54 Life Insurance Practice Questions & Answers

1. 1. For a life insurance policy to be legally valid, when must insurable interest exist between the policyowner and the insured?

   • A.Both at the time of application and at the time of the insured's death
   • B.Continuously at all times while the policy remains in force
   • C.Only at the time the insured dies
   • D.Only at the time the application is made✓ Answer

   Life insurance is not a contract of indemnity, so the insurable interest requirement exists only to prevent wagering on a human life; it is therefore tested at the inception of the contract. Once the policy is validly issued it remains enforceable even if the relationship later ends, which is the opposite of property insurance, where insurable interest must exist at the time of loss.

   Source: Common-law insurable interest doctrine as codified in NAIC-based state insurance codes (interest required at policy inception, not at time of loss)Report a problem with this question

2. 2. An applicant who has previously been convicted of insurance fraud presents which type of hazard to the insurer?

   • A.Morale hazard
   • B.Legal hazard
   • C.Physical hazard
   • D.Moral hazard✓ Answer

   A moral hazard arises from a defect in the applicant's character — a demonstrated tendency toward dishonesty that makes an intentional or fabricated loss more likely. It is distinguished from a morale hazard, which is mere carelessness or indifference toward a loss because insurance is in place, and from a physical hazard, which is a tangible condition such as an occupation or health impairment.

   Source: Standard risk-classification terminology in the Pearson VUE Life General Knowledge outline, Section III (general insurance/underwriting concepts)Report a problem with this question

3. 3. Which underwriting concept describes the tendency of individuals with a greater-than-average likelihood of loss to seek or maintain insurance more often than standard risks?

   • A.Risk retention
   • B.Adverse selection✓ Answer
   • C.Risk pooling
   • D.The law of large numbers

   Adverse selection is the reason insurers underwrite at all: without risk classification, worse-than-average risks would buy coverage disproportionately and actual claims would exceed the mortality assumed in the rate. Underwriting exists to keep each rate class homogeneous, while the law of large numbers is the separate statistical principle that makes aggregate losses predictable.

   Source: Pearson VUE Life General Knowledge outline, Section III (underwriting and risk classification principles)Report a problem with this question

4. 4. A producer takes an application, collects the initial premium, and issues a conditional receipt. The proposed insured dies two days later, before underwriting is complete, and the file shows the applicant was insurable exactly as applied for. What must the insurer do?

   • A.Pay the death benefit, because coverage was effective from the date of the receipt once the applicant proved insurable as applied for✓ Answer
   • B.Refund the premium with interest, because the contestable period had not yet begun
   • C.Refund the premium only, because no policy had been issued or delivered
   • D.Pay the death benefit only if the insurer had already approved the application in writing

   A conditional (insurability) receipt makes coverage retroactive to the date of the application or the date of the required medical exam, whichever is later, provided the applicant meets the insurer's underwriting standards for the plan and amount applied for. The operative condition is insurability, not the insurer's completion of its paperwork, so the claim is payable.

   Source: Pearson VUE Life General Knowledge outline, Section III.C (premium receipts); conditional/insurability receipt ruleReport a problem with this question

5. 5. Statements made by an applicant on a life insurance application are generally treated as:

   • A.Guarantees that void the contract if any statement is later disputed
   • B.Opinions that have no legal effect on the contract
   • C.Representations, which must be substantially true to the best of the applicant's knowledge and belief✓ Answer
   • D.Warranties, which must be literally and absolutely true

   Because an applicant cannot be expected to have absolute knowledge of every fact, the law treats application answers as representations; only a material misrepresentation — one that would have changed the insurer's underwriting decision — gives the insurer grounds to rescind, and only within the contestable period. Warranties must be literally true and are essentially not used in modern individual life contracts.

   Source: Pearson VUE Life General Knowledge outline, Section III.A (representations, warranties, concealment, material misrepresentation)Report a problem with this question

6. 6. What is the correct use of information obtained from the MIB during life insurance underwriting?

   • A.It is a coded alert that must be confirmed by further underwriting before any adverse decision is made✓ Answer
   • B.It replaces the need for an attending physician's statement
   • C.It reports the applicant's prior claim payments and credit score
   • D.It may be used as the sole reason to decline or rate an applicant

   MIB data consists of coded impairment alerts contributed by member insurers, not complete medical records, and member rules prohibit using an MIB code by itself as the basis of a declination, rating, or other adverse underwriting decision. Its proper function is as a flag that prompts additional investigation, such as an attending physician's statement, exam, or lab work.

   Source: Pearson VUE Life General Knowledge outline, Section III.D (sources of underwriting information); MIB Group member rules and FCRA adverse-action requirementsReport a problem with this question

7. 7. Why would a life insurance policy be backdated at the applicant's request?

   • A.To postpone the effective date of the suicide exclusion
   • B.To obtain a lower premium based on a younger issue age, with the skipped premiums paid at issue✓ Answer
   • C.To reduce the amount of coverage needed to satisfy underwriting
   • D.To avoid having to provide evidence of insurability

   Backdating ("saving age") assigns an earlier policy date so the premium is computed at the insured's younger age, and the owner must pay the premiums covering the backdated months, so the saving is worthwhile only over the long run. State law limits how far a policy may be backdated, and backdating can never be used to create coverage for a loss that has already occurred.

