Life Insurance Policies

Question 1

The Human Life Value is one of the two ways to determine the appropriate amount of personal Life Insurance. Describe the Human Life Value.

Answer 1

The Human Life Value takes into consideration the INCOME that will be EARNED OVER THE WORKING LIFETIME of the insured person (normally considered from the current ago until age 65 or 70). Enough insurance is purchased to cover the loss of income the surviving family will incur at the insured’s death.

Question 2

Describe the Needs Approach method of determining the appropriate amount of personal Life Insurance.

Answer 2

The Needs Approach looks at the SPECIFIC NEEDS of the surviving family (ex. enough to cover things like mortgage, debts, last expenses, college funding for kids, income for family, etc.). TWO CALCULATIONS are used: (1) the first calculation is for the lump sum of money needed for immediate needs, and (2) the second calculation determines the income the family will need for day-to-day living, in addition to Survivors’ Income and SS (note that this should also take into consideration the SS “Blackout Period.”

Question 3

What are five examples of personal uses for Life Insurance?

Answer 3

(1) Creates an estate, (2) To accumulate cash value for emergencies/opportunities, (3) Provide liquidity, (4) Estate conservation, and (5) Provide income for surviving family.

Question 4

When business partners enter into a Buy/Sell agreement funded by a Life Insurance policy, and the owners of the business buy Life Insurance on each other, what type of Buy/Sell agreement is this?

Answer 4

This is a Cross Purchase Buy/Sell Agreement. Cross Purchase allows the owners of a business to buy Life Insurance on each other, each partner is the POLICY OWNER, PREMIUM PAYOR, and BENEFICIARY of a Life Insurance Policy on each of his partners’ lives. Upon the death of a business partner, the proceeds will be used to buy out the share of the deceased partner(s).

Question 5

In a Buy/Sell Agreement, in regards to taxes, the premiums paid are _______________ and the proceeds are ______________.

Answer 5

With a Buy/Sell Agreement, the premiums paid are NOT TAX DEDUCTIBLE, and the proceeds are NOT TAXED.

Question 6

When the owners of a business enter into a Buy/Sell Agreement in which they enter an agreement with a legal entity (a trust), and not with one another, this type of Buy/Sell is what?

Answer 6

This is an Entity Purchase, in which the owners enter an agreement with a legal entity (a trust), and not with one another. The TRUST is the POLICY OWNER, APPLICANT, and BENEFICIARY of each policy purchased. Upon death of an owner, the trust gets the death benefit and buys out the share of the deceased partner(s) and pays the deceased owners’ heirs.

Question 7

Describe Key Person Life Insurance.

Answer 7

Key Person Life Insurance protects the COMPANY against the death of a KEY EMPLOYEE. The company owns the policy, pays the premiums, and is the beneficiary. The key employee derives NO BENEFIT.

Question 8

With regard to Key Person Life Insurance and taxes, the premiums paid are _____________ and the proceeds are _______________.

Answer 8

With regard to Key Person Life Insurance and taxes, the premiums paid are ARE NOT TAX DEDUCTIBLE and the proceeds are INCOME TAX FREE.

Question 9

When a small corporation raises an executive employee’s pay to match the premium that is paid for the personally-owned Life Insurance covering the employee, this type of business use for Life Insurance is called _______________.

Answer 9

Executive Bonuses. The policy is owned COMPLETELY by the employee, and the business gets NO GAIN from the policy at the executive employee’s death.

Question 10

With regards to Executive Bonuses and tax considerations, the increase in the employee’s pay us ______________ and the increase in pay is ____________ to the employee.

Answer 10

With regards to Executive Bonuses and tax considerations, the increase in pay is TAX DEDUCTIBLE TO THE COMPANY AS SALARY, and the increase in pay is TAXABLE INCOME to the employee.

Question 11

If a person is considered terminally ill (life expectancy of less than 24 months), chooses to sell their Life Insurance policy at a discount to a group of investors, what is this called?

Answer 11

This is a Viatical Settlement, in which a terminally ill person sells their Life Insurance policy at a discount to a group of investors. Example: A policy with a face amount of $1,000,000 is sold for $800,000.

