Life License Practice Test 01

Nonforfeiture values guarantee which of the following for the policyowner?

That the cash value will not be lost. Because permanent life insurance policies have cash values, there are certain guarantees built into the policy that cannot be forfeited by the policyowner. Nonforfeiture values give the insured the right to the cash value even if the policy lapses or is surrendered.

When Y applied for insurance and paid the initial premium on August 14, he was issued a conditional receipt. During the underwriting process, the insurance company found no reason to reject the risk or classify it other than as standard. Y was killed in an automobile accident on August 22, before the policy was issued. In this case, the insurance company will

Issue the policy anyway and pay the face value to the beneficiary. The conditional receipt says that coverage will be effective either on the date of the application or the date of the medical exam, whichever occurs last, as long as the applicant is found to be insurable as a standard risk, and policy is issued exactly as applied for.

The type of policy that can be changed from one that does not accumulate cash value to the one that does, is a

Convertible Term Policy. A convertible term policy has a provision that allows the policyowner to convert to permanent insurance.

Which of the following best defines target premium in a universal life policy?

The recommended amount to keep the policy in force throughout its lifetime. The target premium is a recommended amount that should be paid on a policy in order to cover the cost of insurance protection and to keep the policy in force throughout its lifetime.

Which of the following is NOT true regarding the annuitant?

The annuitant cannot be the same person as the annuity owner. While they don’t have to be, the annuitant and annuity owner are often the same person. The annuitant is the person who receives benefits or payments from the annuity and for whom the annuity is written. Since the annuitant’s life expectancy is taken into consideration, the annuitant must be a natural person.

When is the earliest a policy may go into effect?

When the application is signed and a check is given to the agent. The policy can be effective as early as the date of the application, if the premium is submitted with the application and the policy is issued as applied for.

All of the following are TRUE statements regarding the accumulation at interest option EXCEPT

The interest credited under this option is not taxable since it remains inside the insurance policy. The interest credited under this option is TAXABLE, whether or not the policyowner receives it.

Which is true about a spouse term rider?

The rider is usually level term insurance. The spouse term rider allows a spouse to be added for coverage. It is available for a limited amount of time, typically expiring at age 65. A spouse term rider (just like any other insured rider) is usually level term insurance.

An insured purchases a policy in 2008 and died in 2013. The insurance company discovers at that time that the insured concealed information during the application process. What can they do?

Pay the death benefit. The incontestability clause prevents an insurer from denying a claim due to statements in an application after the policy has been in force for 2 years, even on the basis of a material misstatement of facts or concealment of a material fact.

An insured has a life insurance policy from a participating company and receives quarterly dividends. He has instructed the company to apply the policy dividends to increase the death benefit. The dividend option that the insured has chosen is called

Paid-up additions. When this option is selected, the annual dividend acts as a single premium each year to buy additional amounts of insurance, based on the insured’s currently attained age.

According to the entire contract provision, what document must be made part of the insurance policy?

Copy of the original application. An insurance contract must contain a copy of the original application.

A life insurance policy has a legal purpose if both of which of the following elements exist?

Insurable interest and consent. To ensure legal purpose of a life insurance policy, it must have both insurable interest and consent.

Which of the following is called a "second-to-die" policy?

Survivorship life. Survivorship life (also referred to as "second-to-die" or "last survivor" policy) is much the same as joint life in that it insures two or more lives for a premium that is based on a joint age.

An employer has sponsored a qualified retirement plan for its employees where the employer will contribute money whenever a profit is realized. What is this called?

Profit sharing plan. A profit sharing plan is one where the employer will contribute monies into an employee’s retirement plan when the company shows a profit. The others are all qualified plans, but company profit isn’t an issue with them.

What does "liquidity" refer to in a life insurance policy?

Cash values can be borrowed at any time. Liquidity in life insurance refers to availability of cash to the insured through cash values.

The rider in a whole life policy that allows the company to forgo collecting the premium if the insured is disabled is called

Waiver of premium. Waiver of premium rider waives the premium if the insured owner has been totally disabled for a predetermined period. The payor benefit provides for an owner other than the insured and the waiver of cost of insurance is found in Universal Life.

