Life and health insurance practice test, answers explained

Choosing a higher deductible on a health policy to lower the premium is an example of which method of handling risk?

1. Avoidance

   Avoidance means not taking on the exposure at all; the insured still faces the health risk and keeps the coverage.
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2. Sharing

   Sharing spreads losses across a group, such as a reciprocal or a pool; a deductible is borne by the insured alone.
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3. Transfer

   Buying the policy transfers risk, but raising the deductible moves part of it back to the insured, the opposite direction.
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4. Retention

   A higher deductible means the insured keeps more of each loss, so this is retaining part of the risk in exchange for a lower premium.
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Select an answer to record it. The card then marks the key and opens the reasoning under every choice.

Under the capital liquidation approach to needs analysis, a family's future income needs are met by:

1. Paying a lump sum equal to 10 times salary

   A multiple of salary is a rule of thumb, not a needs analysis method that tracks the family's income.
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2. Spending only the interest, keeping principal intact

   Living on the earnings while the fund stays whole is the other needs approach, and it requires a larger fund.
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3. Spending both the principal and its earnings

   Capital liquidation plans for the principal to be used up along with its earnings over the income period.
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4. Using only Social Security survivor benefits

   Survivor benefits are counted as an offset in a needs analysis, not used as the method for funding the gap.
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Ben, 35, wants the same amount of death protection for the next 20 years until his children are grown, at the lowest cost and with a premium that will not change. He should buy:

1. 20-year level term

   Level term keeps the same face and a fixed premium for the whole period at the lowest cost, matching a need that ends in 20 years.
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2. Annually renewable term

   ART starts cheaply but the premium rises every year, which fails the requirement of an unchanging premium.
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3. 20-year decreasing term

   Decreasing term lowers the death benefit over time, but Ben wants the same amount of protection throughout.
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4. 20-pay whole life

   Limited-pay whole life has a fixed premium but costs far more because it builds cash value for life.
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Universal life is described as 'unbundled' because:

1. Its mortality, expense and interest items are shown apart

   Universal life discloses the cost of insurance, expense charges and credited interest as separate items, which is what unbundled means.
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2. Its death benefit and cash value are sold as two separate policies

   Both parts live in one contract; the separation is in how charges are reported, not in two policies.
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3. Its riders, unlike the base policy, must be renewed each year

   Riders are part of the one contract and are not renewed on their own each year; they have nothing to do with the unbundled label.
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4. Its premiums are split between the general and separate accounts

   Separate account investing describes variable products; a regular universal life policy is backed by the general account.
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A policy on a child whose face amount automatically increases, often to five times the original amount, when the child reaches age 21 without evidence of insurability is:

1. Guaranteed insurability

   Guaranteed insurability lets the insured buy more coverage at set dates for added premium, rather than increasing the face automatically.
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2. Family maintenance insurance

   Family maintenance coverage pays income to survivors for a set period after a parent's death, not a growing child policy.
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3. Payor benefit insurance

   A payor benefit waives a child policy's premiums if the adult payor dies or becomes disabled; it does not raise the face.
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4. Jumping juvenile insurance

   A jumping juvenile policy increases its face, often fivefold, at age 21 with no premium change and no evidence of insurability.
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Accelerated death benefit riders for terminal illness are frequently added to life policies:

1. Only for insureds over age 65

   Terminal illness can strike at any age, and the rider is not limited to older insureds.
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2. At little or no extra premium

   Terminal-illness accelerated benefit riders are often included free or for a small charge, since they only advance money the insurer will pay anyway.
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3. For a premium similar to the base policy

   The benefit is an advance on the existing death benefit, not new coverage, so it does not carry a full premium of its own.
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4. After the insured passes a medical exam

   The rider is usually added at issue without separate evidence; medical proof matters only when a claim for terminal illness is made.
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Ruth's waiver of premium rider covers disabilities that begin before age 65. She becomes totally disabled at 67. Her premiums will:

1. Stop once she files a disability claim

   Filing a claim does not end premiums here, because a disability that starts at 67 falls outside the rider's age limit.
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2. Continue to be due as usual

   The rider covers only disabilities that start before age 65; one that begins at 67 falls outside it, so Ruth must keep paying.
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3. Be waived after 6 months

   Six months is a typical waiting period once a covered disability starts, but this disability is not covered.
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4. Be waived for up to 2 years

   No two-year waiver applies; the age limit removes the benefit entirely for this disability.
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A policyowner assigns a life policy to a bank to secure a loan, and the bank's interest ends when the loan is repaid. This is a:

