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In insurance, a type of risk that involves the chance of loss or gain and which is therefore uninsurable is called

speculative risk: Speculative risk is risk that may result in loss or gain. This type of risk is generally uninsurable.

A hurricane is an example of a(n)

Peril: A hurricane is an example of a peril. A peril is a condition that involves danger or risk and is the cause of a loss. Insurance policies are written to provide financial protection against losses from stated perils.

Which of the following is an example of pure risk?

the loss of life: The loss of a life is a good example of pure risk because there is no possible gain in this situation.

Which of the following is defined as increasing the severity or frequency of loss?

Hazard: A hazard does indeed increase the number of, or the severity of, losses.

Mary refuses to fly on a commercial airplane for her business. This is an example of risk ________.

Avoidance: Mary refuses to fly on a commercial airplane for her business. This is an example of risk avoidance.

The banding together of individuals who collectively agree to cover a loss suffered by any group member is the definition of which method of handling risk?

share the risk: Under risk-sharing each member of a group agrees to share the financial burden of a loss that could be suffered by any member.

Pamela replaces the batteries in her smoke alarms throughout the house and tests them once a year. This is an example of

risk reduction: Risk reduction is an option to lessen the possibility of loss when a risk cannot be avoided. In this case, the risk of fire that could result in severe loss is reduced through having active fire alarms.

Which of the following is considered an element of insurable risk?

The risk of loss must be measurable with a dollar value defined.

Adverse selection can be described as

the fact that people in poor health are more likely to buy and keep insurance. Adverse selection is selection against an insurer. It refers to the tendency of persons who are likely to make a claim based on their circumstances to buy and keep insurance. For example, a person who is sick is more likely to buy health insurance and to keep the policy in force than a healthy person.

This term is the principle that the greater the number of incidents of a random process, the more likely that the expected number of incidents and the actual numbers of incidents will be the same.

law of large numbers: The law of large numbers describes the principle that the greater the number of incidents of a random process, the more likely that the expected number of incidents and the actual numbers of incidents will be the same. This fact allows the insurer to predict the extent of risk.

Both mutual insurance companies and stock insurance companies have which of the following features in common?

Both can issue dividends:The stock company can issue dividends to its stockholders; the mutual company can issue dividends to its policyowners.

The Grand Halvorson Lodge has 250 members, united by a common Danish heritage. For 50 years they have also run an annual carnival for the purpose of sponsoring families in need of medical care for their children. All the money brought in through dues and fund-raising events is used to support their non-profit work with needy families. The Grand Halvorson Lodge offers life insurance to its members. What type of insurer is it considered?

fraternal benefit society: The members of a lodge or fraternal organization can provide life insurance for their members.

A group of people who agree to pro-rate and share the losses suffered by other members is called a(an) ______________ insurer.

Reciprocal: A group of people who agree to pro-rate and share the losses suffered by other members is called a reciprocal insurer.

Which of the following services does Lloyd's of London provide?

a common meeting ground where member associations can conduct insurance business: Lloyd's of London provides a common meeting ground where member associations can conduct insurance business.

When a state bars the sale of a particular coverage within its boundaries, a typical insurance company cannot cover it. In this case, an insurer not licensed in the state can underwrite this insurance through a third party broker. What type of insurer can underwrite the coverage in this case?

a surplus lines insurer: A surplus lines insurer is not licensed to do business in the state. However, it must be eligible to provide unique coverage when requested through the surplus lines market.

When an insurance company cedes part of an insurance risk to another insurance company, the process is known as

reinsurance: When an insurance company wants to transfer some or all of the risks represented by its insureds, the process is known as reinsurance. The company accepting the risk being transferred is the reinsurance company.

Which of the following statements is TRUE about government insurers?

The populace, through taxation, funds the insurance program. Government insurance is funded through taxation.

An insurance company that has received a certificate of authority from the state to sell insurance in that state is known as a(an) ___________ insurer.

Admitted: An insurance company that has received a certificate of authority from the state to sell insurance in that state is known as a(an) admitted insurer. Agents who, within a given state, sell insurance for a non-admitted insurance company face severe penalties.

In an insurance transaction, the insurance salesperson in the agency system who legally represents the insurer is known as the __________.

Agent: In an insurance transaction, the insurance salesperson in the agency system who legally represents the insurer is known as the agent. (A broker, on the other hand, has traditionally and legally been viewed as a representative of the applicant rather than of the insurer.)

XYZ Insurance, incorporated in Texas, has agents authorized to sell life insurance in Arkansas. In Arkansas, XYZ Insurance is categorized as which of the following?

a foreign insurer: In Arkansas, XYZ Insurance is categorized as a foreign insurer.

Under the rules of agency, the party for whom the agent acts is called the ______.

Principal: Under the rules of agency, the party for whom the agent acts is called the principal. An agent and principal are the two parties involved in the agency relationship.

The agent holds three types of authorities. The authority that a customer believes that an agent holds based on the agent's statements and which may make the insurer liable for the agent's acts is called _________ authority.

