I85PREP
⌘ K
MS Life & Health study materials
MS Life & Health study resources

MS Life & Health practice questions

One question at a time. Build your MS Life & Health 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 1Insurance Regulation and General Insurance Concepts

Which type of risk offers only the possibility of loss, with no possibility of financial gain?

  1. Business risk
  2. Speculative risk
  3. Investment risk
  4. Pure risk Correct answer.

Explanation

Pure risk involves only two outcomes - loss or no loss - and arises in situations such as fire, illness, or premature death. Insurance is designed for pure risk because it produces no gain for the insured. Speculative risk, by contrast, involves the possibility of profit as well as loss and is generally not insurable.

Question 2Insurance Regulation and General Insurance Concepts

In life insurance, insurable interest must exist at which point?

  1. Both when the application is submitted and when the insured dies
  2. When the beneficiary files the claim
  3. At the time the application is submitted Correct answer.
  4. At the time the insured dies

Explanation

For life insurance, insurable interest must exist at the time of application; once the policy is issued, the interest is generally presumed to continue. Property insurance follows a different timing rule, requiring insurable interest at the time of loss. This requirement prevents the purchase of coverage as a wager on someone else's life.

Question 3Insurance Regulation and General Insurance Concepts

An insurer that is chartered under the laws of the state in which it is transacting business is known in that state as what?

  1. An alien insurer
  2. A foreign insurer
  3. A domestic insurer Correct answer.
  4. A surplus lines insurer

Explanation

An insurer is a domestic insurer in its state of incorporation, a foreign insurer when admitted in other states, and an alien insurer in the United States when chartered outside the country. These labels describe the insurer's domicile relative to the jurisdiction where it does business.

Question 4Insurance Regulation and General Insurance Concepts

A producer offers to pay a portion of an applicant's first-year premium out of the producer's own commission in order to close the sale. This practice is best identified as what?

  1. Coercion
  2. Defamation
  3. Rebating Correct answer.
  4. Twisting

Explanation

Rebating is the offer of any inducement not specified in the policy - such as cash, commissions, or gifts - to persuade someone to buy insurance. It is an unfair trade practice prohibited in every state because it results in unequal treatment of similar buyers. Premium reductions are permitted only when stated in the policy or expressly allowed by statute.

Question 5Insurance Regulation and General Insurance Concepts

A puddle of water on a supermarket floor that raises the likelihood a shopper will slip and fall is best classified as what?

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

Explanation

Hazards are conditions that increase the chance or severity of a loss. Physical hazards are tangible conditions such as wet floors, faulty wiring, or icy steps. Moral and morale hazards arise instead from the honesty or the attitude of the insured.

Question 6Insurance Regulation and General Insurance Concepts

The principle that as an insurer covers more similar, independent exposure units, actual losses become more predictable and approach expected losses is known as what?

  1. The rule of adhesion
  2. The principle of subrogation
  3. The law of large numbers Correct answer.
  4. The doctrine of indemnity

Explanation

The law of large numbers holds that the more homogeneous exposure units an insurer pools, the more closely actual results track expected results. That predictability is what allows insurers to set rates with confidence. Indemnity, subrogation, and adhesion are unrelated contract principles.

Question 7Insurance Regulation and General Insurance Concepts

An insurer offers a generous guaranteed-issue policy and attracts a large number of applicants who already know they are seriously ill, producing higher-than-expected claims. This outcome illustrates which concept?

  1. Pooling of homogeneous risks
  2. Moral hazard
  3. Adverse selection Correct answer.
  4. Reinsurance

Explanation

Adverse selection occurs when applicants with a higher-than-average risk of loss are more likely to seek or keep coverage than average risks are. Insurers manage it through underwriting, exclusions, and waiting periods. Pooling and reinsurance are techniques for spreading risk, not descriptions of a skewed applicant mix.

Question 8Insurance Regulation and General Insurance Concepts

An insurer pays its policyholder's collision claim and then seeks reimbursement from the at-fault driver who caused the damage. Which right is the insurer exercising?

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

Explanation

Subrogation lets the insurer stand in the insured's shoes and recover from the party responsible for the loss after paying the claim. It reinforces the principle of indemnity by preventing the insured from collecting twice for the same loss. Contribution and salvage address different situations and do not involve recovery from a third party.

Question 9Insurance Regulation and General Insurance Concepts

A contract in which the dollar amounts exchanged by the parties are unequal and depend on an uncertain event is described as what?

