I85PREP
⌘ K
CISR Life & Health study materials
CISR Life & Health study resources

CISR Life & Health practice questions

One question at a time. Build your CISR Life & Health understanding.

First 50 of 199 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Introduction to Life Insurance

Which party to a life insurance contract makes the promise to pay the death benefit?

  1. The beneficiary
  2. The policyowner
  3. The producer
  4. The insurer Correct answer.

Explanation

A life insurance policy is a unilateral contract in which only the insurer makes an enforceable promise, namely to pay the stated benefit when the insured dies. The policyowner's role is to pay premiums and keep the contract in force, not to promise a benefit payment.

Question 2Introduction to Life Insurance

An applicant completes the application, pays the initial premium, and receives a conditional receipt. The producer then submits the paperwork. Under the conditional receipt, coverage typically begins when:

  1. The producer mails the application to the home office
  2. The first full policy year has been completed
  3. The insurer issues the policy and delivers it
  4. The underwriting requirements are satisfied, provided the applicant was insurable at the time of application Correct answer.

Explanation

A conditional receipt provides interim coverage that becomes effective retroactively once the insurer's underwriting conditions are met, as long as the proposed insured met the insurability standards on the date the application and premium were taken. If the applicant was not insurable, no coverage ever attaches.

Question 3Introduction to Life Insurance

Which characteristic describes a life insurance contract because the insurer drafts the policy and the applicant generally must accept or reject it as written?

  1. Utmost good faith
  2. Aleatory
  3. Unilateral
  4. Contract of adhesion Correct answer.

Explanation

A contract of adhesion is prepared by one party, the insurer, and offered to the other on a take-it-or-leave-it basis. Ambiguities in such a contract are generally construed against the drafter.

Question 4Introduction to Life Insurance

A policyowner intentionally omits a known heart condition on a life application. Two years later the insured dies of an unrelated cause. What is the insurer's most likely position?

  1. It may deny the claim only if the omitted condition caused the death
  2. It may reduce the benefit to the amount of premiums paid
  3. It may rescind the policy because material misrepresentation voids coverage at any time
  4. It must pay the claim because the two-year contestable period has expired Correct answer.

Explanation

The incontestability clause bars the insurer from contesting the policy for misrepresentation after it has been in force for the contestable period, typically two years from issue. A material misrepresentation discovered after that period generally cannot be used to deny a claim, even if the misstatement was intentional.

Question 5Introduction to Life Insurance

The person whose life is insured under a policy is known as the:

  1. Annuitant
  2. Insured Correct answer.
  3. Owner
  4. Beneficiary

Explanation

The insured is the individual whose death triggers the death benefit. The owner holds the contractual rights, and the beneficiary receives the proceeds.

Question 6Introduction to Life Insurance

Which of the following best describes the insurable interest requirement at the time a life policy is purchased?

  1. The insured must have an interest in the beneficiary's continued life
  2. The producer must document a relationship between owner and beneficiary
  3. The insurer must show a loss if the insured dies
  4. The beneficiary must have a financial interest in the insured's continued life Correct answer.

Explanation

Insurable interest in life insurance means the beneficiary or owner would suffer a financial or emotional loss if the insured died. It must exist at the time of application, but not at the time of death.

Question 7Introduction to Life Insurance

A policy is issued with a face amount of $250,000 and a cash value of $18,000. Which statement about the insurer's obligation is accurate?

  1. The insurer must pay the full face amount plus cash value at death
  2. The insurer pays the face amount, and the cash value is not paid in addition Correct answer.
  3. The cash value is paid only if the owner surrenders the policy before death
  4. The insurer pays the greater of face amount or cash value

Explanation

Under a traditional whole life policy, the death benefit is the face amount; the cash value is an internal reserve that is not paid in addition to the face amount at death. The owner may access cash value during life through loans or surrender.

Question 8Introduction to Life Insurance

Which element is required for a life insurance contract to be legally enforceable?

