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QFA Life Assurance study materials
QFA Life Assurance study resources

QFA Life Assurance practice questions

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Question 1Life Assurance

Under a life assurance policy, what does the principle of insurable interest require at the time the policy is taken out?

  1. The policyholder must stand to suffer financial loss if the life assured dies Correct answer.
  2. The policyholder must own property that is mortgaged
  3. The life assured must have passed a medical examination
  4. The beneficiary must be a blood relative of the life assured

Explanation

Insurable interest means the person taking out cover has a legitimate financial stake in the continued life of the person assured, so they would suffer measurable loss from that death. It is a legal safeguard against using life assurance as a wager. It generally must exist when the contract is formed.

Question 2Life Assurance

A person who takes out a life assurance policy on their own life is normally described as which party?

  1. The trustee
  2. The assignee
  3. The reinsurer
  4. The life assured Correct answer.

Explanation

The life assured is the person whose death triggers the benefit. Where the same person owns the policy, they are both policyholder and life assured. Other roles such as assignee or trustee describe different relationships to the contract.

Question 3Life Assurance

What is the main purpose of underwriting in life assurance?

  1. To calculate the commission payable to the intermediary
  2. To set the premium and terms according to the risk the applicant presents Correct answer.
  3. To decide which investment funds the premiums will buy
  4. To confirm the policyholder has a valid will

Explanation

Underwriting assesses mortality and other risk factors so the insurer can decide whether to accept the case and on what terms and price. It protects the pool of policyholders from being charged too little for higher-risk lives. Investment and commission matters are handled separately.

Question 4Life Assurance

Which of these is typically classified as a non-medical risk factor in life underwriting?

  1. Occupation and hazardous pursuits Correct answer.
  2. Blood pressure reading
  3. Family medical history
  4. Body mass index

Explanation

Non-medical factors include lifestyle, occupation, hobbies and financial circumstances, which are gathered from the application and sometimes an attending physician's report. Clinical measurements and family history are medical factors.

Question 5Life Assurance

In a without-profits (non-participating) whole of life policy, what does the policyholder receive on death?

  1. A benefit linked to a chosen unit fund
  2. A guaranteed sum assured with no share of surplus Correct answer.
  3. Only a return of premiums paid
  4. The sum assured plus declared bonuses

Explanation

Without-profits contracts provide a fixed guaranteed benefit and the policyholder does not participate in the insurer's surplus. Bonuses are a feature of with-profits business. Unit-linked benefits depend on investment performance.

Question 6Life Assurance

What is the key feature of a term assurance policy?

  1. It builds a cash value that the owner can surrender
  2. It pays a guaranteed lump sum whenever death occurs
  3. It pays an income for life starting at retirement
  4. It pays a benefit only if death occurs within a specified period Correct answer.

Explanation

Term assurance provides protection for a defined period and pays out only if death happens during that term, with no benefit if the life assured survives. Because it is pure protection it is usually the cheapest form of life cover. Cash value and retirement income features belong to other products.

Question 7Life Assurance

What is the primary role of a reinsurer in life assurance?

  1. To regulate the solvency of insurance companies
  2. To administer claims on behalf of the policyholder
  3. To sell policies directly to the public
  4. To take on part of the mortality risk accepted by the direct insurer Correct answer.

Explanation

Reinsurance transfers some of the risk an insurer has accepted to another company, helping to manage large or concentrated exposures. The reinsurer deals with the insurer, not the retail customer. Regulation is the job of supervisory authorities.

Question 8Life Assurance

Which document normally sets out the terms of the contract between the policyholder and the life assurance company?

  1. The intermediary's file note
  2. The insurer's annual report
  3. The policy document Correct answer.
  4. The proposal form

Explanation

The policy document contains the contractual terms, including benefits, exclusions and conditions. The proposal form is the application and evidence source, but the policy is the formal contract instrument.

Question 9Life Assurance

A 40-year-old takes out a 20-year level term policy with a sum assured of 200,000. He survives the full term. What does the insurer pay?

  1. A return of all premiums paid
  2. The full sum assured of 200,000
  3. A surrender value equal to the premiums plus interest
  4. Nothing, because the policy matured without a claim Correct answer.

Explanation

Pure term assurance has no maturity benefit, so if the life assured survives the term no sum assured is payable. Premiums are not refunded unless the contract is a return-of-premium variant. This is why term cover is inexpensive relative to whole of life.

