Life Insurance Practice Exam

The chance of loss without any possibility for gain is known as:

Pure Risk

When an insurer can no longer meet its financial obligations when they are due, the insurer is considered to be:

Insolvent

When can a representation be altered or withdrawn?

Before the insurance is effected, but not afterwards

A cause of loss is also known as a(n):

Peril

Which of the following must be printed on every licensee’s business cards, written price quotations and printed advertisements:

License Number

The Insurance Commissioner may deny an insurance license application without a hearing:

If the applicant has a final conviction of a felony

All of the following definitions are correct EXCEPT:

A hazard is a cause of loss

All of the following are ways to reduce risk EXCEPT:

Buying Insurance

Your license will be considered to be inactive when you:

No longer have appointments

An insurer organized under the laws of another state who is legally transacting insurance in this state is known as:

A foreign insurer Explanation: A domestic insurer is organized in this state, a foreign insurer is organized in another state and an alien insurer is organized in another country.

When must a licensee notify the Insurance Commissioner of a change of address?

Immediately

When an insurer voids an insurance contract due to an intentionally fraudulent omission by the insured of a material fact, it is known as:

Rescission

All are true about transacting insurance EXCEPT:

Transacting without a license is a felony Explanation: Any person who transacts insurance without a valid license is guilty of a misdemeanor punishable by a fine not exceed $50,000 or by imprisonment in a county jail for a period not exceeding one year, or by both that fine and imprisonment.

Making an insured whole again after a loss is known as:

To indemnify Explanation: The principle of indemnity states that the purpose of insurance is to restore a person financially to the position they were in before the claim occurred. To make a person whole again financially is to indemnify that person.

A representation that fails to correspond with its assertions or stipulations is:

False Explanation: A representation is false when the facts fail to correspond with its assertions or stipulations.

The purchase of insurance does all of the following EXCEPT:

Eliminates risk Explanation: The purchase of insurance does not eliminate risk. Instead, it transfers the risk to the insurance company in consideration of a premium.

The uncertainty about loss that exists whenever more than one outcome is possible is called:

Risk Explanation: Risk is defined as the chance, possibility or uncertainty of loss.

As specified by the California Insurance Code (CIC), every person must have insurable interest in the person insured at the time of application. Every person has an insurable interest in the life or health of all of the following persons EXCEPT:

Their best friend Explanation: You would have an insurable interest in another person if you would benefit if that person continues to live. On life insurance, insurable interest must exist at the time of application and is usually based upon immediate kinship or economics.

A hazard is defined as something that increases the risk. Which of the following is considered to be a morale hazard?

Driving recklessly Explanation: There are three types of hazards: 1) physical hazards, such as smoking or sky diving; 2) moral hazards, such as engaging in illegal activities; and 3) morale hazards, which are presented by careless persons.

Under the California Insurance Code (CIC), neither party to a contract of insurance is bound to communicate any of the following EXCEPT:

Information known to be material Explanation: Each party of a contract of insurance shall communicate to the other, in good faith, all facts within their knowledge which are or which they believe to be material to the contract.

An example of a fiduciary duty is:

The trust that your client places in you in regard to handling premiums Explanation: An agent acts in a fiduciary capacity, based upon trust and confidence, when handling the financial affairs of their customers, including the handling of premiums.

An appointment as an agent of an insurer becomes effective on the date it is:

Signed by the insurer Explanation: The authority to transact insurance given to a licensee by an insurer by appointment shall be effective as of the date the notice of appointment is signed by the insurer.

A licensed life agent may transmit an application for insurance to an insurer for which the life agent is not appointed. If the insurer issues the policy, the insurer is considered to have authorized the agent to act on its behalf, and they must forward a notice of appointment to the Commissioner within ____ days after receiving the application.

14 days

On employer group life, premiums paid by an employer for that portion of an employee’s group life coverage in excess of $_________ are taxable as income to the employee.

$50,000

Benefits of a group life policy must be paid to the employee’s beneficiary, which may not be:

Their Employer

A hazard is defined as:

Something that increases the chance of loss

When recommending to a senior consumer an annuity purchase or the exchange of an annuity that results in another insurance transaction, a producer must have reasonable grounds for believing that the recommendation is:

Suitable

Licensees must print their license number on all of the following EXCEPT:

Correspondence

Which type of annuity has no accumulation period?

Single Premium Immediate

All of the following are true regarding concealment EXCEPT:

Only intentional concealment entitles an injured party to rescind the contract

On a noncontributory employer group life contract, what percentage of the eligible employees must enroll?

