Module 3

Question 1

The primary purpose of life insurance is to ?

Answer 1

provide funds to others in the event of the insured’s death

Question 2

The primary purposes of life insurance and annuities are, in fact, two sides of the same coin. Life insurance pays the beneficiaries when ?. Annuities pay while the annuitant is ?.

Answer 2

the insured dies; alive

Question 3

Once a client has life insurance and finds that her health has changed and would now be rated substandard, it is generally far safer and more cost-effective to ?

Answer 3

retain an existing standard issue policy than to try to find another policy based on substandard rates.

Question 4

One factor you should consider is whether insurance is needed to:

Answer 4

provide estate liquidity at death.

Question 5

A number of variables cause the estate to shrink at death:

Answer 5

the decedent’s debt, probate and administrative costs, federal and state estate taxes, and any state inheritance tax.

These costs must be paid in cash, usually within nine months after death. Therefore, the estate must be sufficiently liquid to meet these costs. Insurance can provide this needed cash if other assets are not available.

Question 6

If a large amount of insurance is needed, ? may be the only method of completely covering the need.

Answer 6

term insurance

Question 7

For life insurance needs determination purposes, an ? rate and an ? rate of return must be determined.

Answer 7

inflation; after-tax

Question 8

It is important to understand that if a client can qualify for one type of life insurance, they generally can qualify for any type of life insurance. The main exception to this rule is:

Answer 8

that term products often are not offered to prospective insureds over certain ages, whereas permanent products may be available at age 70 or 80.

Therefore, age and health factors do not preclude the availability of any particular product (except when dealing with a client of advanced age).

Question 9

Original issue rates on any kind of insurance become HIGHER/LOWER with advancing age.

Answer 9

higher

Question 10

What is term life insurance?

Answer 10

A type of life insurance policy that provides coverage for a specific period or “term,” typically ranging from 10 to 30 years. If the policyholder passes away during the term of the policy, the beneficiaries receive a death benefit, which is a lump sum of money. If the policyholder outlives the term, the coverage ends, and no benefits are paid out.

Question 11

What type of policy does the below refer to?

This form of insurance almost always has the lowest initial premium because the risk of death—the mortality rate—is relatively low when insurance is first sold and the risk is priced for one year at a time.

Answer 11

An annually renewable term policy

Question 12

Term insurance premiums are based on ? for the interval of one year.

Answer 12

the estimated cost of insuring the individual

The cost of insuring a person—the mortality cost—increases each year. As a result, mortality costs for all are lower today than they will be in one year.

Question 13

? generally have a guaranteed maximum premium and are renewable for a specified period of time.

Answer 13

Renewable term policies

Question 14

Most insurance companies permit a ? policyowner to keep the policy in force up to age 70 or so, or sometimes even longer. Some states limit the age to which term insurance may be renewed.

Answer 14

term life insurance

Question 15

In today’s marketplace, term policies often have the initial premium guaranteed for some period of time, ranging anywhere from 5 to 30 years. The longer the guarantee for the level premium, the ?

Answer 15

higher the premium cost.

Question 16

What are reentry term policies?

Answer 16

These policies permit the insured to be underwritten every five years or so. If the insured is still insurable in the same classification, the premium may actually drop in the sixth year, and for other policies the premium will increase minimally. Unfortunately, if the insured is not in the same physical condition, the premium will increase significantly. At some ages the premium cost may even triple or quadruple.

Question 17

What is decreasing term insurance?

Answer 17

A form of term life insurance in which the premium remains level but the amount of death benefit decreases.

Question 18

What type of policy is the below referring to?

These policies have generally been sold to cover home mortgages. For this reason, these are typically 15-year or 30-year policies. One problem with the early forms of ? was that they all used straight-line depreciation. The amount of coverage decreased by the same dollar amount every year. Unfortunately, the principal of home loans doesn’t decrease in this manner.

These policies are less common today primarily because most people do not live in one home until it is paid off and when they move, they often obtain a larger mortgage.

Answer 18

decreasing term policy

Question 19

What is a level death policy?

Answer 19

a type of life insurance where the death benefit amount remains the same throughout the life of the policy, as long as the policy is active. In other words, the payout to beneficiaries upon the policyholder’s death is fixed and does not change, regardless of how long the policy is held or when the policyholder passes away during the term.

Question 20

Insurance experts generally recommend that if term insurance is used to cover a mortgage, the insured should also purchase a ? policy.

Answer 20

level death

If, years down the road, the insured needs less insurance coverage, that policy may be able to be reduced. This strategy guarantees that when the reduction occurs, the policyowner wants it to happen. The preferred method is to incorporate the mortgage need into an overall life insurance needs analysis.

Question 21

An easy way to remember the key components of term insurance is that it has a ? for the time period (term), a ?, and no cash value.

Answer 21

guaranteed premium; guaranteed death benefit

Question 22

Whole life insurance is sometimes called ? insurance because these policies are designed to last for the life of the insured rather than remain in force for a specified period as is characteristic of term insurance.

Answer 22

permanent

Question 23

? is the most common form of permanent insurance.

Answer 23

whole life

Question 24

What type of policy does the below represent?

Premiums are initially higher than those for term insurance; however, they remain the same throughout the policy period. The cash account of a traditional ? policy is invested in the company’s general account. While the conservative nature of the general account does not provide much in the way of investment earnings, it does help to ensure that the life insurance will be in effect when needed.

Answer 24

whole life policy

Question 25

Companies offering whole life insurance must provide ? with the policies.

Answer 25

nonforfeiture values

Question 26

What are nonforfeiture values?

Answer 26

The benefits or values that a policyholder can receive from a life insurance policy if they decide to stop paying premiums (i.e., surrender the policy) or if they are unable to continue making premium payments. These values are meant to protect the policyholder from losing everything if they can no longer afford the policy. Nonforfeiture options typically apply to permanent life insurance policies (like whole life or universal life insurance) that accumulate cash value over time.

Question 27

Whole life policies offered by stock companies rarely pay dividends and are referred to as ?

Answer 27

nonparticipating whole life

Question 28

Whole life policies offered by mutual companies, which are owned by policyowners, sometimes pay dividends to their policyowners. A policy that receives dividends is said to be ?

Answer 28

participating

Question 29

The standard form of ? provides a guaranteed death benefit for the life of the insured and requires premium payments to be made until death or policy maturity.

Answer 29

whole life insurance

Question 30

An easy way to remember the key components of whole life is that these policies have a guaranteed ?, guaranteed ?, and a guaranteed ?. If a client is very conservative and likes guarantees, this is a suitable policy.

Answer 30

premium; death benefit; cash value

Question 31

What is Variable Life (VL) Insurance?

Answer 31

A type of permanent life insurance that combines a death benefit with an investment component. The key feature of variable life insurance is that the policyholder can allocate the cash value portion of the policy into various investment options such as stocks, bonds, mutual funds, or other investment vehicles. This means the cash value and potentially the death benefit can increase or decrease depending on the performance of the investments chosen.

The policy’s cash value is not guaranteed and is invested in a separate account.

Question 32

What type of policy does the below refer to?

Premiums are fixed, but the cash values vary in relation to the contract’s earnings. A ? policy typically includes a guarantee that the death benefit in any year will never be less than the initial face amount. Premiums are typically higher on a ? policy than for an equal amount of whole life

Answer 32

Variable Life (VL) policy

Question 33

What is a prospectus?

Answer 33

A formal document that provides detailed information about a financial product, such as a mutual fund, stock offering, or insurance policy. It is typically issued by the issuer (such as a company or financial institution) to provide potential investors with the information they need to make an informed decision.

Question 34

The buyer of ? must be willing to give up the guarantee of a stated cash value in exchange for the possibility of enhanced death benefits and cash values. Many policyowners are not willing to take the investment risk that may result in lower death benefits and cash values.

Answer 34

Variable Life (VL)

Question 35

What are Limited-Pay policies?

Answer 35

Whole life policies with a shorter premium-paying period. Even though premiums cease at some point, the death benefit continues for the life of the insured or to age 120 when the policy matures or endows.

Question 36

Some ? policies are designed to be paid up when the insured reaches a specific age, such as 65, when premiums are paid to that age and then cease. Other plans include 10-pay, 20-pay, or 30-pay life policies where premiums are paid for 10, 20, or 30 years, respectively. Due to the shorter payment period, the premiums for these policies are higher than those on traditional whole life products.

Answer 36

limited-pay

Question 37

What is single premium whole life?

Answer 37

A policy in which a lump sum payment is made, and no further premiums are required. If the policy is surrendered within the first few years, there are substantial surrender charges. Special tax rules apply to these policies, as they are classified as modified endowment contracts (MECs).

Question 38

What is the below an example of?

A client has recently inherited $100,000 and wants to provide a similar bequest to her only child. With a small portion of the $100,000 she can purchase a ? to achieve her goal with no additional premiums due.

Answer 38

single premium whole life policy

Question 39

What is a modified whole life policy?

Answer 39

A whole life policy preceded by a period of term insurance. These policies have low, term-like premiums for a number of years that then increase to whole life levels. Many of these policies have an ultimate premium that is lower than it would be if the insured waited until the premium increased to purchase the insurance.

Question 40

Another type of modified whole life insures the ?. The policy provides term insurance until the insured reaches a specified age, typically somewhere between ages 18 and 25. When the child reaches this age, the policy converts to a whole life or limited-pay life policy with a lower premium than if the insured had waited until that age to purchase the insurance.

Answer 40

lives of children

Question 41

What is graded premium life insurance?

Answer 41

A type of whole life insurance policy where the premiums start at a lower rate and gradually increase over a specified period, usually 5 to 10 years. After this initial period, the premiums typically level off and remain constant for the rest of the insured’s lifetime.

Question 42

What is an endowment policy?

Answer 42

A policy in which the death benefit and cash surrender value are equal at a specific date. When the insured reaches the age of mortality (e.g., age 100), the reserves equal the death benefit, and the policy is said to have endowed. The face amount of the policy is paid at endowment, and this will likely create an unfavorable tax situation for the insured. This is because the amount received exceeding the policy’s basis (generally, the premium paid) would be taxable as ordinary income.

Question 43

What is Universal Life (UL) insurance?

Answer 43

Gives policyowners the ability to adjust the premium, death benefit, and cash value to meet their financial goals. Unlike whole life insurance, universal life does not have a structured premium requirement. The policy will remain in force as long as the cash surrender value can support the monthly deductions for mortality and administrative expenses. If the cash surrender value is insufficient to support the deductions, the policyowner is required to deposit additional premium to avoid a policy lapse.

Question 44

While flexible premiums are a distinguishing feature of universal life, caution should be used when applying this flexibility. Unlike variable life, the universal life policyowner does not have the ability to direct the investment of the policy’s ?.

Answer 44

cash value

Question 45

Peter currently owns a universal life policy with an existing cash value of $600. He has paid his normal premium of $1,000 but learns that the company’s mortality and administrative costs to maintain the policy are $1,900. This means that Peter must deposit an additional ? to keep the policy in force.

Answer 45

$300 ($1,900 – $1,600)

Question 46

What is Option A in a UL policy?

Answer 46

Option A (also known as the level death benefit option) pays a level death benefit. The death benefit remains constant throughout the life of the policy, regardless of the cash value accumulation. As the policy’s cash value grows, the insurance company uses it to offset the amount of risk they are covering. This means the amount of pure insurance (or the “at-risk” portion for the insurer) decreases as the cash value increases. Because the insurer’s risk decreases as the cash value grows, the cost of insurance generally stays lower compared to other options.

Question 47

What is Option B in a UL policy?

Answer 47

Option B refers to a specific death benefit option where the death benefit is equal to the face amount of the policy plus any accumulated cash value. The death benefit paid to the beneficiary includes the face value of the policy (the initial death benefit amount) plus the accumulated cash value that has built up in the policy over time. As the policy’s cash value increases, so does the death benefit. This means that the death benefit will rise as the cash value grows, potentially providing a larger payout than under Option A. Like all universal life policies, Option B allows for flexible premiums and adjustable death benefits. However, because the death benefit is tied to the cash value, Option B typically results in higher premiums compared to Option A.

