Free life insurance exam practice questions with answers

Topics in this practice set

• Policy types: term, whole life, universal, variable and indexed life
• Riders and options: waiver of premium, accidental death, guaranteed insurability, accelerated benefits
• Insurable interest, beneficiaries, nonforfeiture and dividend options, policy loans and settlement options
• Underwriting and risk classification
• Annuities: immediate and deferred, fixed, variable and indexed, payout options
• Federal taxation of life insurance and annuities, modified endowment contracts and 1035 exchanges
• Group life, contract law, policy provisions, replacement and ethical practices

26 Life Insurance practice questions with answers and rationales

Work each question first, then open the answer. Every explanation says why the right choice is right and why each wrong choice fails.

1. Question 1 · Life insurance: policy types (term)

   A homeowner wants coverage that pays off the remaining balance of a 25-year amortizing mortgage if she dies, with the death benefit shrinking as the loan balance falls. Which policy type best fits this need?

   1. A. Level term insurance
   2. B. Single-premium whole life
   3. C. Increasing term insurance
   4. D. Decreasing term insurance
   Show the answer and rationale

   Correct answer: D. Decreasing term insurance

   Decreasing term is term coverage whose death benefit declines on a set schedule toward zero by the end of the term, so it can be matched to an amortizing loan such as a mortgage. Whether the premium stays level or decreases depends on the contract.

   • A: Level term keeps the same face amount, so it does not track the shrinking loan.
   • B: Single-premium whole life is permanent coverage with a level face amount and is not designed to decline.
   • C: Increasing term raises the death benefit, the opposite of an amortizing debt.

   Sources: Decreasing term life insurance (Guardian Life)

2. Question 2 · Life insurance: whole life dividends

   Which statement about dividends paid on a participating whole life policy is correct?

   1. A. They are not guaranteed and reflect the insurer's actual experience.
   2. B. They are guaranteed in the policy contract each year.
   3. C. They are paid only if the insured dies during the dividend year.
   4. D. They are fully taxable as ordinary income when received in cash.
   Show the answer and rationale

   Correct answer: A. They are not guaranteed and reflect the insurer's actual experience.

   Dividends on a participating policy distribute divisible surplus, which arises when the insurer's actual mortality, investment and expense results are better than assumed. They are never guaranteed. For tax purposes, a dividend is generally included in income only to the extent it exceeds the policyowner's investment in the contract (basis).

   • B: Dividends are never guaranteed, even though the policy's guaranteed cash values and premiums are.
   • C: Dividends are paid to living policyowners; they are not conditioned on death.
   • D: Under 26 USC 72(e), a policy dividend is generally included in income only to the extent it exceeds the investment in the contract, so it is not fully taxable when received.

   Sources: Participating policy (Achievable); 26 U.S.C. 72(e) (Cornell LII); IRS Publication 525, Surrender of policy for cash (cost reduced by untaxed dividends)

3. Question 3 · Life insurance: dividend options

   A policyowner wants his participating whole life policy's annual dividend to increase both the death benefit and the cash value without new evidence of insurability. Which dividend option should he choose?

   1. A. Cash payment
   2. B. Accumulation at interest
   3. C. Reduction of the next premium
   4. D. Paid-up additions
   Show the answer and rationale

   Correct answer: D. Paid-up additions

   The paid-up additions option uses each dividend as a net single premium to buy a small amount of fully paid-up whole life insurance. This raises both death benefit and cash value, and no underwriting is required.

   • A: Taking cash removes the money from the policy and adds no coverage.
   • B: Accumulation at interest earns interest but does not purchase additional death benefit.
   • C: Premium reduction lowers outlay but does not add coverage or cash value.

   Sources: Opinion describing a paid-up addition as bought by the dividend as a single premium (291 U.S. 170)

4. Question 4 · Life insurance: policy loans

   A whole life policy with a $200,000 face amount has an outstanding policy loan of $15,000 and unpaid accrued loan interest of $1,000 when the insured dies. The policy provides that the loan balance and accrued loan interest are deducted from the proceeds. No other adjustments apply. What death benefit is paid to the beneficiary?

   1. A. $200,000
   2. B. $199,000
   3. C. $184,000
   4. D. $185,000
   Show the answer and rationale

   Correct answer: C. $184,000

   Under the policy's indebtedness provision, loan principal and accrued interest are deducted from the proceeds payable at death. $200,000 - $15,000 - $1,000 = $184,000.

