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IIQE Paper 3 study materials
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IIQE Paper 3 practice questions

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Question 1Life insurance products and policy features

Under a whole life insurance policy, which statement best describes when the death benefit is payable?

  1. On the death of the insured, whenever that occurs, provided the policy is in force Correct answer.
  2. Only during the first ten policy years, after which coverage ceases
  3. Only if death occurs before the insured reaches age 65
  4. Only if death results from an accident rather than illness

Explanation

Whole life cover is permanent: the sum assured is paid whenever the insured dies, so long as premiums are paid and the policy has not lapsed or been surrendered. There is no fixed expiry age and no restriction to accidental death. This permanence is the defining contrast with term insurance.

Question 2Life insurance products and policy features

A policyholder wants the lowest initial premium for a large death benefit over a fixed 20-year period, with no savings element. Which product type fits best?

  1. Annuity certain
  2. Endowment policy
  3. Term insurance Correct answer.
  4. Whole life policy

Explanation

Term insurance provides pure protection for a defined period and builds no cash value, so the premium per unit of sum assured is the lowest of the protection products. Endowment and whole life both carry a savings or permanent element that raises cost. An annuity is a vehicle for paying out capital, not for providing a death benefit.

Question 3Life insurance products and policy features

Which feature distinguishes an endowment policy from a whole life policy?

  1. The endowment has no surrender value at any time
  2. The endowment pays a benefit only when death is accidental
  3. The endowment pays the sum assured at a fixed maturity date if the insured survives, as well as on earlier death Correct answer.
  4. The endowment can only be issued to insureds aged over 60

Explanation

An endowment is a savings-plus-protection contract with a fixed term: it pays on survival to maturity or on earlier death. Whole life pays only on death and has no contractual maturity payout date. This survival benefit is the key structural difference.

Question 4Life insurance products and policy features

What is the primary purpose of a universal life policy's flexible premium feature?

  1. To allow the policyholder to vary premium payments within limits, with the account value absorbing the difference Correct answer.
  2. To guarantee a fixed premium for the entire policy term
  3. To remove the need for any mortality charge
  4. To convert the policy automatically into a term contract at age 65

Explanation

Universal life separates the protection and savings elements, allowing premiums to be adjusted within contractual limits while the accumulated account value funds mortality and expense charges. Paying less draws down the account value; paying more builds it. The mortality charge is not eliminated by this flexibility.

Question 5Life insurance products and policy features

An insured under a participating (with-profits) whole life policy has received reversionary bonuses for several years. What is the effect of these bonuses?

  1. They increase the sum assured and become payable on death, subject to policy terms Correct answer.
  2. They convert the policy into a unit-linked contract
  3. They reduce the premium payable in future years
  4. They are paid only if the policy is surrendered within 12 months

Explanation

Reversionary bonuses, once declared, are normally irrevocable and are added to the sum assured, increasing the death benefit. They are not a premium discount and do not alter the fundamental nature of the contract. Some policies also carry terminal bonuses payable at claim.

Question 6Life insurance products and policy features

In a unit-linked life policy, what does the policyholder's fund value represent?

  1. The sum assured stated on the policy schedule
  2. A guaranteed minimum return underwritten by the insurer
  3. The value of units held, which fluctuates with the performance of the underlying investments Correct answer.
  4. The total premiums paid, less a fixed administration fee

Explanation

Premiums in a unit-linked policy buy units in an investment fund, and the policy value is the number of units multiplied by the current unit price. That price moves with market performance, so investment risk rests with the policyholder. It is not a guaranteed return nor the flat sum assured.

Question 7Life insurance products and policy features

Which statement correctly describes the free-look period in a life insurance policy?

  1. A period during which the insurer may cancel the policy without notice
  2. A period during which the policyholder may cancel the policy and receive a refund of premiums, subject to the terms Correct answer.
  3. A period after which no further premiums are payable
  4. A period during which the insured may change the nominated beneficiary without consent

Explanation

The free-look period gives the policyholder a cooling-off window after delivery of the policy to reconsider the purchase and cancel, with premiums refunded in accordance with the policy and applicable regulatory requirements. It protects the buyer rather than the insurer. It does not affect premium obligations or beneficiary nomination rules.

