Life Insurance Part V

Question 1

Which of following is not true about Whole life insurance:
A. It has a guaranteed cash value
B. It provides coverage to age 100 or prior death
C. It is convertible to Term life without a physical exam
D. It is considered to be permanent insurance

Answer 1

Correct Answer(s): [C]

Whole life is considered to be permanent insurance, since it will cover you until you die, or age 100,
whichever comes first. Although most Term life is convertible to Whole life without a physical exam,
Whole life cannot be converted to Term.

Question 2

All of the following are true, EXCEPT:
A. Universal Life insurance is a type of interest sensitive Life insurance
B. Universal Life insurance has a fixed premium
C. In order to sell a variable product, the producer must be registered with the NASD
D. Variable/Universal Life insurance has a flexible premium

Answer 2

Correct Answer(s): [B]

Universal Life insurance is a type of interest sensitive Life insurance product. It has a flexible premium, the premium is not fixed. In order to sell variable products, the insurance producer must have a Life insurance license and be registered with FINRA (formerly called the NASD). Just like Universal Life, Variable/Universal Life has a flexible premium.

Question 3

Which of the following persons are eligible for a traditional IRA?
A. Any single person earning less than $30,000 a year
B. Any married person earning less than $50,000 a year
C. Any person with earned income
D. Any person

Answer 3

Correct Answer(s): [C]

This is a trick question. It is not asking who can deduct their IRA contribution. It is asking who is
eligible for an IRA. Anyone with earned income is eligible for an IRA. Contributions to a traditional IRA
may not be deductible if the person earns over a certain amount and is also covered by another
qualified plan. Of course, contributions to ROTH IRAs are never deductible.

Question 4

All of the following are true about Universal Life insurance EXCEPT:
A. There is a minimum guaranteed interest rate
B. Cash values are invested in a separate account maintained by the insurer
C. It pays a current interest rate that changes year to year
D. A risk “corridor” must be maintained by the insurer

Answer 4

Correct Answer(s): [B]

Universal life is also known as “interest sensitive” whole life, since the current interest is based upon
what is happening in the economy and may vary every year, but not below the minimum interest rate
guaranteed in the policy. Tax regulations also require insurers to maintain a “risk corridor”, which is
the difference between the face amount and the accumulated cash value. However, cash values are
invested in the insurer’s general account. The separate account is used for Variable Life.

Question 5

Which of the following individual policy conversions is usually permitted without any evidence of
insurability?
A. Conversion from a Whole Life policy to a Term policy
B. Conversion from a Term policy to a Whole Life policy
C. Conversion to a lower-premium plan
D. Conversion to a larger amount of insurance

Answer 5

Correct Answer(s): [B]

The Conversion privilege is simply a marketing tool that allows insureds who buy Term Insurance to
convert to Whole Life without proving continued good health. Without this privilege, few would buy
Term Insurance. You cannot convert Term-to-Term or convert to a higher or lower face amount, and
you cannot convert Whole Life-to-Term.

Question 6

Mr. Baugh elects to make a direct rollover of his traditional IRA from one trustee to another trustee at
age 35. How is this taxed?
A. All is taxed as capital gain in the year of the rollover
B. Income taxes are incurred, but the 10% IRS penalty is waived
C. There is no current tax implication
D. All is taxed as ordinary income in the year of the rollover

Answer 6

Correct Answer(s): [C]

Rollovers are permitted from one qualified plan to another qualified plan without any current tax
implications as long as the rollover is made only once a year and made within 60 days of a
distribution.

Question 7

Your client is currently enrolled in a 401k at their place of employment. Which of the following is CORRECT
in regards to your client and an IRA?
A. Your client is not eligible to have an IRA since he already has a qualified plan where she works
B. Any person who has earned income may fund an IRA, regardless of their participation in a qualified plan
at their place of employment
C. Your client will only be able to fund the IRA if she is over age 70 ½
D. Your client may only fund the IRA to the extent that she has underfunded her 401k

Answer 7

Correct Answer(s): [B]

An IRA is an individual retirement account. As such, it is totally separate from any retirement account
your client may (or may not) have at their place of employment. The requirement to fund an IRA is
that the client has earned income. It is entirely possible to be enrolled in the qualified plan where you
work, and to also fund an IRA in that same year. The IRA is outside of work.

