All Life

Which of the following statements regarding a traditional individual retirement account (IRA) is NOT correct? A) Distributions must begin from an IRA by April 1 of the year following the IRA owner's attainment of age 70½. B) Assuming that only tax-deductible contributions were made into the IRA, 100% of distributions from it are treated as taxable income. C) IRAs are available to anyone younger than age 70½ with earned income, but deductible contributions are limited for individuals who are also covered under an employer-sponsored retirement plan. D) A 10% penalty is assessed on any distribution from an IRA before age 59½.

A 10% penalty is assessed on any distribution from an IRA before age 59½. Explanation Although distributions before age 59½ are subject to a 10% penalty in most situations, there are exemptions to this rule. For example, annuitized distributions and distributions made upon the death or disability of the IRA owner are exempt from the penalty tax. All distributions are subject to ordinary income taxation, assuming that the IRA was funded only with tax-deductible contributions.

Which of the following statements regarding annuities is NOT true? A) If a beneficiary has not been named, the death benefit is paid to the owner's estate. B) A 10% penalty on taxable earnings is levied if withdrawals are taken prior to age 70½. C) Annuities may be used to liquidate an estate. D) The annuitant receives the checks in the annuitization period.

A 10% penalty on taxable earnings is levied if withdrawals are taken prior to age 70½. Explanation If a withdrawal is taken from an annuity, the earnings are taxed as ordinary income. There is an additional 10% penalty levied on the growth portion if withdrawals are made prior to age 59½.

"Which of the following statements regarding a producer's authority is NOT correct? A) An agent's apparent authority may be binding on an insurer under the law of agency. B) Advising an applicant to answer certain questions in a manner in order to pass underwriting is an example of apparent authority. C) Reviewing a prospective applicant's insurance program and recommending the purchase of a particular product is an example of implied authority. D) Soliciting and negotiating insurance contracts on the company's behalf are considered part of an agent's express authority."

"Advising an applicant to answer certain questions in a manner in order to pass underwriting is an example of apparent authority. Explanation Express authority is specific authority given to an agent. Implied authority is authority that, while not specifically granted to an agent, can be assumed to have been granted as necessary to perform the agent's routine responsibilities. Apparent authority is authority that the public can logically assume an agent will possess, whether or not she has actually received such authority from the insurer. In this case, an agent that coaches a person in completing an application to pass underwriting is committing fraud. An agent would not have any authority to do so, apparent or otherwise."

"A Notice to Applicant must be issued to the consumer no later than A) 3 days after paying the initial premium B) 3 days after the policy has been issued C) 3 days after completing the application D) 3 days after the report was requested"

"3 days after the report was requested Explanation A Notice to Applicant must be issued to all applicants for life or health coverage. It notifies the applicant that a report regarding past credit history and previous insurance requests has been ordered. An agent must leave this notice with the applicant no later than 3 days after the report is requested."

"All individual life insurance policies must include a reinstatement provision providing that the policy can be reinstated at any time within how many years from the date of premium default? A) 3 years B) 4 years C) 1 year D) 2 years"

"3 years Explanation A policy must provide for reinstatement at any time within 3 years from the date of premium default if satisfactory evidence of insurability is provided, back premiums (with interest on premium loans) are paid, and any other indebtedness on the policy is paid."

"Of the following payment modes, which is generally the least expensive? A) Quarterly B) Monthly C) Semiannual D) Annual"

"Annual Explanation The annual payment mode is generally the least expensive due to the lower billing and handling costs involved and the fact that the insurer has the full annual premium to invest all at once."

All of the following types of groups are eligible for group life insurance EXCEPT A) trade association groups B) labor union groups C) employer group plans D) a group of creditors

a group of creditors Explanation Group credit life insurance is provided for its group of debtors. The other types of groups are employer group plans, multiple employer trusts, labor unions, professional associations and trade associations.

Annuities may be purchased with all of the following EXCEPT A) a single payment that may be deferred for 5 years B) a schedule of fixed payments C) a single lump-sum payment D) a schedule of flexible payments

a single payment that may be deferred for 5 years Explanation Annuities may be purchased with a single lump sum, a scheduled payment, or a flexible payment.

At a certain point in time, an employee will have a nonforfeitable right to the money contributed to a pension plan by the employer. This right is known as A) a proprietary interest B) a contributory interest C) a possessive interest D) a vested interest

a vested interest Explanation After a specified number of years, an employee becomes 100% vested. That is, the employee acquires a nonforfeitable ownership interest of 100% of the contributions the employer has made on the employee's behalf.

Premiums paid into a variable annuity, after deduction for expenses, are applied regularly to purchase A) stock units B) annuity units C) variable units D) accumulation units

accumulation units Explanation Premiums paid into a variable annuity are used regularly to purchase accumulation units. The value of these units depends on the market value of the assets in the account at the time of purchase.

Which of the following statements regarding traditional IRAs is NOT correct? A) Peter inherits $15,000 in traditional IRA benefits from his father who recently died. Peter can set up a tax-favored rollover traditional IRA with the money. B) Bradley has $36,000 of pretax dollars and earnings in a traditional IRA when he decides to retire, and he elects to withdraw $8,000 per year. During his first year of retirement, $8,000 will be included in his taxable income. C) Walter is 60 and is not disabled. If he takes a distribution from his traditional IRA, it is subject to tax as ordinary income, but with no penalty for early withdrawal. D) June has accumulated $30,000 of pretax dollars and earnings in her traditional IR At age 55, she withdraws $2,500 to take a vacation. She will have to include the $2,500 in her taxable income for the year and pay a $250 penalty.

Peter inherits $15,000 in traditional IRA benefits from his father who recently died. Peter can set up a tax-favored rollover traditional IRA with the money. Explanation Only the individual who establishes the traditional IRA and his spouse are eligible to benefit from the rollover treatment.

If an employer pays all the premiums for a group life insurance policy, the policy must insure A) at least 50% of the eligible employees B) at least 75% of the eligible employees C) at least 40% of the eligible employees D) all eligible employees

all eligible employees Explanation If an employer pays all the premiums for a group life insurance policy, the policy must insure all eligible, insurable employees. However, if the employees contribute all of the premiums, the policy may be placed in force if at least 75% of the then-eligible, insurable employees elect to make the required contributions.

To enroll in an employer's qualified retirement plan, employees must A) be at least 21 years old and complete 1 year of service B) be at least 18 years old and complete 1 year of service C) complete 1 year of service D) be at least 18 years old

be at least 21 years old and complete 1 year of service Explanation In general, employees who are at least 21 years old and have completed 1 year of service must be allowed to enroll in a qualified plan. If the plan provides for 100% vesting upon participation, they may be required to complete 2 years of service before enrolling.

To sell variable contracts, a person must A) hold a Certified Financial Planner designation B) be licensed as a managing general agent C) maintain a bond payable to the state D) be licensed for life insurance, maintain both federal and state securities licenses, and, in some states, have a specific variable annuity endorsement

be licensed for life insurance, maintain both federal and state securities licenses, and, in some states, have a specific variable annuity endorsement Explanation A person may not sell any variable contracts unless he is a licensed life insurance producer, is also registered with the Financial Industry Regulatory Authority (FINRA) as a principal or a registered representative, and completes state-specific certification, if required.

Group life insurance plans in which employees contribute to the overall premium are called A) participatory B) contributory C) group underwritten D) noncontributory

contributory Explanation When employees contribute to the premium payable for a group life insurance contract, the plan is called contributory.

The premium cost for group insurance is generally based on A) administrative costs B) turnover rate of employees C) experience rating D) community rating

experience rating Explanation The premium cost is generally based on experience rating. Claims history and large homogeneous groups help to determine more accurate mortality and morbidity rates.

All of the following groups are eligible for group insurance EXCEPT A) groups that exist solely in order to purchase insurance B) small employers within the same industry who self-fund a plan C) trade or professional associations D) collective members of a labor union

groups that exist solely in order to purchase insurance Explanation Eligible groups include employer-sponsored groups, trade or professional associations, and labor unions. Multiple employer trusts (METs), multiple employer welfare arrangements (MEWAs), and lender groups are also eligible. However, a group cannot be formed only for the purpose of buying insurance.

An equity-indexed annuity A) is very similar to a variable annuity B) does not have a fixed minimum guarantee C) has its interest tied to a stock market-related index D) can decrease in value

has its interest tied to a stock market-related index Explanation An equity-indexed annuity has most of the features of fixed annuity contracts except that the interest credited to the annuity owner's account is tied to a stock market-related index, such as the Standard & Poor's 500 Index. Unlike variable annuities, an equity-indexed annuity cannot decrease in value and has a fixed minimum guarantee.

Taxpayers are able to withdraw IRA funds without penalty for all of the following reasons EXCEPT A) costs associated with the owner's disability B) education costs, including room and board C) buying a first home (up to $10,000) D) travel necessitated by medical reasons

travel necessitated by medical reasons Explanation Transfers to the owner's estate or beneficiaries are also not penalized.

"Of the following, which statement best describes a 10-year renewable term life insurance policy? A) A 10-year renewable term is a policy with a level premium and a corresponding decreasing face amount. B) A 10-year renewable term is a policy in which the premium and face amount increase at the end of each 10-year period. C) A 10-year renewable term is a policy with a fixed face amount and a premium that increases at each 10-year renewal period. D) A 10-year renewable term is a policy in which both the premium and face amount remain level for the term of the policy."

"A 10-year renewable term is a policy with a fixed face amount and a premium that increases at each 10-year renewal period. Explanation A 10-year renewable term life insurance policy has a fixed face amount that remains the same during the term of coverage period. As the name implies, the policy can be renewed at the end of each designated 10-year policy period. The policy can typically be renewed for a specified number of years or up to a term period that corresponds with a specified age, at which time coverage ceases. The premium remains level during each designated 10-year policy period, and then increases with the renewal of each new 10-year policy period."

"Ken, the insured, purchased a $40,000 5-year level term policy and a $100,000 whole life insurance policy when he was 49. When he died at age 56, his beneficiary received A) 40000 B) 100000 C) nothing D) 140000"

"100000 Explanation In this case, Ken died after his term policy expired. As a result, his beneficiary received nothing under that policy. However, the beneficiary would receive the $100,000 death benefit under the whole life insurance policy that continued in force."

"An insurer may NOT contest an individual life insurance policy after it has been in force for how long? A) The insurer can contest the policy for the life of the policyholder B) 30 days C) 2 years D) 1 year"

"2 years Explanation An insurer may not contest a policy after it has been in force for 2 years, unless the insured fails to pay the premiums."

"Which of the following $50,000 limited-pay life policies will have the highest premium for an applicant who is age 30? A) 20-pay life policy B) Life paid-up at age 65 C) 30-pay life policy D) 25-pay life policy"

"20-pay life policy Explanation Limited-pay life insurance policies have shorter premium-paying periods. The shorter the period, the higher the premium."

"A policy's grace period is usually no more than A) 60 days B) 45 days C) 10 days D) 31 days"

"31 days Explanation The time limit between when premium is due and date of policy lapse is known as the grace period and generally is no more than 31 days."

"The payment of claims provisions states that the insurer will pay the death benefit within how many days after receiving notification of the claim? A) 145 days B) 90 days C) 60 days D) 120 days"

"60 days Explanation Payment of death claims must be made within 60 days after receiving notification of a claim. Interest will be added to the claim for payments made more than 60 days after the notification was received."

"Which of the following statements regarding representations is CORRECT? A) Representations are statements the applicant may or may not believe to be true. B) A representation must be material for the insurer to void the contract. C) If a representation is false on a material point, the insurer may alter the contract but may not rescind it. D) A representation is guaranteed to be true."

"A representation must be material for the insurer to void the contract. Explanation A representation that is determined to be false, but not material, would not void an insurance contract."

"Who would NOT have an insurable interest for a life insurance policy? A) The employer of a key employee insured B) The daughter of the insured C) The spouse of the insured D) The closest friend of the insured"

"The closest friend of the insured Explanation Insurable interest is defined as interest created by love and affection for those persons closely related by blood or law. For those who are not related, an insurable interest is a lawful economic interest in having the life of the insured continue."

"Which of the following statements pertaining to the spendthrift clause in a life insurance policy is NOT correct? A) The spendthrift clause is designed to protect beneficiaries against the claims of creditors. B) The spendthrift clause does not exempt proceeds paid to beneficiaries in a lump sum. C) The exemption applies only to money held in trust by the insurance company that is payable at some future time to the named beneficiary. D) A beneficiary receives $125 per month from a life policy under the fixed-amount settlement option and a spendthrift clause. The beneficiary may have the company send the payments to a creditor to pay off a debt."

"A beneficiary receives $125 per month from a life policy under the fixed-amount settlement option and a spendthrift clause. The beneficiary may have the company send the payments to a creditor to pay off a debt. Explanation The spendthrift clause in a life insurance policy is designed to protect beneficiaries from their creditors by providing that the death benefits are not subject to creditor claims. This clause applies only while the insurer holds the money, and only to installment payments."

"An insurance company that holds a certificate of authority in a state may be known as any of the following EXCEPT A) accepted B) authorized C) admitted D) approved"

"accepted Explanation When an insurer is licensed in a state, they are considered to be admitted, authorized, or approved."

"Which of the following statements regarding the cost-of-living rider is NOT correct? A) The typical cost-of-living rider is provided through a form of term insurance coverage. B) If the face amount is increased through the cost-of-living adjustment, there is typically an increase in the premium. C) A drawback of the rider is that a drop in the Consumer Price Index (CPI) can result in a decrease in the coverage previously added. D) It is not necessary for the insured to demonstrate evidence of insurability to receive the increased coverage provided through a cost-of-living adjustment."

"A drawback of the rider is that a drop in the Consumer Price Index (CPI) can result in a decrease in the coverage previously added. Explanation Declines in the CPI are not matched by a decline in the amount of coverage; instead, future increases are held off until the CPI exceeds its prior high point."

"Which of the following causes of death would most likely be covered in a life insurance policy issued today, though for many years it was typically excluded from coverage? A) A commercial airline pilot is killed when his personal airplane crashes into the ocean. B) A skydiving hobbyist dies when his parachute fails to open during a skydive. C) A soldier is killed while on a night patrol in a war zone. D) A fare-paying passenger is killed in a commercial airplane crash while flying to visit a relative."

"A fare-paying passenger is killed in a commercial airplane crash while flying to visit a relative. Explanation The aviation exclusion eliminates coverage for private pilots, test pilots, military pilots, and their crew members. Commercial flight is no longer an exclusion. Military service and hazardous occupations and hobbies are still excluded on most policies. While some companies may provide coverage, lower policy limits and higher premiums are to be expected."

"Joshua's insurance agent delivered his new term life policy to him. Three days later Joshua changed his mind—he no longer wanted the life policy and returned it to his agent. Joshua had paid the initial premium. Under the free-look provision, what is Joshua entitled to receive? A) The policy's cash surrender value B) A partial refund of the initial premium C) A credit that can be applied to the purchase of another policy D) A full refund of the initial premium"

"A full refund of the initial premium Explanation Under the free-look provision, policyowners have 10 days to examine their new life policies. If a policyowner is not satisfied with the policy, he may return it to the insurer and receive a full refund of the initial payment."

"Which of the following would be a source of instant liquidity upon the death of an estate owner? A) Debts payable to the estate B) A life insurance policy on the estate owner's life, payable to the estate C) A home D) Bank certificates of deposits"

"A life insurance policy on the estate owner's life, payable to the estate Explanation The term instant liquidity refers to property that is readily convertible into cash without loss or cash itself. In this example, the only asset that would provide instant liquidity would be the life insurance policy."

"What is stranger-owned life insurance? A) Life insurance transactions where the insured is a stranger to the producer B) Life insurance owned by multiple persons who are strangers to one another C) Life insurance that is marketed to people who don't know each other D) A life insurance transaction where investors persuade seniors to take out new life insurance policies, naming the investor as the beneficiary "

"A life insurance transaction where investors persuade seniors to take out new life insurance policies, naming the investor as the beneficiary Explanation Stranger-owned life insurance (STOLI) or investor-owned life insurance (IOLI) transactions have been banned by most states as a form of fraud. The investor persuades the senior to take out a new life insurance policy and name the investor as the beneficiary. The premiums are usually paid by the investors for a period of time based on the policy's contestable period, after which the insured is paid some small amount and names the investor as the beneficiary of the policy."

"Which of the following statements pertaining to reinstatement of a life insurance policy is CORRECT? A) A new contestability period is renewed with a reinstated policy. B) The insurance company will make all beneficiaries prove insurability before reinstatement. C) When reinstating a policy, the insurer will change the premium based on the insured's attained age. D) Reinstatement is only available to policyowners who have intentionally surrendered their life policies."

"A new contestability period is renewed with a reinstated policy. Explanation When reinstating a life policy, a new 2-year contestability period starts. If the company reinstates the life policy, the premiums remain the same as they were before the policy lapsed for nonpayment. The insurance company never underwrites the beneficiaries on a life policy; only the insureds have to prove insurability. Reinstatement is only available to policyowners if the policy lapses for nonpayment and within 3 years."

"If the first premium was not paid at the time of application, what must the producer also collect? A) Results from the paramedic's visit B) Referrals C) Medical records D) A signed statement of good health"

"A signed statement of good health Explanation When the producer delivers the policy, the first premium must be collected, if it was not given when the application was being completed. The producer must also get a signed statement of good health, which attests that the applicant's health is the same as when he applied for the policy."

"Choua applied for a $100,000 whole life policy but did not pay the initial premium at the time of application. When the agent later delivers the policy, the agent must collect the premium and obtain which of the following statements from Choua? A) A statement of insurability B) A statement of good health C) A statement of no material change in risks D) A statement of continued representations and warranties "

"A statement of good health Explanation If Choua does not pay the initial premium when applying for the policy, the agent may require her to sign a statement attesting to her continued good health before delivering the policy. The agent will then submit the premium with the signed statement to the insurance company. The signed statement is required to ensure that Choua has remained in reasonably good health from the date she signed the application until she received the policy."

"Jorge would like to purchase a life insurance policy that offers level premiums from the time the policy is issued until his death. He also wants a policy that combines death protection with a savings element that can eventually be used for retirement purposes. Jorge should consider purchasing which of the following plans? A) A straight whole life insurance policy B) A single premium whole life insurance policy C) A family maintenance policy D) A 30-year term life insurance policy"

"A straight whole life insurance policy Explanation Jorge should consider purchasing a straight whole life insurance policy, which provides permanent level protection with level premiums from the time the policy is issued until his death (or age 100). It also includes a cash value element, which can be used for retirement purposes."

"Which of the following statements pertaining to reinstatement of a life insurance policy is NOT correct? A) When reinstating a policy, the insurer must charge the policyowner for past-due premiums. B) A suicide exclusion period is renewed with a reinstated policy. C) When reinstating a policy, the insurer must charge the policyowner for interest premium loans. D) A new contestable period becomes effective in a reinstated policy."

"A suicide exclusion period is renewed with a reinstated policy. Explanation When reinstating a life policy, no new suicide exclusion period goes into effect."

"Mitsuko is interested in buying a permanent insurance policy that will have a cash value and a death benefit. She wants a policy that will not tax any earnings until the policy is surrendered. What type of policy would best meet her needs? A) A variable policy B) A universal life policy C) A convertible term policy D) An interest-sensitive whole life policy"

"A variable policy Explanation The characteristics of a variable life insurance policy include lifetime coverage, cash value, and a death benefit. Policyowners may purchase funds or investments offered by the insurance company and do not pay tax on earnings until the policy is surrendered."

"Steve is diagnosed with inoperable cancer and learns that he has only a few months to live. He wants to take an extended vacation with his spouse and needs some immediate funds. He has held a whole life insurance policy for many years. Which of the following options would be the best source of funds, if Steve wants a lump-sum payment? A) Steve cannot withdraw any cash value B) Policy loan C) Policy surrender D) Accelerated benefit rider"

"Accelerated benefit rider Explanation The accelerated benefit rider allows the insured to access a portion of the death benefit in advance if he has been diagnosed as terminally ill and is expected to die within 24 months. The portion of the death benefit given to the insured is not taxable. The death benefit is reduced by the amount accelerated to the insured, and the remaining amount of death benefit is paid to the beneficiary upon the insured's death."

"Which of the following statements regarding accelerated death benefits is NOT correct? A) A written disclosure must be given to the applicant explaining the effect on various aspects of the policy. B) The inability to perform activities of daily living (eating, dressing, bathing etc.) is considered a qualifying event. C) An insured may request an accelerated death benefit payment if death is expected within 24 months due to terminal illness. D) Accelerated death benefit payments are always 100% of the death benefit."

"Accelerated death benefit payments are always 100% of the death benefit. Explanation Because accelerated death benefit payments reduce the actual death benefit, payments range anywhere from 25-100% of the death benefit."

Which of the following statements regarding group life insurance is FALSE? A) The premium is based on the insured's attained age at the time of conversion. B) Conversion must be done within 31 days from the date coverage is lost. C) The converted policy must be a term insurance policy, not permanent insurance. D) No proof of insurability is required.

The converted policy must be a term insurance policy, not permanent insurance. Explanation When a certificate holder converts from a group life insurance policy to an individual policy, the converted policy must be permanent insurance, not term insurance.

"Which of the following statements is CORRECT? A) If an insuring company revises its bylaws or practices, any life insurance contract issued before the change must be modified to reflect the company's new policies. B) If a premium deposit is not paid with the application, the policy will still be valid if the applicant is acceptable to the insurer's underwriters. C) After a policy is delivered to and accepted by the policyowner, it cannot be changed in any way, except in accordance with terms stated in the contract. D) Misrepresentations made in an application are always considered grounds for voiding an insurance contract."

"After a policy is delivered to and accepted by the policyowner, it cannot be changed in any way, except in accordance with terms stated in the contract. Explanation Because of the entire contract provision, policyowners are protected against arbitrary changes by the issuing company. Issued policies are not affected by later changes of any kind in an insurer's bylaws or practices. The policy can be changed only in accordance with terms spelled out in the contract. Applications for policies must be accompanied by the initial premium, or a portion of it. Misrepresentations are considered fraudulent and grounds for voiding a contract if they are material to the risk and are made with the intent to defraud."

"When agents act on behalf of insurers, they are acting under which legal principle? A) Utmost good faith B) Reasonable expectations C) Agency D) Estoppel"

"Agency Explanation By legal definition, an agent is a person who works for another person or entity (known as the principal), with regard to contractual arrangements with third parties. An authorized agent has the power to bind the principal to contracts and to the rights and responsibilities of those contracts."

"Which of the following terms correctly describes a life insurance company that is organized outside the United States or its possessions? A) Foreign B) Distant C) Remote D) Alien"

"Alien Explanation An alien insurance company is one that is incorporated or organized under the laws of a foreign nation, province, or territory."

"Which of the following statements regarding the fiduciary duty of a producer is CORRECT? A) An insurance producer may never receive money meant for the insurer. B) Premiums may be kept in the producer's personal account. C) All premiums received by an insurance producer must be held in trust and cannot be used for personal matters. D) Up to $5,000 a month of premium money may be used for the producer's personal needs."

"All premiums received by an insurance producer must be held in trust and cannot be used for personal matters. Explanation All premiums, return premiums, or other funds received by a producer in insurance transactions are considered to be trust funds under the law. The producer operates in a fiduciary capacity and must promptly account for payment of such funds to the proper parties."

All of the following events are allowable reasons to take an early withdrawal from an IRA and not pay a tax penalty EXCEPT A) qualifying medical expenses B) disability C) purchase of a vacation home D) death

purchase of a vacation home Explanation If an IRA owner who is younger than 59½ withdraws money from an IRA, she must pay a tax penalty of 10% of the amount withdrawn, except in cases of death, disability, or qualifying medical expenses. Taking the money out of an IRA to buy a vacation home would incur the penalty tax.

"Tom has a $50,000 whole life policy. If he continues to pay the required premiums and lives to age 100, he will receive A) the cash surrender value, a sum less than $50,000 B) nothing, because he outlived the term of the contract C) double the face amount, or $100,000 D) $50,000 as an endowment"

"$50,000 as an endowment Explanation By design, a whole life policy endows for its face amount at age 100. That means that when the policyowner is 100 years old, the cash value of the policy equals the face amount of the policy. At that point, the insurance is canceled, and the insured receives the face amount as an endowment."

"Which of the following statements pertaining to an agent's handling of premium money is NOT correct? A) An agent may spend premium money for his personal use. B) An agent holds premium money for the insured; the money belongs to the insurer. C) An agent who violates regulations concerning handling premium money may be charged with embezzlement or mishandling funds. D) An agent must not make personal use of premium money received from policyowners."

"An agent may spend premium money for his personal use. Explanation An agent enjoys a fiduciary role with an insured. This establishes a relationship of trust. As a result, the agent must be very careful in handling money received from the insured and the company's premiums or be subject to harsh penalties."

"Jordan wants to set aside money so that his grandchildren's college tuition will be paid. While he is only 58, he is concerned that if he dies too young, he will not have had enough years to accumulate assets. What is Jordan's reason for purchasing life insurance? A) Mortgage payoff B) Estate creation C) Liquidity D) Estate conservation"

"Estate creation Explanation Jordan purchases life insurance because he wants to make sure he can create an estate for his grandchildren if he dies prematurely."

"Which of the following would be considered a moral hazard in underwriting a health insurance risk? A) A family history of diabetes B) A serious heart ailment C) Excessive dieting D) A hazardous occupation"

"Excessive dieting Explanation Moral hazards are habits or lifestyles of applicants that could pose additional risk for the insurer. These hazards are evaluated carefully when underwriting health insurance policies."

"Which of the following provisions of a life insurance contract generally helps to keep policies in force if policyowners neglect to pay their premiums? A) Insuring clause B) Free-look period C) Grace period D) Incontestable clause"

"Grace period Explanation The grace period provides additional time—usually 31 days after the premium due date for fixed premium life policies and 61 days for flexible premium policies—in which the policyowner can pay the premium."

"Denicia is appointed by an insurance company to transact insurance on its behalf. She collects her clients' premiums and has them sign paperwork. By what authority can she do so? A) Apparent B) Implied C) Fiduciary D) Express"

"Implied Explanation Implied authority is not expressly granted but is assumed to have been given in order to transact the principal's business. It is incidental to express authority because not every detail of an agent's authority can be specifically noted."

"Which of the following statements regarding Lloyd's associations is CORRECT? A) Insurance is provided by individual underwriters. B) Lloyd's of London is an insurance company. C) Lloyd's associations are insurance companies. D) Insurance can only be offered in London."

"Insurance is provided by individual underwriters. Explanation Lloyd's associations are made up of underwriters who are individually liable and responsible for the insurance contracts they underwrite."

"Which of the following is NOT required in order to reinstate a lapsed permanent life policy? A) Submit an application for reinstatement within 4 years of the lapse B) Provide satisfactory evidence of insurability C) Pay the premium for the reinstated policy D) Pay all past-due premiums with interest"

"Submit an application for reinstatement within 4 years of the lapse Explanation While not a requirement, the insurer may ask the insured to submit an application for reinstatement within 3 years of the lapse."

"What can an insured add to a permanent insurance policy which will provide additional coverage, yet cost less than purchasing a separate policy? A) Double indemnity rider B) Return of premium rider C) Other insured rider D) Term insurance rider"

"Term insurance rider Explanation A term insurance rider may be added to a permanent policy. If the insured dies while the term rider is in force, the beneficiary will receive the death benefit from the permanent policy and the term policy. Adding a rider to an existing policy has a lower premium than writing it as a stand-along policy."

"Which of the following factors is NOT used to calculate each payment with the fixed period option? A) A guaranteed interest rate B) The length of the chosen period C) The chosen payment amount D) The amount of the death benefit"

"The chosen payment amount Explanation The chosen payment amount is a factor for the fixed amount settlement option, not the fixed period option."

"In an insurance transaction, whom does a licensed agent legally represent? A) The applicant B) The insurer C) The state insurance department D) The National Association of Insurance Commissioners"

"The insurer Explanation Under the law of agency, insurance agents represent the insurers that appoint them."

"Which of the following is the definition of risk? A) The measurement of a loss B) The uncertainty about whether a loss will occur C) An insurance term for a claim D) The transfer of insurance to a different insurer"

"The uncertainty about whether a loss will occur Explanation A risk is the possibility that a loss that is covered by insurance will happen."

"Which of the following statements regarding the standard cost-of-living rider used with life insurance policies is NOT correct? A) There is typically a percentage cap on the amount of yearly increase that is available to the policyowner with this rider. B) A cost-of-living rider can involve attaching an increasing term insurance rider to the base policy. C) This rider provides the policyowner with the option to increase the death benefit of her life policy to match an increase in the cost-of-living index. D) There is no additional premium required to pay for increases in the death benefit resulting from the cost-of-living rider."

"There is no additional premium required to pay for increases in the death benefit resulting from the cost-of-living rider. Explanation With the cost-of-living rider, any increase in the death benefit as a result of this rider will also result in an increase in premium."

"Who must sign endorsements, modifications, or any other changes to a life insurance contract? A) an executive officer of the company B) the principal of the brokerage firm C) the insured D) the agent of record"

"an executive officer of the company Explanation Any amendments to the policy must be signed by an executive officer of the insurance company. No other person or entity is authorized to do so."

"All of the following are forms of unfair discrimination EXCEPT A) charging one person a higher premium than another person of equal risk to the company B) charging one person a higher premium than someone else of the same age and sex because of a higher risk represented by that person C) refusing to sell a policy to someone because of his race or religion D) refusing to service the policy needs of a person because of where he lives"

"charging one person a higher premium than someone else of the same age and sex because of a higher risk represented by that person Explanation Unfair discrimination exists when two people of equal risk are charged different rates solely because of a difference in race, religion, national origin, or where they live. It would not be unfair discrimination to charge one person a higher premium than someone else of the same age and sex because of a higher risk represented by that person."

"The contract provision that states that the policy, a copy of the application, and any attached papers constitute the complete insurance contract is the A) nonforfeiture provision B) entire contract provision C) incontestable clause D) statutory provision"

"entire contract provision Explanation Life insurance policies must contain an entire contract provision that specifies that the policy, along with an attached copy of the application and any other attached documents, constitutes the entire insurance contract. Furthermore, all statements made on the application are, in the absence of fraud, considered to be representations and not warranties."

"Vanita and Tarun have an estate worth $10 million, most of which is invested in their family business. In order to pay the federal estate tax that will be due at the death of the survivor, their reason for purchasing life insurance would be for A) tax evasion B) liquidity C) estate conservation D) estate creation"

"estate conservation Explanation For Vanita and Tarun, having life insurance will be important so that the expenses (estate taxes and probate expenses) will be paid upon their deaths."

"Major risk factors in health insurance underwriting include all of the following EXCEPT A) occupation B) lifestyle C) physical condition D) marital status"

"marital status Explanation Marital status is not a risk factor."

"Certain perils, like war, are usually excluded from most insurance policies because they have the potential to adversely affect large numbers of insureds at the same time. This explains why one of the characteristics of an insurable risk is that the risk be A) noncatastrophic B) cataclysmic C) trivial D) calamitous"

"noncatastrophic Explanation Insurable risks must be noncatastrophic so insurers are able to pay for losses to the insured. If an event causes extensive damage to large numbers of insureds simultaneously, the insurer may not have the ability to pay all of the claims."

"Statements that are guaranteed to be true are called A) representations B) warranties C) estoppels D) waivers"

"warranties Explanation Warranties are statements that are guaranteed to be true. Representations are statements that are believed to be true."

Cal, age 57, owns a whole life insurance policy with a $750,000 face amount that was paid for with a single premium of $100,000. The current cash value is $125,000. If he were to borrow $30,000 from this policy today, which of the following choices best describes the tax treatment this transaction will receive? A) $25,000 of the loan is subject to income taxation plus an additional 10% penalty tax. B) The first $25,000 of the loan is tax-free, but the remaining $5,000 is subject to income taxation. C) The loan is income tax-free. D) The first $5,000 of the loan is tax-free, and the remaining $25,000 is subject to income taxation.

$25,000 of the loan is subject to income taxation plus an additional 10% penalty tax. Explanation This policy is a modified endowment contract (MEC), evidenced by the fact that it was paid for with a single premium. Accordingly, all withdrawals, including loans, above the cost basis (the total amount of premium paid in) are subject to income taxation and, if the owner is under age 59½, an additional 10% penalty.

Contributions to a simplified employee pension (SEP) are not included in the employee's taxable income for the year as long as the contribution does not exceed A) 50% of the employee's compensation up to a specified maximum amount B) 25% of the employee's income, with no individual maximum limit C) 25% of the employee's income up to a specified maximum amount D) 75% of the employee's compensation

25% of the employee's income up to a specified maximum amount Explanation Contributions to a SEP are not included in the employee's taxable income for the year, to the extent that the contribution does not exceed 25% of the employee's compensation up to a specified maximum amount.

Generally speaking, how many days does a certificate holder have to convert to an individual policy? A) 10 B) 60 C) 31 D) 45

31 Explanation Typically, a certificate holder has 31 days to convert from a group policy to an individual life policy. The number of days may vary from state to state, so it is important to refer to your specific state supplement.

Larry purchased a traditional IRA when he was 32 years old. Over the years he has contributed (and deducted from his taxes) $50,000 into the contract. Now, at age 62, Larry is retiring and plans to annuitize the contract. His life expectancy is 20 years, and he will receive $450 per month under a straight life annuity income option. Of the $5,400 he will receive annually from this annuity, how much will represent taxable income? A) 2916 B) 5400 C) 0 D) 2484

5400 Explanation The exclusion ratio calculation that is used to calculate the tax-free portion of nonqualified annuity payments is irrelevant with qualified contributions. Since this IRA was fully funded with tax-deducted contributions, the annuity income payment ($5,400 per year) is taxable as ordinary income.

Cynthia is scheduled to receive a $36,000 lump-sum distribution from her former employer's qualified pension plan and wishes to establish a rollover IRA to avoid paying taxes on the money that year. Within how many days must the rollover be completed for Cynthia to avoid paying taxes? A) 120 days B) 30 days C) 90 days D) 60 days

60 days Explanation A maximum of 60 days is allowed to complete a rollover to an IRA before the IRS will tax an individual on a lump-sum distribution.

If an employer group plan is contributory, most states require that at least A) 50% of the eligible employees participate B) 85% of the eligible employees participate C) 65% of the eligible employees participate D) 75% of the eligible employees participate

75% of the eligible employees participate Explanation In a contributory group plan, the employer pays part of the premium. Most states require that at least 75% of the eligible employees participate in the contributory plan.

If a company has 1,000 employees who are eligible for a contributory group health insurance program, how many would be required to participate? A) 750 B) 1000 C) 1500 D) 500

750 Explanation In most states, if a group health insurance plan is contributory, 75% of eligible persons must be insured.

Which of the following is NOT an eligible group to obtain group life insurance? A) A multiple employer trust B) A neighborhood investment club C) A labor union D) A trade or professional association

A neighborhood investment club Explanation Group life insurance is limited to employer groups, multiple employer trusts, labor unions, group credit life insurance, and association plans.

Which the following statements regarding 1035 exchanges is NOT correct? A) Life insurance to annuity transfers are not taxable. B) Life insurance to life insurance transfers are not taxable. C) Annuity to annuity transfers are not taxable. D) Annuity to life insurance transfers are tax-free.

Annuity to life insurance transfers are tax-free. Explanation Annuity to life insurance transfers do not qualify under 1035 exchange rules, so any annuity gains would be taxable.

Acme Corporation has established a nonqualified deferred compensation plan with life insurance as the funding vehicle. Acme currently has 100 employees, 90 of whom work full time. Which of the following individuals must be covered by the plan? A) Only Acme's executive officers and directors B) All of Acme's full- and part-time employees C) All of Acme's full-time employees D) Any employee, officer, or executive that Acme selects

Any employee, officer, or executive that Acme selects Explanation Acme's deferred compensation plan is a nonqualified plan, which means that Acme can pick and choose which employees and owners can participate in the plan without regard to years of service, salary levels, or any other criteria.

Oliver, age 48, and Lucia, age 46, are married and file a joint tax return. Both are covered by their companies' pension plans. Which of the following statements regarding contributions they could make to a traditional IRA is NOT correct? A) Both can make contributions to their own individual traditional IRAs. B) There is a maximum deductible contribution limit involved with a traditional IR C) Based on their modified AGI, they may have their deduction for contributions to a traditional IRA reduced (phased out). D) Both can take advantage of the catch-up provision and contribute the catch-up amount in addition to the base amount.

Both can take advantage of the catch-up provision and contribute the catch-up amount in addition to the base amount. Explanation There is a maximum deductible contribution limit involved with qualified retirement plans, including traditional IRAs. The actual amount involved is typically indexed, meaning it could change with the new year. Persons covered by a retirement plan at work may have their deduction for contributions to a traditional IRA reduced (phased out) based on their modified AGI. To be eligible for the catch-up provision, individuals must be 50 or older.

Which of the following statements regarding both individual credit life insurance and group credit life insurance is NOT correct? A) Both policies would typically be decreasing term policies. B) Both policies are used to pay off debt if the insured dies before doing so. C) Both policies are typically medically underwritten. D) Both policies may end at the payoff of the debt.

Both policies are typically medically underwritten. Explanation A debt may be secured by either an individual or a group credit life policy. The group product is sold by the creditor to any of the debtors and is a guaranteed-issue (not underwritten) product. The individual policy, on the other hand, would be underwritten by the insurer and the debtor would have to qualify for the coverage. Both policies are typically decreasing term, will pay off the debt if the insured dies before doing so, and may be ended at the payoff of the debt.

Which of the following statements regarding group health coverage is NOT correct? A) The insured employee receives a certificate of coverage. B) The employer contracts with the insurer for group coverage, and the employee may contribute to the premium. C) Both the policyowner and the insured receive a copy of the master policy. D) The employer is the policyowner.

Both the policyowner and the insured receive a copy of the master policy. Explanation Employees covered by a group health plan do not receive a copy of the master contract or policy. The employer is the policyowner and receives the master contract. The employee receives a certificate of coverage as proof of insurance coverage.

The individuals who are insured under a group life contract are given which of the following as evidence of their coverage? A) Certificates of authority B) A replacement notice C) Certificates of insurance D) The insurance policy

Certificates of insurance Explanation The individuals who are insured under the contract (typically, employees or others who have a specific relationship to the policyowner) are given certificates of insurance as evidence of their coverage.

Which of the following statements about a Roth IRA is CORRECT? A) Only individuals younger than age 70½ can contribute. B) Distributions must begin at age 70½. C) The Roth IRA was introduced in 1980. D) Contributions are not tax deductible.

Contributions are not tax deductible. Explanation Although contributions to a Roth IRA are not tax deductible, interest, dividends, and capital gains accumulate tax-free. Unlike traditional IRAs, there is no prohibition on making contributions after reaching age 70½, and distributions need not begin at age 70½.

Which of the following types of life insurance covers the life of a debtor in connection with a specific loan? A) Credit life B) Replacement C) Long-term care D) Credit disability

Credit life Explanation Credit life insurance covers the life of a debtor. Credit life insurance and credit disability insurance cover debtors of a creditor in connection with a specific loan or other credit transaction. Credit disability insurance provides payments on loans that become due while the debtor is disabled.

Which of the following federal acts governs the funding, vesting, administration, and termination of private pension plans? A) McCarran-Ferguson Act B) Medicare and Medicaid C) ERISA D) OASDI

ERISA Explanation The Employee Retirement Income Security Act of 1974 (ERISA) establishes minimum standards for most pension and health plans in the private sector to protect people who participate in these plans. ERISA entitles participants to information about their plans and charges plan managers with fiduciary duties to these participants.

All of the following employed persons who have no employer retirement plan would be eligible to set up a traditional IRA EXCEPT A) Edna, age 72, a nurse B) Brent, age 40, a medical technician C) Jack, age 60, a plumber D) Miriam, age 26, a chemical engineer

Edna, age 72, a nurse Explanation Individuals must be under age 70½ to be eligible for a traditional IRA

A variable annuity is based on which of the following? A) Equity investments (stocks and bonds) B) Variable premiums C) The Dow Jones Industrial Average D) CD rates

Equity investments (stocks and bonds) Explanation Variable annuities are based on equity investments and payments. They vary with the value of the investments in a separate account.

Gina, age 66, has worked for the past 35 years as a dermatologist and has funded her defined contribution plan at the maximum allowed each year. She would like to delay taking income from the account for 3 years. Which of the following statements is TRUE? A) Gina's RMD date is age 76 because you can defer RMDs for 10 years after retirement. B) Gina has no specific date at which time she must begin RMD withdrawals. C) Gina will be required to begin distributions within 1 year of retirement. D) Gina can delay taking income until age 69 even though she is retired, as she is not required to begin RMDs until age 70½.

Gina can delay taking income until age 69 even though she is retired, as she is not required to begin RMDs until age 70½. Explanation RMDs from IRA and 401(k) plans and other defined contribution plans must begin no later than when the owner turns 70½. The first distribution can be delayed until April 1 of the year following the attainment of age 70½.

Which of the following statements regarding group insurance is INCORRECT? A) Two or more labor unions may join together to provide group insurance for collective members. B) Tax advantages are available to small employers in the same or similar industries who form trusts to provide insurance for employees. C) Group insurance plans sponsored by a business are sometimes referred to as employer group plans. D) Group life insurance premiums are less expensive than premiums for individual insurance policies.

Group insurance plans sponsored by a business are sometimes referred to as employer group plans. Explanation Group insurance plans sponsored by a business are sometimes referred to as employee, not employer, group plans.

Which of the following statements about group and individual life insurance is CORRECT? A) Group plans issue separate contracts to each insured individual. B) Group plans require individual underwriting and evidence of insurability. C) Group plans involve experience rating, while individual policies require individual underwriting and evidence of insurability. D) Group plans typically have higher premiums per unit of benefits than individual insurance.

Group plans involve experience rating, while individual policies require individual underwriting and evidence of insurability. Explanation Group insurance involves experience rating, which is a method of establishing a premium for the group based on the group's previous claims experience. In contrast, individual policies require individual underwriting and evidence of insurability. Another characteristic of group insurance is that, per unit of benefits, it is available at lower rates than individual insurance, due primarily to the lower administrative, operational, and selling expenses associated with group contracts./

What are the tax consequences if Maksim makes a partial rollover of his 401(k) plan assets? A) He must only pay income tax on the amount retained. B) He must only pay a 10% penalty on the amount retained. C) He must pay a 10% penalty plus income tax on the amount retained. D) Because partial rollovers are permitted, he does not have to pay income tax or the 10% penalty on the amount retained.

He must pay a 10% penalty plus income tax on the amount retained. Explanation Distributions from employer-sponsored plans are eligible for a tax-free rollover if they are reinvested in an IRA within 60 days after receipt of the distribution and if the plan participant does not actually take physical receipt of the distribution. The entire amount need not be rolled over; a partial distribution may be rolled over from one IRA or eligible plan to another IR However, if a partial rollover is executed, the part retained will be taxed as ordinary income and subject to a 10% penalty.

Jessica has a Roth IRA. Which of the following statements is TRUE? A) Her IRA contributions are not tax deductible. B) Her IRA distributions are taxed. C) Distributions before age 70½ are assessed an excise tax. D) She may not use any distributions toward the purchase of her first home.

Her IRA contributions are not tax deductible. Explanation Roth IRA contributions are not tax deductible, but distributions are received tax-free.

Rick purchased an annuity, making a single lump-sum payment on September 1. His benefits began on October 1 . What kind of annuity did Rick buy? A) Secondary B) Immediate C) Deferred D) Continual

Immediate Explanation Annuities can be classified as immediate or deferred, depending on when benefits begin. An immediate annuity begins benefit payouts 1 payment interval following the annuitant's initial payment to the company. Immediate annuities are always purchased with a single payment. In contrast, a deferred annuity begins benefit payouts after a period longer than 1 payment interval.

Which of the following statements comparing group and individual life insurance is NOT true? A) Individual insurance is generally available at lower rates than group insurance. B) The employer selects the type of insurance coverage under a group plan, while an individual selects the coverage for an individual policy. C) Individual underwriting and individual evidence of insurability are generally not required under a group plan. D) Group insurance involves experience rating for establishing premiums.

Individual insurance is generally available at lower rates than group insurance. Explanation Group insurance is provided at lower rates than individual insurance, primarily because of the lower administrative, operational, and selling expenses associated with group contracts. Because most employers pay all or part of the group premium, individual insureds are able to have insurance coverage for far less than what they would pay for an individual or personal plan.

Shiyuan, while in the process of converting her group life insurance to an individual policy, dies. What happens to the claim her beneficiary submits? A) It is paid under the new individual policy. B) It is paid under the old group plan. C) It is not paid by either policy. D) It is paid pro rata by both plans.

It is paid under the old group plan. Explanation If the person insured under the group life insurance policy dies while eligible for conversion but before the individual policy becomes effective, the amount of life insurance that she would have been entitled to have issued under the individual policy is payable as a claim under the group policy, whether or not the individual application or payment of the first premium has been made.

Which of the following statements does NOT describe a fixed annuity? A) It will produce income benefits that are adjusted to keep pace with inflation. B) It provides a guaranteed rate of interest. C) It is invested in the insurer's general account. D) It guarantees income payments will last the annuitant's lifetime.

It will produce income benefits that are adjusted to keep pace with inflation. Explanation The benefit of investing in the insurer's general account is that all annuity contract values, including the monthly payment, are guaranteed. In exchange for this guarantee, annuity income payments are fixed and will not increase to keep pace with inflation.

George and Virginia have an annuity that will provide benefits for George's life and then continue to provide the same amount of benefits to Virginia as his survivor. What type of annuity did George set up? A) Joint life annuity B) Temporary annuity certain C) Life annuity with period certain D) Joint life and survivorship annuity

Joint life and survivorship annuity Explanation The joint and survivor annuity is often purchased by married couples who want to guarantee that the surviving spouse will receive regular income for life. Other annuity products have the possibility of the surviving spouse outliving the income payments.

Mary, age 70, recently purchased a nonqualified immediate annuity to supplement her retirement income, and through it will receive a lifetime income of $800 per month. Which of the following statements most correctly describes how this income will be taxed? A) Mary will pay income tax each year on just a portion of the payments received, and when she has fully recovered her basis, all future payments will be taxable. B) Mary will pay income tax on the full amount received each year until the sum of payments equals the amount she paid for the annuity (her basis), at which point all future payments will not be taxed. C) Mary will not pay income tax until the sum of payments received equals her basis, at which point all future payments will be fully taxable. D) Mary will pay income tax each year on just a portion of the payments received, and when she has fully recovered her basis, all future payments will not be taxed.

Mary will pay income tax each year on just a portion of the payments received, and when she has fully recovered her basis, all future payments will be taxable. Explanation How benefits will be taxed in retirement will always be an important part of any senior planning. The exclusion ratio calculation identifies the amount of each annuity payment that is a tax-free return of basis. The remaining amount of each annuity payment is taxable as ordinary income. Once the annuity's cost basis is fully returned, however, the full amount of any further payments is fully taxable.

Max and Leah recently became grandparents. Max, age 71, is employed as an architect and earns an annual salary of $55,000. He has never set up an IRA, but he is thinking about it, now that he has grandchildren. His spouse, Leah, is covered by her company's corporate retirement plan. She has told him that he can contribute to her plan so that they can retire sooner. Which of the following statements is TRUE? A) Max may set up an IRA, but he will pay 50% excise taxes if he makes any withdrawals in the next 10 years. B) Max's contributions will be tax deductible because his company has never offered a sponsored plan. C) Max and Leah's combined income is too great to enjoy any tax-deferred growth. D) Max cannot contribute to Leah's plan.

Max cannot contribute to Leah's plan. Explanation For a married couple, an individual account must be set up for each person. Also, an individual must be under the age of 70½ to be eligible to open an IRA.

Bill names his church as the beneficiary of his $300,000 life insurance policy. When Bill dies, who is responsible for the income taxes payable on the lump-sum proceeds received by the church? A) Bill's estate and Bill's church split the tax B) Bill's estate C) No income tax is payable on the death proceeds D) Bill's church

No income tax is payable on the death proceeds Explanation Lump-sum proceeds payable upon the insured's death are not subject to income tax, no matter who the beneficiary is.

Which of the following scenarios regarding individual retirement accounts (IRAs) is NOT correct? A) Walter is 60. He may take a distribution from his traditional IRA without having to worry about an early withdrawal penalty. B) Peter is currently employed, but his spouse, Karina, is not. Since Karina has no earned income that she can contribute to a traditional IRA, Peter can set up a joint IRA account for the two of them. C) Ben, age 72, has a traditional IR If he does not take at least the minimum required distribution for the current year, a 50% excise tax will be assessed on the amount that should have been withdrawn. D) June has accumulated $30,000 in her traditional IR At age 55, she withdraws $2,500 to take a vacation. She will have to include the $2,500 in her taxable income for the year and pay a $250 penalty.

Peter is currently employed, but his spouse, Karina, is not. Since Karina has no earned income that she can contribute to a traditional IRA, Peter can set up a joint IRA account for the two of them. Explanation For married couples, an individual IRA account must be set up for each person, even if only 1 spouse is working. Separate IRA accounts could be set up for Peter and Karina, but not a joint account. All of the other answer choices involve correct scenarios.

Ralph owns a $50,000 nonparticipating whole life policy. Its cash value has accumulated to $15,000, and he has paid a total of $9,500 in premiums. If he surrenders the policy for its cash value, how will it be taxed? A) Ralph will receive $9,500 tax-free; the $5,500 balance is taxable as income. B) Ralph will receive the $15,000 as taxable income. C) Ralph will receive the $15,000 tax-free. D) Ralph will receive $5,500 tax-free; the $9,500 balance is taxable as income.

Ralph will receive $9,500 tax-free; the $5,500 balance is taxable as income. Explanation A policyowner is allowed to receive tax-free an amount equal to what he paid into the policy over the years in the form of premiums. Any gains are taxable.

Which of the following statements about a contributory group life insurance plan is CORRECT? A) All eligible employees must participate in the plan. B) The employer must pay for the entire cost of the insurance program. C) At least 70% of eligible employees must participate in the plan. D) The employees must pay for part of the cost of the insurance program.

