Life 2 (Chapters 5 & 6)

Question 1

The entire contract provision contains all of the following except:
	 policy document
	 application
	 any attached riders
	 medical exam

Answer 1

Medical exam

Question 2

The provision in a life insurance policy that provides protection against unintentional policy lapse is known as the:

Reduction of Premium option
Waiver of Premium benefit
Payor clause
Automatic Premium Loan provision

Answer 2

Automatic Premium Loan provision

This allows the company to take a loan against the policy cash value to pay the premium. It is a loan with interest. If not paid back to the company while living, the amount will be subtracted from the death benefit upon death.

Question 3

All of the following are true about an ENDOWMENT policy EXCEPT:

It is a form of Whole Life insurance.
It has a high premium cost per dollar of face value.
It is an Insured Savings Plan.
The cash value and the face value are equal at the endowment date.

Answer 3

It is a form of Whole Life insurance.

Whole life is designed to last until age 100. Endowment policies endow prior to that.

Question 4

Variable Life insurance is considered:

An insurance contract only
A securities contract only
An insurance and general contract
An insurance and securities contract

Answer 4

An insurance and securities contract

Which is why it is regulated by the state department of financial services and the securities and exchange commission. WHen regulated by two, you need two licenses, (The state’s and FINRAs Series 6 or 7.)

Question 5

Which of the following policies would have a higher premium?
	 Participating Policies
	 Non-Participating Policies
	 Mixed Plan Policies
	 Should be the same

Answer 5

Participating Policies

Participating policies would have a higher premium to cover the costs of unexpected events. Cost of business goes up, etc…

Question 6

Maurice takes a $500 loan against a $10,000 whole life policy with a 5% interest rate. Maurice dies one year later and had not repaid the loan. How much will the benefit be?
	 $10,000
	 $9,500
	 $9450
	 $9475

Answer 6

$9475

The loan plus the interest (5%) must be subtracted from the death benefit. 5% of $500 is $25…$500 (loan) plus $25 (interest) is $525….$10,000 minus $525 is $9475….

Question 7

Which is the only type of rider added at no additional cost to the policyowner?
	 The waiver of premium rider
	 The automatic premium loan rider
	 The payor rider
	 The cost of living rider

Answer 7

The automatic premium loan rider

Question 8

An agent who holds a securities license is called
	 A Registered Investment Advisor
	 A Registered Representative
	 A Registered Investment Counselor
	 A Registered Financial Representative

Answer 8

A Registered Representative

One who holds either the Series 6 or Series 7 license (FINRA)is called a Registered Representative.

Question 9

A UNIVERSAL Life Insurance policy has all the following features EXCEPT:

It is considered a form of Permanent Life Insurance.

Without its adjustable features it resembles an Endowment policy.

Contributions (premiums) may be increased or decreased by the policy payer.

The face amount may be increased (subject to evidence of insurability), or decreased (subject to the I.R.S. corridor).

Answer 9

Without its adjustable features it resembles an Endowment policy.

Question 10

Which of the following statements is true about a policy assignment?

It permits the beneficiary to designate the person or persons to receive the benefits.

It is valid during the insured’s lifetime only, because the death benefit is payable to the named beneficiary.

It transfers the owner’s rights under the policy to the extent expressed in the assignment form.

It is the same as a beneficiary designation.

Answer 10

It transfers the owner’s rights under the policy to the extent expressed in the assignment form.

Two types of assignment: 1. Absolute 2. Collateral

Question 11

All of the following apply to PARTICIPATING policy dividends EXCEPT:

Taxable as current income like any other dividend

Considered by the I.R.S. as a return of excess premium

May be the result of actual expense experience being less than anticipated expense

Could be increased by the extended longevity of current policyholders

Answer 11

Taxable as current income like any other dividend

Question 12

Double Indemnity applies to which of the following?
	 Sickness
	 Accident
	 Sickness or Accident
	 Death before age 55

Answer 12

Accident

Only accidents and death must occur with-in 90 days of the accident.

Question 13

Ernest has a life insurance policy with a death benefit of $100,000, consisting of $50,000 whole life and a $50,000 level term rider. His agent has informed him that electing the extended term non-forfeiture option would provide him with a death benefit of how much?
	 $100,000
	 $50,000
	 $25,000
	 Nothing

Answer 13

$50,000

All supplementary benefits are dropped when a nonforfeiture benefit is elected

Question 14

Which of these is not a common form of term insurance?
	 Level
	 Increasing
	 Decreasing
	 Modified Graded

Answer 14

Modified Graded

No such thing!

Question 15

Which of the following statements about a Renewable Term policy is true?

It is renewable at the option of the insurance company.

It is renewable at the option of the insured.

It is renewable at the option of the insurance company, with proof of insurability.

It is renewable at the option of the insured, with proof of insurability.

Answer 15

It is renewable at the option of the insured.

