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Which of the following statements regarding life insurance exclusions is true?

  1. They guarantee payment regardless of situation

  2. They limit payout under specific circumstances

  3. They cancel the policy immediately

  4. They affect only temporary policies

The correct answer is: They limit payout under specific circumstances

The chosen answer, which states that life insurance exclusions limit payout under specific circumstances, is true because exclusions are provisions in a life insurance policy that specify conditions or events under which the insurer will not pay benefits. Common exclusions can include cases of suicide within a specified period, death due to illegal activities, or death caused by certain hazardous pursuits. By defining these conditions, the policy outlines risks that the insurer seeks to mitigate, thus protecting the insurer from undue financial liability. The other statements do not accurately reflect the nature of life insurance exclusions. The statement that exclusions guarantee payment regardless of situation is misleading, as exclusions actually define situations where payment would not be guaranteed. The claim that exclusions cancel the policy immediately is also incorrect; exclusions do not terminate the policy but merely restrict the payout under certain conditions. Finally, the notion that exclusions affect only temporary policies is false because exclusions can apply to both temporary (term) and permanent (whole life or universal) life insurance policies.