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Quizzes > Business & Finance > Finance & Economics

Chapter 13 Life Insurance Provisions, Options, and Riders Quiz

Think you know when an insured pays 1200 annually for her policy? Start the quiz now!

Difficulty: Moderate
2-5mins
Learning OutcomesCheat Sheet
Paper art illustration for free life insurance quiz on a coral background

Think you know when an insured pays an annual premium to his insurer? Take our free life insurance quiz to put your skills to the test! You'll answer questions on everything from "an insured pays 1200 annually for her" coverage to vital life insurance policy provisions and explore policy options and riders while gaining a solid understanding of life insurance riders. Along the way, you'll learn how various riders tailor your protection and why life insurance policy provisions are essential to maximizing benefits. Ready for a quick insurance policy quiz that sharpens your expertise and boosts your confidence? Jump in now and see your score!

What is meant by the annual premium in a life insurance policy?
The total cost to the insurer for underwriting the policy.
The amount the insured must pay each year to keep the policy in force.
A one-time lump-sum payment at issue.
The death benefit amount the insurer pays out.
The annual premium is the amount the policyholder pays each year to maintain coverage; it covers mortality, interest, and expense charges. It is distinct from the death benefit and not a one-time payment. Premium calculation is based on age, health, and policy features. Investopedia - Annual Premium
Which premium payment mode typically results in the highest total annual cost compared to an annual mode?
Monthly
Quarterly
Semiannual
Annual
Monthly payments require more administrative handling and therefore carry a higher mode factor, increasing total cost. Quarterly and semiannual modes have lower factors than monthly but higher than annual. Annual mode has no additional mode loading. NAIC Glossary - Mode Factor
A payment made at the beginning of a coverage period is known as payment in:
Advance
Arrears
Level
Deposit
An advance payment is made at the start of the coverage period, whereas an arrears payment is made at the end. Level and deposit are not standard financial terms for timing of premium payments. Investopedia - Advance Payment
What is the standard length of the grace period in most life insurance contracts?
30 days
15 days
60 days
90 days
Most life insurance policies include a 30-day grace period during which the insured can pay an overdue premium without losing coverage. Some states specify 31 days, but 30 days is the industry standard. Investopedia - Grace Period
Which clause prevents an insurer from contesting a life policy after it has been in force for two years?
Incontestability clause
Suicide clause
Free-look clause
Reinstatement clause
The incontestability clause bars the insurer from denying claims after the policy has been in force for two years, except in cases of fraud. It provides certainty for policyholders and beneficiaries. NAIC - Incontestability
Which rider waives future premiums if the insured becomes totally disabled?
Waiver of Premium rider
Disability Income rider
Accidental Death rider
Guaranteed Insurability rider
The Waiver of Premium rider suspends premium payments if the insured meets the definition of total disability. The policy remains in force without expense to the insured. Investopedia - Waiver of Premium
What is a 'mode factor' in life insurance premium calculations?
A multiplier used to adjust the annual premium for different payment frequencies.
The interest rate credited to policy cash values.
The mortality charge within the premium.
An additional flat policy fee.
Mode factors are multipliers that convert an annual premium to premiums for other payment modes (e.g., monthly, quarterly) to reflect increased administrative costs. NAIC Glossary - Mode Factor
What distinguishes a level premium policy from a flexible premium policy?
Level premium requires fixed payments; flexible premium allows adjustment in amount or timing.
Level premium policies have no cash value; flexible ones do.
Level premiums increase annually; flexible premiums decrease.
Level premium policies are term only; flexible are whole life only.
Level premium policies have a fixed payment schedule, while flexible premium policies (like universal life) allow the policyowner to vary the amount and timing of premium payments within contractual limits. Investopedia - Universal Life
Adding a term rider to a whole life policy provides what?
Additional term coverage for a specified period.
Permanent coverage after term expires.
Guaranteed cash value increases.
Reduction of base policy dividends.
A term rider offers extra term insurance benefit for a defined period, supplementing the permanent coverage of the base whole life policy without accumulating additional cash value. NAIC - Term Rider
The suicide clause in life insurance typically excludes coverage for death by suicide during:
The first two policy years.
The first policy month.
The entire policy term.
After the policy lapses and is reinstated.
Most life policies include a suicide exclusion for the initial two years, returning only premiums paid if death by suicide occurs in that period. After two years, full death benefits apply. Investopedia - Suicide Clause
What is the primary benefit of a waiver of premium rider?
It waives future premiums if the insured becomes disabled and meets the rider’s definition.
