Life Insurance Exam Questions and Answers Part 2

Which statement about a whole life policy is true? A. Beneficiary may be changed only with the consent of the premium payor B. Cash value may be borrowed against C. Premiums are flexible D. Death benefit can usually be adjusted Correct Answer: B. Cash value may be borrowed against One feature of whole life policies is that the policyowner may borrow against the cash value. How does a typical Variable Life Policy investment account grow? A. Based on returns from insurer's general account B. Tied to the price of gold C. Through mutual funds, stocks, bonds D. Tied to Treasury Bills Correct Answer: C. Through mutual funds, stocks, bonds A Variable Life Policy has investment values based on instruments such as mutual funds, stocks, and bonds. A Nonforfeiture clause gives the policyowner A. Lifetime income B. Guaranteed values even if the policy has lapsed C. Cost of living allowances D. Unemployment benefits Correct Answer: B. Guaranteed values even if the policy has lapsed A nonforfeiture clause stipulates that a policyowner can receive full or partial benefits or a partial refund of premiums after a lapse due to non-payment. A policy loan is made possible by which of these life insurance policy features? A. Owner's rights provision B. Consideration clause C. Cash value provision D. Extended term provision Correct Answer: C. Cash value provision The Cash value provision makes a policy loan possible. A Cost of Living rider gives the insured A. Tax incentives B. Additional death benefits C. Monthly income D. Decreasing premiums Correct Answer: B. Additional death benefits The Cost of Living rider can be purchased with many types of life insurance and provides additional death benefits to hedge against inflation. Term insurance has which of the following characteristics? A. Endows at the end of the policy period B. Builds cash value C. Expires at the end of the policy period D. Has nonforfeiture options Correct Answer: C. Expires at the end of the policy period With term insurance, the policy expires at the end of the policy period. A $20,000 life insurance policy application is completed, but the producer does not collect the initial premium. At what point does the coverage go into effect? A. Upon a completed medical examination B. When the MIB report is received C. Upon policy approval D. When the applicant receives the policy and pays the initial premium Correct Answer: D. When the applicant receives the policy and pays the initial premium Coverage becomes effective when the applicant receives the policy and pays the initial premium. Information obtained from a phone conversation with the proposed insured can be found in which of these reports? A. MIB report B. Inspection report C. Agent's report D. Attending physician's report Correct Answer: B. Inspection report An inspection report may include information obtained by a telephone call to the proposed insured. ABC Insurance Company has accepted a life insurance application that contains unanswered questions and makes it part of the contract. In this situation, the insurer has: A. Waived one of its legal rights B. Committed an act of fraud C. Assigned the risk to a reinsurer D. Issued a voidable policy Correct Answer: A. Waived one of its legal rights If an insurer accepts an application with unanswered questions and includes it in the contract, the company has waived one of its legal rights. What action should a producer take if the initial premium is NOT submitted with the application? A. Forward the application to the insurer after giving the applicant a conditional receipt B. Keep the application until premium is paid C. Forward the application to the insurer without the initial premium D. Forward the application to the insurer after giving the applicant a binding receipt Correct Answer: C. Forward the application to the insurer without the initial premium If a premium is not paid with the application, the producer should submit it without the premium, but the policy will not be valid until the initial premium is collected. Which of the following statements is CORRECT regarding the tax treatment of a lump-sum payment paid to a life insurance policy's primary beneficiary? A. The proceeds are taxable only if the beneficiary's tax bracket has changed B. All proceeds are considered taxable income in the year they are received C. All proceeds are income tax-free in the year they are received D. The proceeds which exceed the amount paid in premiums are taxable Correct Answer: C. All proceeds are income tax-free in the year they are received If a life insurance policy has a stated beneficiary, all proceeds are income taxfree in the year they are received. Upon policy delivery, a signed good health statement is requested from the applicant. Why would this be necessary? A. The initial premium was NOT submitted with the application B. The applicant is suspected of making a material misrepresentation C. The applicant chose an annual premium mode D. The initial premium was submitted with the application Correct Answer: A. The initial premium was NOT submitted with the application A signed statement of good health is typically requested if the application was submitted without the initial premium. How long does the coverage normally remain on a limited-pay life policy? A. At the discretion of the insurer B. Age 65 C. Age 100 D. When premium payments stop Correct Answer: C. Age 100 Even though premium payments are limited to a certain period, the insurance protection extends until the insuredâs ™€ death or to age 100. A