Life Insurance Policies Flashcards

1
Q

Any employee insured under a group life insurance plan is normally

required to show proof of insurability
covered with term life insurance
given a master certificate
covered on a noncontributory basis

A

Employees covered under a group life plan are normally insured with term insurance.

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2
Q

Group life insurance is typically issued as

whole life insurance
level term insurance
increasing term insurance
decreasing term insurance

A

Group life insurance is typically issued as level term insurance, which provides a fixed amount of coverage throughout the term of the contract.

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3
Q

What are premiums for group credit life insurance based on?

The average age of the borrower over the life of the debt
The age of the borrower at the time debt is incurred
The age of the borrower when debt is paid off
Flat rate unrelated to the borrower’s age

A

Premiums for group credit life insurance are based on claims experience and expense factors, not necessarily the borrower’s age.

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4
Q

What minimum percentage of all eligible employees must participate in a group life insurance plan if the premiums are completely paid for by the employer?

50%
100%
0%
75%

A

correct answer is “100%”. If group life insurance premiums are completely paid for by the employer, the minimum percent of eligible employees required to be covered is 100%.

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5
Q

If an employer pays for accidental death and dismemberment insurance for its employees, the amount paid by the employer is generally

considered taxable income to each employee
tax deductible to the business
partially deductible to the business
non-deductible to the business

A

The amount that an employer pays for their employees’ accidental death and dismemberment insurance is deductible to the business.

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6
Q

Which action will trigger a penalty tax on premature distributions from a modified endowment contract (MEC)?

claim on a death benefit
policy loans
extended term settlement option
policyowner reaching the age of 70 1/2

A

If a policy is classified an MEC, policy loans will be subject to penalty taxes.

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7
Q

What typically changes at the re-entry option date found in some term life policies?

contestable period
amount of coverage
beneficiary
premium

A

A re-entry option gives the insured the opportunity to provide evidence of insurability at the end of the term to qualify to renew the policy at a lower premium.

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8
Q

What is an insurance contract that identifies individuals by relationship to a specific organization?

Industrial insurance
COBRA plan
Employer insurance
Group insurance

A

An insurance policy that covers individuals of a particular organization is called group insurance.

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9
Q

When would evidence of insurability be required for a person already covered with a variable universal life policy?

When the premium is increased
When policy is being converted to permanent coverage
When the policy has renewed
When the death benefit is increased

A

Evidence of insurability is normally required when the death benefit is increased in a variable universal life policy.

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10
Q

Which statement about group life insurance is INCORRECT?

A minimum number of employees participating may be required
Each participant requires evidence of insurability
Employer is issued a master policy
Cost can be shared between employer and employee

A

Evidence of insurability is NOT normally required of each participant in group life insurance.

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11
Q

Which of the following would NOT be a reason for purchasing life insurance on a child’s life?

Provide benefits for the child if the parents die
Help provide funds for the child’s education
Provide a start on the child’s personal insurance
Pay for the child’s funeral expenses

A

An insurance policy on a child would not pay any benefits if one or both of the parents died. All of the other answers are valid reasons for buying life insurance on a child.

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12
Q

Which of the following statements about universal life insurance is NOT true?

Premiums are flexible
Universal life insurance normally has a minimum guaranteed cash value for duration of the policy
Death benefit can be increased
The cash value interest rate must equal or exceed a guaranteed minimum value

A

All of these statements about universal life insurance are true EXCEPT “Universal life insurance normally has a minimum guaranteed cash value for duration of the policy”.

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13
Q

Which statement regarding the certificate of insurance is accurate?

It indicates evidence of an employee’s insurance coverage
It is an insurance contract between the employer and insurer
It is issued by the employer to the employee
Each certificate of insurance is underwritten on an individual basis

A

It indicates evidence of an employee’s insurance coverage”. The certificate of insurance serves as evidence of an employee’s coverage in a group life plan.

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14
Q

Which of these statements accurately portrays an adjustable life insurance policy?

Cash value loans are not permitted
Evidence of insurability required for conversion
Settlement options are limited
Policy can alternate between forms of term and whole life insurance

A

Adjustable life insurance allows the policyowner to adjust the policy’s face amount, premium, and type of protection without having to complete a new application or exchange policies. Example: converting a term policy to whole life or vice versa.

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15
Q

Why do insurers require a minimum number of employees participate in a group insurance plan?

Profits are maximized
Efficiency is maximized
Minimize adverse selection
Claims are minimized

A

The larger the group to be insured, the more predictable will be the expected losses from the group.

