Life Insurance Part XI

Question 1

The life insurance policy provision that prevents the insurer from modifying a policy after it has been
issued is the:
A. Insuring Clause
B. Consideration Clause
C. Entire Contract Clause
D. Incontestability Clause

Answer 1

Correct Answer(s): [C]

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 2

Margaret May wants to name her husband as the beneficiary of her Life policy; however, she wishes to
retain all of the rights of ownership. Mrs. May should name her husband as:
A. Irrevocable beneficiary
B. Revocable beneficiary
C. Secondary beneficiary
D. Tertiary beneficiary

Answer 2

Correct Answer(s): [B]

Most people are both the insured and the owners of their own Life insurance policies. As such, they
may designate any beneficiaries they desire and they may change their designation any time they so
choose, since their choice is revocable at their option. However, anyone may appoint an Irrevocable
Beneficiary if they so desire. This designation, once chosen, may never be changed by the insured
without the consent of the irrevocable beneficiary. Policy loans may not be taken without that
person’s consent either. Irrevocable designations are rare, but are sometimes used for business
purposes, in divorce settlements, or for children.

Question 3

Life insurance policies often exclude coverage for all of the following, EXCEPT:
A. Accidental death
B. War
C. Suicide
D. Dangerous hobbies

Answer 3

Correct Answer(s): [A]

Accidental death is covered by a Life insurance policy. Although some policies exclude death caused by
war, death due to dangerous hobbies (such as flying or sky diving) is covered, unless excluded by the
underwriter when the policy is first issued. Death due to suicide is excluded for a specific time period
after the policy’s effective date. The length of the suicide exclusion varies by state. It is generally one
to two years.

Question 4

All of the following are correct, EXCEPT:
A. The fact that a Life insurance policy is conditional means that future events must occur
B. If a client forgets to mention something on the application that is not considered fraud
C. The USA PATRIOT Act was created after September 11, 2001
D. HIV test results may be disclosed to the producer

Answer 4

Correct Answer(s): [D]

HIV test results, as well as all MIB information, may only be disclosed to the applicant’s Doctor.

Question 5

Upon the insured’s death 5 years after he bought the policy, the insurer determines that there was
material misrepresentation on application:
A. They will deny the claim
B. They will refund premiums
C. They will pay a portion of the claim
D. They must pay the claim

Answer 5

Correct Answer(s): [D]

Life insurance policies are only contestable for the first 2 years. After 2 years the policy is
incontestable, even for fraud. It helps to remember for Life insurance that “liars pray for two years
and then they are covered”! Just a silly saying that helps me remember, I hope it helps you.

Question 6

All of the following are true about a preferred risk for life insurance EXCEPT:
A. The premium is lower than the premium charged for a standard risk
B. The applicant has a longer than average life expectancy
C. The premium is lower than the premium charged for someone who smokes
D. The rates and benefits are based on the 1980 CSO Mortality Table

Answer 6

Correct Answer(s): [D]

Life insurance underwriting classifies 3 types of risk: preferred, standard or non-standard. The 1980
Commissioners Standard Ordinary (CSO) Mortality Table, based on the law of large numbers,
calculates the rates and benefits for the standard, or average risk presented by most people. A
preferred risk is better, so rates are lower. A non-standard risk, such as someone with a health
problem or dangerous hobby or occupation, would pay a surcharge or rate-up.

Question 7

Which of the following is true regarding a variable life policy?
A. The insurer decides how to invest the premium paid in
B. The premium is variable, depending upon the performance of the variable account
C. The insured decides how to invest the premium paid in
D. The insured determines the premium amount to be paid

Answer 7

Correct Answer(s): [A]

A variable life policy is a type of life insurance that invests in the stock market. The premium is fixed,
determined by the insurer based upon the risk classification of the client. The insured does not
determine how to invest the premium paid in. The premium paid in goes to the separate account of the
insurer and is invested as the insurer sees fit. The rate of return the cash value earns is variable.

