The interest earned on dividends is:
a. Taxable
b. Tax deductible
c. Nontaxable
d. 40% taxable, similar to a capital gain
answer
a. Taxable
The dividends themselves are not taxable, but any interest earned on the dividends is taxable.
question
Mona let her permanent policy lapse. She discovered there was $2,498 in cash remainaing in the policy and decided to reduce her debt load. She exercised which Nonforfeiture Option?
a. Accumulation at Interest
b. Cash Surrender
c. Fixed Amount
d. Accelerated Endowment
answer
b. Cash Surrender
The only Nonforfeiture Option listed is Cash Surrender. Mona surrenders the policy for its cash value and then uses that cash value to reduce her debt load.
question
Settlement Options may be used if the insured dies or if the insured:
a. Pays policy annually.
b. Is covered strictly with Term Insurance.
c. Is alive at maturity and receives the face amount.
d. Exercises the Irrevocable Option.
answer
c. Is alive at maturity and receives the face amount.
Settlement options are used when the insured lives to the endowment date or at the insured's death.
question
The cash received by the policyowner when he/she terminates a policy is known as what?
a. Accrued Premium Value
b. Loan Value
c. Paid-Up Insurance Value
d. Cash Surrender Value
answer
d. Cash Surrender Value
The Cash Surrender Value is the Nonforfeiture Option that allows the owner to withdraw the cash value upon the surrender of the policy.
question
Which is not a Dividend Option?
a. Reduced Paid-Up
b. Paid-Up Additions
c. Paid in Cash
d. Accumulate at Interest
answer
a. Reduced Paid-Up
Reduced Paid-Up is a Nonforfeiture Option; the other answer chronicles are Dividend Options.
question
What happens to the nonforfeiture values when a policy lapses for nonpayment of premium?
a. Values are recalculated by actuaries.
b. Coverage is rescinded.
c. The values are returned to the policyowner.
d. The insurer considers them for profit sharing.
answer
c. The values are returned to the policyowner.
Nonforfeiture means not to be given up. The purpose of Nonforfeiture Options is to protect the policyowner against total loss of benefits if the policy should lapse or if it is cancelled.
question
Fred owns a 40-Pay Life Policy. He designated his wife, Ethel, as primary beneficiary. Upon Fred's death, Ethel receives a set amount for life. Fred chose which Settlement Option?
a. Joint Life
b. Fixed Period
c. Life Income Only
d. Paid-Up Additions
answer
c. Life Income Only
Life Income Only guarantees payment for the lifetime of the recipient. Paid-Up Additions is a Dividend Option.
question
There are considerable differences in life insurance policies. Which of the following helps to establish basic continuity?
a. Options
b. Beneficiaries
c. Rates
d. Premiums
answer
a. Options
Life insurance policy options (Settlement, Nonforfeiture, and Dividend) establish basic continuity to the interpretation of life insurance policies.
question
Beth exercised an owner's option on a life policy to stop paying premiums but continue to be covered until she was age 100. Which Nonforfeiture Option did she choose?
a. Extended Term
b. Application to Reduce Premiums
c. Reduced Paid-Up
d. Paid-Up Option
answer
c. Reduced Paid-Up
The Nonforfeiture Option that would allow Beth to stop paying premiums and continue to be covered at age 100, but for a reduced face amount, is Reduced Paid-Up. Application to Reduce Premiums and Paid-Up Option are Dividend Options.
question
Beth owns a 20-Pay Life participating policy. She has chosen the Settlement Option that guarantees payments over a specified period and the dividends are applied toward future premiums. Which Dividend Option did she choose?
a. Fixed Period
b. Paid-Up Option
c. Fixed Amount
d. Premium Reduction
answer
d. Premium Reduction
The Dividend Option that allows the dividends to be applied toward the next premium due is Premium Reduction. Fixed Period and Fixed Amount are Settlement Options.
question
What effect, if any, does the Dividend Option-Acceleration of Endowment have on a policy?
a. This is not a Dividend Option
b. Makes the endowment date sooner
c. None
d. Increase premium outlay
answer
b. Makes the endowment date sooner
Acceleration of Endowment uses dividends to reduce (shorten) the period for the policy to mature or endow.
question
Which Settlement Option pays a specified dollar amount until benefits are exhausted?
a. Fixed Period
b. Paid-Up Option
c. Life Income
d. Fixed Amount
answer
d. Fixed Amount
The key words are specified dollar amount. Fixed Amount pays benefits at a specified dollar amount (such as $1,000/month) until the benefits are exhausted.