  1. Consideration, consisting of the premium and the insurer's promise Correct answer.
  2. Delivery of the policy to the beneficiary
  3. A witness signature on the policy
  4. A medical examination for every applicant

Explanation

Consideration in a life contract is the applicant's premium payment and statements in the application exchanged for the insurer's promise to pay. Offer, acceptance, and legal purpose are also required, but consideration is the classic element tested.

Question 9Introduction to Life Insurance

An applicant for a $1,000,000 policy answers all health questions truthfully and discloses a family history of cancer. The producer notices that the applicant is visibly underweight but does not note it. Which principle governs the applicant's duty here?

  1. Waiver, meaning the insurer gives up the right to underwrite
  2. Warranty, requiring the applicant to guarantee perfect health
  3. Caveat emptor, placing all risk on the insurer
  4. Utmost good faith, requiring full and honest disclosure of material facts Correct answer.

Explanation

Life insurance is a contract of utmost good faith, so both parties must disclose material information honestly. The applicant satisfied this duty by answering truthfully; the producer's observation is a separate underwriting matter.

Question 10Introduction to Life Insurance

Which of the following is a representation rather than a warranty in a life insurance application?

  1. A statement believed to be true to the best of the applicant's knowledge Correct answer.
  2. A promise that a future event will certainly occur
  3. A guarantee that the insured will never smoke
  4. A clause that voids coverage for any inaccuracy

Explanation

Applications generally ask for representations, which are statements believed true to the best of the applicant's knowledge. Only a material misrepresentation affects the contract, and the insurer may contest it during the contestable period.

Question 11Introduction to Life Insurance

A producer collects the initial premium and gives the applicant a receipt. Which document typically serves as the applicant's temporary evidence of insurance until the policy is issued?

  1. The buyer's guide
  2. The conditional receipt Correct answer.
  3. The certificate of authority
  4. The policy summary

Explanation

The conditional receipt acknowledges the premium and provides interim coverage if the underwriting conditions are met. It is not a permanent policy but bridges the gap before issue and delivery.

Question 12Introduction to Life Insurance

Which of the following statements about a binding receipt is correct?

  1. It provides coverage only after the first policy anniversary
  2. It provides no coverage until the policy is delivered
  3. It provides coverage only if the applicant dies in an accident
  4. It provides coverage from the date of the application regardless of insurability Correct answer.

Explanation

A binding receipt, also called an unconditional receipt, gives immediate coverage from the date of application even if the applicant later proves uninsurable. This makes it more favorable to the applicant than a conditional receipt.

Question 13Introduction to Life Insurance

An insurer issues a policy with a suicide exclusion that applies for two years. The insured dies by suicide 18 months after issue. What is the insurer's obligation?

  1. Pay the cash value plus the face amount
  2. Deny the claim entirely with no return of premium
  3. Pay the full face amount to the beneficiary
  4. Refund premiums paid, typically without interest, rather than pay the face amount Correct answer.

Explanation

A suicide clause limits the insurer's liability during the stated period, usually one to two years, to a return of premiums paid. After the exclusion period ends, suicide is treated like any other cause of death and the face amount is payable.

Question 14Introduction to Life Insurance

What is the primary purpose of the free-look provision in a life insurance policy?

  1. To allow the producer to replace the policy without disclosure
  2. To allow the owner to return the policy for a refund within a stated period after delivery Correct answer.
  3. To allow the insurer to cancel the policy for misrepresentation
  4. To allow the beneficiary to change the owner

Explanation

The free-look provision gives the policyowner a stated number of days after delivery to examine the policy and return it for a full premium refund. It protects consumers from buying unsuitable coverage.

Question 15Introduction to Life Insurance

A policyowner names a beneficiary and retains the right to change that designation without the beneficiary's consent. This designation is:

  1. Vested
  2. Revocable Correct answer.
  3. Contingent
  4. Irrevocable

Explanation

A revocable designation lets the owner change the beneficiary at any time during the insured's life without consent. An irrevocable designation requires the beneficiary's consent to change.

