Principles of Risk Management and Insurance - Chapter 12

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Life Insurance Contractual Provisions
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1

Which of the following statements about the ownership of a life insurance policy is (are) true?

  1. Under the ownership clause, the policyholder and beneficiary equally share all contractual rights in the policy while the insured is living.
  2. The policyholder can designate a new owner by filing an appropriate form with the insurance company.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

2

Which of the following statements about the entire contract clause is true?

  1. A) It allows the insurer to change the policy terms without the insured's consent.
  2. B) It specifies that all statements in the application are considered warranties.
  3. C) It specifies that the life insurance policy and the attached application constitute the complete agreement between the parties.
  4. D) It prevents the insurance company from contesting a policy after it has been in force for two years during the lifetime of the insured.

Answer: C

3

Which of the following would be a valid reason for an insurer to contest a policy after the contestable period has ended?

  1. A) The policyholder made a material misrepresentation in the application process.
  2. B) The insurer's loss ratio is running higher than the insurer anticipated.
  3. C) The applicant had someone else take the medical examination required for policy approval for her.
  4. D) The policyholder concealed a material fact at the time of application.

Answer: C

4

Amy purchased a life insurance policy with the intent of committing suicide to pay all the debts that were burdening her family. If she commits suicide 9 months after the policy is purchased, and the insurer is able to prove that her death was a suicide, how much will be paid by the insurance company?

  1. A) nothing, because the policy is void
  2. B) the premiums paid for the policy
  3. C) the policy's cash value
  4. D) the face value of the policy

Answer: B

5

Which of the following statements about the grace period in a whole life insurance contract is (are) true?

  1. The purpose of the grace period is to prevent the policy from lapsing by giving the policyowner additional time to pay an overdue premium.
  2. If the insured dies during the grace period, the death benefit is reduced by 50 percent.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

6

All of the following statements about the requirements to reinstate a lapsed life insurance policy are true EXCEPT

  1. A) Evidence of insurability is required.
  2. B) The lapse must have resulted from other than the surrender of the policy for its cash value.
  3. C) All overdue premiums must be paid along with interest from the premium due dates.
  4. D) There is no time limit on when the policy may be reinstated.

Answer: D

7

Bert purchased a life insurance policy 4 years ago. He inadvertently stated that he was 1 year younger than his actual age. If Bert dies today, how much will the insurance company pay?

  1. A) nothing
  2. B) less than the policy face value
  3. C) the policy face value
  4. D) more than the policy face value

Answer: B

8

Which of the following statements about beneficiary designations is (are) true?

  1. The primary beneficiary is entitled to the death proceeds of a life insurance policy only if the contingent beneficiary dies before the insured.
  2. If a revocable beneficiary designation is used, the insured must obtain the beneficiary's permission of exercise most policy rights.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: D

9

A contingent beneficiary in a life insurance policy has the right to

  1. A) receive the policy proceeds if the primary beneficiary dies before the insured.
  2. B) share the policy proceeds with the primary beneficiary.
  3. C) change the beneficiary designation under specified circumstances.
  4. D) exercise policy rights if the insured is incapacitated.

Answer: A

10

Which of the following statements about the change of plan provision in a life insurance contract is (are) true?

  1. A change to a lower premium policy results in a refund of the difference in the cash values of the two policies.
  2. A change to a higher premium policy requires evidence of insurability.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

11

Which of the following statements about the assignment of a life insurance policy is true?

  1. A) The insurer must be notified of any assignment or the death proceeds will be paid to the named beneficiary.
  2. B) Under an absolute assignment, the only right transferred to a new owner is the right to change the beneficiary designation.
  3. C) As long as a collateral assignment exists, a creditor will receive the entire death benefit even if the loan has been repaid.
  4. D) Assignment may be made only with the permission of the insurer and the beneficiary.

Answer: A

12

Which of the following statements about the assignment of a life insurance policy is (are) true?

