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Question 1Life Assurance

Under a term assurance policy, what happens to the cover if the life assured survives to the end of the policy term?

  1. The policy ends with no payout unless a return-of-premium option applies Correct answer.
  2. The policy automatically converts to a whole-of-life policy
  3. The policy pays out the sum assured as a survival benefit
  4. The policy continues at the same premium until death

Explanation

Term assurance provides protection only for a defined period and pays a benefit solely on death within that period. If the life assured survives the term, the cover simply expires, with no maturity value unless a specific option such as return of premiums was included.

Question 2Life Assurance

Which type of life assurance policy has no fixed expiry date and pays a sum assured whenever the life assured dies?

  1. Endowment assurance
  2. Decreasing term assurance
  3. Convertible term assurance
  4. Whole-of-life assurance Correct answer.

Explanation

Whole-of-life assurance is designed to run for the whole of the life assured's lifetime, so the sum assured becomes payable on death whenever it occurs. Term and endowment contracts, by contrast, have defined end points.

Question 3Life Assurance

What distinguishes a unit-linked life assurance policy from a conventional without-profits policy?

  1. The policy value is linked to the performance of underlying investments Correct answer.
  2. The policy has no mortality charge
  3. The sum assured is guaranteed and never varies
  4. Premiums are always lower than for term assurance

Explanation

In a unit-linked policy, premiums buy units in an investment fund, so the policy value depends on the fund's performance. A conventional without-profits policy instead promises a fixed sum assured with no investment linkage.

Question 4Life Assurance

In a life assurance contract, what is the role of the principle of insurable interest?

  1. It guarantees the policy will pay out on death
  2. It sets the maximum premium the insurer may charge
  3. It determines the investment return of the policy
  4. It requires the policyholder to benefit financially from the continued life of the life assured Correct answer.

Explanation

Insurable interest requires the policyholder to have a legitimate financial interest in the life assured continuing to live, which prevents the use of life assurance as a pure wager. It must exist at inception of the contract.

Question 5Life Assurance

What is the main purpose of underwriting in life assurance?

  1. To calculate the insurer's marketing budget
  2. To classify risks and set terms that reflect the applicant's mortality risk Correct answer.
  3. To decide the investment strategy of the insurer's funds
  4. To determine the policy's surrender value

Explanation

Underwriting assesses factors such as age, health and occupation to classify the applicant's risk and apply appropriate terms, such as standard rates, loadings or exclusions. This protects the pooling of risk among policyholders.

Question 6Life Assurance

A policyholder stops paying premiums and the policy lapses. Which outcome typically follows for a conventional life policy with no surrender value?

  1. The cover ceases and no benefit is payable Correct answer.
  2. The policy converts automatically to paid-up whole-of-life cover
  3. The sum assured is paid immediately
  4. The insurer refunds all premiums paid

Explanation

When premiums cease and the policy has no surrender value, the contract lapses and cover ends without benefit. Automatic paid-up status applies only where the policy terms provide for it and sufficient value has built up.

Question 7Life Assurance

What does a decreasing term assurance policy typically provide?

  1. A sum assured payable only on survival
  2. A sum assured that reduces over the term, often used to cover a repayment mortgage Correct answer.
  3. A sum assured that increases with inflation
  4. A sum assured that stays level throughout the term

Explanation

Decreasing term assurance has a sum assured that falls over the policy term, which suits liabilities that reduce over time such as a capital-and-interest repayment mortgage. The premium is usually lower than for level term cover of the same initial amount.

Question 8Life Assurance

What is the primary purpose of a family income benefit policy?

  1. To build an investment fund for retirement
  2. To provide a regular income to dependants for the remaining policy term after a death Correct answer.
  3. To repay a lump sum to clear a mortgage
  4. To cover the policyholder's medical expenses

Explanation

Family income benefit pays a regular income, rather than a lump sum, to the beneficiary for the balance of the policy term following the life assured's death. This supports dependants' ongoing living costs.

