LOMA 280 Test PDF

Test Preparation Guide
for LOMA 280
ONLINE COURSE PORTAL

This text is assigned reading material for LOMA 280—Principles of Insurance. Enrollment
in this course includes access to the LOMA 280 Course Portal, which provides, in addition
to all assigned study materials, an array of study tools, including some online and multi-
media features to enhance your learning experience and help you prepare for the
examination.
Copyright © 2011 LL Global, Inc. All rights reserved.

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LOMA (Life Office Management Association, Inc.) is an international association founded in 1924.
LOMA is committed to a business partnership with its worldwide members in the insurance and
financial services industry to improve their management and operations through quality employee
development, research, information sharing, and related products and services. Among LOMA’s
activities is the sponsorship of several self-study education programs leading to professional
designations. These programs include the Fellow, Life Management Institute (FLMI) program and the
Fellow, Financial Services Institute (FFSI) program. For more information on all of LOMA’s
education programs, please visit www.loma.org.
Statement of Purpose: LOMA Educational Programs Testing and Designations

Examinations described in the LOMA Education and Training Catalog are designed solely to measure
whether students have successfully completed the relevant assigned curriculum, and the attainment of
any LOMA designation indicates only that all examinations in the given curriculum have been
successfully completed. In no way shall a student’s completion of a given LOMA course or
attainment of a LOMA designation be construed to mean that LOMA in any way certifies that
student’s competence, training, or ability to perform any given task. LOMA’s examinations are to be
used solely for general educational purposes, and no other use of the examinations or programs is
authorized or intended by LOMA. Furthermore, it is in no way the intention of the LOMA
Curriculum and Examinations staff to describe the standard of appropriate conduct in any field of the
insurance and financial services industry, and LOMA expressly repudiates any attempt to so use the
curriculum and examinations. Any such assessment of student competence or industry standards of
conduct should instead be based on independent professional inquiry and the advice of competent
professional counsel.

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Test Preparation Guide
for LOMA 280
Information in this text may have been changed or updated since

its publication date. For current updates, visit www.loma.org.
LOMA Education and Training

Atlanta, Georgia

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PROJECT TEAM:
Authors: Sean Schaeffer Gilley, FLMI, ACS, AIAA, AIRC, FLHC, AAPA, ARA,
CEBS, HIA, MHP, PAHM
Melanie R. Green, FLMI, ACS, AIAA
Martha Parker, FLMI, ACS, ALHC, AIAA
Project Manager: Julia K. Wooley, FLMI, ACS, ALHC, HIA, MHP
Technical Support: David A. Lewis, FLMI, ACS
Learning Coordinator: Tonya Vaughan
Administrative Support: Mamunah Carter
19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1
This text, or any part thereof, may not be reproduced or transmitted in any form or by any means,
electronic or mechanical, including photocopying, recording, storage in an information retrieval
system, or otherwise, without the prior written permission of the publisher.
While a great deal of care has been taken to provide accurate, current, and authoritative information
in regard to the subject matter covered in this book, the ideas, suggestions, general principles,
conclusions, and any other information presented here are for general educational purposes only. This
text is sold with the understanding that it is neither designed nor intended to provide the reader with
legal, accounting, investment, marketing, or any other types of professional business management
advice. If legal advice or other expert assistance is required, the services of a competent professional
should be sought.
ISBN: 978-1-57974-352-9
Printed in the United States

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Contents
Contents ................................................................................................................................................ 5
Preface...................................................................................................................................................
Preface ................................................................................................................................................... 6
Practice Questions................................................................................................................................
Questions................................................................................................................................ 8
Chapter One ....................................................................................................................................... 9
Chapter Two.....................................................................................................................................
Two ..................................................................................................................................... 12
Chapter Three...................................................................................................................................
Three................................................................................................................................... 15
Chapter Fou
Four .................................................................................................................................... 17
Chapter Five.....................................................................................................................................
Five ..................................................................................................................................... 20
Chapter Six....................................................................................................................................... 22
Chapter Seven .................................................................................................................................. 25
Chapter Eight ................................................................................................................................... 28
Chapter Nine .................................................................................................................................... 33
Chapter Ten ...................................................................................................................................... 38
Chapter Eleven.................................................................................................................................
Eleven ................................................................................................................................. 42
Chapter Twelve ................................................................................................................................ 45
Chapter Thirteen .............................................................................................................................. 48
Chapter Fourteen..............................................................................................................................
Fourteen.............................................................................................................................. 52
Answers to Practice Questions..........................................................................................................
Questions .......................................................................................................... 55
Sample Examination..........................................................................................................................
Examination .......................................................................................................................... 57
Answers to Sample Exam .................................................................................................................. 74

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6 | Test Preparation Guide for LOMA 280
Preface
Before You Begin…
Important Information on How to Study
and Prepare for a LOMA Examination
Welcome to the Test Preparation Guide (TPG) for LOMA 280. This learning package was designed
by LOMA to complement Principles of Insurance by Harriett E. Jones, J.D., FLMI, AIRC, ACS, and
Steven R. Silver, J.D., FLMI, AFSI, ACS, AIRC, AAPA. Used along with the textbook, this TPG
will help you master the course material as you prepare for the LOMA 280 examination. This TPG
includes practice questions and a full-scale sample examination.
The nature of LOMA’s self-study program offers two important benefits.
First, you have the opportunity to learn important job-related information that will help
you become a more knowledgeable and valuable employee.
Second, a self-study program allows you to learn at your own pace and study at times
that suit your own schedule.
You may need some help in developing the skills necessary for self study, or you may have some
qualms about taking examinations. Even if you’re very confident of your study skills, you need to
understand what you will be expected to know once you have completed the course and how you can
make sure you have mastered the course content. That’s why LOMA developed the TPG.
LOMA provides valuable tips on effective studying and test taking strategies. “Study Tips” and
“Becoming Test-Wise” include many practical pointers that will help you organize your study and
prepare for the examination for this course. Both of these tools can be found in the Exam Prep section
of the Course Portal.
The remainder of the TPG is your guide to mastering the course material. By reading and working
through this manual, you not only will discover how to focus your study, but you will also receive
valuable practice in applying your knowledge and will be able to gauge your level of mastery of the
material.
The TPG is your key to learning success.

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Preface | 7
Acknowledgments
The TPG for LOMA 280 was designed to provide a comprehensive, self-directed learning approach
to help students master the information in this course. As with all projects at LOMA, development of
the TPG depended upon the combined efforts of many individuals.
Our thanks go to Julia K. Wooley, FLMI, ACS, ALHC, HIA, MHP, who acted as Project Manager.
Thanks also go to Tonya Vaughan for her work typesetting this text, and to Amy Stailey for her cover
design.
Sean Schaeffer Gilley, FLMI, ACS, AIAA, AIRC, FLHC, AAPA, ARA, CEBS, HIA, MHP, PAHM
Melanie R. Green, FLMI, ACS, AIAA
Martha Parker, FLMI, ACS, ALHC, AIAA
Atlanta, Georgia
2011

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Practice Questions
Learning objectives are now presented with the Practice Questions.

The learning objectives in the assigned text are each measured by one or more practice
questions. Each practice question represents an example of how your knowledge of the
learning objective may be measured on the examination for this course. Learning objectives
appear in a shaded box above the question or questions associated with that learning
objective. Additional information on how to use learning objectives to guide your study and
preparation for the exam appears in “Study Tips,” which can be accessed in the Course
Portal under Exam Prep.
An interactive version of these Practice Questions can be accessed in the Course Portal
under Exam Prep.

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Chapter 1 Practice Questions | 9
LEARNING OBJECTIVES &

PRACTICE QUESTIONS Chapter One
Learning Objective: Distinguish between speculative risk and pure risk.
1. Both individuals and businesses experience two kinds of risk—speculative risk and pure risk. By
definition, a pure risk is one in which the possible outcomes include
(1) loss, no loss, or gain
(2) only loss or no loss
(3) only loss
(4) only gain
Learning Objective: Describe various ways to manage financial risk.
2. Individuals and businesses often use risk management as a means of identifying and assessing
financial risks. To eliminate or reduce exposure to a specific financial risk, an individual can use
at least one of four risk management techniques: avoid the risk, control the risk, transfer the risk,
or accept the risk. From the answer choices below, select the response that correctly describes an
individual controlling the risk of financial loss.
(1) Lauren Knill insists that all passengers riding in her automobile wear seat belts at all times.
(2) Colton Grey, a self-employed graphic design artist, purchased a disability income
insurance policy that will provide him with monthly income benefits if he becomes
totally disabled.
(3) Because he is concerned about suffering neck and back injuries, Franklin Mulongo never
rides roller coasters at amusement parks.
(4) After purchasing a new computer, Lisa Huggins rejected the manufacturer’s offer of an
extended warranty on the new computer system.
Learning Objective: Identify the five characteristics of insurable risks.
3. In order for a risk—a potential loss—to be considered insurable, the risk must have certain
characteristics. The following statements are about various risks. Select the answer choice that
correctly represents a characteristic of insurable risk.
(1) In order to provide insurance coverage to an individual, an insurer must be able to predict
the losses that the proposed insured will experience.
(2) In order for a potential loss to be insurable, the element of chance must be present.
(3) Only those potential losses that would cause catastrophic financial damage to both the
insurer and the insured are considered to be insurable.
(4) For most types of insurance, an insurable loss must be definite in terms of the amount of
the loss, but not in terms of when to pay the benefits.

Answers to Practice Questions begin on page 55
4. Every insurance policy can be classified as a valued contract or a contract of indemnity. Nancy
Upchurch is the policyowner-insured of a life insurance policy and a medical expense insurance
policy. Ms. Upchurch’s life insurance policy can be classified as a (contract of indemnity /
valued contract). Her medical expense insurance policy can be classified as a (contract of
indemnity / valued contract).
(1) contract of indemnity / contract of indemnity
(2) contract of indemnity / valued contract
(3) valued contract / contract of indemnity
(4) valued contract / valued contract
5. The law of large numbers states that, typically, the more times we observe a particular event, the
(more / less) likely that our observed results will approximate the true probability—or
likelihood—that the event will occur. Using this concept, insurers have been able to develop
(mortality tables / morbidity tables) that indicate with great accuracy the number of people in
a large group who are likely to die at each age.
(1) more / mortality tables
(2) more / morbidity tables
(3) less / mortality tables
(4) less / morbidity tables
Learning Objective: Define antiselection and give examples of two factors that can increase or
decrease the likelihood that an individual will suffer a loss.
6. From an insurer’s standpoint, the tendency of individuals who believe they have a greater-than-
average likelihood of loss to seek insurance protection to a greater extent than do other
individuals is known, by definition, as
(1) reinsurance
(2) speculative risk
(3) antiselection
(4) moral hazard
Learning Objective: Identify four risk classes for proposed insureds.
7. Insurance companies generally classify proposed insureds who have a significantly greater-than-
average likelihood of loss but who are still found to be insurable in a risk category known as
(1) declined risks
(2) preferred risks
(3) standard risks
(4) substandard risks

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Learning Objective: Define insurable interest and determine in a given situation whether the
insurable interest requirement is met.
8. Doris Crowell applied for a life insurance policy on her own life and named her next-door
neighbor, Patrick O’Neill, as the beneficiary of the policy even though they are not related and
have no relationship other than as neighbors. At the same time, Mr. O’Neill applied for a life
insurance policy on the life of Ms. Crowell and named himself as the beneficiary. According to
insurable interest laws, an insurable interest most likely exists in
(1) both of these applications
(2) Ms. Crowell’s application, but not in Mr. O’Neill’s application
(3) Mr. O’Neill’s application, but not in Ms. Crowell’s application
(4) neither of these applications


PRACTICE QUESTIONS Chapter Two
Learning Objective: Distinguish among the three types of business organizations and explain
why insurance companies must be organized as corporations.
1. In most countries, insurance companies and most other businesses are organized as corporations.
One difference between a corporation and other forms of business organization is that
(1) a corporation is less stable and less permanent than other forms of business organization
(2) a corporation’s assets and liabilities belong to the corporation itself, not to its owners
(3) a corporation’s structure protects it from being sued
(4) only a corporation dissolves if a majority owner dies
Learning Objective: Distinguish among stock insurers, mutual insurers, and fraternal
benefit societies.
2. The Benchmark Association is a nonprofit organization formed to provide social, as well as

insurance, benefits to its members. Members in the association share a common vocational
background. Benchmark’s members elect officers and are members of local chapters, usually
referred to as lodges, which hold regular meetings. Only lodge members and their families are
permitted to own Benchmark insurance. Benchmark is best classified as a type of organization
known as a
(1) fraternal benefit society
(2) property/casualty (P&C) insurance company
(3) partnership
(4) depository institution
Learning Objective: Describe the financial services industry and explain how insurance
companies function within that industry.
3. The following statements are about financial institutions. Three of the statements are true, and
one of the statements is false. Select the answer choice containing the FALSE statement.
(1) Insurance companies cannot be classified as financial institutions because they do not
function in the economy as financial intermediaries.
(2) Financial institutions serve as financial intermediaries by channeling funds from groups
that act as suppliers of funds to groups that act as users of funds.
(3) Financial institutions help people, businesses, and governments save, borrow, invest, and
otherwise manage money.
(4) A financial institution is a business that owns primarily financial assets, such as stocks and
bonds, rather than fixed assets, such as equipment and raw materials.

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4. Consider the following consolidations in the financial services industry:

Oak Financial Services and the Pine Bank recently consolidated to form one financial
services corporation. After the consolidation, Pine Bank survived as a legal entity, and
Oak Financial Services ceased to exist.
Emerald Financial Services purchased a controlling interest in Diamond Insurance. After
this consolidation, both Emerald Financial Services and Diamond Insurance survived as
separate legal entities.
From the answer choices below, select the response that correctly indicates whether each
consolidation transaction is a merger or an acquisition.
Oak and Pine transaction Emerald and Diamond transaction
(1) acquisition acquisition
(2) acquisition merger
(3) merger acquisition
(4) merger merger
Learning Objective: Describe the roles that the federal and state governments play in U.S.
insurance regulation.
5. In the United States, the McCarran-Ferguson Act affects the regulation of the insurance industry.
The primary effect of the McCarran-Ferguson Act is that it
(1) ensures uniformity in insurance regulation among the states
(2) prohibits insurers from engaging in a variety of practices that are considered unfair
or deceptive
(3) leaves insurance regulation to the federal government, as long as the states consider federal
regulation to be adequate
(4) leaves insurance regulation to the state governments, as long as Congress considers state
regulation to be adequate
6. In the United States, the National Association of Insurance Commissioners (NAIC) develops
model laws and regulations. One characteristic of the NAIC and the model laws and regulations
it develops is that the
(1) NAIC is a governmental association created by the U.S. federal government
(2) function of the NAIC is to promote uniformity of state insurance regulation
(3) states are required to adopt the NAIC’s model laws and regulations as written
(4) states may modify model laws and regulations, but they must adopt some form of each
model law and regulation

Learning Objective: Identify the two primary types of insurance regulation in most countries.
7. Owners’ equity is the difference between the amount of a company’s assets and the amount of its
liabilities, and it represents the owners’ financial interest in the company. Owners’ equity in a
mutual insurance company consists of
(1) both capital and surplus
(2) capital, but not surplus
(3) surplus, but not capital
(4) neither capital nor surplus

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PRACTICE QUESTIONS Chapter Three
Learning Objectives: (1) Explain the difference between a valid contract, a void contract, and a
voidable contract; and (2) Identify the four general requirements for the creation of a valid
informal contract and describe how each of these requirements can be met in the formation of
an insurance contract.
1. Robert Houck purchased a life insurance policy on his life from Classic Financial. Mr. Houck
purchased the policy after a court had declared him to be mentally incompetent. In this situation,
the contract for insurance is
(1) void
(2) valid and binding on Classic
(3) voidable only by Mr. Houck
(4) voidable by either Classic or Mr. Houck
Learning Objective: Distinguish between formal and informal contracts, bilateral and
unilateral contracts, commutative and aleatory contracts, and contracts of adhesion and
bargaining contracts, and identify the types of contracts an insurance contract represents.
2. A life insurance contract is enforceable because the parties to the contract met requirements
concerning the substance of the agreement rather than requirements concerning the form of the
agreement. In addition, the insurer’s promise to pay the policy benefit is contingent on the death
of the insured occurring while the policy is in force. This information indicates that a life
insurance contract is
(1) an informal, commutative contract
(2) an informal, aleatory contract
(3) a formal, commutative contract
(4) a formal, aleatory contract
Learning Objective: Identify the four general requirements for the creation of a valid informal
contract and describe how each of these requirements can be met in the formation of an
insurance contract.
3. The following statements are about the general requirements that must be met for a valid life
insurance contract to be formed. Select the answer choice containing the correct statement.
(1) Only an insurer must express its intent to be bound by the terms of an insurance contract in
order to fulfill the requirement of mutual assent.
(2) An applicant gives the application and the initial premium and promises to pay the renewal
premiums as consideration for a life insurance contract.
(3) In order for an insurance contract to be valid, each party to the contract must give or
promise something that is of value to the other party.
(4) The requirement of lawful purpose in the making of an insurance contract is fulfilled by the
presence of an offer and the acceptance of that offer.

