Life Insurance Flashcards
All of these are typically sources of underwriting information for life or health insurance EXCEPT* Consumer reports* Medical Information Bureau (MIB) reports* Disclosure authorization response* Attending physician's statement (APS)
Disclosure authorization response
When does a life insurance policy typically become effective?* When the policy is issued* When initial premium is collected and policy is issued* When the application is completed and signed* When the completed application is signed and initial premium is collected
When initial premium is collected and policy is issued
Which of these is likely to occur when life or health insurance is being applied for? The Medical Information Bureau (MIB) will determine the risk classification The agent is required to report all medical information to the Medical Information Bureau (MIB) Physical examinations are required Medical history from the insured may be reviewed and reported
Medical history from the insured may be reviewed and reported
What is the purpose of the Medical Information Bureau (MIB)? To accept or decline insurance applicants To set the premium rates for insurers To help underwriters evaluate risk To perform physical examinations on applicants
To help underwriters evaluate risk
Which of the following does a life insurance policy summary normally include? The policy's cash value Agent's report Policyowner's MIB report Stated beneficiary
The policy's cash value
All of these are considered sources of information that can assist an underwriter in determining whether or not to accept a risk EXCEPT Agent's report Medical Information Bureau (MIB) Inspection reports National Association of Insurance Underwriters
National Association of Insurance Underwriters
What is involved when a life insurance policy has been backdated? Setting a policy's effective date prior to a preexisting condition Redating a policy after it has been issued Reinstating a lapsed policy Making the policy effective on an earlier date than the present
Making the policy effective on an earlier date than the present
Which scenario would most life insurance policies exclude coverage for? A tourist traveling abroad on a major airline carrier An individual who has a hobby racing cars once a month An airline pilot who flies for a commercial carrier A soldier on leave at home
An individual who has a hobby racing cars once a month
Which of the following would be a valid reason why a policy premium would be higher than the standard premium? The insurer is not a member of the MIB The agent quoted the wrong price The insured does not have the necessary financial reserves The insured does not meet established underwriting requirements
The insured does not meet established underwriting requirements
A field underwriter's main task is assign a risk classification to the insured report medical information to the Medical Information Bureau (MIB) to ensure an applicant's medical information is accurate and complete to approve or decline an applicant
to ensure an applicant's medical information is accurate and complete
An applicant's character and personal habits can be obtained for underwriting purposes from which source? Investigative consumer report Attending physician's statement Medical Information Bureau (MIB) Credit report
Investigative consumer report
Which of the following would be considered an underwriting duty of an agent? Requesting medical information from the Medical Information Bureau (MIB) Completing all applications and collecting initial premiums Accepting or declining an application Assigning a risk classification
Completing all applications and collecting initial premiums
Preferred risk policies with reduced premiums are issued by insurance companies because the insured has a higher face amount than average a better ability to pay premiums over a long period of time worse than average mortality or morbidity experience better than average mortality or morbidity experience
better than average mortality or morbidity experience
An attending physician's statement would be appropriate for which life insurance purpose? Attending physician's statements are mandatory during the application process At the request of the applicant to assist in the underwriting decision At the request of the producer to assist in the underwriting decision At the request of the insurer to assist in the underwriting decision
At the request of the insurer to assist in the underwriting decision
Which of these is NOT considered to be a risk factor in life insurance underwriting? Number of children Health history Hobbies Occupation
Number of children
The principle of insurable interest, in regards to a life insurance contract, is accurately described in which statement? An agent establishes insurable interest An individual does not have insurable interest on his or her own life Insurable interest only pertains to business arrangements Insurable interest can be based on the love and affection of individuals related by blood or law
Insurable interest can be based on the love and affection of individuals related by blood or law
A change in an insurance application requires an initial made by the producer an initial made by the applicant approval by the insurer submitting a new application
an initial made by the applicant
All of these are considered key factors in underwriting life insurance EXCEPT Tobacco use Health history Age Marital status
Marital status
Statements made by an insurance applicant on an application are considered to be irrevocable warranties representations guarantees
representations
An individual most likely will have an insurable interest in insuring a person's life if an economic interest exists for the continuance of the insured's life a financial interest exists at the time of insured's death there is any blood relationship with the insured a business relationship exists
an economic interest exists for the continuance of the insured's life
What would happen if a life insurance applicant is given a conditional receipt from an insurance agent and then dies the next day? Claim will be denied by insurer Claim will be paid if money was received by the insurance company Claim will be paid if underwriter has received the application Claim will be paid if application is approved
Claim will be paid if application is approved
In which of the following relationships would there NOT be an insurable interest? Parent to child Business partner to business partner Brother to sister Business owner to business customer
Business owner to business customer
Which characteristic of an insurance contract means there is a potential for unequal exchange of value for both parties?* Aleatory* Adhesion* Unilateral* Conditional
Aleatory ( Insurance contracts are aleatory. Aleatory contracts are conditioned upon the occurrence of an event. The benefits provided by an insurance policy may or may not exceed the premiums paid.)
An agent is an individual that represents whom?* Insurer* Insured* Broker* Himself/Herself
Insurer (An agent is an individual who is authorized by an insurer to sell goods and services on its behalf. An agent is also the insurer's representative in dealing with the public.)
Which of the following statements describes an insurable interest?* The policyowner must expect to benefit from the insured's death.* The policyowner must expect to suffer a loss when the insured dies or becomes disabled. (The policyowner must face the possibility of losing money or something of value in the event of the death or disability of the insured.)* The beneficiary, by definition, has an insurable interest in the insured.* The insured must have a personal or business relationship with the beneficiary.
The policyowner must expect to suffer a loss when the insured dies or becomes disabled. (The policyowner must face the possibility of losing money or something of value in the event of the death or disability of the insured.)
Who receives dividends in a mutual insurance company? Policyholders Stockholders Beneficiaries Employees
Policyholders
Which of the following requires insurers to disclose when an applicant's consumer or credit history is being investigated 1970 - Fair Credit Reporting Act 1959 - Intervention by (SEC) The Securities and Exchange Commission 1999 - Financial Services Modernization Act 1945 - The McCarran-Ferguson Act
1970 - Fair Credit Reporting Act (Fair Credit Reporting Act requires the fair and accurate reporting of information about consumers. Insurers must inform applicants about any investigations being made. If the report is used to deny coverage or charge higher rates, the insurer must provide the applicant the name of the credit reporting agency conducting the investigation.)
In addition to the state, the organization that regulates variable life and variable annuities is the Federal Trade Commission (FTC) National Association of Insurance Commissioners (NAIC) Securities and Exchange Commission (SEC) Federal Communications Commission (FCC)
Securities and Exchange Commission (SEC)
A life insurance company that shares its surplus earnings with its insureds is known as a participating company a fraternal organization an association an admitted company
a participating company
What type of agent may represent a number of insurance companies under separate contractual agreements Career agent Captive agent Company agent Independent agent
Independent agent
Companies that sell more than one type of insurance are multi-line insurers property and causalty mutual company life company
multi-line insurers
Which one of the following statements about participating life insurance is true? Policyowners may be entitled to receive dividends Policyowners are assessed monthly for losses The insured must be the policyowner The insurer must be a stock company
Policyowners may be entitled to receive dividends
Why are dividends from a mutual insurer not subject to taxation? Because insurance premiums are tax-deductible Because dividends are already subject to capital gains Because dividends are payable directly to the policyholder Because dividends are considered to be a return of premium
Because dividends are considered to be a return of premium
Which law requires fair and accurate reporting of information about consumers? Financial Services Modernization Act Fair Credit Reporting Act McCarran-Ferguson Act Unfair Trade Practices Act
Fair Credit Reporting Act
The State Guaranty Association guarantees that a policy will be issued that a claim will be paid if an insurer becomes insolvent that dividends will be paid the rate of return on a policy
that a claim will be paid if an insurer becomes insolvent
A nonparticipating policy will provide a return of premium provide tax advantages not pay dividends give policyowners special privileges
not pay dividends
What is the primary purpose of a rating service company such as A.M Best? Determine which insurer offers the best rates Determine which insurer offers the best policies Determine financial strength of an insurance company Determine which agent to use locally
Determine financial strength of an insurance company
Mutual insurers pay dividends to participating policyowners if the insurer has which of the following? Divisible surplus Reciprocal Dividend Agreement Certificate of Authority Participating clause
Divisible surplus (By issuing participating policies that pay policy dividends, mutual insurers allow their policyowners to share in any company earnings.)
