Life Insurance Premiums, Proceeds, Beneficiaries

Question 1

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

Answer 1

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.

Question 2

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

Answer 2

If all beneficiaries die before the insured dies, the proceeds of a life insurance policy will be paid to the insured’s estate.

Question 3

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

Answer 3

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.

Question 4

Which life insurance settlement option pays lifetime benefits to two or more people?

Joint
Joint and survivor
Life income
Life income with period certain

Answer 4

The joint and survivorship life income option pays lifetime benefits to two or more beneficiaries.

Question 5

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

Answer 5

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.

Question 6

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

Answer 6

An increase in an insurance company’s rate of earnings on investments would be one way to reduce premiums.

Question 7

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

Answer 7

The applicant should realize that any false statements on an insurance application could lead to loss of coverage.

Question 8

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

Answer 8

Determining the final rate classification is not the responsibility of the life insurance agent.

Question 9

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

Answer 9

The fixed amount installment option pays a predetermined amount of income at specific intervals until the proceeds and any interest earned are exhausted.

Question 10

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

Answer 10

A life insurance producer’s responsibilities in the underwriting process include all of these EXCEPT choosing the final approval date.

Question 11

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

Answer 11

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.

Question 12

When a producer submits an application that discloses personal information regarding the applicant, who supplies the privacy notice?

Producer
Insurer
Underwriter
Fiduciary

Answer 12

The correct answer is “Producer”. The producer is responsible for providing the insurance applicant with privacy notices.

Question 13

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

Answer 13

A single premium whole life policy provides protection for life as a paid-up policy.

Question 14

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

Answer 14

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.

Question 15

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

Answer 15

A portion of the payments paid to the beneficiary stems from interest generated from the proceeds.

Question 16

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

Answer 16

In a fixed period settlement option, the dollar amount of each installment depends upon the total number of installments.

Question 17

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

Answer 17

Where an applicant lives is not a factor in determining preferred rates.

Question 18

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

Answer 18

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.

Question 19

Which tax cost is normally associated with death?

Sales tax
Federal excise tax
Federal estate tax
Payroll

Answer 19

The Federal estate tax is a tax cost typically associated with death.

Question 20

Which would be described as a beneficiary designation by class?

Children of the insured
Estate of the insured
Tertiary beneficiary
A specific named beneficiary

Answer 20

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).

Question 21

Which tax is normally associated with an individual’s death?

Excise tax
Federal estate tax
Consumption tax
Ad valorem tax

Answer 21

The Federal estate tax is a tax typically associated with death..

Question 22

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

Answer 22

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.

Question 23

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

Answer 23

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.

Question 24

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

Answer 24

Applicant is a substandard risk”. An insurance policy’s coverage can be modified if the applicant is a substandard risk.

Question 25

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

Answer 25

The contingent beneficiary is the person who receives the policy proceeds if the primary beneficiary dies before the insured.

Question 26

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

Answer 26

A spendthrift clause in a life insurance policy would have no effect if the beneficiary receives the proceeds as one lump sum payment.

Question 27

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

Answer 27

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.

Question 28

Switching Life insurance policies without tax consequence is permitted under Section 1035 rules MEC rules Replacement rules the Exclusion Ratio

Answer 28

Switching Life insurance policies without tax consequence is permitted under Section 1035 rules.

Question 29

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

Answer 29

Life insurance is purchased to fund a buy-sell agreement in the event of the death of a major stockholders in a business.

Question 30

Which report contains information regarding an individual's general reputation and credit standing? Consumer report MIB report Agent's report Credit report

Answer 30

A consumer report". A consumer report contains information regarding a consumer's credit, reputation, or habits.

Question 31

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

Answer 31

"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.

Question 32

he highest mortality rate belongs to which group? Age 60 females Age 60 males Age 70 females Age 70 males

Answer 32

The group on this list that has the highest mortality rate is age 70 males.

Question 33

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

Answer 33

The needs approach to personal life insurance planning may involve creating a lump sum to provide for all of these EXCEPT employee benefits.

Question 34

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

Answer 34

It is typically obtained by the producer and forwarded to the insurer

Question 35

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

Answer 35

"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.

Question 36

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

Answer 36

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.

Question 37

What effect does interest income have upon insurance premiums? Decreases premium Increases premium Levels the premium Adjusts premium on a quarterly basis

Answer 37

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.

Question 38

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

Answer 38

A conditional receipt is given to an applicant upon receipt of the initial premium.

Question 39

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

Answer 39

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".

