Understanding Risk Management: Definitions, Types, and Impacts
School
Kazakhstan Institute of Management, Economics and Strategic Research**We aren't endorsed by this school
Course
FIN 3020
Subject
Economics
Date
Dec 10, 2024
Pages
31
Uploaded by mikon_off
1)Traditionally, risk has been defined as A)uncertainty concerning the occurrence of loss. 2)Objective risk is defined as A)the relative variation of actual loss from expected loss. 3)An insurance company estimates its objective risk for 10,000 exposures to be 10 percent. Assuming the probability of loss remains the same, what would happen to the objective risk if the number of exposures were to increase to 1 million? A)It would decrease to 1 percent. 4)Uncertainty based on a person's mental condition or state of mind is known as A)subjective risk. 5)The long-run relative frequency of an event based on the assumption of an infinite number of observations with no change in the underlying conditions is called A)objective probability. 6)Which of the following statements about a priori probabilities is correct? A)They are objective probabilities that can be determined by deductive reasoning. 7)An individual's personal estimate of the chance of loss is A)a subjective probability. 8)A peril is A)the cause of a loss. 9)An earthquake is an example of A)a peril. 10)Dense fog that increases the chance of an automobile accident is an example of A)a physical hazard. 11)Faking an accident to collect insurance proceeds is an example of A)moral hazard. 12)Carelessness or indifference to a loss is an example of A)attitudinal hazard. 13)Some characteristics of the judicial system and regulatory environment increase the frequency and severity of loss. This hazard is called A)legal hazard. 14)Taylor Tobacco Company is concerned that the company may be held liable in a court of law and ordered to pay a large damage award. The characteristics of the judicial system that increase the frequency and severity of loss are known as A)legal hazard. 15)A name that encompasses all of the major risks faced by a business firm is A)enterprise risk. Which of the following statements about financial risk is (are) true? I.Enterprise risk does not include financial risk. II.Financial risk is easily addressed through the purchase of insurance. A)neither I nor II16)One of the speculative financial risks considered in an enterprise risk management program is the risk of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money. This risk is called A)financial risk.
17)Katelyn was just named Risk Manager of ABC Company. She has decided to create a risk management program which considers all of the risks faced by ABC—pure, speculative, operational, and strategic—in a single risk management program. Such a program is called a(n) A)enterprise risk management program. 18)A pure risk is defined as a situation in which there is A)only the possibility of loss or no loss. 19)The premature death of an individual is an example of A)a pure risk. Which of the following statements about speculative risks is true? B)They may benefit society even though a loss occurs. 20)An automobile that is a total loss as a result of a collision is an example of which of the following types of risk? I.Speculative risk II.Diversifiable risk A)II only 21)All of the following are programs to insure fundamental risks EXCEPT A)auto physical damage insurance. 22)All of the following are examples of personal risks EXCEPT A)loss of business income. 23)Which of the following is a reason why premature death may result in economic insecurity? I.Additional expenses associated with death may be incurred. II.The income of the deceased person's family may be inadequate to meet its basic needs. A)both I and II Which of the following is a characteristic of insurance? A)pooling of losses 2)Which of the following is implied by the pooling of losses? A)sharing of losses by an entire group 3)According to the law of large numbers, what happens as the number of exposure units increases? A)Actual results will more closely approach probable results. 4)According to the law of large numbers, what should happen as an insurer increases the number of units insured? A)Actual results will more closely approach expected results. 5)Characteristics of a fortuitous loss include which of the following? I.The loss is certain to occur. II.The loss occurs as a result of chance. A)II only From the viewpoint of the insurer, all of the following are characteristics of an ideally insurable risk EXCEPT A)The loss should be catastrophic. 6)From the standpoint of the insurer, which of the following is a characteristic of an ideally insurable risk? A)The chance of loss must be calculable. 7)Why is a large number of exposure units generally required before a pure risk is insurable? A)It enables the insurer to predict losses more accurately.
8)The requirement that losses should be accidental and unintentional in order to be insurable results in which of the following? I.Decrease in moral hazard II.More accurate prediction of future losses A)both I and II 9)Which of the following is implied by the requirement that a loss should be determinable and measurable to be insurable? I.The loss must be definite as to place. II.The loss must be definite as to amount. A)both I and II Methods by which insurers may minimize or avoid catastrophic losses include which of the following? I.The use of reinsurance II.Concentrating coverage written in one geographic region A)I only 10)Which of the following types of risks best meets the requirements for being insurable by private insurers? A)property risks 11)Reasons why market, financial, and production risks are often uninsurable include which of the following? I.The potential to produce a catastrophic loss is great. II.The chance of loss cannot be accurately estimated. A)both I and II 12)Which of the following types of risks is normally uninsurable by private insurers? A)political risks 13)Which of the following is a result of adverse selection? A)Persons most likely to have losses are also most likely to seek insurance at standard rates. The tendency for unhealthy people to seek life or health insurance at standard rates is an example of B)adverse selection. 14)Which of the following statements regarding insurance and gambling is (are) true? I.Insurance is used to handle existing pure risks, while gambling creates a new speculative risk. II.Insurance usually involves risk avoidance, while gambling typically involves only risk reduction. A)I only 15)In addition to marketing life insurance, life insurers typically sell which of the following products? I.Retirement annuities II.Disability income insurance A)both I and II 16)Inland marine insurance provides coverage for A)goods being shipped on land. 17)Which of the following is classified as casualty insurance? A)workers compensation insurance Which of the following is a form of casualty insurance? B)general liability insurance 18)Which of the following statements regarding private insurance and government insurance is (are) true?
I.Private insurance includes life and health insurance and property and liability insurance. II.All government insurance is social insurance. A)I only 19)All of the following are benefits to society that result from insurance EXCEPT A)elimination of moral hazard. 20)Which of the following statements about the insurance industry as a source of investment funds is (are) true? I.These funds result in a lower cost of capital than would exist in the absence of insurance. II.These funds tend to promote economic growth and full employment. A)both I and II 21)All of the following are social costs associated with insurance EXCEPT A)increased cost of capital. Risk management is concerned with A)the identification and treatment of loss exposures. 2)A situation or circumstance in which a loss is possible, regardless of whether a loss occurs, is called a A)loss exposure. 3)Which of the following is a post-loss risk management objective? A)continuing operations 4)Preloss objectives of risk management include which of the following? I.Preparing for potential losses in the most economical way II.Reduction of anxiety A)both I and II 5)A risk manager is concerned with which of the following? I.Identifying potential losses II.Selecting the appropriate techniques for treating loss exposures A)both I and II Which of the following is a source of information a risk manager could use to help identify pure loss exposures? A)physical inspections 6)Loss severity is defined as the A)probable size of the losses which may occur during some period. 7)Loss frequency is defined as the A)probable number of losses that may occur during some period. 8)The worst loss that could ever happen to a firm is referred to as the A)maximum possible loss. 9)The worst loss that is likely to happen is referred to as the A)probable maximum loss. All of the following statements about avoidance are true EXCEPT B)It can be used for any loss exposure facing a firm. 10)Abandoning an existing loss exposure is an example of A)avoidance. 11)Which of the following conditions is (are) appropriate for using retention? I.Losses are difficult to predict. II.The worst possible loss is not serious.
A)II only 12)Which of the following statements regarding the use of retention is (are) true? I.Retention is best used for loss exposures that have a low frequency and a high severity. II.A financially strong firm can have a higher retention level than a firm whose financial position is weak. A)II only Which of the following statements about the use of a captive insurance company by a parent firm is true? A)The captive may be used to insure loss exposures that the parent firm is finding difficult to insure with private insurers. 13)Which of the following statements about self-insurance is (are) true? I.It is a form of planned retention. II.State law usually prohibits its use for workers compensation. A)I only 14)All of the following are potential advantages of retention EXCEPT A)protection from catastrophic losses. 15)A restaurant owner leased a meeting room at the restaurant to a second party. The lease specified that the second party, not the restaurant owner, would be responsible for any liability arising out of the use of the meeting room, and that the restaurant owner would be "held harmless" for any damages. The restaurant owner's use of the hold-harmless agreement in the lease is an example of A)noninsurance transfer. All of the following are disadvantages of noninsurance transfers EXCEPT B)The only potential losses that can be transferred are those that are not commercially insurable. 16)ABC Insurance retains the first $1 million of each property damage loss and purchases insurance for that part of any property loss that exceeds $1 million. The insurance for property losses above $1 million is called A)excess insurance. 17)Which of the following statements about the use of deductibles is (are) true? I.They represent risk retention by insurance purchasers. II.They tend to increase the cost of adjusting small claims. A)I only 18)Which of the following statements about an excess insurance plan is true? A)The insurer does not participate in a loss until it exceeds the amount the firm has decided to retain. 19)Factors a risk manager must consider in selecting an insurer include which of the following? I.The availability of risk management services II.The financial strength of the insurer A)both I and II Which of the following statements about stock insurers is true? A)Stockholders bear any losses and share in any profits. 2)Which of the following statements about mutual insurers is true? A)They may pay dividends to their policyholders. 3)Why are some mutual insurers referred to as "assessment mutuals"? A)They can assess policyholders if premiums are insufficient to pay losses and expenses. 4)The corporate structure of mutual insurers is changing rapidly. All of the following are current trends EXCEPT A)sharp increase in the number of mutual insurance companies.
