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OK Life & Health practice questions

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Question 1Life Insurance

Under a typical individual life insurance policy, which party holds the ownership rights such as the right to name a beneficiary, take a policy loan, and surrender the contract?

  1. The irrevocable beneficiary
  2. The insurance producer who sold the policy
  3. The insured
  4. The policyowner Correct answer.

Explanation

The policyowner holds all contractual ownership rights, including beneficiary designation, loans, surrender, and assignment. The insured is the person whose life is covered and may or may not be the owner. Beneficiaries only receive proceeds and producers have no ownership interest.

Question 2Life Insurance

An applicant completes an application and pays the initial premium on March 3. The producer issues a conditional receipt. The insurer approves the policy as applied for and delivers it on March 12. Under the conditional receipt, coverage typically becomes effective on which date?

  1. March 12, because coverage always begins at policy delivery
  2. The date the producer mails the policy to the applicant
  3. The end of the free-look period
  4. March 3, provided the applicant met the insurability conditions on that date Correct answer.

Explanation

A conditional receipt provides interim coverage retroactive to the date of application and premium payment, but only if the proposed insured satisfied the insurer's underwriting requirements on that date. If the applicant was not insurable then, no interim coverage arises. Delivery date matters mainly for policies issued without such a receipt.

Question 3Life Insurance

Which provision prevents an insurer from denying a claim based on a misstatement in the application after the policy has been in force for a specified period, usually two years?

  1. Grace period provision
  2. Reinstatement provision
  3. Incontestability clause Correct answer.
  4. Entire contract clause

Explanation

The incontestability clause bars the insurer from contesting the policy for material misrepresentation after the contestable period, generally two years from issue. Fraudulent misrepresentation concerning the insured's age or identity may still be addressed under other provisions. The other clauses govern contract completeness, premium timing, and revival of lapsed coverage.

Question 4Life Insurance

A policyowner pays premiums annually but the insured dies 20 days after a premium due date during the grace period. What is the insurer's obligation?

  1. Pay the death benefit only if the beneficiary pays the overdue premium first
  2. Deny the claim because the premium was not paid by the due date
  3. Pay only the cash surrender value
  4. Pay the death benefit, deducting the unpaid premium from the proceeds Correct answer.

Explanation

The grace period, commonly 31 days, keeps the policy in force after a missed due date. If the insured dies during that period, the insurer pays the death benefit and subtracts any premium owed. The policy has not lapsed, so a full denial would be improper.

Question 5Life Insurance

Which dividend option under a participating whole life policy uses dividends to buy additional permanent coverage at the insured's attained age, increasing both the death benefit and cash value?

  1. Accumulate at interest
  2. Paid-up additions Correct answer.
  3. Cash payment
  4. Reduced paid-up insurance

Explanation

Paid-up additions use each dividend to purchase a small amount of single-premium permanent insurance at the insured's attained age. This raises the death benefit and cash value without requiring further premiums on the additions. The other options either accumulate funds, convert existing coverage, or pay cash out.

Question 6Life Insurance

A whole life policyowner stops paying premiums and elects the reduced paid-up nonforfeiture option. What is the result?

  1. The same death benefit for a limited number of years
  2. Conversion of the policy to term insurance with the same face amount
  3. A smaller level death benefit that remains in force for life with no further premiums Correct answer.
  4. A single premium payment to restore the original face amount

Explanation

Reduced paid-up insurance uses the policy's net cash value as a single premium to buy a lower face amount of permanent coverage. The new benefit stays in force for the insured's lifetime and requires no additional premiums. It does not preserve the original face amount.

Question 7Life Insurance

An insured with a $500,000 level term policy dies during the policy term. The beneficiary receives the face amount. Which statement best describes the income tax treatment of that payment?

  1. The death benefit is generally received income tax free by the beneficiary Correct answer.
  2. The death benefit is taxable to the insured's estate in all cases
  3. The death benefit is taxable as ordinary income to the beneficiary
  4. Only the amount exceeding premiums paid is taxable

Explanation

Life insurance death proceeds paid to a beneficiary are generally excluded from the beneficiary's gross income under the Internal Revenue Code. Interest paid on proceeds left on deposit with the insurer is taxable, and estate tax may apply if the insured held incidents of ownership. Ordinary income taxation of the face amount is not the rule.

