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

NE Life & Health practice questions

One question at a time. Build your NE 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

Which body administers and enforces Nebraska's insurance laws?

  1. The Nebraska Public Service Commission
  2. The National Association of Insurance Commissioners
  3. The Nebraska Department of Banking and Finance
  4. The Nebraska Department of Insurance, led by the Director of Insurance Correct answer.

Explanation

Nebraska's insurance code is administered by the Department of Insurance, whose chief is the Director of Insurance, appointed by the Governor. The NAIC is a voluntary association of state regulators that drafts model laws but has no enforcement authority.

Question 2Insurance Regulation

Under Nebraska law, which of these activities generally requires an insurance producer license?

  1. Handing a shopper a printed brochure listing policy premiums
  2. Soliciting the sale of a life insurance policy Correct answer.
  3. An attorney drafting a client's will
  4. Typing an application at the direction of a licensed producer

Explanation

Soliciting, negotiating, or selling insurance for compensation requires a Nebraska producer license. Purely clerical or administrative support work done under the supervision of a licensed producer does not.

Question 3Insurance Regulation

A Nebraska producer receives a premium check from an applicant. Nebraska law requires the producer to:

  1. Deposit the funds into the agency's general operating account
  2. Use the funds to pay agency expenses as long as the insurer is repaid within a year
  3. Hold the funds in a fiduciary capacity and account for them to the insurer Correct answer.
  4. Treat the funds as earned commission until the policy is issued

Explanation

Premiums collected belong to the insurer or the insured, and a producer who receives them acts as a fiduciary. The funds must be kept separate and accounted for, and commingling them with agency money is prohibited.

Question 4Insurance Regulation

Nebraska's free-look provision lets the owner of an individual life insurance policy return it for a full premium refund within how many days after delivery?

  1. 30 days
  2. 10 days Correct answer.
  3. 20 days
  4. 3 days

Explanation

Individual life policies delivered in Nebraska must give the owner a 10-day examination period after delivery. Returning the policy within that window entitles the owner to a full refund of premium.

Question 5Insurance Regulation

A Nebraska resident holding a life and health producer license must complete how much continuing education for each two-year license term?

  1. 24 hours, including 3 hours of ethics Correct answer.
  2. 40 hours, including 8 hours of ethics
  3. 30 hours, including 6 hours of ethics
  4. 12 hours, with no separate ethics requirement

Explanation

Nebraska requires 24 credit hours of approved continuing education every two years, at least 3 of which must cover ethics. Hours must be completed before the license term ends for the license to be renewed.

Question 6Insurance Regulation

A Nebraska producer's sale of a new life policy will replace the applicant's existing coverage. Before submitting the application, the producer must:

  1. Nothing beyond the standard application, since replacing coverage is the applicant's own decision
  2. Obtain the Director's written approval before submitting the application
  3. Present a signed replacement notice to the applicant and leave a copy Correct answer.
  4. Notify the existing insurer only after the new policy has been delivered

Explanation

Replacement rules require the producer to give the applicant a notice regarding replacement, obtain the required signature, and leave a copy with the applicant. The insurer then forwards notice to the existing insurer so that company can contact its policyholder.

Question 7Insurance Regulation

A producer falsely tells a client that the client's current insurer is 'about to be seized by regulators' in order to persuade the client to surrender an existing policy and buy a new one. This practice is:

  1. Twisting Correct answer.
  2. Unfair discrimination
  3. Coercion
  4. Rebating

Explanation

Twisting is inducing a policyholder to lapse, surrender, or replace coverage through misrepresentation or incomplete comparison of policies. It is an unfair trade practice subject to penalties and license action.

Question 8Insurance Regulation

To close a sale, a Nebraska producer offers to pay $200 of the applicant's first-year premium out of her own commission. This offer is:

  1. Permitted if the policy face amount exceeds $500,000
  2. Permitted if the applicant discloses it to the insurer
  3. Permitted because the producer is using her own money
  4. Prohibited rebating Correct answer.

Explanation

Offering any inducement not stated in the policy, including paying part of a premium from commission, is unlawful rebating. Commissions may be shared only with a licensed producer or the insurer, never with the applicant as an inducement.

