Free Insurance Licensing CA-Life-Accident-and-Health Practice Exam with Questions & Answers | Set: 3

Variable life insurance allows the insured to choose where the assets backing the cash value are invested. Policyholders can allocate their premiums among various investment options, such as stocks, bonds, or mutual funds, which can influence the cash value and death benefit of the policy based on the performance of these investments. This type of policy combines life insurance protection with investment flexibility, appealing to those who want more control over how their policy's cash value grows.

Adverse selection refers to a situation where those most likely to file claims are the ones most eager to purchase insurance, which can lead to higher-than-expected loss ratios for insurers. Characteristics of adverse selection include:

Occurring when premiums are low relative to the risk (A).

Attracting individuals with the greatest probability of loss (B).

Leading to poor underwriting results if many high-risk applicants are accepted (D).However, insurance companies can and do use underwriting criteria to assess and mitigate risks, meaning they can discriminate based on the probability of loss, which makes option C incorrect.

Policies covered under the California Life and Health Insurance Guarantee Association (CLHIGA) include disability income, individual health, and deferred annuities. Self-funded group life insurance policies are not covered by CLHIGA because these policies are funded by the employer, not an insurance company, and therefore do not fall under the association's protection.

Preferred Provider Organizations (PPOs) offer flexible and broad access to healthcare providers. Characteristics of PPOs include incentives for using network providers (B), the ability for employees to see specialists without referrals (C), and coverage for care received from non-network physicians, although at a higher cost (D). Unlike Health Maintenance Organizations (HMOs), PPOs do not require primary care physicians to serve as gatekeepers, making option A incorrect.

Endowment insurance is a type of life insurance policy that pays the face amount to the insured if they survive to the end of a specified period, known as the endowment period. If the insured dies during this period, the face amount is paid to the beneficiary. This differs from term insurance (A), which provides coverage for a specified term and pays out only if the insured dies during that term; whole life insurance (C), which covers the insured for their entire life and includes a savings component; and universal life insurance (D), which offers flexible premiums and death benefits along with a savings component.

 Accidental Death Benefit: This is a rider added to a whole life policy that provides an additional payout if the insured dies as a result of an accident.

 Additional Premium: The premium charged for this rider is separate and does not impact the cash value of the whole life policy itself.

 Policy's Cash Value: The cash value in a whole life policy grows based on the base policy premiums and interest; it is not affected by the additional premium for the accidental death benefit rider.References: California Insurance Code Section 10271.5 outlines the treatment of additional benefits and riders in life insurance policies.

 Definition of Representation: A representation is a statement made by an applicant for insurance or by the insured during the policy period.

 Failure to Correspond: If a representation fails to match its stipulations or assertions, it is considered "false."

 Impact: False representations can lead to denial of claims or voiding of the policy, depending on the materiality of the misrepresentation.References: California Insurance Code Section 358 states that a representation is false when it fails to correspond with its assertions or stipulations.

When a life insurance policy is surrendered for its cash value, the cost recovery rule applies. According to this rule, the cost basis of the policy (the total amount of premiums paid into the policy) is exempt from taxation. Only the amount received that exceeds the cost basis is considered taxable income. This means that the insured will receive the cost basis tax-free, and only the gain (if any) above the cost basis is subject to taxation.

Every individual annuity policy sold to a senior in the State of California must include a 30-day free look period. This allows the policyholder to review the annuity contract and cancel it within 30 days for a full refund of premiums paid. This regulation ensures consumer protection by providing seniors with the opportunity to fully understand their purchase and reconsider if necessary, as mandated by California insurance laws.

The suicide clause in a life insurance policy protects the insurer against adverse selection by stating that if the insured commits suicide within a specified period (usually two years) after the policy is issued, the insurer will not pay the death benefit but will return the premiums paid. This provision helps prevent individuals from obtaining life insurance with the intention of committing suicide shortly after, thus mitigating the risk for the insurer.