1-5. Introduction to Life Insurance and Annuities

Question 1

1. The benefit under a joint and survivor death benefit option is generally smaller than under a life-only option.

Answer 1

True

1. The benefit under a joint and survivor death benefit option is generally smaller than under a life-only option.

Question 2

2. Unusual expenditures made by family members after a client’s death often are referred to as adjustment funds.

Answer 2

True

2. Unusual expenditures made by family members after a client’s death often are referred to as adjustment funds.

Question 3

3. Death benefit proceeds from life insurance policies are generally taxable as regular income.

Answer 3

False

3. Death benefit proceeds from life insurance policies are generally taxable as regular income.

Rationale: Death benefits from life insurance policies are generally received income tax free.

Question 4

4. Dividends received from participating life insurance policies are usually paid when the insurer earns more than 8% on invested policy reserves.

Answer 4

False

4. Dividends received from participating life insurance policies are usually paid when the insurer earns more than 8% on invested policy reserves.

Rationale: Insurers normally base dividends on a part of earnings over a very conservative interest rate, such as 3.5% per year.

Question 5

5. Annually renewable term (ART) insurance usually has a very low premium.

Answer 5

True

5. Annually renewable term (ART) insurance usually has a very low premium.

Question 6

6. Although approximately one-third of all insurance policies sold are term, only about 5% of death claims are paid from term insurance policies.

Answer 6

True

6. Although approximately one-third of all insurance policies sold are term, only about 5% of death claims are paid from term insurance policies.

Question 7

7. One distinction between universal life (UL) policies and other permanent life policies is that UL policy elements are unbundled.

Answer 7

True

7. One distinction between universal life (UL) policies and other permanent life policies is that UL policy elements are unbundled.

Question 8

8. Interest rates credited to current premiums on UL policies are nearly always the same as rates credited to past premiums.

Answer 8

False

8. Interest rates credited to current premiums on UL policies are nearly always the same as rates credited to past premiums.

Rationale: It is often the case that older premiums are credited at different rates than newer premiums. The combined rate received from older and newer rates is
referred to as the blended rate.

Question 9

9. Surrender charges normally increase the longer the policyholder holds an insurance contract.

Answer 9

False

9. Surrender charges normally increase the longer the policyholder holds an insurance contract.

Rationale: Surrender charges decrease the longer a contract is held. Most surrender charges have durations from 5–15 years, and they gradually decrease over those time spans.

Question 10

10. UL policy returns react faster than whole life policy returns when interest rates change.

Answer 10

True

10. UL policy returns react faster than whole life policy returns when interest rates change.

Question 11

11. Variable universal life (VUL) policies require the policyholder to bear the risk of the underlying investment.

Answer 11

True 11.

Variable universal life (VUL) policies require the policyholder to bear the risk of the underlying investment.

Question 12

12. The death benefit guarantee period in an adjustable life policy cannot change once the policy is issued.

Answer 12

False

12. The death benefit guarantee period in an adjustable life policy cannot change once the policy is issued.

Rationale: The death benefit guarantee period, cash value, and premium are all changeable in adjustable life policies.

Question 13

13. Joint life policies cover more than one life.

Answer 13

True

13. Joint life policies cover more than one life.

Question 14

14. Employer-paid premiums on group life insurance policies are taxable as income to employees.

Answer 14

False

14. Employer-paid premiums on group life insurance policies are taxable as income to employees.

Rationale: Premiums paid for up to $50,000 of group life insurance are excluded from employees’ income. Employerpaid premiums for amounts over $50,000 must be included as income to employees.

Question 15

15. The primary loads of life insurance products are mortality costs and acquisition and administration expenses.

Answer 15

True

15. The primary loads of life insurance products are mortality costs and acquisition and administration expenses.

Question 16

16. Low-load life insurance features include lower premiums and lower cash surrender values.

Answer 16

False

16. Low-load life insurance features include lower premiums and lower cash surrender values.

Rationale: Although low-load policies do require lower premiums, they feature high immediate cash surrender values. When short premium payment periods are chosen, typical cash surrender values may be 80% to 100% of the first-year premiums.

Question 17

17. For a life insurance claim to be filed, all that is required is a copy of the death certificate and a claim form signed by the beneficiary.

