Life & Health Insurance Exam Life & Health Insurance Insurance Regulation and Ethics 4 — Questions and Answers
Question 1: The McCarran-Ferguson Act of 1945 established that:
- Federal law supersedes state insurance regulation in all matters
- States have primary authority to regulate insurance (Correct answer)
- The SEC oversees all insurance investment products
- NAIC has binding authority over all insurers
Correct answer: States have primary authority to regulate insurance
The McCarran-Ferguson Act affirmed that the regulation of the business of insurance is the responsibility of the individual states.
Question 2: When a producer makes an intentional misrepresentation on an insurance application, the insurer may:
- Only increase the premium at renewal
- Void the policy from its inception (ab initio) (Correct answer)
- Transfer the policy to a surplus lines carrier
- File a claim against the insured's estate
Correct answer: Void the policy from its inception (ab initio)
Intentional misrepresentation makes the policy voidable, allowing the insurer to rescind the contract from its original effective date.
Question 3: Which of the following is NOT a purpose of insurance regulation?
- Protecting policyholders from insurer insolvency
- Ensuring fair and equitable treatment of consumers
- Guaranteeing every applicant is issued a policy (Correct answer)
- Maintaining competitive insurance markets
Correct answer: Guaranteeing every applicant is issued a policy
Insurance regulation does not guarantee issuance of policies to all applicants; insurers retain the right to underwrite and decline risks.
Question 4: A life insurance producer who is also a registered investment adviser (RIA) has a duty that is:
- Limited strictly to insurance suitability standards
- Higher than a producer acting solely as an insurance agent (Correct answer)
- Lower because investment products are more regulated
- Identical to that of a bank teller
Correct answer: Higher than a producer acting solely as an insurance agent
Registered investment advisers are held to a fiduciary standard, which is a higher duty of care than the suitability standard applied to insurance-only producers.
Question 5: A 'free-look' period in a life insurance policy allows the policyholder to:
- Review and return the policy for a full premium refund within a specified period (Correct answer)
- Borrow against the policy's cash value without interest
- Add riders to the policy at no additional cost
- Suspend premium payments for up to 60 days
Correct answer: Review and return the policy for a full premium refund within a specified period
A free-look provision gives the new policyholder a set number of days (typically 10-30) to review the contract and return it for a full refund if not satisfied.
Question 6: Which of the following describes 'churning' in the context of life insurance?
- Repeatedly replacing policies within the same company to generate commissions (Correct answer)
- Mixing client premium funds with personal funds
- Selling policies to clients in multiple states simultaneously
- Collecting premiums and failing to remit them to the insurer
Correct answer: Repeatedly replacing policies within the same company to generate commissions
Churning is the practice of convincing a policyholder to use existing policy values to purchase new coverage primarily to generate additional commissions.
Question 7: Under the principle of subrogation, after paying a claim, the insurer has the right to:
- Increase the insured's premium retroactively
- Pursue recovery from the responsible third party (Correct answer)
- Cancel the policy without notice
- Require the insured to repay the claim amount
Correct answer: Pursue recovery from the responsible third party
Subrogation allows the insurer, after indemnifying the insured, to step into the insured's shoes and seek recovery from the negligent third party.
Life & Health Insurance Exam Life & Health Insurance Insurance Regulation and Ethics 4
The McCarran-Ferguson Act of 1945 established that: