Life Insurance Review Class Chapter 1
Purpose of Life Insurance
1. What do life insurance policies guaranty? A specified sum of __________ upon death of the person who is
insured.
2. What is the true significance of insurance? To substitute future economic uncertainty for certainty and to
replace the unknown with a sense of ________________.
3. What does an annuity provide? A stream of income by making a series of payments to the ______________
for a specified period of time or for his lifetime.
4. What is risk pooling or loss sharing? Spreading a _______ over a large group of people, by substituting a
small certain cost for a large unknown risk (economic risk of dying).
5. What do we call the predicting the approximate number of deaths or the likelihood of disability that will
occur among a certain group during a certain period? Law of _________ Numbers.
6. What is the definition of RISK? Uncertainty regarding _________________ loss.
7. List the 2 types of Risks? 1. Pure 2. Speculative.
8. What is the difference between the 2 types of risk? Speculative involves both the chance of loss or _______
(Race Track, or stock market investing). Pure risk has only the chance of loss (Life & Health Insurance).
9. Which kind of risk is insurable? ________ risk.
10. Is it correct to state that all pure risks are insurable? No, certain __________________ or elements must be
evident before a pure risk can be insured.
11. What is a Peril? The immediate specific _________ that causes a loss.
12. What gives rise to a Peril? A __________.
13. For the purpose of Life and Health insurance there are 3 basic types of Hazards:
A). Physical - blind, family traits
B). _________ - stealing, smoking (drinking, drugs, dishonesty), habit that increases the probability of loss
C). Morale - jay walking, careless - temporary state of mind – the attitude or state of mind (It’s insured so
why worry).
14. What kind of hazard is it when an employee takes merchandise without paying for it? ___________.
15. What kind of hazard is it when you are late for an appointment? Reckless driving? ____________
16. List and describe the 4 options to treat risk?
1. Avoidance (don’t fly)
2. Reduction (smoke alarm, not smoking)
3. Retention (self insured)
4. T__________________ (buys insurance)
17. Listed below are the 6 elements of insurable risk that make pure risk insurable, & their meanings?
Remember this phase: Cannot goes with Catastrophic everything else MUST BE when it comes to
insurable risk.
1. LOSS MUST BE due to chance – fortuitous: beyond our control.
2. LOSS MUST BE definite and measurable – who, what, when, why and where. (Death certificate)
3. LOSS MUST BE predictable – Statistically predictable
4. LOSS ____________ be a ________________________ - Trillion dollar policy
5. LOSS exposure to be insured MUST BE large – based on the law of large numbers
6. LOSS exposure MUST BE randomly selected – fair proportion of good and poor risks
18. Adverse Selection - Less favorable insurance risks (such as people in poor health) to seek or continue
insurance to a greater extent than people in good health.
Known Test Questions & Concepts – Chapter 1
1.
Which of the following insurance concepts is founded on the ability to predict the approximate number of
deaths or frequency of disabilities within a certain group during a specific time?
A.
B.
C.
D.
2.
Principle of large loss
Quantum insurance principle
Indemnity law
Law of large numbers
In the insurance business, risk can best be defined as:
A. sharing the possibility of a loss
B. uncertainty regarding the future
C. uncertainty regarding financial loss
D. uncertainty regarding when death will occur
3.
Which of the following risks is insurable?
A.
B.
C.
D.
4.
Pure risks
Gambling
Speculative risks
Investing
Tom buys his wife Mary a $50,000 diamond ring. When she is not wearing the ring, she keeps it in a safe
deposit box at a local bank. This is an example of risk:
A. avoidance
B. reduction
C. retention
D. transference
5.
Buying insurance is one of the most effective ways of:
A. avoiding risk
B. transferring risk
C. reducing risk
D. retaining risk
6.
Which of the following statements does NOT describe an element of an insurable risk?
A. The loss must not be due to chance.
B. The loss must be definite and measurable.
C. The loss cannot be catastrophic.
D. The loss exposures to be insured must be large.
7.
Law of Large Numbers: Prediction of the approximate number of deaths or the likelihood of disability that
will occur among a certain group during a certain period
8.
Speculative risk: involves both the chance of loss or gain
9.
Pure risk: involves only the chance of loss or remaining the same
10.
Peril: The immediate specific event that causes a loss
11.
Risk-retention: self-insured
12.
What are the main factors that determine a life insurance premium? Mortality; interest; expense
Answers to 1-6
1. D
2. C
3. A
4. B
5. B
6. A
Life Insurance Review Class Chapter 2
The Insurance Industry
14. What kind of insurance companies write more than one line of insurance? Multi-line.
15. Name the two types of Life Insurance Companies and how they are different?
1. __________ Insurers – Purpose is to produce a profit for its Stockholders. When declared stock dividends
are paid to stockholders. (STOCK DIVIDENDS)
2. ____________ Insurers – Have NO stockholders instead the owners are the policyholders. You have the
right to vote on the board of directors, issue participating policies that pay ____________ dividends.
16. In a Mutual Company, what is a policy dividend? ____________ of overpayment- Extra expense.
17. How are dividends created? “Divisible Surplus” (Divided/Profits).
18. What is the only thing that differs between a Participating (PAR) and a Non-participating (NON-PAR) Policy,
if all option and riders are alike? PAR policies have a slightly ____________ premium to cover unexpected
contingencies.
19. What are the (5) Dividend Options?
1. C______
2. Reduce your Premiums
3. Accumulate at Interest
4. Purchase Paid-Up Additions
5. O____ Year Term (aka – 5th DIVIDEND OPTION)
20. Which dividend option was developed to accommodate the Split Dollar Plan? ______ Dividend Option –
Sharing of cost between the Employer & Employees. The employer buys as much one year term with the
dividend and the Employee pays for the remainder Whole Life premium cost.
21. What is a company called that helps an insurance company transfer a portion of its risk?
____________________.
22. What kind of insurance company is non-profit and has a lodge system? Fraternal Benefit Society.
23. What is another name for Home Service? Debit Insurer/Industrial Insurance.
24. What is the insurance called that is sold by a Home Service Insurer? ____________________.
25. Describe the features of Industrial insurance? Small issue face amount, premiums collected weekly, at
insured’s home.
26. What is the primary function of a Career Agency? Recruit, __________, and Supervise.
27. What is the primary function of a Personal Producing General Agency (PPGA)? Sell insurance.
28. What does direct selling in insurance mean? No agents or brokers involved.
29. Give an example of direct selling? Vending ________________ at the airports.
30. How is insurance mass marketed? TV, radio, newspapers, internet etc. (Marketed means advertised, not
sold)
31. Does the Federal Government or the State regulate the insurance industry? State.
32. What is the name of the law made it clear that continued regulations of insurance by states was in the
public’s best interest? McCarran ________________ Act.
33. How does the Fair Credit Reporting Act protect the public? Rights to ______________, through fair and
accurate reporting of information. From an insurer’s position, they must furnish the consumer with the
name of the reporting agency if information was used to deny or rate coverage.
34. What does Domestic Insurer mean? A company doing business in the state in which it is incorporated.
35. What does Foreign Insurer mean? Company licensed to do business in state in which it is not incorporated.
36. What does Alien Insurer mean? Companies incorporated in a country ______________ the U.S.
37. If a company is licensed in the state where it is incorporated, does it need to be licensed in the states
where it does business? ______.
38. Who issues licenses in Florida? Department of _________________ Services.
39. Agents must complete how many hours of continuing education every 2 years? ____ hours.
40. How many of the 24 hours must be devoted to Ethics? __ Hours.
41. What is twisting? Act of persuading a policy owner to drop and/or replace an existing policy by
misrepresenting the terms or conditions of another.
42. What does misrepresentation mean? False and ____________________ statements.
43. What is replacement and when can it be done? Convincing a policyholder to __________, terminate, or
seriously alter an existing policy and purchase another. Must include full and fair disclosure, and notice to
both existing and replacing company.
44. What is rebating and when can it be done? Giving cash or anything of significant value in exchange for
purchasing a policy, it is an “illegal ____________________”. In Florida, rebating is allowed, but only under
very stringent rules.
45. What does NAIC stand for? National Association of __________________ Commissioners - They encourage
uniformity in state insurance laws and regulations, and support continued state regulation of insurance
matters.
46. How does the Unfair Trade Practices Act protect the public? This act gives Chief Financial Officer the power
to investigate insurance companies and producers, to issue Cease and Desist orders, and to impose penalties
or violations up to $____________.
47. Rating Services demonstrates the financial strength and stability of insurance companies such as: A.M
Best, Standard & Poor’s and Moody and Fitch.
48. If an adjustable interest rate is charged on a policy loan, what determines the limit that can be charged?
Moody’s corporate ________ index. Not Moody and Fitch.
49. What is the maximum percentage rate that can be charged on a fixed rate loan? 10%.
Known Test Questions & Concepts – Chapter 2
1.
Which of the following insurance companies is owned by its policyholders?
A.
B.
C.
D.
2.
Service insurer
Stock insurer
Reinsurer
Mutual insurer
A reinsurer is a company that
A. accepts all the risk from another insurer
B. assumes a portion of the risk from another insurer
C. cedes the risk
D. does not take any risk
3.
An insurance company organized and headquartered in Florida can be described as what type of company in
Florida?
A. Alien
B. Home-based
C. Foreign
D. Domestic
4.
A life insurance company organized in Illinois, with its home office in Philadelphia, is licensed to conduct
business in Florida. In Florida, this company is classified as a(n)
A. domestic company
B. alien company
C. foreign company
D. regional company
5.
Risk-pooling: spreading a risk over a large number of people by substituting a small certain cost ($10) for a
large unknown risk economic risk of dying).
6.
Spendthrift Clause: Protects the proceeds of life insurance death benefits from being attacked by creditors.
7.
Stock insurers = stockholders; mutual insurers = policyholders.
8.
In a mutual company, what is a policy dividend? Refund of extra premiums paid.
9.
Reinsurer: A company that helps an insurance company transfer a portion of its risk.
10.
Foreign insurer: Company licensed to do business in a state in which it is not incorporated (written in the
form of an example).
11.
Unfair claims practice by the insurer: signing the insured’s initials… 394-395.
Answers to (1-4)
1. D
2. B
3. D
4. C
Life Insurance Review Class Chapter 3
Law and the Insurance Contract
1. Name and describe the elements needed for contracts to be legally valid and binding?
O & A - Offer an ____________________
C - Consideration (Initial Premium $ & application)
L - Legal Purpose (contract for murder not legal) Life Insurance contract
C - __________________ Parties
2. Name the 3 groups of people who are not competent to enter a legal contract.
A) Minors
B) ________________ impaired
C) Under the influence of alcohol or drugs
3. What does Consideration mean? Initial ______________ with application.
4. What is it called when the values exchanged are not equal? Aleatory $600 premium / $100,000 Protection.
5. What is it called when only one party prepares the contract? ________________-insurance company writes
contract.
6. What is it called when only one party makes enforceable promises? ___________________ - insurance
company makes or pledges anything.
7. What is it called when benefits will be paid if certain conditions happen? Conditional - Promise to pay
benefits is dependent on the occurrence of the risk insured - If and Then.
8. What kind of contract pays a stated amount in the event of loss? ____________- Life Insurance - Face
Amount.
9. What kind of contract only reimburses or pays the amount of loss? Indemnity (Health Insurance).
10. What is it called when both parties are trusted to reveal relevant facts? Utmost Good __________.
11. What is it called when information is guaranteed to be true? Warranty.
12. What is it called when information is believed to be true? ____________________________ (statements
made by the client on the application in relationship to his health).
13. What is it called when an applicant fails to disclose known material facts? Concealment.
14. When must insurable interest exist? At __________________ of the policy – signing of application.
15. Who could have insurable interest in another person’s life? Spouse, parent, child, business _____________.
16. What kind of authority is granted by means of the agent’s contract? Expressed.
17. What kind of authority not expressly granted but which the agent is assumed to have authority in order to
transact business? ______________ - business cards.
18. What kind of authority is the appearance of, the assumption of, because of the circumstances the principal
created? Apparent.
19. What is a person called who holds a position of special trust and confidence? _________________.
20. What is it called when you voluntarily give up of a legal, given right? Waiver.
21. What is it called when you are denied the right to enforce a legal right that you have previously given up?
________________: AKA - The Loss of Defense.
22. Explain the difference between a void and voidable contract? Void has no __________ effect. Voidable - is
binding unless rejected by the party that has the right to do so. Ceases paying premiums.
23. What is it called when someone deliberately conceals or misrepresents a material truth on an application?
__________.
24. How long can an insurance company challenge the validity of statements made on a policy? ______ years
AKA- Incontestable Clause.
25. Is misstating ones age included in the incontestable time period? No.
Known Test Questions & Concepts – Chapter 3
1.
Which of the following legal terms indicates that a life insurance contract contains the enforceable promise
of only one party?
A.
B.
C.
D.
2.
Adhesion
Unilateral
Conditional
Aleatory
“An insurance contract is prepared by one party, the insurer, rather than by negotiation between the
contracting parties.” Which of the following statements explains this characteristic of insurance contracts?
A. The insurance contract is an aleatory contract.
B. The insurance contract is a contract of acceptance.
C. The insurance contract is a contract of adhesion.
D. The insurance contract names only the insurer as the competent party.
3.
All statements made by an applicant in an application for life insurance are considered to be?
A.
B.
C.
D.
4.
warranties
affirmations
representations
declarations
Which of the following statements regarding insurable interest is NOT correct?
