Life Insurance

Question 1

What is mortality cost in life insurance?

Answer 1

Face amount × Probability of claim (function of age).

Question 2

How does age affect mortality cost?

Answer 2

Lower for young, increases exponentially with age.

Question 3

What is the purpose of term life insurance?

Answer 3

Pure insurance protection, no investment component.

Question 4

What happens if the insured outlives the term?

Answer 4

Coverage ceases, no payout.

Question 5

What are common term lengths?

Answer 5

Annual, 5, 20, 30 years.

Question 6

Who is term insurance best for?

Answer 6

Young clients, families with children.

Question 7

What is annual renewable term?

Answer 7

Premium increases each year, level death benefit, convertible, inexpensive early.

Question 8

What is level term insurance?

Answer 8

Level premium and death benefit, no cash value.

Question 9

What is decreasing term insurance?

Answer 9

Level premium, decreasing death benefit, used for mortgages.

Question 10

List two advantages of term insurance.

Answer 10

Inexpensive for young, renewable without evidence of insurability.

Question 11

List two disadvantages of term insurance.

Answer 11

No cash value, premiums increase with age.

Question 12

What is a key feature of universal life insurance?

Answer 12

Flexible premiums and adjustable face value.

Question 13

Who invests the cash value in standard universal life?

Answer 13

The insurer.

Question 14

What happens if cash value underperforms?

Answer 14

Death benefit may decrease.

Question 15

Describe Universal Life Type A.

Answer 15

Level death benefit, NAR decreases as cash value grows.

Question 16

Describe Universal Life Type B.

Answer 16

Death benefit = face amount + cash value, NAR constant.

Question 17

Who bears the investment risk in variable universal life?

Answer 17

The policyholder.

Question 18

What is the duration of whole life insurance?

Answer 18

Lifetime protection.

Question 19

How are premiums structured in ordinary whole life?

Answer 19

Level for life.

Question 20

What is a limited pay whole life policy?

Answer 20

Premiums paid for a set period (e.g., 10 years), then paid up.

Question 22

What is modified whole life?

Answer 22

Lower premiums early, higher later.

Question 23

Who invests the cash value in variable whole life?

Answer 23

The policyholder.

Question 24

What is a first-to-die policy?

Answer 24

Pays when the first insured dies (e.g., for couples).

Question 25

What is a second-to-die policy?

Answer 25

Pays when the second insured dies (used for estate liquidity).

Question 26

Are dividends from participating policies taxable?

Answer 26

Not taxable (considered return of premium).

Question 27

Name two uses for policy dividends.

Answer 27

Buy paid-up insurance, reduce premium.

Question 28

What is the cash surrender value option?

Answer 28

Receive cash (minus charges) if policy surrendered.

Question 29

What is reduced paid-up insurance?

Answer 29

Use cash value to buy a smaller paid-up policy.

Question 30

What is extended term insurance?

Answer 30

Use cash value for paid-up term insurance (same face, limited time).

Question 31

What is the grace period?

Answer 31

30–31 days to pay premium before lapse.

Question 32

What is the incontestability clause?

Answer 32

Insurer cannot contest policy after 2 years except for fraud/nonpayment.

Question 33

What happens if age or sex is misstated?

Answer 33

Benefit adjusted to what premium would have bought at correct age/sex.

Question 34

What is the suicide clause?

Answer 34

No coverage if suicide within 1–2 years; premiums returned.

Question 35

What is reinstatement?

Answer 35

Can reinstate lapsed policy by paying back premiums and proving insurability.

Question 36

How are policy loans treated for tax?

Answer 36

No income tax on loans (unless MEC); loans reduce death benefit.

Question 37

What is a contingent beneficiary?

Answer 37

Receives proceeds if primary beneficiary is unavailable.

Question 38

Name two payout options for beneficiaries.

Answer 38

Lump sum, annuity payments.

Question 39

Are death benefits taxable?

Answer 39

Generally not taxable income.

Question 40

Are premiums deductible for individuals?

Answer 40

No

Question 41

Are group life premiums deductible for employers?

Answer 41

Yes.

Question 42

How is group life coverage taxed for employees?

Answer 42

First $50,000 tax-free; excess is taxable as imputed income.

Question 43

What is a Modified Endowment Contract (MEC)?

Answer 43

Policy that fails the 7-pay test (premiums paid too quickly in 7 years), thus rendering life insurance an investment

Question 44

How are MEC withdrawals taxed?

Answer 44

LIFO: earnings out first, ordinary income, 10% penalty before 59½.

Question 45

How are non-MEC withdrawals taxed?

Answer 45

FIFO: basis out first (not taxed), then earnings.

Question 46

What is the transfer for value rule?

Answer 46

Death benefit may be taxable if policy is transferred for value (with exceptions).

Question 48

What is a viatical settlement?

Answer 48

Sale of policy by terminally ill insured to a third party.

Question 49

Can you exchange life insurance for an annuity tax-free?

Answer 49

Yes.

Question 50

Can you exchange an annuity for life insurance tax-free?

Answer 50

No.

Question 51

What is an absolute assignment in life insurance?

Answer 51

A full and permanent transfer of all policy rights to another party

Question 52

What is a collateral assignment in life insurance?

Answer 52

A transfer of policy rights to a creditor as collateral for a loan; rights revert to the policyholder when the loan is repaid

Question 53

How do you calculate imputed income for group life insurance coverage exceeding $50,000?

Answer 53

Multiply the excess coverage (in $1,000s) by the IRS cost per $1,000 for the employee's age, then by the number of months covered Example: What is the monthly imputed income for a 45-year-old with $100,000 excess group life coverage at $0.15 per $1,000? A: $100,000 ÷ $1,000 = 100; 100 × $0.15 = $15 per month

Question 54

What is the 7-pay test for a Modified Endowment Contract (MEC)?

Answer 54

If cumulative premiums paid during the first 7 years exceed the amount required to pay up the policy in 7 years, the policy becomes a MEC