Life Insurance Premiums, Proceeds, Beneficiaries Flashcards
A life insurance company just paid a $100,000 death benefit to a beneficiary. When the insured died, the cash value was $15,000 and the total premiums-paid equaled $10,000. How much of the proceeds will be added to the beneficiary’s gross income for federal income tax purposes?
$5,000
$105,000
$100,000
Nothing
When an insured dies, proceeds of a life insurance policy paid as a lump-sum death benefit to a beneficiary are exempt from federal income tax.
Where will a life insurance policy’s proceeds be directed to if all the beneficiaries die before the insured?
Insured’s estate
Court-ordered beneficiary
Beneficiary’s estate
Insured’s creditors
If all beneficiaries die before the insured dies, the proceeds of a life insurance policy will be paid to the insured’s estate.
Death proceeds from a life insurance policy are typically included in a deceased insured’s gross estate
only if the insured’s estate is listed as beneficiary
for federal income tax reasons
only if the policy is owned by the beneficiary
for federal and state income tax purposes
The correct answer is “for federal income tax reasons”. Life insurance death proceeds are normally included in a deceased insured’s gross estate for federal income tax purposes only.
Which life insurance settlement option pays lifetime benefits to two or more people?
Joint
Joint and survivor
Life income
Life income with period certain
The joint and survivorship life income option pays lifetime benefits to two or more beneficiaries.
Kevin has an existing life insurance policy and assigns it to another insurer for a new contract. How would this transaction be treated for tax purposes?
As a Section 1035 exchange
As a transfer
As a rollover
As a Section 1040 exchange
When an existing life insurance policy is assigned to another insurer for a new contract, the transaction may be treated for tax purposes as a Section 1035 exchange.
Which of these occurrences could improve an insurer’s ability to reduce premiums?
Expense factor increase
Rate of earnings on investments increase
Mortality rates increase
Requiring monthly premium payments instead of annual
An increase in an insurance company’s rate of earnings on investments would be one way to reduce premiums.
After an applicant reads and signs an insurance application, he/she should be conscious of the fact that
the premium quoted by the agent is final
the policy is guaranteed to be issued
a false statement could lead to loss of coverage
premium refunds are not allowed
The applicant should realize that any false statements on an insurance application could lead to loss of coverage.
Which of these is NOT an underwriting responsibility of a life insurance agent?
Ordering an inspection report
Requesting an attending physician’s report (APR)
Asking relevant questions concerning an applicant’s avocations
Determining the final rate classification
Determining the final rate classification is not the responsibility of the life insurance agent.
Which life insurance settlement option pays a stated monthly benefit until both principal and interest are exhausted?
Life income option
Fixed amount installment option
Fixed period installment option
Interest only option
The fixed amount installment option pays a predetermined amount of income at specific intervals until the proceeds and any interest earned are exhausted.
Which of these is NOT considered the responsibility of a producer during the underwriting process?
Promptly sending the completed application to the insurance company
Selecting the final approval date
Collecting additional medical information if needed
Forwarding any material personal observations to the insurer
A life insurance producer’s responsibilities in the underwriting process include all of these EXCEPT choosing the final approval date.
Which of the following statements about the installments for a fixed period settlement option in life insurance policies is NOT true?
The longer the period of time, the smaller each installment
The periodic payment amount is determined by the beneficiary’s age
The installment payments are composed of both principal and interest
The shorter the period of time, the larger each installment
The amount of the periodic payment in a fixed period settlement option is based on the length of the benefit period, not the beneficiary’s age.
When a producer submits an application that discloses personal information regarding the applicant, who supplies the privacy notice?
Producer
Insurer
Underwriter
Fiduciary
The correct answer is “Producer”. The producer is responsible for providing the insurance applicant with privacy notices.
Which statement best describes a single premium whole life policy?
Premiums that can only be paid from a single source
Paid-up policy that offers lifetime protection
A single premium that is due annually
Paid-up policy that offers limited protection
A single premium whole life policy provides protection for life as a paid-up policy.