  1. Under a collateral assignment, the policyowner assigns a life insurance policy to secure a loan.
  2. Under an absolute assignment, only limited ownership rights in a policy are transferred.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: A

13

The transfer of all ownership rights in a life insurance policy can be accomplished through a(n)

  1. A) absolute assignment.
  2. B) irrevocable beneficiary designation.
  3. C) incontestable clause.
  4. D) participating-policy provision.

Answer: A

14

Which of the following statements about life insurance policy loans is true?

  1. A) Loans are only permitted for specific reasons listed in the policy.
  2. B) They are forgiven if the insured dies before the loans are repaid.
  3. C) The policyholder must pay interest on a life insurance policy loan.
  4. D) They must be repaid on the basis of a schedule determined at the time of the loan.

Answer: C

15

Which of the following statements is true regarding an automatic premium loan provision?

  1. A) Its purpose is to prevent a policy from lapsing because of nonpayment of premium.
  2. B) Interest does not have to be paid on an automatic premium loan.
  3. C) If the provision is used, the insured must show evidence of insurability to resume regular premium payments.
  4. D) An automatic premium loan, unlike a regular policy loan, is forgiven if the insured dies before the loan is repaid.

Answer: A

16

What major feature distinguishes a participating policy from a nonparticipating policy?

  1. A) the availability of a waiver-of-premium provision
  2. B) the existence of settlement options
  3. C) the payment of dividends
  4. D) the method by which beneficiaries can be named

Answer: C

17

Sources of life insurance dividends include which of the following?

  1. Excess interest earned on the assets necessary to maintain legal reserves
  2. Favorable mortality experience
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

18

Which of the following is a common dividend option found in a participating life insurance policy?

  1. A) reduced paid-up insurance
  2. B) fixed period
  3. C) paid-up additions
  4. D) life income

Answer: C

19

Which of the following statements about dividend options is (are) true?

  1. The interest on dividends left to accumulate with the insurer is not considered to be taxable income.
  2. Paid-up additions are additional units of whole life insurance.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

20

Advantages of selecting the paid-up additions dividend option in a life insurance policy include which of the following?

  1. Evidence of insurability is not required to purchase additional insurance.
  2. The additions are purchased at net rates without a loading for expenses.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

21

Which of the following dividend options, sometimes called the “fifth dividend option,” is not offered by all insurers that sell participating life insurance coverage?

  1. A) paid-up additions
  2. B) reduction of premiums
  3. C) accumulation of dividends at interest
  4. D) term insurance

Answer: D

22

All of the following are nonforfeiture options found in cash value life insurance policies EXCEPT

  1. A) cash value.
  2. B) reduction of premiums.
  3. C) reduced paid-up insurance.
  4. D) extended term insurance.

Answer: B

23

Which of the following statements about nonforfeiture options found in life insurance policies is true?

  1. A) Under the reduced paid-up option, the paid-up policy is term insurance.
  2. B) Under the extended term option, the amount of term insurance is less than the face value of the surrendered cash value policy.
  3. C) Under the reduced paid-up option, no additional premiums must be paid.
  4. D) Unless the policyowner has selected another nonforfeiture option, the cash value option goes into effect automatically.

Answer: C

24

All of the following statements about the interest settlement option are true EXCEPT

  1. A) The minimum guaranteed interest rate is usually equal to the prime rate.
  2. B) The interest can be paid monthly, quarterly, semiannually, or annually.
  3. C) The beneficiary may be allowed to withdraw part or all of the proceeds.
  4. D) The beneficiary may be allowed to change to another settlement option.

Answer: A

25

Which of the following statements about life insurance settlement options is true?

  1. A) Under the fixed period option, the beneficiary normally has the right to make partial withdrawals in case of emergency.
  2. B) Under the fixed period option, any remaining proceeds revert to the insurer if the beneficiary dies before the end of the fixed period.
  3. C) Under the fixed amount option, the beneficiary can be given the right to increase or decrease the fixed amount.
  4. D) Under the fixed amount option, any interest credited in excess of the guaranteed rate increases the amount of each periodic payment.

