Insurance Life & Health Insurance 4 — Questions and Answers
Question 1: Which of the following correctly describes an 'irrevocable beneficiary' designation?
- The beneficiary can be changed at any time by the policyowner
- The policyowner cannot change the beneficiary or assign the policy without the beneficiary's consent (Correct answer)
- Benefits are paid automatically to the insured's estate
- The designation expires after 10 years
Correct answer: The policyowner cannot change the beneficiary or assign the policy without the beneficiary's consent
An irrevocable beneficiary has a vested interest in the policy, so the policyowner cannot change beneficiaries, take loans, or assign the policy without that beneficiary's written consent.
Question 2: Under a 'key person' life insurance arrangement, who is the applicant, owner, premium payer, and beneficiary?
- The key employee's spouse
- The employer (business) (Correct answer)
- The key employee
- A corporate trustee
Correct answer: The employer (business)
In key person insurance, the business is the applicant, owner, premium payer, and beneficiary; it insures an employee whose death would cause significant financial loss to the company.
Question 3: What distinguishes a 'non-participating' life insurance policy from a 'participating' policy?
- Non-participating policies do not pay policy dividends to policyowners (Correct answer)
- Non-participating policies have no cash value
- Non-participating policies cannot be converted to permanent insurance
- Non-participating policies are only sold by mutual insurance companies
Correct answer: Non-participating policies do not pay policy dividends to policyowners
Participating policies are eligible to receive dividends (a return of excess premium) from the insurer, while non-participating policies are not, typically resulting in lower initial premiums.
Question 4: A 'stop-loss' provision in a major medical health insurance policy:
- Limits the insurer's total claims in a calendar year
- Caps the insured's out-of-pocket coinsurance payments so that the insurer pays 100% above a specified threshold (Correct answer)
- Stops premium increases after age 65
- Prevents the insurer from cancelling the policy mid-term
Correct answer: Caps the insured's out-of-pocket coinsurance payments so that the insurer pays 100% above a specified threshold
The stop-loss (or coinsurance cap) provision protects the insured by limiting how much they pay in coinsurance after the deductible, after which the insurer covers 100% of eligible expenses.
Question 5: What is the primary difference between 'own-occupation' and 'any-occupation' disability definitions?
- Own-occupation pays only if the insured cannot work at all; any-occupation pays if unable to work in their specialty
- Own-occupation pays if the insured cannot perform their specific job; any-occupation pays only if unable to work at any job for which they are qualified (Correct answer)
- Own-occupation is limited to physical disabilities; any-occupation covers mental illness as well
- Own-occupation applies only during the elimination period; any-occupation applies after
Correct answer: Own-occupation pays if the insured cannot perform their specific job; any-occupation pays only if unable to work at any job for which they are qualified
Own-occupation (own-occ) is the more liberal definition: the insured is considered disabled if they cannot perform the duties of their specific occupation, even if they can work elsewhere.
Question 6: Which of the following is a characteristic of a 'modified endowment contract' (MEC)?
- It receives the same favorable tax treatment as a standard life insurance policy
- Withdrawals and loans are subject to income tax and a 10% penalty if taken before age 59½ (Correct answer)
- It pays dividends tax-free to the policyowner
- It is exempt from estate taxes at death
Correct answer: Withdrawals and loans are subject to income tax and a 10% penalty if taken before age 59½
A MEC fails the 7-pay test under IRC Section 7702A, causing withdrawals and loans to be treated as ordinary income (gains first) and subject to a 10% penalty before age 59½.
Question 7: Under COBRA, how long may a qualified beneficiary continue group health coverage after the covered employee is terminated (for reasons other than gross misconduct)?
- 12 months
- 18 months (Correct answer)
- 24 months
- 36 months
Correct answer: 18 months
COBRA provides 18 months of continuation coverage for employees who lose coverage due to termination or reduction in hours, with certain qualifying events allowing extensions to 29 or 36 months.
Insurance Life & Health Insurance 4
Which of the following correctly describes an 'irrevocable beneficiary' designation?