Ch. 4 - Type of Insurance Policies

Rick owns a variable universal life policy and chooses a variable death benefit option. What will typically happen to the death benefit as a result of this selection?

A. Remain the same

B. Decrease but never increase

C. Increase but never decrease

D. Fluctuate with changes in the cash account

Which is an accurate description of the premium in a grade premium life insurance policy?

a. Level premium for a stated number of years the increases annually for the remainder of the contract

b. Level premium for a stated number of years then decreases annually for the remainder of the contract

c. Annual decreases in premium for a stated number of years then remains level

d. Annual increases in premium for a stated number of years then remain level

A "premature" distribution from a modified endowment contract (MEC) incurs a penalty tax of

a. 5%

b. 10%

c. 17.5%

d. 20%

Which of the following could be a future use of the cash value that builds in a recently-purchased whole life insurance policy?

a. Convert the cash value to a paid-up term policy

b. Gives policyowner ability to borrow against funds within two years

c. Increases the policy's face amount

d. Provide supplemental income in 35 years

What would be considered an advantage of purchasing term life insurance?

a. cash value can be borrowed against

b. the coverage is permanent

c. nonforfeiture values are available

d. the initial premium is lower compared to an equivalent amount of whole life coverage

A policy owner has just borrowed from a life insurance policy's cash value. Which of these statements is true?

a. in the event of death, the loan amount is deducted from the policy proceeds

b. the policy lapses if not repaid within 5 years

c. a policyowner must pre-qualify for the loan to determine creditworthiness

d. interest on the loan amount is prohibited

Which of these policies is considered a whole life policy?

a. credit life

b. single premium life

c. renewable life

d. convertible life

Which statement concerning an adjustable life insurance policy is FALSE?

a. cash surrender is possible

b. evidence of insurability is required when there is a change in premium

c. combines term and permanent insurance into a single plan

d. an extra premium paid is allowable

Laura added a children's rider to her life insurance policy. What type of coverage was added?

a. level term

b. increasing term

c. decreasing term

d. juvenile term

How does a continuous premium whole life policy differ from a limited payment whole life policy?

a. the time period in which premiums will be paid

b. the availability of cash value loans

c. the availability of nonforfeiture options

d. the settlement options

An advantage of owning a flexible premium life insurance policy would be

a. premiums are fixed for the first 5 years

b. the insurer can make policy charges without difficulty

c. the policy owner can make policy changes without difficulty

d. evidence of insurability is required with any change in premium

When a ten year renewable term life insurance policy issued at age 45 is renewed, the premium rate will be the current rate for

a. ten year term insurance for a person aged 55

b. ten year term insurance for a person aged 45

c. yearly renewable term insurance for a person aged 55

d. yearly renewable term insurance for a person aged 45

All of these are considered features of whole life insurance EXCEPT

a. cash value accumulation

b. permanent coverage

c. initial premium is lower than for an equivalent amount of term insurance

d. policy loans are allowed

Which of the following statement about universal life insurance is NOT true?

a. Death benefit can be increased

b. Premiums are flexible

c. Universal life insurance normally has a minimum guaranteed cash value for duration of the policy

d. The cash value interest rate must equal or exceed a guaranteed minimum value

Which of the following combinations best describe a universal life insurance policy?

a. A mutual fund and an endowment policy

b. A term insurance policy and a whole life policy

c. A modified endowment policy and an annual term insurance policy

d. A flexible premium deposit fund and a monthly renewable term insurance policy

What is the face amount of a $50,000 graded death benefit life insurance policy when the policy is issued?

a. $0

b. $50,000

c. Under $50,000 initially, but decreases annually over time

d. Under $50,000 initially, but increases over time

How does the cost for a survivorship life policy compare to the cost of combining two separate life insurance policies?

a. Survivorship life policy is lower

b. Survivorship life policy is higher

c. Depends on the investment performance of the underlying accounts

d. Both have the same actuarial costs

How long does protection normally extend to under a limited pay whole life policy?

a. It depends on the performance of the underlying investment account

b. When premiums are no longer required as stated in the contract

c. Until age 65

d. Until age 100

Peter, age 50, surrenders his modified endowment contract (MEC). How is the gain treated in terms of federal income taxes?

a. The gain is treated as taxable income and a penalty tax is imposed on the gain

b. The gain is treated as taxable income but no additional penalties are applied

c. The gain is not taxable but a penalty is assessed

d. Surrendering an MEC is considered a tax and penalty-free transaction

A nonparticipating whole life insurance policy was surrendered for its $20,000 cash value. The total premiums paid had totaled $16,000. What were the federal income tax consequences to the policy owner on receipt of the cash value?