Question 8Life insurance products and policy features

A life policy contains a suicide exclusion clause. What does this typically mean?

  1. The insurer will double the benefit for suicide within the first year
  2. The insurer will not pay the death benefit if the insured dies by suicide within a specified initial period, though premiums may be refunded Correct answer.
  3. The insurer will pay the sum assured if death by suicide occurs at any time
  4. The insurer will pay only if suicide is witnessed by a third party

Explanation

Suicide exclusions commonly apply for an initial period, often one or two years, after which the policy pays on death from any cause. If death by suicide occurs within that period, the insurer normally refunds premiums paid rather than paying the sum assured. The clause limits early anti-selection risk.

Question 9Life insurance products and policy features

What is the main effect of a non-forfeiture provision in a traditional life policy?

  1. The policy acquires a surrender value or paid-up value after a specified period of premium payment Correct answer.
  2. The policyholder forfeits all benefits if one premium is late
  3. The insurer may cancel the policy without refund at any time
  4. The policy automatically lapses when the insured changes occupation

Explanation

Non-forfeiture provisions protect the policyholder's accumulated value: after premiums have been paid for a set period, the policy generally has a surrender value or can be converted to a reduced paid-up policy. Without such a provision, a lapse could extinguish all value. The provision works in the policyholder's favour.

Question 10Life insurance products and policy features

A policyholder has stopped paying premiums on a whole life policy that has acquired a surrender value. Which option is typically available under the non-forfeiture provisions?

  1. Convert the policy into a unit-linked contract automatically
  2. Extend the policy to cover the insured's spouse at no cost
  3. Take a reduced paid-up sum assured for the remaining lifetime Correct answer.
  4. Increase the sum assured without further underwriting

Explanation

Where premiums cease on a policy with value, the policyholder may usually elect a reduced paid-up sum assured, surrender for cash, or take an extended term option. A reduced paid-up policy keeps cover in force at a lower benefit with no further premiums. The other options are not standard non-forfeiture elections.

Question 11Life insurance products and policy features

What is the function of an incontestability clause in a life insurance policy?

  1. It requires the insured to submit to a medical examination every year
  2. It prevents the insurer from contesting the policy after a specified period, except for fraud or non-payment of premium Correct answer.
  3. It allows the insurer to contest the policy at any time for misrepresentation
  4. It guarantees the policy cannot be surrendered

Explanation

An incontestability clause limits the period, commonly two years, during which the insurer may rescind the policy for material misrepresentation. After that period the policy becomes incontestable, subject to exceptions such as fraud and non-payment. This gives the policyholder long-term certainty of cover.

Question 12Life insurance products and policy features

A policyholder wishes to transfer ownership of a life policy to an adult child while keeping the policy in force. Which policy provision governs this?

  1. The automatic premium loan provision
  2. The assignment provision Correct answer.
  3. The reinstatement provision
  4. The grace period provision

Explanation

Assignment is the mechanism by which the ownership rights under a policy are transferred to another person, either absolutely or by way of security. The insurer must normally be notified and record the assignment. Reinstatement, grace period and automatic premium loan deal with premium payment and lapse, not ownership transfer.

Question 13Life insurance products and policy features

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

  1. To allow the policyholder extra time to pay an overdue premium while cover remains in force Correct answer.
  2. To suspend all policy benefits until the next anniversary
  3. To permit the insured to increase the sum assured without underwriting
  4. To allow the insurer to delay payment of a claim indefinitely

Explanation

The grace period, commonly 30 or 31 days, gives the policyholder time to pay a premium after the due date without the policy lapsing. If death occurs during the grace period, the outstanding premium is usually deducted from the claim. It is a protection for the policyholder, not a delay mechanism for the insurer.

Question 14Life insurance products and policy features

A life policy lapsed 18 months ago and the policyholder now wants to restore it. Which provision applies?