Mike applied for life insurance and was issued a conditional receipt. He is later found to be insurable and is issued a policy. When does his coverage become effective?
Date the insurer received the application
Date of issuance of the conditional receipt
Date the policy was approved
Date of policy delivery
An applicant who is given a conditional receipt and is later found to be insurable will have the coverage effective at the time the conditional receipt is issued.
Which of these is an accurate statement regarding the fixed period settlement option on a life insurance policy?
A portion of the payments paid to the beneficiary comes from interest calculated on the proceeds of the policy
A portion of the payments paid to the beneficiary comes from interest generated from policy loans
Payments are normally guaranteed for 10 years or more
Payment can be adjusted monthly by the beneficiary
A portion of the payments paid to the beneficiary stems from interest generated from the proceeds.
Which statement regarding a fixed period settlement option is correct?
The installment payment amount is determined by the total number of installments
The insurance company dictates the total number of installment payments
The insurance company dictates each installment payment amount
A fixed period settlement option can pay no longer than 20 years
In a fixed period settlement option, the dollar amount of each installment depends upon the total number of installments.
An insurance policy may be issued with a preferred insurance premium in all of these situations EXCEPT
living in a rural area
being a nonsmoker
good health history
good credit history
Where an applicant lives is not a factor in determining preferred rates.
An insured may be required to sign which document at policy delivery to ensure there has not been any adverse medical conditions since the time of the application?
Binding receipt
Good health statement
Agent’s report
MIB disclosure
At policy delivery, a good health statement may need to be signed by the insured to ensure there has NOT been any adverse medical conditions since the time of application.
Which tax cost is normally associated with death?
Sales tax
Federal excise tax
Federal estate tax
Payroll
The Federal estate tax is a tax cost typically associated with death.
Which would be described as a beneficiary designation by class?
Children of the insured
Estate of the insured
Tertiary beneficiary
A specific named beneficiary
With a beneficiary designation by class, the policyowner designates a class or group of beneficiaries instead of specifying one or more beneficiaries by name. (A class designation for a beneficiary is a way of naming a group of people to receive assets, instead of listing each person individually).
Which tax is normally associated with an individual’s death?
Excise tax
Federal estate tax
Consumption tax
Ad valorem tax
The Federal estate tax is a tax typically associated with death..
A life insurance beneficiary died after receiving only six payments under the policy’s life income settlement option. What happens with the remaining balance of the death proceeds?
Transfers to the beneficiary’s estate
Donated to charity
Transfers to the insured’s estate
Kept by the insurance company
Under the life income settlement option, the beneficiary is able to have the benefits converted into an annuity which is based upon the individual’s life expectancy and payable as long as the beneficiary is still alive.
Which of the following disability buy-sell agreements is best suited for businesses with a limited number of partners?
Entity agreement
Cross-purchase agreement
Key person plan
Split dollar plan
A cross-purchase agreement is a document that allows a company’s partners or other shareholders to purchase the interest or shares of a partner who dies, becomes incapacitated, or retires. A cross-purchase agreement is used in business continuation planning. A cross-purchase agreement is best suited for businesses with a limited number of partners.
In what situation could an insurance policy’s coverage be modified?
Applicant is uninsurable
Applicant is a substandard risk
Applicant is a standard risk
Applicant is a preferred risk
Applicant is a substandard risk”. An insurance policy’s coverage can be modified if the applicant is a substandard risk.
A life insurance policy’s contingent beneficiary is the
person who receives the death benefits if the primary beneficiary dies before the insured
primary person who receives the death benefits if the insured dies
person who receives the death benefits if there is no named beneficiary
person whose approval is needed before a beneficiary designation is changed
The contingent beneficiary is the person who receives the policy proceeds if the primary beneficiary dies before the insured.
A life policy’s spendthrift clause would have no effect if the beneficiary is paid the proceeds as a
fixed-period installment
fixed-amount installment
life income option
lump-sum payment
A spendthrift clause in a life insurance policy would have no effect if the beneficiary receives the proceeds as one lump sum payment.