   • A: The loan reduces the payout; the full face is not paid.
   • B: This deducts only about $1,000 and ignores the loan principal.
   • D: This deducts the loan principal but omits the unpaid accrued interest.

   Sources: Idaho Code 41-1931 - deduction of policy loan principal and accrued interest in determining amount due

5. Question 5 · Life insurance: universal life

   Which feature is characteristic of a traditional (non-variable) universal life policy?

   1. A. Fixed premiums and a fixed death benefit that cannot be changed
   2. B. Cash value invested in separate account subaccounts at the owner's direction
   3. C. Flexible premiums, with cost of insurance charges deducted from the account value
   4. D. Cash value that is forfeited if premiums are skipped
   Show the answer and rationale

   Correct answer: C. Flexible premiums, with cost of insurance charges deducted from the account value

   Universal life has flexible premiums: within limits the owner chooses the timing and amount, and monthly cost of insurance and expense charges are deducted from the account value. The policy can lapse if the account value is insufficient to cover the charges.

   • A: Fixed premium and benefit describe traditional whole life, not UL.
   • B: Owner-directed subaccounts describe variable (universal) life, not traditional UL.
   • D: Cash value is not forfeited; the policy lapses only when account value cannot cover charges.

   Sources: NYLIAC Variable Universal Life prospectus: flexible premiums, monthly deductions, lapse (SEC EDGAR; a VUL, cited for the shared UL mechanics)

6. Question 6 · Life insurance: variable life

   Under a variable life insurance policy, who bears the investment risk of the separate account?

   1. A. The insurer, which guarantees the separate account cash value
   2. B. The policyowner, because cash values vary with investment performance
   3. C. The beneficiary, who receives the account value instead of the face amount
   4. D. The state guaranty association, which backs separate account returns
   Show the answer and rationale

   Correct answer: B. The policyowner, because cash values vary with investment performance

   In variable life, premiums are allocated to separate account subaccounts and the cash value is not guaranteed; the policyowner bears the investment risk. The death benefit has a guaranteed minimum (the face amount) but may rise with performance. Variable life policies are securities subject to federal securities law as well as state insurance regulation.

   • A: The insurer guarantees a minimum death benefit, but not the separate account cash value.
   • C: The beneficiary has no investment role; the owner holds the contract risk.
   • D: Guaranty associations do not guarantee investment performance.

   Sources: NYLIAC Variable Universal Life prospectus (SEC EDGAR); Variable life insurance (Cornell LII Wex)

7. Question 7 · Life insurance: indexed universal life

   An indexed universal life policy credits interest based on the change in an equity index, subject to a cap rate and a floor of 0%. In a year when the index falls 12%, what interest credit is expected on the indexed account?

   1. A. Negative 12%
   2. B. 0%, because of the floor
   3. C. The cap rate
   4. D. 12%, because the index moved by that amount
   Show the answer and rationale

   Correct answer: B. 0%, because of the floor

   Indexed UL does not invest directly in the index. The credited rate is linked to index movement, limited by a cap, and protected by a floor that is typically 0%. When the index declines, the floor means no negative index credit, though policy charges are still deducted.

   • A: A 0% floor prevents the index loss from being passed through as a negative credit.
   • C: The cap is the maximum possible credit, not what is credited in a down year.
   • D: The credit is not the absolute index change; a decline produces no gain.

   Sources: Mutual of Omaha indexed UL guide: 0% floor, cap rate, one-year participation (opened PDF)

8. Question 8 · Life insurance: riders

   A policy includes a waiver of premium rider. The insured becomes totally disabled as defined by the rider and the waiting period is satisfied. What is the effect?

   1. A. The policy's face amount is paid to the insured.
   2. B. Premiums are waived during the disability and the policy remains in force.
   3. C. The policy is converted to paid-up term insurance.
   4. D. The insurer refunds all premiums previously paid.
   Show the answer and rationale

   Correct answer: B. Premiums are waived during the disability and the policy remains in force.

   The waiver of premium rider frees the insured from paying premiums while totally disabled as the rider defines it, typically after a waiting period (often about six months). The policy stays in force.

   • A: The face amount is payable at death, not on disability.
   • C: The rider does not change the type of coverage.
   • D: Past premiums are not refunded; future premiums are waived.

