Al is a 60-year-old male. His $100,000 fixed annuity can provide $5.50 per $1,000 of accumulated value under a straight life payout option. How much income can Al expect and for how long?

$450 a month for the period selected by the owner $550 a month for the period selected by the annuitant $450 a month for life *$550 a month for life* Fixed annuitized amounts do not change over the term of the annuitization period. Under a straight life payout option, Al's $100,000 annuity fund would generate $550 a month for as long as he lives.

Sally is a 25-year-old clerk employed by Acme, Inc. Under Acme's employer-pay-all group life plan, Sally's coverage is $60,000. The premiums for what portion of that coverage are taxable to Sally?

*$10,000* $40,000 $30,000 $20,000 The cost of the first $50,000 of coverage is tax exempt for employees. Because Sally has $60,000 of coverage, $10,000 ($60,000 - $50,000) is taxable to her.

ABC Life Insurance Co. just sold Alex a new life insurance policy that will replace his existing policy. Alex may examine the policy and return it within how many days if he is not satisfied for any reason?

*30 days* 31 days 20 days 10 days If a life insurance policy replaces another, the policyowner is entitled to a free-look period of at least 30 days following delivery of the policy. The policyowner can return the policy within the free-look period for an immediate refund of the entire premium paid.

With regard to qualified plans, the term "vesting" refers to which of the following points?

*A plan participant achieves a nonforfeitable right to employer contributions made on his or her behalf.* No further contributions need to be made on behalf of a plan participant. A plan participant's accrued benefit must be paid out. A plan participant can take distributions from the plan without penalty. Vesting refers to the point at which a plan participant achieves a nonforfeitable right to the contributions made by the employer on his or her behalf. At all times, however, an employee is fully vested in amounts he or she contributed or deferred into a plan.

For estate tax purposes, what is the value of any life insurance policy a person owns at his or her death?

*It is generally includible in the valuation of his or her estate.* It is subject to estate taxes at the beneficiary's death. It is includible in the beneficiary's estate. It is fully deductible from the insured's estate. For estate tax purposes, the value of any life insurance policy a person owns at his or her death is generally includible in the valuation of his or her estate.

If Rick withdraws funds from his universal life insurance policy, what will be the effect on the policy's death benefit?

*It will be reduced by the amount of the withdrawal.* It will not change as a result of the withdrawal. It will be reduced by the amount of the withdrawal, plus interest It will not change, as long as Rick repays the amount withdrawn. A withdrawal reduces the universal life insurance policy's death benefit by the amount of the withdrawal.

Which one of the following most correctly describes the tax treatment of life insurance policy loans, assuming the policy is not a modified endowment contract (MEC)?

*Life insurance policy loans are not taxed.* Life insurance policy loans that exceed the premiums paid are taxed as income. Life insurance policy loans are taxed as income. Life insurance policy loans are taxed at capital gains rates. Policy loans are loans of the contract's cash values. As such, they are not taxed.

All the following statements regarding Simplified Employee Pension (SEP) plans are correct EXCEPT

*Only large employers use SEP plans. Under a SEP plan, an employer sets up individual retirement accounts for each participating employee.* All contributions made by the employer on behalf of employees vest immediately. SEP plans do not accept employee contributions. Because of the lowered administrative, reporting and compliance costs, smaller employers often use SEP plans.

Phil has selected the paid-up insurance dividend option with his participating whole life insurance policy. Which of the following best describes the purpose for this type of dividend option?

*Pay up the whole life insurance policy several years early.8 Purchase additional units of paid-up whole life insurance. Reduce the policy face amount so that the dividend is sufficient to pay-up the policy in the year that the dividend is issued. Purchase additional units of term life insurance coverage. The paid-up insurance option lets the policyowner use the dividends to pay up the life insurance policy early. A policyowner who chooses this option could pay up a whole life policy several years early, depending on the policy and the dividend amounts.

Which of the following is a characteristic of industrial life insurance?

*Premiums are payable monthly or weekly. The face amount of the policy is less than $25,000.* It is sold to groups only. It is issued in connection with credit transactions. Industrial life insurance is a type of life insurance for which premiums are payable monthly or weekly. In addition, the face amount of the policy may not exceed $1,000.

Which statement regarding prepaid tuition plans is NOT correct?

*Prepaid tuition plans are typically open to both state residents and non-residents.* Prepaid tuition plans allow parents to lock in the cost of today's tuition, even if inflation or tuition increases. Amounts contributed to prepaid tuition plans are available tax free when used to pay for qualified tuition costs. Prepaid tuition plans typically limit a child's choice of colleges to in-state schools. State pre-paid tuition plans are usually limited to state residents and apply to in-state public universities or colleges.

Joanna has a $500,000 permanent life insurance policy that she no longer wants to keep in force. In order to enter into a viatical settlement, what must Joanna prove?

*She is terminally or chronically ill.* She has a financial need to sell her policy. She will use the funds to pay for medical expenses. She is her family's breadwinner. To enter into a viatical settlement, the insured must be diagnosed as terminally or chronically ill. The insured can use the funds to pay for medical expenses or simply to improve his or her quality of life. The insured need not show a financial need to sell the policy or prove that he or she is the family breadwinner.

What is the only restriction on naming an annuitant?

*The annuitant must be a natural person.* The annuitant must not be related to the owner. The annuitant can be a natural or non-natural person. The annuitant must be related to the owner.

Which of the following best describes the tax treatment of fixed annuity death benefit payments?

*The beneficiary must pay taxes on any amount he or she receives that exceeds the sum of the premiums paid into the contract.* The accumulated cash value is taxed as ordinary income. The cash accumulations less the premiums paid are taxed as ordinary income. The beneficiary must pay taxes on the entire contract amount. Any amount the beneficiary receives that exceeds the sum of the premiums paid into the contract is taxable to the beneficiary.

All of the following statements about annuities are generally correct, EXCEPT:

*The historic purpose of annuities is to create estates over a certain period.* Annuities are not life insurance. Annuities are sold by life insurance agents and are issued by life insurance companies. An annuity converts a sum of money into a series of income payments. The purpose of life insurance is to create an estate. But the historic purpose of annuities is to liquidate an estate over a certain period.

Which one of the following statements regarding a Keogh plan for a business partnership is correct?

*The plan must comply with the same maximum contribution and benefit limits applicable to other qualified plans.* The partners are not permitted to participate in the plan. It must be structured as a defined contribution plan. All of the employees must participate. Keogh plans today are treated the same way as corporate plans with respect to maximum contribution and benefit limits, participation and coverage requirements, and nondiscrimination requirements.

The four shareholders of ABC Corporation each own a $1,000,000 interest in the company and enter into a stock redemption agreement which is funded with life insurance. One of the shareholders dies six months later. All the following statements regarding this scenario are correct EXCEPT

*The three remaining shareholders will buy the deceased owner's interest from his estate.* ABC Corporation will use the death benefit to buy the deceased owner's interest from his estate. The insurer will pay the $1,000,000 death benefit from the deceased owner's policy to ABC Corporation. Each of the surviving shareholders will then own a one-third share of ABC Corporation.

Which one of the following statements about non-qualified deferred compensation plans is most correct?

*When an executive receives the deferred compensation, he or she will generally be in a lower tax bracket and will pay lower taxes.* The executive will typically receive the deferred compensation when he or she changes jobs. If the executive dies before retirement, his or her heirs will not receive any of the deferred compensation. Life insurance is never used with deferred compensation plans. A non-qualified deferred compensation plan lets an employee delay receiving current compensation until a future date, usually retirement. At retirement, he or she will generally be in a reduced tax bracket and will pay lower taxes.

Under a family term rider to a life insurance policy, children who are covered under the rider can typically convert their coverage to permanent coverage as early as

*age 21, without having to provide evidence of insurability.* age 21, as long as evidence of insurability is provided. age 25, without having to provide evidence of insurability. age 25, as long as evidence of insurability is provided.

Which type of life insurance is issued in connection with a specific loan or credit transaction in case the debtor dies or becomes unable to pay the remaining debt?

*credit life insurance* debtor life insurance limited life insurance surplus lines insurance Credit life insurance covers the life of a debtor and is issued in connection with a specific loan or other credit transaction.

Policyowners can buy additional permanent life insurance without proof of insurability under which type of rider?

*guaranteed insurability rider* term rider cost-of-living-adjustment rider accidental death and dismemberment (AD&D) rider

The ABC Company offers a fixed annuity, guaranteeing a minimum rate of 3 percent, which Jim buys with a $10,000 premium payment. At the time Jim bought his contract, ABC had declared a "crediting rate" of 6 percent for two years. ABC Life will declare another interest crediting rate at the end of the two-year period. Although this rate may be higher or lower than 6 percent, it will NOT be which of the following?

*less than the contract's minimum of 3 percent* less than the highest previous rate of 6 percent higher than the minimum credited rate of 3 percent more than the lowest credited rate of 3 percent The new rate will not be less than the contract's 3 percent minimum interest rate.

Which of the following lets an annuity owner take advantage of interest crediting changes in response to market conditions at the time he or she withdraws funds?

*market value adjusted annuities* fixed annuities variable annuities equity-indexed annuities The market value adjusted (MVA) annuity is a fixed annuity that offers an interest-rate adjustment feature, which lets the owner take advantage of interest crediting changes in response to market conditions at the time he or she withdraws funds.

When he applied for his life insurance policy four years ago, Terry omitted any information in the application related to treatment he had received several years earlier for a serious chronic illness. Which of the following actions can the insurance company take when it learns of the omission?

*nothing* cancel the policy reduce the benefits impose additional exclusions After a policy has been in force for two years, it becomes incontestable with respect to the truthfulness of any statements that the policyowner made in the insurance application.

In a fixed annuity, what is the second interest crediting rate called?

*renewal rate* interest amount secondary credit amount interest schedule The second interest crediting rate is called a "renewal rate." The same applies to all future renewal rates.

Section 457 plans are qualified retirement plans that are reserved for employees of which type of organization?

*state and local government units* educational organizations charitable organizations religious organizations Section 457 plans are qualified retirement plans reserved for employees of state and local government units. Under these plans, eligible employees can elect to defer salary into the plan on a pre-tax basis.

Grace's annuity pays her an income for her lifetime, regardless of how long she lives. When she dies, no further payments are made to anyone. Which of the following types of settlement options does she have?

*straight, or pure, life income* life income with guaranteed minimum (refund guarantee or life annuity certain) joint survivor life income life income with period certain Under a straight or pure life income option, the annuitant receives an income for his or her lifetime, regardless of how long the owner lives. At the owner's death, no further payments are made to anyone; the contract ends.

George purchased an annuity that will provide his wife, Anna, with monthly income payments for as long as she lives. In this scenario, what is Anna called?

*the annuitant* the owner the agent the beneficiary The annuitant is the person the owner chooses to receive the periodic annuity payments when the contract annuitizes.

Which of the following statements best describes the purpose of the annuity payout period?

*to distributes funds in the form of guaranteed periodic payments over a time period selected by the annuity owner, throughout the annuitant's lifetime and even afterward.* to distribute funds in the form of guaranteed periodic payments over a specified number of years selected by the insurance company based on the annuitant's life expectancy at the time of annuitization to distribute funds in the form of guaranteed periodic payments over a specified number of years not to exceed ten years to distribute funds in the form of periodic payments over a time not to exceed the annuitant's age of 120 years. The period during which funds are paid out in the form of periodic income payments is known as the annuity payout period. Income payments are guaranteed for any period the owner wants, from a set number of years to the annuitant's remaining lifetime, or even longer in the case of joint and survivor annuities. The annuity owner, not insurer, selects the annuity payout period.

