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MD Life & Health practice questions

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Question 1Insurance Regulation and General Insurance Concepts

Insurance is best described as which of the following?

  1. The transfer of financial risk from an individual to an insurer Correct answer.
  2. An agreement in which the insurer promises to prevent future losses from happening
  3. A savings plan in which the insurer invests premiums on the policyholder's behalf
  4. A government program that guarantees that accidental losses will never occur

Explanation

Insurance is a mechanism that transfers the financial consequences of loss from the insured to the insurer in exchange for a premium. The insurer then spreads the cost of the losses of the few across the premiums paid by the many.

Question 2Insurance Regulation and General Insurance Concepts

Which of the following best describes a pure risk?

  1. A risk that is eliminated completely whenever an insurance policy is purchased
  2. A situation that offers the chance of a gain as well as the chance of a loss
  3. A situation that offers only the chance of loss or no loss at all Correct answer.
  4. A risk that a person creates intentionally in order to collect policy proceeds

Explanation

Pure risks involve only the possibility of loss or no loss, with no possibility of gain, and they are the type of risk insurance is designed to handle. Speculative risks involve the chance of gain as well as loss and are generally not insurable.

Question 3Insurance Regulation and General Insurance Concepts

In insurance terminology, the specific cause of a loss, such as a fire or an illness, is called

  1. a peril Correct answer.
  2. a risk
  3. a hazard
  4. an exposure

Explanation

A peril is the event or cause of loss itself, such as fire, windstorm, or sickness. A hazard, by contrast, is a condition that increases the likelihood or severity of a loss from that peril.

Question 4Insurance Regulation and General Insurance Concepts

The law of large numbers allows an insurer to do which of the following?

  1. Eliminate the need for an insurer to maintain any claim reserves on its books
  2. Guarantee that actual annual losses will exactly equal the insurer's expected losses
  3. Predict losses more reliably as the number of similar exposure units grows Correct answer.
  4. Charge the same premium to every applicant regardless of that person's health history

Explanation

The law of large numbers holds that actual results approach expected results as the number of similar, independent exposure units increases. This is why insurers write large volumes of similar risks and price coverage on the basis of pooled mortality and morbidity experience.

Question 5Insurance Regulation and General Insurance Concepts

Adverse selection is a concern for insurers mainly because

  1. people with the greatest likelihood of loss are the most likely to seek coverage Correct answer.
  2. producers often sell policies to persons who reside outside the state of issue
  3. premium rates are routinely set too low to cover the insurer's operating expenses
  4. applicants usually withhold information only when requesting very large policies

Explanation

Adverse selection occurs when those at higher risk are more eager to buy insurance than those at lower risk, which can distort the pooled experience on which rates are based. Insurers counter it through underwriting, exclusions, and waiting periods.

Question 6Insurance Regulation and General Insurance Concepts

In life insurance, insurable interest must exist

  1. at the moment the insured person dies
  2. at the time the policy is applied for and issued Correct answer.
  3. only when the policy is purchased by a business entity
  4. continuously from the application date until the insured dies

Explanation

For life insurance, insurable interest is required at the time the contract is formed, because that is when the policy is not a gambling contract. The interest need not continue afterward, which is why a policy remains valid after a divorce.

Question 7Insurance Regulation and General Insurance Concepts

The principle of utmost good faith requires an applicant for insurance to

  1. pay all premiums within the grace period after the due date
  2. disclose all material facts the insurer needs to evaluate the risk Correct answer.
  3. read every word of the policy before signing the application
  4. purchase only the amount of coverage the insurer recommends

Explanation

Insurance is a contract of utmost good faith, which means each party must deal honestly and the applicant must disclose material information the insurer relies on in underwriting. A material misstatement or concealment can give the insurer grounds to rescind the policy.

Question 8Insurance Regulation and General Insurance Concepts

Why is an insurance policy described as an aleatory contract?

