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Provisions, Options, and Riders

Grace period, incontestability, nonforfeiture and dividend options, settlement options, beneficiaries, and common riders. This is usually the heaviest section on the life exam.

Study questions and answers

Try each question first, then tap to check your answer.

1. Under the entire contract provision, the entire contract consists of the policy and:

  1. The agent's notes
  2. A copy of the application attached to the policy
  3. The buyer's guide
  4. The MIB report
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B. A copy of the application attached to the policy
Only the policy and the attached application make up the contract. Nothing outside it, such as agent notes, can be added by reference.

2. If the insured dies during the grace period with the premium unpaid, the insurer will:

  1. Pay the death benefit minus the overdue premium
  2. Deny the claim
  3. Pay only the cash value
  4. Refund all premiums paid
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A. Pay the death benefit minus the overdue premium
Coverage stays in force during the grace period. The unpaid premium is deducted from the death benefit.

3. After the incontestability period (typically two years) has passed, the insurer generally cannot:

  1. Raise premiums on a whole life policy
  2. Contest the policy based on misstatements in the application
  3. Deny a claim for nonpayment of premium
  4. Adjust benefits for a misstated age
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B. Contest the policy based on misstatements in the application
After the incontestable period, the insurer cannot void the policy for misstatements on the application. Nonpayment of premium and misstatement of age are still handled under their own provisions.

4. An applicant understated their age, and the error is discovered after the insured's death. The insurer will:

  1. Deny the claim
  2. Pay the full face amount
  3. Adjust the death benefit to the amount the premium would have purchased at the correct age
  4. Refund the premiums paid
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C. Adjust the death benefit to the amount the premium would have purchased at the correct age
The misstatement of age provision adjusts the benefit instead of voiding the policy.

5. If an insured commits suicide during the suicide exclusion period, the insurer typically:

  1. Pays the full face amount
  2. Refunds the premiums paid
  3. Pays half of the face amount
  4. Pays the cash value only
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B. Refunds the premiums paid
During the exclusion period (commonly two years), the insurer's liability is limited to a refund of premiums.

6. Which nonforfeiture option keeps the same face amount in force for a limited period of time?

  1. Reduced paid-up insurance
  2. Cash surrender value
  3. Paid-up additions
  4. Extended term insurance
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D. Extended term insurance
Extended term uses the cash value to buy term insurance for the full face amount for as long as the cash value allows.

7. The reduced paid-up nonforfeiture option provides:

  1. Permanent coverage at a lower face amount with no further premiums
  2. Term coverage for the original face amount
  3. A lump-sum cash payment
  4. Paid-up additions purchased with dividends
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A. Permanent coverage at a lower face amount with no further premiums
The cash value is used as a single premium to buy a smaller, fully paid-up permanent policy.

8. Which dividend option uses dividends to buy small amounts of single-premium permanent insurance?

  1. Accumulation at interest
  2. Paid-up additions
  3. Reduction of premium
  4. One-year term
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B. Paid-up additions
Paid-up additions increase both the death benefit and the cash value without new evidence of insurability.

9. Policy dividends are generally not taxable because they are:

  1. Paid only to beneficiaries
  2. Capped by federal law
  3. Considered a return of excess premium
  4. Paid only by stock insurers
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C. Considered a return of excess premium
Dividends from participating policies are treated as a return of overcharged premium. Interest earned on dividends left with the insurer is taxable.

10. Under which settlement option does the insurer hold the proceeds and pay the beneficiary only the interest earned?

  1. Fixed period
  2. Fixed amount
  3. Life income
  4. Interest only
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D. Interest only
With interest only, the principal stays with the insurer and can be paid out later, often to a secondary beneficiary.

11. Which life income settlement option pays the highest monthly amount?

  1. Life income with period certain
  2. Straight life income (life only)
  3. Joint and survivor
  4. Life income with refund
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B. Straight life income (life only)
Life only pays the most per month because payments stop at death and there is no guarantee for beneficiaries.

12. Which rider keeps the policy in force without premium payments if the insured becomes totally disabled, after a waiting period?

  1. Waiver of premium
  2. Guaranteed insurability
  3. Payor benefit
  4. Accidental death benefit
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A. Waiver of premium
Waiver of premium waives premiums during a qualifying total disability, usually after a waiting period such as six months.

