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III IC-02 practice questions

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Question 1Practice of Life Insurance (content domains not enumerated in source)

In life insurance underwriting, what does the term 'adverse selection' describe?

  1. The process of selecting the cheapest available reinsurance treaty
  2. The tendency of people with higher-than-average health risks to seek or retain insurance more eagerly than lower-risk people Correct answer.
  3. The insurer's practice of declining applicants who live in certain postcodes
  4. The tendency of policyholders to lapse when interest rates rise

Explanation

Adverse selection is the tendency for applicants with greater risk to buy or keep cover in larger proportion than those with lower risk, which pushes claims above the level assumed in pricing. Underwriters and policy design features such as waiting periods and exclusions exist largely to control it. The concept concerns the behaviour of insureds, not the insurer's marketing geography or reinsurance purchasing.

Question 2Practice of Life Insurance (content domains not enumerated in source)

Which principle requires a life insurance applicant to disclose all facts that would influence a prudent insurer's decision to accept the risk or set its terms?

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

Explanation

Utmost good faith (uberrimae fidei) obliges the applicant to volunteer material facts, because the insurer cannot inspect the applicant's health or history directly. Indemnity, contribution and subrogation are principles associated with general insurance and have little or no application to a life policy paying a fixed sum.

Question 3Practice of Life Insurance (content domains not enumerated in source)

A woman aged 45 names her two children as beneficiaries of a pure endowment assurance policy maturing at age 60. What does this policy pay?

  1. A sum at age 60 whether she survives or not
  2. A sum only if she dies before age 60
  3. A sum at age 60 if she survives, with nothing payable on earlier death Correct answer.
  4. A sum on death whenever it occurs, plus a refund of premiums

Explanation

A pure endowment pays the sum assured only if the life assured survives to the maturity date, and nothing is paid if death occurs before then. It is the opposite of term assurance and is often used as a savings vehicle. A policy paying on survival or earlier death is an endowment assurance, not a pure endowment.

Question 4Practice of Life Insurance (content domains not enumerated in source)

Which of the following best describes the role of a life insurance agent in the sales process?

  1. Setting the premium rates applied to the applicant
  2. Issuing the policy document on behalf of the insurer
  3. Collecting material information about the applicant and transmitting it accurately to the insurer Correct answer.
  4. Underwriting and rating the proposed life

Explanation

The agent acts as a link between applicant and insurer, gathering the proposal information and passing it on faithfully so the insurer can assess the risk. Issuing documents, underwriting and rating are functions of the insurer. An agent who withholds or alters information can jeopardise the policy and breach the agency relationship.

Question 5Practice of Life Insurance (content domains not enumerated in source)

What is the main purpose of a free-look period in a life insurance policy?

  1. To allow the agent to revise the proposal after issue
  2. To allow the insurer to cancel the contract within a set number of days
  3. To postpone the start of cover until the first premium is paid
  4. To allow the policyholder to examine the policy and return it for a refund of premiums if dissatisfied Correct answer.

Explanation

The free-look period gives the policyholder a short window after receiving the policy to review it and cancel for a refund if the terms are not what was expected. It protects consumers against being locked into a contract they did not understand. It does not give the insurer a cancellation right or delay the commencement of cover.

Question 6Practice of Life Insurance (content domains not enumerated in source)

A policyholder pays premiums annually under a participating (with-profits) whole life policy. What is the policyholder entitled to receive in addition to the guaranteed sum assured?

  1. A refund of all premiums paid at maturity
  2. A dividend guaranteed by the stock exchange
  3. A fixed interest payment set at policy issue
  4. A share of the insurer's surplus declared as bonuses Correct answer.

Explanation

With-profits policyholders share in the insurer's distributable surplus through bonuses, such as reversionary bonuses added to the sum assured and terminal bonuses paid on claim. Bonuses are not guaranteed in advance and depend on the fund's performance. They are not premium refunds, fixed interest, or exchange-traded dividends.

Question 7Practice of Life Insurance (content domains not enumerated in source)

Which document typically sets out the insurer's promise to pay the sum assured and the conditions under which the promise applies?

  1. The premium notice
  2. The proposal form
  3. The agent's field receipt
  4. The policy document Correct answer.

Explanation

The policy document is the formal contract of insurance, containing the insurer's promise, the schedule of benefits, exclusions and conditions. The proposal form records the applicant's disclosures and becomes the basis of the contract, but it is not the contract itself. Field receipts and premium notices are administrative documents.