  1. The reinstatement provision Correct answer.
  2. The free-look provision
  3. The assignment provision
  4. The beneficiary nomination provision

Explanation

Reinstatement allows a lapsed policy to be restored, usually within a stated period, on payment of overdue premiums with interest and evidence of insurability. The insurer may require a new health declaration. Free-look, assignment and nomination deal with different matters entirely.

Question 15Life insurance products and policy features

Under a typical policy, when does an automatic premium loan provision operate?

  1. When the policyholder requests a loan for personal expenses
  2. When a premium is unpaid at the end of the grace period and the policy has sufficient cash value, the insurer uses that value to pay the premium Correct answer.
  3. When the policy is surrendered for its cash value
  4. When the insured dies before the first premium is paid

Explanation

An automatic premium loan provision keeps a policy in force by borrowing against its cash value to pay an overdue premium after the grace period expires. The loan plus interest is later deducted from the policy value or claim. It is automatic and designed to prevent unintentional lapse.

Question 16Life insurance products and policy features

Which of the following best describes the role of a nominated beneficiary in a life insurance policy?

  1. The beneficiary is responsible for paying any outstanding premiums after the insured's death
  2. The beneficiary must be a licensed insurance intermediary
  3. The beneficiary is the person designated to receive the death benefit, subject to the policy terms and applicable law Correct answer.
  4. The beneficiary becomes the legal owner of the policy on nomination

Explanation

Nomination identifies who should receive the policy proceeds on the insured's death, subject to the policy wording and the relevant legal framework. Nomination does not transfer ownership of the policy, which remains with the policyholder. Nor does it impose premium obligations on the nominee.

Question 17Life insurance products and policy features

An insured dies while a policy loan plus accrued interest is outstanding. How is the claim usually settled?

  1. The claim is refused entirely because a loan existed
  2. The full sum assured is paid and the loan is written off
  3. The loan is transferred to the nominated beneficiary as a personal debt
  4. The loan and interest are deducted from the death benefit before payment Correct answer.

Explanation

A policy loan is secured against the policy's value, so on a claim the outstanding loan and accrued interest are deducted from the proceeds. The balance is paid to the beneficiary. The existence of a loan does not invalidate the claim, and the debt is not passed to the nominee personally.

Question 18Life insurance products and policy features

What does a waiver of premium rider provide?

  1. It reduces the sum assured whenever a premium is missed
  2. It waives the insurer's obligation to pay the death benefit
  3. It waives future premiums if the insured becomes totally disabled as defined in the rider, keeping the policy in force Correct answer.
  4. It refunds all premiums if the policyholder survives to maturity

Explanation

A waiver of premium rider pays the premiums on the policyholder's behalf if the insured suffers a qualifying disability, so the underlying policy stays in force without further payment. It is a supplementary benefit attached to the base policy. It does not refund premiums or reduce the sum assured.

Question 19Life insurance products and policy features

A policyholder adds an accidental death benefit rider to a whole life policy. What does this rider normally provide?

  1. A replacement for the base policy's death benefit
  2. Cover for critical illness diagnosed during the policy term
  3. An additional benefit if death results from an accident as defined in the rider Correct answer.
  4. A refund of premiums if the insured survives to age 65

Explanation

An accidental death benefit rider pays an extra sum, often equal to the base sum assured, if the insured dies from an accident within the rider's definition. It sits on top of the base cover rather than replacing it. Critical illness and survival refunds are different benefits altogether.

Question 20Life insurance products and policy features

In a family income benefit policy, how is the benefit normally paid on the insured's death?

  1. As a series of regular instalments for the remaining term of the policy Correct answer.
  2. As a lump sum payable only at the policy's maturity date
  3. As a single lump sum equal to the sum assured
  4. As a refund of premiums only

Explanation

Family income benefit is a form of term insurance that pays an income to the dependants for the balance of the policy term rather than a lump sum. If death occurs early, more instalments are paid; if late, fewer. This structure suits the replacement of regular household income.

Question 21Life insurance products and policy features

Which statement about a decreasing term insurance policy is correct?

