Free Iowa Life Insurance & Annuities Practice Questions

A hazard doesn't cause the loss itself; it just makes a loss more likely or more severe. Icy steps, frayed wiring, a careless attitude: none of those start the fire or the fall, but they tip the odds. Causes of loss are perils; hazards just stack the deck.

Morale hazard is the 'eh, I'm covered' attitude: indifference or carelessness that creeps in because insurance exists. It's not dishonesty (that's moral hazard) and it's not a physical condition (physical hazard). Trick to remember: moralE hazard is about a person's lazy attitudE.

A physical hazard is a tangible condition that increases the likelihood or severity of a loss: gasoline in the garage, a slippery floor, frayed wiring. You can see or touch it. If it's an attitude problem it's morale; if it's dishonesty it's moral; if it's a physical thing sitting there raising the odds, it's physical.

Insurers like risks that are accidental (due to chance, not intentional) and definite and measurable (you can pin down when, where, and how much). Add in 'predictable for large groups,' 'not catastrophic to the insurer,' and 'affordable premium,' and you've got the recipe for an insurable risk. A loss someone causes on purpose? Not insurable.

Reinsurance is insurance for insurance companies. The original insurer (the ceding company) hands off part of its risk to a reinsurer so one giant loss doesn't sink it. Individuals never deal with reinsurers directly; it all happens behind the scenes between carriers.

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.

A contract of adhesion is written by one party (the insurer) and accepted as-is by the other, with no line-by-line negotiating. The practical kicker: because the insured didn't get to write it, any ambiguity is interpreted in the insured's favor. That's a courtroom rule worth knowing.

Unilateral means only one side makes a legally enforceable promise, and it's the insurer, who promises to pay covered claims. The insured doesn't actually promise to keep paying premiums; they just won't get coverage if they stop. One enforceable promise equals unilateral.

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.

In a Section 162 executive bonus plan, the employer pays the premium as a bonus, but the executive owns the policy and names the beneficiary. The bonus is tax-deductible to the employer and taxable income to the executive. The big perk: the employee keeps the policy even if they leave.

At its core, life insurance is income replacement: making sure the people who depend on you financially aren't left stranded if you're gone. Cash value growth, estate planning, and business uses are all real, but protecting dependents' income is the bread-and-butter purpose.

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.

Life premiums rest on three legs: mortality (the expected cost of paying claims), interest (what the insurer earns investing your premium, which lowers the cost), and expenses (the loading for operating costs). Mortality pushes premium up, interest pulls it down, expenses add the overhead.

Field underwriting is the agent acting as the insurer's first set of eyes: asking the application questions accurately, spotting obvious risks, and deciding whether someone is worth submitting. Good field underwriting saves everyone time and keeps bad risks from clogging the pipeline.

The MIB is a shared database where member insurers post coded information about applicants' health-related findings. If someone fails to disclose a condition on a new application, the MIB can flag the discrepancy. It's a fraud-and-omission check, not a claims payer or rate setter.

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.

The underwriter is the gatekeeper of risk: reviewing the application and supporting info, deciding whether to accept the applicant, and assigning the right risk class and premium. Agents sell, claims examiners pay claims, but the underwriter decides who gets in the door and on what terms.

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.

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.

Whole life is the workhorse of permanent insurance: lifelong coverage, level premiums that never change, a guaranteed death benefit, and guaranteed cash value that builds over time. You pay more than term, but you get permanence plus a savings element with guarantees attached.

Limited-pay whole life compresses the premium payments into a set number of years (20-pay, 30-pay, paid-up-at-65). You pay higher premiums but finish paying sooner, and the policy stays in force for life. Coverage is still permanent; you just stop writing checks early.

Ordinary, straight, or continuous-premium whole life spreads premiums across the insured's entire life, you pay until death or maturity. It has the lowest premium of the whole life family because payments are stretched out the longest. Limited-pay and single-premium just compress that schedule.

Universal life is the flexible permanent option: within limits, you can raise or lower premiums, skip a payment if there's enough cash value to cover costs, and adjust the death benefit. That flexibility is the trade-off for fewer hard guarantees than whole life.

UL gives two death-benefit flavors. Option A (level) keeps the death benefit flat, so as cash value grows the pure-insurance portion shrinks. Option B (increasing) pays the face amount plus the cash value, so the total benefit grows. Option B costs more because the insurer's at-risk amount stays higher.

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.

In a contributory plan, employees chip in toward the premium (often via payroll deduction), so insurers usually require at least 75% participation to guard against adverse selection. In a noncontributory plan the employer pays it all and typically 100% of eligible employees must be covered. Who pays drives the participation rule.

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.

The misstatement of age (or sex) provision is a fix-it clause, not a gotcha. Because premium is based on age, the company simply recalculates and pays the death benefit the premiums actually paid would have purchased at the true age. Understate your age and the payout shrinks a bit, but the policy isn't canceled. It adjusts the benefit; it doesn't kill the claim.

A policy loan borrows against the cash value of a permanent policy, and the insurer can't refuse a properly requested loan up to the available cash value. If the loan isn't paid back it doesn't void anything; the company just subtracts the outstanding balance plus interest from the death benefit. A policy loan is essentially your own money, so at death the company nets it out rather than denying the claim.

