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BIA Diploma in Life Insurance study materials
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BIA Diploma in Life Insurance practice questions

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Question 1Life Insurance Principles and Practice

Which principle explains why a person taking out life insurance must have a financial interest in the continued life of the person insured?

  1. Insurable interest Correct answer.
  2. Contribution
  3. Subrogation
  4. Indemnity

Explanation

Insurable interest requires that the policyholder would suffer genuine financial loss if the life insured died, which prevents the use of insurance as a wager. Insurers rely on this principle to reduce moral hazard and to keep the contract enforceable at inception. Without it, a stranger could profit from another person's death.

Question 2Life Insurance Principles and Practice

A life policy names the insured's spouse as beneficiary, but the insured later dies and the insurer pays the sum assured to the spouse. What is the role of the beneficiary in this contract?

  1. The person whose life is measured for the contract
  2. A party who receives the benefit but is not usually the contracting party Correct answer.
  3. The underwriter who assesses the risk
  4. The agent who arranged the sale

Explanation

The beneficiary is the person designated to receive the death benefit, while the policyholder remains the party contracting with the insurer. The beneficiary usually has no obligation to pay premiums and may have no contractual duties at all. This separation is a defining feature of life insurance compared with most general insurance.

Question 3Life Insurance Principles and Practice

Which characteristic most clearly distinguishes life insurance from most general insurance contracts?

  1. It is always arranged by a broker
  2. It never requires disclosure of health information
  3. It cannot be cancelled by the policyholder
  4. It is a long-term contract whose insured event is certain to occur eventually Correct answer.

Explanation

Death is inevitable, so a life policy is not covering a contingency that may never happen but timing the payment of an event that will occur. This supports long-term contracts, level or increasing premiums, and cash values in some designs. General insurance instead covers events that may or may not happen during a short period.

Question 4Life Insurance Principles and Practice

In life insurance terminology, what does the sum assured represent?

  1. The total premiums the policyholder will ever pay
  2. The amount the insurer promises to pay on the insured event Correct answer.
  3. The surrender value available in the first year
  4. The commission paid to the intermediary

Explanation

The sum assured is the contractual benefit payable when the insured event occurs, such as death or survival to maturity. Premiums are calculated by reference to it, but the two figures are not the same. It is set at inception and may be adjusted by options or bonuses depending on policy terms.

Question 5Life Insurance Principles and Practice

Which type of life policy provides protection for a fixed period and pays only if death occurs during that period?

  1. Endowment insurance
  2. Term insurance Correct answer.
  3. Whole life insurance
  4. Annuity

Explanation

Term insurance covers a defined period and pays the sum assured only if death happens within it, with no benefit if the insured survives. Because there is no savings element, it usually offers the highest death cover for a given premium. Whole life and endowment contracts, by contrast, guarantee a payout eventually or at maturity.

Question 6Life Insurance Principles and Practice

What is the main purpose of underwriting in life insurance?

  1. To reduce the number of claims paid by denying valid cover
  2. To classify risks so that premiums reflect expected claims experience Correct answer.
  3. To increase the commission earned by agents
  4. To satisfy statutory capital requirements only

Explanation

Underwriting gathers and assesses information about the proposed life so that applicants are placed in groups with similar expected mortality. Premiums can then be set fairly across those groups, and substandard risks may be accepted with extra premiums or exclusions. This protects the insurer's solvency and treats policyholders equitably.

Question 7Life Insurance Principles and Practice

Which of the following best describes the principle of utmost good faith in a life insurance contract?

  1. The insurer must always pay claims within one week
  2. Both parties must disclose material facts fully and honestly Correct answer.
  3. The agent must guarantee the policy will perform well
  4. The policyholder must pay premiums in cash only

Explanation

Utmost good faith requires each party to volunteer material information the other could not reasonably discover, particularly the applicant's health and habits. It applies to the insurer too, for example in disclosing unusual policy terms. Breach can allow the innocent party to avoid the contract.