Question 48

A family with children generally needs more insurance when the children are young. (To increase the amount of coverage, the insured will be required to show evidence of insurability.) However, after the children have left home, the family’s insurance needs may subside. A single ? policy can be used to meet the insured’s changing requirements.

Answer 48

UL

Question 49

What is variable universal life (VUL)?

Answer 49

a type of permanent life insurance that combines death benefit protection with an investment component. It offers policyholders flexibility in premium payments, death benefit amounts, and the ability to invest their cash value in various sub-accounts similar to mutual funds. Basically, VUL marries the flexibility of UL with the investment selection aspect of VL.

Question 50

? are complex and they can be expensive.

Answer 50

VUL policies

Question 51

What is equity-indexed universal life (EIUL)?

Answer 51

another form of fixed permanent life insurance. these policies provide for a minimum fixed interest rate, but also allow policyowners to use an index option to potentially earn better returns than the guaranteed rate. they are not variable policies, but they blend the security of fixed rate UL with the growth potential of market-indexed returns.

Question 52

What is a participation rate in an equity-indexed universal life (EIUL) policy?

Answer 52

dictates a specific percentage of the index gain that is credited to the policy.

Question 53

Let’s assume an EIUL uses the S&P 500 index and it gains 10% over the time period. If the EIUL has a 70% participation rate, then ? is what is credited to the policy.

Answer 53

7%

Question 54

What is a rate cap in an equity-indexed universal life (EIUL) policy?

Answer 54

limits the interest an EIUL can earn by placing an upper limit on the credited rate.

Question 55

What is adjustable life insurance?

Answer 55

The policyowner may increase or decrease the face amount, premiums, and length of coverage.

When the policy is first issued, the face amount and premium are selected. From those choices comes a guarantee period. This period is the number of years the death benefit is guaranteed to be in place. Because the premium can be changed at will within minimum and maximum range limitations, the guarantee period can be lengthened or shortened. Dividends paid on adjustable life policies are commonly used to extend the guarantee period and increase the cash value.

Question 56

The disadvantage of ? is that the policy may become a very expensive term policy if only the minimum premium is paid and dividends are not adequate to continue the policy at the initial premium rate. The flexibility may give a poorly motivated or careless policyowner too many ways to inadvertently lapse the policy.

Answer 56

adjustable life

Question 57

What is a first-to-die policy (also known as survivorship policies)?

Answer 57

a joint life insurance policy that covers two or more people (typically spouses or business partners) and pays out the death benefit when the first insured person dies. After the payout, the policy terminates, leaving the surviving insured without coverage.

This type of policy arrangement may be used to fund buy-sell agreements.

Question 58

What is the below an example of?

If one of three covered business partners dies before retirement and they have a buy-sell agreement funded with life insurance, the business is provided with enough cash to purchase their share of the business without invading current assets.

Answer 58

first-to-die policy

Question 59

What is a second-to-die policy (also known as survivorship life or last-to-die)?

Answer 59

pays when the last person dies. This policy is especially useful in estate tax planning situations when the unlimited marital deduction is used.

Question 60

What is the below an example of?

A married couple has purchased a ? policy. After the husband dies, his entire estate passes estate tax-free to his wife; when she dies, a well-structured policy will provide the liquidity necessary for the wife’s estate taxes. With proper estate planning, the insurance benefits may avoid estate taxes while being available to pay taxes arising from the transfer of other assets.

Answer 60

second-to-die

Question 61

What is low-load life insurance?

Answer 61

an outcome of an interest in life insurance policies sold by individuals who do not earn commissions (e.g., fee-based financial planners). The name specifically refers to the low, or lack of, commission costs incorporated into the insurance premium. Low-load life insurance can be any type of product, including term, survivorship life, whole life, UL, and VL.

Question 62

What is private placement life insurance (PPLI)?

Answer 62

a specialized type of life insurance that is not available to the general public. These policies are structured more like investment products than insurance products. PPLI is treated by regulatory authorities as an unregistered security. Thus only agents that also hold a securities license may offer PPLI. Furthermore only accredited investors, as defined by the SEC, are eligible to purchase PPLI.

Question 63

? is highly customizable and offers more investment choices than a typical variable universal life policy. For this reason it also draws closer scrutiny from the IRS.

Answer 63

Private placement life insurance

The complexity and ability to customize PPLI policies makes them suitable only for high net worth individuals.

Question 64

One of the draws of life insurance is that the ? is received income-tax free by beneficiaries.

Answer 64

death benefit

**Do not confuse this with being estate tax exempt. Life insurance is included in the estate of the owner so, in most situations, it will increase the value of the estate, and if the client’s assets exceed the current thresholds for estate taxation, there could be estate tax due.

Question 65

Another benefit of cash value life insurance is that ?.

Answer 65

the earnings grow tax-deferred

Question 66

If Susan had paid $20,000 in life insurance premiums, she will pay no tax if she withdraws $15,000. However, her basis is now $5,000. If over the next several years she pays an additional $10,000 in premiums, her basis increases to $15,000. If she subsequently surrenders the policy and receives $28,000, she will pay ordinary income on the ? above her basis. Because she paid taxes on the money she put into the policy (basis), that amount is not taxed.

Answer 66

$13,000

Question 67

What is a modified endowment contract (MEC)?

Answer 67

a policy is classified as a MEC if the policyowner deposits the equivalent of more than total net annual premium payments at any time during the first seven years.

MEC status means that any withdrawals from the policy (e.g., loans, partial cash withdrawals, pledging as collateral, etc.) will be taxable as ordinary income (on a LIFO basis), generally subject to a 10% early withdrawal penalty if accessed prior to the policyowner reaching age 591⁄2. However, the policy death benefit, when paid, typically remains income-tax-free.

Question 68

What is a viatical settlement?

Answer 68

the sale of a life insurance policy by a terminally ill policyholder to a third party (usually a viatical settlement company or investor) for a lump sum cash payment. The buyer then becomes the policy’s beneficiary and assumes responsibility for paying the premiums, eventually collecting the death benefit when the original policyholder passes away.

Question 69

The owner of the policy is generally stated on the ? page and on the application, which is made part of the policy.

Answer 69

declarations

Question 70

What are nonforfeiture options?

Answer 70

choices available to a policyholder of a whole life or cash value life insurance policy if they decide to stop paying premiums. These options allow the policyholder to retain some value from the policy instead of losing all benefits.

Question 71

Most beneficiary designations are ?.

Answer 71

revocable

Question 72

An ? designation involves different rights and requirements. Once a beneficiary is designated as ?, the owner must get written permission from that beneficiary if the owner wants to do anything with the policy other than stop premium payments (and in some cases of divorce, if continued premium payments are court ordered, even this cannot be done). The owner may not change beneficiaries, borrow against the policy, surrender the policy, or assign it absolutely or collaterally without the irrevocable beneficiary’s written permission.

Answer 72

irrevocable beneficiary; irrevocable

Question 73

What is a grace period?

Answer 73

This provides that premiums received within 30 (or 31) days after the due date are treated as though received on time. This clause also states that if premiums are not received in that time frame, the policy will lapse.

Question 74

The ? clause normally follows the grace period clause.

Answer 74

reinstatement

Question 75

What is the reinstatement clause?

Answer 75

With most companies, it provides that once the policy has lapsed, the owner may reinstate it by paying all back premiums, paying off or reinstating any policy loans that existed at the time of lapse, and providing proof of insurability satisfactory to the company.

Question 76

What is the misstatement of age clause?

Answer 76

This provides that if, at death, the insured turns out to be older or younger than indicated on the application, the benefit will be adjusted to provide the amount the premium would have provided at the correct age.

Question 77

What is the contestable clause?

Answer 77

Once a life insurance policy is issued, the insurance company has no more than two years (some states specify one year) to determine if there is any reason that it should not have issued the policy. If the insured dies within the one-or two-year limit, the clock stops, and the insurance company can take any reasonable amount of time required to investigate and determine if there was any material misrepresentation or concealment in the application.

Question 78

What is the suicide clause?

Answer 78

The majority of policies will pay a death benefit if the insured commits suicide. Under the suicide clause, if the insured commits suicide within one or two years (again, this varies by state) after the policy was issued, the insurance company need only return the cumulative premiums minus any indebtedness (some companies also pay interest). Once the one or two years pass, suicide is treated as any other death. Missouri, the only state with no suicide clause, requires the insurance company to prove that the insured intended to commit suicide before purchasing the policy.

Question 79

Two types of policy loans can be made against cash value policies:

Answer 79

standard policy loans and APLs

Question 80

The policy loans interest rate may be fixed or variable. More often than not, participating policies use a ? rate.

Answer 80

variable

Question 81

A participating policy that has a fixed interest rate, such as 8%, typically includes a provision called ?.

Answer 81

direct recognition

Question 82

What is the direct recognition provision?

Answer 82

This provision recognizes that the insurance company can earn either more or less than the 8% being charged for policy loans. If it can earn more, the dividends for the policy may be reduced when borrowing takes place. If the insurance company cannot earn as much as the 8%, dividends may be increased. When a variable interest rate is used for borrowing, the dividends are ordinarily the same whether or not borrowing takes place.

Question 83

What is the conversion clause?

Answer 83

permits the policyowner to convert the term insurance into a cash value form of insurance.

Question 84

What is the common disaster clause (also referred to as a payment delay clause)?

Answer 84

if the insured and the primary beneficiary die in a common disaster, even if the deaths occur as much as 30 days apart, the beneficiary is presumed to have died first. This automatically delivers the proceeds to the secondary beneficiaries. This can be a good clause to include in order to prevent children from being inadvertently disinherited, especially in the case of a second marriage.

Question 85

What is the spendthrift clause?

Answer 85

This clause essentially prevents a beneficiary (who may be presumed to be a spendthrift or otherwise unable to handle money well) from assigning any benefits they may eventually get from the insurance company. It prevents this only while the insurer has the money. Once it is in the hands of the beneficiary, there are no restrictions on how they may use the money.

Question 86

Policies issued by mutual life insurance companies must include a provision that addresses ?.

Answer 86

dividends

Question 87

When a mutual life insurance company has revenues in excess of expenses, it has a ?.

Answer 87

surplus

Question 88

What is the cash dividend option?

Answer 88

pays dividends to policyowners in cash. On the policy anniversary, if there is any divisible surplus credited to a policy, the insurance company pays dividends to policyowners by direct deposit or check. It is considered a return of premium and is not taxed.

Question 89

What is the reduced premium dividend option?

Answer 89

on the policy anniversary, the premium will be reduced by any dividend paid. whenever the dividend exceeds the premium due, one of the other dividend options is used with the balance.

Question 90

What is the below an example of?:

Steven has a whole life policy for which the annual premium is $1,000. He uses his dividends to reduce this premium. This year his dividend is $275, so he only pays out-of-pocket $725.

Answer 90

reduced premium dividend option

Question 91

What is the accumulate-at-interest dividend option?

Answer 91

similar to a savings account. the insurance company holds the dividends in a separate account and pays a current rate of interest on the accumulated dividends. At death or on surrender, this fund is paid out in addition to the other policy proceeds. While dividends on participating policies are generally not taxable as income because they are considered a return of premium, the interest earned on accumulated dividends is taxable.

Question 92

What is the paid-up additions dividend option?

Answer 92

a small amount of insurance is purchased that has a cash value equal to the dividend without any medical or other underwriting required. This small amount of insurance is fully paid up; there are no premiums due to keep it in force. As with the cash value of the basic policy, the cash value of this additional paid-up insurance increases at the guaranteed interest rate credited to the rest of the policy. Additionally, these paid-up additions generate more dividends. All of the growth of these additions is fully tax-deferred.

