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UT Life & Health practice questions

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Question 1Life Insurance Basics and Purpose

Which of the following best describes the primary purpose of life insurance?

  1. To eliminate the need for an emergency savings fund
  2. To cover routine medical expenses during the insured's lifetime
  3. To replace the insured's earning capacity for dependents Correct answer.
  4. To provide a guaranteed return that beats inflation

Explanation

Life insurance is purchased primarily to create an immediate estate that replaces income lost if the insured dies prematurely, protecting dependents from financial hardship. It is not designed to guarantee investment returns, replace emergency savings, or pay routine medical bills.

Question 2Life Insurance Basics and Purpose

Which statement best describes insurable interest in a life insurance transaction?

  1. The applicant must own property that the insured has pledged as collateral
  2. The applicant expects financial benefit from the insured's continued life Correct answer.
  3. The applicant must be named as the policy beneficiary
  4. The applicant must be related to the insured by blood or by marriage

Explanation

Insurable interest requires a financial or economic interest in the continued life of the insured, such as a spouse, parent, or business partner would have. The legal test is economic benefit or loss, not merely a family relationship.

Question 3Life Insurance Basics and Purpose

Life insurance is designed to address which type of risk?

  1. Market risk
  2. Currency risk
  3. Pure risk Correct answer.
  4. Speculative risk

Explanation

Pure risk involves only the chance of loss or no loss, with no possibility of gain; premature death is the classic example. Insurers generally insure pure risks and avoid speculative risks.

Question 4Life Insurance Basics and Purpose

A mortality rate used in life insurance underwriting and pricing expresses...

  1. The percentage of collected premiums that is returned to policyowners as dividends
  2. The maximum age to which a person can be expected to live
  3. The average age at which policyholders surrender their coverage
  4. The number of deaths per 1,000 people in a population each year Correct answer.

Explanation

A mortality rate measures how frequently deaths occur in a defined population over a period, typically expressed per 1,000 lives per year. Insurers use mortality tables based on these rates to price coverage.

Question 5Life Insurance Basics and Purpose

The premium on a life insurance policy is best described as...

  1. The consideration paid for the insurer's promise to pay a death benefit Correct answer.
  2. A fee charged only when a beneficiary files a claim for the death benefit
  3. A state tax imposed on the transfer of the death benefit to a beneficiary
  4. The cash value accumulated in the policy's savings component

Explanation

The premium is the consideration the policyowner pays in exchange for the insurer's promise to provide coverage and pay a death benefit. It funds the insurer's mortality, expense, and reserve obligations.

Question 6Life Insurance Basics and Purpose

When the insured dies while a life insurance policy is in force, the insurer generally pays...

  1. The face amount, paid to the named beneficiary Correct answer.
  2. The outstanding policy loan balance, paid to the lender
  3. A refund of all premiums paid, paid to the policyowner
  4. The policy's cash value, paid to the insured's estate

Explanation

The insurer's core obligation is to pay the policy's face amount, or death benefit, to the named beneficiary when the insured dies while coverage is in force. Other amounts may apply only in specific circumstances.

Question 7Life Insurance Basics and Purpose

Which three factors are most commonly used in calculating a life insurance premium?

  1. Mortality, cash value, and beneficiary age
  2. Mortality, interest, and expense Correct answer.
  3. Morbidity, interest, and commission
  4. Mortality, inflation, and marketing

Explanation

Insurers build premiums around three primary assumptions: expected mortality, the interest rate earned on reserves, and the expenses of issuing and maintaining the policy. State premium taxes may also be reflected, but these three are the core factors.

Question 8Life Insurance Basics and Purpose

Adverse selection in life insurance refers to the tendency of...

  1. Higher-risk people to seek coverage more than lower-risk people Correct answer.
  2. Healthy people to buy more coverage than unhealthy people
  3. Agents to sell policies only to friends and relatives
  4. Insurers to reject applicants who have a family history of illness

Explanation

Adverse selection is the tendency for people at higher risk of loss to seek or retain insurance more than those at lower risk. Insurers use underwriting and policy design to control it.