100%

All of the following would be considered to be ordinary life insurance EXCEPT:

Group

When must the beneficiary of a life insurance policy have an insurable interest in the insured:

At no time

A policy shall specify all of the following EXCEPT:

The financial rating of the insurer

If a life insurance beneficiary wants all of the proceeds paid out to them in 10 years, they should select which of the following settlement options?

Fixed Period

All life insurance policies and annuities offered for sale to a senior citizen in California shall provide a free look period of ____ days after the receipt of the policy, during which time the applicant may return the contract for a refund of all premiums paid.

30 days

Which of the following insurance mathematical premises states that the greater the number of similar exposures, the easier it is to predict future losses?

The law of large numbers

If a corporation enters into an agreement with a shareholder to purchase their shares if they die, they have entered into a:

Buy/sell agreement

All life insurance policies and annuities offered for sale to individuals under age 60 in California shall provide a free look period of not less than ____ days nor more than ____ days.

10 / 30 days

When an applicant reveals conditions that require more information the underwriter will order:

An attending physician’s statement

The individual upon whose life an annuity is based on is known as the:

Annuitant

All are true about representations EXCEPT:

A representation may be altered or withdrawn before or after the insurance is effected

All of the following are true regarding convertible term insurance EXCEPT:

A convertible term policy may be converted to any type of life insurance

The chance of loss without any possibility for gain is known as:

Pure Risk

Using the needs approach to quantifying, how much life insurance a client needs focuses on all of the following except:

Income replacement

Which department of an insurer is responsible for the selection and classification of risks:

Underwriting

A licensee who has applied to renew a license is entitled to continue operating under his or her existing license for ____ days after its specified expiration date, or until notified by the department that the renewal application is deficient, whichever comes first, as long as the applicant has satisfied all the license renewal requirements.

60 days

All of the following are true regarding Traditional IRAs EXCEPT:

Qualified distributions are tax free

Which type of term life insurance is usually used as mortgage redemption life insurance?

Decreasing

When a new life insurance policy is classified as a modified endowment contract (MEC), the policyholder may be affected in all of the following ways EXCEPT:

Death benefits are taxable

The person whose life is covered by a life insurance policy is known as the:

Insured

Under the CIC, all of the following are true when a person transacts insurance without a valid license EXCEPT:

They are guilty of a felony

Under the California Insurance Code, all of the following are insurable events EXCEPT:

Losing money playing the lottery

All of the following are true regarding the conversion privilege on employer group life EXCEPT:

The employer must pay the entire cost of the converted policy

On employer group life, dependent children may be covered from birth until age:

26

Which of the following is true regarding variable annuities?

Unit values fluctuate depending upon the performance of the separate account

Under social security, to be fully insured for full retirement, disability, death and survivor’s benefits, an individual must have worked and contributed to social security for at least ____ calendar quarters.

40

The entire contract provision on a life insurance policy states:

The entire contract includes the policy and the application, if attached

Every licensee must notify the Commissioner of a change in their email, residence, principal business or mailing address:

Immediately

The Commissioner may, without notice or hearing, suspend or revoke the permanent license of a licensee for any of the following reasons EXCEPT:

Placing before the public any advertisement which uses the existence of the California Life and Health Insurance Guarantee Association for the purpose of inducing the sale of insurance

All of the following are true regarding a mortality table EXCEPT:

It shows which individuals will die each year at a given age

Under the Internal Revenue Code section 1035, all of the following life insurance exchanges are tax deferred EXCEPT:

The exchange of an annuity for a life insurance policy

War and aviation are common types of life insurance:

Exclusions

A renewable term life insurance policy has a(n):

Level death benefit with an increasing premium Although renewable term life insurance has a level face amount, the premiums will increase as the insured gets older. Renewable term may be written for one year, five years, 10 years or even longer. On annual renewable term, the premium will increase each year, but for renewable term written for longer periods of time, the premium is based upon the average age of the insured during the term.

Which of the following is not a dividend option offered on participating life insurance policies:

Extended term Explanation: On a participating policy issued by a mutual insurer, the policyholders might participate in the insurer’s profits in the form of dividends, although they may not be guaranteed. If declared, the policyowner may choose to receive the dividends several different ways, including cash, interest, paid-up additions, applied to the premium when due or as a premium to buy one-year term insurance. However, the extended term option is a non-forfeiture option, not a dividend option.

When ordering an attending physician’s statement, the underwriter must include:

An authorization form signed by the applicant Explanation: The underwriter’s request for an attending physician’s statement must be accompanied by an authorization form signed by the applicant.

