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LLQP practice questions

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Question 1Life Insurance

Under a standard life insurance contract in Canada, which party is legally entitled to receive the death benefit proceeds when the insured dies?

  1. The insurance agent who sold the policy
  2. The insured's next of kin
  3. The named beneficiary Correct answer.
  4. The policyowner's estate automatically

Explanation

The death benefit is paid to the beneficiary designated by the policyowner, and a valid designation directs payment outside the estate. The estate receives proceeds only when no beneficiary is named or the designation fails. Next of kin have no automatic claim when a beneficiary is validly designated.

Question 2Life Insurance

A client wants the death benefit to pass directly to her adult daughter without going through probate. Which designation accomplishes this most reliably?

  1. Making the daughter the policyowner
  2. Naming the daughter as revocable beneficiary Correct answer.
  3. Leaving the beneficiary field blank
  4. Naming the estate as beneficiary

Explanation

A named beneficiary receives proceeds directly, bypassing the estate and probate. Naming the estate causes proceeds to flow through probate. A blank designation defaults to the estate. Making the daughter the owner transfers control of the contract but does not by itself direct proceeds.

Question 3Life Insurance

Which statement best describes the role of the incontestability provision in a Canadian life insurance policy?

  1. It guarantees the insurer can never deny a claim for any reason
  2. It limits the insurer's ability to deny a claim for misrepresentation after a set period, typically two years Correct answer.
  3. It allows the insured to cancel the policy without penalty at any time
  4. It requires the insurer to refund all premiums if the policy lapses

Explanation

The incontestability clause prevents the insurer from denying a claim based on misrepresentation on the application after the contestable period, usually two years from issue. It does not eliminate all grounds for denial, such as fraud in some circumstances or non-payment of premium. It has nothing to do with cancellation rights or premium refunds.

Question 4Life Insurance

A policyowner stops paying premiums and the policy has accumulated cash value. Under the automatic premium loan provision, what typically happens?

  1. The death benefit is permanently doubled
  2. The insurer borrows from cash value to pay the overdue premium and keeps the policy in force Correct answer.
  3. The insurer converts the policy to a term policy without consent
  4. The policy is cancelled immediately and the cash value is forfeited

Explanation

The automatic premium loan provision lets the insurer advance the premium from available cash value so the policy does not lapse. The loan plus interest reduces the cash value and death benefit. It does not cancel the policy or change the death benefit, and it does not convert coverage to term.

Question 5Life Insurance

What is the primary purpose of a grace period in a life insurance contract?

  1. To extend the contestability period indefinitely
  2. To give the policyowner extra time to pay an overdue premium while coverage continues Correct answer.
  3. To permit the beneficiary to change the policy terms
  4. To allow the insurer to re-underwrite the insured annually

Explanation

The grace period, commonly 30 or 31 days, keeps coverage in force while the policyowner pays a late premium. If the insured dies during the grace period, the overdue premium is typically deducted from the proceeds. It does not involve re-underwriting, beneficiary rights, or the contestability period.

Question 6Life Insurance

A 45-year-old applicant is buying a policy and wants the lowest initial premium with the option to convert to permanent coverage later. Which product best fits this need?

  1. Annuity with a guaranteed minimum withdrawal
  2. Whole life insurance
  3. Universal life with a large minimum deposit
  4. Renewable and convertible term insurance Correct answer.

Explanation

Renewable and convertible term offers low initial cost and the right to renew or convert to permanent coverage without new evidence within stated limits. Whole life has higher fixed premiums and is already permanent. Universal life and annuities do not match the stated low-cost convertible term need.

Question 7Life Insurance

Which feature distinguishes whole life insurance from term life insurance?

  1. Whole life provides coverage only for a fixed number of years
  2. Whole life has no premium obligation after the first year
  3. Whole life pays a benefit only on accidental death
  4. Whole life provides lifelong coverage with a cash value component Correct answer.