Which of the following is NOT a commercial insurer Industrial Company Fraternal Company Stock Company Mutual Company
Fraternal Company
What is considered to be the primary reason for buying life insurance? Provide death benefits Provide money for retirement Provide living benefits Provide money for college
Provide death benefits
What is the role of insurance? Provide a solution for economic uncertainty and loss Guarantee lifelong happiness Provide counseling and support services Guarantee short term happiness
Provide a solution for economic uncertainty and loss
What kind of life insurance policy issued by a mutual insurer provides a return of divisible surplus? nonparticipating life insurance policy participating life insurance policy divisible surplus life insurance policy straight life insurance policy
participating life insurance policy (A mutual insurer issues life insurance policies that provide a return of divisible surplus.)
What is the purpose of insurance? To replace the uncertainty of risk with guarantees To replace guarantees with the certainty of risk To remove the possibility of loss To remove the predictability of loss
To replace the uncertainty of risk with guarantees
Participating insurers allow their policyowners to share in any company earnings and receive a dividend receive preferred premium rates determine what type of insurance programs are offered skip premium payments without penalty
share in any company earnings and receive a dividend
A nonparticipating company is sometimes called a(n) alien insurer mutual insurer reinsurer stock insurer
stock insurer
The major difference between participating and nonparticipating policies is the interest assumption premium payment method settlement options presence of policy dividends
presence of policy dividends
Which entity has preserving state regulation of insurance as one of its objectives? American Council of Life Insurance National Association of Life Underwriters National Committee to Preserve the Republic National Association of Insurance Commissioners
National Association of Insurance Commissioners
Which of the following is NOT considered advertising? A rating from a rating service company, such as A.M. Best An illustration A sales presentation Direct mailing from an agency
A rating from a rating service company, such as A.M. Best
Which of the following statements is correct when comparing participating policies with non-participating policies? Premiums for participating policies are usually higher than for non-participating policies Dividends from participating policies are treated as taxable income, but dividends from non-participating policies are not The dividends on participating policies increase the value of the policyholder's stock, but non-participating dividends do not The guaranteed cash values in a participating policy are greater than in a non-participating policy
Premiums for participating policies are usually higher than for non-participating policies
Which of the following statements regarding types of insurers is NOT correct? Reinsurers usually deal with group policyowners. Mutual insurance companies are "owned" by their policyowners. Stock insurance companies seek a profit for their shareholders. Fraternal benefit societies must be nonprofit organizations.
Reinsurers usually deal with group policy owners. (Reinsurers make arrangements with other insurance companies to transfer a portion of their risk to the reinsurer. The company transferring the risk is called the ceding company and the company assuming the risk is the reinsurer.)
Under a Modified Endowment Contract, what are the likely tax consequences? Interest on policy loans is tax deductible Premium payments are tax deductible Pre-death distributions will become taxable Cash value cannot be surrendered early
Pre-death distributions will become taxable
The statement which best describes the relationship between the premiums of a whole life policy and the premium payment period is The shorter the payment period, the lower the premium The longer the payment period, the higher the premium The shorter the payment period, the higher the premium The payment period has no affect on the premium payment
The shorter the payment period, the higher the premium
Which of these riders will pay a death benefit if the insured's spouse dies? Guaranteed Insurability rider Family term insurance rider Family whole insurance rider Payor benefit rider
Family term insurance rider
Variable life insurance and Universal life insurance are very similar. Which of these features are held exclusively by variable universal life insurance? Policyowner may increase or decrease the premium payments Policyowner may increase or decrease the face amount Policyowner can contribute large sums of money Policyowner has the right to select the investment which will provide the greatest return
Policyowner has the right to select the investment which will provide the greatest return
Level premium permanent insurance accumulates a reserve that will eventually equal the face amount of the policy pay a dividend to the policyowner require the policyowner to make periodic withdrawals become larger than the face amount
equal the face amount of the policy
A Renewable Term Life insurance policy can be renewed at a predetermined date or age, regardless of the insured's health only if the insured provides evidence of insurability anytime at the policyowner's request typically with no change in premium
at a predetermined date or age, regardless of the insured's health
A renewable Term Life insurance policy allows the policyowner the right to renew the policy at anytime the policyowner chooses as many times as the policyowner chooses paying the same premium as before the renewal without producing proof of insurability
without producing proof of insurability
Which of these describes the result of a modified endowment contract that failed to meet the seven-pay test? Policy loans are disallowed The premium payments will be tax deductible Pre-death distributions are typically taxable Withdrawals will be prohibited
Pre-death distributions are typically taxable
A Modified Endowment Contract (MEC) is best described as A life insurance contract which accumulates cash values higher than the IRS will allow An annuity contract which was converted from a life insurance contract A modified life contract which enjoys all the tax advantages of whole life insurance A life insurance contract where all withdrawals prior to age 65 are subject to a 10% penalty
A life insurance contract which accumulates cash values higher than the IRS will allow
The premium for a Modified whole life policy is higher than the typical whole life policy during the first few years and then lower than typical for the remainder lower than the typical whole life policy during the first few years and then higher than typical for the remainder normally graded over a period of 20 years level for the first 5 years then decreases for the remainder of the policy
lower than the typical whole life policy during the first few years and then higher than typical for the remainder
Krissa purchases a 10-year level term life insurance policy that has a death benefit of $200,000. Which of these statements is true? The policy automatically converts to whole life after the 10-year period The face amount will remain constant and the premium will increase over the 10-year period The premium will remain constant and the face amount will increase over the 10-year period The face amount and premium will remain constant over the 10-year period
The face amount and premium will remain constant over the 10-year period
A policyowner may change two policy features on what type of life insurance? Modified Whole Life Decreasing Term Life Adjustable Life Whole Life
Adjustable Life
Which of the following are the premium payments for a Universal life policy NOT used for? Death benefits Cash value Loading costs Separate account investments
Separate account investments
A securities license is required for a life insurance producer to sell modified life insurance Modified Endowment Contracts (MEC) variable life insurance universal life insurance
variable life insurance
All of these statements concerning whole life insurance are false EXCEPT Policyowner can take out a policy loan up to the face amount When a whole life policy is surrendered, income taxes may be owed Coverage is normally temporary The death benefit is not affected by outstanding loans
When a whole life policy is surrendered, income taxes may be owed
Which type of life insurance offers flexible premiums, a flexible death benefit, and the choice of how the cash value will be invested? Adjustable life policy Variable universal policy Universal policy Modified whole life policy
Variable universal policy
A life insurance policy that has premiums fully paid up within a stated time period is called stated payment insurance limited universal insurance stated modified insurance limited payment insurance
limited payment insurance (Limited payment insurance is characterized by premiums that are fully paid up within a stated period, after which no further premiums are required.)