1. Absolute assignment

   An absolute assignment permanently transfers all ownership rights; the owner here gets the policy back after repayment.
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2. Irrevocable designation

   An irrevocable beneficiary designation limits the owner's right to change beneficiaries; it is not a loan pledge.
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3. Collateral assignment

   Pledging the policy as loan security, with the lender's rights ending when the debt is repaid, is a collateral assignment.
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4. Viatical settlement

   A viatical settlement is a sale of the policy by a terminally ill owner, not a temporary pledge.
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An applicant whose health, habits, and history are average for her age and sex is classified as:

1. Declined

   Declining is reserved for risks too high to insure, not for average applicants.
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2. Substandard

   Substandard, or rated, applies to above-average risks who are charged extra or issued with limits.
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3. Preferred

   Preferred status is for better-than-average risks, such as nonsmokers with excellent health.
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4. Standard

   An applicant with average health, habits and history is a standard risk and pays the regular rate.
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An insurer obtains a report from a reporting agency on an applicant's credit history, drawn from records only and without interviews. Under the FCRA, this is:

1. A consumer report

   A credit report built from records alone, with no interviews, is a consumer report under the FCRA.
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2. An investigative consumer report

   An investigative report adds interviews with neighbors, friends or associates; this report used records only.
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3. An attending physician's statement

   An APS comes from the applicant's doctor and covers medical history, not credit.
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4. An MIB report

   An MIB report contains coded medical and underwriting information from member insurers, not credit history.
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Lia completes a life insurance application on a producer's tablet and signs it electronically. Under federal and state electronic-signature laws, her signature:

1. Must be notarized to be relied on

   Notarization is not required for an application signature, electronic or otherwise.
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2. Is valid only for term policies with small face amounts

   The laws do not limit electronic signatures by product type or face amount.
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3. Is valid only if a paper copy is also signed

   Requiring a paper backup would defeat the purpose of the laws, which accept the electronic signature on its own.
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4. Has the same legal effect as a handwritten one

   Federal E-SIGN and state UETA laws give an electronic signature the same legal force as a handwritten one.
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Lou was born in 1961. Under current law, he must begin required minimum distributions from his traditional IRA at age:

1. 73

   Seventy-three applies to people born from 1951 through 1959; Lou's 1961 birth year moves him to the later age.
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2. 75

   Under SECURE 2.0, people born in 1960 or later must begin required minimum distributions at 75, so Lou, born in 1961, starts then.
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3. 72

   Seventy-two was the starting age under the first SECURE Act, since raised for later birth years.
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4. 70 1/2

   Seventy and a half was the age before the 2019 changes and no longer applies to anyone born after mid-1949.
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An IRA owner who fails to take a required minimum distribution owes an excise tax on the shortfall of:

1. 6% each year until the amount is withdrawn

   A yearly 6% tax applies to excess IRA contributions, a different violation.
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2. 10% of the entire account balance

   The tax applies to the shortfall, not the whole account, and 10% is only the reduced rate after a timely correction.
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3. 25%, reduced to 10% if corrected timely

   SECURE 2.0 set the excise tax on a missed distribution at 25% of the shortfall, cut to 10% when it is corrected within the correction window.
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4. 50%, with no reduction for a correction

   Fifty percent with no relief for correcting was the penalty before SECURE 2.0 lowered it.
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Edna's daughter works during the day, so Edna spends weekdays at a community center that provides meals, activities, and supervision, and returns home each evening. Her LTC policy would cover this as:

1. Intermediate care

   Intermediate care is facility nursing care below the skilled level, with the resident staying overnight.
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2. Adult day care

   Care at a community center during the day, with meals, activities and supervision while the family caregiver works, is adult day care.
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3. Home care

   Home care is delivered in the person's own residence; Edna receives her care at a center away from home.
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4. Assisted living care

   Assisted living provides housing with personal care; Edna lives at home and only attends the center during the day.
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Hal has Alzheimer's disease and needs substantial supervision to stay safe, but he can still bathe, dress, and eat without help. Under a tax-qualified LTC policy, Hal is:

1. Eligible only after a prior hospital stay

   A prior hospitalization requirement is not allowed as a condition for LTC benefits.
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2. Not eligible, because Alzheimer's may be excluded

   LTC policies may not exclude Alzheimer's and other organic brain disorders.
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3. Not eligible until he loses two or more ADLs

   The two-ADL trigger is one of two routes; cognitive impairment qualifies on its own.
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4. Eligible, because of severe cognitive impairment

