PRACTICE QUIZ-NC LIFE INS
All of the following are standard permanent exclusions found in life insurance policies EXCEPT: A) war B) aviation C) hazardous occupations and hobbies D) suicide
D) suicide A risk that is excluded from coverage means that it is not covered and that the policy's benefit will not be paid if death results from that risk. A suicide clause only restricts coverage until after a certain amount of time has passed, typically two years, and then death by suicide is covered.
Why is it that endowment policies do not meet the IRS definition of life insurance?
They mature before age 120. Endowment contracts build cash values quickly.
The life insurance nonforfeiture option that results in the permanent continuation of cash value life insurance with no further premiums is called the:
reduced paid-up option The paid-up additions option is one of five policy dividend options, not a nonforfeiture option.
Lisa, age 35, takes a $9,000 distribution from her traditional IRA to use as a down payment on her first home. What penalty tax must Lisa pay?
$0 Withdrawals from a traditional IRA before the age of 59' are subject to income tax and a 10 percent penalty. However, the 10 percent penalty tax does not apply to distributions that are used to buy a first home.
The maximum family limit for Social Security retirement and survivors' benefits is generally in the range of:
150 percent to 175 percent of the worker's PIA. The total varies, but generally the maximum family limit for retirement and survivors' benefits ranges from 150 to 175 percent of the worker's PIA.
Your client wants his variable annuity to generate payments that have the best chance to increase during the payout period. The assumed interest rate (AIR) options offered by the insurer are 3%, 5%, 7% and 9%. Which AIR should the client select to best achieve his goal? A) 3% B) 5 percent C) 7% D) 9%
A) 3% A lower AIR produces lower initial payments but more easily enables the contract to generate the same or higher future payments.
All of the following statements about the taxation of life insurance death benefits are correct, EXCEPT: A) All death benefit proceeds, including interest earned on funds retained by the insurer, are tax-free. B) Typically, the beneficiary does not include the death benefit proceeds in his or her income for income tax purposes. C) The income tax treatment of death benefits makes life insurance an attractive financial and estate planning tool.
A) All death benefit proceeds, including interest earned on funds retained by the insurer, are tax-free. The beneficiary does not include the death benefit proceeds in his or her income for income tax purposes.
With respect to life insurance settlement options, the term 'without life contingency' means: A) The death benefit payout is based on a specified period or amount, not on the life of the beneficiary. B) The beneficiary is a non-human entity. C) The benefit is paid out for as long as the beneficiary lives, however long that may be. D) The beneficiary is not permitted to choose the settlement option under any circumstances.
A) The death benefit payout is based on a specified period or amount, not on the life of the beneficiary. This answer describes a settlement option with a life contingency. One without a life contingency is one whose payment is not determined by the life of the person receiving the income payment.
Which of the following statements regarding third-party ownership of a life insurance policy is correct? A) The insured has no rights in the policy. B) The insured can access the policy's cash value but cannot designate the beneficiary. C) The insured cannot access the policy's cash value but can designate the beneficiary. D) The insured can designate the beneficiary and access the cash value, but cannot assign the policy to another third-party owner
A) The insured has no rights in the policy. In a third-party arrangement, all rights are held by the policyowner (which is someone other than the insured).
Under a traditional split-dollar arrangement, what does the employer typically receive when the insured employee dies? A) an amount equal to the policy's cash value B) one-half of the policy's death benefit C) all of the death benefits D) none of the death benefits
A) an amount equal to the policy's cash value At the insured employee's death, the employer does not receive one-half of the policy's death benefit but an equal amount.
Joan owns a variable universal life insurance policy that now has a $100,000 cash value and is beyond its surrender charge period. This year, she plans to withdraw $25,000 from her policy's cash value to buy a new car. Which one of the following statements is most correct? A) Joan must pay a penalty tax for taking an early withdrawal from her cash value. B) Joan's death benefit will be reduced by $25,000. C) Joan can make the withdrawal but will have to pay it back with interest. D) Joan can have access to her cash value only through a policy loan or a complete surrender of the policy.
B) Joan's death benefit will be reduced by $25,000. Joan can access her variable universal cash value through a full or partial surrender of the policy.