It guarantees level premiums for life.
It provides a cash benefit if the insured is hospitalized.
It adds term coverage at no extra cost.
The waiver of premium rider suspends premium payments when the insured is totally disabled beyond a waiting period, keeping the policy in force without further out-of-pocket cost. Investopedia - Waiver of Premium
In a universal life policy, what does the 'corridor' refer to?
The minimum amount by which the death benefit must exceed cash value.
The surrender charge schedule.
The expense charge percentage.
The guaranteed interest rate floor.
The corridor is the mandated gap between the death benefit and the policy’s cash surrender value to maintain favorable tax treatment. It ensures the policy remains classified as life insurance. Investopedia - Corridor Requirement
Which dividend option uses dividends to reduce the next premium due?
Reduction of Premium
Paid-up Additions
Accumulate at Interest
One-Year Term
With the reduction of premium option, dividends are applied to offset future premium payments, effectively lowering the amount the insured must pay. NAIC Glossary - Dividend Options
How does selecting more frequent payment modes affect total premium cost?
It increases total cost due to higher mode factors.
It decreases total cost by earning more interest.
It doesn’t affect total cost.
It converts part of the premium into a surcharge waiver.
More frequent payment modes (monthly, quarterly) carry higher mode factors reflecting increased administrative costs, raising total annual premium compared to annual mode. NAIC - Mode Factor
The pure premium component of a policy’s gross premium covers:
The expected cost of death claims based on mortality.
Administrative expenses.
Insurer’s profit loading.
Premium taxes.
Pure premium (or net premium) represents the portion of gross premium that covers expected death benefits derived from mortality tables, excluding expenses, interest, and profit loadings. Investopedia - Net Premium
If an annual premium is $1,200 and the monthly mode factor is 0.085, what is the monthly premium?
$102.00
$100.00
$80.00
$75.00
Monthly premium = annual premium × monthly mode factor. So $1,200 × 0.085 = $102. NAIC Glossary - Mode Factor
Mortality tables in life insurance are primarily used to estimate:
The expected number of deaths at each age.
The insurer’s administrative expenses.
Policy surrender rates.
Investment returns on reserves.
Mortality tables provide statistical data on death rates by age and gender, used to calculate pure premiums and reserves. Society of Actuaries - Mortality Studies
Expense loading in a gross premium is added to which component?
Net (pure) premium
Death benefit
Policy dividends
Cash surrender value
Gross premium = net premium + expense loading + profit loading. The expense loading is added on top of the net premium that covers mortality cost. Investopedia - Gross Premium
Which formula correctly represents gross premium?
Net premium plus loading
Death benefit times interest rate
Cash value minus surrender charge
Pure premium divided by term
Gross premium includes the net premium (mortality cost) plus loadings for expenses and profit. Other expressions are not standard premium formulas. Investopedia - Gross Premium
The reinstatement provision generally allows policy reinstatement within how many years after lapse?
3 years
1 year
5 years
10 years
Most life insurance contracts permit reinstatement within three years of policy lapse, subject to proof of insurability and payment of back premiums plus interest. NAIC - Reinstatement
The interest rate assumption used in premium calculations affects which of the following?
Net premium
Death benefit amount
Policy term length
Grace period duration
Higher assumed interest earnings reduce the net premium required to cover mortality costs. Death benefit, term, and grace period are contract terms unaffected by interest assumptions. Investopedia - Premium
Policy reserves under whole life insurance are calculated using which assumptions?
Mortality and interest assumptions
Expense loadings only
Dividend options
Suicide clause period
Actuaries use mortality rates and interest rate assumptions to calculate the reserve needed to guarantee benefits. Expense loadings and other factors may affect pricing but not the fundamental reserve formula. Society of Actuaries - Reserves
If a net annual premium is $500 and the insurer applies a 15% expense loading, what is the gross annual premium?
$575
$550
$600
$625
Gross premium = net premium × (1 + expense loading). So $500 × 1.15 = $575. This covers mortality costs plus expenses. Investopedia - Gross Premium
A universal life policy has a cash value of $100,000. What is the minimum death benefit required by the corridor rule (125% corridor)?
$125,000
$120,000
$110,000
$150,000
The corridor requirement mandates the death benefit be at least 125% of cash value to maintain tax-favored status. 125% of $100,000 equals $125,000. Investopedia - Corridor Requirement
An insured pays $2,000 in first-year premiums on a policy where the seven-pay test limit is $1,200. How is the policy classified for U.S. tax purposes?
Modified Endowment Contract (MEC)
Ordinary life policy
Lapsed policy
Single premium policy
Exceeding the seven-pay test causes a policy to become a Modified Endowment Contract, losing certain tax benefits on distributions. It remains in force but is taxed differently. IRS Publication 575 - Retirement Plans
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Study Outcomes