Which type of life insurance is normally associated with a Payor Benefit rider? Juvenile insurance Family income insurance Spouse insurance Term rider
Juvenile insurance
Shawn, Mike, and Dave are brothers who have a $100,000 "first to die" joint life policy covering all three of their lives. If Mike dies first, the policy proceeds will no longer provide insurance protection will go to Mike's estate will be divided by probate will not be paid until the last brother dies
will no longer provide insurance protection
All of these are valid options for an Adjustable Life Policy EXCEPT The policy's premium can be increased or decreased The policy's death benefit can be increased or decreased A nonforfeiture option can be used to increase the death benefit The policy's protection period can be modified
A nonforfeiture option can be used to increase the death benefit
The least expensive option to pay off a 30-year mortgage balance would be convertible term life decreasing term life adjustable term life increasing term life
decreasing term life
How are survivorship life insurance policies helpful in estate planning? Provide funds to help fund retirement Provide funds to help pay taxes Provide funds for funeral expenses Provide tax deductions for premium payments
Provide funds to help pay taxes
Index whole life insurance contains a securities component that acts as a(n) hedge against inflation premium stabilizer means to lowering taxes on earnings incentive to purchase more coverage
hedge against inflation
Term insurance is appropriate for someone who seeks living benefits for themselves seeks a policy that builds cash value seeks temporary protection and lower premiums seeks permanent protection and higher premiums
seeks temporary protection and lower premiums
The type of multiple protection coverage that pays on the death of the last person is called a(n) joint life policy survivorship life policy annuity joint policy dual life policy
survivorship life policy
Which type of policy combines the flexibility of a universal life policy with investment choices? Adjustable universal life policy Flexible universal life policy Variable universal life policy Modified universal life policy
Variable universal life policy
Decreasing term life insurance is often used to provide retirement funds provide coverage for a home mortgage accumulate cash value provide coverage for estate taxes
provide coverage for a home mortgage
The type of policy which pays on the death of the last person is called joint life survivorship life dual life shared life
survivorship life
Which policy feature makes a universal life policy different from a whole life policy? A fixed cash value A flexible premium schedule A fixed death benefit The ability to take out a policy loan
A flexible premium schedule
What does the word "level" in Level Term describe? The period of coverage The face amount The premium payments The cash value
The face amount
What types of life insurance are normally used for key employee indemnification? term, whole, and universal life insurance increasing term insurance joint, credit, and group life insurance adjustable, permanent, and limited-pay life insurance
term, whole, and universal life insurance
Donald is the primary insured of a life insurance policy and adds a children's term rider. What is the advantage of adding this rider? Can be converted to permanent coverage without evidence of insurability Coverage can be different for each child Premiums on this rider are not required until the limiting age is reached Increases the policy's overall cash value
Can be converted to permanent coverage without evidence of insurability
Which of these would be the best example of a limited pay life insurance policy? Whole life policy that pays out its cash value over a 20 year period Whole life policy with premiums paid up after 20 years Term life policy that returns cash value after 20 years Term life policy with premiums paid up after 20 years
Whole life policy with premiums paid up after 20 years
What kind of life insurance policy covers two or more people with the death benefit payable upon the last person's death? Dual Life insurance Joint Life insuranceLast Survivor Life insurance Shared Life insurance
Last Survivor Life insurance
Which of these is NOT a characteristic of the Accelerated Death Benefit option?The face amount and policy premium are not affected by the paymentBefore payment of the benefit is made, specific conditions must exist, such as suffering from a terminal illnessThere may be a dollar limit on the maximum benefitThe benefit can be offered as a rider at a specific extra cost or may be at no cost
The benefit can be offered as a rider at a specific extra cost or may be at no cost
Of the following dividend options, which of these is taxable?Reduction of premiumOne year termPaid-up additionsAccumulation at interest
Accumulation at interest
Which of these is considered to be a Living Benefit option in a life insurance policy?ReinstatementWaiver of premiumAccelerated death benefitPayor benefit
Accelerated death benefit
In what part of an insurance policy are policy benefits found?DeclarationsEntire contractWaiversConditions
Declarations
A provision that allows a policyowner to withdraw a policy's cash value interest free is a(n)partial surrenderwaiver of premiumautomatic premium loangrace period
partial surrender
A provision that allows a policyowner to temporarily give up ownership rights to secure a loan is called a(n)automatic premium loannonforfeiture optioncollateral assignmentirrevocable assignment
collateral assignment
Which dividend option would an insurer invest the policyowner's money and add any interest earnings as the dividends accrue?Accumulation at Interest OptionCash Dividend OptionPaid-Up Additions OptionOne-Year Term Dividend Option
Accumulation at Interest Option
Which situation accurately describes a reduced paid-up nonforfeiture option?Policy has a decreased face amountFace amount of the new policy equals that of the original policyCash value is surrendered to policyownerPremiums must continue to be paid
Policy has a decreased face amount
Which of the following protects a policyowner from a misrepresentation caused by an innocent mistake?Reinstatement clauseEntire Contract clauseIncontestable clauseNonforfeiture clause
Incontestable clause
All of the following riders can increase the death benefit amount EXCEPTCost of LivingWaiver of PremiumAccidental Death RiderGuaranteed Insurability
Waiver of Premium
In order to activate the reinstatement clause of a lapsed life insurance policy, the insured MUSTremit all past-due premiums within the grace periodprovide evidence of insurability to the insurerresubmit a new life insurance applicationprovide a valid reason for the lapse
provide evidence of insurability to the insurer
Which of these is NOT considered to be a common life insurance nonforfeiture option?Cash surrenderExtended term insuranceReduced paid-up insuranceLife income annuity
Life income annuity
Matt is applying for life insurance and requests a double indemnity rider. A double indemnity benefit will be payable to Matt's beneficiary if Mattis killed while committing a felonydies of a strokedies instantly from a car accidentis injured in a skiing accident and dies 18 months later
dies instantly from a car accident
The two major actions required for a policyholder to comply with the Reinstatement Clause areprovide evidence of insurability, agree to a new incontestable periodprovide evidence of insurability, pay past due premiumspay past due premiums, agree to a new incontestable periodpay past due premiums, agree to a reduction in coverage
provide evidence of insurability, pay past due premiums
Joanne has a $100,000 whole life policy with an accumulated $25,000 of cash value. She would like to borrow $15,000 against the cash value. Which of the following statements is TRUE?Net death benefit will be reduced if the loan is not repaidNo interest will be charged on loan balanceTerm life policies are the only type of insurance that allows policy loansA loan can be taken out for up to the face amount of the policy
Net death benefit will be reduced if the loan is not repaid
The suicide clause of a life insurance policy states that if an insured commits suicide within a stated period from the policy's inception, the insurer will only be liable for a return of premiums paidminus indebtedness and with interestduring the last 12 monthsminus indebtedness and without interestduring the last 6 months
minus indebtedness and without interest
The free-look provision gives the policyownerthe right to return the policy for a partial refund within a specified number of daysthe right to contest the terms of the policythe right to change a policy provisionthe right to return the policy for a full refund within a specified number of days
the right to return the policy for a full refund within a specified number of days
A guaranteed issue insurance policy has noinitial premium requirementincontestable periodwaiting periodmedical underwriting
medical underwriting
A life insurance rider that allows an individual to purchase insurance as they grow older, regardless of insurability, is called a(n)guaranteed term riderguaranteed insurability rideraccelerated benefit ridercost of living rider
guaranteed insurability rider
Loans obtained by a policyowner against the cash value of a life insurance policyare treated as taxable incomewould not be treated as taxable incomeare limited by the face amount of the policywould be subject to a Federal estate tax
would not be treated as taxable income
All of these are common exclusions to a life insurance policy EXCEPTaccidental deathmilitary serviceaviationhazardous occupations
accidental death
The automatic premium loan provision authorizes an insurer to withdraw from a policy's cash value the amount ofany interest payable from an outstanding policy loan balancepast due premiums that have not been paid by the end of the grace periodthe outstanding policy loan balanceany surrender charges owed by the policyowner
past due premiums that have not been paid by the end of the grace period
All of these are valid options for what a policyowner may do with policy dividends EXCEPTcash outlay to the policyowneraccumulate without interestreduction in policy premiumbuy additional insurance coverage
accumulate without interest
A waiver of premium rider allows an insured to waive premium payments if the insured istemporarily disabledunemployedcompletely and permanently disabledexperiencing financial hardship
completely and permanently disabled
A whole life insurance policy accumulates cash value that becomesthe policy loan value which the insured may borrow againstthe death benefitthe source of funding for administration feesa source of funding a term rider to the policy
the policy loan value which the insured may borrow against
What is an insurance policy's grace period?Period of time after the initial premium is paid and before the policy is issuedPeriod of time it takes for a policy's underwriting to completePeriod of time after a policy is issued and before it is delivered to policyownerPeriod of time after the premium is due but the policy remains in force
Period of time after the premium is due but the policy remains in force
If an insured's age on a life insurance policy has been misstated, what is the insurer's liability if the insured dies?No death benefit is owed because of the misstatement of ageThe full original death benefit listed on the policyA prorated death benefit based on the amount of insurance the insured's premiums would have been if purchased at the correct ageThe original death benefit listed on the policy minus any outstanding loans and interest
A prorated death benefit based on the amount of insurance the insured's premiums would have been if purchased at the correct age
An insured individual and the policy's beneficiary die from the same accident. The common disaster provision states the insurer will continue as ifthe insured outlived the beneficiarythe beneficiary outlived the insuredno beneficiary was ever namedthe insured and beneficiary died at the same time
