Fundamentals of Life Insurance

Fundamentals of Life Insurance 1) Which of the following types of families is likely to have the least need for a large amount of life insurance? A) a blended family B) a traditional family C) a single person family D) a sandwiched family Answer: C 2) The human life value is defined as the A) present value of a deceased breadwinner's future gross income. B) future value of a deceased breadwinner's past earnings. C) present value of the family's share of a deceased breadwinner's future earnings. D) future value of the family's share of a deceased breadwinner's future earnings. Answer: C 3) All of the following information is needed to calculate a person's human life value EXCEPT A) the person's average annual earnings over his or her productive lifetime. B) the person's estimated annual Social Security benefits after retirement. C) the person's cost of self-maintenance. D) the number of years from the person's present age to the expected retirement age. Answer: B 4) To calculate a human life value, it is necessary to deduct certain costs from a person's average annual earnings. These costs include A) funeral costs. B) income taxes. C) investment income. D) pension benefits after retirement. Answer: B 5) All of the following are defects which limit the usefulness of the human life value approach in determining the correct amount of life insurance to purchase EXCEPT A) The effects of inflation are ignored. B) Other sources of income for survivors are ignored. C) Earnings are assumed to remain constant. D) Earnings during the individual's productive lifetime are ignored. Answer: D 1 6) Which of the following statements about the needs approach for estimating the amount of life insurance to purchase is (are) true? I. It involves an analysis of various family needs which must be met if a family breadwinner dies. II. Its use is appropriate only if a person currently has no life insurance protection. A) I only B) II only C) both I and II D) neither I nor II Answer: A 7) The purpose of an estate clearance fund is to pay all of the following EXCEPT A) burial expenses. B) estate administration expenses. C) education costs. D) installment debts. Answer: C 8) What is the length of the readjustment period which is considered when the needs approach is used to determine the amount of life insurance to own? A) 3 to 6 months B) 1 to 2 years C) until the youngest child reaches age 18 D) until the surviving spouse reaches age 65 Answer: B 9) Under the needs approach, when is the dependency period of a surviving spouse assumed to end? A) 1 or 2 years after the breadwinner's death B) when the youngest child reaches age 18 C) when the surviving spouse reaches age 65 D) when the surviving spouse dies Answer: B 10) The period during which a surviving spouse is ineligible for Social Security benefits is referred to as the A) emergency period. B) readjustment period. C) dependency period. D) blackout period. Answer: D 2 11) Which of the following statements about the capital retention approach for determining life insurance needs is (are) true? I. It assumes that life insurance proceeds will be liquidated to provide income to survivors. II. It requires the preparation of a personal balance sheet. A) I only B) II only C) both I and II D) neither I nor II Answer: B 12) When the capital retention approach is used to determine how much life insurance to purchase, all of the following are subtracted from total assets to calculate the capital available to produce income EXCEPT A) investments in stocks and bonds. B) non-income producing capital such as autos and the value of the home. C) the amount of money needed to payoff the mortgage. D) auto loans and credit card debt. Answer: A 13) Disadvantages of the capital retention approach include which of the following? I. Assets are often liquidated too quickly. II. It underestimates the amount of life insurance needed. A) I only B) II only C) both I and II D) neither I nor II Answer: D 14) Tom and Nancy Boyle provide financial support for their two children. In addition, they provide financial support for Tom's aged father and Nancy's aged mother. The Boyle family can be described as a A) blended family. B) single-parent family. C) two-income earner family. D) sandwiched family. Answer: D 3 15) Julian, age 45, would like to determine how much life insurance to purchase using the human life value approach. He assumes his average annual earnings over the next 20 years will be $40,000. Of this amount, $20,000 is available annually for the support of his family. Julian will generate this income for 20 more years and he believes that 5 percent is the appropriate interest (discount) rate. The present value of one dollar payable for 20 years at a discount rate of 5 percent is $12.46. What is Julian's human life value? A) $184,600 B) $249,200 C) $360,800 D) $400,000 Answer: B 16) Jessica is an agent for LMN Life Insurance Company. She met with Brad, who was interested in purchasing life insurance. Jessica explained the various uses of life insurance, including income for Brad's wife during the 1- or 2-year period following Brad's death. This period is known as the A) dependency period. B) estate