Question 12

What is the person or company that on behalf of a Viator, and for a fee, offers or attempts to negotiate Viatical Settlements?

Answer 12

Viatical Settlement Broker

Question 13

To become a Viatical Broker, the initial license fee is $_______ and the annual renewal fee is $_________.

Answer 13

$500 is initial license fee, and the annual renewal fee is $100.

Question 14

To become a provider of a Viatical broker, the initial license fee is $______, and the annual renewal fee is $______.

Answer 14

The provider’s initial license fee is $1000, and the annual renewal fee is $500.

Question 15

Which type of ordinary Life Insurance develops a cash value after the third year?

Answer 15

Whole Life (sometimes called Cash Value Life Insurance or Permanent Life Insurance) is a Life Policy that runs for the insured’s WHOLE LIFE - that is, until death or the ultimate age on the mortality table being used (usually age 120).

Question 16

What type of ordinary Life Insurance is purchased to cover temporary needs over a specific period of time (ex. to cover a bank loan or mortgage)?

Answer 16

Term Life Insurance (term = temporary, written for a specific period of time). Term Life Insurance DOES NOT HAVE cash value accumulation, and is issued to remain in force for a specified period of time, following which it is subject to renewal or termination.

Question 17

What is the main difference between an Endowment Policy and a Whole Life Policy?

Answer 17

An Endowment policy is similar to Whole Life, but it matures (endows) PRIOR to age 95. If the insured is alive at the end of the premium paying period, he receives the face amount of the policy. If the insured dies BEFORE maturity, the beneficiary receives the proceeds.

Question 18

Would a policy with a Mutual company for Life Insurance be a participating or non-participating policy?

Answer 18

A Life Insurance policy from a Mutual company (owned by the policyowners) would be a PARTICIPATING policy, which means the policyowners are eligible to receive dividends.

Question 19

What type of Life Insurance and Annuities have guaranteed rates of return?

Answer 19

Fixed Life Insurance and Annuities have guaranteed rates of return. The cash values are invested in the company’s general account, which is invested conservatively.

Question 20

Monthly, quarterly, Semi-Annually, and Yearly are examples of _____________.

Answer 20

Premium Modes, which is the method and frequency with which a premium is paid to an insurance company.

*NOTE: Single Premium is NOT a premium mode, because MODES represent some type of REPETITIVE premium.

Question 21

What two items must an agent give an applicant for Life Insurance prior to accepting the initial premium?

Answer 21

Agents must give applicants for Life Insurance a Life Insurance Policy Summary and Buyer’s Guide prior to accepting the first premium.

Question 22

Upon replacement, the replacing insurance company must notify the existing insurance company within ____ days.

Answer 22

Five

Question 23

Insurance companies must give a ____ day Free Look upon replacement.

Answer 23

Insurance companies must give a 30-DAY FREE LOOK upon replacement.

Question 24

What do Gross Premiums consist of?

Answer 24

Gross Premiums consist of mortality expense, PLUS company expenses (also called loading, an example is the commission paid to an agent), MINUS any interest earned.

Question 25

A conditional receipt is never given, unless ________________.

Answer 25

The conditional receipt is never given, unless the premium is received.

Question 26

True or False: An insurance company may not refuse a risk based solely on the data supplied by the MIB.

Answer 26

True.

Question 27

The document that contains information to help prospective life insurance buyers make an informed choice is called a __________.

Answer 27

Buyer’s Guide. The buyer’s guide is a condensation of information that Ohio regards as necessary for a buyer to make an informed decision.

Question 28

What is the earliest age at which a worker might be eligible for early retirement benefits?

Answer 28

62. The worker mat retire as early as age 62 and receive a payment lower than the amount that could be received at full retirement age. Surviving spouses may elect benefits (widow or widower benefits), which are even more greatly reduced, as early as age 60.

Question 29

With three partners in a business, how many life insurance policies would be required to insure a cross purchase buy/sell plan?