The employees must pay for part of the cost of the insurance program. Explanation In a contributory group life insurance plan, employees must pay for part of the cost of the insurance. Payments are usually made through payroll deductions.

The annuitant of an annuity can be compared to which of the following with respect to a life insurance policy? A) A creditor B) The insured C) The policyowner D) A beneficiary

The insured Explanation The annuitant can be compared to an insured in a life insurance policy. The annuitant is the person by whose life the contract is measured. Just as life insurance policyowners are often the insureds, annuity owners are often the annuitants.

Which of the following statements pertaining to qualified pension plans is NOT correct? A) The employer's contributions on the employee's behalf are tax deductible to the employer. B) The amount of the employer's contributions is limited by current tax law. C) The interest on the employer's contributions is included in the employee's gross income and is currently taxable. D) The employer's contributions become fixed liabilities for the employer.

The interest on the employer's contributions is included in the employee's gross income and is currently taxable. Explanation A qualified pension plan meets requirements set by the federal government to receive favorable tax treatment. This includes the deductibility of employer contributions and the deferral of taxes on the amount of the contributions (and the income earned) for the employee. The employer's contributions, which are limited by law, are considered liabilities to the employer.

Which of the following statements regarding a variable annuity is TRUE? A) The amount of the annuity benefit payments is guaranteed. B) The investment risk is borne by the annuitant/contract owner. C) The value of the amount of the annuity over the life of the accumulation period is guaranteed. D) The rate of return credited to the separate account is guaranteed.

The investment risk is borne by the annuitant/contract owner. Explanation Unlike a fixed annuity, a variable annuity guarantees neither the rate of return the annuity fund will earn nor the amount of benefit payments the annuitant will receive. Both are dependent on how well the variable annuity's underlying investments perform.

Norma and Luis are considering the purchase of an annuity for retirement. Which payout option would be the least suitable for them? A) The life with period certain option B) The joint life and survivor annuity option C) The life with refund option D) The joint life annuity option

The joint life annuity option Explanation The joint life annuity option would be the least suitable because income payments stop at the death of the first annuitant, which leaves the survivor without the income.

Which of the following statements about the group conversion option is NOT true? A) The member can convert to any type of insurance except term insurance. B) Group life policies must include a conversion privilege. C) The option guarantees the member that coverage will continue for 60 days. D) If the member dies during the conversion period, the insurer will pay the death benefit in full.

The option guarantees the member that coverage will continue for 60 days. Explanation The option guarantees the member that coverage will continue for 31 days.

When a variable annuity is purchased, who is responsible for the investment risk? A) The beneficiary B) The insurer C) The owner D) The participant

The owner Explanation The owner, who may or may not be the annuitant, is responsible for the investment risk. The insurer is not allowed to bear the risk of variable annuity products.

What is one of the advantages of purchasing an individual credit life insurance policy? A) Individual policy premiums may be lower than those for group coverage. B) The policy is sponsored by the lender. C) No evidence of insurability is required. D) The policy can continue in force even after the loan has been paid off.

The policy can continue in force even after the loan has been paid off. Explanation An individual credit life insurance policy may remain in force beyond repayment of the loan. Also, the death benefit is allowed to exceed the amount of the debt or loan, whereas with a group policy, the amount of insurance is equal to the amount owed.

As a beneficiary, Kathryn receives $800 monthly from her deceased spouse's life insurance under a fixed-amount option. Each payment consists partly of principal (proceeds) and partly of interest. How is this income taxed? A) The portion of each payment consisting of interest is taxed; the remainder is tax-free. B) The portion of each payment consisting of principal is taxed; the remainder is tax-free. C) Each payment is fully taxed. D) Each payment is received fully tax-free.

The portion of each payment consisting of interest is taxed; the remainder is tax-free. Explanation The monthly payment to the beneficiary under the fixed-amount option is considered a partially taxable installment (similar to an annuity payment). A fixed, unchanged portion of each payment is considered a return of principal and is therefore not taxed. The balance, however, is taxable as interest income.

For which of the following types of policies would premiums be invested in an insurer's separate account? A) Whole life policies B) Fixed annuities C) Endowments D) Variable annuities

Variable annuities Explanation Life insurers are not allowed to bear the risk of variable annuities or life insurance, so they set up separate accounts where the values are held and the investment risk is borne by the contract owner. The owner makes various investments in subaccounts inside the separate account.

All of the following are likely to appear on a group participant's certificate of insurance EXCEPT A) a summary of benefits B) an individual's certificate number C) a physician's address D) a beneficiary designation

a physician's address Explanation Group policies are underwritten as a whole, rather than on each individual member. Evidence of coverage under a master policy is given to employees in the form of a certificate of insurance. The information on the certificate includes a summary of the plan benefits, the group or certificate number, and the designated beneficiary's name.

Annuity buyers who want their product to be supported by the insurers' general accounts would most likely be looking for interest returns that A) can go up but can never go down B) will keep pace with inflation C) are guaranteed never to be less than the rate specified in the contract D) can compete with equity investment returns

are guaranteed never to be less than the rate specified in the contract Explanation Life insurance and annuity policies that are supported by the insurer's general account include a provision that guarantees interest returns to never be less than the rate specified in the contract.

One reason a plan may require employees to sign up within 31 days after the probationary period is to A) charge higher premiums B) avoid adverse selection C) discriminate based on age D) require medical exams

avoid adverse selection Explanation Plans require employees to sign up with 31 days after the probationary period to avoid adverse selection. By limiting the number of days between eligibility and enrollment, insurers reduce the probability of claims.

A principal function of annuities is to A) reduce income taxes B) liquidate an estate C) provide for surviving dependents D) create an estate

liquidate an estate Explanation The principal function of life insurance is to create an estate. The principal function of annuities is to liquidate an estate.

All of the following are annuity premium factors EXCEPT A) medical history B) assumed interest rate C) age D) sex

medical history Explanation Age, sex, and assumed interest rate are all annuity premium factors. Annuities do not require any medical underwriting for issuance.

Which of the following is LEAST likely to appear on a group insurance application? A) beneficiary designation B) Social Security number C) address D) medical questions

medical questions Explanation Information such as name, address, Social Security number and beneficiary designations are on applications for group health insurance. Since underwriting is focused on the group rather than the individual, medical questions are the least likely to appear on the form.

Under a group life insurance plan, each employee has the right to A) an insurance illustration B) dispute the premium C) name their beneficiary D) an individual policy

name their beneficiary Explanation Each employee is a certificate holder and has the right to name their beneficiary.

With group life insurance policies, standard provisions that apply to employees who join during the open enrollment period typically include all of the following EXCEPT A) a grace period B) providing proof of insurability C) conversion rights D) misstatement of age

providing proof of insurability Explanation Providing proof of insurability may be required if the employee joins the group plan after the enrollment period, but it is not required when the employee joins the plan during the normal enrollment period. The other answer choices are all standard provisions with group life policies.

The purpose of a 401(k) plan is to save for A) unreimbursed medical expenses B) college costs for dependent children C) periods of unemployment D) retirement

retirement Explanation Section 401(k) plans are defined contribution plans that are intended for retirement savings.

The advantages of qualified retirement plans to employers include all of the following EXCEPT A) increased employee productivity B) favorable tax rules C) rewarding a few employees rather than many D) allowing the employer to attract and keep talented employees

rewarding a few employees rather than many Explanation Qualified retirement plans provide many advantages to employers, including favorable tax rules, increased productivity from employees, and good public relations with employees and the public.

When indebtedness is discharged before the scheduled maturity date, credit insurance is A) prorated for the actual length of the payment period, with premiums adjusted accordingly B) terminated and a refund is paid to the insured C) extended for the length of the loan, at additional cost to the insured D) transferred to another debt that is still owed

terminated and a refund is paid to the insured Explanation When a debt is paid off before the scheduled maturity date, through renewal or refinancing, the insurance coverage must be ended and a refund paid to the insured./

The period during which annuity benefits are received is called A) the annuitization period B) the accumulation period C) the payout period D) the earnings period

the annuitization period Explanation The annuitization period is the "taking out" time. This is the period of time following the accumulation of the annuitant's payments (principal and interest) during which annuity benefits are received. The accumulation period is the "putting in" time.

In writing group insurance, insurance companies use all of the following underwriting criteria EXCEPT A) the age and sex of the individuals in the group B) the size of the group C) the individuals' medical histories D) the type of and premium for coverage

the individuals' medical histories Explanation Group insurance is underwritten on the size and composition of the group, as well as the type of plan and amount of premium to be charged. Individual medical histories are not a factor in underwriting group insurance.

Individual certificates issued to all individuals insured under an insurance policy must include all of the following information EXCEPT A) the premium amount B) a conversion provision C) a statement of the insurance protection provided D) a statement of to whom benefits are payable

the premium amount Explanation Individual certificates for insureds in a group plan must state what coverage is provided and to whom it is payable, and they must include a detailed conversion provision.

The owner of an annuity contract possesses all the following rights EXCEPT A) to advance the deferred annuity's starting date to an earlier date than that which is stated in the contract at issue B) to determine the annuity income settlement option even when the annuitant is another person C) to cancel a deferred annuity at any time and receive its full cash value D) to designate the contract's annuitant and the beneficiary

to cancel a deferred annuity at any time and receive its full cash value Explanation While the owner of an annuity contract enjoys many rights of ownership, including the right to move up (but not push back) the annuity starting date in a deferred annuity, most deferred annuities have a surrender or withdrawal charge that reduces distributions made in the early years of the contract.

"Which of the following is NOT a standard life insurance policy nonforfeiture option? A) 1-year term insurance option B) Extended term insurance option C) Reduced paid-up (permanent) insurance option D) Cash surrender option"

"1-year term insurance option Explanation Policyowners have 3 nonforfeiture options from which to choose: cash surrender, reduced paid-up insurance, and extended term insurance. The cash surrender option allows a policyowner to request an immediate cash payment of the cash value when the policy is surrendered. The reduced paid-up option lets the policyowner take a paid-up policy for a reduced face amount of insurance. The policyowner may also use the policy's cash value to buy a term insurance policy in an amount equal to the original policy's face value, for as long a period as the cash value will buy, by selecting the extended term option."

"A life insurance policy must give the policyowner at least how many days after delivery of the policy to cancel the policy? A) 15 days B) 10 days C) 20 days D) 31 days"

"10 days Explanation A policyowner must be given at least 10 days after delivery of the policy to cancel the policy. In this case, the policyowner is entitled to a full return of all premiums paid for the policy."

"A new life insurance policyowner has just received her policy. How long does she have to review and return it if she is not satisfied with it? A) 1 day B) 10 days C) 5 days D) 30 days"

"10 days Explanation Policyowners are guaranteed a free-look provision. This provision states that the policyowner has 10 days after the policy is delivered to return the policy to the insurer and receive a full refund for the premium."

"The free look, or right to examine provision allows a policyowner the right to review and then return a policy for a full refund within no less than how many days? A) 60 days B) 45 days C) 25 days D) 10 days"

"10 days Explanation The free look provision gives a policyowner generally no less than 10 days to review and return a policy for a full refund for any reason."

"Which of the following life insurance policies with the same face value would have the highest premium if issued to the same person? A) 10-year renewable level term B) 10-year nonrenewable level term C) 10-year renewable and convertible level term D) 10-year decreasing term"

"10-year renewable and convertible level term Explanation The option to renew and the option to convert are available in term insurance for additional premiums."

"Darlene owned a $100,000 whole life policy that had a $75,000 cash value when she died at the age of 75. The amount paid by the insurance company as a death benefit was A) 100000 B) 75000 C) nothing D) 175000"

"100000 Explanation Upon the death of an insured, a whole life policy pays its face amount. In this case, the face amount is $100,000."

"Beth is secondary beneficiary of a life policy, receiving monthly income benefits under an installment refund option. Her mother, the primary beneficiary, received a total of $4,200 in benefits before she died. The original proceeds totaled $22,000. Assuming Beth lives long enough, she will be paid monthly benefits until she has received a total of A) 22000 B) 18700 C) 4200 D) 17800"

"17800 Explanation Under an installment refund option, the same income payments continue to the secondary beneficiary after the primary beneficiary dies, until the entire death benefit amount is paid."

"At the age of 34, Ben purchased a whole life policy with a guaranteed insurability option. How many opportunities will he have to purchase additional life insurance in the future? A) 5 B) 4 C) 2 D) 3"

"2 Explanation Typically, the guaranteed insurability option allows the insured to purchase additional insurance at 3-year intervals between ages 25 and 40. In this case, Ben would be able to exercise this option at age 37 and at age 40."

"An individual life insurance policy must become incontestable no later than how long after its effective date? A) 1 year B) 3 years C) 6 months D) 2 years"

"2 years Explanation Individual life insurance policies must include an incontestability provision stating that the policy will become incontestable no later than 2 years after its effective date (except for nonpayment of premiums)."

"Peggy takes out a $50,000 10-year term policy on herself and names her 2 children, aged 11 and 12, as primary beneficiaries to share equally in the proceeds. How much would each child receive if Peggy should die when the children are aged 19 and 20? A) 50000 B) Nothing C) $50,000 plus the cash value in the policy D) 25000"

"25000 Explanation If Peggy dies within the 10-year term period, her beneficiaries will equally split the $50,000 face amount, each receiving $25,000."

"Josie has been totally disabled for 2 years. During that time, the insurance company has paid all premiums (a total of $1,200) on her $25,000 life policy, which has a waiver of premium clause. If Josie dies now, the insurance company will pay a death benefit of A) 23800 B) 12500 C) 25000 D) 23300"

"25000 Explanation The waiver of premium rider only waives the policyowner's responsibility of paying the life policy premiums if she suffers a disability and is unable to work after 90 days. The waiver of premium only waives the policyowner's responsibility to pay; it does not accelerate any portion of the death benefit to the insured. Therefore, Josie's life policy pays its death benefit of $25,000."

"The insured in a $25,000 life insurance policy died of a heart attack. Since the policy had a double indemnity provision, the policy beneficiary received A) 12500 B) 50000 C) 25000 D) nothing"

"25000 Explanation Under a double indemnity provision, the policy beneficiary would receive double the face amount in the event of a fatal accidental injury. Since the insured's death was not due to an accident, the policy paid its $25,000 face amount."

"Roberta is the insured in a $30,000 life insurance policy for which she pays an annual premium of $700. There is an outstanding policy loan of $2,500. Her last premium due has not been paid, and she dies during the grace period. How much will her beneficiary receive? A) 26800 B) 30000 C) 29300 D) 27500"

"26800 Explanation When a death claim is filed against a life policy, all amounts due on that policy are subtracted from the death benefit. This includes any policy loans, plus interest due, and any outstanding premiums. In this case, $30,000 minus $700 (annual premium owed) minus $2,500 (outstanding policy loan) equals $26,800."

"An insured that wants to reinstate a lapsed permanent life policy must do so within A) 4 years B) 3 years C) 5 years D) 2 years"

"3 years Explanation In addition to other requirements, a permanent life insurance policy that an insured wishes to reinstate must be done within three years of the lapse."

"If a life insurance policy lapses for nonpayment, within how many years from the date of premium default may the policy be reinstated? A) 2 years B) 4 years C) 3 years D) 5 years"

"3 years Explanation Lapsed life insurance policies can be reinstated at any time within 3 years from the date of premium default. To reinstate the policy, the former policyholder must provide satisfactory evidence of insurability, if required by the insurer; pay back premiums (with interest on premium loans); and pay any other indebtedness on the policy. However, the policy cannot be reinstated if it has been surrendered for its cash surrender value, if its cash surrender value has been exhausted, or if its paid-up term insurance has expired."

"Edna stopped paying premiums on her permanent life insurance policy 7 years ago, though she never surrendered it. She is still insurable and has no outstanding loan against the policy. The company will probably decline to reinstate the policy because the time limit for reinstatement has expired. The limit is A) 60 to 90 days B) 1 year C) 3 years D) 6 months to 18 months"

"3 years Explanation The policyowner has only a limited period of time—3 years from the date of the last premium due—in which to reinstate a lapsed policy. It is important to remember that policyowners can only reinstate life policies that have lapsed for nonpayment only. If a policyowner intentionally surrenders the policy, reinstatement is not allowed."

"Micah pays $220 annually for a $50,000 life insurance policy. The premium is due June 1, however it is not paid until June 24. If Micah died on June 15, what would the amount of the death benefit? A) 49220 B) 50000 C) 49780 D) 0"

"49780 Explanation Since Micah died during the grace period, the policy will pay the death benefit minus the amount of past due premium."

"A consumer may make a written request for complete disclosure of the nature and scope of an investigative report regarding her credit history. The disclosure must be made within A) 5 days B) 30 days C) 15 days D) 10 days"

"5 days Explanation Consumers have the right to view the information contained in any investigative reports that have been ordered in conjunction with an application for life or health insurance. The consumer's request must be in writing, and the disclosure must be made in writing within 5 days after receipt of the consumer's request."

"Brian, a 45-year-old general contractor, wants financial protection for his family while $300,000 of his assets are tied up in a building project for the next 5 years. Which of the following types of life insurance policies would give him that protection at the lowest cost? A) 5-year level term B) Life paid-up at 50 C) Straight whole life D) Single premium whole life"

"5-year level term Explanation Level term insurance provides a level face amount of coverage for the term of the policy. Because it covers a specified term only and does not have a cash value, it is cheaper than whole and limited-pay (including single premium) life insurance. Because the $300,000 amount remains level, level term insurance is the recommended insurance product for Brian."

"Gerald, a 40-year-old building contractor, wants financial protection for his family while $150,000 of his assets are tied up in a building project for about 5 years. Which of the following types of life insurance policies would give him that protection at the lowest cost? A) Life paid-up at 45 B) Straight whole life C) 5-year level term D) Single premium whole life"

"5-year level term Explanation Level term insurance provides a level face amount of coverage for the term of the policy. Because it covers a specified term only and does not have a cash value, it is cheaper than whole and limited-pay (including single premium) life. Because the $150,000 amount remains level in this situation, level term insurance is best suited to Gerald's needs."

"Which of the following period certain income options would call for the highest payment rate per $1,000 of life policy proceeds? A) 15-year period certain B) 10-year period certain C) 20-year period certain D) 5-year period certain"

"5-year period certain Explanation The shorter the period certain, the higher the monthly payment rate."

"Jay has a $50,000 life insurance policy with an accidental death benefit that pays triple the face amount. If Jay commits suicide 3 years after purchasing the policy, how much will his beneficiary receive? A) 50000 B) 150000 C) 0 D) 100000"

"50000 Explanation An accident is defined as an event that is unknown and unforeseen by nature. Therefore, suicide does not qualify as an accident because it is done willfully, and there is no coverage under the accidental death rider. Moreover, the base policy includes a 2-year suicide clause that excludes coverage if the insured commits suicide during that period following the effective date. Because the suicide occurred more than 2 years after the policy effective date, the face amount will be paid from the base policy only."

"Samiya purchased a $500,000 life policy from LHC Insurance Company at the age of 35. At her death the insurance company discovered that her primary beneficiary was older than Samiya had stated on the application. How much will Samiya's beneficiary receive? A) 250000 B) 500000 C) Nothing D) The full amount of the benefits, but the policyowner's estate must pay a fine"

"500000 Explanation Misstatement of age does not invalidate a life insurance policy. However, the misstatement of age provision only applies to situations where the insured's age is misstated. The beneficiary's age, whether misstated or not, does not affect the amount of the death benefit to be paid."

"Sarah owns a life insurance policy with a $50,000 face amount and a 10-year return-of-premium rider. She pays an annual premium of $700. If she were to die 6 years after purchasing the policy, what would be the total amount payable to the beneficiary? A) 50000 B) 50700 C) 54200 D) 57000"

"54200 Explanation The return-of-premium rider increases the death benefit by the sum or premiums paid to date."

"Most state laws allow life insurance policies to be backdated up to A) 9 months B) 6 months C) 3 months D) 1 month"

"6 months Explanation Backdating a policy allows the premium to be based on an applicant's earlier age, which lowers the premium. Life insurance applications may be backdated up to 6 months in most states."

"The insurer is generally required to pay the death benefit claim within A) 90 days B) 30 days C) 60 days D) 45 days"

"60 days Explanation The provision says the insurer is to pay the death benefit promptly, which is interpreted by most companies to mean within 60 days after receiving notification of the death of the insured."

"At age 60, David decides to stop paying premiums on his $60,000 whole life policy and exchanges it for extended term insurance. What face value will the term insurance have? A) 45000 B) 10000 C) 30000 D) 60000"

"60000 Explanation When a policyowner stops paying premiums on a whole life policy and exchanges the policy for extended term insurance, a policy's cash surrender value is used to purchase an amount of term insurance equal to the original policy's face amount. The term insurance will last as long as the cash value is sufficient to pay premiums."

"For a beneficiary to receive accidental death benefits, the death of the insured generally must occur within how many days following the accident? A) 30 days B) 90 days C) 60 days D) 45 days"

"90 days Explanation For a beneficiary to receive accidental death benefits, the death of the insured generally must occur within 90 days following an accident."

"Betty owns a universal life insurance policy that was issued with a $100,000 face amount and now has total death benefit protection of $110,000. Several months ago she borrowed $15,000 from the policy. The outstanding loan balance (including interest) is $15,200. If Betty dies today, what will be the amount of the death benefit? A) 100000 B) 110000 C) 94800 D) 95000"

"94800 Explanation Outstanding policy loans plus interest are deducted from life insurance death benefit proceeds, leaving, in this case, a net death benefit of $94,800 ($110,000 - $15,200)."

"Which of the following statements regarding the Fair Credit Reporting Act is TRUE? A) Direct writers do not need to inform applicants about investigative reports. B) Third-party credit information may be given to insurers at any time. C) A Notice to Applicant is always issued within 3 days after the policy is delivered. D) A Notice to Applicant is required."

"A Notice to Applicant is required. Explanation All applicants must be informed that reports regarding their credit history are being ordered by an insurer. The Notice to Applicant must be given to the consumer no later than 3 days after the report has been requested."

"An exchange of value is necessary to form a valid contract. What is the legal term that means something of value? A) Endorsement B) Application C) Consideration D) Premium"

"Consideration Explanation The legal term is consideration. The insured's consideration is the premium paid and the representations made in the application. The insurer's consideration is the promise to pay the face amount of the contract to the named beneficiary upon the death of the insured."

"Which of the following statements about life insurance is NOT correct? A) Life insurance is not a personal contract between the insurer and insured. B) A policyowner must notify the beneficiary before transferring ownership. C) A policyowner must notify the insurer in writing to transfer a policy. D) If a policy is transferred, the new owner receives all of the rights of policy ownership."

"A policyowner must notify the beneficiary before transferring ownership. Explanation Life insurance is not a personal contract between the insurer and the insured. Policyowners actually own their policies and can give them away if they wish. To transfer a policy, a policyowner must simply notify the insurer in writing and need not notify the beneficiary. The new owner is then granted all the rights of policy ownership."

"Which of the following criteria may be used when determining the premium rate for an insurance applicant? A) Religion B) Blindness C) Race D) Age"

"Age Explanation No person or insurer may refuse to issue or renew insurance to anyone or charge different rates because of race, color, religion, national origin, or sex. However, it is permissible to charge different rates to different individuals when the rates can be justified through valid actuarial tables. Age may be considered a valid justification for charging individuals different rates."

"Which of the following statements pertaining to a life insurance policy application is CORRECT? A) If an applicant's age is shown erroneously on a life insurance application as 28 instead of 29, this could result in a premium quote that is higher than it should be. B) An agent must be very specific when listing an applicant's occupation on an application. C) The applicant's signature is required on an application, but the agent's signature is not. D) A submitted application is considered a valid offer even if the premium is not collected."

"An agent must be very specific when listing an applicant's occupation on an application. Explanation An agent must be very specific when listing an applicant's occupation and duties on the application because of the insurer's need to evaluate job hazards that may affect insurability. An applicant whose age is erroneously shown to be younger than his actual age will receive a premium quote that is lower than it should be. Both the applicant and the agent must sign the application. The application is considered a valid offer only when the initial premium is received."

"An insurable interest may be found in which of the following? A) An employee in the life of another employee of the same company B) A partner in the life of a former partner C) A shareholder in the life of another shareholder of the same corporation D) An employer in the life of a key employee"

"An employer in the life of a key employee Explanation To have an insurable interest in another person, a person or business must stand to gain by the insured's survival, suffer financial loss if the insured individual dies, or both. An employer has an insurable interest in the life of a key employee. A partner has an insurable interest in the life of any other current partner, but not of a former partner. Just the fact that 2 shareholders had invested in the same corporation or that 2 employees worked for the same company would not constitute an insurable interest."

"Which of the following statements pertaining to the suicide clause in a life insurance policy is NOT correct? A) An insured committed suicide on February 1. The insured had a $50,000 life insurance policy, which was issued on January 28 two years previously. The $50,000 death benefit was paid to the beneficiary of the policy. B) The suicide clause stipulates a period of time during which benefits will not be paid if the insured commits suicide. C) The suicide clause is designed to protect the insuring company. D) An insured with a $75,000 life insurance policy issued December 15 commits suicide two years later, on December 24th The beneficiary of the policy will receive a return of the premiums paid for the policy."

"An insured with a $75,000 life insurance policy issued December 15 commits suicide two years later, on December 24th The beneficiary of the policy will receive a return of the premiums paid for the policy. Explanation Suicide clauses typically extend 2 years, during which time the insurer will not have to pay benefits if the insured does, in fact, commit suicide. The insuring company is obligated to return the premiums paid. In this situation, the insured committed suicide 9 days after the clause time period expired; therefore, the insurer must pay the benefits to the beneficiary."

"Which of the following situations is the best example of unfair discrimination? A) An insurer assigns a premium rating to an applicant who weighs 30 pounds more than a typical person of that age and sex. B) An insurer refuses to issue a policy to an applicant whose credit history suggests an inability to financially support the policy being applied for. C) An insurer assigns a premium rating to an applicant because of studies that suggest members of the applicant's race have a shorter than average life expectancy. D) An insurer refuses to issue a policy to an applicant who has been treated for drug dependency on 2 separate occasions in the previous 5 years."

"An insurer assigns a premium rating to an applicant because of studies that suggest members of the applicant's race have a shorter than average life expectancy. Explanation Unfair discrimination occurs when an insurer charges two people of equal risk different rates or provides disparate services or benefits based solely on differences in race, religion, physical ability, national origin, or location of residence."

"Jamal's agent delivers his life policy to him on February 5. Until what date can Jamal opt to return his policy and receive a full refund of the premiums paid? A) Jamal can return it anytime as long as he is within his grace period B) Jamal can do this anytime C) March 5 D) February 15"

"February 15 Explanation All individual life insurance policies must include a 10-day free-look period. The policyowner has the right to return the policy within 10 days of delivery for a full refund of the premiums paid if he is dissatisfied for any reason."

"An agent for Zephyr Insurance Company, equipped with business cards, sample Zephyr policies, and an Zephyr rate book, informs a prospect that Zephyr has given him unlimited binding authority. The prospect assumes this is true. Which of the following terms correctly defines the agent's authority in this case? A) Implied authority B) Binding authority C) Express authority D) Apparent authority"

"Apparent authority Explanation Apparent authority is what a third party (such as a member of the public) assumes an agent has, on the basis of the actions or words of the principal. By supplying the agent with business cards, sample policies, and rate books, the insurance company has given the impression that it supports his words and actions."

"When the insured and the beneficiary in a life insurance policy die simultaneously, how must the proceeds of the policy be distributed? A) As if the beneficiary had survived the insured B) As if the insured had survived the beneficiary C) As if the insured had assigned the policy to the beneficiary D) As if the insured had designated another beneficiary"

"As if the insured had survived the beneficiary Explanation If the insured and the beneficiary designated in a life insurance policy both die and there is insufficient evidence that they have died otherwise than simultaneously, the policy proceeds will be distributed as if the insured had survived the beneficiary, unless otherwise specified in the policy."

"Which of the following statements about executive bonus plans is NOT correct? A) They are considered nonqualified plans. B) At the employee's death, the company receives the death proceeds free of tax. C) The bonus paid to the employee is includable in his gross income. D) The employee is the policyowner."

"At the employee's death, the company receives the death proceeds free of tax. Explanation An executive bonus plan is a nonqualified plan in which life insurance is purchased by an employer as an alternative to paying a cash bonus. The employee owns the policy and names the beneficiary, so the employer retains no policy rights. At the employee's death, the beneficiary receives the death proceeds free of tax. The premiums paid by the employer as a bonus are deductible by the employer, and the amount of the premiums paid for the employee is reportable as income."

"Which of the following options is designed to protect the policyowner should the policy be in danger of lapsing for nonpayment of premiums? A) Waiver of premium B) Premium exclusion C) Automatic premium loan D) Guaranteed insurability"

"Automatic premium loan Explanation Under the automatic premium loan provision, the cash values will be used to pay the premium if the premium due has not been paid by the end of the grace period."

"Which of the following is NOT a common characteristic of an insurance contract? A) Indemnity B) Legal purpose C) Adhesion D) Utmost good faith"

"Legal purpose Explanation Legal purpose is 1 of the 4 elements of a legal contract. Adhesion, utmost good faith, and indemnity are 3 of the 7 characteristics of insurance contracts."

"Why do most states ban STOLI transactions? A) Because the investor is not a domestic insurer B) Because they are not a profitable line of business for insurance companies C) Because the premiums on the policies are too high D) Because the investor, who is named as the beneficiary, does not have an insurable interest in the insured"

"Because the investor, who is named as the beneficiary, does not have an insurable interest in the insured Explanation Most states ban STOLI (stranger-owned life insurance) because it has become a method of fraud targeted at senior citizens. The investor persuades the senior to take out a new life insurance policy and name the investor as the beneficiary. The premiums are usually paid by the investors for a period of time based on the policy's contestable period, after which the insured is paid some small amount and names the investor as the beneficiary of the policy."

"What happens if the insurer discovers that the insured's age was accidentally misstated on an application for an individual life insurance policy? A) The policy will be canceled. B) Benefits will be calculated according to how much coverage the premium paid would have purchased for the correct age. C) Benefits are paid as if the misstated age is the insured's real age. D) The insured must pay a $5,000 fine."

"Benefits will be calculated according to how much coverage the premium paid would have purchased for the correct age. Explanation All individual life insurance policies must contain a misstatement of age provision stating that if the insured's age was accidentally misstated on an application for a life insurance policy, benefits will be calculated according to how much coverage the premium paid would have purchased for the correct age."

"What happens if, when paying benefits, the insurer discovers that a person's age had been misstated on his individual life insurance application? A) Benefits will be paid as if the incorrect age stated were actually the correct age. B) No benefits will be paid. C) Benefits will be paid for the amount of coverage the premium would have purchased at the correct age. D) The policyholder's estate must pay a $10,000 fine."

"Benefits will be paid for the amount of coverage the premium would have purchased at the correct age. Explanation When an insured's age has been misstated in applying for a life policy, the policy will pay the amount that the premium would have bought if the correct age had been stated."

"What happens if a claim arises during the grace period of an individual life insurance policy? A) The benefits will be doubled. B) Benefits will be paid, but unpaid premiums can be deducted from the policy proceeds. C) Benefits will not be paid, but premiums will be returned. D) No benefits and no return of premiums will be paid."

"Benefits will be paid, but unpaid premiums can be deducted from the policy proceeds. Explanation The standard life insurance grace period provides that if a claim is made during the grace period, any unpaid premiums may be deducted from the policy proceeds."

"Anna applied for a $2 million life insurance policy and paid the first premium but was later found to be uninsurable. The agent gave her a receipt that guarantees coverage until the insurer formally rejects her application. Which type of receipt did Anna receive? A) Insurability B) Conditional C) Binding D) Approval"

"Binding Explanation With a binding receipt, coverage is guaranteed, even if Anna is later found to be uninsurable, until the insurer formally rejects the application. However, because the underwriting process can take several weeks, this can place the insurer at considerable risk. Accordingly, binding receipts are almost never used in life insurance."

"Which of the following statements pertaining to limited-pay life policies is CORRECT? A) Insurance protection exists only during the time premiums are actually paid. B) The total premium cost for a single premium life policy is more than the total premium cost for a policy with premiums spread over a period of years. C) A limited-pay life policyowner pays premiums of variable amounts during the life of the policy. D) Both limited-pay life and whole life policies endow at age 100."

"Both limited-pay life and whole life policies endow at age 100. Explanation Both limited-pay life and whole life policies endow at age 100. A single premium policy would cost less than a policy with payments spread over its term, since there are fewer administrative expenses involved with a single payment policy."

"Brian met with an insurance producer to discuss how much life insurance he would need to support his family in the event of his premature death. Both parties agreed that a $750,000 life insurance policy would be sufficient. When Brian stated that he wanted to discuss the matter with his spouse, the producer asked him to sign a general background information form before he left. However, the document was actually an application form that the producer submitted to the insurer. If the insurer then issues a contract, it will be legally unenforceable because A) Brian did not make a valid offer B) Brian is not presumed to be a competent party to the contract C) Brian did not make a valid acceptance of the contract D) the insurer did not make a valid offer"

"Brian did not make a valid offer Explanation To be legally enforceable, a contract must be made with a definite, unqualified offer by one party and the acceptance of its exact terms by the other party. Because Brian did not know that he was signing a life insurance application, he did not make a valid offer for the insurance contract."

"Which of the following statements regarding buy-sell agreements is NOT correct? A) The buyer of the business is the beneficiary. B) Buy-sell agreements may be funded with life insurance. C) The death benefit is the purchase price of the business interest. D) Buy-sell agreements are only funded with annuities."

"Buy-sell agreements are only funded with annuities. Explanation Buy-sell agreements are also known as business continuation plans. Their purpose is to provide the funds for the sale of a business should the owner die or become disabled. The owner is the insured and the buyer is the beneficiary. The death benefit is equal to the purchase price of interest in the business, which is stated in the buy-sell agreement."

"Roland purchases a life insurance policy and names his spouse, Carol, as a beneficiary. Roland's children, Sasha and Alex, are to share the benefits equally if Carol dies before him. His church is to receive the proceeds if his spouse and children all predecease him. The primary beneficiary is A) Alex B) the church C) Carol D) Sasha"

"Carol Explanation When an insured dies, the first person in line to receive the death proceeds is the primary beneficiary."

"Michelle has a term insurance policy in which the amount of protection remains constant during the term period. Which kind of term insurance does Michelle have? A) Level term B) Increasing term C) Family term D) Decreasing term"

"Level term Explanation Level term insurance provides a constant, or level, face amount of coverage for the term of the policy."

"After comparing policies for the last 3 months, Carol has finally found a health insurance policy that she would like to purchase. When Carol submits the application with the initial premium, A) the insurance company cannot make a counteroffer B) Carol has made an offer that the insurance company can accept or reject C) Carol cannot rescind the offer once made D) the insurance company can make an offer by issuing the policy"

"Carol has made an offer that the insurance company can accept or reject Explanation When Carol submits an application along with the initial premium, she is making an offer to the insurance company. The insurer can accept the offer by issuing the policy as applied for, or it may counteroffer by issuing another policy at different premium rates or with different terms. Until the insurer accepts the offer, Carol has the right to rescind it."

"Which of the following is NOT considered unfair discrimination? A) Refusing to issue an annuity to a man because he is only 25 years old B) Charging a higher individual life insurance premium for a 50-year-old than for a 25-year-old C) Refusing to insure someone specifically because another insurer refused to write a policy on that person D) Refusing to issue an individual life insurance policy to a woman because she is unmarried "

"Charging a higher individual life insurance premium for a 50-year-old than for a 25-year-old Explanation It is illegal to permit unfair discrimination between individuals of the same class and life expectancy when determining the rates, dividends, benefits, terms, or conditions for any life insurance or annuity contract. It is also illegal to permit unfair discrimination between individuals of the same class and the same hazards in the premium amount, policy fees, or benefits. It would not be unfair discrimination to charge a higher individual life insurance premium to a 50-year-old than a 25-year-old."

"Henry owns a variable life insurance policy in which his spouse, Colin, is the primary beneficiary. His children, Jacob and Charlotte, are equal secondary beneficiaries. The American Red Cross and his alma mater are listed as equal tertiary beneficiaries. If both Colin and Jacob predecease Henry, how will the policy's death benefit be distributed at Henry's death? A) Charlotte will receive 100% of the death benefit. B) Charlotte will receive 50% of the death benefit, and the American Red Cross and Henry's alma mater will each receive 25% of the death benefit. C) The American Red Cross, Henry's alma mater, and Charlotte will each receive one-third of the death benefit. D) The American Red Cross and Henry's alma mater will each receive 50% of the death benefit."

"Charlotte will receive 100% of the death benefit. Explanation As long as even one secondary beneficiary is alive at the insured's death, that person will receive the full benefit. The tertiary beneficiary will receive benefits only if the secondary and primary beneficiaries predecease the insured."

"Clarence, the insured, designated his estate as the beneficiary of his life insurance policy. Which of the following statements is CORRECT? A) The amount of Clarence's estate will be reduced by the amount of proceeds it receives. B) The proceeds will not be included in Clarence's gross estate for estate tax purposes. C) Clarence's creditors can make claims against the proceeds more readily than if the proceeds were paid to named beneficiaries. D) The heirs will be able to select specific settlement options from the estate, just as if they were the direct beneficiaries."

"Clarence's creditors can make claims against the proceeds more readily than if the proceeds were paid to named beneficiaries. Explanation If insurance proceeds are paid directly to an insured's estate, the size of the estate will be increased by the amount of the proceeds. Settlement options will be lost to heirs, since an estate will distribute its assets in lump sums. Creditors can attach proceeds more readily if they are paid to an estate. The value of the policy will be included in the gross estate for tax purposes."

"The beneficiary on Lina's life insurance policy is listed as "children of the insured." Which of the following terms best describes this type of beneficiary designation? A) Basic beneficiaries B) Class beneficiaries C) Generational beneficiaries D) Juvenile beneficiaries"

"Class beneficiaries Explanation A policyowner may designate a class of beneficiaries without specifying the beneficiaries by name. This is a practical way to accommodate changes in the group of beneficiaries. For instance, the policyowner may want to ensure that all of her children will benefit. A class designation will accommodate this by including her current offspring as well as any children yet to be born."

"Winnie is insured under a life insurance policy. She designates "all natural children of the insured" as beneficiaries in her life insurance policy. Which of the following phrases best describes this type of beneficiary designation? A) Juvenile beneficiaries B) Tertiary beneficiaries C) Class beneficiaries D) Generational beneficiaries"

"Class beneficiaries Explanation Rather than specifying one or more beneficiaries by name, a policyowner may designate a class or group of beneficiaries. Thus, if Winnie names "children of the insured" as her beneficiaries, she is designating a class of beneficiaries. Designating a class of beneficiaries allows for withdrawals or additions to the class without having to amend the designation."

"What are the 2 types of assignment of rights to another in a life insurance policy? A) Dividend and cash value B) Direct and participating C) Collateral and absolute (also known as permanent) D) Whole and pieces"

"Collateral and absolute (also known as permanent) Explanation Assignments transfer an owner's interests. Collateral assignments do not change ownership. Most commonly, they pledge a portion of the death benefit as collateral. Absolute assignments transfer all rights of ownership."

"In which of the following circumstances would the incontestable clause of an insurance policy apply? A) Impersonation of the applicant by another B) Intent to murder C) Concealment of smoking D) No insurable interest"

"Concealment of smoking Explanation After a policy has been in force for the specified term, the insurer cannot contest a death claim or refuse payment of proceeds for a concealment of smoking. A policy issued under any of the other 3 situations may be voided at any time, since it would not be considered a valid, enforceable contract."

"Madge took out a $100,000 10-year convertible term policy at age 30. At age 36 she decides to convert the policy to permanent insurance of the same amount on an original-age basis. Which of the following statements is NOT correct? A) A higher premium will be charged for the new policy. B) The new policy will build cash values at a faster rate than if she converts at her attained age. C) Conversion will be contingent upon her evidence of insurability. D) She must make up the difference in premiums for the period between ages 30 and 36."

"Conversion will be contingent upon her evidence of insurability. Explanation Under term life insurance, the option to convert offers the insured the right to change the term policy to permanent insurance without evidence of insurability."

"Which of the following riders provides for changes in the benefit payable based on changes in the Consumer Price Index? A) Payables rider B) Guaranteed insurability rider C) Social Security rider D) Cost-of-living adjustment rider"

"Cost-of-living adjustment rider Explanation The cost-of-living adjustment (COLA) rider allows for indexing the monthly or weekly benefit payable under a disability policy to changes in the Consumer Price Index."

"Cybil is insured under a key-person life insurance policy owned by Delta Corporation and then quits her job. Which of the following statements is NOT correct? A) Cybil can convert the policy to an individual policy. B) Delta can surrender the policy for cash. C) Delta can keep the policy in force. D) Delta can assign the policy."

"Cybil can convert the policy to an individual policy. Explanation If Cybil leaves Delta Corporation, the company can surrender the policy for cash, assign the policy, or keep it in force because there is no need to maintain an insurable interest. Cybil has no conversion right with respect to the key-person policy because she does not own the policy."

"Sam applied for a term life insurance policy, paid the initial premium, and received a conditional receipt on December 1. If the insurer issued the policy on January 1 and the agent delivered the policy on January 3, the policy effective date is A) December 1 B) January 3 C) when the policy is delivered and a statement of continued good health is obtained D) January 1"

"December 1 Explanation Sam's policy effective date will be December 1; the date the conditional receipt was issued in exchange for his initial premium payment. If Sam didn't pay the initial premium at the time of application, the effective date would typically be the date the policy was issued by the insurance company."

"Amanda took out a $250,000 home mortgage when she purchased her house 5 years ago. What type of life insurance policy would be the best choice to insure the remaining balance on her home mortgage? A) Whole life B) Level term C) Variable life D) Decreasing term"

"Decreasing term Explanation Amanda should consider purchasing a decreasing term insurance policy to cover the balance of her home mortgage, which decreases from year to year."

"Joe buys his first home after obtaining a 30-year mortgage from his bank. He is considering the purchase of life insurance to ensure that the mortgage will be paid in the event of his death, in which case he will leave the house to his spouse and children. What would be the best life insurance protection for Joe? A) Decreasing term B) Universal life C) Level term D) Whole life"

"Decreasing term Explanation Decreasing term insurance is the best policy for Joe to buy. It addresses his need for protection that will decline from year to year. This would be a good choice to insure the declining balance on a home mortgage."

"Which of the following terms refers to the period following the death of a breadwinner during which the children are living at home? A) Blackout period B) Provision period C) Child-rearing period D) Dependency period"

"Dependency period Explanation The dependency period is the period following the death of a breadwinner during which the children are living at home. The need for family income is greatest while the children are growing up."

"In which of the following cases would the insurance company most likely cover the loss under a life insurance policy? A) Graham is killed by a shark while scuba diving. B) While robbing a convenience store, Sam is killed by the accidental detonation of a homemade bomb. C) During a cross-country flight to a shareholders' meeting, Judy's commercial airliner suffers engine failure and crashes with no survivors. D) While on a night patrol, Andrea, a first lieutenant in the U.S. Army, is killed in a gun battle with the enemy."

"During a cross-country flight to a shareholders' meeting, Judy's commercial airliner suffers engine failure and crashes with no survivors. Explanation Exclusions for death resulting from commercial aviation are rarely found in modern life insurance policies. However, this exclusion was not uncommon when commercial aviation was a new means of transportation."

"Which of the following statements regarding current assumption whole life insurance is NOT correct? A) During a period of relatively high interest rates the premiums could be reduced. B) During a period of relatively high interest rates the premiums could be increased. C) Premium adjustments are usually made on an annual basis. D) It is also known as interest-sensitive whole life."

"During a period of relatively high interest rates the premiums could be increased. Explanation Current assumption whole life policies, also known as interest-sensitive whole life, offer flexible premium payments that are tied into current interest rate fluctuations. Depending on interest rate fluctuation, the insurer reserves the right to increase or decrease the premium within a certain range. During periods of low interest rates, premiums could be increased. During periods of high interest rates, premiums could be reduced. Premium adjustments are typically made on an annual basis."

"Which of the following statements regarding the delivery of a life insurance policy is NOT correct? A) An agent has an ethical responsibility to explain the policy, including any riders, exclusions, or other details of the policy, to the policyholder. B) Agents will usually get a signed receipt from the policyowner. C) During the delivery appointment, the agent should review the policy with the policyholder. D) During the delivery appointment, the agent should ask for referrals. "

"During the delivery appointment, the agent should ask for referrals. Explanation A life insurance policy may be mailed to the policyholder; however, some states require the producer to obtain a signed receipt that acknowledges the date of delivery. If the policy is delivered in person, it is a good opportunity for the producer to review the entire policy with the policyholder and answer any questions that may arise."

"Which of the following situations would create a possible errors and omissions liability to the producer? A) The producer fails to return phone calls from the client. B) The producer informs the insurer that he has serious doubts about the applicant's insurability. C) During the sale of a replacement health policy, the producer tells an applicant that the new policy will cover expenses ordinarily paid by Medicare. D) The producer fails to inform the client that her policy is being canceled at the end of the year."

"During the sale of a replacement health policy, the producer tells an applicant that the new policy will cover expenses ordinarily paid by Medicare. Explanation The producer selling the replacement policy has engaged in misrepresentation, which is illegal. Health policies exclude coverage for benefits that are covered by Medicare. The producer has exposed himself to errors and omissions liability as well as possible license suspension or revocation."

"Which of the following does NOT appear in the producer's report? A) Character B) Financial status C) Education D) Habits"

"Education Explanation The producer's report contains information based on the agent's knowledge of the insured and is used as an additional underwriting resource. The report is never seen by the insured and is not attached to the policy or application at issuance."

"Which provision of a life insurance policy declares that the application is part of the contract? A) Insuring clause B) Incontestable clause C) Entire contract clause D) Ownership clause"

"Entire contract clause Explanation The entire contract clause states that the entire contract consists of the policy, any amendments or riders, and a copy of the original application."

"Which provision of a life insurance policy states that "no statement shall void this policy or be used in defense of a claim under it unless contained in the application"? A) Insuring clause B) Consideration clause C) Incontestable clause D) Entire contract clause"

"Entire contract clause Explanation The entire contract clause states that the policy document, the application (which is attached to the policy), and any attached riders constitute the entire contract. The policy cannot refer to any outside documents as being part of the contract."

"What kind of policy will protect an insurance agent against liability arising out of acts committed in her professional capacity? A) Errors and omissions B) Contractual liability C) General liability D) Indemnity "

"Errors and omissions Explanation Under errors and omissions (E&O) insurance, the insurer agrees to pay for claims arising out of the errors and omissions of the insured agent. It is a professional liability insurance policy."

"Which of the following is NOT a business use of life insurance? A) Estate conservation B) Deferred compensation C) Key-person coverage D) Buy-sell funding"

"Estate conservation Explanation Estate conservation is one of the uses for personal life insurance, not business insurance."

"Which section of a life insurance policy specifies the conditions, times, and circumstances under which the insured is NOT covered by the policy? A) Insuring clause B) Exclusions C) Coinsurance provision D) Coverages"

"Exclusions Explanation The exclusions section of a life insurance policy specifies the conditions, times, and circumstances under which the insured is not covered by the policy."

"Which of the following is NOT a characteristic of an insurable risk? A) Calculable B) Accidental C) Expensive D) Measurable"

"Expensive Explanation The 6 characteristics of an insurable risk are that the risk must be calculable, affordable, noncatastrophic, homogeneous, accidental, and measurable."

"What is the default nonforfeiture option? A) Interest only B) Extended term C) Reduced paid-up D) Surrender value"

"Extended term Explanation If a permanent life policy lapses for nonpayment and the policyowner has not chosen a nonforfeiture option, the insurance company by default will choose extended term insurance. The company will purchase a 1-year term policy on the insured's behalf at his attained age with the same size death benefit as the policy that lapsed for nonpayment."

"Which of the following acts helps ensure confidential, fair, and accurate reporting of consumer information? A) Unfair Trade Practices Act B) McCarran-Ferguson Act C) Fair Credit Reporting Act D) Disclosure Act"

"Fair Credit Reporting Act Explanation The Fair Credit Reporting Act is a federal law that promotes confidential, fair, and accurate reporting of information about consumers. It provides that consumer reports may be furnished by consumer reporting agencies only for certain purposes, which includes underwriting of insurance. It guarantees that every consumer may demand to learn the identity of any investigative agency, the information the agency may have, and to whom the reports are given."

"Which of the following acts of legislation requires fair and accurate reporting of a consumer's buying and bill-paying history? A) Employee Retirement Income Security Act B) Fair Credit Reporting Act C) McCarran-Ferguson Act D) Unfair Trade Practices Act"

"Fair Credit Reporting Act Explanation The Fair Credit Reporting Act protects an individual's privacy during the course of a credit check. If any consumer report is used to deny insurance coverage or charge higher rates, the insurer must furnish to the applicant the name of the reporting agency conducting the investigation. Any insurance company that fails to do so is liable to the consumer for actual and punitive damages."

"What settlement option is designed to pay out a specified amount of income at regular intervals over an unspecified period of time? A) Life income option B) Fixed-period option C) Fixed-amount option D) Interest-only option"

"Fixed-amount option Explanation The fixed-amount settlement option provides for the payment of a policy's death benefit in specified amounts at regular intervals. The duration of the payments is not specified; payments are made until the proceeds—or principal—and interest are exhausted."

"Which standard life provision allows a policyowner to return a life policy, for any reason, within 10 days of delivery for a full refund of the premium? A) Trial period provision B) Ownership provision C) Grace period provision D) Free-look provision"

"Free-look provision Explanation All individual life insurance policies must include a free-look provision stating that the policyowner, if she is not satisfied for any reason, may return the policy within 10 days of delivery for a full refund of the premium."

