I85PREP
⌘ K
MGA study materials
MGA study resources

MGA practice questions

One question at a time. Build your MGA understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1General insurance principles and risk

In general insurance, what does the term 'risk' most precisely refer to?

  1. The uncertainty of a financial loss occurring from a defined peril Correct answer.
  2. The commission paid to an intermediary for placing business
  3. The legal document that sets out the contract terms
  4. The premium charged by the insurer for accepting a policy

Explanation

Risk in insurance means the possibility of loss arising from an uncertain event, usually tied to a defined peril. It is the exposure the insurer agrees to carry in exchange for premium, not the price or the paperwork itself.

Question 2General insurance principles and risk

Which characteristic distinguishes a 'pure risk' from a 'speculative risk'?

  1. Speculative risk is always insurable by commercial insurers
  2. Pure risk involves only the possibility of loss or no loss Correct answer.
  3. Speculative risk is limited to natural catastrophes
  4. Pure risk offers the chance of gain as well as loss

Explanation

Pure risks, such as fire or liability claims, carry only downside outcomes: loss or no loss. Speculative risks, such as trading or investment, combine the chance of gain with the chance of loss and are generally not insurable.

Question 3General insurance principles and risk

An insurer combines thousands of similar independent motor policies so that actual claims experience is more predictable. Which principle does this illustrate?

  1. Utmost good faith
  2. Indemnity
  3. Pooling of risks Correct answer.
  4. Subrogation

Explanation

Pooling spreads individual exposures across a large group so that aggregate outcomes become statistically predictable. This predictability lets the insurer set premiums that cover expected claims and expenses.

Question 4General insurance principles and risk

Which of the following is an example of a moral hazard rather than a physical hazard?

  1. A warehouse storing flammable solvents near a heater
  2. A property located in a flood-prone river valley
  3. A vehicle fitted with worn brake pads
  4. An insured who becomes careless about security because cover exists Correct answer.

Explanation

Moral hazard arises from the attitude or behaviour of the insured, such as reduced care once insured. Physical hazards are tangible conditions of the property or activity that increase the chance or severity of loss.

Question 5General insurance principles and risk

What is the primary purpose of the principle of indemnity in general insurance?

  1. To ensure the insured can profit from a loss
  2. To guarantee the insurer always recovers its outlay
  3. To restore the insured financially to approximately their pre-loss position Correct answer.
  4. To remove the need for a sum insured

Explanation

Indemnity aims to place the insured back in the financial position held before the loss, no better and no worse. It prevents profit from loss and underpins how claim settlements are calculated.

Question 6General insurance principles and risk

Which of the following best describes 'utmost good faith' as it applies to insurance contracts?

  1. Both parties must disclose all material facts relevant to the risk Correct answer.
  2. The broker guarantees the financial soundness of the insurer
  3. The insurer must always pay every claim in full
  4. The insured may withhold information that would raise the premium

Explanation

Utmost good faith requires each party to disclose material facts that would influence the other's decision to accept or rate the risk. Non-disclosure or misrepresentation can allow the insurer to avoid or adjust the contract.

Question 7General insurance principles and risk

A fire destroys stock valued at 40,000 in a building insured for 60,000, where the stock's full value is 80,000. Under a policy with an average (coinsurance) clause, what claim payment would typically apply to the stock?

  1. 20,000
  2. 30,000 Correct answer.
  3. 40,000
  4. 60,000

Explanation

The average clause reduces the claim in proportion to underinsurance: sum insured divided by value at risk, multiplied by the loss. Here 60,000 / 80,000 = 0.75, and 0.75 × 40,000 = 30,000.

Question 8General insurance principles and risk

Which of the following situations would most likely be treated as a speculative risk and therefore excluded from a standard commercial property policy?

  1. Damage caused by an accidental electrical fire
  2. Losses from the insured deliberately investing in a volatile commodity Correct answer.
  3. Water damage from a burst pipe
  4. Theft of stock by a burglar

Explanation

Speculative risks involve deliberate ventures with the chance of gain or loss and are not insurable through standard property cover. Fire, water damage and theft are pure risks normally within the scope of property policies.

Question 9General insurance principles and risk

An insurer declines to cover a property because it sits directly on an active fault line. Which risk-management technique has the insurer effectively applied to its own exposure?

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

Explanation

Declining the risk avoids it altogether, so the insurer carries no exposure to that property. Avoidance is distinct from retention, transfer or reduction, which all involve keeping or managing the exposure in some form.

