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LLQP Life practice questions

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Question 1Life Insurance

Insurable interest must exist for a life insurance contract to be enforceable. When is that interest required?

  1. Only when the policy is assigned to a third party
  2. At both the time of application and the time of death
  3. Only at the time the application is submitted Correct answer.
  4. Only at the time of the insured's death

Explanation

Insurable interest is a legal requirement at the formation of the contract, meaning it must exist when the application is made and the policy is issued. It does not need to continue until death, because the policyowner may have a legitimate interest that later disappears.

Question 2Life Insurance

Under provincial insurance legislation, the standard grace period allowed for payment of an overdue life insurance premium is:

  1. 10 days
  2. 30 days Correct answer.
  3. 60 days
  4. 31 days

Explanation

Provincial insurance statutes require a grace period of 30 days for payment of a premium after the due date, during which the coverage remains in force. If the insured dies within that period, the overdue premium is simply deducted from the benefit.

Question 3Life Insurance

Which statement describes the income tax treatment of a life insurance death benefit paid to a named beneficiary in Canada?

  1. It is taxed as a capital gain
  2. Only the cash value portion is taxable
  3. It is fully taxable as ordinary income
  4. It is generally received tax-free Correct answer.

Explanation

A death benefit paid by reason of death to a named beneficiary is generally received free of income tax because the policy proceeds are not treated as income of the beneficiary. The policyowner's estate may, however, face other consequences such as probate fees if no beneficiary is named.

Question 4Life Insurance

A contingent beneficiary receives the death benefit when:

  1. The insured dies during the contestability period
  2. The primary beneficiary predeceases the insured Correct answer.
  3. The policy has been assigned to a lender
  4. The policyowner dies before the insured

Explanation

A contingent (or secondary) beneficiary is next in line and is paid only if no primary beneficiary is alive and able to receive the proceeds at the time of the insured's death. Naming a contingent beneficiary prevents the proceeds from falling into the estate.

Question 5Life Insurance

A waiver of premium rider provides that:

  1. The death benefit is doubled on accidental death
  2. Premiums are waived for one year following any hospital stay
  3. Premiums are refunded if the policy is cancelled
  4. Premiums are waived during qualifying total disability Correct answer.

Explanation

The waiver of premium rider keeps the policy in force by waiving premium payments once the insured satisfies the definition of total disability and any elimination period. Coverage and cash values continue to build as though premiums were being paid.

Question 6Life Insurance

Which factor has the greatest influence on the mortality cost built into a life insurance premium?

  1. The payment frequency selected
  2. The beneficiary's age
  3. The insured's age at issue Correct answer.
  4. The owner's marital status

Explanation

Mortality cost rises with age because the probability of death within a given year increases, so the insured's age at issue is the single largest driver of the premium. Other underwriting factors such as health, sex and occupation refine that base cost.

Question 7Life Insurance

Once a life insurance policy has been in force for two years, the insurer generally cannot deny a claim because of:

  1. Failure to name a contingent beneficiary
  2. Non-payment of premium
  3. A change of occupation by the insured
  4. Misrepresentation in the application Correct answer.

Explanation

The incontestability provision bars the insurer from rescinding the contract or denying a claim based on misrepresentation or non-disclosure after the policy has been in force for two years from issue. Fraudulent misrepresentation discovered within that period may still allow the insurer to act.

Question 8Life Insurance

The policyowner of a life insurance policy is the person who:

  1. Underwrites the contract on behalf of the insurer
  2. Must always be the same person as the insured
  3. Receives the death benefit when the insured person dies
  4. May name the beneficiary and surrender the policy Correct answer.

Explanation

The owner holds all contractual rights, including naming and changing a revocable beneficiary, taking policy loans, assigning the contract and surrendering it. The owner, insured and beneficiary may be three different people.

