Life Insurance Flashcards

Flashcards from the Life Insurance Lecture

What is a contract or device for transferring risk from a person, business, or organization to an insurance company?

Insurance is the transfer of risk.

Which of the following represents a pure risk?

The chance your house may burn down. Pure risk involves the possibility of loss. Speculative risks involve the possibility of loss and gain.

Suzanne regularly leaves her side door unlocked when she leaves for work. One afternoon a thief entered her apartment and stole all of her jewelry. What was the type of hazard in this example?

Leaving the door unlocked is a morale hazard.

Since he lives in a good neighborhood and across the street from the fire station, Jeff decides to cancel his fire insurance policy. This is an example of which risk management method?

By not carrying fire insurance, Jeff is retaining the risk of financial loss from an unexpected fire.

Sometimes an individual or business has an exceptionally large or specialized risk that no authorized insurer can or will cover. In this case they may call:

Excess or Surplus lines are highly specialized insurance coverages.

Insurance companies often purchase insurance to cover their own exposure to loss. This is called:

Reinsurance helps protect insurance companies from catastrophic losses and from wild fluctuations in underwriting results.

Insurance programs designed to cover catastrophic risks, including insurance for war risks, flood, and crop losses are primarily insured by:

The federal government provides a wide variety of insurance benefits through a number of programs. It provides, supports, or subsidizes a number of insurance programs designed to cover catastrophic risks, including insurance for war risks, flood, and crop losses.

A person in a position of financial trust is called:

Agents have a fiduciary responsibility to applicants/insureds and the insurance company.

The failure to disclose known facts is:

Generally an insurer can void a contract if it can prove the insured intentionally concealed a material fact.

The ABC Insurance Company is incorporated in Mexico. While doing business in Texas, it is:

The insurance company is an alien insurer since Mexico is not a part of the U.S.

A risk that bears the same health, habits, and occupational characteristic as the persons on whose the mortality table was based upon is known as a:

Standard risks represent average exposures and fall into the normal range.

A general report in regard to the applicant’s finances, health, character, work, hobbies, and other habits that is usually completed by interviewing friends and associates is known as:

An investigative consumer report is also called an inspection report.

Most states allow backdating to be done on an insurance application for:

Backdating is done so that the premium can be based on an earlier age for the insured. If the application is backdated the policy becomes effective as of that date and the insured must pay back premiums from that date.

All of the following statements about completing the insurance application are correct EXCEPT:

The producer’s report is only signed by the producer. The proposed insured does not see this report.

The section of the application that includes information regarding the proposed insured’s physical condition, medical history, and alcohol and drug use is known as:

Height, weight, tobacco use, drug use, medications, high risk hobbies, family health conditions, international travels, history of disability claims and medical treatments is some of the information included in the second-part of the application.

Under which of the following receipts is coverage effective as of the date of the application as long as the applicant is found to be insurable under the company’s standard underwriting rules?

Some conditional receipts make the coverage effective on the date of application, or the date of the medical examination, whichever is later. A binding receipt is often used with homeowners insurance, not life insurance.

Which of the following imposes a requirement that the insurer must keep all medical information confidential and protect the applicant’s privacy?

If any health information is going to be shared, applicants must be given notice of the insurer’s information-sharing practices, their right to maintain privacy, and an opportunity to refuse to have their information released.

A risk that represents a chance of experiencing a loss that is below average and therefore favorable to the company is a:

These risks may be insured at preferred or discounted rates.

Which of the following is used to determine a consumer’s eligibility for personal credit, insurance, or employment?

A credit report is an example of a consumer report. This can tell underwriters if an applicant is likely to be reliable about making premium payments.

While delivering the policy, the producer must obtain a signed document that the insured’s health is the same as when he or she applied for the insurance policy. This document is called:

This gives the insurer a good basis to contest a claim if it turns out that the insured’s health declined before the coverage actually went into effect.

Which of the following factors does NOT have an effect on the insurance premium rates?

The producer’s certification does not have any effect on premium rates. Mortality, morbidity, interest rates, and expenses do.