All of the following are true regarding the waiver of premium rider when it is attached to a whole life insurance policy EXCEPT:

The amount of the waived premium due is treated as a policy loan The waiver of premium rider is actually a type of credit disability insurance that is added to a life insurance policy for an additional premium charge. If the insured is disabled for more than six months, the rider will pay the insured’s premium until they either recover or die. Since the premium is being paid by the rider, the cash value in the policy will continue to accumulate as if the insured was paying the premium themselves. If the insured does not become disabled, the rider will usually drop off the policy at age 65 and the overall policy premium will be reduced.

All of the following criteria must be satisfied before a participant is eligible to receive social security disability income benefits EXCEPT:

12 month waiting period Explanation: A fully insured social security participant who becomes totally disabled is eligible for disability income benefits if they meet social security’s stringent definition of total disability, which requires that an individual must be disabled as a result of a medically defined physical or mental impairment for at least five months and be unable to perform any gainful work. Further, the disability must be expected to last at least 12 months, or be expected to result in death.

The process by which a mutual insurer becomes a stock insurance company is known as:

Demutualization Explanation: A domestic incorporated mutual life insurer issuing non-assessable policies on a reserve basis may be converted into an incorporated stock life insurance company, issuing on a reserve basis, non-assessable policies of life insurance. Such a process is known as demutualization.

A licensed life agent may transmit an application for insurance to an insurer for which the life agent is not appointed. If the insurer issues the policy, the insurer is considered to have authorized the agent to act on its behalf, and they must forward a notice of appointment to the Commissioner within ____ days after receiving the application.

14 Explanation: A licensed life agent may transmit an application for insurance to an insurer for which the life agent is not appointed. If the insurer issues the policy, the insurer is considered to have authorized the agent to act on its behalf, and the insurer shall forward a notice of appointment to the Commissioner within 14 days.

All are true regarding the reinstatement of a lapsed life insurance policy EXCEPT:

No new contestability clause or suicide exclusion may apply Explanation: Most insurers will allow an insured up to three years to reinstate a lapsed life insurance policy by paying their overdue premium and providing satisfactory proof of insurability. However, since both the suicide clause and the contestability clause start over on reinstatement, the main advantage of reinstating would be that the premium for the reinstated policy is based upon the insured’s original age, not the age at reinstatement. Remember though, a policy that has been surrendered for cash cannot be reinstated.

All of the following are true regarding participating life insurance policies issued by mutual insurers EXCEPT:

Dividends are guaranteed to be paid if the insurer makes a profit Explanation: On participating life insurance policies, the payment of dividends to the policyholders is at the discretion of the board of directors of the insurer. Remember, dividends may never be guaranteed and the insurer does not have to pay them, whether they make a profit or not.

Life insurance applications must be signed by all of the following EXCEPT the:

Beneficiary Explanation: Although an agent is not a party to a life insurance contract, they are a party to the application, so they must sign it along with the insured and the policyowner, if different than the insured. Beneficiaries are not considered to be a party to the application, so they need not sign it.

At the time of application, life settlement brokers must disclose all of the following EXCEPT:

Affiliations between the broker and the person making an offer on a proposed life settlement contract Explanation: A life settlement transaction occurs when a policyowner sells their life insurance policy to another for more than its cash value, but less than its face amount. A life settlement broker is a person who represents the policyowner in a life settlement transaction. At the time the policyowner applies to make a life settlement transaction, the broker must disclose that accelerated benefits may be a possible alternative, that the transaction may have tax implications and that the owner will be required to disclose medical, financial and personal information. Any affiliations between the broker and the person making an offer to buy the policy must be disclosed by the broker at the time of the offer, not at the time of the application.

All of the following are true regarding key person life insurance EXCEPT:

Death benefits are taxable Explanation: Key person life insurance utilizes an individual life insurance policy for a business purpose. On a key person life policy, the employer is both the policyowner and the beneficiary and the key person is the insured. Although the premiums paid by the employer are not tax deductible, the proceeds payable upon the death of the key person are not taxable to the employer, who would use them to hire and train a replacement.

Contributions to a Roth IRA withdrawn prior to age 59 1/2:

May be withdrawn without tax or penalty Explanation: Since the contributions to a Roth IRA are made in after tax dollars, the participant may withdraw the money they contributed at any time, without tax or penalty.

Which of the following is true regarding the accelerated benefits rider:

Amounts paid out will reduce the future death benefit payable to a beneficiary Explanation: The accelerated benefits rider serves as a viable alternative to making a viatical settlement. The rider allows a policyowner to accelerate receipt of a portion of the policy’s death benefit upon the occurrence of a critical or terminal illness. Depending upon the insurer, accelerated (or living) benefits may be included as a policy provision or added as a rider, generally for no additional premium charge. All insureds are eligible and there are no restrictions on the use of the funds. Accelerated benefits are not taxable, although future death benefits payable to a beneficiary will be reduced by any amounts paid under the terms of this rider.