Dustin bought a life insurance policy three years ago. If he commits suicide, what, if anything, is the insurer obligated to pay to the beneficiary?

*ull death benefit* nothing partial death benefit refund of the premiums An individual life insurance policy can exclude death by suicide of the insured for two years after policy issue. If the insured commits suicide after that period, the insurer must pay the death benefit to the beneficiary.

What is a typical life insurance policy's grace period?

2 years *31 days* 10 days 20 days Although the premium is due on its due date, the policyowner has 31 days after this date to pay the premium before the policy lapses.

Alice's annuity imposes a declining surrender charge that begins at 7 percent during the first year of the contract and declines 1 percentage point each year. What would the surrender charge rate be for a full withdrawal in the third year of the same contract?

3 percent 4 percent *5 percent* 6 percent If a deferred annuity imposes a 7 percent declining surrender charge during the first year of the contract, it would be 6 percent during the second year and 5 percent during the third year. The surrender charge is typically a percentage of the contract's accumulated value and usually declines at 1 percent per year. In the eighth year, the surrender charge period ends.

The suicide exclusion provision of a typical life insurance policy excludes coverage if death is the result of suicide within

3 years following policy issue. 1 year following policy issue. *2 years following policy issue.* 6 months following policy issue. The standard suicide provision denies payment of the death benefit if, during the first two years following policy issue, the insured commits suicide.

At what age does U.S. tax law require IRA owners and other qualified plan participants to start taking distributions from their plans?

59 1/2 69 *70 1/2* 65 According to the Internal Revenue Code, distributions from qualified retirement plans must begin at age 70 1/2 or upon retirement, whichever comes later.

Under a disability waiver of premium rider, an insured most commonly must be totally disabled for how long before the waiver begins?

6 weeks 12 weeks *6 months* 10 months Most waiver of premium riders require that the insured be totally disabled for six months before the waiver begins.

In accordance with Section 1035 of the Tax Code, which of the following exchanges is permitted on a tax-free basis?

A variable annuity for a variable life insurance policy. A market-value adjusted annuity for a whole life insurance policy. *A deferred market-value adjusted annuity for an immediate variable annuity.* An equity-indexed annuity for an equity-indexed life insurance policy. Sec. 1035 permits the exchange of any type of annuity product for any other type of annuity product.

Which statement regarding life insurance cost-of-living riders is NOT correct?

Adjustable life policies often include a cost-of-living agreement, so if the coverage increases, the premium may also rise. The cost-of-living rider on a whole life policy is typically an increasing term insurance rider. *As the Consumer Price Index (CPI) increases, so does the policyowner's coverage, providing the insured can prove insurability.* Universal life policies, with their highly flexible terms, are not good candidates for the addition of a cost-of-living rider. As the CPI increases, so does the policyowner's coverage, without requiring the insured to prove insurability.

The activities a producer performs to support the insurance company in learning all it can about the applicant when seeking applications for insurance is called

Agency development Fiduciary process *Field underwriting* Due diligence

The purpose for a long-term care rider with a deferred annuity contract is to

Allow the annuity owner to assign the deferred annuity to a nursing home Allow the deferred annuity to be annuitized earlier than age 65 if the annuitant requires long-term care. *Allow withdrawals from the deferred annuity without a surrender charge if the annuitant is confined to a nursing home.* Allow tax-free withdrawals from the deferred annuity if the annuitant requires long-term care. The long-term care rider lets annuity contract owners withdraw funds without a surrender charge if they become confined to a nursing home.

Which of the following best explains why Section 1035 of the Tax Code does not permit a tax-free exchange of an annuity for a life insurance policy?

Allowing a tax-free exchange of an annuity for life insurance would jeopardize the financial strength of insurance companies. The IRS wants to encourage people to own annuities, not life insurance. *Allowing a tax-free exchange of an annuity for life insurance would enable taxable annuity gain to escape taxation via the life insurance death benefit.* Allowing a tax-free exchange of an annuity for life insurance would result in the life insurance death benefit becoming taxable. Section 1035 prohibits the exchange of any type of annuity product for any type of life insurance product, because to do so would enable taxable annuity gain to escape taxation via the life insurance death benefit.

Which one of the following statements regarding life insurance accelerated benefits is most correct?

An accelerated benefit is only available as a provision of the policy itself, not as a rider. *An accelerated benefit rider pays out part or all of the policy's face value while the insured is still living.* The insured can use these funds only for medical care. An accelerated benefit is only available as a rider. An accelerated benefits rider pays out part or all of the policy's face value while the insured is still living. Some portion of the death benefit payment is accelerated and paid while the insured is still alive.

George is receiving income payments from an annuity. His wife, Ellen, will continue receiving income payments for the rest of her life from George's annuity when he dies. Under this annuity contract, what is Ellen considered?

An agent *An annuitant( An owner A beneficiary

Which statement regarding two-tiered interest rate annuities is NOT correct?

An annuity offers a lower rate that is applied if the contract owner surrenders the annuity and takes its values in a lump sum instead of annuitizing. If the owner surrenders the annuity and takes its values in a lump sum instead of annuitizing, the lower rate of interest is retroactively applied to the contract issue date. The annuity offers a higher rate that is only available if the contract owner keeps the product and chooses to annuitize it. *A two-tiered fixed annuity has a guaranteed higher level of interest crediting than most traditional fixed annuities.* A two-tiered fixed annuity has a higher level of interest crediting than most traditional fixed annuities, as long as the contract owner keeps the product and chooses to annuitize it.

Ann is the beneficiary of an annuity owned by Jim. Jim intended to annuitize the contract at retirement but died shortly before retiring. What benefits will Ann receive from the annuity?

Ann will receive income for life. *Ann will receive the annuity's accumulated value and may select a payout option.* Ann's right to any funds will be based on the income payout option that Jim selected. Ann will receive the contract's funds in a lump sum.

Ann is beneficiary of an annuity owned by Jim. If Jim annuitizes the contract at retirement and dies shortly afterward, what benefits will Ann receive from the annuity?

Ann will receive the annuity proceeds. Ann will receive lifetime income. *Ann's right to any funds will be based on the income payout option Jim selected.* Ann's will receive income for 20 years. If the owner/annuitant dies after annuitization begins, then the beneficiary's right to any funds will be based on the income payout option the owner selected.

Which of the following statements best describes the purposes that annuities serve?

Annuities are a form of life insurance that ensures lifetime income. *Annuities accumulate and/or distribute sums of money.* Annuities are income distribution instruments that are not able to accumulate money. Annuities collect premiums to pay them back to the annuitant in a lump sum sometime in the future.

What will happen if a person starts receiving Social Security retirement benefits before reaching his or her full retirement age and continues to work and earn money that exceeds specified earnings limits?

Benefits will not be affected. *Benefits will be reduced each year until the worker attains full retirement age.* Benefits will be reduced by $2 for every $5 earned over the earnings limit. Benefits will be permanently reduced. If a person retires early and continues to work, his or her Social Security benefits can be reduced if the amount earned exceeds the annual earnings limit. For every $2 earned over this limit, benefits are reduced by $1. This limit continues until the worker reaches full retirement age. At that point, no earnings limit is imposed, and the person may work and receive full benefits.

Kyle set up a Section 529 college savings plan and named his only son, Joe, as beneficiary. Which of the following statements is correct?

Both Joe and Kyle share control over the funds in the account. Joe will have control over the funds in the account only when he reaches the age of majority. Joe can control how the funds in the account are used. *Kyle controls how the funds in the account are used.* With a Section 529 college savings plan, the account holder controls the account at all times. Even when Joe reaches the age of majority, he will not have control over the account.

Brian earned $100,000 this year and contributed $10,000 to his 401(k) plan account. His employer contributed an additional $2,000 on his behalf. All the following statements regarding this are correct, EXCEPT

Brian will not be taxed this year on the amount that his employer contributed to his account. *Brian's taxable income will be reduced by the amount that both he and his employer contributed to his 401(k) plan account.* Brian's contributions to his 401(k) plan account are made with pre-tax dollars. Brian's taxable income will be reduced by the amount he contributed to his 401(k) plan account. Brian's taxable income will be reduced only by the amount that he contributed to his 401(k) account. The amount contributed by his employer does not lower his taxable income.

Which of the following best typifies the use of a structured settlement annuity?

Carl wants to save money in a financial product that will grow on a tax-deferred basis and, at retirement, provide him with income that he cannot outlive. *Shirley was paralyzed in a car accident, and a jury awarded her $2 million which must be paid to her over a 20 year period.* Dick recently retired and wants to take his vested retirement plan money and divide it between a lump sum payment and payments made over his lifetime. Rachel wants to use a portion of her monthly annuity payment to fund a life insurance policy in which her husband is the beneficiary. A person injured in an accident or by the actions of another party is often awarded a sum of money through a court settlement. If payments are to be paid over time, a structured settlement annuity is used.

All the following statements about family term riders with life insurance are correct, EXCEPT

Children covered by this rider can convert their coverage to permanent coverage at age 21 without proof of insurability. *The family term rider covers multiple family members (spouse plus children) with term insurance coverage that varies by age.* The policyowner can add or drop family members on a family term rider but must prove insurability if adding insureds. A family term rider is an alternative to either a separate spousal rider or separate children's rider. A family term rider covers multiple family members (spouse plus children) equally with term insurance but coverage is not based on their ages.

All of the following distributions from a qualified plan are exempt from the 10 percent penalty tax on premature distributions, EXCEPT

Distributions made because the participant dies. *Distributions made because the participant needs the funds to pay for homeowners insurance premiums.* Distributions made because the participant has medical expenses that exceed 10 percent of his or her adjusted gross income. Distributions made because the participant becomes disabled. A distribution taken to pay homeowners insurance premiums would be subject to the 10 percent penalty tax on premature distributions, if taken before age 59 1/2.

If Sam, who owns a deferred annuity, withdraws funds as a full or partial surrender before the contract annuitizes, what happens?

Fifty percent of Sam's withdrawals are taxable income. *Withdrawals are taxable until accrued earnings have been fully withdrawn, at which point remaining withdrawals (of principal) are not taxable.* Up to $40,000 of Sam's withdrawals are tax free. Sam's annuity withdrawals are tax free. If Sam withdraws funds as full or partial surrenders before the contract annuitizes, any withdrawn annuity interest earnings are taxable.

Tracy, the CEO of HML Data, Inc., is insured under an executive bonus plan. All the following statements regarding this are correct EXCEPT:

HML Data can take an income tax deduction for premium payments it makes under the policy. Tracy can choose the beneficiary under the policy. Tracy owns the life insurance policy. *HML Data is required to pay all of the premiums for the policy.* Under an insured executive bonus plan, the employer pays some or all of the premiums on a life insurance policy an executive owns.

The senior vice president of Salem Computers is covered by a salary continuation plan, which stipulates that he cannot work for a competitor. What will happen if he decides to leave his position and work for another computer company?

