Question 1

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 2

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 assigned by 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 3

The gross premium is defined as

Accepted Answer

A) the net premium plus the loading allowance. 
B) the terminal reserve plus the commission. 
C) the net premium minus expenses. 
D) the sum of all acquisition expenses.

Question 4

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 5

Which of the following statements is (are)true about the federal estate tax?
I.The gross estate can be reduced by a number of deductions.
II.If the person who died had any ownership interest in a life insurance policy at the time of death,the proceeds are included in the gross estate for federal estate tax purposes.

Accepted Answer

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

Question 6

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?

Accepted Answer

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

Question 7

Mary is interested in comparing life insurance policies.Rather than looking at the cost per thousand,she would like to compare the rate of return earned on the savings portion of the policy.Which of the following would be of the most interest to Mary?

Accepted Answer

A) the policy's Linton Yield 
B) the policy's surrender cost 
C) the policy's traditional net cost 
D) the policy's net payment cost

Question 8

All of the following statements about the income tax treatment of individually-purchased life insurance are true EXCEPT

Accepted Answer

A) policyowner dividends are received tax-free. 
B) the annual increase in cash value is not taxable while the policy remains in force. 
C) premiums paid for individual life insurance are a tax deductible expense. 
D) life insurance proceeds paid to a beneficiary in a lump-sum are received tax-free.

Question 9

The gross premium for life insurance is equal to

Accepted Answer

A) the present value of the future death claim plus an expense loading. 
B) the present value of the future death claim less the sum of the premiums paid when death occurs. 
C) the present value of the future death claim less the present value of the expected dividends. 
D) the net premium less the expense loading.

Question 10

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?

Accepted Answer

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

Question 11

Which of the following statements describes how the net payment cost index differs from the surrender cost index?

Accepted Answer

A) Dividends are ignored. 
B) The cash value is ignored. 
C) Premiums are not accumulated at a specified interest rate. 
D) Dividends are not accumulated at a specified interest rate.

Question 12

Which of the following statements is (are)true with regard to using interest-adjusted cost data when shopping for life insurance?
I.Cost indexes apply to new policies and should not be used to determine whether to replace a policy.
II.Cost indexes should only be used to compare similar plans of insurance.

Accepted Answer

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

Question 13

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.If the premiums were invested at 5 percent interest for 10 years,the premiums would grow to $16,878.55.Assuming 5 percent interest,what is the surrender cost of this policy,per thousand per year,over the first 10 years the policy is in force?

Accepted Answer

A) $4.48 
B) $4.75 
C) $4.92 
D) $5.16

Question 14

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 15

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?

Accepted Answer

A) a policy which has a cash value 
B) a policy which pays dividends 
C) a policy which invests in common stock 
D) a policy which provides for an increasing death benefit

Question 16

Each of the following helps to reduce federal estate taxes EXCEPT

Accepted Answer

A) the marital deduction. 
B) the applicable unified tax credit amount. 
C) life insurance policies in which the deceased had an incidents of ownership at the time of death. 
D) expenses such as the cost of the funeral,estate settlement costs,and probate costs.

Question 17

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

Question 18

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 19

All of the following statements about the tax treatment of life insurance purchased by an individual are true EXCEPT

Accepted Answer

A) The annual increase in the cash value is currently taxable. 
B) Premium payments are usually not tax deductible. 
C) Death benefits received in a lump sum are not taxable income. 
D) Policyowner dividends are not considered taxable income.

Question 20

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

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 may be variations in grades assigned by different rating organizations. II.They ignore factors such as profitability and quality of investments.

The gross premium is defined as

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

Mary is interested in comparing life insurance policies.Rather than looking at the cost per thousand,she would like to compare the rate of return earned on the savings portion of the policy.Which of the following would be of the most interest to Mary?

All of the following statements about the income tax treatment of individually-purchased life insurance are true EXCEPT

The gross premium for life insurance is equal to

Which of the following statements describes how the net payment cost index differs from the surrender cost index?

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?

Each of the following helps to reduce federal estate taxes EXCEPT

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

All of the following statements about the tax treatment of life insurance purchased by an individual are true 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?