4. The following statements are about contractual capacity in the formation of contracts. Select the
answer choice containing the correct statement.
(1) If an insurer issues a policy to a person who is younger than the permissible age to
purchase insurance, the insurer can sue to avoid the policy.
(2) An insurer acquires its legal capacity to issue an insurance contract by being licensed or
authorized to do business as an insurer by the proper regulatory authority.
(3) To establish a valid contract in most jurisdictions, an individual must first prove his legal
capacity in a court of law.
(4) Corporations are generally presumed to have the same contractual capacity as that of
a minor.
Learning Objective: Distinguish between formal and informal contracts, bilateral and
unilateral contracts, commutative and aleatory contracts, and contracts of adhesion and
bargaining contracts, and identify the types of contracts an insurance contract represents.
5. Different types of contracts have certain characteristics. In a life insurance contract, only the
insurer makes a legally enforceable promise when entering into the contract. This characteristic
of an insurance contract identifies it as a
(1) bilateral contract
(2) bargaining contract
(3) contract of adhesion
(4) unilateral contract

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PRACTICE QUESTIONS Chapter Four
Learning Objective: Describe the legal reserve system, and explain how a product’s financial
design allows a life insurance company to meet its policy reserve requirements.
1. In the insurance industry, policy reserves represent the amount an insurer estimates it will need
for the purpose of
(1) accumulating surplus funds
(2) reinsuring risks for direct writers
(3) paying future benefits to policyowners
(4) paying stockholder dividends to the owners of its stock
2. For this question, if answer choices (1) through (3) are all correct, select answer choice (4).
Otherwise, select the one correct answer choice.
The system insurance companies use to set financial values for life insurance policies is
generally known as the legal reserve system. The premise(s) on which this system is
based include
(1) that the amount of benefits payable should be specified or calculable in advance of the
insured event
(2) that companies should collect in advance the money needed to fund a policy reserve so that
the insurer will have sufficient funds available to pay claims and expenses as they occur
(3) that the amounts a customer pays for a life insurance policy should be related to the
amount of risk the insurance company assumes for that policy
(4) all of the above
Learning Objective: Identify and define the three primary elements in the financial design of a
life insurance product, and explain how each element affects a product’s financial design.
3. For an insurance product, the cost of benefits is the value of all benefits under the product. The
cost of benefits for a single life insurance product can be calculated by
(1) adding a charge for operating expenses to each year’s potential benefit payable minus
expected investment earnings
(2) subtracting all the potential benefits payable from the total premiums the company expects
to receive
(3) multiplying all the potential benefits payable by the expected probability that each
potential benefit will be payable
(4) dividing all the potential benefits payable by the expected probability that each potential
benefit will be payable

Learning Objectives: (1) Identify and define the three primary elements in the financial design
of a life insurance product, and explain how each element affects a product’s financial design,
and (2) Explain how insurers use mortality tables in the financial design of products, and
describe the effect that mortality rates have on the cost of benefits and the premium rate for a
block of policies.
4. The following statements are about the mortality rates that are shown in mortality tables. Select
the answer choice containing the correct statement.
(1) In general, the higher the mortality rate for a group of insureds of the same age and sex, the
lower the premium rate.
(2) Mortality rates for males typically are lower than the mortality rates for females of the
same age.
(3) A mortality table that shows separate mortality rates for smokers and nonsmokers is
referred to as a composite mortality table.
(4) A mortality experience table is a mortality table that reflects the actual mortality of an
insurance company’s insureds.
Learning Objective: Describe the effect of compound interest on investment earnings, and
calculate the amount of interest earned on a given sum of money.
5. Dan Ruggiero loaned $1,000 to his sister, Ronda Houseman. Mr. Ruggiero charged his sister a
10 percent interest rate, compounded annually. At the end of two years, Ms. Houseman wanted
to pay back the entire loan plus the total interest accrued on the loan. This information indicates
that Ms. Houseman should pay Mr. Ruggiero a total of
(1) $1,000
(2) $1,020
(3) $1,200
(4) $1,210
Learning Objective: Identify and define the three primary elements in the financial design of a
life insurance product, and explain how each element affects a product’s financial design.
6. The operating expenses in an insurance product design are the expenses that arise in the normal
course of the insurer’s operations. An insurer’s operating expenses include all of the following
costs EXCEPT
(1) taxes
(2) payroll
(3) office expenses
(4) benefit payments

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Learning Objective: Explain the purpose of using conservative values in the financial design of
a life insurance product.
7. Using conservative values in financial design provides to insurers a risk margin against adverse
developments. Conservative values for specific life insurance product elements generally take
the form of
(1) mortality rates that are higher than expected
(2) investment earnings that are higher than expected
(3) operating expenses that are lower than expected
(4) profits that are higher than expected
Learning Objective: Define premium rate, and calculate the annual premium amount for a
given life insurance policy.
8. The annual premium rate for a $500,000 life insurance policy is expressed as $4 per $1,000 of
coverage. The annual premium amount for this policy is
(1) $20
(2) $200
(3) $2,000
(4) $20,000
Learning Objective: Explain how the level premium system operates.
9. In the level premium system of financial design, the premium rates charged for level
premium policies
(1) increase as an insured’s age increases
(2) decrease as an insured’s age increases
(3) are higher than needed to pay claims and expenses in earlier policy years
(4) are lower than needed to pay claims and expenses in earlier policy years


PRACTICE QUESTIONS Chapter Five
Learning Objective: Identify the common personal and business needs that life insurance
can meet.
1. Colleen Moore is the policyowner-insured of a life insurance policy that names her 32-year-old
son, David, as the beneficiary. If Ms. Moore dies while the policy is in force and while David is
still alive, then the death benefit of the policy will be payable to
(1) Ms. Moore’s estate, and the death benefit, if paid in a lump sum, most likely will be
considered taxable income to the estate
(2) Ms. Moore’s estate, and the death benefit, if paid in a lump sum, most likely will not be
considered taxable income to the estate
(3) David, and the death benefit, if paid in a lump sum, most likely will be considered taxable
income to David
(4) David, and the death benefit, if paid in a lump sum, most likely will not be considered
taxable income to David
2. George Remick developed a plan that considers the amount of assets and debts that he is likely to
have at the time of his death. The plan also considers how Mr. Remick can best preserve those
assets so that they can be distributed as he desires. The plan Mr. Remick developed is known, by
definition, as
(1) a key person insurance plan
(2) an estate plan
(3) a business continuation insurance plan
(4) a buy-sell agreement
Learning Objective: Describe the coverage provided by level term, decreasing term, and
increasing term life insurance policies, and explain when the premium charged for term life
insurance coverage may increase.
3. Harris Anderson purchased a new home and obtained a 30-year mortgage from the
HomeSweetHome Mortgage Company. The terms of the mortgage loan contract required
Mr. Anderson to purchase mortgage life insurance and to name HomeSweetHome as the
beneficiary of the mortgage life insurance policy. Mr. Anderson purchased mortgage life
insurance from the Beachside Insurance Company. The following statements are about this
situation. Select the answer choice containing the correct statement.
(1) HomeSweetHome Mortgage Company is a party to the mortgage life insurance contract
that Mr. Anderson purchased.
(2) Beachside Insurance is a party to the mortgage loan contract that Mr. Anderson obtained.
(3) The amount of the renewal premium Mr. Anderson will pay for his mortgage life insurance
policy is likely to decrease throughout the 30-year term of his mortgage loan.
(4) The amount of the policy benefit payable at any given time under Mr. Anderson’s mortgage
life insurance policy generally equals the amount Mr. Anderson owes on the
mortgage loan.

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4. The following statements are about family income coverage and credit life insurance. Select the
(1) Family income coverage is a plan of increasing term life insurance.
(2) Family income coverage provides a stated monthly income benefit amount to the
beneficiary—typically the insured’s surviving spouse—if the insured dies during the term
of coverage.
(3) The amount of benefit payable under a credit life insurance policy usually remains level
over the duration of the loan.
(4) The policy benefit of a credit life insurance policy may be paid to a beneficiary other than
the lender, or creditor, if the insured borrower dies during the policy’s term.
Learning Objective: Describe renewable term life insurance and convertible term
life insurance.
5. Ana Maria Avila purchased a $100,000 15-year renewable term insurance policy on her life. At
the end of the 15-year term, the renewal provision in Ms. Avila’s policy most likely gives her the
right, within specified limits, to renew her insurance coverage
(1) without having to submit evidence of her insurability
(2) for a one-year term, but not for another 15-year term
(3) after first undergoing a required medical examination
(4) at the same premium rate she was charged for the original 15-year term policy
6. Edgar Whitefeather is the policyowner-insured of a five-year term life insurance policy for
which the face amount remains the same throughout the term of the insurance coverage. One
feature of Mr. Whitefeather’s policy gives him the right to change the term policy to a cash value
life insurance policy without providing evidence that he continues to be an insurable risk. This
information indicates that Mr. Whitefeather’s insurance policy can be characterized as
(1) a renewable term insurance policy
(2) an increasing term insurance policy
(3) a decreasing term insurance policy
(4) a convertible term insurance policy
Learning Objective: Describe the operation of a return of premium (ROP) term policy.
7. Kaitlin Miller, age 35, purchased a $250,000 30-year return of premium (ROP) term insurance
policy from the Kumquat Insurance Company. Ms. Miller paid annual premiums of $700.
Ms. Miller paid all required premiums and was alive at the end of the 30-year term when the
policy expired. This information indicates that
(1) Ms. Miller’s policy expired without Kumquat making any payment to anyone
(2) Kumquat paid $21,000 to Ms. Miller
(3) Kumquat paid $250,000 to the beneficiary of Ms. Miller’s policy
(4) Kumquat paid $250,000 to Ms. Miller


PRACTICE QUESTIONS Chapter Six
Learning Objective: Define cash value life insurance and distinguish it from term
life insurance.
1. Whole life insurance products and term life insurance products differ as to whether they contain
a savings element, and whether they offer insurance coverage for the entire lifetime of the
insured or for only a certain period of time. (Term / Whole) life insurance builds a cash value
that functions as a savings element. (Term / Whole) life insurance provides protection for the
entire lifetime of the insured, as long as the policy remains in force.
(1) Term / Term
(2) Term / Whole
(3) Whole / Term
(4) Whole / Whole
Learning Objective: Identify the common characteristics of whole life insurance, modified
whole life insurance, and joint whole life insurance, and describe the features that differentiate
these types of whole life insurance.
2. The following statements are about two types of whole life insurance policies: limited-payment
policies and continuous-premium policies. Select the answer choice containing the
correct statement.
(1) The annual premium for a limited-payment whole life insurance policy is greater than the
annual premium for an equivalent continuous-premium whole life insurance policy.
(2) The cash value of a continuous-premium whole life insurance policy builds more rapidly
than does the cash value under an equivalent limited-payment whole life insurance policy.
(3) Under a limited-payment whole life insurance policy, life insurance coverage expires at the
end of the specified premium payment period.
(4) A continuous-premium whole life insurance policy is considered to be paid up when the
insured reaches age 65.
3. Some insurers issue modified-premium whole life insurance policies. According to the terms of
most modified-premium policies, the amount of the annual premium changes after a specified
initial time period. Compared to a continuous-premium whole life insurance policy with the
same face amount, a modified-premium whole life insurance policy has an initial annual
premium that is normally
(1) lower, and a cash value that builds more quickly
(2) lower, and a cash value that builds more slowly
(3) higher, and a cash value that builds more quickly
(4) higher, and a cash value that builds more slowly

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4. Sang-jin Kwon, age 42, pays level premiums for a type of whole life insurance policy. The
policy specifies that the face amount will decrease from $300,000 to $200,000 when Mr. Kwon
reaches age 60, and then decrease again from $200,000 to $100,000 when he reaches age 70.
From the answer choices below, select the response that correctly identifies the type of policy
Mr. Kwon purchased, and whether the annual premium Mr. Kwon pays for this policy is higher
or lower than the annual premium he would pay for a continuous-premium whole life insurance
policy that provided $300,000 of coverage throughout his lifetime.
Type of policy Annual premium rate
(1) modified-premium policy lower than for a continuous-premium policy
(2) modified-premium policy higher than for a continuous-premium policy
(3) modified coverage policy lower than for a continuous-premium policy
(4) modified coverage policy higher than for a continuous-premium policy
5. Doug Cooper purchased a whole life insurance policy that insures both him and his wife,
Jennifer, and provides funds to pay any estate taxes that may be levied after their deaths. The
policy specifies that the death benefit will be paid only after both Doug and Jennifer have died.
This information indicates that the type of insurance policy Doug purchased is
(1) an endowment insurance policy
(2) a last survivor life insurance policy
(3) a joint whole life insurance policy
(4) a family policy
Learning Objective: Explain how universal life insurance differs from whole life insurance in
terms of its separate policy elements and its flexible premiums, face amount, and
death benefit.
6. One true statement about a universal life insurance policy is that the
(1) policy is treated as a life insurance product under United States federal tax laws, regardless
of the size of the policy’s cash value in relation to its death benefit
(2) policyowner decides, within certain limits, what the policy’s face amount will be, the
amount of the death benefit payable, and the amount of premiums he will pay for
that coverage
(3) policyowner may not use the cash value of the policy as security for a policy loan
(4) policy elements, such as mortality charges, interest rate, and expenses, are combined into
one bundle and stated in the policy as a single periodic premium amount that the
policyowner must pay to keep the policy in force