Question 8Life Insurance Principles and Practice

A policyholder stops paying premiums and the policy lapses without value. What is the immediate consequence for the life cover?

  1. The sum assured is automatically doubled
  2. The insurer must refund all premiums paid
  3. The cover ends and no benefit is payable unless the policy is reinstated Correct answer.
  4. The policy converts into a paid-up whole life policy

Explanation

When premiums cease and no surrender or paid-up value is available, the contract lapses and the insurer's obligation to pay the death benefit ends. The policyholder may later apply for reinstatement, usually with evidence of insurability and payment of arrears. Refunds of past premiums are not automatic in protection policies.

Question 9Life Insurance Principles and Practice

An applicant deliberately conceals a diagnosed heart condition when completing a life insurance proposal. The insurer later discovers this after the insured dies. What is the insurer's most likely legal position?

  1. It can only cancel cover after the next premium due date
  2. It must pay the claim but may increase future premiums
  3. It has no remedy because the policy has already been issued
  4. It may avoid the contract for breach of the duty of disclosure Correct answer.

Explanation

Deliberate non-disclosure of a material fact allows the insurer to avoid the contract, meaning it can treat the policy as never having existed and refuse the claim. Materiality is judged by whether a prudent underwriter would have been influenced by the fact. Remedies may be limited by statute or by the insurer's own practices in some jurisdictions.

Question 10Life Insurance Principles and Practice

A 45-year-old non-smoker applies for a 20-year term policy with a sum assured of 500,000. Which factor will most directly reduce the premium compared with a 55-year-old smoker applying for identical cover?

  1. A shorter policy term for the younger applicant
  2. A larger sum assured for the younger applicant
  3. Payment of premiums by monthly instalments
  4. Lower expected mortality for the younger non-smoker Correct answer.

Explanation

Premiums are based on expected mortality, and younger non-smokers show markedly lower death rates than older smokers over the same period. Age and smoking status are among the strongest rating factors in life underwriting. The term and sum assured described are identical, so they cannot explain the difference.

Question 11Life Insurance Principles and Practice

Which arrangement allows a policyholder to transfer ownership of a life policy to another person while the insured life remains unchanged?

  1. Reinstatement of the policy
  2. Conversion of the policy
  3. Assignment of the policy Correct answer.
  4. Surrender of the policy

Explanation

Assignment transfers the rights and benefits of a policy to an assignee, either absolutely or as security for a debt. The life insured stays the same, but the new owner controls the policy and receives benefits. This is commonly used in mortgage protection and business planning.

Question 12Life Insurance Principles and Practice

A whole life policy has a cash value of 40,000 and the policyholder has an outstanding policy loan of 12,000. If the policy is surrendered, what amount is typically payable before any surrender charge?

  1. 28,000 Correct answer.
  2. 52,000
  3. 40,000
  4. 12,000

Explanation

A policy loan is secured against the cash value, so on surrender the outstanding loan and accrued interest are deducted from the surrender value. The net amount is therefore the cash value less the loan balance. Surrender charges, if any, would then be applied to that figure.

Question 13Life Insurance Principles and Practice

Which statement correctly describes the free-look period in a life insurance contract?

  1. The policyholder may skip the first premium without losing cover
  2. The beneficiary may change the policy terms at any time
  3. The insurer may cancel the policy without reason during the first year
  4. The policyholder may cancel within a stated period and receive a refund of premiums Correct answer.

Explanation

A free-look provision gives the buyer a short period after delivery to reconsider and cancel for a refund, subject to adjustment for any cover already provided. It is a consumer protection feature common in life insurance. It does not give the insurer a right to cancel or the beneficiary any power over terms.

Question 14Life Insurance Principles and Practice

An insurer calculates that a proposed insured has a significantly higher mortality risk than standard lives but is still insurable. Which underwriting outcome is most appropriate?

