NC LIFE INSURANCE MIDTERM EXAM 2026 QUESTIONS AND ANSWERS GRADED A+

NC LIFE INSURANCE MIDTERM EXAM 2026 QUESTIONS AND ANSWERS GRADED A+ Fraternal benefit society - -an organization of people who share a month ethnic, religious or vocational affiliation. They are entities they have no capital stock, have a representative form of government. They exist not for profit but solely for the benefit of their members and their beneficiaries and operate on a lodge system. Fraternal benefit societies - -agents of these societies must comply with the same general laws governing licensing that apply to resident and nonresident agents. Graded premium whole life - -has premiums they start very low then increase annually for a long period and stay level for the rest of the life of the policy. Death benefit option 1 of a universal life policy - -the benefit payable when the insured dies stays level and equal to the initial specified amount. Death benefit option 2 of a universal life policy - -this benefit is generally increasing. This benefit equals the policy's specified amount plus the cash value. Variable universal life insurance - -combines the features of universal life insurane with the ability to allocate premiums to a seperate account. This means the growth of the contract's cash value is based on the performance of the underlying investment. Straight life income - -provides the largest monthly income payment for a given amount o annualized funds. Also called pure life option, income payments are made for the annuitants lifetime, regardless of how long that may be. In regards to the section 1035 tax code, which exchanges is permitted on a tax-free basis? - -1. Life insurance for life insurance 2. Life insurance for an endowment ment for an endowment insurance for an annuity 5. Annuity for an annuity Modified endowment contract (mec) - -tax law considers a single premium life insurance policy to be what? NC LIFE NC LIFE Anthony becomes an agent for acme insurance company. Acme has not filed the notice of appointment with the commissioner. It must do so within how many days? - -15 days Spendthrift clause - -a clause that prevents the debtors of a beneficiary from collecting the benefits before he/she receives them. Annuity death benefits - -are not tax deductible or tax free A couple makes a combined income for $175,000 their individual retirement plan (ira) be tax deductible? - -no. If it is joint an dover $123,000 there is no deduction. What is the cap on an ira tax deduction that will provide no deduction for a single person? - -$74000 or more. Prepaid tuition plans - -college saving plan that allows for the purchase of units or credits at participating colleges and universities for future tuition. Limited to instate tuition only. Not subject to federal tax. Parents are able to lock in the price of tuition at that time. Risk sharing - -allocating ownership of a risk to another party Risk transfer - -a pure risk is transferred from the insured to the insurer, who typically is in a stronger financial position Which is a characteristic of industrial life insurance? - -premiums are payable monthly or weekly. Industrial life insurance - -these policies generally do not require a medical exam to qualify. They offer individual coverage in small face amounts usually less than $10,000. Reinsurance - -an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance How long do insurers allow backdating a policy in order to receive lower rates? - -6 months What are the differences between mutual insurance companies and stock insurance companies? - -mutual insurance companies are owned by its policy holders while stock insurance companies are owned by stockholders who may or may not be policy holders. Mutual insurance companies sell participating policies which distributes policy dividends that are nontaxable while stock companies distribute profit in the form of taxable stock dividends. NC LIFE NC LIFE Which of the following individuals would be most likely to enter into a viatical settlement? - -ben, who is terminally ill and needs money to pay his medical bills Agent smith represents gretchen and is negotiating the viatical settlement agreement in which she will sell her life insurance policy to bbc corporation. In this transaction, what is agent smith considered? - -a viatical settlement broker Which of the following individuals represents a viator and negotiates viatical settlement contracts? - -viatical broker About 2 percent - -insurers will decline applicants with very high substandard risk ratings. What percentage of applicants do insurers reject? Numeric codes that are communicated electronically - -in what form does the mib present its information to insurers? Insurers cannot rate or decline a life insurance risk based solely on mib information. - which one of the following best describes the restrictions an insurer must operate under when using information from the medical information bureau (mib)? Using life insurance for wagering or betting - -the requirement that an insurable interest must exist when life insurance is purchased is intended to prevent people from doing which of the following? Insurable interest must exist only at the time the applicant enters into a life insurance contract. - -in life insurance, for how long must insurable interest exist? Describe "insurable interest"? - -the relationship between the person applying for life insurance and the person whose life is to be insured. It is a necessary element in the issuing of a life insurance contract. Implied authority - -authority an agent has by virtue of being reasonable necessary to carry out his or her express authority. When an agent receives premium payments, it is implied that he or she has the authority to do so by the principal in order to carry out the necessities of performing his or her duties as an agent. Express authority - -an agent has actually been told by the contract that they may act on behalf of the principal. (the company for whom they work). So, for example, xyz insurer specifically authorizes an agent to bind certain risks. Apparent authority - -exists where the principals words or conduct would lead a reasonable person in the third party's position to believe that the agent was authorized to act, even if the principal and the purported agent had never discussed such a relationship. An example would be an agent that displayed signs, preprinted company forms and stationary with the company logo would leas one to believe that that agent had the authority to act for the principal (the insurer). NC LIFE NC LIFE A third party (such as an irrevocable trust) can apply for and own the policy from the beginning. - -robert is purchasing a life insurance policy, which he wants to keep out of his taxable gross estate. Which of the following arrangements would help him meet that goal? The insured has no right to name the beneficiary. - -in personal insurance, what is the disadvantage to third-party ownership? 