Question 8

Why does whole life insurance cost more than annuities?
A. Whole life cash values earn less than annuity cash values
B. Annuities never have a beneficiary
C. Whole life premiums must also include the cost of mortality
D. Annuities are not subject to non-forfeiture provisions

Answer 8

Correct Answer(s): [C]

Whole life is actually “death insurance”, while annuities are “life insurance”, since they pay you if you
continue to live. However, you shouldn’t purchase an annuity until you already have your life
insurance in order, since annuities have no death benefit. At age 30, a premium of $1,000 could buy a
$100,000 whole life policy, payable to your beneficiary if you died right away. If you used that same
$1,000 to buy an annuity and died, your beneficiary would only get $1,000 plus interest.

Question 9

When a life insurance policy lapses or is surrendered prior to maturity, any built up cash value may be
used to buy a lesser amount of the same type of insurance. When this is done, the new policy would be
known as:
A. Paid up additions
B. Converted insurance
C. Reduced paid up insurance
D. Extended term insurance

Answer 9

Correct Answer(s): [C]

When a policy with a cash value lapses, the insurer must give the policy owner a choice of three nonforfeiture options, which are cash surrender, extended term or reduced paid up insurance. If the insured selects reduced paid up, the cash value is used as a single premium at his current age to buy him a new whole life policy paid up to age 100, without any physical exam. However, since the cash value is not sufficient to buy the same amount, the policy limit is reduced.

Question 10

Dividend projections may be included in a proposal for Life insurance:
A. When there is a clear statement that they are not guaranteed
B. Only upon the request of the applicant
C. When they are required to be applied to future premiums due
D. When past results are used as the basis for future projections

Answer 10

Correct Answer(s): [A]

Mutual insurers issue ‘participating policies’ which might pay dividends to the policy holders, since
they own the company. However, dividends may never be guaranteed. Dividends are not taxable.

Question 11

An insurance producer selling a Variable Annuity whose cash value depends on the performance of an
underlying investment account must be registered with:
A. The National Association of Life Underwriters
B. The National Association of Insurance Commissioners
C. The Financial Industry Regulatory Authority (FINRA, formerly the NASD)
D. The Chartered Life Underwriters

Answer 11

Correct Answer(s): [C]

Producers selling Variable Life and Variable Annuities must have a state life insurance license plus a
federal securities license (Series 6 or 7), which are now issued by FINRA, formerly known as the
National Association of Securities Dealers (NASD).

Question 12

A business owner with a fluctuating income who wants a life insurance policy that can be changed to
suit economic conditions should buy:
A. Variable life
B. Adjustable life
C. Equity indexed life
D. Interest-sensitive Whole life

Answer 12

Correct Answer(s): [B]

Adjustable Whole life insurance is sold to persons who have fluctuating incomes, such as stock
brokers or real estate agents. It allows the insured to adjust the amount of the death benefit, the
amount of the premium or even the type of coverage as their needs change. Increases in the death
benefit may require the insured to pass a physical exam.

Question 13

An insurance company will grant an advance from the cash value of a Life insurance policy when the
policy owner requests which of the following?
A. A low-interest dividend loan
B. A policy loan
C. A loan from Extended Term Insurance
D. An automatic premium loan

Answer 13

Correct Answer(s): [B]

A policy loan may be requested by the insured anytime there is a cash value present. Some companies do require that you leave a certain minimum amount in your cash value, so you cannot borrow it all. The maximum interest rate on policy loans varies by state law. However, your company may not charge an interest rate higher than the one stated in its policy initially. Loans do not have to be paid back while the insured is alive, since all loans plus overdue interest on them will be subtracted from policy proceeds in the event that the insured dies with a loan outstanding. Insurance companies may defer granting policy loans for up to 6 months, although they seldom do.

Question 14

On July 1st, 2010, a 30 year old client bought a traditional whole life policy with a face amount of
$100,000, an annual premium of $1,000 and the automatic premium loan rider. He died on August
15th, 2011 without paying any more premiums. How much will the policy pay to his beneficiary?
B. $100,000, less the overdue premiums and indebtedness
C. Zero
D. $99,000

Answer 14

Correct Answer(s): [C]

Although whole life does eventually develop a cash value, it usually doesn’t do so for 3 years. So,
although this client added the automatic premium loan rider to his policy, it had no effect since no
cash value had yet accumulated. Whole life has a 30 day grace period, and since this client died after
the end of the grace period, there is no coverage. If he had died within the grace period, the policy
would have paid $99,000. A policy lapses at the end of the grace period.