5)Which of the following statements is true about fraternal insurers? A)They specialize in writing life and health insurance. Which of the following statements about a reciprocal exchange is (are) true? I.It usually specializes in health insurance. II.It is an unincorporated mutual insurance company. A)II only 6)Which of the following statements about Lloyd's of London is true? A)Coverage is actually written by syndicates who belong to Lloyd's of London. 7)Temporary evidence of insurance until a policy is actually issued is provided by a(n) A)binder. 8)Which of the following statements about brokers is (are) true? I.They legally represent the insured rather than the insurance company. II.They are prohibited from being licensed as agents. A)I only 9)Neil needs insurance that is unavailable in the state where he lives. To obtain insurance from a nonadmitted insurer, Neil should contact a A)surplus lines broker. Which of the following statements about life insurance marketing systems is true? B)Some exclusive agents who market property and liability insurance also sell life insurance. 10)Which of the following statements about personal producing general agents is (are) true? I.They often have the option of recruiting and training sub-agents. II.They are independent agents who produce substantial amounts of life insurance with one insurer. A)both I and II 11)Advantages of the direct response system for marketing life insurance include which of the following? I.Advertising can be specifically directed to selected markets. II.Complex products can be easily sold. A)I only 12)Which of the following statements about the exclusive agency system for marketing property and liability insurance is true? A)New exclusive agents may start as employees and after a training period become independent contractors. All of the following statements about the independent agency system are true EXCEPT B)The insurer rather than the agent owns the renewal rights to the business. 13)A property and casualty insurer in which the salesperson is an employee of the insurer, not an independent contractor, is called a A)direct writer. 14)Which of the following statements about the sale of property and liability insurance through the direct response system is (are) true? I.Selling expenses are higher because market segmentation tends to be less precise than with other marketing methods. II.It is the most appropriate system for selling complex products. A)neither I nor II 15)Under one life insurance marketing system, individual producers conduct sales interviews at the workplace with the approval of the management of the business. There are few direct costs to the
employer, and this marketing system is especially appropriate for the low-income and middle-income workers. This life insurance marketing system is called the A)worksite marketing. 16)Which of the following is characteristic of a typical mass merchandising plan? A)payment of premiums through payroll deduction David is a successful independent insurance agent. Recently, one of the life insurance companies with whom he places business offered him a special financial arrangement. If David meets sales targets, he will receive large bonuses. He will also be able to recruit and train sub- agents and receive an over-riding commission based on the amount of life insurance the sub- agents sell. Based on this description, David is a(n) B)personal-producing general agent. 17)Sarah owns a property and liability insurance agency. She is authorized to represent several insurance companies and she is compensated by commissions. Sarah's agency owns the expiration rights to the business she sells. Sarah is a(n) A)independent agent. 18)The leaders of a religious group decided to start a life insurance organization to insure members of the religious group. The insurer will operate as a nonprofit organization, thus receiving favorable tax treatment. The insurer formed will be a A)fraternal insurer. 19)Scott works in property and liability insurance marketing. He legally represents insurance purchasers, rather than insurance companies. Scott is paid a commission on the insurance placed with insurers. Scott is a(n) A)insurance broker. ABC Insurance has always used the exclusive agency system to market coverages. ABC, however, cannot afford full-time agents in sparsely-populated areas. To reach customers in these areas, ABC enters into agreements with local independent agents. Using more than one marketing system is called employing a B)multiple distribution system. 20)Cathy just started a job with XYZ Manufacturing Company. She attended an orientation and was given a packet providing information about the various employee benefits XYZ offers. One item in the packet was a booklet and application form from an auto insurer. The insurer offers lower premiums to XYZ employees. The insurer's plan for selling individually-underwritten auto insurance to employees of XYZ Manufacturing Company is called A)mass merchandising. 21)Brian buys and sells investment securities for his clients. Brian also decided to become a licensed life insurance agent to better serve his customers. While Brian's primary focus is buying and selling financial securities for his clients in exchange for commissions, he also earns commissions on his life insurance sales. Brian is a(n) A)stock broker. 22)ABC Term Life Insurance Company uses an interesting marketing system—it has no agents. Instead, the company markets its coverages through television and radio ads, newspaper inserts, and the Internet. The type of marketing system that ABC Term Life Insurance Company uses is called the A)direct response system. The function of an actuary is to A)determine premium rates. 2)Insurers obtain data which can be used to determine rates from A)insurance advisory organizations. 3)Which of the following statements about underwriting policy is (are) true?
I.A company must establish an underwriting policy consistent with company objectives. II.Underwriting policy is usually subjective and allows the underwriter considerable flexibility with respect to lines written and forms used. A)I only 4)Which of the following statements about underwriting standards is (are) true? I.One purpose of underwriting standards is to reduce adverse selection against the insurer. II.Equitable rates should be charged so that each group of policyowners pays its own way in terms of losses and expenses. A)both I and II The underwriting process begins with the A)agent. 5)Common sources of underwriting information for life and health insurance include all of the following EXCEPT A)the applicant's income tax return. 6)If an underwriter suspects moral hazard, the underwriter may ask an outside firm to investigate the applicant and make a detailed report to the insurer. This report is called a(n) A)inspection report. 7)One source of life and health insurance underwriting information is an organization that life and health insurance companies can join. As a member, life and health insurance companies report health impairments of applicants, and this information is shared with member companies. Although the information is shared, the underwriting decision of the member company is not disclosed. What is this organization called? A)Medical Information Bureau (MIB) Factors that may result in more restrictive underwriting decisions include which of the following? I.Inadequate rates. II.The unavailability of reinsurance at favorable terms. A)both I and II 8)Which of the following is a function of the marketing department of an insurance company? A)to identify production goals 9)Which of the following statements about claim settlement is (are) true? I.The fair payment of claims requires an insurer to adopt a very liberal claims policy. II.To prevent lawsuits, an insurer should provide no personal assistance to a claimant other than that which is required by contractual obligations. A)neither I nor II10)Which of the following statements about claims settlement is true? A)Independent adjustors may be used in a geographic area where the volume of business is too low for an insurer to have its own adjustors. Which of the following statements about adjustment bureaus is (are) true? I.They are frequently used to settle claims when a large number of losses occur in a given geographic location as a result of a catastrophic event. II.Their major advantage is low cost because of the use of part-time adjustors. A)I only 11)All of the following statements about the settlement of a claim are true EXCEPT A)The adjustor must file the proof of loss, which is a sworn statement supporting his or her decision regarding a claim. 12)Which of the following statements about reinsurance is true?
