Module 3 Life Insurance & Annuities

Question 1

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

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

Answer 1

Riskiest is RILA Buffer, then RILA Floor, then EIA

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

Registered Index Linked Annuity is riskier than an Equity Index Linked Annuity. Buffer is riskier than floor. Buffer simply means that a percentage of your loss will be BUFFED off, while a floor means that you will not lose more than the floor.

Question 2

Dawn, 55, recently received a lump sum settlement of $100,000 from a civil suit she filed against a drunk driver. She wants to invest the $100,000 in an annuity that will begin making monthly payments to her when she retires at age 65. She does not expect to make any additional premium payments to the annuity. Dawn has a high risk tolerance and wants to be able to invest her premium in subaccounts of her own choosing. She is not interested in receiving a guaranteed minimum return on her investment. Which of the following annuities best meets Dawn’s needs?

A)
Flexible premium deferred equity-indexed annuity
B)
Fixed, single premium immediate annuity
C)
Flexible premium deferred variable annuity
D)
Single premium deferred variable annuity

Answer 2

Wants to pay in once, get an annuity, high risk tolerance, wants subaccounts for investment, and wants to get payments in 10 years.

Single premium, deferred, variable annuity

Single premium - Pay in once
Deferred - get the payments later
Variable - you get subaccounts to invest in all on your own
Annuity.. Welp

The answer is single premium deferred variable annuity. Because Dawn expects to make only one premium payment and wants income payments to begin in the future, a single premium deferred annuity best meets her needs. She needs a variable annuity because neither a fixed annuity nor an equity-indexed annuity will allow her to invest in subaccounts.

LO 3.6.1

Question 3

Which of the following definitions describes an accelerated death benefit rider found in insurance policies?

A)
A benefit under a long-term care insurance policy that continues to pay a long-term care facility for a limited time if a patient must temporarily leave because of hospitalization
B)
A benefit rider that pays a portion of the death benefit to an individual deemed terminally ill, usually with a life expectancy of 24 months or less
C)
A provision for the replacement of lost earnings due to less-than-total disability
D)
A benefit under long-term care insurance that provides reimbursement for occasional full-time care at home for a person who is receiving home health care

Answer 3

B

The answer is a benefit rider that pays a portion of the death benefit to an individual deemed terminally ill, usually with a life expectancy of 24 month or less. If the accelerated death benefit rider is included in an existing policy, it serves as a source of funds for either a terminally or chronically ill insured. This rider typically provides that, if an individual is terminally ill, usually with a life expectancy of 24 months or less, the insurance company will pay out a portion of the death benefit. The most common amount paid is 50% of the face amount. The other 50% is paid out as an income tax-free death benefit to the insured’s named beneficiary.

LO 3.3.3

Question 4

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

Final expenses
Debts and mortgages
Education expense
Support of elderly parents
A)
I and II
B)
I, III, and IV
C)
I and IV
D)
I, II, III, and IV

Answer 4

Definitely all of them

Question 5

Which of the following life insurance riders allows for additional life coverage for a period of time on a cash value policy for the named insured?

A)
A spouse term rider
B)
A children’s term rider
C)
A term rider
D)
A guaranteed insurability rider

Answer 5

C

The answer is a term rider. The term rider allows for additional term coverage on the named insured on a cash value policy. A spouse or children’s rider allows for additional term life coverage on a person other than the named insured. A guaranteed insurability rider allows the named insured to purchase additional cash value coverage at specific times.

Question 6

Which of the following are features of a straight life, fixed, single premium immediate annuity?

Payments do not increase with inflation.
Payments stop when the annuitant dies.
The annuitant may die before a return of the principal is realized.
The income level may drop if the underlying investments go down in value.
A)
I, II, and III
B)
I and III
C)
I, II, and IV
D)
II, III, and IV

Answer 6

Statement IV is incorrect. Payments from a straight life, fixed, single premium immediate annuity are fixed and are not dependent on underlying investments.

LO 3.6.2

Question 7

Which of the following items are covered, but are subject to a specific dollar limit, under the personal property provision of a homeowners policy?

Furs
Jewelry
Coin collections
A)
I and II
B)
II and III
C)
I, II, and III
D)
I and III

Answer 7

All

Question 8

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

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

Answer 8

C

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

LO 3.3.2

Question 9

Esmeralda purchased an indefinite duration life insurance policy that has a guaranteed cash value and pays annual dividends. Which of the following types of life insurance did Esmeralda purchase?

A)
Participating whole life
B)
Term life
C)
Endowment life
D)
Universal life

Answer 9

A

The answer is participating whole life. Dividends are essentially a return of premium when actual policy expenses are less than anticipated. Generally, mutual life insurance companies offer participating policies that pay dividends. Participating whole life policies are an example of this type of policy. Universal life policies pay interest, but not dividends. Term life has no cash value, and therefore, does not pay dividends. Endowment policies are not participating, and therefore, do not pay dividends.

Question 10

When evaluating life insurance needs, which of the following factors should be considered by a married person with children?

The duration of financial support for the surviving spouse
Whether the surviving spouse and children have the financial resources needed to avoid financial hardship
Whether adequate financial resources are available to the children to pay for higher education costs
A)
I and II
B)
I, II, III, and IV
C)
III and IV
D)
I and III

Answer 10

All

Question 11

Azumi purchased an annuity for $26,000 in the current year. Under the contract, Azumi will receive $300 each month for the rest of her life starting next month. According to actuarial estimates, Azumi will live long enough to collect 100 payments, and she will receive a 3% return on her original investment. Which of the following statements regarding the taxation of Azumi’s annuity income is CORRECT?

A)
If Azumi lives to collect more than 100 payments, she must amend her prior years’ tax returns to increase her taxable portion of each payment received in the past.
B)
If Azumi collects $3,000 in the current year, the $3,000 is treated as a recovery of basis, and thus, is not taxable.
C)
If Azumi dies after collecting a total of 50 payments, she has an economic loss that is not tax deductible.
D)
If Azumi collects more than 100 payments, all amounts received after the 100th payment must be fully included in her gross income.

Answer 11

The answer is if Azumi collects more than 100 payment, all amounts received after the 100th payment must be fully included in her gross income. Payments beyond projected life expectancy are fully taxable unless the annuity payments began on or before December 31, 1986. If the annuitant dies before life expectancy and has not completely recovered her basis, the unrecovered basis is deductible on the annuitant’s final income tax return as a miscellaneous itemized deduction not subject to the 2% of adjusted gross income floor. For contracts where annuity payments began after December 31, 1986, the exclusion ratio is only used to the extent of recovering the basis; therefore, the taxpayer will not use the exclusion ratio for payments made after life expectancy and will be taxed on the entire amount.

