Life Insurance Part III Flashcards
Which of the following is a Non-forfeiture Option that provides continuing cash value buildup? A. Extended Term B. Cash Surrender C. Reduced Paid-Up D. Deferred Annuity
Correct Answer(s): [C]
There are only three non-forfeiture options: Cash Surrender, Reduced Paid-Up, and the automatic
option, Extended Term. Their purpose is to protect the insured’s accumulated cash value in case the
Whole Life policy lapses. A client has 60 days from the policy’s premium due date to select the option
she prefers. If none is selected, the company will give the client the automatic option, Extended Term.
Here, the face amount of the new policy is the same as on the initial policy. The accumulated cash
value is used internally by the company to pay the premium for a new Term policy at the insured’s
attained age. The policy term is however long that amount of money will buy. There is no cash value,
and at the expiration of the term the policy expires and the insured has no further coverage. If the
client selects the Reduced Paid-Up option, the company then uses all of the accumulated cash values
to buy the client internally a new Whole Life policy paid up to age 100. It would have an i
Which of the following statements about the Misstatement of Age provision in a Life insurance policy
is true?
A. If the insured’s age has been understated, it provides that a death benefit smaller than the face amount of the policy will be payable
B. If the insured’s age has been overstated, it provides that a premium refund and the face amount of the
policy will be payable
C. It is an optional provision
D. It becomes inoperative after the expiration of the policy’s Contestable period
Correct Answer(s): [A]
The Misstatement of Age provision is separate from the Incontestability Clause. Lying about your age
cannot void the policy. However, it can reduce the amount of benefits paid at the time of your death.
The formula to calculate this is as follows: The client is 40, but states he is 30, to get a lower rate. He
buys a $100,000 policy. His premium paid is $200 per year. At the correct age, he should have paid
$400 per year.
DID PAY $200 'f7 x $100,000 FACE AMOUNT = $50,000 PAID AT DEATHSHOULD PAY $400
The formula is: “Did” / “Should” x Face Amount = Amount Paid. In this example, the insurance
company will pay 200/400, or 'bd of the face amount the client thought he was buying.
Which of these is a rider that would ensure you can purchase additional insurance coverage, at specified ages, regardless of health? A. Guaranteed Insurability Rider B. Child Term Rider C. Waiver of Premium Rider D. Payor Benefit Rider
Correct Answer(s): [A]
When you add the Guaranteed Insurability Rider to a Life insurance policy you have specific dates where you can increase your coverage, regardless of health, based upon your current age.
Which life insurance rider allows the insured to purchase additional amounts of insurance at specified
intervals in the future without a physical exam?
A. Paid up option
B. Guaranteed insurability
C. Accidental death benefit
D. Extended term option
Correct Answer(s): [B]
The guaranteed insurability rider may be added for an additional premium to the policies of younger
insureds, generally under age 35. The rider allows several future option dates at which the insured
may purchase additional coverage at their current age, but without a physical exam. The accidental
death benefit rider is also known as double indemnity. The extended term option and the paid up
option are non-forfeiture options you can exercise if your cash value life policy lapses.
A client contributed $100,000 to a 403b tax sheltered annuity (TSA) via payroll deduction over a
period of time. His account is now valued at $190,000. When he takes cash surrender at age 60, what
amount is subject to taxes?
A. $90,000
B. None
C. $190,000
D. $100,000
Correct Answer(s): [C]
TSAs are qualified plans, meaning that the contributions are made in pre-tax dollars, so this client’s cost basis is zero. Neither the $100,000 he contributed nor has the $90,000 in tax deferred earnings ever been taxed. So, upon cash surrender, the entire $190,000 would be taxable as ordinary income in the year of the distribution. There would be no penalty since the client is past age 59 1/2. This client would be better off to annuitize the contract and take the money out over time.
A producer sends a completed and signed application along with the check for the initial premium to
the underwriter, who notices that the applicant forgot to sign the check. When would coverage start?
A. On the date the application was signed
B. The date of the conditional receipt
C. When the producer delivers the policy and picks up a signed check along with a Statement of Continued
Good Health
D. When the underwriter received the application and unsigned check
Correct Answer(s): [C]
There is never any coverage without the money. Remember, consideration is a requirement of a legal
contract. The applicant’s consideration is the premium paid plus the answers on the application, which
are required to be the truth to the best of the applicant’s knowledge (representations).
Tim Watson wants to obtain a Life insurance policy on his employee, Mike Carson, and to name Mike's wife, Deborah Carson, as the beneficiary. Signatures of which of the following would be legally required on the application? I. Tim Watson II. Mike Carson III. Deborah Carson A. I and II B. I only C. I, II, and III D. II and III
Correct Answer(s): [A]
In order to buy a Life insurance policy on the life of another, you must have insurable interest and his
consent in writing, unless of course, the insured is a minor. In this question, Tim wants to buy Life
insurance on his key employee, Mike Carson. Both Tim and Mike would have to sign the application,
but not Deborah, since she is simply the beneficiary. It appears that Tim is buying this Life insurance
on Mike as a fringe benefit in order to reward Mike for his service. Of course, since Tim is the policy
owner, he can change the beneficiary to whomever he chooses, since that designation is revocable.
