Life Insurance Part I

Question 1

A client buys a Life policy on July 1st and dies of suicide on December 20th. The insurance company
will:
A. Deny claim
B. Pay claim
C. Refund premiums to the estate
D. Refund premiums paid, less any loans, to the beneficiary

Answer 1

Correct Answer(s): [D]

https://www.nationwide.com/personal/loginclause has passed by, then the insurer will refund the premiums paid in, less any loans outstanding, to the beneficiary. If the insured had a single premium Whole Life policy, it is possible that there were loans outstanding. This is the best answer.

Question 2

Which of the following Settlement Options might provide payments that exceed the proceeds of the
policy and the interest earned?
A. Fixed Period
B. Life Annuity
C. Interest Only
D. Fixed Amount

Answer 2

Correct Answer(s): [B]

There are 5 settlement options from which a beneficiary may select upon the death of the insured. 1)
Cash; 2) Fixed Period (proceeds, plus interest, are all paid out over a fixed period of time, the client
chooses the time period); 3) Fixed Amount (the beneficiary elects to receive a specific dollar amount
monthly, for as long as the money lasts); 4) Interest (the proceeds are left with the company to
accumulate additional interest), and 5) Life Annuity (paid as long as the Beneficiary/Annuitant lives).

Question 3

A life insurance policy that covers two parties, but only pays when the last party dies is known as:
A. Survivorship Life
B. Contingent Life
C. Joint Life
D. Other insured Life

Answer 3

Correct Answer(s): [A]

Survivorship Life insurance, also known as a ‘last to die or second to die’ policy, covers two insureds, but only pays when the last party dies. It is often purchased to pay estate taxes, which are due when the last spouse
dies. However, although Joint life insurance also covers two insureds, the death benefit is payable
upon the death of the first party.

Question 4

Which of the following is not true about Group Life insurance?
A. It must be convertible
B. There are no participation requirements
C. The grace period is usually 31 days
D. Premiums may be contributory or noncontributory, at the employer’s option

Answer 4

Correct Answer(s): [B]

Group Life usually has ‘participation’ requirements, which are designed to prevent adverse selection.
On ‘contributory’ group plans, 75% of those eligible must enroll. On ‘noncontributory’ plans, 100%
must enroll. Remember, on Group Life, the employer is the Master Policy Holder and the insured
employee receives a Certificate of Insurance, summarizing their coverage.

Question 5

An applicant for life insurance misstated his age as 30, when he was really 40. Although the correct
premium for his $100,000 policy should have been $1,000 a year, he only paid $750 a year. At his
death 10 years later, how much will the beneficiary receive?
A. 75000
B. $100,000, less the total amount of the accumulated underpaid premiums due
C. $100,000, since death occurred after the end of the 2 year contestability clause
D. Nothing, the contract is void

Answer 5

Correct Answer(s): [A]

The misstatement of age provision and the incontestability clause are completely separate. A life
policy may not be voided for lying about your age. However, the face amount of the policy will be
adjusted to the amount that the incorrect premium would have purchased at his correct age. At age
40, a premium of $750 a year would only buy a $75,000 policy. He only paid 3/4s of what he should
have paid, so the insurer will only pay 3/4s of his face amount.

Question 6

The amount of annuity benefits included in the value of the estate of a deceased “life income only”
annuitant is:
A. The interest earned in the annuity account
B. The amount of the premium paid
C. Zero
D. The amount of future benefits to be paid

Answer 6

Correct Answer(s): [C]

No money is left in your account at your death, so nothing goes to your estate. However, since this is the
most risky pay out option, your monthly payments would be highest. You must select a pay out option
whenever you annuitize, and you can never change it.

