Life Insurance
This module tests life insurance from application to claim: insurable interest, utmost good faith, underwriting, policy provisions, beneficiary designations, premium structure, and product taxation. Questions ask what the insurer must pay, who may change a beneficiary, or whether a claim can be contested.
Contract foundations and underwriting
Life insurance requires insurable interest at inception and utmost good faith from both parties. The application is the basis of the contract; material misrepresentation or non-disclosure can void coverage, subject to the incontestability period. Underwriting classifies risk as preferred, standard, substandard (rated), or declined and may use the MIB, paramedical, attending physician's statement, or inspection report. A conditional receipt usually provides interim coverage only if the applicant is insurable as a standard risk on the receipt date; a binding receipt provides immediate coverage.
Provisions that decide claims
Key provisions include the two-year incontestability clause, the two-year suicide exclusion (insurer returns premiums), a 30-day grace period, reinstatement within two years with evidence of insurability and payment of overdue premiums with interest, misstatement of age/sex adjustment, and non-forfeiture options (cash surrender, reduced paid-up, extended term). Policy loans accrue interest and reduce proceeds. Beneficiary designations can be revocable or irrevocable; an irrevocable beneficiary must consent to a change, assignment, or loan in most provinces. A named beneficiary generally receives the death benefit directly, outside the estate.
Products and premium
Term insurance is temporary and may be renewable or convertible. Whole life is permanent, with participating policies eligible for dividends; universal life separates the insurance element from a policy account and charges cost of insurance. Premiums reflect mortality, interest, and expenses; modal premiums are higher than annual because of modal loading. Death benefits are generally received tax-free by a named beneficiary, but policy gains on surrender or transfer may be taxable.
Worked example
An applicant states age 55 on a $500,000 policy and pays the premium for age 55 ($2,000). At death, the insurer proves the correct age was 60, for which the premium would have been $3,000. Under the misstatement-of-age provision, the insurer pays $500,000 × ($2,000 ÷ $3,000) = $333,333, not the full face amount and not a refund. The policy remains valid; the benefit is adjusted to the premium actually paid.
Traps that cost marks
Owners confuse the policyholder, life insured, and beneficiary; only the owner controls the contract. An irrevocable beneficiary cannot be removed without consent. Incontestability does not reset when a policy is reinstated. Suicide exclusions return premiums rather than pay the face amount. A minor beneficiary may require a trustee or guardian. A conditional receipt is not unconditional coverage; the applicant's insurability on the receipt date matters.