Life Insurance Exam Practice Test

25 practice questions

Choose an answer, then check it under Show answer.

1. Question 1 of 25Easy

   How does the federal income tax treatment of a lump-sum life insurance death benefit differ from payments received under an interest-only settlement option?

   1. AA. The lump-sum death benefit is tax-deferred, whereas the interest payments are treated as a return of premium.
   2. BB. The lump-sum death benefit is fully tax-free, whereas the interest payments are taxable as ordinary income.
   3. CC. The lump-sum death benefit is taxable as a capital gain, whereas the interest payments are completely tax-free.
   4. DD. Both the lump-sum death benefit and the interest payments are fully subject to federal ordinary income tax.
   Show answer to question 1

   Answer: B. The lump-sum death benefit is fully tax-free, whereas the interest payments are taxable as ordinary income.

   Lump-sum life insurance death proceeds paid to a named beneficiary are generally received entirely free of federal income tax. However, when proceeds are retained by the insurer under an interest-only option, the interest paid to the beneficiary is taxable as ordinary income in the year received. A common misconception is that all payments originating from a life insurance death benefit remain tax-free regardless of settlement choice.

2. Question 2 of 25Medium

   A client who recently left her job wants to move the balance of her former employer's qualified plan into an IRA without paying current income tax. What should the producer recommend?

   1. AA. Purchase an immediate annuity inside the old plan and leave it there.
   2. BB. Use a Section 1035 exchange to move the plan balance into the IRA.
   3. CC. Complete a rollover of the distribution within 60 days.
   4. DD. Cash out the plan, set the money aside, and deposit whatever remains at year end.
   Show answer to question 2

   Answer: C. Complete a rollover of the distribution within 60 days.

   A rollover keeps the plan money tax deferred when it is moved into an IRA within the 60-day window. A Section 1035 exchange applies to life insurance policies and annuities, not to a qualified plan balance moving into an IRA.

3. Question 3 of 25Medium

   Why does a single premium whole life policy generate an immediate cash value upon issuance?

   1. AA. The entire policy reserve is funded in advance at inception
   2. BB. The cash value is legally mandated to equal the full death benefit upon issue
   3. CC. The insurer waives all initial mortality charges and administrative expenses
   4. DD. The face amount is deferred until the insured attains age 100 or 120
   Show answer to question 3

   Answer: A. The entire policy reserve is funded in advance at inception

   Because the policyowner pays the entire cost of the lifetime contract upfront in one lump sum, the insurer immediately establishes a large policy reserve that creates instant cash value. The distractor claiming cash value equals the death benefit at issue is incorrect because the initial cash value is substantial but less than the face amount.

4. Question 4 of 25Hard

   Walter owns a life policy on his wife and names his adult son as beneficiary. Walter never names a contingent owner. Walter dies while his wife is still living. Who owns the policy after Walter's death?

   1. AA. The wife becomes owner because she is the insured.
   2. BB. The insurer cancels the policy and pays the cash value to the estate.
   3. CC. Walter's estate becomes the owner because no contingent owner was named.
   4. DD. The son becomes owner because he is the named beneficiary.
   Show answer to question 4

   Answer: C. Walter's estate becomes the owner because no contingent owner was named.

   A beneficiary designation directs the death benefit when the insured dies; it does not transfer ownership when the policyowner dies. Without a contingent owner, ownership of the policy passes to Walter's estate. The son does not become owner merely because he is the beneficiary, and the wife does not become owner merely because she is the insured.

5. Question 5 of 25Medium

   An applicant asks why a friend of the same age was quoted a lower premium for the same coverage. What is the most accurate explanation the producer can give?

   1. AA. Lower premiums are offered only to applicants who buy larger face amounts.
   2. BB. Premiums for applicants of the same age are always identical because age is the only rating factor.
   3. CC. The friend must have paid a larger producer commission on the same policy.
   4. DD. Insurers assign each applicant to a risk class based on factors such as health, occupation, and tobacco use.
   Show answer to question 5

   Answer: D. Insurers assign each applicant to a risk class based on factors such as health, occupation, and tobacco use.

