Life Insurance Part II Flashcards
Which of the following is true regarding Stranger-originated Life insurance (STOLI) policies?
A. The concern is that the owner does not have an insurable interest
B. These policies are legal in all states
C. Owning Life insurance on your spouse is an example of a STOLI policy
D. An Investor-originated Life insurance (IOLI) policy is materially different from a Stranger-originated Life
insurance (STOLI) policy
Correct Answer(s): [A]
Stranger-originated Life insurance (STOLI) and an Investor-originated Life insurance (IOLI) policy are
essentially the same thing. Some states have outlawed these policies. The concern is that with a
STOLI policy the owner does not have insurable interest. The owner, a stranger, only benefits when
the insured dies. This undermines the basic premise of Life insurance, to provide protection for your
loved ones when you die.
Which of the following is true when the insurer issues a ‘rated’ policy:
A. Coverage is effective immediately
B. It is considered to be acceptance of the risk
C. No additional premiums will be due
D. It is considered to be a counteroffer 还价
Correct Answer(s): [D]
Normally, it is the applicant who makes the offer to buy and it is the underwriter who accepts the risk
when they issue the policy. However, when the underwriter makes a counteroffer, it is now up to the
applicant to either accept it or reject it. Underwriters make counteroffers either in the form of ‘rated’
policies or by issuing a policy with an exclusion attached, such as for dangerous hobbies, occupations
or health conditions.
A life insurance policy that combines term insurance protection, a flexible premium, and cash value accumulation is: A. Universal life B. Variable life C. Increasing term life D. Equity indexed life insurance
Correct Answer(s): [A]
The protection portion of a Universal life insurance policy is actually Term insurance. As a result, the
cost of protection goes up gradually as the insured ages, which means that over a period of time, more
of the premium paid will be allocated to the cost of mortality and less will be allocated to the cash
value account. The flexible premium feature of a UL policy allows the insured to skip premiums as long
as there is adequate cash value available to pay for the cost of insurance protection.
Automatic Premium Loan is not available on which of the following types of Life insurance policies: A. 5 year Level Term B. Life Paid-Up at age 65 C. Traditional Whole Life D. 20 Pay Life
Correct Answer(s): [A]
Since Term Life has no cash value, loans may not be taken.
The time period covered by the Free Look provision of a Life insurance contract starts:
A. When the contract is issued and mailed to the agency office from the home office of the insurance
company
B. When the contract is received in the agency office and given to the producer
C. When the insured receives the contract and makes the first premium payment, if needed
D. When the insured receives the contract and a “right to look” receipt
Correct Answer(s): [C]
The Free Look never begins until the policy is actually delivered. Even if the premium had been paid
previously, the Free Look would not have begun until policy delivery. If the client returns the policy to
the insurer within the time period specified (varies by state law), she would get all of her money back.
An insured paid in $4,000 in premiums on his whole life policy over a period of time. When his cash
value equaled $7,000, he elected to take a policy loan in the amount of $5,000. All are true about this
situation EXCEPT:
A. The face amount payable will be reduced if he dies with this loan outstanding
B. Loans are not taxable
C. The insurer will charge annual interest on this loan until it is repaid
D. $1,000 of the loan is taxable since it exceeds his cost basis
Correct Answer(s): [D]
Most insurers will allow you to borrow up to 90% of the amount of your cash value. Actually, you are
borrowing money from the insurer and they are keeping your cash value as collateral. Since they had
this money invested, they will charge you interest to offset their loss. For example, if they had the
money invested at 12% and were paying you 4%, they have lost 8%! Policy loans are not taxable, but
the insurer will subtract any loan plus interest from proceeds payable at death.
An insurable interest must exist when: A. Life insurance policy is issued B. Death proceeds become payable C. A policy is surrendered for cash D. Cash values are borrowed
Correct Answer(s): [A]
Insurable Interest is based upon love, devotion, economics or a family relationship. An Insurable
Interest must exist at the time of application for one person to buy a policy on the life of another. It
need not exist at the time of claim. This requirement prevents gambling or the possibility of murder.
