Life-Only Insurance Practice Exam.
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1. A universal life policy has a $500,000 specified death benefit under the level option and an account value of $120,000. What is the net amount at risk the insurer charges for?
- A. $380,000, the specified amount less the account value
- B. $120,000, the account value alone
- C. $500,000, the full specified amount
- D. $620,000, the specified amount plus the account value
Show answer & explanation
Answer: A
Under the level option the insurer pays the specified amount, of which the account value is already the policyowner's own money, so the insurer's true exposure is 500,000 minus 120,000 equals 380,000. Cost of insurance charges apply to that net amount at risk, which is why those charges fall over time as the account value builds under a level design and stay flat under an increasing design.2. A survivorship life policy insures two spouses. When is the death benefit paid, and why is this structure commonly used?
- A. On the second death, which lowers the premium relative to two single policies and aligns the payout with when estate settlement costs fall due
- B. On the first death, providing immediate income replacement to the survivor
- C. Half on each death, split between two beneficiaries
- D. On either death, at the beneficiary's election
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Answer: A
Second-to-die coverage pays only when both insureds have died, so the insurer's expected payout is deferred and the premium is lower than insuring either life alone. The timing suits estate liquidity planning, where the obligation typically arises at the second death. First-to-die is the separate product that pays on the earlier death, which suits business buy-sell and income replacement needs instead.3. A universal life policy is issued with Option B, the increasing death benefit. How does the death benefit behave?
- A. The beneficiary receives only the specified amount, with the account value absorbed
- B. The beneficiary receives the specified amount plus the accumulated account value, so the benefit grows as the account value grows
- C. The death benefit increases by a fixed percentage each year regardless of account value
- D. The death benefit decreases as the account value grows
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Answer: B
The increasing death benefit design pays the specified amount plus the account value, so the net amount at risk stays constant and the total benefit rises with the account. The level design pays only the specified amount, meaning the net amount at risk shrinks as the account value grows, which makes it cheaper in cost of insurance charges.4. What separates variable universal life from fixed universal life?
- A. Variable universal life may be sold with a life insurance licence alone
- B. Variable universal life has no death benefit component
- C. Variable universal life guarantees a minimum credited interest rate on all cash value
- D. Cash value is allocated among separate account subaccounts with investment risk borne by the owner, requiring a securities registration to sell
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Answer: D
Variable products place cash value in separate account subaccounts where the owner bears investment risk and no minimum rate is guaranteed, which is precisely why they are securities requiring both a life licence and a securities registration. The general account guarantees found in fixed universal life do not apply to separate account values.5. An indexed universal life policy credits interest based on an index with a cap of 10 percent, a floor of 0 percent and a participation rate of 80 percent. The index returns 15 percent. What is credited?
- A. 8 percent, because the cap applies before the participation rate
- B. 10 percent, because 80 percent of 15 percent is 12 percent, which the cap reduces to 10 percent
- C. 15 percent, the full index return
- D. 12 percent, because the participation rate applies and the cap does not
Show answer & explanation
Answer: B
The participation rate applies first, giving 0.80 times 15 percent equals 12 percent, and the cap then limits the credit to 10 percent. The floor protects against a negative index year by crediting zero rather than a loss, which is the trade the policyholder accepts in exchange for the cap.6. A policyowner surrenders a whole life policy with a $60,000 cash surrender value after paying $44,000 in total premiums. What is the income tax consequence?
- A. $16,000 is taxable as ordinary income, being the excess of the amount received over the cost basis
- B. The full $60,000 is taxable
- C. $16,000 is taxable as a long-term capital gain
- D. Nothing is taxable, since life insurance proceeds are tax free
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Answer: A
On surrender the gain equals the amount received minus the cost basis, which is generally total premiums paid, so 60,000 minus 44,000 equals 16,000 of ordinary income. The tax-free treatment applies to death proceeds paid to a beneficiary, not to a living surrender, and the gain is ordinary rather than capital.7. A life insurance policy fails the seven-pay test and becomes a modified endowment contract. What changes?
- A. The policy loses its cash value entirely
- B. Premiums become tax deductible
- C. The death benefit becomes fully taxable to the beneficiary
- D. Distributions and loans are taxed on a last-in first-out basis with a possible penalty before age 59 and a half, though the death benefit remains income tax free
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Answer: D
MEC status changes the taxation of living distributions from first-in first-out cost recovery to last-in first-out gain-first treatment, with an additional penalty on the taxable portion before age 59 and a half, and policy loans are treated as distributions. The income tax exclusion for death proceeds is unaffected, and MEC status once acquired cannot be reversed.8. A policyowner elects the extended term nonforfeiture option on a lapsing whole life policy. What results?
- A. The cash value is paid out and coverage ends
- B. Premiums continue at a reduced rate for the original face amount
- C. A reduced face amount continues for the insured's lifetime
- D. The full face amount continues as term insurance for a period determined by the cash value, with no further premiums
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Answer: D
Extended term applies the net cash value as a single premium to buy term insurance at the full face amount, and the duration is whatever that premium purchases. Reduced paid-up is the alternative that keeps coverage for life at a smaller face amount, and it is typically the automatic option only where the policy so provides.9. A participating whole life policyowner elects the paid-up additions dividend option. What does the dividend purchase?
- A. An increase in the policy's guaranteed interest rate
- B. Small single-premium whole life policies at the insured's attained age, adding both death benefit and cash value with no evidence of insurability
- C. A refund of premium paid in cash
- D. One-year term insurance equal to the cash value
Show answer & explanation
Answer: B
Paid-up additions buy fully paid single-premium whole life at attained age, so each addition brings its own cash value and dividend eligibility, compounding the policy over time. The one-year term option, sometimes called the fifth dividend option, is the separate choice that buys term equal to the cash value.10. A policy's incontestable clause has a two-year period. The insured dies in year three, and the insurer discovers a material misrepresentation on the application. What can the insurer do?