  1. Adhesion
  2. Unilateral
  3. Conditional
  4. Aleatory Correct answer.

Explanation

An aleatory contract is one whose performance depends on an uncertain event, so one party may receive far more or far less than it paid. Insurance is aleatory because a modest premium can produce a large claim payment. Unilateral, conditional, and adhesion describe other features of the insurance contract.

Question 10Insurance Regulation and General Insurance Concepts

A producer who holds no written binding authority issues a binder anyway, and the insurer has routinely honored such binders in the past. The producer's authority in this instance is best characterized as what?

  1. Fiduciary authority
  2. Implied authority
  3. Express authority
  4. Apparent authority Correct answer.

Explanation

Apparent authority arises when an insurer's words or conduct lead a third party to reasonably believe the producer has authority, even when the written agency agreement does not grant it. Because the insurer had routinely honored these binders, the applicant could reasonably rely on the producer. Express authority comes from the agency agreement and implied authority covers acts incidental to it.

Question 11Insurance Regulation and General Insurance Concepts

A producer deposits clients' premium payments into the agency's general operating account, mixing those funds with the agency's own money. This conduct is best described as what?

  1. Rebating of premiums
  2. Commingling of funds Correct answer.
  3. Coercion of a client
  4. Twisting of a policy

Explanation

Premiums collected on an insurer's behalf are held in trust, and a producer may not mix them with personal or general business funds. Mixing trust money with other funds is commingling, which is prohibited and can result in license suspension or revocation. Spending those funds for the producer's own purposes would be the separate offense of misappropriation.

Question 12Insurance Regulation and General Insurance Concepts

What is the primary purpose of a state life and health insurance guaranty association?

  1. Protect policyholders of an insolvent insurer Correct answer.
  2. Reimburse agents for unpaid renewal commissions
  3. Ensure that insurers earn a reasonable profit
  4. Regulate the premium rates insurers charge

Explanation

Guaranty associations are created by state statute to pay covered claims of policyholders when an admitted insurer becomes insolvent. They are funded through assessments on member insurers. They do not set rates, guarantee profits, or stand in for the state insurance department.

Question 13Insurance Regulation and General Insurance Concepts

A statement in an application that the applicant believes to be true to the best of her knowledge, and whose falsity generally must be material to affect the contract, is what kind of statement?

  1. A representation Correct answer.
  2. A condition precedent to coverage
  3. A warranty of absolute truth
  4. A waiver of a known right

Explanation

Representations are statements believed true to the best of the applicant's knowledge, and a false representation generally affects the contract only if it is material or fraudulent. A warranty, by contrast, is a promise that a fact is literally true, and its breach may affect coverage regardless of materiality. Conditions and waivers are separate contractual concepts.

Question 14Insurance Regulation and General Insurance Concepts

To persuade a client to replace an existing policy, a producer falsely tells her that her current insurer is about to become insolvent. This practice is called what?

  1. Coercion
  2. Rebating
  3. Defamation
  4. Twisting Correct answer.

Explanation

Twisting is misrepresenting or making incomplete comparisons about an existing policy in order to induce a policyholder to lapse, surrender, or replace it. It is an unfair trade practice because it deprives the client of accurate information on which to base a decision. Defamation involves false statements about an insurer's financial condition made to damage its reputation generally.

Question 15Insurance Regulation and General Insurance Concepts

In an insurance contract, the insured's payment of premium and the insurer's promise to pay covered claims together constitute what?

  1. Consideration Correct answer.
  2. An estoppel
  3. An offer to contract
  4. A waiver of rights

Explanation

Consideration is the value each party gives in exchange for the other's promise. The insured's consideration is the premium and compliance with policy conditions, while the insurer's is its promise to pay covered claims. Without consideration flowing both ways, no enforceable contract exists.

Question 16Insurance Regulation and General Insurance Concepts

Before a producer submits an application that will replace an existing life insurance policy, what must the producer generally do?

  1. Obtain the insurer's written consent to the replacement
  2. Give the applicant a notice regarding replacement Correct answer.
  3. Cancel the old policy before the new one is issued
  4. Notify the state guaranty association

Explanation

State replacement regulations require the producer to present a replacement notice comparing the existing and proposed coverage, obtain the applicant's signature, and leave a copy with the applicant. The notice protects consumers from the harm of unnecessary replacement. Cancelling old coverage first or seeking the insurer's consent is not part of these rules.

Question 17Insurance Regulation and General Insurance Concepts

Which federal statute confirms that the states retain primary authority to regulate the business of insurance?