   Alzheimer's that requires substantial supervision for safety meets the severe cognitive impairment trigger of a tax-qualified policy, even with no ADLs lost.
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When a PPO member uses a network provider, the provider has agreed to:

1. Be paid a flat monthly sum per member

   A fixed amount per member is capitation, typical of HMOs, not PPO fee-for-service contracts.
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2. Accept the negotiated fee as payment in full

   Network providers agree to discounted fees and cannot bill the member beyond them, apart from the plan's normal cost sharing.
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3. Bill the member for any amount above the allowed fee

   Balance billing is what network contracts forbid; it happens with out-of-network providers.
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4. Collect full charges for the member to file

   Network providers usually file with the plan themselves and are paid at the negotiated rate, not full charges.
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What is the purpose of a Cost of Living Adjustment (COLA) rider in a disability income policy?

1. To increase benefits annually based on inflation indexes

   A COLA rider raises the monthly benefit during a long disability in line with an index such as the CPI.
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2. To decrease premiums as the insured ages

   A COLA rider adds cost; it does not lower premiums over time.
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3. To give a one-time raise after five years of disability

   A single fixed increase is not cost-of-living indexing, which adjusts the benefit year by year.
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4. To adjust the elimination period based on changes in medical costs

   The elimination period is fixed at issue; medical costs do not change it.
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Sara owns a guaranteed renewable long-term care policy. Which statement about her premium is correct?

1. It can never increase while the policy is in force

   A premium that can never change describes noncancelable coverage, which is rare for LTC.
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2. It may rise only if raised for her whole class

   Guaranteed renewable means the insurer must renew, but it can raise rates for the entire class, never for Sara alone.
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3. It may rise if Sara's own health gets worse

   Individual rate increases based on health are exactly what guaranteed renewability prevents.
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4. It may rise each year the insurer renews her

   Renewal is automatic and does not by itself justify a rate change; increases need a class-wide filing.
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Under the NAIC LTC model, a policy may exclude coverage for a pre-existing condition for no longer than:

1. 6 months after the effective date

   The NAIC LTC model limits a pre-existing condition exclusion to six months after the policy takes effect.
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2. 12 months after the effective date

   Twelve months was a common pre-existing condition limit in group health plans before the ACA; the LTC model allows only half that.
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3. 24 months after the effective date

   Two years matches the contestable period, not the pre-existing condition limit.
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4. 3 months after the effective date

   Three months understates the limit the model actually allows.
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Most health policies define a covered sickness as an illness or disease that:

1. Results from a sudden, unexpected external event

   A sudden, unexpected external event defines an accident, not a sickness.
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2. Is caused by the insured's job

   Work-related illness is usually workers compensation territory and is often excluded from individual health coverage.
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3. First shows up after the contract takes effect

   Health policies cover a sickness that first manifests after coverage begins, which keeps conditions that existed earlier out.
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4. Was diagnosed within 2 years before applying

   A condition diagnosed before coverage is a pre-existing one, the opposite of a covered sickness.
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A surviving spouse with no children in her care and no disability may begin reduced Social Security survivor benefits as early as age:

1. 60

   A surviving spouse who is not disabled and has no child in care can start reduced survivor benefits at age 60.
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2. 50

   Age 50 is the earliest age for a disabled surviving spouse, not for one without a disability.
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3. 65

   Sixty-five is the Medicare age; survivor benefits can begin earlier at a reduced rate.
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4. 62

   Sixty-two is the earliest age for retirement and spousal benefits, not for survivor benefits.
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A divorced person age 62 or older who has not remarried can receive benefits on an ex-spouse's Social Security record if the marriage lasted at least:

1. 10 years

   An unmarried ex-spouse aged 62 or older can claim on the former spouse's record if the marriage lasted at least 10 years.
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2. 2 years

   Two years understates the requirement for divorced-spouse benefits by a wide margin.
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3. 20 years

   Twenty years was a former requirement, since cut to the current, shorter period.
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4. 5 years

   Five years is too short; a marriage of that length does not create benefit rights for an ex-spouse.
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Other than family size, the ACA lets premiums for individual major medical plans vary only by:

1. Occupation, age, and health history

   Occupation and health history are not permitted factors in the ACA individual market.
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2. Age, tobacco use, and geographic area

   Besides family size, ACA individual market rates may vary only by age, tobacco use and rating area.
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3. Health status, age, and prior claims history

   Health and claims history were common rating factors before the ACA and are now banned.
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4. Sex, age, and geographic area