- A. It may deny the claim because misrepresentation voids coverage permanently
- B. It may rescind the policy at any time for any misrepresentation
- C. It may reduce the death benefit proportionally
- D. It must pay the claim, unless the case falls within a recognized exception such as fraud where state law permits
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Answer: D
After the contestable period expires the insurer generally cannot void the policy for misrepresentation, which is the clause's purpose: it forces underwriting scrutiny during a defined window rather than at claim time. The misstatement of age or sex provision is different, adjusting the benefit to what the premium would have purchased at the correct age without contesting the policy.11. A life policy contains a suicide clause with a two-year period and the insured dies by suicide in month eighteen. What does the insurer pay?
- A. The cash value only
- B. The full face amount
- C. Nothing at all
- D. A refund of premiums paid, rather than the face amount
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Answer: D
Within the suicide period the insurer's liability is limited to a return of premiums, which protects against a policy purchased in contemplation of suicide without leaving the estate with nothing. After the period expires the death benefit is paid in full, and the suicide clause runs independently of the incontestable clause even where both are two years.12. What does a waiver of premium rider provide?
- A. The policyowner may skip premiums at will without consequence
- B. The insurer pays the premiums while the insured is totally disabled, after a waiting period, keeping the policy and its values fully in force
- C. Premiums are waived at retirement regardless of health
- D. The insurer refunds all premiums paid if the insured survives the term
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Answer: B
Waiver of premium responds to total disability, typically after a waiting period of several months, and the insurer pays the premium so cash value accumulation and the death benefit continue undisturbed. It is not a return-of-premium feature and it is not triggered by retirement, and definitions of total disability vary between own-occupation and any-occupation standards.13. A guaranteed insurability rider is attached to a life policy. What does it allow?
- A. The purchase of additional coverage at specified ages or events without evidence of insurability
- B. A guarantee that the death benefit will keep pace with inflation automatically
- C. Coverage for the insured's entire family under one policy
- D. A guarantee that premiums will never increase
Show answer & explanation
Answer: A
The rider sells the right to buy more insurance later at standard rates regardless of health, exercisable at listed option dates such as specified ages, marriage or the birth of a child. It addresses future insurability risk rather than premium or inflation risk, and the new coverage is issued at the then-attained age rate.14. An accelerated death benefit rider is exercised by a terminally ill insured. What is the general effect on the policy?
- A. The policy terminates with no residual benefit in every case
- B. The advance is always fully taxable as ordinary income
- C. A portion of the death benefit is advanced to the insured, reducing what the beneficiary later receives, and the advance is generally received income tax free when the statutory conditions are met
- D. The full death benefit is paid and the policy remains in force for the beneficiary
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Answer: C
An acceleration advances part of the death benefit during life, and the beneficiary receives the remainder reduced by what was advanced plus any charges. Amounts paid to a terminally ill insured meeting the statutory definition receive tax-free treatment, and chronically ill acceleration is subject to per-diem limits.15. A settlement option is elected under which the insurer retains the proceeds and pays only the interest earned to the beneficiary. Which option is this?
- A. Interest only, with the principal remaining with the insurer until a later event
- B. Lump sum, paying the entire amount at once
- C. Fixed period, paying principal and interest over a set number of years
- D. Life income, paying for the beneficiary's lifetime
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Answer: A
The interest-only option leaves the principal intact and pays earnings, which is useful where a beneficiary needs income now but the principal is intended for a later purpose. Fixed period and fixed amount both liquidate the principal, and life income options add mortality risk, paying for life with variations such as period certain or refund features.16. A beneficiary receives a $400,000 death benefit under a fixed period settlement option over ten years, receiving $46,000 per year. How is each payment taxed?
- A. $6,000 is tax free and $40,000 is taxable
- B. The full $46,000 is tax free as a life insurance death benefit
- C. The full $46,000 is taxable as ordinary income
- D. $40,000 is the tax-free return of the death benefit and $6,000 is taxable interest
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Answer: D
The death benefit portion is excluded from income, so 400,000 divided over ten years gives 40,000 per year tax free, and the remaining 6,000 represents interest the insurer credited while holding the proceeds, which is taxable. Electing a settlement option therefore converts part of an otherwise tax-free benefit into taxable interest income.17. A deferred annuity is in the accumulation phase and the owner takes a partial withdrawal. How is it taxed?
- A. Entirely tax free until the contract is annuitized
- B. As a long-term capital gain
- C. Last-in first-out, so earnings come out first and are fully taxable, with a penalty possible before age 59 and a half
- D. First-in first-out, so the cost basis is recovered before any tax applies
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Answer: C
Non-qualified deferred annuities use LIFO for withdrawals, so gain is distributed and taxed first as ordinary income, and a ten percent penalty may apply before age 59 and a half. Once annuitized, the exclusion ratio applies instead, spreading the basis recovery across the payment stream.18. An annuitant invested $120,000 in a non-qualified annuity and annuitizes for a total expected return of $200,000. What is the exclusion ratio?
- A. 100 percent, since the entire payment recovers basis first
- B. 60 percent, so 60 percent of each payment is a tax-free return of basis
- C. 40 percent, so 40 percent of each payment is tax free
- D. 0 percent, since annuity payments are fully taxable
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Answer: B
The exclusion ratio is the investment in the contract divided by expected return: 120,000 divided by 200,000 equals 0.60, so 60 percent of each payment is excluded and 40 percent is taxable. Once the full basis has been recovered, subsequent payments to a surviving annuitant become fully taxable.19. Which annuity payout option produces the largest periodic payment for a given premium?
- A. Straight life, because payments cease at death with no guarantee to a beneficiary
- B. Joint and survivor
- C. Life with ten-year period certain
- D. Life with refund
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Answer: A
Straight life pays the most because the insurer bears no obligation after the annuitant's death, so nothing is reserved for a guarantee. Every added guarantee, whether a period certain, a refund feature or a second life, reduces the payment, and joint and survivor produces the smallest because it covers two lives.20. What distinguishes a fixed annuity from a variable annuity during accumulation?