the insured outlived the beneficiary
All of the following are considered to be nonforfeiture options available to a policyowner EXCEPTExtended Term InsuranceCash SurrenderReduction of PremiumReduced Paid-Up Insurance
Reduction of Premium
A life insurance policyowner does NOT have the right tochange a beneficiaryselect a beneficiarytake out a policy loanrevoke an absolute assignment
revoke an absolute assignment
If an insured dies during the grace period with no premiums paidthe policy would be payable, minus the premium amountthe policy would be payable only after the beneficiary makes past due premium paymentall past premiums will be refunded with interestthe claim would be denied
the policy would be payable, minus the premium amount
Life insurance policies will normally pay for losses arising fromcommercial aviationwarsuicidehazardous jobs
commercial aviation
A policyowner may exercise which of these dividend options that uses the dividend to pay all or part of the next premium due?Reduction of premium dividend optionExtended term optionPaid-up optionCash dividend option
Reduction of premium dividend option
James is the insured on a life insurance policy where his age was misstated on the application. Which of the following is CORRECT regarding the death benefit amount?The original face amount will be paid to the beneficiaryThe policy will be voided with no death benefits paidThe death benefit paid will be what the premium would have purchased at the correct ageThe amount of premiums paid will be returned with interest
The death benefit paid will be what the premium would have purchased at the correct age
Which of the following is considered to be an alternative to a life settlement?Accelerated death benefit riderWaiver of premium riderExtended term optionDecreasing term insurance
Accelerated death benefit rider
What is an insurer required to do when faced with an error made under the Misstatement of Age provision?Cancel the policyPay age-corrected benefitsPay full benefits as stated in the policyBill the policyowner for back premiums
Pay age-corrected benefits
Ownership of a life insurance policy may be temporarily transferred with a(n)collateral assignmentabsolute assignmenttransferable assignmentbeneficiary assignment
collateral assignment
Level premium term life insurance policiesbuild cash value in a separate accountautomatically convert to permanent insurance at a predetermined dateautomatically renew at predetermined dateshave premiums that are averaged over the policy period
have premiums that are averaged over the policy period
If the beneficiary dies from the same accident as the insured individual, the insurer will proceed as ifthe insured outlived the beneficiarythe beneficiary outlived the insuredboth the insured and beneficiary died at the same timethe estate was listed as beneficiary
the insured outlived the beneficiary
The premium payment mode that results in the highest overall cost would bemonthlyquarterlysemi-annualannual
monthlymonthly
How does life insurance create an immediate estate?Cash value may be borrowed upon at any timeNonforfeiture options are immediately availableThe insured's estate receives the death benefitAfter first premium is paid, the face amount may be available to the beneficiary
After first premium is paid, the face amount may be available to the beneficiary
Purchasing a life insurance policy in order to avoid the forced sale of assets upon death is calledestate fundingcapital withholdingcapital gainsestate conservation
estate conservation
A policyowner can receive an immediate payment before the insured dies by using a(n)viatical settlement contractbuy-sell arrangementadhesion agreementspendthrift plan
viatical settlement contract
An example of naming a beneficiary by class would be"To the children born of my union with Ned Jackson: David Jackson, Jennifer Jackson, and Scott Jackson""To the child born of my union with Ned Jackson: Scott Jackson""To the children born of my union with Ned Jackson""To Ned Jackson"
"To the children born of my union with Ned Jackson"
A policyowner can receive a percentage payment of the death benefits prior to death by using what kind of contract?Viatical settlement agreementFunding medium agreementSplit dollar planBuy-sell plan
Viatical settlement agreement
Which of these is considered a major tax advantage of life insurance?Tax credits are available for life insurance premiums paidAnnual earnings are tax freePremiums are tax deductible by an employee if paid for by an employerIncome tax is typically not owed on proceeds paid directly to a beneficiary
Income tax is typically not owed on proceeds paid directly to a beneficiary
Where would policy proceeds be paid if both the insured and primary beneficiary were killed in the same accident?primary beneficiary's estatecontingent beneficiaryinsured's estatechildren of the insured
contingent beneficiary
What would be an expense factor in an insurance program?Premiums collectedMortality costsOpportunity costsInvestment interest
Mortality costs
Proceeds from a life insurance policy are protected from the beneficiary's creditors by which clause?protection clausecreditor clausespendthrift trust clausebeneficiary trust clause
spendthrift trust clause
A tax-free Section 1035 Exchange of a life insurance policy to a different policy is permitted if it occursin the same state as the original transactionwithin a 12 month periodfrom insurer to insurer and no cash is received by the policyownerfrom agent to agent as long as the agents are licensed in the same line
from insurer to insurer and no cash is received by the policyowner
A beneficiary has just received a claim payment for a life insurance policy. Which of the following is TRUE regarding the federal income tax liability owed?A flat tax of 10% is owed on all proceedsFederal income tax is owed if proceeds exceed $250,000No federal income tax is owed on life insurance proceedsTax liability owed depends on the type of life insurance policy
No federal income tax is owed on life insurance proceeds
What is the primary feature of a viatical settlement?No interest on policy loansReduced death benefit prepaymentLonger contestable periodLower premiums
Reduced death benefit prepayment
What does a life insurance policy guarantee to the stated beneficiary upon the death of the insured?Policy DividendSpecified amount of moneyPolicy's cash valueFuneral expense fund
Specified amount of money
Which of these factors help determine an insured's life insurance premium?insured's salarymarital statusplace of residenceavocation (hobby)
avocation (hobby)
A method of marketing group benefits to employers who have a small number of employees is theMETBlanket Life InsuranceARTSmall Employer Trust
MET (A method of marketing group benefits to employers who have a small number of employees is the multiple employer trust (MET). METs may provide a single type of insurance (such as health insurance) or a wide range of coverage (life, medical expense, and disability income insurance).
What are blanket life policies?Policies that are mass-marketedPolicies that cover everyone in a householdPolicies that are issued by the Guaranty Association covering multiple insurersPolicies that cover a group of people exposed to a common hazard
Policies that cover a group of people exposed to a common hazard (Blanket life insurance covers a group of people exposed to a common hazard. Individuals do not need to apply for blanket coverage and insurers do not need to provide each person with a certificate of coverage. Insureds are not specifically named in the policy because coverage is temporary.)
Which of the following makes a group life policy different from an individual life policy?Higher premiumHigher underwriting costsIndividual underwritingLower premiums
Lower premiums (The primary reason for a group life plan having lower premiums is the lower administrative, operational, and selling expenses associated with servicing one contract, as opposed to several individual contracts.)
When an employer pays the entire premium of a group plan, the plan is calledRebatingWaiver of premiumContributoryNoncontributory
Noncontributory (In a noncontributory plan, an employer pays the entire premium and the employee is not expected to contribute.)
The insured is which one of these in group life insurance?ApplicantPolicyownerBeneficiaryCertificate holder
Certificate holder (Each employee eligible to participate in the plan fills out an enrollment card and is given a certificate of insurance, which summarizes the coverage terms and explains the employee's rights under the group contract.)
In group life policies, individual certificates are given toEach policyholderEach insuredEach applicantThe insurance agent
Each insured (Each employee eligible to participate in a group plan fills out an enrollment card and is given a certificate of coverage. This certificate summarizes the coverage terms and explains the employee's rights under the group contract.)
The coverage, conditions, and limitations in the master policy of a group contract can be found in which document?Certificate of AuthorityConsumer reportCoverage documentCertificate of coverage and benefits
Certificate of coverage and benefits
Which of the following statements regarding group life insurance plans is CORRECTThe employee is generally responsible for paying the entire premium.Group insurance, per unit of benefits, is available at rates lower than those for individuals.An employee may not continue the policy if he/she terminates employment.Group insurance plans are only available to key employees.
Group insurance, per unit of benefits, is available at rates lower than those for individuals. (Group insurance generally is available at rates lower than those for an individual because of the lower administrative, operational, and selling expenses associated with them.)
All of the following are distinguishing characteristics of group life insurance EXCEPTFlow of insuredsGroup underwritingMaster contractIndividual policies
Individual policies
All of the following statements about group life insurance for employees are true EXCEPTThe policy is issued to the employerEvidence of insurability is normally required of each participantPremiums may be paid jointly by the employer and the employeesEligible groups may be required to meet minimum size standards
Evidence of insurability is normally required of each participant
Insurers require that a minimum number of trade association member employees participate in a group insurance plan in order tomaximize premium incomeminimize adverse selectioncalculate valid loss ratioslower plan expenses
minimize adverse selection (The larger the group to be insured, the more predictable will be the expected losses from the group.)
Abbey's employer recently made group insurance available for its employees as a benefit. After filling out her enrollment card, she is given a(an)policyreceiptcertificate of insuranceapplication
certificate of insurance (This summarizes the coverage terms and explains the employee's rights under the group contract. In these cases, the employer is the applicant and contract policyholder.)
A non-contributory health insurance plan helps the insurer avoidadverse selectionstate compliancethe underwriting processtax deductions
adverse selection (Because all eligible employees are usually covered, noncontributory plans are desirable from an underwriting standpoint because adverse selection is minimized.)
Converting a group plan to permanent life insurance involvessubmitting proof of insurabilitypaying a lower premiumconverting to term life insurancethe conversion being applied within 1 month of termination
the conversion being applied within 1 month of termination
All of the following conditions are included in group credit life programs EXCEPTPremiums are usually paid by the borrowerThe amount of insurance per borrower is limitedBenefits are paid to the borrower's beneficiary Benefits are paid to the creditor
Benefits are paid to the borrower's beneficiary (Benefits in a credit life policy are normally paid to the creditor.)