Which of the following types of insurance has premiums that are due weekly and are collected in person by producers who go door to door?

With industrial life insurance the face amounts are usually small—$2,000 or less and are often bought simply to help pay burial expenses. This is the only policy that you will learn about that has weekly premiums.

Which of the following describes an employer that agrees to pay an employee a stated amount of income beginning at retirement rather than paying them the money now?

This benefits the employee because the money is not taxable until the employee actually receives it. In return, the employee agrees to work for the employer until retirement so it also benefits the employer.

All of the following are examples of buy-sell agreements EXCEPT:

Rather than giving a yearly bonus to an employee in cash, companies can use the money to buy a life insurance policy for the employee. The other 3 answer choices are buy-sell agreements and provide for the sale of a business at the death of an owner. They are often referred to as business continuation plans.

All of the following are examples of an insurable interest EXCEPT:

Spouses, children, close family members, and business partners are all examples in which insurable interest exists. A neighbor or a best friend would not be an example of an insurable interest.

Which of the following terms refers to how easily an asset can be turned into cash without loss of value?

An example of a liquid asset is a bank savings or checking account. (Illiquid assets are those that lack liquidity and are also called hard assets).

When the owner of a life insurance policy is not the insured, there are three parties to the contract. Which of the following is not a party to this type of contract?

When a life insurance policy’s applicant and insured are the same, it is a two-party contract between the insurer and the owner/insured. When the insured and policyowner are different, it is a three party contract between the insurer, insured, and policyowner.

Which of the following classes of life insurance has a death benefit only, increasing premiums temporary coverage and expires at end of the term?

Term is temporary, permanent is for a lifetime.

Which of the following premiums is the mortality element minus the interest element?

Gross premium is the net premium plus the expense element. It may also be referred to as the loaded premium.

All of the following are names of distinct income need periods EXCEPT:

Social Security actually pays the survivor benefits during the family dependency and retirement periods, but not during the preretirement period. For this reason, the preretirement period is often called the blackout period.

Pam owns a 1-year term policy. At the end of the year, she may purchase another identical policy without showing proof of insurability. Pam’s policy is:

Renewable term may be renewed at the end of a specified period without proof of insurability. The renewal is for the same term of the time as originally purchased.

Zelda agrees to pay premiums on her policy every year for 20 years. After that, she will no longer have to pay premiums, but her insurance protection will continue until she dies. Zelda has:

This is a limited-pay policy because Zelda is required to pay premiums for only a limited period.

Ashley has a policy that she must pay premiums on until she is 100 years old or until she dies. Ashley has:

Ashley’s policy is a continuous premium whole life policy because she is required to pay premiums for her whole life or until she is 100.

Which of the following is NOT flexible in a universal life policy?

The guaranteed interest rate is not flexible in a universal life policy.

Martha has a universal life policy she purchased several years earlier. At that time, the death benefit in the policy was $100,000. Her cash value is now $50,000, and she has selected death benefit option A. How much is her current death benefit?

Option A in a universal life policy provides a level death benefit equal to the policy’s face amount. If she would have chosen Option B, the amount of the death benefit would have been $150,000.

Karen has a universal life policy she purchased several years earlier. At that time, the death benefit in the policy was $100,000. Her cash value is now $20,000, and she has selected death benefit option B. How much is her current death benefit?

Option B provides for an increasing death benefit equal to policy’s face amount plus the cash value. If she would have chosen Option A, the amount of the death benefit would have been $100,000.

Which of the following is NOT required to be able to sell variable policies?

Registration with the NAIC is not a requirement.

Which of the following types of insurance is designed to provide life insurance protection for only a limited time?

Term life insurance provides insurance protection for a limited time.

Which of the following types of insurance requires a level premium and provides lifelong protection?

Whole life insurance requires a level premium and provides lifelong protection.

Christy has a term policy that will allow her to switch over to a whole life policy at any time during the first half of the term without providing evidence of insurability. What type of policy is this?