Question 15

With proper notice and authorization, insurers may report underwriting information that an applicant
lists on their application for Life insurance to the:
A. State insurance department
B. Anyone who requests it
C. Medical Information Bureau (MIB)
D. Fair Credit Reporting Association

Answer 15

Correct Answer(s): [C]

Virtually all Life and Health insurers are members of the MIB. Member insurers report their customers’
medical history to the MIB, who in turn, makes it available to underwriters. However, MIB procedures
require that written notice be given to applicants that their health data will be reported by the insurer
to the MIB.

Question 16

Parents are considering opening traditional IRAs for their two children, ages six and eight. Why should
they consider something other than IRAs?
A. Minors are not permitted to have IRAs
B. It is unlikely that the children have any earned income
C. Any earned income in the IRA accounts would be taxable to the parents
D. Future rollovers would not be permitted

Answer 16

Correct Answer(s): [B]

In order to contribute to an IRA, you must have earned income. You can make an annual contribution
of $2,000, or 100% of earned income, whichever is less. Children may have IRAs if they have earned
income. Earnings in an IRA are tax deferred and since IRAs are considered to be qualified plans, future
rollovers would be permitted.

Question 17

Insurable interest must exist:
A. In order to be named as beneficiary
B. At the time of loss
C. Continuously
D. At the time of application

Answer 17

Correct Answer(s): [D]

On Life insurance, insurable interest must exist at the time of application, but not necessarily at the
time of loss. For example, you buy a policy to cover your spouse, naming yourself as beneficiary. If
you get divorced, the policy is still valid, even though you no longer have an insurable interest in your
ex-spouse. Further, a beneficiary need not have an insurable interest in order to collect proceeds.
Remember, you can name any one you want as beneficiary.

Question 18

Premature distributions from a Traditional IRA prior to age 59 1/2 are subject to:
A. Ordinary income tax
B. Ordinary income tax plus a 10% penalty
C. Capital gains tax plus a 6% penalty
D. A 50% IRS penalty

Answer 18

Correct Answer(s): [B]

Assuming that the Traditional IRA was funded with before tax dollars, upon premature distribution the
entire amount withdrawn would be subject to ordinary income tax plus a 10% IRS premature
distribution penalty.

Question 19

A client buys a $100,000 life insurance policy and names his two children, Jack and Jill, as his primary
beneficiaries and his spouse as contingent beneficiary. If both the insured and his son Jack die as a
result of the same accident, how will the proceeds be paid?
A. 1/2 to the spouse and 1/2 to Jill
B. All to Jill
C. 1/2 to Jill and 1/2 to Jack’s estate
D. All to his spouse

Answer 19

Correct Answer(s): [B]

Since one of the primary beneficiaries (Jill) is still alive, 100% of the proceeds will go to her tax free.
The contingent beneficiary comes into play only is she outlives all the primary beneficiaries. You can
name anyone you want as beneficiary to your life insurance policy. They do not need to have an
insurable interest.

Question 20

A father, age 60, and his son, age 30, both want to purchase $100,000 immediate annuities. All of the
following are true about these contracts EXCEPT:
A. The father would receive higher monthly payments
B. The premiums would be the same on both contracts
C. Neither contract is subject to underwriting
D. The father’s premium would be higher due to his age

Answer 20

Correct Answer(s): [D]

The premium for a $100,000 immediate annuity is $100,000, regardless of age. It is the payout that
differs. The father’s monthly payments would be much higher since his life expectancy is much
shorter. Since annuities have no insurance protection, there is no underwriting.An immediate annuity
has no accumulation (pay in) period. The annuitant would pay in a lump sum, single premium and
“annuitize” the contract immediately. Monthly payments would continue for life.

Question 21

Group Life insurance is convertible:
A. To Term Life insurance at any time at the option of the employee
B. To an increased amount of Whole Life insurance, at the employee’s option
C. Based upon the employee’s original age at time of employment
D. For a specified period of time after termination of employment without a physical exam

Answer 21

Correct Answer(s): [D]

convertible to Whole Life insurance within a specified time (often 31 days) after termination of
employment, regardless of health. The new Whole Life policy will be based upon your current age and
will be more expensive, since Whole Life will build cash value. However, when converting, your new
policy limit cannot exceed the limit you had on your former Group Life policy.

