California Life and Health - Licensing (Practice Questions)

An insured purchased variable life insurance policy with a face amount of $50,000. Over the life of the policy, stock performance declined and the cash value fell to $10,000. If the insured dies, how much will be paid out?

$50,000. The cash value of a variable life insurance policy is not guaranteed. However, even if investments devalue significantly, they cannot be lower than the initial guaranteed benefit amount.

An employee will be taxed on the cost of group life insurance paid by the employer if the amount of coverage exceeds

$50,000. The cost of coverage paid by the employer in excess of $50,000 is taxed to the employee.

The validity of coverage under a life insurance policy may not be contested, except for nonpayment of premium, after the policy has been in force for at least how many years?

2 years. The incontestability clause prevents an insurer from denying a claim due to statements in the application after the policy has been in force for 2 years, even if there has been a material misstatement of facts or concealment of a material fact.

What is the period of coverage for events such as a death or divorce under COBRA?

36 months. The maximum period of coverage under COBRA is 36 months, in the event of the covered employee's death or divorce.

For how long is an insurance company allowed to defer policy loan requests?

6 months. Insurers writing variable life insurance policies may defer loan requests for up to 6 months. This excludes loan requests used to pay policy premiums.

An investor buys a life policy on a elderly person in order to sell it for a life settlement. This is an example of

A STOLI policy Stranger-originated life insurance (STOLI) policies are usually purchased by people who have no relationship with the insured with the intention of selling them for life settlements.

Which of the following statement is NOT true concerning insurable interest as it applies to life insurance?

A debtor has an insurable interest in the life of a lender. A lender has an insurable interest in the life of a debtor, but only to the extent of the debt. The debtor does not have an insurable interest in the life of the lender.

The term "illustration" in a life insurance policy refers to

A presentation of nonguaranteed elements of a policy. The term "illustration" means a presentation or depiction that includes nonguaranteed elements of a policy of individual or group life insurance over a period of years.

For variable products, underlying assets must be kept in

A separate account. Under a variable life insurance policy, assets must be placed in a separate fund, used primarily for the investment of stocks, bonds, and other security investment options.

What do Modified Life and Straight Life policies have in common?

Accumulation of cash value. Modified Life and Graded-Premium Life policies are useful as a compromise between straight life and convertible term insurance since the premium is less than straight life in the early years, but some cash value is being accumulated.

Insurance policies are not drawn up through negotiations, and an insured has little to say about its provisions. What contract characteristic does this describe?

Adhesion. A contract of adhesion is prepared by only the insurer; the insured's only option is to accept or reject the policy as it is written.

An insured mistakes her age at the time the life insurance application is taken. This misstatement may result in

Adjustment in the amount of death benefit. If the applicant has misstated his or her age or gender on the application, the insurer, in the event of a claim, is allowed under this provision to adjust the benefits to an amount that the premium at the correct age or gender would have otherwise purchased.

Which of the following best describes the concept that the insured pays a small amount of premium for a large amount of risk on the part of the insurance company?

Aleatory. An insurance contract is an aleatory contract in that it requires a relatively small amount of premium for a large risk.

Which of the following would qualify as an implied warranty in an insurance contract?

An oral representation by the applicant. A warranty is a statement considered to be guaranteed to be true and becomes part of the contract. Representations in insurance contracts qualify as implied warranties.

The LEASTY expensive first-year premium is found in which of the following policies?

Annually Renewable Term

The full premium was submitted with the application for life insurance, and the policy was issued two weeks later as requested. When does the policy coverage become effective?

As of the application date. If the full premium was submitted with the application and the policy was issued as requested, the policy coverage effective date would generally coincide with the date of application.

Which of the following protects the insured from an unintentional policy lapse due to a nonpayment of premium?

Automatic premium loan. Automatic premium loan provision is not required, but is commonly added to contracts with a cash value at no additional charge. This is a special type of loan that prevents the unintentional lapse of a policy due to nonpayment of the premium.

A policy available to business owners that provides payment for normal business expenses in the event that the owner is disabled is called

Business Overhead Expense. Business Overhead insurance is often purchased by small employers to pay the ongoing business expenses (such as payroll) in the event the owner of the business becomes disabled. Premiums paid are tax deductible as a business expense, but proceeds paid are taxable as income.