13. The guaranteed insurability rider allows the policyowner to:

  1. Convert term coverage to permanent coverage
  2. Receive double the death benefit for an accidental death
  3. Buy additional coverage at specified dates or events without evidence of insurability
  4. Have premiums waived during disability
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C. Buy additional coverage at specified dates or events without evidence of insurability
Option dates are often tied to ages or life events such as marriage or the birth of a child.

14. Which type of beneficiary designation cannot be changed without the beneficiary's consent?

  1. Revocable
  2. Contingent
  3. Tertiary
  4. Irrevocable
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D. Irrevocable
An irrevocable beneficiary has a vested interest, so the owner needs that beneficiary's consent to change the designation or take certain actions such as policy loans.

15. Under a per stirpes beneficiary designation:

  1. Proceeds are divided equally among living named beneficiaries only
  2. A deceased beneficiary's share passes to that beneficiary's descendants
  3. Proceeds go to the insured's estate
  4. Proceeds go to the contingent beneficiary
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B. A deceased beneficiary's share passes to that beneficiary's descendants
Per stirpes means by the branch: a deceased beneficiary's share goes to their heirs. Per capita divides proceeds among the living named beneficiaries.

16. Under the Uniform Simultaneous Death Act, if the insured and the primary beneficiary die in the same accident and the order of death cannot be determined, proceeds are paid as if:

  1. The insured survived the beneficiary
  2. The beneficiary survived the insured
  3. Both died at the same moment, split equally
  4. The policy had lapsed
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A. The insured survived the beneficiary
Because the insured is presumed to have survived, proceeds go to the contingent beneficiary or, if there is none, to the insured's estate.

17. An accelerated (living) benefits rider allows the policyowner to:

  1. Increase coverage without evidence of insurability
  2. Receive part of the death benefit early if the insured is terminally ill
  3. Borrow against the policy interest-free
  4. Skip premium payments during unemployment
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B. Receive part of the death benefit early if the insured is terminally ill
Accelerated benefits pay a portion of the death benefit before death. The amount paid reduces the remaining death benefit.

18. If a policy loan is outstanding when the insured dies, the insurer will:

  1. Require the beneficiary to repay the loan
  2. Void the policy
  3. Reduce the death benefit by the loan balance plus interest
  4. Pay the full face amount and forgive the loan
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C. Reduce the death benefit by the loan balance plus interest
Unpaid loans and interest are deducted from the death benefit.

19. A collateral assignment of a life insurance policy:

  1. Permanently transfers all ownership rights
  2. Uses the policy as security for a loan, limiting the creditor's interest to the amount owed
  3. Changes the beneficiary to the insured's estate
  4. Cancels the policy's cash value
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B. Uses the policy as security for a loan, limiting the creditor's interest to the amount owed
Under a collateral assignment, the lender is paid first up to the debt, and the remainder goes to the beneficiary.

20. A payor benefit rider on a juvenile policy:

  1. Pays the child's college tuition
  2. Converts the policy to term coverage
  3. Waives premiums if the adult premium payor dies or becomes disabled, usually until the child reaches a specified age
  4. Doubles the death benefit for accidental death
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C. Waives premiums if the adult premium payor dies or becomes disabled, usually until the child reaches a specified age
The payor rider keeps a child's policy in force if the adult paying for it dies or becomes disabled.

21. An accidental death benefit rider pays an additional benefit if death results from an accident, generally within:

  1. 2 years of the accident
  2. 90 days of the accident
  3. 30 days of the accident
  4. 1 year of the accident
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B. 90 days of the accident
The accidental death benefit (often double indemnity) usually requires death within 90 days.

22. A cost of living rider:

  1. Pays a monthly living allowance
  2. Reduces premiums when inflation is high
  3. Waives premiums during unemployment
  4. Increases the face amount based on changes in the Consumer Price Index
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D. Increases the face amount based on changes in the Consumer Price Index
The increase is usually added as term insurance without evidence of insurability.

23. The automatic premium loan provision:

  1. Automatically pays premiums from a bank account
  2. Lets the insurer borrow from the policyowner
  3. Uses the policy's cash value to pay a premium that remains unpaid at the end of the grace period
  4. Applies only to term policies
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C. Uses the policy's cash value to pay a premium that remains unpaid at the end of the grace period
Automatic premium loans prevent an unintentional lapse, as long as there is enough cash value.