State insurance laws generally allow a number of groups to hold blanket life insurance policies. All of the following are examples of groups eligible for blanket life insurance EXCEPTA school covering students, teachers, or employees.Members of a sports team while they are participating on the team.Religious organization covering its members while on a church sponsored trip.A start up company to cover the health insurance needs of its employees
A start up company to cover the health insurance needs of its employees(Blanket life insurance policies cover eligible groups for blanket LIFE insurance , not health insurance.)
To what is a group life plan in which the employer pays the entire cost commonly referred?Contributory planNoncontributory planGroup permanent planGroup paid-up plan
Noncontributory plan
Which of the following statements about the certificate of insurance is true?It is a binding contract between the employee and the insurerIt serves as evidence of an employee's coverageIt is issued to the employerIt is used only when accidental death benefits are provided
It serves as evidence of an employee's coverage
The conversion privilege under a group life plan allows an employee to convert to a(n)family plan with another insurerindividual plan with another insurer that has better ratesindividual plan upon employment terminationindividual policy in the spouse's name
individual plan upon employment termination
The type of insurance most frequently used in group life plans isannually renewable term. 10-year renewable term.limited pay whole life.single-premium whole life.
annually renewable term. (Annual renewable term insurance gives the insurer the right to increase the premium each year (based on the group's rating) and gives the policyholder the right to renew coverage each year.)
All of these are requirements of a group life plan EXCEPTA minimum number of participants are requiredThe cost of the plan is dictated by average age of groupParticipants receive a certificate of coverageParticipants are required to provide evidence of insurability
Participants are required to provide evidence of insurability
A group life insurance plan must insure all eligible employees if theGroup was formed for the express purpose of obtaining insuranceEmployer pays the entire premiumEmployees are covered under a retirement planEmployer pays for a group health insurance plan
Employer pays the entire premium
What does the Group Life underwriting risk selection process help protect insurance companies from?Risk aversionNatural selectionAdverse selectionRisk management
Adverse selection
If an employee wants to enter the group outside the open enrollment period, the insurer mayRequire evidence of insurability Require a higher premiumRequire an extended open enrollment periodRequire physical exams on existing members
Require evidence of insurability (If an employee does not enroll in the plan during the enrollment period (typically 31 days), the employee may be required to provide evidence of insurability if enrollment is desired at a later date. This is to protect the insurer against adverse selection.)
All of the following employees would normally be excluded from a group term life plan EXCEPTA full-time employee who has been on the job 2 yearsEmployee who works part time each weekEmployee who works less than 3 months a yearEmployee with less than 3 months of employment
A full-time employee who has been on the job 2 years
Most employers will establish benefit schedules according to all of the following EXCEPTEarningsAge Employment PositionsFlat Benefit
Age (Most employers will establish benefit schedules based on an employee's earnings or position within the company. A flat benefit to each employee may also be an option. An employee's age is not taken into account.)
A type of group that has a constitution and bylaws and has been organized for purposes other than obtaining insurance is called a(n)employer groupemployee groupassociation or labor groupmultiple coalition
association or labor group (They are organized and maintained in good faith for purposes other than obtaining insurance.)
Jackie has just signed up to participate in her employer's franchise life insurance program. Which of the following statements is CORRECT?She may not continue the policy if she terminates employment.As the "sponsor" of the program, her employer collects premiums from her and remits them to the insurance company. The employer is given a certificate of insurance.Jackie is allowed to select the type and amount of insurance coverage.
As the "sponsor" of the program, her employer collects premiums from her and remits them to the insurance company. (Franchise life insurance is a form of group insurance covering employees of a common employer or are members of a common association. The employer or association is not the master policyholder but simply a "sponsor". Each insured is given an individual policy.)
An employee under a group insurance policy has the right to name a beneficiary and the right toremain on the group plan in the event of employment terminationcash surrender the existing policychange the policy provisionsconvert to an individual policy in the event of employment termination
convert to an individual policy in the event of employment termination
All of the following statements pertaining to the conversion privilege of group term life insurance are correct EXCEPTAn insured employee typically has 31 days following termination of employment in which to convert the group insurance.An insured employee must convert to the same type of coverage that was provided under the group plan (that is, term). Insureds who convert their coverage to individual plans pay a premium rate according to their attained age.An insured employee may exercise the conversion privilege regardless of that employee's insurability.
An insured employee must convert to the same type of coverage that was provided under the group plan (that is, term). (Most group conversion provisions require the individual to convert the coverage under a group term plan to a whole life policy.)
If an employee in poor health is part of a large group that is acceptable for group life insurance, that employee isineligible for coverage under the planeligible for coverage, but on a rated basiseligible for the same type of coverage as other employeesineligible until good health is restored
eligible for the same type of coverage as other employees
What action may the insurer take on future policy anniversaries after a group life master policy has been issued?Cancel insurance on group members who become terminally illInsurer can make no changes to policyInsurer can deny claims after a group has excessive claimsInsurer can adjust premium
Insurer can adjust premium (Most group life plans are term plans, which use annual renewable term (ART) insurance for the underlying policy. This gives the insurer the right to increase the premium each year (based on the group's experience rating), and it gives the policyholder the right to renew coverage each year.)
How do interest earnings accumulate in a deferred annuity?On a tax credit basisOn a tax-deferred basisOn a tax-free basisOn a taxable basis
On a tax-deferred basis
Under a non-qualified annuity, interest is taxed after thedeposits have been madedeath of the annuitantdistribution of paymentsexclusion ratio has been calculated
exclusion ratio has been calculated (The taxable and non-taxable portions of annuity payments are determined by the exclusion ratio.)
Who assumes the investment risk with a fixed annuity contract?The ownerThe annuitantThe insurer The beneficiary
The insurer (It is the insurance company that bears the investment risk of a fixed annuity. The insurance company guarantees the annuitant's principal as well as a guaranteed minimum rate of return, even if the underlying assets underperform the guaranteed rate.)
Which of these statements regarding the annuitant is CORRECT?The contract can only be assigned by the annuitantThe annuitant is the only individual who can surrender the contractThe annuitant must also be the beneficiaryThe annuitant's life expectancy determines the annuity payments
The annuitant's life expectancy determines the annuity payments
Which of these is NOT considered to be a purpose of an annuity?Annuities are intended to create an estateAnnuities are intended to liquidate an estateAnnuities are intended for the tax-free growth of principalAnnuities are intended to distribute accumulated principal
Annuities are intended to create an estate
Lisa has recently bought a fixed annuity. Which of these is considered to be a disadvantage of owning this type of annuity?Payments cease 5 years after the annuitant's deathDuring periods of inflation, annuitants will experience an increase in purchasing power of their paymentsDuring periods of inflation, annuitants will experience a decrease in purchasing power of their paymentsPayment amounts can be unpredictable from month to month
During periods of inflation, annuitants will experience a decrease in purchasing power of their payments
An annuity is primarily used to provideretirement incomedisability incomelong-term care benefitsdeath benefits
retirement income
If the annuitant dies before the annuity start date,the benefits will be given tax-free only to a stated beneficiarynothing is given to the beneficiarythe premiums paid will be given to the beneficiarythe premiums paid plus interest earned will be given to the beneficiary
the premiums paid plus interest earned will be given to the beneficiary
Kathy's annuity is currently experiencing tax-deferred growth until she retires. Which phase is this annuity in?Payout periodAccumulation periodDeferred periodGrowth period
Accumulation period
How soon can the benefit payments begin with a deferred annuity?Anytime after date of purchaseAnytime within 12 months after date of purchaseA minimum of 6 months after date of purchaseA minimum of 12 months after date of purchase
A minimum of 12 months after date of purchase
During the accumulation period, who can surrender an annuity?PayorAnnuitantBeneficiaryPolicyowner
Policyowner (The policyowner is the only one who can surrender an annuity during the accumulation period.)
What is the nonforfeiture value of an annuity before annuitization?All premiums paidAll premiums paid plus interestAll premiums paid minus any withdrawals and surrender chargesAll premiums paid, plus interest, minus any withdrawals and surrender charges
All premiums paid, plus interest, minus any withdrawals and surrender charges
Which of these annuities require premium payments that vary from year to year?Flexible premium immediate annuityFlexible premium deferred annuityFixed premium deferred annuityFixed premium immediate annuity
Flexible premium deferred annuity
When does an immediate annuity begin making payments?After multiple premiums have been paidAfter the first premium has been paidAfter policy has been active for one yearAfter the incontestable period
After the first premium has been paid
The taxable portion of each annuity payment is calculated using which method?Exclusion RatioTaxable RatioCost BasisTax Basis
Exclusion Ratio
Which of the following is considered to be the period when the accumulated value in an annuity is paid out?Annuitization phaseAccumulation phasePrincipal phasePeriod certain phase
Annuitization phase
Larry died in an automobile accident. His survivors are eligible for limited Social Security benefits. Larry's insured status wasPartially insuredInsuredConditionally insuredHalf insured
Partially insured (To be considered partially insured, a worker must have earned 6 credits during the 13-quarter period ending with the quarter in which the worker died.)