Answer 17

True

7. For a life insurance claim to be filed, all that is required is a copy of the death certificate and a claim form signed by the
   beneficiary.

Question 18

18. A revocable beneficiary designation ensures that the beneficiary cannot be changed without written permission.

Answer 18

False

18. A revocable beneficiary designation ensures that the beneficiary cannot be changed without written permission.

Rationale: Revocable beneficiary designations can be changed by the policyholder at will. Beneficiary
designations that require written permission for changes are termed irrevocable.

Question 19

19. Lump-sum distributions are the most popular method of settlement option.

Answer 19

True

19. Lump-sum distributions are the most popular method of settlement option.

Question 20

20. The most common nonforfeiture option is reduced paid-up insurance.

Answer 20

False

20. The most common nonforfeiture option is reduced paid-up insurance.

Rationale: The most common nonforfeiture option is cash. Other common options are reduced paid-up insurance and extended term insurance.

Question 21

21. Under the “installments for a fixed period” settlement option, the beneficiary specifies an amount of desired income, and the insurer determines how long the payments will last.

Answer 21

False

21. Under the “installments for a fixed period” settlement option, the beneficiary specifies an amount of desired income, and the insurer determines how long the payments will last.

Rationale: When a beneficiary specifies a certain amount of income, he or she has elected the “installment of a fixed amount” settlement option. In the “installment for a fixed period option,” the beneficiary specifies the period of time over which payments are to be received.

Question 22

22. The life income with refund settlement option guarantees only that payments will last throughout the beneficiary’s life.

Answer 22

False

22. The life income with refund settlement option guarantees only that payments will last throughout the beneficiary’s life.

Rationale: The life income with refund settlement also guarantees a refund if the beneficiary dies without having at least received the death benefit principal.

Question 23

23. A person who elects the reduced premium dividend option will receive a check whenever there is a policy surplus.

Answer 23

False

23. A person who elects the reduced premium dividend option will receive a check whenever there is a policy surplus.

Rationale: The reduced premium dividend option will result in the subsequent premium being reduced by the amount of the dividend credited.

Question 24

24. Under the provisions of a disability waiver of premium rider, the policyowner will not be required to repay any premiums waived due to a qualifying disability.

Answer 24

True

24. Under the provisions of a disability waiver of premium rider, the policyowner will not be required to repay any premiums waived due to a qualifying disability.

Question 25

25. Under the provisions of the common disaster clause, if the insured and the primary beneficiary die in a common accident, the beneficiary is presumed to have died first.

Answer 25

True

25. Under the provisions of the common disaster clause, if the insured and the primary beneficiary die in a common accident, the beneficiary is presumed to have died first.

Question 26

26. A deferred annuity means that the policyholder’s premium payment is deferred until three months after signing the annuity
    application.

Answer 26

False

26. A deferred annuity means that the policyholder’s premium payment is deferred until three months after signing the annuity application.

Rationale: A deferred annuity means that income payments will not start until at least one year from the first premium payment.

Question 27

27. Generally, withdrawals from tax-deferred annuities prior to age 59½ will trigger an IRS-imposed 10% penalty.

Answer 27

True

27. Generally, withdrawals from tax-deferred annuities prior to age 59½ will trigger an IRS-imposed 10% penalty.

Question 28

28. Mortality refers to life expectancy and morbidity refers to rates of disability.

Answer 28

True

28. Mortality refers to life expectancy and morbidity refers to rates of disability.

Question 29

29. An insurance company’s dividend scale is based on its profits and surplus.

Answer 29

True

29. An insurance company’s dividend scale is based on its profits and surplus.

Question 30

30. Generally, last-to-die joint life policies have a lower lapse rate than individual policies.

Answer 30

True

30. Generally, last-to-die joint life policies have a lower lapse rate than individual policies.

Question 31

31. It is usually sufficient for a planner to consider only a client’s current insurance needs. Future needs should be considered in the future.

Answer 31

False

31. It is usually sufficient for a planner to consider only a client’s current insurance needs. Future needs should be considered in the future.

Rationale: Planners should consider their clients’ future insurance needs as well as their current needs. Insurance also can be used to fund education or estate needs that may not be required for 20 to 30 years.