Rhode Island Life Insurance Practice Exam Free - 2026

• A. None, because payment was made within 90 days
• B. Interest at 6% per annum from the date proof of death was received
• C. Interest at 9% per annum from the date of death to the date of payment
• D. Interest at the rate paid on demand deposits from the date of death

Correct answer: C. Interest at 9% per annum from the date of death to the date of payment

Explanation: Rhode Island requires an insurer to pay the beneficiary interest on life insurance proceeds at the rate of nine percent (9%) per annum from the date of the insured's death to the date of payment, and the interest becomes part of the total sum paid. There is no 90-day payment-free window, the rate is fixed by statute rather than a 6% or demand-deposit rate, and it runs from the date of death, not from receipt of proof. See R.I. Gen. Laws § 27-4-26.

• A. 5% per annum
• B. 6% per annum
• C. 10% per annum
• D. 8% per annum

Correct answer: D. 8% per annum

Explanation: Policies issued on or after May 25, 1982 must provide either a maximum fixed policy loan interest rate of not more than eight percent (8%) per annum, or an adjustable maximum rate tied to Moody's corporate bond yield average that the insurer resets at least once every twelve months but not more often than every three months. Five and six percent are below the statutory ceiling but are not the maximum the statute allows; ten percent exceeds it. See R.I. Gen. Laws § 27-4-13.1.

• A. Within 3 business days of receipt of the application
• B. Within 5 business days of receipt of the completed application
• C. Within 10 days of policy issuance
• D. Within 30 days of policy delivery

Correct answer: B. Within 5 business days of receipt of the completed application

Explanation: The replacing insurer must notify any existing insurer that may be affected by the proposed replacement within five (5) business days of receipt of a completed application indicating replacement, and must mail a copy of the illustration or policy summary within five business days of the existing insurer's request. Ten days after issuance is the deadline for the insurer's confirmation letter about sales material under the alternative procedure, and thirty days of delivery is the replacement free-look period, not the notification deadline; three business days is not a figure in the regulation. See 230-RICR-20-25-4.

• A. $450,000 in death benefits and $150,000 in cash value
• B. $500,000 in death benefits and $250,000 in cash value
• C. $250,000 in death benefits and $100,000 in cash value
• D. $300,000 in death benefits but not more than $100,000 in net cash surrender value

Correct answer: D. $300,000 in death benefits but not more than $100,000 in net cash surrender value

Explanation: For any one life, regardless of the number of policies, the association covers up to three hundred thousand dollars ($300,000) in life insurance death benefits, but not more than one hundred thousand dollars ($100,000) in net cash surrender and net cash withdrawal values. Option A ignores the statutory caps; $250,000 is the limit for the present value of annuity benefits, not life death benefits; $500,000 is the cap for basic hospital, medical and surgical insurance, not life insurance. See R.I. Gen. Laws § 27-34.3-3.

• A. The beneficiary must submit receipts to substantiate the loss
• B. Death benefits are limited to documented funeral expenses
• C. The insurer may reduce the benefit to the beneficiary's actual economic loss
• D. The stated face amount is paid regardless of the precise dollar value of the loss

Correct answer: D. The stated face amount is paid regardless of the precise dollar value of the loss

Explanation: A life policy pays the agreed face amount because the value of a human life cannot be measured precisely, making it a valued contract rather than one that reimburses proven loss. Property insurance follows indemnity and asks for proof of actual loss, which is why the receipt and economic loss choices do not fit. Benefits are not capped at funeral costs; the face amount controls.

• A. A life insurance policy exchanged for an annuity contract
• B. An annuity contract exchanged for a life insurance policy
• C. An annuity contract exchanged for a certificate of deposit
• D. A life insurance policy exchanged for shares of stock

Correct answer: A. A life insurance policy exchanged for an annuity contract

Explanation: Section 1035 permits a life policy to be exchanged for an annuity, a life policy for another life policy, or an annuity for another annuity, all without current recognition of gain. The reverse direction, annuity to life insurance, is specifically not permitted because it would convert taxable gain into a tax-free death benefit. Stocks and bank deposits are not insurance contracts and fall entirely outside the provision.