Question 8

If a three person business partnership wants to buy Life insurance to fund a cross-purchase buy/sell
agreement, how many policies would you have to sell:
A. Six
B. Nine
C. One
D. Three

Answer 8

Correct Answer(s): [A]

In this example, a producer would have to sell 6 policies in order to make this work. For example,
Partner A would have to buy policies on both Partners B and C. Partner B would have to buy policies
on both Partners A and C, and Partner C would have to buy policies on both Partners A and B.
Premiums would not be tax deductible, and proceeds payable upon death would not be taxable.

Question 9

All of the following are differences between Straight Whole Life and a Life Paid up at age 65 (LP65)
policy EXCEPT:
A. The rate of cash value accumulation
B. The annual premiums
C. The maturity date
D. The premium paying period

Answer 9

Correct Answer(s): [C]

$1,000, payable to age 100, which is 70 years. At age 65, the cash value would be about $40,000.
However, a $100,000 LP65 policy purchased at age 30 would have an annual premium of about
$2,000, payable to age 65, which is 35 years. At age 65, the cash value would be about $80,000. The
shorter the premium paying period, the higher the premium, and the faster the cash values build.

Question 10

In order to sell variable life insurance you must be registered with which of the following?
A. The NASD
B. The State
C. The SEC
D. The NYSE

Answer 10

Correct Answer(s): [A]

In order to sell variable polices you must not only have your life insurance license, but also either a
Series 6 license (mutual funds and variable products) or your series 7 (stockbroker’s license). In order
to get your series 6 or series 7 you must be registered with the NASD (National Association of
Securities Dealers). The NASD is now known as FINRA (Financial Industry Regulatory Authority). You
may see the term NASD and/or FINRA on your exam.

Question 11

Life insurance Producers (agents) have the authority to:
A. Sign policies
B. Issue contracts
C. Collect premiums and deliver policies
D. Bind coverage

Answer 11

Correct Answer(s): [C]

A life agent’s duties are specified in a contractual agreement with the insurer. Agents may sign
applications, collect premiums, issue conditional receipts and deliver policies. However, it is the
insurer who signs and issues the policy. A binder of coverage is temporary evidence of insurance used
commonly by agents in the Property/Casualty area, not life or health. Binders may be oral or written,
and are valid until superseded by the policy.

Question 12

If a client wants cash value life insurance with a flexible premium and an adjustable death benefit that
will allow the policy owner a choice of various cash value investment options, he should buy:
A. Variable/Universal Life
B. Variable Life
C. Universal Life
D. Adjustable Life

Answer 12

Correct Answer(s): [A]

Variable Life has a fixed premium and a minimum guaranteed death benefit, but since it allows
customers to self-direct their cash value into several non-guaranteed sub-accounts, it is considered to
be a securities product which requires the producer to have both a state life insurance license and a
federal securities license. Although Universal Life (also known as ‘Interest-Sensitive’ Whole Life) is
not considered to be a security, it does offer ‘current’ rates of return, flexible premiums and
adjustable death benefits. If you combine the two products, you have Variable/Universal Life, which
offers the best features of both contracts.

Question 13

All of the following are true when you appoint an Irrevocable Beneficiary on your life insurance policy
EXCEPT:
A. They have a vested interest in your policy
B. You cannot take a policy loan without their consent
C. You cannot make any policy changes without their consent
D. They cannot be changed without their consent

Answer 13

Correct Answer(s): [C]

If you appoint an Irrevocable Beneficiary, you cannot make any changes to your policy that would
affect their interest therein, without their prior consent, such as taking a loan or cash surrender.
However, things that don’t have any effect upon their vested interest, such as changing the dividend
option on a participating life insurance policy issued by a mutual insurer, may still be changed without
their consent. However, a “revocable” beneficiary may be changed anytime.

Question 14

All of the following are true about Group life insurance EXCEPT:
A. It is convertible to whole life
B. It is convertible to term life
C. It is usually annual renewable term
D. It has no cash value

Answer 14

Correct Answer(s): [B]

Virtually all group life coverage is already term insurance, and you cannot convert term insurance to
term insurance. Group life is only convertible to a more expensive type of insurance, usually whole
life. Conversion is required by state law and may be done within 31 days of termination of your
employment. The face amount of the new policy will be the same as you had under the group, but no
physical exam is required. Dependent’s coverage may also be converted.