Question 9Life Assurance

An applicant aged 45 takes out a 20-year level term policy with a sum assured of 200,000. The applicant dies in year 12. What is payable, assuming no relevant exclusions apply?

  1. A reduced amount reflecting the years remaining
  2. The full sum assured of 200,000 Correct answer.
  3. Nothing, because the term has not ended
  4. A refund of premiums paid plus interest

Explanation

Level term assurance pays the full sum assured if death occurs at any point during the policy term, provided no exclusion applies. The number of years remaining in the term does not reduce a level sum assured.

Question 10Life Assurance

A policyholder with a repayment mortgage wants cover whose benefit broadly tracks the outstanding loan balance. Which policy type best fits this need?

  1. Level term assurance
  2. Whole-of-life assurance
  3. Decreasing term assurance Correct answer.
  4. Endowment assurance

Explanation

A repayment mortgage balance falls over time, and decreasing term assurance mirrors this by reducing the sum assured over the term. This generally costs less than level cover for the same initial amount.

Question 11Life Assurance

Which factor would most likely lead a life insurer to apply a premium loading to a standard term assurance application?

  1. The applicant's disclosed history of a significant medical condition Correct answer.
  2. The applicant's chosen payment frequency
  3. The applicant's employer's industry sector
  4. The applicant's preference for a paperless policy

Explanation

A disclosed medical condition that increases mortality risk is a core underwriting factor that may lead to a premium loading or other special terms. Non-risk factors such as payment frequency or administrative preferences do not drive mortality loading.

Question 12Life Assurance

What is the effect of a 'free cover limit' in a group life assurance scheme?

  1. It allows members to increase cover without any medical evidence at any time
  2. It guarantees the scheme will never be reviewed
  3. It removes the need for the employer to pay premiums
  4. It sets a level of cover below which members are accepted without individual medical underwriting Correct answer.

Explanation

A free cover limit is the amount of cover an insurer will provide to a group member without individual medical evidence, subject to scheme conditions. Cover above that limit may require medical underwriting.

Question 13Life Assurance

A whole-of-life policy is described as 'with-profits'. What does this mean for the policyholder?

  1. The policy may receive bonuses reflecting the insurer's distributable surplus Correct answer.
  2. The policy is invested solely in government bonds
  3. The premium is guaranteed never to be reviewed
  4. The sum assured is fixed and cannot change

Explanation

With-profits policies may share in the insurer's distributable surplus through bonuses, which can increase the eventual payout. Bonuses are not guaranteed in advance, though some may become guaranteed once declared.

Question 14Life Assurance

What is the key feature of a 'renewable' term assurance policy?

  1. The policy automatically increases the sum assured each year
  2. The policy can be surrendered for its investment value
  3. The policy pays a maturity benefit at the end of the term
  4. The policyholder may renew the cover at the end of the term without further medical evidence Correct answer.

Explanation

A renewable term policy gives the policyholder the option to renew cover at the end of the term without providing fresh medical evidence, usually at a higher premium reflecting age. This protects against future uninsurability.

Question 15Life Assurance

A policyholder wants the option, at a set future date, to change a term policy into whole-of-life cover without new medical evidence. Which policy feature provides this?

  1. A conversion option Correct answer.
  2. A critical illness rider
  3. A waiver of premium benefit
  4. A surrender value option

Explanation

A conversion option allows the policyholder to convert term cover into a longer-term or whole-of-life policy without further medical evidence, typically within a specified window. It protects against deterioration in health.

Question 16Life Assurance

What is the primary function of a life assurance policy's 'grace period'?

  1. It gives the policyholder extra time to pay an overdue premium before the policy lapses Correct answer.
  2. It allows the insurer to delay paying a claim
  3. It permits the policyholder to cancel without charge
  4. It suspends cover while premiums are unpaid

Explanation

A grace period gives the policyholder a set time after a premium due date to pay before the policy lapses, and cover usually continues during this period. It protects policyholders from inadvertent loss of cover for short payment delays.

Question 17Life Assurance

An insurer declines a claim because the deceased policyholder failed to disclose a material fact at application. On what principle is the insurer relying?