He will not receive any benefits under the salary continuation plan until he retires. He will only receive part of the benefits that he was entitled to receive under the salary continuation plan. He will only receive that part of the benefit that he deferred from his own compensation. *He will forfeit his benefits under the plan since he failed to meet the conditions in the agreement.* The senior vice president will forfeit all benefits under the salary continuation agreement if he fails to meet the conditions in the agreement. In this case, because he left to work for a competitor, he will not be entitled to any benefits under the plan.

Fred, age 65, never married and has been working for more than 40 years. He provided more than 80 percent of his elderly mother's financial support. He died a year after he began caring for her. Which of the following statements is correct?

His mother is eligible to receive monthly benefits equal to 75 percent of Fred's primary insurance amount (PIA). His mother will receive a $500 lump-sum payment. His mother will not receive any survivor benefits. *His mother is eligible to receive monthly benefits equal to 82.5 percent of Fred's primary insurance amount (PIA).* Beginning at age 62, each parent of a deceased worker is eligible to receive monthly survivor benefits if the parent was at least one-half supported by the worker when the worker died. If only one parent is eligible, he or she receives 82.5 percent of the worker's PIA.

Diane invested $6,000 two years ago in a Section 529 college savings plan for her daughter, Cathleen, age 5. The account earned $400 the first year and $450 the second year. Which of the following statements is correct?

Income tax on the earnings must be paid this year at the combined rate of Diane and Cathleen. *No income tax must be paid on the earnings this year.* Income tax on the earnings must be paid this year at Diane's tax rate. Income tax on the earnings must be paid this year at Cathleen's tax rate. Funds in a Section 529 college savings plan accumulate tax free for federal income tax purposes. When later used to pay for higher education expenses, all of the money, including earnings, comes out income tax free.

When a deferred annuity is annuitized, which one of the following most correctly describes the tax treatment of the contract's "gain" (i.e., accrued interest) portion of each payment?

It is tax exempt. A 29 percent tax is applied. Gain is exempt from taxation until basis has been distributed; then it becomes taxable. *It is taxable.* The exclusion ratio is applied to each annuity payment to determine the portion that is excluded from tax. The balance (the portion attributed to interest earnings) is taxable.

If an employer sets up a profit-sharing plan, which one of the following statements is most correct?

It must allow employees to contribute up to the maximum annual limit. *It must establish individual accounts for each participant.* It must contribute the same amount to the plan each year. It must allow employees to make elective deferrals to plan accounts and to adjust their contribution levels at any time. Under a profit-sharing plan, the employer is the sole contributor to the plan. Contributions are directed into individual accounts for each participant.

To be eligible to set up a SIMPLE plan, a business has to meet which one of the following basic requirements?

It must be organized as an S corporation. It must have reported a profit on its tax returns the previous two years. It must already have a qualified plan in place that it will be replacing with the SIMPLE plan. *It must employ no more than 100 people.* SIMPLE plans are designed solely for small businesses with no more than 100 employees.

Which of the following statements most correctly describes the accidental death benefit rider on a life insurance policy?

It pays benefits if the insured suffers a disabling injury, permanent dismemberment, or death resulting from an accident. It pays benefits if the insured dies as result of an accident or a sudden illness. *It pays benefits only in the event of accidental death.* It pays benefits if the insured dies as result of an accident or a self-inflicted injury. The accidental death benefit rider provides an additional amount of insurance if the insured dies as a result of an accident.

Nicole, age ten, is the insured in a traditional "jumping juvenile" policy with a $5,000 face amount. When she reaches age 21, what will most likely happen to the juvenile policy's face amount?

It will increase to $10,000. *It will increase to $25,000.* It will remain $5,000. It will increase to $20,000. A jumping juvenile policy is typically issued in units of $1,000 of death benefit. When the insured child reaches age 21, the death benefit jumps to $5,000 per unit. The death benefit under Nicole's policy will increase to $25,000 when she reaches age 21.

Jason, age 27, is single, works for a small computer company, and earns $125,000 a year. Because the company does not have any retirement plan for its employees, Jason set up and contributed to a traditional IRA this year. Which of the following statements is correct?

Jason cannot take a deduction for his IRA contribution because his adjusted gross income is too high. Jason can deduct part of his IRA contribution this year. Jason cannot take a deduction for his IRA contribution because he is not covered by a qualified employer plan. *Jason can deduct the full amount that he contributes to his traditional IRA.* Because Jason is not covered by a qualified employer plan, he can deduct the full amount that he contributes to a traditional IRA.

Which statement about life insurance accelerated living benefits riders or provisions is NOT correct?

Living benefits riders are a fairly new product. *They are commonly used to supplement an individual's retirement income.* They provide financial support while the insured is living. They provide financial support when the insured faces an illness. Accelerated living benefits riders are designed to release a portion of the policy's death benefit to help the terminally ill or permanently confined insured with final expenses.

Paul reached age 70 1/2 this year and has a Roth IRA worth $100,000. Which of the following statements best describes his distribution options?

Paul must take his first required minimum distribution by April 1 of the year following the year he turns 70 1/2. If Paul waits to take a distribution until next year, he must take two distributions. Paul will have to pay a 50 percent penalty tax if he does not take the full amount of the required minimum distribution. *Paul is not required to take any distributions from his Roth IRA.* Unlike traditional IRAs, Roth IRA owners are not required to take distributions once they reach age 70 1/2. As a result, a Roth IRA can remain intact and can be passed to the owner's beneficiary when the owner dies, if desired.

Which of the following individuals would be most likely to enter into a viatical settlement?

Philip, who wants to sell his existing policy and purchase one with a higher face value *Ben, who is terminally ill and needs money to pay his medical bills* Alana, who no longer needs life insurance coverage and wants to surrender her policy Rebecca, who wishes to sell her policy because she has no remaining family members Individuals who are terminally or chronically ill can sell their life insurance policies at a discount to viatical companies through a viatical settlement.

Which of the following explains why a waiver of premium rider must function differently with a universal life insurance policy than with a traditional whole life policy?

Premium payments for a universal life policy are predetermined. Premium payments for a universal life policy are not flexible and must be paid quarterly. Premium payments for a universal life policy are flexible but continuous. *Premium payments for a universal life policy are flexible, and need not be paid continuously.* Because universal life premium payments are flexible, they need not be paid continuously.

All of the following statements about an insurance company's general account are correct EXCEPT:

Premiums deposited to the general account are invested by the company in safe, secure investments, including long-term bonds and mortgages. Premiums for a company's guaranteed products are deposited into the insurer's general account. *The investment of funds from the general account allows the insurer to guarantee all of its products, both fixed and variable.* Premiums in the general account are invested in fixed interest securities, enabling the insurer to predict its level of investment returns and earnings.

The tax-free exchange of a life insurance policy for an annuity is sometimes called a

Section 79 Exchange Section 403(b) Exchange Section 401(k) Exchange *Section 1035 Exchange* Section 1035 of the Tax Code deals with the exchange of life insurance policies and annuities.

Social Security benefits are funded through payroll taxes split between the employee and employer. Which of the following best explains the amount of tax paid by self-employed individuals?

Self-employed individuals pay a rate that is more than the employee rate but less than the combined employer and employee rate. Self-employed individuals pay the same rate as employers. Self-employed individuals pay the same rate as employees. *Self-employed individuals pay a tax rate equal to the combined employer and employee rate.*

In addition to lump sums the surviving family will need immediately when an insured dies, they also will likely need an ongoing stream of income. Which one of the following statements regarding the need for ongoing income is most correct?

Social Security typically does not pay benefits to the surviving dependents of deceased people who were covered by Social Security. Social Security benefit payments will generally provide most of the ongoing income that the surviving family needs. *Additional amounts of life insurance may be needed to provide enough ongoing income for the surviving family.* The human life value approach is typically used to figure out how much ongoing income a surviving family needs. Because a surviving family will need ongoing income as well as lump-sum benefits, additional life insurance may be necessary to cover these expenses.

All the following statements regarding the insurer disclosure that must be made with respect to accelerated benefits riders are correct EXCEPT:

Some states require that the disclosure must note that receipt of accelerated benefit payments may adversely affect the recipient's eligibility for Medicaid or other government benefits. The disclosure must include an explanation of the effect payment of the accelerated benefit would have on the policy's cash value, accumulation account, death benefit, premium, and policy loans. *If a life policy includes an accelerated benefit, most states require that insurers provide a disclosure statement to the applicant only if an accelerated benefit payout is requested.* The disclosure must provide a brief description of accelerated benefits and definitions of conditions triggering payment of benefits. If a life policy includes an accelerated benefit, most states require that insurers provide a disclosure statement to the applicant at the time of application.

Sue, an annuity owner, names her 15-year-old son and 10-year-old daughter as joint annuitants of her contract. Upon whose life (or lives) are income payments determined?

Sue's son's life Sue's life Sue's daughter's life *the joint life expectancy of Sue's son and daughter* If two people are named jointly as annuitants, then their joint life expectancy is the measurement for the contract's income payments.

All of the following statements about the funding of Social Security benefits are correct, EXCEPT:

The FICA tax is split between a worker and his or her employer. Social Security benefits are funded through payroll taxes. *Self-employed workers pay a lower FICA tax than employees.* The FICA tax is allocated between OASDI and Medicare. Self-employed workers pay the same FICA tax rate as employees. However, while employees split the tax with employers, a self-employed worker must pay the full 15.3 percent FICA tax himself or herself.

Sally's $750,000 life insurance policy was payable to her son when she died. Her son, the executor of Sally's estate, receives the $750,000 in death proceeds income tax-free. How are those funds handled in Sally's estate?

The amount includible in Sally's estate cannot be determined from the information provided. *Sally's estate must include $750,000 for the purpose of determining any estate tax liability.* Only $200,000 of the death benefit is includible in Sally's estate. Those funds are exempt from Sally's estate. Sally's estate must include $750,000 for the purpose of determining any estate tax liability, although estates valued at less than a certain threshold amount are generally exempt from federal estate tax.

The exclusion ratio applies until all principal in the annuity contract has been paid out. After that, what happens?

The annuity will be paid up, and no further taxes will apply. The annuity contract is canceled. *The full amount of future annuity payments are treated as taxable income.* The full amount of future annuity payments are income tax free.

The IRS encourages the use of annuities for long-term retirement savings. Therefore, the IRS may impose a penalty tax on any withdrawal that occurs before which of the following?

The contract annuitizes. *The contract owner reaches age 59 1/2.* The contract owner reaches age 62. The annuitant reaches age 60.

All of the following statements about the interest rates on deferred annuities are correct EXCEPT:

The current declared rate is subject to change. The guaranteed minimum rate extends for the life of the contract. *The guaranteed minimum rate is usually 5 to 6 percent.* The annuity contract usually stipulates a minimum period the current declared rate will remain in effect. The guaranteed minimum rate is usually 2 to 3 percent, compounded annually.

If an employer sets up a profit-sharing plan for its employees, which one of the following statements is most correct?

The employer must make contributions to the plan every year. *The employer must make substantial and recurring contributions for the plan to maintain its qualified status.* The employees must be the sole contributors to the plan. Contributions to the plan are directed into one account maintained for participants. Profit-sharing plans provide some flexibility for the employer. For example, an employer does not have to make contributions every year. However, to remain qualified, the plan must be maintained with substantial and recurring contributions.