Question 15

Which of the following is not considered to be a 'qualified' plan?
A. 403b Tax Sheltered Annuity
B. IRA
C. Keogh
D. Split Dollar

Answer 15

Correct Answer(s): [D]

Tax qualified retirement plans receive special tax treatment from the IRS. However, a Split Dollar
plan, where an employer helps a valued employee buy Whole Life insurance by splitting the cost, is
considered to be a non-qualified plan, meaning that no special tax treatment applies.

Question 16

In which of the following would you have insurable interest?
A. Your neighbor
B. Your spouse
C. Your friend
D. Your co-worker

Answer 16

Correct Answer(s): [B]

You have insurable interest in yourself, your family members, and for business reasons (like a key
person).

Question 17

At age 30, Tom Morris wishes to purchase a Whole Life policy. His producer explains that he can pay for the policy in several ways. One method is called 20-Pay Life, and another, Straight Life. Tom wishes to know which plan will accumulate cash value at a faster rate in the early years of the policy.
Which of the following would be the producer’s most appropriate response?
A. Straight Life will accumulate cash value faster.
B. 20-Pay Life will accumulate cash value faster.
C. Both plans will accumulate cash value at the same rate.
D. The rate of cash-value accumulation depends on the profitability of the insurance company.

Answer 17

Correct Answer(s): [B]

You can simply remember this truism: The shorter the premium-paying period, the more expensive the
premiums and the faster the cash value builds. Since all the policies mentioned are forms of Whole
Life, reaching their maturity at age 100, the only thing different is the premium-paying period. A 20-
Pay Life requires that all the premiums be paid within 20 years from the day it is purchased. A Straight
(or Ordinary) Whole Life policy requires the premiums to be paid to age 100. If Tom is now 30, the
assumption is that he would have to pay premium to age 100, or 70 years. Obviously, 20-Pay Life,
which would require the premiums to be paid in over three times as fast, would be much more
expensive and would also build cash value much faster.

Question 18

If a life insurance policyholder dies in the grace period, the policy will pay:
A. The face amount, less any loans
B. Nothing, since the policy lapses as of the due date
C. The face amount, less any loans and overdue premiums
D. The face amount

Answer 18

Correct Answer(s): [C]

State law requires individual life policies to have at least a 30 day grace period, during which coverage
still applies. However, any loans and overdue premiums would be subtracted from the policy proceeds.
The grace period on group life is 31 days and it is 28 days on industrial life.

Question 19

Which of the following is true regarding the tax implications of a participating Individual Life insurance policy sold by a mutual insurer?
A. Proceeds paid to a beneficiary are not taxable
B. Premiums are tax deductible
C. Interest earned on dividends is not taxable
D. Dividends are taxable

Answer 19

Correct Answer(s): [A]

Participating Life insurance policies sold by mutual insurers often pay dividends, although they may not be guaranteed. If a dividend is declared, the policy owner may choose from several dividend options. Although cash dividends received are not taxable, if the policy owner elects to leave the dividend with the insurer to earn interest, the interest paid on the dividend is taxable as ordinary income.

Question 20

Which of the following statements is false?
A. With an Immediate Annuity the payments begin right away, the contract is annuitized in the beginning
B. On an Equity-indexed product, when the index performs well, the client’s premiums due will go down
C. Survivorship Life insurance is used in estate planning
D. An Annuity is designed in case you live too long

Answer 20

Correct Answer(s): [B]

On an Equity-indexed product, when the index performs well, the difference is credited to the cash value. Premiums do not change based upon performance of the index. On an Immediate Annuity payments begin right away, in the beginning. Annuity products are designed to pay out a dollar amount monthly for life. If the insurance company expects you to live to be age 80, but you live to be 98, you will continue receiving payments until you die at age 98. Survivorship Life insurance is designed to pay out when the last spouse dies. Estate tax calculations are done when the last spouse dies. As such, Survivorship Life insurance is often used in estate planning, sold in a face amount designed to be used to pay the expected estate tax.