Insurance Exam Flashcards

What is the main benefit of having an existing policy reinstated as opposed to getting a new one? 1. No evidence of insurability is necessary 2. Using original insured issue age 3. No registration is necessary 4. Unpaid loans are forgiven

Answer: First issuance insurance Use of age

The main benefit of reinstating an existing life insurance policy, as opposed to getting a new one, is often the use of the original insured issue age. Premiums are typically based on the insured's age when the policy was first issued, so reinstating can result in lower premiums than a new policy at a current, older age. Additionally, it may avoid the need for new evidence of insurability if done within a specific timeframe.

Which of the following applies most frequently to term life insurance?

Answer: It starts with little to no insurance coverage.

The statement 'It starts with little to no insurance coverage' is generally incorrect for term life insurance, as term policies provide a specific death benefit from the policy's inception. However, if 'insurance coverage' is interpreted as 'cash value,' then term life insurance indeed has no cash value component, unlike permanent life insurance. This lack of cash value accumulation is a defining characteristic of term life, which focuses solely on providing a death benefit for a specified period.

Which of the following is taken into account when courts examine a contract to ascertain the parties' intentions? 1. the whole contract; 2. the pertinent sections of the deal; 3. any additions to the main contract; and 4. any words with unclear definitions

Answer: The entire contract

When courts examine a contract to ascertain the parties' intentions, they typically consider the entire contract, often referred to as the 'four corners' doctrine. This means all clauses, provisions, and any attached riders or amendments are viewed holistically to understand the full context and meaning of the agreement. This approach prevents misinterpretations based on isolated phrases and ensures the contract is treated as a unified document.

Which key distinction between individual and group health insurance exists?

Answer: Evidence of insurability is necessary for individual insurance

A key distinction between individual and group health insurance is the requirement for evidence of insurability. For individual health insurance, applicants typically undergo medical underwriting, where they must provide evidence of their health status to the insurer. In contrast, group health insurance usually does not require individual members to prove insurability, as the risk is spread across the entire group, making it accessible even to those with pre-existing conditions.

Which of the following requires a covered employee to consent to a pay cut so that the money can be used to pay for medical costs?

Answer: Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) requires a covered employee to consent to a pay cut so that the money can be used to pay for medical costs. Employees contribute pre-tax dollars from their salary into the FSA, which can then be used for qualified healthcare expenses. This arrangement provides tax advantages by reducing the employee's taxable income.

Which of the following statements about irrevocable beneficiaries' assignment rights is TRUE?

Answer: Based on the expected proceeds, they have a higher chance of getting a loan. After a life-changing event, they can be altered without the beneficiary's permission.

The statement provided as correct for irrevocable beneficiaries contains a contradiction. While an irrevocable beneficiary has a vested interest in the policy, which might be considered by some lenders if the beneficiary is seeking a loan and can somehow assign their interest (though this is complex and usually requires the policy owner's consent), the claim that 'they can be altered without the beneficiary's permission' is fundamentally incorrect. An irrevocable beneficiary's designation cannot be changed, nor can policy rights be assigned or loans taken against the policy, without their explicit written consent.

Which of the following in a disability income policy may be viewed as a time deduction rather than a money deduction because benefits are not payable during that time? 1. The phase of eviction 2. The trial period 3. The benefit time frame 4. The grace interval

Answer: Elimination period

In a disability income policy, the elimination period is the time deduction during which benefits are not payable, even after a disability has been established. This period acts like a deductible, where the insured must wait a specified number of days before benefit payments begin. A longer elimination period typically results in lower premiums, as the insurer pays out for a shorter duration.

There is an annual dollar limit for tax deductions on a long-term care policy for an individual. This limit is based on which of the following?

Answer: age

The annual dollar limit for tax deductions on long-term care insurance premiums is based on the insured individual's age. The IRS sets specific limits that increase with the policyholder's age, allowing older individuals to deduct a larger amount of their premiums. This provides a tax incentive for people to plan for their long-term care needs as they age.

Which three permanent individual life insurance types are most common?

Answer: Variable Life, Whole Life, Universal Life

The three most common types of permanent individual life insurance are Whole Life, Universal Life, and Variable Life. Whole Life offers guaranteed premiums, death benefits, and cash value growth. Universal Life provides more flexibility in premium payments and death benefits. Variable Life allows policyholders to invest the cash value in various sub-accounts, offering potential for higher returns but also greater risk.

Which clause in an insurance policy offers the assurance that losses covered by the policy will be paid in exchange for the insured's premium and adherence to the terms of the policy?

Answer: insuring clause

The insuring clause is the core promise within an insurance policy. It explicitly states the insurer's commitment to pay benefits for covered losses, in exchange for the premium paid and the insured's adherence to the policy's terms. This clause defines the scope of coverage and the conditions under which the policy will provide financial protection.

Which must a policy pass to avoid being a MEC?

Answer: seven-pay test

To avoid being classified as a Modified Endowment Contract (MEC), a life insurance policy must pass the seven-pay test. This test ensures that the cumulative premiums paid into the policy within the first seven years do not exceed the net level premium required to pay up the policy in seven years. Failing this test results in the policy losing some favorable tax treatments, such as tax-free withdrawals and loans.

Which policy provision allows the policyowner to have a certain number of days to review the contract and cancel and receive a full refund if they don't like the terms or costs?

Answer: Free look

The 'free look' provision grants the policyowner a specific period, typically 10 to 30 days, to review a newly issued insurance contract. During this time, they can decide if the policy meets their needs and, if not, return it for a full refund of all premiums paid. This provision ensures consumer protection and allows for careful consideration of the contract without immediate commitment.

Which defense time restriction makes the policy incontestable?

Answer: 2 years

The incontestability clause in life insurance policies states that after a policy has been in force for a specific period, usually two years, the insurer cannot dispute the validity of the policy due to misstatements or concealment in the application. This provision protects the beneficiary from claims being denied years later based on minor inaccuracies. After this two-year period, the policy becomes incontestable.

If a firm wishes to cover its CEO's life, what form of insurance should it buy?

Answer: key person insurance

Key person insurance is a type of life insurance purchased by a business on the life of an essential employee, such as a CEO. The company is both the policyowner and beneficiary, receiving the death benefit if the key person dies. This coverage helps the business mitigate financial losses and operational disruptions caused by the unexpected death of a vital individual.

Which of the following is a fraternal benefit society?

Answer: provides life insurance benefits to its members

A fraternal benefit society is a non-profit organization that operates for the benefit of its members, often sharing a common bond like religion or ethnicity. A key characteristic is that they provide life insurance and other benefits exclusively to their members. They are distinct from commercial insurers as they typically operate under a lodge system and have a charitable purpose.

Which form of policy allows the policyholder to change the death benefit and is supported by equity investments?

Answer: variable universal life

Variable universal life (VUL) insurance is a flexible policy that allows the policyholder to adjust both the death benefit and premium payments. A distinguishing feature is that its cash value is invested in a separate account, offering a choice of sub-accounts similar to mutual funds, which are supported by equity investments. This provides potential for higher returns but also carries investment risk.