   Sources: Other Life Insurance Options and Riders (thismatter.com)

9. Question 9 · Life insurance: riders

   A 25-year-old buys a policy with a guaranteed insurability rider. What does the rider allow?

   1. A. Receiving part of the death benefit early if terminally ill
   2. B. Increasing the death benefit automatically each year with the consumer price index
   3. C. Doubling the death benefit if death results from an accident
   4. D. Buying additional coverage at set intervals without evidence of insurability
   Show the answer and rationale

   Correct answer: D. Buying additional coverage at set intervals without evidence of insurability

   The guaranteed insurability (guaranteed purchase option) rider lets the owner buy more coverage at set intervals or on specified life events, up to an age limit, without evidence of insurability. The added coverage is priced at the premium for the new amount.

   • A: That describes an accelerated benefits rider.
   • B: That describes a cost-of-living rider.
   • C: That describes an accidental death benefit rider.

   Sources: Other Life Insurance Options and Riders (thismatter.com)

10. Question 10 · Life insurance: accelerated benefits

    An insured with a $100,000 policy is diagnosed as terminally ill and receives $40,000 under an accelerated benefits rider. How does this affect the benefit paid to the beneficiary at death?

    1. A. It is unchanged at $100,000.
    2. B. It is reduced by the amount advanced and any related charges.
    3. C. It increases because the rider adds accidental death coverage.
    4. D. It is eliminated and the policy terminates immediately.
    Show the answer and rationale

    Correct answer: B. It is reduced by the amount advanced and any related charges.

    An accelerated benefits rider pays part of the death benefit early, for example for terminal illness. The amount advanced (and any related charges or interest) is subtracted from what is later paid at death, and the face amount and cash value are reduced accordingly. A partial acceleration does not end the policy. (Federal tax: amounts paid to a terminally ill insured are treated as death proceeds under 26 USC 101(g).)

    • A: The advance comes from the death benefit, so the later payout falls.
    • C: The rider is not an accidental death rider and does not add coverage.
    • D: A partial acceleration does not terminate the policy.

    Sources: Other Life Insurance Options and Riders (thismatter.com); 26 U.S.C. 101(g) - accelerated death benefits (Cornell LII); IRS Publication 525 - Accelerated Death Benefits

11. Question 11 · Life insurance: beneficiaries

    A policyowner explicitly names his sister as an irrevocable beneficiary. What does this mean for the owner's ability to change the beneficiary?

    1. A. He can change the beneficiary at any time by written request.
    2. B. He cannot change the beneficiary without her consent.
    3. C. The sister must also pay the premiums.
    4. D. The sister automatically owns the policy.
    Show the answer and rationale

    Correct answer: B. He cannot change the beneficiary without her consent.

    An irrevocable beneficiary has a vested right, so the owner cannot remove or replace her without her consent. By contrast, a beneficiary not explicitly designated irrevocable can be changed without the previous beneficiary's consent (e.g., Wis. Stat. 632.48(1)(b)). Whether other actions such as loans, assignments or surrender also need her consent depends on the policy and state law.

    • A: Free changes describe a revocable designation.
    • C: Premium payment obligation is unrelated to beneficiary status.
    • D: Beneficiary designation does not transfer ownership.

    Sources: Wis. Stat. 632.48 - changing a beneficiary not explicitly irrevocable (opened); N.Y. Insurance Law 3113 - irrevocable beneficiary consent for borrowing or change (court-ordered context, opened)

12. Question 12 · Life insurance: beneficiaries

    A $300,000 policy names the insured's three children equally as primary beneficiaries on a per stirpes basis, meaning the proceeds are divided into equal shares at the children's level and a deceased child's share passes to her descendants. One child died before the insured and left two surviving children. The other two children survive. How much does each grandchild receive?

    1. A. $100,000
    2. B. $50,000
    3. C. $75,000
    4. D. $150,000
    Show the answer and rationale

    Correct answer: B. $50,000

    Per stirpes divides the proceeds into equal shares at the children's level: one share for each surviving child and one for each deceased child who left surviving descendants. Here that is three shares of $100,000. The deceased child's $100,000 passes to her two children, $50,000 each. Equal division among all living takers (the classic per capita result) would instead give four shares of $75,000.

    • A: $100,000 is the deceased child's whole branch share, which her two children split.
    • C: $75,000 would result from dividing equally among the four living takers (two children and two grandchildren), which ignores the branches.
    • D: $150,000 is half the proceeds; no branch is entitled to half.