  1. The policy builds a cash value that is paid at maturity
  2. The sum assured reduces over the term while the premium usually stays level, making it suitable for repayment mortgages Correct answer.
  3. The sum assured stays level while the premium decreases each year
  4. The premium increases each year as the sum assured falls

Explanation

Decreasing term insurance has a sum assured that reduces over the policy term, typically in line with a repayment mortgage balance, while the premium remains level. It is pure protection and builds no cash value. The falling benefit keeps the cost lower than level term cover.

Question 22Life insurance products and policy features

A renewable term policy includes a renewal option. What does this typically allow?

  1. Renewal only if the insured has made no claim during the term
  2. Renewal at the original premium regardless of the insured's health or age
  3. Renewal of the policy at the end of the term without fresh evidence of insurability, at a premium based on the insured's attained age Correct answer.
  4. Conversion of the policy into an endowment with no change in premium

Explanation

A renewal option lets the policyholder continue term cover at the end of the term without new medical underwriting, though the premium is recalculated on the insured's attained age and therefore rises. It protects insurability rather than guaranteeing the original price. Claims history does not normally bar renewal.

Question 23Life insurance products and policy features

An insured holds a convertible term policy and wishes to switch to permanent cover without further medical evidence. Which limitation most commonly applies to this conversion option?

  1. The conversion must be completed before a stated age or within a specified period set out in the policy Correct answer.
  2. The conversion may only be made if the insured has never claimed
  3. The conversion can only be made after the term policy has lapsed
  4. The conversion must result in a lower sum assured than the term policy

Explanation

Conversion options usually carry a time limit, for example conversion before a specified age or within a set number of years from commencement. Within that window the insured can convert without fresh underwriting, but the premium reflects the permanent product chosen. Claim history and lapse status do not normally define the option.

Question 24Life insurance products and policy features

A whole life policy is described as 'limited payment'. What does this mean?

  1. The policyholder may skip premiums at any time without consequence
  2. The policy can only be issued for a maximum term of ten years
  3. The insurer may limit the death benefit to the premiums paid
  4. Premiums are payable for a fixed number of years or until a stated age, after which cover continues for life without further premiums Correct answer.

Explanation

Limited payment whole life compresses the premium-paying period, for example 20-pay life or paid-up at 65, while the death benefit remains in force for the insured's lifetime. Premiums are higher than under ordinary whole life because they are paid over a shorter period. Cover does not expire when payments stop.

Question 25Life insurance products and policy features

A policyholder is considering surrendering a traditional whole life policy in its early years. Which consideration is most relevant?

  1. Surrender automatically refunds all premiums with interest
  2. The surrender value in early years is often well below total premiums paid because of acquisition costs and early charges Correct answer.
  3. Surrender has no effect on the death benefit because cover continues
  4. The surrender value always exceeds total premiums paid from the first year

Explanation

Early surrender values are typically low relative to premiums paid because front-end costs such as commission and underwriting expenses are recovered in the early years. Surrendering also terminates cover, so the policyholder loses protection. A decision to surrender should therefore weigh both the cash value and the loss of cover.

Question 26Life insurance products and policy features

Which document does a person normally complete first when applying for a life insurance policy, providing personal, medical and financial details?

  1. The application form (proposal) Correct answer.
  2. The endorsement page
  3. The policy schedule
  4. The premium receipt

Explanation

The application or proposal is the starting document in underwriting, because the insurer relies on the facts disclosed there to assess risk and decide on acceptance terms. The policy schedule is issued afterwards by the insurer and only records the terms finally agreed.

Question 27Life insurance products and policy features

What is the purpose of the insurable interest requirement at the time a life policy is taken out?

  1. To fix the policy's surrender value in advance
  2. To ensure the applicant would suffer genuine financial loss from the insured's death Correct answer.
  3. To limit cover to the amount of the beneficiary's tax liability
  4. To guarantee the insurer a minimum premium volume

Explanation

Insurable interest requires that the policyholder stands to lose financially if the life insured dies, which prevents the use of life insurance as a wager on a stranger's life. The test is applied when the contract is formed, not when a claim arises.