Apparent: The authority that a customer believes that an agent holds based on the agent's statements and which may make the insurer liable for the agent's acts is called apparent authority.

Which of the following statements is TRUE about a legal contract?

A contract is enforceable at law. A contract is enforceable by law. Once all of the elements of the contract have been met then the contract is binding on all parties.

Based on the definition of a legal contract, which of the following statements represents an offer?

an application for coverage presented by the applicant with the first premium. An application for coverage presented by the applicant with the first premium constitutes a legal offer.

ABC Insurance reviews Henry Garrett's application for insurance and decides to insure Henry for an amount that is less than what Henry applied for. It presents Henry with a policy for $100,000 instead of the $200,000 he requested. The legal term that refers to the action taken by ABC Insurance is __________.

Counteroffer: ABC Insurance has rejected Henry's offer and made a counteroffer.

The terms of an insurance policy must be accepted or rejected as presented; they are not open to negotiation. Which term describes this characteristic of insurance policies?

Adhesion: An insurance contract is a contract of adhesion. This means it is drafted by the insurer and offered to the prospective policyowner on a take-it-or-leave-it basis.

Which of the following statements is TRUE about insurance policies?

Only the insurer is required to make an enforceable promise. In a unilateral contract such as an insurance contract, only the insurer is required to make an enforceable promise.

With regard to an insurance contract, which of the following would constitute grounds to void the contract?

Fraud: Fraud is the act of deceiving with the intent to gain something of value. It is grounds to void a contract.

Fred's policy clearly states that he must send his premiums directly to the insurer's home office in Columbus, Ohio. For five years, however, Fred always paid his life insurance premiums to his agent instead. The agent then passed them on to the home office. Last month, on the 20th, Fred was hit by a truck and killed two days after receipt by the agent of Fred's latest annual premium. The insurer denied the death claim by stating the contract premium was not paid. However, the beneficiary is able to collect the death benefit based on application of which of the following legal principles?

Estoppel: Estoppel involves one party's giving up of a right, involuntarily. In this case, the insurer gives up the right to deny a claim based on the issue of where premiums are paid because he has accepted the arrangement for the prior five years.

Which of the following best describes an agent's responsibilities?

An agent has to act in the best interests of insureds, applicants, and insurers. In addition to the duties an agent owes to the insurer, the agent also must act only in the best interests of the applicant or insured.

Julie accepts Tom's application for a life insurance policy. She also takes his premium and sends it directly to the insurance company's home office. Her agency contract does not mention the handling of premiums. Which type of authority allows Julie's actions?

Implied Authority: Julie's handling of the premium is an example of implied authority. While not specifically mentioned in her agent's contract, the contract implies Julie's authority to collect and remit premiums because it is required to carry out her duties as an agent.

What authority does an insurer give to an agent through the agent's contract?

express authority: The contract between the agent and insurer gives the agent express authority. An agent's contract specifies the activities the agent can perform and outlines the agent's duties.

Under the captive agency system, who employs an agent?

one insurance company. Under the captive (or career) agency system, one insurance company employs the agent. The agent works at a branch of the company and earns commissions for sales. A general agent supervises the agent.

What is a person's alcoholism?

Hazard: A hazard is a condition that increases the frequency or severity of the loss. Therefore, a person's alcoholism is a health hazard that may cause illness or early death.

Adverse selection arises from which of the following?

The fact that people in poor health are more likely to buy and keep insurance. Adverse selection is the tendency of people more likely to have a claim to buy and keep insurance. These people are selecting against the insurance company. For example, a person who is sick is more likely to buy health insurance and to keep the policy in force than a healthy person.

An insurer receives a "B" rating from a rating organization. Based on that rating, what is its ability to meet its contract obligations?

speculative under stressful circumstances: If an insurer receives a "B" rating, then the rating organization sees its ability to honor its insurance obligations under stressful circumstances as speculative.

How do insurers treat a flood?

as a peril: A flood is a peril, which is a condition that involves danger or risk and causes a loss. Insurance policies offer financial protection against losses caused by perils.

Which of the following statements is TRUE regarding insurable interest?

An applicant can take out a policy on a business partner in a small business. Business partners have a legitimate insurable interest in one another since the death of one would be very harmful to the business.

Jeff and his wife Anne each took out life insurance policies. Jeff named Anne and his son Andy as joint beneficiaries; Anne named Jeff and Andy as joint beneficiaries. Ten years later, they divorced. Sixteen months later, Jeff suddenly dies of a heart attack. At the time of Jeff's death, the policy was in force, and no changes had been made. According to the concept of insurable interest, who collects the death benefit?

both Anne and Andy: Because the insurable interest existed at the time the policy was written, the named beneficiaries, Anne and Andy, share in the death benefit.

An insurance product characterized by small coverage amounts, with premiums paid on a weekly or monthly basis, and a death benefit but no living benefits, is called a(n) _________ policy.

industrial insurance: An industrial insurance policy offers individual coverage in small amounts usually around $1,000 to $2,000, with premiums paid frequently. Since little cash value accumulates, these policies do not offer living benefits.

