TEST 280

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Test Preparation Guide

for LOMA 280

ONLINE COURSE PORTAL

This text is assigned reading material for LOMA 280Principles of Insurance. Enrollment in this course includes access to the LOMA 280 Course Portal, which provides, in addition to all assigned study materials, an array of study tools, including some online and multi-media features to enhance your learning experience and help you prepare for the examination.


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LOMA (Life Office Management Association, Inc.) is an international association founded in 1924. LOMA is committed to a business partnership with its worldwide members in the insurance and

financial services industry to improve their management and operations through quality employee

development, research, information sharing, and related products and services. Among LOMAs

activities is the sponsorship of several self-study education programs leading to professional

designations. These programs include the Fellow, Life Management Institute (FLMI) program and the

Fellow, Financial Services Institute (FFSI) program. For more information on all of LOMAs

education programs, please visit www.loma.org.

Statement of Purpose: LOMA Educational Programs Testing and Designations

Examinations described in the LOMA Education and Training Catalog are designed solely to measure

whether students have successfully completed the relevant assigned curriculum, and the attainment of

any LOMA designation indicates only that all examinations in the given curriculum have been

successfully completed. In no way shall a students completion of a given LOMA course or

attainment of a LOMA designation be construed to mean that LOMA in any way certifies that

students competence, training, or ability to perform any given task. LOMAs examinations are to be used solely for general educational purposes, and no other use of the examinations or programs is

authorized or intended by LOMA. Furthermore, it is in no way the intention of the LOMA

Curriculum and Examinations staff to describe the standard of appropriate conduct in any field of the

insurance and financial services industry, and LOMA expressly repudiates any attempt to so use the

curriculum and examinations. Any such assessment of student competence or industry standards of

conduct should instead be based on independent professional inquiry and the advice of competent

professional counsel.


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Test Preparation Guide

for LOMA 280

Information in this text may have been changed or updated since

its publication date. For current updates, visit www.loma.org.

LOMA Education and Training

Atlanta, Georgia


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PROJECT TEAM:

Authors: Sean Schaeffer Gilley, FLMI, ACS, AIAA, AIRC, FLHC, AAPA, ARA,

CEBS, HIA, MHP, PAHM

Melanie R. Green, FLMI, ACS, AIAA

Martha Parker, FLMI, ACS, ALHC, AIAA

Project Manager: Julia K. Wooley, FLMI, ACS, ALHC, HIA, MHP

Technical Support: David A. Lewis, FLMI, ACS

Learning Coordinator: Tonya Vaughan

Administrative Support: Mamunah Carter


19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1

This text, or any part thereof, may not be reproduced or transmitted in any form or by any means,

electronic or mechanical, including photocopying, recording, storage in an information retrieval

system, or otherwise, without the prior written permission of the publisher.

While a great deal of care has been taken to provide accurate, current, and authoritative information

in regard to the subject matter covered in this book, the ideas, suggestions, general principles,

conclusions, and any other information presented here are for general educational purposes only. This

text is sold with the understanding that it is neither designed nor intended to provide the reader with

legal, accounting, investment, marketing, or any other types of professional business management

advice. If legal advice or other expert assistance is required, the services of a competent professional

should be sought.

ISBN: 978-1-57974-352-9

Printed in the United States


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Contents

Contents ................................................................................................................................................ 5

Preface ................................................................................................................................................... 6

Practice Questions ................................................................................................................................ 8

Chapter One ....................................................................................................................................... 9

Chapter Two ..................................................................................................................................... 12

Chapter Three ................................................................................................................................... 15

Chapter Four .................................................................................................................................... 17

Chapter Five ..................................................................................................................................... 20

Chapter Six....................................................................................................................................... 22

Chapter Seven .................................................................................................................................. 25

Chapter Eight ................................................................................................................................... 28

Chapter Nine .................................................................................................................................... 33

Chapter Ten ...................................................................................................................................... 38

Chapter Eleven ................................................................................................................................. 42

Chapter Twelve ................................................................................................................................ 45

Chapter Thirteen .............................................................................................................................. 48

Chapter Fourteen .............................................................................................................................. 52

Answers to Practice Questions .......................................................................................................... 55

Sample Examination .......................................................................................................................... 57

Answers to Sample Exam .................................................................................................................. 74

Contents ................................................................................................................................................ 5

Preface................................................................................................................................................... 6

Practice Questions................................................................................................................................ 8

Chapter One ....................................................................................................................................... 9

Chapter Two..................................................................................................................................... 12

Chapter Three................................................................................................................................... 15

Chapter FourChapter Fou .................................................................................................................................... 17

Chapter Five..................................................................................................................................... 20

Chapter Six....................................................................................................................................... 22

Chapter Seven .................................................................................................................................. 25

Chapter Eight ................................................................................................................................... 28

Chapter Nine .................................................................................................................................... 33

Chapter Ten ...................................................................................................................................... 38

Chapter Eleven................................................................................................................................. 42

Chapter Twelve ................................................................................................................................ 45

Chapter Thirteen .............................................................................................................................. 48

Chapter Fourteen.............................................................................................................................. 52

Answers to Practice Questions.......................................................................................................... 55

Sample Examination.......................................................................................................................... 57

Answers to Sample Exam.................................................................................................................. 74

6 | Test Preparation Guide for LOMA 280


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Preface

Before You Begin

Important Information on How to Study and Prepare for a LOMA Examination

Welcome to the Test Preparation Guide (TPG) for LOMA 280. This learning package was designed by LOMA to complement Principles of Insurance by Harriett E. Jones, J.D., FLMI, AIRC, ACS, and Steven R. Silver, J.D., FLMI, AFSI, ACS, AIRC, AAPA. Used along with the textbook, this TPG will help you master the course material as you prepare for the LOMA 280 examination. This TPG includes practice questions and a full-scale sample examination.

The nature of LOMAs self-study program offers two important benefits.

First, you have the opportunity to learn important job-related information that will help you become a more knowledgeable and valuable employee.

Second, a self-study program allows you to learn at your own pace and study at times that suit your own schedule.

You may need some help in developing the skills necessary for self study, or you may have some qualms about taking examinations. Even if youre very confident of your study skills, you need to understand what you will be expected to know once you have completed the course and how you can make sure you have mastered the course content. Thats why LOMA developed the TPG.

LOMA provides valuable tips on effective studying and test taking strategies. Study Tips and Becoming Test-Wise include many practical pointers that will help you organize your study and prepare for the examination for this course. Both of these tools can be found in the Exam Prep section of the Course Portal.

The remainder of the TPG is your guide to mastering the course material. By reading and working through this manual, you not only will discover how to focus your study, but you will also receive valuable practice in applying your knowledge and will be able to gauge your level of mastery of the material.

The TPG is your key to learning success.

Preface | 7


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Acknowledgments

The TPG for LOMA 280 was designed to provide a comprehensive, self-directed learning approach to help students master the information in this course. As with all projects at LOMA, development of the TPG depended upon the combined efforts of many individuals.

Our thanks go to Julia K. Wooley, FLMI, ACS, ALHC, HIA, MHP, who acted as Project Manager. Thanks also go to Tonya Vaughan for her work typesetting this text, and to Amy Stailey for her cover design.

Sean Schaeffer Gilley, FLMI, ACS, AIAA, AIRC, FLHC, AAPA, ARA, CEBS, HIA, MHP, PAHM

Melanie R. Green, FLMI, ACS, AIAA

Martha Parker, FLMI, ACS, ALHC, AIAA

Atlanta, Georgia 2011



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Practice Questions

Learning objectives are now presented with the Practice Questions.