Jessica's traditional IRA is worth $300,000 and consists only of prior deductible contributions and earnings. What are the tax implications if Jessica converts her IRA to a Roth IRA?

The entire $300,000 will be subject to income tax and to the 10 percent early withdrawal penalty. She can spread out any income taxes due over four years. *She must pay income taxes on the entire $300,000.* Only part of the $300,000 will be subject to income tax. If Jessica converts her traditional IRA to a Roth IRA, she must pay taxes on the entire amount when she converts it. However, from that point on, the converted account builds tax free. As long as she holds the account for five years and is older than age 59 1/2, any distribution she takes from the Roth will be tax free.

In general, life insurance death benefits paid to a beneficiary in a lump sum are not taxed. Which statement is correct if the payout option is other than a lump sum?

The full amount is tax deductible to the beneficiary. Interest earnings are received by the beneficiary on a tax-deferred basis. *The full amount is taxable to the beneficiary. Interest earnings are taxable income to the beneficiary.* Interest earnings are taxable income to the beneficiary only if the payout option is other than a lump sum.

What must an annuity owner do to withdraw funds from his or her annuity contract?

The funds must remain in the contract until annuitization. Pledge a certain amount of collateral, and agree to a repayment schedule. *Notify the insurer of the request to withdraw funds.* Provide proof of the owner's need for those funds. An annuity owner who wants to withdraw any values from his or her contract must simply notify the insurer. The insurer cannot withhold these funds or refuse to honor the owner's request.

Under the "transfer-for-value" rule, the portion of a life insurance death benefit recognized as taxable income is calculated in which of the following ways?

The gain is calculated as the death benefit minus the cash surrender value of the policy minus premiums paid by the new owner. The gain is calculated as the cash surrender value plus the purchase price of the policy minus premiums paid by the new owner. The gain is calculated as the death benefit plus the purchase price of the policy plus premiums paid by the new owner. *The taxable gain is calculated as the death benefit minus the purchase price and premiums paid by the new owner.*

At the end of the interest-paying period (or upon request by the beneficiary), what happens to the annuity proceeds that the insurer was holding?

The insurer keeps the interest, thus increasing the death benefit amount. The insurer pays the proceeds in a lump sum. The insurer pays the proceeds to the beneficiary. *The insurer pays the proceeds, either in a lump sum or under one of the other settlement options.* At the end of the interest-paying period (or upon request by the beneficiary), the insurer pays the proceeds either in a lump sum or under one of the other settlement options.

Policyowners can withdraw the interest earnings on their dividends or allow the interest to continue to accumulate. In either case, how is the interest treated for income tax purposes?

The interest earned is not tax free but it is tax deferred. *The dividend itself is tax free but the interest earned on the dividend is reported as taxable income in the year credited.* The interest earned on the dividend is taxable if withdrawn, but if paid out as part of the death benefit it is income tax free. The interest earned is not taxable.

Mary inherited $10 million several years ago. She has just bought a life insurance policy to help preserve her estate. All of the following statements regarding this are correct EXCEPT

The policy's death benefit can be used to pay Mary's debts when she dies. The policy's death benefit can be used to pay Mary's estate settlement costs. *The policy's death benefit cannot be used to pay Mary's estate taxes or settlement fees.* The policy's death benefit can help eliminate the need to sell assets to pay estate taxes when Mary dies. For people with substantial assets, life insurance offers a way to protect their estates. The death benefit can be used to pay estate taxes, settlement costs, and other debts that the estate may face upon a person

If a life insurance policy's death benefit is paid to the insured's estate, which of the following statements is correct?

The proceeds cannot be used to make charitable gifts. *The proceeds can be used to pay for estate taxes or other costs that an estate may face.* The proceeds will never be subject to federal income tax. The proceeds cannot be given to heirs named in a will.

To be eligible to receive Social Security disability benefits, a worker must satisfy all of the following requirements EXCEPT:

The worker must remain disabled during the waiting period. *The worker must satisfy a 12-month waiting period.* The worker must be unable to engage in any substantial gainful work. The disability must be expected to last at least 12 months. To be eligible to receive Social Security disability benefits, the worker must first satisfy a waiting period of five consecutive months.

Which statement about life policy riders that cover additional insureds is NOT correct?

These riders cover someone other than the base policy insured. Policy riders can provide needed coverage on more than one insured at a lower premium. *Each additional insured is issued his or her own separate policy.* These riders typically take the form of term insurance. Policy riders can provide needed coverage on more than one insured at a lower premium. The policyowner buys an additional insured or other insured rider, which is added to the base policy.

Which statement about current declared interest rates on deferred fixed annuities is NOT correct?

They are based on the insurer's investment results and on the economic climate. They remain in effect for a limited period, such as one or two years after the rate is declared. *They extend for the life of the contract.* They are subject to periodic change. They remain in effect for a limited period.

Which one of the following most accurately describes the income tax treatment of life insurance death benefits received by a terminally ill insured under the accelerated benefits rider?

They are taxable as ordinary income while the insured is alive; the rest of the death benefit is income tax free when distributed at death. *They are generally income tax free.* They are tax deferred until the insured dies, at which point they are taxable. They are taxable in the year the benefit is received. Except in so-called transfer for value cases that are beyond the scope of this course, the qualifying insured pays no income tax on accelerated death benefit payments made prior to death.

Endowment contracts are not considered life insurance (for tax purposes) because

They do not pay death benefits. They do not build cash values. *They endow before age 120.* They never mature. To meet the legal definition of life insurance, a policy cannot endow before age 120. However, endowment contracts build cash values quickly and endow well before age 120.

Insurance agents must comply with all of the following rules when selling life insurance policies in North Carolina EXCEPT:

They must give prospects a Buyer's Guide and a policy summary. *They can never use life insurance policy illustrations during a sales presentation.* They can use terms such as financial planner or investment advisor only if they hold such designations. They must inform prospects that they are acting as life insurance agents before beginning a sales presentation. Agents can use an illustration to explain a life insurance policy to a consumer. They must also give prospects a Buyer's Guide and policy summary, and they must disclose that they are acting as agents. Terms such as financial planner or investment advisor can be used only if the agent holds such designations.

Which one of the following statements most correctly describes the transfer-for-value rule in life insurance taxation?

When life insurance policies are sold or transferred to another party for valuable consideration, the funds will be included in the beneficiary's estate when he or she dies. The transfer-for-value rule applies when life insurance policies are sold or transferred to an unrelated third party. In such cases, the beneficiary may be subject to income tax on the interest earned on the death benefit. *When life insurance policies are sold or transferred to another party for valuable consideration, the beneficiary may be subject to income tax when the death benefits are paid.* If a life insurance policy is transferred for value, the death benefit is tax free.

Whittier Insurance Company just began an advertising campaign for a new type of life insurance policy. The advertisements encourage prospective purchasers to contact Whittier's representatives to learn more about this insurance, which it calls a "Premier Savings and Investment Plan." Which of the following statements is correct?

Whittier's advertising may lawfully refer to life insurance as a savings and investment plan only if the policy is of a permanent nature. Whittier's advertising is lawful as long as it also discloses the policy's death benefit. *Whittier has engaged in unlawful advertising that misrepresents the true nature of the policy.* Whittier's advertising is lawful as long as it also discloses its name and address. It is unlawful to use a name or title for an insurance policy that misrepresents the true nature of the policy. A life insurance company also may not misrepresent the terms, benefits, or advantages of an insurance policy.

Which one of the following entities would be eligible to set up a Keogh plan?

a corporation with more than 100 employees a regular C corporation with 15 employees *a three-person law partnership* a Subchapter S corporation with seven employees A Keogh plan is a qualified retirement plan designed for unincorporated businesses (sole proprietorships and partnerships). A limited liability company, a Subchapter S corporation, and a corporation are not eligible to establish a Keogh plan because they are incorporated entities.

Agent Smith represents Gretchen and is negotiating the viatical settlement agreement in which she will sell her life insurance policy to BBC Corporation. In this transaction, what is Agent Smith considered?

a viatical settlement provider a viatical settlement purchaser a viator *a viatical settlement broker* A viatical settlement broker negotiates viatical settlement contracts between viators and viatical settlement providers. A broker represents and is compensated by the viator.

What type of annuity option pays income over a set number of years or in specified amounts?

annuity contingent income option life contingent payout option *annuity certain income option* life annuity certain option (made up term)

Brad invested $8,000 in a savings plan that lets him lock in the cost of a future college tuition at today's prices. What type of plan is this?

college savings plan *prepaid tuition plan* Uniform Transfers to Minors Act (UTMA) account Education Savings Account Brad invested in a prepaid tuition plan, which lets him pre-pay a child's education at today's tuition rates.

What is the term for voluntarily giving up a known right?

conditional estoppel voidable *waiver* Waiver is voluntarily giving up a known right. If an insurer voluntarily gives up a legal right that it has under an insurance contract, it cannot deny a claim based on a violation of that right. Estoppel is similar to the idea of waiver but involves giving up a right without intending to do so. The difference is the lack of intent to give up the right.

What do most insurance agents and buyers use today to figure out how much life insurance to buy?

cost-benefit analysis financial loss analysis the human life value approach *the needs approach* Because the human life value approach does not consider a person's unique needs, many insurance buyers and agents today use the needs approach instead. Under the needs approach, an agent examines a person's financial situation in detail.

What is a term insurance policy in which the protection and premium amounts stay the same during the term period known as?

decreasing term increasing term renewable decreasing term *level term* Level term insurance offers a level death benefit and premium during a set period. During the term of coverage, neither the death benefit nor the premium changes.

The requirement that an insurable interest must exist when life insurance is purchased is intended to prevent people from doing which of the following?

designating an ineligible person as the policy beneficiary using life insurance to fund future cash needs *using life insurance for wagering or betting* overusing life insurance

When a person dies, the survivors often immediately need a certain amount of money to cover costs. The survivors will need an immediate lump sum to pay for all of the following EXCEPT

estate taxes. debts incurred by the insured. *utilities and clothing.* final medical and funeral expenses. In addition to lump sum amounts that are needed immediately at an insured's death, the surviving family will also typically need income to cover ongoing needs such as utilities, food, clothing, and transportation.

Sandy and Cindy are healthy, 45 years old, and have similar life expectancies. Though they are insured by the same company, Sandy's life insurance premiums are considerably lower than Cindy's. What may this indicate a case of?

false advertising twisting misrepresentation *unfair discrimination* Unfair discrimination can arise when individuals of the same class and life expectancy are charged different premiums or rates for life insurance. However, if these differences are based on sound actuarial principles, they do not constitute unfair discrimination.

The ABC Company offers a fixed annuity, guaranteeing a minimum rate of 3 percent, which Jim buys with a $10,000 premium payment. At the time Jim bought his contract, ABC had declared a "crediting rate" of 6 percent for two years. For how long will Jim receive a 6 percent interest rate?

five years *two years* for the entire contract one year Jim's contract is guaranteed to earn 6 percent for the first two years.

The replacement regulations apply to transactions involving which of the following?

immediate annuities credit life insurance individual life insurance group life insurance The replacement regulations apply to transactions involving individual life insurance. Insurers selling group life insurance, credit life insurance, and immediate annuities are not subject to the replacement transactions.

