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CO Life & Health practice questions

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Question 1Life Insurance

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

  1. Throughout the entire period of coverage
  2. At the time the claim is paid
  3. At the time the insured person dies
  4. At the time the application is submitted Correct answer.

Explanation

Insurable interest must exist when the policy is applied for and issued; it need not continue afterward. Property insurance is different because interest must exist at the time of loss. If the relationship later ends, the life policy remains valid.

Question 2Life Insurance

Which of the following describes level term life insurance?

  1. It provides lifetime coverage with a premium that never changes
  2. It pays a stated benefit only if death occurs during the term Correct answer.
  3. It builds a guaranteed cash value the owner can borrow
  4. It pays a benefit only if the insured survives the term

Explanation

Level term pays a fixed face amount if the insured dies within the stated term and builds no cash value. If the insured outlives the term, nothing is paid and coverage ends unless a renewal or conversion right is used.

Question 3Life Insurance

A policyowner designates a revocable primary beneficiary. What does the owner retain?

  1. The right to receive the death benefit if the beneficiary dies first
  2. The right to change the beneficiary without that person's consent Correct answer.
  3. The right to assign the policy only with the beneficiary's approval
  4. The right to cancel the beneficiary's interest after the insured dies

Explanation

A revocable designation leaves the owner in full control, so the beneficiary can be changed at any time without consent. Only an irrevocable designation requires the beneficiary's written consent to a change.

Question 4Life Insurance

What is the purpose of the grace period in an individual life insurance policy?

  1. It keeps coverage in force after a premium due date is missed Correct answer.
  2. It lets the insurer contest the policy after the contestable period
  3. It allows the owner to return the policy for a full premium refund
  4. It delays the start of coverage until the first premium is paid

Explanation

The grace period, usually 30 or 31 days, keeps the policy in force after a premium due date passes so the owner can still pay. If the insured dies during that period, any unpaid premium is deducted from the proceeds.

Question 5Life Insurance

The incontestability clause provides that, after the policy has been in force for two years, the insurer:

  1. Must pay double the face amount for an accidental death
  2. Must refund all premiums if the insured dies of natural causes
  3. Can adjust the benefit if the insured's age was misstated
  4. Can no longer contest the policy for application misstatements Correct answer.

Explanation

After the contestable period, usually two years from issue, the insurer may not rescind the policy or deny a claim because of a misstatement on the application. Misstatements of age or sex are still corrected by adjusting the benefit, and nonpayment of premium still causes a lapse.

Question 6Life Insurance

If the insured dies by suicide during the two-year suicide clause period, the insurer will typically:

  1. Pay the full face amount to the named beneficiary
  2. Void the contract and keep all premiums paid
  3. Pay the full face amount after two years have passed
  4. Refund premiums paid and deny the death benefit Correct answer.

Explanation

A suicide clause limits the insurer's liability during the first two years; if death is by suicide in that period, the insurer returns the premiums paid and pays no face amount. After the clause expires, suicide is treated like any other cause of death.

Question 7Life Insurance

Which feature distinguishes ordinary whole life from term life?

  1. It can be renewed each term without new underwriting
  2. It provides lifetime coverage and guaranteed cash value Correct answer.
  3. It charges a premium that rises each year as the insured ages
  4. It pays a benefit only when the insured survives the term

Explanation

Whole life is permanent coverage with a level premium and a guaranteed cash value that grows over time. Term coverage is temporary and builds no cash value, so it cannot deliver lifetime protection at a level premium.

Question 8Life Insurance

In Colorado, a person who buys an individual life insurance policy may return it for a full refund during which period?

  1. Three days after the policy is delivered
  2. Five days after the application is signed
  3. Thirty days after the first premium is paid
  4. Ten days after the policy is delivered Correct answer.

Explanation

Colorado gives the owner of a newly delivered individual life policy a free-look period of at least ten days to return it for a full refund. The period runs from delivery of the policy, not from the date of application.