A. Insurable interest exists when the applicant is the insured.
B. A policy obtained by a person without an insurable interest in the insured can be enforced.
C. The applicant must be subject to loss upon the death, illness or disability of the insured.
D. Generally, the person to be insured must give his or her consent before a policy is issued, even if the
applicant has an insurable interest.
5.
Which of the following statements describes an insurable interest?
A. The policy owner must expect to benefit from the insured’s death.
B. The policy owner must expect to suffer a loss when the insured dies or becomes disabled.
C. The beneficiary, by definition, has an insurable interest in the insured.
D. The insured must have a personal or business relationship with the beneficiary.
6.
7.
With life and health contracts, when must an insurable interest exist?
A. After the policy is issued
B. Before the beneficiary is named
C. While the policy is in force
D. At the inception of the policy
The authority that an insurer gives to its agent by means of the agent’s contract is known as?
A. implied authority
B. express authority
C. fiduciary responsibility
D. general authority
8.
Which of the following terms is used for the voluntary relinquishment of a known right?
A.
B.
C.
D.
9.
An insurance company has how many years to challenge the validity of a life insurance contract?
A.
B.
C.
D.
10.
Estoppel
Adhesion
Waiver
Unilateral
One
Two
Three
Four
Bob and Tom enter into a contract in which Bob agrees to fraudulently induce sick people to sell their
insurance contracts to Tom’s company. Bob and Tom’s contract can best be described as?
A.
B.
C.
D.
void
competitive
voidable
conditional
11. What does consideration mean? Initial premium with application.
12. Aleatory: values exchanged are not equal.
13. Adhesion: one party prepares the contract.
14. Unilateral: one party makes enforceable promises.
15. Specific features of an insurance contract: Aleatory; adhesion; unilateral; conditional.
16. Utmost Good Faith: both parties are trusted to reveal relevant facts.
17. Representation: information is believed to be true (statements made by the client on the application in
relationship to their health).
18. Concealment: When an applicant fails to disclose known material facts.
19. What kind of authority is granted by means of the agent’s contract? Expressed Authority.
20. Characteristics of a contract: Aleatory; unilateral; conditional; NOT estoppels.
Answers to (1-10)
1=D, 2=C, 3=C, 4=B, 5=B, 6=D, 7=B, 8=C, 9=B, 10=A
Life Insurance Review Class Chapter 5
Life Insurance Policies
50. Name and describe the 3 basic kinds of life insurance?
A. Ordinary – there are two types: 1. Term (Temporary), 2. Permanent: whole life, endowment, universal
life, variable universal life, & other interest-sensitive cash value policies.
B. Industrial – less than 1% of all policies on the market.
C. Group – (covered in detail in another chapter).
51. What is another name for term insurance? Temporary. It provides insurance only for a specified ________ &
pays only if the insured dies during that period. (Ex. 10, 15, 20, 25, 30 or 35 years, or term to age 65).
52. The three basic kinds of term insurance are:
1. Level Term – premium and coverage (face amount) that stays level for a certain period of time.
Premium
Coverage
2. Decreasing Term – May be called mortgage insurance or credit life insurance. Premiums stay level but
your coverage (face amount) gradually ________________ over a period of time.
Premium
Coverage
3. Increasing Term – face amount (coverage) increases for the term. Usually a rider on a policy called COLA
(Cost Of Living Adjustment). Most often tied to some type of permanent insurance and the Cost of Living
Index or CPI (Consumer Price Index).
Coverage
Premium
53. What does option to renew mean? Tied only to term insurance. Being able to renew for another term for
same _______ amount, without proof of ___________________.
54. What does option to convert mean? Being able to convert to __________ life without proof of insurability.
Conversion usually takes place within 3 to 5 years before the term policy is scheduled to end.
55. What is it called when the premium increases to reflect an older age when renewing a policy? Step-_______.
56. What is another name for whole life insurance? ___________________ (to age 100) or Cash Value
Insurance (savings).
57. What is the main difference between term insurance and whole life? Cash value and Maturity at age _____.
$50,000
Straight Whole Life
$50,000
Face Amount
$600 = Premium
$30,000
00
Age
25
(Savings Guarantee %)
Cash Value
65
100
***Cash Value Insurance: During the exam all insurance questions are assumed to be cash value whole life
policies unless stated otherwise.
58. What determines the amount of a policy’s cash value?
A. Face Amount
B. ______________
C. How long the policy has been in force
59. When does a whole life insurance policy mature? At age ______. By actuarial assumption every insured is
presumed to be dead by age 100.
60. Six features of permanent life insurance policies:
1. Straight Whole Life – Permanent level protection and level premiums until death/age 100.
2. 20-Pay Whole Life - premium is only paid for ____ years but death coverage extends until death/100.
3. Life Paid to 65 – premiums paid only to ____, but death coverage extends until death/100.
4. Single Premium Whole Life - one time only, lump sum premium paid coverage extends until death/100.
5. Modified Whole Life - lower payment in first years (usually 5 years) then ____________ than typical
thereafter until death/100. What product was designed for someone with limited financial resources
today, but has a promise of improved position in the future? ________________ Whole Life.
6. Graded Premium Whole Life - premiums are lower than typical whole life rates during the preliminary
period following issue (5-10 years) and increase each year until leveling off until death/100.
61. Describe an Endowment Policy - Endows at specified date - death benefits go to the beneficiary if the
insured dies within the specified period or it pays a living benefit to the policy owner if the insured is alive at
the end of the endowment period. It is the most ___________________ type of policy that was ever sold.
They are no longer sold. IRS stepped in and eliminated them by closing the favorable tax loophole.
62. What government designation, for tax purposes, is given to a life policy if deemed to be mostly savings and
doesn’t pass the 7-pay test? Modified __________________ Contract (MEC).
63. How do you avoid becoming classified as an MEC? You meet the 7-pay ________.
64. Describe the features of a Family Plan Policy. All family members are covered under one policy. The
breadwinner has whole life; spouse & children are covered with term.
65. Describe the difference between a Joint Life Policy and a Joint and Last Survivor Policy – Joint Life covers 2
people, pay death benefit when the __________ one dies – Joint & last survivor covers 2 people, pays a
death benefit only when ____________ insured dies (AKA - second to die policy). Usually purchased to cover
estate taxes. These are types of life insurance policies, not annuities, which we will discuss in a later
chapter.
66. Juvenile Policies can be written up to what age? 14 or 15.
67. What is the provision found in a Juvenile policy that in the event of the death or disability of the
adult, the premium payer will waive premiums until age 25 known as? Payer ________________.
68. A jumping Juvenile policy allows the young adult to convert his original face amount to how many times
higher? 5 times the original amount at age 21.
69. What is Credit Life Insurance? Covers life of debtor for amount of a loan AKA – Decreasing Term.
70. Adjustable life is known for its flexibility as objectives change because it combines what two kinds of plans
into a single plan? Whole life & ________. Can adjust the 1. Premiums, 2. Face amount, 3. Amount of each
kind of insurance.
71. What is the primary difference between whole life and Universal life? Flexibility. Remember, if you see
flexibility on the test, the answer is Universal Life.
72. What are the 3 things can be adjusted on a Universal Life policy without needing a new policy?
A) Face amount
B) ______________ amount
C) Frequency of payment
73. How does the cash value grow in a UL policy? Credited with Minimum Guaranteed percentage or Current
Rates determined by the Company.
74. In Universal Life what kind of insurance is deducted monthly? ART (Annual Renewable Term) or YRT (Yearly
Renewable Term).
75. Do Universal Life policies have a loan value? Yes, loans and partial withdrawals are permitted.
76. What happens if the cash account is not large enough to support the monthly mortality and expense
deductions in a Universal Life policy? Policy ___________________.
77. What kind of insurance has a corridor? Universal life Option I.
78. Describe the death benefit in Universal Life - Option I policy? Death benefit equals increasing cash values
plus decreasing term. As cash value approaches the face amount before policy matures, an additional
amount of insurance, called the corridor is maintained.
79. Describe the death benefit of a Universal Life - Option II policy? Death benefit equals level term + increasing
cash value (no need for a corridor since always more insurance than cash)
80. List difference between Whole Life and Variable Whole Life? Variable Life has Separate accounts
maintained for savings; agents need a Life including Variable Annuity License along with an FINRA registered
representative security license. Variable Life has a better potential for gain since the cash values may be in
equities = stocks & bonds, the policyholder assumes the investment risk. Policy owner must be given a
______________________ either preceding or accompanying the sale.
81. In Whole Life, the cash values grow according to a table, the savings are guaranteed at a minimum return in
the general account of the insurance company; the insurer bears the risk.
82. What license must a life insurance agent have to sell Variable life or Variable Universal life? A FINRA
Registered Representative Securities license and a Florida Life including a Variable Annuities license.
83. How does a VUL (Variable Universal Life) policy work? Works like a UL (Universal Life) except cash values
grow like VL (Variable Life) in separate accounts in equities.
Known Test Questions & Concepts – Chapter 5
1.
Which of the following terms best describes a life insurance policy that provides a straight $100,000 of
coverage for a period of five years?
A. Permanent level
B. Whole term
C. Level term
D. Variable term
2.
All of the following statements about term insurance are correct EXCEPT?
A. it pays a benefit only if the insured dies during a specified period
B. level, decreasing and increasing are basic forms of term insurance
C. cash values build during the specified period
D. it provides protection for a temporary period of time
3.
The cash values of life insurance policies belong to which of the following?
A. Policy owner
B. Insured
C. Insurer
D. Beneficiary
4
At what point does a whole life policy mature or endow?
A. When the policy’s cash value equals the face amount
B. When premiums paid equal the policy’s face amount
C. When premiums paid equal the policy’s cash value
D. When the policy’s cash value equals the loan amount
5.
Jane, age 35, has just purchased a 20-pay whole life policy. When she turns 55, she will?
A.
B.
C.
D.
6.
receive the policy’s face amount benefit
have a fully matured policy
cease paying premiums
no longer be covered by the policy
All of the following statements regarding basic forms of whole life insurance are correct EXCEPT?
A. generally, straight life premiums are payable, at least annually, for the duration of the insured’s life
B. the owner of a 30-pay life policy will owe no more premiums after the 30th year the policy is in force
C. limited payment life provides protection only for the years during which premiums are paid
D. a single-premium life policy is purchased with a large one-time only premium
7.
Which of the following statements describing whole life insurance is CORRECT?
A.
B.
C.
D.
8.
The face amount of the policy gradually increases the longer the policy remains in force.
The shorter the premium period, the slower the cash value will grow.
Whole life insurance is designed to mature at age 100.
The policy’s cash value decreases each year the policy is in force.
A policy covering two lives that only pays a death benefit when the second insured person dies is a?
A. joint life policy
B. family policy
C. double indemnity policy
D. joint and last survivor policy
9.
All of the following statements about variable insurance policies are correct EXCEPT?
A.
B.
C.
D.
Sales presentations must be preceded or accompanied by a prospectus
State laws protect consumers and promote meaningful communication
Materials used in selling variable policies must be approved by the state Office of Insurance Regulation
Full and fair disclosure must be provided to prospective policy owners
10.
Adjustable life combines what two kinds of plans into a single plan? Whole life and term.
11.
Which of the following can be adjusted on a Universal Life policy without needing a new policy? Face
amount; payment amount; frequency of payment (EXCEPT)
12.
What kind of insurance has a corridor? Universal Life – Option 1
13.
Variable life has a better potential for gain since the cash values may be in: equities (stocks and bonds)
Answers to (1-9) 1=C, 2=C, 3=A, 4=B, 5=C, 6=C, 7=C, 8=D, 9=C
Life Insurance Review Class Chapter 6
Policy Provisions, Options & Riders
84. Where is the entire contract provision found? At the _______________ of the policy.
85. What does the entire contract provision mean? Cover to cover which includes policy document, attached
riders, and the ___________________ if attached.
86. How does the entire contract provision protect the insured? The insurer (Insurance Company) cannot add
or change any part of the policy after ______________ unless they are making it better for the client.
87. Where is the insuring clause found in a policy? On the __________ of the policy. (do not confuse with entire
contract provision)
88. What does the insuring clause promise the insured? To pay the _________________ at death or at age 100.
89. What does the free look provision provide? A chance for the insured to ___________ the policy without
forfeiting his money.
90. How long is the free look period? ____ days. Was 10 days is now 14. When does the free look period begin?
At ______________ delivery: hand it to the client with a signed receipt (not constructive delivery).
91. To what does the consideration clause refer? Amount and frequency of the _____________.
92. How long is the grace period? Ordinary insurance is ___ days. Industrial (debit) insurance is ___ weeks or 28
days.
93. What is the grace period for persons over age 64? ___ days with notice to be sent to a secondary addressee.
94. What 4 things may have to be done before a lapsed policy will be reinstated? (3 pay, 1 proof)
A. Pay all premiums due up to date
B. Pay back outstanding ________
C. Pay all interest due
D. Proof of ___________________
95. Generally, how long is the incontestable period? ___ years.
96. What are the 3 situations in which the incontestable period (2 years) does not apply?
(Legal contract does not exist)
A. Impersonation
B. No Insurable interest
C. Intent to murder
97. What is it called when a policy owner transfers one or all of his rights of ownership of his policy?
Assignment.
98. Must the insurance company be notified when a policy is assigned? Yes, but _____________ is not needed.
99. Does insurable interest have to exist to ____________ a policy? No. you own it and can give away to anyone.
100.
What is it called when the assignee receives full control of the policy? ______________ assignment.
101.
What is it called when the policy proceeds are assigned to a creditor? _____________ or partial
assignment.
102.
