Free LLQP Ethics Common Law Practice Questions: Contract Law

Use this focused LLQP Ethics Common Law page as a short practice test for Contract Law. The items are original Finance Prep sample exam questions built for LLQP-style scenario judgment, not trivia, puzzle questions, official LLQP questions, copied live-exam content, or exam dumps.

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Sample questions

These are original Finance Prep practice questions aligned to this LLQP competency area. They are not official LLQP questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Integrate into Practice the Legal Aspects of Insurance and Annuity Contracts

In an employer-sponsored group life insurance plan, the insurer issues one master contract covering eligible employees. For contract purposes, who is the policyholder (contracting party) under this group arrangement?

• A. The employer (plan sponsor), because the master policy is issued to it
• B. The insurer, because it issues the master contract and pays claims
• C. The plan administrator, because it handles enrollment, premium remittances, and records
• D. Each employee, because the coverage relates to their personal life/health and they receive a certificate

Best answer: A

What this tests: Contract Law

Explanation: In a group insurance arrangement, the master contract is issued by the insurer to the plan sponsor (commonly the employer). That plan sponsor is the policyholder because it is the contracting party that establishes the plan with the insurer.

Employees typically receive certificates describing their coverage. They are generally members/certificate holders (and usually the insured persons), but they are not the policyholder of the master contract.

Privacy note for practice: even when the employer is the policyholder, an agent/insurer should treat individual employee information as confidential and disclose it only on a need-to-know basis with appropriate consent/authorization.

In a typical group plan, the plan sponsor (often the employer) holds the master policy as policyholder, while employees are members/certificate holders.

Question 2

Topic: Integrate into Practice the Legal Aspects of Insurance and Annuity Contracts

Mina is covered under her employer’s group long-term disability (LTD) plan. The employer is switching to a new insurer effective July 1. HR says the “incidence of change of insurer” is July 1, but the new insurer’s employee booklet will arrive later. Mina is worried about a gap in coverage.

Which factor is the key one that can affect whether her coverage continues smoothly at the change of insurer?

• A. Whether Mina’s premium payroll deductions stay the same after July 1, because unchanged deductions confirm the insurer must keep the same coverage in force.
• B. Whether Mina meets the plan’s eligibility conditions on July 1 (for example, being in an eligible class and meeting any active-at-work requirements), because the change date determines which contract applies to her coverage.
• C. Whether Mina’s beneficiary designation stays on file with HR, because beneficiary information must be transferred for coverage to continue without interruption.
• D. Whether the plan name and policy number remain the same, because identical identifiers mean the insurer change is only administrative and does not affect coverage terms.

Best answer: B

What this tests: Contract Law

Explanation: The deciding factor is the incidence of change of insurer, which in practice is the effective date the new insurer assumes the group plan. From that date forward, members’ rights and obligations generally flow from the new group contract/certificate, and continuity of coverage can depend on the member’s status at that date (for example, being in an eligible class and meeting any active-at-work/eligibility conditions).

When a group plan changes insurers, members should watch for items that can affect continuity, such as eligibility rules, any evidence-of-insurability requirements for changes, and any differences in limitations/exclusions under the new contract. They should ask HR (or the advisor) for clear written confirmation of the effective date and what coverage applies as of that date.

Coverage continuity in a group replacement often turns on the member’s status at the incidence (effective) date of the change of insurer. The effective date is when the new contract takes over, and eligibility/active-at-work conditions can determine what continues automatically versus what may be limited or require action.

Question 3

Topic: Integrate into Practice the Legal Aspects of Insurance and Annuity Contracts

In a life insurance policy, the insured’s age was misstated on the application and the error is discovered at claim time. Under a typical misstatement-of-age provision, how does the insurer generally resolve the claim?

• A. Pay the full stated benefit because the contract was issued and the insurer accepted premiums.
• B. Deny the claim and treat the policy as void because age is always a material misrepresentation.
• C. Recalculate the benefit using the insurer’s current rates and underwriting rules as of the date the error is discovered.
• D. Adjust the benefit (or premium) to the amount that the premiums paid would have purchased at the insured’s correct age, using the insurer’s rates for the policy at issue.

Best answer: D

What this tests: Contract Law

Explanation: A misstatement-of-age provision is a common policy clause that addresses an error in the insured’s age (or birth date) stated in the application. Because age directly affects pricing and benefit amounts, the provision sets out a built-in remedy that typically avoids treating the policy as automatically void.