   Life insurance premiums reflect the applicant's risk class, which is based on several factors including health, occupation, hobbies, family history, and tobacco use. Age alone does not fully determine the rate, and commissions do not change the insurer's premium for a given policy. Two applicants of the same age can therefore be placed in different classes.

6. Question 6 of 25Hard

   A life insurer declines Priya's application based on a consumer report. The notice identifies the reporting agency and explains her right to dispute. Priya asks why the notice also says the reporting agency did not make the decision. What should the producer explain?

   1. AA. The reporting agency supplies information but cannot give the insurer's specific reasons.
   2. BB. The insurer is prohibited from using consumer reports in life insurance underwriting.
   3. CC. The reporting agency must approve every applicant who has no errors in the report.
   4. DD. The reporting agency must issue the policy whenever the insurer declines the risk.
   Show answer to question 6

   Answer: A. The reporting agency supplies information but cannot give the insurer's specific reasons.

   An adverse action notice must state that the consumer reporting agency did not make the adverse decision and cannot explain the insurer's specific underwriting reasons. The reporting agency only furnishes information to the insurer. It does not approve applicants, issue policies, or override the insurer's decision.

7. Question 7 of 25Medium

   All of the following statements about a joint and survivor annuity are true EXCEPT:

   1. AA. It covers two annuitants under a single contract.
   2. BB. Because income may be paid over two lifetimes, it produces a lower periodic payment than a single life option.
   3. CC. Income can continue to the survivor at 100 percent or at a reduced percentage of the original payment.
   4. DD. Income stops at the first annuitant's death, and the survivor must buy a new contract.
   Show answer to question 7

   Answer: D. Income stops at the first annuitant's death, and the survivor must buy a new contract.

   The purpose of a joint and survivor annuity is to keep income flowing to the survivor after the first death, so it does not end there. The lower payment compared with a single life option reflects the insurer's expectation of paying over two lifetimes, not a requirement that the survivor repurchase coverage.

8. Question 8 of 25Medium

   What is the primary reason a policyowner would choose a collateral assignment rather than an absolute assignment of a life insurance policy?

   1. AA. To permanently transfer all ownership rights and responsibilities to a family member
   2. BB. To secure a loan by pledging a limited portion of the policy value to a lender
   3. CC. To avoid paying future premiums while keeping the death benefit in full force
   4. DD. To change an irrevocable beneficiary designation without the beneficiary's consent
   Show answer to question 8

   Answer: B. To secure a loan by pledging a limited portion of the policy value to a lender

   A collateral assignment is a temporary transfer of limited ownership rights used to provide security for a debt or loan. Once the debt is paid off, the assigned rights automatically revert to the policyowner. Permanently giving up all ownership rights describes an absolute assignment, not a collateral assignment.

9. Question 9 of 25Medium

   An underwriter notices that applicant Todd omitted his hazardous hobby of scuba diving on a submitted life insurance application. The insurer decides to issue the policy with a scuba diving exclusion rider attached to the contract. What must occur before this modified policy becomes legally binding?

   1. AA. The underwriter must obtain verbal permission from Todd's designated primary beneficiary.
   2. BB. Todd must sign an amendment agreeing to the policy change upon delivery.
   3. CC. The producer must re-sign the original application with an underwriter's endorsement.
   4. DD. The state insurance department must review and approve the individualized rider.
   Show answer to question 9

   Answer: B. Todd must sign an amendment agreeing to the policy change upon delivery.

   When an insurer issues a policy that differs from the one applied for (such as adding an exclusion rider), it constitutes a counteroffer that requires the applicant's explicit agreement. Todd must sign an amendment accepting the counteroffer upon policy delivery before coverage takes effect. Beneficiaries have no ownership rights requiring their consent, and re-signing by the producer does not bind the applicant.

10. Question 10 of 25Medium

    Janet owns a juvenile policy on her son Ethan and added a payor benefit rider. Janet becomes totally disabled before Ethan reaches the age stated in the rider. What is the consequence for the policy?

    1. AA. Premiums are waived until Ethan reaches the stated age.
    2. BB. The policy pays the death benefit to Ethan immediately.
    3. CC. The rider pays Janet a monthly disability income.
    4. DD. Ethan must begin paying premiums from the cash value.
    Show answer to question 10

    Answer: A. Premiums are waived until Ethan reaches the stated age.