Once the debt is repaid, does the policy owner regain the policy’s benefits? Yes
103.
What does the beneficiary get if an insured commits suicide during the first 2 years of the policy?
Refund of all ______________ paid.
104.
What is the provision or rider called that allows for an early payment of a portion of the death
benefit to be paid to an insured that is terminally or chronically ill? __________________ Benefit.
105.
If a policy owner misstates his age, will the company be able to do anything about it after the
contestable period expires? Yes. What? Adjust ______________ to reflect the correct age. Could be an
increase or decrease in benefits.
106.
What does an (APL) automatic premium loan provision provide? Insurer can pay the insured’s
premiums from the ________ values (protects the insurance company). Treated as a loan.
107.
What are the most common exclusions the company won’t pay if found in life insurance policies?
(look for an “except” question on state exam)
A. Suicide
B. _______
C. Aviation
D. Commission of a felony
108.
To what does the term non-forfeiture value refer? The cash value is not _______________ if policy
lapses.
109.
What options are available to the policy owner if they can no longer make the payments but have
some cash value in the policy? 3 non-forfeiture options: REC
A. Reduced paid-up (small amount of insurance for life)
B. Extended term (same face amount for as long as cash values will purchase)
C. Cash surrender
110.
When are there cash values in a policy? Ordinary insurance: 3 years. Industrial or debit insurance: 5
years.
111.
What does participating mean? The policy pays ________________.
112.
Are dividends taxable? No. Why? Because dividends are a refund of premium, not a profit. Therefore
you are not taxed.
113.
Is the interest earned on the dividends taxable? Yes. If the dividends are left with the insurance
company to accumulate, the ____________ is taxable. The _____________ is not taxable.
114.
What are the 5 options a policy owner has to use their dividends?
CRAPO
1. Cash
2. Reduce premiums
3. Accumulate interest (if dividends are left with the insurance company)
4. Paid-up additions (a very small policy good for life, no future payment is necessary)
5. One year term (as much as the dividend will buy for one year)
115.
Which is the option referred to as the fifth dividend option? One _______ term.
116.
What is the difference between a provision and a rider? A provision is part of the _______ policy; a
rider is in _____________ to the main policy and there is frequently an additional charge.
117.
What is the rider called that allows the insured to periodically buy additional amounts of insurance
without proof of insurability? Guaranteed ____________________ Rider.
118.
In the guaranteed insurability rider what age must the insured be for the rider to be in effect? 25-40.
119.
What is the rider called that prevents a policy from lapsing because the insured becomes disabled?
Waiver of _____________ rider.
120.
How long is the waiting period before the rider becomes effective? 3 months–6 months (90-180
days).
121.
How long does the waiver of premium rider remain in effect? A specified age-60-65.
122.
How long will the company waive the premiums? Until the disabled insured recovers, if disabled
before 65 and never recovers, paid for ________.
123.
What is the rider called when the owner dies, the child’s premiums are waived until they reach age
25? Payor ________________ Rider (only found in Juvenile Insurance & you will see this on the test).
124.
How must a person die for his beneficiary to receive double indemnity? By _______________.
125.
In what period of time must the death occur to receive double indemnity? ____ days after the
accident or die from complications.
126.
What is the rider called that guards against inflation? Cost of Living Adjustment (COLA), also known
as increasing term.
127.
What rider can be used to have more than one family member insured? Other ______________
rider (covers spouse or child rider).
Known Test Questions & Concepts – Chapter 6
1.
Which provision of a life insurance policy states that the application is part of the contract?
A. Consideration clause
B. Insuring clause
C. Entire contract clause
D. Incontestable clause
2.
Which life insurance provision allows the policyholder to inspect and, if dissatisfied, to return the policy for a
full refund?
A. Waiver of premium
B. Facility of payments
C. Probationary period
D. Free look
3.
To what period would a 14-day free-look provision apply in Florida?
A. The first 14 days after the application has been signed by the applicant
B. The first 14 days after the application has been received by the insurer
C. The first 14 days after the policy has been issued by the insurer
D. The first 14 days after the issued policy has been received by the insured
4.
What constitutes “consideration” for a life insurance policy?
A.
B.
C.
D.
5.
Application and initial premium
Agent’s commission
Adhesion feature of the contract
Policy’s benefits
Which of the following is stated in the consideration clause of a life insurance policy?
A. Insured’s risk classification
B. Insured’s general health condition
C. Amount and frequency of premium payments
D. Benefits payable upon the insured’s death
6.
Which of the following allows 30 days during which premiums may be paid to keep policies in force?
A. Grace period
B. Reinstatement clause
C. Incontestable clause
D. Waiting period6
7.
Randy’s premium payment was due on June 1, but the company did not receive it until June 28. Which
policy provision kept Randy’s policy from lapsing?
A.
B.
C.
D.
8.
Reinstatement
Facility-of-payment
Grace period
Automatic premium loan
John stopped paying premiums on his permanent life insurance policy eight years ago though he never
surrendered it. He is still insurable and has no outstanding loan against the policy. The company probably will
decline to reinstate the policy because the time limit for reinstatement has expired. The limit usually is
A. six months
B. one year
C. two years
D. three years or as long as seven years
9.
Which of the following would NOT apply when a life insurance policy is reinstated after a lapse?
A.
B.
C.
D.
10.
All back premiums must be paid.
All outstanding loans must be pain.
A new contestable period goes into effect.
A new suicide exclusion period goes into effect.
In which of the following situations does the incontestable clause apply?
A. Impersonation of the applicant by another
B. No insurable interest
C. Intent to murder
D. Concealment of smoking
11.
Which of the following statements regarding the assignment of a life insurance policy is NOT correct?
A. Absolute assignment involves a complete transfer, giving the assignee full control over the policy.
B. Under a collateral assignment, a creditor is entitled to be reimbursed out of the policy’s proceeds only for
the amount of the outstanding credit balance.
C. Under a collateral assignment, policy proceeds in excess of the collateral amount pass to the insured’s
beneficiary.
D. All beneficiaries must expressly approve any assignments of life insurance policies.
12.
All of the following statements regarding assignment of a life insurance policy are correct EXCEPT
A.
B.
C.
D.
13.
To secure a loan, the policy can be transferred temporarily to the lender as security for the loan
The policy owner must obtain approval from the insurance company before a policy can be assigned
The life insurance company assumes no responsibility for the validity of an assignment
The life insurance company must be notified in writing by the policy owner of any assignment
Which of the following statement regarding policy assignments is CORRECT?
A. The policy owner must notify the insurer of the assignment and receive the insurer’s permission.
B. The procedure required for policy assignment is explained in the policy’s insuring clause.
C. A policy that has named an irrevocable beneficiary cannot be assigned without that beneficiary’s
agreement.
D. Insurable interest must exist between the insured and the assignee at the time of assignment.
14.
When a policy owner cannot exercise his or her rights of ownership without the policy beneficiary’s consent,
the beneficiary is designated
A. vested
B. contractual
C. irrevocable
D. primary
15.
An error in age is discovered after the death of an insured but before any policy death proceeds are
distributed. The insured was older than previously assumed. How would an insurance company handle such
a situation?
A. No adjustment would be made because the contestable period had passed.
B. The amount of death proceeds would be reduced to reflect the statistically diminished mortality risk.
C. The amount of death proceeds would be reduced to reflect whatever benefit the premium paid would
have purchased at the correct age.
D. The beneficiary would be required to pay all underpaid back premiums before the death benefit is
received.
16.
If error is discovered after an insured dies and the insured was younger than the insurance policy stated, the
insurance company will
A. reduce the death benefits
B. reduce premiums
C. waive the difference
D. increase the death benefits
17.
Jerry has just purchased a life insurance policy and is taking time to review the policy’s provisions. He will
find that his policy excludes death by all of the following means EXCEPT
A. suicide
B. accident
C. aviation
D. war
18.
All of the following are standard life insurance policy non-forfeiture options EXCEPT
A. cash surrender option
B. one-year term insurance option
C. extended term insurance option
D. reduced paid-up (permanent) insurance option
19.
Leland elects to surrender his whole life policy for a reduced paid-up policy. The cash value of his new policy
will
A. continue to increase
B. decrease gradually
C. remain the same as in the old policy
D. decrease by 50 percent immediately
20.
Which of the following factors determines whether policy dividends will be paid on a participating policy?
A. Reserves and experience
B. Expenses and claims costs
C. Interests and benefits
D. Premiums and renewability
21.
“If an insurance company determines that the insured is totally disabled, the policy owner is relieved of
paying the policy premiums as long as the disability continues.” This statement describes the
A. premium suspension clause
B. waiting period exemption
C. disability income rider
D. waiver of premium rider
22.
The rider that provides for a waiver of premiums on a juvenile policy if the adult payor dies or becomes
disabled is a
A. guaranteed insurability rider
B. payor rider
C. waiver of premium rider
D. automatic premium loan rider
23.
Where is the Entire Contract Provision found? At the beginning of the policy
24.
What does the Entire Contract Provision mean? Policy document, attached riders, and the application make
up the entire contract (EXCEPT)
25.
What has to be done before a lapsed policy will be reinstated? Pay all premiums due up to date, as well as
all interest due; pay back outstanding loans; new suicide clause; new incontestability period (EXCEPT)
26.
What does the (APL) Automatic Premium Loan provision provide? Insurer can pay insured’s premium from
cash value
27.
An exclusion that an insurance company won’t pay: death due to a felonious act (CORRECT)
28.
Which of the following are non-forfeiture options: reduced paid-up; extended term; cash surrender (EXCEPT)
29.
Dividends are not tax deductible. Why? Premiums are being refunded -- not a profit
30.
What options does a policy owner have to use their dividends? Reduced premiums; accumulate interest;
paid-up additions (EXCEPT)
31.
Waiver of Premium – remains in effect until specified age (60-65); when the provision expires, the policy
premium is reduced accordingly. If an insured becomes disabled prior to the specified age, all premiums
usually are waived while the disability continues – even those premiums falling due after the insured passes
the stipulated age. Even though premiums are waived, the death benefit remains the same, cash values
increase at their normal rate, and dividends for participating policies are paid as usual (123)
32.
Paid-up additions: Very small policies of the same kind of additional insurance purchased with dividends at
the insured’s attained age
33.
X applied for insurance, pay the premium, and needs to take a medical exam. X has a heart attack and dies
before the medical exam can occur. What would the insurer do? Pay no death benefit and return the first
premium payment
34.
X commits suicide 9 months into the contract, but paid ‘back premiums’ for three years. What would the
insurer do? Pay no death benefit and return all premiums paid
35.
If you lose your appointment status, after how many months do you have to ‘start from scratch’ as a ‘firsttimer’? 6; 12; 24; or 48
36.
Identify the phrasing of the Insuring Clause
37.
After the grade period ends, how would the policy still exist? Automatic Premium Loan
38.
When would a paid-up policy be worth more? Shorter premium period; longer premium period; endows at a
later date… The shorter the premium-paying period, the higher the premium… the shorter the premiumpaying period, the quicker the cash value grows because a greater percentage of each payment is credited to
the policy’s cash values
Answers to (1-22)
12. B
1. C
13. C
2. D
14. C
3. D
15. B
4. A
16. D
5. C
17. B
6. A
18. B
7. C
19. A
8. D
20. B
9. D
21. D
10. D
22. B
11. D
Life Insurance Review Class Chapter 7
Life Insurance Beneficiaries
1. Who decides the beneficiary for a life policy? Owner, (may or may not be the insured).
2. Are you considered to have an insurable interest in yourself? ______.
3. Between whom must insurable interest exist if the insured is not the applicant/policy owner?
Beneficiary and ______________.
4. What should one do to prevent their insurance proceeds from being in their estate? Name a
_____________________.
5. Name the 3 beneficiary designations in their proper order? Primary; __________________; Tertiary (both
the Secondary and the Tertiary are sometimes referred to as Contingents).
6. When does the 3rd designate receive proceeds from a life policy? When the Primary and Secondary die
before the insured dies.
7. Explain the difference between: Per Capita - proceeds divided between the living beneficiaries that are
named in the policy. Per Stripes - proceeds of deceased beneficiaries pass down through to their living
_________________.
8. Explain the difference between a revocable beneficiary and an irrevocable beneficiary?
Irrevocable means the policy owner ____________ be changed without the beneficiary’s consent. Revocable
means policy owner ______ change the beneficiary at anytime.
9. What can the policyholder not do if he has an irrevocable beneficiary unless the beneficiary agrees? Take
out a loan, __________________ the policy, or change the beneficiary.
10. Explain the Uniform Simultaneous Death Act? Florida law Assumes insured died ________ if there is no
evidence to the contrary.
11. What policy provision states that the primary beneficiary must outlive the insured for a stipulated time (14
or 30 days) for death benefits will be paid to the primary beneficiary’s estate?
Common ________________ provision, it provides an orderly sequence of beneficiaries. Stops law suits.
12. What is the clause called that protects beneficiaries from claims from creditors? Spendthrift Clause.
13. What is the provision called that permits an insurer to pay an amount of the proceeds to someone not
named in the policy, but who has a valid right? ________________ of Payment
14. What kind of policy usually has a facility of payment provision? __________________.
Known Test Questions & Concepts – Chapter 7
1.
Who designates the beneficiary of a life insurance policy?
A. Insured
B. Policy owner
C. Underwriter
D. Fiduciary
2.
When an insured dies, who stands first to receive the policy’s proceeds?
A.
B.
C.
D.
3.
Policy owner
Primary beneficiary
Insured’s creditors
Insured’s estate
What is the beneficiary designation that can only be changed with the beneficiary’s written agreement?