Question 16Introduction to Life Insurance

An insured names a spouse as primary beneficiary and two children as contingent beneficiaries. The spouse dies before the insured. At the insured's death, proceeds are paid to:

  1. The two children, per the contingent designation Correct answer.
  2. The spouse's estate
  3. The insurer retains the proceeds
  4. The insured's estate

Explanation

A contingent beneficiary receives proceeds if the primary beneficiary is not living when the insured dies. Because the spouse predeceased the insured, the contingent beneficiaries take the proceeds.

Question 17Introduction to Life Insurance

Which type of life insurance provides coverage for a specified period and builds no significant cash value?

  1. Term life Correct answer.
  2. Whole life
  3. Variable life
  4. Universal life

Explanation

Term insurance covers a defined period, such as 10 or 20 years, and pays only if death occurs during that term. It provides pure protection with no meaningful cash accumulation.

Question 18Introduction to Life Insurance

A 20-year level term policy is renewable and convertible. Which statement best describes the convertibility feature?

  1. The owner may convert the policy only by providing a new medical exam
  2. The beneficiary may convert the policy after the insured dies
  3. The owner may exchange the term policy for a permanent policy without new evidence of insurability Correct answer.
  4. The insurer may convert the policy to a lower face amount at its discretion

Explanation

Conversion allows the owner to exchange term coverage for a permanent policy without proving insurability, preserving the insured's health status. The premium is based on the attained age at conversion.

Question 19Introduction to Life Insurance

Which feature distinguishes whole life insurance from term insurance?

  1. It provides permanent coverage and accumulates cash value Correct answer.
  2. It pays only accidental death benefits
  3. It expires at a stated age
  4. It requires annual proof of insurability

Explanation

Whole life is permanent coverage that remains in force for the insured's lifetime as long as premiums are paid, and it builds guaranteed cash value. Term coverage is temporary and generally has no cash value.

Question 20Introduction to Life Insurance

A whole life policy is issued with a face amount of $500,000. The owner has paid premiums for 15 years and the cash value is $60,000. If the owner surrenders the policy, what does the owner generally receive?

  1. The total premiums paid with interest
  2. The cash surrender value, minus any outstanding loans and surrender charges Correct answer.
  3. Nothing, because surrender forfeits all value
  4. The full face amount

Explanation

Surrender entitles the owner to the cash surrender value, which is the cash value less any outstanding policy loans and applicable surrender charges. The face amount is paid only as a death benefit.

Question 21Introduction to Life Insurance

Which statement about a policy loan against a whole life policy is correct?

  1. The loan requires proof of insurability
  2. The loan reduces the death benefit and cash value if unpaid Correct answer.
  3. The loan must be repaid within 12 months or the policy lapses
  4. The loan is taxable as ordinary income when taken

Explanation

A policy loan is secured by the cash value, and any unpaid balance with interest is deducted from the death benefit or surrender value. Policy loans are generally not taxable while the policy remains in force.

Question 22Introduction to Life Insurance

An insured dies during the grace period after failing to pay a premium. What is the insurer's obligation?

  1. Pay the death benefit, less the overdue premium Correct answer.
  2. Deny the claim because the premium was unpaid
  3. Return premiums paid with no death benefit
  4. Pay only the cash value

Explanation

The grace period allows the policy to remain in force for a stated number of days after the due date. If death occurs during that period, the insurer pays the claim and deducts the unpaid premium.

Question 23Introduction to Life Insurance

A policy lapses because the owner stops paying premiums. Which nonforfeiture option provides continuing term coverage for a limited period with no further premiums due?

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

Explanation

Extended term insurance uses the net cash value to purchase term coverage at the original face amount for as long as that value will support. Reduced paid-up instead buys a smaller permanent policy.

Question 24Introduction to Life Insurance

Which dividend option under a participating whole life policy uses the dividend to buy additional permanent coverage at the insured's attained age?

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

Explanation

Paid-up additions use dividends to purchase small amounts of additional whole life coverage that require no further premiums. Each addition increases both the death benefit and cash value.