Employers often purchase life insurance on a key employee in order to
provide the employer with a tax credit
pay for finding and training a replacement if the employee dies prematurely
provide an income to the deceased key employee’s family
pay for funeral costs
Employers will frequently purchase life insurance on a key employee to help offset the cost of finding and training a replacement in the event of the key employee’s premature death.
Switching Life insurance policies without tax consequence is permitted under
Section 1035 rules
MEC rules
Replacement rules
the Exclusion Ratio
Switching Life insurance policies without tax consequence is permitted under Section 1035 rules.
What is considered a valid reason for small corporations to insure the lives of its major stockholders?
To provide an income for the surviving dependents
Fund a buy-sell agreement
Reduce the company’s tax liability
To pay for final expenses
Life insurance is purchased to fund a buy-sell agreement in the event of the death of a major stockholders in a business.
Which report contains information regarding an individual’s general reputation and credit standing?
Consumer report
MIB report
Agent’s report
Credit report
A consumer report”. A consumer report contains information regarding a consumer’s credit, reputation, or habits.
A policyowner fell behind on the premium payments of a whole life policy and is now in the grace period. How much will the beneficiary receive if the insured dies during this grace period and the policy also contains an outstanding policy loan?
Full face amount
Face amount minus the loan balance
Face amount minus the past-due premium
Face amount minus the loan balance and past-due premium
“Face amount minus the loan balance and past-due premium”. The beneficiary in this case will receive the face amount minus the loan amount and the overdue premium.
he highest mortality rate belongs to which group?
Age 60 females
Age 60 males
Age 70 females
Age 70 males
The group on this list that has the highest mortality rate is age 70 males.
When using the needs approach for life insurance planning, a lump sum may be created to provide for all of the following EXCEPT
Charitable donation
Final expenses
Education
Employee benefits
The needs approach to personal life insurance planning may involve creating a lump sum to provide for all of these EXCEPT employee benefits.
The initial premium for a life insurance policy is typically paid in what way?
The producer pays it from any commissions received
It is typically obtained by the producer and forwarded to the insurer
It is typically forwarded to the insurer by the applicant
The applicant mails it to the insurer after the policy has been approved
It is typically obtained by the producer and forwarded to the insurer
Al surrenders his life insurance policy for its cash value. The total of premiums paid into the policy minus total dividends received in cash or used to offset premiums is referred to as the
premium basis
cash basis
cost basis
net proceeds
“cost basis”. The total of the premiums paid into the policy minus total dividends received in cash or used to offset premiums is referred to as the cost basis. When withdrawing cash value from a life insurance policy, the amount withdrawn up to the cost basis is generally not taxed.
How long do most states allow an insurance company to delay the payment of a cash surrender under the Delayed Payment provision?
1 month
4 months
6 months
2 months
Most states allow insurers to delay payment of cash surrender values for up to 6 months after policyowners request payment. This provision is a proactive measure for companies should an economic crisis arise, but such delays are rarely invoked.
What effect does interest income have upon insurance premiums?
Decreases premium
Increases premium
Levels the premium
Adjusts premium on a quarterly basis
The actuarial formula for a bundled insurance premium is as follows: Mortality costs (based upon age and gender) less assumed interest = Net premium. Please note that assumed interest always lowers the mortality costs and thus, lowers the total premium.
What must be given to a life insurance applicant when the agent receives an application and the initial premium?
Commission disclosure
Agent’s report
Good health statement
Conditional receipt
A conditional receipt is given to an applicant upon receipt of the initial premium.
Which of the following is NOT a reason for a business to buy key person life insurance?
The loss of company revenues while a replacement is being sought
A void in leadership if the key person were to die
An increased pension liability if the key employee dies
The reduction in sales as a direct result from death of the key employee
All of these are reasons for a business organization to purchase key person life insurance EXCEPT “An increased pension liability if the key employee dies”.
When an applicant applies for a large amount of life insurance coverage, which of the following would likely NOT be an underwriting requirement?
