Nevada Life & Health Insurance Exam — All Questions

To contribute to a Health Savings Account (HSA), an individual must be covered by a:

• a.Stand-alone dental plan
• b.Qualified high-deductible health plan (HDHP)✓
• c.Low-deductible HMO plan
• d.Medicare plan

HSA contributions require enrollment in a qualified high-deductible health plan and no disqualifying coverage. Low-deductible HMOs, Medicare, and dental plans do not qualify a person to fund an HSA.

Most people receive Medicare Part A without paying a monthly premium because:

• a.It is entirely optional coverage that any resident may simply decline without affecting their other benefits
• b.They or their spouse paid Medicare payroll taxes while working, typically for 40 quarters✓
• c.It is funded from Part B premiums
• d.It is means-tested for low income

Part A is premium-free for those with a sufficient work history of Medicare payroll taxes (about 40 quarters). It is not means-tested, optional, or funded by Part B.

Medicare Part B (medical insurance) helps cover:

• a.Only outpatient prescription drugs dispensed through various Medicare-approved retail pharmacies
• b.Long-term custodial nursing home care
• c.Physician services, outpatient care, lab tests, and durable medical equipment✓
• d.Inpatient hospital room and board

Part B covers physician and outpatient services, tests, and durable medical equipment. Inpatient hospital care is Part A, and drugs are Part D; Medicare does not cover long-term custodial care.

Medicare Part B is:

• a.Available only to disabled individuals
• b.Paid for entirely by employers on behalf of their retired former employees who have already turned 65
• c.Voluntary and financed partly by a monthly premium usually deducted from Social Security✓
• d.Provided free to everyone at 65

Part B is optional and requires a monthly premium, commonly withheld from the enrollee's Social Security check. It is not free, disability-only, or employer-funded.

Medicare Part C (Medicare Advantage) is:

• a.A supplement to the Medicaid program
• b.Coverage delivered through private insurers approved by Medicare, combining Part A and B benefits, often with extras✓
• c.Free, government-run hospital-only coverage that automatically replaces both Part A and Part B for every single enrollee nationwide
• d.A government-run prescription drug program

Part C lets beneficiaries receive their Medicare benefits through approved private plans that bundle Parts A and B, frequently adding extras like drug or dental coverage. It is not government drug coverage or a Medicaid supplement.

A significant gap in Medicare is that it generally does NOT cover:

• a.Diagnostic laboratory tests
• b.Inpatient hospital stays
• c.Long-term custodial (nursing home) care✓
• d.Physician office visits

Medicare pays for medically necessary care but not ongoing custodial long-term care, which is a major reason people buy LTC insurance. Hospital stays, doctor visits, and lab tests are covered.

Medicare Supplement (Medigap) policies are:

• a.Unregulated and vary randomly from insurer to insurer
• b.A form of stand-alone prescription drug plan that is sold to replace the need for enrolling in Medicare Part D at all
• c.Sold only by the federal government
• d.Standardized into lettered plans, so a given plan letter offers the same core benefits from any insurer✓

Medigap plans are federally standardized by letter, so the same plan letter provides identical core benefits regardless of insurer, making them easy to compare. They are sold by private insurers, not the government, and are not drug plans.

The Medigap open enrollment period is a ___-month period, beginning when the individual is 65 and enrolled in Part B, during which they can buy any Medigap policy without medical underwriting:

• a.24
• b.6✓
• c.3
• d.12

The Medigap open enrollment period lasts 6 months from when someone is 65 and enrolled in Part B, and during it insurers cannot use medical underwriting to deny or rate coverage.

A Medigap policy is designed to:

• a.Replace Medicare entirely and serve as the beneficiary's sole source of both hospital and physician coverage from that point forward
• b.Fully cover custodial long-term care
• c.Pay some of Medicare's cost-sharing, such as deductibles and coinsurance, without duplicating benefits Medicare already pays✓
• d.Provide drug coverage in place of Part D

Medigap fills gaps in Original Medicare, like deductibles and coinsurance, and by law cannot duplicate benefits Medicare pays. It does not replace Medicare, substitute for Part D, or cover long-term custodial care.

To be 'fully insured' for Social Security retirement benefits, a worker generally needs:

• a.100 quarters of coverage
• b.40 quarters (credits) of coverage✓
• c.10 quarters of coverage
• d.No work history at all

Fully insured status for retirement benefits generally requires 40 quarters (credits) of covered work, about 10 years. Fewer quarters may provide only limited or no benefits.