  1. Postpone the decision indefinitely
  2. Decline the application automatically
  3. Accept the risk with an extra premium or exclusion Correct answer.
  4. Accept at standard rates without conditions

Explanation

Substandard risks can often be insured if the insurer charges a rating that reflects the extra mortality, such as an additional premium, a lien, or a specific exclusion. Declining is reserved for risks the insurer is unwilling to take at all. Standard rates would unfairly subsidise the higher risk by other policyholders.

Question 15Life Insurance Principles and Practice

What is the primary function of a life insurer's actuarial reserve?

  1. To fund the sales commission of new agents
  2. To pay shareholder dividends each year
  3. To cover the insurer's office rent
  4. To hold funds sufficient to meet future policy obligations Correct answer.

Explanation

Reserves are liabilities recognised for promises already made, representing the present value of expected future benefits less future premiums. They protect the insurer's ability to pay claims as policies mature. They are not a profit distribution or a general expense fund.

Question 16Life Insurance Principles and Practice

A policyholder with a participating whole life policy receives an annual dividend. Which statement best explains the source of that dividend?

  1. A refund of the policyholder's own premiums
  2. A payment from the insurer's share capital
  3. A guaranteed interest payment on the sum assured
  4. A share of surplus arising from favourable experience relative to assumptions Correct answer.

Explanation

Participating policyholders share in the insurer's divisible surplus, which arises when actual mortality, expenses, or investment returns are better than assumed. Dividends are therefore not guaranteed and can vary year to year. They are distinct from a refund of premium or a capital distribution.

Question 17Life Insurance Principles and Practice

Which of the following persons would generally have insurable interest in the life of a business partner?

  1. The other partner in the same business Correct answer.
  2. A supplier with no financial exposure to the partner
  3. A competitor of the business
  4. A casual acquaintance of the partner

Explanation

Business partners often have a financial interest because the death of one partner can cause loss through buyout obligations or disruption. Insurance is commonly arranged under a partnership or key person arrangement. Mere acquaintance, competition, or a remote supply relationship does not create the required financial loss.

Question 18Life Insurance Principles and Practice

What is the effect of a suicide clause in a life insurance policy?

  1. It permanently excludes all deaths caused by accident
  2. It requires the beneficiary to prove the cause of death in every case
  3. It limits or excludes payment if death by suicide occurs within a stated initial period Correct answer.
  4. It increases the sum assured after the first year

Explanation

A suicide clause typically restricts the insurer's liability, for example by returning premiums only, if the insured dies by suicide within the first one or two years. After that period the full benefit is normally payable. This protects the insurer against anti-selection while limiting long-term exclusion.

Question 19Life Insurance Principles and Practice

A policyholder wants to stop paying premiums but retain a reduced paid-up whole life policy. Which policy feature makes this possible?

  1. An accidental death benefit rider
  2. A guaranteed insurability option
  3. Accumulated cash value used to fund a smaller continuing benefit Correct answer.
  4. A waiver of premium rider

Explanation

A non-forfeiture provision allows the cash value to be applied to a reduced paid-up policy or extended term cover if premiums cease. The benefit is lower because the same value now supports a smaller amount of permanent cover. This protects the policyholder from total loss of value on lapse.

Question 20Life Insurance Principles and Practice

In a life insurance claim, what does the incontestability clause usually provide after a specified period?

  1. The policy automatically becomes paid up
  2. The insurer cannot deny the claim on grounds of misrepresentation in the application Correct answer.
  3. The beneficiary can request a higher benefit
  4. The insurer must pay double the sum assured

Explanation

After the contestability period, typically one or two years, the insurer generally cannot avoid the policy because of inaccurate statements in the application, apart from fraud or non-payment in many jurisdictions. This gives beneficiaries certainty that a long-standing policy will pay. It does not alter the benefit amount or premium status.

Question 21Life Insurance Principles and Practice

An insured dies from an illness that was diagnosed after the policy was issued but which was already present, though unknown to the insured, at application. How would the insurer typically assess the claim?