   Source: Pearson VUE Life General Knowledge outline, Section III.B (completing the application; policy dating and backdating to obtain a lower age-based rate)Report a problem with this question

8. 8. Under model replacement rules, when must a producer present the applicant with the required notice regarding replacement of life insurance?

   • A.Within 30 days after the new policy is delivered
   • B.Only if the applicant asks questions about the existing coverage
   • C.At the time the existing policy is surrendered
   • D.No later than when the application is taken, signed by both the applicant and the producer✓ Answer

   Replacement regulation is built on informed consent before the transaction is completed, so the replacement notice must be presented and signed no later than when the application is taken, and the buyer's guide and policy summary let the applicant compare the existing and proposed contracts before acting. Disclosure delivered after the sale would defeat the purpose of the rule.

   Source: NAIC Life Insurance and Annuities Replacement Model Regulation (#613); NAIC Life Insurance Disclosure Model Regulation (buyer's guide and policy summary)Report a problem with this question

9. 9. A policy with a level premium and a face amount that declines over the term, frequently purchased to match a mortgage balance, is:

   • A.Increasing term insurance
   • B.Level term insurance
   • C.Decreasing term insurance✓ Answer
   • D.Annually renewable term insurance

   Decreasing term keeps the premium level while the death benefit steps down on a schedule, which matches the falling balance of an amortizing debt such as a mortgage. Level term holds the face amount constant, and annually renewable term holds the face amount level while the premium rises each year at the insured's attained age.

   Source: Pearson VUE Life General Knowledge outline, Section I.C (term life: level, decreasing, increasing, annually renewable)Report a problem with this question

10. 10. A renewable term policy allows the policyowner to:

    • A.Renew the coverage only if the insured passes a new medical examination
    • B.Exchange the policy for permanent coverage priced at the original issue age
    • C.Renew the coverage at the same premium originally charged
    • D.Renew the coverage without evidence of insurability at a premium based on the insured's attained age✓ Answer

    The renewal guarantee protects an insured whose health has deteriorated, so no new proof of insurability may be required; however, the cost of mortality rises with age, so the renewal premium is recalculated at the insured's attained age. Exchanging term for permanent coverage is a separate right granted only by a convertibility feature.

    Source: Pearson VUE Life General Knowledge outline, Section I.C (renewable and convertible term provisions)Report a problem with this question

11. 11. An owner converts a convertible term policy to whole life using the original-age conversion option. What must the owner do?

    • A.Submit evidence of insurability for the permanent policy
    • B.Wait until the end of the current term period to convert
    • C.Accept a reduced face amount equal to the term policy's cash value
    • D.Pay the difference between the term and permanent premiums back to the original issue date, plus interest✓ Answer

    Original-age conversion prices the new permanent policy as though it had been issued on the original policy date, so the insurer must be made whole for the additional premium plus interest it would have collected during the intervening years. The attained-age option requires no back payment but sets the permanent premium at the insured's current, higher age; neither option requires evidence of insurability.

    Source: Pearson VUE Life General Knowledge outline, Section I.C (convertible term: original-age vs attained-age conversion)Report a problem with this question

12. 12. Among permanent life insurance plans, which normally has the LOWEST annual premium for the same face amount and issue age?

    • A.Life paid up at age 65
    • B.Continuous-premium (straight) whole life✓ Answer
    • C.20-pay whole life
    • D.Single-premium whole life

    All of these plans must accumulate enough reserve to pay the same face amount, so the plan that spreads the funding over the longest period — the insured's entire lifetime — produces the smallest individual payment. Shortening the premium-paying period concentrates the same funding into fewer, larger premiums, with single premium representing the extreme case.

    Source: Pearson VUE Life General Knowledge outline, Section I.A (whole life: continuous premium, limited-pay, single premium)Report a problem with this question

13. 13. Compared with a continuous-premium whole life policy on the same insured, a 20-pay whole life policy will:

    • A.Provide no guaranteed cash value until the 20th policy year
    • B.Provide death benefit protection for only 20 years
    • C.Have a lower annual premium and accumulate cash value more slowly
    • D.Have a higher annual premium and accumulate cash value more quickly✓ Answer

    Limited-pay whole life compresses the funding of lifetime protection into 20 payments, so each premium is larger and the reserve behind the policy — its cash value — builds faster and reaches the face amount at maturity. Coverage does not stop after 20 years; the contract is simply paid up and continues in force to the maturity date.

    Source: Pearson VUE Life General Knowledge outline, Section I.A (limited-payment whole life; reserve and cash-value accumulation)Report a problem with this question

14. 14. In a universal life policy with the Option A (Option 1) death benefit, what happens as the cash value grows?

    • A.The policy automatically becomes paid up
    • B.The total death benefit increases by the amount of the cash value
    • C.The cost of insurance charge rises in direct proportion to the cash value
    • D.The total death benefit stays level and the insurer's net amount at risk decreases✓ Answer

    Option A pays a level total death benefit, so the pure insurance the insurer must supply — the net amount at risk, equal to the death benefit minus the accumulated cash value — shrinks as the cash value grows, which holds cost-of-insurance charges down. Federal tax law requires a minimum corridor between cash value and death benefit, so the death benefit may be forced upward in later years to preserve the policy's status as life insurance.