Question 12

Jeff owns a life insurance policy on his own life. The policy is not a modified endowment contract (MEC). His basis in the policy is $10,000. This year, he pays premiums of $1,000 on the policy, receives dividends of $300 in cash, and takes a withdrawal of $5,000. In addition, the cash value of the policy increases by $2,000. Which of the following statements regarding the income tax consequences of this policy is CORRECT?

The premiums of $1,000 are tax deductible.
The $2,000 increase in cash value is excluded from gross income.
The dividends of $300 are included in gross income.
The withdrawal of $5,000 is included in gross income.
A)
II, III, and IV
B)
I and III
C)
II and IV
D)
II only

Answer 12

II only

The $2,000 increase in cash value is excluded from gross income.

The increase in cash value of a life insurance policy is not taxable to the owner of the policy as long as it remains in the policy. Premiums on individual life insurance policies are not tax deductible. Dividends are generally considered to be a return of premium and are not taxable. Withdrawals from non-MEC contracts are not taxable unless they exceed the owner’s basis.

Question 13

Which of the following annuities includes a participation rate feature?

A)
Variable
B)
Single-premium
C)
Fixed
D)
Equity-indexed

Answer 13

The answer is equity-indexed. Equity-indexed annuities have participation rates that determine how much of the increase in the underlying index will be used to calculate the interest rate credited to the owner.

Question 14

Which of the following items should be considered when reviewing an existing life insurance policy for possible replacement?

The client’s risk tolerance level
The existing policy’s relative value
The companies’ A.M. Best, Inc., and other ratings
Any possible changes in the client’s insurability
A)
I, II, III, and IV
B)
I and IV
C)
II, III, and IV
D)
I, II, and III

Answer 14

ALL

Question 15

Which of the following life insurance policies is commonly used in business continuation agreements?

A)
First-to-die life
B)
Second-to-die life
C)
Adjustable life
D)
Endowment life

Answer 15

The answer is first-to-die life. First-to-die life policies are commonly used in business continuation agreements. Second-to-die life policies are typically used to pay any federal estate tax obligation.

LO 3.2.4

Question 16

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

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

Answer 16

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.

LO 3.3.2

Question 17

Under which life insurance settlement option are proceeds paid to the beneficiary at a set dollar amount per month until all principal and interest are exhausted?

A)
Interest only
B)
Fixed amount
C)
Fixed period
D)
Life income

Answer 17

Fixed amount

The answer is fixed amount. Under the fixed-amount option, a fixed amount is paid until both the principal and interest are exhausted. The amount paid remains unchanged, but the period in which the payments are made depends on how much is to be paid each period.

Question 18

A client just purchased a house and took out a $300,000 mortgage with a repayment term of 15 years. She wants to purchase a life insurance policy that will provide a death benefit equal to the unpaid mortgage balance if she dies with a mortgage. She wants a level premium and does not feel she will need life insurance once the mortgage is paid off. Which of the following life insurance policies best meets the client’s needs?

A)
Whole life insurance
B)
Decreasing whole life insurance
C)
Decreasing term life insurance
D)
30-year level term life insurance

Answer 18

The answer is decreasing term life insurance. A decreasing term life insurance policy is the best choice for this client because it provides a level premium and a death benefit that decreases over time. Historically, this type of policy has been used as mortgage protection insurance because the decrease in death benefit approximates the declining principal as mortgage payments are made by the homeowner. Level term life insurance provides fixed premiums, but the face amount remains constant. Decreasing whole life insurance is not a type of policy. Whole life insurance is not appropriate because, although the premiums are fixed, the face amount remains constant, and the policy provides a cash value.

LO 3.5.1

Question 19

Which of the following statements regarding the accidental death benefit (ADB) rider is CORRECT?

The ADB rider is no longer synonymous with the term double indemnity.
For large amounts of life insurance, the maximum amount of ADB rider offered by an insurance company is usually substantially less than the face amount.
A)
Neither I nor II
B)
I only
C)
Both I and II
D)
II only

Answer 19

Both

Question 20

Which of the following factors should be considered when determining the most appropriate type of life insurance?

The duration of the need
The amount of disposable income available to the proposed policyowner
The financial discipline of the proposed policyowner
The risk tolerance level of the proposed policyowner
A)
I and IV
B)
I, II, III, and IV
C)
II and III
D)
I, III, and IV

Answer 20

ALL

Question 21

Which of the following statements regarding dividend options is CORRECT?

Cash received under the cash dividend option is not taxable.
Dividends received under the dividend option are taxable.
A)
Both I and II
B)
II only
C)
I only
D)
Neither I nor II

Answer 21

The answer is I only. Cash received under the cash dividend option is not taxable because they are considered a return of premium. Dividends received under the dividend option are not taxable as they are also considered a return of premium.

Question 22

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

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

Answer 22

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.

LO 3.3.3

Question 23

Donald is married and has two small children. Both he and his spouse are employed outside the home. They spend both incomes, have a mortgaged home, keep credit cards with outstanding balances each month, have little savings, and care for aging parents.

Based on Donald’s current life risk exposures, which of the following can be addressed with life insurance?

Death before debt repayment
Death before accomplishing personal goals
Death of an income earner
Estate tax liability
A)
I and II
B)
III and IV
C)
II and IV
D)
I and III

Answer 23

I III

In this situation, the risks Donald should address are paying off debt and replacing lost income. Given these facts, there is no current concern for estate taxes, and personal goals are not something that can be insured against.

LO 3.1.1

Question 24

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)
Accelerated death benefit rider
D)
Disability waiver of premium

Answer 24

D

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.

LO 3.3.3

Question 25

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

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

Answer 25

B

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.

LO 3.2.1

Question 26

Which of the following correctly identifies the primary purpose of a buy-sell agreement funded with life insurance?

A)
To allow the business to purchase a deceased owner’s share of the business from the estate
B)
To pay the deceased’s estate tax liability
C)
To include policy cash values as a corporate asset
D)
To guarantee marketability of closely held stock

Answer 26

A.

The primary purpose of a buy-sell agreement funded with life insurance is to allow the business to purchase a deceased owner’s share of the business from the estate.

The answer is to allow the business to purchase a deceased owner’s share of the business from the estate. The primary purpose of a buy-sell agreement funded with life insurance is to provide the cash required by the agreement to allow the surviving partner(s) to buy the deceased partner’s share from his heirs or estate in the event he dies before retiring.

LO 3.2.4

Question 27

Which of the following statements regarding various types of life insurance is true?

