Module 3 Flashcards

Question

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

Answer 1

nonforfeiture values

Answer 2

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.

Answer 3

nonparticipating whole life

Answer 4

participating

Answer 5

whole life insurance

Answer 6

premium; death benefit; cash value

Answer 7

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.

Answer 8

Variable Life (VL) policy

Answer 9

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.

Answer 10

Variable Life (VL)

Answer 11

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.

Answer 12

limited-pay

Answer 13

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).

Answer 14

single premium whole life policy

Answer 15

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.

Answer 16

lives of children

Answer 17

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.

Answer 18

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.

Answer 19

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.

Answer 20

cash value

Answer 21

$300 ($1,900 – $1,600)

Answer 22

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.

Answer 23

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.

Answer 24

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.

Answer 25

VUL policies

Answer 26

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.

Answer 27

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

Answer 28

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

Answer 29

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.

Answer 30

adjustable life

Answer 31

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.

Answer 32

first-to-die policy

Answer 33

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

Answer 34

second-to-die

Answer 35

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.

Answer 36

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.

Answer 37

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

Answer 38

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.

Answer 39

the earnings grow tax-deferred

Answer 40

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.

Answer 41

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.

Answer 42

declarations

Answer 43

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.

Answer 44

irrevocable beneficiary; irrevocable

Answer 45

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.

Answer 46

reinstatement

Answer 47

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.

Answer 48

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.

Answer 49

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.

Answer 50

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.

Answer 51

standard policy loans and APLs

Answer 52

direct recognition

Answer 53

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.

Answer 54

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

Answer 55

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.

Answer 56

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.

Answer 57

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.

Answer 58

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.

Answer 59

reduced premium dividend option

Answer 60

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.

Answer 61

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.

Answer 62

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

Answer 63

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.

Answer 64

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.

Answer 65

term rider

Answer 66

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.

Answer 67

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

Answer 68

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.

Answer 69

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

Answer 70

disability waiver of premium rider

Answer 71

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.

Answer 72

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

Answer 73

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.

Answer 74

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

Answer 75

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.

Answer 76

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.

Answer 77

restoration of benefits

Answer 78

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.

Answer 79

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.

Answer 80

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.

Answer 81

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.

Answer 82

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.

Answer 83

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.

Answer 84

human life value method

Answer 85

gradually depleted or remains intact

Answer 86

capital utilization and capital retention

Answer 87

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

Answer 88

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.

Answer 89

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

Answer 90

whole life

Answer 91

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.

Answer 92

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.

Answer 93

guarantees The law prevents an insurance company from guaranteeing dividends.

Answer 94

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.

Answer 95

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

Answer 96

life expectancy

Answer 97

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.

Answer 98

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.

Answer 99

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.

Answer 100

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.

Answer 101

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.

Answer 102

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.

Answer 103

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).

Answer 104

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.

Answer 105

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.

Answer 106

fixed; variable

Answer 107

equity-indexed annuities (EIAs)

Answer 108

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.

Answer 109

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

Answer 110

set the maximum loss the client is willing to accept.

Answer 111

EIAs; RILAs; RILAs

Answer 112

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

Answer 113

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

Answer 114

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%.

Answer 115

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.

Answer 116

deferred income annuity (DIA)

Answer 117

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.

Answer 118

tax deferral

Answer 119

ordinary income

Answer 120

$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.

Answer 121

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.

Answer 122

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.

Answer 123

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.

Answer 124

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.

Answer 125

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.

Answer 126

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

Answer 127

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).

Answer 128

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.

Answer 129

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.

Answer 130

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.

Answer 131

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.

Answer 132

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.

Answer 133

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

Answer 134

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.

Answer 135

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.

Answer 136

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).

Answer 137

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.

Answer 138

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.

Answer 139

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.

Answer 140

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.

Answer 141

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.

Answer 142

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.

Answer 143

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.

Answer 144

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%).

Answer 145

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.

Answer 146

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.

Answer 147

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.

Answer 148

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.

Answer 149

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.

Answer 150

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.

Answer 151

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.

Answer 152

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.

Answer 153

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.

Answer 154

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.

Answer 155

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.

Answer 156

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.

Answer 157

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.

Answer 158

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.

Answer 159

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.

Answer 160

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.

Answer 161

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

Answer 162

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

Answer 163

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

Answer 164

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.

Answer 165

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.

Answer 166

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.

Answer 167

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.

Answer 168

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.

Answer 169

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.

Answer 170

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.

Answer 171

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.

Answer 172

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.

Answer 173

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.

Answer 174

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.

Answer 175

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.

Answer 176

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

Answer 177

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.

Answer 178

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.

Answer 179

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.

Answer 180

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.

Answer 181

B) Option A Option A pays a level death benefit.

Answer 182

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.

Answer 183

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).

Answer 184

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.

Answer 185

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.

Answer 186

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.

Answer 187

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.

Answer 188

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.

Answer 189

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.

Answer 190

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."

Answer 191

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.

Answer 192

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.

Answer 193

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.

Answer 194

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

Answer 195

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.

Answer 196

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.

Answer 197

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.

Answer 198

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.

Answer 199

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.

Answer 200

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.

Answer 201

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.

Answer 202

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.

Answer 203

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.

Answer 204

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.

Answer 205

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..

Answer 206

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.

Answer 207

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.

Answer 208

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.

Answer 209

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.

Answer 210

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.

Answer 211

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.

Module 3 Flashcards

Life Insurance & Annuities