L4. Life Insurance Policy Provisions Options and Riders

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  1. All of the following are true regarding an individual life insurance grace period, EXCEPT:
    A) It is usually 30 days on individual life policies
    B) The full death benefit is payable
    C) Death during the grace period is covered
    D) t is the first policy provision to apply if the insured does not pay their premium on time
    • B) The full death benefit is payable
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • On individual life insurance policies, when the insured dies in the grace period, the face amount of the policy is paid to the beneficiary, less the overdue premium.
  2. Which of the following dividend options would be taxable:
    A) One-year term
    B) Reduction of premium payments
    C) Cash
    D) Interest
    • D) Interest
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Dividends paid to policyholders of a mutual insurer are not taxable as the IRS considers them to be a return of overpayment of premium. However, if the policyholder selects the interest dividend option, the interest the insurer pays the policyholder would be taxable as ordinary income.
  3. All of the following are true about the Accidental Death Benefit rider, EXCEPT:
    A) Death must be related to an accident that occurs prior to a specified age
    B) Death must be accidental
    C) Death must occur within a certain period of time after the accident
    D) Death must be occupational
    • D) Death must be occupational
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • The Accidental Death Benefit (ADB) rider may be added to a life insurance policy at issue for an additional premium. It usually pays double the face amount of the policy if the insured dies within 90 days of an accident, occupational or not. However, the ADB rider usually drops off the policy at a specified age (often 65), so accidents occurring after that age would not be covered, although the policy would still pay single indemnity.
  4. Which of the following has the rights of ownership for the life of the insured:
    A) Insured
    B) Family of the insured
    C) Beneficiary
    D) Owner
    • D) Owner
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • The rights of ownership belong to the owner of the policy, who is not always the insured. Of course, the owner could transfer the policy to another person by making an absolute assignment.
  5. A temporary assignment of life insurance benefits may be accomplished by executing a(n):
    A) Absolute assignment
    B) Revocable assignment
    C) Collateral assignment
    D) Irrevocable beneficiary
    • C) Collateral assignment
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • A collateral assignment is a temporary assignment that a policy owner might make to a bank as collateral for a loan.
  6. An employer may transfer a Key Person life insurance policy from one key person to another by making a(n):
    A) Life settlement transaction
    B) Irrevocable beneficiary designation
    C) Change of insured
    D) Absolute assignment
    • C) Change of insured
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Some insurers offer a "Change of Insured" rider, which allows the policy owner to transfer coverage from one key person to another, subject to proof of insurability.
  7. Which of the following is a non-forfeiture option that provides continuing cash-value build up:
    A) Extended Term
    B) Cash Surrender
    C) Reduced Paid-Up
    D) Deferred Annuity
    • C) Reduced Paid-Up
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)There are only three non-forfeiture options: 1) Cash Surrender, 2) Reduced Paid-Up and the automatic option, 3) Extended Term. Their purpose is to protect the insured's accumulated cash values in case the Whole Life or Endowment policy lapses. A client has 60 days from the policy's premium-due date to select the option they prefer. If none is selected, the company will give the client the automatic option, Extended Term. Here, the face amount of the new policy is the same as on the initial policy. The accumulated cash value is used internally by the company to pay the premium for a new Term policy at the insured's attained age. The policy term is, however, as long as that amount of money will buy. There is no cash value, and at the expiration of the term, the policy expires and the insured has no further coverage.If the client selects the Reduced Paid-Up option, the company then uses all of the accumulated cash value to buy the client internally a new Whole Life policy paid up to age 120. It would have an immediate cash value, but no further premiums would ever be due. The face amount would be more than the accumulated cash value, but less than the original face amount of the initial policy, so it is called Reduced Paid-Up. Cash value would continue to accumulate, and at maturity (age 120) the cash value would equal the face amount. No physical exam is required. Of course, if the client takes Cash Surrender, there is no further coverage.
  8. The owner of a business is insured under a $100,000 Key Employee Life policy that contains a Double Indemnity clause and a Suicide Clause. The business has paid the annual premium of $2,000. Six months after the inception date of the policy, the insured commits suicide. The insurance company's liability for payment is:
    A) $2,000
    B) $0
    C) $100,000
    D) $200,000
    • A) $2,000
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • If an insured dies by suicide within the first two years of a new life insurance policy, there is no coverage. However, the insurance company will refund the premium paid to the beneficiary.