  1. Understand Annual Premium Structures -

    Explain how an insured pays an annual premium to his insurer and identify key factors that influence premium amounts.

  2. Analyze Real-World Premium Scenarios -

    Compute and interpret examples such as when an insured pays 1200 annually for her policy, reinforcing practical application.

  3. Differentiate Policy Provisions -

    Outline core life insurance policy provisions and assess how each affects coverage and premium payment timelines.

  4. Evaluate Policy Options and Riders -

    Compare common policy options and riders, explaining how they alter policy benefits and costs.

  5. Apply Rider Knowledge -

    Demonstrate understanding of life insurance riders by selecting appropriate add-ons for varying client needs.

Cheat Sheet

  1. Annual Premium Fundamentals -

    Review how an insured pays an annual premium to his insurer by calculating the net premium plus loads. For example, assume an insured pays 1200 annually for her $250 000 term policy; you'd start with mortality cost and add expense load. This formula comes from Society of Actuaries' standard net premium tables.

  2. Payment Modes and Cash-Flow Impact -

    Understand the difference in cost when an insured pays premiums monthly, quarterly, semiannually, or annually, as frequency affects administrative fees. Annual mode often has lower per-period fees but requires a larger lump sum, whereas monthly modes add service charges spread out. The National Association of Insurance Commissioners shows annual payments can save 3 - 5 % over monthly plans.

  3. Essential Policy Provisions -

    Life insurance policy provisions like the insuring clause, consideration clause, and grace period define both insurer and insured rights. The grace period provision, for instance, lets an insured make a late payment within 31 days without policy lapse, reinforcing financial security. These provisions are standard in accredited courses such as the University of Pennsylvania's Wharton Risk Center curriculum.

  4. Understanding Life Insurance Riders -

    Policy options and riders allow customization beyond base coverage, such as waiver of premium, accidental death, or guaranteed insurability riders. Each rider adjusts the premium and policy flexibility, so weigh the cost-benefit trade-off before adding extras. The American Council of Life Insurers provides clear summaries of popular riders and their real-world use cases.

  5. Cost-Benefit Analysis of Riders -

    Conduct a rider cost analysis by comparing incremental premium increases against added benefits, revisiting as needs evolve. Use the mnemonic "RIDER": Rate difference, Income needs, Duration, Evaluation, Renewal flexibility to keep key factors top of mind. Research in the Journal of Risk and Insurance notes riders can add 10 - 30 % to base premiums depending on age and health.

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