Types of Life Policies and Group Life — practice questions

8% of the exam ≈12 real questions 13 free questions here

Term, whole life, universal and indexed universal life, variable products, special coverages and group life: about 12 of the 150 combined questions.

Where people lose points

• Variable products require FINRA registration as well as the life license.
• Decreasing term fits a mortgage; level term fits income replacement.
• Universal life separates the death benefit, premium and cash value.
• Group life certificate holders do not own the master policy.

Questions and answers, explained

All 10 questions above, with the correct answer and why it is correct. Everything here is on types of life policies and group life.

1. In a noncontributory group life insurance plan, the employer pays the entire premium. What percentage of eligible employees must be covered under the plan?

   • A25 percent
   • B50 percent
   • C75 percent
   • D100 percentCorrect

   Why: Noncontributory plans require 100 percent participation of eligible employees: since employees pay nothing, covering everyone prevents adverse selection and simplifies administration. The 75 percent figure (the closest distractor) is the typical participation requirement for contributory plans, in which employees pay part of the premium. Outline IV.C (contributory vs. noncontributory).

   Reference CA Life objectives II.B and II.G (Types of life policies; group life)

2. How is the monthly cost of insurance (COI) charge in a universal life policy determined?

   • AIt is a level charge fixed at policy issue and guaranteed never to change at all.
   • BIt equals the target premium divided by twelve equal monthly periods.
   • CIt is the net amount at risk times the current mortality rate per $1,000.Correct
   • DIt is a flat percentage deducted from each premium payment as received.

   Why: The insurer deducts the COI from the accumulated value each month, calculated as the net amount at risk times the current cost per $1,000 at the insured's attained age, so the charge rises as the insured ages. Option D is the closest distractor: a percentage taken off each premium is the premium expense load, a separate deduction from the COI. The contract also states guaranteed maximum mortality rates the insurer may never exceed.

   Reference CA Life objectives II.B and II.G (Types of life policies; group life)

3. Beatriz has funded her universal life policy at the minimum premium for 12 years. The insurer's credited interest rate has now fallen to the contract's guaranteed minimum, and her cost of insurance charges have risen with her attained age. What is the most likely consequence?

   • AThe insurer must continue the coverage at no further cost because a guaranteed rate applies.
   • BHer accumulated value will be depleted and the policy will lapse unless she pays more premium.Correct
   • CThe insurer will automatically reduce the specified amount to a level her value can still support.
   • DThe policy will automatically convert to reduced paid-up insurance instead.

   Why: Minimum funding plus a drop to the guaranteed crediting rate plus rising attained-age mortality charges is the standard sequence that exhausts a universal life accumulated value; once it cannot cover a monthly deduction the grace period begins and the policy lapses if no premium is paid. Option C is the closest distractor: a face reduction can rescue the contract, but the owner must request it, since the insurer does not reduce the specified amount on its own. Reduced paid-up is a nonforfeiture option of traditional whole life, not an automatic universal life feature.

   Reference CA Life objectives II.B and II.G (Types of life policies; group life)

4. Nadia takes a $15,000 partial withdrawal (partial surrender) from her Option A universal life policy. How does this differ from taking a $15,000 policy loan?

   • AA withdrawal permanently reduces the death benefit; a loan reduces it only if outstanding at death.Correct
   • BA withdrawal accrues interest charges each year, while a policy loan accrues no interest at all.
   • CA withdrawal must be repaid within five years, while a policy loan never has to be repaid during life.
   • DNeither transaction affects the death benefit in any way at any point during the contract.

   Why: A partial withdrawal is a permanent surrender of value: it cannot be repaid, it may incur a surrender charge, and under Option A it reduces the specified amount dollar for dollar. Choice B inverts the facts — loans accrue interest, withdrawals do not — and a loan only reduces the proceeds if it is unpaid when the insured dies. Withdrawals are also taxed on a FIFO basis in a non-MEC contract, while loans are generally not taxable.

   Reference CA Life objectives II.B and II.G (Types of life policies; group life)

5. Which statement about the cash value of a variable universal life policy is correct?

   • AThe insurer guarantees a minimum cash value at least equal to the premiums paid.
   • BCash value is credited at the insurer’s declared rate, subject to a 3% floor.
   • CThere is no guaranteed minimum; poor subaccount performance can cause a lapse.Correct
   • DCash value is held in the general account and is protected from market losses.

   Why: In a VUL the owner directs the money into separate-account subaccounts and bears all the investment risk, so the cash value has no floor and can fall far enough that policy deductions exhaust it and the contract lapses. Option D is the closest distractor and describes the general-account backing of fixed products such as interest-sensitive whole life. Some variable contracts guarantee a minimum death benefit, but that guarantee does not extend to the cash value.