  1. The Employee Retirement Income Security Act
  2. The Fair Credit Reporting Act
  3. The McCarran-Ferguson Act Correct answer.
  4. The Sherman Antitrust Act

Explanation

The McCarran-Ferguson Act of 1945 declares that continued state regulation of the business of insurance is in the public interest and largely exempts insurance from federal antitrust law to the extent the business is state-regulated. It is the foundation of the state-based regulatory system. The other statutes address antitrust, consumer credit reporting, and employee benefit plans.

Question 18Insurance Regulation and General Insurance Concepts

An investor persuades a healthy 75-year-old with no relationship to the investor to apply for a large life policy that the investor will own, fund, and hold until the insured's death. This arrangement is best described as what?

  1. A group life conversion privilege exercised at retirement
  2. A life settlement funded by a licensed institutional buyer
  3. A stranger-originated life insurance arrangement Correct answer.
  4. A viatical settlement arrangement for a terminally ill person

Explanation

Stranger-originated life insurance describes any arrangement in which a party without an insurable interest procures or funds a policy at inception primarily as an investment in the insured's death. Because insurable interest must exist when the application is made, this violates insurable interest laws and is prohibited in most states. Viatical and life settlements involve the sale of a policy that already exists.

Question 19Insurance Regulation and General Insurance Concepts

A reinsurance agreement that automatically covers a defined class of policies the primary insurer writes during the contract period is known as what?

  1. Treaty reinsurance Correct answer.
  2. Retrocession
  3. Facultative reinsurance
  4. Coinsurance

Explanation

Treaty reinsurance is an agreement under which the reinsurer automatically accepts, in advance, a specified share of every risk in a defined class that the ceding insurer writes. Facultative reinsurance, by contrast, is negotiated risk by risk. Retrocession is reinsurance purchased by a reinsurer.

Question 20Insurance Regulation and General Insurance Concepts

An insurer charges a higher premium to a class of applicants because actuarial data show materially higher mortality for that class. Under state unfair discrimination laws, this practice is permissible only when the distinction is what?

  1. Identical for all applicants in the same state
  2. Supported by actuarial data and not arbitrary Correct answer.
  3. Disclosed in the insurer's annual report to shareholders
  4. Approved in advance by the federal government

Explanation

Rating classifications are permitted when they rest on sound actuarial principles and are reasonably related to expected loss experience. Unfair discrimination is the use of distinctions that are arbitrary or unsupported by experience. Federal approval and shareholder disclosure are not the governing standard.

Question 21Life Insurance Basics

Which insurance principle allows an insurer to spread the cost of expected losses among a large group of policyholders?

  1. Pooling of risks Correct answer.
  2. Adverse selection
  3. Insurable interest
  4. Utmost good faith

Explanation

Pooling combines the premiums of many policyholders so that the losses of the few are shared by the whole group, which makes the cost of coverage predictable. Insurers apply mortality tables and the law of large numbers to price coverage for the pooled group.

Question 22Life Insurance Basics

Insurable interest in a life insurance transaction must exist at which point?

  1. Continuously until the insured reaches age 65
  2. Only when the beneficiary designation is changed
  3. Only at the time a death claim is filed
  4. When the policy is applied for and issued Correct answer.

Explanation

For life insurance, insurable interest must exist when the contract is formed, meaning at application and issue. It does not have to continue afterward because the policy pays a stated sum rather than indemnifying a measurable loss.

Question 23Life Insurance Basics

Which element of a valid contract is satisfied by the premium paid and the insurer's promise to pay covered claims?

  1. Legal purpose
  2. Consideration Correct answer.
  3. Offer and acceptance
  4. Competent parties

Explanation

Consideration is the value each party gives to the other: the applicant's premium and statements, and the insurer's promise to pay covered claims. Without consideration the agreement is a gratuitous promise rather than an enforceable contract.

Question 24Life Insurance Basics

Why is a life insurance contract classified as aleatory?

  1. The values exchanged depend on an uncertain event Correct answer.
  2. The insurer drafts the contract without negotiation
  3. Only the insurer makes legally enforceable promises
  4. Both parties exchange benefits of equal value

Explanation

An aleatory contract exchanges values that are unequal and contingent on an uncertain event. A small premium may produce a large death benefit, or the premiums may be paid with no benefit ever being paid.