Question 7

A client with a participating Life insurance policy receives both interest and dividends. What are the
tax implications?
A. Neither are taxable
B. The interest is taxable, but the dividends are not
C. The dividends are taxable, but the interest isn’t
D. Both are taxable as ordinary income

Answer 7

Correct Answer(s): [B]

Participating Life insurance policies sold by mutual insurers often pay dividends, although they may
not be guaranteed. If a dividend is declared, the policy owner may choose from several dividend
options. Although cash dividends received are not taxable, if the policy owner elects to leave the
dividend with the insurer to earn interest, the interest paid on the dividend is taxable as ordinary
income.

Question 8

The dividend option, which allows the insured to purchase a Paid Up Whole Life policy, is:
A. Cash surrender
B. Extended Term
C. Policy loan
D. Paid-up option

Answer 8

Correct Answer(s): [D]

Paid up addition is the dividend option that allows the insured to use the dividend paid to purchase a
Whole Life policy, regardless of health.

Question 9

When a life insurance agent solicits insurance, collects premiums and delivers policies while acting in
the best interests of an insurer, they are acting as a:
A. Managing general agent (MGA)
B. Third party administrator (TPA)
C. Trustee
D. Fiduciary

Answer 9

Correct Answer(s): [D]

Agents act in a fiduciary capacity based on trust and confidence, especially when handling premiums.
A third party administrator is a private company hired to administer group life enrollments and claims.
A managing general agent is a sales manager who supervises an insurer’s sales office in a particular
territory on a commission over ride basis. A trustee is a neutral party, like a bank, who acts as
custodian for employee funds in qualified plans.

Question 10

All of the following are true when the Waiver of Premium rider is enacted, EXCEPT:
A. The policy still pays dividends
B. The cash value grows more slowly 
C. The face amount remains unchanged
D. The face amount is now less

Answer 10

Correct Answer(s): [D]

When the Waiver of Premium rider is enacted, the policy will remain in force, even though the client is
not paying the premium. The insurance company is not actually putting the premium into the cash
value during this time, so it is true that during this time the cash value will grow more slowly. The face
amount does not change when the Waiver of Premium rider is enacted. Remember, you are looking for
what is false. The answer choice “the face amount is now less” is correct, because it is false.

Question 11

A beneficiary designation that prevents the policy owner from making certain changes in the policy is:
A. Revocable 
B. Contingent
C. Primary 
D. Irrevocable

Answer 11

Correct Answer(s): [D]

Most beneficiaries are ‘revocable’, which means that the policy owner can change it at any time. However, if a person is listed as ‘irrevocable’ beneficiary, the beneficiary cannot be changed without their consent, nor can the policy be changed in any way that would affect the interest of the irrevocable beneficiary. Irrevocable beneficiary designations are rare, but may be used in connection with Life insurance sold for a business purpose, or as part of a property settlement in a divorce.

Question 12

If the insured lies about his age, all of the following would occur, EXCEPT:
A. The insurer will adjust the benefit down, if the insured said he was younger than he was
B. The insurer uses the premium paid at the correct age and pays the death benefit
C. The insurer will adjust the benefit up, if the insured overstated his age
D. The insurer will refund overpaid premiums, if the insured said he was older than he was

Answer 12

Correct Answer(s): [D]

The insurer will take the premiums paid at the correct age and pay the death benefit. If the insured
understated his age, then the face amount will go down. If the insured overstated his age, then the
face amount will go up. The insurer will not adjust the premiums after the insured has died.

Question 13

If a person wants to invest a lump sum in an annuity that may appreciate along with market and
economic conditions, they should buy a:
A. Deferred Annuity
B. Variable Annuity
C. Flexible premium Annuity
D. Fixed Annuity

Answer 13

Correct Answer(s): [B]

Variable Annuities are considered to be securities, since the insurer invests the customer’s premiums
in an underlying ‘separate account’, which is very similar to a mutual fund. Most mutual funds invest
in common stock, which may keep up with the rate of inflation over a period of time, although rates of
return may not be guaranteed.

