Life Insurance Practice Exam C
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If an agent currently has an inactive license, this means
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The agent can transact any insurance which is authorized by that license.
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The agent is restricted to transacting only in California and no other state.
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The agent can only transact insurance business that is approved by his managing general agent.
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The agent cannot transact any insurance business for which a valid license is required.
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Life Insurance Practice Exam C focuses on assessing knowledge in insurance law, financial planning, and risk management. It covers topics such as types of insurers, policy illustrations, and benefits related to employee service years, vital for professionals in the field.
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- 2.
Which department or division of an insurance company is responsible for the selection, evaluation, and distribution of risks?
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Marketing and sales
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Underwriting
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Claims
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Actuarial
Correct Answer
A. UnderwritingExplanation
The underwriter’s primary purpose is to evaluate risk to determine which applicants to insure and what coverage to offer (selection). It is the underwriter’s responsibility to protect the insurer against adverse selection (too many high risks on the books) by eliminating the highest risks.Rate this question:
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- 3.
Bob, the owner and insured has a non-participating whole life policy for $50,000. He never misses a payment and has never borrowed from the cash value. Bob turned 100 years old today. How much of the cash value is he entitled to?
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All of it, $50,000
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About $25,000 – it depends on the actuarial tables.
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None of it –Bob did not die, yet.
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None of the above
Correct Answer
A. All of it, $50,000Explanation
Whole life policies mature or endow at age 100. If the insured has not died by that age they are guaranteed the face amount of the policy (minus any outstanding policy loans).Rate this question:
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- 4.
When determining life insurance premium rates an insurer may not legally use which of the following?
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Age
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Gender
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Nationality
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All of the above may be used.
Correct Answer
A. NationalityExplanation
Using nationality would be an unfair discrimination.Rate this question:
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- 5.
Agent Bill has decided to use a new time management strategy while making sales presentations. To save time he decides to not answer a client’s question the first time it is asked. Instead he answers them only if they are asked a second time. This way he can make it to his next appointment on time. Professional insurance organizations would consider this to be:
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A smart and ethical strategy
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An unethical practice
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Not in violation of their codes of conduct
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None of the above
Correct Answer
A. An unethical practiceExplanation
Failing to answer a client’s question directly and promptly would be considered unethical behavior by most standards.Rate this question:
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- 6.
The standard policy provision which prevents an insurance company from rescinding a policy for misstatements on the application after two years is:
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The misstatement protection clause
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The incontestability provision
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The double indemnity clause
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There is no such provision in life insurance
Correct Answer
A. The incontestability provisionExplanation
The answers on a life insurance application are contestable by the insurer for two years. After that, the application becomes incontestable and it doesn’t matter what the company finds, including fraud, they are stuck with the contract. This does not apply to a misstatement of age or sex where the benefit may be adjusted accordingly.Rate this question:
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- 7.
One of the reasons that a person would purchase an annuity is that they are concerned with the risk of:
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Dying too soon.
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Becoming too old to qualify for ordinary life insurance.
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Having to pay taxes on their retirement savings.
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Outliving their retirement income.
Correct Answer
A. Outliving their retirement income.Explanation
An annuity, issued by an insurance company, is the only investment in the world that can guarantee a life-time income no matter how long the annuitant lives. Therefore, an annuity would protect a person from the risk of outliving all of their financial resources.Rate this question:
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- 8.
What is the purpose of “key person” insurance?
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To provide key employees with life insurance coverage.
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To provide retirement benefits to key employees.
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To give senior managers the ability to purchase shares in the business.
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To cover decreased business revenues as a result of the death or disability of a key employee.
Correct Answer
A. To cover decreased business revenues as a result of the death or disability of a key employee.Explanation
The business is indemnified for the loss of business earnings that the key employee would have brought in until the business can hire and train a replacement.Rate this question:
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- 9.