Question 9Insurance Regulation

Before a newly licensed Nebraska producer may begin soliciting business for an insurer, the insurer must:

  1. Obtain the Director's written approval of the producer's sales record
  2. File an appointment with the Nebraska Department of Insurance Correct answer.
  3. Have the producer sign a notice of appointment posted on the insurer's website
  4. Wait until the producer submits her first application to the insurer

Explanation

A producer acts for an insurer only after the insurer files an appointment with the Department. Soliciting before the appointment is on file exposes both the producer and the insurer to penalties.

Question 10Insurance Regulation

A licensed Nebraska producer moves to a new home and business address. She must notify the Nebraska Department of Insurance of the change within:

  1. 15 days
  2. 30 days Correct answer.
  3. 10 days
  4. 60 days

Explanation

Licensed producers must keep their address of record current and notify the Department within 30 days of a change. Notices from the Department go to the address on file, so a stale address can cause a producer to miss renewal or disciplinary notices.

Question 11Insurance Regulation

Which statement best describes the role of the Nebraska Life and Health Insurance Guaranty Association?

  1. It is funded by appropriations from the state general fund
  2. It guarantees the full value of every policy issued in Nebraska
  3. It pays limited covered claims of insolvent insurers Correct answer.
  4. It investigates consumer complaints and disciplines producers

Explanation

The guaranty association is a mechanism funded by member insurers that pays statutorily capped claims when a member company becomes insolvent. It is not a state agency and does not make policyholders whole without limit.

Question 12Insurance Regulation

Nebraska requires a Medicare supplement policy to give the policyholder a right to return it for a full refund within:

  1. 30 days Correct answer.
  2. 45 days
  3. 60 days
  4. 10 days

Explanation

Medicare supplement policies must carry a 30-day free-look right beginning with delivery, longer than the ordinary life insurance examination period. A policy returned within that time must be refunded in full and treated as though never issued.

Question 13Insurance Regulation

Before accepting an application for long-term care insurance in Nebraska, the producer must:

  1. Provide the outline of coverage when the policy is delivered
  2. Deliver an outline of coverage only if the applicant asks for one
  3. Rely on the insurer to mail the outline of coverage after underwriting
  4. Deliver an outline of coverage at the time of application Correct answer.

Explanation

Long-term care solicitations must include delivery of an outline of coverage at the time the application is taken, so the buyer can compare benefits before committing. The outline summarizes benefits, exclusions, and premium in a standard format.

Question 14Insurance Regulation

Two Nebraska applicants are the same age, sex, and health class, but the insurer charges one a higher premium because of the agent's personal dislike of that applicant. This is:

  1. Controlled business
  2. Lawful risk classification
  3. Unfair discrimination Correct answer.
  4. Rebating

Explanation

Charging different rates to insureds of the same class and expected mortality or morbidity is unfair discrimination. Lawful classification must rest on actuarial factors, not on personal feelings about the applicant.

Question 15Insurance Regulation

A Nebraska producer collects $4,000 in premium, deposits it in the agency's payroll account, and spends it on office rent, planning to reimburse the insurer after a large commission arrives. Under Nebraska insurance law this conduct is best described as:

  1. Misappropriation of fiduciary funds, subject to license revocation and criminal penalties Correct answer.
  2. A minor recordkeeping violation that is cured when the insurer is later repaid
  3. Permissible if the insurer receives the premium before the grace period expires
  4. An acceptable short-term advance from the insurer, because the producer fully intends to repay the balance

Explanation

Premium held by a producer is trust money, and using it for the agency's expenses is misappropriation regardless of intent to repay. The Director may revoke the license, and the conduct can also be prosecuted as theft.

Question 16Insurance Regulation

An unlicensed office assistant at a Nebraska agency reviews a caller's needs, recommends a specific cancer policy, quotes the premium, and takes the application; the licensed producer signs it later without contacting the caller. This is:

  1. A violation only if the applicant later files a complaint with the Department
  2. A licensing violation, because the assistant solicited and negotiated insurance without a license Correct answer.
  3. Acceptable, because the assistant received no commission on the sale
  4. Acceptable, because a licensed producer reviewed and signed the application before it was submitted

Explanation

Soliciting and negotiating insurance requires a license, and a producer cannot launder unlicensed activity by signing paperwork afterward without meaningful involvement. Both the assistant and the supervising producer risk disciplinary action.