clearance period. C) blackout period. D) readjustment period. Answer: D 17) Sarah is using the needs approach to determine how much life insurance to buy. Her cash needs are $30,000; her income needs are $140,000; and special needs are $100,000. Sarah has the following assets: $20,000 in bank accounts, $30,000 in retirement plans, and $40,000 in investment accounts. Sarah owns no individual life insurance. She is covered by a $50,000 group life insurance policy through her employer. Based on this information, how much additional life insurance should Sarah purchase? A) $80,000 B) $130,000 C) $150,000 D) $160,000 Answer: B 4 18) Richard is using the capital retention approach to determine how much life insurance to purchase. Richard would like to provide $35,000 per year to his family, forever, if he dies. The assets that he has today will provide $25,000 in annual income without the liquidation of these assets. If life insurance proceeds can be invested to earn a 5 percent annual return, how much life insurance should Richard purchase to fund the additional income needed to meet the $35,000 annual income goal? A) $10,000 B) $100,000 C) $150,000 D) $200,000 Answer: D 19) Bill is attempting to determine how much life insurance to purchase. He has two dependent children and his wife does not work outside of the home. An advisor suggested that Bill should consider Social Security benefits when doing his life insurance planning. One concern in this regard is the period after Social Security benefits to a widow terminate until they resume again. This period is called the A) blackout period. B) dependency period. C) emergency period. D) readjustment period. Answer: A 20) When using the needs approach, several "special needs" should be considered. One special need is money to cover unexpected events, such as major car repairs, dental bills, or home repairs. Money set aside for this purpose is called a(n) A) estate clearance fund. B) emergency fund. C) readjustment period fund. D) mortgage redemption fund. Answer: B 21) Most family heads need substantial amounts of life insurance. However, with limited income, money spent on life insurance reduces the amount of discretionary income available for other high-priority needs. What an insured person gives up when he or she purchases life insurance instead of using the premium dollars for other purposes is called the A) estimated cost of life insurance. B) net cost of life insurance. C) real (inflation-adjusted) cost of life insurance. D) opportunity cost of buying life insurance. Answer: D 5 22) Which of the following statements about yearly renewable term insurance is (are) true? I. It requires evidence of insurability for renewal. II. It is most appropriate when an insured needs lifetime protection. A) I only B) II only C) both I and II D) neither I nor II Answer: D 23) What happens to the premiums for yearly renewable term insurance as an insured gets older? A) They increase at an increasing rate. B) They increase at a decreasing rate. C) They decrease at a constant rate. D) They remain level. Answer: A 24) All of the following statements about term insurance are true EXCEPT A) The insurance provides protection for a specified period of time. B) Most policies can be renewed for additional periods without evidence of insurability. C) Most policies can be converted to a permanent life insurance policy. D) Most policies have a cash value that is refunded when coverage ceases. Answer: D 25) All of the following statements about the conversion of a term policy are true EXCEPT A) Under an attained age conversion, the premium is based on the insured's attained age at the time of conversion. B) Under an original age conversion, the policyowner must pay a financial adjustment in addition to the premium for the new policy. C) Most insurers require original age conversion to take place within a specified period (5 years, for example) of the issue of the term policy. D) Evidence of insurability is required before a conversion is permitted. Answer: D 26) Which of the following statements about a decreasing term insurance policy is true? A) The face amount of the policy decreases during the policy period, and the premium increases. B) The face amount of the policy decreases during the policy period, but the premium remains level. C) The premium decreases during the policy period, but the face amount remains constant. D) Both the premium and the face amount of the policy decrease gradually over the policy period. Answer: B 6 27) The purchase of term insurance is justified by which of the following circumstances? I. The insured wants to save money through the policy for a specific need. II. The insured has a temporary need for life insurance protection. A) I only B) II only C) both I and II D) neither I nor II Answer: B 28) A legal reserve in life insurance is a result of A) premium taxes payable by life insurance companies being postponed during the early policy years. B) dividends being paid to policyowners. C) inadequate premiums in the early policy years being subsidized by investment earnings. D) excess premiums in the early policy years being invested at compound interest. Answer: D 29) The