Question 93

With most companies, the use of the ? option provides for the greatest long-term increase in death benefit and cash accumulation.

Answer 93

paid-up additions

the extra cash value created by using paid-up additions usually exceeds that created by accumulating the dividends at interest.

Question 94

What is the one-year term dividend option (also known as the fifth dividend option)?

Answer 94

a policyowner may elect to have the annual dividend buy one-year term insurance. This option allows for a small dividend to buy a much larger amount of death benefit protection.

Question 95

What is a term rider within a whole life policy?

Answer 95

an additional coverage option that allows the policyholder to add temporary (term) life insurance to their permanent whole life policy. This rider provides extra coverage for a specified period, usually at a lower cost than purchasing a separate term policy.

Question 96

What is the below an example of?:

Henry needs $1 million in death benefit coverage and prefers whole life to term insurance, but can’t afford the premiums on a $1 million whole life policy. His planner’s recommendation is to purchase a $250,000 whole life policy and add a $750,000 term rider. Henry has the $1 million in death benefit protection needed at a premium he can afford.

Answer 96

term rider

Question 97

What is a cost of living rider?

Answer 97

an optional rider that allows the death benefit to increase over time to keep up with inflation, ensuring that the policy’s value does not erode due to rising costs.

Question 98

What is the accidental death benefit (ADB) rider?

Answer 98

an optional rider that provides an additional payout if the insured dies due to an accident.

Question 99

What is the guaranteed insurability option (also known as a guaranteed purchase option)?

Answer 99

permits policyowners to purchase more life insurance on a younger insured at specified times and in specified amounts without providing evidence of insurability up to a specified age limit, which is most often in the insured’s 40s. It is typically offered to purchasers of cash value policies.

Question 100

What is the spouse or children’s rider?

Answer 100

may permit conversion to cash value coverage without evidence of insurability prior to termination or at the death of the insured.

Question 101

The most common rider included with life insurance policies is the ?.

Answer 101

disability waiver of premium rider

Question 102

What is the disability waiver of premium rider?

Answer 102

if the policyowner is disabled, under the definitions in the contract, the insurance company will waive the premium for the base policy and generally all riders. Any loan interest will still be required to be paid, so if there are large loans, the policy may still lapse if the client cannot cover the repayment. Otherwise, the policy will continue as if the premiums were being paid. At no time will the policyowner be required to repay any premiums waived on account of a qualifying disability.

Question 103

With most companies, a qualifying disability must last ? months before the premium is waived.

Answer 103

six

Often, once qualification has been determined, premiums that were paid subsequent to the date of disability will be refunded.

Question 104

What is presumptive disability?

Answer 104

a provision that may result in the waiver of premium being effective without a total disability of the policyowner. Most companies include this provision and it is the same provision that is found in most disability income insurance policies.

Question 105

What is a disability income rider (DIR)?

Answer 105

provides both a waiver of premium and a supplemental income if the insured is totally disabled under the same definitions for waiver of premium.

Question 106

What is the critical illness rider?

Answer 106

allows a client to accelerate a portion of the death benefit on a life insurance policy. The policies will provide specified illnesses such as terminal diseases or chronic illnesses that require continuous care over an extended period. The amount of the accelerated benefit made available will be dependent on diagnosis and life expectancy at the time of diagnosis. Obviously, this reduces the death benefit that the family will receive. The insured may choose to take all of the benefit or a portion, leaving the balance for the family. There may also be other requirements, such as the policy remaining in effect for a certain number of years.

Question 107

What is a long-term care rider?

Answer 107

allows the policyowner to access the death benefit to pay for long-term-care-related expenses. the amount of death benefit and long-term care allowance are based on the insured’s age, gender, and health at the time of purchase. the death benefit is reduced by the amount used for long-term care expenses plus a service charge.

Question 108

Some companies that offer long-term care riders may also allow for a ? rider.

Answer 108

restoration of benefits

Question 109

What is a restoration of benefits rider?

Answer 109

allows an insured to potentially use all of the face amount for long-term care and the family collects the full face amount upon death. In combination, these riders can be excellent additions to the life insurance policy in that they can preserve assets that would have been used for care and provide liquidity at death.

Question 110

What is the accelerated death benefit rider?

Answer 110

Accelerated payments of the death benefit may be triggered when the insured meets the definition of terminally ill. When this is the case, a percentage of the death benefit can be accessed. IRS law changes were made so that terminally ill patients accessing the cash benefit would not be taxed and the cash received would be treated as if it were a death benefit. The wider availability of the accelerated death benefit riders has reduced the need for the viatical market.

Question 111

What is the family income benefit rider?

Answer 111

provides that the benefit payout will automatically be spread out in monthly benefits, removing the choice of payout options from the beneficiary. It is especially beneficial for minors, spouses who have difficulty managing money, special needs children, or anyone else who is concerned about the beneficiary managing the money. There may or may not be a charge associated with the family income benefit rider.

Question 112

What is a return of premium rider?

Answer 112

Some clients will purchase term insurance and prefer to pay a premium so if they do not die within the time frame, they will receive their premiums back. Requirements are that the policy must be kept the entire time and can cost 20%–40% more than a policy without such a rider.

Question 113

What is the multiple of salary method?

Answer 113

Perhaps the simplest method for arriving at a life insurance coverage amount is to multiply the wage earner’s salary times a number that works for the client. The “six, eight, or ten times salary” rules have been used for quite some time in an effort to make the needs determination process less complex. The concept behind this rule of thumb is that by replacing the salary of the deceased for a period of years, the family will be able to continue as they were. Younger clients will want to use a larger multiplier than older clients, as there are more years of income replacement needed.

Question 114

What is the human life value method?

Answer 114

Perhaps a more precise method is the human life value approach, which takes into account the income-earning ability of the deceased over their lifetime. Rather than simply replacing lost income, this approach accounts for the changes in wages for the insured’s working lifetime, and then discounts this amount to a present value with the assumption that the death occurs imminently. While this calculation can be done with a financial calculator, software is most commonly used and additional sums are added for final expenses to arrive at the total amount needed.

Question 115

What insurance need method is being described below?:

The strength of this method is that it accounts for the working life of the deceased. By inflating the income producing ability, a more accurate present value can be calculated. Conversely, the weakness of this approach is that it limits the needs analysis to the income producing ability of the deceased and final expenses. There is often much more to the client’s situation than these factors alone. For instance, this method fails to incorporate potential promotions or job changes and the additional income that would accompany these events. Additionally, the amount arrived at is depleted because a capital utilization approach is applied. This will be discussed in the following paragraphs.

Answer 115

human life value method

Question 116

There are ? types of income replacement needs analyses.

Answer 116

two

Question 117

The difference between capital utilization and capital retention is whether the principal used to generate the income is ?.

Answer 117

gradually depleted or remains intact

Question 117

What are the different types of income replacement needs analyses?

Answer 117

capital utilization and capital retention

Question 118

What is the capital utilization method?

Answer 118

uses all of the principal over a period of time so that, ultimately, nothing remains.

Question 119

Let’s assume a 45-year-old client wishes to replace $50,000 of her $80,000 annual income. In addition, the client expects this salary to increase 3% per year and she plans to live to age 90. Because this money is needed to provide for lost income, it may be wise to use a conservative interest rate assumption in this calculation. For this example we’ll use 6%.

The keystrokes on an HP 10bII+ in BEG mode would be the following:

Answer 119

45, N;
1.06/1.03 − 1 = 0.0291 × 100 = 2.9126,
I/YR; 50,000,
PMT; and solve for PV, which equals $1,281,305.

This indicates that $1,281,305 invested at 6% will generate $50,000 starting tomorrow (when we assume the death will occur) and an increasing amount each year thereafter until the spouse reaches age 90. At that time, the fund would be fully depleted. As long as the surviving spouse dies before that happens, this approach will suffice.

Question 120

What is capital retention?

Answer 120

preserves the principal and only interest is used to meet the income needs.

Question 121

If the client consistently mentions that the budget is limited or that he prefers not to spend much on life insurance, ? products may be the better recommendation

Answer 121

term

Question 122

If a strong preference for a product with guarantees is expressed, ? products would make for a better recommendation.

Answer 122

whole life

Question 123

If the client wants a guarantee to never lose their cash value but wants the opportunity to participate to some degree in market upturns, an ? product may be most appropriate.

Answer 123

indexed

Question 124

The client has two choices if insufficient resources prevent purchasing the type of policy deemed most appropriate to meet their needs:

Answer 124

either the client’s objectives will have to be modified or, using the least desirable option, the client may choose to purchase the appropriate type of insurance, but in a lesser amount.

Question 125

What is a current dividend scale?

Answer 125

Each year, a dividend scale is adopted by the board of directors of every insurance company that sells participating policies. This scale, based on the profits and surplus of the insurance company, is used to determine how much money can be paid to policyowners.

Question 126

Companies generally want to maintain a dividend scale from year to year so their illustrations provide a reasonable representation of what actually may happen with a given policy. No illustration is complete if it does not include a statement similar to the following: “Dividends are shown at the current scale and are neither ? nor projections of the future.” A planner reviewing illustrations must look for a statement that indicates whether the illustration is using the current scale or a lower one.

Answer 126

guarantees

The law prevents an insurance company from guaranteeing dividends.

Question 127

What is a 1035 exchange?

Answer 127

a tax-free transfer of an existing life insurance policy, annuity, or endowment contract into a new policy or annuity without triggering immediate tax consequences. It is governed by Section 1035 of the Internal Revenue Code (IRC) and allows policyholders to upgrade or modify their coverage while deferring taxable gains.

Question 128

Why were annuities created?

Answer 128

Annuities were created to address concerns about individuals outliving their money and managing their money in later years.

Question 129

Irrespective of the classification, annuities are structured based on ? of a specific individual or two individuals who are referred to as annuitants.

Answer 129

life expectancy

Question 130

What is a single premium immediate annuity?

Answer 130

This type of annuity provides a guaranteed income for the life of the annuitant. In its purest form, monthly payments begin one month after purchase and continue for the life of the annuitant. It is important to shop these carefully based on company strength and current rates, as payouts can vary substantially.

Question 131

What is a deferred annuity?

Answer 131

A deferred annuity contract is based on the accumulation of funds of more than one year rather than the immediate payment of benefits. Currently, these products come in three basic forms: fixed, variable, and indexed.

Question 132

What are fixed annuities?

Answer 132

can be funded by either a single premium (SPDA) or an ongoing series of payments (FPDA). the contract is fixed in that there is a guaranteed fixed interest rate minimum that will be credited on the account value. the account value is the sum of all premiums plus earnings credited minus withdrawals and expenses. In addition to the basic guaranteed rate (e.g., typically low 2–4%) the company generally will pay an excess current rate (based on market conditions). the excess current rate usually will be guaranteed for a period of time extending from one month to ten years, depending on the contract.

Question 133

What is a variable annuity?

Answer 133

created on the theory that the equities market will outperform inflation and fixed interest rate investments over time. Each payment into the contract purchases units of a subaccount similar to buying shares of a mutual fund. The units accumulate in a separate account and may carry unit value that reflects this investment’s market performance. Investment choices are as varied as in any mutual fund account; some annuity contracts will allow liberal transferring, but most will charge for and/or restrict frequent transfers.

Question 134

What is the guaranteed minimum income benefit (GMIB) for annuities?

Answer 134

guarantees a minimum income to the annuitant, regardless of adverse investment performance. sometimes the guarantee requires annuitization of the contract, and in other instances the guarantee allows for systematic withdrawals based on the guaranteed value. this rider has many restrictions and moving parts that must be explored. Restrictions on timing, specific annuity tables, required annuitization, adjusted age, et cetera, can make these riders very complex and difficult to analyze accurately. It can provide important protection, but the assumption that the rate of return stated is locked in can be misleading.

Question 135

What is the guaranteed minimum accumulation benefit (GMAB) for annuities?