Question 17Insurance Regulation

The Nebraska Director of Insurance may examine the books and records of a licensed insurer:

  1. At any reasonable time under the Director's examination authority Correct answer.
  2. Only after a court has found that the insurer violated a state statute
  3. Only when the insurer's annual statement shows surplus below the minimum
  4. Only during the license renewal process every two years

Explanation

The Director has broad market-conduct and financial examination authority and may inspect an insurer's records at reasonable times without waiting for insolvency, litigation, or a renewal cycle. Examination costs are typically borne by the examined insurer.

Question 18Insurance Regulation

Which of these insurer behaviors is an unfair claims settlement practice under Nebraska law?

  1. Failing to attempt a prompt, fair settlement when liability is clear Correct answer.
  2. Investigating a claim that shows signs of possible fraud
  3. Requesting a certified proof-of-death certificate before paying a life insurance claim
  4. Denying a claim after a reasonable investigation reveals a material misrepresentation

Explanation

Unfair claim settlement practices include failing to act in good faith to reach a prompt, fair settlement once liability and damages are reasonably clear. Insurers may still verify coverage, investigate suspicious claims, and deny claims supported by material misrepresentation.

Question 19Insurance Regulation

Under Nebraska law, a licensed producer may share a commission on a life insurance sale with:

  1. An unlicensed referral source who supplied the client's name
  2. The applicant, as an inducement to buy the policy
  3. Any employee of the agency who helped process the paperwork
  4. Another licensed producer or the insurer Correct answer.

Explanation

Commission splitting is limited to licensed producers and insurers lawfully entitled to receive it. Paying commission to an unlicensed person is a form of illegal compensation, and paying it to the applicant is rebating.

Question 20Insurance Regulation

A Nebraska resident obtains a producer license mainly to insure her own home, her own vehicles, and the property of a business she owns, writing almost nothing for the public. Nebraska law treats this as:

  1. Illegal only if the producer earns a commission on her own policies
  2. Acceptable, because every insured person consented to the arrangement
  3. Controlled business, which is restricted under Nebraska law Correct answer.
  4. Permissible as long as each insurer is told about the arrangement

Explanation

A license may not be used principally to place insurance on the licensee's own person, property, or interests, which is known as controlled business. States restrict it because the licensing system is meant to serve the insuring public, not to give licensees a private commission channel.

Question 21General Insurance Concepts

For a life insurance policy to be valid, insurable interest must exist at which point?

  1. When the policy is applied for Correct answer.
  2. When the first claim is filed
  3. Only at the time of the insured's death
  4. Continuously from issue until death

Explanation

Insurable interest in a life insurance policy must exist when the contract is formed, meaning at the time of application and policy issue. It does not have to continue afterward, because the policy is not a contract of indemnity for the insured's life. Property insurance, by contrast, requires interest at the time of loss.

Question 22General Insurance Concepts

Which statement best describes pure risk?

  1. A risk that can be eliminated by diversification
  2. A risk that involves the chance of loss or gain
  3. A risk that is always uninsurable
  4. A risk that involves only the chance of loss Correct answer.

Explanation

Pure risk presents only the possibility of loss or no loss, with no opportunity for gain, and it is the category of risk insurance is designed to handle. Speculative risk involves the chance of both loss and gain and is generally not insurable.

Question 23General Insurance Concepts

In an insurance contract, the consideration given by the insured consists of which of the following?

  1. The premium paid plus the application statements Correct answer.
  2. The promise to report any covered claim promptly
  3. The commission paid to the producing agent
  4. The insurer's promise to pay covered claims

Explanation

Consideration is what each party gives up to make the contract binding. The insured provides the premium and the representations made in the application, while the insurer provides its promise to pay covered losses.

Question 24General Insurance Concepts

An insurer that is incorporated under the laws of another country and is authorized to transact business in Nebraska is classified as which of the following?

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

Explanation

Insurer classification by domicile depends on where the company is chartered. A domestic insurer is incorporated in the state in question, a foreign insurer is incorporated in another state or U.S. jurisdiction, and an alien insurer is incorporated outside the United States.

Question 25General Insurance Concepts

In insurance terminology, a peril is best defined as which of the following?