A. Revocable beneficiary
B. Wife of the insured
C. Per stripes
D. Irrevocable beneficiary
4.
If an irrevocable beneficiary dies before the policy owner, who of the following
gains control of a life insurance policy with a reversionary irrevocable clause?
A. Insured
B. Irrevocable beneficiary’s children
C. Policy owner
D. Insurer
5.
All of the following statements about beneficiary designations are correct EXCEPT
A. when a charity is named beneficiary, the policy owner’s heirs cannot contest the gift
B. minors cannot be named life insurance beneficiaries
C. a business may be designated as a beneficiary
D. when a trust is named beneficiary, a trustee will manage the insurance proceeds
6.
Kevin, the insured under a $200,000 life insurance policy, and his sole beneficiary, Lynda, are killed instantly
in a car accident. Under the Uniform Simultaneous Death Act, to whose estate will the policy proceeds be
paid?
A. Lynda’s estate
B. Kevin’s estate
C. Both Kevin’s and Lynda’s estate, equally
D. The proceeds will escheat to the state
7.
Christine’s policy has a clause that reads as follows: “Should the primary beneficiary and the insured die in
the same accident and the primary beneficiary fails to survive the insured by 14 days, it will be assumed that
the beneficiary predeceased the insured.” Which of the following phrases best describes this clause?
A. Secondary beneficiary provision
B. Facility-of-payment provision
C. Uniform Simultaneous Death Act
D. Common disaster provision
8.
A clause that states that policy distributions payable to a beneficiary after the insured dies are not assignable
or transferable and may not be attached in any way is called a
A. facility-of-payment clause
B. debtors protection clause
C. spendthrift trust clause
D. assignment clause
9.
When does the third designate (tertiary or contingent) receive proceeds from a life policy?
Answers to (1-9)
1-B, 2-B, 3-D, 4-C, 5-B, 6-B, 7-D, 8-C, 9- When the Primary and Secondary die before the insured.
Life Insurance Review Class Chapter 8
Life Insurance Premiums & Proceeds
1. What are the 3 basic factors that determine a life insurance premium? M________________, Interest,
Ex______________(MIX.)
2. What do insurance companies use to determine someone’s chances of dying? Mortality ____________.
3. The legal reserve money (reserves) set aside for each policy to pay future claims is invested and earns
interest. Will a greater percent on the reserve money result in a greater or lesser premium? Lesser.
4. For a mortality table to be accurate, it must be based on what 2 things: large cross section of
____________, and a large cross section of ________.
5. When calculating premiums, the insurance company assumes all premium payments are paid at the
beginning of the year. Therefore, if you pay monthly or quarterly, will the total you pay be more or less
because the insurance company wants to make up for the fact that they didn’t have all the money all year to
earn interest? ________. (modalization factor)
6. What 5 factors influence mortality tables? Age, Sex, Health, ___________________, and Habits.
7. What is it called if an applicant represents a higher than normal risk for the insurance company?
______________________ Risk.
8. How does the insurance company handle such risks if they don’t reject the applicant? Extra percentage
Tables (Rating).
9. How do insurance companies treat the “reserves” on their books? __________________.
10. What are the different modes of premium payments? Monthly, Quarterly, Semiannually or Annually.
11. As a rule, are life insurance premiums tax deductible? ____.
12. If a corporation purchased life insurance on its president, can the corporation deduct the premiums paid?
No.
13. Are premiums paid on life insurance owned by a charitable organization deductible? ______.
14. Are premiums paid by an ex-spouse as part of an alimony decree deductible? Yes, alimony (Judge Ordered).
15. Are premiums paid by a business creditor for life insurance purchased as collateral security, deductible?
______.
16. Are premiums paid by an employer for employee group insurance deductible as a business expense? Yes.
17. If a policy is surrendered for its cash value of $8,000 and the cost basis was $6,000, is this a taxable event?
______. $2,000 is treated as ordinary income.
18. What is the settlement option called that pays out in a single payment? Lump-sum cash.
19. What is the settlement option called that pays the beneficiary at regular intervals only the interest earned
on the proceeds? ________________ only.
20. What is the settlement option called that pays the beneficiary equal amounts of money at regular intervals
for a specified time? Fixed ____________ (Remember each payment consists of principal and interest).
21. What is the settlement option called that pays the beneficiary a specific amount of money at regular
intervals until the proceeds are exhausted? Fixed ____________ (Remember each payment consists of
principal and interest).
22. What is the settlement option that pays the beneficiary a guaranteed income for life? Life ____________
option.
23. What is this last settlement option similar to and how does the insurance company treat it? Single payment
immediate ______________.
24. What provision allows the terminally ill to have access to some of their insurance proceeds while they are
still living? Accelerated benefit.
25. What are companies called which purchase life insurance policies from the terminally ill?
________________ Settlement companies.
26. Are accelerated death benefits taxable? ____.
27. Does a terminally ill person who sells her policy to a viatical company have to pay taxes on the money? No.
28. When a viatical company pays the original owner money and the owner assigns his policy to the viatical
company, what kind of assignment is used? ________________ assignment.
29. Is a lump sum payment to a beneficiary, taxable? No
30. If benefits are paid out in installment payments, is any portion of the payment taxable? ______.
If you answered yes, above, explain? Proceeds are not taxable but the interest they earn is.
31. What is the annuity rule? Original principal is not taxable but the interest earned is, therefore if payments
from proceeds are paid out over time, each payment is part principal and part interest.
32. If surrendering a policy, how can a policy owner figure out his cost basis? Total premiums paid, less
dividends, less loans, less extra premiums for riders i.e.: waiver of premium, accidental death etc.
33. In an endowment policy, which has matured, when a policy owner chooses an interest-only option, will the
policy owner have to pay any taxes on the proceeds? Yes. Why? Rule of ______________________ receipt.
34. What is the rule of constructive receipt? Since the policy owner has the right to withdraw the endowed
proceeds, so whether or not he does take the money, he will have to pay taxes on the interest earned.
35. What must a policy owner do to avoid constructive receipt? Exercise an ______________ option.
36. How long after an Endowment matures does the policy owner have before constructive receipt becomes
effective? ____ days.
37. What section of the tax code allows an insurance product to be exchanged for another insurance product,
or annuity and maintain the original cost basis? ________ (1035 Exchange).
38. While life insurance proceeds paid to a beneficiary are not income taxable, they are included in the value of a
deceased’s estate to determine if the estate will need to pay what kind of tax? Federal ____________ tax
(Note: Spouses can inherit an unlimited amount with no federal estate tax. Beneficiaries do not pay income
taxes on the benefits of a life insurance policy).
Known Test Questions & Concepts – Chapter 8
1. All of the following are primary premium factors EXCEPT
A. expense
B. interest
C. dividends
D. mortality
2. The amount of money an insurer sets aside to pay future claims is called a (n)
A.
B.
C.
D.
premium
reserve
dividend
accumulated interest
3. All of the following statements about the taxation of insurance proceeds are correct EXCEPT
A. accumulated policy dividends are exempt from income tax
B. a beneficiary will not be taxed on insurance proceeds paid as a lump sum death benefit
C. a policy owner who receives the cash value for a surrendered policy must pay taxes on any gain
E. generally, no gain or loss is recognized when one insurance policy is exchanged for another
4. Beth, age 50, the beneficiary of her late husband’s life insurance policy, has elected to receive the proceeds in
monthly installments over the next five years. Due to the insurer’s interest earnings, Beth notices that the
amount of the payments is often more than what she was guaranteed. What kind of settlement option did Beth
select?
A. Life-income
B. Fixed-amount
C. Cash value
D. Fixed-period
5. Under which option does the insurer hold the death proceeds for a specified period of time and, at regular
intervals, pay the beneficiary a guaranteed rate of interest on the proceeds?
A. Fixed-period
B. Interest-only
C. Fixed-amount
D. Life-income
6. Fixed amount: A settlement option that pays the beneficiary a specific amount of money at regular intervals until
the proceeds are exhausted.
7. Is a lump sum payment to a beneficiary taxable? No
Answers:
1.
2.
3.
4.
5.
C
B
C
D
B
Life Insurance Review Class Chapter 9
Life Insurance Underwriting & Policy Issue
128.
What is another term for risk selection: reviewing many of the characteristics that make up the risk
profile of an insurance applicant? Underwriting.
129.
The underwriter’s job it is to determine if the insured is insurable, and if insurable interest exists.
130.
If the owner and the insured are not the same person, what must exist? __________________
interest.
131.
When does insurable interest have to exist? At policy _________________.
132.
Who else besides the insured himself could have insurable interest in the insured? Spouse, children,
parents, business partners, and __________________ only to the amount of the debt.
133.
What is the most basic source of insurability information an underwriter uses to determine if the
insured is insurable? The _____________________.
134.
What are the 3 parts to an application?
135.
Part I General, Part II Medical, Part III Agent’s Report
136.
What is the Job of an Underwriter? Select, classify and ________ a risk.
137.
What are the 5 other reports an underwriter could use in determining applicants insurability?
1. Medical Report – APS (Attending Physician Statement)
2. MIB (Medical Information Bureau)
3. Special __________________________
4. Inspection Report – Neighbors
5. Credit ____________
11. Who completes the medical report? ________________ or Paramedic.
12. What does MIB stand for? Medical Information Bureau.
13. What is the purpose of the MIB? Hold down __________________ costs.
14. What does the MIB help to prevent? Fraud.
15. Why does an Underwriter usually order an Inspection Report? Large amount of insurance.
16. When is a special questionnaire required? When applicant participates in a ___________________ hobby.
17. When would a credit report be ordered? When applicant is suspected of being a poor risk.
Is an applicant notified if the insurer requests a copy of their credit report? ______.
18. What does the FCRA (Fair Credit Reporting Act) give the consumer? The right to disagree with something in
the report? They can file a statement giving their view of the issue.
19. Who is considered to be a field underwriter? An __________.
20. Who must sign an application?
A) Insured
B) Policy owner
C) Agent
21. What must the applicant do if there is a change to be made on the application? Applicant _____________
the correction.
22. What must occur for insurance to be conditionally effective? Application completed, and consideration
(Premium - money) given, and _______________ completed if needed.
23. In a binding receipt (AKA – temporary insurance agreement) the insurance company guarantees the death
benefit until the insurance company either ______________ or rejects the applicant. What are the
limitations on the
binding receipt?
A) Max issue $100,000
B) No more than 60 days
C) 30 days in case of accidental death
24. When does the applicant’s insurance coverage actually begin? When ______________ exam is completed,
if needed. If no medical needed, then it begins at the time of application.
25. Who delivers the policy to the insured? The ____________.
26. What is the insurance called, when one needs immediate coverage, but has to delay the effective date of
their permanent policy for several months? ______________ insurance or interim term insurance. Max
delay is 11 months.
27. What does constructive delivery of a policy mean? When a policy is sent from the ______________ for
unconditional delivery without any requirements such as money (premium) to be collected or amendment
to be signed.
28. How should an application be submitted if applicant has questionable health problems? ______ (cash on
delivery).
29. If a policy is issued COD, what must the agent obtain? Statement of good ___________ and premium due.
Known Test Questions & Concepts – Chapter 9
1. Underwriting is a process of
A. selection and issue of policies
B. evaluation and classification of risks
C. selection, reporting and rejection of risks
D. selection, classification and rating of risks
2. Which of the following statements pertaining to the Medical Information Bureau (MIB) is CORRECT?
A. The MIB is operated by a national network of hospitals.
B. Information obtained by the MIB is available to all physicians.
C. The MIB provides assistance in the underwriting of life insurance.
D. Applicants may request that MIB reports be attached to their policies.
3. Which of the following statements pertaining to a life insurance policy application is CORRECT?
A. The names of both the insured and the beneficiary are indicated on the application.
B. If an applicant’s age is shown erroneously on a life insurance application as 28 instead of 29, the result
may be a premium quote that is higher than it should be.
C. The size of the policy being applied for does not affect the underwriting process.
D. The agent’s report in the application must be signed by the agent and the applicant.
4. What is in the Agent’s Report section of the application: The agent provides first-hand knowledge about the
applicant’s financial condition and character, the background and purpose of the sale, and how long the agent
has known the applicant
5. What is the purpose of the MIB? Hold down insurance costs and reduce fraud
6. What must occur for insurance to be conditionally effective? Application completed, consideration ($$) given and
medical completed, if necessary
7. When does the applicant’s insurance coverage actually begin? When the medical exam is completed, if needed.
Otherwise, it begins at the time of the application.
8. All of the following are not competent to enter a legal contract EXCEPT: minors; mentally impaired; under the
influence of alcohol or drugs; _____________
9. Where does the client obtain information about the differences in the types of policies available to them? Buyer’s
Guide
10. Why should the agent personally deliver the policy to the insured? NOT to sign the replacement contract
Answers:
1. D
2. C
3. A
Life Insurance Review Class Chapter 10
Group Life Insurance
1.
2.
3.
4.
5.
6.
7.
What is a policy called that is issued for Group Insurance? ____________ Contract.
Who is the applicant of Group Insurance? The employer/association/union.
Typically, who is covered by Group Insurance? __________________/members.
Are the employee’s names listed on a Group policy? No.
What does an employee get as proof of group insurance coverage? A ___________________ of Insurance.
Is Group Insurance usually less expensive or more expensive than individual coverage? ________ expensive.
If it is a non-contributory plan, how many employees must participate? ______% of eligible employees must
be insured.
8. What kinds of groups are eligible for group insurance coverage? ______________ groups (formed for
purposes other than the buying of insurance).