An insurance company that is owned by the policyholders is called a:
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Stock insurer
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Reciprocal insurer
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Mutual insurer
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Fraternal insurer
Correct Answer
A. Mutual insurerExplanation
A mutual insurer raises capital to operate on by selling policies and collecting premiums. Policy owners have voting rights. When the board of directors votes for a policy dividend distribution it is paid to the policy owners.Rate this question:
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- 10.
What is the written instrument called in which the contract of insurance is set forth?
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The covenant of insurance.
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The document of record including all warrantees granted.
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The policy.
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The California Insurance Code.
Correct Answer
A. The policy.Explanation
The policy is the written agreement which puts the insurance coverage into effect.Rate this question:
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- 11.
Group members that are covered by group life insurance policies are required to be issued which of the following?
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A Master Policy
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A Certificate of Insurance
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An estimate of the sponsor's premiums
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None of the above
Correct Answer
A. A Certificate of InsuranceExplanation
There is only one Master Policy and it is held by the head of the sponsoring group. Each eligible group member covered by the plan must be provided with a Certificate of Insurance / Coverage.Rate this question:
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- 12.
Cliff, who is 44 years old, falls while mountain climbing on vacation. He is left paralyzed. After a year, doctors feel he will never recover from his injuries. Which of the following programs will he be able to collect disability income?
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Medi-Cal
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Worker's Compensation
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Social Security
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Medicare
Correct Answer
A. Social SecurityExplanation
Social Security has, as one of its four main components, a disability income section for long term disability.Rate this question:
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- 13.
Which of the following would be appropriate for an individual with a low income and high insurance needs?
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Straight whole life
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Paid-up at 65 insurance
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Endowment insurance
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Term insurance
Correct Answer
A. Term insuranceExplanation
Term life insurance is pure protection. It is the least expensive form of ordinary life insurance. It has the lowest cost-to-benefit ratio.Rate this question:
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- 14.
In group insurance, to avoid proving insurability an employee usually needs to join the group insurance plan:
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During the probationary period
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During the enrollment period
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After the elimination period
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At anytime with group insurance
Correct Answer
A. During the enrollment periodExplanation
Sometimes called the eligibility period, the enrollment period is the time for employees to enroll without having to provide evidence of insurability.Rate this question:
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- 15.
Larry is age 50, has been paying premiums on his whole life policy for more than 15 years, and now has a need to use about 1/3 of his available cash value for a short period of time. He does not want to give up his insurance, and can afford to continue paying premiums. What advice would you give Larry?
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Look for other available funds. Policy cash value is unavailable for loans before 59½ due to IRS tax penalties.
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Tell Larry he should have purchased term insurance because whole life has no cash value.
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The only way to access the cash value is through a surrender of the policy. He can have up to 90% of the cash value to purchase other insurance.
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Tell Larry to take the policy loan, continue paying premiums to prevent a lapse, and also recommend that he repay the principal and interest on the loan.
Correct Answer
A. Tell Larry to take the policy loan, continue paying premiums to prevent a lapse, and also recommend that he repay the principal and interest on the loan.Explanation
It would not be good advice to tell Larry to surrender his policy for the full amount of cash value and then purchase other insurance. First, he doesn’t need the full amount and secondly he will be older and his insurability may have changed. By taking a policy loan and paying it back he will ultimately maintain the full face amount of coverage and the full cash value will be restored.Rate this question:
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- 16.
The owner chooses the annual mode to pay their life insurance premium. For the year, they will pay _________________
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More as compared to the other payment modes.
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The same as compared to the other payment modes.
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Less as compared to the other payment modes.
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None of the above
Correct Answer
A. Less as compared to the other payment modes.Explanation
Premium is calculated on an annualized basis. The more payments (semiannual, quarterly, monthly) the premium is broken into the more expensive for the year. One annual payment allows the insurer to work with all of the money up front and cuts down on their expenses.Rate this question:
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- 17.
Regarding group life insurance coverage sponsored by a business, which of the following persons is the one responsible for applying for the plan, providing member info, making the premium payments for the members, and maintaining the policy or contract?
