Life & Health Insurance Exam, General, Practice Exams

An insured and the sole primary beneficiary die in the same crash, order of death unknown. Under the Uniform Simultaneous Death Act, proceeds go to:

1. The contingent beneficiary or the insured's estate ✓
2. The primary beneficiary's heirs under the policy's terms
3. The first to be pronounced dead
4. The insurer, as unclaimed funds

Why: The Act presumes the insured survived the beneficiary, so the proceeds pass to the contingent beneficiary or the insured's estate.

A pre-existing condition exclusion in an individual health policy refers to:

1. A condition treated within a look-back period before the effective date ✓
2. Any condition the insured might develop after buying the policy
3. A condition the insurer agrees to cover with no waiting at all
4. Only conditions that are explicitly listed by name in the policy

Why: A pre-existing condition is one for which care was received within a stated look-back period before coverage began. On ACA-compliant individual major-medical plans, pre-existing condition exclusions are prohibited entirely; time-limited exclusions survive only on excepted or non-ACA products.

If the named beneficiary of a life policy is a minor child, the death proceeds:

1. Are usually paid to a guardian or trust, not directly to the minor ✓
2. Are forfeited entirely until the child reaches the age of majority
3. Must by law be split equally among all of the insured's relatives
4. Revert to the insurance company until a court orders otherwise

Why: Insurers generally will not pay proceeds directly to a minor; a guardian, custodian, or trust receives and manages the funds.

The four essential elements required to form a valid insurance contract are offer and acceptance, competent parties, legal purpose, and:

1. Consideration ✓
2. A medical examination of the applicant
3. Approval by the state insurance commissioner
4. A guaranteed minimum interest rate

Why: A valid contract requires agreement (offer/acceptance), consideration, competent parties, and a legal purpose.

A withdrawal from a nonqualified deferred annuity is taxed:

1. Gain first (LIFO), as ordinary income ✓
2. Principal first, with no tax until basis is gone
3. At long-term capital-gains rates entirely
4. Only when the contract is fully surrendered

Why: Nonqualified annuity withdrawals come out earnings-first (LIFO) and are taxed as ordinary income (plus a possible penalty before 59½).

An annuitant has a $50,000 cost basis and a $100,000 expected return. Of each $10,000 annual payment, how much is taxable?

1. $5,000 ✓
2. $2,500
3. $10,000
4. $0

Why: Exclusion ratio = basis ÷ expected return = 50,000/100,000 = 50%. Half of each $10,000 payment ($5,000) is excluded; the other $5,000 is taxable.

Which managed-care plan typically requires members to select a primary care physician and obtain referrals to see specialists?

1. PPO
2. HMO ✓
3. Indemnity plan
4. EPO

Why: An HMO uses a primary care physician 'gatekeeper' and referrals, with care generally limited to the network; a PPO allows out-of-network care at higher cost without referrals.

An annuity 'free-look' provision allows the purchaser to:

1. Return the contract within a set period for a refund ✓
2. Withdraw all earnings tax-free during the first year
3. Switch the contract to a different insurer at no cost
4. Cancel the contract any time over the next ten years

Why: The free-look period lets the buyer examine the annuity and return it within the stated number of days for a refund of premium.

A 'stock' insurance company is:

1. Owned by stockholders and may pay them dividends ✓
2. Owned by its policyholders, who receive policy dividends
3. A nonprofit organized under the lodge system
4. An unincorporated group of subscribers

Why: A stock insurer is owned by shareholders (dividends are taxable shareholder dividends); a mutual insurer is owned by policyholders.

An insurer incorporated in another U.S. state but doing business in this state is a(n) ____ insurer.

1. Foreign ✓
2. Domestic
3. Alien
4. Admitted

Why: Domestic = incorporated in this state; foreign = another state; alien = another country.

A life insurance policy that fails the federal '7-pay test' is classified as a Modified Endowment Contract (MEC), meaning:

1. Lifetime distributions are taxed on a LIFO basis with a possible penalty ✓
2. All future death benefits paid to beneficiaries become fully taxable
3. The policy immediately loses its cash value and reverts to term coverage
4. Premiums paid into the policy become deductible on the owner's tax return

Why: A MEC keeps a tax-free death benefit, but living distributions are taxed gains-first (LIFO) with a 10% penalty before 59½.

For group term life insurance, the cost of employer-provided coverage exceeding $50,000 is:

1. Imputed as taxable income to the covered employee ✓
2. Fully deductible by the employee on their personal return
3. Exempt from tax because all group life is a tax-free benefit
4. Taxed only when the employee eventually leaves the company

Why: Employees are taxed (imputed income, via IRS Table I) on the cost of employer-paid group term coverage above $50,000.

