Free PSI Exam Questions and Answers — Questions and Answers

Question 1: Which kind of life insurance has prices based on the insured's current age but can be renewed annually without a needed medical exam?

renewable term (Correct answer)
decreasing term
convertible term
key person insurance

Correct answer: renewable term

Renewable term life insurance allows policyholders to extend their coverage at the end of the term without needing a new medical exam or proving insurability. While the premiums will increase based on the insured's current age, the guarantee of renewal without re-qualification is a key feature. This provides continuous protection even if the insured's health declines.

Question 2: Generally, speaking, only which of the following types of injuries are covered by short-term disability insurance?

Death benefit
Non-covered injuries by other insurance
Non-work-related injuries (Correct answer)
Exam for medical underwriting

Correct answer: Non-work-related injuries

Short-term disability insurance is designed to provide income replacement for individuals who are temporarily unable to work due to illness or injury. It specifically covers disabilities that are not work-related, as work-related injuries are typically covered by Workers' Compensation insurance. This distinction ensures there is no overlap in coverage for different types of disabilities.

Question 3: Which of the following requires a covered employee to consent to a pay cut so that the money can be used to pay for medical costs?

Notice of claim
Flexible Spending Account (FSA) (Correct answer)
Health Savings Account (HSA)
Insuring clause

Correct answer: Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to contribute pre-tax money from their paychecks to pay for eligible healthcare expenses. Employees consent to a pay cut (salary reduction) to fund their FSA, which then provides a tax-advantaged way to cover medical costs. Unlike HSAs, FSA funds typically must be used within the plan year.

Question 4: Which of the following criteria must be met by a policy in order to AVOID being labeled as a MEC?

6-pay Test
7-Pay Test (Correct answer)
8-pay Test
10-pay Test

Correct answer: 7-Pay Test

The 7-Pay Test is a crucial criterion used to determine if a life insurance policy is classified as a Modified Endowment Contract (MEC). If the cumulative premiums paid into a policy during its first seven years exceed the 'seven-pay limit' (the amount that would have paid up the policy in seven years), it becomes a MEC, which alters its tax treatment for withdrawals and loans.

Question 5: The following choices are all exempt from forfeiture: EXCEPT

Cash dividend option (Correct answer)
Accumulation at interest option
Paid-up option
Reduced paid-up insurance

Correct answer: Cash dividend option

Nonforfeiture options in life insurance policies protect policyholders by ensuring they receive some value from their policy if they stop paying premiums or surrender it. These options include cash surrender value, reduced paid-up insurance, and extended term insurance. A cash dividend option, however, is a way to receive policy dividends and is not considered a nonforfeiture option that prevents forfeiture of cash value.

Question 6: All of the following ARE NOT CONSIDERED AS PART OF A CONSUMER REPORT USED TO DETERMINE INSURANCE ELIGIBILITY

transfusions of blood
credit information
medical underwriting exam (Correct answer)
the underwriting process begins

Correct answer: medical underwriting exam

Consumer reports, such as credit reports or MIB (Medical Information Bureau) reports, are used by insurers to gather information about an applicant's risk profile. A medical underwriting exam, on the other hand, is a direct physical assessment conducted by a medical professional. It is a part of the underwriting process itself, not a 'consumer report' obtained from a third-party agency.

Question 7: Which of the following changes the Social Security Act so that group health insurance takes precedence over Medicare?

ERISA
MEDICARE
TEFRA (Correct answer)
COBRA

Correct answer: TEFRA

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) amended the Social Security Act to make group health plans the primary payer for Medicare-eligible employees and their spouses aged 65-69. This legislation established that group health insurance takes precedence over Medicare for this specific demographic, shifting the financial responsibility for healthcare costs.

Question 8: General property taxes on real estate that pay for government operations are called:

improvement taxes
special assessment taxes
special taxes
ad valorem taxes (Correct answer)

Correct answer: ad valorem taxes

Ad valorem taxes are property taxes levied based on the assessed value of real estate. The term 'ad valorem' literally means 'according to value.' These taxes are the primary source of funding for local government operations, including schools, police, and fire departments, and are applied proportionally to the value of the property.