Question 28Life insurance products and policy features

Which party bears the investment risk in a unit-linked life policy?

  1. The policyholder, because the value follows the underlying funds Correct answer.
  2. The reinsurer, because it underwrites the mortality risk
  3. The insurer, because it guarantees the fund value
  4. The fund manager, because it selects the assets

Explanation

In unit-linked business the policyholder's benefits rise and fall with the value of the units allocated, so investment risk sits with the policyholder. The insurer's guarantee, if any, is limited to the death benefit and does not protect the unit value.

Question 29Life insurance products and policy features

A term insurance policy pays a benefit only on death within the policy term. What happens if the insured survives to the end of the term?

  1. The sum assured is paid as a survival benefit
  2. The insurer refunds all premiums paid
  3. No benefit is payable and the cover ends Correct answer.
  4. The policy automatically converts to whole life cover

Explanation

Pure term insurance provides protection only and carries no survival benefit, so if the insured outlives the term nothing is paid. This absence of a maturity payment is why term premiums are lower than whole life premiums for the same sum assured.

Question 30Life insurance products and policy features

In an endowment insurance policy, when is the sum assured normally payable?

  1. On the first policy anniversary
  2. Only if the insured dies during the term
  3. On survival to the maturity date, or earlier on death Correct answer.
  4. Only after the policy has been surrendered

Explanation

An endowment combines protection with savings: the sum assured is paid either on death within the term or on survival to maturity. This dual payout is what distinguishes it from pure term insurance.

Question 31Life insurance products and policy features

Which statement best describes the role of the policy schedule in a life insurance contract?

  1. It replaces the policy document in the event of a dispute
  2. It lists the insurer's reinsurance arrangements
  3. It records details such as the sum assured, premium and policy dates Correct answer.
  4. It sets out the insurer's investment strategy for unit funds

Explanation

The schedule is the part of the policy document that personalises the contract, showing the insured's details, sum assured, premium, term and key dates. It must be read together with the standard policy provisions.

Question 32Life insurance products and policy features

What is the main purpose of a critical illness rider attached to a life policy?

  1. To increase the death benefit each year in line with inflation
  2. To waive premiums whenever the insured changes occupation
  3. To pay an accelerated benefit when the insured is diagnosed with a specified illness Correct answer.
  4. To refund premiums if the policy is cancelled

Explanation

A critical illness rider pays a lump sum, often by accelerating the death benefit, when the insured is diagnosed with a condition listed in the rider. Payment is triggered by diagnosis of a defined illness rather than by death.

Question 33Life insurance products and policy features

A whole life policyholder wants the death benefit paid to a named individual rather than to the estate. What is the usual way to achieve this?

  1. Convert the policy to term insurance
  2. Assign the policy to the insurer
  3. Add an accidental death rider
  4. Name the individual as beneficiary under the policy Correct answer.

Explanation

Naming a beneficiary directs the death benefit to that person, which can allow faster settlement and keep the proceeds outside the estate. This is why the beneficiary nomination should be reviewed whenever circumstances change.

Question 34Life insurance products and policy features

An applicant for a life policy discloses a history of high blood pressure on the proposal form. What is the insurer most likely to do?

  1. Apply standard terms without further consideration
  2. Reject every application mentioning any medical history
  3. Assess the risk and possibly apply a premium loading or exclusion Correct answer.
  4. Refer the applicant to a competitor

Explanation

Underwriting evaluates disclosed medical information and may result in standard terms, a premium loading, an exclusion or declinature depending on severity. Full disclosure by the applicant is essential because the insurer prices the risk on that information.

Question 35Life insurance products and policy features

A policyholder with a traditional participating whole life policy receives an annual dividend. What does this represent?

  1. A guaranteed interest payment fixed at inception
  2. A share of the insurer's surplus allocated to participating policyholders Correct answer.
  3. A loan from the insurer repayable on death
  4. A refund of the policy's expense charges

Explanation

Participating policies share in the surplus generated by the insurer's life fund, and dividends or bonuses are allocated according to the policy's terms. They are not guaranteed and may vary from year to year.