Answer 29

Six policies. Under the cross purchase, each partner would buy a policy on each of the other two owners. The total would be: 3 x 2 = 6

Question 30

ABC Computers uses a corporate check to pay the premiums for key employee life insurance on the life of Joe, its most prized employee. How do the taxes work on this transaction?

Answer 30

The company does not deduct the premium, and the benefits are income tax free. This arrangement benefits the company directly; so, it cannot deduct premiums, but the payout on Joe’s death is income tax free.

Question 31

The applicant for life insurance, if other than the proposed insured, must have what in regards to insurable interest?

Answer 31

The applicant must have an insurable interest in the life of the insured. Without the factor of insurable interest, the purchase of insurance on the life of anyone other than one’s self would be the same as a bet or a gamble, leading to possible illegal activities.

Question 32

Underwriting is a process of ________, _________, and _______ of risks.

Answer 32

Underwriting is a process of evaluation, classification, and rating of risks. The process is designed to have the underwriter evaluate the various risk factors of the applicant and determine the acceptability of the risk to the insurance company.

Question 33

The viator has ____ days to rescind the viatical settlement after receiving the viatical settlement proceeds.

Answer 33

15 days. The viator may cancel the viatical settlement within 15 calendar days after receiving the viatical settlement proceeds. If the insured dies during the 15-day rescission period, the settlement contract shall be deemed to be rescinded, subject to repayment of all viatical settlement proceeds to the viatical settlement company.

Question 34

A policy that shares in the company’s excess funds or divisible surplus is called a ___________.

Answer 34

Participating policy. Participating policies issued by mutual insurance companies (and some fraternal benefit societies) are designed to share in any divisible surplus of the company. The surplus is generated by improved mortality results, savings on expenses, and improved investment returns. An improvement in one area usually affects the other areas and increases the overall results. A policy dividend is a return of overcharged premium.

Question 35

A credit life insurance policy is issued to the __________________.

Answer 35

A credit life insurance policy is issued to the finance company or lender in a credit transaction. It is a form of group insurance; the master policy is issued to the owner of the group insurance policy with certificates of insurance being issued to the insureds. In this case, the creditor will hold the master policy and the borrowers will each receive a certificate of insurance.

Question 36

Credit life insurance is what type of policy?

Answer 36

Credit life insurance is decreasing term insurance. Since the reason for the purchase of this plan is to cover an outstanding but diminishing risk, such as a car loan, the decreasing term plan is ideal. Credit life insurance is neither renewable nor convertible. It is issued for the life of the loan only.

Question 37

What type of term insurance is used to provide the death benefit of a return on premium rider?

Answer 37

Increasing term. The return of premium rider provides an increasing death benefit equal to the total premiums paid into the policy by the policy owner. Increasing term would be used to accomplish the increasing death benefit.

Question 38

What life policy has a combination of a protection element of term insurance and cash value that grows on an interest-sensitive basis?

Answer 38

Universal life. Universal life is considered to be an interest-sensitive form of permanent protection; it combines term life insurance with a tax-deferred savings plan (cash value).

Question 39

What is the type of Level Term insurance in which the face amount stays level, but in which the premium increases each year?

Answer 39

Annual Renewable Term (ART)

Question 40

With which two life insurance policies can the client skip, reduce, or increase premiums? The policy will not lapse as long as there is enough cash value to cover expense deductions?

Answer 40

Variable Universal and Traditional Universal Life

Question 41

What type of policies are generally used to cover a married couple to pay estate taxes at the death of the second spouse?

Answer 41

Survivorship (second to die) policies.

Question 42

True Group Life plans require a minimum of ___ lives to be covered under the master contract.

Answer 42

10

Question 43

True or False: Group coverage is usually provided without a physical examination.

Answer 43

True.

Question 44

Dependents have ____ days to convert their Group Life to an Individual contract.

Answer 44

31

Question 45

Group Life has a ___ day Grace Period.

Answer 45

31

Question 46

Group Life is incontestable after ____ years.

Answer 46

Two

Question 47

Group Life is convertible to permanent without a physical within ____ days of termination of employment, at attained age.

