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1. A beneficiary received $200,000 in proceeds from a Life Insurance policy. He selected a 20
   year fixed period payout at 5% interest and received annual payments of $12,500. How much
   of each payment will be excluded from tax:

    A.   None
    B.   $2,500
    C.   $10,000
    D.   $12,500

2. A client paid $20,000 in cash to buy a Single Premium Deferred Annuity, which after 10
   years has grown to $35,000. If he takes a partial distribution of $15,000, how will it be taxed:

    A.   No tax is due since the amount withdrawn is less that his cost basis
    B.   The entire distribution is taxable as ordinary income
    C.   The entire distribution is taxable as capital gain
    D.   The entire $35,000 is taxable since partial distributions are not allowed

3. A client paid $4,500 in premiums into a $50,000 Whole Life insurance policy. If he dies
   when his cash value is $5,000, how much will be taxable to the beneficiary:

    A.   None
    B.   $ 5,000
    C.   $45,500
    D.   $50,000

4. The Doctrine of Reasonable Expectations applies to what type of law:

    A.   Tort
    B.   Criminal
    C.   Contract
    D.   Corporate

5. The money that an insurer is required to set aside to honor future liabilities to customers is
   known as:

    A.   Retained equity
    B.   Net worth
    C.   Legal reserves
    D.   Capital surplus

                            Testeachers                             1
6. An insurer domiciled in another country, but doing business in this state, is know as a(n)
   _____________ company:

    A.   International
    B.   Foreign
    C.   Off shore
    D.   Alien

7. Recognizing hazards and exposures and making plans to avoid them is known as:

    A.   Risk classification
    B.   Risk management
    C.   Risk transfer
    D.   Risk avoidance

8. A peril is defined as a:

    A.   Risk
    B.   Exposure
    C.   Cause of loss
    D.   Uncertainty of loss

9. Which of the following is true about Variable Life insurance:

    A.   Insurers must determine the value of the separate account daily
    B.   The minimum death benefit is guaranteed
    C.   The cash value is guaranteed
    D.   The death benefit cannot increase above the minimum

10. When a policy owner adds a rider to a Life Insurance policy to cover all of his children, the
    premium is based upon:

    A.   The number of children
    B.   The health of the children
    C.   The ages of the children
    D.   A flat premium

11. Upon annutization of an annuity, proceeds are usually paid to the:

    A.   Beneficiary
    B.   Owner
    C.   Annuitant
    D.   Insured

12. When a corporation buys life insurance on their shareholders and names themselves as
    beneficiary, it is to:

    A.   Provide Group Life benefits to the shareholder's beneficiary
    B.   Provide Key Person benefits in the event a shareholder dies
    C.   Fund a buy/sell agreement
    D.   Fund an executive bonus

2                              Testeachers
13. All of the following are true about Adjustable Life insurance EXCEPT:

    A.   Both the premium and the amount of coverage may change
    B.   It is a type of Whole Life insurance
    C.   Adjusting the premium downwards will increase the cash value
    D.   Decreasing the face amount will cause the premium to go down

14. All of the following are true regarding Modified Endowment Contracts (MEC) EXCEPT:

    A. Cash surrender of the contract prior to age 59  may lead to taxes plus penalties
    B. Increasing the premium on an existing Whole Life policy could cause it to become a
    C. A decrease in the death benefit on an existing Whole Life policy could cause it to become
       a MEC
    D. Issuing an MEC is a violation of the state Insurance Code

15. Which of the following is eligible for an IRC Section 1035 exchange:

    A.   Variable annuity to life insurance
    B.   Fixed annuity to universal life
    C.   Endowment to universal life
    D.   Whole life to universal life

16. Which of the following is true regarding Variable Life insurance:

    A.   The death benefit and the face amount are always the same
    B.   The minimum face amount is guaranteed
    C.   The death benefit can vary above or below the face amount
    D.   The insured's premiums are invested in a general account

17. Straight Whole Life and Limited Pay Whole have all of the following in common EXCEPT:

    A.   Both reach maturity at age 100
    B.   The cash value equals the face amount at maturity
    C.   Both require premium payments as long as the insured lives
    D.   Both have level premiums