    Source: Pearson VUE Life General Knowledge outline, Section I.B (universal life death benefit options); IRC Sec. 7702 corridor requirementReport a problem with this question

15. 15. A universal life policy using the Option B (Option 2) death benefit:

    • A.Pays the face amount only, with the accumulated cash value retained by the insurer
    • B.Pays a level total death benefit with a decreasing net amount at risk
    • C.Pays the face amount plus the accumulated cash value and generally incurs higher cost-of-insurance charges✓ Answer
    • D.Pays the face amount reduced by any interest credited to the policy

    Under Option B the cash value is paid in addition to the face amount, so the insurer's net amount at risk stays at the full face amount and mortality charges are assessed on that larger amount for the life of the contract. Because more of each premium is consumed by cost of insurance, Option B accumulates less cash value than Option A for the same premium.

    Source: Pearson VUE Life General Knowledge outline, Section I.B (universal life death benefit Option B / increasing death benefit)Report a problem with this question

16. 16. A universal life policyowner stops paying premiums while the policy still holds accumulated cash value. When will the policy lapse?

    • A.When the accumulated value is no longer sufficient to cover the monthly cost of insurance and expense charges✓ Answer
    • B.Immediately, because universal life requires a premium every policy year
    • C.At the end of the policy year in which premium payments stopped
    • D.Never, because universal life is guaranteed paid up once issued

    Universal life is a flexible-premium, unbundled contract: each month the insurer deducts mortality and expense charges from the accumulation account, so the policy remains in force as long as that account can absorb the deduction. Paying only the minimum premium rather than the target premium increases the chance the account is exhausted and the policy lapses unless a no-lapse guarantee rider applies.

    Source: Pearson VUE Life General Knowledge outline, Section I.B (universal life: flexible premium, monthly deductions, target vs minimum premium)Report a problem with this question

17. 17. Which statement about variable universal life (VUL) is correct?

    • A.It may be sold with a state life insurance license only, because it is an insurance contract
    • B.Cash value is held in the insurer's general account and earns a guaranteed minimum rate
    • C.It is regulated only by the SEC and is exempt from state insurance regulation
    • D.Cash value is held in a separate account, is not guaranteed, and the producer must hold both a life license and FINRA registration✓ Answer

    Because the policyowner bears the investment risk of subaccounts held in the insurer's separate account, VUL is a security as well as an insurance contract, so it must be sold with a prospectus by a producer who holds a state life license and is registered with FINRA. It is therefore subject to dual regulation by the SEC/FINRA and the state insurance department.

    Source: Pearson VUE Life General Knowledge outline, Section I.B (variable life and variable universal life; separate account, prospectus, dual licensing/registration)Report a problem with this question

18. 18. How is interest credited to the cash value of an indexed universal life (IUL) policy?

    • A.At a rate selected each year by the policyowner
    • B.By directly investing the cash value in the individual stocks that make up the index
    • C.By a formula tied to an external index, subject to a participation rate and a cap, with a floor that limits downside✓ Answer
    • D.At the full total return of the index with no adjustment

    An IUL credits interest by formula: the movement of the index is multiplied by a participation rate and limited by a cap, while a floor (commonly 0%) protects the account when the index falls, and no money is actually invested in the index itself. Because the owner is not exposed to the underlying securities, indexed UL is a fixed insurance product and is not a security requiring FINRA registration.

    Source: Pearson VUE Life General Knowledge outline, Section I.B (interest-sensitive/indexed universal life: participation rate, cap, floor; not a registered security)Report a problem with this question

19. 19. A survivorship (second-to-die) life insurance policy pays the death benefit:

    • A.When the last surviving insured dies, which makes it a common way to fund estate settlement costs✓ Answer
    • B.When the first of the two insureds dies
    • C.Only if both insureds die within the same policy year
    • D.In equal shares at the death of each insured

    Because the insurer pays nothing until both insureds have died, the expected payout is deferred and the premium is lower than for two comparable single-life policies. That pricing, combined with the fact that estate settlement costs for a married couple typically come due at the second death, makes survivorship life the standard funding vehicle for estate liquidity; joint (first-to-die) life is the opposite design.

    Source: Pearson VUE Life General Knowledge outline, Section I.E (combination plans: joint life vs survivorship/second-to-die life)Report a problem with this question

20. 20. A policyowner stops paying premiums on a whole life policy and elects the extended term insurance nonforfeiture option. The resulting coverage:

    • A.Keeps the original face amount for a limited period determined by the net cash value✓ Answer
    • B.Continues to accumulate cash value at the original contractual rate
    • C.Requires the insured to provide evidence of insurability
    • D.Provides a reduced face amount payable for the whole of the insured's life

    Extended term applies the net cash surrender value as a single premium to buy term insurance for the full original face amount, so the size of the cash value determines only how long that term runs. It is the option most contracts apply automatically when the owner elects none, and no evidence of insurability may be required because the guaranteed values already belong to the owner.