All of the following are examples of third-party ownership of a life insurance policy EXCEPT

An insured borrows money from the bank and makes a collateral assignment of a part of the death benefit to secure the loan. A collateral assignment is the transfer of some or all of the death benefits of the policy to a creditor as security for a loan, but does not give the creditor the rights of ownership. In the event of the insured’s death, the creditor would only be able to recover that portion of the policy’s proceeds equal to the creditor’s remaining interest in the loan.

All of the following are personal uses of life insurance EXCEPT

Estate liquidation. Personal uses of life insurance include survivor protection, estate creation and conservation, cash accumulation, and liquidity.

The insurer discovered that one of the applicants for life insurance missed a couple of questions on the application. What should the insurer do with the application?

Return to the applicant for completion. Any unanswered questions need to be answered before the policy is issued. If the insurer receives incomplete applications, they need to be returned to the applicants for completion.

In a life settlement contract, whom does the life settlement broker represent?

The owner. Life Settlement Broker is a person who, for compensation, solicits, negotiates, or offers to negotiate a life settlement contract. Life settlement brokers represent only the policyowners.

Which of the following is INCORRECT concerning a noncontributory group plan?

The employees receive individual policies. The employer receives a master policy, and employees receive a certificate of insurance.

Which of the following is an example of liquidity in a life insurance contract?

The cash value available to the policyowner. Liquidity in life insurance refers to availability of cash to the insured. Some life insurance policies offer cash values that can be borrowed at any time and used for immediate needs.

Upon policy delivery, the producer may be required to obtain any of the following EXCEPT

Signed waiver of premium. The policy does not go into effect until the premium has been collected. If the premium was not collected at the time of the application, the producer may also be required to get a Statement of Good Health from the applicant at the time of policy delivery. Waiver of premium is a rider that can be added to a life insurance policy, and not something to be obtained from the applicant.

Which of the following is correct concerning the taxation of premiums in a key-person life insurance policy?

Premiums are not tax deductible as a business expense. The business cannot take a tax deduction for the expense of the premium. However, if the key employee dies, the benefits paid to the business are usually received tax free.

Because of financial obligations, John felt that he needed more insurance than the insurer was willing to issue. John’s insurance producer told him that he could maximize the death benefit without increasing the face amount by the use of a(n)

Return of premium rider. With the "return of premium" rider attached to the policy, upon the insured’s death, the benefit paid will be the face amount plus an amount equal to all the premiums paid on the contract.

If an annuitant dies before annuitization occurs, what will the beneficiary receive?

Either the amount paid into the plan or the cash value of the plan, whichever is the greater amount. If an annuitant dies before annuitization, the beneficiary will receive either the amount paid into the plan or the cash value of the plan, whichever is greater.

An insured purchased a 15-year level term life insurance policy with a face amount of $100,000. The policy contained an accidental death rider, offering a double indemnity benefit. The insured was severely injured in an auto accident, and after 10 weeks of hospitalization, died from the injuries. What amount would his beneficiary receive as a settlement?

$200,000. The beneficiary would most likely receive twice the face value of the policy, since his fatal injuries were caused by an accident and he died within the 90-day benefit limit stipulated in most policies.

The type of settlement option which pays throughout the lifetimes of two or more beneficiaries is called

Joint and survivor. A joint and survivor option pays while either beneficiary is still living.

In terms of parties to a contract, which of the following does NOT describe a competent party?

The person must have at least completed secondary education. The parties to a contract must be capable of entering into a contract in the eyes of the law. Generally, this requires that both parties be of legal age, mentally competent to understand the contract, and not under the influence of drugs or alcohol.

During partial withdrawal from a universal life policy, which portion will be taxed?

Interest. During the withdrawal, the interest earned on the withdrawn cash value may be subject to taxation.

Which of the following determines the cash value of a variable life policy?

The performance of the policy portfolio. The cash value of a variable life policy is not guaranteed and fluctuates with the performance of the portfolio in which the premiums have been invested by the insurer.

What does "level" refer to in level term insurance?

Face amount. Level term policies maintain level death benefit (or face amount) throughout the term of the policy. In level term insurance, the premium also remains consistent over the years, unlike the premiums of many policies, which increase as the policyholder ages.

The proposed insured makes the premium payment on a new insurance policy. If the insured should die, the insurer will pay the death benefit to the beneficiary if the policy is approved. This is an example of what kind of contract?

