Life Insurance Basics 7% Exam Questions and Answers Rated A+

Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy? - Premiums are not tax deductible as a business expense - Premiums are tax deductible by the key employee - Premiums are tax deductible as a business expense - Premiums are taxable to the employee - - Premiums are not tax deductible as a business expense. The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free. When is the earliest a policy may go into effect? - When the insurer approves the application - After the underwriter reviews the policy - When the application is signed and a check is given to the agent - When the first premium is paid and the policy has been delivered - - When the application is signed and a check is given to the agent The policy can be effective as early as the date of the application, if the premium is submitted with the application and the policy is issued as applied for. The factor added to the net premium to cover the costs of the insurer in obtaining and maintaining the business is called - Dividend accumulation - Premium tax - Expenses - Legal reserve - - Expenses Loading is another term for expenses. Net premium (mortality minus interest earned) plus expenses (or loading) equal the gross premium. What does "liquidity" refer to in a life insurance policy? - The insured receives payments each month in retirement. - Cash values can be borrowed at any time. - The death benefit replaces the assets that would have accumulated if the insured had not died. - The policyowner receives dividend checks each year. - - Cash values can be borrowed at any time. Liquidity in life insurance refers to availability of cash to the insured through cash values. Which of the following methods of calculating the amount of life insurance needed takes into account the insured's wages, years until retirement, and inflation? - Lump-sum approach - Human life value approach (HLVA) - Needs approach - Blackout approach - - Human life value approach (HLVA) Human life value approach is determined by the loss of income that would result with the death of the insured, after making adjustments for expenses, inflation, etc. When an employer offers to give an employee a wage increase in the amount of the premium on a new life insurance policy, this is called - Key person policy - Fraternal association - Aleatory contract - Executive bonus - - Executive bonus When an employer offers to give an employee a wage increase in the amount of the premium on a new life insurance policy, this is called an executive bonus. A producer must do all of the following when delivering a new policy to the insured EXCEPT: - Explain the policy provisions, riders, and exclusions - Collect any premium due - Explain the rating procedures if the policy is rated differently than applied for - Disclose commissions earned from the sale of the policy - - Disclose commissions earned from the sale of the policy. A producer must explain policy provisions, exclusions, and riders at the time of delivery, as well as the rating procedures, especially if the policy is rated differently than applied for. The producer must also collect any due premium and have the insured sign the statement of continued good health. All of the following are factors that an underwriter could use to select and classify risk EXCEPT - Occupation - Avocation - National origin - Morals - - National origin The company will discriminate in favor of good risks and not of poor risks; however, it cannot discriminate unfairly by using factors such as race or national origin in their underwriting. A producer is helping a married couple determine the financial needs of their children in the event one or both should die prematurely. This is a personal use of life insurance known as - Survivorship insurance - Juvenile protection provision - Survivor protection - Life planning - - Survivor protection Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. This is known as survivor protection. Which of the following statements concerning buy-sell agreements is true? - Premiums paid are deductible as a business expense. - Benefits received are considered income taxable. - Buy-sell agreements pay in the event of a medical emergency. - Buy-sell agreements are normally funded with a life insurance policy. - - Buy-sell agreements are normally funded with a life insurance policy. A buy-sell agreement is simply a contract that establishes what will be done with a business in the event that an owner dies. Buy-sell agreements are normally funded with a life insurance policy. Which of the following is a generic consumer publication that explains life insurance in general terms in order to assist the applicant in the decision-making process? - Policy Summary - Illustrations - Buyer's Guide - Insurance Index - - Buyer's Guide The Buyer's Guide is a consumer publication that explains life insurance in general terms in order to assist the applicant in the decision-making process. It is a generic guide that does not address the specific policy of the insurer, instead explaining life insurance in a way that the average consumer can understand. Which of the following statements regarding HIV testing for live insurance purposes is NOT true? - Positive test results will be forwarded to the state's Department of Health if a physician is not selected by the applicant. - The testing practices must meet the criteria of the U.S. Department of Health and Human Services. - HIV testing is regulated at the state level. - Insurers are barred from requesting HIV testing. - - Insurers are barred from requesting HIV testing. It is common for insurers to require HIV testing when an applicant seeks a policy with a large face amount. The insurer must abide by a variety of rules created by its respective state. Which of the following is NOT an example of a valid insurable interest? - Business partners in each other's lives - Employer in key employee's life - Child in parents' lives - Debtor in the life of the creditor - - Debtor in the life of the creditor The three recognized areas in which insurable interest exists are as follows: a policyowner insuring their own life, the life of a family