The automatic premium loan provision authorizes an insurer to withdraw from a policy cash value

Under the policy loan provision, a permanent life insurance policy may be borrowed against, using the policy's cash value as collateral. The cash value can also be pledged as security to obtain loans from other sources. However, if the insured dies before the loan is repaid, the loan amount and any interest due must be repaid from the death benefit proceeds.

Florida law restricts an insurance company from charging a fixed rate higher than 10% annually. Older policies still in force stipulate a flat rate of interest, such as 5-8%. Alternatively for newer policies, insurance companies can use an adjustable rate of interest with the limit based on the average monthly published interest rate determined by Moody's corporate bond index.

Automatic Premium Loan Provision

The automatic loan provision enables the insurer to withdraw funds from the policy if any cash value has accumulated within the contract - to pay for any premiums that may not be paid by the policyowner. The amount withdrawn becomes a loan against the cash value and is subject to the interest rate specified within the contract.

How long is the loan period on STOLI arrangements? Select one: a. 1 year b. 2 years c. 3 years d. 4 years

The loan period is typically 2 years on STOLI arrangements.
The correct answer is: 2 years

The applicant's statements in the application are considered ______________ and not _____________, unless fraudulent.

Select one: a. representations; warranties b. warranties; representations c. absolute truth; the insured's best knowledge d. fraud; warranties

The applicant's statements in the application are considered representations and not warranties, unless fraudulent.

The correct answer is: representations; warranties

The ____________ clause states that the insurance coverage is in place on application and the payment of the first premium.

Select one: a. Payment of premium b. Insuring c. Consideration d. Applicant control

The consideration clause grants coverage when the application has been made and the first premium paid.

The correct answer is: Consideration

All of the following are part of the entire contract provision, EXCEPT:

Select one: a. States that the insurer's promise to pay benefits is contingent upon the policyowner's premium payments b. States who can make changes to the contract c. Policy d. Application

The insurer's promise to pay benefits in exchange for the policyowner's premium payments is part of the consideration clause.

The correct answer is: States that the insurer's promise to pay benefits is contingent upon the policyowner's premium payments

Which of the following provisions is not optional?

Select one: a. Suicide clause b. Misstatement of age clause c. Hazardous occupation clause d. Aviation clause

The misstatement of age clause is a required provision which is intended to benefit the policyowner.

The correct answer is: Misstatement of age clause

If no beneficiary is named in the insuring clause of a life policy, what happens to the benefit proceeds?

Select one: a. The proceeds go to the next of kin. b. The proceeds go to the children of the insured. c. The proceeds go to the parents of the insured. d. The proceeds go to the estate of the insured.

If no beneficiary is designated on a life policy, the proceeds go to the insured's estate.

The correct answer is: The proceeds go to the estate of the insured.

Hank wants to understand his rights as the owner of a life insurance policy. All of the following are rights under the owners' rights provision, EXCEPT:

Select one: a. Changing the beneficiary b. Assigning rights to another party c. Choice of premium payment mode d. Changing the grace period

Changing the grace period on a policy is not an owners' right.

The correct answer is: Changing the grace period

What part of the insurance contract contains the insurer's consideration?

Select one: a. Consideration clause b. Insuring clause c. Payment of claims d. Execution clause

The insuring clause contains the insurer's promise to pay benefits in the event of a covered loss. The consideration clause states that a policyowner must pay premium in exchange for the insurer's promise to pay benefits.

The correct answer is: Insuring clause

Barney dies during the grace period of a life insurance policy. The insurer will:

Select one: a. Void the policy b. Pay half the death benefit c. Pay the full death benefit d. Pay the death benefit minus the overdue premium

Coverage is still in force during the grace period. The insurer will deduct the overdue premium from the death benefit if the insured dies during the grace period.

The correct answer is: Pay the death benefit minus the overdue premium

Which of the following policies allows partial withdrawals or surrenders?

Select one: a. Modified whole life b. Variable universal c. Variable d. Adjustable

Universal life policies (including variable universal) allow policyowners to take partial withdrawals or surrenders.

The correct answer is: Variable universal

Which type of assignment is partial and temporary?

Select one: a. Absolute b. Collateral c. Involuntary d. None

A collateral assignment is a partial and temporary transfer of ownership rights and is usually used for securing a loan.