Buying life insurance is a risk management process whereby a person elects to ____ the financial risk of their premature death.

Transfer Explanation: Risk may be managed several different ways, including risk avoidance, risk retention and risk reduction. However, buying insurance is the most common method of risk management, which involves the transfer of risk to an insurer in consideration of a premium.

A comprehensive long-term care rider added to a life insurance policy will provide coverage for:

Custodial care in a nursing home and home based care Explanation: There are several levels of long term care. A rider that provides comprehensive long term care will cover both custodial care in a nursing home and home based care.

If an applicant for life insurance misstated their age on their application and dies 5 years later:

The death benefit will be adjusted to what the premium paid would have purchased if the correct age was known Explanation: Although a life insurance policy is incontestable after it has been in force for two years, the misstatement of age clause goes on indefinitely. Although a claim may never be denied for misstatement of age, the amount payable to the beneficiary may be adjusted to reflect how much coverage the premium paid by the insured would have purchased if the correct age was known.

A person who, for a fee paid by any person other than an insurer, advises any person insured under, named as beneficiary of, or having any interest in, a life or disability insurance contract, in any manner concerning that contract must be licensed as a:

Life and disability insurance analyst Explanation: A life and disability insurance analyst sells advice for a fee, which may be paid by any person other than an insurer.

All of the following are true regarding adverse selection EXCEPT:

Insurers may discriminate against those who may incur losses in order to avoid it Explanation: Although insurers may utilize various strategies designed to prevent adverse selection, they cannot discriminate against those who may incur losses to avoid it.

The rules regarding replacement apply when replacing which of the following types of life insurance?

Term life Explanation: The rules regarding replacement do not apply when replacing credit life insurance, group life or group annuities. They do apply when replacing other types of insurance, including term life insurance.

A life insurance policy supplemental illustration may be furnished in addition to a basic illustration as long as it illustrates:

Non-guaranteed elements that are not guaranteed or not determined at policy issue Explanation: A supplemental illustration may be provided so long as: 1) it is accompanied by or preceded by a basic illustration; 2) the non-guaranteed elements shown are not more favorable to the policyowner than those shown in the basic illustration; 3) it contains the same statement required of a basic illustration that non-guaranteed elements are not guaranteed; and 4) the supplemental illustration includes a notice referring to the basic illustration for guaranteed elements and other important information.

An applicant who wants to provide permanent life insurance on themselves and term life insurance coverage for their spouse and children all on one policy should purchase a:

Family policy Explanation: A family life policy (also known as a family protection policy) provides coverage for the policyowner’s entire family for just one premium charge. The policy actually consists of permanent whole life insurance on the primary insured and level, convertible term insurance added as a rider to cover the spouse and children.

Upon annuitization, which annuity pay out option will generate the highest monthly payments?

Straight life Explanation: Upon annuitization, annuity owners must select a pay out option, which can never be changed. Since the straight life (or life income) pay out option has no beneficiary, it is considered the most risky choice. However, generally the higher the risk, the higher the reward.

Insurable interest must exist:

At the time of application Explanation: On life insurance, an insurable interest must exist at the time of application, but need not continue to exist at the time of loss. Insurable interest is usually based upon either close kinship or economics.

The spouse of a currently insured social security participant who died is eligible to receive monthly life income benefits starting as early as age:

60

A non-taxable refund of premium that may be returned to a policyowner by an insurance company under a participating life insurance policy is known as a:

Dividend

All of the following are components of a life insurance policy premium EXCEPT:

Dividends

A condition that could result in a loss is known as a:

Exposure Explanation: An exposure is a condition that could result in a loss. A peril is a cause of loss. Risk is the chance of loss and a hazard is something that increases the risk.

The legal doctrine that states that any ambiguity in an insurance contract will be construed in favor of the insured is known as the Doctrine of:

Adhesion Explanation: Since an insured does not have the opportunity to negotiate the terms and conditions contained in an insurance contract, any vague language in the contract is construed against the insurer, since they wrote it. This is known as the Doctrine of Adhesion.

All of the following are non-forfeiture options contained in a cash value life insurance policy EXCEPT:

Paid-up additions Explanation: Be sure to know and understand the three non-forfeiture options that are designed to protect a customer’s cash value upon policy lapse. Paid-up additions are not a non-forfeiture option, they are a dividend option.

Every life and disability agent must maintain all records at their principal place of business for a minimum of ____ years, readily available and open to the inspection of the Commissioner at all times.

5 years Explanation: Agents must maintain all records at their principal place of business for a minimum of five years, readily available and open to the inspection of the Commissioner at all times.