The learning objectives in the assigned text are each measured by one or more practice questions. Each practice question represents an example of how your knowledge of the learning objective may be measured on the examination for this course. Learning objectives appear in a shaded box above the question or questions associated with that learning objective. Additional information on how to use learning objectives to guide your study and preparation for the exam appears in Study Tips, which can be accessed in the Course Portal under Exam Prep. An interactive version of these Practice Questions can be accessed in the Course Portal under Exam Prep.

Chapter 1 Practice Questions | 9


Answers to Practice Questions begin on page 55

Chapter One

Learning Objective: Distinguish between speculative risk and pure risk.

1. Both individuals and businesses experience two kinds of riskspeculative risk and pure risk. By definition, a pure risk is one in which the possible outcomes include

(1) loss, no loss, or gain (2) only loss or no loss (3) only loss (4) only gain

Learning Objective: Describe various ways to manage financial risk.

2. Individuals and businesses often use risk management as a means of identifying and assessing financial risks. To eliminate or reduce exposure to a specific financial risk, an individual can use at least one of four risk management techniques: avoid the risk, control the risk, transfer the risk, or accept the risk. From the answer choices below, select the response that correctly describes an individual controlling the risk of financial loss.

(1) Lauren Knill insists that all passengers riding in her automobile wear seat belts at all times. (2) Colton Grey, a self-employed graphic design artist, purchased a disability income

insurance policy that will provide him with monthly income benefits if he becomes totally disabled.

(3) Because he is concerned about suffering neck and back injuries, Franklin Mulongo never rides roller coasters at amusement parks.

(4) After purchasing a new computer, Lisa Huggins rejected the manufacturers offer of an extended warranty on the new computer system.

Learning Objective: Identify the five characteristics of insurable risks.

3. In order for a riska potential lossto be considered insurable, the risk must have certain characteristics. The following statements are about various risks. Select the answer choice that correctly represents a characteristic of insurable risk.

(1) In order to provide insurance coverage to an individual, an insurer must be able to predict the losses that the proposed insured will experience.

(2) In order for a potential loss to be insurable, the element of chance must be present. (3) Only those potential losses that would cause catastrophic financial damage to both the

insurer and the insured are considered to be insurable. (4) For most types of insurance, an insurable loss must be definite in terms of the amount of

the loss, but not in terms of when to pay the benefits.

LEARNING OBJECTIVES &

PRACTICE QUESTIONS



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4. Every insurance policy can be classified as a valued contract or a contract of indemnity. Nancy Upchurch is the policyowner-insured of a life insurance policy and a medical expense insurance policy. Ms. Upchurchs life insurance policy can be classified as a (contract of indemnity / valued contract). Her medical expense insurance policy can be classified as a (contract of indemnity / valued contract).

(1) contract of indemnity / contract of indemnity (2) contract of indemnity / valued contract (3) valued contract / contract of indemnity (4) valued contract / valued contract

5. The law of large numbers states that, typically, the more times we observe a particular event, the

(more / less) likely that our observed results will approximate the true probabilityor likelihoodthat the event will occur. Using this concept, insurers have been able to develop (mortality tables / morbidity tables) that indicate with great accuracy the number of people in a large group who are likely to die at each age.

(1) more / mortality tables (2) more / morbidity tables (3) less / mortality tables (4) less / morbidity tables

Learning Objective: Define antiselection and give examples of two factors that can increase or

decrease the likelihood that an individual will suffer a loss.

6. From an insurers standpoint, the tendency of individuals who believe they have a greater-than-average likelihood of loss to seek insurance protection to a greater extent than do other individuals is known, by definition, as

(1) reinsurance (2) speculative risk (3) antiselection (4) moral hazard

Learning Objective: Identify four risk classes for proposed insureds.

7. Insurance companies generally classify proposed insureds who have a significantly greater-than-average likelihood of loss but who are still found to be insurable in a risk category known as

(1) declined risks (2) preferred risks (3) standard risks (4) substandard risks




Learning Objective: Define insurable interest and determine in a given situation whether the

insurable interest requirement is met.

8. Doris Crowell applied for a life insurance policy on her own life and named her next-door neighbor, Patrick ONeill, as the beneficiary of the policy even though they are not related and have no relationship other than as neighbors. At the same time, Mr. ONeill applied for a life insurance policy on the life of Ms. Crowell and named himself as the beneficiary. According to insurable interest laws, an insurable interest most likely exists in

(1) both of these applications (2) Ms. Crowells application, but not in Mr. ONeills application (3) Mr. ONeills application, but not in Ms. Crowells application (4) neither of these applications



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Chapter Two

Learning Objective: Distinguish among the three types of business organizations and explain

why insurance companies must be organized as corporations.

1. In most countries, insurance companies and most other businesses are organized as corporations. One difference between a corporation and other forms of business organization is that

(1) a corporation is less stable and less permanent than other forms of business organization (2) a corporations assets and liabilities belong to the corporation itself, not to its owners (3) a corporations structure protects it from being sued (4) only a corporation dissolves if a majority owner dies

Learning Objective: Distinguish among stock insurers, mutual insurers, and fraternal

benefit societies.

2. The Benchmark Association is a nonprofit organization formed to provide social, as well as insurance, benefits to its members. Members in the association share a common vocational background. Benchmarks members elect officers and are members of local chapters, usually referred to as lodges, which hold regular meetings. Only lodge members and their families are permitted to own Benchmark insurance. Benchmark is best classified as a type of organization known as a

(1) fraternal benefit society (2) property/casualty (P&C) insurance company (3) partnership (4) depository institution

Learning Objective: Describe the financial services industry and explain how insurance

companies function within that industry.

3. The following statements are about financial institutions. Three of the statements are true, and one of the statements is false. Select the answer choice containing the FALSE statement.

(1) Insurance companies cannot be classified as financial institutions because they do not function in the economy as financial intermediaries.

(2) Financial institutions serve as financial intermediaries by channeling funds from groups that act as suppliers of funds to groups that act as users of funds.

(3) Financial institutions help people, businesses, and governments save, borrow, invest, and otherwise manage money.

(4) A financial institution is a business that owns primarily financial assets, such as stocks and bonds, rather than fixed assets, such as equipment and raw materials.


PRACTICE QUESTIONS




4. Consider the following consolidations in the financial services industry:

Oak Financial Services and the Pine Bank recently consolidated to form one financial services corporation. After the consolidation, Pine Bank survived as a legal entity, and Oak Financial Services ceased to exist. Emerald Financial Services purchased a controlling interest in Diamond Insurance. After this consolidation, both Emerald Financial Services and Diamond Insurance survived as separate legal entities.

From the answer choices below, select the response that correctly indicates whether each consolidation transaction is a merger or an acquisition.

Oak and Pine transaction Emerald and Diamond transaction (1) acquisition acquisition (2) acquisition merger (3) merger acquisition (4) merger merger

Learning Objective: Describe the roles that the federal and state governments play in U.S.

insurance regulation.

5. In the United States, the McCarran-Ferguson Act affects the regulation of the insurance industry. The primary effect of the McCarran-Ferguson Act is that it

(1) ensures uniformity in insurance regulation among the states (2) prohibits insurers from engaging in a variety of practices that are considered unfair

or deceptive (3) leaves insurance regulation to the federal government, as long as the states consider federal

regulation to be adequate (4) leaves insurance regulation to the state governments, as long as Congress considers state

regulation to be adequate 6. In the United States, the National Association of Insurance Commissioners (NAIC) develops

model laws and regulations. One characteristic of the NAIC and the model laws and regulations it develops is that the

(1) NAIC is a governmental association created by the U.S. federal government (2) function of the NAIC is to promote uniformity of state insurance regulation (3) states are required to adopt the NAICs model laws and regulations as written (4) states may modify model laws and regulations, but they must adopt some form of each

model law and regulation



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Learning Objective: Identify the two primary types of insurance regulation in most countries.