Learning Objective: Describe how variable life insurance allows policyowners to decide how
their premiums and cash values are invested.
7. The following statements are about variable life (VL) insurance in the United States. Select the
(1) A VL insurance policy’s premiums and cash values are invested in an investment account,
which the insurer maintains separately from its general investment account.
(2) The death benefit provided by a VL insurance policy remains constant throughout the life
of the policy.
(3) VL insurance policies offer policyowners guaranteed investment earnings and minimum
cash values.
(4) The insurance company alone assumes the investment risk of a VL insurance policy.
Learning Objective: Describe the features that variable universal life insurance products share
with universal life insurance and variable life insurance products.
8. Margaret Reece purchased a variable universal life (VUL) insurance policy from the Patrician
Life Insurance Company. Ms. Reece’s policy combines features of universal life insurance and
variable life insurance. One characteristic of Ms. Reece’s VUL insurance policy is that the
(1) policy elements are not listed separately
(2) premiums are fixed
(3) face amount is flexible
(4) policy has a flexible interest rate with a guaranteed minimum
Learning Objective: Describe the characteristics of endowment insurance.
9. The difference between an endowment insurance policy and a cash value life insurance policy is
that only the endowment insurance policy
(1) pays a fixed benefit whether the insured survives to the policy’s maturity date or dies
before that maturity date
(2) has premiums that are level throughout the term of the policy
(3) steadily builds a cash value
(4) receives favorable federal income tax treatment in the United States

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PRACTICE QUESTIONS Chapter Seven
Learning Objective: Identify and describe three types of supplemental disability benefits that
life insurance policies may provide.
1. Rusty Shackleford is the policyowner-insured of a whole life insurance policy issued by the
Mountainview Life Insurance Company. Mr. Shackleford was injured in an accident and was
unable to work for 18 months. After Mr. Shackleford satisfied a three-month waiting period,
Mountainview began paying the renewal premiums on Mr. Shackleford’s policy, and the policy’s
cash value continued to increase just as if Mr. Shackleford were paying the premiums himself.
This information indicates that Mr. Shackleford’s policy contained a
(1) waiver of premium for payor benefit
(2) waiver of premium for disability (WP) benefit
(3) paid-up additions option benefit
(4) disability income benefit
2. One benefit that may be added to an individual life insurance policy is the disability income
benefit. One true statement about a supplemental disability income benefit is that
(1) the insured must be totally disabled to receive the benefit
(2) the insurer begins paying benefits at the start of the disability
(3) life insurance policies that include a disability income benefit rarely include a waiver of
premium for disability (WP) benefit as well
(4) the amount of the monthly disability income benefit is a percentage of the insured’s
current earnings
Learning Objective: Explain the coverage that an accidental death benefit rider provides and
give examples of common exclusions.
3. Rachel Loo, age 29, died when the commercial airplane on which she was traveling as a
passenger crashed, killing everyone on board. At the time of her death, Ms. Loo was insured by a
$300,000 whole life insurance policy with a typical double indemnity accidental death benefit
rider. This information indicates that the insurer is liable for paying the designated beneficiary of
Ms. Loo’s policy
(1) $0
(2) $300,000
(3) $600,000
(4) $900,000

4. One type of supplemental accident benefit is the accidental death and dismemberment (AD&D)
benefit. AD&D benefits generally specify that the
(1) insured must be totally disabled and unable to work in order to receive any benefits
(2) insurer will pay both accidental death benefits and dismemberment benefits for injuries
suffered in the same accident
(3) insured must suffer the actual physical loss of a limb to qualify for
dismemberment benefits
(4) dismemberment benefit is payable if an accident causes the insured to lose any two limbs
or sight in both eyes
Learning Objective: Identify three types of accelerated death benefit riders and describe the
differences among those riders.
5. Accelerated death benefits, also known as living benefits, allow a policyowner-insured to receive
all or part of the policy’s death benefit before the insured’s death if certain conditions are met.
Three commonly offered types of accelerated death benefits are the terminal illness (TI) benefit,
the dread disease (DD) benefit, and the long-term care (LTC) insurance benefit. The following
statements are about these different types of accelerated death benefits. Select the answer choice
containing the correct statement.
(1) Insurers generally offer accelerated death benefit coverage on policies of all face amounts.
(2) Insurers typically charge an additional premium amount for all three types of accelerated
death benefits.
(3) The payment of an accelerated death benefit reduces the death benefit that will be paid to
the beneficiary at the insured’s death by the amount of the accelerated death benefit paid.
(4) Insurers pay only lump-sum benefits under all three types of accelerated death benefits.
Learning Objective: Describe three types of insurance riders that expand a life insurance
policy’s coverage to insure more than one individual.
6. Sally Warner, the policyowner-insured of a whole life insurance policy, wants to add a second
insured rider to the policy so that her business partner, Patricia Skelton, will be provided with
life insurance coverage. The insurer most likely will base the premium rate for the coverage
provided by the rider on
(1) the combined risk characteristics of Ms. Warner and Ms. Skelton
(2) the risk characteristics of Ms. Warner only
(3) the risk characteristics of Ms. Skelton only
(4) a flat amount that the company charges for all second insured riders

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Learning Objective: Identify two types of insurability benefit riders and explain how they
allow a life insurance policyowner to purchase additional insurance coverage.
7. Scott Herbermann is the policyowner-insured of a $200,000 whole life insurance policy. The
policy includes a supplemental benefit rider that gives Mr. Herbermann the right to purchase
$25,000 of additional whole life insurance at age 34, age 37, and age 40, without submitting
evidence of insurability. This information indicates that Mr. Herbermann’s policy includes the
type of supplemental benefit known as
(1) an additional insured rider
(2) a paid-up additions option benefit
(3) a guaranteed insurability (GI) benefit
(4) credit life insurance


PRACTICE QUESTIONS Chapter Eight
Learning Objective: Describe the free-look provision of an insurance policy.
1. Ginger Harrison applied for an individual $250,000 insurance policy on her life and paid the
initial premium. The insurer issued the policy as applied for, and the insurer’s agent delivered the
policy to Ms. Harrison on June 15. The policy included a typical 10-day free-look period.
Ms. Harrison was killed in an automobile accident on June 22. She never indicated whether she
intended to keep the policy or return it to the insurer. In this situation, the named beneficiary is
entitled to receive
(1) $250,000, because Ms. Harrison’s coverage was in effect during the 10-day free-
look period
(2) a return of the initial premium only, because Ms. Harrison had not advised the insurer of
her decision to keep or return the policy
(3) a return of the initial premium only, because Ms. Harrison’s death occurred during the 10-
day free-look period
(4) nothing, because Ms. Harrison’s coverage would not have gone into effect until after the
expiration of the 10-day free-look period
Learning Objective: Identify the documents that make up the entire contract between the
owner of a life insurance policy and the insurer.
2. The wording of the entire contract provision in a life insurance policy varies according to
whether the policy is a closed contract or an open contract. The following statements are about
these two types of contracts. Select the answer choice containing the correct statement.
(1) The entire contract provision in a closed contract typically states that the entire insurance
contract consists of the policy, any attached riders, and the attached copy of the application
for insurance.
(2) Because insurance policies issued by fraternal insurers are closed contracts, the insurer
must attach a copy of the fraternal society’s charter, constitution, and bylaws to the policy
in order for the contract to be valid.
(3) All individual life insurance policies are open contracts.
(4) The entire contract provision in an open contract allows oral statements to modify the
terms of the policy.

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Learning Objective: Explain the purpose and operation of the incontestability provision.
3. Each of the situations below describes a misrepresentation made in the application for an
individual life insurance policy. The insurer discovered the misrepresentations after receiving
death claims on the policies. In each case, the insurance policy contains a typical two-year
incontestability provision:
Claire Bodin stated on her application for insurance that she had broken her right wrist in
a jogging accident, when in fact, she had broken her left wrist. Ms. Bodin died during her
policy’s contestable period.
Miriam Kauffman stated on her application for insurance that she had been treated for a
chest cold when, in fact, she had been treated for cancer. Ms. Kauffman died of cancer
three years after the policy was issued.
Clayton Stuckey stated on his application for insurance that he had received a routine
medical check-up on February 26, when in fact, the visit was a post-operative visit
following heart bypass surgery. Mr. Stuckey died 18 months after the policy was issued.
With regard to these situations, it most likely is correct to say that the insurer has the right to
avoid the contract on the ground of a material misrepresentation in the application(s)
submitted by
(1) Ms. Bodin, Ms. Kauffman, and Mr. Stuckey
(2) Ms. Bodin only
(3) Ms. Kauffman only
(4) Mr. Stuckey only
Learning Objective: Apply the terms of the standard grace period provision in a given
situation to determine whether a life insurance policy has lapsed for nonpayment of premium.
4. Creighton Madden was the policyowner-insured of a $100,000 term life insurance policy that
contained a typical grace period provision. The policy’s annual premium of $500 was due on
September 1 of each year. Mr. Madden died on September 14, 2010, without having paid the
renewal premium due on September 1, 2010. At the time of his death, Mr. Madden had paid a
total of $10,000 in premiums to the insurer. In this situation, the amount the insurer most likely
paid Mr. Madden’s designated beneficiary was
(1) $0
(2) $10,000
(3) $99,500
(4) $100,000

Learning Objective: Identify situations in which a life insurance policy can be reinstated and
the conditions the policyowner must meet to reinstate the policy.
5. Antonio Castellano was the policyowner-insured of a traditional whole life insurance policy that
lapsed two years ago. Mr. Castellano now wishes to reinstate the lapsed policy. At the time his
policy lapsed, there were no outstanding policy loans. If the reinstatement provision in his policy
is typical, then the conditions Mr. Castellano must meet in order to reinstate his policy include
(1) completing a reinstatement application within the time frame stated in the reinstatement
provision and presenting satisfactory evidence of his continued insurability only
provision and paying all back premiums plus interest on those premiums only
(3) presenting satisfactory evidence of his continued insurability and paying all back premiums
plus interest on those premiums only
provision, providing satisfactory evidence of his continued insurability, and paying all back
premiums plus interest on those premiums
Learning Objective: Determine the action an insurer likely will take if it discovers a
misstatement of the age or sex of the person insured by a life insurance policy.
6. Tom Espeland applied to the Mosaic Insurance Company for an insurance policy on the life of
his mother, Joanna. He incorrectly stated on the application that Joanna was age 50, when in fact,
she was 53 years old. The policy contained a typical misstatement of age provision. Mosaic
discovered the misstatement of age when processing a claim for the policy’s death benefits. In
this situation, Mosaic most likely will
(1) pay the policy’s face amount based on the age stated in the insurance application
(2) reduce the policy’s face amount to the amount that the premiums paid would have
purchased had Joanna’s age been stated correctly on the insurance application
(3) give the policy beneficiary the option to receive as a refund any premium amount
difference caused by the misstatement rather than adjust the policy’s face amount
(4) declare the policy void because Joanna’s age was misrepresented on the
insurance application

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Learning Objective: Describe the rights provided by a policy loan provision and a policy
withdrawal provision, and explain the differences between a policy loan and a
commercial loan.
7. Cash value life insurance policies typically grant the policyowner the right to borrow money
from the insurer by using the cash value of the policy as security for the loan. The following
statements are about the characteristics of such policy loans. Select the answer choice containing
the correct statement.
(1) Insurers typically do not permit policyowners to take out policy loans on universal life
insurance policies.
(2) A policy loan is an advance payment of part of the amount that the insurer eventually must
pay out under the life insurance policy.
(3) A policy loan creates a debtor-creditor relationship between the policyowner and
the insurer.
(4) A policyowner has the right to take out a policy loan for any amount up to the policy’s
face amount.
Learning Objective: Identify and describe the nonforfeiture options typically included in cash
value life insurance policies.
8. The following statements are about the nonforfeiture options available to policyowners of life
insurance policies that build cash values. Select the answer choice containing the
correct statement.
(1) Coverage issued under the reduced paid-up insurance nonforfeiture option does not have a
cash value.
(2) Once a policyowner selects the extended term insurance nonforfeiture option, the
policyowner loses the right to cancel the extended term insurance and surrender the policy
for its remaining cash value.
(3) Under the cash payment nonforfeiture option, when a policyowner surrenders a policy, the
insurer may subtract the amount of any outstanding policy loan, plus any interest on the
loan, from the cash surrender value amount listed in the policy.
(4) Under the reduced paid-up nonforfeiture option, any supplemental benefits that were
available on the original policy, such as accidental death benefits, are usually available
when the policy is continued as reduced paid-up insurance.

Learning Objective: Identify the exclusions that insurers sometimes include in individual life
insurance policies.
9. Jutta Kindermann was insured under a $250,000 life insurance policy that contained a typical
accidental death benefit rider and a typical two-year suicide exclusion provision. Three years
after Ms. Kindermann’s policy was issued, Ms. Kindermann died, and it was determined that she
had committed suicide. At the time of her death, the policy was in force, and there were no
unpaid premiums or policy loans. In this situation, the insurer most likely was obligated to pay
the beneficiary of Ms. Kindermann’s policy
(1) nothing, because Ms. Kindermann committed suicide
(2) a return of premiums paid for the policy only
(3) the basic death benefit only
(4) both the basic death benefit and the accidental death benefit

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PRACTICE QUESTIONS Chapter Nine
1. An insurance policy is a contract between the insurer and the policyowner and is subject to the
rules of contract law. An insurance policy also is a type of property and, thus, is subject to the
principles of property law. In legal terminology, property is classified as either real property or
personal property and as tangible property or intangible property. With regard to these
classifications, an insurance policy is classified correctly as
(1) tangible real property
(2) tangible personal property
(3) intangible real property
(4) intangible personal property
Learning Objective: Distinguish between primary and contingent beneficiaries and between
revocable and irrevocable beneficiaries.
2. Lindsay Inthachak was the policyowner-insured of a whole life insurance policy. Lindsay
designated her husband, Stephen, as the party to receive the policy proceeds following her death.
Lindsay designated their daughter, Lily, to receive the policy proceeds if Stephen predeceases
Lindsay. In this situation, Stephen is the type of policy beneficiary known as a
(1) contingent beneficiary
(2) primary beneficiary
(3) secondary beneficiary
(4) successor beneficiary
3. The following statements are about revocable and irrevocable beneficiary designations. Select
(1) A beneficiary designation is said to be revocable if the policyowner has the right to change
the beneficiary designation only after obtaining the beneficiary’s consent.
(2) The vast majority of beneficiaries of life insurance policies are irrevocable beneficiaries.
(3) A revocable beneficiary’s interest in a life insurance policy during the insured’s lifetime is
referred to as a “mere expectancy” of receiving the policy proceeds.
(4) A beneficiary designation is said to be irrevocable if the policyowner has the unrestricted
right to change the designation during the life of the insured.

