Free Arizona Life Insurance & Annuities Practice Questions

Insurance only deals with pure risk: situations where there's a chance of loss or no loss, but no chance of gain (like your house burning down). Speculative risk involves a chance of loss, no loss, OR gain. That's gambling and investing, and insurers won't touch it. If there's an upside, it's not insurable.

Indemnity is the whole heartbeat of insurance: you get made whole, not rich. The goal is to put you back where you were financially right before the loss, no better, no worse. That's why you can't insure a $20,000 car for $80,000 and cash in. Insurance reimburses a loss; it doesn't hand out winnings.

Adverse selection is the insurer's headache: the people most likely to have a loss are also the most eager to buy and keep coverage. If underwriting didn't push back, the risk pool would fill up with bad risks and the math would collapse. It's exactly why underwriting and exclusions exist.

Treaty reinsurance is the automatic, blanket deal: the reinsurer agrees in advance to take a whole category of risks. Facultative is the opposite, case-by-case, where the reinsurer can accept or decline each risk individually. Treaty equals automatic and broad; facultative equals optional and specific.

The law of large numbers needs lots of similar exposures to make predictions reliable. A big pool of comparable homes lets the insurer forecast losses; a handful of wildly different ones doesn't. And concentrating them all in one spot is actually bad: one hurricane could wipe out the whole pool at once.

Participating policies 'participate' in the insurer's profits by paying policy dividends, and are typically issued by mutual companies. Nonparticipating policies don't pay dividends and are typically issued by stock companies. The word 'participate' is your tell.

An agent represents the insurer (the principal); that's the cornerstone of agency law. A broker, by contrast, represents the insured. So when an agent acts within their authority, the insurer is on the hook for what they do. Agent equals the insurer's rep.

Apparent authority is about appearances: what a reasonable customer believes the agent can do based on how the insurer let the agent act (business cards, signage, company applications). Express authority is spelled out in the contract; implied is what's needed to carry out the express. Apparent is the 'looks legit' bucket.

Express authority is the authority written right into the agency agreement, the powers the insurer explicitly hands the agent. Implied authority fills in the gaps needed to use that express authority, and apparent authority is what the public reasonably assumes. Express equals expressly stated.

Concealment is staying silent about a material fact you know the insurer would want, and if it's intentional, it can void the policy. It's the sin-of-omission version of misrepresentation (which is an active false statement). Both turn on the fact being 'material,' meaning it would have affected the insurer's decision.

Key person (or key employee) insurance protects the business itself against losing someone whose death would really hurt the bottom line. The business owns the policy, pays the premiums, and is the beneficiary. If the key person dies, the company gets funds to cover the disruption and find a replacement.

In a cross-purchase plan, each owner buys a policy on each of the other owners, so they personally buy out a deceased partner's share. Compare that to an entity (stock redemption) plan, where the business owns the policies and does the buying. Cross-purchase equals owners insuring each other; entity equals the company insuring the owners.

The needs approach tallies up the actual bills the family faces if the insured dies: final expenses, paying off the mortgage, an income fund for survivors, kids' education, an emergency cushion. Add them up, subtract existing resources, and the gap is how much coverage is needed.

Immediate (or cash) needs are the bills that hit right away: funeral and burial costs, final medical expenses, and outstanding debts. Ongoing income for survivors and future college costs are different buckets, classified as income needs and future needs rather than immediate cash needs.

You don't insure what's already covered. After totaling the family's needs, subtract the resources they already have: savings, investments, existing life insurance, Social Security survivor benefits. What's left is the true coverage gap the new policy should fill.

Net premium covers mortality and interest. Loading is the extra piled on top for the insurer's expenses, commissions, overhead, and margin, so net premium plus loading equals the gross premium you actually pay. Loading equals the cost of doing business.

