Financial Advisor Insurance Planning for Financial Advisors 1 — Questions and Answers
Question 1: What type of life insurance provides coverage for a specified period and pays a death benefit only if the insured dies within that period?
- Whole life insurance
- Term life insurance (Correct answer)
- Universal life insurance
- Variable life insurance
Correct answer: Term life insurance
Term life insurance provides pure death benefit protection for a defined period (e.g., 10, 20, or 30 years) with no cash value component.
Question 2: Which life insurance policy type combines a permanent death benefit with a cash value component that grows at a guaranteed interest rate?
- Term life insurance
- Variable universal life insurance
- Whole life insurance (Correct answer)
- Group term life insurance
Correct answer: Whole life insurance
Whole life insurance offers a guaranteed death benefit, guaranteed cash value growth at a fixed rate, and level premiums for the life of the insured.
Question 3: Under IRC Section 101(a), life insurance death benefits paid to a named beneficiary are generally:
- Taxable as ordinary income to the beneficiary
- Subject to capital gains tax on growth
- Partially taxable based on premiums paid by the insured
- Received income-tax-free by the beneficiary (Correct answer)
Correct answer: Received income-tax-free by the beneficiary
IRC Section 101(a) provides that life insurance proceeds paid by reason of death are excluded from the gross income of the beneficiary.
Question 4: Which estate planning tool uses a trust to own life insurance policies so that the death proceeds are excluded from the insured's taxable estate?
- Irrevocable Life Insurance Trust (ILIT) (Correct answer)
- Revocable Living Trust
- Charitable Remainder Trust (CRT)
- Grantor Retained Annuity Trust (GRAT)
Correct answer: Irrevocable Life Insurance Trust (ILIT)
An ILIT is an irrevocable trust that owns and is the beneficiary of life insurance policies, keeping proceeds outside the insured's gross estate for estate tax purposes.
Question 5: A 'paid-up' life insurance policy means:
- The policy has lapsed due to non-payment of premiums
- No further premiums are required and the policy remains in full force (Correct answer)
- The death benefit has already been paid to the beneficiary
- The policy has been surrendered for its cash value
Correct answer: No further premiums are required and the policy remains in full force
A paid-up policy has accumulated sufficient cash value so that no additional premiums are needed to keep the policy in force until death.
Question 6: Which fundamental insurance principle holds that a policyholder cannot profit from an insurance claim beyond their actual financial loss?
- Principle of subrogation
- Principle of indemnity (Correct answer)
- Principle of insurable interest
- Principle of utmost good faith
Correct answer: Principle of indemnity
The principle of indemnity states that insurance is designed to restore the insured to their pre-loss financial position, not to generate a profit.
Question 7: A client wants permanent life insurance with the flexibility to adjust premium payments and death benefit amounts over time. Which policy type is most appropriate?
- Level term life insurance
- Traditional whole life insurance
- Universal life insurance (Correct answer)
- Group term life insurance
Correct answer: Universal life insurance
Universal life insurance allows policyholders to vary the timing and amount of premium payments and adjust the death benefit within policy limits.
Financial Advisor Insurance Planning for Financial Advisors 1
What type of life insurance provides coverage for a specified period and pays a death benefit only if the insured dies within that period?