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The agent who obtained the group plan.
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The insurer that provided the group plan.
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The master policyholder.
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The individuals who make up the covered group.
Correct Answer
A. The master policyholder.Explanation
There is only one actual contract and that is referred to as the Master Policy. The group members covered by the plan are issued Certificates of Insurance. The head of the sponsoring group is the Master Policyholder and is the responsible party to the contract.Rate this question:
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- 18.
Why is having a large number of similar exposure units important to insurance companies?
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The larger the number insured, the more accurately the insurer can predict losses and set appropriate premiums.
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The larger the number of insured’s, the larger the market share for the insurer. This is very important for advertizing purposes.
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The larger the number of insureds, the more premium collected, the more profitable the company.
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None of the above are the most important reason.
Correct Answer
A. The larger the number insured, the more accurately the insurer can predict losses and set appropriate premiums.Explanation
The Law of Large Numbers or the law of averages make it easier and more accurate to predict group losses and to, therefore, set the appropriate amount of premium to cover the risk and help ensure that the company will be profitable.Rate this question:
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- 19.
When an agent, broker, or solicitor handles premiums for an insurer, they are acting in which of the following capacities?
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Managing General Agent (MGA).
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A legal representative with power of attorney.
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A natural person under the code.
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A fiduciary.
Correct Answer
A. A fiduciary.Explanation
A fiduciary is a person acting in a position of trust. For example, they may have been trusted with the funds or property of another person (handling premium for the insurance company).Rate this question:
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- 20.
A contract or policy, which is considered a savings or investment vehicle used for the purpose of accumulating investment funds to be paid out some time in the future through a withdrawal provision, describes which of the following?
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An annuity
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A term life insurance policy
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A long term care policy
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All of the above
Correct Answer
A. An annuityExplanation
Of the three, only an annuity would be considered a savings or investment vehicle.Rate this question:
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- 21.
An individual investor is trying to decide between a bank C.D. and an insurance company annuity. They both pay the same interest rate on an equal principal amount invested over the same period of time. Which one will be worth the most total dollars at the end of that period of time?
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The C.D. and the annuity will both be the same, even after considering the taxes paid over the years.
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The C.D. will be worth more because of the FDIC.
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The annuity will be worth more because of its tax deferred characteristics.
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The C.D. will be worth more because the insurer issuing the annuity will have paid commissions to the writing agent that must be deducted.
Correct Answer
A. The annuity will be worth more because of its tax deferred characteristics.Explanation
The investor would have had to pay taxes annually on the C.D. These tax dollars, paid out of the C.D., would have decrease the compounding effect on the C.D. over the years.Rate this question:
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- 22.
Ron is paying into an annuity that will be used to help supplement his retirement in a few years. His premium payments go into the insurer’s “separate account” and they purchase “accumulation units.” What type of annuity did Ron buy?
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Periodic premium immediate annuity
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Fixed annuity
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Guaranteed qualified plan annuity
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Variable annuity
Correct Answer
A. Variable annuityExplanation
All insurers must maintain a “separate account” for their variable products. During the accumulation phase of a variable annuity, premium payments purchase “accumulation units.”Rate this question:
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- 23.
Which of the following statements is false regarding the application for life insurance?
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When bound to the policy, applications become part of the entire contract.
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The name of the insured person must be indicated on the application.
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Answers to application questions are considered to be representations and not warranties.
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Before a policy can be issued or changed, the beneficiary must initial the application to indicate their approval.
Correct Answer
A. Before a policy can be issued or changed, the beneficiary must initial the application to indicate their approval.Explanation
The policy owner has the right to name the beneficiary and may do so without their knowledge. The beneficiary, as the beneficiary, is not a party to the contract and therefore does not sign or initial anything.Rate this question:
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- 24.
Which of the following policy riders is/are frequently found in life insurance policies?
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Cost of Living rider
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AD&D
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Waiver of Premium
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All of the above
Correct Answer
A. All of the aboveExplanation
These are all frequently found in life insurance policies.Rate this question:
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- 25.