Question 9Life Insurance Basics and Purpose

The law of large numbers helps an insurer predict losses because...

  1. Premiums must rise as the number of policyowners increases
  2. Each insured person's death can be predicted in advance
  3. A larger group of similar risks produces more stable results Correct answer.
  4. Reinsurance removes all uncertainty from the insurer's results

Explanation

The law of large numbers states that as the number of similar independent risks increases, actual losses tend to approximate expected losses more closely. This makes pricing and reserving more reliable for large groups.

Question 10Life Insurance Basics and Purpose

Reinsurance is best described as...

  1. One insurer transfers risk to another insurer Correct answer.
  2. An insurer refunds premium when a policy is cancelled
  3. A state guaranty fund protects policyowners from insolvency
  4. A policyowner buys additional coverage from a second insurer

Explanation

Reinsurance is an arrangement in which an insurer transfers part of its risk to another insurer, often to limit large losses or increase capacity. The original insurer remains responsible to the policyowner.

Question 11Life Insurance Basics and Purpose

Which statement accurately describes a stock life insurance company?

  1. It is owned by subscribers and managed by an attorney-in-fact
  2. It is owned by stockholders and may pay taxable dividends Correct answer.
  3. It is owned by the state and returns premiums to members
  4. It is owned by policyowners and pays nontaxable dividends

Explanation

A stock insurer is owned by stockholders, who elect the board and may receive dividends taxed as ordinary income. Policyowners are customers, not owners.

Question 12Life Insurance Basics and Purpose

A mutual life insurer is owned by...

  1. Its creditors
  2. Its policyowners Correct answer.
  3. The state insurance department
  4. Its stockholders

Explanation

A mutual insurer is owned by its policyowners, who may receive dividends that are generally treated as a return of premium for tax purposes. Control is exercised through policyowner voting.

Question 13Life Insurance Basics and Purpose

A life insurance contract is aleatory because...

  1. The insurer may unilaterally change the policy terms
  2. The policyowner must disclose all known facts to the insurer
  3. Both parties exchange promises of exactly equal value
  4. The amounts exchanged may be unequal and depend on chance Correct answer.

Explanation

An aleatory contract exchanges promises of potentially unequal value, contingent on an uncertain event such as death. A small premium may result in a large death benefit, or no benefit may be paid.

Question 14Life Insurance Basics and Purpose

A life insurance policy is considered a contract of adhesion because...

  1. The contract must be approved by the beneficiary before it is valid
  2. The insurer drafts the contract and the applicant accepts or rejects it Correct answer.
  3. The policyowner and insurer negotiate every clause equally
  4. The insured must adhere to a physical examination requirement

Explanation

In a contract of adhesion, one party, usually the insurer, drafts the terms and the other party accepts or rejects them. Ambiguities are generally construed against the drafter.

Question 15Life Insurance Basics and Purpose

Key person life insurance is purchased by a business primarily to...

  1. Satisfy state workers' compensation requirements
  2. Fund the purchase of a deceased owner's shares by a co-owner
  3. Protect the business against loss from a vital employee's death Correct answer.
  4. Provide retirement income for all employees

Explanation

Key person insurance reimburses a business for the financial loss caused by the death of an essential owner or employee. It is not a retirement plan or a general employee benefit.

Question 16Life Insurance Basics and Purpose

A buy-sell agreement funded with life insurance is designed to...

  1. Pay estate taxes on the owner's personal residence
  2. Provide group term coverage for rank-and-file employees
  3. Replace a key employee with a trained successor
  4. Fund the buyout of a deceased owner's interest Correct answer.

Explanation

A buy-sell agreement sets a price and terms for the surviving owners or the business to buy a deceased owner's interest from the heirs. Life insurance is often used to fund that purchase.

Question 17Life Insurance Basics and Purpose

Which characteristic is most closely associated with a fraternal benefit society?