When the partners of a business develop an arrangement whereby should one of them die or become permanently disabled, the other partners would purchase the interest of the deceased or disabled partner at a predetermined price, this is called a/an

Business continuation plan. A business continuation plan is an agreement between business owners whereby they agree, should one of them die or become disabled, the surviving owners will purchase the interest of the deceased or disabled owner at a predetermined price. Such a plan is usually funded by each owner purchasing insurance on each of the other owners.

Which of the following statements concerning buy-sell agreements is true?

Buy-sell agreements are normally funded with a life insurance policy. A buy-sell agreement is simply a contract that establishes what will be done with a business in the event that an owner dies. Buy-sell agreements are normally funded with a life insurance policy.

Services provided by the Health Insurance Counseling and Advocacy Program are paid for

By state and local governments. Although the Department of Aging Administers the HICAP program, it is funded by state and local governments.

An insured receives an annual life insurance dividend check. What term best describes this arrangement?

Cash option. The cash option allows an insurer to send the policyholder an annual, nontaxable dividend check.

What limits the amount that a policyowner may borrow from a whole life insurance policy?

Cash value. The amount available to the policyowner for a loan is the policy's cash value. If there are any outstanding loans, that amount will be reduced by the amount of the unpaid loans and interest.

What does "liquidity" refer to in a lifer insurance policy?

Cash values can be borrowed at any time. Liquidity in life insurance refers to availability of cash to the insured through cash values.

Which of the following elements in an Indexed Universal Life policy is tied to an index?

Cash values. Under the Indexed Universal policy, the policy's cash value is dependent upon the performance of the equity index.

If a Medicare insured uses a non-participating in Medicare physician, he or she may not be asked to sign a private contract. Which of the following conditions will NOT apply when the insured signs a private contract with the provider?

Claims should be submitted to Medicare. When an insured uses services of a non-participating in Medicare physician, the insured and the provider might need to sign a private contract. The insured will have to pay whatever the provider charges for the services; Medicare limiting charges will not apply. Therefore, no claims should be submitted to Medicare, and Medicare will not pay if one is submitted.

What is the clause that describes the method paying the death benefit in the event that the insured and beneficiary are both killed in the same accident?

Common Disaster Clause. The Common Disaster Clause provision states that when an insured and beneficiary die in a common accident, and the beneficiary dies before or within a specific period of time after the insured, the insurer will proceed as if the insured outlived the beneficiary.

When applying for an individual life insurance policy, an applicant states that he went to the doctor for nausea, but fails to mention that he was also have severe chest pains. This is an example of

Concealment. Concealment occurs when a person withholds a material fact that is crucial to making a decision. In insurance, this involves withholding information that would be crucial to underwriting decisions.

Every expressed warranty made at or before the execution of a policy must be

Contained in and referred to in the policy or other document and signed by the insured. According to CIC 443, every express warranty made at or before the execution of a policy must be contained in the policy itself, or in another instrument signed by the insured and referred to in the policy.

The type of policy that can be changed from one that does not accumulate cash value to the one that does is a

Convertible Term Policy. A convertible term policy has a provision that allows the policyowner to convert to permanent insurance.

According to the entire contract provision, what document must be made part of the insurance policy?

Copy of the original application. An insurance contract must contain a copy of the original application.

Which of the following is NOT allowed in credit life insurance?

Creditor requiring that a debtor buys insurance from a certain insurer. In credit life insurance, a creditor may require that the debtor have life insurance, but they cannot require the debtor to purchase insurance through a specific insurer.

Which of the following would be the beneficiary in credit life insurance?

Creditor. The creditor is the owner and the beneficiary of the policy.

A producer agent must do all of the following when delivering a new policy to the insured EXCEPT

Disclose commissions earned from the sale of the policy. A producer must explain policy provisions, exclusions, and riders at the time of delivery, as well as the rating procedures, especially if the policy is rated differently than applied for. The producer must also collect any due premium and have the insured sign the statement of continued good health.

All of the following statements concerning dividends are true EXCEPT

Dividend amounts are guaranteed in the policy. Dividends cannot be guaranteed. True: Favorable investment results generate higher dividends. Dividend amounts are guaranteed in the policy. Lower insurance company costs generate higher dividends. They stem from favorable underwriting experience.

