Life Insurance: The Final Test

A life policy that is cash surrendered is subject to federal income tax. Which of the following statements is true concerning the taxation of surrender values?

A) The amount received in excess of the total premiums paid is taxable
B) The amount received minus the face amount of the policy is taxable
C) The taxation only applies if the surrender is done during the first 7 years of the policy
D) None of the above

Where do these questions come from? I have studied the book front to back countless times and I don’t remember seeing half these questions. But I know this. Only the earnings are taxed, therefore it has to be… A: the amount received in excess of the total premiums paid is taxable.

After emptying my pockets at the secretaries desk of the Prometric Testing Center I was escorted into a room with five desks against two walls and ten desks in the center of the room. Each desk was in its own cubicle and had a computer. With nothing but scratch paper and a key to my locker in my hand I sat down at the middle desk against the left wall. As I sat down I couldn’t help but notice that they had placed cameras above each desk and every few minutes a proctor would walk through.

An insurance contract that has features of a life policy’s settlement options and is designed as a way for an insurance company to sell savings accounts is called a/an:

A) Policy rider
B) Policy options rider
C) Annuity
D) Variable life

If there was any question I would be scolded for missing, it would be this one. The pride and joy of the insurance industry is Annuities and their ability to not only mix insurance and savings, but to be more profitable than a savings account in every way. C, Annuity.

Although the exam was not the hardest exam I had ever taken, it was certainly the most draining exam I had ever taken. Before I started the test I had already planned to not only take my time on each question, but I would also take my own little “brain break” every 25 questions. At first the questions were difficult but doable. I felt confident going into question 16, but then it steadily got harder, until I reached question #30 where I felt every question probing deep into my understanding of the material. I felt like each question drained me more and more.

In order to avoid a taxable event when replacing one life policy with a different policy, which of the following must be done?
Complete the 1035 exchange form
Request exchange privileges at the time of application for the new policy
Make all money transfers directly to the new policy
All of the above

If I’m wrong on this one then so be it. I know that completing a 1035 exchange will avoid taxes, but so will making transfers directly into the new policy. Maybe its all the above, but B doesn’t fit the description. Here goes nothin, A, complete the 1035 exchange form.

Just over half way through the test I was getting exhausted. As I read the question it didn’t even seem to register. I couldn’t seem to get past the way the guy next to me seemed to be pounding on the keyboard, I think he was taking a GRE test, in any case he was making it extremely difficult for me to focus on my test. If only he would type more quietly like the person behind me. Once I noticed the earmuffs hanging on the wall beside me I eagerly put them on and instantly enjoyed the silence.

The questions seemed to ease up once I got to question 80, at that point I knew I only had about 25 questions left so I took my time on each question. At that point in the test I knew it would be close if I did pass, so I didn’t want to rush through it. After the final questions I went back and reviewed the questions that I didn’t feel confident about my answers.
Eager to be done with the test I was tempted to click the link that said “end exam”, but I didn’t want to miss out on a question that I could have gotten right had I reviewed. After I was done reviewing I nervously clicked the “end exam” link. Then, as I read the score breakdown of the exam, to my astonishment and relief it said, “PASS”.

After leaving the testing room and going to the front office to get my certification I felt completely drained. The secretary kept asking me questions about applying for my insurance license. All I remember is that I couldn’t answer any questions that didn’t apply to life insurance, annuities, or insurance taxes. Undoubtedly they were confused at how some one like me could pass an insurance exam when I wasn’t even sure if I wanted to apply for the license or not.

Exhausted and mentally drained I walked out of the testing center with joy I had not felt in months and a re-enforced confidence in my future.