Life Application, Underwriting and Policy Delivery — practice questions

9.2% of the exam ≈12 real questions 12 free questions here

Completing the application, premium receipts, underwriting sources, policy delivery and contract law: about 12 of the 130 scored questions.

Where people lose points

• A conditional receipt covers from the application date only if the applicant was insurable as applied for.
• With no premium at application, coverage starts at delivery when the premium is paid.
• Insurable interest must exist at application, not at death.
• Correct a paper application by striking and initialing, never with correction fluid.

Questions and answers, explained

All 10 questions above, with the correct answer and why it is correct. Everything here is on life application, underwriting and policy delivery.

1. An applicant completes a life insurance application but does not submit the initial premium with it. Under contract law, which party makes the OFFER in this transaction?

   • AThe applicant, at the moment he signs and dates the application
   • BThe agent, at the moment he solicits the sale from the applicant
   • CThe insurer, when it issues the policy; the applicant accepts by payingCorrect
   • DThe insurer, at the moment it receives the application in the home office

   Why: With no premium attached, the application is only an invitation to the insurer to make an offer; the issued policy is the offer, and the applicant accepts by paying the initial premium (and signing the statement of good health) at delivery. Choice A is correct only in the other fact pattern — when the premium accompanies the application, the applicant is the offeror and the insurer accepts by issuing the policy as applied for. Outline III.D — contract law.

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

2. A life insurance applicant has an abnormal scan and a biopsy scheduled for the following week. The application contains no question that squarely covers pending diagnostic testing, and he says nothing about it. He is issued a policy and dies of cancer 10 months later. The insurer's strongest ground for rescission is:

   • AConcealment — he withheld a material fact he knewCorrect
   • BBreach of warranty — a policy statement proved untrue
   • CMisstatement of age — the age given was inaccurate
   • DTwisting — he was induced to replace a policy

   Why: Concealment is the deliberate withholding of a material fact the applicant knows would affect the underwriting decision, and it can support rescission inside the contestable period even where no specific question was asked. Choice B fails because a warranty is a guaranteed statement, and statements on a life application are representations rather than warranties. Outline III.C.

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

3. An underwriter finds an MIB code on an applicant suggesting a prior cardiac finding. Under MIB rules, the insurer may:

   • ADecline the application on the strength of the coded MIB report alone
   • BRate the applicant substandard based on the MIB code alone
   • CUse the code only as an alert that must be independently verified firstCorrect
   • DReport the code to the applicant’s employer for independent confirmation

   Why: MIB entries are brief coded alerts, and member company rules prohibit basing an adverse underwriting decision solely on MIB information; the insurer must confirm it through its own sources, typically an attending physician statement. Choice A is the classic misconception — the code triggers investigation, it does not decide the case. Codes generally remain in the database about seven years. Outline III.C.

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

4. At policy delivery, an agent must obtain a signed statement of continued good health in which situation?

   • AIn every delivery, without exception, because the statement is a standard part of the delivery receipt form
   • BOnly when the policy was issued exactly as applied for and underwriting added no rating
   • CWhen the initial premium was not collected with the application, so health must be confirmed unchangedCorrect
   • DOnly when the proposed insured is over age 65 or the face amount exceeds the non-medical limit

   Why: If no premium accompanied the application, no coverage existed during underwriting, so the insurer conditions the effective date on the insured's health being unchanged at delivery, and the statement of good health documents that. When the premium was paid up front under a conditional receipt, coverage generally relates back to the receipt date and the statement is not needed, which is why choice A overstates the rule. Outline III.D — policy delivery.

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

5. A policyowner pays $3,000 in premiums, dies the following year, and the insurer pays a $500,000 death benefit. The fact that the values exchanged by the two parties may be grossly unequal makes an insurance policy:

   • AA contract of adhesion
   • BAn aleatory contractCorrect
   • CA unilateral contract
   • DA personal contract

   Why: Aleatory means each party's performance depends on an uncertain event and the dollar values exchanged are deliberately unequal. Choice A, adhesion, describes how the contract was drafted — entirely by the insurer and offered on a take-it-or-leave-it basis, so ambiguities are construed against the insurer — not the unequal exchange of value. Outline III.D.