Which of the following does the FICA tax fundSocial Security(OASDI) and Unemployment benefitsMedicare and Railroad Retirement System benefitsUnemployment and Medicaid benefitsSocial Security(OASDI) and Medicare benefits
Social Security (OASDI) and Medicare benefits (A majority of FICA tax is used to fund Social Security benefits. The remaining portion funds Medicare benefits.)
Under Social Security disability requirements, a worker is fully insured on a permanent basis after having worked in a covered occupation for:10 quarters20 quarters30 quarters40 quarters
40 quarters (To obtain fully insured status, a covered worker must accrue a total of 40 quarters of credit, which is about 10 years of work.)
How long does the elimination period last for a Social Security Disability claimant?12 months5 months 0 months6 months
5 months (Social Security Disability benefits are subject to rigid requirements. Disability benefits begin after the worker has satisfied a waiting period of 5 consecutive months, during which the worker must be disabled. The disability must be expected to last a minimum of 12 months.)
How does one qualify as a fully-insured individual under Social Security disability coverage?Individual has been credited with the appropriate number of quarters of coverageIndividual is currently covered under MedicaidIndividual is expected to be disabled for 5 monthsIndividual is currently employed
Individual has been credited with the appropriate number of quarters of coverage
Which of the following examples pertaining toSocial Security benefits is CORRECT?-Simon was a fully employed worker at the time of his death. His surviving spouse will receive a lump-sum death benefit of $2,250.-Lola, age 30, has a daughter, age 10. Her husband, who is covered under Social Security, died unexpectedly last month following surgery. Both Lola and her daughter are entitled to receive monthly survivor benefits until her daughter reaches age 18.-Mason, who is married with one son, age 16, is a fully insured retired worker receiving Social Security benefits. In addition, his spouse is eligible for benefits at age 62 and his son is eligible for benefits until he is 18 years old. -Arlene, the 20-year-old daughter of a fully insured retired worker, becomes totally and permanently disabled from injuries received in a car accident. Because her disability occurred after age 16, Arlene is not eligible for her father's Social Security benefits.
Mason, who is married with one son, age 16, is a fully insured retired worker receiving Social Security benefits. In addition, his spouse is eligible for benefits at age 62 and his son is eligible for benefits until he is 18 years old. (The spouse of any worker eligible for retirement benefits is entitled to an old age income at a reduced amount starting at age 62. An unmarried child of a worker on retirement income is generally eligible to receive a monthly benefit until the child turns 18.)
Social Security is funded by a payroll tax imposed on a limit of an employee's income. What is this limitation called?Taxable wage base Maximum wage limitAverage monthly wage (AMW)Average indexed monthly earnings (AIME)
Taxable wage base (This payroll, or FICA tax, is applied to employees' incomes up to a certain limit, called the taxable wage base.)
Delores just received her first Social Security Disability payment. What can we correctly assume about her?Her disability is expected to last at least 12 months She is at least 65 years oldShe has applied for MedicareShe became disabled 12 months ago
Her disability is expected to last at least 12 months (The qualification for Social Security Disability benefits is subject to rigid requirements. One of these requirements states the disability must be the result of a physical or mental impairment expected to last at least 12 months.)
An insured's status under Social Security can be described aspartially insuredactively insuredfully insured completely insured
fully insured (There are two types of insured statuses that qualify individuals for Social Security benefits: fully insured and currently insured. Most Social Security benefits are paid to fully insured individuals.)
All of the following statements correctly describe the purpose of Social Security EXCEPTIt provides a source of income for a meaningful standard of living during retirementIt provides basic protection against financial problems accompanying death, disability, and retirementIt augments a sound personal insurance planIt provides retirement and survivor benefits to a worker and the worker's family
It provides a source of income for a meaningful standard of living during retirement
Social Security benefits include all of the following, EXCEPTUnemployment benefitsDisability benefitsRetirement benefitsMedicare benefits
Unemployment benefits
In determining Social Security retirement benefits, which of the following statements is CORRECT?Average monthly wages (AMW) are adjusted for inflation.The Primary Insurance Amount (PIA) determines the worker's average indexed monthly earnings (AIME).The PIA is a determination of the amount equal to the worker's full retirement benefit at the worker's full retirement age. Workers retiring past age 59 can receive 100% of their PIA.
The PIA is a determination of the amount equal to the worker's full retirement benefit at the worker's full retirement age. (The Primary Insurance Amount (PIA) is the amount equal to the worker's full retirement benefit at age 65. )
The primary insurance amount (PIA) is equal to1/2 worker's retirement benefit at 621/2 worker's retirement benefit at 65Full worker's retirement benefit at 62Full worker's retirement benefit at 65
Full worker's retirement benefit at 65 (The PIA is actually the amount equal to the worker's full retirement benefit at age 65 (benefits are reduced for early retirement) or benefits to a disabled worker. Benefits payable to workers and their spouses and dependents are usually expressed as a percentage of the worker's PIA. For example, a person who elects to retire at age 62 with Social Security retirement benefits will receive benefits equal to 80% of his or her PIA.)
The period in which there are no Social Security benefits for the surviving spouse is called theblackout period elimination periodineligible perioddependency period
blackout period (The blackout period begins when the youngest child turns 16 and continues until the spouse reaches age 60, at the earliest. If there are no eligible children with the surviving spouse when the breadwinner dies, the blackout period starts immediately.)
What is the formal name for Social Security?Qualifed Age Survivors Disability InsuranceAdvanced Age Survivors Disability InsuranceRetirement Age Survivors Disability InsuranceOld Age Survivors Disability Insurance
Old Age Survivors Disability Insurance (The Social Security program, enacted in 1935 and administered at the federal level by the Social Security Administration, is more formally called OASDI. This acronym aptly identifies the types of protection provided under the program: "Old Age" (retirement), "Survivors" (death benefits), and "Disability Insurance".)
How is Social Security (OASDI) funded?Federal grantsSales taxesTreasury BondsPayroll taxes
Payroll taxes (OASDI is supported by a payroll tax, paid by employees, employers, and self-employed individuals.)
Individuals covered by Social Security include all of the following EXCEPTSmall business ownersState workers who are not covered by state pension plansFederal employees (after 1984)Railroad workers
Railroad workers (Railroad workers are covered under a separate federal program, the Railroad Retirement System.)
What is the interval spanning between the day when the youngest child of a family turns 16 and before the surviving spouse turns age 60 called?Accumulation periodNonpayment periodBlackout intervalBlackout period
Blackout period (The blackout period begins when the youngest child turns 16 and continues until the spouse reaches age 60, at the earliest. If there are no eligible children with the surviving spouse when the breadwinner dies, the blackout period starts immediately.)
Jan, a single, working mother, dies at age 40. Dave, her only son, would receive a one-time lump-sum benefit of$255$500$1,000$2,555
$255 (The maximum lump-sum death benefit to a deceased worker's surviving spouse or children is $255.)
Under Social Security, in order to be considered fully insured, the worker must have worked how many years and received how many quarters?40 years and 10 full quarters10 years and 40 full quarters (Workers are fully insured if they have accumulated the required number of credits based on their age. For most people, the required number of credits is 40 (representing approximately 10 years of work).)20 years or less and 40 full quarters40 years or less than 10 quarters
10 years and 40 full quarters (Workers are fully insured if they have accumulated the required number of credits based on their age. For most people, the required number of credits is 40 (representing approximately 10 years of work).)
Which one of the following is NOT covered by Social SecuritySelf-employed workerBusiness ownerRailroad workerInsurance salesman
Railroad worker
A qualified retirement plan is "top heavy" whenMore than 20% of participants are highly compensatedMore than 20% of annual additions are for key employee accountsFewer than 60% of employees benefit by the planMore than 60% of plan assets are in key employee accounts
More than 60% of plan assets are in key employee accounts (A plan is considered to be top heavy if more than 60% of plan assets are attributable to "key employees" as of the last day of the prior plan year.)