3 years - -under the standard bring-back rule, assets transferred out of a decedent's estate will be valued in the estate if the transfer occurred within how many years before death? The business - -who normally owns life insurance used to meet business insurance needs? Binding receipt - -provides coverage as soon as premium is received (before approval) Give the applicant a "notice to applicants regarding replacement of life insurance." List all existing life insurance policies that will be replaced. Give the applicant a policy comparison statement signed by the producer. - -in cases where an existing life insurance policy is going to be replaced by new life insurance policy, the producer must do all the following Bank secrecy act Usa patriot act and the Fincen final rules of 2005 - -all the following are federal laws or related rulings that have a direct impact on anti-money laundering requirements (3 of them) Binding receipt - -also called a temporary insurance receipt. The insured is guaranteed coverage throughout the underwriting period, which can extend for a number of weeks. It guarantees coverage from the time the applicant completes the application or the insured completes the medical exam. Cost indexes - -use the factors of premiums, cash value, and policy dividends to compare the relative cost of similar polices. Buyers guide - -states require producers to provide this; it explains the general features, benefits and conditions of the type of insurance being considered. To provide buyers with the policy details of the insurance contract they are considering for purchase. - -what is the purpose of a policy summary? Cease and disist order - -which remedy does the commissioner have is a person has violated the insurance information and privacy protection act? NC LIFE NC LIFE Defamation - -to publish of circulate a false, deceptive or misleading statement or a statement that is maliciously critical of a derogatory to the finical condition of an insurer. Twisting - -a form of misrepresentation in which an agent persuades an insured/owner to cancel, lapse, or switch policies, even when it's to the insured's disadvantage. Rebating - -any inducement offered in the sale of insurance products that is not specified in the policy. Ordinary life insurance - -a level-premium policy that provides lifetime protection. Includes ife insurance in face amounts greater then $25,000. It includes every type of life insurance and annuity. Whole life insurance - -harry and cindy want life insurance to provide death benefits in case either dies, as well as living benefits, in the event of financial emergencies. Which of the following would this couple most likely buy? They add an expense load, which includes a safety margin factor, to the net premium to produce the gross premium. - -actuaries begin the process of calculating premium rates by using mortality tables, which help predict future experience but not with 100% certainly. How do actuaries compensate for this uncertainty when determining the gross premium charged to the policy owner? Explain stoli: stranger owner life insurance - -an arrangement in which investors convince an individual to purchase a life insurance policy on themselves which is transferred to the investor in exchange for a sum or money. It is financed through premium loans during the first several years. Until it is transferred from the insured to the investors. Standard risk - -an applicant or insured who is considered to have an average probability of a loss based on health, vocation and lifestyle. This is the classification when he or she meets the insurers guidelines as an acceptable risk. Preferred risk - -an insurance classification for applicants who have a lower expectation of incurring loss, and who, therefore, are covered at a reduced rate. Excellent heath, low risk jobs, and healthy lifestyle. Substandard risk - -an applicant or insured who has a higher than normal probability of loss, and who may be subject to an increased premium. Poor health, bad habits, high risk job. Variations on the basic whole life policy (7) - -- limited pay whole life - modified premium whole life - graded premium whole life - indeterminate premium whole life NC LIFE NC LIFE - interest- sensitive and current assumption - indexed whole life - variable whole life Straight whole life insurance - -a whole life policy in which death benefits are level. Level premiums are paid until he or she reaches age 120 or until they die. Limited-pay whole life insurance - -a whole life policy under which a policy owner pays a high premium than for an otherwise identical ordinary life policy in return for the right to pay premiums for a shorter period. Cash value continues to grow even after it is paid up. Modified premium whole life insurance - -policies with a lower premium in the early years of the policy, usually the first five years. At the end of the initial period, the premium is increased and stays at that increased level for the life of the policy Graded premium whole life - -has premiums that start low compared to straight whole life, then they increase annually for a long period and stay level the rest of the life of the policy. Premiums increase in a series of steps until they become level for the remainder of the premium. May range from 10-years increasing until they level out. Indeterminate whole life insurance - -issued with two premium rates; a lower fixed rate and a guaranteed maximum rate. The policy owner pays the lower fixed rate for a specified number of years at the end of the period, the premium rate then moves up and down based on investment earrings the insurer experiences. Indexed whole life insurance - -a type of whole life insurance that ties its death benefits and its premiums to a specified index, most commonly the consumer price index (cpi). Overtime, the policy's face amount increases automatically with cpi increases. Variable whole life insurance vs. Traditional whole life - -permanent life insurance with many of the same characteristics of traditional whole life insurance but instead of the insurer's money being kept in general accounts and invested in conservative investments with contractual guarantees it is invested in separate accounts which