question
A ____ Option protects the policyowner against total loss of benefits in the event of a lapsed policy and add flexibility to a cash value policy.
a. Settlement
b. Nonforfeiture
c. Dividend
d. Spendthrift
answer
b. Nonforfeiture
Nonforfeiture Options are found in life insurance policies that generate a cash value, and protect the owner against total loss of that cash value, if the policy should lapse or it is cancelled.
question
Which provision allows an insure to borrow from the cash value of a policy to pay premiums due and prevent the lapse of coverage?
a. Nonforfeiture Option
b. Automatic Premium Loan
c. Spendthrift Clause
d. Partial Withdrawal
answer
b. Automatic Premium Loan
The Automatic Premium Loan Provision enables the insurer to borrow automatically from the policy's cash value, at the end of the grace period, to cover a premium payment to prevent the policy from lapsing.
question
Alice finds she no longer is able to pay premiums on her $50,000 Whole Life Policy, but needs that amount of protection for her family. Which Nonforfeiture Option provides this protection?
a. Fixed Amount
b. Extended Term
c. Reduced Paid-Up
d. Paid-Up Option
answer
b. Extended Term
Extended Term would allow the present cash value of the policy to buy a single premium term policy of the same face amount for as long as period as it will buy. Fixed Amount is a Settlement Option, and Paid-Up Option is a Dividend Option.
question
All of the following are Dividend Options, except:
a. Waiver of Premium
b. Paid-Up Additional Insurance
c. One-Year Term
d. Cash
answer
a. Waiver of Premium
Waiver of Premium is a rider available to most life insurance policies.
question
If the policyowner specifies the time over which all installments are to be paid, he/she has chosen which Setllement Option?
a. Extended Term
b. Fixed Period
c. Fixed Amount
d. Acceleration of Endowment
answer
b. Fixed Period
The key word is time. Anytime the policyowner specifies payments to be guaranteed for a specific period regardless of who may receive the payments, policyowner or beneficiary, is the Fixed Period Settlement Option. Acceleration of Endowment is a Dividend Option, and Extended Term is a Nonforfeiture Option.
question
Lyle owns a $50,000 20-Pay Life Policy that he lets lapse at the end of the fourth year. The Nonforfeiture Option providing the longest period of coverage would be:
a. Paid-Up Additions
b. Reduced Paid-Up
c. Extended Term
d. Paid-Up Option
answer
b. Reduced Paid-Up
Reduced Paid-Up provides the longest period of coverage. Extended Term would provide the most protection. The other two answers are not Nonforfeiture Options.
question
Ted owns a $50,000 Whole Life Policy. At age 47, he decides to stop playing premiums on his policy and exercise the Extended Term Option. Ted's term benefit will be:
a. $25,000
b. $50,000
c. $47,000
d. Varies from company to company
answer
b. $50,000
The Extended Term Option uses the present cash value of the policy, upon its lapse, to buy a single premium term policy of the same face amount.
question
Albert owned a $100,000 policy that had accumulated a cash value of $9,850, of which he had borrowed $2,500. His beneficiary will receive which of the following amounts?
a. The face amount, less the loan and accrued interest
b. $107,800
c. $87,920
d. $90,420
answer
a. The face amount, less the loan and accrued interest
Any outstanding loans not paid upon the insured's death will be deducted from the face amount (death benefit) along with any interest due.
question
Frank's policy lists his wife as beneficiary. Upon Frank's death, she is to receive a stipulated amount until the benefit is exhausted. While he pays premiums, he chooses to have the dividends increase the death benefit. Which of the following Dividends Options was chosen?
a. Fixed Amount
b. Paid-Up Additions
c. Acceleration of Endowment
d. Paid-Up Option
answer
b. Paid-Up Additions
Frank's objective is to use his dividends to increase the death benefit. Paid-Up Additions purchases single premium additional permanent benefits at the insured's attained age. The additional insurance is added to the face amount and it generates cash values and dividends as if the paid-up additional benefit was part of the original policy.
question
The premiums paid to add the Automatic Premium Loan (APL) Provision has the following effect on a life policy:
a. No effect, there is not a premium for APL.
b. Pays premium by loan to increase the death benefit.
c. Reduces administration cost.
d. Increases cash value.
answer
a. No effect, there is not a premium for APL.