• A. Has a face amount above one million dollars
• B. Is funded faster than the seven-pay test permits
• C. Contains a waiver of premium rider
• D. Is issued to an applicant over age 65

Correct answer: B. Is funded faster than the seven-pay test permits

Explanation: The seven-pay test compares cumulative premiums paid in the first seven years to what would have been required to pay the contract up in seven level annual payments; exceeding that limit creates a MEC. Age of the insured, riders attached, and the size of the face amount have no bearing on the classification. Once a contract fails the test it generally remains a MEC permanently.

• A. On a first-in, first-out basis, so nontaxable cost basis is recovered first
• B. As entirely tax-free withdrawals, since the contract is still life insurance
• C. On a last-in, first-out basis, so taxable gain is treated as coming out first
• D. As long-term capital gain to the extent the distribution exceeds premiums

Correct answer: C. On a last-in, first-out basis, so taxable gain is treated as coming out first

Explanation: MEC status flips the ordering rule so that gain is deemed withdrawn before basis, making the distribution taxable to the extent of earnings, and a 10 percent penalty may also apply before age 59 1/2. Ordinary non-MEC life insurance keeps the favorable first-in, first-out treatment. Gains from these contracts are taxed as ordinary income, not at capital gains rates, and the death benefit rather than living distributions is what remains income-tax free.

• A. The portion of each payment that must be withheld and remitted as federal income tax
• B. The portion of the account value that may be withdrawn each year free of surrender charges
• C. The minimum guaranteed interest rate the insurer must credit during the payout period
• D. The portion of each payment treated as a tax-free return of the owner's investment

Correct answer: D. The portion of each payment treated as a tax-free return of the owner's investment

Explanation: The exclusion ratio divides the investment in the contract by the expected total return, and the resulting percentage of each annuity payment is excluded from income as a recovery of principal. The remaining portion of each payment is taxable as ordinary income. Surrender-charge-free withdrawal amounts, tax withholding, and guaranteed rates are contract or administrative features unrelated to this tax calculation.

• A. The principal remains income-tax free and the interest payments are taxable income
• B. The interest payments are tax free and the principal is taxable when finally withdrawn
• C. Both the principal and the interest are taxable because the beneficiary elected to defer
• D. Both the principal and the interest are tax free because they arise from a death benefit

Correct answer: A. The principal remains income-tax free and the interest payments are taxable income

Explanation: Death proceeds themselves are received income-tax free, but any earnings the insurer credits after the insured's death are ordinary interest income to the beneficiary. Treating the principal as taxable misstates the general rule for death benefits. Treating the interest as tax free would let the beneficiary earn investment income permanently without tax, which the Code does not allow.

• A. The entire loan is taxable as ordinary income
• B. The loan is generally not a taxable event
• C. The loan is taxable only to the extent it exceeds the death benefit
• D. The loan is treated as a capital gain

Correct answer: B. The loan is generally not a taxable event

Explanation: Borrowing against a non-MEC life policy is treated as a loan rather than a distribution, so no income is recognized while the contract stays in force. If the policy later lapses or is surrendered with a loan outstanding, gain above basis can become taxable at that point. MEC loans are treated differently and are taxable to the extent of gain.

• A. Taxable only if paid in cash
• B. A long-term capital gain
• C. A nontaxable return of excess premium
• D. Fully taxable ordinary income when received

Correct answer: C. A nontaxable return of excess premium

Explanation: Policy dividends are considered a refund of premium the policyowner overpaid, so they are not income when received, although they do reduce the owner's cost basis. Interest credited on dividends left to accumulate with the insurer is a separate item and is taxable. The tax result does not change based on whether the dividend is taken in cash or applied to another dividend option.