house common stock, bond, money-market and other securities investment options with no guarantees. There is a minimum guaranteed death benefit. Current assumption whole life insurance - -a nonparticipating whole life policy in which the cash values are based on and premium rates can change based on the insurer's current mortality, investment, and expense experience Variable whole life insurance - -a form of whole life insurance in which premiums are placed in investment sub-accounts that the policy owner owns. The insurer guarantees a minimum death benefit. Usually the face amount of the policy at issue. However the cash values and death benefit rise and fall on the basis of the sub-accounts investment performance. NC LIFE NC LIFE Policy owners can choose how to invest their policy premiums and cash values with this type of whole life insurance. - -variable life insurance Redetermination - -with interest sensitive whole life insurance policies, insurers may change interest and premium rates after reviewing their investment experience. What is the process the insurers use to make these changes called? Flexible permanent life insurance types (4) - -adjustable life, universal life, variable universal life, and equity index life. Adjustable life insurance - -an insurance policy that lets the policy owner change the premium, cash value, and death benefit of the policy as much as they want. In changing these elements, the policy can act as a term life police, ordinary policy, or a limited payment life policy. Universal life insurance - -an extremely flexible life insurance policy in which the policy owner can increase premiums, reduce premiums, or pay no premiums. Similarly the policy owner can increase the benefit paid at death or decrease it. Variable universal life insurance - -a duel securities insurance product that combines the best aspects of universal life such as premium and death benefit flexibility with the investment potential of a variable life. Gives the policy owner the greatest degree of control over premiums, death benefits and cash value. Equity indexed life - -a flexible premium whole life contract that offers a rate of return on policy cash accumulation based on selected stock market index or indices from period to period with guarantee of no threat to principal. Net amount at risk - -the difference between the policies cash value and the policy's death benefit. Specified amount - -the amount of death benefit a policy owner initially buys in a universal life policy. Variable universal life insurance option 3: - -the death benefit is equal to the sum of the policy's specified amount (selected initial db) plus the premiums paid. Like option 2, it includes a level net amount at risk. This appeals to consumers who are concerned that a drop in the market values could mean the cash value is less than the sum of premiums paid. Difference between universal life and whole life: - -whole life's mortality, interest, and expenses are bundled. Universal life is more flexible because they are unbundled, so they can determine how much they want to pay into that policy. NC LIFE NC LIFE Decreasing term - -which type of life insurance policy would most likely be used to insure the declining balance of a home mortgage? Decreasing term insurance - -which of the following types of life insurance is best suited for mortgage protection purposes? Under decreasing term insurance, the death benefit decreases over the policy period while with a level term policy, the death benefit stays level over the policy period. - -what is the main difference between decreasing term insurance and level term insurance? Only whole life insurance builds a cash value. - -what differs whole life insurance from term life insurance? Variable life insurance - -a producer must be licensed by the financial industry regulatory authority (finra) to sell which one of the following types of life insurance? Family maintenance policy - -uses a level term rider. Provides the same amount of money whenever death occurs to provide a stream of income. Will provide a stream of income throughout the term no matter when the insured dies. Family income policy - -uses decreasing term to funs a potential income period that decreases as the policy ages. Based on a decreasing term rider (as time goes on there will be less money available to provide a stream of income). Issued with a date in the future that will be the ending date of income, should the insured die. Cash value - -where are the premiums a policyowner pays for a universal life policy credited? Premiums can increase or decrease to suit the policyowner's changing needs. - -with respect to adjustable life insurance, which one of the following statements is correct? As long as the policy's cash value covers the monthly deductions for the cost of insurance and expenses, andrea's policy stays in force. - -andrea owns a variable universal life insurance policy. She has been paying premiums for the last ten years. The policy's cash value is now $75,000. When her son enters college she stops making premium payments and pays tuition instead. After her son graduates, andrea plans to start making premium payments again. Which one of the following statements is most correct, assuming andrea wishes to keep the policy in force? Endowments - -provide a guaranteed cash growth and tax sheltered investment tool. They are no longer popular because they do not have tax deferred growth. Modified endowment contract (mec) - -category of life insurance that fails to meet the 7 pay test imposed by the federal government. Because of that, it loses some of its favorable tax treatment normally given to life insurance policies. NC LIFE NC LIFE Ten-year family maintenance policy - -jack bought a life insurance policy to make sure his surviving family members would have an income for ten years if he died prematurely. Five years after purchasing the policy, jack died. Beginning with the date of his death, the policy began paying a level monthly benefit to his family for ten years. What type of policy did jack buy? Lower cost - -which of the following is the main appeal of joint life insurance compared to two separate policies? Survivorship life insurance policies - -they pay the death benefit only when the second insured dies. They insure two persons under one policy. They are also known as second-to-die policies. When the first insured dies - -under a joint life insurance policy, when does the insurer pay the death benefit? They endow before age 120. - -endowment contracts are not considered life insurance (for tax purposes) because Well