Question 1

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 not tax deductible. 
C)  Death benefits received in a lump sum are not taxable income. 
D)  Policyowner dividends are not considered taxable income.

Question 2

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 3

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 4

According the 2001 CSO mortality table, the yearly probability of dying for a 40 year-old man is .00165. The present value of $1 one year from today, assuming a 5.5 percent interest rate, is .9479. What is the net single premium per $1,000 for a one-year term insurance policy sold to a man at age 40 assuming a 5.5 percent interest rate? Assume the premium is paid at the start of the year and the death benefit is paid at the end of the year.

Accepted Answer

A)  $1.56 
B)  $2.45 
C)  $7.18 
D)  $952.81

Question 5

Which of the following statements about the surrender cost index for measuring the cost of life insurance is true?

Accepted Answer

A)  It is based on the assumption that the policy will be in force indefinitely. 
B)  It takes into account the settlement options available in the policy. 
C)  It does not consider the cash value in the policy. 
D)  It takes the amount and timing of each dividend into consideration.

Question 6

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 7

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 8

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 9

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 10

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 11

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 12

Consumer experts typically recommend all of the following rules when buying life insurance EXCEPT

Accepted Answer

A)  Consider the financial strength of the insurer. 
B)  Deal with a competent agent. 
C)  Ignore all factors other than cost. 
D)  Shop around for a low-cost policy.

Question 13

Carl and Carol Williams, a married couple, are doing some estate planning. Upon his death, Carl plans to leave $1,000,000 in property to his wife. This amount will reduce the value of Carl's gross estate and will be taxed later when Carol dies. This reduction of the gross estate is called the

Accepted Answer

A)  unified tax credit. 
B)  taxable estate. 
C)  capital gains deduction. 
D)  marital deduction.

Question 14

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 15

To level a net single premium (NSP), the NSP is divided by

Accepted Answer

A)  the maximum number of years the premium could be paid. 
B)  the ordinary life annuity factor for the premium payment period. 
C)  the present value of a life annuity due of $1 for the premium payment period. 
D)  the deferred life annuity factor for the premium payment period.

Question 16

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 traditional net cost per thousand per year of David's policy over the 20-year period?

Accepted Answer

A)  -$1.52 
B)  -$2.64 
C)  $5.17 
D)  $9.75

Question 17

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 18

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 19

ABC Life Insurance Company is offering a new product. The product is a two-year term insurance policy funded by a single premium at the start of the first year. Death claims are paid at the end of the year in which death occurs. A portion of the appropriate mortality table is shown below. The first number is age, the second is the number alive at the start of the year, and the last number is the number dying during the year.
399,693,53914,928
409,678,61115,970
Using a 5.5 percent interest rate, the present value of $1 one year from today is .9479, and the present value of $1 two years from today is .8985. Assuming a 5.5 percent interest rate, what is the net single premium for a $1,000 two-year term policy issued at age 39?

Accepted Answer

A)  $1.49 
B)  $2.94 
C)  $5.67 
D)  $12.83

Question 20

A factor that can be ignored when determining the cost of life insurance is

Accepted Answer

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

Exam 13: Buying Life Insurance

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

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

Which of the following statements about the surrender cost index for measuring the cost of life insurance is true?

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

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

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?

Consumer experts typically recommend all of the following rules when buying life insurance EXCEPT

Carl and Carol Williams, a married couple, are doing some estate planning. Upon his death, Carl plans to leave $1,000,000 in property to his wife. This amount will reduce the value of Carl's gross estate and will be taxed later when Carol dies. This reduction of the gross estate is called the

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

To level a net single premium (NSP) , the NSP is divided by

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?

A factor that can be ignored when determining the cost of life insurance is