Question 9Life Insurance

If an insured's age was understated on the application and the error is discovered at death, the insurer will:

  1. Pay what the premium would have bought at the true age Correct answer.
  2. Pay the full face amount because age errors are ignored
  3. Pay the face amount and bill the estate for the difference
  4. Pay nothing and rescind the policy back to its issue date

Explanation

The misstatement of age or sex provision adjusts the death benefit to the amount the premium actually paid would have purchased at the correct age. The policy is not rescinded, and no difference is billed to the estate.

Question 10Life Insurance

To reinstate a lapsed life insurance policy, the owner generally must:

  1. Pay only the current premium and wait thirty days for approval
  2. Sign a new application and accept a new contestable period
  3. Surrender all cash value accumulated before the policy lapsed
  4. Show evidence of insurability and pay overdue premiums Correct answer.

Explanation

Reinstatement restores a lapsed policy when the owner provides evidence of insurability and pays overdue premiums with interest, along with repaying any policy loan. It is generally available for up to three years after the lapse, and a new contestable period may apply to the restored coverage.

Question 11Life Insurance

What does the automatic premium loan provision do?

  1. It uses cash value to pay a premium so the policy stays in force Correct answer.
  2. It converts the policy into a paid-up contract at the due date
  3. It cancels the policy when a premium is more than thirty days late
  4. It lends the owner money equal to the policy's full cash value

Explanation

The automatic premium loan provision authorizes the insurer to advance an unpaid premium from the policy's cash value so coverage does not lapse. The advance is a loan that accrues interest and reduces both cash value and the death benefit.

Question 12Life Insurance

An owner stops paying premiums on a whole life policy and elects the extended term option. What happens?

  1. The policy continues with the same premium and no cash value
  2. The face amount is reduced and coverage continues for life
  3. The insurer refunds the cash value and ends all coverage
  4. Cash value buys term equal to the original face amount Correct answer.

Explanation

Under extended term, the net cash value is used as a single premium to buy term insurance equal to the original face amount for as long as that amount will purchase. No further premiums are due, and no cash value remains.

Question 13Life Insurance

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

  1. It reduces the death benefit if outstanding at death Correct answer.
  2. It can exceed the policy's cash value by up to ten percent
  3. It is taxable income to the owner in the year it is received
  4. It must be repaid within twelve months or the policy is void

Explanation

A policy loan is an advance from the owner's own cash value, so it is not taxable income. Interest accrues, and any unpaid balance plus interest is subtracted from the death benefit; the insurer cannot demand repayment while the policy remains in force.

Question 14Life Insurance

Under the paid-up additions dividend option, each dividend is used to:

  1. Accumulate at interest in a fund the owner can withdraw
  2. Reduce the next premium due on the base policy
  3. Buy a small amount of additional permanent coverage Correct answer.
  4. Purchase one-year term insurance equal to the dividend

Explanation

Paid-up additions use each dividend to buy additional single-premium permanent insurance at the insured's attained age. The additions carry their own cash value and generally are not subject to a new contestable period.

Question 15Life Insurance

What right does a convertible term policy give the owner?

  1. To convert the policy into an annuity with a guaranteed rate
  2. To renew the term coverage at the same premium again
  3. To raise the face amount at any time without a new exam
  4. To trade it for permanent coverage without a medical exam Correct answer.

Explanation

The conversion privilege lets the owner exchange term coverage for a permanent policy without new evidence of insurability, with the premium based on the attained age at conversion. This protects the owner if health declines during the term.

Question 16Life Insurance

Because universal life has flexible premiums, what happens if the cash value cannot cover the monthly cost of insurance?

  1. The policy converts to extended term with the same face amount
  2. The insurer automatically raises the death benefit to compensate
  3. The insurer bills the beneficiary for the shortfall at death
  4. The policy lapses unless the owner pays more premium Correct answer.

Explanation

Universal life deducts the cost of insurance and expenses from the cash value each month while the owner controls the premium. If the cash value is exhausted and no additional premium is paid, the policy lapses unless a no-lapse guarantee applies.

Question 17Life Insurance

Which is true of variable life insurance cash values?