before age 120, usually at age 65 - -a life insurance policy matures or endows when its guaranteed cash value equals its face amount. With an endowment contract, when does the policy endow? Bill, who is on long-term disability this month - -which of the following employees of abc computers could not convert their group life coverage to an individual policy? State laws typically set a maximum coverage limit that creditors can offer to borrowers. - -which one of the following statements about credit life insurance is most correct? Master policy - -what does a group sponsor receive under a group life insurance policy to show it is the policyowner and pays the premiums? Assignee - -in an absolute assignment, what term is used to describe the new policyowner? A written request or application for reinstatement Payment of all back premiums, plus interest Proof of insurability - -to reinstate his lapsed life insurance policy under a reinstatement agreement, peter must provide all of the following, 2 years from the date of the of the issue - -how long is the standard incontestability period? NC LIFE NC LIFE A return of premiums paid, plus interest - -jones commits suicide 18 months after buying a life insurance policy that contains a standard suicide provision. Jones's beneficiary will get which of the following from the insurer? 2 years following policy issue. - -the suicide exclusion provision of a typical life insurance policy excludes coverage if death is the result of suicide within The insurer names a blood relative or someone with a valid claim as the new beneficiary. - -under a policy's facility of payment provision, what does an insurer do with the death benefit? Frank grant - -who is the tertiary beneficiary in the following beneficiary designation: "sally grant, wife of the insured, if she survives the insured; otherwise in equal shares to surviving children of the insured, if any; otherwise to frank grant, brother of the insured." Insurers require the court to appoint a legal guardian before paying benefits to a minor child. - -if insurers do not allow minors to be beneficiaries of life insurance, what do they do if no adults are available to receive death benefits? Common disaster provision - -allows for life insurance policy proceeds to pass to a contingent beneficiary if the primary beneficiary doesn't survive the insured for a minimum period which can be 30 days of more depending on the state. Nonforfeiture options - -determine how cash value will be handled when a permanent life policy is lapsed or surrendered. Cash surrender- surrenders the policy and pays cash value in a lump sum to po. Extended term-** used when po has not selected an option, provides same amount of coverage as in the lapsed policy but lasts for a term that is purchased with the policy's cash value Reduced paid-up insurance- uses cash value to buy a paid up policy using a single premium payment based on the insureds current age. - -what are the 3 nonforfeiture options? Define options vs. Riders - -options must be selected when purchasing a policy. A rider is a truly optional feature that costs extra but adds value to the policy. Reduced paid-up option - -under which nonforfeiture option does permanent life insurance continue in force with no further need for premiums? Cash surrender option - -jerry asks his insurance company to pay him the cash value of his permanent life insurance and cancel the policy. Jerry is using which of the following nonforfeiture options? It will tell melissa that her policy does not have the extended term option and she may only take any remaining cash value in cash. Because universal life policies normally do NC LIFE NC LIFE not contain the standard nonforfeiture options for policy lapses. - -melissa asks to continue her lapsed universal life insurance policy under the extended term option. How will the insurance company respond? 6 months - -what is the max amount of time most states allow insurers to delay paying cash surrender values? Cash surrender option only - -what is the only nonforfeiture option for a universal life insurance policy? Automatically apply the extended term option - -if a policy owner does not select a nonforfeiture option for a whole life policy what will the insurer most likely do? Policy surrender - -surrenders a portion of policy coverage causing a proportionate reduction in the death benefit. Partial surrender - -it is a partial surrender of a portion of the policy. The death benefit is reduced proportionately by the amount of the the surrender. Living benefit - -insured is alive and insured wants to withdraw that money for a living purposed opposed to a death benefit. How is the cash value effected on a policy loan vs. A policy withdraw? - -a policy loan preserves the cash value and allows the policy to continue to grow as intended. A policy loan does not have oy be paid back but the loan can never exceed the cash value. A policy withdraw takes from some of the cash value of the policy and reduces life insurance protection and cash value by the withdraw amount. A policy owner does not have to repay a loan. If not paid back the insurer will most likely surrender the policy and the company will take its lended amount plus accrued interest from the cash value. Or the death benefit will be reduced if not surrendered and they will take the amount of the outstanding loan. - -what happens if a policy loan is not repaid? Withdrawals reduce the death benefit dollar-for-dollar. Policyowners can withdraw funds as long as the policy has a cash surrender value. Insurers do not require policyowners to repay withdrawals. - -cash value withdrawals from a universal life insurance policy? Prevents a life insurance policy from lapsing if the policyowner fails to pay a premium - the automatic premium loan (apl) provision does which of the following? It will be reduced by the amount of the withdrawal. - -if rick withdraws funds from his universal life insurance policy, what will be the effect on the policy's death benefit? Cash, accumulate at interest, premium reduction, paid up additions. - -what are the 4 standard dividend options? NC LIFE NC LIFE Cash dividend option - -a payment option where the insurer sends the policy owner a check in the amount of the policy dividend, retaining the face value of the policy in the account. Reduce premium dividend option - -this option uses dividend proceeds to reduce the next year's premium payments. It helps lower the overall premiums for the following year, based on the amount of dividends issued. Accumulate at interest dividend option - -with this dividend option