7. Owners equity is the difference between the amount of a companys assets and the amount of its liabilities, and it represents the owners financial interest in the company. Owners equity in a mutual insurance company consists of

(1) both capital and surplus (2) capital, but not surplus (3) surplus, but not capital (4) neither capital nor surplus




Chapter Three

Learning Objectives: (1) Explain the difference between a valid contract, a void contract, and a

voidable contract; and (2) Identify the four general requirements for the creation of a valid

informal contract and describe how each of these requirements can be met in the formation of

an insurance contract.

1. Robert Houck purchased a life insurance policy on his life from Classic Financial. Mr. Houck purchased the policy after a court had declared him to be mentally incompetent. In this situation, the contract for insurance is

(1) void (2) valid and binding on Classic (3) voidable only by Mr. Houck (4) voidable by either Classic or Mr. Houck

Learning Objective: Distinguish between formal and informal contracts, bilateral and

unilateral contracts, commutative and aleatory contracts, and contracts of adhesion and

bargaining contracts, and identify the types of contracts an insurance contract represents.

2. A life insurance contract is enforceable because the parties to the contract met requirements concerning the substance of the agreement rather than requirements concerning the form of the agreement. In addition, the insurers promise to pay the policy benefit is contingent on the death of the insured occurring while the policy is in force. This information indicates that a life insurance contract is

(1) an informal, commutative contract (2) an informal, aleatory contract (3) a formal, commutative contract (4) a formal, aleatory contract

Learning Objective: Identify the four general requirements for the creation of a valid informal

contract and describe how each of these requirements can be met in the formation of an

insurance contract.

3. The following statements are about the general requirements that must be met for a valid life insurance contract to be formed. Select the answer choice containing the correct statement.

(1) Only an insurer must express its intent to be bound by the terms of an insurance contract in order to fulfill the requirement of mutual assent.

(2) An applicant gives the application and the initial premium and promises to pay the renewal premiums as consideration for a life insurance contract.

(3) In order for an insurance contract to be valid, each party to the contract must give or promise something that is of value to the other party.

(4) The requirement of lawful purpose in the making of an insurance contract is fulfilled by the presence of an offer and the acceptance of that offer.


PRACTICE QUESTIONS



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4. The following statements are about contractual capacity in the formation of contracts. Select the answer choice containing the correct statement.

(1) If an insurer issues a policy to a person who is younger than the permissible age to purchase insurance, the insurer can sue to avoid the policy.

(2) An insurer acquires its legal capacity to issue an insurance contract by being licensed or authorized to do business as an insurer by the proper regulatory authority.

(3) To establish a valid contract in most jurisdictions, an individual must first prove his legal capacity in a court of law.

(4) Corporations are generally presumed to have the same contractual capacity as that of a minor.

Learning Objective: Distinguish between formal and informal contracts, bilateral and

unilateral contracts, commutative and aleatory contracts, and contracts of adhesion and

bargaining contracts, and identify the types of contracts an insurance contract represents.

5. Different types of contracts have certain characteristics. In a life insurance contract, only the insurer makes a legally enforceable promise when entering into the contract. This characteristic of an insurance contract identifies it as a

(1) bilateral contract (2) bargaining contract (3) contract of adhesion (4) unilateral contract




Chapter Four

Learning Objective: Describe the legal reserve system, and explain how a products financial

design allows a life insurance company to meet its policy reserve requirements.

1. In the insurance industry, policy reserves represent the amount an insurer estimates it will need for the purpose of

(1) accumulating surplus funds (2) reinsuring risks for direct writers (3) paying future benefits to policyowners (4) paying stockholder dividends to the owners of its stock

2. For this question, if answer choices (1) through (3) are all correct, select answer choice (4).

Otherwise, select the one correct answer choice.

The system insurance companies use to set financial values for life insurance policies is generally known as the legal reserve system. The premise(s) on which this system is based include

(1) that the amount of benefits payable should be specified or calculable in advance of the insured event

(2) that companies should collect in advance the money needed to fund a policy reserve so that the insurer will have sufficient funds available to pay claims and expenses as they occur

(3) that the amounts a customer pays for a life insurance policy should be related to the amount of risk the insurance company assumes for that policy

(4) all of the above

Learning Objective: Identify and define the three primary elements in the financial design of a

life insurance product, and explain how each element affects a products financial design.

3. For an insurance product, the cost of benefits is the value of all benefits under the product. The cost of benefits for a single life insurance product can be calculated by

(1) adding a charge for operating expenses to each years potential benefit payable minus expected investment earnings

(2) subtracting all the potential benefits payable from the total premiums the company expects to receive

(3) multiplying all the potential benefits payable by the expected probability that each potential benefit will be payable

(4) dividing all the potential benefits payable by the expected probability that each potential benefit will be payable


PRACTICE QUESTIONS



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Learning Objectives: (1) Identify and define the three primary elements in the financial design

of a life insurance product, and explain how each element affects a products financial design,

and (2) Explain how insurers use mortality tables in the financial design of products, and

describe the effect that mortality rates have on the cost of benefits and the premium rate for a

block of policies.

4. The following statements are about the mortality rates that are shown in mortality tables. Select the answer choice containing the correct statement.

(1) In general, the higher the mortality rate for a group of insureds of the same age and sex, the lower the premium rate.

(2) Mortality rates for males typically are lower than the mortality rates for females of the same age.

(3) A mortality table that shows separate mortality rates for smokers and nonsmokers is referred to as a composite mortality table.

(4) A mortality experience table is a mortality table that reflects the actual mortality of an insurance companys insureds.

Learning Objective: Describe the effect of compound interest on investment earnings, and

calculate the amount of interest earned on a given sum of money.

5. Dan Ruggiero loaned $1,000 to his sister, Ronda Houseman. Mr. Ruggiero charged his sister a 10 percent interest rate, compounded annually. At the end of two years, Ms. Houseman wanted to pay back the entire loan plus the total interest accrued on the loan. This information indicates that Ms. Houseman should pay Mr. Ruggiero a total of

(1) $1,000 (2) $1,020 (3) $1,200 (4) $1,210

Learning Objective: Identify and define the three primary elements in the financial design of a

life insurance product, and explain how each element affects a products financial design.

6. The operating expenses in an insurance product design are the expenses that arise in the normal course of the insurers operations. An insurers operating expenses include all of the following costs EXCEPT

(1) taxes (2) payroll (3) office expenses (4) benefit payments




Learning Objective: Explain the purpose of using conservative values in the financial design of

a life insurance product.

7. Using conservative values in financial design provides to insurers a risk margin against adverse developments. Conservative values for specific life insurance product elements generally take the form of

(1) mortality rates that are higher than expected (2) investment earnings that are higher than expected (3) operating expenses that are lower than expected (4) profits that are higher than expected

Learning Objective: Define premium rate, and calculate the annual premium amount for a

given life insurance policy.

8. The annual premium rate for a $500,000 life insurance policy is expressed as $4 per $1,000 of coverage. The annual premium amount for this policy is

(1) $20 (2) $200 (3) $2,000 (4) $20,000

Learning Objective: Explain how the level premium system operates.

9. In the level premium system of financial design, the premium rates charged for level premium policies

(1) increase as an insureds age increases (2) decrease as an insureds age increases (3) are higher than needed to pay claims and expenses in earlier policy years (4) are lower than needed to pay claims and expenses in earlier policy years



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Chapter Five

Learning Objective: Identify the common personal and business needs that life insurance

can meet.