The usual adjustment principle is:

• The insurer corrects the contract result so it reflects what the premium actually paid would have bought at the insured’s true age, based on the insurer’s rates for that policy at the time it was issued.

In practice, this often means reducing (or sometimes increasing) the death benefit to the amount supported by the premiums at the correct age, rather than denying the claim outright.

Misstatement-of-age provisions are designed to correct the contract outcome, not automatically void it. The usual remedy is an adjustment so the coverage matches what the correct age would have bought when the policy was issued.

Question 4

Topic: Integrate into Practice the Legal Aspects of Insurance and Annuity Contracts

A client’s permanent life insurance policy has an outstanding policy loan when the insured dies. Based only on the exhibit, how will the policy loan affect the amount paid to the beneficiary?

EXHIBIT — Policy provision: Policy Loans and Death Benefit

Any policy loan (including any accrued interest) is a debt secured by the policy’s cash surrender value.

If the insured dies, we will pay the death benefit **less any indebtedness** on the policy (loan balance + accrued interest) as of the date of death.

Example: Death benefit \$250,000; loan balance \$20,000; accrued interest \$800.
Net amount payable: \$229,200.

• A. Only the loan principal is deducted from the death benefit; accrued interest is waived at death.
• B. The insurer will pay the full death benefit, and the beneficiary must separately repay the loan and interest to the insurer.
• C. The insurer will pay the death benefit reduced by the outstanding loan balance and any accrued interest as of the date of death.
• D. The death benefit is not payable until the loan is repaid, because the loan voids coverage.

Best answer: C

What this tests: Contract Law

Explanation: A policy loan on a permanent life insurance policy is an advance against the policy’s cash value. The loan creates an indebtedness on the contract, and interest continues to accrue while the loan is outstanding.

At claim time, the insurer does not ignore the debt. Instead, the policy provision typically states that the death benefit is reduced by the total outstanding indebtedness, which includes both the loan principal and any accrued interest up to the date of death. This reduces the net amount payable to the beneficiary and protects the insurer from paying out amounts that are effectively already advanced under the contract.

The exhibit confirms this with both (1) the clause “death benefit less any indebtedness (loan balance + accrued interest)” and (2) the numeric example showing the net payable is the death benefit minus both the loan and interest.

This matches the exhibit’s wording “death benefit less any indebtedness” and the example calculation that deducts both loan principal and accrued interest.

Question 5

Topic: Integrate into Practice the Legal Aspects of Insurance and Annuity Contracts

An insurance agent is reviewing a client file and sees the following excerpt attached to the insurer’s product guide.

Exhibit (excerpt)

“CLHIA/CAP guidance is intended to promote consistent industry disclosure practices. It is not legislation and does not amend or override any insurance policy or annuity contract. In all cases, the law and the contract wording govern.”

Based only on the exhibit, which interpretation is correct?

• A. The guidance has the same legal force as statutory conditions, so it becomes part of every contract even if not shown in the policy wording.
• B. The guidance supports consistent professional practice, but the agent must still follow applicable law and the contract terms because the guidance does not override them.
• C. If the guidance conflicts with the policy wording, the agent should follow the guidance because it represents the industry’s mandatory standard.
• D. Because the guidance exists, the agent can rely on it instead of reviewing exclusions, riders, and other key clauses in the contract.

Best answer: B

What this tests: Contract Law

Explanation: Industry guidelines (such as CLHIA guidelines and CAP guidance) help insurers and agents apply consistent disclosure and professional practices across the market. However, guidelines are not law and they do not change the client’s legal rights and obligations under an insurance or annuity contract.

When there is any tension between a guideline and what governs the relationship, the hierarchy is clear at the LLQP level:

• Law and regulations set minimum legal requirements.
• The contract wording (including statutory conditions where applicable, exclusions, riders, and key clauses) defines the parties’ rights and obligations.
• Guidelines inform best practice and consistency but cannot override law or the contract.

This matches the exhibit’s key points: guidelines promote consistency but are not law and do not amend or override the contract; law and contract wording govern.

