Life & Health Insurance Exam, General, Practice Exams

An applicant who regularly scuba dives in caves is most likely to be:

1. Charged a higher (rated) premium or have the avocation excluded ✓
2. Declined for any coverage of any kind
3. Given the lowest preferred premium available under the policy's terms
4. Required to convert to an annuity instead

Why: Hazardous avocations increase risk; insurers respond with a rating, an exclusion rider, or a higher premium.

'Defamation' in insurance regulation refers to:

1. Making false or maligning statements about an insurer's financial condition ✓
2. Refusing to renew a policy after a single claim is filed
3. Sharing part of a commission with another licensed producer
4. Filing a consumer complaint with the state insurance department

Why: Defamation is making, publishing, or circulating false statements that are maligning, especially about the financial condition of an insurer.

Pension maximization is a strategy in which a retiree:

1. Takes the larger single-life pension and buys life insurance to protect the spouse ✓
2. Always elects the reduced joint-and-survivor pension for maximum safety
3. Withdraws the entire pension as a lump sum and stops all coverage
4. Delays the pension indefinitely to keep earning service credits

Why: Pension max takes the higher single-life payout and uses life insurance to provide for the surviving spouse, instead of accepting a smaller joint-and-survivor benefit.

An annuitant has a $60,000 cost basis and a $120,000 expected return. Of each $12,000 annual payment, the taxable portion is:

1. $6,000 ✓
2. $3,000
3. $12,000
4. $0

Why: Exclusion ratio = 60,000/120,000 = 50%; $6,000 of each $12,000 payment is excluded and $6,000 is taxable.

Credit life insurance is typically written as:

1. Decreasing term equal to the outstanding loan balance, payable to the creditor ✓
2. Whole life insurance with a growing cash value that the borrower may freely access at any time
3. Level term naming the borrower's family as the primary beneficiary
4. A variable policy whose benefit rises and falls with interest rates

Why: Credit life is decreasing term tied to the loan balance; if the borrower dies, it pays the remaining debt to the creditor.

The guaranteed insurability rider allows the insured to:

1. Stop paying premiums whenever the insured becomes disabled
2. Buy more coverage at set option dates without proving insurability ✓
3. Convert the life policy into an immediate income annuity
4. Take all future policy dividends as annual cash payments

Why: It guarantees the right to purchase more coverage at set option dates without re-proving insurability.

In a variable life insurance policy, the investment risk on the cash value is borne by:

1. The policyowner ✓
2. The insurance company, which guarantees the cash value in full
3. The state insurance guaranty association at all times
4. The producer who originally sold the policy contract

Why: In variable life the cash value is held in separate accounts the owner directs, so the policyowner assumes the investment risk (a minimum death benefit is usually guaranteed).

At death, an insured personally owned the policy on their own life. The death proceeds are:

1. Included in the insured's gross estate for estate-tax purposes ✓
2. Excluded from the estate because they go to a beneficiary
3. Subject to income tax in the beneficiary's hands
4. Never reportable for any tax at all

Why: Holding incidents of ownership causes the proceeds to be included in the insured's gross estate (though not subject to income tax).

Before a producer can legally transact business on behalf of an insurer, the insurer generally must:

1. File an appointment authorizing the producer to represent it ✓
2. Pay the producer a guaranteed minimum annual salary
3. Obtain written consent from every existing policyholder
4. Conduct a medical examination of the producer

Why: An appointment is the insurer's authorization (filed with the state) allowing a licensed producer to act as its representative.

State guaranty association protection may NOT be:

1. Used by producers as a selling point in advertising ✓
2. Available to policyholders of an insolvent insurer
3. Subject to statutory coverage limits
4. Funded by assessments on member insurers

Why: Using guaranty fund protection to induce a sale is prohibited; the fund exists to protect policyholders of insolvent insurers, within limits.

Most state replacement regulations require that, when replacing an existing life policy, the producer:

1. Give the applicant a replacement notice and list the policies being replaced ✓
2. Pay the surrender charges on the old policy out of personal funds
3. Wait two full years before the new coverage can take any effect
4. Obtain written permission from the original selling insurance company

Why: Replacement rules require disclosure: the producer provides a replacement notice and gives the existing insurer an opportunity to conserve the policy.

An applicant pays the first premium and receives a binding (temporary insurance) receipt. Coverage is effective:

1. Immediately as of the receipt date, even before underwriting finishes ✓
2. Only after the policy is formally issued
3. Only if the applicant later proves insurability under the policy's terms
4. 30 days after the application is signed

Why: A binding receipt provides immediate coverage as of its date; a conditional receipt instead makes coverage contingent on the applicant being insurable.

An insured with a $6,000 monthly benefit has a residual disability with a 40% income loss. The residual benefit is:

1. $2,400 ✓
2. $6,000
3. $3,600
4. $1,200

Why: Residual benefit is proportional to income lost: 40% × $6,000 = $2,400.

