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. General Insurance Concepts

   A statement an applicant makes on an insurance application that is believed true to the best of their knowledge, rather than guaranteed to be literally true, is a:

   • a.Warranty
   • b.Waiver
   • c.Concealment of a known material fact
   • d.Representation

   Answer: d

   Explanation: A representation is a statement the applicant believes to be true to the best of their knowledge; it need only be substantially true, and only a material misrepresentation gives grounds to void the policy. A warranty is a statement guaranteed to be literally and absolutely true. Concealment is the deliberate withholding of a known material fact. A waiver is the voluntary giving up of a known right. Application statements in life and health insurance are treated as representations, not warranties.

3. 3. Life Insurance Policies

   Under Option B (the increasing death benefit option) of a universal life policy, the total death benefit is equal to:

   • a.The face amount reduced by the cash value as it steadily accumulates
   • b.The face amount plus the accumulated cash value
   • c.The accumulated cash value alone
   • d.A level face amount that never changes

   Answer: b

   Explanation: Option B pays the policy's face amount plus the accumulated cash value, so the total death benefit grows as the cash value builds, at a higher cost than the level option. Subtracting cash value from the face amount is not how any standard option works. The cash value alone is not the death benefit. A level face amount that never changes describes Option A. Option B's defining feature is that the death benefit increases with the cash value.

4. 4. Annuities

   Under a 'cash refund' life annuity option, if the annuitant dies before receiving payments equal to the amount paid in, the beneficiary receives:

   • a.The difference between the amount paid in and the total payments already made, in a lump sum
   • b.Double the original deposit
   • c.Lifetime income equal to the annuitant's own payments, which is not what a cash refund option provides
   • d.Nothing, because payments stop at death

   Answer: a

   Explanation: A cash refund option pays the annuitant for life, and if the annuitant dies before the sum of the payments equals the amount paid in, the beneficiary receives the remaining difference in a lump sum, ensuring at least the purchase amount is returned. It does not pay nothing (that would be straight life), does not double the deposit, and does not grant the beneficiary lifetime income. The refund feature guarantees the principal is not lost to an early death, at the cost of a smaller payment.

5. 5. Health Insurance Basics

   The term 'usual, customary, and reasonable' (UCR) charge refers to:

   • a.The amount a plan treats as appropriate for a service based on the prevailing fees charged in that geographic area
   • b.The flat copayment due at a visit
   • c.The plan's annual deductible
   • d.The monthly premium the insured pays for the coverage, a fixed cost unrelated to how a plan decides a reasonable charge for a service

   Answer: a

   Explanation: A UCR charge is the amount an insurer considers reasonable for a given service, determined by the usual fee the provider charges, the customary fees of similar providers in the same area, and what is reasonable for the situation; the plan bases reimbursement on this figure, and the insured may owe amounts a provider bills above it. UCR is not the deductible, premium, or copay. UCR limits how much a plan will recognize for out-of-network or fee-for-service charges.

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

   In group insurance, the individual members of the group receive:

   • a.Their own master contracts to keep
   • b.Certificates of coverage, while a single master policy is issued to the sponsor
   • c.Separately underwritten individual policies issued individually to each member of the group
   • d.No documentation of their coverage

   Answer: b

   Explanation: In group insurance, the insurer issues one master policy to the sponsor (such as an employer or association), and each covered member receives a certificate of coverage that summarizes their benefits and rights. Members do not get individually underwritten policies, are not left without documentation, and do not each hold a master contract. The master-policy-and-certificate structure is a defining feature of group insurance and is why group underwriting looks at the group rather than each person.

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

   An accelerated (living) death benefit rider allows the insured to receive part of the death benefit while still alive if the insured:

   • a.Changes to a higher-paying job
   • b.Relocates to another region
   • c.Is diagnosed as terminally or chronically ill
   • d.Reaches normal retirement age

   Answer: c

   Explanation: The accelerated death benefit advances a portion of the face amount when the insured is terminally or chronically ill, helping pay care costs. Ordinary events like a new job, retirement, or moving do not trigger it.

8. 8. General Insurance Concepts

   Replacement regulations exist primarily to:

   • a.Automatically increase premiums on replaced policies
   • b.Prohibit every replacement transaction outright so that no existing policy may ever be exchanged for a newer competing one
   • c.Ensure the policyowner receives information to compare policies and is protected from an unsuitable replacement
   • d.Speed up the payment of producer commissions

   Answer: c

   Explanation: Replacement rules give consumers disclosures and comparison information so they are not talked into losing value on a poor replacement. They do not ban replacement outright, raise premiums, or speed commissions.

9. 9. Health Policies

   When an individual pays disability income premiums with after-tax dollars, the benefits received are:

   • a.Taxed as capital gains
   • b.Received income-tax-free
   • c.Subject to a 10% penalty
   • d.Fully taxable as ordinary income

   Answer: b

   Explanation: Because the premiums were paid with already-taxed money, individually purchased DI benefits are received tax-free. Employer-paid premiums that were not taxed to the employee produce taxable benefits.

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

    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

    Answer: d

    Explanation: 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.