9. What are the usual eligibility requirements for contributing members to participate? Full-time, active
workers.
10. What is the usual probation period for new employees to enroll in the plan? 1 - 6 months.
11. How long is the usual enrollment period in which new employees can sign up? ____ days.
12. If they decide to enroll after the enrollment period, what may be required of them? Proof of insurability.
13. What is the most common type of insurance used in a group policy? Annual __________________ Term.
14. Why? Insurance companies can increase premiums annually. Employers can renew annually, no evidence of
insurability required, and it is the lowest cost.
15. Do groups only offer term insurance? No. Though most groups are ART, some offer WL, UL, paid up WL.
16. Can an employer deduct group insurance premiums as a business expense? ______.
17. When doesn’t an employee have to claim employer-paid premiums as income? When face amount is
$__________ or less.
18. What are the three choices an employer can use to determine the amount of group coverage an employee
will have? Earnings, _______________ or Flat Benefit.
19. What are the rules for an employee to convert his group insurance to an individual policy after leaving a
company? 31 days, no proof of insurability needed, plan other than term.
20. What is the difference between Group Insurance and Franchise Insurance? Group insurance issues
certificates, Franchise insurance issues individual _______________- usually written on groups too small to
qualify for group coverage, not used in FL since Florida has no minimum number of lives for a group.
21. Who most commonly uses Franchise Insurance in other states? Small groups.
22. For what is Group Credit Life Insurance used? To protect a __________________ interest.
23. What type of insurance is used? Decreasing Term on the lives of the debtors. The insurance cannot be more
than the debt.
24. What type of insurance covers a group of people for a particular common hazard? ______________
insurance.
25. What does a MET group mean? Multiple _____________ Trust- for employees who have the same
occupation but different employer’s who join a trust to get a larger group and insurance cheaper.
26. What is the difference between a contributory and a non-contributory plan? Noncontributory - only
________________ contributes so 100% participate. Contributory- the _______________ can contribute.
75% of eligible employees must be insured.
27. What is a Multiple Employer Welfare Arrangement (MEWA)? A type of MET for union Employees that is
self-funded and has tax-exempt status. Employees covered under an MEWA are required by law to have an
“employment related common bond”.
Known Test Questions & Concepts – Chapter 10
1. With regard to group insurance plans, which of the following statements is CORRECT?
A. Employees generally pay for all of the premiums.
B. The sponsoring employer of a group insurance plan is given a master certificate of insurance that lists the
names of all employees covered by the plan.
C. Per unit of benefits, group insurance generally is available at rates lower than those for individual plans.
D. Group insurance plans are a means for employers to provide a benefit for their key employees, without
having to include all employees.
2. Group insurance plans that require employees to pay a portion of the premium are called
A. underwritten
B. contributory
C. participatory
D. shared
3. The type of insurance most frequently used in group life plans is
A. annually renewable term
B. ten-year renewable term
C. limited pay whole life
D. single-premium whole life
4. All of the following statements pertaining to the conversion privilege of group term life insurance are correct
EXCEPT
A. an insured employee typically has 31 days following termination of employment in which to convert the
group insurance
B. an insured employee must convert to the same type of coverage as was provided under the group plan
(that is, term)
C. insured’s who convert their coverage to individual plans pay a premium rate according to their attained
age
D. an insured employee may exercise the conversion privilege regardless of his or her insurability
5. What does an annuity provide? A stream of income for a specific period of time or for life.
6. Characteristics of Group insurance: less expensive than individual coverage; 100% of eligible employees must be
insured; full-time, active workers; and 31 day enrollment period for new workers (60 days is wrong) (EXCEPT)
7. When doesn’t an employee have to claim employer-paid premiums as income? When the face amount is $50K or
Less.
8. What are the rules for an employee to convert his group insurance to an individual policy after leaving a
company? 31 days; no insurability needed; plan other than term (EXCEPT)
9. Whose name goes on the group policy? Employer/Company
Answers: 1-C, 2-B, 3-A, 4-B
Life Insurance Review Class Chapter 11
Annuities
138.
What is an annuity? A systematic ______________________ of an estate.
139.
Who can sell an annuity? Insurance Companies and Financial Institutions.
140.
What is the difference between life insurance and an annuity? Life Insurance creates an
____________; annuity liquidates an estate. Life insurance is concerned about when someone dies;
annuities are concerned about how long one lives.
141.
Describe why each factor listed below, influences the amount the annuitant will receive?
1. Age - life expectancy: the older you are, the fewer the years, the larger the payment.
2. Sex - __________ statistically live longer than men.
3. Money Paid in - helps to determine the money that will be paid out.
4. Interest ________________ - the higher the interest, the more it increases the annuity’s value, (can
reduce premium).
5. ________________ - deducted from premium to pay the annuity costs.
6. Payout Option - the size of the payout amount depends on the beneficiary option chosen.
142.
If a man and a woman are the same age, with the same amount in an annuity, which one will receive
the most monthly income? The man. Women statically live longer so the company expects to pay longer,
smaller payments.
143.
List and describe the 2 ways to fund an annuity? 1. Lump sum 2. _______________ payments (Fixed
or
Flexible).
144.
List and describe the 2 ways annuities can be paid out? 1. Immediate (paid within a year) 2.
____________, (more than a year but by 90 years of age-in Florida).
145.
How soon can an immediate annuity start to payout? Within the first month but no longer than in
the first year.
146.
Describe each of the 5 income options listed below; in all cases the annuitant gets income for life of
the annuitant, these terms refer to: if and how much the beneficiary will get.
1. Straight ________ – highest income provider – no beneficiary.
2. Cash ___________ - Pays the annuitant a guaranteed income for life and if the annuitant dies before the
annuity fund is depleted, a Lump Sum Refund is payable to a beneficiary.
3. ______________________ Refund - Pays the annuitant a guaranteed income for life, and if the
annuitant dies before the annuity fund is depleted; continued installments will be paid to the beneficiary
until the principal is depleted.
4. Life with Period _____________ - annuitant guaranteed payments for life or for a period of time,
whichever is longer, beneficiary will receive the same payment for balance of the period.
5. Joint and Full ________________ – Pays for the life of two annuitants (Ex. $6,000 / Mo.). Guaranteed
payments for two people, if either person dies the survivor continues to receive the same benefit. No
further payment is made to a beneficiary.
6. Joint & 2/3 Survivor - Pays for the life of two annuitants, (Ex. $6,000 /Mo.). Upon the death of the first
annuitant the income is reduced to 2/3 of the original income $6.000/Mo. to the survivor for life
(Ex. $4,000). Upon the death of both annuitants nothing becomes payable to a beneficiary.
7. Joint & 1/2 Survivor - Pays for the life of two annuitants, (Example $6,000/Mo.) Upon the death of the
first annuitant the income is reduced to 1/2 of the original income $6.000/Mo. to the survivor for life
(Ex. $3,000). Upon the death of both annuitants nothing become payable to a beneficiary.
8. Period Certain - Not based on life contingency. It guarantees benefit payments for a certain period of
time whether or not the annuitant is living. At the end of the specified term the payments cease.
10. Describe how fixed and variable annuities are different?
Fixed annuities are like a ______________ account, which guarantees a percentage rate credited and
guaranteed minimum payment amount per month at maturity; the funds are invested in the insurance
companies general account. Variable annuities are like ____________ funds, money is invested into
separate accounts and they come with no guarantees.
11. With whom must sales representatives be registered to sell VA? FINRA (Financial Industry Regulatory
Authority), and the Florida Department of Financial Services.
12. What is the putting in period in an annuity called? - _______________________ period.
13. What is the taking out or payout period in an annuity called? Annuity period.
Known Test Questions & Concepts – Chapter 11
1. All of the following statements regarding annuities are correct EXCEPT
A. generally, annuity contracts issued today require fixed, level funding payments
B. annuities are sold by life insurance agents
C. an annuity is a periodic payment
D. annuitants can pay the annuity premiums in lump sums
2. What annuity payout option provides for lifetime payments to the annuitant but guarantees a certain minimum
term of payments, whether or not the annuitant is living?
A. Installment refund option
B. Life with period certain
C. Joint and survivor
D. Straight life income
3. Joanna and her husband, Tom, have a $40,000 annuity that pays them $200 a month. Tom dies and Joanna
continues receiving the $200 monthly check as long as she lives. When Joanna dies, the annuity payments cease.
This is an example of a(n)
A. installment refund annuity
B. joint and full survivor annuity
C. life annuity
D. cash refund annuity
4. Which of the following statements regarding annuity payout options is NOT correct?
A. Under a straight life annuity option, all annuity payments stop when the annuitant dies.
B. In a cash refund annuity, the annuitant’s beneficiary always receives an amount equal to the beginning
annuity fund plus all interest.
C. A period certain annuity guarantees a definite number of payments.
D. Joint and survivor annuities guarantee payments for the duration of two lives.
5. All of the following statements about variable annuities are correct EXCEPT
A. individuals who sell variable annuities must be registered with FINRA
B. the contract owner bears the investment risk rather than the insurance company
C. once a variable annuity has been annuitized, the amount of monthly annuity income cannot fluctuate
D. during the accumulation period, the contract owner’s contributions to the annuity are converted to
accumulation units and credited to his or her account
6. Which of the following statements best describes equity index contracts?
A. Equity index contracts are always backed by investments in stocks.
B. Selling equity index contracts never requires a license for variable products.
C. Most of the investments backing equity index contracts are similar to those for non-indexed contracts.
D. Cash values of equity index contracts mirror all changes in stock market values.
7. “Annuity payments are taxable to the extent that they represent interest earned rather than capital returned.”
What method is used to determine the taxable portion of each payment?
A. Exclusion ratio
B. Marginal tax formula
C. Surtax ratio
D. Annuitization ratio
8. How long does Life with Period Certain make payments to an annuitant? Whichever is LONGER – life or a specific
period of time.
9. What ratio is used to determine the nontaxable and taxable portion of each annuity payment? Exclusion Ratio.
10. What does an annuity protect a person from outliving? Their income.
11. When do you pay income tax on the gains made within your annuity? Upon payout (CORRECT.)
12. Annuities are defined in terms of all of the following EXCEPT: funding; pay out;
income options; age
13. After annuitization, how does the current interest rate affect a FIXED annuity? Stays the same; increases;
decreases; no way to know.
14. Equity Indexed Annuities – equities.
15. X has a policy worth $10,000 and takes out a $500 loan with 5% interest. X dies. How much will the beneficiary
received? $$ amount answer.
16. 1035 Exchange for Whole Life policies: a life insurance policy for another life insurance policy, endowment
policy, or annuity contract; an endowment policy for an annuity contract; and an annuity contract for another
annuity contract (EXCEPT) – an annuity contract CANNOT be exchanged tax free for a life insurance contract.
Answers:
1. A
2. B
3. B
4. B
5. C
6. C
7. A
Life Insurance Review Class Chapter 12
Social Security
1.
2.
3.
4.
When was Social Security established? ________.
What does OASDI stand for? Old Age, _________________, Disability Insurance.
Social Security is not a welfare program rather an - ____________________ Program.
What groups of workers are not covered under Social Security? Federal Employees hired before 1984.
They were covered under the Civil Service Act, 25% of state and local government Employees, and
________________ workers.
5. What kind of contributions must you make to be covered by Social Security? ________.
6. What is the difference between being covered and being eligible for Social Security? You pay in but have to
have worked enough credits to be _______________.
7. How many quarters of credit must a worker have to be fully insured? ____ credits.
8. In 2009, how much money must someone pay FICA taxes on, in order to earn a quarter of coverage?
$1,090.00.
9. How many quarters of coverage must a worker have had to be considered currently insured so that his
survivors will be eligible for limited benefits? 6 credits during the 13-quarter period ending with the quarter
in which the worker died.
10. What is another name for Social Security Death Benefits? _______________ benefits.
11. What was the lump sum death benefit paid to the surviving spouse or children, designed for? Help pay
______________ expenses.
12. How much is the lump sum amount? $_______, paid only if there is a surviving spouse or child.
13. What is the earliest age that a surviving spouse can receive Social Security benefits? 60.
14. What is the blackout period for a surviving spouse? From the time youngest child reaches ____ and the
spouse reaches age ____.
15. Until what age can a child collect S.S.? 18 or ____ if still in High School or disabled before age 22.
16. What percentage of a deceased worker’s PIA does an eligible child receive? 75%.
17. What percentage of a retired worker’s PIA is a child eligible to collect? 50%.
18. FICA is a “pay as you go” system; what does this mean? Money paid in ______ is used now for current
recipients.
Known Test Questions & Concepts – Chapter 12
1. Rudy is eligible for full death, retirement and disability benefits under Social Security. His worker status is
A. completely insured
B. currently insured
C. fully insured
D. partially insured
2. Which period involves expenses being at their highest when children are young (i.e. period of greatest need)?
Dependency period
3. What group of workers is NOT covered under Social Security? Railroad workers
4. What are social security benefits based on? Average indexed monthly earnings (AIME) – an average of the
worker’s lifetime earnings that were subject to the FICA tax.
Answer: 1-C
Life Insurance Review Class Chapter 13
Retirement Plans
1. What is the difference between a qualified and a non-qualified plan? Qualified plans receive
__________________ tax treatment.
2. What type of plan is exempt from current income taxation? A __________________ plan.
3. Are employer’s contributions to a qualified plan considered deductible business expenses? Yes.
4. Does an employee pay taxes on an employer’s contributions the year they are received? No, taxed when
money is withdrawn.