A beneficiary is set to receive $2,500 a month until the lump sum amount and interest are exhausted. Which settlement option was chosen?
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Fixed period option
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Interest (only) option
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Life income option
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Fixed amount option
Correct Answer
A. Fixed amount optionExplanation
This option stresses that the beneficiary will receive a defined / set amount of money monthly until all funds are exhausted or depleted. Since it doesn’t define the length of time it can’t be fixed period, or life income.Rate this question:
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- 26.
Any transaction in which new life insurance or a new annuity is to be purchased, and it is known or should be known that existing life insurance or annuity will be lapsed, forfeited, surrendered, or otherwise terminated is known as what type of transaction?
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Absolute assignment
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Replacement
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Reinsurance
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Unethical
Correct Answer
A. ReplacementExplanation
According to the CIC this is a description of a replacement transaction.Rate this question:
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- 27.
Concerning federal tax treatment of life insurance payments, which of the following statements is/are correct?
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Death benefits paid to the beneficiary are generally tax exempt.
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Ordinary life premiums are tax deductible for the owner.
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Employer paid premiums for their group life insurance plan are not tax deductible as a business expense.
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None of the above is incorrect.
Correct Answer
A. Death benefits paid to the beneficiary are generally tax exempt.Explanation
This is true according to current federal tax laws.Rate this question:
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- 28.
When the insured becomes disabled under the requirements of the policy, which of the following provisions keeps the policy in force even though the owner stops making the premium payments?
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The guaranteed insurability provision
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The accelerated living benefit provision
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The waiver of premium provision
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The spendthrift trust provision
Correct Answer
A. The waiver of premium provisionExplanation
This is a type of an insurance protection on an insurance policy. WP results in the insurance company giving up their right to premium payments during the period of the disability. The policy remains in force, in all respects, until the insured is no longer disabled or they die.Rate this question:
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- 29.
A retirement plan participant’s absolute ownership of the monies in his or her account is referred as:
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Funded
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Qualified
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Vested
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Matured
Correct Answer
A. VestedExplanation
Vesting is defined as the ownership one has in the monies in their retirement plan.Rate this question:
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- 30.
All of the following are true about the Social Security System except:
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The majority of workers in the U.S. are required to pay into the system.
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The system is fully funded.
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Meant to supplement other retirement income, it provides a minimum floor of income.
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Benefits are prescribed by law, not by contract.
Correct Answer
A. The system is fully funded.Explanation
The system will shortly begin paying out more than it’s collecting in taxes.Rate this question:
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- 31.
In which of the following classes of insurance can a binder not be issued?
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Life insurance
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Auto insurance
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Fire insurance
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Marine insurance
Correct Answer
A. Life insuranceExplanation
CIC (Sec. 382.5), in part, says “For purposes of this section, ‘binder’ does not include . . . life or disability insurance.” A binder is deemed to be an insurance policy to show proof of coverage and may be issued by P&C agents with the approval of their insurer.Rate this question:
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- 32.
Which statement about federal income taxation of life insurance settlement payments is true?
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Upon surrender of a whole life policy no part of the cash value is taxable because it is paid in a lump sum.
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Choosing the “life income” settlement option saves the beneficiary from paying any income taxes.
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The “interest only” option results in no taxation until the beneficiary selects one of the other options.
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A lump sum settlement is paid out tax free when paid to a natural person.
Correct Answer
A. A lump sum settlement is paid out tax free when paid to a natural person.Explanation
Currently, no part of the face amount of a life insurance settlement is taxable when paid to a natural person. Only interest earned, if any, would be taxable as income.Rate this question:
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- 33.
Which of the following statements about contingent beneficiaries is false?
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The contingent beneficiary receives benefits equally with the primary beneficiary
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More than one contingent may be named
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They will receive the death benefit if the primary predeceases the insured
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They receive remaining installment or income payments to be made under a settlement agreement if the primary were to decease prematurely
Correct Answer
A. The contingent beneficiary receives benefits equally with the primary beneficiaryExplanation
The contingent would not share the death benefits with the primary as they only receive them if the primary dies before the insured dies.Rate this question:
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- 34.
