Life Insurance Part VIII

Question 1

Most insurance contracts sold by banks are backed by:
A. FDIC
B. The State Guaranty Association
C. The Federal government
D. The State government

Answer 1

Correct Answer(s): [B]
Banks often act as agents selling annuities on behalf of various life insurance companies, who are required to have a Certificate of Authority in this state. All authorized insurers are required to join the State Guaranty Association, which covers client claims and cash values in the event the insurer becomes insolvent. However, variable products are not covered. Agents are not allowed to use the existence of the Guaranty Association as an inducement to the sale.

Question 2

All of the following are true of Deferred Annuities EXCEPT:
A. Most are considered to be non-qualified plans
B. They could be purchased with single, level or flexible premium payments
C. They are not subject to IRS early withdrawal penalties
D. They are tax deferred during the accumulation (pay in) period

Answer 2

Correct Answer(s): [C]
Although you can "fund" an IRA with an annuity, it is not the annuity that is qualified, it is the IRA. Otherwise, the only annuity that is considered "tax qualified" is a 403B Tax Sheltered Annuity (TSA), which are sold primarily to public school teachers. However, although most annuities are "nonqualified", they are still subject to IRS 10% early withdrawal penalties if surrendered for cash prior to age 59 1/2. No IRS penalty is levied for early "annuitization", however.

Question 3

An applicant has been denied insurance coverage because of information contained in a consumer report. According to the Fair Credit Reporting Act, all of the following statements are true about this situation, EXCEPT:
A. The applicant has the right to obtain disclosure of the substance of the information in the consumer report from the reporting agency
B. The applicant has the right to obtain a copy of the consumer report directly from an insurance company that used the report
C. The reporting agency cannot issue any report containing adverse information about the applicant that predates the report by more than seven years, except in the case of a bankruptcy, which may be reported for a 14-year period
D. The applicant has the right to obtain the identity of other inquirers who have obtained consumer reports on him within the past six months from the reporting agency

Answer 3

Correct Answer(s): [B]
The Fair Credit Reporting Act is a federal law that is designed to protect individuals who are being investigated by Consumer Reporting Agencies or Credit Bureaus. The law requires pre-notification of any possible investigation and post-notification if any adverse underwriting action is taken by the company as a result of the information received from a credit bureau. An applicant for insurance also has the right to request a copy of the credit report that the company obtained. However, this report may not be obtained directly from the insurance company, but only from the credit bureau that made the report. Remember, pre-notification must be IN WRITING, and when the applicant signs an application, this disclosure by the company that it may order an investigative type report is usually located right above the applicant's signature line.

Question 4

On Life insurance, the purpose of the Entire Contract Clause is to:
A. Spell out the rights of the beneficiary
B. Require that the insurer attach the application to the policy at issue
C. Spell out the rights of the policy owner
D. Limit the policy to the contract plus the application if attached

Answer 4

Correct Answer(s): [D]
The Entire Contract Clause prevents the insurer from modifying a policy once it has been issued. The Entire Contract, which consists of the policy and the application, if attached, is the only document that is admissible in court.

Question 5

Which of the following is not true regarding the provisions of the federal Fair Credit Reporting Act:
A. It applies to consumer reports ordered in relation to credit, insurance or employment
B. If adverse action is taken as a result of a report, the customer must be informed of the specific reason for such action
C. If adverse action is taken as a result of a report, the customer must be informed of the source of the report
D. If adverse action is taken as a result of a report, the insurer must give the customer a copy of the report

Answer 5

Correct Answer(s): [D]
Under the Fair Credit Reporting Act, when adverse action (such as rejection of insurance) is taken, the applicant must be informed of the specific reason and the source of the consumer (or credit) report. Although the applicant can obtain a copy of the report from the credit reporting agency, neither the producer nor the insurer has to give the applicant a copy of the report.

Question 6

If a client who has a "modified endowment contract" (MEC) takes a premature distribution prior to
age 59 1/2, the penalty tax will be:
A. 10%
B. 28%
C. 15%
D. 7.50%

Answer 6

Correct Answer(s): [A]
An MEC is a life insurance policy where the cash value builds too fast. If the cash value in the policy exceeds the total amount of premiums paid in by the end of the 7th year, the policy is considered to be a MEC. While it is not illegal to sell a MEC, most clients don't want them since they lose some of their favored tax treatment. The IRS considers a MEC to be an investment rather than life insurance. Many single premium UL policies sold when interest rates were high were MECs.

Question 7

Which of the following statements is true about the premium payment schedule for a Whole Life
policy?
A. Premiums are payable for a designated period of time only, after which coverage is no longer provided
B. Premiums are payable throughout the insured’s lifetime, and coverage continues until the insured’s death
C. One premium, in the amount of the insured’s choice, is payable at the time of application, and the
balance of the premiums is deducted from the face amount of the policy at the time of the insured’s death
D. Premiums are payable until the insured’s retirement only, after which coverage is continued automatically until the insured’s death

Answer 7

Correct Answer(s): [B]
whichever comes first. If the insured is still alive at age 100, the policy will reach maturity and pay the insured the face amount or cash value, whichever is more. This is because the insurance company's Mortality Table states that everyone has died by their 100th birthday. An insured, who would like to retire at age 65, keeping his Life insurance in force but discontinuing premium payments, should consider buying an LP65, which is a Whole Life policy with a limited payment period. Of course, the shorter the premium paying period, the higher the premium.

