State: Texas | Category: Life Insurance | All tests in this Category:
Practice Test 1 Practice Test 21. Misrepresentation of policy terms or benefits by an insurer or its agents constitutes which unfair practice?
Texas prohibits misrepresenting the terms or benefits of a policy; this misleads consumers and is an unfair trade practice.
2. Replacing policies to generate additional commissions by inducing a replacement is known as which practice?
Churning is the practice of replacing policies primarily to generate extra commissions, which is considered unfair.
3. Which statement best describes rollovers for qualified plans?
Qualified plan rollovers to another qualified plan or to a traditional IRA are permitted and generally do not trigger current taxation if done properly.
4. Which principle allows insurers to predict losses more accurately by pooling many similar exposures?
The law of large numbers states that as the sample size grows, the actual results approach the expected results, improving predictability of losses for pricing and reserves.
5. Under HIPAA, who must authorize the release of medical information to the insurer?
Under HIPAA, a written authorization from the applicant is generally required for releasing medical information to the insurer.
6. Which characteristic makes life insurance a practical tool for funding a buyout in a closely held business?
Life insurance provides a liquid source of funds (cash value or death benefit) to fund a buyout, enabling the remaining owners to purchase shares.
7. Death benefits paid to a beneficiary are generally tax-free, with exceptions such as transfers of value.
In most cases, life insurance death benefits are income-tax-free to the beneficiary; exceptions include transfers of value (e.g., sale of the policy).
8. To reinstate a lapsed policy, what is typically required?
Reinstatement usually requires payment of back premiums with interest and evidence of insurability; additional conditions may apply per policy.
9. Which factor directly affects life insurance premiums due to mortality risk and is commonly used in underwriting classifications?
Smoking status is a well-established factor that materially increases mortality risk and premium costs in underwriting.
10. Premium payments are typically applied to which premium due first?
Premiums are normally allocated to the oldest due premium first to satisfy outstanding obligations and prevent compounding overdue amounts.
11. A policy illustration is typically used to show:
Policy illustrations display non-guaranteed elements like dividends or rate projections where applicable; actual results may differ.
12. Subrogation in insurance is the process by which:
Subrogation allows the insurer to step into the insured's shoes to pursue recovery from a third party responsible for the loss, preventing the insured from collecting twice and helping keep premiums stable.
13. How does a critical illness policy define covered illnesses?
CI policies define coverage by listing specific illnesses on the policy. If an illness is not listed, it is typically not covered unless the policy states otherwise.
14. The master policy in a Texas group life plan is issued to:
The master policy is issued to the policyowner, typically the employer or sponsor, who then provides coverage to eligible employees through certificates.
15. Who typically designates the beneficiary for the group life death benefit?
The employee designates the beneficiary for the death benefit on the certificate; the employer is the policyowner, not the beneficiary designation.
16. Which settlement option provides guaranteed income for life to the beneficiary?
The life income option provides payments for the beneficiary's lifetime, often with or without a guaranteed period.
17. What is the primary purpose of a Safe Harbor 401(k) plan?
Safe Harbor plans satisfy certain employer contribution requirements and notice provisions, allowing the plan to bypass the usual ADP/ACP nondiscrimination tests.
18. How long is the typical grace period for a life insurance premium?
Most life insurance policies provide a 30-day grace period for late premiums; death benefits may be paid minus overdue premium if death occurs during the grace period.
19. If both the insured and the designated beneficiary die before settlement, the death benefit may be paid to
If both die before settlement, the death benefit may go to the insured's estate or to the contingent beneficiary, depending on policy terms and designations.
20. If a critical illness policy lapses and is later reinstated, what is commonly required?
Lapsed policies may be reinstated, but typical terms require evidence of insurability and payment of any back premiums; a new waiting period may apply.
21. Which statement best describes the tax treatment of life insurance death benefits when paid to heirs or beneficiaries of a business owner?
Death benefits paid to beneficiaries are generally received income tax-free, though estate or other taxes may apply separately.
22. The Government Pension Offset (GPO) reduces Social Security spousal or survivor benefits by what amount related to the government pension?
GPO reduces Social Security spousal or survivor benefits by two-thirds of the government pension amount for individuals receiving a government pension from non-covered work.
23. Which statement best describes the liquidity purpose of life insurance in estate planning for a business owner?
Life insurance can provide liquidity to cover estate taxes and buy out the business owner's stake so the business can continue without forced sales.
24. Which statement accurately describes the taxation of a nonqualified (after-tax) annuity's distributions?
Nonqualified annuities are funded with after-tax dollars; the IRS uses an exclusion ratio to determine the tax-free portion, representing return of investment; the remaining portion is taxable as ordinary income.
25. At the end of the grace period, if the premium remains unpaid, what usually happens to the policy?
If the premium is not paid by the end of the grace period, the policy typically lapses according to the policy terms.
26. The premium is:
Premium is the price for the policy coverage paid by the insured or policyowner.