, Question 1
An insurer issues a policy with a reinstatement provision. The insured lapses
the policy after paying premiums for 18 months, then applies for reinstatement
4 months later. Which requirement is the insurer LEAST likely to impose as a
condition of reinstatement?
A. Evidence of insurability satisfactory to the insurer
B. Payment of all overdue premiums with interest
C. Payment of a new first-year commission to the producer
D. Repayment of any policy loan with interest
Correct Answer: C - Payment of a new first-year commission to
the producer
RATIONALE
Reinstatement typically requires evidence of insurability, payment of
overdue premiums plus interest, and repayment of loans with interest.
A new first-year commission is not a reinstatement condition;
commissions are governed by producer contracts, not policy
provisions.
Question 2
A producer discusses a replacement policy with a client. Under West Virginia's
replacement regulations, which action best fulfills the producer's duty when the
existing insurer's policy has been in force for 10 years and contains a
substantial surrender charge?
A. Provide the client with a signed replacement notice and leave the
comparison to the client
B. Present a written and signed comparison of the existing and proposed
coverage, including surrender charges and cost implications
C. Advise the client to surrender the old policy first to avoid a gap in
coverage
D. Notify only the existing insurer of the intended replacement within 5
Page 2
, days
Correct Answer: B - Present a written and signed comparison of
the existing and proposed coverage, including surrender charges
and cost implications
RATIONALE
West Virginia replacement rules require a signed, written comparison
that discloses surrender charges, loss of benefits, and cost
implications. Simply notifying the client or insurer does not satisfy the
full disclosure obligation, and advising surrender first is improper.
Question 3
A deferred annuity contract is surrendered during the accumulation phase. The
contract holder has a cost basis of $40,000 and a cash value of $75,000.
Assuming no exceptions apply, how is the $35,000 gain taxed?
A. Entirely as capital gain
B. Entirely as ordinary income
C. As a return of principal first, then ordinary income
D. As tax-free because it is an annuity
Correct Answer: B - Entirely as ordinary income
RATIONALE
Non-qualified annuity gains are taxed as ordinary income under LIFO
(last-in, first-out) rules. The $35,000 gain is fully taxable as ordinary
income; capital gain treatment and tax-free treatment do not apply to
annuity gains.
Question 4
An insured dies by suicide 18 months after policy issue. The policy contains a
standard 2-year suicide clause and a 2-year incontestability clause. Which
statement accurately describes the insurer's obligation?
Page 3
, A. The insurer must pay the full face amount because the incontestability
period has not expired
B. The insurer may deny the claim entirely and retain all premiums
C. The insurer must refund premiums paid and deny the face amount
D. The insurer must pay the full face amount because suicide is never
excluded
Correct Answer: C - The insurer must refund premiums paid and
deny the face amount
RATIONALE
During the suicide clause period, the insurer's liability is limited to a
refund of premiums paid. The incontestability clause does not override
the suicide provision, and full denial without refund is not permitted.
Question 5
A policyowner wants to access cash value while keeping the policy in force.
Which option creates a loan against the policy and requires interest payments,
potentially reducing the death benefit if not repaid?
A. Partial surrender
B. Policy loan
C. Accelerated death benefit
D. Dividend accumulation
Correct Answer: B - Policy loan
RATIONALE
A policy loan uses cash value as collateral, accrues interest, and
reduces the death benefit if unpaid. Partial surrender permanently
reduces cash value, while accelerated death benefits and dividends
operate differently.
Page 4
An insurer issues a policy with a reinstatement provision. The insured lapses
the policy after paying premiums for 18 months, then applies for reinstatement
4 months later. Which requirement is the insurer LEAST likely to impose as a
condition of reinstatement?
A. Evidence of insurability satisfactory to the insurer
B. Payment of all overdue premiums with interest
C. Payment of a new first-year commission to the producer
D. Repayment of any policy loan with interest
Correct Answer: C - Payment of a new first-year commission to
the producer
RATIONALE
Reinstatement typically requires evidence of insurability, payment of
overdue premiums plus interest, and repayment of loans with interest.
A new first-year commission is not a reinstatement condition;
commissions are governed by producer contracts, not policy
provisions.
Question 2
A producer discusses a replacement policy with a client. Under West Virginia's
replacement regulations, which action best fulfills the producer's duty when the
existing insurer's policy has been in force for 10 years and contains a
substantial surrender charge?
A. Provide the client with a signed replacement notice and leave the
comparison to the client
B. Present a written and signed comparison of the existing and proposed
coverage, including surrender charges and cost implications
C. Advise the client to surrender the old policy first to avoid a gap in
coverage
D. Notify only the existing insurer of the intended replacement within 5
Page 2
, days
Correct Answer: B - Present a written and signed comparison of
the existing and proposed coverage, including surrender charges
and cost implications
RATIONALE
West Virginia replacement rules require a signed, written comparison
that discloses surrender charges, loss of benefits, and cost
implications. Simply notifying the client or insurer does not satisfy the
full disclosure obligation, and advising surrender first is improper.
Question 3
A deferred annuity contract is surrendered during the accumulation phase. The
contract holder has a cost basis of $40,000 and a cash value of $75,000.
Assuming no exceptions apply, how is the $35,000 gain taxed?
A. Entirely as capital gain
B. Entirely as ordinary income
C. As a return of principal first, then ordinary income
D. As tax-free because it is an annuity
Correct Answer: B - Entirely as ordinary income
RATIONALE
Non-qualified annuity gains are taxed as ordinary income under LIFO
(last-in, first-out) rules. The $35,000 gain is fully taxable as ordinary
income; capital gain treatment and tax-free treatment do not apply to
annuity gains.
Question 4
An insured dies by suicide 18 months after policy issue. The policy contains a
standard 2-year suicide clause and a 2-year incontestability clause. Which
statement accurately describes the insurer's obligation?
Page 3
, A. The insurer must pay the full face amount because the incontestability
period has not expired
B. The insurer may deny the claim entirely and retain all premiums
C. The insurer must refund premiums paid and deny the face amount
D. The insurer must pay the full face amount because suicide is never
excluded
Correct Answer: C - The insurer must refund premiums paid and
deny the face amount
RATIONALE
During the suicide clause period, the insurer's liability is limited to a
refund of premiums paid. The incontestability clause does not override
the suicide provision, and full denial without refund is not permitted.
Question 5
A policyowner wants to access cash value while keeping the policy in force.
Which option creates a loan against the policy and requires interest payments,
potentially reducing the death benefit if not repaid?
A. Partial surrender
B. Policy loan
C. Accelerated death benefit
D. Dividend accumulation
Correct Answer: B - Policy loan
RATIONALE
A policy loan uses cash value as collateral, accrues interest, and
reduces the death benefit if unpaid. Partial surrender permanently
reduces cash value, while accelerated death benefits and dividends
operate differently.
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