- A. A fixed annuity has no minimum guaranteed rate
- B. A variable annuity guarantees principal against market loss
- C. A fixed annuity credits a guaranteed minimum rate from the general account, while a variable annuity's value depends on separate account subaccount performance
- D. Only fixed annuities may be purchased with a single premium
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Answer: C
The fixed annuity is a general account obligation carrying a guaranteed minimum rate, so the insurer bears investment risk, while a variable annuity's accumulation units fluctuate with subaccount performance and the owner bears that risk. That risk transfer is why variable annuities are securities requiring a registration in addition to the insurance licence.21. An immediate annuity is purchased. When do payments begin?
- A. Within one payment interval of purchase, so a monthly contract begins paying about a month later
- B. Only after a five-year accumulation period
- C. Exactly at the contract anniversary one year later
- D. At the annuitant's normal retirement age regardless of purchase date
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Answer: A
An immediate annuity is funded with a single premium and begins distributing within one payment period, which is what distinguishes it from a deferred contract that accumulates first. Because there is no accumulation phase, an immediate annuity is a liquidation vehicle rather than a savings vehicle, and it is generally irrevocable once annuitized.22. A producer replaces an existing life policy with a new one from a different insurer. What is generally required?
- A. Approval from the state insurance department before the new policy is issued
- B. Surrender of the old policy before the new application is signed
- C. Nothing beyond the new application, since replacement is the applicant's decision
- D. Delivery of a replacement notice to the applicant and notification of the existing insurer, which is given an opportunity to conserve the business
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Answer: D
Replacement regulation requires disclosure to the applicant and notice to the existing insurer, which may then present a conservation effort, because a replacement restarts contestable and suicide periods and may cost more at the older attained age. Surrendering the old policy before the new one is issued exposes the applicant to a coverage gap and is the opposite of the required sequence.23. A producer tells a prospect that a competing insurer is financially unstable, without any basis. Which unfair trade practice is this?
- A. Twisting, which is misrepresentation inducing a replacement
- B. Defamation, which is making a false or maliciously critical statement about an insurer's financial condition
- C. Rebating, which is giving value not specified in the contract
- D. Coercion, which is forcing the purchase of insurance
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Answer: B
Defamation targets the insurer's reputation through false statements about its financial condition. Twisting also involves misrepresentation but is defined by the outcome of inducing a policyholder to lapse or replace existing coverage, and churning is the version where the replacement stays within the same insurer.24. A producer binds coverage the insurer had not authorized them to bind, and the insurer had previously allowed the practice without objection. On what basis might the insurer still be bound?
- A. No basis, since an unauthorized act never binds the principal
- B. Implied authority, since binding is incidental to any producer's role
- C. Express authority, since the agency contract granted it in writing
- D. Apparent authority, arising from the insurer's conduct leading a reasonable applicant to believe the producer held that power
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Answer: D
Apparent authority arises from the principal's own conduct rather than from any grant to the agent, so an insurer that tolerates a practice can be held to it against a third party who reasonably relied. Express authority is what the agency contract states and implied authority is what is necessary to carry it out, and neither covers a power the insurer withheld.25. An applicant signs an application and pays the initial premium, receiving a conditional receipt. When does coverage begin?
- A. Never, since a conditional receipt creates no coverage
- B. Only when the policy is physically delivered
- C. Immediately and unconditionally upon payment
- D. Retroactively to the receipt date or medical exam date if the applicant proves insurable as applied for under the insurer's standards
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Answer: D
A conditional receipt creates coverage contingent on the applicant meeting the insurer's underwriting standards, and where that condition is satisfied coverage relates back to the receipt or exam date, so a death during underwriting is covered. A binding receipt differs, providing coverage for a stated period regardless of the eventual underwriting outcome.26. Which statement accurately describes a key feature of universal life insurance?
- A. The cash value is invested in separate account subaccounts chosen by the owner
- B. The premium is fixed and can never be changed by the policyowner
- C. The policy builds no cash value of any kind
- D. The policyowner may adjust premiums and the death benefit within limits
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Answer: D
Universal life is flexible-premium permanent insurance that separates the mortality, expense, and interest components, allowing the policyowner to adjust premiums and death benefits within limits. Its cash value earns a current interest rate subject to a contractual guaranteed minimum; separate account subaccounts describe variable life, not universal life.27. What is the fee required to sit for this examination?
- A. $49
- B. $29
- C. $39
- D. $59
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Answer: C
The published exam fee is $39.28. In insurance, the principle that requires an insured to have a legitimate financial stake in the subject of the policy — such that they would suffer a genuine loss if the covered event occurred — is known as what?
- A. Subrogation
- B. Insurable interest
- C. Indemnity
- D. Utmost good faith
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Answer: B
Insurable interest is the requirement that the policyowner stand to experience a real financial loss from the insured event; without it, a contract resembles a wager rather than insurance.29. An insurance contract is described as one in which the values exchanged by the two parties are unequal — the insured pays a comparatively small premium while the insurer may owe a much larger benefit. This characteristic identifies the contract as which type?
- A. Bilateral
- B. Conditional
- C. Aleatory
- D. Unilateral
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Answer: C
An aleatory contract is one in which the amounts exchanged may be unequal and depend on an uncertain future event, which describes the premium-versus-benefit relationship in insurance.30. The concept describing the potential for loss — the underlying possibility that a covered event might occur — is best labeled as what?
- A. Exposure
- B. Hazard
- C. Risk
- D. Peril
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Answer: C
Risk refers to the uncertainty or possibility of loss. A peril is the actual cause of loss, and a hazard is a condition that increases the chance or severity of a loss.31. Which term identifies the actual cause of a loss, such as fire, windstorm, or theft?
- A. Hazard
- B. Loss
- C. Peril
- D. Exposure
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Answer: C
A peril is the specific cause of a loss. Fire, windstorm, and theft are all examples of perils against which insurance may provide protection.32. When registering to sit for the examination, what fee must a candidate pay?
