ADVANCED INSURANCE PRACTICE (AIN3701) –
COMPREHENSIVE EXAM QUESTIONS COMPLETE
WITH 100% VERIFIED ANSWERS
1. In a reinsurance transaction where the ceding insurer transfers only
the excess loss above a predetermined retention, and the reinsurer
pays no share of losses below that retention, this arrangement is
known as:
a) Quota share reinsurance
b) Surplus reinsurance
c) Excess of loss reinsurance
d) Facultative obligatory reinsurance
Correct answer: c
Explanation: Excess of loss reinsurance is a non-proportional form
where the reinsurer pays only losses exceeding the ceding insurer's
retention, up to a limit. Quota share and surplus are proportional.
Facultative obligatory gives the ceding insurer choice but obligates the
reinsurer.
2. A life insurance policy has been in force for 18 months when the
insured dies from a cause that was materially misrepresented on the
application. The insurer discovers the misrepresentation during claim
investigation. Under standard incontestability provisions, the insurer
will most likely:
a) Pay the full death benefit because the policy is incontestable
,b) Deny the claim and refund premiums
c) Pay a reduced benefit based on the correct risk classification
d) Void the policy only if fraud can be proven in court
Correct answer: b
Explanation: The incontestability clause typically takes effect after two
years. Since only 18 months have passed, the policy is still within the
contestable period. The insurer may deny the claim due to material
misrepresentation and refund premiums paid.
3. A policyowner borrows $25,000 from a whole life policy with a cash
value of $40,000 and a face amount of $150,000. The loan has an
interest rate of 6% that is not paid when due. One year later, with
accumulated interest of $1,500, the insured dies. Assuming no prior
repayments, the beneficiary will receive:
a) $150,000
b) $125,000
c) $123,500
d) $148,500
Correct answer: c
Explanation: Death benefit is reduced by outstanding loan plus unpaid
interest. $150,000 - ($25,000 + $1,500) = $123,500. The cash value is
irrelevant to death benefit calculation after the loan is taken.
**4. Under a universal life policy with a target premium of $5,000 per
year, the policyowner pays only $2,000 in year one. If the monthly cost
of insurance and expense charges total $300 per month, and the initial
cash value was zero, what is the cash value after 12 months assuming
no interest crediting?**
a) $2,000
b) $0
,c) -$1,600 (policy lapses)
d) $2,000 minus $3,600 = negative, policy lapses before 12 months
Correct answer: d
Explanation: Annual charges = $300 × 12 = $3,600. Premium paid =
$2,000. Shortfall is $1,600. Cash value would become negative mid-year,
causing the policy to lapse unless the policyowner pays additional
premium or the policy has a no-lapse guarantee rider.
**5. A participating whole life policy issued on a male age 35 has paid
annual dividends that were left to accumulate at interest. At age 60, the
policyowner surrenders the policy. The accumulated dividends with
interest total $18,000, and the cash surrender value is $75,000. The
policyowner's total premiums paid were $50,000. Which portion is
taxable as ordinary income?**
a) $0 because life insurance proceeds are tax-free
b) $25,000 ($75,000 - $50,000)
c) $43,000 ($75,000 + $18,000 - $50,000)
d) $18,000 only
Correct answer: c
Explanation: Upon surrender, the amount received in excess of total
premiums paid is taxable as ordinary income. Total received = $75,000 +
$18,000 = $93,000. Minus $50,000 premiums = $43,000 taxable.
6. In a surplus share reinsurance treaty, the ceding insurer's retention
is $300,000. A risk with a total line of $1,200,000 is ceded. The ceding
percentage for the reinsurer is:
a) 25%
b) 75%
c) 80%
d) 100%
, Correct answer: b
Explanation: Surplus share cedes the amount above retention. Ceded
amount = $1,200,000 - $300,000 = $900,000. Ceding percentage =
$900,000 / $1,200,000 = 75%. The reinsurer assumes 75% of premiums
and losses.
7. An equity-indexed annuity guarantees a minimum return of 3% and
credits additional interest based on 80% of the S&P 500 index
increase, subject to a cap of 10%. If the index increases by 15% over
the term, what interest rate is credited?
a) 15%
b) 12%
c) 10%
d) 3%
Correct answer: c
Explanation: 80% of 15% = 12%, but the cap is 10%, so credited interest
= 10%. The guaranteed minimum of 3% applies only if the calculated
amount is below 3%.
