Insurance Planning

Question 1

An insurable risk is characterized by an accidental loss, low cost, and a:

A.Large number of exposure units.
B.High chance of loss.
C.Low amount of exposure.
D.Limited number of perils.

Answer 1

Solution: The correct answer is A.

Recall that there must be a large number of homogenous (or similar) exposure units to minimize the overall risk to the insurer. The insurer, however, does not want a high chance of loss. The others are not part of an insurable risk profile.

Question 2

The following type of insurance would be described as an unbundled policy where the company selects the places of investment:

A.Universal life insurance.
B.Interest sensitive life insurance.
C.Variable universal life insurance.
D.Adjustable life insurance.

Answer 2

Solution: The correct answer is A.

In all of these coverages, the monies above and beyond mortality and expenses are invested by the company in its general fund. Only variable life allows the investor to select investments. A universal policy is unbundled. The way this question is asked (“unbundled and selected by the company”) points one toward the correct answer of universal life.

Question 3

Under the definition of long term care, the highest level of care provision which calls for services where residents are seen regularly by physicians is known as:

A.Intensive nursing care.
B.Skilled nursing care.
C.Intermediate care.
D.Custodial care.

Answer 3

Solution: The correct answer is B.

Option A - There is no coverage known as “intensive nursing care.”

Option C - Intermediate care is identical to skilled nursing care defined above, but not seen with as much regularity by a physician (not daily).

Both options B & C are institutional care, whereas option D is not.

Question 4

All of the following are settlement options except:

A.Fixed period payments.
B.Fixed amount installments.
C.Reduced paid-up insurance.
D.Interest Only

Answer 4

Solution: The correct answer is C.

All of the following are settlement options except reduced paid-up insurance, which is a non-forfeiture provision.

Question 5

When Emil purchased his $100,000 home, he insured it at the required coinsurance amount of 80% of the value. Over the last five years, the value of his home has increased and is now $160,000, but he has not increased his coverage. Emil has a $500 deductible. He has a kitchen fire causing $10,000 in damage. What amount will his insurer pay for repairs?

A.$4,250
B.$5,750
C.$6,250
D.$9,500

Answer 5

Solution: The correct answer is B.

The amount carried divided by the amount required (80% of current value) times the loss, minus the deductible equals the payment. One of the tricks on this one is that he purchased $80,000 of coverage initially (80% of the purchase price). So, the covered loss equals [$80,000 / (.80 × $160,000)] × $10,000 = $6,250. The insurer will pay $6,250 - $500 = $5,750.

Question 6

Which of the following is true of a Modified Endowment Contract (MEC)?

No money can be withdrawn from the contract without incurring a 10% penalty.
Once a contract is a MEC, it remains so even after a 1035 Exchange for a different policy.
Any withdrawals are made on a LIFO basis.
The contract owner can borrow the money out of the policy without incurring the penalty.
A.I and II only.
B.I and IV only.
C.II and III only.
D.III and IV only.

Answer 6

Solution: The correct answer is C.

Option “I” is false because once all the earnings are withdrawn and tax and penalty paid on them, the basis is not taxed, nor is there a penalty. Option “IV” is false because even loans from a MEC are taxable and the penalty is applied.

Question 7

Which of the following statements are accurate regarding the taxation of disability insurance?

Premiums paid by the employer, benefits are taxable to the employee.
Premiums paid by the employer, benefits are non-taxable to the employee.
A private disability policy paid with after tax dollars, then benefits are taxable.
A private disability policy paid with after tax dollars, then benefits are non-taxable.
A.I and III only.
B.II and III only.
C.II and IV only.
D.I and IV only.

Answer 7

Solution: The correct answer is D.

Question 8

Dave is 46, married and has an annual salary of $60,000. His employer offers group term life insurance coverage equal to 2 times his annual salary. The employer’s cost for Dave is $.40 per $1,000 of which Dave pays $.15 per month per $1,000. The Table 1 (Section 79) rate for 45-49 year olds is $0.29 per $1,000. What additional income must Dave include in his taxable income this year resulting from the group term insurance? Round your answer to the nearest dollar.