Whole life is always more expensive than term, cash value can be used as a savings plan and accessed for emergencies, and there is low risk and low return on investments.
Universal life has flexible premium payments, an adjustable death benefit, and an unbundled structure. It also provides access to cash values for emergencies; if inadequate deposits are made, the client will need to either increase premiums or allow the policy to lapse.
Variable life has a guaranteed premium, guaranteed death benefit, and guaranteed cash value. The owner can choose from a number of investment options. High policy expenses may reduce the returns.
Term insurance does not provide cash accumulation; it provides more coverage per premium dollar than any other form of coverage. It may be too expensive for clients to retain after retirement.
A)
II and III
B)
I, II, and III
C)
I, II, and IV
D)
I and II

Answer 27

I II IV

III is incorrect. Variable life does have a guaranteed premium and a guaranteed death benefit, but it does not have guaranteed cash values.

Question 28

In the event of his death, Jim wants to provide funding for his daughter Lauren, 4, to attend four years of college, starting at age 18. The current annual cost of tuition is $25,000. Assume inflation of 6.5% and after-tax earnings of 6%. If Jim wants to have enough life insurance to assure adequate funds for Lauren when she begins college (should he die today), approximately how much insurance should he purchase for this need alone? (Round your answer to the nearest dollar.)

A)
$108,076
B)
$103,417
C)
$107,568
D)
$100,710

Answer 28

The answer is $107,568. The solution to this requires using the three-step process used in education funding.

Step 1: 14, N; 6.5 I/YR; 25,000, +/-, PV, and solve for FV = 60,371.85

Step 2: Set for BEG mode; 4, N; 1.06 / 1.065 = .9953 - 1 = -.004695 × 100 = -0.4695, I/YR; 0, FV (to clear it out), 60,371.85, +/-, PMT, and solve for PV = 243,201.44

Step 3: 14, N; 6, I/YR; 243,201.44, FV, 0, PMT (to clear it out), and solve for PV = 107,568

Question 29

Which of the following is a life insurance dividend option?

A)
Reduced paid-up
B)
Extended term
C)
Fixed payment
D)
Reduced premium

Answer 29

D Reduced Premium

Basically you use the value of the dividend to reduce the amount of money you need to pay the premium. Dividends are a partial return of premium, and can be used to offset that premium to a degree.

Fixed payment is a settlement option.
Reduced Paid-up and extended term are nonforfeiture options.

Question 30

Whole life insurance nonforfeiture options allow a policyowner to

surrender a whole life insurance policy and receive the net cash value (cash value less any applicable surrender charges and/or outstanding policy loans).
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.
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)
III only
B)
II and III
C)
I, II, and III
D)
I and II

Answer 30

The answer is I, II, and III. There are three common nonforfeiture options available when surrendering or discontinuing premium payments on a whole life insurance policy. Under the cash surrender value option, a policyowner can surrender the policy and receive the net cash value. By electing the reduced paid-up insurance option, a policyowner leaves the net cash value of the original life insurance policy with the company and receives a smaller amount of fully paid-up insurance of the same type. If the policyowner chooses the extended term insurance option, the net cash value is used as a net single premium to purchase a paid-up term insurance policy.

Question 31

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

Generally, the clause prevents the insurance company from contesting the validity of the policy after it has been in force for two years.
The validity of the contract cannot be questioned after the stated period except in limited situations.
A)
I only
B)
II only
C)
Neither I nor II
D)
Both I and II

Answer 31

I And II

Contestable clause is on the side of the insured. If you’ve had a policy that’s been in effect for two years, it protects the insured saying “Well, the insurance company didn’t have a problem collecting your payments for all this time, so surely they will also be happy to perform the duties for the policy”. The validity of the contract also cannot be questioned after the stated period except in limited situations.

Question 32

Which of the following life insurance policies is typically used to pay any federal estate tax obligation?

A)
Second-to-die life
B)
Adjustable life
C)
First-to-die life
D)
Endowment life

Answer 32

Second to die life policies are generally used to pay any federal estate tax obligations.

Simply put:
If you have a large estate that will be passed down after both parties die, the second to die life policy provides liquidity precisely when taxes are due.

Example: 10mil estate, 5mil exemption. 5mil taxable taxed at 40% = $2mil estate taxes to pay. The couple (with the estate) takes out a second to die life policy, with a death benefit of $2mil and pay the policy premiums on it. When the second spouse dies, the policy will pay $2 mil, which is exactly what will be needed for the estate taxes, preventing any need to liquidate assets.

Question 33

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 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.
B)
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.
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 33

A

Since he has a 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. AD&D rider would do nothing to benefit Antonio.

B is incorrect because he wouldn’t be giving his heirs the maximum possible inheritance since the death benefit would be “REDUCED”.

Question 34

Which of the following is an appropriate economic assumption that should be considered when evaluating a client’s life insurance needs?

A)
The client’s goals
B)
The client’s profile
C)
The inflation rate
D)
The client’s risk tolerance

Answer 34

Inflation rate.

Question 35

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

Death benefits paid to a beneficiary are not usually taxable as income.
Income taxes on investment gains are tax-deferred.
The earnings on the cash value are not taxed during the accumulation period.
A)
I and II
B)
II and III
C)
I, II, and III
D)
I and III

Answer 35

I II III

Question 36

Which of the following statements regarding the disadvantages of annual renewable term life insurance are CORRECT?

Term life insurance does not develop cash values or a savings plan.
Term life insurance becomes increasingly uneconomical as the policyowner grows older.
At the end of a stipulated period of time, the policyowner may be declined for renewal coverage.
Initially, term life insurance has a higher premium than whole life insurance for the same amount of coverage.
A)
I, II, and III
B)
I and IV
C)
II and III
D)
I, II, III, and IV

Answer 36

The answer is I, II, and III. Initially, term life insurance has a lower premium than whole life insurance. Over time, however, the cost of a term life insurance policy will far exceed that of a whole life policy with the same face amount of coverage.

Question 37

Which of the following are the primary factors that should be considered when deciding to keep or replace a policy?

Lower cash value or dividends with a new policy
New policy acquisition costs
Length of time the insurer has been in business
Agent service
A)
II, III, and IV
B)
I, II, and III
C)
I, II, and IV
D)
II and IV

Answer 37

C I II IV

Question 38

Which feature of most life insurance policies can be used to customize the policy to meet the client’s needs?

A)
Policy loans
B)
Riders
C)
Dividends
D)
Beneficiaries

Answer 38

The answer is riders. Available riders often allow for customization of the policy to meet a client’s needs and compete in the marketplace. The riders available vary by company and policy. Dividends and loans may be available on cash value policies, but not on term policies. All policies allow for beneficiaries to be named, so this wouldn’t add customization options.