An insurance product characterized by whole life coverage as long as the premiums are paid in any dollar amount. It offers both a death benefit and living benefits. It is not regulated by FINRA. What is this policy called?

Permanent: Permanent insurance lasts for the entire life of the insured. It offers both a death benefit and living benefits.

Which of the following is added to the net single premium during loading to produce the gross premium amount?

expenses and contingencies: The actuary adds an amount for expenses and contingencies called "loading" to produce the gross premium.

Which of the following factors used in calculating life insurance premiums identifies what the insurer expects to earn on the premiums it receives?

Interest: Interest is the income that the insurance company can expect to earn on the premiums it receives.

Because actuaries really don't know the mortality when determining the gross premium for the future of a life insurance policy, they typically

intentionally underestimate expected future earnings and overestimate expected future mortality and expenses. Actuaries really don't know the mortality when determining the gross premium for the future of a life insurance policy. So, they intentionally underestimate expected future earnings and overestimate expected future mortality and expenses. This provides a margin of financial safety that ensures benefits payments due 100 years in the future will be paid.

Which of the following factors is included in calculating the net single premium?

Mortality: Mortality and interest are the only factors considered in calculating the net single premium.

Under which premium mode would the policyowner pay the highest total premium (when converted to an annualized amount)?

Monthly: A monthly premium mode includes the most in charges to cover the insurers increased expenses and lost earnings.

The agent's primary responsibility(ies) during field underwriting is to

collect the right data from the applicant and disclose the insurer's underwriting and policy issue practices to the applicant. The two most important duties that the agent performs during field underwriting are to collect the right data to help the insurer decide whether to accept the application; and to disclose information about the insurer's underwriting and policy issue practices.

A premium receipt that guarantees coverage for the period after the application is signed and before the underwriter makes a decision is called a

binding receipt: A binding receipt guarantees temporary coverage for the applicant for the entire underwriting period. This holds true even if the insured is later found to be uninsurable.

If the applicant makes a mistake on an application, which of the following actions should the agent take?

Ask the applicant to cross out the mistake, make the correction and initial the change. If the applicant makes a mistake on an application, he or she should cross out the incorrect entry, add the correct entry and initial the change.

Ted is taking out a life insurance policy naming his sister Gail as the insured. Their brother Randy is the beneficiary. Ted will be responsible for paying the premiums. Who is required to sign the application?

Ted and Gail: Both the applicant and the insured must sign the application in this case.

A customer has purchased over a dozen life insurance and annuity contracts over the past year, using cashier's checks to pay the premiums. If this action is part of a money laundering operation, what stage does it represent?

layering stage: Money laundering is a process that moves illegal money through three stages on its way to apparent legitimacy: placement, layering, and integration. The second stage, layering, is achieved by using cash or cash equivalents to purchase multiple financial instruments that can subsequently be converted into clean money.

When a producer determines that the sale of a life insurance policy will replace an existing policy, the producer must do all of the following EXCEPT

notify the state insurance department. A producer is not required to notify the state insurance department of a transaction that involves the replacement of a life insurance policy.

The insurer has approved the policy, with conditions that the applicant must meet before delivery is official. The type of policy delivery that the agent should make in this situation is called ________.

Legal: If any conditions are attached to delivery of a policy then legal delivery is preferred. Legal delivery requires personal delivery of the policy to the client, along with an explanation.

A policy's effective coverage date begins on

the date of the receipt of a first payment or the date of a medical exam, if required. The date of the receipt of a first payment or the date of a medical exam, if required, controls when the insurance coverage goes into effect. A binding or conditional receipt identifies this date when the premium is submitted with the application. If the premium is not submitted until the policy is delivered, the date the applicant pays the first premium is still the effective date of coverage.

What type of information is typically found in the agent's report?

The agent's report is the primary source for information about any prior insurance policy, if the new coverage is a replacement policy. The agent may also be able to identify other policies the applicant has.

What information about the proposed insured is available from the Medical Information Bureau to assist the underwriter in making a decision?

Only the applicant's medical impairments reported by other insurers are available. The Medical Information Bureau maintains a database of confidential information on applicants for life and health insurance that have been underwritten by member insurers and found to possess a medical impairment. While all impairments must be reported, the insurer does not report its underwriting decision, therefore this decision is not available to the next insurance underwriter.

According to FCRA, an insurer who requests an MIB, inspection, or consumer report, is responsible for which of these follow-up actions with the applicant?

They are responsible for disclosing to the applicant all requests for reports, what each covers, and how to contact the reporting agency for a copy of a report. The FCRA requires the requesting agency (in this case the insurer) to notify the applicant that a report is being requested. What the report will cover must also be disclosed to the applicant. If the applicant is denied insurance based in part on a report, then the insurer must also provide the reporting agency contact information so that the applicant can request a copy of the report.

Nine out of ten people fall into which two risk classifications based on the underwriter's evaluation process?

preferred and standard: Nine out of ten people fall into the preferred and standard risk classifications based on the underwriter's evaluation process.