Question 25Introduction to Life Insurance

Which of the following is generally considered a legal purpose requirement for a life insurance contract?

  1. The insured must consent to coverage on their own life or have a valid insurable interest Correct answer.
  2. The policy must be delivered in person
  3. The beneficiary must be a family member
  4. The premium must be paid annually

Explanation

A life policy must be purchased for a lawful purpose, which generally means the owner has an insurable interest in the insured and the insured consents to being covered. Without this, the arrangement could be an illegal wagering contract.

Question 26Introduction to Life Insurance

Which of the following individuals would generally be considered to have an insurable interest in the life of a business partner?

  1. A competing business owner in the same industry
  2. A co-partner in the same business Correct answer.
  3. A supplier who sells goods to the partnership
  4. A customer who regularly purchases from the partnership

Explanation

Insurable interest exists when a person would suffer a financial loss from the death of the insured. Business partners typically have a mutual insurable interest because the death of one partner can cause financial disruption to the partnership. This interest must exist at the time the policy is purchased.

Question 27Introduction to Life Insurance

An insurer issues a policy on January 1. The policy includes a two-year suicide exclusion. The insured dies by suicide on March 1 of the following year. What is the insurer's obligation?

  1. Pay the policy's cash value or return premiums as specified in the policy Correct answer.
  2. Pay the face amount minus any outstanding policy loans
  3. Refund all premiums paid without interest and deny the death benefit
  4. Pay the full face amount because the exclusion period has expired

Explanation

A suicide exclusion typically limits the insurer's liability to a refund of premiums or the cash value if death by suicide occurs within the exclusion period. Because the death occurred within two years, the full death benefit is not payable. The exact refund is governed by the policy's suicide clause.

Question 28Introduction to Life Insurance

Which of the following best describes the purpose of the entire contract provision in a life insurance policy?

  1. It requires the policyowner to notify the insurer of any changes in health.
  2. It ensures that the policy and the application constitute the complete agreement. Correct answer.
  3. It grants the policyowner the right to return the policy for a full refund.
  4. It allows the insurer to modify the policy unilaterally after issue.

Explanation

The entire contract provision states that the policy, together with the attached application, constitutes the entire agreement between the parties. This prevents the insurer from incorporating outside documents or making unilateral changes. It protects the policyowner by ensuring that only the written contract governs.

Question 29Introduction to Life Insurance

An applicant for a life insurance policy pays the initial premium and receives a conditional receipt. The applicant is killed in an accident before the insurer completes underwriting. Which statement is correct?

  1. The insurer must return the premium and pay interest but has no death benefit obligation.
  2. The insurer must pay the death benefit only if the applicant was insurable under the insurer's underwriting standards. Correct answer.
  3. The insurer must pay the death benefit regardless of insurability because the premium was paid.
  4. The insurer has no obligation because the policy was not formally issued.

Explanation

A conditional receipt provides coverage only if the applicant meets the insurer's underwriting requirements. If the applicant was insurable at the time of application, the death benefit is payable even if the policy was not yet issued. If not insurable, the insurer refunds the premium.

Question 30Introduction to Life Insurance

Which of the following is an example of a representation in a life insurance application?

  1. A statement that the applicant is 35 years old Correct answer.
  2. A statement that the applicant's income will not decrease
  3. A guarantee that the applicant has never smoked
  4. A promise that the applicant will maintain good health

Explanation

A representation is a statement believed to be true to the best of the applicant's knowledge, such as age or health history. It is not a guarantee. A warranty, by contrast, is a statement that must be literally true. Most statements in a life insurance application are representations.

Question 31Introduction to Life Insurance

A policyowner dies while the policy is in force. The named primary beneficiary is the insured's spouse, but the spouse died one month earlier. The policy contains a standard contingent beneficiary designation naming the insured's children equally. How should the insurer distribute the proceeds?