Question 9Life Insurance

An insured holds a renewable term policy and renews at the end of the term. The insured will:

  1. Convert automatically to whole life coverage
  2. Receive a refund of the premiums paid so far
  3. Keep coverage without new evidence of insurability Correct answer.
  4. Requalify medically and pay a lower premium

Explanation

The renewal privilege lets the insured continue coverage at the end of each term without providing new evidence of insurability. The trade-off is that the premium is recalculated at the insured's attained age and is therefore higher at each renewal.

Question 10Life Insurance

When a convertible term policy is converted to a permanent policy, the new premium is normally based on:

  1. The average mortality cost of the term period
  2. The insured's attained age at conversion Correct answer.
  3. A flat rate filed by the insurer
  4. The insured's original age at issue

Explanation

Under the standard conversion privilege the insured may exchange the term policy for a permanent plan without new evidence of insurability, but the premium is calculated at the insured's attained age at the time of conversion. Some contracts offer an original-age conversion at extra cost.

Question 11Life Insurance

When the extended term nonforfeiture option is applied to a whole life policy, the policyowner receives:

  1. Continuation of the original policy with premiums waived
  2. Term coverage for the full face amount for a set period Correct answer.
  3. A refund of all premiums paid plus interest
  4. A reduced death benefit with no further premiums

Explanation

Extended term uses the policy's net cash value as a single premium to buy term insurance equal to the original face amount for whatever period that value will purchase. No further premiums are due and the coverage expires at the end of that period.

Question 12Life Insurance

If the insured dies while a policy loan is outstanding, the death benefit payable is:

  1. Held until the estate repays the loan
  2. Paid in full, with the loan forgiven
  3. Reduced by unpaid interest only
  4. Reduced by the loan plus accrued interest Correct answer.

Explanation

A policy loan is an advance against the policy's own values, so the insurer deducts the outstanding loan balance and any accrued interest from the proceeds before paying the beneficiary. The beneficiary therefore receives the net amount.

Question 13Life Insurance

Dividends paid on a participating whole life policy are:

  1. Not guaranteed and generally treated as a return of premium Correct answer.
  2. Paid only if the insured dies during the policy year
  3. Taxable as interest income when received in cash
  4. Guaranteed to be paid each policy year

Explanation

Dividends reflect the insurer's experience with mortality, expenses and investment returns and are therefore not guaranteed. Because they are treated in law as a return of premium, they are generally not taxable as income unless they exceed the owner's adjusted cost basis.

Question 14Life Insurance

Where an irrevocable beneficiary has been named, the policyowner may change that designation only:

  1. By appointing a trustee on the beneficiary's behalf
  2. By paying an administrative fee to the insurer
  3. After the policy has been in force for five years
  4. With the beneficiary's written consent Correct answer.

Explanation

An irrevocable designation gives the beneficiary a vested interest in the policy, so the owner cannot change the beneficiary, surrender the policy or assign it without that beneficiary's written consent. A revocable designation, by contrast, can be changed freely by the owner.

Question 15Life Insurance

An insured names three children as beneficiaries 'per stirpes'. One child later dies leaving two children of her own. On the insured's death, the proceeds are:

  1. Paid entirely to the estate of the deceased child
  2. Divided into thirds, with the deceased child's share going to her children Correct answer.
  3. Shared equally between the two surviving children, with nothing to the grandchildren
  4. Held in trust until the grandchildren reach age 18

Explanation

Per stirpes distribution passes a deceased beneficiary's share down that beneficiary's own bloodline, so each surviving child takes one third and the deceased child's third is divided between her children. Per capita distribution, by contrast, would divide the proceeds only among the surviving beneficiaries.

Question 16Life Insurance

When a minor is named as the beneficiary of a life policy, the insurer will generally:

  1. Pay the benefit to the insured's estate automatically
  2. Withhold payment until the minor reaches age 18
  3. Pay the benefit directly to the minor
  4. Require a trustee or guardian to receive the funds Correct answer.

Explanation

A minor cannot give a valid receipt for insurance proceeds, so the insurer requires payment to a trustee, guardian or public trustee, or into court. Naming a trustee in the designation avoids delay and cost.

