Question 1

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

Accepted Answer

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

Question 2

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 for 20 years,the premiums would grow to $79,156.If the dividends were accumulated at 5 percent 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 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?

Accepted Answer

A) $5.62 
B) $13.75 
C) $15.77 
D) $27.38

Question 3

Purposes of life insurance policy reserves include which of the following?
I.Legal test of the insurer's solvency.
II.Formal recognition of the obligation to pay future claims.

Accepted Answer

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

Question 4

Which of the following statements about the yearly-rate-of-return method (also known as the Belth method)of calculating the yearly rate of return for a life insurance policy is (are)true?
I.The formula requires the use of benchmark prices per $1,000 of protection.
II.The main drawback of the formula is its complexity,necessitating the use of a computer to calculate the rate of return.

Accepted Answer

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

Question 5

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?

Accepted Answer

A) $0 
B) $100 
C) $400 
D) $50,400

Question 6

All of the following statements about the surrender cost index for measuring the cost of life insurance are true EXCEPT

Accepted Answer

A) It is based on a specific time period,such as 10 or 20 years. 
B) It takes into account the settlement options available in the policy. 
C) It requires that annual premiums be accumulated at a specified interest rate. 
D) It takes the amount and timing of each dividend into consideration.

Question 7

Marshall is interested in determining the cost per thousand of his life insurance policy.Which of the following will provide Marshall the most meaningful measure of the cost per thousand dollars per year of his life insurance?

Accepted Answer

A) the needs approach 
B) the traditional net cost method 
C) the human life value approach 
D) the surrender cost index

Question 8

The difference between the present value of future benefits payable under a life insurance policy and the present value of net premiums for the policy is the policy's

Accepted Answer

A) retrospective reserve. 
B) policyholders surplus. 
C) prospective reserve. 
D) admitted assets.

Question 9

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.

Accepted Answer

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

Question 10

Actuaries at Term Life Insurance Company calculated the net single premium per thousand for a five-year term policy for a man age 32 to be $5.04.To calculate the net level premium for this policy,the net single premium should be

Accepted Answer

A) divided by 5. 
B) divided by the future value life annuity due factor for $1 for five years. 
C) divided by the present value life annuity due factor for $1 for five years. 
D) divided by the present value ordinary life annuity factor for $1 for five years.

Question 11

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

Accepted Answer

A) traditional net cost method 
B) net payment cost index 
C) the Linton Yield 
D) the surrender cost index

Question 12

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 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.

Accepted Answer

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

Question 13

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

Accepted Answer

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

Question 14

Life insurance policy reserves

Accepted Answer

A) are always equal to the policy's cash surrender value. 
B) are a major asset of life insurance companies. 
C) are paid to the beneficiary when the insured dies. 
D) are a major liability of life insurance companies.

Question 15

Major factors that must be considered in determining the cost of life insurance include all of the following EXCEPT

Accepted Answer

A) time value of money. 
B) premiums paid. 
C) settlement options. 
D) dividends.

Question 16

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?

Accepted Answer

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

Question 17

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 for 20 years,the premiums would grow to $79,156.If the dividends were accumulated at 5 percent 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 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?

Accepted Answer

A) $5.62 
B) $13.75 
C) $15.77 
D) $27.38

Question 18

Beth purchased a $50,000 nonparticipating whole life insurance policy.The annual premium was $1,278.The cash value of the policy after 10 years will be $13,740.The future value of $1 deposited at the start of the year for 10 years,assuming 5 percent interest,is $13.207.What is the traditional net cost of this policy,per thousand per year,over the first 10 years the policy is in force?

Accepted Answer

A) -$2.86 
B) -$2.14 
C) -$1.92 
D) -$0.88

Question 19

The policy reserve at the end of any given policy year is called the

Accepted Answer

A) terminal reserve. 
B) unearned premium reserve. 
C) mean reserve. 
D) initial reserve.

Question 20

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.

Accepted Answer

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

Exam 13: Buying Life Insurance

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

Purposes of life insurance policy reserves include which of the following? I.Legal test of the insurer's solvency. II.Formal recognition of the obligation to pay future claims.

All of the following statements about the surrender cost index for measuring the cost of life insurance are true EXCEPT

Marshall is interested in determining the cost per thousand of his life insurance policy.Which of the following will provide Marshall the most meaningful measure of the cost per thousand dollars per year of his life insurance?

The difference between the present value of future benefits payable under a life insurance policy and the present value of net premiums for the policy is the policy's

Actuaries at Term Life Insurance Company calculated the net single premium per thousand for a five-year term policy for a man age 32 to be $5.04.To calculate the net level premium for this policy,the net single premium should be

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 for purchasing life insurance? I.Avoid policies which pay dividends. II.Purchase life insurance equal to ten times your annual salary.

Life insurance policy reserves

Major factors that must be considered in determining the cost of life insurance include all of the following EXCEPT

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?

The policy reserve at the end of any given policy year is called the