Life Insurance: Provisions, Products, Beneficiaries, and Taxation
What the exam actually tests
Life questions cluster into policy provisions, product design, and beneficiary/tax treatment.
Provisions. The entire contract clause means the insurer cannot change the policy unilaterally and only specified officers may modify it. The incontestability clause lets the insurer rescind for material misrepresentation only during the first two years. The suicide clause likewise usually runs two years, after which the death benefit is paid. Know the grace period (commonly 30 or 31 days), reinstatement (evidence of insurability plus overdue premiums with interest), and misstatement of age or sex: the benefit is adjusted to what the premium would have purchased - the policy is not voided. Also know automatic premium loan, free look, and waiver of premium.
Products. Term (level, decreasing, increasing, annually renewable), whole life (level premium, guaranteed cash value), universal life (flexible premium, current interest, cost of insurance), variable life (separate account, prospectus, securities registration), and indexed UL. Master nonforfeiture options (cash surrender, reduced paid-up, extended term) and dividend options.
Beneficiaries and tax. Primary versus contingent, revocable versus irrevocable, per stirpes versus per capita, common disaster and simultaneous death. Death proceeds are generally income-tax free; inside buildup is tax-deferred; dividends are a return of premium; loans become income only on lapse or surrender; a MEC loses favorable treatment.
Worked example. A $500,000 policy carries an $8,000 unpaid loan plus $300 accrued interest at death. Payable = $500,000 − $8,300 = $491,700.
Rule of thumb: when a stem mentions "two years," suspect incontestability or the suicide clause; when it mentions a loan, subtract it from the face amount.