    Source: NAIC Standard Nonforfeiture Law for Life Insurance (Model #808); extended term insurance optionReport a problem with this question

21. 21. Which nonforfeiture option provides permanent coverage with a smaller face amount, requires no further premiums, and keeps accumulating cash value until the policy's maturity date?

    • A.Cash surrender
    • B.Extended term insurance
    • C.Reduced paid-up insurance✓ Answer
    • D.Automatic premium loan

    Reduced paid-up applies the net cash value as a single premium for a paid-up whole life policy, so the face amount shrinks but the protection lasts to the maturity date and the reserve continues to grow. Extended term is its mirror image — full face amount for a shortened period — and cash surrender terminates the contract entirely.

    Source: NAIC Standard Nonforfeiture Law for Life Insurance (Model #808); reduced paid-up insurance optionReport a problem with this question

22. 22. What does the automatic premium loan provision do?

    • A.Lends the owner the policy's cash value on written request at a guaranteed interest rate
    • B.Automatically pays the face amount if the owner becomes totally disabled
    • C.Automatically borrows against the cash value to pay a premium still unpaid at the end of the grace period, preventing lapse✓ Answer
    • D.Waives all future premiums after a six-month waiting period

    The APL provision is a lapse-prevention feature: if a premium is still unpaid when the grace period ends, the insurer advances it as a policy loan against available cash value so the contract and its riders stay in force. The advance plus interest reduces the death benefit or surrender value until repaid, and it is distinct from the waiver of premium rider, which is triggered by disability rather than nonpayment.

    Source: Pearson VUE Life General Knowledge outline, Section II (policy loan provisions; automatic premium loan)Report a problem with this question

23. 23. A policyowner elects the paid-up additions dividend option on a participating whole life policy. Each dividend is used to:

    • A.Be held on deposit by the insurer at a guaranteed rate of interest
    • B.Buy one-year term insurance equal to the policy's cash value
    • C.Buy a small amount of single-premium permanent insurance that increases both the death benefit and the cash value✓ Answer
    • D.Reduce the next premium due on the policy

    Paid-up additions are purchased at the insured's attained age with no evidence of insurability, and because each addition is itself fully paid-up permanent insurance, it immediately increases both the face amount and the cash value and can earn dividends of its own. The one-year term (fifth dividend) option instead buys temporary coverage that expires annually, and accumulation at interest leaves the dividend on deposit.

    Source: Pearson VUE Life General Knowledge outline, Section II (dividend options: cash, reduce premium, accumulate at interest, paid-up additions, one-year term)Report a problem with this question

24. 24. An insured dies while a whole life policy carries an outstanding policy loan and accrued loan interest. The insurer will:

    • A.Pay the full face amount and bill the insured's estate for the loan
    • B.Pay only the policy's cash value
    • C.Pay the face amount reduced by the outstanding loan balance and accrued interest✓ Answer
    • D.Deny the claim because the loan was not repaid before death

    A policy loan is not a withdrawal but an advance secured by the policy's guaranteed values, so any unpaid balance plus accrued interest is simply subtracted from the proceeds paid at death or on surrender. The insurer must make the loan available up to the guaranteed loan value and has no right to deny the claim merely because a loan is outstanding.

    Source: Pearson VUE Life General Knowledge outline, Section II (policy loan and withdrawal provisions); NAIC Standard Nonforfeiture Law (guaranteed loan value)Report a problem with this question

25. 25. A life insurance contract becomes a modified endowment contract (MEC) when it:

    • A.Is surrendered before the end of the seventh policy year
    • B.Fails the 7-pay test because cumulative premiums in the first seven contract years exceed the 7-pay limit✓ Answer
    • C.Is issued on any limited-payment basis
    • D.Develops a cash value greater than its face amount

    IRC Section 7702A applies a 7-pay test: if cumulative premiums paid during the first seven contract years exceed the sum of seven level annual net premiums, the contract is a MEC because it is funded too quickly to be treated as ordinary life insurance. A single-premium policy always fails the test, once a contract is a MEC it stays one, and a policy received in a 1035 exchange for a MEC is also a MEC.

    Source: Internal Revenue Code Sec. 7702A (7-pay test defining a modified endowment contract)Report a problem with this question

26. 26. An insurer calculates a life insurance premium using mortality, interest, and expense. If the insurer assumes a HIGHER rate of interest, the premium will:

    • A.Increase, because more interest must be credited to policyowners
    • B.Decrease, because projected investment earnings fund more of the future benefit✓ Answer
    • C.Increase, because larger reserves must be held
    • D.Stay the same, because interest affects only policy dividends

    The premium is the amount that, together with the interest it is expected to earn, must accumulate to the funds needed to pay future claims, so the more the insurer expects to earn on invested premiums the less it has to collect up front. Higher assumed mortality or higher expense loading works in the opposite direction and raises the gross premium.