member (relative or spouse), or the life of a business partner, key employee, or someone who has a financial obligation to the policyowner. A debtor does not have an insurable interest in the creditor. The term "illustration" in a life insurance policy refers to - A depiction of policy benefits and guarantees. - Pictures accompanying a policy. - Charts and graphs. - A presentation of nonguaranteed elements of a policy. - - A presentation of nonguaranteed elements of a policy. The term "illustration" means a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years. Which of the following types or risk will result in the highest premium? - Substandard risk - Standard risk - Preferred risk - All risks pay equal premiums - - Substandard Risk The "substandard" rating indicates that an individual represents an under-average insurance risk because of physical condition, personal or family history of disease, occupation, habits or hobbies. This rating incurs the highest premium if policy is issued. An insurer receives a report regarding a potential insured that includes the insured's financial status, hobbies and habits. What type of a report is that? - Underwriter's Report - Inspection Report - Medical Information Bureau's report - Agent's Report - - Inspection Report Inspection reports cover moral and financial information regarding a potential insured, usually supplied by private investigators and credit agencies. Companies that use inspection reports are subject to the rules outlined in the Fair Credit Reporting Act. What is the purpose of key person insurance? - To provide health insurance to the families of key employees - To insure retirement benefits are available to all key employees - To maintain an account that insures the owner of a company remains solvent - To lessen the risk of financial loss because of the death of a key employee - - To lessen the risk of financial loss because of the death of a key employee A business can suffer a financial loss because of the premature death of a key employee that has specialized knowledge, skills or business contacts. A business can lessen the risk of such loss by the use of key person insurance. All of the following are personal uses of life insurance EXCEPT: - Cash accumulation - Buy-sell agreement - Survivor protection - Estate creation - - Buy-sell agreement. Personal uses of life insurance include survivor protection, estate creation and conservation, cash accumulation, and liquidity. A buy-sell agreement is for business uses of life insurance. Which of the following will be included in a policy summary? - Copies of illustrations and application - Comparisons with similar policies - Primary and secondary beneficiary designations - Premium amounts and surrender values - - Premium amounts and surrender values A policy summary must be delivered along with the policy and will provide the producer's name and address, the insurance company's home office address, the generic name of the policy issued, and premium, cash value, surrender value and death benefit figures for specific policy years. Why should the producer personally deliver the policy when the first premium has already been paid? - To ensure the producer gets paid commission - To find out how the family has been doing since the initial presentation - To make sure the policy is not stolen or lost - To help the insured understand all aspects of the contract - - To help the insured understand all aspects of the contract It is the producer's responsibility to make sure that the policy is understood by the insured and all of their questions are satisfied, and the delivery receipt is signed. Which of the following statements is correct about a standard risk classification in the same age group and with similar lifestyles? - Standard risk pays a higher premium than a substandard risk. - Standard risk requires extra rating. - Standard risk is also known as high exposure risk. - Standard risk is representative of the majority of people. - - Standard risk is representative of the majority of people. Standard risks are representative of the majority of people in their age and with similar lifestyles. They are the average risk. All of the following statements concerning the use of life insurance as an Executive Bonus are correct EXCEPT: - The policy is owned by the company. - Any type of insurance policy may be used. - The employer pays a bonus to a selected employee to fund the policy. - It is considered a nonqualified employee benefit. - - The policy is owned by the company. The policy is owned by the employee. When J. applied for a life insurance policy, the agent informed him that a medical exam would be required. The exam may be completed by - A physician of the applicant's choice and at his expense. - A home office underwriter. - A paramedic or examining physician at the insurer's expense. - The agent. - - A paramedic or examining physician at the insurer's expense. The applicant may be allowed to select the physician or paramedic facility to perform the examination. The insurer pays the cost of such an examination. Partners in a business enter into a buy-sell agreement to purchase life insurance, which states that should one of them die prematurely, the other would be financially able to buy the interest of the deceased partner. What type of insurance policy may be used to fund this agreement? - Term insurance only - Permanent insurance only - Universal life insurance only - Any form of life insurance - - Any form of life insurance Any form of Life insurance may be used to fund a buy-sell agreement. All of the following are duties and responsibilities of producers at the time of the application EXCEPT: - Check to make sure that there are no unanswered questions on the application. - Change any incorrect statement on the application by personally initialing next to the corrected statement. - Explain the nature and type of any receipt the producer is giving to the applicant. - Probe beyond the stated questions if the producer feels the applicant is misrepresenting or concealing information. - - Change any incorrect statement on the application by personally initialing next to the corrected statement.