Life Insurance Part VII Flashcards
On March 8th, a prospect filled out an application for a Life insurance policy, but paid no premium. The
underwriter approved the application on March 14th and issued the policy on March 15th. The
producer delivered the policy on March 25th and collected the first premium. The coverage became
effective on:
A. March 14th
B. March 8th
C. March 25th
D. March 15th
Correct Answer(s): [C] Coverage becomes effective when the policy is delivered and the producer picks up the first premium.
Which rider will waive the premium on a policy written for a child if the policy owner becomes disabled due to accident or sickness? A. Guaranteed Insurability B. Waiver of Premium C. Accidental Death and Dismemberment D. Payor benefit
Correct Answer(s): [D]
The Payor Benefit rider is similar to Waiver of Premium, except it is usually added to a policy written
on the life of a child. If the premium ‘payor’ (usually a parent) becomes disabled, this rider will pay
the premium on the child’s policy until the child reaches age 18, at which time they have to assume
future premium payments.
All of the following are true about Equity Indexed annuities EXCEPT:
A. They are designed to keep up with the rate of inflation
B. They are issued by insurance companies
C. They have investment risk
D. They have no early withdrawal penalties
Correct Answer(s): [D]
Equity adjusted annuities are also known as variable annuities, where the cash value is invested in a
separate account, which is similar to a mutual fund, which historically have kept pace with the rate of
inflation in the economy. All annuities are issued by insurers, but in this case, the agents would also
have to have securities licenses. Virtually all annuities have early withdrawal penalties. Cash values
are not guaranteed, so there is some investment risk.
All are true about the duties of a Life insurance Producer (agent) EXCEPT:
A. When soliciting insurance, the true name of the insurer must be disclosed
B. Both the agent and the applicant must sign the application
C. A Conditional Receipt is given when the applicant pays the initial premium
D. The agent has a fiduciary duty to sell only profitable policies on behalf of the insurer
Correct Answer(s): [D]
The agent represents the insurer, but has a fiduciary duty to both the insurer and the insured. A
fiduciary occupies a position of trust and confidence on behalf of both parties. Although the agent
must follow the underwriting guidelines specified in her agent’s contract, she has no idea whether or
not a policy sold will ultimately be profitable for the company. The outcome depends on chance. The
agent is a party to the application and must sign it, but is not a party to the contract.
Which of the following is true about the Misstatement of Age provision:
A. It allows the insurer to contest a claim during the first 2 years
B. It allows the insurer to change the premium
C. It allows the insurer to void the contract
D. It allows the insurer to adjust benefits
Correct Answer(s): [C] A Life insurance claim may not be 'contested' for misstatement of age. However, if the insured understates his age in order to obtain a lower premium, at his death the insurer will adjust his benefits according to what the incorrect premium would have purchased at his correct age. The Misstatement of Age clause applies indefinitely.
A life insurance policy might be purchased on the life of a child for all of the following reasons EXCEPT:
A. To help pay for the child’s future educational needs
B. To pay for the child’s funeral expenses
C. To solve an insurability problem the child may later develop
D. To provide benefits to the child if the parents die
Correct Answer(s): [D] If you want to provide benefits to the child in case the parents die, you need to purchase a policy on the parents and name the child as beneficiary. Most people buy little, if any, life insurance on their children. However, a cash value life policy such as whole life could provide funds for a child's education later on. If the guaranteed insurability rider is added, the child will be able to increase coverage later on without passing a physical exam.
An insured who owns a $100,000 whole life policy with a cash value of $40,000 elects the extended-term non-forfeiture option. What will the face amount of her new policy be? A. $60,000 B. $40,000 C. $100,000 D. $80,000
Correct Answer(s): [C] If you select the extended term option, the insurer keeps your cash value and uses it as a single premium to purchase you a new term policy with the same face amount as your old whole life policy for an extended period of time. In this question, the insurer would keep the $40,000 cash value and internally purchase the client a new $100,000 term policy based upon her current age, regardless of her health. If she dies within the term of coverage, her beneficiary will receive $100,000.
