EXAMFX Life Insurance 3 — Questions and Answers
Question 1: A life insurance policy's 'free look' period typically lasts how long after policy delivery?
- 5 days
- 10 days (Correct answer)
- 30 days
- 60 days
Correct answer: 10 days
Most states require a free look period of at least 10 days after policy delivery, during which the policyowner may return the policy for a full premium refund.
Question 2: What is the purpose of the 'entire contract' clause in a life insurance policy?
- It defines the maximum benefit the insurer will pay
- It states that the policy and attached application constitute the complete agreement between insurer and policyowner (Correct answer)
- It prevents the insurer from modifying the policy after issuance
- It requires disputes to be settled by arbitration
Correct answer: It states that the policy and attached application constitute the complete agreement between insurer and policyowner
The entire contract clause specifies that the policy document along with the attached copy of the application forms the complete and binding contract between the parties.
Question 3: Which type of life insurance rider provides an additional benefit if the insured dies from an accident?
- Waiver of premium rider
- Guaranteed insurability rider
- Accidental death benefit rider (Correct answer)
- Payor benefit rider
Correct answer: Accidental death benefit rider
The accidental death benefit rider, sometimes called 'double indemnity,' pays an additional death benefit equal to the face amount if the insured dies as a result of an accident.
Question 4: Under the MEC (Modified Endowment Contract) rules, what tax treatment applies to withdrawals?
- Withdrawals are always tax-free up to basis
- Withdrawals are taxed last-in-first-out (LIFO), meaning gains are distributed first (Correct answer)
- Withdrawals are taxed first-in-first-out (FIFO), meaning basis is distributed first
- Withdrawals are never subject to income tax
Correct answer: Withdrawals are taxed last-in-first-out (LIFO), meaning gains are distributed first
MECs are taxed under LIFO rules, so any withdrawals are considered to come from earnings (gains) first and are subject to income tax, plus a 10% penalty if taken before age 59½.
Question 5: What is a 'key person' life insurance policy designed to do?
- Provide retirement income for a key executive
- Protect a business from financial loss due to the death of a vital employee (Correct answer)
- Fund a buy-sell agreement between business partners
- Provide group coverage for all employees
Correct answer: Protect a business from financial loss due to the death of a vital employee
Key person life insurance is owned by the business and compensates the company for lost revenue, recruiting costs, and other financial losses resulting from the death of a crucial employee or owner.
Question 6: Which settlement option guarantees income payments for the rest of the beneficiary's life with no refund of unused principal?
- Life income with period certain
- Life income with refund
- Straight life income (Correct answer)
- Joint and survivor option
Correct answer: Straight life income
Straight life income (pure life annuity) provides the highest periodic payment but stops completely at the beneficiary's death, with no refund to heirs if the beneficiary dies early.
Question 7: A producer who submits a life insurance application with knowledge that the applicant provided a false answer on a material question may be guilty of:
- Misrepresentation (Correct answer)
- Rebating
- Twisting
- Defamation
Correct answer: Misrepresentation
Misrepresentation occurs when a producer knowingly makes or assists in making false or misleading statements on an insurance application, which is an unfair trade practice.
EXAMFX Life Insurance 3
A life insurance policy's 'free look' period typically lasts how long after policy delivery?