Answer: C

26

Which of the following statements about life income settlement options is (are) true?

  1. Under a joint-and-survivor life income option, payments cease at the death of the first annuitant.
  2. Under a life income with guaranteed period, a contingent beneficiary is guaranteed a minimum number of payments regardless of when the primary beneficiary dies.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: D

27

Disadvantages of life insurance settlement options include which of the following?

  1. Higher yields can often be obtained elsewhere.
  2. Life income options have limited usefulness at younger ages.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

28

Which of the following statements about the waiver-of-premium provision in life insurance is true?

  1. A) Because the probability of becoming disabled exceeds the probability of premature death, the cost to include this provision is usually prohibitive at younger ages.
  2. B) Premiums are usually waived if the insured becomes partially disabled.
  3. C) Life insurance protection continues in force during a period of disability, but dividends cease and cash values are reduced.
  4. D) The disability must occur before a stated age, such as 65, for premiums to be waived.

Answer: D

29

All of the following are requirements that must be satisfied before premiums are waived under a waiver-of-premium provision EXCEPT

  1. A) The insured must furnish proof of disability to the insurer.
  2. B) The insured must be disabled before some specified age, such as age 60 or 65.
  3. C) The insured must satisfy the definition of disability.
  4. D) The insured must satisfy a 2-year waiting period.

Answer: D

30

Which of the following statements about the guaranteed purchase option is true?

  1. A) An insured usually has 24 months to exercise an option.
  2. B) The option cannot be exercised until the insured reaches age 40.
  3. C) The amount of life insurance that can be purchased at each option is limited to 10 percent of the face amount of the basic policy.
  4. D) The additional coverage can be purchased without demonstrating insurability.

Answer: D

31

Which of the following statements about the guaranteed purchase option is true?

  1. A) It is usually available with term insurance policies.
  2. B) The premium when an option is exercised is based on the insured's age at the time the original policy was issued.
  3. C) The option permits the insured to purchase specified amounts of life insurance in the future even if the insured has become uninsurable.
  4. D) If a guaranteed purchase option expires without being used, it can be exercised at a later date.

Answer: C

32

Which of the following statements about a typical accidental death benefit rider is (are) true?

  1. Accidental injury must be the cause of death for the increased benefit to be paid.
  2. The accidental death must occur prior to some specified age for the increased benefit to be paid.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

33

Reasons for NOT purchasing an accidental death benefit rider include which of the following?

  1. Most people die as a result of a disease rather than from an accident.
  2. The economic value of a human life is not increased if death occurs because of an accident.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

34

The cost-of-living rider typically bases increases in the policy face value on changes in the

  1. A) gross national product.
  2. B) interest rate for short-term U.S. government securities.
  3. C) consumer price index.
  4. D) national wage level.

Answer: C

35

Which of the following statements about accelerated death benefits riders is (are) true?

  1. The benefit paid is usually less than the full face amount.
  2. Several different medical conditions may trigger the payment of benefits.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

36

The practice of buying the life insurance policy of a terminally ill insured at a discount is referred to as a

  1. A) collateral assignment.
  2. B) viatical settlement.
  3. C) catastrophic illness conversion.
  4. D) grace period transaction.

Answer: B

37

Al was named the beneficiary in his mother's life insurance policy. His mother died during the contestable period. The insurer denied payment, citing a material misrepresentation on the application. Al believes the insurer should pay the claim because the misrepresentation occurred on the application, and the application is not part of the formal agreement between the insurer and the policyholder. Which provision protects the insurer by making the application part of the formal agreement between the parties to the contract?

  1. A) incontestable clause
  2. B) entire contract clause
  3. C) ownership clause
  4. D) reinstatement clause

Answer: B

38

Cal purchased a whole life policy 6 years ago. The policy requires annual premium payments. Cal forgot to pay the premium that was due 2 weeks ago. He wonders if his life insurance is still in force. Which life insurance policy provision is designed to keep the policy in force for a short time even if the premium payment is late?