Question 10Life Assurance

An applicant for life cover fails to disclose a known heart condition. Two years later the insurer discovers this and the life assured dies of an unrelated cause. Under a typical incontestability clause, what is the insurer's position?

  1. The insurer must pay but may recover the sum from the intermediary
  2. The insurer may reduce the benefit in proportion to the undisclosed risk
  3. The insurer may cancel the policy and keep all premiums in every case
  4. The insurer generally cannot avoid the policy for non-disclosure after the contestability period Correct answer.

Explanation

An incontestability clause prevents the insurer from avoiding the contract for misrepresentation or non-disclosure after a stated period, commonly two years from inception. After that point the policy stands, subject to fraud provisions in some jurisdictions. This gives policyholders long-term certainty.

Question 11Life Assurance

A policyholder stops paying premiums on a whole of life policy that has accumulated a cash value. Which option typically preserves some cover without further premiums?

  1. Requesting a premium holiday with full cover continuing
  2. Surrendering the policy and reinvesting the proceeds
  3. Assigning the policy to a third party
  4. Converting to a reduced paid-up policy Correct answer.

Explanation

A reduced paid-up option uses the existing cash value to support a smaller sum assured for the remaining term with no further premiums. This keeps some protection in force. A premium holiday is not a standard non-forfeiture option, and surrender ends cover.

Question 12Life Assurance

What does a 'days of grace' provision allow in a life assurance policy?

  1. A waiting period before the death benefit becomes payable
  2. A period after the due date in which the premium may be paid without lapse Correct answer.
  3. A period during which the policyholder may cancel for a full refund
  4. An extension of the term if the policyholder survives to maturity

Explanation

Days of grace give the policyholder extra time, often around 30 days, to pay an overdue premium while the policy remains in force. If death occurs during this period the benefit is normally paid less the outstanding premium. It is distinct from a cooling-off or waiting period.

Question 13Life Assurance

A policy is written subject to the 'suicide clause'. What does this typically provide?

  1. Premiums are waived if the life assured becomes depressed
  2. The sum assured is doubled if death is accidental
  3. The policy is void if the life assured ever attempts suicide
  4. The sum assured is not paid if death by suicide occurs within a stated initial period Correct answer.

Explanation

A suicide clause limits the insurer's liability where death by suicide occurs within an initial period, often one or two years, after which full cover applies. The insurer may instead return premiums paid. It protects against anti-selection at inception.

Question 14Life Assurance

Which settlement option under a life assurance policy provides the beneficiary with regular payments for a fixed number of years?

  1. Lump sum settlement
  2. Interest only option
  3. Life income option
  4. Fixed period instalment option Correct answer.

Explanation

A fixed period option pays the proceeds in instalments over a chosen number of years, after which payments stop regardless of whether the beneficiary is alive. A life income option pays for the beneficiary's lifetime. Interest only leaves the capital intact.

Question 15Life Assurance

An insurer uses a mortality table showing the probability of death at each age. For which purpose is this table primarily used?

  1. Calculating premiums for life assurance and annuity products Correct answer.
  2. Deciding the insurer's marketing budget
  3. Determining the commission rate for brokers
  4. Setting the investment strategy for unit funds

Explanation

Mortality tables give the expected incidence of death by age and sex, which underpins pricing of life cover and annuities. They are fundamental actuarial tools for calculating premiums and reserves. Other business decisions use different data.

Question 16Life Assurance

A policyholder wishes to transfer the ownership of a life policy to another person as a gift. Which mechanism is used?

  1. Adding a waiver of premium rider
  2. Surrender of the policy
  3. Making a nomination in the policy
  4. Assignment of the policy Correct answer.

Explanation

Assignment transfers the legal rights and ownership of a policy to another party, either absolutely or by way of security. A nomination typically directs proceeds to a beneficiary without transferring ownership. Surrender ends the contract.

Question 17Life Assurance

What is the main advantage of placing a life policy under trust?

  1. It removes the need for the life assured to disclose medical history
  2. Proceeds can pass to beneficiaries without forming part of the estate for tax and probate purposes Correct answer.
  3. It guarantees the insurer will pay a higher sum assured
  4. It allows the policyholder to reclaim premiums at any time

Explanation

Putting a policy in trust separates the proceeds from the settlor's estate, which can speed distribution and reduce inheritance tax or probate delays. It does not change the sum assured or underwriting requirements. Trust arrangements are commonly used in estate planning.