5. Does an employee pay taxes on money they contribute to their qualified plan at work? ____.
6. What does ERISA mean? Employee Retirement ____________ Security Act.
7. What does ERISA do for workers? Protects the ____________of workers.
8. What are ERISA’s participation standards? Determines employee eligibility; employees who are 21 and
have completed one year of service.
9. What is a requirement of funding a qualified plan? There must be a real _______________________ made.
It must be held by a 3rd party and invested.
10. Describe a Defined Contribution Plan? Plan must be written (defined, described). Obligates employer to
make periodic payments to each participants’ account. Specified Contribution / Unspecified _____________.
11. Name and describe the 3 types of Defined Contribution Plans? PMS
A). Profit ______________ - employees participate in company profits.
B). Money ________________ - employer makes fixed contributions with future benefits.
C). Stock __________ – does not depend on profits, employees receive stock in company.
12. Describe a Defined Benefit Plan? It establishes a definite future benefit; what is defined or described is the
benefit. Specified Benefit / Unspecified Contribution.
13. What is a more common name for a Defined Benefit Plan? Pension Plan.
14. What are the 4 requirements for a Defined Benefit Plan to qualify for favorable tax treatment?
1. Definitely determinable Benefits.
2. Systematic payment of Benefits.
3. Primarily retirement Benefits; insurance can be only incidental
4. Maximum employee Benefit per year.
15. What is the maximum annual amount an employer can defer in a 401k, 403B, 457, or SARSEP plan in 2011?
$_____________.
16. Describe the characteristics of a 401k? Salary reduction into a qualified retirement plan. Typically the
employer matches a percentage of what you put in.
17. Why is a 401K called a “cash or deferred arrangement”? Because employees can take their income in cash,
or defer a portion of it to the 401k until they ____________ which gives them favorable tax advantages.
18. What is another name for a 403(b)? A tax _________________ annuity or TSA – Tax __________________
annuity.
19. Who can have a 403B? Nonprofit, charitable, educational, religious organization 501(c)(3) organizations.
20. What is the maximum contribution limit of a Keogh plan? Same maximum contribution limits as Corporate
Plans
21. If a small business owner contributes for himself to a Keogh, must he contribute for his employees? Yes,
same ____________________ for your employees.
22. What is the maximum contribution limit of a SEP Plan? 25% of employee compensation up to $225,000
whichever is less. (Check current year because the dollar amounts change).
23. What does SEP stand for? Simplified ________________ Pension.
24. SIMPLE plans are for small businesses with fewer than how many employees? ______.
25. What does IRA stand for? Individual ____________________ Account.
26. How much can someone contribute to an IRA per year? $5,000 (Catch up for 50 years old) plus-$1,000.
(Check current year because the dollar amounts change).
27. How much can a husband and wife, contribute to their IRA accounts if they are both working? $10,000.
If only one is working? $10,000. (Check current year because the dollar amounts change).
28. How many people can own an IRA account? ______ (no joint accounts).
29. Who can contribute to an IRA? In a traditional IRA anyone with Earned income under age 701/2, with the
Roth there is a maximum amount of income you can earn but there is no age limit as long as they are earning
income. (Check current year because the dollar amounts change).
30. When must one start to take money out of their IRA account? April 1st following the year in which they
reach ______.
31. When can you take money out of a qualified plan without a penalty? ______, dies, disability, $10,000 for a
first home, higher education expense-college, health insurance premium while unemployed.
32. How much is the penalty? ____% of the amount withdrawn and taxed as earned income.
33. Is the money you take from a qualified plan taxable? Yes.
34. Where can IRA money be placed? Stock accounts, CD’s at Credit Union or Bank, Mutual Funds, REIT, Annuity,
Governmental bonds, certain U.S. coins.
35. Are contributions to the Roth deductible? ____.
36. In a Roth, does the interest you earn, dividends and capital gains grow tax-free? ______, never need to pay
tax.
37. Who can contribute to a Roth? Anyone with earned income, even past 70 ½, single who earn up to
$107,000, married up to $169,000. A partial contribution is allowed for singles to $122,000, married to
$179,000. (Check current year because the dollar amounts change).
38. What are the qualified distributions from a Roth IRA that are not taxable? After 59 ½, death disability, first
home (to $10,000 from earnings plus what you contributed), education. After __ years you can withdraw the
portion that you put in. (note: no mandatory withdraw at 70 ½).
39. A non-working spouse can contribute how much to their IRA or Roth IRA? $__________. (Check current
year because the dollar amounts change).
40. When is an IRA rollover used? When employees leave or change employment, 401k or 403b to traditional
IRA.
41. If an employee receives funds from a qualified plan before he is 59½, how long does he have to deposit the
un-cashed funds into another qualified plan without tax consequences? ____ days because of the rule of
________________________ receipt.
42. Who is the only person who is eligible to benefit from a rollover other than the person who established the
account? A spouse.
Known Test Questions & Concepts – Chapter 13
1. Which of the following statements correctly describes the tax advantage of a qualified retirement plan?
A. Employer contributions are not taxed when they are paid out to the employee.
B. Earnings of the plan are taxable to the employee only when he or she receives benefits.
C. Earnings of the plan are only taxable if the employee voluntarily terminates participation in the plan.
D. Employer contributions are deductible business expenses when the employee receives benefits.
2. Which of the following phrases best describes vesting?
A. The time at which a worker meets the eligibility requirements for plan participation
B. The age at which an employee must begin to make withdrawals from retirement plans
C. The right of a worker’s spouse to be considered in retirement income needs
D. The employee’s right to funds or benefits, contributed by the employer, should he or she leave that
employer
3. All of the following should be eligible to establish a Keogh retirement plan EXCEPT
A. a dentist in private practice
B. partners in a furniture store
C. a sole proprietor of a jewelry store
D. a major stockholder-employee in a family corporation
4. Herbert and Olga, both age 48, have been married for 10 years. They have no children, and each has a wellpaying job. However, neither is covered by an employer retirement plan. What is the maximum amount
they may set aside together in tax-deductible, traditional IRA funds in 2009?
A. $ 4,000
B. $ 5,000
C. $ 8,000
D. $10,000
5. All of the following types of plans are reserved for small employers EXCEPT
A. 401(k)s
B. SARSEPs
C. SIMPLE IRAs
D. SIMPLE 401(k)s
6. Are employees 100% vested in their own contributions? Yes.
7. Profit sharing and money purchase.
8. When must one start to take money out of their IRA account? April 1st following the year in which they turn 70½.
9. Pension Act of 2006 (EXCEPT)
Answers:
1. B
2. D
3. D
4. D
5. A
Life Insurance Review Class Chapter 14
Uses of Life Insurance
D. What are the 2 basic approaches used to determine the amount of insurance needed?
1. Human Life Approach
2. Needs Approach
E. Which is the approach that estimates future earnings until retirement and deducts an assumed rate of
return? Huebner’s __________ Life value approach
F. What is the approach that takes into consideration the benefits that will exist and what will be needed to
meet the family’s financial needs? __________ Approach.
G. Listed below are several uses for individual life insurance, using the needs approach:
Final ________________: Money needed for cost of last illness, funeral expenses, debts, death taxes.
______________: pay-off mortgage or continue payments or rental payments for a period of time.
__________________: pay for children’s college education.
Monthly ____________ - Dependency period: while the children are young and expenses are high
(period of greatest need). Blackout period: time when there are no social security benefits. For a
surviving spouse, this would be from youngest child age 16 to spouses age 60 (widows can retire earlier
than most). (16-60)
_________________ Fund: for maintenance, repairs and medical bill.
H. What kind of insurance would you buy to guarantee that your freshman son be able to complete his
college education? ___________________ Term.
I. Listed below are several uses for business life insurance:
Funding ____________: Transfer ownership Buy/Sell Life insurance- contract written before owner dies;
contract states who will buy and someone must sell the business. The money comes from life insurance.
J. Who can have a buy/sell plan?
A. Sole _____________________
B. Partnerships
C. Corporations
8. What is a Buy/Sell Plan? Sole Proprietors can make it possible for an employee to buy business.
Employee purchases insurance on life of Proprietor; it is not tax ___________________ to the employee.
9. Partnership Cross Purchase: partners purchase insurance on each other individually; the partnership
itself is not involved. How many policies would be required for 3 partners? ______ policies.
10. Partnership Entity Plan: the business itself purchases insurance on its partners. How many policies
Would be required for 3 partners? __________ policies.
11. Legal partnerships __________ when one of the partners dies.
12. Corporation entity plans are called? Stock Redemption Plans - Buys spouse stock as payment.
13. Business interruption. Key-Person Insurance: the beneficiary is the ________________. It is a business
asset. Premiums are not tax deductible. In key-person insurance, will the business have to pay taxes on
the proceeds? No.
14. An employee benefit: protects employee’s families from financial problems. This is a benefit to the
employee and usually ART is sold.
15. What is the employer’s benefit from offering group life? Encourages new employees to join a company
and discourages established employees from taking his/her ______________ elsewhere.
16. What is the employer’s contribution equal to in a Split-Dollar Plan? The increase in the policy’s cash
value, the employee contributes the remainder of the premium.
17. Upon the death of the employee, how are the proceeds split? Employer gets amount equal to cash
values and the employee’s beneficiary gets the rest.
18. What dividend option is used in the Split Dollar plan? 5th _______________ option: one-year term.
19. What is a Deferred Compensation Plan? Non-qualified, funded by the _______________ since they are
giving up current wages.
20. Does the deferred compensation plan permit a business to provide extra benefits to officers and highly
paid employees? Yes, it is a ______-qualified fund. There are no restrictions on non-qualified plans.
Known Test Questions & Concepts – Chapter 14
1. Which of the following statements regarding key-person insurance is NOT correct?
A. Key-person life insurance indemnifies a business for financial loss caused by the death of a key employee
or key executive.
B. The business may borrow from the cash value of a permanent key-person life insurance policy.
C. The policy’s death proceeds received by the business are not taxable.
D. Premiums for a key-person life insurance policy are a tax-deductible expense to the business.
2. Which of the following statements about key-person insurance is CORRECT?
A. The key employee’s family is the beneficiary of the policy.
B. The death proceeds are taxable.
C. The business may take a tax deduction for premiums paid.
D. Because the business has complete control over the policy, it can be considered a business asset.
3. 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 is a(n)
A. entity buy-sell plan
B. stock redemption buy-sell plan
C. cross-purchase buy-sell plan
D. 401(k) plan
4. With three partners in a business, how many life insurance policies would be required to insure a cross-purchase
buy-sell plan?
A. 3
B. 6
C. 9
D. 12
5. A partnership owns, pays for and is the beneficiary of the life insurance policies on the lives of its individual
partners. This is known as a(n)
A. entity buy-sell plan
B. stock redemption plan
C. cross purchase plan
D. Keogh plan
6. What is the approach that takes into consideration the benefits that will exist and what will be needed to meet
the family’s financial needs? Needs Approach.
7. Which period involves expenses being at their highest when children are young (i.e. period of greatest need)?
Dependency period
8. What is the funding medium for Buy/Sell agreements: COMES from life insurance.
9. Are Buy/Sell plans tax deductible to the employee? No.
10. Partnership Cross Purchase: Partners purchase insurance on each other individually; the partnership itself is not
Involved.
11. How many policies would be required for three partners in a Partnership Cross Purchase? 6 policies.
12. Key person insurance: Primary purposes that key-person insurance serves include business indemnification;
reserve fund; business credit; and favorable tax treatment.
13. Split-Dollar Plan.
14. What is a Deferred Compensation Plan? Non-qualified, funded by the employee since they are giving up their
current wages.
Answers:
1. D
2. D
3. C
4. B
5. A
Life Insurance Review Class Chapter 26
Florida Laws & Rules Pertinent to Life & Health Insurance
147.
Who administers the insurance laws in Florida? The Chief Financial Officer (CFO), the Financial
Services Commissioner and the Director of the office of insurance regulation.
148.
Name the Department that makes and amends insurance laws? _____________________.
149.
Who imposes criminal penalties on those who violate these laws? State Courts, they also decide
conflict between insurance companies and policy owners.
150.
Why does the state government control the insurance business? McCarran _________________
Act, Public Trust, Financial importance to state and national economy, expert control because of the
technical nature of insurance.
151.
What are the duties of the Financial Services Commission? 1. Enforce the insurance code, 2. Conduct
________________________, 3. Hold public hearings &, 4. Collect and disseminate information.
152.
How long must insurance company keep its records? ____ years.
153.
Why do life insurers invest in Bonds and Mortgages? They are long-term investments and insurer’s
liability to policy owners is long term. They offer a good degree of ____________ and the liquidity needed.
154.
What penalties can an agent receive for violating provisions of the Insurance Code? 1. License
denied, 2. Revoked or ______________ license, 3. Fines from $500 - $3,500, 4. Up to ____ months in prison,
5. Administrative penalty.
155.
What is a Fraternal Life Insurance Organization? A corporation or society or association has a lodge
system, non-profit representative form of government, issues ______________________, primarily for
members. (Elks, Lions, Etc.)
156.
What is an admitted insurance company? Office of Insurance Regulation has issued them a
_____________
to do business in the state.
157.
What does the public need to know about non-admitted insurance companies? Does not fall under
the Office of Insurance Regulation jurisdiction as far as financial stability, policy coverage, and
__________________.
158.
Why is an unauthorized mail-order insurance company illegal in Florida? Florida requires insurance
applications and transactions to be done by a ________________ agent within our state.
159.
What does a stock insurance company doing business on a mixed plan mean? Company offers both
_________________________ and nonparticipating insurance.
160.