  1. Because it may be canceled by either party at any time without prior notice
  2. Because the amounts exchanged by the parties depend on chance events Correct answer.
  3. Because it requires both parties to exchange equal value at the same time
  4. Because it is prepared by the insurer and accepted or rejected by the applicant

Explanation

An aleatory contract is one in which the values exchanged may be unequal and depend on an uncertain event. A policyholder may pay small premiums and receive a large claim payment, or pay premiums and receive nothing if no covered loss occurs.

Question 9Insurance Regulation and General Insurance Concepts

An insurance policy is a contract of adhesion, which means that

  1. ambiguities in the wording are resolved in favor of the insurer
  2. both parties negotiate and draft the contract terms together
  3. the insured is legally bound to renew the policy each year
  4. the insurer drafts the terms and the applicant must accept or reject them Correct answer.

Explanation

Because the insurer writes the policy and the applicant has no real bargaining power over its terms, the contract is one of adhesion. As a result, ambiguous language is construed against the drafter, that is, in favor of the insured.

Question 10Insurance Regulation and General Insurance Concepts

The principle of indemnity in health insurance means that the insured

  1. is guaranteed a profit when total claims exceed the premiums paid
  2. must submit claims only after every other source of payment has been exhausted
  3. may collect from several policies and keep any amount exceeding the actual loss
  4. should be restored to approximately the same financial position as before the loss Correct answer.

Explanation

Indemnity means the insured is compensated for the actual loss and should not profit from it. Coordination-of-benefits and other-payment provisions in health policies exist largely to enforce this principle when more than one plan covers the claim.

Question 11Insurance Regulation and General Insurance Concepts

Reinsurance is best defined as

  1. a producer sharing commissions with a general agent
  2. an insurer transferring part of its risk to another insurer Correct answer.
  3. one insurer taking over all the policyholders of another insurer
  4. a government program that pays claims of insolvent insurers

Explanation

Reinsurance is insurance for insurers: the ceding insurer transfers a portion of its risk and premium to a reinsurer in exchange for the reinsurer's agreement to share covered losses. It increases the ceding insurer's capacity and protects its surplus against large or catastrophic claims.

Question 12Insurance Regulation and General Insurance Concepts

Which statement accurately describes a mutual insurer?

  1. It is owned by shareholders who receive dividends from company profits
  2. It must be organized in the same state in which it writes business
  3. It issues policies only to members of a specific fraternal organization
  4. It is owned by its policyholders, who may receive dividends Correct answer.

Explanation

A mutual insurer is owned by its policyholders rather than by outside shareholders, and it may distribute divisible surplus to them as dividends. A stock insurer, by contrast, is owned by shareholders.

Question 13Insurance Regulation and General Insurance Concepts

An insurer that is chartered in Maryland and sells policies in Maryland is classified as

  1. a surplus lines insurer
  2. an alien insurer
  3. a foreign insurer
  4. a domestic insurer Correct answer.

Explanation

An insurer is a domestic insurer in the state where it is chartered or incorporated. The same company is a foreign insurer when it operates in another state of the United States and an alien insurer when it operates in the United States but is chartered abroad.

Question 14Insurance Regulation and General Insurance Concepts

Before an insurer may transact insurance business in Maryland, it must obtain

  1. a letter of credit from a Maryland-chartered bank
  2. a federal charter issued by the U.S. Treasury
  3. an endorsement from the state treasury
  4. a certificate of authority from the Insurance Commissioner Correct answer.

Explanation

An insurer must be authorized, meaning it must hold a certificate of authority issued by the Maryland Insurance Commissioner, before it may transact insurance in the state. Transacting without that authority makes the insurer an unauthorized insurer subject to enforcement action.

Question 15Insurance Regulation and General Insurance Concepts

The Maryland Insurance Commissioner is responsible for

  1. setting the interest rates that insurers pay on policy loans
  2. drafting the policy forms that every insurer must use in the state
  3. guaranteeing payment of every claim that an insurer denies
  4. enforcing the state's insurance laws and regulating insurers and producers Correct answer.

