17 Free North Carolina Life & Health Practice Questions: Annuities and Other Life Topics (2026)

Answer: A

Mr. Henderson's desire for predictable, steady payments that do not fluctuate with market conditions indicates a preference for fixed benefits. Fixed annuities offer guaranteed interest rates and guaranteed payout amounts, with the insurer bearing the investment risk. Variable benefits (C) fluctuate with market performance, and equity-indexed benefits (B) offer market participation with some guarantees, but neither provides the absolute predictability of a fixed annuity. Flexible premium payments (D) relate to how the annuity is funded, not the determination of benefits.

Answer: D

Variable annuities are considered securities because their value is based on the performance of underlying separate accounts, which are invested in mutual funds or other securities. Therefore, in addition to a state life insurance license, a producer must also hold a securities license, typically obtained from the Financial Industry Regulatory Authority (FINRA). Pre-licensing education is no longer required in NC (A). Registering as an investment advisor (B) is a different role. While NCDOI licenses insurance producers, the securities aspect requires FINRA registration, not just an NCDOI variable products exam (C).

Answer: A

In an entity plan (also known as a stock redemption plan for corporations, but applicable here for a partnership), the business itself owns the life insurance policies on each partner/owner, pays the premiums, and is the beneficiary. Upon the death of a partner, the business receives the death benefit and uses it to buy out the deceased partner's interest. A cross-purchase plan (B) involves each partner owning policies on the other partners. Deferred compensation (D) is an employee benefit, not a buy-sell agreement.

Answer: D

Premiums paid for key person life insurance are generally not tax-deductible for the business. This is because the death benefit, when paid to the company, is typically received tax-free. The IRS does not allow a deduction for premiums if the death benefit is received tax-free. Options A, B, and C are incorrect as they suggest deductibility under various conditions, which is generally not the case for key person insurance premiums.

Answer: D

A 401(k) plan is a defined contribution retirement plan offered by many private sector employers. It allows employees to contribute a portion of their pre-tax salary, often with employer matching contributions, and features tax-deferred growth. IRAs (A) are individual plans, not typically employer-sponsored in this manner. Keogh plans (B) are for self-employed individuals. TSAs (C) are for public school employees and certain non-profits.

Answer: D

Mortgage Life Insurance is a specific type of group life contract designed to pay off the outstanding balance of a mortgage upon the death of the insured borrower. While similar to credit life in that it covers a debt, mortgage life is specifically tied to a home loan. Option A, Credit Life Insurance, is a broader category that covers various types of loans, but mortgage life is more specific to housing. Option B, Group Term Life, is a general category for employer-sponsored plans, not typically tied to a specific debt. Option C, Survivorship Life, covers two lives and pays out on the second death, which is not the purpose here.

Answer: D

The Interest-Adjusted Cost Method is considered the most accurate cost comparison method because it accounts for the time value of money (i.e., the interest that could have been earned on premiums if they had been invested elsewhere). This provides a more realistic picture of the policy's true cost over time. Option A, the Traditional Net Cost Method, is simpler but does not consider the time value of money, making it less accurate. Options C and D are variations of the interest-adjusted method, but the general Interest-Adjusted Cost Method is the overarching concept for considering time value.

Answer: A

A Simplified Employee Pension (SEP) IRA is an excellent option for small businesses and self-employed individuals. It is easy to establish and administer, allows for substantial tax-deductible contributions, and offers flexibility in contribution amounts from year to year. Option B, a 401(k) plan, is more complex and costly to administer for small businesses. Option C, a Traditional IRA, has lower contribution limits. Option D, a TSA (403(b)), is for specific non-profit and public education employees.

Answer: C

If the initial premium was not paid with the application, coverage does not begin until the policy is delivered, the first premium is paid, and the applicant signs a Statement of Continued Good Health. This statement confirms that the applicant's health has not materially changed since the application was submitted. Option A is generally not required unless a significant amount of time has passed or new health issues arise. Option B is incorrect as premium payment is almost always required for the policy to become effective. Option D is not a standard requirement.

Answer: C

Group term life insurance, by its nature, provides a death benefit only and does not accumulate cash value. It is a temporary form of coverage, not permanent. Group underwriting typically evaluates the group as a whole, not each individual, especially for non-contributory plans.

Answer: B

A Tax-Sheltered Annuity (TSA), also known as a 403(b) plan, is a retirement plan specifically available to employees of public schools and certain tax-exempt organizations (501(c)(3) organizations), which includes non-profit hospitals. A 401(k) is typically for for-profit companies. Keogh plans and SEP IRAs are primarily for self-employed individuals and small business owners.

Answer: C

The primary purpose described is to ensure the orderly transfer of a deceased partner's business interest to the surviving partner, which is the definition of a buy-sell agreement. Life insurance is a common funding mechanism for such agreements. The other options describe different uses of funds or insurance.

Answer: B

The legal concept being violated is 'Competent Parties'. For a contract to be valid, all parties must be legally competent. Impersonation undermines the identity and competence of the party applying for the license, which is a prerequisite for entering into an insurance contract as a producer. While it could also touch on legal purpose (as fraud is illegal), competent parties is more direct to the identity of the individual attempting to form a contract.

Answer: C

In a fixed annuity, the insurer bears the investment risk. They guarantee a minimum interest rate and the safety of the principal during the accumulation phase. The annuitant receives predictable returns and does not bear the investment risk. While the Guaranty Association provides a safety net in case of insurer insolvency, the primary bearer of investment risk for a fixed annuity is the insurer itself, not the NCDOI or the annuitant.

Answer: B

An Executive Bonus Plan (also known as a Section 162 Plan) involves the employer paying a bonus to an executive, who then uses that bonus to pay the premiums on a personally owned life insurance policy. The executive owns the policy and controls its cash values and death benefits. The bonus is tax-deductible to the company and taxable income to the executive. Key Person insurance protects the company from the loss of a vital employee. Deferred compensation plans typically involve an agreement to pay an executive at a later date. Split-dollar plans involve splitting the premium, cash value, and/or death benefit between the employer and employee.

Answer: B

The four essential elements of a valid contract are Offer and Acceptance, Consideration, Competent Parties, and Legal Purpose. 'Competent Parties' refers to the legal capacity of the parties (e.g., of legal age, mentally sound, not under the influence of drugs or alcohol) to enter into a contract. Legal Purpose means the contract must be for a lawful reason. Consideration is the exchange of value. Offer and Acceptance is the mutual agreement.

Answer: D

Variable annuities invest funds in a separate account, which is distinct from the insurer's general account. This separate account is typically invested in a portfolio of various securities, such as mutual funds, chosen by the annuitant. The value of the annuity fluctuates based on the performance of these underlying investments, and the annuitant bears the investment risk. The insurer's general account holds assets for fixed annuities and other guaranteed products. GICs are typically associated with fixed annuities or pension plans, not variable products.