A)The insurer transferring business to a reinsurer is called the ceding company. 13)All of the following are reasons for a primary insurer to use reinsurance EXCEPT A)to increase the unearned premium reserve. 14)The unearned premium reserve of an insurer is A)a liability representing the unearned portion of gross premiums on outstanding policies. A reinsurance contract that is entered into on a case-by-case basis after an application for insurance is received by a primary insurer is called B)facultative reinsurance. 15)Which of the following statements about treaty reinsurance is true? A)The reinsurer must accept all business that falls within the scope of the treaty. 16)Which of the following statements about treaty reinsurance is true? A)Using a reinsurance pool provides financial capacity to write large amounts of insurance. 17)Delta Insurance Company has a surplus-share treaty with Eversafe Reinsurance. Delta has a retention limit of $200,000, and nine lines of insurance are ceded to Eversafe. How much will Eversafe pay if a $1,600,000 building insured by Delta suffers an $800,000 loss? A)$700,000 18)Huge Insurance Company is a property insurer that is interested in protecting itself against cumulative losses that exceed $200 million during the year. This protection can best be obtained using a(n) A)excess-of-loss reinsurance treaty. All of the following statements about life insurance company investments are true EXCEPT B)The majority of these investments are short-term investments. 19)Which of the following statements about the investments of property and liability insurers is (are) true? I.Income from investments is important in offsetting any unfavorable underwriting experience. II.Because premium income is continually being received, the investment objective of liquidity is of little importance. A)I only 20)Functions of an insurance company's legal department include which of the following? I.Lobbying for legislation favorable to the insurance industry. II.Drafting policy provisions. A)both I and II 21)Jan is employed by an insurance company. She reviews applications to determine whether her company should insure the applicant. If insurable, Jan assigns the applicant to a rating category based on the applicant's degree of risk. Jan is a(n) A)underwriter. LMN Mutual Insurance Company has total liabilities of $300 million. The company has total assets of $380 million. What is LMN's policyholders' surplus? A)$80 million 2)Which of the following would not appear in the asset section of an insurance company's balance sheet? A)loss reserves 3)Under one method of estimating a loss reserve, the reserve is based on life expectancy, duration of disability, and similar factors. This method of estimating loss reserves is called the A)tabular value method.
4)Reasons for the unearned premium reserve include which of the following? I.To pay losses that occur during the policy period. II.To pay premium refunds to policyholders in the event of cancellation. A)both I and II A property and casualty insurer's loss reserve includes estimates for all of the following EXCEPT A)claims anticipated but not yet incurred. 5)Which of the following statements about methods for estimating loss reserves for property and casualty insurers is (are) true? I.The judgment method involves the use of a statutory formula to estimate the loss reserve. II.The average value method is used when the number of claims is large and the claims are settled quickly. A)II only 6)One item that appears on an insurance company's financial statements is a liability that represents an estimate of the claims reported and adjusted but not yet paid, claims reported and filed but not yet adjusted, and claims incurred but not yet reported to the company. This liability is called the insurer's A)loss reserves. 7)A loss reserve established for each individual claim when it is reported to a property and casualty insurance company is call a(n) A)case reserve. Which of the following items would not appear in the income section of an insurance company's income and expense statement? B)commissions 8)JKL Insurance Company reported the following information on its accounting statements last year: Premiums Written $90,000,000 Loss Adjustment Expenses $5,000,000 Underwriting Expenses $30,000,000 Premiums Earned $100,000,000 Incurred Losses $70,000,000 What was JKL's loss ratio last year? A)75.0 percent 9)JKL Insurance Company reported the following information on its accounting statements last year: Premiums Written $90,000,000 Loss Adjustment Expenses $5,000,000 Underwriting Expenses $30,000,000 Premiums Earned $100,000,000 Incurred Losses $70,000,000 What was JKL's expense ratio last year? A)33.3 percent JKL Insurance Company reported the following information on its accounting statements last year: Premiums Written $90,000,000 Loss Adjustment Expenses $5,000,000 Underwriting Expenses 30,000,000 Premiums Earned $100,000,000 Incurred Losses $70,000,000 What was JKL's combined ratio last year? B)108.3
10)Which of the following statements about property and casualty insurance company operating results is (are) true? I.An insurance company can have a combined ratio greater than 1 (or 100 percent) and still be required to pay income taxes. II.By all measures, the property and casualty insurance industry is highly profitable when compared to other industries. A)I only 11)Life insurance policyholders may borrow the cash value from their life insurance policies. Where are life insurance policy loans shown on a life insurance company's financial statements? A)as an asset 12)MedProf Insurance markets medical malpractice insurance. The company's combined ratio in 2012 was 95.4. Its expense ratio was 25.4. What was the company's loss ratio? A)70.0 To protect policyholders, state laws place limitations on a life insurance company's investments. The assets backing interest-sensitive products, such as variable life insurance and variable annuities, are not subject to these restrictions. Assets backing interest-sensitive products are placed in a special account called the life insurer's B)separate account. 13)Which of the following statements is (are) true concerning investments of property and casualty insurers and life insurers? I.Property and casualty insurance companies place greater emphasis on liquidity than do life insurers. II.Life insurance company investments are, on average, of longer duration than property and casualty insurance company investments. A)both I and II 14)Which of the following is an expense for a life insurance company? A)death benefits paid to a beneficiary 15)All of the following statements about business objectives in designing a rating system are true EXCEPT A)The rating system should be independent of long-run changes in economic conditions. All of the following statements about regulatory objectives of insurance rate making are true EXCEPT B)Insurers know in advance if the coverages marketed will be profitable, so rate regulation is not needed. 16)The unit of measurement used in property and casualty insurance pricing is called the A)exposure unit. 17)The portion of an insurance premium allocated to expenses, profit, and a margin for contingencies is called the A)loading. 18)Which of the following statements about judgment rating is true? A)It is used when the loss exposures are so diverse that a class rate cannot be calculated. 19)Under one type of merit rating, the class or manual rate is adjusted upward or downward based on past loss history. This type of merit rating is called A)experience rating. All of the following statements about class rating are true EXCEPT B)The complexity of class rating makes it inappropriate for personal lines coverages. 20)Ratemakers at ABC Insurance Company calculated the pure premium to be $280 for a risk they
were considering insuring. What is the gross rate for this risk, assuming a 30 percent expense ratio? A)$400 21)Which of the following statements is (are) true about the loss ratio method of class rating? I.A premium is calculated, and the pure premium is loaded to cover expenses, profit, and contingencies. II.The actual loss ratio is compared to the expected loss ratio, and the rate is adjusted accordingly. A)II only 22)Which of the following statements about schedule rating is (are) true? I.It involves the determination of a basis rate for each exposure, which is then modified by credits or debits. II.It is based on the assumption that certain physical characteristics of the insured's operations will influence the insured's future loss experience. A)both I and II Which of the following statements about experience rating is (are) true? I.The insured's past loss experience is used to determine the premium for the next policy period. II.Its use is generally limited to small firms whose actual experience lacks credibility. A)I only 23)Which of the following statements about retrospective rating is true? A)The premium for the current period is determined by the loss experience during the current period. 24)Monopoly Insurance is the only company marketing a certain line of insurance in a state. After complaints from several consumers, the State Insurance Department investigated Monopoly's rates. The regulators determined that Monopoly was taking advantage of being the only insurer offering the line by charging more than double the actuarial cost of the coverage. Which regulatory rating objective was Monopoly violating? A)Rates must not be excessive. 25)Small Town used to be just that—a small town 6 miles from Large City. Over the years, the area between Small Town and Large City has developed, and now Small Town is part of the suburbs surrounding Large City. An auto insurer that operated in the area had a large increase in auto claims from Small Town insureds. The insurer did not adjust its rates, and this year will lose money because of claims attributable to higher population density. Which business rating objective did this insurer fail to meet? A)responsiveness Reasons for regulation of insurance include which of the following? I.Maintaining insurer solvency II.Ensuring reasonable rates A)both I and II 1)The right of the states to regulate the business of insurance was first established by A)Paul v. Virginia. 2)The basis for current state regulation of insurance is A)the McCarran-Ferguson Act. 3)All of the following statements about the methods of regulating insurance are true EXCEPT A)Insurers are totally exempt from regulation by federal agencies and laws. Which of the following statements about the licensing of insurance companies is (are) true? I.A new capital stock insurer must meet minimum capital and surplus requirements, which vary by state and line of insurance.
