Life Insurance Practice Exam Questions
Pam is a 56-year-old vice president employed by Gulf, Inc. Under Gulf's employer-pay-all group life plan, Pam's coverage is $300,000. The value of what portion of that coverage is taxable to Pam?
$250,000
If the 55-year-old surviving spouse of a deceased covered worker has a child under age 16, he or she is entitled to a surviving spouse's benefit equal to:
75 percent of the deceased worker's PIA
Peter is 80 years old, a widower, and living with his employed son who has been fully supporting Peter. In the event of his son's death, what level of Social Security benefit could Peter receive?
82.5 percent of the son's PIA
Which of the following can be funded with a single premium payment, a series of fixed premium payments, or flexible premium payments?
deferred annuities
The formal term used to describe the funds used in providing life insurance policy dividends is:
divisible surplus
The type of Section 529 plan that builds a tax-free pool of money the account owner can use to pay for qualifying education expenses including tuition, fees, room and board, and books is called a(n):
education savings plan
The nontaxable portion of fixed annuitized income payments is based on which of the following calculations?
exclusion ratio
When a policy has been issued on a substandard (rated) basis, which nonforfeiture option is normally NOT available?
extended term option
If a group health insurance policy terminates, an employee can elect to convert coverage provided he or she has been insured under the plan for how long before it terminates?
five years
Leo is annuitizing his $250,000 deferred annuity and has chosen a settlement option that will pay him $1,500 per month for as long as it takes to entirely liquidate the $250,000 principal plus interest, whether or not Leo is alive. Which annuity settlement option has Leo chosen?
fixed amount option
Oscar has saved $250,000. He is 67 and working part time, and would like to fully retire now and receive monthly payments for life. What type of annuity is the best choice for Oscar?
fixed immediate annuity
Jessica, age 25, buys a $100,000 life insurance policy. The initial premium is lower than straight whole life rates and increases each year for the first ten years of the policy period. After that, the premium levels off and stays at that amount for the life of the policy. What type of policy does Jessica own?
graded premium whole life
To qualify for and get the favorable tax treatment given to life insurance, a universal life insurance policy must meet which of the following tests?
guideline premium test
Anne, a life insurance applicant, wants to change an answer that she gave on the application. She should do which one of the following?
have the applicant cross out and initial the incorrect entry
The basic purpose of an annuity settlement option is to determine:
how long annuity income payments will be paid and with what guarantees
Straight whole life, limited pay whole life, and modified premium whole life all have which one of the following characteristics in common?
premium amounts that are known in advance
The underwriter at the home office relies on many sources of information in deciding to accept, decline, or rate a risk. The most commonly used sources include all of the following, EXCEPT:
the applicant's signed statement of intent
The maximum family benefit available under Social Security is based on:
the earnings of a single worker
Pamela owns a fixed deferred annuity that she will annuitize next year when she retires. Which of the following is a key factor in determining the percentage of her monthly annuity payment that will be subject to tax?
the expected return
In a few situations, premiums paid for a life insurance policy are tax deductible. These situations include all of the following, EXCEPT:
the policyowner intends to use the policy's cash value to help pay for his child's college education
All of the following are true statements about the insuring clause of a life insurance policy EXCEPT:
it lists the policyowner's rights under the policy.
Bridget's life insurance policy provides $500,000 of coverage for a period of ten years, at which time the coverage terminates. Which type of policy does Bridget own?
level term
As beneficiary of her husband's life insurance, Beth chooses to receive payments for life. However, she is guaranteed that the payments will be made for ten years. Beth has chosen which of the following settlement options?
life income with period certain
An annuity's basic purpose is to:
liquidate a sum of money and protect against outliving one's income
Before selling an annuity, an agent must make reasonable efforts to obtain information about the prospect with respect to all of the following EXCEPT:
marital status
If an endowment policy is exchanged for another endowment policy under Section 1035, the maturity date of the new policy must be:
no later than the current policy's maturity date
When Terry applied for his life insurance policy four years ago, he omitted any information in the application related to treatment he had received several years earlier for a serious chronic illness. Which of the following actions can the insurance company take when it learns of the omission?
nothing
For policyowners who do not pay premiums annually, insurance companies increase premiums to do which of the following?
offset the insurer's increased billing costs and lost earnings.
