Life Insurance Part VI Flashcards
KEOGH Plans (HR 10s):
A. Were initially set up to benefit the self employed or partners
B. Do not have to cover eligible employees
C. May be set up by corporations for the benefit of their employees
D. Have no maximum contribution limits
Correct Answer(s): [A]
Keoghs were established for the benefit of self employed and partners, who often have no retirement
plans at all. Contribution limits vary by year. Eligible employees who are at least age 21, worked there
at least 1 year and are full time must also be covered. HR 10 stands for House of Representatives Bill
#10. Keoghs are named after U.S. Senator Keogh.
Which of the following is true about ROTH IRAs?
A. Qualified distributions are tax free
B. Distributions must begin by age 70 1/2
C. Rollovers are not permitted
D. Contributions are tax deductible
Correct Answer(s): [A]
Contributions to ROTH IRAs must be made in after tax dollars and are not tax deductible. You can make a roll over from a traditional IRA to a ROTH IRA, but you must pay taxes on the amount rolled over in the year of the rollover. Qualified distributions from a ROTH IRA are not taxable and do not have to begin by age 70 1/2. Remember, the money contributed has already been taxed!
The contingent beneficiary will receive policy proceeds when:
A. No beneficiary has been designated
B. The insured pre-deceases the primary beneficiary
C. The insured pre-deceases all designated beneficiaries
D. The primary beneficiary pre-deceases the insured
Correct Answer(s): [D]
A ‘contingent’ beneficiary is also known as a ‘secondary’ beneficiary, since they will only receive the
policy proceeds if the primary beneficiary dies before the insured and no new primary beneficiary is
named.
The clause that states the insurer's promise to pay the policy benefits in accordance with the contract's provisions is the: A. Incontestability Clause B. Beneficiary Clause C. Consideration Clause D. Insuring Clause
Correct Answer(s): [D]
The Insuring Clause states that coverage is provided in accordance with the terms of the policy. It
includes the insurer’s promise to pay covered claims and is located on the first page of the policy
If the premium due is not paid, a Life insurance policy will lapse: A. At the end of the policy period B. On the premium due date C. At the end of the grace period D. On the policy anniversary date
Correct Answer(s): [C]
State law requires that all Life insurance policies have a grace period, which can be as long as 31 days.
Coverage still applies during the grace period, but any overdue premium will be subtracted from the
proceeds paid. If payment is not received during the grace period, the policy will lapse.
Albert Metz, who has $2,000 of Group Life insurance, has just terminated his employment. The
maximum amount that Mr. Metz will be able to convert is which of the following?
A. $500
B. $1,000
C. $1,500
D. $2000
Correct Answer(s): [D]
Mr. Metz cannot convert to more coverage than he initially had on his Group contract. On Group Life,
the employer is the policy owner and may pay all the premiums (noncontributory) or may ask the
employee to pay part (contributory). If the plan is contributory, 75% must participate. The employer
gets the original policy and the employee gets a certificate. Most groups will make coverage available
for dependents.
Jim gets married and wants to add his new spouse to his existing Life insurance policy. Which rider should he add? A. Payor Rider B. Other Insured Rider C. Guaranteed Insurability Rider D. Term Rider
Correct Answer(s): [B]
The Other Insured Rider may be added to your Whole Life insurance policy at any time in order to
provide Term Life coverage for a relative, such as a new spouse or child. Of course, the ‘other’ person
would have to pass a physical exam and your premium would increase. This rider is often used to
provide family coverage.
A $10,000 Life insurance policy with a Triple Indemnity clause has been in force for three years. The
insured is injured in a train wreck and dies in a hospital five months later. The death proceeds payable
under the policy would be:
A. $30,000
B. $20,000
C. 10000
D. $ -0-
Correct Answer(s): [C]
Accidental Death Benefit (ADB), sometimes called Double or Triple Indemnity, is a rider that may be
attached to any Life insurance policy for an extra premium charge. The additional benefits are paid
only if the insured dies within 90 days of an accident. If the insured lingers beyond 90 days, the policy
reverts back to single indemnity only, and the face amount without the rider is paid, since it is
assumed that death resulted more from natural causes than as a result of the accident.