The Automatic Premium Loan Provision is available on cash value policies only, with no additional premium.
question
Burt named Liz as his beneficiary however he did not choose a Settlement Option. At the time of his death, who determines the option to be used to receive the benefits?
a. Burt's estate, since no Settlement Option was chosen.
b. Liz
c. The insurer
d. Statutes require the proceeds be laid lump sum when an option is not chosen.
answer
b. Liz
If the owner of the policy does not select a Settlement Option while alive, then the beneficiary may choose an option at the time of claim.
question
Which of the following statements is true?
a. There are several dividend options.
b. Dividends can only be withdrawn at certain specified intervals.
c. Dividends are guaranteed and taxable as income when received.
d. Dividends are declared under nonparticipating policies only.
answer
a. There are several dividend options.
Dividends are declared under participating policies; they are not guaranteed; if received the dividend itself is not taxable; and they can be withdrawn anytime there is an accumulation.
question
All of the following are Settlement Options, except:
a. Fixed Period
b. Reduced Paid-Up
c. Interest Only
d. Life Income Joint and Survivor
answer
b. Reduced Paid-Up
Reduced Paid-Up is a Nonforfeiture Option, not a Settlement Option.
question
What are the Nonforfeiture Options in a Decreasing Term Policy?
a. Increased options
b. There are none
c. Same as Whole Life
d. Reduced Paid-Up only
answer
b. There are none
There are no Nonforfeiture Options in a Term Policy, as Term policies do not accumulate a cash value.
question
When is the Automatic Premium Loan Provision activated?
a. At the beginning of the underwriting period.
b. At the end of the grace period.
c. At the end of the policy period.
d. At time of reinstatement.
answer
b. At the end of the grace period.
The Automatic Premium Loan provision automatically becomes effective at the end of the grace period to prevent the policy from lapsing.
question
Which of the following terms correctly matches the given definition?
a. Paid-Up Additions - cash value is used to buy a single premium permanent policy.
b. Paid-Up Option - dividends are used to pay up a policy sooner than scheduled.
c. Life Income Period Certain - term insurance cash value distribution.
d. One-year Term - cash value is used to buy a single premium term policy.
answer
b. Paid-Up Option - dividends are used to pay up a policy sooner than scheduled.
One-year Term and Paid-Up Additions are incorrect as they are Dividend Options, and dividends (not the cash value) are used to fulfill the objective. Life Income Period Certain is incorrect because term insurance has no cash value.
question
An investor receives ample income each month from the interest earned while retaining his/her principal. This is referred to as which of the following?
a. Net Capital
b. Capital Gains
c. Conservative Earnings
d. Capital Conservation
answer
d. Capital Conservation
The Interest Option of settlement leaves the principal (capital) with the insurer, thus conserving the capital, and the interest income generated is taxed as ordinary income.
question
A retiree elected the Ten Years Certain and Life Income Option. He dies the dash after receiving 119 monthly payments. The contingent payee will receive:
a. No more payments
b. Five more payment
c. One more payment
d. Ten more payments
answer
c. One more payment
Since the retiree died within the period certain (10 years or 120 months), then the contingent payee would receive only one or more payment since the retiree has received 119 monthly payments. If the retiree had lived beyond the 10 years, then they would have been paid a benefit as long as they lived.
question
Angela bought a policy from her friend. After looking it over thoroughly, Angela only has one question. Will she receive dividends? Yes, if it is which of the following?
a. Nonparticipating
b. Participating
c. Cash Value
d. Accumulating
answer
b. Participating
Dividends are declared under participating policies, are paid as declared, and are to guaranteed. The dividends are a return of excess premiums paid.
question
Which Settlement Option pays for a specified period, regardless of who may receive the payments?
a. Reduced Paid-Up
b. One-Year Term
c. Paid-Up Additions
d. Fixed Period
answer
d. Fixed Period
Anytime the policyowner specifies payments to be guaranteed for a specific period regardless of who may receive the payments, policyowner or beneficiary, is the Fixed Period Settlement Option.
question
A beneficiary wants a guarantee that benefits will be paid for a period of ten years before the funds are exhausted, which of the following options should the beneficiary select?
a. Fixed Amount
b. Fixed Time
c. Fixed Period
d. Fixed Income
answer
c. Fixed Period
Anytime the policyowner specifies payments to be guaranteed for a specific period regardless of who may receive the payments, policyowner or beneficiary, is the Fixed Period Settlement Option.
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