A.$28
B.$126
C.$210
D.$244

Answer 8

Solution: The correct answer is A.

Dave is paying $216 each year for the coverage ($120 × 0.15 × 12). The Table I cost is calculated by subtracting $50,000 (the tax-free amount allowed under Section 79) from the $120,000 actually purchased, dividing the remainder by $1,000, multiplying the Table 1 rate of 0.29 times 12. ($120,000 - $50,000 / $1,000 × 0.29 × 12). So, the Table 1 premium is $244 (rounded.) Subtract the $216 already paid by Dave from the $244 Table 1 premium to determine the additional taxable income ($244 - $216 = $28).

Question 9

An employer is required to extend medical coverage (under COBRA, the Consolidated Omnibus Budget Reconciliation Act) to eligible members of the employee’s family if the employee:

Dies.
Retires.
Divorces.
Terminates employment (prior to retirement.)
A.I, II and III only.
B.I and III only.
C.II and IV only.
D.I, II, III and IV.

Answer 9

Solution: The correct answer is D.

One of the few exceptions to continued COBRA coverage is termination due to gross misconduct.

Question 10

Your client, John Kent, purchased a limited payment whole life policy 15 years ago. He would like to stop paying the premiums on his policy, but continues to need the same amount of insurance. If he did so, which one of the following is a non-forfeiture option he could use?

A.Reduced paid-up insurance.
B.Extended term insurance.
C.Installments for a fixed period.
D.One-year term.

Answer 10

Solution: The correct answer is B.

Extended term insurance is the only choice that is a non-forfeiture option that won’t reduce the coverage.

Option A - Although this is a non-forfeiture provision, the amount of insurance coverage would be reduced.

Option C is a settlement option.

Option D is a dividend option.

Question 11

ABC Company wants to create a split dollar agreement for an executive. Which statement accurately describes a split dollar agreement?

A.The employer owns the life insurance policy under a collateral assignment.
B.The employer owns the life insurance policy under the endorsement method.
C.The employee is primarily responsible for making the premium payment under the endorsement method.
D.The employer is primarily responsible for making the premium payment under the collateral assignment method.

Answer 11

Solution: The correct answer is B.

Question 12

There are four business partners. They are preparing a buy-sell agreement. It will be funded using a cross purchase life insurance arrangement. How many policies will be purchased by the partners?

A.0
B.4
C.8
D.12

Answer 12

Solution: The correct answer is D.

Question 13

Identify which concept applies to each of the following descriptions (in order) as it pertains to insurance contracts:
1. The value exchanged between parties may not be equal
2. The wording of insurance contracts is non-negotiable
3. Insurance contracts may be canceled if payment is not received
4. Only one of the parties to the contract is bound by a promise

A. Conditional - Adhesion - Aleatory - Unilateral

B. Aleatory - Adhesion - Conditional - Unilateral

C. Adhesion - Aleatory - Conditional - Unilateral

D. Aleatory - Unilateral - Adhesion - Conditional

E. None of the above

Answer 13

Solution: B

Aleatory: Value exchanged between parties may not be equal
Adhesion: The wording of insurance contracts is non-negotiable
Conditional: Insurance contracts may be canceled if payment is not received
Unilateral: Only one of the parties to the contract is bound by a promise

Question 14

What type of hazard results from the indifference a person has to the potential loss because he or she already has insurance?

A.Peril
B.Physical Hazard
C.Moral Hazard
D.Morale Hazard

Answer 14

Solution: The correct answer is D.

Moral hazard is a character flaw or dishonesty. e.g. burning your own house down.

Morale hazard is the indifference a person has towards loss because of insurance. e.g. leaving the keys in your car and the car running.

