Chapter 4

Question 1

Settlement Option Characteristics

Answer 1

Used when the insured lives to the endowment date or at the insured’s death.
Benefits are usually paid lump sum, unless the recipient chooses an optional mode of settlement. The policyowner may select options while living, if none was chosen the beneficiary may choose an option at time of claim. If the owner had chosen an option prior to death, it cannot be changed by anyone. Principal payments received are not taxable as income, but any interest received is taxed as ordinary income.

Question 2

Interest

Answer 2

Payments paid at least annually. Income generated is taxed as ordinary income. Also known as capital conservation.

Question 3

Optional Modes of Payment

Answer 3

Interest
Fixed Amount
Fixed Period
Life Income Only
Life Income Period Certain
Life income Joint and Survivor
Joint Life
Settlement occurs when insured dies, or when cash value = death benefit (must be paid out).

Question 4

Fixed

Answer 4

Amount - Payments are a specified dollar amount until the benefits are exhausted.
Fixed Period - payments are guaranteed for a specified period of time, regardless of who may receive the payments, policyowner or beneficiary.

Question 5

Life Income

Answer 5

Life Income Only - payments are guaranteed for the lifetime of the recipient.
Life Income Period Certain - Payments are guaranteed for the lifetime of the recipient or a specified period of time, whichever is longer.
Life Income Joint and Survivor - guaranteed for the lifetime of 2 recipients.

Question 6

Joint Life

Answer 6

Payments are guaranteed to two or more recipients until the first recipient dies, then all payments cease.

Question 7

Nonforfeiture Options (Guaranteed Values)

Answer 7

Options are found in policies that accumulate cash values and protect the policy-owner against total loss of benefits if the policy should lapse or be canceled.
Cash Surrender
Reduced Paid Up
Extended Term

Question 8

Cash Surrender

Answer 8

Withdraw the cash value and surrender the policy. Policy-owner receives the total cash value less any outstanding loans and accrued interest.

Question 9

Reduced Paid-Up

Answer 9

Present Cash value is used to buy a single premium, permanent paid-up policy of a reduced face amount, the longest period of coverage provided by a non-forfeiture option.

Question 10

Extended Term

Answer 10

Present Cash value is used to buy a single premium term policy of the same face amount for as long a period as it will buy. This option provides the most protection and is referred to as the Automatic Option.

Question 11

Dividend Options

Answer 11

Dividends are a return or excess premium and are not taxable as income
Interest earned on dividends is taxable
Should the total accumulation of dividends exceed the accumulated premiums paid, the exceeding amount is taxable as normal income.
Dividends are the property of policy-owner and may be withdrawn.

Question 12

Dividend Options

Answer 12

Cash
Premium Reduction
Accumulate at Interest
Paid-Up Additions 
One Year Term
Paid Up Option
Acceleration of Endowment

Question 13

Cash Dividend Option

Answer 13

Policyowner receives the declared dividends on or near each policy anniversary.

Question 14

Premium Reduction Option

Answer 14

Dividends are applied toward the next premium due.

Question 15

Accumulate at Interest Dividend Option

Answer 15

Retained by the insurer and interest rate is paid.

Question 16

Paid Up Additions

Answer 16

Purchases single premium, additional permanent benefits at the insured’s attained age. The additional insurance is added to the face amount and generates cash value and dividends as if the paid up additional benefit was part of the original policy.

Question 17

One Year Term

Answer 17

Purchases single premium, one year term policy, for an amount equal to cash value.

Question 18

Paid Up Option

Answer 18

Pays off policy more quickly than scheduled

Question 19

Acceleration of Endowment

Answer 19

reduces the time period for the policy to endow.

Question 20

Policy Loans and Withdrawal Options

Answer 20

Cash Loan - loan deducted from the death benefit. Interest is charged on the loan.
Partial Surrender/Withdrawal - similar to a loan because it reduces death benefit.
Full Surrender - Loan exceeds cash value results in automatic lapse.

Question 21

Cash Loans

Answer 21

Deducted form face or cash values along with any interest due.
Loans are available once it has cash value.
Company may defer loans up to 6 months unless it was intended to pay the premium.
Interest may be fixed or variable (Moody’s Corporate bond yield), annually but not more than quarterly.
Will not void policy until the total amount of loan and interest equal the total cash value.

Question 22

Automatic Premium Loans

Answer 22

Enables insurer to automatically borrow the cash value to cover the premium payment to prevent the contract from lapsing.
Becomes effective at the end of a grace period.
APL is treated as all other loans.
APL is available only on policies that have cash value and is not an extra charge in premium.

Question 23

Partial Withdrawals or Surrenders

Answer 23

A partial withdrawal of cash value is permitted in Universal, Variable Life, Variable Universal Life (flexible policies).
Partial or full withdrawal is allowed.
In the early years, the insurer may apply a surrender charge.