Question 8

Life insurance becomes effective when:
A. The applicant writes the check and receives a conditional receipt
B. When the producer signs the application
C. When the conditions in the conditional receipt are satisfied
D. When the insurer receives the application at their home office

Answer 8

Correct Answer(s): [C]
One of the conditions in a conditional receipt requires that the applicant pay the initial premium before coverage can start. However, there may be other conditions specified in the conditional receipt, such as passing a physical exam.

Question 9

Which of the following is not true regarding Equity Indexed annuities:
A. They are designed to keep up with inflation
B. Producers must also have a FINRA or NASD license
C. Their performance is usually linked to the S&P 500 stock index
D. They have a guaranteed minimum rate of return

Answer 9

Correct Answer(s): [B]
Equity Indexed annuities are not considered to be securities, so they can be sold by any Life insurance licensee. However, since their performance is usually linked to an indexing method based upon the Standard and Poor's 500 stock index, their rate of return may exceed the minimum guaranteed in the contract.

Question 10

A producer completes an application for Life insurance and sends it to the underwriter who approves it
and issues the policy. When is coverage effective:
A. Immediately
B. On the date the client signed the application
C. On the date the underwriter approved the application
D. When the producer delivers the policy and picks up the premium

Answer 10

Correct Answer(s): [D]
On the state exam, don't assume that the premium has been paid. A producer may send the underwriter a 'submittal' application, just to find out if the applicant is insurable. If the underwriter issues the policy, coverage would start when the producer delivers the policy and picks up the premium, along with a Statement of Continued Good Health.

Question 11

Which of the following types of Life insurance has a tax deductible premium:
A. Partnership Life
B. Whole Life
C. Key Person Life
D. Group Life

Answer 11

Correct Answer(s): [D]
On Group Life, the portion of the premium paid by an employer is tax deductible as a business expense. No other types of Life insurance have tax deductible premiums, including other types of Life insurance sold for business purposes, such as Key Person or Partnership Life.

Question 12

A 45-year old customer who is seeking to supplement his retirement income at age 65 would not buy a:
A. Immediate Annuity
B. Equity Indexed Annuity
C. Variable Annuity
D. Deferred Annuity

Answer 12

Correct Answer(s): [A]
An immediate annuity has no accumulation period. For example, if Aunt Mary died and left you 1 million dollars, you could buy an immediate annuity and start to receive monthly payments right away for as long as you may live. On a deferred annuity, you would pay money in now, but take it out later, perhaps at retirement. Immediate annuities are often used to fund state lottery payouts.

Question 13

A Fireman purchases whole life insurance with the waiver of premium rider attached. If he becomes totally disabled at age 60, how long will the rider pay the premiums?
A. To age 100
B. To age 100 or prior death
C. Six months
D. To age 65

Answer 13

Correct Answer(s): [B]
Waiver of Premium rider has a 6 month waiting period, during which the insured must pay his own premiums. However, if the insured is disabled more than 6 months, premiums are paid retroactively. Although most riders, including this one, automatically drop off the policy at age 65, this insured became disabled while the rider was still in effect, so the rider will pay the premiums until he recovers, dies or reaches age 100, when the policy reaches maturity.

Question 14

Which of the following annuitization options will give the annuitant the highest payout amount?
A. Life income with a 30-year period certain
B. Life income with a 5-year period certain
C. Life income with refund
D. Life income (straight life)

Answer 14

Correct Answer(s): [D]
When an annuitant annuitizes the more risk taken on the higher the monthly payment will be. To choose life income (straight life) means the annuitant has no beneficiary. This is the riskiest choice. As such it means that the annuitant will make the most money monthly, have the highest payout amount.

Question 15

To add coverage for a child to your Whole Life policy you would purchase which of these riders?
A. Guaranteed Insurability Rider
B. Child Term Rider
C. Waiver of Premium Rider
D. Payor Benefit Rider

Answer 15

Correct Answer(s): [B]
A Child Term Rider is the rider you would purchase to add Term coverage for a child to your existing Whole Life policy.

Question 16

A person has an unlimited insurable interest in:
A. Their own life
B. The life of a friend
C. Their father-in-law
D. The life of their neighbor

Answer 16

Correct Answer(s): [A]
Underwriters require that you have an insurable interest in whose ever life you are insuring. Insurable interest must exist at the time of application, but not necessarily at the time of claim. Insurable interest may be based on economics, such as a business partner, or on a close birth relationship, such as a child. Everyone has an unlimited insurable interest in their own life. The purpose of insurable interest is to prevent gambling.