Explanation

The Commissioner heads the Maryland Insurance Administration and administers and enforces the Insurance Article, including licensing insurers and producers, reviewing rates and forms, and investigating unfair trade practices. The Commissioner also issues orders, including cease-and-desist orders and fines.

Question 16Insurance Regulation and General Insurance Concepts

In Maryland, a producer's authority to act on behalf of a specific insurer begins when

  1. the producer pays the annual license renewal fee
  2. the producer passes the state licensing examination
  3. the insurer provides the producer with business cards and marketing materials
  4. the insurer appoints the producer and notifies the Commissioner Correct answer.

Explanation

A producer must hold a license, but license authority is limited to acting for insurers that have appointed the producer, with the appointment filed with the Commissioner. Acting for an insurer without an appointment generally means the producer may not be compensated for that business.

Question 17Insurance Regulation and General Insurance Concepts

A producer who collects premiums from clients holds those funds

  1. as personal property once the premium has been received
  2. free of any accounting requirement if commissions are deducted first
  3. in a trust account that may be used for business expenses until the premium is remitted
  4. in a fiduciary capacity and must not mix them with personal funds Correct answer.

Explanation

Premiums collected on behalf of an insurer or an insured are held in a fiduciary capacity. Commingling those funds with the producer's own money and using them for personal or business expenses is prohibited.

Question 18Insurance Regulation and General Insurance Concepts

Offering a client a portion of the producer's commission to encourage the purchase of a policy is

  1. acceptable practice for policies with large face amounts
  2. allowed when the client pays the full premium in cash
  3. permitted if the insurer approves it in writing
  4. an illegal inducement known as rebating Correct answer.

Explanation

Sharing a commission or offering any valuable consideration not stated in the policy as an inducement to buy is rebating, an unfair trade practice prohibited by law. Differences in price must be reflected in the policy and filed rates rather than negotiated between the producer and the client.

Question 19Insurance Regulation and General Insurance Concepts

A producer tells a policyholder that her current annuity has 'lost all its value' so that she will surrender it and purchase a new contract. This conduct is

  1. acceptable because the producer disclosed the source of the information
  2. allowed if the policyholder signs a notice regarding replacement
  3. prohibited as twisting, a misrepresentation used to induce replacement Correct answer.
  4. permitted if the replacement contract offers a higher interest rate

Explanation

Twisting is a misrepresentation or incomplete comparison that induces a policyholder to lapse, surrender, or replace existing coverage. The fact that the new contract may be more favorable does not excuse a false statement about the old one.

Question 20Insurance Regulation and General Insurance Concepts

When a Maryland producer takes an application for a policy that will replace existing life insurance, the producer must

  1. obtain the insurer's advance approval before discussing replacement
  2. wait 30 days before submitting the application for underwriting
  3. destroy the old policy before the new one is delivered
  4. give the applicant a replacement notice identifying the existing coverage Correct answer.

Explanation

Replacement rules require that the applicant receive a notice regarding replacement, signed by both the applicant and the producer, that identifies the existing coverage being replaced. Copies go to the insurer, and the existing insurer is notified so the policyholder can compare the two contracts.

Question 21Insurance Regulation and General Insurance Concepts

Under Maryland law, insurance rates must be

  1. adequate, not excessive, and not unfairly discriminatory Correct answer.
  2. set at the lowest level that still permits a producer commission
  3. based only on the applicant's age and sex
  4. identical for every policyholder in the state

Explanation

Rate regulation requires that rates be adequate to pay expected claims and expenses, not so high as to be excessive, and not unfairly discriminatory among similarly situated policyholders. Rates may reflect expected loss experience, but distinctions must be supported by actuarial data.

