Introduction to Life Insurance and Annuities

Question 1

Personal Needs Examples of Life Risk Exposures

Answer 1

• General debt-related requirements
• Pure life annuitant not outliving spouse (who
subsequently would lose income)
• Payor of an installment obligation to the client dying before finishing the obligation
o note that there is a potential disability exposure as well
• Goals or obligations that must be funded upon the death of the client, including charitable
objectives

Question 2

Family Needs Examples of Life Risk Exposures

Answer 2

• Last expenses
• Death of a primary
income earner
• Dependent income
• Education needs
• Family goals
• Parents

Question 3

Business Needs Examples of Life Risk Exposures

Answer 3

• Death of a partner
• Death of a key employee
• Employee retention programs
• Business liquidity

Question 4

Question 1 - Personal Risk Exposures
All of the following are personal risk exposures
that may indicate a need for life insurance except

Answer 4

a. death before debt repayment.
b. death of a client with considerable liquid assets.
c. spouse outliving pension plan pure life annuitant.
d. death of client before reaching personal goals.

Question 5

Buy-Sell Agreements

Type: Stock redemption

Answer 5

• The business agrees to buy the deceased shareholder’s stock
(i.e., entity plan)

Question 6

Buy-Sell Agreements

Type: Cross-purchase

Answer 6

• Each business owner agrees to buy out the

interest of the deceased business owner

Question 7

Business Continuation Option

Type: Wait & See

Answer 7

• Upon the death of a business owner, the remaining owners decide the best way to proceed

Question 8

Business Continuation Option

Type: Third Party Buyout

Answer 8

• A non-related party agrees to purchase the

deceased owner’s interest

Question 9

Amount of protection for Term Insurance Definition

Answer 9

Level: Remains constant during term

Decreasing: Decreases over the specified time frame

Question 10

Amount of protection for Whole Life

Answer 10

Remains constant unless loans have reduced the face amount, dividends are used to increase the
face amount, or riders are purchased

Established in contract

Question 11

Amount of protection for Variable Life

Answer 11

May increase or decrease during the period

Minimum benefit usually established in contract at the original face amount

Question 12

Amount of protection for Universal Life

Answer 12

Constant unless option 2 (which increases the death benefit by the cash value amount) is chosen, loans have reduced the face amount, or riders are purchased

Question 13

Amount of protection for Variable Universal Life

Answer 13

Generally level (may increase due to investment
results)

Question 14

Savings element (cash value) For Term insurance

Answer 14

Level: None

Decreasing: None (actually some policies
actually, have small savings)

Question 15

Savings element (cash value) For Whole Life

Answer 15

Established in contract but may be increased
by dividends or excess interest in current assumption whole life products Early on, the annual
level premium more than pays for insurance
protection Guaranteed minimum rate of return

Question 16

Savings element (cash value) For Variable Life

Answer 16

Cash value from separate accounts varies; an established ratio to amount of protection is maintained to prevent conversion to MEC or non-life insurance

Question 17

Savings element (cash value) For Universal Life

Answer 17

Varies based on premium payment, death benefit, and interest rate paid on the cash fund

Has a guaranteed minimum rate of return

Question 18

Savings element (cash value) Variable Universal Life

Answer 18

Cash value from separate accounts varies based on investment results

Question 19

Income-tax-deferred buildup Term Life

Answer 19

Level: Not present
Decreasing: Not present; no buildup (usually)

Question 20

Income-tax-deferred buildup Whole Life

Answer 20

Yes, if meets MEC rules: Occurs where a

single premium life policy is set up. Used as an ILIT.

Question 21

Income-tax-deferred buildup Variable Life

Answer 21

Present, thus tax-deferred buildup if meets

Question 22

Income-tax-deferred buildup Universal Life

Answer 22

Yes, if meets MEC rules

Question 23

Income-tax-deferred buildup Variable UL

Answer 23

Yes, if meets MEC rules

Question 24

Taxation of death benefit Term Life

Answer 24

Level: Same as whole life
Decreasing: Same as whole life

Question 25

Taxation of death benefit Whole Life

Answer 25

Income tax free to beneficiary Estate taxable if insured held incidents of ownership in the policy at death, if insured had transferred it within 3 years of death or if it death, was payable to or for the benefit of the estate

Question 26

Taxation of death benefit Variable Life

Answer 26

Same as whole life

Question 27

Taxation of death benefit Universal Life

Answer 27

Same as whole life

Question 28

Taxation of death benefit Variable UL

Answer 28

Same as whole life

Question 29

Appropriate use Term Life

Answer 29

Level: Temporary need for death protection When low initial premium is a factor Decreasing: When need decreases over time; examples—home mortgage or until children are self-sufficient

Question 30

Appropriate use Whole Life

Answer 30

When lifetime death protection is desired When forced savings is desired Can borrow against cash value When no change in premium amount is desired

Question 31

Appropriate use Variable Life

Answer 31

When client wants lifetime death protection and cash value invested in securities

Question 32

Appropriate use Universal Life

Answer 32

When maximum flexibility is desired When the savings element is desired When need is for whole of life

Question 33

Appropriate use Variable UL

Answer 33

When client wants the combined elements of | variable life and universal life

Question 34

Duration of Protection Term Life

Answer 34

Level: Specified period; if insured dies after the period, no benefit; may be renewable Decreasing: Same as above; not renewable

Question 35

Duration of Protection Whole Life

Answer 35

Whole life of the insured | If insured is alive at age 100/120, face amount is paid