Question 40

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

Answer 40

Underwriting requirements for life insurance normally do not include an eye exam.

Question 41

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

Answer 41

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.

Question 42

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

Answer 42

An individual's need for a death benefit for survivors is influenced by all of the following factors EXCEPT self-maintenance costs.

Question 43

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

Answer 43

The amount received for a life insurance policy in a life (viatical) settlement is less than the death benefit.

Question 44

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

Answer 44

A premium receipt is given to an applicant when the initial premium is paid with the application

Question 45

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

Answer 45

An irrevocable designation may not be changed without the written consent of the beneficiary.

Question 46

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

Answer 46

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.

Question 47

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

Answer 47

A conditional receipt indicates that certain conditions must be met in order for the insurance coverage to go into effect.

Question 48

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

Answer 48

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.

Question 49

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

Answer 49

Field underwriting by a producer may result in the disclosure of hazardous activities of the applicant.

Question 50

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

Answer 50

Death benefit proceeds pass directly to the beneficiary and are not subject to attachment by the insured's creditors.

Question 51

The Medical Information Bureau consists of members from which group? Doctors Hospitals Underwriters Insurance companies

Answer 51

Insurance companies make up the membership of the Medical Information Bureau.

Question 52

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

Answer 52

An insurer's obligation involving the disclosure of an insured's nonpublic information is to give notice, explain, and allow opting out.

Question 53

When premiums are determined, one factor would be the expenses of the policyowner beneficiary insurer producer

Answer 53

Insurance companies are just like any other business. They have operating expenses which need to be factored into the premiums.

Question 54

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

Answer 54

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.

Question 55

Where is the difference between a standard risk and a substandard risk reflected? Premium charges Backdating Coverage is not offered Back-end charges

Answer 55

The difference between a standard risk and a substandard risk is reflected in the premium charges.

Question 56

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

Answer 56

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.

Question 57

Which settlement option makes minimum guaranteed dollar payments over a stated number of years? Fixed-Amount Life Income Interest-Only Fixed-Period

Answer 57

The Fixed-Period Proceed Option pays proceeds (including interest and principal) in minimum guaranteed dollar payments over a stated number of years.

Question 58

A signed good health statement may be requested by a life producer at the time of policy delivery application physical examination policy issue

Answer 58

A life insurance producer may be required to obtain a signature on a statement of good health at the time of policy delivery.

Question 59

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

Answer 59

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.

Question 60

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

Answer 60

Needs analysis is a method of life insurance planning which identifies the needs of an individual and the individual's dependents.

Question 61

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

Answer 61

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.

Question 62

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

Answer 62

The amount an employer pays for his employee's life insurance is typically deductible to the business.

Question 63

Insurable interest in one's own life is legally considered as illegal in most states contingent on future earnings generally unlimited limited

Answer 63

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

Question 64

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

Answer 64

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.

Question 65

policyowner with a terminal illness who sells his life insurance policy to a third party is called a viable viatee viatical viator

Answer 65

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.

Question 66

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

Answer 66

In calculating the amount of personal life insurance needed, all of this information would be relevant except for local unemployment rates.

Question 67

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

Answer 67

An emergency reserve fund is designed primarily to cover the cost of unexpected expenses.

Question 68

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

Answer 68

A terminally ill policyowner selling an existing life insurance policy to help support his family is an example of a viatical settlement.

Question 69

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

Answer 69

A producer must give a disclosure notice about information practices to an applicant prior to or at the time of signing the application.

Question 70

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

Answer 70

Unemployment tax liabilities are not expenses a surviving family will normally have.

Question 71

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

Answer 71

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.

Question 72

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

Answer 72

"Leave a conditional receipt with client". A conditional receipt is normally given prior to a policy being issued.

Question 73

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

Answer 73

The "needs approach" in life insurance is most useful in determining the amount of life insurance to be recommended to a client.

Question 74

Life insurance premiums are computed on what three factors? Mortality, interest, expenses Mortality, interest, dividends Morbidity, interest, expenses Morbidity, interest, dividends

Answer 74

Mortality, interest, and expenses are the three factors used in computing life insurance premium.

Question 75

Which of these is NOT considered to be a cost connected with an individual's death? Tax liability Business expenses Funeral expense Probate costs

Answer 75

"Business expenses". All of these are considered to be costs associated with an individual's death EXCEPT business expenses.

Question 76

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

Answer 76

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.

Question 77

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

Answer 77

The completed application for insurance is the basic source of insurability information.