WI Life & Health common mistakes
WI Life & Health · Understand the traps and how to avoid them.
Skips the replacement notice/compare-existing-coverage step when the new contract is a different product type - e.g., an annuity funded by surrendering a life policy, or a life policy funded by liquidating an annuity - treating 'replacement' as life-for-life only.
The word 'replacement' gets mentally filed under permanent life policies, so a cross-product sale feels like a new sale rather than a replacement of existing coverage.
What to do instead
Define replacement as any transaction where existing life insurance or annuity coverage is lapsed, surrendered, forfeited, or reduced to fund a new contract, regardless of product type. For every such stem, expect the notice regarding replacement to be signed by applicant and producer, delivered at or before application, list all contracts being replaced, and accompany the application to the replacing insurer.
Answers that insurable interest must still exist at the time of the insured's death, and eliminates or endorses options on that basis.
Confuses the underwriting gate (insurable interest at application) with the claims gate (a valid policy and named beneficiary at death), because both stages involve 'the insured.'
What to do instead
Anchor the timing rule: insurable interest must exist at the time of application and policy issue only; it is not retested at death. If a stem says the insured and beneficiary later divorced, became business competitors, or the business relationship ended, that does not void the claim - the policy remains payable.
Picks the 'extended term' nonforfeiture option in a stem where the client wants to stop paying premiums and keep protection in force for the rest of their life at the full face amount.
Both 'reduced paid-up' and 'extended term' let the client stop paying premiums, so test takers match on 'stop paying' and never check the duration/face amount conditions in the stem.
What to do instead
Use a two-question decision rule: Does the client keep the same face amount? (extended term - but only for a limited term, no cash value) or keep lifetime coverage? (reduced paid-up - smaller face, no further premiums). Also keep nonforfeiture options separate from dividend options: dividends are paid on participating policies and are not a nonforfeiture value.
Chooses a disability income rider when the stem is about premiums being waived and refunded after a disability, or chooses waiver of premium when the stem asks for a monthly income benefit.
Both riders are triggered by the same trigger word - 'disability' - and both are described in policy language as providing 'benefits,' so the distinction between waiving an outflow and paying an inflow is lost.
What to do instead
Memorize the effect, not the name: waiver of premium keeps the policy in force by paying the premiums to the insurer (typically after a 6-month waiting period, with premiums paid during the waiting period refunded); a disability income rider pays cash to the insured. If the stem mentions the insurer paying premiums, it is waiver; if it mentions income replacing wages, it is the DI rider.
Treats every annuity payout as fully taxable, or assumes withdrawals from a nonqualified annuity are tax-free until the cost basis is recovered - i.e., no exclusion ratio on annuitized payments and no gain-first treatment of withdrawals.
Pulls IRA/qualified-plan rules (all dollars taxable, no basis recovery) into the nonqualified annuity question, or mixes accumulation-phase withdrawals with annuitization-phase payments.
What to do instead
Split the two phases. Before annuitization, nonqualified withdrawals are taxed gain-first (LIFO) with a 10% penalty on the gain before age 59½ unless an exception applies. After annuitization, apply the exclusion ratio: each payment is part return of basis (tax-free) and part gain (taxable). Qualified plans have no basis unless after-tax money was contributed. Also verify the contract type - a variable annuity's separate account is not the insurer's general account.
Treats 'guaranteed renewable' as meaning the premium can never increase, or treats 'noncancellable' as merely a stronger word for 'guaranteed renewable' and selects them interchangeably.
The labels sound like tiers of the same promise, and all three common renewal clauses are usually learned as a list rather than as three separate sets of insurer rights.
What to do instead
Learn the three rights the insurer may or may not exercise - cancel, raise premium, change benefits. Noncancellable: none of the three (rate and benefits locked). Guaranteed renewable: cannot cancel or change benefits, but can raise premiums by class. Conditionally renewable: can decline renewal only for stated reasons. Read the stem for who can do what rather than for the label.
Answers that individual disability income benefits are taxable, or that group long-term disability benefits are tax-free, without checking who paid the premium.
Default assumptions - 'disability benefits are income, so they must be taxed' or 'insurance benefits are always tax-free' - get applied without running the premium-payer test.
What to do instead
Run the premium-payer test on every DI benefit question: employer-paid premiums (deductible to the employer) make the benefits taxable income to the employee; premiums paid by the individual with after-tax dollars make benefits tax-free. For a split-premium plan, tax only the portion attributable to employer-paid premium. Group LTD is therefore usually taxable to the employee.
Applies federal COBRA rules to a small employer, or assumes 18 months is the continuation period for every qualifying event and every family member.
COBRA is taught as a single block of numbers, so the employer-size threshold and the event-specific durations get compressed into one fact.
What to do instead
Check two facts before choosing a duration: (1) employer size - federal COBRA applies to group health plans of employers with 20 or more employees in the prior year; smaller employers fall under Wisconsin's state continuation requirements; (2) the qualifying event and who is continuing - termination or reduced hours, disability, and dependent events such as divorce, death, or Medicare eligibility each carry different maximum periods.
Says a modified endowment contract loses its death benefit or that policy loans from a MEC are tax-free, instead of applying the 7-pay test and the MEC distribution ordering rules.
'MEC' reads like a failed or disqualified policy, so candidates assume the contract is invalidated rather than merely losing favorable tax treatment.
What to do instead
State it precisely: a MEC is a life policy that fails the 7-pay test (or is received in exchange for a MEC). It stays valid, the death benefit remains income-tax-free to the beneficiary, but lifetime distributions - including loans - are taxed gain-first and carry a 10% penalty before age 59½ unless an exception applies. Read MEC stems for 'overfunded' or 'single large premium' language.
Confuses a cross-purchase buy-sell with an entity-purchase (stock redemption) plan when counting policies, naming the beneficiary, or describing the surviving owners' basis in the acquired shares.
Both plans accomplish the same business goal and both involve life insurance on the owners, so the distinguishing mechanic - who owns the policy and who receives the proceeds - is skipped.
What to do instead
Draw the ownership arrow: in an entity purchase the business owns the policies and is the beneficiary, and the business buys back the shares (survivors get no basis step-up from the purchase itself); in a cross-purchase each owner owns policies on the other owners, and with N owners you need N×(N−1) policies. Identify the policy owner in the stem first - everything else follows.