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Exam 13: Buying Life Insurance

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Question 1

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Why might the use of "grades" assigned by a life insurance company rating organization not be a reliable guide for consumers? I.There may be variations in grades given by different rating organizations. II.They ignore factors such as profitability and quality of investments.

A) I only
B) II only
C) both I and II
D) neither I nor II

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Question 2

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Lisa does not want her life insurance policy included in her gross estate when she dies. Lisa can remove the life insurance policy from her estate if she does which of the following more than 3 years before she dies?

A) borrow the cash value of the policy
B) make an absolute assignment of the policy to someone else
C) change the beneficiary to someone who does not have insurable interest
D) select a lump sum settlement option and name her estate the beneficiary

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Question 3

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Lynn calculated the future value of the first twenty premiums she will pay under her nonparticipating whole life insurance policy. Then she subtracted the cash value after 20 years. Next, she divided this value by the future value annuity due factor for 20 years to arrive at an annual cost of insurance. Finally, she divided the annual cost by the number of thousands of dollars of life insurance purchased to arrive at the cost per thousand per year. Lynn calculated the

David purchased a $100,000 participating whole life policy. The annual premium is $2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20 years will be $35,260. If the premiums were invested at 5 percent interest for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent interest for 20 years, they would grow to be $24,400. The amount to which $1 deposited annually will accumulate in 20 years at 5 percent interest is $34.719. Based on this information, what is the surrender cost per thousand per year of David's policy over the 20-year period?

Which statement is true regarding using interest-adjusted cost data and purchasing life insurance?

David purchased a $100,000 participating whole life policy. The annual premium is $2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20 years will be $35,260. If the premiums were invested at 5 percent interest for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent interest for 20 years, they would grow to be $24,400. The amount to which $1 deposited annually will accumulate in 20 years at 5 percent interest is $34.719. Based on this information, what is the net payment cost per thousand per year of David's policy over the 20-year period?

Paul is shopping for a life insurance policy. An agent asked Paul if he would like to purchase a participating policy. What is a "participating" policy?

Which method of analyzing the cost of life insurance does not consider the cash value of the policy in the analysis?

Consumer experts typically recommend which of the following rules when purchasing life insurance? I.Avoid policies which pay dividends. II.Purchase life insurance equal to ten times your annual salary.

Brad owns a cash value life insurance policy. Last year, the cash value increased by $300. Brad received $100 in policyowner dividends on the policy last year. Brad was the beneficiary named in his grandmother's $50,000 life insurance policy. When she died this past year, Brad received $50,000. How much taxable income relating to life insurance must Brad report for federal income tax purposes?

Which of the following statements about the use of interest-adjusted cost data for comparing life insurance policies is (are) true? I.Using interest-adjusted cost data provides a more accurate measure of the cost of life insurance than is provided if the time value of money is ignored. II.Its use is most appropriate in deciding between policies when the cost variation is very small.

Which of the following statements about the Linton yield is (are) true? I.It is based on the assumption that a cash-value policy can be viewed as a combination of insurance protection and a savings fund. II.It is the average compound annual rate of return required to make the savings deposits in a life insurance policy equal to the policy's guaranteed cash value at the end of a specified period.

The first step in "shopping for life insurance" is to

Under the traditional net cost method, the net cost of life insurance for a given period (e.g., 20 years) is determined by which of the following formulas?

The National Association of Insurance Commissioners (NAIC) has drafted a "Life Insurance Policy Illustration" model law that most states have adopted. Which of the following statements concerning this model law is (are) true? I.The policy illustration must include a narrative summary describing the basic characteristics of the policy. II.The policy illustration must include a numeric summary showing the premium outlay, the value of the accumulation account, the cash surrender value, and the death benefit.

The gross premium for life insurance is equal to

Which of the following statements is (are) true regarding taxation of life insurance? I.Life insurance proceeds paid in a lump-sum to a designated beneficiary are received free of federal income taxes. II.The policyowner must pay taxes annually on the amount by which the cash value of his or her life insurance policy has increased.

Which of the following statements about the traditional net cost method of measuring the cost of life insurance is (are) true? I.The traditional net cost method does not consider the time value of money. II.The traditional net cost method can show that life insurance has a negative cost.

The net single premium for a life insurance policy is

The net premiums collected by a life insurer for a particular block of policies, plus interest income at an assumed rate, less assumed death benefits paid is called the