North Carolina (NC) Life Insurance Practice
Exam | Complete Exam Questions with 100%
Verified Correct Answers and Rationales |
Latest Update 2026/2027
SECTION 1: BASIC PRINCIPLES OF LIFE INSURANCE
1. The fundamental purpose of life insurance is to:
A) Eliminate all financial risks of an individual's life
B) Provide financial protection against the loss of income due to death
C) Serve as a tax-free investment vehicle for retirement
D) Provide guaranteed returns regardless of market conditions
Answer: B) Provide financial protection against the loss of income due to death
Rationale: Life insurance's fundamental purpose is to protect beneficiaries from
financial loss resulting from the insured's death by providing income replacement.
While some policies have investment features, this is not their primary purpose .
2. The "face amount" of a life insurance policy refers to:
A) The cash value minus any outstanding loans
B) The total premiums paid over the policy's life
C) The initial death benefit stated in the policy
D) The insurer's net profit on the policy
Answer: C) The initial death benefit stated in the policy
Rationale: The face amount is the original death benefit specified in the policy
when issued, prior to any adjustments for loans, dividends, or policy changes .
,3. The principle of insurable interest in life insurance requires that:
A) The beneficiary must have an insurable interest in the insured at the time of
death
B) The policyowner must have an insurable interest in the insured at the time of
application
C) The insured must have an insurable interest in themselves
D) Both the policyowner and beneficiary must have insurable interest
Answer: B) The policyowner must have an insurable interest in the insured at
the time of application
Rationale: In life insurance, insurable interest must exist only at the time the policy
is issued. The policyowner must face economic loss upon the death of the insured,
preventing wagering on human life .
4. Which statement about insurable interest in life insurance is CORRECT?
A) Insurable interest must exist both at policy inception and at time of death
B) Insurable interest must exist only at the time the applicant enters into the life
insurance contract
C) Anyone can purchase life insurance on any person regardless of relationship
D) Insurable interest is only required for policies over $100,000
Answer: B) Insurable interest must exist only at the time the applicant enters
into the life insurance contract
Rationale: In life insurance, insurable interest must exist only at the time the policy
is issued. The relationship between the person applying and the insured must
demonstrate that the policyowner would suffer economic loss upon the insured's
death .
5. An applicant's statements on an insurance application are considered legal:
,A) Warranties
B) Representations
C) Guarantees
D) Waivers
Answer: B) Representations
Rationale: Representations are statements believed to be true to the best of the
applicant's knowledge. Unlike warranties (which are guarantees of absolute truth),
representations are considered opinions .
6. A warranty in an insurance contract is:
A) A statement that is believed to be true
B) A guarantee that statements in the application are absolutely true
C) A promise by the insurer to pay claims promptly
D) A provision allowing policy replacement
Answer: B) A guarantee that statements in the application are absolutely true
Rationale: A warranty is a guarantee that statements given by the applicant in the
application are absolute facts. If a warranty is found to be false, the insurer may
void the policy regardless of whether the false statement was material to the risk .
7. The "law of large numbers" enables insurers to:
A) Guarantee profits on every policy
B) Predict future losses with reasonable accuracy
C) Eliminate all risk from the insurance pool
D) Charge the same premium to all applicants
Answer: B) Predict future losses with reasonable accuracy
Rationale: The law of large numbers states that as the number of exposure units
increases, actual results will more closely approximate expected results. This
, allows insurers to predict mortality rates and other losses with reasonable
accuracy .
8. A mutual insurance company is owned by its:
A) Stockholders
B) Policyholders
C) Board of directors
D) Agents
Answer: B) Policyholders
Rationale: Mutual insurance companies are owned by their policyholders, who
may receive dividends (nontaxable) from the company's surplus. Stock insurance
companies are owned by stockholders .
9. Which of the following best describes "adverse selection"?
A) Preference for policies with the greatest investment return
B) The tendency of higher-risk individuals to seek insurance more frequently than
lower-risk individuals
C) The process of assigning substandard risk ratings to applicants
D) The insurer's refusal to pay claims for nonpayment of premiums
Answer: B) The tendency of higher-risk individuals to seek insurance more
frequently than lower-risk individuals
Rationale: Adverse selection occurs when individuals who have a higher-than-
average probability of loss are more likely to purchase insurance, creating an
imbalance in the risk pool. Insurers use underwriting to protect against adverse
selection .
10. Insurance contracts are known as _______ because certain future conditions
or acts must occur before any claims can be paid.