An example of a tax-qualified retirement plan would be a(n)equity compensation plandefined contribution planexecutive index plan1035 exchange plan
defined contribution plan
A Roth IRA owner must be at least what age in order to make tax-free withdrawals?59 1/2 and owned account for a minimum of 10 years59 1/2 and owned account for a minimum of 5 years70 1/2 and owned account for a minimum of 10 years70 1/2 and owned account for a minimum of 5 years
59 1/2 and owned account for a minimum of 5 years
The IRS levies an excise tax on retired individuals over a certain age who do not take the required minimum distribution from a qualified retirement plan. What is the excise tax rate?20%30%50%60%
50% (Distributions must be made by April 1 following the year the participant turns age 70 1/2, or a 50% excise tax will be assessed on the amount that should have been withdrawn.)
Which of the following is NOT a federal requirement of a qualified plan?Must benefit a broad cross-section of employeesEmployee must be able to make unlimited contributionsVesting schedule must be definedEmployer establishes the plan
Employee must be able to make unlimited contributions
Which statement about traditional individual retirement accounts is true?Funds withdrawn from an IRA after age 60 are not subject to income taxOnly workers covered by other pension plans are eligible for IRAsA 10% penalty generally must be paid on funds withdrawn prior to age 59 1/2The minimum amount that can be deposited into an IRA each year is $2,000
A 10% penalty generally must be paid on funds withdrawn prior to age 59 1/2
The annual addition to an employee's account in a qualified retirement plancan be any amount as determined by the end of year to yearmust be the same dollar amount for every full time employeecannot exceed the maximum limits set by the Internal Revenue Serviceusually reflects the employee's individual work performance each year
cannot exceed the maximum limits set by the Internal Revenue Service
An IRA owner names the spouse beneficiary. What is true if the owner dies before any distributions are made?All future distributions are forfeitedThe surviving spouse can roll the account into an IRADistributions must begin within six month of the decedent's death.Distributions must begin in the year after the deceased would have reached age 70 1/2.
The surviving spouse can roll the account into an IRA (A surviving spouse who inherits IRA benefits or benefits from the deceased spouse's qualified plan is eligible to establish a rollover IRA in the surviving spouse's own name.)
Which of the following employers is required to follow ERISA regulations?A local government with 150 employeesA church with 30 employeesA local electrical supply company with 12 employeesA Canadian company with 300 employees working in the United States
A local electrical supply company with 12 employees
Upon retiring at age 60, an employee requested the 401(k) plan trustee to issue a check payable to the employee for the entire accrued benefit in the employee's account. The funds were immediately rolled over into an IRA. The 401(k) distribution will beSubject to a penalty taxEligible for capital gains tax treatmentIncluded in gross income for tax purposesReduced by the amount withheld for federal income tax
Included in gross income for tax purposes (In this situation, the 401(k) distribution will be included in gross income for tax purposes because the plan participant took physical receipt of the distribution before its rollover to the IRA.)
Which of these statements concerning Traditional IRAs is CORRECT?Earnings are not taxable when withdrawnEarnings are taxable when withdrawnContributions are never tax-deductibleContributions are always made by the employer
Earnings are taxable when withdrawn
Which is true about the income tax withholding requirements for eligible rollover funds received personally by a participant in a profit-sharing plan?A 10% mandatory withholding rate appliesA 20% mandatory withholding rate applies A 50% mandatory withholding rate appliesThe participant may elect to have nothing withheld
A 20% mandatory withholding rate applies (A plan sponsor must withhold 20% of the distribution in federal taxes on a rollover. Once the rollover takes place to a new custodian, the remainder of the distribution is made.)
All of the following are types of insurance policy exchanges that can be made without current taxation EXCEPT:The exchange of an annuity for a life insurance policy The exchange of a life insurance policy for an annuityAn annuity exchanged for another annuity contractA life insurance policy exchanged for another life policy
The exchange of an annuity for a life insurance policy (The 1035 exchange does not allow for an annuity to be exchanged for a life insurance policy. This is not considered an equal exchange and will be taxed.)
Distributions from a traditional individual retirement annuity (IRA) must begin byThe participant's 65th birthdayThe participant's 70th birthdayDecember 31st of the year the participant turns 70 1/2April 1st of the year following the year the participant attains age 70 ½
April 1st of the year following the year the participant attains age 70 ½
Qualified distributions from a Roth IRA areFully taxable in the year receivedTaxable only on amounts over the aggregateSubject to a 10% penalty taxReceived income tax free
Received income tax free
An individual, age 45, received a distribution of $15,000, less $3,000 income tax withholding, from a former employer's 401k plan. None of the money was rolled over. Which federal taxes apply?Only income taxes on $15,000Only income taxes on $12,000Income taxes plus a 10% penalty tax on $15,000 Income taxes plus a 10% penalty tax on $12,000
Income taxes plus a 10% penalty tax on $15,000 (All withdrawals from a qualified retirement plan are taxable as current income. In addition, any withdrawals made before age 59 1/2 is subject to an additional tax penalty of 10% of the amount withdrawn.)
All of the following are exempt from the 10% tax penalty for early qualified plan withdrawals EXCEPTQualified college expensesFirst time home purchaseDeath of the participantStock purchase
Stock purchase (Withdrawing funds from a qualified plan for the purpose of purchasing stocks or other securities would trigger a 10% tax penalty.)
One of the purposes of a qualified profit-sharing plan is toMotivate management to achieve a 25% profit marginDistribute a portion of company earnings to employeesLiquidate the assets of a corporationReward the stockholders of a corporation
Distribute a portion of company earnings to employees
Who were Keogh plans designed to provide pension benefits for?Corporate officersPublic school employeesThe self-employedGovernment employees
The self-employed
Rollover contributions to an individual retirement annuity (IRA) areLimited to 15 percent of the participant's compensationLimited to $2,000 per yearLimited to $35,000 per year for married partiesUnlimited by dollar amount
Unlimited by dollar amount
A qualified plan participant elected a trustee-to-trustee transfer of rollover funds instead of personally receiving the funds and then rolling them over. The election permits the participant toAvoid mandatory income tax withholding on the amount transferredEliminate the possibility of funds being lost in the mailSignificantly reduce the amount of time required for the transactionEliminate the penalty tax that normally applies to rollover funds
Avoid mandatory income tax withholding on the amount transferred (There is no federal tax withholding involved in a transfer of funds from one qualified plan into another. Rollovers, however, involve a 20% withholding. Once the rollover takes place to the new custodian, the remainder of the distribution is made.)
How are contributions made to a Roth IRA handled for tax purposes?Fully tax deductibleNot tax deductiblePartially tax deductibleConditionally tax deductible
Not tax deductible
Which of the following is generally assessed when a participant receives retirement savings from an IRA before reaching age 59 1/2?Income tax onlyA penalty tax onlyIncome tax and a penalty taxCapital gains tax
Income tax and a penalty tax
A partnership buy-sell agreement in which each partner purchases insurance on the life of each of the other partners is called across purchase plan split-dollar plankey person plandeferred buy-sell plan
cross purchase plan (Under a cross purchase plan, the partners individually agree to purchase the interest of a deceased partner. Each partner is the owner, payor, and beneficiary of the life insurance on the lives of the other partners.)
What is the tax advantage of key-person life insurance?Premiums are tax deductibleDeath proceeds are nontaxableProceeds are deferredCash value increase is taxed at a low rate
Death proceeds are nontaxable
When calculating the amount of life insurance needed for an income earner, what has to be determined when using the Needs Approach?The income earner's future projected incomeThe family's financial objectives if the income earner were to die or become disabledThe insurance company's financial ratingThe income earner's credit scoreWhen calculating the amount of life insurance needed for an income earner, what has to be determined when using the Needs Approach?The income earner's future projected incomeThe family's financial objectives if the income earner were to die or become disabledThe insurance company's financial ratingThe income earner's credit score
The family's financial objectives if the income earner were to die or become disabled
Life insurance can be used in business in all of the following ways EXCEPTas a funding mediumas a profit sharing planas a form of business interruption insuranceas an employee benefit
as a profit sharing plan
All of the following are considered to be costs associated with an individual's death EXCEPTEstate taxesProbate costsBusiness expensesBurial expenses
Business expenses
Which of the following statements about key person insurance is CORRECT?The key employee's family is the beneficiary of the policy.The death proceeds are taxable.The business may take a tax deduction for premiums paid.It can be considered a business asset.
It can be considered a business asset. (Complete control of the policy rests with the business, which means key person insurance can be considered a company owned asset not earmarked for any specific purpose.)
Which plan can be used as an incentive by an employer to help an employee buy life insurance?Deferred compensation planKey person insuranceSole proprietor buy-sell planSplit-dollar plan
Split-dollar plan (In a typical split-dollar plan, the employer and the employee share the premium cost.)