Answer 135

guarantees that there will be a minimum account value at the end of a specified guaranteed date. variations can include a step up with a new guarantee period. there may be restrictions on asset allocations that, if not followed, could void the agreement. withdrawals may or may not be allowed and annuitization is generally not required.

Question 136

What is the guaranteed minimum withdrawal benefit (GMWB) for annuities?

Answer 136

guarantees that either a return of principal or payout of a protected amount through systematic withdrawals over a specified time period in years (not covering a life expectancy).

Question 137

what is the guaranteed lifetime withdrawal benefit (GLWB) for annuities?

Answer 137

the most popular rider currently with almost 70% of annuity buyers selecting it. this rider guarantees the right to withdraw up to the specified percentage each year for life. the guaranteed compounding ceases at the first withdrawal or at the expiration of the specified period, frequently 10 years.

Question 138

What are equity-indexed annuities (EIAs)?

Answer 138

offer some of the growth potential of the stock market with the downside protection of a guaranteed annuity. as with EIULs, these products are fairly sophisticated, so both financial advisers and their clients should have a firm understanding of these annuities before adding them to a client’s portfolio.

Question 139

EIAs have characteristics of both ? and ? annuities.

Answer 139

fixed; variable

Question 140

What type of annuity is being referenced below?

They usually provide a guaranteed minimum interest rate and an interest rate tied to a market index. Similar to EIULs, ? are linked to a benchmark (such as the S&P 500 index), which provides the potential for growth.

Answer 140

equity-indexed annuities (EIAs)

Question 141

Surrender charges and expenses tend to be HIGHER/LOWER in indexed annuities.

Answer 141

higher

Question 142

What is a registered indexed-linked annuity (RILAs)?

Answer 142

an instrument that seeks to mirror the returns of a stock market index such as the S&P 500. RILAs allow investors to participate in gains when there is a bull market and enjoy a degree of protection when there is a bear market. However, it is important to understand that the annuity owner is not directly invested in the index or in the stock market. A RILA instead uses index strategies that seek to emulate the index performance. RILAs are regulated by FINRA, the U.S. Securities and Exchange Commission (SEC), and state insurance commissioners.

Question 143

RILAs are similar to equity-indexed annuities (EIAs) because:

Answer 143

they also use an index/call option crediting strategy to determine the cash value of an annuity.

Question 144

What distinguishes RILAs from other annuities is the unique ability to:

Answer 144

set the maximum loss the client is willing to accept.

Question 145

In comparing annuities, ? are the most conservative of the three indexed products in that they offer some potential for gain and no risk of loss. ? with a floor option enjoy more potential for gain with some risk of loss, and ? with a buffer offer the greatest gain and loss potential.

Answer 145

EIAs; RILAs; RILAs

Question 146

Benefits of a RILA include:

Answer 146

deferred taxes, limited risk, and potential gains from market growth.

Question 147

Disadvantages of an RILA can include:

Answer 147

higher fees and caps that limit gains when the market goes up.

Question 148

Randy and Kathleen are retired. They understand the markets go up and down, but they are unwilling to accept losses beyond 10%. Therefore, they purchased a RILA with a 10% floor. If the index rises, their gains will also be capped at 10% for the year. The following year the index fell 15%; however, their loss is limited to only ?.

Answer 148

10%

Question 149

Steven and Donna are in their mid-50s. They plan to save for retirement for 20 more years and are willing to tolerate more risk. They purchase a RILA with a 10% buffer. The next year, the index declined 18%. Their loss is limited to 18% minus ?.

Answer 149

10%, or 8%

Note that their gains are capped by the same buffer amount. For example, if the index had risen by 22%, their gain would have been 22% minus 10%, or 12%.

Question 150

What are qualified longevity annuities (QLACs)?

Answer 150

an insurance option that ensures retirees have a stream of regular income throughout their advanced years. income stream begins at an advanced age and continues throughout the individual’s life.

Question 151

QLACs are a type of ?.

Answer 151

deferred income annuity (DIA)

Question 152

What is a deferred income annuity (DIA)?

Answer 152

a type of annuity that provides guaranteed income payments starting at a future date (typically several years after purchase). It is designed for individuals who want to secure future retirement income while allowing their investment to grow in the meantime.

Question 153

One of the reasons annuities gained popularity is the opportunity for ?.

Answer 153

tax deferral

Question 154

Contributions to nonqualified annuities are made with ? dollars, which becomes the basis in the contract.

Answer 154

after-tax

Question 155

For most annuities, all money withdrawn on or after the annuity starting date will normally be taxable as ? until all the earnings have been withdrawn (LIFO rules—last in, first out).

Answer 155

ordinary income

Question 156

For annuities, in most cases, any taxable withdrawals made prior to age 59&1⁄2 will be subject to a ? tax penalty, or as the IRS refers to it, “a ? excise tax.”

Answer 156

10%

Question 157

Assume Clara purchased a $100,000 annuity and, based on her life expectancy, the insurance company determines she could expect 20 years of payments at $750 per month. Part of each $750 will be taxable, and part will be a nontaxable return of capital. The nontaxable amount is determined as follows:

Answer 157

$416.67

$750 x [$100k / ($750 x 12 x 20)] = $750 x 0.5556 = $416.67

So, for each $750 payment, $416.67 will be a nontaxable return of capital and $333.33 will be taxable. Variable payout annuities are taxed in a similar manner; however, the formula is a bit different.

Question 158

What is superannuation?

Answer 158

This risk generally appears for most clients when they are choosing a settlement option between a lump sum and a lifetime stream of annuity payments at retirement or from a life insurance death benefit.

Question 159

Which factor should NOT be considered when selecting a life insurance policy?

A. The duration of the need
B. The amount of life insurance needed
C. The risk tolerance level of the proposed owner of the policy
D. The risk tolerance level of the insurance agent

Answer 159

D. The risk tolerance level of the insurance agent

Explanation: The risk tolerance of the proposed owner of the policy, not the insurance agent, must be considered. The risk tolerance of the sales representative is not a factor that should be considered when selecting a life insurance policy.

Question 160

Elizabeth, age 57, wants to ensure that a 7-year loan on her new BMW will be paid off in the event of her death. She wants a predictable, inexpensive premium. Which policy would best meet her need?

A. A decreasing term policy
B. An annual term policy
C. A 5-year term policy
D. A 10-year term policy

Answer 160

D. A 10-year term policy

Explanation: The 5-year term and annual term options will require renewals at a higher premium. It is unlikely she will find a 7-year decreasing term policy because those are typically 15-year or 30-year products to align with typical mortgage terms.

Question 161

A client owns a life insurance policy that will provide permanent paid-up protection for the rest of her life after she has paid premiums for 20 years. What type of policy does the client own?

A. Whole life
B. Limited-pay whole life
C. Single premium whole life
D. Convertible term

Answer 161

B. Limited-pay whole life

Explanation: Limited-pay whole life premiums are payable for only a limited number of years, after which the policy becomes paid up for its stated face amount.

Question 162

A client owns a whole life insurance policy in which his premiums were lower in the initial years after the policy was issued and then increased once thereafter. What type of whole life policy does the client own?

A. Modified premium whole life
B. Limited-pay whole life
C. Ordinary (straight) life
D. Single premium whole life

Answer 162

A. Modified premium whole life

Explanation: Modified premium whole life premiums are lower for the initial years of the policy and are generally increased once thereafter.

Question 163

Which factor(s) should be considered while reviewing a universal life (UL) insurance policy for a client?

A. The mortality charge specified in the policy
B. The mortality charge being assessed to the policy
C. The interest rate being credited to the policy
D. All of these

Answer 163

D. All of these

Explanation: All the listed items are potential costs in a UL policy and should be considered by the planner.

Question 164

The client owns a UL insurance policy with the Option B death benefit. The net amount at risk (NAR) is $275,000, and the current cash value is $75,000. What is the amount of death benefit that will be paid if the client died today?

A. $0, because the NAR exceeds the current cash value
B. $75,000
C. $275,000
D. $350,000

Answer 164

D. $350,000

Explanation: The death benefit under Option B of a UL policy is the NAR plus the cash value. The client’s policy will pay a total death benefit of $350,000; ($275,000 + $75,000).

Question 165

The client owns a UL insurance policy with the Option A death benefit on his own life. The death benefit is $375,000, and the current cash value is $75,000. If the client dies today, which death benefit will be paid to the beneficiary?

A. $0, because the NAR exceeds the current cash value
B. $300,000
C. $375,000
D. $450,000

Answer 165

C. $375,000

Explanation: The death benefit under Option A of a UL policy is the face amount of the policy. The beneficiary will not receive the cash value. The policy will pay a total death benefit of $375,000.

Question 166

What is the general risk tolerance level of a client who is considering purchase of a variable universal life (VUL) insurance policy?

A. Moderate to high
B. Low
C. Risk averse
D. Low to moderate

Answer 166

A. Moderate to high

Explanation: VUL policies are best suited for clients with moderate to high risk tolerance levels. You should use risk tolerance as a guide in selecting a cash value type policy (whole life, universal, variable, or VUL) for any client.

Question 167

Which of the following is NOT a characteristic of variable universal life (VUL) insurance?

A. The policy must be offered with a prospectus.
B. Cash values held in subaccounts are part of the insurance company’s general account.
C. There are increasing or decreasing death benefits.
D. There are flexible premium payments.

Answer 167

B. Cash values held in subaccounts are part of the insurance company’s general account.

Explanation: Cash values held in subaccounts are not part of the insurance company’s general account. VUL insurance policies must be offered with a prospectus because of the subaccount investment options. VUL policies also feature a flexible death benefit along with flexible premiums. However, the cash values inside of the subaccounts are not part of the insurance company’s general account.

Question 168

What is the planning situation in which a financial planner would typically use a second-to-die life insurance policy?

A. Estate planning
B. College education planning
C. Retirement planning
D. Emergency fund planning

Answer 168

A. Estate planning

Explanation: A financial planner would typically use a second-to-die life insurance policy in the estate planning process to provide liquidity at the death of the surviving spouse.

Question 169

Meaghan purchased a participating whole life insurance policy 15 years ago and now wishes to receive the policy’s cash surrender value (CSV). She gives you the following information to assess the potential taxation of the surrender:

CSV: $80,000
Dividends received: $12,500
Outstanding loan: $40,000
Premiums paid: $60,000

What is the amount of cash value that is taxable to Meaghan and what is the character of this income?

A. $0
B. $32,500 ordinary income
C. $40,000 capital gain
D. $72,500 ordinary income

Answer 169

B. $32,500 ordinary income

Explanation: Investment in contract = premiums paid – dividends received. $60,000 − $12,500 = $47,500. gain at surrender = cash surrender value − investment in contract – outstanding loans or withdrawals. $80,000 − $47,500 = $32,500 ordinary income Meghan paid $60,000 in premiums. However, life insurance dividends are considered a return of premium for tax purposes. So her adjusted basis in the contract is $47,500. The current Cash Surrender Value is $80,000. $80,000 – $47,500 = $32,500. Therefore her gain in the contract is $32,500. However, due to IRS rules, that amount will be taxed as ordinary income, not capital gain.

Note that the insurance company will withhold $40,000 of cash surrender proceeds to satisfy the outstanding policy loan.

Question 170

You have a client, Patrick, who wishes to cash surrender his existing ordinary life policy. He brings you the following nonforfeiture table included in his policy:

Policy Year-End: 1, 2, 3, 4
Cash Surrender Value: $0, $0, $10, $25
Reduced Paid-Up Insurance: $0, $0, $65, $100
Extended Term Insurance: 0 years, 0 years, 5 years, 8 years

If Patrick bought a $200,000 ordinary life policy 3 years ago, what amount of cash value, if any, will he receive (assume he has not borrowed against the policy and the policy is not subject to surrender charges)?

A. $0
B. $2,000
C. $5,000
D. $13,000

Answer 170

B. $2,000

Explanation: Under the CSV option, Patrick would receive $2,000; ($10 × 200).