Learning Objective: Identify the policy dividend options that most commonly are included in
participating life insurance policies, and describe the characteristics of each option.
4. A participating policy is a type of policy under which the policyowner shares in the insurance
company’s divisible surplus through the receipt of policy dividends. A nonparticipating policy is
a type of policy in which the policyowner does not share in the insurer’s surplus. The following
statements are about participating and nonparticipating life insurance policies. Select the answer
choice containing the correct statement.
(1) Although policy dividends are not guaranteed to be paid, most insurers periodically pay
dividends on their participating life insurance policies that are expected to remain in force
over a long term.
(2) Generally, the premium rates for participating policies are lower than those for equivalent
nonparticipating policies.
(3) In setting premium rates for nonparticipating policies, insurers typically use more
conservative assumptions regarding mortality, investment earnings, and expenses than they
do for equivalent participating policies.
(4) A policy dividend is not considered a refund of part of the premiums a participating
policyowner paid during a policy year.
5. A participating life insurance policy is a type of policy under which the policyowner shares in
the insurer’s divisible surplus through the receipt of policy dividends. The following statements
are about these policy dividends. Select the answer choice containing the correct statement.
(1) The amount payable as an annual policy dividend is determined during the risk assessment
process in an insurer’s underwriting department.
(2) Generally, dividend amounts paid on participating life insurance policies decrease
substantially with the age of the policy.
(3) The terms of some life insurance policies state that the policy must be in force for two
years before any policy dividends are payable.
(4) An applicant for a participating policy usually selects a dividend option during the
application process and once selected, the dividend option cannot be changed over the life
of the policy.
6. The owner of a participating life insurance policy may receive policy dividends in a number of
different ways, called dividend options. Under one type of dividend option, the insurer applies
policy dividends toward the payment of renewal premiums. By definition, this dividend option is
known as the
(1) accumulation at interest option
(2) automatic dividend option
(3) cash dividend option
(4) premium reduction dividend option

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7. When Craig Alred purchased a participating whole life insurance policy on his life, he selected
the cash dividend option. After the policy had been in force for five years, Mr. Alred requested
that the dividend option be changed to the paid-up additional insurance dividend option. With
regard to this situation, it is correct to say that
(1) any paid-up additional insurance issued under this new dividend option will be one-year
term insurance in an amount equal to the policy’s cash value
(2) the premium charged for any paid-up additional insurance issued under this new dividend
option will include an amount to cover the insurer’s expenses
(3) the insurer will require Mr. Alred to provide satisfactory evidence of insurability before
changing to this new dividend option
(4) any paid-up additional insurance issued under this new dividend option will be whole life
insurance in whatever face amount the dividend can provide at Mr. Alred’s attained age
Learning Objective: Identify the methods by which ownership of a life insurance policy can
be transferred.
8. An assignment of a life insurance policy may take one of two forms: an absolute assignment or a
collateral assignment. With respect to a collateral assignment, it is correct to say that the
assignee’s rights
(1) include all ownership rights granted to the policyowner
(2) are limited to those ownership rights that directly concern the monetary value of the policy
(3) are permanent, rather than temporary
(4) are limited to the right to select a settlement option only
9. Tim Parnell purchased a $50,000 whole life insurance policy on the life of his daughter,
Samantha, shortly after her third birthday. The policy contained a typical change of ownership
provision. Using the endorsement method, Tim transferred ownership of the policy to Samantha
as a gift when she turned 23. With regard to making the transfer of ownership using the
endorsement method in this situation, it most likely is correct to say that
(1) Tim must enter into a separate assignment agreement with Samantha that will exist apart
from the life insurance policy
(2) Tim must make a collateral assignment of the life insurance policy to Samantha
(3) the insurer must issue a new life insurance policy that names Samantha as the
new policyowner
(4) Tim must notify the insurer, in writing, of the change of ownership
Learning Objective: Identify the person in a given situation who is entitled to receive the
proceeds of a life insurance policy following the insured’s death.
10. Ian Muldoon was the policyowner of a $150,000 life insurance policy insuring the life of his
wife, Sarah. The policy named Hannah, Sarah’s mother, as primary beneficiary, and Joseph,
Sarah’s brother, as contingent beneficiary. When Sarah died, Ian, Hannah, and Joseph had all
predeceased her. This information indicates that the policy proceeds are payable to
(1) Ian’s estate
(2) Sarah’s estate
(3) Hannah’s estate
(4) Joseph’s estate

Learning Objective: Describe the general rule stated in a simultaneous death act, and explain
how that rule is affected if a policy contains a survivorship clause.
11. Sharon Rickett was the policyowner-insured of a life insurance policy that named her husband,
Brandon, as the primary beneficiary and their daughter, Abigail, as the contingent beneficiary.
Sharon and Brandon were both killed in an automobile accident, and there was no proof as to
which of them died first. Sharon’s policy did not provide for common disasters. If the Ricketts
lived in a state that has enacted a typical simultaneous death act, and if Abigail was still living at
the time of her parents’ deaths, then the proceeds of Sharon’s policy most likely would be
payable to
(1) Abigail
(2) Sharon’s estate
(3) Brandon’s estate
(4) no one, because Sharon and Brandon died simultaneously
12. Some life insurance policies include a clause which states that the beneficiary must outlive the
insured by a specified period to be entitled to receive the policy proceeds. Under this type of
clause, if the beneficiary does not outlive the insured by the specified period of time, then the
policy proceeds are paid as if the beneficiary predeceased the insured. As a result, the policy
proceeds are more likely to be distributed as the policyowner had intended. By definition, this
type of clause is known as a
(1) right of revocation clause
(2) succession beneficiary clause
(3) survivorship clause
(4) key person clause
Learning Objective: Identify the person in a given situation who is entitled to receive the
proceeds of a life insurance policy following the insured’s death.
13. According to laws in many countries, if the beneficiary of a life insurance policy wrongfully and
intentionally kills the insured, the beneficiary (is / is not) disqualified from receiving policy
proceeds. If it is proven that the policy was purchased with the intention to profit from the
insured’s death, then the life insurance contract is considered (void / valid).
(1) is / void
(2) is / valid
(3) is not / void
(4) is not / valid

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Learning Objective: Calculate the proceeds payable under a given life insurance policy
following the death of the insured.
14. Nathan Katogir was the policyowner-insured of a $100,000 participating whole life insurance
policy with a $100,000 accidental death benefit rider. Mr. Katogir’s $1,150 annual premium was
due on June 21. On June 30, Mr. Katogir was killed in an automobile accident. At the time of his
death, he had not yet paid his overdue premium. Also at the time of his death, his policy had
$4,500 in accumulated policy dividends, including interest, left on deposit with the insurer, and a
$2,000 outstanding policy loan. This information indicates that the total death benefit payable to
the beneficiary of Mr. Katogir’s policy was
(1) $96,850
(2) $101,350
(3) $196,850
(4) $201,350
Learning Objective: Identify the settlement options that typically are included in life insurance
policies, and describe the features of each option.
15. In addition to lump-sum settlements of policy proceeds, insurers also make available to the
policyowner and to the beneficiary alternative settlement options for receiving life insurance
policy proceeds. With regard to these settlement options, it is correct to say
(1) that the life income option typically results in larger installment payments than would be
available under the fixed amount or fixed period options
(2) that a policyowner who selects the interest option cannot place restrictions on the payee’s
right to withdraw the policy proceeds
(3) that, under the fixed period option, the payee usually has the right to withdraw only a part
of the policy proceeds during the payment period
(4) that, under the fixed amount option, the insurer pays equal installments of a stated amount
to the payee until the policy proceeds, plus the interest earned, are exhausted


PRACTICE QUESTIONS Chapter Ten
Learning Objective: Define the terms , , , , and
.
1. By definition, the person whose lifetime is used to determine the amount of benefits payable
under an annuity contract is known as the
(1) payee
(2) annuitant
(3) contract owner
(4) annuity consideration
2. Ravi Patel purchased an annuity on February 1, 2010. Under the terms of the contract, the
insurer will begin making annual income payments to Mr. Patel on February 1, 2030. With
regard to the contract’s maturity date and annuity period, it is correct to say that Mr. Patel’s
contract has a maturity date of
(1) February 1, 2010, and the contract’s annuity period is one year
(2) February 1, 2010, and the contract’s annuity period is twenty years
(3) February 1, 2030, and the contract’s annuity period is one year
(4) February 1, 2030, and the contract’s annuity period is twenty years
Learning Objective: Distinguish between immediate and deferred annuity contracts, single-
premium and flexible-premium annuity contracts, and fixed and variable annuity contracts.
3. An annuity contract can be classified as either an immediate annuity or a deferred annuity. An

annuity contract under which periodic income payments are scheduled to begin more than one
annuity period after the date on which the annuity was purchased is (an immediate / a deferred)
annuity. For this type of annuity contract, the time period between the contract owner’s purchase
of the annuity and the beginning of the payout period is known as the annuity contract’s
(liquidation / accumulation) period.
(1) an immediate / liquidation
(2) an immediate / accumulation
(3) a deferred / liquidation
(4) a deferred / accumulation
4. David Hoddeson, age 58, inherited $300,000 from his father’s estate. Mr. Hoddeson used the
entire inheritance as a lump-sum premium payment to purchase an annuity contract that will
provide him with monthly periodic income payments, beginning on his 65th birthday. This
information indicates that Mr. Hoddeson purchased a
(1) flexible-premium deferred annuity
(2) flexible-premium immediate annuity
(3) single-premium deferred annuity
(4) single-premium immediate annuity

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5. A variable annuity is an annuity under which the amount of the accumulated value and the
amount of the periodic income payments fluctuate in accordance with the performance of one or
more specified investment funds. The following statements are about variable annuities. Select
(1) An insurer that issues a variable annuity must guarantee that the contract’s accumulated
value will experience no loss of principal and will earn at least a minimum guaranteed
interest rate.
(2) Federal laws in the United States treat variable annuities as securities that must comply
with federal securities laws.
(3) Once the contract owner of a variable annuity allocates premium amounts among a number
of subaccounts, she cannot change the subaccounts in which future premiums are invested.
(4) If the contract owner of a variable annuity allocates premiums among a number of
subaccounts, she generally cannot change the percentage of money allocated to
specific subaccounts.
6. Two hybrid types of annuity products that insurers issue are equity-indexed annuities (EIAs) and
market value adjusted (MVA) annuities. With regard to these hybrid annuities, it is correct to say
that an
(1) EIA typically is classified as a variable annuity
(2) EIA does not offer any guarantees
(3) MVA annuity allows contract owners to move or withdraw premium deposits at certain
times stipulated in the contract to take advantage of prevailing market interest rates
(4) MVA annuity requires contract owners to be “locked in” with fixed earnings for the life of
the contract
Learning Objective: Explain standard contract provisions included in individual

annuity contracts.
7. One individual annuity contract provision gives the contract owner a stated period of time—
usually 10 to 30 days—after the contract is delivered in which to cancel the contract and receive
a full refund of the initial premium paid. This type of individual annuity contract provision is
known as the
(1) incontestability provision
(2) free-look provision
(3) entire contract provision
(4) dividends provision
Learning Objective: Describe the guaranteed benefits included in some variable

annuity contracts.
8. Some variable annuity contracts guarantee that up to a certain percentage of the amount paid into
the contract will be available for withdrawals annually during the accumulation period, even if
subaccount investments perform poorly. This guaranteed benefit is known as a
(1) guaranteed minimum withdrawal benefit (GMWB)
(2) guaranteed minimum death benefit (GMDB)
(3) guaranteed minimum income benefit (GMIB)
(4) guaranteed minimum accumulation benefit (GMAB)

Learning Objective: Explain the fees and charges typically paid by annuity contract owners.
9. Antoine Fargo purchased a variable annuity from the Habersham Insurance Company. The
contract specifies that, each time Mr. Fargo withdraws money from the product, Habersham will
charge a fee, expressed as a percentage of the withdrawal. This percentage will decrease over
time, until eventually Mr. Fargo can withdraw funds without incurring a charge. By definition,
this fee is known as a
(1) contingent deferred sales charge (CDSC), and it is considered a front-end sales charge
(2) contingent deferred sales charge (CDSC), and it is considered a back-end sales charge
(3) mortality and expense risk (M&E) charge, and it is considered a front-end sales charge
(4) mortality and expense risk (M&E) charge, and it is considered a back-end sales charge
Learning Objective: Identify and distinguish among the types of payout options available
under annuity contracts.
10. Greta Anderson was the contract owner, the annuitant, and the payee of a life with refund
annuity for which she paid a single premium of $75,000. The annuity will provide an income
payment of $5,000 per year during Greta’s lifetime. Greta died five years after income payments
began, and at the time of her death, she had received periodic income payments totaling $25,000.
In this situation, the contingent payee named in Greta’s annuity contract is entitled to receive
(1) nothing
(2) a single payment of $5,000
(3) $50,000
(4) $75,000
Learning Objective: List the factors that affect the amount of an annuity’s periodic income
payments and describe the effect of each factor.
11. For all types of life annuities, the number and timing of periodic income payments depends on
mortality experience as well as on the frequency of payments and the total length of the payout
period. All other factors being equal, it generally is correct to say that the shorter the time period
that an annuitant is expected to live, the
(1) larger the periodic income payments will be
(2) smaller the periodic income payments will be
(3) greater the number of periodic income payments that will be made
(4) lower the annuity contract’s stated interest rate will be

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Learning Objective: Describe two types of favorable income tax treatment for annuities in
various jurisdictions, and compare the income tax treatment of traditional IRAs and Roth IRAs.
12. In the United States, the tax treatment of an individual retirement arrangement (IRA) varies
depending on whether it is a traditional IRA or a Roth IRA. One correct statement about a
(1) traditional IRA is that contributions are not tax-deductible
(2) traditional IRA is that investment earnings accumulate and are distributed on a tax-
free basis
(3) Roth IRA is that federal tax laws typically impose tax penalties if an individual who is
younger than age 59½ makes a withdrawal from an IRA
(4) Roth IRA is that there are no annual contribution limits


PRACTICE QUESTIONS Chapter Eleven
Learning Objective: Identify the parties to a group insurance contract, and distinguish
between contributory and noncontributory group insurance plans.
1. The parties to a master group insurance contract are the

(1) group policyholder and the insurer only
(2) group policyholder and the group insureds only
(3) insurer and the group insureds only
(4) insurer, the group policyholder, and the group insureds
2. The following statements are about group insurance contracts. Select the answer choice
(1) If a group policyholder pays the entire premium amount for the group coverage, then the
group insurance plan is a contributory plan.
(2) Each group member must receive individual copies of the master group contract.
(3) Each group member insured under a group life insurance policy has the right to name the
beneficiary who will receive the benefit payable upon that group member’s death.
(4) Group policyholders are not required to provide each group member with a certificate of
insurance or a separate benefit booklet that describes the group insurance plan.
3. An insurance contract is an informal contract that must be formed in accordance with the rules of
contract law. Thus, to form a valid group insurance contract, certain requirements must be met.
The following statements are about these requirements. Select the answer choice containing the
correct statement.
(1) The group insureds covered under the group insurance contract and the insurer must
mutually agree to the contract’s terms.
(2) Both the proposed group insureds and the group policyholder must have contractual
capacity in order to enter into a contract for group insurance.
(3) The group policyholder must prove an insurable interest in the group insureds so that the
contract will have been formed for a lawful purpose.
(4) The group policyholder and the insurer must exchange legally adequate consideration in
order for the contract to be valid.