II.The licensing requirements for insurance companies are less stringent than those imposed on most other types of firms. A)I only 4)An insurance company incorporated in another state has been licensed to operate in your state. In your state, the insurer would be considered a(n) A)foreign insurer. 5)An insurance company chartered in another country has been licensed to operate in your state. In your state, the insurer would be considered a(n) A)alien insurer. 6)Which of the following is considered a nonadmitted asset for an insurer? A)office furniture 7)The policyholders' surplus of an insurer is defined as the difference between its A)assets and its liabilities. Which of the following statements about the use of risk-based capital requirements is (are) true? I.Insurers must have a certain amount of capital depending on the riskiness of their investments and insurance operations. II.Insurers may be required to take certain actions depending on how much capital they have relative to their risk-based capital requirements. A)both I and II 8)Which of the following statements about the regulation of insurance company investments is (are) true? I.The purpose of regulating insurance company investments is to prevent insurers from making unsound investments which could threaten their solvency. II.Life insurers can invest an unlimited amount of their assets in common stocks. A)I only 9)Which of the following statements about the regulation of life insurance companies is (are) true? I.The percentage of assets a life insurance company may invest in a specific type of asset (e.g., stocks or bonds) is generally limited by law. II.The purpose of limiting the accumulation of surplus is to prevent an insurer from increasing its surplus at the expense of policyowner dividends. A)both I and II 10)Which of the following statements about state insurance guaranty funds is (are) true? I.They limit the amount that policyholders can collect if an insurer becomes insolvent. II.They are usually funded by general revenues of the states. A)I only Under one type of rate regulation, insurers do not have to register their rates with state regulatory authorities. However, insurers may be required to furnish rate schedules and supporting data to state officials. A fundamental assumption underlying this type of rating law is that market forces will determine the price and availability of insurance, rather than discretionary acts of regulators. This type of rate regulation is called A)no filing required. 11)Under what type of rate regulation are insurers required to obtain approval of rates before using them if the rate change exceeds a specified predetermined range? A)flex-rating law 12)By misrepresenting the true facts, Gretchen was able to convince a client to drop a life insurance policy with another company and to purchase a policy from the company that Gretchen represents.
Gretchen has engaged in an illegal sales practice called A)twisting. 13)Which of the following statements about premium taxes is (are) true? I.They are levied by the federal government as a result of the McCarran-Ferguson Act. II.Their primary purpose is to provide funds for insurance regulation. A)neither I nor II Which of the following is an advantage of federal regulation of insurance over state regulation of insurance? A)more effective treatment of systemic risk 14)Which of the following is an advantage of state regulation of insurance over federal regulation of insurance? A)quicker response to local insurance problems 15)A shortcoming of state regulation of insurance found by Congressional committees and the General Accounting Office is that state regulation A)provides inadequate consumer protection. 16)The major reasons for insurer insolvency include which of the following? I.Inadequate pricing and loss reserves II.Rapid growth and inadequate surplus A)both I and II 17)Which of the following is a principal method of ensuring the solvency of insurers? A)requiring submission of annual financial statements to state regulators The number of title insurance companies operating in State Z is relatively low. Recently, the largest of these companies (50 percent market share) acquired the second largest company (30 percent market share). Immediately after the acquisition, the insurer raised premiums by 75 percent. This scenario demonstrates which of the following rationales for the regulation of insurance? B)ensure reasonable rates 18)In which of the following did the Court decide that insurance was interstate commerce when conducted across state lines, and therefore was subject to federal regulation? A)South-Eastern Underwriters Association case 19)A life insurance company based in Canada was licensed to operate in Massachusetts. When operating in Massachusetts, the Canadian insurer would be considered a(n) A)alien insurer. 20)XYZ Mutual Insurance Company has total assets of $10 million. The policyholders' surplus is $2 million. What are XYZ Mutual's total liabilities? A)$8.0 million Mutual Property Insurance Company has a surplus of $2 million. According to a conservative rule, how much new net premiums can Mutual Property Insurance Company safely write? B)$2 million 21)Fly-By-Night Insurance Company had much larger losses than forecast. The company did not charge adequate premiums nor did the company purchase reinsurance. If Fly-By-Night becomes insolvent, which of the following will help pay the unpaid claims of the insurer? A)guaranty fund 22)Grace is a life insurance agent. She is attempting to sell a large life insurance policy, but the prospective purchaser is having second thoughts. To persuade the prospective purchaser, Grace said, "I will earn a $1,000 commission if you buy this policy. I'll give you $500 of my commission if you buy the policy." In most states, what illegal sales practice will Grace be guilty of if she splits her commission with
the purchaser? A)rebating 23)State X's premium tax rate is 2 percent. State Y's premium tax rate is 3 percent. State X insurers are required to pay the 3 percent rate on business written in State Y. State X requires insurers from State Y to pay a 3 percent premium tax on business written in State X, even though the premium tax rate is only 2 percent in State X. This practice is known as a A)retaliatory tax law. Fundamental purposes of the principle of indemnity include which of the following? I.To reduce physical hazards II.To prevent the insured from profiting from insurance A)II only 1)Which of the following is a fundamental purpose of the principle of indemnity? A)to reduce moral hazard 2)Sam's furniture was destroyed by a fire. The furniture cost $1200 when it was purchased, but similar new furniture now costs $1800. Assuming the furniture was 50 percent depreciated, what is the actual cash value of Sam's loss? A)$900 3)The loss settlement under which of the following supports the principle of indemnity? A)actual cash value property insurance 4)Under which of the following rules is actual cash value determined by taking into consideration all relevant factors an expert would use to determine the value of the property? A)the broad evidence rule A total loss under a valued policy is settled on the basis of the B)amount of insurance covering the loss. 5)Which of the following statements describes how losses will be settled if a property insurance policy is written on a replacement cost basis? A)Losses are settled without a deduction for depreciation. 6)Which of the following statements about the principle of insurable interest is (are) true? I.It makes it difficult to measure the amount of an insured's loss. II.It reduces moral hazard. A)II only 7)All of the following will support an insurable interest for purposes of purchasing property and liability insurance EXCEPT A)close family relationship. 8)Which of the following statements about an insurable interest in life insurance is (are) true? I.It is required of any person named as beneficiary. II.It may result from a pecuniary (financial) interest. A)II only When must an insurable interest legally exist in life insurance? A)only at the inception of the policy 9)When must an insurable interest legally exist in property insurance for an insured to receive payment for a loss from the insurer? A)only at the time of the loss 10)Sue's office building was damaged by a fire caused by a careless tenant. After paying Sue for the loss, the insurance company sued the tenant to recover its loss. This suit is based on the principle of A)subrogation.