Jim names his spouse Mary as primary beneficiary and his two children, Scott and Suzy, as contingent
beneficiaries. If Jim and Mary both die as a result of the same auto accident, the proceeds of Jim’s Life
insurance policy will be paid to:
A. Scott only
B. Scott and Suzy equally
C. Jim’s estate
D. Mary’s heirs
Correct Answer(s): [B]
Under the Common Disaster clause, whenever the insured and their primary beneficiary die as a result
of the same accident, it is assumed that the insured died last, so the proceeds would go to the
contingent beneficiaries equally if more than one is listed.
A life insurance settlement option in which the beneficiary chooses to have proceeds paid out in equal
amounts until they are exhausted is known as the:
A. Fixed amount option
B. Fixed period option
C. Period certain option
D. Life income option
Correct Answer(s): [A]
At your death, you beneficiary may choose from 5 settlement options: cash, interest, fixed period,
fixed amount or an annuity. The fixed period option, such as 10 years, means that payments will be
made for 10 years, or 120 months. The fixed amount option means that payments will be made in level
monthly payments, such as $500 a month, for as long as the money lasts. Both will eventually exhaust
proceeds. However, both life income and period certain options are annuities.
Which of the following is CORRECT regarding designating a contingent beneficiary?
A. They would receive the policy proceeds when the primary beneficiary pre-deceases the insured
B. They are never eligible to receive the policy proceeds
C. They would receive the policy proceeds when the insured pre-deceases both the primary and contingent
beneficiary
D. They would receive the policy proceeds when the insured pre-deceases the primary beneficiary
Correct Answer(s): [A]
In order for the contingent beneficiary to ever get the policy proceeds, the primary beneficiary must
pre-decease (die before) the insured.
A life insurance policy that combines term insurance protection, a flexible premium, and cash value accumulation is: A. Universal Life B. Variable Life C. Increasing Term Life D. Variable/Universal Life
Correct Answer(s): [A]
The protection portion of a Universal Life insurance policy is actually Term insurance. As a result, the
cost of protection goes up gradually as the insured ages, which means that over a period of time, more
of the premium paid will be allocated to the cost of mortality and less will be allocated to the cash
value account. The flexible premium feature of a UL policy allows the insured to skip premiums as long
as there is adequate cash value available to pay for the cost of insurance protection.
Which of the following statements about a typical Suicide clause in a Life insurance policy is true?
A. Suicide is covered for a specific period of years and excluded thereafter
B. Suicide is covered as long as the policy is in force
C. Suicide is excluded as long as the policy is in force
D. Suicide is excluded for a specific period of years and covered thereafter
Correct Answer(s): [D]
The Suicide Clause, which is completely separate from the Incontestability Clause, excludes coverage
for death resulting from suicide during the suicide exclusion (this time period varies by state, typically
it is one to two years). After that, suicide is covered. If the insured dies by suicide during the suicide
exclusion, there is no coverage, but the insurance company will refund the premiums paid in to date to
the beneficiary, less any loans outstanding.
Once completed and signed by the applicant, a producer may change an application:
A. With the verbal consent of the applicant
B. At anytime
C. If the applicant initials the change
D. With consent of his manager
Correct Answer(s): [C]
Applications can never be changed without the written consent of the applicant. They would have to
either re-sign the application or initial the change.
All of the following are characteristics of Universal life insurance EXCEPT:
A. Agents must obtain an NASD securities license
B. Death benefits are tax free to beneficiaries
C. Premiums are flexible
D. There is a guaranteed minimum rate of return on the cash value
Correct Answer(s): [A]
Although universal life offers a “current” rate of return, which may be above the minimum guaranteed
in the contract, it is not classified as a security so no NASD license is required. Universal life is a type
of whole life, and is sometimes called interest sensitive whole life. All life insurance death benefits are
income tax free, although they may be subject to estate taxes. It is variable whole life that requires an
NASD securities license. UL policies also offer flexibility in premiums.
The Life insurance policy clause that prevents an insurance company from denying payment of a death
claim after a specified period of time is known as the:
A. Incontestability clause
B. Misstatement of Age clause
C. Insuring clause
D. Reinstatement clause
Correct Answer(s): [A]
The Incontestability Clause protects the client who may have lied (misrepresentation) on his original
application for Life insurance. The company has 2 years to investigate the insured from the original
date of application. If the client dies within the first 2 years and the insurance company can prove that
he lied about a material fact on his original application, they can deny the claim. However, after the 2-
year period has elapsed, they must pay the claim even if he lied. So, those who lied can quit worrying
after 2 years!