Replacement is heavily regulated because it can hurt the consumer (a new contestable period, new surrender charges, lost benefits). Producers must follow replacement rules: notify the existing insurer, give the client required disclosure notices, and make sure the swap is actually in the client's interest, not just the agent's.

Preferred risks are the gold-star applicants: nonsmokers, healthy weight, clean history, lower-than-average mortality. Because they're cheaper to insure, they earn the lowest premiums. Standard is average, substandard pays more, and declined can't get coverage at all.

An attending physician's statement (APS) comes from the doctor who actually treated the applicant, used when the application or exam flags something needing more detail. An inspection report covers lifestyle and finances; an MVR covers driving. For specific medical history, it's the APS.

An inspection report (often from a consumer reporting agency) paints a general picture: lifestyle, finances, habits, reputation, usually for larger policies. It's not a medical record (that's the APS or exam) and not a driving record (that's the MVR). Think background sketch, not diagnosis.

With decreasing term, the death benefit shrinks over the term while the premium stays level, which makes it a natural fit for a mortgage: as you pay the loan down, you need less coverage to pay it off. It's cheaper than level term because the insurer's risk drops each year.

The renewable feature lets you keep coverage going at the end of the term without proving you're still healthy, which is valuable if your health has declined. The catch: the premium jumps at each renewal because you're older. Renewability protects insurability, not your wallet.

Convertible term lets you swap your term policy for a permanent one (like whole life) without a new medical exam, even if your health has tanked. The new premium is based on your age at conversion. It's a built-in escape hatch from 'temporary' to 'permanent' coverage.

Annual renewable term renews every single year with no evidence of insurability needed, but the premium climbs each year as you age and mortality risk rises. It starts cheap and gets pricier over time, the opposite of a level-premium permanent policy.

Endowment is the point where the cash value catches up to the face amount and the policy 'matures.' On older whole life policies that's age 100; newer ones push it to 121. If the insured lives that long, the insurer pays out the face amount as a maturity benefit.

Whole life's selling point is guarantees: the premium won't change, the death benefit is locked, and the cash value follows a guaranteed schedule. Dividends (on participating policies) are never guaranteed, they depend on the insurer's results. Guarantees yes; dividends maybe.

Variable products hold cash value in a separate account, segregated from the insurer's general account and invested in subaccounts the owner picks. The general account (backing whole life and fixed UL) is where the insurer guarantees a return; the separate account passes market performance straight through to the policyowner.

VUL is the mashup: UL's flexible premiums and adjustable death benefit, plus variable life's investment choice, where the owner directs cash value into subaccounts and bears the market risk. Maximum flexibility and maximum exposure. It's also a security, so it needs the dual license.

Group plans underwrite the group as a whole, not each person, so members usually get coverage with little or no medical underwriting up to a guaranteed issue limit. The large, naturally-formed group spreads the risk, which is why a new employee can often get coverage without an exam.

Section 79 lets employees receive up to $50,000 of employer-paid group term life with no taxable income. Coverage above $50,000 creates 'imputed income', a small taxable amount based on an IRS table. So the first $50k is a clean tax-free perk; beyond that, the IRS wants its cut.

The free look (sometimes called the right-to-examine period) lets the owner return the policy within a set number of days, usually 10, for a full refund of every dollar paid. Think of it like a receipt-in-hand store return: you get cash back, not a store credit. It exists because a life policy is a big commitment people often buy on an agent's recommendation, so the law builds in a cooling-off window.

Reinstatement lets an owner revive a lapsed policy instead of buying a new one, which matters because the old policy keeps its original (lower) issue-age premium. The trade-off: the insurer can ask for evidence of insurability (you still have to be insurable) plus the back premiums with interest. Remember it as prove you're healthy and catch up on what you owe. A new two-year contestable period usually starts on the reinstated coverage.

Beneficiaries are arranged in line: the primary is first, and the contingent (secondary) is the backup. If the primary isn't living when the insured dies, the proceeds drop down to the contingent beneficiary. The estate only gets involved when no named beneficiary survives. Think contingent equals contingency plan, the backup who steps in.

