Ch. 6 - Life Premiums and Benefits

Life insurance premiums are computed on what three factors?

a. Mortality, interest, dividends

b. Morbidity, interest, expenses

c. Mortality, interest, expenses

d. Morbidity, interest, dividends

A policyowner with a terminal illness who sells his life insurance policy to a third party is called a

a. viable

b. viatical

c. viator

d. viatee

When a policy loan is requested by a policyowner and it requires the consent of the beneficiary, what kind of beneficiary designation is this?

a. Collateral beneficiary

b. Revocable beneficiary

c. Irrevocable beneficiary

d. Per stripes beneficiary

Kevin has an existing life insurance policy and assigns it to another insurer for a new contract. How would this transaction be treated for tax purposes?

a. as a Section 1035 exchange

b. as a transfer

c. as a rollover

d. as a Section 1040 exchange

A life insurance company just paid a $100,000 death benefit to a beneficiary. When the insured died, the cash value was $15,000 and the total premiums-paid equaled $10,000. How much of the proceeds will be added to the beneficiary's gross income for federal income tax purposes?

a. nothing

b. $5,000

c. $100,000

d. $105,000

Wyatt is shopping for life insurance and is mainly concerned with the policy's death benefit. Which index should he be looking at when making comparisons?

a. net gain index

b. net payment cost index

c. cost surrender index

d. guaranteed renewable index

Which of these factors does NOT affect life insurance premium rates?

a. expense factor

b. interest factor

c. mortality factor

d. producer certification

Which life insurance policy provision prohibits a beneficiary from "commuting, encumbering, withdrawing, or assigning" any portion of the proceeds prior to actual receipt from the company?

a. insuring clause

b. spendthrift clause

c. nonforfeiture provision

d. collateral provision

Which statement best describes a single premium whole life policy?

a. premiums that can only be paid from a single source

b. a single premium that is due annually

c. paid-up policy that offers lifetime protection

d. paid-up policy that offers limited protection

How much is normally paid to a policyowner in a life (viatical) settlement?

a. total premiums paid plus interest

b. full face amount

c. more than the face amount

d. less than the death benefit

Which of the following statements about the installments for a fixed period settlement option in life insurance policies is NOT true?

a. the periodic payment amount is determined by the beneficiary's age

b. the shorter the period of time, the larger each installment

c. the longer the period of time, the smaller each installment

d. the installment payments are composed of both principal and interest

Death proceeds from a life insurance policy are typically included in a deceased insured's gross estate

a. for federal income tax reasons

b. for federal and state income tax purposes

c. only if the insured's estate is listed as beneficiary

d. only if the policy is owned by the beneficiary

Which settlement option makes minimum guaranteed dollar payments over a stated number of years?

a. interest-only

b. fixed-period

c. fixed-amount

d. life income

A life insurance beneficiary died after receiving only six payments under the policy's life income settlement option. What happens with the remaining balance of the death proceeds?

a. transfers to the insured's estate

b. transfers to the beneficiary's estate

c. donated to charity

d. kept by the insurance company

Which life insurance settlement option pays a stated monthly benefit until both principal and interest are exhausted?

a. fixed amount installment option

b. fixed period installment option

c. life income option

d. interest only option

Which would be described as a beneficiary

a. children of the insured

b. estate of the insured

c. tertiary beneficiary

d. a specific named beneficiary

What is considered a valid reason for an insurer's refusal to pay policy proceeds directly to a minor?

a. Minors are not capable of having insurable interest

b. Minors are normally not capable of handling money in a reasonable manner

c. Minors are usually not capable of paying for the insurance premium

d. Minors cannot legally enter into a contract

Which of these occurrences could improve an insurer's ability to reduce premiums?

a. expense factor increase

b. mortality rates increase

c. rate of earnings on investments increase

d. requiring monthly premium payments instead of annual

When premiums are determined, one factor would be the expenses of the

a. beneficiary

b. insurer

c. policyowner

d. producer

During the early years of a whole life insurance policy, the cash value will normally be

a. equal to the total premiums paid

b. more than the total premiums paid

c. less than the total premiums paid

d. unavailable as a policy loan

Which statement is INCORRECT about the interest-only settlement option in a life insurance policy?

a. interest rate is guaranteed with a minimum rate

b. interest on proceeds must be paid by the beneficiary

c. interest is payable to a sated beneficiary

d. interest must be paid at least annually

Which tax cost is normally associated with death?

a. federal excise tax

b. sales tax

c. federal estate tax

d. payroll

Switching Life insurance policies without tax consequence is permitted under

a. MEC rules

b. Section 1035 rules

c. the Exclusion Ratio

d. Replacement rules

Which tax is normally associated with an individual's death?