   Reference CA Life objectives II.B and II.G (Types of life policies; group life)

6. A 45-year-old client wants permanent coverage whose cash value can benefit from stock market gains, but he states plainly that he could not accept a year in which market losses reduce the credited value of his account. Which product best fits?

   • AVariable universal life allocated to equity subaccounts.
   • BIndexed universal life with a 0% floor.Correct
   • CScheduled-premium variable life.
   • DAnnually renewable term with a conversion privilege.

   Why: Indexed universal life credits interest linked to an external index subject to a cap or participation rate, and its floor means a negative index year credits 0% rather than a loss, which matches the client's stated risk tolerance. Option A is the closest distractor because it also offers market-linked upside, but it places direct investment risk on the owner, exactly what he rejected. The agent should still disclose that policy charges continue in a 0% year, so the accumulated value can decline even though the index credit is never negative.

   Reference CA Life objectives II.B and II.G (Types of life policies; group life)

7. An indexed universal life policy uses annual point-to-point crediting with annual reset, a 100% participation rate, a 10% cap and a 0% floor. The index falls 20% in year 1 and rises 15% in year 2. What interest is credited for those two years?

   • A0% in year 1 and 0% in year 2, because the index has not yet recovered its original starting value.
   • B0% in year 1 and 10% in year 2.Correct
   • C-20% in year 1 and 15% in year 2.
   • D0% in year 1 and 15% in year 2.

   Why: The floor limits year 1 to 0% despite the 20% index decline; annual reset then re-establishes the starting index value at the lower level, so the 15% year-2 gain is measured from that new base and is credited up to the 10% cap. Option D is the closest distractor because it applies the reset correctly but forgets the cap. Option A describes a point-to-point method without reset, where the prior loss must be recovered before any interest is credited.

   Reference CA Life objectives II.B and II.G (Types of life policies; group life)

8. An interest-sensitive (current assumption) whole life policy is subject to periodic redetermination. If the insurer's mortality and interest experience deteriorates, what may the policyowner face at the next redetermination date?

   • AAn increased premium, but never above the guaranteed maximum premium stated in the contract.Correct
   • BA reduction of the guaranteed death benefit stated on the policy schedule page at issue.
   • CLoss of the policy’s nonforfeiture options for the entire remainder of the contract term.
   • DA mandatory surrender of the contract at its then-current cash surrender value, with no option to continue.

   Why: Current assumption whole life re-prices at stated intervals using the insurer's then-current mortality, interest and expense results; a bad experience period can push the premium up, but the contract's guaranteed maximum premium caps how far it can go. Option B is the closest distractor and confuses the pricing element with the benefit: the death benefit remains guaranteed, and it is the premium or cash value projection that moves. Nonforfeiture options are guaranteed by the Standard Nonforfeiture Law and cannot be forfeited through redetermination.

   Reference CA Life objectives II.B and II.G (Types of life policies; group life)

9. How does an endowment contract differ from an ordinary whole life policy?

   • AAn endowment pays the face amount to the owner if the insured is living on a stated maturity date.Correct
   • BAn endowment provides no death benefit at all before it reaches its stated maturity date.
   • CAn endowment accumulates no cash value during the years the premiums are being paid.
   • DAn endowment always requires a single premium payment made at the time the contract is first issued.

   Why: An endowment pays the face amount at the insured's death OR to the owner as a living benefit if the insured survives the endowment date — for example, a 20-year endowment issued at 45 matures at 65. Option B is the closest distractor and misses the death protection that runs throughout the endowment period. Because cash value must reach the face amount so quickly, short endowments generally fail the federal definition of life insurance and are taxed unfavorably, which is why they are rarely sold today.

   Reference CA Life objectives II.B and II.G (Types of life policies; group life)

10. Marta, age 30, purchases a 20-pay whole life policy. Which of the following is TRUE about her coverage?

    • AHer coverage will end when she reaches age 50.
    • BThe policy will mature and pay the face amount when she reaches age 50.
    • CHer premium payments will end at age 50, but coverage continues for her entire life.Correct
    • DHer cash value will grow more slowly than under an ordinary whole life policy.

    Why: In limited-pay whole life, premiums are compressed into a stated period (here, 20 years), after which the policy is paid up, but protection continues for the insured's entire life. Option A confuses the premium-paying period with the coverage period. Because the same lifetime coverage is funded in fewer years, cash value grows faster, not slower, than ordinary whole life.

    Reference CA Life objectives II.B and II.G (Types of life policies; group life)

Drill other domains

• Basic Insurance Concepts and Contract Law (17.3%)
• The Insurance Marketplace, Licensing and Ethics (9.3%)
• Life Insurance Basics, Underwriting and Claims (7.3%)
• Annuities (5.3%)
• The Life Insurance Contract and Riders (9.3%)
• Replacement, Cancellation, Taxation and Social Security Disability (5.3%)

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