Urine sample
Consumer report
Eye examination
Blood sample
Underwriting requirements for life insurance normally do not include an eye exam.
What is considered a valid reason for an insurer’s refusal to pay policy proceeds directly to a minor?
Minors are not capable of having insurable interest
Minors cannot legally enter into a contract
Minors are usually not capable of paying for the insurance premium
Minors are normally not capable of handling money in a reasonable manner
A life insurance company usually will NOT pay policy proceeds directly to a minor beneficiary because a minor may not use sound judgement in handling money.
Which of these factors does NOT influence an individual’s need for life insurance?
Self-maintenance expenses
Future educational costs of the dependents
Number of dependents
Lifestyle of the applicant
An individual’s need for a death benefit for survivors is influenced by all of the following factors EXCEPT self-maintenance costs.
How much is normally paid to a policyowner in a life (viatical) settlement?
More than the face amount
Full face amount
Less than the death benefit
Total premiums paid plus interest
The amount received for a life insurance policy in a life (viatical) settlement is less than the death benefit.
When does the producer give a premium receipt for a life insurance application?
During the medical exam
When the application has been approved
When the completed application has been collected
When the initial premium has been paid with the application
A premium receipt is given to an applicant when the initial premium is paid with the application
T is covered by an Accidental Death and Dismemberment (AD&D) policy that contains an irrevocable beneficiary. What action will the insurance company take if T requests a change of beneficiary?
Change will be made immediately
Change will be made only if premiums are paid current
Request will be accepted only if in writing by the insured
Request of the change will be refused
An irrevocable designation may not be changed without the written consent of the beneficiary.
What would be a valid reason for naming a trust as the beneficiary of a life insurance policy as opposed to naming an individual?
More settlement options available with a trustee
Avoiding probate
Management of proceeds would be provided
Trustee can pay off any existing policy loans
The correct answer is “Management of proceeds would be provided”. One reason for naming a trust rather than an individual as the beneficiary of a life insurance policy is to provide management of the proceeds.
An agent gives a conditional receipt to a client for an insurance policy after collecting the initial premium. When will the policy become effective?
When the conditions of the receipt are met
The date of policy delivery
The date the sales appointment was set
When the policy is issued
A conditional receipt indicates that certain conditions must be met in order for the insurance coverage to go into effect.
What would be the disadvantage of naming a trust as beneficiary of a life insurance policy?
Trustee must be a bank or brokerage
Trust administration fees would reduce policy proceeds
Trusts cannot be used if a minor is the beneficiary
Trusts cannot be formed for life insurance purposes
One possible disadvantage of naming a trust as beneficiary of a life insurance policy is that the policy proceeds may be reduced by trust administration fees.
A trust as a beneficiary of a life insurance policy means that the policy’s proceeds are paid to a trust instead of directly to individuals. The trust then distributes the money to the beneficiaries as outlined in the trust documents.
Benefits of a trust beneficiary
Probate avoidance
The funds from the life insurance policy are not included in the policyholder’s estate for probate.
Control
The policyholder can control how the money is distributed to beneficiaries.
Estate tax reduction
The funds from the life insurance policy may be exempt from estate taxes.
Special needs
A special needs trust can channel assets to someone with special needs without triggering laws that may be against them.
Trust types
There are two types of trusts that can hold life insurance: irrevocable and revocable. Irrevocable trusts are often used because they don’t include the assets in the policyholder’s gross estate for estate tax purposes.
Field underwriting by a producer
is used to reduce costs to the insurer
may result in the disclosure of hazardous activities of the applicant
is illegal in most states
involves conducting a physical examination of the applicant
Field underwriting by a producer may result in the disclosure of hazardous activities of the applicant.
When there is a named beneficiary on a life insurance policy, the death benefits
are paid directly to the beneficiary, minus any debt claims by the insured’s creditors
are paid directly to the beneficiary without interference from the insured’s creditors
are paid directly to the insured’s creditors, with any remaining balance forwarded to the beneficiary
are directed to a trustee if the insured has any outstanding debts
Death benefit proceeds pass directly to the beneficiary and are not subject to attachment by the insured’s creditors.