Which of the following is NOT a type of information that needs to be gathered in order to determine the value of someone's life when using the needs approach?

Estimated longevity. There are four main types of information that an insurer needs to obtain in order to determine the value of someone's life: debt status, income, mortgage, and expenses. Longevity is not a factor in the personal financial planning process.

If the Executive Bonus plan, who is the owner of the policy, and who pays the premium?

Executive is the owner, and the executive pays the premium. Executive buys the policy and pays the premium, and the employer reimburses the executive for cost (or pays a bonus in the amount of the premium). Since the executive is receiving compensation, the amount paid by the employer would be considered taxable income.

Which policy component decreases in decreasing term insurance?

Face amount. Decreasing term policies feature a level premium and a death benefit that decreases each year over the duration of the policy term.

An applicant is denied insurance because of information found on a consumer report. Which of the following requires that the insurance company supply the applicant with the name and address of the consumer reporting company?

Fair Credit Reporting Act. The Fair Credit Reporting Act governs what information can be collected and how the information can be used.

Which of the following types of insurance covers the whole family in a single contract?

Family Policy. A family policy provides permanent life insurance for the breadwinner and term riders for other family members. With a family income policy, the principal wage earner is the only family member insured.

If a beneficiary wants a guarantee that benefits paid from principal and interest would be paid for a period of 10 years before being exhausted, what settlement option should the beneficiary select?

Fixed period. Under the fixed-period installments option (also called period certain), a specified period of years is selected, and equal installments are paid to the recipient. The payments will continue for the specified period even if the recipient dies before the end of that period.

What kind of policy issues certificates of insurance to insureds?

Group insurance. Individuals covered by group life insurance do not receive a policy, but receive a certificate of insurance from the master policy.

Which of the following life insurance policies does NOT build cash value?

Guaranteed universal life. Unlike universal life insurance, guaranteed universal life insurance does not build cash value. As long as the policyowner pays the premiums, the policy remains in force.

Which of the following methods of calculating the amount of life insurance needed takes into account the insured's wages, years until retirement, and inflation?

Human life value approach (HLVA). Human life value approach is determined by the loss of income that would result with the death of the insured, after making adjustments for expenses, inflation, etc.

A life insurance policy has a legal purpose if both of which of the following elements exist?

Insurable interest and consent. To ensure legal purpose of a life insurance policy, it must have both insurable interest and consent.

Who makes up the Medical Information Bureau?

Insurers. The Medical Information Bureau is made up of insurers so the companies can compare the information they have collected on a potential insured with information other insurers may have discovered.

An insured purchased a Life Insurance policy. The agent told him that depending upon the company's investments and expense factors, the cash values could change from those shown in the policy at issue time. The policy is a/an

Interest-sensitive Whole Life. Because the cash values are generated by investments, interest rates will affect the amount of the cash value.

Which of the following is true regarding the spendthrift clause in life insurance policies?

It can protect the policy proceeds from creditors of the beneficiary. The spendthrift clause in a life insurance policy prevents the beneficiary's reckless spending of benefits, and protects the policy proceeds from creditors of the beneficiary or policyowner.

In Modified Life policies, what happens to the premium?

It is level at the beginning and increases after the first few years. Modified Life policies charge lower premiums (similar to term rates) during the first few policy years, usually the first 3 to 5 years, and then higher level premiums for the remainder of the insured's life. The higher subsequent premiums are typically higher than straight life premiums would be for the same age and amount of coverage.

When a reduced-paid up nonforfeiture option is chosen, what happens to the face amount of the policy?

It is reduced to the amount of what the cash value would buy as a single premium. In a reduced paid-up policy, the original policy's cash value is used as single premium to pay for a permanent policy with a reduced face amount from the original, hence the name. The new policy accumulates in cash value until its maturity or the insured's death.

Twin brothers are starting a new business. They know it will take several years to build the business to the point that they can pay off the debt incurred in starting the business. What type of insurance would be the most affordable and still provide a death benefit should one of them die?

Joint Life. A Joint Life policy covering two lives would be the least expensive because the premiums are based on an average age, and it would pay a death benefit only at the first death.