  1. Pay the claim because the insured did not knowingly misrepresent an unknown condition Correct answer.
  2. Reduce the benefit by half in all cases
  3. Delay payment until the beneficiary proves the diagnosis date
  4. Refuse the claim because any pre-existing condition voids cover

Explanation

Non-disclosure requires knowledge of the material fact; a condition genuinely unknown to the applicant cannot be misrepresented. Insurers generally pay such claims unless the policy contains a specific pre-existing condition exclusion. This reflects the good faith basis of the disclosure duty.

Question 22Life Insurance Principles and Practice

Which factor best explains why level premium whole life insurance costs more per year than a renewable term policy of the same sum assured at the same age?

  1. The whole life policy includes higher agent commission by law
  2. The term policy has no mortality risk to the insurer
  3. The whole life policy is always sold to older applicants
  4. The whole life premium funds lifelong cover and builds reserves for claims at older ages Correct answer.

Explanation

A level premium spreads the rising cost of mortality over the whole lifetime, so early years overpay relative to risk and build reserves that fund later claims. Term insurance covers only a limited period and can be priced lower for the same amount. The difference is structural, not caused by commission rules or applicant age.

Question 23Life Insurance Principles and Practice

A life insurer's mortality experience shows significantly more deaths than assumed among a block of policies. Which consequence is most likely if the trend continues?

  1. The insurer's investment returns automatically increase
  2. The sum assured on existing policies is reduced
  3. Policyholders receive higher dividends
  4. Reserves and premium adequacy come under pressure and rates may be revised for new business Correct answer.

Explanation

Adverse mortality means claims exceed the assumptions used to price premiums and set reserves, eroding surplus and threatening solvency. The insurer may strengthen reserves and reprice new business, while existing guaranteed premiums remain fixed. Higher dividends would be the opposite of what adverse experience produces.

Question 24Life Insurance Principles and Practice

An applicant for a large sum assured is asked to complete a medical examination and provide a report from a physician. Why does the insurer undertake this additional investigation?

  1. To obtain grounds for declining all large policies
  2. To reduce the time taken to issue the policy
  3. To comply with a rule that all applicants must be examined
  4. To verify material health information and price the larger risk accurately Correct answer.

Explanation

Higher sums assured expose the insurer to greater financial risk, so it gathers independent evidence to confirm disclosed information and detect undisclosed conditions. The results feed into the rating decision and may support special terms. Examinations are risk-based rather than universal, and they usually lengthen rather than shorten processing.

Question 25Life Insurance Principles and Practice

A policyholder assigns a policy absolutely to a lender as security for a mortgage. Which statement best describes the lender's position if the borrower dies before the loan is repaid?

  1. The lender receives the entire sum assured regardless of the debt balance
  2. The lender receives policy proceeds up to the outstanding debt and any excess passes to the estate or named beneficiary Correct answer.
  3. The lender becomes the life insured under the policy
  4. The assignment is void on the borrower's death

Explanation

A collateral assignment gives the lender a secured claim limited to the debt outstanding at death. Any surplus proceeds belong to the policyholder's estate or the beneficiary named under the policy. The lender does not become the life insured, and the assignment remains effective at death.

Question 26Life Insurance Principles and Practice

Which of the following best describes the purpose of a life insurance premium?

  1. It is a tax levied on the insured's estate after death
  2. It is a fee paid only when a claim is made
  3. It is the consideration paid by the policyholder for the insurer's promise to pay benefits Correct answer.
  4. It is a refundable deposit held in trust for the policyholder

Explanation

A premium is the consideration that makes the insurance contract legally binding and funds the insurer's pooled obligations. It covers expected mortality costs, expenses, and contributions to reserves rather than being a refundable deposit or a claim-time fee.

Question 27Life Insurance Principles and Practice

What does the term 'sum assured' mean in a life insurance policy?

  1. The guaranteed amount payable on the occurrence of the insured event Correct answer.
  2. The cash value accumulated at maturity
  3. The maximum amount the insurer may deduct for expenses
  4. The total premiums the policyholder is expected to pay

Explanation

The sum assured is the benefit stated in the contract that the insurer promises to pay when the insured event occurs. It is the core measure of cover and is distinct from premiums, expenses, and cash values.