Question 171

A client is insured by a life insurance policy with a face amount of $250,000. The client dies during the policy’s grace period with an unpaid premium of $800. What amount will the insurance company pay to the beneficiary listed on the policy?

A. $0
B. $249,200
C. $250,000
D. $250,800

Answer 171

B. $249,200

Explanation: If the insured dies during the grace period, the insurance company deducts the unpaid premiums from the death benefit payable to the beneficiary; therefore, the beneficiary receives $249,200.

Question 172

The client is 50 years old but appears younger. She has applied for a life insurance policy that has an annual premium of $50 per $1,000 of coverage for age 50, and $30 per $1,000 of coverage for age 45. On the policy application, the client states her age as 45 and purchases a $40,000 life insurance policy, issued for someone of that age. She then dies unexpectedly one year later at her actual age of 51. What amount of death benefit will be paid to her beneficiary, assuming the insurance company discovers the misstatement of age on the application?

A. $0
B. $20,000
C. $24,000
D. $40,000

Answer 172

C. $24,000

Explanation: The insurance company will adjust the face amount of the policy to reflect the amount of insurance that could have been purchased for the correct age, calculated as follows: Total premium paid annually = $30 ($30 per $1,000 of coverage) × 40 ($40,000 of coverage) = $1,200. Premium per $1,000 of insurance for insured age 50 = $50. Face amount of policy (adjusted for correct age) = ($1,200 ̧ $50) × $1,000 = $24,000.

Question 173

Rex purchased a $500,000 whole life, double indemnity policy on his life on September 1 of the current year (premiums were $450 per month). On November 30 of the following year, he committed suicide. Premiums were paid as agreed up to November 1 of the following year. Assuming that his policy included a suicide clause, what amount will be paid or refunded by the insurance company?

A. $0
B. $6,750
C. $500,000
D. $1 million

Answer 173

B. $6,750

Explanation: The two-year suicide clause, a common whole life policy provision, will preclude payment of the face value of the policy. Rather, only the premiums paid through the date of suicide will be returned without interest. The amount of premium returned is $6,750 (15 months × $450).

Question 174

Assume you have a client who owns a modified premium whole life insurance policy and has recently taken a large loan against the cash value. She is aware that the death benefit payable to her husband, who is the sole beneficiary of the policy, will be reduced by the amount of the loan and asks you whether she can preserve at least a portion of the original death benefit. The policy is a participating policy. What is the best option for the client to choose?

A. Fifth dividend option
B. Reduced paid-up insurance option
C. Cash dividend option
D. Have dividends applied to reduce the premium

Answer 174

A. Fifth dividend option

Explanation: The fifth dividend option would permit her to purchase one-year term insurance equal to the net cash value of the policy and add it to the policy’s death benefit. In this way, she could recoup at least a portion of the otherwise reduced death benefit.

Question 175

Enrico wants to ensure his life insurance policy does not lapse in the event he is sick or injured and cannot work. Which rider should he have on his policy?

A. Disability income rider
B. Accidental death rider
C. Return of premium rider
D. Disability waiver of premium rider

Answer 175

D. Disability waiver of premium rider

Explanation: The disability waiver of premium rider is designed to specifically keep a policy in force when the insured is disabled.

Question 176

Which method of calculating the life insurance need is designed to use the interest only on a portion of the death benefit for income replacement?

A. The capital retention method
B. The capital utilization method
C. The LIFE method
D. The multiple of salary method

Answer 176

A. The capital retention method

Explanation: The capital retention method is intended to provide income from the interest on the amount allocated to income replacement. Capital utilization uses up the principal over time so that at some point in the future the money is all gone. Both the LIFE and multiple of salary methods are overall needs analysis methods.

Question 177

Jason, age 35, is married with children and has only a limited amount of disposable income. He needs life insurance protection but wants to keep his premium payments as low as possible for the next 20 years. He anticipates being in good health throughout this period. Assuming he remains healthy, what type of term policy would be most beneficial to Jason?

A. Decreasing term insurance
B. Reentry term insurance
C. Annual renewable term insurance
D. Modified whole life term insurance

Answer 177

B. Reentry term insurance

Explanation: Given that Jason anticipates being in good health, he may benefit from purchasing a level term policy (probably for five years) with a reentry provision that allows him to requalify for lower premiums at the end of this term provided he can demonstrate satisfactory evidence of insurability.

Question 178

Assume that you have a client who currently has a need for permanent (cash value type) life insurance but cannot afford that form of insurance. Based on the client’s need, what is a reasonable recommendation?

A. Convertible term life insurance
B. Annual renewable term life insurance
C. Reentry term life insurance
D. Variable annuity

Answer 178

A. Convertible term life insurance

Explanation: If there is a need for permanent insurance, your client should purchase a form of convertible term life insurance.

Convertible term allows for the exchange of the policy for permanent life policy without evidence of insurability.

Question 179

Trisha is a financial planner for XYZ Company. She is scheduled to meet with Tim and Jodi this afternoon for a follow-up meeting. In their first meeting, Trisha learned that Tim and Jodi have three young children and no life insurance coverage. Trisha also discovered that they owe a substantial amount on their current mortgage. Moreover, Tim’s family has a history of diabetes and heart disease. What is the next planning action for Trisha?

A. She should communicate her recommendations to the clients.
B. She should recommend that the clients purchase a convertible term life insurance policy for the appropriate face amount because of Tim’s family history.
C. She should analyze and evaluate the clients’ current financial status before developing and communicating any recommendations.
D. She should recommend a decreasing term life insurance policy for both Tim and Jodi to make sure the mortgage is taken care of in the unlikely event one of them should die prematurely.

Answer 179

C. She should analyze and evaluate the clients’ current financial status before developing and communicating any recommendations.

Explanation: Trisha should analyze and evaluate the clients’ current financial status before developing and communicating any recommendations. Tim and Jodi should purchase a convertible term life insurance policy to help protect their children’s financial future or a decreasing term life insurance policy to cover the mortgage; however, Trisha has not completed the necessary step to reach the point of recommending financial solutions. At this point, Trisha needs to analyze and evaluate the clients’ current financial status.

Question 180

Which factor(s) should you consider before replacing a life insurance policy?

A. The issuing company’s A.M. Best rating and other ratings
B. The appropriateness of the policy for the needs of the client
C. The client’s risk tolerance level
D. All of these

Answer 180

D. All of these

Explanation: All of these are correct. Also, the existing policy’s relative value, any possible (or intervening) changes in the client’s insurability, and the financial cost of the client starting over with a new policy also should be considered.

Question 181

Jane owns an equity-indexed annuity (EIA) with a participation rate of 90%. This year, the underlying equity index increases by 10%. What is the interest that will be credited to her annuity?

A. 9%
B. 10%
C. 11%
D. 19%

Answer 181

A. 9%

Explanation: Because Jane’s participation rate is 90%, she will be credited with an interest rate equal to 90% of the increase in the underlying index or 9%; (90% × 10% = 9%).

Question 182

When purchased inside of an IRA, what type of annuity would NOT be required to comply with the required minimum distribution (RMD) regulations?

A. Variable annuity contract
B. Indexed annuity contract
C. Fixed annuity contract
D. Qualified longevity annuity contract (QLAC)

Answer 182

D. Qualified longevity annuity contract (QLAC)

Explanation: The final rules made qualified longevity annuity contracts (QLACs) accessible to 401(k) plans and other employer-sponsored individual account plans and IRAs by amending the RMD regulations so that longevity annuity payments will not need to begin prematurely in order to comply with RMD regulations.

Question 183

Which settlement option(s) in a life insurance policy are available upon the death of the insured? Remember, life insurance settlement options are the same as annuity payout options.

I. Interest only
II. Life income with period certain
III. Cash surrender value (CSV)
IV. Joint and last survivor

A. IV only
B. I and II
C. I, II, and III
D. I, II, and IV

Answer 183

D. I, II, and IV

Explanation: CSV is a nonforfeiture option. When the insured dies, the cash value in a whole life policy is retained by the insurance company.

Question 184

Generally, which type of annuity does NOT guarantee a specific amount of annuity payment?

A. A variable annuity
B. A single premium annuity
C. A fixed annuity
D. A nonqualified annuity

Answer 184

A. A variable annuity

Explanation: A variable annuity does not guarantee a specific annuity payment. Rather, the payment is based on the performance of the assets in which the variable annuity is invested.

Question 185

Joe and Mary, a retired married couple, have no sources of income other than the interest and dividends from investments and Social Security. At this time, Joe is considering the purchase of an immediate annuity. Joe has asked you, his financial planner, which settlement option he should select. His primary objective is to ensure that Mary is provided for subsequent to his death and that she has as much income available to her as possible. What is the best recommendation for a settlement option?

A. A joint and 50% survivor annuity
B. A joint and 100% survivor annuity
C. A life annuity with a 20-year period certain
D. A single life annuity

Answer 185

B. A joint and 100% survivor annuity

Explanation: Given Joe’s objectives (particularly that of providing as much income as possible to Mary subsequent to his death), a joint and 100% survivor annuity is preferable. Although a life annuity with a period certain of 20 years could provide significant income to Mary, she could also outlive the payment period.

Question 186

Which exchange transaction is NOT a tax-free exchange under IRC Section 1035?

A. Exchanging a variable annuity for a whole life insurance policy
B. Exchanging a universal life insurance policy for a variable life insurance policy
C. Exchanging a variable annuity for a qualified long-term care contract
D. Exchanging a variable life insurance policy for a variable annuity

Answer 186

A. Exchanging a variable annuity for a whole life insurance policy

Explanation: Exchanging an annuity for a life insurance policy is not a tax-free exchange under Section 1035.

Question 187

Sandra has just been informed that she is the beneficiary of her grandmother’s life insurance policy. She has decided to choose a settlement option for the $500,000 death benefit. Which settlement option would prevent the risk of superannuation?

A. Lump sum distribution
B. Fixed-period installments
C. Single or straight life annuity
D. Fixed-amount installments

Answer 187

C. Single or straight life annuity

Explanation: The single life annuity is the only settlement option that would provide lifetime income and prevent the risk of superannuation. A lump sum distribution could be exhausted prior to death. Fixed-period installments only last for a specific period of time. Fixed-amount installments may also be exhausted prior to death.

Question 188

Mark, age 58, has a nonqualified variable annuity worth $455,000 with a cost basis of $325,000. He decides to withdraw $11,000 to pay off the balance of a credit card. What are the tax consequences of this transaction?

A. Ordinary income tax and a 10% penalty on the $11,000 distribution
B. Long-term capital gains tax on the $11,000, plus a 10% penalty
C. Ordinary income tax on $11,000
D. Transaction considered a tax-free distribution

Answer 188

A. Ordinary income tax and a 10% penalty on the $11,000 distribution

Explanation: Mark is under the age of 591⁄2, and there is no exception for paying off credit cards, so he will pay the 10% early withdrawal penalty plus ordinary income tax on the distribution.

Question 189

Final expenses typically include all of these except:

A. Funeral expenses
B. Investment funds
C. Last illness expenses
D. Estate taxes

Answer 189

B. Investment funds

Explanation: Investment funds are an asset, not an expense. Funeral expenses are considered postmortem expense. Last illness expenses are considered a postmortem expense. Although some clients may not be subjected to estate taxes, these are considered a postmortem expense.

Question 190

Which of these are broad economic assumptions (i.e., not an individual’s personal situation) that must be made during the life insurance selection process?

I. The rate of return a client can earn on investments
II. The inflation rate for the calculation period
III. Current resources available to purchase insurance
IV. The client’s risk tolerance

A. I and II
B. II and III
C. III and IV
D. I and IV

Answer 190

A. I and II

Explanation: The rate of return and the inflation rate are broad economic variables that must be assumed to determine the appropriate amount of life insurance coverage. Current resources are important in the insurance selection process, but are not a necessary economic assumption, and risk tolerance is important in the insurance selection process, but it is a client attribute, not an economic assumption.