An applicant classified as a 'preferred' risk:

1. Pays the lowest premium because of better-than-average risk factors ✓
2. Pays the highest premium because of poor health or habits
3. Is automatically declined for any individual coverage
4. Must purchase coverage only through an employer group plan

Why: Preferred risks (e.g., ideal build, nonsmoker) present lower-than-average mortality and qualify for the lowest premiums; standard and substandard pay more.

If a deceased insured held any incidents of ownership in their life policy at death, the death benefit is generally:

1. Excluded from the estate and paid entirely income-tax-free
2. Included in the insured's taxable estate for estate-tax purposes ✓
3. Taxed as ordinary income to the named policy beneficiary
4. Subject to an automatic 10% early-distribution penalty

Why: Incidents of ownership (e.g., right to change the beneficiary) cause the proceeds to be included in the insured's taxable estate.

An alien insurer is one that is:

1. Incorporated outside the United States ✓
2. Incorporated in this state
3. Incorporated in another U.S. state
4. Not licensed in any state

Why: Alien = incorporated in another country; domestic = this state; foreign = another U.S. state.

The McCarran-Ferguson Act established that the insurance business is primarily regulated by:

1. The individual states ✓
2. A single federal insurance agency in Washington
3. The Internal Revenue Service and the U.S. Treasury
4. International treaty organizations and trade bodies

Why: McCarran-Ferguson (1945) affirmed that regulation of insurance is left to the states, except where federal law specifically applies.

A policy loan taken against a life policy's cash value:

1. Must be repaid in full within thirty days or it lapses
2. Reduces the death benefit by any unpaid loan and interest ✓
3. Is treated as taxable income in the year the loan is taken
4. Requires the owner to submit new evidence of insurability

Why: Unpaid loan balance and interest are subtracted from the death benefit; loans are not taxable while the policy stays in force.

Renewable term insurance lets the owner renew at the end of each term:

1. Only after passing a fresh medical examination each term
2. Without evidence of insurability, at a premium that rises each term ✓
3. At the same level premium for the rest of the insured's life
4. Only while the insured remains under forty years of age

Why: Renewability guarantees renewal without proving insurability, though the premium rises with age.

If an annuitant dies during the accumulation phase of a deferred annuity, the contract typically pays the beneficiary:

1. At least the premiums paid (or current value, if greater) ✓
2. Nothing, because annuities have no death benefit before payout
3. Triple the account value as a guaranteed accidental death bonus
4. Only the surrender value after deducting all future charges

Why: Most deferred annuities guarantee the beneficiary the greater of premiums paid or current account value if the owner dies before annuitization.

A self-funded employer wants protection against one employee's catastrophic claim. It should buy:

1. Specific (individual) stop-loss insurance ✓
2. Aggregate stop-loss insurance only
3. A fully insured HMO contract
4. Reinsurance on its building

Why: Specific stop-loss caps the employer's liability for any single individual's claims; aggregate stop-loss caps total claims.

Before recommending an annuity, a producer learns the client needs the money within a year for living expenses. The producer should:

1. Conclude the annuity is likely unsuitable and not recommend it ✓
2. Recommend the annuity with the highest surrender charges
3. Sell the annuity anyway to meet a monthly sales quota
4. Recommend it only if the client signs a liability waiver

Why: Suitability rules require matching the product to the client's situation; an annuity (with surrender charges and a long horizon) is unsuitable for funds needed immediately.

Federal telemarketing (do-not-call) rules require that insurers and producers:

1. Not call numbers listed on the national Do-Not-Call Registry ✓
2. Call every prospect at least once per month
3. Record all sales calls and send them to the state
4. Only contact prospects by postal mail

Why: Telemarketers must scrub against the national Do-Not-Call Registry and honor opt-outs.

Insurers usually limit disability income benefits to about 60–70% of the insured's gross income in order to:

1. Preserve the insured's financial incentive to return to work ✓
2. Comply with a federal cap on all insurance benefit amounts
3. Match the benefit exactly to the insured's monthly expenses
4. Guarantee the insurer a profit on every policy that is sold

Why: Benefits are capped below full income (and are tax-free when individually paid) so the insured retains a financial incentive to recover and return to work.

A structured settlement annuity is typically used to:

1. Pay periodic settlement amounts from a legal claim over time ✓
2. Provide an employer's executives with deferred bonuses
3. Fund a child's college education through a trust
4. Replace a key employee who has died

Why: A structured settlement funds court/insurance settlement payments as periodic income; amounts for physical-injury claims are generally tax-free.

A whole life policyowner borrows against the cash value and does not repay it. At death, the death benefit is:

1. Reduced by the outstanding loan and interest ✓
2. Paid in full, with the loan forgiven
3. Forfeited entirely because of the loan
4. Replaced by a refund of premiums

Why: An unpaid policy loan plus interest is subtracted from the death benefit paid to the beneficiary.

Workers' compensation insurance covers:

1. Job-related injuries and occupational illnesses ✓
2. Any injury an employee suffers, whether on or off the job
3. Only injuries that occur during an employee's commute home
4. Medical costs of an employee's dependents and family members

Why: Workers' compensation is a no-fault, state-mandated coverage for work-related injuries and occupational diseases; off-the-job losses are not covered.