1. Colleen Moore is the policyowner-insured of a life insurance policy that names her 32-year-old son, David, as the beneficiary. If Ms. Moore dies while the policy is in force and while David is still alive, then the death benefit of the policy will be payable to

(1) Ms. Moores estate, and the death benefit, if paid in a lump sum, most likely will be considered taxable income to the estate

(2) Ms. Moores estate, and the death benefit, if paid in a lump sum, most likely will not be considered taxable income to the estate

(3) David, and the death benefit, if paid in a lump sum, most likely will be considered taxable income to David

(4) David, and the death benefit, if paid in a lump sum, most likely will not be considered taxable income to David

2. George Remick developed a plan that considers the amount of assets and debts that he is likely to

have at the time of his death. The plan also considers how Mr. Remick can best preserve those assets so that they can be distributed as he desires. The plan Mr. Remick developed is known, by definition, as

(1) a key person insurance plan (2) an estate plan (3) a business continuation insurance plan (4) a buy-sell agreement

Learning Objective: Describe the coverage provided by level term, decreasing term, and

increasing term life insurance policies, and explain when the premium charged for term life

insurance coverage may increase.

3. Harris Anderson purchased a new home and obtained a 30-year mortgage from the HomeSweetHome Mortgage Company. The terms of the mortgage loan contract required Mr. Anderson to purchase mortgage life insurance and to name HomeSweetHome as the beneficiary of the mortgage life insurance policy. Mr. Anderson purchased mortgage life insurance from the Beachside Insurance Company. The following statements are about this situation. Select the answer choice containing the correct statement.

(1) HomeSweetHome Mortgage Company is a party to the mortgage life insurance contract that Mr. Anderson purchased.

(2) Beachside Insurance is a party to the mortgage loan contract that Mr. Anderson obtained. (3) The amount of the renewal premium Mr. Anderson will pay for his mortgage life insurance

policy is likely to decrease throughout the 30-year term of his mortgage loan. (4) The amount of the policy benefit payable at any given time under Mr. Andersons mortgage

life insurance policy generally equals the amount Mr. Anderson owes on the mortgage loan.


PRACTICE QUESTIONS




4. The following statements are about family income coverage and credit life insurance. Select the answer choice containing the correct statement.

(1) Family income coverage is a plan of increasing term life insurance. (2) Family income coverage provides a stated monthly income benefit amount to the

beneficiarytypically the insureds surviving spouseif the insured dies during the term of coverage.

(3) The amount of benefit payable under a credit life insurance policy usually remains level over the duration of the loan.

(4) The policy benefit of a credit life insurance policy may be paid to a beneficiary other than the lender, or creditor, if the insured borrower dies during the policys term.

Learning Objective: Describe renewable term life insurance and convertible term

life insurance.

5. Ana Maria Avila purchased a $100,000 15-year renewable term insurance policy on her life. At the end of the 15-year term, the renewal provision in Ms. Avilas policy most likely gives her the right, within specified limits, to renew her insurance coverage

(1) without having to submit evidence of her insurability (2) for a one-year term, but not for another 15-year term (3) after first undergoing a required medical examination (4) at the same premium rate she was charged for the original 15-year term policy

6. Edgar Whitefeather is the policyowner-insured of a five-year term life insurance policy for

which the face amount remains the same throughout the term of the insurance coverage. One feature of Mr. Whitefeathers policy gives him the right to change the term policy to a cash value life insurance policy without providing evidence that he continues to be an insurable risk. This information indicates that Mr. Whitefeathers insurance policy can be characterized as

(1) a renewable term insurance policy (2) an increasing term insurance policy (3) a decreasing term insurance policy (4) a convertible term insurance policy

Learning Objective: Describe the operation of a return of premium (ROP) term policy.

7. Kaitlin Miller, age 35, purchased a $250,000 30-year return of premium (ROP) term insurance policy from the Kumquat Insurance Company. Ms. Miller paid annual premiums of $700. Ms. Miller paid all required premiums and was alive at the end of the 30-year term when the policy expired. This information indicates that

(1) Ms. Millers policy expired without Kumquat making any payment to anyone (2) Kumquat paid $21,000 to Ms. Miller (3) Kumquat paid $250,000 to the beneficiary of Ms. Millers policy (4) Kumquat paid $250,000 to Ms. Miller



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Chapter Six

Learning Objective: Define cash value life insurance and distinguish it from term

life insurance.

1. Whole life insurance products and term life insurance products differ as to whether they contain a savings element, and whether they offer insurance coverage for the entire lifetime of the insured or for only a certain period of time. (Term / Whole) life insurance builds a cash value that functions as a savings element. (Term / Whole) life insurance provides protection for the entire lifetime of the insured, as long as the policy remains in force.

(1) Term / Term (2) Term / Whole (3) Whole / Term (4) Whole / Whole

Learning Objective: Identify the common characteristics of whole life insurance, modified

whole life insurance, and joint whole life insurance, and describe the features that differentiate

these types of whole life insurance.

2. The following statements are about two types of whole life insurance policies: limited-payment policies and continuous-premium policies. Select the answer choice containing the correct statement.

(1) The annual premium for a limited-payment whole life insurance policy is greater than the annual premium for an equivalent continuous-premium whole life insurance policy.

(2) The cash value of a continuous-premium whole life insurance policy builds more rapidly than does the cash value under an equivalent limited-payment whole life insurance policy.

(3) Under a limited-payment whole life insurance policy, life insurance coverage expires at the end of the specified premium payment period.

(4) A continuous-premium whole life insurance policy is considered to be paid up when the insured reaches age 65.

3. Some insurers issue modified-premium whole life insurance policies. According to the terms of

most modified-premium policies, the amount of the annual premium changes after a specified initial time period. Compared to a continuous-premium whole life insurance policy with the same face amount, a modified-premium whole life insurance policy has an initial annual premium that is normally

(1) lower, and a cash value that builds more quickly (2) lower, and a cash value that builds more slowly (3) higher, and a cash value that builds more quickly (4) higher, and a cash value that builds more slowly


PRACTICE QUESTIONS




4. Sang-jin Kwon, age 42, pays level premiums for a type of whole life insurance policy. The policy specifies that the face amount will decrease from $300,000 to $200,000 when Mr. Kwon reaches age 60, and then decrease again from $200,000 to $100,000 when he reaches age 70. From the answer choices below, select the response that correctly identifies the type of policy Mr. Kwon purchased, and whether the annual premium Mr. Kwon pays for this policy is higher or lower than the annual premium he would pay for a continuous-premium whole life insurance policy that provided $300,000 of coverage throughout his lifetime.

Type of policy Annual premium rate (1) modified-premium policy lower than for a continuous-premium policy (2) modified-premium policy higher than for a continuous-premium policy (3) modified coverage policy lower than for a continuous-premium policy (4) modified coverage policy higher than for a continuous-premium policy

5. Doug Cooper purchased a whole life insurance policy that insures both him and his wife,

Jennifer, and provides funds to pay any estate taxes that may be levied after their deaths. The policy specifies that the death benefit will be paid only after both Doug and Jennifer have died. This information indicates that the type of insurance policy Doug purchased is

(1) an endowment insurance policy (2) a last survivor life insurance policy (3) a joint whole life insurance policy (4) a family policy

Learning Objective: Explain how universal life insurance differs from whole life insurance in

terms of its separate policy elements and its flexible premiums, face amount, and

death benefit.