- A. $29
- B. $49
- C. $39
- D. $59
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Answer: C
The stated exam fee is $39, so choice B is correct. The remaining amounts do not match the published fee.33. The doctrine of indemnity is best understood as serving which purpose?
- A. To guarantee replacement with brand-new property regardless of prior condition
- B. To allow the insured to profit from a covered loss
- C. To transfer the insurer's obligations to a reinsurer
- D. To restore the insured to approximately the same financial position held before the loss, without gain
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Answer: D
Indemnity aims to make the insured whole — restoring them to the financial position occupied immediately before the loss — while preventing them from profiting from the event.34. A moral hazard differs from a physical hazard primarily in that a moral hazard arises from:
- A. An individual's characteristics or tendencies, such as a dishonest intent to cause or exaggerate a loss
- B. The statutory language of the policy contract
- C. An act of nature beyond human control
- D. A tangible condition of the property, such as faulty wiring
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Answer: A
A moral hazard stems from a person's character or intentions — for example, a dishonest inclination to file a false claim — whereas a physical hazard is a tangible condition that increases the likelihood of loss.35. The principle of utmost good faith in an insurance contract imposes which primary expectation on the parties?
- A. That premiums must always be paid annually in a single installment
- B. That both parties deal honestly and disclose all material facts relevant to the risk
- C. That only the insurer must disclose all material facts
- D. That the insured waives the right to contest any claim denial
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Answer: B
Utmost good faith requires both the insurer and the applicant to act honestly and to disclose all material information affecting the risk, so that each party can rely on the representations of the other.36. Priya forgot to pay her life insurance premium on its due date. Which policy provision keeps her coverage in force for a limited time while she catches up?
- A. The automatic premium loan
- B. The reinstatement provision
- C. The incontestability clause
- D. The grace period
Show answer & explanation
Answer: D
The grace period gives the policyowner typically 30 or 31 days after a missed premium during which coverage stays in force. The incontestability clause instead limits the insurer's ability to contest the policy after two years.37. Three years after issuing a policy, an insurer discovers the applicant concealed a medical condition on the application. The premiums are fully paid. What is the insurer's position under the incontestability clause?
- A. It may void the policy because concealment is never protected
- B. It may reduce the death benefit proportionally
- C. It cannot contest the policy, since it has been in force beyond two years
- D. It may contest only if the concealment was intentional
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Answer: C
After the policy has been in force for two years, the insurer cannot contest it for misstatements or concealment; the only remaining exception is nonpayment of premium, which does not apply here since premiums are paid. A proportional benefit adjustment applies to misstatement of age or sex, not concealment.38. A policyowner names his spouse as primary beneficiary and his daughter as contingent beneficiary. Under what circumstance would the daughter receive the policy proceeds?
- A. Only if the spouse predeceases the insured
- B. Automatically, splitting the proceeds equally with the spouse
- C. Whenever the daughter requests payment from the insurer
- D. Only if the proceeds are first paid to the insured's estate
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Answer: A
A primary beneficiary is first in line; a contingent beneficiary receives proceeds only if the primary predeceases the insured. Payment to the estate occurs only when no beneficiary survives at all.39. Three years after issuing a policy, an insurer discovers the insured materially concealed a health condition on the application. What is the insurer's position under the incontestability clause?
- A. It may void the policy because concealment was material
- B. It may contest the policy only if it refunds all premiums
- C. It may reduce the death benefit proportionally
- D. It cannot contest the policy, because two years have passed
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Answer: D
The incontestability clause bars the insurer from contesting the policy for misstatements or concealment once it has been in force for two years, with the exception of nonpayment of premium. At three years, the contestable period has expired.40. An insured dies by suicide 14 months after his life policy is issued. How will the insurer respond?
- A. Pay the full death benefit to the beneficiary
- B. Pay the cash value only
- C. Deny all liability, keeping the premiums
- D. Refund the premiums paid, but not the death benefit
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Answer: D
The suicide clause excludes death by suicide during the first two years of the policy and limits the insurer's liability to a refund of premiums paid. Since 14 months is within the two-year exclusion period, only premiums are returned.41. A whole life policyowner can no longer afford premiums but does not want to lose the value she has built up. Which set of options guarantees she receives her accumulated cash value?
- A. Nonforfeiture options
- B. Renewability options
- C. Settlement options
- D. Dividend options
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Answer: A
Nonforfeiture options guarantee the policyowner the accumulated cash value if the policy lapses or is surrendered, through cash surrender, reduced paid-up insurance, or extended term insurance.42. A policyowner becomes totally disabled and can no longer work. Which rider keeps his life insurance in force without further out-of-pocket premium payments?
- A. Guaranteed insurability rider
- B. Accelerated death benefit rider
- C. Return of premium rider
- D. Waiver of premium rider
Show answer & explanation
Answer: D
The waiver of premium rider waives premiums if the insured becomes totally disabled, keeping the policy in force. The accelerated death benefit rider instead advances part of the death benefit upon terminal illness, and the guaranteed insurability rider permits purchasing additional coverage without evidence of insurability.43. A policyowner wants to replace his current beneficiary with his new spouse, but the insurer tells him he needs the existing beneficiary's written consent first. What does this indicate about the current designation?
- A. The beneficiary is the insured's estate
- B. The beneficiary is a contingent beneficiary
- C. The policy is still within its contestable period
- D. The beneficiary was designated irrevocably
Show answer & explanation
Answer: D
A revocable beneficiary can be changed at any time by the policyowner, but an irrevocable beneficiary must consent to any change. The consent requirement therefore shows the current beneficiary was named irrevocably.44. An insured named his sister as primary beneficiary and his brother as contingent beneficiary. Both siblings die before the insured, and no other beneficiary is named. When the insured later dies, the policy proceeds are paid to:
- A. The sister's heirs
- B. The state's unclaimed property fund
- C. The insured's estate
- D. The brother's heirs
Show answer & explanation
Answer: C
A contingent beneficiary receives proceeds only if the primary predeceases the insured — but here the contingent also predeceased the insured. When no beneficiary survives the insured, the proceeds are paid to the insured's estate.45. After an insured's death, the insurer learns the insured's age was understated on the application. Under the misstatement of age provision, how is the claim handled?