Question 22Insurance Regulation and General Insurance Concepts

The Maryland Life and Health Insurance Guaranty Corporation exists to

  1. insure the personal property of insurance company employees
  2. pay every claim of any insurer that becomes insolvent, without limit
  3. guarantee that insurers earn a minimum rate of return on premiums
  4. provide limited protection to policyholders of an insolvent member insurer Correct answer.

Explanation

The guaranty corporation is a nonprofit entity, funded by member insurers, that provides limited statutory protection to policyholders and claimants when a member insurer becomes insolvent. Coverage limits and exclusions apply, and the corporation does not guarantee a company's financial performance.

Question 23Insurance Regulation and General Insurance Concepts

Which statement correctly distinguishes a warranty from a representation in insurance?

  1. The terms are interchangeable because both describe statements made during underwriting
  2. A warranty is guaranteed true; a representation is believed true to the best of the applicant's knowledge Correct answer.
  3. A warranty is made only during the claims process, while a representation is made on the application
  4. A representation is a promise that a fact is true, while a warranty is merely an opinion

Explanation

A warranty is a statement the insured guarantees to be literally true, and a breach may allow the insurer to avoid the contract. A representation is a statement believed true to the best of the applicant's knowledge, and in life and health insurance it is generally grounds for rescission only if material.

Question 24Insurance Regulation and General Insurance Concepts

An insurer knowingly accepts late premium payments for several months, then denies coverage for a loss because a payment was late. Which concept most likely prevents the denial?

  1. Subrogation
  2. Consideration
  3. Adhesion
  4. Estoppel, because the insurer's conduct led the insured to believe coverage continued Correct answer.

Explanation

Estoppel prevents a party from asserting a right after conduct that led the other party to rely on a different state of affairs. By accepting late payments, the insurer waived strict compliance with the premium deadline and generally cannot later deny coverage on that ground.

Question 25Insurance Regulation and General Insurance Concepts

An arrangement in which investors persuade an unrelated person to apply for a life policy solely so the investors can obtain the death benefit is

  1. a stranger-originated life insurance transaction, which is generally prohibited Correct answer.
  2. a viatical settlement, which requires the insured to be terminally ill
  3. a group life conversion, which requires the employer's consent
  4. a restricted beneficiary designation, which is allowed with insurer approval

Explanation

Stranger-originated life insurance, or STOLI, is designed from the outset for investors with no insurable interest to profit from the insured's death. Because the purchaser lacks insurable interest at inception, such arrangements are generally prohibited and are often treated as fraudulent.

Question 26Insurance Regulation and General Insurance Concepts

A retailer installs a fire-suppression system throughout its warehouse to lessen the damage a fire would cause. Which risk management technique does this illustrate?

  1. Risk avoidance
  2. Risk reduction Correct answer.
  3. Risk retention
  4. Risk transfer

Explanation

Risk reduction lowers the frequency or severity of a loss while the exposure still exists. A sprinkler system cannot prevent every fire, but it can limit the resulting damage. Avoidance would eliminate the exposure entirely, while retention and transfer involve bearing or shifting the financial consequences.

Question 27Insurance Regulation and General Insurance Concepts

Which statement describes a stock insurance company?

  1. It is owned by subscribers who exchange indemnity agreements through an attorney-in-fact.
  2. It is a nonprofit organization operated for the benefit of a fraternal group.
  3. It is owned by shareholders and operates with the goal of earning a profit. Correct answer.
  4. It is owned by its policyholders and issues nonparticipating policies only.

Explanation

A stock insurer is a corporation owned by shareholders who supply capital and expect a return on their investment. Policyholders buy coverage from the company but do not own it. Mutual, fraternal, and reciprocal insurers have different ownership structures.

Question 28Insurance Regulation and General Insurance Concepts

Which of the following is a pure risk?

  1. Opening a new retail store
  2. Betting on a horse race
  3. Investing in a volatile stock
  4. Fire damage to a family home Correct answer.