Question 8Practice of Life Insurance (content domains not enumerated in source)

What is the primary function of a life insurance premium?

  1. To guarantee that no claim will ever be declined
  2. To cover the cost of claims, expenses and the build-up of reserves Correct answer.
  3. To provide a loan to the insurer from the policyholder
  4. To pay commissions only to the selling agent

Explanation

Premiums are the pooled contributions from policyholders that fund expected claims, the insurer's operating expenses and the reserves needed to meet future obligations. They are calculated from mortality, interest and expense assumptions. Premiums do not guarantee claim payment regardless of circumstances, nor are they loans or solely commission payments.

Question 9Practice of Life Insurance (content domains not enumerated in source)

An applicant for a life policy has a history of hypertension that is controlled by medication. How should this be treated in the proposal?

  1. It should be disclosed as a material fact Correct answer.
  2. It should be mentioned after the policy is issued
  3. It may be omitted because the condition is controlled
  4. It should be disclosed only if the insurer asks a direct question about it

Explanation

Hypertension is a material fact because it can affect mortality and therefore the insurer's decision and rating. Under the duty of utmost good faith, the applicant should disclose it even if it is controlled, since treatment does not remove the underlying risk. Omitting it could allow the insurer to avoid the policy later.

Question 10Practice of Life Insurance (content domains not enumerated in source)

An insurer discovers that a policyholder knowingly concealed a serious heart condition at proposal. What is the insurer's most likely contractual remedy?

  1. Transfer the policy to another insurer
  2. Reduce the premium retrospectively
  3. Increase the sum assured to compensate
  4. Avoid the policy from inception and decline the claim Correct answer.

Explanation

Where there has been material non-disclosure or misrepresentation, the insurer may avoid the contract, treating it as if it never existed, and refuse the claim. The remedy reflects the breach of utmost good faith. Adjusting premiums, raising benefits or transferring the policy are not remedies for concealment.

Question 11Practice of Life Insurance (content domains not enumerated in source)

A 35-year-old takes out a 20-year term assurance with a renewable option. What does the renewable option allow?

  1. The insurer to cancel the policy on each anniversary
  2. The policyholder to convert the policy into an annuity at the original rate
  3. The insurer to increase the premium at any time
  4. The policyholder to extend cover at expiry without fresh medical evidence, at a higher premium Correct answer.

Explanation

A renewal option lets the policyholder continue term cover beyond the original term without proving insurability, though the premium is recalculated at the attained age and is therefore higher. It protects against losing cover because of deteriorating health. It does not allow arbitrary insurer premium increases or unilateral cancellation.

Question 12Practice of Life Insurance (content domains not enumerated in source)

An endowment assurance policy has a surrender value. What does this represent?

  1. The amount the insurer will pay if the policyholder terminates the policy early Correct answer.
  2. The full sum assured payable on surrender
  3. The total premiums paid without any deduction
  4. A loan secured against the policy at zero interest

Explanation

The surrender value is the amount payable when a policy with a savings element is terminated before maturity or claim. It is typically less than the sum assured and may be less than premiums paid, because the insurer recovers expenses and the cost of cover already provided. It is not a zero-interest loan or a full premium refund.

Question 13Practice of Life Insurance (content domains not enumerated in source)

Why do insurers use mortality tables in pricing life insurance?

  1. To predict the exact date of each policyholder's death
  2. To estimate the proportion of a group expected to die in each year of age Correct answer.
  3. To set the commission rate paid to agents
  4. To calculate the insurer's tax liability

Explanation

Mortality tables give statistical rates of death by age and sex for a population, allowing the insurer to estimate expected claims across a large group. Individual deaths cannot be predicted, but pooled probabilities make pricing and reserving possible. Tax liability and agent commission are separate calculations.

Question 14Practice of Life Insurance (content domains not enumerated in source)

A policyholder with a whole life policy needs cash and the policy has acquired a cash value. Which policy provision allows borrowing against that value?

  1. Policy loan Correct answer.
  2. Grace period
  3. Non-forfeiture option
  4. Automatic premium loan

Explanation

A policy loan provision allows the policyholder to borrow up to the available cash value, with the loan and interest deducted from any benefit if not repaid. It keeps the policy in force while providing liquidity. Automatic premium loans, non-forfeiture options and grace periods serve different purposes.

