Life Insurance Ch. 3 Quiz

Questions and Answers

A life insurance policy which ensures that the premium will be paid if the insured becomes disabled has what kind of rider attached?

Accelerated Benefits

Return of Premium

Cost of Living

Waiver of Premium (correct)

What action will an insurer take if an interest payment on a policy loan is not made on time?

Cancel the policy if not paid within the grace period

Automatically add the amount of interest due to the loan balance (correct)

Subtract from any dividends owed

Disallow any further loans

What is the Suicide provision designed to do?

Allows the insurer the option to pay a death benefit in the event of suicide

Safeguard the insurer from an applicant who is contemplating suicide (correct)

Protect the insurer from ever paying a claim that results from suicide

Decline an applicant who is contemplating suicide

All of these statements about the Waiver of Premium provision are correct EXCEPT

Insured must be eligible for Social Security disability for claim to be accepted Signup and view all the answers

Which of the following Dividend options results in taxable income to the policyowner?

Accumulation at Interest Signup and view all the answers

P is the insured on a participating life policy. Which statement is true if P's premiums are waived due to a disability?

P will still receive declared dividends Signup and view all the answers

Which of these are NOT an example of a Nonforfeiture option?

Life Income Signup and view all the answers

What does the ownership clause in a life insurance policy state?

Who the policyowner is and what rights the policyowner is entitled to Signup and view all the answers

The Accelerated Death Benefit provision in a life insurance policy is also known as a(n)

Living Benefit Signup and view all the answers

The automatic premium loan provision is designed to

Avoid a policy lapse Signup and view all the answers

What benefit does the Payor clause on a Juvenile Life policy provide?

Premiums are waived if payor becomes disabled Signup and view all the answers

D is the policyowner and insured for a $50,000 life insurance policy. The beneficiary is D's wife. D and his wife divorce and D remarries, transferring ownership of his policy to his new wife. If D dies without making any further changes, to whom will the policy proceeds be paid?

Ex-wife Signup and view all the answers

What action can a policyowner take if an application for a bank loan requires collateral?

Assign policy ownership to the bank Signup and view all the answers

Which of these provisions require proof of insurability after a policy has lapsed?

Reinstatement Signup and view all the answers

Which of the following statements is CORRECT about accelerated death benefits?

Must have a terminal illness to qualify Signup and view all the answers

Which of these Nonforfeiture Options continue a build-up of cash value?

Reduced Paid-Up Signup and view all the answers

Which of these life insurance riders allows the applicant to have excess coverage?

Term rider Signup and view all the answers

The provision that can be used to put an insurance policy back in force after it has lapsed due to nonpayment is called

Reinstatement Signup and view all the answers

M has an insurance policy that also has an outstanding policy loan at the time of M's death. The insurer will deduct the outstanding loan balance from the

Policy proceeds Signup and view all the answers

A provision in a life insurance policy that pays the policyowner an amount that does not surpass the guaranteed cash value is called the

Policy Loan provision Signup and view all the answers

N is covered by a Term Life policy and does not make the required premium payment which was due August 1. N dies September 15. What action will the insurer take?

Claim will be denied Signup and view all the answers

Additional coverage can be added to a Whole Life policy by adding a(n)

Decreasing term rider Signup and view all the answers

An insured's inability to perform two or more activities of daily living may trigger which type of policy rider?

Long term care Signup and view all the answers

When a life insurance policy exceeds certain IRS table values, the result would create which of the following?

Modified Endowment Contract (MEC) Signup and view all the answers

What kind of life insurance product covers children under their parent's policy?

Term rider Signup and view all the answers

Variable Whole Life Insurance can be described as:

Both an insurance and securities product Signup and view all the answers

When is the face amount paid under a Joint Life and Survivor policy?

Upon death of the last insured Signup and view all the answers

K is looking to purchase Renewable Term insurance. Which of these types of term insurance may be renewable?

Level Signup and view all the answers

F needs life insurance that provides coverage for only a limited amount of time with a death benefit that changes regularly according to a schedule. What kind of policy is needed?