Answer 47

31

Question 48

True or False: Term insurance may be converted to Whole Life, but not the reversion. Conversion is based on the client’s current age.

Answer 48

True.

Question 49

True or False: A Credit Life policy cannot exceed 15 years. It is a type of Decreasing Term. Benefits are paid directly to the creditor. Misstatements of age provisions do apply.

Answer 49

True

Question 50

Credit Life is sold on a Group basis, and no _________ is required to enroll debtors in a Group Credit Life policy.

Answer 50

License

Question 51

What type of coverage is most Group Life Insurance?

a. Annual Renewable Term
b. Decreasing Term
c. Interest-sensitive Whole Life
d. Whole Life

Answer 51

a. Annual Renewable Term

Most group policies are purchased by employers who want to pay as little as possible, so most Group policies are Annual Renewable Term contracts. Premiums are based on the average age of the group and often consider past claims experience of the group.

Question 52

What type of insurance best protects a 30-year mortgage obligation?

a. Annual Renewable Term
b. Credit Life
c. Decreasing Term
d. Level Term

Answer 52

c. Decreasing Term

Credit Life may only be used on loans up to 15 years in duration. However, Decreasing Term policies may be written for any length of time, often up to 30 years or longer.

Question 53

Which situation is NOT an insurable interest?

a. business partner
b. creditor upon the life of a debtor
c. key person
d. son-in-law on the life of his father-in-law

Answer 53

d. son-in-law on the life of his father-in-law

Insurable interest must exist at the time of application. If you benefit if a person continues to live, then you have an insurable interest in that person. Insurable interest is based on economics or immediate family relationships. Unless the son-in-law is in a business with his father-in-law, insurable interest does not exist.

Question 54

Which statement about the agent’s duties is FALSE?

a. The agent must cash the applicant’s check prior to delivering the policy.
b. The agent must explain all policy ratings at the time of policy delivery.
c. Applicants must approve all changes in the application in writing.
d. If the policy is issued with an exclusion, the agent must explain to the applicant that he can either accept or refuse it, and receive a full premium refund.

Answer 54

a. The agent must cash the applicant’s check prior to delivering the policy.

The client’s premium check is usually submitted to the insurer along with the application.

Question 55

A Life Insurance policy sold to each spouse, rather than a Joint Life Insurance policy sold to cover both spouses would NOT provide

a. a combined higher premium
b. coverage for both spouses whenever either dies
c. coverage only for whichever spouse dies first
d. two separate premiums

Answer 55

c. coverage only for whichever spouse dies first

A Joint Life policy is usually written to cover only the first party to die. A Survivorship Life policy covers only the last party to die and is usually used to pay Estate taxes. If both spouses want coverage to apply when either dies, they need separate policies.

Question 56

To calculate a single net premium, a Life Insurance company would subtract which of the following from the cost of mortality?

a. commissions
b. expenses
c. interest
d. loading for contingencies

Answer 56

c. interest

The net single premium calculation is mortality minus interest (M - I = NSP). No commission or expense factors are included in this calculation.

Question 57

When an insured sells or assigns a Life Insurance policy to another party to get money to pay for terminal expenses, it is known as a(n)

a. absolute assignment
b. accelerated benefit
c. collateral assignment
d. viatical settlement

Answer 57

d. viatical settlement

If the insured develops a terminal illness, she may need money to pay for the cost of care prior to death. The client can sell the policy to an investor at a discount by assigning rights of ownership to the investor, who now names himself as beneficiary. When the insured dies, the investor gets the policy proceeds, which are more than the investor paid the insured. This is known as a Viatical Settlement.

Some insurers now include a provision or rider in their policies called “accelerated” or “living” benefits. This allows an insured to receive funds from his own policy in advance of death and eliminates the need to make a Viatical settlement.

Question 58

Which statement about accelerated benefits is FALSE?

a. Accelerated benefits are added as a rider to some policies, but built into others as a provision.
b. Accelerated benefits are treated as a policy loan.
c. Accelerated benefits pay a portion of the death benefit prior to the death of the insured.
d. Accelerated benefits reduce the amount payable to the beneficiary at the death of the insured.