Insurers use inspection reports to verify the information applicants provide to agents and examiners. Who is most likely to be the subject of an inspection report?

applicants who ask for very high amounts of life insurance or business insurance: Insurers most often order inspection reports on applicants who ask for very high amounts of life insurance or business insurance.

Harry and Constance want life insurance to provide death benefits in case either dies, as well as living benefits in the event of financial emergencies. Which of the following would this couple most likely buy?

whole life insurance: Whole life insurance pays death benefits for the insureds' lifetimes, or until age 100. Whole life policies also accumulate cash values, which grow over the life of the policy. These are the "living benefits" Harry and Constance are seeking.

Life insurance has been purchased by ABC Company on the lives of two partners, Hugh and Danny, and three key employees Eileen, Vern, and June. Which of the following would apply if Hugh and June were to leave the business?

The company could keep the life insurance it has on both Hugh and June, even though both are no longer employed there. A company can keep the life insurance it carries on its employees, even when they are no longer employed there.

Someone other than the insured often applies for and owns a life insurance policy. Which of the following can NOT be an applicant and owner?

a minor child of the insured: The applicant and owner cannot be a minor child.

An underwriter must keep application information confidential to comply with the Fair Credit Reporting Act (FCRA) of 1971. The FCRA does which of the following?

sets procedures requesting agencies must follow to ensure confidentiality, accurate reporting, and proper use of the information. The FCRA sets procedures that requesting agencies must follow to ensure confidentiality, accurate reporting, and proper use of the information.

Which of the following best describes the bring back rule?

If an insured dies within three years after transferring life insurance to a third party, the policy death benefits become part of the insured's estate for tax purposes. If the insured dies within three years after transferring the policy to a third-party owner, the policy death benefits become part of the insured's estate for tax purposes.

When reviewing applications and applying underwriting standards, insurance companies must use the same selection criteria with all applicants. State laws prohibit discrimination against specific groups of people in all of the following, EXCEPT

setting premiums: Premiums are determined on the basis of the applicant's risk. If a specific group, by its nature, constitutes a higher risk, the insurer has the right to set premiums generally higher for that group.

An actuary is setting life insurance rates. What affect will it have on a policy if higher interest assumptions are used?

Premiums will be lower: In making life insurance rates, higher assumed interest earnings reduce premiums.

Which one of the following statements about term insurance is correct?

The policy pays a death benefit only if the insured dies during the term. Term insurance pays a death benefit only if the insured dies during the term.

For policyowners who do not pay premiums annually, insurance companies increase premiums to do which of the following?

offset the insurer's increased billing costs and lost interest: The additional premiums do offset the insurer's increased billing costs and lost interest.

Which of the following statements generally guides insurance companies in determining "loading"?

Total loading from all policies should cover total operating costs, provide a safety margin, and contribute to profits or surplus. Total loading from all policies should cover total operating costs, provide a safety margin, and contribute to profits or surplus.

Which of the following best describes how the insured's money is handled in a variable life insurance policy?

Premiums are placed in investment subaccounts owned by the policyowner. Under a variable life insurance policy, premiums are placed in investment subaccounts owned by the policyowner.

Audrey owns a five-year non-renewable term life insurance policy. What occurs if Audrey is alive at the end of its five-year term?

The policy ends without value. If Audrey is alive at the end of her non-renewable term life insurance policy's five-year term, the policy ends without value.The essence of term life insurance is that it is coverage that continues for a specified term. If the insured dies during the term of coverage, the death benefit is paid. If the insured is alive at the end of that term, the coverage ends without value.

Term insurance that may be extended at the end of the term for an additional period without requiring the insured to present proof of insurability is known as _____ term insurance.

Renewable: Renewable term life insurance is term insurance that may be extended at the end of the term period for an additional term period without requiring proof of insurability.

Convertible term life insurance allows the policyowner to exchange the coverage for a ________ life insurance policy without proving insurability.

Permanent: Convertible term life insurance allows the policyowner to exchange the coverage for a permanent life insurance policy without proving insurability.

What decreases under a decreasing term insurance policy or rider?

the death benefit: Under a decreasing term insurance policy or rider, the death benefit decreases. Just like level term insurance, decreasing term insurance provides temporary protection for a specified period of time. The significant difference between level term insurance and decreasing term insurance is that in decreasing term insurance the death benefit decreases monthly over the policy term until it reaches zero at the end of the term.

What feature stays level under an increasing term insurance policy or rider?

the premium: Under an increasing term insurance policy or rider, the premium stays level. However the death benefit increases.

What two features of whole life insurance distinguish it from term insurance?

It provides permanent protection for the insured's whole life and it includes a cash value feature. Whole life provides permanent protection for the insured's whole life and it includes a cash value feature.

In an ordinary life insurance policy, which of the following features increases over the policy's lifetime?

cash value: Under an ordinary life insurance policy, the net amount at risk decreases while the cash value increases.

In an ordinary life policy, death benefits and premiums are always_________.

Level: In an ordinary life policy, death benefits and premiums are always level.

Which of the following is TRUE with respect to limited payment life insurance policies?