A term policy that will allow the insured to switch over to a whole life policy at any time during the first half of the term without providing evidence of insurability is a convertible term insurance policy.

Tammy has a $100,000 life insurance policy with a double indemnity rider. Tammy is killed in an automobile accident. How much will the policy pay?

The policy will pay a death benefit of $200,000. The extra benefit is usually the same amount as the policy, so it doubles the death benefit.

Kumar has a life insurance policy with a rider that will pay him $1,000 per month if he is totally and permanently disabled. Which type of rider does he have?

Kumar has a disability income rider because it is providing him money to help with bills during the period that he is disabled.

Paul has a life insurance policy on his son for which he pays all the premiums. A rider to this policy states that if Paul becomes permanently and totally disabled, the premiums will be paid until his son reaches age 21, at which point his son will take over the premium payments. Which type of rider does he have?

This is a payor rider because it provides for a waiver of premiums on the son’s coverage if the payor (Paul) becomes disabled.

Which of the following riders allows for an advance of the death benefit if the insured is confined to a nursing home or cannot perform the activities of daily living?

The payment advance reduces the death benefit payable upon death.

Alberta is concerned that if she became totally and permanently disabled, she would not be able to pay her life insurance premiums and the policy will lapse. Which type of rider should she consider to protect against this possibility?

A waiver of premium rider will waive the premiums on Alberta’s policy if she becomes disabled.

Which of the following riders is increasing term insurance that always equals the total premiums paid during the time the policy is in effect?

A return of premium rider is increasing term insurance that always equals the total premiums paid during the time the policy is in effect.

Which of the following is waiver of all future premiums in the event of total and permanent disability?

Waiver of premium is waiver of all future premiums in the event of total and permanent disability.

Which of the following is a guarantee that at specified ages, dates, or events, the insured may buy additional insurance without a medical exam?

Guaranteed insurability is a guarantee that at specified ages, dates, or events, the insured may buy additional insurance without a medical exam.

The amount of money paid by an accidental death benefit rider if the insured dies in an accident is referred to as the:

The amount of money paid by an ADB rider if the insured dies in an accident is referred to as the principal sum.

The amount of money paid by an accidental death and dismemberment rider if the insured is disabled in an accident is referred to as the:

The amount of money paid by an AD&D rider if the insured is disabled in an accident is referred to as the capital sum.

Heath has chosen to receive the payout from his wife’s life insurance policy in such a way that he will have an income for the remainder of his life, regardless of how long he lives. Heath has selected the:

This is an example of the life-income option because the proceeds will be paid over the beneficiary’s life, regardless of how long that might be.

Jim has selected to receive only the interest from his mother’s life insurance policy. When Jim dies, his children will receive the lump-sum benefit in addition to the benefit from his life insurance policy. Jim has selected the:

Because Jim has elected to receive only the interest, this example represents the interest-only option.

Walter is the beneficiary of his mother’s life insurance policy. He wants to make sure the proceeds will last not only as long as he lives but also as long as his wife is alive. Walter should select the:

Joint and survivorship life income option.

Of all of the life income options, which settlement option has the largest payment?

Life only is also known as straight life and has the largest settlement payment.

Which of the following is not a factor in determining the amount the beneficiary will receive each time a payment is made under the fixed amount option?

The capital amount is not a factor in determining the amount the beneficiary will receive each time a payment is made under the fixed amount option.

Carmen has selected to receive $10,000 per month until the principal and interest on her husband’s life insurance policy have been paid out. Carmen has selected the:

Carmen has elected to receive a fixed amount per month until all the proceeds have all been paid, so this is an example of the fixed-amount option.

All of the following statements regarding the life only settlement options are correct EXCEPT:

With the life only settlement option payment ends even if the beneficiary dies shortly after payments begin.

Thomas has chosen to receive the settlement from his wife’s $100,000 life insurance policy according to the life income option. Under the option he chooses, he will receive an income for his life and his daughter will receive payments if he dies before receiving $100,000 in income. Thomas has selected a:

Refund annuity option.