What is the objective of a mutual life insurance company? To provide insurance for its policy owners
at the
lowest possible cost; they must sell “par” policies (with dividends).
161.
What are the 4 activities that could be called “transacting business”?
1. Solicitation to ________________
2. Negotiating a sale
3. Effecting a sale
4. Transacting matters that arise from a sale (not agent’s contract with his insurer).
16. What are legal reserves? A dollar amount an insurance company must have in reserve to cover business in
force. What are legal reserves considered; an asset or a liability? Future _____________________.
17. What is the purpose of the legal reserve? To guaranty that insurance companies can deliver what they
promise, it is set-aside at an interest rate to pay for _____________ death claims.
18. What 2 factors are used to determine the amount of legal reserve required? 1. Mortality Table
2. Interest rates.
19. Will the premium on a 3% reserve interest rate be higher or smaller than a 3 1/2% interest assumption?
Greater, because it will take more money to earn the same amount.
20. What is the Florida Replacement Rule? It sets forth the requirements and procedure needed to
______________ a policy or drastically alter an existing policy when purchasing a new policy.
21. What is the Code of Ethics of the Florida Association of Life Underwriters? It defines appropriate and
inappropriate behavior for an insurance agent.
22. Could an agent have his license suspended if he was incompetent to transact business? ______.
23. When is the only time an agent can pay or share his commission with another person? When the other
person is _______________ in the same line of insurance.
24. What is twisting? Persuading a policyholder to __________ their current policy to another to switch to
another insurance company without disclosing pertinent facts (with full disclosure there is no twisting).
25. What is misrepresentation? When an agent fails to state the facts as they really are; an innocent
misrepresentation of a material fact could void the contract; a fraudulent misrepresentation of an
immaterial fact would not necessarily void the contract.
26. What is defamation? Written statement or slander ____________.
27. What is fraud? Intentional deception that results in injury to another.
28. What is embezzlement? Illegally converting another person’s __________ to your own use.
29. What is a fictitious group and are they legal in Florida? Several people forming a group for the purpose of
buying insurance. They are not permitted in Florida.
30. What is the fine for violating a cease and desist order? $____________.
31. How are life insurance agents paid? Commission - a percentage of 1st year premiums.
32. How does the Florida law describe excess and rejected business? A risk that your own company is not
willing to take, on a single case basis-you can place the business with another _____________ and get paid.
33. What is meant by controlled business? Gets insurance license for the purpose of insuring relatives, friends
When can an agent write controlled business? As long as he writes at least as much other business with the
general public. 50% controlled, 50% uncontrolled.
34. Are financial institutions (banks) allowed to sell all types of insurance? ______.
35. What are the conditions that must be met for rebating to be permitted in Florida? Must be available to all
insured’s, must be filed by the agent with the insurer, uniformly applied to all insured, rebate schedule must
be prominently displayed, must not discriminate, not require collateral business (insurance company must
approve).
36. Must an agent notify the Department of Financial Services when they change their address? Yes within
_____-days. If so, must it be in writing? Yes, Online acceptable.
37. How many hours of Continuing Education are required? ____ hours every __ years. __ must be in ethics.
38. What name is given the designated person in charge of an agency or location for a multiple location agency?
______________ Agent.
39. After you have your license, what else do you need before transacting insurance business?
_______________________.
40. What should agents know regarding the privacy of consumer financial information? To protect the
________________ of an individual’s personal and financial information.
Known Test Questions & Concepts – Chapter 26
1. An insurance company can be any of the following EXCEPT
A. domestic and admitted
B. foreign and non-admitted
C. domestic and alien
D. alien and non-admitted
2. In insurance regulatory language, which of the following properly identifies a “foreign” insurance company?
A. Insurance company whose home office is in another country
B. Insurance company whose home office is in another state
C. Insurance company that has no local representative
D. Insurance company whose policies are in a foreign language
3. The definition of “transacting insurance” includes all of the following EXCEPT
A. soliciting a contract of insurance
B. negotiating a contract of insurance
C. underwriting a contract of insurance
D. effectuating a contract of insurance
4. Transacting insurance business does NOT include which of the following activities?
A. Soliciting the purchase of insurance
B. Negotiating an agency contract with an insurance company
C. Negotiating an insurance contract
D. Recommending specific types of insurance based on a policy owner’s
needs
5. Of the following terms, which best describes the act of replacing existing life insurance with a new life insurance
policy based upon incomplete or incorrect representations?
A. Twisting
B. Rebating
C. Embezzlement
D. Concealment
6. Sliding consists of all of the following activities EXCEPT
A. telling an applicant that certain ancillary coverage is required by law when it is not
B. advising a client that certain ancillary coverage is included at no additional charge when such a charge is
required
C. charging an applicant for ancillary coverage over the cost of coverage applied or without the applicant’s
consent
D. recommending that a client take cash value from a policy to make other investments
7. Which of the following would be considered an unfair claim practice?
A. Implementing standards for proper investigation
B. Denying a claim after reasonable investigation of the facts
C. Misrepresenting insurance policy provisions affecting a loss
D. Acting promptly on claims communication
8. Which of the following activities is NOT a violation of the Insurance Code?
A. Charging a fee that is more than the premium stated in the policy
B. Collecting premiums and depositing them in the agent’s personal account
C. Writing as much non-controlled insurance business as controlled business
D. Offering a premium rebate if the insured contracts for other insurance business
9. Within what time period must an agent notify the Department of Financial Services of name or address change?
60 days
10. How long must an insurance company keep its records? 3 years.
11. Activities that could be called “transacting business”: solicitation to purchase; negotiating a sale; effecting a
sale; transacting matters that arise from a sale (EXCEPT).
12. Code of Ethics.
13. Misrepresentation: When an agent fails to state the facts as they really are (be ready for examples).
14. After you have your license, what else do you need before transacting insurance business? Appointment
(CORRECT)
15. Circumstances when an agents license can be revoked, suspended, etc.
16. Sliding: Addition to cost of coverage applied for without the applicant’s informed consent.
Answers:
1. C
2. B
3. C
4. B
5. A
6. D
7. C
8. C
Life Insurance Review Class Chapter 27
Florida Laws & Rules Pertinent to Life Insurance
162.
Why does the Florida Insurance Code regulate an agents’ right to call themselves names such as
financial planners, etc? Because agents must disclose that they sell __________________ not just acting in
an advisory capacity.
163.
Define the Florida Replacement Rule? Complete disclosure. Agent must furnish comparison and
summary statement if policyholder requests it (initial box).
164.
How can a policy owner get a written comparison and summary statement? By asking the
__________ for it.
165.
Where can a policy owner get instructions about replacement? From the insurance company.
166.
What constitutes replacement when a new policy is being purchased? If a new policy creates a:
i. Lapse, termination of old policy.
ii. Old policy to ___ forfeiture- paid- up or extended term.
iii. Reduction in old policy.
iv. Old policy loan greater than 25% of value.
167.
When the buyer’s guide & policy summary must be given to the insured? Prior to or at policy
___________.
168.
How long is the free look? ____ days after delivery.
169.
What does Florida call an insurance agent who also holds a license to sell securities? ____________
licensed.
170.
How many days does a dually licensed agent have to notify the policy owner when he knows his
proposal involving the purchase of securities, will cause an existing policy to lapse or be affected? ____ days,
the notice must be signed by the agent, have his address and describe how policy is affected and why, and
list all companies involved.
171.
When the insured dies, must the beneficiary pay the insured debts? ___.
172.
If the insured does not name a beneficiary what happens to the proceeds when the insured dies?
Goes to his estate and is subject to creditor claims.
173.
What is the highest fixed interest rate policy loan allowed in Florida? ____%.
174.
If an adjustable interest rate is charged on a policy loan, what determines the limit that can be
charged? ______________ corporate bond index. Not Moody and Fitch; they are a rating agency.
175.
If an insured has industrial policies, which total more than $3,000, what options are available to him?
Change to one ordinary policy without proof of insurability.
176.
Can an agent be named a beneficiary on a non-family member policy? NO, -unless they have
________________ interest.
177.
Explain the features of a family policy? Entire family members covered, breadwinner with whole life,
term on spouse and children.
178.
Are children born after a family policy is issued, covered? ______, includes adopted children as well.
179.
Explain what the Spendthrift Clause means? Protects the proceeds from being attached by creditors.
180.
What’s the difference between Uniform Simultaneous Death Act and the Common Disaster
provision? Uniform simultaneous Death Act is a FL law; assumes insured died last if no evidence to the
contrary.
181.
Common disaster provision; helps to clarify the order of payment when there is sufficient evidence
that beneficiary survived insured. There is a time frame attached. 14 or 30 days are typical.
182.
What is the grace period for persons over 64 years of age? ____ days with notice to be sent to a
secondary addressee.
183.
Can the proceeds of a group insurance policy be assigned? ______.
184.
What is the minimum number of members needed for a group insurance in Florida? No minimum.
185.
Must an insurance company notify its members when the master policy is canceled or expires?
______.
186.
How is this usually done? Through the ________________. The insurer notifies the group
policyholder (employer), employer then notifies certificate holders (employees).
187.
What rights does a surviving spouse have who is covered under her husband’s group insurance?
She has the same conversion rights her husband had. 31 days, no evidence of insurability, and choose a plan
other than term insurance.
188.
Who qualifies as a group in Florida? 1. Employer or Employee group, 2. Labor Union groups, 3.
Trustee group, 4. Debtor group, 5. Association, 6. Credit __________, 7. Dependent group – spouse or
children.
189.
What is a trustee group? Groups of employees of two or more employers - A trustee holds the policy
for members.
190.
How long must a professional Association be in existence to qualify for group insurance? ____ years.
191.
What other rules must they meet? Have a purpose other than insurance; at least one annual
meeting; if contributory, must have at least ______members; if non-contributory, all must be covered.
192.
How much group insurance must a credit union provide? Amount equal to what your debt is.
193.
What is the largest percentage of coverage a spouse or children of a member of a group can have?
____%.
194.
Does a participating company pay insurance policy dividends to its stockholders? No
195.
Does a non-participating company pay dividends? No.
196.
Can dividends be used to pay premiums? ______.
197.
Compare par and non-par policy as to premium? Par is higher to cover ___________________
contingencies.
198.
What does paid-up additions mean? Very small policies of the same kind of additional insurance
purchased with ___________________ at insured’s attained age.
199.
What is the fifth dividend? Allows insured to buy one-year term insurance equal to the cash value.
200.
What was the original purpose of the fifth dividend? To fill the gap in policy owner’s coverage
caused by __________________ money from his policy.
201.
How much one-year term can be purchased under the fifth dividend? It can equal the current
________ value of the policy.
202.
Who regulates retirement plans? ERISA, it overrides any state laws-ERISA stands for Employee
Retirement Income Security Act.
203.
What does vesting in a pension plan mean? Vesting refers to the employee’s right to benefits or
contributions accrued on behalf of the employee. Employees are always ______% vested in their own
contributions. Vested interest in employer-funded benefits normally goes from 0% to 100% on a time
schedule. (ERISA)
204.
What is the difference between variable whole life insurance and whole life insurance? In VL, cash is
in separate account, invested in stock, need dual _____________; with WL the cash grows according to a
table.
205.
Why was variable life insurance developed? To keep up with __________________.
206.
What are the characteristics of Universal life insurance? Flexible premium & adjustable benefits,
cash debited with expenses, credited with interest (guaranteed and current), ART insurance, loans, and/or
partial withdraws ________________ sensitive.
207.
How does Universal Life Insurance work? Premium accumulates depending on how much of the
insurer’s premiums are credited to the cash after expenses and the amount needed monthly to fund the
insurance face value of the policy. (ART) - The cash accumulates currently ______ free.
208.
What are the restrictions on Universal Life receiving favorable tax treatment? Death benefits must
be greater than cash value by a government percentage. A “corridor” is required if cash approaches the
death benefit so policy does not become a MEC.
Known Test Questions & Concepts – Chapter 27
1. Which of the following rules would apply if an agent knows an applicant is going to cash in an old policy and use
the funds to purchase new insurance?
A. Conversion rule
B. Disclosure rule
C. Replacement rule
D. Reinstatement rule
2. Which of the following is correct about the replacement rule?
A. The replacement rule applies only to health insurance policies.
B. The agent has 90 days from the effective date to deliver a Buyer’s Guide.
C. Instructions regarding the rule are available from appointed life insurers.
D. Up to 30 days is allowed for a full refund of premium.
3. In which of the following ways is a beneficiary protected from the creditors of the deceased insured?
A. The proceeds of an insurance policy can always be claimed by the deceased insured’s creditors.
B. When the policy is made payable to the estate, the proceeds are protected from the creditors.
C. If the policy is made payable to a named beneficiary, then the creditors can make no claim on the
proceeds.