Question 15Practice of Life Insurance (content domains not enumerated in source)

What is the effect of a 'reinstatement' provision in a life insurance policy that has lapsed for non-payment?

  1. It automatically doubles the sum assured
  2. It refunds all premiums paid before the lapse
  3. It restores the policy to full force on evidence of insurability and payment of overdue premiums with interest Correct answer.
  4. It converts the policy into a term policy permanently

Explanation

Reinstatement allows a lapsed policy to be restored, usually within a stated period, on payment of arrears with interest and satisfactory evidence of continued insurability. It revives the original contract terms rather than creating a new benefit level. It does not double cover, convert the policy type or refund premiums.

Question 16Practice of Life Insurance (content domains not enumerated in source)

A proposer completes a proposal form and pays the first premium, and the insurer issues a conditional acceptance at a higher premium. When does cover generally begin?

  1. Only when the proposer accepts the counter-offer and the revised premium is paid Correct answer.
  2. When the policy anniversary next occurs
  3. On the date the agent first met the proposer
  4. Automatically on the date of the original proposal regardless of acceptance

Explanation

A conditional acceptance or rated acceptance is a counter-offer, so no contract exists until the proposer accepts it and pays the required premium. Cover then commences under the terms agreed. Neither the first meeting nor the original proposal date creates cover where the offer was not accepted as made.

Question 17Practice of Life Insurance (content domains not enumerated in source)

What distinguishes a 'rated' or 'substandard' life risk from a standard risk?

  1. The policy is written on a group rather than individual basis
  2. The policy is issued without any underwriting assessment
  3. The policy is issued with an extra premium or restriction because the risk is above average Correct answer.
  4. The policy carries a lower sum assured than requested for administrative reasons

Explanation

A substandard risk is one whose mortality is higher than average, so the insurer applies an extra premium, a reduced benefit or an exclusion to reflect the additional risk. This allows cover to be offered where a standard rate would be inadequate. It is not an absence of underwriting or a mere administrative adjustment.

Question 18Practice of Life Insurance (content domains not enumerated in source)

In a unit-linked life policy, how is the investment element typically structured?

  1. Premiums are pooled in a single fund with a guaranteed fixed return
  2. Part of the premium buys units in investment funds chosen under the policy, whose value fluctuates Correct answer.
  3. The insurer guarantees the maturity value regardless of fund performance
  4. The entire premium is used to purchase term cover only

Explanation

In unit-linked business, premiums (after deductions for risk cover and expenses) purchase units in specified funds, and the policy value moves with the unit price. The investment risk generally rests with the policyholder. This differs from with-profits or guaranteed products where the insurer bears more of the investment risk.

Question 19Practice of Life Insurance (content domains not enumerated in source)

An insurer's underwriting department receives a proposal showing a hazardous occupation such as deep-sea diving. What is the most appropriate underwriting response?

  1. Decline automatically without further review
  2. Issue the policy at standard rates to avoid delay
  3. Assess the additional risk and consider an extra premium, exclusion or declinature Correct answer.
  4. Ignore the occupation because only health matters

Explanation

Occupation is a material factor in life underwriting because hazardous work raises the risk of accidental death. The underwriter should evaluate the degree of hazard and apply an appropriate extra premium, an accidental death exclusion, or decline if the risk is unacceptable. Ignoring it or issuing at standard rates would misprice the risk.

Question 20Practice of Life Insurance (content domains not enumerated in source)

Why does a life insurer hold mathematical reserves?

  1. To meet future liabilities to policyholders as they fall due Correct answer.
  2. To pay commissions to agents in advance
  3. To satisfy shareholders' dividend expectations
  4. To fund the insurer's marketing budget

Explanation

Mathematical reserves are the liabilities the insurer recognises for future policyholder benefits, calculated from assumptions about mortality, interest and expenses. They ensure the insurer can meet claims and maturities as they arise. They are not a fund for commissions, marketing or dividends, which are funded from surplus and capital.

Question 21Practice of Life Insurance (content domains not enumerated in source)

An individual whole life policy has been in force for many years when the policyholder stops paying premiums. Which non-forfeiture option allows the cash value to be used to provide a smaller sum assured that remains in force for life?

  1. Reduced paid-up insurance Correct answer.
  2. Cash surrender
  3. Extended term insurance
  4. Automatic premium loan

Explanation

Under the reduced paid-up option, the available cash value is applied as a single premium to buy a lower sum assured that stays in force for the rest of the life, with no further premiums due. Extended term insurance instead provides the original sum assured for a limited period. Automatic premium loan and cash surrender produce different outcomes.