"Which of the following statements regarding the disposition of fiduciary funds is CORRECT? A) Funds collected as premiums are to be kept separate from those used for personal expenses or investments. B) Since the insured knowingly gave the premiums to the agent, personal use of those funds by the agent would not be considered theft. C) As long as the agent replaces any funds he used for personal expenses, the agent has not violated the fiduciary trust. D) A licensee may invest fiduciary funds in the stock market."

"Funds collected as premiums are to be kept separate from those used for personal expenses or investments. Explanation All premiums received by an agent are funds received and held in trust in a fiduciary capacity, and an agent or licensee is prohibited from commingling personal funds with funds held in a fiduciary capacity. Any agent who takes funds held in trust for personal use would be guilty of theft. A licensee may not expose the fiduciary funds to risk by investing them in the stock market."

"Which of the following statements is CORRECT? A) Both Trisha and her partner, Joan, are licensed general (noncommercial) aviation airplane pilots. They do not have to identify their hobby when they apply for insurance. B) Stan is applying for insurance. His younger sister, Kathryn, is committed to hang gliding. Family history is considered a risk factor in insuring Stan. C) George's brother, father, and grandfather had diabetes during their lifetimes. Family history will be considered a risk factor when George applies for insurance. D) Joyce's mother died 10 years ago, when she was 58, of cirrhosis of the liver. Family history is a risk factor in insuring Joyce."

"George's brother, father, and grandfather had diabetes during their lifetimes. Family history will be considered a risk factor when George applies for insurance. Explanation Family history is considered a health factor insofar as it relates to the health status of the living and the cause of the related deceased's death. A dangerous hobby (such as flying airplanes) is a risk factor and must be disclosed when applying for insurance. Nonhereditary illnesses (such as cirrhosis of the liver) and the hobbies of other family members are not considered relevant for underwriting purposes."

"Which of the following would most likely NOT be a reason to purchase a life insurance policy for the purpose of accumulating cash? A) Planning for retirement B) Purchasing a new water heater C) Going on a shopping spree D) Going back to college"

"Going on a shopping spree Explanation Permanent life insurance policies build cash value over time. The funds that are accumulated are often called living benefits because they may be used by the policyholder while he is still alive."

"Ramon's premium payment was due on June 1, but the company did not receive it until June 28. Which policy provision kept Ramon's policy from lapsing? A) Reinstatement B) Automatic premium loan C) Grace period D) Facility-of-payment"

"Grace period Explanation If policyowners forget or neglect to pay their premiums by the date they are due, the grace period allows an extra 30 days, or 1 month, during which premiums for fixed premium policies may be paid to keep the policies in force."

"Sean has a young family and needs affordable whole life insurance. He is looking for a policy with lower initial premiums but is not averse to paying more at a later time. What type of whole life insurance variation would be suitable for him? A) Single pay B) Graded premium C) Life paid-up at 65 D) 20-pay life"

"Graded premium Explanation Graded premium policies offer lower premiums during the initial period that gradually increase before leveling off for the duration of the contract. The total amount paid over the period of the policy would equal what is paid for a straight whole life policy. Graded premium policies work well for individuals who can expect to improve their financial condition. In life paid-up at 65 and 20-pay life policies, premium payments are completed before age 100. Single pay insurance is permanent cash value whole life insurance that is purchased with 1 large premium, which would probably not be affordable for Sean."

"Gene, age 20, purchased a $50,000 life insurance policy. The premium at issue is lower than normal whole life rates, and it increases each year for the first 5 years of the policy period. After that, the premium levels off. What type of policy does Gene own? A) Limited-pay at age 20 whole life B) Minimum deposit whole life C) Modified whole life D) Graded premium whole life"

"Graded premium whole life Explanation Graded premium whole life, like modified whole life, redistributes the policy premiums. The premium is lower than normal whole life rates during the preliminary period following issue (usually 5-10 years) and increases each year until leveling off after the preliminary period. A modified whole life policy has a level premium during the preliminary period."

"Jenna owns a policy in which the premium at the inception of the policy is lower than the continuous premium whole life rate and then increases each year for the first 5 years of the policy period. After 5 years, the premium levels off. What type of policy does Jenna own? A) Graded premium whole life B) Minimum deposit whole life C) Step-rate premium life D) Modified whole life"

"Graded premium whole life Explanation The premiums for a graded premium contract increase each year during the early years of the contract, usually for 5 years, and remain constant for the rest of the time. The initial premium charged is usually lower than the equivalent level premium for a straight life policy at the same age of issue."

"Which of the following life insurance policy riders will allow insureds to purchase additional insurance at future dates, regardless of their health? A) Conversion option B) Guaranteed insurability option C) Double indemnity option D) Waiver of premium option"

"Guaranteed insurability option Explanation The guaranteed insurability option (or rider) permits the insured, at stated intervals, to buy specified amounts of additional insurance without evidence of insurability. The option requires an additional premium and is usually attached to a permanent life policy at the time of purchase."

"Which of the following individuals can access the cash value of her life insurance policy to provide extra retirement income? A) Harriet, who owns a $100,000 single premium whole life policy B) Judith, who is covered by a $500,000 key-person life insurance policy C) Rosa, who owns a $50,000 25-year level term policy D) Mai, who owns a $200,000 decreasing term policy"

"Harriet, who owns a $100,000 single premium whole life policy Explanation Only Harriet can access the cash values of her life insurance policy. Term life insurance policies, unlike permanent insurance, have no cash value. A key-person life insurance policy is considered a business asset, to be used for business purposes."

"Louise applied for a $40,000 life insurance policy, paid the initial premium, and received a conditional receipt. Which of the following statements is NOT correct? A) If Louise completed her requirements by taking the required medical exam, but died 4 days later from an accidental fall, the insurer would still pay the beneficiary the coverage amount as long as the policy was issued as originally applied for. B) If Louise died of a heart attack 1 day after completing the medical exam, which fulfilled her requirements, the insurer would continue to underwrite the policy as if she were still alive. C) If Louise died of a heart attack 1 day before taking the required medical exam, the insurer would still pay the beneficiary the coverage amount stated in the application. D) If Louise died from an accidental fall a few days before her required medical exam, the insurer would return the full premium that was paid with the application with no coverage ever having gone into effect."

"If Louise died of a heart attack 1 day before taking the required medical exam, the insurer would still pay the beneficiary the coverage amount stated in the application. Explanation In order for coverage to go into effect, the applicant must first complete all of the requirements, including payment of the initial premium. If the applicant's circumstances require a medical exam, the exam must also be completed before any coverage can go into effect. If all of the applicant's requirements have been met, the insurer will continue to underwrite the policy even if the applicant dies before the policy is issued. If the policy is issued as originally applied for, benefits will be paid to the designated beneficiary."

"Malia purchases a $50,000 5-year level term policy. Which of the following statements about Malia's coverage is NOT correct? A) If Malia dies at any time during the 5 years, her beneficiary will receive the policy's face value. B) If Malia dies after the specified 5 years, only the policy's cash value will be paid. C) If Malia lives beyond the 5 years, the policy expires and no benefits are payable. D) The policy provides a straight, level $50,000 of coverage for 5 years."

"If Malia dies after the specified 5 years, only the policy's cash value will be paid. Explanation If the insured lives beyond the 5-year period, the policy expires and no benefits are payable. There are no cash values in term policies."

"Which of the following statements pertaining to the Medical Information Bureau (MIB) is CORRECT? A) Insurers do not need to get release of information forms from applicants. B) Information maintained by the MIB includes socio-economic data such as income, level of education, and zip code. C) Insurers must report all underwriting decisions to the MIB. D) Information obtained from the MIB by insurers may not be used as the sole reason to decline an applicant's request for insurance. "

"Information obtained from the MIB by insurers may not be used as the sole reason to decline an applicant's request for insurance. Explanation The purpose of the MIB is to reduce misrepresentation and fraud by sharing underwriting information with member insurance companies. Individual files contain facts such as hazardous occupations, poor driving records and medical history. For example, if information provided on an application is different than what is in an individual's MIB file, the insurer will conduct a further investigation. However, insurers cannot use information obtained from the MIB as the sole decision of whether or not to decline an applicant. Also, applicants must sign a written authorization form indicating consent for information to be released to the insurer."

"Which of the following statements pertaining to inspection reports and credit reports on life insurance applicants is NOT correct? A) Inspection reports only require consumer notification when they are conducted. B) Information contained in inspection reports is usually obtained through interviews with employers, neighbors, and associates of the proposed insured. C) Consumers must be notified and give their consent to an inspection report. D) Applicants with unfavorable credit ratings, a history of moral hazard, or both are poor prospects for life insurance."

"Inspection reports only require consumer notification when they are conducted. Explanation Insurance companies usually obtain inspection reports from several knowledgeable sources on applicants who apply for large amounts of life insurance. An applicant's poor credit rating can mean unreliable premium payments, causing the insurance company to lose money."

"Which of the following statements regarding life insurance is NOT correct? A) A creditor has an insurable interest in a debtor. B) Spouses are automatically considered to have insurable interest in each other. C) All individuals are considered to have insurable interest in themselves. D) Insurable interest must be maintained throughout the life of the contract."

"Insurable interest must be maintained throughout the life of the contract. Explanation For life and health insurance policies, insurable interest is required only when the contract is issued. It does not have to be maintained throughout the life of the contract, nor is it necessary at the time of a claim."

"Which of the following statements pertaining to the conversion privilege in group health insurance policies is NOT correct? A) Insureds who resign or are terminated have 365 days in which to convert their coverage to individual policies. B) A conversion privilege applies when a group health policy is terminated. C) Some states specify minimum benefits for conversion policies. D) An insured who is terminated from the plan can obtain a conversion policy without evidence of insurability within a specified time."

"Insureds who resign or are terminated have 365 days in which to convert their coverage to individual policies. Explanation Concerning the conversion privilege in group health insurance, an insured employee who resigns or is terminated has 31 days in which to take out a conversion policy without having to show evidence of insurability."

"Which provision sets forth the insurer's basic promise to pay benefits upon the insured's death? A) Settlement options provision B) Consideration clause C) Insuring clause D) Reinstatement provision"

"Insuring clause Explanation The insuring clause sets forth the insurer's basic promise to pay benefits upon the insured's death. It is usually found on the first page of the policy and identifies the parties to the contract."

"Hector's spouse was the primary beneficiary of his $250,000 life insurance policy. She received payments of approximately $700 a month as long as she lived and, at her death, their 2 children received lump-sum payments of $125,000 each. What settlement option was in effect on Hector's policy? A) Interest-only option B) Life income option C) Period certain option D) Installment refund option"

"Interest-only option Explanation The fact that the policy's proceeds of $250,000 were available for distribution upon the spouse's death indicates that they had been preserved while she received interest payments."

"Heather wants her $85,000 life insurance policy arranged to pay her spouse a monthly income if she dies first, but most or all of the proceeds to go to their 2 children after her spouse's death. Which of the following settlement options could Heather select to provide income for her spouse and conserve the proceeds for the children? A) Fixed-period option B) Fixed-amount option C) Life income option D) Interest-only option"

"Interest-only option Explanation Under the interest-only option, only the interest on the face amount will be paid to the spouse on a regular basis. The face amount ($85,000) will be preserved for the children."

"Winston, the insured, and his spouse, Irene, his sole beneficiary, both died in a hotel fire. Hospital physicians witnessed that Irene lived at least 2 hours longer than Winston. The life policy had no common disaster clause. Which of the following will receive the policy proceeds? A) Irene's estate B) Winston's estate C) Winston's secondary beneficiary D) The state"

"Irene's estate Explanation In light of the witnesses to the deaths in this case and in the absence of the common disaster clause, Irene's estate should receive the proceeds. She, the primary beneficiary, outlived the insured policyowner."

"What type of beneficiary on a life policy can only be changed with the written consent of that individual beneficiary? A) Primary B) Irrevocable C) Contractual D) Revocable"

"Irrevocable Explanation If a beneficiary is named irrevocably, the policyowner has given up her right to change that beneficiary, unless that beneficiary has provided written consent to do so."

"What is the most common approach for rating life insurance applicants who are determined to be substandard risks? A) Issuing a policy in the amount applied for, but crediting its values with lower interest rates. B) Issuing a policy of less than the amount applied for, with a lower than standard premium. C) Issuing a policy in the amount applied for, but reducing the amount paid out as a death benefit. D) Issuing a policy in the amount applied for, with a higher than standard premium."

"Issuing a policy in the amount applied for, with a higher than standard premium. Explanation The most common approach to rating insurance applicants is to issue the policy with a higher than standard premium. The higher premium rate may be permanent or temporary, depending on the type of additional risk the applicant poses to the insurer."

"Which of the following best describes the basic purpose for the facility-of-payment clause found in some life insurance policies? A) It requires the insurer to distribute the death benefit in a settlement option that it believes is best suited for the beneficiary's needs. B) It authorizes the insurer to designate the payee of the life insurance death benefits if the designated beneficiary cannot be located. C) It authorizes the insurer to distribute the life insurance death benefit as a lump-sum cash payment, even if the owner selected a different settlement option, if the death benefit is below a specified limit. D) It authorizes the insurer to change the beneficiary designation if the current beneficiary does not have an insurable interest in the insured."

"It authorizes the insurer to designate the payee of the life insurance death benefits if the designated beneficiary cannot be located. Explanation The facility-of-payment clause exists to expedite the claims process for life insurance companies by authorizing them to pay death benefit proceeds to a beneficiary of their choosing if the designated beneficiary cannot be located or the designated beneficiary is invalid (e.g., a minor)."

"A beneficiary receives the proceeds from a life insurance policy in a lump-sum payment. Which of the following statements best explains how the proceeds will be treated in relation to the debts of the beneficiary? A) It is protected from the beneficiary's creditors once it is paid to a beneficiary. B) It can be subject to the beneficiary's debts and creditors. C) It is protected from the beneficiary's creditors as long as it is paid in a lump sum. D) It is not subject to the beneficiary's debts and creditors."

"It can be subject to the beneficiary's debts and creditors. Explanation When proceeds of a life insurance policy are payable to a beneficiary but held in trust by the insurer, the beneficiary has an exclusive right to the proceeds. These payments are not subject to the beneficiary's debts and cannot be reached by creditors. This protection only applies to policies in which the proceeds are payable in installments. It does not protect proceeds paid in a lump sum. The protection also does not extend to proceeds once they are paid to a beneficiary."

"Which of the following statements about the spendthrift clause is NOT correct? A) It helps protect the death benefit proceeds from the beneficiary's creditors. B) It gives the beneficiary the right to use the death benefit as collateral for a loan. C) It states that the life policy proceeds will be paid directly to the beneficiary. D) Once the beneficiary has received payments from the proceeds, the creditors can take steps to attach those payments."

"It gives the beneficiary the right to use the death benefit as collateral for a loan. Explanation The spendthrift clause is a policy provision that makes it possible for an insured to protect the proceeds of a life insurance policy from the actions of a spendthrift beneficiary by preventing the beneficiary's creditors from attaching the proceeds until they have been received by the beneficiary. While the proceeds are protected from the beneficiary's creditors while they are still held by the insurance company, any accumulated interest that is involved would be taxable to the beneficiary. This clause provides for any proceed payments to be made directly to the beneficiary. Once the beneficiary has received payments from the proceeds, the creditors can then take steps to attach those payments."

"Which of the following statements about variable universal life insurance is NOT correct? A) It allows the insured to make withdrawals or to borrow from the policy during the insured's lifetime. B) It guarantees a minimum cash value in the investment account. C) It offers flexibility in premium payments and face amounts dependent on investment performance. D) It pays a death benefit to a named beneficiary and offers the insured tax-deferred cash value investment options."

"It guarantees a minimum cash value in the investment account. Explanation While most variable universal life products allow the policyholder to control the investment mix in order to build substantial cash value, a minimum cash value is seldom guaranteed. The death benefit and the cash value of the policy fluctuate according to the investment performance of a separate account fund. Most variable life insurance policies guarantee that the death benefit will not fall below a specified minimum. Because the policyowner assumes investment risk under variable life insurance policies, these products are considered securities contracts."

"Which of the following statements best describes the nature of a cash value loan? A) It is a financial transaction in which the insurer loans the money and attaches a comparable portion of the cash value as collateral. B) It is a financial transaction in which future growth of the cash value is suspended until the loan amount plus interest is recovered. C) It is a financial transaction in which the cash value is reduced by the amount of the loan. D) It is a financial transaction in which the cash value is unaffected but the face amount is reduced by the amount of the loan plus interest."

"It is a financial transaction in which the insurer loans the money and attaches a comparable portion of the cash value as collateral. Explanation A cash value loan is a loan from the insurer to the policyowner. A comparable portion of the policy's cash value is used as collateral to secure the loan."

"Which of the following statements about a modified whole life policy is NOT correct? A) Cash value builds until the insured reaches age 100 so long as the policy is in force. B) Premiums are uniformly lower during the early years of the contract. C) It is basically an endowment policy. D) The premium-paying period continues to age 100."

"It is basically an endowment policy. Explanation The modified whole life policy is a variation of the traditional whole life policy, not an endowment policy. The premiums in a modified whole life policy are lower in the early years of the policy's term and higher in its later years."

"Which of the following statements regarding a conditional receipt is CORRECT? A) It is given pending acceptance by the applicant of additional riders. B) It is given when the application is completed. C) It is given only if the initial premium has been submitted with the signed application. D) It is given at the time of policy delivery."

"It is given only if the initial premium has been submitted with the signed application. Explanation The conditional receipt means that if the coverage is accepted as applied for and an initial premium is submitted with the application, the policy will be in force from the date the application is signed. The receipt is not provided simply by completing the application. At the time of policy delivery, the policy would have already been approved and coverage would no longer be conditional. It is also not given pending acceptance of additional riders and changes in the policy."

"Which of the following statements regarding exposure is NOT true? A) It is measured in degrees. B) It is measured in units. C) It is the risk assumed by the insurer. D) It is used to determine insurance premiums."

"It is measured in degrees. Explanation Exposure is the degree of risk an insurance company is willing to assume and pay out in the event of a loss. Insurance premiums are calculated by multiplying the rate and the number of exposure units."

"Suppose Max wants to arrange the distribution of his life insurance proceeds so that his spouse, as beneficiary, will receive monthly payments for as long as she lives. Which of the following settlement options will meet this need? A) Life income option B) Fixed-amount option C) Interest-only option D) Fixed-period option"

"Life income option Explanation The life income option provides for the guaranteed payment of the proceeds for the life of the beneficiary."

"Which of the following statements regarding the mortality rate is NOT correct? A) It is taken from the mortality table and converted into a dollar-and-cents rate. B) It is used in the determination of health insurance rates. C) It is used in the determination of life insurance rates. D) It is defined as the number of deaths per 1,000 people."

"It is used in the determination of health insurance rates. Explanation The mortality rate is defined as the number of deaths per 1,000 people. It is 1 of the 3 factors used in determining life insurance rates, and it is taken from the mortality table and then converted into a dollar-and-cents rate. Morbidity is used in determining health insurance rates."

"Which of the following statements regarding the grace period for life insurance is NOT correct? A) It is usually shorter than 30 days. B) It can vary according to the particular policy. C) It begins the date the premium is due. D) The overdue premium plus interest (if there is a loan) may be deducted from any death claim that occurs during the grace period."

"It is usually shorter than 30 days. Explanation The grace period is the period during which the premium must be paid. It begins with the premium due date as specified in the policy. The grace period can vary, but for most ordinary life policies, it is 1 month (30 or 31 days). The insurer may impose an interest penalty on premiums paid during the grace period."

"Which of the following statements regarding the insuring clause is NOT correct? A) It is usually signed by the insured. B) It states to whom benefits should be paid. C) It is usually found on the first page of the policy. D) It sets forth the insurer's promise to pay benefits upon the insured's death."

"It is usually signed by the insured. Explanation The insuring clause is usually signed by an authorized officer of the company."

"Which of the following statements describes variable life insurance? A) It gives voting rights to the contract holder that are determined by reference to state law and not the corporate bylaws. B) It can be sold by any agent licensed to sell life insurance. C) It varies in the benefits provided based on the investment experience of the insurer's general account. D) It provides insurance benefits that vary according to the investment experience of separate accounts maintained by the insurer."

"It provides insurance benefits that vary according to the investment experience of separate accounts maintained by the insurer. Explanation Variable contract insurers maintain separate accounts with stated investment objectives. Variable policies' cash values are linked to these accounts."

"Which of the following statements pertaining to a temporary insurance agreement is CORRECT? A) It provides protection against death by accident, but not death from natural causes. B) Coverage begins when the application is signed and the premium is paid, assuming any required medical exam is scheduled within 3 days. C) It provides temporary coverage until an application is rejected or the policy is issued. D) It provides term insurance protection until the policy is converted to permanent insurance."

"It provides temporary coverage until an application is rejected or the policy is issued. Explanation A temporary insurance agreement, also called a binding receipt, is just that: temporary coverage until an application is rejected or the policy is issued."

"Which of the following statements about a 1-year renewable term policy is CORRECT? A) Its premium increases each year on the basis of the insured's health. B) It has a premium that remains the same, no matter how many times it is renewed. C) It renews with an increase in premium based on the insured's age. D) It may not be renewed more than once."

"It renews with an increase in premium based on the insured's age. Explanation Under a renewable term policy, the premiums remain level for each term period, but increase at each renewal on the basis of the age of the insured."

"What is the purpose of the Fair Credit Reporting Act? A) It requires consumer report agencies to adopt reasonable procedures when exchanging credit information. B) It protects credit companies during the course of their investigations. C) It guarantees that credit reports will remain confidential and not accessible to businesses that do not sell insurance. D) It prohibits insurance companies from obtaining reports on applicants from investigative agencies."

"It requires consumer report agencies to adopt reasonable procedures when exchanging credit information. Explanation The Fair Credit Reporting Act is a federal law that ensures confidential, fair, and accurate reporting of information about consumers, including applicants for insurance. It does not preclude insurance companies from obtaining outside reports; however, it allows consumers to request the disclosure of information contained in these reports."

"Which of the following statements pertaining to the insuring clause in a life insurance policy is NOT correct? A) It specifies the length of the grace period. B) It defines the responsibilities of the insurer. C) It names the beneficiary. D) It gives the effective date of coverage."

"It specifies the length of the grace period. Explanation The insuring clause explains the promise the insurer has made to the named insured to pay a death benefit to a designated beneficiary. The grace period is a separate policy provision."

"Which of the following statements best summarizes the function of insurance? A) It protects against living too long. B) It spreads financial risk over a large group so as to minimize the loss to any one individual. C) It is a form of legalized gambling. D) It spreads financial risk over a diverse group of people who are exposed to different risks."

"It spreads financial risk over a large group so as to minimize the loss to any one individual. Explanation The function of insurance is to safeguard against financial loss by having the losses of a few paid by the contributions of many who are exposed to the same risk."

"Abner's age was misstated in his application for a $50,000 life policy. What will the company do when it discovers the error? A) It will adjust either the premium rate or the amount of protection. B) It will amend the application, but no additional premium can be charged. C) It probably will void the policy. D) It will do nothing because the policy cannot be altered in any way after it has been issued."

"It will adjust either the premium rate or the amount of protection. Explanation Because Abner's age was misstated in his application, the company will adjust either the premium rate or the amount of the protection."

"Which of the following causes of death is generally NOT covered by a life insurance policy? A) Hazardous hobby B) Hazardous occupation C) Commercial aviation D) War"

"War Explanation Life insurance policies generally exclude death resulting from war or military duty. A life insurance policy might exclude death due to piloting an aircraft as a hazardous hobby, but it would not exclude death of a passenger in a commercial airline accident."

"Which of the following statements regarding risk factors is NOT correct? A) Carlos, an office manager, would represent a lower disability risk to an insurance company than would Ezekiel, a foreman in a farm equipment factory. B) Jill is 15 years younger than her supervisor and therefore poses a higher risk to an insurance company. C) Bob and Gunesh both work for the same construction company. Bob is an auditor, and Gunesh is a diesel mechanic. Of the two, Bob would likely represent a lower risk to an insurance company. D) Kimberly's job requires manual labor in a manufacturing plant. Betsy is an office supervisor who does no manual labor. Kimberly would probably be considered to have a higher disability risk than Betsy."

"Jill is 15 years younger than her supervisor and therefore poses a higher risk to an insurance company. Explanation A person who performs manual labor is typically more likely to suffer a physical injury than a person who does no manual labor. By the same reasoning, an office manager or an auditor represents a lower disability risk than a factory worker or a diesel mechanic. The fact that Jill is 15 years younger than her supervisor, in and of itself, suggests a lower risk rather than a higher risk to her insurer."

"In which of the following cases would the insurance company most likely cover the loss under a life insurance policy? A) While taking her final pilot's test, Sandi losses control of her plane and dies in the crash. B) Frank's ski mask impairs his vision while he is robbing a bank, causing him to trip; he hits his head on the floor and is killed instantly. C) Joe, a retired army general, dies of a heart attack at age 85. D) While competing in the local county fair's derby race, Sanjay and Craig are both killed in an explosion as their cars collide."

"Joe, a retired army general, dies of a heart attack at age 85. Explanation Exclusions for war and military service do not pertain to retired military personnel."

"A family in which both parents work and, therefore, are in need of the same amount of coverage, would be a candidate for which of the following plans? A) Joint life B) Family maintenance C) Family plan D) Juvenile plan"

"Joint life Explanation A joint life plan is simply 1 policy covering 2 or more persons. Usually, permanent insurance is written."

"Carlos and Jenna both work to support their family. To provide the same amount of life insurance protection in the event either dies, they should consider purchasing which of the following plans? A) Family maintenance B) Family C) Joint life D) Juvenile"

"Joint life Explanation A joint life policy is 1 policy that covers 2 people. Using some type of permanent insurance, it pays the death benefit when the first insured dies. The survivor then has the option of purchasing a single individual policy without evidence of insurability."

"Juan owns a 5-year $50,000 term life insurance policy, and Maria owns a $50,000 whole life insurance policy. Which of the following statements is CORRECT? A) Both policies provide living benefits to the policyowners while alive. B) Juan's policy, but not Maria's, may have an option to convert. C) Juan and Maria will receive the cash surrender value if they cancel their policies. D) Maria's policy, but not Juan's, may have an option to renew."

"Juan's policy, but not Maria's, may have an option to convert. Explanation Two features of whole life insurance distinguish it from term insurance: cash values and maturity at age 100. These 2 features combine to produce living benefits to the policyowner. Juan's term insurance policy, however, may contain an option to convert, which gives him the right to convert or exchange the term policy for a whole life plan without evidence of insurability."

"Kevin, the insured in a $200,000 life insurance policy, and his sole beneficiary, Lynda, are killed instantly in a car accident. Under the Uniform Simultaneous Death Act, to whose estate will the policy proceeds be paid? A) Both Kevin's and Lynda's estates, equally B) Kevin's estate C) Lynda's estate D) The proceeds will escheat to the state"

"Kevin's estate Explanation Under the Uniform Simultaneous Death Act, if the insured and primary beneficiary are killed in the same accident and there is not sufficient evidence to show who died first, the policy proceeds are to be distributed as if the insured died last. Kevin's estate would receive the proceeds because Lynda, the beneficiary, was deemed to have predeceased Kevin and no other beneficiary was named."

"Carl and Laura receive $270 per month under a joint and two-thirds survivor life policy settlement option. What would happen if Carl died within a year after payment started? A) Laura would receive $135 per month for as long as she lived. B) Laura would receive $180 per month for as long as she lived. C) Laura would continue to receive a monthly benefit of $270 for as long as she lived. D) The balance of the proceeds would be paid to Laura in a lump sum."

"Laura would receive $180 per month for as long as she lived. Explanation The joint and two-thirds survivor life income option provides an income for 2 people: the full amount for the couple, while both are living, and two-thirds of the amount for the survivor."

"Which of the following dividend options produces a result similar to taking dividends in cash and depositing them in a bank savings account? A) Applying dividends against premium payments B) Using dividends to buy 1-year term insurance C) Taking dividends in cash D) Leaving dividends to accumulate at interest"

"Leaving dividends to accumulate at interest Explanation Of the 5 common dividend options, leaving dividends with the company to accumulate at interest is the only choice that directly produces interest income."

"What are accelerated benefits? A) Health insurance benefits paid in advance to providers of health care services B) Health benefits paid before the expenses are incurred C) Life insurance cash values paid in a lump sum to the beneficiary D) Life insurance death benefits paid before the death of an insured with a terminal illness"

"Life insurance death benefits paid before the death of an insured with a terminal illness Explanation Accelerated benefits are life insurance death benefits that are paid before the death of an insured if he is suffering from a terminal illness."

"Which of the following statements pertaining to sole proprietor buy-sell plans is CORRECT? A) In a sole proprietor buy-sell agreement, the sole proprietor is the owner of the policy. B) Life insurance is an ideal medium for funding a buy-sell agreement because, for a reasonable premium, it makes money available when needed to activate the sale of the business. C) Concerning disposition of the business after the proprietor's death, the only alternatives open to a sole proprietor are to dissolve the business or leave it to an heir as a bequest. D) A buy-sell agreement for a sole proprietor can be drafted by the proprietor or the life insurance agent."

"Life insurance is an ideal medium for funding a buy-sell agreement because, for a reasonable premium, it makes money available when needed to activate the sale of the business. Explanation When a sole proprietor dies, the business can come to a sudden halt unless some arrangement has been made beforehand to continue the business. A buy-sell agreement funded by a life insurance policy purchased by an employee (or other party) on the life of the proprietor will transfer the business from the owner to the other party at an agreed-upon price. The agreement must be drafted by an attorney."

"Which of the following is a liquid asset? A) Precious gems B) Life insurance proceeds C) Farming equipment D) Precious metals"

"Life insurance proceeds Explanation While life insurance proceeds are a liquid asset, precious metals, precious gems, and farming equipment are considered hard or illiquid assets."

"Which of the following statements regarding basic forms of whole life insurance is NOT correct? A) A single premium life policy is purchased with a large onetime-only premium. B) Limited payment life provides protection only for the years during which premiums are paid. C) Generally, straight life premiums are payable, at least annually, for the duration of the insured's life. D) The owner of a 30-pay life policy will owe no more premiums after the 30th year the policy is in force."

"Limited payment life provides protection only for the years during which premiums are paid. Explanation Although the premium payments are limited to a certain period, the insurance protection extends until the insured's death or to age 100."

"An individual wishes to purchase whole life insurance but does not wish to pay premiums past retirement age. Which of the following policies should the person buy? A) Limited-pay B) Graded premium C) Modified life D) Single premium"

"Limited-pay Explanation With a limited-pay life policy, the insured pays premiums for a specified amount of time, with 2 stipulations: (1) the premium payment period must last at least 10 years; and (2) premiums must be paid up by the age of 65. Single premium life insurance is permanent cash value whole life insurance that is purchased with 1 large premium. As its name implies, it requires no further premiums to keep the coverage in force for the life of the insured. Modified premium policies typically have a lower fixed premium for the first 3- or 5-year period, at which point premiums increase. Graded premium policy premiums are lower in the initial period and gradually increase before leveling off for the duration of the contract."

"Which of the following statements regarding limited-pay life insurance is NOT correct? A) Limited-pay policies mature more quickly than do continuous premium whole life policies. B) Limited-pay policy death benefits remain level for the duration of the policy. C) Cash value grows more quickly in limited-pay life policies than it does in continuous premium whole life policies. D) Limited-pay policies endow when the insured is 100 years old."

"Limited-pay policies mature more quickly than do continuous premium whole life policies. Explanation Limited-pay policies emphasize savings more than straight life policies do. These policies also make it possible for an insured to stop premium payments at the expiration of a specified period without any reduction in the amount of the insurance for as long as the insured survives. The most common types of limited-pay policies are 10-pay life, 20-pay life, and life paid-up at age 65."

"Jeremy did not designate a specific settlement option to be paid upon his death. How will the death benefit proceeds be distributed? A) Fixed-period benefits B) Lump-sum payments C) Fixed-amount benefits D) Interest-only payments"

"Lump-sum payments Explanation The lump-sum payment settlement option is automatic when the policyowner has not chosen a specific settlement option prior to death."

"Which of the following would NOT constitute unfair discrimination in insurance underwriting? A) Brandon has his policy rated because of his religion. B) Maria is charged a higher premium based on her poor health. C) Thomas is refused a policy because he was born in a country on a terror watch list. D) Artem is declined for insurance because his residence is considered to be in a dangerous neighborhood."

"Maria is charged a higher premium based on her poor health. Explanation Insurers may discriminate against poor risks by rating or declining them, particularly for poor health. National origin, religion, race, and residence, however, may not be used in insurance underwriting; to do so would constitute unfair discrimination."

"Alecia buys a life insurance policy and names her spouse, Max, as a beneficiary. Alecia's children, Rosa and Manuel, are to share the benefits equally if Max dies before her. Her church is to receive the proceeds if her spouse and children predecease her. How would the proceeds of Alecia's policy be distributed if both her children predecease her? A) Max would receive 75% of the proceeds and the church would receive 25% B) The church would receive 100% of the proceeds C) Max and the church would each receive 50% of the proceeds D) Max would receive 100% of the proceeds"

"Max would receive 100% of the proceeds Explanation In this case, the church, as the tertiary (third) beneficiary, would receive proceeds only if and when all primary and secondary beneficiaries predecease the insured. As Max is the primary beneficiary, he would receive 100% of the proceeds."

"Individual life insurance policies must include all of the following provisions EXCEPT A) an entire contract provision B) a conversion provision C) a misstatement of age provision D) an incontestability provision"

"a conversion provision Explanation An individual life insurance policy must include provisions for entire contract, incontestability, and misstatement of age. A conversion provision is required only in group insurance policies."

"A prospect with a young family needs affordable whole life insurance. As a rising young executive, it is likely that the prospect's current limited resources will increase substantially over the next 15 years. What type of whole life insurance variation would you recommend? A) Modified life B) Single pay C) 20-pay life D) Straight Whole Life"

"Modified life Explanation In a modified whole life policy, premiums are generally lower in the first years of the policy and higher in later years. This type of policy is designed for persons with limited financial resources who have the promise of higher resources in later years. The total over the period of the policy would be equivalent to the straight whole life policy."

"Doris and Arnold receive $450 per month under a joint and one-half survivor life insurance option. What would happen if Arnold were to die first after the payments have started? A) Doris would have to select another settlement option. B) Monthly payments of $225 would be made to Doris as long as she lived. C) Doris would receive $450 per month as long as she lived. D) The remaining proceeds would be paid to Doris in a lump sum."

"Monthly payments of $225 would be made to Doris as long as she lived. Explanation The joint and one-half survivor life income option provides an income for 2 people. In this case, the couple, while both are living, gets the full amount; the survivor gets half the amount, or $225."

"What factor in life insurance is comparable to the morbidity factor in health insurance? A) Mortality B) Interest C) Premium D) Loading"

"Mortality Explanation The morbidity factor, the incidence of disability due to accidents or sickness at various ages, is to health insurance what the mortality factor (incidence of death) is to life insurance."

"Which of the following premium factors has the greatest effect on life insurance premium calculations? A) Expense B) Mortality C) Health D) Interest"

"Mortality Explanation Three primary factors are considered when computing the basic premium for life insurance: mortality, interest, and expense. Of these, the mortality factor has the greatest effect on premium calculations. While an insurer's interest and expense factors are generally the same for all of its policyowners, the mortality factor can vary greatly depending on the personal characteristics of individual insureds."

"What tool do life insurance actuaries use to help establish premium rates based on the probabilities of death at various ages? A) Annuity table B) Morbidity table C) Mortality table D) Survivor table"

"Mortality table Explanation A mortality table is used to help establish life insurance premium rates, since it helps actuaries predict the number of deaths and, thus, the number of insurance claims an insurer could expect to experience in any given year. Morbidity tables predict disabilities."

"Which of the following statements about policy delivery is CORRECT? A) Most insurers require agents to personally deliver the policy so that they can explain the policy's terms, exclusions, and riders. B) Constructive delivery is not considered a legal means of delivering an insurance policy. C) The insurer typically sends the policy directly to the policyowner. D) Policies cannot be mailed to agents for delivery to policyowners."

"Most insurers require agents to personally deliver the policy so that they can explain the policy's terms, exclusions, and riders. Explanation Some states and most insurers require policies to be delivered in person. This gives the agent a timely opportunity to review the contract and its provisions, exclusions, and riders with the insured. In addition, the agent's review helps reinforce the sale and builds the client's trust and confidence in the agent's abilities."

"Which of the following is an incorporated insurer that is owned by its policyholders and does not have capital stock or shares? A) Stock company B) Guaranty company C) Surplus lines company D) Mutual company"

"Mutual company Explanation Mutual companies are incorporated insurers that are owned by their policyholders and do not issue capital shares or stock. Many mutual companies sell participating policies, which share the insurer's divisible surplus in the form of policy dividends."

"Which of the following insurance companies are organized and incorporated under state laws but have no stockholders? A) Mutual insurers B) Stock insurers C) Lloyd's of London D) Reciprocal insurers"

"Mutual insurers Explanation Mutual insurance companies are organized and incorporated under state laws but have no stockholders. Instead, the owners are the policyholders. Like mutual insurers, reciprocal insurers are also owned by their policyowners; however, the policyowners insure the risks of the other policyowners. Stock insurers are private organizations, organized and incorporated under state laws for the purpose of making a profit for their stockholders. Lloyd's of London, on the other hand, is an association of individuals and companies that individually underwrite insurance."

"Which of the following statements regarding mutual insurers is TRUE? A) Mutual insurers issue participating policies. B) If a mutual insurer is profitable, it may issue taxable dividends to its policyholders. C) The board of directors oversees the operations of the company. D) Mutual insurers are also known as reciprocal insurers."

"Mutual insurers issue participating policies. Explanation Mutual insurers issue participating (or par) policies and are owned by policyholders. The board of directors is elected by the policyholders; however, officers oversee the company's operations. If the company is profitable, it may return excess premiums to its policyholders, which are considered a nontaxable dividend."

"Norris is the primary beneficiary of a life insurance policy. He dies after receiving $275 per month for 6 years, under a 10-year period certain income option. His son, Neil, is the secondary beneficiary. Which of the following statements pertaining to this situation is CORRECT? A) Neil will receive $275 per month for as long as he lives. B) Neil will receive a lump-sum payment of $13,200. C) Neil will receive income checks in the same amount as his father for 4 years. D) Neil will receive nothing, since Norris did not survive the 10-year period certain."

"Neil will receive income checks in the same amount as his father for 4 years. Explanation Under a period certain income option, installments are payable for the duration of that period, whether or not the primary beneficiary lives. In this case, installments are payable for a period of 10 years. Since the primary beneficiary died after 6 years, the secondary beneficiary will be paid the same installments for 4 more years."

"An insured may apply for reinstatement of a life policy within what period of time after voluntarily surrendering the life policy? A) Never B) Within 1 year C) Within 2 years D) Within 6 months"

"Never Explanation An insured may apply for reinstatement of a life policy after terminating premium payment if this action is taken within 3 years of the lapse of the policy. However, if the policyowner voluntarily surrenders the life policy, reinstatement is never available."

"After an individual life insurance policy has been in effect for 2 years, which of the following is grounds for cancellation? A) Material misrepresentation B) Implied warranties C) Nonpayment of premium D) Fraudulent statements"

"Nonpayment of premium Explanation The incontestability provision states that other than for nonpayment of premium, the validity of a policy may not be contested after it has been in force for 2 years."

"If a life insurance policy specifically names a beneficiary other than the insured's estate, what recourse may the creditors of the deceased insured take to attach the policy proceeds? A) File a petition with the insurer showing proof of the deceased insured's outstanding debts and thus qualify for a portion of the death benefit B) Attach a lien against the policy that automatically diverts a portion of the death benefit to the creditor C) Seek a court injunction to delay payment of the death proceeds until the issue of who gets paid is settled in court D) Nothing, because life insurance proceeds are exempt from the claims of the deceased insured's creditors as long as there is a named beneficiary other than the insured's estate"

"Nothing, because life insurance proceeds are exempt from the claims of the deceased insured's creditors as long as there is a named beneficiary other than the insured's estate Explanation One of the notable features of the spendthrift clause is that the life insurance proceeds are exempt from the claims of the deceased insured's creditors as long as there is a named beneficiary other than the insured's estate."

"Susan, the beneficiary on John's $500,000 life policy, chose life-only as her settlement option. Susan received 5 years of settlement checks from the insurance company, totaling $150,000. How much will Susan's beneficiary receive upon her death? A) Nothing, because life-only states that when the beneficiary dies, any remaining death benefit is kept by the insurance company B) Susan's beneficiary will receive checks for the rest of his life C) $350,000 minus taxes and fees D) 350000"

"Nothing, because life-only states that when the beneficiary dies, any remaining death benefit is kept by the insurance company Explanation In the life-only settlement option, the beneficiary will receive monthly checks for the rest of her life. If there is any death benefit remaining at the beneficiary's death, the insurance company keeps the balance."

"Chantal applied for life insurance on November 1, but she did not submit a premium payment with the application. She underwent a physical examination on November 10, which she passed, and the results of that exam were forwarded to the insurance company. The policy was issued by the company on November 15, and the agent delivered the policy to Chantal on November 17, at which time she paid the first premium. When did Chantal's coverage become effective? A) November 17 B) November 1 C) November 10 D) November 15"

"November 17 Explanation In situations where the applicant does not submit a premium with the application, the issuance of the policy (if she is found to be insurable) and its delivery to the applicant constitute the contractual offer. The applicant accepts the company's offer when the first premium is paid, and it is on that date that the contract becomes effective."

"Which of the following is NOT a type of agent authority? A) Express B) Obvious C) Apparent D) Implied"

"Obvious Explanation There are 3 types of agent authority: express, implied, and apparent"

"If a life insurance applicant is given a binding receipt, when does her coverage become effective? A) On the date the policy is delivered B) On the date the applicant proves to be insurable C) On the date the receipt is given D) On the date the policy is issued"

"On the date the receipt is given Explanation Under a binding receipt (or temporary insurance agreement), coverage is guaranteed at the time of application for the amount of insurance applied for. The temporary coverage continues until the policy is issued as requested, until the company offers a different policy, or until the company rejects the application, but in no event for more than 60 days from the date the agreement was signed."

"Alaina, age 39, is married and has a small son. She is employed as a sales manager by R.J. Links, a sole proprietorship that owes much of its success to Alaina's efforts. She recently borrowed $50,000 from her brother-in-law, Pete, to finance a vacation home. Which of the following individuals does NOT have an insurable interest in Alaina's life? A) Her brother-in-law B) Her employer C) Her spouse D) One of her customers"

"One of her customers Explanation Generally, a person has an insurable interest in another person if they are related by blood or marriage or if their relationship is such that the insured's continuing to live will benefit that individual or the insured's death will cause that individual financial or economic loss. Spouses are assumed to have an automatic insurable interest in each other. Thus, in this case, all 3 individuals have an insurable interest in Alaina's life."

"Which of the following provides for an enhanced death benefit on a universal life policy? A) Option A B) The corridor C) The cost basis D) Option B"

"Option B Explanation Option B (or option 2) allows the cash value in the account to be added to the death benefit. For example, if a $100,000 policy has $25,000 of cash value, the beneficiary will receive $125,000."

"Paul, age 62, is applying for a universal life insurance policy and wants to arrange the beneficiary designation in such a way as to use the proceeds to provide lifetime income to his spouse, Marsha. Which of the following settlement options is best suited for this purpose? A) The insurer can distribute the proceeds in a lump-sum payment, deposit the money in a bank account, and then set up a periodic distribution plan for Marsha. B) Paul, as the owner, can pick life income as the settlement option his spouse must take when he dies. This option will give Marsha a monthly income she cannot outlive. C) Paul can select the fixed-period option and base the distribution period on Marsha's life expectancy at the time of Paul's death. D) Paul can leave the proceeds with the insurance company to accumulate interest and distribute the interest to Marsha."

"Paul, as the owner, can pick life income as the settlement option his spouse must take when he dies. This option will give Marsha a monthly income she cannot outlive. Explanation Life income is a life settlement option that will pay the beneficiary a monthly income for the rest of her life, taking into account the size of the death benefit and the life expectancy of the beneficiary. If there is any balance when the beneficiary dies, the insurance company keeps the balance."

"Suppose a whole life insurance policy was issued on August 3. On August 31 two years later, the insured committed suicide. What action will the insurer probably take? A) Return all premiums paid plus interest B) Pay the policy's face amount minus premiums paid C) Pay the policy's face amount D) Return all premiums without interest"

"Pay the policy's face amount Explanation Since the policy was in effect beyond the 2-year suicide clause period, the insurer is obligated to pay the face amount of the policy."

"Ben is considering the purchase of a $75,000 whole life policy. Which of the following options would tend to lower his premiums? A) The waiver of premium option B) The addition of a cost-of-living rider C) Paying premiums annually as opposed to monthly D) The addition of a guaranteed insurability rider"

"Paying premiums annually as opposed to monthly Explanation The less frequently premiums are collected on a life insurance policy, the less it costs the insurer to administer that policy and the more the insurer will have to invest. Consequently, an annual premium payment mode would be less expensive than a monthly premium payment mode. Options that add value to a policy, like guaranteed insurability, waiver of premium, and cost-of-living riders, would tend to increase the cost of the policy."

"Which of the following statements regarding fraternal benefit societies is NOT true? A) They are organized under a lodge system. B) Policies are called contracts. C) The society exists for the benefit of its members. D) Life insurance is a benefit of membership."

"Policies are called contracts. Explanation Fraternal benefit societies operate under a special state insurance code. Policies are called certificates, and members who own life insurance are called certificate holders."

"Which of the following statements about participating and nonparticipating life insurance policies is NOT correct? A) Participating policy premiums are normally slightly higher than nonparticipating policy premiums. B) Policy dividend payments cannot be guaranteed. C) An extra charge to cover unexpected contingencies is built into the premiums of participating policies. D) Policy dividends are considered taxable income."

"Policy dividends are considered taxable income. Explanation The payment of policy dividends will vary from year to year and, therefore, cannot be guaranteed. Unlike corporate dividends, life insurance policy dividends are considered a return of part of the premiums paid and are not taxable income. A slightly higher premium is typically charged for participating policies than for nonparticipating policies because an extra charge to cover unexpected contingencies is built into premiums for participating policies."

"Which of the following is NOT a characteristic of an insurable risk? A) Noncatastrophic B) Premeditated C) Homogenous D) Affordable"

"Premeditated Explanation The 6 characteristics of an insurable risk are that the risk must be calculable, affordable, noncatastrophic, homogeneous, accidental, and measurable."

"Mark purchased a 20-year $100,000 level term life insurance policy and a $250,000 straight whole life insurance policy. Which of the following statements is CORRECT? A) Premiums for both policies are set at the time of policy issue and remain level throughout the term of the policies. B) If Mark takes a loan from either policy that is still outstanding when he dies, the amount of the loan plus interest due will be subtracted from the death benefit. C) Mark can take a policy loan from either policy, provided the loan is paid back within the 20-year period. D) The whole life insurance policy will mature when Mark reaches age 65; the term life insurance policy will expire in 20 years."

"Premiums for both policies are set at the time of policy issue and remain level throughout the term of the policies. Explanation The premiums for both the level term life insurance policy and the straight whole life insurance are calculated at the time of policy issue and remain level throughout the term of the policies. Because only whole life insurance policies have cash value, Mark cannot take a policy loan from his term policy. Any amounts outstanding at his death will be subtracted from the death benefit."

"Which of the following statements applies to universal life insurance? A) A rate of interest higher than that paid on whole life is paid for the term of the policy. B) Premiums generally may be increased or decreased at the policyowner's option. C) It is similar to endowment insurance. D) The policy involves a cash account and increasing term insurance coverage."

"Premiums generally may be increased or decreased at the policyowner's option. Explanation Universal life insurance functions as whole life insurance but is essentially level or decreasing term insurance plus an investment account. It matches a client's needs in that she can adjust premium payments, the face amount of the policy, or both. Interest is based on the current rate or the guaranteed policy minimum, whichever is greater."

"Which of the following is NOT a characteristic of fraternal benefit societies? A) Representative form of government B) Profit-making organization with capital stock C) Lodge system D) Insurance benefits to members"

"Profit-making organization with capital stock Explanation A fraternal benefit society is any incorporated or unincorporated society, order, or lodge that operates solely for the benefit of its members and their beneficiaries. The society must be nonprofit and operate on the lodge system with a representative form of government. Fraternal benefit societies usually provide insurance benefits, including death benefits; endowments; annuities; disability benefits; hospital, medical, and nursing benefits; and monument or tombstone benefits."

"Which of the following would be an authorized method of handling an initial premium payment? A) Provide the applicant with a signed receipt of the appropriate type (binding or conditional) B) Advise the applicant that a written receipt will be sent from the insurer C) Assure the applicant that a written receipt will be provided at policy delivery D) Tell the applicant that written receipts are only required for cash transactions"

"Provide the applicant with a signed receipt of the appropriate type (binding or conditional) Explanation Whenever an applicant for insurance makes an initial premium payment, the applicant must immediately be given a written receipt of the appropriate type (binding or conditional) that is signed by the agent."

"Of the following, which best describes a need that decreasing term insurance is often used to meet? A) Providing long-term coverage at a reasonable premium B) Providing funds to pay off an outstanding loan at a reasonable premium C) Providing funds for final expenses at a reasonable premium D) Providing funds to pay off an outstanding loan at a high premium"

"Providing funds to pay off an outstanding loan at a reasonable premium Explanation Decreasing term insurance is often used to provide funds to pay off an outstanding loan in the event the insured dies before the loan has been fully repaid. The decreasing coverage can often track with the outstanding loan balance at a premium that remains level. Compared to other types of life insurance policies, decreasing term can typically be purchased at a reasonable premium."

"How can an insured access all or a portion of a life insurance benefit to pay for a long-term illness or life-threatening disease? A) Use the grace period provision B) Purchase an accelerated benefit rider C) Purchase an inflation protection option D) Use the nonforfeiture option"

"Purchase an accelerated benefit rider Explanation An accelerated benefit option allows for the early payment of a portion (or all, in some cases) of a policy's face amount. To qualify for early payment, the insured either must suffer from a terminal medical condition or have a qualified covered condition that requires skilled nursing care."

