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Exam 13: Buying Life Insurance

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Question 21

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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?

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

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Question 22

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

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.

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Question 23

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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

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.

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?

The gross premium for life insurance is equal to

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 net payment cost of this policy,per thousand per year,over the first 10 years the policy is in force?

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

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.

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 (are) 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.

Which of the following statements about the traditional net cost method of measuring the cost of life insurance is (are) true? I.The traditional net cost method does not consider the time value of money. II.The traditional net cost method can show that life insurance has a negative cost.

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 deterring the cost of life insurance is

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.

The first step in "shopping for life insurance" is to

The gross premium is defined as

Each of the following helps to reduce federal estate taxes EXCEPT

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

Lynn calculated the future value of the first twenty premiums she will pay under her nonparticipating whole life insurance policy.Then she subtracted the cash value after 20 years.Next,she divided this value by the future value annuity due factor for 20 years to arrive at an annual cost of insurance.Finally,she divided the annual cost by the number of thousands of dollars of life insurance purchased to arrive at the cost per thousand per year.Lynn calculated the

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.