Question 191

Darla, age 35, is married with three children and has little disposable income. She is healthy now, but her family has a history of numerous medical problems as they approach mid-life. She cannot afford permanent insurance but would like to have the option available in the future without having to take a medical exam. Which of the following term life insurance choices would be most appropriate for Darla?

A. Level term
B. Decreasing term
C. Annual renewable term
D. Convertible term

Answer 191

D. Convertible term

Explanation: If Darla’s financial situation improves, she will have the option of converting her term policy into a permanent policy without evidence of insurability.

Question 192

All of these statements concerning whole life insurance are CORRECT except:

A. Whole life insurance pays benefits only if the insured dies during a specified period of years.
B. The protection afforded by the whole life insurance contract is permanent - the term never expires, and the policy never has to be renewed or converted.
C. Whole life insurance policies issued on a participating basis may return part of the premium in the form of policyowner dividends.
D. The nonparticipating version of whole life insurance does not pay any policyowner dividends.

Answer 192

A. Whole life insurance pays benefits only if the insured dies during a specified period of years.

Explanation: Whole life insurance provides for the payment of the policy’s face amount upon the death of the insured, regardless of when death occurs. Therefore, it is the incorrect answer.

Question 193

Which of these is NOT an advantage of universal life (UL) insurance?

A. It has flexible premium payments.
B. It lends itself to a compulsory savings program.
C. It has an adjustable death benefit.
D. It has an unbundled structure.

Answer 193

B. It lends itself to a compulsory savings program.

Explanation: Due to flexible premiums, universal life insurance does not lend itself to compulsory savings. It is often the case that people reduce payments to the point that universal life effectively becomes expensive term insurance.

Question 194

Modified endowment contracts can only be created in which of these life insurance policies?

I. Term life policies
II. Whole life policies
III. Universal life policies
IV. Variable universal life policies

A. I and II
B. III and IV
C. II, III, and IV
D. I, II, III, and IV

Answer 194

C. II, III, and IV

Explanation: The only policy in which a MEC cannot be created (though technically possible with a single payment) is a term life policy because it has no investment capacity and only lasts to the end of the term. A whole life policy has no premium flexibility, but can be structured as a single payment policy and therefore becomes a MEC. Universal life policies have unbundled premiums and can become a MEC. Variable universal life policies have an unbundled premium structure and can become a MEC.

Question 195

Which of these does NOT accurately describe a valid policy replacement scenario?

A. Replacing one term policy with another is usually the least complex of the alternatives.
B. Replacing a cash value policy with a similar cash value policy is not usually advantageous.
C. Replacing a cash value policy with a term policy is usually unwise.
D. Replacing a term policy through the policy’s conversion clause is usually the best and least expensive alternative.

Answer 195

D. Replacing a term policy through the policy’s conversion clause is usually the best and least expensive alternative.

Explanation: The term company may not have the most desirable cash value policy, and costs may be higher than with another company. Replacing one term policy with another is one of the simplest replacement scenarios, because there is no concern about built up cash values. Replacing one cash value policy with another seldom is beneficial for the client. A new front-end load along with a higher age-rated premium increases the new premium. Once a reasonably good cash value policy has been purchased, retaining it is usually more advantageous than exchanging it for another policy.

Question 196

Which of these identifies an acceptable 1035(a) exchange?

A. A long term care policy to a variable life policy.
B. An annuity contract for a whole life policy.
C. An annuity contract for a modified endowment contract.
D. A modified endowment contract for an annuity contract.

Answer 196

D. A modified endowment contract for an annuity contract.

Explanation: A MEC can be exchanged for a similar MEC or an annuity contract. An LTC policy cannot be exchanged for a life policy. An annuity contract can be exchanged for another annuity contract, but not a life policy. An annuity cannot be exchanged for a modified endowment contract or any life policy.

Question 197

Which of these annuities allow payments to the policyholder to begin shortly after purchase?

A. Variable, flexible installment, immediate annuity.
B. Single premium immediate annuity.
C. Single premium, variable deferred with some fixed subaccounts.
D. Fixed variable annuity.

Answer 197

B. Single premium immediate annuity.

Explanation: Flexible premium, immediate annuity are not a type of annuity. Variable refers only to the underlying investments. All deferred annuities begin payments at some point in the future. Variable and fixed refer only to the underlying investments.

Question 198

Ralph, age 63, sold his tractor dealership for $700,000. With the proceeds, he purchased a nonqualified fixed annuity. That will pay him $62,000 per year for the rest of his life. His actual life expectancy is 25 years. How much of the annual payment is taxable?

A. $0
B. $28,000
C. $34,000
D. $62,000

Answer 198

C. $34,000

Explanation: $700,000 / 25 years = $28,000 tax-free dollars annually, which leaves $34,000 as taxable income.

Question 199

All of the following are dividend options provided by a whole life insurance policy except

A) reduce premiums.
B) one-year term insurance option.
C) life income option.
D) cash option.

Answer 199

C) life income option.

The answer is life income option. The life income option is a settlement option, not a dividend option.

Question 200

Joint life insurance includes which type of policies?

A) Both first-to-die and second-to-die policies
B) Business ownership policies (BOPs)
C) Group life policies
D) Second-to-die policies

Answer 200

A) Both first-to-die and second-to-die policies

Both first-to-die and second-to-die policies are joint life policies.

Question 201

Which of the following dividend options may create an income tax liability for the policyowner?

A) One-year term
B) Cash
C) Accumulate at interest
D) Paid-up additions

Answer 201

C) Accumulate at interest

The answer is accumulate at interest. While dividends are not taxable since they are considered a return of premium, interest earned on accumulated dividends may create an income tax liability to the extent the cash value and interest exceed the policyowner’s basis in the policy. Cash is a return of premium and not taxed. With paid-up additions and one-year term, the dividend is effectively “spent” as it is used to acquire additional death benefit and is not taxed.

Question 202

Which of the following term life insurance policies is designed to protect the insured’s mortgage?

A) Level term life insurance
B) Reentry term life insurance
C) Annual renewable term life insurance
D) Decreasing term life insurance

Answer 202

D) Decreasing term life insurance

The answer is decreasing term life insurance. Decreasing term life insurance features a level premium with a decreasing death benefit. This type of policy has been historically used as mortgage protection insurance because the decrease in policy death benefit roughly approximates the declining principal balance as mortgage payments are made by the homeowner.

Question 203

What of the following types of life insurance have historically been used as mortgage protection?

A) Decreasing term life insurance
B) Convertible term life insurance
C) Modified premium whole life insurance
D) Level-term life insurance

Answer 203

A) Decreasing term life insurance

The answer is decreasing term life insurance. Decreasing term life insurance features a level premium with a decreasing death benefit and has historically been used for mortgage protection because the death benefit can be set up to track the declining principal balance on a mortgage.

Question 204

Universal life insurance gives policyowners the ability to adjust

I. the premiums.
II. the death benefit.
III. the cash values.
IV. the policy expenses.

A) I, II, and III
B) I and III
C) I and II
D) II, III, and IV

Answer 204

A) I, II, and III

Universal life insurance policies allow policyowners to adjust the premiums, death benefit, and cash values. They do not allow policyowners to change the policy expenses.

Question 205

Which of the following is a life insurance dividend option?

A) Cash surrender
B) Extended term
C) Cash
D) Joint income

Answer 205

C) Cash

The answer is cash. Taking the dividend in the form of cash (the insurance company mails a check) is a dividend option. Cash surrender and extended term are nonforfeiture options. Joint income is a settlement option.

Question 206

Which of the following factors should be considered when utilizing the financial needs analysis method in determining the required amount of life insurance?

I. The family expenses that will remain after the wage earner dies
II. The value of the wage earner’s life
III. The income that can be generated by the surviving spouse
IV. The number of dependents

A) I, III, and IV
B) I and III
C) I, II, III, and IV
D) II, III, and IV

Answer 206

A) I, III, and IV

The value of the life lost is not considered in the needs approach. Rather, the focus is on the financial needs and remaining resources of the surviving dependents.

Question 207

Which of the following life insurance policy riders was developed in response to viatical settlements?

A) Accelerated death benefits rider
B) Long-term care rider
C) Critical illness rider
D) Family income benefit rider

Answer 207

A) Accelerated death benefits rider

The answer is accelerated death benefits rider. The accelerated death benefits rider was developed in response to increased demand for viatical settlements (where policyowners sell their life insurance policy for a portion of the value of the death benefit). Once an insured meets the definition of terminally ill per the policy, a portion of the death benefits as defined by the policy (ranging between 25% and 98%) may be accessed.

Question 208

Claire, 49, owns a life insurance policy. Her basis in the policy is $50,000, and the cash value is $75,000. The policy is not a modified endowment contract. Claire is dissatisfied with the policy and is interested in surrendering it or exchanging it for another financial product, but she does not want to incur an income tax liability. Which of the following transactions would allow Claire to accomplish her goal?

I. Surrender the policy for $75,000 in cash and purchase another policy
II. Exchange the policy for another life insurance policy
III. Exchange the policy for a variable annuity
IV. Exchange the policy for a qualified long-term care insurance policy

A) I and III
B) II, III, and IV
C) II and III
D) II only

Answer 208

B) II, III, and IV

The answer is II, III, and IV. Statements II, III, and IV describe transactions that can be accomplished under Section 1035 of the Internal Revenue Code without recognizing any gain or loss. Statement I (surrendering the policy for cash and purchasing another policy) would result in taxable income of $25,000.

Question 209

Which of the following are risk exposures that may indicate a need for life insurance on a primary income earner?

I. Final expenses
II. Debts and mortgages
III. Education expense
IV. Support of elderly parents

A) I and IV
B) I and II
C) I, II, III, and IV
D) I, III, and IV

Answer 209

C) I, II, III, and IV

The answer is I, II, III, and IV. All of these are risk exposures. Other risk exposures include dependents’ need for income and the funding of family goals.

Question 210

Geraldo purchased a participating whole life insurance policy 15 years ago and now wishes to receive the policy’s cash surrender value (CSV).

He gives you the following information to assess the potential taxation of the surrender:

CSV: $80,000
Dividends received: $12,500
Premiums paid: $60,000
What is the amount of cash value that is taxable to Geraldo and what is the character of this income?

A) $40,000 ordinary income
B) $0
C) $32,500 capital gain
D) $32,500 ordinary income

Answer 210

D) $32,500 ordinary income

Geraldo paid $60,000 in premiums. However, life insurance dividends are considered a return of premium, so his adjusted basis in the contract is $47,500. The current cash surrender value is $80,000. $80,000 - $47,500 = $32,500; therefore, his gain in the contract is $32,500. However, due to IRS rules, that amount will be taxed as ordinary income, not capital gain. $7,500 of his premiums paid are attributable to the cost of insurance.

Question 211

Assume Greg dies of a heart attack, and Jackie receives the $50,000 death benefit provided by his group life insurance policy and $150,000 from his individually owned universal life insurance policy as lump-sum payments. What amount must Jackie include in her gross income?

A) $200,000
B) $0
C) $150,000
D) $50,000

Answer 211

B) $0

The answer is $0. When Greg dies, Jackie receives a $50,000 death benefit under his 20-year level term policy and a $150,000 death benefit (two times his salary of $75,000) under his group life policy. Because she receives the benefits in one lump sum, they are not included in her gross income.

Question 212

Which of the following questions regarding policy replacements is CORRECT?

I. Replacing a cash value policy with another cash value policy usually is not advantageous.
II. The new policy will have the same contestable and suicide clause periods as the existing policy.

A) Neither I nor II
B) Both I and II
C) II only
D) I only

Answer 212

D) I only

The answer is I only. Statement II is incorrect. The new policy will have to pass through a contestable period and a suicide clause period, through which the existing policy already may have passed.

Question 213

Which of the following statements regarding the contestable clause of a life insurance policy is CORRECT?