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16
Q

Which statement regarding universal life insurance is correct?

Policyowner can change the premium but not the face amount
Cash value accumulations have a guaranteed minimum interest rate
Partial withdrawals cannot be made from the policy’s cash value
Policyowner can change the face amount but not the premium

A

The correct answer is “Cash value accumulations have a guaranteed minimum interest rate”. Cash value accumulations are subject to a minimum interest guarantee in universal life insurance.

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17
Q

An employer has a group life coverage for his employees. How would an employee in poor health be treated in this situation?

Eligible for the same type of coverage as the other employees
Must pay a rating based on risk
Approved on a graded basis
Not eligible for insurance on this plan

A

Group insurance policies are not written on an individual basis so an employee in poor health is eligible for the same coverage as the other employees in the group

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18
Q

Which type of life insurance policy allows a policyowner the choice of investments along with flexible premium payments?

Variable universal life
Graded premium whole life
Modified endowment contract
Adjustable life

A

Variable universal life involves a guaranteed death benefit plus premium and investment flexibility.

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19
Q

The conversion option for group term insurance may be exercised by an employee

at any time while still employed
after providing proof of insurability
within 2 years of the hire date
within 31 days of terminated employment

A

An employee has 31 days after terminated employment to exercise the conversion option.

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20
Q

Which type of policy can group term life insurance normally be converted to?

An individual permanent life insurance policy
An individual renewable policy
An individual level term policy
A group permanent life insurance policy

A

Group term insurance can typically be converted to a permanent individual life insurance policy.

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21
Q

Which statement regarding the cash value of a whole life insurance policy is correct?

Starts growing with the initial premium
Available to the policyowner when policy has been surrendered
Can be borrowed against, starting in the policy’s fifth year
Cash value accumulation is based on the performance of a separate investment account

A

Cash value is available to policyowners when policies are surrendered.

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22
Q

A “premature” distribution from a modified endowment contract (MEC) incurs a penalty tax of

17.50%
5%
20%
10%

A

Penalty taxes (10%) on premature distributions prior to age 59 1/2 from a modified endowment contract (MEC) normally apply to policy loans.

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23
Q

A life policy that has premiums that are lower than normal during the early years is called

Decreasing term
Variable life
Limited-pay life
Modified life

A

Modified life has premiums that are lower than normal during the early years of the policy.

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24
Q

Which type of life insurance policy is best suited for paying off the outstanding balance of a 30-year mortgage in the event of the insured’s death?

30-year increasing term
30-year decreasing term
30-year whole life
30-year endowment

A

Decreasing term life insurance provides a death benefit that gradually decreases over the span of the policy. Decreasing term life insurance is commonly used for paying off an outstanding mortgage balance in the event of an insured’s death (mortgage insurance).

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25
Q

A nonparticipating whole life insurance policy was surrendered for its $20,000 cash value. The total premiums paid had totaled $16,000. What were the federal income tax consequences to the policyowner on receipt of the cash value?

$20,000 was received as ordinary income
$20,000 was received as a capital gain
$16,000 was received as ordinary income and $4,000 as tax-free
$16,000 was received tax-free and $4,000 as ordinary income

A

In this situation, the policyowner would receive $16,000 tax free and $4,000 as ordinary income.

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26
Q

All of these statements concerning group credit life insurance are false EXCEPT

The face amount is based on the outstanding loan balance
Cash value loans are allowable
Dividends can reduce the premium payments
The face amount and premiums are flexible

A

The amount of credit life insurance applied for is based on the outstanding loan balance amount.

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27
Q

A survivorship life insurance policy usually covers how many lives?

2
3
1
4

A

Survivorship life insurance policies insure the lives of two people. It is a variation of a joint life policy that also insures the lives of two people.

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28
Q

How are level term policies able to provide level premiums?

Policy dividends
Premiums are averaged over the term of the policy
Yearly reductions in face amount
Yearly policy fees

A

Level term policies are able to offer level premiums because the premiums are averaged over the term of the policy.

29
Q

Assets that back the non-guaranteed values of variable life insurance products are held in which account?

General account of the insurer
Separate account set up by the insurer
Money market account
Trust account set up by the insured

A

Assets that back the non-guaranteed values of variable life insurance products are held in a separate account set up by the insurer. The assets that back the non-guaranteed values of variable life insurance products are held in a separate account managed by the insurance company, which functions similarly to a mutual fund and allows policyholders to choose from various investment options like stocks and bonds; the performance of these investments directly impacts the cash value of the policy.