The premium-paying period is shorter than for ordinary whole life insurance, and a higher premium is charged for otherwise identical ordinary whole life insurance coverage. The premium-paying period is shorter than for ordinary whole life insurance, and a higher premium is charged for otherwise identical ordinary whole life insurance coverage.

A single premium life policy becomes a _________ because it fails the 7-Pay Test.

MEC: The 7-pay test considers the amount of premiums paid into the contract during its first 7 years. If this amount exceeds the net level premiums needed to produce future benefits (such as a paid-up policy) after seven level annual payments are made, the policy is a modified endowment contract, or MEC. It is still life insurance, but its emphasis on tax-deferred increase in cash value causes it to lose some of the favorable tax treatment otherwise given to life insurance.

In a modified premium whole life policy, premiums in the earlier policy years are generally ________ than they are in later years.

Lower: In a modified premium whole life policy, premiums in the earlier policy years are generally lower than they are in later years.

Which of the following features is the same for ordinary whole life, modified premium whole life, and graded premium whole life policies of the same amount?

face amount: The face amount is the same for ordinary whole life, modified premium whole life, and graded premium whole life policies of the same amount.

Straight whole life, limited pay whole life, and modified and graded premium whole life all share a common trait. What is that trait?

They offer fixed, "known in advance" premium amounts. Straight whole life, limited pay whole life, and modified and graded premium whole life all share a common trait: they offer fixed, "known in advance" premium amounts. That fixed amount may increase over time, as is the case with modified and graded premium policies.

Which of the following is a characteristic of both interest-sensitive and current assumption life insurance policies?

Premium rates can change over time in response to the insurer's actual mortality, interest, and expense experience. Interest-sensitive and current assumption policies have premium rates that can change over time in response to the insurer's actual mortality, interest, and expense experience.

Unlike a traditional current assumption whole life policy, an interest-sensitive whole life insurance policy includes one feature that is NON-guaranteed. Which is it?

interest credited to the policy's cash value: In an interest-sensitive whole life insurance policy, only the interest to be credited to the cash value is non-guaranteed. Unlike current assumption whole life insurance, the mortality and expense charges are guaranteed.

In a variable whole life insurance (VLI) policy, the policyowner allocates premium payments to one or more variable _________ and/or a fixed account.

sub-accounts: In a variable whole life insurance (VLI) policy, the policyowner allocates premium payments to one or more variable sub-accounts and/or a fixed account. The VLI cash values are the sum of the balance in each variable sub-account plus the balance in the fixed account.

Why do variable life policies carry charges and fees that traditional whole life policies do not?

because of the product's investment feature and the costs associated with separate account investing: Because of VLI's investment feature and costs associated with subaccount investing, the insurer may also charge a policy administrative expense or operational charge and a fee for the expenses incurred by the separate investment accounts' investment advisory fees.

Jon buys a $100,000 straight whole life policy. His twin brother, Ted, buys a $100,000 ten-pay life policy. All other factors being equal, which of the following statements is most correct?

Ted will pay higher premiums than Jon. Under a limited pay life insurance policy, premiums are paid for a shorter period of time. As a result, the premiums are higher than those charged for an ordinary straight life policy. Ted will pay higher premiums for a shorter time period than Jon.

Bob bought a $100,000 ten-year level term insurance policy on March 1, 2002. What will happen if he dies on March 10, 2012?

Bob's beneficiary will not get any benefits. Bob's $100,000 ten-year level term policy gives him a level $100,000 of coverage during the ten-year period. If Bob dies after the ten-year period, the policy will have expired and no benefits will be payable.

A producer must be licensed by the Financial Industry Regulatory Authority (FINRA) to sell which one of the following types of life insurance?

variable life insurance: Producers who sell variable life products must hold both a life insurance license and a NASD Series 6 or 7 securities license.

Andrea bought a $300,000 term-to-55 policy. Which of the following statements about the policy is NOT correct?

The policy will pay the entire death benefit only if Andrea reaches age 55. Andrea's $300,000 term-to-55 policy gives $300,000 of coverage until she reaches the age of 55. The policy will pay the entire death benefit as long as Andrea dies sometime within the term of coverage.

Adjustable life insurance lets the policyowner change all of the following elements of a life insurance policy EXCEPT

the policy type. Adjustable life insurance does not let the policyowner change the policy so that it functions as universal life insurance. However, the policy can function at any one time as a term life insurance policy, an ordinary whole life insurance policy, or a limited payment life insurance policy.

Which of the following features of an adjustable life insurance policy requires the agreement of both the insurer and the policyowner to change?

premiums only: It's important to understand that with an adjustable life insurance policy, any change in the premium requires a formal adjustment to the policy. Both the policyowner and the insurer must agree to the change before it can be made.

In a universal life insurance policy, why are the three factors central to the policy—mortality, interest, and expenses—considered to be "unbundled?"

As separate policy elements, they individually impact the universal life insurance policy and allow much of its flexibility. In a universal life insurance policy, the three factors central to the policy—mortality, interest, and expenses—are considered to be "unbundled" because as separate policy elements, they individually impact the universal life insurance policy and allow much of its flexibility.