A rider that keeps a policy from lapsing due to non-payment of premium by borrowing from the cash value is: A. Automatic Premium Loan B. Mode of Payment C. Extended Term Option D. Reduced Paid-Up Option
Correct Answer(s): [A]
You can add a rider called Automatic Premium Loan (APL) to any cash value Life insurance policy to
keep the policy from lapsing due to non-payment of premium. The policy will automatically borrow
from itself, which creates an interest bearing loan, which will be subtracted from proceeds upon your
death. APL cannot be added to a Term Life policy, since there is no cash value.
An insured's premium for Life insurance is based mainly upon their: A. Occupation B. Risk classification C. Age D. Gender
Correct Answer(s): [B]
Underwriting is also known as ‘risk classification’, which includes an applicant’s age, gender,
occupation and hobbies. There are 3 main risk classifications: 1) preferred risk (such as a nonsmoker),
who receives the lowest rate; 2) standard (or average) risk, which is the category that most
people fall under; and 3) non-standard (such as a person with a dangerous hobby or health problem),
who pays a premium surcharge (or ‘rate-up’).
Which of the following contracts requires that a series of benefit payments be made at specified intervals? A. Annuity B. Ordinary Whole Life C. Modified Whole Life D. 20-Pay Life
Correct Answer(s): [A]
When an Annuity policy is in the Pay-Out period, it will pay the annuitant back all the monies the
annuitant paid in, plus interest, over his lifetime. The principal amount is guaranteed and will be paid
out as long as the annuitant lives. The amount paid is based upon the annuitant’s expected life span,
sex, and the annuity pay-out option selected. Annuity benefit payments to the annuitant are usually
paid out monthly. Insurance companies offer Annuities to the beneficiaries of insureds who have died,
enabling these beneficiaries to reinvest the policy proceeds with a high degree of safety and the
guarantee of lifetime income.
Employer contributions to a qualified plan earn tax deferred interest, which primarily benefits the: A. Employee B. Plan trustee C. Employer D. IRS
Correct Answer(s): [A]
Although the employer can deduct the contributions they pay into a qualified retirement plan for the
benefit of their employees, the tax deferred interest the plan earns belongs to the employee after a
period of vesting. The employee pays no tax on the contributions or the interest earned until
distributions begin, when 100% is taxable as ordinary income.
Replacement of an existing Life insurance policy may be detrimental to a customer for all of the
following reasons EXCEPT:
A. It is unlawful
B. They may be rejected by their new insurer because their health has changed
C. The suicide clause starts over on their new policy
D. Their new policy will probably cost more since they are older
Correct Answer(s): [A]
Rules regarding replacement are designed to protect customers, since replacing an existing Life insurance policy with a new one may be detrimental for various reasons. However, replacement is not unlawful as long as the insurer and the producer follow the rules.
Since only one party to an insurance contract makes an enforceable promise, insurance contracts are considered to be: A. Contracts of Adhesion B. Aleatory contracts C. Contracts of Utmost Good Faith D. Unilateral contracts
Correct Answer(s): [D]
Insurance contracts are one sided, or unilateral, in that only one party to the contract (the insurer)
makes an enforceable promise. The insurer promises to pay covered claims if the insured pays the
premium.
When pledging Life insurance as collateral for a bank loan, the policy owner must:
A. Make a collateral assignment to the bank
B. Name the bank as additional insured
C. Make an absolute assignment to the insurer
D. Designate the bank as lien holder
Correct Answer(s): [A]
There are two types of assignment: 1) an absolute assignment, where 100% of the ownership in a
policy is irrevocably transferred to a new owner; and 2) a collateral assignment, where a policy owner
temporarily pledges his Life insurance policy to a bank as collateral for a loan. If the insured dies with
a bank loan outstanding, his insurer will use some of the policy proceeds to pay off the loan. The
balance of the proceeds, if any, will go to the primary beneficiary.
The provision in a Life insurance policy that provides protection against unintentional policy lapse is known as the: A. Payor clause B. Automatic Premium Loan provision C. Reduction of Premium option D. Waiver of Premium benefit
Correct Answer(s): [B]
Automatic Premium Loan (APL) is a rider that can be added to any Life insurance policy that has or
will have a cash value. It cannot be added to Term insurance. It is usually free, but the producer or
client must check this option on the application. If the policy has a cash value and the insured forgets
to pay the premium when due, the policy will not lapse, since it will borrow from itself to pay the
overdue premium. Remember, this is a rider, not a non-forfeiture option. However, when the insured
dies, all loans are subtracted from policy proceeds, so the beneficiary’s pay-out may be reduced.