30
Q

How long does protection normally extend to under a limited pay whole life policy?

It depends on the performance of the underlying investment account
Until age 100
When premiums are no longer required as stated in the contract
Until age 65

A

Under a limited payment whole life insurance policy, protection usually continues to age 100.

31
Q

The insurance coverage in a variable life insurance policy may vary based on the value of

the AM Best rating the company has received
its underlying investments
the total premiums paid
the consumer price index

A

The amount of insurance protection in a variable life insurance policy may vary according to the value of its underlying investments.

32
Q

These are all accurate statements regarding universal life insurance EXCEPT

Mortality charge is deducted from the policy’s cash value each month
Flexible premiums as long as the cost of insurance protection is covered
Policy loans are not permitted
Policy states what percentage of the premium is contributed to the cash value and which pays for the cost of insurance

A

Policy loans are allowed in universal life insurance policies.

33
Q

A policyowner has just borrowed from a life insurance policy’s cash value. Which of these statements is true?

A policyowner must pre-qualify for the loan to determine creditworthiness
The policy lapses if not repaid within 5 years
Interest on the loan amount is prohibited
In the event of death, the loan amount is deducted from the policy proceeds

A

If a life insurance policyowner borrows the cash value of a policy, the amount of the loan outstanding is deducted from the policy proceeds.

34
Q

What is the guaranteed cash value of a whole life insurance policy when the insured turns 65 years old?

Equal to the policy’s face amount
Less than the policy’s face amount
Depends on the performance of the separate underlying investment account
Greater than the policy’s face amount

A

When an insured reaches the age of 65, the guaranteed cash value of a whole life policy will be less than the face amount of the policy.

35
Q

An insurance policy that can also be classified as a securities product is called

modified life
universal life
variable life
a Modified Endowment Contract

A

Because of the transfer of investment risk from the insurer to the policyowner, variable insurance products are considered securities contracts as well as insurance contracts.

36
Q

John received a one-time distribution of $50,000 from his modified endowment contract (MEC). Prior to that, the contract’s cash value was $150,000, the contract investment amount was $100,000, and the death benefit was $500,000. What percentage of the $50,000 distribution was taxable as ordinary income?

50%
0%
100%
25%

A

Funds withdrawn from an MEC are subject to last-in first-out (LIFO) tax treatment, which assumes that the investment or earnings portion of the contract’s values is withdrawn first (making these funds fully taxable as ordinary income).

37
Q

Which of these must be disclosed in a universal life policy?

The commissions earned from the sale of the policy
The producer’s license expiration date
The policy’s surrender charges
Maximum coverage that can be purchased

A

The surrender charges of a universal life policy must be disclosed.

38
Q

At what point are death proceeds paid in a joint life insurance policy?

If both insureds die from the same accident
Only after insurable interest has been confirmed to still exist
When the second insured dies
When the first insured dies

A

A joint life policy covers two or more lives and provides for the payment of the proceeds at the death of the first among those insured, at which time the policy terminates.

39
Q

Which of these policies is considered a whole life policy?

Renewable life
Single premium life
Credit life
Convertible life

A

A single-premium life policy is considered a type of whole life insurance.

40
Q

How does a continuous premium whole life policy differ from a limited payment whole life policy?

The availability of nonforfeiture options
The time period in which premiums will be paid
The settlement options
The availability of cash value loans

A

The feature that separates a continuous premium whole life policy from a limited payment whole life policy is the length of time premiums will be paid.

41
Q

Which statement concerning adjustable life insurance is accurate?

The face amount and premiums can be changed simultaneously by the policyowner
Cash value loans are not permitted
Settlement options are limited
Only the face amount can be changed by the policyowner

A

Adjustable life insurance combines features of both term and whole life coverage. Length of coverage, accumulated cash value, and the premiums can be adjusted to fit specific needs.

42
Q

Rick owns a variable universal life policy and chooses a variable death benefit option. What will typically happen to the death benefit as a result of this selection?

Fluctuate with changes in the cash account
Decrease but never increase
Remain the same
Increase but never decrease

A

When a variable universal life policyowner selects a variable death benefit option, the death benefit generally will fluctuate with changes in the cash account.

43
Q

Which statement concerning an adjustable life insurance policy is FALSE?