Question 8Life Insurance

An insured owns a $1,000,000 policy and transfers absolute ownership to an adult child, naming the child as beneficiary. The insured dies 18 months later. What is the most likely estate tax consequence?

  1. The proceeds are excluded from the insured's gross estate because the transfer occurred more than three years before death Correct answer.
  2. The proceeds are fully included because the insured originally applied for the policy
  3. The proceeds are included because the beneficiary is a family member
  4. The proceeds are included at half value because the transfer was recent

Explanation

A transfer of ownership removes the policy from the insured's estate only if the insured survives the transfer by more than three years. Surviving 18 months fails that test, so the full proceeds are pulled back into the gross estate. Family relationship of the beneficiary is not the controlling factor.

Question 9Life Insurance

Which settlement option provides the beneficiary with income for life, with payments guaranteed to continue to a named contingent payee if the beneficiary dies before receiving a specified number of years of payments?

  1. Joint and survivor income
  2. Straight life income
  3. Life income with period certain Correct answer.
  4. Fixed period

Explanation

Life income with period certain guarantees payments for the beneficiary's lifetime and, if death occurs before the chosen period ends, continues payments to a contingent payee for the remainder. Straight life stops at the beneficiary's death. Joint and survivor covers two lives, and fixed period pays for a set time regardless of life expectancy.

Question 10Life Insurance

A policyowner designates a primary beneficiary and lists two children as contingent beneficiaries. The primary beneficiary dies before the insured, and the insured dies without changing the designation. Who receives the proceeds?

  1. The two children, in equal shares Correct answer.
  2. The primary beneficiary's estate
  3. The insured's estate
  4. The policyowner's creditors

Explanation

Contingent beneficiaries receive the proceeds when no primary beneficiary is living at the insured's death. With two named contingent beneficiaries and no stated percentages, they typically share equally. The primary beneficiary's estate takes nothing because that beneficiary did not survive the insured.

Question 11Life Insurance

A policy names the insured's spouse as an irrevocable beneficiary. The insured later wants to change the beneficiary to a child. What is required?

  1. Written consent of the irrevocable beneficiary Correct answer.
  2. Only the policyowner's written request to the insurer
  3. Nothing, because beneficiary changes are always unrestricted
  4. A court order in every case

Explanation

An irrevocable beneficiary has a vested interest in the policy proceeds. The owner cannot change that designation, take loans, or surrender the policy without the irrevocable beneficiary's written consent. A revocable designation, by contrast, can be changed by the owner unilaterally.

Question 12Life Insurance

A 45-year-old buys a 10-year renewable and convertible term policy. Five years later the insured develops diabetes but wants to convert to permanent coverage. Which statement is correct?

  1. Conversion requires a new medical exam because health has changed
  2. Conversion is allowed without evidence of insurability if exercised within the conversion period Correct answer.
  3. Conversion is permitted only at the original face amount minus cash value
  4. Conversion is barred because the policy is term insurance

Explanation

A convertible term policy lets the insured exchange it for permanent coverage without proving insurability, provided the conversion privilege is exercised within the stated period. The premium is based on the insured's attained age at conversion. Declining health therefore does not block conversion.

Question 13Life Insurance

Which life insurance arrangement is used to fund a buy-sell agreement among three equal business owners so that each owner's interest is purchased from the estate at death?

  1. Group term life covering all employees equally
  2. Split-dollar plan between the business and each owner
  3. Entity purchase or cross-purchase funded with life insurance on each owner Correct answer.
  4. Key person insurance owned by the business with the business as beneficiary

Explanation

A buy-sell agreement obligates surviving owners or the entity to buy a deceased owner's interest, and life insurance provides the funding. In a cross-purchase, each owner insures the others; in an entity purchase, the business owns policies on each owner. Key person insurance reimburses the business for a loss rather than funding a buyout.

Question 14Life Insurance

An employer pays the premiums on a $150,000 group term life plan for an employee. What is the general income tax treatment of the coverage for the employee?

