Free Ohio 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.

Moral hazard equals dishonesty. It's the risk that someone deliberately causes or exaggerates a loss to profit, like torching a failing business for the payout. Don't mix it up with morale hazard (carelessness, choice B) or physical hazard (the actual physical conditions in A and D).

Buying insurance is the classic risk transfer: you hand the financial consequences of a loss to the insurer in exchange for a premium. Avoidance means not doing the risky thing at all, retention means keeping the risk yourself (like a deductible), and reduction means lowering the odds or severity (smoke detectors). Insurance equals transfer.

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.

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.

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.

A stock insurer is owned by its stockholders (shareholders), who receive taxable dividends when the company profits. Policyholders are just customers. Contrast that with a mutual insurer, which is owned by its policyholders. Stock equals stockholders; mutual equals members/policyholders.

An admitted (or authorized) insurer holds a certificate of authority from the state and plays by that state's rules. A non-admitted (unauthorized) insurer hasn't been granted one, which is where surplus lines come in for hard-to-place risks. Also worth knowing: domestic equals home state, foreign equals another state, alien equals another country.

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.

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.

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.

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.

Higher mortality means more expected claims, so it drives premium up. Higher assumed interest does the opposite, lowering premium because the insurer expects to earn more on your money. Lower expenses and a younger insured both push premium down. Mortality up equals premium up.

A participating policy lets the owner 'participate' in the insurer's favorable results through policy dividends, typically from mutual companies. Nonparticipating policies pay no dividends and usually come from stock companies. If it pays a dividend, it participates.

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.

No money up front means no conditional receipt, so coverage doesn't start until the policy is delivered and the first premium is paid. To protect the insurer, the agent collects a statement of good health at delivery, confirming the applicant's health hasn't changed since they applied.

The application is the foundation of the contract, so the agent records what the applicant actually says, accurately and completely, then has the applicant review and sign it. Guessing at answers, signing for someone, or hiding bad health facts isn't just sloppy, it's misrepresentation, and it can void the policy or cost the agent their license.

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.

The main risk buckets run preferred (better than average, lowest premium), standard (average), substandard or 'rated' (higher risk, higher premium), and declined (uninsurable). A higher-than-average but still insurable applicant lands in substandard, where they're charged extra to reflect the added risk.

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.

Term is pure, no-frills protection: it covers you for a set period (10, 20, 30 years, or to a certain age) and pays only if you die during that window. No cash value, no investment piece, just the death benefit, which is why it's the cheapest way to buy a big chunk of coverage.

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.

Single premium whole life is bought with one big upfront payment, and the policy is immediately paid up for life with substantial cash value from day one. It's often used as a wealth-transfer or estate tool. Heads up: large single-premium policies can become MECs, which changes the tax treatment.

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.

A standard (fixed) UL credits the cash value at the insurer's current declared interest rate, which floats with conditions, but it can't drop below a guaranteed minimum floor stated in the policy. So you get upside when rates are good and a safety net when they're not.

UL's flexibility means you can skip premiums, but only as long as there's enough cash value to cover the monthly cost-of-insurance and expense charges. When the cash value runs dry and can't cover those deductions, the policy lapses. Flexible isn't the same as free.

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.

Group term life carries a conversion privilege: when you leave, you can convert to an individual permanent policy without proving insurability, typically within 31 days, though at individual rates for your age. It's a lifeline for someone who's become hard to insure, even though it usually costs more.

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.

The employer holds the master policy; each covered member gets a certificate of insurance, a summary of their coverage, benefits, and conversion rights under the group plan. It's proof you're covered, even though you don't hold the actual contract.

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.

The incontestability clause says that once a policy has been in force for two years during the insured's lifetime, the company can no longer contest it over misstatements on the application. The point is to protect beneficiaries from a company digging up a minor error years later to dodge a claim. After two years the application is essentially locked, so honest mistakes can't sink the payout. (Outright fraud and nonpayment of premium are the usual exceptions.)

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.

The automatic premium loan (APL) is a safety net: if a premium goes unpaid past the grace period, the company automatically borrows it from your cash value so the policy doesn't lapse. It quietly keeps coverage alive, though each rescue is a loan that chips away at cash value and, if left unpaid, the death benefit. Picture it as the policy paying its own premium out of the cash value you've built.

A revocable beneficiary can be changed anytime at the owner's discretion. An irrevocable beneficiary, by contrast, has a vested right: the owner can't change the beneficiary, or take a loan, surrender, or assign the policy, without that person's written consent. Just read it literally, irrevocable means you can't revoke it without permission, which is a much stronger position for the beneficiary.

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.

Nonforfeiture options guarantee that the cash value you've built in a permanent policy can't be forfeited if you stop paying. Instead of the company keeping it, you choose the form in which you take it. The word says it all: non-forfeiture means you don't forfeit your cash value. It's yours, and these options just decide what shape it takes.

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.

Straight life income pays the largest monthly check because it's a pure bet on longevity: payments continue for the recipient's lifetime and stop the instant they die, with nothing left for heirs. Die early and the insurer keeps the balance; live a long time and you can collect well beyond the original proceeds. Life only means exactly that, the biggest payment but zero guarantee to anyone else.

Life insurance hedges the risk of dying too soon and leaving dependents short. An annuity hedges the opposite risk: living too long and running out of money. That's why an annuity is essentially a vehicle for the systematic liquidation of an estate, turning a sum of money into income you can't outlive. Easy hook: life insurance is for dying too soon, an annuity is for living too long.

If the annuitant dies before income payments begin, the accumulated value generally passes to the named beneficiary, much like a death benefit. The annuity doesn't simply disappear into the insurer's pocket. (Once payments have begun, what's left depends on which payout option was chosen.) Hook: die during the build-up phase, and the beneficiary collects what's been saved.

An immediate annuity is bought with one lump sum and starts paying right away, within one payment interval, so within a month for monthly payments or within a year for annual ones. It's popular with retirees who have a lump sum and want income now. Hook: immediate means income starts almost immediately, and it must be single premium, since you can't flexibly fund something that's already paying out.

Variable annuity money goes into the insurer's separate account, where the owner allocates it among subaccounts that work much like mutual funds (stocks, bonds, and so on). That market exposure is exactly what makes the contract variable. Hook: variable means a separate account whose value varies with the markets.

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.

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.

One of the annuity's main draws is tax deferral: interest and gains compound untaxed during accumulation, and you owe tax only when money comes out. Deferring the tax lets more dollars stay invested and compound. Hook: nothing is taxed until you take it out, which is the whole appeal of the accumulation phase.

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.

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.

Although the death benefit is income-tax-free, it can still be pulled into the insured's taxable estate if the insured kept incidents of ownership, such as the right to change the beneficiary, take a loan, or surrender the policy. Removing those controls (often through an irrevocable life insurance trust) is how planners keep proceeds out of the taxable estate. Hook: income-tax-free is not the same as estate-tax-free, and control is what drags it into the estate.

A policy loan from a life policy that stays in force is generally not a taxable event, because it's a loan rather than income; you're borrowing against your own cash value. The catch: if the policy later lapses or is surrendered with a loan outstanding and a gain, the previously untaxed gain can become taxable. (And these rules tighten if the policy is a MEC.) Hook: a loan isn't income, so it isn't taxed, as long as the policy stays in force.

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.

A buy-sell agreement funded with life insurance guarantees that, when an owner dies, cash is available to buy out their share, so the surviving owners keep control and the deceased owner's family receives fair value in cash. Hook: it funds the buyout of a departed owner's interest so the business transitions cleanly.

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 qualified plan must satisfy IRS and ERISA standards, including nondiscrimination rules that prevent it from favoring owners and highly paid employees, in exchange for its tax breaks. A nonqualified plan skips those rules but also skips the upfront tax advantages and can favor select employees. Hook: qualified plans earn tax breaks by following the rules; nonqualified plans trade the breaks for flexibility.

A traditional IRA gives you the deduction up front and tax-deferred growth, so distributions are taxed as ordinary income when you take them in retirement. Hook: traditional IRA means a tax break now, taxed later as ordinary income.

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.