DE Life & Health common mistakes
DE Life & Health · Understand the traps and how to avoid them.
On an incontestability question, the candidate selects 'the insurer can void the policy and refund premiums' after learning the insured misstated age or sex more than two years after issue.
The candidate lumps every application misstatement into the incontestability clause and forgets that age and sex misstatements are handled by a separate policy provision that adjusts benefits rather than rescinds the contract.
What to do instead
Separate the provisions: after the contestable period the insurer generally cannot rescind for fraud, but a misstatement of age or sex adjusts the death benefit to what the premium would have purchased at the correct age/sex; nonpayment of premium remains a basis for lapse.
The candidate calculates tax on a withdrawal from a nonqualified deferred annuity as basis-first, treating the withdrawal as tax-free until the owner recovers premiums paid.
The candidate carries over IRA/Roth intuition ('contributions come out first') and does not apply the annuity-specific gain-first rule.
What to do instead
For nonqualified annuities before annuitization, withdrawals are taxed LIFO: taxable gain comes out first, then basis; add the 10% early-withdrawal penalty on the taxable portion before age 59½ unless an exception applies, and apply the same LIFO/penalty treatment to MEC loans and withdrawals.
The candidate states that a life insurance death benefit is always completely tax-free, including for estate tax purposes.
The candidate remembers the general income-tax exclusion for death proceeds and never separates income taxation from estate taxation.
What to do instead
State both rules: death proceeds are generally excluded from the beneficiary's gross income, but the proceeds are included in the insured's gross estate if the insured held incidents of ownership at death or transferred the policy within three years of death.
The candidate says Medicare Part A pays physician and outpatient services and Part B pays inpatient hospital costs.
The candidate memorizes 'A and B' without anchoring each part to a benefit category, and the letters do not intuitively indicate hospital versus medical.
What to do instead
Anchor the parts: Part A = inpatient hospital, skilled nursing facility, hospice, some home health; Part B = physician/outpatient, durable medical equipment, outpatient therapy; Part C = Medicare Advantage; Part D = outpatient prescription drugs.
The candidate computes a health claim by applying the coinsurance percentage to the full provider charge before subtracting the deductible, or treats coinsurance as a flat dollar amount.
The candidate confuses coinsurance (a percentage of allowed charges) with a copay (a fixed dollar amount) and skips the order of cost-sharing steps.
What to do instead
Use the sequence: allowed charge, then deductible, then coinsurance on the remaining allowed amount, capped by the out-of-pocket maximum; a copay is a fixed dollar amount and is not a percentage of the charge.
The candidate describes the elimination period in a disability income policy as the initial period after issue during which sickness is not covered.
The candidate confuses the elimination period with the probationary period because both sound like 'waiting periods.'
What to do instead
Define them separately: the elimination period is the waiting period after a disability begins before benefits are payable; the probationary period is the initial period after issue during which a specified cause of disability (often sickness) is not covered.
The candidate says the reduced paid-up nonforfeiture option keeps the original face amount but shortens the coverage period, and that extended term insurance reduces the face amount.
The two nonforfeiture options are memorized as a pair without attaching the face/term trade-off to each one.
What to do instead
Attach the trade-off: reduced paid-up = smaller face amount, no further premiums, coverage continues for life; extended term = original face amount, no further premiums, coverage continues for a limited term; cash surrender = lump-sum surrender value.
The candidate labels an agent's misrepresentation of a policy's benefits to persuade a client to drop an existing policy as 'rebating.'
All unfair trade practices are studied in one block and the candidate matches the wrong label to the fact pattern because the definitions overlap in the 'wrongful inducement' sense.
What to do instead
Match the label to the conduct: rebating = offering anything of value not stated in the policy to induce a sale; twisting = misrepresentation to induce lapse/replacement; churning = replacing a policy primarily to generate new commissions; use the specific conduct, not the general category.
The candidate divides a deceased beneficiary's share equally among all surviving grandchildren instead of limiting it to that beneficiary's own descendants.
The candidate treats 'per stirpes' as an equal-head count and does not trace the family tree by branch.
What to do instead
Draw the branch: per stirpes splits the deceased beneficiary's share among that beneficiary's descendants by right of representation; per capita splits among surviving named beneficiaries equally by head.
The candidate treats any false statement on a life insurance application as automatically voiding the policy, even when the statement is immaterial or the policy is past the contestable period.
The candidate conflates warranties (strict conditions) with representations (statements believed true) and ignores materiality and the contestability period.
What to do instead
Apply the representation rule: application answers are representations, and the insurer may rescind only for a material misrepresentation during the contestable period; an immaterial or post-contestable misstatement does not automatically void coverage.