17 Free Washington Life & Health Practice Questions: Types of Life Insurance and Provisions (2026)
How to Use This Types of Life Insurance and Provisions Set
Two sections of the outline sit behind this set. Types of Life Insurance Policies has 12 items on the combined exam, and Life Insurance Policy Provisions, Options, and Riders has 17. That is the largest block of non-Washington content on the exam, and it is the one that rewards a clear mental model: what each policy type promises, which provisions protect the owner, and which rider adds which benefit.
The questions below move from policy loans and riders through universal and indexed products to dividends, survivorship cover and the tax consequence of a lapsed loan. Read each stem for the single detail that decides the answer.
Types of Life Insurance Policies has 12 items and Life Insurance Policy Provisions, Options, and Riders has 17 items on the PSI combined Life and Disability outline.
Practice Questions 1-6: Loans, Riders, Free Look and Universal Life
Policy loans, cost of living and accelerated benefit riders, the free look period, the level universal life death benefit and the guaranteed insurability rider.
Question 1 (Chapter 5)
An insured owns a whole life insurance policy with a cash value that has grown significantly. The insured wishes to access the cash value without terminating the policy or triggering a taxable event. Which option allows the insured to borrow against the cash value while the policy remains in force?
- A) Surrender the policy for its cash value
- B) Take a policy loan
- C) Exercise the extended term nonforfeiture option
- D) Convert to a reduced paid-up policy
Show answer & explanation
Answer: B
A policy loan allows the insured to borrow against the cash value while keeping the policy in force. The loan is not considered taxable income as long as the policy remains in force. Option A would terminate the policy and may trigger taxes if cash value exceeds premiums paid. Options C and D are nonforfeiture options that also terminate the original policy in exchange for other benefits.
Question 2 (Chapter 5)
A policyholder wants to ensure that the death benefit of their life insurance policy increases each year to keep pace with inflation. Which rider would best accomplish this goal?
- A) Waiver of premium rider
- B) Accidental death benefit rider
- C) Guaranteed insurability rider
- D) Cost of living (COL) rider
Show answer & explanation
Answer: D
A cost of living (COL) rider increases the death benefit annually, typically tied to an inflation index, to help the benefit keep pace with inflation. Option A waives premiums if the insured becomes disabled but does not increase the death benefit. Option B provides an additional death benefit only if death is due to an accident. Option C allows the insured to purchase additional coverage without evidence of insurability but does not automatically increase the existing death benefit.
Question 3 (Chapter 5)
A life insurance policy includes an accelerated death benefit (living benefit) rider. Under what circumstance can the insured typically access this benefit?
- A) When the insured reaches age 65
- B) When the insured is diagnosed with a terminal illness
- C) When the insured surrenders the policy for cash value
- D) When the insured wants to purchase additional coverage
Show answer & explanation
Answer: B
An accelerated death benefit (living benefit) rider allows the insured to receive a portion of the death benefit while still alive if diagnosed with a terminal illness (or sometimes a specified chronic illness), helping to cover medical or living expenses. Option A is incorrect as age alone does not trigger the benefit. Option C describes a surrender, not an accelerated benefit. Option D refers to purchasing additional coverage, which is not the purpose of this rider.
Question 4 (Chapter 5)
Under a life insurance policy, what is the purpose of the 'free look' period?
- A) To allow the insurer to investigate the insured's background after issue
- B) To allow the policyholder to increase the death benefit without evidence of insurability
- C) To allow the insurer to adjust premiums based on actual experience
- D) To allow the policyholder to return the policy for a full refund within a set time after delivery
Show answer & explanation
Answer: D
The free look period allows the policyholder to examine the policy after delivery and return it for a full refund of premiums paid if not satisfied, typically within 10 or more days depending on state regulation. Option A describes the underwriting process, which occurs before issue. Option B describes a guaranteed insurability rider. Option C is not a standard provision; premiums are generally guaranteed in the policy.
Question 5 (Chapter 5)
An insured owns a universal life insurance policy and selects the 'level death benefit' option. Which statement accurately describes how the death benefit is determined under this option?
