Test Your Insurance Knowledge

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Insurance Knowledge Quiz

1. Life insurance can be used only to provide income for surviving dependent family members.




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Life insurance has many uses. In addition to protecting the needs of your family, life insurance can be used to pay federal and state death taxes and other estate settlement costs, protect businesses from the loss of a key employee, pay off loans, provide education funds, equalize inheritances, benefit a charity, create an estate, supplement a retirement fund and more.

2. In general, life insurance death proceeds are not subject to income taxation.




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The recipient of life insurance proceeds payable upon the death of the insured will generally receive those proceeds income tax free. This favorable tax treatment also applies if the proceeds are paid to the estate of the insured or to a corporation or partnership.

3. Term life insurance is an excellent vehicle for providing short-term coverage.




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Term life insurance is often the best alternative for temporary life insurance needs. A term policy pays benefits only if the insured dies during a specified period of time. This type of policy typically does not build up any cash values.

4. The single most important distinction between variable life and traditional whole life is the shifting of the investment risk from the insurer to the policyowner.




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Variable life insurance gives the consumer more control over policy values through a variety of funding options. A principal advantage of this type of insurance is the potential of improved product performance through allocation of a portion of the cash value to equity investments.

5. For life long insurance protection, a permanent life insurance policy would likely be the best choice.




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A permanent life insurance policy provides an immediate estate upon the death of the insured. The policyholder agrees to pay a fixed or level premium at regular intervals throughout the life of the insured.

6. Typically, a policyowner has the power to change the beneficiary or beneficiaries while a life insurance policy is in force.




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Virtually all life insurance policies contain a provision granting the policyowner the power to change the beneficiary or beneficiaries while the policy is in force. However, if an irrevocable designation had been made, then a change of beneficiary could only be made if the named beneficiary consents.

7. The cash value growth within a life insurance policy is taxed each year.




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The cash value growth in a life insurance policy generally enjoys deferral of taxation while the policy remains in force. If the entire life insurance policy is surrendered for its cash value, the difference between the gross cash value and the basis in the policy, is generally subject to income tax.

8. Most deferred annuity contracts impose a surrender charge if monies are removed from the contract by either full or partial surrender within a certain number of years from the date of purchase.




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A surrender charge is typically imposed on early withdrawals. As an example, an annuity contract may impose a surrender charge of 7% of the amount surrendered during the first contract year, 6% during the second year, 5% in the third year and so on until reaching zero in the eighth year. Surrender charges are one reason why annuity contracts should be viewed as long-term purchases.

9. Cost indexes are used to compare the costs of similar life insurance policies.




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The two most common types of cost indexes used to compare the costs of similar life insurance policies are the surrender cost index and the net payment cost index. If the level of cash values is an important decision making factor, you would want to compare the surrender cost indexes of similar life insurance policies. The net payment cost index should be referenced if your main concern is the benefits that are to be paid upon your death.

10. When selecting a life insurance policy, ratings tell the whole story about a life insurance company.




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While company ratings can help you to compare the relative strengths of each insurance company under consideration, bear in mind that these ratings do not reveal which companies provide the best returns, tell how good their products are, guarantee their financial strength or security, or offer comment on the quality and level of service provided. Please note, however, that rating agencies, such as A.M. Best, have instituted programs designed to help consumers more easily determine company strength. These agencies award their own versions of a strength symbol to life insurance companies they feel are financially sound.

11. An employee typically is not taxed on the premiums paid by the employer under a group term life insurance plan, unless the amount of coverage exceeds $50,000.




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Many employers offer group life insurance as part of their employee benefit packages. An employee is not taxed on the premiums paid by the employer under a group life insurance plan that meets the requirements of IRC Section 79, unless the amount of coverage exceeds $50,000. If the face amount exceeds $50,000, the employer must compute the cost of the additional protection and notify the employee of the amount to include as taxable income. It is important to note that group life insurance is viewed as an attractive employee benefit, however, the amount of insurance that can be acquired is typically limited and may not be a sufficient source to meet your life insurance needs.

12. When an employee with group life insurance coverage is temporarily laid off or granted a leave of absence, the life insurance contract is immediately terminated.




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If an employee is laid off or granted a leave of absence, or is disabled for a short period of time, coverage can be continued for a limited period of time at the discretion of the employer (and on a nondiscriminatory basis). However, the individual employee will be responsible for payment of the premium. At the end of the set continuation period, the insured has the right to the extension of benefits as well as the right to convert the term coverage to a permanent individual policy.

13. Employer-sponsored group disability insurance policies are “portable,” meaning you can keep your coverage even if you leave your job.




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Most group disability coverage is not portable. Therefore, you lose your disability protection if you lose your job or if you leave the employer or the group.

14. If you pay the premiums for a disability income policy with after-tax dollars, the income benefits you receive under the policy are not subject to federal income tax.




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However, if your employer pays your premiums, your disability income benefits will generally be taxable as ordinary income.

15. The following statements are all myths surrounding long-term care:

The government or health insurance will cover me.
I will be able to pay for it.
It will not happen to me, and besides, I am too young.
My family will take care of me. I cannot afford long-term care insurance.




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Because of these common misconceptions about long-term care, few consumers prepare for this possibility that could have potentially devastating personal and financial consequences. Long-term care insurance can help lessen the risk and ensure financial and personal independence well into the future.


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