George buys a participating life insurance policy. A dividend is paid this year, and George wants to use it to purchase small single premium amounts of life insurance. Which dividend option has he selected?
paid-up additions
If a worker has over 40 OASDI quarters of coverage what is his or her Social Security worker status?
permanently insured
A 1035 exchange is not considered a policy replacement for regulatory purposes.
the value of any group life insurance exceeding $50,000, less any premiums the employee pays
A retiree's monthly Social Security retirement benefit amount is dependent on the worker's PIA and:
the worker's age at the time he or she chooses to receive benefits
Stanley is licensed as a life insurance agent and also sells variable annuities in Florida. He is taking several continuing education courses to renew his license. How many hours must he complete in courses covering suitability in annuity and life insurance transactions?
three
Which of the following is the primary reason for participating in a qualified retirement plan?
to accumulate assets and produce income during retirement
The purpose of Tom's life insurance policy's rights provision is which of the following?
to establish Tom's rights as policyowner and the conditions under which he can exercise those rights
All the following statements regarding a life insurance policy's accelerated benefits provision are correct EXCEPT:
to qualify for accelerated benefits, the insured must be certified as having a terminal illness
A Section 259 prepaid tuition plan may cover:
tuition and mandatory fees only
Matt participates in the company's qualified retirement plan and is planning to retire at age 67. He must begin receiving distributions from the plan by April 1 of the year following the year in which he:
turns age 70'
Miguel purchased a permanent insurance policy that lets him vary premium payments and adjust the death benefit over the policy's term. After owning the policy for fifteen years, the policy's cash values had grown to the point that he decided not to pay premiums for the next six months. What type of policy does Miguel own?
universal life
A type of permanent life insurance that lets the policyowner increase, reduce or even skip premium payments at will without the policy lapsing best describes:
universal life insurance
For which of the following types of life insurance is a cost-of-living (COL) rider generally unnecessary and therefore unavailable?
universal life insurance
Children covered by a family term rider can convert their coverage to permanent coverage at age 21 without proof of insurability. The converted policy's face value is typically which of the following amounts?
up to five times the coverage under the family term rider
Val has owned a whole life insurance policy for the past 25 years. She would like to use the values in her existing policy to purchase a new variable universal life policy. Which strategy should she use to ensure neutral tax treatment and to avoid taxation of any policy gain?
use a Section 1035 exchange of the existing policy for a new policy
All of the following are common types of term life insurance EXCEPT:
variable term
In a viatical settlement arrangement, the party who enters into the arrangement with the policyowner is called a:
viatical settlement provider
Bob owns an ordinary whole life insurance policy. He likes to pay smaller premiums more frequently. An insurer would likely offer him the chance to pay premiums on all of the following schedules, EXCEPT:
weekly
A life insurance policy matures or endows when its guaranteed cash value equals its face amount. With an endowment contract, when does the policy endow?
well before age 120, usually at age 65
When would be the best time to surrender a market-value-adjusted annuity during the surrender charge period?
when current market interest rates are lower than they were when the annuity was issued
Which one of the following statements most correctly describes how interest-sensitive whole life and current assumption whole life insurance differ?
Current assumption policies guarantee a minimum interest rate and cash value while interest-sensitive policies do not guarantee the interest rate and cash value.
Which of the following correctly explains why a waiver of premium rider functions differently with a universal life insurance policy than with a traditional whole life policy?
Premium payments for a universal life policy are flexible, making it difficult to know how much premium to waive.
Ralph, Jerry, and Paula are primary and equal beneficiaries of the $600,000 insurance policy on the life of their mother, Judy. Ralph dies before his mother. He leaves two children, Tim and Hal. If Judy's life insurance policy designates the death benefit be paid "per stirpes," how will the insurer distribute the policy benefits?
Ralph's $200,000 share will pass equally to his two children when Judy dies. The surviving siblings, Jerry and Paula, will each receive $200,000.