    Sources: HRS 560:2-709 - per stirpes and per capita at each generation (UPC 2-709 as enacted in Hawaii, opened)

13. Question 13 · Life insurance: nonforfeiture options

    A policyowner stops paying premiums on a whole life policy and elects the nonforfeiture option that uses the cash value to continue the original face amount as term coverage for a limited time. Which option is this?

    1. A. Extended term insurance
    2. B. Reduced paid-up insurance
    3. C. Automatic premium loan
    4. D. Cash surrender
    Show the answer and rationale

    Correct answer: A. Extended term insurance

    Extended term insurance applies the net cash surrender value as a single premium for term coverage at the policy's stated amount (including paid-up additions, reduced by policy debt) for as long as that value will purchase. Reduced paid-up instead keeps permanent coverage in a smaller amount.

    • B: Reduced paid-up keeps permanent coverage but at a lower face amount.
    • C: An automatic premium loan borrows to pay premiums and keeps the policy in force; it is not a nonforfeiture option.
    • D: Cash surrender ends the coverage rather than continuing it.

    Sources: N.Y. Insurance Law 4220 - nonforfeiture benefits: extended term and reduced paid-up (opened); Nonforfeiture Options and Cash Value (Open Exam Prep, opened)

14. Question 14 · Life insurance: settlement options

    A beneficiary selects a life income with 10-years-certain settlement option and names her son as contingent payee. She dies after receiving payments for four years. What happens to the payments?

    1. A. They continue to the contingent payee for the remaining six years of the certain period.
    2. B. They stop immediately because the payee died.
    3. C. The remaining payments are made for the contingent payee's lifetime.
    4. D. The insurer keeps the remaining payments because the payee's life ended the contract.
    Show the answer and rationale

    Correct answer: A. They continue to the contingent payee for the remaining six years of the certain period.

    Life income with period certain pays for the payee's life or the certain period, whichever is longer. If the payee dies during the period, the remaining guaranteed payments go to the named contingent payee. If she lives past the period, payments continue for her lifetime.

    • B: That is a straight life income option, which has no certain period.
    • C: The guarantee covers only the remainder of the certain period, not the successor's lifetime.
    • D: The certain period is a guarantee, so the insurer cannot retain the remaining payments.

    Sources: Life income with period certain option (IRMI); Life insurance settlement options (Western & Southern)

15. Question 15 · Life insurance: underwriting and risk classification

    Which situation best illustrates adverse selection in life insurance?

    1. A. An insurer places applicants with similar mortality risk into the same premium class
    2. B. An insurer declines a request because the amount is not supported by the proposed insured's income
    3. C. A producer collects the initial premium with the application
    4. D. People who know they are in poor health apply for large amounts of coverage at standard rates
    Show the answer and rationale

    Correct answer: D. People who know they are in poor health apply for large amounts of coverage at standard rates

    Adverse selection is the tendency of people with a higher-than-average chance of loss to seek insurance more actively than others. Underwriting (risk classification, evidence of insurability, limits on amounts) lets the insurer charge premiums that fit the risk and keeps the pool balanced.

    • A: Grouping like risks is classification, a tool used to counter adverse selection.
    • B: Declining for lack of financial justification is an underwriting control, not adverse selection.
    • C: Collecting the initial premium concerns when coverage begins, not who applies.

    Sources: IRMI: Adverse selection

16. Question 16 · Annuities: fixed versus variable

    During the accumulation period of a variable annuity, who bears the investment risk of the separate account subaccounts?

    1. A. The insurer, because it guarantees principal and a minimum interest rate on the subaccounts
    2. B. The contract owner, because values rise and fall with the performance of the chosen subaccounts
    3. C. The insurer, because its general account guarantees the value of every subaccount
    4. D. The beneficiary, because the beneficiary receives any remaining value
    Show the answer and rationale

    Correct answer: B. The contract owner, because values rise and fall with the performance of the chosen subaccounts

    In a variable annuity the owner allocates premiums among subaccounts that resemble mutual funds. The rate of return, and therefore the account value, can go up or down, and there is no guarantee of return, so the owner can lose money. A fixed annuity, by contrast, credits a declared or guaranteed rate backed by the insurer.

    • A: That describes a fixed annuity; subaccount values are not guaranteed.
    • C: Subaccount values are not guaranteed by the insurer; they follow investment results.
    • D: The beneficiary has no ownership interest during accumulation and bears no investment risk then.