Question 39

Policies that pay dividends are said to be participating policies. Which of the following policies pay dividends?

A)
Whole life policies
B)
Multi-year term life policies
C)
Annual term policies
D)
Universal life policies

Answer 39

Whole life policies

The answer is whole life policies. Only participating whole life policies pay dividends that are essentially a return of premium when a mutual life insurance company has better-than-expected operating results. While universal life policies pay interest, neither universal nor term life policies pay dividends.

LO 3.3.2

Question 40

Which of the following is NOT a characteristic of term life insurance?

A)
In a decreasing term policy, the amount of the death benefit decreases while the premium remains level.
B)
Most term life insurance policies permit the insured to renew the policy each year without having to provide evidence of insurability.
C)
Interest is accumulated on the cash value.
D)
Coverage is usually affordable (especially at younger ages).

Answer 40

The answer is interest is accumulated on the cash value. Term life insurance does not have a cash value.

Question 41

The life insurance needs analysis method considers any recurring expenses and any unusual expenditures that may result from a person’s death. Which of the following are variables that are considered when conducting this analysis?

Final expenses
Readjustment and dependency period funds
Mortgage fund
Education fund(s)
A)
I, II, III, and IV
B)
IIII and IV
C)
I, II, and III
D)
I and II

Answer 41

ALL

Question 42

Which of the following factors should be analyzed when assessing the cost of a universal life insurance policy?

The actual interest rate credited to the policy
The actual mortality charge assessed to the policy
The guaranteed interest rate specified in the policy
A)
I and III
B)
I, II, and III
C)
II and III
D)
I and II

Answer 42

ALL

Question 43

The final expenses of an estate include all of the following except

A)
the decedent’s investments.
B)
expenses of last illness.
C)
the decedent’s outstanding debts.
D)
burial expenses.

Answer 43

The answer is the decedent’s investments. The decedent’s investments would be considered assets, not expenses. Though disposition of these assets could possibly incur some expense, the assets themselves are not expenses.

Question 44

All of the following statements concerning the methods of providing life insurance protection are correct except

A)
an insurance company can use two approaches to provide life insurance protection: term life insurance, which is temporary, or whole life insurance, which is permanent protection that builds up a cash reserve or savings component.
B)
term life insurance is a good choice for people who need permanent life insurance protection.
C)
term life insurance is a form of life insurance in which the death proceeds are payable if the insured dies during a specified period and nothing is paid if the insured survives to the end of that period.
D)
because death rates rise at an increasing rate as the insured ages, the net premium for term life insurance also rises at an increasing rate.

Answer 44

The answer is term life insurance is a good choice for people who need permanent life insurance protection. Term life insurance may not be appropriate for meeting a permanent life insurance need because the protection expires at the end of the term.

Question 45

All of the following are true for dividends left to accumulate at interest except

A)
they can be used to purchase paid-up additional insurance.
B)
they are taxable as earned.
C)
they can increase the death benefit.
D)
they may be allowed to accumulate on a tax-deferred basis until they exceed premiums paid.

Answer 45

The answer is they are taxable as earned. One of the benefits of life insurance cash values is that they grow on a tax-deferred basis, so the statement that they are taxable as earned is false.

Dividends are viewed as a return of premium and are NOT taxable.

Question 46

Which of the following universal life options pay a level death benefit?

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

Answer 46

Option A gives level death benefit. Option B gives an increasing death benefit.

Increasing death benefit is the net amount at risk + cash value.

Question 47

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

Answer 47

Option A provides a level death benefit

Option B does an increasing death benefit.

Question 48

A client is in the process of purchasing a universal life insurance policy. The client desires an increasing death benefit. Which of the following universal life death benefit options will meet the client’s needs?

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

Answer 48

B

Question 49

Whole life policy illustrations exhibit all of the following except

A)
guaranteed cash values.
B)
guaranteed death benefits.
C)
anticipated earnings in variable subaccounts.
D)
guaranteed premiums.

Answer 49

The answer is anticipated earnings in variable subaccounts. Traditional whole life policies do not contain variable subaccounts. Whole life policy illustrations exhibit guaranteed premiums, cash values, and death benefits.

Question 50

Michelle purchased a $100,000 life insurance policy on her life. To date, she has paid $50,000 in total premiums and received $10,000 in dividends. The policy currently has a net cash value of $15,000 and is subject to a $30,000 outstanding loan. If Michelle decides to surrender the policy, she will realize a gain of

A)
$0.
B)
$5,000.
C)
$15,000.
D)
$10,000.

Answer 50

B

The answer is $5,000. Michelle’s gain upon the surrender of the policy would be $5,000. She has a basis in the policy of $10,000, calculated as follows: total premiums paid ($50,000) minus outstanding loan ($30,000) minus dividends received ($10,000) equals $10,000. Dividends received represent a return of premiums and, therefore, reduce the policyowner’s basis in the policy. Michelle has a gain upon surrender of $5,000, calculated as follows: net cash value ($15,000) minus basis in policy ($10,000) equals gain upon surrender ($5,000).

Question 51

When gathering client data to determine life insurance needs, which of the following are relevant?

A)
Client goals and objectives
B)
Risk tolerance
C)
All of these
D)
Survivors’ needs

Answer 51

C

Question 52

Which of the following statements match the appropriate use of a settlement option to meet the client’s objective?

Ralph’s estate attorney has talked with him about the possibility of disclaiming assets. He has no need of funds and is waiting to get clarity from the attorney. He picks interest only.
Mary’s resources are quite meager, and she is concerned about her income lasting her entire life. She has no heirs to be concerned about. She is concerned about creditors possibly trying to get settlements from these funds. She chooses installments for a fixed period.
Mario is the beneficiary of a substantial policy. He is a very conservative investor. He would like to receive some income for his life, but he would also like it to continue to support his disabled duaghter. He is uninsurable and has not been able to purchase coverage to provide for her lifetime. He is concerned that someone may take the resources from her after his death. He chooses a life income option of joint and survivor income with his daughter.
Doreen is married and her husband is not in great health, so his life expectancy is less than 10 years. She does not wish to manage money and would like to just receive a check. She does want to make sure her husband would be provided for in case of her death prior to his. She chooses installments of a fixed amount.
A)
II, III, and IV
B)
I, II, III, and IV
C)
I and III
D)
I, II, and III

Answer 52

The answer is I and III. II is incorrect because Mary would be better off with a straight life option. She has no heirs to be concerned about, and this would provide both the highest payout and some protection from creditors. They could attach the income stream but not the lump sum. IV is inappropriate for Doreen because the best option would be a life income option to annuitize the death benefit using life with period certain or refund certain, depending on the quote received from the company. That would provide her with the highest payout while still protecting her husband for the next 10 years.