All of the following types of insurance contracts must contain non-forfeiture provisions EXCEPT: A. Annuities B. Term C. Whole life D. Variable Life
Correct Answer(s): [B]
Any life insurance product that has a cash value must also contain non-forfeiture provisions as
required by law. If the policy lapses, the client’s cash value may not be “forfeited” to the insurer.
However, since term insurance does not have any cash value, non-forfeiture provisions are not
required. The 3 non-forfeiture options are cash surrender, reduced paid-up and extended term, which
is also known as the “automatic” option.
An applicant forgot to mention on her application for Life insurance the heart condition that she
suffered as a child, since she has not had any issues in over 30 years. She purchased Life insurance
from you and then, 5 years later, died of the heart condition. Which of the following is correct?
A. The insurer will pay the claim
B. The insurer will contest the claim for fraud
C. The insurer does not have to pay the claim under the Incontestability Clause
D. Fraud includes not only intent to deceive but also accidental omission
Correct Answer(s): [A]
Life insurance policies are only contestable during the first 2 years. Since this client died after 2 years,
whether or not it was fraud, she is covered. Fraud includes intent to deceive. An accidental omission is
not considered to be fraud.
HIPAA is designed to do which of the following?
A. Protect financial information
B. Ensure that anyone who would like to get insurance is able to purchase it
C. Protect health information
D. Protect credit information
Correct Answer(s): [C]
HIPAA requires that health plans notify their enrollees at the time of sale of their privacy practices.
HIPAA is designed to protect a person’s health information.
Which rider will allow the insured to increase his coverage without a physical exam after the policy is issued: A. Guaranteed Insurability B. Other Insured C. Payor Benefit D. Waiver of Premium
Correct Answer(s): [A]
For an additional premium, an insured may add a Guaranteed Insurability rider to his Life insurance
policy at inception. This rider enables the insured to increase coverage incrementally at specified
future option dates without taking a physical exam. Premiums for each future increase in coverage are
based upon the insured’s current age at the time an option is exercised.
All of the following are Non-Forfeiture Options on a cash value Life insurance policy EXCEPT: A. Extended Term B. Cash Surrender C. Reduced Paid-Up D. Automatic Premium Loan
Correct Answer(s): [D]
Automatic Premium Loan is a rider, not a Non-Forfeiture option. Non-Forfeiture options protect the
policy owner’s cash value when a Life insurance policy lapses. The policy owner may select cash
surrender, reduced paid-up, or the extended term non-forfeiture option. Term Life policies have no
Non-Forfeiture options, since they have no cash value.
An insured paid $4,000 in premiums on his whole life policy over a period of time. When his cash value
equaled $6,500, he elected to take cash surrender. How much is taxable:
A. $2,500
B. $6,500
C. $4,000
D. None, life insurance benefits are never taxable
Correct Answer(s): (B)
The $4,000 in premiums was paid in with after tax dollars and constitute his cost basis. Upon cash
surrender, which is a non-forfeiture provision in the policy, only the amount taken out above cost
basis is taxable as ordinary income. Of course, this $2,500 represents the amount of tax deferred
interest earned in the cash value account to date. However, life insurance proceeds payable upon
death are not subject to income tax, although they are included in the value of your estate.
All of the following are true, when a person buys Life insurance on the life of another person, EXCEPT:
A. They have all the rights of ownership
B. They must have an insurable interest in that person at the time of application
C. The policy proceeds will be taxable to the policy owner when the insured dies
D. This is called Third-Party ownership
Correct Answer(s): [C]
As long as you have an insurable interest at the time of application, you can buy Life insurance on
other people, such as your spouse, child, business partner or key employee. This is called ‘third-party’
ownership, since you own the policy, but the other person is the insured. However, proceeds paid on
Life insurance are never taxable.
