Life Insurance Basics, Underwriting and Claims — practice questions

7.3% of the exam ≈11 real questions 14 free questions here

Who is who on a policy, needs analysis, business uses, applications, receipts, underwriting sources and delivery: about 11 of the 150 combined questions.

Where people lose points

• Human life value measures lost earnings; the needs approach adds up obligations.
• A conditional receipt covers only if the applicant was insurable as applied for.
• Binders are prohibited in California life and disability insurance.
• The applicant, the insured and the owner can be three different roles.

Questions and answers, explained

All 10 questions above, with the correct answer and why it is correct. Everything here is on life insurance basics, underwriting and claims.

1. While completing an application for health insurance, the applicant gives the agent an answer that later must be corrected. What is the BEST way to correct the application?

   • AErase the incorrect answer or cover it with correction fluid and write in the new answer
   • BHave the agent correct the answer later and initial the change on the applicant's behalf
   • CDraw a line through the incorrect answer, insert the correct one, and have the applicant initial the changeCorrect
   • DSubmit the application unchanged and explain the error to the underwriter by phone

   Why: The application is the insurer's primary source of underwriting information and typically becomes part of the contract, so any change must be clearly visible and acknowledged by the applicant with his or her initials — or a fresh application should be completed. An agent must never alter an application on his or her own or conceal a correction.

   Reference CA Life objectives II.A and II.I (Life insurance basics; underwriting, pricing and claims)

2. Elena applied for an individual disability income policy, paid the initial premium, and received a conditional receipt. No medical exam was required. Ten days later — before the insurer issued the policy — she was seriously injured in an accident. Underwriters then determine she was insurable as a standard risk on the date of the application. The insurer should

   • Apay the claim, because under the conditional receipt coverage began on the application dateCorrect
   • Bdeny the claim, because the policy had not yet been issued or delivered to her when she was hurt
   • Cdeny the claim but refund the premium she paid with the application
   • Dpay the claim only if the agent had express authority to bind the coverage

   Why: A conditional receipt makes coverage effective as of the date of the application (or the medical exam, if one is required) provided the applicant is later found insurable as applied for at standard rates. Because Elena met that condition, the loss is covered even though the policy had not yet been issued; had she been found uninsurable, the receipt would have provided no coverage at all.

   Reference CA Life objectives II.A and II.I (Life insurance basics; underwriting, pricing and claims)

3. An individual life or health application is generally divided into parts. Which statement about the agent's report is CORRECT?

   • AIt is Part II of the application and must be signed by the applicant and the agent
   • BIt must be read aloud to the applicant before the application is signed and submitted
   • CIt replaces the need to gather the applicant's medical history on Part II
   • DIt is a confidential communication to the insurer and is not part of the entire contractCorrect

   Why: Part I of the application gathers general personal data and Part II gathers medical history, while the agent's report is a separate confidential section in which the agent conveys observations and personal knowledge to the underwriter; it is not shown to the applicant and is not attached to the policy. Because it is not part of the entire contract, statements in it cannot be used to contest the policy the way the applicant's own application answers can.

   Reference CA Life objectives II.A and II.I (Life insurance basics; underwriting, pricing and claims)

4. A health insurance applicant has a chronic but well-controlled knee condition. Which underwriting action is available in health insurance but is NOT typically used in life insurance?

   • AIssuing the policy at standard rates with no modification of coverage
   • BDeclining the application outright as an uninsurable risk
   • CIssuing the policy with an impairment (exclusion) rider excluding that specific conditionCorrect
   • DCharging a higher, rated premium to reflect the added risk

   Why: Health insurers may accept a substandard risk by attaching an impairment or exclusion rider that removes coverage for a named condition while insuring everything else — an approach not generally used in life insurance, where a substandard risk is handled instead through a rated premium. Choices B and D are available in both lines, so they do not distinguish health underwriting from life underwriting.

   Reference CA Life objectives II.A and II.I (Life insurance basics; underwriting, pricing and claims)

5. An applicant applied for a standard health policy, but the insurer issued it with a rated premium and an exclusion rider. When the agent delivers the policy, the agent must

   • Acollect the premium and say nothing, because the applicant already applied for coverage
   • Bexplain that the policy is a counteroffer, obtain the applicant's signed acceptance, and collect any added premiumCorrect
   • Creturn the policy to the insurer and demand that it be reissued at standard rates as applied for
   • Ddeliver the policy but leave the exclusion rider unsigned so that it will not apply

   Why: A policy issued on terms other than those applied for is a counteroffer rather than an acceptance, so no contract is formed until the applicant accepts the changed terms — normally by signing an amendment or acceptance form and paying any additional premium. Choice A is the classic field-underwriting failure: delivering a modified policy without explaining and documenting the change sets up a disputed claim later and exposes the agent to disciplinary action and E&O liability.