Question 53

Marcellus just annuitized his variable annuity and selected a life income with a 10-year period certain payout option. His first monthly income payment from the annuity is $1,500. If Marcellus dies after receiving income payments for 12 years, which of the following statements is CORRECT?

A)
Income payments will continue to the beneficiary for 10 years; the amount of each monthly income payment will depend on the investment returns of the underlying subaccounts.
B)
Income payments will continue to the beneficiary for life; the income payments are guaranteed to be at least $1,500 per month for 10 years.
C)
Income payments will stop.
D)
Income payments will continue to the beneficiary for 10 years; each monthly payment is guaranteed to be at least $1,500.

Answer 53

The answer is income payments will stop. Under a life annuity with a period certain payout option, income payments are guaranteed to continue for the annuitant’s life. Payments continue beyond the annuitant’s life only if the annuitant dies before the end of the guaranteed period.

LO 3.6.2

Question 54

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

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

Answer 54

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.

LO

Question 55

the human life value method used to calculate life insurance needs

A)
uses an individual’s income-earning ability as the basis for determining the amount of necessary life insurance.
B)
uses a capital retention model.
C)
examines all recurring expenses and any unusual expenditures that may result from a person’s death.
D)
applies a discount rate to a future sum (either riskless or expected investment rate of return) to determine the future value of a life.

Answer 55

The answer is uses an individual’s income-earning ability as the basis for determining the amount of necessary life insurance. The human life value method projects the income a person will earn during her employment career and then uses a discount rate to determine the present value of those future earnings.

Question 56

Jalen purchased a term life insurance contract with a death benefit of $200,000 and a two-year suicide clause. He committed suicide less than six months after he purchased the policy. What is the required payment from the insurance company to the beneficiary?

A)
The insurance company would not pay anything.
B)
The insurance company would pay half of the death benefit.
C)
The insurance company would return all premiums without interest to the beneficiary.
D)
The insurance company would pay the full $200,000 death benefit.

Answer 56

The answer is the insurance company would return all premiums without interest to the beneficiary. The suicide clause stipulates that, if the insured commits suicide within a specified period (usually two years), the insurance company is only liable for a return of the insured’s premium payments, not the policy’s death benefit.

LO 3.2.1

Question 57

Which of the following is the definition of human life value in life insurance planning?

A)
The future value of the family’s share of the deceased person’s current earnings
B)
The present value of the family’s share of the breadwinner’s future earnings
C)
An individual’s average earnings over the past 10 years
D)
The difference between the family’s total needs at the breadwinner’s death and the existing financial assets

Answer 57

The answer is the present value of the family’s share of the breadwinner’s future earnings. A human life value is a present value amount and represents the family’s share of the present value of a breadwinner’s future earnings that would be lost due to death.

Question 58

Charles was the beneficiary of his mother’s life insurance policy. The face amount of the policy was $500,000, and there was an outstanding policy loan of $25,000 when Charles’s mother died earlier this year. The settlement option for the policy was interest only, payable annually. This year, Charles receives his first payment of $14,250 from the insurance company. Which of the following statements regarding this arrangement is CORRECT?

The death benefit payable under the policy was $475,000.
The payment of $14,250 consists partly of interest and partly of principal.
Charles must include $475,000 in this year’s gross income.
Charles must include $14,250 in this year’s gross income.
A)
II and IV
B)
I and IV
C)
I only
D)
II and III

Answer 58

The answer is I and IV. The outstanding policy loan of $25,000 reduces the death benefit payable under the policy to $475,000. Because the settlement option was interest only, the entire payment of $14,250 consists of interest, and the $475,000 principal amount remains on deposit with the insurance company. The principal amount of a life insurance death benefit is income tax free. Charles must include $14,250 in this year’s gross income because the payment consists entirely of interest. In addition, the $14,250 of taxable income may be subject to the 3.8% Medicare contribution tax.

Question 59

Which of the following statements concerning federal income tax and annuities is CORRECT?

The premium invested in the annuity accumulates on a tax-deferred basis.
Generally, amounts received as withdrawals during an annuity’s accumulation period are taxable, to the extent the withdrawal represents gains earned by the contract.
A)
II only
B)
I only
C)
Neither I nor II
D)
Both I and II

Answer 59

The answer is both I and II. When contributions are left to accumulate, the earnings credited to the contract are not taxable until withdrawn by the annuitant.

Question 60

Gracie, your client, is in the process of purchasing a universal life policy. She would like a level death benefit. Which of these universal life death benefit options would help Gracie achieve this goal?

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

Answer 60

Option A pays a level death benefit. Option B pays an increasing death benefit. Options C and D are not death benefit options for universal life policies.

Question 61

Which of the following is a dividend option?

A)
Fixed payment
B)
Paid-up additions
C)
Life income
D)
Reduced paid-up

Answer 61

The answer is paid-up additions. Using dividends to purchase small amounts of paid-up insurance is a dividend option. Reduced paid-up is a nonforfeiture option, while fixed payment and life income are settlement options.

LO 3.3.2

Question 62

Carolyn was the beneficiary of her spouse’s life insurance policy with a face amount of $1,000,000. She elected the single life annuity settlement option. The settlement option will pay her $4,500 per month, and her life expectancy is 30 years. How much of each monthly payment is taxable?

A)
$0
B)
$2,778
C)
$1,722
D)
$3,034

Answer 62

The answer is $1,722 (rounded). The total amount Carolyn will receive from the settlement option is $1,620,000 ($4,500 × 360). Her tax basis is $1,000,000, so her exclusion ratio is 0.6173 ($1,000,000 ÷ $1,620,000). Therefore, $2,777.85 of each payment is excluded from gross income ($4,500 × 0.6173), and the remainder ($1,722.15) is taxable. In addition, the taxable income may be subject to the 3.8% Medicare contribution tax.

Question 63

Which of the following statements regarding the accelerated death benefit rider is CORRECT?

A source of funds for a terminally ill individual is to access a percentage of the death benefit of an existing policy.
The advance received is taxable income.
The main advantage of the accelerated death benefit rider is that terminally ill insureds may obtain advances of death benefits and use them for a variety of personal needs.
A)
I only
B)
II and III
C)
I and III
D)
III only

Answer 63

The answer is I and III. The advance is received income tax-free. Note, too, that the receipt of the advance reduces the face amount of the insured’s life insurance policy, which may pose a problem to surviving dependents.