Return of Premium life insurance policy is: A. A Nonforfeiture option B. Interest-sensitive C. Whole life and Increasing term D. Variable life Correct Answer: C. Whole life and Increasing term A Return of Premium life insurance policy is whole life insurance with an increasing term rider equal to the amount of premiums paid. What is the purpose of a Policy Summary? A. It highlights the critical parts of the policy issued B. It details the commissions earned by the agent C. It guarantees a policy will be issued D. It allows the consumer to compare the costs of different policies Correct Answer: A. It highlights the critical parts of the policy issued A Policy Summary highlights the critical parts of the policy issued and describes the coverages, riders, and exclusions. A(n) _____ rider may be used to include coverage for children under their parents' life insurance policy. A. Parent B. Conversion C. Payor D. Term Correct Answer: D. Term A Term rider may be used to include coverage for children under their parents' life insurance policy. Which of these types of policies may NOT have the Automatic Premium Loan provision attached to it? A. Endowment B. 20-Pay Life C. Modified Whole Life D. Decreasing Term Correct Answer: D. Decreasing Term The Automatic Premium Loan provision can be incorporated into all of these policies EXCEPT decreasing term. The Common Disaster clause provides that if both the insured and the sole named beneficiary were to die in a common accident, which of the following is true? A. This clause provides the payment of proceeds to the insured's estate B. The estate taxes in the beneficiary's estate may be reduced C. The estate taxes in the insured's estate may be reduced D. This clause provides the payment of proceeds to the beneficiary's estate Correct Answer: A. This clause provides the payment of proceeds to the insured's estate The Common Disaster clause presumes the beneficiary dies first, so proceeds go to the contingent beneficiary or the insured's estate if no contingent exists. Company Z has a Cross Purchase Buy-Sell Agreement in place among its three founding partners. If the agreement is funded with individual life insurance, what would it require? A. One policy is owned and paid for by the company B. Each partner must own a policy on the other partners C. One policy is owned by the company and premiums are split equally among the partners D. Each partner owns their own individual policy Correct Answer: B. Each partner must own a policy on the other partners In a Cross Purchase Buy-Sell Agreement, each partner owns a policy on the other partners. K, age 45, and his wife, age 43, have three children. They purchase a Family Policy that covers K's wife to age 65. All of these situations will pay a death benefit EXCEPT A. K's wife dies at age 66 B. A child dies at age 18 C. K's wife dies at age 60 D. A child dies at age 15 Correct Answer: A. K's wife dies at age 66 K's wife has coverage only until age 65. Which parts of a life insurance policy are guaranteed to be true? A. Representation B. Rating C. Warranty D. Statement Correct Answer: C. Warranty Warranties are statements considered literally true; if untrue, they can void the policy. Which of the following correctly explains the actions an agent should take if a customer wants to apply for an insurance policy? A. Complete the application over the phone with the customer, sign the application for the customer, then send the application off to the insurance company B. Have the customer sign a blank application, then take the application back to his office to complete prior to sending it off to the insurance company C. Have the customer fill out the application and send it to his office for him to sign, then send it off to the insurance company D. Complete the application and review the information with the customer prior to obtaining the customer's signature, then send the application off to the insurance company Correct Answer: D. Complete the application and review the information with the customer prior to obtaining the customer's signature, then send the application off to the insurance company The agent must review the completed application with the customer before obtaining their signature. In a life insurance policy, which provision states who may select policy options, designate and name a beneficiary, and be the recipient of any financial benefits from the policy? A. Entire Contract B. Insuring Clause C. Owner's Rights D. Nonforfeiture Correct Answer: C. Owner's Rights The Owner's Rights provision defines these privileges. All of these Settlement options involve the systematic liquidation of the death proceeds in the event of the insured's death, EXCEPT: A. Fixed Period B. Interest Only C. Life Income D. Fixed Amount Correct Answer: B. Interest Only The Interest Only option retains the principal and pays only interest. A 15-year mortgage is best protected by what kind of life policy? A. Adjustable life B. 15-year decreasing term C. 15-year level term D. Modified whole life Correct Answer: B. 15-year decreasing term A decreasing term policy aligns with the declining balance of a mortgage. Dividends paid from a life insurance policy are A. issued by the Department of Insurance B. issued by the insurer C. taxable D. guaranteed Correct Answer: B. issued by the insurer Dividends are paid by the insurer and are generally not taxable as income. Which premium schedule results in the lowest cost to the policyowner? A. Quarterly B. Annual C. Monthly D. Semi-annual Correct Answer: B. Annual Annual payments avoid additional billing