LLQP Ethics and Regulatory Compliance 5 — Questions and Answers
Question 1: Which of the following actions by an agent constitutes 'sliding' under insurance regulations?
- Replacing a client's policy without disclosure
- Adding coverage to a policy without the client's knowledge or consent to earn more premium (Correct answer)
- Offering a client a discount on premiums
- Failing to submit a client's application promptly
Correct answer: Adding coverage to a policy without the client's knowledge or consent to earn more premium
Sliding occurs when an agent adds products or coverage to a policy without the buyer's informed consent, typically to inflate the premium and commission.
Question 2: A client in poor health wants to apply for life insurance without disclosing a recent cancer diagnosis. The agent suspects the client is hiding this information. The agent's ethical obligation is to:
- Submit the application as-is to protect client privacy
- Counsel the client on the importance of full disclosure and refuse to submit an incomplete application (Correct answer)
- Submit the application and let the insurer discover the omission on its own
- Document the suspicion but submit the application anyway
Correct answer: Counsel the client on the importance of full disclosure and refuse to submit an incomplete application
An agent who knowingly submits a fraudulent application is complicit in insurance fraud and must insist on full disclosure or refuse to submit.
Question 3: Under most state laws, an insurance agent who receives client funds must:
- Deposit them into a personal account temporarily until forwarding
- Hold them in a separate fiduciary or trust account (Correct answer)
- Forward them within 90 days with no restrictions
- Return them to the client and require direct payment to the insurer
Correct answer: Hold them in a separate fiduciary or trust account
Agents acting as fiduciaries must keep client funds in a separate trust account and never commingle them with personal funds.
Question 4: Which of the following would be considered an unfair trade practice under state insurance codes?
- Providing accurate illustrations of policy values
- Making false statements about a competitor's financial condition to induce a client to switch insurers (Correct answer)
- Charging premiums according to the filed rate schedule
- Disclosing commission rates when asked by a client
Correct answer: Making false statements about a competitor's financial condition to induce a client to switch insurers
Making false or misleading statements about a competitor's financial condition to induce policy replacement is a form of defamation and an unfair trade practice.
Question 5: An agent who continues to transact insurance business after their license has expired is subject to:
- A written warning only for a first offense
- Civil and criminal penalties, including fines and possible prosecution (Correct answer)
- Automatic reinstatement if they apply within 30 days
- No penalty if they were unaware of the expiration
Correct answer: Civil and criminal penalties, including fines and possible prosecution
Transacting insurance without a valid license is illegal and can result in significant fines, license denial, and criminal charges.
Question 6: What is the primary purpose of mandatory errors and omissions (E&O) insurance for licensed agents?
- To protect the insurer from agent misconduct
- To protect clients and agents from financial loss due to the agent's professional mistakes (Correct answer)
- To replace the agent's general liability coverage
- To satisfy federal securities regulations
Correct answer: To protect clients and agents from financial loss due to the agent's professional mistakes
E&O insurance protects both clients who suffer losses due to agent errors and the agent from the resulting financial liability claims.
Question 7: A client instructs their agent to invest their annuity surrender proceeds into a new annuity without taking possession of the funds. The correct tax-advantaged method for this transfer is:
- A partial withdrawal followed by a personal check to the new insurer
- A 1035 exchange conducted directly between the two insurance companies (Correct answer)
- Depositing the funds into a checking account for 61 days before reinvesting
- Requesting a lump-sum distribution and reinvesting within 30 days
Correct answer: A 1035 exchange conducted directly between the two insurance companies
A Section 1035 exchange allows tax-free transfer of annuity proceeds directly between insurers, avoiding immediate tax liability.
LLQP Ethics and Regulatory Compliance 5
Which of the following actions by an agent constitutes 'sliding' under insurance regulations?