Explanation

Whole life is permanent coverage that builds cash value and typically has level premiums for life or to a stated age. Term covers a set period and generally has no cash value. Whole life does not become premium-free after one year, and it pays on death from any cause subject to exclusions.

Question 8Life Insurance

In a universal life policy, what does the cost of insurance (COI) charge represent?

  1. A penalty applied when the policy is surrendered
  2. A fixed administration fee charged only at issue
  3. The amount deducted monthly for the pure mortality risk based on the net amount at risk Correct answer.
  4. The investment return credited to the policy

Explanation

The COI is the mortality charge deducted from the policy fund to cover the net amount at risk, which is the death benefit minus the accumulated fund value. It generally rises as the insured ages. Administration fees, investment credits, and surrender charges are separate items.

Question 9Life Insurance

A client with a family history of heart disease is concerned about being declined. Which underwriting outcome allows the insurer to issue coverage with an extra premium because of increased risk?

  1. Substandard rating Correct answer.
  2. Declined application
  3. Standard rating
  4. Preferred rating

Explanation

A substandard rating is applied when the applicant presents higher-than-average mortality risk, and the insurer charges an extra premium. Preferred and standard ratings reflect average or better risk with standard rates. A declined application means no coverage is offered.

Question 10Life Insurance

Which of the following best describes the purpose of the suicide exclusion clause in a life insurance policy?

  1. It limits the insurer's liability if the insured dies by suicide within a specified period, often two years Correct answer.
  2. It voids the policy if the insured changes occupations
  3. It permanently excludes all deaths related to mental illness
  4. It excludes deaths from natural causes after age 65

Explanation

The suicide exclusion typically limits the insurer's liability to a refund of premiums if the insured dies by suicide within a defined period after issue. After that period, suicide is generally covered. It does not permanently exclude mental illness deaths, exclude natural causes, or relate to occupation changes.

Question 11Life Insurance

An insured dies by suicide 18 months after a policy with a two-year suicide exclusion was issued. What does the insurer typically do?

  1. Refund the premiums paid rather than pay the full death benefit Correct answer.
  2. Pay the full death benefit because the policy was in force
  3. Pay only the cash value plus interest
  4. Deny all benefits and keep the premiums

Explanation

When death by suicide occurs within the exclusion period, the insurer's liability is usually limited to returning premiums paid, not the face amount. After the exclusion period, the full benefit is normally payable. Forfeiting premiums or paying only cash value does not reflect the standard clause.

Question 12Life Insurance

What is the key characteristic of a participating whole life policy?

  1. It may receive policyholder dividends based on the insurer's experience Correct answer.
  2. It guarantees a stock market return each year
  3. It has no cash value until the insured dies
  4. It can only be issued to corporate owners

Explanation

Participating policies allow the policyowner to share in the insurer's experience through dividends, which are not guaranteed. They still build cash value and can be owned by individuals or corporations. Dividends reflect insurer results, not stock market performance.

Question 13Life Insurance

A policyowner wants premium payments redirected to build cash value faster while keeping the same death benefit. Which dividend option best fits this goal?

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

Explanation

Paid-up additions use dividends to purchase small amounts of additional permanent coverage, increasing both cash value and death benefit. Cash payment removes value from the policy. Premium reduction lowers premiums but does not build extra cash value. Accumulate at interest grows a side fund, not additional coverage.

Question 14Life Insurance

Which statement accurately describes the tax treatment of life insurance death benefits in Canada for a named individual beneficiary?

  1. The death benefit is fully taxable as ordinary income
  2. The death benefit is subject to capital gains tax in the beneficiary's hands
  3. The death benefit is generally received tax-free by the beneficiary Correct answer.
  4. Only the cash value portion is taxed to the beneficiary

Explanation

Death benefits paid to a named beneficiary are generally received tax-free because the proceeds are paid from after-tax funds and the policy is not typically subject to capital gains at death. Taxable implications arise in specific situations, such as a disposition of the policy during life or certain corporate ownership. Cash value and capital gains are not taxed to the beneficiary in the standard individual case.