  1. A condition that increases the chance of loss
  2. A cause of loss Correct answer.
  3. The uncertainty of a financial loss
  4. The portion of a loss retained by the insured

Explanation

A peril is the actual cause of a loss, such as fire, an accident, or death. Hazards are conditions that increase the likelihood or severity of a loss, while risk refers to uncertainty.

Question 26General Insurance Concepts

The principle of indemnity is intended to restore an insured to which of the following?

  1. A better financial position than before the loss
  2. The same financial position as before the loss Correct answer.
  3. A position determined solely by the insurer
  4. The full policy limit regardless of the loss amount

Explanation

Indemnity means the insured is made whole, neither profiting nor losing from a covered event. Paying more than the actual loss would create a moral hazard and violate this principle.

Question 27General Insurance Concepts

Which contract characteristic describes an agreement in which the values exchanged by the parties may be unequal?

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

Explanation

An aleatory contract depends on an uncertain event, so the amounts exchanged can be very unequal, such as a small premium against a large claim payment. Insurance contracts are aleatory in nature.

Question 28General Insurance Concepts

An insurance policy is described as a contract of adhesion because of which of the following?

  1. It becomes binding only after a covered loss occurs
  2. The parties bargain over each clause at arm's length
  3. It is written by the insurer and accepted as-is Correct answer.
  4. The insured proposes the wording of the contract

Explanation

Insurance policies are prepared by the insurer and offered on a take-it-or-leave-it basis, so the insured merely adheres to the terms. Because of this imbalance, courts construe ambiguities against the party that drafted the policy.

Question 29General Insurance Concepts

Statements made by an applicant on an insurance application are generally treated as which of the following?

  1. Opinions with no legal effect
  2. Guarantees binding at any cost
  3. Warranties that must be literally true
  4. Representations believed to be true Correct answer.

Explanation

Application answers are representations, meaning the applicant is expected to answer truthfully to the best of their knowledge. Only material misrepresentations allow the insurer to rescind coverage. Warranties, which must be literally true, are used sparingly in life and health insurance.

Question 30General Insurance Concepts

After paying a covered loss, subrogation permits an insurer to do which of the following?

  1. Cancel the policy without notifying the insured
  2. Deny coverage for a subsequent unrelated claim
  3. Recover the amount paid from the party that caused the loss Correct answer.
  4. Collect additional premium from the insured

Explanation

Subrogation transfers to the insurer the insured's right to pursue the party responsible for the loss, up to the amount the insurer paid. This supports the indemnity principle by preventing the insured from collecting twice.

Question 31General Insurance Concepts

An insured deliberately sets fire to an insured building in order to collect the insurance proceeds. This conduct is an example of which of the following?

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

Explanation

A moral hazard involves a dishonest intent to cause a loss in order to gain from insurance, such as intentional arson or fraud. Morale hazards arise from indifference or carelessness rather than deliberate wrongdoing.

Question 32General Insurance Concepts

The law of large numbers helps an insurer by doing which of the following?

  1. Making losses more predictable as exposure units increase Correct answer.
  2. Setting the maximum premium an insurer may charge for a policy
  3. Guaranteeing that future losses will never exceed the expected level
  4. Removing the need for an insurer to hold any reserves against losses

Explanation

The law of large numbers holds that as the number of similar exposure units increases, actual results tend to approach the expected results. This predictability allows insurers to set rates and hold adequate reserves.

Question 33General Insurance Concepts

In a reinsurance arrangement, the insurer that transfers part of its risk to another company is called which of the following?

  1. The primary beneficiary
  2. The ceding insurer Correct answer.
  3. The assuming insurer
  4. The retrocessionaire

Explanation

The ceding insurer is the company that transfers, or cedes, a portion of its risk to a reinsurer. The reinsurer accepting the risk is the assuming insurer.

Question 34General Insurance Concepts

Which statement is true of a mutual insurance company?

  1. It is owned by shareholders who receive dividends from profits
  2. It issues stock to raise capital
  3. It is owned by its policyholders Correct answer.
  4. It must be organized as a nonprofit charity

Explanation

A mutual insurer is owned by its policyholders, who may receive dividends as a return of divisible surplus rather than as a distribution of profit. A stock insurer, by contrast, is owned by shareholders.