An insurance commissioner is unable to finish their 4 year term due to death or for some reason leaves office. How will a new commissioner be chosen?
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A special election must be held within 120 days.
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The NAIC appoints an interim commissioner.
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A deputy officer within the DOI is promoted.
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The governor appoints a replacement commissioner.
Correct Answer
A. The governor appoints a replacement commissioner.Explanation
While the Commissioner must be elected by the people, replacements are appointed by the Governor to fill out the remainder of the term, if there is a vacancy.Rate this question:
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- 35.
The California Insurance Commissioner may deny an application for license for all of the following reasons, except:
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The applicant lacks integrity.
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The applicant is not properly qualified to perform the duties.
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The applicant does not have a California business address.
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The applicant does not have a good business reputation.
Correct Answer
A. The applicant does not have a California business address.Explanation
Having a California business address is not a prerequisite qualification for holding a license. For example, an individual could apply independently and not be sponsored by an insurance company, or an agent who is licensed and lives in another state and they apply for the California non-resident license.Rate this question:
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- 36.
The purpose of the laws regarding the replacement of life insurance and annuity contracts includes all of the following, except:
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To protect the interests of life insurers and their agents.
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To reduce the opportunity for misrepresentation and incomplete disclosures.
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To assure the purchaser receives information to make an informed decision.
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To establish penalties for failure to comply with replacement requirements.
Correct Answer
A. To protect the interests of life insurers and their agents.Explanation
Replacement laws were passed to protect the consuming public and not insurance companies and their agents.Rate this question:
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- 37.
In order to calculate how much premium an insurance policy owner will pay, the insurer multiplies the rate by which of the following?
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The premium adjustment factor
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The number of exposure units
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The expense load (or loading factor)
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The number of people covered on the policy
Correct Answer
A. The number of exposure unitsExplanation
Life insurance is sold on a per thousand dollars per year basis. One exposure unit is $1,000 of life insurance coverage. So, the rate times the number of exposure units (or increments of $1,000) equal the annualized premium.Rate this question:
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- 38.
Which of the following are members of and financially supports the Medical Information Bureau?
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Insurance companies
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National Association of Insurance Commissioners
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Licensed insurance agents
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All of the above
Correct Answer
A. Insurance companiesExplanation
The MIB was set up by and for the use of life and disability insurers and their subscriber or membership fees pay for its operation.Rate this question:
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- 39.
Which of the following would an insured use to protect against the negative effect of inflation on the future purchasing power of their life or disability income policy?
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Guaranteed Insurability rider
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Inflation offset rider
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Cost of Living rider
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Increased Benefits rider
Correct Answer
A. Cost of Living riderExplanation
The Cost of Living (COLA) rider is used to keep pace with inflation. The amount of increase is tied to an increase in an inflation index, such as the Consumer Price Index (CPI).Rate this question:
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- 40.
Which of the following beneficiary designations would meet the policyowner’s wish to have his children receive equal shares of his life insurance. And if any of his children should die before he does, he wants the surviving children to receive the deceased child’s share equally divided among them.
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Per capita designation
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Per stripes designation
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Each named as contingent with equal shares.
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Any of these would produce the desired results.
Correct Answer
A. Per capita designationExplanation
Per capita, or per “heads,” by definition provides for the survivor(s) to share equally the deceased beneficiary’s portion.Rate this question:
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- 41.
With a waiver of premium rider attached to a whole life policy issued by a mutual insurer, all of the following are true, except:
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Dividends will continue to be paid, if earned.
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Cash values will continue to grow.
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All features of the policy will remain in force.
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The insurer will waive the premium payment while the policy owner will continue to pay the cost of the WP rider.