Question 15Life Insurance

What is a policy loan against the cash value of a whole life policy?

  1. A grant from the insurer that never needs repayment
  2. A transfer of ownership to the lender
  3. A withdrawal that permanently reduces the face amount without interest
  4. A borrowing of cash value in which unpaid loan balance plus interest is deducted from proceeds at death Correct answer.

Explanation

A policy loan lets the policyowner borrow from available cash value, and any outstanding balance and interest reduce the death benefit if not repaid. It is not a grant, and it does not automatically reduce the face amount. Ownership remains with the policyowner.

Question 16Life Insurance

Which of the following describes the net amount at risk in a life insurance policy?

  1. The difference between the death benefit and the policy's accumulated cash value Correct answer.
  2. The total premiums paid since issue
  3. The cash surrender value minus any loans
  4. The amount the beneficiary receives after tax

Explanation

The net amount at risk is the portion of the death benefit the insurer must fund from its own resources, calculated as the death benefit minus the accumulated fund or cash value. Premiums paid and cash surrender value are different measures. Taxes are not part of this calculation.

Question 17Life Insurance

Which is a distinguishing feature of a term-to-100 policy?

  1. It provides coverage for exactly 10 years
  2. It provides coverage to age 100 with premiums payable for life or to a stated age and no cash value Correct answer.
  3. It pays a benefit only if death is accidental
  4. It is a registered retirement savings plan

Explanation

Term-to-100 is permanent coverage with no cash value and premiums payable to age 100 or another stated period. It differs from traditional whole life because it lacks a savings component. It is not a fixed 10-year term, a retirement savings plan, or accidental death coverage.

Question 18Life Insurance

A client is considering a universal life policy and asks how the policy's fund value grows. Which statement is correct?

  1. The fund value is fixed and never changes
  2. The fund value equals the death benefit at all times
  3. The fund value grows only through the cost of insurance deduction
  4. The fund value grows through credited interest or investment returns, net of charges Correct answer.

Explanation

In universal life, the policy fund grows through interest or investment returns credited to it, less charges such as COI and administration fees. The COI deduction reduces the fund rather than growing it. The fund value fluctuates and does not equal the death benefit.

Question 19Life Insurance

Which provision allows a policyowner to receive the cash value of a whole life policy upon surrendering it?

  1. Non-forfeiture provision Correct answer.
  2. Incontestability clause
  3. Suicide exclusion
  4. Grace period

Explanation

Non-forfeiture provisions protect the policyowner's equity by providing options such as cash surrender, reduced paid-up insurance, or extended term insurance if premiums stop. The suicide exclusion, incontestability clause, and grace period address different matters and do not govern surrender value.

Question 20Life Insurance

A policyowner stops paying premiums on a whole life policy and chooses the reduced paid-up option. What is the result?

  1. The full death benefit continues with no premiums due
  2. The policy is cancelled and the cash value is paid out
  3. A smaller death benefit remains in force with no further premiums required Correct answer.
  4. The policy becomes term insurance for the original face amount

Explanation

Reduced paid-up uses the existing cash value to purchase a lower face amount of permanent coverage that stays in force without further premiums. The full benefit is not maintained, the policy is not cancelled, and the result is permanent rather than term coverage.

Question 21Life Insurance

What is the purpose of a waiver of premium rider?

  1. It waives premiums if the insured becomes totally disabled and meets the waiting period Correct answer.
  2. It waives the insurer's right to contest the policy
  3. It waives the suicide exclusion after one year
  4. It waives the beneficiary's tax liability

Explanation

A waiver of premium rider keeps coverage in force by waiving premiums when the insured becomes totally disabled for the required period. It does not affect taxes, contestability, or the suicide exclusion. Those matters are governed by other provisions.

Question 22Life Insurance

An insured with a disability income rider on a life policy becomes disabled. What does this rider typically provide?