Under a Section 1035 exchange, a nonqualified deferred annuity can be exchanged tax-free for which of the following products: A) either a qualified or a nonqualified annuity B) a nonqualified annuity only C) a permanent life insurance policy or a nonqualified annuity D) an endowment policy or a nonqualified annuity
B) a nonqualified annuity only IRS Section 1035 exchange rules permit nonqualified annuities to be exchanged only for another nonqualified annuity (but not for a qualified annuity, which can only be exchanged with another qualified annuity).
Bridget's life insurance policy provides $500,000 of coverage for a period of ten years, at which time the coverage terminates. Which type of policy does Bridget own? A) increasing term B) level term C) decreasing term D) temporary term
B) level term All forms of term life insurance provide temporary coverage.
An insurable interest will typically be presumed in all of the following types of relationships EXCEPT: A) child and parent B) neighbor and friend C) business and key employee D) creditor and debtor
B) neighbor and friend An insurable interest exists between children and parents, businesses and key employees, and creditors and debtors. It typically will not be presumed between a neighbor and a friend.
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? A) Kara can make further premium payments once her policy is paid up while Donna cannot. B) The cash value of Kara's policy will build faster than Donna's policy after Kara's policy is paid up. C) Kara's policy will build cash value more quickly than Donna's policy while she is paying premiums. D) Donna's policy will build cash value more quickly than Kara's policy while she is paying premiums.
C) Kara's policy will build cash value more quickly than Donna's policy while she is paying premiums. Limited payment life insurance policy premiums are payable over a shorter time than ordinary life premiums. The higher premiums mean the cash value grows more quickly during the premium-paying period than it would with a straight whole life policy over the same period.
All of the following statements about annuities are generally correct, EXCEPT: A) Annuities are not life insurance. B) Annuities are sold by life insurance agents and are issued by life insurance companies. C) The historic purpose of annuities is to create estates over a certain period. D) An annuity converts a sum of money into a series of income payments.
C) The historic purpose of annuities is to create estates over a certain period. Annuities are not life insurance.
Nonforfeiture options give a life insurance policyowner optional ways to receive the policy's:
Cash Value Participating whole life insurance policies pay policy dividends to their owners, which are available in several ways called dividend options.
All the following statements regarding the tax benefits of qualified retirement plans are correct EXCEPT: A) Employers can take an income tax deduction, within limits, for contributions they make to the plan. B) Employees are not currently taxed on contributions to the plan made on their behalf by the employer. C) Benefits are taxed to employees only when they are withdrawn or distributed. D) Upon distribution, employees are required to pay taxes only on the interest earned on plan contributions but not on the contribution amount itself.
D) Upon distribution, employees are required to pay taxes only on the interest earned on plan contributions but not on the contribution amount itself. The federal government encourages employers to set up qualified retirement plans for the benefit of their employees by offering tax incentives. For example, an employer can deduct the contributions it makes to a plan, and employees will not be currently taxed on contributions made on their behalf to the plan. Benefits are taxed to employees only when distributed or withdrawn.
Increasing term insurance has which of the following? A) an increasing premium and an increasing death benefit B) an increasing premium and a level death benefit C) a level premium and a level death benefit D) a level premium and an increasing death benefit
D) a level premium and an increasing death benefit With increasing term life insurance, the death benefit increases over the term and the premium normally remains level, though at a higher level than either level term or decreasing term.
Which of the following types of insurance is typically used for credit life insurance?
Decreasing Term Universal life insurance does not accommodate the declining balance protection needs of credit life insurance.
An employee is insured under a $100,000 group life insurance policy. At his death, the proceeds are paid to his beneficiary in a lump sum. What are the tax consequences?
None of the proceeds are subject to income tax. The death benefits paid to the employee's beneficiary under a group life insurance plan are exempt from income taxes if they are paid in a lump sum. If paid under a settlement option, the interest portion of each periodic payment is taxable to the beneficiary.
What options does an insurer have when asked by an annuity owner for a full withdrawal of an annuity contract's accumulated value?
The insurer must comply with the request. The insurer cannot withhold these funds or refuse to honor the owner's request.