6. One true statement about a universal life insurance policy is that the

(1) policy is treated as a life insurance product under United States federal tax laws, regardless of the size of the policys cash value in relation to its death benefit

(2) policyowner decides, within certain limits, what the policys face amount will be, the amount of the death benefit payable, and the amount of premiums he will pay for that coverage

(3) policyowner may not use the cash value of the policy as security for a policy loan (4) policy elements, such as mortality charges, interest rate, and expenses, are combined into

one bundle and stated in the policy as a single periodic premium amount that the policyowner must pay to keep the policy in force



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Learning Objective: Describe how variable life insurance allows policyowners to decide how

their premiums and cash values are invested.

7. The following statements are about variable life (VL) insurance in the United States. Select the answer choice containing the correct statement.

(1) A VL insurance policys premiums and cash values are invested in an investment account, which the insurer maintains separately from its general investment account.

(2) The death benefit provided by a VL insurance policy remains constant throughout the life of the policy.

(3) VL insurance policies offer policyowners guaranteed investment earnings and minimum cash values.

(4) The insurance company alone assumes the investment risk of a VL insurance policy.

Learning Objective: Describe the features that variable universal life insurance products share

with universal life insurance and variable life insurance products.

8. Margaret Reece purchased a variable universal life (VUL) insurance policy from the Patrician Life Insurance Company. Ms. Reeces policy combines features of universal life insurance and variable life insurance. One characteristic of Ms. Reeces VUL insurance policy is that the

(1) policy elements are not listed separately (2) premiums are fixed (3) face amount is flexible (4) policy has a flexible interest rate with a guaranteed minimum

Learning Objective: Describe the characteristics of endowment insurance.

9. The difference between an endowment insurance policy and a cash value life insurance policy is that only the endowment insurance policy

(1) pays a fixed benefit whether the insured survives to the policys maturity date or dies before that maturity date

(2) has premiums that are level throughout the term of the policy (3) steadily builds a cash value (4) receives favorable federal income tax treatment in the United States




Chapter Seven

Learning Objective: Identify and describe three types of supplemental disability benefits that

life insurance policies may provide.

1. Rusty Shackleford is the policyowner-insured of a whole life insurance policy issued by the Mountainview Life Insurance Company. Mr. Shackleford was injured in an accident and was unable to work for 18 months. After Mr. Shackleford satisfied a three-month waiting period, Mountainview began paying the renewal premiums on Mr. Shacklefords policy, and the policys cash value continued to increase just as if Mr. Shackleford were paying the premiums himself. This information indicates that Mr. Shacklefords policy contained a

(1) waiver of premium for payor benefit (2) waiver of premium for disability (WP) benefit (3) paid-up additions option benefit (4) disability income benefit

2. One benefit that may be added to an individual life insurance policy is the disability income

benefit. One true statement about a supplemental disability income benefit is that

(1) the insured must be totally disabled to receive the benefit (2) the insurer begins paying benefits at the start of the disability (3) life insurance policies that include a disability income benefit rarely include a waiver of

premium for disability (WP) benefit as well (4) the amount of the monthly disability income benefit is a percentage of the insureds

current earnings

Learning Objective: Explain the coverage that an accidental death benefit rider provides and

give examples of common exclusions.

3. Rachel Loo, age 29, died when the commercial airplane on which she was traveling as a passenger crashed, killing everyone on board. At the time of her death, Ms. Loo was insured by a $300,000 whole life insurance policy with a typical double indemnity accidental death benefit rider. This information indicates that the insurer is liable for paying the designated beneficiary of Ms. Loos policy

(1) $0 (2) $300,000 (3) $600,000 (4) $900,000


PRACTICE QUESTIONS



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4. One type of supplemental accident benefit is the accidental death and dismemberment (AD&D) benefit. AD&D benefits generally specify that the

(1) insured must be totally disabled and unable to work in order to receive any benefits (2) insurer will pay both accidental death benefits and dismemberment benefits for injuries

suffered in the same accident (3) insured must suffer the actual physical loss of a limb to qualify for

dismemberment benefits (4) dismemberment benefit is payable if an accident causes the insured to lose any two limbs

or sight in both eyes

Learning Objective: Identify three types of accelerated death benefit riders and describe the

differences among those riders.

5. Accelerated death benefits, also known as living benefits, allow a policyowner-insured to receive all or part of the policys death benefit before the insureds death if certain conditions are met. Three commonly offered types of accelerated death benefits are the terminal illness (TI) benefit, the dread disease (DD) benefit, and the long-term care (LTC) insurance benefit. The following statements are about these different types of accelerated death benefits. Select the answer choice containing the correct statement.

(1) Insurers generally offer accelerated death benefit coverage on policies of all face amounts. (2) Insurers typically charge an additional premium amount for all three types of accelerated

death benefits. (3) The payment of an accelerated death benefit reduces the death benefit that will be paid to

the beneficiary at the insureds death by the amount of the accelerated death benefit paid. (4) Insurers pay only lump-sum benefits under all three types of accelerated death benefits.

Learning Objective: Describe three types of insurance riders that expand a life insurance

policys coverage to insure more than one individual.

6. Sally Warner, the policyowner-insured of a whole life insurance policy, wants to add a second insured rider to the policy so that her business partner, Patricia Skelton, will be provided with life insurance coverage. The insurer most likely will base the premium rate for the coverage provided by the rider on

(1) the combined risk characteristics of Ms. Warner and Ms. Skelton (2) the risk characteristics of Ms. Warner only (3) the risk characteristics of Ms. Skelton only (4) a flat amount that the company charges for all second insured riders




Learning Objective: Identify two types of insurability benefit riders and explain how they

allow a life insurance policyowner to purchase additional insurance coverage.

7. Scott Herbermann is the policyowner-insured of a $200,000 whole life insurance policy. The policy includes a supplemental benefit rider that gives Mr. Herbermann the right to purchase $25,000 of additional whole life insurance at age 34, age 37, and age 40, without submitting evidence of insurability. This information indicates that Mr. Herbermanns policy includes the type of supplemental benefit known as

(1) an additional insured rider (2) a paid-up additions option benefit (3) a guaranteed insurability (GI) benefit (4) credit life insurance



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Chapter Eight

Learning Objective: Describe the free-look provision of an insurance policy.

1. Ginger Harrison applied for an individual $250,000 insurance policy on her life and paid the initial premium. The insurer issued the policy as applied for, and the insurers agent delivered the policy to Ms. Harrison on June 15. The policy included a typical 10-day free-look period. Ms. Harrison was killed in an automobile accident on June 22. She never indicated whether she intended to keep the policy or return it to the insurer. In this situation, the named beneficiary is entitled to receive

(1) $250,000, because Ms. Harrisons coverage was in effect during the 10-day free-look period

(2) a return of the initial premium only, because Ms. Harrison had not advised the insurer of her decision to keep or return the policy

(3) a return of the initial premium only, because Ms. Harrisons death occurred during the 10-day free-look period

(4) nothing, because Ms. Harrisons coverage would not have gone into effect until after the expiration of the 10-day free-look period

Learning Objective: Identify the documents that make up the entire contract between the

owner of a life insurance policy and the insurer.

2. The wording of the entire contract provision in a life insurance policy varies according to whether the policy is a closed contract or an open contract. The following statements are about these two types of contracts. Select the answer choice containing the correct statement.

(1) The entire contract provision in a closed contract typically states that the entire insurance contract consists of the policy, any attached riders, and the attached copy of the application for insurance.

(2) Because insurance policies issued by fraternal insurers are closed contracts, the insurer must attach a copy of the fraternal societys charter, constitution, and bylaws to the policy in order for the contract to be valid.

