EXAMFX Life Insurance 2 — Questions and Answers
Question 1: Which life insurance policy provision allows the policyowner to reinstate a lapsed policy within a specified period?
- Incontestability clause
- Reinstatement provision (Correct answer)
- Grace period provision
- Nonforfeiture option
Correct answer: Reinstatement provision
The reinstatement provision allows a policyowner to restore a lapsed policy, typically within 3 years, by paying overdue premiums with interest and providing evidence of insurability.
Question 2: What is the primary difference between a universal life policy and a whole life policy?
- Universal life has a fixed premium while whole life has flexible premiums
- Universal life offers flexible premiums and adjustable death benefits while whole life has fixed premiums (Correct answer)
- Universal life has no cash value while whole life accumulates cash value
- Universal life is temporary coverage while whole life is permanent
Correct answer: Universal life offers flexible premiums and adjustable death benefits while whole life has fixed premiums
Universal life insurance provides premium and death benefit flexibility, allowing policyowners to adjust both within certain limits, unlike the fixed structure of whole life policies.
Question 3: Under which settlement option does the insurer retain the death benefit principal and pay only interest to the beneficiary?
- Life income option
- Fixed amount option
- Interest only option (Correct answer)
- Fixed period option
Correct answer: Interest only option
The interest only option allows the insurer to hold the death benefit proceeds and pay periodic interest to the beneficiary, who can later elect another settlement option.
Question 4: A life insurance applicant is diagnosed with a terminal illness after submitting the application but before the policy is issued. The insurer should:
- Issue the policy as applied for since the application was submitted first
- Issue the policy with a higher premium
- Deny the application based on the material change in health (Correct answer)
- Issue the policy with a graded death benefit
Correct answer: Deny the application based on the material change in health
A terminal illness diagnosed after application but before policy issuance is a material change that the insurer can use to deny coverage, since insurability must exist at the time of policy delivery.
Question 5: Which of the following describes a 'spendthrift clause' in a life insurance policy?
- It limits the amount the policyowner can borrow against the cash value
- It prevents beneficiaries from assigning or pledging the death benefit proceeds (Correct answer)
- It requires the insurer to pay the death benefit in installments
- It restricts the policyowner from changing the beneficiary designation
Correct answer: It prevents beneficiaries from assigning or pledging the death benefit proceeds
A spendthrift clause protects death benefit proceeds from the beneficiary's creditors and prevents the beneficiary from assigning or pledging those proceeds before receipt.
Question 6: When a life insurance policyowner takes out a policy loan, what happens if the policyowner dies before repaying the loan?
- The beneficiary must repay the loan before receiving any proceeds
- The loan amount plus interest is deducted from the death benefit paid to the beneficiary (Correct answer)
- The loan is forgiven and the full death benefit is paid
- The policy is voided and no death benefit is paid
Correct answer: The loan amount plus interest is deducted from the death benefit paid to the beneficiary
Outstanding policy loans plus accrued interest are deducted from the policy's death benefit at the time of the insured's death.
Question 7: Which nonforfeiture option provides the policyowner with a paid-up policy for a reduced face amount?
- Extended term insurance
- Reduced paid-up insurance (Correct answer)
- Cash surrender value
- Automatic premium loan
Correct answer: Reduced paid-up insurance
The reduced paid-up insurance nonforfeiture option uses the policy's cash value to purchase a fully paid-up whole life policy with a lower face amount than the original policy.
EXAMFX Life Insurance 2
Which life insurance policy provision allows the policyowner to reinstate a lapsed policy within a specified period?