Per stirpes means by branch: if a named beneficiary dies first, their share flows down to their own descendants rather than being reabsorbed by the surviving beneficiaries. So the late child's one-third doesn't vanish or get split among the siblings; it goes to that child's kids. Contrast per capita (by head), where only surviving named beneficiaries share. Hook: stirpes sounds like stem or branch, and the share follows the family branch down.

A minor can absolutely be named, but an insurer won't hand a large check to a child who can't legally give a valid receipt. Without planning, a court has to appoint a guardian to manage the money, which is slow, costly, and out of the family's control. That's why people set up a trust or custodial arrangement, or name a trusted adult to manage it. Minors can inherit; they just can't legally sign for it, so arrange a manager in advance.

With reduced paid-up insurance, the cash value is applied as one lump-sum premium to purchase a fully paid-up policy of the same type, meaning permanent coverage that lasts for life, just at a lower face amount. You keep lifelong protection and never pay another premium. Read the name as a checklist: reduced (smaller face) plus paid-up (no more premiums), and it stays permanent.

The reduction of premium option applies the dividend against the next premium due, so the owner simply pays the difference out of pocket. It's a practical choice for someone who wants to ease the ongoing cost of keeping the policy rather than build extra value. In plain terms, the dividend pays part of your bill for you.

The fixed period option spreads the proceeds plus interest over a set length of time you choose, say 10 years, and the payment size is simply whatever it takes to empty the fund in that window. Its cousin, fixed amount, instead locks the dollar figure of each payment and lets the time vary. Hook: fixed period, you pick the time; fixed amount, you pick the dollar amount.

With a waiver of premium rider, if the insured becomes totally disabled (usually after a waiting period of around six months), the insurer stops charging premiums while keeping the policy completely in force, so cash value and death benefit keep building as if you were still paying. You get sick, the insurer picks up the tab, and nothing about your coverage skips a beat.

An accelerated death benefit rider lets a terminally ill insured (often defined as having a limited life expectancy, such as 12 to 24 months) draw down a portion of their own death benefit while still living, to cover medical bills or simply ease their final months. Whatever is advanced is later subtracted from what the beneficiary receives. It lets you tap your own death benefit early when you need it most, and it's frequently offered at little or no extra cost.

A flexible premium annuity lets you fund it on your own schedule, more this year, less or nothing next, rather than with one fixed lump sum. By definition these are deferred, because you can't keep adding money to a contract that's already paying out. Hook: flexible premium equals flexible deposits, and it's always a deferred contract.

A fixed annuity promises a guaranteed minimum interest rate during accumulation and a fixed, predictable income at payout. The insurer holds these funds in its general account and shoulders the investment risk. Hook: fixed means fixed, guaranteed numbers, prioritizing safety and predictability over upside.

Because the insurer guarantees both the interest rate and the payout amount in a fixed annuity, the insurer, not the owner, carries the investment risk. If the company's general-account investments underperform, it still must honor the guarantee. Hook: the guarantees live with the insurer, so the risk does too.

Because the value rides on the subaccounts' performance, the owner, not the insurer, bears the investment risk in a variable annuity. Strong markets can grow the value, weak ones can shrink it, with no fixed guarantee on the gain. Hook: variable risk sits with the owner, fixed risk sits with the insurer; they're mirror images.

Because a variable annuity is both an insurance product and a security, selling it requires dual qualification: a life insurance license from the state plus a securities registration through FINRA, and the prospect must receive a prospectus. Hook: it's part insurance, part investment, so you need both sets of credentials.

The cap rate is the ceiling: even if the index soars 20%, a 6% cap limits credited interest to 6%. It works alongside the participation rate (the share of the index gain you receive) and the floor (the guaranteed minimum, often 0%). Hook: the cap caps your gains, the floor floors your losses.