Question 22Practice of Life Insurance (content domains not enumerated in source)

An insurer's mortality experience shows significantly higher deaths than assumed among policies issued in a particular distribution channel. Which action best reflects sound actuarial practice?

  1. Investigate the causes and review underwriting, pricing and channel controls Correct answer.
  2. Reduce the sum assured on existing policies without consent
  3. Ignore the finding because mortality tables are fixed
  4. Immediately cancel all policies in that channel

Explanation

A persistent adverse deviation from assumed mortality signals a problem in pricing, underwriting or distribution quality. Sound practice is to investigate the causes and adjust underwriting standards, pricing assumptions and channel oversight. Ignoring the data, mass cancellation or unilateral benefit reduction would be inappropriate or unlawful.

Question 23Practice of Life Insurance (content domains not enumerated in source)

A policy contains a 'suicide exclusion' applying for the first 12 months. A policyholder dies by suicide in month 9. How should the claim normally be handled?

  1. Pay the sum assured minus the premiums still owed
  2. Pay nothing and retain all premiums without exception
  3. Apply the exclusion, typically refunding premiums paid and paying no death benefit Correct answer.
  4. Pay the full sum assured because death has occurred

Explanation

Where death results from suicide within the exclusion period, the insurer is not liable for the sum assured but usually returns the premiums paid, as the policy provides. This protects the insurer against anti-selection while giving the estate some return. Paying the full benefit would defeat the exclusion, and forfeiting all premiums ignores the standard refund provision.

Question 24Practice of Life Insurance (content domains not enumerated in source)

An insurer sells a policy with a premium that is initially low and increases at stated intervals, with the increases disclosed in the policy. What is the principal consumer-protection concern?

  1. The premium is guaranteed never to change
  2. The sum assured automatically falls with each increase
  3. The policyholder may be unable to afford later increases and lapse, losing cover Correct answer.
  4. The insurer may alter the schedule at will

Explanation

Where premiums are designed to step up over time, the risk is that the policyholder cannot sustain later payments and the policy lapses, often after the cheapest cover years have passed. Regulators therefore require clear disclosure of the premium pattern. The schedule is disclosed and fixed by the contract, and the sum assured does not automatically fall because premiums rise.

Question 25Practice of Life Insurance (content domains not enumerated in source)

An applicant for a large sum assured is asked to attend a medical examination and provide a report from their own doctor. Why does the insurer require both?

  1. To determine the applicant's occupation classification
  2. To verify health independently and obtain detailed history relevant to the risk Correct answer.
  3. To comply with tax reporting requirements
  4. To set the commission payable to the agent

Explanation

An insurer's own medical examination provides independent verification of current health, while the attending physician's report supplies detailed medical history and context. Together they support accurate risk classification for larger or higher-risk sums assured. They are not tax, occupational or commission tools.

Question 26Practice of Life Insurance (content domains not enumerated in source)

Under a life insurance policy, what does the 'free look' period typically allow a policyholder to do?

  1. Increase the sum assured without further underwriting at any time
  2. Borrow up to the full cash value without interest for the first year
  3. Cancel the policy within a stated number of days after delivery and receive a refund of premiums paid Correct answer.
  4. Delay payment of the first premium until the first claim arises

Explanation

A free look provision gives the policyholder a short review window after the policy is delivered, during which the contract can be cancelled for a refund of premiums paid. It protects consumers who bought without fully understanding the terms. The window is defined in the contract and usually runs from delivery, not from the proposal date.

Question 27Practice of Life Insurance (content domains not enumerated in source)

In life insurance terminology, what is an 'assignment' of a policy?

  1. The transfer of the policyholder's rights under the policy to another party Correct answer.
  2. The allocation of a share of surplus to participating policies
  3. The conversion of a term policy into a permanent policy
  4. The substitution of one insured life for another with consent

Explanation

Assignment transfers the beneficial rights of the policy to a third party, often as security for a loan or as a gift. The insurer must usually be notified and may need to record the assignment. The insured life generally cannot be changed by assignment.

Question 28Practice of Life Insurance (content domains not enumerated in source)

What is the main purpose of a beneficiary nomination in a life insurance policy?