  1. It is managed by an attorney-in-fact for its subscribers
  2. It is a government agency that insures high-risk individuals
  3. It is owned by stockholders who elect the company's board of directors
  4. It uses a lodge system and offers social and charitable benefits Correct answer.

Explanation

Fraternal benefit societies are nonprofit organizations that operate on a lodge system and provide insurance and social or charitable benefits to their members. They are not stock companies, reciprocals, or government agencies.

Question 18Life Insurance Basics and Purpose

A reciprocal insurance exchange is best described as...

  1. A state-sponsored residual market insurer for high-risk applicants
  2. An unincorporated group of subscribers with an attorney-in-fact Correct answer.
  3. A mutual company owned by its policyowners
  4. A stock company owned by investors

Explanation

A reciprocal exchange is an unincorporated group of subscribers who agree to insure one another and use an attorney-in-fact to manage the exchange. It is not a stock or mutual company.

Question 19Life Insurance Basics and Purpose

Under a conditional receipt, life insurance coverage becomes effective when...

  1. The agent submits the application, regardless of insurability
  2. The policy is delivered and the first premium is paid, even if uninsurable
  3. The beneficiary signs a waiver of the contestability period
  4. The applicant applies, pays the initial premium, and is insurable Correct answer.

Explanation

A conditional receipt provides interim coverage only if the applicant completes the application, pays the initial premium, and meets the insurer's insurability requirements. If those conditions are not met, no coverage attaches.

Question 20Life Insurance Basics and Purpose

The entire contract clause in a life insurance policy provides that...

  1. The beneficiary may change the policy terms after the insured dies
  2. The policy and attached application are the entire agreement Correct answer.
  3. The policyowner may cancel for a full refund at any time
  4. The insurer may add new exclusions by mailing an endorsement

Explanation

The entire contract clause states that the policy and the attached application make up the whole agreement. The insurer cannot rely on outside documents or make unilateral changes.

Question 21Types of Life Insurance Policies

Which of the following best describes level term life insurance?

  1. It provides lifetime coverage and builds a guaranteed cash value.
  2. It refunds all premiums paid if the insured survives the policy term.
  3. It automatically converts to permanent coverage when the term ends.
  4. It provides death protection for a stated period and accumulates no cash value. Correct answer.

Explanation

Level term pays a stated face amount only if the insured dies during the policy term, and both the premium and the face amount remain constant. Because the policy contains no savings element, it has no cash value, loan value, or surrender value. Its only function is pure death protection.

Question 22Types of Life Insurance Policies

A traditional whole life policy is designed so that coverage

  1. remains in force even if the owner stops paying premiums in the first year.
  2. continues for the insured's entire life as long as scheduled premiums are paid. Correct answer.
  3. ends at age 65, when the cash value is paid to the owner.
  4. reduces the face amount each year as the cash value grows.

Explanation

Whole life is permanent insurance: it stays in force to the insured's death provided required premiums are paid, and the death benefit is paid whenever death occurs. It uses level premiums and builds a guaranteed cash value. Lapse protection comes from nonforfeiture options, not from free coverage.

Question 23Types of Life Insurance Policies

Under an annually renewable term policy, the premium

  1. stays level for the insured's entire lifetime.
  2. declines each year as the insured builds equity in the policy.
  3. is payable for 20 years, after which coverage continues free of charge.
  4. increases each year with the insured's attained age while the face amount stays level. Correct answer.

Explanation

Annually renewable term guarantees the right to renew each year without new evidence of insurability. Because the cost of the mortality risk rises as the insured ages, the premium increases annually. The face amount itself remains level.

Question 24Types of Life Insurance Policies

Decreasing term life insurance is most commonly purchased to

  1. pay estate taxes on an estate that is expected to grow.
  2. protect a debt whose outstanding balance declines over time, such as a mortgage. Correct answer.
  3. provide a level death benefit while accumulating cash value.
  4. fund a retirement income that increases each year.