Question 16

Which of the following is a non-forfeiture option that provides continuing cash value buildup?
	 Extended Term
	 Cash Surrender
	 Reduced Paid-Up
	 Fixed Period Option

Answer 16

Reduced Paid-Up

Non-forfeiture options pertain to cash values. These options protect the insured’s cash value in the event that he/she decides to stop paying premiums. The insured may use these options in one of three ways. He/she may “cash in” the policy and receive the full cash value. He/she may use the cash value and buy a reduced death benefit that will be completely paid up. ( The cash value in the reduced policy will continue to grow and aventually endow at age 100.) Or, he/she may turn the policy into a term policy , keeping the death benefit at the original amount but for a limited amount of time.

Question 17

A Universal Life insurance policy "unbundles" several components of a typical life insurance policy. Which of the following is NOT one of these components?
	 the protection element
	 the savings element
	 the loading element
	 the interest element

Answer 17

the interest element

A Universal Life policy “unbundles” the insurance or protection element, the savings or accumulation element, and the expense or loading element. Each year the insured may choose how much insurance he needs and how much he wants to pay. This would affect the cash values.

Question 18

Which of the following statements concerning an insurance company’s separate account is/are true?
1. Separate account funds are free from the claims of the insurance company’s creditors
2. In the event of insolvency of the insurance company, the separate account funds are protected for the policyowner.
3. Indexed annuities may be set up with separate accounts.
4. Separate account funds are guaranteed.
1 & 2
1 & 3
1, 2 & 3
2, 3, & 4

Answer 18

1, 2 & 3

Question 19

Cash values must be present in life policies: 
1) Ordinary 3 year
2) Industrial 3 year
3) Ordinary 5 year
4) Industrial 5 year
	 1 and 2
	 3 and 4
	 1 and 4
	 2 and 4

Answer 19

1 and 4

Even though the “cost” per 1000 for industrial insurance is higher, the “amount” of insurance purchased for “ordinary” is higher, resulting in a higher premium payment per year. The law states that the company must begin setting aside cash values in ordinary policies sooner.

Question 20

Dividend projections may be included in a proposal for a life insurance policy when which of the following is true?

The applicant has requested that they be included.

There is a clear statement that payment of future dividends is not guaranteed.

The projected amounts are calculated on the basis of the Commissioners Standard Ordinary Mortality Tables.

The projected amounts do not exceed the dividends previously paid by the same insurance company.

Answer 20

There is a clear statement that payment of future dividends is not guaranteed.

Policy dividends are not guaranteed. There must be clear statements to this fact on the proposal for insurance. Policy dividends are defined by the I.R.S. as a return of premium and are not taxed. The distribution of dividends hinges on several factors, including positive operating expenses or fewer insureds having died than were expected, also known as a divisible surplus.

Question 21

Which of the following individual policy conversions is usually permitted without any evidence of insurability?

Conversion from a Term policy to a Whole Life policy

Conversion from a Whole Life policy to a Term policy

Conversion to a larger amount of insurance

Conversion to a lower premium plan

Answer 21

Conversion from a Term policy to a Whole Life policy

Generally the conversion is from term to permanent.

Question 22

All of the following statements regarding Modified Endowment Contracts are true except?

It is the responsibility of the insurance company to make sure the policy does not become a M.E.C.

Loans will first be taxed as ordinary income, then a return of premium

A 10% penalty may be imposed on any money borrowed before age 59 1/2

It is the responsibility of the insured to make sure the policy does not become a M.E.C.

Answer 22

It is the responsibility of the insured to make sure the policy does not become a M.E.C.

A life policy must meet the seven pay test. SImply put, take the total amount of premiums necessary to pay the policy in full during the first seven years. Let’s say $21,000. Now, divide that by seven, ($3000). That is the most you could pay into the policy in any given year. Ex. In year 1..the most you could pay in would be $3000. Year 2, because you have paid in the most ($3000) in the prior year you can only pay in another $3000. But let’s say in year 3, you only pay in $2000, now the next year you can pay in $4000. In this example the $3000 is a guideline that you can not pay in any more than the cummulative totals. To continue, if at the end of year five you had paid a total of $14,000 (you could have paid a total of $15,000…$3000 x 5….you could pay in no more than $4000. If you pay in any more than this , it will become a M.E.C. and subject to taxation on any loans or withdrawals.

Question 23

The delayed payment provision permits an insurer to postpone payments of cash surrender values after policyowners request payment for a period of:
	 30 days
	 60 days
	 90 days
	 6 months

Answer 23

6 months

This is a protective measure for companies should an economic crisis arise, but it is hardly ever invoked.

Question 24

Universal life has 2 optional death benefits. They are:
1. Death benefits include the cash value and the pure amount at risk (level face).
2. Death benefits remain a constant amount at risk plus any cash value (increasing).
3. Death benefits are tied to the market value of the mutual funds.
1 only
2 only
1 & 2
3

Answer 24

1 & 2

Question 25

Sue lost her job. Times were hard. She could not afford to pay the premiums on her life insurance policy. Which of the following non-forfeiture options should she elect to maximize her death benefits?
	 reduced paid-up
	 1 year term
	 cash surrender
	 extended term

Answer 25

extended term

An extended term gives her the most insurance, but for a limited amount of time. A 1 Year term is not a non-forfeiture option, but is a dividend option. Reduced paid-up gives her the longest amount of time, but the benefit is reduced. Sue desires maximization of her death benefit.

