Life Insurance Part IX

Question 1

If an applicant for a Life insurance policy is found to be a substandard risk, the insurance company is
most likely to:
A. Refuse to issue the policy
B. Charge an extra premium
C. Require a yearly medical exam
D. Lower its insurability standards

Answer 1

Correct Answer(s): [B]

Most clients are insurable, it’s just a matter of selecting the proper premium to match the risk being
undertaken. When the client completes the application and writes a check for the first premium, he is
making an “offer” to buy insurance from the company. If the company declines to write coverage at
the premium quoted, they may offer to do so at a higher price. This would constitute a counteroffer by
the company. The applicant would then have the right to accept or reject the new offer.

Question 2

On a life paid up at age 65 (LP65) policy, when will the cash value equal the face amount of the policy?
A. When all the policy premiums have been paid up
B. 20 years from the date of purchase
C. At age 100
D. At age 65

Answer 2

Correct Answer(s): [C]

An LP 65 is a type of whole life insurance, which reaches maturity at age 100. Although all the
premiums are paid up by age 65, the cash value will not equal the face amount until age 100.
Coverage will apply until the death of the insured or age 100, whichever comes first. For example, if
you bought a $100,000 LP 65 at age 30, you would be paid up at age 65, but your cash value will not
equal the face amount of the policy ($100,000) until the policy reaches maturity at your age 100.

Question 3

If an application for Life insurance is not complete:
A. The insurer will reject it
B. The insurer will consider it to be void
C. The insurer will return it to the producer
D. The insurer will issue the policy and request additional information

Answer 3

Correct Answer(s): [C]

Incomplete applications will be returned to the producer, who then must meet with the applicant for
completion. If an insurer issued a policy based upon incomplete information, they may be waiving
their rights to contest a claim within the 2 year contestability period.

Question 4

Sandra Timms, age 27, is advised by her producer to purchase Life insurance to cover a 20-year amortized $50,000 business improvement loan. Which of the following plans would adequately protect Ms. Timms at the minimum premium outlay?
A. A $50,000 Whole Life policy
B. A $50,000 20 Pay Life policy
C. A $50,000 Level Term policy for 20 years
D. A $50,000 Decreasing Term policy for 20 years

Answer 4

Correct Answer(s): [D]

The key here is “minimum premium”. Term is the most inexpensive type of coverage. Since Sandra’s $50,000 loan will be paid off over 20 years and the loan balance will decrease each year, Decreasing Term makes sense. Decreasing Term is not renewable.

Question 5

A producer makes a presentation to a 45-year-old customer comparing a $100,000 20 Pay Whole Life policy to a $100,000 Life Paid-Up at 65 policy. Assuming that both policies are offered by the same insurer, which of the following is true?
A. The Life Paid-up at 65 policy would accumulate cash values faster
B. The 20-Pay Life policy would have a higher annual premium
C. They are exactly the same
D. Both policies would reach maturity at the end of their premium paying period

Answer 5

Correct Answer(s): [C]

Since the customer’s original age was 45, a 20-Pay Life and a Life Paid-Up at age 65 written by the same insurer would be exactly the same, since the customer would be paying premiums over a 20-year period in either case. Both policies would have the same premium and would accumulate cash value at the same rate. Remember, Limited Pay Whole Life policies reach maturity at age 100, not at the end of the premium paying period.

Question 6

If an employee whose retirement plan is 60% vested terminates employment:
A. 40% is forfeited
B. All is forfeited
C. 60% is forfeited
D. Nothing is forfeited

Answer 6

Correct Answer(s): [A]

Qualified retirement plans are required to have vesting schedules. Vesting means ownership of employer contributions by the employee. ERISA requires full vesting either over a 5 year or 7 year schedule, or better. If you quit your job and you are only 60% vested, then you will forfeit the remaining 40% which will stay in the plan for the benefit of others.

Question 7

All of the following are true about life insurance policies EXCEPT:
A. Term insurance has lower premiums than Whole in the early years of the contract
B. A Limited Pay Whole Life policy provides coverage for the life time of the insured
C. If the insured understates his age, the policy will pay less than the face amount at death
D. Limited Pay Whole Life policy requires premiums to be paid until death or policy maturity

Answer 7

Correct Answer(s): [D]

Since Term has no cash value, the premiums are lower than Whole Life in the early years of the
contract, but in the long run, the net cost is higher, since there is no cash value. A Limited Pay Whole
Life policy will cover you until you die, or age 100, whichever comes first. However, premiums are paid
up in a limited period of time, such as 20 years or at age 65. Under misstatement of age, the insurer
will reduce the face amount payable if you understate your age.

Question 8

All of the following are true regarding the various types of whole life insurance EXCEPT:
A. A single premium may buy a paid up policy for life
B. A limited pay policy and a straight whole life policy both reach maturity at age 100
C. A 20 pay life policy is paid up at the end of the premium paying period
D. A life paid up at age 65 (LP65) reaches maturity at age 65

Answer 8

Correct Answer(s): [D]

Limited pay whole life policies, such as 20 pay life or life paid up at age 65 are types of whole life
insurance. The only difference is that the premiums, which are normally paid every year until the insured
reaches age 100, are paid over a shorter period of time. The shorter the premium paying period, the
higher the premium. However, the total cost is the same in the long run. Although you are done paying for
an LP65 at age 65, it does not reach maturity until age 100.

Question 9

A statement that an applicant for Life insurance makes on their application that is the truth to the best
of their knowledge is considered to be a(n):
A. Representation
B. Warranty
C. Guaranty
D. Affidavit

Answer 9

Correct Answer(s): [A]

Applicants for insurance are not required to make sworn statements of truth (warranties) on their
application. However, they are required to tell the truth to the best of their knowledge, which is
known as a ‘representation’.

