Sample practice questions

A few real questions from this free bank, with full explanations. Use the practice tool above for the whole set.

1. 1. General Insurance Concepts

   For a life insurance policy to be valid, when must the policyowner have an insurable interest in the insured?

   • a.At the time of the insured's death
   • b.Continuously for the entire life of the policy
   • c.At the time the policy is applied for and issued
   • d.Only if the beneficiary is not a family member

   Answer: c

   Explanation: In life insurance, insurable interest must exist at the inception of the contract (when the policy is applied for), not at the time of loss. This differs from property insurance, where insurable interest must exist at the time of the loss. Requiring it continuously is incorrect: for example, a business may keep key-person coverage even after buying the policy, and a divorced spouse's policy can remain valid. Making it depend on the beneficiary's relationship confuses insurable interest (a relationship between owner and insured) with the separate question of who receives the proceeds.

2. 2. Life Insurance Basics

   In a traditional whole life policy, the cash value:

   • a.Grows tax-deferred and is guaranteed
   • b.Must be completely withdrawn by the owner every year
   • c.Is available to the owner only at the insured's death
   • d.Rises and falls directly with stock market performance

   Answer: a

   Explanation: Whole life cash value grows on a guaranteed schedule and accumulates tax-deferred, and the living owner can access it through loans or surrender. It is not locked up until death; that is a benefit of the cash value while the insured is alive. It does not move with the stock market (that describes variable products). And there is no requirement to withdraw it annually. The guaranteed, tax-deferred growth is a hallmark of traditional whole life.

3. 3. Life Policy Provisions, Riders, Options & Exclusions

   A cost-of-living (COLA) rider on a life insurance policy is designed to:

   • a.Pay policy dividends to the owner in cash
   • b.Refund all premiums paid when the insured dies, a feature that belongs to a return-of-premium design rather than a cost-of-living rider
   • c.Increase the death benefit periodically to offset inflation, usually without new evidence of insurability
   • d.Lower the premium a little each year

   Answer: c

   Explanation: A cost-of-living rider automatically increases the policy's death benefit at intervals, typically tied to an inflation index, so the coverage keeps pace with rising prices, and these increases usually require no additional evidence of insurability. It does not reduce premiums (increased coverage generally costs more), does not refund premiums, and is unrelated to paying dividends. The rider protects the real value of the death benefit against inflation over time.

4. 4. Health Insurance Basics

   Unlike a Flexible Spending Account (FSA), unused funds in a Health Savings Account (HSA) at year-end:

   • a.Are forfeited under a use-it-or-lose-it rule, which is how a flexible spending account instead works
   • b.Roll over and remain the account owner's money, even if the owner changes jobs
   • c.Are taxed at a flat fifty percent rate
   • d.Automatically revert to the employer

   Answer: b

   Explanation: HSA balances roll over indefinitely and belong to the account owner, who keeps them even when changing employers or health plans, so the account can grow over many years. An FSA, by contrast, is generally subject to a use-it-or-lose-it rule. HSA funds do not revert to the employer and are not taxed at a flat penalty rate simply for remaining in the account. Portability and rollover are key advantages of the HSA over the FSA.

5. 5. Group Insurance, Social Insurance & Senior Products

   A central federal Affordable Care Act reform to individual and small-group health coverage was to:

   • a.Remove all preventive care from coverage
   • b.Prohibit denying coverage or charging more due to pre-existing conditions and require coverage of essential health benefits
   • c.Allow insurers to impose lifetime dollar limits on benefits, which is the opposite of what the law did, since it banned such lifetime limits
   • d.Permit denial of coverage for people with prior illnesses

   Answer: b

   Explanation: The ACA prohibits insurers in the individual and small-group markets from denying coverage or charging higher premiums because of pre-existing conditions, and it requires plans to cover a set of essential health benefits. It did the opposite of allowing lifetime limits (it banned them), did not permit denial for prior illness, and expanded rather than removed preventive care (which many plans must cover at no cost sharing). Guaranteed issue and essential health benefits are hallmark ACA consumer protections.

6. 6. General Insurance Concepts

   A substandard (rated) risk is one who:

   • a.Presents higher-than-average risk and is charged a higher premium or issued with restrictions
   • b.Receives the insurer's lowest available premium
   • c.Represents exactly average, expected risk
   • d.Cannot be insured under any circumstances and must always be declined regardless of the premium offered

   Answer: a

   Explanation: Substandard applicants are insurable but at above-average risk, so they pay a rated (higher) premium or accept limitations. They are not uninsurable, preferred, or standard.

7. 7. Health Policies

   Under a presumptive disability provision, the insured is automatically considered totally disabled, often with no elimination period, upon:

   • a.Any minor injury
   • b.A voluntary change of jobs
   • c.A brief hospital stay
   • d.The loss of sight in both eyes, loss of hearing or speech, or the loss of use of two limbs

   Answer: d

   Explanation: Presumptive disability treats certain severe losses, such as sight, hearing, speech, or two limbs, as total disability automatically, usually waiving the elimination period. Minor injuries or job changes do not qualify.

8. 8. Annuities

   Many deferred annuities include a free withdrawal provision allowing the owner to withdraw, without a surrender charge, up to:

   • a.The entire 100% of the contract value at any time the owner wishes, without any charge
   • b.Nothing during the surrender period
   • c.A stated percentage, often 10%, of the value each year
   • d.Only the interest, never the principal

   Answer: c

   Explanation: A common free withdrawal provision lets the owner take out a set percentage, frequently 10% per year, without surrender charges. It is neither unlimited nor a total lockout.

9. 9. Life Insurance Policies

   A 'credit life' insurance policy is designed to:

   • a.Provide retirement savings that the borrower can draw on later
   • b.Insure the life of the lender's owner or chief officer
   • c.Pay off the balance of a specific loan if the borrower dies
   • d.Pay the borrower a monthly income for life

   Answer: c

   Explanation: Credit life insurance is decreasing term coverage tied to a loan; if the borrower dies, the proceeds pay the remaining loan balance, and the creditor is the beneficiary up to that balance. It insures the borrower's life for the lender's protection, not the lender's owner. It does not provide lifetime income or a retirement fund. Because the benefit tracks the declining loan balance, credit life is a specialized form of decreasing term insurance.

10. 10. Group Insurance, Social Insurance & Senior Products

    When an employee leaves a job with group term life insurance, the 'conversion' privilege generally allows the employee to:

    • a.Convert to an individual permanent policy without evidence of insurability, within a limited time, at an individual (attained-age) rate
    • b.Keep the group term rate for life by paying the employer directly
    • c.Force the former employer to continue paying the group premiums indefinitely, at no cost to the former employee for as long as the group plan exists
    • d.Convert to an individual term policy at no cost, with no evidence of insurability required and no time limit on when the employee must apply

    Answer: a

    Explanation: The conversion privilege lets a departing employee convert their group term coverage to an individual permanent (whole life) policy without proving insurability, provided they apply and pay within a short window (commonly 31 days) after coverage ends; the premium is based on the individual's attained age, so it is higher than the group rate. The employee does not keep the group rate, the conversion is not free, and the former employer is not required to keep paying. This protects insurability for someone whose health may have changed.