   Reference CA Life objectives II.A and II.I (Life insurance basics; underwriting, pricing and claims)

6. A 58-year-old pays the initial premium and receives an insurability-type conditional receipt on the date of application. He dies during underwriting. The insurer's file shows he would have been offered coverage only at a substandard (rated) premium, not at the standard premium he applied for. What is the most likely outcome?

   • AThe full face amount is paid, because the conditional receipt was in effect
   • BThe full face amount less the additional substandard premium that would have been charged
   • CA reduced death benefit equal to what the premium paid would have purchased at rated cost
   • DNo death benefit is paid and the premium is refunded, because he was not insurable at the rate applied forCorrect

   Why: An insurability-type conditional receipt provides coverage only if the proposed insured was insurable exactly as applied for on the receipt date; qualifying only at a rated premium means the condition failed, so the insurer refunds the premium and pays nothing. Choice C describes the adjustment used under the misstatement of age provision, which applies to age or sex errors on an issued policy, not to a failed conditional receipt. Outline III.B.

   Reference CA Life objectives II.A and II.I (Life insurance basics; underwriting, pricing and claims)

7. An applicant receives the required notice that an investigative consumer report has been ordered and writes to the insurer asking exactly what is being investigated. Under the Fair Credit Reporting Act, the insurer must make a complete written disclosure of the nature and scope of the investigation within:

   • A3 days of the applicant’s written request, excluding weekends and holidays
   • B5 days of the request, or of the date the report was ordered, whichever is laterCorrect
   • C15 days of the request, or of the date the policy was issued, whichever comes first
   • D30 days of the request, measured from the postmark on the applicant’s letter

   Why: FCRA sets two different clocks: the written notice that an investigative consumer report was ordered is due no later than three days after the report is requested, and the complete nature-and-scope disclosure is due within five days of the consumer's written request or the report request, whichever is later. Choice A applies the initial-notice deadline to the wrong duty. Outline III.C — sources of underwriting information.

   Reference CA Life objectives II.A and II.I (Life insurance basics; underwriting, pricing and claims)

8. Which feature is required for a valid HIPAA authorization allowing a life insurer to obtain an applicant's protected health information?

   • AIt must describe the information, identify who may disclose and receive it, state a purpose and expiration, and be signedCorrect
   • BIt may be an open-ended, permanent release with no expiration date, provided the applicant may revoke it in writing at any time
   • CIt must be notarized and witnessed by someone with no financial interest in the policy being applied for
   • DIt must be signed by the applicant’s treating physician as well as by the applicant before any records are released

   Why: HIPAA requires a specific, signed, dated authorization with a defined scope, named parties, stated purpose, and an expiration date or event before protected health information may be released to an insurer. Choice B describes a blanket release, which HIPAA expressly does not accept; notarization, choice C, has never been a HIPAA requirement. Outline III.C — privacy in underwriting.

   Reference CA Life objectives II.A and II.I (Life insurance basics; underwriting, pricing and claims)

9. When the agent arrives to deliver a policy, the applicant mentions that she was hospitalized last week for chest pain — after the application was signed, and no premium was paid with the application. The agent should:

   • ADeliver the policy and collect the premium, since the insurer already issued the contract
   • BDeliver the policy but tell the client to notify the insurer herself
   • CNot deliver the policy or collect the premium, and report the change in health to the insurer for further underwritingCorrect
   • DCollect the premium and hold it uncashed until the insurer responds

   Why: The insurer's offer rested on the applicant's health as represented; a material change before delivery must go back to underwriting before the contract is completed. Choice D is the tempting wrong answer — accepting the premium at all, even uncashed, can be treated as completing acceptance and binding the insurer to a risk it never evaluated, and it exposes the agent to discipline for handling the transaction improperly. Outline III.D.

   Reference CA Life objectives II.A and II.I (Life insurance basics; underwriting, pricing and claims)

10. While completing a life insurance application, an applicant realizes he entered an incorrect date of birth. What is the proper way to correct the error?

    • AThe agent should erase the error and neatly write in the correct date
    • BThe applicant should draw a line through the error, write in the correct date, and initial the changeCorrect
    • CThe agent should cover the error with correction fluid and initial the change on the applicant's behalf
    • DThe application should be submitted unchanged so the insurer's underwriter can correct it

    Why: Any change to an application must be made and initialed by the applicant (or a fresh application completed); this documents that the applicant, not someone else, authorized the correction. Neither the agent nor the insurer may alter an application without the applicant's consent, and erasures or correction fluid destroy the audit trail and invite disputes over what was originally stated. Outline III.A (changes in the application).

    Reference CA Life objectives II.A and II.I (Life insurance basics; underwriting, pricing and claims)

Drill other domains

• Basic Insurance Concepts and Contract Law (17.3%)
• The Insurance Marketplace, Licensing and Ethics (9.3%)
• Types of Life Policies and Group Life (8%)
• Annuities (5.3%)
• The Life Insurance Contract and Riders (9.3%)
• Replacement, Cancellation, Taxation and Social Security Disability (5.3%)

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