Question 64

Which of the following is NOT a whole life insurance policy dividend option?

A)
Fifth dividend option
B)
Cash option
C)
Life income option
D)
Paid-up additions

Answer 64

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

Question 65

In calculating life insurance needs, which of the following can be defined as the present value of the family’s share of the decedent breadwinner’s future earnings?

A)
Portfolio value
B)
Conversion value
C)
Human life value
D)
Net present value

Answer 65

The answer is human life value. Human life value is the family’s share of the earnings of the breadwinner. The projected value of the decedent breadwinner’s future earnings is discounted to its present value to determine the human life value.

Question 66

Joint life insurance includes which type of policies?

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

Answer 66

A

Question 67

Which of the following statements regarding the reinstatement clause in a life insurance policy is true?

A)
Proof of insurability is never required prior to reinstatement.
B)
No insurance coverage will have been in place from the date of the lapse to the date all reinstatement requirements are submitted.
C)
Policy loans are forgiven due to the lapse.
D)
The owner can reinstate a lapsed policy without repaying missed premiums.

Answer 67

The answer is no insurance coverage will have been in place from the date of the lapse to the date all reinstatement requirements are submitted. Assuming reinstatement is granted, no coverage is available during the lapsed period.

Question 68

Frank and Julie recently purchased an annuity to help provide them with retirement income. They will pay the premiums with after-tax dollars, and they will begin receiving income payments from the annuity at age 65. After analyzing these facts, which type of annuity did Frank and Julie purchase?

A)
Deferred qualified annuity
B)
Immediate nonqualified annuity
C)
Deferred nonqualified annuity
D)
Immediate qualified annuity

Answer 68

The answer is deferred nonqualified annuity. They purchased a deferred annuity because income payments will begin in the future. Also, the annuity is nonqualified because the premiums are paid with after-tax dollars.

Question 69

If a client wishes to be rewarded with lower life insurance premiums for maintaining good health, which of the following types of life insurance policies would be most appropriate?

A)
Decreasing term
B)
Whole life
C)
Reentry term
D)
Convertible term

Answer 69

The answer is reentry term. Reentry term is a policy under which the insurance company may renew coverage at a lower premium rate than the guaranteed renewal rate, provided that, at the time of renewal, the insured furnishes satisfactory evidence of continued insurability. A reentry term policy, therefore, rewards individuals who remain in good health as they continue to age while maintaining insurance coverage for other insureds who no longer qualify for lower rates.

Question 70

Which of the following statements about private placement life insurance (PPLI) is true?

A)
PPLI policies are highly customizable and allow for a great deal of flexibility with how the cash value account is invested.
B)
The flexibility with how the cash value account is invested makes these policies ideal for individuals with modest to moderate incomes.
C)
The IRS more closely scrutinizes “off the shelf” life insurance policies than PPLI policies.
D)
PPLI policies allow for a great deal of flexibility, and that is why they are typically structured as whole life policies.

Answer 70

The answer is PPLI policies are highly customizable and allow for a great deal of flexibility with how the cash value account is invested. As such, they are typically structured as variable universal life policies. A disadvantage of this flexibility is the potential to overfund the policy, causing it to fail the cash value accumulation test under IRC Section 7702 or for the policy to become a modified endowment contract. These policies are structured more as investment products than insurance products and draw closer scrutiny from the IRS. The complexity and ability to customize PPLI policies makes them ideal for high net worth individuals.

Question 71

Which of the following questions regarding policy replacements is CORRECT?

Replacing a cash value policy with another cash value policy usually is not advantageous.
The new policy will have the same contestable and suicide clause periods as the existing policy.
A)
Both I and II
B)
II only
C)
I only
D)
Neither I nor II

Answer 71

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.

LO 3.5.2

Question 72

Reginald is the beneficiary of his father’s life insurance policy. The face amount of the policy is $250,000, and Reginald selects the single life annuity settlement option. His life expectancy is 20 years. Assuming Reginald lives for only 12 years after payments begin, which of the following statements regarding payments to him under this settlement option is CORRECT?

Payments will continue to Reginald’s designee for an additional eight years.
A portion of each payment Reginald receives is includible in his gross income.
Any unrecovered tax basis in the settlement option that remained at Reginald’s death is deductible on his final income tax return.
A)
I and II
B)
I only
C)
II only
D)
I and III

Answer 72

The answer is II only. Under the single life annuity settlement option, the annuity payments stop when the beneficiary dies. Each payment includes a taxable interest component and a nontaxable principal component. A beneficiary of an annuity from a life insurance settlement option who dies before his life expectancy cannot deduct any unrecovered basis.

Question 73

Which of the following is a life insurance dividend option?

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

Answer 73

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 74

Which of these types of life insurance policies pay a death benefit only if the insured dies during a specific time period?

Term life insurance
Ordinary life insurance
Limited-pay life insurance
A)
III only
B)
I only
C)
I, II, and III
D)
I and II

Answer 74

The answer is I only. Only a term life insurance policy pays a death benefit only if the insured dies within a specified period. In the case of term life insurance, the insured must die before the term expires for the beneficiary to collect the death benefit. Ordinary life and limited-pay life policies are types of permanent life insurance.

Question 75

Brendan and Sasha, both age 28, are considering the purchase of an annuity to help them save monthly for their retirement at age 65. They want an annuity that will allow them to participate in the equities market, and because of their long-term investment horizon, they are not particularly concerned about safety of principal. Which of the following annuity products best meets their needs?

A)
Fixed deferred annuity
B)
Variable deferred annuity
C)
Single premium deferred annuity
D)
Fixed immediate annuity

Answer 75

A variable annuity will allow the Brendan and Sasha to participate in the equities market. Fixed annuities are more suited for investors who are concerned with safety of principal. Because the couple wants to save monthly, a single premium deferred annuity is not a wise choice.

LO 3.6.1

Question 76

Jorge and Margarita would like to know how much life insurance they need to pay for college for their six-year-old daughter, Aida, when she is 18. Average college expenses today are $22,500 per year, and they believe these costs will increase by 5% per year. Jorge and Margarita believe they can get a 7% return on their savings. What amount should they allocate today to have enough to pay for all four years of Aida’s college costs?

A)
$65,937
B)
$38,315
C)
$69,777
D)
$69,681

Answer 76

The answer is $67,777 (rounded). The following is a three-step calculation. The keystrokes for this problem are as follows:

Step 1: 12, N; 5, I/YR; 22,500, +/-, PV; solve for FV = 40,406.7673

Step 2: set for BEG mode; 4, N; 1.07 ÷ 1.05 = 1.019 – 1 = 0.01905 × 100 = 1.9048, I/YR; 40,406.7673, +/-, PMT; 0, FV; solve for PV = 157,151.6738

Step 3: 12, N; 7, I/YR; 0, PMT; 157,151.6738, FV; solve for PV = 69,777.22

Question 77

Which of the following statements regarding fixed annuities is CORRECT?