    Sources: FINRA: Annuities; Cornell LII Wex: Annuity

17. Question 17 · Annuities: surrender charges

    The owner of a deferred annuity is in the fifth contract year of a seven-year surrender charge period. The contract allows a penalty-free withdrawal each year, and the owner withdraws more than that amount. Which statement is correct?

    1. A. A surrender charge applies only when the contract is annuitized
    2. B. A surrender charge is a tax that the IRS imposes on early withdrawals
    3. C. A surrender charge may apply to the amount withdrawn above the penalty-free amount
    4. D. A surrender charge applies to the entire account value whatever amount is withdrawn
    Show the answer and rationale

    Correct answer: C. A surrender charge may apply to the amount withdrawn above the penalty-free amount

    A surrender charge is a fee owed to the insurer by an owner who withdraws or surrenders during the surrender period. Contracts commonly allow a penalty-free amount each year, so the charge is applied to the excess withdrawn. It is separate from income tax and from the federal 10 percent additional tax on taxable distributions before age 59 1/2.

    • A: Surrender charges attach to withdrawals or surrenders, not to annuitization.
    • B: A surrender charge is a contractual fee paid to the insurer, not a tax; the IRS additional tax is separate.
    • D: The charge is based on the amount withdrawn, not the whole account value.

    Sources: FINRA: Annuities; IRS Publication 575 (Pension and Annuity Income)

18. Question 18 · Annuities: payout options

    A retiree annuitizes a contract under a life income with 10-years-certain option and a named beneficiary, and dies after receiving payments for six years. Assuming the beneficiary takes the remaining guaranteed installments as scheduled, what happens next?

    1. A. The insurer pays the beneficiary the installments for the remaining four years of the certain period
    2. B. All payments stop because the annuitant has died
    3. C. The insurer pays the beneficiary a lump sum equal to the original premium regardless of payments made
    4. D. The insurer pays the beneficiary for the rest of the beneficiary's life
    Show the answer and rationale

    Correct answer: A. The insurer pays the beneficiary the installments for the remaining four years of the certain period

    Life income with period certain pays the annuitant for life but guarantees payments for at least the stated period. If the annuitant dies within that period, the remaining guaranteed payments go to the beneficiary. A straight life option has no such guarantee.

    • B: Stopping all payments describes a straight life annuity; the period certain guarantees ten years of payments.
    • C: The guarantee is for the remaining payments in the period, not a refund of the full premium.
    • D: Payments last only for the unexpired certain period, not for the beneficiary's lifetime.

    Sources: Cornell LII Wex: Annuity; IRS Publication 575 (Pension and Annuity Income)

19. Question 19 · Federal taxation: life insurance death benefit

    A beneficiary receives a $200,000 lump-sum death benefit on the death of the insured. The policy was never transferred for value. Under federal tax law, the death benefit is generally

    1. A. excluded from the beneficiary's gross income
    2. B. taxable as ordinary income to the extent it exceeds the premiums paid
    3. C. taxable as a long-term capital gain
    4. D. taxable as ordinary income unless the beneficiary is the insured's spouse
    Show the answer and rationale

    Correct answer: A. excluded from the beneficiary's gross income

    Life insurance proceeds paid by reason of the insured's death are generally excluded from the beneficiary's gross income under IRC Section 101(a). Exceptions include a transfer for valuable consideration, and interest earned on proceeds the insurer holds and pays out is taxable.

    • B: Premiums paid do not limit the exclusion of a lump-sum death benefit.
    • C: Death benefits are not treated as capital gains.
    • D: The exclusion is not limited to spouses.

    Sources: 26 U.S.C. 101 (Certain death benefits)

20. Question 20 · Federal taxation: modified endowment contracts

    A life insurance policy entered into after 1988 is a modified endowment contract (MEC) because it failed the 7-pay test. The owner is 45 and not disabled. Immediately before the transaction the cash value is $40,000 and the owner's investment in the contract (total premiums paid, with no earlier distributions or taxable loans) is $30,000. The owner takes an $8,000 policy loan. Assume no other MECs with the same insurer and ignore loan interest. Which result applies?