I. Generally, the clause prevents the insurance company from contesting the validity of the policy after it has been in force for two years.
II. The validity of the contract cannot be questioned after the stated period except in limited situations.

A) Both I and II
B) II only
C) Neither I nor II
D) I only

Answer 213

A) Both I and II

The answer is both I and II. Both of these statements are correct.

Question 214

All of the following factors are key considerations in determining a client’s profile for life insurance purposes except

A) health.
B) age.
C) income.
D) education level.

Answer 214

D) education level.

The answer is education level. Age, income, and health are important factors in determining appropriate life insurance products. Though education level may affect earning capacity, it is relatively unimportant in terms of the life insurance profile.

Question 215

Which of the following statements regarding variable annuity living benefit riders is CORRECT?

A) None of the answers are correct.
B) The guaranteed minimum withdrawal benefit (GMWB) is the most popular rider currently with almost 70% of annuity buyers selecting it.
C) The guaranteed minimum accumulation benefit (GMAB) guarantees that there will be a minimum account value at the end of a specified guaranteed date.
D) The guaranteed lifetime withdrawal benefit (GLWB) is the most popular rider currently with almost 70% of annuity buyers selecting it.

Answer 215

D) The guaranteed lifetime withdrawal benefit (GLWB) is the most popular rider currently with almost 70% of annuity buyers selecting it.

The guaranteed lifetime withdrawal benefit (GLWB) is the most popular rider currently with almost 70% of annuity buyers selecting it.

Question 216

Which of the following insurance policy riders prevents the policy from lapsing as a result of nonpayment of premiums during the insured’s disability?

A) Guaranteed insurability option
B) Accidental death benefit rider
C) Disability waiver of premium
D) Accelerated death benefit rider

Answer 216

C) Disability waiver of premium

The answer is disability waiver of premium. In most cases, the disability waiver of premium rider requires total disability (as defined in the policy) before the rider is triggered. The guaranteed insurability rider allows the insured to purchase additional insurance, regardless of insurability, at specified intervals up to a specified maximum age.

Question 217

Antonio is looking for ways to reduce expenses in retirement. He has been paying premiums on a whole life policy. His health is not great, and his life expectancy will be shorter than a normal person his age. Which of the following strategies and reasons would be appropriate for Antonio?

A) Antonio could take a reduced paid-up life policy and eliminate future premiums. Since his health is not great, this would give his heirs the maximum inheritance if he died within the next 10 years.
B) Antonio could convert his policy to an extended term policy. According to the insurance company, his policy would last past a normal life expectancy, and the full death benefit would go to his heirs without additional out-of-pocket expenses, as long as he passes away within the extended term period.
C) Antonio could add an accidental death and disability (AD&D) rider.
D) Antonio could surrender the policy for cash because he could invest the money for his heirs at a better return and still reduce his expenses.

Answer 217

B) Antonio could convert his policy to an extended term policy. According to the insurance company, his policy would last past a normal life expectancy, and the full death benefit would go to his heirs without additional out-of-pocket expenses, as long as he passes away within the extended term period.

Antonio could convert his policy to an extended term policy. According to the insurance company, his policy would last past a normal life expectancy, and the full death benefit would go to his heirs without additional out-of-pocket expenses, as long as he passes away within the extended term period. Because of his shortened life expectancy, taking a cash surrender would provide the least amount of money for his heirs. Utilizing an extended term policy would create the most resources for his heirs. The AD&D rider would do nothing to benefit Antonio.

Question 218

A client is in the process of purchasing a universal life policy. The client desires a level death benefit. Which of the following universal life death benefit options would help the client achieve this goal?

A) Option C
B) Option A
C) Option D
D) Option B

Answer 218

B) Option A

Option A pays a level death benefit.

Question 219

Personal risk exposures that can be covered by life insurance include

I. premature death before a debt is repaid.
II. premature death before children’s education is paid.
III. the spouse without a retirement benefit outliving the spouse who is receiving a straight life annuity pension payout.
IV. long-term care.

A) I, II, III, and IV
B) I and III
C) II, III, and IV
D) I, II, and III

Answer 219

A) I, II, III, and IV

The answer is I, II, III, and IV. All of these are personal risk exposures that can be covered by life insurance.

Question 220

Daniele has a universal life insurance policy with the Option B death benefit. The net amount at risk (NAR) is $500,000, and the current cash value is $225,000. The beneficiary is her son, Richard. If Daniele dies today, what amount will Richard receive as a death benefit?

A) $225,000
B) $500,000
C) $725,000
D) $275,000

Answer 220

C) $725,000

The answer is $725,000. Under a universal life insurance policy with the Option B death benefit (also known as the increasing death benefit option), the death benefit is the NAR plus the cash value. Richard will receive $725,000 ($500,000 + $225,000).

Question 221

Which of these regarding Registered Indexed-Linked Annuities (RILAs) is true?

A) From most-to-least conservative products, the ordering is EIAs, RILA-buffer, and then RILA-floor.
B) From least-to-most conservative products, the ordering is EIAs, RILA-floor, and then RILA-buffer.
C) From most-to-least conservative products, the ordering is EIAs, RILA-floor, and then RILA-buffer.
D) From least-to-most conservative products, the ordering is EIAs, RILA-buffer, and then RILA-floor.

Answer 221

C) From most-to-least conservative products, the ordering is EIAs, RILA-floor, and then RILA-buffer.

Equity-indexed annuities (EIAs) are the most conservative of the three indexed products in that it offers some potential for gain and no risk of loss. RILAs with a floor option enjoy more potential for gains with some risk of loss. Lastly, RILAs with a buffer offer the greatest gain and loss potential.

Question 222

Which of these statements regarding variable universal life insurance is CORRECT?

I. This policy contains investment options and a guaranteed death benefit.
II. Premium payments and death benefits can be adjusted.
III. VUL allows for income tax-free policy loans and taxable cash value withdrawals assuming the gain exceeds basis.
IV. Variable universal life insurance policies often lag the returns provided by universal life policies.

A) I, II, III, and IV
B) I and IV
C) I, II, and III
D) II and III

Answer 222

D) II and III

The answer is II and III. Variable universal life insurance policies are suited for individuals with higher, not lower, risk tolerances and investment experience. In addition, their returns typically are higher than universal life given their equity exposure. However, the death benefit amount itself is not guaranteed, and is dependent upon investment performance.

Question 223

Which of the following is the period during which the owner of a life insurance policy is allowed to pay an overdue premium?

A) Reinstatement period
B) Waiver of premium period
C) Contestable period
D) Grace period

Answer 223

D) Grace period

The answer is grace period. The insurance remains in force during the grace period. The grace period prevents the policy from lapsing by providing the policyowner with additional time to pay an overdue premium. If the insured dies within the grace period, the company deducts the overdue premium from the death benefit payable to the beneficiary.

Question 224

Under a Section 1035 exchange, which of the following policies may be exchanged on a tax-free basis?

I. An endowment policy exchanged for another endowment policy, in which the beginning date for regular payments is no later than the original contract qualified long-term care contract, or annuity contract
II. One annuity contract exchanged for another annuity contract
III. A life insurance policy exchanged for another life insurance policy (on the same insured), annuity, or endowment contract
IV. An annuity contract exchanged for a life insurance policy

A) I and IV
B) II and III
C) I, II, and III
D) I and II

Answer 224

C) I, II, and III

Statement IV is not an eligible tax-free exchange under Section 1035. A taxable event occurs if an annuity is exchanged for a life insurance policy or endowment contract.

Question 225

A periodic annuity payment that is guaranteed to pay a set amount is a feature of

A) a fixed annuity.
B) a deferred annuity.
C) a deferred variable annuity.
D) a variable annuity.

Answer 225

A) a fixed annuity.

The answer is a fixed annuity. To guarantee fixed payments to the annuitant, the insurer invests the premiums during the accumulation period in bonds, mortgages, and other fixed-income securities with a guaranteed return.

Question 226

Miguel purchased a $100,000 annuity and, based on his life expectancy, the insurance company determines he could anticipate 20 years of payments of $750 per monthly. What part of each monthly payment is taxable?

A) $416.67
B) $750.00
C) $333.33
D) $0

Answer 226

The answer is $333.33. Part of each $750 will be taxable, and part will be a nontaxable return of capital. The nontaxable amount is determined as follows:

$750 × [$100k / ($750 x 12 x 20)] = $750 x 0.5556 = $416.67

For each $750 payment, $416.67 will be a nontaxable return of capital and $333.33 will be taxable.

Question 227

Which of the following statements concerning term life insurance is CORRECT?

I. The convertible feature of a term life insurance policy permits the policyowner to exchange the term contract for a contract of permanent life insurance within a specified time without evidence of insurability.
II. Fixed-level term typically costs more (less) than annual renewable term (ART) in the earlier (later) stages of life.
III. Term life insurance provides life insurance protection for a limited period only. The face amount of the policy is payable if the insured dies during the specified period, and a reduced amount is paid if the insured survives under the premium guarantee rider provision..
IV. The premium for term life insurance is initially lower because most term contracts do not cover the period of old age when death is most likely to occur and the cost of insurance is high.

A) I, II, and IV
B) II only
C) III and IV
D) I and III

Answer 227

A) I, II, and IV

The answer is I, II, and IV. Statement III is incorrect because nothing is paid if the insured survives the period specified in the term life insurance policy. The correct rider is “return of premium” rider, not “premium guaranteed rider provision.”

Question 228

All of the following statements regarding whole life insurance are correct except

A) whole life is considered permanent life insurance.
B) whole life insurance policies issued on a participating basis may return part of the premium in the form of policyowner dividends.
C) whole life insurance allows for flexible premium payments under the universal rider provision.
D) the protection afforded by the whole life insurance contract is permanent. The term never expires, and the policy never has to be renewed or converted.

Answer 228

C) whole life insurance allows for flexible premium payments under the universal rider provision.

Whole life insurance premium payments occur on a fixed schedule and there is no “universal rider” option available.

Question 229

Which of these statements regarding indexed universal life insurance is CORRECT?

I. This policy contains investment options and no minimum guaranteed rate of return.
II. A rate cap dictates a specific percentage of the index gain that is credited to the policy.
III. A participation rate limits the interest an equity indexed universal life policy (EIUL) can earn by placing an upper limit on the credited rate.
IV. Indexed universal life insurance policies are suited for individuals with higher risk tolerances and investment experience.

A) I and IV
B) IV only
C) II and III
D) I, II, III, and IV

Answer 229

B) IV only

Indexed universal life policies do not contain investment options; rather, they track an external index and receive a crediting rate to the cash value account. A participation rate dictates a specific percentage of the index gain that is credited to the policy. A rate cap also limits the interest an EIUL can earn by placing an upper limit on the credited rate.

Question 230

Which of these statements concerning variable universal life (VUL) insurance is CORRECT?

I. VUL insurance incorporates all of the premium flexibility features of the universal life policy with the policyowner directed investment aspects of variable life insurance.
II. Failure to repay a VUL loan can result in policy lapse and loss of surrender cash value net of loan repayment, but generally will avoid taxable income.

A) II only
B) I only
C) Neither I nor II
D) Both I and II

Answer 230

B) I only

The answer is I only. A VUL insurance policy combines the policyowner investment direction element of variable life insurance with the flexible premium, cash value, and death benefit elements of universal life. Accordingly, the attributes of a VUL policy include an increasing or decreasing death benefit and a flexible premium payment schedule. Failure to repay a VUL loan can result in policy lapse and loss of surrender cash value net of loan repayment. Taxable income is also due to the extent gains exceed basis, regardless of whether or not any cash value is received upon surrender.

Question 231

Which of the following regarding policy loans is NOT true?

A) A variable interest rate is generally used with participating policies.
B) Most insurers charge interest in advance.
C) With variable products, cash value equal to the amount borrowed is moved to a guaranteed interest rate account.
D) A policyholder generally may borrow close to the entire cash value of a policy (less some interest).