Question 15

The principle of indemnity suggests that:

A.A person is entitled to compensation only to the extent that financial loss has been suffered
B.Insured cannot indemnify himself from both the insurance company and a negligent third party for the same claim
C.The insured must be subject to emotional or financial hardship resulting from the loss
D.The insured and insurer must both be forthcoming with all relevant facts about the insured risk and coverage provided for that risk

Answer 15

Solution: The correct answer is A.

B describes subrogation.

C describes an insurable interest

D describes concealment

Question 16

All of the following are true regarding COBRA except?

A.The employer is allowed to charge up to 102% of the health insurance premium.
B.COBRA must be offered because of voluntary or involuntary termination of the employee or reduction in hours from full time to part time.
C.Termination of employment requires 36 months of coverage.
D.Divorce or legal separation requires 36 months of coverage.

Answer 16

Solution: The correct answer is C.

C is false because termination of employment only requires 18 months of coverage.

Question 17

Sarah and her husband Ralph have been covered under her employer’s group health plan. Ralph started a very successful small business and they have enjoyed a significant increase in earnings. Sarah has recently gone part time and her group health plan will no longer cover them. Ralph’s business does not provide health insurance. Which of the following statements regarding COBRA coverage is correct?

A.Because Sarah’s change to part time is voluntary, COBRA rules do not apply.
B.COBRA rules allow continuation of health coverage for up to 36 months.
C.COBRA rules allow continuation of health coverage for up to 18 months.
D.COBRA rules allow continuation of health coverage for up to 29 months.

Answer 17

Solution: The correct answer is C.

18 months is the correct continuation for going part time, and it does not matter if it is voluntary or involuntary.

Question 18

The principle of indemnity is:

A.A person is entitled to compensation only to the extent that financial loss has been suffered.
B.Insured cannot indemnify himself from both the insurance company and a negligent third party for the same claim.
C.The insured must be subject to emotional or financial hardship resulting from the loss.
D.The insured and insurer must both be forthcoming with all relevant facts about the insured risk and coverage provided for that risk.

Answer 18

Solution: The correct answer is A.

B describes subrogation.

C describes an insurable interest.

D describes concealment.

Question 19

An individual’s personal assessment of the chance of a loss is an example of:

A.A priori probability.
B.Subjective probability.
C.Objective risk.
D.Objective probability.

Answer 19

Solution: The correct answer is B.

A priori probability is calculated by logically examining a circumstance or existing information regarding a situation. Subjective probability is looking at risk from your point of view. Objective risk and probability would be looking at it from an unbiased standpoint.

Question 20

Owl Enterprises would like to reward some of their top three executives. They have chosen to purchase whole life policies on each of them and use a split dollar arrangement. Which financing option aligns best with this decision?

A.Collateral Assignment Split Dollar plan
B.Endorsement Split Dollar plan
C.Residual Endorsement Split Dollar plan
D.Endorsed Assignment Split Dollar plan

Answer 20

The correct answer is B.

In a collateral Assignment method, the policy is owned by the employee with an assignment to the employer. Under the Endorsement method, the employer owns the policy. The other two options do not exist.

Question 21

20.0% complete
Question
Diane, an ER surgeon, buys a disability policy with a base benefit of $6000 and an SIS offset benefit of $1200. Diane becomes disabled and eventually receives $1000 in Social Security disability benefits. How much will she receive from her policy initially, before Social Security starts paying her benefit?

A.$4800
B.$6000
C.$6200
D.$7200

Answer 21

Solution: The correct answer is D.

Initially, she receives the full benefit. Once SS starts paying her benefit would drop to $6200.

Question 22

Cindy’s employer has a contributory long-term group disability policy where she pays 60% of the premium. If she becomes disabled and is receiving a benefit of $4000, which of the following is correct?

A.She will receive a benefit of $2400.
B.The entire benefit will be taxable.
C.The entire benefit will be non-taxable.
D.She will receive a benefit of $4000, of which $1600 will be taxable.