Which of the following can be funded with a single premium payment, a series of fixed premium payments, or flexible premium payments?

immediate annuities retirement annuities *deferred annuities* single-premium immediate annuities Deferred annuities can be funded with a single premium payment, a series of fixed premium payments, or with flexible premium payments. Moreover, the owner can make these payments whenever and in whatever amount he or she wants.

Which of the following doubles or triples the benefits if the insured dies from a specific accident?

impairment riders guaranteed insurability riders *multiple indemnity riders* nonrenewable (cancelable and term) policies A multiple indemnity rider offers double or triple benefits if the insured dies accidentally, becomes dismembered, or loses a limb because of an accident.

Mark and Mary buy a deferred annuity and choose a joint and survivor option. When they annuitize the contract, Mark receives a monthly income of $1,200. Under which of the following would Mary receive a monthly income of $600 for life?

joint and 100 percent survivor joint and period certain joint and two-thirds survivor *joint and one-half survivor* In a joint and one-half survivor option, after the first annuitant dies, the survivor's income is reduced to one-half of the original amount.

Which of the following distributes a sum of money regularly, starting very shortly after they are bought?

life insurance *immediate annuities* deferred annuities deferred variable annuities Immediate annuities distribute a sum of money regularly, starting very shortly after they are bought.

Which of the following would be most appropriate for Haley, 55, if her primary objective is to ensure having an income she cannot outlive?

mutual funds CDs *an annuity* life insurance Annuities provide benefits during one's life. They ensure that one's income cannot be outlived.

All the following statements regarding the automatic premium loan are correct, EXCEPT:

nder the most common automatic premium loan provision, the policy's cash value must be at least equal to the unpaid premium for the automatic premium loan to be made. The insurer can set up the policy so that automatic premium loans cannot pay consecutive premiums. *The insurer deducts the automatic premium loan on the first day of the premium payment grace period if the policyowner has not paid by that time.* The insurer can set up the policy so that automatic premium loans can pay no more than 12 monthly premiums. The insurer deducts the automatic premium loan on the last day of the premium payment grace period if the policyowner has not paid by that time.

What is the name of one of the first systems developed for determining how much life insurance is necessary, based on the economic value of a human life?

needs approach cost-benefit analysis financial loss analysis *human life value approach* The human life value approach involves estimating an individual's personal earnings each year to retirement. The costs of self-maintenance and income taxes are then deducted, and the result is the income needed to provide for family members. This residual income stream is then discounted to its present value.

To qualify for Social Security disability benefits, a worker must satisfy a waiting period of how many months?

nine months six months three months *five months* To qualify for Social Security disability benefits, a worker must be totally disabled, which means that he or she is unable to engage in any substantial gainful employment. The disability must be expected to last at least 12 months (or result in an earlier death). Benefits will begin only after the worker has satisfied a waiting period of five consecutive months, during which he or she must remain disabled.

An insurer must keep records of all forms used to solicit insurance for how long?

one year two years five years *three years* Insurers must keep a file of all forms used when soliciting insurance, including Buyer's Guides, policy summaries, and other sales documents,for three years.

When can Hank add a waiver of premium or a waiver of cost rider to his universal life policy?

only when the policy is issued one year after the policy is issued *when the policy is issued or at a later date* only six months after the policy has been issued Usually, a policyowner can add both UL riders when the policy is issued or at a later date.

When selling a life insurance policy that replaces an existing policy, the agent must leave all of the following items with the applicant EXCEPT:

originals or copies of marketing communications used in the sale Buyer's Guide and policy summary *confirmation that any existing insurers have been notified of the replacement* Notice Regarding Replacement signed by the agent and applicant The insurer, not the agent, confirms that any existing insurers are notified of the replacement. However, the insurer is not required to provide this confirmation to the applicant.

What are policies that do not meet IRC Section 7702's definition of life insurance generally called?

seven-pay policies FIFO policies LIFO policies *modified endowment contracts (MECs)*

All of the following are accurate reasons for not using deferred annuities for short-term accumulation goals EXCEPT:

possible immediate taxation of gain upon distribution *possible loss of accrued interest earnings upon distribution* possible surrender charges upon distribution possible penalty tax upon distribution While the distributed amount may be subject to surrender charges, income taxation of gain, and a penalty tax, early distribution from a deferred annuity will not result in loss of accrued interest.

Which of the following holds an insurance company's undivided investment account and the funds that support the contractual obligations of the insurer's fixed and guaranteed products?

primary account special account *general account* funded account The *general account* is the company's undivided investment account. (that makes fixed annuity guarantees possible) It holds the funds that support the contractual obligations of the insurer's fixed and guaranteed products, such as whole life (nonvariable permanent) insurance policies and fixed annuities. Premiums for a company's guaranteed products are deposited into the insurer's general account. The premiums, in turn, are invested by the company in safe, secure investments, such as long-term bonds and mortgages

Under the settlement option that Gary and Fran chose for their father's life insurance, they receive monthly payments until the second payee (survivor) dies. At that point, income payments stop. What option have Gary and Fran chosen?

straight life income settlement option *joint and survivor life income* life income with refund life income with period certain Under the joint and survivor option, monthly payments are made to two payees until the second payee (survivor) dies. At that point, income payments stop, unless a period certain applies. No further payments are made to a contingent payee.

Which of the following annuity settlement options will pay the annuitant an income for life no matter how long he lives, and will pay the beneficiary a death benefit equal to the difference between the total contract value at annuitization and the sum of payments made if the annuitant dies prematurely?

straight, or pure, life income joint survivor life income *life income with guaranteed minimum (refund guarantee or life annuity certain)* life income with period certain The life income with refund guarantee payout option pays the annuitant an income for life no matter how long he or she lives. The refund guarantee option provides that the balance is paid to the chosen beneficiary.

Which annuity settlement option guarantees that income is paid for the length of the annuitant's life, but no less than a specified number of years?

straight, or pure, life income joint survivor life income life income with guaranteed minimum (refund guarantee or life annuity certain) *life income with period certain* The life with period (or term) certain option guarantees that income is paid for the length of the annuitant's life. However, the income is paid for no less than a certain number of years. If the annuitant dies before the chosen period ends, income payments continue to the beneficiary for the balance of the period.

To be considered currently insured, a worker must have earned how many quarters of coverage in the 13-quarter period before he or she dies?

ten eight *six* nine To be considered currently insured, a worker must have 6 quarters of coverage in the 13-quarter period before he or she dies. Being currently insured entitles the worker to certain survivor benefits payable to his or her family if the worker dies.

Harry is diagnosed with a mental disorder. To become eligible for payments under his policy's long-term care rider, he must prove which of the following?

that his health or safety had been at risk within the last six months that the mental condition appeared within the past ten months *that his health or safety would be at risk without supervision* that he has been mentally handicapped for the past 12 months The insured must be certified within the last 12 months.

Which of the following is NOT a party to an annuity?

the annuitant the owner *the agent* the beneficiary In addition to the insurance company that issues the contract, the parties to an annuity are the owner, the annuitant, and the beneficiary.

Settlement options can be based on the length of the joint lives of which of the following?

the beneficiary and his or her spouse *two or more annuitants* the owner's life the owner and the annuitant

Depending on a person's individual needs, life insurance can provide both death benefits and living benefits. People commonly purchase life insurance for all of the following reasons EXCEPT

to protect survivors against the income lost when an insured dies to create an estate *to save money to purchase a first home* to preserve an estate While the cash value can meet a variety of living expense needs, saving for a first home (generally regarded as a short-term goal) is usually not an appropriate use of life insurance.

When a person buys a fixed immediate annuity or when a fixed deferred annuity is annuitized, the funds are converted into fixed payments. They are then distributed based on the payout option the owner has selected. Which of the following options most correctly describes the basis upon which the annuity payment amount is determined?

the cash accumulated in the policy divided by an indexed amount provided by the insurer the owner/annuitant's age and sex *dollars per $1,000 of accumulation, based on the payout option* dollars per $10,000 of accumulation, based on the settlement option selected

An insurable interest must exist between the applicant or owner of an insurance policy and whom?

the insurance company *the insured* the insured and beneficiary the beneficiary For a life insurance contract to be valid, there must be an insurable interest between the applicant or owner and the insured.

The Notice Regarding Replacement provides all of the following information to the life insurance applicant EXCEPT:

the insurer's identity *the role of the Department of Insurance in regulating replacement transactions* whether an existing policy will fund the new policy a list of any life insurance policies that will be replaced The Notice Regarding Replacement does not discuss the Department of Insurance's role in regulating replacement transactions.

In a modified endowment contract, the life insurance policy's cash value grows more quickly than is permitted by the Tax Code, which results primarily from which of the following?

the issuance of a variable life policy *excessively large premiums being deposited into the contract during the first seven years or less* the policy's death benefit shrinking the policyowner buying two or more policies and combining them This imbalance results from large amounts of premiums being deposited into the contract.

Which of the following best describes income payments under the period certain payout option?

the longer the payout period, the larger the amount of each monthly payment the shorter the payout period, the longer the number of monthly payments the shorter the payout period, the smaller the amount of each monthly payment *the longer the payout period, the smaller the amount of each monthly payment* Under a period or term certain annuity payout, payments are made for the specified number of years and then end. Common term certain payouts are 10, 15, 20, and 25 years. Thus, the larger the payout period, the smaller the amount of each monthly payment.

Which of the following riders waives the cost of insurance from being deducted from a universal life insurance policy's cash value in the event the insured becomes disabled?

traditional life insurance waiver of cost of insurance rider universal life waiver of stipulated premium rider *universal life waiver of cost of insurance rider* traditional life insurance waiver of stipulated premium rider

Besides select policy anniversary dates, a life insurance guaranteed insurability rider usually permits special alternative option dates that typically include all the following, EXCEPT

the policyowner's adoption of a child. a birthday of the policyowner's child. the insured's marriage. *the policyowner's college graduation.*

When paying policy death benefits, life insurance companies must consider all of the following, EXCEPT:

the share of the death benefits that goes to each beneficiary, if the insured has named more than one the succession of beneficiaries *the relationship between the insured and beneficiary* the order of beneficiaries and their succession Insurable interest is a requirement only when an insurer issues a policy, not when paying death claims.

All of the following statements regarding the accidental death benefit rider to a life insurance policy are correct EXCEPT

this rider is also called a double indemnity rider. Most insurers limit the age at which insured policyowner may add an accidental death benefit rider. Benefits are payable under the accidental death benefit rider only if the insured dies as a result of an accident. *There is usually no additional premium required to buy an accidental death benefit rider.* An additional premium is usually required to buy an accidental death benefit rider.

What is the main purpose of key person insurance?

to add to an employee's salary at retirement to provide retirement benefits to key employees *to compensate the business for the loss of its key employee* to compensate the key employee's family when he or she dies Key person insurance coverage compensates the business for the loss it suffers when a key employee dies. The death benefit proceeds provide the business with an important financial cushion when the key employee dies.

The life insurance Buyer's Guide helps prospective buyers determine all of the following EXCEPT:

type of insurance to buy *most qualified insurer* most suitable policy amount of insurance to buy The life insurance Buyer's Guide helps prospective buyers determine what kind of insurance they need, how much insurance they should buy, and how to find a suitable policy that best suits their needs and objectives.

What is a terminally ill person who sells his or her life insurance policy through a viatical settlement known as?

viatical broker viatical settlement purchaser viatical settlement provider *viator* A viator is a person who owns a life insurance policy and seeks to enter into a viatical settlement contract.