  9. The provision in a life insurance policy that provides protection against unintentional policy lapse is known as the:
    A) Payor Clause
    B) Waiver of Premium Benefit
    C) Reduction of Premium Option
    D) Automatic Premium Loan Provision
    • D) Automatic Premium Loan Provision
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Automatic Premium Loan (APL) is a rider that can be added to any life insurance policy that has or will have a cash value. It cannot be added to Term insurance. It is usually free, but the producer or client must check this option on the application. If the policy has a cash value and the insured forgets to pay the premium when due, the policy will not lapse, since it will borrow from itself to pay the overdue premium. Remember: This is a rider, not a non-forfeiture option. However, when the insured dies, all loans are subtracted from policy proceeds, so the beneficiary's pay-out may be reduced.
  10. Which statement about the Misstatement of Age Provision in a life insurance policy is true:
    A) If the insured's age has been understated, it provides that a death benefit smaller than the face amount of the policy will be payable
    B) If the insured's age has been overstated, it provides that a premium refund and the face amount of the policy will be payable
    C) It becomes inoperative after the expiration of the policy's contestable period
    D) It is an optional provision
    • A) If the insured's age has been understated, it provides that a death benefit smaller than the face amount of the policy will be payable
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • The Misstatement of Age Provision is separate from the Incontestability Clause. Lying about age cannot void the policy. However, it can reduce the amount of benefits paid at the time of your death. The formula to calculate this is as follows: The client is 40, but states 30, to get a lower rate. The client buys a $100,000 policy. The premium paid is $200 per year. At the correct age, the client should have paid $400 per year. Divide what the client did pay ($200) by what the client should pay ($400) and multiply the answer times the face amount to determine what will be paid at death.
  11. Which of the following dividend options, when elected, would cause the insurer to send the insured a check:
    A) Cash payment
    B) Reduced paid-up
    C) Paid up additions
    D) Extended term
    • A) Cash payment
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • If the insured elects the cash payment dividend option, they will receive a non-taxable dividend distribution check from the insurer.
  12. If the insured's age was overstated at the time a life insurance policy was purchased and the error is discovered upon the death of the insured, the insurance company will:
    A) Provide the additional insurance in the amount that has been purchased by the additional premium
    B) Refund the overcharge in premiums to the beneficiary
    C) Be prevented from taking any action according to the provisions of the Incontestability clause
    D) Void the policy
    • A) Provide the additional insurance in the amount that has been purchased by the additional premium
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • This is the reverse of the typical situation, in which the insured usually understates their age in order to have a lower premium. If the insured had overstated their age, then of course, they would have been paying a higher premium than they should have. So the formula works in reverse, too: The company would adjust the face amount to be higher, based on the amount the incorrect premium would have bought at the insured's correct age.
  13. A life insurance company may contest a policy during the Contestable period for which of the following reasons:
    A) Nonpayment of premiums
    B) Material misrepresentation
    C) Misstatement of age
    D) Change of occupation
    • B) Material misrepresentation
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • The Incontestability clause states that the policy is "contestable" for the first two years for material misrepresentation by the insured on the application for insurance. Life insurance policies do not have a change-of-occupation clause. The Misstatement of Age clause permits the insurance company to adjust benefits up or down in the event the insured has lied about their age at the time of application.
  14. The purpose of a Grace Period provision is to:
    A) Protect the insurance company against adverse selection by policyholders
    B) Protect the policyholder against unintentional lapse
    C) Permit the insurance company to determine the cause of death
    D) Permit the beneficiary to establish an insurable interest
    • B) Protect the policyholder against unintentional lapse
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Grace Periods are: 30 days on Whole Life, Term, and Endowment; 28 days on Industrial Life, and 31 days on Group Life. If the insured dies within the grace period, the overdue premium is subtracted from policy proceeds and the beneficiary receives the remainder.
  15. When the insured lists a group of beneficiaries it is known as a:
    A) Minor designation
    B) Individual designation
    C) Trust designation
    D) Class designation
    • D) Class designation
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • The owner of the policy can designate the beneficiary anyway they choose. The designation described in the question is a class designation such as "all my children."
  16. A life insurance policy becomes incontestable after how long for non-fraudulent misstatements:
    A) 2 years
    B) 3 years
    C) 1 year
    D) A policy is never contestable for non-fraudulent misstatements
    • A) 2 years
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • During the first two years of a policy, the insurance company can contest a claim related to fraudulent or non-fraudulent misstatements. However, after two years, the policy becomes totally incontestable.
  17. If an employee dies within the grace period on their group life insurance without converting to an individual policy, the insurer will:
    A) Deny the claim, since the employee had not applied for a converted policy
    B) Pay the death benefit, but subtract the overdue premium
    C) Pay the death benefit in full
    D) Pay the claim, but send a bill to the beneficiary for the overdue premium
    • C) Pay the death benefit in full
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • On group life insurance policies, when the insured dies in the grace period without converting to an individual policy, the full amount of the life insurance that would have been issued to them under such converted policy shall be payable, whether or not application for the converted policy or the payment of the first premium has been made.
