Extra Questions Life Basics and Taxes

Question 1 of 57

Mr. Burns has just cashed in his life insurance policy. You explain to him that:

All cash value received after 59 1/2 is received income-tax free.

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All cash value received is fully taxable.

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None of the cash value is taxable upon surrender.

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The gain, money received in excess of the premiums paid into the policy, is taxed as ordinary income.

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Question 2 of 57

Mrs. Savage applied for a life insurance policy but received a counter-offer at a 50% higher premium, due to her weight problem. Which of the following would you say to Mrs. Savage?

This is a rate-up and is not allowed in the State of Washington.

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The insured should hit the agent in the nose for such verbal abuse.

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The insured may sue for such actions.

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This is known as a surcharge.

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Question 3 of 57

On March 1st, Chris filled out an application and paid the initial premium to the producer/agent. Which of the following is not a correct statement?

The Policy Effective Date is the date of the application, provided the insured is proven insurable.

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A Conditional Receipt should have been given to Chris by the producer/agent on March 1st.

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Chris must be insurable for the policy to issue, which means he must qualify medically.

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If the producer/agent lost the premium check paid by Chris, the policy will not become effective until the producer/agent gets another check.

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Question 4 of 57

Ben is applying for a life insurance policy with you. Following the completion of the application, all of the following are required to sign the application, EXCEPT __________.

the producer

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the owner/applicant

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the insured

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the beneficiary

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Question 5 of 57

If a life insurance contract has violated the Seven-Pay-Test (Modified Endowment Contract) rule of the IRS, all of the following are true, except:

The insurance contract is now considered to be over funded.

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If the policy is surrendered before 59 1/2, a 10% penalty will apply.

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The life policy will now be classified as a Modified Endowment Contract.

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The amount of proceeds will be reduced, upon the death of the insured.

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Question 6 of 57

The principal difference between an entity purchase and a cross-purchase buy-sell is __________.

the identity of the insured.

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the amount of the insurance.

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the type of the business being protected.

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the identity of the beneficiary and policyowner.

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Question 7 of 57

The key point with the conversion options, whether group or individual policies, is the fact that

They do not cost any premiums.

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They may be removed at the option of the owner, and thus, lowers the premium.

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They are advantages which are available only if the owner and the insured are the same.

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They are guaranteed, regardless of the health of the insured.

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Question 8 of 57

The insurance company is the only party to the contract which makes a legally enforceable promise. The insurance company promises to pay a specific dollar amount if the insured dies. The policy owner makes no promise to continue paying premiums. That is why insurance contracts are known as __________ contracts.

Bi-Lateral

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Adhesion

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Conditional

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Unilateral

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Question 9 of 57

Full protection under an insurance contract is effective when __________.

the insured passes a physical exam.

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the policy effective date is issued with the policy.

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the policy is received by the insured.

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the first premium is collected and the applicant is insurable.

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Question 10 of 57

The Fair Credit Reporting Act does which of the following?

It prevents insurance companies from using credit information in the underwriting process.

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It makes the disclosure of all personal health information illegal.

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It requires the insurers to send all applicants copies of any credit reports obtained.

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It requires the insurers to notify an applicant that an inspection (credit) report may be ordered, and inform them how to obtain their own copy.

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Question 11 of 57

Mr. Nguyen has a group life policy and upon leaving his employment he may:

Convert it to permanent insurance within 31 days, provided he is insurable.

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Convert it to any insurance of the same amount, without proof of insurability.

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Not convert it unless requested within 60 days.

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Convert it to permanent insurance, without proof of insurability within 31 days.

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Question 12 of 57

All of the following statements regarding taxation of life insurance are correct, except:

Premiums are not deductible from the income of the insured.

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Dividends are tax-free.

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Cash Values accrue tax deferred.

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Death proceeds are taxed on a federal level as ordinary income.

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Question 13 of 57

Which of the following is an insurance industry organization to which insurers report applications and other reports about applicants, and which the applicant has the same rights as those available under the Fair Credit Reporting Act?

Insurance Industry Reporting Agency, INC.

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Equifax

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Insurance Services Office

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Medical Information Bureau

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Question 14 of 57

Which of the following statements would be incorrect regarding the filling out of an application? If an error occurs:

A single line should be drawn through the error and the insured should initial the error.