fees. An insured's inability to perform two or more activities of daily living may trigger which type of life policy rider? A. Accidental B. Long term care C. Waiver of premium D. Accelerated death benefit Correct Answer: B. Long term care This rider provides benefits for chronic illness or disability. S would like to use dividends from her life insurance policy to purchase paid-up additions. All of these would be factors that determine how much coverage can be purchased EXCEPT A. beneficiary's age B. type of life insurance C. dividend amount used toward purchase D. S's attained age Correct Answer: A. beneficiary's age The beneficiary's age does not affect paid-up additions. A company that owns a life insurance policy on one of its key employees may do all of the following EXCEPT A. Change beneficiary B. Change the policy's interest rate C. Cancel policy D. Borrow against cash value Correct Answer: B. Change the policy's interest rate The interest rate is set by the insurer and cannot be changed by the policyowner. The Accelerated Death Benefit provision in a life insurance policy is also known as a(n): A. Living Benefit B. 1035 exchange C. Non-forfeiture option D. Inter vivos gift Correct Answer: A. Living Benefit This provision allows access to death benefits while the insured is still alive. B receives yearly dividends and interest from a participating life insurance policy. Which of these should B include as gross income for federal income tax purposes? A. Dividends only B. Interest and dividends C. Interest only D. Neither interest nor dividends are taxable Correct Answer: C. Interest only Interest is taxable, but dividends are generally not. Which of the following consists of an offer, acceptance, and consideration? A. Warranty B. Contract C. Estoppel D. Representation Correct Answer: B. Contract These are the essential elements of a legally binding contract. What does a Face Amount Plus Cash Value Policy pay upon the insured's death? A. Face amount plus total premium paid throughout the life of the policy B. Face amount plus the policy's cash value C. Face amount plus the policy's dividends D. The greater amount of the policy's death benefit or the cash value Correct Answer: B. Face amount plus the policy's cash value This policy type pays both the face amount and the accumulated cash value. A Limited-Pay Life policy has: A. graded death benefits B. premium payments limited to a specified number of years C. no cash value D. premium payments that are paid to age 100 Correct Answer: B. premium payments limited to a specified number of years Premiums are paid for a set period, but coverage continues for life. The Consideration clause in a life insurance contract contains what pertinent information? A. Amount of premium payments and when they are due B. Offer and acceptance C. Entire Contract D. Summary of benefits Correct Answer: A. Amount of premium payments and when they are due This clause specifies the premium obligations. P died five years after purchasing a life policy. While investigating the claim, the insurer discovered material misrepresentations made by P during the application process. Which of these actions will the insurer take? A. Beneficiary will be denied the claim and refunded all paid premiums B. Beneficiary will be paid a partial Death Benefit C. Beneficiary will be paid the Death Benefit D. Beneficiary will be denied the claim Correct Answer: C. Beneficiary will be paid the Death Benefit After the incontestability period (typically 2 years), the insurer must pay the claim. A life insurance application may be rejected on the basis of all of these factors EXCEPT A. Hobbies B. Weight C. Medical history D. Gender Correct Answer: D. Gender Gender cannot be used as a basis for rejection. Which settlement option pays a stated amount to an annuitant, but no residual value to a beneficiary? A. Life Income B. Fixed Amount C. Fixed Period D. Interest Only Correct Answer: A. Life Income Life Income payments cease upon the annuitant's death. How are policyowner dividends treated in regards to income tax? A. Interest on accumulations is taxed B. Dividends are not taxable C. Taxed as ordinary income D. Taxed as capital gains Correct Answer: A. Interest on accumulations is taxed Dividends are typically tax-free unless they exceed total premiums paid. How would a contingent beneficiary receive the policy proceeds in an Accidental Death and Dismemberment (AD&D) policy? A. If the insured died of accidental causes B. If the insured died of natural causes C. If the primary beneficiary is a minor at the time of the insured's death D. If the primary beneficiary dies before the insured Correct Answer: D. If the primary beneficiary dies before the insured Contingent beneficiaries receive proceeds if the primary beneficiary predeceases the insured. All of these statements about Equity Indexed Life Insurance are correct, EXCEPT: A. If the gain on the index goes beyond the policy's minimum rate of return, the cash value will mirror that of the index B. The premiums can be lowered or raised, based on investment performance C. Cash value has a minimum rate of accumulation D. Tied to an equity index such as the S&P 500 Correct Answer: B. The premiums can be lowered or raised, based on investment performance Equity Indexed Life Insurance is permanent life insurance that allows policyholders to tie accumulation values to a stock market index. P is blinded in an industrial accident. Which provision of his life insurance policy will pay a stated benefit amount? A. Accelerated Benefits provision B. Accidental Death and