  18. A life insurance dividend option that would result in cash value that is in excess of that guaranteed in the policy is:
    A) Interest
    B) Reduced paid-up
    C) Paid-up additions
    D) Apply to premium when due
    • C) Paid-up additions
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Mutual insurers often pay dividends, although they are not guaranteed. If the insurer does pay a dividend, the policy owner may select one of several dividend options. If they select the "paid-up" additions option, each dividend will be used as a single premium to buy a small, additional whole life insurance policy. Since each policy purchased develops its own cash value over a period of time, the policy owner will end with more cash value than that guaranteed by their initial policy. Remember, "reduced paid-up" is a non-forfeiture option, not a dividend option.
  19. Which of the following statements is true about a policy assignment:
    A) It transfers the owner's rights under the policy to the extent expressed in the assignment form
    B) It is valid during the insured's lifetime only because the death benefit is payable to the named beneficiary
    C) It is the same as a beneficiary designation
    D) It permits the beneficiary to designate the person or persons to receive the benefits
    • A) It transfers the owner's rights under the policy to the extent expressed in the assignment form
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • There are two types of assignment: Absolute and Collateral. An Absolute Assignment transfers all of the policyholder's rights to another party, such as when a parent assigns the policy to the child who is also the insured. A Collateral Assignment occurs when the insured pledges their policy proceeds to the bank for a loan. This is seldom done anymore, since interest rates on life insurance loans are generally lower than those on bank loans.
  20. A parent who wishes to have complete control of a son's life insurance policy until the son reaches age 25 can do so through the use of:
    A) Consideration Clause
    B) Insuring Clause
    C) Ownership Provision
    D) Payor Provision
    • C) Ownership Provision
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Although you may not be the insured, you can still be the policyholder. If you buy a policy on your minor child, you own the policy and your child is the insured. You control the cash values and may designate the beneficiary. This is called the Ownership Provision. At a certain age, say age 25, you may assign your ownership of the policy to your child, giving up all rights to the policy. This is called an Absolute Assignment, meaning that it may never be revoked.
  21. Most collateral assignments of life insurance policies are made in order to protect the:
    A) Insurance company from fraudulent claims
    B) Insured's insurability
    C) Insured's personal or business credit
    D) Beneficiary from the claims of creditors
    • C) Insured's personal or business credit
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Collateral Assignments, in which the insured pledges their policy to the bank as collateral for a bank loan, are very common. When the loan is paid off, the Collateral Assignment drops off. A Collateral Assignment assures the bank that if the insured dies with the loan outstanding, the bank will be paid.
  22. If a life insurance policy owner elects to take the reduced paid-up nonforfeiture option, all of the following are true regarding their new policy, EXCEPT:
    A) It will be paid up to age 120
    B) The death benefit will remain the same
    C) It will have an immediate cash value
    D) The death benefit is reduced
    • B) The death benefit will remain the same
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • If a policy owner selects the reduced paid-up non-forfeiture option, the face amount of their new policy will be reduced from what they had on their original policy. However, if the policy owner selected the extended term option, the face amount of the new policy would be the same as they had on their original policy, although coverage would not continue to age 120 as it does on reduced paid-up.
  23. Timmy has a life insurance policy with a $200,000 death benefit with a cost of living rider. If the consumer price index increases 3%, how much additional coverage can Timmy purchase: A) $600
    B) $6,000
    C) $300
    D) $3,000
    • B) $6,000
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • If Timmy purchased this rider when he purchased his policy, and it was tied to the consumer price index, it would allow him to purchase up to 3% of the policy limit in additional insurance, which happens to be $6,000 in this case.
  24. Beth has a whole life policy with a $200,000 face amount and $50,000 in cash value and wants to take a $30,000 loan to buy a bus. Which of the following is true:
    A) Any amount owed will be subtracted from that due at death
    B) Loans cannot be taken from a whole life policy
    C) There will be no interest charged
    D) Only term policies include loan provisions
    • A) Any amount owed will be subtracted from that due at death
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • If Beth dies with a loan outstanding the loan amount plus interest will be subtracted from the death benefit paid to the beneficiary.
  25. If the primary beneficiary is no longer living when the insured dies, who would receive the death benefit:
    A) The contingent beneficiary
    B) It is forfeited to the insurer
    C) The irrevocable beneficiary
    D) The revocable beneficiary
    • A) The contingent beneficiary
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • If the primary beneficiary pre-deceases the insured, the contingent beneficiary will receive the policy proceeds.