Extended term insurance is the standard automatic (default) nonforfeiture option. The cash value buys term coverage at the same face amount, lasting only as long as that value will fund it. The owner keeps full death-benefit protection for a limited stretch with no further premiums. The default keeps the same face amount but trades forever for a fixed term.

Cash surrender is the most straightforward option: you take the cash value in hand and the policy ends, with no more coverage. It's the right move when you no longer need the insurance and want the money, but be aware that any gain above total premiums paid can be taxable. Surrender means exactly what it sounds like, you give up the policy entirely in exchange for the cash.

A participating policy can pay dividends, but they're not investment earnings, they're treated as a return of premium the company overcharged, which is exactly why they're generally not taxable. And because they depend on the insurer's actual experience (mortality, expenses, investment results), they're never guaranteed. A dividend is your own money coming back, not a profit the company promises.

Under accumulation at interest, the dividend itself stays a tax-free return of premium, but once it sits with the insurer and earns interest, that interest is taxable income, just like interest in a savings account. So the dividend is tax-free coming back to you; the moment it starts earning, the earnings are fair game for the IRS.

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.

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.

The annuitant is the measuring life: their age and life expectancy drive how big each income payment is, because the insurer is calculating how long it will likely have to pay. The annuitant is often, but not always, the same person as the owner. Think of the annuitant as the yardstick the insurer measures the payout against.

Annuitization is the switch from saving to spending: the owner converts the accumulated value into a guaranteed income stream and chooses a payout option that sets how long, and to whom, payments run. Once you annuitize, you've generally traded the lump sum for the income. Hook: annuitize means turn the pile of money into a paycheck.

A variable annuity tracks your money in accumulation units while you're paying in, and their value rises and falls with the separate-account subaccounts. When you annuitize, those convert into annuity units, which then determine each variable income payment. Hook: accumulation units are the saving-phase scoreboard, annuity units are the paying-phase scoreboard.

An indexed annuity ties its interest to a market index such as the S&P 500, so it can earn more than a plain fixed annuity in good years, while a guaranteed minimum (a floor) keeps a bad index year from crediting a negative return. Hook: indexed means index-linked upside with a guaranteed floor underneath.

Life with period certain pays for the annuitant's whole life and adds a guaranteed minimum stretch, say 10 or 20 years. Die inside that window and a beneficiary collects the remaining guaranteed payments; live past it and payments simply continue for life. Hook: lifetime income plus a guaranteed floor of years, so an early death isn't a total loss.

Once an annuity is paying out, each payment is part return of your own after-tax contributions (the cost basis) and part earnings. The exclusion ratio is the fraction of each payment that is the tax-free return of basis; the rest is taxable. Hook: the exclusion ratio is what you get to exclude from tax, because you already paid tax on that money going in.

Nonqualified annuity withdrawals follow LIFO, last in first out, so the IRS treats the taxable earnings as coming out before your original principal. That means an early withdrawal is taxed as ordinary income until all the gain is used up. Hook: gains come out first and get taxed first, your own basis comes out last.

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.

Annuity suitability rules require the producer to have reasonable grounds that the recommendation fits the consumer's finances, time horizon, liquidity needs, and goals, all gathered before the sale. The focus is the customer's best interest, not the sale itself. Hook: suitability means the product has to fit the person, not the other way around.

The death benefit itself stays income-tax-free even when paid out over time, but any interest the insurer credits while holding the money is taxable income to the beneficiary. Hook: the original benefit is tax-free; the earnings on top of it are not, just like interest in any account.

Normally death benefits are income-tax-free, but the transfer-for-value rule says that if a policy is sold or transferred for valuable consideration, the portion of the benefit above the buyer's cost can become taxable income. There are key exceptions (transfers to the insured, a business partner, a partnership, or a corporation in which the insured is an officer or shareholder). Hook: sell a policy for value and you can taint the tax-free payout, unless an exception applies.

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.

Qualified plans get favorable tax treatment: contributions are typically pre-tax (deductible to the employer and not currently taxed to the employee), and the money grows tax-deferred until distribution. That's the carrot for meeting the IRS and ERISA rules. Hook: pre-tax in, tax-deferred growth, taxed later, the standard qualified-plan bargain.

Unlike a traditional IRA, a Roth IRA has no required minimum distributions during the original owner's lifetime, so the money can keep growing tax-free for as long as the owner likes. Hook: no RMDs for the Roth owner; the money can sit and grow untouched.

A 403(b), or tax-sheltered annuity, is the qualified plan built for public school employees and certain 501(c)(3) nonprofits, working much like a 401(k) but for that sector. Hook: 403(b) is the schools-and-nonprofits version of a 401(k).

Required minimum distributions from a traditional IRA now generally begin at age 73 under current law (raised from the older 70 1/2 and 72 thresholds). The IRS eventually wants the tax it let you defer, so it forces withdrawals to start. Hook: 73 is the current RMD starting age, the point where tax-deferred finally becomes tax-due.

Pull money out of a traditional IRA or qualified plan before age 59 1/2 and, unless an exception applies, you owe a 10% early-withdrawal penalty in addition to the regular income tax. It's the same 59 1/2 line that applies to annuities. Hook: 59 1/2 is the universal early-access line; cross it early and there's a 10% penalty.