Question 9: A mechanic's lien may be filed by a:

taxing authority
seller’s real estate agent.
contractor (Correct answer)
buyer’s real estate agent

Correct answer: contractor

A mechanic's lien is a specific, involuntary lien placed on real property by individuals or companies who have provided labor or materials for improvements to that property but have not been paid. Contractors, subcontractors, and material suppliers are common parties who can file such a lien to secure payment for their work.

Question 10: How much is the annual real estate tax on a $135,000 property assessed at $47,250 with an equalization factor of 125% and a 2.5% tax rate?

$1,181
$1,418
$1,477 (Correct answer)
$945

Correct answer: $1,477

First, calculate the adjusted assessed value: $47,250 (assessed value) * 1.25 (equalization factor) = $59,062.50. Next, multiply the adjusted assessed value by the tax rate: $59,062.50 * 0.025 (2.5%) = $1,476.5625. Rounded to the nearest dollar, the annual real estate tax is $1,477.

Question 11: Which lien is voluntary and specific?

Mortgage lien (Correct answer)
Mechanic’s lien
IRS tax lien
Special assessment

Correct answer: Mortgage lien

A mortgage lien is considered voluntary because the property owner willingly pledges their property as collateral for a loan. It is also a specific lien because it attaches only to the particular piece of real estate identified in the mortgage agreement, not to all of the owner's assets. This makes it distinct from involuntary or general liens.

Question 12: Among these, which is a general lien?

Mechanic’s lien
Judgment (Correct answer)
Bail bond lien
Real estate taxes

Correct answer: Judgment

A general lien attaches to all of a debtor's property, both real and personal, within the jurisdiction. A judgment lien, which arises from a court order, is a classic example of a general lien because it can be enforced against any non-exempt property owned by the debtor to satisfy the judgment. Other options listed are typically specific liens.

Question 13: When a real estate sales agreement is signed, but before title officially transfers, the agreement is in the following state:

voidable
executory (Correct answer)
unilateral
executed

Correct answer: executory

An executory contract is one where some future act or obligation remains to be performed by one or both parties. In real estate, a sales agreement is in an executory state after it has been signed but before the closing, as both the buyer and seller still have obligations to fulfill before the title officially transfers.

Question 14: The buyers got a loan with a 75% loan-to-value (LTV) ratio. The term was 30 Years, and the interest rate was 7.125%. The interest payment for the first month was $477.82. What was the property's appraisal?

$80,475
$103.70
$79,239
$107,300 (Correct answer)

Correct answer: $107,300

First, calculate the loan amount using the monthly interest payment: ($477.82 * 12 months) / 0.07125 (annual interest rate) = $80,475.05. Since the loan-to-value (LTV) ratio is 75%, divide the loan amount by the LTV to find the appraisal: $80,475.05 / 0.75 = $107,300.06. Rounded to the nearest dollar, the property's appraisal is $107,300.

Question 15: Subject to appropriate exclusions, a document that protects against hidden risk such forgeries and title problems is called:

an abstract of title
a certificate of title
a title insurance policy (Correct answer)
a chain of title

Correct answer: a title insurance policy

A title insurance policy provides protection to the policyholder against financial loss due to defects in the title to a property. It covers hidden risks such as forged documents, undisclosed heirs, errors in public records, and other title problems that might not be discovered through a standard title search. This offers crucial security for both buyers and lenders.

Question 16: The interest on a $60,000 loan was $412.50 of last month's loan payment. What is the interest rate per year?

8.50%
7.50%
7.75%
8.25% (Correct answer)

Correct answer: 8.25%

To find the annual interest rate, first calculate the total annual interest: $412.50 (monthly interest) * 12 months = $4,950. Then, divide the annual interest by the loan amount: $4,950 / $60,000 = 0.0825. Convert this decimal to a percentage by multiplying by 100, resulting in an annual interest rate of 8.25%.

Free PSI Exam Questions and Answers

Which kind of life insurance has prices based on the insured's current age but can be renewed annually without a needed medical exam?