Dismemberment clause C. Consideration clause D. Entire Contract Correct Answer: B. Accidental Death and Dismemberment clause An AD&D clause provides benefits for death due to an accident or for the loss of one or more hands, feet, arms, legs, or loss of sight. Which is true concerning a Variable Universal Life policy? A. Policyowner controls where the investment will go and selects the amount of the premium payment B. Policyowner has no say where the investment will go but can choose the premium mode C. The investment vehicle for this type of policy is held in the insurer's general portfolio D. The death benefit can vary but the policyowner has no say in the premium amount paid Correct Answer: A. Policyowner controls where the investment will go and selects the amount of the premium payment With Variable Universal Life, the policyowner controls the investment of cash values and chooses the timing and amount of premium payments. How are surrender charges deducted in a life policy with a rear-end loaded provision? A. Deducted from policy's cash value B. Deducted when the policy is discontinued C. Deducted when assigned to another policyowner D. Deducted from the death benefit Correct Answer: B. Deducted when the policy is discontinued In a policy with a rear-end loaded provision, surrender charges are deducted when the policy is discontinued. P is the insured on a participating life policy. Which statement is true if P's premiums are waived due to a disability? A. P cannot assign ownership of the policy while premiums are being waived B. P cannot borrow against the policy's cash value while disabled C. P will still receive declared dividends D. P will have to pay income taxes on the amount of premiums waived Correct Answer: C. P will still receive declared dividends Even though premiums are waived because of the disability, the insured will continue to receive dividends just as if the insured were still making the payments themselves. Under a Graded Premium policy, the premiums: A. are higher during the policy's early years B. can be adjusted by the insured C. are constant throughout the length of the policy D. are lower during the policy's early years Correct Answer: D. are lower during the policy's early years A Graded Premium life policy provides for annual increases in premiums for a constant face amount of insurance during a defined preliminary period, with the purpose of making initial payments more affordable. What is the underlying concept regarding level premiums? A. The early years are charged less than what is needed B. The early years are charged more than what is needed C. Level premiums build cash value quicker in the early years D. Level premiums can only be paid annually Correct Answer: B. The early years are charged more than what is needed The concept of level premiums charges more than needed in early years. In a life insurance policy, which feature states that the policy will not cover certain risks? A. Exclusion B. Expulsion C. Exception D. Ejection Correct Answer: A. Exclusion The feature of a life insurance policy stating that the policy will not cover certain risks is called an exclusion. A Term Life rider offers the insured: A. additional life coverage B. long-term care coverage C. disability protection D. cash value Correct Answer: A. additional life coverage A Term Life rider offers the insured additional life coverage. All of the following statements are true regarding a policy's Grace period, EXCEPT: A. Past due premiums are waived B. Grace period terms are stated in the policy C. Policy loans may still be made D. Full coverage continues Correct Answer: A. Past due premiums are waived Premiums due are NOT waived during a policy's Grace period. Which of these terms accurately defines an underwriter's assessment of information on a life insurance application? A. Risk classification B. Warranty review C. Inspection report D. Insurable interest Correct Answer: A. Risk classification Underwriting, another term for risk selection, is the process of reviewing the many characteristics that make up the risk profile of an applicant to determine if the applicant is insurable and, if so, at standard or substandard rates. A Universal Life policy is sometimes referred to as an unbundled Life Policy because the owner can see the interest earned, expense charges, and the: A. inflation factor B. commission rate C. cost of insurance D. inherent risk Correct Answer: C. cost of insurance The Universal Life Policy is called an unbundled Life Policy because the policyholder can see the expense charges, the interest earned, and the cost of insurance. Which of these is NOT considered to be an element of an insurance contract? A. the offer B. negotiating C. consideration D. acceptance Correct Answer: B. negotiating The elements of an insurance contract do not include negotiating. N is a student pilot with a large life insurance policy. Which of these features would limit the insurer's obligation in the event N was killed while flying as a student pilot? A. Collateral assignment B. Concealment C. Exclusion D. Misrepresentation Correct Answer: C. Exclusion Exclusions are specified hazards listed in a policy for which benefits will not be paid. A(n) ______ Life policy offers the owner investment in products such as moneymarket funds, long-term bonds and equities. A. Term B. Variable C. Universal D. Adjustable Correct Answer: B. Variable A Variable Life policy offers the owner investment in products such as moneymarket funds, long-term bonds, or equities. A policyowner is able to choose the frequency of premium