  1. They rise and fall with separate account performance Correct answer.
  2. They are guaranteed never to fall below the initial premium
  3. They are held in the insurer's general investment account
  4. They earn a fixed rate set by the insurer each year

Explanation

Variable life cash value is invested in separate account subaccounts chosen by the owner, so it fluctuates with investment performance and is not guaranteed. Because the contract is a security, selling it requires a securities registration in addition to a life license.

Question 18Life Insurance

In group life insurance, what document does an employee receive as proof of coverage?

  1. An individual policy naming the employee as owner
  2. A binder issued by the insurer's agent at enrollment
  3. The employer's trust agreement with the insurer
  4. A certificate of coverage under the master policy Correct answer.

Explanation

The employer or trustee holds the master policy, and each participant receives a certificate summarizing the benefits and rights. Underwriting is done on the group as a whole rather than on individual evidence of insurability.

Question 19Life Insurance

A beneficiary selects the life income settlement option. How long will payments continue?

  1. For a fixed number of years chosen by the beneficiary
  2. Until the entire principal and interest have been paid out
  3. Until the beneficiary reaches age sixty-five or dies
  4. For as long as the beneficiary lives, with no end date Correct answer.

Explanation

The life income option pays the beneficiary for life, with the payment amount based on the beneficiary's age, sex and the assumed interest rate. Payments stop at death unless a period certain or refund feature is added.

Question 20Life Insurance

What risk does an immediate annuity primarily address for a retiree?

  1. The risk of outliving the funds set aside for income Correct answer.
  2. The risk that inflation will erode a fixed pension payment
  3. The risk that the insurer will become insolvent before payout
  4. The risk of dying earlier than the savings are used up

Explanation

An immediate annuity converts a lump sum into income that can be guaranteed for life, addressing the risk of outliving one's savings. Life insurance addresses the opposite risk of dying before income needs end.

Question 21Life Insurance

A life policy fails the seven-pay test, making it a modified endowment contract. What is the tax result?

  1. Loans and withdrawals face a ten percent penalty before age 59½ Correct answer.
  2. The death benefit is fully taxable to the beneficiary as income
  3. Premiums paid into the contract are no longer deductible
  4. The contract must be surrendered within sixty days

Explanation

A policy that fails the seven-pay test is taxed like an annuity, so distributions are treated as income first, and a 10% penalty applies before age 59½ unless an exception applies. The death benefit itself remains income-tax free to the beneficiary.

Question 22Life Insurance

An individual sells a life policy to an unrelated investor. What is the consequence of the transfer-for-value rule?

  1. The sale is void because policies may never be transferred
  2. The insurer must refund the premiums paid by the original owner
  3. The policy becomes a modified endowment contract automatically
  4. The benefit becomes taxable to the buyer in most cases Correct answer.

Explanation

Under the transfer-for-value rule, a policy sold for valuable consideration loses its income-tax-free death benefit in the buyer's hands, except in specified cases such as transfers to the insured, a partner, or certain corporations. Those exceptions preserve the exclusion.

Question 23Life Insurance

Section 7702 of the Internal Revenue Code requires a life insurance contract to meet which test to be taxed as life insurance?

  1. It must satisfy the cash value or guideline premium test Correct answer.
  2. The cash value must equal the face amount by the tenth year
  3. The policy must credit interest at a rate of at least three percent
  4. The owner must be insured until at least age sixty-five

Explanation

Section 7702 defines which contracts qualify as life insurance for federal tax purposes by requiring either the cash value accumulation test or the guideline premium and corridor test. A contract that fails both is not taxed as life insurance.

Question 24Life Insurance

Why is stranger-originated life insurance prohibited?

  1. It automatically creates a modified endowment contract
  2. It lacks insurable interest at inception for the buyer Correct answer.
  3. It prevents the insured from naming a family beneficiary
  4. It requires the insurer to register the policy as a security

Explanation

Stranger-originated life insurance is arranged by investors who have no insurable interest in the insured's life, making the contract a wager on a human life and void under state law. Coverage must be obtained in good faith for protection rather than for resale to investors.

Question 25Life Insurance

Which exchange qualifies for tax deferral under Section 1035?

  1. A term life policy exchanged for a mutual fund account
  2. A life policy surrendered for cash and then reinvested
  3. An annuity exchanged for a term life insurance policy
  4. A whole life policy traded for a universal life policy Correct answer.