    Source: Pearson VUE Life General Knowledge outline, Section I (premium determination: mortality, interest, expense; net vs gross premium)Report a problem with this question

27. 27. A participating life insurance policy differs from a nonparticipating policy in that it:

    • A.Is issued only by stock insurance companies
    • B.May pay policy dividends, which are a return of excess premium and are never guaranteed✓ Answer
    • C.Guarantees a fixed annual dividend to the policyowner
    • D.Provides no guaranteed cash value

    Participating contracts — traditionally issued by mutual insurers, which are owned by their policyowners — return part of the premium as a dividend when actual mortality, interest, and expense experience is more favorable than the conservative assumptions used in pricing. Because that experience is unknown in advance, dividends may be illustrated but never guaranteed; nonparticipating policies pay no dividends and are typically issued by stock companies.

    Source: Pearson VUE Life General Knowledge outline, Section I and Section II (participating vs nonparticipating policies; dividends as a return of excess premium, not guaranteed)Report a problem with this question

28. 28. Under the entire contract provision of a life insurance policy, the entire contract consists of:

    • A.The policy, the application, and the insurer's charter and bylaws
    • B.The policy and any copy of the application attached to it✓ Answer
    • C.The policy and the insurer's underwriting file on the insured
    • D.The policy and any statements the producer made during the sales interview

    The entire contract provision limits the agreement to the policy plus the attached copy of the application; nothing may be incorporated by reference, so bylaws, underwriting files, and oral sales statements are not part of the contract. It also means no change is valid unless in writing and signed by an executive officer of the insurer — a producer cannot waive or alter a provision.

    Source: NAIC standard policy provisions — Entire Contract provisionReport a problem with this question

29. 29. A life insurance policy has been in force for four years when the insurer discovers that the insured materially misrepresented a health condition on the application. Under the incontestability provision, the insurer may:

    • A.Contest the policy at any time, because incontestability protects only the insurer
    • B.Not contest the policy on that ground, because the two-year contestable period has expired✓ Answer
    • C.Reduce the death benefit in proportion to the risk that was concealed
    • D.Rescind the policy, because a material misrepresentation always voids coverage

    Once the policy has been in force during the insured's lifetime for two years, the incontestability provision bars the insurer from contesting the contract for material misrepresentation or concealment. The provision never applies to nonpayment of premium, and it does not block the separate misstatement-of-age adjustment or the suicide clause.

    Source: NAIC standard incontestability provision (2 years)Report a problem with this question

30. 30. An insured dies 20 days after a premium due date, during the policy's grace period, with that premium still unpaid. The insurer will:

    • A.Refund all premiums paid instead of paying the death benefit
    • B.Pay the full face amount and bill the insured's estate for the unpaid premium
    • C.Deny the claim, because the policy lapsed on the premium due date
    • D.Pay the face amount less the unpaid premium✓ Answer

    The grace period (commonly 31 days) keeps the policy fully in force after a missed premium, so the death is covered. Because the insurer never received the premium that bought that period of coverage, it deducts the unpaid premium from the proceeds it pays.

    Source: NAIC standard grace period provision (31 days typical)Report a problem with this question

31. 31. Which of the following is NOT required in order to reinstate a lapsed life insurance policy within the reinstatement period?

    • A.Payment of premiums recalculated at the insured's attained age✓ Answer
    • B.Payment of all overdue premiums with interest
    • C.A written application for reinstatement
    • D.Evidence of the insured's continued insurability

    Reinstatement restores the ORIGINAL contract, so the premium continues to be based on the insured's original issue age — that is the main advantage over buying a new policy. The owner must apply in writing, prove continued insurability, and pay all back premiums with interest (plus repay or reinstate any policy loan), and the contestable and suicide periods start over on the reinstated policy.

    Source: NAIC standard reinstatement provisionReport a problem with this question

32. 32. A life policy was issued after the applicant understated his age. The misstatement is discovered only after the insured's death, many years later. The insurer will:

    • A.Pay the full face amount, because the contestable period has expired
    • B.Void the policy and refund the premiums paid
    • C.Pay the face amount less the additional premium that should have been charged, plus interest
    • D.Pay the amount the premiums actually paid would have purchased at the insured's correct age✓ Answer

    The misstatement of age or gender provision is an adjustment clause, not a rescission clause: the contract stays valid and the benefit is recomputed to what the premiums actually paid would have bought at the true age or gender. This adjustment survives the two-year incontestable period.

    Source: NAIC standard misstatement of age or sex provisionReport a problem with this question

33. 33. An insured takes his own life 14 months after the policy is issued, within the contract's two-year suicide period. The insurer's obligation is to:

    • A.Return the premiums paid, less any outstanding policy loan✓ Answer
    • B.Pay only the policy's accumulated cash value
    • C.Pay the full face amount, because suicide is never an excluded cause of death
    • D.Pay nothing and retain the premiums as liquidated damages

    During the suicide period (one to two years, two being typical) the insurer's liability is limited to a refund of premiums paid, less any indebtedness, because the policy is meant to cover fortuitous loss rather than an anticipated act. After the period expires the death benefit is payable in full even if death is by suicide.