    1. A. Nothing is taxed because policy loans are never income
    2. B. $8,000 is included in income, with no additional tax because loans are exempt from the 10 percent tax
    3. C. $8,000 is included in income, and a 10 percent additional tax of $800 generally applies
    4. D. $2,000 is included in income, because only the proportion of gain is taxed
    Show the answer and rationale

    Correct answer: C. $8,000 is included in income, and a 10 percent additional tax of $800 generally applies

    A policy that fails the 7-pay test of IRC 7702A(b) is a MEC. A loan from a MEC is treated as an amount received (IRC 72(e)(4)(A), 72(e)(10)) and is taxed to the extent of gain first (income is recovered before basis). Gain is $40,000 - $30,000 = $10,000, so the full $8,000 is taxable. IRC 72(v) adds a 10 percent tax on the taxable amount ($800) unless an exception such as age 59 1/2, disability or substantially equal periodic payments applies; none does here.

    • A: Loans from a MEC are treated as distributions, unlike loans from a non-MEC policy.
    • B: Section 72(v) applies to loans treated as amounts received; the exceptions are age 59 1/2, disability and periodic payments.
    • D: MEC distributions are taxed gain first, not proportionally (proportional would give $2,000).

    Sources: 26 U.S.C. 7702A; 26 U.S.C. 72 (Annuities; certain proceeds of life insurance contracts)

21. Question 21 · Federal taxation: Section 1035 exchange

    Which exchange can generally qualify for tax-free treatment under IRC Section 1035?

    1. A. An annuity contract exchanged for a life insurance policy
    2. B. A life insurance policy exchanged for shares of a mutual fund
    3. C. A life insurance policy exchanged for a certificate of deposit
    4. D. A life insurance policy exchanged for a fixed annuity contract
    Show the answer and rationale

    Correct answer: D. A life insurance policy exchanged for a fixed annuity contract

    Section 1035 permits tax-free exchanges of life insurance for life insurance, endowment or annuity contracts, and annuity for annuity, among others. Direction matters: an annuity cannot be exchanged tax-free for a life policy. Exchanges into non-insurance products are taxable.

    • A: An annuity-to-life exchange is not covered by Section 1035.
    • B: A mutual fund is not an insurance contract, so the exchange is taxable.
    • C: A certificate of deposit is not an insurance contract, so the exchange is taxable.

    Sources: 26 U.S.C. 1035 (Certain exchanges of insurance policies)

22. Question 22 · Federal taxation: annuity gains and early withdrawal

    A 52-year-old individual owns a non-qualified deferred annuity. All premiums were paid after August 13, 1982. Immediately before a partial withdrawal, the value is $150,000 and the cost basis (investment in the contract) is $100,000. The owner withdraws $20,000 before the annuity starting date. The owner is not disabled, the withdrawal is not part of substantially equal periodic payments, and no other exception applies. Which statement is correct?

    1. A. $6,667 is included in income because gain is taxed pro rata, and the additional tax is $667
    2. B. Nothing is taxable because basis is recovered first, and no additional tax applies
    3. C. $20,000 is included in income, with no additional tax because the withdrawal is under 25 percent of value
    4. D. $20,000 is included in income, and a 10 percent additional tax of $2,000 generally applies
    Show the answer and rationale

    Correct answer: D. $20,000 is included in income, and a 10 percent additional tax of $2,000 generally applies

    For non-qualified annuity amounts received before the annuity starting date, the amount is allocated first to earnings (IRC 72(e)(2)(B); IRS Pub 575). Gain is $150,000 - $100,000 = $50,000, so the entire $20,000 is ordinary income. Because the owner is under 59 1/2 and no exception applies, a 10 percent additional tax on the taxable part ($2,000) applies under IRC 72(q). Annuitized payments use an exclusion ratio instead; a pro rata approach would give $6,667 taxable and $667 additional tax.

    • A: Pro rata treatment applies to annuitized payments, not to withdrawals from post-1982 contracts.
    • B: For these withdrawals gain, not basis, is recovered first.
    • C: No 25 percent exception to the additional tax exists.

    Sources: 26 U.S.C. 72 (Annuities; certain proceeds of life insurance contracts); IRS Publication 575 (Pension and Annuity Income)

23. Question 23 · Group life insurance

    Under a group life insurance plan sponsored by an employer, who receives the master contract and who receives a certificate of insurance?