- A) The death benefit equals the face amount plus the accumulated cash value.
- B) The death benefit decreases annually by the amount of policy charges deducted from the cash value.
- C) The death benefit is always equal to the current cash value of the policy.
- D) The death benefit remains constant and equals the face amount stated in the policy, regardless of cash value accumulation.
Show answer & explanation
Answer: D
Under the level death benefit option in a universal life policy, the death benefit remains level and equal to the face amount specified in the policy. The cash value does not add to the death benefit; instead, the amount of insurance protection is the difference between the face amount and the cash value. As cash value grows, the amount of pure insurance decreases, keeping the total death benefit level. Option A describes the increasing death benefit option. Option B is incorrect because the death benefit does not decrease due to charges; it remains level. Option C is incorrect because the death benefit is not equal to the cash value.
Question 6 (Chapter 5)
A life insurance policy includes a guaranteed insurability rider. Which statement best describes the purpose of this rider?
- A) It guarantees that the death benefit will increase annually to keep pace with inflation.
- B) It waives the premium if the insured becomes totally and permanently disabled.
- C) It allows the insured to purchase additional amounts of insurance at specified times without evidence of insurability.
- D) It provides a monthly income benefit if the insured suffers a qualifying disability.
Show answer & explanation
Answer: C
The guaranteed insurability rider (also called a guaranteed purchase option) allows the insured to purchase additional coverage at predetermined intervals or life events (e.g., age, marriage, birth of a child) without having to provide proof of good health or undergo medical underwriting. Option A describes a cost of living rider. Option B describes a waiver of premium rider. Option D describes a disability income benefit rider.
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Practice Questions 7-12: Credit Life, Entire Contract, Indexed Products and Dividends
Parties to credit life, the entire contract provision, the indexed floor, dividend options, survivorship life and the increasing universal life design.
Question 7 (Chapter 5)
In individual credit life insurance purchased by a borrower, which statement correctly describes the parties to the policy?
- A) The policyowner is the creditor, and the beneficiary is the debtor.
- B) The policyowner and beneficiary are both the debtor.
- C) The policyowner is the debtor, and the beneficiary is the creditor.
- D) The policyowner and beneficiary are both the creditor.
Show answer & explanation
Answer: C
C is correct. In individual credit life insurance the borrower (debtor) applies for and owns the policy and is the insured, while the lender (creditor) is named beneficiary for the outstanding loan balance, so the debt is paid off if the borrower dies. A reverses the roles, B would leave the lender unprotected, and D describes a group credit life arrangement in which the creditor holds the master policy, not an individual policy bought by the borrower.
Question 8 (Chapter 5)
Which statement is true regarding the 'entire contract' provision in a life insurance policy?
- A) It allows the insurer to modify the policy terms unilaterally after the policy is issued.
- B) It requires the insured to undergo a medical examination at each premium payment to maintain coverage.
- C) It states that the policy, along with any attached applications and riders, constitutes the complete agreement between the insurer and the insured.
- D) It permits the insured to change the beneficiary designation without notifying the insurer.
Show answer & explanation
Answer: C
The entire contract provision specifies that the life insurance policy, the application (which becomes part of the policy), and any attached riders or endorsements form the complete agreement between the parties. Nothing outside these documents can modify or contradict the terms of the contract. Option A is incorrect because the insurer cannot unilaterally modify the policy after issue. Option B is incorrect because the entire contract provision does not impose medical examination requirements. Option D is incorrect because while the insured can usually change the beneficiary, this right is governed by other provisions (like ownership and beneficiary designation), not the entire contract clause.
Question 9 (Chapter 5)
A 50-year-old buys an indexed universal life (IUL) insurance policy. The cash value earns interest based on the performance of a stock market index, subject to a cap and a floor. Which statement correctly describes how the floor provision works in this context?
- A) The floor guarantees a minimum death benefit regardless of index performance.
- B) The floor requires the policyholder to pay a minimum premium to keep the policy in force.
- C) The floor ensures the cash value earns at least a minimum interest rate (often 0%) even if the index declines.
- D) The floor sets a maximum limit on the amount of cash value that can be withdrawn each year.