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

6. While completing a life insurance application, an applicant realizes he entered an incorrect date of birth. What is the proper way to correct the error?

   • AThe agent should erase the error and neatly write in the correct date
   • BThe applicant should draw a line through the error, write in the correct date, and initial the changeCorrect
   • CThe agent should cover the error with correction fluid and initial the change on the applicant's behalf
   • DThe application should be submitted unchanged so the insurer's underwriter can correct it

   Why: Any change to an application must be made and initialed by the applicant (or a fresh application completed); this documents that the applicant, not someone else, authorized the correction. Neither the agent nor the insurer may alter an application without the applicant's consent, and erasures or correction fluid destroy the audit trail and invite disputes over what was originally stated. Outline III.A (changes in the application).

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

7. Under the USA PATRIOT Act, insurers that issue permanent life insurance and annuity products must establish an anti-money laundering (AML) program. The primary purpose of this program is to:

   • ADetect and prevent money laundering and terrorist financing, reporting suspicious activityCorrect
   • BProtect customers’ nonpublic personal financial information from any unauthorized disclosure
   • CVerify that an insurable interest exists between the applicant and the insured
   • DEnsure that consumer credit reports are used fairly in the underwriting process

   Why: AML programs required under the USA PATRIOT Act exist to detect and deter money laundering and terrorist financing; they must include a designated compliance officer, employee training, independent testing, and the filing of suspicious activity reports (SARs) with FinCEN. Option B describes the Gramm-Leach-Bliley Act's privacy requirements, and option D describes the Fair Credit Reporting Act — different federal laws covered elsewhere in the application process. Outline III.A (USA PATRIOT Act/AML).

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

8. A life insurer orders an investigative consumer report on an applicant, which will include interviews with neighbors and associates about the applicant's character and lifestyle. Under the federal Fair Credit Reporting Act, the applicant must:

   • AAutomatically receive a complete copy of the report before underwriting may begin
   • BProvide fingerprints and a notarized authorization before the report is ordered
   • CBe interviewed personally before any third parties may be contacted about him
   • DBe told in writing the report may be made and, on request, its nature and scopeCorrect

   Why: The FCRA requires that a consumer be given written notice, within three days of the request, that an investigative consumer report may be made, and the consumer has the right to request disclosure of the nature and scope of the investigation. If the insurer takes adverse action based on the report, it must also identify the reporting agency. A full copy is available to the consumer on request from the agency — it is not delivered automatically, which is why option A is wrong. Outline III.B (Fair Credit Reporting Act).

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

9. A life insurance policy is drafted entirely by the insurer and offered to the applicant on a take-it-or-leave-it basis, so courts construe any ambiguity against the insurer. This describes which characteristic of insurance contracts?

   • AAleatory
   • BUnilateral
   • CAdhesionCorrect
   • DConditional

   Why: A contract of adhesion is drafted by one party (the insurer) and accepted or rejected as written by the other, so ambiguities are interpreted in favor of the insured. Aleatory means the values exchanged may be unequal and depend on an uncertain event; unilateral means only the insurer makes a legally enforceable promise; conditional means the insurer's duty to pay depends on conditions such as premium payment and proof of loss. Outline III.D (unique aspects of the insurance contract).

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

10. The applicant answers a question incorrectly on a paper application and wants to fix it. What is the proper way for the agent to correct it?

    • ALeave the error and explain it to the underwriter by phone
    • BChange the answer after the applicant leaves
    • CUse correction fluid so the application stays clean and readable for the underwriter
    • DCross out the wrong answer, write the correct one, and have the applicant initial itCorrect

    Why: A correction should be made by striking the incorrect answer, entering the correct one and having the applicant initial the change, or by starting a new application. Erasing or using correction fluid, or changing answers without the applicant, is not acceptable.

    Reference Texas outline #124401, general section III.A.2 (Changes in the application)

Topics inside this domain

• Texas agent licensing: temporary license, appointment and renewal

Drill other domains

• Types of Life Policies and Annuities (11.5%)
• Life Policy Riders, Provisions, Options and Exclusions (11.5%)
• Retirement and Other Life Insurance Concepts (6.2%)
• Types of Health Policies (12.3%)
• Health Policy Provisions, Clauses and Riders (11.5%)
• Social Insurance (4.6%)

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