the insurer holds the dividends in an interesting-bearing account for the policy owner. The po can withdraw the acculated dividends at any time. Any interest earned on these dividends is taxable in the year creditied. Paid-up additions dividend option - -the dividend is used to purchase a small amount of paid-up whole life insurance Paid up insurance dividend option - -dividend option in which the policy owner uses the dividend to pay up the policy earlier therefore they will no longer owe premiums. Paid up additions option because; the dividend is used to buy a small paid up life insurance protection. This paid up policy accrues its owe interest and its own cash values. Annual additions increase the total db and the cash value will grow. - -what is the best dividend option according to the course and why? Mutual company - -what type of life insurance company is owned by the policy owners? Cash payment, interest only, fixed period, and fixed amount - -what are the 4 settlement options without a life contingency (life span of the person receiving income benefits is not a factor) Interest only settlement option - -life insurance settlement option in which the insurer retains the policy proceeds, which become the principal, and pays out only the interest earned on the principal. Single straight life, life income with period certain, life income with refund, joint and survivor life. - -what are the 4 settlement options with a life contingency, meaning the life span of the person receiving the income benefits is the primary factor establishing the benefits? Life income with period certain settlement option - -provides that payments are guaranteed for life or for at least a certain period. Life income with refund settlement option - -a life insurance settlement option with a life contingency that provides income payments for the life of the payee. If the payee dies NC LIFE NC LIFE before receiving payments equal to the amount placed under the settlement option, then the remainder goes to a contingent payee in the form of a refund Joint and survivor life settlement option - -provides that payments are made to payee's and that payments stop when the 2nd payee dies. Lump-sum cash payment - -under which of the following settlement options are the insurer's responsibilities under the contract fulfilled upon the death of the insured? Straight life income settlement option - -julie is the beneficiary of her husband's $150,000 life insurance policy. When he dies, julie chooses to receive payments of about $800 a month, or $9,600 a year, which will continue as long as she lives, whether she lives past her life expectancy or dies before it. Payments are to cease when she dies, whenever that may occur. Julie has chosen which of the following settlement options? The beneficiary may choose from all settlement options that would have been available to carl. - -carl is owner and insured of a life insurance policy. If he were to die without having selected a settlement option, which of the following option(s) is available to the beneficiary? Waiver of premium rider, disability income rider, and payor benefit rider. - -what are the 3 policy disability riders? Waiver of premium rider - -with this rider, should the owner be disabled and cant earn an income, after 6 months, all premiums will be paid by the insurer during the disability period; after 6 months, the premiums will be repaid Disability income rider - --pays a monthly income benefit to the insured in the event he or she becomes disabled -pays benefits for life or until a disability ends once a waiting period has passed from the date of the insured's disability Payor benefit rider - -often added to juvenile life insurance, if the person paying the premiums, usually the parent of the juvenile, becomes disabled before a certain age, the premiums on the policy will be waived while the payor is disabled or until the child reaches a certain age. They offer waiver of stipulated premium or waiver of cost of insurance riders. - -what do universal life insurance polices offer instead of waiver of premium riders? Universal life waiver of cost of insurance - -which waives the cost of insurance from a universal life insurance policy's cash value in the event the insured becomes disabled? Premium payments for a universal life policy are flexible, and need not be paid continuously. - -which of the following explains why a waiver of premium rider must NC LIFE NC LIFE function differently with a universal life insurance policy than with a traditional whole life policy? When the policy is issued or at a later date - -when can hank add a waiver of premium or a waiver of cost rider to his universal life policy? A disability income benefit rider pays a monthly income to the insured if he or she becomes disabled. The waiver of premium rider waives the policy's premiums. - describe the difference between a disability income benefit rider and a waiver of premium rider.****** Other insured rider - -used to cover a spouse. Usually ends sometime before the other insured's age 100 because the intent of coverage is temporary. Children's term rider - -allows children of the insured to be added to coverage for a limited period of time for a specified amount. Coverage usually ends when they reach 18,21 or 25. Family term rider - -this rider covers multiple family members (spouse plus kids) equally with term insurance. Children covered by their rider can convert their coverage to permanent insurance at age 21 without proof of insurability. Issuing the rider for a specified amount or for a specified percentage of the base policy - -insurers often set children's term rider limits on the basis of which of the following? Accelerate benefits rider - -a provision or rider that allows a payout of some portion of the policy's death benefit while the insured is still living. Typically up to 50% of the db, though some will allow up to 100%.. To qualify for this rider one must; be terminally ill or have a catastrophic accident resulting in permanent disability requiring long term care. Long term care rider - -this rider provides financial support for the costs of medical care, nursing, home care, assisted living care for extended durations. This rider does not require the insured to suffer a catastrophic injury. Hat his health or safety would be at risk without supervision - -harry is diagnosed with a mental disorder. To become eligible for payments under his policy's long-term care rider, he must prove which of the following? At least two activities of daily living for at least 90 days - -if ken becomes eligible (by a