11)Which of the following statements about subrogation is true? A)Subrogation helps to hold down the cost of insurance. 12)Which of the following statements about subrogation is true? A)The insured's right to collect benefits may be forfeited if the insured interferes with the insurer's subrogation rights after a loss occurs. The principle of utmost good faith is supported by all of the following legal doctrines EXCEPT B)subrogation. 13)What is the legal significance of a material concealment by an insurance applicant? A)The contract is voidable at the insurer's option. 14)What is the legal significance of a material misrepresentation in an insurance application? A)The contract is voidable at the insurer's option. 15)A false material statement made by an applicant for insurance is an example of A)misrepresentation. 16)Which of the following statements about a warranty in an insurance contract is (are) true? I.It is part of the insurance contract. II.Statements made by an insurance applicant are considered warranties rather than representations. A)I only David owns a liquor store in a high-crime area. In order to obtain a reduced insurance premium, David promised to have a burglar alarm operating at the store when the store was closed. This agreement, which was incorporated into the insurance contract, is an example of a A)warranty. 17)Which of the following statements about offer and acceptance for insurance contracts is true? A)In property insurance, the offer and acceptance are usually in writing but may be oral. 18)Chris applied for life insurance and paid the first premium on Monday. She was given an insurability premium receipt which specified that coverage was effective on the date of the application or the date of the medical exam, whichever is later. She took the medical exam the following Thursday. She was found to be in perfect health. On which day was her coverage effective? A)on Thursday when she passed the medical exam 19)Which of the following statements about consideration in an insurance contract is (are) true? I.The insured's total consideration is submission of a completed application. II.The insurer's consideration is the promise to do those things specified in the policy. A)II only A contract in which the values exchanged are not equal because chance is involved is called a(n) A)aleatory contract. 20)Why are insurance contracts said to be contracts of adhesion? A)One party writes the contract, and the other party must accept the entire contract as written. 21)Why does the insured get the benefit of the doubt if an insurance policy contains any ambiguities or uncertainties? A)because insurance contracts are contracts of adhesion 22)Why can an insurer refuse to pay a claim if an insured fails to abide by the policy provisions? A)because insurance contracts are conditional 23)Which of the following types of insurance policies can usually be assigned without the insurer's consent? I.Life insurance II.Property insurance
A)I only What is the practical effect of an insurance policy being a conditional contract? A)The insurer can refuse to a pay claim unless the insured has complied with all policy provisions. 24)What is the practical effect of an insurance contract being a contract of adhesion? A)The policy is interpreted in the insured's favor if the policy contains any ambiguities or uncertainties. 25)All of the following statements about the rules governing agency relationships are true EXCEPT A)The principal is responsible for the acts of agents only if the acts are criminal. 26)The voluntary relinquishment of a legal right is called A)waiver. The portion of a property and liability insurance contract that contains information about the property or activity to be insured is called the A)declarations. 2)What information is contained in the insuring agreement of an insurance policy? A)a summary of the major promises of the insurer 3)Which of the following statements about "open-perils" coverage is (are) true? I.All losses are covered except those losses specifically excluded. II.The burden of proof is on the insured to prove that a loss is covered. A)I only 4)The exclusion of flood in a homeowners policy is an example of an A)excluded peril. 5)Exclusions are used in insurance policies for all of the following reasons EXCEPT A)to waive policy conditions. Reasons why a peril may be considered uninsurable and therefore excluded from insurance contracts include which of the following? I.The losses from the occurrence of the peril may be due to a predictable decline in value. II.The losses from the occurrence of the peril may be incalculable and catastrophic. A)both I and II 6)The policy provision requiring the filing of proof of loss with the insurer is an example of a(n) A)condition. 7)Which of the following statements about the definition of the insured is (are) true? I.In some cases, a person who is not specifically named may be classified as an insured. II.Under no circumstances can more than one person be named as an insured. A)I only 8)All of the following statements about endorsements and riders are true EXCEPT A)They are primarily used to circumvent legislation requiring specific policy provisions. 9)Deductibles are not used in which of the following type of insurance? A)life insurance One of the purposes that deductible are used in insurance policies is to B)eliminate coverage for small claims. 10)The deductible used for automobile collision losses is an example of a(n) A)straight deductible. 11)Which of the following statements about a calendar-year deductible is (are) true? I.It requires the insured to pay a specified amount of each claim regardless of when the claim occurs
during the year and regardless of any previous claims during the year. II.It is used only in policies which cover direct property losses. A)neither I nor II 12)A provision in a disability income insurance policy that requires a person to be disabled for 60 days before receiving benefits is an example of a(n) A)elimination period. 13)At what point in time must an insured meet the coinsurance requirement in a property insurance policy in order to avoid having to pay a portion of the loss? A)only at the time of loss David owns a commercial building with a replacement cost of $4 million. The building is insured on a replacement cost basis for $2.4 million under a fire insurance policy that has an 80 percent coinsurance clause. How much will David collect if the building sustains a covered fire loss with a replacement cost of $80,000? B)$60,000 14)The primary purpose of coinsurance in property insurance is to A)achieve equity in rating. 15)Which of the following statements about problems arising from the use of a coinsurance clause is (are) true? I.The amount of insurance should be periodically evaluated to avoid a coinsurance penalty because of inflation. II.An agreed value coverage option is one method used to solve the problem of values that fluctuate throughout the policy term. A)both I and II 16)Connie has a major medical policy with a $200 deductible. She is required to pay 25 percent of covered expenses in excess of the deductible. The insurer will pay 75 percent of expenses in excess of the deductible. If Connie has eligible medical expenses of $10,000, how much will be paid by her insurer? A)$7,350 Purposes of the coinsurance clause in health insurance contracts include which of the following? I.To reduce premiums. II.To exclude coverage for certain medical procedures. A)I only 17)The purpose of other-insurance provisions is to A)preserve the principle of indemnity. 18)Lisa has three fire insurance policies on her office building. The policy from company A is for $400,000, and the policies from companies B and C are for $100,000 each. If Lisa has a $360,000 loss, how much of the loss will be covered by each policy if the loss is settled on a pro rata basis by the insurers? A)policy A: $240,000; policies B and C: $60,000 each 19)Kevin has three liability policies which provide for contribution by equal shares if other insurance applies to a loss. How much will each policy pay for a $3,000,000 liability judgment if policy A provides $500,000 of coverage, policy B provides $1,000,000 of coverage, and policy C provides $3,000,000 of coverage? A)Policy A will pay $500,000, policy B will pay $1,000,000, and policy C will pay $1,500,000. Helen and John both own automobiles on which they carry liability insurance. If Helen is negligent and has an accident while driving John's car with his permission, how will each insurer respond to any liability judgment against Helen? B)Helen's insurance will pay on an excess basis if John's insurance is insufficient to cover the
judgment. 20)Kate is covered under her employer's group health plan. She is also covered as a dependent under her husband's group health plan. Under the usual coordination-of-benefits provision, how will each company respond to a claim filed by Kate? A)Kate's plan is primary, and her husband's plan is excess. 21)Eric's property was damaged in an accident. He phoned his agent to see if the loss was covered under his property insurance policy. The agent said, "As long as the cause of loss is not specifically excluded in the policy, the loss is covered." Based on the agent's answer, what type of insuring agreement appears in the policy? A)"open-perils" coverage 22)Janet hit a wall causing a large dent in the fender of her car. She was busy at work and delayed reporting the damage to her insurer for 9 months. The insurer denied the claim, stating, "Although such a loss is usually covered, you are required under the terms of the contract to provide prompt notification in case of loss." The prompt notification requirement is an example of a(n) A)condition. Mark reviewed his homeowners policy. He learned that his personal property was insured on an actual cash value basis. He would like replacement cost coverage on his personal property. He contacted his agent who said, "I'll simply add an amendment to your contract that changes the basis of recovery to replacement cost." The written provision the agent was referring to is called a(n) B)endorsement. 23)Under the terms of Jenny's auto insurance policy, she must pay the first $500 of any physical damage loss to her vehicle before her insurer will pay anything. What type of deductible is included in Jenny's auto insurance policy? A)straight deductible 24)Shauna hurt her back and was unable to work. She filed a claim under her disability income insurance policy. Under terms of the policy, 60 days must pass between the date of the injury and when the insurer begins to replace lost earnings. This 60-day period is called a(n) A)elimination (waiting) period. 25)ABC Company insured its building on a replacement cost basis for $700,000 under a property insurance policy that included an 80 percent coinsurance clause. The building had a replacement cost of $1 million when it sustained a $40,000 loss. How much will ABC Company receive from its insurer, assuming no deductible applies? A)$35,000 Which of the following types of families is likely to have the least need for a large amount of life insurance? A)a single person family 2)The human life value is defined as the A)present value of the family's share of a deceased breadwinner's future earnings. 3)Which of the following pieces of information is needed to calculate a person's human life value? A)the person's cost of self-maintenance. 4)To calculate a human life value, it is necessary to deduct certain costs from a person's average annual earnings. These costs include A)income taxes. 5)All of the following are defects which limit the usefulness of the human life value approach in determining the correct amount of life insurance to purchase EXCEPT A)Earnings during the individual's productive lifetime are ignored. Which of the following statements about the needs approach for estimating the amount of life insurance to purchase is (are) true?