If a life insurance policy increases significantly in face amount (death benefit) when the insured reaches a specified age, what type of policy is this?

Jumping juvenile policy. While many policies provide a level death benefit, Jumping Juvenile policies provide a low face amount in the early years and then increase, usually by 5 times the amount, when the insured reaches an age specified in the policy (usually age 21).

The growing tendency of individuals to file lawsuits and to claim tremendous amounts for alleged damages is known as

Legal hazard. Legal hazards arise from court actions which increase the likelihood or size of a loss.

Kayla's husband died in a plane crash. She needs a new source of funding that will help put her child through daycare. Which of the following would be the best source?

Life insurance proceeds. There are many legitimate need-based expenses that can be paid by life insurance proceeds, from groceries to retirement income. Daycare is considered to be among these expenses.

An insured has a life insurance policy that requires him to only pay premiums for a specified number of years until the policy is paid up. What kind of policy is it?

Limited-pay Life. In limited-pay policies, the premiums for coverage will be completely paid-up well before age 100, usually after a specified number of years.

The premium of a survivorship life policy compared with that of a joint life policy would be

Lower. Survivorship Life is much the same as joint life in that it insures two or more lives for a premium that is based on a joint age. The major difference is that survivorship life pays on the last death rather than upon the first death. Since the death benefit is not paid until the last death, the joint life expectancy in a sense is extended, resulting in a lower premium than that which is typically charged for joint life.

An insured and his spouse own a home. When the insured dies, the insurer pays the remaining balance on his home loan. Which type of life insurance provision/rider does this describe?

Mortgage Redemption. The mortgage redemption provision insures the life of a homeowner for an amount equal to his mortgage. If the insured dies, the insurer assumes responsibility for the remaining loan balance.

Attempting to determine how much insurance a family would require based upon their financial objectives is known as

Needs approach. Needs method determines how much benefit would be necessary to replace the loss income and increased expense should the insured die prematurely.

Which Universal Life option has a gradually increasing cash value and a level death benefit?

Option A. Under Option A, the death benefit remains level while the cash value gradually increases. The death benefit will increase at a later date in order to maintain a gap between the cash value and the death benefit before the policy matures.

During the grace period, the policyowner can

Pay a late premium without penalty. A grace period is the period of time specified in the policy that allows the policyowner to pay a premium after due date without penalty, or without policy lapsing.

Which of the following riders would NOT cause the Death Benefit to increase?

Pay or Benefit Rider. Payor Benefit Rider does not increase the Death Benefit; it only pays the premium if the payor is disabled or dies. With Guaranteed Insurability Rider, the policyowner can increase DB at specified ages or events, i.e. marriage or birth of a child; Cost of Living Rider increases DB to keep pace with inflation; in Accidental Death Rider, if the insured dies from an accident, DB is a multiple of the Face Amount.

An insured purchased a life policy in 2010 and died in 2017. The insurance company discovers at the time that the insured had misstated information during the application process. What can they do?

Pay the death benefit. The incontestability clause prevents an insurer from denying a claim due to statements in an application after the policy has been in force for 2 years, even on the basis of a material misstatement of facts or concealment of a material fact.

If the policyowner, the insured, and the beneficiary under a life insurance policy are three different people, who has the ownership rights?

Policyowner. Only the policyowner has the ownership rights under the policy, and not the insured or the beneficiary.

Which of the following will be included in a policy summary?

Premium amounts and surrender values. A policy summary must be delivered along with the policy and will provide the producer's name and address, the insurance company's home office address, the generic name of the policy issued, and premium, cash value, surrender value and death benefit figures for specific policy years.

Regarding the taxation of Business Overhead policies,

Premiums are deductible, and benefits are taxed. The premiums paid for BOE insurance are tax deductible to the business as a business expense. However, the benefits received are taxable to the business as received.

When may a representation be withdrawn?

Prior to the issuance of the policy. Once the policy is issued, representations cannot be withdrawn.