The correct answer is: Collateral

Once a life insurance policy has been in force for two years, the incontestable clause prevents the insurer from denying a claim or canceling the policy for anything other than nonpayment of premiums. Which of the following is NOT a reason for voiding a policy during the contestable period?

Select one: a. Misstatement of age b. Hiding a life-threatening medical condition c. Not divulging drug use d. Neglecting to provide information on medical treatment(s) received

Misstatement of age is not a reason to void a policy. The policy can be rewritten to reflect the premium for the correct age.

The correct answer is: Misstatement of age

The entire contract clause of a life policy provides all of the following, EXCEPT:

Select one: a. A copy of the insured's application b. Approved riders and endorsements c. A copy of the basic policy d. Permission for producer to make changes to the policy

The entire contract clause prevents the producer and the policyholder from amending the policy.

The correct answer is: Permission for producer to make changes to the policy

The automatic premium loan provision is best described by the following:

Select one: a. Cancels the death benefit b. Uses the cash value to pay unpaid premiums, thereby keeping the policy in force c. Surrenders the policy for its cash value d. Automatically pays policy premiums

The automatic premium loan provision uses the policy's cash value to pay premiums so the policy does not lapse due to nonpayment of premiums.

The correct answer is: Uses the cash value to pay unpaid premiums, thereby keeping the policy in force

All of the following statements are true regarding the APL provision in a life insurance policy, EXCEPT:

Select one: a. APL stands for automatic premium loan. b. The APL provision allows the insurer to automatically use policy cash value to pay an overdue premium. c. The APL provision prevents policies from unintended lapse caused by nonpayment of premium. d. The APL is unlike other policy loans, and if not repaid, it will not reduce the death benefit by the amount of the premium loan with interest.

An APL is like any other policy loan, and if not repaid will reduce the death benefit by the amount of the premium loan with interest.

The correct answer is: The APL is unlike other policy loans, and if not repaid, it will not reduce the death benefit by the amount of the premium loan with interest.

Paul buys a $50,000 whole life insurance policy. After some time, he has $20,000 cash value in the policy. The interest rate on his policy is 7%. Paul decides to take out a policy loan in the amount of $10,000 on January 1, and decides to prepay the interest that would be due on the loan. That year he does not repay the loan. If Paul dies on December 31 of that year, what is the most his beneficiary will receive?

Select one: a. $30,000 b. $39,300 c. $40,000 d. $50,000

The most Paul's beneficiary will receive is the face amount minus the policy loan (interest is not deducted because Paul prepaid the interest for the year).

The correct answer is: $40,000

Transfer of ownership rights from one person to another is described by the:

Select one: a. Entire contract b. Reinstatement c. Nonforfeiture benefits d. Assignment clause

The assignment clause specifies the policyowner's right to transfer ownership rights from one person to another.

The correct answer is: Assignment clause

Which of the following does NOT happen if an insured dies during the grace period of a policy?

Select one: a. The face amount of the policy is paid to the beneficiary. b. The overdue premium is deducted from the paid benefit. c. Any interest due on the overdue premium is deducted from the benefit. d. The insurance company is relieved of any responsibility to pay a benefit.

The insurance company is NOT relieved of the responsibility to pay a benefit in the event the insured dies during the grace period.

The correct answer is: The insurance company is relieved of any responsibility to pay a benefit.

A policyholder has the right to examine the policy purchased. If the policy owner returns the policy to the insurer within the specified time, to be cancelled, he/she can expect:

Select one: a. A pro-rated refund b. No refund c. A one month refund d. A full refund

The policyholder can expect a full refund if the policy is returned within the specified time.

The correct answer is: A full refund

Dianne's life policy lapsed due to unpaid premiums. Which of the following statements is not true about conditions to reinstate a policy?

Select one: a. The policyowner must provide proof of insurability. b. Back premiums must be paid. c. The policy has not been expired for more than 1 year. d. Policy loans and interest must be repaid.

Most states allow reinstatement up to three (3) years after the lapse of a policy.

The correct answer is: The policy has not been expired for more than 1 year.

Why are STOLI arrangements ethical dilemmas?