Question 22

Which of the following correctly describes the Doctrine of Waiver and Estoppel?
A. It gives the insured a period of time to return the policy for a full refund
B. It defines what is admissible in court
C. It allows the insurer to contest a claim for 2 years
D. It states that if the insurer accepts an incomplete application, the insurer cannot contest a claim related
to whatever was left blank

Answer 22

Correct Answer(s): [D]

The Doctrine of Waiver and Estoppel states that if the insurer accepts an incomplete application, the
insurer cannot contest a claim related to whatever was left blank. It is the Entire Contract Clause that
defines what is admissible in court.

Question 23

Traditional IRAs have a premature distribution penalty for distributions taken prior to age:
A. 65
B. 70 ½
C. 55
D. 59 ½

Answer 23

Correct Answer(s): [D]

With certain exceptions, such as death or disability, Traditional IRA distributions made prior to age 59
'bd are subject to a 10% IRS penalty as well as ordinary income taxes.

Question 24

All of the following are non-forfeiture options on a whole life policy EXCEPT:     participating whole life
A. Extended term
B. Reduced paid up
C. Cash surrender
D. Paid up additions

Answer 24

Correct Answer(s): [D]

If your policy lapses, your accumulated cash value may not be forfeited to the insurer. They must give
you a choice of selecting either cash surrender, extended term or reduced paid up. If you elect cash
surrender, you have no further coverage and you cannot apply for reinstatement. If you don’t select
an option within 60 days of lapse, the insurer must give you the extended term option automatically.
Paid up additions is a dividend option, available only on participating policies.

Question 25

All of the following are life insurance dividend options EXCEPT:
A. Reduced paid up
B. Paid up additions
C. Apply to premium when due
D. Interest

Answer 25

Correct Answer(s): [A]

Participating policies, which are issued by mutual insurers, may pay dividends although they are never
guaranteed. If a dividend is declared, the insured may select from 5 dividend options, which may be
changed at any time, even if you have an irrevocable beneficiary designation. They are: cash, interest,
apply to premium when due, paid up additions and 1 year term insurance. Reduced paid up is a nonforfeiture provision, not a dividend option.

Question 26

Distributions from a Traditional IRA must begin no later than age:
A. 59.5
B. 70.5
C. 65
D. 55

Answer 26

Correct Answer(s): [B]

Traditional IRAs are subject to Required Minimum Distribution rules, which state that participants
must start to receive distributions no later than April 1st of the year after they reach age 70 1/2.

Question 27

A customer buys $20,000 Life insurance policy with a $20,000 AD&D rider. The rider will pay double if
the insured dies of which of the following?
A. Heart attack
B. Cancer
C. During an operation to remove spleen
D. Car accident

Answer 27

Correct Answer(s): [D]

The AD&D rider is designed to pay out if the insured dies in an accident.

Question 28

A customer buys a $25,000 Life insurance policy with a $25,000 Accidental Death Benefit rider
attached. If he dies of cancer, how much will his policy pay?
A. 25000
B. Nothing
C. $75,000
D. $50,000

Answer 28

Correct Answer(s): [A]

Accidental Death Benefits (also known as Double Indemnity) are actually a type of Health insurance
policy that may be added to a Life insurance policy for an additional premium. This rider covers
accidents only and death must result within a specified period of time after the accident, usually
within 90 days. Cancer is a sickness, not an accident.

Question 29

On January 1, 2011, an insured bought a $100,000 Term life insurance policy for an annual premium
of $200. If he dies on January 27, 2012 without paying his renewal premium, how much will the policy
pay?
A. Nothing, since the policy has lapsed
B. $100,000, less any outstanding loans
C. 99800

Answer 29

Correct Answer(s): [C]

The insured’s renewal premium was due on January 1, 2012, but he failed to pay it. However, term
insurance has a 30-day grace period. Since he died on January 27, 2012, within the grace period, he is
covered, but the overdue premium will be subtracted. Since Term has no cash value, no loans could be
outstanding.

Question 30

Which of the following is incorrect regarding Term insurance?
A. It may be convertible to Whole Life
B. It is used for temporary situations
C. Conversion and renewal is done at original age
D. Level Term may be renewed

Answer 30

Correct Answer(s): [C]

Term insurance is best for temporary situation. It is not permanent protection, like Whole Life would
be. Term may be converted to a Whole Life policy. Level Term may be renewed. Both conversion and
renewal on Term insurance is available to the client regardless of health (without having to pass a
physical). Both conversion and renewal are done at the client’s attained (also called current) age, not
at the original age.