Question 10General insurance principles and risk

Why does the law of large numbers matter to an insurer when underwriting a new class of business?

  1. It removes the need for reinsurance on catastrophe exposures
  2. It allows premiums to be set on the basis of a small number of large risks
  3. It makes aggregate claims experience more predictable as the number of similar exposures grows Correct answer.
  4. It guarantees that no individual claim will ever exceed the sum insured

Explanation

As the number of independent similar exposures increases, actual results tend to converge on expected values. This statistical predictability supports rate-making and reserving, but it does not eliminate large individual or catastrophe losses.

Question 11General insurance principles and risk

An insured fails to disclose a previous declined application when completing a proposal form. The insurer later discovers this after a claim. What is the most likely consequence under the duty of disclosure?

  1. The insurer must pay the claim in full because the policy was already issued
  2. The insured automatically receives a refund but the claim stands
  3. The insurer may be entitled to avoid the policy or reduce the claim depending on the non-disclosure's effect Correct answer.
  4. The broker becomes liable for the full claim amount

Explanation

A material non-disclosure can entitle the insurer to remedies ranging from avoidance to proportionate reduction, depending on the applicable law and the effect on the risk. The key test is whether the omitted fact would have influenced a prudent underwriter.

Question 12General insurance principles and risk

Which statement correctly describes the relationship between frequency and severity of losses?

  1. Low-frequency, high-severity losses are best handled by ignoring them
  2. Frequency and severity are always inversely proportional in every class of insurance
  3. High-frequency, low-severity losses are usually best handled through catastrophe reinsurance
  4. High-frequency, low-severity losses are usually best handled through retention or deductibles Correct answer.

Explanation

Predictable, frequent small losses are often funded through deductibles or self-retention because the cost is manageable and known. Low-frequency, high-severity events are the ones that call for insurance or reinsurance protection.

Question 13General insurance principles and risk

What is the primary function of a deductible in a general insurance policy?

  1. To extend cover to excluded perils
  2. To guarantee the insurer pays the full loss
  3. To transfer a defined first portion of each loss to the insured Correct answer.
  4. To increase the premium payable by the insured

Explanation

A deductible makes the insured bear the initial amount of each loss, which removes small claims and encourages care. In return, the premium is usually reduced to reflect the retained portion.

Question 14General insurance principles and risk

An insured's building is insured on a reinstatement (new-for-old) basis rather than an indemnity basis. What is the practical effect on a total loss claim?

  1. The insurer pays the cost of rebuilding to a similar standard, subject to the sum insured Correct answer.
  2. The insurer pays nothing because the building is destroyed
  3. The insurer pays only the market value of the land
  4. The insurer pays the depreciated value of the building

Explanation

Reinstatement cover pays the cost of rebuilding or replacing with equivalent new property, usually up to the sum insured. Indemnity, by contrast, would deduct depreciation and pay only the current value.

Question 15General insurance principles and risk

Which of the following best explains why insurers use exclusions in policy wordings?

  1. To guarantee that all losses are covered
  2. To define risks that are uninsurable, better covered elsewhere, or deliberately retained by the insured Correct answer.
  3. To remove the need for a proposal form
  4. To increase the number of claims the insurer must pay

Explanation

Exclusions clarify the boundary of cover by removing exposures such as war, wear and tear, or risks the insured should manage. They keep pricing accurate and prevent the policy from becoming an all-risks guarantee.

Question 16General insurance principles and risk

A policyholder deliberately sets fire to their own insured premises to claim the sum insured. Which principle most directly prevents recovery?

  1. Contribution
  2. Subrogation
  3. Average
  4. Indemnity Correct answer.

Explanation

Indemnity prevents the insured from making a profit from loss, and deliberate acts to create a claim defeat recovery entirely. Insurers may also rely on fraud and public policy defences in such cases.

Question 17General insurance principles and risk

An insured holds two property policies covering the same building and same interest, both with average clauses. A loss occurs and both policies respond. Which principle governs how the insurers share the payment?

  1. Subrogation, because the insurers step into the insured's shoes
  2. Utmost good faith, because the insured must disclose both policies
  3. Contribution, because each insurer shares the loss proportionately Correct answer.
  4. Indemnity, because the insured may recover twice

Explanation

Contribution allows insurers covering the same interest against the same peril to share the loss so the insured does not recover more than the loss. Each insurer pays its rateable proportion, preserving the indemnity principle.

Question 18General insurance principles and risk

After paying an insured's claim for water damage caused by a contractor's negligence, the insurer pursues the contractor for reimbursement. Which principle supports this action?