    Source: NAIC standard suicide provision (1–2 year exclusion, premium refund)Report a problem with this question

34. 34. A policyowner assigns her life insurance policy to a bank as security for a business loan. Under this collateral assignment:

    • A.The bank is entitled to the entire death benefit if the insured dies while the loan is outstanding
    • B.The bank may be paid only up to the amount of the outstanding debt, and the balance goes to the named beneficiary✓ Answer
    • C.The assignment is void unless the insurer approves it in advance
    • D.The bank becomes the policyowner and may change the beneficiary

    A collateral assignment is a partial and temporary transfer of rights made to secure a debt, so the assignee's claim is capped at the amount owed and the remaining proceeds go to the beneficiary. An absolute assignment, by contrast, transfers all ownership rights permanently; in either case the owner must notify the insurer in writing but does not need the insurer's permission.

    Source: Standard assignment provision — absolute vs. collateral assignmentReport a problem with this question

35. 35. The free look (right to examine) period on an individual life insurance policy:

    • A.Begins on the date the application is signed
    • B.Allows the owner to return the policy in exchange for its cash surrender value
    • C.Begins when the policy is delivered to the owner and permits its return for a full refund of premium✓ Answer
    • D.Begins on the policy date and permits a refund of premium less a service charge

    The free look runs from policy DELIVERY, not from the application or policy date, because the purpose is to let the owner read the contract actually issued. If the policy is returned within the period the owner receives a full refund of premium — not the cash value and not a net amount.

    Source: NAIC free look / right to examine provision (runs from delivery; commonly 10 days, longer for seniors and replacements in many states)Report a problem with this question

36. 36. An insured names his three children as beneficiaries per stirpes. One daughter dies before the insured, leaving two children of her own. At the insured's death, the daughter's share is:

    • A.Divided between the deceased daughter's own two children✓ Answer
    • B.Divided equally among the two surviving children and the two grandchildren
    • C.Paid to the insured's estate
    • D.Divided equally between the two surviving children of the insured

    Per stirpes ('by the branch') means a deceased beneficiary's share passes down that beneficiary's own line of descent to his or her heirs. Per capita ('by the head') is the opposite: the deceased beneficiary's share is redistributed among the surviving named beneficiaries.

    Source: Beneficiary class designations — per stirpes vs. per capitaReport a problem with this question

37. 37. A life policy has an irrevocable beneficiary. The policyowner now wants to take a policy loan against the cash value. The owner:

    • A.May do so freely, because policy loans are an unrestricted right of the owner
    • B.May do so only if the loan does not exceed one half of the cash value
    • C.May do so after simply notifying the insurer that the designation is now revocable
    • D.May do so only with the written consent of the irrevocable beneficiary✓ Answer

    An irrevocable beneficiary holds a vested interest in the policy, so the owner cannot take any action that reduces that interest — changing the beneficiary, assigning the policy, borrowing against it, or surrendering it — without the beneficiary's written consent. A revocable designation, by contrast, may be changed at any time by the owner alone.

    Source: Irrevocable beneficiary vested-interest ruleReport a problem with this question

38. 38. An insured and the primary beneficiary die in the same accident and the order of death cannot be determined. Under the Uniform Simultaneous Death Act (common disaster clause):

    • A.The insurer holds the proceeds until a court determines who died first
    • B.The insured is presumed to have survived the beneficiary, so the proceeds pass to the contingent beneficiary, or to the insured's estate if none is named✓ Answer
    • C.The proceeds are paid to the primary beneficiary's estate
    • D.The proceeds are divided equally between the two estates

    The Act creates a presumption that the insured died last (the beneficiary predeceased), which keeps the proceeds out of the beneficiary's estate and directs them to the contingent beneficiary. This protects the insured's intended succession of beneficiaries and avoids double probate.

    Source: Uniform Simultaneous Death Act / common disaster provisionReport a problem with this question

39. 39. A spendthrift clause attached to a life insurance settlement agreement:

    • A.Protects proceeds still held by the insurer from the beneficiary's creditors and bars the beneficiary from assigning or commuting them✓ Answer
    • B.Protects the proceeds only from the claims of the insured's creditors
    • C.Allows the insurer to reduce payments if the beneficiary becomes insolvent
    • D.Limits the beneficiary to receiving no more than a fixed monthly amount for life

    The spendthrift clause works because proceeds left with the insurer under a settlement option have not yet been constructively received by the beneficiary, so creditors cannot attach them and the beneficiary cannot pledge, assign, or take them in a lump sum. The policyowner normally must elect the settlement option before death for the clause to apply.

    Source: Spendthrift clause / settlement option provisionsReport a problem with this question

40. 40. Which of the following is NOT a settlement option?

    • A.Interest only
    • B.Reduced paid-up✓ Answer
    • C.Life income with period certain
    • D.Fixed period

    Settlement options govern HOW policy proceeds (death or maturity) are paid out to a payee. Reduced paid-up belongs to the three nonforfeiture options under the Standard Nonforfeiture Law — it tells the owner what to do with cash value on a lapse or surrender, not how proceeds are distributed.

    Source: Standard settlement options vs. Standard Nonforfeiture Law optionsReport a problem with this question

41. 41. A beneficiary wants the largest possible monthly income guaranteed for as long as she lives. Which settlement option produces the largest payment?

    • A.Joint and survivor income
    • B.Life income with an installment refund
    • C.Life income with a 20-year period certain
    • D.Straight (pure) life income✓ Answer

    Straight life pays the most per period because the insurer guarantees nothing to anyone after the payee's death — the entire sum is spread over one life expectancy only. Every guarantee added (period certain, refund, a second life) must be funded by lowering each payment.