Question 35General Insurance Concepts

An agent has no express authority to bind coverage, but the insurer has routinely accepted the agent's binders for years without objection. If a dispute arises, a court is most likely to find which of the following?

  1. The agent had apparent authority to bind coverage Correct answer.
  2. The insurer may deny the claim without consequence
  3. The binder is void because it was oral
  4. The agent acted outside any authority

Explanation

Apparent authority arises when the insurer's own conduct leads third parties to reasonably believe the agent has authority, even if express authority was never granted. Having routinely accepted the agent's binders, the insurer created that impression.

Question 36General Insurance Concepts

Adverse selection refers to which of the following?

  1. The insurer's selection of agents with poor sales records
  2. The tendency of poorer risks to seek insurance more often Correct answer.
  3. The tendency of insurers to reject every high-risk applicant
  4. The practice of insuring only the largest employer groups

Explanation

Adverse selection is the tendency of people who face the greatest likelihood of loss to be the most eager to buy insurance. Underwriting, exclusions, and waiting periods are used to control it.

Question 37General Insurance Concepts

An insurer's agent accepts a premium payment after the grace period has expired and tells the policyholder the coverage remains in force. The insurer later attempts to deny a claim because the premium was late. The insurer will most likely be:

  1. Allowed to rescind for concealment
  2. Excused by the terms of a conditional receipt
  3. Barred by estoppel Correct answer.
  4. Protected by the entire contract clause

Explanation

Estoppel prevents a party from asserting a right after its own conduct led another party to rely on that conduct to their detriment. The agent's acceptance of the late premium and assurance of coverage waived the prompt-payment requirement and estops the later denial.

Question 38General Insurance Concepts

Which statement best describes a risk retention group?

  1. It is a state guaranty fund that pays claims of insolvent insurers
  2. It is an insured-owned liability insurer under federal law Correct answer.
  3. It is a surplus lines broker placing coverage with alien insurers
  4. It is a federal program that insures catastrophic flood losses

Explanation

A risk retention group is a group captive formed under the federal Liability Risk Retention Act to insure the liability risks of its member owners. It must be licensed in at least one state but may operate in others without separate licensing.

Question 39General Insurance Concepts

A producer collects an initial premium from an applicant and deposits it into a personal bank account, planning to forward it to the insurer later. The producer has done which of the following?

  1. Acted properly, since the premium was eventually to be remitted
  2. Exceeded apparent authority but not an ethical duty
  3. Breached a fiduciary duty and commingled funds Correct answer.
  4. Committed an unfair trade practice only if the policy later lapses

Explanation

Premiums collected on an insurer's behalf are held in a fiduciary capacity and must be kept in a separate trust account. Depositing them with personal funds is commingling, a breach of fiduciary duty that can lead to license revocation.

Question 40General Insurance Concepts

Which feature distinguishes a fraternal benefit society from a commercial life insurer?

  1. It may not insure more than 100 members at any one time
  2. It sells only group term policies to employers
  3. It operates on a lodge system with a social purpose Correct answer.
  4. It is exempt from all state insurance regulation

Explanation

A fraternal benefit society is a nonprofit organization with a lodge or chapter system and a social, charitable, or religious purpose that provides life and health benefits to its members. Commercial insurers are not organized around a lodge structure.

Question 41Life Insurance Basics

For a life insurance policy to be valid, when must insurable interest generally exist?

  1. At the time the policy is applied for and issued. Correct answer.
  2. At the time the first premium is paid only.
  3. At the time the insured dies.
  4. At both the time of application and the time of death.

Explanation

Insurable interest is required at policy inception, meaning when the contract is applied for and issued. After a policy is validly issued, it remains enforceable even if the relationship that created the interest later ends. Life insurance does not require insurable interest at the time of death.

Question 42Life Insurance Basics

Which statement best describes the grace period in a life insurance policy?

  1. A period after issue during which the insurer may cancel for any reason.
  2. A period during which the beneficiary may contest a claim decision.
  3. A period after the due date during which the policy remains in force. Correct answer.
  4. A period after reinstatement during which the insurer may rescind coverage.

Explanation

The grace period lets the policyowner pay an overdue premium after its due date while keeping coverage in force. If the insured dies during the grace period, the insurer typically deducts the unpaid premium from the death benefit. The exact length is set by the policy and state law, commonly about 30 or 31 days.