Show answer & explanation
Answer: C
In an indexed universal life policy, the floor is a protective feature that guarantees a minimum interest rate (often 0%) on the cash value if the linked index performs negatively. This prevents the cash value from decreasing due to market downturns. It does not guarantee a death benefit (A is incorrect), it is not related to premium payments (B is incorrect), and it does not limit withdrawals (D is incorrect).
Question 10 (Chapter 5)
A policyowner wants to use the dividend from a participating whole life insurance policy to reduce the out-of-pocket premium cost. Which dividend option should they select?
- A) Paid-up additions
- B) Cash payment
- C) Reduction of premium
- D) Accumulation at interest
Show answer & explanation
Answer: C
The 'reduction of premium' dividend option allows the policyholder to apply the dividend toward the payment of the premium due, thereby reducing the amount they must pay out of pocket. Paid-up additions (A) use dividends to buy additional paid-up insurance, increasing cash value and death benefit. Cash payment (B) sends the dividend to the policyholder as taxable income. Accumulation at interest (D) leaves the dividend with the insurer to earn interest. Thus, C is correct for reducing out-of-pocket premium cost.
Question 11 (Chapter 5)
A 60-year-old purchases a survivorship life insurance policy covering themselves and their spouse. The death benefit is $500,000. When is the death benefit paid under this policy?
- A) Upon the death of the first insured to die.
- B) Upon the death of either insured, if death occurs due to an accident.
- C) Upon the death of the second insured to die.
- D) Only if both insureds die simultaneously in a common disaster.
Show answer & explanation
Answer: C
A survivorship life (also called joint and survivor or second-to-die) policy pays the death benefit only after the death of the second (last) insured. It does not pay upon the first death (A is incorrect), does not pay based on cause of death (B is incorrect), and does not require simultaneous death (D is incorrect). This type of policy is often used for estate planning to provide liquidity for estate taxes after both spouses have passed.
Question 12 (Chapter 5)
An insured owns a universal life insurance policy and has elected the 'increasing death benefit' option (Option B). The cash value of the policy has grown significantly over time. How is the death benefit calculated under this option?
- A) The death benefit equals the face amount plus the current cash value.
- B) The death benefit equals the face amount specified in the policy, regardless of cash value.
- C) The death benefit equals the current cash value only.
- D) The death benefit is recalculated annually to equal the face amount plus half the cash value.
Show answer & explanation
Answer: A
A is correct. Universal life offers two death-benefit designs: the level design (often called Option A or Option 1) keeps the death benefit at the face amount, and the increasing design (Option B or Option 2) pays the face amount plus the accumulated cash value, so the benefit grows as cash value grows. B describes the level design, C ignores the face amount, and D invents a half-cash-value formula.
Practice Questions 13-17: Term, Variable Life, Loans at Lapse and Paid-Up Additions
Decreasing term, variable life, the tax result of a lapsed loan, an indexed crediting calculation and dividends used for paid-up additions.
Question 13 (Chapter 5)
Which of the following statements is true regarding a decreasing term life insurance policy?
- A) The premium decreases over the term of the policy as the death benefit decreases.
- B) It is primarily used to provide increasing financial protection for a growing family.
- C) The death benefit decreases over the term of the policy, while the premium remains level.
- D) The death benefit is paid only if the insured dies during the first half of the policy term.
Show answer & explanation
Answer: C
In a decreasing term life insurance policy, the death benefit decreases over time (often to match a declining obligation like a mortgage), while the premium remains level throughout the term. The premium does not decrease with the death benefit. It is not used for increasing protection (that would be increasing term), and the death benefit is payable if the insured dies at any point during the term, not just the first half.
Question 14 (Chapter 5)
An insured owns a variable life insurance policy and has allocated the cash value to separate accounts invested in stock funds. Over several years, the market value of these funds increases significantly. What is the impact on the policy's death benefit and cash value?
- A) Both the death benefit and cash value decrease due to the increased investment risk.
- B) The death benefit remains level, while the cash value increases.
- C) The cash value decreases, but the death benefit increases to offset the investment gain.