  1. A) waiting period
  2. B) grace period
  3. C) guaranteed purchase option
  4. D) reinstatement clause

Answer: B

39

Bruce lied about his health history when he purchased a life insurance policy. He died 3 years after the policy was issued. Which life insurance policy provision will require the life insurer to pay the beneficiary even though Bruce lied on the application?

  1. A) incontestable clause
  2. B) entire contract clause
  3. C) ownership clause
  4. D) change-of-plan provision

Answer: A

40

Which life insurance policy provision specifies that it is the policyholder, and not the insured or beneficiary, who possesses all contractual rights while the policy is in force?

  1. A) nonforfeiture options
  2. B) entire contract clause
  3. C) incontestable clause
  4. D) ownership clause

Answer: D

41

Becky is considering the purchase of a whole life policy on her own life. She is concerned that if she becomes disabled, paying premiums will become a burden. Which provision can Becky attach to her life insurance policy to address this concern?

  1. A) guaranteed purchase option
  2. B) waiver-of-premium provision
  3. C) accidental death benefit rider
  4. D) accelerated death benefits rider

Answer: B

42

Tim purchased a 10-payment whole life insurance policy 15 years ago. Tim would like to donate this paid-up policy to a charity. Under which policy provision can Tim transfer all ownership rights in the policy to the charity?

  1. A) absolute assignment
  2. B) extended term nonforfeiture option
  3. C) reinstatement
  4. D) collateral assignment

Answer: A

43

Beth purchased a participating life insurance policy 6 years ago. Her life insurance needs have increased, but she has developed a medical condition that makes it impossible for her to purchase more life insurance at affordable premiums. Which dividend option makes sense for Beth to use given her medical condition?

  1. A) cash
  2. B) apply to premium
  3. C) dividend accumulations
  4. D) paid-up additions

Answer: D

44

Lionel purchased a $200,000 ordinary life insurance policy when he was 25 years old and had significant life insurance needs. Now Lionel is 50. His mortgage is almost paid-off and his children have left home and are financially independent. Lionel no longer wants to pay premiums, but he would like to have some permanent life insurance in force. Which nonforfeiture option could Lionel employ to meet these objectives?

  1. A) cash value
  2. B) reduced paid-up insurance
  3. C) paid-up additions
  4. D) extended term insurance

Answer: B

45

Jane purchased a life insurance policy on her own life and named her daughter, Cheryl, as beneficiary. Cheryl has a history of not managing money well. Jane wants the death benefit paid to Cheryl in monthly installments over 20 years. Which settlement option should Jane pre-select for Cheryl?

  1. A) lump sum
  2. B) fixed amount
  3. C) fixed period
  4. D) interest option

Answer: C

46

Malcolm would like to purchase life insurance. He is concerned that he might need additional life insurance in the future and that he might be uninsurable at that time. What provision can Malcolm add to his life insurance policy that will permit him to purchase additional life insurance at specified times in the future without providing evidence of insurability?

  1. A) double indemnity rider
  2. B) guaranteed purchase option
  3. C) waiver-of-premium provision
  4. D) accelerated death benefits rider

Answer: B

47

Which of the following statements is (are) true concerning settlement options?

  1. A straight life annuity provides the lowest amount of periodic income of all the life income options.
  2. Fixed-period and fixed-amount are life income options.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: D

48

Which of the following statements is (are) true concerning the automatic premium loan provision?

  1. Unlike other policy loans, interest is not charged on automatic premium loans.
  2. The basic purpose of an automatic premium loan is to prevent a life insurance policy from lapsing.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

49

Life insurance policy proceeds can be paid to a trustee upon the death of the insured. All of the following statements concerning payment of proceeds to a trustee are true EXCEPT

  1. A) Use of a trustee provides flexibility with regard to the timing and amount of the payments.
  2. B) Trustees are often used when the beneficiary is a minor child or an adult with diminished mental capacity.
  3. C) The trustee is not permitted to accept a fee for rendering services.
  4. D) The trustee does not guarantee investment results.

