Free Arkansas life insurance practice test.

Answer C. The insurer must tell the applicant and give the name of the reporting agency

When adverse action is based on a consumer report, the FCRA requires the insurer to notify the consumer and provide the name, address, and phone number of the consumer reporting agency that supplied the report. The insurer is not required to delete the report, offer a discount, or report the action to a federal agency.

Fair Credit Reporting Act, 15 USC 1681

Answer C. Misrepresentation

Misrepresentation is a false statement of a material fact on the application, which is what Karen did. Concealment is failing to disclose a known material fact, not stating something false. Waiver is giving up a known right. Estoppel prevents someone from denying something they previously allowed another to rely on.

Answer D. The insured's future earning potential over their working years

The human life value approach estimates the economic value of a person's future earnings that would be lost at death. Existing cash value is not the basis of this calculation. The guaranty association does not set required face amounts. Debt alone is part of the needs approach, not the human life value method.

Answer B. The policyowner

In variable life the cash value is held in separate accounts chosen by the policyowner, so the policyowner bears the investment risk and reward. The insurer guarantees only a minimum death benefit, not the investment results. The guaranty association does not cover market losses. The producer has no risk role.

Answer B. Paid-up additions

Paid-up additions use dividends to purchase small pieces of extra whole life coverage, raising both cash value and death benefit. Cash simply pays the owner, reduction of premium lowers the next premium, and accumulation at interest leaves dividends on deposit to earn interest.

Answer B. On the owner, because returns depend on the chosen subaccounts

A variable annuity invests premiums in separate account subaccounts, so the owner bears the investment risk and the value can rise or fall. The insurer does not guarantee performance, so it does not bear the risk. The guaranty association protects against insurer insolvency, not market losses. The producer has no financial responsibility for market results.

Answer B. The amount received that exceeds the total premiums she paid

On a full surrender, the taxable gain is the amount received that exceeds the cost basis, which is generally the premiums paid. The full cash value is not all taxable because her basis returns tax free. It is not fully tax free since gains above basis are taxed. Dividends alone are not the measure of the taxable amount.

Answer D. The consumer who is replacing existing coverage

Replacement rules protect consumers by making sure they get full disclosure and time to compare before dropping existing coverage for new coverage. The new insurer is not the protected party; it must follow disclosure duties. The producer benefits from a sale but is not the one protected. The guaranty association deals with insolvent insurers, not replacements.

Arkansas Rule governing replacement of life insurance and annuities

Answer B. A resident insurance producer license

Arkansas requires anyone who sells, solicits, or negotiates insurance to hold a producer license issued by the Insurance Department. A certificate of deposit is not how producers are authorized. There is no federal insurance charter for life producers because insurance is regulated by the states. A local business permit does not grant authority to sell insurance.

Ark. Code Ann. 23-64-201 et seq. (producer licensing)

Answer C. Notify Maria that a report may be obtained in connection with her application

The FCRA requires that the applicant be notified that a consumer report may be obtained in connection with the transaction. The insurer does not have to hand over a copy before applying, does not need the commissioner's approval to order a report, and owes no fee to the consumer for the report.

Fair Credit Reporting Act, 15 USC 1681

Answer D. Domestic insurer

A domestic insurer is one formed under the laws of the state where it operates. A foreign insurer is formed in another US state. An alien insurer is formed in another country. A fraternal is a member benefit society, which is not what this describes.

Answer A. Mortality, interest, and expenses

The three primary premium factors are mortality (expected death claims), interest (earnings on invested premiums), and expenses (cost of doing business). Inflation, dividends, and taxes are not the three core factors. Age and gender affect mortality but are not the three main factors themselves. Cash value and loans are policy features, not premium-setting factors.

Answer C. The performance of a stock market index, subject to a cap and floor

Indexed universal life ties interest crediting to a market index like the S&P 500, usually with a cap limiting gains and a floor protecting against losses. It is not a simple fixed rate. The owner does not directly own stocks. Dividends apply to participating whole life, not indexed UL crediting.

Answer B. Extended term insurance

Extended term insurance uses the cash value to buy term coverage at the same face amount for as long as the money lasts. Cash surrender ends the policy for cash, reduced paid-up keeps permanent coverage but at a lower face amount, and automatic premium loan pays premiums from cash value rather than stopping payments.

Answer B. Equity indexed annuity

An equity indexed annuity guarantees a minimum rate and can credit additional interest linked to a market index, which is exactly what Maria has. A fixed immediate annuity pays a set amount and does not tie interest to an index. A variable annuity puts money in subaccounts with no guaranteed minimum and can lose value. A single premium life annuity describes how it is funded and paid out, not how interest is credited.

Answer C. Treated as a return of premium and not taxable until they exceed premiums paid

Dividends are considered a return of overpaid premium, so they are not taxable until total dividends exceed the total premiums paid. They are not ordinary income when paid, not capital gains, and not subject to a penalty tax. Interest earned on dividends left with the insurer is taxable, but the dividend itself is a return of premium.

Answer C. An insurer becomes insolvent and cannot pay claims

The guaranty association pays covered claims when a member insurer becomes insolvent. Producer fraud is handled through other legal remedies, not the guaranty association. A missed premium is the policyholder's obligation, not an insolvency event. Premium increases are a rating matter, not an insolvency triggering association coverage.

Arkansas Life and Health Insurance Guaranty Association Act (Ark. Code Ann. Title 23)

Answer C. Protect policyholders if a member insurer becomes insolvent

The guaranty association steps in to protect covered policyholders within limits when a licensed insurer becomes insolvent. It does not protect insurer profits. It does not pay agent commissions. It does not set premium rates, which is the market and regulatory process, not the association's role.

Ark. Code Ann. 23-96-101 et seq. (Life and Health Insurance Guaranty Association Act)

Answer A. Fines and imprisonment may be imposed

18 USC 1033 provides criminal penalties, including fines and imprisonment, for violations. A warning is not the only option. There is no automatic appointment, and retaking an exam is not the federal penalty for this violation.

18 USC 1033

Answer C. Express authority

Express authority is spelled out in writing in the agency contract. Implied authority is not written but reasonably needed to carry out express duties. Apparent authority is what a customer reasonably believes the producer has based on the insurer's conduct. Assumed authority is not a recognized category.