The net profit of an insurer, less any dividends paid out, is known as their:

Earned Surplus The earned surplus of an insurer, which is also known as retained earnings, consists of the net profit of the insurer, less any dividends paid out to policyholders. Net profit consists of the total income of the insurer, less all expenses and taxes. Dividends, if declared, are paid out of the insurer’s net profit and what is left over after that is known as the earned surplus.

Which of the following life insurance riders allows the policyowner to increase coverage periodically without providing proof of insurability:

Guaranteed insurability Explanation: The guaranteed insurability rider allows the insured to purchase additional life insurance in the future without furnishing proof of insurability, although all options to do so must be exercised prior to reaching a certain age, often age 35. Option dates generally occur at three year intervals or when the insured gets married or has a child. If the option is not exercised it is lost, and the insured will have to wait for the next option date to occur. Of course, the premium for the additional amounts of insurance added will be based upon the insured’s age at the time the option is exercised. Without this rider, the insured may be required to purchase more than one life insurance policy in order to increase coverage, assuming they can still pass a physical exam.

Many insurers follow the principle of indemnity. To indemnify means to:

Make whole Explanation: To indemnify other persons is to restore them financially to the position they were in prior to a loss, or to make them whole again financially.

A 30 year old applicant wants to buy a $100,000 ordinary life insurance policy with the lowest possible initial premium outlay. Which of the following should the agent recommend?

Modified whole life Explanation: On modified whole life, it is the premium that is modified (or discounted) in the early years of the policy, not the face amount. Of the responses listed, the modified whole life policy would have the lowest initial premium outlay at policy inception, followed by traditional whole life, limited-pay whole life and single premium whole life, which would be the most expensive.

Which mode of premium payment would have the highest overall annual cost?

Monthly

The department of an insurer that is responsible for classifying risks is:

Underwriting

Which of the following best describes the entire contract clause as it relates to life insurance?

The policy and the application, if attached at issue

If a corporation and a shareholder enter into an agreement that requires the corporation to buy the shareholder’s shares upon his or her death, they have entered into:

A buy/sell agreement

If the beneficiary of a life insurance policy wants $1,000 per month for as long as the money lasts, they should choose the ________ settlement option.

Fixed Amount

Social security provides protection for all of the following EXCEPT:

Poor Investments

A retirement plan where contributions are based upon the success of the company is known as a:

Profit Sharing Plan

Life insurance policies and annuities sold to persons age 65 or older must contain an examination period of ____ days after receipt of the policy for purposes of review, at which time the applicant may return the contract for a full refund of premium.

30 days

Which of the following describes the tax implications of investing in a Roth IRA?

Non-deductible contributions / tax free distributions

All of the following are true regarding group life conversion EXCEPT:

The employer will pay the entire cost of the new policy

A life settlement broker represents which of the following in a life settlement transaction:

The policy owner

If the beneficiary of a life insurance policy wants to take the proceeds over a 5 year period, they should select the ______ settlement option.

Fixed Period

A client who wants life insurance protection and cash values that fluctuate in value based upon the performance of a separate account should purchase:

Variable Life

All of the following are true regarding participating life insurers EXCEPT:

They are owned by their stock holders

The premium that an employer pays for group life insurance coverage for an employee that exceeds $50,000 in coverage is:

Taxable as income to the employee

All of the following are true regarding dividends paid by a mutual life insurance company EXCEPT:

They must be paid in cash

When using the needs approach to determine how much life insurance a client should buy, producers should consider all of the following EXCEPT:

Future earnings potential

Employee stock ownership plans (ESOP) invest in:

The stock of the employer

Under social security, being fully insured entitles a worker and family to full benefits. To achieve fully insured status, an individual must attain at least ____ quarters of coverage.

40

A person who receives a bonus at work and elects to use the money to buy an annuity that will start paying monthly payments right away has purchased a:

Single premium immediate annuity Explanation: Single premium immediate annuities are purchased with a lump sum and annuitized right away, meaning that they do not have any accumulation period. Many states utilize single premium immediate annuities as a pay out option for lottery winners. Single premium deferred annuities are also purchased with a lump sum which remains in the accumulation period until such time that the client annuitizes the contract.

On group life insurance, dependent children may be covered up to age:

26 Explanation: Insurance under any group life insurance policy may be extended to insure dependents. A dependent includes a member’s spouse and all children from birth until age 26 years of age, or a child 26 years of age or older who is both incapable of self-sustaining employment by reason of mental retardation or physical handicap and chiefly dependent upon the employee for support and maintenance.

All of the following are dividend options on a participating life insurance policy EXCEPT:

Monthly income Explanation: Mutual insurers usually offer their policyholders a choice of five dividend options: cash, accumulation at interest, paid-up additions, reduced premium payment and one-year term. Monthly income is an annuity pay out option, not a dividend option.