Social Security survivor benefits may be paid to:

• a.A surviving spouse and dependent children of a deceased insured worker✓
• b.Only the deceased worker themselves, paid out as a single lump sum into the worker's estate
• c.The deceased worker's employer
• d.Anyone who applies for them

Survivor benefits support the eligible family, typically a surviving spouse and dependent children, of an insured worker who dies. They are not paid to unrelated applicants or employers.

Social Security disability benefits use a strict definition: the worker must be unable to engage in ______ due to a medically determinable impairment expected to last at least 12 months or result in death:

• a.their own occupation
• b.any substantial gainful activity✓
• c.a preferred, higher-paying job
• d.part-time work only

Social Security disability requires inability to perform any substantial gainful activity, a very strict any-occupation-style standard, with a durational requirement of 12 months or death. It is not an own-occupation test.

The Social Security 'blackout period' is the span during which a surviving spouse receives no survivor income, generally:

• a.From when the youngest child turns 16 until the surviving spouse reaches age 60✓
• b.Immediately after the worker's death
• c.While the surviving spouse is disabled
• d.The years after the surviving spouse turns 65 and begins receiving their own Social Security retirement benefit

The blackout period runs from when the youngest child reaches 16 (ending the caregiver benefit) until the surviving spouse turns 60 and can claim widow(er)'s benefits. During it, no Social Security survivor income is paid to the spouse.

A worker's Social Security benefit amount is based on the Primary Insurance Amount (PIA), which is derived from the worker's:

• a.Number of dependents only
• b.Average indexed earnings over their working career✓
• c.Current savings balance
• d.The total size and annual payroll of the worker's single most recent employer

The PIA is computed from the worker's averaged, indexed lifetime earnings and determines the benefit at full retirement age. Savings, employer size, and dependent count do not set the PIA.

In group life insurance, the individual employee receives a ________ while the employer holds the ________:

• a.certificate of insurance; master contract✓
• b.rider; annuity
• c.prospectus; binder
• d.policy; certificate

Group insurance is written as one master contract issued to the employer, and each covered employee receives a certificate summarizing their coverage. The other pairings do not describe group life.

Group life underwriting typically:

• a.Is performed separately for each individual employee, who must submit their own detailed medical evidence of insurability
• b.Requires each member to pass an individual medical exam
• c.Declines every applicant with any health condition
• d.Evaluates the group as a whole, so individual evidence of insurability is often not required✓

Group underwriting looks at the characteristics of the whole group rather than each individual, so members usually need not prove insurability. This lowers cost and broadens access.

In a noncontributory group plan, the employer pays the entire premium, so insurers usually require:

• a.100% of eligible employees to be covered, to avoid adverse selection✓
• b.75% participation among eligible employees
• c.Individual underwriting of each employee
• d.No minimum participation

Because the employer pays it all in a noncontributory plan, insurers require 100% participation, which eliminates adverse selection. Contributory plans, where employees pay part, use a lower threshold like 75%.

In a contributory group plan, where employees pay part of the premium, insurers commonly require a minimum participation of about:

• a.75% of eligible employees✓
• b.10% of eligible employees
• c.100% of eligible employees
• d.0%, with no minimum

Contributory plans typically require around 75% participation to spread risk and limit adverse selection. Requiring 100% is the noncontributory rule, and very low thresholds would invite adverse selection.

When an employee leaves a job covered by group term life, the conversion privilege usually allows them to convert to:

• a.An individual permanent (whole life) policy without evidence of insurability, at their attained age✓
• b.No coverage whatsoever, because group term life simply cannot be continued in any form after employment ends
• c.A cheaper group plan automatically
• d.A new group term plan elsewhere

The conversion privilege lets a departing employee convert group term to an individual permanent policy without proving insurability, though at the attained-age premium. It does not provide new group coverage or a discount.

A key advantage of the group life conversion privilege is that the departing employee:

• a.Keeps the employer's premium contribution
• b.Receives a lower premium than the group rate
• c.Converts the group coverage to an individual term policy at no cost to the employee for the first full year
• d.Does not have to prove insurability, which is valuable for someone in poor health✓

The conversion privilege's main value is guaranteed insurability, no medical exam, which matters most for someone whose health has declined. The individual premium is usually higher, and the employer no longer contributes.