Select one: a. Because the insured receives a lump-sum payment from a third party when the policy is sold to the stranger/investor b. Because the investor/stranger does not have an insurable interest in the insured c. Because life insurance cannot be sold to third parties d. All of the above

STOLI and IOLI arrangements are ethical dilemmas because the investor or stranger does not have insurable interest in the continued life and well being of the insured. They want the insured to die very soon, so that they will receive the policy death benefits. Often times, once the policy has been sold to a stranger/investor, the insured will be contacted several times a year to see if he/she has died.

The correct answer is: Because the investor/stranger does not have an insurable interest in the insured

What is the primary purpose of the entire contract provision in a life insurance policy?

Select one: a. Provide specifics on when the premium are due b. Provide specifics on how premiums are paid c. Provide assurance that the policyholder has all necessary policy documents in their possession d. Provide details of policy loan provision

The primary purpose of the entire contract clause is to make sure that the policyholder has all documents pertaining to the policy in their possession.

The correct answer is: Provide assurance that the policyholder has all necessary policy documents in their possession

Withdrawals or partial surrenders can be made on the cash value of a universal life policy. Which of the following is specified in the policy?

Select one: a. Timing on repaying the withdrawal b. The amount of tax on the withdrawal, if it is over basis c. How much can be withdrawn d. How to convert the withdrawal to a loan

The policy will specify how much can be withdrawn, at what frequency the withdrawals can be made, and the service charges applicable to the withdrawal. There is no presumption that the withdrawal will be repaid.

The correct answer is: How much can be withdrawn

Which provision prevents the insurer from making changes to a contract by citing documents not included in the policy itself?
Select one: a. Entire Contract provision b. Free Look provision c. Reinstatment provision d. Incontestability clause / provision

The Entire Contract provision states: The insurance policy itself (including any riders and endorsements/amendments) and the application, if attached to the policy, comprise the entire contract between all parties. This prevents the insurer from making changes by using anything not included in the policy.
The correct answer is: Entire Contract provision

When Dakota's life insurance policy was written, it stated on the policy that Dakota was male. However, Dakota is female. On average, women tend to live several years longer than men. When Dakota died this misstatement was discovered. How did this impact the policy?
Select one: a. The death benefit was lowered. b. The premium was lowered. c. The death benefit was increased. d. The premium was increased.

On average, women tend to live several years longer than men. This is why life insurance premium rates tend to be lower for women. The death benefit would be increased.
The correct answer is: The death benefit was increased.

If a policy loan is unpaid, the automatic premium loan provision has the effect of deducting the amount of the loan with interest from the death benefit. What should the policyowner do to avoid this reduction in the death benefit?

Select one: a. Nothing b. Supply the insurance company with proof of insurability c. Repay the loan d. Repay the loan with interest

To prevent the death benefit from being reduced, all outstanding loans plus interest must be repaid.

The correct answer is: Repay the loan with interest

Julie applies for a health insurance policy. Her consideration consists of:

Select one: a. Application b. Initial premium c. Statements made on the application and initial premium d. Statements made on the application and promise to pay premiums

The applicant's consideration consists of the statements made on the application to the best of the applicant's knowledge, and the applicant's initial premium.

The correct answer is: Statements made on the application and initial premium

This provision identifies the named insured, type, and amount of coverage provided by the policy:

Select one: a. Insuring clause b. Execution clause c. Consideration clause d. Policy face

The insuring clause is found on the policy face (title page). It contains the insurer's basic promise to pay benefits. The insuring clause names the individuals covered by the policy, the policy effective date, and period of coverage.

The correct answer is: Insuring clause

Marcella purchases a modified life insurance policy at the age of 31. Thinking she could get a slightly better rate on her policy, she lists her age as 21. If the insurance company discovers the error upon Marcella's death, what action will the insurance company take?

Select one: a. Pay the full death benefit b. Refund the premiums paid without interest c. Void the policy for misrepresentation and fraud d. Pay the death benefit based on Marcella's actual age

The insurance company will pay the death benefit, but it will be reduced based on what the premium should have been with Marcella's correct age. Take note: even an intentional misstatement of age is not considered material enough to void the policy.

The correct answer is: Pay the death benefit based on Marcella's actual age

Of the following individuals, who has the right to change the beneficiary designations in a life insurance policy?