Answer 58

b. Accelerated benefits are treated as a policy loan.

Accelerated or living benefits are NOT treated as a loan and no interest will accrue, although any amounts paid will reduce the amount payable at death.

Question 59

When determining the amount of Life Insurance a client needs, it is NOT necessary to consider

a. child’s education
b. final expenses
c. mortgage payoff
d. self-maintenance costs

Answer 59

d. self-maintenance costs

There are two ways to determine the amount of Life Insurance to be sold to a client. The “needs” approach is often used for clients to determine the amount necessary to take care of their final expenses, children’s education, and mortgage. The “human life value” approach is used for people to measure the amount of future income their family will lose if they die.

Question 60

Universal Life policies DO NOT provide

a. the cash value invested in a separate account.
b. the choice of a fixed or level premium
c. flexibility in premium payments
d. a minimum guaranteed interest rate on the cash value.

Answer 60

a. the cash value invested in a separate account

Variable Life utilizes a separate account similar to a mutual find, which is why an agent also needs a FINRA license. Universal Life does offer a “current” interest rate, but funds are invested in the insurer’s “general account,” which DOES HAVE a minimum guaranteed rate of return.

Question 61

Taxes on accumulated interest in the cash value account of a Whole Life policy, if required, are due

a. at death
b. never
c. upon cash surrender
d. when taking a loan

Answer 61

c. upon cash surrender

If an insured surrenders her Whole Life policy for cash and the amount of cash received exceeds the total amount of the premiums paid over a period of time, the difference must be interest, and is taxable as ordinary income. Loans are NOT taxable, however.

Question 62

Which type of Life Insurance offers only pure protection?

a. Term
b. Universal Life
c. Variable Life
d. Variable/Universal Life

Answer 62

a. Term

In this context, “pure” protection means coverage for mortality only. Term Insurance has no cash value and therefore offers the most pure protection for the lowest cost.

Question 63

Which is NOT a dividend option on a Life Insurance policy issued by an insurer?

a. apply to premium when due
b. cash
c. Extended Term option
d. paid-up additions

Answer 63

c. Extended Term Option

Be sure you can identify the difference between “non-forfeiture” options and “dividend” options. All policies with a cash value MUST have non-forfeiture options, but ONLY policies issued by mutual insurers have dividend options. The three non-forfeiture options are: cash surrender, reduced paid-up, and extended term. You should understand them fully.

Question 64

The interest adjusted cost comparison index

a. is also known as the Net Payment Cost Index
b. is based upon living to cash in the policy at the 20th year
c. is a better buy when the index is higher
d. helps the prospect to determine the lowest price id he dies in the 10th year

Answer 64

b. is based upon living to cash in the policy at the 20th year

The interest-adjusted net cost method (also known as the surrender cost index) deals with calculation of the cash values at the 10th and 20th years. When using either index, the lower the number, the better.

Question 65

Which rider is added to a policy written on the life of a child to make sure the premium is paid if the policyowner dies or becomes disabled?

a. Accelerated Benefits rider
b. Automatic Premium Load
c. Extended Term option
d. Payor Benefit rider

Answer 65

d. Payor Benefit rider

The payor benefit rider is like the Waiver of Premium, except it is added to a policy written on the life of a child. The benefit is payable if the premium payor dies or is disabled for a period of time.

Question 66

The spendthrift clause on a Life Insurance policy does NOT keep the beneficiary from _________ the proceeds.

a. assigning
b. commuting
c. spending
d. transferring

Answer 66

c. spending

The spendthrift clause prevents the beneficiary from changing the way the insured specified proceeds to be paid when the insured dies. For example, the insured specified that the proceeds be paid to his or her beneficiary over a 20-year period in the event of the insured’s death. However, when the insured dies, the beneficiary would rather have the cash up front. The spendthrift clause prevents the beneficiary from commuting, assigning, or transferring the proceeds to other parties in lieu of a lump sum cash payment. The proceeds must be paid out over the 20-year period, as specified.