medical reason) for payments under his life insurance long-term care rider, he must be certified as unable to perform which of the following? The death benefit is reduced to the amount of the accelerated benefit payment and in some cases an additional amount may be deducted. - -if the insured qualifies and takes an accelerated death benefit from her policy, which most accurately describes the impact this will have on the policy's death benefit. NC LIFE NC LIFE Guarenteed insurability rider (gir) - -protects the insureds right to buy additional amounts of coverage in the future without requiring the insured to provide proof of insurability. Accidental death benefit rider - -a life insurance policy rider providing for payment of an additional benefit when death occurs by accidental means. Usually double the or triple indemnity rider because the face value of the rider will double triple. Return of premium rider - -pays the p.o. A return on all premiums paid on the policy in the insured is still alive when the term period expires, if the insured dies during the term, only the the d.b. Is paid to the beneficiary. Term riders - -can be added to any policy to increase the death benefit payable if the insured dies during the specified term. They are pure death benefits, they have no cash value or other living benefits associated with them. The economic value of a human life - -on what is the human life value approach to calculating the amount of life insurance an insured needs based? Human life value approach - -to determine the amount of insurance that a client should buy, an agent estimates the person's earnings each year until retirement and deducts from that amount the costs of self-maintenance and income taxes. The result is the residual income needed to provide for family members. In this case, the agent used which of the following approaches? Buy-sell agreement - -a person or group of people or entity agrees to buy a business owner's interest in the business upon the owners death or permanent disability. Common with partnerships or close corporations. Two types of buy-sell agreements - -cross purchase agreement- a contact between individual partners or shareholders. The partners or share holders agree to buy the interest of the others in the event the individual dies or withdraws from the business. And. Enity plan- in contract, an entity plan is one in which the business itself is a part to the agreement. The business buys the deceased partner or shareholders interest in the business. Key person insurance coverage - -the amount of coverage typically reflects the financial loss that the business would suffer if the key employee died. The business applies for and owns the policy. The key employee has no ownership rights in the policy. Employee deferrals of current compensation - -what is a non-qualified deferred compensation plan funded by? NC LIFE NC LIFE The employer funds the future benefit under a salary continuation plan. - -what is the main difference between a traditional deferred compensation plan and a salary continuation plan? Annuity cash values accumulate on a tax-deferred basis, meaning that interest earnings and growth are not taxable. This tax deferred feature is one of the main advantages to the annuity ownership. - -explain taxation on annuities. Annuity - -liquidates an estate or takes a large sum of money that the insurance company has which has been provided by the annuitant and distributes that through a serious of payments. Immediate annuities - -funded with a single premium, payout begins within one year of purchase, purpose is to distribute income. Deffered annuities - -funded by single, fixed or flexible premiums, payout begins sometime in the future, purpose is to build and distribute income, typically used for a retirement fund. Deferred annuities - -which of the following can be funded with a single premium payment, a series of fixed premium payments, or flexible premium payments? Fixed premium deferred annuity - -fran has an annuity into which she is making monthly fixed premium deposits of a specified amount and which she intends to use to supplement her income when she retires in 15 years. The annuity is credited with the higher of a current or guaranteed rate of interest. What type of policy does fran most likely own? Annuity owners may pay a fee for withdrawing from the annuity in the early years, example would be a 7% charge during the 1st 3 years of contract a 6% charge in the 4th and 5th year and so on. - -explain the surrender charges of an annuity Taxation on the distribution of annuities - -distributions from a deferred annuity are taxable right upfront. It is taxable on the is also a 10% penalty tax on withdraws before age 59 1/2/ not good for short term use or for seniors. Under no circumstances- accumulated funds un a deferred annuity always belong to the owner. They are not forfeitable, even if the owner stops making premium payments. - deferred annuities accumulate funds for the future distribution. Under what circumstances are these funds forfeitable to the insurer? Fixed amount certain payout option - -under which of the following are payments made for as long as it takes to liquidate the annuity principal, with the contract owner choosing a monthly amount, and the insurance company computing how long it will take to liquidate the principal at the selected amount? NC LIFE NC LIFE Life income with period certain option Straight life income, or pure life income, option Life income with guaranteed refund option - -the typical settlement options involving life contingencies generally include all of the following; He can choose the settlement option when the deferred contract annuitizes or when he buys the annuity. - -sam is planning to buy a deferred annuity. When will he select a settlement option? Straight, or pure, life income - -grace's annuity pays her an income for her lifetime, regardless of how long she lives. When she dies, no further payments are made to anyone. Which of the following types of settlement options does she have? The beneficiary must pay taxes on any amount he or she receives that exceeds the sum of the premiums paid into the contract. - -which of the following best describes the tax treatment of fixed annuity death benefit payments? If the contract owner or annuitant dies during the accumulation period - -under which one of the following circumstances does a fixed deferred annuity contract provide a death benefit? It is the amount contributed into the contract plus interest earned on that, minus any withdraws or charges. - -explain a fixed annuity death benefit Only if the annuity owner annuitizes the contract - -a 2-tiered fixed annuity will pay a higher level of interest than the standard declared rate fixed annuity under which condition? 