   Sex-based rating is prohibited under the ACA, even though age and area are allowed.
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Under the ACA, a plan that offers dependent coverage must allow an adult child to stay on a parent's plan until age:

1. 26

   A plan that offers dependent coverage must keep an adult child eligible until age 26, regardless of marriage or student status.
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2. 30

   Some states extended coverage further under their own laws, but the federal requirement stops at 26.
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3. 23

   Twenty-three resembles the student cutoffs some plans used before the ACA, not the federal requirement.
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4. 21

   Age 21 reflects older dependent rules from before the ACA.
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Producer Dan offers to give a prospect $200 of his commission if she buys a life policy from him. Dan is engaging in:

1. Defamation

   Defamation is making false statements about another insurer or producer, which Dan has not done.
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2. Commingling

   Commingling means mixing premiums held in trust with the producer's own money, not offering an inducement.
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3. Twisting

   Twisting is misrepresentation used to get a client to replace an existing policy; no replacement or false statement is involved.
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4. Rebating

   Offering part of a commission, or anything else of value not stated in the policy, to induce a purchase is rebating.
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Dora is replacing her individual health policy with a new one. The producer should advise her to:

1. Let both lapse to restart waiting periods

   Restarting waiting periods works against her, and lapsing both leaves her with no coverage.
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2. Stop paying the old premium once she has applied

   Applying does not create coverage; letting the old policy lapse early leaves her exposed.
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3. Keep the old policy until the new one is in force

   Keeping the old policy until the new one is issued avoids a gap, especially while new waiting periods and exclusions apply.
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4. Cancel the old policy before applying for the new one

   Canceling first risks being left uninsured if the new application is declined or delayed.
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Paul buys a policy on his own life and names his friend Mia as beneficiary. Regarding insurable interest:

1. Mia must be related to Paul by blood or marriage

   Family ties support insurable interest for a third-party owner; a self-insured owner may name a friend.
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2. Mia must have an insurable interest at Paul's death

   Insurable interest is tested at application, and only for the owner; nothing is required of the beneficiary at death.
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3. Paul must have one and already does as the insured

   Only the owner needs an insurable interest, and a person always has one in his own life, so Paul qualifies and may name a friend as beneficiary.
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4. Paul must show that Mia depends on him financially

   Proof of dependence is not needed when the insured owns the policy; Paul's relationship to his beneficiary does not have to be justified.
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Under the Gramm-Leach-Bliley Act, a consumer who has a continuing relationship with an insurer, such as a policyowner, is called a:

1. Third party

   A third party is an outside entity that might receive information, not the insurer's own policyowner.
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2. Licensee

   Licensee is the privacy rules' term for the insurer or producer that must protect the information, not for the policyowner.
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3. Customer

   Under GLBA, a consumer with an ongoing relationship with the insurer, such as a policyowner, is a customer and receives privacy notices.
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4. Beneficiary

   A beneficiary is a party to receive proceeds, which does not by itself create a continuing customer relationship.
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Under the NAIC Life Insurance Illustrations Model Regulation, when a policy form designated for use with illustrations is sold without one, the producer must:

1. Reclassify the policy as a non-illustrated form

   The insurer designates which forms are illustrated; a producer cannot change that label to avoid the certification.
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2. Obtain the insurer's written approval to skip it

   There is no approval to skip an illustration; the rule is a producer certification on the insurer's form, which the applicant also acknowledges.
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3. Have the applicant waive the free-look period in writing

   The free look is unrelated to illustrations, and the regulation does not ask the buyer to give it up.
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4. Certify in writing that no illustration was used

   The producer certifies on a form provided by the insurer that no illustration was used, and the applicant acknowledges that one matching the issued policy will be provided no later than delivery.
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Rosa buys an immediate annuity and chooses life income with a 10-year period certain. She dies after receiving monthly payments for 4 years. What happens next?

1. Payments stop, since the annuitant has died

   Payments ending at death describes a straight life annuity; the period certain adds a guarantee for the stated years.
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2. Her beneficiary is paid for the remaining 6 years

   The period certain guarantees 10 years of payments in total; Rosa received 4, so her beneficiary collects the other 6 years.
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3. Her beneficiary receives a refund of the premium paid

   Returning unrecovered premium is the refund life annuity, a different payout option from a guaranteed number of years.
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4. Her beneficiary receives payments for a new 10 years

   The guarantee runs from the first payment, not from the death, so the 4 years already paid count toward it.
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