Question 6

Topic: Integrate into Practice the Legal Aspects of Insurance and Annuity Contracts

In an annuity contract (accumulation or payout), an insurer receives a request for contract details (e.g., current value, guarantees, or payment schedule). From a privacy/confidentiality standpoint, whose consent/authorization generally controls whether this information can be disclosed to a third party?

• A. The beneficiary
• B. The annuitant
• C. The contract owner (annuity owner)
• D. The payee/annuity grantee (person receiving payments)

Best answer: C

What this tests: Contract Law

Explanation: Privacy and confidentiality in insurance/annuity practice are generally tied to who holds the contractual rights. In an annuity, the owner is the party who enters into the contract and controls key rights (for example, requesting information, making changes, and authorizing disclosure to others).

This is especially important because annuities often separate roles:

• Accumulation annuity example: A parent is the owner, a child is the annuitant (measuring life), and the parent may later name a beneficiary. The child being the annuitant does not automatically make them the person who can obtain or authorize release of contract values.
• Payout annuity example: The owner may set up payments to a different payee (annuity grantee). Even during payout, the payee’s right is typically to receive payments—not necessarily to control disclosures or contract changes—unless they are also the owner or have proper authorization.

Compared with life insurance, the same privacy principle applies: the policy owner controls the contract and disclosures. The insured and beneficiary may be different people, and neither automatically controls information unless they are the owner or have valid authorization.

The owner is the contracting party who holds the contractual rights (including directing information sharing). Disclosing details to others generally requires the owner’s consent or clear authorization.

Question 7

Topic: Integrate into Practice the Legal Aspects of Insurance and Annuity Contracts

Jordan, an insurance agent, receives a call from Mei, the adult daughter of client Robert, asking to change Robert’s life insurance beneficiary to herself. Mei says Robert is “not feeling well” and asks Jordan to process it today. The policy is in force and Jordan has not received any written authorization from Robert. What is Jordan’s best next step?

• A. Explain that only the policyowner (or a properly authorized legal representative) can instruct beneficiary changes, and ask for Robert’s written, signed authorization or proof of legal authority (e.g., valid power of attorney) before taking instructions, documenting the request.
• B. Ask Mei to complete and sign the insurer’s beneficiary change form on Robert’s behalf so the change can be made quickly.
• C. Discuss Robert’s current beneficiary and policy details with Mei so she can confirm what needs to be updated before Jordan contacts the insurer.
• D. Process the beneficiary change since Mei is an immediate family member and appears to be acting in Robert’s best interest.

Best answer: A

What this tests: Contract Law

Explanation: Beneficiary, ownership, and withdrawal instructions are contract instructions that generally must be given by the policyowner. If someone else requests a change (such as an adult child), the agent must verify legal authority before accepting instructions or disclosing policy information.

Verifying authority protects:

• The client, from unauthorized changes, coercion, or fraud.
• The insurer, by ensuring it can rely on valid instructions and reducing dispute risk.
• The agent, by supporting fair dealing, confidentiality, and defensible documentation.

Appropriate steps typically include confirming who the policyowner is, obtaining the policyowner’s written instruction (or confirming a properly authorized representative such as an attorney under a valid power of attorney), and documenting the interaction.

Beneficiary changes are instructions that must come from the policyowner or someone with verified legal authority. Requiring authorization protects the client, prevents unauthorized changes, and supports the insurer’s ability to rely on valid instructions.

Question 8

Topic: Integrate into Practice the Legal Aspects of Insurance and Annuity Contracts

A life insurance policyholder dies 10 months after the policy was issued (within the policy’s contestability period). Which statement is most accurate about how contestability and policy exclusions can affect the claim?

• A. Because the death occurred during the contestability period, the insurer may investigate the application for a material misrepresentation and, if one is found, may reduce or deny benefits; contractual exclusions may also independently limit or deny payment if they apply.
• B. During the contestability period, the insurer can deny a claim for any incorrect statement on the application, even if the error was not material to the risk or coverage decision.
• C. If death occurs during the contestability period, policy exclusions no longer apply because the insurer’s only available reason to deny the claim is misrepresentation.
• D. Because premiums were paid and the policy was in force, the insurer must pay the full death benefit and cannot investigate application information once a death claim is submitted.

Best answer: A

What this tests: Contract Law

Explanation: In a death claim that occurs within the contestability period, the insurer can typically take a closer look at the application and underwriting information to confirm that the contract was formed on accurate, complete, and truthful material facts (utmost good faith). If the insurer discovers a material misrepresentation or omission (something that would have affected the insurer’s decision to issue the policy or the terms/premium), the claim outcome can be affected—up to and including denial of benefits or treating the policy as if it would have been issued differently.