Variable universal life (VUL) policies have the same two death benefit options as those in fixed interest UL policies. As a third death benefit option, what do some VUL polices offer?
a death benefit equal to the sum of the policy's specified amount plus the greater of total premiums paid or actual cash value
Under a Section 1035 exchange, a nonqualified deferred annuity can be exchanged tax-free for which of the following products:
a nonqualified annuity only
The owner of a whole life policy who qualifies for accelerated benefits under the policy's accelerated benefits provision can expect to receive:
a percentage of (but less than) the policy's death benefit
Which of the following is the most accurate definition of a SIMPLE retirement plan?
a plan reserved for small companies with no existing qualified employee retirement plan
Which organization is eligible to sponsor a 403(b) plan for its employees
a religious center, state university, a non-profit
Two months after buying a single premium life insurance policy, Norton kills himself. As a result, what will Norton's family receive from Norton's life insurance policy?
a return of the premiums paid, plus interest
Bob bought a $100,000 ten-year level term insurance policy on March 1, 2008. What would happen if he died on March 15, 2018?
No death benefit would be payable.
At the age of 56, Carmen opens a Roth IRA. What is the earliest age at which she can take a withdrawal of earnings from her account without being subject to tax or penalty?
61
Under traditional whole life insurance plans, policy loans can be as high as what percent of the cash value?
100 percent
Most life insurance guaranteed insurability riders require that death benefit increases be exercised within what time period?
30 days before or after an increase option date
If a person receives funds directly from a qualified pension plan and intends to roll them over to an IRA, within how many days must the rollover be completed?
60 days
All the following statements regarding tax-free Section 1035 exchanges are correct EXCEPT:
A 1035 exchange is not considered a policy replacement for regulatory purposes.
Social Security provides a variety of programs for eligible workers and their families. What are its two main programs?
OASDI and Medicare
All the following statements about term life insurance are correct EXCEPT:
A small cash value gradually accumulates while the policy is in force.
Four partners own ABCD Company, which is supported by an insured entity purchase buy-sell agreement. If one partner dies, which of the following correctly describes what happens to that partner's share in the business?
ABCD uses the life insurance proceeds to buy the deceased partner's share of the business, automatically increasing each surviving partner's share of the business to a one-third share.
Which of the following is NOT a requirement for employer-sponsored group life insurance?
All employees must be insurable.
Ann is the beneficiary of an annuity owned by Jim. Jim intended to annuitize the contract at retirement but died shortly before retiring and selecting a payout option. What benefits will Ann receive from the annuity?
Ann will receive the annuity's accumulated value and may select a payout option.
Ann is beneficiary of an annuity owned by Jim. If Jim annuitizes the contract at retirement and dies shortly afterward, what benefits will Ann receive from the annuity?
Ann's right to any funds will be based on the income payout option Jim selected.
All the following statements regarding annuity death benefits are correct EXCEPT:
Annuity death benefits are income tax-free.
Variable universal life combines features of variable life and universal life. Variable universal life and universal life are alike in all of the following ways EXCEPT:
Both are considered securities products as well as life insurance.
All of the following are eligible to make contributions (tax-deductible or otherwise) to a traditional IRA EXCEPT:
Bud, age 68, whose income consists of his pension and Social Security benefits
Which of the following best describes a life insurance policy's contingent beneficiary?
a beneficiary who is paid the death benefit if the primary beneficiary is removed or dies before the insured
A return of premium rider is generally available only with:
term life insurance policies
Assuming all are under age 59 ', which of the following will be assessed a premature distribution penalty when making a withdrawal from her IRA?
Daisy, who needs money because she has been unemployed for two years
Diana, age 56, pays $3,000 each year in premiums for her variable annuity and plans to annuitize the contract when she retires in ten years. Which of the following statements is correct while Diana's annuity is still in the accumulation phase?
Diana's premium payments will grow on a tax deferred basis
Which of the following statements about IRA rollovers is CORRECT?
Funds can be rolled over from one IRA to another or from a qualified retirement plan to an IRA.