Question 36Life insurance products and policy features

A policyholder is choosing between paying premiums monthly and annually for the same whole life policy. Which statement is correct?

  1. Monthly payment always reduces the total annual outlay
  2. Annual payment is only available for term policies
  3. The payment frequency has no effect on total cost
  4. Monthly payment usually costs more in total than annual payment Correct answer.

Explanation

More frequent premium payments create extra administration and lose the insurer investment income it would otherwise earn, so the total paid in instalments generally exceeds the annual premium. The difference is sometimes expressed as a modal loading.

Question 37Life insurance products and policy features

An insured under a joint life policy dies. Under a typical joint life first-death design, what happens?

  1. The survivor must reapply for cover
  2. The policy continues for the survivor at half the premium
  3. The sum assured is halved and paid on the second death
  4. The sum assured is paid and the policy ends Correct answer.

Explanation

A joint life first-death policy pays the sum assured on the first death among the lives insured and then terminates. This design is commonly used for couples or business partners who need funds on the first death.

Question 38Life insurance products and policy features

What distinguishes a survivorship (second-death) policy from a joint life first-death policy?

  1. It never pays a death benefit
  2. It pays only after both lives insured have died Correct answer.
  3. It pays on the first death and continues for the survivor
  4. It covers only one life from inception

Explanation

A survivorship policy pays the sum assured only on the death of the last surviving life insured, which makes it useful for estate planning where assets pass to the survivor first. A first-death policy, by contrast, pays on the earlier death.

Question 39Life insurance products and policy features

An insurer issues a policy with a reinstatement provision after lapse. Which condition is normally required before the policy can be restored?

  1. A written waiver of all future premiums
  2. Payment of overdue premiums with interest and evidence of insurability Correct answer.
  3. Surrender of the policy's cash value to the insurer
  4. Nomination of a new beneficiary

Explanation

Reinstatement typically requires the policyholder to pay arrears with interest and to satisfy the insurer that the life insured remains insurable. This protects the insurer against adverse selection by those whose health has deteriorated.

Question 40Life insurance products and policy features

A whole life policyholder has a cash value and needs funds but wants to keep the policy in force. Which option is designed for this need?

  1. Assigning the policy to a charity
  2. Taking a policy loan secured by the cash value Correct answer.
  3. Stopping premium payments permanently
  4. Surrendering the policy for its cash value

Explanation

A policy loan lets the policyholder borrow against the accumulated cash value while the policy remains in force, with the loan and interest deducted from any later claim or surrender. Surrender ends the cover and is therefore not suited to someone who wants to keep protection.

Question 41Life insurance products and policy features

What is the usual effect of an automatic premium loan provision when a premium is unpaid at the end of the grace period?

  1. A loan is taken from the cash value to pay the premium and keep the policy in force Correct answer.
  2. The beneficiary is changed to the insurer
  3. The policy is cancelled and all premiums are forfeited
  4. The sum assured is automatically increased

Explanation

Where the automatic premium loan provision applies, the insurer advances the unpaid premium from the policy's cash value so the policy does not lapse, and the loan plus interest is later recovered from the policy proceeds. The provision operates only if sufficient cash value exists.

Question 42Life insurance products and policy features

A policyholder wants cover that pays an income to the family for a fixed number of years after death, rather than a single lump sum. Which product fits best?

  1. Endowment insurance
  2. Unit-linked whole life
  3. Decreasing term insurance
  4. Family income benefit Correct answer.

Explanation

Family income benefit pays a regular income for the remaining balance of the policy term after the insured dies, rather than one lump sum. This suits policyholders whose priority is replacing lost earnings over a defined period.

Question 43Life insurance products and policy features

Which feature most clearly distinguishes a unit-linked policy from a traditional with-profits policy?

  1. Premiums are always paid as a single lump sum
  2. The policy cannot be surrendered
  3. The death benefit is always lower than the sum assured
  4. The value is expressed in units whose price changes with the underlying investments Correct answer.

Explanation

Unit-linked policies allocate premiums to units, and the policy value moves with the unit price of the chosen funds, so the policyholder bears the investment risk directly. With-profits policies instead share in the insurer's surplus through bonuses.