Explanation

Section 1035 permits tax-free exchanges of a life policy for another life policy or for an annuity, and an annuity for an annuity. Transfers from an annuity to life insurance, or from a policy to a non-insurance asset, do not qualify.

Question 26Life Insurance

If the insured dies during the grace period before the overdue premium is paid, the insurer will:

  1. Refund all premiums paid and pay no death benefit
  2. Pay the face amount minus the overdue premium Correct answer.
  3. Deny the claim because the policy had already lapsed
  4. Pay the full face amount with no deduction taken

Explanation

Coverage continues in force throughout the grace period, but the unpaid premium remains a debt owed to the insurer. If death occurs before payment, the insurer pays the face amount reduced by the overdue premium.

Question 27Life Insurance

Once a life insurance policy has been in force for two years during the insured's lifetime, the insurer generally can no longer contest the policy because of:

  1. A material misstatement on the application Correct answer.
  2. The insured's death occurring within the contestable period
  3. Failure to pay a premium when due
  4. A policy assigned to a third party without notice

Explanation

The incontestability clause bars the insurer from contesting the policy for misrepresentation after it has been in force for two years during the insured's lifetime. Nonpayment of premium remains a valid ground for termination at any time.

Question 28Life Insurance

Under a conditional receipt, coverage becomes effective when:

  1. The insurer's home office underwriting department approves the application and issues the policy
  2. The applicant signs the application and pays the initial premium, whether or not insurable
  3. The producer delivers the policy and collects the first premium from the applicant at delivery
  4. The application is complete, the initial premium is paid, and the applicant is insurable Correct answer.

Explanation

A conditional receipt provides temporary coverage only if the applicant proves insurable under the insurer's underwriting rules. If the applicant would not have qualified as a standard risk, no coverage attaches even though the premium was paid.

Question 29Life Insurance

Insurable interest in a life insurance policy must exist:

  1. At the time the insured dies
  2. Only when a beneficiary is changed
  3. Continuously for the entire policy term
  4. At the time the policy is issued Correct answer.

Explanation

Insurable interest is tested when the contract is formed, which is why a policy can be issued on a business partner or spouse. Once issued, coverage stays valid even if the relationship later ends, such as after a divorce.

Question 30Life Insurance

If the owner names an irrevocable beneficiary, the owner may change that beneficiary only with:

  1. The irrevocable beneficiary's written consent Correct answer.
  2. The producer's signature
  3. A court order
  4. The insurer's written approval

Explanation

An irrevocable beneficiary holds a vested interest in the policy proceeds. The owner cannot change the designation, borrow against the policy, or surrender it without that beneficiary's written consent.

Question 31Life Insurance

The entire contract provision means the policy consists of:

  1. The policy and any separate advertising or sales material provided
  2. The policy, the application, and any attached riders or endorsements Correct answer.
  3. The policy alone, with no other documents considered part of it
  4. The policy together with the producer's written recommendations and notes

Explanation

The entire contract provision states that the policy, the attached application, and any riders or endorsements constitute the whole agreement. Nothing outside those documents can be added by the insurer.

Question 32Life Insurance

A decreasing term life policy is most commonly used to:

  1. Accumulate cash value for the insured's retirement
  2. Fund a buy-sell agreement with a fixed, unchanging value
  3. Cover a declining mortgage or other debt balance Correct answer.
  4. Provide a level income for a surviving spouse for life

Explanation

Decreasing term provides a face amount that declines over time, matching the balance of a mortgage or other amortizing loan. The premium usually stays level even though the benefit shrinks.

Question 33Life Insurance

Under Section 79, employer-paid group term life coverage is free of imputed income to the employee up to:

  1. $50,000 of coverage Correct answer.
  2. $10,000 of coverage
  3. $100,000 of coverage
  4. $25,000 of coverage

Explanation

Section 79 allows employer-paid group term coverage up to $50,000 without imputed income to the employee. Coverage above that amount is taxed using IRS Table I rates based on the employee's age.