  26. If an insured with a participating whole life policy elects the one year term dividend option, the amount of term life insurance purchased by the dividend will equal:
    A) The death benefit
    B) The cash value
    C) The annual premium due
    D) All premiums paid to date
    • A) The death benefit
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Some participating life insurance policies offer a dividend option known as "one year term" insurance. If a policy holder has borrowed against their policy, then part of the dividend can be used to buy one year term insurance equal to the face value of the policy. If the insured should die during the one year term before paying back the loan, the beneficiary will still receive the full value of the policy.
  27. When the primary beneficiary predeceases the insured, the proceeds are paid to the:
    A) Tertiary beneficiary
    B) Contingent beneficiary
    C) Collateral beneficiary
    D) Alternate beneficiary
    • B) Contingent beneficiary
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
  28. The life insurance policy clause that prevents an insurance company from denying payment of a death claim after a specified period of time is known as the:
    A) Incontestability Clause
    B) Reinstatement Clause
    C) Insuring Clause
    D) Misstatement of Age Clause
    • A) Incontestability Clause
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • The Incontestability Clause protects the client who may have lied (misrepresentation) on the original application for life insurance. The company has two years to investigate the insured from the original date of application. If the client dies within the first two years and the insurance company can prove that they lied about a material fact on the original application, they can deny the claim. However, after the two-year period has elapsed, they must pay the claim even if the client lied. So, those who lied can quit worrying after two years!
  29. If the beneficiary of a $100,000 life insurance policy elects a 10-year fixed period settlement option and the annual payout is $13,000, including 6% interest, how much of the payout is excluded from income tax each year:
    A) $13,000
    B) $10,000
    C) $1,300
    D) $6,000
    • B) $10,000
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • On a 10-year fixed period settlement option, 1/10th of the policy proceeds will be payable tax free to the beneficiary each year, which in this case would be $10,000. If the annual payout exceeds that amount, the difference must be the interest earned on the unpaid balance, which is taxable as ordinary income.
  30. Darla Jenkins purchased a $100,000 individual Whole Life policy January 1st and paid an initial annual premium of $1,000. After her policy is issued Darla becomes interested in hang gliding and dies in a hang gliding accident on January 15th of the following year without paying her annual premium. What will the insurer pay to her beneficiary:
    A) Zero, since she did not pay her premium
    B) Zero, since she died hang gliding
    C) $100,000
    D) $99,000
    • D) $99,000
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Since Darla died during the grace period, the insurer will pay the face amount minus the overdue premium she should have paid ($100,000-$1,000=$99,000). If Darla had died after the 30-day grace period without paying her premium there would be no coverage. There are three grace periods you must know for Life insurance: 28 days on industrial life, 30 days for all other types of life insurance including annuities, and 31 for group life. Although Darla died while participating in a dangerous hobby, the question makes no mention of hang gliding being excluded in the policy, so you have to assume that it is covered. Since Darla picked up this dangerous hobby after the policy had already been issued it will not affect her coverage
  31. Which of the following best describes the Waiver of Premium rider:
    A) It is a rider that can be added to any policy that will pay the insured's premium after a waiting period if the insured becomes totally disabled
    B) It is a rider that can only be added to a cash value life insurance policy which creates a loan against the cash value in order to pay the premium for the insured
    C) It is a non-forfeiture option that will provide the insured with term life insurance for a limited period of time if their original policy lapses
    D) It is a rider that can only be added to a cash value life insurance policy that will pay the insured's premium if they become totally disabled
    • A) It is a rider that can be added to any policy that will pay the insured's premium after a waiting period if the insured becomes totally disabled
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • The waiver of premium rider can be added to any policy and will waive the insured's premium after a six-month waiting period if the insured becomes totally disabled. During the six-month period the insured is responsible for paying their premium. If, after the six months, they are still totally disabled, the rider goes into effect and will pay the insured back the premium they paid during the six months and waive the ongoing premium as long as they are disabled. Waiver of premium is a rider NOT a non-forfeiture option.
  32. An insured died during the grace period of their life insurance policy and had not paid the required annual premium. The insurance company is obligated to pay which of the following to the beneficiary:
    A) The face amount of the policy less any earned premiums
    B) The cash value of the policy, if any
    C) The full face amount of the policy
    D) A refund of any premiums paid
    • A) The face amount of the policy less any earned premiums
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • There are three grace periods to remember: 28 days on Industrial Life, 30 days on all other life except group, and 31 days on group life. The purpose of the grace period is to protect the insured who honestly forgot to pay on the due date. The policy will not actually lapse until the end of the grace period. If a client dies within the grace period, it is assumed they would have paid the premium, so the company will pay the face amount to the beneficiary, less any overdue premiums.