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The producer should take the application back to the insured for the correction.

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Neither the producer nor the company can make the change without the written approval of the applicant.

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Any correction needs a notarized statement from the applicant/insured.

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Question 15 of 57

When spouses are to be included in the group life insurance plan of a member which is contributory, then:

50% of the spouses must be included.

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They must prove their insurability.

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The company decides which spouses are eligible.

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75% of spouses are required to participate in the plan.

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Question 16 of 57

All of the following are correct statements regarding Credit Life coverage, EXCEPT

Credit Life is a type of group coverage where a master policy is issued to a creditor (the bank) to insure persons who are debtors of the creditor.

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The creditor (usually a bank) is the beneficiary who receives the death proceeds to cover the repayment of a loan in the event the borrower (insured) dies before the loan has been repaid.

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The amount of life coverage on the insured (the debtor) may not exceed the amount of the debt owed to the creditor.

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The insured (debtor) must qualify for the insurance by completing a minor medical exam.

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Question 17 of 57

To encourage public school systems and tax-exempt charitable, educational, and religious organizations to set aside funds for the retirement of their employees, a/an __________ may be set up and contributions deducted from the employees’ current incomes.

IRA (individual retirement account)

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HR10 (Keogh)

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SEP (simplified employee pension)

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TSA (tax sheltered annuity)

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Question 18 of 57

What is the difference between a Traditional IRA and a Roth IRA?

The amount of allowable contributions.

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Who is allowed to contribute (husband and/or wife).

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The use of a deferred annuity to fund IRA .

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The tax deductibility of the contributions.

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Question 19 of 57

If a policy is issued differently than submitted or applied for, __________.

coverage is still effective until non-payment of premium.

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coverage will not be in effect until a new application is taken from the insured.

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this would be known as an acceptance.

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a signature from the policy owner will be needed upon delivery of the policy for coverage to be in effect.

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Question 20 of 57

The Busy Bean Company applies for life insurance on its key vice president, Harold. The Busy Bean Company is the premium payor and beneficiary, and controls all rights to the policy. All of the following are true, except:

Harold is the proposed insured, his company is the applicant.

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Harold is the proposed insured, his company is the payor.

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Harold is required to show insurability, his company is the beneficiary.

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Harold is the policyowner, his company is the applicant.

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Question 21 of 57

Policy Delivery is the responsibility of the Producer and the policy must be delivered within __________.

10 days

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20 days

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a given period of time set by the insurer

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a reasonable period of time after issuance

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Question 22 of 57

When an applicant gives an application and premium, he is making an offer to buy insurance. If the insurance company then issues the policy as it was applied for, the company has

delivered the policy.

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cashed the check.

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issued a counter offer.

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accepted the offer.

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Question 23 of 57

An insurance company cannot unfairly discriminate, however, discrimination on age, sex and health conditions is allowed if:

The State Commissioner deems it appropriate.

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The owner/applicant approves it.

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The State Commissioner can pass a law to approve it.

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A bona fide statistical difference in risk or exposure has been substantiated.

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Question 24 of 57

Max Zabicki applies for life insurance and properly informs the insurer of his heart condition. The life contract is issued. Which of the following statements is true concerning this situation?

The insurer may delay paying a claim for two years.

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The insurer may deny a claim if death occurs in the contestability period due to the heart condition.

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The insurer will pay only after a court of law has determined that a claim is valid.

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The insurer has waived its rights to deny a death claim due to a heart attack.

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Question 25 of 57

Since the insurer prepares the provisions of the contract, and the policyholder simply adheres or agrees to them, a court will rule in favor of the insured if there is any ambiguity in the contract terms. That is why insurance contracts are known as __________ contracts.

Unilateral

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Estoppel

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Conditional

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Adhesion

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Question 26 of 57

A life insurance policy was issued for Reba with an additional premium of $300 due upon delivery. You explain to Reba that:

The policy was issued with a rate-up because of her religion.

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The additional premium is needed to pay for losses incurred by the insurance company.

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The additional premium is the commission of the producer.

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The policy was issued with a surcharge for a negative health condition.

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Question 27 of 57

All of the following statements are correct about the Medical Information Bureau, except:

The insurer must inform the applicant about how they may receive a copy of the MIB report.

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The insurer must be authorized by the applicant to retrieve and give information to the MIB.