24. Reinstatement of a lapsed life policy generally requires all of the following EXCEPT:

  1. Payment of past-due premiums with interest
  2. Application within the allowed reinstatement period
  3. Evidence of insurability
  4. Repayment of every premium paid since the policy was first issued
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D. Repayment of every premium paid since the policy was first issued
Only past-due premiums (with interest) and any outstanding loans must be repaid. Reinstatement usually starts a new contestable period, and a policy surrendered for cash cannot be reinstated.

25. The insuring clause of a life policy:

  1. States the insurer's promise to pay the death benefit
  2. States the premium amount and due dates
  3. Lists the policy exclusions
  4. Names the contingent beneficiary
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A. States the insurer's promise to pay the death benefit
The insuring clause is the insurer's basic promise to pay.

26. The consideration clause of a life policy states:

  1. The owner's right to name a beneficiary
  2. The amount and frequency of premium payments, and that the application statements are part of the consideration
  3. The free-look period
  4. The insurer's promise to pay
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B. The amount and frequency of premium payments, and that the application statements are part of the consideration
The consideration clause sets out what the policyowner gives in exchange for the insurer's promise.

27. The free-look provision allows the policyowner to:

  1. Skip a premium payment each year
  2. Change beneficiaries without the insurer's consent
  3. Return the policy within a specified period after delivery for a full refund of premium
  4. Inspect the insurer's financial records
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C. Return the policy within a specified period after delivery for a full refund of premium
The number of free-look days is set by state law and varies by product and situation.

28. A spendthrift clause protects:

  1. The insurer from fraudulent claims
  2. Policy proceeds from the beneficiary's creditors before the proceeds are paid
  3. The agent from lawsuits
  4. The insured from overpaying premiums
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B. Policy proceeds from the beneficiary's creditors before the proceeds are paid
It applies when proceeds are paid in installments under a settlement option.

29. A facility of payment clause allows the insurer to:

  1. Pay claims through a third-party administrator
  2. Delay payment for one year
  3. Pay proceeds only by check
  4. Pay part of the proceeds to someone who is not the named beneficiary, such as a relative who paid funeral expenses
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D. Pay part of the proceeds to someone who is not the named beneficiary, such as a relative who paid funeral expenses
This clause is common in industrial policies, where beneficiaries may be minors or deceased.

30. A common disaster clause:

  1. Requires the beneficiary to survive the insured by a specified period to receive the proceeds
  2. Excludes deaths in natural disasters
  3. Splits proceeds among all beneficiaries equally
  4. Pays double the death benefit in natural disasters
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A. Requires the beneficiary to survive the insured by a specified period to receive the proceeds
If the primary beneficiary does not survive the period, proceeds go to the contingent beneficiary.

31. An absolute assignment of a life insurance policy:

  1. Uses the policy as collateral for a loan
  2. Changes only the beneficiary
  3. Is temporary and ends when a loan is repaid
  4. Transfers all ownership rights to the new owner
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D. Transfers all ownership rights to the new owner
A collateral assignment is temporary and partial. An absolute assignment is a permanent transfer.

32. A contingent beneficiary receives the proceeds if:

  1. The primary beneficiary is under age 21
  2. The policy is surrendered
  3. The primary beneficiary dies before the insured
  4. The insured dies before age 65
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C. The primary beneficiary dies before the insured
The contingent (secondary) beneficiary is next in line after the primary beneficiary.

33. When a minor is named as a life insurance beneficiary, the proceeds are generally:

  1. Held by the agent until the minor turns 18
  2. Paid to a guardian or trustee rather than directly to the minor
  3. Paid directly to the minor
  4. Paid to the insured's estate
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B. Paid to a guardian or trustee rather than directly to the minor
Minors lack the legal capacity to receive proceeds directly.

34. Under a results clause in a war exclusion, the insurer will not pay if:

  1. Death results from an act of war
  2. The insured dies in a foreign country
  3. The insured is a reservist
  4. The insured dies while in military service from any cause
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A. Death results from an act of war
A status clause excludes any death while in military service. A results clause excludes only deaths caused by war.

35. If an outstanding policy loan plus interest grows larger than the policy's cash value:

  1. The insurer forgives the excess
  2. The beneficiary must repay the excess
  3. The face amount automatically doubles
  4. The policy will lapse after the required notice
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D. The policy will lapse after the required notice
When the loan balance exceeds the cash value, the policy terminates after notice to the owner.
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