Policy exclusions are separate from contestability. Even if the application was accurate, an exclusion (for example, a time-limited suicide exclusion or other stated limitations) can independently limit or bar payment when the cause of death falls within the excluded circumstances. In practice, an insurer may assess both: whether coverage applies under the contract terms (including exclusions) and whether the contract can be challenged based on material misrepresentation during the contestability period.

Within the contestability period, insurers commonly have broader rights to investigate the accuracy of application information, and exclusions operate as separate contract limits that can still apply to the loss.

Question 9

Topic: Integrate into Practice the Legal Aspects of Insurance and Annuity Contracts

Mina bought a life insurance policy while married and named her spouse, Jordan, as beneficiary. They divorced last year and Mina now wants the death benefit to go to her children. Which statement is most accurate?

• A. A divorce does not necessarily change the beneficiary on the policy; if Mina wants her children to receive the proceeds, she should review the contract and file a valid beneficiary change with the insurer and document the update.
• B. Divorce automatically cancels any spousal beneficiary designation in Canada, so Mina’s children will receive the death benefit even if she does nothing.
• C. Because Mina is the policy owner, telling the agent by email is enough to change the beneficiary; the insurer must follow the email even if no insurer change process is completed.
• D. After divorce, naming an ex-spouse as beneficiary is always ineffective, and the proceeds will also be fully protected from creditors regardless of who is named.

Best answer: A

What this tests: Contract Law

Explanation: A beneficiary designation is a contractual direction to the insurer about who should receive the insurance proceeds at death. After separation or divorce, a client’s intentions often change, but the policy paperwork may not.

From a professional practice perspective, the key risk is assuming that a relationship change automatically updates the policy. In many situations, the insurer will pay the beneficiary shown on its records unless it receives a valid change of beneficiary in the form and manner it requires (and subject to any restrictions such as an irrevocable designation). That is why policy reviews after major life events—marriage, divorce, new dependants—are important: they help confirm the client’s current intent, update designations, and reduce disputes and delays for survivors.

In this scenario, the most appropriate guidance is to review Mina’s policy and ensure she completes a proper beneficiary change with the insurer so her children (or a trustee, if appropriate) are clearly designated.

Beneficiary designations can remain in force after a relationship breakdown, and insurers generally pay the beneficiary on record unless a proper change is made. A post-divorce review helps avoid unintended outcomes and supports clear documentation.

Question 10

Topic: Integrate into Practice the Legal Aspects of Insurance and Annuity Contracts

Which practice best reflects professional standards for beneficiary designations on life insurance or group/registered plans, including what can happen if the designation is not properly filed?

• A. Tell the client to update their will instead, since a will automatically overrides any beneficiary designation on the policy or plan.
• B. Have the client complete and sign the insurer/plan administrator’s beneficiary designation form (or endorsement), submit it promptly, keep a copy, and explain that if it is not properly filed the benefit may be paid under the last valid designation or the default (often the estate).
• C. Record the client’s beneficiary choice in your meeting notes and proceed, because the insurer will follow the agent’s file if there is a claim.
• D. Keep the signed beneficiary form in your office file so it can be produced later if there is any dispute at claim time.

Best answer: B

What this tests: Contract Law

Explanation: Beneficiary designations are part of the insurance/plan contract process and must be handled with strong documentation discipline. Common methods include completing the insurer’s policy application/beneficiary section, issuing a signed change/endorsement for an in-force policy, or using the plan administrator’s forms for group or registered plans.

From a professional standards perspective, the key is that the designation must be properly completed, signed (as required), and delivered to the insurer/plan administrator. Proper filing matters because the insurer/administrator will normally pay proceeds according to the last valid designation on their records. If a new designation is not properly filed, it may be treated as ineffective—often resulting in payment to a prior beneficiary or under default rules (commonly to the estate), which can create delays, disputes, and potentially different creditor-protection outcomes than the client expected.

This reflects best practice: use the correct form, ensure it is executed and delivered to the insurer/administrator, retain documentation, and set expectations about consequences if it is not properly filed.

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• LLQP Ethics Common Law: Representative Conduct

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