  1. The cost of coverage up to $50,000 is excluded, and the value of excess coverage is reported as taxable income Correct answer.
  2. The entire premium is tax free with no reporting at all
  3. The entire premium is taxable income to the employee
  4. The death benefit is taxable to the employee annually

Explanation

Under group term life rules, employer-paid coverage up to $50,000 of face amount is excluded from the employee's income. The value of coverage above $50,000, determined by IRS Table I rates, is reported as taxable income. The death benefit itself is not taxed annually to the employee.

Question 15Life Insurance

Which of the following best describes the purpose of the suicide clause in a life insurance policy?

  1. To exclude all suicide deaths from coverage permanently
  2. To require a psychological examination before issuing the policy
  3. To reduce the death benefit by the amount of outstanding loans
  4. To limit the insurer's liability to a refund of premiums if the insured dies by suicide within a stated period Correct answer.

Explanation

The suicide clause typically applies for the first two years, during which the insurer's liability is limited to return of premiums paid. After that period, a suicide death is treated like any other cause and the full benefit is payable. The clause is not a permanent exclusion.

Question 16Life Insurance

A policyowner takes a $20,000 policy loan against a whole life policy and never repays it. The insured then dies. How is the death benefit affected?

  1. The insurer pays the full face amount and forgives the loan
  2. The insurer pays the cash value only
  3. The insurer pays the face amount minus the outstanding loan and accrued interest Correct answer.
  4. The insurer pays nothing because the loan was unpaid

Explanation

A policy loan is an advance against the policy's cash value, and the insurer treats unpaid loan principal and interest as a debt. At death, the proceeds are reduced by that outstanding balance. The beneficiary receives the net amount, not the full face value.

Question 17Life Insurance

Which provision allows a lapsed whole life policy to be restored, usually within three to five years, upon evidence of insurability and payment of overdue premiums with interest?

  1. Waiver of premium rider
  2. Reinstatement provision Correct answer.
  3. Extended term provision
  4. Automatic premium loan provision

Explanation

The reinstatement provision permits revival of a lapsed policy after proof of insurability and payment of back premiums plus interest. Reinstated policies may carry a new contestable period. Automatic premium loan prevents lapse, waiver of premium waives premiums on disability, and extended term is a nonforfeiture option.

Question 18Life Insurance

An insured is diagnosed with a terminal illness and the policy includes an accelerated death benefit rider. What does this rider generally allow?

  1. Early payment of part of the death benefit while the insured is still alive Correct answer.
  2. A loan against the policy that must be repaid
  3. Doubling of the death benefit at no cost
  4. Conversion of the policy to an annuity

Explanation

An accelerated death benefit rider lets a terminally or chronically ill insured receive a portion of the face amount before death. The eventual death benefit is reduced by the amount accelerated. It is not a loan, a free benefit increase, or an annuity conversion.

Question 19Life Insurance

A producer collects the initial premium and gives the applicant a binding receipt. The applicant dies before the insurer completes underwriting. What is the effect of a binding receipt?

  1. Coverage is in force from the date of the application regardless of insurability Correct answer.
  2. Coverage begins when the policy is delivered
  3. No coverage exists until the free-look period ends
  4. Coverage begins only if the insurer later approves the application

Explanation

A binding receipt provides immediate temporary coverage from the application date even if the proposed insured would not have been insurable. This differs from a conditional receipt, which requires insurability on the effective date. The insurer bears the risk during underwriting under a binding receipt.

Question 20Life Insurance

Which of the following correctly describes the entire contract provision?

  1. The producer may modify the contract orally
  2. The policy and the attached copy of the application constitute the whole agreement, and no outside documents bind the insurer Correct answer.
  3. The beneficiary may amend the policy terms
  4. The insurer may change policy terms at any time without notice

Explanation

The entire contract provision states that the policy plus the attached application form the complete agreement. It prevents the insurer from relying on outside documents and prevents oral changes by producers. Only an authorized officer can modify the contract, and only in writing.

Question 21Life Insurance

An applicant for a $2,000,000 policy omits a history of heart disease on the application. The insurer issues the policy, and the insured dies of a heart attack 30 months later. What is the insurer's likely position?