Decreasing term policy Signup and view all the answers

What type of policy would offer a 40-year-old the quickest accumulation of cash value?

20-pay life Signup and view all the answers

Which type of life policy contains a monthly mortality charge as well as self-directed investment choices?

Variable Universal Life Signup and view all the answers

Which of these types of life insurance allows the policyowner to have level premiums and to also choose from a selection of investment options?

Variable Life Signup and view all the answers

A Family Income Policy is a combination of Whole Life and:

Decreasing Term insurance Signup and view all the answers

Life insurance that covers an insured's whole life with level premiums paid over a limited time is called:

Limited Pay Life Signup and view all the answers

What type of life policy covers two people and pays upon the death of the last insured?

Survivorship Signup and view all the answers

What kind of life insurance starts out as temporary coverage but can be later modified to permanent coverage without evidence of insurability?

Convertible Term Signup and view all the answers

L, aged 50, and L's spouse, 48, have one natural child and one adopted child. They purchase a Family Policy that covers L's spouse to age 65. A death benefit will NOT be paid in which of the following circumstances?

L's spouse dies at age 66. Signup and view all the answers

When a policyowner exchanges a term policy for a whole life policy without providing proof of good health, which of these applies?

Conversion provision Signup and view all the answers

A life policy with a death benefit that can fluctuate according to the performance of its underlying investment portfolio is referred to as:

Variable Life Signup and view all the answers

S is close to retiring and would like to purchase a policy that will yield greater gains than bonds, but will still protect the principal with a minimum level of risk. Which product would S be advised to purchase?

Equity index insurance Signup and view all the answers

A potential client, age 40, would like to purchase a Whole Life policy that will accumulate cash value at a faster rate in the early years of the policy. Which of these statements made by the producer would be correct?

20-Pay Life accumulates cash value faster than Straight Life. Signup and view all the answers

Which policy requires an agent to register with the National Association of Securities Dealers (NASD) before selling?

Variable Life Signup and view all the answers

A variable insurance policy:

Does not guarantee a return on its investment accounts Signup and view all the answers

What type of life insurance incorporates flexible premiums and an adjustable death benefit?

Universal Life Signup and view all the answers

P is looking to purchase a life insurance policy that will pay a stated monthly income to his beneficiaries for 20 years after he dies and a lump sum of $20,000 at the end of that 20-year period. What type of policy should P purchase?

Family Maintenance policy Signup and view all the answers

K pays on a $20,000 20-Year Endowment policy for 10 years and dies from an automobile accident. How much will the insurance company pay the beneficiary?

$20,000 death benefit Signup and view all the answers

Which of these statements describe a Modified Endowment Contract (MEC)?

Exceeds the maximum amount of premium that can be paid into a policy and still have it recognized as a life insurance contract Signup and view all the answers

What type of life insurance are credit policies issued as?

Term Signup and view all the answers

Which provision allows the policyowner to change a term life policy to a permanent one without providing proof of good health?

Conversion Signup and view all the answers

What kind of life policy either pays the face value upon the death of the insured or when the insured reaches age 100?

Whole Life Signup and view all the answers

D needs life insurance that provides coverage for only a limited amount of time while also paying the lowest possible premium. What kind of policy is needed?

Level term Signup and view all the answers

Which statement is correct regarding the premium payment schedule for whole life policies?

Premiums are payable throughout the insured's lifetime/ coverage lasts until death of the insured Signup and view all the answers

Which type of policy is considered to be overfunded, as stated by IRS guidelines?

Modified Endowment Contract Signup and view all the answers

Under a Renewable Term policy:

The renewal premium is calculated on the basis of the insured's attained age Signup and view all the answers

Which is true concerning a Variable Universal Life policy?

Policyowner controls where the investment will go and selects the amount of the premium payment Signup and view all the answers

When is the face amount of a Whole Life policy paid?

When the insured dies or at the policy's maturity date, whichever happens first Signup and view all the answers

Which of these would be considered a Limited-Pay Life policy?