- D) Both the death benefit and cash value increase in proportion to the growth of the separate accounts.
Show answer & explanation
Answer: D
In a variable life insurance policy, the death benefit and cash value are directly tied to the performance of the separate accounts (investment options) selected by the policyowner. If the market value of the funds increases, both the cash value and the death benefit increase proportionally. There is no fixed, level death benefit in variable life (unless it includes a minimum death benefit guarantee, but the base policy fluctuates). The death benefit does not remain level, and the cash value does not decrease with market growth.
Question 15 (Chapter 5)
Under a life insurance policy, the insured takes an automatic premium loan when a premium is due and insufficient cash value exists to cover it. If the loan balance later exceeds the cash value, causing the policy to lapse, what are the tax consequences of the outstanding loan balance?
- A) The outstanding loan balance is always tax-free as a return of premium.
- B) The outstanding loan balance is taxable as ordinary income to the extent it exceeds the total premiums paid into the policy.
- C) There are no tax consequences because policy loans are never taxable.
- D) The outstanding loan balance is taxable as capital gains.
Show answer & explanation
Answer: B
When a life insurance policy lapses or is surrendered with an outstanding loan balance, the amount of the loan that exceeds the policy's cost basis (total premiums paid, less any prior dividends or withdrawals) is taxable as ordinary income. This is because the loan is considered a distribution from the policy. Option A is incorrect; it is not a return of premium. Option C is incorrect; loans can become taxable upon lapse. Option D incorrectly characterizes the taxation as capital gains; it is ordinary income.
Question 16 (Chapter 5)
A 50-year-old buys an indexed universal life (IUL) insurance policy. The cash value earns interest based on the performance of the S&P 500 index, subject to a 6% cap and a 0% floor. If the S&P 500 returns -4% in a given year, what is the interest credited to the cash value for that year?
- A) -4%
- B) 0%
- C) 6%
- D) 2%
Show answer & explanation
Answer: B
In an indexed universal life policy, the floor protects against negative index returns. If the index return is negative (e.g., -4%), the floor (0% in this case) is applied, so 0% interest is credited. The cap (6%) limits gains in positive years but does not affect negative years. Option A incorrectly credits the negative return. Option C applies the cap, which is for gains only. Option D incorrectly averages or adjusts the return.
Question 17 (Chapter 5)
An insured owns a participating whole life insurance policy and elects to receive dividends as paid-up additions. What is the primary effect of this dividend option on the policy?
- A) The death benefit decreases over time as dividends are used to pay premiums.
- B) The cash value and death benefit both increase due to the addition of paid-up insurance.
- C) The policyholder receives immediate cash payments that are taxable as ordinary income.
- D) The policy term is extended by one year for each dividend received.
Show answer & explanation
Answer: B
When dividends are used to purchase paid-up additions, the policyholder buys additional fully paid-up insurance coverage. This increases both the cash value and the death benefit of the policy over time. Option A is incorrect because the death benefit increases, not decreases. Option C is incorrect because paid-up additions do not involve cash payments to the policyholder. Option D is incorrect because paid-up additions do not extend the policy term; they add permanent coverage.
The Mistakes That Cost Marks
Mixing up the two universal life designs. Level pays the face amount. Increasing pays the face amount plus the cash value. Two questions test that pair from opposite directions.
Applying the cap to a loss. The cap limits gains. In a down year the floor applies, and the credited rate is the floor.
Reading riders by name. Cost of living grows the benefit, guaranteed insurability buys more cover without evidence, waiver of premium pays the premium, and the accelerated benefit pays part of the death benefit early.
Choosing the wrong dividend option. Reduction of premium lowers what you pay out of pocket. Paid-up additions raise both cash value and death benefit.
Forgetting the tax on a lapsed loan. The part of the loan that exceeds basis is taxed as ordinary income when the policy lapses.
Your Next Step
You have worked through 17 questions on this part of the exam. Check the ones you missed against the explanations, then try the same topic again after a day. When you are ready for the full picture, start with the LanePrep course preview for audio lessons and quizzes, or return to the free Washington Life & Health practice question hub to choose your next topic.
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