State: Ohio | Category: Life Insurance | All tests in this Category:
Practice Test 1 Practice Test 21. Nonqualified annuity funds are contributed with after-tax dollars. Which portion of each distribution is NOT taxed?
The return of the investment in the contract (cost basis) is not taxed; the earnings portion is taxed as ordinary income.
2. Which doctrine prevents a party from denying or asserting a claim after it has misrepresented facts or delayed action, based on prior conduct or representations?
The estoppel doctrine prevents a party from taking a position contrary to its prior conduct or statements if others relied on them.
3. How is the exclusion ratio generally calculated for a nonqualified annuity?
Exclusion ratio = investment in contract / expected return. The 'expected return' is the anticipated amount to be returned over the life of the contract.
4. Distributions from a qualified annuity (funded with pre-tax dollars) are generally taxed as?
Qualified annuity distributions are taxed as ordinary income because contributions were made with pre-tax dollars.
5. The Government Pension Offset (GPO) reduces Social Security spousal or survivor benefits by what amount related to the government pension?
GPO reduces Social Security spousal or survivor benefits by two-thirds of the government pension amount for individuals receiving a government pension from non-covered work.
6. Which statement best describes the liquidity purpose of life insurance in estate planning for a business owner?
Life insurance can provide liquidity to cover estate taxes and buy out the business owner's stake so the business can continue without forced sales.
7. Which is the typical grace period length for life insurance premiums in most jurisdictions?
Most jurisdictions require a minimum grace period of 30 days for premium payments, allowing time to make the payment without lapse.
8. The premium is:
Premium is the price for the policy coverage paid by the insured or policyowner.
9. Which principle allows insurers to predict losses more accurately by pooling many similar exposures?
The law of large numbers states that as the sample size grows, the actual results approach the expected results, improving predictability of losses for pricing and reserves.
10. Which statement about survivor benefits is true?
A surviving spouse can receive up to 100% of the deceased worker's benefit if they wait until their own FRA; claiming earlier typically results in a reduced amount.
11. Under the state's contract law, the principle of utmost good faith (uberrimae fidei) requires which of the following?
Utmost good faith requires full and honest disclosure of all material facts by both parties to ensure a fair contract and informed underwriting decisions.
12. Which tax treatment generally applies to employer-paid group term life insurance death benefits?
Death benefits from group term life insurance are generally paid to beneficiaries tax-free; the imputed income rule may apply to the employee for coverage above certain limits.
13. A policy illustration is typically used to show:
Policy illustrations display non-guaranteed elements like dividends or rate projections where applicable; actual results may differ.
14. Which of the following would be considered false advertising by an insurer under ORC 3901.21?
Advertising a policy with false or deceptive claims, such as guaranteed issue when it isn’t, constitutes false advertising and is prohibited.
15. Premium payments are typically applied to which premium due first?
Premiums are normally allocated to the oldest due premium first to satisfy outstanding obligations and prevent compounding overdue amounts.
16. Which of the following statements is true about the tax treatment of life insurance premiums when used to fund a buy-sell agreement?
Typically, premiums paid by a business for life insurance on the lives of owners under a buy-sell are not deductible as a business expense.
17. Which settlement option provides guaranteed income for life to the beneficiary?
The life income option provides payments for the beneficiary's lifetime, often with or without a guaranteed period.
18. At the end of the grace period, if the premium remains unpaid, what usually happens to the policy?
If the premium is not paid by the end of the grace period, the policy typically lapses according to the policy terms.
19. During the contestability period, misstatements of age or sex discovered can lead to which of the following?
Most policies have a contestability period (commonly two years); misstatements found can lead to rescission or adjustment of benefits.
20. An underwriting class is best described as:
An underwriting class determines the premium rate category (e.g., standard, preferred, substandard) assigned to the applicant.
21. Which factor directly affects life insurance premiums due to mortality risk and is commonly used in underwriting classifications?
Smoking status is a well-established factor that materially increases mortality risk and premium costs in underwriting.
22. Death benefits paid to a beneficiary are generally tax-free, with exceptions such as transfers of value.
In most cases, life insurance death benefits are income-tax-free to the beneficiary; exceptions include transfers of value (e.g., sale of the policy).
23. Which characteristic makes life insurance a practical tool for funding a buyout in a closely held business?
Life insurance provides a liquid source of funds (cash value or death benefit) to fund a buyout, enabling the remaining owners to purchase shares.
24. If a critical illness policy lapses and is later reinstated, what is commonly required?
Lapsed policies may be reinstated, but typical terms require evidence of insurability and payment of any back premiums; a new waiting period may apply.