Evidence of insurability is required when there is a change in premium
An extra premium paid is allowable
Cash surrender is possible
Combines term and permanent insurance into a single plan

A

All of these statements about an adjustable life insurance policy are true EXCEPT “Evidence of insurability is required when there is a change in premium”.

44
Q

How does the cost for a survivorship life policy compare to the cost of combining two separate individual life insurance policies?

Depends on the investment performance of the underlying accounts
Both have the same actuarial costs
Survivorship life policy is higher
Survivorship life policy is lower

A

Compared to the combined premium for separate life insurance policies on two individuals, the premium for a survivorship life policy is lower.

45
Q

What is the face amount of a $50,000 graded death benefit life insurance policy when the policy is issued?

Under $50,000 initially, but increases over time
Under $50,000 initially, but decreases annually over time
$0
$50,000

A

The correct answer is “Under $50,000, but increases annually until fully insured”. The initial face amount of a $50,000 graded death benefit life insurance policy is under $50,000, but increases annually until fully insured.

46
Q

Who normally pays the premiums for group credit life insurance?

Creditor and borrower share the cost equally
Beneficiary
Creditor
Borrower

A

The correct answer is “Borrower”. The borrower typically pays the premiums on any credit life insurance policy.

47
Q

What type of life insurance policy covers two or more persons and pays the face amount upon the death of the first insured?

Survivorship life
Joint life
Universal life
Joint and survivorship

A

A joint life insurance policy covers two or more individuals with the face amount payable upon the death of the first insured.

48
Q

Laura added a children’s rider to her life insurance policy. What type of coverage was added?

Decreasing term
Increasing term
Level term
Juvenile term

A

The correct answer is “Level term”. Level term is provided by adding a children’s rider to a life insurance policy.

49
Q

Peter, age 50, surrenders his modified endowment contract (MEC). How is the gain treated in terms of federal income taxes?

The gain is treated as taxable income but no additional penalties are applied
The gain is treated as taxable income and a penalty tax is imposed on the gain
Surrendering an MEC is considered a tax and penalty-free transaction
The gain is not taxable but a penalty is assessed

A

If an MEC is surrendered prior to age 59 1/2, the gain is taxable as well as a 10% penalty imposed on that gain.

50
Q

What would be considered an advantage of purchasing term life insurance?

Cash value can be borrowed against
The initial premium is lower compared to an equivalent amount of whole life coverage
Nonforfeiture values are available
The coverage is permanent

A

The initial premium is typically lower on a term policy than for the same amount of whole life insurance.

51
Q

A material change in a modified endowment contract (MEC) results in

the seven pay test, adjusted for cash value, applies again
the contract becoming void
a tax penalty
a new contestable period

A

Under the rules for an MEC, if there is a material change in the contract, the seven pay test applies again.

52
Q

Which is an accurate description of the premium in a graded premium life insurance policy?

Annual decreases in premium for a stated number of years then remains level
Annual increases in premium for a stated number of years then remains level
Level premium for a stated number of years then decreases annually for the remainder of the contract
Level premium for a stated number of years then increases annually for the remainder of the contract

A

With a graded premium life insurance policy, the premium increases yearly for a stated number of years then remains level.

53
Q

All of these are considered features of whole life insurance EXCEPT

Cash value accumulation
Permanent coverage
Policy loans are allowed
Initial premium is lower than for an equivalent amount of term insurance

A

The initial cost of whole life insurance is actually HIGHER than an equivalent amount of term insurance.

54
Q

Which of the following combinations best describe a universal life insurance policy?

A term insurance policy and a whole life policy
A modified endowment policy and an annual term insurance policy
A mutual fund and an endowment policy
A flexible premium deposit fund and a monthly renewable term insurance policy

A

The correct answer is “A flexible premium deposit fund and a monthly renewable term insurance policy”. A universal life insurance policy can be described most accurately as a combination of a flexible premium deposit fund and a monthly renewable term insurance policy.

55
Q

An advantage of owning a flexible premium life insurance policy would be

Premiums are fixed for the first 5 years
The insurer can make policy changes without difficulty
The policyowner can make policy changes without difficulty
Evidence of insurability is required with any change in premium

A

One advantage of owning a flexible-premium life insurance policy is that changes may be made without difficulty by the policyowner.

56
Q

Under an adjustable life insurance policy, which of the following may NOT be changed without further underwriting?

The person insured
The payment period
The plan of coverage
The period of coverage

A

All of these may normally be changed without further underwriting in an adjustable life insurance policy EXCEPT for “The individual who is insured”.