  33. Which of the following is true if the insured/owner of the policy does not pre-designate a settlement option for the beneficiary prior to death:
    A) The insurer will automatically pay out a fixed dollar amount to the beneficiary, since it is the automatic option
    B) The beneficiary may select the settlement option upon death of the insured
    C) The insurer may select the settlement option upon death of the insured
    D) The insurer will keep the death benefit since no settlement option was designated
    • B) The beneficiary may select the settlement option upon death of the insured
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • The insured/owner of the policy has the right to pre-designate how they would like the beneficiary to receive the face amount of the policy upon their death. However, if the insured does not, the beneficiary has the right to select from the settlement options offered by the insurer. It is the beneficiary's choice, not the insurers. If no option is selected, the automatic settlement option is cash.
  34. In a policy insuring the life of a child, which of the following allows the premiums to be waived in the event of the death or disability of the person responsible for premium payments:
    A) Reduced Paid-Up Option
    B) Payor Provision
    C) Waiver of Premium Provision
    D) Reduction of Premium Option
    • B) Payor Provision
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • The Payor Provision (sometimes called Payor Waiver of Premium) is an optional provision (or rider) often added to a policy insuring the life of a minor. The adult (usually the parent) may become sick or disabled and become incapable of paying the premium. This rider will then pay the premium on behalf of the sick or disabled payor. However, it is exactly like the Waiver of Premium Rider you would see on your own life insurance policy in that both riders have a six-month waiting period before premiums are retroactively paid. Both riders cost extra and will automatically drop off at age 60 or 65 at which time the premium would be reduced. The extra premium for these riders must be shown separately from the premium charged for the life insurance. None of the extra premium charge goes toward cash-value accumulation.
  35. All of the following are true when the beneficiary of a life insurance policy selects the fixed period settlement option, EXCEPT:
    A) The amount of each monthly payment depends upon the total number of monthly payments remaining
    B) Each monthly payment is partly interest and partly principal
    C) At the end of the fixed period, the proceeds will be exhausted
    D) Monthly payments will continue for a fixed period of time, or for life, whichever is longer
    • D) Monthly payments will continue for a fixed period of time, or for life, whichever is longer
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • The fixed period settlement option specifies that the beneficiary will receive monthly payments from the insurer for a specified period of time, such as 10 years. At the end of that time, all funds will be exhausted and payments will stop. However, since the proceeds will continue to earn interest over this 10 year period, each monthly payment will vary based upon the current account value divided by the total number of monthly payments remaining.
  36. Which individual policy conversion is usually permitted without any evidence of insurability:
    A) Conversion from a Term policy to a Whole Life policy
    B) Conversion to a lower premium plan
    C) Conversion to a larger amount of insurance
    D) Conversion from a Whole Life policy to a Term policy
    • A) Conversion from a Term policy to a Whole Life policy
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • The conversion privilege is simply a marketing tool that allows insureds who buy Term insurance to convert to Whole Life without proving continued good health. Without this privilege, few would buy Term insurance. You cannot convert Term-to-Term or convert to a higher or lower face amount, and you cannot convert Whole Life-to-Term.
  37. Dividend projections may be included in a proposal for life insurance when which of the following is true:
    A) There is a clear statement that payment of future dividends is not guaranteed
    B) The projected amounts are calculated on the basis of the Commissioner's Standard Ordinary Mortality Tables
    C) The projected amounts do not exceed the dividends previously paid by the same insurance company
    D) The applicant has requested that they be included
    • A) There is a clear statement that payment of future dividends is not guaranteed
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Dividends may be paid to policyholders of a mutual insurance company, such as Mutual of New York. Dividends are considered to be a return of an overpayment by the IRS and, therefore, not taxable. Although a company may state its past dividend history in a proposal, it is illegal to guarantee future dividends, since they might not occur.
  38. The time period covered by the 10-Day Free Look Provision of a life insurance contract starts:
    A) When the insured receives the contract and makes the first premium payment, if needed
    B) When the insured receives the contract and a Right to Look receipt
    C) When the contract is received in the agency office and given to the producer
    D) When the contract is issued and mailed to the agency office from the home office of the insurance company
    • A) When the insured receives the contract and makes the first premium payment, if needed
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • The 10-day Free Look never begins until the policy is actually delivered. Even if the premium had been paid previously, the 10-day Free Look would not have begun until policy delivery. The client then has 10 days to rescind the policy and get all of the money back.