Life Paid-Up at Age 70 Signup and view all the answers

A Limited-Pay Life policy has:

Premium payments limited to a specified number of years Signup and view all the answers

The Consideration clause in a life insurance contract contains what pertinent information?

Amount of premium payments and when they are due Signup and view all the answers

Whose life is covered on a life insurance policy that contains a payor benefit clause?

Child Signup and view all the answers

The Accidental Death and Dismemberment (AD&D) provision in a life insurance policy would pay additional benefits if the insured:

Is blinded in an accident Signup and view all the answers

How do life insurance companies handle cases where the insured commits suicide within the contract's stated Contestable period?

Claims are denied under the Suicide clause of the policy Signup and view all the answers

Which statement regarding the Misstatement of Age provision is considered to be true?

Coverage will be adjusted to reflect the insured's true age if a misstatement of age is discovered Signup and view all the answers

When does a Guaranteed Insurability Rider allow the insured to buy additional coverage?

At future dates specified in the contract with no evidence of insurability required Signup and view all the answers

Which of the following statements about accumulated interest earned on dividends from an insurance policy is TRUE?

It is taxed as ordinary income Signup and view all the answers

S has a Whole Life policy with a premium payment due soon. Which provision would keep the policy in force if S does not make the required payment and the policy has adequate cash value from which the premium payment can be made?

Automatic Policy Automatic Policy Loan Signup and view all the answers

What does the insuring agreement in a life insurance contract establish?

An insurer's basic promise Signup and view all the answers

When a misrepresentation on a life insurance policy application is discovered, what action may an insurance company take?

Void the policy only if it is discovered during the Contestable period and proven to be material Signup and view all the answers

Which of these is NOT considered to be a right given to a policyowner?

Modify a provision in the insurance contract Signup and view all the answers

N is a student pilot with a large life insurance policy. Which of these features would limit the insurer's obligation in the event N was killed while flying as a student pilot?

Exclusion Signup and view all the answers

The incontestable clause allows an insurer to:

Contest a claim during the contestable period Signup and view all the answers

How are surrender charges deducted in a life policy with a rear-end loaded provision?

Deducted when the policy is discontinued Signup and view all the answers

T took out a $50,000 life insurance policy with an Accidental Death and Dismemberment rider. Five years later, T commits suicide. How much will the insurer pay?

$50,000 Signup and view all the answers

B owns a Whole Life policy with a guaranteed insurability option that allows him to purchase, without evidence of insurability, stated amounts of:

Additional Whole Life coverage at specified times Signup and view all the answers

In a life insurance policy, which feature states that the policy will not cover certain risks?

Exclusion Signup and view all the answers

A long-term care rider in a life insurance policy may trigger a benefit in the event of which of the following?

Inability of the insured to perform more than 2 Activities of Daily Living (ADLs) Signup and view all the answers

The Consideration clause in a life insurance policy indicates that a policyowner's consideration consists of a completed application and:

The initial premium Signup and view all the answers

Study Notes

Life Insurance Types and Provisions

Modified Endowment Contract (MEC) occurs when a policy exceeds IRS limits, impacting its tax treatment.
A Term Rider allows children to be covered under their parent's life insurance policy.
Variable Whole Life Insurance functions as both an insurance and securities product, bearing investment risk.
Joint Life and Survivor policy pays the face amount upon the death of the last insured.
Level Term insurance is renewable, providing stability in premiums.

Policy Variations and Features

Decreasing Term policies have a death benefit that schedules a decline over time.
20-Pay Life policies accumulate cash value quickly for insured individuals, especially beneficial for younger buyers.
Variable Universal Life policies place monthly mortality charges along with self-directed investment choices.
A Family Income Policy merges Whole Life with Decreasing Term insurance for financial protection over time.

Premium Structures

Limited Pay Life policies feature premium payments constrained to a specified period, offering whole life coverage.
Universal Life policies combine adjustable premiums with an adjustable death benefit.
Premiums for Whole Life policies are payable throughout the insured's life, ensuring lifetime coverage.