    A payor benefit rider waives premiums when the premium payor dies or becomes totally disabled before the child reaches the age stated in the rider. It does not pay a death benefit or a monthly income, and it does not shift premium responsibility to the child while the rider is active.

11. Question 11 of 25Easy

    Rachel chooses the accumulation at interest option for dividends generated by her participating whole life policy. Several years later, Rachel dies while the policy is in full force, having never withdrawn any dividends or credited interest. How are the accumulated funds distributed upon Rachel's death?

    1. AA. They are automatically converted into paid-up additions to recalculate the final death claim.
    2. BB. They are added to the face amount of the policy and paid directly to the named beneficiary.
    3. CC. They are retained by the insurer to offset administrative expenses incurred during the policy term.
    4. DD. They are transferred to Rachel's estate and must pass through probate regardless of the named beneficiary.
    Show answer to question 11

    Answer: B. They are added to the face amount of the policy and paid directly to the named beneficiary.

    Dividends left to accumulate at interest remain the property of the policyowner and, upon the death of the insured, are added to the policy death benefit and paid directly to the named beneficiary. They are not forfeited to the insurer, nor do they bypass the beneficiary designation to enter probate unless the estate itself is the designated beneficiary.

12. Question 12 of 25Medium

    A client tells her insurance producer that she needs to reduce her annual premium payments on her adjustable life policy, but she wants to keep her current face amount. What should the producer explain will happen to the policy?

    1. AA. The policy will immediately lapse because premium schedules are permanently fixed at issue.
    2. BB. The policy protection period may shorten, potentially shifting coverage from whole life toward term.
    3. CC. The insurer will convert the entire face amount into an immediate variable annuity contract.
    4. DD. The insurer will refund the accumulated cash value as an immediate lump-sum distribution.
    Show answer to question 12

    Answer: B. The policy protection period may shorten, potentially shifting coverage from whole life toward term.

    Because an adjustable life policy balances premium, face amount, and protection period, lowering the premium while keeping the face amount unchanged reduces the duration of coverage, which can convert whole life coverage into term insurance. The policy does not immediately lapse because adjustable life specifically allows the owner to change premium payments and policy design over time.

13. Question 13 of 25Easy

    Kira holds a 15-year term life policy that includes both a renewal provision and a conversion provision. At the end of the 15 years she is in poor health and wants to keep the same type of coverage in force. Which provision allows her to continue the term coverage without new evidence of insurability?

    1. AA. The renewability provision
    2. BB. The nonforfeiture provision
    3. CC. The conversion provision
    4. DD. The reinstatement provision
    Show answer to question 13

    Answer: A. The renewability provision

    The renewability provision lets Kira continue the term policy for another term without proving insurability, even though her health has worsened. The conversion provision would move her into a permanent policy, not keep term coverage, and reinstatement and nonforfeiture options apply to lapsed coverage or surrender values rather than renewal.

14. Question 14 of 25Medium

    A policyowner wants life insurance proceeds to provide ongoing financial support for an adult child with special needs without causing the child to lose eligibility for government assistance. Which beneficiary designation best accomplishes this goal?

    1. AA. Naming all surviving relatives under a class designation
    2. BB. Naming a trust established for the benefit of the child
    3. CC. Naming the child directly as the primary beneficiary
    4. DD. Naming the insured's estate with instructions in a will
    Show answer to question 14

    Answer: B. Naming a trust established for the benefit of the child

    Designating a properly drafted trust allows life insurance proceeds to be held and managed by a trustee for the child's benefit without giving the child direct ownership of the assets, which protects eligibility for needs-based government programs. Naming the child directly transfers outright ownership of the funds, which typically disqualifies the recipient from public assistance.

15. Question 15 of 25Medium

    All of the following statements about the effective date of coverage are accurate when an application is submitted without the initial premium EXCEPT:

    1. AA. No coverage exists if the applicant becomes uninsurable before the policy is delivered.
    2. BB. The insurer's approval of the application by itself does not put the policy in force.
    3. CC. Coverage begins on the date the insurer approves the application, even before the policy is delivered.
    4. DD. Coverage normally begins on the date the policy is delivered and the first premium is paid.
    Show answer to question 15

    Answer: C. Coverage begins on the date the insurer approves the application, even before the policy is delivered.