Question 34Life Insurance

If a beneficiary dies before the insured and the designation is per stirpes, that beneficiary's share goes to:

  1. That beneficiary's descendants, by right of representation Correct answer.
  2. The remaining primary beneficiaries, divided equally among them
  3. The insured's estate, to be distributed by the probate court
  4. The contingent beneficiary named last on the designation form

Explanation

Per stirpes means by branch: a deceased beneficiary's share passes to that beneficiary's descendants. Per capita, by contrast, would divide the deceased beneficiary's share among the surviving primary beneficiaries.

Question 35Life Insurance

A spendthrift clause in a life insurance policy:

  1. Protects settlement proceeds from the beneficiary's creditors Correct answer.
  2. Requires the insurer to pay all proceeds in a single lump sum
  3. Allows the beneficiary to borrow against the future settlement payments
  4. Lets creditors attach the beneficiary's settlement payments

Explanation

A spendthrift clause prevents a beneficiary from assigning or encumbering settlement proceeds and shields those proceeds from the beneficiary's creditors. It applies only to amounts the insurer still holds.

Question 36Life Insurance

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

  1. Name a creditor as an irrevocable primary beneficiary
  2. Transfer all ownership rights permanently to another person
  3. Pledge the policy as security for a loan Correct answer.
  4. Avoid probate by transferring the policy to a trust

Explanation

A collateral assignment pledges the policy as security for a debt, giving the lender rights only up to the amount owed. Any proceeds above the debt go to the named beneficiary.

Question 37Life Insurance

Under a typical waiver of premium rider, premiums are waived once the insured has been totally disabled for:

  1. Six months Correct answer.
  2. 30 days
  3. Two years
  4. One year

Explanation

Waiver of premium riders typically require total disability to persist through a waiting period, commonly about six months, before premiums are waived. Premiums paid during the waiting period are usually refunded.

Question 38Life Insurance

A guaranteed insurability rider allows the insured to:

  1. Buy additional coverage at stated ages without proving insurability Correct answer.
  2. Reinstate a lapsed policy without paying any premiums
  3. Convert the policy to an annuity without paying a fee
  4. Increase the death benefit at any time without any underwriting limit

Explanation

The guaranteed insurability rider lets the insured purchase specified amounts of additional coverage at stated ages or events without new underwriting. The premium is based on the insured's age when the coverage is purchased.

Question 39Life Insurance

The accidental death benefit rider typically pays:

  1. A refund of all premiums paid if the insured dies accidentally
  2. A guaranteed monthly income for life to the beneficiary instead of paying the face amount
  3. An additional amount equal to or a multiple of the face amount if death results from an accident Correct answer.
  4. The face amount only, with no extra amount for accidental death

Explanation

An accidental death benefit, often called double indemnity, pays an extra amount in addition to the face amount when death results from an accident as defined in the rider. Exclusions usually include death from sickness and certain hazardous activities.

Question 40Life Insurance

An accelerated death benefit rider allows the owner to:

  1. Double the face amount of the policy upon accidental death
  2. Receive part of the death benefit early upon proof of terminal illness Correct answer.
  3. Convert the policy into a term policy at any time without evidence
  4. Skip premium payments during a period of involuntary unemployment

Explanation

An accelerated death benefit lets a terminally ill insured receive a portion of the death benefit while alive, with the remaining amount paid to the beneficiary later. The early payout is usually discounted for early payment.

Question 41Life Insurance

A survivorship (second-to-die) life insurance policy pays the death benefit when:

  1. The younger insured reaches age 65
  2. The first of the two insureds dies
  3. The policy's cash value equals the face amount
  4. Both insureds have died Correct answer.

Explanation

A survivorship policy insures two people, usually spouses, and pays when the second insured dies. It is often used to fund estate taxes that come due at the second death.

Question 42Life Insurance

A modified whole life policy is characterized by:

  1. A single premium paid at issue to fund lifelong coverage
  2. Premiums that remain level for the entire lifetime of the policy
  3. Coverage that expires at the end of a stated term of years
  4. Lower premiums in the early years that increase to a higher level later Correct answer.

Explanation

Modified whole life charges lower premiums in the early policy years, then steps up to a higher level for the remaining years. It provides lifelong coverage with a cash value.