A life insurance policy can be delivered by all of the following means, EXCEPT

Priority mail. Acceptable methods of delivery include Registered or Certified Mail, Personal Delivery with a signed, written delivery receipt, 1st Class Mail with a signed written Delivery Receipt, or any reasonable means determined by the Commissioner. Priority mail does not establish an exact date of delivery or to whom it was delivered, and personally delivering the policy needs to be done by a properly licensed representative who can answer questions.

The price of insurance for each exposure unit is known as

Rate. Rate is the price of insurance for each exposure unit. The rate helps determine the premium by multiplying it by the number of units of insurance purchased.

A man decided to purchase a $100,000 Annually Renewable Term Life policy to provide additional protection until his children finished college. He discovered that his policy

Required a premium increase each renewal. Annually Renewable Term policies' premiums are adjusted each year to the insured's attained age; however, the policy may be guaranteed renewable. Death benefits remain level, and as with any term policy, there are no cash values.

To sell variable life insurance policies, an agent must receive all of the following EXCEPT

SEC registration. Agents selling variable life products must be registered with FINRA, have a securities license, and must be licensed within the state to sell life insurance. SEC registration is for securities, not agents.

Upon policy delivery, the producer may be required to obtain any of the following EXCEPT

Signed waiver of premium. The policy does not go into effect until the premium has been collected. If the premium was not collected at the time of the application, the producer may also be required to get a Statement of Good Health from the applicant at the time of policy delivery. Waiver of premium is a rider that can be added to a life insurance policy, and not something to be obtained from the applicant.

Which settlement option provides a single beneficiary with income for the rest of his/her life?

Single life. The Single Life Option provides a single beneficiary with income for the rest of his/her life.

The clause that protect the proceeds of a life insurance policy from creditors after the death of the insured is known as the

Spendthrift clause. The spendthrift clause protects the policy proceeds from creditors of the policyowner or beneficiary.

When a life insurance policy stipulates that the beneficiary will receive payments in specified installments or for a specified number of years, what provision prevents the beneficiary from changing or borrowing from the planned installments?

Spendthrift provision. When a life insurance policy contains a spendthrift provision, all rights of the beneficiary to change time of payment or amount of installments, surrender for cash, borrow against, or assign for any purpose, are withdrawn and those parts of the policy that may give the beneficiary such rights are declared inoperative and void.

Kayla's husband died in a plane crash. She needs a new source of funding that will help put her child through daycare. Which of the following would be the best source?

State Education Waiver. There are many legitimate need-based expenses that can be paid by life insurance proceeds, from groceries to retirement income. Daycare is considered to be among these expenses.

The interest earned on policy dividends is

Taxable. Dividends are a return of unused premiums on which the insured has already paid taxes. Any interest earned is taxable as ordinary income.

Upon the death of the insured, the primary beneficiary discovers that the insured chose the interest only settlement option. What does this?

The beneficiary will only receive payments of the interest earned on the death benefit. With the Interest Only settlement option, the insurance company retains the policy proceeds and pays interest on the proceeds to the recipient (beneficiary) at regular intervals (monthly, quarterly, semiannually, or annually).

The policyowner of an adjustable life policy wants to increase the death benefit. Which of the following statements is correct regarding this change?

The death benefit can be increased by providing evidence of insurability. The policyowner (insured) would need to prove insurability for the amount of the increase.

Who is the owner and who is the beneficiary on a Key Person Life Insurance policy?

The employer is the owner and benficiary. With the key-person coverage, the business (the employer) is the applicant, owner, premium payer, and beneficiary.

The title page of the policy provides a summary of the benefits and coverages provided by the policy. All of the following information is included in the title page EXCEPT

The insured's beneficiaries. Although the named beneficiaries are important, it is information NOT contained within the first several pages of the policy which is known as the TITLE PAGE.

Which of the following does NOT need to be identified in an insurance policy?

The insurer's financial rating. An insurer's financial rating does not need to be specified in an insurance policy.

All of the following are TRUE statements regarding the accumulation at interest option:

The interest is credited at a rate specified by the policy. The policyholder has the right to withdraw the accumulations at any time. The annual dividend is retained by the company. Incorrect! The interest credited under this option is TAXABLE, whether or not the policyowner receives it.

Which of the following is NOT required on an illustration used in the sale of a life insurance policy?