All of the following factors are used in the needs approach for determining the amount of required life insurance EXCEPTthe monthly incomethe emergency fund periodthe education fundthe percentage of future income
the percentage of future income (The percentage of future income is not used in the needs approach for determining the amount of required life insurance.)
Robert and his employer agree on the purchase of a split-dollar life insurance policy and the usual split-dollar approach to premium payments. Each year, the employer will contribute to the premium an amount equal toone-half the premiumthe annual dividendthe increase in the policy's cash value two-thirds of the premium
the increase in the policy's cash value (In a typical split-dollar plan, the employer and the employee share the premium cost. Though there are variations, generally the employer's contribution is equal to the increase in the policy's cash value.)
The approach that is used to make life insurance recommendations, determines the total funds available to a family from all sources, and subtracts the amount needed to meet their financial objectives is known as theHuman Life Value approachNeeds approach Dollar Valuation approachInput-Output approach
Needs approach (The needs approach analyzes the family's financial needs and objectives should the breadwinner die or become disabled. These needs are then weighed against the ability of the family to meet them out of current or anticipated assets.)
In which business plan do the partners agree to buy the interest of the deceased partner?EntityCross purchaseStock purchaseBusiness insurance plan
Cross purchase (Under the cross-purchase buy-sell plan (the more common approach to a buyout), the partners individually agree to purchase the interest of a deceased partner. The executor of the deceased partner's estate is then directed to sell the interest to the surviving partners. The partnership itself is not a party to the agreement.)
All the following statements regarding survivor financial needs are correct EXCEPTThe term dependency period refers to the 20-year period immediately following the insured's death during which the widowed spouse must depend on Social SecurityThe period for which there are no Social Security benefits for the surviving spouse is known as the blackout periodA final expense fund addresses a deceased breadwinner's last illness and funeral costs, death taxes, outstanding debts, and moreA housing fund addresses a family's rental or home mortgage needs
The term dependency period refers to the 20-year period immediately following the insured's death during which the widowed spouse must depend on Social Security (This is an inaccurate statement. The dependency period refers to that period following the death of a breadwinner during which the children are living at home.)
Acme Partnership has three individual partners. The partnership itself owns, pays for, and is beneficiary of the life policies that insure the lives of the individual partners. This type of arrangement is called apartnership cross-purchase planpartnership purchase planpartnership entity buy-sell plan key person buy-sell plan
partnership entity buy-sell plan (An entity plan states that when a partner dies, that partner's interest is purchased by the partnership. The interest is then divided among the surviving partners.)
All of these are examples of a business use for life insurance EXCEPTWorkers CompensationBuy-sell fundingKey personPartnership entity plan
Workers Compensation
Three business partners individually agree to acquire the interest of a deceased partner and own life insurance on each of the other partners in the amount of his or her share of the business's buyout value. What is described here isan entity buy-sell plana stock redemption buy-sell plana cross-purchase buy-sell plan a 401(k) plan
a cross-purchase buy-sell plan (Under the cross-purchase buy-sell plan (the more common approach to a buyout) the partners individually agree to purchase the interest of a deceased partner. The executor of the deceased partner's estate is then directed to sell the interest to the surviving partners.)
Which of the following statements regarding deferred compensation plans is CORRECT?A deferred compensation plan must always be designed as a qualified plan.Life insurance is not a permissible funding vehicle, but annuities are.They permit a business to provide extra benefits to officers, executives, and other highly paid employees. A deferred compensation plan must be made available to all employees who are at least 21 years old and have 1 year of service to the business.
They permit a business to provide extra benefits to officers, executives, and other highly paid employees. (Deferred compensation is an arrangement whereby an employee (or owner) agrees to forgo some portion of his or her current income (such as annual raises or bonuses) until a specified future date, typically retirement.)
Craig purchased a life insurance policy to enable his heirs to pay estate taxes. What is this called?Estate conservationLiquidity maintenanceSurvivor fundHuman value protection
Estate conservation
A partnership owns, pays for, and is the beneficiary of life insurance policies on the lives of its individual partners. This is known asan entity buy-sell plan a stock redemption plana cross purchase plana Keough plan
an entity buy-sell plan (With an entity buy-sell plan, a deceased partner's interest is purchased from his or her estate by the partnership. This interest is divided among the surviving partners in proportion to their own interest.)
Needs analysis is a method of life insurance planning whichIdentifies the needs of an individual and the individual's dependents Eliminates the need for estimating future interest and inflation ratesRequires the team effort of the producer and home office underwriterIgnores Social Security benefit payments
Identifies the needs of an individual and the individual's dependents (Needs analysis is a method of life insurance planning which identifies the needs of an individual and the individual's dependents.)
Under a partnership cross-purchase plan, when there are 4 partners, how many policies are needed?412 1620
12 (With a partnership cross-purchase plan, each partner owns, is the beneficiary of, and pays the premiums for life insurance on the other partner or partners in an amount equal to his or her share of the purchase price.)
With three partners in a business, how many life insurance policies would be required to insure a cross-purchase buy-sell plan?36 912
6 (Each partner owns, pays for, and is the beneficiary of an insurance policy on each of the other two partners in a cross-purchase buy-sell agreement.)
Which of the following statements regarding ways to determine the proper amount of life insurance is CORRECT?The most popular method today for determining the proper amount of life insurance is the human life value approach.When using the needs approach to determine the proper amount of life insurance to purchase, non-insurance-type assets, such as pension benefits or personal savings, are not factors in the calculation.The needs approach considers only the most immediate financial concerns without regard for family financial goals, such as college education for children or retirement income for a surviving spouse.There are two basic approaches to determining the amount of life insurance that is needed: the human life value approach and the needs approach.
There are two basic approaches to determining the amount of life insurance that is needed: the human life value approach and the needs approach. (The human life value approach and the needs approach are the two basic approaches to determining the amount of life insurance needed.)
Which of the following statements regarding key person insurance is NOT correct?Key person life insurance indemnifies a business for financial loss caused by the death of a key employee or key executive.The business may borrow from the cash value of a permanent key person life insurance policy.The policy's death proceeds received by the business are not taxable.Premiums for a key person life insurance policy are a tax-deductible expense to the business.
Premiums for a key person life insurance policy are a tax-deductible expense to the business.
All of these are legitimate uses of insurance in a business setting EXCEPTFunding against general company financial loss Funding against financial loss by the death of a key employeeFunding business continuation agreementsFunding a buy-sell plan
Funding against general company financial loss (Life and health insurance can be used for a variety of reasons in a business setting. Safeguarding against general company financial loss is not one of them.)
A business often buys life insurance on a key employee to:Take a tax deductionPay estate taxes for the key employeePay the remaining balance of the key employee's mortgagePay for finding and training a replacement if the employee dies prematurely
Pay for finding and training a replacement if the employee dies prematurely (One reason for a business to purchase key person life insurance is to pay for finding and training a replacement if the employee dies prematurely.)
When a wage earner dies, the surviving family may have all of the following expenses EXCEPTFinal expensesUnemployment tax liabilitiesFamily living expensesDeath taxes
Unemployment tax liabilities
If a corporation collects the policy benefit on a key person life policy, which of the following is correct?Amount received is taxableAmount received is non-taxable Amount received is partially taxableAmount received is subject to exclusionary rule
Amount received is non-taxable (Key person life insurance receives favorable tax treatment. The death proceeds received by the business are not taxable. Premiums, of course, are not deductible for income purposes.)
Which of these requires an analysis of a family's financial needs and objectives should the breadwinner die or become disabled?Needs Approach Human Value Life ApproachHuman Needs ApproachHuman Value Needs Approach
Needs Approach (The needs approach requires an analysis of the family's financial needs and objectives should the breadwinner die or become disabled. Those needs are weighed against the ability of the family to meet them out of current or anticipated assets.)
Which approach predicts a person's earning potential and determines how much of that would be devoted to dependents?Future value approachEarnings approachNeeds approachHuman life value approach
Human life value approach (The human life value approach predicts an individual's future earning potential and determines how much of that amount would be devoted to dependents.)
Which of these is a method of determining the level of funds required for ongoing support in the event of the breadwinner's death?Financial loss valueHuman life value Assessment valueReplacement value
Human life value (The human life value calculator helps you assess the financial loss your family would incur if you were to die today.)
What is the reason for key person insurance?Lessen the risk of financial loss due to the death of a key employee Provide health and life insurance to families of key employeesProvide retirement benefits to key employeesLessen the chance of financial loss due to fraud by a key employee
Lessen the risk of financial loss due to the death of a key employee (Key person insurance can lessen the risk of financial loss due to the death of a key employee who has specialized skills, knowledge, or business contacts.)
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