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The MIB is a non-profit agency established by the insurance industry.

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The insurance company must supply the applicant with copies of the MIB reports.

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Question 28 of 57

Conversion Rights for employees and dependents in group insurance guarantee that coverage can be continued should the employee do all of the following, except:

Leave employment.

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Cancel the formal request within 31 days.

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Pay the premiums (based on attained age with no evidence of insurability required).

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Prove insurability.

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Question 29 of 57

Which of the following people do not have an insurable interest in each other?

Two partners who own a service type business.

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A creditor of a debtor to the extent of the indebtedness.

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Divorced parents of three minor children.

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Two shareholders of a publicly owned corporation.

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Question 30 of 57

The producer goes to deliver an issued policy. The producer arrives at the home of an insured (owner) to discover that the insured is not home. The producer should:

Leave the policy with the spouse to make sure the insured receives it.

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Leave the policy at the home to effectuate the 10-day free look.

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Mail the policy the next day to the insured.

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Deliver the policy at a later date when the issued policy can be explained to the insured.

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Question 31 of 57

The producer fills out an application and collects the premium for life insurance. Just before mailing the policy to the insurer, the producer loses the check. The policy is __________.

not in effect.

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not in effect until the producer/agent replaces the check.

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in effect as long as the producer/agent agrees to pay the premiums from his commission check.

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in effect since the producer/agent (a representative of the company) received full consideration.

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Question 32 of 57

Stan Marsh is leaving his employment and will no longer be covered under his group plan. However, under group life insurance, there are conversion rights for employees. You explain to Stan that conversion rights__________.

are guaranteed for the employees only, not dependents.

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must be accepted within six months of leaving employment.

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allow the insured to convert the group term to an individual term insurance policy.

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are guaranteed without requiring proof of insurability.

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Question 33 of 57

The producer collects full minimum premium and a fully completed application. Three days later the insured dies before the producer sends it to the insurance company and before the blood test and EKG can be administered. Which of the following is correct?

There is coverage since consideration was received. The policy will pay a death benefit.

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There is coverage since the insured died after the application date.

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There is no coverage since the producer did not send the paperwork to the insurance company.

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There is no coverage.

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Question 34 of 57

All of the following are correct statements regarding a Conditional Receipt, except:

A conditional receipt is issued when money is collected with the application.

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A conditional receipt is not a guarantee that any claims will be covered.

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A conditional receipt provides coverage on condition that the insurer issues the policy as applied for.

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A conditional receipt is a receipt which gives guaranteed coverage and is issued by a producer.

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Question 35 of 57

Which of the following statements is incorrect when a producer does not collect the initial premium with the application?

Without the initial premium, the insurance company issues the policy and offers it to the insured.

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Without the initial premium, there is no coverage.

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Without the initial premium, the policy becomes effective when the insured pays the first premium.

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Without the initial premium, the issued policy guarantees coverage upon the delivery of the contract.

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Question 36 of 57

Which of the following variable life policy owners has taxable income from the transaction shown?

Susie cashes in her policy for $15,000; she paid $20,000 into it.

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For Marcia, cash values grew $2,000 this year.

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Joan dies; her beneficiary receives $100,000.

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Kevin surrenders his policy for $7,000 after paying $4,000 in premiums.

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Question 37 of 57

Which of the following is correct regarding the Key Employee concept?

The company is the owner (third party ownership) and the beneficiary.

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The employee is the insured.

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The premiums are not tax-deductible for the company.

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All of these are correct statements.

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Question 38 of 57

Which of the following is incorrect regarding the Buy and Sell Agreement?

It is a legal document.

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It states who may purchase a deceased partners share of the business, and at what price.

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Life insurance can be used to fund a Buy and Sell Agreement.

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It should be drawn up by the producer/agent of record.

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Question 39 of 57

Under the Cross Purchase plan of a Buy and Sell agreement, __________.

the business buys one policy on each of the partners.

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each partner buys one policy on his or her own life.

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the policy premiums will be lower since it is a business agreement.

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each owner buys a policy on the other owners, naming himself as the beneficiary.

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Question 40 of 57

A warranty is a guarantee specified in the policy and is guaranteed to be true and exact for the life of the contract. The warranty of the insurance company to the insured is

the promise to cancel the policy following a claim.

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the promise to increase premiums following a loss.