Explanation

A pure risk involves only the possibility of loss or no loss, with no chance of gain. Fire damage to a home fits that definition because the homeowner can only lose or avoid loss. Gambling, investing, and starting a business are speculative risks because they can produce gain as well as loss.

Question 29Insurance Regulation and General Insurance Concepts

In an insurance contract, the applicant's payment of the initial premium and the insurer's promise to pay covered claims together represent which element?

  1. Acceptance
  2. Offer
  3. Consideration Correct answer.
  4. Legal purpose

Explanation

Consideration is the value each party gives in exchange for the other party's promise. The applicant gives premium, and the insurer gives its promise to pay covered claims. Offer and acceptance concern the formation of the agreement, while legal purpose concerns whether the contract's objective is lawful.

Question 30Insurance Regulation and General Insurance Concepts

A producer who holds no express authority to bind coverage tells an applicant that coverage begins immediately. The applicant reasonably relies on the producer's statement, and the insurer later denies a claim. Under agency law, the insurer may be bound by the producer's statement because of:

  1. Subrogation
  2. Coinsurance
  3. Apparent authority Correct answer.
  4. Reinsurance

Explanation

Apparent authority arises when the insurer's conduct leads a third party to reasonably believe the producer has authority to act. If the applicant reasonably relied on the producer's apparent power to bind coverage, the insurer may be held responsible. Subrogation, coinsurance, and reinsurance involve claims recovery or risk sharing, not agency authority.

Question 31Insurance Regulation and General Insurance Concepts

An applicant intentionally hides a serious medical condition on a life insurance application to obtain a lower premium. This conduct is best classified as:

  1. A moral hazard Correct answer.
  2. A speculative risk
  3. A morale hazard
  4. A physical hazard

Explanation

A moral hazard involves dishonesty or a conscious intent to create or exaggerate a loss, such as concealing information to obtain coverage or a lower rate. A morale hazard reflects carelessness or indifference after coverage is purchased. Physical hazards are tangible conditions, and speculative risks involve the chance of gain.

Question 32Insurance Regulation and General Insurance Concepts

An insurer introduces a health plan and accepts applicants without meaningful underwriting. Which result is most likely?

  1. A disproportionate number of high-risk applicants entering the pool Correct answer.
  2. Guaranteed profitability because premiums are collected in advance
  3. The elimination of adverse selection through the law of large numbers
  4. A lower-than-expected claims ratio because only healthy applicants enroll

Explanation

Adverse selection occurs when applicants with greater-than-average risk are more likely to seek or keep coverage. Without underwriting, the insurer cannot identify or price for those risks, so high-risk applicants may enter the pool disproportionately. Collecting premiums in advance does not guarantee profitability, and the law of large numbers does not eliminate adverse selection.

Question 33Insurance Regulation and General Insurance Concepts

After paying a claim for an injury caused by a negligent third party, an insurer seeks reimbursement from that third party. This right is called:

  1. Indemnification
  2. Coinsurance
  3. Subrogation Correct answer.
  4. Contribution

Explanation

Subrogation gives the insurer the right to pursue the party responsible for a loss after the insurer has paid the insured. It prevents the insured from collecting twice and places the ultimate cost on the responsible party. Contribution and coinsurance involve sharing losses among insurers or between insurer and insured.

Question 34Insurance Regulation and General Insurance Concepts

A health policy has a $1,000 deductible and an 80/20 coinsurance clause. The insured incurs a covered medical expense of $6,000. How much will the insurer pay, assuming no other limits apply?

  1. $6,000
  2. $5,000
  3. $4,000 Correct answer.
  4. $4,800

Explanation

The insured first pays the $1,000 deductible, leaving $5,000 of covered expense. The insurer then pays 80% of that remaining amount, which is $4,000. The insured pays the other 20%, or $1,000, plus the deductible.

Question 35Insurance Regulation and General Insurance Concepts

Which policy section contains the insurer's promise to pay benefits for covered losses?