"Which of the following types of risk is insurable? A) Whole risks B) Pure risks C) Speculative risks D) Partial risks"

"Pure risks Explanation Only pure risks are insurable because they involve only the chance of loss; there is never a possibility of gain or profit. The risk associated with the chance of injury from an accident is an example of pure risk. There is no opportunity for gain if the event does not occur, only the opportunity for loss if it does occur. Insurance is concerned with the economic problems created by pure risks."

"Assume 4 individuals, all age 30, purchase the following life insurance policies. If all policies are still in force 10 years later, who will have the largest cash value in his policy? A) Dennis, who has a $100,000 life paid-up at 65 policy B) Jack, who has a $100,000 life paid-up at 55 policy C) Luis, who has a $100,000 straight whole life policy D) Rajesh, who has a $100,000 20-pay life policy"

"Rajesh, who has a $100,000 20-pay life policy Explanation The larger the face amount of the policy, the larger the cash values. The shorter the premium payment period, the quicker the cash values grow. The longer the policy has been in force, the greater the buildup in cash values."

"John, age 55, owns a whole life policy with a face amount of $100,000 for which the annual premium is $1,000. John explains to his agent that he lost his job and cannot afford his $1,000 annual premium but still desires to have life insurance to age 100. What nonforfeiture option could John's agent recommend to him? A) Reduced paid-up policy B) Reduced premium C) Modified endowment contract D) There are no options, since John can't afford to pay the premium anymore"

"Reduced paid-up policy Explanation With the reduced paid-up nonforfeiture option, the cash value of John's policy will be used to purchase a single premium whole life policy based on his attained age for a reduced face amount. The advantage for John is that he will continue to have insurance protection and will not be required to pay any additional premiums."

"A person who always wears a seatbelt in a car is using what risk handling method? A) Retention B) Restraint C) Removal D) Reduction"

"Reduction Explanation Wearing a seatbelt is an example of risk reduction because it can lessen the likelihood or severity of injuries resulting from an auto accident."

"Which of the following is a required provision in all individual life insurance policies? A) Open enrollment B) Conversion C) Notice of claim D) Reinstatement"

"Reinstatement Explanation All individual life insurance policies must include a reinstatement provision stating that if the policyowner defaults on premium payments, the value of the policy can be applied to purchase other insurance. If the insurance is in force and the original policy has not been canceled or surrendered to the company, the policy can be reinstated within 3 years of default. Satisfactory evidence of insurance must be provided, if required; in addition, back payment of premiums with interest premium loans and payment of any other indebtedness to the company must be made."

"Which of the following statements regarding consumer rights is NOT correct? A) Consumers may dispute information in their reports. B) Reporting agencies may not delete information in reports when proved incorrect. C) Insurers may use consumer reports as additional underwriting information. D) Reporting agencies may reinvestigate disputed information. "

"Reporting agencies may not delete information in reports when proved incorrect. Explanation When a consumer feels there is inaccurate information in her report, she may ask the reporting agency to reinvestigate and correct or delete the information."

"Self-insurance is an example of what kind of risk treatment? A) Avoidance B) Transference C) Retention D) Reduction"

"Retention Explanation Self-insurance is a form of risk retention because the individual or business entity personally retains the risk and must accept any resulting economic loss."

"What can a policyowner do if 9 days after an individual life insurance policy is delivered, he decides not to keep it? A) Return it, but lose the premiums paid B) Return it for a full refund of premiums C) Return it and receive back three-quarters of the premiums paid D) Return it and lose the premiums paid, unless it is replaced with another policy"

"Return it for a full refund of premiums Explanation Life insurance policies must include a 10-day free-look period that allows the policyowner to return the policy to the insurer within 10 days of delivery. Upon delivery or mailing of the policy, the insurer will refund any premium paid and the policy will be considered void from its inception."

"Upon the insured's death, which of the following policies will pay the face amount of the policy plus a sum equal to all or a portion of the premiums paid? A) Guaranteed dividend policy B) Adjusting benefit policy C) Return-of-premium policy D) Cost-of-living policy"

"Return-of-premium policy Explanation Return-of-premium policies promise to pay the policy face amount plus a sum equal to all or a portion of the premiums paid."

"Which of the following terms indicates the insured's right to change beneficiaries in a life insurance policy? A) Per stirpes B) Revocable C) Per capita D) Irrevocable"

"Revocable Explanation Revocable is a term indicating the insured's right to change beneficiaries in a life insurance policy."

"Which of the following policyowner rights relates directly to the cash value of permanent insurance? A) Right to assign proceeds B) Right to change premium mode C) Right to name beneficiaries D) Right to take a policy loan"

"Right to take a policy loan Explanation A policyowner has the right to take a policy loan based on the cash value accumulated in the policy."

"On August 1, Roger completed an application for a major medical policy, gave his agent a check for the initial premium, and received a conditional receipt from the agent. No medical examination was required. On August 3, the agent submitted Roger's application and premium to the insurance company. On August 6, Roger was involved in an accident and admitted to a hospital. On August 12, the agent received Roger's policy from the insurance company. Which of the following statements concerning this situation is CORRECT? A) Roger's coverage began when he received the conditional receipt. B) Roger's coverage began the day the agent sent the application and premium to the insurance company. C) Roger's coverage will begin when he receives the policy from the agent. D) Roger's coverage began the day the insurance company received the application and premium from the agent."

"Roger's coverage began when he received the conditional receipt. Explanation The conditional receipt provides that when an applicant pays the initial premium, coverage is effective, on the condition that the applicant proves to be insurable, either on the date the application was signed or the date of the medical examination, if one is required."

"Lawrence signed an application for a life insurance policy on September 2 and took a required medical exam on September 4. He gave the agent a check for the initial premium and received a conditional receipt at the time of application. The policy was issued as originally applied for and the agent delivered the policy to him on October 15. The earliest effective date for Lawrence's insurance policy would be A) October 15 B) September 4 C) December 31 D) September 2"

"September 4 Explanation The conditional receipt explains to the applicant that the policy will be issued subject to the approval of the insurance company. If the policy is eventually issued as originally applied for, typically the earliest effective date is the date the applicant has completed all of the requirements. In this instance the applicant was required to complete a medical exam as part of the requirements, so the earliest effective date would be the date the medical exam was completed. The date the policy is actually delivered to the insured is immaterial."

"Sophia has a $250,000 10-year convertible term policy and would like to convert it to a permanent policy. Her agent provides her with the following information. Which statement is NOT correct? A) The new premium will be based on either her original or her attained age. B) She may convert to the permanent policy for up to 12 months following the term policy's expiration. C) Sophia will not have to provide evidence of insurability. D) A new application will not be required."

"She may convert to the permanent policy for up to 12 months following the term policy's expiration. Explanation Conversion of a policy must be made before the term policy expires."

"All of the following are sources of insurability information about life insurance applicants EXCEPT A) inspection reports B) the application C) Social Security reports D) Medical Information Bureau reports"

"Social Security reports Explanation Social Security reports are not sources of insurability information. Inspection (consumer) reports, the application, the Medical Information Bureau report, attending physicians' statements, medical exam and lab reports, and special questionnaires are important sources of insurability information."

"Which of the following statements about the differences between individual and group life insurance is CORRECT? A) Employees or members are individual policy owners. B) Each person within a group chooses the amount of insurance they want or need. C) Individuals pay less than employees or members pay for group insurance. D) The cost of group life insurance is generally lower than individual insurance."

"The cost of group life insurance is generally lower than individual insurance. Explanation Premiums for group life insurance are usually much lower than what an individual would pay for similar coverage because the cost is based upon the group."

"Which of the following statements pertaining to sources of insurability information is CORRECT? A) When conducting an inspection report, an investigator cannot interview an individual who actually knows the applicant. B) The insurance agent completes the medical report on a life insurance applicant. C) An insurer cannot use an unfavorable credit report to reject an applicant for insurance. D) Special questionnaires are used to obtain additional information when an extra hazard or risk may be involved."

"Special questionnaires are used to obtain additional information when an extra hazard or risk may be involved. Explanation Special questionnaires are used to obtain additional information when an extra hazard or risk (e.g., skydiving) may be involved. A medical report, if required, is completed by a physician or paramedic, not by the agent. An unfavorable credit report can be used to reject an applicant. Investigators interview individuals who are personally acquainted with the insurance applicant."

"Which type of provision in a life insurance policy ensures that a beneficiary will not spend all of the insurance proceeds at once? A) Spendthrift provision B) Guardianship provision C) Control of beneficiary provision D) Change of beneficiary provision"

"Spendthrift provision Explanation Some individual life insurance policies contain a spendthrift provision specifying that the proceeds will be paid to the beneficiary in equal installments during the beneficiary's lifetime. To ensure that the beneficiary does not spend all the proceeds at once, the insured can void the beneficiary's right to exchange, surrender, assign, or borrow against the policy."

"Which of the following statements regarding life insurance applications is NOT correct? A) The application must be carefully reviewed by the agent for completeness. B) Completed applications contain personal information, which must be protected. C) The application may not be altered without the change being initialed by the applicant. D) Statements made by the applicant on the application are considered to be warranties."

"Statements made by the applicant on the application are considered to be warranties. Explanation A life insurance application is attached to the policy and becomes part of the contract. It may not be altered except by the applicant or with the applicant's written consent. If a policy is issued and the application is incomplete, the missing information is waived by the insurer. The statements made by the applicant in the application are considered to be representations, not warranties. A representation is a statement believed to be true to the best of one's knowledge or ability. A warranty is a statement that is warranted (guaranteed) to be true."

"Which kind of insurance company is owned by individuals who buy shares but are not entitled to receive policy dividends? A) Fraternal insurance company B) Stock insurance company C) Mutual insurance company D) Reciprocal insurance company"

"Stock insurance company Explanation Stock companies consist of stockholders, also known as shareholders, that receive stock dividends, not policy dividends. Mutual companies consist of policyholders, and if the company is profitable they may receive a policy dividend, which is actually a nontaxable return of excess premium."

"What is the difference between a stock insurer and a mutual insurer? A) Stock insurers have shareholders and mutual insurers have policyholders. B) Stock insurers have policyholders and mutual insurers have shareholders. C) Stock insurers have policyholders and mutual insurers have certificate holders. D) Stock insurers have certificate holders and mutual insurers have policyholders."

"Stock insurers have shareholders and mutual insurers have policyholders. Explanation A stock insurer is an incorporated insurer with capital that is divided into shares and owned by shareholders. A mutual insurer is owned by its customers, who are known as policyholders."

"What are life insurance transactions that are marketed to senior citizens and a possible method of fraud called? A) Stronger-owned life insurance (STOLI) or investor-owned life insurance (IOLI) B) Stranger-owned life insurance (STOLI) or insured-owned life insurance (IOLI) C) Senior-owned life insurance (STOLI) or insured-owned life insurance (IOLI) D) Stranger-owned life insurance (STOLI) or investor-owned life insurance (IOLI)"

"Stranger-owned life insurance (STOLI) or investor-owned life insurance (IOLI) Explanation Stranger-owned life insurance (STOLI) or investor-owned life insurance (IOLI) transactions have been banned by most states as a form of fraud. The investor persuades the senior to take out a new life insurance policy and name the investor as the beneficiary. The premiums are usually paid by the investors for a period of time based on the policy's contestable period, after which the insured is paid some small amount and names the investor as the beneficiary of the policy."

"Which of the following uses life insurance death benefits to provide financial support for dependents when the primary wage earner dies? A) Estate conservation B) Survivor protection C) Estate creation D) Investments"

"Survivor protection Explanation The death benefit proceeds are used for survivor protection to provide financial support for a family when an income earner dies."

"Hachiro, age 45, purchased a life insurance policy from AllPro Insurers and named his 8-year-old son, Takeshi, as a beneficiary. Which of the following statements regarding this situation is CORRECT? A) Hachiro and Takeshi are considered parties to the insurance contract. B) Takeshi is not a competent party to the insurance contract because he is a minor. C) Hachiro, AllPro Insurers, and Takeshi are considered parties to the insurance contract. D) Takeshi is not a party to the insurance contract."

"Takeshi is not a party to the insurance contract. Explanation A beneficiary is not a party to an insurance contract. The fact that Takeshi is a minor is irrelevant in this case. Under certain conditions, even minors can enter into insurance contracts as competent parties."

"Ted, the insured in a $75,000 life policy, and his sole beneficiary, Maxine, are killed instantly when their car is struck by a train. Under the Uniform Simultaneous Death Act, to whose estate will the policy proceeds be payable? A) Ted's estate B) Maxine's estate C) Both Ted's and Maxine's estates, equally D) The proceeds will escheat to the state"

"Ted's estate Explanation The Uniform Simultaneous Death Act provides that, if the insured and the primary beneficiary are killed in the same accident and there is not sufficient evidence to show who died first, the policy proceeds are to be distributed as if the insured died last. Ted's estate would receive the proceeds, since Maxine, the beneficiary, was deemed to have predeceased Ted and no other beneficiary was named."

"Which of the following statements pertaining to term insurance is CORRECT? A) Nancy and Jennifer are the same age and have term policies of identical face amounts. Nancy's policy is renewable; Jennifer's policy is nonrenewable. Jennifer pays the higher premium. B) A term policy cannot be both renewable and convertible. C) Term insurance provides protection for only a temporary period. D) Jorge decides to exercise an option to renew his term insurance, but first he must pass a physical examination."

"Term insurance provides protection for only a temporary period. Explanation A term policy can be purchased with an option to renew, an option to convert, or both. The option to renew allows the policyowner to renew the policy (at the then-attained age premium) without evidence of insurability. The option to convert allows the policyowner to convert the term policy to permanent insurance (with an adjustment to premium), without evidence of insurability. Renewable policies carry higher premiums than nonrenewable policies."

"AGC Publishing applied for key-person life insurance on its chief executive officer. Which of the following parties must sign the application? A) The CEO and the agent handling the application B) An officer of AGC and the agent handling the application C) The CEO, another officer of AGC, and the agent handling the application D) The CEO and another officer of AGC"

"The CEO, another officer of AGC, and the agent handling the application Explanation Each life insurance application requires the signatures of the proposed insured and the agent who solicits the application. If the policyowner is a firm or corporation, one or more partners or officers other than the proposed insured must sign the application. As a result, the CEO, another officer of AGC, and the agent handling the application must all sign the insurance application."

"Which of the following statements pertaining to the Fair Credit Reporting Act is NOT correct? A) The Fair Credit Reporting Act is a state law that helps to ensure accurate reporting of information about consumers. B) The Fair Credit Reporting Act does not apply to insurance companies who use their own staffs to investigate an applicant for insurance. C) A life insurance company obtains a consumer report on Burl, an applicant, without advising him of its intended action. The company has violated the Fair Credit Reporting Act. D) Peg's application for life insurance is rejected because of an unfavorable consumer report. She has a right to know what information the reporting agency has and can insist that any errors in the data be corrected."

"The Fair Credit Reporting Act is a state law that helps to ensure accurate reporting of information about consumers. Explanation The Fair Credit Reporting Act is a federal law, not a state law."

"Which of the following statements pertaining to the Medical Information Bureau (MIB) is NOT correct? A) The purpose of the MIB is to help prevent fraud and to serve as a reliable source of important medical information about insurance applicants. B) Applicants must sign authorization forms for information from the MIB files to be given to a member company. C) The MIB is organized and supported by private hospitals. D) Applicants for life insurance must be informed in writing that the insurer may make a report on their health to the MIB."

"The MIB is organized and supported by private hospitals. Explanation The Medical Information Bureau (MIB) is a nonprofit central information agency established to aid in the underwriting process. Its purpose is to provide medical information regarding applicants for insurance. Private hospitals do not have access to the MIB, nor do they fund it."

"In addition to the Department of Insurance, who has the authority to regulate variable life insurance? A) The Securities Exchange Commission B) The National Association of Insurance Commissioners C) The Federal Deposit Insurance Corporation D) Insurance companies"

"The Securities Exchange Commission Explanation Because variable life insurance is considered a securities product, the SEC has jurisdiction over variable life insurance products."

"Who represents an insurance company in an insurance transaction? A) The agent B) The Commissioner C) The broker D) The consultant"

"The agent Explanation An agent is authorized in writing by an insurance company to solicit, negotiate, or effectuate insurance contracts on the company's behalf and to collect insurance premiums. A broker is paid to negotiate insurance policies and place risks for his client, the party to be insured. A consultant is paid to offer advice or to counsel the public with respect to the benefits, advantages, and disadvantages of insurance policies."

"Which of the following statements regarding policy delivery is NOT true? A) The agent should explain the policy provisions, riders, and exclusions to the policyowner. B) The insurer may mail the policy to the policyowner in some states. C) The agent may hold on to the policy for safekeeping without showing it to the policyowner. D) The agent is often required to obtain a dated receipt from the policyowner to verify delivery."

"The agent may hold on to the policy for safekeeping without showing it to the policyowner. Explanation The agent is usually required to make a face-to-face delivery of the policy to the policyowner and to collect a signed receipt to verify the delivery was made. This practice provides an opportunity for the agent to review the policy, including provisions, riders, and exclusions, with the policyowner."

"Which of the following is stated in the consideration clause of a life insurance policy? A) The insured's risk classification B) Benefits payable upon the insured's death C) The amount and frequency of premium payments D) The insured's general health condition"

"The amount and frequency of premium payments Explanation The consideration clause specifies the amount and frequency of premium payments that the policyowner must make to keep the insurance in force."

"Janet, the insured, dies during a grace period for her $50,000 life policy. What happens, considering that her premium has not been paid? A) The premium due, plus a 10% penalty, is charged against the policy. B) The amount of the premium due is deducted from the policy proceeds paid to the beneficiary. C) The beneficiary must pay the premium after the death claim is paid. D) The premium is canceled because the insured died during the grace period."

"The amount of the premium due is deducted from the policy proceeds paid to the beneficiary. Explanation If an insured dies during the grace period of a life policy, the amount of the premium due is deducted from the policy proceeds paid to the beneficiary."

"Ron, the insured, dies during the grace period for his $100,000 life insurance policy. Considering that the premium on the policy has not been paid, what happens? A) The premium due, plus a 10% penalty, is charged against the policy. B) The amount of the premium is deducted from the policy proceeds paid to the beneficiary. C) The beneficiary must pay the premium after the death claim is paid. D) The premium is canceled because the insured died during the grace period."

"The amount of the premium is deducted from the policy proceeds paid to the beneficiary. Explanation If the premium of a policy has not been paid and the insured dies during the grace period, the policy benefit is payable. However, the premium amount due is deducted from the benefits paid to the beneficiary."

"Lisa exercised her automatic premium loan provision to pay her annual premium on her $50,000 life insurance policy. She died 4 months after the loan was taken, never having a chance to repay it. Which of the following statements is CORRECT? A) The amount paid to Lisa's beneficiary as the death proceeds was reduced by the amount of the loan plus interest due. B) The type of insurance Lisa owned was term. C) The premium was paid by the insurance company from its reserves. D) The policy was canceled, since the loan was not repaid."

"The amount paid to Lisa's beneficiary as the death proceeds was reduced by the amount of the loan plus interest due. Explanation The policyowner's cash values are used to pay premium loans. If the loan is not repaid at the time of the insured's death, the amount of the loan plus interest is subtracted from the death proceeds."

"If there are changes to an insurance application due to an error in information, who must initial the corrections? A) The claims adjuster B) The insurer C) The applicant D) The underwriter "

"The applicant Explanation Applications must be completed accurately so that the underwriter has the information needed to consider writing the policy. If a correction needs to be made, the applicant must initial the changes."

"Of the following, which is a situation that could result in the conditional receipt becoming void? A) The applicant dies after the policy is issued. B) The applicant is found to be a substandard risk. C) The applicant's policy is issued as applied for. D) The applicant dies before the policy is issued."

"The applicant is found to be a substandard risk. Explanation In the event the applicant is found to be a substandard risk, the conditional receipt in turn becomes null and void. The applicant would be offered a substandard policy, but no coverage would be effective until the substandard policy was delivered and explained and the additional premium was paid. If the applicant were to die before the policy is issued, the insurer would continue underwriting the applicant. If the insurer determines she would have issued the policy had the applicant still been living, the conditional receipt is valid and the named beneficiary would receive the policy proceeds."

"What is the basic source of information for life insurance underwriting and policy issue? A) The application B) The Medical Information Bureau C) Consumer reports D) Physician reports"

"The application Explanation The application for insurance is the basic source of insurability information. It is the first source of information to be reviewed, and it is reviewed thoroughly."

"With regard to life insurance applications, which of the following statements is CORRECT? A) Part II of the application deals with the proposed insured's personal and occupational history. B) Part I of the application deals with the proposed insured's medical history. C) All applications for life insurance must include a medical exam. D) The application includes the names of the insured and the beneficiary."

"The application includes the names of the insured and the beneficiary. Explanation All applications for life insurance are not necessarily accompanied by a medical exam; in fact, substantial amounts of life insurance are written by insurers on a nonmedical basis. Part I of the application solicits information about the proposed insured's personal and occupational history. Part II of the application involves the proposed insured's medical history."

"Which of the following statements pertaining to reinstating a life insurance policy is NOT correct? A) All back premiums must be paid. B) Any outstanding policy loan must be repaid. C) The insured may need to provide evidence of insurability. D) The cash surrender value must be forfeited to the insurer."

"The cash surrender value must be forfeited to the insurer. Explanation Paying back premiums and any policy loans, and possibly having to prove insurability, are required before a lapsed policy will be reinstated. Reinstatement is only available to the policyowner if the policy was canceled for nonpayment."

"Vivian commits suicide 4 years after taking out a $100,000 life insurance policy on herself. Her beneficiary is concerned that the death claim will be denied. Which of the following statements is NOT correct? A) If the suicide clause were in effect, the company would refund the premiums paid. B) The company has definite proof of the cause of her death, so it can refuse to pay the death benefit. C) If the beneficiary were familiar with the policy's suicide clause, she would not doubt payment of the claim. D) The suicide clause in Vivian's policy would have expired, so it would not affect the death claim."

"The company has definite proof of the cause of her death, so it can refuse to pay the death benefit. Explanation As a general practice, the suicide clause provides that death benefits are payable in full after the policy has been in force for 2 years, even if the insured did commit suicide."

"A corporation has key-person life insurance on its president. If the president dies, which of the following statements would be CORRECT? A) The policy premiums will be returned to the beneficiary. B) The company may use the death benefit proceeds to search for and retain a new president. C) The death benefit proceeds will be distributed equally to the executives. D) The proceeds will be paid to the president's beneficiary."

"The company may use the death benefit proceeds to search for and retain a new president. Explanation With key-person life insurance, the business organization is the owner, premium payor, and beneficiary of the policy. The death benefit proceeds may be used to search for, retain, and train a replacement."

"Which of the following statements regarding a cost-of-living rider on a life insurance policy is NOT correct? A) An inflation index determines the amount of inflation adjustment that must be made to the policy up to a maximum percentage increase. B) A cost-of-living rider seeks to protect against inflation's erosion of life insurance policy values. C) The cost-of-living adjustment is tied to the gross domestic product (GDP). D) The cost-of-living rider provides increases in insurance without requiring the insured to provide evidence of insurability."

"The cost-of-living adjustment is tied to the gross domestic product (GDP). Explanation A cost-of-living (COL) or cost-of-living adjustment (COLA) rider is tied to an increase in an inflation index, most commonly the Consumer Price Index (CPI). The COL rider provides for automatic increases in the policy death benefit in proportion to increases in the CPI."

"If an insured does not exercise the option to increase coverage under a guaranteed insurability rider, what is the result? A) The coverage will not change and the option automatically expires. B) The policy is canceled. C) The insurer automatically increases the coverage, per the amount stated in the option. D) The premiums on the underlying policy are lowered proportionately because no increase in insurance coverage was purchased."

"The coverage will not change and the option automatically expires. Explanation When no purchase is made under a guaranteed insurability option, the option for that particular age expires automatically. There is no change in the underlying policy. Normally, the insured will have 90 days in which to exercise an optional purchase."

"Michelle, age 31, just purchased a $50,000 variable life insurance policy. Which of the following statements is NOT correct? A) The death benefit of $50,000 is not guaranteed. B) She directs the insurer as to how her cash values are to be invested. C) The cash value growth of her policy will depend on how the investments supporting those values perform. D) Her premium payments will be fixed and level for the duration of the contract."

"The death benefit of $50,000 is not guaranteed. Explanation A variable life insurance policy invests its cash values in securities at the owner's direction. There are no guarantees as to the cash value growth or accumulation. Although the death benefit may fluctuate in response to the cash values, a minimum death benefit, the policy's face amount, is guaranteed. Premiums are fixed and payable over the life of the policy."

"John purchased a life insurance policy with a $250,000 death benefit at age 32. When John died the insurer discovered that he was really 25 years old at the time of application. How much will the beneficiary receive? A) Half the benefits will be paid for the age stated in the application. B) The death benefit will be increased according to how much coverage the premium John paid would have purchased had he reported his correct age. C) The beneficiary will receive $250,000. D) The beneficiary will receive nothing because John lied on his application."

"The death benefit will be increased according to how much coverage the premium John paid would have purchased had he reported his correct age. Explanation All individual life insurance policies must contain a misstatement of age provision. According to this provision, if the insured's age was misstated, the amount payable under the policy is that which the premium would have purchased if the correct age had been stated."

"Which of the following statements regarding a deferred compensation plan is CORRECT? A) The employer purchases a whole life insurance policy, the cash value of which the employee can access only while working for the employer. B) The employer purchases a whole life insurance policy on key employees and receives the death benefits if the employee dies before retirement. C) The employee uses part of his current income to purchase a whole life insurance policy, the cash value of which can be accessed only while he is employed by his current employer. D) The employee agrees to forgo part of his current income until a specified future date, typically retirement, and may use life insurance as the funding vehicle for the plan."

"The employee agrees to forgo part of his current income until a specified future date, typically retirement, and may use life insurance as the funding vehicle for the plan. Explanation A deferred compensation plan is an arrangement in which an employee (or owner) agrees to forgo some portion of his current income (such as annual raises or bonuses) until a specified future date, typically retirement. Life insurance is a popular funding vehicle for these plans in that the amounts deferred are used to pay premiums on cash value life insurance. At retirement, the cash values are available to the employee to supplement his income. If the employee dies before retirement, his beneficiary receives the policy proceeds."

"Which of the following statements pertaining to executive bonus plans is CORRECT? A) The business owns the life insurance policy. B) The employee has access to the policy's living benefits. C) Death benefits are paid to the business. D) Premiums are paid by the employee."

"The employee has access to the policy's living benefits. Explanation With an executive bonus plan, the business pays the premiums on the life insurance policy, in place of giving a yearly cash bonus. The employee owns the policy and has full access to its living benefits. The death benefit proceeds are paid to the employee's beneficiary."

"Which of the following statements regarding deferred compensation plans is NOT correct? A) The employee may convert the funds to another plan if he leaves the company. B) The death benefit proceeds from the plan are paid to the employee's beneficiary. C) The funds are taxable at retirement. D) The business pays the premiums on a life insurance policy owned by the employer."

"The employee may convert the funds to another plan if he leaves the company. Explanation The benefits from a deferred compensation plan are forfeited if the employee leaves the company before retirement. Otherwise, the benefits are received at retirement, and if the plan has been funded with life insurance, the beneficiary designated by the employee will receive the deferred compensation plan death benefit proceeds."

"Which of the following statements regarding a stock insurer is NOT true? A) It is owned by shareholders. B) The operations are overseen by a board of directors. C) The policies are participating policies. D) Profits may be distributed as dividends."

"The policies are participating policies. Explanation A stock insurer is owned by its stockholders, or shareholders, who choose a board of directors to oversee the operations of the organization. If the company is profitable, it distributes dividends to its stockholders. Policies are called nonparticipating policies. Participating policies are issued by mutual insurers."

"Which of the following statements regarding executive bonus plans is NOT correct? A) The bonus is included in the employee's gross income. B) The employer may alternatively use the bonus to pay the premiums on a life insurance policy covering the employee's life. C) An executive bonus plan is a nonqualified employee benefit arrangement in which an employer pays a bonus to a particular employee. D) The employer becomes the policyowner of the insurance policy."

"The employer becomes the policyowner of the insurance policy. Explanation An executive bonus plan, or Section 162 bonus plan, is a nonqualified employee benefit arrangement in which an employer pays a bonus to a particular employee. The bonus is tax deductible to the employer. The employee in turn uses the bonus to pay the premiums on a life insurance policy covering her life. The employee is the owner of the policy, and the bonus is included in the employee's gross income. When the employee dies, the beneficiary named in the policy receives the death proceeds free of tax."

"Which of the following statements pertaining to a whole life policy is NOT correct? A) It provides both insurance protection and living values. B) The face amount may be paid as a lump sum at the policyowner's selected retirement age. C) It is designed to mature or endow at the insured's age 100. D) The policy offers insurance protection to age 100."

"The face amount may be paid as a lump sum at the policyowner's selected retirement age. Explanation The face amount of a whole life policy may be paid as a lump sum at the policyowner's death, not at retirement age."

"What action will an insurer take if it learns that a deceased life insurance policyholder was actually older than the insurer had believed? A) The insurer cannot take any action. B) The face amount will be lowered to reflect the proper amount based on the correct age. C) The face amount will be paid to the beneficiary and the employer will be required to pay the additional premiums owed. D) The face amount will be increased to reflect the proper amount based on the correct age."

"The face amount will be lowered to reflect the proper amount based on the correct age. Explanation According to the misstatement of age provision in a life insurance contract, if the insured's age was misstated on an application, any amount payable under the policy will be determined according to how much coverage the premium would have purchased for the correct age. Consequently, if a deceased life insurance policyholder was actually older than the insurer had believed, the insurer can lower the face amount to reflect the proper amount based on the insured's correct age."

"Which of the following differentiates a variable life product from a conventional life product? A) The fact that the product has a separate account which is distinct from the general account B) The lack of an assignment provision C) The fact that the product was purchased through a direct response mailing D) The fact that performance is guaranteed to provide a stable rate of returns"

"The fact that the product has a separate account which is distinct from the general account Explanation Unlike conventional life insurance, which is classified as a fixed product with a specific (guaranteed) benefit, variable life products provide insurance and benefits that vary according to the investment experience of their underlying accounts. These underlying accounts, which are separate accounts the insurer establishes and maintains, are typically are made up of equities such as stocks, the values of which rise and fall and cannot be guaranteed. A purchaser of a variable life policy incurs a degree of risk not associated with a fixed whole life policy."

"Which of the following statements regarding trusts in life insurance is NOT correct? A) Life insurance proceeds may be handled by a trust. B) Trusts may be named as a beneficiary on behalf of a minor. C) The beneficiary is the person receiving the benefits from a trust. D) The grantee is the party that manages a trust."

"The grantee is the party that manages a trust. Explanation There are three parties to a trust - the grantor, the trustee, and the beneficiary. The grantor sets up and determines how a trust will operate. The trustee manages the trust according to the grantor's instructions. The beneficiary receives the benefits of the trust."

"Whom do independent insurance agents represent? A) The state insurance department B) The insurer C) The insured D) Themselves"

"The insured Explanation An independent insurance agent has relationships with multiple insurance companies but represents the insured by comparing coverage and costs to provide the most appropriate insurance."

"An exchange of value, consideration, is necessary to form a valid contract. Whose consideration is it, in a contract for insurance, to make truthful statements on an application? A) The beneficiary B) The insurer C) The insured D) The assignee"

"The insured Explanation The insured's consideration is payment of premiums and providing truthful statements on the application."

"Which of the following statements about accelerated benefit provisions is NOT correct? A) The death benefit, less the accelerated payment, is still payable. B) The insured must be expected to die within 6 months. C) They are standard in life insurance policies. D) They provide for the early payment of part of a policy's face amount if the insured suffers from a terminal illness or injury."

"The insured must be expected to die within 6 months. Explanation An accelerated benefit rider provides for the early payment of a portion of a policy's face amount if the insured is expected to die within 24 months."

"Which of the following statements pertaining to key-person life insurance is CORRECT? A) The owner of a company cannot be considered a key person. B) At the death of the key person, proceeds are paid to that person's beneficiary. C) The policy is a company-owned asset. D) The insured key person controls the policy."

"The policy is a company-owned asset. Explanation A key person is any person in an organization whose contributions are essential to its success. With key-person insurance, the business is the owner, premium payor, and beneficiary of the policy. The purpose of the insurance is to protect the business against the economic loss it would suffer if the key person were to die."

"Which of the following statements about reinstating an individual life insurance policy is CORRECT? A) Policies may be reinstated at any time within 4 years from the date of premium default. B) The insured never has to show evidence of insurability. C) The insured must pay all back premiums with interest premium loans before the policy can be reinstated. D) Policies that have been surrendered for their cash value may be reinstated."

"The insured must pay all back premiums with interest premium loans before the policy can be reinstated. Explanation All individual life insurance policies must include a reinstatement provision stating that the policy can be reinstated at any time within 3 years from the date of premium default, unless the policy has been surrendered for its cash value, its cash surrender value has been exhausted, or its paid-up term insurance has expired. For a policy to be reinstated, the insured must submit a written application; provide evidence of insurability, if required; and pay all back premiums plus interest."

"Tammy owns a participating whole life insurance policy for which she has elected the paid-up additions option. If the insurer declares a dividend of $500 in the current year, how will this amount be used with this dividend option? A) The insurer adds a paid-up unit of whole life insurance with a cash value that is equal to $500. B) The insurer adds a paid-up unit of whole life insurance with a $500 face amount to Tammy's base policy. C) The insurer adds $500 to the face amount of Tammy's base policy. D) The insured uses the $500 as if it were a single premium to purchase a unit of paid-up whole life insurance based on Tammy's attained age."

"The insured uses the $500 as if it were a single premium to purchase a unit of paid-up whole life insurance based on Tammy's attained age. Explanation The paid-up additions dividend option uses the annual policy dividend as if it were a single premium to purchase a paid-up whole life insurance policy."

"With a life insurance contract, which of the contracting parties makes an enforceable promise? A) The applicant or owner B) The insurer C) The agent D) The beneficiary"

"The insurer Explanation A life insurance contract is unilateral in that only one party—the insurer—makes an enforceable promise (the promise to pay the policy's benefit if certain occurrences come to pass or certain conditions are met). The applicant or owner makes no enforceable promise and is not legally required to maintain the contract (by continuing to pay the premiums)."

"Which of the following statements pertaining to life insurance premiums is NOT correct? A) The interest factor is a premium charge based on assumed lost earnings after claims. B) An insurance company invests the premium money it collects to earn interest. C) The expense factor in premium ratemaking frequently is referred to as loading. D) For an insurance company, the costs of doing business must be reflected in its premiums."

"The interest factor is a premium charge based on assumed lost earnings after claims. Explanation The premium factors include the insurer's operating costs, also called loading; the mortality charge; and a credit for the insurer's use of the premiums until a claim occurs."

"Which of the following statements regarding key-person coverage is NOT correct? A) Premiums are paid by the business. B) The business owns the policy. C) The key person designates the beneficiary. D) The business is the beneficiary."

"The key person designates the beneficiary. Explanation Key-person coverage exists to protect a company in the event that a key individual in the company dies. The business is the beneficiary on the policy and may use the insurance proceeds to offset financial losses, pay for attracting and training a replacement, or both."

"Which section of the application should contain a record of any injuries the applicant may have suffered? A) The agent's report B) The MIB C) A special questionnaire D) The medical section"

"The medical section Explanation The record of an applicant's specific injuries should be recorded in the medical section of the application for life insurance. This is a primary purpose of the medical section."

"Which of the following is NOT found in Part I of the application? A) The insured's occupation and business address B) The name and address of the insured C) The name and address of the insured's current physician D) The name of the beneficiary"

"The name and address of the insured's current physician Explanation Part I of the application contains general information. The name and address of the insured's current physician would be in located in Part II, which contains health information."

"Which of the following statements regarding a disability income rider is NOT correct? A) A disability income rider is a form of health insurance. B) The only way to provide disability benefits in a life insurance policy is through a disability income rider. C) A disability income rider does not provide benefits for partial or temporary disability. D) Most disability income riders do not cover disabilities that develop after age 60 or 65."

"The only way to provide disability benefits in a life insurance policy is through a disability income rider. Explanation A waiver of premium rider (a type of disability coverage) is generally included with guaranteed renewable and noncancelable individual disability income policies. It is a valuable provision because it exempts the policyowner from paying premiums during periods of total disability."

"Which of the following statements regarding the paid-up additions life insurance policy dividend option is NOT correct? A) Paid-up additions consist of permanent life insurance of the same type as the base policy. B) A paid-up addition increases the policy's total cash value as well as its death benefit. C) The paid-up additions dividend option is only available to insureds that remain insurable. D) The amount of paid-up coverage acquired is based on the insured's attained age at the time the dividend is declared."

"The paid-up additions dividend option is only available to insureds that remain insurable. Explanation It is not necessary to demonstrate evidence of insurability to elect the paid-up additions dividend option. Paid-up additions are based on the insured's underwriting status when the policy was issued, and the amount of the addition is based on the insured's attained age when the dividend is declared."

"Leo purchases a $50,000 5-year level term policy. Which of the following statements about Leo's coverage is CORRECT? A) The policy provides a straight, level $50,000 of coverage for 5 years. B) If Leo dies at any time during the 5 years, his beneficiary will receive the policy's face value plus the policy's cash value. C) If Leo lives beyond the 5 years, the premium for the existing policy will increase. D) If Leo dies after the specified 5 years, only the policy's cash value will be paid."

"The policy provides a straight, level $50,000 of coverage for 5 years. Explanation A straight 5-year level term policy provides coverage for the stipulated 5-year time period in an amount equal to the policy's face value. If the insured lives beyond the 5-year period, the policy expires and no benefits are payable. There are no cash values in term policies. Since the policy expires at the end of the 5-year period, there is no longer a policy in force, which in turn means any premium once involved is no longer applicable."

"Which of the following has the greatest impact in making one individual's life insurance premium different from that of another individual, assuming both own the same type of policy? A) The policy's expense factor B) The policy's mortality factor C) The policy's interest factor D) The policy's issue date"

"The policy's mortality factor Explanation Of the 3 basic premium factors, the mortality charge has by far the greatest impact in distinguishing one person's rate from another."

"Which of the following phrases best describes a life insurance policy under the entire contract clause? A) The policy, any amendments or riders, and a copy of the signed application B) The basic policy document only C) The policy document plus riders as agreed to by the applicant D) The policy document plus riders and the initial premium deposit receipt"

"The policy, any amendments or riders, and a copy of the signed application Explanation The application, all amendments and riders, a copy of the signed application, and any attached documents make up the entire contract."

"Who designates the beneficiary of a life insurance policy? A) The fiduciary B) The policyowner C) The insured D) The underwriter"

"The policyowner Explanation One of the rights of owning a life insurance policy is the right to designate and change the beneficiary of the policy proceeds."

"Which of the following situations constitutes an insurable interest? A) The beneficiary, by definition, has an insurable interest in the insured. B) The insured must have a personal or business relationship with the beneficiary. C) The policyowner must expect to benefit from the insured's death. D) The policyowner must expect to suffer a loss when the insured dies or becomes disabled."

"The policyowner must expect to suffer a loss when the insured dies or becomes disabled. Explanation Insurable interest requires that the policyowner be expected to benefit from the insured's continuing to live or enjoying good health or to suffer a loss when the insured dies or is disabled. An insurable interest must exist between the applicant and the insured. It does not need to exist between the applicant and the beneficiary. For life and health insurance policies, an insurable interest must exist at the inception of the policy, but it does not need to be maintained for the term of the policy."

"Which of the following statements pertaining to life policy assignment is NOT correct? A) To secure a loan, the policy temporarily can be transferred to the lender as security for the loan. B) The life insurance company assumes no responsibility for the validity of an assignment. C) The policyowner must obtain approval from the insurance company before a policy can be assigned. D) The policyowner must notify the company in writing of any assignment."

"The policyowner must obtain approval from the insurance company before a policy can be assigned. Explanation A policyowner may assign or transfer ownership of a life policy to anyone without the insurer's approval."

"Which of the following statements pertaining to modified whole life and graded premium whole life policies is NOT correct? A) Modified whole life contracts build cash values and have premium-paying periods to age 100. B) The premium for modified whole life increases each year after the first few years of policy issue. C) The premium for graded premium whole life increases each year during the first few years after policy issue. D) Graded premium whole life policies build cash values and have premium-paying periods to age 100."

"The premium for modified whole life increases each year after the first few years of policy issue. Explanation Premiums for modified whole life policies do not increase annually after the first few years. They level off after the premium period."

"Willa purchases a 5-year $50,000 level term policy with an option to renew. Which of the following statements about the policy's renewability is CORRECT? A) The premium for the renewal period will be the same as the initial period, but a onetime service charge will be assessed upon renewal. B) The premium for the renewal period will be lower than the initial period. C) The premium for the renewal period will be the same as the initial period. D) The premium for the renewal period will be higher than the initial period."

"The premium for the renewal period will be higher than the initial period. Explanation Premiums for the renewal period will be higher because of the insured's advanced age and increased risk."

"Helen has just taken out a modified whole life policy. Which of the following statements is CORRECT? A) The face amount will be lower during the next few years and then be increased to a higher, constant level. B) The face amount will be higher during the next few years and then remain constant at a lower level. C) The premium will be higher during the next few years and then remain constant at a lower level. D) The premium will be lower during the next few years and then be increased to a higher, constant level."

"The premium will be lower during the next few years and then be increased to a higher, constant level. Explanation The modified whole life policy is issued with a level premium payable during the first few (usually 5) years that is lower than the normal whole life policy rates. The premium increases and is higher than normal thereafter."

"When the insured dies, who stands first to receive the life policy's death benefit? A) The policyowner B) The primary beneficiary C) The insured's estate D) The insured's creditors"

"The primary beneficiary Explanation A primary beneficiary is the first party designated to receive the proceeds of a life insurance policy when they become payable."

"Assured Insurance Company deals directly with insureds and does not have any agents. Assured is A) a mass marketer B) an independent insurer C) a reciprocal insurer D) a direct writer"

"a direct writer Explanation A direct writer deals directly with policyowners through salaried employees instead of commissioned agents."

"Which of the following statements regarding insurers is CORRECT? A) A stock company that issues both participating and nonparticipating life insurance policies is classified as a full lines company. B) The primary purpose of an insurance company that is organized as a stock insurer is to earn a profit for its stockholders. C) If a life insurance company is owned by its policyowners, it is a stock company. D) Mutual insurance companies sell insurance to insurers."

"The primary purpose of an insurance company that is organized as a stock insurer is to earn a profit for its stockholders. Explanation Stock insurance companies are owned by stockholders, not policyowners. They are organized for the purpose of making a profit for their stockholders."

"Which of the following is an accurate statement for a producer to make regarding underwriting? A) The applicant must provide a list of the sources and give permission to contact them. B) The Medical Information Bureau (MIB) will contact the applicant for additional information. C) The primary source of information used in underwriting will be the application. D) A consumer report must be requested."

"The primary source of information used in underwriting will be the application. Explanation The signed application is the primary source of underwriting information. A consumer report, while another source of information, is not routinely requested, nor is a list of potential sources to contact. The MIB is a clearinghouse for information and does not contact applicants for any information."

"Which of the following statements about accelerated living benefits is NOT correct? A) They are provided at no additional cost to the policyowner. B) The proceeds must be spent on the insured's medical expenses. C) They allow access to the policy's face value. D) They are standard in life insurance policies."

"The proceeds must be spent on the insured's medical expenses. Explanation Accelerated benefit provisions are standard in life insurance policies and are included at no additional cost to the policyowner. They allow access to the policy's face value if the insured suffers from a terminal illness or injury. (The death benefit, less any accelerated payment, is still payable.) The insured can spend the proceeds in any manner."

"When meeting with an applicant for health insurance, an insurance producer notices a pack of cigarettes in the applicant's shirt pocket, even though the applicant says he has been a nonsmoker for 10 years. Which of the following statements best describes the producer's responsibility? A) The producer should provide an agent's report to the insurer explaining what she observed. B) The producer should insist that the applicant change his response to the question on the application. C) The producer should change the answer on the application after the appointment. D) The producer should ignore the fact, since it is the insurer's responsibility to identify this information."

"The producer should provide an agent's report to the insurer explaining what she observed. Explanation A producer's responsibility as a field underwriter is to observe situations that may not be detected by the home office underwriting department and report these findings to the insurer. Asking an applicant to reconsider an answer to a question on the application is allowable, but it is up to the judgment of the producer. She is not obligated to do so. It is illegal for a producer to change a response on a signed application without the applicant's consent."

"Which of the following is NOT taken into account when using the needs approach to determine the proper amount of insurance protection? A) The projected future earnings of the breadwinner and the number of years she expects to work B) The amount of the family's retirement income needs C) The family's preretirement period needs D) The family's dependency period needs"

"The projected future earnings of the breadwinner and the number of years she expects to work Explanation The needs approach for determining how much insurance protection is needed requires an analysis of the family's financial needs, including the dependency, preretirement, and retirement periods, if the breadwinner dies. Future earnings are part of a human life value approach, but not the needs approach."

"Which of the following statements pertaining to variable life insurance is CORRECT? A) The benefits of variable life insurance vary according to the amount of premiums paid. B) With a variable life insurance policy, the insurance company assumes the investment risk. C) In a variable life insurance policy, cash values and the death benefit are not guaranteed. D) Variable life insurance cannot be proposed in a sales situation unless the proposal is preceded or accompanied by a prospectus."

"Variable life insurance cannot be proposed in a sales situation unless the proposal is preceded or accompanied by a prospectus. Explanation Because variable life insurance is considered a security, a prospectus must precede any sale of it."

"A policyowner stops paying premiums on a whole life policy with an accidental death benefit and exchanges the policy for extended term insurance. Which of the following statements pertaining to this situation is NOT correct? A) The policyowner will have continued protection for a limited period of time. B) There will be no accidental death benefit with the new policy. C) The term policy has no cash value. D) The term policy will have a reduced face value."

"The term policy will have a reduced face value. Explanation When a policyowner stops paying premiums on a whole life policy with an accidental death benefit and exchanges the policy for extended term insurance, the policy's cash surrender value is used to purchase an amount of term insurance equal to the original policy's face amount. The term insurance will last as long as the cash value is sufficient to pay premiums. An accidental death benefit would not be included."

"Which of the following statements regarding insurance is NOT true? A) All types of insurance are implemented through a contractual agreement between the insurance owner and the insurer. B) All types of insurance are based on the law of large numbers. C) There are no physical hazards in life and health insurance. D) All types of insurance indemnify the insured against financial loss."

"There are no physical hazards in life and health insurance. Explanation There are many types of physical hazards in life and health insurance, such as diabetes and heart and lung conditions. These can be identified through tests and medical equipment."

"Which of the following statements regarding policy dividends is CORRECT? A) They are not available to insureds after a specified age, such as 60. B) They are the difference between the gross premium charged and the actual experience of the insurer. C) Though they may vary from year to year, they are guaranteed to be paid each year. D) They are issued on nonparticipating policies."

"They are the difference between the gross premium charged and the actual experience of the insurer. Explanation Policy dividends issued on participating policies (policies in which the insureds may participate in the operating and investment results of the insurer) are a reflection of favorable operations, investment, or mortality results. They are never guaranteed. In fact, most states require life insurance proposals that contain dividend illustrations to state that future dividends are not guaranteed."

"Which of the following statements pertaining to inspection reports on life insurance applicants is NOT correct? A) They usually are obtained from national investigative agencies or firms. B) They generally are requested on applicants who apply for large amounts of life insurance. C) They provide information obtained principally from law enforcement officials. D) They help to determine the insurability of applicants."

"They provide information obtained principally from law enforcement officials. Explanation To help determine the insurability of applicants, insurance companies normally receive inspection reports on life insurance applicants from national investigative agencies."

"Which of the following statements regarding a spousal rider to a life insurance policy is NOT correct? A) This rider usually consists of level term life insurance. B) There is a premium for this coverage in addition to the base policy premium. C) This is a form of other insureds rider. D) This rider usually provides coverage that lasts as long as the coverage that is provided through the base policy."

"This rider usually provides coverage that lasts as long as the coverage that is provided through the base policy. Explanation Like any additional insured rider, the spousal rider usually consists of level term life insurance coverage that terminates at a specified date (e.g., 10 years after policy issue) or age (e.g., the spouse's 65th birthday)."

"How can the cash value accumulation in a straight whole life insurance policy be accessed while the insured is living and while keeping the coverage in force? A) Through a cash value surrender B) Through a policy loan C) Through a dividend payment D) Through a partial cash value withdrawal"

"Through a policy loan Explanation The cash values of a straight whole life policy can be accessed through a policy loan or through a complete withdrawal of the entire cash value. A policy loan allows the policy to continue in force (though any amount not paid back with interest at the time of death will be subtracted from the death benefit). A complete withdrawal constitutes a surrender of the policy and coverage ends."

"Roland is 45 years old and married. He has a 19-year-old son who is in his first year of studies at a local university. He also has an 8-year-old daughter. A decreasing term policy could be recommended for Roland for which of the following reasons? A) To provide a future college education for his daughter B) To provide an emergency source for loans C) To supplement Roland's retirement income D) To guarantee that his son's college tuition will be covered"

"To guarantee that his son's college tuition will be covered Explanation Decreasing term insurance is designed to address needs that decrease from year to year. A decreasing term policy could be written for an amount of insurance to equal the remaining cost of the son's tuition. It would not be used as a method to create funds for the daughter's education, nor does it create any cash value that could be borrowed."

"Which of the following statements best defines why an applicant would want to backdate an insurance application? A) To take advantage of higher interest rates in place at the earlier date B) To have the policy's premium based on the insured's age at the earlier date C) To create a larger cash value upon policy issue D) To move the policy issue date ahead of a disqualifying event, such as a diagnosis of a terminal disease"

"To have the policy's premium based on the insured's age at the earlier date Explanation The basic purpose for backdating a life insurance application is to make the policy's effective date (and, accordingly, the policy's premiums) based on the applicant's age at the earlier date. If the insured can decrease the insurance age by 1 year, he will pay a lower premium."