  1. The claim must be paid because the contestable period has expired Correct answer.
  2. The claim is limited to returned premiums
  3. The claim may be denied because the misstatement was material
  4. The claim is paid only if the beneficiary proves good faith

Explanation

Once the two-year contestable period has run, the insurer generally cannot rescind the policy for misstatements in the application, even material ones. The death benefit is payable subject to other policy terms. Fraudulent identity or age misstatements are narrow exceptions.

Question 22Life Insurance

Which of the following is a characteristic of variable universal life insurance compared with traditional whole life?

  1. Cash value grows at a guaranteed minimum interest rate with no investment risk
  2. The policy has no death benefit
  3. Premiums are always fixed and payable for life
  4. Cash value fluctuates with the performance of separate account subaccounts chosen by the owner Correct answer.

Explanation

Variable universal life combines flexible premiums with cash value invested in separate account subaccounts, so the owner bears investment risk. Traditional whole life offers guaranteed cash value growth and fixed premiums. Variable products require securities licensing for producers and prospectus delivery.

Question 23Life Insurance

A policyowner with a universal life policy pays only the minimum premium for several years while the cost of insurance rises. What is the most likely result if no additional premium is paid?

  1. The policy converts to paid-up permanent coverage
  2. The insurer is required to reduce the face amount and waive premiums
  3. The policy may lapse when the cash value is exhausted by monthly deductions Correct answer.
  4. The death benefit increases automatically to offset costs

Explanation

Universal life policies deduct cost of insurance and expense charges monthly from the cash value. If premiums are insufficient and the cash value is depleted, the policy can lapse unless the owner pays more. There is no automatic face reduction or paid-up conversion.

Question 24Life Insurance

Which rider pays a benefit if the insured becomes totally and permanently disabled and cannot work, typically waiving premiums during the disability?

  1. Waiver of premium rider Correct answer.
  2. Accidental death benefit rider
  3. Return of premium rider
  4. Guaranteed insurability rider

Explanation

The waiver of premium rider keeps the policy in force by waiving premiums during a qualifying total disability, usually after an elimination period. Accidental death riders add benefits for accidental death, guaranteed insurability allows future purchases without proof of health, and return of premium refunds premiums under stated conditions.

Question 25Life Insurance

An insured owns a policy with a guaranteed insurability rider and later develops a serious illness. At the next option date, what can the insured do?

  1. Convert the policy to term insurance only
  2. Increase the face amount only by paying cash value
  3. Purchase additional coverage only at substandard rates
  4. Purchase additional coverage at standard rates without providing evidence of insurability Correct answer.

Explanation

A guaranteed insurability rider, also called guaranteed purchase option, lets the insured buy specified amounts of additional coverage at stated ages or events without proving insurability. The additional coverage is issued at standard rates for the attained age. It is not limited to a term conversion or cash-value payment.

Question 26Life Insurance

Which party to a life insurance contract makes the offer by submitting an application and the initial premium?

  1. The insurer
  2. The producer
  3. The beneficiary
  4. The applicant Correct answer.

Explanation

In life insurance the applicant makes the offer to buy coverage by completing the application and paying the first premium, and the insurer accepts or rejects that offer when it underwrites and issues the policy. The producer only solicits and transmits the application and has no authority to bind the insurer.

Question 27Life Insurance

An applicant pays the first premium and receives a conditional receipt. Before the policy is delivered, the applicant dies in an accident and the insurer's underwriting guidelines would have approved the risk as applied for. What is the insurer's obligation?

  1. Refund the premium only, because no policy was ever delivered
  2. Deny the claim because the producer had no authority to bind coverage
  3. Pay the face amount because coverage took effect on the date of the application under the conditional receipt Correct answer.
  4. Pay a pro rata return of premium plus interest, because the contract never attached

Explanation

A conditional receipt provides interim coverage that takes effect retroactively to the application or medical exam date, but only if the proposed insured was insurable as a standard risk under the insurer's rules. Because underwriting would have approved the risk as applied for, the condition is satisfied and the face amount is payable.

Question 28Life Insurance

Which life insurance policy structure combines a fixed minimum guaranteed death benefit with a cash value invested in separate accounts chosen by the owner?

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

Explanation

Variable universal life places cash value in separate accounts, typically subaccounts holding mutual-fund-like investments, so the owner bears the investment risk while a minimum guaranteed death benefit may remain. Traditional and modified whole life build cash value in the insurer's general account at guaranteed rates.