- A. The death benefit is adjusted to the amount the premium paid would have purchased at the insured's correct age.
- B. The policy is retroactively voided and premiums are refunded.
- C. The full face amount is paid, and the beneficiary is billed for back premiums.
- D. The claim is denied entirely.
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Answer: A
The misstatement of age provision does not void the policy or deny the claim; it adjusts the death benefit to what the premium actually paid would have purchased at the correct age.46. During underwriting, an insurer orders an investigative consumer report on an applicant. Which obligation does the Fair Credit Reporting Act impose on the insurer?
- A. It must obtain the applicant's medical records directly from every treating physician.
- B. It must guarantee the applicant a preferred risk classification.
- C. It must destroy the report within 30 days of the underwriting decision.
- D. It must notify the applicant, who has the right to know the nature of the information collected.
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Answer: D
Under the Fair Credit Reporting Act, an insurer that obtains a consumer or investigative report must notify the applicant, and the applicant has the right to know the nature of the information collected.47. All of the following are nonforfeiture options that guarantee a policyowner the accumulated cash value EXCEPT:
- A. Extended term insurance
- B. Reduced paid-up insurance
- C. Cash surrender
- D. Waiver of premium
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Answer: D
The nonforfeiture options are cash surrender, reduced paid-up insurance, and extended term. Waiver of premium is a rider that waives premiums if the insured becomes totally disabled — it is not a nonforfeiture option.48. A homeowner wants life insurance whose death benefit shrinks over the years to match the declining balance of her 30-year home loan. Which policy design best fits this need?
- A. Level term insurance
- B. Universal life with a level death benefit
- C. Increasing whole life
- D. Decreasing term insurance
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Answer: D
Decreasing term reduces the death benefit over time and is often used to cover a mortgage, making it a natural match for a loan balance that declines as it is paid down.49. Under a traditional whole life policy, what happens to the cash value when the contract reaches its maturity date?
- A. It is reduced to the sum of premiums paid
- B. It equals the policy's face amount
- C. It converts to an annuity automatically
- D. It is forfeited to the insurer
Show answer & explanation
Answer: B
In whole life insurance, the cash value grows on a guaranteed fixed schedule and equals the face amount at maturity, which is typically age 100 or 121.50. An insured misses the premium due date on her individual life insurance policy. Under the required grace period provision, which statement is accurate?
- A. Coverage remains in force for a stated period, typically 30 or 31 days, after the missed premium.
- B. The policy lapses at midnight on the premium due date.
- C. The death benefit is permanently reduced by the amount of the missed premium.
- D. The insurer must refund all premiums previously paid.
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Answer: A
The grace period provision keeps coverage in force for a stated period after a missed premium, typically 30 or 31 days, so the policy does not lapse the moment a payment is late.51. In life insurance, at what point must insurable interest exist between the policyowner and the insured?
- A. Continuously throughout the life of the policy
- B. At the inception of the policy only
- C. At the time of the insured's death only
- D. Both at inception and at the time of loss
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Answer: B
In life insurance, insurable interest must exist only at the inception of the policy, not at the time of the loss. A person is also presumed to have unlimited insurable interest in their own life.52. When must insurable interest exist for a life insurance contract to be validly issued and enforced?
- A. Continuously, verified at every policy anniversary.
- B. Only at the inception of the policy.
- C. Both at inception and at the time of loss.
- D. Only at the time of the insured's death.
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Answer: B
In life insurance, insurable interest must exist only when the policy is issued — at inception — not at the time of the loss. This differs from the beneficiary's position at claim time, which does not require insurable interest.53. A policyowner named his sister as irrevocable beneficiary. He now wishes to name his new spouse instead. What does the irrevocable designation require?
- A. The change is prohibited under all circumstances.
- B. The insurer must approve the change through reunderwriting.
- C. Nothing — the owner may change any beneficiary at will.
- D. The sister must consent to the change.
Show answer & explanation
Answer: D
A revocable beneficiary can be changed at any time by the owner, but an irrevocable beneficiary must consent before being replaced. The change is possible, but only with the sister's consent.54. Marcus purchases a policy that will pay a death benefit only if he dies within the next 20 years. The policy accumulates no savings element. What type of life insurance did Marcus buy?
- A. Term life insurance
- B. Variable life insurance
- C. Whole life insurance
- D. Universal life insurance
Show answer & explanation
Answer: A
Term insurance provides protection for a specified period, pays a death benefit only if the insured dies within that term, and builds no cash value. Whole life and universal life are permanent forms that build cash value, and variable life invests cash value in separate accounts.55. An agent holds only a state life insurance license. Why can't she sell variable life policies?
- A. Variable life is a security, so its sale also requires FINRA registration
- B. Variable life requires a separate property and casualty license
- C. Variable life may be sold only by the insurer's home office
- D. Variable life may not be sold by individual producers at all
Show answer & explanation
Answer: A
Because variable life is a security, its sale requires a FINRA registration in addition to a life license. In variable life, cash value is invested in separate account subaccounts and the policyowner bears the investment risk.56. A retiree worries less about dying too soon and more about running out of money during a long retirement. Which product is specifically designed to address that concern, and how?
- A. An annuity, by liquidating a principal sum into an income stream
- B. Major medical insurance, by covering hospital and surgical expenses
- C. Disability income insurance, by replacing lost earnings after an elimination period
- D. Term life insurance, by paying a death benefit within a set period
Show answer & explanation
Answer: A
An annuity liquidates a principal sum into a stream of income and protects against outliving one's assets — the mathematical opposite of life insurance, which protects against dying too soon. The other products address death protection, medical expenses, and lost earnings from disability, not longevity risk.57. An insured misses her premium due date but dies 20 days later without having paid. Which policy provision most likely allows her beneficiary to still collect the death benefit?