"What is the insurer's consideration or exchange of value regarding an insurance policy? A) To sign endorsements or modifications to the policy. B) To make representations on the application. C) To pay death benefits to the beneficiary when the insured dies. D) To pay premiums in whole or within the grace period."

"To pay death benefits to the beneficiary when the insured dies. Explanation The insurer's consideration is to pay the face amount of the contract to the beneficiary upon the death of the insured."

"For which of the following reasons would a domestic insurer set up separate accounts? A) To simplify its bookkeeping system and allow for variables B) To provide for annuities to be payable in fixed or variable amounts or for variable life insurance C) To pay claims to individual claimants for different classes of insurance D) To justify the volatility of investment returns"

"To provide for annuities to be payable in fixed or variable amounts or for variable life insurance Explanation The varying market values in a separate account provide income for variable life insurance products."

"Which of the following statements about the reinstatement of individual life insurance policies is NOT correct? A) To reinstate a policy, the insured is never required to provide evidence of insurability. B) The insured must make back payment of premiums and pay any other indebtedness. C) Policies can be reinstated within 3 years from the date of premium default. D) Policies cannot be reinstated if they were surrendered for their cash surrender value."

"To reinstate a policy, the insured is never required to provide evidence of insurability. Explanation All individual life insurance policies must include a reinstatement provision. The provision states that a policy can be reinstated at any time within 3 years from the date of premium default, provided that the insured proves insurability, if required by the insurance company; back payment of premiums is paid; and any other indebtedness to the insurer is paid or reinstated. Policies cannot be reinstated, however, if they have been surrendered for their cash surrender value, their cash surrender value has been exhausted, or the paid-up term insurance has expired."

"Which of the following statements regarding universal life is INCORRECT? A) UL premiums are fixed, however the policyowner may increase or decrease the death benefit. B) Withdrawals and policy loans are taken from the cash value account. C) UL premiums are flexible and the policyowner may increase or decrease the death benefit. D) Death benefits are flexible, subject to insurability requirements."

"UL premiums are fixed, however the policyowner may increase or decrease the death benefit. Explanation UL premiums are flexible, not fixed. The policy owner may increase or decrease the death benefit based on insurability requirements. Both withdrawals and loans are permitted and are taken from the cash value account."

"Which of the following statements regarding nonqualified deferred compensation plans is NOT correct? A) Most deferred compensation plans are unfunded. B) A deferred compensation plan is an unsecured promise made by an employer to pay an employee part of the employee's compensation in the future. C) Under a nonqualified deferred compensation plan, an employee can rely on guaranteed future benefits. D) The employer receives no tax deduction for the amount of the compensation deferred until the compensation is actually distributed."

"Under a nonqualified deferred compensation plan, an employee can rely on guaranteed future benefits. Explanation Because most nonqualified deferred compensation plans are unfunded, an employee cannot rely on guaranteed future benefits. Typically, the employer finances its obligations on a pay-as-you-go basis."

"Which of the following descriptions of life insurance policy settlement options is CORRECT? A) Under an installment refund option, if the primary beneficiary dies, payments of the same amount continue to the secondary beneficiary until all installments to both beneficiaries equal the original amount of proceeds. B) Glenn chooses a life-income-only option, and Jeri chooses a life-income-with-cash-refund option. Jeri's income is based on the higher rate per $1,000 of proceeds. C) Under a life-income-only option, if a primary beneficiary dies after receiving income payments for only 3 months, the balance of the proceeds will be paid in a lump sum to the secondary beneficiary. D) Today, most life insurance proceeds are not paid out as lump sums."

"Under an installment refund option, if the primary beneficiary dies, payments of the same amount continue to the secondary beneficiary until all installments to both beneficiaries equal the original amount of proceeds. Explanation Under an installment refund option, if the primary beneficiary dies, installments of the same amount continue to the secondary beneficiary until all installments paid to both beneficiaries equal the original amount of proceeds. Under a life-income-only option, installments are paid to the primary beneficiary as long as she lives, with no return of principal guaranteed. Therefore, this option provides the largest installments per $1,000 of proceeds. The lump-sum option is still the most commonly used settlement option."

"Which of the following statements regarding how to fix a mistake in an insurance application is NOT correct? A) If the insurer discovers a mistake, it usually returns the application to the agent who, with the applicant, corrects the application. B) Under no circumstances may an agent correct information on an insurance application once it has been completed by the applicant. C) If the insurer discovers an incorrect application before the policy is issued, the insurer may cancel the contract. D) If the agent fixes the mistake in the application, the applicant must initial the correction."

"Under no circumstances may an agent correct information on an insurance application once it has been completed by the applicant. Explanation In certain circumstances, an agent may correct an insurance application after it has been completed. If an applicant makes a mistake in the information he has given an agent, the applicant can have the agent correct the information on the application, but the applicant must initial the correction. An insurer may cancel a policy if it believes that a mistake on the application was an intentional deception about a fact material to the issuance of the policy."

"Which of the following statements about life insurance policy settlement options is NOT correct? A) Under the fixed-period option, the payment of excess interest will lengthen the payment period. B) Debra and Renee are each receiving monthly income from their deceased spouses' identical life insurance policies under the fixed-period option. Debra's payments are to be made for 15 years and Renee's for 20 years. Debra receives the larger monthly payments. C) By using the interest-only option, 2 or more settlement options can be combined for added flexibility. D) Payments under the interest-only option may be made at a rate higher than the guaranteed minimum."

"Under the fixed-period option, the payment of excess interest will lengthen the payment period. Explanation Under the fixed-period option, the payment of excess interest will be used to make each payment larger, not to extend the payment period."

"Which of the following terms indicates that a life insurance contract contains the enforceable promises of only one party? A) Aleatory B) Conditional C) Unilateral D) Adhesion"

"Unilateral Explanation Insurance contracts are unilateral in that only one party—the insurer—makes any kind of enforceable promise. Insurers promise to pay benefits when a certain event occurs, such as death or disability. The applicant makes no such promise—he does not even promise to pay premiums, and the insurer cannot require that they be paid. In contrast, with a bilateral contract, each contracting party makes enforceable promises."

"While a policy loan is generally an available option with any form of permanent life insurance, a partial withdrawal of cash value from the policy is available only with which of the following types of life insurance? A) Modified premium whole life B) Variable life C) Universal life D) Straight whole life"

"Universal life Explanation While policy loans are available with any type of permanent life insurance policy, partial cash value withdrawals require the policy flexibility that only universal life insurance offers."

"Patrick owns an adjustable life policy. Which of the following statements is CORRECT? A) Upon showing evidence of insurability, Patrick can increase the face amount of his policy. B) The company has a right to raise or lower the premium on the basis of its investment earnings. C) Any adjustments made on the policy will have retroactive effects on the policy's provisions. D) Decreasing the premium shortens the premium-paying period."

"Upon showing evidence of insurability, Patrick can increase the face amount of his policy. Explanation Adjustable life is a whole life policy with adjustable features. Premiums can be increased or decreased at the policyowner's request, as can the face amount of the policy (usually subject to evidence of insurability). None of the changes made in an adjustable life policy have any retroactive effect on any of the provisions; adjustments apply only to the future. Increasing the premiums could lengthen the coverage period or shorten the premium-paying period. Decreasing the premiums reduces cash values, shortens the protection period, or lengthens the premium-paying period."

"Wendy has a $100,000 whole life participating policy. She recently married and is planning to have a family. She wants to increase her life insurance coverage but at minimal additional cost. Which of the following dividend options would be most suitable for her needs? A) Allow dividends to accumulate at interest B) Apply dividends against premium payments C) Use dividends to buy 1-year term insurance D) Use dividends to buy paid-up additions"

"Use dividends to buy paid-up additions Explanation By using dividends to buy paid-up additions, Wendy can increase her life insurance coverage without significantly adding to the cost. The dividends buy paid-up additions of life insurance, of the same kind as the original or base policy. The premium rate is based on her attained age at the time the paid-up addition is purchased. Although she can also use dividends to buy 1-year term insurance, her need for increased coverage in the coming years will remain unsatisfied. Applying dividends against premium payments will lower the cost of her insurance, but it will not increase her coverage as desired. And while allowing dividends to accumulate at interest gives her a source of funds for withdrawal at any time, it too fails to meet her need for increased coverage."

"Arnold buys a $25,000 participating whole life policy. He has a definite need for more life insurance but believes he cannot afford it. Which of the following dividend options would help to solve this problem automatically? A) Applying dividends against premium payments B) Using dividends to buy paid-up additions C) Leaving dividends to accumulate at interest D) Taking dividends in cash"

"Using dividends to buy paid-up additions Explanation Under a participating whole life policy, if an individual needs more life insurance, he can use dividends to buy paid-up additions."

"With respect to the regulation of variable contracts and those who sell them, which of the following statements is most accurate? A) Variable contracts and their distribution are regulated exclusively by the Department of Insurance because state regulation supersedes federal regulation. B) Variable contracts and their distribution are regulated separately (often with conflicting regulatory demands) by the Department of Insurance, the SEC, and FINRA. C) Variable contracts and their distribution are regulated separately but in a fairly coordinated fashion between the Department of Insurance, the SEC, and FINRA D) Variable contracts and their distribution are regulated exclusively by the Securities Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) because federal regulation supersedes state regulation."

"Variable contracts and their distribution are regulated separately but in a fairly coordinated fashion between the Department of Insurance, the SEC, and FINRA Explanation Insurers that set up separate accounts to manage variable contracts must be licensed by the Commissioner and registered with FINRA. The Department of Insurance, the SEC, and FINRA regulate the sale of variable contracts separately, but in a fairly coordinated manner."

"Which of the following types of life insurance requires that the agent be licensed by FINRA before selling the policy? A) Adjustable life B) Variable life C) Term life D) Universal life"

"Variable life Explanation To sell variable life insurance, an individual must hold a life insurance producer's license and a FINRA registered representative's license."

"Which of the following types of life insurance riders is NOT based on term life insurance? A) Spousal B) Waiver of premium C) Cost-of-living D) Return-of-premium"

"Waiver of premium Explanation The waiver of premium rider is based more on the actuarial principles of disability insurance than life insurance. All the other riders listed are based on some form of term life insurance."

"Premium payment amounts can be all of the following EXCEPT A) static B) flexible C) graded D) level"

"static Explanation Premium payment amounts can be level, graded, flexible, or single payment."

"With regard to substandard life insurance risks, which of the following statements is CORRECT? A) An applicant can be deemed a substandard risk based on physical condition only; no other criteria may be considered. B) To provide coverage to substandard risks, insurers are allowed to charge an extra premium; however, they cannot alter benefit periods or waiting periods. C) Because of stringent underwriting requirements, most life insurance applicants are classified as substandard risks. D) When the applicant represents a substandard risk, the policy may be modified to reduce the benefits provided. "

"When the applicant represents a substandard risk, the policy may be modified to reduce the benefits provided. Explanation To take into account the above-average exposure involved with a substandard risk, insurers may charge a higher premium or make an adjustment in regard to the benefits involved. An individual can be deemed a substandard risk based on physical condition, occupation, or moral hazards (risky habits). For most insurers, substandard or declined risks represent a small percentage of applicants."

"When is a conditional receipt normally given to an applicant? A) At the initial meeting B) When the initial premium is paid C) When coverage first becomes available D) At policy delivery"

"When the initial premium is paid Explanation A conditional receipt is normally given when the applicant pays the initial premium at the time the policy application is signed. A conditional receipt covers the applicant immediately from the date of application as long as he passes the insurer's underwriting requirements. If a medical examination or blood profile is required, coverage begins after the applicant passes the medical examination."

"Herb and Felicia have been married for several years and are interested in increasing their life insurance protection as their family grows. Herb is a lawyer with a midsized firm. Felicia is a freelance writer of children's books. In planning for the future, when might they expect that their family will have its greatest need for income should one of them die? A) If Herb is diagnosed with a terminal illness B) When the children move away from the home and are self-supporting C) While the children are in elementary school D) If Felicia survives Herb and lives to an old age"

"While the children are in elementary school Explanation The greatest need the survivor might have is when the children are young. Cash needs for paying the mortgage and bills, as well as saving money for college educations may be met through purchasing adequate amounts of life insurance."

"Which of the following policies endows at age 100? A) Whole life and limited-pay life B) Level term and whole life C) Any endowment policy D) Endowment and decreasing term"

"Whole life and limited-pay life Explanation A policy endows when it reaches the point when the cash value equals the face amount. Endowment policies can endow at different ages. Whole life and limited-pay life policies endow at age 100. Term policies do not endow."

"Diane would like to purchase a life insurance policy in which the face amount remains level and the cash value grows each year until she dies (or reaches age 100). Which type of policy should she purchase? A) Whole life policy B) Limited-pay life policy C) Term policy D) Endowment policy"

"Whole life policy Explanation The cash values of a whole life policy grow steadily, and if Diane lives and premiums are paid to age 100, she will be entitled to the face amount."

"If consumer information reports are obtained under false pretenses, the maximum penalty is A) a $7,500 fine, imprisonment for 5 years, or both B) a $7,500 fine, imprisonment for 1 year, or both C) a $5,000 fine, imprisonment for 1 year, or both D) a $5,000 fine, imprisonment for 5 years, or both "

"a $5,000 fine, imprisonment for 1 year, or both Explanation The maximum penalty for obtaining consumer information reports under false pretenses is a maximum fine of $5,000, 1 year of imprisonment, or both."

"An attending physician's statement (APS) requested by the underwriting department will normally contain all of the following applicant information EXCEPT A) a Medical Information Bureau report B) the applicant's medical history and treatment as known to the physician C) copies of the applicant's medical records with the physician D) the applicant's current medical condition as known to the physician"

"a Medical Information Bureau report Explanation An attending physician's statement is often requested from any physician identified in the application who has treated the applicant. The request will ask for the applicant's current medical condition and medical history with the physician, as well as copies of the applicant's medical records. A Medical Information Bureau (MIB) report would contain insurer underwriting information from any insurer to whom the applicant has previously submitted an application. Physicians would not have access to this information."

"A peril is A) a moral hazard B) a cause of loss C) a type of risk D) an exposure"

"a cause of loss Explanation A peril is a cause of loss, such as illness, injury, or premature death. Insurance is purchased to transfer the financial loss of a covered peril from an individual or business to an insurance company."

"With regard to insurable risks, which of the following statements is NOT correct? A) a type of risk B) a cause of loss C) a moral hazard D) an exposure"

"a cause of loss Explanation A peril is a cause of loss, such as illness, injury, or premature death. Insurance is purchased to transfer the financial loss of a covered peril from an individual or business to an insurance company."

"The license an insurer usually needs to sell insurance in a state is called A) a certificate of authority B) a certificate of insurance C) a certificate of approval D) a certificate of qualifications"

"a certificate of authority Explanation Most states require an insurer to have a certificate of authority to underwrite and sell insurance in that state."

"When Lisa applied for a life insurance policy, the agent issued a receipt stating that the coverage is effective as of the date of application, if the applicant is found to be insurable under the company's general underwriting rules. This type of receipt is known as A) a conditional receipt B) an inspection receipt C) an acceptance receipt D) a binding receipt"

"a conditional receipt Explanation Lisa received a conditional receipt from the agent. This type of receipt states that the coverage is effective as of the date of application, if the applicant is found to be insurable under the company's general underwriting rules. Some conditional receipts make coverage effective on the date of application or on the date of a required medical examination, whichever is later."

"A life insurance company is incorporated under the laws of the state of Michigan and maintains its home office in Detroit. The company would be considered A) a domestic company B) a local company C) a foreign company D) a preferred company"

"a domestic company Explanation A domestic insurer is one that is admitted to, formed and incorporated under the laws of the state in which insurance is written"

"A rider on a whole life policy that adds temporary coverage for a spouse and children is A) a family income rider B) a family maintenance rider C) a multiple protection policy D) a family term rider"

"a family term rider Explanation The family term rider is attached to the base policy covering the insured and insures family members other than the insured."

"An individual who occupies a position of trust when handling the financial affairs of another is A) a superior B) a trustee C) a consultant D) a fiduciary"

"a fiduciary Explanation A fiduciary is an individual occupying a position of trust and confidence when handling or supervising the funds or the affairs of another. A trustee is a person appointed or required by law to execute a trust to the benefit or use of another."

"An insurance producer in a position of financial trust to both the client and the insurer is best described as A) a solicitor B) a broker C) a trustee D) a fiduciary"

"a fiduciary Explanation An insurance producer acts in a fiduciary capacity when holding premiums or money collected from a policyholder that is to be paid to an insurance company. Producers are prohibited from misappropriating or converting such funds to their own use or illegally withholding them. Producers who convert or misappropriate these funds are guilty of theft and can be punished as provided by law."

"A nonprofit organization with a representative form of government and an elected officer that sells life insurance only to its members would be considered A) a home service insurer B) a service insurer C) a fraternal benefit society D) a risk retention group"

"a fraternal benefit society Explanation To be characterized as a fraternal benefit society, the organization must have a lodge system that may include charitable work. Insurance programs are operated under a special section of the state code, and fraternals receive some income tax advantages."

"An individual who recruits agents to sell insurance within a certain geographical area is A) a broker B) a general agent C) a special agent D) a career agent"

"a general agent Explanation A general agent is responsible for hiring, training, and supervising agents to sell insurance in a certain location."

"A false statement of fact is known as A) an adhesion B) a concealment C) a misrepresentation D) aleatory"

"a misrepresentation Explanation False statements of facts, called misrepresentations, may provide grounds for voiding the policy if they are material. This is true even if the misrepresentation was unintentional."

"Filing a fraudulent health insurance claim is an example of A) a morale hazard B) a physical hazard C) a peril D) a moral hazard"

"a moral hazard Explanation A moral hazard is a subjective characteristic of the insured that increases the chance of loss. Careless actions or behaviors are example of morale hazards. A peril is the specific event causing a loss. A hazard is any factor that gives rise to a peril."

"All of the following are basic factors used to compute life insurance premiums EXCEPT A) an interest factor that offsets part of the mortality and expense charges B) an expense factor that covers the cost of issuing and maintaining the policy C) a mortality factor that covers the risk of dying prematurely D) a morbidity factor that covers the risk of becoming disabled and triggering the waiver of premium provision"

"a morbidity factor that covers the risk of becoming disabled and triggering the waiver of premium provision Explanation Morbidity (the risk of suffering a serious illness or injury) is a basic factor in the calculation of health insurance premiums, but it is not a factor in the basic calculation of life insurance premiums."

"An insurance company that is owned by its policyowners, who share the insurer's divisible surplus in the form of participating policy dividends, is known as A) a stock insurance company B) a reciprocal insurance company C) a reinsurance company D) a mutual insurance company"

"a mutual insurance company Explanation A mutual insurance company is an incorporated entity owned by its policyowners. Many of these companies sell participating policies that share the divisible surplus of the insurer with the policyowners in the form of policy dividends."

"An insurance company that is owned by its policyholders, who share the insurer's divisible surplus in the form of participating policy dividends, is known as A) a reinsurance company B) a stock insurance company C) a reciprocal insurance company D) a mutual insurance company"

"a mutual insurance company Explanation A mutual insurer is an incorporated insurer owned by its policyowners, who hold policies as their evidence of ownership. It is common for mutual companies to sell participating policies, in which the policyowners share the insurer's divisible surplus in the form of policy dividends."

"An insurer that issues participating policies is A) a fraternal insurer B) a stock insurer C) a policy insurer D) a mutual insurer"

"a mutual insurer Explanation Mutual insurers have participating policies because the policyowners participate in the operating results of the company."

"An individual may purchase a life insurance policy on all of the following persons EXCEPT A) a dependent B) a business partner C) a spouse D) a neighbor"

"a neighbor Explanation An individual may purchase a life or health insurance policy on a party with whom she has an insurable interest. A spouse, a business partner, and a dependent are people in whom the policyowner would have an insurable interest. In other words, the policyowner has a reasonable expectation of benefiting from the continuance of these people's lives or will suffer a loss from their deaths."

"A deferred compensation plan is A) a nonqualified plan funded by the employee B) a qualified plan funded by the employer C) a nonqualified plan funded by the employer D) a qualified plan funded by the employee"

"a nonqualified plan funded by the employer Explanation Deferred compensation plans are agreements between employers and employees. Funds are set aside by an employer for when an employee retires. If the plan is funded with life insurance, the company is the owner, premium payor, and beneficiary of the plan and the employee is the insured. These types of plans are nonqualified because they do not meet participation, nondiscrimination, and other requirements of qualified plans."

"If a medical report is required on an applicant, it is completed by A) a home office underwriter B) the home office medical director C) a paramedic or examining physician D) the agent"

"a paramedic or examining physician Explanation If a medical report is required on an applicant, it must be completed by a paramedic or examining physician called a medical examiner. Medical reports are required when the application for coverage exceeds a certain face amount."

"Dying too soon is an example of A) a moral hazard B) a speculative risk C) a physical hazard D) a peril"

"a peril Explanation A peril is the direct cause of a loss. For example, a married woman who is expecting her first child may purchase insurance to protect her spouse and child in the event that she suffers an accident or early death."

"Each application for life insurance requires the signature of all of the following EXCEPT A) the policyowner, if different from the insured B) the agent C) the beneficiary D) the proposed insured"

"the beneficiary Explanation Each application for life insurance requires the signature of the insured, the policyowner (if different from the insured), and the agent."

"A life insurance policy is all of the following EXCEPT A) a personal contract B) a unilateral contract C) an aleatory contract D) a conditional contract"

"a personal contract Explanation Unlike a property-casualty insurance policy, a life insurance policy is not a personal contract and the owner is not fixed. Instead, a life insurance policy is a valued contract and the owner may be changed by assignment."

"A group of individuals who agree to share each other's losses is known as A) a mixed group B) a reinsurer C) a reciprocal group D) a service organization"

"a reciprocal group Explanation A reciprocal insurer or reciprocal exchange is a group of individuals (subscribers) who agree to indemnify each other for their losses. The exchange of these agreements is made through an attorney-in-fact common to all subscribers."

"All of the following are required provisions in life insurance policies EXCEPT A) a 1-month grace period for payment of premiums after the first payment has been made B) a replacement provision C) a reinstatement provision D) a misstatement of age provision"

"a replacement provision Explanation Replacement is a tran"

"Because increasing term insurance can be added to permanent policies and, when added, is less expensive than a stand-alone policy, it is almost always sold as A) an option B) a rider C) a whole life policy D) an endorsement"

"a rider Explanation Increasing term insurance is used primarily to provide a benefit that increases over time. As such, it is usually sold as a rider"

"A corporation or other limited liability association that assumes and spreads the liability exposure for any of its group members is called A) a reciprocal insurer B) a mutual insurer C) a risk retention group D) a stock insurer"

"a risk retention group Explanation A risk retention group is a corporation or other limited liability association that assumes and spreads the liability exposure for any of its group members. All members of a risk retention group have an ownership interest in the group and must be in businesses that expose them to similar liabilities."

"An insured that meets the average health and life expectancy anticipated by the insurer for a person of that age and gender would be classified as A) a standard risk B) an insurable risk C) an accepted risk D) a preferred risk"

"a standard risk Explanation Standard risks meet the average health and life expectancy anticipated by the insurer. Preferred risks represent excellent health and below-average risk of loss to the insurer. Standard, preferred, and substandard would all be accepted and insurable risks."

"Another name for an entity plan is A) a stock redemption plan B) a cross-purchase plan C) a deferred compensation plan D) a business continuity plan"

"a stock redemption plan Explanation Entity plans are a type of buy-sell agreement. When a business is a corporation, entity plans are also called stock redemption plans because the corporation is actually redeeming the deceased owner's stock."

"Murt Enterprises wants to build 3 new casinos in Illinois. It is possible the necessary insurance coverages will be placed through A) an admitted carrier B) a federal insurer C) a domestic insurer D) a surplus lines company"

"a surplus lines company Explanation Surplus lines companies write insurance that standard insurance companies have declined because a risk has atypical underwriting conditions, needs more coverage than an admitted insurer will assume, or requires forms or rates that are not filed in that state."

"Specialized risks that admitted insurers are not able to cover may often be obtained through A) a residual insurer B) a competitor C) a surplus lines insurer D) the government"

"a surplus lines insurer Explanation When a risk is either too large or too specialized for an authorized insurer to underwrite, coverage can be obtained from a surplus lines insurer who is nonadmitted or does not have a certificate of authority from the state."

"An individual life insurance policy must include all of the following EXCEPT A) a table showing the annual loan values of the policy for at least 30 years B) an entire contract provision C) a 1-month grace period D) an incontestability provision"

"a table showing the annual loan values of the policy for at least 30 years Explanation Individual life insurance policies must include a table that shows, for at least 20 years, the annual loan values and options available under the policies upon default in premium payments. They must also contain a 1-month grace period, an incontestability provision, and an entire contract provision."

"A life insurance policy in which the face amount remains level and the cash value grows to an amount equal to the face amount when the insured reaches age 100 is A) a whole life policy B) a level term policy C) an endowment policy D) a decreasing term policy"

"a whole life policy Explanation The cash values of a whole life policy grow steadily and, if the insured lives and premiums are paid to age 100, will equal the face amount."

"An individual life insurance policy must contain all of the following provisions EXCEPT A) accelerated benefit B) incontestability C) entire contract D) free-look"

"accelerated benefit Explanation All individual life insurance policies must contain an entire contract provision stating that the policy and the application constitute the entire insurance contract. Policies also must provide a 10-day free-look period during which the owner may return the policy and have the premiums refunded. An incontestability provision is mandatory and states that a policy is incontestable after being in force for 2 years, except for nonpayment of premiums. An accelerated benefit provision is an optional provision that may be included in a life insurance policy."

"All of the following are elements of a contract EXCEPT A) legal purpose B) agreement C) acknowledgment D) competent parties"

"acknowledgment Explanation The elements of a contract are agreement, consideration, competent parties, and legal purpose."

"Express authority requires an agent to A) collect premiums on a regular basis B) act in accordance with the agency agreement C) renew her license at the appropriate time D) submit all applications promptly"

"act in accordance with the agency agreement Explanation The agency agreement is the agent's contract with the insurance company. It defines the conditions under which the agent agrees to represent the company and governs the agent's activities on behalf of the company."

"In order to be insured, a group must be randomly selected to avoid A) an increase in premium B) adverse selection C) the chance of loss D) catastrophic loss"

"adverse selection Explanation Adverse selection exists when an insurer has more bad risks than good, resulting in a group of policyowners whose mortality or morbidity experience exceeds the normal or expected rates."

"The tendency of higher-risk individuals to get and keep insurance is known as A) substandard selection B) adverse selection C) misrepresentation D) excess risk"

"adverse selection Explanation The inclination of higher-risk individuals to be "first in line" to get and keep insurance is called adverse selection. One of the purposes of underwriting is to identify and rate up or decline higher-risk individuals."

"The premium for transferring a risk should be A) nominal B) standard C) affordable D) discounted"

"affordable Explanation The premium for transferring a risk should be affordable for the average customer."

"In an insurance transaction, the insurer is represented by the A) broker B) state insurance department C) public adjuster D) agent"

"agent Explanation In an insurance transaction, the agent represents the insurer. The actions of the agent bind the company to an insurance contract."

"In the direct-selling marketing system, insurance can be sold to the public through all of the following methods EXCEPT A) vending machines B) telephone solicitations C) agents D) direct mail"

"agents Explanation Direct-selling systems are the exception to the general rule that insurance is sold mainly through agents. Under these systems, the insurer deals directly with the insured, without agents, through employees of the insurer (e.g., specialized or limited lines, such as airport vending for accidental death and dismemberment protection). Direct selling may be accomplished using mail, telephone, or other means without an agent."

"To have an individual life insurance policy reinstated, a person must do all of the following EXCEPT A) make back payments of premiums B) agree to a new policy without another reinstatement provision C) provide satisfactory evidence of insurability, if required D) pay any other indebtedness owed to the insurer"

"agree to a new policy without another reinstatement provision Explanation All individual life insurance policies must include a reinstatement provision stating that if the policyowner defaults in premium payments, the value of the policy can be applied to purchase other insurance. If the insurance is in force and the original policy has not been canceled or surrendered to the company, the policy can be reinstated within 3 years from the default. Satisfactory evidence of insurability must be provided, if needed, and back payment of premiums and payment or reinstatement of any other indebtedness to the company must be made."

"Tina's grandparents purchased a $250,000 universal life insurance with the intent to permanently transfer ownership to her when she turned 21. What is that transfer of rights known as? A) an absolute assignment B) a collateral assignment C) absolute change of beneficiary D) ownership rights"

"an absolute assignment Explanation The transfer of ownership rights in whole to another individual is known as an absolute or permanent assignment."

"An assignment in which the assignee receives full control over the policy is called A) an absolute assignment B) a guaranteed assignment C) a revocable assignment D) a collateral assignment"

"an absolute assignment Explanation Under an absolute assignment, the transfer of rights and benefits is complete and irrevocable. A collateral assignment is one in which the policy is assigned to a creditor as security for a debt until the debt is satisfied."

"When applicable, all of the following forms require an applicant's signature EXCEPT A) an agent's report B) the application C) the authorization form D) an aviation questionnaire"

"an agent's report Explanation An applicant's signature is required on the application itself, an aviation questionnaire, and the authorization form, as these are all forms requiring detailed information from the insured. An agent's report is not given to the applicant and does not require her signature."

"A contract in which one party may receive considerably more in value than the other party is A) an aleatory contract B) a unilateral contract C) an executory contract D) a contract of indemnity"

"an aleatory contract Explanation Insurance contracts are considered to be aleatory because either party may receive considerably more in value than the other. The insured may pay premiums for years without a claim. Alternately, the insured may pay premiums for a short period of time before a loss, and then the insurance company must pay the claim, which can be much greater than the amount of premium received."

"An executive bonus plan is an employee benefit arrangement in which A) an employer pays the premiums on a permanent life insurance policy that is owned by the employee B) an employer contributes to a variable annuity C) an employer contributes to a 401(k) plan D) an employer contributes to a deferred compensation plan"

"an employer pays the premiums on a permanent life insurance policy that is owned by the employee Explanation An executive bonus plan is an employee benefit arrangement in which an employer pays a bonus to a particular employee in the form of paying premiums on a life insurance policy covering the employee's life. The employee, not the employer, is the policyowner."

"Stella sends a written request to her insurer for a change to be made on her policy. What is that change called? A) an assignment B) a contract C) an endorsement D) an application"

"an endorsement Explanation A change to a policy is called an endorsement or modification. The change must be requested by the insured in writing and accepted by the insurer."

"A provision in a policy that expressly cites a risk that is NOT covered is known as A) an exclusion B) an eliminated loss C) an omission D) a reduction"

"an exclusion Explanation An exclusion is a policy provision that specifically restricts coverage from certain risks or otherwise limits the scope of coverage."

"An agent that represents only 1 insurance company is known as A) an exclusive or captive agent B) a company agent C) a general agent D) a direct agent"

"an exclusive or captive agent Explanation Insurance agents who represent just 1 insurance company are known as exclusive or captive agents. They are generally compensated by commission. These types of agents represent the insurer (the insurance company)."

"A commercial insurer can take all of the following forms EXCEPT A) a mutual insurance company B) an individual benefit society C) a stock insurance company D) a fraternal benefit society"

"an individual benefit society Explanation A commercial insurer is classified by its form of ownership and can be a stock insurance company, mutual insurance company, or fraternal benefit society."

"All of the following are required provisions of group life insurance policies EXCEPT A) an individual policy contract B) a grace period C) an incontestability provision D) a misstatement of age provision"

"an individual policy contract Explanation A grace period, a misstatement of age provision, and an incontestability provision are all required provisions, as well as provisions for the entire contract, evidence of individual insurability, individual certificates (rather than individual policies), and assignment."

"An investigative consumer report is also called A) a credit report B) a binding report C) a privacy report D) an inspection report"

"an inspection report Explanation An investigative consumer report, also known as an inspection report, is a general report on an applicant's finances, character, hobbies, work, health, and other habits. The information is usually obtained through interviews with friends and associates."

"Unlike corporate dividends, insurance policy dividends A) are the same as marketable securities B) are not considered taxable income C) are reported on an insured's income tax filing D) are guaranteed to be declared and payable every year"

"are not considered taxable income Explanation Policy dividends are not taxable income because they are considered a partial return of premiums paid."

"If the insured and the beneficiary of the insured's life insurance policy both die simultaneously, the policy proceeds will be distributed A) to the beneficiary's estate B) as if the insured had survived the beneficiary C) to the insured's next of kin D) according to the beneficiary's will"

"as if the insured had survived the beneficiary Explanation If the insured and the beneficiary designated in a life insurance policy both die and there is insufficient evidence that they have died otherwise than simultaneously, the policy proceeds will be distributed as if the insured had survived the beneficiary, unless otherwise specified in the policy."

"All of the following may be done to determine insurability in regard to AIDS EXCEPT A) conducting a blood test for AIDS with the applicant's consent B) asking questions regarding the applicant's sexual orientation C) asking questions regarding whether the applicant has or has had AIDS D) sharing an AIDS blood test result with persons designated by the applicant "

"asking questions regarding the applicant's sexual orientation Explanation Certain questions, such as those regarding sexual orientation, may not be asked as part of the underwriting process."

"All of the following are dividend options EXCEPT A) assigning dividends to pay off a mortgage B) accumulate at interest C) reduced premiums D) paid-up additions"

"assigning dividends to pay off a mortgage Explanation There are 5 common dividend options: taking dividends in cash, applying dividends against premium payments, leaving dividends with the company to accumulate at interest, buying paid-up additions, and buying 1-year term protection."

"While Debby was out of the country on vacation, she forgot to pay her life insurance premium, missed the grace period and wants to reinstate her policy. Which of the following is NOT a condition of reinstatement? A) satisfactory evidence of insurability B) payment of all past due premiums, plus interest C) application for reinstatement (within 3 years of lapse) D) assignment of a new beneficiary"

"assignment of a new beneficiary Explanation Provided that Debby has not surrendered the policy for cash, she must submit a new application, pay all past due amounts plus premiums and take a new medical exam to provide evidence of insurability."

"With a life insurance contract, an insurable interest must exist A) at the inception of the contract B) when the proceeds are paid out C) as long as the insured lives D) at the insured's death"

"at the inception of the contract Explanation With life insurance, an insurable interest is only required upon policy application and inception. It does not have to continue through the duration of the contract, nor does it have to exist at the insured's death for the policy's proceeds to be claimed. This is in contrast to property and casualty insurance, which requires that an insurable interest exist at the time of the claim."

"Insurable interest must exist between the policyowner and the insured A) when the beneficiary collects the death benefit B) at the time the contract is entered into C) throughout the life of the contract D) when the policyowner dies"

"at the time the contract is entered into Explanation Any legally competent individual may buy an insurance contract on his life for the benefit of any person. However, buying an insurance contract on the life of someone else is prohibited unless the benefits are payable either to that individual, his personal representatives, or a person having a personal interest in the insured. That interest must exist at the time the contract is entered into. The interest does not have to exist at the time the beneficiary collects the benefit."

"A contract based on the principle of indemnity A) does not attempt to value the insured's actual financial loss B) attempts to return the insured to his original financial position C) allows the insured to sue the insurer if the full value of the contract is not paid when a claim occurs D) pays a stated sum, regardless of the actual loss incurred"

"attempts to return the insured to his original financial position Explanation An indemnity contract pays an amount equal to the loss—it attempts to return the insured to his original financial position. In contrast, a valued contract pays a stated sum, regardless of the actual loss incurred, when the contingency insured against occurs."

"All of the following are personal uses of life insurance EXCEPT A) auto protection B) survivor protection C) estate creation D) mortgage payoff"

"auto protection Explanation The personal uses of life insurance include survivor protection, mortgage payoff, estate creation, estate conservation, liquidity, and cash accumulation."

"Underwriting techniques commonly used by insurers in issuing policies to applicants who do not measure up to a standard rating include all of the following EXCEPT A) charging an extra premium B) attaching an exclusion rider or waiver to a policy C) averaging total risks pending D) limiting the type of policy"

"averaging total risks pending Explanation Underwriting techniques used by insurers in issuing policies to substandard risks include charging extra premiums to compensate for the additional risk, limiting coverage by excluding certain risks, and restricting or modifying the policy issued."

"All of the following are standard modes of premium payments EXCEPT A) annually B) semi-annually C) biennially D) quarterly"

"biennially Explanation The standard mode or frequency of premium payments is monthly, quarterly, semi-annually and annually."

"Which is NOT a life insurance policy provision? A) consideration B) cancellation C) endorsements D) reinstatement"

"cancellation Explanation Consideration, reinstatement, and endorsements are all life insurance policy provisions. Cancellation is one of the health insurance policy provisions."

"Jerry has just purchased a life insurance policy and is taking time to review the policy's provisions. He will find that his policy excludes death by all of the following means EXCEPT A) scuba diving B) cancer C) auto racing D) skydiving"

"cancer Explanation Most life insurance policies exclude the following risks: war, private aviation, hazardous occupation or hobbies, commission of a felony, and suicide."

"After Joe died, Well Life Insurance Company discovered that he had misrepresented his health status when he applied for a life insurance policy 7 years ago. The insurer A) can void the policy B) does not have to pay the death benefit C) cannot void or revoke the policy D) must prove the misrepresentation was material before voiding the policy"

"cannot void or revoke the policy Explanation In most cases, life insurers have only a limited time in which to discover false statements, misrepresentations, or concealment. After that time period passes, usually 2 years from policy issue, the contract cannot be voided or revoked for those reasons."

"Jane, age 35, has just purchased a 20-pay whole life policy. When she turns 55, she will A) no longer be covered by the policy B) receive the policy's face amount benefit C) cease paying premiums D) have a fully matured policy"

"cease paying premiums Explanation Limited-pay whole life policies have level premiums that are limited to a certain period (less than life). This period can be of any duration. For example, a 20-pay whole life policy is one in which premiums are payable for 20 years from the policy's inception, after which no more premiums are owed."

"All of the following are rights of policy ownership EXCEPT A) selecting a settlement option B) changing a policy provision with the agent's approval C) designating beneficiaries D) selecting a nonforfeiture option"

"changing a policy provision with the agent's approval Explanation Owning a life insurance policy provides certain rights and choices. However, changing a policy provision, with or without the agent's approval, is not one of them. Only the insurance company can change policy provisions, never the policyowner or the agent."

"All of the following policyowner rights contribute to the flexibility of a life insurance policy EXCEPT A) beneficiary selection B) settlement options C) nonforfeiture options D) classification of the applicant"

"classification of the applicant Explanation Nonforfeiture options provide help when the insured no longer wants to pay premiums. Settlement options offer a choice of how proceeds will be paid. Choosing and changing the beneficiary is a right of the policyowner. Classifying the applicant according to her risk is the right of the insurer."

"All of the following are types of insurers EXCEPT A) mutual B) fraternal C) stock D) communal"

"communal Explanation The various types of insurers include stock and mutual insurers, fraternal benefit societies, reciprocal insurers, and risk retention groups."

"Since the obligations of the insurance company hinge on certain acts of the policyowner, the beneficiary, or both, the insurance contract is termed A) aleatory B) conditional C) bilateral D) unilateral"

"conditional Explanation Insurance is a conditional contract because the obligations of the insurance company hinge on the performance of certain acts by the owner and the beneficiary, such as the payment of premiums and furnishing proof of loss."

"Direct response marketing is A) only available to groups B) outlawed in many states C) sold through insurance agents D) conducted through ads in the mail, in magazines, and on the internet"

"conducted through ads in the mail, in magazines, and on the internet Explanation There are no agents or producers in direct response marketing. Policies are sold directly to the public, and marketing is done through the mail or by advertisements in newspapers and magazines, on the radio, on television, and on the internet."

"Lynn elects to surrender her whole life policy for a reduced paid-up policy. The cash value of her new policy will A) decrease gradually B) continue to increase C) reduce immediately to $0 D) remain the same as in the old policy"

"continue to increase Explanation Once Lynn surrenders her whole life policy for a reduced paid-up policy, the face value is reduced but the cash value continues to increase."

"Leland elects to surrender his whole life policy for a reduced paid-up policy. The cash value of his new policy will A) remain the same as in the old policy B) decrease gradually C) decrease by 50% immediately D) continue to increase"

"continue to increase Explanation When Leland surrenders his whole life policy for a reduced paid-up policy, the face value is reduced but the cash value continues to increase."

"In contrast to traditional whole life insurance policies, with variable life insurance products A) premiums are invested in an insurer's general account B) investments match the insurer's contractual guarantees and liabilities C) contract cash values are not guaranteed D) the insurer assumes the investment risk"

"contract cash values are not guaranteed Explanation Variable insurance products do not guarantee contract cash values. This is because policyowners can direct the investment of the funds backing their variable contracts through separate account options. Instead of a fixed return, the investment account will earn a variable return depending on the account's investment performance."

"All of the following are purposes of juvenile insurance EXCEPT A) providing funds for a child's final expenses B) beginning a life insurance program for a child at a low premium rate C) funding a college education D) covering the medical expenses of a child"

"covering the medical expenses of a child Explanation Juvenile insurance may provide funds for a child's final expenses, for a college education, or to begin a life insurance program for a child, at relatively low premium rates. Juvenile insurance also can ensure a child has some life insurance if he becomes uninsurable later."

"All of the following factors influence an applicant's mortality EXCEPT A) personal habits B) dangerous hobby C) hazardous occupation D) credit report"

"credit report Explanation Those employed in hazardous occupations pose a greater risk to an insurer, as do those who engage in dangerous hobbies, such as skydiving. Habits such as smoking or overeating can also increase the risk of death."

"The overall purpose of the USA PATRIOT Act is to A) examine domestic insurers B) enforce insurance laws C) implement new laws D) deter terrorist activity"

"deter terrorist activity Explanation The USA PATRIOT Act was established to implement measures to prevent, detect, and prosecute any persons suspected of international money laundering and financing of terrorist activities."

"All of the following are types of hazards in life insurance EXCEPT A) physical B) moral C) direct D) morale"

"direct Explanation In life insurance there are 3 types of hazards: physical, moral, and morale."

"Insurers that deal directly with insureds without the use of agents are known as A) reciprocals B) writers independent insurers C) mass marketers D) direct response"

"direct response Explanation A large volume of insurance is sold through direct-writing companies that do not use agents, but instead employ their own salespersons."

"With regard to insurance, consideration means A) the insurer's method of evaluating the applicant for coverage B) directly giving something of value C) a side-by-side policy comparison by the applicant D) a screening process all agents undergo prior to licensing"

"directly giving something of value Explanation The term consideration refers to an exchange of value. With insurance, the consideration given by the insured is the paid premium and the consideration given by the insurer is the promise to pay for any valid claim."

"Withdrawals from a universal life policy A) only decrease the cash value B) only decrease the death benefit C) are taxed as ordinary income D) do not require repayment"

"do not require repayment Explanation Universal life policies allow both policy loans and withdrawals from the cash value in the policy. Both the death benefit and cash value are reduced by the amount of the withdrawal."

"All of the following are types of agent authority EXCEPT A) dubious authority B) express authority C) implied authority D) apparent authority"

"dubious authority Explanation There are 3 types of authority under the law of agency: apparent, express, and implied."

"When a cross-purchase plan is funded by life insurance, A) premiums must be paid by the eldest partner B) the surviving partner's policy is automatically canceled C) each partner owns a policy on the lives of each of the other partners D) the business owns the policies"

"each partner owns a policy on the lives of each of the other partners Explanation Cross-purchase plans are 1 of the 2 types of buy-sell agreements. Each partner owns a policy on the lives of each of the other partners, and the surviving owners purchase the deceased owner's interest in the business"

"To determine the amount of life insurance required, the needs approach takes into account all of the following expenses EXCEPT A) emergency fund needs B) retirement income needs C) preretirement needs D) family dependency needs"

"emergency fund needs Explanation To determine the amount of life insurance required, the needs approach considers the amount of monthly income the family will need during the dependency, preretirement, and retirement periods. An emergency fund is a cash need rather than an income need."

"When there is no coverage available through an authorized carrier in the state, this insurance is referred to as A) reciprocal insurance B) risk retention C) reinsurance D) excess and surplus lines"

"excess and surplus lines Explanation Excess and surplus lines is the name given to insurance when there is no coverage available through an authorized carrier in the state where the risk arises or the risk is located, or for which there is no market through the original producer. This type of business must be placed through a licensed excess or surplus lines broker."

"Agents that work on behalf of 1 specific insurance carrier are known as A) independent agents B) direct agents C) general agents D) exclusive or captive agents"

"exclusive or captive agents Explanation Agents that work on behalf of 1 specific insurance company are known as exclusive or captive agents. They are generally paid on a commission structure and represent the insurer, not the insured."

"If a premium payment has not been given with the application, the policy becomes effective only when the producer delivers the policy and A) explains its provisions and obtains the initial premium and a signed statement of continued good health B) obtains a signed application and statement of continued good health C) explains its provisions and provides a conditional receipt D) explains its provisions and leaves a receipt for policy delivery"

"explains its provisions and obtains the initial premium and a signed statement of continued good health Explanation When the initial premium has not been paid at the time of application, in addition to other delivery requirements, the producer must obtain a statement of continued good health with the first premium. The signed application must be submitted at the time of the application, not when the policy is delivered."

"A life insurance policy may pay death benefits before the insured dies for all of the following reasons EXCEPT A) terminal illness B) eligibility for long-term care C) financial difficulties D) catastrophic illness"

"financial difficulties Explanation Life insurance policies may pay death benefits before the insured dies if the insured has a catastrophic or terminal illness or becomes eligible for long-term care. This is called an accelerated benefit provision."

"Major risk factors in life and health insurance underwriting include all of the following EXCEPT A) occupation B) habits or lifestyle C) financial status D) physical condition "

"financial status Explanation Physical condition, habits or lifestyle (moral hazards), and occupation are major risk factors in health insurance. Financial status is not a risk factor."

"Penalties for violating the Fair Credit Reporting Act include A) fines up to $10,000 B) fines, actual damages suffered by the consumer, punitive damages, and reasonable attorney's fees C) fines up to $12,000 D) imprisonment for 3 years "

"fines, actual damages suffered by the consumer, punitive damages, and reasonable attorney's fees Explanation Violators of the Fair Credit Reporting Act may be subject to fines and imprisonment and may be required to pay any actual damages suffered by the consumer, punitive damages, and reasonable attorney's fees."

"Variable universal life policies provide all of the following EXCEPT A) cash values B) a flexible premium capability C) a death benefit D) fixed premiums"

"fixed premiums Explanation Variable universal life insurance combines many characteristics of variable life (such as a death benefit and an equities-based cash value) with universal life (such as flexible premium payments and adjustable death benefits)."

"All of the following factors are usually considered cash needs when determining the life insurance needs of a family EXCEPT A) children's education costs B) funds to support spousal retirement C) last illness and funeral costs D) outstanding debts"

"funds to support spousal retirement Explanation The family cash needs are the amount of cash required at death to pay for a deceased breadwinner's last illness and funeral costs, outstanding debts and taxes, children's education costs, and an emergency fund. Spousal retirement is a family income need."

"An option whereby additional insurance may be purchased at various times without evidence of insurability is known as A) waiver of premium B) payor benefit C) constructive delivery D) guaranteed insurability"

"guaranteed insurability Explanation Many insurance companies now offer a guaranteed insurability option (GIO), also known as a guaranteed insurability benefit (GIB), which allows a policyholder to purchase specified amounts of additional insurance without evidence of insurability."

"If a policyowner purchases a $250,000 single premium whole life insurance policy and needs additional funds for retirement 6 months later, A) he can draw on the cash value to supplement his retirement income B) he can take a loan from the policy to supplement his retirement income but must repay it within 1 year C) he can take a withdrawal but not a loan from the policy D) he cannot access the policy's cash value because there has not been enough cash value accumulation buildup in the policy"

"he can draw on the cash value to supplement his retirement income Explanation Because a single premium whole life policy involves a large, onetime premium payment at the beginning of the policy period, the policy is completely paid for at that point. The payment of a single premium gives it an immediate cash value. As a result, the policyowner can draw on the cash value of a whole life insurance policy to supplement his retirement income."

"Elaine signs an application for a $50,000 life policy, pays the first premium, and receives a conditional receipt. If Elaine were killed in an auto accident 2 days later, A) her beneficiary would receive $50,000, if Elaine qualified for the policy as applied for B) the premium would be returned to Elaine's family because the policy had not been issued C) the insurer could reject the death claim because the underwriting process was never completed D) the company could reject the application on the basis that the death was accidental "

"her beneficiary would receive $50,000, if Elaine qualified for the policy as applied for Explanation If the applicant qualifies for coverage, she is immediately insured at the time of application upon paying an initial premium and receiving a conditional receipt."

"All of the following are found in the first part of the application EXCEPT A) Social Security number B) hobbies C) date of birth D) name"

"hobbies Explanation The first part of the application is for general information, which includes personal data such as name, address, date of birth, gender, marital status, and Social Security number."

"All of the following are required provisions in an individual life insurance contract EXCEPT A) grace period B) home health care C) payment of claims D) misstatement of age"

"home health care Explanation All individual life insurance policies must contain a misstatement of age provision, a grace period, and a payment of claims provision. A home health care provision would not be part of a life insurance policy; rather, it might be found in an accident and health insurance policy."

"Death benefits paid out to a beneficiary may NOT be protected from the insured's creditors A) if they are paid out in a lump sum B) if they are held in trust by the insurer C) if the beneficiary is the insured's estate D) if they are paid out in installments"

"if the beneficiary is the insured's estate Explanation When initially established, a life insurance contract is between the policyowner and the insurer. Upon the insured's death, however, the contractual agreement exists between the insurer and the named beneficiary. If there is no named beneficiary, meaning the proceeds will go to the insured's estate, then there is no protection from the insured's creditors. If the life insurance policy proceeds are paid to a named beneficiary upon the insured's death, the insured's creditors have no right to those proceeds. The proceeds of a life policy paid out to a beneficiary are generally protected from the insured's creditors; they may not be protected from the beneficiary's creditors. Please note, however, that this question is asking specifically about the insured's creditors, not the beneficiary's creditors."