  1. Indemnity
  2. Contribution
  3. Subrogation
  4. Utmost good faith Correct answer.

Explanation

Life assurance is a contract of utmost good faith, requiring applicants to disclose material facts that would influence the insurer's decision. Non-disclosure of a material fact can allow the insurer to avoid the contract or decline a claim.

Question 18Life Assurance

Which statement best explains why life assurance premiums are generally lower for a younger applicant than for an older applicant on identical cover?

  1. Younger applicants have a lower expected mortality over the policy term Correct answer.
  2. Younger applicants are exempt from underwriting
  3. Younger applicants pay less tax on premiums
  4. Younger applicants receive higher investment returns

Explanation

Premiums reflect expected mortality risk, which is statistically lower for younger lives over a given period. This lower expected claims cost allows insurers to charge less for equivalent cover.

Question 19Life Assurance

A policyholder with a unit-linked policy asks why the policy value can fall even though premiums have been paid regularly. Which explanation is most accurate?

  1. Premiums are returned if the fund falls
  2. The insurer guarantees the fund cannot lose value
  3. Charges are deducted only at maturity
  4. The value depends on the price of the units held, which can decrease Correct answer.

Explanation

In a unit-linked policy, the policy value reflects the number of units held multiplied by the unit price, and unit prices can fall as well as rise. Investment risk is therefore borne by the policyholder.

Question 20Life Assurance

What distinguishes 'mortgage protection term assurance' from a 'mortgage endowment' arrangement?

  1. Mortgage protection term assurance is only available to first-time buyers
  2. Mortgage protection term assurance guarantees a lump sum at maturity
  3. Mortgage protection term assurance repays the loan on death but builds no investment fund Correct answer.
  4. Mortgage endowment provides no life cover

Explanation

Mortgage protection term assurance is pure protection that pays off the loan on death during the term but has no investment element. A mortgage endowment combines life cover with an investment fund intended to repay the loan at maturity, though the final value is not guaranteed.

Question 21Life Assurance

Which of the following best describes the purpose of a 'waiver of premium' benefit on a life policy?

  1. It refunds premiums if the policyholder survives the term
  2. It increases the sum assured when premiums are paid early
  3. It allows the insurer to increase premiums after a claim
  4. It keeps the policy in force by meeting premiums if the policyholder becomes incapacitated as defined Correct answer.

Explanation

Waiver of premium ensures that if the policyholder becomes disabled or incapacitated as defined in the policy, the insurer meets subsequent premiums so the cover continues. It protects the policy from lapsing when income is disrupted.

Question 22Life Assurance

An applicant with a family history of a hereditary condition applies for term assurance. The insurer proposes to include a 'moratorium' or exclusion clause instead of declining cover. What is the effect of a moratorium clause?

  1. It increases the sum assured after a set number of years
  2. It excludes claims relating to the condition for a specified initial period, after which cover applies Correct answer.
  3. It permanently excludes all claims relating to that condition
  4. It cancels the policy if the condition is diagnosed

Explanation

A moratorium clause excludes claims related to a specified condition for an initial period only, after which the exclusion lapses. It allows cover to be offered where a permanent exclusion or declinature might otherwise apply.

Question 23Life Assurance

A group life scheme provides death-in-service cover of three times salary. An employee earning 40,000 dies in service. Assuming no exclusions and the scheme pays the stated multiple, what benefit is payable?

  1. 40,000
  2. 80,000
  3. 120,000 Correct answer.
  4. 160,000

Explanation

Death-in-service cover of three times salary on a salary of 40,000 gives a benefit of 120,000. The multiple stated in the scheme rules is applied directly to the salary at the relevant date.

Question 24Life Assurance

An insurer discovers that a policyholder deliberately concealed a serious illness at application. Which remedy is most consistent with the law on misrepresentation in life assurance?

  1. The insurer must pay the claim but may increase future premiums
  2. The insurer must refund all premiums with interest and pay the claim
  3. The insurer must pay half the sum assured
  4. The insurer may avoid the contract and decline the claim, subject to applicable consumer protections Correct answer.