Under federal tax rules, employer-paid group term life premiums are tax-free to the employee only up to ________ of coverage; the cost of coverage above that is taxable income to the employee:

• a.$10,000
• b.$100,000
• c.$250,000
• d.$50,000✓

The first $50,000 of employer-provided group term life is a tax-free benefit; the imputed cost of coverage above $50,000 is taxable income to the employee. The other amounts are incorrect thresholds.

Federal COBRA generally lets an eligible employee who loses group health coverage continue it for a limited time by:

• a.Enrolling immediately in Medicare
• b.Receiving free coverage for life
• c.Paying the full premium themselves (up to 102% of cost) for a stated period such as 18 months✓
• d.Paying nothing at all for the continued coverage, since the former employer must keep funding it in full

COBRA allows continuation of the group health plan if the former employee pays the full premium plus up to a 2% administrative charge, commonly for 18 months. It is not free or permanent, and it is separate from Medicare.

Which is a COBRA qualifying event that can extend continuation up to 36 months for dependents?

• a.A routine pay raise
• b.The employer moving to a new office
• c.Switching to a different doctor
• d.Divorce from, or the death of, the covered employee✓

Events like divorce or the covered employee's death can extend dependents' COBRA continuation to 36 months. A raise, a doctor change, or an office move are not qualifying events.

COBRA generally applies to employers with:

• a.Only government agencies
• b.Fewer than 5 employees
• c.Any number of employees
• d.20 or more employees✓

Federal COBRA applies to private employers (and state/local government) with 20 or more employees. Very small employers are exempt, though some states have mini-COBRA laws.

A Section 125 cafeteria plan allows employees to:

• a.Choose only cash compensation
• b.Choose among qualified benefits, paying for some of them with pre-tax dollars✓
• c.Avoid all taxes on their wages
• d.Purchase only employer-sponsored group life insurance, paying those premiums entirely with after-tax dollars

A Section 125 plan lets employees select from a menu of qualified benefits and fund chosen ones with pre-tax dollars, lowering taxable income. It is not cash-only, tax-free wages, or life-insurance-only.

A Flexible Spending Account (FSA) under a cafeteria plan traditionally follows a rule that:

• a.Unused funds may be forfeited at year-end (use-it-or-lose-it), subject to limited carryover or grace rules✓
• b.Unused account balances automatically roll over indefinitely from one plan year to the next with no limit whatsoever
• c.Funds are always refunded to the employee in cash
• d.There is no annual contribution limit

The classic FSA use-it-or-lose-it rule means unspent funds can be forfeited at year-end, though limited carryover or grace-period options may apply. Funds are not cash-refundable and contributions are capped.

The 'actively-at-work' provision in group insurance requires that, for coverage to take effect, the employee must:

• a.Be retired from the company
• b.Have reached age 65
• c.Be actively performing their job duties on the day coverage is to begin✓
• d.Pass an individual physical exam

The actively-at-work provision conditions the start of coverage on the employee being at work and able to perform their duties on the effective date. It is not tied to retirement, an exam, or a specific age.

For an employee age 65 or older who is still working at a large employer, the employer group health plan is generally the ______ payer and Medicare is ______:

• a.primary; secondary✓
• b.excluded; primary
• c.the only; unused
• d.secondary; primary

Under the Medicare Secondary Payer rules, a large employer's group plan pays first (primary) for an active employee 65+, and Medicare pays second. The group plan is not secondary or the only payer in this situation.

Group short-term disability (STD) differs from long-term disability (LTD) mainly in that STD:

• a.Pays benefits for many years, often continuing all the way until the insured reaches retirement age
• b.Never has any waiting period
• c.Covers only retired employees
• d.Has a shorter benefit period (weeks to months) and a shorter waiting period✓

STD pays for a shorter benefit period after a brief waiting period, bridging until LTD begins. LTD covers longer durations; STD is not for retirees and usually has a short elimination period.

The exclusion ratio for an annuity payout is calculated as the:

• a.Investment in the contract (cost basis) divided by the expected total return✓
• b.The annuity's surrender charge divided by its remaining accumulated cash value at the time of payout
• c.Death benefit divided by the annuitant's age
• d.Total premiums divided by the current interest rate

The exclusion ratio is the cost basis divided by the expected return; it determines the tax-free portion of each annuity payment. The rest of each payment is taxable earnings.