"Under a fixed-period life insurance settlement option, excess interest will A) shorten the payment period B) lengthen the payment period C) have no effect on payments D) increase the size of the payments"

"increase the size of the payments Explanation Under a fixed-period life insurance settlement option, excess interest will increase the size of payments. Insurers may choose to pay interest over and above the guaranteed rate if they have sufficiently high earnings."

"The insurance concept of returning consumers to the financial status they enjoyed prior to a loss is known as A) restoration B) indemnification C) risk handling D) utmost good faith"

"indemnification Explanation Utmost good faith is an insurance contract characteristic, but indemnification means to return an individual to the financial condition she had prior to a loss. This is why insurance deals in pure risk rather than speculative risk; it is about indemnification, not profit."

"Equity index life insurance policy values are determined by a specified participation rate and A) aggressive investment in the stock market B) flexible premium payments C) dividends from stocks in a particular stock market index D) indirect links to a stock market index"

"indirect links to a stock market index Explanation Equity index life insurance links policy values, based on a specified participation rate, to potential increases in a particular market index, such as the Standard & Poor's 500 Index. The life insurance policy is not participating in the actual stock market index or in the actual stocks that are in that index. Consequently, it does not benefit from the dividends of those stocks. Equity index or equity linked universal life insurance allows a conservative indirect link to a stock market index and allows a certain participation percentage of increase based on the increase in the stock market index. While it is true that the premium payments are flexible, this question is about how equity index life insurance policy values are determined. This question is not about how policy values might be affected, which is where flexible premiums come into play."

"The phrase "the applicant for insurance has more to gain if the insured continues to live than if the insured dies" is the rule defining A) insurable interest B) the aleatory nature of an insurance contract C) a legal wagering contract D) one's legal capacity to enter into an insurance contract"

"insurable interest Explanation A person acquiring a life insurance contract must be subject to loss upon the death of the individual to be insured. This is known as insurable interest, and it is required before a life insurance policy will be issued."

"When a policyowner cannot exercise her rights of ownership without the policy beneficiary's consent, the beneficiary is designated A) vested B) primary C) irrevocable D) contractual"

"irrevocable Explanation If a policyowner names an irrevocable beneficiary, the policyowner gives up her right to change that beneficiary, and unless otherwise specified in the policy, the owner cannot take any action that would affect the right of that beneficiary to receive the full amount of the insurance at the insured's death. This includes taking out a policy loan or surrendering the policy."

"If an agent fails to perform an act required by a policy, the insurer A) is still required to fulfill its obligation B) may release the agent and write a new contract with the policyholder C) has 60 days to notify the policyholder of the omission D) is exempt from fulfilling its obligation to the policyholder"

"is still required to fulfill its obligation Explanation The insurer is liable for its agent's acts if the agent is licensed and has a contract with the insurer."

"An applicant for health insurance completes the application and satisfies all of the conditions of the conditional receipt. If the policy is eventually issued as applied for, coverage takes effect A) as soon as the policy has been delivered to the applicant B) as soon as the underwriting process has been completed C) just as if the policy had already been issued D) as soon as the policy has been issued"

"just as if the policy had already been issued Explanation If the initial premium was paid with the application, the applicant satisfies all of the conditions of the conditional receipt, and the policy is eventually issued as applied for, coverage takes effect just as if the policy had already been issued."

"The payor benefit option or rider is typically used with A) juvenile policies B) adjustable life policies C) family policies D) joint life policies"

"juvenile policies Explanation The juvenile policy's payor benefit rider provides that the policy premiums will be waived if the policyowner dies or becomes totally disabled."

"David has a $300,000 nonrenewable 5-year term policy. The premium he pays for this policy would be A) more than for a $300,000, 5-year renewable term policy B) increased each year during the 5-year period C) the same as for a $300,000, 5-year renewable term policy D) less than for a $300,000, 5-year renewable term policy"

"less than for a $300,000, 5-year renewable term policy Explanation Nonrenewable policies are less expensive than renewable policies, all other things being equal. This is because the renewal provision provides continued coverage without evidence of insurability, putting the insurer at greater risk."

"Nora, age 25, just started working and would like to purchase life insurance to ensure that her spouse and child are protected if she dies prematurely. She has very limited funds but would eventually like to have permanent protection. Nora should consider purchasing A) variable life insurance B) whole life insurance C) limited-pay whole life insurance D) level term life insurance"

"level term life insurance Explanation Because permanent life insurance protection costs more than term insurance protection, Nora should consider purchasing a term life insurance policy. Most term policies include a conversion option that guarantees policyowners the right to convert the policy to permanent protection without having to provide evidence of insurability."

"A policy loan is generally available with all of the following types of life insurance policies EXCEPT A) modified premium whole life insurance B) universal life insurance C) variable life insurance D) level term life insurance"

"level term life insurance Explanation While cash value withdrawals are available only with universal life insurance policies, policy loans are available with any type of permanent life insurance policy. Because they have no cash value, term life insurance policies do not accommodate policy loans."

"A whole life policy that makes it possible to stop premium payments at the end of a specified time without a reduction in the death benefit is called A) single pay B) graded premium C) limited-pay D) modified premium"

"limited-pay Explanation Whole life limited-pay policies make it possible to stop premium payments at the end of a specified time period without a reduction in the death benefit. In other words, the policy becomes fully paid before the insured turns 100. The most common examples of this are 10-pay life, 20-pay life, and life paid-up at 65."

"In the life insurance business, a word that is synonymous with expenses is A) underwriting B) controlling C) actuary D) loading"

"loading Explanation Each premium an insurer charges must carry its small proportion of normal operating expenses. The expense factor is computed and included in the premium rates for life insurance. The expense factor is also called the loading charge."

"All of the following are characteristics of an insurable risk EXCEPT A) loss must not be catastrophic B) loss must be measurable C) loss must be intentional D) loss must be accidental"

"loss must be intentional Explanation The characteristics of an insurable risk are as follows: there must be a large number of homogeneous exposure units, loss must be accidental and unintentional, loss must be measurable, loss cannot be catastrophic, and the premium must be economically feasible."

"All of the following are penalties for violating the Fair Credit Reporting Act EXCEPT A) reasonable attorney's fees B) either fines or imprisonment C) punitive damages awarded by a court D) loss of license indefinitely "

"loss of license indefinitely Explanation Violators of the Fair Credit Reporting Act may be subject to fines, imprisonment, or both. They may also be required to pay any actual damages suffered by a consumer, punitive damages awarded by a court, and reasonable attorney's fees."

"The best reason for designating a trust as a life insurance policy beneficiary is to A) make it possible to manage the policy proceeds for the long-term benefit of an individual or organization B) make it possible to benefit an individual or organization that might have otherwise been ineligible to be a designated beneficiary C) remove the policy proceeds from the insured's taxable estate D) make it possible to accumulate income tax-free interest on the policy proceeds once they are paid into the trust"

"make it possible to manage the policy proceeds for the long-term benefit of an individual or organization Explanation The primary reason for naming a trust as a beneficiary is to let the insured control the proceeds after death. The trust can be set up to distribute the proceeds in whatever manner the grantor (insured) wishes. There are no special tax advantages for choosing a trust over an individual named beneficiary."

"Delivering policies in person gives the agent an opportunity to do all of the following EXCEPT A) make last-minute changes to the policy B) confirm riders and explain policy exclusions C) answer any questions the policyowner has regarding the contract D) review the policy with the policyowner "

"make last-minute changes to the policy Explanation Delivering policies in person gives an agent the opportunity to review the policy with the policyowner, including riders and exclusions, and answer any questions the policyowner may have. An agent cannot make any last-minute changes to the policy after it has been issued, unless it is done in strict compliance with state and insurance company regulations."

"All of the following can directly affect the amount of premium an individual insured pays EXCEPT A) marital status B) age C) sex D) occupation"

"marital status Explanation For any individual, occupation, age, and sex are factors considered in developing a life insurance premium. Marital status is not, since it does not directly affect a person's proposed lifespan."

"False information that will void an insurance contract is known as A) misrepresentations B) breach of warranty C) indemnifications D) material misrepresentations"

"material misrepresentations Explanation Information that is not true and that would affect an underwriter's decision to reject a risk is a material misrepresentation. These statements are grounds for voiding an insurance contract."

"Nicole plans to take out a $200,000 mortgage for a vacation home. Her bank, however, requires her to provide some type of collateral for the loan. If Nicole owns a $500,000 whole life insurance policy, the policy A) will not have enough cash value to be used as collateral for the loan B) may be used as collateral for the loan C) may not be used as collateral for the loan D) may not be used as collateral for the loan because it cannot be attached by creditors"

"may be used as collateral for the loan Explanation Because Nicole's whole life insurance is considered property with a quantifiable cash value, it may be used as collateral or security for the loan."

"All of the following are considered competent parties to enter into insurance contracts EXCEPT A) trusts B) minors C) estates D) business entities"

"minors Explanation Applicants, unless proven otherwise, are generally presumed to be competent to enter into insurance contracts, with the exception of minors, the mentally infirm, and those under the influence of alcohol or narcotics. In general, state laws hold that minors below a certain age are not capable of understanding the contract they agree to (although there are some situations in which minors may enter into contracts). Other competent parties that may enter into contracts of insurance with an insurance company include business entities, trusts, and estates."

"All of the following are premium elements EXCEPT A) expenses B) interest C) morality D) mortality"

"morality Explanation Calculating premium rates for life insurance is based on 3 elements: mortality, interest, and expenses. Morality is 1 of the 3 types of hazards (physical, moral, and morale)."

"The net premium is defined as A) mortality plus expenses B) mortality plus interest C) mortality minus interest D) mortality minus expenses"

"mortality minus interest Explanation Mortality minus interest equals the net premium."

"Selena is a single parent paying for her home. She is concerned about where her children will live if she suddenly dies. Her primary reason for purchasing life insurance is A) cash accumulation B) liquidity C) estate creation D) mortgage payoff"

"mortgage payoff Explanation Life insurance is primarily used for providing income for survivors, mortgage payoff, creating an immediate estate, and providing funds for expenses that would be applicable upon the death of the insured. Selena's primary concern is that her children will be able to stay in their own home, so her reason for purchasing life insurance is to pay off the mortgage on her home."

"Endorsements or modifications to a contract A) must be signed by the insured's agent B) must be in writing and agreed to by both the insurer and the policyowner C) require the signature of an executive officer of the insurance agency D) are requested by the agent/producer"

"must be in writing and agreed to by both the insurer and the policyowner Explanation Endorsements to a contract may be made by the policyowner. The changes must be made in writing and agreed to by both the policyowner and the insurer. An agent or producer cannot authorize the amendment. An executive officer of the insurance company must sign the amendment."

"In the sale of life insurance, all references to policy dividends A) generally address the insurance policy as an investment vehicle B) must include a statement that dividends are not guaranteed C) should project dividend return at least 15 years into the life of the policy D) must state the guaranteed rate of return"

"must include a statement that dividends are not guaranteed Explanation Any reference to policy dividends in the presentation of a life insurance policy must include a statement that dividends are not guaranteed."

"With respect to life insurance policy beneficiaries, all the following are examples of a class designation EXCEPT A) my sisters and brothers B) my sister Mimi and my nephew Rodolfo C) children of the insured D) all my children"

"my sister Mimi and my nephew Rodolfo Explanation With a class designation the beneficiary is defined as a class or group of individuals easily identified by membership in a defined group. By definition, identifying a beneficiary by individual name means it is not a class designation."

"The annual gross premium of a life insurance policy is defined as A) net premium plus mortality B) interest plus expense less mortality C) mortality costs plus loading D) net premium plus expense"

"net premium plus expense Explanation Gross premium equals net single premium plus expense (the insurer's expense of doing business). The gross premium is what the policyowners are required to pay."

"A life insurance gross premium is A) net single premium plus mortality B) mortality costs plus loading C) interest plus expense less mortality D) net single premium plus expense"

"net single premium plus expense Explanation A life insurance gross premium is the amount a policyowner is expected to pay. It comprises the mortality charge less interest (net single premium) plus normal operating costs associated with providing coverage (expense charge)."

"The privilege of accessing the cash value of an insurance policy if it is surrendered is known as the A) entire contract provision B) reinstatement provision C) nonforfeiture provision D) conversion privilege"

"nonforfeiture provision Explanation After a life insurance policy has been in effect for a specified amount of time, the policy may provide for access to the policy's cash value. Under certain circumstances, the money can be used to pay for a premium that is in default, paid as a lump sum in cash, or paid as a cash amount in return for the surrender of the policy. Policies must explain the mortality table and interest rate used to calculate the cash surrender values. A conversion privilege is found in a group life policy. It allows for a terminated plan member to convert the group policy to an individual policy under certain circumstances. The reinstatement provision allows for the reinstatement of a lapsed policy. The entire contract provision stipulates that the application and policy itself comprise the entire contract of insurance."

"A captive agent who has an exclusive contract with an insurer may A) represent only those consumers referred by the principal B) not represent another insurer selling an identical policy C) contract with other insurers to sell the same policy and provide the best service to consumers D) represent the customer in the sale of insurance"

"not represent another insurer selling an identical policy Explanation It is unethical for a captive agent to represent 2 or more insurers selling the same policies."

"When he was 45, Frank purchased a $40,000 5-year level term policy. When he died at age 52, his beneficiary received A) nothing B) 20000 C) the cash value of the policy D) 40000"

"nothing Explanation In this case, the insured died after his term policy period had expired. As a result, his beneficiary received nothing."

"All of the following are life insurance policy provisions EXCEPT A) modifications B) notice of claim C) payment of claims D) assignment"

"notice of claim Explanation Notice of claim is a health insurance provision, not a life insurance policy provision."

"The concept of agent confidentiality requires all of the following practices EXCEPT A) keeping completed applications from being seen by anyone except the applicant and authorized insurer personnel B) avoiding gossiping about an applicant's personal information with others C) notifying the applicant of insurer privacy practices D) notifying the applicant of a substandard rating decision by the insurer"

"notifying the applicant of a substandard rating decision by the insurer Explanation Notifying the applicant of insurer rating decisions is important, but it is not part of an agent's confidentiality practices. These refer to the need for agents to carefully guard against providing applicants' confidential information to anyone except authorized insurer personnel."

"All of the following are distinguishing characteristics of straight whole life policies EXCEPT A) option to renew B) level premiums C) insurance protection to age 100 D) cash values"

"option to renew Explanation An option to renew is a feature of term insurance."

"Universal life is distinguished from whole life insurance in that A) no withdrawals can be made from the policy's cash value account B) policy loans can be taken from the policy C) partial withdrawals can be taken from the cash value account D) complete withdrawals of the cash value can be taken"

"partial withdrawals can be taken from the cash value account Explanation A factor that distinguishes universal life from whole life is that partial withdrawals can be made from the policy's cash value account. Whole life insurance allows a policyowner to tap cash values only through a policy loan or a complete cash surrender of the policy's cash values, in which case the policy terminates."

"Insurance policies that pay dividends are referred to as A) participating policies B) preferred policies C) reserved policies D) nonparticipating policies"

"participating policies Explanation Insurance policies can be issued on a participating or a nonparticipating basis. Policies that pay dividends are referred to as participating policies. Policies that do not pay dividends are referred to as nonparticipating policies."

"Which life insurance policy provision refers to the prompt payment of the death benefit? A) payment of premium B) grace period C) consideration D) payment of claims"

"payment of claims Explanation The payment of claims provision states the insurer must pay death benefits promptly, which usually means no longer than 60 days."

"Floods, heart attacks, theft, and choking are all examples of A) exposures B) perils C) risks D) hazards"

"perils Explanation A peril is something that causes a loss. It can be within or beyond a person's control. Death, accidents, and sickness are also examples of perils."

"An agent must notify the applicant that all of the following sources will be used to assess the applicant EXCEPT A) personal references B) a credit report C) the application D) a Medical Information Bureau report"

"personal references Explanation Agents must inform prospective insureds that the most common sources of underwriting information include the application, the medical report, an attending physician's statement, the Medical Information Bureau, special questionnaires, inspection reports, and credit reports. Personal references are not required."

"For situations where no initial premium was paid when the application was taken, when delivering that policy the agent is generally required to do all of the following EXCEPT A) collect any premium due B) present the insured with a conditional receipt C) obtain a statement of good health from the insured D) explain the policy, its provisions, and any riders, exclusions, or ratings involved"

"present the insured with a conditional receipt Explanation Since the insured has already been underwritten and a policy issued, a conditional receipt is no longer applicable in this situation. Keep in mind, however, that whether the policy will go into effect is dependent on the insured's health status at the time of delivery and full payment of any premiums due. If the insured has experienced any negative health changes that could affect his insurability since the time of application, the agent cannot deliver the policy and coverage does not go into effect."

"ERISA was enacted to A) protect the interests of participants in employee benefit and health plans B) distribute Social Security benefits C) protect the interests of employers in defined pension plans D) provide tax incentives to employers "

"protect the interests of participants in employee benefit and health plans Explanation The Employee Retirement Income Security Act (ERISA) is a federal law that establishes minimum standards for pension and health plans to provide protection for employees in these types of plans."

"The purpose of the common disaster provision is to A) provide benefits in case of a common disaster, such as a flood B) protect the interests of the primary beneficiary C) protect the interests of the contingent beneficiary D) provide benefits to the primary beneficiary's heirs"

"protect the interests of the contingent beneficiary Explanation The common disaster provision provides a means for the policyowner to make certain that the contingent beneficiary receives the proceeds if both the insured and the primary beneficiary die within a short time of each other due to a common disaster. This provision states that the primary beneficiary must outlive the insured by a specified time period in order to receive the benefits. Otherwise, the policy proceeds go to the contingent beneficiary."

"An agent may do all of the following to comply with disclosure notification rules EXCEPT A) provide a copy of the information disclosure procedures form to the state Department of Insurance B) notify the applicant of the insurer's information disclosure procedures with a written form C) answer any questions the applicant may have regarding the insurer's information gathering and dissemination practices D) obtain the applicant's signature on the disclosure form authorizing the insurer to gather and disseminate information"

"provide a copy of the information disclosure procedures form to the state Department of Insurance Explanation State laws require disclosure forms to be given in advance to applicants. Whether the Department of Insurance requires a copy or not is decided on a state-by-state basis."

"The significance of a free-look provision is that it A) provides life insurance policyholders with the right to return their policies for any reason within 10 days of delivery for a full refund of premiums B) means that the policyholder must be given access to the agent's records C) allows a life insurance policy to be issued without a physical examination D) is a special offer in which the policyholder receives the first 90 days of coverage for free"

"provides life insurance policyholders with the right to return their policies for any reason within 10 days of delivery for a full refund of premiums Explanation A free-look period gives policyholders the right to return their policies for a full refund at any time within 10 days of delivery."

"In contrast to traditional whole life insurance policies, term life insurance A) provides both pure insurance protection and cash value B) offers tax-advantaged borrowing and withdrawals C) cannot be renewed D) provides pure insurance protection only"

"provides pure insurance protection only Explanation Both term and permanent life insurance include pure insurance protection. However, only permanent life insurance includes a cash value that is the policyowner's property at all times."

"An example of an illiquid asset is A) life insurance proceeds B) real estate C) bank savings accounts D) checking accounts"

"real estate Explanation An asset that can be quickly and easily turned into cash without losing its value is considered a liquid asset. Real estate is an illiquid asset."

"All of the following are examples of liquid assets EXCEPT A) real estate B) mutual funds, stocks, or bonds (depending on the timing of the sale) C) life insurance proceeds D) checking or savings accounts"

"real estate Explanation Liquid assets are those that can be converted to cash without loss of value. Real estate is based on market value and is subject to the asking price and selling price, which are negotiated between the buyer and seller."

"All of the following are considered suspicious activities EXCEPT A) reluctance to provide identification B) requests to have surrender proceeds paid to a party not clearly related to the purchaser C) receipt of cash payments in excess of $5,000 D) greater interest in termination rather than performance features of a product "

"receipt of cash payments in excess of $5,000 Explanation One of the suspicious activities an insurer must report is the receipt of cash payments in excess of $10,000, not $5,000."

"If an individual life insurance policy contains a spendthrift provision, the policy can prohibit the beneficiary from taking all of the following actions EXCEPT A) borrowing against the policy B) exchanging the policy C) receiving equal installment payments under the policy D) surrendering the policy for cash"

"receiving equal installment payments under the policy Explanation A life insurance policy with a spendthrift provision can prohibit the beneficiary from exchanging, surrendering, and borrowing against the policy. To ensure that the beneficiary does not spend all the proceeds at once, the policy will specify that proceeds are to be paid to the beneficiary in equal installments during the beneficiary's lifetime."

"A contract in which one insurer cedes all or part of a risk to another insurer is known as A) reinsurance B) assuming insurance C) a participating policy D) retro insurance"

"reinsurance Explanation In a reinsurance contract, an insurer protects itself from loss or liability arising from an original contract of insurance by insuring itself through another insurer. Reinsurance is the spreading or sharing of a risk too large for one insurer by ceding part of the risk to another company or reinsurer."

"All of the following are methods of handling risk EXCEPT A) avoidance B) sharing C) repetition D) transfer"

"repetition Explanation The different methods for handling risk include sharing, transfer, avoidance, reduction, and retention."

"All statements made by an applicant in an application for life insurance are considered to be A) representations B) declarations C) affirmations D) warranties"

"representations Explanation Most states require that life insurance policies contain a provision that all statements made in the application be deemed representations, not warranties. A representation is a statement made by the applicant that she believes to be true. A warranty is a statement made by the applicant that is guaranteed to be true."

"Statements made on an application regarding the applicant's medical history or health that require a medical opinion to be confirmed are called A) representations B) interpretations C) identifications D) declarations"

"representations Explanation Representations are statements on an insurance application that the applicant represents to be true to the best of her knowledge and belief. By contrast, a warranty is guaranteed to be true."

"In order for any contract, including an insurance policy, to be legal it must contain all of the following elements EXCEPT A) representations B) legal purpose C) consideration D) competent parties"

"representations Explanation The 4 elements of any legal contract are competent parties, legal purpose, agreement, and consideration. Representations are statements made on an application that the applicant believes to be factual."

"The concepts of agent accuracy and completeness would prohibit all of the following practices EXCEPT A) substantially rewording an applicant's answer to a question to improve the likelihood of approval B) allowing an applicant to skip over an application question he considered too personal C) correcting an application error without the applicant's knowledge D) reviewing the completed application with the applicant to ensure accuracy "

"reviewing the completed application with the applicant to ensure accuracy Explanation Applications should always be reviewed with the applicant before submission to ensure accuracy and completeness. Correcting errors without the applicant's knowledge, knowingly skipping questions, and rewording answers are all improper practices."

"Paul is a single father with 2 young daughters. He has decided to give up his 2 favorite hobbies—skydiving and race car driving—because they are risky pursuits that could lead to his premature death. This method of dealing with risk is called A) risk avoidance B) risk transference C) risk sharing D) risk retention"

"risk avoidance Explanation Paul has chosen to deal with the risk of dying prematurely by giving up his 2 favorite hobbies, race car driving and skydiving. This method of dealing with risk is called avoidance."

"Beth and Talli's California neighborhood was ravaged by wildfires last summer. As a result, they installed a sprinkler system in their home to minimize damage in the event of a fire. This method of dealing with risk is called A) risk transference B) risk reduction C) risk avoidance D) risk retention"

"risk reduction Explanation Installing a sprinkler system in a home is a method of reducing risk. Although the possibility that a home may catch fire cannot be avoided entirely, Beth and Talli can reduce the risk of loss due to fire by installing a sprinkler system."

"Underwriting is a process of A) selecting and marketing policies B) determining and establishing premiums C) selecting, classifying, and rating risks D) selecting, reporting, and rejecting risks"

"selecting, classifying, and rating risks Explanation Underwriting is a process by which an insurance company selects, classifies, and rates risks. Careful underwriting avoids financial loss for the insurance company."

"The premiums insurance producers receive from insureds must be kept A) in the producer's business account B) as part of the issuing insurer's general fund C) separate from any personal funds D) as part of their total book of business"

"separate from any personal funds Explanation All premiums received by an insurance producer are funds received and held in trust. Insurance producers must keep these funds separate from their own personal funds, including any business accounts the producer may have."

"A stock insurer is owned by its A) subscribers B) shareholders C) policyholders D) certificate holders"

"shareholders Explanation A stock insurer is a public or private corporation that allows shareholders to purchase stock in the company. The shareholders, as owners, elect a board of directors."

"Jill met with an insurance agent to discuss purchasing a $500,000 term life insurance policy. If Jill signs a contract 2 weeks later while intoxicated, A) the contract will be voidable at the insurer's option B) she will not be presumed to be competent C) the contract will be considered valid D) she will be presumed to be competent since she was capable of understanding the contract during the initial meeting"

"she will not be presumed to be competent Explanation To be enforceable, a life insurance contract must be entered into by competent parties. In general, an applicant will be presumed to be competent unless proven otherwise. However, applicants who are under the influence of alcohol or drugs when signing the contract are not presumed to be competent."

"To reinstate a lapsed policy, the insured must do all of the following EXCEPT A) pay all back premiums B) sign a Notice to the Applicant Regarding Replacement C) submit a written application D) produce evidence of insurability, if required by the insurer"

"sign a Notice to the Applicant Regarding Replacement Explanation For a policy to be reinstated, the insured must submit a written application; produce satisfactory evidence of insurability, if required by the insurance company; pay all back premiums (with interest); and pay any other debt to the insurer. Only in a replacement transaction is the selling agent required to sign a Notice to the Applicant Regarding Replacement."

"The type of risk that involves the chance of both loss and gain is A) pure risk B) impure risk C) whole risk D) speculative risk"

"speculative risk Explanation Speculative risk involves the chance of both loss and gain. For example, the placement of a bet at a racetrack is a speculative risk."

"Individual life insurance policies can exclude benefits if death occurs as a result of any of the following EXCEPT A) suicide, if within 5 years from the date of policy issue B) specified hazardous occupation, if within 2 years from the date of policy issue C) aerial flight (except as a fare-paying passenger) D) war"

"suicide, if within 5 years from the date of policy issue Explanation Individual life insurance policies generally cannot exclude or restrict liability for certain named causes of death. However, policies can exclude or restrict coverage if death occurs as a result of war, from any aerial flight (except as a fare-paying passenger), while engaged in a specified hazardous occupation if within 2 years of the date of policy issue, or from suicide if within 2 years from the date of policy issue."

"After a family's breadwinner dies, the blackout period generally can be defined as the period A) during which children only receive Social Security benefits B) that begins when the youngest child turns 16 and ends when the surviving parent reaches age 60 C) that begins when the surviving parent retires D) during which minor children are living at home"

"that begins when the youngest child turns 16 and ends when the surviving parent reaches age 60 Explanation The blackout period is the time during which no Social Security benefits are payable to a surviving spouse. This period begins when the youngest child reaches age 16 and continues until, at the earliest, the surviving spouse reaches age 60."

"A producer owes a fiduciary responsibility to all of the following EXCEPT A) the insured, on canceled policies B) the insurer, for premiums due C) the prospective purchaser of insurance, when the application is rejected D) the Commissioner for license fees"

"the Commissioner for license fees Explanation A producer is in a position of financial trust to the insurance buyer and the insurer. Therefore, a producer must promptly remit all premiums and other insurance proceeds to the insurer. Any money that is held on behalf of an applicant or insured, such as premiums on an application or a canceled policy, must be returned to the applicant or former insured. No such relationship exists between the producer and the Commissioner or Director of Insurance within a state."

"Variable life insurance policies are regulated by A) the Securities and Exchange Commission (SEC) B) the SEC, FINRA, and the states C) the Financial Industry Regulatory Authority (FINRA) D) the states"

"the SEC, FINRA, and the states Explanation Because of the securities element of variable life products, these policies are regulated by the SEC and FINRA in addition to traditional state regulation, which applies to all insurance policies. Variable life products may only be offered by properly licensed representatives of a broker-dealer."

"All of the following statements regarding the insuring agreement are true EXCEPT A) the insuring agreement is usually found on the first page B) the clause includes the death benefit amount C) the agent or producer must sign the clause D) the beneficiary is named in the insuring agreement"

"the agent or producer must sign the clause Explanation An insuring clause or agreement in life insurance contains the insurer's promise to pay the death benefit to a named beneficiary. An authorized officer of the company must sign the clause, not an agent or producer."

"The needs approach can be used to determine all of the following EXCEPT A) the amount needed to replace the breadwinner's projected increasing annual salary B) the amount needed to pay for a child's education C) the amount of income needed if the breadwinner dies D) the amount needed to provide income for the surviving spouse's retirement"

"the amount needed to replace the breadwinner's projected increasing annual salary Explanation The needs approach to determine how much life insurance is needed is not limited to fulfilling objectives in the event of death only, such as final expenses and immediate debts that need to be paid. It also considers a family's (or business's) living needs, such as maintenance income for the family, providing for a child's education, and planning for the surviving spouse's retirement income. Replacement of the breadwinner's projected increasing annual salary is a factor that is taken into account when using the human life value approach to determine how much life insurance is needed."

"Upon the issuance of a life insurance policy, an insurable interest must exist between A) the agent and the applicant B) the insured and the beneficiary C) the applicant and the beneficiary D) the applicant and the insured"

"the applicant and the insured Explanation Upon the issuance of a life insurance policy, the applicant must have an insurable interest in the life of the individual to be insured. While an insurable interest must exist at the time of issuance, it need not exist at the time of the insured's death."

"An insurer will use all of the following to determine if a person should be issued a policy EXCEPT A) a medical report from a qualified professional B) information stored in the Medical Information Bureau C) the applicant's work history D) the application for insurance"

"the applicant's work history Explanation During the underwriting process the insurer decides if it will issue a policy to an applicant. The insurer will use information from the Medical Information Bureau, the attending physician or nurse, the application, and possibly more comprehensive investigative reports. The insurer will use this information to determine the risk the applicant represents."

"A mortality table reflects A) the average number of deaths that will occur during a given year for a given age group of individuals B) who among a given group of individuals will die within a given year C) the average lifespan for any given individual D) the declining probability of death as the age of a given group of individuals increases"

"the average number of deaths that will occur during a given year for a given age group of individuals Explanation A mortality table reflects the average number of deaths that will occur in a certain year for a given group of people. Mortality is the relative incidence of death within a given group."

"Alexandria assigns her $10,000 life insurance policy to a bank as collateral for a loan. The assignee is A) the insurance company B) Alexandria, the insured C) the bank D) the beneficiary of the policy"

"the bank Explanation When a life insurance policy is assigned, the recipient of the policy (in this case, the bank) is called the assignee."

"With interest-sensitive whole life insurance, A) the policy always pays a dividend B) the interest rate is guaranteed by the insurer C) the cash value is based on the interest rate stated in the policy D) the cash value fluctuates in accordance with interest rates"

"the cash value fluctuates in accordance with interest rates Explanation Interest-sensitive whole life policies are whole life insurance policies that do not pay dividends. Instead, the cash value grows in an accumulation account from premium payments paid in and interest credited (the interest is paid on the reserve cash value in the policy's accumulation account). The cash value fluctuates in accordance with interest rates. A life insurance charge is also deducted from this accumulation account to pay for mortality costs and the insurer's other expenses."

"Variable life insurance policies are regulated by the Securities Exchange Commission and FINRA because A) the insurer assumes the risk of market value losses B) the policyholder receives the full benefit of any investment gains after policy charges are deducted C) the cash values are tied to the actual performance of investment funds D) the cash values are tied to the insurance company's general investment account"

"the cash values are tied to the actual performance of investment funds Explanation Because of the relationship of variable life products to the stock market, they are regulated by the SEC and FINRA in addition to the states. A variable life insurance policy ties cash values and possibly death benefits to the actual performance of a particular investment fund or a combination of funds, not necessarily to the insurance company's general investment account. Variable life allows the policyholder to invest the premiums among the various investment options available within the policy structure. The policyholder assumes the risk of market value losses and receives the full benefit of any investment gains after policy charges are deducted. Variable life products may be offered only by properly licensed representatives of a broker-dealer."

"James signed an application for a $50,000 life insurance policy and paid the first premium on October 1. The agent issued a conditional receipt. A week later, James took the required medical examination and was found to be insurable. If he dies before the insurer approves the application, A) the coverage will be retroactively effective, but the policy will only pay $25,000 B) no coverage will be provided C) the coverage will be retroactively effective D) no coverage will be provided, but James's premium will be refunded"

"the coverage will be retroactively effective Explanation If James pays the premium, receives an insurability receipt, and proves to be insurable, coverage will be effective retroactively. As a result, his beneficiary will receive the $50,000 death benefit."

"If an application for insurance is sent to the insurer without the first premium, but the premium is paid when the policy is delivered, the effective date of coverage is A) the date the premium was paid B) the date the policy was issued C) the date the policy was delivered D) the date the application was taken"

"the date the policy was issued Explanation The effective date of coverage when an application is sent without the initial premium, but the premium is paid when the policy is delivered, is the date the policy was issued."

"An accidental death and dismemberment (AD&D) policy rider's principal sum is equal to A) a reimbursement policy B) double consideration C) the death benefit on the base life insurance policy D) principal twice"

"the death benefit on the base life insurance policy Explanation An AD&D principal sum is paid out if the insured dies within 90 days of an accident. The principal sum paid from the rider is equal to the death benefit on the base life insurance policy. Essentially, this could be considered a double death benefit or double indemnity."

"An insurers' operating costs are known as A) the relativity load B) the interest dollars C) the rate of costing D) the expense load"

"the expense load Explanation Insurance company operating costs are referred to as the expense load. When this element is added to the premium, the term is known as loading."

"The mode of premium payment refers to A) the frequency of the payment B) the type of payment C) the number of payments in total D) the amount of the payment"

"the frequency of the payment Explanation The mode of the premium payment is the frequency of the payment. Modes are usually monthly, quarterly, semi-annually, and annually."

"The time period between the date when premium is due and when coverage lapses is called A) the grace period B) the consideration period C) the benefit period D) the incontestability period"

"the grace period Explanation The grace period is the time between the due date of the premium and the date upon which coverage will lapse."

"Regular notices sent to policyowners for payment of their life insurance policy premiums reflect A) the net level premium B) the gross premium C) the net single premium D) the gross single premium"

"the gross premium Explanation The gross premium is determined by adding the net single premium to the expense factor. Policyowners pay the gross premium on life insurance policies. The gross premium is determined by adding the net single premium and interest amount together. The net single premium is defined as the single amount needed immediately to fund future benefits. When the net premium is combined with interest, that amount will be sufficient to pay a future death benefit. Policy premiums are generally paid over a number of years, rather than with a single payment. The net single premium is converted into annual level premiums, adjusted for the smaller amount of interest the premiums will earn."

"The loaded premium is A) the gross premium B) the base premium C) the net premium D) the modified premium"

"the gross premium Explanation The term loaded premium refers to the gross premium, which is calculated by adding the net premium and expense loading."

"Upon issuance of a conditional receipt to an insurance applicant who has paid the insurer an initial premium, A) the applicant eliminates the need to provide the usual application information B) the applicant forfeits his right to a permanent contract C) the insurance company assumes no risk until the policy is issued D) the insurance company is conditionally assuming the risk"

"the insurance company is conditionally assuming the risk Explanation When the company issues a conditional receipt, it is initiating a conditional contract, which means it is providing early coverage and assuming the risk. The condition upon which the contract is issued is the applicant's qualification for the policy he applied for."

"The purpose of the incontestability provision is to protect A) the insured B) the insurer C) he employer D) the beneficiary"

"the insured Explanation The incontestability provision protects the insured by stating that after a life insurance policy has been in effect for 2 years, the insurer cannot deny a claim by saying statements made in the application were intended to defraud the insurance company."

"Under a common disaster clause in a life insurance policy, it is assumed that A) the insured and primary beneficiary died simultaneously B) the primary beneficiary died last, unless the insured lives beyond a stipulated period C) the contingent beneficiary is entitled to the policy proceeds D) the insured died last, unless the primary beneficiary lives beyond a stipulated period"

"the insured died last, unless the primary beneficiary lives beyond a stipulated period Explanation Under a common disaster clause in a life insurance policy, it is assumed that the insured died last, unless the primary beneficiary lives beyond a stipulated period (usually 30 or 90 days). If the primary beneficiary does not live beyond that period, proceeds are payable to the insured's secondary beneficiary or to her estate."

"All of the following are basic premium factors EXCEPT A) the insurer's expenses B) the insured's annual income C) interest earnings D) the mortality rate"

"the insured's annual income Explanation Three basic factors must be considered when computing the premium rate for a life insurance policy: mortality (the event or risk the insured wants to protect against); interest (the amount assumed to be earned on the insurer's funds); and expenses (the overhead charges the insurer incurs)."

"In an insurance transaction, an insurance producer who sells insurance policies to the public represents A) the insurer B) the public C) the insured D) the director"

"the insurer Explanation A producer who represents the insurer and is authorized to sell its insurance or annuity contracts is considered to be an agent of the insurer in an insurance transaction."

"An exclusive insurance producer who solicits insurance represents A) the Commissioner B) the insurer C) the beneficiary D) the insured"

"the insurer Explanation An insurance producer who sells insurance for an insurer represents the insurance company, not the insured, in any controversy."

"Andrei is a newly licensed insurance agent. In any insurance transaction, his primary duty is to serve A) the state insurance department B) himself C) the applicant and insured D) the insurer"

"the insurer Explanation Licensed insurance agents legally represent the insurer in all insurance transactions and in any disputes arising between the insured or beneficiary and the insurer."

"Morris is a licensed insurance agent. His principal is A) the applicant B) the National Association of Insurance Commissioners C) the insurer D) the state insurance department"

"the insurer Explanation The insurer appoints licensed agents to act on its behalf. Therefore, Morris would be the agent of the insurance company that appointed him."

"When Mary applied for a life insurance policy, she did not disclose that she had just been treated for cancer 3 months ago. In addition, Mary intentionally misstated her age so that her premiums would be lower. If the insurer issues the policy but discovers the misrepresentations 1 year later, A) the insurer can challenge the validity of the contract B) Mary and the insurer cannot void the contract C) Mary can void the contract D) the insurer cannot challenge the validity of the contract"

"the insurer can challenge the validity of the contract Explanation If Mary intentionally failed to disclose that she had been treated for cancer, the insurer can void the contract. However, the insurer has a limited time (typically, 2 years from the date of issue) to challenge the validity of the contract. After that period, the insurer cannot contest the policy or deny benefits on the basis of material misrepresentations, concealment, or fraud. If Mary misstated her age, the misstatement of age provision allows the insurer to reduce benefits or refund premiums, and it may do this beyond the 2-year contestability window."

"In insurance, A) contracts made by the agent are considered to be contracts of the producer B) contracts made by the principal are considered to be contracts of the agent C) the insurer is the principal and the producer is the agent D) the producer is the principal and the insurer is the agent"

"the insurer is the principal and the producer is the agent Explanation In insurance, the insurer is the principal and the producer is the agent. An agency relationship is created by the consent of both the agent and the principal."

"With individual life insurance, all of the following would factor into the premium rate EXCEPT A) the insurer's interest earnings B) the insurer's reserves C) the insurer's expenses D) the applicant's mortality"

"the insurer's reserves Explanation Life insurance premium factors include interest earnings, expenses, and mortality. Reserves are funds set aside by the insurer for the payment of future claims and are not one of the premium elements."

"Which of the following is NOT a part of what constitutes the entire contract? A) any applicable riders B) the invoice for first month's premium C) the life insurance policy D) a copy of the original application"

"the invoice for first month's premium Explanation The entire contract is made up of the policy, a copy of the original application and any applicable riders or amendments."

"The law of large numbers states that A) the smaller the number of risks combined into 1 group, the less uncertainty there will be as to the amount of loss that will be incurred B) the larger the number of risks combined into 1 group, the smaller the loss will be to any 1 individual in that group C) the larger the number of risks combined into 1 group, the less uncertainty there will be as to the amount of loss that will be incurred D) the smaller the number of risks combined into 1 group, the larger the loss will be to any 1 individual in that group"

"the larger the number of risks combined into 1 group, the less uncertainty there will be as to the amount of loss that will be incurred Explanation The law of large numbers operates under the principle that the larger the number of similar risks combined into 1 group, the less uncertainty there will be as to the amount of loss that group will incur. Thus, an insurance company is able to determine in advance the approximate number of claims it will receive in a given period for a given risk and place its business on a nonspeculative basis."

"The settlement option that will pay the largest amount to the beneficiary regardless how long he lives is A) the life with period certain option B) the life only or straight life option C) the life with refund option D) the interest only option"

"the life only or straight life option Explanation The life only or straight life option provides a series of level payments to the beneficiary based on his life expectancy and are guaranteed for life. Payments cease upon the death of the beneficiary."

"All of the following are elements of an insurable risk EXCEPT A) the loss must be catastrophic B) the loss must be the result of chance C) the loss must have a determinable value D) the loss must be predictable"

"the loss must be catastrophic Explanation One of the criteria for an insurable risk is that it not be catastrophic. A principle of insurance holds that only a small portion of a given group will experience loss at any one time. Risks that would adversely affect large numbers of people or large amounts of property, such as wars, are typically not insurable. Similarly, insurers would not issue a policy for $1 trillion on a single life. That one death would create a catastrophic; loss to the company."

"The policy provision that permits the insurer to adjust benefits because of an incorrect age is A) the entire contract provision B) the free-look provision C) the incontestable provision D) the misstatement of age provision"

"the misstatement of age provision Explanation The misstatement of age provision permits the insurer to adjust benefits or premiums if the insured misstates his age. This adjustment will reflect the amount of benefits that would have been paid relative to the individual's correct age. If the misstatement of age is such that no policy would have been issued had the correct age been reported, then the insurer's liability is a refund of any premiums paid."

"The provision that allows a person to select the premium payment mode, settlement options, borrow cash values that have accumulated or cancel the policy is known as A) the modifications provision B) the assignment provision C) the insuring agreement D) the ownership rights provision"

"the ownership rights provision Explanation The provision of ownership rights allows the owner of a life insurance policy to choose or change a beneficiary, select settlement, conversion, and non-forfeiture options, receive or borrow funds from accumulated cash values, receive proceeds upon maturity or endowment, assign ownership, select the premium mode payment and cancel the policy."

"With regard to a breadwinner's death, the blackout period generally can be defined as A) a time when life insurance is rarely needed B) the period that begins when the youngest child is 16 and ends when the surviving parent turns 60 C) the period during which the children are living at home and are dependent D) the period from the surviving spouse's retirement to his death"

"the period that begins when the youngest child is 16 and ends when the surviving parent turns 60 Explanation The blackout period is the period during which no Social Security benefits are payable to a surviving spouse. This period begins when the youngest child reaches age 16 and continues until the surviving parent reaches the earliest retirement age at 60."

"The payor benefit typically waives premiums on a juvenile policy if A) the person who pays the premium dies or becomes disabled before the insured child reaches a certain age B) the policy is converted before the insured reaches a specified age C) the insured child dies before reaching a specified age, usually 21 or 25 D) the insured child becomes disabled"

"the person who pays the premium dies or becomes disabled before the insured child reaches a certain age Explanation The payor benefit rider provides that in the event of the premium payor's death or disability, premiums on the policy will be waived until the insured child attains a specified age or until the maturity date of the contract, whichever occurs first."

"Coverage for a health insurance policy will take effect just as if the policy had already been issued if all of the following conditions have been met EXCEPT A) the policy has been legally delivered to the applicant B) the policy is eventually issued as applied for C) the applicant satisfies all of the conditions of the conditional receipt D) the initial premium was paid with the health application"

"the policy has been legally delivered to the applicant Explanation If the initial premium was paid with the application, the applicant satisfies all of the conditions of the conditional receipt, and the policy is eventually issued as applied for, coverage takes effect just as if the policy had already been issued. It is not necessary for the policy to be legally delivered to the applicant for coverage to take effect."

"All of the following elements of an adjustable life policy are adjustable EXCEPT A) the face amount B) the premium C) the cash value D) the policy loan rate"

"the policy loan rate Explanation This policy contains adjustable provisions that allow premiums to be increased or decreased, the face amount to be increased or decreased, and an extra premium to be paid."

"The party to whom the life insurance policy cash values belong is A) the beneficiary B) the policyowner C) the insured D) the insurer"

"the policyowner Explanation The accumulation that builds over the life of a policy is referred to as the policy's cash value. It belongs to the policyowner, who may or may not be the insured."

"When a life insurance beneficiary is revocable, A) the policyowner can change that beneficiary at any time with written notice B) the policyowner is limited with respect to how many times he can change the beneficiary during the policy's term C) the policyowner and the beneficiary share ownership of the policy D) the policyowner may only change the beneficiary with the beneficiary's consent"

"the policyowner can change that beneficiary at any time with written notice Explanation When beneficiaries are revocable, the policyowner may change this designation at any time. The policyowner also retains complete ownership of the policy and may change the beneficiary any number of times during the policy's term. A revocable beneficiary has no vested claim in the policy or its proceeds while the insured is living."

"A significant feature of adjustable life insurance is that A) the premiums may be increased or decreased from time to time by the policyowner B) the policyowner may make retroactive adjustments in the policy's provisions C) the policyowner need not pay premiums after the policy has been in force for a certain number of years D) the cash value is 3 times greater than in traditional whole life insurance"

"the premiums may be increased or decreased from time to time by the policyowner Explanation An adjustable life policy is simply a whole life policy with adjustable features, such as premiums that may be increased or decreased from time to time by the policyowner. These adjustments cannot be made retroactively."

"Malik works as a dentist and mountain climbs, skis, and flies airplanes in his spare time. When he applies for a life insurance policy, the agent's and Malik's signatures will be required on all of the following documents EXCEPT A) a questionnaire regarding Malik's aviation activities B) a form authorizing the insurer to obtain investigative consumer reports and medical information C) the application D) the report issued by the Medical Information Bureau"

"the report issued by the Medical Information Bureau Explanation When applying for life insurance, both the agent and applicant must sign the application as well as any additional questionnaires regarding the applicant's hobbies. A form authorizing the insurance company to obtain investigative consumer reports or medical information from investigative agencies, physicians, hospitals, or other sources must be signed by the proposed insured and the agent as witness. There is no requirement that the agent and applicant must sign reports issued by the Medical Information Bureau."

"A life insurance policyowner has all of the following rights EXCEPT A) the right to take a policy loan B) the right to change the grace period C) the right to name a beneficiary irrevocably D) the right to change the mode of premium payment"

"the right to change the grace period Explanation The policyowner has no right to change the grace period. That provision is a contractual clause developed by the insurer according to individual state laws."

"The incontestability period is usually A) shorter for individual term life insurance policies B) the shortest for group life insurance policies C) the same for both individual and group life insurance policies D) longer for individual whole life insurance policies"

"the same for both individual and group life insurance policies Explanation The time period for the incontestability provision in individual and group life insurance policies is usually the same, with the standard incontestability period being 2 years."

"Under an installment refund settlement option, if the primary beneficiary dies, the secondary beneficiary will receive A) a lump-sum payment B) the same income payments for a fixed number of years C) the same income payments until the total amount paid out to both beneficiaries equals the original amount of proceeds D) half of the remaining proceeds"

"the same income payments until the total amount paid out to both beneficiaries equals the original amount of proceeds Explanation Under an installment refund settlement option, if the primary beneficiary dies, the secondary beneficiary will receive the same income payments until the total amount paid out to both beneficiaries equals the original amount of proceeds."

"ERISA requires that certain benefit and insurance plan information be made available to all of the following EXCEPT A) the Department of Labor B) the state legislature C) the Internal Revenue Service D) participants"

"the state legislature Explanation Plan information, including important information about plan features and funding, must be provided to participants, their beneficiaries, the Department of Labor, and the IRS. Since ERISA is a federal law, information does not need to be made available to the state legislatures."

"Jordan completed an application for life insurance and paid the initial premium. When his agent delivers the policy, the premium is higher. This is because A) the underwriters determined Jordan to be a preferred risk B) the underwriters determined Jordan to be a substandard risk C) Jordan was late last month paying his auto insurance premium D) the insurance company took a rate increase"

"the underwriters determined Jordan to be a substandard risk Explanation If Jordan has been underwritten as a substandard risk, the policy will have a higher premium than what was originally submitted with the application. This is because the initial premium was based on a standard premium."

"With a participating life insurance policy, a policyowner may do all of the following with dividends received EXCEPT A) take the dividends in cash B) use the dividends to pay overdue premiums from previous years C) purchase additional life insurance protection D) allow the dividends to accumulate at interest"

"use the dividends to pay overdue premiums from previous years Explanation Policy dividends may be taken in cash, used to reduce the following year's premium, or used to purchase a 1-year term policy or additional life insurance protection. Dividends can also be allowed to accumulate at interest."

"The death benefit proceeds of a life insurance policy are protected from the beneficiary's creditors unless A) they are paid to a contingent beneficiary B) they are paid out in installments C) they are paid out in a lump sum D) they are held in trust by the insurer"

"they are paid out in a lump sum Explanation The spendthrift clause is designed to protect the proceeds of a life insurance policy from the beneficiary's spending habits and creditors. When this clause is included in the policy, the creditors cannot attach the death benefit proceeds before they are made to the beneficiary. Once the beneficiary has received the proceeds, however, the creditors can take steps to attach those proceeds. Since a lump-sum settlement would immediately place all of the proceeds in the beneficiary's possession, the proceeds would not be protected from the beneficiary's creditors."

"Decreasing term insurance could be recommended for all of the following EXCEPT A) for protection while a business loan is outstanding B) to build a retirement fund C) for mortgage protection D) to protect a family while children are growing up"

"to build a retirement fund Explanation Decreasing term insurance is designed to address needs that decrease from year to year, such as mortgage or loan protection. By the end of the term period, the face amount decreases to nothing. This would not help create a retirement fund."