Which of the following actions does the insurer take on a universal life insurance's monthly deduction day?

deducts the cost of insurance and any expense charge: The insurer deducts the cost of insurance and any expense charge from the universal life policy's cash value.

The three factors that are unbundled in a universal life insurance policy, permitting flexibility are: mortality, expenses, and _________.

Interest: The three factors that are unbundled in a universal life insurance policy, permitting flexibility are: mortality, expenses, and interest.

The death benefit in most life insurance policies is called the policy's face amount. In universal life insurance policies, the amount of death benefit the policyowner initially buys is called

the specified amount: In universal life insurance policies, the amount of death benefit the policyowner initially buys is called the "specified amount."

Which of the following statements is TRUE under a universal life insurance policy's death benefit Option 1? Increases in cash value ____________________.

do not increase the death benefit: Under a universal life insurance policy's death benefit Option 1, increases in cash value, do not increase the death benefit paid at the insured's death.

Under a universal life insurance policy death benefit option 2, the death benefit is equal to what amount?

the cash value plus the policy's specified amount: The death benefit is equal to the policy's specified amount plus its cash value.

What is the purpose of surrender charges in universal life insurance policies?

to recover the insurer's business acquisition costs: The purpose of surrender charges in universal life insurance policies is to recover the insurer's business acquisition costs.It is not unusual, considering first year commissions, field expenses and underwriting expenses, for the acquisition cost of new business to be 150% or more of the first year premium. These business acquisition costs can be recovered by the insurer through deductions from each premium, the imposition of surrender charges, or both premium deductions and surrender charges.

Which of the following terms identifies the highest premium that the policyowner can pay based on the policy's death benefit and still maintain the policy's qualification as life insurance?

maximum premium: The maximum premium is the highest amount the policyowner can pay based on the policy's death benefit and still permit the policy to meet the guideline premium test. This test qualifies the policy as life insurance. Please try again.

Interest crediting in an indexed universal life insurance policy is

tied to an external index: Indexed universal life operates like a declared rate universal life policy except that the interest, instead of being declared by the insurer, is tied to an external index. The interest credited to the contract's values is based on the change in the associated index.

Which term below refers to a deduction made from a VUL premium by the insurer to recover its new business acquisition costs?

sales load: The sales load allows the insurer to recover its new business acquisition costs (first year commissions, field expenses, underwriting costs, etc.)

Which term below refers to a deduction made from a VUL premium by the insurer to recover its new business acquisition costs?

sales load: The sales load allows the insurer to recover its new business acquisition costs (first year commissions, field expenses, underwriting costs, etc.)

The death benefit payable under VUL death benefit Option 3 is equal to

the specified amount plus the total premiums paid: The death benefit payable under VUL death benefit Option 3 is equal to the specified amount plus the total premiums paid.The three VUL death benefit options are Option 1: The death benefit is equal to the policy's specified amount. Option 2: The death benefit is equal to the sum of the policy's specified amount plus the cash value. Option 3: The death benefit is equal to the sum of the policy's specified amount plus the total premiums paid.

All of the following statements about joint life (first-to-die) life insurance are correct, EXCEPT:

The premium is more than it would be for two separate policies providing the same death benefit. The premium is less than it would be for two separate policies providing the same death benefit.

George bought a 25-year family income policy that will provide $2,000 per month income for his survivors. If George died after ten years, how many years of income would they receive?

15: Under a family income policy if the insured dies within a specified period, the family will receive a stated amount of income from the date of death until the end of the period. Because George bought a 25-year family income policy that will provide $2,000 per month income for his survivors, and he died after 10 years, the surviving family would receive 15 years of income.

Generally, a family protection policy provides whole life insurance coverage for the principal insured and the following coverage for other family members?

term life insurance for the spouse to age 65 and each child to age 21: Generally a family protection policy provides whole life insurance coverage for the principal insured; term life insurance coverage on the spouse to age 65; and term life insurance coverage on each child to age 21.

The feature that is unique to endowment contracts versus other life insurance policies is

The endowment pays a living benefit if the policy endows while the insured is still alive. This feature is unique to endowment contracts: The endowment pays a living benefit if the policy endows while the insured is still alive. Other life insurance policies do not offer this option.

What do covered employees receive to show they have coverage under a group life insurance policy?

...

What is the primary reason for the decline in popularity of endowments?

In 1984, federal legislation passed requiring that no life insurance policy can endow before age 95. In addition to inflation, the popularity of endowments among consumer was passage of federal legislation in 1984 setting a new statutory definition of life insurance on flexible premium contracts. Under tax code Section 7702, no life insurance policy can endow before age 95.

Which of the following characteristics is TRUE for group life insurance?

All participants pay the same premium rate. All participants pay the same premium rate. (Premium rates are averaged for the entire group.)

What is the minimum number of people that a group must cover to be eligible to provide group life insurance according to the NAIC?

10: A group must cover at least ten persons under one master policy.

Two or more employers from the same industry who form a trust to buy group insurance for their employees is known by its acronym, _________.

MET: Two or more employers who form a trust to buy group insurance for their employees is known by its acronym, MET (Multiple Employer Trust).