Question 17Life Insurance

To reinstate a life insurance policy that has lapsed, the policyowner must generally:

  1. Wait for the next policy anniversary date to reinstate
  2. Pay the overdue premiums only, without interest
  3. Submit a brand new application and pay a new policy fee
  4. Prove insurability and pay back premiums with interest Correct answer.

Explanation

Reinstatement restores the original contract, so the insurer requires evidence of insurability and payment of all overdue premiums with interest, usually within a limited period after lapse. New contestability and suicide periods generally run from the reinstatement date.

Question 18Life Insurance

A universal life policy differs from a traditional whole life policy mainly because it:

  1. Cannot be used for estate planning
  2. Unbundles the insurance and savings elements Correct answer.
  3. Guarantees a fixed premium for life
  4. Has no cash value component

Explanation

Universal life separates the cost of insurance and expense charges from the savings fund, and the policyowner can see and adjust each element within contract limits. Whole life bundles protection, savings and dividends into a single fixed premium structure.

Question 19Life Insurance

An accidental death benefit rider attached to a life policy typically pays:

  1. An additional amount if death results from an accident Correct answer.
  2. A refund of premiums to the beneficiary
  3. A monthly income after the insured's death
  4. The cash value if the insured becomes disabled

Explanation

The rider pays an extra benefit, often equal to the face amount, when death is caused by an accident as defined in the contract and occurs within the stated period after the injury. Death from other causes still triggers only the base death benefit.

Question 20Life Insurance

A collateral assignment of a life insurance policy is used primarily to:

  1. Transfer ownership permanently to a family member
  2. Reduce the premium payable under the contract
  3. Provide security for a loan made by a creditor Correct answer.
  4. Avoid probate on the death benefit

Explanation

A collateral assignment pledges the policy as security for a debt, giving the lender limited rights to the extent of the outstanding balance. Any proceeds remaining after the debt is satisfied pass to the named beneficiary.

Question 21Life Insurance

A life insurance policy that fails the tax-exempt test in Canada is subject to which consequence?

  1. A requirement to convert the policy to term insurance
  2. Accrual taxation of investment income inside the policy Correct answer.
  3. Loss of the policy's death benefit entirely
  4. Immediate taxation of the death benefit to the beneficiary

Explanation

A policy that does not meet the exempt test loses its tax-sheltered status, so investment income earned in the policy is taxed to the policyowner as it accrues rather than being deferred. The death benefit itself continues to be paid, but the tax deferral advantage is lost.

Question 22Life Insurance

In most Canadian provinces, the death benefit of a life policy is protected from the insured's creditors when:

  1. The policy is owned by the insured personally
  2. The policy has been in force for more than ten years
  3. The beneficiary designation is revocable
  4. A preferred beneficiary such as a spouse or child is named Correct answer.

Explanation

Provincial insurance statutes protect proceeds payable to a preferred beneficiary, typically a spouse, child, parent or grandchild, from the creditors of the insured. Protection depends on the class of beneficiary named, not on how long the policy has existed.

Question 23Life Insurance

If the insured dies by suicide during the policy's suicide exclusion period, the insurer will typically:

  1. Pay only the cash surrender value plus interest
  2. Refund the premiums paid, without interest Correct answer.
  3. Pay the full death benefit to the estate
  4. Deny the claim and keep all premiums paid

Explanation

The suicide clause limits the insurer's liability during an initial period, usually two years, to a return of premiums paid rather than payment of the face amount. After that period expires, the full death benefit is payable like any other claim.

Question 24Life Insurance

A joint first-to-die life insurance policy pays its death benefit when:

  1. The survivor reaches age 65
  2. The first of the insureds dies Correct answer.
  3. Both insureds have died
  4. The policy anniversary after the first death

Explanation

A first-to-die policy covers two or more lives but pays a single benefit on the first death, which suits needs such as estate taxes or a mortgage that arise at that moment. Because only one benefit is paid, the premium is usually lower than the cost of separate policies.