When a policyowner uses the cash value in their policy to buy a lesser amount of permanent life insurance, they have exercised which non-forfeiture option:

Reduced paid-up Explanation: Non-forfeiture options are designed to protect a life insurance policyowner’s cash value in the event of policy lapse, whether intentional or not. The three non-forfeiture options are cash, reduced paid-up and the extended term option. Under the reduced paid-up option, the insurer keeps the owner’s cash value and buys them a new whole life policy that is paid up until they die, although the face amount of the new policy will be reduced. The extended term option is called the automatic option since it is the default option unless another option is selected. Under the extended term option, the insurer will also keep the owner’s cash value but buy them a new term life policy for an extended period of time instead, with the same face amount as the lapsed policy. Of course, none of these options will apply if the lapsed policy was term life insurance, since term does not have any cash value there is nothing to forfeit.

Group life insurance policies may exclude all of the following EXCEPT:

Accidents Explanation: Group life insurance policies may exclude death due to war, aviation or during military service.

If an employer offers employees the option of voluntarily increasing their group life coverage to an amount that is more than the group life policy normally covers, who is responsible for paying the premium for the elective coverage?

Those employees who elect to increase coverage Explanation: The cost of elective group life coverage must be paid by the employee.

Agents must send all of the following to the replacing insurer when replacing life insurance EXCEPT:

Copies of all printed communications used for presentation to the applicant Explanation: Although replacing agents must leave with the applicant the original or a copy of all printed communications used in their presentation, they do not have to send them to the replacing insurer.

In the case of a variable annuity sold to a senior citizen in this state for which the owner has directed that the premium be invested in the mutual funds underlying the contract during the 30-day cancellation period, cancellation during that period entitles the owner to a refund of:

The account value Explanation: In the case of a variable annuity for which a senior owner has directed that the premium be invested in the mutual funds underlying the contract during the 30 day cancellation period, cancellation shall entitle the owner to a refund of the account value. However, if the owner had not directed that the premium be invested in the mutual funds underlying the contract, all premiums paid would have to be refunded if the owner canceled the contract during the 30 day free look period.

All of the following are true regarding key person life insurance EXCEPT:

The premium is tax deductible for the employer as a business expense Explanation: Key person life insurance is individual life insurance that is used for a business purpose. The business owner would buy life insurance on a key person, naming the business as beneficiary. If the key person died, the proceeds would be paid to the business that would use the funds to hire and train a replacement. The premiums paid are not tax deductible, but neither are the proceeds taxable.

If an insured’s medical conditions indicate that more information is needed, the underwriter will:

Order an attending physician’s statement Explanation: An attending physician’s statement is a statement requested by the insurer from any doctor that the insured may have seen within a specified period of time prior to applying for the policy. The statement includes detailed information regarding the purpose of the doctor’s visits, results of medical tests, prior treatments and/or hospital stays and medical recommendations.

Which of the following annuity benefit payment options would generate the highest monthly payments to the contract owner upon annuitization?

Pure or straight life Explanation: Remember, the higher the risk the higher the potential reward. Since the pure or straight life annuity pay out option has no beneficiary, it is the most risky and therefore would generate the highest monthly payments to the contract owner upon annuitization.

Which type of term life insurance has a level face amount but a premium that increases each year as the insured gets older?

Renewable Explanation: Although renewable term life insurance has a level face amount or death benefit, the premiums will go up each year as the insured gets older. Most group life insurance is sold as annual renewable term, with the premium based upon the average age of the group.

Which risk classification will have the highest premium?

Non-standard Explanation: Life insurance rates are based upon the Commissioner’s Standard Ordinary mortality table, which measures the chance of death for the standard (or average) person. If a person is above average, the rate may be lower than standard, which is known as a preferred risk. If the person is below average, often due to health problems or a dangerous hobby or occupation, he or she may pay a higher (or non-standard) rate. Remember, a rate is defined as the cost per unit. The premium is the rate multiplied by the number of units purchased. One unit of life insurance is $1,000 of coverage.

List in order from the lowest annual premium to the highest:

Modified, ordinary, limited pay, single premium Explanation: Let’s assume our client is a 30 year old male who wants to buy an ordinary whole life policy with a face amount of $100,000 with an annual premium of $1,000 per year payable to age 100. If this premium is too high, the insurer could modify it, by allowing the client to pay less in the early years and more in later years. If he wants to pay the policy off faster, the client could buy a limited pay life policy, such as a 20 Pay life, or the client could simply pay all the premiums up front, which is known as a single premium policy.

Which of the following life insurance settlement options enables the beneficiary to conserve the proceeds of a life insurance policy?