    When no premium accompanies the application, the contract becomes effective only when the policy is delivered and the first premium is collected in good health. Approval is an internal underwriting decision and creates no coverage before delivery and payment, so the policy is not in force on the approval date.

16. Question 16 of 25Medium

    A business purchases a key person life insurance policy on its chief operating officer, pays the premiums, and names itself as beneficiary. How are the premiums and the death proceeds treated for federal income tax purposes?

    1. AA. The premiums are not deductible, and the death proceeds are generally received income tax free.
    2. BB. The premiums are not deductible, and the death proceeds are taxable income.
    3. CC. The premiums are deductible, and the death proceeds are taxable income.
    4. DD. The premiums are deductible, and the death proceeds are received income tax free.
    Show answer to question 16

    Answer: A. The premiums are not deductible, and the death proceeds are generally received income tax free.

    Premiums on a key person policy are not deductible because the business is the beneficiary and the policy is not compensation to the employee. When the insured dies, the lump-sum death proceeds are generally received free of federal income tax. Treating the premiums as deductible or the proceeds as taxable misstates both sides of the transaction.

17. Question 17 of 25Easy

    What is the main purpose of a cost of living rider attached to a life insurance policy?

    1. AA. To let the policyowner withdraw cash value to cover rising household costs
    2. BB. To lower the premium whenever the cost of living index falls
    3. CC. To pay the policyowner's living expenses if the insured becomes disabled
    4. DD. To raise the death benefit periodically so it keeps pace with inflation
    Show answer to question 17

    Answer: D. To raise the death benefit periodically so it keeps pace with inflation

    A cost of living rider increases the face amount on a scheduled basis, usually tied to a price index, so inflation does not erode the value of the death benefit. It does not pay living expenses or create withdrawal rights, and it never reduces the premium when the index falls.

18. Question 18 of 25Easy

    Marcus is a licensed life insurance producer advising a client in his home state. The life insurance company Marcus represents was formed and incorporated under the laws of a different US state, where its corporate headquarters is located. In the state where Marcus and his client reside, how is this insurance company classified?

    1. AA. As an unauthorized insurer
    2. BB. As a domestic insurer
    3. CC. As a foreign insurer
    4. DD. As an alien insurer
    Show answer to question 18

    Answer: C. As a foreign insurer

    An insurer that is formed under the laws of another US state, district, or territory is classified as a foreign insurer in any other state where it conducts business. The most tempting distractor is an alien insurer, but an alien insurer is formed under the laws of a country outside the United States. A domestic insurer is formed under the laws of the state where business is being transacted.

19. Question 19 of 25Easy

    Marcus holds a valid state life insurance producer license. A client asks him to help purchase a variable life policy. What additional requirement must Marcus satisfy before he can legally solicit this contract?

    1. AA. Complete an appointment certification with the state guaranty association.
    2. BB. Obtain a property and casualty insurance license from the state insurance department.
    3. CC. Post a personal fidelity bond with the state insurance commissioner.
    4. DD. Register with the Financial Industry Regulatory Authority (FINRA) after passing a securities exam.
    Show answer to question 19

    Answer: D. Register with the Financial Industry Regulatory Authority (FINRA) after passing a securities exam.

    Because variable life insurance is dual-regulated as both an insurance contract and a security, a producer must hold a state life license and obtain FINRA registration before soliciting it. A property and casualty license authorizes the sale of property and liability coverages, not securities-based insurance products.

20. Question 20 of 25Easy

    What is the main tax benefit for an employee who elects to make pre-tax salary deferrals into a 401(k) plan?

    1. AA. The deferrals eliminate all future federal income tax obligations upon retirement distribution.
    2. BB. The deferrals qualify the employee for completely tax-free policy loans at any age.
    3. CC. The deferrals reduce current taxable income while allowing earnings to grow tax-deferred.
    4. DD. The deferrals provide an immediate state tax credit equal to total contributions made.
    Show answer to question 20

    Answer: C. The deferrals reduce current taxable income while allowing earnings to grow tax-deferred.