Which of the following is NOT a factor in determining the amount the beneficiary will receive each time a payment is made under the fixed period option?

The age of the beneficiary is not a factor in determining the amount the beneficiary will receive each time a payment is made under the fixed-period option.

Which of the following statements about reduced paid-up insurance option is NOT true?

The reduced paid-up amount is simply the amount of paid-up insurance that can be purchased using the existing cash value.

Which clause identifies the fact that the policyowner must pay something of value for the insurer’s promise to pay benefits?

The consideration clause identifies the fact that the policyowner must pay something of value for the insurer’s promise to pay benefits.

All of the following are designations of beneficiaries EXCEPT:

Contingent beneficiaries get all proceeds only if all the beneficiaries on a level above them die first.

Which of the following is allowed when policy proceeds are being paid through a spendthrift clause?

The spendthrift provision is designed to prevent a beneficiary whom the policyowner believes cannot control their money from squandering all policy proceeds.

Carl purchased a life insurance policy when he was 44. The insurer accidentally recorded his age as 42. When the accident is discovered in a review of the files 5 years later:

The coverage will be reduced to what the premium would have purchased based on his correct age.

All of the following can be named beneficiaries in a life insurance contract EXCEPT:

There are a number of options for designating a beneficiary; the insured is not one of these.

If the named beneficiaries cannot be found, under the facility of payment provision the insurer may:

Under the facility of payment provision, the insurer may select a beneficiary if the named beneficiaries cannot be found.

The incontestability provision is usually in effect after:

This gives the insurer a certain period of time in which to question the truth of any statement contained in the application. Misstatement of age does is excluded from this provision.

John leaves his $300,000 estate to his 3 children to split equally according to a per capita distribution. One of his children dies before John does. Upon John’s death, which of the following statements is TRUE?

Per capita means “by the head” so it is divided equally between surviving members of the family.

When Tom dies, Rosemary receives the death benefit. If Rosemary had died before Tom, George would have received the benefit. Which of the following statements is TRUE?

George would have received the benefits if Rosemary was no longer alive.

John leaves his $300,000 estate to his 3 children to split equally according to a per stirpes distribution. One of his children dies before John does. Upon John’s death, which of the following is TRUE?

Per stirpes means “by the branch” and it means that children of a deceased beneficiary are entitled to that beneficiary’s share of the proceeds.

Gianna starts work at a new job on March 1. She is not eligible for insurance coverage until July 1. The period between start date and her eligibility date is:

The probationary period is the time period from the hire date to when the employee is eligible to enroll in the group plan. There is no coverage during the probationary period.

Adam is eligible for coverage on July 1. He enrolls on July 15. He does not need to show evidence of insurability because he enrolled within:

Adam does not need to prove evidence of insurability because he enrolled within the enrollment period.

The baker’s union and the butcher’s union worked together to form a trust to provide insurance to their employees. This type of group is sponsored by:

The Taft-Hartley Trust is a group that is made up of 1 or more unions to form a group.

Jimmy’s Print Shop and Emily’s Boutique join together to form a trust to provide insurance to their employees. This type of group is called:

A multiple employer trust (MET) is when 2 or more employers form together to sponsor a group plan for their employees.

General Electricians offers insurance to its employees. About 80% of its eligible employees are currently covered under the plan. This plan is:

It is most likely that this plan requires employees to contribute toward the premiums.

All of the following are correct regarding group insurance EXCEPT:

Individuals in a group policy receive a certificate of insurance.

If the employer pays the entire group insurance premium for 100% of its employees, the plan is:

100% of eligible employees must participate in order for a plan to be noncontributory.

A typical enrollment period is how many days after the probationary period?

If an employee enrolls during the enrollment period, no medical questions are asked. If they wait and enroll after the enrollment period has ended, the insurance company may require evidence of insurability.

In group insurance, the sponsoring group is issued:

One master policy is issued to the sponsoring group as policyholder. The individuals in the group receive certificates of insurance.