Question 25Life Insurance

Compared with participating whole life insurance, a term-to-100 policy typically offers:

  1. A shorter coverage period with renewable premiums
  2. Lower initial cost, with no cash value or dividends Correct answer.
  3. Higher premiums because of the added savings element
  4. Guaranteed dividends and a cash surrender value

Explanation

Term-to-100 provides lifetime protection with a premium that is lower at issue than whole life because it contains no savings or dividend element. It normally has no cash surrender value and builds no policy reserve available to the owner.

Question 26Life Insurance

For a life insurance policy to be valid, insurable interest must exist at which point?

  1. At both application and death
  2. Only when the insured dies
  3. At application and issue Correct answer.
  4. At any time before the first premium is paid to the insurer

Explanation

Insurable interest is required when the contract is formed, because life insurance is not a contract of indemnity. It does not have to continue until the insured's death.

Question 27Life Insurance

An insured misses a premium due date but the policy is still within the grace period. What happens if the insured dies during this period?

  1. The insurer pays the full death benefit and forgives the premium
  2. The insurer pays nothing because the policy has lapsed
  3. The policy is automatically converted to paid-up insurance
  4. The insurer pays the death benefit less any unpaid premium Correct answer.

Explanation

The grace period keeps the policy in force while the overdue premium is unpaid. If death occurs, the insurer deducts the unpaid premium from the death benefit.

Question 28Life Insurance

After a new life insurance policy is delivered, the free look provision gives the policyowner the right to:

  1. Cancel only if the insurer agrees
  2. Return it within a set period for a full refund Correct answer.
  3. Exchange the policy for any other insurer's product
  4. Return the policy after the first anniversary

Explanation

The free look provision lets the policyowner cancel a newly delivered policy within a stated period, usually for a full refund. It is a consumer protection right, not a discretionary insurer concession.

Question 29Life Insurance

An absolute assignment of a life insurance policy transfers:

  1. The policy temporarily as security for a loan
  2. Only the right to receive the death benefit
  3. The policy back to the insurer
  4. All ownership rights to the assignee Correct answer.

Explanation

An absolute assignment permanently transfers ownership of the policy to the assignee. A collateral assignment, by contrast, transfers only a limited interest as security for a debt.

Question 30Life Insurance

A contingent beneficiary on a life insurance policy receives the death benefit when:

  1. The primary beneficiary survives the insured
  2. The primary beneficiary dies first Correct answer.
  3. The policyowner dies before the insured
  4. The insured becomes disabled

Explanation

A contingent beneficiary is next in line and receives the proceeds only if the primary beneficiary does not survive the insured. If no contingent beneficiary survives, proceeds usually go to the estate.

Question 31Life Insurance

Which statement describes decreasing term life insurance?

  1. The premium decreases each year while the benefit stays level
  2. The death benefit and premium both increase each year
  3. The benefit decreases while the premium stays level Correct answer.
  4. The cash value decreases as the death benefit increases

Explanation

Decreasing term has a level premium but a face amount that declines over the policy term. It is often used for obligations that shrink over time, such as a mortgage.

Question 32Life Insurance

A waiver of premium rider generally provides that:

  1. Premiums are waived during qualifying total disability Correct answer.
  2. The death benefit is waived if the insured dies by accident
  3. The insurer refunds all premiums if the insured survives the term
  4. The policyowner may skip any premium without affecting coverage

Explanation

A waiver of premium rider waives premiums after the insured satisfies the disability definition and waiting period, while the policy remains in force. It does not refund or forgive premiums for arbitrary reasons.

Question 33Life Insurance

In Canada, when a personally owned life policy pays a death benefit to a named beneficiary, the beneficiary generally:

  1. Must include the benefit in the estate
  2. Pays capital gains tax on the benefit
  3. Receives the benefit free of income tax Correct answer.
  4. Reports the benefit as taxable income

Explanation

A life insurance death benefit paid to a named beneficiary is generally received free of income tax in Canada. The policyowner's estate is not taxed on the benefit merely because a beneficiary is named.