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Learning Objective: Describe the operation of the probationary period and the actively-at-
work requirement.
4. Rafael Montero accepted a job with the Beehive Company on June 5, 2010, and actually began
working for Beehive on June 10, 2010. Beehive provides both noncontributory group life
insurance and contributory group health insurance to its employees. Beehive’s employee benefits
plan requires a typical 30-day probationary period and a 31-day eligibility period. This
information indicates that Mr. Montero’s group life insurance coverage will become effective on
(1) June 10, and he will be eligible to enroll for group health insurance coverage during a 31-
day period that begins on June 10
(2) June 10, and he will be eligible to enroll for group health insurance coverage during a 31-
day period that begins on July 10
(3) July 10, and he will be eligible to enroll for group health insurance coverage during a 31-
day period that begins on July 10
(4) July 10, and he will be eligible to enroll for group health insurance coverage during a 31-
day period that begins on August 10
Learning Objectives: Compare group underwriting with individual underwriting, and identify
the risk characteristics that group underwriters consider.
5. The following groups have applied for group life insurance coverage from Palmino Financial.
Palmino’s group underwriting guidelines are typical of most insurers. Select the answer choice
describing a group that will likely FAIL to qualify for group insurance coverage.
(1) RBG Associates is a small group of retired individuals who banded together as a group for
the sole purpose of obtaining group life insurance coverage at reasonable rates.
(2) In the United States, the Milltown Labor Union promotes the welfare, interests, and rights
of its members.
(3) The Prism Company is a professional organization for accountants that provides continuing
education classes and organized travel opportunities and seeks to provide voluntary group
insurance coverage to its members.
(4) CB&C Association is a group consisting of the eligible employees of several small
employers and two labor unions that are in the building industry.
Learning Objective: Identify the common types of insurable groups.
6. Group underwriters consider a number of specific characteristics of a group when evaluating

whether that group is an acceptable risk. One factor that would tend to make an employer-
employee group eligible for group insurance coverage is if the
(1) employer plans to pay no portion of the group insurance premium
(2) employer anticipates experiencing excessive changes in the group membership
(3) group will maintain at least a 25% participation level at all times in the group
insurance plan
(4) group has a sufficient number of new members periodically entering the group so that both
the group’s size and its age distribution remain stable

Learning Objective: Describe the purpose and operation of benefit schedules in group life
insurance policies.
7. Group life insurance policies typically include a schedule that defines the amount of life
insurance the policy provides for each insured. For example, the schedule might provide life
insurance coverage to all eligible employees in an amount equal to one year’s salary. In another
schedule, the amount of life insurance coverage might vary depending on whether the employee
is a senior executive, a manager, or a nonmanagement employee. By definition, this schedule is
known as
(1) a blended rating schedule
(2) a benefit schedule
(3) a self-administered group plan schedule
(4) an experience refund schedule
Learning Objective: Explain the method insurers use to calculate group insurance premiums.
8. Celestial Financial Services is negotiating with the following two prospective clients for group
life insurance coverage:
The Spiral Company is a newly formed organization that employs nine people.
The Galaxy Company is seeking life insurance coverage for its 1,500 employees. Galaxy
is presently insured by another insurer.
With regard to the methods used to calculate the premium rate for group insurance coverage and
these two companies, it most likely is correct to say that Celestial Financial will use
(1) manual rating for both Spiral and Galaxy
(2) manual rating for Spiral and experience rating for Galaxy
(3) experience rating for both Spiral and Galaxy
(4) experience rating for Spiral and manual rating for Galaxy
9. The Fencepost Corporation provides $50,000 of noncontributory group life insurance coverage
for each of its eligible employees. The current monthly premium rate for this coverage is $0.50
per $1,000 of coverage. In February, Fencepost had 100 eligible employees. On March 1,
Fencepost hired five additional employees who immediately became eligible for group life
insurance coverage. During the month of March, the number of Fencepost employees remained
constant. This information indicates that the amount of premium payable for the month of
March was
(1) $25
(2) $125
(3) $2,500
(4) $2,625

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PRACTICE QUESTIONS Chapter Twelve
Learning Objective: Identify and describe typical provisions contained in a group life
insurance policy and compare these provisions with similar provisions contained in individual
life insurance policies.
1. Group life insurance policies usually include a number of standard provisions, many of which
are similar to provisions found in individual life insurance policies. The following statements are
about provisions typically found in group life insurance policies. Select the answer choice
(1) The incontestability provision in a group life insurance policy prohibits an insurer from
contesting an individual group member’s coverage without contesting the validity of the
master group contract itself.
(2) Some group life insurance policies include a conversion privilege, which allows a group
insured whose coverage terminates for certain reasons to convert her group life insurance
coverage to an individual life insurance policy, but only after presenting evidence of
her insurability.
(3) Group life insurance policies typically include a misstatement of age provision but
typically do not include a misstatement of sex provision.
(4) The grace period provision in a group life insurance policy specifies that, if the policy
terminates for nonpayment of premiums, then the group policyholder is not legally
obligated to pay the premium for the coverage provided during the grace period.
2. An insured group member under a group life insurance policy is prohibited from naming the
group policyholder as the beneficiary of the policy UNLESS the policy is provided under a
(1) group creditor life policy
(2) single-employer group policy
(3) multiple-employer group policy
(4) labor union group policy
Learning Objective: Identify the features of group term life insurance plans, group accidental
death and dismemberment plans, group cash value insurance plans, and group creditor life
insurance plans.
3. One type of group life insurance policy is yearly renewable term (YRT) insurance plans. With
regard to group YRT plans, it is correct to say that
(1) the insurer typically has the right to change the premium rate of a group YRT insurance
plan each year when the coverage is renewed
(2) few group life insurance policies are YRT insurance plans
(3) evidence of insurability is required from the group insureds each year when the YRT
insurance coverage is renewed
(4) group YRT insurance plans build a cash value

4. Julia Gallagher is covered under the group life insurance plan her employer provides. The group
insurance policy provides $125,000 of group term life insurance, $50,000 of group accidental
death and dismemberment (AD&D) insurance, and $25,000 of business travel accident
insurance. If Ms. Gallagher dies in an accident while she is traveling on business for her
employer, then her beneficiary would be entitled to receive
(1) $0
(2) $75,000
(3) $125,000
(4) $200,000
5. One commonly offered group cash value life insurance plan is a group paid-up plan, which
combines paid-up whole life insurance with decreasing amounts of term life insurance. With
regard to the premium contributions that employees and employers pay for these group paid-up
plans, it is correct to say that the employees’ premium contributions typically pay for
(1) both the paid-up whole life insurance and the decreasing term life insurance
(2) the paid-up whole life insurance only
(3) the decreasing term life insurance only
(4) neither the paid-up whole life insurance nor the decreasing term life insurance
6. Some insurers offer group universal life (UL) plans and/or group variable universal life (VUL)
plans. With regard to these two group plans, it is correct to say
(1) that, under a group UL plan, the employer typically pays a portion of the policy premium
(2) that, under a group UL plan, employees are not permitted to choose the amount of
premium they wish to pay
(3) that, under a group VUL plan, the employer typically pays the entire policy premium
(4) that the participants in a group VUL plan are given a choice of different subaccount options
for investing their cash values
Learning Objective: Identify the components of a group retirement plan and describe the
types of provisions that a plan document contains.
7. One component of a retirement plan is a detailed legal agreement that establishes the existence
of an employer-sponsored retirement plan and specifies the rights and obligations of various
parties to the plan. Among other things, this component describes the individuals whom the plan
covers, the benefits that the plan provides, and the method for funding the plan. This component
is referred to as the
(1) plan document
(2) funding vehicle
(3) plan sponsor
(4) plan administrator

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8. A retirement plan’s benefit formula describes the calculation of the plan sponsor’s financial
obligation to plan participants. One type of benefit formula allows the plan sponsor to know in
advance what it will cost to fund the retirement plan each year. This type of benefit formula most
likely is the
(1) defined benefit formula that is commonly used in pension plans
(2) defined benefit formula that is commonly used in savings plans
(3) defined contribution formula that is commonly used in pension plans
(4) defined contribution formula that is commonly used in savings plans
Learning Objective: Identify and describe the four common types of employer-sponsored
retirement plans.
9. In the United States, two types of employer-sponsored retirement plans are a 401(k) plan and a
stock bonus plan. With regard to these two types of retirement plans, it is correct to say that,
under a
(1) 401(k) plan, the amount of an employee’s plan contribution is included in the employee’s
current taxable income
(2) 401(k) plan, the employee enters into a salary reduction arrangement that permits the
employer to deduct the amount of the employee’s plan contributions from her salary
(3) stock bonus plan, contributions are dependent upon company profits
(4) stock bonus plan, retirement assets are accumulated on behalf of participants, and such a
plan promises to provide a monthly retirement income benefit
10. In the United States, employers sometimes establish for employees a retirement savings plan
known as a profit sharing plan. One characteristic of a typical profit sharing plan is that
(1) employer contributions may fluctuate each year, but the employer must make a minimum
contribution to the plan each year
(2) the plan guarantees a specified monthly retirement income benefit to employees
(3) the amount of an employer’s contribution each year is determined by the employer’s profits
for that year
(4) employees are never allowed to contribute to such plans
11. In the United States, the Old Age, Survivors, Disability and Health Insurance (OASDHI) Act, or
Social Security, provides retirement income benefits to qualified residents. In Canada, either the
Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP) provides retirement benefits.
With regard to whether these programs require mandatory contributions from covered employees
and their employers, it is correct to say that
(1) both the Social Security program and the CPP and QPP require mandatory contributions
(2) only the Social Security program requires mandatory contributions
(3) only the CPP and QPP require mandatory contributions
(4) neither the Social Security program nor the CPP and QPP require mandatory contributions


PRACTICE QUESTIONS Chapter Thirteen
Learning Objective: Identify some common types of basic medical expense coverage, and
describe the benefits that each provides.
1. Major medical expense coverage specifies the different types of medical treatments, supplies,
and services that are included under the coverage, as well as those expenses that are excluded
from the coverage. From the answer choices below, select the response that correctly identifies a
medical expense that typically is included under major medical expense coverage, and a medical
expense that typically is excluded from such coverage.
Included in coverage Excluded from coverage
(1) anesthesia and oxygen surgical supplies and services
(2) elective cosmetic surgery childhood immunizations
(3) hospital charges for room and routine dental treatments
board in semiprivate room
(4) routine eye examinations and speech therapy
corrective lenses
2. In its major medical expense policies, the Nova Insurance Company specifies that the maximum
benefit amount payable for a particular service will be 90% of the amount that medical care
providers within a particular geographic region commonly charge for that same service. This
information indicates that Nova bases the maximum benefit amount payable for a particular
service on that service’s
(1) manual rate
(2) blended rate
(3) vesting requirement
(4) usual, customary, and reasonable (UCR) fee
Learning Objective: Identify the purpose of expense participation features in major medical
expense policies, and give examples of commonly used expense participation methods.
3. Ademe Bekele is covered by a comprehensive major medical expense policy that specifies a
$700 calendar-year deductible, a 15% coinsurance requirement, and a $5,000 maximum out-of-
pocket provision. In March 2010, Mr. Bekele was hospitalized for four days for treatment of
pneumonia. During that period of hospitalization, Mr. Bekele incurred $12,500 in covered
medical expenses. If Mr. Bekele incurs no other medical expenses during 2010, then his out-of-
pocket medical expenses for 2010 will total
(1) $700
(2) $1,770
(3) $2,470
(4) $5,000

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Learning Objective: Identify and describe common types of medical expense coverage other
than basic and major medical expense coverage.
4. In the United States, most insureds are covered by some type of managed care plan. There are
several types of managed care plans, but most of them share some common characteristics. One
such characteristic is that managed care plans typically
(1) shift all of the financial risk to the insurer rather than to the health care provider
(2) require plan members to pay a copayment, in addition to premium payments, to the
provider when a plan member receives services from that provider
(3) adjust the amount of the plan member’s monthly premium payment to reflect the number
of times the plan member used provider services
(4) exclude extensive preventive care programs, such as prenatal and well-baby care, routine
physical examinations, and screening programs
5. The United States federal government provides certain medical expense benefits through a
federal government program known as Medicare. Medicare provides medical expense benefits to
(1) persons over the age of 65 and persons with qualifying disabilities
(2) persons over the age of 65 only
(3) persons with qualifying disabilities only
(4) all persons in the United States, regardless of age or disability
Learning Objective: Identify the criteria used to classify disability income coverage as either
short-term coverage or long-term coverage.
6. The coverage provided by individual disability income insurance policies is classified as either
short-term or long-term coverage, depending on the length of the benefit period. For example,
most short-term individual disability income coverage provides a maximum benefit period
ranging from (13 to 26 weeks / one to five years). The maximum benefit period provided by
long-term individual disability income coverage for illnesses commonly extends (for one year /
until the insured reaches age 65).
(1) 13 to 26 weeks / for one year
(2) 13 to 26 weeks / until the insured reaches age 65
(3) one to five years / for one year
(4) one to five years / until the insured reaches age 65

Learning Objective: Identify the various definitions of that have commonly

been included in disability income insurance policies, and distinguish among those definitions.
7. Joel Cohen’s disability income insurance policy contains the current usual definition of total
disability that is included in most disability income policies. According to his policy, the
definition of total disability changes after the insured has been totally disabled for two years.
This information indicates that, should Mr. Cohen become disabled, then at the end of the initial
two-year period of disability, he will be considered totally disabled only if his disability
(1) prevents him from working at any occupation for which he is reasonably fitted by
education, training, or experience
(2) prevents him from performing the essential duties of his own previous occupation
(3) prevents him from performing the essential duties of any occupation
(4) causes him to earn less than he earned before becoming disabled
8. The following statements are about disability income insurance coverage. Select the answer
choice containing the correct statement.
(1) As a general rule, the benefit amount provided by disability income coverage is intended to
fully replace the insured’s pre-disability earnings.
(2) Most disability income policies are designed to provide benefits beginning on the first day
of an insured’s disability.
(3) A presumptive disability is a stated condition that, if present, automatically causes the
insured to be considered totally disabled.
(4) Disability income benefits typically should be set low enough so as to cause the disabled
insured to experience a drastic reduction in income and lifestyle.
Learning Objective: Identify and describe some supplemental benefits that may be included
in a disability income insurance policy.
9. Nancy Tong purchased an individual disability income policy that specifies a flat benefit amount.
The policy contains a supplemental benefit that grants Ms. Tong the right to increase the benefit
amount in accordance with commensurate increases in her income, without providing evidence
of insurability. This information indicates that Ms. Tong’s disability income policy contains a
supplemental benefit known as a
(1) guaranteed minimum income benefit (GMIB)
(2) cost-of-living adjustment (COLA) benefit
(3) future purchase option benefit
(4) partial disability benefit

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Learning Objective: Describe the benefit triggers for long-term care insurance policies.
10. For this question, if answer choices (1) through (3) are all correct, select answer choice (4).
Otherwise, select the one correct answer choice.
Long-term care benefits generally are payable if an insured either loses his physical functional
capacity to perform at least a specified number of the activities of daily living (ADLs) without
assistance or has a severe cognitive impairment. With regard to ADLs, it is correct to say that
activities that are considered to be ADLs include
(1) eating
(2) bathing
(3) dressing
(4) all of the above
Learning Objective: Describe the methods insurers use to pay long-term care benefits.
11. Some long-term care (LTC) policies specify that the insurer will pay the insured the amount of
covered LTC expenses per day up to the stated maximum daily benefit amount. For example, if
an insured enters a nursing home costing $100 per day and the policy provides a daily benefit
amount of $125, then the insured will receive a benefit of $100 per day, the actual cost for
nursing home care. In this scenario, the LTC policy includes a method for calculating the LTC
benefit that is known as the
(1) benefit trigger method
(2) indemnity method
(3) reimbursement method
(4) portability method