  1. Average
  2. Reinstatement
  3. Subrogation Correct answer.
  4. Contribution

Explanation

Subrogation gives the insurer the right to stand in the insured's position and recover the loss from the party responsible. This supports indemnity by preventing the insured from recovering twice and by shifting cost to the party at fault.

Question 19General insurance principles and risk

An underwriter reviews a proposal where the insured has a poor loss history, operates in a high-hazard trade, and requests a low deductible. Which combination best explains why the underwriter might decline or impose special terms?

  1. The proposal proves the risk is speculative and therefore automatically uninsurable
  2. The proposal demonstrates that the law of large numbers will not apply to any insurer
  3. The proposal presents adverse moral and physical hazard indicators with limited retention by the insured Correct answer.
  4. The proposal shows the insured is willing to retain more risk than the insurer

Explanation

Poor claims history and a hazardous trade raise physical and moral hazard concerns, while a low deductible means the insured retains little of each loss. Together these factors increase expected claims and justify declinature, higher premium, or excess adjustments.

Question 20General insurance principles and risk

An insurer writes a large property portfolio and buys a facultative reinsurance treaty for a single high-value factory. Which statement best describes the risk-management effect for the insurer?

  1. The insurer has eliminated the need for any deductible on the original policy
  2. The insurer has retained the full exposure and increased its capital requirement
  3. The insurer has avoided the risk entirely and no longer owes the insured any duty
  4. The insurer has transferred part of the severity exposure while retaining the original insured relationship Correct answer.

Explanation

Reinsurance transfers part of the insurer's exposure, particularly severity, to the reinsurer while the original policy remains with the insurer. The insurer still manages the insured relationship and claims, but its net retained risk is reduced.

Question 21Life insurance fundamentals

Under a typical individual life insurance contract, which party is legally entitled to exercise the ownership rights, such as naming a beneficiary or taking a policy loan?

  1. The beneficiary
  2. The writing agent
  3. The policyowner Correct answer.
  4. The insured

Explanation

Ownership rights belong to the policyowner, who controls the contract and may name or change the beneficiary and borrow against cash value. The insured is the person whose life is covered and need not be the owner, and the agent has no contractual rights.

Question 22Life insurance fundamentals

Which characteristic distinguishes term life insurance from whole life insurance?

  1. Term coverage remains in force for the insured's entire lifetime
  2. Term coverage builds guaranteed cash value that the owner may borrow
  3. Term coverage has no cash value accumulation and expires at the end of its stated period Correct answer.
  4. Term coverage pays dividends that are guaranteed in the contract

Explanation

Term insurance provides pure death protection for a defined period and builds no cash value, so it simply ends when the term expires. Whole life instead lasts for life and accumulates guaranteed cash value, with dividends never guaranteed.

Question 23Life insurance fundamentals

An applicant completes a life insurance application and pays the initial premium at that time. When does coverage typically take effect under the conditional receipt?

  1. When the first policy anniversary is reached
  2. When the insurer issues and delivers the policy
  3. On the date of the application or the medical examination, provided the applicant proves insurable Correct answer.
  4. Only after the free-look period expires

Explanation

A conditional receipt provides interim coverage effective as of the application or medical exam date, but only if the proposed insured meets the insurer's underwriting standards. If the applicant is not insurable, no coverage arises under the conditional receipt.

Question 24Life insurance fundamentals

A life insurance policy lists a primary beneficiary and a contingent beneficiary. The primary beneficiary dies before the insured. What happens to the death benefit?

  1. It is paid to the policyowner's creditors first
  2. It is paid to the insured's estate automatically
  3. It is forfeited and retained by the insurer
  4. It is paid to the contingent beneficiary if that person survives the insured Correct answer.

Explanation

A contingent beneficiary stands next in line and receives the proceeds when the primary beneficiary does not survive the insured. Only when no named beneficiary survives does the proceeds typically pass to the estate.

Question 25Life insurance fundamentals

Which statement best describes the purpose of the free-look provision in a life insurance policy?

  1. It requires the owner to renew the policy each year
  2. It gives the owner a stated period after delivery to return the policy for a full premium refund Correct answer.
  3. It suspends the contestability period while the owner reviews the contract
  4. It lets the insurer rescind coverage for material misrepresentation

Explanation

The free-look provision grants the policyowner a set number of days after delivery to examine the contract and return it for a refund of premium. It protects the buyer rather than the insurer, and it does not affect the contestability clock.

