Life Insurance Part X Flashcards
What type of Term Life insurance has a level premium and a policy limit that goes down over time? A. Decreasing Term B. Level Term C. Increasing Term D. Convertible Term
Correct Answer(s): [A]
Decreasing Term Life insurance is often written as 20 or 30-year mortgage redemption insurance.
Although the premium remains the same throughout the term of the policy, the face amount decreases
each year. As a result, there is no coverage remaining at the expiration of the term, so although most
Decreasing Term policies are convertible to Whole Life during their term, they are not renewable.
John Livingston owns a 30-Pay Life policy that he purchased at the age of 30. The cash value will
equal the face amount of the policy when he reaches the age of:
A. 30
B. 60
C. 100
D. 70
Correct Answer(s): [C]
Limited Pay Life insurance policies such as Life Paid Up at 65 or 20-Pay Life are simply variations of
Whole Life policies. The cash value will equal face amount of the policy (at least) at the maturity of the
policy, which is always age 100 on Whole Life policies. These limited-pay policies are designed so that
the insured may pay his or her premiums faster and be “paid up” at a certain age. However, just
because the premiums are paid up doesn’t mean the policy has matured.
A producer submits a completed and signed application to the underwriter along with the first premium check. After checking the results of the physical exam, the underwriter issues a ‘rated’ policy. Which of the following will not be required:
A. Additional premium to be collected at policy delivery
B. A statement that the applicant’s health has not changed since the physical exam
C. A new completed and signed application
D. An explanation of the rating or premium surcharge to the client
Correct Answer(s): [C]
When the underwriter issues a ‘rated’ policy, they are making a counteroffer. The applicant now has the choice of either rejecting the counteroffer or accepting it by paying the additional premium required. No new application is required.
All of the following are true regarding Key Employee life insurance EXCEPT:
A. Premiums are tax deductible for the employer
B. The employer is the policy owner and the beneficiary
C. Proceeds are not taxable
D. It is a policy based on third party ownership
Correct Answer(s): [A]
Although the premium an employer pays for Key Employee coverage seems like a business expense, it
is not tax deductible. However, proceeds payable are not taxable. A Key Person policy is designed to
provide funds for the employer to hire and train a replacement for a deceased key employee. The
employer is the policyholder and the beneficiary. The employer has an insurable interest in the key
person based upon economics. The key person is simply the insured.
Variable/Universal life insurance:
A. Has a guaranteed cash value
B. Allows the insured to self direct the cash value
C. Guarantees the rate of return
D. May be sold by any licensed Life insurance Producer
Correct Answer(s): [B]
Variable/Universal life is considered to be a “security”, and neither the cash value nor the rate of
return is guaranteed, so a NASD license is required in addition to your Life license. However, many
such contracts allow the insured to “self direct” the investment of the cash values. In other words, the
insurer may maintain several “sub-accounts” within the separate account, and the insured may move
his money from one sub-account to another periodically.
All of the following are a part of a Life insurance policy, EXCEPT the: A. Conditional Receipt B. Insuring Clause C. Incontestability Clause D. Copy of the application
Correct Answer(s): [A]
Under the Entire Contract provision, a copy of the insured’s application for Life insurance is attached
to the policy. If it weren’t, any false answers (misrepresentations) by the insured would not be
admissible in court, since they would not be part of the entire contract. However, the Conditional
Receipt is NOT part of a Life insurance policy. It is part of the application, and is torn off and given to
the applicant when he pays his initial premium at the time of application.
When someone other than the insured is the owner of a Life insurance policy, the owner may do all of
the following without the insured’s consent, EXCEPT:
A. Increase the amount of insurance
B. Surrender the policy for its cash value
C. Change the beneficiary
D. Make a policy loan
Correct Answer(s): [A]
As owner of the policy, this “third party” has the right to control the policy, including the beneficiary
designation, taking a loan, or even surrendering the policy for cash. However, under the Doctrine of
Insurable Interest, the policy owner would need the written consent of the insured to increase the
policy limits. Remember, Life insurance policy limits may not usually be increased once the policy is in
force, unless the policy contains the Guaranteed Insurability Rider (GIR).
All of the following are factors in determining the amount of Key Person life insurance an employer
should buy on an employee EXCEPT:
A. The amount it would cost to conduct a job search for a replacement
B. The amount of group life coverage the employee already has
C. The amount it would cost to train a replacement
D. The amount of income lost until the key person can be replaced
Correct Answer(s): [B]
The proceeds of Key Person life go to the employer. The proceeds of group life go to the beneficiary
designated, often the spouse, so it makes no difference how much group life the employee has. The
premiums paid by the employer for Key Person life are not tax deductible, but proceeds are received
tax free. This is a type of 3rd party ownership. The employer owns the policy, but the employee is the
insured.
