Life Insurance Fundamentals

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Questions and Answers

Which of the following can be designated as a beneficiary in a life insurance policy?

A minor child
An individual expressly prohibited by law
An adult relative (correct)
A creditor

What happens if a policyholder fails to pay the premium for their permanent life insurance policy?

The policy remains active indefinitely
The automatic premium loan provision is activated
The settlement options remain unaffected
The guaranteed insurability provision lapses (correct)

What is a primary requirement for insurable interest when purchasing a life insurance policy?

The policyholder must share a residence with the insured
The policyholder must have a financial dependency on the insured (correct)
The insured must be a close relative
The insured must be a legal spouse

When does a life insurance policy typically go into force?

At the time of policy delivery to the policyholder (C) Signup and view all the answers

In the context of life insurance, what are policy reserves primarily for?

To settle claims made by the beneficiaries (D) Signup and view all the answers

Which of the following statements is true regarding common-law spouses as beneficiaries?

They cannot be designated as beneficiaries if a legal partner is still alive (A) Signup and view all the answers

When a policyholder surrenders their insurance policy for cash value, what is the outcome?

They lose all rights to the policy (C) Signup and view all the answers

Which of the following types of tax is levied on the proceeds from an insurance policy?

Income tax on interest earnings (B) Signup and view all the answers

If a life insurance policy does not name a beneficiary, the death benefit will typically go to which of the following?

The insured’s estate (C) Signup and view all the answers

What must a policy owner do if they wish to cash in a policy with an irrevocable beneficiary?

Obtain written consent from the beneficiary (B) Signup and view all the answers

When a policy becomes paid up with an accidental death rider, which of the following is true?

The accidental death rider ceases to exist (D) Signup and view all the answers

Who is the individual that purchases an annuity plan commonly referred to as?

Owner (D) Signup and view all the answers

Which of the following is a requirement before an agent can be granted a license by the insurance commissioner?

Satisfactory completion of a life insurance course (C) Signup and view all the answers

For life insurance coverage to remain valid, when must insurable interest exist?

When the policy is issued and at the time of any loan (A) Signup and view all the answers

Which statement about life insurance applications is not correct?

They are never a part of the policy (C) Signup and view all the answers

What is the maximum claim the insurance commissioner can adjudicate against an insurance company for a single claim?

$500,000 (C) Signup and view all the answers

What is required for a sale to be considered completed?

Payment of the first premium must be made in full or part as specified (C) Signup and view all the answers

How does an automatic premium loan differ from other policy loans?

It goes into effect without the policy owner's action (D) Signup and view all the answers

What does the typical grace period provision in a life insurance policy provide?

A three-month extension to pay premiums without penalty (A) Signup and view all the answers

What occurs when a policy is assigned absolutely?

The assignee gains all rights and interests of the original policyholder (A) Signup and view all the answers

What happens if the policy owner does not pay the premium by the due date?

The policy enters a grace period during which it remains active (D) Signup and view all the answers

What will happen to dividends on a participating policy with an outstanding loan?

Dividends may be paid at a reduced rate (B) Signup and view all the answers

Which of the following is NOT a common requirement for premium payment?

The first premium must always be paid via check (B) Signup and view all the answers

What is a significant characteristic of life insurance policies regarding grace periods?

They assure that coverage continues during the grace period (A) Signup and view all the answers

Study Notes

Life Insurance

Insurable Interest: A person has insurable interest on the life of their child or grandchild, anyone they are wholly or partially dependent on for support or education, or anyone with whom they have a pecuniary interest.
Beneficiary: Anyone can be designated as a beneficiary except creditors, minors, or those prohibited by law from receiving donations
Policy Reserves: The insurance company is obligated to pay policy reserves
Premium Non-payment: A permanent life insurance policy's guaranteed insurability provision can lapse for non-payment of premium.
Policy Loans: A policyholder can obtain money from the insurance company without losing their coverage by taking a policy loan.
Misstatement of Age: If the policyholder misstates their age on the application, the insurance company will pay the face amount adjusted for the misstatement.
Beneficiary: If a policy does not name a beneficiary, the beneficiary becomes the insured's estate.
Irrevocable Beneficiary: A policy owner with an irrevocable beneficiary must get the beneficiary's consent to cash in the policy.
Accidental Death Rider: When a policy with an accidental death rider becomes paid up, the accidental death rider ceases.
Annuity Plans: An annuity plan is a purchase of income. The person who purchases the annuity plan is called the annuitant
Life Insurance Application: Statements made on life insurance applications are considered warranties. Misstatement of material facts could void the policy during the contestable period.
Insurance Commission (IC): Prior to granting a license, the IC requires proof of a clean employment record, a reasonable educational background, and a prospective agent's character and reputation.
IC Claims: The IC has the power to adjudicate insurance claims against insurance companies. Claims exceeding $500,000 are ineligible.
Insurable Interest: Insurable interest must exist at the time the policy is issued and at the time of the loan. It doesn't necessarily have to exist the entire lifetime of the policy.
Completion of Sale: A life insurance sale is considered completed when the applicant signs the application and pays the first premium.
Automatic Premium Loan: An automatic premium loan goes into effect without any action by the policy owner. This loan covers premiums that are not paid by the due date without requiring any action from the policyholder.
Grace Period: The grace period provision gives the policy owner time to pay a late premium without penalty.
Absolute Assignment: When a policy is assigned absolutely, the assignee acquires all the rights and interests of the original policyholder.
Policy Lapse: If a policy owner does not pay their premium on the due date, the policy will enter a grace period. If the premium is not paid after the grace period, the policy will lapse.
Participating Policy Loans: Dividends for participating policies with loans are unaffected. They are not suspended or reduced.

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Description

This quiz explores essential concepts of life insurance, including insurable interest, beneficiaries, and policy loans. Test your knowledge on the various aspects of life insurance policies and their implications. Perfect for students or anyone seeking to understand the intricacies of life insurance.