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the promise to switch policy contracts following a claim.

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the promise to pay following a loss.

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Question 41 of 57

Which of the following would be the main source of underwriting information used by the insurer in the underwriting process?

Report from the agent

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Attending Physician Statement

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MIB report

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Application from the proposed insured

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Question 42 of 57

Premium given to the insurance company represents the __________ from the applicant.

Acceptance

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Entire Contract

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Agreement

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Consideration

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Question 43 of 57

The test for Modified Endowment Contract status is called the Seven-Pay Test. A contract fails to meet the seven-pay test if it accumulates amounts paid under the contract at any time during the first seven contract years exceeding the sum of the net level premiums. The IRS considers such contracts to be __________.

under-funded.

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exempt from current tax laws.

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governed under the Fair Credit Reporting Act.

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over-funded.

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Question 44 of 57

Which of the following individuals must have insurable interest in the insured?

Beneficiary

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Producer of record

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Physician

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Policy owner

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Question 45 of 57

The type of receipt given to the applicant when the application is completed and the initial premium is received is called a/an

Binding Receipt

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Retro-Active Receipt

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Certificate of Insurance

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Conditional Receipt

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Question 46 of 57

To qualify for life insurance and determine the amount of premium to be charged, the insurance company will consider all of the following, EXCEPT

the health of the insured.

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the age of the insured.

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the gender (sex) of the insured.

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the monthly income of the insured.

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Question 47 of 57

Which is NOT an element of insurability when buying life insurance?

Current health

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Height vs. weight

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Past health

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Marital status

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Question 48 of 57

Which of the following is an INCORRECT statement regarding the Medical Information Bureau (MIB)?

The MIB is a non-profit agency supported by the insurance industry.

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The Medical Information Bureau (MIB) maintains files of information that applicants have submitted to other insurance companies and by sharing this information applicant fraud can be detected.

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If an insurance company runs an MIB on an applicant, the applicant would have the same rights that apply under the Fair Credit Reporting Act.

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The (MIB) Medical Information Bureau can check on any applicant, but the applicant will be notified only IF the application for coverage is rejected.

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Question 49 of 57

If a producer collects a premium check and issues a conditional receipt on March tenth but fails to send the check to the insurer. When would coverage be effective?

When the policy is issued, April fifteenth

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When the policy is delivered, April twenty-fifth

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When the check is finally sent in

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At the time the check was collected, March tenth

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Question 50 of 57

An insured submits the required premium along with a fully completed, dated, and signed application. The policy issues one month later. When was coverage in effect?

Time of the Free Look Period

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Time when the owner gets the policy

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Time the policy is issued by the insurer

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Time of the application

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Question 51 of 57

Acceptance from the insurance company usually means that they have __________

cashed the check given by the insured.

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rejected the policy.

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received the medical information on the insured.

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issued the policy.

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Question 52 of 57

Which one of the following is considered a field underwriter?

insurance company

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adjuster

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company underwriter

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producer acting as an agent

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Question 53 of 57

If no conditional receipt is issued at the time of the application, a statement of continued good health will be required at the time of

receipt from approved physician

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policy issue

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policy renewal

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delivery of the policy

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Question 54 of 57

To prevent people from profiting from a loss, insurance companies must be certain that

premium will be paid.

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the applicant is healthy.

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the producer is related to the applicant.

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insurable interest exists.

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Question 55 of 57

Without the initial premium, if a policy is issued it will be effective when

the insured accepts the policy and completes a new medical exam.

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the insured accepts the policy and registers with the FTC call center.

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the insured accepts the policy and then returns it to the producer of record.

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the insured accepts the policy, pays the first premium, and signs a statement of continued good health.

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Question 56 of 57

The primary purpose of the HIPAA (Health Insurance Portability and Accountability Act) Privacy Rule is to

detect applicant fraud.

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get a doctor to approve the releasing of health information.

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define and limit the use of health information disclosed between insurance companies.

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define and limit the circumstances under which an individual can have his protected health information disclosed to other parties.

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Question 57 of 57

Without the initial premium, sometimes called non-prepaid, the insurer issues the policy and offers it to the insured. The policy becomes effective when

the owner accepts the policy.

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the insured pays the first premium.

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the insured has filled out and signed a statement of continued good health.

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All of these are correct statements.

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