Question 36

Duration of Protection Variable Life

Answer 36

Whole life of the insured

Question 37

Duration of Protection Universal Life

Answer 37

Can be structured for a term or for whole of insured’s life Failure to maintain cash value can terminate policy

Question 38

Duration of Protection Variable UL

Answer 38

Can be structured for a term or for insured’s life Failure to maintain cash value can terminate policy

Question 39

Cost/ premium as compared to other forms Term Life

Answer 39

Level: Stated in contract; increases over time Decreasing: Stated in contract; usually level for life of contract

Question 40

Cost/ premium as compared to other forms Whole Life

Answer 40

Level amount; determined in advance by insurance company Outlay higher than term initially at same age; lifetime cost is lower than term

Question 41

Cost/ premium as compared to other forms Variable Life

Answer 41

Level premium

Question 42

Cost/ premium as compared to other forms Universal Life

Answer 42

Flexible premium payments

Question 43

Cost/ premium as compared to other forms Variable UL

Answer 43

Flexible premiums; poor investment results will increase premiums required

Question 44

Question 2 - Universal Life Which one of the following is not an advantage of universal life (UL) insurance?

Answer 44

a. It has flexible premium payments. *b. It lends itself to a compulsory savings program. c. It has an adjustable death benefit. d. It has an unbundled structure.

Question 45

Tax Treatment Normal tax status

Answer 45

• withdrawals taxed as ordinary income o any amount above basis • death benefit received by beneficiary income tax free • death benefit may be subject to estate tax o incidents of ownership; paid to estate; transferred within three years

Question 46

Tax Treatment Modified Endowment Contract (MEC)

Answer 46

• fails seven pay test seven-• loans or withdrawals taxed as ordinary income (LIFO) • 10% penalty if withdrawal taken before age 59½ • death benefits retain normal tax status

Question 47

``` Modified endowment contracts can only be created in which of the following types of life insurance policies? I. Term Life Policies II. Whole Life Policies III. Universal Life Policies IV. Variable Universal Life Policies ```

Answer 47

a. I and II only. b. III and IV only. c. II, III, and IV only. d. I, II, III, and IV.

Question 48

Life Insurance Policy Provisions Ownership clause

Answer 48

The designated owner has vested privileges including the right to transfer the policy, receive cash values and dividends, or borrow against the policy

Question 49

Life Insurance Policy Provisions Entire contract clause

Answer 49

The policy and application attached to it constitute the entire contract between insurer and insured.

Question 50

Life Insurance Policy Provisions Grace period

Answer 50

The period after failure to pay a premium, during which the policy remains in force.

Question 51

Life Insurance Policy Provisions Reinstatement

Answer 51

The insured may reinstate a lapsed policy within a | specified period of default in payment by meeting certain requirements.

Question 52

Life Insurance Policy Provisions Misstatement of age clause

Answer 52

The amount payable will be what the premium paid | would have purchased for the correct age.

Question 53

Life Insurance Policy Provisions Contestable period

Answer 53

The period following which an insurer may not deny a claim because of error, misstatement, or concealment by the insured.

Question 54

Life Insurance Policy Provisions Suicide clause

Answer 54

If the insured commits suicide within a stated period after policy issuance, the insurer is only liable to return to the beneficiary the premiums paid, generally with accumulated interest.

Question 55

Life Insurance Policy Provisions Policy loan

Answer 55

The insured may borrow from the insurance company using the policy cash values as collateral.

Question 56

Life Insurance Policy Provisions Automatic premium loan

Answer 56

If the insured defaults on payment of premiums they may be paid out of the policy loan value

Question 57

Life Insurance Policy Provisions Delay clause

Answer 57

The insurer may postpone payment of cash value or a loan for six months after the request date.

Question 58

Beneficiary Designations/Provisions Primary

Answer 58

• The person or entity first entitled to proceeds of the policy after the death of the insured

Question 59

Beneficiary Designations/Provisions Contingent

Answer 59

• The person entitled to proceeds of the policy if the primary beneficiary is deceased at the death of the insured or is ineligible to receive them.

Question 60

Beneficiary Designations/Provisions Revocable

Answer 60

• The insured reserves the right to change the beneficiary designation at any time.

Question 61

Beneficiary Designations/Provisions Irrevocable

Answer 61

• The insured cannot change beneficiary designation, acquire a policy loan, or assign the policy without consent of the primary beneficiary.

Question 62

Per Capita Example

Answer 62

Children of deceased child (grandchildren) share equally with surviving children

Question 63

Per Stirpes Example

Answer 63

• Grandchildren receive only the share of the deceased child • Other per stirpes include: “Per stirpes at each generation” (surviving grandchildren split deceased children’s shares equally) and “Per stirpes; primary beneficiaries only” (no contingent beneficiaries receive anything until all primary beneficiaries are deceased).

Question 64

Viatical Agreements

Answer 64

• HIPAA codified rules for viatication • Insured diagnosed as terminally ill o under two years life expectancy • Life Settlements (Senior Settlements) o life expectancy of more than two years o may or may not be considered terminally ill o proceeds may be taxable • Death benefit taxable to purchaser as an investment (i.e., amount above basis taxable)

Question 65

Question 4 - Viatical Arrangements Which of the following is not true regarding viatical agreements?

Answer 65

a. The insured sells his or her life insurance policy to someone else. b. The buyer usually pays 60% to 90% of the death benefit. c. The buyer must continue to pay premiums after purchasing the policy. d. On the death of the insured, the buyer receives the amount of money spent to purchase the policy.