PRACTICE QUESTIONS Chapter Fourteen
Learning Objective: Identify and describe the provisions that individual health insurance
policies typically include.
1. One individual health insurance policy provision limits the time during which a claimant who
disagrees with the insurer’s claim decision has the right to sue the insurer to collect the amount
the claimant believes she is owed under the policy. By definition, this provision is known as
(1) a claims provision
(2) a legal actions provision
(3) a stop-loss provision
(4) an overinsurance provision
Learning Objective: Describe the factors that insurers consider in the financial design of
individual health insurance products.
2. For this question, select the answer choice containing the terms that correctly complete the
blanks labeled A and B in the paragraph below.
Underwriting of applications for individual health insurance focuses on the degree of morbidity
risk that a proposed insured represents. One factor that can affect the degree of morbidity risk a
proposed insured presents is whether the proposed insured is male or female. In general, females
experience a A morbidity rate than do males of the same age. Therefore, the cost of
providing health insurance coverage to females generally is B than the cost of
providing health insurance coverage to males of the same age.
A B
(1) higher higher
(2) higher lower
(3) lower higher
(4) lower lower
3. A number of jurisdictions require an insurer’s loss ratio to be at least a minimum stated

percentage. The loss ratio for a block of policies generally is stated as the percentage of
(1) premiums the insurer paid out in benefits for the block of policies
(2) total premiums the insurer received during the grace period
(3) total premiums the insurer paid out in premium refunds only
(4) total premiums the insurer lost because of policy lapses only

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Learning Objective: Calculate the amount of benefits payable when an insured is covered by
two group health insurance policies that contain a coordination of benefits (COB) provision.
4. Rachel Culpepper is covered under two group medical expense plans; one plan is through her
employer and the second plan is through her husband’s employer. Both plans specify a $500
deductible and a 20% coinsurance requirement. Both plans contain a coordination of benefits
(COB) provision, but neither plan contains a nonduplication of benefits provision.
Ms. Culpepper’s primary plan is the plan provided through her employer. During the current
calendar year, Ms. Culpepper incurred $5,600 in allowable medical expenses. This information
indicates that the amount of the benefit Ms. Culpepper is entitled to receive under her husband’s
plan is
(1) $1,020
(2) $1,520
(3) $3,580
(4) $4,080
5. Damon and Andrea Utsey have one young daughter, Abigail. Both Damon and Andrea work full
time for employers that provide group medical expense coverage to employees and their spouses
and dependents. Both group plans include coordination of benefits (COB) provisions, and both
plans specify that the birthday rule will be used to determine which plan will be the primary
payer if an individual is covered as a dependent under both plans. The dates of birth for the
members of the Utsey family are as follows:
Damon’s date of birth is October 9, 1970
Andrea’s date of birth is April 20, 1972
Abigail’s date of birth is October 15, 2004
In this situation, the plan that most likely will be considered the primary provider of benefits for
Abigail is the plan provided by
(1) Damon’s employer, because Damon is older than Andrea
(2) Damon’s employer, because his birth date falls closer to Abigail’s birth date than does
Andrea’s birth date
(3) Damon’s employer, because the majority of the members of the Utsey family have
birthdays during the same month as Damon
(4) Andrea’s employer, because her birth date falls earlier in the calendar year than does
Damon’s birth date

Learning Objective: Distinguish between fully insured plans and self-insured plans.
6. The following statements are about ways in which a group insurance plan’s claim costs and
administrative expenses are paid using funding mechanisms. Select the answer choice containing
the correct statement.
(1) Most group long-term disability income plans are fully insured plans.
(2) Under a fully insured group insurance plan, the group policyholder bears the responsibility
and the risk for all claim payments.
(3) Under a fully insured group insurance plan, if the dollar amount of the claims submitted to
the insurer is less than the dollar amount of premiums collected, the insurer must refund
the difference to the group policyholder.
(4) Most group long-term care insurance plans are self-insured plans.
Learning Objective: Describe the operation of a self-insured group health insurance plan,
including the use of stop-loss insurance and plan administration.
7. The Skyline Company provides group medical expense and disability income insurance
coverage to its employees through a self-insured plan. Skyline purchased stop-loss coverage to
protect itself from the risk of having several catastrophic medical claims in a given year. Under
the terms of the stop-loss coverage, the insurer will become responsible for paying claims when
Skyline’s total claims exceed $1 million within the contract year. This information indicates that
Skyline purchased the type of stop-loss coverage known as
(1) specific stop-loss coverage
(2) aggregate stop-loss coverage
(3) individual stop-loss coverage
(4) salary continuation coverage

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Answers to Practice Questions | 55
Answers to Practice Questions

Chapter 1 Chapter 5
1. p. 21......................................................... 2 1. p. 74; c. 1, p. 27 ....................................... 4
2. pp. 22-23 ................................................. 1 2. p. 74......................................................... 2
3. pp. 26-27, 28, 29 ..................................... 2 3. p. 80......................................................... 4
4. p. 27......................................................... 3 4. pp. 81-82 ................................................. 2
5. p. 28......................................................... 1 5. pp. 83-84 ................................................. 1
6. p. 30......................................................... 3 6. pp. 84-86 ................................................. 4
7. pp. 31-32 ................................................. 4 7. pp. 86-87 ................................................. 2
8. pp. 32-33 ................................................. 2
Chapter 6
Chapter 2 1. p. 89......................................................... 4
1. pp. 36-37 ................................................. 2 2. pp. 92-93 ................................................. 1
2. p. 38......................................................... 1 3. pp. 93-94 ................................................. 2
3. pp. 38, 40................................................. 1 4. pp. 94-95 ................................................. 3
4. p. 41......................................................... 3 5. p. 95......................................................... 2
5. p. 43......................................................... 4 6. p. 98......................................................... 2
6. p. 43......................................................... 2 7. pp. 100, 102............................................. 1
7. p. 44......................................................... 3 8. pp. 102-103 ............................................. 3
9. pp. 103-104 ............................................. 1
Chapter 3
1. pp. 49, 53 ................................................. 1 Chapter 7
2. pp. 49, 56................................................. 2 1. pp. 107-108, 109 ..................................... 2
3. pp. 50-51 ................................................. 3 2. p. 110....................................................... 1
4. pp. 51-53 ................................................. 2 3. pp. 110-111 ............................................. 3
5. p. 55......................................................... 4 4. p. 111....................................................... 4
5. pp. 111-114 ............................................. 3
Chapter 4 6. p. 115....................................................... 3
1. p. 61......................................................... 3 7. pp. 115-116 ............................................. 3
2. pp. 61-62 ................................................. 4
3. p. 62......................................................... 3 Chapter 8
4. pp. 62-64 ................................................. 4 1. pp. 118-119 ............................................. 1
5. p. 65......................................................... 4 2. p. 119....................................................... 1
6. p. 67......................................................... 4 3. pp. 120-122 ............................................. 4
7. p. 68......................................................... 1 4. pp. 122-123 ............................................. 3
8. pp. 68-69 ................................................. 3 5. pp. 124-125 ............................................. 4
9. pp. 69-70 ................................................. 3 6. pp. 125-126 ............................................. 2
7. pp. 126-127 ............................................. 2
8. pp. 128-129 ............................................. 3
9. p. 131; c. 7, p. 111 ................................... 3

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Chapter 9 Chapter 12
1. p. 134....................................................... 4 1. pp. 188, 189, 190..................................... 3
2. p. 135....................................................... 2 2. pp. 189-190, 193 ..................................... 1
3. pp. 136-137 ............................................. 3 3. p. 191....................................................... 1
4. pp. 138-139 ............................................. 1 4. pp. 191-192 ............................................. 4
5. p. 139....................................................... 3 5. p. 192....................................................... 2
6. p. 139....................................................... 4 6. p. 193....................................................... 4
7. p. 140....................................................... 4 7. p. 194....................................................... 1
8. p. 143....................................................... 2 8. pp. 195, 196-198 ..................................... 4
9. p. 144....................................................... 4 9. p. 198....................................................... 2
10. p. 145....................................................... 1 10. p. 198....................................................... 3
11. pp. 145-146 ............................................. 1 11. pp. 198-199 ............................................. 1
12. p. 146....................................................... 3
13. p. 147....................................................... 1 Chapter 13
14. pp. 147-148 ............................................. 4 1. pp. 204, 206............................................. 3
15. pp. 149-150 ............................................. 4 2. p. 204....................................................... 4
3. pp. 205-206 ............................................. 3
Chapter 10 4. p. 208....................................................... 2
1. p. 154....................................................... 2 5. p. 210....................................................... 1
2. p. 154....................................................... 3 6. p. 211....................................................... 4
3. p. 155....................................................... 4 7. pp. 211-212 ............................................. 1
4. pp. 156, 157............................................. 3 8. p. 213....................................................... 3
5. pp. 158-159 ............................................. 2 9. p. 215....................................................... 3
6. p. 158....................................................... 3 10. p. 216....................................................... 4
7. p. 160....................................................... 2 11. p. 217....................................................... 3
8. p. 162....................................................... 1
9. p. 162....................................................... 2 Chapter 14
10. p. 165....................................................... 3 1. p. 222....................................................... 2
11. p. 166....................................................... 1 2. p. 223....................................................... 1
12. p. 169....................................................... 3 3. p. 225....................................................... 1
4. pp. 226-227, 228 ..................................... 2
Chapter 11 5. pp. 228-229 ............................................. 4
1. p. 173....................................................... 1 6. pp. 229-230 ............................................. 1
2. pp. 173, 174, 175..................................... 3 7. p. 231....................................................... 2
3. p. 175....................................................... 4
4. p. 176....................................................... 3
5. p. 178....................................................... 1
6. pp. 179-180 ............................................. 4
7. pp. 180-181 ............................................. 2
8. pp. 182-183 ............................................. 2
9. pp. 183-184 ............................................. 4

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Sample Examination | 57
Sample Examination
Learning Objectives for the Sample Examination Questions.

Learning objectives for the Sample Examination questions appear only in the interactive
version of the Sample Examination, which is available in the Course Portal under Exam
Prep. The learning objective associated with each question appears in the answer
explanation for the question’s correct response. Additional information on how to use
learning objectives to guide your study and preparation for the exam appears in “Study
Tips,” which can be accessed in the Course Portal under Exam Prep.

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This examination contains 60 objective questions. Each question is valued at 1.667 points. For
each question, circle the number of your chosen response.
1. One primary focus of insurance regulation is to ensure that insurance companies conduct their
businesses fairly and ethically. For example, many countries have laws that prohibit insurers
from engaging in unfair trade practices. This type of insurance regulation is known, by
definition, as
(1) market conduct regulation
(2) solvency regulation
(3) prudential regulation
(4) securities regulation
2. To be considered insurable, a risk—a potential loss—must have certain characteristics. The

following statements are about the characteristics of insurable risks. Select the answer choice
that contains the correct statement.
(1) The only type of risk that can be insured is speculative risk.
(2) A pure risk is not insurable because it involves the possibility of gain.
(3) In order for a potential loss to be insurable, the element of chance must not be present.
(4) For most types of insurance, in order for a potential loss to be insurable, the loss must be
definite in terms of time and amount.
3. A contract must be supported by an exchange of legally adequate consideration. When Jacques

Renard purchased a life insurance policy from the Prescott Life Insurance Company, Prescott
provided legally adequate consideration by promising to pay the policy benefit if Mr. Renard
dies while the policy is in force. Mr. Renard provided legally adequate consideration for the life
insurance contract by submitting to Prescott the
(1) application only
(2) initial premium only
(3) application and the initial premium
(4) initial premium and subsequent renewal premiums
4. Variable universal life (VUL) insurance combines the features of variable life insurance and
universal life insurance. One typical feature of variable universal life insurance policies is that
(1) they guarantee investment earnings and cash values
(2) they are not considered securities because the insurer assumes the investment risk of a
VUL policy
(3) insurers place the cash values of VUL policies in their general accounts
(4) policyowners can choose whether the death benefit will remain level or will vary along
with changes in the investment earnings of subaccounts
5. By definition, the person or party who is to receive the policy proceeds of a life insurance policy
under a settlement option is known as the
(1) assignor
(2) assignee
(3) payee
(4) preference beneficiary

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6. Liza Nagel was the policyowner-insured of a $200,000 life insurance policy. Ms. Nagel died
while the policy was in force, and the beneficiary submitted a claim for the policy benefit. A
claim examiner used the following information to calculate the amount of proceeds payable:
$350 in declared but unpaid policy dividends
$600 in accumulated policy dividends left on deposit with the insurer
$10,000 in paid-up additions
$650 premium due and unpaid
$5,000 outstanding policy loan
This information indicates that the total benefit amount payable on Ms. Nagel’s life insurance
policy is
(1) $183,400
(2) $194,700
(3) $205,300
(4) $214,100
7. The Westcott Health Insurance Company is establishing initial premium rates to charge the
following two groups for group health insurance:
The Camelot Corporation is a large company with over 10,000 employees who are eligible
for group health insurance coverage. Camelot has been insured by another health
insurance company for the past five years.
The Pixie Company is a small company with 10 employees who are eligible for group
health insurance coverage. Pixie has been insured by another health insurance company
for the past two years.
From the following answer choices, select the response that correctly identifies the method(s)
Westcott most likely will use to calculate the initial premium rates for these two groups.
Camelot Pixie
(1) manual rating manual rating
(2) manual rating experience rating
(3) blended rating experience rating
(4) experience rating manual rating
8. The Calypso Company provides group life insurance coverage to its eligible employees. The
group insurance premiums are payable monthly. During one month, eight new employees
enrolled in Calypso’s group life insurance plan, and no insured employees left the group. With
respect to the effect that this increase in insured group members had on Calypso’s monthly
premium amount and premium rate, it is correct to say that the monthly premium amount
(1) increased, and the premium rate per $1,000 of coverage also increased
(2) increased, but the premium rate per $1,000 of coverage did not change
(3) did not change, and the premium rate per $1,000 of coverage also did not change
(4) did not change, but the premium rate per $1,000 of coverage increased

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9. The Banyan Company sponsors a defined contribution retirement plan for its eligible employees.
The vesting requirements and other terms of Banyan’s plan are specified in a plan document.
Employee participation in the plan is voluntary. The following statements are about Banyan’s
retirement plan. Select the answer choice that contains the correct statement.
(1) One benefit to Banyan of using a defined contribution plan is that it knows in advance
what it will cost to fund the plan each year.
(2) Banyan’s use of a defined contribution plan indicates that the benefit a plan participant will
receive is determined in advance of the participant’s retirement.
(3) The vesting requirements in Banyan’s plan document specify the requirements employees
must meet to be eligible to participate in the plan.
(4) The fact that employee participation in Banyan’s plan is voluntary indicates that all eligible
group members are automatically enrolled as plan participants.
10. The Fauna Company self-insures medical expense coverage for its employees. Fauna purchased
insurance from the Luray Insurance Company to place a maximum dollar limit on Fauna’s
liability for paying health insurance claims. The insurance contract provides that Luray will
begin to reimburse Fauna for claims when Fauna has paid a total of $500,000 in claims within a
12-month period. The type of insurance coverage that Fauna purchased from Luray is known as
(1) specific stop-loss coverage
(2) first-dollar coverage
(3) individual stop-loss coverage
(4) aggregate stop-loss coverage
11. The Crescent Insurance Company sold a life insurance policy to Drew Fleming, age 16. Drew
resides in a jurisdiction where the minimum permissible age to purchase life insurance is 18.
With respect to whether the contract between Crescent and Drew is legally enforceable, it is
correct to say that the contract most likely is
(1) voidable by Crescent, and Crescent may reject the contract at any time
(2) voidable by Drew, and Drew may reject the contract before he reaches age 18 or within a
reasonable time afterward
(3) voidable by Drew, and Drew may reject the contract only after he reaches age 18
(4) valid, and neither Crescent nor Drew may reject the contract
12. Today, the financial services industry is characterized by the movement toward a single financial
institution being able to serve a customer’s banking, insurance, and securities needs. This
movement is commonly known as
(1) portability
(2) incorporation
(3) globalization
(4) convergence