Which of the following individuals represents a viator and negotiates viatical settlement contracts?

viatical settlement provider financing entity viatical settlement purchaser *viatical broker* A viatical settlement broker negotiates viatical settlement contracts between viators and viatical settlement providers. A broker represents and is compensated by the viator.

What happens to Peter's signed application after it has been submitted to the insurer?

It becomes the insurer's property and is filed away. It becomes property of the state. *It becomes part of the contract between the insurer and the policyowner.* It is destroyed. The signed application becomes part of the contract between the insurer and the policyowner.

Which of the following is the main appeal of joint life insurance compared to two separate policies?

higher death benefit for the same premium as an individual policy. renewal feature ability to cover an entire family *lower cost* The main appeal of joint life insurance is its lower cost. The premium is less than it would be for two separate policies offering the same death benefit.

Which statement about term life insurance is NOT correct?

*A small cash value gradually accumulates while the policy is in force.* Upon issue, it is generally less expensive than permanent insurance of comparable face amount. It pays a benefit only if the insured dies during the specified period. It offers protection for a specified, limited period. Unlike permanent life insurance, term insurance does not build any cash value.

Karen transfers all rights in her life insurance policy to her brother, David, in an absolute assignment. Who is typically responsible for paying the policy's premiums from that point forward?

*David must pay the premiums.* Karen must pay the premiums. Karen and David can decide between them who should pay the premiums. The insurer suspends the premiums. The assignee, David, assumes full responsibility for the policy, including paying future premiums.

Carl is a policyowner who does not want to pay premiums annually. How does Carl's insurance company adjust his premium when it allows him to pay more frequently?

*The insurer increases the modal premium so that the sum of premiums exceeds the annual premium.* The insurer increases only the first monthly premium. The insurer increases only the first annual premium. The insurer does not change the premium. For policyowners who do not want to pay premiums annually, insurance companies increase the annual premium to account for lost interest and additional insurer costs.

The federal Risk Retention Act of 1986 contains guidelines for which of the following entities?

*risk retention groups* reinsurance companies surplus lines insurance companies risk purchasing groups

Who normally owns life insurance used to meet business insurance needs?

*the business* the business jointly with the insured the insured the employees Life insurance used to meet business insurance needs is normally owned by the business rather than the insured.

Under the standard bring-back rule, assets transferred out of a decedent's estate will be valued in the estate if the transfer occurred within how many years before death?

7 years 4 years *3 years* 5 years Assets that the original owner transferred are included in the gross value of the estate if the transfer occurred within the three years before his or her death.

Donna, age 40, buys a $200,000 straight whole life policy. Her best friend, Kara, buys a $200,000 20-pay life policy. Which of the following statements is correct?

Donna's policy will build cash value more quickly than Kara's policy while she is paying premiums. The cash value of Kara's policy will build faster than Donna's policy after Kara's policy is paid up. *Kara's policy will build cash value more quickly than Donna's policy while she is paying premiums.* Kara can make further premium payments once her policy is paid up while Donna cannot.

Which statement regarding the reduced paid-up life insurance nonforfeiture option is NOT correct?

If the lapsed policy was a participating policy, the paid-up policy is eligible for dividends. A paid-up policy under the reduced paid-up insurance option requires no further premiums nor can any be paid. A policyowner of a lapsed policy can take the reduced paid-up option regardless of whether the lapsed policy was issued on a standard or substandard (rated) basis *The paid-up policy will not build any more cash value* The paid-up policy keeps a cash value, which will continue to grow throughout the life of the policy. However, it will grow much more slowly than during the period that premiums were being paid.

What of the following best describes the meaning or purpose of insurable interest?

Insurable interest must always be present for as long as the coverage lasts with all types of insurance. *Insurable interest exists only if the person buying the contract will suffer a financial loss when the insured dies* Insurable loss exists only if the parties involved are married. Insurable interest can protect business owners from fraudulent claims of creditors. For insurable interest to exist, the person buying the insurance must suffer a loss when the insured dies. That loss can come from close familial ties or financial ties.

Which one of the following best describes the restrictions an insurer must operate under when using information from the Medical Information Bureau (MIB)?

Insurers must rate or decline a life insurance risk based on MIB information. *Insurers cannot rate or decline a life insurance risk based solely on MIB information.* Insurers can rate, but cannot decline, a life insurance risk based solely on MIB information. Insurers cannot rate, but can decline, a life insurance risk based solely on MIB information.

All the following statements about ordinary whole life insurance are correct EXCEPT

Its death benefits are level. *The cash value decreases as the insured gets older.* The premium level is higher than the actual mortality costs during the early years of the policy. The insured pays level premiums until he or she dies or reaches age 120, whichever comes first. Under an ordinary life policy, the cash value increases and reaches the policy's face amount when the insured reaches age 120.

Life insurance applies to business arrangements in all of the following ways, EXCEPT:

Partners and partnerships use life insurance to ensure liquidity cash on hand. Life insurance is often bought by businesses to cover the lives of their key employees or owners. Partners often insure each other's lives (naming themselves as beneficiaries) in order to provide funds that can be used to buy out the business interest of the one who dies *Life insurance is used to make up for the financial losses that might occur when an important customer dies.*

Robert is purchasing a life insurance policy, which he wants to keep out of his taxable gross estate. Which of the following arrangements would help him meet that goal?

Robert could transfer ownership of his life insurance to a third-party owner any time before his death. The death benefits must be paid to Robert's estate. Robert must transfer ownership to a third-party irrevocable trust within three years before his death. *A third party (such as an irrevocable trust) can apply for and own the policy from the beginning.* If Robert transfers the life insurance policy to a third party (the trust) and then dies within three years after the transfer, the policy death benefits are included in the insured's estate for tax purposes.

All the following statements regarding stranger-owned life insurance (STOLI) are correct EXCEPT

STOLI and investor-owned life insurance (IOLI) are the same thing. STOLI is financed through premium loans during the first several years, until it is transferred from the insured to the investors. STOLI is an arrangement in which investors convince an individual to purchase a life insurance policy on himself which is transferred to the investor in exchange for a sum of money. *The insured retains the right to designate the policy's beneficiary.* Upon transfer to the investor, the insured loses all rights to the contract and the new owner typically changes the beneficiary designation to the investor(s).

An applicant for an insurance policy submits an application without the first premium. Which of the following is correct?

The applicant has made an offer to the insurer. *The applicant has invited the insurer to make an offer.* The insurer has made an offer to the applicant. The insurer may not make a counteroffer to the applicant. When an applicant submits an application without the first premium, the applicant has invited the insurer to make an offer. In contrast, when an applicant submits an application to the insurer with the first premium payment, the applicant has made an offer that the insurer may or may not accept.

All of the following statements about key person life insurance are correct, EXCEPT:

The business applies for, owns, and is the beneficiary of the policy covering the life of a key employee Key person, or key employee, life insurance is an example of third-party ownership. *Upon the insured employee's death, the surviving family receives the policy's death benefit.* Life insurance used as key person life is normally owned by the business rather than the insured. Upon the insured employee's death, the business receives the policy's death benefit.

Life insurance has been purchased by ABC Company on the lives of two partners, Hugh and Danny, and three key employees Eileen, Vern, and June. Which of the following would apply if Hugh and June were to leave the business?

The company could keep the life insurance it has on Hugh, since he is a principal of the company, but would have to drop June's coverage, because she is not. *The company could keep the life insurance it has on both Hugh and June, even though both are no longer employed there.* The company would have to drop its coverage for both Hugh and June within 30 days of their departures. The company can only retain its coverage on June because she is not a principal of the company. A company can keep the life insurance it carries on its employees, even when they are no longer employed there.

Which of the following most correctly describes death benefit option 1 of a universal life insurance policy?

The death benefit equals the policy's cash value plus a level net amount at risk; thus, it rises over time. The death benefit equals the policy's cash value plus a fluctuating net amount at risk, thus it may increase or decrease over time. The death benefit equals the policy's cash value plus a net amount at risk that remains level for several years before it starts decreasing; thus, it rises for several years and then remains level thereafter. *The death benefit equals the policy's cash value plus a decreasing net amount at risk; thus, it generally remains level over time.* UL death benefit option 1 resembles a traditional whole life policy in that the net amount at risk decreases while the cash value increases to produce a level death benefit.

In personal insurance, what is the disadvantage to third-party ownership?

The insured has access to the policy's cash values The policyowner has no right to name the beneficiary *The insured has no right to name the beneficiary.* The beneficiary holds rights to the policy's cash values

Which one of the following statements about variable life insurance is correct?

The insurer guarantees all of the policyowner's investment earnings and policy values. The policy offers some increasing term coverage. Its cash values are guaranteed. *Policyowners can choose how to invest their policy's premiums and cash values.*

If insurers do not allow minors to be beneficiaries of life insurance, what do they do if no adults are available to receive death benefits?

The state receives the funds and holds them in escrow until the child is age 21. Each state treats these situations differently. *Insurers require the court to appoint a legal guardian before paying benefits to a minor child.* Insurers hold the proceeds in trust until the child reaches maturity. Even if the child has a surviving parent, the insurer requires the court to appoint a legal guardian before paying out proceeds to a minor child, because a surviving parent does not automatically qualify as a guardian for his or her children.

With a joint life insurance policy, which of the following best describes the coverage continuation option available to the surviving insured upon the death of the first insured?

The surviving insured may continue the existing joint life policy, after providing evidence of insurability. The surviving insured may buy an individual policy with the same or a lesser face amount, after providing evidence of insurability. *The surviving insured may buy an individual policy with the same or a lesser face amount, without having to provide evidence of insurability.* The surviving insured may continue the existing joint life policy, without having to provide evidence of insurability. When the first insured dies under a joint life policy, the surviving insured has a conversion right that allows the survivor to buy an individual policy with the same or a lesser face amount. Moreover, the surviving insured does not have to prove insurability.

All the following statements about standard policy exclusions are correct EXCEPT,

The war exclusion usually excludes paying the death benefit if the death directly resulted from war. *The war and commission of a felony exclusions are required by law.* If an insurer excludes a risk from coverage, then it is not covered, and the insurer will not pay the policy's benefit if death results from that risk. Standard exclusions found in most policies last for the life of the policy, even after the contestability period ends. The war and commission of a felony exclusions are not required by law. However, insurance companies commonly include them.

Which one of the following statements about variable life insurance is correct?

With a variable life insurance policy, the insurer assumes most of the investment risk. Variable life insurance policies do not guarantee a minimum death benefit. The death benefit under a variable life insurance policy will never be more than the stated minimum. *Variable life insurance policyowners can transfer funds between subaccounts and the insurer's general account.* Variable life insurance policyowners can transfer funds between subaccounts. They can also transfer funds between subaccounts and the insurer's general account.

Which of the following is not a potential consequence of replacing a life insurance policy?

a new contestability period potentially higher cost of insurance. *purchasing a life insurance policy that may be cancelled by the insurer later.* the need to prove insurability Replacement can occur when a new life insurance policy is purchased to replace an existing one issued by the same or a different insurer. As a general rule, no type of life insurance may be cancelled by the insurer.