a. $16,000 was received as ordinary income and $4,000 as tax-free

b. $20,000 was received as a capital gain

c. $20,000 was received as ordinary income

d. $16,000 was received tax-free and $4,000 as ordinary income

Which statement regarding universal life insurance is correct?

a. Cash value accumulations have a guaranteed minimum interest rate

b. Policyowner can change the face amount but not the premium

c. Policyowner can change the premium but not the face amount

d. Partial withdrawals cannot be made from the policy's cash value

Which statement regarding whole life insurance is accurate?

a. Cash value loans are not permitted

b. Insurance coverage can continue for life

c. Policy normally matures at retirement

d. No cash value accumulations

What typically changes at the re-entry option date found in some term life policies?

a. beneficiary

b. amount of coverage

c. premium

d. contestable period

How long does one premium payment cover in a single premium whole life policy?

a. Until the policy's first renewal date

b. One month

c. One year

d. Full life of the policy

A material change in a modified endowment contract (MEC) results in

a. the contract becoming void

b. a new contestable period

c. the seven pay test, adjusted for cash value, applies again

d. a tax penalty

An insurance policy that can also be classified as a securities product is called

a. variable life

b. modified life

c. universal life

d. a Modified Endowment Contract

When does the insured stop making payments under a thirty-payment whole life policy?

a. At the time of death or 30 years after the policy's inception, whichever comes first

b. It depends on the performance of the underlying investment account

c. When the cash value surpasses the face amount

d. At age 100

Which of the following would NOT be a reason for purchasing life insurance on a child's life?

a. Provide benefits for the child if the parents die

b. Pay for the child's funeral expenses

c. Provide a start on the child's personal insurance

d. Help provide funds for the child's education

Which of these must be disclosed in a universal life policy?

a. Maximum coverage that can be purchased

b. The policy's surrender charges

c. The commissions earned from the sale of the policy

d. The producer's license expiration date

What type of life insurance policy covers two or more persons and pays the face amount upon the death of the first insured?

a. Joint and survivorship

b. Survivorship life

c. Universal life

d. Joint life

Which statement regarding a single premium life insurance policy is NOT correct?

a. No further premiums are necessary

b. Policy loans are permitted

c. Cash value is immediately created

d. Additional premiums may be required under certain conditions

The insurance coverage in a variable life insurance policy may vary based on the value of

a. the AM Best rating the company has received

b. its underlying investments

c. the consumer price index

d. the total premiums paid

What type of premiums are associated with individual mortgage protection life insurance policies?

a. level premiums

b. flexible premiums

c. modified premiums

d. decreasing premiums

Taxable income may be result from all of these modified endowment contract (MEC) transactions EXCEPT for

a. A cash value loan is taken out

b. Automatic premium loan provision is utilized

c. The policy is surrendered for less than what was paid into it

d. Dividend is issued

Under an adjustable life insurance policy, which of the following may NOT be changed without further underwriting?

a. the person insured

b. the period of coverage

c. the payment period

d. the plan of coverage

What is the guaranteed cash value of a whole life insurance policy when the insured turns 65 years old?

a. greater than the policy's face amount

b. less than the policy's face amount

c. depends on the performance of the separate underlying investment account

d. equal to the policy's face amount

Which type of life insurance policy is best suited for paying off the outstanding balance of a 30-year mortgage in the event of the insured's death?

a. 30-year endowment

b. 30-year increasing term

c. 30-year decreasing term

d. 30-year whole life

The death proceeds of a credit life insurance policy are typically paid to the

a. borrower

b. lender

c. annuitant

d. borrower's dependents

How are level term policies able to provide level premiums?

a. policy dividends

b. yearly policy fees

c. yearly reductions in face amount

d. premium are average over the term of the policy

Which of these statements accurately portrays an adjustable life insurance policy?

a. policy can alternate between form of term and whole life insurance

b. cash value loans are not permitted

c. evidence of insurability required for conversion

d. settlement options are limited

Which of these life insurance policies does NOT contain a cash value provision?

a. modified whole life

b. universal life

c. decreasing term life

d. adjustable life

At what point are death proceeds paid in a joint life insurance policy?

a. When the first insured dies

b. When the second insured dies

c. Only after insurable interest has been confirmed to still exist

d. If both insureds die from the same accident

Which of the following is generally a form of group credit life insurance?

a. decreasing term insurance

b. increasing term insurance

c. level term insurance

d. whole life insurance

Which of these is NOT a reason to buy a term life policy?