All of the following group insurance eligibility requirements are true EXCEPT:

Employers do not have to include every employee in the plan, but they cannot exclude specific individuals. They can determine which classes are eligible and which are not eligible.

Annuities exist to:

Annuities address the risk of living too long while life insurance addresses the risk of dying too young.

Tracey is paying money into an annuity she hopes will support her in her retirement years. Her contract currently is in which of the following periods?

This annuity is still in the accumulation phase or the “putting in” phase.

Liz purchases an immediate annuity. The annuity contract must be a:

An immediate annuity is purchased with a single premium, and annuity payments begin one payout interval later.

Which type of annuity is most likely to provide death benefits if the insured dies during the accumulation period?

A death benefit is paid if the annuitant dies before the annuity payments begin. This is more likely to occur with a deferred annuity.

Which of the following factors is NOT used to determine single premium immediate annuity premiums?

All of these factors-except the annuitant’s retirement date-are used to determine single premium immediate annuity premiums.

Which of the following types of annuities are regulated as securities?

Variable annuities are regulated as securities because the contract-owner bears the investment risk.

An annuity that guarantees a minimum rate of return is:

A fixed annuity guarantees a minimum rate of return.

Devon purchases an annuity that will pay a monthly income for the remainder of his life and then stop making payments. Devon has purchased:

A straight-life annuity will pay a monthly income for the remainder of Devon’s life and then stop making payments.

Albert has purchased an annuity that will pay him a monthly income for the rest of his life. If Albert dies before the annuity has paid back as much as he put into it, the insurance company has agreed to pay the difference to Albert’s daughter. Albert has purchased a:

Albert has purchased a life with refund annuity. The money will be paid either as a lump sum or a continuation of benefits.

Michelle purchases an annuity that offers a guaranteed minimum interest rate and a guarantee against loss of principal if the contract is held to term. However, if the S&P 500 moves upward, Michelle’s annuity might end up accruing more than the guaranteed minimum interest rate. Michelle has purchased:

Michelle has purchased an equity-indexed annuity. The distinctive feature is that the interest rate credited to accumulated values is tied to stock.

Which of the following would NOT qualify as a 1035 exchange?

The gain in the contract become taxable upon the surrender of the annuity.

The penalties assessed against MECs primarily affect:

The penalties assessed against MECs primarily affect money taken out of the policy.

As a general rule, for federal tax purposes:

As a general rule, for federal tax purposes, neither life insurance nor annuity premium is tax deductible.

Billy is receiving the proceeds of a life insurance policy as an income stream over a period of several years. What part of the money will be subject to tax?

If death benefits are paid out over a period of time instead of in one lump sum, the original death benefit is not taxable. The interest earned is taxable as it is received by the beneficiary.

For accelerated death benefits to receive the same tax treatment as regular death benefits the insured must be certified to have an illness or physical condition that can reasonably be expected to result in death within:

Accelerated death benefits receive this same tax treatment only if they are qualified to have an illness that will result in death within 24 months or permanence in a nursing home due to a catastrophic condition. Only a doctor can qualify a person to be terminally ill.

All of the following statements regarding tax treatment of group life insurance are true EXCEPT:

Premiums paid by the employer are tax-deductible to the business.

An individual choose to receive money from their annuity during the accumulation period. What is the penalty tax that must be paid in addition to regular taxes due on the taxable amount received?

Tax treatment on money received before it enters the annuity period gets similar tax treatment as a modified endowment contract.

What is the name of the test that is done on a life insurance policy to see if it premiums exceed those needed to fully pay up a death benefit with seven level annual payments?

If a policy fails the seven-pay test it is considered a modified endowment contract.

All of the following statements regarding a modified endowment contract (MEC) are true EXCEPT:

In a MEC, withdrawals are taxed on a last-in-first-out basis. Meaning that the entire taxable portion of the cash value is considered to be withdrawn before the non-taxable cost basis.

The amount of an annuity payout option or a life insurance settlement option that is taxable gain is determined by using the:

To calculate the exclusion ratio, divide the cost basis by the expected return.