(3) All individual life insurance policies are open contracts. (4) The entire contract provision in an open contract allows oral statements to modify the

terms of the policy.


PRACTICE QUESTIONS




Learning Objective: Explain the purpose and operation of the incontestability provision.

3. Each of the situations below describes a misrepresentation made in the application for an individual life insurance policy. The insurer discovered the misrepresentations after receiving death claims on the policies. In each case, the insurance policy contains a typical two-year incontestability provision:

Claire Bodin stated on her application for insurance that she had broken her right wrist in a jogging accident, when in fact, she had broken her left wrist. Ms. Bodin died during her policys contestable period. Miriam Kauffman stated on her application for insurance that she had been treated for a chest cold when, in fact, she had been treated for cancer. Ms. Kauffman died of cancer three years after the policy was issued. Clayton Stuckey stated on his application for insurance that he had received a routine medical check-up on February 26, when in fact, the visit was a post-operative visit following heart bypass surgery. Mr. Stuckey died 18 months after the policy was issued.

With regard to these situations, it most likely is correct to say that the insurer has the right to avoid the contract on the ground of a material misrepresentation in the application(s) submitted by

(1) Ms. Bodin, Ms. Kauffman, and Mr. Stuckey (2) Ms. Bodin only (3) Ms. Kauffman only (4) Mr. Stuckey only

Learning Objective: Apply the terms of the standard grace period provision in a given

situation to determine whether a life insurance policy has lapsed for nonpayment of premium.

4. Creighton Madden was the policyowner-insured of a $100,000 term life insurance policy that contained a typical grace period provision. The policys annual premium of $500 was due on September 1 of each year. Mr. Madden died on September 14, 2010, without having paid the renewal premium due on September 1, 2010. At the time of his death, Mr. Madden had paid a total of $10,000 in premiums to the insurer. In this situation, the amount the insurer most likely paid Mr. Maddens designated beneficiary was

(1) $0 (2) $10,000 (3) $99,500 (4) $100,000



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Learning Objective: Identify situations in which a life insurance policy can be reinstated and

the conditions the policyowner must meet to reinstate the policy.

5. Antonio Castellano was the policyowner-insured of a traditional whole life insurance policy that lapsed two years ago. Mr. Castellano now wishes to reinstate the lapsed policy. At the time his policy lapsed, there were no outstanding policy loans. If the reinstatement provision in his policy is typical, then the conditions Mr. Castellano must meet in order to reinstate his policy include

(1) completing a reinstatement application within the time frame stated in the reinstatement provision and presenting satisfactory evidence of his continued insurability only

(2) completing a reinstatement application within the time frame stated in the reinstatement provision and paying all back premiums plus interest on those premiums only

(3) presenting satisfactory evidence of his continued insurability and paying all back premiums plus interest on those premiums only

(4) completing a reinstatement application within the time frame stated in the reinstatement provision, providing satisfactory evidence of his continued insurability, and paying all back premiums plus interest on those premiums

Learning Objective: Determine the action an insurer likely will take if it discovers a

misstatement of the age or sex of the person insured by a life insurance policy.

6. Tom Espeland applied to the Mosaic Insurance Company for an insurance policy on the life of his mother, Joanna. He incorrectly stated on the application that Joanna was age 50, when in fact, she was 53 years old. The policy contained a typical misstatement of age provision. Mosaic discovered the misstatement of age when processing a claim for the policys death benefits. In this situation, Mosaic most likely will

(1) pay the policys face amount based on the age stated in the insurance application (2) reduce the policys face amount to the amount that the premiums paid would have

purchased had Joannas age been stated correctly on the insurance application (3) give the policy beneficiary the option to receive as a refund any premium amount

difference caused by the misstatement rather than adjust the policys face amount (4) declare the policy void because Joannas age was misrepresented on the

insurance application




Learning Objective: Describe the rights provided by a policy loan provision and a policy

withdrawal provision, and explain the differences between a policy loan and a

commercial loan.

7. Cash value life insurance policies typically grant the policyowner the right to borrow money from the insurer by using the cash value of the policy as security for the loan. The following statements are about the characteristics of such policy loans. Select the answer choice containing the correct statement.

(1) Insurers typically do not permit policyowners to take out policy loans on universal life insurance policies.

(2) A policy loan is an advance payment of part of the amount that the insurer eventually must pay out under the life insurance policy.

(3) A policy loan creates a debtor-creditor relationship between the policyowner and the insurer.

(4) A policyowner has the right to take out a policy loan for any amount up to the policys face amount.

Learning Objective: Identify and describe the nonforfeiture options typically included in cash

value life insurance policies.

8. The following statements are about the nonforfeiture options available to policyowners of life insurance policies that build cash values. Select the answer choice containing the correct statement.

(1) Coverage issued under the reduced paid-up insurance nonforfeiture option does not have a cash value.

(2) Once a policyowner selects the extended term insurance nonforfeiture option, the policyowner loses the right to cancel the extended term insurance and surrender the policy for its remaining cash value.

(3) Under the cash payment nonforfeiture option, when a policyowner surrenders a policy, the insurer may subtract the amount of any outstanding policy loan, plus any interest on the loan, from the cash surrender value amount listed in the policy.

(4) Under the reduced paid-up nonforfeiture option, any supplemental benefits that were available on the original policy, such as accidental death benefits, are usually available when the policy is continued as reduced paid-up insurance.



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Learning Objective: Identify the exclusions that insurers sometimes include in individual life

insurance policies.

9. Jutta Kindermann was insured under a $250,000 life insurance policy that contained a typical accidental death benefit rider and a typical two-year suicide exclusion provision. Three years after Ms. Kindermanns policy was issued, Ms. Kindermann died, and it was determined that she had committed suicide. At the time of her death, the policy was in force, and there were no unpaid premiums or policy loans. In this situation, the insurer most likely was obligated to pay the beneficiary of Ms. Kindermanns policy

(1) nothing, because Ms. Kindermann committed suicide (2) a return of premiums paid for the policy only (3) the basic death benefit only (4) both the basic death benefit and the accidental death benefit




Chapter Nine 1. An insurance policy is a contract between the insurer and the policyowner and is subject to the

rules of contract law. An insurance policy also is a type of property and, thus, is subject to the principles of property law. In legal terminology, property is classified as either real property or personal property and as tangible property or intangible property. With regard to these classifications, an insurance policy is classified correctly as

(1) tangible real property (2) tangible personal property (3) intangible real property (4) intangible personal property

Learning Objective: Distinguish between primary and contingent beneficiaries and between

revocable and irrevocable beneficiaries.

2. Lindsay Inthachak was the policyowner-insured of a whole life insurance policy. Lindsay designated her husband, Stephen, as the party to receive the policy proceeds following her death. Lindsay designated their daughter, Lily, to receive the policy proceeds if Stephen predeceases Lindsay. In this situation, Stephen is the type of policy beneficiary known as a

(1) contingent beneficiary (2) primary beneficiary (3) secondary beneficiary (4) successor beneficiary

3. The following statements are about revocable and irrevocable beneficiary designations. Select

the answer choice containing the correct statement.

(1) A beneficiary designation is said to be revocable if the policyowner has the right to change the beneficiary designation only after obtaining the beneficiarys consent.

(2) The vast majority of beneficiaries of life insurance policies are irrevocable beneficiaries. (3) A revocable beneficiarys interest in a life insurance policy during the insureds lifetime is

referred to as a mere expectancy of receiving the policy proceeds. (4) A beneficiary designation is said to be irrevocable if the policyowner has the unrestricted

right to change the designation during the life of the insured.