Question 29Life Insurance

A universal life policy's cash value falls to the point where the cost of insurance and expense charges exceed the interest credited, and the owner pays no additional premium. What happens under the typical policy terms?

  1. The insurer automatically reduces the death benefit to keep the policy in force
  2. The insurer converts the policy to extended term coverage automatically
  3. The cost of insurance charges are waived until the cash value recovers
  4. The policy enters a grace period and may lapse unless sufficient premium is paid Correct answer.

Explanation

Universal life is flexible-premium but not guaranteed to stay in force; when the cash value is insufficient to cover monthly deductions, the insurer notifies the owner and a grace period begins. If adequate premium is not paid within that period, the policy lapses.

Question 30Life Insurance

Which dividend option under a participating whole life policy uses dividends to buy additional permanent coverage at the insured's attained age, with the new coverage participating in future dividends?

  1. Accumulate at interest
  2. Reduced paid-up
  3. Paid-up additions Correct answer.
  4. One-year term

Explanation

Paid-up additions use each dividend to purchase small amounts of single-premium permanent insurance at the insured's attained age, and those additions themselves earn dividends and build cash value. This makes them the option that compounds both death benefit and cash value.

Question 31Life Insurance

Which of the following best describes the grace period provision in a life insurance policy?

  1. It allows the beneficiary to delay filing a claim after the insured's death
  2. It allows the insurer to cancel the policy for any reason during the first year
  3. It allows the owner to return a delivered policy for a full refund
  4. It allows the owner a stated number of days after a missed premium due date to pay and keep the policy in force Correct answer.

Explanation

The grace period, commonly 30 or 31 days, gives the owner extra time after a premium due date before the policy lapses, and coverage remains in force during that period. If the insured dies within the grace period, any unpaid premium is typically deducted from the proceeds.

Question 32Life Insurance

An insured dies by suicide 18 months after a policy with a two-year suicide clause was issued. What does the insurer typically pay?

  1. The full face amount, because the contestable period has passed
  2. The cash value only, because the policy is not yet mature
  3. A refund of premiums paid, with the death benefit denied Correct answer.
  4. Nothing at all, because suicide voids the contract permanently

Explanation

A suicide clause limits the insurer's liability during the stated period, usually one or two years, to a return of premiums rather than the face amount. Because death occurred within the two-year window, the refund applies; after the clause expires, suicide is covered like any other cause of death.

Question 33Life Insurance

Which provision prevents the insurer from denying a claim based on a material misstatement in the application after the policy has been in force for two years?

  1. Entire contract clause
  2. Incontestability clause Correct answer.
  3. Reinstatement provision
  4. Misstatement of age provision

Explanation

The incontestability clause bars the insurer from contesting the policy, generally after two years from issue, on grounds of misrepresentation or concealment in the application. Fraudulent misstatements about age or sex are handled instead by adjusting benefits under the misstatement of age provision.

Question 34Life Insurance

A policyowner names a beneficiary who will receive the proceeds only if the primary beneficiary is dead at the time of the insured's death. What is this beneficiary called?

  1. Contingent beneficiary Correct answer.
  2. Irrevocable beneficiary
  3. Primary beneficiary
  4. Revocable beneficiary

Explanation

A contingent beneficiary stands second in line and receives the death benefit only if the primary beneficiary has already died or is otherwise unavailable. Naming one avoids having the proceeds pass through probate when the primary beneficiary predeceases the insured.

Question 35Life Insurance

Which settlement option leaves the death benefit on deposit with the insurer, paying the beneficiary only the interest earned while the principal remains intact for a later distribution?

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

Explanation

Under the interest only option the insurer retains the proceeds and pays the beneficiary periodic interest, with the principal later paid to a remainder beneficiary or the estate. The other options liquidate principal over time through scheduled payments.

Question 36Life Insurance

A policyowner elects the extended term nonforfeiture option on a whole life policy. What does the owner receive?

  1. A lump-sum refund of all premiums paid
  2. A smaller paid-up whole life policy for life
  3. Continued whole life coverage with no further premiums due
  4. Term coverage for a period determined by the cash value, in the same face amount as the original policy Correct answer.