  1. Exclusions
  2. Insuring clause Correct answer.
  3. Conditions
  4. Declarations

Explanation

The insuring clause is the part of the policy that states the insurer's basic promise to pay covered claims. The declarations identify the insured and policy limits, conditions set out duties of the parties, and exclusions remove specified losses from coverage.

Question 36Insurance Regulation and General Insurance Concepts

An insured adds a rider to a life insurance policy that provides an additional accidental death benefit. What is the effect of the rider?

  1. It takes effect only after the policy has lapsed.
  2. It eliminates the insurer's duty to pay the base death benefit.
  3. It modifies the original policy and becomes part of the contract. Correct answer.
  4. It replaces the original policy in its entirety.

Explanation

A rider or endorsement changes or adds to the terms of the original policy and is incorporated into the contract. It does not replace the entire policy unless the rider expressly does so. The base coverage continues on its original terms unless the rider states otherwise.

Question 37Insurance Regulation and General Insurance Concepts

Why does an insurer's ability to predict losses improve as the number of similar, independent exposure units increases?

  1. Speculative risks are removed from the pool.
  2. Collected premiums must always equal paid claims.
  3. Actual loss experience tends to approach expected results. Correct answer.
  4. Individual losses become more severe as the pool grows.

Explanation

The law of large numbers holds that as the number of independent, similar exposure units increases, actual loss experience tends to approach the expected or predicted level. This improves the reliability of ratemaking and reserving. It does not make individual losses more severe or guarantee that premiums equal claims.

Question 38Insurance Regulation and General Insurance Concepts

Which type of insurer is owned by its policyholders, who agree to insure one another through an exchange and appoint an attorney-in-fact to manage its affairs?

  1. Lloyd's association
  2. Fraternal benefit society
  3. Reciprocal insurer Correct answer.
  4. Stock insurer

Explanation

A reciprocal insurer is an unincorporated group of subscribers who exchange indemnity agreements with one another. The subscribers are both insureds and owners, and they appoint an attorney-in-fact to manage the exchange. A stock insurer is owned by shareholders, and a fraternal benefit society is organized around a lodge or fraternal membership.

Question 39Insurance Regulation and General Insurance Concepts

An insurance policy contains a condition precedent. What does this mean?

  1. The requirement applies solely to the insurer's right to cancel the policy.
  2. The policy becomes void only after the insurer has paid a claim.
  3. The insurer must pay a claim before the insured submits proof of loss.
  4. The insured must satisfy a specified requirement before the insurer's duty to pay arises. Correct answer.

Explanation

A condition precedent is a requirement that must be met before the other party's duty to perform becomes enforceable. In insurance, the insured may be required to provide notice of loss or proof of loss before the insurer must pay. If the condition is not satisfied, the insurer may not yet owe performance.

Question 40Insurance Regulation and General Insurance Concepts

What does the entire contract provision in an insurance policy establish?

  1. The insured may rely on oral statements made before the application.
  2. The policy and any attached application form the complete agreement. Correct answer.
  3. Only the insurer's bylaws are incorporated into the agreement.
  4. The producer may orally modify the policy after delivery.

Explanation

The entire contract provision states that the policy, together with any attached application or endorsements, constitutes the complete agreement. It prevents the parties from relying on outside documents or oral statements to change the contract. Only an authorized written modification becomes part of the policy.

Question 41Life Insurance Basics and Policy Types

At what point must insurable interest exist for an individual life insurance policy to be valid?

  1. When the application is submitted Correct answer.
  2. Only at the policy's maturity date
  3. Each time a premium is paid
  4. When a claim is filed

Explanation

Insurable interest must exist at the time the policy is applied for; otherwise the contract is not valid. It need not continue after issue, and it is not tested at claim time.

Question 42Life Insurance Basics and Policy Types

An individual buys a life policy and returns it 12 days after delivery, requesting a full refund. Which right supports this?