D. The cash surrender value of a life insurance policy can be attached by an ordinary creditor.
4. All of the following are correct about the policy loan interest rate EXCEPT
A. an adjustable rate of interest can be charged
B. an insurance company can charge a fixed rate of up to 10 percent
C. adjustable interest rates are based on a published index
D. there are no restrictions or limitations on policy loan interest rates
5. Which of the following statements is correct about group life insurance?
A. It is written with a master policy for members of qualified groups.
B. A group member is prohibited from assigning incidents of ownership.
C. Group life rates are generally higher than those for individual policies.
D. Only the group member can pay the premiums for the group policy.
6. All of the following groups are eligible for group life insurance EXCEPT
A. employer and employee groups
B. labor unions
C. trustee groups
D. social clubs
7. Which of the following is the correct number of lives required in Florida for a group life insurance policy?
A. Three
B. Eight
C. Ten
D. No minimum
8. All of the following statements about a participating policy are correct EXCEPT
A. premiums may be higher than those for a nonparticipating policy
B. the surrender values are generally the same as a nonparticipating policy
C. policy dividends may be paid in cash
D. policy dividends paid in cash are taxable
9. Which of the following is a requirement of a participating life insurance policy?
A. Pays dividends to stockholders
B. Assesses premiums against stockholders
C. Pays dividends to policyholders
D. May be converted to a term life policy
10. All of the following statements are correct about a participating policy EXCEPT
A. dividends are not considered in comparison to non-par policies
B. dividends are paid to the policy owner
C. dividends may be used to pay premiums
D. dividends may be left with the insurer to accumulate interest
11. Variable life insurance policies involve all of the following EXCEPT
A. an approach to counter the effects of inflation
B. compliance with the Securities and Exchange Commission
C. benefits that vary with investment experience
D. a traditional approach to term life insurance
12. All of the following apply to a universal life insurance policy EXCEPT
A. the coverage includes an annual renewable term policy
B. there are no restrictions on it as far as receiving favorable tax treatment
C. there can be a flexible premium and an adjustable benefit
D. the accumulations in the policy grow on a tax-sheltered basis
13. How is replacement defined in the Florida Replacement Rule: lapsed, forfeited, surrendered or otherwise
terminated; converted to reduced paid-up insurance, continued as term insurance or otherwise reduced in
value by the use of non-forfeiture benefits or other policy values; amended so as to effect either a reduction in
benefits or in term for which coverage would otherwise remain in force or for which benefits would be paid;
reissued with any reduction in case value; pledged as collateral or subject to borrowing, whether in a single loan
or under a schedule of borrowing over a period of time for amounts in the aggregate exceeding 25% of the loan
value set forth in the policy (EXCEPT)
14. Agent’s duties in terms of replacement: present to the applicant, not later than at the time of taking the
application, a “Notice to Applicant Regarding Replacing Life Insurance” – signed by agent and applicant and left
with the applicant; leave with the applicant the original or a copy of all Sales Proposals used for presentation to
the applicant; submit to the replacing insurer with the application, a completed copy of the “Notice to
Applicant Regarding Replacement of Life Insurance” and a copy of all Sales Proposals used for presentation to
the applicant.
15. Par & non-par policies: All of the following statements about a participating policy are true EXCEPT:
premiums may be higher than those for a nonparticipating policy; the surrender values are generally the same
as a nonparticipating policy; policy dividends may be paid in case; policy dividends paid in cash are taxable.
Answers:
1. C
2. C
3. C
4. D
5. A
6. D
7. D
8. D
9. C
10. A
11. D
12. B
Life Insurance Review Class Chapter 28
Variable Annuities
209.
Where is the separate account of a VA invested? ________________ – Stocks and Bonds.
210.
How does a VA company figure the value of an accumulation unit? Divides total Variable Annuity
fund by the total number of accumulation units outstanding.
211.
Why can’t a VA company guarantee the interest to be paid on a VA? Because the market goes up
and down based on the fluctuation of stocks and bonds.
212.
How does a VA company figure the value of an investor account? Multiplies the __________ of an
accumulation unit by the number of units in an investors account.
213.
What licenses must an agent have to sell VA? Florida Life insurance & Variable Annuities, and
__________ (Financial Industry Regulatory Authority) registered representative Securities License.
214.
Who regulates the selling of VA’s? Dually regulated by the Department of Financial Services, and
______ (Securities Exchange Commission).
215.
Companies who sell VA are regulated by the SEC as? ________-end investment companies.
216.
What is the risk of a fixed annuity? Won’t keep up with __________________.
217.
Why was a Variable Annuity developed? To keep up with __________________ or outperform
common stocks and bonds.
218.
What are the two periods of a Variable Annuity? Putting in period called the ____________________
Period & the taking out period called the ______________ Period.
219.
How are accumulation units acquired? Purchaser pays in a lump sum or an agreed periodic payment
over time.
220.
Are investment gains in accumulation units currently taxable? ____. Never during the accumulation
is period there any income or capital gains taxes owed.
221.
How does the value of an accumulation unit affect the number of units a purchaser gets credited to
his account? Buys more units when value is low and less when value is high.
222.
When do accumulation units convert to an annuity units? When Annuitant ______________ or at
annuity maturity.
223.
After annuitization does the number of annuity units ever change? No.
224.
What factors determine the income an annuitant receives? Number of units and dollar value per
unit.
225.
Does the dollar value of a VA annuity unit change? ______.
226.
How often must a VA company inform a policy owner of the value of their account during the
accumulation period? Once a ________.
227.
How does a VA company make an applicant aware that a VA should not be his only source of
retirement income? By a question on the application.
228.
Can a person be licensed only as a variable annuity agent? No, must be ____________ licensed (life
& VA).
229.
What does it mean when a policy owner is entitled to a “paid-up deferred annuity”? When the
annuitant ______________________ making premium payments.
230.
If an annuity can have a waiver of premium, to which phase would it apply? Accumulation period.
231.
Is a group annuity permitted? Yes.
232.
What are the restrictions on a group annuity in order for the insurance company not to register?
A) Must be a qualified plan with at least ____ employees
B) No employee contributions can be allocated to a separate account invested primarily in common stock.
C) Must comply with the Investment Company Act of ________.
233.
What is the exclusion ratio for VA? 100%.
234.
What is the difference between stocks and bonds? Stocks promise no __________ rate of return.
Bonds reflect a debtor relationship; have a fixed interest rate and maturity date when principal will be
repaid.
235.
A systematic investor would be taking advantage of? Dollar ________ Averaging.
236.
What is dollar cost averaging? It applies equal amounts of money at regular intervals regardless of
market value.
237.
What must the agent give to a prospective VA buyer before or at the time of the sale? A
___________________.
238.
Within what period of time must an agent notify the Department of Financial Services of name or
change of address? ____ days.
ADDITIONAL FIXED & VARIABLE ANNUITIES QUESTIONS & ANSWERS
1. Is a Periodic Payment, Deferred Annuity, in the accumulation or the annuity phase? Accumulation.
2. Is an Immediate Life Annuity with 10 years certain, in the accumulation period or the annuity period?
Annuity period.
3. If you have a Tax Deferred Annuity and receive a payment of $500, of which, $300.00 was return of
investment, how much of the payment is taxable? 100%, investment was non-taxed dollars.
4. What is similar between an Annuity and a Mutual Fund? Professionally managed, requires security
license.
5. What is different between an Annuity & a Mutual Fund? Annuity guarantees lifetime income, M.F.
guarantees nothing.
6. How is the value of an Annuity unit calculated? Value of separate account divided by outstanding units.
7. What changes the value of an Annuity unit? Changes in assets of separate account.
8. What type of annuity income option gives the annuitant the largest monthly payment? Straight life.
9. What type of annuity provides a stable retirement income plus protection against inflation?
Combination of fixed and variable annuity (Equity Indexed).
10. Which can change, the number of accumulation units or the number of annuity units? Accumulation
Units.
11. In a straight life annuity, who gets the remaining funds after the owner dies? The insurance company.
12. How long would the company pay out a $100,000 lump sum investment on an Immediate, Life with a 10
year certain annuity, when the annuitant did not die for 23 years? 23 years.
13. What does 10 Year Certain guarantees? That company will make payments for at least 10 years; if the
annuitant dies before the years are up, the beneficiary will keep getting the money through the end of
the 10 years. If the annuitants out lives the 10 years of payment income ceases.
14. How long will the owner of a VA receive payments after he annuitizes? For life of the annuitant.
15. What guarantee is there on the interest rate on a VA? None tied to market returns.
16. What is the federal government penalty for withdrawing money from an annuity before 59½? 10%.
17. What is the tax difference between gains on VA and gains made on Mutual Funds? Gains inside the VA’s
are tax deferred, at retirement they are taxed as ordinary income tax; mutual funds are taxed as they
grow.
18. How does the performance of the underlying portfolio investment affect the value of a VA? It increases
or decreases accordingly.
19. What does a life annuity guarantee? Income for life.
20. What is a company called that writes both insurance and VA? Ordinary Insurer.
21. If you can purchase a lump sum immediate annuity, why can’t you purchase a periodic immediate
annuity? Periodic means in the accumulation stage, immediate means payments start right away
(annuity stage).
22. If the same amount is invested each month and the value of the underlying stocks increases does the
money buy more or less units? Less (dollar cost averaging).
23. A 50-year-old client, in the 30% tax bracket, invested $10,000 in an annuity, which is now worth
$16,000. How much will it cost him if he cashes in the annuity? $3, 400. (10% penalty on $16,000. plus
30% on $6,000 growth).
24. A client invests $80,000 in an immediate straight life annuity, which pays him $1,000 per month. How
much will his beneficiary get when he dies 12 months later? Nothing.
25. While making periodic payments to your annuity, you get a statement showing that your account has
made $127 in capital gains, is this money taxable? No, not until it is paid out, and then taxed as
ordinary income.
26. What VA option guarantees payment for a period of time or until death whichever is greater?
Life w/ period certain.
27. What are the 6 elements that determine the payout amount of a VA?
1. Age 2. Sex 3. Amount invested 4. Interest earnings 5. Company expenses 6. Payout Option
28. Is insurability a factor in buying an annuity? No, only in life insurance.
29. What licenses do you need to sell VA? Florida Life & Variable Annuities License and a FINRA Securities
license.
30. How soon can payout start on a deferred VA? After accumulation units are converted to annuity units,
no sooner than 12 months after established.
31. What happens in a 20 year certain annuity if the annuitant dies in the 12th year? The beneficiary
receives payments for the last 8 years.
32. What would you recommend a 68-year-old woman purchase; she’s widowed, retired, in good health and
needs money for everyday living? A lump sum immediate straight life annuity.
33. Would a $100,000 immediate annuity pay more to a 60 year old than to a 70 year old?
No, because a 60 year old will live longer.
34. What is meant by the phase Variable Annuity policy owner is entitled to a paid-up deferred VA? It’s a
non-forfeiture option that credits policy owners w/ paid up policy when they discontinue making
payments (Accumulation Phase).
35. Does a VA have a loan value? Yes although some group contracts don’t allow it.
36. What is the relationship between the annuitant’s separate account and the separate account portfolio? It
reflects changes in the assets in the company’s separate account.
37. Kay had a payroll deduction tax-deferred annuity. She contributed $9,000. It is now worth $15,000. When
she annuitizes, how much of the money will she have to pay taxes on? All of it.
38. If the number of units is fixed in the annuity stage of a VA, is the payment amount also fixed? No Why?
The varying interest rate is reflected in the payments because the VALUE of each unit can change.
39. How are fixed annuities funded? Single payment or periodic payments.
40. If expense costs more than projected, will it affect the annuitant’s account? No Why? Company
Responsibility.
41. What does a VA guarantee? Income for life.
42. What annuity option pays an annuitant until his death, but if the annuity fund is not depleted, pays his
wife the remainder in a lump sum? Cash refund.
43. What income option pays an annuitant until his death, and then pays his wife the same amount until
she dies? Joint and full survivor.
44. What income option pays an annuitant until his death and then continues the same payment to his
wife until the fund is depleted? Installment refund.
45. What does an annuity protect a person from outliving? His/her income.
46. If a couple has a Joint Life Annuity, how is a spouse protected when the annuitant dies? She’s not.
47. What is the guarantee called that guaranties annuity payments for life? Survivorship factor.
48. What must be done for an annuitant to start receiving payments? Convert to annuity units.
49. Who is responsible for the investment risk in a VA? The annuitant.
50. What is the only way you can purchase an immediate annuity? Lump sum.
51. What are the 3 things variable Life insurance and variable Annuities have in common?
Separate accounts, dually licensed agents, flexible returns.
52. What can change the value of the annuity units? Performance in the separate accounts.
53. Will the return on a VA be more or less than a fixed annuity? Depends on whether fixed dollar annuity
maintain their purchasing power through time.
55. Do you pay income tax on the money you put into an annuity? No, if it is a qualified plan, (i.e.: TSA,
Traditional IRA) yes, if it is a non-qualified annuity.
56. When do you pay income tax on the gains made within your annuity? Upon payout.
57. What is the option called that guarantees payments for a period of time or until death whichever is
greater? Life and period certain.
58. If you are purchasing a deferred annuity and your payments are $150 a month, what phase are you in?
Accumulation.
Known Test Questions & Concepts – Chapter 28
1. Which of the following is one of the basic types of variable annuity?
A. Delayed
B. Guaranteed
C. Immediate
D. Retirement
2. Common stocks are used in the investment portfolio underlying variable annuities because common stocks
A. usually provide a hedge against inflation
B. guarantee a minimum interest rate
C. are based on the full faith and credit of the insurer
D. are insured by the federal government
3. Insurers selling variable annuities are subject to
A. state regulation
B. Federal Trade Commission regulation
C. bank examiners’ scrutiny
D. municipal regulation
4. The period of time from a variable annuity contract’s issue date until the start of payments is known as the
A. deductible period
B. accumulation period
C. probationary period
D. funding period
6. During the accumulation period of a deferred variable annuity, the value of the individual account rises or
falls based on the
A. variable premiums
B. number of annuitants
C. investment results
D. company expenses
6. Before VA benefits can be paid out, the accumulation units in a participant’s account must be converted to
A. investment units
B. statistical units
C. annuity units
D. optional units
7. When can’t the number of units be changed? Annuity period
Answers:
1. C
2. A
3. A
4. B
5. C
6. C