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13. One characteristic of cash value life insurance that distinguishes it from term life insurance is
that cash value life insurance policies such as whole life policies typically
(1) provide coverage at a premium rate that is lower than the premium rate charged for
comparable term life insurance policies
(2) provide coverage at a premium rate that increases each year as the insured ages, whereas
the premium rate for a term life insurance policy remains level throughout the life of
the policy
(3) provide a savings element in addition to insurance coverage, whereas term life insurance
policies provide insurance coverage only
(4) provide a death benefit only if the insured dies during the period specified in the policy,
whereas term life insurance policies provide insurance coverage for the entire lifetime of
the insured, as long as the policy remains in force
14. Individual health insurance policies typically include a provision that limits the time during
which a claimant who disagrees with the insurer’s claim decision has the right to sue the insurer
to collect the amount the claimant believes is owed under the policy. This individual health
insurance policy provision is known as a
(1) stop-loss provision
(2) legal actions provision
(3) claims provision
(4) conversion provision
15. Sylvie Hyde is the policyowner-insured of a whole life insurance policy that includes a typical
spouse and children’s insurance rider. Sylvie’s spouse, Van, and their three children are covered
under the rider. One true statement about this spouse and children’s insurance rider is that the
(1) insurance coverage on Van also is whole life insurance coverage
(2) insurance coverage on each child is term life insurance that will expire when that child
reaches a stated age
(3) premium for the rider will increase if Sylvie adds children who are born or adopted after
the issue date of the insurance rider
(4) premium for the rider increases as Van and the children age
16. By definition, variable life (VL) insurance is a form of cash value life insurance in which
(1) premiums and the amount of the death benefit are fixed for the life of the policy
(2) premiums are fixed, but the amount of the death benefit may vary over the life of the policy
(3) premiums are flexible, and the amount of the death benefit may vary over the life of
the policy
(4) premiums are flexible, but the amount of the death benefit is fixed for the life of the policy

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17. The following statements are about the level premium system. Select the answer choice that
contains the correct statement.
(1) Under a level premium system, the insurer uses premium dollars from the early policy
years, plus the investment earnings, to help pay the increased number of death claims in the
later years.
(2) Insurers cannot increase the premium rate for a level premium policy based on an insured’s
age, but they can increase the premium rate when the cost of providing benefits on a block
of level premium policies increases.
(3) The level premium system allows a person to purchase a series of one-year term life
insurance policies and pay the same premium amount for every year of coverage rather
than pay a premium that increases each year with the insured’s age.
(4) As people insured under a block of level premium policies grow older, insurers increase the
premium rate to have sufficient funds to pay the increasing number of death claims
each year.
18. In the United States, Medicare is a federal government program that provides medical expense
benefits to eligible individuals. One true statement about Medicare is that it
(1) covers 100 percent of an enrollee’s medical expenses, without requiring a contribution
from the enrollee
(2) provides medical expense benefits only to individuals who have low incomes
(3) provides medical expense benefits to persons age 65 and older and persons with
certain disabilities
(4) prohibits Medicare recipients from purchasing supplemental Medicare coverage
19. Teresa Fahey is covered by two group medical expense insurance policies. Each policy specifies
a $250 calendar-year deductible and a 20 percent coinsurance requirement. Each plan contains a
typical coordination of benefits (COB) provision that is not a nonduplication of benefits
provision. Last year, Ms. Fahey incurred $10,000 in allowable medical expenses during a
hospital stay. Those were her only medical expenses for the year. The plan designated as the
primary plan paid the full benefit amount payable under the plan. In this situation, the benefit
amount payable by the plan designated as the secondary plan is
(1) $0
(2) $2,200
(3) $5,600
(4) $7,800

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20. The following paragraph contains two pairs of terms enclosed in parentheses. Determine which
term in each pair correctly completes the paragraph. Then select the answer choice containing
the two terms that you have chosen.
A point-of-service (POS) plan is a managed care plan that allows plan members to choose, at the
point of service, whether to seek medical care in-network or out-of-network. A POS plan’s level
of coverage for services received from non-network providers is (lower than / the same as) the
level of coverage for services received from in-network providers. Plan members generally must
select a [third-party administrator (TPA) / primary care provider (PCP)] who is responsible
for coordinating members’ medical care within the plan’s network of providers.
(1) lower than / third-party administrator (TPA)
(2) lower than / primary care provider (PCP)
(3) the same as / third-party administrator (TPA)
(4) the same as / primary care provider (PCP)
21. Major medical expense insurance policies typically specify the services and treatments that are
covered by the policy and those that are excluded from coverage. Major medical expense
policies in the United States typically cover medical expenses that result from
(1) treatment of an illness or injury that occurs while the insured is in military service or that
results from an act of war
(2) routine dental treatments and routine eye examinations
(3) treatment that is paid for by other organizations
(4) preventive services such as childhood immunizations and periodic screening and
diagnostic tests
22. The Langdon Corporation provides its employees with a retirement savings plan that is funded
entirely by cash contributions payable from Langdon’s profits. The amount of Langdon’s
contributions varies from year to year, depending on company profits. Although the plan
accumulates retirement assets on behalf of plan participants, it does not promise to provide
monthly retirement income benefits. This information indicates that Langdon sponsors a type of
retirement savings plan known, by definition, as a
(1) savings plan
(2) stock bonus plan
(3) profit sharing plan
(4) Riester pension

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23. The Fernbank Corporation purchased a group life insurance contract that contained a two-year
contestable period. Four years after the contract was issued, Kenny Dowd, a new employee,
filled out a medical questionnaire to be eligible for group coverage. He made material
misrepresentations about his health on the questionnaire. Mr. Dowd died nine months after his
coverage became effective, and the insurer discovered the material misrepresentations when
Mr. Dowd’s beneficiary filed a claim for the death benefit. In this situation, the incontestability
provision in the contract provides that the insurer
(1) can contest the validity of Fernbank’s master group contract on the basis of Mr. Dowd’s
material misrepresentations
(2) can contest the validity of Mr. Dowd’s coverage on the basis of the
material misrepresentations
(3) cannot contest the validity of either the master group contract or Mr. Dowd’s coverage,
because the contestable period had expired
(4) cannot contest the validity of Mr. Dowd’s coverage, but it can adjust the amount of the
death benefit payable to reflect Mr. Dowd’s true insurability at the time of application
24. Bernadette Russo was insured under the group life insurance plan provided by her employer, the
Bainbridge Company. Bainbridge’s policy provided her with $125,000 of group term life
insurance coverage, $125,000 of group accidental death and dismemberment (AD&D) insurance
coverage, and $50,000 of business travel accident insurance coverage. Ms. Russo was insured
under Bainbridge’s group policy when she died in an automobile accident while traveling on
vacation. In this situation, the total amount of benefits payable to Ms. Russo’s beneficiary is
(1) $125,000
(2) $175,000
(3) $250,000
(4) $300,000
25. Sheila Donahue applied for an insurance policy on the life of her husband, Burt, and named their
daughter, Naomi, as the beneficiary of the policy. The insurer’s underwriting guidelines
regarding the presence of insurable interest in a third-party policy are the same guidelines that
most insurers use. In this situation, before the insurer issues a policy, it most likely will require
that an insurable interest in Burt’s life is present for
(1) both Sheila and Naomi, and, according to laws in most jurisdictions, their relationship to
Burt is sufficient to create an insurable interest in his life
(2) both Sheila and Naomi, and, according to laws in most jurisdictions, their relationship to
Burt is not sufficient to create an insurable interest in his life
(3) Sheila only, and, according to laws in most jurisdictions, her relationship to Burt is
sufficient to create an insurable interest in his life
(4) Naomi only, and, according to laws in most jurisdictions, her relationship to Burt is not
sufficient to create an insurable interest in his life

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26. The four primary factors that affect the amount of an annuity’s periodic income payments are the
amount of the principal invested, the accumulation period, the interest rate that represents
investment earnings, and the number and timing of periodic income payments. With regard to the
relationships among these factors, and assuming that all other factors remain unchanged, it is
correct to say that increasing the accumulation period of an annuity contract generally results in
(1) a decrease in the number of periodic income payments
(2) a decrease in the amount of investment earnings
(3) an increase in the stated interest rate
(4) an increase in the dollar amount of each periodic income payment
27. When Kayla Miller purchased a $500,000 term insurance policy on her life, she named her son
Jeremy as the sole beneficiary of the policy and selected a settlement option whereby Jeremy
would receive the policy proceeds in a series of monthly payments for 10 years. The amount of
each monthly payment under this option depends on the amount of the policy proceeds, the
interest rate applied to the proceeds, and the length of the payment period that Ms. Miller chose.
This information indicates that the settlement option Ms. Miller chose for her policy is the
(1) interest option
(2) life income option
(3) fixed amount option
(4) fixed period option
28. Colin Munro paid an initial premium of $2,500 when he applied for a $200,000 life insurance
policy on his life. The insurer issued the policy with a typical two-year suicide exclusion period
and a double indemnity accidental death benefit. Nine months after the policy was issued,
Mr. Munro committed suicide by jumping off a bridge. At the time of his death, Mr. Munro had
not made another premium payment. In this situation, the insurer most likely was liable to pay
the policy beneficiary
(1) $0
(2) $2,500
(3) $200,000
(4) $400,000
29. Contracts between two parties can be classified as either bilateral or unilateral, depending on
whether one or both parties make legally enforceable promises. Contracts can be further
classified as bargaining contracts or contracts of adhesion, depending on whether both parties, as
equals, set the terms and conditions of the contract or whether the contract is prepared by one
party and accepted by the other party without any bargaining between the parties. With respect to
these classifications of contracts, life insurance policies are classified as
(1) bilateral bargaining contracts
(2) bilateral contracts of adhesion
(3) unilateral bargaining contracts
(4) unilateral contracts of adhesion

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30. The specific wording of the entire contract provision in an individual life insurance policy varies
according to whether the policy is an open contract or a closed contract. With respect to types of
contracts and to the documents that constitute the entire contract, most individual life insurance
policies are
(1) open contracts, and the entire contract consists of the insurance policy, any attached riders,
and the insurance company’s governing corporate documents
(2) open contracts, and the entire contract consists of the insurance policy, any attached riders,
and the attached copy of the insurance application
(3) closed contracts, and the entire contract consists of the insurance policy, any attached
riders, and the insurance company’s governing corporate documents
(4) closed contracts, and the entire contract consists of the insurance policy, any attached
riders, and the attached copy of the insurance application
31. When Paul LaRue purchased an insurance policy on his life, he stated on the application that his
age was 35, when in fact he was then age 40. The policy contained a typical misstatement of age
provision. Fifteen years after the policy was issued, Mr. LaRue died, and the policy beneficiary
filed a claim for the policy proceeds. In processing the death claim, the insurer discovered the
misstatement of age on Mr. LaRue’s policy application. The action that the insurer most likely
would take in this situation is to
(1) pay the full face amount stated in the policy without requiring any payment from
the beneficiary
(2) pay the face amount stated in the policy on the condition that the beneficiary first pay the
difference between the amount of premiums actually paid and the amount of premiums that
would have been payable by Mr. LaRue at age 40
(3) adjust the policy’s face amount to the amount the premiums actually paid would have
purchased if Mr. LaRue’s age had been stated correctly on the application
(4) deny the claim
32. A common supplemental benefit in individual life insurance policies is the waiver of premium
for disability (WP) benefit. Under a WP benefit, the insurer waives its right to collect premiums
that become due while the insured is totally disabled. One true statement about the WP benefit
included in a cash value life insurance policy is that the
(1) WP benefit is designed for third-party policies in which the policyowner is not the
policy’s insured
(2) cash value does not increase while the insurance company is waiving premiums
(3) insurance company will waive the payment of premiums immediately upon receiving proof
that an insured is totally disabled, without imposing a waiting period
(4) insurance company actually pays the premiums that are waived under a WP benefit

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33. The length of a whole life insurance policy’s premium payment period directly affects both the
amount of the premium required for the policy and the pace at which the policy’s cash value
builds. Compared to a limited-payment whole life policy with the same face amount, a
continuous-premium whole life policy typically has a (lower / higher) annual premium and
builds a cash value more (slowly / rapidly).
(1) lower / slowly
(2) lower / rapidly
(3) higher / slowly
(4) higher / rapidly
34. The basic accounting equation for a stock insurance company consists of the insurer’s assets,
liabilities, capital, and surplus. With respect to the capital and surplus components of the
accounting equation, it is correct to say that a stock insurance company’s
(1) capital represents the amount of money that the company’s owners invested in
the company
(2) capital represents the amount by which the company’s assets exceed its liabilities
(3) surplus represents the amount of money the company earns from investing the funds it
receives from customers
(4) surplus represents the items of value that the company owns
35. Calvin Ludlow, age 40, purchased an annuity that will begin providing him with annual income
payments when he is 50 years old. Mr. Ludlow is the annuitant of the contract. The annuity will
provide payments for 15 years, regardless of whether Mr. Ludlow lives or dies during the period.
The income payments will cease at the end of the 15-year period, even if Mr. Ludlow is still
alive. One true statement about Mr. Ludlow’s annuity is that it
(1) has a 10-year payout period
(2) has a 15-year annuity period
(3) is a deferred annuity
(4) is a life annuity with period certain
36. A Roth IRA (individual retirement arrangement) is one type of retirement savings plan that an
individual can establish in the United States. With respect to the federal tax treatment of Roth
IRAs, it is correct to say that
(1) qualified withdrawals of a Roth IRA’s investment earnings are tax-free
(2) there are no limits on the amount that an individual can contribute to a Roth IRA each year
(3) the contributions that an individual makes to a Roth IRA are deductible from his current
taxable income
(4) investment earnings on a Roth IRA are taxable in the year in which they are earned

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37. Sanjay Reddy was insured by a $200,000 term life insurance policy that included a double
indemnity accidental death benefit rider with typical exclusions and limitations. Ten years after
the policy was issued and while the policy was still in force, Mr. Reddy had a heart attack while
standing at the corner of a busy street, waiting for the pedestrian sign to change. A moment later,
he was struck by an automobile, but was not badly injured. Mr. Reddy was rushed to the
hospital, where he died three days later of complications resulting from his heart attack. After the
beneficiary submitted a claim for the policy proceeds, the insurer was able to confirm from
eyewitnesses that Mr. Reddy had suffered the heart attack before he was struck by the
automobile. In this situation, the total death benefit payable most likely was
(1) $100,000
(2) $200,000
(3) $400,000
(4) $600,000
38. The following statements are about risk characteristics that a group insurance underwriter
considers when evaluating whether a group is an acceptable risk. Select the answer choice that
contains the correct statement.
(1) If young, new members are continually joining a group, the age distribution and loss rate of
the group will be less stable than if the group did not add young, new members for a
number of years.
(2) In general, the larger the group, the more likely that the group will experience a loss rate
that approximates the group’s predicted loss rate.
(3) Regardless of the type of group that is being insured, group underwriting guidelines require
the group policyholder to pay at least a portion of the group insurance premium.
(4) Insurers impose more stringent underwriting requirements on employer-employee groups
than on association groups because antiselection by individual group members is more
likely to occur in employer-employee groups.
39. Fiona Beck purchased a whole life insurance policy that included a typical reinstatement
provision and an incontestability provision with a two-year contestable period. Ms. Beck paid
premiums for eight years and then allowed the policy to lapse. One year after the policy lapsed,
Ms. Beck reinstated her policy by meeting the conditions specified in the reinstatement
provision. With respect to the contestability of reinstated insurance policies, it is correct to say
that Ms. Beck’s reinstated policy
(1) is incontestable, because the contestable period specified in the original policy has expired
(2) will never become incontestable, because the reinstated policy does not contain an
incontestability provision
(3) is contestable for two years from the date on which the policy was reinstated, but only on
the basis of material misrepresentations made in her original application
(4) is contestable for two years from the date on which the policy was reinstated, but only on
the basis of material misrepresentations made in her reinstatement application