    Source: Life income settlement options — straight life vs. guaranteed variantsReport a problem with this question

42. 42. Death proceeds are left with the insurer under the interest-only settlement option. For federal income tax purposes:

    • A.Both the principal and the interest are taxable as ordinary income
    • B.The principal is excluded from the beneficiary's income, but the interest paid is taxable✓ Answer
    • C.Both the principal and the interest are received income-tax free
    • D.The interest is tax free but the principal becomes taxable when it is finally withdrawn

    IRC Section 101(a) excludes the death benefit itself from the beneficiary's gross income, but that exclusion covers only the proceeds — earnings the insurer credits after the insured's death are ordinary interest income. The same split applies to installment options: the principal portion of each payment is tax free and the interest portion is taxable.

    Source: IRC 101(a) and 101(c) — interest on retained proceedsReport a problem with this question

43. 43. The waiver of premium rider on a life insurance policy:

    • A.Waives premiums if the insured becomes unemployed for any reason
    • B.Keeps the policy in force by waiving premiums during the insured's total disability, generally after a waiting period of about six months✓ Answer
    • C.Refunds all premiums paid if the insured becomes disabled
    • D.Pays the insured a monthly income while he is totally disabled

    Waiver of premium is a policy-preservation benefit, not an income benefit: on total disability the insurer pays the premiums so coverage and cash value continue to build. A separate disability income rider is what pays the insured a monthly income, and the universal life equivalent of waiver of premium is the waiver of monthly deduction.

    Source: Waiver of premium rider — total disability, typical 6-month waiting periodReport a problem with this question

44. 44. A payor benefit rider attached to a juvenile life insurance policy:

    • A.Pays an additional death benefit if the premium-paying adult dies
    • B.Waives the remaining premiums if the insured child becomes totally disabled
    • C.Waives the premiums until the child reaches a stated age if the adult premium payor dies or becomes totally disabled✓ Answer
    • D.Lets the child purchase additional coverage later without evidence of insurability

    The payor rider insures the PAYOR, not the child: if the adult who pays the premiums dies or becomes totally disabled, premiums are waived so the child's coverage survives, typically until the child reaches age 21 or 25. Waiver of premium, by contrast, is triggered by the disability of the insured, and the guaranteed insurability option is the rider that adds coverage without underwriting.

    Source: Payor benefit (payor) rider on juvenile policiesReport a problem with this question

45. 45. The guaranteed insurability rider allows the policyowner to:

    • A.Reinstate a lapsed policy without evidence of insurability
    • B.Increase the face amount automatically in step with the Consumer Price Index
    • C.Purchase additional coverage on specified option dates or at stated life events without proving insurability✓ Answer
    • D.Convert a term policy to permanent coverage only if the insured is still in good health

    The guaranteed insurability option transfers the risk of future insurability to the insurer: on the stated option dates (commonly every three years to about age 40) and on alternate dates such as marriage or the birth of a child, the owner may buy stated amounts of additional coverage at attained-age rates with no underwriting. Automatic CPI-linked increases describe the cost of living rider, a different benefit.

    Source: Guaranteed insurability option (GIO/GPO) riderReport a problem with this question

46. 46. An accelerated death benefit (living needs) rider:

    • A.Advances a portion of the death benefit to a terminally ill insured and reduces the amount later payable to the beneficiary✓ Answer
    • B.Pays a monthly long-term care benefit in addition to the full face amount
    • C.Refunds all premiums paid if the insured is diagnosed with a terminal illness
    • D.Pays an additional benefit if the insured's death is accidental

    The rider does not create new money — it pays part of the existing death benefit early, so whatever is advanced (plus any charge) is subtracted from the proceeds at death. Under IRC 101(g) the advance is received income-tax free when the insured is terminally ill (life expectancy generally 24 months or less) or chronically ill.

    Source: Accelerated death benefit rider; IRC 101(g)Report a problem with this question

47. 47. An employee's group life insurance coverage ends when she leaves the employer. The group conversion privilege generally provides that she:

    • A.Must apply within 31 days, needs no evidence of insurability, and converts to an individual permanent policy at her attained age✓ Answer
    • B.Must submit evidence of insurability if she is over age 50
    • C.May convert only to an individual term policy priced at her original issue age
    • D.Has 12 months from termination in which to convert

    The conversion privilege exists so a departing certificate holder is not left uninsurable, so it is issued without underwriting — but because the insurer takes that adverse-selection risk, the new individual policy is a permanent form priced at the insured's attained age. The window is short (commonly 31 days) precisely to limit that adverse selection.

    Source: Group life insurance conversion privilege (31-day conversion period)Report a problem with this question

48. 48. In a noncontributory group life insurance plan:

    • A.Each employee must submit evidence of insurability before coverage begins
    • B.Each covered employee receives the master contract
    • C.The employer pays the entire premium and 100% of eligible employees must be covered✓ Answer
    • D.The employees pay the entire premium and participation is voluntary

    When the employer pays the whole premium the plan must cover 100% of eligible employees, because mandatory full participation is what prevents adverse selection and allows coverage to be issued on a group (rather than individual) underwriting basis. The employer or trust holds the master contract; each employee receives only a certificate of insurance.