I.It involves an analysis of various family needs which must be met if a family breadwinner dies. II.Its use is appropriate only if a person currently has no life insurance protection. A)I only 6)Which of the following is a cost/expense that an estate clearance fund is designed to pay? A)burial expenses 7)What is the length of the readjustment period which is considered when the needs approach is used to determine the amount of life insurance to own? A)1 to 2 years 8)Under the needs approach, when is the dependency period of a surviving spouse assumed to end? A)when the youngest child reaches age 18 9)The period during which a surviving spouse is ineligible for Social Security benefits is referred to as the A)blackout period. Which of the following statements about the capital retention approach for determining life insurance needs is (are) true? I.It assumes that life insurance proceeds will be liquidated to provide income to survivors. II.It requires the preparation of a personal balance sheet. A)II only 10)When the capital retention approach is used to determine how much life insurance to purchase, all of the following are subtracted from total assets to calculate the capital available to produce income EXCEPT A)investments in stocks and bonds. 11)Disadvantages of the capital retention approach include which of the following? I.Assets are often liquidated too quickly. II.It underestimates the amount of life insurance needed. A)neither I nor II 12)Tom and Nancy Boyle provide financial support for their two children. In addition, they provide financial support for Tom's aged father and Nancy's aged mother. The Boyle family can be described as a A)sandwiched family. Julian, age 45, would like to determine how much life insurance to purchase using the human life value approach. He assumes his average annual earnings over the next 20 years will be $40,000. Of this amount, $20,000 is available annually for the support of his family. Julian will generate this income for 20 more years and he believes that 5 percent is the appropriate interest (discount) rate. The present value of one dollar payable for 20 years at a discount rate of 5 percent is $12.46. What is Julian's human life value? B)$249,200 13)Jessica is an agent for LMN Life Insurance Company. She met with Brad, who was interested in purchasing life insurance. Jessica explained the various uses of life insurance, including income for Brad's wife during the 1- or 2-year period following Brad's death. This period is known as the A)readjustment period. 14)Sarah is using the needs approach to determine how much life insurance to buy. Her cash needs are $30,000; her income needs are $140,000; and special needs are $100,000. Sarah has the following assets: $20,000 in bank accounts, $30,000 in retirement plans, and $40,000 in investment accounts. Sarah owns no individual life insurance. She is covered by a $50,000 group life insurance policy through her employer. Based on this information, how much additional life insurance should Sarah purchase? A)$130,000 Richard is using the capital retention approach to determine how much life insurance to purchase. Richard would like to provide $35,000 per year to his family, forever, if he dies. The assets that he has today will
provide $25,000 in annual income without the liquidation of these assets. If life insurance proceeds can be invested to earn a 5 percent annual return, how much life insurance should Richard purchase to fund the additional income needed to meet the $35,000 annual income goal? B)$200,000 15)Bill is attempting to determine how much life insurance to purchase. He has two dependent children and his wife does not work outside of the home. An advisor suggested that Bill should consider Social Security benefits when doing his life insurance planning. One concern in this regard is the period after Social Security benefits to a widow terminate until they resume again. This period is called the A)blackout period. 16)When using the needs approach, several "special needs" should be considered. One special need is money to cover unexpected events, such as major car repairs, dental bills, or home repairs. Money set aside for this purpose is called a(n) A)emergency fund. 17)Most family heads need substantial amounts of life insurance. However, with limited income, money spent on life insurance reduces the amount of discretionary income available for other high-priority needs. What an insured person gives up when he or she purchases life insurance instead of using the premium dollars for other purposes is called the A)opportunity cost of buying life insurance. Which of the following statements about yearly renewable term insurance is (are) true? I.It requires evidence of insurability for renewal. II.It is most appropriate when an insured needs lifetime protection. A)neither I nor II 18)What happens to the premiums for yearly renewable term insurance as an insured gets older? A)They increase at an increasing rate. 19)Which of the following statements about term insurance is true? A)Most policies can be renewed for additional periods without evidence of insurability. 20)All of the following statements about the conversion of a term policy are true EXCEPT A)Evidence of insurability is required before a conversion is permitted. 21)Which of the following statements about a decreasing term insurance policy is true? A)The face amount of the policy decreases during the policy period, but the premium remains level. The purchase of term insurance is justified by which of the following circumstances? I.The insured wants to save money through the policy for a specific need. II.The insured has a temporary need for life insurance protection. A)II only 22)A legal reserve in life insurance is a result of A)excess premiums in the early policy years being invested at compound interest. 23)The net amount at risk for an ordinary life insurance policy is the difference between the A)face amount of the policy and the legal reserve. 24)Which of the following statements about life insurance cash values is (are) true? I.Cash values are a result of the level premium method of purchasing life insurance. II.The cash value of a policy must always exceed the policy's legal reserve. A)I only 25)All of the following statements about ordinary life insurance are true EXCEPT A)The face amount of the policy is paid if the insured lives to age 65.
Which of the following statements about the ownership of a life insurance policy is (are) true? I.Under the ownership clause, the policyholder and beneficiary equally share all contractual rights in the policy while the insured is living. II.The policyholder can designate a new owner by filing an appropriate form with the insurance company. A)II only 1)Which of the following statements about the entire contract clause is true? A)It specifies that the life insurance policy and the attached application constitute the complete agreement between the parties. 2)Which of the following would be a valid reason for an insurer to contest a policy after the contestable period has ended? A)The applicant had someone else take the medical examination required for policy approval for her. 3)Amy purchased a life insurance policy with the intent of committing suicide to pay all the debts that were burdening her family. If she commits suicide 9 months after the policy is purchased, and the insurer is able to prove that her death was a suicide, how much will be paid by the insurance company? A)the premiums paid for the policy Which of the following statements about the grace period in a whole life insurance contract is (are) true? I.The purpose of the grace period is to prevent the policy from lapsing by giving the policyowner additional time to pay an overdue premium. II.If the insured dies during the grace period, the death benefit is reduced by 50 percent. A)I only 4)All of the following statements about the requirements to reinstate a lapsed life insurance policy are true EXCEPT A)There is no time limit on when the policy may be reinstated. 5)Bert purchased a life insurance policy 4 years ago. He inadvertently stated that he was 1 year younger than his actual age. If Bert dies today, how much will the insurance company pay? A)less than the policy face value 6)Which of the following statements about beneficiary designations is (are) true? I.The primary beneficiary is entitled to the death proceeds of a life insurance policy only if the contingent beneficiary dies before the insured. II.If a revocable beneficiary designation is used, the insured must obtain the beneficiary's permission of exercise most policy rights. A)neither I nor II A contingent beneficiary in a life insurance policy has the right to A)receive the policy proceeds if the primary beneficiary dies before the insured. 7)Which of the following statements about the change of plan provision in a life insurance contract is (are) true? I.A change to a lower premium policy results in a refund of the difference in the cash values of the two policies. II.A change to a higher premium policy requires evidence of insurability. A)I only 8)Which of the following statements about the assignment of a life insurance policy is true? A)The insurer must be notified of any assignment or the death proceeds will be paid to the named beneficiary. 9)Which of the following statements about the assignment of a life insurance policy is (are) true? I.Under a collateral assignment, the policyowner assigns a life insurance policy to secure a loan. II.Under an absolute assignment, only limited ownership rights in a policy are transferred. A)I only
The transfer of all ownership rights in a life insurance policy can be accomplished through a(n) A)absolute assignment. 10)Which of the following statements about life insurance policy loans is true? A)The policyholder must pay interest on a life insurance policy loan. 11)Which of the following statements is true regarding an automatic premium loan provision? A)Its purpose is to prevent a policy from lapsing because of nonpayment of premium. 12)What major feature distinguishes a participating policy from a nonparticipating policy? A)the payment of dividends 13)Sources of life insurance dividends include which of the following? I.Excess interest earned on the assets necessary to maintain legal reserves II.Favorable mortality experience A)both I and II Which of the following is a common dividend option found in a participating life insurance policy? A)paid-up additions 14)Which of the following statements about dividend options is (are) true? I.The interest on dividends left to accumulate with the insurer is not considered to be taxable income. II.Paid-up additions are additional units of whole life insurance. A)II only 15)Advantages of selecting the paid-up additions dividend option in a life insurance policy include which of the following? I.Evidence of insurability is not required to purchase additional insurance. II.The additions are purchased at net rates without a loading for expenses. A)both I and II 16)A dividend option that allows the policyholder to purchase 1-year term insurance is referred to as the A)fifth dividend option. All of the following are nonforfeiture options found in cash value life insurance policies EXCEPT B)reduction of premiums. 17)Which of the following statements about nonforfeiture options found in life insurance policies is true? A)Under the reduced paid-up option, no additional premiums must be paid. 18)All of the following statements about the interest settlement option are true EXCEPT A)The minimum guaranteed interest rate is usually equal to the prime rate. 19)Which of the following statements about life insurance settlement options is true? A)Under the fixed amount option, the beneficiary can be given the right to increase or decrease the fixed amount. Which of the following statements about life income settlement options is (are) true? I.Under a joint-and-survivor life income option, payments cease at the death of the first annuitant. II.Under a life income with guaranteed period, a contingent beneficiary is guaranteed a minimum number of payments regardless of when the primary beneficiary dies. A)neither I nor II 20)Disadvantages of life insurance settlement options include which of the following? I.Higher yields can often be obtained elsewhere. II.Life income options have limited usefulness at younger ages.
