Chapter 3: Life Basics and Policies

Question 1

Three categories of “insurable interest”?

Answer 1

A person’s own life,
The lives of relatives or spouses, and
Business or financial relationships.

Question 2

Only ________ ______ insurance policies build cash value.

Answer 2

Whole Life

Question 3

A life insurance policy that builds cash value is said to have _____ ______

Answer 3

Living benefits

Question 4

Immediate availability of funds is called ________

Answer 4

Liquidity

Question 5

What three expenses are involved in maintaining an estate?

Answer 5

Estate and inheritance taxes
, Probate fees and
Estate administration.

Question 6

When a terminally or chronically ill insured sells their life insurance policy to a third party in exchange for a large portion of the death benefit, this is called a ________ _________

Answer 6

Viatical Settlement

Question 7

What is the name of the third party that purchases an insured’s life insurance policy? What is the insured now called?
Who now pays the premiums?

Answer 7

Viatical Settlement Provider
Viator
Viatical Settlement provider

Question 8

What percentage of a death benefit will a viator receive?

Answer 8

50-80%

Question 9

Who represents Viatical Settlement Providers? Who represents the Viators?

Answer 9

Viatical Producers
Viatical Brokers

Question 10

TF: premiums paid toward life insurance taken out for charity are tax deductible

Answer 10

True

Question 11

Two methods of determining the proper amount of life insurance?

Answer 11

Human Life value Approach
The Needs Approach

Question 12

What do you call determining the amount of life insurance coverage needed based on the financial loss a family would experience if a wage earner died

Answer 12

Human Life Value Approach

Question 13

The ______ ________ calculates the amount of money a family needs immediately upon the death of the insured to pay for their expenses and basic necessities. This may be more appropriate for families with ___________.

Answer 13

Needs Approach
Two Income Earners

Question 14

Four pieces of info used to determine proper amount of life insurance

Answer 14

Expenses,
Maintenance income,
Debts/mortgages, and
Dependent children’s education.

Question 15

Three income periods are called?

Answer 15

Dependency Period
Pre-Retirement Period
Retirement Period

Question 16

What is the Family Dependency Period?

Answer 16

Children are dependent on parents for financial support

Question 17

What is the Pre-retirement period? What is the Retirement Period?

Answer 17

Children aren’t dependent on parents for financial support
The surviving spouse no longer earns income (retirement benefits start)

Question 18

What is the Social Security Blackout period?

Answer 18

The blackout period is the time during which a surviving spouse is ineligible to receive Social Security Survivors benefits. This period occurs once an unmarried child reaches the age of 16, and until the age of 18 or 19, if attending high school full time. Social Security benefits are paid to the child, not the widow.

At the earliest, the blackout period ends when the surviving spouse reaches the age of 60. Regardless of age, if a dependent child is disabled, the surviving spouse may be eligible to receive Social Security Survivors benefits.

Question 19

Businesses are affected by the death of? 4

Answer 19

Owner
Partner
Shareholder
Officer or Key Employee

Question 20

Three uses of life insurance as a business purpose?

Answer 20

Funding Tool
Business Interuption insurance
Employee benefit

Question 21

What is Buy Sell Funding?

Answer 21

Buy-sell agreements are also known as business continuation agreements and are used to assure the ownership of the business is properly transferred upon the death or disability of an owner or partner.

Question 22

What is key person insurance?

Answer 22

A business that buys life insurance on a key employee has purchased key person insurance.

Question 23

All of the following are drawbacks of buying a viatical settlement, EXCEPT:
Select one:
a. Viatical settlement payouts may be subject to creditors claims if the insured has debt.
b. Viators may be unable to receive benefits through Medicaid or Supplemental Social Security Income.
c. The insured’s life insurance protection ends.
d. The portion of the death benefit the viator receives in a viatical settlement ranges from 50 to 80 percent of the death benefit.

Answer 23

C

Question 24

In which of the following does an applicant for a life insurance policy not have an insurable interest?
Select one:
a. Himself
b. His cousin
c. His business partner
d. His sister

Answer 24

B

Question 25

Viatical brokers represent _______; viatical producers represent _________. Select one: a. viators; viatical settlement providers b. viatical settlement providers; viators c. insurers; insureds d. insureds; insurers

Answer 25

A

Question 26

All of the following are true regarding the insurable interest creditors have in the lives of their debtors, EXCEPT: Select one: a. Creditors may take out life insurance on the lives of debtors. b. Creditors may take out life insurance on the lives of debtors in an amount equal to the unpaid debt. c. Creditors must have debtors, consent to take out life insurance policies on them. d. The face amount of life insurance on debtors stays constant throughout the policy term.

