How Is A Life Insurance Policy Dividend Legally Defined

Question: In a life insurance policy, the entire contract consists of

Answer: Policy and attached application (The entire contract of a life policy consists of the policy and attached application.)

Question: Which statement is true regarding policy dividends?

Answer: A dividend option is selected by the insured at the time of the policy purchase. (Insureds elect a dividend option at the time of policy purchase.)

Question: Which of the following does a policyowner NOT have a right to change?

Answer: Dividend schedule (All of these are considered rights of a policyowner EXCEPT the right to change the dividend schedule.)

Question: How is a life insurance policy dividend legally defined?

Answer: A return of excess premium and not taxable. (Life insurance policy dividends are a return of part of the premiums paid. As such, policy dividends are generally not taxable income.)

Question: When an accidental death benefit is added to a whole life policy, how does this affect the policy’s cash value?

Answer: Policy’s cash value life is not affected (When an accidental death benefit is added to a whole life policy, the policy’s cash value is not affected.)

Question: An insurer can be protected from adverse selection with which policy provision?

Answer: Suicide clause (The suicide clause protects the insurer against possible adverse selection.)

Question: When a life insurance policy is surrendered, how does the cost recovery rule apply?

Answer: The policy’s cost basis is exempt from taxation (Correct. ​ ​ ​ ​ The cost basis of the policy is exempt from taxation as it pertains to the cost recovery rule.)

Question: Which of these is NOT a valid policy dividend option?

Answer: Monthly income payments (“Monthly income payments” is not a valid policy dividend option.)

Question: What time period allows an insured’s life insurance policy to remain in force even if the premium was not paid on the due date?

Answer: Grace Period (The grace period allows an insured’s life insurance policy to remain in force even if the premium was not paid on the due date.)

Question: Jerry is an insured who understated his age on his life insurance application, paying $12 per $1,000 of insurance instead of $15 per $1,000. If he dies, how will the adjusted death benefit be calculated?

Answer: 12/15th of the policy’s face amount (In this situation, the adjusted death benefit will be calculated at 12/15th of the policy’s face amount.)