a. Excise tax

b. Consumption tax

c. Federal estate tax

d. Ad valorem tax

A terminally ill policyowner decides to sell his life insurance policy at a discount to help support his family. This sale is called a(n)

a. accelerated death benefit

b. assignment

c. viatical settlement

d. nonforfeiture option

A life policy's spendthrift clause would have no effect if the beneficiary is paid the proceeds as a

a. fixed-period installment

b. life income option

c. fixed-amount installment

d. lump-sum payment

When there is a named beneficiary on a life insurance policy, the death benefits

a. are directed to a trustee if the insured has any outstanding debts

b. are paid directly to the insured's creditors, with any remaining balance forwarded to the beneficiary

c. are paid directly to the beneficiary, minus any debt claims by the insured's creditors

d. are paid directly to the beneficiary without interference from the insured's creditors

Al surrenders his life insurance policy for its cash value. The total of the premiums paid into the policy minus total dividends received in cash or used to offset premiums is referred to as the

a. premium basis

b. net proceeds

c. cash basis

d. cost basis

Which statement regarding a fixed period settlement option is correct?

a. The insurance company dictates each installment payment amount

b. A fixed period settlement option can pay no longer than 20 years

c. The installment payment amount is determined by the total number of installments

d. The insurance company dictates the total number of installment payments

A policyowner fell behind on the premium payments of a whole life policy and is now in the grace period. How much will the beneficiary receive if the insured dies during this grace period and the policy also contains an outstanding policy loan?

a. full face amount

b. face amount minus the past-due premium

c. face amount minus the loan balance

d. face amount minus the loan balance and past-due premium

What kind of arrangement gives the policyowner the right to change the beneficiary?

a. Contestable designation

b. Incontestable designation

c. Irrevocable designation

d. Revocable designation

Which life insurance settlement option pays lifetime benefits to two or more people?

a. life income with period certain

b. joint

c. joint and survivor

d. life income

Death benefits from a life insurance policy are normally considered to be

a. exempt from federal income tax

b. subject to the cost recovery rule

c. subject to attachments from the insured's creditors

d. subject to the value added

Who is the beneficiary in a life insurance policy?

a. the person designated to have control over the nonforfeiture options

b. the stated person or entity who is designated to receive the death proceeds

c. the person responsible for payment of the policy premiums

d. the stated person whose life is insured in the insurance contract

How long do most states allow an insurance company to delay the payment of a cash surrender under the Delayed Payment provision

a. 1 month

b. 2 months

c. 4 months

d. 6 months

What would be the disadvantage of naming a trust as beneficiary of a life insurance policy?

a. trusts cannot be formed for life insurance purposes

b. trust administration fees would reduce policy proceeds

c. trusts cannot be used if a minor is the beneficiary

d. trustee must be a bank or brokerage

Which statement regarding the joint and survivor life insurance settlement option is NOT true?

a. age of the beneficiaries plays a factor when determining the payment amounts

b. income continues until the last beneficiary dies

c. two or more beneficiaries can be paid

d. the amount of each installment is larger than the single life income option

The highest mortality rate belongs to which group?

a. age 60 females

b. age 70 males

c. age 60 males

d. age 70 females

T is covered by an Accidental Death and Dismemberment (AD&D) policy that has an irrevocable beneficiary. What action will the insurance company take if T requests a change of beneficiary?

a. request will be accepted only if in writing by the insured

b. change will be made only if premiums are paid current

c. change will be made immediately

d. request of the change will be refused

What effect does interest income have upon insurance premiums?

a. increases premium

b. decreases premium

c. levels the premium

d. adjusts premium on a quarterly basis

The beneficiary of a life insurance policy is normally selected by whom?

a. policyowner

b. contingent beneficiary

c. estate

d. insurance company

Where will a life insurance policy's proceeds be directed to if all the beneficiaries die before the insured?

a. insured's creditors

b. beneficiary's estate

c. insured's estate

d. court-ordered beneficiary

Which of these is an accurate statement regarding the fixed period settlement option on a life insurance policy?

a. a portion of the payments paid to the beneficiary comes from interest calculated on the proceeds of the policy

b. payment can be adjusted monthly by the beneficiary

c. a portion of the payments paid to the beneficiary comes from interest generated from policy loans

d. payments are normally guaranteed for 10 years or more

A life insurance policy's contingent beneficiary is the

a. primary person who receives the death benefits if the insured dies

b. person who receives the death benefits if the primary beneficiary dies before the insured

c. person who receives the death benefits if there is no named beneficiary

d. person whose approval is needed before a beneficiary designation is changed

What would be a valid reason for naming a trust as the beneficiary of a life insurance policy as opposed to naming an individual?

a. avoiding probate

b. management of proceeds would be provided

c. trustee can pay off any existing policy loans

d. more settlement options available with a trustee