Select one: a. The insured b. The policyowner c. The revocable beneficiary d. The insurance company

The policyowner has all rights of ownership, including changing the beneficiary designations in a life insurance policy.

The correct answer is: The policyowner

Gerry forgets to pay his life insurance premium, and the policy lapses. If he is within the reinstatement period and decides to reinstate his policy, he will be required to take all of the following actions, EXCEPT:

Select one: a. Pay all past-due premiums b. Pay any back-due interest on an outstanding policy loan c. Provide proof of evidence of insurability d. Surrender or cancel the policy within 10 years of the reinstatement date

When the insured reinstates a life insurance policy, all of the following must be done: 1.) Pay all past-due premiums; 2.) Pay any back-due interest on outstanding policy loans; and 3.) provide proof of insurability.

The correct answer is: Surrender or cancel the policy within 10 years of the reinstatement date

Which clause states that the policy owner must pay something of value for the insurer's promise to pay benefits?
Select one: a. Insuring clause b. Consideration clause c. Entire Contract clause d. Reinstatement clause

The consideration clause states that a policyowner must pay a premium in exchange for the insurer’s promise to pay benefits.
The correct answer is: Consideration clause

Jennifer is trying to add her insurance premium payments to her budget. All of the following are accepted payment mode options, EXCEPT:
Select one: a. Monthly b. Quarterly c. Annually d. When she feels like it

When she feels like it is not a payment option for life insurance policies.
The correct answer is: When she feels like it

All of the following are ownership rights, EXCEPT:

Select one: a. Right to name a beneficiary b. Right to take out a policy loan c. Right to make changes to the policy d. Right of assignment

Only an authorized officer of the insurer can make changes to the policy; however, a policyowner can request a policy change.

The correct answer is: Right to make changes to the policy

The stipulated period of time, allotted by the insurance company, to allow a policyholder to make an overdue payment while the policy remains in force and coverage is provided is called the _____________.

Select one: a. Reinstatement clause b. Grace period c. Loan provision d. Consideration clause

The grace period is a stipulated period of time that policyowners are allotted to pay overdue premiums.

The correct answer is: Grace period

Which of the following best describes the automatic premium loan provision of a life insurance policy?

Select one: a. The insurer will automatically use the policy cash value to pay an overdue premium. b. Withdrawals or partial surrenders of policy cash value can be made; the policy specifies how much can be withdrawn and at what frequency. c. A policy loan in an amount up to the current cash value, less any existing indebtedness may be made. d. Modifications to the policy must be made by an authorized officer of the insurer and attached to the policy.

The automatic premium loan provision permits the insurer to automatically use the policy cash value to pay an overdue premium.

The correct answer is: The insurer will automatically use the policy cash value to pay an overdue premium.

In most states, the period of contestability for material misrepresentations made on a life insurance application is:

Select one: a. 10 days b. 90 days c. 2 years d. 3 years

In most states, the incontestable clause is a 2-year period. From the date of application, the insurer has 2 years to contest any material misrepresentations made on the application.

The correct answer is: 2 years

James is past due on his life insurance premium by 5 days. His policy has a 30 day grace period. If James dies on day 15 of his grace period, what would the beneficiary receive?
Select one: a. The full face amount, minus any past due premium b. A refund of past premiums c. The full face amount d. Nothing since James' premiums are past due

The beneficiary would receive the full face amount, minus any past due premium.
The correct answer is: The full face amount, minus any past due premium

Gail has no children and has decided to make a gift of her life insurance to her alma mater. This type of assignment is voluntary and also usually absolute and complete. Specifics of this type of assignment include:

Select one: a. All the rights of the policy are assigned. b. The assignee has the right to use the cash value of the policy. c. The policyowner cannot recover surrendered rights. d. All of the above

With this type of assignment, all rights are assigned, the assignee can use the cash value and the assignment is usually permanent.

The correct answer is: All of the above

The insuring clause of a policy includes all of the following, EXCEPT:

Select one: a. The names of covered individuals b. The amount of the policy premium c. The effective date of the policy d. The period of coverage of the policy

The amount of the policy premium is not part of the insuring clause.

The correct answer is: The amount of the policy premium

Megan dies during the grace period. What will the insurance company do?