net amount at risk for an ordinary life insurance policy is the difference between the A) present value of future benefits and the present value of future premiums. B) face amount of the policy and the total premiums that have been paid. C) face amount of the policy and the legal reserve. D) annual premium and the annual policyholder dividend. Answer: C 30) Which of the following statements about life insurance cash values is (are) true? I. Cash values are a result of the level premium method of purchasing life insurance. II. The cash value of a policy must always exceed the policy's legal reserve. A) I only B) II only C) both I and II D) neither I nor II Answer: A 31) All of the following statements about ordinary life insurance are true EXCEPT A) Premiums are level throughout the policy period. B) The face amount of the policy is paid if the insured lives to age 65. C) There is a build-up of cash value that can be borrowed by the policyholder. D) It offers the policyholder the flexibility to meet a wide variety of financial objectives. Answer: B 7 32) Which of the following statements about limited-payment life insurance is true? A) It is a form of term insurance. B) It matures at the end of the premium-payment period. C) The premium decreases each year during the premium-payment period. D) Its use may be appropriate if a person wants paid-up life insurance during retirement. Answer: D 33) Which of the following statements about endowment insurance policies is (are) true? I. The face amount is paid if the insured dies during the policy period or at the end of the policy period if the insured is still alive. II. The use of endowment insurance has increased in recent years because of its favorable tax treatment. A) I only B) II only C) both I and II D) neither I nor II Answer: A 34) All of the following statements about variable life insurance are true EXCEPT A) The premium is level and guaranteed not to increase. B) The death benefit varies according to investment experience. C) The policyowner has the option of investing the cash value in several investment accounts. D) Cash surrender values are guaranteed. Answer: D 35) All of the following statements about universal life insurance are true EXCEPT A) Interest is credited to the policy's cash value each month. B) Any withdrawal of a policy's cash value reduces the amount of the death benefit. C) Interest credited to a policy's cash value is taxable for the policyowner in the year credited. D) The policyowner can add to a policy's cash value at any time subject to policy guidelines. Answer: C 36) Which of the following statements about universal life insurance is (are) true? I. The interest rate credited to the cash value at the time the policy is issued remains fixed for the life of the policy. II. A monthly deduction is made from the policy's cash value for the cost of insurance protection. A) I only B) II only C) both I and II D) neither I nor II Answer: B 8 37) All of the following statements describe the flexibility available to the owner of a universal life insurance policy EXCEPT A) Policy loans are permitted on an interest-free basis. B) The frequency of premium payments can be varied. C) The death benefit can be increased with evidence of insurability. D) Premium payments can be any amount provided there is sufficient cash value to keep the policy in force. Answer: A 38) Which of the following statements about a variable universal life insurance policy is (are) true? I. There is a minimum guaranteed interest rate for the cash value. II. The policyowner has a variety of investment options for the investment of premiums. A) I only B) II only C) both I and II D) neither I nor II Answer: B 39) All of the following statements about current assumption whole life insurance are true EXCEPT A) It is a form of participating whole life insurance that pays annual dividends. B) An accumulation account is credited with an interest rate based on present market conditions and company experience. C) Under the low-premium version, the premium is subject to change after an initial guaranteed period. D) Under the high-premium version, the premium may vanish after a period of time. Answer: A 40) Which of the following statements about an indeterminate-premium whole life insurance policy is (are) true? I. It permits the insurer to adjust premiums based on anticipated future experience. II. It allows policyholder dividends to be used to lower premiums. A) I only B) II only C) both I and II D) neither I nor II Answer: A 9 41) A whole life insurance policy in which premiums are reduced for an initial period (e.g. 3 years) and are higher thereafter is an example of a A) level-term policy. B) modified life policy. C) limited-payment whole life policy. D) variable life policy. Answer: B 42) Which of the following statements about policies sold to preferred risks is (are) true? I. Preferred risks are people whose mortality experience (deaths per thousand at a given age) is expected to be more favorable than average. II. Insurers require preferred risks to purchase at least a minimum amount of life insurance, such as $250,000. A) I only B) II only C) both I and II D) neither I nor II Answer: C 