PRACTICE QUESTIONS



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Learning Objective: Identify the policy dividend options that most commonly are included in

participating life insurance policies, and describe the characteristics of each option.

4. A participating policy is a type of policy under which the policyowner shares in the insurance companys divisible surplus through the receipt of policy dividends. A nonparticipating policy is a type of policy in which the policyowner does not share in the insurers surplus. The following statements are about participating and nonparticipating life insurance policies. Select the answer choice containing the correct statement.

(1) Although policy dividends are not guaranteed to be paid, most insurers periodically pay dividends on their participating life insurance policies that are expected to remain in force over a long term.

(2) Generally, the premium rates for participating policies are lower than those for equivalent nonparticipating policies.

(3) In setting premium rates for nonparticipating policies, insurers typically use more conservative assumptions regarding mortality, investment earnings, and expenses than they do for equivalent participating policies.

(4) A policy dividend is not considered a refund of part of the premiums a participating policyowner paid during a policy year.

5. A participating life insurance policy is a type of policy under which the policyowner shares in

the insurers divisible surplus through the receipt of policy dividends. The following statements are about these policy dividends. Select the answer choice containing the correct statement.

(1) The amount payable as an annual policy dividend is determined during the risk assessment process in an insurers underwriting department.

(2) Generally, dividend amounts paid on participating life insurance policies decrease substantially with the age of the policy.

(3) The terms of some life insurance policies state that the policy must be in force for two years before any policy dividends are payable.

(4) An applicant for a participating policy usually selects a dividend option during the application process and once selected, the dividend option cannot be changed over the life of the policy.

6. The owner of a participating life insurance policy may receive policy dividends in a number of

different ways, called dividend options. Under one type of dividend option, the insurer applies policy dividends toward the payment of renewal premiums. By definition, this dividend option is known as the

(1) accumulation at interest option (2) automatic dividend option (3) cash dividend option (4) premium reduction dividend option




7. When Craig Alred purchased a participating whole life insurance policy on his life, he selected the cash dividend option. After the policy had been in force for five years, Mr. Alred requested that the dividend option be changed to the paid-up additional insurance dividend option. With regard to this situation, it is correct to say that

(1) any paid-up additional insurance issued under this new dividend option will be one-year term insurance in an amount equal to the policys cash value

(2) the premium charged for any paid-up additional insurance issued under this new dividend option will include an amount to cover the insurers expenses

(3) the insurer will require Mr. Alred to provide satisfactory evidence of insurability before changing to this new dividend option

(4) any paid-up additional insurance issued under this new dividend option will be whole life insurance in whatever face amount the dividend can provide at Mr. Alreds attained age

Learning Objective: Identify the methods by which ownership of a life insurance policy can

be transferred.

8. An assignment of a life insurance policy may take one of two forms: an absolute assignment or a collateral assignment. With respect to a collateral assignment, it is correct to say that the assignees rights

(1) include all ownership rights granted to the policyowner (2) are limited to those ownership rights that directly concern the monetary value of the policy (3) are permanent, rather than temporary (4) are limited to the right to select a settlement option only

9. Tim Parnell purchased a $50,000 whole life insurance policy on the life of his daughter,

Samantha, shortly after her third birthday. The policy contained a typical change of ownership provision. Using the endorsement method, Tim transferred ownership of the policy to Samantha as a gift when she turned 23. With regard to making the transfer of ownership using the endorsement method in this situation, it most likely is correct to say that

(1) Tim must enter into a separate assignment agreement with Samantha that will exist apart from the life insurance policy

(2) Tim must make a collateral assignment of the life insurance policy to Samantha (3) the insurer must issue a new life insurance policy that names Samantha as the

new policyowner (4) Tim must notify the insurer, in writing, of the change of ownership

Learning Objective: Identify the person in a given situation who is entitled to receive the

proceeds of a life insurance policy following the insureds death.

10. Ian Muldoon was the policyowner of a $150,000 life insurance policy insuring the life of his wife, Sarah. The policy named Hannah, Sarahs mother, as primary beneficiary, and Joseph, Sarahs brother, as contingent beneficiary. When Sarah died, Ian, Hannah, and Joseph had all predeceased her. This information indicates that the policy proceeds are payable to

(1) Ians estate (2) Sarahs estate (3) Hannahs estate (4) Josephs estate



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Learning Objective: Describe the general rule stated in a simultaneous death act, and explain

how that rule is affected if a policy contains a survivorship clause.

11. Sharon Rickett was the policyowner-insured of a life insurance policy that named her husband, Brandon, as the primary beneficiary and their daughter, Abigail, as the contingent beneficiary. Sharon and Brandon were both killed in an automobile accident, and there was no proof as to which of them died first. Sharons policy did not provide for common disasters. If the Ricketts lived in a state that has enacted a typical simultaneous death act, and if Abigail was still living at the time of her parents deaths, then the proceeds of Sharons policy most likely would be payable to

(1) Abigail (2) Sharons estate (3) Brandons estate (4) no one, because Sharon and Brandon died simultaneously

12. Some life insurance policies include a clause which states that the beneficiary must outlive the

insured by a specified period to be entitled to receive the policy proceeds. Under this type of clause, if the beneficiary does not outlive the insured by the specified period of time, then the policy proceeds are paid as if the beneficiary predeceased the insured. As a result, the policy proceeds are more likely to be distributed as the policyowner had intended. By definition, this type of clause is known as a

(1) right of revocation clause (2) succession beneficiary clause (3) survivorship clause (4) key person clause

Learning Objective: Identify the person in a given situation who is entitled to receive the

proceeds of a life insurance policy following the insureds death.

13. According to laws in many countries, if the beneficiary of a life insurance policy wrongfully and intentionally kills the insured, the beneficiary (is / is not) disqualified from receiving policy proceeds. If it is proven that the policy was purchased with the intention to profit from the insureds death, then the life insurance contract is considered (void / valid).

(1) is / void (2) is / valid (3) is not / void (4) is not / valid




Learning Objective: Calculate the proceeds payable under a given life insurance policy

following the death of the insured.

14. Nathan Katogir was the policyowner-insured of a $100,000 participating whole life insurance policy with a $100,000 accidental death benefit rider. Mr. Katogirs $1,150 annual premium was due on June 21. On June 30, Mr. Katogir was killed in an automobile accident. At the time of his death, he had not yet paid his overdue premium. Also at the time of his death, his policy had $4,500 in accumulated policy dividends, including interest, left on deposit with the insurer, and a $2,000 outstanding policy loan. This information indicates that the total death benefit payable to the beneficiary of Mr. Katogirs policy was

(1) $96,850 (2) $101,350 (3) $196,850 (4) $201,350

Learning Objective: Identify the settlement options that typically are included in life insurance

policies, and describe the features of each option.

15. In addition to lump-sum settlements of policy proceeds, insurers also make available to the policyowner and to the beneficiary alternative settlement options for receiving life insurance policy proceeds. With regard to these settlement options, it is correct to say

(1) that the life income option typically results in larger installment payments than would be available under the fixed amount or fixed period options

(2) that a policyowner who selects the interest option cannot place restrictions on the payees right to withdraw the policy proceeds

(3) that, under the fixed period option, the payee usually has the right to withdraw only a part of the policy proceeds during the payment period

(4) that, under the fixed amount option, the insurer pays equal installments of a stated amount to the payee until the policy proceeds, plus the interest earned, are exhausted



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Chapter Ten

Learning Objective: Define the terms , , , , and

.