8. Which statement about a modified endowment contract (MEC) is
correct?
a) All single-premium life policies are automatically MECs
b) A MEC allows tax-free withdrawals of all amounts up to premiums
paid
c) Loans from a MEC are taxed on a first-in, first-out (FIFO) basis
d) The 10% penalty for MEC distributions does not apply after age 65
Correct answer: a
Explanation: Under the Technical and Miscellaneous Revenue Act of
1988 (TAMRA), any single-premium life insurance policy is automatically
a MEC. MEC distributions are taxed LIFO (not FIFO), and the 10%
COMPREHENSIVE EXAM QUESTIONS COMPLETE
WITH 100% VERIFIED ANSWERS
1. In a reinsurance transaction where the ceding insurer transfers only
the excess loss above a predetermined retention, and the reinsurer
pays no share of losses below that retention, this arrangement is
known as:
a) Quota share reinsurance
b) Surplus reinsurance
c) Excess of loss reinsurance
d) Facultative obligatory reinsurance
Correct answer: c
Explanation: Excess of loss reinsurance is a non-proportional form
where the reinsurer pays only losses exceeding the ceding insurer's
retention, up to a limit. Quota share and surplus are proportional.
Facultative obligatory gives the ceding insurer choice but obligates the
reinsurer.
2. A life insurance policy has been in force for 18 months when the
insured dies from a cause that was materially misrepresented on the
application. The insurer discovers the misrepresentation during claim
investigation. Under standard incontestability provisions, the insurer
will most likely:
a) Pay the full death benefit because the policy is incontestable
,b) Deny the claim and refund premiums
c) Pay a reduced benefit based on the correct risk classification
d) Void the policy only if fraud can be proven in court
Correct answer: b
Explanation: The incontestability clause typically takes effect after two
years. Since only 18 months have passed, the policy is still within the
contestable period. The insurer may deny the claim due to material
misrepresentation and refund premiums paid.
3. A policyowner borrows $25,000 from a whole life policy with a cash
value of $40,000 and a face amount of $150,000. The loan has an
interest rate of 6% that is not paid when due. One year later, with
accumulated interest of $1,500, the insured dies. Assuming no prior
repayments, the beneficiary will receive:
a) $150,000
b) $125,000
c) $123,500
d) $148,500
Correct answer: c
Explanation: Death benefit is reduced by outstanding loan plus unpaid
interest. $150,000 - ($25,000 + $1,500) = $123,500. The cash value is
irrelevant to death benefit calculation after the loan is taken.
**4. Under a universal life policy with a target premium of $5,000 per
year, the policyowner pays only $2,000 in year one. If the monthly cost
of insurance and expense charges total $300 per month, and the initial
cash value was zero, what is the cash value after 12 months assuming
no interest crediting?**
a) $2,000
b) $0
,c) -$1,600 (policy lapses)
d) $2,000 minus $3,600 = negative, policy lapses before 12 months
Correct answer: d
Explanation: Annual charges = $300 × 12 = $3,600. Premium paid =
$2,000. Shortfall is $1,600. Cash value would become negative mid-year,
causing the policy to lapse unless the policyowner pays additional
premium or the policy has a no-lapse guarantee rider.
**5. A participating whole life policy issued on a male age 35 has paid
annual dividends that were left to accumulate at interest. At age 60, the
policyowner surrenders the policy. The accumulated dividends with
interest total $18,000, and the cash surrender value is $75,000. The
policyowner's total premiums paid were $50,000. Which portion is
taxable as ordinary income?**
a) $0 because life insurance proceeds are tax-free
b) $25,000 ($75,000 - $50,000)
c) $43,000 ($75,000 + $18,000 - $50,000)
d) $18,000 only
Correct answer: c
Explanation: Upon surrender, the amount received in excess of total
premiums paid is taxable as ordinary income. Total received = $75,000 +
$18,000 = $93,000. Minus $50,000 premiums = $43,000 taxable.
6. In a surplus share reinsurance treaty, the ceding insurer's retention
is $300,000. A risk with a total line of $1,200,000 is ceded. The ceding
percentage for the reinsurer is:
a) 25%
b) 75%
c) 80%
d) 100%
, Correct answer: b
Explanation: Surplus share cedes the amount above retention. Ceded
amount = $1,200,000 - $300,000 = $900,000. Ceding percentage =
$900,000 / $1,200,000 = 75%. The reinsurer assumes 75% of premiums
and losses.
7. An equity-indexed annuity guarantees a minimum return of 3% and
credits additional interest based on 80% of the S&P 500 index
increase, subject to a cap of 10%. If the index increases by 15% over
the term, what interest rate is credited?
a) 15%
b) 12%
c) 10%
d) 3%
Correct answer: c
Explanation: 80% of 15% = 12%, but the cap is 10%, so credited interest
= 10%. The guaranteed minimum of 3% applies only if the calculated
amount is below 3%.
8. Which statement about a modified endowment contract (MEC) is
correct?
a) All single-premium life policies are automatically MECs
b) A MEC allows tax-free withdrawals of all amounts up to premiums
paid
c) Loans from a MEC are taxed on a first-in, first-out (FIFO) basis
d) The 10% penalty for MEC distributions does not apply after age 65
Correct answer: a
Explanation: Under the Technical and Miscellaneous Revenue Act of
1988 (TAMRA), any single-premium life insurance policy is automatically
a MEC. MEC distributions are taxed LIFO (not FIFO), and the 10%