Select one: a. Pay the full death benefit b. Pay the death benefit, but deduct the premium due c. Require Megan's beneficiary to pay the overdue premium and then pay the full death benefit d. Void the policy

Coverage is still in force during the grace period. The insurer will deduct the overdue premium from the death benefit if the insured dies during the grace period.

The correct answer is: Pay the death benefit, but deduct the premium due

When Julie is choosing a payment option for her life insurance premium, which of the following is NOT normally an option?

Select one: a. Bank draft b. Weekly c. Semiannually d. Cash

Weekly is not normally a payment option.

The correct answer is: Weekly

This type of assignment is voluntary and involves a voluntary transfer of all ownership rights of a life insurance policy to another party.

Select one: a. Partial b. Absolute c. Collateral d. Conditional

An absolute assignment is a voluntary assignment of all ownership rights to another person or entity.

The correct answer is: Absolute

Which of the following best describes the automatic premium loan provision?

Select one: a. Keeps the policy in force by using the policy cash value to pay unpaid premiums b. Draws from the death benefit to pay premiums c. Pays the policy premiums d. It is a policy surrender.

The automatic premium loan provision uses the policy's cash value to pay premiums so the policy does not lapse due to nonpayment of premiums.

The correct answer is: Keeps the policy in force by using the policy cash value to pay unpaid premiums

Which of the following is not part of the entire contract provision in a life insurance policy?

Select one: a. Insurance policy b. Insurance application c. What individuals are permitted to make changes to the policy d. The insurer's promise to pay benefits contingent on premium payments

The insurer's promise to pay benefits in exchange for the policyowner's premium payments is part of the consideration clause.

The correct answer is: The insurer's promise to pay benefits contingent on premium payments

Richard's agent delivered his new life insurance policy to him for a free look. The free look provision may vary from state to state and for the type of policy. What is the minimum amount of time allowed for a free look on a newly issued life insurance policy?

Select one: a. 5 days b. 10 days c. 20 days d. 30 days

The minimum free look for a newly issued life insurance policy is 10 days.

The correct answer is: 10 days

Which of the following best describes what a policyowner must do to reinstate a lapsed life insurance policy?

Select one: a. Call the insurer and request to reinstate the policy b. Pay the back due premiums c. Provide proof of insurability and pay all back due premiums within two years d. Pay all back due premiums with interest and provide proof of insurability

The policyowner must pay all overdue premiums including interest and provide proof of insurability to reinstate a lapsed life insurance policy.

The correct answer is: Pay all back due premiums with interest and provide proof of insurability

If a life insurance policy lapses, it can be reinstated if which of the following conditions is met?

Select one: a. Not more than three (3) years have elapsed b. Back premiums have been paid c. Proof of insurability is provided d. All of the above

All of the conditions are required to reinstate a policy.

The correct answer is: All of the above

Helen was trying to quit smoking, so when she filled out her life insurance application, she listed herself as a nonsmoker. What will happen if the insurer discovers that she is still smoking one year after the policy was written?

Select one: a. The policy is rewritten to take into account the smoking risk. b. The policy is voided. c. The policy is forwarded to a company that assumes risk for smokers. d. None of the above

Misstatement of smoking status will result in the coverage immediately being voided.

The correct answer is: The policy is voided.

Which of the following best describes the cash loan provision in a life insurance policy?

Select one: a. The insurer will automatically use the policy cash value to pay an overdue premium. b. Withdrawals or partial surrenders of policy cash value can be made; the policy specifies how much can be withdrawn and at what frequency. c. A policy loan in an amount up to the current cash value, less any existing indebtedness, may be made. d. Modifications to the policy must be made by an authorized officer of the insurer and attached to the policy.

The cash loan provision states that policyowners can make a policy loan in an amount up to the current cash value, less any existing indebtedness (prior loans with interest). Policy loans need not be repaid, in which case the amount of the outstanding loan with interest would be deducted from the death benefit upon the insured's death.

The correct answer is: A policy loan in an amount up to the current cash value, less any existing indebtedness, may be made.

The transfer of some or all of a policyowner's legal rights to another party is called an assignment. Which of the following is NOT a type of assignment utilized to transfer rights?