payments through what policy feature? A. Consideration B. Payor benefit C. Assignment provision D. Premium Mode Correct Answer: D. Premium Mode Premium Mode is the feature that allows the policyowner to select the timing of premium payment, such as monthly, quarterly, annually, etc. Which of the following statements is CORRECT about accelerated death benefits? A. Those on Social Security disability automatically qualify for this benefit B. The full face amount is available as an accelerated benefit C. This provision is usually provided with an increase in premium D. Must have a terminal illness to qualify Correct Answer: D. Must have a terminal illness to qualify Accelerated death benefits provide for the early payment of some portion of the policy face amount should the insured suffer from a terminal illness or injury. The __________ has the right to change a life insurance policy's beneficiary. A. policyowner B. beneficiary C. insured D. insurer Correct Answer: A. policyowner The policyowner has the right to change a life insurance policy's beneficiary. A policyowner would like to change the beneficiary on a Life insurance policy and make the change permanent. Which type of designation would fulfill this need? A. Contingent B. Revocable C. Primary D. Irrevocable Correct Answer: D. Irrevocable An irrevocable designation may not be changed without the written consent of the beneficiary. A contract where one party either accepts or rejects the terms of a contract written by another party is called a contract of A. aleatory B. adherence C. adhesion D. assimilation Correct Answer: C. adhesion A contract of adhesion is offered intact to one party by another and must be accepted or rejected in full, with no negotiation over terms. Why must an insurance applicant answer all questions on the application? A. The Medical Information Bureau (MIB) requires this for an insurer to be a member B. Statements and representations on the application are part of the consideration for issuing a policy C. The National Association of Insurance Commissioners (NAIC) requires all questions be answered D. Statements and representations are considered guarantees Correct Answer: B. Statements and representations on the application are part of the consideration for issuing a policy The application statements and representations are part of the consideration for issuing a policy. N is covered by a Term Life policy and does not make the required premium payment which was due August 1. N dies September 15. What action will the insurer take? A. Claim will be decided by an arbitrator B. Claim will be denied C. Claim will be partially paid D. Claim will be paid in full Correct Answer: B. Claim will be denied The insurance company will deny the claim, as the policy would have lapsed due to nonpayment by September 15. Which of these actions is taken when a policyowner uses a Life Insurance policy as collateral for a bank loan? A. Revocable assignment B. Collateral assignment C. Beneficiary change D. Irrevocable assignment Correct Answer: B. Collateral assignment A policyowner using the Life Insurance policy as collateral for a bank loan would make a collateral assignment. A primary beneficiary has died before the insured in a life insurance policy. A contingent beneficiary is also named in the policy. Which of the following will occur when the insured dies? A. Probate will decide who receives proceeds B. Proceeds will go to the contingent beneficiary C. Proceeds will go to the insured's estate D. Proceeds will go to the primary beneficiary's estate Correct Answer: B. Proceeds will go to the contingent beneficiary If the primary beneficiary dies before the insured, the contingent beneficiary will receive the proceeds when the insured dies. S owns a life insurance policy with cash values that fluctuate according to the underlying investment performance of common stocks. Which of these policies does S own? A. Variable Whole Life B. Endowment C. Joint Life D. Variable Term Life Correct Answer: A. Variable Whole Life Variable whole life insurance is a policy in which the cash values are determined by the performance of the underlying securities in the policy. The reason for backdating a policy is A. to avoid being considered a substandard risk due to a recent cancer diagnosis B. to obtain a premium rate based on an earlier age C. to decrease the Contestable period D. to decrease the face amount Correct Answer: B. to obtain a premium rate based on an earlier age Backdating a life insurance policy is done to use premiums based on an earlier age. If a 10-Year Term Life policy contains a Renewability provision, the policy will renew A. along with a decrease in premium B. only with evidence of insurability C. without evidence of insurability D. at the option of the insurer Correct Answer: C. without evidence of insurability Renewable term allows coverage to be extended without new underwriting, even if the insured's health has declined. A policy of adhesion can only be modified by whom? A. The agent B. The insurance company C. The applicant D. The primary beneficiary Correct Answer: B. The insurance company A policy of adhesion is a contract which only the insurer can modify. K is the insured and P is the sole beneficiary on a life insurance policy. Both are involved in a fatal accident where K dies before P. Under the Common Disaster provision, which of these statements is true? A. Proceeds will be payable to K's estate if P dies within a specified time B. Proceeds will be paid to P's estate C. The courts will decide who will receive death benefits