Wilson buys life insurance but commits suicide three years later. Wilson's beneficiary will get which of the following from the insurer?

a return of the premiums paid a return of premiums paid, plus interest nothing *the full death benefit* Because Wilson's suicide occurs after the exclusion period, the insurer will pay the full death benefit. But even If the suicide had occurred during the exclusion period, the insurer would have returned the premiums paid, plus interest.

The insurance company function that is responsible for evaluating the insurable risks and assigning appropriate premium rates.

actuarial division claims division sales division *underwriting division*

A life insurance policy matures or endows when its guaranteed cash value equals its face amount. With an endowment contract, when does the policy endow?

after age 120 when the insured dies *well before age 120, usually at age 65* at age 120 Endowment contracts are a special form of life insurance in which cash values grow rapidly. As a result, the policy endows well before age 120.

In a front-end loaded universal life contract, when does an insurer deduct costs and fees from each premium?

after premiums have been deposited and when values are withdrawn from the policy twice each year after premiums have been deposited and credited to the policy's cash value at the end of each policy year *before crediting the premium to the policy's cash value* In a front-end loaded contract, an insurer deducts costs and fees from each premium before crediting the premium to the policy's cash value. As a result, the amount that is actually invested in the contract is reduced. For this reason, front-end loaded universal life policies are less attractive to consumers than back-end loaded contracts.

To protect his family in case he died prematurely, John applied for a $1 million life insurance policy. When he died two years later, the insurer paid $1 million in benefits, even though John was unemployed when he died. What is this type of insurance contract?

contract of indemnity indemnification policy reimbursement contract. *valued contract* Life insurance policies are valued contracts, which means they pay a stated amount in the event of a loss. Life insurance contracts, unlike contracts of indemnity, do not try to judge the actual amount of the loss. Because John bought a life insurance policy insuring his life for $1 million, that is the amount the policy paid when he died, regardless of the fact that he was unemployed at the time. A contract of indemnity, on the other hand, limits the benefit to the amount of the insured's actual loss.

If the employer pays the entire premium for group term life insurance, what is the plan called?

contributory fully insured self-insured *non-contributory* If an employer pays the entire amount of premiums for a group term life insurance policy, the plan is a non-contributory plan. Under a contributory policy, both the employer and employees share premium payments.

An insurance company is developing a new product. Which one of the following is the actuaries' most important responsibility?

creating a product with competitive features and benefits *deciding the premium for the new product* assuring that the new product will be appealing to average consumers deciding the classification of the new product The actuaries' most important input in the process is determining the premium.

Best Insurance Company is incorporated in Canada and just applied for a license to transact insurance in North Carolina. Which type of insurer is Best Insurance Company considered in North Carolina?

foreign domestic *alien* limited North Carolina classifies insurance companies according to where they were incorporated. An alien company is one that has been incorporated or organized under the laws of any jurisdiction outside the United States.

Sue, an applicant who is a preferred risk, can expect to pay a premium that is best described as which of the following?

generally the same premiums as for standard risks *generally lower premiums than for standard risks* generally the same premiums as for standard risks, but over a shorter period of time generally higher premiums than for a standard risk An applicant who presents a very low risk of loss to the insurer is a preferred risk. A person who is a preferred risk presents a low risk of loss to the insurer so he or she will usually pay lower premiums.

In-person delivery of a whole life insurance policy gives the agent the opportunity to do all of the following, EXCEPT

get any required delivery forms, discuss any exclusions, and explain any substandard ratings. *increase the policy's face amount, if the applicant agrees to do so (and pay the additional premium) within ten days of policy delivery.* begin the free-look period. explain policy benefits, terms, and riders. Once a whole life policy is issued, no changes can be made to it.

What is the main appeal of joint life insurance?

higher death benefit renewal feature *lower cost than two separate policies.* ability to cover an entire family The main appeal of joint life insurance is its lower cost. The premium is less than it would be for two separate policies offering the same death benefit.

Which of the following types of insurance is typically used for credit life insurance?

increasing term whole life limited payment *decreasing term* The type of insurance typically used in credit life insurance is decreasing term insurance. The coverage matches the declining balance on the loan. As the insured's loan balance decreases, so does the coverage.

Term life insurance is well suited for all the following needs EXCEPT:

inexpensive protection until the policyowner can afford permanent life insurance. mortgage protection insurance. *a source of emergency cash for any financial need.* protection while the family children are living at home or attending college. Because it only offers protection for a limited time, term life is best used for temporary needs that have a defined end-date. Term life is pure insurance, with no cash value (or "savings element") associated with it, making it unsuitable as a source of cash while the insured is alive.

What are statements that are guaranteed to be true called?

representations declarations petitions *warranties* A warranty is a statement that its maker guarantees to be true in all ways. If a warranty is found false, the other party has the right to end the contract, even if the statement was not important to the contract's formation. However, statements made by insurance applicants on the application are deemed to be representations, not warranties.

An underwriter must keep application information confidential to comply with the Fair Credit Reporting Act (FCRA) of 1971. The FCRA does which of the following?

sets protocols agents must follow when requesting confidential financial information from applicants sets procedures insurers must follow to make sure they use information effectively *sets procedures credit reporting agencies must follow to ensure confidentiality, accurate reporting, and proper use of the information* monitors the code the Medical Information Bureau (MIB) uses to send confidential information to insurers

The Acme Supply Company might buy life insurance to do all of the following, EXCEPT:

to insure partners' lives to provide liquidity to fund buy-out agreements to insure the lives of key employees or owners to insure liquidity in case one of the owners or key employees dies *to provide insurance coverage for large-volume customers*

Under a joint life insurance policy, when does the insurer pay the death benefit?

when either insured dies when both insureds die when the surviving insured dies *when the first insured dies* Under a joint life insurance policy, the insurer pays the death benefit when the first insured dies. The surviving insured has a conversion right, which allows him or her to buy an individual policy with the same or lesser face amount.

What typically happens to the face amount of an indexed whole life insurance policy over time?

It increases automatically every year as long as the insured can prove insurability. It increases every year at the same rate as the national inflation rate. It increases based upon the insurer's investment experiences. *It increases annually to reflect increases in the Consumer Price Index.* Indexed whole life insurance ties its death benefit and premiums to a specified index, most commonly the Consumer Price Index (CPI). Over time, the policy's face amount increases automatically with CPI increases.

In life insurance, for how long must insurable interest exist?

It must continue for the life of the policy. It must exist when a claim is submitted. *Insurable interest must exist only at the time the applicant enters into a life insurance contract.* If no insurable interest exists when a policyowner buys a life insurance policy, the contract may still be enforced. With life insurance, insurable interest need exist only at the time the applicant enters into the life insurance contract.

When does the free-look period for a variable life insurance policy end?

*10 days after the policy is delivered, or it can be extended to 45 days after the insurance application is completed, whichever is later* 21 days after the policy is delivered 7 days after the policy is delivered 30 days after the policy is delivered The free-look period for a variable life policy generally ends ten days after the policy is delivered, or it can extend for 45 days after the insurance application is completed, whichever is later. Some states require longer free-look periods.

The Fair Credit Reporting Act (FCRA) generally requires insurers that seek a credit report to notify the applicant of the request within

*3 days of requesting the report.* 24 hours of requesting the report. 5 days of requesting the report. 10 days of requesting the report. The FCRA requires businesses (including insurers) that seek a credit report to notify the applicant about the request, usually within three days. If the applicant requests a summary of the report, it must be provided within five business days of the request.

All the following statements regarding reinsurance are correct EXCEPT

*Claims are paid to the policyowner separately by each insurer participating in the reinsurance agreement.* Reinsurance is a risk-sharing process used by insurance companies. The insurer accepting some of the risk being transferred is known as the reinsurance company. The insurer seeking to transfer some of its risk is known as the ceding company. The policyowner is usually unaware of the reinsurance arrangement; when a claim is paid, it is paid entirely by the ceding company that issued the policy.

Which of these personal relationships does NOT automatically constitute insurable interest?

*Neighbors have insurable interest in each other.* Dependent children have insurable interest in their parents or grandparents. Spouses have insurable interest in each other People have insurable interest in themselves. In general, neighbors do not have insurable interest in each other>

In what form does the MIB present its information to insurers?

*Numeric codes that are communicated electronically* A telephone call from a MIB analyst discussing the MIB's findings on the applicant A posting on the MIB website describing the applicant's medical history A written report detailing the MIB's findings on the applicant The MIB sends information to insurers in written code, which helps protect the confidentiality of the information.

Which of the following statements regarding the way whole life insurance differs from term life insurance is most correct?

*Only whole life insurance builds a cash value.* Only whole life insurance can be renewed. Only whole life insurance offers level premium payments. Only whole life insurance offers protection until age 80. Unlike term life insurance, whole life insurance builds cash value. In addition, it offers permanent protection for the insured's whole life.

With respect to adjustable life insurance, which one of the following statements is correct?

*Premiums can increase or decrease to suit the policyowner's changing needs.* The policyowner stops making premium payments after the policy has been in force for a certain period. The policyowner can increase the death benefit without hurting the policy's cash value. It offers five times higher cash value than whole life insurance. The policyowner can adjust death benefits, premiums, or cash value to suit changing needs.

Which of the following best illustrates risk transfer?

*Robert purchases life insurance because he figures doing so is far less expensive than trying to save all the money his survivors would need upon his death.* Carol eats a healthy diet and exercises regularly, hoping that doing so will help to keep her healthy. John refuses to buy life insurance because he figures he has enough money in his savings to pay for his burial when he dies. Sheila refuses to drink alcoholic beverages if she expects to drive a car afterwards. Purchasing insurance is a risk transfer technique, because it transfers to a third party (the insurer) the financial risk associated with premature death.

Stephanie is a policyowner who pays premiums monthly. How does her insurer cover the cost of sending her more frequent premium notices?

*The insurer charges higher premiums.* The insurer views the lost earnings as a cost of doing business. The insurer charges a one-time lost-earnings fee. The insurer imposes policy loan restrictions.

Under a policy's facility of payment provision, what does an insurer do with the death benefit?

*The insurer names a blood relative or someone with a valid claim as the new beneficiary.* The insurer keeps the money. The insurer holds the funds in trust until the insured's estate is probated. The insurer transfers the money to the state.

Tiger Motors Company has 25 employees and would like to start a group life insurance plan. However, one of its employees has had two heart attacks during the past five years and his health is questionable. What will happen in this case?

*Tiger Motors cannot exclude the employee from the plan based on his risk potential.* Tiger Motors can ask the employee to voluntarily withdraw from the plan to make premiums lower. Tiger Motors can charge the employee a higher premium than the other employees. Tiger Motors can exclude the employee from coverage. Although the employee may pose a high risk to the group, Tiger Motors cannot exclude him from coverage based on his risk potential.

A type of not-for-profit insurance provider that is operated by an organization that has a representative form of leadership, operates on a lodge system, and exists solely for the benefit of its members and their beneficiaries is called a

*fraternal insurance company* reciprocal insurance exchange mutual insurance company home service insurance company Sponsored by fraternal societies, fraternal insurers are not-for-profit organizations that specialize primarily in life insurance and annuity products that are usually available only to the society's members.

Which of the following is not a reason for license suspension or revocation?

*soliciting relatives and friends for insurance* knowingly accepting insurance from an unlicensed individual having a producer license revoked in another state failing to pay state income tax A producer's license may be suspended or revoked for failing to pay state income tax, having a license revoked in another state, and accepting insurance from unlicensed individuals. It is not unlawful to solicit relatives and friends for insurance.