  1. Free-look provision Correct answer.
  2. Automatic loan provision
  3. Reinstatement clause
  4. Grace period

Explanation

The free-look provision gives the policyowner a stated number of days after delivery to return the policy for a full premium refund. It applies even if the policyowner simply changes their mind.

Question 43Life Insurance Basics and Policy Types

If a premium is unpaid, the grace period allows the policyowner to...

  1. pay the overdue premium while coverage remains in force Correct answer.
  2. convert the policy to term coverage
  3. receive a dividend equal to the premium
  4. skip the premium permanently without consequence

Explanation

The grace period is a set number of days after the due date during which the policy stays in force. If the premium is not paid by the end of that period, the policy may lapse.

Question 44Life Insurance Basics and Policy Types

After a life policy has been in force for two years, the insurer generally cannot contest the policy based on...

  1. failure to name a beneficiary
  2. fraudulent claims submitted after death
  3. misstatements made on the application Correct answer.
  4. nonpayment of premium

Explanation

The incontestability clause bars the insurer from contesting the policy for misstatements after it has been in force for a stated period, usually two years. Nonpayment of premium and fraud in a claim remain outside that protection.

Question 45Life Insurance Basics and Policy Types

Which statement describes a level term life policy?

  1. It builds cash value that grows at a guaranteed rate
  2. It provides lifetime coverage with a single premium
  3. It refunds every premium paid if the insured survives the term
  4. It pays a benefit for a set period and builds no cash value Correct answer.

Explanation

Level term provides a fixed death benefit for a specified period and has no cash value. If the insured survives the term, coverage ends unless a renewal or conversion right is used.

Question 46Life Insurance Basics and Policy Types

Which feature distinguishes ordinary whole life insurance from term insurance?

  1. Permanent coverage with level premiums and cash value Correct answer.
  2. Coverage can be renewed only with evidence of insurability
  3. Its premium increases each year with the insured's age
  4. It pays benefits only if death occurs within a stated period

Explanation

Ordinary whole life provides lifelong coverage, a level premium, and a cash value that grows over time. Term covers only a stated period and generally has no cash value.

Question 47Life Insurance Basics and Policy Types

A policyowner names a beneficiary but keeps the right to change that beneficiary. This designation is...

  1. contingent
  2. irrevocable
  3. revocable Correct answer.
  4. viatical

Explanation

A revocable beneficiary can be changed by the policyowner without the beneficiary's consent. An irrevocable designation requires the beneficiary's consent to change.

Question 48Life Insurance Basics and Policy Types

Under a typical two-year suicide clause, if the insured dies by suicide during the first two policy years, the insurer will...

  1. pay the face amount plus accumulated dividends
  2. pay the full face amount to the beneficiary
  3. refund premiums paid, less any indebtedness Correct answer.
  4. deny the claim and keep all premiums

Explanation

The suicide clause limits the insurer's liability during the early policy years. The usual result is a return of premiums paid rather than payment of the face amount.

Question 49Life Insurance Basics and Policy Types

An applicant pays the initial premium and receives a conditional receipt. Coverage under the receipt becomes effective when...

  1. the first policy anniversary is reached
  2. the insurer determines the applicant is insurable Correct answer.
  3. the beneficiary signs the receipt
  4. the policy is physically delivered to the agent

Explanation

A conditional receipt provides coverage as of the application or medical exam date if the applicant proves insurable. If the applicant is not insurable, no coverage arises under the receipt.

Question 50Life Insurance Basics and Policy Types

An insurer discovers after the insured's death that the insured misstated his age at application, paying a lower premium. The insurer will...

  1. deny the claim because the application was inaccurate
  2. pay what the premium would have bought at the correct age Correct answer.
  3. rescind the policy and refund all premiums paid
  4. pay the full face amount without any adjustment

Explanation

The misstatement-of-age provision adjusts the benefit to the amount the premium paid would have purchased at the correct age. The policy is not voided for an age misstatement.