A)both I and II 21)Which of the following statements about the waiver-of-premium provision in life insurance is true? A)The disability must occur before a stated age, such as 65, for premiums to be waived. 22)All of the following are requirements that must be satisfied before premiums are waived under a waiver-of-premium provision EXCEPT A)The insured must satisfy a 2-year waiting period. Which of the following statements about the guaranteed purchase option is true? B)The additional coverage can be purchased without demonstrating insurability. 23)Which of the following statements about the guaranteed purchase option is true? A)The option permits the insured to purchase specified amounts of life insurance in the future even if the insured has become uninsurable. 24)Which of the following statements about a typical accidental death benefit rider is (are) true? I.Accidental injury must be the cause of death for the increased benefit to be paid. II.The accidental death must occur prior to some specified age for the increased benefit to be paid. A)both I and II 25)Reasons for NOT purchasing an accidental death benefit rider include which of the following? I.Most people die as a result of a disease rather than from an accident. II.The economic value of a human life is not increased if death occurs because of an accident. A)both I and II The cost-of-living rider typically bases increases in the policy face value on changes in the A)consumer price index. 26)Which of the following statements about accelerated death benefits riders is (are) true? I.Under a terminal illness rider, after a partial payment is made to the insured, there is a reduction in the face amount of insurance, cash value, and premiums. II.Benefits under a long-term care rider are for home health care only. A)I only 27)The practice of buying the life insurance policy of a terminally ill insured at a discount is referred to as a A)viatical settlement. 28)Al was named the beneficiary in his mother's life insurance policy. His mother died during the contestable period. The insurer denied payment, citing a material misrepresentation on the application. Al believes the insurer should pay the claim because the misrepresentation occurred on the application, and the application is not part of the formal agreement between the insurer and the policyholder. Which provision protects the insurer by making the application part of the formal agreement between the parties to the contract? A)entire contract clause Cal purchased a whole life policy 6 years ago. The policy requires annual premium payments. Cal forgot to pay the premium that was due 2 weeks ago. He wonders if his life insurance is still in force. Which life insurance policy provision is designed to keep the policy in force for a short time even if the premium payment is late? B)grace period 29)Bruce lied about his health history when he purchased a life insurance policy. He died 3 years after the policy was issued. Which life insurance policy provision will require the life insurer to pay the beneficiary even though Bruce lied on the application? A)incontestable clause
30)Which life insurance policy provision specifies that it is the policyholder, and not the insured or beneficiary, who possesses all contractual rights while the policy is in force? A)ownership clause 31)Becky is considering the purchase of a whole life policy on her own life. She is concerned that if she becomes disabled, paying premiums will become a burden. Which provision can Becky attach to her life insurance policy to address this concern? A)waiver-of-premium provision Tim purchased a 10-payment whole life insurance policy 15 years ago. Tim would like to donate this paid-up policy to a charity. Under which policy provision can Tim transfer all ownership rights in the policy to the charity? B)absolute assignment 32)Beth purchased a participating life insurance policy 6 years ago. Her life insurance needs have increased, but she has developed a medical condition that makes it impossible for her to purchase more life insurance at affordable premiums. Which dividend option makes sense for Beth to use given her medical condition? A)paid-up additions 33)Lionel purchased a $200,000 ordinary life insurance policy when he was 25 years old and had significant life insurance needs. Now Lionel is 50. His mortgage is almost paid-off and his children have left home and are financially independent. Lionel no longer wants to pay premiums, but he would like to have some permanent life insurance in force. Which nonforfeiture option could Lionel employ to meet these objectives? A)reduced paid-up insurance 34)Jane purchased a life insurance policy on her own life and named her daughter, Cheryl, as beneficiary. Cheryl has a history of not managing money well. Jane wants the death benefit paid to Cheryl in monthly installments over 20 years. Which settlement option should Jane pre-select for Cheryl? A)fixed period A factor that can be ignored when deterring the cost of life insurance is A)settlement options. 2)Under the traditional net cost method, the net cost of life insurance for a given period (e.g., 20 years) is determined by which of the following formulas? A)the total premiums for the period less the sum of the total dividends received during the period and the cash value at the end of the period. 3)Which of the following statements about the traditional net cost method of measuring the cost of life insurance is (are) true? I.The traditional net cost method does not consider the time value of money. II.The traditional net cost method can show that life insurance has a negative cost. A)both I and II 4)Which of the following statements about the surrender cost index for measuring the cost of life insurance is true? A)It takes the amount and timing of each dividend into consideration. Which of the following statements describes how the net payment cost index differs from the surrender cost index? B)The cash value is ignored. 5)David purchased a $100,000 participating whole life policy. The annual premium is $2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20 years will be $35,260. If the premiums were invested at 5 percent for 20 years, the premiums would grow to
$79,156. If the dividends were accumulated at 5 percent for 20 years, they would grow to be $24,400. The amount to which $1 deposited annually will accumulate in 20 years at 5 percent is $34.719. Based on this information, what is the traditional net cost per thousand per year of David's policy over the 20-year period? A)-$2.64 6)David purchased a $100,000 participating whole life policy. The annual premium is $2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20 years will be $35,260. If the premiums were invested at 5 percent for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent for 20 years, they would grow to be $24,400. The amount to which $1 deposited annually will accumulate in 20 years at 5 percent is $34.719. Based on this information, what is the surrender cost per thousand per year of David's policy over the 20-year period? A)$5.62 David purchased a $100,000 participating whole life policy. The annual premium is $2,280. Projected dividends for the first 20 years are $15,624. The cash value after 20 years will be $35,260. If the premiums were invested at 5 percent for 20 years, the premiums would grow to $79,156. If the dividends were accumulated at 5 percent for 20 years, they would grow to be $24,400. The amount to which $1 deposited annually will accumulate in 20 years at 5 percent is $34.719. Based on this information, what is the net payment cost per thousand per year of David's policy over the 20-year period? A)$15.77 7)Which of the following statements about the use of interest-adjusted cost data for comparing life insurance policies is (are) true? I.Using interest-adjusted cost data provides a more accurate measure of the cost of life insurance than is provided if the time value of money is ignored. II.Its use is most appropriate in deciding between policies when the cost variation is very small. A)I only 8)Which of the following statements about the Linton yield is (are) true? I.It is based on the assumption that a cash-value policy can be viewed as a combination of insurance protection and a savings fund. II.It is the average compound annual rate of return required to make the savings deposits in a life insurance policy equal to the policy's guaranteed cash value at the end of a specified period. A)both I and II Which of the following statements about the yearly-rate-of-return method (also known as the Belth method) of calculating the yearly rate of return for a life insurance policy is (are) true? I.The formula requires the use of benchmark prices per $1,000 of protection. II.The main drawback of the formula is its complexity, necessitating the use of a computer to calculate the rate of return. A)I only 9)Consumer experts typically recommend all of the following rules when buying life insurance EXCEPT A)Ignore all factors other than cost. 10)Consumer experts typically recommend which of the following rules for purchasing life insurance? I.Avoid policies which pay dividends. II.Purchase life insurance equal to ten times your annual salary. A)neither I nor II 11)Why might the use of "grades" assigned by a life insurance company rating organization not be a
reliable guide for consumers? I.There may be variations in grades given by different rating organizations. II.They ignore factors such as profitability and quality of investments. A)I only Marshall is interested in determining the cost per thousand of his life insurance policy. Which of the following will provide Marshall the most meaningful measure of the cost per thousand dollars per year of his life insurance? A)the surrender cost index 12)Lynn calculated the future value of the first twenty premiums she will pay under her nonparticipating whole life insurance policy. Then she subtracted the cash value after 20 years. Next, she divided this value by the future value annuity due factor for 20 years to arrive at an annual cost of insurance. Finally, she divided the annual cost by the number of thousands of dollars of life insurance purchased to arrive at the cost per thousand per year. Lynn calculated the A)the surrender cost per thousand per year. 13)Which method of analyzing the cost of life insurance does not consider the cash value of the policy in the analysis? A)net payment cost index 14)Mary is interested in comparing life insurance policies. Rather than looking at the cost per thousand, she would like to compare the rate of return earned on the savings portion of the policy. Which of the following would be of the most interest to Mary? A)the policy's Linton Yield Which of the following statements is (are) true regarding taxation of life insurance? I.Life insurance proceeds paid in a lump-sum to a designated beneficiary are received free of federal income taxes. II.The policyowner must pay taxes annually on the amount by which the cash value of his or her life insurance policy has increased. A)I only 15)The first step in "shopping for life insurance" is to A)determine if you need life insurance. 16)Lisa does not want her life insurance policy included in her gross estate when she dies. Lisa can remove the life insurance policy from her estate if she does which of the following more than 3 years before she dies? A)make an absolute assignment of the policy to someone else 17)Brad owns a cash value life insurance policy. Last year, the cash value increased by $300. Brad received $100 in policyowner dividends on the policy last year. Brad was the beneficiary named in his grandmother's $50,000 life insurance policy. When she died this past year, Brad received $50,000. How much taxable income relating to life insurance must Brad report for federal income tax purposes? A)$0 Carl and Carol Williams, a married couple, are doing some estate planning. Upon his death, Carl plans to leave $1,000,000 in property to his wife. This amount will reduce the value of Carl's gross estate and will be taxed later when Carol dies. This reduction of the gross estate is called the B)marital deduction. 18)Paul is shopping for a life insurance policy. An agent asked Paul if he would like to purchase a participating policy. What is a "participating" policy? A)a policy which pays dividends 19)Each of the following helps to reduce federal estate taxes EXCEPT A)life insurance policies in which the deceased had an incidents of ownership at the time of death.