Question 25Life Insurance Basics

The authority a producer receives in writing through an agency agreement with an insurer is called:

  1. Apparent authority
  2. Express authority Correct answer.
  3. Fiduciary authority
  4. Implied authority

Explanation

Express authority is granted in writing by the insurer, usually through the producer or agency agreement, and spells out what the producer may do. Authority that is not written but is reasonably necessary to carry out those duties is implied.

Question 26Life Insurance Basics

A producer collects the initial premium and gives the applicant a conditional receipt. The applicant dies before the policy is issued, and the insurer would have issued the policy as applied for. The insurer must:

  1. Wait until underwriting is complete before deciding
  2. Refund the premium because no policy was ever issued
  3. Pay the full death benefit as applied for Correct answer.
  4. Pay only the premiums paid plus interest

Explanation

A conditional receipt provides coverage retroactive to the date of application when the premium is paid and the insurer would have issued the policy as applied for. Because that condition is met, the death benefit is payable even though the policy was never delivered.

Question 27Life Insurance Basics

The primary purpose of life insurance underwriting is to:

  1. Classify risks so similar risks pay similar premiums Correct answer.
  2. Guarantee that every applicant who applies will be issued coverage
  3. Set the beneficiary designation that will apply at the insured's death
  4. Establish the cash value the policy will have at issue

Explanation

Underwriting evaluates each applicant and places them in a risk class so that people with similar expected mortality pay similar premiums. This protects the pool from adverse selection and keeps pricing fair among policyholders.

Question 28Life Insurance Basics

An insurer learns that an insured failed to disclose a material fact but continues to collect premiums for two years. A court is most likely to hold that the insurer:

  1. Waived its right to contest the policy by accepting premiums Correct answer.
  2. May reduce the death benefit in proportion to the undisclosed risk
  3. May rescind the policy because material facts were concealed
  4. Must return all premiums before contesting the claim

Explanation

Continuing to accept premiums with knowledge of a breach gives up, or waives, the right to rely on that breach. Estoppel then prevents the insurer from taking a position inconsistent with the conduct that kept the contract alive.

Question 29Life Insurance Basics

In the underwriting process, the producer functions as a field underwriter by:

  1. Delivering the policy only after the contestable period ends
  2. Determining the final rate class for the proposed insured
  3. Collecting accurate applicant information for the insurer Correct answer.
  4. Approving or declining the application on behalf of the insurer

Explanation

The producer is the insurer's first line of underwriting, gathering complete and truthful information on the application and forwarding it with any known adverse facts to the home office. The final selection and classification decision rests with the insurer's underwriters.

Question 30Life Insurance Basics

Assuming identical coverage, which premium payment mode produces the highest total outlay for the year?

  1. Annual
  2. Quarterly
  3. Semi-annual
  4. Monthly Correct answer.

Explanation

The more frequently premiums are paid, the higher the total annual cost, because each installment adds administrative expense and the insurer loses investment earnings on money not paid in advance. Annual payment is therefore the least expensive mode and monthly the most expensive.

Question 31Life Insurance Basics

The free-look provision in an individual life insurance policy gives the owner the right to:

  1. Cancel the policy at any time and receive the full cash value
  2. Exchange the policy for another type without evidence of insurability
  3. Suspend premium payments during the first policy year
  4. Return the policy within a stated number of days after delivery Correct answer.

Explanation

The free-look provision allows the owner to return a newly delivered policy for a full refund of premiums paid within a specified period, commonly 10 to 30 days. It gives the buyer time to review the contract and change their mind.

Question 32Life Insurance Basics

Constructive delivery of a life insurance policy occurs when the insurer:

  1. Mails the policy unconditionally to the owner's address Correct answer.
  2. Mails the policy only after the first premium has cleared
  3. Hands the policy personally to the insured or the beneficiary
  4. Obtains a signed delivery receipt from the policy owner

Explanation

Constructive delivery happens when the insurer gives up control of the policy and places it in the mail or otherwise puts it within the owner's reach without conditions. Physical possession by the owner is not required for the policy to be legally delivered.

Question 33Life Insurance Basics

Premiums a producer collects from applicants are held:

  1. In escrow until the free-look period expires
  2. As the producer's own funds until the policy is issued
  3. In a fiduciary capacity on behalf of the insurer Correct answer.
  4. As a personal loan from the applicant to the producer

Explanation

Collected premiums belong to the insurer or the applicant, never to the producer, and must be handled in a fiduciary capacity, kept separate from personal funds, and remitted promptly. Misusing these funds is a breach of duty and may be unlawful.