Once an annuitant has lived long enough to recover the entire cost basis through the exclusion ratio, subsequent payments are:

• a.Taxed as long-term capital gains
• b.Entirely tax-free
• c.Refunded to the annuitant
• d.Fully taxable as ordinary income✓

After the basis is fully recovered, there is nothing left to exclude, so all further payments are fully taxable as ordinary income. The payments are not tax-free, capital gains, or refunded.

A surrender charge on a deferred annuity:

• a.Is a federal tax that is imposed on the annuity's earnings each and every year that the contract remains in the accumulation phase
• b.Is a declining penalty for withdrawing funds during the early contract years, letting the insurer recover its costs✓
• c.Applies only at the annuitant's death
• d.Rewards the owner for withdrawing early

A surrender charge is an insurer-imposed penalty that typically declines each year during the surrender period, protecting the insurer from early liquidation costs. It is not a reward or a federal tax.

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

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.

A withdrawal of taxable gain from a nonqualified annuity before age 59 1/2 is generally subject to:

• a.A 25% federal penalty
• b.No penalty at all, because annuity withdrawals of any kind are always treated as tax-favored
• c.A 10% federal tax penalty in addition to ordinary income tax✓
• d.Long-term capital gains tax only

Early distributions of gain from an annuity before 59 1/2 usually incur a 10% federal penalty on top of ordinary income tax. Annuity gains are ordinary income, not capital gains.

When determining the suitability of an annuity recommendation, a producer should consider the client's:

• a.Marital status only
• b.Favorite mutual fund only
• c.Only the client's home zip code and the general cost of living in that particular geographic area
• d.Age, income, financial objectives, liquidity needs, risk tolerance, and time horizon✓

Suitability requires evaluating the client's full financial picture, age, income, goals, liquidity, risk tolerance, and time horizon, to ensure the annuity fits. A single factor is not enough.

Recommending a deferred annuity with a long surrender period to an elderly client who needs access to funds soon is a suitability concern because:

• a.The death benefit would be too high
• b.Annuities carry no fees or surrender charges of any kind, so liquidity is never a concern for any client
• c.The surrender charges and limited liquidity may not fit the client's short time horizon and cash needs✓
• d.Annuities are always unsuitable for anyone

A long surrender period ties up funds a client may soon need, exposing them to charges, which conflicts with a short time horizon and liquidity needs. Annuities are not universally unsuitable, but the fit matters.

In a QUALIFIED annuity funded entirely with pre-tax dollars, distributions are:

• a.Fully taxable as ordinary income, because there is no after-tax cost basis✓
• b.Entirely tax-free, because the contributions to the plan were originally made with after-tax dollars
• c.Partly excluded from tax by the exclusion ratio
• d.Taxed as long-term capital gains

Since a fully pre-tax qualified annuity has no after-tax basis, the entire distribution is taxable as ordinary income. The exclusion ratio applies only when there is after-tax basis, as in a nonqualified annuity.

A nonqualified annuity is funded with after-tax dollars, so at payout:

• a.Only the earnings portion is taxable; the return of basis is tax-free✓
• b.The entire payment is taxable
• c.Nothing is ever taxable
• d.The full payment is taxed as a gift to the annuitant in the calendar year that it is received

Because the principal was already taxed, only the earnings are taxed when a nonqualified annuity pays out, with the exclusion ratio spreading the tax-free return of basis. It is not fully taxable or gift-taxed.

Choosing a 'life with 10-year period certain' payout means the annuitant receives income for life, but if they die early, payments continue to a beneficiary:

• a.For the remainder of the 10-year certain period✓
• b.Forever
• c.Not at all
• d.For exactly one additional year

Life with period certain pays for the annuitant's life and guarantees payments for at least the certain period; if the annuitant dies within it, the beneficiary receives the rest of that period. It does not pay forever or nothing.

In a fixed indexed annuity, a participation rate of 80% means the contract credits:

• a.Nothing unless the index falls
• b.A guaranteed 80% of every premium payment that the owner deposits into the contract
• c.A guaranteed 80% return each year
• d.80% of the index's gain, subject to any cap and floor✓

The participation rate is the share of the index's gain that is credited, so 80% credits 80% of the measured index increase, still limited by any cap and protected by the floor. It is not a share of premium or a guaranteed return.