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40. Todd Swenson was the policyowner of a $300,000 whole life insurance policy. The amount of
his annual renewal premium was $1,200. When Mr. Swenson’s policy lapsed for nonpayment of
a renewal premium, the policy’s reduced paid-up insurance nonforfeiture option went into effect.
The policy’s net cash surrender value was $15,000 when the policy lapsed. In applying the
nonforfeiture option in this situation, the insurer most likely
(1) paid $15,000 in a lump sum to Mr. Swenson
(2) automatically paid the overdue premium for Mr. Swenson by making a $1,200 loan against
the policy’s cash value
(3) applied $15,000 as a net single premium to purchase a whole life insurance policy with a
face amount lower than $300,000
(4) applied $15,000 as a net single premium to purchase a $300,000 whole life
insurance policy
41. Cassandra Hirsch is the policyowner-insured of a 10-year renewable term life insurance policy
that includes a typical renewal provision. On the policy anniversary at the end of the 10-year
term, the renewal provision most likely gives Ms. Hirsch the right to renew her policy for
another 10-year term for
(1) a smaller face amount than the original policy provided, at a lower premium rate
(2) the same face amount that the original policy provided, at the same premium rate
(3) the same face amount that the original policy provided, at a higher premium rate
(4) a larger face amount than the original policy provided, at a higher premium rate
42. One distinguishing characteristic of a universal life insurance policy is that the
(1) policyowner is allowed to request an increase in the policy’s face amount after the policy
has been in force for a specified period, but the policyowner cannot decrease the policy’s
face amount
(2) policy does not guarantee that interest will be paid on the policy’s cash value each year
(3) policyowner is allowed to decide the amount he will pay for renewal premiums at the time
he purchases the policy, but the renewal premium amount remains fixed for the life of
the policy
(4) mortality charge that the insurer deducts from the policy’s cash value increases each year
as the insured ages
43. When an annuity contract owner withdraws money from the annuity, the insurer may charge a
back-end sales charge, which is called a contingent deferred sales charge (CDSC) in a variable
annuity. With respect to the form of this charge and whether the amount of the charge changes
over time, it is correct to say that a back-end sales charge/CDSC is expressed as a
(1) flat amount, and the amount of the charge typically decreases over time
(2) flat amount, and the amount of the charge typically remains the same over time
(3) percentage of the withdrawal, and the percentage typically decreases over time
(4) percentage of the withdrawal, and the percentage typically remains the same over time

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44. Credit life insurance is available to cover borrowers and credit card holders for the amounts they
owe on their loans and accounts. One characteristic of credit life insurance is that the
(1) insurance policy generally provides protection for the insured’s lifetime, as long as the
insured continues paying the premiums
(2) lender pays the entire premium amount without any contributions from the borrowers who
are covered by credit life insurance
(3) policy benefit always is payable directly to the creditor if the insured borrower dies while
the policy is in force
(4) amount of life insurance coverage in force remains level over the duration of the loan,
regardless of changes in the amount of the outstanding loan balance
45. During the financial design of a life insurance product, insurance companies multiply all of the
potential benefits payable under the product by the expected probability that each benefit will be
payable. The result of this calculation is the life insurance product’s
(1) cost of benefits
(2) divisible surplus
(3) policy reserves
(4) accumulated value
46. The following statements are about the mortality tables that insurers use in the financial design
of life insurance products. Select the answer choice that contains the correct statement.
(1) Conservative values for specific life insurance product elements generally take the form of
mortality rates that are lower than expected.
(2) A mortality experience table is a mortality table that is compiled from an insurance
company’s own records, reflecting its insureds’ actual mortality.
(3) Most mortality tables are unisex tables that do not show separate mortality rates for males
and females.
(4) Mortality tables are not developed for use in a particular country because life expectancy
and mortality rates do not vary significantly from one country to another.
47. The Jasper Life Insurance Company places proposed insureds into one of four risk classes:
standard, preferred, substandard, and declined. An underwriter for Jasper determined that
Morteza Samad, a proposed insured, presented a likelihood of loss that was neither significantly
greater than average nor significantly lower than average. This information indicates that Jasper
placed Mr. Samad in the risk class known as the
(1) standard risk class
(2) preferred risk class
(3) substandard risk class
(4) declined risk class

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48. The Zuni Investment Company was formed for the purpose of operating investment vehicles that
pool the funds of investors and use the funds to buy a variety of stocks, bonds, and other
securities. This information indicates that Zuni is the type of financial institution known as a
(1) depository institution
(2) finance company
(3) fraternal benefit society
(4) mutual fund company
49. Lloyd Belanger, a United States resident, purchased an insurance policy on his life and named
his wife, Carol, as the primary beneficiary. Several years later, Lloyd and Carol died in an
automobile accident, and it was impossible to determine which of them died first. The state’s
simultaneous death act governed how the insurer paid the policy proceeds. Assuming that
Lloyd’s policy did not contain a provision that conflicted with the simultaneous death act, the
policy proceeds were
(1) payable as if Carol had outlived Lloyd
(2) payable as if Lloyd had outlived Carol
(3) payable as if Carol had not been involved in the accident
(4) not payable, because Lloyd and Carol died simultaneously
50. Abraham Kern is the policyowner-insured of a participating whole life insurance policy that
specifies the premium reduction dividend option. Mr. Kern pays an annual premium of $1,500
for his coverage. Last year, the insurer declared a $300 dividend for Mr. Kern’s policy.
Regarding the effect of this policy dividend, it is correct to say that
(1) the face amount of Mr. Kern’s policy increased by $300
(2) Mr. Kern had to pay only $1,200 toward the next annual renewal premium
(3) the insurer used the policy dividend to purchase one-year term insurance on Mr. Kern’s life
(4) the dividend was left on deposit with the insurer, because it was less than the amount of
Mr. Kern’s annual premium
51. Vera Sund is the policyowner of a juvenile life insurance policy on the life of her 6-year-old
daughter, Lily. Vera’s husband, Troy, is the primary beneficiary of the policy. Under the terms of
the policy, when Lily reaches age 18, ownership and control of the policy will pass to her. The
policy contains a typical waiver of premium for payor rider. Under the terms of this rider, the
insurer will waive its right to collect the policy’s renewal premiums upon the death or total
disability of
(1) Vera, and the insurer will waive the premiums only until Lily reaches age 18
(2) Vera, and the insurer will continue to waive the premiums even after Lily reaches age 18
(3) Troy, and the insurer will waive the premiums only until Lily reaches age 18
(4) Troy, and the insurer will continue to waive the premiums even after Lily reaches age 18

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52. When Ben and Rachel Spano obtained a 30-year mortgage loan of $310,000 to purchase a home,
they also purchased a $310,000 joint mortgage life insurance policy. Ben died 10 years after the
policy was issued. The beneficiary designation in the policy was typical of that found in most
joint mortgage policies. This information indicates that, upon Ben’s death, a policy benefit most
likely was
(1) payable to Rachel in an amount less than $310,000
(2) payable to Rachel in an amount equal to $310,000
(3) payable to the mortgage lender in an amount less than $310,000
(4) not payable because a policy benefit is not payable until both Ben and Rachel have died
53. An insurer performed the following calculation to determine the annual premium amount for a
$100,000 life insurance policy with a $5.00 premium rate:
$5.00 × 100 = $500
The number 100 in this calculation represents the policy’s
(1) coverage units
(2) actuarial assumptions
(3) indemnity benefits
(4) tabular mortality rates
54. When underwriters evaluate applications for individual health insurance, they consider several
factors to determine the degree of morbidity risk that a proposed insured presents. Four primary
factors are an individual’s sex, age, health, and work history. One true statement about these
morbidity factors is that
(1) males generally experience a higher morbidity rate than females of the same age
(2) the average duration of illnesses generally decreases with age
(3) an individual’s future health is strongly affected by her past and current illnesses
and injuries
(4) people with a history of steady employment generally represent a higher degree of
morbidity risk than do people with a history of only temporary jobs or who have a number
of gaps in their work record
55. Natalie Koch declined to participate in her employer’s group life insurance plan when she first
became eligible for coverage in March. When she later decided to participate, she waited until
November to enroll because eligible employees are allowed to join the plan during that month
without providing evidence of insurability. The November period during which Ms. Koch can
join her employer’s plan without providing evidence of insurability generally is known as
(1) a probationary period
(2) an elimination period
(3) an eligibility period
(4) an open enrollment period

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56. Most disability income policies use a two-part definition of total disability. The current usual
definition of total disability states that, at the end of a specified period after the disability begins,
usually two to five years, an insured is considered totally disabled only if the disability
(1) is classified as a presumptive disability
(2) prevents him from performing the duties of any occupation
(3) prevents him from performing the essential duties of his own previous occupation
(4) prevents him from working at any occupation for which he is reasonably fitted by
education, training, or experience
57. Consolidation, which is the combination of financial services institutions within or across
sectors, has (decreased / increased) the number of traditional financial institutions within each
sector of the financial services industry. Consolidation in the financial services industry occurs
primarily through mergers and acquisitions. When two corporations are involved in a transaction
known as (a merger / an acquisition), both corporations survive as separate legal entities after
the transaction.
(1) decreased / a merger
(2) decreased / an acquisition
(3) increased / a merger
(4) increased / an acquisition
58. The Willow Life Insurance Company has a reinsurance agreement with the Copley Insurance
Company in which Willow transfers, and Copley accepts, part of the risk on insurance policies
that Willow has issued. Willow’s role in this reinsurance agreement is that of a
(1) reinsurer
(2) plan administrator
(3) direct writer
(4) financial holding company
59. Long-term care insurance policies contain requirements specifying the conditions that establish
an insured’s eligibility to receive long-term care benefits. These requirements are known, by
definition, as
(1) benefit triggers
(2) attachment points
(3) class designations
(4) physical hazards
60. Madelyn Berg is developing a plan that considers the amount of assets and debts that she is
likely to have when she dies and how best to preserve those assets so that they can be distributed
as she desires. A will and life insurance coverage are important components of the plan. The type
of plan Ms. Berg is developing is known, by definition, as
(1) an estate plan
(2) a financial model
(3) a funding vehicle
(4) a survivorship life insurance plan
END OF EXAMINATION

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Answers to Sample Exam

1. J&S, c. 2, pp. 44, 45 ................................ 1 31. J&S, c. 8, pp. 125-126 ............................. 3
2. J&S, c. 1, pp. 21, 23, 26 .......................... 4 32. J&S, c. 7, pp. 107-108 ............................. 4
3. J&S, c. 3, pp. 50-51 ................................. 3 33. J&S, c. 6, pp. 92-93 ................................. 1
4. J&S, c. 6, p. 103 ...................................... 4 34. J&S, c. 2, p. 44 ........................................ 1
5. J&S, c. 9, p. 148 ...................................... 3 35. J&S, c. 10, p. 155 .................................... 3
6. J&S, c. 9, pp. 147-148 ............................. 3 36. J&S, c. 10, p. 168 .................................... 1
7. J&S, c. 11, p. 183 .................................... 4 37. J&S, c. 7, pp. 110-111 ............................. 2
8. J&S, c. 11, p. 184 .................................... 2 38. J&S, c. 11, pp. 178-180 ........................... 2
9. J&S, c. 12, pp. 194-196 ........................... 1 39. J&S, c. 8, p. 125 ...................................... 4
10. J&S, c. 14, p. 231 .................................... 4 40. J&S, c. 8, p. 128 ...................................... 3
11. J&S, c. 3, pp. 52-53 ................................. 2 41. J&S, c. 5, pp. 83-84 ................................. 3
12. J&S, c. 2, p. 40 ........................................ 4 42. J&S, c. 6, p. 96 ........................................ 4
13. J&S, c. 6, p. 89 ........................................ 3 43. J&S, c. 10, p. 162 .................................... 3
14. J&S, c. 14, p. 222 .................................... 2 44. J&S, c. 5, p. 81 ........................................ 3
15. J&S, c. 7, pp. 114-115 ............................. 2 45. J&S, c. 4, p. 62 ........................................ 1
16. J&S, c. 6, p. 102 ...................................... 2 46. J&S, c. 4, pp. 63, 68 ................................ 2
17. J&S, c. 4, pp. 69-70 ................................. 1 47. J&S, c. 1, p. 31 ........................................ 1
18. J&S, c. 13, p. 210 .................................... 3 48. J&S, c. 2, p. 39 ........................................ 4
19. J&S, c. 14, pp. 226-227 ........................... 2 49. J&S, c. 9, pp. 145-146 ............................. 2
20. J&S, c. 13, pp. 207-208 ........................... 2 50. J&S, c. 9, p. 139 ...................................... 2
21. J&S, c. 13, p. 204 .................................... 4 51. J&S, c. 7, pp. 108-109 ............................. 1
22. J&S, c. 12, p. 198 .................................... 3 52. J&S, c. 5, pp. 80-81 ................................. 1
23. J&S, c. 12, pp. 188-189 ........................... 2 53. J&S, c. 4, pp. 68-69 ................................. 1
24. J&S, c. 12, pp. 191-192 ........................... 3 54. J&S, c. 14, p. 223 .................................... 3
25. J&S, c. 1, p. 33 ........................................ 1 55. J&S, c. 11, p. 177 .................................... 4
26. J&S, c. 10, pp. 166, 167 .......................... 4 56. J&S, c. 13, pp. 211-212 ........................... 4
27. J&S, c. 9, p. 149 ...................................... 4 57. J&S, c. 2, p. 41 ........................................ 2
28. J&S, c. 8, p. 131; c. 7, p. 111 .................. 2 58. J&S, c. 1, p. 29 ........................................ 3
29. J&S, c. 3, pp. 55, 57 ................................ 4 59. J&S, c. 13, p. 216 .................................... 1
30. J&S, c. 8, p. 119 ...................................... 4 60. J&S, c. 5, p. 74 ........................................ 1

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Statement of Purpose: LOMA Educational Programs Testing and Designations

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Information in this text may have been changed or updated since

LOMA Education and Training

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Learning objectives are now presented with the Practice Questions.

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LEARNING OBJECTIVES &

Learning Objective: Describe various ways to manage financial risk.

Learning Objective: Identify the five characteristics of insurable risks.

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Learning Objective: Identify four risk classes for proposed insureds.

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LEARNING OBJECTIVES &

2. The Benchmark Association is a nonprofit organization formed to provide social, as well as

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4. Consider the following consolidations in the financial services industry:

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LEARNING OBJECTIVES &

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LEARNING OBJECTIVES &

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Learning Objective: Explain how the level premium system operates.

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LEARNING OBJECTIVES &

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LEARNING OBJECTIVES &

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Learning Objective: Describe the characteristics of endowment insurance.

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LEARNING OBJECTIVES &

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LEARNING OBJECTIVES &

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LEARNING OBJECTIVES &

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LEARNING OBJECTIVES &

3. An annuity contract can be classified as either an immediate annuity or a deferred annuity. An