The name of the primary and secondary beneficiaries. Other required items include the name and business address of producer or insurer's authorized representative; the name, age and sex of proposed insured; underwriting or rating classification upon which the illustration is based; and the initial death benefit.

Which of the following determines the cash value of a variable life policy?

The performance of the policy portfolio. The cash value of a variable life policy is not guaranteed and fluctuates with the performance of the portfolio in which the premiums have been invested by the insurer.

Under an extended term nonforfeiture option, the policy cash value is converted to

The same face amount as in the whole life policy. Under this option the insurer uses the policy cash value to convert to term insurance for the same face amount as the former permanent policy.

All of the following are requirements for life insurance illustrations EXCEPT

They must be part of the contract. An illustration may not be altered by an agent and must clearly state that it is not part of the contract. It is legal to list nonguaranteed values in the contract, but they must be specifically labeled as projected, not guaranteed values.

An insured wants to change from an annual premium mode to a monthly premium mode. Which of the following is true?

This change can only be made on the policy's anniversary. The frequency of premium payments can be changed on the policy's anniversary date, provided that the payment is not less than a minimum amount that the insurer requires.

What is the purpose of a disclosure statement in life insurance policies?

To explain features and benefits of a proposed policy to the consumer. Disclosure statements will help the applicants to make more informed and educated decisions about their choice of insurance.

Why should the producer deliver the policy when the first premium has already been paid?

To help the insured understand all aspect of the contract. It is the producer's responsibility to make sure that the policy is understood by the insured and all of their questions are satisfied, and the delivery receipt is signed.

What is the purpose of establishing the target premium for a universal life policy?

To keep the policy in force. The target premium is a recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime.

Which of the following is Not a goal of risk retention?

To minimize the insured's level of liability in the event of loss. Retention usually results from three basic desires of the insured: to reduce expenses and improve cash flow, to increase control of claim reserving and claims settlements, and to fund losses that cannot be insured.

Which of the following policies would have an IRS required corridor or gap between the cash value and the death benefit?

Universal Life - Option A. Universal Life Option A (Level Death Benefit option) policy must maintain a specified "corridor" or gap between the cash value and the death benefit, as required by the IRS. If this corridor is not maintained, the policy is no longer defined as life insurance for tax purposes, and consequently loses most of the tax advantages that have been associated with life insurance.

Which of the following types of policies allows the policyowner to skip premium payments, provided that there is enough cash value in the policy to cover the premium amount?

Universal Life. The policyowner has the flexibility to increase the amount of premium going into the policy and to later decrease it again. In fact, the policyowner may even skip paying a premium and the policy will not lapse as long as there is sufficient cash value at the time to compensate for the nonpayment of premium.

In a survivorship life policy, when does the insurer pay the death benefit?

Upon the last death. Survivorship life pays on the last death rather than upon the first death.

Which of the following types of policies allows for a flexible premium and a variable investment component?

Variable universal life insurance. A variable universal life insurance policy combines a flexible premium with an investment component that allows for potentially great returns.

Which of the following is a key distinction between variable whole life and variable universal life products?

Variable whole life has a guaranteed death benefit. Variable universal life insurance may or may not have a minimum death benefit, unlike variable whole life insurance which guarantees a minimum death benefit.

What types of services may NOT be provided under the long-term care's assisted living care?

Visits by a registered nurse. The following services may be provided: linens and personal laundry service, assistance with dressing and bathing, reminders regarding medication, assistance with eating. Assisted living offers nonmedical assistance.

An agent and an applicant for a life insurance policy fill out and sign the application. However, the applicant does not wish to give the agent the initial premium, and no conditional receipt is issued. When will coverage begin?

When the agent delivers the policy, collects the initial premium, and the applicant completes an acceptable Statement of Good Health. If the initial premium is not paid with the application, the agent will be required to collect the premium at the time of policy delivery. In this case, the applicant will most likely need to fill out a Statement of Good Health.

What is the purpose of a fixed-period settlement option?

When the fixed-period installments option is selected, the insurer agrees to pay the proceeds in equal installments over a specified period of time.

When would a 20-pay whole life policy endow?

When the insured reaches age 100. A limited-pay whole life policy, just like straight life, endows for the face amount if the insured lives to age 100. The premium is, however, completely paid off in 20 years.