Life Insurance Review

Question 1

There are two main categories of life insurance. ___ provides temporary protection, while ___ has a savings component and builds cash values.

Answer 1

Term Insurance; Cash-value life insurance

Question 2

Most term life insurance policies are ___, which means the policy can be exchanged for a cash-value policy without evidence of insurability.

Answer 2

Convertible

Question 3

Under the ___ method of converting term life insurance, the premium charged for the new policy is based on the insured’s attained age at the time of conversion.

Answer 3

Attained-Age

Question 4

Under the ___ method of converting term life insurance, the premium charged for the new policy is based on the insured’s original age when the term insurance was first purchased.

Answer 4

Original-Age

Question 5

___ life insurance is issued for one-year periods.

Answer 5

Yearly Renewable Term

Question 6

A(n) ___ life insurance policy provides protection to age 65, at which time the policy expires.

Answer 6

Term to Age 65

Question 7

Under the ___ life insurance policy, the face value gradually declines each year.

Answer 7

Decreasing Term

Question 8

Under a(n) ___ life insurance policy, renewal premiums are based on select (lower) mortality rates if the insured can periodically demonstrate acceptable evidence of insurability.

Answer 8

Reentry Term

Question 9

___ life insurance is a product that returns the premiums at the end of the term period provided that the insurance is still in force.

Answer 9

Return of Premium

Question 10

Term insurance is appropriate when:

(3 points)

Answer 10

• The amount of income that can be spent on life insurance is limited
• The need for protection is temporary
• The insured wants to guarantee future insurability

Question 11

___ is a cash-value policy that provides lifetime protection. A stated amount is paid to a designated beneficiary when the insured dies, regardless of when the death occurs.

Answer 11

Whole Life Insurance

Question 12

___ is a level-premium policy that accumulates cash values and provides lifetime protection to age 121.

Answer 12

Ordinary Life Insurance

Question 13

In an ordinary life insurance policy, the insurer’s ___ is a liability that must be offset by sufficient financial assets.

Answer 13

Legal Reserve

Question 14

In an ordinary life insurance policy, the ___ is the difference between the legal reserve and the face amount of insurance.

Answer 14

Net Amount at Risk

Question 15

In an ordinary life insurance policy, the policyholder overpays for insurance protection during the early years, resulting in a legal reserve and the accumulation of ___.

Answer 15

Cash Surrender Values

Question 16

An ordinary life insurance policy is appropriate when:

Answer 16

Lifetime protection is needed and can be used to save money

Question 17

What is the major limitation of ordinary life insurance policies?

Answer 17

Some people are still underinsured after the policy is purchased

Question 18

Under a(n) ___ life insurance policy, the insured has lifetime protection, and premiums are level, but they’re paid only for a certain period (Usually 10, 20, 25, or 30 years).

Answer 18

Limited-Payment

Question 19

A(n) life insurance policy is ___ when no additional premium payments are required; it matures when the face amount is paid as a death claim or endowment.

Answer 19

Paid Up

Question 20

A(n) ___ life insurance policy provides lifetime protection with a single premium.

Answer 20

Single-Premium Whole

Question 21

___ life insurance pays the face amount of the insurance if the insured dies within a specific period. If the insured is still alive at the end of the period, the face amount is paid to the policyholder.

Answer 21

Endowment

Question 22

___ life insurance is a fixed-premium policy in which the death benefit and cash values vary according to the investment experience of a separate account, which is similar to a mutual fund maintained by the insurer.

Answer 22

Variable

Question 23

Universal Life Insurance provides flexibility in what 3 ways?

Answer 23

• Premiums are flexible
• Cash withdrawals are permitted
• Policies receive favorable tax treatment

Question 24

What are the four main limitations of universal life insurance?

Answer 24

• Insurers advertise misleading rates of return
• Cash-value and premium-payment projections can be misleading and invalid
• Insurers can increase mortality charge
• A policy may lapse because some policyholders do not have a firm commitment to pay premiums

Question 25

The Annual Disclosure Statement shows:

(6 points)

Answer 25

• Premiums paid
• Death benefit
• Value of cash value account
• Mortality charge
• Expense charges
• Interest credited

Question 26

How is the cash value of a life insurance policy at the end of the period calculated?

Answer 26

• Add cash value at beginning of period
• Add premium payments at beginning of period
• Subtract mortality charge at beginning of period
• Subtract expense charge at beginning of period
• Add interest credited at end of period

Question 27

There are two main forms of universal life insurance. ___ pays level death benefits during the early years, and the death benefit increases in the later years to meet the corridor test required by the Internal Revenue Code.

Answer 27

Option A

Question 28

There are two main forms of universal life insurance. ___ provides for increasing death benefits which is equal to a constant net amount at risk plus an accumulated cash value.

Answer 28

Option B

Question 29

A(n) ___ policy is a whole life policy in which premiums are lower for the first 3-5 years and higher thereafter.

Answer 29

Modified Life

Question 30

One advantage of ___ insurance is that applicants can purchase permanent insurance immediately even though they cannot afford the higher premiums for a regular whole life policy.