Question 26Life insurance fundamentals

Which of the following best defines the incontestability clause in a life insurance policy?

  1. The beneficiary must contest the will within two years
  2. The owner may change the beneficiary only during the first two years
  3. After a stated period, usually two years, the insurer generally cannot deny a claim based on misstatements in the application Correct answer.
  4. The insurer may cancel the policy at any time for any reason

Explanation

The incontestability clause limits the insurer's ability to contest the policy after a set period, commonly two years from issue, based on application misrepresentation. It protects the beneficiary's expectation that a long-standing claim will be paid.

Question 27Life insurance fundamentals

A policyowner wants to skip a premium payment but keep the policy in force by using accumulated cash value. Which nonforfeiture option accomplishes this?

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

Explanation

The automatic premium loan provision authorizes the insurer to advance unpaid premiums from the cash value so the policy stays in force. Reduced paid-up and extended term instead convert the policy after a lapse or surrender.

Question 28Life insurance fundamentals

Which dividend option under a participating whole life policy uses dividends to purchase additional permanent coverage at the insured's attained age?

  1. Premium reduction
  2. Accumulate at interest
  3. Paid-up additions Correct answer.
  4. Cash payment

Explanation

The paid-up additions option applies each dividend to buy a small amount of additional single-premium permanent insurance. This increases both the death benefit and the cash value without a new medical examination.

Question 29Life insurance fundamentals

Which settlement option pays the death benefit as a guaranteed stream of income for as long as the beneficiary lives, with payments stopping at death?

  1. Fixed amount
  2. Life income Correct answer.
  3. Fixed period
  4. Interest only

Explanation

A life income settlement guarantees payments for the beneficiary's lifetime, so the duration is measured by a life rather than a set period or amount. Fixed period and fixed amount end when the specified time or fund is exhausted.

Question 30Life insurance fundamentals

An insured dies during the grace period after failing to pay the premium due. What is the insurer's obligation?

  1. Deny the claim because the premium was unpaid
  2. Pay the death benefit, typically less any premium due Correct answer.
  3. Pay nothing until a court orders payment
  4. Pay only the cash value to the estate

Explanation

The grace period keeps the policy in force for a stated time after the due date, so a death during that period is covered. The insurer may deduct the overdue premium from the proceeds.

Question 31Life insurance fundamentals

Which of the following correctly describes the reinstatement provision of a lapsed life insurance policy?

  1. The insurer automatically restores coverage after one year
  2. The owner may restore the original policy by paying overdue premiums with interest and providing evidence of insurability Correct answer.
  3. The owner must purchase an entirely new policy at current rates
  4. Reinstatement permanently waives the contestability period

Explanation

Reinstatement allows a lapsed policy to be restored, usually within a set window, by paying back premiums plus interest and proving insurability. A new contestability period generally applies to the reinstated policy.

Question 32Life insurance fundamentals

Which type of life insurance policy combines a death benefit with a cash value whose growth is tied to a separate account of investments chosen by the owner?

  1. Decreasing term
  2. Variable life Correct answer.
  3. Traditional whole life
  4. Level term

Explanation

Variable life places cash value in separate accounts selected by the owner, so the value fluctuates with investment performance. Because the owner bears investment risk, variable products are securities and require appropriate registration.

Question 33Life insurance fundamentals

A policyowner has a permanent policy with a cash value of $50,000 and an outstanding loan of $20,000. If the insured dies, how is the death benefit generally affected?

  1. Only the cash value is paid to the beneficiary
  2. The outstanding loan balance plus accrued interest is deducted from the proceeds Correct answer.
  3. The full face amount is paid with no adjustment
  4. The loan is forgiven and the full face amount is paid

Explanation

An unpaid policy loan is a debt against the contract, so the insurer subtracts the loan balance and accrued interest from the death benefit. The beneficiary receives the net amount.

Question 34Life insurance fundamentals

Which underwriting concept holds that an insurer may charge a higher premium to an applicant whose health or occupation presents greater-than-average risk?

  1. Insurable interest
  2. Moral hazard
  3. Risk classification Correct answer.
  4. Adverse selection

Explanation

Risk classification groups applicants by expected mortality so that higher-risk individuals pay more than standard risks. This keeps premiums fair across policyholders and protects the insurer's solvency.

Question 35Life insurance fundamentals

Which of the following is required for a person to purchase life insurance on another person's life?