A Section 1035 exchange permits a tax-free transfer between:

• a.Like insurance contracts, such as life-to-life, life-to-annuity, or annuity-to-annuity✓
• b.An annuity and a personal checking account
• c.A health policy and a pension plan
• d.A life insurance policy and an ordinary consumer car loan carried at the policyowner's own bank

Section 1035 allows tax-free exchanges among like contracts, letting a policyowner move to a better product without triggering tax on the gain. Transfers to unrelated financial accounts do not qualify.

Which 1035 exchange is NOT permitted on a tax-free basis?

• a.Life insurance to another life insurance policy
• b.Annuity to a life insurance policy✓
• c.Life insurance to an annuity
• d.Annuity to another annuity

You may exchange life to life, life to annuity, or annuity to annuity tax-free, but not an annuity into a life insurance policy, because that would move taxable gain into a tax-free death benefit. The permitted directions preserve the tax structure.

The main tax disadvantage of a Modified Endowment Contract (MEC) is that:

• a.The premiums the owner pays into the contract suddenly become fully tax-deductible on the owner's personal income tax return
• b.The death benefit becomes taxable
• c.Living distributions such as loans and withdrawals are taxed on a LIFO basis, with a possible 10% penalty before age 59 1/2✓
• d.It can no longer pay policy dividends

A MEC loses favorable living-benefit treatment: loans and withdrawals are taxed earnings-first (LIFO) and may carry a 10% penalty before 59 1/2. The death benefit itself remains income-tax-free.

The general rule that life insurance death proceeds are income-tax-free can be lost under the 'transfer-for-value' rule when the policy is:

• a.Never sold or transferred to any party, but is instead simply allowed to lapse for nonpayment of the premium
• b.Sold or transferred for valuable consideration to certain parties, making part of the proceeds taxable✓
• c.Paid up with annual premiums
• d.Owned by the insured's spouse

If a policy is transferred for value to a non-exempt party, the death benefit can become partly taxable, an exception to the usual income-tax-free rule. Simply keeping or paying up a policy does not trigger it.

When death proceeds are left with the insurer and paid to the beneficiary in installments, the portion that is taxable is the:

• a.Entire payment
• b.None of the payment
• c.Return of the principal death benefit
• d.Interest earned on the retained proceeds✓

The death benefit principal remains income-tax-free, but any interest the insurer credits on proceeds it holds under a settlement option is taxable. Only that interest, not the principal, is taxed.

Premiums paid for personal life insurance are:

• a.Deductible once coverage exceeds $50,000
• b.Deductible as a medical expense
• c.Fully tax-deductible each year
• d.Generally NOT tax-deductible✓

Personal life insurance premiums are paid with after-tax dollars and are not deductible, which is part of why the death benefit is received tax-free. There is no coverage-amount or medical-expense exception for personal policies.

The cash value inside a permanent life insurance policy grows:

• a.Taxable to the owner each year
• b.Tax-free forever, with no conditions
• c.As a capital gain reported annually
• d.Tax-deferred while the policy remains in force✓

Cash value accumulates tax-deferred as long as the policy stays in force; it is not taxed annually. Gains can become taxable if the policy is surrendered for more than its basis.

Life insurance proceeds may be pulled into the insured's taxable estate if, at death, the insured held:

• a.a term policy
• b.a fully paid-up policy
• c.incidents of ownership, such as the right to change the beneficiary or borrow against the policy✓
• d.a beneficiary designation only

If the insured retained incidents of ownership, control such as changing beneficiaries or borrowing, the proceeds are included in the taxable estate. The policy type alone (term or paid-up) does not decide this.

Required minimum distributions (RMDs) generally force the owner of a traditional qualified plan to begin taking taxable distributions:

• a.Never during the owner's lifetime
• b.At age 40, so that the government can begin collecting income tax on the deferred funds much earlier in life
• c.Only after the owner's death
• d.At a specified age set by law (such as 73), so the IRS eventually collects tax on the deferred funds✓

RMDs require withdrawals to begin at the age set by law (currently around 73) so the deferred, pre-tax funds are eventually taxed. They start during the owner's lifetime, not only at death.

Premiums a business pays for key person life insurance are:

• a.Fully tax-deductible to the business as an ordinary and necessary operating expense in every single year
• b.Always taxable income to the employee
• c.Deductible by the insured employee
• d.NOT tax-deductible, but the death benefit is generally received income-tax-free by the business✓

Key person premiums are not deductible because the business is the beneficiary, but the death benefit it later receives is generally income-tax-free. The premiums are not the employee's income or deduction.