Conditional. A conditional contract requires both the insurer and policyowner to meet certain conditions before the contract can be executed, unlike other types of policies, which put the burden of condition on either the insurer or the policyowner.

In an annuity, the accumulated money is converted into a stream of income during which time period?

Annuitization period. The "annuitization period" (annuity period) is the time during which accumulated money is converted into an income stream.

Which of the following is true of a children’s rider added to an insured’s permanent life insurance policy?

It is term coverage that is convertible to permanent insurance at or prior to the child reaching the maximum coverage age. Children’s rider are term insurance covering all of the children in the family, including newly born children, and are convertible to permanent insurance upon a child reaching the maximum age without evidence of insurability.

When a life insurance policy was issued, the policyowner designated a primary and a contingent beneficiary. Several years later, both the insured and the primary beneficiary died in the same car accident, and it was impossible to determine who died first. Which of the following would receive the death benefit?

The insured’s contingent beneficiary. Under the Uniform Simultaneous Death Law, the law will assume that the beneficiary dies first in a common disaster. This provides that the proceeds will be paid to the contingent beneficiary or to the insured’s estate if none is designated.

Who does the secondary notice provision protect?

Elderly insureds. The secondary notice provision protects elderly insureds, and prevents the policy from lapsing for nonpayment of premium after the grace period without the insurer notifying the policyowner and a designated secondary addressee of the impending lapse in coverage.

Licensed life insurance agents are expected to be familiar with which of the following laws?

All of the insurance laws and regulations. While the other laws may have particular significance, an agent should be generally aware of all insurance laws.

If an employee is accepted into a group insurance plan, which status will the employee have?

Certificate holder. In group insurance, plan participants (insureds) do not receive a policy. Instead, they receive certificates of insurance, indicating that they are covered by the policy.

Which of the following insurance providers must be nonprofit and sell insurance only to its members?

Fraternal. To be characterized as a fraternal benefit society, the organization must be nonprofit, have a lodge system that includes ritualistic work and maintain a representative form of government with elected officers. Insurance may only be sold to members of the society.

An insured purchased an insurance policy 5 years ago. Last year, she received a dividend check from the insurance company that was not taxable. This year, she did not receive a check from the insurer. From what type of insurer did the insured purchase the policy?

Mutual. Funds not paid out after paying claims and other operating costs are returned to the policyowners in the form of a dividend. If all funds are paid out, no dividends are paid.

Which of the following would be required to be licensed as an insurance producer?

A salaried employee who advertises and solicits insurance. A person does not require an insurance producer license if he or she only advertises without intent to solicit insurance. However, once there is solicitation, a license is required.

When does a free-look period begin on a life insurance policy?

When the policy is delivered to the insured. The free-look provision allows an insured a period of a specified number of days from the delivery date of the policy to look over a new policy and return it for a full premium refund if dissatisfied for any reason.

What term is used for replacing insurance policies for the sole purpose of making commissions?

Churning. "Churning" is defined as replacing insurance policies for the sole purpose of making commissions.

An agent has been convicted of a crime punishable by a 1-year imprisonment. Within how many days must the agent notify the department of insurance?

30 days. Agents must notify the Department of Insurance in writing 30 days after being found guilty of a felony or a crime punishable by imprisonment of 1 year or more.

All of the following would be considered an insurance transaction EXCEPT

Obtaining an insurance license. An insurance transaction means the carrying on of business in insurance, which could include the solicitation of a policy, advising, negotiation, or inducement related to coverage or claims. Obtaining an insurance license is a prerequisite to transacting insurance.

Which of the following is true regarding the spendthrift clause in life insurance policies?

It can protect the policy proceeds from creditors of the beneficiary. The spendthrift clause in a life insurance policy prevents the beneficiary’s reckless spending of benefits, and protects the policy proceeds from creditors of the beneficiary or policyowner.

What method do insurers use to protect themselves against catastrophic losses?

Reinsurance. Insurers use reinsurance to protect themselves from catastrophic losses. This is a method where the reinsurer indemnifies the ceding insurer for part or all of the losses it sustains related to a policy issued previously.

If an employer decides to change its life insurance policy to a similar one with a different insurer, which of the following describes the extent that replacement regulations will be exercised?

Replacement regulations will not apply in this situation. If a new life insurance policy is provided under a group life insurance policy covering employees or members of an association, replacement regulations do not apply.