Answer 22

Solution: The correct answer is D.

Taxability is pro-rata based on premium.

Question 23

What is the maximum stay in a skilled nursing care facility for those covered by Medicare?

A.20 days
B.60 days
C.90 days
D.100 days

Answer 23

Solution: The correct answer is D.

For those covered by Medicare, the maximum stay in a skilled nursing care facility is up to 100 days per benefit period, with specific cost-sharing rules:

Days 1–20: Medicare covers the full cost, and the patient pays nothing for covered services.
Days 21–100: The patient is responsible for a daily copayment, which changes annually.
After 100 days: Medicare no longer covers any costs, and the patient is responsible for all charges.
A new benefit period can begin after a 60-day break from receiving skilled care.

Question 24

Which of the following options are automatically offered by issuers on all long-term care policies?

A.Waiver of premium
B.Restoration of benefits
C.Inflation protection
D.All of the above

Answer 24

Solution: The correct answer is C.

Issuers of long-term care policies must offer inflation protection as well as a nonforfeiture benefit.

Option benefits that might be offered include waiver of premium, refund of premium, restoration of benefits, bed reservation, and respite care.

Question 25

Ralph, age 35, deposited $55,000 in a non-qualified single premium deferred annuity. Fifteen years later he surrenders the contract for a lump sum distribution of $100,000. Which of the following is correct? A.Ralph owes income tax on $45,000. B.Ralph owes income tax on $100,000. C.Ralph owes income tax on $100,000 + 10%. D.Ralph owes income tax on $45,000 + 10%.

Answer 25

Solution: The correct answer is D. Proceeds – basis = ordinary income for early withdrawal (earnings first). Contract surrender is 100,000 - basis of 55,000 = 45,000 of gain. Gain is taxed at ordinary income rates plus the 10% penalty applies to the taxable amount. 10% penalty applies because the distribution occurred prior to age 59 ½. All annuities have an early withdrawal penalty. This is a trade-off for tax deferral. The penalty can be waived by using substantial and equal payments, annuitizing or qualifying for a penalty exception. Editor's Note: Yes, ALL annuities, non-qualified too. This is covered in your Insurance textbook in chapter 8. This concept was also in Life, Accident and Health pre-licensing and your FINRA series 6 and 7 courses.

Question 26

Match the scenario to the correct coverage: Fire from lightning strike burns den furniture. A.Coverage A B.Coverage B C.Coverage C D.Coverage D E.Coverage E F.Coverage F

Answer 26

Solution: The correct answer is C.

Question 27

Match the scenario to the correct coverage: Lightning strikes a storage building. A.Coverage A B.Coverage B C.Coverage C D.Coverage D E.Coverage E F.Coverage F

Answer 27

Solution: The correct answer is B.

Question 28

Under a HO-3 Policy, all perils are covered, with some exceptions. All of the following are perils that are excluded from a HO-3 policy, except: A.Termite Damage B.Flood C.Earthquake D.Tornado

Answer 28

Solution: The correct answer is D. Termite damage is slow, so it’s excluded. Flood and earthquake are definitely excluded.

Question 29

Section II of a HO-3 policy provides what type of protection for the homeowner? A.Dwelling B.Damage to Other’s Property C.Loss of Use D.Personal Property

Answer 29

Solution: The correct answer is B. A, C and D are in section I

Question 30

Family members are covered for the purposes of Part A (Liability Coverage) for a Personal Auto Policy when operating all of the following except? A.Your covered auto B.Rented auto C.Borrowed car D.Replacement car after 31 days

Answer 30

Solution: The correct answer is D. You have a duty to notify the insurance company within first 30 days of purchasing a new car.

Question 31

All of the following statements are correct regarding a Personal Auto Policy Part B (Medical Payments) coverage except? A.Provides payment for medical expenses of an insured due to an auto accident B.Provides medical payments if struck as a pedestrian C.Provides payments for medical expenses for household pets if struck by the covered auto D.Provides payment for medical expenses of anyone occupying the insured’s covered auto.