57
Q

What type of premiums are associated with individual mortgage protection life insurance policies?

Level premiums
Modified premiums
Flexible premiums
Decreasing premiums

A

Decreasing term policies are normally used for mortgage protection life insurance to which the premium remains level, but the coverage decreases over time.

58
Q

An individual who purchases a modified life insurance policy expects

a flexible face amount
coverage for two people
a higher rate of return
an improvement in future income

A

The purpose of modified whole life policies is to make the initial purchase of permanent insurance easier and more attractive, especially for individuals who have limited financial resources, but the promise of an improved financial position in the future.

59
Q

Which of the following could be a future use of the cash value that builds in a recently-purchased whole life insurance policy?

Gives policyowner ability to borrow against funds within two years
Increases the policy’s face amount
Provide supplemental income in 35 years
Convert the cash value to a paid-up term policy

A

The correct answer is “Provide supplemental income in 35 years”. Whole life policies typically begin to accrue cash value during the 3rd year after issue. The cash value that accumulates can be used to supplement income during retirement years.

60
Q

Which of the following is a TRUE statement regarding universal life insurance?

Policy loans are not permitted
Premiums or face amount cannot be changed
Policy indicates how much of each premium is used toward company expenses
Death benefits are normally taxable

A

Premium payments are separated and paid toward the insurance protection. The loading cost and the remaining balance is used to build the cash value.
Unlike other policies, universal life insurance is transparent about how your premiums are allocated, showing you how much goes towards company expenses, cash value accumulation, and the death benefit.

61
Q

When a ten year renewable term life insurance policy issued at age 45 is renewed, the premium rate will be the current rate for

Yearly renewable term insurance for a person aged 55
Ten year term insurance for a person aged 45
Yearly renewable term insurance for a person aged 45
Ten year term insurance for a person aged 55

A

A ten year renewable term policy permits the policyowner to renew the same coverage for another ten years at the end of the first ten-year term. The premiums for the renewal period will be higher than the initial period.

62
Q

Which of these is NOT a reason to buy a term life policy?

To pay a mortgage balance if an insured dies
To offer low-cost insurance coverage
To accumulate savings
To offer temporary protection

A

All of these are valid reasons for purchasing term insurance EXCEPT to accumulate savings.

63
Q

When does the insured stop making payments under a thirty-payment whole life policy?

At the time of death or 30 years after the policy’s inception, whichever comes first
It depends on the performance of the underlying investment account
When the cash value surpasses the face amount
At age 100

A

Under a thirty-payment whole life insurance policy, the insured stops paying premiums at the earlier of date of death or 30 years after the policy’s inception.

64
Q

Which of these is NOT considered a type of limited payment whole life insurance?

15 payment life
Life paid-up at 65
Endowment at age 70
20 payment life

A

All of these are forms of limited payment whole life insurance policies EXCEPT an Endowment at age 70.

65
Q

What is a juvenile life insurance policy?

A life policy that covers the life of a minor
A life policy that covers the lives of both the parents and their children
Coverage normally sold as a term rider
A life policy that covers the parents of a minor

A

A juvenile life insurance policy is a life insurance policy that insures the life of a minor. Also known as child life insurance, is a permanent life insurance policy that covers a minor. It’s a financial tool to protect a family from unexpected costs and to help build a financial foundation for the child.
How it works
The policy is usually owned by the adult who purchases it.
The child is the insured, but they technically don’t own the policy.
The parent or guardian is the beneficiary.
The policy lasts for the child’s life, as long as premiums are paid.
The policy can be transferred to the child when they become an adult.

66
Q

Which of these may NOT be deducted from premium payments or the cash value of a variable life insurance policy?

Administrative charges
Federal premium taxes
Investment management fees
Mortality costs

A

All of these are allowable deductions to be made from premium payments or the cash value of a variable life insurance policy EXCEPT Federal premium taxes.

67
Q

Which statement regarding a single premium life insurance policy is NOT correct?

Additional premiums may be required under certain conditions
Policy loans are permitted
No further premiums are necessary
Cash value is immediately created

A

Only one premium payment is required with a single premium life insurance policy.

68
Q

Which statement regarding an adjustable life insurance policy is NOT true?

Policy loans are not permitted
Combines term and permanent insurance into a single plan
Plan of coverage may be changed by the policyowner
Allows flexibility as insurance needs change

A

If the adjustable life policy has cash value, the policyowner is permitted to take out a policy loan.