In a policy insuring the life of a child, which of the following allows the premiums to be waived in the
event of the death or disability of the person responsible for premium payments?
A. Waiver of Premium provision
B. Reduction of Premium option
C. Payor Benefit Rider
D. Reduced Paid-Up option
Correct Answer(s): [C]
The Payor Provision (sometimes called Payor Waiver of Premium) is an optional provision (or rider)
often added to a policy insuring the life of a minor. The adult (usually the parent) may become sick or
disabled and become incapable of paying the premium. This rider will then pay the premium on behalf
of the sick or disabled payor. However, it is exactly like the Waiver of Premium Rider you would see on
your own Life insurance policy in that both riders have a 6-month “waiting period” before premiums
are retroactively paid. Both riders cost extra and will automatically drop off at age 60 or 65 at which
time the premium would be reduced. The extra premium for these riders must be shown separately
from the premium charged for the Life insurance. None of the extra premium charge goes toward
cash-value accumulation.
The Life insurance rider that will pay the insured's premium after a period of disability due to accident or sickness is: A. Automatic Premium Loan B. Waiver of Premium C. Accidental Death and Dismemberment D. Guaranteed Insurability
Correct Answer(s): [B]
Waiver of Premium is a type of Health (also known as Disability) insurance that may be added to a Life
policy for an additional premium. If the policy owner becomes totally disabled for a period of at least 6
months, the insurer will waive future premiums due until the policy owner recovers.
What are the tax implications when an annuitant elects to take cash surrender of a deferred annuity
during the accumulation period at age 56:
A. Only the interest is taxable as ordinary income
B. All the funds distributed are taxable as ordinary income
C. Only the interest is taxable as ordinary income, plus a 10% early withdrawal penalty
D. All of the funds distributed are taxable as a capital gain
Correct Answer(s): [C]
Most annuities are non-qualified, which means they were purchased with after tax dollars. The amount
you paid in is your cost basis, which will be returned to you someday tax free. Only the interest is
taxable as ordinary income, but since the client is under age 59 and 1/2, there is also an IRS 10%
early withdrawal penalty levied on the interest. Response B is correct as far as it goes, but D is a
better answer.
The Employees Retirement Income Security Act (ERISA) requires all of the following EXCEPT:
A. Uniform treatment of all eligible employees
B. Vesting of employer contributions after a period of time
C. Employer contributions to be made in after tax dollars
D. Favorable tax treatment for both the employer and employees
Correct Answer(s): [C]
ERISA regulates “Qualified Plans, such as corporate pension plans, by establishing eligibility
requirements, requiring “vesting” of employer contributions and prohibiting discrimination in favor of
highly paid employees. Vesting means ownership, and if you are fully vested, the money in plan
belongs to you. Although the employer’s contributions are made in before tax dollars, neither the
contributions nor the interest earned is taxable to the employee until distributions begin.
Grandma owns a policy on her grandchild. Which rider would kick in if Grandma should die tomorrow? A. Child Term Rider B. Guaranteed Insurability Rider C. Payor Benefit Rider D. Waiver of Premium Rider
Correct Answer(s): [C]
By adding the Payor Benefit Rider on a policy Grandma owns that covers the life of the child, the
premium will be waived in the event of Grandma’s death or total disability, keeping the grandchild’s
policy in force, until the grandchild reaches the age of majority. At the age of majority the policy
becomes the responsibility of the grandchild.
In most states, when a group life insurance plan is written on a contributory basis, the group plan
must insure at least:
A. 50% of the eligible group members
B. 75% of the eligible group members
C. 100% of the eligible group members
D. No participation requirements apply to contributory group plans
Correct Answer(s): [B]
Participation requirements protect the insurer from “adverse selection”. If no minimum percentage of
participation is required, then perhaps only those with health problems would enroll, causing the
insurer to experience a high loss ratio. The premiums are shared by the employer and the employee on
a contributory group and at least 75% must enroll. 100% must enroll in a non-contributory group
plan.
Which of the following is true regarding KEOGH (HR 10) plans?
A. The maximum contribution 15% of earned income
B. They are non-qualified plans
C. They are for employees of public educational institutions
D. They are for the self employed or partners only
Correct Answer(s): [D]
A Keogh plan is a qualified plan for the self employed and partners only. The maximum contribution
limit into a KEOGH varies by year. Corporations may set up SEP IRAs, but not Keoghs. Public
educational institutions, charities and religious organizations utilize 403B tax sheltered annuities
(TSAs).