Answer 31

Solution: The correct answer is C. Does not cover pets. Does cover as a pedestrian.

Question 32

All of the following statements are correct regarding a Personal Auto Policy Part C (Uninsured Motorists) coverage except? A.Payment for property damage B.Payment for lost wages C.Payment for punitive damages D.All of the above

Answer 32

Solution: The correct answer is C. Does not pay for punitive damages. Cannot sue yourself for liability.

Question 33

All of the following statements are correct regarding a personal umbrella liability policy except? A.Provides protection above and beyond the liability limits of your homeowners and PAP B.Requires the insured to carry certain underlying minimum amounts of liability for homeowners and PAP C.The insurer provides legal defense to the insured D.Only appropriate for individuals with a high net worth

Answer 33

Solution: The correct answer is D. Future earnings can be garnished. PLUP may protect against garnished wages.

Question 34

Which of the following statements concerning the personal auto policy’s (PAP’s) Part D Coverage for Damage to Your Auto is (are) correct? Part D is the portion of the PAP that provides coverage for physical damage to the covered auto and to certain other nonowned automobiles. Part D actually provides two coverages: collision and comprehensive (fire, theft, vandalism, etc.). A.I only. B.II only. C.Both I and II. D.Neither I nor II.

Answer 34

Solution: The correct answer is C. Both I and II are correct.

Question 35

Which of the following statements concerning property insurance is (are) correct? Property insurance policies fall into two broad categories with respect to covered perils-named perils policies and “all risks” policies. Named perils policies contain a list of the covered perils, which range in number depending on the type of the policies. A.I only. B.II only. C.Both I and II. D.Neither I nor II.

Answer 35

Solution: The correct answer is C. Both I and II are correct.

Question 36

The two most well-known credit scores are: A.FICO and Auto B.Auto and Vantage C.Vantage and FICO D.FICO and Rico

Answer 36

Solution: The correct answer is C.

Question 37

Betty Sue, age 75, is a widow with no close relatives. She is very ill, unable to walk, and confined to a custodial nursing home. Which of the following programs is likely to pay benefits towards the cost of the nursing home? Medicare may pay for up to 100 days of care after a 20-day deductible. Medicaid may pay if the client has income and assets below state-mandated thresholds. A.1 only B.2 only C.Both 1 and 2 D.Neither 1 nor 2

Answer 37

Solution: The correct answer is B. Statement 1 is incorrect because Medicare covers all costs for the first 20 days of skilled nursing home care and cover the next 80 days with a deductible. Students should know from the Insurance course that Medicaid provides for low income persons.

Question 38

All of the following statements concerning annuities are correct EXCEPT A.The pure life annuity is ideal for the person who needs maximum income spread out over a lifetime and has no living dependents to whom he or she wishes to leave assets. B.A cash refund annuity guarantees that the annuitant or their beneficiary will receive the premium payments as a lump sum payment. C.An installment refund annuity is an annuity that continues periodic payments after the annuitant has died until the original purchase price is refunded. D.A joint and survivor annuity is an annuity based on the lives of two or more annuitants and begins payments after the first annuitant dies.

Answer 38

Solution: The correct answer is D. A joint and survivor annuity is an annuity based on the lives of two or more annuitants and begins payments while both annuitants are alive.

Question 39

Holiday Clothes Outlet (HCO) is a partnership with a growing online store. HCO has three owners. One of the owners is about to get married which made the others think about a longevity plan for their business. The three owners have equal ownership and are all in their late 20’s. What would be their best choice to fund a buy/sell agreement and why? A.Cross purchase agreement. They will need fewer policies than the entity agreement. B.Entity purchase agreement. They are young and early in the business and don’t have the disposable income to pay for the policies. C.Cross purchase agreement. The policy values and premiums would be equitable. D.Entity purchase agreement. They will need fewer policies than the cross-purchase agreement.