All of the following will have to pay income tax on their group term life insurance benefit EXCEPT:
Gabriel, who works at a grocery store and whose employer-paid group life insurance is valued at $50,000
Gloria chooses to take her life insurance policy dividends in cash. The insurance company sends a check for the amount of the declared dividend on the anniversary date of the policy. What is the tax consequence to Gloria for receiving cash dividends?
Her dividends are not income taxable.
Which of the following best describes the meaning of insurable interest?
Insurable interest represents the financial impact on the policyowner by the loss of the insured person or property.
Which of the following most accurately describes a market-value adjusted annuity (MVA)?
It is a provision found in some fixed deferred annuity contracts that discourages deferred annuity contract owners from surrendering their annuity when rates are rising.
If an employer sets up a profit-sharing plan, which one of the following statements is most correct?
It must establish individual accounts for each participant.
Regarding life insurance premium receipts, which of the following correctly describes how a temporary insurance agreement works?
It provides death benefit coverage (usually less than the applied-for amount and typically through term life insurance) for a specified term after the date of application while the application goes through underwriting.
Though based on similar actuarial principles, annuities are regarded as the exact opposite of life insurance. Which of the following explains the meaning of this statement?
Life insurance creates an estate, while annuities liquidate an estate.
All of the following are correct statements about the taxation of modified endowment contracts (MECs) EXCEPT:
MECs enjoy all of the tax advantages of life insurance.
Justine leaves her position with her employer on March 1. She wants to convert her employer's group life insurance coverage to an individual policy. In order to convert her group coverage, she must apply for an individual policy no later than what date?
March 31
Mary is applying for a life insurance policy on her son, Noah. Mary's husband, Nick, will be the beneficiary. An insurable interest must exist between which two parties?
Mary and Noah
Which of the following best illustrates the intended use of an annuity?
Maura purchases an annuity to convert a sum of money into a series of payments to herself.
Steve owns, and is the beneficiary of, a life insurance policy. If he selects the straight life income settlement option, which of the following best describes how the policy death benefit would be distributed?
Steve will receive payments until his death, at which point payments will stop.
Which of the following statements about the funding of Social Security benefits is correct?
The FICA tax is allocated between OASDI and Medicare.
Arianna owns several industrial life insurance policies and wishes to convert them into an ordinary life insurance policy. Which of the following is required to convert the policies?
The combined face value of Arianna's policies must exceed $3,000.
Which of the following best describes how group life insurance premiums are treated for tax purposes?
The employer can deduct its premiums as a business expense, but employees cannot deduct their premium contributions.
Which statement about profit-sharing plans is correct?
The employer is not required to make the same amount of contributions every year.
In what way is a profit-sharing plan unique among defined contribution plans?
The employer is the sole contributor.
With respect to profit sharing plans, which of the following statements is correct?
The employer must make substantial and recurring contributions for the plan to maintain its qualified status.
Any of the following conditions will qualify a distribution of accelerated benefits from a life insurance policy as tax-free EXCEPT:
The insured must have suffered a dismemberment or blindness due to an accident.
Which of the following statements about the 'accumulate at interest' policy dividend option is correct?
The insurer credits a rate of interest to the dividends as they remain on deposit with the insurer.
A joint and survivor income option can allow the joint payees to choose a period certain. Suppose the joint payees choose a ten-year period certain. If the second of the joint payees dies before ten years of income payments are made, then what happens?
The insurer pays the contingent payee for the balance of the ten-year period.
Which of the following statements regarding the reduced paid-up life insurance nonforfeiture option is correct?
The paid-up policy will build a cash value.
If the total amount of a policy loan plus interest exceeds the policy's cash surrender value, which of the following will happen?
The policy will lapse.
Under the Uniform Simultaneous Death Act, what is the result if the insured and the primary beneficiary of a life insurance policy die at the same time?
The proceeds will be paid as if the insured survived the beneficiary.
Kelly owns a deferred annuity. What options does she have for using the funds accumulating in her contract before the annuitization date?
They can be withdrawn, partially or in full, before the contract annuitizes.