  1. A permanent increase in the death benefit
  2. A monthly benefit to replace income during disability Correct answer.
  3. A refund of all premiums paid to date
  4. A lump-sum payment of the full death benefit

Explanation

A disability income rider provides a monthly income benefit during qualifying disability, subject to waiting and benefit periods. It does not accelerate the full death benefit, permanently raise the face amount, or refund all premiums. Those effects belong to other riders or provisions.

Question 23Life Insurance

Which of the following best describes an accelerated death benefit rider?

  1. It converts the policy into an annuity at retirement
  2. It allows part of the death benefit to be paid early when the insured is terminally ill Correct answer.
  3. It doubles the death benefit if death is accidental
  4. It waives premiums during unemployment

Explanation

An accelerated death benefit rider lets the insured receive a portion of the death benefit in advance when diagnosed with a terminal illness, with the remainder paid at death. It does not double benefits, waive premiums for unemployment, or convert the policy to an annuity.

Question 24Life Insurance

A policyowner names a revocable beneficiary. What right does this give the policyowner?

  1. The right to receive the death benefit while still alive
  2. The right to stop paying premiums without consequence
  3. The right to change the beneficiary without the beneficiary's consent Correct answer.
  4. The right to transfer ownership to the beneficiary automatically

Explanation

A revocable designation lets the policyowner change the beneficiary at any time without consent. An irrevocable designation requires beneficiary consent to change. Revocable status does not transfer ownership, waive premiums, or make the death benefit payable during life.

Question 25Life Insurance

An irrevocable beneficiary has been named on a policy. What limitation applies to the policyowner?

  1. The policyowner can never surrender the policy for any reason
  2. The policyowner loses the right to pay premiums
  3. The death benefit becomes taxable to the beneficiary
  4. The policyowner generally needs the beneficiary's consent to change the designation Correct answer.

Explanation

With an irrevocable designation, the policyowner generally must obtain the beneficiary's written consent to change the beneficiary or take certain actions affecting the beneficiary's interest. The policyowner still pays premiums and may have limited rights to surrender with consent. Tax treatment of the death benefit is unaffected by revocability.

Question 26Life Insurance

Under a joint first-to-die life insurance policy covering two people, when is the death benefit payable?

  1. On the death of the first insured to die Correct answer.
  2. In equal halves on each insured's death
  3. On the death of the last surviving insured
  4. Only if both insureds die in the same event

Explanation

A joint first-to-die policy pays a single death benefit when the first of the insureds dies, leaving the survivor with proceeds while the policy then ends. This structure suits couples funding mortgage or estate liquidity needs at the first death.

Question 27Life Insurance

A policyowner has a $250,000 whole life policy with a $60,000 cash value and dies owing a $20,000 policy loan plus accrued interest. What does the beneficiary receive?

  1. $60,000, being the cash value at death
  2. $250,000, because the death benefit is never reduced
  3. $190,000, being the face amount less the cash value
  4. $230,000, being the face amount less the loan Correct answer.

Explanation

On death the insurer pays the face amount minus any outstanding policy loan and accrued interest, so the beneficiary receives $250,000 less $20,000, or $230,000. The cash value is not separately paid because it is part of the death benefit.

Question 28Life Insurance

Which statement correctly describes the incontestability provision after a life policy has been in force for two years?

  1. The insurer cannot deny a claim based on misrepresentation in the application, except for fraud relating to the initial claim Correct answer.
  2. The insurer may still rescind the contract for any material misrepresentation
  3. The insurer may reduce the death benefit to the premiums paid if it finds an error
  4. The insurer may cancel the policy if the insured's health changes

Explanation

After the contestability period ends, the insurer generally cannot deny a claim because of misstatements in the application; limited exceptions include fraud connected with the claim itself and certain other statutory exceptions. This protects beneficiaries from late rescission of a valid contract.

Question 29Life Insurance

An applicant completes an application and pays the first premium, and the insurer issues a conditional receipt. What does the receipt generally provide?