Answer 39

Solution: The correct answer is C. Entity purchase will not be an option for a partnership, the company would need to be a separate legal entity, not a pass through, in order for the entity to own the policies. Although Option D is a true statement, it does not fit the question facts. Option A is a false statement they will need 3 x (3-1) = 6 policies for the cross purchase, and only 3 if they were able to use the entity purchase.

Question 40

Which of the following statements concerning the personal auto policy (PAP's) Part B Medical Coverage is incorrect? A.Coverage generally pays for medical costs excluding funeral service expenses for the insured when they are involved in an auto accident. B.The coverage is provided without regard to fault of the injury. C.It covers the insured, who includes the policy owner or family member, as well as any other person occupying a vehicle covered by the insurance policy D.Coverage includes injuries sustained as a pedestrian when struck by a motor vehicle.

Answer 40

Solution: The correct answer is A. Coverage generally pays for medical costs and funeral service expenses for the insured when they are involved in an auto accident.

Question 41

Which of the following statements concerning the insurance terms is correct? A.Subrogation states that, upon paying the insured the amount of a loss, they may not try to collect from a responsible third party. B.Indemnity is when an insured is entitled to payment in excess of the actual extent of financial loss or legal liability. C.The principle of indemnity does not assert that an insured will recoup 100 percent of any loss D.The principle of indemnity and the subrogation clause are closely aligned to accomplish the goal of ensuring the insured may profit from their loss.

Answer 41

Solution: The correct answer is C. Subrogation is the right, upon paying the insured the amount of a loss, to try to collect from a responsible third party. Indemnity is when an insured is entitled to payment at least to the extent of financial loss or legal liability. The principle of indemnity and the subrogation clause are closely aligned to accomplish the goal of preventing an insured from profiting from insurance.

Question 42

A homeowner looking to insure their property should consider the following insurance policies EXCEPT: A.HO-2 B.HO-3 C.HO-4 D.HO-5

Answer 42

Solution: The correct answer is C. HO-4 is a Renter's policy.

Question 43

Which of the following property is covered under the personal property coverage (Coverage C) of HO- 3? A.Exotic fish in a built in fishtank B.A motorized three wheeler. C.Copy machine and fax used for business located in home office, valued at $2000. D.Your friend's bedroom set who rents a room in your house.

Answer 43

Solution: The correct answer is C. Fish, motorized land vehicles, property of roomers or boarders not related to the insured are all examples of property excluded from coverage.

Question 44

All of the following statements regarding a Health Savings Account are true except: A.Contributions can be made by an employer and an employee.. B.A spouse who is independently eligible to establish an HSA may not open up their own HSA if they are listed with the spouse on a jointly filed income tax return. C.Contributions are not allowed for individuals covered by Medicare, another health insurance policy, or are dependents of another person for income tax purposes. D.A 20% penalty applies to non-medical expense withdrawals prior to age 65.

Answer 44

Solution: The correct answer is B. One major exception to the dependent eligibility rule is that spouses who independently meet the requirements to establish an HSA may open up their own HSA even though they are listed with the spouse on a jointly filed income tax return.

Question 45

Which of the following has the least impact on credit score? A.Total credit usage and available credit. B.Number of new accounts and types of credit. C.Age of credit history. D.Payment history over last 12 months.

Answer 45

Solution: The correct answer is B. Number of new accounts (10%) and types of credit (10%) are the least influential.

Question 46

Which of the following statements concerning the reduction of Social Security benefits is NOT correct? A.A worker's benefit is reduced in the years prior to full retirement age, in the year of reaching full retirement age the benefit is not reduced. B.Generally, only wages and net self-employment income count towards the retirement earnings limitation test. C.A person generally can continue to work even when considered "retired" under Social Security: however, those earnings obtained by a beneficiary under normal retirement age and above certain limitations will reduce the benefit. D.In the years before reaching full retirement age, a worker's benefit may be reduced by $1 for every $2 in earnings above the respective year's retirement earnings limit.