A refund annuity promises that if the annuitant dies before collecting at least what they paid in, the difference goes to a beneficiary, either as a lump sum (cash refund) or as continued payments (installment refund). It guarantees the premium isn't lost to an early death, in exchange for a somewhat smaller payment than life only. Hook: refund means you or your beneficiary are guaranteed to get back at least what you put in.

Period certain isn't a life option at all: it pays for a set number of years (say 10 or 20) regardless of whether the annuitant lives or dies. If the annuitant dies during the period, a beneficiary collects the rest. Hook: period certain is about a certain period of years, not a lifespan.

Like other tax-favored retirement vehicles, annuities carry an early-withdrawal penalty: pull taxable gain before age 59 1/2 and the IRS adds a 10% penalty on top of the ordinary income tax you already owe. It's meant to discourage using a retirement tool as a piggy bank. Hook: 59 1/2 is the magic age; touch the gains early and there's a 10% penalty.

A 1035 exchange lets an owner swap one contract for a better-suited one, life-to-life, life-to-annuity, or annuity-to-annuity, and carry the cost basis over without triggering tax on the gain. Note it's a one-way street: you can roll a life policy into an annuity, but not an annuity back into life insurance. Hook: 1035 is a tax-free trade-in for a comparable contract.

A life insurance death benefit paid as a lump sum is generally received free of federal income tax, no matter the size. That income-tax-free payout is one of the biggest reasons life insurance is such a powerful planning tool. Hook: the lump-sum death benefit lands in the beneficiary's hands income-tax-free.

Premiums on personal life insurance are paid with after-tax dollars and are not deductible. The trade-off for that is the income-tax-free death benefit on the back end. Hook: no deduction going in, but a tax-free benefit coming out; the IRS won't let you have it both ways.

A MEC results when a policy is funded faster than the 7-pay test allows, essentially cramming too much premium in too soon, which Congress decided looked more like an investment than insurance. The death benefit stays income-tax-free, but the living benefits lose their friendly tax treatment. Hook: overfund it past the 7-pay limit and it gets reclassified as a MEC.

Once a policy is a MEC, living distributions are taxed like an annuity: LIFO, so the taxable gain comes out first, and a 10% penalty can apply if you're under age 59 1/2. That's a sharp change from a normal policy, where loans are tax-free. Hook: MEC living benefits are taxed annuity-style, gain first and a possible early-withdrawal penalty.

Accelerated (living) benefits paid to a terminally ill insured are generally treated like a tax-free death benefit, since the law recognizes the person is drawing on their own coverage early during a terminal illness. Hook: terminally ill plus accelerated benefits equals tax-free, the same treatment the death benefit itself would receive.

Premiums on key person life insurance are not deductible to the business, because the business is also the beneficiary; the IRS won't let you deduct the cost of producing a tax-free benefit. Hook: no deduction for key person premiums, which pairs with the tax-free proceeds the business collects.

An employee can receive up to $50,000 of employer-paid group term life with no income tax on the cost of that coverage. Above $50,000, the IRS imputes income based on a standard cost table. Hook: $50,000 is the magic line for tax-free group term life, and the cost of anything above it becomes taxable to the employee.

Like the cash value in life insurance, annuity earnings grow tax-deferred during accumulation; you pay tax only when you take money out. Hook: no tax until you tap it, which is the core appeal of annuity accumulation.

With a nonqualified annuity, you've already paid tax on the money you put in (your basis), so the exclusion ratio splits each income payment into a tax-free return of that basis and a taxable earnings portion. Hook: the exclusion ratio is the slice of each payment you exclude from tax because it's your own money coming back.

A Roth IRA flips the deal: you contribute after-tax dollars (no deduction), but a qualified distribution, generally after age 59 1/2 and a five-year holding period, comes out completely tax-free, earnings included. Hook: Roth means no deduction now but tax-free qualified withdrawals later, the mirror image of a traditional IRA.