Explanation

Deliberate concealment of a material fact breaches the duty of utmost good faith, allowing the insurer to avoid the contract and refuse the claim, subject to any statutory consumer protections. Remedies may be adjusted proportionately for lesser degrees of fault under modern rules.

Question 25Life Assurance

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

  1. A surrender of the policy
  2. An assignment of the policy Correct answer.
  3. A waiver of premium
  4. A conversion option

Explanation

Assignment transfers the legal ownership and rights of a life policy to another party, either absolutely or by way of security. This is distinct from surrender, which ends the policy in return for its value.

Question 26Pensions

Under a defined benefit pension plan, the benefit payable at retirement is typically determined by which of the following?

  1. A formula based on salary history and years of service Correct answer.
  2. The investment performance of the participant's chosen funds
  3. The prevailing market interest rate at the retirement date
  4. The accumulated value of employee and employer contributions

Explanation

Defined benefit plans promise a benefit computed from a formula, commonly referencing final or average salary and credited service. Investment risk in such plans is borne by the plan sponsor rather than the participant.

Question 27Pensions

In a defined contribution pension plan, which party generally bears the investment risk on the assets in a participant's account?

  1. The pension regulator
  2. The plan administrator
  3. The plan sponsor
  4. The participant Correct answer.

Explanation

In a defined contribution plan the benefit equals the account balance, so investment gains or losses fall on the participant. The sponsor's obligation is limited to making the required contributions.

Question 28Pensions

A participant in a defined benefit plan has 30 years of credited service and a final average salary of 90,000. If the plan formula is 1.5% per year of service applied to final average salary, what is the annual benefit?

  1. 40,500 Correct answer.
  2. 27,000
  3. 54,000
  4. 45,000

Explanation

The formula multiplies the accrual rate by years of service and final average salary: 0.015 x 30 x 90,000 = 40,500. This is a standard flat-benefit unit formula.

Question 29Pensions

Which of the following best describes vesting in a pension plan?

  1. The participant's right to a benefit that is not forfeitable upon termination Correct answer.
  2. The sponsor's ability to reduce accrued benefits for active employees
  3. The requirement that contributions be invested in stable assets
  4. The process of converting an annuity into a lump sum at retirement

Explanation

Vesting establishes a participant's nonforfeitable entitlement to accrued benefits, generally after a specified period of service. Before vesting, benefits may be forfeited on termination of employment.

Question 30Pensions

A plan provides a lump sum equal to the present value of the accrued benefit. If the accrued annual benefit is 12,000 payable as a life annuity and an annuity factor of 14 is applied, what lump sum is payable?

  1. 168,000 Correct answer.
  2. 196,000
  3. 180,000
  4. 144,000

Explanation

The lump sum equals the annual benefit multiplied by the annuity factor: 12,000 x 14 = 168,000. The factor converts a stream of payments into a single present value.

Question 31Pensions

Which of the following is the primary purpose of a pension plan's actuarial valuation?

  1. To establish the vesting schedule for new employees
  2. To calculate the income tax owed by each participant
  3. To determine the plan's contribution requirements and funded status Correct answer.
  4. To set the investment management fee for the plan's custodian

Explanation

An actuarial valuation measures plan assets against liabilities to determine funding requirements and funded status. It uses demographic and economic assumptions to project benefit obligations.

Question 32Pensions

In pension terminology, what does the term 'funded ratio' measure?

  1. Active participants divided by retired participants
  2. Investment return divided by the discount rate
  3. Annual contributions divided by annual benefit payments
  4. Plan assets divided by plan liabilities Correct answer.

Explanation

The funded ratio compares the value of plan assets to the actuarial value of liabilities. A ratio below 100% indicates a funding shortfall.

Question 33Pensions

Which actuarial assumption has the greatest direct effect on the present value of a pension plan's liabilities?

  1. The number of investment managers employed
  2. The assumed rate of salary growth for retired participants
  3. The discount rate used to value future benefit payments Correct answer.
  4. The plan's administrative expense budget

Explanation

The discount rate converts projected benefit payments to a present value, so a lower rate produces a higher liability. It is generally the most sensitive assumption in liability measurement.