In life policies issued in this state, insurers are permitted to charge interest during the policy grace period for the number of days elapsing before the premium is paid. What is the maximum annual interest rate?

8%. The time that may elapse between a premium’s due date and its eventual payment is called the grace period. Insurer’s may impose interest charges not to exceed 8% per year for the number of days elapsing before the premium is paid.

An agent delivers a life insurance policy to the proposed insured. The insured makes a decision not to accept the policy. The insured may return the policy for a full refund of premium within how many days?

14. The free-look provision in Florida allows the insured to return a life policy or annuity after 14 days if dissatisfied for any reason.

Which of the following persons is required to hold a producer license?

A person who negotiates insurance contracts. Persons who perform clerical tasks that are not related to soliciting or negotiating insurance contracts are not required to be licensed.

In what way can an agent demonstrate a high standard of ethics?

Putting the client’s best interest before their own. The needs of the client(s) are the priority to a highly ethical agent.

Which of the following is an example of an agent’s fiduciary responsibilities?

Promptly forwarding premiums to the insurance company. Fiduciary refers to a position of trust. When an agent is handling the premiums that belong to an insurance company, they are acting in a fiduciary capacity.

In which of the following situations is it legal to limit coverage based on marital status?

It is never legal to limit coverage based on marital status. Availability of insurance benefits or coverage may not be denied based on sex or marital status. Marital status may be considered for the purpose of defining persons eligible for dependent benefits.

An insurance agent X has been found guilty of a felony and was sentenced to 3 years in prison. What would be the appropriate plan of action?

Send a written notification to the department of insurance. Agents must notify the Department of Insurance in writing 30 days after being found guilty of a felony or a crime punishable by imprisonment of 1 year or more.

Under special circumstances, continuing education requirements may be extended beyond the 2-year period for a maximum period of

12 months. Excess classroom hours accumulated during any 2-year period may be carried forward to the next 2-year period. If good cause is shown, the department may grant an extension not to exceed 1 year.

An agent’s client needs additional insurance which the agent’s own insurer cannot provide. The agent has to solicit additional coverage from another authorized insurer. This coverage is known as

Excess. A licensed life agent may place excess or rejected risks within the agent’s licensing authority with another insurer without being required to have an appointment with that insurer. Excess business is that portion of a risk above the limits of that which the agent’s own insurer will accept.

When a producer was reviewing a potential customer’s coverage written by another company, the producer made several remarks that were maliciously critical of that other insurer. The producer could be found guilty of

Defamation. A producer or broker who makes oral or written statements intended to injure another producer or insurer is guilty of the unfair trade practice of defamation.

A participating insurance policy may do which of the following?

Pay dividends to the policyowner. A participating insurance policy will pay dividends to the owner based upon actual mortality cost, interest earned and costs.

All of the following information about a customer must be used in determining annuity suitability EXCEPT

Beneficiary’s age. To ensure suitability of annuity products, producers must obtain relevant information about the consumer’s age, income, financial status, tax status, financial experience and objectives. Beneficiary’s age is not a suitability factor.

A customer with an existing life insurance contract is considering exchanging it for a newer contract. What Florida insurance regulation should the customer’s insurance agent consult?

The Florida Replacement Rule. The Florida Replacement Rule established the procedures followed when a prospective life insurance buyer replaces an existing insurance contract with new insurance.

The minimum age for purchasing life insurance policy in Florida is

15. In Florida, the minimum legal age to enter into a life insurance contract is 15.

Can a group that is formed for the sole purpose of obtaining group insurance qualify for group coverage?

No, the group must be formed for a purpose other than obtaining group insurance. In order to qualify for group coverage, the group must be formed for a purpose other than obtaining group insurance. In other words, it must be a natural group. There are generally two types of groups eligible for group insurance: employers sponsored, and association sponsored.

Which of the following is NOT a responsibility of the Office of Insurance Regulation?

Enacting new insurance laws. New laws are enacted by the state legislature.

An insured received a new life insurance policy 5 days ago, but after a closer inspection of the policy provisions, decided to return it to the insurer. What provision would allow the insured to return the policy for a full premium refund?

Free look. The free-look provision generally allows an insured a specified number of days from the delivery date of the policy to look over a new policy and return it for a full premium refund if dissatisfied for any reason. For life policies and annuities in Florida, that time period is extended to 14 days.