Primerica Life Insurance | Primerica |
Academic Year 2026/2027 | Comprehensive
Licensing Examination
Section 1: Insurance Fundamentals & Risk Management (Questions 1–25)
Q1. The fundamental mechanism of insurance that allows losses of the few to be
shared among the many is called:
A. Underwriting
B. Risk pooling
C. Adverse selection
D. Indemnification
Correct Answer: B
Rationale: Risk pooling is the core mechanism of insurance. Premiums
from a large group of policyholders (the pool) pay for losses experienced by a
small number of members, making risk predictable and affordable. Underwriting
is the risk selection process. Adverse selection is the tendency of higher-risk
individuals to seek insurance disproportionately. Indemnification restores the
insured to their pre-loss financial position.
Q2. Which of the following is NOT a method of handling risk?
A. Avoidance
B. Retention
C. Transfer
D. Subrogation
Correct Answer: D
Rationale: Subrogation is a legal principle that allows an insurer to pursue
a third party after paying a claim; it is not a method of risk handling. The four
primary methods of handling risk are avoidance (eliminating the activity),
,retention (accepting the risk), transfer (shifting risk to an insurer), and reduction
(minimizing the severity or frequency of loss).
Q3. An individual who has a higher-than-average probability of loss is said to
present a:
A. Speculative risk
B. Pure risk
C. Physical hazard
D. Moral hazard
Correct Answer: C
Rationale: A physical hazard is a physical condition that increases the
chance of loss (e.g., poor health, hazardous occupation). Speculative risk involves
the possibility of gain or loss and is not insurable. Pure risk involves only the
possibility of loss. Moral hazard refers to dishonesty or character traits that
increase the chance of loss.
Q4. SATA: Which of the following are essential elements of a valid insurance
contract?
A. Offer and acceptance
B. Consideration
C. Competent parties
D. Legal purpose
E. Notarization
Correct Answer: A, B, C, D
Rationale: All valid contracts require offer and acceptance (agreement),
consideration (premium and promise to pay), competent parties (legal capacity),
and legal purpose. Notarization is not required for insurance contracts, though
some states may require specific disclosures or signatures.
,Q5. Insurable interest in life insurance must exist:
A. At the time of death only
B. At the time of application only
C. At both application and death
D. At neither time
Correct Answer: B
Rationale: For life insurance, insurable interest must exist at the time of
application but not necessarily at the time of death. This differs from property
insurance, where insurable interest must exist at the time of loss.
Q6. Which of the following best describes the principle of indemnity?
A. The insured must disclose all material facts
B. The insurer has the right to recover from a negligent third party
C. The insured should be restored to approximately the same financial position
after a loss
D. The insurer may cancel a policy for nonpayment
Correct Answer: C
Rationale: Indemnity means restoring the insured to their approximate
pre-loss financial condition. Disclosure of material facts relates to utmost good
faith. Recovery from a third party is subrogation. Cancellation for nonpayment is a
contractual right.
Q7. An applicant conceals a history of heart disease on a life insurance
application. The insurer may:
A. Not contest the policy under any circumstances
B. Contest the policy within the contestability period
C. Only adjust the premium
D. Cannot take any action
Correct Answer: B
, Rationale: The contestability period (typically two years) allows the
insurer to contest a policy for material misrepresentations. After the
contestability period, the policy generally becomes incontestable, except in cases
of fraud in some jurisdictions.
Q8. Utmost good faith in insurance contracts means:
A. The insurer must always pay claims
B. Both parties must disclose all material facts
C. The insured must accept the insurer's decision
D. The agent must be licensed
Correct Answer: B
Rationale: Utmost good faith (uberrimae fidei) requires both the insurer
and the insured to act honestly and disclose all material facts. Failure by either
party can void the contract.
Q9. An insurer's right to recover claim payments from a negligent third party is
called:
A. Contribution
B. Subrogation
C. Indemnity
D. Salvage
Correct Answer: B
Rationale: Subrogation allows the insurer to step into the insured's shoes
and pursue legal action against a third party responsible for a loss. Contribution
applies when multiple insurers share a loss. Indemnity is the principle of
restoration. Salvage refers to the residual value of damaged property.