Question 34Pensions

A plan's projected benefit obligation is 500 million and the fair value of plan assets is 450 million. What is the plan's funded status?

  1. A surplus of 100 million
  2. A deficit of 100 million
  3. A surplus of 50 million
  4. A deficit of 50 million Correct answer.

Explanation

Funded status equals plan assets minus the benefit obligation: 450 - 500 = -50 million, a deficit. A negative result indicates the obligation exceeds assets.

Question 35Pensions

Which of the following best describes a pension plan's 'service cost' for a period?

  1. The benefits paid to retirees during the period
  2. The present value of benefits earned by employees during the period Correct answer.
  3. The investment return earned on plan assets during the period
  4. The change in the discount rate during the period

Explanation

Service cost measures the value of benefits attributed to employee service in the current period. It is a component of the periodic pension expense.

Question 36Pensions

A plan uses a 5% discount rate and expects to pay a single benefit of 105,000 one year from now. What is the present value of that obligation?

  1. 99,750
  2. 100,000 Correct answer.
  3. 110,250
  4. 105,000

Explanation

The present value equals the future payment divided by one plus the discount rate: 105,000 / 1.05 = 100,000. Discounting converts the future obligation to today's value.

Question 37Pensions

Which of the following describes an actuarial gain on a pension plan's liabilities?

  1. A decrease in the number of active participants
  2. An increase in contributions required by the sponsor
  3. A decrease in the obligation arising from experience differing from assumptions Correct answer.
  4. An increase in plan assets from investment returns

Explanation

An actuarial gain occurs when actual experience, such as mortality or turnover, produces a lower obligation than assumed. It reflects a deviation from the actuarial assumptions.

Question 38Pensions

Under a cash balance plan, each participant has a hypothetical account that is credited with which of the following?

  1. Dividends from the plan sponsor's equity
  2. Pay credits and interest credits Correct answer.
  3. Only employee contributions with no interest
  4. Only employer contributions invested in participant-chosen funds

Explanation

A cash balance plan is a defined benefit plan expressed as a hypothetical account that grows through pay credits and interest credits. The sponsor bears the investment risk, not the participant.

Question 39Pensions

A participant has a cash balance account of 80,000. The plan credits interest at 4% and provides a pay credit of 6,000 for the year. Assuming credits occur at year end, what is the account balance at the end of the year?

  1. 89,200 Correct answer.
  2. 86,000
  3. 83,200
  4. 90,000

Explanation

The account grows by interest on the opening balance plus the pay credit: 80,000 x 1.04 = 83,200, plus 6,000 = 89,200. Both interest and pay credits increase the hypothetical account.

Question 40Pensions

Which of the following is a typical feature of a multiemployer pension plan?

  1. Each employer funds only the benefits of its own former employees
  2. Participants direct the investment of their individual accounts
  3. Benefits are guaranteed entirely by the federal government
  4. Contributions are made by multiple employers under a collective bargaining agreement Correct answer.

Explanation

Multiemployer plans pool contributions from several unrelated employers, usually under collective bargaining, and assets are shared. Withdrawal liability rules address an employer leaving the plan.

Question 41Pensions

What is the purpose of a pension plan's minimum funding requirement?

  1. To guarantee a minimum investment return each year
  2. To ensure contributions are sufficient to cover benefits accruing and amortize shortfalls Correct answer.
  3. To cap the benefits payable to highly compensated employees
  4. To require full funding of all future benefits immediately

Explanation

Minimum funding rules require sponsors to contribute enough to cover current accruals and amortize any funding shortfall over time. They do not require immediate full funding of all future benefits.

Question 42Pensions

A plan sponsor must choose between a higher assumed discount rate and a lower one. All else equal, what effect does a higher discount rate have on the measured benefit obligation?