Correct Answer
A. The insurer will waive the premium payment while the policy owner will continue to pay the cost of the WP rider.Explanation
The waiver of premium provision exempts the owner from paying any of the premium once the rider is triggered (usually after six months).Rate this question:
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- 42.
Which of the following is a true statement about contributory group life insurance?
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The employer must pay 100% of the premiums.
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All eligible employees must be covered by the plan.
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Participating employees will contribute towards the payment of premiums.
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All of the above
Correct Answer
A. Participating employees will contribute towards the payment of premiums.Explanation
Contributory group plans must be voluntary because the participating group members must pay for all or a part of the premiums.Rate this question:
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- 43.
The additional amount of premium paid for an accidental death benefit rider on a whole life policy does not:
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Cover the cost of the added protection.
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Increase the cash values
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Both
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Neither
Correct Answer
A. Increase the cash valuesExplanation
The additional premium is used only to compensate the insurer for the added risk of the rider.Rate this question:
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- 44.
Life insurance settlement options provide the beneficiary several choices as to how the insurer will pay them the death benefits of the policy. Which of the following is not true about these options?
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The choice can be made by the policy owner at the time of application.
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The policy owner can change to another option any time before the death of the insured.
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If no pre-selection is in effect at the time the insured dies, the insurer allows the beneficiary to choose the option.
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The beneficiary can change to a second option if made within 6 months of the initial payout.
Correct Answer
A. The beneficiary can change to a second option if made within 6 months of the initial payout.Explanation
The policyowner has the right to pre-select the settlement option, if they so desire. Otherwise, it will be left to the beneficiary. However, once the choice is made and the insurer makes payment the option cannot be changed with the exception of the “interest only” option.Rate this question:
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- 45.
The risk management technique of loss retention is effective when all of the following conditions exist, except:
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The probability of loss is unknown.
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The losses are easily predictable.
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The worst possible loss is not very serious.
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The person assumes the risk of the loss themselves.
Correct Answer
A. The probability of loss is unknown.Explanation
If the person facing the loss exposure decides to retain the risk themselves and not buy insurance, to not know the probability of loss could be financially disastrous.Rate this question:
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- 46.
When an agent submits a license renewal application with the required renewal fee on or before the expiration date, which of the following statements is true?
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If they have not received the new license by the day after the current license expires, they may not transact until the new license is received.
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The agent may transact all normal business for up to 60 days after the specified expiration date.
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The agent may only transact after the expiration date if they have received a payment receipt from the department.
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The agent may transact only if they appear in person to the DOI and request a temporary extension of their license.
Correct Answer
A. The agent may transact all normal business for up to 60 days after the specified expiration date.Explanation
This is a code provision allowing the agent to continue running their business while the department processes and mails out the new license.Rate this question:
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- 47.
What happens to the insurance license of a corporation when the corporation ceases to exist?
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It becomes inactive
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It terminates unless the corporation files an application to continue business within 30 days.
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It is suspended temporarily by the DOI.
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It terminates
Correct Answer
A. It terminatesExplanation
The corporation ceases to exist, it has permanently dissolved and, therefore, loses its ability as a person to hold a license.Rate this question:
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- 48.
The Social Security system has four main benefit programs. Disability, Retirement, & Medicare are three of them. The fourth program is:
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Rehabilitation
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Medical
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Hospice
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Survivors
Correct Answer
A. SurvivorsExplanation
DRuMS can be used to remember the four parts of Social Security. Disability, Retirement, Medicare, and Survivors.Rate this question:
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- 49.
There are four basic classes of life insurance. All of the following may be regarded as ordinary insurance, except:
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Term life insurance policy.
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A whole life paid-up at 65 policy.
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A group life insurance policy.
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An 18-year endowment policy.
Correct Answer
A. A group life insurance policy.Explanation
Ordinary is the same as “individual” insurance. Term, whole life, and endowments may be purchased on an individual basis. Group life is always issued on a group (not individual) basis.Rate this question:
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Mar 21, 2023Quiz Edited by
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Oct 14, 2012Quiz Created by
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