  1. Interim coverage from the date of the receipt if the applicant proves insurable under the insurer's rules Correct answer.
  2. Coverage begins only after the contestability period ends
  3. Coverage begins only when the policy is physically delivered
  4. Coverage is limited to a refund of premium if the applicant dies

Explanation

A conditional receipt provides interim coverage from the date of the receipt or medical examination, provided the applicant meets the insurer's underwriting standards. If the applicant is not insurable, no coverage arises and the premium is refunded.

Question 30Life Insurance

A policyowner with a $500,000 term policy has a $100,000 outstanding policy loan. What happens to the death benefit if the insured dies?

  1. The beneficiary receives $400,000 because the loan is deducted Correct answer.
  2. The beneficiary receives $500,000 and the insurer absorbs the loan
  3. The beneficiary receives $500,000 and the estate repays the loan
  4. The beneficiary receives $100,000, being the loan amount

Explanation

A policy loan is a debt secured by the policy, so the outstanding balance plus interest is deducted from the death benefit at the time of claim. The beneficiary therefore receives the face amount less the loan.

Question 31Life Insurance

Which of the following best describes the role of the policyowner in a life insurance contract?

  1. The person who owns the contractual rights and pays the premium Correct answer.
  2. The person whose life is insured under the policy
  3. The insurer's underwriter who approves the risk
  4. The person who receives the death benefit

Explanation

The policyowner holds the contractual rights, including the right to change a revocable beneficiary, surrender the policy, or take a loan, and is responsible for paying premiums. The insured is the person whose life is covered, and they may be different people.

Question 32Life Insurance

Which statement accurately describes the grace period in a life insurance policy?

  1. It allows the insurer to cancel the policy for late payment without notice
  2. It gives the policyowner a period after the due date to pay the premium while coverage continues Correct answer.
  3. It permits the policyowner to skip a premium without any consequence
  4. It is the period during which the insured may contest the policy

Explanation

The grace period is typically 30 or 31 days after the premium due date, during which the policy remains in force. If the insured dies in that period before payment, the overdue premium is deducted from the death benefit.

Question 33Life Insurance

A policyowner names their spouse as beneficiary and later wants to change the designation. Which type of beneficiary permits this change without the beneficiary's consent?

  1. Contingent beneficiary
  2. Irrevocable beneficiary
  3. Estate beneficiary
  4. Revocable beneficiary Correct answer.

Explanation

A revocable beneficiary can be changed by the policyowner at any time without consent, because the beneficiary has no vested interest. An irrevocable designation, by contrast, requires the beneficiary's consent to change.

Question 34Life Insurance

An insured dies and the named beneficiary is the insured's adult child. How is the death benefit generally treated for income tax purposes in Canada?

  1. The benefit is taxable to the estate regardless of the named beneficiary
  2. The full amount is taxable to the beneficiary as ordinary income
  3. The benefit is received tax-free by the named beneficiary Correct answer.
  4. Only the cash value portion is taxable

Explanation

When a named individual beneficiary receives a life insurance death benefit, the proceeds are generally paid free of income tax. The policyowner's estate may face tax on the policy's gain if the estate is the beneficiary or the policy is transferred for value.

Question 35Life Insurance

An applicant is rated as a substandard risk and the insurer issues the policy with an extra premium. What does this mean?

  1. The applicant was declined and must apply elsewhere
  2. The insurer charges more because the applicant presents a higher-than-average mortality risk Correct answer.
  3. The policy has no cash value until the extra premium is refunded
  4. The applicant receives a larger death benefit to offset the risk

Explanation

A substandard or rated policy is issued with an additional premium, exclusion, or modified benefit to reflect higher expected mortality. The applicant still receives coverage, but at a higher cost than a standard risk.

Question 36Life Insurance

Which statement best describes the purpose of a collateral assignment of a life insurance policy?