Question 67

When a creditor has a temporary interest in a Life Insurance policy, it is known as a(n)

a. absolute assignment
b. collateral assignment
c. lien
d. ownership provision

Answer 67

b. collateral assignment

There are two types of assignments: 1. absolute, and 2. collateral. An absolute assignment would occur when an insured signs over ownership of a Life policy bought on his child to the child when the child attains age 21. The insured gives up all rights of ownership irrevocably.

A collateral assignment is temporary. For example, an insured takes out a loan from the bank, who asks the insured to provide Life Insurance to pay off the loan if he should die. Since the insured already has Life Insurance, he directs the insurer to pay off the loan out of the proceeds of the insured’s Life policy.

Neither type of assignment is valid unless the insurer is notified in writing.

Question 68

Upon your death, if your beneficiary chooses the interest only settlement options, the

a. interest is taxable
b. principal reverts to the insurer
c. proceeds and interest are taxable
d. proceeds are taxable

Answer 68

a. interest is taxable

Proceeds of a Life policy due upon death of the insured ARE NEVER taxable. However, if the beneficiary selects the interest option, which means the insurer will retain the proceeds for the beneficiary and pay interest in the meantime, the interest is taxable as ordinary income in the year earned. For any payment that includes some of the death proceeds, that portion is income tax free.

Question 69

Which statement about a Limited-Pay Whole Life policy is FALSE?

a. The cash value will be paid to the policy owner upon cash surrender
b. The face amount of the policy will be paid to the policyowner at policy maturity.
c. The policy will cover the insured until death or age 120, whichever occurs first.
d. The policy will reach maturity at the end of the premium paying period.

Answer 69

d. The policy will reach maturity at the end of the premium paying period.

Although Limited-Pay policies are a type of Whole Life Insurance, the premium is paid during a limited period of time, such as 20 years. However, the policy does not reach maturity until age 120. Limited-Pay policies are very expensive, but build cash values very quickly.

Question 70

The Accidental Death Benefit rider does NOT

a. drop off the policy automatically at a certain age, causing the overall premium to decrease
b. have a lower cost per $1000 than Life Insurance
c. pay double when the insured dies as a result of sickness
d. require death to occur within a certain period of time

Answer 70

c. pay double when the insured dies as a result of sickness.

The ADB, or Accidental Death Benefit rider, can be added to a Life policy by means of a rider. The rider costs about $1.00 per $1,000 of coverage, but drops off the policy at older ages, since the chance of accidental death increases. It does not cover sickness.

Question 71

The rider added to a Life policy to create coverage for an entire family is the ______ rider.

a. Family
b. Family Income
c. Family Maintenance
d. Other Insured

Answer 71

a. Family

A Family rider allows the breadwinner to add level, convertible Term Insurance as a rider to his or her WHole Life policy to cover a spouse and children. The Term Insurance on the spouse is often written for 10, 15, or 20 years. The children’s’ coverage expires when they turn 18 or later, depending on the company. Both the spouse and the children can convert to Whole Life without a physical exam at expiration of the Term.

Question 72

A valid 1035 exchange of a Life Insurance contract must be

a. on the life of the same person.
b. to the same type of policy.
c. with the same insurer who issued the initial policy.
d. with the same person designated as beneficiary of the policy.

Answer 72

a. on the life of the same person.

A 1035 exchange allows a person to switch from one Life policy to another without incurring any present tax liability. However, both policies must be on the life of the same person.

Question 73

Which statement about the replacement of Life Insurance in Ohio is FALSE?

a. Agents must review the existing policy prior to replacement to see if it contains any limitations that may not be covered by the new policy.
b. Replacement is illegal.
c. Replacement to the detriment of the client is illegal.
d. Special forms must be given to clients electing to replace coverage.

Answer 73

b. Replacement is illegal.

Replacement of insurance is not illegal, unless detrimental to the client. However, special rules must be followed. Misrepresenting the facts regarding replacement is called twisting.

Question 74

Under the Fair Credit Reporting Act, which statement is FALSE regarding a customer who is rejected due to adverse information contained in a consumer report?

a. The client must get a court order to be able to access such reported information.
b. Inaccurate information must be corrected by the consumer reporting agency.
c. The insurer must inform the client of where to obtain a copy of the report.
d. Upon written request, the credit bureau must send the client a list of all parties who have requested a report during the last six months.