  1. It increases the service cost but not the obligation
  2. It increases the present value of the obligation
  3. It reduces the present value of the obligation Correct answer.
  4. It has no effect on the obligation

Explanation

A higher discount rate reduces the present value of future benefit payments. This lowers the measured obligation and can improve the reported funded status.

Question 43Pensions

Which of the following best describes a 'joint and survivor' annuity option in a pension plan?

  1. Benefits cease entirely at the participant's retirement date
  2. Benefits are paid only as a single lump sum
  3. Benefits continue to a surviving beneficiary after the participant's death Correct answer.
  4. Benefits increase automatically with inflation each year

Explanation

A joint and survivor annuity provides continuing payments to a designated survivor after the participant dies. Because it offers survivor protection, the participant's benefit is typically reduced relative to a single-life annuity.

Question 44Pensions

A participant elects a joint and survivor annuity with a 50% survivor benefit. If the participant's monthly benefit is 3,000, what monthly amount does the surviving beneficiary receive after the participant's death?

  1. 1,500 Correct answer.
  2. 750
  3. 2,250
  4. 3,000

Explanation

A 50% survivor benefit pays the survivor half of the participant's benefit: 3,000 x 0.50 = 1,500 per month. The percentage specifies the survivor's share of the participant's payment.

Question 45Pensions

Which of the following is the most appropriate reason a pension plan engages in liability-driven investing?

  1. To maximize short-term trading profits on equity holdings
  2. To eliminate all funding risk by holding only cash
  3. To avoid the need for actuarial valuations
  4. To align asset cash flows and duration with the timing of benefit payments Correct answer.

Explanation

Liability-driven investing seeks to match asset characteristics such as duration and cash flows to the plan's benefit obligations. This reduces the volatility of the funded status.

Question 46Pensions

A plan has a duration of liabilities of 12 years. To hedge interest rate risk, the plan should generally seek assets with which characteristic?

  1. No sensitivity to interest rates
  2. A duration close to 12 years Correct answer.
  3. A duration much greater than 12 years
  4. A duration close to zero

Explanation

Matching asset duration to liability duration offsets the effect of interest rate changes on the funded status. A close duration match minimizes surplus volatility from rate movements.

Question 47Pensions

Which of the following best describes the role of a pension plan's trustee?

  1. To hold plan assets and act in the beneficiaries' interests Correct answer.
  2. To set the plan sponsor's corporate tax rate
  3. To underwrite the plan's investment losses
  4. To determine each participant's personal tax liability

Explanation

A trustee holds legal title to plan assets and owes fiduciary duties to act in the interests of participants and beneficiaries. The trustee oversees administration consistent with the plan's terms.

Question 48Pensions

Which of the following is the most significant risk to a pension plan that pays benefits from a mature population with few active employees?

  1. Rapid growth in the number of active participants
  2. Longevity risk combined with a shrinking contribution base Correct answer.
  3. Overfunding of the benefit obligation
  4. Excessive diversification of the investment portfolio

Explanation

A mature plan with many retirees and few actives faces rising benefit payments with a limited contribution base, while longer lifespans increase total payouts. This combination strains liquidity and funding.

Question 49Pensions

A plan's actuary assumes a retirement age of 65, but employees are expected to retire earlier on average. All else equal, what is the effect of earlier retirement on the plan's liability?

  1. It decreases the liability because salaries are lower
  2. It decreases the liability because benefits start later
  3. It increases the liability because benefits are paid over a longer period Correct answer.
  4. It has no effect because the benefit formula is unchanged

Explanation

Earlier retirement means benefits begin sooner and are paid over a longer expected period, raising the present value of the obligation. The assumption therefore increases measured liabilities.

Question 50Pensions

Which of the following best describes a plan's 'normal retirement age'?

  1. The age at which a participant first becomes eligible to join the plan
  2. The age at which the plan terminates automatically
  3. The age at which a participant may retire with an unreduced accrued benefit Correct answer.
  4. The age at which the sponsor must increase contributions

Explanation

Normal retirement age is the age specified in the plan at which a participant can retire with a full, unreduced benefit. Retiring earlier may reduce the benefit under early retirement provisions.