Q10. Which type of risk is insurable?
Academic Year 2026/2027 | Comprehensive
Licensing Examination
Section 1: Insurance Fundamentals & Risk Management (Questions 1–25)
Q1. The fundamental mechanism of insurance that allows losses of the few to be
shared among the many is called:
A. Underwriting
B. Risk pooling
C. Adverse selection
D. Indemnification
Correct Answer: B
Rationale: Risk pooling is the core mechanism of insurance. Premiums
from a large group of policyholders (the pool) pay for losses experienced by a
small number of members, making risk predictable and affordable. Underwriting
is the risk selection process. Adverse selection is the tendency of higher-risk
individuals to seek insurance disproportionately. Indemnification restores the
insured to their pre-loss financial position.
Q2. Which of the following is NOT a method of handling risk?
A. Avoidance
B. Retention
C. Transfer
D. Subrogation
Correct Answer: D
Rationale: Subrogation is a legal principle that allows an insurer to pursue
a third party after paying a claim; it is not a method of risk handling. The four
primary methods of handling risk are avoidance (eliminating the activity),
,retention (accepting the risk), transfer (shifting risk to an insurer), and reduction
(minimizing the severity or frequency of loss).
Q3. An individual who has a higher-than-average probability of loss is said to
present a:
A. Speculative risk
B. Pure risk
C. Physical hazard
D. Moral hazard
Correct Answer: C
Rationale: A physical hazard is a physical condition that increases the
chance of loss (e.g., poor health, hazardous occupation). Speculative risk involves
the possibility of gain or loss and is not insurable. Pure risk involves only the
possibility of loss. Moral hazard refers to dishonesty or character traits that
increase the chance of loss.
Q4. SATA: Which of the following are essential elements of a valid insurance
contract?
A. Offer and acceptance
B. Consideration
C. Competent parties
D. Legal purpose
E. Notarization
Correct Answer: A, B, C, D
Rationale: All valid contracts require offer and acceptance (agreement),
consideration (premium and promise to pay), competent parties (legal capacity),
and legal purpose. Notarization is not required for insurance contracts, though
some states may require specific disclosures or signatures.
,Q5. Insurable interest in life insurance must exist:
A. At the time of death only
B. At the time of application only
C. At both application and death
D. At neither time
Correct Answer: B
Rationale: For life insurance, insurable interest must exist at the time of
application but not necessarily at the time of death. This differs from property
insurance, where insurable interest must exist at the time of loss.
Q6. Which of the following best describes the principle of indemnity?
A. The insured must disclose all material facts
B. The insurer has the right to recover from a negligent third party
C. The insured should be restored to approximately the same financial position
after a loss
D. The insurer may cancel a policy for nonpayment
Correct Answer: C
Rationale: Indemnity means restoring the insured to their approximate
pre-loss financial condition. Disclosure of material facts relates to utmost good
faith. Recovery from a third party is subrogation. Cancellation for nonpayment is a
contractual right.
Q7. An applicant conceals a history of heart disease on a life insurance
application. The insurer may:
A. Not contest the policy under any circumstances
B. Contest the policy within the contestability period
C. Only adjust the premium
D. Cannot take any action
Correct Answer: B
, Rationale: The contestability period (typically two years) allows the
insurer to contest a policy for material misrepresentations. After the
contestability period, the policy generally becomes incontestable, except in cases
of fraud in some jurisdictions.
Q8. Utmost good faith in insurance contracts means:
A. The insurer must always pay claims
B. Both parties must disclose all material facts
C. The insured must accept the insurer's decision
D. The agent must be licensed
Correct Answer: B
Rationale: Utmost good faith (uberrimae fidei) requires both the insurer
and the insured to act honestly and disclose all material facts. Failure by either
party can void the contract.
Q9. An insurer's right to recover claim payments from a negligent third party is
called:
A. Contribution
B. Subrogation
C. Indemnity
D. Salvage
Correct Answer: B
Rationale: Subrogation allows the insurer to step into the insured's shoes
and pursue legal action against a third party responsible for a loss. Contribution
applies when multiple insurers share a loss. Indemnity is the principle of
restoration. Salvage refers to the residual value of damaged property.
Q10. Which type of risk is insurable?
