Free North Carolina life insurance practice test.

Answer B. She receives the face amount as a living benefit

When an endowment matures and the insured is still living, the insured receives the full face amount as a living benefit. Choice A is wrong because the whole point of an endowment is a payout at maturity. Choice C is wrong because the beneficiary is paid only if the insured dies. Choice D is wrong because the endowment pays out and ends rather than converting.

Answer B. It prevents the insurer from denying a claim due to misstatements after the policy has been in force for a set period

The incontestable clause bars the insurer from contesting the policy based on misstatements or omissions once the policy has been in force for a stated period, usually two years. Choice A is wrong because the clause limits insurer power rather than expanding it. Choice C describes a benefit feature, not the incontestable clause. Choice D describes beneficiary rights, unrelated to contestability.

Answer D. Extended term insurance

Extended term insurance is one of the three standard nonforfeiture options, along with cash surrender and reduced paid-up insurance. Automatic premium loan is a policy loan feature, not a nonforfeiture option. Guaranteed insurability and accidental death benefit are riders, not nonforfeiture options.

Answer B. The dividend is not taxable but the interest earned is taxable

Under the accumulate at interest option, the dividend itself remains a nontaxable return of premium, but the interest it earns is taxable income to the owner. Saying both are taxable ignores that the dividend is a premium refund. Saying neither is taxable ignores the taxable interest. The last choice reverses the correct rule.

Answer B. A method of paying the death benefit or cash value to the beneficiary other than one lump sum

A settlement option is simply a way to pay out policy proceeds in a form other than one single lump sum, such as installments or income for life. Choice A is about commissions, which has nothing to do with paying proceeds. Choice C describes a premium mode discount. Choice D describes a benefit rider, not a payout method.

Answer B. Monthly deductions are taken from the account value to keep it in force

Universal life is flexible, so as long as the account value is large enough, the insurer keeps deducting the monthly mortality and expense charges from it, and the policy stays in force even without new premiums. The insurer does not waive charges, there is no automatic one-year premium suspension, and the mortality charge continues to be assessed rather than dropping to zero.

Answer A. To keep enough healthy members in the group and limit adverse selection

In contributory plans employees pay part of the cost, so some may opt out. A minimum participation rule ensures a broad mix of members, keeping healthy lives in the pool and limiting adverse selection. Choice B is wrong because contributory means employees share the cost, not that the employer pays all. Choice C is the opposite of the goal. Choice D is wrong because a master policy is still needed.

Answer A. Coverage under the certificates generally ends because they depend on the master policy

Certificates provide coverage only because the master policy exists, so ending the master policy generally ends the certificate coverage, subject to conversion rights the law may provide. Certificates are not independent contracts, so they do not simply continue unchanged. Any conversion right is usually to an individual policy that the employee pays for, not free automatic whole life. The insurer does not issue a master policy to each employee, since a master policy covers a group.

Answer D. A permanent (whole life) type policy

Converted coverage is usually issued as a permanent form such as whole life, at the insurer's standard rate for the person's age. It is not indefinite term with the same face. It is not an annuity, which is not life insurance protection. A group certificate cannot continue after the person leaves the group, which is exactly why conversion exists.

Answer B. The amount is taxed as income and a premature distribution penalty tax applies

Early withdrawals from a traditional IRA are taxed as ordinary income and are usually subject to an additional penalty tax for taking the money out too soon. The withdrawal is not tax free. There is no simple flat fee substitute for taxation. An early withdrawal does not convert the account to a Roth.

Answer D. Entity purchase plan

When the business entity itself owns the policies and buys back the deceased owner's interest, it is an entity purchase (also called stock redemption) plan. A cross-purchase has owners individually owning policies on each other. Group term and deferred compensation are employee benefit arrangements, not buy-sell funding methods.

Answer A. Tax deferred until withdrawn

Annuity earnings grow tax deferred; you owe no tax until you take money out. They are not taxed annually as credited, they are not permanently tax free, and annuity gains are taxed as ordinary income rather than capital gains when withdrawn.

Answer A. One party writes it and the other must take it or leave it

A contract of adhesion is drafted entirely by the insurer, and the applicant simply accepts or rejects it without bargaining over the wording. Equal negotiation describes an ordinary bargained contract, not adhesion. Unequal value based on chance describes an aleatory contract. Only the insurer promising describes a unilateral contract.

Answer B. It relies on the traditional net cost method, which ignores when money is paid or returned

Devon is using the traditional net cost method, which ignores the time value of money and can make a policy look cheaper than it truly is. Premium totals are disclosed, dividends are not guaranteed but are still subtracted in this method, and cash value is correctly subtracted, not added. The real flaw is the ignored timing of dollars.

Answer B. A person who is of legal age and mentally capable of understanding the agreement

Competent parties must be of legal age and have the mental capacity to understand the contract, and not be under undue influence or intoxication. Ability to pay the premium relates to consideration, not competency. A medical exam is an underwriting step, not a test of legal competency. Mental capacity does matter, so an adult who lacks it is not competent.

Answer C. He may sell it once he is appointed by that insurer

Even with proper securities registration, a producer must be appointed by the insurer to solicit that company's products, so Carlos must be appointed first. Securities registration does not replace the insurance appointment requirement. Variable products still require the standard insurance appointment. North Carolina does not issue a stand alone variable products license separate from the life license plus FINRA registration.

NC appointment requirement, N.C. Gen. Stat. 58-33-40; combined with FINRA registration for variable products.

Answer A. To transfer the risk of a specified loss from the insured to the insurer in exchange for premium

An insurance contract is fundamentally an agreement to transfer or indemnify against the risk of a defined loss in return for premium payments. Insurance cannot guarantee losses will never happen; it responds after a covered loss. The insurer's investment activity is not the purpose of the contract. A pure savings account with no promise to pay claims is not insurance.

North Carolina Contract of Insurance (Art. 1, G.S. 58-1-10)

Answer C. Both individuals and legal entities such as corporations and associations

In the definitions section, 'person' is defined broadly to include individuals as well as legal entities like corporations, partnerships, and associations. It is not limited to human beings only, so the first choice is too narrow. It is not limited to producers or to insurers, so the second and fourth choices are also too narrow.

G.S. 58-1-5 (Definitions)

Answer C. It has the force of law and insurers must comply

Rules and regulations properly adopted by the Commissioner carry the force of law and must be followed by regulated entities. They are not optional suggestions. They apply to all regulated insurers, not only those who agree. Validly adopted rules remain in effect until changed, not for only a week.

N.C. Gen. Stat. Chapter 58, Article 2

Answer B. Because the endowment must build enough cash value to equal the face amount by a specific earlier maturity date

An endowment must accumulate cash value equal to the face amount by its maturity date, which is usually sooner than a whole life policy's age 100 or 121 endowment, so premiums are higher. Choice A is false since endowments do build cash value. Choice C is invented; endowments do not automatically insure a spouse. Choice D is wrong because dividends depend on whether the policy is participating, not on it being an endowment.