- A. The reinstatement provision
- B. The automatic premium loan provision
- C. The grace period provision
- D. The incontestability clause
Show answer & explanation
Answer: C
The grace period gives the policyowner typically 30 or 31 days after a missed premium during which coverage remains in force. Because the insured died only 20 days after the missed payment, death occurred within the grace period, so the claim is payable (usually minus the overdue premium).58. After an insured's death, the insurer learns the application understated his age. Rather than denying the claim, the insurer will:
- A. Void the policy and refund premiums
- B. Pay the face amount as written, since the policy has matured
- C. Adjust the death benefit to what the premium paid would have purchased at the correct age
- D. Bill the estate for the underpaid premiums before paying anything
Show answer & explanation
Answer: C
Under the misstatement of age provision, a misstated age or sex does not void the policy; instead, the death benefit is adjusted to the amount the premium actually paid would have purchased at the insured's correct age.59. Which of the following is NOT one of the standard nonforfeiture options in a whole life policy?
- A. Cash surrender
- B. Guaranteed insurability
- C. Reduced paid-up insurance
- D. Extended term insurance
Show answer & explanation
Answer: B
The three nonforfeiture options are cash surrender, reduced paid-up insurance, and extended term insurance. Guaranteed insurability is a rider that allows the insured to purchase additional coverage at set intervals without evidence of insurability — it is not a nonforfeiture option.60. An insured dies, and both the primary and contingent beneficiaries predeceased her with no other beneficiary named. To whom does the insurer pay the policy proceeds?
- A. The state's unclaimed property fund immediately.
- B. The insured's estate.
- C. The insurer retains the proceeds.
- D. The insured's closest living relative, chosen by the insurer.
Show answer & explanation
Answer: B
When no beneficiary survives the insured, the policy proceeds are paid to the insured's estate. A contingent beneficiary would take only if the primary predeceased the insured and the contingent survived — here neither survived.61. An insured is diagnosed with a terminal illness and wants access to some of her policy's death benefit while still alive to pay for care. Which rider makes this possible?
- A. Guaranteed insurability
- B. Waiver of premium
- C. Accelerated death benefit
- D. Extended term
Show answer & explanation
Answer: C
The accelerated death benefit rider advances a portion of the death benefit to the insured if she is diagnosed as terminally ill. Waiver of premium responds to total disability, extended term is a nonforfeiture option, and guaranteed insurability allows buying additional coverage.62. A life insurance policy has been continuously in force for three years. The insurer then discovers that the applicant concealed a material health condition on the original application. Which action is the insurer permitted to take?
- A. Contest the policy only if it obtains a court order.
- B. Void the policy for concealment at any time.
- C. Reduce the death benefit in proportion to the concealed risk.
- D. It may not contest the policy for the concealment, because the contestability period has expired.
Show answer & explanation
Answer: D
The incontestability clause bars the insurer from contesting a policy for misstatements or concealment once it has been in force for two years, with nonpayment of premium as the exception. Because three years exceeds two years, the insurer cannot contest.63. An insured dies by suicide 14 months after his life policy is issued. Based on the standard suicide clause, what is the insurer obligated to pay?
- A. The policy's cash value plus interest.
- B. Nothing at all.
- C. The full death benefit.
- D. A refund of the premiums paid.
Show answer & explanation
Answer: D
The suicide clause excludes death by suicide during the first two years of the policy, limiting the insurer's liability to a refund of premiums paid. Fourteen months falls within that two-year window, so only the premiums are returned.64. A licensed life producer wants to begin selling variable life insurance. What additional credential does regulation require, and why?
- A. A certified public accountant designation, because subaccount values must be audited.
- B. A property and casualty license, because the cash value is an asset.
- C. No additional credential; a life license alone is sufficient.
- D. A FINRA registration, because variable life is a security.
Show answer & explanation
Answer: D
Variable life invests its cash value in separate account subaccounts and is classified as a security. For that reason, selling it requires a FINRA registration in addition to a life insurance license.65. Which of the following correctly pairs the Life Only exam's question count with its time limit?
- A. 100 questions in 120 minutes
- B. 80 questions in 90 minutes
- C. 60 questions in 120 minutes
- D. 80 questions in 120 minutes
Show answer & explanation
Answer: D
The exam has 80 scoreable questions and a 120-minute time limit.66. A candidate has $50 available and needs to pay the Life Only examination fee. After paying the fee, how much will remain?
- A. $21
- B. $31
- C. $11
- D. $1
Show answer & explanation
Answer: C
The exam fee is $39; subtracting it from $50 leaves $11. This is arithmetic over the stated fee.67. Two candidates each register for the Life Only examination. What is the combined total of the two exam fees?
- A. $68
- B. $39
- C. $98
- D. $78
Show answer & explanation
Answer: D
Each exam fee is $39; two fees total $78. This is arithmetic over the stated fee.68. Camille wants permanent coverage that guarantees a level premium, guaranteed cash value growth, and a fixed death benefit for the rest of her life. Which policy type best matches her needs?
- A. Annual renewable term
- B. Traditional whole life
- C. Decreasing term
- D. Variable universal life
Show answer & explanation
Answer: B
Traditional whole life is designed to provide guaranteed level premiums, guaranteed minimum cash value growth, and a fixed death benefit for the insured's entire life, which is exactly what Camille is asking for. Variable universal life is tempting because it is also permanent, but its cash value and sometimes its death benefit fluctuate with investment performance rather than being guaranteed, so it does not meet her requirement for guarantees.69. A 35-year-old buys a term life policy that lets her exchange it for a permanent policy later without new medical underwriting, regardless of any change in her health. Which policy feature enables this?
- A. Renewability
- B. Waiver of premium
- C. Convertibility
- D. Accelerated benefit
Show answer & explanation
Answer: C
Convertibility is the feature that allows a term policyowner to exchange the term contract for a permanent policy without submitting new evidence of insurability, insulating the insured from any health changes since issue. Renewability is a tempting distractor because it also avoids new underwriting, but it only extends the same term coverage for another term period rather than converting it into permanent coverage.70. A father purchases a life insurance policy on his own life and adds a rider that provides term coverage on his young children without requiring a separate application for each child. Which rider is this?