1. By definition, the person whose lifetime is used to determine the amount of benefits payable under an annuity contract is known as the

(1) payee (2) annuitant (3) contract owner (4) annuity consideration

2. Ravi Patel purchased an annuity on February 1, 2010. Under the terms of the contract, the

insurer will begin making annual income payments to Mr. Patel on February 1, 2030. With regard to the contracts maturity date and annuity period, it is correct to say that Mr. Patels contract has a maturity date of

(1) February 1, 2010, and the contracts annuity period is one year (2) February 1, 2010, and the contracts annuity period is twenty years (3) February 1, 2030, and the contracts annuity period is one year (4) February 1, 2030, and the contracts annuity period is twenty years

Learning Objective: Distinguish between immediate and deferred annuity contracts, single-

premium and flexible-premium annuity contracts, and fixed and variable annuity contracts.

3. An annuity contract can be classified as either an immediate annuity or a deferred annuity. An annuity contract under which periodic income payments are scheduled to begin more than one annuity period after the date on which the annuity was purchased is (an immediate / a deferred) annuity. For this type of annuity contract, the time period between the contract owners purchase of the annuity and the beginning of the payout period is known as the annuity contracts (liquidation / accumulation) period.

(1) an immediate / liquidation (2) an immediate / accumulation (3) a deferred / liquidation (4) a deferred / accumulation

4. David Hoddeson, age 58, inherited $300,000 from his fathers estate. Mr. Hoddeson used the

entire inheritance as a lump-sum premium payment to purchase an annuity contract that will provide him with monthly periodic income payments, beginning on his 65th birthday. This information indicates that Mr. Hoddeson purchased a

(1) flexible-premium deferred annuity (2) flexible-premium immediate annuity (3) single-premium deferred annuity (4) single-premium immediate annuity


PRACTICE QUESTIONS




5. A variable annuity is an annuity under which the amount of the accumulated value and the amount of the periodic income payments fluctuate in accordance with the performance of one or more specified investment funds. The following statements are about variable annuities. Select the answer choice containing the correct statement.

(1) An insurer that issues a variable annuity must guarantee that the contracts accumulated value will experience no loss of principal and will earn at least a minimum guaranteed interest rate.

(2) Federal laws in the United States treat variable annuities as securities that must comply with federal securities laws.

(3) Once the contract owner of a variable annuity allocates premium amounts among a number of subaccounts, she cannot change the subaccounts in which future premiums are invested.

(4) If the contract owner of a variable annuity allocates premiums among a number of subaccounts, she generally cannot change the percentage of money allocated to specific subaccounts.

6. Two hybrid types of annuity products that insurers issue are equity-indexed annuities (EIAs) and

market value adjusted (MVA) annuities. With regard to these hybrid annuities, it is correct to say that an

(1) EIA typically is classified as a variable annuity (2) EIA does not offer any guarantees (3) MVA annuity allows contract owners to move or withdraw premium deposits at certain

times stipulated in the contract to take advantage of prevailing market interest rates (4) MVA annuity requires contract owners to be locked in with fixed earnings for the life of

the contract

Learning Objective: Explain standard contract provisions included in individual

annuity contracts.

7. One individual annuity contract provision gives the contract owner a stated period of timeusually 10 to 30 daysafter the contract is delivered in which to cancel the contract and receive a full refund of the initial premium paid. This type of individual annuity contract provision is known as the

(1) incontestability provision (2) free-look provision (3) entire contract provision (4) dividends provision

Learning Objective: Describe the guaranteed benefits included in some variable

annuity contracts.

8. Some variable annuity contracts guarantee that up to a certain percentage of the amount paid into the contract will be available for withdrawals annually during the accumulation period, even if subaccount investments perform poorly. This guaranteed benefit is known as a

(1) guaranteed minimum withdrawal benefit (GMWB) (2) guaranteed minimum death benefit (GMDB) (3) guaranteed minimum income benefit (GMIB) (4) guaranteed minimum accumulation benefit (GMAB)



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Learning Objective: Explain the fees and charges typically paid by annuity contract owners.

9. Antoine Fargo purchased a variable annuity from the Habersham Insurance Company. The contract specifies that, each time Mr. Fargo withdraws money from the product, Habersham will charge a fee, expressed as a percentage of the withdrawal. This percentage will decrease over time, until eventually Mr. Fargo can withdraw funds without incurring a charge. By definition, this fee is known as a

(1) contingent deferred sales charge (CDSC), and it is considered a front-end sales charge (2) contingent deferred sales charge (CDSC), and it is considered a back-end sales charge (3) mortality and expense risk (M&E) charge, and it is considered a front-end sales charge (4) mortality and expense risk (M&E) charge, and it is considered a back-end sales charge

Learning Objective: Identify and distinguish among the types of payout options available

under annuity contracts.

10. Greta Anderson was the contract owner, the annuitant, and the payee of a life with refund annuity for which she paid a single premium of $75,000. The annuity will provide an income payment of $5,000 per year during Gretas lifetime. Greta died five years after income payments began, and at the time of her death, she had received periodic income payments totaling $25,000. In this situation, the contingent payee named in Gretas annuity contract is entitled to receive

(1) nothing (2) a single payment of $5,000 (3) $50,000 (4) $75,000

Learning Objective: List the factors that affect the amount of an annuitys periodic income

payments and describe the effect of each factor.

11. For all types of life annuities, the number and timing of periodic income payments depends on mortality experience as well as on the frequency of payments and the total length of the payout period. All other factors being equal, it generally is correct to say that the shorter the time period that an annuitant is expected to live, the

(1) larger the periodic income payments will be (2) smaller the periodic income payments will be (3) greater the number of periodic income payments that will be made (4) lower the annuity contracts stated interest rate will be




Learning Objective: Describe two types of favorable income tax treatment for annuities in

various jurisdictions, and compare the income tax treatment of traditional IRAs and Roth IRAs.

12. In the United States, the tax treatment of an individual retirement arrangement (IRA) varies depending on whether it is a traditional IRA or a Roth IRA. One correct statement about a

(1) traditional IRA is that contributions are not tax-deductible (2) traditional IRA is that investment earnings accumulate and are distributed on a tax-

free basis (3) Roth IRA is that federal tax laws typically impose tax penalties if an individual who is

younger than age 59 makes a withdrawal from an IRA (4) Roth IRA is that there are no annual contribution limits



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Chapter Eleven

Learning Objective: Identify the parties to a group insurance contract, and distinguish

between contributory and noncontributory group insurance plans.

1. The parties to a master group insurance contract are the

(1) group policyholder and the insurer only (2) group policyholder and the group insureds only (3) insurer and the group insureds only (4) insurer, the group policyholder, and the group insureds

2. The following statements are about group insurance contracts. Select the answer choice

containing the correct statement.

(1) If a group policyholder pays the entire premium amount for the group coverage, then the group insurance plan is a contributory plan.

(2) Each group member must receive individual copies of the master group contract. (3) Each group member insured under a group life insurance policy has the right to name the

beneficiary who will receive the benefit payable upon that group members death. (4) Group policyholders are not required to provide each group member with a certificate of

insurance or a separate benefit booklet that describes the group insurance plan. 3. An insurance contract is an informal contract that must be formed in accordance with the rules of

contract law. Thus, to form a valid group insurance contract, certain requirements must be met. The following statements are about these requirements. Select the answer choice containing the correct statement.

(1) The group insureds covered under the group insurance contract and the insurer must mutually agree to the contracts terms.

(2) Both the proposed group insureds and the group policyholder must have contractual capacity in order to enter into a contract for group insurance.

(3) The group policyholder must prove an insurable interest in the group insureds so that the contract will have been formed for a lawful purpose.

(4) The group policyholder and the insurer must exchange legally adequate consideration in order for the contract to be valid.


PRACTICE

TEST 280

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