  1. To direct who should receive the death benefit proceeds Correct answer.
  2. To fix the premium rate for the life of the contract
  3. To set the maximum sum assured the insurer will accept
  4. To guarantee the policy cannot lapse for non-payment

Explanation

A nomination identifies the person or persons intended to receive the proceeds on the death of the life insured. Its legal effect depends on the jurisdiction and on whether the nomination is revocable or irrevocable. It does not alter premium, sum assured, or lapse rules.

Question 29Practice of Life Insurance (content domains not enumerated in source)

A policyholder dies while the policy is in force and all premiums are paid. What is the insurer's core obligation?

  1. To refund only the premiums paid, less expenses
  2. To transfer the policy to the deceased's employer
  3. To continue the policy in the name of the estate indefinitely
  4. To pay the death benefit to the entitled recipient, subject to the policy terms Correct answer.

Explanation

The defining promise of life insurance is payment of the death benefit when the insured event occurs and the contract is in force. Payment is made to the person entitled under the policy and applicable law. The insurer does not simply refund premiums.

Question 30Practice of Life Insurance (content domains not enumerated in source)

What does the 'grace period' in a life insurance contract provide?

  1. A waiting period before the death benefit becomes payable
  2. A short period after the due date during which an overdue premium may be paid without the policy lapsing Correct answer.
  3. A period during which the insurer may contest the validity of the contract
  4. An extension of the policy term equal to any missed premium

Explanation

The grace period protects the policyholder from immediate loss of cover if a premium is paid slightly late. If death occurs during the grace period, the unpaid premium is typically deducted from the benefit. Once the grace period expires unpaid, the policy may lapse or use a non-forfeiture option.

Question 31Practice of Life Insurance (content domains not enumerated in source)

What is a 'policy loan' under a whole life insurance contract?

  1. A bank loan guaranteed by the insurer's reserves
  2. A premium payment deferred to the next policy year
  3. An advance from the insurer secured by the policy's cash value Correct answer.
  4. A loan from one policyholder to another

Explanation

A policy loan lets the owner borrow against accumulated cash value, with the insurer charging interest. If the loan and interest are not repaid, they are deducted from the benefit at death or surrender. It is not a bank product or a transfer between policyholders.

Question 32Practice of Life Insurance (content domains not enumerated in source)

Which type of life insurance pays a benefit only if the insured dies within a specified period?

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

Explanation

Term assurance provides cover for a defined period and pays only on death within that term. If the insured survives, there is normally no benefit and no cash value. Whole life and endowment policies pay on death whenever it occurs, subject to their terms.

Question 33Practice of Life Insurance (content domains not enumerated in source)

What is the role of an actuarial valuation of a life insurer's liabilities?

  1. To calculate the tax payable by policyholders on benefits
  2. To estimate the reserves needed to meet future policy obligations Correct answer.
  3. To determine the market price of the insurer's shares
  4. To set the commission paid to intermediaries

Explanation

Actuarial valuation projects future benefit payments and expenses against expected premiums and investment returns to determine the reserves required. It is a solvency and prudential exercise. It does not set share prices, commissions, or policyholder tax.

Question 34Practice of Life Insurance (content domains not enumerated in source)

An applicant for a life policy dies from an illness that began after the policy was issued and after the contestable period had ended. How should the insurer respond?

  1. Refund premiums because death occurred soon after issue
  2. Pay the death benefit, because the policy was validly in force and the contestable period had expired Correct answer.
  3. Reduce the benefit in proportion to premiums paid
  4. Investigate the original proposal for non-disclosure before deciding

Explanation

Once the contestable period has expired, the insurer generally cannot avoid the contract for innocent non-disclosure, and cover is fully in force. A condition arising after issue is not a misrepresentation at proposal. The claim is therefore payable under the policy terms.

Question 35Practice of Life Insurance (content domains not enumerated in source)

A policyholder wants to stop paying premiums but keep some life cover. Which non-forfeiture option converts the existing cash value into a smaller paid-up policy?

  1. Extended term insurance
  2. Reduced paid-up insurance Correct answer.
  3. Cash surrender
  4. Automatic premium loan

Explanation

Reduced paid-up insurance uses the cash value as a single premium to buy a lower sum assured that remains in force with no further premiums. Extended term keeps the original sum assured for a limited period instead. Cash surrender ends cover entirely.

Question 36Practice of Life Insurance (content domains not enumerated in source)

An insurer pays a claim under a policy where the insured's death was caused by a pre-existing condition that the applicant failed to disclose, and the death occurs within the contestable period. What is the insurer's likely position?

