17 Free South Carolina Life Insurance Exam Practice Questions (2026)

Answer: D

In a variable universal life (VUL) policy, the cash value is invested in separate accounts (like mutual funds) chosen by the policyowner, so it fluctuates with market performance. The death benefit may also vary—it typically includes the cash value, so it can increase or decrease based on investment results. Option A is incorrect because there are no guarantees (unlike fixed whole life). Option B describes a fixed-rate product. Option C is incorrect; there is no fixed multiple relationship between death benefit and cash value in VUL.

Answer: D

Decreasing term life insurance is designed so that the death benefit decreases over time, typically to match a declining financial obligation like a mortgage loan. As the loan balance decreases, the need for life insurance coverage decreases. The premium remains level. It does not build cash value (it's pure term insurance), and it does not return premiums unless it is a return of premium variant, which decreasing term typically is not.

Answer: C

A life insurance policy that fails the 7-pay test (where premiums paid in the first 7 years exceed what would be needed to pay up the policy in that period) is classified as a modified endowment contract (MEC) for tax purposes. Single-premium life policies often fail this test because the large lump-sum payment causes rapid cash value growth, triggering MEC status. MECs are taxed differently—distributions are subject to income tax and possibly penalties if taken before age 59½. Option A is incorrect because while it may start as single-premium whole life, its tax treatment changes if it becomes an MEC. Options B and D are incorrect because they do not describe the tax classification issue.

Answer: A

Joint life (first-to-die) insurance pays the death benefit upon the first death of any insured, after which the policy ends. It is commonly used to fund buy-sell agreements or provide income for a surviving business partner. Option B describes survivorship (second-to-die) life. Option C describes a feature of return of premium term, not joint life. Option D is incorrect because joint life term policies typically do not build cash value; if permanent, cash value is accessible but the death benefit is still paid only on the first death.

Answer: D

A no-lapse guarantee rider (secondary guarantee) ensures the policy will not lapse for a specified period (often to age 100 or 120) as long as the policyowner pays a defined minimum premium, even if the credited interest rate falls to the guaranteed minimum or expenses exceed credits. This addresses the illustration concern directly. A is incorrect — waiver of premium pays premiums if the insured becomes disabled, but does not guarantee the policy stays in force if interest credits are low. B is incorrect — accelerated death benefit allows early access to the death benefit for terminal illness; it does not prevent lapse. C is incorrect — guaranteed insurability allows purchasing additional coverage at specified times without evidence of insurability; it does not affect the current policy's lapse protection.

Answer: A

A is correct because war is a standard exclusion in life insurance policies. B is incorrect—death from cancer is covered unless specifically excluded (not standard). C is incorrect—felony exclusion is not standard in life insurance (more common in AD&D). D is incorrect—there is no age-based death exclusion in standard life policies.

Answer: A

A is correct because the suicide clause usually limits the insurer's liability to a return of premiums if suicide occurs within the first 2 policy years. B is incorrect—after 2 years, the full death benefit is typically paid. C is incorrect—the clause does not apply for the entire policy life. D is incorrect—the clause applies regardless of prior mental health history.

Answer: A

A common disaster clause (or provision) in a beneficiary designation specifies that if the insured and primary beneficiary die in the same accident and it cannot be determined who survived the other, the proceeds are paid as if the primary beneficiary predeceased the insured, thus directing the benefit to the contingent beneficiary. Option B is incorrect because the payor benefit rider waives premiums if the payor dies or becomes disabled, not for beneficiary direction in a common disaster. Option C is incorrect because the incontestability clause prevents the insurer from contesting the policy's validity after a certain period, unrelated to beneficiary direction. Option D is incorrect because the grace period allows delayed premium payment without policy lapse, not beneficiary determination.

Answer: A

An accelerated death benefit (ADB) rider allows the policyowner to receive a portion of the death benefit while still alive if they meet certain criteria, such as a terminal illness with a limited life expectancy (often 12 or 24 months). Option B is incorrect because the waiver of premium rider waives premiums upon disability, not pays a benefit for illness. Option C is incorrect because the AD&D rider pays for accidental death or dismemberment, not illness. Option D is incorrect because the return of premium rider refunds premiums if the insured outlives the term, not pays a benefit for illness.

Answer: D

D is correct because qualified plans (like 401(k)s) must satisfy IRS Code requirements to receive tax benefits, whereas nonqualified plans (like deferred compensation) are not subject to those rules and thus lack the same tax advantages. A is incorrect as it reverses the tax treatment (qualified plans use pre-tax contributions). B is incorrect as qualified plans often have higher limits due to tax incentives. C is incorrect as early withdrawal penalties depend on plan type and age, not qualification status alone.

Answer: D

A single premium life insurance policy is funded by one large initial payment, after which no further premiums are required to keep the policy in force for the insured's lifetime. This allows the policyholder to effectively 'skip' premium payments during retirement (or any time after) while maintaining the death benefit. Options A, B, and C are incorrect because term, whole life, and universal life policies typically require ongoing premium payments to maintain coverage, although some may have paid-up options after years of payments.

Answer: C

Key person insurance (also called key man insurance) is designed to protect a business from the financial impact of losing a key employee whose skills, knowledge, or relationships are critical to the company's success. The death benefit provides the business with funds to cover losses such as lost profits, costs of recruiting and training a replacement, or temporary operational expenses. It is not primarily for purchasing ownership interest (that is buy-sell insurance, making A incorrect), not for benefiting the family directly (B is incorrect), and not for funding retirement plans (D is incorrect).

Answer: B

A SEP IRA is ideal for self-employed individuals as it allows tax-deductible contributions and flexible annual funding based on business income, with no requirement to contribute every year. A traditional IRA has a fixed low limit and may not be deductible if the client is covered by another plan. A SIMPLE IRA requires employer contributions and is designed for businesses with employees. A Roth IRA does not provide tax-deductible contributions.

Answer: B

Insurable interest can exist between engaged couples due to the reasonable expectation of marriage and the associated financial and emotional ties. The policy can be issued if this interest is demonstrated. It is not required to be married (A), payment for a venue is irrelevant (C), and ownership/insured roles are flexible as long as interest exists (D).

Answer: B

To remove life insurance proceeds from the taxable estate, ownership must be transferred to an irrevocable life insurance trust (ILIT) and the client must survive three years after the transfer (to avoid the three-year rule under IRC § 2035). Naming a revocable trust (A) or estate (C) does not remove proceeds from the estate, and reducing the face amount (D) may not be sufficient or practical and does not change ownership. An ILIT is the standard estate planning tool for this purpose.

Answer: D

Under Regulation 69-12.1, if an applicant has existing insurance, the producer must provide the Notice Regarding Replacement, which must be signed by both the producer and applicant. While a policy illustration and buyer's guide may be provided in other contexts, and a certificate of insurance represents proof of coverage, the specific document required when replacement is involved is the Notice Regarding Replacement.

Answer: D

Under South Carolina Regulation 69-12.1, when discussing a life insurance replacement, the producer must provide the applicant with a Notice Regarding Replacement form. This form must be completed and signed by both the producer and the applicant, and a copy must be provided to the applicant before the application for the new policy is signed. Option A is incorrect because the form is required whenever replacement is discussed, not only if the client initiates it. Option B is incorrect because the form is not submitted to the SCDOI; it is retained by the producer and the replacing insurer. Option C is incorrect because both the producer and the applicant must sign the form, regardless of whether the transaction is electronic or in-person.