    Source: Group life insurance — master contract/certificates; contributory vs. noncontributory participation requirementsReport a problem with this question

49. 49. Which statement about a variable annuity is correct?

    • A.It is a security, so the producer must hold a life license plus FINRA registration and must deliver a prospectus✓ Answer
    • B.Premiums are held in the insurer's general account and earn a guaranteed minimum interest rate
    • C.The insurer bears the investment risk during the accumulation period
    • D.Values are credited using a participation rate and a cap tied to an outside index

    A variable annuity places premiums in a separate account of investment subaccounts, so the OWNER bears the investment risk and there is no guaranteed rate — that is precisely why it is regulated as a security requiring registration and prospectus delivery in addition to the state life license. Options A and B describe a fixed annuity, and option C describes an indexed annuity, which is generally not a security.

    Source: Variable annuity separate account; SEC/FINRA registration and prospectus requirementReport a problem with this question

50. 50. An immediate annuity is best described as a contract that:

    • A.May be funded with flexible premiums paid over many working years
    • B.Has a long accumulation period before the owner may annuitize
    • C.Must be surrendered by the owner before income payments can begin
    • D.Is purchased with a single premium and begins income payments within about one year of purchase✓ Answer

    An immediate annuity has essentially no accumulation period: it is bought with a single premium and the first payment must begin within twelve months (usually one payment interval, such as a month). Flexible premiums and a long accumulation phase are features of a deferred annuity, which alone can be surrendered before annuitization.

    Source: Immediate vs. deferred annuity — first payment within 12 months of purchaseReport a problem with this question

51. 51. When a nonqualified annuity is annuitized, the exclusion ratio is used to:

    • A.Determine what portion of each payment is a tax-free recovery of the investment in the contract✓ Answer
    • B.Determine the surrender charge applied to an early withdrawal
    • C.Calculate the 10% penalty on distributions taken before age 59 1/2
    • D.Exclude the annuity's death benefit from the beneficiary's taxable income

    The exclusion ratio is the investment in the contract divided by the expected return; that fraction of every annuity payment is a tax-free return of the owner's after-tax basis and the remainder is ordinary income. Once the entire basis has been recovered, all later payments are fully taxable.

    Source: IRC 72(b) — exclusion ratio for annuity paymentsReport a problem with this question

52. 52. Which of the following exchanges is NOT permitted on a tax-free basis under IRC Section 1035?

    • A.A life insurance policy exchanged for an annuity contract
    • B.An annuity contract exchanged for a life insurance policy✓ Answer
    • C.An annuity contract exchanged for another annuity contract
    • D.A life insurance policy exchanged for another life insurance policy

    Section 1035 permits exchanges only in a one-way direction from more tax-favored to less tax-favored contracts: life to life, life to annuity, endowment to annuity, annuity to annuity, and life or annuity to a qualified long-term care contract. An annuity may never be exchanged tax free for life insurance, because that would convert tax-deferred gain into an income-tax-free death benefit.

    Source: IRC Section 1035 — permitted tax-free exchange directionsReport a problem with this question

53. 53. A life insurance policy that is classified as a modified endowment contract (MEC):

    • A.Loses the income-tax-free treatment of its death benefit
    • B.Is created when premiums paid in the first seven years fall below the net level premium
    • C.Has lifetime distributions and loans taxed on a LIFO basis, with a 10% penalty on the taxable amount taken before age 59 1/2✓ Answer
    • D.Can be restored to non-MEC status by reducing premiums in later years

    A policy becomes a MEC when cumulative premiums in the first seven contract years EXCEED the 7-pay net level premium limit of IRC 7702A, and Congress then removes the favorable living-benefit tax treatment: withdrawals, loans, and assignments come out gain-first (LIFO) and carry a 10% penalty on the taxable portion before age 59 1/2. Once a MEC, always a MEC — the status cannot be undone and carries over to any contract received in exchange — but the death benefit itself remains income-tax free.

    Source: IRC 7702A (7-pay test); IRC 72(e) and 72(v) — MEC distributionsReport a problem with this question

54. 54. Which statement about the federal income taxation of life insurance death proceeds is correct?

    • A.Proceeds are always income-tax free, regardless of how the policy was acquired
    • B.Proceeds are taxable to any beneficiary who is not related to the insured
    • C.If the policy was sold to an unrelated third party for valuable consideration, the proceeds exceeding that consideration plus subsequent premiums are taxable income✓ Answer
    • D.Proceeds are tax free only if the beneficiary elects a lump sum within 60 days of death

    IRC 101(a)(1) excludes death proceeds from gross income, but the transfer-for-value rule of 101(a)(2) removes that exclusion when a policy is sold or transferred for valuable consideration, limiting the tax-free amount to the buyer's consideration plus premiums it later paid. The rule has safe-harbor exceptions — transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner, to a corporation in which the insured is an officer or shareholder, or carryover-basis transfers.

    Source: IRC 101(a)(1) and the transfer-for-value rule, IRC 101(a)(2)Report a problem with this question

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