- A. Guaranteed insurability rider
- B. Children's term rider
- C. Cost of living rider
- D. Payor benefit rider
Show answer & explanation
Answer: B
A children's term rider attaches inexpensive term coverage on all of the insured's eligible children under one rider, avoiding the need for a separate policy or application for each child. A payor benefit rider is a tempting distractor because it also concerns dependents, but it waives premiums if the premium-paying parent dies or becomes disabled rather than providing coverage on the children themselves.71. In insurance terminology, a condition that increases the likelihood or severity of a loss, such as owning a swimming pool without a fence around it, is best described as which of the following?
- A. Risk
- B. Peril
- C. Loss
- D. Hazard
Show answer & explanation
Answer: D
A hazard is a condition that increases the probability or severity of a loss occurring, and an unfenced pool is a textbook physical hazard because it makes an accident more likely without itself being the cause of any injury. Peril is a tempting distractor because it is closely related terminology, but a peril is the actual cause of loss, such as drowning or fire, rather than a condition that merely makes a loss more probable.72. A juvenile life policy is issued on a 10-year-old with a payor benefit rider attached. The premium-paying parent dies before the child reaches the policy's stated age. What happens to the policy?
- A. The policy immediately terminates
- B. The insurer converts the policy to a paid-up reduced amount
- C. The child must begin paying premiums immediately
- D. Premiums are waived until the child reaches the stated age, and the policy continues in force
Show answer & explanation
Answer: D
The payor benefit rider is designed for exactly this situation: if the premium-paying adult dies or becomes disabled before the child reaches the age stated in the rider, premiums are waived and the policy remains fully in force until that age is reached. Converting the policy to reduced paid-up insurance is a tempting distractor because it is a real nonforfeiture concept, but that option only applies when premiums stop being paid outright, not when a payor benefit rider is actively waiving them.73. An annuity owner selects a life income with period certain payout option rather than a straight life income option. What is the tradeoff of making this choice?
- A. The periodic payment is generally higher, but the death benefit is eliminated entirely
- B. The payments become variable rather than fixed
- C. The annuity loses its tax-deferred accumulation status
- D. The periodic payment is generally lower, but payments are guaranteed for a minimum period even if the annuitant dies early
Show answer & explanation
Answer: D
Because a life income with period certain option adds a guarantee that payments continue to a beneficiary if the annuitant dies before the certain period ends, the insurer spreads that extra risk across a lower periodic payment compared with a straight life income. Straight life income produces the higher payment mentioned in one distractor precisely because it carries no such guarantee, making that the opposite tradeoff rather than a description of period certain.74. A producer tells a prospective client that if she purchases a policy today, he will personally return part of his commission to her as a discount on the first premium. Under state insurance law, this practice is generally:
- A. Prohibited as an unlawful rebate
- B. Permitted as long as it is disclosed to the client in writing
- C. Permitted only for existing policyholders
- D. Permitted if the amount returned is a small percentage of the premium
Show answer & explanation
Answer: A
Offering to return part of a commission or any other inducement not specified in the policy is classic rebating, an unfair trade practice prohibited under state insurance law regardless of disclosure or the size of the amount involved. Writing down the offer does not cure the violation because rebating is prohibited based on the nature of the inducement itself, not on whether the client was told about it.75. An insurance contract is formed when the applicant submits an offer and the insurer alone decides whether to accept, reject, or counteroffer, leaving the applicant no power to negotiate the printed terms once the policy is issued. This describes which characteristic of insurance contracts?
- A. Indemnity
- B. Utmost good faith
- C. Adhesion
- D. Aleatory
Show answer & explanation
Answer: C
A contract of adhesion is one drafted entirely by one party, here the insurer, and offered to the other party on a take-it-or-leave-it basis, which matches the applicant's total lack of power to negotiate the printed terms. Aleatory is a tempting distractor because it also describes a core feature of insurance contracts, but it refers to the unequal exchange of value between premium and potential benefit, not to who controls the drafting of the terms.76. An applicant knows she has a family history of a hereditary illness but does not disclose it because the application does not specifically ask about family medical history. She then purchases a policy at standard rates. This scenario illustrates which insurance concept?
- A. Rebating
- B. Adverse selection
- C. Coercion
- D. Twisting
Show answer & explanation
Answer: B
Adverse selection describes the tendency of individuals who know they present a higher-than-average risk to seek insurance at standard rates, taking advantage of information the insurer does not have, which is precisely what is happening here. Twisting is a tempting distractor because it is another common exam term involving misleading conduct, but twisting refers to a producer inducing a client to replace an existing policy through misrepresentation, not to an applicant withholding personal risk information.77. Which statement correctly distinguishes a peril from a hazard in insurance terminology?
- A. A peril is a condition that increases the chance of loss, while a hazard is the cause of the loss itself
- B. A peril applies only to property insurance, while a hazard applies only to life insurance
- C. A peril is the cause of loss, such as fire or death, while a hazard is a condition that increases the likelihood or severity of that loss
- D. Peril and hazard are interchangeable terms describing the same concept
Show answer & explanation
Answer: C
A peril is the actual event that causes a loss, such as fire, windstorm, or death, while a hazard is a condition that makes that peril more likely or more severe, so keeping the direction of that relationship straight is the whole point of the distinction. The option reversing the two definitions is the classic trap on this topic, since students often remember that the terms are related without recalling which one is the cause and which one is the contributing condition.78. A life insurance policy's entire contract provision states that the policy, together with the attached application, constitutes the entire agreement between the insurer and the policyowner. What is the primary purpose of this provision?