43) Which of the following statements about second-to-die life insurance is (are) true? I. The insurance is a form of endowment coverage. II. The premium is lower than the combined cost of purchasing a life insurance policy on each insured. A) I only B) II only C) both I and II D) neither I nor II Answer: B 44) Which of the following statements about savings bank life insurance is true? A) The maximum amount that a depositor can purchase is $50,000. B) The maximum amount of insurance that a depositor can purchase is limited to the amount of money on deposit in his or her savings account with the savings bank. C) The objective of savings bank life insurance is to provide protection to the bank in case a borrower dies before a loan is repaid. D) The objective of savings bank life insurance is to provide low-cost insurance to consumers by holding down expenses. Answer: D 10 45) Which of the following statements about industrial life insurance (also called home service life insurance) policies is true? A) Most policies have a face value exceeding $100,000. B) Most industrial life insurance policies are cash value coverage. C) Industrial life insurance is group term insurance coverage marketed to employers. D) This popular product accounts for over 40 percent of the life insurance sold today. Answer: B 46) Michael wants to make sure that life insurance proceeds are available to pay his outstanding mortgage balance if he dies. He purchased a type of life insurance in which the amount of coverage gradually declines, just as his outstanding mortgage balance gradually declines. This type of life insurance is called A) modified life insurance. B) decreasing term insurance. C) re-entry term insurance. D) current assumption whole life. Answer: B 47) Carl would like to purchase life insurance. He would also like to invest in a mutual fund. An agent told Carl about a form of life insurance in which Carl could select where the saving component is invested. This form of life insurance has fixed premiums and the cash value is not guaranteed. This type of life insurance is called A) universal life insurance. B) current assumption whole life. C) variable life insurance. D) indeterminate-premium whole life. Answer: C 48) Tamara purchased a term insurance policy when she had high life insurance needs and limited income. Now Tamara can afford whole life insurance. What term life insurance provision will permit Tamara to switch her term insurance to whole life insurance without having to show that she is still insurable? A) renewal provision B) tax-free exchange provision C) conversion provision D) free look provision Answer: C 11 49) Alex, age 26, purchased a 20-payment whole life insurance policy. After Alex has made 20 premium payments, his life insurance policy is considered A) matured. B) reduced. C) expired. D) paid-up. Answer: D 50) Ann is considering the purchase of a life insurance policy with these characteristics: flexible premium payments, the insurance and savings components are separate, the interest rate credited to the savings is tied to a market interest rate but a minimum rate is guaranteed, and a monthly administrative fee is charged. Ann is considering buying A) whole life insurance. B) variable life insurance. C) universal life insurance. D) current assumption whole life. Answer: C 51) Dave purchased a life insurance policy. The policy is nonparticipating and the cash values are based on the insurer's present mortality, investment, and expense experience. After 2 years, the insurer will recalculate the premium based on the mortality, investment, and expense experience at that time. Dave purchased A) current assumption whole life. B) variable life insurance. C) universal life insurance. D) variable universal life insurance. Answer: A 52) Which of the following $100,000 whole life insurance policies, issued by the same company to a man age 32, would require the highest first-year premium? A) continuous premium (ordinary) life B) whole life paid-up at 65 C) 10-payment whole life D) 20-payment whole life Answer: C 12 53) Which of the following statements about variable universal life insurance is (are) true? I Variable universal life insurance has fixed premium payments. II. Variable universal life insurance allows the policyowner to decide where the premiums are invested. A) I only B) II only C) both I and II D) neither I nor II Answer: B 54) Which statement is true concerning the economic problem of premature death in the United States? I. The economic impact of premature death of the breadwinner varies for different types of families. II. Increased life expectancy has increased the economic problem of premature death over time. A) I only B) II only C) both I and II D) neither I nor II Answer: A 55) Which of the following statements is true regarding the results of studies by LIMRA and New York Life Insurance Company on the adequacy of life insurance owned by households in the United States? I. The average household is adequately insured against the risk of premature death. II. The average household is significantly underinsured against the risk of premature death. A) I only B) II only C) both I and II D) neither I nor II Answer: B 13