Question 44Life insurance products and policy features

An insured has a terminal illness benefit included in a life policy. What does this normally allow?

  1. Cancellation of the policy without any payout
  2. Payment of the sum assured to the insurer's shareholders
  3. Early payment of part or all of the sum assured when life expectancy is very short Correct answer.
  4. An increase in the sum assured on diagnosis

Explanation

A terminal illness benefit accelerates payment of the death benefit when the insured's life expectancy is certified as very short, providing funds when they are most needed. Any amount paid early is deducted from the eventual death benefit.

Question 45Life insurance products and policy features

A policyholder pays premiums for ten years on a traditional whole life policy and then surrenders it. Which outcome is most likely?

  1. The full sum assured is paid
  2. The policy continues without further premiums
  3. A surrender value based on the policy's cash value is paid and cover ends Correct answer.
  4. The insurer refunds all premiums paid

Explanation

Surrender before death or maturity gives the policyholder the surrender value, which reflects the accumulated cash value and may be less than premiums paid in the early years. The contract then terminates and no further death benefit is available.

Question 46Life insurance products and policy features

An applicant for a large sum assured is asked to complete a financial questionnaire and provide income evidence. What is the insurer primarily assessing?

  1. The applicant's insurable interest and the reasonableness of the sum assured Correct answer.
  2. The applicant's investment knowledge
  3. The applicant's preferred premium frequency
  4. The applicant's choice of beneficiary

Explanation

Financial underwriting checks that the sum assured bears a sensible relationship to the applicant's income and liabilities, which supports the insurable interest requirement and guards against over-insurance. Medical evidence alone does not address this risk.

Question 47Life insurance products and policy features

A policyholder has a whole life policy with a cash value and is deciding between a policy loan and surrender to raise funds. Which comparison is most accurate?

  1. A loan keeps the cover in force while surrender ends it, though the loan reduces the eventual payout Correct answer.
  2. Surrender preserves cover while a loan ends it
  3. Both options end the insurance cover immediately
  4. Both options pay the full sum assured to the policyholder

Explanation

A policy loan is secured by the cash value and leaves the contract running, with the debt and interest deducted from later proceeds, whereas surrender terminates the contract in exchange for the surrender value. A policyholder wanting continued protection should therefore prefer the loan route where sufficient cash value exists.

Question 48Life insurance products and policy features

An insurer discovers that an applicant failed to disclose a material medical fact that would have changed the underwriting decision. Within the contestable period, what is the insurer's usual position?

  1. The insurer must pay the full claim and may only raise future premiums
  2. The insurer may only cancel the beneficiary nomination
  3. The insurer may rescind the contract or adjust the claim for material non-disclosure Correct answer.
  4. The policy is unaffected because the insurer issued the document

Explanation

Material non-disclosure gives the insurer grounds to rescind or otherwise adjust the contract during the contestable period, because it priced a risk it was not told about. After the incontestability period, the insurer's ability to avoid the policy is generally restricted to fraud and non-payment of premium.

Question 49Life insurance products and policy features

A policyholder with a participating whole life policy wants to use accumulated bonuses to increase the sum assured permanently. Which dividend option achieves this?

  1. Cash payment of each dividend
  2. Paid-up additions option Correct answer.
  3. Interest accumulation option
  4. Premium reduction option

Explanation

Under the paid-up additions option, each dividend buys a small amount of additional paid-up insurance, so the total sum assured grows permanently without further premiums. Cash payment and premium reduction use the dividend for immediate income or cost relief instead.

Question 50Life insurance products and policy features

A married couple wants one policy that pays a lump sum only after both have died, to fund an inheritance tax liability expected on the second death. Which product is most appropriate?

  1. Single life term insurance on the husband
  2. Joint life first-death whole life
  3. Survivorship whole life Correct answer.
  4. Family income benefit

Explanation

A survivorship policy pays on the second death, which matches a tax liability that arises only when the surviving spouse dies and the estate passes on. First-death cover would pay too early and leave the later liability unprovided for.