Question 18Life Assurance

A life assured dies as a result of a pre-existing condition that was fully and honestly disclosed and accepted at standard rates. What is the insurer's normal obligation?

  1. Pay only the premiums paid to date
  2. Decline the claim because the cause of death was pre-existing
  3. Refer the claim to the reinsurer to decide
  4. Pay the sum assured because the risk was accepted and disclosed Correct answer.

Explanation

Once the insurer accepts a disclosed condition at standard rates, it has priced and accepted that risk. The claim is therefore payable in the normal way. Non-disclosure, not a known and accepted condition, is what would justify a declined claim.

Question 19Life Assurance

Which of the following best describes an endowment assurance policy?

  1. It pays a benefit only after the policyholder reaches age 65
  2. It pays only on death and has no maturity benefit
  3. It pays an income for life after retirement
  4. It pays the sum assured on death or on survival to the end of the term, whichever occurs first Correct answer.

Explanation

Endowment assurance combines protection and savings: it pays on death within the term or on survival to maturity. This dual payout makes it more expensive than pure term cover. It is not a lifetime income product.

Question 20Life Assurance

An applicant aged 55 applies for a large sum assured with a history of heavy smoking. How is the premium most likely to be affected?

  1. It will be identical to a non-smoker of the same age
  2. It will be rated higher to reflect the increased mortality risk Correct answer.
  3. It will be lower because older applicants pose less risk
  4. It will be waived until the applicant reaches retirement

Explanation

Smoking and increasing age both raise expected mortality, so the insurer applies a higher premium or rating. Premiums rise with age rather than fall. Standard rates apply only to standard risks.

Question 21Life Assurance

A life assurance policy states that the insurer will not pay a claim if the life assured dies while committing a criminal offence. What is this an example of?

  1. A settlement option
  2. An incontestability clause
  3. A policy exclusion Correct answer.
  4. A non-forfeiture option

Explanation

An exclusion removes or limits cover for specified circumstances, such as death while engaged in crime. Exclusions define the boundaries of the promise to pay. Incontestability, non-forfeiture and settlement options serve different purposes.

Question 22Life Assurance

An insurer calculates a premium that assumes a guaranteed interest rate of 4% but investment returns fall to 2%. What risk is the insurer primarily exposed to?

  1. Mortality risk
  2. Morbidity risk
  3. Interest rate (guarantee) risk Correct answer.
  4. Persistency risk

Explanation

When a product guarantees a minimum return or interest rate, the insurer bears the risk that actual investment returns fall short. This is interest rate or guarantee risk. Mortality, morbidity and persistency risks relate to death rates, sickness and lapse behaviour respectively.

Question 23Life Assurance

A policyholder with a with-profits policy has simple (non-compounding) reversionary bonuses added each year. Compared with compound bonuses, what is the effect on the final payout?

  1. The final payout is unaffected because bonuses are not guaranteed
  2. The final payout is lower because bonuses do not earn further bonuses Correct answer.
  3. The final payout is higher because simple bonuses grow faster
  4. There is no difference because both methods add the same total

Explanation

Simple bonuses are calculated on the original sum assured only, so they do not themselves attract future bonuses. Compound bonuses are calculated on the sum assured plus accumulated bonuses, producing faster growth over time. Hence simple bonuses yield a lower final payout.

Question 24Life Assurance

A whole of life policy has a sum assured of 100,000 and accumulated bonuses of 20,000. The insurer applies a terminal bonus of 10% of the sum assured plus bonuses. What is the total death benefit?

  1. 130,000
  2. 132,000 Correct answer.
  3. 120,000
  4. 110,000

Explanation

The total before terminal bonus is 100,000 plus 20,000, equal to 120,000. A terminal bonus of 10% of that base adds 12,000, giving 132,000. Terminal bonuses are commonly expressed as a percentage of the sum assured plus accrued bonuses.

Question 25Life Assurance

An insurer offers a unit-linked policy where the policyholder bears the investment risk. How does this affect the insurer compared with a conventional with-profits contract?