a. to pay a mortgage balance if an insured dies

b. to offer temporary protection

c. to offer low-cost insurance coverage

d. to accumulate savings

Which type of life insurance policy allows a policyowner the choice of investments along with flexible premium payments?

a. variable universal life

b. modified endowment contract

c. adjustable life

d. graded premium whole life

These are all accurate statements regarding universal life insurance EXCEPT

a. Mortality charge is deducted from the policy's cash value each month

b. Policy loans are not permitted

c. Flexible premiums as long as the cost of insurance protection is covered

d. Policy states what percentage of the premium is contributed to the cash value and which pays for the cost of insurance

Who normally pays the premiums for group credit life insurance?

a. Creditor and borrower share the cost equally

b. Borrower

c. Creditor

d. Beneficiary

Which statement concerning adjustable life insurance is accurate?

a. cash value loans are not permitted

b. the face amount and premiums can be changed simultaneously by the policyowner

c. settlement options are limited

d. only the face amount can be changed by the policyowner

Straight whole life insurance can be accurately described in all of these statements EXCEPT

a. Policy protection normally expires at age 65

b. Nonforfeiture values are available to the policyowner

c. Provides level protection with level premiums

d. Cash value loans are permitted

Which action will trigger a penalty tax on premature distributions from a modified endowment contract (MEC)?

a. policy loans

b. claim on a death benefit

c. extended term settlement option

d. policyowner reaching the age of 70 1/2

Assets that back the non-guaranteed values of variable life insurance products are held in which account?

a. trust account set up by the insured

b. separate account set up by the insurer

c. general account of the insurer

d. money market account

Which statement concerning a decreasing term life policy is accurate?

a. Cash value decreases over the policy period

b. Premium decreases over the policy period

c. Face amount decreases over the policy period

d. Face amount stays the same over the policy period

A survivorship life insurance policy usually covers how many lives?

a. 1

b. 2

c. 3

d. 4

Which statement regarding an adjustable life insurance policy is NOT true?

a. Combines term and permanent insurance into a single plan

b. Allows flexibility as insurance needs change

c. Plan of coverage may be changed by the policyowner

d. Policy loans are not permitted

Which of these is NOT considered a type of limited payment whole life insurance?

a. Life paid-up at 65

b. 20 payment life

c. 15 payment life

d. Endowment at age 70

An individual who purchases a modified life insurance policy expects

a. a higher rate of return

b. coverage for two people

c. an improvement in future income

d. a flexible face amount

Which of these may NOT be deducted from premium payments or the cash value of a variable insurance policy?

a. mortality costs

b. administrative charges

c. investment management fees

d. federal premium taxes

Which of these is NOT an advantage of term life insurance?

a. The greatest amount of coverage can be provided for the initial premium paid

b. It can be provided as a rider to another policy

c. A cash benefit will be produced if the insured is alive at the end of the policy period

d. Temporary insurance needs to be met

When would evidence of insurability be required for a person already covered with a variable universal life policy?

a. When the premium is increased

b. When the policy has renewed

c. When the death benefit is increased

d. When policy is being converted to permanent coverage

What kind of life policy typically offers mortgage protection?

a. Whole life

b. Decreasing term

c. Increasing term

d. Level term

What is a juvenile life insurance policy?

a. coverage normally sold as a term rider

b. a life policy that covers the parents of a minor

c. a life policy that covers the life of a minor

d. a life policy that covers the lives of both parents and their children

All of these statements concerning group credit life insurance are false EXCEPT

a. cash value loans are allowable

b. dividends can reduce the premium payments

c. the face amount and premiums are flexible

d. the face amount is based on the outstanding loan balance

Which of the following is a TRUE statement regarding universal life insurance?

a. Death benefits are normally taxable

b. Policy loans are not permitted

c. Premiums or face amount cannot be changed

d. Policy indicates how much of each premium is used toward company expenses

Which statement regarding the cash value of a whole life insurance policy is correct?

a. Can be borrowed against, starting in the policy's fifth year

b. Cash value accumulation is based on the performance of a separate investment account

c. Available to the policyowner when policy has been surrendered

d. Starts growing with the initial premium

A life policy that has premiums that are lower than normal during the early years is called

a. decreasing term

b. modified life

c. variable life

d. limited-pay life

John received a one-time distribution of $50,000 from his modified endowment contract (MEC). Prior to that, the contract's cash value was $150,000, the contract investment amount was $100,000, and the death benefit was $500,000. What percentage of the $50,000 distribution was taxable as ordinary income?

a. 0%

b. 25%

c. 50%

d. 100%