These twenty questions come from nineteen sections of the official North Carolina outline. Answer each one in your head first, then reveal the correct choice and the reason behind it.
Question 1 of 20
Endowment
Maria buys an endowment policy that matures in 20 years, and she is alive when it matures; what happens?
- A. The coverage simply ends and she gets nothing
- B. She receives the face amount as a living benefit
- C. Her beneficiary receives the death benefit
- D. The policy converts automatically to term insurance
+Reveal answer
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.
Types of Individual Life Insurance > Endowment (concept)
Question 2 of 20
General provisions
What is the main purpose of the incontestable clause in a life insurance policy?
- A. It allows the insurer to cancel the policy at any time for any reason
- B. It prevents the insurer from denying a claim due to misstatements after the policy has been in force for a set period
- C. It guarantees the death benefit will increase each year
- D. It lets the policyowner change the beneficiary without notice
+Reveal answer
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.
NC General Statutes standard policy provisions (incontestable clause); concept tested, period commonly two years
Question 3 of 20
Nonforfeiture values
Which of the following is a standard nonforfeiture option available to a policyowner?
- A. Automatic premium loan
- B. Extended term insurance
- C. Guaranteed insurability
- D. Accidental death benefit
+Reveal answer
Answer: B. 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.
NC Standard Nonforfeiture Law concept; outline node: Nonforfeiture values
Question 4 of 20
Dividends
James leaves his dividends with the insurer to earn interest. How is that arrangement treated for taxes?
- A. The dividend and the interest are both fully taxable each year
- B. The dividend is not taxable but the interest earned is taxable
- C. Neither the dividend nor the interest is ever taxable
- D. Only the dividend is taxable, not the interest
+Reveal answer
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.
Policy Provisions, Options, and Other Features > Dividends (concept)
Question 5 of 20
Settlement options
What is a settlement option in a life insurance policy?
- A. A way for the insurer to choose which agent gets paid a commission
- B. A method of paying the death benefit or cash value to the beneficiary other than one lump sum
- C. A discount on premiums for paying annually
- D. A rider that increases the face amount over time
+Reveal answer
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.
Policy Provisions, Options, and Other Features > Settlement options (concept)
Question 6 of 20
Premium payment
David has a universal life policy with a large account value but stops paying premiums; why might his coverage continue for a while anyway?
- A. The insurer waives all future charges
- B. Monthly deductions are taken from the account value to keep it in force
- C. Premiums are legally suspended for a year
- D. The mortality charge drops to zero when premiums stop
+Reveal answer
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.
Policy Provisions, Options, and Other Features > Premium payment (nonpayment, mortality/expense charges)
Question 7 of 20
Group underwriting
Why do insurers often set a minimum participation percentage for contributory group life plans?
- A. To keep enough healthy members in the group and limit adverse selection
- B. To force the employer to pay the entire premium
- C. To make sure only unhealthy employees enroll
- D. To eliminate the need for a master policy
+Reveal answer
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.
Other Life Topics > Group underwriting (concept)
Question 8 of 20
Master policy and certificates
Linda's employer cancels the group life master policy; what is the effect on the individual certificates?
- A. Certificates continue unchanged because each is its own contract
- B. Coverage under the certificates generally ends because they depend on the master policy
- C. Certificates automatically convert to whole life at no cost
- D. The insurer must issue each employee a new master policy
+Reveal answer
Answer: B. 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.
Other Life Topics > Master policy and certificates
Question 9 of 20
Group Conversion
When an employee leaves a group life plan, the individual policy issued under the conversion privilege is generally which type?
- A. A term policy with the same face amount forever
- B. A permanent (whole life) type policy
- C. A variable annuity
- D. A group certificate renewed monthly
+Reveal answer
Answer: B. 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.
Other Life Topics > Group Conversion (concept)
Question 10 of 20
Tax qualified retirement plans
Tom takes a withdrawal from his traditional IRA before reaching age 59 and a half without qualifying for an exception. What generally happens?
- A. The amount is taxed as income and a premature distribution penalty tax applies
- B. The withdrawal is completely tax free
- C. Only a flat fee is charged with no tax
- D. The IRA converts automatically to a Roth
+Reveal answer
Answer: A. 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.