Explanation

Extended term uses the net cash value as a single premium to buy term insurance equal to the original face amount for whatever period that amount of money will purchase at the insured's attained age. The coverage ends when the term period expires, with no cash value remaining.

Question 37Life Insurance

Which type of life insurance is specifically designed to provide death benefit protection for a limited number of years at the lowest initial cost, with no cash value accumulation?

  1. Endowment
  2. Term life Correct answer.
  3. Single premium whole life
  4. Ordinary whole life

Explanation

Term insurance covers a defined period and pays only if death occurs during that period, so it carries no cash value and has the lowest premium for a given face amount. Permanent products such as whole life and endowment combine protection with cash value accumulation.

Question 38Life Insurance

An insured holds a renewable term policy with a renewal provision that does not require evidence of insurability. What is the primary consequence for the insured at renewal?

  1. The policy may be renewed at the insurer's then-current premium rates for the attained age without a new health exam Correct answer.
  2. The face amount automatically increases to offset inflation
  3. The premium stays exactly the same as the original rate for each renewal period
  4. The policy automatically converts to permanent coverage

Explanation

Guaranteed renewability lets the insured continue term coverage without proving insurability, but the premium is recalculated at the insurer's current rates for the insured's attained age. That is why renewal premiums rise steeply as the insured ages.

Question 39Life Insurance

Which of the following is a characteristic of a joint life policy covering two insureds?

  1. It pays the death benefit at the first death of either insured Correct answer.
  2. It pays half the face amount at each insured's death
  3. It pays two separate full face amounts, one at each insured's death
  4. It pays the death benefit only after both insureds have died

Explanation

A joint life policy, sometimes called first-to-die, pays the face amount when the first of the two insureds dies and then terminates. It is often used in estate planning between spouses or in business continuation arrangements.

Question 40Life Insurance

A survivorship (second-to-die) life policy is most commonly used for which purpose?

  1. Funding a key employee's buyout at retirement
  2. Providing liquidity to pay estate taxes after the second spouse dies Correct answer.
  3. Replacing income when the first spouse dies
  4. Covering a business partner's death before age 65

Explanation

Survivorship policies pay at the second death, which aligns with the unlimited marital deduction: no estate tax is due at the first death, and the proceeds provide liquidity when the surviving spouse's estate is finally taxed. The premium is lower than for two separate policies because payment is deferred.

Question 41Life Insurance

Which rider allows an insured to purchase additional amounts of coverage at specified dates or life events without proving insurability?

  1. Waiver of premium rider
  2. Guaranteed insurability rider Correct answer.
  3. Return of premium rider
  4. Accidental death benefit rider

Explanation

The guaranteed insurability rider, also called a future purchase option, lets the insured buy stated amounts of additional coverage at predetermined ages or events such as marriage or the birth of a child at standard rates. The insurer waives the usual evidence of insurability for those purchases.

Question 42Life Insurance

Which rider is designed to pay a monthly benefit to the insured while alive when the insured is diagnosed with a qualifying terminal illness, reducing the death benefit later paid to the beneficiary?

  1. Long-term care rider
  2. Payor benefit rider
  3. Accelerated death benefit rider Correct answer.
  4. Disability income rider

Explanation

An accelerated death benefit rider lets the insured draw a portion of the policy's death benefit early upon proof of a qualifying terminal illness, with the remainder paid to the beneficiary at death. The draw reduces the eventual death benefit by the amount advanced.

Question 43Life Insurance

An insured's policy includes a disability income rider. Which of the following best describes what this rider provides?

  1. Payment of the policy's premiums while the insured is disabled
  2. An early release of part of the death benefit for terminal illness
  3. An additional benefit paid to the beneficiary if death is accidental
  4. A monthly income to the insured while disabled, independent of the policy's death benefit Correct answer.

Explanation

A disability income rider pays the insured a stated monthly benefit during a qualifying disability, providing living benefits in addition to the life insurance protection. It is distinct from waiver of premium, which only keeps the policy in force.

Question 44Life Insurance

An insured with a waiver of premium rider becomes totally disabled and remains so for six months, satisfying the elimination period. What is the effect on the policy?

