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Alabama Life Practice Exam

20 exam-style questions drawn from the same bank as our full Alabama Life course (Alabama Insurance Producer — Life — Exam Prep). Answer all 20, then grade yourself — most state exams require 70% to pass. Explanations for every question are part of the full course.

1. A material misrepresentation in the life application is discovered three years after issue and was not fraudulent. Under the standard incontestable clause, the insurer's remedy is:
Generally none — the contestable period has expiredTo deny any pending claim and refund premiumsTo increase the premium retroactivelyTo rescind the policy
2. On a participating whole life policy, dividends are best described as:
Contractually guaranteed interest credited under §7702 minimum-rate rules for life policiesGuaranteed annual interest computed on the cash value at the contract's stated minimum rateTaxable income to the policy owner, reportable as ordinary income each contract anniversaryA return of unused premium based on the insurer's mortality, expense, and investment experience
3. An employer pays the premium on a $200,000 group term life policy covering one of its key employees, age 45. Under IRC §79, what is the income tax effect on the employee?
The entire employer-paid annual premium is taxable to the employee as ordinary W-2 wages on the year-end Form W-2.The death benefit, if paid, is included in the employee's beneficiary's gross income because the coverage was employer-paid group life.The cost (per the IRS Table I rates) of coverage in excess of $50,000 is imputed income to the employee.Nothing — employer-paid group term life insurance premiums are never imputed or taxed to the covered employee at any face amount.
4. Which unit is used to measure the owner's share of the separate account during the accumulation phase of a variable annuity?
Annuity unitAccumulation unitSettlement unitSubaccount share
5. An insurer's expense assumption is built into the gross premium primarily to recover which categories of cost?
Only the soliciting producer's first-year commission and contract issue feeThe cost of yearly renewable term reinsurance ceded to a reinsurer onlyFederal income taxes paid by policyowners on annual dividends and inside buildupAcquisition costs, ongoing administration, and premium taxes
6. Under the NAIC standard provisions adopted by every state, an individual life policy becomes incontestable after it has been in force during the lifetime of the insured for:
Two years from issueFive years from issueThree years from issueOne year from issue
7. A 20-pay life policy and a 20-year endowment policy both have a 20-year premium-paying period. What is the key difference between them?
20-pay life is paid up at year 20 but coverage continues for life; a 20-year endowment matures and pays the face amount to the living insured at year 20Both contracts pay the face amount at year 20 to the policy owner; only the premium amount and the underlying mortality assumption differ between the two20-pay life is a form of decreasing term insurance, while the 20-year endowment is a permanent contract that endows at age 100 under standard mortality20-pay life builds no cash value during its premium-paying period, while the endowment builds the cash value that funds the year-20 maturity distribution
8. For 2024, what is the basic elective deferral limit for a participant under age 50 in a 401(k) plan?
$23,000$7,000$30,500$15,500
9. Which payout option pays a fixed dollar amount each period until the principal and interest are exhausted, regardless of how long the annuitant lives?
Life with period certainFixed-amount installmentLife onlyJoint and survivor
10. Under the 'transfer-for-value' rule, when a life insurance policy is sold to a third party for valuable consideration, the death benefit may become:
Taxable to the new buyer-owner only when the acquiring transferee is a closely held C-corporation or holding entityEntirely income-tax-free under IRC §101(a) regardless of who acquires the in-force life-insurance contractTaxable to the extent it exceeds the buyer's basis (consideration paid plus subsequent premiums)Subject to the IRC §72(t) 10% additional federal tax on premature distributions taken before the insured's age 59½
11. Which is a hallmark difference between ordinary life and industrial life policies?
Ordinary life always requires full medical underwriting and a paramedical exam, while industrial life never gathers any health information from the proposed insuredOrdinary life is regulated under each state's NAIC-model insurance code, while industrial life is federally regulated under SEC and FINRA marketing rulesOrdinary life has annual or other periodic premiums and larger face amounts; industrial life uses small face amounts and very short collection intervalsIndustrial life cannot accumulate cash value because its short-interval premiums fail the IRC §7702 corridor and guideline-premium tests for life insurance
12. An applicant pays the initial premium with the application and receives a conditional receipt. Two days later, before any underwriting is completed, the applicant dies. Under the conditional receipt, when does coverage exist?
Coverage exists only if the applicant survives the carrier's standard underwriting period and any required medical examCoverage exists immediately on the receipt date in all cases, regardless of any later underwriting finding by the carrierCoverage never exists until the policy contract is delivered to the applicant and the first premium is paid in fullCoverage exists only if the applicant would have been approved as a standard risk on the receipt date
13. Which of the following best describes the difference between an Accidental Death Benefit (ADB) rider and an Accidental Death and Dismemberment (AD&D) rider?
ADB pays an additional death benefit only if death results from accident; AD&D adds scheduled benefits for the loss of limbs or sightADB pays only when death is from any cause whatsoever, while AD&D pays only when a covered dismemberment occurs without any death of the insuredADB and AD&D are the same product marketed under different names by competing carriers under their own internal branding for accident benefitsAD&D pays double the face amount for death by sickness, while ADB pays double the face amount for accidental death from a covered cause
14. Which premium payment mode generally results in the LOWEST total annual outlay?
Semi-annualMonthlyQuarterlyAnnual
15. Generally, a worker must accumulate how many quarters of coverage to be fully insured for Social Security retirement benefits?
60 quarters (about 15 years) of covered employment under the §414(a) rule20 quarters (about 5 years) of covered employment with FICA withholding40 quarters (about 10 years) of covered employment80 quarters (about 20 years) of covered employment under the SSA standard
16. An insured chooses the 'Accumulate at Interest' dividend option. Which statement about the federal income tax treatment is correct?
The dividend itself is treated as a nontaxable return of premium, but the interest credited on accumulated dividends is currently taxable to the policyowner each yearInterest on accumulated dividends remains tax-free inside the contract if the underlying policy meets the §7702 CVAT or GPT definition-of-life-insurance tests for federal income tax purposesThe dividend itself and the interest credited on accumulated dividends are both fully taxable to the policyowner as ordinary income at the marginal federal rate in the year they are credited inside the contractBoth the declared dividend and the interest credited on accumulated dividends inside the contract are tax-free until the policy is surrendered for its accumulated cash value by the policyowner
17. Which feature is characteristic of a level term life insurance policy?
Both the face amount and premium remain constant for the policy termBoth the face amount and premium increase each yearThe face amount remains constant while the premium increases each yearThe face amount decreases each year while the premium remains constant
18. A whole life policyowner takes a $10,000 policy loan from her insurer. Until the loan is repaid, what is the effect on the death benefit if she dies?
The insurer cancels the policy on the date of death and refunds all premiums paid to date to the named beneficiary or the insured's estate.The insurer pays the face amount minus the outstanding loan balance and accrued interest.The insurer pays the full original face amount in full; policy loans never reduce or offset the death benefit paid to a named beneficiary.The insurer pays only the policy's accumulated cash surrender value to the named beneficiary, since the loan is treated as a partial surrender.
19. Under IRC §101(g), accelerated death benefits paid because the insured is terminally ill are generally treated for federal income tax purposes as:
Tax-free, like death proceeds under §101(a)Taxable to the extent the benefit exceeds basis in the contractTax-free only if the insured is age 59½ or olderFully taxable as ordinary income
20. Interest credited to a fixed indexed annuity (FIA) is generally tied to the performance of:
The insurer's general account portfolio's actual investment yieldAn owner-selected separate-account subaccount within the contractA specified equity or bond market index, such as the S&P 500The federal funds rate as published by the Federal Reserve Board

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