Answer 30

Modified Life

Question 31

___ life insurance policies are sold at lower rates to individuals whose mortality experience is expected to be lower than average.

Answer 31

Preferred Risk

Question 32

___ is a policy written on the lives of two or more people and is payable at the time of death to the first person to die.

Answer 32

Joint Life Insurance

Question 33

___ insures two or more lives and pays the death benefit upon the death of the second or the last insured.

Answer 33

Second-to-Die Life Insurance

Question 34

___ life insurance is widely used in estate planning.

Answer 34

Second-to-Die

Question 35

___ is a type of life insurance that’s sold by savings banks.

Answer 35

Savings Bank Life Insurance

Question 36

___ is a type of life insurance in which the policies are sold in small amounts and an agent of the company collects premiums at the insured’s home.

Answer 36

Industrial Life Insurance

Question 37

For the following scenario, identify the life insurance policy that best meets the description:

A policy where the face amount of insurance increases if the investment results are favorable.

Answer 37

Variable Life Insurance

Question 38

For the following scenario, identify the life insurance policy that best meets the description:

A policy that can be used to insure the human life value of an individual, age 35, at the lowest possible annual premium.

Answer 38

Decreasing Term Insurance

Question 39

For the following scenario, identify the life insurance policy that best meets the description:

A fixed premium policy that permits the policyholder to determine how premiums are invested.

Answer 39

Variable Life Insurance

Question 40

For the following scenario, identify the life insurance policy that best meets the description:

A policy that allows cash withdrawals for a down payment on a home or payment of college tuition.

Answer 40

Universal Life Insurance

Question 41

For the following scenario, identify the life insurance policy that best meets the description:

A policy designed to pay estate taxes upon the death of the last surviving spouse.

Answer 41

A second-to-die policy

Question 42

___ provides life insurance on a group of people in a single master contract.

Answer 42

Group Life Insurance

Question 43

The ___ is defined as the present value of the future death benefit.

Answer 43

Net Single Premium (NSP)

Question 44

The NSP is based on what 3 assumptions?

Answer 44

• Premiums are paid at the beginning of the policy year
• Death claims are paid at the end of the policy year
• The death rate is uniform throughout the year

Question 45

For a yearly renewable term insurance policy, how is the cost of a year’s insurance calculated?

Answer 45

(Amount of insurance) x (Probability of death) x (PV of $1 for period funds are held)

Question 46

For a multi-year term policy, how must NSP be determined?

Answer 46

The cost of each year’s mortality must be computed separately for each year and then added together to determine NSP

Question 47

For an ordinary life insurance policy, how must the NSP be determined?

Answer 47

The cost of each year’s mortality must be computed separately for each year to the end of the mortality table, and then added together to compute NSP.

Question 48

How is the Net Annual Level Premium calculated?

Answer 48

NSP / [(PVLAD of $1 for premium) - (paying period)]

Question 49

If premiums are paid for life, the premium is called a(n) ___.

Answer 49

Whole Life Annuity Due

Question 50

If premiums are paid for only a temporary period, the premium is called a(n) ___.

Answer 50

Temporary Life Annuity Due

Question 51

The ___ is determined by adding a loading allowance to the Net Annual Level Premium.

Answer 51

Gross Premium

Question 52

The purpose of a loading allowance is to:

(4 points)

Answer 52

• Cover operating expenses
• Provide a margin for contingencies
• Provide a contribution to profits, in the case of stock insurers
• Provide a margin for dividends, if the policy is a participating policy

Question 53

What are the 2 purposes of the policy reserve?

Answer 53

• Formal recognition of the insurer’s obligation to pay future claims
• Legal test of the insurer’s solvency

Question 54

The ___ is the difference between the PV of future benefits and the PV of future net premiums.

Answer 54

Prospective Reserve

Question 55

The ___ represents the net premiums collected by the insurer for a particular block of policies, plus interest earnings at an assumed rate, less the assumed death claims paid out.

Answer 55

Retrospective Reserve

Question 56

Which of the following is a common dividend option found in a participating life insurance policy?

A. Reduced paid-up insurance

B. Fixed period

C. Paid-up additions

D. Life income

Answer 56

C

Question 57

All of the following are nonforfeiture options found in cash value life insurance policies except…

A. Cash value

B. Reduction of premiums

C. Reduced paid-up insurance

D. Extended term insurance

Answer 57

B

Question 58

Which of the following statements about life income settlement options is/are true?

I. Under a joint-and-survivor life income option, payments cease at the death of the first annuitant.

II. Under a life income with guaranteed period, a contingent beneficiary is guaranteed a minimum number of payments regardless of when the primary beneficiary dies.

Answer 58

Neither I nor II

Question 59

A(n) ___ is the reserve at the end of any given policy year.

Answer 59

Terminal Reserve

Question 60

The ___ is the reserve at the beginning of any policy year.

Answer 60

Initial Reserve

Question 61

The ___ is the average of the terminal and initial reserves. It is used to indicate the insurer’s reserve liabilities on its annual statement.

Answer 61

Mean Reserve