  39. If the beneficiary's main objective for the death benefit proceeds is estate conservation, they would most likely select which settlement option upon death of the insured:
    A) Cash
    B) Interest
    C) Fixed amount
    D) Fixed period
    • B) Interest
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Life insurance proceeds create an immediate estate upon death of the insured. If the beneficiary is mainly interested in conserving that money for the future, they should select the interest settlement option. If the interest settlement option is selected the insurer keeps the death benefit and pays the beneficiary interest, usually monthly, which is taxable to the beneficiary as ordinary income. The beneficiary can obtain the death benefit from the insurer at any time. When the beneficiary does decide to access the death benefit in the future it is tax free.
  40. An insured has a Whole Life policy with a $100,000 face amount and a $40,000 cash value. If the insured's policy lapses, which non-forfeiture option should they select to provide lifetime coverage:
    A) Reduced Paid-up
    B) Paid-up Additions
    C) Extender Term
    D) Cash Surrender
    • A) Reduced Paid-up
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Once the insured's policy lapses the insurer has to offer the insured the choice of what they want to do with their cash value. The three non-forfeiture options are: Cash Surrender, Extended Term and Reduced Paid-up. If the insured wants permanent life insurance they would select the Reduced Paid-up non-forfeiture option. If selected, the insurer uses the insured's cash value to purchase the insured a single premium whole life policy, with a reduced face amount. Since the insured will never pay another premium, the face amount will be reduced from that of the original policy.
  41. Non-standard language would be used in which of the following provisions:
    A) Reinstatement
    B) Uniformity with state statutes
    C) Misstatement of age
    D) Marriage
    • D) Marriage
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • All mandatory and optional provisions within a policy will use standard contract language. Marriage is not a mandatory or optional provision.
  42. If an insured would like to cover their spouse and child on their life insurance policy they would add which of the following riders:
    A) Family term rider
    B) Guaranteed insurability
    C) Waiver of premium
    D) Cost of living
    • A) Family term rider
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • A family term rider will provide term life insurance on a spouse and children.
  43. If a parent purchases life insurance on their child all of the following are true, EXCEPT:
    A) The parent is responsible for the premium
    B) The parent is the insured
    C) The child is the insured
    D) The parent is the owner of the policy
    • B) The parent is the insured
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)This is an example of third party ownership. Remember, the owner and the insured are not always the same person. In this example the parent is the policy owner and the child is the insured. The policy owner retains all the rights of ownership, such as paying the premium, designating the beneficiary, and taking loans. In this situation if the parent died, the policy would NOT pay a death benefit, since the parent is not the insured, the child is. Once the child reaches a certain age the parent could execute an absolute assignment and assign ownership of the policy to the child. If done, the child would now be the owner/insured and would be responsible for paying the premium, could change the beneficiary, or even take cash surrender.
  44. Which statement about the Reinstatement Provision is true:
    A) It provides for reinstatement of a policy regardless of the insured's health
    B) It permits reinstatement within 10 years after a policy has lapsed
    C) It requires the policyholder to pay, with interest, all premiums that are in arrears in order for the policy to be reinstated
    D) It guarantees the reinstatement of a policy that has been surrendered for cash
    • C) It requires the policyholder to pay, with interest, all premiums that are in arrears in order for the policy to be reinstated
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Most companies will offer the right to apply for reinstatement for up to three (sometimes five) years after a policy has lapsed. Although the client may have the right to apply, the company does not have to take them. The client must prove continued good health and pay back premiums plus interest. The company has nothing to lose by offering Reinstatement. The client's only reasons to apply for reinstatement, rather than applying for a new policy, are that, if accepted, the reinstated policy would have the same original age and perhaps a lower interest rate on policy loans than a new policy may have. Policies that have been surrendered for cash may not be reinstated.
  45. Extended term is exercised through which of the following whole life provisions:
    A) Assignment
    B) Settlement
    C) Loan
    D) Nonforfeiture
    • D) Nonforfeiture
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Extended term is a non-forfeiture option which can be elected by the insured at any time during the policy period of a cash value life insurance contract.
  46. If an insurer keeps the death benefit amount and pays the beneficiary earnings on a monthly basis, the beneficiary has selected which settlement option:
    A) Cash payment
    B) Interest only
    C) Life income
    D) Reduced-paid up
    • B) Interest only
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • If the beneficiary selects the interest only settlement option, the insurer will retain the death benefit and pay the beneficiary interest, which is taxable, monthly.
  47. If a life insurance policy contains a "war clause" and an insured dies as a result of war, the insurer will:
    A) Pay the face amount of the policy
    B) Pay 50% of the death benefit
    C) Pay nothing
    D) Refund the premiums
    • D) Refund the premiums
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • A "war clause" is an exclusion in some life insurance policies that states that there is no coverage if the insured dies as a result of war. However, the premiums paid will be refunded to the beneficiary.