  1. To the insured's estate, because the primary beneficiary predeceased
  2. To the policyowner's creditors, to satisfy outstanding debts
  3. To the insured's children, in equal shares Correct answer.
  4. To the spouse's estate, because the spouse was the primary beneficiary

Explanation

When the primary beneficiary predeceases the insured, the contingent beneficiary becomes entitled to the proceeds. The children, as named contingent beneficiaries, receive the death benefit in equal shares. The proceeds avoid probate because a valid beneficiary designation exists.

Question 32Introduction to Life Insurance

Which of the following best describes the purpose of the grace period in a life insurance policy?

  1. It provides a period during which the policyowner can change the beneficiary without consent.
  2. It allows the insurer to cancel the policy for any reason within a set time.
  3. It permits the policyowner to return the policy for a full refund.
  4. It gives the policyowner extra time to pay a premium without losing coverage. Correct answer.

Explanation

The grace period is a provision that allows the policyowner to pay a late premium within a specified number of days after the due date. Coverage remains in force during this period. If the insured dies during the grace period, the insurer pays the death benefit, typically minus any unpaid premium.

Question 33Introduction to Life Insurance

A whole life policy is issued with a face amount of $100,000. The policyowner has paid premiums for 10 years and the cash value is $12,000. The owner surrenders the policy. Which of the following is true regarding the surrender?

  1. The owner receives a refund of all premiums paid.
  2. The owner receives the cash value of $12,000, which may be reduced by any outstanding policy loan. Correct answer.
  3. The owner receives the full face amount of $100,000.
  4. The owner receives nothing because whole life policies have no surrender value.

Explanation

Surrendering a whole life policy entitles the owner to the policy's cash surrender value, not the face amount. Any outstanding policy loans or unpaid premiums are deducted from the cash value. The owner does not receive a refund of all premiums paid.

Question 34Introduction to Life Insurance

Which of the following statements about a renewable term life insurance policy is correct?

  1. The renewal is guaranteed only if the insured remains in good health.
  2. The policy automatically converts to permanent coverage at renewal.
  3. The insured must provide evidence of insurability to renew the policy.
  4. The premium increases at each renewal based on the insured's attained age. Correct answer.

Explanation

A renewable term policy allows the insured to renew coverage without providing evidence of insurability. The premium at renewal is based on the insured's attained age, so it increases as the insured gets older. Renewal does not convert the policy to permanent insurance.

Question 35Term and Permanent Life Insurance

An applicant buys a 20-year term life policy with a level death benefit and a renewable provision. Which statement best describes what the renewal provision allows?

  1. The insurer may raise the death benefit automatically at each policy anniversary
  2. The insured may extend coverage for another term without providing new evidence of insurability Correct answer.
  3. The owner may convert the policy to whole life at the original premium rate
  4. The beneficiary may renew the policy after the insured dies to extend the payout period

Explanation

A renewal (renewability) provision lets the insured continue term coverage for one or more additional terms without proving insurability. The premium at renewal is based on the insured's attained age, so it rises even though the death benefit stays level. Renewal does not convert the policy to permanent insurance.

Question 36Term and Permanent Life Insurance

Which characteristic distinguishes whole life insurance from term life insurance?

  1. Coverage lasts for the insured's lifetime and builds cash value Correct answer.
  2. Coverage is limited to a stated number of years
  3. The death benefit is payable only if death occurs during the policy term
  4. Premiums always increase at each renewal date

Explanation

Whole life is permanent coverage that remains in force for the insured's entire life, provided premiums are paid, and it accumulates a cash value. Term coverage, by contrast, is temporary and generally has no cash value. This permanence and cash accumulation are the defining differences.

Question 37Term and Permanent Life Insurance

A policyholder owns a participating whole life policy. What does the participating designation mean?

  1. The policyholder may vote on the insurer's investment portfolio
  2. The policy automatically converts to term insurance at retirement
  3. The death benefit is reduced each year by the dividend amount
  4. The policy is eligible to receive dividends from the insurer's divisible surplus Correct answer.

Explanation

Participating policies give the owner the right to share in the insurer's divisible surplus through dividends. Dividends are not guaranteed and are treated as a return of premium for tax purposes. They do not reduce the death benefit unless the owner chooses a reduced-paid-up or similar option.