  1. The owner must have an insurable interest in the insured Correct answer.
  2. The insured must consent in writing only
  3. The beneficiary must be a family member
  4. The insured must be at least 65 years old

Explanation

Insurable interest means the owner would suffer a genuine financial or emotional loss if the insured died, which prevents wagering on a life. Consent alone does not replace the need for insurable interest.

Question 36Life insurance fundamentals

Which life insurance policy type provides a death benefit that decreases over time while the premium generally remains level, often used to cover a declining mortgage balance?

  1. Convertible term
  2. Renewable term
  3. Increasing term
  4. Decreasing term Correct answer.

Explanation

Decreasing term features a face amount that declines on a schedule while the premium stays level, matching obligations such as a mortgage that shrink over time. Renewable and convertible term describe policy rights rather than benefit patterns.

Question 37Life insurance fundamentals

What is the primary function of the Medical Information Bureau (MIB) in life underwriting?

  1. To license life insurance agents
  2. To store coded medical and lifestyle information that member insurers may use in underwriting Correct answer.
  3. To pay death benefits when an insurer becomes insolvent
  4. To issue standard mortality tables for insurers

Explanation

The MIB maintains coded reports of medical and lifestyle information that member insurers may consult during underwriting. It does not make underwriting decisions or pay claims.

Question 38Life insurance fundamentals

An applicant for a $1,000,000 life policy discloses a history of heart disease on the application. The underwriter is most likely to respond in which way?

  1. Decline the application automatically because of the condition
  2. Issue the policy with no contestability period
  3. Request additional medical records or an exam before classifying the risk Correct answer.
  4. Issue the policy at standard rates without further inquiry

Explanation

A disclosed impairment triggers further investigation, such as attending physician statements or a medical exam, so the insurer can classify the risk accurately. The outcome may be standard, rated, or declined depending on the findings.

Question 39Life insurance fundamentals

Which of the following best describes the role of the attending physician statement (APS) in life underwriting?

  1. It certifies that the beneficiary is eligible for proceeds
  2. It replaces the application entirely
  3. It provides detailed medical history from the applicant's treating physician to help classify the risk Correct answer.
  4. It sets the premium rate for the entire policy class

Explanation

An APS supplies clinical detail about an applicant's condition, treatment, and prognosis that the application alone cannot capture. Underwriters use it to decide whether to offer standard, rated, or declined coverage.

Question 40Life insurance fundamentals

Which statement accurately describes a participating whole life policy?

  1. It may pay non-guaranteed dividends reflecting the insurer's experience Correct answer.
  2. It cannot be surrendered for cash
  3. It has no cash value until the insured dies
  4. It pays dividends that are guaranteed by the insurer each year

Explanation

Participating policies may pay dividends based on the insurer's mortality, expense, and investment experience, and those dividends are never guaranteed. The owner may take them in cash or apply them under a chosen dividend option.

Question 41Life insurance fundamentals

An insured under a level term policy dies by suicide 18 months after the policy is issued, and the policy contains the standard two-year suicide exclusion. What is the insurer's typical obligation?

  1. Refund premiums paid, and the insurer is not obligated to pay the face amount Correct answer.
  2. Pay the full death benefit to the beneficiary
  3. Pay half of the face amount
  4. Pay the cash value to the estate

Explanation

A suicide clause generally limits the insurer's liability during the first two years to a return of premiums paid. After that period, suicide is treated as any other cause of death and the full benefit is payable.

Question 42Life insurance fundamentals

Which of the following correctly pairs a policy provision with its function?

  1. Waiver of premium - waives the death benefit after disability
  2. Assignment - transfers the insured's medical risk to another party
  3. Grace period - allows the insurer to cancel for nonpayment immediately
  4. Entire contract clause - states that the policy and attached application constitute the whole agreement Correct answer.

Explanation

The entire contract clause establishes that the policy plus any attached application form the complete agreement, preventing outside promises from altering it. This protects the owner from unauthorized changes by the insurer or agent.

Question 43Life insurance fundamentals

Which of the following best explains why insurers use mortality tables in pricing life insurance?

  1. To guarantee that every applicant will be accepted
  2. To determine beneficiary eligibility
  3. To predict the number of deaths in a group at each age and set premiums accordingly Correct answer.
  4. To set the free-look period length

Explanation

Mortality tables estimate the probability of death at each age, allowing insurers to project claims and set premiums that cover expected costs. They are a pricing tool and do not determine acceptance or contract terms.

Question 44Life insurance fundamentals

A policyowner names a beneficiary as "my spouse, per stirpes." The insured's spouse dies before the insured, but the couple's two children survive. How are proceeds typically distributed?

