Types of Life Policies and Features — practice questions

10% of the exam ≈15 real questions 22 free questions here

Whole life, universal life, variable universal life, term, and annuities — this domain is worth about 15 of the 150 scored questions. Most items are recognition problems: a scenario describes a client need or a policy behavior, and you pick the product that matches.

Where people lose points

• Confusing variable universal life (separate account, no guaranteed minimum) with interest-sensitive whole life (general account, guaranteed floor).
• Missing that decreasing term is the mortgage answer while level term is the income-replacement answer.
• Mixing up the accumulation period and the annuity period on deferred annuities.
• Forgetting that joint life pays on the first death and survivorship life pays on the second.

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 features.

1. A universal life policy uses death benefit Option A (level). As the policy's cash value grows over time, what happens to the net amount at risk?

   • AIt increases, because the total death benefit rises right along with the cash value.
   • BIt decreases, because the exposure is the specified amount minus the cash value.Correct
   • CIt stays constant, because the net amount at risk is fixed at policy issue.
   • DIt becomes zero once the cash value exceeds half of the specified amount.

   Why: Under death benefit Option A the total death benefit stays level, so the insurer's pure insurance exposure (specified amount minus cash value) shrinks as the cash value builds, and the monthly cost of insurance is charged against that shrinking net amount at risk. Choice A is the closest distractor: a death benefit that rises with the cash value describes death benefit Option B, but even under Option B the net amount at risk stays level at the specified amount rather than increasing. Choice C states the Option B result, not the Option A result. (Outline I.B.)

   Reference FL 2-15 Outline I.B (Universal life death benefit options)

2. In a universal life policy, the target premium is best described as the premium that:

   • ACovers only the current month’s mortality and expense charges on the contract.
   • BThe insurer calculates as enough to carry the policy to maturity; commission is based on it.Correct
   • CIs the largest amount the contract may accept before it becomes a modified endowment contract.
   • DMust be paid on each due date or the policy immediately lapses without value.

   Why: The target premium is the insurer's suggested funding level, designed so that, under current interest and mortality assumptions, the policy will stay in force for life; it is also the usual base for first-year commission. Option A describes the minimum premium, the closest distractor, which funds only the current period's deductions. Option C describes the seven-pay or guideline premium limits. (Outline I.B.)

   Reference FL 2-15 Outline I.B (Universal life premium structure)

3. Why does federal tax law require a universal life policy to maintain a "corridor" between its cash value and its death benefit?

   • ATo keep enough pure insurance in the contract that it qualifies as life insurance.Correct
   • BTo guarantee that the policy can never lapse for insufficient account value.
   • CTo cap the amount the insurer may charge for the monthly cost of insurance.
   • DTo force the insurer to credit at least the guaranteed minimum interest rate each year.

   Why: IRC section 7702 defines what counts as life insurance, and under its guideline premium and corridor test the death benefit must stay a stated multiple of the cash value — 250% for insureds age 40 and under, declining at higher ages — so a heavily funded contract cannot become a tax-sheltered investment wrapper. Option B is the closest distractor but confuses a tax-qualification rule with a policy guarantee; a universal life policy can still lapse if the accumulated value cannot cover its deductions. Cost of insurance ceilings and guaranteed interest floors are contractual terms, not corridor rules. (Outline I.B.)

   Reference FL 2-15 Outline I.B (Universal life); IRC s. 7702

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. (Outline I.B.)

   Reference FL 2-15 Outline I.B (Universal life withdrawals and loans)

5. 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. (Outline I.B.)

   Reference FL 2-15 Outline I.B (Interest-sensitive whole life)

6. A 35-year-old applicant compares four permanent policies, all with a $100,000 face amount. Which will have the HIGHEST annual premium?