Under a Section 162 executive bonus plan, the employer:

1. Pays a bonus equal to the premium, which the employee owns and is taxed on ✓
2. Owns the policy and keeps all of the cash value for corporate purposes
3. Borrows against the executive's personal policy to fund operations
4. Defers the executive's salary into a nonqualified retirement account

Why: The employer pays a deductible bonus equal to the premium; the employee owns the policy and reports the bonus as taxable income.

Unlike Original Medicare, a Medicare Advantage (Part C) plan must include:

1. An annual out-of-pocket maximum ✓
2. Coverage with no provider network at all
3. Free long-term custodial nursing care
4. A guaranteed cash rebate each year

Why: Medicare Advantage plans must cap annual out-of-pocket costs for Part A and B services; Original Medicare has no such maximum.

An insurer holding a certificate of authority to transact business in a state is said to be:

1. Admitted (authorized) ✓
2. Nonadmitted (unauthorized)
3. Alien
4. Reciprocal

Why: An admitted/authorized insurer holds a certificate of authority; a nonadmitted insurer does not.

An insured and the primary beneficiary die together in a car accident, and the order of death cannot be determined. Under the common disaster clause, the proceeds go to:

1. The contingent beneficiary (or the insured's estate) ✓
2. The primary beneficiary's estate and heirs
3. The insurer, as an unclaimed death benefit
4. The first responder who reported the accident

Why: The common disaster provision presumes the insured survived the beneficiary, so proceeds pass to the contingent beneficiary or the insured's estate.

A life insurance policy's aviation exclusion typically denies the death benefit when the insured dies:

1. As a non-fare-paying private pilot or crew member ✓
2. While riding as a paying passenger on a scheduled commercial flight
3. From any cause during the first two years of the policy
4. While traveling by automobile to a private airport hangar

Why: Aviation exclusions usually apply to non-commercial flying (private pilots/crew); fare-paying passengers on scheduled flights remain covered.

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 disability policy has a 30-day probationary period for sickness. An insured who becomes ill on day 20 of coverage:

1. Has no benefit for that sickness ✓
2. Is fully covered like any other claim
3. Receives only accident benefits for it
4. Must restart the entire policy

Why: The probationary period excludes sicknesses that begin during the initial waiting span (here, the first 30 days); accidents are usually covered immediately.

In a variable annuity, accumulation units measure the contract's value:

1. During the pay-in phase before income payments begin ✓
2. Only after the contract has been fully annuitized into a stream of income
3. While the annuitant is receiving level, guaranteed monthly income payments
4. According to a fixed interest rate the insurer declares anew each year

Why: Accumulation units track value during the accumulation phase; annuity units are used during the payout phase.

Under the 'entire contract' provision in a health policy, the contract consists of:

1. The policy and the attached copy of the application ✓
2. Only the policy itself, with all prior statements disregarded
3. The policy plus any verbal promises the agent made at the sale
4. The policy and the insurer's internal underwriting guidelines

Why: The entire contract is the policy plus the attached application; nothing not attached at issue can be made part of the contract.

An insured with a $100,000 policy dies during the grace period while owing a $200 premium. The beneficiary receives:

1. $99,800 ✓
2. $100,000
3. $0
4. $50,000

Why: Coverage stays in force during the grace period; the claim is paid with the overdue premium deducted: $100,000 − $200 = $99,800.

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.

The 'reduced paid-up' nonforfeiture option uses the policy's cash value to:

1. Buy a smaller, fully paid-up permanent policy ✓
2. Keep the full face amount in force as term insurance for a limited time
3. Pay the entire surrender value to the owner in one lump sum
4. Convert the coverage into an immediate lifetime income annuity

Why: Reduced paid-up uses the net cash value as a single premium to purchase a smaller amount of fully paid-up permanent insurance; extended term instead keeps the full face for a limited period.

A 60-year-old annuity owner withdraws $5,000 of gain. Because the owner is past 59½, the withdrawal is:

1. Ordinary income, with no 10% penalty ✓
2. Tax-free as a return of premium
3. Subject to the 10% penalty anyway
4. Taxed at capital-gains rates

Why: After 59½ the 10% premature-distribution penalty no longer applies; the gain is still ordinary income.

Medicare Part B generally pays what share of the approved amount after the annual deductible is met?

1. 80% ✓
2. 100%
3. 50%
4. 20%

Why: After the Part B deductible, Medicare typically pays 80% of the approved amount and the beneficiary pays the remaining 20% coinsurance.

'Twisting' is an unfair trade practice defined as:

1. Using misrepresentation to induce a client to replace an existing policy ✓
2. Charging two clients different premiums for identical coverage by mistake
3. Sharing a small portion of one's commission with a licensed co-agent
4. Recommending the lowest-cost policy a client genuinely qualifies for

Why: Twisting is inducing a policy replacement through misrepresentation or incomplete comparisons; doing so within the same insurer is called churning.