  1. The policy lapses and the cash value is refunded to the insured
  2. The insurer pays the premiums while the disability continues and the policy stays in force Correct answer.
  3. The policy is converted to extended term coverage for the duration of the disability
  4. The insurer pays the premiums and increases the death benefit by the amount waived

Explanation

Once the elimination period is satisfied, the waiver of premium rider keeps the policy in force by having the insurer pay premiums, including any policy loan interest, for as long as the total disability lasts. The death benefit and cash value continue as though premiums were paid by the owner.

Question 45Life Insurance

A producer delivers a policy and collects the initial premium at delivery. When does coverage generally take effect in this situation?

  1. On the date the application was signed, regardless of delivery
  2. On the date the beneficiary is confirmed by the insurer
  3. On the date the policy is delivered and the premium is paid, assuming the applicant is insurable Correct answer.
  4. Only after the free-look period has expired

Explanation

When the premium is collected at delivery, the policy generally takes effect when it is delivered and the premium is paid, provided the applicant remains insurable as represented. If the premium had been paid with the application, the effective date would typically relate back to the application or medical exam date.

Question 46Life Insurance

Which of the following correctly describes the ownership rights under a life insurance policy?

  1. The insurer controls the policy and may change the beneficiary at will
  2. The owner controls the policy and may name or change the beneficiary, assign the policy, and take loans Correct answer.
  3. The beneficiary controls the policy once named
  4. The insured always controls the policy because the policy insures the insured's life

Explanation

Policy ownership is separate from the insured life; the owner holds the contractual rights, including beneficiary designation, assignment, surrender, and policy loans. When the insured and owner are different people, the owner, not the insured, exercises these rights.

Question 47Life Insurance

An irrevocable beneficiary is named on a life policy. Which action can the policyowner take without that beneficiary's consent?

  1. Change the beneficiary to a different person
  2. Continue paying premiums to keep the policy in force Correct answer.
  3. Assign the policy as collateral for a loan
  4. Surrender the policy for its cash value

Explanation

An irrevocable beneficiary has a vested interest, so the owner cannot change the beneficiary, surrender the policy, or assign it in a way that impairs that interest without consent. Paying premiums simply maintains the contract and does not diminish the beneficiary's rights.

Question 48Life Insurance

A policyowner with a $250,000 death benefit has an outstanding policy loan of $30,000 plus $2,000 of accrued interest at the insured's death. How are the proceeds paid to the beneficiary?

  1. $280,000, because the loan is added to the death benefit
  2. $218,000, because the loan and accrued interest are deducted from the face amount Correct answer.
  3. $220,000, because only the loan principal is deducted
  4. $250,000, because the insurer absorbs the loan against the death benefit

Explanation

A policy loan is an advance against the policy's value, and any unpaid principal and interest are subtracted from the death benefit before payment. Here $250,000 minus $30,000 principal and $2,000 interest yields $218,000 to the beneficiary.

Question 49Life Insurance

An employer provides $250,000 of group term life coverage to an employee under a plan that meets the requirements for group life. What is the income tax treatment of the cost of coverage above $50,000?

  1. No portion of employer-paid group term coverage is ever taxable
  2. The entire face amount is taxable income to the employee in the year of coverage
  3. The value of coverage above $50,000 is taxable income to the employee, calculated using IRS Table I rates Correct answer.
  4. The entire cost of employer-paid group term coverage is taxable to the employee

Explanation

Employer-paid group term life premiums are excluded from the employee's income up to $50,000 of coverage, and the cost of coverage above that amount is reported as taxable income using IRS Table I rates. The death benefit itself is generally received income-tax-free by the beneficiary.

Question 50Life Insurance

Which statement accurately compares the cash value of an ordinary whole life policy with the premiums paid over time?

  1. Cash value grows slowly at first and generally does not equal total premiums paid until many years have passed Correct answer.
  2. Cash value equals the total premiums paid from the first policy year
  3. Cash value is paid only if the insured dies during the policy term
  4. Cash value is unrelated to the policy's reserves and guaranteed interest rate

Explanation

Whole life cash value builds from reserves funded by premiums and grows at a guaranteed minimum rate, but early premiums mostly cover expenses and mortality costs, so cash value lags premiums for years. It typically equals cumulative premiums only in later policy years.