Question 28Life Insurance Principles and Practice

Which party bears the mortality and investment risk in a traditional without-profits term insurance policy?

  1. The beneficiary, who must prove the loss
  2. The reinsurer alone, which sets the terms
  3. The policyholder, who absorbs all investment losses
  4. The insurer, which guarantees the death benefit Correct answer.

Explanation

In a without-profits term policy the insurer guarantees a fixed death benefit and bears the risk that claims or investment returns differ from assumptions. The policyholder simply pays a level premium for that guarantee.

Question 29Life Insurance Principles and Practice

What is a beneficiary in a life insurance policy?

  1. The agent who sold the policy
  2. The person or entity nominated to receive the death benefit Correct answer.
  3. The insurer's officer who approves the claim
  4. The person who medically examines the applicant

Explanation

A beneficiary is the party named in the policy to receive the proceeds when the insured dies. The nomination directs payment and is separate from underwriting, claims administration, and distribution roles.

Question 30Life Insurance Principles and Practice

Which of the following is a characteristic of term life insurance?

  1. It provides cover for a specified period and builds no significant cash value Correct answer.
  2. It pays dividends to all policyholders by law
  3. It guarantees lifelong cover with compulsory savings
  4. It cannot be renewed under any circumstances

Explanation

Term insurance provides protection for a defined period and is pure protection, so it generally accumulates no meaningful cash value. Permanent contracts, by contrast, may build cash value and last for life.

Question 31Life Insurance Principles and Practice

Which document normally sets out the insurer's promise to pay and the key terms of a life insurance contract?

  1. The application form alone
  2. The agent's sales brochure
  3. The insurer's annual report
  4. The policy document Correct answer.

Explanation

The policy document is the formal contract instrument containing the insurer's promise, conditions, exclusions, and definitions. Marketing material and the application may form part of the record but do not by themselves constitute the policy terms.

Question 32Life Insurance Principles and Practice

What is the main purpose of a policy exclusion clause?

  1. To guarantee payment in every circumstance
  2. To transfer ownership of the policy
  3. To increase the premium payable in later years
  4. To describe circumstances in which the insurer will not pay a claim Correct answer.

Explanation

Exclusions define specific events or conditions for which cover is not provided, thereby bounding the insurer's liability. They help keep premiums affordable by removing risks the insurer does not intend to underwrite.

Question 33Life Insurance Principles and Practice

Which of the following best describes the role of a life insurance agent in the sales process?

  1. To determine the final underwriting decision on each application
  2. To settle claims directly with the beneficiary
  3. To set the insurer's premium rates
  4. To advise the client, gather information, and submit a complete and accurate proposal Correct answer.

Explanation

An agent's role is to assess client needs, explain the product, and ensure the proposal submitted is complete and truthful. Underwriting decisions, claims settlement, and rate-setting remain with the insurer's specialist functions.

Question 34Life Insurance Principles and Practice

An applicant's premium is calculated using a mortality table. What does such a table show?

  1. The administrative costs of issuing policies
  2. The expected number of deaths at each age in a defined population Correct answer.
  3. The commission payable to intermediaries
  4. The investment return earned by the insurer's fund

Explanation

A mortality table expresses the probability or number of deaths at each age within a reference population. Actuaries use it to estimate expected claims and derive premium rates.

Question 35Life Insurance Principles and Practice

A 30-year-old applicant takes out a 10-year term policy and asks what happens at the end of the term if the insured is still alive. Which outcome is typical when no claim has occurred?

  1. The insurer refunds all premiums with interest
  2. The policy automatically converts to an endowment without further premiums
  3. The cover ends and no death benefit is payable Correct answer.
  4. The sum assured is paid as a survival benefit

Explanation

Pure term insurance pays only on death within the term; if the insured survives, the cover simply expires with no benefit. Any renewal or conversion would depend on specific options in the contract.

Question 36Life Insurance Principles and Practice

An insurer wants to compare the mortality risk of smokers and non-smokers of the same age and sex. Which practice achieves this?