    Pre-tax elective deferrals reduce the employee's gross taxable income in the year contributed and allow investment gains to accumulate tax-deferred until distribution. Eliminating all future taxes is incorrect because pre-tax 401(k) contributions and their earnings are fully subject to ordinary income tax when withdrawn.

21. Question 21 of 25Hard

    Priya, age 68, is the beneficiary of a $300,000 death benefit and wants income for life. She worries that if she dies soon her son will receive nothing, so she wants any shortfall between the proceeds and the payments she received to go to him. Which option should the producer recommend?

    1. AA. Fixed-period installments for 15 years
    2. BB. Interest-only option
    3. CC. Life income with a refund feature
    4. DD. Straight life income
    Show answer to question 21

    Answer: C. Life income with a refund feature

    A life income with a refund feature pays for life and, if death occurs before the payments received equal the proceeds, pays the difference to the beneficiary. Straight life income would pay more each month but leaves nothing at death, and a 15-year fixed period would stop at the end of the term even if she were still alive.

22. Question 22 of 25Hard

    Tomas bought a life policy six months ago and has paid all premiums. He now decides he no longer wants the policy and asks for a full refund of all premiums. He is far beyond the free look period. What is the insurer generally required to do?

    1. AA. Pay the policy's cash surrender value, if any.
    2. BB. Return only the premiums paid in the last six months.
    3. CC. Refuse any payment because the policy is still in force.
    4. DD. Refund all premiums paid because he changed his mind.
    Show answer to question 22

    Answer: A. Pay the policy's cash surrender value, if any.

    After the free look period ends, the owner no longer has an unconditional right to a full premium refund. If the owner cancels the policy, the insurer generally pays the cash surrender value, which may be less than the premiums paid.

23. Question 23 of 25Hard

    Henry's life policy lapses because he stops paying premiums. Eight months later he applies for reinstatement, provides evidence of insurability, and pays the overdue premiums. The insurer approves the reinstatement. Six months after reinstatement, Henry dies, and the insurer discovers he concealed a serious illness on the reinstatement application. What may the insurer generally do?

    1. AA. Pay the full face amount because the original policy had been in force more than two years.
    2. BB. Pay only the cash value because the policy had lapsed before Henry died.
    3. CC. Pay the face amount minus the overdue premiums that Henry still owed.
    4. DD. Rescind the reinstated policy and refund premiums, because a new contestable period began.
    Show answer to question 23

    Answer: D. Rescind the reinstated policy and refund premiums, because a new contestable period began.

    Reinstatement generally starts a new contestable period, so the insurer may contest the reinstatement application for a material misrepresentation. The original policy's contestable period does not cover statements made on the reinstatement application.

24. Question 24 of 25Hard

    A life insurance applicant asks a producer to waive a standard policy exclusion for hazardous hobbies. Based on the limitations of producer authority, how must the producer handle this request?

    1. AA. Agree to the waiver under the producer's customary implied authority
    2. BB. Submit an amended application with the exclusion omitted without notifying underwriting
    3. CC. Issue a written binder immediately waiving the exclusion for the client
    4. DD. Inform the applicant that only an executive officer of the insurer can alter policy terms
    Show answer to question 24

    Answer: D. Inform the applicant that only an executive officer of the insurer can alter policy terms

    Agency contracts and standard life insurance policy provisions explicitly restrict the power to modify, amend, or waive policy terms to executive officers of the insurance company. Producers do not have express or implied authority to alter contracts or waive exclusions, nor do life producers have binding authority to issue binders altering terms.

25. Question 25 of 25Hard

    All of the following are true of the level death benefit option in variable universal life insurance EXCEPT:

    1. AA. The amount at risk generally decreases as cash value increases.
    2. BB. The death benefit equals the specified amount plus the cash value.
    3. CC. The death benefit generally stays at the specified amount while cash value grows.
    4. DD. Mortality charges are generally based on the net amount at risk.
    Show answer to question 25

    Answer: B. The death benefit equals the specified amount plus the cash value.

    Under the level death benefit option, the policy generally pays the specified amount, and the amount at risk is the death benefit minus cash value. A death benefit equal to the specified amount plus cash value describes the increasing death benefit option, not the level option.

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