Explanation

A decreasing term policy pays a face amount that declines on a scheduled basis while the premium stays level. The declining benefit matches the shrinking balance of an amortizing loan. Mortgage protection is the classic use of this design.

Question 25Types of Life Insurance Policies

A 20-pay whole life policy means that

  1. the death benefit is paid only if death occurs within the first 20 years.
  2. the policy may be renewed every 20 years without evidence of insurability.
  3. premiums are paid for 20 years, but coverage continues for life. Correct answer.
  4. coverage lasts 20 years and the cash value is paid out at the end of the term.

Explanation

Limited-pay whole life shortens the premium-paying period while keeping permanent coverage. After the 20th premium, the policy is fully paid up and no further premiums are due, yet the death benefit remains in force for life. The cash value also continues to grow after the policy is paid up.

Question 26Types of Life Insurance Policies

Which feature distinguishes universal life from traditional whole life?

  1. Universal life pays a death benefit only if death occurs during the term selected.
  2. Universal life unbundles the protection, expense, and cash value elements and permits flexible premium payments. Correct answer.
  3. Universal life provides no cash value accumulation.
  4. Universal life guarantees a rate of return equal to the insurer's portfolio yield.

Explanation

Universal life separates the mortality charge, expense charges, and cash value so each is visible to the owner. This unbundling lets the owner vary premium amounts and, within limits, adjust the death benefit. Interest credited to the cash value is declared by the insurer but cannot fall below a guaranteed minimum.

Question 27Types of Life Insurance Policies

Under the level death benefit option (Option A) of a universal life policy, as the cash value grows, the amount of pure insurance protection

  1. decreases, because the death benefit remains level and the cash value is part of it. Correct answer.
  2. increases by the same dollar amount as the cash value.
  3. stays fixed in all circumstances, regardless of the cash value.
  4. is automatically converted into paid-up additions.

Explanation

With Option A the total death benefit is a specified amount, and the cash value is a component of that amount. The net amount at risk therefore equals the specified amount minus the cash value, so it shrinks as the cash value grows. Corridor rules can force the death benefit upward if cash value becomes very large.

Question 28Types of Life Insurance Policies

Which statement about variable life insurance is correct?

  1. Premiums are held in the insurer's general account and earn a fixed rate of interest.
  2. The insurer guarantees a minimum cash value no matter how the investments perform.
  3. Cash value is held in a separate account and fluctuates with the performance of the underlying investments. Correct answer.
  4. The policy may not be sold as a security and requires no prospectus.

Explanation

Variable life cash values are invested in a separate account whose value rises and falls with the underlying portfolios, and the policyowner bears that investment risk. A minimum death benefit is guaranteed, but cash value is not. Because of the separate account, the contract is a security.

Question 29Types of Life Insurance Policies

Variable universal life combines which two sets of features?

  1. Level term protection with a guaranteed return-of-premium benefit.
  2. Limited-pay whole life with a fixed guaranteed interest rate.
  3. The flexible premiums and adjustable death benefit of universal life with separate-account investment options. Correct answer.
  4. Decreasing term coverage with an automatic conversion privilege.

Explanation

Variable universal life uses the universal life chassis, so premiums are flexible and the death benefit can be adjusted within limits. Instead of a fixed interest credit, cash value is directed into separate-account subaccounts chosen by the owner. The owner therefore bears the investment risk and the policy is a security.

Question 30Types of Life Insurance Policies

In an indexed universal life policy, interest credited to the cash value is

  1. fixed at issue for the life of the policy at the insurer's portfolio yield.
  2. linked to the movement of an external index, subject to a cap and a floor. Correct answer.
  3. determined solely by the subaccounts the owner selects.
  4. guaranteed to match the full return of the referenced stock index each year.

Explanation

Indexed universal life credits interest based on the change in a published index, modified by a participation rate and a cap. A floor, commonly zero percent, prevents a negative index return from reducing cash value, although policy charges still apply. The result is partial participation rather than a direct investment in the index.