Select one: a. Beneficiaries_ assignment b. Absolute assignment c. Collateral assignment d. Total unconditional assignment

There is no assignment designated as total unconditional. This does not even exist.

The correct answer is: Total unconditional assignment

A policyholder can request an automatic premium loan (APL) provision on their cash value life policy to protect against an unintended lapse in coverage due to nonpayment of premium. All of the following are true statements regarding the automatic premium loan provision, EXCEPT:

Select one: a. The automatic premium loan does not reduce the death benefit of the policy. b. The policyholder must initiate the request for the provision. c. Only policies that build cash value qualify for the APL provision. d. If the APL is automatic and the cash value falls to zero, the policy will lapse.

The automatic premium loan DOES reduce the death benefit of the policy if the loan is not repaid.

The correct answer is: The automatic premium loan does not reduce the death benefit of the policy.

IOLI is a:

Select one: a. STOLI b. HIPAA c. MEC d. All of the above

Investor-originated life insurance (IOLI) is a type of STOLI. With IOLI, investors solicit elderly people to purchase life insurance, and an agent or broker agrees to loan insureds money to pay the premiums for a period of time, with the agreement that after two years in paying premiums the investors become the policyowners, and receive the policy death benefits upon the insured's death.
The correct answer is: STOLI

Who of the following can be the owner of a life insurance policy?

Select one: a. Applicant b. Insured c. Premium payor d. All of the above

The owner of a policy is usually the applicant or insured, but can also be the premium payor. Premium Payor is the person paying the premium.

The correct answer is: All of the above

Mark understands that the _________ is not an ownership right for a life insurance policy.

Select one: a. Right to request a change on the policy b. Right to assign the policy c. Right to take out a policy loan d. Right to make a policy change

Only an authorized officer of the insurer can make changes to the policy; however, a policyowner can request a policy change.

The correct answer is: Right to make a policy change

Annie was a beneficiary on her aunt's life policy. After Annie's aunt died, the insurer discovered that her aunt's age had been misstated on the original life insurance application. The aunt was actually 5 years older than what was stated on the policy. What affect does this have on the policy benefits?

Select one: a. The death benefit would be lowered. b. The premium would be lowered. c. The death benefit would be increased. d. The premium would be increased.

Because Annie's aunt was actually 5 years older than the age stated on the policy, the amount of the death benefit would be lowered.

The correct answer is: The death benefit would be lowered.

Judith unintentionally misstates her age on her policy application. The insurer discovers the mistake 15 years later, while Judith is still alive. What will the insurer do?

Select one: a. Void the policy because Judith made a material misrepresentation in her application b. Adjust the premium to the correct amount for Judith's correct age c. Adjust the death benefit to reflect Judith's correct age for the amount of premiums paid into the policy d. Nothing

Since Judith is still living, the insurer will adjust her premiums.

The correct answer is: Adjust the premium to the correct amount for Judith's correct age

Per specifications in the entire contract clause, who can amend the life policy?

Select one: a. Authorized representative of the beneficiary b. Authorized officer of the insurer c. Authorized representative of the product d. None of the above

Only an authorized officer of the insurance company can amend a policy.

The correct answer is: Authorized officer of the insurer

Which of the following best describes the incontestable clause?

Select one: a. Allows the insurer to adjust the premiums or policy benefits b. States the rights of the policyowner c. Limits the time period the insurer can dispute the applicant's statements on the application d. Contains the insurer's basic promise to pay benefits

The incontestable clause allows the insurer to challenge the statements made in the application for a limited period of time, usually two years.

Insuring clause is the insurer;s basic promise to pay the benefits.

The correct answer is: Limits the time period the insurer can dispute the applicant's statements on the application

The insuring clause is best described as:

Select one: a. The insurance company's promise to pay benefits b. The beneficiary's right to obtain policy ownership c. The insurance company's right to deny a claim d. The insured's right to double benefits

The insuring clause contains the insurer's basic promise to pay benefits.

The correct answer is: The insurance company's promise to pay benefits

Which provision allows an insurer to borrow from the cash value?

What happens if a loan taken out against the cash value of a life insurance policy is not repaid before the insured's death?

What is the loan provision in life insurance policies?

Which one of the following statements best describes the automatic premium loan provisions?