  1. The insurer's investment risk is reduced because the policyholder bears fund performance Correct answer.
  2. The insurer bears more investment risk because benefits are guaranteed
  3. The insurer must pay a fixed guaranteed return regardless of fund value
  4. The insurer's mortality risk is eliminated entirely

Explanation

In unit-linked business the policy value follows the chosen funds, so investment performance risk sits with the policyholder. This reduces the insurer's exposure to investment guarantees compared with with-profits business. Mortality risk still exists and is not eliminated.

Question 26Pensions

Under a typical personal pension arrangement, what is the main tax treatment of contributions made by the member?

  1. The member receives tax relief on contributions at their marginal rate, subject to limits. Correct answer.
  2. The member pays contributions from net income with no tax relief at all.
  3. The member can only contribute from employer funds, not personally.
  4. The member receives a flat tax credit of 50% regardless of income.

Explanation

Personal pension contributions normally attract tax relief at the individual's marginal rate, within the annual allowance and any relevant earnings limits. Relief is commonly given via relief at source or net pay arrangements.

Question 27Pensions

What is the primary purpose of the lifetime allowance (or its successor lump sum allowance regime) in a registered pension scheme?

  1. To limit the number of pension schemes a person may join.
  2. To set the maximum age at which benefits can be taken.
  3. To cap the total tax-privileged pension benefits an individual can build. Correct answer.
  4. To determine the minimum contribution an employer must make.

Explanation

The lifetime allowance historically capped the value of tax-privileged pension savings, with excess benefits subject to additional tax charges. Its successor allowances similarly limit tax-free lump sums and other benefits.

Question 28Pensions

In a defined benefit occupational scheme, how is the member's retirement benefit typically calculated?

  1. By reference to accrued service and final or average salary. Correct answer.
  2. By the fund value at the date the member retires.
  3. By the total contributions paid by the member only.
  4. By the investment return on the member's individual fund.

Explanation

Defined benefit schemes promise a benefit based on a formula, commonly a fraction of salary for each year of service. Investment risk sits with the scheme, not the member.

Question 29Pensions

What does 'vesting' generally mean in the context of pension benefits?

  1. The member stops making contributions temporarily.
  2. The member becomes entitled to the benefit without further conditions. Correct answer.
  3. The member transfers the pension to another provider.
  4. The member chooses an annuity provider.

Explanation

Vesting refers to the point at which a member's right to a benefit becomes unconditional and secured. Before vesting, certain conditions may still apply.

Question 30Pensions

An individual wants to take 25% of their defined contribution pension as a tax-free lump sum at retirement. What is this payment commonly called?

  1. Pension commencement lump sum Correct answer.
  2. Trivial commutation payment
  3. Serious ill-health lump sum
  4. Uncrystallised funds lump sum

Explanation

The pension commencement lump sum is the tax-free cash normally available when benefits are first taken, typically up to 25% of the fund within the lump sum allowance.

Question 31Pensions

What is the normal minimum pension age in the UK for accessing pension benefits (subject to protected retirement ages)?

  1. 50
  2. 65
  3. 55 Correct answer.
  4. 60

Explanation

The normal minimum pension age is currently 55 for most members, though it is legislated to rise to 57. Members with protected pension ages may access earlier.

Question 32Pensions

Which of the following best describes an annuity purchased with pension funds?

  1. A contract providing a guaranteed income for life in exchange for a lump sum. Correct answer.
  2. A lump sum paid on death to nominated beneficiaries.
  3. A savings account with a fixed interest rate for five years.
  4. An investment fund that grows tax-free until retirement.

Explanation

An annuity converts accumulated pension capital into a guaranteed income stream, often for life. The provider bears longevity and investment risk in exchange for the premium.

Question 33Pensions

What is the main purpose of auto-enrolment in workplace pensions?

  1. To prevent employees from opting out of a scheme.
  2. To increase pension saving by automatically enrolling eligible workers. Correct answer.
  3. To allow employers to avoid making any contributions.
  4. To replace the State Pension entirely.

Explanation

Auto-enrolment requires employers to enrol eligible jobholders into a qualifying pension scheme, with minimum contributions from both employer and employee. Its aim is to boost retirement saving participation.

Question 34Pensions

A member of a defined contribution scheme wants to draw an income directly from their invested fund without buying an annuity. Which option describes this?