  1. Using the same rate for all occupations
  2. Relying solely on the applicant's stated income
  3. Charging every applicant an identical flat premium
  4. Applying premium loadings based on classified risk groups Correct answer.

Explanation

Risk classification groups lives with similar expected mortality and applies premiums that reflect those differences. This keeps pricing equitable so that lower-risk lives are not subsidising higher-risk lives.

Question 37Life Insurance Principles and Practice

A policyholder wishes to add cover that pays an additional sum if death results from an accident. Which type of benefit is being described?

  1. A waiver of premium benefit
  2. An accidental death rider Correct answer.
  3. A policy loan provision
  4. A cash value surrender option

Explanation

An accidental death rider provides an extra benefit when death is caused by accident as defined in the rider. It supplements the base sum assured rather than altering premium payment or cash value features.

Question 38Life Insurance Principles and Practice

An insured under a whole life policy dies while the policy is still in force and all premiums are paid. What is the insurer's basic obligation?

  1. To pay the sum assured to the nominated beneficiary, subject to policy terms Correct answer.
  2. To refund only the premiums paid to date
  3. To pay the cash value instead of the sum assured
  4. To cancel the policy without payment because death was unexpected

Explanation

On a valid death claim under an in-force policy, the insurer pays the contractual sum assured to the beneficiary, less any outstanding loans or adjustments. The cash value is not paid in place of the death benefit.

Question 39Life Insurance Principles and Practice

A policyholder surrenders a whole life policy with a cash value of 25,000 and an outstanding loan of 8,000. What amount is typically paid on surrender?

  1. 25,000
  2. 33,000
  3. 17,000 Correct answer.
  4. 8,000

Explanation

On surrender the insurer pays the cash surrender value after deducting any outstanding policy loan and accrued interest. The net amount here is 25,000 less 8,000, which equals 17,000.

Question 40Life Insurance Principles and Practice

Which statement correctly describes the role of a reinsurer in life insurance?

  1. It assumes part of the insurer's risk under an agreed treaty or facultative arrangement Correct answer.
  2. It regulates the solvency of the primary insurer
  3. It sells policies directly to the public instead of the insurer
  4. It acts as the beneficiary in every claim

Explanation

Reinsurance transfers part of the insurer's risk to a reinsurer under treaty or facultative agreements, protecting the insurer against large or concentrated claims. The reinsurer does not deal directly with the policyholder or act as regulator.

Question 41Life Insurance Principles and Practice

An applicant for a life policy is asked to disclose hobbies such as scuba diving and private flying. Why does the insurer seek this information?

  1. To calculate the agent's commission
  2. To assess whether the activities increase mortality risk and affect terms Correct answer.
  3. To confirm the applicant's employment history
  4. To determine the beneficiary's tax position

Explanation

Hazardous pursuits can raise the likelihood of accidental death, so underwriters use this information to decide whether to accept, load, or exclude the risk. It is a mortality assessment rather than an employment or tax enquiry.

Question 42Life Insurance Principles and Practice

Which of the following best explains why insurers hold actuarial reserves for life policies?

  1. To avoid paying claims in early years
  2. To fund the agent network's expenses
  3. To meet future policy obligations as they fall due Correct answer.
  4. To pay dividends to shareholders each year

Explanation

Actuarial reserves are liabilities set aside to meet expected future benefits under in-force policies. They support solvency and ensure the insurer can honour obligations when claims arise.

Question 43Life Insurance Principles and Practice

A policyholder has a participating whole life policy and the insurer declares a dividend. Which option allows the dividend to be used to buy additional permanent cover?

  1. Accumulation at interest option
  2. Cash payment option
  3. Premium reduction option
  4. Paid-up additions option Correct answer.

Explanation

Under the paid-up additions option, the dividend purchases a small amount of additional paid-up whole life cover, increasing the death benefit. The other options use the dividend for cash, lower premiums, or interest-bearing accumulation.

