Life Insurance Study Questions

Question 1

What is insurance?

Answer 1

Insurance transfers the risk of loss from an individual or business entity to an insurance company, which in turn spreads the cost of unexpected losses to many individuals.

Question 2

What is risk?

Answer 2

Risk is the uncertainty or chance of loss occurring.

Question 3

What is a peril?

Answer 3

Perils are the causes of loss insured against in an insurance policy.

Question 4

What are the elements of insurance risk?

Answer 4

1. Due to chance
2. Definite and measurable
3. Statistically predictable
4. Not catastrophic
5. With large loss exposure
6. Insurance cannot be mandatory

Question 5

What is the difference between an authorized/admitted and unauthorized/non admitted insurer?

Answer 5

An admitted or authorized insurer is qualified and received a certificate of authority from the DOI to transact insurance in the state. A non admitted or nonauthorized insurer is an Insurance company that has not applied for, or has been denied a certificate of authority and may not transact insurance.

Question 6

What is the difference between domestic, foreign, and alien insurance companies?

Answer 6

A domestic insurer is incorporated in this state. A foreign insurer is incorporated in another state. An alien insurer is incorporated outside the United States.

Question 7

What are the 3 types of agent authority?

Answer 7

Express, implied, and apparent.

Question 8

What are the four elements of an insurance contract?

Answer 8

1. Agreement-offer & acceptance
2. Consideration
3. Competent parties
4. Legal purpose

Question 9

what does indemnify mean?

Answer 9

to “restore” an insured to the same financial status as before the loss

Question 10

What does representation mean and how does it differ from warranty?

Answer 10

Representations are statements believed to be true to the best of ones knowledge. a warranty is an absolutely true statement upon which the validity of the insurance policy depends.

Question 11

in a life insurance policy, when must insurable interest exist?

Answer 11

insurable interest must exist between the policyowner and the insured at the time of the application.

Question 12

what are some common personal uses of life insurance?

Answer 12

survivor protection, estate creation and conservation, cash accumulation, and liquididy.

Question 13

what is a life settlement?

Answer 13

a transaction in which the owner of a life insurance policy sells a life insurance policy to a third party for some form of compensation, usually cash.

Question 14

What is the difference between life settlement contracts and STOLIs?

Answer 14

life settlements are initiated from existing life insurance policies (the owner sells the policy to a third party), while STOLIs are initiated as a new contract without insurable interest (illegal in most states).

Question 15

What is the needs approach to determining amounts of life insurance based upon?

Answer 15

the needs approach is based on the predicted needs of a family after the premature death of the insured.

Question 16

What is the purpose of key person insurance?

Answer 16

to minimize the risk of a financial loss because of the premature death of a key employee that has specialized knowledge, skills or business contacts.

Question 17

What does insurance solicitation mean?

Answer 17

solicitation of insurance means an attempt to persuade a person to buy an insurance policy, and it can be done orally or in writing.

Question 18

Who is responsible for all written and distributed insurance advertisements?

Answer 18

the insurer whose policies are advertised is responsible for all its advertisements, regardless of who wrote, created, presented, or distributed them.

Question 19

What information does a Buyer’s Guide provide?

Answer 19

Basic information about life insurance policies and comparison of policy cost

Question 20

what are the steps a producer must follow when replacing an existing policy?

Answer 20

1. give applicant a notice regarding replacement
2. obtain a list of all existing life insurance policies to be replaced
3. give the applicant the original or a copy of written or printed communications used for presentation to the applicant and
4. submit to the replacing insurance company, with the application, a copy of the replacement notice

Question 21

what is underwriting?

Answer 21

underwriting is the risk selection and classification process.

Question 22

what information is gathered in parts 1 & 2 of the application?

Answer 22

part 1 of the application includes the general questions about the applicant, including name, age, address, birth date, gender, income, marital status, and occupation. Part 2 includes medical information about prospective insured.

Question 23

what is the purpose of the agent’s report?

Answer 23

the agents (producers) report is used by the agent to discuss his or her personal observations concerning the proposed insured.

Question 24

who is required to sign an application for life insurance?

Answer 24

both the agent and the proposed insured (usually the applicant) must sign the application

Question 25

When does an insurance policy go in effect?

Answer 25

the policy will go into effect when the first premium is paid and the policy has been delivered

Question 26

how can an insurance company use the information it obtains from the MIB?

Answer 26

it can use MIB information to conduct further investigation into an applicants current insurability

Question 27

how does a substandard risk policy differ from a standard risk?

Answer 27

Substandard risk applicants are not acceptable at standard rates because of physical condition, personal or family history of disease, occupation, or dangerous habits. These policies could be issued with the premium rated-up (higher than the standard risk)

Question 28

what are the 3 factors that determine the premium for a particular policy?

Answer 28

mortality, interest earnings, and epense.

Question 29

when is a policy considered delivered?

Answer 29

when the insurer relinquishes control of the policy by mailing it to the policy owner, legally the policy is considered delivered.

Question 30

when would an insured be required to sign a statement of good health?

Answer 30

if the initial premium is not paid with the application, the agent may need to obtain the statement of good health at policy delivery.

Question 31

what are the characteristics of term life insurance?

Answer 31

it provides temporary, pure death protection, with no cash value.

Question 32

What is annually renewable term insurance?

Answer 32

annually renewable term (ART) is the purest form of term insurance in which the death benefit remains level; the policy may be guaranteed renewable each year without proof of insurability, but the premium increases annually according to the attained age.

Question 33

what are the characteristics of whole life insurance?

Answer 33

permanent protection to the insureds age 100, with living benefits such as cash value, policy loans, and nonforfeiture options.