The funds are held in the insurance company’s general account, and the insurance company bears all of the investment risk.
The funds are held in subaccounts, and the owner of the fixed annuity bears all of the investment risk.
The fixed annuity is designed for a conservative investor who is more concerned with safety of principal than keeping up with inflation.
A)
II and III
B)
I and II
C)
III only
D)
I and III

Answer 77

The answer is I and III. The fixed annuity pays a specified (or fixed) interest rate over a given period and provides more security of principal than a variable annuity, but it does not offer the potential for growth. The funds are held in the insurance company’s general account, and the insurance company bears all of the investment risk.

Question 78

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?

Surrender the policy for $75,000 in cash and purchase another policy
Exchange the policy for another life insurance policy
Exchange the policy for a variable annuity
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 78

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 79

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

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

Answer 79

C

Question 80

All of the following statements concerning categories of annuities are correct except

A)
a straight life annuity provides periodic (usually monthly) income payments that continue as long as the annuitant lives and terminates at the annuitant’s death.
B)
a deferred annuity is one in which the first benefit payment is made one payment interval after the date of purchase.
C)
an annuity may be paid periodically in a fixed amount for a period determined by the insurer.
D)
a joint-and-last-survivor annuity provides income that ceases only upon the last death among the covered lives.

Answer 80

The answer is a deferred annuity is one in which the first benefit payment is made one payment interval after the date of purchase. INstead, A single premium IMMEDIATE annuity is one in which the first benefit payment is made one payment interval after the date of purchase.

Question 81

Nancy and Joe are married and in need of permanent life insurance. They anticipate their incomes substantially increasing in the next three to eight years, but right now, they are on a tight budget. Which of the following is the best form of permanent life insurance for the couple?

A)
Decreasing term insurance
B)
Current assumption whole life
C)
Modified premium whole life
D)
Limited-pay whole life

Answer 81

The answer is modified premium whole life. With a modified premium whole life insurance policy, premiums are lower for the initial three to five years after issue and then increase once thereafter. As such, modified whole life is simply an ordinary life policy with a unique premium payment structure that accommodates a policyowner who expects to experience an increasing salary in the near future.

Question 82

Dan owns a life insurance policy on his own life. The beneficiary is his daughter, Rose. Dan unexpectedly dies, and Rose receives the death benefit in a lump-sum payment. Which of the following statements regarding the tax treatment of the death benefit is CORRECT?

The life insurance death benefit will be included in Dan’s gross estate for estate tax purposes.
The life insurance death benefit will be included in Rose’s gross income.
A)
II only
B)
Both I and II
C)
I only
D)
Neither I nor II

Answer 82

The answer is I only. The life insurance death benefit will be included in Dan’s gross estate because he had incidents of ownership in the policy. Generally, payments are excluded from the beneficiary’s gross income.

Question 83

Which one of the following factors is the only true statement about policy replacement?

The new policy’s contestable clause will be waived.
The new policy will likely have higher initial costs.
A)
I only
B)
II only
C)
Both I and II
D)
Neither I nor II

Answer 83

The answer is II only. The majority of a life insurance policy’s costs are included in the early years of the policy. 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. And, if the new policy has surrender charges, those will apply even if the policy being replaced has no surrender charge remaining.

Question 84

Barb is the beneficiary of a $1 million life insurance policy. The insured recently died, and Barb is considering different settlement options. If her primary objective is to avoid paying any income taxes on the amounts received under the settlement option, which of the following settlement options will best meet her needs?

A)
Lump sum
B)
Fixed-amount installments
C)
Fixed-period installments
D)
Single life annuity

Answer 84

The answer is lump sum. Life insurance death benefits received in a lump sum are generally excluded from gross income. The payments under the other settlement options include both a taxable interest component and a tax-free principal component.

Question 85

A life insurance contract with low fixed premiums during the first three to five years and higher fixed premiums for the remainder of the policy period is called

A)
a modified premium whole life policy.
B)
a variable life policy.
C)
an increasing term policy.
D)
a limited-pay whole life policy.

Answer 85

The answer is a modified premium whole life policy. Modified premium whole life policies are designed for individuals, such as young professionals, who want permanent life insurance but are not yet able to afford the higher premiums of traditional whole life insurance. The increase to an ultimately higher premium should match an anticipated increase in the policyowner’s income.

Question 86

Which of the following life insurance policy riders pays an additional death benefit if the insured dies accidentally?

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

Answer 86

The answer is accidental death benefit rider. The accidental death benefit rider pays an additional death benefit if the insured dies accidentally (e.g., in a plane crash).

Question 87

Which of the following life insurance riders is an extension of benefits rider?

A)
Accidental death rider
B)
Guaranteed insurability rider
C)
Critical illness rider
D)
Spouse term rider

Answer 87

The answer is critical illness rider. Riders for critical illness, long-term care, and waiver of premium for disability are examples of riders that are classified as extension of benefits riders. These differ from other riders in that they do not increase the death benefit, but rather, address other issues that allow the policy to remain in force when significant life events occur.

Question 88

Limited-pay whole life insurance policies

require the owner to pay premiums for a shorter period than traditional whole life insurance policies.
provide lifetime coverage.
have cash value accumulation.
require premiums to be paid for the entire life of the insured.
A)
III and IV
B)
I, II, and III
C)
I and II
D)
II and III

Answer 88

The answer is I, II, and III. Limited-pay whole life policies only require the premiums to be paid for a specific period.

Question 89

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

Answer 89

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 90

Which of the following statements regarding the misstatement of age clause in a life insurance policy is CORRECT?

The face amount of the policy will be adjusted to the amount of insurance that the premium paid would have purchased based on the insured’s correct age.
In many cases of misstatement of age, insureds understate their age to reduce the premiums.
A)
Neither I nor II
B)
II only
C)
Both I and II
D)
I only

Answer 90

The answer is both I and II. By understating their age, insureds could reduce life insurance premiums. The misstatement of age clause provides that if a misstatement of the insured’s age is discovered after the policy is issued, the insurance company can adjust the face amount of the policy to an amount that the premium would have purchased had the insured’s age been stated correctly.