Question 17

If an insured designates an irrevocable beneficiary on their Life insurance policy, they could do which of the following without the consent of that beneficiary:
A. Take a policy loan
B. Change a dividend option
C. Take cash surrender
D. Appoint a new primary beneficiary

Answer 17

Correct Answer(s): [B]
Dividends have no effect on an irrevocable beneficiary's vested interest in a Life insurance contract, so the policy owner may change a dividend option at any time.

Question 18

Most Term Life insurance:
A. Has a guaranteed cash value
B. Is renewable to age 100
C. Is renewable with evidence of insurability
D. Is convertible to permanent Whole Life without a physical exam

Answer 18

Correct Answer(s): [D]
Most Term Life insurance is both renewable and convertible. Insureds may renew without a physical exam up to a certain age, as specified in the policy (often age 65). Most Term is also convertible to Whole Life without a physical exam based upon current age. Since Whole Life costs more than Term, premiums will go up upon conversion. However, you cannot convert Whole Life to Term.

Question 19

When giving a client a conditional receipt which of the following is true?
A. The coverage will begin at the earliest as of the date of application or when the client passes a physical, whichever is later
B. Coverage begins as of the date of application
C. In order for coverage to begin the applicant must pay all premiums
D. You never collect a premium until you deliver the policy

Answer 19

Correct Answer(s): [A]
When you give out a conditional receipt you are only giving it out because you have collected the client's first premium payment and the application. The client that receives a conditional receipt is now conditionally covered. There may be no conditions to complete, in which case coverage is effective as of date of application. If there are conditions to satisfy, then coverage is effective when the conditions are satisfied. The most common condition is that the client must pass a physical. When you give out a conditional receipt, coverage will be effective as of date of application or when the client passes the physical exam (if one is required), whichever is later.

Question 20

A client applied for Life insurance on October 1st. The application was approved and the policy was
issued on October 10th. It was delivered to the customer on October 18th. When did the Free Look
start?
A. October 18th
B. October 31st
C. October 1st
D. October 10th

Answer 20

Correct Answer(s): [A]
The Free Look starts at the time of policy delivery. During the Free Look, the policy owner may return the policy for any reason and receive a full refund. Of course, once the policy is returned, no coverage will apply.

Question 21

All of the following are true about Universal Life EXCEPT:
A. The insured may increase the premium, but not the cash value
B. A current interest rate is used when interest rates are above the industry standard
C. If cash values increase too fast, the policy may be classified as a modified endowment
D. Premiums are flexible and may be changed at the option of the insured

Answer 21

Correct Answer(s): [A]
On Universal Life, whenever the insured pays more than the minimum premium required, the cash value will increase. UL has a guaranteed minimum rate of return, but will pay the current interest rate (which varies year to year) when interest rates in the economy are above the minimum guaranteed in the contract. Single premium UL policies might be classified as MECs, since cash values may build too fast.

Question 22

A client buys a Life insurance policy on July 1st and dies by suicide 6 months later. The insurance
company will:
A. Deny the claim
B. Deny the claim, but refund the premium
C. Pay half of the claim
D. Pay the claim in full

Answer 22

Correct Answer(s): [B]
How long the suicide exclusion lasts for varies by state. It is generally one or two years. If an insured should commit suicide before the suicide clause has passed by, the insurer will refund the premiums paid to the beneficiary. After the suicide clause has passed by, suicide is covered.

Question 23

A prospect's statements made in the application for insurance constitute a part of which of the following?
A. Consideration Clause
B. Incontestability Clause
C. Subrogation Clause
D. Co-insurance Clause

Answer 23

Correct Answer(s): [A]
The Consideration Clause states, "In consideration of the premium paid and the statements and answers contained herein, I hereby apply for Life Insurance with .......". The Incontestability Clause states that the insurance company may not contest a claim for any reason after the policy has been in force for two consecutive years. The Subrogation Clause has to do with Liability insurance and the Co- Insurance Clause has to do with Major Medical (Health) insurance.

Question 24

A producer takes an application from a proposed insured without receiving payment of the first premium. The insurance company issues the policy and, when the producer visits the proposed insured to deliver it, she realizes that the health of the applicant has deteriorated significantly since the application was taken. The producer should:
A. Rate the policy and obtain any additional premium required
B. Refuse to deliver the policy or to accept any premium offered
C. Deliver the policy as it was issued
D. Obtain the premium from the prospect and send it to the company immediately

Answer 24

Correct Answer(s): [B]
Remember, due to lack of consideration, no valid contract exists yet. Therefore, the producer, who is bound to protect the company, should refuse to deliver the policy or accept any premium offered.

Question 25

The life policy that has the highest cost if not kept in force for a long period of time is:
A. Decreasing term
B. Annual renewable term
C. Level term
D. Whole life

Answer 25

Correct Answer(s): [D]
Annual renewable term is the type of insurance used in most group life and has the lowest cost. Decreasing term is also very inexpensive, since the amount of coverage goes down over a period of time. Level term is the most expensive type of term insurance, since coverage remains constant as you grow older. However, although whole life is cheapest in the long run since its cash value lowers your net cost; it is most expensive in the short run, since cash values grow slowly.