Question 34Life Insurance

A conditional premium receipt given with an application provides temporary life insurance from the application date only if:

  1. The first full year's premium is financed by a loan
  2. The agent personally approves the risk
  3. The proposed insured meets underwriting requirements Correct answer.
  4. The policy is delivered after the free look period

Explanation

A conditional premium receipt provides interim coverage only if the proposed insured proves insurable under the insurer's rules. If the conditions are met, coverage can be effective from the application or medical date.

Question 35Life Insurance

An automatic premium loan provision in a whole life policy is designed to:

  1. Use cash value to pay an overdue premium Correct answer.
  2. Refund premiums paid after the policy is surrendered
  3. Increase the death benefit when premiums are unpaid
  4. Convert the policy to term insurance automatically

Explanation

The automatic premium loan provision borrows against available cash value to pay an unpaid premium, preventing unintentional lapse. The loan and interest reduce the policy's cash value and death benefit if not repaid.

Question 36Life Insurance

A policyowner of a whole life policy chooses the reduced paid-up nonforfeiture option. The result is:

  1. A larger death benefit with higher premiums
  2. A full refund of all premiums paid
  3. A smaller paid-up policy Correct answer.
  4. A term policy for the original face amount

Explanation

Reduced paid-up uses the policy's net cash value to buy a smaller paid-up policy with no further premiums. The new face amount is lower than the original, but coverage continues for life.

Question 37Life Insurance

A guaranteed insurability rider allows the policyowner to:

  1. Increase the death benefit without any premium change
  2. Skip premiums during unemployment
  3. Convert the policy to an annuity at no cost
  4. Buy more coverage later without new evidence Correct answer.

Explanation

The guaranteed insurability rider lets the policyowner buy specified amounts of additional coverage on option dates without proving insurability. The premium for the new coverage is based on the insured's age at the time of purchase.

Question 38Life Insurance

When an employee's group life coverage ends because the employee leaves the job, the conversion privilege usually allows the employee to:

  1. Convert to an individual policy without new evidence Correct answer.
  2. Transfer the coverage to a spouse automatically
  3. Keep the group rate for life without paying any premiums
  4. Receive the group death benefit immediately

Explanation

Group life conversion privileges typically allow an employee to convert to an individual policy without medical evidence within a limited window after group coverage ends. The employee must apply and pay the individual premium.

Question 39Life Insurance

If an insurer discovers after the insured's death that the insured's age was understated on the application, the insurer will generally:

  1. Pay the full face amount without adjustment
  2. Adjust the benefit to the correct-age amount Correct answer.
  3. Deny the claim entirely because age is a material fact
  4. Refund all premiums and pay nothing

Explanation

The age misstatement provision adjusts the death benefit to the amount the premiums paid would have purchased at the correct age. The insurer does not usually deny the claim solely because of an age error.

Question 40Life Insurance

Compared with naming the estate as beneficiary, naming a person as beneficiary of a life policy generally:

  1. Requires the proceeds to go through probate
  2. Keeps proceeds out of the estate and probate Correct answer.
  3. Makes the proceeds subject to the deceased's debts
  4. Makes the death benefit taxable to the beneficiary

Explanation

A named beneficiary receives the proceeds directly, so the money generally bypasses the estate and probate. Naming the estate instead subjects the proceeds to estate administration.

Question 41Life Insurance

The cash surrender value of a permanent life policy is best described as:

  1. The total premiums paid since issue
  2. The amount available only at maturity
  3. The amount paid on surrender after charges Correct answer.
  4. The death benefit minus outstanding loans

Explanation

Cash surrender value is the net amount the policyowner would receive on surrender, after any surrender charges or indebtedness. It is not the same as total premiums paid or the death benefit.