The Medical Information Bureau consists of members from which group?
Doctors
Hospitals
Underwriters
Insurance companies
Insurance companies make up the membership of the Medical Information Bureau.
When the disclosure of an insured’s nonpublic information is involved, what is the insurer obligated to do?
Provide the proper NAIC paperwork
Insurer is not obligated to take any action
Insurer is obligated to verify that the producer is in compliance
Give notice, explain, and allow opting out
An insurer’s obligation involving the disclosure of an insured’s nonpublic information is to give notice, explain, and allow opting out.
When premiums are determined, one factor would be the expenses of the
policyowner
beneficiary
insurer
producer
Insurance companies are just like any other business. They have operating expenses which need to be factored into the premiums.
Which life insurance policy provision prohibits a beneficiary from “commuting, encumbering, withdrawing, or assigning” any portion of the proceeds prior to actual receipt from the company?
Insuring clause
Spendthrift clause
Nonforfeiture provision
Collateral Provision
A spendthrift clause prevents a beneficiary from recklessly spending benefits by requiring the benefits to be paid in fixed amounts or installments over a certain period of time.
Where is the difference between a standard risk and a substandard risk reflected?
Premium charges
Backdating
Coverage is not offered
Back-end charges
The difference between a standard risk and a substandard risk is reflected in the premium charges.
Which statement regarding the joint and survivor life insurance settlement option is NOT true?
Age of the beneficiaries plays a factor when determining the payment amounts
Two or more beneficiaries can be paid
Income continues until the last beneficiary dies
The amount of each installment is larger than the single life income option
The amount of each installment is larger than the single life income option”. This is incorrect. The amount of each installment would actually be larger with a single life income option as opposed to a joint and survivor option.
Which settlement option makes minimum guaranteed dollar payments over a stated number of years?
Fixed-Amount
Life Income
Interest-Only
Fixed-Period
The Fixed-Period Proceed Option pays proceeds (including interest and principal) in minimum guaranteed dollar payments over a stated number of years.
A signed good health statement may be requested by a life producer at the time of
policy delivery
application
physical examination
policy issue
A life insurance producer may be required to obtain a signature on a statement of good health at the time of policy delivery.
Which statement is INCORRECT about the interest-only settlement option in a life insurance policy?
Interest must be paid at least annually
Interest is payable to a stated beneficiary
Interest rate is guaranteed with a minimum rate
Interest on proceeds must be paid by the beneficiary
Interest on proceeds is paid by the insurer to the beneficiary. The beneficiary must pay TAXES on any interest paid on the proceeds in an interest-only settlement option.
When an individual is planning to protect his family with life insurance, one method of doing so is called needs analysis. What exactly does needs analysis involve?
Places a dollar value on the life of the individual
Establishes the investment risk level acceptable to the individual
Identifies the needs of an individual and the individual’s dependents
Takes into account the present value of future income earned by the breadwinner
Needs analysis is a method of life insurance planning which identifies the needs of an individual and the individual’s dependents.
Wyatt is shopping for life insurance and is mainly concerned with the policy’s death benefit. Which index should he be looking at when making comparisons?
Guaranteed renewable index
Net payment cost index
Cost surrender index
Net gain index
The net payment cost index is useful if one’s primary concern is the amount of death benefits provided in the policy. It is helpful in comparing future costs, such as in 10 to 20 years, if one will continue to pay premiums and does not take the policy’s cash value.
The premiums paid by an employer for his employee’s group life insurance are usually considered to be
tax-deductible to the employer
partially deductible to the employee
tax-deductible to the employee
taxable income to the employee
The amount an employer pays for his employee’s life insurance is typically deductible to the business.
Insurable interest in one’s own life is legally considered as
illegal in most states
contingent on future earnings
generally unlimited
limited
generally unlimited”. The insurable interest on one’s own life is generally regarded as unlimited.