Question 34

how does continuous premium straight life differ from 20-year limited pay life?

Answer 34

the premiums for straight life will be spread over the insureds lifetime, thus enabling the insurance company to charge a lower annual premium. When the premium-paying period is condensed to 20 years, a higher annual premium is required.

Question 35

Which features of an adjustable life policy can be changed by the policy owner?

Answer 35

the premium or the premium-paying period, the face amount, and the period of protection.

Question 36

which authorities regulate variable life policies?

Answer 36

variable life insurance products are dually regulated by the state and federal government: the securities and exchange commission (SEC), the financial industry regulatory authority (FINRA), and the state department of insurance.

Question 37

What qualifications must an individual obtain prior to selling variable life in surance products?

Answer 37

Registration with FINRA, a securities license, and a state issued license to sell life insurance.

Question 38

who owns a group contract? what does the insured receive?

Answer 38

the actual policy (master policy/contract) is issued to the sponsor of the group, which is often an employer. The employees are the insured who are issued certificates of insurance.

Question 39

what are some of the group characteristics important for underwriting?

Answer 39

purpose, size, turnover and financial strength of the group.

Question 40

who is the owner and who is the beneficiary of a credit life policy?

Answer 40

the creditor is the owner and the beneficiary of the policy.

Question 41

what is the limit on the amount of credit life insurance on a debtor?

Answer 41

the amount of credit life insurance cannot exceed the amount owed to the creditor.

Question 42

what is the difference between absolute and collateral assignment?

Answer 42

an absolute assignment permanently transfers all rights of ownership to another person or entity. a collateral assignment is a transfer of partial rights to another person.

Question 43

what constitutes the entire contract?

Answer 43

the policy and a copy of the application, along with any riders or amendments, form the entire contract.

Question 44

what is the free-look period, and when does it begin?

Answer 44

the free-look period allows the policy owner a specified number of days from receipt to look over the policy and if dissatisfied for any reason, return it for a full refund of premium. It starts when the policyowner receives the policy, not when the insurer issues the policy.

Question 45

what is the purpose of a grace period?

Answer 45

to prevent unintentional policy lapse for nonpayment of premiums.

Question 46

what is the difference between a revocable and irrevocable beneficiary?

Answer 46

the policyowner may change a revocable beneficiary at any time. an irrevocable designation, however, may not be changed without the written consent of the beneficiary.

Question 47

what happens to an unpaid policy loan at an insureds death?

Answer 47

if there are outstanding loans at the time of the insureds death, the amount will be considered a debt to the policy and the death benefit will be reduced by the amount of indebtedness.

Question 48

What is the purpose of the Automatic Premium Loan provision?

Answer 48

it prevents the unintentional lapse of a policy due to nonpayment of the premium.

Question 49

Which rider allows the early payment of a portion of the death benefit to the insured?

Answer 49

accelerated death benefits rider

Question 50

what are the 3 nonforfeiture options in life insurance policies?

Answer 50

cash surrender value, reduced paid-up insurance or extended term option.

Question 51

Which nonforfeiture option is automatically selected if the policyowner has not made a selection?

Answer 51

if the policyowner has neglected to select one of these nonforfeiture options, the insurer will automatically implement the extended term option in the event of termination of the original policy.

Question 52

Which dividend option increases the death benefit?

Answer 52

paid-up additions increase the death benefit of the original policy by whatever amount the dividend will buy.

Question 53

what settlement options are available in life insurance policies?

Answer 53

cash payment (lump-sum), life income, interest only, fixed-period installments, and fixed amount installments.

Question 54

how do annuities differ from life insurance policies?

Answer 54

Annuities liquidate an estate (life insurance creates an estate). Annuities pay income to the annuitant while he or she is still living; life insurance pays the death benefit.

Question 55

who has all of the rights in an annuity contract?

Answer 55

the owner of the annuity has all of the rights such as naming the beneficiary and surrendering the annuity.

Question 56

what happens to the benefit if the annuitant dies during the accumulation period?

Answer 56

if the annuitant dies before annuitization (or payout period), his/her beneficiary will receive the amount paid into the plan or the cash value, whichever is greater.

Question 57

an annuity has 2 distinct periods. what are they called, and what happens during each?

Answer 57

1. the accumulation period, also known as the pay-in period, is the period of time over which the annuitant makes payments (premiums) into an annuity.
2. The annuity period, also referred to as the annuitization period, liquidation period, or payout period, is the time when money is distributed to the annuitant.

Question 58

What are the 2 premium payment options in annuities?

Answer 58

single premium and periodic premiums.

Question 59

How soon can payments begin in a deferred annuity?

Answer 59

in a deferred annuity, income payments begin sometime after one year from the date of purchase.

Question 60

what happens to the contract value if the owner decides to surrender a deferred annuity prior to annuitization?

Answer 60

at surrender, the owner gets their premium, plus interest (the value of the annuity), minus the surrender charge.

Question 61

how long will a life annuity with 15-year period certain pay benefits?

Answer 61

for the life of the annuitant; however, if he or she dies shortly after the annuity payments begin, the payment to the beneficiary will only last 15 years.

Question 62

how does inflation affect the purchasing power of a fixed annuity?

Answer 62

inflation can erode the purchasing power of income payments.

Question 63

where are premiums invested in a fixed annuity?

Answer 63

into the life insurance companys general account comprised mostly of conservative investments.

Question 64

In a fixed annuity, how are the guaranteed and current interest rate related?

Answer 64

During the Accumulation phase, the insurer will invest the principal, and give the annuitant a guaranteed interest rate based on a minimum rate as specified in the annuity, or the current interest rate, whichever is higher.