  1. The insurer must pay because the policy was issued
  2. The insurer may be entitled to avoid the policy and decline the claim for material non-disclosure Correct answer.
  3. The insurer must pay but may increase future premiums
  4. The insurer must pay only the surrender value in all cases

Explanation

Within the contestable period, material facts that would have changed the underwriting decision can justify avoidance of the contract. The insurer's remedy depends on the policy wording and applicable law. Paying the full benefit would ignore the effect of the non-disclosure.

Question 37Practice of Life Insurance (content domains not enumerated in source)

A unit-linked policyholder's fund value falls because equity markets decline. Who bears this investment risk?

  1. The insurer, because it guarantees the sum assured
  2. The broker, because it advised on the fund choice
  3. The reinsurer, because it assumes mortality risk
  4. The policyholder, because the benefit is linked to the value of the chosen units Correct answer.

Explanation

In unit-linked contracts the investment risk sits with the policyholder, whose benefit reflects unit prices. The insurer typically guarantees only a minimum death benefit, if anything. Market movements are therefore borne by the policyholder.

Question 38Practice of Life Insurance (content domains not enumerated in source)

What is the effect of adding a 'waiver of premium' benefit to a life policy?

  1. The policy is automatically surrendered when disability begins
  2. All future premiums are cancelled permanently regardless of recovery
  3. The sum assured is increased by the amount of waived premiums
  4. Premiums are waived while the policyholder meets the defined disability condition, and cover continues Correct answer.

Explanation

Waiver of premium keeps the policy in force by waiving premiums during qualifying disability, as defined in the rider. Cover continues and the policy is not surrendered. The waiver usually ends if the policyholder recovers.

Question 39Practice of Life Insurance (content domains not enumerated in source)

An insurer introduces a new mortality table showing lower mortality than the previous table. What is the likely effect on term assurance premiums for new policyholders?

  1. Premiums are unaffected because mortality tables apply only to annuities
  2. Premiums are set solely by investment returns
  3. Premiums must rise to rebuild reserves
  4. Premiums may be reduced because expected claims are lower Correct answer.

Explanation

Mortality tables are a core pricing input for life cover. If expected death claims fall, the cost of providing the benefit falls, allowing lower premiums for new business. Existing policies keep their original contractual rates.

Question 40Practice of Life Insurance (content domains not enumerated in source)

A policyholder surrenders a participating whole life policy after several years. What is typically deducted from the cash value before payment?

  1. The beneficiary's nomination fee
  2. The insurer's tax on death benefits
  3. A surrender charge reflecting unrecouped acquisition costs Correct answer.
  4. The full sum assured

Explanation

Early surrender often incurs a charge because the insurer has not yet recovered initial expenses such as commission and underwriting. The surrender value is the cash value less such charges. The sum assured is not deducted.

Question 41Practice of Life Insurance (content domains not enumerated in source)

Why might an insurer apply a 'lien' to a policy issued on a substandard life?

  1. To reduce the benefit payable if death occurs in the early years of the policy Correct answer.
  2. To remove the contestable period
  3. To guarantee a loan against the policy
  4. To increase the policy term automatically

Explanation

A lien is a common way to handle substandard risk without charging a higher premium. The full sum assured applies after the lien period, but a reduced amount is paid if death occurs early. It does not extend the term or remove contestability.

Question 42Practice of Life Insurance (content domains not enumerated in source)

A policy includes a 'disability benefit' rider that pays an income on total and permanent disability. What underwriting concern is most relevant to this rider?

  1. The likelihood and duration of disability claims, not just mortality Correct answer.
  2. Only the investment return of the insurer's fund
  3. Only the policy's cash value at the time of claim
  4. Only the insured's age at issue

Explanation

Disability riders expose the insurer to morbidity risk, so underwriters assess occupation, health, and lifestyle for the chance and length of disability. Mortality alone is not the relevant measure. Investment returns and cash value do not determine the rider's risk.

Question 43Practice of Life Insurance (content domains not enumerated in source)

What is 'moral hazard' in life insurance underwriting?

  1. The risk that mortality tables become outdated
  2. The risk that interest rates fall below the pricing assumption
  3. The risk that the applicant's circumstances or intentions increase the chance or size of a claim Correct answer.
  4. The risk that the insurer's expenses exceed budget

Explanation

Moral hazard concerns behaviour and intent, such as a person taking out cover with no insurable interest or concealing habits that affect risk. It is distinct from financial risks such as interest rates or expense overruns. Underwriters look for indicators of moral hazard in the proposal.