Other Life Topics > Tax qualified retirement plans (IRA)
Question 11 of 20
Business uses of life insurance
A company called Coastal Freight owns a single life policy on each of its four owners and will use the proceeds to buy back any owner's shares at death; what type of buy-sell plan is this?
- A. Cross-purchase plan
- B. Entity purchase plan
- C. Group term plan
- D. Deferred compensation plan
+Reveal answer
Answer: B. 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.
Other Life Topics > Business uses of life insurance (buy-sell agreements)
Question 12 of 20
Federal income tax treatment of life insurance and annuity premiums
When a nonqualified deferred annuity has grown in value, how are the earnings treated while they remain in the contract?
- A. Taxed each year as they are credited
- B. Tax deferred until withdrawn
- C. Never taxable at any point
- D. Taxed as capital gains each year
+Reveal answer
Answer: B. 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.
IRC Section 72; Other Life Topics > Federal income tax treatment of annuity growth
Question 13 of 20
Legal concepts
An insurance policy is called a contract of adhesion mainly because:
- A. Both parties negotiate every term equally
- B. One party writes it and the other must take it or leave it
- C. The exchange of value depends on a future uncertain event
- D. Only the insurer makes an enforceable promise
+Reveal answer
Answer: B. 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.
Other Life Topics > Legal concepts (adhesion)
Question 14 of 20
Cost comparison methods
Agent Devon tells a prospect that whichever policy has the lowest total of premiums minus dividends and cash value is automatically the best buy; why is this advice misleading?
- A. Total premiums are never disclosed to buyers
- B. It relies on the traditional net cost method, which ignores when money is paid or returned
- C. Dividends are always guaranteed, so they should not be subtracted
- D. Cash value should be added, not subtracted
+Reveal answer
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.
Other Life Topics > Cost comparison methods: interest adjusted cost vs. traditional net cost
Question 15 of 20
Formation of the life insurance contract
Which of these describes a legally competent party for purposes of forming a valid life insurance contract?
- A. A person who is of legal age and mentally capable of understanding the agreement
- B. Any person who can afford the premium
- C. Only a person who has passed a medical exam
- D. Any adult regardless of mental capacity
+Reveal answer
Answer: A. 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.
Formation of the life insurance contract, competent parties
Question 16 of 20
Variable life
Carlos holds both a North Carolina life license and the required securities registration, but the insurer whose variable annuity he wants to sell has not appointed him. What is his standing to sell that insurer's product?
- A. He may sell it once he is appointed by that insurer
- B. He may sell it immediately because his securities registration overrides appointment rules
- C. He never needs an appointment for variable products
- D. He must first obtain a separate variable products license from the state
+Reveal answer
Answer: A. 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.
Question 17 of 20
Contract of Insurance
What is the legal purpose of a contract of insurance as defined in North Carolina law?
- A. To guarantee that no losses will ever occur to the insured
- B. To transfer the risk of a specified loss from the insured to the insurer in exchange for premium
- C. To allow the insurer to invest the insured's premiums for personal profit only
- D. To provide a savings account with no promise to pay claims
+Reveal answer
Answer: B. 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)
Question 18 of 20
Definitions
Under North Carolina insurance law, what does the term 'person' generally include?
- A. Only individual human beings
- B. Only licensed insurance producers
- C. Both individuals and legal entities such as corporations and associations
- D. Only insurance companies authorized in the state
+Reveal answer
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)
Question 19 of 20
Commissioner of Insurance
The Commissioner adopts a new rule setting standards for how insurers must file certain forms. What is the legal effect of a properly adopted rule?
- A. It has the force of law and insurers must comply
- B. It is a suggestion that insurers may follow if convenient
- C. It applies only to insurers that agree to it
- D. It expires automatically after one week
+Reveal answer
Answer: A. 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
Question 20 of 20
Endowment
Why does an endowment policy generally cost more than a whole life policy for the same face amount?
- A. Because endowments have no cash value to fund
- B. Because the endowment must build enough cash value to equal the face amount by a specific earlier maturity date
- C. Because endowments include free additional coverage on the spouse
- D. Because endowments pay dividends that whole life does not
+Reveal answer
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.
Types of Individual Life Insurance > Endowment (concept)