Question 31Types of Life Insurance Policies

The conversion privilege in a convertible term policy allows the policyowner to

  1. raise the face amount at any time without paying additional premium.
  2. surrender the policy at any time for its accumulated cash value.
  3. exchange the term coverage for permanent coverage without providing evidence of insurability. Correct answer.
  4. renew the term policy indefinitely at the original premium regardless of age.

Explanation

Conversion lets the owner replace term coverage with a permanent policy even if health has deteriorated, because no new underwriting is required. The new premium is based on either the insured's attained age at conversion or, under an original-age option, the age at which the term was issued. The right usually expires at a stated policy anniversary or age.

Question 32Types of Life Insurance Policies

A survivorship, or second-to-die, life insurance policy pays the death benefit

  1. only if both insureds die within the same calendar year.
  2. in monthly installments beginning at the first death.
  3. to the first insured to die, ending coverage for the survivor.
  4. after both insureds have died. Correct answer.

Explanation

A survivorship policy covers two people and pays when the second one dies. Premiums are lower than for two separate policies because the insurer's obligation is deferred. It is used mainly to provide liquidity for estate settlement costs at the second death.

Question 33Types of Life Insurance Policies

Modified whole life insurance is characterized by

  1. lower premiums in the early policy years followed by higher, level premiums later. Correct answer.
  2. premiums that increase every year for as long as the insured lives.
  3. a death benefit that declines while the premium remains level.
  4. a single lump-sum premium that pays the policy up immediately.

Explanation

Modified whole life charges less than a standard whole life premium during an initial period, then steps up to a higher level premium that continues for life. It is aimed at buyers whose income is expected to rise. The coverage is permanent and builds cash value like other whole life policies.

Question 34Types of Life Insurance Policies

A single premium whole life policy

  1. may be surrendered at any time with no income tax consequences.
  2. has no cash value until the insured reaches age 65.
  3. requires premium payments for ten years and is then paid up.
  4. is paid up with one lump-sum premium and immediately builds substantial cash value. Correct answer.

Explanation

Single premium whole life is funded with one deposit at issue, so the policy is immediately paid up and carries a large cash value relative to the face amount. Because of the heavy front-end funding, it is very likely to be classified as a modified endowment contract. Lifetime coverage continues with no further premiums.

Question 35Types of Life Insurance Policies

In a current assumption universal life policy, the interest rate credited to the cash value

  1. is tied directly to the insurer's stock price.
  2. is declared periodically by the insurer but may never fall below the guaranteed minimum rate. Correct answer.
  3. is set at issue and can never be changed for the life of the policy.
  4. equals the referenced index return with no cap or participation limit.

Explanation

Current assumption universal life credits interest at a rate the insurer declares periodically, reflecting its current portfolio results. The contract guarantees a floor rate below which the credited rate cannot drop. If the current rate falls, the policy's cost of insurance charges may consume cash value faster.

Question 36Types of Life Insurance Policies

Return of premium term insurance differs from level term insurance in that

  1. the policy builds traditional whole life cash values that can be borrowed against.
  2. the insured receives a refund of premiums paid if the insured survives to the end of the term. Correct answer.
  3. the face amount increases each year at no additional cost.
  4. premiums are lower because the insurer assumes no mortality risk.

Explanation

Return of premium term charges a higher premium than standard level term and refunds the premiums if the insured outlives the term. The extra premium funds the refund feature rather than a conventional savings account. It is still a term product with a level face amount and no permanent cash value accumulation.

Question 37Types of Life Insurance Policies

Under the increasing death benefit option (Option B) of a universal life policy, the death benefit payable equals

  1. the specified amount plus the accumulated cash value. Correct answer.
  2. the specified amount reduced by any outstanding policy loan.
  3. the cash value only.
  4. the specified amount minus the cash value.

Explanation

Option B pays the specified amount on top of the cash value, so the total benefit grows as cash value grows. The net amount at risk stays level, which means mortality charges remain higher and cash value grows more slowly than under Option A at the same premium. The owner typically selects Option B when seeking an increasing estate benefit.

