Do You Know Life Insurance Basics?

Most breadwinners recognize the importance of life insurance. If you should die unexpectedly, your family could face a severe financial squeeze, perhaps having to sell the home and give up other lifestyle comforts. With an adequate policy, your beneficiaries may be able to pay off the mortgage (or make a sizable dent in it), take care of funeral expenses, and meet a wide variety of other financial obligations.

But do you really know all you need to know about life insurance? How about the differences between permanent and term insurance? What about other types of policies? What sorts of riders are available? What are the income tax and estate tax consequences?

It’s surprising how little some people truly understand about life insurance. How do you stack up? Here’s a brief quiz on several basic concepts:

1. Which of the following is true about permanent life insurance?

a) It provides a cash value in addition to a death benefit.
b) It is limited to the spouse with the greater amount of earnings. 
c) The policy can never be voided. 
d) The death benefit is limited to $1 million.

2. Which of the following is true about term insurance?

a) It cannot be purchased if you are retired.  
b) It generally has a lower initial premium than whole life insurance. 
c) Underwriting approval is automatic. 
d) The death benefit is limited to $1 million.

3. The rule of thumb is to acquire life insurance protection equal to:

a) The value of your home. 
b) Your salary multiplied by your number of children. 
c) Three times your annual expenses. 
d) Five to seven times your annual income.

4. Whole life insurance is best described as a:

a) Type of permanent life insurance policy. 
b) Type of term life insurance policy. 
c) Contract with an insurer to provide future payments.  
d) Retirement plan sponsored by an insurer.

5. Universal life insurance is best described as a:

a) Type of permanent life insurance policy. 
b) Type of term life insurance policy. 
c) Contract with an insurer to provide future payments.  
d) Retirement plan sponsored by an insurer.

6. An annuity is best described as a:

a) Type of permanent life insurance policy. 
b) Type of term life insurance policy. 
c) Contract with an insurer to provide future payments. 
d) Retirement plan sponsored by an insurer.

7. A permanent life insurance policy may be:

a) Sold before the insured’s death. 
b) Used as collateral on a car loan.
c) Exchanged tax-free for a mutual fund investment. 
d) Voided due to a disability.

8. Life insurance proceeds paid to a beneficiary are: 

a) Treated as a taxable gift. 
b) Treated as a tax-free gift. 
c) Exempt from federal income tax. 
d) Exempt from federal estate tax.

Answers: 1-a; 2-b; 3-d; 4-a; 5-a; 6-c; 7-a; 8-c

This article was written by a professional financial journalist for G.W. Sherwold and is not intended as legal or investment advice.

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