- A. It voids the policy's incontestability clause after two years
- B. It allows the insurer to add new terms to the contract after the policy is issued
- C. It prevents the insurer from relying on documents or oral statements outside the policy and application to dispute a claim
- D. It requires the policyowner to resubmit medical evidence every policy year
Show answer & explanation
Answer: C
The entire contract provision protects the policyowner by fixing the terms of the agreement to only the policy and the attached application, so the insurer cannot later point to sales materials, oral promises, or side agreements to deny or limit a claim. Allowing the insurer to add terms after issue is essentially the opposite of what this provision does, since its whole function is to lock the contract's terms in place at issue rather than leave them open to later modification.79. A policyowner wants to change the beneficiary designation on her whole life policy. The policy does not state that the current beneficiary is irrevocable. What must the policyowner do to make the change effective?
- A. Wait until the next policy anniversary to submit the change
- B. Obtain approval from the state insurance department before the change is effective
- C. Obtain written consent from the current beneficiary before making any change
- D. Notify the insurer in the manner required by the policy, typically through written notice
Show answer & explanation
Answer: D
When a beneficiary designation is revocable, the policyowner retains full control and can change it at any time simply by following the policy's stated procedure, which is almost always written notice to the insurer recorded in its records. Requiring the current beneficiary's consent is a tempting distractor, but that requirement applies only when the beneficiary designation was made irrevocable, which the facts here specifically say is not the case.80. A candidate passes the state life insurance licensing examination. Before that candidate can legally sell life insurance policies on behalf of a specific insurer, what additional step must generally occur?
- A. The producer must retake the licensing examination annually
- B. The insurer must appoint the producer with the state insurance department
- C. No further action is required once the examination is passed
- D. The producer must obtain a separate federal insurance license
Show answer & explanation
Answer: B
Passing the examination only makes a candidate eligible for a license; before that licensed producer can actually represent and bind business for a particular insurer, the insurer must file an appointment with the state insurance department authorizing the producer to act on its behalf. Assuming no further action is needed once the exam is passed overlooks this separate appointment step, which is what actually creates the agency relationship between the producer and a specific company.81. A licensed life producer sells policies for an insurer that is later declared insolvent by the state insurance department. Policyholders' claims up to statutory limits are most likely to be protected by which mechanism?
- A. The insolvent insurer's reinsurance treaty
- B. The producer's errors and omissions insurance policy
- C. The state guaranty association
- D. A federal deposit insurance fund
Show answer & explanation
Answer: C
State guaranty associations exist specifically to protect policyholders when a licensed insurer becomes insolvent, paying covered claims up to statutory limits funded by assessments on other insurers licensed in that state. A federal deposit insurance fund is a tempting distractor because it sounds like a parallel safety net, but that program protects bank deposits, not insurance policies, and has no role in an insurer insolvency.82. During a market conduct examination, a state insurance department finds that an insurer's claims department has a pattern of denying valid claims without conducting a reasonable investigation. Which category of violation does this most likely represent?
- A. A rebating violation
- B. An unfair claims settlement practice
- C. A boycott, coercion, or intimidation violation
- D. A twisting violation
Show answer & explanation
Answer: B
Repeatedly failing to investigate claims reasonably before denying them is a hallmark example of an unfair claims settlement practice, a category of unfair trade practice specifically aimed at how insurers handle and pay claims. A twisting violation is a tempting distractor because it is another commonly tested unfair trade practice, but twisting involves misrepresenting facts to induce a policy replacement, which has nothing to do with how an insurer investigates or pays claims.
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Key facts: Life-Only Insurance exam
The Life-Only Insurance is administered by State DOI, with 80 scored questions, a 2 hours time limit and a 70% (60% in CA) result.
This free Life-Only Insurance practice test has 82 original questions written to State DOI's official content outline, last checked against it on July 18, 2026. Every question shows a worked explanation, and nothing here requires a signup.
As of 2026, the Life-Only Insurance exam fee is $39 (typical, varies by state).
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Official sources
Primary documents used to verify the exam details shown on this page.
- Texas Life Agent ExamTexas DOI / Pearson VUEpearsonvue.com
- Renew a License — Continuing EducationCalifornia Department of Insuranceinsurance.ca.gov
- California Insurance Code Section 1749.8 — Annuity TrainingCalifornia Legislature (Insurance Code)leginfo.legislature.ca.gov
- California Insurance Code Section 1749.3 — Continuing EducationCalifornia Legislature (Insurance Code)leginfo.legislature.ca.gov
- California Insurance Code Section 1749 — Prelicensing EducationCalifornia Legislature (Insurance Code)leginfo.legislature.ca.gov
- Renew a License — Producer LicensingCalifornia Department of Insuranceinsurance.ca.gov
Last verified against the official exam content outline:
Frequently asked questions
Do these practice questions match the real Life-Only exam?
They are written to mirror the real exam's multiple-choice style and topic coverage, including policy types, provisions and riders, beneficiaries, annuities, and taxation. The wording is intentionally exam-like, offering answer choices that all look reasonable so you have to truly know the rule. They are study questions, not leaked exam content, so treat them as training rather than memorization targets.
How many practice questions should I do before test day?
Most candidates do well working through several hundred questions spread over a few weeks, rather than cramming them all at once. Short daily sessions of 20 to 40 questions beat marathon sessions because spaced repetition locks in the rules. Ramp up to full-length timed sets in your final week so the real exam's pacing feels familiar.
How should I use the answer explanations?
Read the explanation for every question, including the ones you got right. Knowing why the wrong answers are wrong is what saves you when the real exam rephrases a concept — for example, understanding that a contingent beneficiary collects only if the primary predeceases the insured, not just recognizing the term. Keep a running list of rules you missed and re-quiz yourself on those items until they stick.
How do I know I'm ready for the Life-Only exam?
You're likely ready when you consistently score comfortably high on full-length timed practice sets across every topic area, not just your strong ones. Watch for stable scores over several sessions rather than one lucky run. If annuity taxation or policy provisions still trip you up, drill those categories specifically before you book your seat.
Are these Life-Only practice questions really free?
Yes — the practice questions on this page are free and require no signup, credit card, or account. You can start answering immediately and see explanations for every question. Use them as often as you like while you prepare.