Question 38Types of Life Insurance Policies

A life policy fails the 7-pay test and is classified as a modified endowment contract. What is the consequence?

  1. Distributions, including policy loans, are taxed as income to the extent of gain and may incur a 10% penalty before age 59½. Correct answer.
  2. The policy immediately loses tax deferral on its cash value growth.
  3. The death benefit becomes fully subject to income tax for the beneficiary.
  4. The owner must surrender the policy within 60 days of the reclassification.

Explanation

A MEC is still valid life insurance and its death benefit remains generally income tax free. The change is in the treatment of living distributions, which follow an income-first ordering rule and can trigger a 10% penalty before age 59½. The policy is not required to be surrendered and its internal growth continues to be tax deferred.

Question 39Types of Life Insurance Policies

Variable life insurance is regulated differently from whole life because

  1. variable life cash values are held in the insurer's general account.
  2. variable life is exempt from state insurance regulation.
  3. variable life policies may never guarantee a minimum death benefit.
  4. variable life is a security, so it must be registered and sold with a prospectus by representatives holding a securities license. Correct answer.

Explanation

Because cash values are invested in a separate account that functions like an investment company, variable life is both an insurance contract and a security. Insurers must register the contract and provide a prospectus, and producers need a securities license in addition to a state insurance license. A minimum death benefit is still guaranteed by the insurer.

Question 40Types of Life Insurance Policies

Graded premium whole life insurance provides for

  1. a premium that is level for five years and then drops to a lower permanent rate.
  2. premiums payable only in years when the insured has earned income.
  3. premiums that start below a level whole life rate, increase each year for a stated period, and then remain level for life. Correct answer.
  4. a death benefit that is graded downward as the insured grows older.

Explanation

Graded premium whole life, sometimes called step-rate whole life, begins with a premium lower than a standard whole life rate and raises it annually for a set number of years. After that step period the premium remains level for life and the coverage stays permanent. It is designed for younger buyers who expect rising earnings.

Question 41Life Insurance Policy Provisions, Options, and Riders

A life insurance policy contains an entire contract provision. What does this provision establish?

  1. The agent may change policy terms orally if the change favors the insured.
  2. The policy and the attached application form the complete agreement. Correct answer.
  3. The insurer may add new exclusions after issue without the owner's consent.
  4. The policyholder may amend the contract at any time by written notice.

Explanation

The entire contract clause states that the policy, together with the attached copy of the application, constitutes the whole agreement between the parties. No outside document or oral statement can add to or modify the contract, and only an officer of the insurer can change it in writing.

Question 42Life Insurance Policy Provisions, Options, and Riders

A premium is due January 1 but the policyowner does not pay until January 25. What is the status of the coverage during that period under the grace period provision?

  1. Coverage continued only if the owner notified the insurer in advance.
  2. Coverage lapsed on January 1 and must be reinstated.
  3. Coverage continued in force and the premium remains owed. Correct answer.
  4. Coverage continued at half of the face amount until payment.

Explanation

The grace period allows a premium to be paid after its due date while the policy stays fully in force. If the insured dies during the grace period, the insurer pays the death benefit but deducts any unpaid premium.

Question 43Life Insurance Policy Provisions, Options, and Riders

An insured dies four years after the policy is issued and the insurer discovers the insured understated a medical condition on the application. How must the claim be handled under the incontestability clause?

  1. The insurer may pay only if the misstatement was unintentional.
  2. The insurer must pay the full death benefit as stated in the policy. Correct answer.
  3. The insurer may rescind the policy and return the premiums paid.
  4. The insurer may reduce the benefit to the premiums paid plus interest.

Explanation

The incontestability clause prevents the insurer from denying a claim based on misstatements on the application after the policy has been in force for a stated period, commonly two years. Once that period passes, the full face amount must be paid.