  1. Income drawdown Correct answer.
  2. Final salary scheme
  3. Salary sacrifice
  4. Trivial commutation

Explanation

Income drawdown allows a member to keep the fund invested and take income withdrawals, bearing the investment risk themselves. It contrasts with buying a guaranteed annuity.

Question 35Pensions

An employee earns £40,000 and contributes £4,000 to a personal pension under relief at source. Assuming a 20% basic rate, how much is added to the pension by HMRC?

  1. £1,000 Correct answer.
  2. £4,000
  3. £800
  4. £2,000

Explanation

Under relief at source, the provider claims basic rate relief at 20% of the gross contribution. A £4,000 net contribution is grossed up to £5,000, so HMRC adds £1,000.

Question 36Pensions

A member has a defined contribution fund of £200,000 and wishes to take the maximum pension commencement lump sum. Assuming no other relevant allowances used, how much tax-free cash can they take?

  1. £25,000
  2. £50,000 Correct answer.
  3. £100,000
  4. £200,000

Explanation

The pension commencement lump sum is normally 25% of the crystallised fund, so 25% of £200,000 is £50,000. The remainder stays in the pension to provide income.

Question 37Pensions

An employer operates salary sacrifice for pension contributions. What is the main advantage for the employee?

  1. The employee avoids all pension contribution limits.
  2. The employer must double its contribution.
  3. The employee receives a higher State Pension.
  4. Reduced gross salary lowers income tax and National Insurance contributions. Correct answer.

Explanation

Salary sacrifice exchanges salary for employer pension contributions, lowering the employee's taxable pay and NICs. The sacrificed amount goes into the pension as an employer contribution.

Question 38Pensions

A member of a defined benefit scheme leaves service after 10 years with a pensionable salary of £30,000 under a 1/60th accrual rate. What is the annual pension at normal retirement age, ignoring revaluation?

  1. £6,000
  2. £30,000
  3. £3,000
  4. £5,000 Correct answer.

Explanation

The pension is calculated as accrual rate × service × pensionable salary: 1/60 × 10 × £30,000 = £5,000 per year. Revaluation and early/late retirement adjustments are ignored here.

Question 39Pensions

What is the effect of the annual allowance on pension contributions?

  1. It caps the total fund value at retirement.
  2. It determines the age at which benefits must be taken.
  3. It sets the minimum contribution for auto-enrolment.
  4. It limits the tax-relieved contributions an individual can make each year. Correct answer.

Explanation

The annual allowance restricts the amount of tax-relieved pension saving in a tax year, with excess contributions potentially subject to an annual allowance charge. It operates alongside the lifetime and lump sum allowances.

Question 40Pensions

A scheme member wishes to transfer a defined benefit pension to a defined contribution arrangement. What regulatory requirement commonly applies?

  1. The employer must consent to the transfer.
  2. The member must generally take regulated advice where the transfer value exceeds a set threshold. Correct answer.
  3. The member must transfer within seven days of requesting a valuation.
  4. The member must be over age 65 to transfer.

Explanation

For defined benefit transfers above a specified value, the member is generally required to obtain appropriate independent financial advice before proceeding. This safeguard reflects the value of guaranteed benefits being given up.

Question 41Pensions

Which statement best explains the difference between defined benefit and defined contribution schemes from the member's perspective?

  1. In a defined contribution scheme the employer guarantees a set income.
  2. In both schemes the employer bears all investment risk.
  3. In a defined benefit scheme the employer bears investment risk; in a defined contribution scheme the member does. Correct answer.
  4. In a defined benefit scheme the member chooses the investment strategy and bears the risk.

Explanation

Defined benefit schemes promise a formula-based benefit, so investment and longevity risk largely sit with the employer or scheme. In defined contribution schemes the member's fund depends on investment performance and the risk is the member's.

Question 42Pensions

What is a 'trivial commutation' payment?

  1. A refund of excess contributions above the annual allowance.
  2. A lump sum paid when total pension savings are below a small-pot threshold. Correct answer.
  3. A tax-free lump sum taken at normal retirement.
  4. A payment made to a scheme after the member dies.

Explanation

Trivial commutation allows small pension pots below a defined threshold to be paid as a lump sum, subject to conditions and tax treatment. It is distinct from the standard pension commencement lump sum.