Question 34Life Insurance Basics

An arrangement in which investors with no insurable interest finance a policy on a stranger's life is best described as:

  1. A permissible viatical settlement
  2. An approved group life conversion
  3. An illegal wagering contract Correct answer.
  4. A valid key person policy

Explanation

A policy procured by investors who have no insurable interest in the insured is a wagering contract, which offends public policy and is generally void or illegal. Legitimate life insurance requires insurable interest at the time of application.

Question 35Life Insurance Basics

The entire contract provision in a life insurance policy means that:

  1. The insurer may amend the policy unilaterally by mailing notice to the owner
  2. Only the provisions printed in the policy body are enforceable
  3. Oral statements made by the producer are incorporated into the contract
  4. The policy and the attached application form the whole agreement Correct answer.

Explanation

The entire contract provision makes the policy and the attached copy of the application the complete agreement between the parties. The insurer cannot incorporate outside documents by reference, and only authorized officers may modify the contract with the owner's consent.

Question 36Life Insurance Basics

An applicant knows of a serious heart condition but intentionally omits it from the application. The insurer later discovers the omission. The insurer may:

  1. Reduce the death benefit to the premiums paid plus interest
  2. Rescind the contract for concealment of a material fact Correct answer.
  3. Take no action because the producer failed to ask about it
  4. Deny the claim but keep the policy in force at a rated premium

Explanation

Intentional concealment of a material fact allows the insurer to rescind, because it was induced to issue coverage it would not otherwise have issued. Materiality and intent separate concealment from an innocent oversight.

Question 37Life Insurance Basics

Which statement best explains why mortality results become more predictable as an insurer covers more lives?

  1. Each additional insured permanently lowers the average mortality rate
  2. Mortality rates are fixed by law and cannot vary
  3. Actual results approach expected results as the sample grows Correct answer.
  4. Larger insurers are exempt from state reserve requirements

Explanation

The law of large numbers holds that as the number of similar exposure units increases, actual experience converges toward expected experience. That convergence is what makes mortality predictable enough to price coverage.

Question 38Life Insurance Basics

In life insurance, statements made by an applicant on the application are generally treated as:

  1. Concealments, unless the insurer independently verifies them
  2. Opinions, which the insurer may not rely on
  3. Representations, which must be substantially true Correct answer.
  4. Warranties, which the law requires to be literally true

Explanation

Application answers are treated as representations, meaning they must be substantially true to the best of the applicant's knowledge rather than literally guaranteed. A warranty is the stricter standard, requiring literal truth, and life insurance law ordinarily does not impose it on ordinary application answers.

Question 39Life Insurance Policies

Which statement best describes level term life insurance?

  1. It provides protection for a stated period and builds no cash value. Correct answer.
  2. It provides lifetime coverage with a guaranteed cash value that grows at a fixed rate.
  3. It accumulates cash value at a rate the insurer sets each year.
  4. It pays a benefit only if death occurs after the policy's maturity date.

Explanation

Term insurance covers the insured for a specified period and has no cash value component. If the insured outlives the term, the coverage ends with no benefit unless a renewal or conversion privilege is used.

Question 40Life Insurance Policies

A homeowner wants life insurance whose death benefit roughly follows a declining mortgage balance while the premium stays level. Which policy best fits?

  1. Ordinary whole life insurance
  2. Level term insurance
  3. Decreasing term insurance Correct answer.
  4. Increasing term insurance

Explanation

Decreasing term carries a level premium while the face amount declines on a schedule, typically matching a shrinking loan balance. Level term keeps a constant face amount, and whole life builds cash value rather than declining.

Question 41Life Insurance Policies

What right does the conversion privilege in a convertible term policy give the owner?

  1. The right to raise the face amount without limit whenever desired
  2. The right to a full refund of premiums when the term expires
  3. The right to skip premiums during any period of disability
  4. The right to exchange the policy for a permanent policy without proving insurability Correct answer.

Explanation

Conversion lets the owner exchange term coverage for a permanent policy without new evidence of insurability, with the new premium based on the insured's attained age. The insurer cannot decline the exchange because of the insured's health.

Question 42Life Insurance Policies

Which feature distinguishes ordinary whole life insurance from term insurance?

  1. It stays in force for the insured's lifetime and develops guaranteed cash value. Correct answer.
  2. It can be renewed only at the insurer's option each year.
  3. It pays a benefit only if death occurs within the stated term.
  4. Its death benefit declines as the insured grows older.