Question 44Life Insurance Principles and Practice

An insured under a term policy becomes totally and permanently disabled and a waiver of premium rider applies. What is the typical effect?

  1. The insurer pays the sum assured immediately
  2. The beneficiary receives the premium amount
  3. Future premiums are waived while the disability continues and the cover remains in force Correct answer.
  4. The policy is cancelled and the cash value refunded

Explanation

A waiver of premium rider waives premiums during qualifying disability so the policy stays in force without further payment. It does not accelerate the death benefit or cancel the cover.

Question 45Life Insurance Principles and Practice

Which of the following best describes the difference between a participating and a non-participating life policy?

  1. Participating policies share in the insurer's surplus through dividends; non-participating policies do not Correct answer.
  2. Participating policies have no death benefit; non-participating policies do
  3. Participating policies are always term; non-participating policies are always whole life
  4. Participating policies are issued only to businesses; non-participating policies only to individuals

Explanation

Participating policies give the policyholder a right to share in divisible surplus, usually through dividends, while non-participating policies offer fixed benefits with no such sharing. The distinction concerns surplus participation, not policy type or eligibility.

Question 46Life Insurance Principles and Practice

An insurer's premium includes a margin for adverse deviation. What is the purpose of this margin?

  1. To provide a cushion if actual experience is worse than assumed Correct answer.
  2. To reduce the sum assured paid at claim
  3. To eliminate the need for reserves
  4. To guarantee higher dividends to policyholders

Explanation

A margin for adverse deviation builds prudence into assumptions so that the insurer remains solvent if mortality, expenses, or investment returns are worse than expected. It does not alter the contractual benefit or remove the need for reserves.

Question 47Life Insurance Principles and Practice

Two insurers offer identical whole life cover to the same applicant. Insurer A charges a higher premium because it assumes a lower interest rate on its investments. What does this illustrate?

  1. That mortality is irrelevant to pricing
  2. That premium rates depend partly on the insurer's assumed investment return Correct answer.
  3. That expenses are always identical across insurers
  4. That the sum assured varies between identical policies

Explanation

Premium is built from assumptions about mortality, expenses, and interest earnings; a lower assumed return requires a higher premium to fund the same benefit. This shows how investment assumptions influence pricing even for identical cover.

Question 48Life Insurance Principles and Practice

An insured dies during the grace period after a premium due date, and the premium remains unpaid. How is a claim typically treated when the policy provides a grace period?

  1. The claim is paid only if the beneficiary pays double the premium
  2. The claim is denied because the premium was late
  3. The policy is treated as never having existed
  4. The claim is payable, with the unpaid premium deducted from the proceeds Correct answer.

Explanation

A grace period keeps cover in force for a stated time after the due date, so a death in that period is covered. The insurer normally deducts the outstanding premium from the benefit paid.

Question 49Life Insurance Principles and Practice

A life insurer notices that lapsed policies are concentrated among healthy younger policyholders, while older policyholders with health issues retain cover. Why does this concern the insurer?

  1. It eliminates the need for underwriting
  2. It reduces the number of agents required
  3. It worsens the mortality experience of the remaining pool, raising future costs Correct answer.
  4. It increases the insurer's investment return

Explanation

When healthier lives leave and higher-risk lives stay, the remaining pool has higher average mortality, a pattern known as adverse persistency. This can push claims above assumptions and increase the cost of future cover.

Question 50Life Insurance Principles and Practice

A policyholder has paid premiums for several years on a whole life policy and now needs cash. The policy has a cash value and the insurer offers a loan against it. Which statement best describes the effect of taking the loan?

  1. The loan plus accrued interest is deducted from the death benefit if not repaid Correct answer.
  2. The loan is interest-free and does not affect the death benefit
  3. The loan increases the sum assured by the borrowed amount
  4. The loan cancels the policy immediately

Explanation

A policy loan is an advance secured by the cash value, and any unpaid balance with interest is deducted from proceeds at claim or surrender. The policy remains in force while the loan and interest are serviced within limits.