"All of the following are rights of policy ownership EXCEPT A) to select a nonforfeiture option B) to assign the policy C) to designate a beneficiary D) to determine the method of submitting claims"

"to determine the method of submitting claims Explanation The rights of ownership include the right to pick a beneficiary, to choose the method of distributing the proceeds, to assign the policy, to receive dividends, to cancel the policy, and to select a nonforfeiture option. The right to determine the method of submitting claims and the time period in which to do so is the right of the insurer."

"Most participating whole life insurance policies allow all of the following uses of standard life insurance dividends EXCEPT A) to purchase additional units of paid-up life insurance B) to purchase 1-year term insurance C) to reduce future premium payments D) to increase the policy's face amount"

"to increase the policy's face amount Explanation Most participating whole life insurance policies allow the policyowner to apply dividends to pay up a policy earlier than otherwise expected, to buy paid-up permanent life insurance, to buy 1-year term insurance, or to reduce future premium payments. The policyowner cannot use dividends to increase the policy's face amount."

"According to the principle of human life value, the purpose of life insurance is A) to determine an individual's eligibility for insurance B) to replace an individual's economic value C) to replace an individual's insurance based on life events D) to determine the amount of insurance an individual needs"

"to replace an individual's economic value Explanation The purpose of life insurance is to replace an individual's economic value, according to the principle of human life value. It is calculated by multiplying the individual's annual income by the number of years until retirement. The answer is the amount of money that will be earned by retirement."

"For a waiver of premium rider to become operative, the insured must be A) terminally ill B) totally disabled C) partially disabled D) chronically ill"

"totally disabled Explanation An insured must be totally disabled for a waiver of premium rider to become operative. The policyowner does not have to pay premiums as long as the disability continues. Instead, the insurer continues to pay all premiums that become due while the insured is disabled to the age listed in the policy."

"A contract agreement between a ceding insurer and reinsurer to underwrite certain classes of risks is known as A) treaty reinsurance B) facultative reinsurance C) retroceding insurance D) assuming reinsurance"

"treaty reinsurance Explanation The agreement in which a reinsurer agrees to underwrite a certain class of business submitted by the ceding insurer is known as treaty reinsurance. Underwriting is done for a class or classes of risks, as opposed to on an individual basis."

"An applicant determined by underwriting to be declined would be A) uninsurable at any price B) provided a counteroffer at a higher premium C) instructed to submit a new application for reconsideration D) offered reduced coverage by the insurer "

"uninsurable at any price Explanation A declined applicant is uninsurable at any price. This is a risk the insurer is unwilling to insure."

"All the following are standard life insurance dividend options EXCEPT A) taking the dividend as an income tax-free cash distribution from the insurer B) using the dividend to purchase a unit of paid-up whole life insurance C) using the dividend to increase the base whole life policy's face amount D) leaving the dividends with the insurer to accumulate at interest in a cash account"

"using the dividend to increase the base whole life policy's face amount Explanation The paid-up addition dividend option uses the dividend to purchase units of paid-up permanent life insurance coverage, which, added to the base policy, creates a steadily increasing amount of coverage. It is generally not possible to increase the face amount of a whole life insurance policy, whether by dividend payment or any other means."

"Limited representatives can sell any of the following kinds of insurance EXCEPT A) credit health B) credit life C) title insurance D) variable life"

"variable life Explanation A limited representative is appointed by an insurer to sell vehicle liability and damage insurance or credit life and credit health insurance."

"During the underwriting process, an insurer may do all of the following EXCEPT A) order a credit report B) verify the applicant's military records, if any C) contact the Medical Information Bureau to check on the applicant's medical history D) order a consumer report to provide details on the applicant's reputation, character, and habits"

"verify the applicant's military records, if any Explanation An agent must explain to his client that, during the underwriting process, the insurer may contact the Medical Information Bureau to check on the applicant's medical history. In addition, an insurer may order a credit report to determine whether the client is a good credit risk and may order a consumer report to provide details on the applicant's reputation, character, and habits."

"A lapsed life insurance policy may be reinstated if all of the following requirements are met EXCEPT A) the policy has not been surrendered B) no more than 3 years have passed since the date of premium default C) waiting 7 years after the premium default date to reinstate D) its cash value has not been exhausted"

"waiting 7 years after the premium default date to reinstate Explanation All individual life insurance policies must include a reinstatement provision stating that if the policy has not been surrendered, its cash surrender value has not been exhausted, and its paid-up term insurance has not expired, it can be reinstated at any time within 3 years from the date of premium default. To reinstate a policy, an individual must submit an application to the insurer; produce satisfactory evidence of insurability, if required by the insurer; pay back premiums (with interest on premium loans); and pay any other indebtedness upon the policy."

"Denise, age 52, has a straight whole life policy and decides to stop paying premiums and take a paid-up policy for a reduced amount. Her paid-up policy will be A) term insurance B) whole life C) any type of policy she selects D) an annuity"

"whole life Explanation When a policyowner decides to stop paying premiums and take a paid-up policy for a reduced amount, the paid-up policy will be the same kind as the original policy."

"Jia is applying for individual medical insurance coverage. All of the following factors will adversely affect her ability to obtain coverage at a reasonable premium EXCEPT A) working at a desk every day B) a family history of heart disease C) being 55 years old D) being an avid scuba diver "

"working at a desk every day Explanation Working in a sedentary job should not negatively affect an applicant's insurability. Family health history, age, and high-risk hobbies can affect an applicant's insurability and premium in a negative way."

Betty purchased a universal life insurance policy when she was 61. Upon her 66th birthday, she received sizable inheritance, paid an exceptionally large annual premium and, in doing so, violated the 7-pay test. The following year, hoping to correct the situation, she made no premium payment so that the average premiums paid were less than the 7-pay test average. Today the policy's cash value stands at $45,000, and her basis in the contract is $28,000. If she were to withdraw $30,000 from the policy's cash value, which of the following best describes the tax treatment this transaction would receive? A) $28,000 of the distribution is tax-free, but $2,000 is subject to income taxation. B) The entire distribution is income tax-free. C) The entire $30,000 distribution is subject to income taxation. D) $13,000 of the distribution is tax-free, but $17,000 is subject to income taxation.

$13,000 of the distribution is tax-free, but $17,000 is subject to income taxation. Explanation This policy became a modified endowment contract (MEC) the moment it violated (and did not immediately correct) the 7-pay test. Once a policy becomes a MEC, it cannot lose that status. As such, pre-death distributions are treated first as a distribution of (income-taxable) gain, which in this case is $17,000.

Maureen, age 62, owns a non-MEC whole life insurance policy with a death benefit of $200,000 and a cash value of $40,000. Her basis in the policy is $25,000. If she were to borrow $30,000 from this policy and then die immediately thereafter (without having repaid any portion of the loan), which of the following best describes the resulting tax treatment of the policy's death benefit? A) The full $200,000 will be paid to the beneficiary, all of which is income tax-free. B) The full $200,000 will be paid to the beneficiary, but $30,000 of that amount will be subject to income taxation. C) $170,000 will be paid to the beneficiary, all of which is income tax-free. D) $170,000 will be paid to the beneficiary, but $5,000 of that amount will be subject to income taxation.

$170,000 will be paid to the beneficiary, all of which is income tax-free. Explanation Except in the case of a MEC, life insurance policy loans are income tax-free. If the insured policyowner dies before the loan is repaid, the death benefit is reduced by the outstanding loan balance, with no income tax consequences.

Fred, age 60, has 3 years until he retires. He decides to surrender his whole life insurance policy and use the cash value to fund a single premium annuity. How many payments will he make to fund the annuity? A) As many as he wishes B) 3 C) 7 D) 1

1 Explanation A single premium annuity is funded with 1 payment. When the funding is provided with a single lump sum, the principal is created immediately.

Jessie owns a deferred fixed annuity in which the contractually guaranteed rate is 3%. The contract also has a standard current rate interest provision. If current rates are 5%, what rate of interest will be credited to Jessie's annuity? A) 0.05 B) 0.03 C) 0.08 D) 0.04

0.05 Explanation The current rate is the rate actually credited to the annuity. It can be higher than, but never lower than, the contractually guaranteed rate.

Jerome's Jazz and Juice Bar offers group life insurance on a contributory basis. How many of Jerome's employees must participate in the plan? A) 0.5 B) 0.95 C) 0.9 D) 0.75

0.75 Explanation Group life insurance policies may be contributory (requiring the employees to help fund the plan) or noncontributory (funded entirely by the employer). If a plan is contributory, employee participation in the plan cannot be mandatory. However, at least 75% of the eligible employees must elect to participate. Noncontributory plans must cover 100% of the eligible employees.

If a group life insurance plan is contributory, what minimum percentage of eligible employees must participate? A) 1 B) 0.6 C) 0.5 D) 0.75

0.75 Explanation In a contributory plan (one in which the employees must contribute to the cost of the insurance), 75% of the eligible employees must participate.

If an employer pays the entire premium for a group life insurance policy, the policy must insure what percentage of eligible employees? A) At least 40% B) 1 C) At least 75% D) At least 50%

1 Explanation If an employer pays the entire premium for a group life insurance policy, the policy must insure all eligible, insurable employees. However, if the employees contribute part of the premium, at least 75% of the eligible, insurable employees must enroll in the employer's group plan.

What minimum percentage of eligible employees must be insured under a noncontributory group life policy? A) 0.5 B) 0.25 C) 1 D) 0.75

1 Explanation If employees do not contribute to the cost of their group life insurance, the insurance must be available to all members of the group or to all employees.

Group life insurance policies include a probationary period requiring new employees to wait a certain time before they can enroll in the plan. How long is the typical range for these probationary periods? A) 1 to 12 months B) 10 to 25 days. C) 18 to 24 months D) 30 to 45 days.

1 to 12 months Explanation During the probationary period, employees are not covered. The employer picks the time period, which is typically between 1 and 12 months, and it applies to all eligible employees without discrimination.

A company has 1,200 eligible employees for its group life insurance program, and the company pays the total premium. How many employees must be insured to initiate the plan? A) 1,000 employees B) 600 employees C) 900 employees D) 1,200 employees

1,200 employees Explanation If a group life insurance plan is noncontributory, 100% of eligible persons must be insured.

The penalty for premature withdrawal of funds from a traditional IRA is A) 10% of the account balance B) 5% of the taxable amount withdrawn or $50, whichever is less C) 10% of the taxable amount withdrawn D) 100

10% of the taxable amount withdrawn Explanation A premature withdrawal is generally taken before the owner reaches age 59½ and carries adverse tax consequences. The penalty for premature withdrawal of funds from a traditional IRA is 10% of the taxable amount withdrawn.

James died after receiving $180 per month for 6 years from a $25,000 life with refund annuity. His spouse, Lucy, as his beneficiary, will now receive the same monthly income until her payments total A) 25000 B) 12040 C) 12960 D) 2160

12040 Explanation Under the life with refund annuity, also known as an installment annuity, the beneficiary receives the same monthly income (minus payments previously paid to the original annuitant) until the face amount is exhausted. In this case, the original $25,000 annuity fund has paid $12,960, leaving $12,040 for Lucy.

Last year Wendell, age 57, withdrew $1,500 from his IRA, which consists entirely of pretax contributions. In addition to including that amount in his taxable income, he has to pay a penalty of A) 50 B) 150 C) 300 D) 100

150 Explanation When prematurely withdrawing pretax dollars from an IRA (before reaching age 59½), the individual must include the amount withdrawn in his taxable income as well as pay a penalty equal to 10% of the taxable amount withdrawn. There are exceptions that allow an individual to withdraw funds before age 59½ without paying a penalty: withdrawing funds for a life annuity, to buy a first home, for education costs, due to a disability, or upon the owner's death. After age 59½, any IRA distribution is taxed as ordinary income with no penalty.

To be eligible to participate in a Keogh plan, an employee must be at least how many years of age? A) 70½ B) 65 C) 18 D) 21

21 Explanation To be eligible to participate in a Keogh plan, an employee must be at least 21 years of age, have completed 1 or more years of continuous employment with that employer, and have worked at least 1,000 hours in the year.

Interest earned and distributions made are tax-free if a Roth IRA is maintained for at least how many years? A) 5 years B) 10 years C) 15 years D) 7 years

5 years Explanation In order for distributions to be tax-free, a Roth IRA must be maintained for at least 5 years and distribution must be after age 59½.

Frank owns and is insured by a participating whole life insurance policy with a death benefit of $85,000, including $35,000 of paid-up additions to the face amount. His basis in the policy is $30,000. The beneficiaries are his daughter and son, equally. If he were to die today, what amount of this policy would be valued in Frank's estate? A) 85000 B) 50000 C) 0 D) 55000

85000 Explanation Life insurance owned by the insured is included, at its full death benefit amount, in the insured's estate at death for estate valuation purposes.

When an employer establishes a group insurance plan, what evidence of insurance may each participating employee receive? A) An insurance notice B) A certificate of insurance C) A coverage form D) A letter of confirmation

A certificate of insurance Explanation When an employer establishes a group insurance plan, each participating employee receives or may request a certificate of insurance outlining coverage. The employer, as the policyowner, receives the master contract.

Who is most likely to offer group credit life insurance? A) A car dealership B) A restaurant C) A shoe store D) A local florist

A car dealership Explanation A car dealership is most likely to offer group credit life insurance as a form of collateral which guarantees that if the owner of the care dies, the dealership, who is the beneficiary, will be compensated for the remaining balance.

In which of the following situations would premium payments be tax deductible? A) Randy is the owner and premium payor of a life insurance policy covering his spouse. B) A company provides $25,000 of life insurance coverage to each of its 15 employees and pays the full premium. C) A company is the owner and premium payor of a $250,000 key-executive policy covering the life of its president. D) Janet is the owner and premium payor of a mortgage policy that covers the outstanding mortgage on her home.

A company provides $25,000 of life insurance coverage to each of its 15 employees and pays the full premium. Explanation Premiums paid by a company for group term life insurance are deductible as a business expense, assuming the group plan and its provisions meet the necessary requirements. Premiums paid for personal life insurance are not tax deductible, including key-person insurance.

Which of the following distributions from a Roth IRA would be qualified and, therefore, NOT taxable, assuming the account was established at least 5 years ago? A) A distribution made before age 55½ B) A distribution of $10,000 used to buy a first house C) A distribution made before age 59½, provided the recipient is retired D) A distribution used to purchase a vacation home

A distribution of $10,000 used to buy a first house Explanation A qualified distribution (one that is not taxed) is made after the taxpayer reaches age 59½, made to a beneficiary after the taxpayer's death, made because the taxpayer is disabled, used to buy the taxpayer's first home, or used to pay education costs. Furthermore, the distribution cannot be made any earlier than 5 years after the account was set up.

Which of the following groups is least likely to be eligible for coverage through a group health plan? A) A professional association that wishes to provide coverage for members nationally B) A group of neighbors who wish to insure themselves and their families C) An automobile manufacturer that will offer coverage to its customers D) A college alumni association that offers coverage for member alumni

A group of neighbors who wish to insure themselves and their families Explanation To qualify, the members must be a natural group formed for a purpose other than to obtain insurance. As a result, families in a neighborhood will likely not qualify.

Which of the following statements regarding 1035 exchanges is NOT correct? A) A universal life insurance policy may be exchanged for a fixed deferred annuity tax-free, and the deferred annuity thereafter becomes subject to regular annuity taxation rules. B) A life insurance policy that is a modified endowment contract (MEC) may be exchanged for a new life insurance policy and, provided that premiums are paid for at least 7 years thereafter, no longer be considered a ME C) In order for an exchange of policies to qualify for Section 1035 treatment, the exchange of policy values must be made directly between insurers. D) A deferred annuity may be exchanged for an immediate annuity with no immediate tax consequences, but annuity benefit payments are subject to taxation under annuity taxation exclusion ratio rules.

A life insurance policy that is a modified endowment contract (MEC) may be exchanged for a new life insurance policy and, provided that premiums are paid for at least 7 years thereafter, no longer be considered a ME Explanation Once a MEC, always a MEA life insurance policy that is a MEC may be exchanged tax-free under Section 1035, but the new policy retains the MEC label.

Tony, who is 65 and in excellent health, wants to buy an annuity with $100,000 he recently gained on the sale of his home. He wants to select an income option that will provide him the highest monthly income possible. Which annuity income option best meets Tony's objective? A) A straight life annuity income option B) A 10-year period certain and life annuity income option C) It is not possible to answer this question with the limited information provided D) An installment refund annuity income option

A straight life annuity income option Explanation Regardless of the annuitant's age, health, or marital status, a straight life annuity income option will provide more monthly income than any life annuity income option that includes a guarantee feature.

Which of the following best describes the concept of vesting, with respect to qualified retirement plans? A) The age at which an employee must begin to withdraw from retirement plans B) The right of an employee's spouse to be included in the employee's qualified plan benefits C) An employee's right to funds or benefits contributed by an employer D) The time when an employee meets eligibility requirements for plan participation

An employee's right to funds or benefits contributed by an employer Explanation Vesting is the right of an employee to his retirement fund. Benefits that have vested belong to the employee even if he terminates employment before retirement. Although an employee is always vested in the benefits he contributed, an employer's contributions will vest according to a vesting schedule set by law.

With regard to the taxation of life insurance policies, which of the following statements is CORRECT? A) Amy owns a participating life insurance policy on her own life. She can deduct the premium payments, but she will be taxed on any dividends the policy may pay. B) Donita has taken a policy loan to use as collateral for a loan. The amount of the loan is taxable. C) Terry owns a 10-year-old whole life insurance policy, which she surrenders for cash. She will be taxed on the full amount she receives, since the policy did not mature. D) As long as a whole life policy is not surrendered, the cash value accumulates tax deferred.

As long as a whole life policy is not surrendered, the cash value accumulates tax deferred. Explanation Premiums for individual life insurance, dividends paid on participating policies, and policy loans are not taxable to a policyowner. With policy surrenders, any gain in the cash value is taxable to the extent that the amount received exceeds the total amount of premiums paid by the policyowner.

Which of the following statements regarding an immediate annuity is NOT correct? A) A single premium immediate annuity is designed to make its first benefit payment to the annuitant at the first payment after a delay of 1 payment interval from the date of purchase. B) An immediate annuity has a long accumulation period. C) An immediate annuity must make its first payment within 12 months from the purchase date. D) An immediate annuity is funded with a single payment.

An immediate annuity has a long accumulation period. Explanation Because an immediate annuity makes its first payment at the first payment from the date of purchase, and because most annuities make monthly payments, an immediate annuity would typically pay its first payment 1 month from the purchase date; thus, an immediate annuity has a relatively short accumulation period.

Which of the following statements regarding annuities is NOT correct? A) Pure life annuities provide income as long as the annuitant lives; benefits terminate at death. B) An annuity can be classified as immediate or deferred, depending on when benefit payments begin. C) Annuities that pay benefits in specified dollar amounts are fixed annuities; annuities that pay benefits in relation to units are variable annuities. D) An installment refund annuity guarantees a specific amount of benefits, payable to the annuitant only; if death occurs before total payout, an amount equal to all premiums is refunded to the annuitant's estate or beneficiary.

An installment refund annuity guarantees a specific amount of benefits, payable to the annuitant only; if death occurs before total payout, an amount equal to all premiums is refunded to the annuitant's estate or beneficiary. Explanation A refund annuity guarantees a specific amount of benefits, which will be paid whether or not the annuitant is alive to receive them. If the annuitant dies before receiving this minimum guaranteed benefit, the difference is paid to a beneficiary or to the estate. The money can be in a lump sum (cash refund) or in installments (installment refund).

Archibald surrenders a life insurance policy and receives a lump-sum cash payment of $32,000. His premium payments up to the time of surrender amounted to $26,000. How is the surrender treated for tax purposes? A) Archibald will receive $6,000 tax-free and will be taxed on his $26,000 cost basis. B) The full $32,000 is received tax-free. C) The full $32,000 is taxable as ordinary income. D) Archibald will receive his $26,000 cost basis tax-free and will be taxed on $6,000.

Archibald will receive his $26,000 cost basis tax-free and will be taxed on $6,000. Explanation Archibald will be taxed on the amount that exceeds the $26,000 he paid into the policy's cost basis.

A group life insurance plan participant who has been covered under the plan for 4 years terminates employment on October 1. On October 22 she dies without having made a decision whether to convert her group coverage to an individual policy. What action will the insurer take? A) Assume that the deceased employee would have elected the conversion option and pay the death benefit without regard for the deceased employee's insurability prior to death B) No action, because the employee had not elected the conversion option C) Underwrite the deceased employee to determine if she would have been insurable and, if so, pay the death benefit to the beneficiary D) Underwrite the deceased employee to determine if she would have been insurable and, if so, give the beneficiary the option of exercising the conversion privilege and buying a policy on his life

Assume that the deceased employee would have elected the conversion option and pay the death benefit without regard for the deceased employee's insurability prior to death Explanation If a terminated employee dies during the conversion period without having attempted to convert her life coverage, insurers must presume the deceased would have elected to convert before the end of the conversion period if the death had not occurred. Death benefits are therefore still payable.

Which of the following types of annuity payout options guarantees, as a minimum, the payout of the entire annuity principal amount? A) Cash refund B) Period certain C) Joint and full survivor option D) Pure life

Cash refund Explanation Of these options, only the cash refund payout guarantees that the entire annuity principal will be paid out to the annuitant or beneficiary. A pure life option and a period certain option guarantee payments for a certain period of time, during which the principal may or may not be fully liquidated.

What type of annuity payment option provides a guaranteed income to the annuitant for life and, if the annuitant dies before the annuity is depleted, a lump-sum cash payment to the annuitant's beneficiary? A) Period certain option B) Cash refund option C) Straight life option D) Installment refund option

Cash refund option Explanation A period certain option guarantees payments for a certain amount of time, whether or not the annuitant is alive. The payments stop when the specified period is over. A straight life option pays the annuitant a guaranteed income for her lifetime; no further payments are made after the annuitant dies. An installment refund option pays out what is left to the beneficiary in the form of continued annuity payments.

Larry owns a deferred annuity for which his spouse, Karen, is the designated annuitant and his son, Chris, is the designated beneficiary. If Larry were to die before the contract is annuitized, to whom would the contract's death benefit be payable? A) Larry's estate B) Chris C) No one; there is no death benefit under these circumstances D) Karen

Chris Explanation A deferred annuity's death benefit (which is equal to the contract's accumulated value) is payable to the contract's beneficiary, not the annuitant. This can create planning problems for annuity contract owners who assume contract proceeds would be payable to the designated annuitant were the owner to die before annuitization.

Matteo owns a nonqualified deferred annuity that has a current value of $50,000. He has 2 children, ages 11 and 17. If he decides to devote this annuity solely to help pay for their college education, and his goal is to maximize the annuity income payments, which of the following is the best option? A) Convert to an immediate annuity using a straight life annuity income option B) Convert to an immediate annuity using a 10-year period certain and life annuity income option C) Convert to an immediate annuity with an installment refund annuity income option D) Convert to an immediate annuity using a 10-year period certain annuity option

Convert to an immediate annuity using a 10-year period certain annuity option Explanation Distributing a lump sum of money over a specified period of time with a period certain annuity only will generate a higher annuity payment amount than any option that includes a life contingency.

Madison, who is 27, is interested in purchasing a car from the local dealership. What kind of insurance might be included when she finances her car? A) Credit life insurance B) Convertible term insurance C) Universal life insurance D) Variable life insurance

Credit life insurance Explanation Auto dealerships offer credit life insurance and include the premium as part of the car loan. If Madison should die before paying off her loan, the dealership will receive the amount of life insurance necessary to pay off the outstanding debt.

Which of the following statements regarding group credit life insurance is NOT correct? A) When a debt or loan has been repaid, the policy ceases to provide coverage. B) Depending on the loan amount, evidence of insurability may be required. C) Premiums on a group policy are less expensive than premiums charged for individual policies. D) The insurance amount is equal to the loan amount or debt owed.

Depending on the loan amount, evidence of insurability may be required. Explanation One of the benefits of group credit life insurance is that evidence of insurability is usually not required.

Which of the following statements concerning qualified retirement plans is NOT correct? A) Employer-sponsored IRAs are considered qualified retirement plans. B) Employer contributions to a qualified plan are tax deductible as a business expense. C) The earnings of a qualified plan are not taxed until they are distributed. D) Employer contributions to a qualified plan on behalf of its employees are taxable income to the employees when they are made.

Employer contributions to a qualified plan on behalf of its employees are taxable income to the employees when they are made. Explanation Employer contributions to a qualified plan on behalf of its employees are not considered taxable income to the employees when they are made.

Which act protects the interests of participants in employee benefit plans? A) State Insurance Department Regulation Act B) Insurance Company Act of 1941 C) Sponsoring Employer Benefit Act D) Employee Retirement Income Security Act

Employee Retirement Income Security Act Explanation The Employee Retirement Income Security Act (ERISA) is designed to protect the interests of participants in in employee benefit plans as well as the interests of the participants' beneficiaries.

Which of the following statements regarding 401(k) plans is CORRECT? A) Employers must match the first 5% of an employee's elective deferral. B) Contributions are required by employers. C) All employees must contribute by law. D) Employees can make elective salary deferrals.

Employees can make elective salary deferrals. Explanation Employees have the choice to make elective deferrals to their employer's 401(k) plan. Employees are not required to contribute, and employers are not required to offer matching contributions.

Which of the following statements regarding employee eligibility for group benefits is TRUE? A) Age and sex determine eligibility B) An employee on disability leave is eligible for group benefits C) Union workers may not be excluded D) Employees must be actively at work

Employees must be actively at work Explanation Employers may establish employment criteria stating that an employee must be actively at work and not on disability leave.

Which of the following employees would NOT be eligible for a 403(b) plan? A) Employees of a hospital B) Employees of banks and credit unions C) Employees of a Catholic church D) Public school employees

Employees of banks and credit unions Explanation 403(b) plans work much like 401(k) plans and are meant for employees of nonprofit organizations such as public schools, hospitals, and churches.

Which of the following statements about the tax advantages of a qualified retirement plan is NOT true? A) Earnings of a qualified retirement plan are exempt from employees' current income taxation. B) Employees' contributions to retirement plans are included in ordinary income. C) Earnings from a qualified retirement plan are taxable when paid as a benefit. D) Employer contributions to qualified plans are deductible business expenses.

Employees' contributions to retirement plans are included in ordinary income. Explanation Employees' contributions to individual retirement plans are deductible from ordinary income under certain conditions.

Annuity payments are taxable to the extent that they represent interest earned rather than capital returned. What method is used to determine the taxable portion of each payment? A) Annuitization ratio B) Marginal tax formula C) Surtax ratio D) Exclusion ratio

Exclusion ratio Explanation An exclusion ratio is applied to each benefit payment the annuitant receives to determine the amount that is excluded from taxation: investment in the contract is equal to the exclusion ratio divided by the expected return. The investment in the contract is the amount of money paid into the annuity. The expected return is the annual guaranteed benefit the annuitant receives, multiplied by the number of years she will receive benefits.

Which of the following business life insurance premiums is tax deductible to the business? A) Key-person life insurance policies B) Life insurance policies that reimburse the business for benefits paid under deferred compensation plans C) Buy-sell agreements funded by life insurance policies D) Executive bonuses

Executive bonuses Explanation Premiums are tax deductible to a business for executive bonuses because they are considered part of the employee's compensation. The other 3 are not tax deductible because financial benefits are derived by the business.

Which of the following statements regarding the tax treatment of distributions from an individually owned, nonqualified, deferred annuity is NOT correct? A) An owner of a deferred annuity who annuitizes the contract will receive the basis tax-free. B) If the contract owner makes a partial surrender, the amount withdrawn is treated first as a taxable distribution of gain (LIFO). C) If the contract owner is younger than age 59½, a partial surrender may be subject to a 10% penalty in addition to ordinary income taxation. D) If the distribution is the result of the annuity contract owner's death, the cash value payable to the beneficiary is income tax-free.

If the distribution is the result of the annuity contract owner's death, the cash value payable to the beneficiary is income tax-free. Explanation There are no tax-free death benefits associated with annuities, as there are with life insurance. The portion of the cash value death benefit that constitutes gain is subject to income taxation whenever distributed.

Which of the following statements best describes a Keogh (HR-10) plan? A) It is a qualified retirement plan for self-employed individuals only. B) It is a nonqualified retirement plan for self-employed individuals only. C) It is a qualified retirement plan for self-employed individuals and their eligible employees. D) It is a nonqualified retirement plan for self-employed individuals and their eligible employees.

It is a qualified retirement plan for self-employed individuals and their eligible employees. Explanation A Keogh plan (or an HR-10) is a qualified retirement plan for self-employed individuals and their eligible employees, if any.

Which annuity settlement arrangement guarantees to pay at least a minimum amount equal to the original investment? A) Installment refund annuity B) Joint and full survivor annuity C) Period certain annuity D) Pure life annuity

Installment refund annuity Explanation An installment refund annuity assumes that the total annuity fund will be paid to the annuitant, his beneficiary, or both.

What is credit life insurance? A) Life insurance that is credited to the policyholder's account B) Insurance that covers a debtor's life and will help provide funds to pay off a loan if the debtor dies before the loan is repaid C) Life insurance purchased with a major bank credit card D) Life insurance purchased on credit, with the money due at a later date

Insurance that covers a debtor's life and will help provide funds to pay off a loan if the debtor dies before the loan is repaid Explanation Credit life insurance is insurance on the life of a debtor in connection with a specific loan or other credit transaction. The amount of credit life insurance may not exceed the initial indebtedness.

Which of the following individuals is NOT eligible to contribute up to the maximum allowable limit to a traditional individual retirement account? A) Shirley, age 21, who is single, earns below the allowable modified adjusted gross income limit, and is not covered under an employer-sponsored retirement plan B) Joe, age 71, who is married, has an earned income, and is not covered under an employer-sponsored retirement plan C) Karen, age 61, who is single, earns below the allowable modified adjusted gross income limit, and is covered under an employer-sponsored profit-sharing plan D) Craig, age 51, who is married, is covered under an employer-sponsored 401(k) plan, and earns below the allowable modified adjusted gross income limit

Joe, age 71, who is married, has an earned income, and is not covered under an employer-sponsored retirement plan Explanation Anyone younger than age 70½ who has earned income may open a traditional IRA and contribute each year an amount up to the maximum allowable contribution limit or 100% of earned compensation, whichever is the lesser amount. The amount of the deductible contribution, however, may be restricted for those who are also covered (or who have a spouse who is covered) under an employer-sponsored plan, or for those with a modified adjusted gross income above a specified limit. Based on the individual's modified adjusted gross income, he may be entitled to only a partial (reduced) deduction or no deduction at all. No contributions are permitted to a traditional IRA once an individual reaches age 70½. The actual annual limit on maximum contributions that an individual can make is indexed and, therefore, may change any given year.

Lee, who is a CPA, would like to open up a traditional IRA as a savings vehicle for retirement. He will be 62 on his next birthday. Lee is currently interviewing with a Fortune 500 company. He was at his last job for over 15 years but is not currently working. Which of the following statements is TRUE? A) Lee's previous salary was over the limits established by the IRA. B) Lee is currently not eligible to open an IRA because he does not have earned income. C) Lee's age does not allow him to make pretax contributions. D) Lee can begin contributing to his spouse's IRA, which would then be considered a joint account.

Lee is currently not eligible to open an IRA because he does not have earned income. Explanation Almost any individual who receives wages and is under 70½ may open an IRA. The IRA establishes a specific dollar amount up to which an individual may contribute his earned income. Married couples must set up their own individual accounts.

Which of the following statements regarding the estate tax treatment of life insurance owned by the insured at the insured's death is NOT correct? A) The insured could keep death benefit proceeds out of his estate by making another party the owner of the policy. B) Life insurance that is owned by the insured will avoid estate tax inclusion as long as ownership is transferred to another party at least 1 year before the insured's death. C) An irrevocable life insurance trust is a common device used to keep life insurance out of the insured's estate. D) Life insurance death benefit proceeds are included in the insured's estate for estate valuation purposes if the policy was owned by the decedent.

Life insurance that is owned by the insured will avoid estate tax inclusion as long as ownership is transferred to another party at least 1 year before the insured's death. Explanation Life insurance owned by the insured is included, at its full death benefit amount, in the insured's estate at death for estate valuation purposes. An insured can avoid this by transferring existing policies to another party (e.g., an irrevocable life insurance trust) at least 3 years before the insured's death.

What annuity payout option provides for lifetime payments to the annuitant but guarantees a certain minimum term of payments (typically 5, 10, or 20 years), whether or not the annuitant is living? A) Period certain B) Straight life income C) Life with period certain D) Installment refund option

Life with period certain Explanation Also known as the life income with term certain option, this payout approach is designed to pay the annuitant an income for life, but guarantees a definite period of payments. If an individual has a 10-year life with period certain annuity and receives monthly payments for 6 years before dying, his beneficiary will receive the same payments for 4 more years.

Which of the following statements regarding annuities is NOT correct? A) Annuity payments are guaranteed. B) Like life insurance, an annuity is used primarily to provide income at death. C) An annuity is based on mortality assumptions and the law of large numbers. D) An annuity contract provides for the purchase of income.

Like life insurance, an annuity is used primarily to provide income at death. Explanation Unlike life insurance, an annuity is used primarily to provide income during life; consequently, annuity payments are guaranteed to be paid as long as the annuitant lives.

Which of the following is least likely to sponsor group credit life insurance plans? A) Mortgage companies B) Credit card companies C) Car dealerships D) Local grocery stores

Local grocery stores Explanation Credit life insurance covers a debt amount owed to a lender so that if the borrower dies, the lender will receive the amount of life insurance to pay off the outstanding debt. Group credit insurance is more likely to be sponsored by car dealerships, credit card companies, and mortgage companies.

To supplement their income in their senior years, Harold purchased a fixed immediate annuity at age 65, naming his spouse, Lucy, as the joint annuitant under a joint and 50% survivor annuity payout option that pays the couple $1,000 per month. If Harold were to die today, which of the following statements would be CORRECT? A) Lucy would continue receiving monthly benefits of $1,000, but only for her remaining life expectancy, at which time payments would cease if she were still alive. B) Lucy would continue receiving monthly benefits of $500, but only for her remaining life expectancy, at which time payments would cease if she were still alive. C) Lucy would continue receiving monthly benefits of $500 for the remainder of her life. D) Lucy would continue receiving monthly benefits of $1,000 for the remainder of her life.

Lucy would continue receiving monthly benefits of $500 for the remainder of her life. Explanation Under a 50% joint and survivor annuity income option, annuity payments are payable as long as both annuitants are alive. However, at the first death the payment amount would decrease to 50% of the original amount.

A trust that is formed by a group of smaller employers in the same or similar industries is known as a A) MET B) union C) MEWA D) association

MET Explanation A multiple employer trust or MET is a group of employers engaged in the same or similar types of industries.

Which of the following statements best describes the general tax treatment of life insurance pre- and post-death distributions? A) Most pre- and post-death distributions from a life insurance policy are income tax-free, but they may be subject to AMT. B) All distributions from a life insurance policy at the insured's death are income tax-free, but pre-death distributions are subject to income taxation. C) Most distributions from a life insurance policy at the insured's death are income tax-free, but pre-death distributions may be subject to income taxation if the withdrawal exceeds premiums paid. D) Most pre- and post-death distributions from a life insurance policy are subject to income taxation to the extent there is gain in the policy.

Most distributions from a life insurance policy at the insured's death are income tax-free, but pre-death distributions may be subject to income taxation if the withdrawal exceeds premiums paid. Explanation Most distributions from a life insurance policy at the insured's death are income tax-free, but pre-death distributions are subject to income taxation to the extent there is gain in the policy. The death benefit of a policy that is subject to transfer-for-value rules may be subject to income taxation, so it is not correct to say all policies enjoy a tax-free death benefit.

Which of the following statements with regard to group term life insurance is CORRECT? A) Most group term policies contain a conversion privilege, allowing insureds to convert the coverage to an individual plan if they leave the group. B) Premiums paid by the employer are tax deductible by the employer and taxable to the employee. C) Group insurance plans must be noncontributory. D) Since group term coverage is an employee benefit, employers can select which employees will be covered.

Most group term policies contain a conversion privilege, allowing insureds to convert the coverage to an individual plan if they leave the group. Explanation Employers who provide group term life insurance plans cannot discriminately limit participation, nor can they arrange the plans to favor key employees. Any premiums paid by the employer are not considered taxable income to the covered employee, though they are deductible by the employer. Group plans may be contributory or noncontributory.

What types of organizations are eligible for 403(b) plans to benefit their employees? A) Private corporations such as law firms and CPA firms B) Nonprofit organizations such as public schools, churches, and hospitals C) Banks and credit unions D) Manufacturing business with more than 1,000 employees

Nonprofit organizations such as public schools, churches, and hospitals Explanation 403(b) plans work much like 401(k) plans but are designed for employees of nonprofit organizations such as public schools, hospitals, and churches.

Sidney, age 58, owns a deferred variable annuity that he purchased 15 years ago and into which he has paid $25,000 in the form of periodic premiums. Today its cash value is $37,000. If he dies today, which of the following statements best describes the tax treatment this transaction will receive? A) Of the cash value, $25,000 is payable to the beneficiary income tax-free, $12,000 is subject to income taxation, and there is a penalty tax. B) Of the cash value, $12,000 is payable to the beneficiary income tax-free and $25,000 is subject to income taxation. C) Of the cash value, $25,000 is payable to the beneficiary income tax-free and $12,000 is subject to income taxation. D) The full $37,000 is payable to the beneficiary income tax-free.

Of the cash value, $25,000 is payable to the beneficiary income tax-free and $12,000 is subject to income taxation. Explanation There are no tax-free death benefits associated with annuities, as there are with life insurance. The portion of the cash value death benefit that constitutes gain is subject to income taxation. Because the payout is the result of death, there is no early withdrawal penalty tax.

What is credit life insurance? A) Policies that cover payment of a debt if the debtor dies B) Life insurance purchased through credit card solicitation C) Credit given to policyholders who consistently pay their premiums on time D) Insurance offered on credit when the policyholder is unable to pay premiums

Policies that cover payment of a debt if the debtor dies Explanation Credit life insurance is insurance on the life of a debtor, written in connection with a loan or other credit transaction for a period of no longer than 10 years.

Which of the following statements regarding conversion is TRUE? A) The converted policy must be term insurance. B) Conversion must be within 45 days from the date coverage is lost. C) The converted policy may be any amount the insured chooses. D) Premiums are based on the attained age at conversion.

Premiums are based on the attained age at conversion. Explanation When a group policy is converted, the premium will be based on the insured's attained age. Conversion must be within 31 days from the date coverage is lost, must be the same coverage amount, and must be a permanent, not term, policy. Lastly, no proof of insurability is required.

Which of the following statements regarding business life insurance policies is NOT true? A) Death benefits are not taxable. B) Key-person life insurance policies are not deductible to the business. C) Premiums are tax deductible, except for executive bonus plans. D) Premiums for executive bonus policies are taxable income to the employee.

Premiums are tax deductible, except for executive bonus plans. Explanation In general, business life insurance policies are not deductible to the business. However, executive bonus plans are considered compensation and are deductible to the business, and the bonus used to pay the premium is taxable to the employee.

Which of the following statements regarding nonqualified annuities and their tax treatment is NOT correct? A) Premiums are tax deductible. B) Interest earnings accumulate tax deferred and are taxed when distributed. C) Nonqualified annuities are LIFO contracts, meaning that the last money credited (interest earned) is the first money distributed in a withdrawal. D) The 10% early withdrawal tax penalty is waived if the owner is disabled.

Premiums are tax deductible. Explanation Nonqualified annuities are funded with after-tax dollars that accumulate tax deferred until distributions occur. Those distributions are on a LIFO basis. If a contract is annuitized, part of the distribution will be returned as principal.

Employees of which of the following generally may participate in a tax-sheltered annuity (TSA) plan? A) Public school systems B) Manufacturing plants C) Professional sports teams D) Professional partnerships

Public school systems Explanation Employees of nonprofit charitable, educational, and religious organizations may participate in tax-sheltered annuity (TSA) plans.

What type of annuity settlement arrangement stops making payments when the annuitant dies? A) Pure life annuity B) Cash refund annuity C) Period certain annuity D) Installment refund annuity

Pure life annuity Explanation When an individual owning a pure life annuity dies, no further payments are made. Of the settlement arrangements listed, a pure life annuity generates the largest monthly income.

For tax purposes, retirement plans can be divided into which of the following 2 categories? A) Qualified and nonqualified B) Independent and funded C) Whole and term D) Fixed and variable

Qualified and nonqualified Explanation For tax purposes, retirement plans can be divided into 2 categories: qualified, which meet certain IRS standards, and nonqualified, which are not required to meet the IRS conditions.

Which of the following would NOT be required of a producer who wants to sell variable annuities? A) Having a valid producer life insurance license and completing the state variable annuity certification, if required B) Registration with the Financial Industry Regulatory Authority C) Successfully passing the required exams D) Registration with the National Association of Insurance and Financial Advisors

Registration with the National Association of Insurance and Financial Advisors Explanation To sell variable annuities, a producer must have a valid life insurance license and be registered with the Financial Industry Regulatory Authority (FINRA). To be registered with FINRA, the producer must first pass the applicable securities exams. To obtain a life insurance license, the producer must also first pass the state life insurance exam. Being a member of the National Association of Insurance and Financial Advisors (NAIFA) is not required to sell variable annuities.

Which of the following statements regarding required minimum distributions is NOT correct? A) Required minimum distributions must occur no later than age 59½. B) The first minimum withdrawal can be delayed until April 1 of the year following the owner turning 70½. C) Annual minimum withdrawals are based upon the life expectancy of the owner. D) There is a 50% penalty on taxes owed if minimum distributions are not taken.

Required minimum distributions must occur no later than age 59½. Explanation RMDs must start at age 70½, though the first can be delayed until April 1 of the year following the owner turning 70½.

Rodney, age 35, earned $40,000 last year and did not participate in an employer retirement plan. Rodney has a nonworking spouse, with whom he filed a joint income tax return. Which of the following statements is TRUE? A) Rodney could establish an IRA for himself and contribute any amount he wishes to it. B) Rodney could establish separate IRAs for himself and his spouse and could deduct a contribution of $10,000 to his IRA and $5,000 to his spouse's IRA. C) Rodney could establish an IRA for himself but not for his spouse because she is unemployed. However, because he is married, he could contribute and deduct up to twice the maximum for an individual IRA, or $10,000. D) Rodney could establish a separate IRA for himself and another for his spouse and could deduct a contribution of up to the current annual maximum, which is adjusted annually for cost of living.

Rodney could establish a separate IRA for himself and another for his spouse and could deduct a contribution of up to the current annual maximum, which is adjusted annually for cost of living. Explanation The spousal deduction is available for qualified taxpayers for separate IRA accounts—one belonging to the taxpayer, the other to the spouse. The maximum deductible amount is adjusted annually.

Scott, who recently married JoEllyn, wants to start saving money for their retirement. He is an engineer for a small company that does not have an employer-sponsored retirement plan, and he earns an annual salary of $65,000. Which of the following statements is TRUE? A) Scott could buy stock from his company to fund his IRA. B) Scott could set up 2 individual accounts (1 for himself and 1 for JoEllyn). C) Scott's income level is above the level set by the IRS. D) IRA contributions are not tax deductible for JoEllyn because she is not eligible to contribute to her company's plan.

Scott could set up 2 individual accounts (1 for himself and 1 for JoEllyn). Explanation For both Scott and JoEllyn to save for retirement using a traditional IRA, an individual account must be set up for each of them.

In which of the following situations might Gabriela be eligible for group credit insurance? A) She recently purchased a car and financed it through the dealership. B) She recently paid off her car loan and has excellent credit. C) She recently purchased a new car, paying cash. D) She is an employee of a car dealership and wants to buy credit insurance through the dealership.

She recently purchased a car and financed it through the dealership. Explanation If the dealership offers credit insurance to its customers, Gabriela will likely be eligible for this coverage. She will not be eligible simply by being an employee of the dealership, paying off her outstanding loan, or paying cash.

Susan, age 52, withdrew $5,000 from her traditional individual retirement account, which consisted entirely of pretax contributions, to purchase her first home. What are the tax consequences? A) Susan will not be assessed a 10% penalty if she pays back the funds within 60 days. B) Susan must pay a 10% penalty plus income tax on the withdrawal. C) Susan will not be assessed the 10% penalty on her early withdrawal. D) Susan must pay a 10% penalty on the withdrawal.

Susan will not be assessed the 10% penalty on her early withdrawal. Explanation With a few exceptions, any distribution from a traditional IRA before age 59½ will be subject to income tax and a 10% penalty. However, up to $10,000 may be withdrawn before age 59½ to pay for the purchase of a first home without being assessed the 10% penalty.

Which of the following statements pertaining to tax-sheltered annuities (TSAs) is CORRECT? A) TSAs are available to any worker not covered by an employer-sponsored retirement plan. B) TSAs are available to employees of certain nonprofit organizations. C) Alice, the vice president of a computer software company, can invest in a tax-sheltered annuity. D) Fred, a schoolteacher participating in a tax-deferred annuity, will receive his benefits tax-free.

TSAs are available to employees of certain nonprofit organizations. Explanation Tax-sheltered annuities are available to employees of certain nonprofit organizations, such as schools. Participants do not pay current taxes on their contributions, but they will be taxed on benefits when they are received.

Who, besides the state, regulates the sale of variable life insurance and variable annuities? A) The National Association of Insurance Commissioners (NAIC) B) The Securities and Exchange Commission (SEC) C) The Federal Communications Commission (FCC) D) The Federal Trade Commission (FTC)

The Securities and Exchange Commission (SEC) Explanation Federal securities laws apply to insurers who issue variable annuities and variable life insurance. Therefore, these insurers must comply with regulations of both the state and the SEC.

Which of the following statements about immediate annuities is NOT correct? A) The first benefit payment is typically made 1 month from the purchase date. B) The income flow must be fixed rather than variable. C) They have relatively short accumulation periods. D) They can only be funded with a single payment.

The income flow must be fixed rather than variable. Explanation The income flow from immediate annuities can be either fixed or variable. With a fixed immediate annuity, the annuitant is guaranteed an income flow without risk of market fluctuations affecting the amount of income. With a variable immediate annuity, the investment risk is transferred to the annuitant. This means that once an income stream is created, the payments can increase or decrease depending on the performance of the underlying investments.

If both an older and a younger person had annuity funds of the same amount and simultaneously began to receive monthly life payments, which individual would receive the larger payments? A) Both would receive the same amount B) The amount of the payment is based on the purchase date of the annuity C) The younger person D) The older person

The older person Explanation If both an older and a younger person had annuity funds of the same amount and simultaneously began to receive monthly payments, the older person would receive the larger payments, since the insurer would expect to pay the older person for a shorter time according to life expectancy.

Which of the following statements about annuities is NOT correct? A) The withdrawal rule on annuity cash value is FIFO. B) Annuities may be appropriate investments for both individuals and corporations. C) The 10% penalty tax is imposed on the interest earned and withdrawn, not on the principal. D) The 10% penalty tax on early distributions does not apply to distributions made to the annuity owner after separating from service from the employer after the owner reaches age 59½.

The withdrawal rule on annuity cash value is FIFO. Explanation The withdrawal rule on annuity cash value is LIFO: last in, first out. This means if the policyowner takes a withdrawal, the company will give the owner interest first, which is taxable at the insured's individual income tax bracket. If the owner is not at least 59½ years old at the time of withdrawal, a 10% penalty will also be assessed to taxable dollars withdrawn. The owner never pays taxes on withdrawing the cost basis or the money paid into the annuity.

Kelly, age 48, owns a universal life insurance policy (non-MEC) with a current death benefit of $270,000 and a cash value of $20,000. Her basis in the policy is $12,000. Kelly is interested in either borrowing or withdrawing $15,000 from this policy. What would be the tax consequences if she were to borrow the $15,000 through a policy loan? A) Of the amount borrowed, $12,000 would be income tax-free, $3,000 would be subject to income taxation, and there would be an additional penalty tax. B) There would be no income taxation on any portion of the amount borrowed, whether or not she repaid the policy loan. C) Of the amount borrowed, $12,000 would be income tax-free and $3,000 would be subject to income taxation. D) There would be no income taxation on any portion of the amount borrowed, but if she did not repay the loan, $3,000 would be subject to income taxation.

There would be no income taxation on any portion of the amount borrowed, whether or not she repaid the policy loan. Explanation Except in the case of a MEC, life insurance policy loans are income tax-free.

Which of the following statements pertaining to SIMPLE plans is NOT correct? A) SIMPLE plans allow employers to set up tax-favored retirement savings plans for their employees without having to comply with complicated qualification requirements. B) All employees are fully and immediately vested in SIMPLE plans. C) SIMPLE plans may be structured like IRAs or 401(k) plans. D) These plans are reserved for employers with 500 or more employees.

These plans are reserved for employers with 500 or more employees. Explanation SIMPLE plans are reserved to small businesses that employ 100 or fewer employees.

Which of the following statements regarding deferred annuities is NOT correct? A) They typically have a surrender charge that is assessed with contract surrender during the first 2 to 12 years or more. Typically up to 10% of the contract value can be withdrawn free of surrender charge in any 1 year. B) They may be funded with a single premium payment or with periodic premium payments. C) The owner is not required to annuitize the contract. D) They generally permit contract owners to withdraw a specified percentage annually, tax-free and without a surrender charge.

They generally permit contract owners to withdraw a specified percentage annually, tax-free and without a surrender charge. Explanation Surrender charge-free withdrawals are generally permitted up to a specified percentage. (A common percentage is 10%.) Although these free withdrawals may escape the contract's surrender charge, they are subject to income taxation. If the contract owner is younger than age 59½, the tax may include a 10% penalty.

Which of the following factors is the most pronounced difference between group and individual insurance plans? A) Premium rates B) Underwriting process C) Customization of coverage for individuals D) Renewability

Underwriting process Explanation The most pronounced difference between group and individual insurance lies in the underwriting process. In the case of group plans, once the group is approved, all members are eventually included. In the case of an individual policy, a key factor is the insured's ability to qualify for coverage and obtain it at an affordable rate.