Explanation

Whole life is permanent coverage with level premiums, a level death benefit, and guaranteed cash value that grows over time. Term provides temporary protection and normally has no cash value.

Question 43Life Insurance Policies

A 30-year-old buys a 20-pay whole life policy. What happens after the twentieth premium is paid?

  1. Coverage ends and the cash value is paid out to the owner.
  2. The policy automatically converts to yearly renewable term.
  3. Coverage continues for life with no further premiums due. Correct answer.
  4. Premiums continue, but at a reduced rate for life.

Explanation

A 20-pay policy is fully paid up after 20 premium years, but the lifetime death benefit and cash value continue. Limited-pay policies compress the same lifetime cost into fewer, larger premiums.

Question 44Life Insurance Policies

Which statement accurately describes single premium whole life insurance?

  1. The policy cannot be surrendered for cash while the insured is alive.
  2. One lump-sum premium immediately creates fully paid-up lifetime coverage with substantial cash value. Correct answer.
  3. Premiums are paid annually for life, and cash value grows slowly at first.
  4. It is a form of term insurance that refunds the premium at expiry.

Explanation

A single premium funds the entire policy at issue, so the contract is immediately paid up and holds a large initial cash value. Because of the heavy front-end funding, such policies are usually modified endowment contracts for tax purposes.

Question 45Life Insurance Policies

Which combination of features characterizes universal life insurance?

  1. Flexible premiums, an adjustable death benefit, and a separately credited cash value Correct answer.
  2. Fixed premiums, a fixed death benefit, and no cash value
  3. One premium payment with coverage ending at age 65
  4. Premiums placed in a separate account chosen by the policyowner

Explanation

Universal life unbundles the policy into its parts: the owner may vary premium payments and death benefit within limits, and the cash value is credited interest at a current rate that is never below a guaranteed minimum. Mortality and expense charges are deducted from the fund each month.

Question 46Life Insurance Policies

A universal life policy uses the increasing death benefit (Option B). The amount paid at the insured's death equals which of the following?

  1. The specified amount regardless of the cash value
  2. The specified amount minus any surrender charge
  3. The specified amount plus the accumulated cash value Correct answer.
  4. The accumulated cash value only

Explanation

Under Option B the death benefit grows over time because it equals the specified amount plus the cash value at death. Option A, the level death benefit, pays only the specified amount.

Question 47Life Insurance Policies

Which statement about variable life insurance is accurate?

  1. Premiums are fixed and the insurer bears all of the investment risk.
  2. The insurer guarantees a minimum cash value no matter how the investments perform.
  3. Cash value is held in a separate account and varies with the investment performance of subaccounts the owner selects. Correct answer.
  4. The contract is regulated only by state insurance departments, not by federal securities law.

Explanation

Variable life cash values are invested in a separate account, and the policyowner selects the subaccounts and bears the investment risk. Because the owner carries that risk, the contract is a security registered with the SEC and sold by representatives holding a securities license.

Question 48Life Insurance Policies

Variable universal life combines which two sets of features?

  1. The flexible premiums of universal life with the separate-account investment options of variable life Correct answer.
  2. A single premium with a death benefit that can never change
  3. The low cost of term coverage with a guaranteed conversion privilege
  4. Guaranteed minimum interest credited to a fund with a fixed annual premium

Explanation

Variable universal life keeps the adjustable premium and adjustable death benefit of universal life while adding separate-account subaccounts like variable life. The owner therefore controls both funding levels and investment allocation while bearing the investment risk.

Question 49Life Insurance Policies

How is interest credited on an equity index universal life policy?

  1. The cash value is invested directly in the stocks that make up the index.
  2. Credited interest is linked to index gains but limited by a cap or participation rate, subject to a floor. Correct answer.
  3. The insurer guarantees a return equal to the full index gain each year.
  4. The owner receives every index gain and absorbs every index loss.

Explanation

Equity index universal life credits interest based on the movement of an external index, but a cap or participation rate limits the upside. A floor, commonly zero percent, protects the cash value from being reduced by index losses.

Question 50Life Insurance Policies

A married couple wants a policy that pays after the second spouse dies to fund estate settlement costs. Which policy fits?

  1. A family income policy
  2. A survivorship (second-to-die) policy Correct answer.
  3. A joint life (first-to-die) policy
  4. Two separate five-year term policies

Explanation

A survivorship or second-to-die policy pays one death benefit after both insureds have died, timed to estate taxes and settlement costs. Because the benefit is delayed, the premium is lower than for two individual policies with the same total coverage.