Question 10

You have a client that is a real estate agent. Which of the following types of permanent protection is best for this type of client?
A. Universal life
B. Variable life
C. Survivorship life
D. Adjustable life

Answer 10

Correct Answer(s): [D]

Adjustable Whole Life is sold to clients with fluctuating incomes. A real estate agent is a perfect client for this type of policy.

Question 11

Statements made by an applicant for a Life insurance policy that are supposed to be true are referred to as:
A. Representations
B. Facts
C. Warranties
D. Information

Answer 11

Correct Answer(s): [A]

Insurance law only requires that applicants answer questions by stating the TRUTH TO THE BEST OF THEIR KNOWLEDGE. These answers are called representations. Warranties, which are sworn statements of truth, are not required.

Question 12

Regardless of actual events, the common disaster provision in a life insurance policy decrees that when the insured and the primary beneficiary both die as a result of the same accident:
A. The primary beneficiary died before the contingent beneficiary
B. The contingent beneficiary died before the primary beneficiary
C. The primary beneficiary died before the insured
D. The insured died before the primary beneficiary

Answer 12

Correct Answer(s): [C]

The common disaster provision, also known as the Uniform Simultaneous Death clause, states that in the event that the insured and the primary beneficiary both die as a result of the same accident, it is assumed the insured died last. This assures that the proceeds of the policy will go to the insured’s contingent beneficiary, rather than the heirs of the primary beneficiary.

Question 13

If an application is incomplete:
A. The insurer will return it to producer
B. The policy is void
C. The insurer will issue a policy
D. The insurer will deny the application

Answer 13

Correct Answer(s): [A]

If an application is incomplete the insurer will return the policy to the producer who should then meet
again with the client, in person, to have the rest of the application completed.

Question 14

Annuities are underwritten by:
A. Securities firms
B. Insurance Agents
C. Insurance companies
D. Banks

Answer 14

Correct Answer(s): [C]

All annuities are insurance products and must be underwritten by insurance companies. Although
agents of banks and securities firms often sell annuities on a commission basis, it is the insurance
company who actually writes the contract and bears the risk that people will live too long (the
mortality risk).

Question 15

What type of permanent Life insurance develops an immediate cash value?
A. Limited Pay Whole Life
B. Adjustable Whole Life
C. Ordinary (Straight) Whole Life
D. Single Premium Whole Life

Answer 15

Correct Answer(s): [D]

Rather than pay premiums over a period of time, wealthy customers may elect to purchase a Whole
Life policy with a single premium paid up-front, which means that the policy would have an immediate
cash value and no further premiums would ever be due. When current interest rates were high, many
Universal Life policies were purchased in this manner.

Question 16

A Buy/Sell Agreement is important when selling which type of Life insurance:
A. Split Dollar Plans
B. Group Life
C. Key Person Life
D. Partnership Life

Answer 16

Correct Answer(s): [D]

Split Dollar plans are used when the employer wants to help an employee buy his own individual Life
insurance. The premiums are “split” between the employer and the employee. A Buy/Sell Agreement
is not Life insurance. It is a legal contract used in Partnership Life. If you die, your partner agrees to
“buy” out your heirs, with tax free money coming from the Life insurance he bought on you. Your heirs
promise to “sell” their interests to your partner, who continues on as a sole proprietor.

Question 17

Which of the following policies provides the greatest amount of protection for an insured's premium dollar as well as some cash accumulation?
A. Term
B. Annuity
C. Limited-Pay Life
D. Whole Life

Answer 17

Correct Answer(s): [D]

If this question had not mentioned cash accumulation, the answer would have been Term. However, Term has no cash value, so the answer is Whole Life, which is the most inexpensive type of permanent insurance and is required to have a cash value after the third policy year. Although Limited Pay Life is a type of Whole Life, it is incorrect since it is usually quite expensive due to the shortened pay-in period. Annuities have no cash value except those monies the annuitant paid in. Since there is no death benefit, no protection is offered.

Question 18

The penalty for taking a policy loan as a premature distribution on a life insurance policy that has been classified as a Modified Endowment Contract (MEC) is:
A. 7.50%
B. 5%
C. None, life insurance policies are not subject to early withdrawal penalties
D. 10%

Answer 18

Correct Answer(s): [D]

Under a federal law called TAMRA, a life insurance policy that builds cash values too fast may be classified as a Modified Endowment Contract (MEC). TAMRA administers the 7 pay test, which states that if the cash value exceeds the premiums paid over the 1st 7 years of the policy, it is an investment rather than life insurance. MECs lose some of the favored tax treatment of life insurance in that loans and cash surrenders taken prior to age 59 and 1/2 are taxable and subject to the 10% penalty.

Question 19

The purpose of the Grace Period is to:
A. Give the insurer time to determine the cause of death
B. Protect the insurer against adverse selection
C. Give the beneficiary time to prove that insurable interest exists
D. Protect the policy owner against unintentional lapse

Answer 19

Correct Answer(s): [D]

A Life insurance policy will lapse (terminate) at the end of the grace period, which may be as long as
31 days. During the grace period, the insured is still covered, and death claims will be paid, less the
overdue premium.

Question 20

All of the following are true regarding group credit life insurance EXCEPT:
A. The policy limit may not exceed the amount of the loan
B. The creditor is the policyholder and the beneficiary
C. Proceeds are payable to the spouse upon the death of the insured debtor
D. It is usually written as decreasing term insurance

Answer 20

Correct Answer(s): [C]

Financial institutions often sell group credit life in connection with loans. The debtor pays the
premium, but the creditor is both the policyholder and the beneficiary. Proceeds of the policy would be
used to pay off the loan. It is a type of decreasing term insurance, which decreases as the loan
amortizes over a period of time.