Interest only Explanation: If a beneficiary wants to conserve the estate that was created for them upon the death of the insured, they would choose the interest only life insurance settlement option. Under this option, the proceeds are left with the insurer to accumulate interest and the principal amount of the death benefit remains intact, although it may be withdrawn at any time. Although life insurance death benefits are not taxable, the interest that accrues on them is.

An individual who obtains a 30 year mortgage and would like insurance coverage which would pay off the mortgage in the event of his or her death and no more and no less, would purchase:

Decreasing term Explanation: Decreasing term insurance can be set up so the amount of life insurance coverage decreases at exactly the same rate as a client’s mortgage amortizes, which is also known as mortgage protection or mortgage redemption insurance.

Which of the following completes the application for life insurance?

Applicant Explanation: An applicant is a prospective insured who completes and signs a written application form containing the personal information needed by the underwriter to make an informed underwriting decision.

The owner of a life insurance policy may do all of the following EXCEPT:

Change the dividend scale Explanation: Although owners of life insurance policies may assign their ownership in the policy to another person, change their mode of payment, change their beneficiary or change their dividend option, they cannot change the dividend scale, which is an illustration of dividends paid historically, currently and projected. The dividend scale (or illustration) is set by the insurer and although it is not a guarantee of future payments, it can be a strong indicator.

The source of dividends paid to the owners of participating life insurance policies issued by mutual insurers is:

Earned surplus Explanation: A mutual insurer’s earned surplus or retained earnings are the source of dividends to be paid to their policyholders. Retained earnings are defined as the insurer’s net profit before the payment of dividends.

The person upon whose life an annuity is based is known as the:

Annuitant Explanation: Since annuities do not offer any life insurance protection, the person whose life the contract is based upon is called the annuitant, not the insured. Remember, although the policyowner and the annuitant are often the same person, they do not have to be.

If a client has to multiply the value of an accumulation unit by the number of units he or she owns in the separate account in order to determine the value of his or her annuity, he or she must have a(an):

Variable annuity Explanation: Variable annuity units are similar to shares of a mutual fund, in that they vary in value based upon the performance of the underlying investment portfolio or separate account. For example, if a client owns 100 units in a variable annuity separate account and each unit is worth $100, then the value of the account is $10,000. However, if the value of a unit increases tomorrow to $110, the account value will increase by $1,000.

The greater the number of similar exposure units insured, the easier it will be to predict future claims based upon the law of:

Large numbers Explanation: The law of large numbers is a mathematical premise that states that the greater the number of exposures the more accurate the prediction. This law forms the basis for the statistical expectation of loss upon which premium rates for life insurance policies are calculated. Out of a large group of policyholders, life insurers can fairly accurately predict not by name, but by number, the number of insureds that will die at a given age.

All of the following are true regarding mutual insurance companies EXCEPT:

They issue non-participating policies Explanation: Mutual insurers issue participating policies, meaning that their policyowners may participate in company profits in the form of dividends. It is stock insurers that issue non-participating policies that may pay dividends to their shareholders, instead of their policyholders.

The person upon whose life a life insurance policy is based is known as the:

Insured Explanation: Although the policyowner and the insured are often the same person, they do not have to be. For example, a parent might purchase a life insurance policy on a minor child. The child is the insured, but the parent is the policyowner.

All of the following are true regarding social security disability income benefits EXCEPT:

Individuals must meet the own job definition of total disability Explanation: Social security’s definition of total disability is difficult to meet since it requires the worker to have fully insured status and be unable to perform any substantial gainful work. The disability must also be expected to last at least 12 months or be expected to result in death.

Which of the following would not be considered to be ordinary life insurance?

Group Explanation: Ordinary life insurance includes whole life (including limited pay whole life), term and endowment policies. Insurers issuing these types of policies base their rates and benefits on the Commissioner’s Standard Ordinary Life mortality table. However, group life is not considered to be ordinary life insurance and rates are generally based upon the past claims experience of the group.

The incontestability clause in a life insurance policy protects the insured by preventing an insurer from denying a claim:

After the policy has been in effect for a specified period of time Explanation: By law, life insurance policies are contestable for the first two years, and incontestable thereafter, meaning that insurers may not deny life insurance claims for material misrepresentations made on the application after the policy has been in effect for two years, even if fraudulent.

When making a life settlement, a policyowner will permanently transfer all rights of ownership in the policy to another party by making a(n):

Absolute assignment Explanation: In a life settlement transaction, a policyowner sells all of their rights of ownership to another party, which is accomplished by means of an absolute assignment. Although the prior policyowner is still the insured under the policy, the new policyowner will usually name themselves as the beneficiary to receive the proceeds upon the death of the insured.