  1. It names the lender as the irrevocable beneficiary of the death benefit
  2. It converts the policy into a term policy
  3. It transfers ownership permanently to a lender
  4. It pledges the policy as security for a loan while the owner retains certain rights Correct answer.

Explanation

A collateral assignment gives a lender a security interest in the policy to the extent of the debt, while the owner generally keeps the right to repay the loan and recover full rights. It is not a permanent transfer of ownership.

Question 37Life Insurance

A policyowner surrenders a whole life policy with an adjusted cost basis of $40,000 and receives a cash surrender value of $55,000. What is the tax consequence?

  1. The $15,000 excess over the adjusted cost basis is taxable as a policy gain Correct answer.
  2. The full $55,000 is taxable as income
  3. No amount is taxable because the policy was surrendered
  4. The $40,000 adjusted cost basis is taxable

Explanation

On surrender, the amount received above the policy's adjusted cost basis is a policy gain and is included in the policyowner's income. The adjusted cost basis represents the premiums paid net of certain amounts and is not itself taxed.

Question 38Life Insurance

What is the primary purpose of a term rider attached to a whole life policy?

  1. To replace the whole life coverage entirely
  2. To increase the cash value of the base policy
  3. To waive premiums if the insured becomes disabled
  4. To provide additional temporary death benefit for a period at low cost Correct answer.

Explanation

A term rider adds temporary coverage, often to protect a growing family or a mortgage, at a lower cost than increasing the permanent base. It does not build cash value and expires at the end of its term.

Question 39Life Insurance

Which of the following is a characteristic of a non-participating whole life policy?

  1. It pays dividends to the policyowner
  2. It has a death benefit that decreases over time
  3. It has fixed premiums and does not share in the insurer's surplus Correct answer.
  4. It requires annual renewal at the insurer's option

Explanation

A non-participating policy has guaranteed, level premiums and pays no dividends, because the policyowner does not share in the insurer's divisible surplus. Participating policies, by contrast, may pay dividends.

Question 40Life Insurance

A policyowner wants to use the cash value of a whole life policy to pay premiums after losing their job. Which non-forfeiture option allows the existing cash value to fund continued coverage for a limited period?

  1. Extended term insurance Correct answer.
  2. Reduced paid-up insurance
  3. Automatic premium loan
  4. Cash surrender

Explanation

Under extended term insurance, the net cash value purchases a term policy for the full face amount for as long as the value will support. Reduced paid-up provides a smaller permanent benefit, while the automatic premium loan borrows against cash value to pay premiums.

Question 41Life Insurance

Which statement correctly describes the effect of adding a guaranteed insurability rider?

  1. It guarantees the policy will never lapse
  2. It guarantees the premium will never increase
  3. It automatically increases the death benefit with inflation
  4. It allows the insured to purchase additional coverage at specified future dates without new evidence of insurability Correct answer.

Explanation

A guaranteed insurability rider gives the insured the option to buy additional coverage at set intervals or events without proving insurability. The additional coverage is priced according to the insured's attained age at the time of purchase.

Question 42Life Insurance

An insured has a policy with a disability income rider and becomes totally disabled. What does this rider typically provide?

  1. A waiver of the policy's death benefit
  2. A lump-sum payment equal to the cash value
  3. A monthly income benefit while the disability continues, subject to the rider's terms Correct answer.
  4. An increase in the death benefit

Explanation

A disability income rider pays a monthly benefit during a covered disability, in addition to keeping the life policy in force. It is distinct from a waiver of premium rider, which waives premiums rather than paying income.

Question 43Life Insurance

A policyowner is considering naming a minor child as direct beneficiary. What is the main practical problem with that choice?

  1. A minor cannot give a valid receipt, so a trustee or guardian may be required Correct answer.
  2. Minors cannot legally be named as beneficiaries
  3. The insurer will not pay a death benefit to a minor
  4. The death benefit becomes fully taxable to the child

Explanation

Insurers generally will not pay a minor directly because a minor lacks legal capacity to give a valid discharge. Proceeds may be held until majority or paid to a court-appointed trustee, which can delay access.