When purchasing a deferred annuity, when do the rights of ownership begin? A. Date of application B. Date of contract C. Date of annuitization D. Date of contract delivery
Correct Answer(s): [B] On a deferred annuity, you pay money in now and take it out later. All annuities are issued by insurance companies and since they are life insurance products, must also have non-forfeiture provisions by state law. Ownership rights begin the date of the contract and you can take cash surrender anytime you want, although there may be early withdrawal penalties. The free look begins the date of contract delivery. You must select a pay-out option on the date of annuitization.
Which of the following types of insurance policies would provide the greatest amount of protection for
a temporary period during which an insured will have limited financial resources?
B. Limited Pay policy
C. Term
D. Whole Life
Correct Answer(s): [C] The word "term" means time. Time is temporary. A Term policy, since it is the most inexpensive type of insurance, would provide an applicant the greatest amount of protection (face amount) on a temporary basis. However, in the long run, Term may be the most expensive type of insurance.
Which of the following is NOT correct regarding Ordinary Whole Life policies?
A. Ordinary Whole Life is a type of permanent insurance
B. Coverage lasts for your own life
C. The cash value grows more quickly in the beginning years of the policy
D. The premiums payments are owed annually until you die or reach age 100
Correct Answer(s): [C] An ordinary Whole Life policy (also known as Straight Whole Life) is a type of permanent insurance. Coverage last until you die, or until you reach age 100. Premiums are owed annually. A Limited Pay Whole Life policy would have the cash value grow more quickly in the beginning years of the policy.
Which of the following statements is incorrect?
A. The Other Insured rider adds Term coverage on another person to a Whole Life policy
B. The AD&D rider pays out if the insured dies in an accident
C. The Consideration Clause includes the first premium and answers on the application, but no signature of the applicant is required
D. The free look starts at policy delivery
Correct Answer(s): [C] Consideration for the insured consists of the answers to the questions on the application (representations, the truth to the best of your knowledge), the first premium payment as well as the applicant's signature.
A Life insurance policy of which the cash value is over-funded according to IRS rules is known as: A. A Variable Life Contract B. A Variable/Universal Life Contract C. A Universal Life Contract D. A Modified Endowment Contract
Correct Answer(s): [D] A Modified Endowment Contract (MEC) is a Whole Life policy of which cash value builds too fast, which causes what is known as "over-funding". Although such policies are not unlawful, they do lose much of the favorable tax treatment afforded to most Life insurance policies, meaning that loans are taxable and cash surrenders prior to age 59 1\2 are subject to a 10% IRS premature distribution penalty.
A life policy may include provisions that do all of the following EXCEPT:
A. Require evidence of insurability in order to reinstate a lapsed policy
B. Exclude coverage if death is caused by suicide
C. Adjust proceeds if the insured’s age is misstated on the application
D. Extend the contestable period beyond 2 years
Correct Answer(s): [D] If you misstate your age on your application, the insurer may adjust the amount paid at your death to the amount the premium you paid would have purchased had you told the truth. Most life insurers will allow lapsed policies to be reinstated if the back premiums are paid and the insured passes a physical exam. Suicide is usually excluded for the first year on a new policy, but the contestable period may not be extended. It is a maximum of 2 years by state law.
At the death of the insured, the beneficiary can make all of the following changes to the settlement
option pre-selected by the policy owner prior to death EXCEPT:
A. Change fixed amount to lump-sum
B. Change lump-sum to interest option
C. Change lump-sum to fixed amount
D. Change lump-sum to fixed period
Correct Answer(s): [A] While seldom done, a policy owner may pre-select the settlement option prior to death. The beneficiary may change a pre-selected settlement option from lump-sum (cash) settlement to a fixed amount or fixed period option, but they cannot change it from the fixed amount or fixed period option to cash.
A Joint Life Annuity: A. Must cover both husband and wife B. Pays until the last party dies C. Has no guaranteed rate of return D. Payments stop when the first party dies
Correct Answer(s): [D] Although a Joint Life Annuity is often purchased to cover both husband and wife, they can be written to cover any 2 people. Both annuitants are covered, but when the first party dies, monthly payments will cease. A Joint and Survivor Annuity will make payments until the last party dies. Annuities can be written as either fixed or variable.