Question 43Pensions

A member is considering whether to buy an annuity or enter income drawdown. Which factor most directly reflects the key trade-off between the two?

  1. Both options provide identical guarantees and flexibility.
  2. An annuity provides guaranteed income but no flexibility, while drawdown offers flexibility but investment risk. Correct answer.
  3. An annuity offers flexibility, while drawdown guarantees a fixed income.
  4. Drawdown guarantees income for life, while an annuity does not.

Explanation

Buying an annuity secures a guaranteed income for life but is generally inflexible and irreversible. Drawdown keeps the fund invested, offering flexibility but exposing the member to investment and longevity risk.

Question 44Pensions

What role does the Pensions Regulator (TPR) play in relation to occupational pension schemes?

  1. It supervises scheme compliance and can intervene to protect members. Correct answer.
  2. It pays the basic State Pension to retirees.
  3. It sets the State Pension age each year.
  4. It provides tax relief directly to scheme members.

Explanation

The Pensions Regulator oversees workplace pension compliance, issuing codes of practice and intervening where schemes or employers fail to meet their duties. It does not administer state benefits or tax relief.

Question 45Pensions

A member has unused annual allowance from the previous three tax years and wishes to contribute more this year. Which mechanism may allow this?

  1. Small pots commutation
  2. Trivial commutation
  3. Carry forward of unused annual allowance Correct answer.
  4. Scheme-specific lump sum protection

Explanation

Carry forward permits an individual to use unused annual allowance from the previous three tax years, subject to conditions such as having relevant UK earnings. It increases the effective contribution limit for the current year.

Question 46Pensions

What is meant by 'relevant UK earnings' for pension contribution tax relief purposes?

  1. The total value of the member's pension fund.
  2. The employer's contribution to the scheme.
  3. Earnings from employment or self-employment that support tax-relieved personal contributions. Correct answer.
  4. Any investment income received from savings.

Explanation

Relevant UK earnings generally include employment income and self-employment profits, and they cap the amount of tax-relieved personal contributions an individual can make. Investment income and capital gains do not usually count.

Question 47Pensions

A member exceeds the annual allowance and is subject to the annual allowance charge. How is this charge typically collected for a member in employment?

  1. By a fixed penalty issued by the Pensions Regulator.
  2. Through self-assessment or, optionally, via the scheme pays mechanism. Correct answer.
  3. By reducing the member's State Pension entitlement.
  4. Through an immediate deduction from the member's tax-free lump sum only.

Explanation

The annual allowance charge is normally reported and paid through self-assessment, though scheme pays allows the scheme to settle it in return for a reduction in benefits where conditions are met. It is not a regulatory penalty.

Question 48Pensions

Which statement correctly describes the treatment of pension benefits on death before benefits are taken from a defined contribution scheme?

  1. Only a surviving spouse can ever receive the fund.
  2. The fund is always forfeited to the scheme.
  3. Benefits must always be paid to the estate and taxed at 40%.
  4. Benefits may be paid as a lump sum or income to nominated beneficiaries, with tax treatment depending on the member's age at death. Correct answer.

Explanation

On death before crystallisation, the fund can typically be paid to nominated beneficiaries as a lump sum or beneficiary income, with tax treatment depending on whether death occurred before or after age 75. Nominations and scheme rules govern who receives it.

Question 49Pensions

An individual with protected pension age wishes to take benefits before the normal minimum pension age. What is the key condition for the protection to apply?

  1. The individual must transfer to a new scheme first.
  2. The individual must be unemployed at the time of access.
  3. The individual must have at least 30 years of contributions.
  4. The protection must relate to a scheme arrangement with a pre-existing right to take benefits early. Correct answer.

Explanation

Protected pension ages generally apply where a member had an existing right under scheme rules to take benefits before the normal minimum pension age. The protection is tied to those specific rights and conditions.

Question 50Pensions

A member is analysing whether to take a tax-free lump sum now or leave the fund invested. Which consideration is most relevant to the decision?

  1. The effect on their State Pension record.
  2. The loss of future investment growth on the commuted amount versus immediate tax-free cash. Correct answer.
  3. The number of schemes they belong to.
  4. The requirement to buy an annuity immediately.

Explanation

Taking the lump sum removes that portion of the fund from future investment growth, so the trade-off is between immediate tax-free cash and potential future returns. This is a core planning consideration.