Question 26

Which of the following features applies to decreasing term insurance?

The premiums do not decrease as the protection decreases

The contract may be converted for the original amount but only at the original age method

A portion of the premium is returned at the end of the contract

The premiums decrease as the protection decreases

Answer 26

The premiums do not decrease as the protection decreases

Decreasing term is designed to cover a decreasing need, such as a mortgage. It is cheaper, dollar for dollar, than level term for the same amount. The amount of insurance decreases but the premium stays the same. Also, you can only convert to whatever the insurance has decrease to, not the original amount.

Question 27

Mr. Ramon purchased a $10,000 10-year limited pay life insurance policy on his ten year old son Luis. A payor rider was added for an additional premium. Should Mr. Ramon die when Luis is 15 when would Luis begin making premium payments?
	 Age 25
	 Age 21
	 age 15
	 Never

Answer 27

Never

A ten pay life insurance policy would be paid up in ten years. In this case when Luis was 20 years old. The payor rider will pay the premiums if the policy owner dies until the insured (child) reaches age 25 or until the policy is paid up, whichever occurs first. If the policy would have been a straight whole life policy, then Luis would have begin paying at age 25.

Question 28

All of the following are a parts of a life insurance policy EXCEPT:
	 Insuring clause
	 Conditional receipt
	 Copy of the application
	 Waiver of premium rider

Answer 28

Conditional receipt

Question 29

The NON-FORFEITURE OPTIONS include all of the following EXCEPT:
Cash surrender payment
Reduced paid-up insurance
Extended term insurance
Purchasing one year term equal to the cash value

Answer 29

Purchasing one year term equal to the cash value

Non-forfieture options apply to cash values. The one year term option is a dividend option.

Question 30

The owner of a business is insured under a $100,000 Key Employee Life policy that contains a Double Indemnity clause and a Suicide clause. The business has paid the annual premium of $2,000. Six months after the inception date of the policy, the insured commits suicide. The insurance company's liability for payment is:
	 $200,000
	 $100,000
	 $2,000
	 $0

Answer 30

$2,000

The claim is denied and the insurance company will return the premium.

Question 31

The applicant chooses the length of the premium-paying period when selecting the type of policy that should best meet his/her objectives. Which type of policy has the highest initial premium and shortest pay period?
	 Single premium life policy
	 10 pay life policy
	 Variable life policy
	 Endowment policy

Answer 31

Single premium life policy

Question 32

Which of the following policies allow for withdrawals:

Universal Life and Variable Life

Universal Life and Variable Universal Life

Whole Life, Universal Life and Variable Universal Life

All polices allow for withdrawals

Answer 32

Universal Life and Variable Universal Life

Only Universal Life and Variable Universal Life allow for withdrawls. Other policies allow for loans but not withdrawals.

Question 33

Patches owns a 30-Pay Life policy that he purchased at the age of 30. The policy will endow at age:
	 60
	 65
	 70
	 100

Answer 33

100

Endow is defined as the policy’s cash value being equal to the death benefit. This happens at age 100 or death, if not earlier. Do not confuse endow with “paid-up”. Paid-up means it is paid up, and no more premiums are required. If the policy becomes paid-up prior to age 100, then the cash value is left to earn interest, growing and growing until the policy matures or endows at age 100.

Question 34

A $10,000 life insurance policy with a Triple Indemnity clause has been in force for 3 years. Black Cloud, the insured, is injured in a train wreck and dies in a hospital 5 months later. The death proceeds payable under the policy would be:
	 $30,000
	 $20,000
	 $10,000
	 $0

Answer 34

$10,000

Only the face amount of the policy would be payable. To receive the accidental death benefit, the insured must die as the result of an accident within 90 days of the accident.

Question 35

The Waiver of Premium:

has a normal waiting period of 30 days.

is removed at age 70.

covers accidental disability on the first day.

is an option that may be rated or denied.

Answer 35

is an option that may be rated or denied.

The waiver of premium has an elimination period of 90 days, and possibly up to 6 months. If the insured is still disabled after that time the premiums for that waiting period are refunded to him/her and all future premiums are waived (paid by the insurance company) until the insured is no longer disabled. This benefit usually drops off at age 60 or 65 depending on the policy.

Question 36

All of the following are true about JUVENILE Policies EXCEPT:

The policy is usually owned by the applying adult(s).

The policy may be an Ordinary or Industrial type.

Because of the low premiums, the Insurance Commission recommends large Face Value policies on children.

A special form of JUVENILE policy may multiply the face amount 5 times when the child reaches age 21.

Answer 36

Because of the low premiums, the Insurance Commission recommends large Face Value policies on children.