    1. A. The employer, as policyholder, receives the master contract; each insured employee receives a certificate
    2. B. Each insured employee receives the master contract; the employer, as policyholder, receives a certificate
    3. C. The insurer keeps the master contract and issues no documents to the employer
    4. D. Each insured employee receives an individual policy; the employer receives a certificate
    Show the answer and rationale

    Correct answer: A. The employer, as policyholder, receives the master contract; each insured employee receives a certificate

    Group life is written under a master contract issued to the group policyholder, such as an employer. State group life laws, for example W. Va. Code 33-14-15, require the insurer to issue to the policyholder, for delivery to each person insured, an individual certificate stating the coverage, to whom benefits are payable, and related rights.

    • B: The master contract is delivered to the group policyholder, not the employees.
    • C: The master contract is issued to and held by the group policyholder.
    • D: Group members receive certificates, not individual policies.

    Sources: W. Va. Code 33-14-15 (Group life: certificates)

24. Question 24 · Contract law: representations and warranties

    A proposed insured answers the health questions on a life insurance application. Under typical state insurance statutes, those answers are treated as

    1. A. warranties, which must be literally true, so any inaccuracy voids the contract
    2. B. conditions precedent that take effect only after a loss
    3. C. representations, which defeat recovery only if the misstatement is material or fraudulent
    4. D. warranties that are enforced only if the insurer also signs the application
    Show the answer and rationale

    Correct answer: C. representations, which defeat recovery only if the misstatement is material or fraudulent

    State statutes typically deem application statements representations and not warranties (for example W. Va. Code 33-6-7). A misrepresentation does not prevent recovery unless it is fraudulent or material (N.C. Gen. Stat. 58-3-10: 'a representation, unless material or fraudulent, will not prevent a recovery on the policy'). Exact tests vary by state.

    • A: Application answers are generally representations, not strict warranties.
    • B: Application answers are statements made at issue, not conditions triggered by a loss.
    • D: Warranty status does not depend on whether the insurer signs.

    Sources: W. Va. Code 33-6-7; N.C. Gen. Stat. 58-3-10

25. Question 25 · Policy provisions: incontestable clause

    A life policy contains a standard two-year incontestable clause. The policy has stayed in force with premiums paid, and the insured dies in the fourth policy year. The insurer then discovers that the insured unintentionally omitted a health condition on the application. In general, the insurer

    1. A. may rescind because a material misrepresentation voids a policy at any time
    2. B. may deny the claim only if the beneficiary also knew of the omission
    3. C. cannot contest the policy for the omission because the contestable period has ended
    4. D. may deny the claim and refund the premiums paid because the omission was material
    Show the answer and rationale

    Correct answer: C. cannot contest the policy for the omission because the contestable period has ended

    After the policy has been in force for the incontestable period (two years in the standard provision), the insurer generally cannot use application statements to contest its validity; N.C. Gen. Stat. 58-58-22 bars contesting validity after two years in force except for nonpayment of premium. Some states allow narrow exceptions (e.g., fraud), which the stem excludes.

    • A: The incontestable clause is what limits rescission after the period.
    • B: The beneficiary's knowledge is not an exception to the clause.
    • D: A refund-and-deny remedy is rescission, which the clause bars after the period.

    Sources: N.C. Gen. Stat. 58-58-22 (required life policy provisions)

26. Question 26 · Policy provisions: misstatement of age

    After the insured's death, an insurer finds that the insured's age was overstated on the application, so premiums were higher than they should have been. The policy has the standard misstatement-of-age provision that adjusts the benefit. What is the general result?

    1. A. The death benefit is adjusted to what the premiums paid would have bought at the true age
    2. B. The policy is void because of a material misrepresentation of age
    3. C. The insurer pays the stated face amount unchanged and makes no adjustment
    4. D. The beneficiary receives only a refund of the premiums paid, without interest
    Show the answer and rationale

    Correct answer: A. The death benefit is adjusted to what the premiums paid would have bought at the true age

    State law requires a provision for an equitable adjustment when age is misstated (N.C. Gen. Stat. 58-58-22(3)); the standard provision adjusts the benefit to what the premium paid would have purchased at the correct age. Because age was overstated, premiums were too high, so the benefit is adjusted upward. The policy is not voided.

    • B: Age misstatement is handled by adjusting benefits, not by voiding the policy.
    • C: The provision calls for an adjustment, not payment of the stated face amount unchanged.
    • D: A refund of premiums is not the remedy under the provision.

    Sources: N.C. Gen. Stat. 58-58-22 (required life policy provisions)

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