2-3% - -what is the typical minimum interest rate compounded annually for a deferred annuity? Variable annuities - -- no guarantees, premiums are invested into insurers subaccounts. Value of contract will increase of decrease depending on the investment results in the variable subaccounts. Accumulation units - -what is the growth of a variable annuity's account value during its accumulation period measured in terms of? 1. Determine the assumed interest rate (air) 2. Use the air to calculate the 1st annual payment amount. 3. Convert the 1st annuity payment amount into a set number of annuity units 4. Determine future annuity payment amounts by multiplying annuity units by the current nav - -what are the four steps to determining the payment amount for a variable annuity? NC LIFE NC LIFE Assumed interest rate (air) - -rate of return that the contract's values are assumed to earn over the annutization period. Owners usually select the rate, typically 3-5% Equity indexed annuity - -the annuity that has a guaranteed minimum interest rate and allows the annuitant to invest money in an index (i.e.: s&p 500). The investments grow as the index grows. Equity indexed annuity death benefits - -provides a death benefit if the annuitant or contract owner dies before the contract is annuitized. (like declared rate fixed and variable annuities). Can only increase in value. Market value adjusted annuity - -unlike an eia, this annuity offers an interest rate feature that makes it possible for the contract value to lose money if the contact is surrendered before the end of its term. A fixed annuity which shifts some of the investment risk to contract holder. Market value adjustment and surrender charge - -funds withdrawn from a market value adjusted annuity (mva) before its contract period ends are subject to which of the following? Market value adjusted annuities - -which of the following lets an annuity owner take advantage of interest crediting changes in response to market conditions at the time he or she withdraws funds? An individual annuity contract is issued to the retiring member using funds from the group contract. - -which one of the following most correctly describes the process that occurs when a group annuity member retires? It permits annuity contract owners to withdraw a specified percentage of the accumulated value annually without imposing a surrender charge. - -the charge-free withdrawals provision of a deferred annuity contract does which of the following? 59 1/2 - -withdraws from an annuity before what age may be subject to a penalty tax? Allow withdraws from the deferred annuity with out a surrender charge if the annuitant is confined to a nursing home. - -the purpose for a long term care rider with a deferred annuity contract is to? Death benefits from an annuity are not considered taxable income, however, if the death benefit is received through a settlement option, the interest earned on the investment will be taxed. - -is an annuity death benefit taxable? They are not taxable while they remain in the policy however, when they are withdrawn the interest from the earrings will be taxed. - -are the cash values of an annuity taxable? NC LIFE NC LIFE Transfer-for-value rule - -a rule that specifies that, subject to certain exceptions, if a life insurance policy is transferred from one owner to another for valuable consideration, the death proceeds will be subject to federal income taxation Since these are not considered a withdraw, no taxes are owed unless; the policy is later surrendered or if the policy is designated as a modified endowment contract. - -taxation rules on life insurance cash values specifically a policy loan? An accelerated benefit rider offers benefits that pay a portion of the policy's face amount if the insured becomes chronically ill. The law states that accelerated benefits are not taxable if certain qualifications are met; they must be deemed terminally or chronically ill. - -taxation rules on accelerated benefits? An endowment is a type of contract that pays a lump-sum db at the insured's death but also pays a lump sum benefit if the insured is alive by a certain age (typically 65). No longer used after 1986. The cash value does not enjoy a tax deferred status, meaning that eat years increase in the cash value is reported as taxable income to the contract owner. - -taxation rules of an endowment contract? A life insurance policy is considered a mec is one that violates excessive funding rules such as failing to meet the 7-pay test. Mecs still enjoy the tax benefits that apply to life insurance polices only as long as the policy is used for the purpose of providing a death benefit. - -taxation rules of a mec (modified endowment contract) Life insurance policy loans are not taxed. - -which one of the following most correctly describes the tax treatment of life insurance policy loans, assuming the policy is not a modified endowment contract (mec)? They are generally income tax free. - -which one of the following most accurately describes the income tax treatment of life insurance death benefits received by a terminally ill insured under the accelerated benefits rider? Employers can deduct premiums paid on a group life insurance plan. - -which of the following statements best describes how employer-paid premiums for group life insurance are treated for tax purposes? The master policy - -what does the employer own under a group insurance plan? Either the contract's accumulated value or the amount of premium the owner invested, whichever is greater - -annuity contracts include a provision to pay a death benefit if the owner or annuitant dies before the contract annuitizes. What does this death benefit typically equal? John will continue to exclude from income the same portion of each payment as originally excluded by lydia. - -lydia, age 65, annuitizes a deferred annuity and selects a 100 percent joint and survivor annuity with john as the joint annuitant. If lydia dies NC LIFE NC LIFE before john after annuity payments have begun, which one of the following most correctly describes how the annuity payments will be taxed when they are paid to john? The contract owner reaches age 59 1/2. - -the irs encourages the use of annuities for long-term retirement savings. Therefore, the irs may impose a penalty tax on any withdrawal that occurs before which of the following? An annuity that is used in a tax-qualified