Answer 26

D

Question 27

A surviving spouse's blackout period ends when she reaches the age of: Select one: a. 59 1/2 b. 60 c. 62 d. 65

Answer 27

60

Question 28

Insurance agent David analyzed Carmen's life insurance needs. He calculated the amount of coverage she will need based on the expenses and basic needs of her family in the event of her untimely death. These include the cost of funeral and burial, mortgage payments, education for the children, and income to support the family's standard of living. Which of the following methods is David using? Select one: a. Needs approach b. Human life value approach c. Estate conservation approach d. Lump-sum approach

Answer 28

A

Question 29

Bob's Motorcycle Company purchases a life insurance policy on Jacob, the nation's leading sales representative. Jacob sells more motorcycles than all of the other sales representatives combined. Which of the following plans was purchased? Select one: a. Deferred compensation plan b. Split-dollar plan c. Executive bonus plan d. Key person insurance

Answer 29

D

Question 30

Insurance agent Maria is assisting Joshua with his life insurance needs. To determine the proper amount of life insurance for Joshua, Maria uses Joshua's age, net annual salary, his expenses, the rate of depreciation, and the remaining number of working years before Joshua retires. What method did Maria use? Select one: a. Survivor method b. Estate method c. Human life value approach d. Needs approach

Answer 30

C

Question 31

Insurance agent Jessica evaluates Ben's life insurance needs. In calculating the amount of life insurance needed, Jessica uses the cost for funeral and burial, mortgage payments, cost of education for Ben's children, and the amount of income Ben's dependents would need to maintain their standard of living. Which method did Jessica use? Select one: a. Survivor method b. Estate method c. Human life value approach d. Needs approach

Answer 31

D

Question 32

The Social Security blackout period begins when the youngest child reaches the age of: Select one: a. 16 b. 18 c. 19 d. 21

Answer 32

A

Question 33

What is the term attributed to the third party that buys the death benefit from a life insurance policy? Select one: a. Beneficiary b. Annuitant c. Viatical settlement provider d. Viator

Answer 33

C

Question 34

TF: Members have the right to convert group life insurance to individual coverage upon leaving the group.

Answer 34

True

Question 35

TF: To get group life insurance, all members of the group must be included and at the same rate

Answer 35

True

Question 36

________ life insurance policies are whole life policies that are effective for the entire ife of the insured, or up to the age of 100

Answer 36

permament

Question 37

_____ life insurance isn't permanent; only effective for a temporary period of time

Answer 37

Term

Question 38

Participating = Pay dividends to _______

Answer 38

Policyholders

Question 39

Nonparticipating = Pay dividends to ____-

Answer 39

Shareholders (stock holders)

Question 40

Fixed life insurance policies earn a _____ rate of interest, providing a _______ minimum of benefits

Answer 40

constant, guaranteed

Question 41

Variable life insurance policies earn a ______ interest rate, and the cash value is ____ ______

Answer 41

fluctuating, not guaranteed

Question 42

For variable life insurance policies, who chooses where to place the investments in the securities market?

Answer 42

The insured

Question 43

TF: agents selling variable insurance policies must be registered with FINRA by holding a securities license

Answer 43

True

Question 44

How long must insurance advertisements be kept for legal purposes?

Answer 44

2-5 years

Question 45

5 rules to follow for insurance ads

Answer 45

Must be clear and not misleading Insurer's actual name must be on ad Must state nature and intent of the ad Cannot contain false statements Testimonials must be real (must indicate if it is financial endorsement)

Question 46

Who is responsible for examining records of insurance ads?

Answer 46

State Insurance Commissioner

Question 47

Who is solely responsible for the content of insurance ads?

Answer 47

the insurer (not the agents)

Question 48

What is the name of the safety net that exist to keep insurers from becoming insolvent?

Answer 48

State Life and Health Guaranty Associations (think of this like insurance FOR the insurers)

Question 49

Who is exempt from state life and health guarantee associations?

Answer 49

Fraternal Benefit Societies and non-profit insurers

Question 50

Limits for amounts paid out by state life and health guaranty associations?

Answer 50

200k death benefits 100k life insurance cash surrender 100k for health insurance benefits

Question 51

TF: A Guaranty Association can’t be used to induce a sale of insurance or annuities.

Answer 51

True

Question 52

TF: The policyowner must be provided with the policy summary at the time of policy delivery.

Answer 52

True

Question 53

TF: Life insurance illustrations must differentiate between guaranteed amounts and nonguaranteed amounts.

Answer 53

True

Question 54

TF: Illustrations are part of the insurance contract

Answer 54

false

Question 55

Illustrations may NOT: 4 things

Answer 55

Be incomplete Depict misleading nonguaranteed elements Misrepresent the true nature of the policy Use the term vanishing premium, implying that the policy is eventually paid up, unless such is the case

Question 56

Two life insurance cost comparison methods

Answer 56

Comparative interest rate method Interest adjusted net cost method

Question 57

The _______-________ _____ ____ method uses the time value of money to compare policy costs

Answer 57

Interest adjusted net cost

Question 58

The _____ _____ _____ ______ calculates an interest rate that must be earned in a side fund of a buy term and invest the difference in order for the value of the side fund to be equal to the surrender value of the policy that has the higher premium at a specific time.