Question 43Life Insurance

Under the interest-only settlement option, the insurer:

  1. Converts the proceeds into a life annuity for the beneficiary
  2. Pays equal installments until the proceeds plus earned interest are fully exhausted
  3. Pays the face amount in a single lump sum at the time of death
  4. Holds the proceeds and pays interest to the beneficiary, leaving principal intact Correct answer.

Explanation

Under interest only, the insurer retains the proceeds and pays the beneficiary the interest earned, with the principal distributed later as directed. The principal itself is not depleted by the payments.

Question 44Life Insurance

In a key person life insurance arrangement, the policy is owned by and payable to:

  1. The key employee's estate
  2. The key employee's spouse
  3. The business, which is also the beneficiary Correct answer.
  4. The key employee, who can name any beneficiary the employee chooses

Explanation

Key person insurance protects a business against the loss of an essential employee. The business owns the policy, pays the premium, and receives the death benefit.

Question 45Life Insurance

An applicant may backdate a life insurance policy in order to:

  1. Avoid the suicide clause period
  2. Reduce the death benefit in exchange for a lower premium
  3. Shorten the contestability period
  4. Save age and obtain a lower premium rate Correct answer.

Explanation

Backdating the policy to an earlier issue date can save age, placing the insured in a younger age bracket and lowering the premium. Insurers limit how far back a policy may be backdated, usually six months.

Question 46Life Insurance

In a Section 162 executive bonus plan, the employer pays premiums on a policy owned by the executive, and the employer:

  1. Avoids any income tax consequence to the executive
  2. Defers the premium cost until the executive retires
  3. Deducts the premium as compensation to the executive Correct answer.
  4. Retains all ownership rights to the policy and its cash value

Explanation

In an executive bonus plan, the employer pays premiums on a policy the executive owns, and the premium is deductible to the employer as compensation. The executive reports the premium as taxable income and may receive a bonus to cover that tax.

Question 47Life Insurance

In a traditional split-dollar arrangement between an employer and an executive, the employer typically:

  1. Owns the policy outright and names the executive's family as the sole owner
  2. Gives up all rights to recover any premiums it has paid
  3. Receives the entire death benefit and pays none of the annual premium
  4. Pays the portion of premium that builds cash value and is repaid at death Correct answer.

Explanation

In a traditional split-dollar plan, the employer pays the portion of premium that builds cash value and is reimbursed from the death benefit or cash value at termination. The employee's beneficiary receives the remaining death benefit.

Question 48Life Insurance

Under Colorado's replacement regulation, when a producer submits an application that will replace existing life insurance, the producer must:

  1. Reduce the new policy's face amount to match the old policy
  2. Wait 30 days after the sale before submitting the new application
  3. Obtain the insurer's written consent before contacting the client
  4. Present and read a signed replacement notice to the applicant Correct answer.

Explanation

Colorado's replacement regulation requires the producer to present and read a signed replacement notice to the applicant when new coverage will replace existing coverage. The insurer must also be notified that a replacement is involved.

Question 49Life Insurance

In a viatical settlement, a person with a terminal illness typically:

  1. Borrows against the policy's cash value at a low interest rate
  2. Exchanges the policy tax free for an annuity contract
  3. Sells the policy to a settlement provider for less than the face amount Correct answer.
  4. Assigns the policy to the insurer in return for a refund of premiums

Explanation

A viatical settlement is the sale of a life insurance policy by a terminally ill insured to a settlement provider for a percentage of the face amount. The provider becomes the owner and beneficiary and keeps paying the premiums.

Question 50Life Insurance

Under the Fair Credit Reporting Act, if an insurer declines an application based on a consumer report, the insurer must:

  1. Obtain the applicant's written permission before declining
  2. Refund the initial premium within 10 days
  3. Notify the applicant and provide the name of the reporting agency Correct answer.
  4. Send the applicant a copy of the complete investigative report

Explanation

Under the FCRA, an insurer that takes adverse action based on a consumer report must notify the applicant and identify the reporting agency. That notice allows the applicant to obtain the report and dispute any inaccurate information.