retirement plan, such as an ira, tsa, or 403b or some plan that receives favorable tax treatment. Money that is tax deductible going into an asset is usually taxable coming out. Principle is taxable as well as interest of every payout or "payment". - -what is a qualified annuity? Taxation of qualified annuities? Exclusion ratio - -this calculates what amount of every monthly annuity payment is considered tax-free, in other words, it determines that portion that is excluded from tax. Calculated by dividing the investment in the contract by the expected return. The payout phase - -what is another name for the annuitization phase of an annuity contract? One-half (50 percent) of the total tax. - -the fica tax is split between an employee and employer, with the employee paying how much? Survivor benefits - -which of the following federal benefit programs is available to eligible u.s. Citizens regardless of their social security insured status? Six - -to be considered currently insured, a worker must have earned how many quarters of coverage in the 13-quarter period before he or she dies? The total benefits payable to a spouse and children are reduced proportionately. - -what happens if the amount of the retirement benefit that a family receives based on the earrings of a single worker exceeds the maximum family retirement benefit? Brian's two children are entitled to receive survivor benefits equal to 75 percent of his primary insurance amount until they reach age 18. - -brian worked as a chemical engineer for the past 25 years until he died last month. He left behind his wife janet, age 45, and two children, ages 12 and 14. Which one of the following statements is most correct? Up to 85 percent of his or her social security benefits will be subject to tax. - -a social security recipient's modified adjusted gross income exceeds the threshold level for his or her filing status. What will happen to his or her benefits? Sara will be eligible to receive a monthly social security benefit indefinitely. - -john, age 62, retired early and is receiving social security retirement benefits. He has one child, sara, age 15. What will happen if sara is in a car accident and becomes disabled? NC LIFE NC LIFE The amount of the retirement benefit the worker will receive at normal retirement age - social security benefits are a function of a worker's average indexed monthly earnings and primary insurance amount (pia). What is a worker's pia? Employers sponsor qualified retirement plans because they can deduct the amount of their contributions from the business taxes. - -why do employers sponsor qualified retirement plans which are plans that qualify for special federal income tax treatment? A business can deduct the contributions it makes from their taxes. The earnings that build within a qualified plan are exempt from income tax until distribution. Employee contributions to the plan are made with pre-tax dollars. This lowers the employees taxable income. - -tax incentives of a qualified retirement plan? 50% of the difference between the amount that should have been taken. An individual (worker) must begin taking periodic distributions no later than april 1st of the year following when they turn age 70 1/2. - -failure to begin taking required minimum distributions (rmd's) from a qualified retirement plan can result in a penalty tax equal to? When must distributions begin to be accepted? A plan participant achieves a non-forfeitable right to the employer contributions made on his or her behalf. - -with regard to qualified plans, the term "vesting" refers to which of the following points? Cliff vesting - -hannah participates in her company's retirement plan, which provides for 100 percent vesting after four years with no vesting prior to that. What is this type of vesting schedule called? Defined benefit plan - -the employer contributes to each participating employees account. A total benefit is specified and that amount determines the amount employees contribute to that account and what the retirement benefit will be. Defined contribution plan; examples; 401k, profit sharing plans, and 403b plans. - specifies how much the employer will contribute on behalf of the employee. The final benefit depends on the amount of those continuations and the interest earrings. This is what most employers use now. Examples of these? It must employ no more than 100 people. - -to be eligible to set up a simple plan, a business has to meet which one of the following basic requirements? It must establish individual accounts for each participant. - -f an employer sets up a profit-sharing plan, which one of the following statements is most correct? Jenna can contribute the maximum contribution amount to a traditional ira for both herself and for rick. - -jenna, age 40, works full time and earns $175,000 a year while NC LIFE NC LIFE her husband, rick, age 42, currently does not work. Which of the following statements is correct? 60 days - -if a person receives funds directly from a qualified pension plan and intends to roll them over to an ira, within how many days must the rollover be completed? $0. While most premature distributions from an ira are subject to a 10 percent penalty tax, lisa will not be subject to the tax if the distribution is used to buy a first home. - -lisa, age 35, takes a $9,000 distribution from her traditional ira to use as a down payment on her first home. What penalty tax must lisa pay? Nothing - -when he applied for his life insurance policy 4 years ago. Terry admitted any information in the application about the treatment he received years ago for a serious chronic illness. What can the insurance company do? Key insurers - -susan is a life and health insurance agent for key insurers. She just sold a life insurance policy to ted, who named his wife edith as beneficiary. Which party does susan represent in this insurance transaction? Age 15 - -a person must be at least what age to purchase life insurance or annuities in north carolina? Individual life insurance - -the replacement regulations apply to transactions involving which of the following? Originals or copies of marketing communications used in the sale Buyer's guide and policy summary Notice regarding replacement signed by the agent and applicant - -when selling a life insurance policy that replaces an existing policy, the agent must leave all of the following items with the applicant When the application is taken - -if a person buys a new life insurance policy to replace an existing one, the agent must give the applicant the notice regarding replacement form no later than when?