Answer 58

Comparative Interest Rate method

Question 59

Two versions of the Interest adjusted Net Cost Method?

Answer 59

Surrender cost index and Net payment cost index.

Question 60

The _______ ______ _____ measures the cost of an insurance policy by projecting the total amount of cash value in a policy (sum of dividends and cash accrued) and deducting the total cost of premiums after a certain number of years.

Answer 60

Surrender Cost Index

Question 61

The _____ ______ ______ ______ excludes the cash value when predicting the average annual premium cost

Answer 61

Net Payment Cost Index

Question 62

What three things will an insurer verify when receiving the death certificate for a claim?

Answer 62

That the policy was in force when the insured died, Whether or not the suicide clause applies, and That the proceeds are paid to the stated beneficiaries.

Question 63

3 responsibilities of the producer when notified about a death claim?

Answer 63

Notifying the insurer of the death, Completing any proof of death forms and having them signed by the appropriate parties – usually the legal representative or designated beneficiary, and Submitting all forms with the death certificate to the insurer.

Question 64

How long do insurers have to pay out benefits for a death claim?

Answer 64

up to 60 days (but they are usually paid within a few days)

Question 65

three circumstances where death benefit payout could be less than face amount?

Answer 65

Policy loan Premium payment overdue Misstatement of age/sex

Question 66

TF: a misstatement of age/sex is grounds for the insurer to void a life insurance policy

Answer 66

False (just adjust the amount to the correct amount)

Question 67

Four drawbacks to policy replacement?

Answer 67

Proof of insurability, New policy provisions that may not be favorable, Higher premiums and The replacing policy will not have cash value.

Question 68

TF: In any life insurance policy transaction, the producer must ask the applicant if a replacement will be involved.

Answer 68

True

Question 69

3 responsibilities of producer if replacement is involved with a policy purchase:

Answer 69

Make a list of all of the applicant's existing life insurance policies/annuity contracts to be replaced. Leave with the applicant a policy comparison statement and a Notice Regarding Replacement. Provide the insurer with a copy of the policy comparison statement and the name of the insurer that corresponds to the policies being replaced.

Question 70

3 insurer duties for a policy replacement

Answer 70

Verify that all state replacement regulations are followed. Keep copies of all replacement paperwork. Notify insurers of policies to be replaced, and if requested, provide insurers with the policy comparison statement.

Question 71

What is window of time agent has to notify policyowner a soon to be lapsed policy will be invested in a security?

Answer 71

15 days

Question 72

Rachel took out a $3,000 policy loan from her life insurance policy. Her policy face amount is $100,000. How will the death benefit be affected if the loan remains unpaid? Select one: a. The death benefit will be reduced by $3,000 plus interest. b. The death benefit will be reduced by $3,000. c. The death benefit will be increased by $3,000. d. The death benefit will not be affected.

Answer 72

A

Question 73

Which document contains detailed information about a life insurance policy regarding policy elements such as policy riders and premiums? Select one: a. Outline of coverage b. Policy summary c. Buyer's guide d. Illustrations

Answer 73

B

Question 74

Securities licenses are obtained through: Select one: a. State insurance department b. FINRA c. SEC d. SSA

Answer 74

B

Question 75

All of the following are true regarding insurance policy illustrations, EXCEPT: Select one: a. Illustrations must be approved by the insurer. b. The agency contract permits the agent to make changes to policy illustrations. c. Illustrations show the relationship between premiums, cash value, interest, and mortality charges. d. Illustrations are not part of the insurance contract.

Answer 75

B

Question 76

Policy replacement is defined as all of the following, EXCEPT: Select one: a. Terminated coverage b. Lapsed coverage c. Policy loan that is not repaid d. Converted to reduced paid-up coverage

Answer 76

C

Question 77

A producer must do all of the following when an insurance transaction involves replacement, EXCEPT: Select one: a. Leave a notice regarding replacement with the applicant b. Provide the applicant with a policy cost comparison statement c. Make a list of all existing policies the applicant intends to replace d. Notify existing insurers of policies to be replaced

Answer 77

D

Question 78

The __________ is a comparison of a policy's projected cash value to premiums paid over several years. Select one: a. Surrender cost index b. Comparing investment method c. Return on investment method d. None of the above

Answer 78

A

Question 79

All of the following rules apply to life insurance illustrations, EXCEPT: Select one: a. The illustration must clearly indicate that it is a life insurance illustration. b. The insurer's and producer's names must be on the illustration. c. The illustration must indicate the date. d. Illustrations may use the term vanishing premium, even if the policy does not have a vanishing premium.

Answer 79

D