Question 44Practice of Life Insurance (content domains not enumerated in source)

An applicant takes out a large policy and, shortly afterwards, changes the beneficiary to an unrelated party and then dies. What underwriting or claims concern is most relevant?

  1. Whether the insurer's mortality table was recently updated
  2. Whether there is a legitimate insurable interest and no indication of moral hazard Correct answer.
  3. Whether the premium was paid annually or monthly
  4. Whether the policy has a waiver of premium rider

Explanation

A sudden change of beneficiary to an unrelated party, close to death, can indicate moral hazard or a lack of insurable interest. Insurers examine such patterns at the claims stage. Premium frequency, riders, and mortality tables are not the central concern here.

Question 45Practice of Life Insurance (content domains not enumerated in source)

An insurer uses 'experience rating' when renewing a group life policy. What does this mean?

  1. The renewal premium reflects the group's own claims experience and demographic changes Correct answer.
  2. The premium is set solely by the insurer's standard table
  3. The premium is reduced by the number of dependants
  4. The premium is fixed for the life of the group

Explanation

Group life renewals often use the group's own claims history and changes in membership to adjust rates. This contrasts with community or table rating. It does not fix the premium permanently or depend on dependants.

Question 46Practice of Life Insurance (content domains not enumerated in source)

A policyholder has a whole life policy with a cash value of 50,000 and an outstanding policy loan of 12,000 plus accrued interest of 1,000. The insured dies. How is the death benefit typically calculated?

  1. Sum assured plus the loan and accrued interest
  2. Sum assured less the loan and accrued interest Correct answer.
  3. Sum assured less the cash value
  4. Sum assured less only the accrued interest

Explanation

On death, the insurer deducts any outstanding policy loan and accrued interest from the benefit before paying the recipient. The loan is a debt against the policy. It is not added to the benefit, and the cash value is not deducted separately because it is the source of the loan.

Question 47Practice of Life Insurance (content domains not enumerated in source)

An insurer's new business strain arises when a policy is written. What best explains this concept?

  1. The sum assured is lower than the reserve
  2. Initial costs and reserve requirements exceed the early premiums received Correct answer.
  3. The policyholder pays premiums too quickly
  4. The reinsurer charges no premium

Explanation

New business strain occurs because acquisition costs and the need to establish reserves are incurred before sufficient premiums are collected. It is a cash-flow and capital issue for the insurer. It is not caused by early premium payment or by reinsurance pricing.

Question 48Practice of Life Insurance (content domains not enumerated in source)

What is the purpose of a 'retention limit' in a life insurer's reinsurance programme?

  1. To limit the number of policies the insurer may sell
  2. To set the maximum risk the insurer keeps before ceding the excess to a reinsurer Correct answer.
  3. To cap the commission paid to agents
  4. To fix the maximum age at which a policy may be issued

Explanation

The retention limit defines how much of each risk the insurer is willing to carry itself. Amounts above that limit are ceded to a reinsurer. It does not restrict sales volume, commission, or issue age.

Question 49Practice of Life Insurance (content domains not enumerated in source)

An endowment policy matures and the policyholder survives to the maturity date. What is the insurer's obligation?

  1. To pay only the premiums paid
  2. To extend the policy automatically for a further term
  3. To pay the maturity benefit, including any declared bonuses where applicable Correct answer.
  4. To pay nothing because the insured did not die

Explanation

Endowment assurance pays a maturity benefit if the insured survives the term, in addition to any death benefit during the term. For participating policies, declared bonuses may be included. The insurer does not withhold payment merely because death did not occur.

Question 50Practice of Life Insurance (content domains not enumerated in source)

In life insurance practice, what does 'utmost good faith' require of an applicant when completing a proposal form?

  1. Nominate a beneficiary who is a close family member
  2. Disclose all material facts that could influence the insurer's acceptance decision Correct answer.
  3. Pay the first premium before any cover can be considered
  4. Submit to a medical examination at the insurer's expense

Explanation

Utmost good faith obliges the applicant to volunteer every fact a prudent underwriter would consider material, whether or not the insurer asks about it. The duty exists because the insurer cannot inspect the life being insured, so it must rely on the applicant's disclosure. Breach can allow the insurer to avoid the contract.