  1. Entirely to the oldest child
  2. To the spouse's estate
  3. Equally to the two surviving children Correct answer.
  4. To the insured's estate

Explanation

The per stirpes designation directs proceeds down the beneficiary's line of descent when that beneficiary predeceases the insured. The surviving children therefore share the proceeds equally.

Question 45Life insurance fundamentals

Which of the following statements about a life insurance policy's cash value during the early policy years is most accurate?

  1. Cash value typically exceeds total premiums paid in the first year
  2. Cash value is usually small in early years because of acquisition costs and grows over time Correct answer.
  3. Cash value equals the face amount from the first day
  4. Cash value is unavailable until the policy matures

Explanation

Early premiums cover expenses such as commissions and issue costs, so cash value builds slowly at first and accelerates in later years. It never equals the face amount while the policy is in force.

Question 46Life insurance fundamentals

Which of the following best describes the purpose of the free-look provision in a newly issued life insurance policy?

  1. It postpones the start of the contestability period until the first premium is paid.
  2. It allows the insurer to cancel coverage without notice during the first year for any reason.
  3. It gives the policyowner a set period after delivery to return the policy for a full refund of premiums paid. Correct answer.
  4. It requires the beneficiary to review the policy before the death benefit becomes payable.

Explanation

The free-look provision grants the policyowner a limited window, commonly 10 to 30 days after delivery, to examine the contract and return it for a refund of premium. It protects buyers from purchasing coverage they do not want or understand. It does not affect insurer cancellation rights or the contestability period.

Question 47Life insurance fundamentals

An applicant pays the initial premium and receives a conditional receipt from the producer. Under the typical terms of that receipt, when does coverage take effect?

  1. Only when the insurer issues and delivers the policy and the first premium is collected.
  2. Only after the contestability period has expired.
  3. On the date of the application, regardless of the applicant's insurability.
  4. On the date of the application or medical examination, whichever is later, provided the applicant is found insurable under the insurer's rules. Correct answer.

Explanation

A conditional receipt provides interim coverage that is conditioned on the applicant meeting the insurer's underwriting requirements. If the applicant proves insurable, coverage is retroactive to the date of application or the required medical exam. If the applicant is not insurable, no interim coverage exists.

Question 48Life insurance fundamentals

Which of the following best describes the function of the entire contract provision in a life insurance policy?

  1. It guarantees that the insurer will pay the full face amount regardless of material misrepresentation.
  2. It permits the producer to alter the policy terms in writing on the insurer's behalf.
  3. It states that the policy, the attached application, and any attached riders or endorsements constitute the complete agreement. Correct answer.
  4. It allows the insurer to amend the policy unilaterally at any time by mailing notice to the policyowner.

Explanation

The entire contract provision limits the agreement to the policy document plus the copy of the application and any attached riders. This protects the policyowner by preventing the insurer from relying on outside documents or oral statements to change the contract. It also restricts unilateral changes by the insurer.

Question 49Life insurance fundamentals

A policyowner who has owned a whole life policy for several years stops paying premiums and elects the reduced paid-up nonforfeiture option. What is the effect on the policy?

  1. The policy is surrendered for its full cash value in a single lump sum.
  2. The policy is converted to level term coverage for the original face amount.
  3. The policy continues with the same face amount but with a shorter premium-paying period.
  4. The policy continues as permanent coverage with a reduced face amount and no further premiums due. Correct answer.

Explanation

Under the reduced paid-up option, the net cash value is used to purchase a smaller amount of permanent paid-up insurance. The death benefit is reduced, but coverage remains in force for life with no additional premiums. This differs from extended term, which keeps the face amount but limits the coverage period.

Question 50Life insurance fundamentals

An insured under a policy with a typical suicide clause dies by suicide 30 months after the policy is issued. Assuming no other issues affect the claim, how must the insurer respond?

  1. It must pay the full death benefit because the suicide clause expires after one year in every jurisdiction.
  2. It must pay the full death benefit because the suicide exclusion period has already expired. Correct answer.
  3. It must refund all premiums paid and deny the death benefit because suicide is always excluded.
  4. It must pay the full death benefit because the clause applies only during the free-look period.

Explanation

The suicide clause limits the insurer's defense to a stated period, commonly one or two years after issue. Once that period expires, a death by suicide is treated like any other cause of death and the full death benefit is payable. The insurer cannot rely on the exclusion after the contractual window closes.