All of the following are true regarding annuities EXCEPT:

The contract owner and the annuitant must be the same person Explanation: Although the policyowner and the annuitant are usually the same person, they do not have to be.

The transfer of risk to an insurance company is an effective risk management technique when:

The amount and frequency of future losses are unknown Explanation: If a business wants to retain small predictable losses, it may elect to self-insure. However, if the amount and frequency of future losses is unknown, it would be better to transfer the risk to an insurance company in consideration of a premium.

Your license will be considered to be inactive when you:

No longer have any appointments

When must a licensee notify the Insurance Commissioner of a change of address?

Immediately

A person shall not solicit, negotiate, or effect contracts of insurance unless the person holds a valid license from the Commissioner authorizing them to act in that capacity. Any person who transacts insurance without a valid license to do so is guilty of a misdemeanor punishable by:

Both a fine not exceeding $50,000 and up to 1 year in a county jail

All of the following are true regarding warranties in an insurance contract EXCEPT:

A particular form of words is necessary to create a warranty

Transacting insurance includes all of the following activities EXCEPT:

Compiling a list of prospects

The Insurance Commissioner may deny an insurance license application without a hearing:

If the applicant has a final conviction of a felony

ll of the following are true regarding representations EXCEPT:

They must be in writing

Which of the following must be printed on every licensee’s business cards, written price quotations and printed advertisements?

Insurance License Number

When an insurer can no longer meet its financial obligations when they are due, the insurer is considered to be:

Insolvent

When an insurer voids an insurance contract due to an intentionally fraudulent omission by the insured of a material fact, it is known as:

Rescission

All are true about transacting insurance EXCEPT:

Transacting without a license is felony

All of the following must be specified in an insurance policy EXCEPT:

The financial rating of the insurer

Under the California Insurance Code (CIC), neither party to a contract of insurance is bound to communicate any of the following EXCEPT:

Information known to be material Explanation: Each party of a contract of insurance shall communicate to the other, in good faith, all facts within their knowledge which are or which they believe to be material to the contract.

When can a representation be altered or withdrawn?

Before the insurance is effected, but not afterwards Explanation: A representation may be altered or withdrawn before the insurance is effected, but not afterwards.

An appointment as an agent of an insurer becomes effective on the date it is:

Signed by the insurer Explanation: The authority to transact insurance given to a licensee by an insurer by appointment shall be effective as of the date the notice of appointment is signed by the insurer.

An insurer organized under the laws of another state who is legally transacting insurance in this state is known as:

A foreign insurer Explanation: A domestic insurer is organized in this state, a foreign insurer is organized in another state and an alien insurer is organized in another country.

The neglect to communicate that which a party knows, and ought to communicate, is concealment. Concealment entitles the injured party to rescind the insurance if it is:

Intentional or unintentional Explanation: Concealment, whether intentional or unintentional, entitles the injured party to rescind (void) an insurance contract.

An example of a fiduciary duty is:

The trust that your client places in you in regard to handling premiums Explanation: Agents acts in a fiduciary capacity, based upon trust and confidence, when handling the financial affairs of their customers, including the handling of premiums.

Every licensee shall file with the Commissioner his or her true name and also all fictitious names under which he or she conducts business. The Commissioner may disapprove the use of any true or fictitious name for all of the following reasons EXCEPT:

It is the bona fide natural name of an individual Explanation: Every licensee shall file with the Commissioner his or her true name and also all fictitious names under which he or she conducts business. The Commissioner may disapprove the use of any true or fictitious name (other than the bona fide natural name of an individual) if such name is too similar to a name already on file, may mislead the public, or implies that the licensee is an insurer.

Any licensee who diverts fiduciary funds to his or her own use is guilty of:

Theft

Acting as an agent for a non-admitted insurer in the transaction of insurance in this state is considered to be a misdemeanor unless acting as a:

Surplus lines broker Explanation: Except when performed by a surplus line broker, acting as an agent for a non-admitted insurer in the transaction of insurance business in this state is a misdemeanor.

A representation that fails to correspond with its assertions or stipulations is:

False Explanation: A representation is false when the facts fail to correspond with its assertions or stipulations.

If a whole life policy is being kept in force by use of the waiver of premium rider, what happens to the policyowner’s cash value?

It will accumulate in the usual manner

All of the following are true about the guaranteed insurability rider EXCEPT:

The premiums charged for the additional coverage is based upon the insured’s original age

Adding a comprehensive long-term care rider to a life insurance policy will provide the insured with which of the following coverages:

Nursing home and home based care

Under a long-term care rider, which of the following are considered to be activities of daily living?

Dressing and Eating