  48. An insurance company has which of the following options when an insured wishes to cash in their policy:
    A) It may defer payment for as long as six months
    B) It must pay them within 90 days
    C) It must pay them within two weeks
    D) It may delay payment for one month
    • A) It may defer payment for as long as six months
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • In order to discourage a possible "run on the bank," so to speak, life insurance companies do have six months to defer the granting of a policy loan or a cash surrender. However, most insurance companies will grant a loan or a cash surrender immediately, in the interest of good public relations.
  49. A $10,000 life insurance policy with a Triple Indemnity Clause has been in force for three years. The insured is injured in a train wreck and dies in a hospital five months later. The death proceeds payable under the policy would be:
    A) $30,000
    B) $10,000
    C) $20,000
    D) $0
    • B) $10,000
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Accidental Death Benefit (ADB), sometimes called Double or Triple Indemnity, is a rider that may be attached to any life insurance policy for an extra premium charge. The additional benefits are paid only if the insured dies within 90 days of an accident. If the insured lingers beyond 90 days, the policy reverts back to single indemnity only, and the face amount without the rider is paid, since it is assumed that death resulted more from natural causes than as a result of the accident.
  50. If the insured understated their age and the error is discovered after the insured's death, the insurance company will:
    A) Refund all past premiums paid with any accumulated interest
    B) Refuse to pay the death claim
    C) Pay the amount the premium would have purchased at the correct age
    D) Pay the face amount of the policy with a deduction for the amount of the underpayment of premium
    • C) Pay the amount the premium would have purchased at the correct age
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Under the Misstatement of Age clause, the insurance company is protected against clients who state they are younger than they really are in order to obtain a lower rate. Although lying about your age will not void the policy, the company will adjust your Death benefit to the amount that the correct premium would have purchased had you told the truth.
  51. Which settlement option might provide payments that exceed the proceeds of the policy and the interest earned:
    A) Interest Only
    B) Fixed Amount
    C) Life Annuity
    D) Fixed Period
    • C) Life Annuity
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • There are five settlement options from which a beneficiary may select upon death of the insured. 1) Cash, 2) Fixed Period (proceeds, plus interest, are all paid out over a fixed period of time, say 10 years), 3) Fixed Amount (the beneficiary elects to receive $1,000 per month, plus interest, for as long as the money lasts), 4) Interest (the proceeds are left with the company to accumulate additional interest) and 5) Life Annuity (paid as long as the beneficiary/annuitant lives).
  52. If a life insurance policy does not permit the policyholder to change the beneficiary, the beneficiary is:
    A) Irrevocable
    B) Guaranteed
    C) Subsequent
    D) Contingent
    • A) Irrevocable
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Typically, the insured or policyholder may change the beneficiary designation at any time. This is called a Revocable Beneficiary designation. However, if the insured or policyholder elects to appoint an Irrevocable Beneficiary, the designation may not be changed without the consent of the irrevocable beneficiary nor may a policy loan be taken. Some 99% of all beneficiary designations are revocable. Irrevocable designations are usually made only in rare situations, such as when the policy's cash value becomes part of a divorce settlement.
  53. Which of the following statements about the Automatic Premium Loan provision in a life insurance policy is true:
    A) The provision cannot be revoked by the policyholder
    B) The provision must be elected by the policyholder
    C) A loan taken under the provision is not interest-bearing
    D) The provision applies only to Whole or Limited-Pay Life policies
    • B) The provision must be elected by the policyholder
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Automatic Premium Loan (APL) is a rider attached to Whole Life or Endowment policies, never Term. It must be elected by the policyholder, even though it is usually free. The purpose of the rider is to keep the policy in force if the insured forgets to pay the premium. The policy, with this rider attached, would automatically borrow from itself to pay the overdue premium, therefore avoiding lapse. Of course, the policy would have to have a cash value before such a "loan" could be taken. Also, all loans must be subtracted from policy proceeds (plus interest on the loan) in the event of the insured's death, so benefits will be reduced. Whole Life and Endowment policies are required to have a cash value no later than the end of the third full year.
  54. If the beneficiary would like to receive the death benefit in one lump sum, they should select the following settlement option:
    A) Extended term
    B) Cash payment
    C) Life income
    D) Interest only
    • B) Cash payment
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Cash payment (lump sum) is the only settlement that would allow the beneficiary to receive the full death benefit in one lump sum.