Question 44Life Insurance

Which statement accurately describes the relationship between the premium, the mortality cost, and the cash value in a whole life policy?

  1. Premiums are level, and the excess over mortality and expense costs accumulates as cash value Correct answer.
  2. Mortality costs decrease as the insured ages
  3. Premiums increase each year as the insured ages
  4. Cash value is funded entirely by the insurer's profits

Explanation

Whole life uses level premiums that exceed the actual cost of protection in early years; the excess, after expenses, builds the cash value that helps fund rising mortality costs later. This level-premium structure is what makes permanent coverage possible.

Question 45Life Insurance

An insured's policy contains a misstatement of age clause. The insurer discovers the insured was actually five years older than stated, and the insured has died. What does the insurer do?

  1. Pay the full face amount without adjustment
  2. Refund all premiums and cancel the policy
  3. Pay the death benefit that the premium paid would have purchased at the correct age Correct answer.
  4. Deny the claim entirely because of the misstatement

Explanation

A misstatement of age clause allows the insurer to adjust the benefit to what the premium would have purchased at the true age rather than voiding the contract. This is a common contractual remedy that preserves coverage for the beneficiary.

Question 46Life Insurance

Which of the following best describes the purpose of a beneficiary designation in a life insurance policy?

  1. It determines the premium the policyowner will pay
  2. It names the insurer's reinsurer
  3. It identifies who receives the death benefit and directs payment outside the estate Correct answer.
  4. It sets the policy's cash value growth rate

Explanation

The beneficiary designation directs the death benefit to the named person or entity, and because a named beneficiary receives the proceeds directly, the amount generally bypasses the estate and probate. It does not affect premium or cash value.

Question 47Life Insurance

A policyowner takes a $30,000 policy loan and later declares bankruptcy. How is the policy loan generally treated in relation to the policy?

  1. It remains a debt secured by the policy and reduces any benefit paid Correct answer.
  2. It is treated as taxable income in the year of the loan
  3. It converts the policy into term insurance
  4. It is forgiven automatically on bankruptcy

Explanation

A policy loan is a debt owed to the insurer and secured by the policy's cash value; it is not forgiven on bankruptcy and reduces the amount paid on death or surrender. The loan itself is generally not taxable income because it is borrowed against the owner's own asset.

Question 48Life Insurance

Which of the following is a key difference between a term life policy and a whole life policy?

  1. Term premiums are always higher than whole life premiums
  2. Whole life can be cancelled without any consequence
  3. Term has cash value while whole life does not
  4. Term provides coverage for a specified period while whole life provides lifelong coverage Correct answer.

Explanation

Term insurance covers a defined period and pays only if death occurs during that term, while whole life provides permanent coverage and builds cash value. Term is generally cheaper initially but does not last for life.

Question 49Life Insurance

An insured with a critical illness rider is diagnosed with a covered condition and receives a benefit. What effect does this typically have on the life insurance policy?

  1. The death benefit is reduced by the amount paid, or the policy may end if the full benefit is paid Correct answer.
  2. The policy is automatically cancelled with no payout on death
  3. The policy converts to a term policy
  4. The death benefit is doubled

Explanation

A critical illness rider typically advances part of the death benefit, reducing the amount later payable on death; if the full benefit is advanced, the policy may terminate. The exact terms depend on the rider, so the contract wording governs.

Question 50Life Insurance

Which statement correctly describes the purpose of the suicide exclusion in a life insurance policy?

  1. It limits the insurer's liability if the insured dies by suicide within a stated period, often two years Correct answer.
  2. It allows the insurer to cancel the policy at any time
  3. It permanently bars all claims related to suicide
  4. It applies only to accidental death benefits

Explanation

The suicide exclusion typically limits the insurer's liability to a refund of premiums if the insured dies by suicide within a specified period, commonly two years from issue. After that period, the exclusion generally no longer applies.