Insurable interest in one’s own life is considered unlimited, allowing individuals to choose life insurance amounts based on personal needs rather than strict financial parameters. This means one can purchase any amount of life insurance reflecting their priorities and responsibilities
XYZ Corp gives money to an employee to purchase a life insurance policy and allows the employee to select the beneficiary. What kind of plan is this?
Deferred compensation
Cross purchase
Split-dollar
Key employee
A split-dollar plan is an arrangement where an employer and an employee share in the cost of purchasing a life insurance policy on the employee. The employee is also allowed to name the beneficiary.
policyowner with a terminal illness who sells his life insurance policy to a third party is called a
viable
viatee
viatical
viator
he original policyowner who sells his life policy to a third party for a reduced face amount is known as the “viator” in a viatical settlement.
Which of these is NOT relevant when determining the amount of personal life insurance needed?
Household income
Existing life insurance coverage
Household debt
Local unemployment rates
In calculating the amount of personal life insurance needed, all of this information would be relevant except for local unemployment rates.
According to the needs approach, an emergency reserve fund’s primary purpose is to
provide a supplemental income source
cover the cost of unexpected expenses
pay for the cost of life insurance
pay off debt
An emergency reserve fund is designed primarily to cover the cost of unexpected expenses.
A terminally ill policyowner decides to sell his life insurance policy at a discount to help support his family. This sale is called a(n)
viatical settlement
assignment
nonforfeiture option
accelerated death benefit
A terminally ill policyowner selling an existing life insurance policy to help support his family is an example of a viatical settlement.
When must a producer provide disclosure about information practices to an applicant?
Prior to or at the time of signing the application
Immediately after signing the application
Upon policy delivery
During the medical examination
A producer must give a disclosure notice about information practices to an applicant prior to or at the time of signing the application.
Which of the following is NOT considered to be an expense for surviving family members of a deceased wage earner?
Unemployment tax expenses
Estate taxes
Living expenses
Funeral expense
Unemployment tax liabilities are not expenses a surviving family will normally have.
During the early years of a whole life insurance policy, the cash value will normally be
equal to the total premiums paid
unavailable as a policy loan
less than the total premiums paid
more than the total premiums paid
The correct answer is “less than the total premiums paid”. During the early years of a whole life insurance policy, the cash value will normally be less than the total premiums paid.
All of these are duties that a producer may be required to perform when delivering an insurance policy EXCEPT
Gather the initial premium
Leave a conditional receipt with client
Acquire a statement of good health signature
Review policy with applicant
“Leave a conditional receipt with client”. A conditional receipt is normally given prior to a policy being issued.
With life insurance, the needs approach is used primarily in determining
how much life insurance a client should apply for
a budget for the surviving dependents to follow in the event of the client’s death
the type of life insurance that should be purchased
which insurance company to purchase the coverage from
The “needs approach” in life insurance is most useful in determining the amount of life insurance to be recommended to a client.
Life insurance premiums are computed on what three factors?
Mortality, interest, expenses
Mortality, interest, dividends
Morbidity, interest, expenses
Morbidity, interest, dividends
Mortality, interest, and expenses are the three factors used in computing life insurance premium.
Which of these is NOT considered to be a cost connected with an individual’s death?
Tax liability
Business expenses
Funeral expense
Probate costs
“Business expenses”. All of these are considered to be costs associated with an individual’s death EXCEPT business expenses.
K is an agent who takes an application for individual life insurance and accepts a check from the client. He submits the application and check to the insurance company, however the check was never signed by the applicant. If the application is approved, when will coverage be effective?
The date of application
The date the agent delivered the policy, collected the initial premium, and obtained a good health statement from the insured
The date the sales appointment was made
The date the application was submitted to the insurance company
In this situation, coverage will go into effect the date the agent delivers the policy, collects the initial premium, and obtains a good health statement from the insured.
The principal source of information concerning an applicant’s identity, age, and marital status is found in the
MIB
credit report
completed application
policy summary
The completed application for insurance is the basic source of insurability information.