If the employer and the employee share the premiums for a group term life insurance policy, the plan is called

a contributory plan: If the employer and the employee share the premiums of group term life insurance, the plan is called a contributory plan.

Which of the following statements about the conversion of group life insurance to individual coverage is correct?

The employee who is converting must normally apply for a conversion policy within 31 days after termination or retirement from the group. The employee who is converting must normally apply for a conversion policy within 31 days after termination or retirement from the group.

A group insurance plan that is paid entirely by the group sponsor is known as a

non-contributory plan: A non-contributory plan is one in which the group sponsor pays the entire premium amount.

Which of the following statements about credit life insurance is correct?

The type of insurance used for credit life is usually decreasing term insurance. The type of insurance used for credit life insurance is usually decreasing term insurance.

Which one of the following most correctly describes a key difference between variable life and variable universal life insurance?

Variable life policies require a fixed premium payable for the life of the policy while variable universal life permits premium flexibility. Variable life policies have a fixed premium payable for the life of the policy. Variable universal life policies generally require a minimum first premium, but policyowners do not pay a fixed amount on a set schedule after this period.

What do covered employees receive to show they have coverage under a group life insurance policy?

certificate of insurance: The insureds get a certificate of insurance to show that they have coverage under the policy.

Which of the following employees of ABC Computers could NOT convert their group life coverage to an individual policy?

Bill, who switched to part-time status: Group term life insurance normally ends when a person leaves the group. With an employee group, insurance ends when a person retires or decides to work for another employer. Regardless of the reason for leaving the group, the employee can convert coverage to an individual policy. Bill could not convert his policy because he is still an employee.

According to FCRA, an insurer who requests an MIB, inspection, or consumer report, is responsible for which of these follow-up actions with the applicant?

...

If a variable universal life policyowner chooses death benefit option 3, what will the benefit equal?

the policy's specified amount plus the total premiums paid: Death benefit option 3 under a variable universal life insurance policy pays a death benefit equal to the policy's specified amount plus the total premiums paid.

With respect to adjustable life insurance, which one of the following statements is correct?

Premiums can increase or decrease to suit the policyowner's changing needs. The policyowner can adjust death benefits, premiums, or cash value to suit changing needs.

A married couple is insured under a joint life policy. The first spouse dies. What can the surviving spouse do with the policy?

The surviving spouse may convert the policy without proving insurability. When the first spouse dies in a joint life policy, the surviving spouse has a conversion right that allows him or her to buy an individual policy with the same or lesser face amount. The surviving insured does not have to prove insurability.

In a universal life insurance policy, an insurer will make all of the following monthly adjustments EXCEPT

deducting future premium payments from the policy's cash value, if agreed to by the policyowner. Universal life policies have monthly adjustments and interest crediting tasks. Each month, on the monthly deduction day, the insurer will credit to the policy any premiums received since the last month as well as the interest on the cash value for the previous month. The insurer also will deduct from the policy the cost of insurance (the mortality charge) and an expense charge. Premium payments are not deducted from the policy's cash value.

Which one of the following statements most correctly describes a universal life insurance feature that is NOT available with traditional whole life insurance?

The policyowner can withdraw part of the policy's cash value. A policyowner can take partial withdrawals from a universal life policy's cash value. Under a traditional whole life policy, the policyowner has access to cash values only through policy loans or full surrender of the contract.

Based on the provisions reviewed, if a policyowner fails to pay a premium on its due date, generally how long does he or she have to pay the premium before the policy lapses?

31 days: The policyowner generally has 31 days to pay a premium after its due date before the policy lapses.

When does the free look period begin?

the date the policy is delivered to the owner: The free-look period begins on the date that the policy is delivered to the policyowner. If the policyowner is not satisfied for any reason, he or she can return the policy for a full refund of the premium paid.

Who has the first right to choose how the proceeds of an insurance policy are paid out when the insured dies?

the policyowner: According to the Payment of Claims provision, the policyowner has the first right to choose which payout or settlement option to use. However, he or she can defer that decision to the beneficiary at the time that the proceeds are due to be paid out.

Jack, the policyowner, recorded his age as 35 when he bought a life insurance policy five years ago. At this point the insurer finds out his actual age at the time of application was 36. Which provision describes the actions the insurer can take to adjust the policy's benefits?

misstatement of age or sex: The misstatement of age or sex provision describes what recourse the insurer has to adjust the policy's benefits and recover premiums owed if the insured's age is misstated on the application.

Under a flexible premium payment plan, the person/entity to decide the amount of the premium (after paying the first premium) is the _______________.

Policyowner: Under a flexible premium payment plan, the person/entity to decide the amount of the premium (after paying the first premium) is the policyowner.

In a third-party ownership situation, the _________ holds all rights in the policy.

Policyowner: In a third-party ownership situation, the policyowner holds all rights in the policy. The insured has no rights. In the personal insurance market, the main reason for setting up a life insurance policy with a third-party ownership arrangement is to keep the policy's death benefit out of the insured's gross estate for tax purposes. In the personal insurance market the primary reason for setting up a life insurance policy with a third-party ownership arrangement is to keep the policy's death benefit out of the insured's gross estate for tax purposes.