All the following statements regarding market-value adjusted (MVA) annuities are correct EXCEPT:
They encourage contract owners to surrender the contract when interest rates are rising.
What is the main difference between decreasing term insurance and level term insurance?
Under decreasing term insurance, the death benefit decreases over the policy period while with a level term policy, the death benefit stays level over the policy period.
All the following statements regarding the tax benefits of qualified retirement plans are correct EXCEPT:
Upon distribution, employees are required to pay taxes only on the interest earned on plan contributions but not on the contribution amount itself.
Which statement about variable life insurance is NOT correct?
Variable life insurance offers guaranteed cash values.
With respect to the difference between variable life insurance (VLI) and variable universal life insurance (VUL), which of the following statements is correct?
Variable life policies require a fixed premium payable for the life of the policy while variable universal life permits premium flexibility.
Required minimum distributions (RMDs) are required with all the following types of qualified retirement plans EXCEPT:
a Roth IRA
When an annuity owner makes premium deposits and allocates them among the contract's subaccounts, what are these funds used to buy?
accumulation units
Catch-up contributions may be made to an IRA by workers who are:
age 50 and older
If the owner of a lapsed whole life insurance policy that was issued on a standard basis does not choose a nonforfeiture option, which of the following will the insurer do?
automatically apply the extended term option
To avoid any appearance that the life settlement involves stranger-originated life insurance (STOLI), life settlement providers typically require that the policy being purchased:
be past its contestability period
A worker who is considered currently insured is entitled to which of the following Social Security benefits?
survivors benefits only
Jason has owned a whole life insurance policy for seven years. If he takes a loan from the policy, the insurer
can charge a fixed interest rate of up to 10 percent annually.
Allen wants to use his life insurance policy as security for a loan, using the policy's cash value as the pledge. What is this called?
collateral assignment
While employer contributions to a qualified plan can be subject to a vesting schedule, participants are always fully vested in their own
contributions
Premium rates will vary depending on the insurer's actual experience in which one of the following types of whole life insurance?
current assumption whole
A type of life insurance that covers two people and pays the death benefit only upon the second insured's death is called
survivorship life
Funds distributed through a viatical settlement are:
tax-free at the federal level and taxable at the state level in some states
Jane works for a company that allows employee contributions under a 401(k) plan. When will Jane become fully vested in her plan contributions?
immediately
Eric is a single, self-employed young man of modest means who needs a small amount of life insurance, primarily as a burial fund. Which one of the following types of insurance is most designed for this need?
industrial insurance
In a fixed life insurance policy, who assumes the risk of investing the premiums?
insurer
Stephanie is a policyowner who pays premiums monthly. How does her insurer cover the cost of sending her more frequent premium notices?
insurer charges higher premiums
Which clause or provision in a life insurance policy promises to pay the face amount to the designated beneficiary in the event of the insured's death?
insuring clause
The type of Section 529 plan that lets parents "prepay" a child's tuition at participating in-state public colleges and universities is called a(n):
prepaid tuition plan
All the following are reasons for a business to own a key employee life insurance policy EXCEPT:
provide the key employee with a nonqualified benefit
With interest-sensitive whole life insurance policies, insurers may change interest and premium rates after reviewing their investment experience. What is the process that insurers use to make these changes called?
redetermination
For what purpose are annuities used most often?
retirement planning
In return for assuming the risk of a possible rate reduction if the annuity is surrendered before the end of its term, most market-value adjusted annuities (MVAs) do which of the following?
reward contract owners with a slightly higher current interest rate than is credited to non-MVA fixed annuities
A life insurance policyowner has the right to do all of the following, EXCEPT:
select and change the contract's dividend's schedule
Which of the following types of whole life insurance is paid with one premium at the time the policy is bought?
single premium life
For a given amount of annuitized funds, which life contingency option provides for the highest monthly payment?
straight life income
Roberta owns a whole life insurance policy and has requested that the beneficiary select a death benefit settlement option "without a life contingency". All of the following would meet this request EXCEPT:
straight life income option
A family life insurance policy provides:
whole life on the primary insured and term life insurance coverage on the spouse and each child to age 21