Answer 46

Solution: The correct answer is A. In the year that the retiree reaches full retirement age, $1 in benefits will be deducted for each $3 earned above the given year’s limit but only for earnings before the month the retiree reaches full retirement age.

Question 47

The following statements about HO-6 coverage are true EXCEPT: A.It excludes Coverage B Other Structures. B.It provides for additional living expenses and loss of rental income for the insured. C.It provides standard coverage of personal property at the replacement value. D.It provides limited coverage for loss assessments.

Answer 47

Solution: The correct answer is C. HO-6 standard coverage includes personal property at the actual cash value. A homeowner can pay an additional premium to purchase an endorsement to change the property insurance “Coverage C” standard of value from actual cash value to replacement cost.

Question 48

Robin's stereo was stolen. The stereo cost $3,300 when purchased. A similar new stereo now costs $2,500. Assuming the stereo was 50% depreciated, what is the actual cash value of Robin's loss? A.$400 B.$1,000 C.$1,250 D.$1,650

Answer 48

Solution: The correct answer is C. 2,500 × .50 = 1,250 (How much she paid is irrelevant to actual cash value).

Question 49

Which of the following statements concerning loss frequency is NOT correct: A.Once the risks are identified, an analysis based on expected loss frequency and loss severity should be completed. B.Loss frequency is the measurement of the dollar magnitude or absolute dollar amount of the potential loss occurring C.Only those risks that have severe financial consequences but occur infrequently are appropriate to transfer or insure. D.The main objective is to determine how often the loss event is likely to occur.

Answer 49

Solution: The correct answer is B. Loss severity measures the dollar magnitude or the absolute dollar amount of the expected financial loss were it to occur.

Question 50

All of the following statements are concerning whole life insurance, which is correct? A.Whole life insurance provides for the payment of the policy's face amount upon the death of the insured, regardless of when death occurs. B.If the whole life insurance premiums are to be paid only during a specified period, the insurance is designed as ordinary life. C.Many whole life policies are "participating" policies, meaning they participate in the returns of the market. D.The protection afforded by the whole life insurance contract never expires, therefore the policy has to be renewed or converted.

Answer 50

Solution: The correct answer is A. If the whole life insurance premiums are to be paid only during a specified period, the insurance is designed as limited pay life. A participating policy means the policy owner may be entitled to receive dividends. The protection afforded by the whole life insurance contract is permanent-the term never expires, and the policy never has to be renewed or converted.

Question 51

Which of the following statements concerning variable life insurance is correct? A.Variable life policies invest the policy owner's cash in the company's general investment account. B.Between 80% and 90% of variable whole life policies must be regulated by the Securities and Exchange Commission (SEC). C.Variable life allows the policy owner to access the cash value by way of withdrawals, rather than just through loans. D.If the variable life policy investment experience is weak, the death benefit amount may be reduced to zero.

Answer 51

Solution: The correct answer is C. Variable life insurance policies require that the insurance company invest the policy owner’s cash value in a separate account, rather than in the company’s general investment account. Variable whole life policies must be regulated by the Securities and Exchange Commission (SEC). The policy will still have the face value benefit, even if the cash value has suffered from poor investment results.

Question 52

Derek Baldwin purchased a 20-year limited payment whole life policy 15 years ago. He would like to stop paying the premiums on his policy. If he does so, which one of the following is a nonforfeiture option he could possibly use? A.Installments for a fixed amount. B.Life annuity. C.Installments for a fixed period. D.Extended term insurance.

Answer 52

Solution: The correct answer is D. Ideally the insured should simply use dividends to meet premium obligations over the next five years and have a fully paid-up policy. However, this is not one of the choices. Therefore, the best possible answer would be extended term, Option "D". Options "A", "B" and "C" are settlement options.