Insurance Contract Provisions

The Conversion provision allows term policies to be switched to permanent ones without proving good health.
An Automatic Policy Loan provision maintains policy coverage if premium payments are missed, relying on the policy's cash value.
The Misstatement of Age provision adjusts coverage based on accurate age information to avoid incorrect premiums.

Additional Riders and Benefits

Payor Benefit clauses cover a child if the paying parent becomes unable to provide coverage.
Accidental Death and Dismemberment (AD&D) provisions provide extra benefits for specific accidental injuries.
Long-term care riders activate benefits when the insured cannot perform essential activities of daily living.

Tax Implications and Rights

Accumulated interest from dividends is taxed as ordinary income, affecting policyholders' financial planning strategies.
Dividend options like Paid-up Additions and Cash do not incur taxes, helping policyholders strategize for financial growth.
The Consideration clause outlines the amount of premium payments and their due dates as fundamental policy details.

Claims and Contestability

Insurers cannot contest claims within the Contestable period on grounds of material misrepresentation.
Suicide provisions protect insurers by disallowing claims if a suicide occurs within a defined timeframe.

Exclusions and Limitations

Exclusions in policies limit coverage for specific risks, affecting claims processing in certain scenarios.
Insurers require agents dealing with Variable Life policies to register with the NASD, ensuring regulatory compliance.
Waiver of Premium provisions maintains coverage during disability but may have waiting periods and eligibility criteria.

Overall Understanding

Life insurance encompasses various types and provisions, designed to cater to different needs and circumstances.
Policymakers need to navigate claims, transaction types, and financial implications to optimize their strategies effectively.### Policy Ownership and Benefits
Ownership of a life insurance policy cannot be assigned while premiums are waived.
Policyowner retains declared dividends even when premiums are waived.

Nonforfeiture Options

Nonforfeiture options include Extended Term, Reduced Paid-Up, and Cash Surrender.
Life Income is NOT classified as a Nonforfeiture option.

Ownership Clause

The ownership clause details who the policyowner is and their rights.
It does not specify rights of beneficiaries or allow policy adjustments without conditions.

Accelerated Death Benefit

Also referred to as a Living Benefit.
Provides early access to death benefits under certain conditions.

Automatic Premium Loan Provision

Aims to prevent policy lapses by drawing on cash value for premium payments.

Payor Clause in Juvenile Life Policies

Waives premiums if the payor becomes disabled, ensuring continued coverage for the juvenile.

Policy Ownership Transfer After Divorce

If the policyowner transfers ownership post-divorce, the ex-spouse remains the designated beneficiary unless changes are made.

Collateral for Bank Loans

Policyowners can assign ownership to a bank to satisfy loan collateral requirements.

Reinstatement of Policies

Proof of insurability is required for reinstatement after a policy has lapsed.

Requirements for Accelerated Death Benefits

A terminal illness is typically necessary to qualify for accelerated benefits.

Nonforfeiture Options and Cash Value

The Reduced Paid-Up option allows for the continuation of cash value accumulation.

Excess Coverage Riders

Term rider enables policyholders to obtain excess coverage beyond the original policy limits.

Reinstatement Provision

The reinstatement provision enables putting a lapsed policy back in force due to nonpayment.

Impact of Outstanding Loans on Death Benefits

Outstanding policy loan balances are deducted from policy proceeds at the time of the insured’s death.

Policy Loan Provision

Provides the policyowner access to funds up to the guaranteed cash value of the policy.

Claim Denial Due to Nonpayment

If premium payments are not made, claims will be denied upon the insured's death.

Additional Coverage for Whole Life Policies

Additional coverage can be secured through the addition of a decreasing term rider.

Activities of Daily Living and Long Term Care

Inability to perform two or more activities of daily living may activate long-term care policy riders.

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Test your knowledge on life insurance policies and provisions with these flashcards. This quiz covers important terms such as Modified Endowment Contracts and various rider types, enhancing your understanding of life insurance concepts. Perfect for students preparing for exams or professionals seeking to refresh their knowledge.