18. All of the following are true regarding Viatical Settlements EXCEPT:

    A.   Amounts received are taxable to the policy owner
    B.   They are done by clients who need to raise money to pay medical bills
    C.   The policy is sold at a discount
    D.   An absolute assignment of policy ownership is required

19. If an IRA participant dies before distributions begin and his spouse is his beneficiary:

    A.   All funds must be distributed within 5 years
    B.   Required minimum distributions must begin when participant would have been age 70 
    C.   The spouse can roll-over all funds to a new IRA
    D.   All funds must be distributed immediately

                            Testeachers                           3
20. Which of the following types of annuities will continue to make payments to a beneficiary
    after the annuitant has died:

    A.   Pure life
    B.   Period certain
    C.   Straight life
    D.   Life income

21. If not kept in force for a long period of time, which type of Life Insurance is most expensive:

    A.   Whole life
    B.   Decreasing term
    C.   Annual renewable term
    D.   Level term

22. When an annuitant dies before annuitizing the contract, his beneficiary will receive:

    A.   Nothing
    B.   The face amount of the policy
    C.   The premiums paid in
    D.   The value of the account

23. All of the following are true regarding Decreasing Term life insurance EXCEPT:

    A.   It is often used by financial institutions who write Credit Life for debtors
    B.   The face amount goes down over the term of the policy
    C.   The premium goes down as the coverage decreases
    D.   It is often used as Mortgage Protection coverage

24. All of the following are true about Life Insurance provisions EXCEPT:

    A.   The reinstatement provision applies after a policy lapses for non-payment
    B.   An absolute assignment is a change in the ownership of the policy
    C.   A revocable beneficiary may be changed at any time
    D.   Mutual insurers may pay dividends to stockholders

25. A mutual policyholder who wants to minimize his annual insurance cost should select which
    of the following dividend options:

    A.   Interest
    B.   1 year term
    C.   Paid-up additions
    D.   Apply to premium when due

4                           Testeachers
                      ANSWERS & RATIONALES

1. C Although life insurance proceeds are not subject to tax, the interest is. To find the tax
     free amount, divided $200,000 by 20 years, so $10,000 a year is tax free. Any amount
     received in excess of that amount is interest and is taxable as ordinary income.

2. B On annuity partial distributions, the first money out is the interest portion, which is this
     cased is $15,000, all of which is taxable as ordinary income. If the annuitant is under age
     59 , a 10% IRS premature distribution penalty could also apply.

3. A Proceeds payable to a Life Insurance beneficiary are never taxable.

4. C The Doctrine of Reasonable Expectations is closely associated with the Doctrine of
     Adhesion. Both doctrines state that any ambiguity in the policy (which is a contract) will
     be construed against the insurance company, since they wrote it. Tort law is also known
     as injury law.

5. C Insurance is regulated by state law. All states require that insurers have a prescribed
     amount of liquid assets (or legal reserves) on hand to honor their future liabilities to
     customers, such as Life Insurance death claims or cash surrenders. Insurers must file
     annual, audited financial statements to prove that they meet this requirement.

6. D Insurers may be domestic, foreign or alien, depending upon where they are incorporated
     (domiciled). An alien insurer is domiciled in a foreign country. A foreign insurer is
     domiciled in another state. A domestic insurer is domiciled in this state.

7. B Risk is defined as the chance of loss. An exposure is defined as a condition that could
     result in a loss. Risk classification is known as underwriting. Insurance is defined as the
     transfer of risk. Recognizing hazards and exposures and making plans to avoid them is
     known as risk management. Know your definitions!

8. C A peril is a cause of loss, such as death in Life Insurance, or accident or sickness in
     Health Insurance.

9. B Producers selling Variable Life need a state Life Insurance license and a federal
     Securities license. Although the cash value is not guaranteed, the minimum death benefit
     is, although the death benefit may increase above the minimum. Most insurers value the
     separate account on a quarterly basis.

10. D Most insurers offer a Children's Rider, which covers all of the insured's children up to a
      certain age for a flat fee, regardless of how many children there are or their health.
      Coverage usually ends at age 18 (or 21), at which time the child may convert their
      coverage to an individual Whole Life policy without evidence of insurability.

                          Testeachers                             5
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