Answer: C

50

Which of the following statements is (are) true regarding exclusions in life insurance contracts?

  1. Life insurance policies are remarkably restrictive, including numerous exclusions.
  2. A life insurer may exclude death attributable to certain activities or hobbies disclosed on the application.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

51

A life insurance policyholder may no longer need life insurance. Such a policyholder may sell the policy to a third party for more than its cash value. The purchaser becomes the new beneficiary and is responsible for subsequent premium payments. Such a financial transaction is called a(n)

  1. A) collateral assignment.
  2. B) accelerated death benefits rider.
  3. C) absolute assignment.
  4. D) life settlement.

Answer: D

52

A life insurance contractual provision protects the beneficiary by not permitting the insurer to introduce outside information to deny payment of the claim. Such outside information might be notes that the agent took while the insured completed the application. This contractual provision is the

  1. A) entire contract clause.
  2. B) incontestable clause.
  3. C) reinstatement clause.
  4. D) change-of-plan provision.

Answer: A

53

Which of the following is a standard nonforfeiture option?

  1. A) paid-up additions
  2. B) life income
  3. C) extended term insurance
  4. D) reduction of premiums

Answer: C

54

Which of the following statements about life insurance policy loans is (are) true?

  1. Interest is not required on a life insurance policy loan, as the policyholder is borrowing his or her own money.
  2. If there is an outstanding loan when the insured dies, payment to the beneficiary is reduced by the amount of the loan.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: B

55

If a life insurance policy lapses for nonpayment of premiums, and the policyholder has not elected another option, which nonforfeiture option usually goes into effect in most policies?

  1. A) reduced paid-up insurance
  2. B) one-year term insurance
  3. C) extended term insurance
  4. D) payment of cash value

Answer: C

56

Which of the following statements regarding the accidental death benefit rider (also known as double indemnity) is true?

  1. A) Adding the accidental death benefit rider doubles the premium for the policy.
  2. B) Financial planners agree that adding the accidental death benefit rider is a wise purchase.
  3. C) The economic value of a human life is doubled or tripled if death is caused by an accident, justifying the purchase of the rider.
  4. D) The death benefit is doubled only if an accidental injury is the direct cause of death and death occurs prior to a specified age.

Answer: D

57

Easy Pay Life Insurance Company allows a term insurance rider to be added to its whole life policies. The result is a policy that offers an increased death benefit with an affordable premium. The general name for such a policy is a(n)

  1. A) blended policy.
  2. B) indexed policy.
  3. C) joint life policy.
  4. D) endowment policy.

Answer: A

58

Which statement about the incontestable clause is true?

  1. It protects the beneficiary if the insurer tries to deny a claim years after the policy is issued.
  2. If protects the insurer from having to pay a claim during the first two years if the insured made a material misrepresentation or concealed material information in the application.
  3. A) I only
  4. B) II only
  5. C) both I and II
  6. D) neither I nor II

Answer: C

59

Marcus is concerned that inflation will erode the purchasing power of the face value of his life insurance policy. His agent suggested that Marcus add a provision that allows him to purchase one-year term insurance equal to the percentage change in the consumer price index without having to demonstrate insurability. This provision is called a(n)

  1. A) cost-of-living rider.
  2. B) guaranteed purchase option.
  3. C) accelerated death benefit rider.
  4. D) waiver-of-premium rider.

Answer: A

60

Janet is the beneficiary of her uncle’s $200,000 life insurance policy. When her uncle died, Janet selected a settlement option that pays monthly benefits for as long as she lives. If Janet dies before receiving $200,000, payments will continue to a contingent beneficiary until a total of $200,000 has been paid. What settlement option did Janet select?

  1. A) joint-and-survivor annuity
  2. B) life income with guaranteed total amount
  3. C) life income with guaranteed period
  4. D) fixed amount option

Answer: B