Question 91

Rosaline was the beneficiary of her father’s variable life insurance policy. The policy had a face amount of $500,000, and Rosaline’s father had a basis in the policy of $300,000. During her life, Rosaline’s father had invested the cash value in subaccounts containing blue-chip stocks, which achieved significant capital appreciation during most of the years the policy was in effect. When her father died, Rosaline received the $500,000 death benefit in a lump sum. How much of the $500,000 death benefit must Rosaline include in her gross income?

A)
$300,000
B)
$0
C)
$500,000
D)
$200,000

Answer 91

The answer is $0. Lump-sum death benefits received from a life insurance policy as a result of the insured’s death are generally excludable from gross income.

Question 92

Universal life insurance gives policyowners the ability to adjust

the premiums.
the death benefit.
the cash values.
the policy expenses.
A)
I and III
B)
I, II, and III
C)
I and II
D)
II, III, and IV

Answer 92

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 93

Which of the following client objectives can be satisfied by a client owning a variable universal life insurance contract, with no special additional coverages, on his life?

A)
To be assured of a constantly increasing cash surrender value
B)
To have a minimum guaranteed death benefit amount available to provide for estate liquidity at the client’s death
C)
To have a minimum guaranteed cash value
D)
To direct investment of premium dollars to alternative investment vehicles

Answer 93

Variable universal life policies offer a variety of investment options inside the subaccount options. There is no guaranteed death benefit, and the cash value cannot be guaranteed to increase or attain any specific value.

Question 94

When designing a life insurance program under the financial needs analysis method, which of the following should be considered?

Funeral expenses related to the death of a wage earner
Education costs of dependents
Payment of debts and mortgages
Retirement of the surviving spouse
A)
I, II, III, and IV
B)
III and IV
C)
I, II, and III
D)
I and II

Answer 94

The answer is I, II, III, and IV. Funds to cover all of these needs should be considered when designing a life insurance program.

Question 95

Ruby, 30, wants to purchase an annuity by making monthly premium payments until she retires at age 60. She wants to be able to vary the amount of the premium payments depending on her disposable income. She wants to attain a guaranteed minimum return on her investment, but also wants to be able to earn returns linked to the stock market. Which of the following annuities best meets her needs?

A)
Flexible premium deferred variable annuity
B)
Flexible premium deferred equity-indexed annuity
C)
Flexible premium deferred fixed annuity
D)
Single premium deferred equity-indexed annuity

Answer 95

The answer is flexible premium deferred equity-indexed annuity. Because the client wants to make varying premium payments over a period of years, she needs a flexible premium deferred annuity. An equity-indexed annuity will provide her with both a guaranteed minimum return and the opportunity to earn returns linked to the stock market.

Question 96

Which of the following statements regarding policy illustrations is CORRECT?

Footnotes should be evaluated as an integral part of the illustration.
The guaranteed columns present a worst-case scenario because they assume the highest mortality and expense charges along with the highest interest rate.
A)
I only
B)
II only
C)
Both I and II
D)
Neither I nor II

Answer 96

The answer is I only. The guaranteed columns present a worst-case scenario because they assume the highest mortality and expense charges along with the *Lowest, not highest, interest rate.

LO 3.3.1

Question 97

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

Answer 97

D)
Option A

Question 98

Which of the following dividend options allows for acquiring additional insurance with no underwriting?

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

Answer 98

The answer is paid-up additions. With the paid-up additions dividend option, a small amount of permanent insurance with a cash value equal to the dividend is purchased 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 99

Norberto and Maria are considering purchasing an annuity to provide additional retirement income, but they are concerned about needing to withdraw funds from the annuity before they retire. Which of the followings statements regarding withdrawals from their annuity is CORRECT?

Withdrawals will consist of taxable earnings until all the earnings have been withdrawn (LIFO rule).
Withdrawals may be subject to a 10% penalty tax if taken before age 59½.
A)
II only
B)
Neither I nor II
C)
I only
D)
Both I and II

Answer 99

The answer is both I and II. Withdrawals will consist of taxable earnings until all the earnings have been withdrawn (LIFO rule), and withdrawals may be subject to a 10% penalty tax if taken before age 59½.

Question 100

Which of the following statements regarding participating and nonparticipating life insurance is CORRECT?

A)
Participating life insurance is a policy in which no annual dividends are paid to the policyowners.
B)
Stock companies are owned by the stockholders and usually offer nonparticipating policies.
C)
Mutual companies are owned by their stockholders and usually offer nonparticipating policies.
D)
Nonparticipating life insurance is a policy in which dividends are paid only on the excess of premium.

Answer 100

The answer is stock companies are owned by the stockholders and usually offer nonparticipating policies. Dividends are not paid on nonparticipating life insurance policies. Mutual companies are owned by their policyholders and may offer participating policies.

LO 3.2.2

Question 101

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

The family expenses that will remain after the wage earner dies
The value of the wage earner’s life
The income that can be generated by the surviving spouse
The number of dependents
A)
II, III, and IV
B)
I, III, and IV
C)
I and III
D)
I, II, III, and IV

Answer 101

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 102

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 102

Kaplan: 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.

Me: Dividends are considered a return of premium. When you see $60,000 in premiums paid and $12,500 of dividends, negate the two. You’ve essentially paid $47,500 towards the policy rather than $60,000. Then the difference between your adjusted basis of 47.5k and 80k cash value is taxed as ordinary income.

Question 103

Which of the following statements regarding different types of annuities is CORRECT?

The owner of a variable annuity contract directs the investment of the contract’s cash value among subaccounts and bears the investment risk.
The variable annuity prospectus contains all of the variable annuity’s investment choices as well as the fees, expenses, investment objectives, investment strategies, risks, performance, and pricing for each investment choice.
A bonus annuity may offer a bonus in the form of a credit that may be added to the initial premium (investment).
An equity-indexed annuity (EIA) is a specialized type of annuity whereby the insurance company credits the contract owner with a return that is based on changes in an equity index, such as the Standard & Poor’s 500 Index.
A)
III and IV
B)
IV only
C)
I, II, III, and IV
D)
II and III

Answer 103

The answer is I, II, III, and IV. In a variable annuity, the owner of the contract directs the investment of the contract’s cash value among subaccounts and bears the investment risk. Any financial planner who solicits or presents a variable annuity to a client should read and understand the variable annuity prospectus. The prospectus contains, but is not limited to, all of the variable annuity’s investment choices as well as the fees, expenses, investment objectives, investment strategies, risks, performance, and pricing for each investment choice.

Any type of annuity that offers a credit based on a percentage of the premium paid is considered a bonus annuity. EIAs combine the features of traditional insurance products (e.g., guaranteed minimum return) with those of a security (e.g., returns linked to equity markets).

LO 3.6.1