   • AOrdinary (straight) whole life
   • BLife paid-up at age 65
   • C30-pay whole life
   • D20-pay whole lifeCorrect

   Why: The shorter the premium-paying period, the higher each annual premium, because the same lifetime coverage must be funded with fewer payments; for a 35-year-old, the 20-pay contract compresses funding into 20 years, while both "30-pay" and "paid-up at 65" require 30 years and ordinary whole life spreads payments over a lifetime. Options B and C are the closest distractors and would in fact produce nearly identical premiums for this insured. The 20-pay policy also accumulates cash value the fastest for the same reason. (Outline I.A.)

   Reference FL 2-15 Outline I.A (Limited-pay whole life)

7. Ernesto, 68, and Pilar, 66, want annuity income to continue in full for as long as either of them is alive. Which payout option meets that objective?

   • AA joint life annuity
   • BA joint and 100% survivor annuityCorrect
   • CLife income with a 10-year period certain on Ernesto's life
   • DA fixed-period annuity payable for 20 years

   Why: A joint and 100% survivor annuity pays while either annuitant lives and continues the full payment to the survivor, so neither spouse can outlive the income. Option A is the closest distractor and is its opposite: a joint life annuity stops at the FIRST death. Option C leaves Pilar with nothing after 10 years if Ernesto dies early, and option D can be exhausted while both are still alive. (Outline I.D.)

   Reference FL 2-15 Outline I.D (Annuity payout options)

8. An annuitant receiving payments under a life income option lives well beyond her life expectancy and has now recovered her entire cost basis. How are her continuing payments taxed?

   • AThey remain partially excluded under the original exclusion ratio.
   • BThey are taxed as long-term capital gains.
   • CThey become fully tax-free.
   • DThey become fully taxable as ordinary income.Correct

   Why: The exclusion ratio applies only until the entire investment in the contract has been recovered tax-free; after that point every remaining payment is fully taxable ordinary income. Option A is the closest distractor, since candidates often assume the ratio applies for life, but the exclusion is capped at the cost basis. Conversely, if the annuitant dies before recovering the basis, the unrecovered amount may be deducted on the final return. (Outline I.D.)

   Reference FL 2-15 Outline I.D (Annuity taxation)

9. Which annuity payout option is NOT life contingent?

   • AStraight life income
   • BLife income with a 10-year period certain
   • CFixed-period (period certain) optionCorrect
   • DInstallment refund life income

   Why: A fixed-period option liquidates the accumulated value plus interest over a stated number of years to the payee, whether the annuitant lives or dies, so no life is used as a measuring life. Option B is the closest distractor: the period certain adds a guarantee, but the payments still continue for the annuitant's lifetime if he outlives the certain period, which makes it life contingent. The fixed-amount option is the other non-life-contingent choice, paying a selected amount until the funds are exhausted. (Outline I.D.)

   Reference FL 2-15 Outline I.D (Annuity payout options)

10. Two equal owners of a Florida landscaping company want one lower-cost policy that will supply the cash to buy out the FIRST owner to die under their buy-sell agreement. Which product fits?

    • AA survivorship (second-to-die) life policy
    • BA single-premium immediate annuity on each owner
    • CTwo individual deferred annuities
    • DA joint life (first-to-die) policyCorrect

    Why: A joint life (first-to-die) policy insures two or more lives under one contract and pays a single death benefit at the first death, which is exactly when buy-sell funding is needed, and it costs less than two comparable individual policies. Option A is the closest distractor and is its mirror image: survivorship life pays only after BOTH insureds have died, which suits estate liquidity rather than a first-death buyout. Annuities supply income streams, not the immediate lump sum a buyout requires. (Outline I.E.)

    Reference FL 2-15 Outline I.E (Joint life and survivorship policies)

Topics inside this domain

• Annuities on the Florida 2-15
• Life policy provisions and clauses
• Variable life, VUL and the separate account
• Annuity best interest rules for buyers 65+

Drill other domains

• Life Policy Riders, Provisions, Options, and Exclusions (10%)
• Life Application, Underwriting, and Policy Delivery (8%)
• Retirement and Other Life Insurance Concepts (5%)
• Types of Health Policies (11%)
• Health Policy Provisions, Clauses, and Riders (10%)
• Social Insurance (4%)

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