Question 42Life Insurance

A common disaster clause in a life policy is intended to:

  1. Pay double the death benefit in a natural disaster
  2. Set the order of death in a common disaster Correct answer.
  3. Cancel the policy if the insured travels abroad
  4. Allow the insurer to choose the beneficiary

Explanation

A common disaster clause addresses simultaneous or near-simultaneous deaths by specifying who is deemed to have survived. It usually requires the beneficiary to outlive the insured by a stated period.

Question 43Life Insurance

A return of premium rider on a term life policy generally:

  1. Reduces the death benefit by premiums paid
  2. Waives premiums after the first year
  3. Refunds premiums if the insured survives Correct answer.
  4. Returns the cash value at death

Explanation

A return of premium rider refunds premiums if the insured survives the term, in exchange for a higher premium. If the insured dies, the base death benefit is payable.

Question 44Life Insurance

An applicant who is classified as a substandard risk will usually:

  1. Pay a higher premium for greater risk Correct answer.
  2. Pay the same premium as a preferred risk
  3. Be declined automatically
  4. Receive a lower death benefit than the face amount

Explanation

A substandard classification means the insurer accepts the risk at a higher premium, often through table ratings or flat extras. The face amount is usually unchanged unless a different product is issued.

Question 45Life Insurance

A joint and last survivor annuity provides income that:

  1. Continues until both annuitants die Correct answer.
  2. Stops when the first annuitant dies
  3. Is paid only for a fixed 10 years
  4. Pays only to the male annuitant

Explanation

A joint and last survivor annuity continues payments until the second annuitant dies. It is commonly used for retirement income for a couple.

Question 46Life Insurance

A policy split option attached to a joint first-to-die life policy is most useful because it allows the policyowner to:

  1. Divide the cash value between the insurer and the policyowner
  2. Split the joint policy into two individual policies Correct answer.
  3. Split the death benefit among beneficiaries without their consent
  4. Convert the policy into two term policies at the original premium

Explanation

A policy split option lets the owners divide joint first-to-die coverage into separate individual policies after a specified event, often divorce or a tax-law change. Each insured then owns and controls an individual policy.

Question 47Life Insurance

Under a universal life policy with a level death benefit (Option A), as the cash value grows, the net amount at risk generally:

  1. Is unaffected by the cash value
  2. Increases by the same amount as the cash value
  3. Remains equal to the full death benefit
  4. Falls as the cash value grows Correct answer.

Explanation

With a level death benefit, the face amount stays fixed, so as cash value grows the net amount at risk falls. The cost of insurance is charged on that declining net amount at risk.

Question 48Life Insurance

A Canadian corporation owns a life policy on a key employee and receives the death benefit. For tax purposes, the death benefit generally:

  1. Credits the capital dividend account Correct answer.
  2. Is fully taxable as business income
  3. Is tax-free but creates no special account
  4. Must be paid directly to the employee's estate

Explanation

A corporation that receives a life insurance death benefit generally adds an amount to its capital dividend account, based largely on the death benefit less the policy's adjusted cost basis. That credit can support tax-free capital dividends to shareholders.

Question 49Life Insurance

When the owner of a life insurance policy dies and the owner is not the person whose life is insured, the policy is generally:

  1. Deemed disposed at fair market value Correct answer.
  2. Paid out as a death benefit
  3. Transferred to the insurer
  4. Cancelled without value

Explanation

If the policyowner dies and the insured is someone else, the policy is deemed to be disposed of at fair market value. Any excess over the adjusted cost basis is taxable, even though no death benefit is paid.

Question 50Life Insurance

When a policyowner surrenders a cash value life policy, the taxable amount is generally:

  1. The total premiums paid
  2. The full cash surrender value
  3. The death benefit minus the cash value
  4. Proceeds minus the adjusted cost basis Correct answer.

Explanation

On surrender, the policyowner is taxed on the proceeds minus the policy's adjusted cost basis. The ACB reflects premiums paid and certain adjustments such as dividends.