Question 38Term and Permanent Life Insurance

Which premium payment arrangement results in the lowest total outlay over the life of a whole life policy, assuming the insured lives to life expectancy?

  1. Quarterly premiums
  2. Monthly premiums
  3. Semiannual premiums
  4. Annual premiums Correct answer.

Explanation

Insurers apply a modal factor that increases the total annual cost as payment frequency rises, because more frequent payments create more administrative expense and credit risk. Annual payment therefore carries the lowest total cost. The difference across modes is modest but consistent.

Question 39Term and Permanent Life Insurance

A 35-year-old buys a 10-year level term policy with a face amount of $250,000. If the insured survives the full 10-year term, what happens to the policy?

  1. It expires with no death benefit payable Correct answer.
  2. It continues as permanent coverage at a reduced face amount
  3. It automatically converts to whole life at the original premium
  4. It pays the face amount to the beneficiary at expiry

Explanation

Pure term insurance provides protection only during the stated term. If the insured outlives the term, the contract expires and no benefit is paid because no insured event occurred during coverage. Any continuation would require a renewal or conversion provision exercised before expiry.

Question 40Term and Permanent Life Insurance

Which of the following best describes the cash value of a traditional whole life policy in its early years?

  1. It grows slowly at first because early premiums cover acquisition costs Correct answer.
  2. It is equal to the total premiums paid from the first year
  3. It equals the face amount minus outstanding premiums
  4. It is unavailable until the policy has been in force 20 years

Explanation

Early whole life premiums fund expenses such as commissions and underwriting, so cash value accumulates slowly in the first years. It then grows more rapidly as those costs are recovered. Cash value never equals total premiums paid in the early years.

Question 41Term and Permanent Life Insurance

A policyowner wants the option that keeps a whole life policy in force with no further premium payments while retaining the full death benefit. Which dividend option accomplishes this?

  1. Reduced paid-up insurance
  2. Premium payment (cash) option Correct answer.
  3. Accumulate at interest
  4. Paid-up additions

Explanation

The premium payment option applies dividends toward the next premium due, so the owner can stop paying out of pocket while the full face amount remains in force. Paid-up additions buy small amounts of additional coverage instead. Reduced paid-up lowers the face amount rather than preserving it.

Question 42Term and Permanent Life Insurance

Which statement accurately describes the incontestability provision in a life insurance policy?

  1. The provision guarantees the policy cannot lapse for nonpayment of premium
  2. The insurer may contest the policy at any time if it discovers a material misstatement
  3. After a stated period, usually two years, the insurer generally cannot contest the policy for misrepresentation Correct answer.
  4. The provision allows the owner to cancel the policy for a full refund within ten days

Explanation

The incontestability clause bars the insurer from contesting the contract after a set period, commonly two years from issue, based on misstatements in the application. Fraudulent misrepresentation may still allow rescission in some circumstances. The clause protects the beneficiary's expectation of payment after the contestable period.

Question 43Term and Permanent Life Insurance

A 45-year-old owns a whole life policy with a $200,000 face amount and a $30,000 cash value. The owner surrenders the policy. Which amount is subject to income tax, assuming no loans and premiums paid of $40,000?

  1. $0 Correct answer.
  2. $30,000
  3. $10,000
  4. $200,000

Explanation

On surrender, the owner is taxed only on the gain, measured as cash value minus the cost basis (premiums paid). Here the cash value of $30,000 is less than the $40,000 basis, so there is no taxable gain. The death benefit is irrelevant because the policy was surrendered rather than paid out at death.

Question 44Term and Permanent Life Insurance

An insured owns a 15-year term policy with a convertible provision and wants permanent coverage. Which statement about conversion is correct?

  1. Conversion must occur before the end of the conversion period stated in the policy Correct answer.
  2. Conversion requires proof of insurability at the time of conversion
  3. Conversion is available only if the insured is terminally ill
  4. Conversion changes the policy into another term policy of equal length

Explanation

The conversion privilege allows the insured to exchange term coverage for permanent coverage without evidence of insurability, but it must be exercised within the conversion period defined in the contract. The new premium is based on the insured's attained age at conversion. Failing to convert before the deadline forfeits the right.

