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Vermont Life Practice Exam

20 exam-style questions drawn from the same bank as our full Vermont Life course (Vermont 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. Selling a life policy for value can make the death benefit taxable under the
Seven-pay testExclusion ratioTransfer for value ruleThree-year rule
2. The share of index growth credited to an indexed annuity is its
Cap rateFloorParticipation rateSpread
3. A dividend option leaving dividends with the insurer to earn interest is
Accumulation at interestReduction of premiumCash optionPaid-up additions
4. 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 feeFederal income taxes paid by policyowners on annual dividends and inside buildupThe cost of yearly renewable term reinsurance ceded to a reinsurer onlyAcquisition costs, ongoing administration, and premium taxes
5. Before an insurer may obtain protected health information (PHI) from an applicant's healthcare provider for life-insurance underwriting, the insurer must obtain:
A signed HIPAA-compliant written authorization specifying the information, recipient, purpose, and expirationAn oral consent obtained from the applicant at the producer's office or via recorded telephone interviewPermission from the applicant's employer or its third-party group benefits administrator with HR signatureA court order from a court of competent jurisdiction requiring the medical provider to release the records
6. Why are traditional endowment contracts rarely sold in the United States today?
They have been prohibited by state insurance codes nationwide since NAIC model act revisions of the mid-1980s barred policies promising both a maturity payout and a death benefit on the same lifeThey cannot be issued on insureds over age 18 under federal juvenile-policy rules, leaving them commercially viable only for child savings programs rather than adult coverageFINRA classified them as securities subject to the Investment Company Act of 1940, requiring a prospectus and broker-dealer registration that most life insurance carriers were unwilling to fundTax law changes (notably the definition of life insurance under IRC §7702 in 1984) caused most endowments to fail the life-insurance tests, eliminating their tax-advantaged inside buildup
7. Life insurance is included in the insured's estate if the insured held any
Premium receiptsBeneficiary rightsDividend rightsIncidents of ownership
8. On July 1, 2024, Frank gifted an existing $1,000,000 whole life policy on his life to an irrevocable life insurance trust (ILIT). Frank dies on June 1, 2027, within three years of the transfer. What is the estate tax consequence under IRC §2035?
The full $1,000,000 death benefit is pulled back into Frank's gross estate under the three-year rule.Nothing, once a policy is in an ILIT, it is always outside the estate.The premiums Frank paid in the last three years are pulled back, but not the death benefit.Only the cash value at the date of gift is pulled back into the estate.
9. In a 401(k) plan, which contributions are ALWAYS 100% immediately vested in the participant?
All employer matching and profit-sharing contributions, regardless of source.Employee elective deferrals (the participant's own salary reductions).Employer matching contributions.Employer profit-sharing contributions.
10. Credit life coverage generally cannot exceed the
Loan balanceCollateral valueBorrower's incomeFace of the loan doubled
11. Surrendering a life policy for more than premiums paid creates
Taxable gainTax-free incomeA deductible lossA capital loss
12. Taxable MEC distributions before age 59 1/2 generally carry a
No penalty10% penalty20% penalty5% penalty
13. The time after a missed premium during which coverage stays in force is the
Free lookReinstatement periodWaiting periodGrace period
14. 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 2020-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 distributionBoth contracts pay the face amount at year 20 to the policy owner; only the premium amount and the underlying mortality assumption differ between the two
15. Which of the following is most commonly included as an exclusion or limited benefit in a typical individual life policy?
Death while engaged in declared or undeclared war, or in service of the armed forces of any country at war (war exclusion)Death from cancer or heart disease, when the underlying condition arose more than five years after the policy was originally issued and deliveredDeath from a motor-vehicle accident where the insured was the at-fault driver in violation of a state traffic law cited on the official police accident reportDeath while traveling as a paid passenger on a scheduled commercial flight, with the aviation exclusion carving out only general-aviation pilots or military aircrew
16. Under the NAIC annuity suitability model regulation as adopted by most states, an insurer or producer making an annuity recommendation must maintain records of the information gathered and the basis for the recommendation for at least:
3 years5 years1 year10 years
17. Within the first two years of participating in a SIMPLE IRA, an employee under age 59½ takes a distribution that does not qualify for any §72(t) exception. What additional tax applies on top of ordinary income tax?
50%10%25%20%
18. A payout for life with payments guaranteed for at least a set number of years is
Life with period certainJoint lifeLife onlyFixed period
19. Which two features distinguish ordinary whole life insurance from term insurance?
No medical underwriting and no cash value, as is typical of credit lifeLevel premium for life and a guaranteed cash value that grows tax-deferredDecreasing premium and increasing death benefit, common on amortizing loansVariable death benefit and equity-indexed cash-value crediting features
20. If an insurer revises its pricing assumption to use a HIGHER assumed interest rate on accumulated reserves, what is the most likely effect on the gross level premium for a new whole life policy, holding mortality and expense assumptions constant?
The premium goes up because the insurer is more aggressive.The premium is unaffected because mortality is the only required input under state law.The premium goes down because future benefits are discounted at a higher rate.The premium is unaffected because interest only matters for dividends.

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