  55. All of the following are true regarding dividends paid by a mutual insurer, EXCEPT:
    A) They are not taxable since the IRS considers them to be a return of premium
    B) They are guaranteed to be paid as stated in a life insurance policy illustration
    C) If the insurer keeps the dividends, but sends the policy owner a monthly check, the policy owner must have selected the interest option
    D) Dividend options may be changed at the discretion of the policy owner
    • B) They are guaranteed to be paid as stated in a life insurance policy illustration
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Life insurance illustrations must clearly state that dividends are not guaranteed.
  56. Which statement about a typical Suicide Clause in a life insurance policy is true:
    A) Suicide is covered as long as the policy is in force
    B) Suicide is excluded for a specific period of years and covered thereafter
    C) Suicide is covered for a specific period of years and excluded thereafter
    D) Suicide is excluded as long as the policy is in force
    • B) Suicide is excluded for a specific period of years and covered thereafter
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • The Suicide Clause, which is completely separate from the Incontestability Clause, excludes coverage for death resulting from suicide during the first two years of a policy. After that, suicide is covered. If the insured dies by suicide during the first two years, there is no coverage, but the insurance company will refund the premiums paid in to date to the beneficiary.
  57. All of the following are a part of a life insurance policy, EXCEPT the:
    A) Incontestability Clause
    B) Insuring Clause
    C) Copy of the application
    D) Conditional Receipt
    • D) Conditional Receipt
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • Under the Entire Contract Provision, a copy of the insured's application for life insurance is attached to the policy. If it weren't, any false answers (misrepresentations) by the insured would not be admissible in court, since they would not be part of the entire contract. However, the Conditional Receipt is not part of a life insurance policy. It is part of the application and is completed and given to the applicant when they pay the initial premium at the time of application.
  58. When someone other than the insured is the owner of a life insurance policy, the owner may do all of the following without the insured's consent, EXCEPT:
    A) Change the beneficiary
    B) Surrender the policy for its cash value
    C) Increase the amount of insurance
    D) Make a policy loan
    • C) Increase the amount of insurance
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • As owner of the policy, this "third party" has the right to control the policy, including the beneficiary designation, taking a loan or even surrendering the policy for cash. However, under the Doctrine of Insurable Interest, the policyholder would need the written consent of the insured to increase the policy limits. Remember: Life insurance policy limits may not usually be increased once the policy is in force unless the policy contains the Guaranteed Insurability rider.
  59. Seth Brown, whose wife is his business partner, buys a life insurance policy on his wife's life. Because of this third-party ownership, the beneficiary should be the:
    A) Policyholder
    B) Policyholder's estate
    C) Policyholder's children
    D) Policyholder's wife
    • A) Policyholder
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • This is an example of Key Person insurance. The beneficiary is Mr. Brown, the policyholder. His wife, the key person, is the insured. Mr. Brown apparently feels that if his wife should die, he would need the funds from the policy proceeds to retrain someone capable of assuming her business duties. This type of policy is often written with the business as the beneficiary as well.
  60. Which of the following Settlement Options provides for payments to be made in regular installments of a specified amount until the principal and interest are exhausted?
    A) Interest
    B) Fixed Period
    C) Life Income
    D) Fixed Amount
    • D) Fixed Amount
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • When the insured dies, the beneficiary may select any one of five Settlement Options. They are: Cash; Fixed Amount (for example, the beneficiary elects to receive $1,000 a month for as long as the money lasts); Fixed Period (the beneficiary chooses to be paid out over a 20-year period); Interest (the beneficiary leaves all the proceeds with the company to accumulate additional interest), and Life Income (the beneficiary takes the policy proceeds as cash and buys a Straight Life or Pure Life Annuity).
  61. The clause in a life insurance policy that states "….a beneficiary cannot assign or encumber the policy proceeds prior to receipt…" is known as the ________ clause:
    A) Incontestability
    B) Spendthrift
    C) Non-forfeiture
    D) Entire contract
    • B) Spendthrift
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • The "spendthrift" clause takes away the rights of the beneficiary to change the time of payments or the amount of installments payable upon the death of the insured. Further, it also prohibits the beneficiary from borrowing against or assigning the unpaid installments, which prevents the beneficiary from making unwise decisions that they may regret later on.
  62. Which of the following is not a dividend option:
    A) Reduction of premium payments
    B) Allow the insurer to keep the dividend and not pay interest
    C) Cash
    D) One-year term
    • B) Allow the insurer to keep the dividend and not pay interest
    • Explanation: (Life Insurance Policy Provisions, Options and Riders)
    • There is no dividend option that would allow the insurer to keep the dividend and not pay interest.
Author:
EdiesTeam
ID:
315668
Card Set:
L4. Life Insurance Policy Provisions Options and Riders
Updated:
2016-03-21 18:37:54
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Life Insurance Policy Provisions Options Riders
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Life Insurance Policy Provisions, Options and Riders
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