Answer 74

a. The must get a court order to be able to access such reported information.

The Federal Fair Credit Reporting Act provides for rejected applicants to obtain copies of a consumer report from the investigating agency upon written request. No court order is required.

Question 75

A client can make a presumption of agency when Agent Smith does any of the following, EXCEPT

a. gives out business cards with the name of XYZ Insurance Company
b. represents the client in finding the best coverage and premium possible
c. uses XYZ Company application and forms
d. uses the XYZ Company rate manual

Answer 75

b. represents the client in finding the best coverage and premium possible

An agent represents the insurer under the Doctrine of Agency Law. The agent does not represent the insured. Brokers represent the insured.

Question 76

What are the different types of reinsurance?

a. facultative
b. treaty
c. both facultative and treaty
d. neither facultative or treaty

Answer 76

c. both facultative and treaty

Both types are used in reinsurance. Remember that the treaty method has been pre-negotiated between two companies, whereas facultative is on a case-by-case basis.

Question 77

An insurance company selling Life and Health Insurance to its own members only is a _______ company.

a. fraternal
b. mutual
c. reciprocal
d. stock

Answer 77

a. fraternal

Fraternal insurers are non-profit with a lodge system and ritualistic form of government. They sell Life and Health Insurance only to their members.

Question 78

An insurance company that has headquarters based in another country, but is authorized to do business is Ohio is considered to be

a. alien
b. domestic
c. foreign
d. surplus lines

Answer 78

a. alien

Although all insurers selling in Ohio need to have a Certificate of Authority, their home offices need not be here.

Question 79

Which statement is FALSE?

a. Agents act in a fiduciary capacity when handling premiums.
b. Misrepresentation on an application can void coverage, if material.
c. Mutual life insurers cannot guarantee their future dividend scale.
d. You can protect future dividends on a non-participating policy.

Answer 79

d. You can predict future dividends on a non-participating policy.

Only “participating” policies might pay dividends to policyowners. Stock insurers issue non-participating policies and dividends paid out to shareholders are stock dividends. In either case, it is illegal to guarantee future dividends.

Question 80

What statement about Life Insurance is FALSE?

a. The 1035 exchange must always be with the same company that issued the first policy.
b. An Automatic Premium Loan rider will keep a Whole Life policy from lapsing.
c. The cash value of a Whole Life policy may be used to supplement retirement.
d. Reinstatement of a lapsed policy us subject to certain conditions.

Answer 80

a. The 1035 exchange must always be with the same company that issued the first policy.

IRS Rule 1035 allows the same person to defer taxes when switching from one Life Insurance policy to another, as long as all the conditions are met. However, policies do not have to be with the same insurance company.

Question 81

Which document provides the clearest source of authority that can be exercised by an agent?

a. the agent’s contract with the insurance company
b. the ethic guidelines published by the National Association of Life Underwriters
c. the insured’s outline of coverage
d. model legislation from the National Association of Insurance Commissioners

Answer 81

a. the agent’s contract with the insurance company

The agent represents the insurance company. The agent’s authority is expressed in writing in a contract between the agent and the insurer.

Question 82

If a Life Insurance policy is purchased and fails to meet the seven-pay-pay test, it is considered by the IRS as a(n)

a. Annuity
b. Modified Endowment Contract (MEC)
c. Modified Whole Life policy
d. Whole Life policy

Answer 82

b. Modified Endowment Contract (MEC)

The federal tax law of definition of “Life Insurance” limits a policy owner’s ability to pay certain high levels of premiums. Also if the cumulative premium payments exceed certain amounts specified under the Internal Revenue Code, the policy will become a Modified Endowment Policy (MEC). When a policy is labeled a MEC, the tax treatment of any death benefit provided under the contract will still qualify for income-tax free treatment but the owner may be subject to additional taxes and penalties on any distributions from the policy during the life of the insured. Once a policy is labeled as a MEC, it stays that way forever.