Jim's life insurance application is the first source of information an underwriter reviews. An accurate and complete application provides critical information about which of the following?

*the applicant's personal data and health* the reason for the requested coverage the applicant's wealth the agent An accurate and complete application provides critical information about personal data about the applicant and the insured, the requested insurance coverage, and the applicant's health.

From an insurance perspective, underwriting is best defined as

*the process of determining if an applicant is an insurable risk.* the process of calculating mortality and morbidity charges. the process of identifying applicants who are engaging in adverse selection. the process of determining when an applicant will die or suffer a serious illness. Through the underwriting process, insurance company underwriters determine if the risk proposed for insurance should be accepted or rejected. That is, it seeks to determine if the applicant represents an insurable risk.

With a survivorship life insurance policy, the insurer pays the death benefit only

*when the surviving spouse dies* if a specifically named insured dies first if a specifically named insured dies second when either of the insureds dies first Survivorship life insurance policies insure more than one person and pay the death benefit on the death of the surviving spouse, regardless of which insured dies first or second.

Harry and Constance want life insurance to provide death benefits in case either dies, as well as living benefits in the event of financial emergencies. Which of the following would this couple most likely buy?

*whole life insurance* term insurance business life insurance group insurance Whole life insurance pays death benefits for the insureds' lifetimes, or until age 120. Whole life policies also accumulate cash values, which grow over the life of the policy. These are the "living benefits" Harry and Constance are seeking.

To be eligible for group life insurance, a group must generally cover at least how many persons under one master policy?

5 3 15 *10* According to the National Association of Insurance Commissioners' requirements, a group must cover at least ten persons under one master policy.

Which one of the following insurance sales arrangements is not affiliated with a single insurance company but instead represents multiple companies?

A sales office that is managed by general manager who is an employee of the ABC Insurance Co. A sales arrangement in which sales are made directly to consumers through mass media channels without the use of producers. *An independent sales office that is managed by a Personal Producing General Agent (PPGA).* A sales office that is managed by an independent contractor, called a general agent, who employs sales representatives traditionally called agents.

Bill owns an indeterminate premium whole life insurance policy. Which one of the following statements about his policy is most correct?

Bill's premiums will be guaranteed for most of the policy period. *Bill's premium will never be higher than the maximum level that the insurer guaranteed when it issued his policy. Bill's premiums will be level for most of the policy period. Bill will pay a low fixed rate for most of the policy period. Bill will pay a lower fixed rate for a certain number of years (such as the first five or ten). At the end of that period, his premium rate will increase or decrease depending on the insurer's investment earnings. If earnings are good, premiums will be lower. If the investment experience is poor, premiums will be higher. However, Bill's premium will never be higher than the maximum level that was guaranteed when his policy was issued.

Which of the following statements about permanent life insurance cash values is NOT correct?

Cash values grow over the life of the policy, designed to reach the face amount at the insured's age 120. *The beneficiary has full access to the cash value.* As long as premiums are paid, the insurance stays in force, the cash values grow, and the policy is guaranteed to pay its death benefit. The policyowner owns the cash value in the policy and can access it. While permanent life insurance includes an accumulation element known as the "cash value," which grows over the life of the policy, only the policyowner owns the cash value and can access it. The beneficiary may not.

Elizabeth owns a universal life insurance policy with a $100,000 cash value. She pays a $1,400 premium for the coverage. If she loses her job and decides not to make a premium payment, which one of the following is most likely to occur assuming Elizabeth wishes to keep the policy in force?

Elizabeth must enter into a formal agreement with the insurer before changing or stopping her premium payments. The policy will lapse. *The policy stays in force as long as the cash value will cover the monthly deductions and charges.* The policy stays in force as long as Elizabeth makes up the missed premium payments later. Elizabeth can decrease or skip premium payments. As long as the policy's cash value covers the monthly deductions and charges, the policy remains in force.

Which of the following most accurately describes "insurable interest"?

Insurable interest is the length of the relationship between the person applying for insurance and the insured. For insurable interest to exist, the buyer must have known the insured for at least three years. With life insurance, insurable interest is the relationship between the person paying for the insurance and the designated beneficiary. Insurable interest is the reason one person is insuring the life of another. Though of interest to the insurer, Insurable interest is not a necessary element for a life insurance contract to be issued. *Insurable interest is the relationship between the person applying for life insurance and the person whose life is to be insured. It is a necessary element in the issuing of a life insurance contract.*

Kevin owns a whole life insurance policy, issued on a standard basis, that has lapsed for nonpayment of the premium. If Kevin has NOT chosen a nonforfeiture option, which of the following actions will the insurer most likely take?

automatically suspend coverage until Kevin either reinstates coverage or notifies the insurer of his option choice *automatically apply the extended term option* automatically surrender the policy and pay Kevin the cash value automatically apply the reduced paid-up option If an owner of a lapsed policy issued on a standard basis does not choose a nonforfeiture option, then the insurer automatically applies the extended term insurance option.

In a collateral assignment, policyowners may (or must) do all the following, EXCEPT

borrow against any cash value that exceeds the loan security amount change beneficiaries. *surrender the policy.* pay the premiums. Under a collateral assignment, the policyowner keeps most of the rights in the policy. The policyowner cannot, however, surrender the policy.

All the following are common types of term life insurance EXCEPT:

level term insurance increasing term insurance annually renewable term *adjustable term insurance* While there is a form of permanent life insurance called adjustable life, there is no type of term insurance by this name.

Jessica, age 25, buys a $100,000 life insurance policy. The initial premium is lower than straight whole life rates and increases each year for the first ten years of the policy period. After that, the premium levels off and stays at that amount for the life of the policy. What type of policy does Jessica own?

single premium life *graded premium whole life* 20-pay life indeterminate premium whole life Jessica owns a graded premium whole life policy. Its premiums begin very low compared to straight whole life, increase annually for a long period (such as ten years), and stay level for the rest of the policy.

Under standard exclusions, most insurers would deny coverage of which of the following?

someone flying as a passenger in a commercial airplane someone killed as a bystander during a bank robbery *someone serving as an aircraft crew member* someone flying as a passenger in a private airplane Depending on the insurer, aviation and hazardous occupations and hobbies may or may not be excluded. If the policy has an aviation exclusion, then it excludes paying a death claim if the insured was serving as an aircraft crew member.

All of the following must sign life insurance applications, EXCEPT:

the applicant the insured (if not the applicant) *the beneficiary* the agent The applicant, the insured (if different from the applicant), and, usually, the agent all must sign the application before it goes to the insurer.

Who normally pays for medical exams or lab tests that insurance companies request?

the insured the Medical Information Bureau *the insurance company* the agent

Loading reflects the costs that the insurance company can expect to pay for its operations. These costs include all of the following, EXCEPT:

the insurer's expenses for rent salaries and commissions employee benefits *mortality costs* Loading reflects an insurance company's cost of operation, excluding mortality costs.

In a third-party life insurance contract, the parties to the contract are the

the owner, the insured and the beneficiary. the insured, the beneficiary and the insurance company. *the owner, the insured and the insurance company.* the insurance company, the owner and the beneficiary. The two parties in a standard two-party insurance contract are the owner and the insurance company. In a third-party contract, the owner and the insured are different people.

Sylvia's insurer guarantees a fixed death benefit for the policy she owns. Based on this, which one of the following benefits is also most likely guaranteed with this policy?

to pay premiums for Sylvia in the event of emergencies to reinstate Sylvia's policy if it ever lapses to send an agent to Sylvia's home to collect the premiums *a minimum rate of return on the policy's cash value*

The primary reason for using third-party ownership in personal life insurance for estate planning purposes is to

transfer the estate tax liability from the owner to the beneficiary. convert the life insurance proceeds from an estate taxable asset to an income taxable asset. reduce the tax rate used in calculating the estate tax. *remove the value of the life insurance proceeds from the insured's estate.* Done correctly, third-party ownership of life insurance removes the value of the life insurance proceeds from the insured's estate.

The Royale Insurance Company, headquartered in Toronto, Canada, conducts business legally in New York. In New York, Royale is a(n)

unauthorized insurance company foreign insurance company domestic insurance company *alien insurance company* An alien insurer is one that is domiciled in a different country

Under a survivorship life insurance policy, when does the insurer pay the death benefit?

when the first insured dies when either insured dies when the deceased insured has surviving children or dependents *when the surviving insured dies* Survivorship life insurance policies are commonly known as second-to-die policies. They insure more than one person but pay the death benefit only when the second insured (such as the surviving spouse) dies.

Linda is an administrative assistant at ABC Insurance Company and is also studying to become a producer. She routinely accepts premiums and makes cold calls soliciting insurance on behalf of her boss, a licensed producer. Which statement is correct?

Linda's actions are lawful because she is in the process of becoming a producer. Linda's actions are lawful, provided ABC Insurance Company has given its consent. Linda's actions are lawful, if her boss acts as her sponsor. *Linda must be licensed in order to accept premiums and solicit insurance.* It is unlawful for a person to solicit insurance, accept premiums, or otherwise act as an agent, broker, limited representative, adjuster, or appraiser without a license. A violation of this requirement is considered a Class 1 misdemeanor.

All of the following statements about the regulation of the sale of variable products are correct, EXCEPT:

Many states also require a state-issued variable life or variable producer's license Agents who sell variable life products are required to comply with all state laws and regulations dealing with the sale of life insurance. The sale of variable products is regulated by the Financial Industry Regulatory Authority (FINRA). *Agents who only sell variable life products and do not sell fixed life products are not required to hold a life insurance license.* Selling variable life products also requires a valid life insurance license.

Which of the following statements regarding joint life insurance and survivorship life insurance is NOT true?

Survivorship life insurance pays the death benefit upon the death of the second insured. Both joint life and survivorship life have a lower premium than two comparable individual policies covering the two insureds. Joint life insurance includes a conversion provision that lets the surviving insured purchase an individual policy without having to prove insurability upon the first insured's death. *Joint life insurance is especially popular in the estate planning market.* Joint life insurance, popular in the business market and with spouses looking for a lower-cost alternative to two policies, pays the death benefit upon the death of the first insured. Survivorship life, popular in the estate planning market, pays the death benefit upon the death of the second insured.

Which statement regarding apparent authority is NOT correct?

The insurer does not intend it. *The insurer is not liable for an agent's acts when he or she is acting under apparent authority.* A third party reasonably believes that the agent has it based on the reasonable statements and actions by the insurer and agent. The agent's contract does not create it. Apparent authority is authority that the contract does not create and the insurer does not intend. It appears to belong to the agent based on the agent's reasonable statements and the actions (or inactions) of the insurer. Because apparent authority seems to the customer to belong to the agent, the insurance company may be liable for the agent's acts, even though the insurer did not allow those acts either expressly or by implication.

Jerry names a trust as the beneficiary of his life insurance. When Jerry dies, how will this trust work?

The trustee invests the insurance benefit in securities. A trust cannot be a beneficiary; Jerry must name an individual or business. The trust passes the insurance benefit to Jerry's next of kin. *The insurer pays the death benefit to the trustee who manages the assets for the trust's beneficiaries, named by Jerry when the trust was formed.* A trust can be the beneficiary of a life insurance policy. The insurer pays the trustee, who manages the assets for the trust's beneficiaries.