Question 43Life Insurance Basics

Under a typical individual life insurance free-look provision, the policyowner may do which of the following?

  1. Return the policy after the contestable period for a full refund.
  2. Cancel the policy at any time and receive the cash value.
  3. Return it within a stated number of days after delivery for a full refund. Correct answer.
  4. Exchange the policy for another insurer's product without underwriting.

Explanation

The free-look period gives the policyowner a stated number of days after policy delivery to return the contract for a full premium refund. It is a consumer protection right that applies at the outset, not throughout the policy's life. The length of the period is set by state law and the policy.

Question 44Life Insurance Basics

Policy dividends paid by a participating life insurance policy are best described as:

  1. A return of divisible surplus that is not guaranteed. Correct answer.
  2. A refund of premium required by state law.
  3. A taxable distribution of the insurer's investment earnings.
  4. Guaranteed annual interest credited to the cash value.

Explanation

Dividends on participating policies represent a return of divisible surplus, essentially a refund of premium attributable to favorable mortality, expense, or investment results. They are not guaranteed and are generally not taxable as income until they exceed the policyowner's cost basis. The insurer's board declares them annually.

Question 45Life Insurance Basics

When a primary beneficiary is living at the insured's death, the policy proceeds are paid to:

  1. The insured's estate.
  2. The contingent beneficiary.
  3. The primary beneficiary. Correct answer.
  4. The policyowner.

Explanation

A primary beneficiary is first in line to receive the death benefit. A contingent beneficiary receives proceeds only if no primary beneficiary survives the insured. The estate is paid only when no named beneficiary is alive or the estate is named.

Question 46Life Insurance Basics

Once the incontestability period expires, which of the following will still permit an insurer to deny a death benefit?

  1. The insured died by suicide in the third policy year.
  2. The insured changed occupations without notifying the insurer.
  3. The insured misstated a material medical fact on the application.
  4. The policy lapsed for nonpayment of premium before death. Correct answer.

Explanation

Incontestability bars the insurer from rescinding the policy for misrepresentations after the contestable period, usually two years. However, the policy must still be in force at death; a lapse for nonpayment means there is no coverage. Suicide and occupation-change issues are governed by separate policy provisions.

Question 47Life Insurance Basics

Why does a whole life policy charge a level premium that is higher than the actual cost of protection in the early years?

  1. Because mortality costs decline as the insured ages.
  2. Because it averages rising mortality costs and builds a reserve. Correct answer.
  3. Because state law prohibits premiums from increasing after issue.
  4. Because the insurer must recover acquisition costs only in the first year.

Explanation

Mortality risk rises with age, so a level premium overpays in the early years and underpay in the later years. The excess accumulates in the insurer's reserves to help fund the higher later cost. This is the level-premium concept underlying permanent life insurance.

Question 48Life Insurance Basics

Which of the following is included in the gross premium but excluded from the net premium?

  1. Operating expenses and commissions Correct answer.
  2. The interest rate assumed in pricing
  3. The mortality cost assumed in pricing
  4. The policy reserve liability

Explanation

The net premium is based on mortality and interest assumptions and covers the expected cost of claims. The gross premium adds expense loading, including commissions, administrative costs, and taxes. Reserves are a liability, not a component of the premium calculation itself.

Question 49Life Insurance Basics

A policyowner with a whole life policy stops paying premiums and does not want to continue premium payments. Which nonforfeiture option provides continuing life insurance for a limited period at the same face amount?

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

Explanation

Extended term insurance uses the policy's net cash value to buy term coverage at the same face amount for as long as the value will pay for it. Reduced paid-up insurance provides a smaller permanent face amount with no further premiums. Cash surrender ends coverage.

Question 50Life Insurance Basics

An outstanding policy loan that is unpaid at the insured's death will generally:

  1. Void the policy and forfeit the death benefit.
  2. Be paid by the beneficiary in addition to the face amount.
  3. Reduce the death benefit paid to the beneficiary. Correct answer.
  4. Be forgiven if the insured dies before repaying it.

Explanation

A policy loan is an advance from the insurer secured by the policy's cash value. If it remains unpaid at death, the insurer subtracts the loan balance and accrued interest from the death benefit. The beneficiary receives the net amount.