Question 14

Which of the following is an example of a Limited-Pay Life policy?
A. 20-pay whole life
B. Whole Life
C. Universal life
D. Renewable Term to Age 70

Answer 14

Correct Answer(s): [A]

There are two basic types of Life Insurance: Whole Life and Term. Limited Pay Life policies, such as
LP65 and 20-Pay Life, are variations of Whole Life (sometimes called Straight Life or Ordinary Life):
the premium-paying period has been shortened, but the policy still does not mature until age 100.

Question 15

When a company requires that their employees pay part of the premium for the Group Life insurance
coverage, it is known as a ___________ group:
A. Contributory
B. Participatory
C. Noncontributory
D. Nonparticipatory

Answer 15

Correct Answer(s): [A]

Premiums on Group Life insurance may be contributory (shared by the employer and the employee) or
‘noncontributory’ (paid entirely by the employer). Premiums paid by the employer are tax deductible
as business expense.

Question 16

Dividend projections may be included in a proposal for Life insurance when which of the following is
true?
A. There is a clear statement that payment of future dividends is not guaranteed
B. The applicant has requested that they be included
C. The projected amounts do not exceed the dividends previously paid by the same insurance company
D. The projected amounts are calculated on the basis of the Commissioners’ Standard Ordinary Mortality
Tables

Answer 16

Correct Answer(s): [A]

Dividends MAY be paid to policyholders of a Mutual Insurance Company, such as Mutual of New York.
Dividends are considered to be a return of an overpayment by the IRS and, therefore, are not taxable.
Although a company may state its past dividend history in a proposal, it is illegal to guarantee future
dividends, since they might not occur.

Question 17

Which of the following statements about the Reinstatement provision is true?
A. It guarantees the reinstatement of a policy that has been surrendered for cash
B. It provides for reinstatement of a policy regardless of the insured’s health
C. It permits reinstatement within 10 years after a policy has lapsed
D. It requires the policy owner to pay, with interest, all premiums that are in arrears in order for the policy
to be reinstated

Answer 17

Correct Answer(s): [D]

Most companies will offer the right to apply for Reinstatement up to 5 years after a policy has lapsed.
Although the client may have the right to apply, the company does not have to take him. He must
prove continued good health, pay back premiums plus interest, and any loans taken plus interest. The
company has nothing to lose by offering Reinstatement. The client’s only reasons to apply for
Reinstatement, rather than applying for a new policy, are that, if accepted, his Reinstated policy would
have his Original age and perhaps a lower interest rate on policy loans than a new policy may have.

Question 18

In the formation of a Life insurance contract, the special significance of a Conditional Receipt is that it:
A. Guarantees the applicant that a policy will be issued in the amount applied for in the application
B. Serves as proof that the producer has determined the applicant to be fully insurable for coverage by the
insurance company
C. Is given by the producer only to applicants who fully prepay all scheduled premiums in advance of policy issue
D. Is intended to provide coverage on a date earlier than the date of the issuance of the policy

Answer 18

Correct Answer(s): [D]

The Conditional Receipt is just that, conditional. This means that coverage is conditional upon the
applicant meeting all of the underwriting requirements of the company and paying the premium. If the
applicant does meet all the conditions, then it is possible that coverage could begin as early as the
date of application.

Question 19

The regulations regarding the replacement of Life insurance do not apply to:
A. Whole life
B. Credit life
C. Individual Term life
D. Limited pay Whole life

Answer 19

Correct Answer(s): [B]

The rules regarding replacement of Life insurance do not apply to Group or Credit life insurance. Credit
life insurance is usually sold by banks or other creditors to cover debtors. If the debtor dies with a
loan outstanding, the insurer pays off the loan.

Question 20

Which rider would pay the insured a lump-sum if he was blinded in an accident?
A. Payor Benefit
B. Accidental Death and Dismemberment
C. Waiver of Premium
D. Guaranteed Insurability

Answer 20

Correct Answer(s): [B]

The Accidental Death and Dismemberment rider will pay a stated amount for death or
dismemberment, including the accidental loss of eyesight. Sickness is not covered.