Answer 231

B) Most insurers charge interest in advance.

Similar to most consumer loans, insurers generally charge interest in arrears. The other statements are true.

Question 232

Yasmin is deciding between dividend options for her life insurance policy. She does not have immediate cash needs, nor the need for additional life insurance. Her household cash flow is strong and she can afford to pay regularly scheduled premium payments. Which of the following options best meets her needs?

A) Accumulated at interest
B) Paid-up additions
C) Reduced premium
D) Cash

Answer 232

A) Accumulated at interest

The answer is accumulated at interest. Yasmin does not have immediate cash needs or the need for additional life insurance, thus the cash and paid-up additions are not needed. She also has strong cash flows and can make regular scheduled payments, thus reduced premium is incorrect. Her best option is accumulate at interest.

Question 233

Cory suffers from chronic asthma and has struggled obtaining insurance in the past. Assuming he now has coverage and has strong cash flows, which of the following dividend options best fits his needs?

A) One-year term
B) Cash
C) Reduced premium
D) Accumulate at interest

Answer 233

A) One-year term

The answer is one-year term. With the one-year term dividend option, the dividend is used to purchase additional term death benefit protection with no underwriting required. The paid-up additions and one-year term dividend options both allow the policyowner to acquire more death benefit at no additional cost, other than using the dividend instead of taking it as cash.

Question 234

Your client wants to provide his spouse with $6,000 of additional income adjusted for inflation, paid at the beginning of each month, for 30 years after his death. He wants to use up the entire amount of principal and interest during that period. He expects 3% inflation and 7% net interest on savings and wants the income to be adjusted annually for inflation.

Assuming he dies today, how much additional life insurance is required to fund this need?

A) $1,274,634
B) $1,278,760
C) $1,260,957
D) $1,256,767

Answer 234

B) $1,278,760

The answer is $1,278,760. The solution to this can be done in a single step. We’re looking for the amount it would take today to fund an increasing monthly benefit for 30 years. With the calculator set for BEG mode (SHIFT, MAR), the keystrokes would be 30 × 12 = 360, N; 1.07 ÷ 1.03 = 1.0388 – 1 = .03833 × 100 = 3.8835 ÷ 12 = .3236, I/YR; 6,000, PMT, and solve for PV = 1,278,760.

Question 235

Whole life insurance nonforfeiture options allow a policyowner to

I. surrender a whole life insurance policy and receive the net cash value (cash value less any outstanding policy loans).
II. stop paying premiums on a whole life insurance policy and exchange the net cash value for a reduced paid-up single premium permanent life insurance policy.
III. stop paying premiums on a whole life insurance policy and use the net cash value as a single premium to purchase a paid-up term life insurance policy with a face amount equal to the face amount of the original policy for a specified period.

A) I and II
B) III only
C) II and III
D) I, II, and III

Answer 235

D) I, II, and III

The answer is I, II, and III. There are three nonforfeiture options available when surrendering or discontinuing premium payments on a whole life insurance policy. First, the policyowner can surrender the policy in return for receiving the cash surrender value of the policy. Second, the policyholder leaves the cash value with the company and receives a smaller amount of fully paid-up insurance. With the third option, a policyholder leaves the cash value with the insurance company in exchange for retaining the full amount of the original policy’s death benefit, but as a term insurance policy for a guaranteed period.

Question 236

In evaluating the replacement of life insurance, which of the following does NOT need to be considered?

I. Spouse’s health status
II. New front-end load costs
III. Income tax consequences

A) I and III
B) II and III
C) I and II
D) I only

Answer 236

D) I only

The answer is I only. The client’s health status would impact replacement, but the spouse’s health would have no impact. All other factors should be considered.

Question 237

Wanda is considering replacement of her life insurance policy with a new policy issued by another company. Which of the following statements regarding policy replacement is CORRECT?

I. The new policy will have high initial costs relative to the current policy’s costs.
II. The new policy’s incontestable clause will be waived.

A) Neither I nor II
B) II only
C) I only
D) Both I and II

Answer 237

C) I only

The answer is I only. The majority of a life insurance policy’s costs are included in the early years of the policy. At this time, acquisition costs are high. As policies age, the expenses decrease. A new policy will have a new contestable clause, initial expenses, and the potential for a substandard rating, as it will be underwritten at the insured’s current age and health.

Question 238

A client recently annuitized his fixed annuity and selected a life annuity with a 15-year period certain payout option. The income payments from the annuity are currently $2,000 per month. If the client dies after receiving income payments for 10 years, which of the following statements is CORRECT?

A) Income payments of $2,000 per month will continue to the beneficiary for five years.
B) Income payments will stop.
C) Income payments of $2,000 per month will continue to the beneficiary for 15 years.
D) Income payments will continue to the beneficiary for five years; the amount of the payments will vary depending on the investment returns of the underlying subaccounts.

Answer 238

A) Income payments of $2,000 per month will continue to the beneficiary for five years.

The answer is income payments of $2,000 per month will continue to the beneficiary for five years. In a life annuity with period certain payout option, if the annuitant dies before the end of the specified period, payments continue to the beneficiary for the remaining term. In this case, payments continue for five years. Because the client’s annuity is a fixed annuity, the payments are not based on the investment performance of subaccounts.

Question 239

Which of the following clients would be a good candidate for term life insurance?

I. Tina, 21, who wants life insurance for only 20 years until her mortgage is paid off and who does not want to accumulate a cash value
II. Ralph, 40, who wants life insurance only until he and his wife reach age 66 and begin receiving Social Security benefits. He wants the maximum face amount he can obtain for the amount of premium he can afford to pay.
III. Sam, 35, who wants current life insurance protection at a minimal cost. He may or may not want to renew his policy from year to year, and he does not mind if his premiums increase in the future.

A) I, II, and III
B) I only
C) I and II
D) II and III

Answer 239

A) I, II, and III

The answer is I, II, and III. All of these clients are good candidates for term life insurance because they have a temporary need for life insurance protection. In addition, term life insurance does not accumulate cash value (making it appropriate for Tina) and provides the maximum face amount of coverage for a given amount of premium (making it appropriate for Ralph). Although premiums typically increase when term life insurance is renewed, this is not a disadvantage for Sam.

Question 240

Which of the following is an advantage of annual renewable term life insurance?

I. Term life insurance has the ability to add a cash value rider.
II. Initially, term life insurance has a lower premium than whole life insurance.
III. Initially, term life insurance provides more insurance protection per premium dollar than whole life insurance.

A) I and II
B) III only
C) II and III
D) I, II, and III

Answer 240

C) II and III

Term life insurance does not accumulate cash value. Term life insurance provides only temporary protection for a given number of years. In the long run, term life insurance provides less insurance protection per premium dollar than whole life insurance.

Question 241

Pauline, age 45, would like to purchase life insurance. She wants a policy that will provide strong protection and build up a cash value. Pauline has a low risk tolerance and is prepared to make fixed scheduled payments. She wants a minimum guaranteed death benefit and a cash value she can access for withdrawals and loans, if needed. Which of the following policies would best meet Pauline’s needs?

A) Whole (ordinary) life
B) Variable life
C) Variable universal life
D) Universal life

Answer 241

A) Whole (ordinary) life

The whole (ordinary) life policy best meets Pauline’s needs because it will provide protection for her entire life (if the premiums are paid as agreed) and a guaranteed cash value plus death benefit. In addition, the insurance company assumes all of the investment risk and guarantees a minimum cash value at each age and operates off fixed scheduled premium payments.

Question 242

Which of the following characteristics of life insurance contracts create favorable tax treatment?

I. Withdrawals and surrenders are taxed at capital gains rates.
II. Death benefits paid to a beneficiary are not usually taxable as income.
III. The earnings on the cash value are not taxed during the accumulation period.

A) I, II, and III
B) II only
C) II and III
D) I and III

Answer 242

C) II and III

The answer is II and III. Income taxes on investment gains are tax-deferred but are taxed at ordinary income rates, not capital gains rates..

Question 243

Which of the following statements regarding the income tax treatment of policy loans from modified endowment contracts (MECs) is CORRECT?

I. They are subject to last-in, first-out (LIFO) tax treatment and allow for tax-free loans.
II. The loan is generally tax free but subject to a 10% penalty if the policyowner is younger than 59½ years old.

A) II only
B) Both I and II
C) Neither I nor II
D) I only

Answer 243

C) Neither I nor II

The answer is neither I nor II. Policy loans from a MEC may be subject to a 10% income tax penalty if the policyowner is younger than 59½ years. Loans and withdrawals are also subject to LIFO tax treatment and are taxed at ordinary income rates.

Question 244

The appropriate amount of life insurance coverage for a client may be affected by his survivors’ needs. These needs may include all of the following except

A) emergency fund.
B) education funding.
C) regular income.
D) the client’s health status.

Answer 244

D) the client’s health status.

The answer is the client’s health status. This question is asking about beneficiary needs. The client’s health status would not affect how much life insurance the client needs. Rather, that would affect whether or not the client can obtain the coverage needed and at what price.

Question 245

Which of the following is a pitfall to avoid when selecting an appropriate type of life insurance?

A) Establishing client goals
B) Comparing the costs of available types of life insurance
C) Recommending the purchase of term insurance because the client is young
D) Taking advantage of breakpoints

Answer 245

C) Recommending the purchase of term insurance because the client is young

The answer is recommending the purchase of term insurance because the client is young. Youth, by itself, is not the determining factor in deciding upon the type of policy to be purchased. Specifically, a strong argument can be made that premiums used to purchase term insurance could have been earning a cash value in a more permanent type of insurance. The type of insurance to be purchased should be determined by the factors comprising the client profile. Insurance companies often have breakpoints with regard to pricing. For instance, it is likely a $500,000 policy will cost less than a $490,000 policy.

Question 246

Le’Veon wants to purchase a life insurance policy on his own life. He is concerned that the policy may lapse if he inadvertently forgets to pay the premiums. Le’Veon’s family has a history of medical issues, and he is concerned that he may become uninsurable in the future. Which of the following policy provisions would best address Le’Veon’s concerns?

A) Automatic premium loan provision
B) Reinstatement provision
C) Nonforfeiture provision
D) Contestability provision

Answer 246

A) Automatic premium loan provision

The answer is automatic premium loan provision. The automatic premium loan provision provides that the premium will automatically be charged against the policy cash value if it is not paid by the due date. A reinstatement provision allows a policyholder to reinstate a policy after it lapses, but only if the insured can prove insurability. A nonforfeiture provision specifies what will happen to the cash value if the policyowner discontinues premium payments, and an incontestability provision prevents the insurer from challenging the validity of a policy after it has been in force for a specific period.

Question 247

Which of the following definitions best describes a single premium immediate annuity (SPIA)?

A) An annuity specifying that, if the annuitant dies before receiving total benefit payments equal to the purchase price of the annuity, the difference will be refunded in the form of continuing benefit payments
B) An annuity whose benefit payments continue for the lifetimes of two or more beneficiaries
C) A life annuity that provides a guaranteed minimum number of benefit payments whether the annuitant lives or dies
D) An annuity whose benefit payments begin one payment interval after the date of purchase

Answer 247

D) An annuity whose benefit payments begin one payment interval after the date of purchase

The answer is an annuity whose benefit payments begin one payment interval after the date of purchase. A SPIA is an annuity whose benefit payments begin one payment interval after the date of purchase.

Question 248

Which of the following is an advantage of single-premium immediate annuities (SPIAs)?

I. Investment risk is transferred to the insurer.
II. They protect the principal from creditors.
III. Most benefits increase with inflation.
IV. They ensure a lifetime of income, without fear of outliving the principal.

A) I, II, and IV
B) I and II
C) I and IV
D) II and III

Answer 248

A) I, II, and IV

The answer is I, II, and IV. Statement III is incorrect. Most SPIA benefits are fixed and will not increase with inflation unless the owner has included a cost-of-living adjustment rider.