Question 45Term and Permanent Life Insurance

An insured pays a $2,000 annual premium on a whole life policy and dies six months into the policy year. How is the unused premium handled?

  1. It is used to purchase paid-up additions
  2. It is applied to the cash value of the policy
  3. It is refunded on a pro rata basis to the beneficiary or estate Correct answer.
  4. It is forfeited to the insurer as an expense charge

Explanation

When the insured dies mid-premium period, the insurer refunds the unearned portion of the premium, typically on a pro rata basis, along with the death benefit. The insurer has not earned premium for the period after death. This refund is separate from the death benefit itself.

Question 46Term and Permanent Life Insurance

Which of the following describes the extended term nonforfeiture option in a whole life policy?

  1. The policy is automatically surrendered for its cash value
  2. Cash value is used to buy a single-premium term policy for the full face amount for a limited period Correct answer.
  3. The owner may skip premiums for one year without interest charges
  4. Cash value is used to buy a reduced face amount of permanent coverage with no further premiums

Explanation

Under the extended term option, the net cash value purchases a single-premium term policy equal to the original face amount, running for whatever period that amount of value will support. It preserves the full death benefit temporarily rather than permanently. The reduced paid-up option is the one that lowers the face amount permanently.

Question 47Term and Permanent Life Insurance

A whole life policyowner has paid $50,000 in premiums and the policy has a $70,000 cash value. The owner takes a $20,000 policy loan. Which statement is correct?

  1. The loan is taxable as ordinary income in the year received
  2. The loan must be repaid within 12 months or the policy is void
  3. The loan permanently forfeits the policy's cash value
  4. The loan reduces the death benefit if not repaid, and interest accrues on the loan Correct answer.

Explanation

Policy loans are generally not taxable because they are advances against cash value, but unpaid loans plus interest reduce the death benefit and cash value. Interest accrues on the outstanding balance. If the loan plus interest exceeds cash value, the policy can lapse.

Question 48Term and Permanent Life Insurance

Which situation would most likely cause a life insurance policy to be classified as a modified endowment contract (MEC)?

  1. The policyowner selects the reduced paid-up nonforfeiture option
  2. The policy is funded with premiums that exceed the seven-pay test limit in the early years Correct answer.
  3. The insured converts a term policy to whole life
  4. The policyowner takes a policy loan equal to the cash value

Explanation

A MEC results when a policy is funded more rapidly than the seven-pay test allows, meaning premiums in the first seven years exceed what would pay the contract up in seven level payments. MEC treatment changes the tax rules for loans and withdrawals, which become taxable to the extent of gain and may incur a penalty before age 59½. Ordinary conversion or nonforfeiture elections do not create a MEC.

Question 49Term and Permanent Life Insurance

An applicant is underwritten for a term policy and is rated substandard. What does a substandard rating mean?

  1. The policy excludes all causes of death from coverage
  2. The policy is issued at a higher premium because of greater-than-average mortality risk Correct answer.
  3. The policy is issued with a reduced death benefit but standard premium
  4. The applicant is declined and no coverage will be issued

Explanation

A substandard (rated) classification means the insurer will issue coverage but charge more than the standard premium to reflect elevated mortality risk. The extra premium may be temporary or permanent depending on the impairment. A decline would be a separate underwriting outcome.

Question 50Term and Permanent Life Insurance

Which best explains why renewable term premiums increase at each renewal?

  1. The grace period shortens with each renewal
  2. The insurer recalculates premiums using the insured's attained age Correct answer.
  3. The death benefit increases at each renewal
  4. The policy converts to permanent coverage automatically

Explanation

Renewable term is priced on attained age, so each renewal reflects the insured's older age and higher mortality cost. The death benefit remains level under a level term design. This is why renewable term becomes progressively more expensive if held for many years.