Exam | Complete Exam Questions with 100%
Verified Correct Answers and Rationales |
Latest Update 2026/2027
SECTION 1: BASIC PRINCIPLES OF LIFE INSURANCE
1. The fundamental purpose of life insurance is to:
A) Eliminate all financial risks of an individual's life
B) Provide financial protection against the loss of income due to death
C) Serve as a tax-free investment vehicle for retirement
D) Provide guaranteed returns regardless of market conditions
Answer: B) Provide financial protection against the loss of income due to death
Rationale: Life insurance's fundamental purpose is to protect beneficiaries from
financial loss resulting from the insured's death by providing income replacement.
While some policies have investment features, this is not their primary purpose .
2. The "face amount" of a life insurance policy refers to:
A) The cash value minus any outstanding loans
B) The total premiums paid over the policy's life
C) The initial death benefit stated in the policy
D) The insurer's net profit on the policy
Answer: C) The initial death benefit stated in the policy
Rationale: The face amount is the original death benefit specified in the policy
when issued, prior to any adjustments for loans, dividends, or policy changes .
,3. The principle of insurable interest in life insurance requires that:
A) The beneficiary must have an insurable interest in the insured at the time of
death
B) The policyowner must have an insurable interest in the insured at the time of
application
C) The insured must have an insurable interest in themselves
D) Both the policyowner and beneficiary must have insurable interest
Answer: B) The policyowner must have an insurable interest in the insured at
the time of application
Rationale: In life insurance, insurable interest must exist only at the time the policy
is issued. The policyowner must face economic loss upon the death of the insured,
preventing wagering on human life .
4. Which statement about insurable interest in life insurance is CORRECT?
A) Insurable interest must exist both at policy inception and at time of death
B) Insurable interest must exist only at the time the applicant enters into the life
insurance contract
C) Anyone can purchase life insurance on any person regardless of relationship
D) Insurable interest is only required for policies over $100,000
Answer: B) Insurable interest must exist only at the time the applicant enters
into the life insurance contract
Rationale: In life insurance, insurable interest must exist only at the time the policy
is issued. The relationship between the person applying and the insured must
demonstrate that the policyowner would suffer economic loss upon the insured's
death .
5. An applicant's statements on an insurance application are considered legal:
,A) Warranties
B) Representations
C) Guarantees
D) Waivers
Answer: B) Representations
Rationale: Representations are statements believed to be true to the best of the
applicant's knowledge. Unlike warranties (which are guarantees of absolute truth),
representations are considered opinions .
6. A warranty in an insurance contract is:
A) A statement that is believed to be true
B) A guarantee that statements in the application are absolutely true
C) A promise by the insurer to pay claims promptly
D) A provision allowing policy replacement
Answer: B) A guarantee that statements in the application are absolutely true
Rationale: A warranty is a guarantee that statements given by the applicant in the
application are absolute facts. If a warranty is found to be false, the insurer may
void the policy regardless of whether the false statement was material to the risk .
7. The "law of large numbers" enables insurers to:
A) Guarantee profits on every policy
B) Predict future losses with reasonable accuracy
C) Eliminate all risk from the insurance pool
D) Charge the same premium to all applicants
Answer: B) Predict future losses with reasonable accuracy
Rationale: The law of large numbers states that as the number of exposure units
increases, actual results will more closely approximate expected results. This
, allows insurers to predict mortality rates and other losses with reasonable
accuracy .
8. A mutual insurance company is owned by its:
A) Stockholders
B) Policyholders
C) Board of directors
D) Agents
Answer: B) Policyholders
Rationale: Mutual insurance companies are owned by their policyholders, who
may receive dividends (nontaxable) from the company's surplus. Stock insurance
companies are owned by stockholders .
9. Which of the following best describes "adverse selection"?
A) Preference for policies with the greatest investment return
B) The tendency of higher-risk individuals to seek insurance more frequently than
lower-risk individuals
C) The process of assigning substandard risk ratings to applicants
D) The insurer's refusal to pay claims for nonpayment of premiums
Answer: B) The tendency of higher-risk individuals to seek insurance more
frequently than lower-risk individuals
Rationale: Adverse selection occurs when individuals who have a higher-than-
average probability of loss are more likely to purchase insurance, creating an
imbalance in the risk pool. Insurers use underwriting to protect against adverse
selection .
10. Insurance contracts are known as _______ because certain future conditions
or acts must occur before any claims can be paid.
