Chapter 4

Question 1

Where would policy proceeds be paid if both the insured and primary beneficiary were killed in the same accident?

Answer 1

Contingent beneficiary

Question 2

What does a life insurance policy guarantee to the stated beneficiary up on the death of the insured?

Answer 2

Specified amount of money

Question 3

What is affected by the frequency of an insurance policy’s premium payments?

Answer 3

The cost

Question 4

What is the purpose of a Section 1035 exchange?

Answer 4

Enables a life policy to be replaced with another life policy and results in postponement of the tax consequence.

Question 5

A policyowner can receive a percentage payment of death benefits prior to death by using what kind of contract?

Answer 5

Viatical settlement agreement

Question 6

What is the primary feature of a viatical settlement?

Answer 6

Reduced death benefit prepayment.

Question 7

What factors determine an insured’s life insurance premium?

Answer 7

Age, occupation, and avocation (hobby).

Question 8

If the beneficiary dies from the same accident of the insured individual, the insurer will proceed as if, what?

Answer 8

The insured outlived the beneficiary, allowing the proceeds to go to the contingent beneficiary.

Question 9

Which policies have premiums that are averaged over the policy period?

Answer 9

Level premium term life insurance policies

Question 10

How does life insurance create an immediate estate?

Answer 10

After the first premium is paid, the face amount may be available to the beneficiary.

Question 11

Define “mortality factor”.

Answer 11

The measure of the number of deaths in a given population.

Question 12

What is the “expense factor”?

Answer 12

The “loading charge” aka operating expenses.

Question 13

What is a “paid-up” policy?

Answer 13

A single premium funding policy paid up with a single payment, normally associated with whole life.

Question 14

What is “cash value”?

Answer 14

• A savings element of whole life policies that are payable before death.
• Value during early years typically will be less than the premiums paid.

Question 15

What types of premiums are tax deductible?

Answer 15

• Premiums used for charity
• Paid by ex-spouse as court-ordered alimony
• Employer-paid premiums for group life

Question 16

What types of premiums are NOT tax deductible?

Answer 16

Premiums used for individual life policies or business purposes.

Question 17

What is the tax treatment of cash value?

Answer 17

As long as the policy is not surrendered, it grows tax-free.

Question 18

What is “cost-basis”?

Answer 18

The total of premiums paid into the policy minus the total dividends received in cash or used to offset premiums.

Question 19

How is the cost of a policy affected when a policyowner pays premiums more frequently?

Answer 19

The cost increases

Question 20

What premium payment mode results in the highest overall cost?

Answer 20

Monthly

Question 21

What is considered a major tax advantage of life insurance?

Answer 21

Income tax is typically not owed on proceeds paid directly to a beneficiary.

Question 22

Naming a contingent beneficiary as “all surviving children” is described by what term?

Answer 22

Class designation

Question 23

Pat is insured with a life insurance policy and Karen is his primary beneficiary. They are both involved in an automobile accident where Pat dies instantly and Karen dies 5 days later. Which policy provision will protect the rights of the contingent beneficiary to receive the policy benefits?

Answer 23

Common disaster clause

Question 24

What is a viatical settlement?

Answer 24

A settlement in which a terminally ill viator may sell their life insurance policy to a third party (viatical/viatee) for a percentage of the face value.

Question 25

If no one is named as a beneficiary of the beneficiary dies before the insured, where does the death benefit go?

Answer 25

To the insured’s estate.

Question 26

Name, in order of succession, the types of beneficiaries.

Answer 26

Primary: First in line
Contingent: Second in line
Tertiary: Third in line or the estate

Question 27

Per Stirpes

Answer 27

“By Bloodline”: if the beneficiary dies before the insured, the benefits will be paid to the beneficiary’s heirs.

Question 28

Per Capita

Answer 28

“By Head”: Even distribution amoung all named living beneficiaries

Question 29

What happens in the event of simultaneous death of insured and primary beneficiary?

Answer 29

The assumption will be the primary died first, allowing death benefits to be paid to contingent beneficiaries.

Question 30

What is the spendthrift clause?

Answer 30

States that benefits are paid in a fixed amount over a certain period of time to prevent the beneficiary from reckless spending.