When a cash value life insurance policy is converted into an annuity in a nontaxable transaction, the event is generally known as A) a 1035 exchange B) a modified endowment C) a rollover D) a pension enhancement

a 1035 exchange Explanation Section 1035 of the Internal Revenue Code provides for tax-free exchanges of certain kinds of financial products, including the exchange of life insurance for annuity contracts.

All of the following groups would be eligible for group insurance EXCEPT A) an employer-employee group B) a labor union C) a family of 10 D) a trade association

a family of 10 Explanation Family members are not considered groups for the purposes of group insurance.

Joanna and her spouse, Bill, have a $40,000 annuity that pays them $200 a month. Bill dies, and Joanna continues receiving the $200 monthly check as long as she lives. When Joanna dies, the payments cease. This is an example of A) a life annuity B) an installment refund annuity C) a joint and full survivor annuity D) a cash refund annuity

a joint and full survivor annuity Explanation The joint and full survivor option provides for payment of the annuity to 2 people. If either person dies, the same income payments continue to the survivor for life. When the surviving annuitant dies, no further payments are made to anyone.

If an annuitant has a refund annuity and dies after the annuity income begins, her beneficiary will receive A) a predetermined lump-sum cash payment B) a lump-sum cash payment equal to the starting annuity fund C) a lump-sum cash payment equal to the starting annuity fund, less the amount of income already paid to the deceased D) nothing

a lump-sum cash payment equal to the starting annuity fund, less the amount of income already paid to the deceased Explanation If an annuitant has a cash refund annuity and dies after the annuity income begins, her beneficiary will receive a lump-sum cash payment equal to the annuity fund, less the amount of income already paid to the deceased.

All of the following individuals should be eligible to establish a Keogh (HR-10) retirement plan EXCEPT A) a dentist in a private practice whose business is unincorporated B) partners in a furniture store C) the sole proprietor of a jewelry store D) a major stockholder-employee in a family corporation

a major stockholder-employee in a family corporation Explanation Keogh plans are qualified retirement plans designed for self-employed individuals in unincorporated businesses.

The period of time a new employee has to wait before she may enroll in a group life insurance plan is called A) an enrollment period B) a probationary period C) a discrimination period D) an elimination period

a probationary period Explanation New employees must wait a certain period of time before they may enroll in a group insurance plan. This period is called the probationary period, and the amount of time is chosen by the employer. The probationary period must apply to all eligible employees.

The combination of current tax deduction for the employer plus tax deferral for the employee is possible with all of the following types of plans EXCEPT A) a money purchase B) a savings account C) a stock bonus D) a 401(k)

a savings account Explanation The combination of current tax deductibility by the employer and tax deferral for the employee is the primary tax benefit of all qualified plans. A savings account does not enjoy either of these tax advantages.

Variable annuities are regulated as A) health insurance under the Affordable Care Act B) unilateral contracts C) long-term care insurance D) both insurance products and securities

both insurance products and securities Explanation Variable annuities are considered securities and insurance products; as such, they are regulated by both the state insurance departments and the Securities and Exchange Commission.

An annuity contract owner has the right to do all of the following EXCEPT A) surrender or terminate the agreement B) change the interest rate C) name or change the annuitant D) choose the payout option

change the interest rate Explanation Unlike life insurance products, where policy issue and pricing are based largely on mortality risk, annuities are investment products. A person funds an annuity and the insurer credits it with a certain rate of interest to make the annuity grow. Annuities are flexible in that the purchaser has a number of rights that allow her to tailor the product to best suit her needs. The purchaser can add funds or make withdrawals, name or change the annuitant or beneficiary, choose the payout option, and surrender or terminate the agreement. The insurer sets the interest rate.

All of the following are characteristics of group life insurance EXCEPT A) the employee designates the beneficiary B) each insured in the group receives a policy C) certificates of insurance provide a summary of benefits D) the employer is the policyowner

each insured in the group receives a policy Explanation A distinguishing characteristic of group life insurance is its use of a master contract that sets forth the terms and conditions between the insurance company and the policyowner, who is the employer. Those covered by the contract—the employees—do not receive individual policies and are not parties to the contract. Each insured instead receives a certificate of insurance and has the right to name beneficiaries.

When credit life or health insurance is required to secure a debt, the debtor must A) buy required coverage directly from the loan institution itself B) purchase the required coverage from the loan institution's insurer C) have the option of getting required coverage from existing coverage or from any authorized insurer D) have the option of buying federal government credit coverage through the Social Security Administration

have the option of getting required coverage from existing coverage or from any authorized insurer Explanation If a creditor requires credit life or health insurance as additional security on a debt, the debtor must be given the option of furnishing the required insurance through existing coverage owned by the debtor or by purchasing coverage from any authorized insurer.

Life insurance protects people from dying too soon, while annuities protect people from A) hospitals B) excessive taxes C) poor health D) living too long

living too long Explanation Annuity products were created to protect people from outliving their income. Once a product is annuitized, it will pay an income to the annuitant as long as she lives.

Under a Keogh (HR-10) plan, employers A) must contribute to their eligible employees, but at a percentage of the employer's choice B) must contribute the same percentage to their eligible employees as they contribute to their own plans C) have the option to choose the percentage amount and which employees they contribute to D) can choose to not contribute to their employees

must contribute the same percentage to their eligible employees as they contribute to their own plans Explanation Under a Keogh (HR-10) plan, employers must contribute the same percentage to their eligible employees as they contribute to their own plans.

In group insurance plans, if the plan is noncontributory, the employer A) is allowed to select the employees who may participate in the plan B) pays the entire premium C) pays none of the premium D) must limit plan enrollment to 5 or fewer employees

pays the entire premium Explanation Noncontributory plans are so classified because the employer pays the entire premium. Covered employees do not contribute to the cost of the plan, although they may pay an extra premium to cover their dependents under the plan. Conversely, a contributory plan is one in which both the employer and the employee pay a portion of the premium.

Under an executive bonus plan, the amount of premiums paid is A) taxable to the business and the employee B) taxable income for the employee C) taxed as a corporate business expense D) not taxed and treated as deferred income

taxable income for the employee Explanation Under an executive bonus plan, the premiums are tax deductible for the business and are considered employee compensation. The premium, since it is considered compensation, is taxable income for the employee.

Many of the basic protections associated with qualified employer plans can be traced to A) the Social Security Reform Act B) the Employee Retirement Income Security Act C) Public Law 15 D) the McCarran-Ferguson Act

the Employee Retirement Income Security Act Explanation The Employee Retirement Income Security Act of 1974, commonly known as ERISA, protects the rights of workers covered under an employer-sponsored plan. ERISA imposes a number of requirements that retirement plans must follow to obtain IRS approval as qualified plans.

A master policy is issued to the sponsoring group and the policyholder is A) the employer B) the producer C) the insurer D) the employee

the employer Explanation The policyholder is the applicant, which is the employer applying on behalf of the employees for group insurance. The policyholder receives the master policy and the employees receive a certificate of insurance.

An annuity has 2 phases: the annuitization phase and A) the retirement phase B) the accumulation or pay in phase C) the growth phase D) the payout phase

the accumulation or pay in phase Explanation An annuity can have 2 phases or periods: the accumulation phase (pay in), where account values grow as principal is credited with interest earned, and the annuitization phase (pay out), where the contract generates an income stream from its accumulated value.

The time during which funds are being paid into an annuity is called A) the annuity period B) the accumulation period C) the savings period D) the paid-up period

the accumulation period Explanation The accumulation period is the time during which funds are being paid into the annuity, in the form of premiums by the contract holder and interest earnings credited by the insurer. The payout or annuity period is the point at which the annuity ceases to be an accumulation vehicle and begins to generate income payments on a regular basis.

All of the following are factors that determine the annuity benefit amount EXCEPT A) the annuitant's age B) the company's expense (loading) factor C) the annuitant's tax bracket D) the annuitant's sex

the annuitant's tax bracket Explanation Age, sex, and expenses (plus premium contributions, payment cost, interest rate, and type of annuity option selected) are all factors that determine the annuity benefit. The annuitant's tax bracket is not a factor.

Typically, a contract for group life insurance is issued to A) the producer who sold the policy B) the employer C) the employee D) the insurer

the employer Explanation A contract for group life insurance is issued to the policyowner (typically, an employer). The individuals who are insured under the contract (typically, employees or others who have a specific relationship to the policyowner) may be given certificates of insurance as evidence of their coverage.

Under a group life plan, eligible dependents of an insured employee could include all of the following EXCEPT A) the insured's in-laws B) the insured's dependent parents C) the insured's brother, who lives with her D) the insured's spouse

the insured's in-laws Explanation To be eligible for coverage under a group life plan, the insured's in-laws would need to be financially dependent upon the insured./

A certificate holder will lose their coverage under a group life insurance plan due to any of the following EXCEPT A) the insurer does not renew the policy B) the employer discontinues the plan C) the certificate holder leaves the employer D) the insurer increases the premium

the insurer increases the premium Explanation A certificate holder and dependents will lose coverage if the insurer or employer does not renew the plan or if the certificate holder chooses to leave the employer. Premium increases are not a factor unless the certificate holder chooses not to continue coverage./

The amount of an annuity payment depends on all of the following factors EXCEPT A) the annuitant's age and gender B) the assumed rate of interest C) the length of the payment guarantee D) the insurer's reserves

the insurer's reserves Explanation The amount of an annuity payment depends on several factors: starting principal, assumed rate of interest, length of the income guarantee period, and the annuitant's age and gender. By knowing the original sum of money (the principal), the length of the payment period, and an assumed rate of interest, as well as the age and gender of the annuitant, one can calculate the payment amount. Actuaries use tables of annuity factors to accomplish this.

During the accumulation period of a deferred variable annuity, the value of the individual account rises or falls based on A) the variable premiums B) the insurer's expenses C) the number of annuitants D) the investment results

the investment results Explanation During the accumulation period of a deferred variable annuity, the value of the individual account rises or falls based on the investment results of the annuity's underlying securities.

A primary difference between a SEP and an IRA is that A) the limit of money an employer is permitted to contribute to a SEP each year is higher than the limit for an IRA B) the amount an employer can contribute to a SEP is unlimited C) the amount contributed by an employer to a SEP is included in the employee's gross income D) the employer can contribute to an IRA but not to a SEP

the limit of money an employer is permitted to contribute to a SEP each year is higher than the limit for an IRA Explanation A SEP is an arrangement whereby an employee establishes and maintains an individual retirement account to which the employer contributes. Employer contributions are not included in the employee's gross income. A primary difference between a SEP and an IRA is the much larger amount that can be contributed each year to a SEP. The allowable limit for a SEP is much higher than that of an IR

Juan names his sister, Silvia, as the beneficiary of his $250,000 life insurance policy. At Juan's death, if Silvia chooses to have the proceeds paid over time, rather than in a lump sum, A) none of the proceeds will be taxable as long as Silvia rolls them into a permanent life insurance policy B) the original death benefit is taxable and the interest is tax-free C) the original death benefit is not taxable; however, interest earned is taxable as ordinary income to Silvia D) the entire death benefit will be taxed

the original death benefit is not taxable; however, interest earned is taxable as ordinary income to Silvia Explanation If death benefits are not taken as a lump-sum payment, then the beneficiary will be taxed on the interest as ordinary income. The original death benefit is not taxable.

Life insurance proceeds are included in the gross estate if A) the beneficiary is a family member B) the policy is trust owned and controlled C) the owner paid premiums with after-tax dollars D) the proceeds are payable to the insured's estate or the insured had any incidence of ownership in the policy at time of death or transferred ownership within 3 years of death

the proceeds are payable to the insured's estate or the insured had any incidence of ownership in the policy at time of death or transferred ownership within 3 years of death Explanation Proceeds from life insurance death benefits are included in the gross estate of the owner if she had ownership at the time of death; if her estate is her beneficiary, regardless of the owner; or if ownership was been transferred within 3 years of her death.

Contracts that provide payments based on the investment return of a segregated asset account are called A) segregated life insurance B) variable life insurance and annuities C) whole life insurance D) participating annuities

variable life insurance and annuities Explanation Variable life insurance and annuities provide payments based on the investment return of an asset account that is segregated from the insurer's general investment account. These accounts are known as separate accounts.

Annuities are classified by all of the following EXCEPT A) funding method (single vs. periodic/flexible/fixed) B) underlying investment (fixed vs. variable) C) who issues them D) payout start (immediate vs. deferred)

who issues them Explanation Annuities are classified by method of payment, number of lives covered, disposition of proceeds, and various other methods.

"A licensed independent life or health insurance producer may represent A) no more than 2 companies B) only 1 insurance company C) 1 or more authorized insurers D) no more than 2 authorized insurers within a 12-month period"

"1 or more authorized insurers Explanation An independent producer is one whose agency agreement allows her to represent more than one insurer. A captive producer is retained by a single insurance company to solicit, sell, renew, or negotiate insurance contracts for that specific company."

"Assume there are 4 different mortality tables. Of these, the most reliable would be the mortality table covering A) 10 million lives B) 100,000 lives C) 4 million lives D) 500,000 lives"

"10 million lives Explanation The larger the group, the more certain or reliable the amount of loss (in this case, the death or mortality rate) will be."

"Jessica saw an advertisement in the local newspaper for a new type of health insurance policy offered by Protective Insurers, Inc. She noticed that Protective Insurers was also selling these policies through vending machines. Protective Insurers would be considered what type of insurer? A) An unauthorized insurer B) A surplus lines insurer C) A mass response writer D) A direct response writer"

"A direct response writer Explanation Protective Insurers, Inc. sells insurance through the direct-selling method, where policies are sold directly to consumers through vending machines, advertisements, or salaried sales representatives. Insurers that operate using this method are known as direct writers or direct response insurers."

"What is the definition of a fiduciary? A) A person in a position of trust and confidence who handles the affairs and funds of others B) An insurance agent who sells policies worth more than $1 million in death benefits C) An institution that handles trust accounts for the wealthy D) A person who determines policy rates at an insurance company"

"A person in a position of trust and confidence who handles the affairs and funds of others Explanation A fiduciary is a person in a position of special trust and confidence who is charged with handling or supervising the affairs or funds of another."

"A mutual insurer is owned by its A) stakeholders B) directors C) stockholders D) policyholders"

"policyholders Explanation Mutual insurers are owned by their customers, or policyholders."

"Which of the following statements regarding insurance company organization is CORRECT? A) Stock companies are owned by the policyholders. B) A stock company pays dividends to its policyholders. C) A policyholder in a mutual company may receive a dividend. D) Mutual companies do not declare dividends."

"A policyholder in a mutual company may receive a dividend. Explanation A stock insurance company is owned by investors, who are called stockholders. If a dividend is declared, it is given to the stockholders. A mutual insurance company has no stockholders but is owned by its policyholders. If any dividends are distributed, they are given to the policyholders, not to any outside investors."

"Which of the following activities is NOT an example of misrepresentation? A) A producer tells a prospect that the policy has received a certain level of dividends for the past 5 years. B) A producer participates in twisting. C) An insurer advertises a life insurance policy as a "retirement savings plan." D) A producer tells a prospect that the insurer has a higher A.M. Best rating than it actually has."

"A producer tells a prospect that the policy has received a certain level of dividends for the past 5 years. Explanation Misrepresentation includes using a title for a policy that misrepresents the true nature of the product, making false statements about an insurer's financial condition, and twisting, which is defined as misrepresentation to induce a policyholder to lapse, forfeit, or surrender a policy. Nothing prohibits a producer from disclosing the level of dividends from a policy if the information provided is true."

"Which of the following is a promise in exchange for an action? A) A contract of adhesion B) An aleatory contract C) A unilateral contract D) A condition contract"

"A unilateral contract Explanation Insurance contracts are unilateral contracts because only one party—the insurer—makes any kind of enforceable promise. The insurer promises to pay benefits if and when certain events, such as death or disability occur. The insured's act of paying the premium is given in exchange for this promise. However, the insured is not obligated to make these payments and can let the policy lapse."

"Which of the following is NOT a type of agent? A) Absolute agents B) Captive agents C) General agents D) Independent agents"

"Absolute agents Explanation The different types of agents are independent agents, captive or exclusive agents, and general or managing general agents."

"Which characteristic of insurance contracts provides legal protection for insureds when coverages are not clearly stated in the policy? A) Utmost good faith B) Indemnity C) Conditional D) Adhesion"

"Adhesion Explanation An insurance contract is a contract of adhesion. The insurer writes the contract and the insured adheres to it as the contract has been written. Insureds are protected by the courts with regard to ambiguities in insurance contracts. In these cases, the courts will usually rule in favor of the party that did not draft the contract."

"Which of the following is an insurer? A) Any person who pays premiums B) The Commissioner of Insurance C) An insurance producer D) An insurance company"

"An insurance company Explanation An insurance company is an insurer because it alone underwrites the coverage and assumes the risk."

"Jamir is an agent for Assured Insurance. He visits Ada, a prospect, in her home. He arrives with business cards, sample policies from Assured, and an Assured rate book. He recommends Assured policies that can meet Ada's needs for insurance. Which of the following terms describes the kind of authority that Jamir has in this situation? A) Implied B) Express C) Binding D) Apparent"

"Apparent Explanation Apparent authority arises from the reasonable assumptions that a third party, such as an insurance prospect, makes on the basis of the actions or statements of the principal. By providing its agent with business cards, sample policies, and rate books, Assured gives a prospect the impression that it supports Jamir's statements and deeds with respect to his insurance transactions."

"Daniel owns an insurance agency in a small town and represents just 1 insurer. He wears apparel with the company logo, has the company name on his vehicle, and hands out merchandise with the company's name imprinted on it. What type of authority does this represent? A) Apparent B) Express C) Assumed D) Implied"

"Apparent Explanation Apparent authority is the authority that a prudent person assumes an agent has. Based on his actions, the prospective client assumes that he has the authority to represent and transact business on the behalf of this particular insurance company. In other words, the agent's authority to represent the insurance company is ""apparent"" to the prospect. Apparent authority is from the client's perspective."

"Angela, a recent applicant for a $50,000 life insurance policy, failed to state on her application that she suffered a heart attack a year earlier, fearing it would affect her insurability. Which of the following terms describes Angela's action? A) Indemnification B) Conversion C) Warranty D) Concealment"

"Concealment Explanation Angela's action is a concealment because she knowingly failed to disclose pertinent, material information on the application. The test of materiality of a concealed fact is whether the insurer, had it known the fact, would have been influenced in accepting or rejecting the risk."

"The fact that an insurance contract promises to pay benefits contingent on a future uncertainty (such as death or illness) makes it what type of contract? A) Conditional B) Aleatory C) Estoppel D) Adhesion"

"Conditional Explanation An insurance contract is conditional in that the insurer's promise to pay benefits is dependent on the occurrence of the risk insured against. If the loss does not materialize, no benefits are paid."

"Which of the following statements regarding exclusive agents is NOT true? A) Exclusive agents represent only 1 company. B) Exclusive agents are usually compensated by commissions. C) Exclusive agents represent the insurer. D) Exclusive agents represent the insured."

"Exclusive agents represent the insured. Explanation Exclusive agents represent the insurer (the insurance company)."

"Which of the following types of agent authority is specifically set forth in writing in the agent's contract? A) Apparent B) Express C) Implied D) Personal"

"Express Explanation Express authority is granted by a principal to its agent. The principal grants this authority through the agent's contract, which is the principal's appointment of the agent to act on its behalf."

"Which of the following types of agent authority is specifically set forth in writing in the agent's contract? A) Apparent B) Implied C) Express D) Personal"

"Express Explanation Express authority is the authority a principal gives to its agent. Express authority is granted by means of the agent's contract, which is the principal's appointment of the agent to act on its behalf."

"An insurance producer acts in what capacity when holding insurance premiums? A) Legal B) Representative C) Official D) Fiduciary"

"Fiduciary Explanation An insurance producer holds all premiums received in a fiduciary capacity. The producer must hold premiums in a separate trust account and must account for and pay the premiums to the insured or insurer that is entitled to them. An insurance producer may deposit all funds belonging to others in 1 account, as long as the separate amounts are recorded. An insurance producer who unlawfully appropriates insurance premiums for his own use commits theft."

"An insured gives a premium to a producer with the expectation that the producer will act with the utmost good faith in forwarding it to the insurer. In this case, the producer is said to have what kind of responsibility to or relationship with the insured? A) Legally binding B) Fiduciary C) Inherent trust D) Broker trust"

"Fiduciary Explanation An insurance producer holds premiums in trust and is therefore in a position of trustee for the funds. He has certain fiduciary responsibilities to the insured and the insurer. As such, the producer does not obtain any rights of ownership in the funds."

"In an insurance transaction, licensed agents legally represent which of the following? A) Themselves B) The state insurance department C) The applicant and the insured D) The insurer"

"The insurer Explanation A licensed insurance agent legally represents the insurer in a sales transaction and in any disputes between the insured or beneficiaries and the insurer."

"Which of the following statements about fraternal benefit societies is NOT correct? A) Policies are called certificates. B) The society must operate under a lodge system of government. C) Life insurance is one of the benefits of membership. D) Insurance may be sold to members as well as nonmembers."

"Insurance may be sold to members as well as nonmembers. Explanation Fraternal society insurance may be sold only to members of the society."

"Which of the following statements about Lloyd's of London is NOT correct? A) It helps its associates settle claims and disputes. B) It is an insurance carrier that underwrites insurance. C) It is an association of individuals and companies that individually underwrite insurance. D) It gathers and disseminates underwriting information."

"It is an insurance carrier that underwrites insurance. Explanation Lloyd's of London is not an insurer but an association of individuals and companies that individually underwrite insurance. It gathers and disseminates underwriting information, helps its associates settle claims and disputes, and, through its member underwriters, provides coverages that might otherwise be unavailable in certain areas. A risk retention group is a mutual company formed to insure people in the same business, occupation, or profession, such as pharmacists, dentists, or engineers."

"Which of the following statements regarding mass marketing insurance is CORRECT? A) It involves one-on-one meetings between prospects and agents. B) It takes advantage of small group situations. C) It is marketed through various forms of print, visual, and aural media. D) It is considered unethical and is illegal in some states."

"It is marketed through various forms of print, visual, and aural media. Explanation Mass marketing insurance takes advantage of large group situations, selling through direct mail, newspapers, radio, and television. It is an acceptable means of marketing insurance, though there is usually little client contact with an agent or a broker."

"Which of the following statements regarding a risk retention group is TRUE? A) Its sole purpose is to provide liability insurance to its policyholders. B) Policyholders may be from any type of industry. C) Risk retention groups are federally regulated. D) A risk retention group may provide any type of insurance."

"Its sole purpose is to provide liability insurance to its policyholders. Explanation A risk retention group is a formed to provide only liability insurance to its policyholders. The policyholders must be in the same industry, and they may operate in multiple states. The state where the group is headquartered issues the laws, rules, and regulations."

"Which of the following is NOT encompassed by agency law? A) Payments made to an agent intended for the principal are payments made to the principal. B) Knowledge of the principal is knowledge of the agent. C) A contract completed by the agent on behalf of the principal is a contract of the principal. D) The acts of an agent are the acts of the principal."

"Knowledge of the principal is knowledge of the agent. Explanation A fundamental rule of agency law states that information known to the agent is also known by the principal, as long as the agency relationship exists. Information known to the principal, however, is not presumed to be known to the agent."

"To avoid adverse selection, insurers determine many different factors and rely on an extensive amount of information before issuing a policy. This process is called A) underwriting B) accrediting C) evaluating D) undersigning"

"underwriting Explanation Insurers use many different sources of information when evaluating a risk, using a process known as underwriting."

"Which of the following is an incorporated insurer that does not have capital stock and has a governing body that is elected by its policyholders? A) Mutual insurer B) Stock insurer C) Reciprocal insurer D) Guaranty association"

"Mutual insurer Explanation A mutual insurer is an incorporated insurer that is owned collectively by its policyowners, who elect its directors. Mutual insurers do not have capital stock. Stock insurers, on the other hand, are incorporated insurers with capital divided into shares that are owned by stockholders, while a reciprocal insurer is an unincorporated group of persons, or subscribers, who operate through a common attorney to provide insurance for each other."

"Which of the following insurance companies is owned by its policyholders? A) Mutual life insurance company B) Reinsurer C) Stock life insurance company D) Home service insurer"

"Mutual life insurance company Explanation A mutual life insurance company is owned and controlled by its policyowners. These policyholders elect a board of trustees or directors to manage the firm. The savings and earnings of a mutual insurance company are returned to the policyowners in the form of dividends or retained as surplus to meet future obligations."

"Concerning mutual insurers, which of the following statements is CORRECT? A) In a mutual company, there are shareholders. B) In a mutual company, there are stockholders. C) Mutual companies are sometimes referred to as nonparticipating companies. D) Policyholders may participate in dividends."

"Policyholders may participate in dividends. Explanation In a mutual company, there are no stockholders. The ownership rests with the policyholders. Funds not paid out after paying claims and other operating costs are returned to the policyowners in the form of policy dividends."

"Which of the following is a distinctive feature of fraternal life insurance? A) Fraternal societies are exempt from income taxes. B) Policies are only available to men who have lived in a fraternity. C) Members must be related. D) Some policies are referred to as open contracts."

"Some policies are referred to as open contracts. Explanation Certificate holders might be assessed additional charges if premiums are not sufficient to pay claims during a given period. Policies with this feature are called open contracts. Stock and mutual insurers do not assess their policyowners."

"Who are the parties to a life insurance contract? A) The agent, the applicant, and the beneficiary B) The applicant and the beneficiary C) The agent and the applicant D) The applicant and the insuring company"

"The applicant and the insuring company Explanation The parties to a life insurance contract are the applicant and the insuring company. Neither the beneficiary nor the agent is a contracting party."

"An insurance contract is prepared by one party, the insurer, rather than through negotiation between the contracting parties. Which of the following statements explains this characteristic of insurance contracts? A) The insurance contract is an aleatory contract. B) The insurance contract is a unilateral contract. C) The insurance contract is a conditional contract. D) The insurance contract is a contract of adhesion."

"The insurance contract is a contract of adhesion. Explanation Insurance contracts are contracts of adhesion, meaning that they are prepared by one party, the insurer. They are not negotiated contracts. In effect, the applicant adheres to the terms of the contract when she accepts it."

"Which of the following statements regarding direct-writing companies is NOT true? A) The producer owns the book of business. B) Employees are paid a salary, commission, or both to sell the company's insurance products. C) The insurer owns all of the business that is produced. D) Producers are considered employees."

"The producer owns the book of business. Explanation Direct-writing companies employ producers to sell the company's insurance products. These employees are paid a salary, commission, or both. The insurer owns the business that the producers write."

"Which of the following describes facultative reinsurance? A) The reinsurer considers each risk before allowing the transfer to be made from the ceding company. B) The reinsurer rejects most risks from the ceding company. C) The reinsurer accepts all risks of a certain type from a ceding company. D) The reinsurer accepts all risks from the ceding company."

"The reinsurer considers each risk before allowing the transfer to be made from the ceding company. Explanation A reinsurance company can accept risks in 2 different ways. The first is facultative reinsurance, whereby the reinsurer considers each risk before allowing the transfer to be completed by the ceding company. Treaty reinsurance is when a reinsurer accepts all risks of a certain type from the ceding company."

"Which of the following statements pertaining to a life insurance contract is CORRECT? A) The term unilateral refers to the legal obligations of the policyowner. B) The term aleatory indicates that the values received by each party may be unequal. C) The term conditional indicates that the insurer will pay benefits regardless of a loss. D) The term adhesion indicates that the parties to the contract have a right to expect honesty from each other."

"The term aleatory indicates that the values received by each party may be unequal. Explanation A unilateral contract in insurance refers to the insurer's legal obligations. Adhesion indicates that the contract was drafted by one party (the insurer) and must be accepted or rejected by a second party (the applicant), who cannot bargain with respect to its terms. Conditional refers to the fact that the insurer's promise to pay benefits is conditioned on the occurrence of a loss."

"Which of the following statements about fraternal benefit societies is NOT correct? A) They are exempt from the licensing requirements if they provide insurance benefits to their members only. B) They are nonprofit societies that have a representative form of government. C) They do not have capital stock. D) They operate on a lodge system."

"They are exempt from the licensing requirements if they provide insurance benefits to their members only. Explanation A fraternal benefit society is a nonprofit organization that does not have capital stock and exists solely for the benefit of its members. Fraternals must have a representative form of government and maintain a lodge system. Fraternal benefit societies that provide insurance benefits for their members must be licensed by the director and file an annual statement of their financial affairs."

"Which of the following statements about participating policies is NOT correct? A) They are issued only by stock companies. B) The annual premium rate is generally higher than that for nonparticipating policies. C) They are eligible for dividends. D) They enable the policyowner to share in the earnings of the company."

"They are issued only by stock companies. Explanation Participating policies are issued by both stock and mutual companies. They are called participating because they are eligible for dividends, thus enabling policyowners to share in the earnings of the company. For this reason, the premium cost is generally higher for participating policies than for nonparticipating policies."

"Which of the following is NOT a type of insurance agent? A) Managing general agent B) Underwriter C) Independent agent D) Captive agent"

"Underwriter Explanation An underwriter works for the insurance company, does not sell insurance, and is not an agent. The other 3 are types of agents who sell insurance."

"An agent that represents only 1 insurance company is A) a broker B) a captive agent C) a general agent D) a special agent"

"a captive agent Explanation Captive agents work exclusively with one insurance company."

"An insurance company that transacts insurance directly with consumers without the assistance of producers is called A) a public approach carrier B) a reinsurance organization C) a direct advertising carrier D) a direct response company"

"a direct response company Explanation Direct response companies sell to consumers without using producers. These companies may use their own employees to sell insurance directly to prospective buyers or do so through the mail or at airport booths"

"An insurance agent could be any of the following EXCEPT A) a direct-writing commissionable agent B) a general agent or managing general agent C) an exclusive or captive agent D) an independent agent"

"a direct-writing commissionable agent Explanation An insurance agent may be independent, exclusive, or a general agent. Direct-writing companies do not use traditional agents, but use salaried employees to sell policies by phone or email."

"A producer who receives life insurance premiums holds the money in trust as A) a fiduciary B) a broker C) a banker D) an investor"

"a fiduciary Explanation A producer is considered to be a fiduciary—that is, a person in a position of financial trust to both the insurance buyer and the insurer. As such, a producer must remit all premiums and other insurance proceeds to the insurer promptly and maintain records of all funds received in this fiduciary capacity, including premiums due to the insurer."

"A life insurance company organized in Pennsylvania, with its home office in Philadelphia, is licensed to conduct business in New York. In New York, this company is classified as A) a domestic company B) a foreign company C) a regional company D) an alien company"

"a foreign company Explanation A foreign insurance company is one that is doing business outside of the state in which it is domiciled."

"An insurer that is domiciled in Ohio and does business in Alabama is considered to be A) an independent insurer B) a domestic insurer C) an alien insurer D) a foreign insurer"

"a foreign insurer Explanation An insurer doing business in a state other than where it is domiciled is considered a foreign insurer."

"Individuals who own life insurance and are called certificate holders are members of a A) a risk retention group B) a home service insurer C) a certificate holders society D) a fraternal benefit society"

"a fraternal benefit society Explanation Fraternal benefit societies are organized under a lodge system and receive some income tax advantages. Insurance programs are operated under a special section of the state's insurance code. Members who own life insurance are called certificate holders."

"All of the following are considered to be insurers EXCEPT A) an insurance company B) a fraternal organization C) an association D) a group of employees enrolled in an insurance plan"

"a group of employees enrolled in an insurance plan Explanation An insurer, also known as an insurance company, is a corporation, fraternal organization, or other association, society, or individual that engages as a principal in any kind of insurance or surety business. A group of employees enrolled in an insurance plan would not be considered an insurer."

"An agent that hires, trains, and supervises other agents within a specific geographical area is A) an independent agent B) the Commissioner's office C) a captive agent D) a managing general agent"

"a managing general agent Explanation An insurance producer represents the insurer, not the insured. A producer acts as the insurer's representative or agent by virtue of an appointment to act as such."

"An incorporated insurer whose governing body is elected by the policyowners is A) a reciprocal insurer B) a stock company C) a mutual company D) a combination insurer"

"a mutual company Explanation An incorporated insurance company that does not have permanent capital stock is a mutual insurer. The policyowners own the company and elect its governing body. A stock insurer, on the other hand, is an incorporated insurance company with its capital divided into shares of stock owned by the stockholders. A combined stock and mutual insurer is also an incorporated insurance company; its capital is divided into shares owned by the stockholders. However, both the stockholders and policyowners control the company."

"An insurance company that is owned by its policyowners, who share the insurer's divisible surplus in the form of participating policy dividends, is known as A) a reciprocal insurance company B) a stock insurance company C) a reinsurance company D) a mutual insurance company"

"a mutual insurance company Explanation A mutual insurance company is an incorporated entity owned by its policyowners. It does not have capital stock, charges a fixed premium, and must maintain the same reserves as a stock company. It is common for mutual companies to sell participating policies in which the policyowners share the insurer's divisible surplus in the form of policy dividends."

"An insurance company that is owned by its policyholders, who share in the company's profits in the form of dividends, is known as A) a reinsurance company B) a stock insurance company C) a mutual insurance company D) a reciprocal insurance company"

"a mutual insurance company Explanation A mutual insurance company is owned by its policyholders, who share in the company's profits in the form of dividends."

"An insurance company that is owned by its policyowners is known as A) a mutual life insurance company B) a parent company C) a stock insurance company D) a domestic company"

"a mutual life insurance company Explanation A mutual life insurance company is a corporation, but there are no stockholders. Instead, the company is owned by its policyowners, from whom its resources are derived. Its assets and income are held for the benefit of the policyowners, who, as contractual creditors, have the right to vote for directors or trustees."

"An unincorporated group of subscribers who operate through an attorney-in-fact to provide indemnity insurance for each other is called A) an unauthorized insurer B) a fraternal benefit society C) a surplus lines insurer D) a reciprocal exchange"

"a reciprocal exchange Explanation A reciprocal exchange is a type of cooperative insurance. Under this form of insurance, each policyowner is insured by all of the others. Each insured is also an insurer, because contracts are exchanged on a reciprocal basis. A reciprocal is managed by an attorney-in-fact."

"An insurer of an insurer is known as A) a service organization B) a mixed group C) a reciprocal D) a reinsurer"

"a reinsurer Explanation A reinsurer insures part of the life insurance underwritten by another life insurance company to reduce the potentially large loss of the other company."

"A fiduciary responsibility is defined as A) a relationship of special trust and confidence when a person is entrusted with another's funds B) the responsibility the producer has to the appointing insurer C) the responsibility of the insured to pay premiums in a timely fashion D) the relationship between the broker and the insurer whose products are sold"

"a relationship of special trust and confidence when a person is entrusted with another's funds Explanation A fiduciary responsibility is a relationship of special trust and confidence in which a person is entrusted with the funds of another person. For instance, all premiums belonging to insurers and all unearned premiums belonging to insureds received by an insurance producer are held in a fiduciary capacity."

"The financial strength rating of an insurance company is similar to A) a financial statement B) a stock offering C) a prospectus D) a report card"

"a report card Explanation The financial strength rating of a company is like a report card because it is the "grade" an independent rating firm has given based on the financial wellness of the company."

"Miguel works for a mutual insurance company that was formed to handle the insurance needs of lawyers. The type of company that Miguel works for is called A) a reinsurer B) a fraternal benefit society C) a risk retention group D) a reciprocal insurer"

"a risk retention group Explanation A risk retention group is a mutual insurance company formed to insure people in the same business, occupation, or profession, such as pharmacists, dentists, lawyers, or engineers. Risk retention groups tend to handle commercial liability exposures. Reinsurers, in contrast, insure other insurers, while the policyholders themselves insure the risks of other policyholders in a reciprocal insurer. Fraternal benefit societies are noted for their social, charitable, and benevolent activities and have memberships based on religious, national, or ethnic affiliations."

"An incorporated insurer whose capital is divided into shares and owned by its stockholders is A) a foreign insurer B) a reciprocal insurer C) a mutual insurer D) a stock insurer"

"a stock insurer Explanation A stock insurer is an incorporated insurer whose capital is divided into shares and owned by its stockholders."

"In an insurance contract, only one party is legally bound to perform under the contract. This describes A) an aleatory contract B) a conditional contract C) a unilateral contract D) an adhesive contract"

"a unilateral contract Explanation Insurance contracts are unilateral contracts because only one party promises to do something. The insurance company promises to pay covered claims (as long as the premium has been paid and the policy is in force); however, the insured does not promise to pay the premiums."

"In legal terms, the voluntary relinquishment of a known right is called A) a withdrawal B) a waiver C) a warranty D) a concealment"

"a waiver Explanation A waiver is a voluntary relinquishment of a known right. If an insurer waives a legal right under an insurance policy, it cannot deny a future claim based on a violation of that right. This is known as estoppel, and the insurer is estopped from denying the claim."

"The inclination of higher-risk individuals to be "first in line" to get and keep insurance is called A) misrepresentation. B) excess risk. C) adverse selection. D) substandard selection."

"adverse selection. Explanation The inclination of higher-risk individuals to be "first in line" to get and keep insurance is called adverse selection. One of the purposes of underwriting is to identify and rate up or decline higher-risk individuals."

"An insurance company formed under the laws of any country other than the United States would be considered A) a foreign insurance company B) a domestic insurance company C) a nonadmitted insurance company D) an alien insurance company"

"an alien insurance company Explanation Insurance companies formed under the laws of any country other than the United States are considered alien insurers."

"All of the following are characteristics of an insurable risk EXCEPT A) assessable B) accidental C) affordable D) anomalistic"

"anomalistic Explanation Risks that can be insured are assessable (measurable), affordable, accidental, calculable, similar, and noncatastrophic."

"Susan is the receptionist at an insurance agency. She is currently studying for her life insurance license. One day at lunchtime, Carla comes in the office to pay her auto insurance premium. Susan talks to her about the importance of life insurance, and Carla immediately completes an application and gives Susan a check for the premium. Carla leaves the agency believing she is covered by life insurance. Susan has acted with A) illegal authority B) implied authority C) apparent authority D) express authority"

"apparent authority Explanation Carla was led to believe that Susan had the authority to issue the policy because she accepted the application and premium. Even though Susan does not have the authority to write the contract, the insurance company may be legally bound to provide coverage."

"Funds held by an insurance producer in a fiduciary capacity A) cannot be converted to an individual's or a firm's own use B) can be used as income by the producer, since they result from sales C) must be held in the producer's personal account for at least 15 days D) are deemed producer funds if they are premiums collected to pay for insurance coverage"

"cannot be converted to an individual's or a firm's own use Explanation Money received by producers is generally held in a fiduciary capacity and, therefore, may not be misappropriated or converted to personal or company use."

"All of the following are distribution systems EXCEPT A) direct response B) claims handling C) independent agencies D) direct writing"

"claims handling Explanation Insurance is distributed through many different channels, including direct response, direct writing, independent agencies, and exclusive agencies. Claims handling is a function of the insurance company."

"The intentional failure to disclose known facts on an insurance application is called A) twisting B) misrepresentation C) adhesion D) concealment"

"concealment Explanation Concealment occurs when the applicant intentionally fails to disclose known facts that could influence the issuance of the policy. This may give the insurer grounds for voiding the policy."

"When important and material facts are hidden by an insured on an application, this is known as A) a breach of contract B) concealment C) a material misrepresentation D) a misrepresentation"

"concealment Explanation When an individual knowingly fails to disclose known facts, this is known as concealment. If it is intentional and the information is material, the insurance company may void the contract."

"Nancy is an agent for Assured Life and Health Insurance Company and convinces Sook, a young newlywed, to buy a policy. Sook and her spouse have recently moved to the city and found new jobs. Nancy wants to help them get settled. She may help them in all of the following ways EXCEPT A) depositing the initial premium in her own account B) delivering the policy C) collecting the initial premium D) explaining the coverage"

"depositing the initial premium in her own account Explanation Depositing client funds in an agent's personal account, which is called commingling, violates fiduciary responsibility"

"With regard to insurance, risk can be defined as A) uncertainty regarding financial gain B) certainty regarding loss C) certainty regarding financial gain D) uncertainty regarding loss"

"uncertainty regarding loss Explanation Risk refers to the uncertainty of financial loss. Insurance replaces the uncertainty of risk with certain guarantees of financial stability."

"When Harry sells his car to his brother, Nate, he transfers his auto insurance policy to him as well. Harry's insurer will A) accept this process as long as Harry receives appropriate consideration from Nate B) disallow the process because auto insurance is a personal contract C) disallow this process because auto insurance is a valued contract D) allow this process as long as Nate is insurable"

"disallow the process because auto insurance is a personal contract Explanation Auto and other property insurance policies are personal contracts, meaning they are made with a particular person and may not be transferred. Life insurance policies are valued contracts; they pay a certain value and are transferable property. Changing the owner of a life policy is called assignment."

"When an agent's duties are specifically spelled out in the contract with the insurance company, this is an example of A) apparent authority B) legal authority C) express authority D) implied authority"

"express authority Explanation Express authority is granted to an agent in the contract and explicitly details the duties and responsibilities to the insurance company."

"The authority that an insurer gives to its agents by means of the agent's contract is known as A) express authority B) implied authority C) general authority D) fiduciary responsibility"

"express authority Explanation Express authority is what the insurer intends to, and in fact does, give to its agent through means of the agency agreement. This authority explicitly appoints the agent to act on behalf of the insurer."

"Bonita's written contract with the insurance company she represents specifically addresses issues such as her duties in collecting premium payments. This is an example of A) express authority B) ambiguous authority C) implied authority D) apparent authority"

"express authority Explanation The written contract or agreement between an agent and the insurer that is explicit about responsibilities, rights, and powers is known as express authority."

"When a reinsurer considers each risk as a single transaction before assuming it, this is called A) discretionary reinsurance B) treaty reinsurance C) facultative reinsurance D) transactional reinsurance"

"facultative reinsurance Explanation Facultative reinsurance is an agreement in which the reinsurer accepts and underwrites risks on a case-by-case basis. The reinsurer does not have to accept and reinsure all risks within a defined class."

"All of the following are examples of social (governmental) insurance EXCEPT A) Medicaid B) fraternals C) workers' compensation D) Medicare"

"fraternals Explanation Social insurance is provided by or required by a governmental entity, either federal or state. As such, Social Security, including Medicare and Medicaid, and state insurance programs, such as workers' compensation, are included. Fraternal insurers are commercial insurers with no governmental connection."

"All of the following are characteristics of an insurable risk EXCEPT A) measurable B) calculable C) affordable D) intentional"

"intentional Explanation If a loss is intentional, there is no risk because it is certain to occur. Therefore, a risk must be accidental for it to be covered by insurance."

"The parties to an insurance contract must act in utmost good faith, which means that both the agent and the applicant A) work together to find insurance for the lowest possible price B) make no attempt to deceive each other C) always arrive on time for meetings D) agree to transact insurance business"

"make no attempt to deceive each other Explanation Both the policyowner and the insurer must know all material facts and relevant information. There can be no attempt by either party to conceal, disguise, or deceive. A consumer purchases a policy largely on the basis of what the insurer and its agent claim are its features, benefits, and advantages. An insurer issues a policy primarily on the basis of what the applicant reveals in the application"

"Independent rating agencies evaluate all of the following factors of an insurer to assess their financial strength EXCEPT A) number of agents B) loss experience C) investments D) operating expenses"

"number of agents Explanation While not all firms rate the same companies or use the same criteria, the main indicators of financial strength are the insurer's loss experience, reserves, investment performance, management, and operating expenses."

"A mutual insurance company is an incorporated entity owned by its A) board of directors B) agents C) corporate officers D) policyowners"

"policyowners Explanation A mutual insurance company is an incorporated entity owned by its policyowners."

"Self-insurance is A) illegal in many states B) practiced by organizations that establish reserves to protect themselves against loss C) available through the federal government D) insurance written by an insurer on itself"

"practiced by organizations that establish reserves to protect themselves against loss Explanation Self-insurance is a legitimate method of insuring loss by establishing one's own reserve of funds."

"Unincorporated groups of people that agree to insure each other's losses under a contract are known as A) reciprocal insurers B) mutual insurers C) stock insurers D) fraternal insurers"

"reciprocal insurers Explanation Reciprocal insurers are unincorporated groups of people called subscribers. Subscribers pay premiums into individual accounts, and if there is a loss, they are assessed an amount to pay the claim. Such groups are run by an attorney-in-fact, who is often overseen by an advisory board made up of subscribers."

"A contract in which one insurer cedes all or part of a risk to another is known as A) a participating policy B) retro insurance C) reinsurance D) assuming insurance"

"reinsurance Explanation Reinsurance is the act of one insurer selling part of a policy to another insurer. The original insurer, or primary insurer, is called the ceding company, and the second insurer is called the assuming company. Many insurers reinsure some of their larger risks because they do not want to be exposed to the exceptional losses they would incur if they had to pay claims on those policies."

"Statements made by an applicant in completing a life insurance application are considered to be A) oaths B) guarantees C) representations D) warranties"

"representations Explanation Statements made by an applicant for insurance that he represents as being substantially true to the best of his knowledge and belief are representations. Even an untrue representation, unless it is material or fraudulent, will not prevent the policyholder from recovering for losses under the policy."

"All of the following are methods of handling risk EXCEPT A) resistance B) reduction C) retention D) sharing"

"resistance Explanation The different methods for handling risk include sharing, transfer, avoidance, reduction, and retention. Resistance is not a method for handling risk."

"According to insurance law, an insurance agent is a person who A) receives a fee as an independent contractor to investigate and negotiate the settlement of claims arising under insurance contracts B) solicits, negotiates, procures or effects insurance or annuity contracts on behalf of an insurer C) is compensated as an independent contractor to procure insurance on behalf of another person, but not on behalf of an insurer or agent D) receives a fee to advise insurance applicants on the merits and disadvantages of insurance policies"

"solicits, negotiates, procures or effects insurance or annuity contracts on behalf of an insurer Explanation An insurance agent is an individual or business entity that solicits, negotiates, procures, or effects insurance or annuity contracts on behalf of an insurer."

"Making appropriate product recommendations based on the needs, objectives, and circumstances of a client is referred to as A) implied authority B) apparent authority C) commingling D) suitability considerations"

"suitability considerations Explanation One aspect of an agent's fiduciary duties is to provide product recommendations to clients based on how suitable the features and benefits are to meet their goals."

"Jake and Sue signed a contract in which Sue agreed to pay half of the life insurance proceeds to Jake if he murdered her estranged spouse. The contract between Jake and Sue would not be enforceable in court because A) Jake and Sue are not considered competent parties B) Jake could not legally accept the contract C) the contract lacks consideration D) the contract lacks a legal purpose"

"the contract lacks a legal purpose Explanation To be legally enforceable, a contract must have a legal purpose. This means that the goal of the contract and the reason the parties enter into the agreement must be legal. A contract wherein Jake agrees to kill Sue's spouse in exchange for half of the insurance proceeds would be unenforceable in court because the contract does not have a legal purpose."

"Licensed and appointed agents represent A) the state insurance department B) the insurer C) the National Association of Insurance Commissioners D) the applicant or insured"

"the insurer Explanation An agent is a person who has been authorized by an insurer to act as its representative to the public and offer for sale its goods and services."

"Insurance agents represent A) the insured B) their MGAs C) the insurer D) themselves"

"the insurer Explanation Insurance brokers represent their clients or insureds."

"A health insurance policy does NOT go into force if A) the applicant pays the initial premium B) the applicant satisfies the conditions of the conditional receipt C) the producer completes the application D) the producer delivers the policy"

"the producer completes the application Explanation The insured must complete the application, not the producer. If the initial premium is paid at the same time the application is submitted, and the terms of the conditional receipt are met, coverage will take effect as if the policy were issued."

"If an agent or producer diverts funds belonging to an insurer to her own use, she has committed the illegal act of A) embezzlement B) theft C) commingling D) fraud"

"theft Explanation An agent or producer who receives a premium holds it in a fiduciary capacity. The producer is placed in a position of trust by the insured who paid the premium and the insurer to whom the premium is owed. Therefore, a producer who diverts these funds for personal use has stolen them."

"With life, accident, and health insurance, an insured's oral misrepresentation or false warranty will NOT void a policy unless A) the insured has more than 1 policy with the same company B) the insured agrees to drop the policy C) there was intent to deceive or it materially affects the insurer's decision to accept the risk D) the policy has been in force less than 1 year"

"there was intent to deceive or it materially affects the insurer's decision to accept the risk Explanation An insured's oral misrepresentation or false warranty cannot be used to void a policy, but misrepresentations made in writing (as on the application) can be grounds for voiding a contract in accordance with the terms of the policy's contestability clause. Even then, a misrepresentation or false warranty will not void a policy unless the applicant actually intended to deceive or it materially affected the company's decision to accept the risk."

"Purchasing insurance is an example of A) avoiding risk B) transferring risk C) reducing risk D) retaining risk"

"transferring risk Explanation Purchasing insurance is the most common method of transferring risk. The burden of carrying the risk and indemnifying against financial or economic loss is transferred from the individual or business entity to the insurance company through the insurance contract."

"When negotiating a contract of insurance, the parties make no attempt to conceal or disguise important facts or deceive each other. The contact is said to be one of A) offer and acceptance B) value C) sharing D) utmost good faith"

"utmost good faith Explanation Insurance is a contract of utmost good faith. Both the policyowner and the insurer must know all material facts and relevant information. There can be no attempt by either party to conceal, disguise, or deceive. A consumer purchases a policy based largely on what the insurer and its agent claim are its features, benefits, and advantages."

"Mark and Steve signed a contract in which Mark agreed to apply for health insurance and Steve would submit fraudulent medical claims through his physician billing service. Mark and Steve plan to share the proceeds. The contract between Mark and Steve can best be described as A) void B) incompetent C) unilateral D) aleatory"

"void Explanation Mark and Steve's contract would be considered a void contract because it lacks one of the elements specified by law for a valid contract. The contract has an illegal purpose (fraudulently submitting medical claims), and neither party to the contract can enforce it. Furthermore, no court would enforce its terms."