Question 44Life Insurance Policy Provisions, Options, and Riders

A policyowner in Texas receives a newly issued individual life policy and decides to cancel it for a full premium refund. How long does the free look provision generally give the owner?

  1. 5 days after delivery
  2. 10 days after delivery Correct answer.
  3. 30 days after delivery
  4. 3 days after delivery

Explanation

The free look provision gives the policyowner a limited period after delivery to return the policy for a full refund of premium. Under Texas rules that period is generally 10 days for an individual life policy.

Question 45Life Insurance Policy Provisions, Options, and Riders

An insured takes his own life 18 months after policy issue, and the policy contains a standard two-year suicide clause. What does the insurer typically do?

  1. Pay the face amount minus the premiums that were paid.
  2. Pay the full face amount to the named beneficiary without reduction.
  3. Pay nothing and keep the premiums that were paid.
  4. Refund the premiums paid instead of paying the face amount. Correct answer.

Explanation

A suicide clause limits the insurer's liability to a return of premiums if the insured dies by suicide within the stated period, typically two years from issue. After the clause expires, a suicide death is treated like any other cause of death and the face amount is payable.

Question 46Life Insurance Policy Provisions, Options, and Riders

After the insured dies, the insurer learns that the insured's age was understated by five years on the application. The policy contains a misstatement of age provision. What must the insurer do?

  1. Deny the claim entirely because the application was inaccurate.
  2. Pay the amount the premium paid would have purchased at the correct age. Correct answer.
  3. Rescind the policy and return all premiums paid with interest.
  4. Pay the full face amount and bill the estate for the extra premium.

Explanation

The misstatement of age provision adjusts the benefit rather than voiding the policy. The insurer recalculates what the premium actually paid would have bought at the insured's true age and pays that adjusted amount.

Question 47Life Insurance Policy Provisions, Options, and Riders

A lapsed life policy may generally be reinstated within how many years of the lapse, provided the owner furnishes evidence of insurability and pays overdue premiums with interest?

  1. 1 year
  2. 5 years Correct answer.
  3. 10 years
  4. 3 years

Explanation

The reinstatement provision typically allows a lapsed policy to be restored within five years of lapse. Reinstatement requires proof of insurability and payment of all overdue premiums plus interest, and any policy loan or interest must also be repaid or reinstated.

Question 48Life Insurance Policy Provisions, Options, and Riders

A policyowner with an automatic premium loan provision on a whole life policy forgets to pay the premium. What does the insurer do?

  1. The insurer reduces the face amount to a smaller paid-up policy.
  2. The insurer extends coverage as term insurance for the remaining cash value.
  3. The insurer advances the premium as a loan against the cash value. Correct answer.
  4. The policy lapses immediately and the cash value is forfeited.

Explanation

The automatic premium loan provision lets the insurer borrow from the policy's cash value to pay an unpaid premium, keeping the policy in force. The loan plus interest reduces the cash value and any death benefit until it is repaid.

Question 49Life Insurance Policy Provisions, Options, and Riders

A policyowner borrows $10,000 against the cash value of a $100,000 whole life policy and dies without repaying it. What does the beneficiary receive?

  1. The full face amount, since the loan is forgiven at death.
  2. The cash value only, less the outstanding loan balance.
  3. The face amount minus the outstanding loan and interest. Correct answer.
  4. The face amount plus the amount of the outstanding loan.

Explanation

A policy loan is an advance from the insurer secured by the policy's cash value, and it is never forgiven. At death the insurer subtracts the unpaid loan balance and accrued interest from the death benefit before paying the beneficiary.

Question 50Life Insurance Policy Provisions, Options, and Riders

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

  1. Coverage continues for life at a smaller face amount. Correct answer.
  2. The cash value is paid out in installment payments.
  3. The policy stays in force while loans pay the premiums.
  4. Coverage continues at the original face amount for a limited term.

Explanation

Under reduced paid-up, the net cash value is used as a single premium to buy a permanent policy with a lower face amount. The new coverage stays in force for the insured's lifetime with no further premiums due.