Brackman Brothers Candy company has bought key person life insurance on both brothers, Harry and Jerry, under a third-party ownership arrangement. Both men have made wills leaving their estates to their spouses and surviving children. When Jerry dies suddenly, who is paid the life insurance policy's death benefit?

Brackman Brothers Candy company: Brackman Brothers Candy company bought the key person insurance on Jerry's life and is the beneficiary of the policy. No other party has any rights to the life insurance proceeds.

The agent's primary responsibility(ies) during field underwriting is to

collect the right data from the applicant and disclose the insurer's underwriting and policy issue practices to the applicant.The two most important duties that the agent performs during field underwriting ar to collect the right data to help the insurer decide whether to accept the application; and to disclose information about the insurer's underwriting and policy issue practices.

A premium receipt that guarantees coverage for the period after the application is signed and before the underwriter makes a decision is called a

binding receipt: A binding receipt guarantees temporary coverage for the applicant for the entire underwriting period. This holds true even if the insured is later found to be uninsurable.

If the applicant makes a mistake on an application, which of the following actions should the agent take?

Ask the applicant to cross out the mistake, make the correction and initial the change. If the applicant makes a mistake on an application, he or she should cross out the incorrect entry, add the correct entry and initial the change.

Ted is taking out a life insurance policy naming his sister Gail as the insured. Their brother Randy is the beneficiary. Ted will be responsible for paying the premiums. Who is required to sign the application?

Ted and Gail: Both the applicant and the insured must sign the application in this case.

A customer has purchased over a dozen life insurance and annuity contracts over the past year, using cashier's checks to pay the premiums. If this action is part of a money laundering operation, what stage does it represent?

layering stage: Money laundering is a process that moves illegal money through three stages on its way to apparent legitimacy: placement, layering, and integration. The second stage, layering, is achieved by using cash or cash equivalents to purchase multiple financial instruments that can subsequently be converted into clean money.

When a producer determines that the sale of a life insurance policy will replace an existing policy, the producer must do all of the following EXCEPT

notify the state insurance department: A producer is not required to notify the state insurance department of a transaction that involves the replacement of a life insurance policy.

The insurer has approved the policy, with conditions that the applicant must meet before delivery is official. The type of policy delivery that the agent should make in this situation is called ________.

Legal: If any conditions are attached to delivery of a policy then legal delivery is preferred. Legal delivery requires personal delivery of the policy to the client, along with an explanation.

A policy's effective coverage date begins on

the date of the receipt of a first payment or the date of a medical exam, if required. The date of the receipt of a first payment or the date of a medical exam, if required, controls when the insurance coverage goes into effect. A binding or conditional receipt identifies this date when the premium is submitted with the application. If the premium is not submitted until the policy is delivered, the date the applicant pays the first premium is still the effective date of coverage.

What type of information is typically found in the agent's report?

information about any prior insurance policy, if the new coverage is a replacement policy: The agent's report is the primary source for information about any prior insurance policy, if the new coverage is a replacement policy. The agent may also be able to identify other policies the applicant has.

What information about the proposed insured is available from the Medical Information Bureau to assist the underwriter in making a decision?

only the applicant's medical impairments reported by other insurers: The Medical Information Bureau maintains a database of confidential information on applicants for life and health insurance that have been underwritten by member insurers and found to possess a medical impairment. While all impairments must be reported, the insurer does not report its underwriting decision, therefore this decision is not available to the next insurance underwriter.

Nine out of ten people fall into which two risk classifications based on the underwriter's evaluation process?

preferred and standard: Nine out of ten people fall into the preferred and standard risk classifications based on the underwriter's evaluation process.

According to FCRA, an insurer who requests an MIB, inspection, or consumer report, is responsible for which of these follow-up actions with the applicant?

disclosing to the applicant all requests for reports, what each covers, and how to contact the reporting agency for a copy of a report: The FCRA requires the requesting agency (in this case the insurer) to notify the applicant that a report is being requested. What the report will cover must also be disclosed to the applicant. If the applicant is denied insurance based in part on a report, then the insurer must also provide the reporting agency contact information so that the applicant can request a copy of the report.

Bob's only goal is to provide a death benefit to protect his family in case he dies while his children are young. What type of life insurance is best suited to this need?

term insurance: Under a term policy, insurance coverage is temporary, applying to only a limited period of time. At the end of that time, the policy expires. The policy pays a death benefit only if the insured dies during the term.

In most situations, the policyowner is also the insured. However, in many cases, the insured and policyowner are different people. This situation is called which of the following?

third-party ownership: This situation is called third-party ownership.

All the following are federal laws or related rulings that have a direct impact on anti-money laundering requirements EXCEPT the:

Fair Credit Reporting Act: The USA PATRIOT Act expands the AML directives of the Bank Secrecy Act, and FinCEN's final rules amended the USA PATRIOT Act to address the insurance company needs. The FCRA does not directly relate to money laundering.

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