20)Which of the following statements is (are) true with regard to using interest-adjusted cost data when shopping for life insurance? I.Cost indexes apply to new policies and should not be used to determine whether to replace a policy. II.Cost indexes should only be used to compare similar plans of insurance. A)both I and II All of the following statements about the income tax treatment of individually-purchased life insurance are true EXCEPT A)premiums paid for individual life insurance are a tax deductible expense. 21)Which of the following statements is (are) true about the federal estate tax? I.The gross estate can be reduced by a number of deductions. II.If the person who died had any ownership interest in a life insurance policy at the time of death, the proceeds are included in the gross estate for federal estate tax purposes. A)both I and II 22)Life insurance policy reserves A)are a major liability of life insurance companies. 23)Purposes of life insurance policy reserves include which of the following? I.Legal test of the insurer's solvency II.Formal recognition of the obligation to pay future claims A)both I and II 24)The difference between the present value of future benefits payable under a life insurance policy and the present value of net premiums for the policy is the policy's A)prospective reserve. Which of the following statements is (are) true with respect to annuities? I.Annuities are the opposite of life insurance. II.The fundamental purpose of annuities is to replace lost income in case of premature death. A)I only 1)When selling life annuities, what risk is the insurer pooling? A)excessive longevity 2)Life annuity payments are made up of all of the following EXCEPT A)unliquidated principal of annuitants who live too long. 3)Stan paid an insurance company $50,000 for a fixed annuity when he was 50 years old. At age 62, Stan plans to begin to receive payments from the insurer. There are no guarantees on the number of payments he will receive. Based on the description provided, this annuity can be described as a(n) A)deferred annuity. Cassie, age 62, paid a life insurer $100,000 in exchange for a life annuity. If Cassie dies before receiving 120 monthly payments from the insurer, the remaining payments will be made to a beneficiary. If Cassie dies after receiving 120 payments, no additional payments are made by the insurer. Cassie has purchased a(n) B)life annuity with guaranteed payments. 4)Which of the following statements is (are) true with respect to a joint-and-survivor annuity? I.Some joint-and-survivor annuities reduce the income payment after the first annuitant dies. II.No payments are made after the first annuitant dies. A)I only 5)During the funding period, the premiums paid for a variable annuity are used to purchase
A)accumulation units. 6)Brad funded a life annuity through installment payments. At age 60, he decided to elect an annuity settlement option and to begin to receive payments. Which of the following life income options will provide Brad with the highest monthly income? A)life annuity (no refund) Which of the following statements is (are) true with respect to the cash (lump sum) annuity settlement option? I.The taxable portion of the distribution is subject to federal and state income taxes. II.The option results in adverse selection against the insurer as those in poor health are more likely to take cash than to annuitize the funds. A)both I and II 7)Which of the following statements is (are) true with respect to variable annuities? I.The price at which accumulation units can be purchased fluctuates during the funding period. II.The value of annuity units fluctuates over time. A)both I and II 8)Bridget started to fund a variable annuity. Three years later, she experienced financial difficulty. She called her agent and cancelled the contract. The insurer returned all but 4 percent of the account balance. The 4 percent kept by the insurer is a(n) A)surrender charge. 9)Insurers offering variable annuities charge a number of expenses. One category of expenses is to pay the fund manager and to pay brokerage fees. This expense is the A)investment management charge. Insurers offering variable annuities charge a number of fees and expenses. One category of fees and expenses is charged to cover the cost of record keeping, paperwork, and periodic reports to annuity owners. This expense is the B)administrative charge. 10)Which of the following statements about variable annuities is true? A)Variable annuities typically provide a guaranteed death benefit payable to a beneficiary if the annuitant dies prior to retirement. 11)Which of the following statements is (are) true with respect to an equity-indexed annuity? I.The maximum percentage gain is usually capped. II.There is no downside protection against loss of principal if the annuity is held to term. A)I only 12)With an equity-indexed annuity, what name is given to the method of crediting excess interest to the annuity? A)the indexing method 13)Under an equity-indexed annuity, what name is given to the percentage increase in the stock index that is credited to the contract? A)the participation rate Which of the following statements regarding the taxation of individual annuities is (are) true? I.The exclusion ratio is the percentage of the annuity income that is taxable. II.After the net cost of the annuity has been paid to the annuitant, the total annuity payment is taxable. A)II only 14)Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). What is the exclusion ratio in this case?
A)50.00 percent 15)Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). Assume that Juanita receives 12 monthly payments of $500 the first year. How much taxable income must she report? A)$3,000 16)Juanita paid a life insurer $45,000 in exchange for an immediate life annuity. Juanita will receive $500 per month from the insurer, and her life expectancy is 15 years (180 months). If Juanita is alive 20 years later, how much of the $6,000 received during the year is taxable? A)$6,000 Which of the following statements is (are) true regarding the taxation of distributions from individual annuities? I.Individual annuity distributions are never taxable. II.Once the annuitant has recovered the premiums he or she paid for the annuity, the entire annuity distribution is taxable. A)II only 17)Which of the following is a permissible IRA investment alternative? A)mutual funds 18)Which of the following statements is (are) true regarding the Roth IRA? I.Roth IRA contributions are tax deductible. II.Roth IRA investment income accumulates income-tax free. A)II only 19)Rita is 66 years old. She earned $20,000 this year working part-time at a store and her modified adjusted gross income was $28,000. Rita is considering making a $3,000 contribution to her traditional IRA. Which of the following statements is true regarding this contribution? Daryl, age 42, quit his job. His employer offered a defined contribution pension plan, and the balance in the account was $30,000 when Daryl quit. He can avoid immediate taxation of these funds by A)using an IRA rollover account. 20)Which of the following statements is (are) true with regard to Roth IRAs? I.The portion of a Roth IRA distribution that is attributable to investment income is taxable. II.There is a maximum income level above which Roth IRA contributions are not allowed. A)II only 21)All of the following statements about traditional and Roth IRAs are true EXCEPT A)Traditional IRAs are exempt from the penalty tax on premature distributions. 22)Which of the following persons can establish a traditional IRA? I.Persons whose only income received is from investments. II.Employed persons under age 70.5 who are not active participants in an employer-sponsored retirement plan. A)II only Donna is single and earns $30,000 annually. She is covered under her employer's retirement plan. Donna would like to start a traditional IRA and contribute $3,000 this year. Which of the following describes her ability to establish a traditional IRA and the tax treatment of her contribution? A)Her contribution is fully tax deductible. 23)Which of the following statements about the withdrawal of funds from a traditional IRA is true? A)Withdrawals must begin no later than April 1 of the year following the calendar year in which an individual attains age 70.5.
24)All of the following are circumstances under which withdrawals from a traditional IRA may be made prior to age 59.5 without incurring a substantial penalty EXCEPT A)The withdrawal is used to pay living expenses after unemployment insurance benefits cease. 25)Which of the following statements regarding individual retirement accounts (IRAs) is (are) true? I.If an individual's only income during the year is from investments, he or she cannot make an IRA contribution. II.The funds in the IRA can be used to purchase life insurance on the owner. A)I only